Ingersoll Rand Inc. - Quarter Report: 2020 March (Form 10-Q)

Note 1. Basis of Presentation and Recent Accounting Pronouncements

Basis of Presentation

On February 29, 2020, Ingersoll Rand Inc. (formerly known as Gardner Denver Holdings, Inc.) completed the acquisition of the Ingersoll Rand Industrial business (“Ingersoll Rand Industrial”) by way of merger and changed its name from Gardner Denver Holdings, Inc. to Ingersoll Rand Inc.  The condensed consolidated financial statements as of and for the three month period ended March 31, 2020 include the financial results of Ingersoll Rand Industrial from the date of acquisition.

Ingersoll Rand Inc. is a holding company whose operating subsidiaries are Gardner Denver, Inc. and Ingersoll Rand Industrial U.S., Inc, and certain of Gardner Denver, Inc’s. and Ingersoll Rand Industrial U.S., Inc’s subsidiaries.  Ingersoll Rand Inc. 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 Ingersoll Rand Inc. and its majority-owned subsidiaries (collectively referred to herein as “Ingersoll Rand” or the “Company”).

The financial information presented as of any date other than December 31, 2019 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, 2019, filed with the Securities and Exchange Commission (“SEC”).

The results of operations for the three month period ended March 31, 2020 is not necessarily indicative of the results to be expected for the full year.  The recent outbreak of the novel Coronavirus (“COVID-19”) is a rapidly developing situation around the globe that has negatively impacted and could continue to negatively impact the global economy.  The Company’s operating results will be subject to fluctuations based on general economic conditions, and the extent to which COVID-19 may ultimately impact its business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate extent of the spread of the disease and the duration of the outbreak and business closures or business disruptions for the Company, suppliers and customers.

The balance sheet as of December 31, 2019 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.

Immediately prior to the acquisition of Ingersoll Rand Industrial, affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) owned 70,671,135 shares of common stock of the Company or approximately 34%, of the total outstanding common stock of the Company.  Following the acquisition of Ingersoll Rand Industrial, KKR owns 70,671,135 shares of common stock of the Company or approximately 17% of the total outstanding common stock of the Company.

The classification of stock-based compensation expense reported for the three month period ended March 31, 2019 was corrected. As a result, previously reported “Other operating expense, net” was decreased and “Selling and administrative expenses” was increased by $9.3 million for the three month period ended March 31, 2019.

Resegmentation

Subsequent to the acquisition of Ingersoll Rand Industrial, Ingersoll Rand reorganized its reportable segments.  As a result, the Company no longer reports under the reportable segments of Industrial, Energy and Medical.  Instead, the Company presents financial information for the reportable segments of Industrial Technologies and Services, Precision and Science Technologies, Specialty Vehicle Technologies and High Pressure Solutions.  The Company’s Chief Operating Decision Maker regularly reviews financial information to allocate resources and assess performance utilizing these reorganized segments.  See Note 5 “Goodwill and Other Intangible Assets” for the allocation of goodwill to the new reportable segments.  See Note 16 “Segment Results” for a description of the new reportable segments.

Recently Adopted Accounting Standard Updates (“ASU”)

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 noncancelable 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 adopted this guidance prospectively on January 1, 2020.  The adoption did not have a material impact on the Company’s 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 Company adopted this guidance on January 1, 2020.  The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which added an impairment model that is based on expected losses rather than incurred losses and is called the Current Expected Credit Losses (“CECL”) model. This impairment model is applicable to loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables as well as any other financial asset with the contractual right to receive cash. Under the new model, an allowance equal to the estimate of lifetime expected credit losses is recognized which will result in more timely loss recognition. The guidance is intended to reduce complexity by decreasing the number of credit impairment models. The Company adopted this guidance on January 1, 2020, using a modified retrospective transition method.  The Company recorded a cumulative-effect adjustment on the adoption date increasing “Accumulated deficit” in the Condensed Consolidated Balance Sheets by $1.0 million and decreasing “Accounts receivable, net of allowance for doubtful accounts” in the Condensed Consolidated Balance Sheets by $1.0 million.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for a limited time to ease the potential burden of accounting for reference rate reform on financial reporting. This guidance applies to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates.  The guidance is effective beginning on March 12, 2020 through December 31, 2022.  The Company has not utilized any of the optional expedients or exceptions available under this ASU.  The Company will continue to assess whether this ASU is applicable throughout the effective period.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions and amending and clarifying existing guidance.  The guidance is effective for public companies beginning with the first quarter of 2021.  Early adoption is permitted. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements and evaluating the timing of adoption.

In August 2018, the FASB issued ASU 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update 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.  This ASU will have an immaterial impact on the Company’s condensed consolidated financial statements.

Note 2. Business Combinations

Ingersoll Rand Industrial Acquisition

On February 29, 2020, Ingersoll Rand completed the acquisition of Ingersoll Rand Industrial for the total estimated purchase consideration of approximately $6,937.0 million which represents Ingersoll Rand common stock with a fair value of $6,919.5 million and the balance equal to the fair value attributable to pre-acquisition service for replacement equity awards and deferred compensation arrangements settled in shares (or valued by reference to shares) of Ingersoll Rand common stock and reimbursement of retirement funding obligation.  Ingersoll Rand Industrial is a global provider of mission-critical flow control and compression equipment and associated aftermarket parts, consumables and services.  Ingersoll Rand acquired Ingersoll Rand Industrial to extend and enhance its portfolio of products to address market opportunities in the compressor, blower, pump and other industrial product markets.

Immediately prior to the merger, Trane Technologies plc (formerly known as Ingersoll-Rand plc) (“Old IR” or “Trane Technologies”) completed a spin-off in which it distributed one share of common stock of Ingersoll-Rand Industrial US. Holdco, Inc. (“SpinCo”), par value $0.01 per share, for each share of Old IR, outstanding as of the record date for the spin-off on February 24, 2020.  In accordance with the merger agreement by and among Ingersoll Rand, Old IR, SpinCo and Charm Merger Sub Inc, a wholly owned subsidiary of Ingersoll Rand (“Merger Sub”), Merger Sub merged with and into SpinCo (the “acquisition”) and each share of common stock of SpinCo, par value $0.01 per share (“SpinCo common stock”), issued and outstanding immediately prior to the acquisition was converted into the right to receive 0.8824 shares of common stock of Ingersoll Rand, par value $0.01 per share (“Ingersoll Rand common stock”).  Immediately after the consummation of the acquisition, approximately 50.1% of the outstanding shares of Ingersoll Rand common stock on a fully-diluted basis was held by SpinCo stockholders and approximately 49.9% of the outstanding shares of the Company common stock on a fully-diluted basis was held by pre-acquisition Ingersoll Rand stockholders.  Since Ingersoll Rand (formerly named Gardner Denver Holdings, Inc.) is the accounting acquirer, the fair value of the equity issued by Ingersoll Rand to SpinCo stockholders in the acquisition was determined by reference to the market price of Ingersoll Rand common stock.  Accordingly, the purchase consideration below reflects the estimated fair value of the Ingersoll Rand shares issued in exchange for shares of SpinCo common stock in the acquisition, which is based on the final closing price of shares of Ingersoll Rand common stock prior to the effective time of the acquisition on February 28, 2020 of $32.79 per share.  The Company incurred approximately $87.3 million in total acquisition-related costs in connection with the acquisition, including approximately $42.3 million in the three month period ended March 31, 2020 recorded to “Other operating expenses, net” in the Condensed Consolidated Statements of Operations.  In addition, the Company incurred $1.0 million in registration fees in connection with issuing shares in the acquisition of Ingersoll Rand Industrial.  The $1.0 million reduced “Capital in excess of par value” of the Condensed Consolidated Balance Sheets.

Preliminary Purchase Price Allocation

In accordance with the FASB’s ASC 805 Business Combinations, Ingersoll Rand was determined to be the accounting acquirer.  As such, Ingersoll Rand applied the acquisition method of accounting with respect to the identifiable assets and liabilities of Ingersoll Rand Industrial, which have been measured at estimated fair value as of the date of the business combination.

Ingersoll Rand Industrial’s assets and liabilities were measured at estimated fair values at February 29, 2020, primarily using Level 3 inputs except for debt, which was measured using Level 2 inputs and non-controlling interests, which was measured using Level 1 inputs.  Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates, market comparables and others.  Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates.

The following table summarizes the preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed by Ingersoll Rand, with the excess of purchase price over the fair value of Ingersoll Rand Industrial’s net assets recorded as goodwill.  Due to the timing of the business combination and the magnitude of and multi-jurisdictional nature of the net assets acquired, at March 31, 2020 the valuation process to determine the fair values is not complete and further adjustments are expected in fiscal year 2020.  The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available, including the refinement of market participant assumptions and finalization of tax returns in the pre-acquisition period.  As the Company finalizes the fair value of assets acquired and liabilities assumed, as well as finalizes working capital adjustments, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition.  The Company will reflect measurement period adjustments in the period in which the adjustments are determined.

The aggregate purchase consideration has been preliminarily allocated as follows.

Summary of Significant Fair Value Methods

The methods used to determine the preliminary fair value of significant identifiable assets and liabilities included in the preliminary allocation of purchase price are discussed below.  The final fair value determination may differ from this preliminary determination.

Acquired inventory is comprised of finished goods, work in process and raw materials.  The preliminary fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort.  The preliminary fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort.  The preliminary fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value.  The preliminary fair value step-up of $102.3 million of inventories measured on a First In First Out (“FIFO”) basis is amortized to “Cost of sales” in the condensed consolidated financial statements as the inventory is sold, which is expected to be a period of four months from the acquisition date.  For inventories measured on a Last In First Out (“LIFO”) basis, the acquired inventory becomes the LIFO base layer inventory.

The preliminary fair value of property, plant and equipment was primarily calculated using replacement costs adjusted for the age and condition of the asset, with the exception of real property which was calculated using the market approach, and is summarized below.

The estimated preliminary fair value and weighted average useful life of the Ingersoll Rand Industrial identifiable intangible assets are as follows.

The Company believes that the amounts of purchased intangible assets recorded represent the preliminary fair values of and approximates the amounts a market participant would pay for these intangible assets as of the acquisition date.

Lease liabilities, included in “Accrued liabilities” and “Other non-current liabilities” in the Condensed Consolidated Balance Sheets, at the acquisition date, are remeasured at the present value of the future minimum lease payments over the remaining lease term and the incremental borrowing rate of Ingersoll Rand as if the acquired leases were new leases as of the acquisition date.  ROU assets included in “Other assets” in the Condensed Consolidated Balance Sheets as of the acquisition date, are equal to the amount of the lease liability at the acquisition date adjusted for any off-market terms of the lease.  The remaining lease term is based on the remaining term at the acquisition date plus any renewal or extension options that the Company is reasonably certain will be exercised.

Ingersoll Rand recognized a pretax net liability representing the net funded status of Ingersoll Rand Industrial’s defined-benefit pension and other postretirement benefit (“OPEB”) plans.  See Note 7 “Benefit Plans” for further information on the pension and OPEB arrangements.

Ingersoll Rand Services Company incurred $1,900.0 million of indebtedness under the Credit Agreement dated as of February 28, 2020 among Ingersoll Rand Services Company, as borrower, Citibank, N.A. as administrative agent and collateral agent and the lenders party thereto (the “Senior Secured Credit Facility”) prior to the closing of the acquisition, and the indebtedness under the Senior Secured Credit Facility will mature February 28, 2027 (or, if such date is not a business day the first business day thereafter).  Ingersoll Rand incurred a total of $26.9 million debt issuance costs associated with the $1,900.0 million loan under the Senior Secured Credit Facility. The $1,900.0 million of indebtedness under the Credit Agreement was reduced by a $2.4 million original issue discount.

The fair value for long term debt is determined based on the total indebtedness less debt issuance costs as the debt consummated at the time of closing of the acquisition.

The acquisition was structured as a merger and therefore, the Company assumed the historical tax basis of Ingersoll Rand Industrial’s assets and liabilities. The deferred income tax assets and liabilities include the expected future federal, state and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the acquisition in the jurisdictions in which legal title of the underlying asset or liability resides.  See Note 13. “Income Taxes” for further information related to income taxes.

Ingersoll Rand Industrial has a 74% controlling interest in Ingersoll-Rand India Limited.  Therefore, there is a 26% non-controlling interest in Ingersoll-Rand India Limited. Ingersoll-Rand India Limited is a public company in India and listed on stock exchanges in India.  Ingersoll Rand’s preliminary fair value of non-controlling interest is based on market quote of Indian Rupee 639.2 per share, available on the last trading day on February 28, 2020 prior to the closing date of the acquisition.  Considering non-controlling shares of 8.2 million, the preliminary fair value of non-controlling interest is $73.3 million.

The Company utilized the carrying values, net of allowances, to value accounts receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represented the fair value of those items at the acquisition date.

The excess of the consideration for the acquisition over the preliminary fair value of net assets acquired was recorded as goodwill.  The estimated goodwill recognized is attributable primarily to expected synergies and expanded market opportunities from combining the Company’s operations with those of Ingersoll Rand Industrial.  The goodwill created in the acquisition is not expected to be deductible for tax purposes and is subject to material revision as the purchase price allocation is completed.  Goodwill arising from the acquisition has been allocated to the Industrial Technologies and Services, High Pressure Solutions, Precision and Science Technologies and Specialty Vehicle Technologies reporting segments.  See Note 5. “Goodwill and Other Intangible Assets” for the allocation of goodwill to segments.

Results of Ingersoll Rand Industrial Subsequent to the Acquisition

The operating results of Ingersoll Rand Industrial have been included in the Company’s condensed consolidated financial statements for the three month period ended March 31, 2020 from the acquisition date. The Company’s condensed consolidated statements of operations for the three month period ended March 31, 2020 included revenues of $293.4 million and a net loss of $33.3 million which includes the effects of purchase accounting adjustments, primarily changes in amortization of intangible assets, depreciation of property, plant and equipment and amortization of stepped up inventory.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the combined results of operations for the Company and Ingersoll Rand Industrial as if the acquisition had been completed on January 1, 2019. The pro forma results have been prepared for comparative purposes only, and do not necessarily represent what the revenue or results of operations would have been had the acquisition been completed on January 1, 2019. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved.

The unaudited pro forma information includes adjustments for the preliminary purchase price accounting impact (including, but not limited to, amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs related to the fair value adjustment to long-term debt, transaction costs and related tax impacts) and the alignment of accounting policies.

The table below reflects the impact of material and nonrecurring adjustments to the unaudited pro forma results for the three month periods ended March 31, 2020 and 2019 that are directly attributable to the acquisition.

The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of the Company’s condensed consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2019 or of the results of the Company’s future results of operations of the combined businesses.

Transactions with Trane Technologies

Certain agreements have been entered into between Ingersoll Rand and Trane Technologies plc, including, among others, an Employee Matters Agreement, a Real Estate Matters Agreement, a Tax Matters Agreement, an Intellectual Property Matters Agreement and a Transition Services Agreement each dated February 29, 2020.  The Transition Services Agreement has a term of twenty four calendar months.  Charges for services under the agreement will be determined on an allocated cost basis, subject to an overall annual aggregate cap.  During the three month period ended March 31, 2020, the Company incurred $2.4 million of charges under the Transition Service Agreement.

Acquisition of Air Compressors and Blowers North Limited

On August 19, 2019, the Company acquired Air Compressors and Blowers North Limited (“ACBN”), a provider of vacuum pumps, blowers and compressors. The Company acquired certain assets of ACBN for total consideration of $7.0 million, which consisted of cash payments of $5.9 million and a $1.1 million deferred payment. The deferred payment is expected to be paid by the end of the first quarter of 2021 and is recorded in “Other liabilities” in the Condensed Consolidated Balance Sheets. The revenues and operating income of ACBN are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Industrial Technologies and Services segment. The goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition of Oina VV AB

On July 3, 2019, the Company acquired Oina VV AB (“Oina”) which specializes in customized pump solutions for liquid handling processes for use in medical, process and industrial applications. The Company acquired all of the assets and assumed certain liabilities of Oina for total consideration, net of cash acquired, of $10.0 million, which consisted of cash payments of $5.6 million, a $1.6 million holdback, and up to $2.8 million in contingent earn-out provisions. The Company made payments of $0.8 million in the three month period ended March 31, 2020, related to the contingent earn-out provisions. The $1.6 million holdback is expected to be paid by the end of the fourth quarter of 2021 and is recorded in “Other liabilities” in the Condensed Consolidated Balance Sheets.  The revenues and operating income of Oina are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Precision and Science Technologies segment. None of the goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition Revenues and Operating Income

The revenue and operating income of the ACBN and Oina acquisitions for the three month period ended March 31, 2020, was $2.3 million and $0.1 million, respectively.

Pro forma information regarding these acquisitions has not been provided as they did not have a material impact on the Company’s Condensed Consolidated Statements of Operations individually or in the aggregate.

Note 3. Restructuring

Restructuring Program 2018 to 2019

In the third quarter of 2018, the Company announced a restructuring program (“2018 Plan”) that primarily involved workforce reductions and facility consolidation. This restructuring program was substantially completed as of December 31, 2019.  Through December 31, 2019, $26.5 million was charged to expense through “Other operating expense, net” in the Consolidated Statements of Operations ($20.4 million for Industrial Technologies and Services, $1.6 million for Precision and Science Technologies, $3.4 million for High Pressure Solutions, and $1.1 million for Corporate).

Additionally, $3.3 million of non-cash asset write-offs in the High Pressure Solutions segment were charged to expense through “Other operating expense, net” in the Consolidated Statements of Operations.  The Company does not anticipate any material future expense related to this restructuring program and any remaining liabilities will be paid as contractually obligated.

Restructuring Program 2020 to 2022

Subsequent to the acquisition of Ingersoll Rand Industrial, the Company announced a restructuring program (“2020 Plan”) to drive efficiencies and synergies, reduce the number of facilities and optimize operating margin within the merged Company. The Company expects to incur total expenses of approximately $350.0 million related to workforce reductions, lease termination costs, other facility rationalization costs and other business related transformation costs from 2020 until 2022. The Company expects to realize approximately $250.0 million in annualized cost synergies by the end of 2022. The Company continues to evaluate operating efficiencies and anticipates incurring additional costs in the coming years in connection with these activities, but is unable to estimate those amounts at this time as such plans are not yet finalized.

Through March 31, 2020, $41.6 million was charged to expense through “Other operating expense, net” in the Condensed Consolidated Statements of Operations ($30.0 million for Industrial Technologies and Services, $3.1 million for Precision and Science Technologies, $3.1 million for High Pressure Solutions, $0.5 million for Specialty Vehicle Technologies and $4.9 million for Corporate).

The following table summarizes the activity associated with the Company’s restructuring programs for the three month period ended March 31, 2020.

As of March 31, 2020, restructuring reserves of $28.4 million related to these programs are included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets. The activity associated with the 2018 Plan for the three month period ended March 31, 2020 was not material. As of December 31, 2019, restructuring reserves of $5.0 million related to these programs are included in ‘‘Accrued liabilities’’ in the Condensed Consolidated Balance Sheets.

Note 4. Inventories

Inventories as of March 31, 2020 and December 31, 2019 consisted of the following.

Note 5. Goodwill and Other Intangible Assets

The Company reorganized its reportable segments during the three month period ended March 31, 2020.  Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired and liabilities assumed in a business combination.

The changes in the carrying amount of goodwill attributable to each reportable segment for the three month period ended March 31, 2020 is presented in the table below.

As of March 31, 2020, goodwill included $343.3 million of accumulated impairment losses within the High Pressure Solutions segment and $220.6 million of accumulated impairment losses within the Industrial Technologies and Services segment.

As of March 31, 2020, there was no indication that the carrying value of the Company’s goodwill and other intangible assets may not be recoverable.  However, a prolonged adverse impact of the COVID-19 pandemic on the Company’s consolidated financial results may require an impairment charge related to one or more of these assets in a future period.

There were no goodwill impairment charges recorded during the three month periods ended March 31, 2020 and 2019.

Other intangible assets as of March 31, 2020 and December 31, 2019 consisted of the following.

Amortization of intangible assets was $55.2 million for the three month period ended March 31, 2020 and $31.4 million for the three month period ended March 31, 2019.  Amortization of intangible assets is anticipated to be approximately $350.0 million in 2020 and $275.0 million to $315.0 million from 2021 through 2025 based upon the exchange rates as of March 31, 2020.

Note 6. Accrued Liabilities

Accrued liabilities as of March 31, 2020 and December 31, 2019 consisted of the following.

A reconciliation of the changes in the accrued product warranty liability for the three month periods ended March 31, 2020 and 2019 are as follows.

Note 7. Benefit Plans

Acquisition of Ingersoll Rand Industrial

Defined Contribution Plans

In connection with the acquisition of Ingersoll Rand Industrial, the Company acquired certain defined contribution plans.  Most of the Ingersoll Rand Industrial employees in the U.S. are covered by a defined contribution plan.  Employer contributions are determined based on criteria specific to the individual.

Pension and Other Postretirement Benefit Plans

The Company acquired a number of pension and postretirement plans worldwide.  As of the date of acquisition of Ingersoll Rand Industrial, the Company recognized the funded status of the acquired defined benefit pension plans.  The funded status is the difference between the fair value of the plan assets and the projected benefit obligation.  Certain Company employees participate in various other postretirement benefit plans that are sponsored by Ingersoll Rand and cover certain U.S. and non – U.S. employees.  The other postretirement benefit plans are unfunded.  The Company funds the other postretirement plans on a pay-as-you-go basis in the form of direct benefit payments.  Other postretirement benefits are contributory with contributions adjusted for annually.  Life insurance plans for retirees are primarily noncontributory.

Deferred Compensation Plans

The Company acquired deferred compensation plans which allow certain key employees to defer a portion of their eligible compensation into a number of investment choices, including the Company’s common stock equivalents.  Except with respect to the Supplemental Employee Savings Plan I and II, which plans settle all investments in cash, any amounts invested in common stock are settled in shares of Ingersoll Rand common stock at the time of distribution. All other investments are settled in cash.  The portion of the acquired deferred compensation to be settled in shares is accounted for in the consideration transferred.

Net Periodic Benefit Cost

The following table summarizes the components of net periodic benefit cost for the Company’s defined benefit pension plans and other postretirement benefit plans recognized for the three month periods ended March 31, 2020 and 2019.

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

Note 8. Debt

Debt as of March 31, 2020 and December 31, 2019 is summarized as follows.

Senior Secured Credit Facilities

The Company entered into a Senior Secured Credit Agreement (“Credit Agreement”) with UBS AG, Stamford Branch, as administrative agent, and other agents, lenders and parties thereto (the debt facilities under the Credit Agreement, the “Senior Secured Credit Facilities”) on July 30, 2013.  The Company entered into Amendment No. 1 to the Credit Agreement with UBS AG, Stamford Branch, as administrative agent, and the lenders and other parties thereto on March 4, 2016 (“Amendment No. 1”), Amendment No. 2 on August 17, 2017 (“Amendment No. 2”) and Amendment No. 3 on December 13, 2018 (“Amendment No. 3”).  Amendment No. 4 to the Credit Agreement, among other modifications, replaced UBS AG, as resigning agent, with Citibank, N.A. as successor agent, on June 28, 2019 (“Amendment No. 4”).

The Senior Secured Credit Facilities provided senior secured financing consisting of (i) a senior secured term loan facility denominated in U.S. dollars (as refinanced and otherwise modified from time to time prior to February 28, 2020, the “Original Dollar Term Loan”), (ii) a senior secured term loan facility denominated in Euros (as refinanced and otherwise modified from time to time prior to February 28, 2020, the “Original Euro Term Loan”) and (iii) a senior secured revolving credit facility (as refinanced and otherwise modified from time to time the “Revolving Credit Facility”).  The Revolving Credit Facility is available to be drawn in U.S. dollars (“USD”), Euros (“EUR”), Great British Pounds (“GBP”) and other reasonably accepted foreign currencies, subject to certain sublimits for the foreign currencies.

See Note 10 “Debt” to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2019 for further information on the amendments to the Senior Secured Credit Facilities.

On February 28, 2020, the Company entered into Amendment No. 5 to the Credit Agreement (“Amendment No. 5”).  Amendment No. 5 refinanced the existing Original Dollar Term Loan and Original Euro Term Loan.  The proceeds from the replacement $927.6 million Dollar Term Loan (“Dollar Term Loan”) and replacement €601.2 million Euro Term Loan (“Euro Term Loan”) were used to refinance the outstanding Original Dollar Term Loan and Original Euro Term Loan.  The proceeds from the Dollar Term Loan and the Euro Term Loan were reduced by an original issue discount of $1.2 million and €0.8 million, respectively.  The Euro Term Loan and Dollar Term Loan will mature on February 28, 2027 (or, if such date is not a business day, the first business day thereafter).  The refinancing of the Original Dollar Term Loan and the Original Euro Term Loan resulted in the write off of unamortized debt issuance costs of $2.0 million which was recorded to “Loss on extinguishment of debt” in the Condensed Consolidated Statements of Operations.

At the time of the acquisition of Ingersoll Rand Industrial, the Credit Agreement was amended to include an additional $1,900.0 million senior secured term loan (“Dollar Term Loan B”) by and among Ingersoll-Rand Services Company, as the borrower, the lenders party thereto and Citi, as the administrative agent.  Further, Ingersoll-Rand Services Company, the borrower with respect to the Dollar Term Loan B was designated as an additional borrower under the Credit Agreement.  The Dollar Term Loan B and the Dollar Term Loan and the Euro Term Loan have guarantees from the same credit parties and are secured by the same collateral.  The Dollar Term Loan B will mature on February 28, 2027 (or, if such date is not a business day, the first business day thereafter). The proceeds from the $1,900.0 million Dollar Term Loan B were reduced by a $2.4 million original issue discount.

As of the closing of the acquisition of Ingersoll Rand Industrial, on February 29, 2020, the aggregate amount of the Revolving Credit Facility increased to $1,000.0 million and the capacity under the Revolving Credit Facility to issue letters of credit increased to $400.0 million.  As of March 31, 2020, the Company had no outstanding borrowings under the Revolving Credit Facility, $44.7 million of outstanding letters of credit under the Revolving Credit Facility and unused availability under the Revolving Credit Facility of $955.3 million.

Interest Rates and Fees

Borrowings under the Dollar Term Loan, Dollar Term Loan B and 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, (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.  Borrowings under the Euro Term Loan bear interest at a rate equal to 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.  The applicable margin for (i) the Dollar Term Loan is 1.75% for LIBOR loans and 0.75% for base rate loans, (ii) the Dollar Term Loan B is 1.75% for LIBOR loans and 0.75% for base rate loans, (iii) the Revolving Credit Facility is 2.00% for LIBOR loans and 1.00% for Base Rate loans and (iv) the Euro Term Loan is 2.00% for LIBOR loans.

In addition to payment interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee of 0.375% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder.  The commitment fee reduces to 0.25% or 0.125% upon the achievement of a Level I or Level II status, respectively.  Level I status means that the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio (as defined in the Senior Secured Credit Facilities) is less than or equal to 1.75 to 1.00.  Level II status means that the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 1.50 to 1.00.  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 Credit Facilities) commencing with the fiscal year ending December 31, 2021 (which percentage will be reduced to 25% if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.25 to 1.00 but greater than 2.00 to 1.00, and which prepayment will not be required if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.00 to 1.00), (ii) 100% of the net cash proceeds of non-ordinary asset sales or other dispositions of property, subject to reinvestment rights (which percentage will be reduced to 50% if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.25 to 1.00 but greater than 2.00 to 1.00 and which prepayment will not be required if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.00 to 1.00), and (iii) 100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the Credit Agreement.

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

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, provided that any voluntary prepayment of the Dollar Term Loan, the Dollar Term Loan B or the Euro Term Loan prior to August 28, 2020, in connection with a repricing transaction shall be subject to a prepayment premium of 1.00% of the principal amount so prepaid.

Amortization and Final Maturity

The Dollar Term Loan, Dollar Term Loan B and Euro Term Loan amortize in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of such term loan, with the balances payable on February 28, 2027 (or, if such date is not a business day, the first business day thereafter).

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.

The Revolving Credit Facility requires that, if the sum of the aggregate principle amount of all borrowings under the Revolving Credit Facility and non-cash collateralized letters of credit outstanding under the Revolving Credit Facility (less the amount of letters of credit outstanding as of June 28, 2019) exceeds 40% of the commitments under the Revolving Credit Facility, the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio shall not exceed 6.25 to 1.00 as of the last day of the fiscal quarter.

The Senior Secured Credit Facilities also contain certain customary affirmative covenants and events of default.

Receivables Financing Agreement

Note 9. Stock-Based Compensation Plan

As of the acquisition date of February 29, 2020, Ingersoll Rand Industrial employees’ unvested equity awards and a limited number of vested awards were converted into equity awards denominated in shares of the Company’s common stock based on a defined exchange ratio.  Ingersoll Rand Industrial employees’ equity awards were converted into Ingersoll Rand stock options and restricted stock units.

Stock Option Awards

Stock options are granted to employees with an exercise price equal to the fair value of the Company’s per share common stock on the date of grant.  Stock option awards typically vest over four or five years and expire ten years  from the date of grant.

A summary of the Company’s stock option (including SARs) activity for the three month period ended March 31, 2020 is presented in the following table (underlying shares in thousands).

The following assumptions were used to estimate the fair value of options granted (excluding previously disclosed modified awards) during the three month periods ended March 31, 2020 and 2019 using the Black-Scholes option-pricing model.

Restricted Stock Unit Awards

Note 10. Accumulated Other Comprehensive (Loss) Income

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

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

Changes in accumulated other comprehensive (loss) income by component for the three month periods ended March 31, 2020 and 2019 are presented in the following table ⁽¹⁾.

On January 1, 2019, the Company adopted ASU 2018-02 which reclassified stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive (loss) income to retained (deficit) earnings.  The Company recorded a cumulative-effect adjustment which increased “Accumulated other comprehensive loss” of the Condensed Consolidated Balance Sheet by $8.2 million.

Reclassifications out of accumulated other comprehensive (loss) income for the three month periods ended March 31, 2020 and 2019 are presented in the following table.

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 using pay-fixed interest rate swaps as cash flow hedges of variable rate debt in order to adjust the relative fixed and variable proportions.

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

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

Derivative Instruments

Gains and losses on derivatives designated as cash flow hedges included in the Condensed Consolidated Statements of Comprehensive (Loss) Income for the three month periods ended March 31, 2020 and 2019 are as presented in the table below.

As of March 31, 2020, the Company was the fixed rate payor on four interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $825.0 million of the Company’s LIBOR-based variable rate borrowings.  These contracts carry fixed rates ranging from 3.6% to 4.3% and expire in 2020.  These swap agreements qualify as hedging instruments and have been designated as cash flow hedges of forecasted LIBOR-based interest payments.  Based on LIBOR-based swap yield curves as of March 31, 2020, the Company expects to reclassify losses of $12.6 million out of AOCI into earnings during the next 12 months.  The Company’s LIBOR-based variable rate borrowings outstanding as of March 31, 2020 were $2,824.2 million and €600.4 million.

The Company had eleven foreign currency forward contracts outstanding as of March 31, 2020 with notional amounts ranging from $7.5 million to $74.2 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 within “Other operating expense, net” in the Condensed Consolidated Statements of Operations.  The Company’s foreign currency forward contracts are subject to master netting arrangements or agreements between the Company and each counterparty for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract with that certain counterparty.  It is the Company’s practice to recognize the gross amounts in the Condensed Consolidated Balance Sheets.  The amount available to be netted is not material.

The Company’s losses on derivative instruments not designated as accounting hedges and total net foreign currency transaction losses for the three month periods ended March 31, 2020 and 2019 were as follows.

The Company has a significant investment in consolidated subsidiaries with functional currencies other than the USD, particularly the EUR. On August 17, 2017, the Company designated its €615.0 million Original Euro Term Loan as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies until it was extinguished and replaced on February 28, 2020 by a €601.2 million Euro Term Loan, further described in Note 8 “Debt”.  As of March 31, 2020, the  Euro Term Loan of €600.4 million remained designated.

The Company’s gains, net of income tax, associated with changes in the value of debt for the three month periods ended March 31, 2020 and 2019 and the net balance of such gains included in accumulated other comprehensive (loss) income as of March 31, 2020 and 2019 were as follows.

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

Fair Value Measurements

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

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

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.