Ingersoll Rand (IR) 10-Q2021 Q1 Quarterly report

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:

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 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.

optional expedients or exceptions available under this ASU. The Company will continue to assess whether this ASU is applicable throughout the effective period.

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:

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):

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:

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.

Also during the first quarter of 2021, within the Industrial Technologies and Services segment, the Company acquired 3 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.

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.

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.

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.

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.

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.

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

The 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.

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 2 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.

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.

Inventories as of March 31, 2021 and December 31, 2020 consisted of the following.

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.

As of March 31, 2021, goodwill included accumulated impairment losses of $220.6 million within the Industrial Technologies and Services segment.

Other intangible assets as of March 31, 2021 and December 31, 2020 consisted of the following.

As of March 31, 2021, there were no indications that the carrying value of goodwill and other intangible assets may not be recoverable.

Accrued liabilities as of March 31, 2021 and December 31, 2020 consisted of the following.

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.

Debt as of March 31, 2021 and December 31, 2020 is summarized as follows.

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.

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 0 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.

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.

The Senior Secured Credit Facilities require the Company to prepay outstanding term loans, subject to certain exceptions, with (i) 50% of annual excess cash flow (as defined in the Senior Credit Facilities) commencing with the fiscal year ending December 31, 2021 (which percentage will be reduced to 25% if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.25 to 1.00 but greater than 2.00 to 1.00, and which prepayment will not be required if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.00 to 1.00), (ii) 100% of the net cash proceeds of non-ordinary asset sales or other dispositions of property, subject to reinvestment rights (which

percentage will be reduced to 50% if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.25 to 1.00 but greater than 2.00 to 1.00 and which prepayment will not be required if the Company’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio is less than or equal to 2.00 to 1.00), and (iii) 100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the Credit Agreement.

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

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

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.

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.

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.

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.

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.

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.

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).

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.

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).

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).

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.

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

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.

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.