Ingersoll Rand Inc. - Quarter Report: 2021 March (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 March 31, 2021
or
| ☐ | 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
____________________________
Ingersoll Rand 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.) | ||||
800-A Beaty Street
Davidson, North Carolina 28036
(Address of Principal Executive Offices) (Zip Code)
(704) 655-4000
(Registrant’s Telephone Number, Including Area Code)
____________________________
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
| Common Stock, $0.01 Par Value per share | IR | New York Stock Exchange | ||||||
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 ý 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ý | 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 ý
The registrant had outstanding 419,452,801 shares of Common Stock, par value $0.01 per share, as of April 23, 2021.
INGERSOLL RAND INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
| Page No. | |||||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, 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, 2020, 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:
•The anticipated benefits of our acquisition of the Ingersoll Rand Industrial business may not be realized fully or at all, may take longer to realize than expected and the integration process will be complex, costly and time-consuming, which could adversely affect our business, financial results and financial condition.
•The COVID-19 pandemic has adversely affected our business and results of operations, and could have a material and adverse effect on our business, results of operations and financial condition in the future.
•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.
•Shareholder and customer emphasis on environmental, social, and governance responsibility may impose additional costs on us or expose us to new risks.
•Our revenues and operating results, especially in the High Pressure Solutions segment, depend on the level of activity in the energy industry, which is significantly affected by volatile oil and gas prices.
•Our results of operations are subject to exchange rate and other currency risks. A significant movement in exchange rates could adversely impact our results of operations and cash flows.
•Potential governmental regulations restricting the use, and increased public attention to and litigation regarding the impacts, of hydraulic fracturing or other processes on which it relies could reduce demand for our products.
•We face competition in the markets we serve, which could materially and adversely affect our operating results.
•Large or rapid increases in the cost of raw materials and component parts, substantial decreases in their availability or our dependence on particular suppliers of raw materials and component parts could materially and adversely affect our operating results.
•Our operating results could be adversely affected by a loss or reduction of business with key customers or consolidation or the vertical integration of our customer base.
•Credit and counterparty risks could harm our business.
•Acquisitions and integrating such acquisitions create certain risks and may affect our operating results.
•Dispositions create certain risks and may affect our operating results.
•The loss of, or disruption in, our distribution network could have a negative impact on our abilities to ship products, meet customer demand and otherwise operate our business.
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•Our ongoing and expected restructuring plans and other cost savings initiatives may not be as effective as we anticipate, and we may fail to realize the cost savings and increased efficiencies that we expect to result from these actions. Our operating results could be negatively affected by our inability to effectively implement such restructuring plans and other cost savings initiatives.
•Our success depends on our executive management and other key personnel and our ability to attract and retain top talent throughout the Company.
•If we are unable to develop new products and technologies, our competitive position may be impaired, which could materially and adversely affect our sales and market share.
•Cost overruns, delays, penalties or liquidated damages could negatively impact our results, particularly with respect to fixed-price contracts for custom engineered products.
•The risk of non-compliance with U.S. and foreign laws and regulations applicable to our international operations could have a significant impact on our results of operations, financial condition or strategic objectives.
•Changes in tax or other laws, regulations, or adverse determinations by taxing or other governmental authorities could increase our effective tax rate and cash taxes paid or otherwise affect our financial condition or operating results.
•A significant portion of our assets consists of goodwill and other intangible assets, the value of which may be reduced if we determine that those assets are impaired.
•Our business could suffer if we experience employee work stoppages, union and work council campaigns or other labor difficulties.
•We are a defendant in certain asbestos and silica-related personal injury lawsuits, which could adversely affect our financial condition.
•A natural disaster, catastrophe, pandemic or other event could adversely affect our operations.
•Information systems failure may disrupt our business and result in financial loss and liability to our customers.
•The nature of our products creates the possibility of significant product liability and warranty claims, which could harm our business.
•Environmental compliance costs and liabilities could adversely affect our financial condition.
•Third parties may infringe upon our intellectual property or may claim we have infringed their intellectual property, and we may expend significant resources enforcing or defending our rights or suffer competitive injury.
•We face risks associated with our pension and other postretirement benefit obligations.
•Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition.
•We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
•Despite our level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, including off-balance sheet financing, contractual obligations and general and commercial liabilities. This could further exacerbate the risks to our financial condition described above.
•The terms of the credit agreement governing the Senior Secured Credit Facilities may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
•Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
•When we utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness, 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.
•The Company may face risk associated with the discontinuation of and transition from currently used financial reference rates.
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
4
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 “Ingersoll Rand” in this Quarterly Report on Form 10-Q mean Ingersoll Rand Inc. and its subsidiaries, unless the context otherwise requires.
Website Disclosure
We use our website www.irco.com as a channel of distribution of Company information. Financial and other important information regarding us is routinely accessible through and posted on our website. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about Ingersoll Rand Inc. when you enroll your email address by visiting the “Email Alerts” section of our website at investors.irco.com. The contents of our website are not, however, a part of this Quarterly Report on Form 10-Q.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INGERSOLL RAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 1,369.8 | $ | 703.5 | |||||||
| Cost of sales | 854.4 | 485.8 | |||||||||
| Gross Profit | 515.4 | 217.7 | |||||||||
| Selling and administrative expenses | 270.7 | 147.2 | |||||||||
| Amortization of intangible assets | 93.7 | 49.3 | |||||||||
| Other operating expense, net | 1.3 | 97.3 | |||||||||
| Operating Income (Loss) | 149.7 | (76.1) | |||||||||
| Interest expense | 23.1 | 27.1 | |||||||||
| Loss on extinguishment of debt | — | 2.0 | |||||||||
| Other income, net | (2.5) | (0.2) | |||||||||
| Income (Loss) from Continuing Operations Before Income Taxes | 129.1 | (105.0) | |||||||||
| Provision (benefit) for income taxes | 17.5 | (67.0) | |||||||||
| Income (Loss) from Continuing Operations | 111.6 | (38.0) | |||||||||
| Income (loss) from discontinued operations, net of tax | (201.7) | 1.2 | |||||||||
| Net Loss | (90.1) | (36.8) | |||||||||
| Less: Net income attributable to noncontrolling interests | 0.3 | — | |||||||||
| Net Loss Attributable to Ingersoll Rand Inc. | $ | (90.4) | $ | (36.8) | |||||||
| Amounts attributable to Ingersoll Rand Inc. common stockholders: | |||||||||||
| Income (loss) from continuing operations, net of tax | $ | 111.3 | $ | (38.0) | |||||||
| Income (loss) from discontinued operations, net of tax | (201.7) | 1.2 | |||||||||
| Net loss attributable to Ingersoll Rand Inc. | $ | (90.4) | $ | (36.8) | |||||||
| Basic earnings (loss) per share of common stock: | |||||||||||
| Earnings (loss) from continuing operations | $ | 0.27 | $ | (0.14) | |||||||
| Loss from discontinued operations | (0.48) | — | |||||||||
| Net loss | (0.22) | (0.13) | |||||||||
| Diluted earnings (loss) per share of common stock: | |||||||||||
| Earnings (loss) from continuing operations | $ | 0.26 | $ | (0.14) | |||||||
| Loss from discontinued operations | (0.47) | — | |||||||||
| Net loss | (0.21) | (0.13) | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INGERSOLL RAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in millions)
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Comprehensive Loss Attributable to Ingersoll Rand Inc. | |||||||||||
| Net loss attributable to Ingersoll Rand Inc. | $ | (90.4) | $ | (36.8) | |||||||
| Other comprehensive loss, net of tax | |||||||||||
| Foreign currency translation adjustments, net | (99.8) | (92.2) | |||||||||
| Unrecognized gain on cash flow hedges, net | — | 1.2 | |||||||||
| Pension and other postretirement prior service cost and gain or (loss), net | 1.2 | 2.9 | |||||||||
| Total other comprehensive loss, net of tax | (98.6) | (88.1) | |||||||||
| Comprehensive loss attributable to Ingersoll Rand Inc. | $ | (189.0) | $ | (124.9) | |||||||
| Comprehensive Loss Attributable to Noncontrolling Interests | |||||||||||
| Net income attributable to noncontrolling interests | $ | 0.3 | $ | — | |||||||
| Other comprehensive loss, net of tax | |||||||||||
| Foreign currency translation adjustments, net | (1.1) | (4.0) | |||||||||
| Total other comprehensive loss, net of tax | (1.1) | (4.0) | |||||||||
| Comprehensive loss attributable to noncontrolling interests | (0.8) | (4.0) | |||||||||
| Total Comprehensive Loss | $ | (189.8) | $ | (128.9) | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INGERSOLL RAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,639.6 | $ | 1,750.9 | |||||||
Accounts receivable, net of allowance for credit losses of $50.6 and $52.7, respectively | 978.1 | 934.4 | |||||||||
| Inventories | 832.5 | 785.3 | |||||||||
| Other current assets | 199.3 | 199.7 | |||||||||
| Assets of discontinued operations - current | 504.4 | 191.8 | |||||||||
| Total current assets | 4,153.9 | 3,862.1 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $310.6 and $291.9, respectively | 713.6 | 714.4 | |||||||||
| Goodwill | 6,154.9 | 6,108.8 | |||||||||
| Other intangible assets, net | 4,499.1 | 4,527.0 | |||||||||
| Deferred tax assets | 16.5 | 16.1 | |||||||||
| Other assets | 323.9 | 334.5 | |||||||||
| Assets of discontinued operations - long-term | — | 495.7 | |||||||||
| Total assets | $ | 15,861.9 | $ | 16,058.6 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Short-term borrowings and current maturities of long-term debt | $ | 40.6 | $ | 40.4 | |||||||
| Accounts payable | 674.2 | 646.6 | |||||||||
| Accrued liabilities | 754.8 | 769.8 | |||||||||
| Liabilities of discontinued operations - current | 66.7 | 41.8 | |||||||||
| Total current liabilities | 1,536.3 | 1,498.6 | |||||||||
| Long-term debt, less current maturities | 3,823.2 | 3,859.1 | |||||||||
| Pensions and other postretirement benefits | 266.3 | 274.8 | |||||||||
| Deferred income taxes | 871.4 | 873.5 | |||||||||
| Other liabilities | 339.0 | 353.3 | |||||||||
| Liabilities of discontinued operations - long-term | — | 9.8 | |||||||||
| Total liabilities | $ | 6,836.2 | $ | 6,869.1 | |||||||
Commitments and contingencies (Note 16) | — | — | |||||||||
| Stockholders’ equity | |||||||||||
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 420,864,854 and 420,123,978 shares issued as of March 31, 2021 and December 31, 2020, respectively | 4.2 | 4.2 | |||||||||
| Capital in excess of par value | 9,337.8 | 9,310.3 | |||||||||
| Accumulated deficit | (266.1) | (175.7) | |||||||||
| Accumulated other comprehensive income (loss) | (84.4) | 14.2 | |||||||||
Treasury stock at cost; 1,495,403 and 1,496,169 shares as of March 31, 2021 and December 31, 2020, respectively | (34.8) | (33.3) | |||||||||
| Total Ingersoll Rand Inc. stockholders’ equity | $ | 8,956.7 | $ | 9,119.7 | |||||||
| Noncontrolling interests | 69.0 | 69.8 | |||||||||
| Total stockholders’ equity | $ | 9,025.7 | $ | 9,189.5 | |||||||
| Total liabilities and stockholders’ equity | $ | 15,861.9 | $ | 16,058.6 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INGERSOLL RAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; in millions)
| Three Month Period Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Ingersoll Rand Inc. Stockholders' Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares Issued | Par | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | 420.1 | $ | 4.2 | $ | 9,310.3 | $ | (175.7) | $ | 14.2 | $ | (33.3) | $ | 9,119.7 | $ | 69.8 | $ | 9,189.5 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | (90.4) | — | — | (90.4) | 0.3 | (90.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for stock-based compensation plans | 0.8 | — | 4.7 | — | — | — | 4.7 | — | 4.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | — | (3.0) | (3.0) | — | (3.0) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of treasury stock for stock-based compensation plans | — | — | (1.1) | — | — | 1.5 | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 23.9 | — | — | — | 23.9 | — | 23.9 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (98.6) | — | (98.6) | (1.1) | (99.7) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | 420.9 | $ | 4.2 | $ | 9,337.8 | $ | (266.1) | $ | (84.4) | $ | (34.8) | $ | 8,956.7 | $ | 69.0 | $ | 9,025.7 | ||||||||||||||||||||||||||||||||||||
| Three Month Period Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total Ingersoll Rand Inc. Stockholders' Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares Issued | Par | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | 206.8 | $ | 2.1 | $ | 2,302.0 | $ | (141.4) | $ | (256.0) | $ | (36.8) | $ | 1,869.9 | $ | — | $ | 1,869.9 | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (36.8) | — | — | (36.8) | — | (36.8) | ||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of Ingersoll Rand Industrial | 211.0 | 2.1 | 6,934.9 | — | — | — | 6,937.0 | 73.3 | 7,010.3 | ||||||||||||||||||||||||||||||||||||||||||||
| Costs of issuing equity securities | — | — | (1.0) | — | — | — | (1.0) | — | (1.0) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for stock-based compensation plans | 0.4 | — | 2.2 | — | — | — | 2.2 | — | 2.2 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | — | (0.8) | (0.8) | — | (0.8) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of treasury stock for stock-based compensation plans | — | — | (1.0) | — | — | 1.4 | 0.4 | — | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 4.4 | — | — | — | 4.4 | — | 4.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (88.1) | — | (88.1) | (4.0) | (92.1) | ||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | (1.0) | — | — | (1.0) | — | (1.0) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | 418.2 | $ | 4.2 | $ | 9,241.5 | $ | (179.2) | $ | (344.1) | $ | (36.2) | $ | 8,686.2 | $ | 69.3 | $ | 8,755.5 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INGERSOLL RAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows From Operating Activities From Continuing Operations: | |||||||||||
| Net loss | $ | (90.1) | $ | (36.8) | |||||||
| Income (loss) from discontinued operations, net of tax | (201.7) | 1.2 | |||||||||
| Income (loss) from continuing operations | 111.6 | (38.0) | |||||||||
| Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities from continuing operations: | |||||||||||
| Amortization of intangible assets | 93.7 | 49.3 | |||||||||
| Depreciation | 25.3 | 13.9 | |||||||||
| Stock-based compensation expense | 23.3 | 3.4 | |||||||||
| Foreign currency transaction losses (gains), net | (18.1) | 2.3 | |||||||||
| Deferred income taxes | (4.8) | (1.1) | |||||||||
| Other non-cash adjustments | (0.4) | 2.0 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables | (53.6) | 12.1 | |||||||||
| Inventories | (56.1) | (19.4) | |||||||||
| Accounts payable | 31.4 | 81.1 | |||||||||
| Accrued liabilities | (8.1) | (80.3) | |||||||||
| Other assets and liabilities, net | (21.6) | 12.7 | |||||||||
| Net cash provided by operating activities from continuing operations | 122.6 | 38.0 | |||||||||
| Cash Flows From (Used In) Investing Activities From Continuing Operations: | |||||||||||
| Capital expenditures | (15.0) | (7.6) | |||||||||
| Net cash acquired (paid) in business combinations | (202.5) | 41.3 | |||||||||
| Disposals of property, plant and equipment | 9.6 | 0.1 | |||||||||
| Net cash provided by (used in) investing activities from continuing operations | (207.9) | 33.8 | |||||||||
| Cash Flows Used In Financing Activities From Continuing Operations: | |||||||||||
| Principal payments on long-term debt | (9.9) | (1,590.6) | |||||||||
| Proceeds from long-term debt | — | 1,586.0 | |||||||||
| Purchases of treasury stock | (3.0) | (0.8) | |||||||||
| Proceeds from stock option exercises | 5.1 | 2.7 | |||||||||
| Payments of contingent consideration | — | (0.7) | |||||||||
| Payments of debt issuance costs | — | (37.5) | |||||||||
| Payments of costs incurred to issue shares for Ingersoll Rand Industrial acquisition | — | (1.0) | |||||||||
| Net cash used in financing activities from continuing operations | (7.8) | (41.9) | |||||||||
| Cash Flows From (Used In) Discontinued Operations: | |||||||||||
| Net cash provided by (used in) operating activities | (0.3) | 30.4 | |||||||||
| Net cash used in investing activities | (0.3) | (0.7) | |||||||||
| Net cash provided by (used in) discontinued operations | (0.6) | 29.7 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (17.6) | (9.4) | |||||||||
| Net increase (decrease) in cash and cash equivalents | (111.3) | 50.2 | |||||||||
| Cash and cash equivalents, beginning of period | 1,750.9 | 505.5 | |||||||||
| Cash and cash equivalents, end of period | $ | 1,639.6 | $ | 555.7 | |||||||
| Supplemental Cash Flow Information | |||||||||||
| Cash paid for income taxes | $ | 26.7 | $ | 12.4 | |||||||
| Cash paid for interest | 19.9 | 25.9 | |||||||||
| Capital expenditures in accounts payable | 3.4 | 4.4 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
INGERSOLL RAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; in millions, except share and per share amounts)
Note 1. Basis of Presentation and Recent Accounting Pronouncements
Basis of Presentation
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 accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting, the instructions for Form 10-Q and Article 10 of the U.S. Securities and Exchange Commission (“SEC”) Regulation S-X. In the Company’s opinion, the condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. We have reclassified certain prior year amounts, including the results of discontinued operations, to conform to the current year presentation. Unless otherwise indicated, amounts provided in these Notes pertain to continuing operations. See Note 2 “Discontinued Operations” for information on discontinued operations.
The results of operations for the interim period ended March 31, 2021 are not necessarily indicative of future results. The ongoing novel Coronavirus (“COVID-19”) pandemic is a continuously evolving 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.
Recently Adopted Accounting Standard Updates (“ASU”)
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 credit losses” in the Condensed Consolidated Balance Sheets by $1.0 million.
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 Company adopted this guidance on January 1, 2021. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-4, 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
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optional expedients or exceptions available under this ASU. The Company will continue to assess whether this ASU is applicable throughout the effective period.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which explicitly clarifies which contracts, hedging relationships, and other transactions are within the scope of the optional expedients and exceptions allowed under Topic 848. The Company has not utilized any of the optional expedients or exceptions available under Topic 848. The Company will continue to assess whether this ASU is applicable throughout the effective period, in conjunction with our assessment of ASU 2020-4.
Note 2. Discontinued Operations
High Pressure Solutions
On February 14, 2021, the Company entered into an agreement to sell a majority interest in its High Pressure Solutions (“HPS”) business to private equity firm American Industrial Partners. The divested business comprised assets including trade receivables, inventory, property, customer lists, trademarks and certain intellectual property and liabilities for accounts payable and other accrued expenses. In exchange for selling a majority interest of 55%, the Company received cash of $300.0 million at closing and retains a 45% common equity interest in the newly-formed entity comprising the HPS business. The transaction closed and proceeds were received on April 1, 2021. We are unable to estimate the period of time the Company will maintain its investment.
The HPS business met the criteria for assets held for sale during the first quarter of 2021 and therefore is presented as a discontinued operation and its net assets are classified as held for sale and comparable prior periods are recast to reflect this change. The Company recognized a loss on disposal of $203.3 million in the three month period ended March 31, 2021 to reduce the carrying value of the HPS business to the estimated fair value of net proceeds and residual equity interest less costs to sell.
The results of operations of the HPS business are presented as discontinued operations as summarized below:
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 62.4 | $ | 96.4 | |||||||
| Cost of sales | 50.5 | 69.6 | |||||||||
| Gross Profit | 11.9 | 26.8 | |||||||||
| Selling and administrative expenses | 4.3 | 8.2 | |||||||||
| Amortization of intangible assets | 2.4 | 5.9 | |||||||||
| Other operating expense, net | 8.1 | 3.4 | |||||||||
| Loss on disposal group | 203.3 | — | |||||||||
| Income (Loss) from Discontinued Operations Before Income Taxes | (206.2) | 9.3 | |||||||||
| Provision (benefit) for income taxes | (4.5) | 8.1 | |||||||||
| Income (Loss) from Discontinued Operations, Net of Tax | $ | (201.7) | $ | 1.2 | |||||||
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The carrying amount of major classes of assets and liabilities classified that were included in discontinued operations at March 31, 2021 and December 31, 2020 related to the HPS business consist of the following (long-term assets and liabilities as of March 31, 2021 have been reclassified as current in the Condensed Consolidated Balance Sheets):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Accounts receivable, net | $ | 54.2 | $ | 32.2 | |||||||
| Inventories | 156.7 | 158.3 | |||||||||
| Other current assets | 3.3 | 1.3 | |||||||||
| Total current assets | 214.2 | 191.8 | |||||||||
| Property, plant and equipment, net | 81.5 | 82.9 | |||||||||
| Goodwill | 194.8 | 194.8 | |||||||||
| Other intangible assets, net | 203.2 | 205.6 | |||||||||
| Other assets | 14.0 | 12.4 | |||||||||
| Total assets, before valuation allowance | 707.7 | 687.5 | |||||||||
| Less: valuation allowance | 203.3 | — | |||||||||
| Total assets, net of valuation allowance | $ | 504.4 | $ | 687.5 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 39.2 | $ | 24.5 | |||||||
| Accrued liabilities | 20.6 | 17.3 | |||||||||
| Total current liabilities | 59.8 | 41.8 | |||||||||
| Other liabilities | 6.9 | 9.8 | |||||||||
| Total liabilities | $ | 66.7 | $ | 51.6 | |||||||
The significant non-cash operating items and capital expenditures reflected in cash flows of discontinued operations for the three month periods ended March 31, 2021 and 2020 related to the HPS business consist of the following:
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Loss on Disposal Group | $ | 203.3 | $ | — | |||||||
| Depreciation and amortization | 4.0 | 9.1 | |||||||||
| Capital expenditures | (0.3) | (0.7) | |||||||||
Note 3. Business Combinations
Acquisitions in 2021
On January 31, 2021, the Company acquired the Vacuum and Blower Systems division of Tuthill Corporation for cash consideration of $184.0 million. The business operates under the tradenames M-D Pneumatics and Kinney Vacuum Pumps and is a leader in the design and manufacture of positive displacement blowers, mechanical vacuum pumps, vacuum boosters and engineered blower and vacuum systems. The results of this business are reported within the Industrial Technologies and Services segment from the date of acquisition.
Due to the timing of the acquisition, the allocation of purchase price is preliminary and will be refined as additional information becomes available. The preliminary goodwill recognized of $80.1 million is attributable to the expected cost synergies, anticipated growth of new and existing customers, and the assembled workforce. The goodwill resulting from this acquisition is expected to be deductible for tax purposes.
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Also during the first quarter of 2021, within the Industrial Technologies and Services segment, the Company acquired three sales and service businesses for cash consideration of $15.1 million.
The following table summarizes the preliminary allocation of consideration to the fair values of identifiable assets acquired and liabilities assumed at the acquisition date.
| M-D Pneumatics and Kinney Vacuum Pumps | All Others | ||||||||||
| Accounts receivable | $ | 4.8 | $ | 2.5 | |||||||
| Inventories | 3.8 | 1.1 | |||||||||
| Other current assets | 0.1 | — | |||||||||
| Property, plant and equipment | 16.5 | 1.1 | |||||||||
| Goodwill | 80.1 | 1.8 | |||||||||
| Other intangible assets | 82.2 | 9.7 | |||||||||
| Total current liabilities | (3.5) | (0.5) | |||||||||
| Total noncurrent liabilities | — | (0.6) | |||||||||
| Total consideration | $ | 184.0 | $ | 15.1 | |||||||
The revenue and operating income included in the financial statements for these acquisitions subsequent to their date of acquisition is $10.6 million and $3.8 million, respectively.
Acquisition of Ingersoll Rand Industrial in 2020
On February 29, 2020, Ingersoll Rand (formerly Gardner Denver Holdings, Inc.) completed the acquisition of and merger with Ingersoll Rand Industrial in exchange for shares of the Company's common stock with a fair value of $6,937.0 million.
| Fair value of Ingersoll Rand common stock issued for Ingersoll Rand Industrial outstanding common stock | $ | 6,919.5 | ||||||
| Fair value attributable to pre-merger service for replacement equity awards | 8.6 | |||||||
| Fair value attributable to pre-merger service for deferred compensation plan | 8.9 | |||||||
| Total purchase consideration | $ | 6,937.0 | ||||||
This transaction was accounted for as a business combination. The assets and liabilities of Ingersoll Rand Industrial were measured at their fair values as of the date of the merger. The determination of fair values required the Company to make estimates about expected future cash flows, discount rates, royalty rates and other subjective assumptions and future events that are highly uncertain. These measurements were finalized within one year of the closing date of the transaction.
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The following table summarizes the allocation of consideration to the fair values of assets acquired and liabilities assumed of Ingersoll Rand Industrial as of February 29, 2020.
| Fair value | ||||||||
| Cash | $ | 38.8 | ||||||
| Accounts receivable | 585.8 | |||||||
| Inventories | 625.4 | |||||||
| Other current assets | 87.2 | |||||||
| Property, plant and equipment | 516.5 | |||||||
| Goodwill | 4,899.2 | |||||||
| Other intangible assets | 3,766.6 | |||||||
| Other noncurrent assets | 270.9 | |||||||
Total current liabilities, including current maturities of long-term debt of $19.0 million | (753.0) | |||||||
| Deferred tax liability | (842.4) | |||||||
| Long-term debt, net of debt issuance costs and an original issue discount | (1,851.7) | |||||||
| Other noncurrent liabilities | (333.0) | |||||||
| Noncontrolling interest | (73.3) | |||||||
| Total consideration | $ | 6,937.0 | ||||||
The Company incurred approximately $87.3 million of acquisition-related costs, of which $42.3 million was incurred in the three month period ended March 31, 2020. The remainder was incurred in 2019. These costs are presented within “Other operating expenses, net” in the Condensed Consolidated Statements of Operations. For additional information, see Note 2 “Business Combinations” of the annual report on Form 10-K for the year ended December 31, 2020.
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 from the date of acquisition through all subsequent periods. The Company’s condensed consolidated statements of operations for the three month periods ended March 31, 2021 and 2020 included revenues of $917.0 million and $293.4 million, respectively, and net income (loss) of $103.1 million and $(33.3) million, respectively, which include the effects of purchase accounting adjustments, primarily the amortization of intangible assets and the impacts on operating expenses of fair value adjustments to acquired inventory and property, plant and equipment.
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.
| For the Three Month Period Ended March 31, 2020 | |||||
| Revenues | $ | 1,269.8 | |||
| Net Loss | (0.2) | ||||
The unaudited pro forma information includes adjustments for the preliminary purchase price allocation (including, but not limited to, amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, fair value adjustments to acquired inventories, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs, transaction costs and related tax impacts) and the alignment of accounting policies.
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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, 2021 and 2020 that are directly attributable to the acquisition.
| For the Three Month Period Ended March 31, 2020 | |||||
| Increase (decrease) to revenue as a result of deferred revenue fair value adjustment, net of tax | $ | — | |||
| Increase (decrease) to expense as a result of inventory fair value adjustment, net of tax | (31.1) | ||||
| Increase (decrease) to expense as a result of transaction costs, net of tax | (38.1) | ||||
Other Acquisitions in 2020
On September 1, 2020, the Company acquired a manufacturer of electric peristaltic pumps for cash consideration, net of cash acquired, of $15.5 million and deferred consideration of $0.9 million. The results of this business are reported within the Precision and Science Technologies segment from the date of acquisition.
Also in the third quarter, within the Industrial Technologies and Services segment, the Company acquired two sales and service businesses for cash consideration of $15.0 million and deferred consideration of $5.1 million.
The revenue and operating income included in the financial statements for these acquisitions subsequent to their date of acquisition is $5.3 million and $2.0 million, respectively.
Note 4. Restructuring
Restructuring Program 2020 to 2022
Subsequent to the acquisition of Ingersoll Rand Industrial, the Company announced a restructuring program (“2020 Plan”) to create 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 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.
For the three month period ended March 31, 2021, expense of $2.4 million was recognized within “Other operating expense, net” in the Condensed Consolidated Statements of Operations ($1.7 million for Industrial Technologies and Services, $0.3 million for Precision and Science Technologies and $0.4 million for Corporate). Through March 31, 2021, we recognized expense related to the 2020 Plan of $72.0 million, $7.2 million, $6.4 million and $0.8 million for Industrial Technologies and Services, Precision and Science Technologies, Corporate and Specialty Vehicle Technologies, respectively.
The following table summarizes the activity associated with the Company’s restructuring programs for the three month period ended March 31, 2021.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance at beginning of period | $ | 17.5 | $ | 4.8 | |||||||
| Charged to expense - termination benefits | 2.4 | 35.7 | |||||||||
| Charged to expense - other | — | 2.8 | |||||||||
| Payments | (7.6) | (15.5) | |||||||||
| Currency translation adjustment and other | (0.4) | — | |||||||||
| Balance at end of period | $ | 11.9 | $ | 27.8 | |||||||
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Note 5. Inventories
Inventories as of March 31, 2021 and December 31, 2020 consisted of the following.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Raw materials, including parts and subassemblies | $ | 509.7 | $ | 486.8 | |||||||
| Work-in-process | 69.6 | 63.6 | |||||||||
| Finished goods | 244.4 | 226.1 | |||||||||
| 823.7 | 776.5 | ||||||||||
| Excess of LIFO costs over FIFO costs | 8.8 | 8.8 | |||||||||
| Inventories | $ | 832.5 | $ | 785.3 | |||||||
Note 6. Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill attributable to each reportable segment for the three month period ended March 31, 2021 is presented in the table below.
| Industrial Technologies and Services | Precision and Science Technologies | Specialty Vehicle Technologies | Total | ||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 4,151.2 | $ | 1,431.4 | $ | 526.2 | $ | 6,108.8 | |||||||||||||||
| Acquisitions | 78.9 | — | 8.1 | 87.0 | |||||||||||||||||||
| Foreign currency translation | (27.7) | (13.3) | 0.1 | (40.9) | |||||||||||||||||||
| Balance as of March 31, 2021 | $ | 4,202.4 | $ | 1,418.1 | $ | 534.4 | $ | 6,154.9 | |||||||||||||||
As of March 31, 2021, goodwill included accumulated impairment losses of $220.6 million within the Industrial Technologies and Services segment.
Other Intangible Assets, Net
Other intangible assets as of March 31, 2021 and December 31, 2020 consisted of the following.
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Amortized intangible assets | |||||||||||||||||||||||||||||||||||
| Customer lists and relationships | $ | 3,261.1 | $ | (896.2) | $ | 2,364.9 | $ | 3,256.2 | $ | (872.0) | $ | 2,384.2 | |||||||||||||||||||||||
| Technology | 282.3 | (47.8) | 234.5 | 285.9 | (39.0) | 246.9 | |||||||||||||||||||||||||||||
| Tradenames | 41.3 | (16.5) | 24.8 | 41.8 | (15.6) | 26.2 | |||||||||||||||||||||||||||||
| Other | 110.6 | (63.4) | 47.2 | 100.5 | (55.2) | 45.3 | |||||||||||||||||||||||||||||
| Unamortized intangible assets | |||||||||||||||||||||||||||||||||||
| Tradenames | 1,827.7 | — | 1,827.7 | 1,824.4 | — | 1,824.4 | |||||||||||||||||||||||||||||
| Total other intangible assets | $ | 5,523.0 | $ | (1,023.9) | $ | 4,499.1 | $ | 5,508.8 | $ | (981.8) | $ | 4,527.0 | |||||||||||||||||||||||
Intangible Asset Impairment Considerations
As of March 31, 2021, there were no indications that the carrying value of goodwill and other intangible assets may not be recoverable.
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Note 7. Accrued Liabilities
Accrued liabilities as of March 31, 2021 and December 31, 2020 consisted of the following.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Salaries, wages and related fringe benefits | $ | 197.3 | $ | 229.6 | |||||||
| Contract liabilities | 188.9 | 172.0 | |||||||||
| Product warranty | 51.8 | 52.5 | |||||||||
| Operating lease liabilities | 47.6 | 49.4 | |||||||||
| Restructuring | 11.9 | 17.5 | |||||||||
| Taxes | 121.2 | 116.0 | |||||||||
| Other | 136.1 | 132.8 | |||||||||
| Total accrued liabilities | $ | 754.8 | $ | 769.8 | |||||||
A reconciliation of the changes in the accrued product warranty liability for the three month periods ended March 31, 2021 and 2020 are as follows.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance at beginning of period | $ | 52.5 | $ | 19.1 | |||||||
| Product warranty accruals | 4.4 | 6.1 | |||||||||
| Acquired warranty | 0.1 | 31.3 | |||||||||
| Settlements | (4.8) | (6.8) | |||||||||
Charged to other accounts(1) | (0.4) | (0.5) | |||||||||
| Balance at end of period | $ | 51.8 | $ | 49.2 | |||||||
(1)Primarily the effects of foreign currency translation adjustments
Note 8. Benefit Plans
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, 2021 and 2020.
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| For the Three Month Period Ended March 31, | For the Three Month Period Ended March 31, | For the Three Month Period Ended March 31, | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||
| Service cost | $ | 1.7 | $ | 0.6 | $ | 1.1 | $ | 0.7 | $ | — | $ | — | |||||||||||||||||||||||
| Interest cost | 2.7 | 1.2 | 1.2 | 1.5 | 0.2 | 0.1 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (3.1) | (1.6) | (3.1) | (2.7) | — | — | |||||||||||||||||||||||||||||
| Recognition of: | |||||||||||||||||||||||||||||||||||
| Unrecognized prior service cost | — | — | — | — | (0.1) | — | |||||||||||||||||||||||||||||
| Unrecognized net actuarial loss | — | — | 1.3 | 0.7 | — | — | |||||||||||||||||||||||||||||
| $ | 1.3 | $ | 0.2 | $ | 0.5 | $ | 0.2 | $ | 0.1 | $ | 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.
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Note 9. Debt
Debt as of March 31, 2021 and December 31, 2020 is summarized as follows.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Short-term borrowings | $ | — | $ | — | |||||||
| Long-term debt: | |||||||||||
| Revolving credit facility, due 2025 | $ | — | $ | — | |||||||
Dollar Term Loan B, due 2027(1) | 1,879.0 | 1,883.7 | |||||||||
Dollar Term Loan, due 2027(2) | 917.4 | 919.6 | |||||||||
Euro Term Loan, due 2027(3) | 697.3 | 728.0 | |||||||||
Dollar Term Loan Series A, due 2027(4) | 391.7 | 392.4 | |||||||||
| Finance leases and other long-term debt | 17.8 | 17.2 | |||||||||
| Unamortized debt issuance costs | (39.4) | (41.4) | |||||||||
| Total long-term debt, net, including current maturities | 3,863.8 | 3,899.5 | |||||||||
| Current maturities of long-term debt | 40.6 | 40.4 | |||||||||
| Total long-term debt, net | $ | 3,823.2 | $ | 3,859.1 | |||||||
(1)As of March 31, 2021, this amount is presented net of unamortized discounts of $2.0 million. As of March 31, 2021, the applicable interest rate was approximately 1.86% and the weighted-average interest rate was 1.88% for the three month period ended March 31, 2021.
(2)As of March 31, 2021, this amount is presented net of unamortized discounts of $1.0 million. As of March 31, 2021, the applicable interest rate was approximately 1.86% and the weighted average interest rate was 1.88% for the three month period ended March 31, 2021.
(3)As of March 31, 2021, this amount is presented net of unamortized discounts of $0.7 million. As of March 31, 2021, the applicable interest rate was 2.00% and the weighted average interest rate was 2.00% for the three month period ended March 31, 2021.
(4)As of March 31, 2021, this amount is presented net of unamortized discounts of $5.3 million. As of March 31, 2021, the applicable interest rate was approximately 2.86% and the weighted average interest rate was 2.88% for the three month period ended March 31, 2021.
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, 2020 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.
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The Euro Term Loan and Dollar Term Loan will mature on February 28, 2027. 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 presented within “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. The proceeds from the $1,900.0 million Dollar Term Loan B were reduced by a $2.4 million original issue discount.
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.
On June 29, 2020, the Company entered into Amendment No. 6 to the Credit Agreement (“Amendment No. 6”). Amendment No. 6 (i) provided for $400.0 million of incremental term loans (“Dollar Term Loan Series A”), reduced by an original issue discount of $6.0 million, and (ii) established an increase of $100.0 million to the Revolving Credit Facility, bringing the total sum of the Revolving Credit Facility to $1,100.0 million. No specific use of proceeds arising from Amendment No. 6 has been identified. The proceeds are expected to be used for general business purposes, including providing incremental liquidity in the event of a prolonged adverse impact of the COVID-19 pandemic.
As of March 31, 2021, the aggregate amount of commitments under the Revolving Credit Facility was $1,100.0 million and the capacity under the Revolving Credit Facility to issue letters of credit was $400.0 million. As of March 31, 2021, the Company had no outstanding borrowings under the Revolving Credit Facility, outstanding letters of credit under the Revolving Credit Facility of $105.4 million and unused availability under the Revolving Credit Facility of $994.6 million.
Interest Rates and Fees
Borrowings under the Dollar Term Loan, Dollar Term Loan B, Dollar Term Loan Series A, 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%, (3) LIBOR for an interest period of one month, adjusted for statutory reserve requirements, plus 1.00% and (4) 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 Dollar Term Loan Series A is 2.75% for LIBOR loans and 1.75% for base rate loans, (iv) the Revolving Credit Facility is 2.00% for LIBOR loans and 1.00% for Base Rate loans and (v) the Euro Term Loan is 2.00% for LIBOR loans.
In addition to interest payments 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
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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 (i) 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 and (ii) any voluntary prepayment of Dollar Term Loan Series A prior to December 29, 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, Dollar Term Loan Series A, 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.
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.
Note 10. Stock-Based Compensation Plans
The Company has outstanding stock-based compensation awards granted under the 2013 Stock Incentive Plan (“2013 Plan”) and the 2017 Omnibus Incentive Plan (“2017 Plan”) as described in Note 17, “Stock-Based Compensation Plans” to the consolidated financial statements in its annual report on Form 10-K for the year ended December 31, 2020.
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Stock-Based Compensation
Stock-based compensation expense for the three month periods ended March 31, 2021 and 2020 are included in “Cost of sales” and “Selling and administrative expenses” in the Condensed Consolidated Statements of Operations and are as follows.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Stock-based compensation expense - continuing and discontinued operations | $ | 24.1 | $ | 3.5 | |||||||
| Stock-based compensation expense recognized in discontinued operations | 0.8 | 0.1 | |||||||||
| Stock-based compensation expense recognized in continuing operations | $ | 23.3 | $ | 3.4 | |||||||
Of the $24.1 million of expense for equity awards granted under the 2013 Plan and 2017 Plan, $16.8 million related to the $150 million equity grant to nearly 16,000 employees worldwide made in the third quarter of 2020.
As of March 31, 2021, there was $175.5 million of total unrecognized compensation expense related to outstanding stock options, restricted stock unit awards and performance stock unit awards.
The Company’s stock-based compensation awards are typically granted in the first quarter of the year and primarily consist of stock options, restricted stock units and performance share units. Eligible employees were also granted restricted stock units, during the three months ended September 30, 2020, that vest ratably over two years, subject to the passage of time and the employee's continued employment during such period. In some instances, such as death, awards may vest concurrently with or following an employee's termination.
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 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, 2021 is presented in the following table (underlying shares in thousands).
| Shares | Weighted-Average Exercise Price (per share) | ||||||||||
| Stock options outstanding as of December 31, 2020 | 7,742 | $ | 18.47 | ||||||||
| Granted | 757 | 45.58 | |||||||||
| Exercised or settled | (334) | 15.30 | |||||||||
| Forfeited | (42) | 26.03 | |||||||||
| Expired | (5) | 9.07 | |||||||||
| Stock options outstanding as of March 31, 2021 | 8,118 | 21.09 | |||||||||
| Vested as of March 31, 2021 | 5,383 | 15.57 | |||||||||
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The following assumptions were used to estimate the fair value of options granted (excluding previously disclosed converted awards) during the three month periods ended March 31, 2021 and 2020 using the Black-Scholes option-pricing model.
| For the Three Month Period Ended March 31, | |||||||||||
| Assumptions | 2021 | 2020 | |||||||||
| Expected life of options (in years) | 6.3 | 6.3 | |||||||||
| Risk-free interest rate | 0.9 | % | 0.7% - 1.5% | ||||||||
| Assumed volatility | 39.4 | % | 24.6% - 39.0% | ||||||||
| Expected dividend rate | 0.0 | % | 0.0 | % | |||||||
Restricted Stock Unit Awards
Restricted stock units are granted to employees and non-employee directors based on the market price of the Company’s common stock on the grant date and recognized in compensation expense over the vesting period. A summary of the Company’s restricted stock unit activity for the three month period ended March 31, 2021 is presented in the following table (underlying shares in thousands).
| Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
| Non-vested as of December 31, 2020 | 5,546 | $ | 33.09 | ||||||||
| Granted | 326 | 45.58 | |||||||||
| Vested | (476) | 28.51 | |||||||||
| Forfeited | (126) | 33.66 | |||||||||
| Non-vested as of March 31, 2021 | 5,270 | 34.26 | |||||||||
Performance Share Unit Awards
Performance share units are granted to employees and are subject to a three years performance period. The number of shares issued at the end of the performance period is determined by the Company’s total shareholder return percentile rank versus the S&P 500 index for the three year performance period. The grant date fair value of these awards is determined using a Monte Carlo simulation pricing model and compensation cost is recognized straight-line over a three year period.
A summary of the Company’s performance stock unit activity for the three month period ended March 31, 2021 is presented in the following table (underlying shares in thousands).
| Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
| Non-vested as of December 31, 2020 | 255 | $ | 29.72 | ||||||||
| Granted | 158 | 55.84 | |||||||||
| Forfeited | (6) | 29.72 | |||||||||
| Non-vested as of March 31, 2021 | 407 | 39.88 | |||||||||
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The following assumptions were used to estimate the fair value of performance share units granted during the three month periods ended March 31, 2021 and 2020 using the Monte Carlo simulation pricing model.
| For the Three Month Period Ended March 31, | |||||||||||
| Assumptions | 2021 | 2020 | |||||||||
| Expected term (in years) | 2.9 | 2.8 | |||||||||
| Risk-free interest rate | 0.2 | % | 0.5 | % | |||||||
| Assumed volatility | 36.9 | % | 35.2 | % | |||||||
| Expected dividend rate | — | % | — | % | |||||||
Note 11. Accumulated Other Comprehensive Income (Loss)
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 8 “Benefit Plans” and Note 12 “Hedging Activities, Derivative Instruments and Fair Value Measurements.”
The before tax income (loss) and related income tax effect are as follows.
| For the Three Month Period Ended March 31, 2021 | For the Three Month Period Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||
| Before-Tax Amount | Tax Benefit or (Expense) | Net of Tax Amount | Before-Tax Amount | Tax Benefit or (Expense) | Net of Tax Amount | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net | $ | (107.2) | $ | 7.4 | $ | (99.8) | $ | (89.5) | $ | (2.7) | $ | (92.2) | |||||||||||||||||||||||
| Unrecognized gains on cash flow hedges, net | — | — | — | 1.6 | (0.4) | 1.2 | |||||||||||||||||||||||||||||
| Pension and other postretirement benefit prior service cost and gain or loss, net | 1.5 | (0.3) | 1.2 | 3.5 | (0.6) | 2.9 | |||||||||||||||||||||||||||||
| Other comprehensive loss | $ | (105.7) | $ | 7.1 | $ | (98.6) | $ | (84.4) | $ | (3.7) | $ | (88.1) | |||||||||||||||||||||||
The tables above include only the other comprehensive income (loss), net of tax, attributable to Ingersoll Rand Inc. Other comprehensive income (loss), net, attributable to noncontrolling interest holders was $(1.1) million and $(4.0) million for the three month periods ended March 31, 2021 and 2020, respectively, and related entirely to foreign currency translation adjustments.
Changes in accumulated other comprehensive income (loss) by component for the three month periods ended March 31, 2021 and 2020 are presented in the following table(1).
| Foreign Currency Translation Adjustments, Net | Unrecognized Gains (Losses) on Cash Flow Hedges | Pension and Other Postretirement Benefit Plans | Total | ||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 74.6 | $ | — | $ | (60.4) | $ | 14.2 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (99.8) | — | 0.2 | (99.6) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | — | 1.0 | 1.0 | |||||||||||||||||||
| Other comprehensive income (loss) | (99.8) | — | 1.2 | (98.6) | |||||||||||||||||||
| Balance as of March 31, 2021 | $ | (25.2) | $ | — | $ | (59.2) | $ | (84.4) | |||||||||||||||
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| Foreign Currency Translation Adjustments, Net | Unrecognized Gains (Losses) on Cash Flow Hedges | Pension and Other Postretirement Benefit Plans | Total | ||||||||||||||||||||
| Balance as of December 31, 2019 | $ | (193.6) | $ | (10.9) | $ | (51.5) | $ | (256.0) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (92.2) | (2.8) | 2.4 | (92.6) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | 4.0 | 0.5 | 4.5 | |||||||||||||||||||
| Other comprehensive income (loss) | (92.2) | 1.2 | 2.9 | (88.1) | |||||||||||||||||||
| Balance as of March 31, 2020 | $ | (285.8) | $ | (9.7) | $ | (48.6) | $ | (344.1) | |||||||||||||||
(1)All amounts are net of tax. Amounts in parentheses indicate debits.
Reclassifications out of accumulated other comprehensive income (loss) for the three month periods ended March 31, 2021 and 2020 are presented in the following table.
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Details about Accumulated Other Comprehensive Income (Loss) Components | For the Three Month Period Ended March 31, | Affected Line(s) in the Statement Where Net Income is Presented | ||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Loss on cash flow hedges (interest rate swaps) | $ | — | $ | 5.3 | Interest expense | |||||||||||||||
| Benefit for income taxes | — | (1.3) | Benefit for income taxes | |||||||||||||||||
| Loss on cash flow hedges (interest rate swaps), net of tax | $ | — | $ | 4.0 | ||||||||||||||||
Amortization of defined benefit pension and other postretirement benefit items(1) | $ | 1.3 | $ | 0.7 | Cost of sales and Selling and administrative expenses | |||||||||||||||
| Benefit for income taxes | (0.3) | (0.2) | Benefit for income taxes | |||||||||||||||||
| Amortization of defined benefit pension and other postretirement benefit items, net of tax | $ | 1.0 | $ | 0.5 | ||||||||||||||||
| Total reclassifications for the period, net of tax | $ | 1.0 | $ | 4.5 | ||||||||||||||||
(1)These components are included in the computation of net periodic benefit cost. See Note 8 “Benefit Plans” for additional details.
Note 12. Hedging Activities, Derivative Instruments 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, from time to time, 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, Chinese Renminbi and Indian rupee are the principal
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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 at least quarterly. 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
The following table summarizes the notional amounts, fair values and classification of the Company’s outstanding derivatives by risk category and instrument type within the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020.
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| 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 Not Designated as Hedging Instruments | |||||||||||||||||||||||||||||||||||
Foreign currency forwards | Fair Value | 38.3 | 1.2 | — | — | — | |||||||||||||||||||||||||||||
Foreign currency forwards | Fair Value | 138.8 | — | — | 0.5 | — | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| 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 Not Designated as Hedging Instruments | |||||||||||||||||||||||||||||||||||
| Foreign currency forwards | Fair Value | 230.5 | 2.9 | — | — | — | |||||||||||||||||||||||||||||
| Foreign currency forwards | Fair Value | 51.2 | — | — | 0.7 | — | |||||||||||||||||||||||||||||
(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.
Losses on derivatives designated as cash flow hedges included in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2021 and 2020 are as presented in the table below.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Interest rate swap contracts | |||||||||||
| Loss recognized in AOCI on derivatives | $ | — | $ | (3.8) | |||||||
Loss reclassified from AOCI into income (effective portion)(1) | — | (5.3) | |||||||||
(1)Losses on derivatives reclassified from accumulated other comprehensive income (“AOCI”) into income were included within “Interest expense” in the Condensed Consolidated Statements of Operations.
As of March 31, 2021, the Company has no interest rate swap contracts. Our previous interest rate swap contracts expired during the third quarter of 2020 and the remaining amounts in AOCI were reclassified to Interest expense during the same period. The Company’s LIBOR-based variable rate borrowings outstanding as of March 31, 2021 were $3,196.4 million and €595.1 million.
The Company had seven foreign currency forward contracts outstanding as of March 31, 2021 with notional amounts ranging from $10.5 million to $47.8 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
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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 gains (losses) on derivative instruments not designated as accounting hedges and total net foreign currency losses for the three month periods ended March 31, 2021 and 2020 were as follows.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Foreign currency forward contracts losses | $ | (0.8) | $ | (2.6) | |||||||
| Total foreign currency transaction gains (losses), net | 18.1 | (2.3) | |||||||||
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 9 “Debt”. As of March 31, 2021, the Euro Term Loan of €595.1 million remained designated.
The Company’s gains (losses), net of income tax, associated with changes in the value of debt for the three month periods ended March 31, 2021 and 2020 were as follows.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Gain, net of income tax, recorded through other comprehensive income | $ | 18.9 | $ | 8.2 | |||||||
The net balance of such gains (losses) included in accumulated other comprehensive income (loss) as of March 31, 2021 and 2020 was $49.7 million and $83.0 million, respectively.
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.
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.
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The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.
| March 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
Foreign currency forwards(1) | $ | — | $ | 1.2 | $ | — | $ | 1.2 | |||||||||||||||
Trading securities held in deferred compensation plan(2) | 9.9 | — | — | 9.9 | |||||||||||||||||||
| Total | $ | 9.9 | $ | 1.2 | $ | — | $ | 11.1 | |||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||
Foreign currency forwards(1) | $ | — | $ | 0.5 | $ | — | $ | 0.5 | |||||||||||||||
Deferred compensation plans(2) | 24.5 | — | — | 24.5 | |||||||||||||||||||
| Total | $ | 24.5 | $ | 0.5 | $ | — | $ | 25.0 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
Foreign currency forwards(1) | $ | — | $ | 2.9 | $ | — | $ | 2.9 | |||||||||||||||
Trading securities held in deferred compensation plan(2) | 9.1 | — | — | 9.1 | |||||||||||||||||||
| Total | $ | 9.1 | $ | 2.9 | $ | — | $ | 12.0 | |||||||||||||||
| Financial Liabilities | |||||||||||||||||||||||
Foreign currency forwards(1) | $ | — | $ | 0.7 | $ | — | $ | 0.7 | |||||||||||||||
Deferred compensation plan(2) | 25.7 | — | — | 25.7 | |||||||||||||||||||
| Total | $ | 25.7 | $ | 0.7 | $ | — | $ | 26.4 | |||||||||||||||
(1)Based on calculations that use readily observable market parameters at their basis, such as spot and forward rates.
(2)Based on the quoted price of publicly traded mutual funds and other equity securities which are classified as trading securities and accounted for using the mark-to-market method.
Goodwill and Other Intangible Assets
Certain of our non-financial assets are subject to impairment analysis, including indefinite-lived intangible assets and goodwill. We review the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually. Any resulting impairment would require that the asset be recorded at its fair value. At December 31, 2020, we did not have any significant non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis. Refer to Note 6 “Goodwill and Other Intangible Assets” for further discussion pertaining to our annual and interim evaluation of goodwill and other intangible assets for impairment.
Note 13. Revenue from Contracts with Customers
Overview
The Company recognizes revenue when the Company has satisfied its obligation and control is transferred to the customer. The amount of revenue recognized includes adjustments for any variable consideration, such as rebates, sales discounts, liquidated damages, etc., which are included in the transaction price, and allocated to each performance obligation. The variable consideration is estimated throughout the course of the contract using the Company’s best estimates.
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
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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 generally due at either collection of payment from customers or recognition of revenue. Applying the practical expedient from ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in “Selling and administrative expenses” in the Condensed Consolidated Statements of Operations.
Disaggregation of Revenue
The following tables provide disaggregated revenue by reportable segment for the three month periods ended March 31, 2021 and 2020.
| For the Three Month Period Ended March 31, 2021 | |||||||||||||||||||||||
| Industrial Technologies and Services | Precision and Science Technologies | Specialty Vehicle Technologies | Total | ||||||||||||||||||||
| Primary Geographic Markets | |||||||||||||||||||||||
| United States | $ | 353.1 | $ | 98.1 | $ | 202.9 | $ | 654.1 | |||||||||||||||
| Other Americas | 60.2 | 3.5 | 12.1 | 75.8 | |||||||||||||||||||
| Total Americas | 413.3 | 101.6 | 215.0 | 729.9 | |||||||||||||||||||
| EMEIA | 319.4 | 80.1 | 15.7 | 415.2 | |||||||||||||||||||
| Asia Pacific | 181.1 | 34.0 | 9.6 | 224.7 | |||||||||||||||||||
| Total | $ | 913.8 | $ | 215.7 | $ | 240.3 | $ | 1,369.8 | |||||||||||||||
| Product Categories | |||||||||||||||||||||||
| Original equipment | $ | 528.7 | $ | 178.7 | $ | 184.6 | $ | 892.0 | |||||||||||||||
| Aftermarket | 385.1 | 37.0 | 55.7 | 477.8 | |||||||||||||||||||
| Total | $ | 913.8 | $ | 215.7 | $ | 240.3 | $ | 1,369.8 | |||||||||||||||
| Pattern of Revenue Recognition | |||||||||||||||||||||||
Revenue recognized at point in time(1) | $ | 847.9 | $ | 214.8 | $ | 233.4 | $ | 1,296.1 | |||||||||||||||
Revenue recognized over time(2) | 65.9 | 0.9 | 6.9 | 73.7 | |||||||||||||||||||
| Total | $ | 913.8 | $ | 215.7 | $ | 240.3 | $ | 1,369.8 | |||||||||||||||
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| For the Three Month Period Ended March 31, 2020 | |||||||||||||||||||||||
| Industrial Technologies and Services | Precision and Science Technologies | Specialty Vehicle Technologies | Total | ||||||||||||||||||||
| Primary Geographic Markets | |||||||||||||||||||||||
| United States | $ | 177.2 | $ | 49.3 | $ | 73.6 | $ | 300.1 | |||||||||||||||
| Other Americas | 45.3 | 4.9 | 4.8 | 55.0 | |||||||||||||||||||
| Total Americas | 222.5 | 54.2 | 78.4 | 355.1 | |||||||||||||||||||
| EMEIA | 200.6 | 40.9 | 5.4 | 246.9 | |||||||||||||||||||
| Asia Pacific | 80.9 | 17.8 | 2.8 | 101.5 | |||||||||||||||||||
| Total | $ | 504.0 | $ | 112.9 | $ | 86.6 | $ | 703.5 | |||||||||||||||
| Product Categories | |||||||||||||||||||||||
| Original equipment | $ | 303.3 | $ | 99.0 | $ | 72.6 | $ | 474.9 | |||||||||||||||
| Aftermarket | 200.7 | 13.9 | 14.0 | 228.6 | |||||||||||||||||||
| Total | $ | 504.0 | $ | 112.9 | $ | 86.6 | $ | 703.5 | |||||||||||||||
| Pattern of Revenue Recognition | |||||||||||||||||||||||
Revenue recognized at point in time(1) | $ | 459.4 | $ | 112.9 | $ | 84.5 | $ | 656.8 | |||||||||||||||
Revenue recognized over time(2) | 44.6 | — | 2.1 | 46.7 | |||||||||||||||||||
| Total | $ | 504.0 | $ | 112.9 | $ | 86.6 | $ | 703.5 | |||||||||||||||
(1)Revenues from short and long duration product and service contracts recognized at a point in time when control is transferred to the customer generally when product delivery has occurred and services have been rendered.
(2)Revenues primarily from long duration ETO product contracts and certain contracts for delivery of a significant volume of substantially similar products recognized over time as contractual performance obligations are completed.
Performance Obligations
The majority of the Company’s contracts have a single performance obligation as the promise to transfer goods and/or services. For contracts with multiple performance obligations, the Company utilizes observable prices to determine standalone selling price or cost plus margin if a standalone price is not available. The Company has elected to account for shipping and handling activities as fulfillment costs and not a separate performance obligation. If control transfers and related revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued.
The Company’s primary performance obligations include delivering standard or configured to order (“CTO”) goods to customers, designing and manufacturing a broad range of equipment customized to a customer’s specifications in ETO arrangements, rendering of services (maintenance and repair contracts), and certain extended or service type warranties. For incidental items that are immaterial in the context of the contract, costs are expensed as incurred or accrued at delivery.
As of March 31, 2021, for contracts with an original duration greater than one year, the Company expects to recognize revenue in the future related to unsatisfied (or partially satisfied) performance obligations of $406.1 million in the next twelve months and $304.5 million in periods thereafter. The performance obligations that are unsatisfied (or partially satisfied) are primarily related to orders for goods or services that were placed prior to the end of the reporting period and have not been delivered to the customer, on-going work on ETO contracts where revenue is recognized over time and service contracts with an original duration greater than one year.
Contract Balances
The following table provides the contract balances as of March 31, 2021 and December 31, 2020 presented in the Condensed Consolidated Balance Sheets.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Accounts receivable, net | $ | 978.1 | $ | 934.4 | |||||||
| Contract assets | 55.1 | 60.5 | |||||||||
| Contract liabilities | 192.6 | 175.7 | |||||||||
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Accounts receivable, net – Amounts due where the Company’s right to receive cash is unconditional. Customer receivables are recorded at face amount less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for expected losses as a result of customers’ inability to make required payments. Management evaluates the aging of customer receivable balances, the financial condition of its customers, historical trends and the time outstanding of specific balances to estimate the amount of customer receivables that may not be collected in the future and records the appropriate provision.
The allowance for credit losses for the three month periods ended March 31, 2021 and 2020 consisted of the following.
| For the Three Month Period Ended March 31, 2021 | |||||
| Balance at beginning of the period | $ | 52.7 | |||
| Provision charged to expense | 0.4 | ||||
| Write-offs, net of recoveries | (1.5) | ||||
| Foreign currency translation and other | (1.0) | ||||
| Balance at end of the period | $ | 50.6 | |||
Contract assets – The Company’s rights to consideration for the satisfaction of performance obligations subject to constraints apart from timing. Contract assets are transferred to receivables when the right to collect consideration becomes unconditional. Contract assets are presented net of progress billings and related advances from customers.
Contract liabilities – Advance payments received from customers for contracts for which revenue is not yet recognized. Contract liability balances are generally recognized in revenue within twelve months.
Contract assets and liabilities are reported in the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Contract assets and liabilities are presented net on a contract level, where required.
Payments from customers are generally due 30-60 days after invoicing. Invoicing for sales of standard products generally coincides with shipment or delivery of goods. Invoicing for CTO and ETO contracts typically follows a schedule for billing at contractual milestones. Payment milestones normally include down payments upon the contract signing, completion of product design, completion of customer’s preliminary inspection, shipment or delivery, completion of installation, and customer’s on-site inspection. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets.
The Company has elected the practical expedient from ASC 606-10-32-18 and does not adjust the transaction price for the effects of a financing component if, at contract inception, the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Note 14. Income Taxes
The following table summarizes the Company’s provision for income taxes and effective income tax provision rate for the three month periods ended March 31, 2021 and 2020.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Income (loss) before income taxes | $ | 129.1 | $ | (105.0) | |||||||
| Provision (benefit) for income taxes | $ | 17.5 | $ | (67.0) | |||||||
| Effective income tax provision rate | 13.6 | % | 63.8 | % | |||||||
The increase in the provision for income taxes and decrease in the effective income tax provision rate for the three month period ended March 31, 2021 when compared to the same three month period of 2020 is primarily due to an increase in the pre-tax book income in jurisdictions with lower effective tax rates combined with decreased earnings in jurisdictions with higher tax rates and a reduction of unrecognized tax reserves as a result of the lapse of the limitation on statutes.
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Note 15. Other Operating Expense, Net
The components of “Other operating expense, net” for the three month periods ended March 31, 2021 and 2020 were as follows.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Other Operating Expense, Net | |||||||||||
| Foreign currency transaction losses (gains), net | $ | (18.1) | $ | 2.3 | |||||||
Restructuring charges, net(1) | 2.4 | 38.5 | |||||||||
Acquisition and other transaction related expenses(2) | 15.3 | 55.0 | |||||||||
| Other, net | 1.7 | 1.5 | |||||||||
| Total other operating expense, net | $ | 1.3 | $ | 97.3 | |||||||
(2)Represents costs associated with successful and/or abandoned acquisitions and divestitures, including third-party expenses and post-closure integration costs (including certain incentive and non-incentive cash compensation costs).
Note 16. Contingencies
The Company is a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature for a company of its size and sector. The Company believes that such proceedings, lawsuits and administrative actions will not materially adversely affect its operations, financial condition, liquidity or competitive position. For further description of the Company’s contingencies, reference is made to Note 20, “Contingencies” in the notes to consolidated financial statements in the Company’s 2020 Form 10-K.
Asbestos and Silica Related Litigation
The Company believes that the pending and future asbestos and silica-related lawsuits are not likely to, in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or liquidity. “Accrued liabilities” and “Other liabilities” of the Condensed Consolidated Balance Sheets include a total litigation reserve of $129.2 million and $131.4 million as of March 31, 2021 and December 31, 2020, respectively, with regards to potential liability arising from the Company’s asbestos-related litigation. Asbestos related defense costs are excluded from the asbestos claims liability and are recorded separately as services are incurred. In the event of unexpected future developments, it is possible that the ultimate resolution of these matters may be material to the Company’s consolidated financial position, results of operation or liquidity.
The Company has entered into a series of agreements with certain of its or its predecessors’ legacy insurers and certain potential indemnitors to secure insurance coverage and/or reimbursement for the costs associated with the asbestos and silica-related lawsuits filed against the Company. The Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $133.4 million and $132.1 million as of March 31, 2021 and December 31, 2020, respectively, which was included in “Other assets” in the Condensed Consolidated Balance Sheets. The amounts recorded by the Company for asbestos-related liabilities and insurance recoveries are based on currently available information and assumptions that the Company believes are reasonable based on an evaluation of relevant factors. The actual liabilities or insurance recoveries could be higher or lower than those recorded if actual results vary significantly from the assumptions.
Environmental Matters
The Company has been identified as a potentially responsible party (“PRP”) with respect to several sites designated for cleanup under U.S. federal “Superfund” or similar state laws that impose liability for cleanup of certain waste sites and for related natural resource damages. The Company has undiscounted accrued liabilities of $13.4 million and $13.7 million as of March 31, 2021 and December 31, 2020, respectively, on its Condensed Consolidated Balance Sheets to the extent costs are known or can be reasonably estimated for its remaining financial obligations in relation to environmental matters and does not anticipate that any of these matters will result in material additional costs beyond amounts accrued. Based upon consideration of currently available information, the Company does not anticipate any material adverse effect on its results of operations, financial condition, liquidity or competitive position as a result of compliance with federal, state, local or foreign environmental laws or regulations, or cleanup costs relating to these matters.
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Note 17. Segment Results
A description of the Company’s three reportable segments is presented below. During the first quarter of 2021, the Company agreed to sell a majority interest in the business comprising its High Pressure Solutions segment. This sale was completed on April 1, 2021. The HPS business is presented as a discontinued operation in current and prior periods and has been excluded from the segment information below unless otherwise noted. Refer to Note 2 “Discontinued Operations” for further discussion of the sale of majority interest in the High Pressure Solutions business.
In the Industrial Technologies and Services segment, the Company designs, manufactures, markets and services a broad range of compression and vacuum equipment as well as fluid transfer equipment, loading systems, power tools and lifting equipment. The Company’s compression and vacuum products are used worldwide in industrial manufacturing, transportation, chemical processing, food and beverage production, energy, environmental and other applications. In addition to equipment sales, the Company offers a broad portfolio of service options tailored to customer needs and complete range of aftermarket parts, air treatment equipment, controls and other accessories. The Company’s engineered loading systems and fluid transfer equipment ensure the safe handling and transfer of crude oil, liquefied natural gas, compressed natural gas, chemicals, and bulk materials. The Company’s power tools and lifting equipment are used by customers in industrial manufacturing, vehicle maintenance, energy and other markets for precision fastening, bolt removal, grinding, sanding, drilling, demolition and the safe and efficient lifting, positioning and movement of loads. The Company sells its products primarily through independent distributors worldwide and also sells directly to the customer.
In the Precision and Science Technologies segment, the Company designs, manufactures and markets a broad range of specialized positive displacement pumps, fluid management equipment and aftermarket parts for medical, laboratory, industrial manufacturing, water and wastewater, chemical processing, energy, food and beverage, agriculture and other markets. The Company’s products are used for a diverse set of applications including precision dosing of chemicals and supplements, blood dialysis, oxygen therapy, food processing, fluid transfer and dispensing, spray finishing and coating, mixing, high-pressure air and gas management and others. The Company sells primarily through a broad global network of specialized and national distributors and original equipment manufacturers (“OEM”) who integrate the Company’s products into their devices and systems.
In the Specialty Vehicle Technologies segment, the Company designs, manufactures and markets Club Car ® golf, utility and consumer low-speed vehicles. As described in Note 20 “Subsequent Events”, the Company entered into an agreement on April 12, 2021 to sell the Club Car business comprising the Specialty Vehicle Technologies segment.
The Chief Operating Decision Maker (“CODM”) evaluates the performance of the Company’s reportable segments based on, among other measures, Segment Adjusted EBITDA. Management closely monitors the Segment Adjusted EBITDA of each reportable segment to evaluate past performance and actions required to improve profitability. Inter-segment sales and transfers are not significant. Administrative expenses related to the Company’s corporate offices and shared service centers in the United States and Europe, which includes transaction processing, accounting and other business support functions, are allocated to the business segments. Certain administrative expenses, including senior management compensation, treasury, internal audit, tax compliance, certain information technology, and other corporate functions, are not allocated to the business segments.
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The following table provides summarized information about the Company’s operations by reportable segment and reconciles Segment Adjusted EBITDA to Income (Loss) from Continuing Operations Before Income Taxes for the three month periods ended March 31, 2021 and 2020.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue | |||||||||||
| Industrial Technologies and Services | $ | 913.8 | $ | 504.0 | |||||||
| Precision and Science Technologies | 215.7 | 112.9 | |||||||||
| Specialty Vehicle Technologies | 240.3 | 86.6 | |||||||||
| Total Revenue | $ | 1,369.8 | $ | 703.5 | |||||||
| Segment Adjusted EBITDA | |||||||||||
| Industrial Technologies and Services | $ | 211.5 | $ | 94.8 | |||||||
| Precision and Science Technologies | 67.2 | 32.9 | |||||||||
| Specialty Vehicle Technologies | 48.2 | 14.1 | |||||||||
| Total Segment Adjusted EBITDA | $ | 326.9 | $ | 141.8 | |||||||
| Less items to reconcile Segment Adjusted EBITDA to Income (Loss) Before Income Taxes: | |||||||||||
| Corporate expenses not allocated to segments | $ | 34.1 | $ | 15.9 | |||||||
| Interest expense | 23.1 | 27.1 | |||||||||
Depreciation and amortization expense (a) | 116.2 | 62.0 | |||||||||
Restructuring and related business transformation costs (b) | 2.7 | 39.1 | |||||||||
Acquisition and other transaction related expenses and non-cash charges (c) | 17.5 | 96.1 | |||||||||
Stock-based compensation (d) | 23.3 | 2.9 | |||||||||
| Foreign currency transaction losses (gains), net | (18.1) | 2.3 | |||||||||
Loss on extinguishment of debt (e) | — | 2.0 | |||||||||
Other adjustments (f) | (1.0) | (0.6) | |||||||||
| Income (Loss) from Continuing Operations Before Income Taxes | 129.1 | (105.0) | |||||||||
| Provision (benefit) for income taxes | 17.5 | (67.0) | |||||||||
| Income (Loss) from Continuing Operations | 111.6 | (38.0) | |||||||||
| Income (loss) from discontinued operations, net of tax | (201.7) | 1.2 | |||||||||
| Net Loss | $ | (90.1) | $ | (36.8) | |||||||
a)Depreciation and amortization expense excludes $2.8 million and $1.2 million of depreciation of rental equipment for the three month periods ended March 31, 2021 and March 31, 2020, respectively.
b)Restructuring and related business transformation costs consist of the following.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Restructuring charges | $ | 2.4 | $ | 38.5 | |||||||
| Facility reorganization, relocation and other costs | — | 0.4 | |||||||||
| Other, net | 0.3 | 0.2 | |||||||||
| Total restructuring and related business transformation costs | $ | 2.7 | $ | 39.1 | |||||||
c)Represents costs associated with successful and/or abandoned acquisitions and divestitures, including third-party expenses, post-closure integration costs (including certain incentive and non-incentive cash compensation costs) and non-cash charges and credits arising from fair value purchase accounting adjustments.
d)Represents stock-based compensation expense recognized for the three month periods ended March 31, 2021 of $23.3 million.
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Represents stock-based compensation expense recognized for the three month periods ended March 31, 2020 of $3.4 million, decreased by $0.5 million for the three month periods ended March 31, 2020, due to costs associated with employer taxes.
e)Represents a loss on extinguishment of a portion of the U.S. term loan and the amendment of the revolving credit facility.
f)Includes (i) effects of amortization of prior service costs and amortization of losses in pension and other postemployment (“OPEB”) expense, (ii) certain legal and compliance costs and (iii) other miscellaneous adjustments.
Note 18. Related Party Transactions
Affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) own 44,788,635 shares of common stock, or approximately 11% of the total outstanding common stock based on the number of shares outstanding as of March 31, 2021.
Affiliates of KKR participated as a lender in the Company’s Senior Secured Credit Facilities. As of March 31, 2021, KKR held a position in the Euro Term Loan of €41.2 million and a position in the Dollar Term Loan B of $39.6 million.
Note 19. Earnings (Loss) Per Share
The the number of weighted-average shares outstanding used in the computations of basic and diluted earnings (loss) per share are as follows.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Average shares outstanding | |||||||||||
| Basic | 419.2 | 277.3 | |||||||||
| Diluted | 425.9 | 277.3 | |||||||||
For the three month period ended March 31, 2021, there were 0.9 million anti-dilutive shares that were not included in the computation of diluted earnings per share. For the three month period ended March 31, 2020, there were 3.8 million potentially dilutive stock-based awards that were not included in the computation of diluted loss per share as we incurred a net loss during the period.
Note 20. Subsequent Events
On April 1, 2021, the Company completed the majority interest sale of its High Pressure Solutions business to the private equity firm American Industrial Partners. Refer to Note 2 “Discontinued Operations” for further discussion on the sale of the High Pressure Solutions business.
On April 12, 2021, the Company entered into an agreement to sell its Specialty Vehicle Technologies (“Club Car”) business to private equity firm Platinum Equity Advisors, LLC (“Platinum Equity”) for an aggregate purchase price of $1.68 billion. The Club Car business did not meet the criteria for assets held for sale as of March 31, 2021 and therefore remains presented as a component of continuing operations. Club Car will be presented as a discontinued operation in the second quarter of 2021 and its net assets will be classified as held for sale and comparable prior periods will be restated to reflect these changes. This transaction is expected to close by the third quarter of 2021, subject to regulatory approvals and customary closing conditions.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Overview
Our Company
We are a leading global provider of mission-critical flow creation technologies and associated aftermarket parts, consumables and services, which we sell across multiple attractive end-markets. We manufacture one of the broadest and most complete ranges of compressor, pump, vacuum and blower products in our markets, which, when combined with our global geographic footprint and application expertise, allows us to provide differentiated product and service offerings to our customers. Our products are sold under a collection of premier, market-leading brands, including Ingersoll Rand, Gardner Denver, Club Car. CompAir, Nash, Elmo Rietschle, Robuschi, Thomas, Milton Roy, ARO, Emco Wheaton and Runtech Systems, which we believe are globally recognized in their respective end-markets and known for product quality, reliability, efficiency and superior customer service.
Recent Developments
Sale of Majority Interest in HPS Business
On February 14, 2021, the Company entered into an agreement to sell a majority interest in its High Pressure Solutions (“HPS”) business to private equity firm American Industrial Partners. In exchange for its majority interest of 55%, the Company received cash of $300.0 million at closing and retains a 45% common equity interest in the newly-formed entity comprising the HPS business. This transaction closed on April 1, 2021. The sale of the majority interest in the HPS business significantly reduces our direct exposure to the upstream oil and gas market.
The historical financial results of the HPS Segment are reflected in our unaudited condensed consolidated financial statements as discontinued operations. Refer to Note 2 “Discontinued Operations” and Note 20 “Subsequent Events” to our unaudited condensed consolidated financial statements for additional discussion of the sale of the HPS segment.
Sale of Special Vehicle Technologies Segment
On April 12, 2021, the Company entered into an agreement to sell its Specialty Vehicle Technologies segment ("Club Car") to private equity firm Platinum Equity Advisors, LLC for an aggregate purchase price of $1.68 billion. This transaction is expected to close by the third quarter of 2021, subject to regulatory approvals and customary closing conditions. Refer to Note 20 “Subsequent Events” to our unaudited condensed consolidated financial statements for additional discussion of the Club Car divestiture.
Our Segments
Effective upon the presentation of the HPS business as discontinued operations, the Company began operating with three reportable segments. As a result of this change, information that the Company’s chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in the three month period ended March 31, 2021, we report utilizing the three reportable segments of Industrial Technologies and Services, Precision and Science Technologies and Specialty Vehicle Technologies. Our 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.
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Industrial Technologies and Services
We design, manufacture, market and service a broad range of air and gas compression, vacuum and blower products, fluid transfer equipment, loading systems, power tools and lifting equipment, including associated aftermarket parts, consumables and services. We primarily sell under the Ingersoll Rand, Gardner Denver, CompAir, Elmo Rietschle, Robuschi, Nash and Emco Wheaton brands. Our customers deploy our products across a wide array of technologies and applications for use in diverse end-markets. Compressors are used to increase the pressure of air or gas, vacuum products are used to remove air or gas in order to reduce the pressure below atmospheric levels, and blower products are used to produce a high volume of air or gas at low pressure. Almost every manufacturing and industrial facility, and many service and process industry applications, use air compression, vacuum and blower products in a variety of process-critical applications such as the operation of pneumatic tools, pumps and motion control components, air and gas separation, vacuum packaging of food products and aeration of waste water, among others. Our liquid ring vacuum pumps and compressors are used in many power generation, mining, oil and gas refining and processing, chemical processing and general industrial applications including flare gas and vapor recovery, geothermal gas removal, vacuum de-aeration, water extraction in mining and paper and chlorine compression in petrochemical operations. Our engineered loading systems and fluid transfer equipment ensure the safe handling and transfer of crude oil, liquefied natural gas, compressed natural gas, chemicals, and bulk materials. Our power tools and lifting equipment portfolio includes electric and cordless fastening systems, pneumatic bolting tools, drilling and material removal tools, hoists, winches and ergonomic handling devices. Typical applications for these products include the precision fastening of bolted joints in the production, assembly and servicing of industrial machinery, on-highway and off-highway vehicles, aircraft, electronics and other equipment.
Our compression products cover the full range of technologies, including rotary screw, reciprocating piston, scroll, rotary vane and centrifugal compressors. Our vacuum products and blowers also cover the full technology spectrum; vacuum technologies include side channel, liquid ring, claw vacuum, screw, turbo and rotary vane vacuum pumps among others, while blower technologies include rotary lobe blowers, screw, claw and vane, side channel and radial blowers. Our liquid ring vacuum pumps and compressors are highly engineered products specifically designed for continuous duty in harsh environments to serve a wide range of applications, including oil and gas refining and processing, mining, chemical processing and industrial applications. In addition to our vacuum and blower technology, our engineered fluid loading and transfer equipment and systems ensure the safe and efficient transportation and transfer of petroleum products as well as certain other liquid commodity products in a wide range of industries.
We complement these products with a broad portfolio of service options tailored to customer needs and a complete range of aftermarket parts, air treatment equipment, controls and other accessories delivered through our global network of manufacturing and service locations and distributor partners. The breadth and depth of our product offering creates incremental business opportunities by allowing us to cross-sell our full product portfolio and uniquely address customers’ needs in one complete solution.
We sell our products through an integrated network of direct sales representatives and independent distributors, which is strategically tailored to meet the dynamics of each target geography or end-market. Our large installed base also provides for a significant stream of recurring aftermarket revenue. For example, the useful life of a compressor is, on average, between 10 and 12 years. However, a customer typically services the compressor at regular intervals, starting within the first two years of purchase and continuing throughout the life of the product. The cumulative aftermarket revenue generated by a compressor over the product’s life cycle will typically exceed its original sale price.
Precision and Science Technologies
We design, manufacture and market a broad range of highly-specialized positive displacement pumps, fluid management systems and aftermarket parts that provide liquid and gas dosing, transfer, dispensing, compression, sampling, pressure management and flow control in specialized or critical applications. Our product offering covers a range of pump and flow control technologies, including mechanically- and hydraulically-actuated diaphragm pumps, air-operated diaphragm and piston pumps, water-powered pumps, peristaltic pumps, gear pumps, flexible impeller pumps, self-priming centrifugal pumps, syringe pumps, motion control components, filtration/regulation/lubrication components, gas boosters, high pressure valves, hydrogen compression systems, liquid and gas sampling systems, odorant injection systems and more. These offerings are sold under brands that are highly recognized in their end markets including ARO, Dosatron, Haskel, Milton Roy, Oberdorfer, Thomas and Welch. Our customer base is composed of a wide range of end users in markets including medical, laboratory, industrial manufacturing, water and waste water, chemical processing, energy, food and beverage, agriculture and others. Our sales are realized primarily through a combination of independent specialty and national distributors and relationships directly with original equipment manufacturers (“OEM”).
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Specialty Vehicle Technologies
We design, manufacture and market golf car and other low speed vehicles for commercial utility and personal transportation under the Club Car ® brand. Product offerings include new and used electric, gas and diesel-powered vehicles, accessories and aftermarket parts. Service offerings include repair and maintenance, short-term rentals and digital connectivity services that enable fleet management, entertainment and provide enhanced end-user experience.
Sales of golf car fleets and turf utility vehicles are primarily derived from golf courses owners and operators around the world. Utility, all-wheel drive, and multi passenger transport vehicles are used in commercial and maintenance applications at resorts and hospitality sites, government agencies and municipalities, manufacturing and construction firms, sports and other areas, colleges and universities and other commercial establishments. Our consumer vehicles are generally sold to individuals and families for personal transportation in residential communities, camp grounds and vacation locations. All of our low speed vehicles are highly featured, and highly customized for their application and are available in multiple colors, fabrics, power trains and accessories. The majority of sales are derived through a global network of independent distributors and dealers. We also sell our products directly to certain customers within the golf industry, through company-owned sales resources.
Components of Our Revenue and Expenses
Revenues
We generate revenue from sales of original equipment and associated aftermarket parts, consumables and services. We sell our products and deliver services both directly to end-users and through independent distribution channels, depending on the product line and geography. Revenue derived from short duration contracts is recognized at a single point in time when control is transferred to the customer, generally at shipment or when delivery has occurred or as services are performed. Certain contracts involve significant design engineering to customer specifications, and depending upon the contractual terms, revenue is recognized either over the duration of the contract or at contract completion when equipment is delivered to the customer.
Expenses
Cost of Sales
Cost of sales includes the costs we incur, including purchased materials, labor and overhead related to manufactured products and aftermarket parts sold during a period. Depreciation related to manufacturing equipment and facilities is included in cost of sales. Purchased materials represent the majority of costs of sales, with steel, aluminum, copper and partially finished castings representing our most significant materials inputs. Stock-based compensation expense for employees associated with the manufacture of products or delivery of services to customers is included in cost of sales. We have instituted a global sourcing strategy to take advantage of coordinated purchasing opportunities of key materials across our manufacturing plant locations.
Cost of sales for services includes the direct costs we incur, including direct labor, parts and other overhead costs including depreciation of equipment and facilities, to deliver repair, maintenance and other field services to our customers.
Selling and Administrative Expenses
Selling and administrative expenses consist of (i) salaries and other employee-related expenses for our selling and administrative functions and other activities not associated with the manufacture of products or delivery of services to customers; (ii) facility operating expenses for selling and administrative activities, including office rent, maintenance, depreciation and insurance; (iii) marketing and direct costs of selling products and services to customers including internal and external sales commissions; (iv) research and development expenditures; (v) professional and consultant fees; (vi) expenses related to our public stock offerings and to establish public company reporting compliance; (vii) employee related stock-based compensation for our selling and administrative functions and other activities not associated with the manufacture of products or delivery of services to customers; and (viii) other miscellaneous expenses. Certain corporate expenses, including those related to our shared service centers in the United States and Europe, that directly benefit our businesses are allocated to our business segments. Certain corporate administrative expenses, including corporate executive compensation, treasury, certain information technology, internal audit and tax compliance, are not allocated to the business segments.
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Amortization of Intangible Assets
Amortization of intangible assets includes the periodic amortization of intangible assets including customer relationships, tradenames, developed technology, backlog and internally developed software.
Other Operating Expense, Net
Other operating expense, net includes foreign currency transaction gains and losses, net, restructuring charges, certain shareholder litigation settlement recoveries, acquisition and other transaction related expenses and non-cash charges, losses and gains on asset disposals and other miscellaneous operating expenses.
Provision for Income Taxes
The provision for income taxes includes U.S. federal, state and local income taxes and all non-U.S. income taxes. We are subject to income tax in approximately 46 jurisdictions outside of the United States. Because we conduct operations on a global basis, our effective tax rate depends, and will continue to depend, on the geographic distribution of our pre-tax earnings among several different taxing jurisdictions. Our effective tax rate can also vary based on changes in the tax rates of the different jurisdictions, the availability of tax credits and non-deductible items.
Items Affecting our Reported Results
General Economic Conditions and Capital Spending in the Industries We Serve
Our financial results closely follow changes in the industries and end-markets we serve. Demand for most of our products depends on the level of new capital investment and planned and unplanned maintenance expenditures by our customers. The level of capital expenditures depends, in turn, on the general economic conditions as well as access to capital at reasonable cost. In particular, demand for our Industrial Technologies and Services products generally correlates with the rate of total industrial capacity utilization and the rate of change of industrial production. Capacity utilization rates above 80% have historically indicated a strong demand environment for industrial equipment. In the midstream and downstream portions of our Industrial Technologies and Services segment, overall economic growth and industrial production, as well as secular trends, impact demand for our products. In our Precision and Science Technologies segment we expect demand for our products to be driven by favorable trends, including the growth in healthcare spend and expansion of healthcare systems due to an aging population requiring medical care and increased investment in health solutions and safety infrastructures in emerging economies. Over longer time periods, we believe that demand for all of our products also tends to follow economic growth patterns indicated by the rates of change in the GDP around the world, as augmented by secular trends in each segment. Our ability to grow and our financial performance will also be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global sales, manufacturing and distribution capabilities and engineering innovative new product applications for end-users in a variety of geographic markets.
Foreign Currency Fluctuations
A significant portion of our revenues, approximately 49% for the three month period ended March 31, 2021, was denominated in currencies other than the U.S. dollar. Because much of our manufacturing facilities and labor force costs are outside of the United States, a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can therefore impact our results of operations and are quantified when significant to our discussion.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Key factors affecting the comparability of our results of operations are summarized below.
Acquisition of Ingersoll Rand Industrial
On February 29, 2020, we completed the acquisition of Ingersoll Rand Industrial. We reorganized our reportable segments as a result of the Ingersoll Rand Industrial acquisition and formed four new reportable segments.
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•Industrial Technologies and Services segment – Ingersoll Rand Industrial’s Compression Technologies and Services (“CTS”) and Power Tools and Lift (“PTL”) businesses joined the legacy Gardner Denver Industrial segment (excluding the Specialty Pump businesses) and the midstream and downstream portions of the Gardner Denver Energy segment to form the new “Industrial Technologies and Services” segment.
•Precision and Science Technologies segment – Ingersoll Rand Industrial’s Precision Flow Systems (“PFS”) and ARO businesses joined the legacy Gardner Denver Medical segment and Specialty Pump businesses from the legacy Gardner Denver Industrial segment to form the new “Precision and Science Technologies” segment.
•Specialty Vehicle Technologies segment – Ingersoll Rand Industrial’s Club Car golf, utility and consumer low-speed vehicles business formed the new “Specialty Vehicle Technologies” segment. On April 9, 2021, we entered into an agreement to sell the Specialty Vehicle Technologies segment. For additional information, see “―Recent Developments” above and refer to Note 20 “Subsequent Events” for discussion on the sale of the Specialty Vehicle Technologies segment.
•High Pressure Solutions segment – The upstream energy portion of the legacy Gardner Denver Energy segment was disaggregated to form the new “High Pressure Solutions” segment. For additional infromation, see “―Recent Developments” above and refer to Note 2 “Discontinued Operations” for discussion on the sale of the High Pressure Solutions segment that closed on April 1, 2021.
Ingersoll Rand Industrial is included in our results of operations beginning on the acquisition date (close of business February 29, 2020). Comparability between the three month periods ended March 31, 2021 and 2020 will be affected by two months of activity from Ingersoll Rand Industrial.
See Note 3 “Business Combinations” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further discussion of the acquisition of Ingersoll Rand Industrial.
Impact of Coronavirus (COVID-19)
We continue to assess and actively manage the impact of the ongoing COVID-19 pandemic on our global operations and also the operations of our suppliers and customers. Demand for our products was negatively impacted throughout the majority of 2020 as a result of the pandemic. Demand began to improve in the fourth quarter of 2020 and accelerated in the first quarter of 2021 as markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions. Order rates in the first quarter of 2021 were particularly strong and we believe represents some deferred demand from 2020. In order to position ourselves to fulfill demand we continue to monitor the supply chain closely and are taking proactive steps to ensure continuity of supply. We are adhering to all state and country mandates and guidelines wherever we operate. Currently all our major manufacturing locations in the United States, United Kingdom, Germany, Italy, Brazil and China are operational. We have taken certain actions to reduce costs and preserve cash given the uncertain environment. The degree to which the pandemic will continue to impact our operations, and the operations of our customers and suppliers remains uncertain. See “The COVID-19 pandemic has adversely affected our business and results of operations, and could have a material and adverse effect on our business, results of operations and financial condition in the future” in Part I Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Restructuring and Other Business Transformation Initiatives
Subsequent to the acquisition of Ingersoll Rand Industrial, we announced a restructuring program (“2020 Plan”) to drive efficiencies and synergies, reduce the number of facilities and optimize operating margins within our merged Company. We expect 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. We expect to realize approximately $300.0 million in annualized cost synergies by the end of 2022. We continue to evaluate operating efficiencies and anticipate incurring additional costs in the coming years in connection with these activities, but we are unable to estimate those amounts at this time as such plans are not yet finalized.
For the three month period ended March 31, 2021, $2.4 million was charged to expense through “Other operating expense, net” in the Condensed Consolidated Statements of Operations ($1.7 million for Industrial Technologies and Services, $0.3 million for Precision and Science Technologies and $0.4 million for Corporate). Through March 31, 2021, we recognized expense related to the 2020 Plan of $72.0 million, $7.2 million, $6.4 million and $0.8 million for Industrial Technologies and Services, Precision and Science Technologies, Corporate and Specialty Vehicle Technologies, respectively.
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Outlook
Industrial Technologies and Services Segment
The mission-critical nature of our products across manufacturing processes drives a demand environment and outlook that are correlated with global and regional industrial production, capacity utilization and long-term GDP growth. Economic conditions remain uncertain with regard to COVID-19, and its impact on end markets, however, recent order rates have begun to improve as markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions. In the first quarter of 2021, we had $1,042.4 million of orders in our Industrial Technologies and Services segment, an increase of 83.7% over the first quarter of 2020. Approximately $596.8 million of these orders relate to the acquisition of Ingersoll Rand Industrial.
Precision and Science Technologies Segment
During the COVID-19 pandemic, the Precision and Science Technologies segment has seen increased demand for our vacuum pump and compressor solutions used in respirator and ventilator applications. Demand of other products and services which had been negatively impacted in 2020 have begun to recover in 2021 as markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions. In the first quarter of 2021, we had $258.2 million of orders in our Precision and Science Technologies segment, an increase of 97.4% over 2020. Approximately $144.9 million of these orders relate to the acquisition of Ingersoll Rand Industrial.
Specialty Vehicle Technologies Segment
During 2020, the Specialty Vehicle Technologies segment is seeing consistent demand in golf end markets along with record demand for consumer vehicle and aftermarket parts offerings. This has helped to offset demand pressure in the commercial end markets as the COVID-19 pandemic continues to impact the hospitality and resort industries. In the first quarter of 2021, we had $404.8 million of orders in our Specialty Vehicle Technologies segment, an increase of 548.7% over 2020.
How We Assess the Performance of Our Business
We manage operations through the three business segments described above. In addition to our consolidated GAAP financial measures, we review various non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and Free Cash Flow.
We believe Adjusted EBITDA and Adjusted Net Income are helpful supplemental measures to assist us and investors in evaluating our operating results as they exclude certain items whose fluctuation from period to period do not necessarily correspond to changes in the operations of our business. Adjusted EBITDA represents net income (loss) before interest, taxes, depreciation, amortization and certain non-cash, non-recurring and other adjustment items. We believe that the adjustments applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about non-recurring items that we do not expect to continue at the same level in the future. Adjusted Net Income is defined as net income (loss) including interest, depreciation and amortization of non-acquisition related intangible assets and excluding other items used to calculate Adjusted EBITDA and further adjusted for the tax effect of these exclusions.
We use Free Cash Flow to review the liquidity of our operations. We measure Free Cash Flow as cash flows from operating activities less capital expenditures. We believe Free Cash Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows from operating activities.
Management and our board of directors regularly use these measures as tools in evaluating our operating and financial performance and in establishing discretionary annual compensation. Such measures are provided in addition to, and should not be considered to be a substitute for, or superior to, the comparable measures under GAAP. In addition, we believe that Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are frequently used by investors and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income and Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity.
Adjusted EBITDA, Adjusted Net Income and Free Cash Flow should not be considered as alternatives to net income (loss) or any other performance measure derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a
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measure of our liquidity. Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
See “Non-GAAP Financial Measures” below for reconciliation information.
Results of Continuing Operations
Consolidated results should be read in conjunction with the segment results section herein and Note 17 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, which provides more detailed discussions concerning certain components of our Condensed Consolidated Statements of Operations. All intercompany accounts and transactions have been eliminated within the consolidated results.
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The following table presents selected Consolidated Results of Operations of our business for the three month periods ended March 31, 2021 and 2020.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Condensed Consolidated Statement of Operations: | |||||||||||
| Revenues | $ | 1,369.8 | $ | 703.5 | |||||||
| Cost of sales | 854.4 | 485.8 | |||||||||
| Gross profit | 515.4 | 217.7 | |||||||||
| Selling and administrative expenses | 270.7 | 147.2 | |||||||||
| Amortization of intangible assets | 93.7 | 49.3 | |||||||||
| Other operating expense, net | 1.3 | 97.3 | |||||||||
| Operating income (loss) | 149.7 | (76.1) | |||||||||
| Interest expense | 23.1 | 27.1 | |||||||||
| Loss on extinguishment of debt | — | 2.0 | |||||||||
| Other income, net | (2.5) | (0.2) | |||||||||
| Income (loss) before income taxes | 129.1 | (105.0) | |||||||||
| Provision (benefit) for income taxes | 17.5 | (67.0) | |||||||||
| Income (Loss) from Continuing Operations | 111.6 | (38.0) | |||||||||
| Income (loss) from discontinued operations, net of tax | (201.7) | 1.2 | |||||||||
| Net loss | (90.1) | (36.8) | |||||||||
| Less: Net income attributable to noncontrolling interests | 0.3 | — | |||||||||
| Net loss attributable to Ingersoll Rand Inc. | $ | (90.4) | $ | (36.8) | |||||||
| Percentage of Revenues: | |||||||||||
| Gross profit | 37.6 | % | 30.9 | % | |||||||
| Selling and administrative expenses | 19.8 | % | 20.9 | % | |||||||
| Operating income (loss) | 10.9 | % | (10.8) | % | |||||||
| Income (loss) from continuing operations | 8.1 | % | (5.4) | % | |||||||
| Adjusted EBITDA | 21.4 | % | 17.9 | % | |||||||
| Other Financial Data: | |||||||||||
Adjusted EBITDA (1) | $ | 292.8 | $ | 125.9 | |||||||
Adjusted Net Income (1) | 191.8 | 60.6 | |||||||||
| Cash flows - operating activities | 122.6 | 38.0 | |||||||||
| Cash flows - investing activities | (207.9) | 33.8 | |||||||||
| Cash flows - financing activities | (7.8) | (41.9) | |||||||||
Free Cash Flow (1) | 107.6 | 30.4 | |||||||||
(1)See the “Non-GAAP Financial Measures” section for a reconciliation to comparable GAAP measure.
Revenues
Revenues for the three month period ended March 31, 2021 were $1,369.8 million, an increase of $666.3 million, or 94.7%, compared to $703.5 million for the same three month period in 2020. The increase in revenues was primarily due to acquisitions, including Ingersoll Rand Industrial, of $573.2 million, higher organic volume in our Industrial Technologies and Services segment of $35.3 million and favorable impact of foreign currencies of $29.8 million. The percentage of consolidated revenues derived from aftermarket parts and services was 34.9% in the three month period ended March 31, 2021 compared to 32.5% in the same three month period in 2020.
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Gross Profit
Gross profit for the three month period ended March 31, 2021 was $515.4 million, an increase of $297.7 million, or 136.7%, compared to $217.7 million for the same three month period in 2020, and as a percentage of revenues was 37.6% for the three month period ended March 31, 2021 and 30.9% for the same three month period in 2020. The increase in gross profit is primarily due to acquisitions, including Ingersoll Rand Industrial, and the runoff of the fair valuation adjustments related to purchase price allocation from inventory into cost of sales in the 2020 period that did not recur in the 2021 period. The increase in gross profit as a percentage of revenues is primarily due to the runoff of the fair valuation adjustments related to purchase price allocation from inventory into cost of sales in the 2020 period that did not recur in the 2021 period.
Selling and Administrative Expenses
Selling and administrative expenses were $270.7 million for the three month period ended March 31, 2021, an increase of $123.5 million, or 83.9%, compared to $147.2 million for the same three month period in 2020. Selling and administrative expenses as a percentage of revenues decreased to 19.8% for the three month period ended March 31, 2021 from 20.9% in the same three month period in 2020. The increase in selling and administrative expenses is primarily due to acquisitions, including Ingersoll Rand Industrial, and increased professional and consultant fees.
Amortization of Intangible Assets
Amortization of intangible assets was $93.7 million for the three month period ended March 31, 2021, an increase of $44.4 million, compared to $49.3 million in the same three month period in 2020. The increase was primarily due to the amortization of intangible assets related to the acquisition of Ingersoll Rand Industrial.
Other Operating Expense, Net
Other operating expense, net was $1.3 million for the three month period ended March 31, 2021, a decrease of $96.0 million, compared to $97.3 million in the same three month period in 2020. The decrease was primarily due to lower acquisition and other transaction related expenses and non-cash charges of $39.7 million, lower restructuring charges of $36.1 million, and higher foreign currency transaction gains, net of $20.4 million.
Interest Expense
Interest expense was $23.1 million for the three month period ended March 31, 2021, a decrease of $4.0 million, compared to $27.1 million in the same three month period in 2020. The decrease was primarily due to the weighted average interest rate decreasing to approximately 2.0% for the three month period ended March 31, 2021 when compared to 5.1% in the same period in 2020.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $2.0 million for the three month period ended March 31, 2020, which was related to the refinancing of the Original Dollar Term Loan and the Original Euro Term Loan.
Other Income, Net
Other income, net was $2.5 million and $0.2 million in the three month periods ended March 31, 2021 and 2020, respectively.
Provision (Benefit) for Income Taxes
The provision for income taxes was $17.5 million resulting in a 13.6% effective income tax provision rate for the three month period ended March 31, 2021, compared to a benefit for income taxes of $67.0 million resulting in a 63.8% effective income tax provision rate in the same three month period in 2020. The increase in the tax provision for the three month period ended March 31, 2021 is primarily due to an increase in the pre-tax book income in jurisdictions with lower effective tax rates combined with decreased earnings in jurisdictions with higher tax rates and a reduction of unrecognized tax reserves as a result of the lapse of the limitation on statutes.
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The increase in the pre-tax book income for the three month period ended March 31, 2021 when compared to the same three month period of 2020 is primarily due to the impacts in 2020 from the COVID-19 global pandemic, transaction costs associated with the acquisition, and amortization and depreciation expenses associated with the purchase price step up adjustments impacting that year.
Net Loss
Net loss was $90.1 million for the three month period ended March 31, 2021 compared to net loss of $36.8 million in the same three month period in 2020. The change in net loss was primarily due to the loss on disposal group (see “―Results of Discontinued Operations” below), higher provision for income taxes, higher selling and administrative expenses, and higher amortization, partially offset by higher gross profit on increased revenues and lower other operating expenses, net.
Adjusted EBITDA
Adjusted EBITDA increased $166.9 million to $292.8 million for the three month period ended March 31, 2021 compared to $125.9 million in the same three month period in 2020. Adjusted EBITDA as a percentage of revenues increased 350 basis points to 21.4% for the three month period ended March 31, 2021 from 17.9% for the same three month period in 2020. The increase in Adjusted EBITDA was primarily due to acquisitions, including Ingersoll Rand Industrial, of $125.0 million, higher organic sales volume of $19.1 million and higher pricing of $17.1 million. The increase in Adjusted EBITDA as a percentage of revenues is primarily attributable to productivity related actions implemented subsequent to the acquisition of Ingersoll Rand Industrial including procurement initiatives, Innovate 2 Value (“I2V”) initiatives and structural selling and administrative cost actions.
Adjusted Net Income
Adjusted Net Income increased $131.2 million to $191.8 million for the three month period ended March 31, 2021 compared to $60.6 million in the same three month period in 2020. The increase was primarily due to increased Adjusted EBITDA, partially offset by an increased income tax provision, as adjusted and higher depreciation expense.
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Non-GAAP Financial Measures
Set forth below are the reconciliations of Net Loss to Adjusted EBITDA and Adjusted Net Income and Cash Flows from Operating Activities to Free Cash Flow.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net Loss | $ | (90.1) | $ | (36.8) | |||||||
| Income (loss) from discontinued operations | (206.2) | 9.3 | |||||||||
| Income tax benefit (provision) from discontinued operations | 4.5 | (8.1) | |||||||||
| Income (loss) from continuing operations, net of tax | 111.6 | (38.0) | |||||||||
| Plus: | |||||||||||
| Interest expense | 23.1 | 27.1 | |||||||||
| Provision for income taxes | 17.5 | (67.0) | |||||||||
Depreciation expense (a) | 22.5 | 12.7 | |||||||||
Amortization expense (b) | 93.7 | 49.3 | |||||||||
Restructuring and related business transformation costs (c) | 2.7 | 39.1 | |||||||||
Acquisition related expenses and non-cash charges (d) | 17.5 | 96.1 | |||||||||
Stock-based compensation (e) | 23.3 | 2.9 | |||||||||
| Foreign currency transaction losses (gains), net | (18.1) | 2.3 | |||||||||
Loss on extinguishment of debt (f) | — | 2.0 | |||||||||
Other adjustments (g) | (1.0) | (0.6) | |||||||||
| Adjusted EBITDA | $ | 292.8 | $ | 125.9 | |||||||
| Minus: | |||||||||||
| Interest expense | $ | 23.1 | $ | 27.1 | |||||||
Income tax provision, as adjusted (h) | 49.7 | 22.1 | |||||||||
| Depreciation expense | 22.5 | 12.7 | |||||||||
| Amortization of non-acquisition related intangible assets | 5.7 | 3.4 | |||||||||
| Adjusted Income from Continuing Operations, Net of Tax | $ | 191.8 | $ | 60.6 | |||||||
| Free Cash Flow from Continuing Operations: | |||||||||||
| Cash flows - operating activities | $ | 122.6 | $ | 38.0 | |||||||
| Minus: | |||||||||||
| Capital expenditures | 15.0 | 7.6 | |||||||||
| Free Cash Flow from Continuing Operations | $ | 107.6 | $ | 30.4 | |||||||
(a)Depreciation and amortization expense excludes $2.8 million and $1.2 million of depreciation of rental equipment for the three month periods ended March 31, 2021 and 2020, respectively.
(b)Represents $88.0 million and $45.9 million of amortization of intangible assets arising from the acquisition of Ingersoll Rand Industrial and other acquisitions (customer relationships, technology, tradenames and backlog) and $5.7 million and $3.4 million of amortization of non-acquisition related intangible assets, in each case for the three month periods ended March 31, 2021 and 2020, respectively.
(c)Restructuring and related business transformation costs consisted of the following.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Restructuring charges | $ | 2.4 | $ | 38.5 | |||||||
| Facility reorganization, relocation and other costs | — | 0.4 | |||||||||
| Other, net | 0.3 | 0.2 | |||||||||
| Total restructuring and related business transformation costs | $ | 2.7 | $ | 39.1 | |||||||
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(d)Represents costs associated with successful and/or abandoned acquisitions and divestitures, including third-party expenses, post-closure integration costs (including certain incentive and non-incentive cash compensation costs), and non-cash charges and credits arising from fair value purchase accounting adjustments.
(e)Represents stock-based compensation expense recognized for the three month period ended March 31, 2021 of $23.3 million.
Represents stock-based compensation expense recognized for the three month periods ended March 31, 2020 of $3.4 million, decreased by $0.5 million due to costs associated with employer taxes.
(f)Represents losses on extinguishment of a portion of the U.S. term loan and the amendment of the revolving credit facility.
(g)Includes (i) effects of the amortization of prior service costs and amortization of losses in pension and other postemployment (“OPEB”) expense, (ii) certain legal and compliance costs and (iii) other miscellaneous adjustments.
(h)Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of the applicable discrete tax items. The tax effect of pre-tax items excluded from Adjusted Income is computed using the statutory tax rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances. Discrete tax items include changes in tax laws or rates, changes in uncertain tax positions relating to prior years and changes in valuation allowances. The adjusted amounts are then used to calculate an adjusted provision for the quarter.
The income tax provision, as adjusted for each of the periods presented below consisted of the following.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Provision for income taxes | $ | 17.5 | $ | (67.0) | |||||||
| Tax impact of pre-tax income adjustments | 23.0 | 93.1 | |||||||||
| Discrete tax items | 9.2 | (4.0) | |||||||||
| Income tax provision, as adjusted | $ | 49.7 | $ | 22.1 | |||||||
Segment Results
We classify our business into three segments: Industrial Technologies and Services, Precision and Science Technologies and Specialty Vehicle Technologies. Our Corporate operations are not discussed separately as any results that had a significant impact on operating results are included in the “Results of Operations” discussion above. We recast certain prior period amounts to conform to the way we are internally managed and how we monitor segment performance during the current fiscal year.
We evaluate the performance of our segments based on Segment Revenues and Segment Adjusted EBITDA. Segment Adjusted EBITDA is indicative of operational performance and ongoing profitability. Our management closely monitors Segment Adjusted EBITDA to evaluate past performance and identify actions required to improve profitability.
The segment measurements provided to and evaluated by the chief operating decision maker are described in Note 17 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.
Segment Results for the Three Month Periods Ended March 31, 2021 and 2020
The following tables display Segment Revenues, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin (Segment Adjusted EBITDA as a percentage of Segment Revenues) for each of our Segments.
Industrial Technologies and Services Segment Results
| For the Three Month Period Ended March 31, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 913.8 | $ | 504.0 | 81.3 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 211.5 | $ | 94.8 | 123.1 | % | |||||||||||
| Segment Margin | 23.1 | % | 18.8 | % | 430 | bps | |||||||||||
Segment Revenues for the three month period ended March 31, 2021 were $913.8 million, an increase of $409.8 million, or 81.3%, compared to $504.0 in the same three month period in 2020. The increase in Segment Revenues was primarily due to acquisitions, including of Ingersoll Rand Industrial, of $337.6 million or 67.0%, higher organic volume of $35.3 million or 7.0%, favorable impact of foreign currencies of $24.3 million or 4.8% and higher pricing of $12.6 million or 2.5%. The percentage of
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Segment Revenues derived from aftermarket parts and service was 42.1% in the three month period ended March 31, 2021 compared to 39.8% in the same three month period in 2020.
Segment Adjusted EBITDA for the three month period ended March 31, 2021 was $211.5 million, an increase of $116.7 million, or 123.1%, from $94.8 million in the same three month period in 2020. Segment Adjusted EBITDA Margin increased 430 bps to 23.1% from 18.8% in 2020. The increase in Segment Adjusted EBITDA was primarily due to acquisitions, including Ingersoll Rand Industrial, of $75.1 million or 79.2%, higher organic sales volumes of $13.7 million or 14.5%, higher pricing of $12.6 million or 13.3%, productivity related procurement and I2V initiatives of $6.7 million or 7.1%, favorable impact of foreign currencies of $6.2 million or 6.5% and lower selling and administrative costs of $2.8 million or 3.0%.
Precision and Science Technologies Segment Results
| For the Three Month Period Ended March 31, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 215.7 | $ | 112.9 | 91.1 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 67.2 | $ | 32.9 | 104.3 | % | |||||||||||
| Segment Margin | 31.2 | % | 29.1 | % | 210 | bps | |||||||||||
Segment Revenues for the three month period ended March 31, 2021 were $215.7 million, an increase of $102.8 million, or 91.1%, compared to $112.9 million in the same three month period in 2020. The increase in Segment Revenues was primarily due to acquisitions, including Ingersoll Rand Industrial, of $82.6 million or 73.2%, higher organic volume of $13.4 million or 11.9%, favorable impact of foreign currencies of $5.0 million or 4.4% and higher pricing of $1.8 million or 1.6%. The percentage of Segment Revenues derived from aftermarket parts and service was 17.2% in the three month period ended March 31, 2021 compared to 12.3% in the same three month period in 2020.
Segment Adjusted EBITDA for the three month period ended March 31, 2021 was $67.2 million, an increase of $34.3 million, or 104.3%, from $32.9 million in the same three month period in 2020. Segment Adjusted EBITDA Margin increased 210 bps to 31.2% from 29.1% in 2020. The increase in Segment Adjusted EBITDA was primarily due to acquisition, including Ingersoll Rand Industrial, of $24.2 million or 73.6%, higher organic sales volume of $6.0 million or 18.2%, favorable impact of foreign currencies of $2.0 million or 6.1% and higher pricing of $1.8 million or 5.5%.
Specialty Vehicle Technologies Segment Results
| For the Three Month Period Ended March 31, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 240.3 | $ | 86.6 | 177.5 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 48.2 | $ | 14.1 | 241.8 | % | |||||||||||
| Segment Margin | 20.1 | % | 16.3 | % | 380 | bps | |||||||||||
Segment Revenues for the three month period ended March 31, 2021 were $240.3 million, an increase of $153.7 million, or 177.5%, compared to $86.6 million in the same three month period in 2020. The increase in Segment Revenues was due to three months of activity for the three month period ended March 31, 2021 compared to one month in the same three month period in 2020. The percentage of Segment Revenues derived from aftermarket parts and service was 23.2% in the three month periods ended March 31, 2021 compared to 16.2% in the same three month period in 2020.
Segment Adjusted EBITDA for the three month periods ended March 31, 2021 was $48.2 million, an increase of $34.1 million, or 241.8%, from $14.1 million in the same three month period in 2020. Segment Adjusted EBITDA Margin increased 380 bps to 20.1% from 16.3% in 2020. The increase in Segment Adjusted EBITDA was due to three months of activity for the three month period ended March 31, 2021 compared to one month in the same three month period in 2020.
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Results of Discontinued Operations
The following table presents selected Consolidated Results of Operations of our business for the three month periods ended March 31, 2021 and 2020.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 62.4 | $ | 96.4 | |||||||
| Cost of sales | 50.5 | 69.6 | |||||||||
| Gross profit | 11.9 | 26.8 | |||||||||
| Selling and administrative expenses | 4.3 | 8.2 | |||||||||
| Amortization of intangible assets | 2.4 | 5.9 | |||||||||
| Loss on disposal group | 203.3 | — | |||||||||
| Other operating expense, net | 8.1 | 3.4 | |||||||||
| Income (loss) before income taxes | (206.2) | 9.3 | |||||||||
| Provision (benefit) for income taxes | (4.5) | 8.1 | |||||||||
| Income (Loss) from Discontinued Operations | $ | (201.7) | $ | 1.2 | |||||||
Revenues
Revenues for the three month period ended March 31, 2021 were $62.4 million, a decrease of $34.0 million, or 35.3%, compared to $96.4 million in the same three month period in 2020. The decrease in revenues from discontinued operations was primarily due to lower volumes of $31.7 million or 32.9%, unfavorable impact of foreign currencies of $1.3 million or 1.3% and lower pricing of $1.0 million or 1.0%, as a result of the current downturn in the upstream energy market. The percentage of Revenues from discontinued operations derived from aftermarket parts and service was 81.6% in the three month period ended March 31, 2021 compared to 81.6% in the same three month period in 2020.
Gross Profit
Gross profit for the three month period ended March 31, 2021 was $11.9 million, a decrease of $14.9 million, or 55.6%, compared to $26.8 million for the same three month period in 2020, and as a percentage of revenues was 19.1% for the three month period ended March 31, 2021 and 27.8% for the same three month period in 2020. The decrease in gross profit is primarily due to the revenue decline described above.
Loss on Disposal Group
Loss on disposal group from the three month period ended March 31, 2021 was $203.3 million was a charge taken to reduce the carrying value of the HPS business to the estimated fair value of the net proceeds and residual equity interest from the transaction.
Other Operating Expense, Net
Other operating expense, net was $8.1 million for the three month period ended March 31, 2021, an increase of $4.7 million, compared to $3.4 million in the same three month period in 2020. The increase was primarily due to higher acquisition and other transaction related expenses and non-cash charges of $6.8 million, partially offset by lower restructuring charges of $2.5 million.
Provision (Benefit) for Income Taxes
The benefit for income taxes was $4.5 million resulting in a 2.2% effective income tax rate for the three month period ended March 31, 2021, compared to a provision for income taxes of $8.1 million resulting in a 87.1% effective income tax rate in the same three month period in 2020. The decrease in the tax provision for the three month period ended March 31, 2021 is primarily due to one-time discrete items associated with the assets held for sale.
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Liquidity and Capital Resources
Our investment resources include cash on hand, cash generated from operations and borrowings under our Revolving Credit Facility. We also have the ability to seek additional secured and unsecured borrowings, subject to Credit Agreement restrictions.
As of March 31, 2021, we had $105.4 million of outstanding letters of credit written against the Revolving Credit Facility and $994.6 million of unused availability.
See the description of these line-of-credit resources in Note 8 “Debt” to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended December 31, 2020 and Note 9 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.
As of March 31, 2021, we were in compliance with all of our debt covenants and no event of default had occurred or was ongoing.
Liquidity
A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing cost of operations, working capital and capital expenditures.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 1,639.6 | $ | 1,750.9 | |||||||
| Short-term borrowings and current maturities of long-term debt | $ | 40.6 | $ | 40.4 | |||||||
| Long-term debt | 3,823.2 | 3,859.1 | |||||||||
| Total debt | $ | 3,863.8 | $ | 3,899.5 | |||||||
We can increase the borrowing availability under the Senior Secured Credit Facilities by up to $1,600.0 million in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans plus an additional amount so long as we do not exceed a specified senior secured leverage ratio. We can incur additional secured indebtedness under the term loan facilities if certain specified conditions are met under the credit agreement governing the Senior Secured Credit Facilities. Our liquidity requirements are significant primarily due to debt service requirements. See Note 10 “Debt” to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended December 31, 2020 and Note 9 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further details.
Our principal sources of liquidity have been existing cash and cash equivalents, cash generated from operations and borrowings under the Senior Secured Credit Facilities. Our principal uses of cash will be to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including possible acquisitions. We may also seek to finance capital expenditures under capital leases or other debt arrangements that provide liquidity or favorable borrowing terms. We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. In the event that suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings. As market conditions warrant, we may from time to time, seek to repay loans that we have borrowed, including the borrowings under the Senior Secured Credit Facilities. Based on our current level of operations and available cash, we believe our cash flow from operations, together with availability under the Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements for the foreseeable future. Our business may not generate sufficient cash flows from operations or future borrowings may not be available to us under our Revolving Credit Facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Our ability to do so depends on, among other factors, prevailing economic conditions, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change in control, we could be required to repay or refinance our indebtedness. We may not be able to refinance any of our indebtedness, including the Senior Secured Credit Facilities, on commercially reasonable terms or at all. Any future acquisitions, joint ventures, or other similar transactions may require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms or at all.
A substantial portion of our cash is in jurisdictions outside the United States. We do not assert ASC 740-30 (formerly APB 23) indefinite reinvestment of our historical non-U.S. earnings or future non-U.S. earnings. The Company records a deferred foreign
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tax liability to cover all estimated withholding, state income tax and foreign income tax associated with repatriating all non-U.S. earnings back to the United States. Our deferred income tax liability as of March 31, 2021 was $41.1 million which primarily consisted of withholding taxes.
Working Capital
| March 31, 2021 | December 31, 2020 | ||||||||||
| Net Working Capital: | |||||||||||
| Current assets of continuing operations: | |||||||||||
| Current assets | $ | 4,153.9 | $ | 3,862.1 | |||||||
| Less: Assets of discontinued operations - current | 504.4 | 191.8 | |||||||||
| Current assets of continuing operations | 3,649.5 | 3,670.3 | |||||||||
| Current liabilities of continuing operations: | |||||||||||
| Current liabilities | 1,536.3 | 1,498.6 | |||||||||
| Less: Liabilities of discontinued operations - current | 66.7 | 41.8 | |||||||||
| Current liabilities of continuing operations | 1,469.6 | 1,456.8 | |||||||||
| Net working capital of continuing operations | $ | 2,179.9 | $ | 2,213.5 | |||||||
| Operating Working Capital: | |||||||||||
| Accounts receivable and contract assets | $ | 1,033.2 | $ | 994.9 | |||||||
| Plus: Inventories (excluding LIFO) | 823.7 | 776.5 | |||||||||
| Less: Accounts payable | 674.2 | 646.6 | |||||||||
| Less: Contract liabilities (current) | 188.9 | 172.0 | |||||||||
| Operating working capital | $ | 993.8 | $ | 952.8 | |||||||
Net working capital of continuing operations decreased $33.6 million to $2,179.9 million as of March 31, 2021 from $2,213.5 million as of December 31, 2020. Operating working capital increased $41.0 million to $993.8 million as of March 31, 2021 from $952.8 million as of December 31, 2020. The increase in operating working capital is primarily due to higher accounts receivable and higher inventories, partially offset by higher accounts payable, higher contract liabilities and lower contract assets.
The increase in accounts receivable was primarily due to the difference in sales mix between the fourth quarter of 2020 and the first quarter of 2021. A higher portion of revenues in the fourth quarter of 2020 were related to highly engineered solutions product contracts with higher advance payments ahead of revenue recognition than in the first quarter of 2021. The decrease in contract assets was primarily due to the timing of revenue recognition and billing on our overtime contracts. The increase in inventories was primarily due to additions to inventory in anticipation of increased demand for certain products. The increase in accounts payable was primarily due to the timing of vendor cash disbursements. The increase in contract liabilities was primarily due to the timing of customer milestone payments for in-process engineered to order contracts.
Cash Flows
The following table reflects the major categories of cash flows for the three month periods ended March 31, 2021 and 2020, respectively.
| For the Three Month Period Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from (used in) continuing operations: | |||||||||||
| Cash flows from operating activities | $ | 122.6 | $ | 38.0 | |||||||
| Cash flows from (used in) investing activities | (207.9) | 33.8 | |||||||||
| Cash flows used in financing activities | (7.8) | (41.9) | |||||||||
| Cash flows from discontinued operations | (0.6) | 29.7 | |||||||||
Free cash flow(1) | 107.6 | 30.4 | |||||||||
(1)See the “Non-GAAP Financial Measures” section included in this Quarterly Report for a reconciliation to the nearest GAAP measure.
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Operating Activities
Cash provided by operating activities increased $84.6 million to $122.6 million for the three month period ended March 31, 2021 from $38.0 million in the same three month period in 2020, primarily due to an increase in income from continuing operations and an increase in accounts payable, partially offset by an increase in inventories and an increase in accounts receivable.
Investing Activities
Cash used in investing activities included capital expenditures of $15.0 million and $7.6 million for the three month periods ended March 31, 2021 and 2020, respectively. Net cash paid in a business combination was $202.5 million in the three month period ended March 31, 2021 and cash acquired in business combinations for the three month period ended March 31, 2020 was $41.3 million.
Financing Activities
Cash used in financing activities of $7.8 million for the three month period ended March 31, 2021 primarily reflected repayments of long term debt of $9.9 million and purchases of treasury stock of $3.0 million, partially offset by proceeds from stock option exercises of $5.1 million.
Cash used in financing activities of $41.9 million for the three month period ended March 31, 2020 reflected repayments of long-term borrowings of $1,590.6 million, purchases of treasury stock of $0.8 million, payments of contingent consideration of $0.7 million, payments of debt issuance costs of $37.5 million and payments of costs incurred to issue shares for the Ingersoll Rand Industrial acquisition of $1.0 million, partially offset by proceeds from the issuance of long-term borrowings of $1,586.0 million and proceeds from stock option exercises of $2.7 million.
Discontinued Operations
Cash provided by (used in) discontinued operations decreased $30.3 million to $(0.6) million for the three month period ended March 31, 2021 from $29.7 million in the same three month period in 2020, primarily due to lower operating income.
Free Cash Flow
Free cash flow increased $77.2 million to $107.6 million in the three month period ended March 31, 2021 from $30.4 million in the same three month period in 2020 primarily due to increased cash provided by operating activities.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are materially likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
Management has evaluated the accounting estimates used in the preparation of the Company’s condensed consolidated financial statements and related notes and believe those estimates to be reasonable and appropriate. Certain of these accounting estimates require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the section “Critical Accounting Estimates” of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 1 “Summary of Significant Accounting Policies” of “Item 8. Financial Statements and Supplementary Data” included in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
Environmental Matters
Information with respect to the effect of compliance with environmental protection requirements and resolution of environmental claims on us and our manufacturing operations is contained in Note 16 “Contingencies” to the condensed consolidated financial
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statements. We believe that as of March 31, 2021, there have been no material changes to the environmental matters disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
Recent Accounting Pronouncements
The information set forth in Note 1 “Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements under Part 1 Item 1 “Financial Statements” under the heading “Recently Issued Accounting Pronouncements” is incorporated herein by reference.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk as a result of our variable-rate borrowings. We manage our exposure to interest rate risk by using pay-fixed interest rate swaps, from time to time, as cash flow hedges of our variable rate debt in order to adjust the relative fixed and variable portions.
In addition, we are exposed to foreign currency risks that arise from our global business operations. Changes in foreign currency exchange rates affect the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a subsidiary’s functional currency. While future changes in foreign currency exchange rates are difficult to predict, our revenues and earnings may be adversely affected if the U.S. dollar further strengthens.
We seek to minimize our exposure to foreign currency risks through a combination of normal operating activities, including by conducting our international business operations primarily in their functional currencies to match expenses with revenues and the use of foreign currency forward exchange contracts and debt denominated in currencies other than the U.S. dollar. In addition, to mitigate the risk arising from entering into transactions in currencies other than our functional currencies, we typically settle intercompany trading balances at least quarterly.
As of March 31, 2021, there have been no material changes to our market risk assessment previously disclosed in the annual report on Form 10-K for the fiscal year ended December 31, 2020.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 16 “Contingencies” to our Condensed Consolidated Financial Statements under Part I Item 1 “Financial Statements,” is incorporated herein by reference.
ITEM 1A. RISK FACTORS
As of March 31, 2021, there have been no material changes to our risk factors included in our annual report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”).
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Company Purchases
The following table contains detail related to the repurchase of our common stock based on the date of trade during the three month period ended March 31, 2021.
| 2021 First Quarter Months | Total Number of Shares Purchased(1) | Average Price Paid Per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| January 1, 2021 - January 31, 2021 | — | $ | — | — | $ | — | |||||||||||||||||
| February 1, 2021 - February 28, 2021 | 21,913 | $ | 50.20 | — | $ | — | |||||||||||||||||
| March 1, 2021 - March 31, 2021 | 38,395 | $ | 49.20 | — | $ | — | |||||||||||||||||
(1)All of the shares purchased during the three month period ended March 31, 2021 were in connection with net exercises of stock options or the surrender to us of shares of common stock to satisfy tax withholding obligations in connection with the vesting of certain restricted stock units.
(2)The average price paid per share includes brokerage commissions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following is a list of all exhibits filed or furnished as part of this report.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosures other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual statement of affairs as of the date they were made or at any other time.
| Exhibit No. | Description | |||||||
| 2.1 | Agreement and Plan of Merger, dated as of April 30, 2019, by and among Ingersoll-Rand plc, Gardner Denver Holdings, Inc., Ingersoll-Rand U.S. HoldCo, Inc. and Charm Merger Sub Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Ingersoll-Rand plc on May 6, 2019). | |||||||
| 2.2 | Separation and Distribution Agreement, dated as of April 30, 2019, by and between Ingersoll-Rand plc and Ingersoll-Rand U.S. HoldCo, Inc. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Ingersoll-Rand plc on May 6, 2019). | |||||||
| First Amendment to Ingersoll Rand Inc. Amended and Restated 2017 Omnibus Incentive Plan. | ||||||||
| Form of Performance Stock Unit Grant Notice and Agreement under the Ingersoll Rand Inc. Amended and Restated 2017 Omnibus Incentive Plan | ||||||||
| Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | ||||||||
| Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | ||||||||
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | ||||||||
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) | ||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Scheme Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: April 30, 2021 | INGERSOLL RAND INC. | |||||||
| By: | /s/ Michael J. Scheske | |||||||
| Name: Michael J. Scheske | ||||||||
| Vice President and Corporate Controller (Principal Accounting Officer) | ||||||||
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