| (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. |
| (3) | Measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curves as of September June 30, 2017.2020. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparties. |
Note 12. Revenue from Contracts with Customers
Overview
The Company recognizes revenue when the Company has satisfied its obligation and control is transferred to the customer. The amount of revenue recognized includes adjustments for any variable consideration, such as rebates, sales discounts, liquidated damages, etc., which are included in the transaction price, and allocated to each performance obligation. The variable consideration is estimated throughout the course of the contract using the Company’s best estimates.
The majority of the Company’s revenues are derived from short duration contracts and revenue is recognized at a single point in time when control is transferred to the customer, generally at shipment or when delivery has occurred or services have been rendered.
The Company has certain long duration engineered to order (‘‘ETO’’) contracts that require highly engineered solutions designed to customer specific applications. For contracts where the contractual deliverables have no alternative use and the contract termination clauses provide for the recovery of cost plus a reasonable margin, revenue is recognized over time based on the Company’s progress in satisfying the contractual performance obligations, generally measured as the ratio of actual costs incurred to date to the estimated total costs to complete the contract. For contracts with termination provisions that do not provide for recovery of cost and a reasonable margin, revenue is recognized at a point in time, generally at shipment or delivery to the customer. Identification of performance obligations, determination of alternative use, assessment of contractual language regarding termination provisions, and estimation of total project costs are all significant judgments required in the application of ASC 606.
Contractual specifications and requirements may be modified. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. In the event a contract modification is for goods or services that are not distinct in the contract, and therefore, form part of a single performance obligation that is partially satisfied as of the modification date, the effect of the contract modification on the transaction price and the Company’s measure of progress for the performance obligation to which it relates, is recognized on a cumulative catch-up basis.
Taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Sales commissions are due at 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 June 30,2020 and 2019.
| | For the Three Month Period Ended June 30, 2020 | |
| | Industrial Technologies and Services | | | Precision and Science Technologies | | | High Pressure Solutions | | | Specialty Vehicle Technologies | | | Total | |
Primary Geographic Markets | | | | | | | | | | | | | | | |
United States | | $ | 289.8 | | | $ | 83.7 | | | $ | 17.3 | | | $ | 191.1 | | | $ | 581.9 | |
Other Americas | | | 70.5 | | | | 9.9 | | | | 0.6 | | | | 12.1 | | | | 93.1 | |
Total Americas | | | 360.3 | | | | 93.6 | | | | 17.9 | | | | 203.2 | | | | 675.0 | |
EMEAI | | | 247.1 | | | | 63.7 | | | | 2.3 | | | | 6.7 | | | | 319.8 | |
Asia Pacific | | | 222.2 | | | | 38.5 | | | | 1.3 | | | | 7.6 | | | | 269.6 | |
Total | | $ | 829.6 | | | $ | 195.8 | | | $ | 21.5 | | | $ | 217.5 | | | $ | 1,264.4 | |
| | | | | | | | | | | | | | | | | | | | |
Product Categories | | | | | | | | | | | | | | | | | | | | |
Original equipment | | $ | 502.0 | | | $ | 169.1 | | | $ | 3.5 | | | $ | 160.0 | | | $ | 834.6 | |
Aftermarket | | | 327.6 | | | | 26.7 | | | | 18.0 | | | | 57.5 | | | | 429.8 | |
Total | | $ | 829.6 | | | $ | 195.8 | | | $ | 21.5 | | | $ | 217.5 | | | $ | 1,264.4 | |
| | | | | | | | | | | | | | | | | | | | |
Pattern of Revenue Recognition | | | | | | | | | | | | | | | | | | | | |
Revenue recognized at point in time(1) | | $ | 750.1 | | | $ | 195.8 | | | $ | 21.5 | | | $ | 212.0 | | | $ | 1,179.4 | |
Revenue recognized over time(2) | | | 79.5 | | | | — | | | | — | | | | 5.5 | | | | 85.0 | |
Total | | $ | 829.6 | | | $ | 195.8 | | | $ | 21.5 | | | $ | 217.5 | | | $ | 1,264.4 | |
| | For the Three Month Period Ended June 30, 2019 | |
| | Industrial Technologies and Services | | | Precision and Science Technologies | | | High Pressure Solutions | | | Specialty Vehicle Technologies | | | Total | |
Primary Geographic Markets | | | | | | | | | | | | | | | |
United States | | $ | 129.1 | | | $ | 39.1 | | | $ | 105.8 | | | $ | — | | | $ | 274.0 | |
Other Americas | | | 35.4 | | | | 1.5 | | | | 9.2 | | | | — | | | | 46.1 | |
Total Americas | | | 164.5 | | | | 40.6 | | | | 115.0 | | | | — | | | | 320.1 | |
EMEAI | | | 178.9 | | | | 27.8 | | | | 2.6 | | | | — | | | | 209.3 | |
Asia Pacific | | | 84.2 | | | | 13.6 | | | | 1.9 | | | | — | | | | 99.7 | |
Total | | $ | 427.6 | | | $ | 82.0 | | | $ | 119.5 | | | $ | — | | | $ | 629.1 | |
| | | | | | | | | | | | | | | | | | | | |
Product Categories | | | | | | | | | | | | | | | | | | | | |
Original equipment | | $ | 289.7 | | | $ | 79.9 | | | $ | 24.4 | | | $ | — | | | $ | 394.0 | |
Aftermarket | | | 137.9 | | | | 2.1 | | | | 95.1 | | | | — | | | | 235.1 | |
Total | | $ | 427.6 | | | $ | 82.0 | | | $ | 119.5 | | | $ | — | | | $ | 629.1 | |
| | | | | | | | | | | | | | | | | | | | |
Pattern of Revenue Recognition | | | | | | | | | | | | | | | | | | | | |
Revenue recognized at point in time(1) | | $ | 396.2 | | | $ | 82.0 | | | $ | 119.5 | | | $ | — | | | $ | 597.7 | |
Revenue recognized over time(2) | | | 31.4 | | | | — | | | | — | | | | — | | | | 31.4 | |
Total | | $ | 427.6 | | | $ | 82.0 | | | $ | 119.5 | | | $ | — | | | $ | 629.1 | |
| (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 products 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. |
The following tables provide disaggregated revenue by reportable segment for the six month periods ended June 30,2020 and 2019.
| | For the Six Month Period Ended June 30, 2020 | |
| | Industrial Technologies and Services | | | Precision and Science Technologies | | | High Pressure Solutions | | | Specialty Vehicle Technologies | | | Total | |
Primary Geographic Markets | | | | | | | | | | | | | | | |
United States | | $ | 466.9 | | | $ | 133.0 | | | $ | 98.0 | | | $ | 264.8 | | | $ | 962.7 | |
Other Americas | | | 115.8 | | | | 14.8 | | | | 10.8 | | | | 16.8 | | | | 158.2 | |
Total Americas | | | 582.7 | | | | 147.8 | | | | 108.8 | | | | 281.6 | | | | 1,120.9 | |
EMEAI | | | 447.7 | | | | 104.6 | | | | 6.4 | | | | 12.2 | | | | 570.9 | |
Asia Pacific | | | 303.2 | | | | 56.2 | | | | 2.6 | | | | 10.5 | | | | 372.5 | |
Total | | $ | 1,333.6 | | | $ | 308.6 | | | $ | 117.8 | | | $ | 304.3 | | | $ | 2,064.3 | |
| | | | | | | | | | | | | | | | | | | | |
Product Categories | | | | | | | | | | | | | | | | | | | | |
Original equipment | | $ | 805.2 | | | $ | 268.1 | | | $ | 16.0 | | | $ | 232.7 | | | $ | 1,322.0 | |
Aftermarket | | | 528.4 | | | | 40.5 | | | | 101.8 | | | | 71.6 | | | | 742.3 | |
Total | | $ | 1,333.6 | | | $ | 308.6 | | | $ | 117.8 | | | $ | 304.3 | | | $ | 2,064.3 | |
| | | | | | | | | | | | | | | | | | | | |
Pattern of Revenue Recognition | | | | | | | | | | | | | | | | | | | | |
Revenue recognized at point in time(1) | | $ | 1,209.6 | | | $ | 308.6 | | | $ | 117.8 | | | $ | 297.3 | | | $ | 1,933.3 | |
Revenue recognized over time(2) | | | 124.0 | | | | — | | | | — | | | | 7.0 | | | | 131.0 | |
Total | | $ | 1,333.6 | | | $ | 308.6 | | | $ | 117.8 | | | $ | 304.3 | | | $ | 2,064.3 | |
| | For the Six Month Period Ended June 30, 2019 | |
| | Industrial Technologies and Services | | | Precision and Science Technologies | | | High Pressure Solutions | | | Specialty Vehicle Technologies | | | Total | |
Primary Geographic Markets | | | | | | | | | | | | | | | |
United States | | $ | 245.6 | | | $ | 76.9 | | | $ | 220.7 | | | $ | — | | | $ | 543.2 | |
Other Americas | | | 65.0 | | | | 2.2 | | | | 22.9 | | | | — | | | | 90.1 | |
Total Americas | | | 310.6 | | | | 79.1 | | | | 243.6 | | | | — | | | | 633.3 | |
EMEAI | | | 369.9 | | | | 56.0 | | | | 7.7 | | | | — | | | | 433.6 | |
Asia Pacific | | | 152.2 | | | | 26.2 | | | | 4.1 | | | | — | | | | 182.5 | |
Total | | $ | 832.7 | | | $ | 161.3 | | | $ | 255.4 | | | $ | — | | | $ | 1,249.4 | |
| | | | | | | | | | | | | | | | | | | | |
Product Categories | | | | | | | | | | | | | | | | | | | | |
Original equipment | | $ | 563.5 | | | $ | 156.5 | | | $ | 49.3 | | | $ | — | | | $ | 769.3 | |
Aftermarket | | | 269.2 | | | | 4.8 | | | | 206.1 | | | | — | | | | 480.1 | |
Total | | $ | 832.7 | | | $ | 161.3 | | | $ | 255.4 | | | $ | — | | | $ | 1,249.4 | |
| | | | | | | | | | | | | | | | | | | | |
Pattern of Revenue Recognition | | | | | | | | | | | | | | | | | | | | |
Revenue recognized at point in time(1) | | $ | 773.8 | | | $ | 161.3 | | | $ | 255.4 | | | $ | — | | | $ | 1,190.5 | |
Revenue recognized over time(2) | | | 58.9 | | | | — | | | | — | | | | — | | | | 58.9 | |
Total | | $ | 832.7 | | | $ | 161.3 | | | $ | 255.4 | | | $ | — | | | $ | 1,249.4 | |
| (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 products 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 June 30,2020, 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 $378.3 million in the next twelve months and $277.8 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 June 30,2020 and December 31,2019 presented in the Condensed Consolidated Balance Sheets.
| | June 30, 2020 | | | December 31, 2019 | |
Accounts receivable | | $ | 922.2 | | | $ | 459.1 | |
Contract assets | | | 53.2 | | | | 29.0 | |
Contract liabilities | | | 163.4 | | | | 51.7 | |
Accounts receivable – Amounts due where the Company’s right to receive cash is unconditional. As of June 30,2020, approximately $575.6 million of the increase in accounts receivable related to the acquisition of Ingersoll Rand Industrial. In the three month period ended June 30,2020, the Company increased its allowance for doubtful accounts by $12.5 million in response to a filing for Chapter 11 bankruptcy protection of a customer in the High Pressure Solutions segment.
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. As of June 30,2020, approximately $17.5 million increase in contract assets related to the acquisition of Ingersoll Rand Industrial.
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. As of June 30,2020, approximately $106.8 million increase in contract liabilities receivable related to the acquisition of Ingersoll Rand Industrial.
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 13. Income Taxes
The following table summarizes the Company’s provision (benefit) for income taxes and effective income tax provision rate for the three and ninesix month periods ended September June 30, 20172020 and 2016:2019.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 32.4 | | | $ | (22.1 | ) | | $ | (166.3 | ) | | $ | (60.3 | ) |
Provision (benefit) for income taxes | | $ | 4.4 | | | $ | (9.1 | ) | | $ | (41.2 | ) | | $ | (33.3 | ) |
Effective income tax rate | | | 13.6 | % | | | 41.3 | % | | | 24.8 | % | | | 55.2 | % |
| | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
(Loss) income before income taxes | | $ | (80.7 | ) | | $ | 53.2 | | | $ | (176.4 | ) | | $ | 112.4 | |
Provision for income taxes | | $ | 95.8 | | | $ | 8.3 | | | $ | 37.0 | | | $ | 20.3 | |
Effective income tax provision rate | | | (118.7 | %) | | | 15.6 | % | | | (21.0 | %) | | | 18.1 | % |
For the three month period ended September 30, 2017 when compared to the same three month period of 2016, theThe increase in the provision for income taxes is primarily due to the increase in the pre-tax income. Theand decrease in the effective income tax provision rate is due tofor the decrease in the U.S. loss at a higher tax rate combined with an increase in foreign profits at a lower tax rate.
For the ninethree month period ended September June 30, 20172020 when compared to the same ninethree month period of 2016,2019 is primarily due to a reduction in the decreasepre-tax book income in jurisdictions with lower effective tax rates combined with significant earnings in jurisdictions with higher tax rates. The reduction in pre-tax book income is mainly 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.
The increase in the provision for income taxes is due to the increase of the pre-tax loss. The significant increase in the loss in the U.S. was caused by one-time expenses associated with the Company’s initial public offering. This included offering-related expenses, early termination fees related to the pay down of debt, and stock-based compensation expense. The decrease in the effective income tax provision rate for the six month period ended June 30,2020 when compared to the same six month period of 2019 is primarily due to thesea reduction in the pre-tax book income in jurisdictions with lower effective tax rates combined with significant earnings in jurisdictions with higher tax rates. The reduction in pre-tax book income is mainly from the COVID-19 global pandemic, transaction costs associated with the acquisition, and amortization and depreciation expenses being benefited at a lower tax rate.associated with the purchase price step up adjustments.
Note 13.14. Supplemental Information
The components of “Other operating expense, net” for the three month and ninesix month periods ended SeptemberJune 30, 20172020 and 2016 are2019 were as follows:follows.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | | | | | | | | | | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Other Operating Expense, Net | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency losses (gains), net | | $ | 1.7 | | | $ | 0.5 | | | $ | 6.3 | | | $ | (2.6 | ) | |
Foreign currency transaction losses, net | | | $ | 5.2 | | | $ | 0.6 | | | $ | 7.8 | | | $ | 3.7 | |
Restructuring charges, net (1) | | | 2.8 | | | | 3.0 | | | | 4.9 | | | | 15.4 | | | | 30.6 | | | | 0.8 | | | | 72.2 | | | | 2.8 | |
Environmental remediation expenses (2) | | | - | | | | - | | | | 0.9 | | | | - | | |
Stock-based compensation expense (3) | | | 9.8 | | | | - | | | | 166.0 | | | | - | | |
Shareholder litigation settlement recoveries (2) | | | | — | | | | — | | | | — | | | | (6.0 | ) |
Acquisition related expenses and non-cash charges (3) | | | | 13.0 | | | | 17.1 | | | | 68.0 | | | | 18.7 | |
Other, net | | | 3.1 | | | | 8.9 | | | | 8.6 | | | | 13.3 | | | | 1.1 | | | | (0.3 | ) | | | 2.6 | | | | 0.8 | |
Total other operating expense, net | | $ | 17.4 | | | $ | 12.4 | | | $ | 186.7 | | | $ | 26.1 | | | $ | 49.9 | | | $ | 18.2 | | | $ | 150.6 | | | $ | 20.0 | |
| (1) | See Note 3 “Restructuring.” |
| (2) | Estimated environmental remediationRepresents an insurance recovery of the Company’s shareholder litigation settlement in 2014. |
| (3) | Represents costs recorded on an undiscounted basis for a former production facility.associated with successful and/or abandoned acquisitions, 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. |
| (3) | Represents stock-based compensation expense recognized for stock options outstanding for the three months and nine months ended September 30, 2017 of $7.8 million and $69.2 million, respectively, and DSUs granted to employees at the date of the initial public offering for the three months and nine months ended September 30, 2017 of $2.0 million and $96.8 million, respectively. See Note 9 “Stock-Based Compensation”. |
Note 14. 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. A more detailed discussionFor further description of certain of thesethe Company’s contingencies, reference is made to Note 20, “Contingencies” in the notes to consolidated financial statements in the Company’s 2019 Form 10-K.
The Company is still assessing any possible exposure to various legal proceedings, lawsuits and administrative actions, is set forth below.including future asbestos and silica-related lawsuits and environmental matters, assumed in the acquisition of Ingersoll Rand Industrial.
Asbestos and Silica Related Litigation
The Company has also been named as a defendant in a number of asbestos-related and silica-related personal injury lawsuits. The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources and typically the Company is one of approximately 25 or more named defendants.
Predecessors to the Company sometimes manufactured, distributed and/or sold products allegedly at issue in the pending asbestos and silica-related lawsuits (the “Products”). However, neither the Company nor its predecessors ever mined, manufactured, mixed, produced or distributed asbestos fiber or silica sand, the materials that allegedly caused the injury underlying the lawsuits. Moreover, the asbestos-containing components of the Products, if any, were enclosed within the subject Products.
Although the Company has never mined, manufactured, mixed, produced or distributed asbestos fiber or silica sand nor sold products that could result in a direct asbestos or silica exposure, many of the companies that did engage in such activities or produced such products are no longer in operation. This has led to law firms seeking potential alternative companies to name in lawsuits where there has been an asbestos or silica related injury.
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, based on: the Company’s anticipated insurance and indemnification rights to address the risks of such matters; the limited potential asbestos exposure from the Products described above; the Company’s experience that the vast majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica from or relating to the Products or for which the Company otherwise bears responsibility; various potential defenses available to the Company with respect to such matters; and the Company’s prior disposition of comparable matters. However, inherent uncertainties of litigation and future developments, including, without limitation, potential insolvencies of insurance companies or other defendants, an adverse determination in the Adams County Case (discussed below), or other inability to collect from the Company’s historical insurers or indemnitors, could cause a different outcome. While the outcome of legal proceedings is inherently uncertain, based on presently known facts, experience, and circumstances, the Company believes that the amounts accrued on its balance sheet are adequate and that the liabilities arising from the asbestos and silica-related personal injury lawsuits will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. “Accrued liabilities” and “Other liabilities” onof the Condensed Consolidated Balance SheetSheets include a total litigation reserve of $102.8$115.2 million and $108.5$118.1 million as of SeptemberJune 30, 20172020 and December 31, 20162019, respectively, with respectregards 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 also pursued litigation against certain insurers or indemnitors, where necessary. The Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $97.3 million and $97.3$122.4 million as of SeptemberJune 30, 20172020 and December 31, 20162019, respectively, which was included in “Other assets” onin the Condensed Consolidated Balance Sheets.
The largest such recent action, Gardner Denver, Inc. v. Certain Underwriters at Lloyd’s, London, et al., was filed on July 9, 2010, in the Eighth Judicial Circuit, Adams County, Illinois, as case number 10-L-48 (the “Adams County Case”). In the lawsuit, the Company seeks, among other things, to require certain excess insurer defendants to honor their insurance policy obligations to the Company, including payment in whole or in part of the costs associated with the asbestos-related lawsuits filed against the Company. In October 2011, the Company reached a settlement with one of the insurer defendants, which had issued both primary and excess policies, for approximately the amount of such defendant’s policies which were subject to the lawsuit. Since then, the case has been proceeding through the discovery and motions process with the remaining insurer defendants. On January 29, 2016, the Company prevailed on the first phase of that discovery and motions process (“Phase I”). Specifically, the Court in the Adams County Case ruled that the Company has rights under all of the policies in the case, subject to their terms and conditions, even though the policies were sold to the Company’s former owners rather than to the Company itself. On June 9, 2016, the Court denied a motion by several of the insurers who sought permission to appeal the Phase I ruling now rather than waiting until the end of the whole case as is normally required. The case is now proceeding through the discovery process regarding the remaining issues in dispute (“Phase II”).
A majority of the Company’s expected future recoveries of the costs associated with the asbestos-related lawsuits are the subject of the Adams County Case.
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. There are a number of key variables and assumptions including the number and type of new claims to be filed each year, the resolution or outcome of these claims, the average cost of resolution of each new claim, the amount of insurance available, allocation methodologies, the contractual terms with each insurer with whom the Company has reached settlements, the resolution of coverage issues with other excess insurance carriers with whom the Company has not yet achieved settlements, and the solvency risk with respect to the Company’s insurance carriers. Other factors that may affect the future liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, legal rulings that may be made by state and federal courts, and the passage of state or federal legislation. The Company makes the necessary adjustments for the asbestos liability and corresponding insurance recoveries on an annual basis unless facts or circumstances warrant assessment as of an interim date.
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. Persons potentially liable for such costs and damages generally include the site owner or operator and persons that disposed or arranged for the disposal of hazardous substances found at those sites. Although these laws impose joint and several liability on PRPs, in application the PRPs typically allocate the investigation and cleanup costs based upon the volume of waste contributed by each PRP. Based on currently available information, the Company was only a small contributor to these waste sites, and the Company has, or is attempting to negotiate, de minimis settlements for their cleanup. The cleanup of the remaining sites is substantially complete and the Company’s future obligations entail a share of the sites’ ongoing operating and maintenance expense. The Company is also addressing four on-site cleanups for which it is the primary responsible party. Three of these cleanup sites are in the operation and maintenance stage and one is in the implementation stage.
The Company has undiscounted accrued liabilities of $7.5$9.2 million and $7.6$6.6 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, on its Condensed Consolidated Balance SheetSheets to the extent costs are known or can be reasonably estimated for its remaining financial obligations for thein relation to environmental matters discussed above 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.
Note 15.16. Segment Results
Effective immediately upon the closing of the Ingersoll Rand Industrial acquisition, the Company operated with 4 reportable segments. As a result of these changes, information that the Company’s chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, for periods subsequent to February 29, 2020, the Company reports its financial performance based on its new segments. The Company recasted certain prior period amounts to conform to the revised segment reporting structure. A description of the Company’s three4 reportable segments, including the specific products manufactured and sold followsis presented below.
In the IndustrialsIndustrial Technologies and Services segment, the Company designs, manufactures, markets and services a broad range of air compression and vacuum equipment as well as fluid transfer equipment, loading systems, power tools and blower products across a wide array of technologies and applications. Almost every manufacturing and industrial facility, and many service and process industries, use airlifting equipment. The Company’s compression and vacuum products are used worldwide in a variety of applications such as operation of pneumatic air tools, vacuum packaging ofindustrial manufacturing, transportation, chemical processing, food products and aeration of waste water. The Company maintains a leading position in its marketsbeverage production, energy, environmental and serves customers globally. Theother applications. In addition to equipment sales, the Company offers comprehensivea broad portfolio of service options tailored to customer needs and complete range of aftermarket parts, air treatment equipment, controls and an experienced direct and distributor-based service network world-wide to complement all of its products.
In the Energy segment, the Company designs, manufactures, markets and services a diverse range of positive displacement pumps, liquid ring vacuum pumps and compressors, and engineered loading systems and fluid transfer equipment, consumables, and associated aftermarket parts and services. It serves customers in the upstream, midstream, and downstream oil and gas markets, and various other markets including petrochemical processing, power generation, transportation, and general industrial.accessories. The Company is one of the largest suppliers in these markets and has long-standing customer relationships. Its positive displacement pumps are used in the oilfield for drilling, hydraulic fracturing, completion and well servicing. Its 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, enhanced oil recovery, water extraction in mining and paper and chlorine compression in petrochemical operations. ItsCompany’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 MedicalPrecision and Science Technologies segment, the Company designs, manufactures and markets a broad range of highly specialized gas, liquidpositive displacement pumps, fluid management equipment and precision syringe pumps and compressors primarilyaftermarket parts for use in the medical, laboratory, industrial manufacturing, water and biotechnology endwastewater, chemical processing, energy, food and beverage, agriculture and other markets. The Company’s customersproducts are mainly mediumused for a diverse set of applications including precision dosing of chemicals and large durable medicalsupplements, 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 suppliers thatmanufacturers (“OEM”) who integrate the Company’s products into their final equipment for use in applications such as oxygen therapy, blood dialysis, patient monitoring, wound treatment,devices and others. Further, withsystems.
In the recent acquisitions,High Pressure Solutions segment, the Company has expanded into liquid handling componentsdesigns, manufactures, markets and services a diverse range of positive displacement pumps, integrated systems and associated aftermarket parts, consumables and services. The Company’s positive displacement pump offering includes mission-critical oil and gas drilling pumps, frac pumps and well servicing pumps, in addition to sales of associated consumables used in biotechnologythe operation of our pumps and aftermarket parts, consumables and services. The products we sell into upstream energy applications including clinical analysis instrumentation.are highly aftermarket-intensive and so we support these products in the field with one of the industry’s most comprehensive service networks. The Company’s customers provide drilling, completions and well services to oil and gas operators, particularly in the major basins and plays in the North American land market. The Company alsois one of the leading suppliers in these upstream energy applications and has long-standing customer relationships.
In the Specialty Vehicle Technologies segment, the Company designs, manufactures and markets Club Car ® golf, utility and consumer low-speed vehicles. The Company has a broad range of end use deep vacuumlong-standing track record as a leading premium manufacturer with strong brand recognition. Its customers include golf course operators, resorts and hospitality sites, government agencies and municipalities, manufacturing and construction firms, sports and other arenas, colleges and universities and other commercial establishments, as well as individual consumers. The Company sells its products for laboratory science applications.primarily through independent distributors in over 80 countries worldwide and also sells its products directly to consumers.
The Chief Operating Decision Maker (“CODM”) evaluates the performance of itsthe 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.
The following table provides summarized information about the Company’s operations by reportable segment and reconciles Segment Adjusted EBITDA to (Loss) Income (Loss) Before Income Taxes for the three month and nine month periods ended SeptemberJune 30, 20172020 and 2016:2019.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 (1) | | | 2017 | | | 2016 (1) | |
| | | | | | | | | | | | |
Revenue | | | | | | | | | | | | |
Industrials | | $ | 288.2 | | | $ | 265.6 | | | $ | 819.0 | | | $ | 803.6 | |
Energy | | | 301.6 | | | | 137.9 | | | | 719.4 | | | | 385.8 | |
Medical | | | 59.8 | | | | 59.1 | | | | 172.0 | | | | 172.2 | |
Total Revenue | | $ | 649.6 | | | $ | 462.6 | | | $ | 1,710.4 | | | $ | 1,361.6 | |
Segment Adjusted EBITDA | | | | | | | | | | | | | | | | |
Industrials | | $ | 63.1 | | | $ | 55.6 | | | $ | 173.7 | | | $ | 156.2 | |
Energy | | | 98.6 | | | | 22.0 | | | | 199.2 | | | | 70.2 | |
Medical | | | 16.8 | | | | 16.6 | | | | 46.9 | | | | 44.7 | |
Total Segment Adjusted EBITDA | | $ | 178.5 | | | $ | 94.2 | | | $ | 419.8 | | | $ | 271.1 | |
Less items to reconcile Segment Adjusted EBITDA to | | | | | | | | | | | | | | | | |
Income (Loss) Before Income Taxes: | | | | | | | | | | | | | | | | |
Corporate expenses not allocated to segments | | $ | 13.8 | | | $ | 5.2 | | | $ | 30.9 | | | $ | 18.8 | |
Interest expense | | | 30.1 | | | | 43.0 | | | | 115.4 | | | | 128.7 | |
Depreciation and amortization expense | | | 43.5 | | | | 42.9 | | | | 126.9 | | | | 126.9 | |
Impairment of goodwill and other intangible assets (a) | | | - | | | | - | | | | - | | | | 1.5 | |
Sponsor fees and expenses (b) | | | - | | | | 1.8 | | | | 17.3 | | | | 3.8 | |
Restructuring and related business transformation costs (c) | | | 6.3 | | | | 18.2 | | | | 20.5 | | | | 46.2 | |
Acquisition related expenses and non-cash charges (d) | | | 1.2 | | | | 1.9 | | | | 3.1 | | | | 3.6 | |
Environmental remediation loss reserve (e) | | | - | | | | - | | | | 0.9 | | | | - | |
Expenses related to initial stock offering (f) | | | 0.5 | | | | - | | | | 3.6 | | | | - | |
Establish public company financial reporting compliance (g) | | | 3.8 | | | | 0.1 | | | | 7.2 | | | | 0.1 | |
Stock-based compensation (h) | | | 9.8 | | | | - | | | | 166.0 | | | | - | |
Loss on extinguishment of debt (i) | | | 34.1 | | | | - | | | | 84.5 | | | | - | |
Other adjustments (j) | | | 3.0 | | | | 3.2 | | | | 9.8 | | | | 1.8 | |
Income (Loss) Before Income Taxes: | | $ | 32.4 | | | $ | (22.1 | ) | | $ | (166.3 | ) | | $ | (60.3 | ) |
| | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | 2020 | | | 2019 (1) | | | 2020 | | | 2019 (1) | |
Revenue | | | | | | | | | | | | |
Industrial Technologies and Services | | $ | 829.6 | | | $ | 427.6 | | | $ | 1,333.6 | | | $ | 832.7 | |
Precision and Science Technologies | | | 195.8 | | | | 82.0 | | | | 308.6 | | | | 161.3 | |
High Pressure Solutions | | | 21.5 | | | | 119.5 | | | | 117.8 | | | | 255.4 | |
Specialty Vehicle Technologies | | | 217.5 | | | | — | | | | 304.3 | | | | — | |
Total Revenue | | $ | 1,264.4 | | | $ | 629.1 | | | $ | 2,064.3 | | | $ | 1,249.4 | |
Segment Adjusted EBITDA | | | | | | | | | | | | | | | | |
Industrial Technologies and Services | | $ | 183.8 | | | $ | 96.7 | | | $ | 278.6 | | | $ | 182.2 | |
Precision and Science Technologies | | | 59.3 | | | | 24.6 | | | | 92.2 | | | | 47.8 | |
High Pressure Solutions | | | (15.2 | ) | | | 32.1 | | | | 8.3 | | | | 73.9 | |
Specialty Vehicle Technologies | | | 41.0 | | | | — | | | | 55.1 | | | | — | |
Total Segment Adjusted EBITDA | | $ | 268.9 | | | $ | 153.4 | | | $ | 434.2 | | | $ | 303.9 | |
Less items to reconcile Segment Adjusted EBITDA to (Loss) | | | | | | | | | | | | | | | | |
Income Before Income Taxes: | | | | | | | | | | | | | | | | |
Corporate expenses not allocated to segments | | $ | 27.7 | | | $ | 7.1 | | | $ | 45.2 | | | $ | 18.6 | |
Interest expense | | | 30.8 | | | | 22.4 | | | | 57.9 | | | | 44.8 | |
Depreciation and amortization expense (a) | | | 143.0 | | | | 44.4 | | | | 214.1 | | | | 89.9 | |
Restructuring and related business transformation costs (b) | | | 32.2 | | | | 2.0 | | | | 74.4 | | | | 6.1 | |
Acquisition related expenses and non-cash charges (c) | | | 95.9 | | | | 17.1 | | | | 192.1 | | | | 18.7 | |
Stock-based compensation (d) | | | 12.7 | | | | 6.2 | | | | 15.7 | | | | 14.8 | |
Foreign currency transaction losses, net | | | 5.2 | | | | 0.6 | | | | 7.8 | | | | 3.7 | |
Loss on extinguishment of debt (e) | | | — | | | | 0.2 | | | | 2.0 | | | | 0.2 | |
Shareholder litigation settlement recoveries (f) | | | — | | | | — | | | | — | | | | (6.0 | ) |
Other adjustments (g) | | | 2.1 | | | | 0.2 | | | | 1.4 | | | | 0.7 | |
(Loss) Income Before Income Taxes | | $ | (80.7 | ) | | $ | 53.2 | | | $ | (176.4 | ) | | $ | 112.4 | |
| (1) | InFor the fourth quarterthree month period ended March 31,2020, as a result of fiscal 2016,the acquisition of Ingersoll Rand Industrial, the Company modifiedchanged its measurement methodology for presenting reconciling items fromof Segment Adjusted EBITDA. Segment Adjusted EBITDA and the reconciliation to (Loss) Income (Loss) Before Income Taxes. The reconciling items for the three and nine month periods ended September 30, 2016 have been restatedTaxes was revised to conform to the methodology used infor the three month period ended March 31,2020. |
| a) | Depreciation and amortization expense excludes $1.5 million and $2.7 million of depreciation of rental equipment for the three and ninesix month periods ended SeptemberJune 30, 2017, and included the following:2020. |
| (a) | Represents non-cash charges for impairment of goodwill and other intangible assets. |
| (b) | Represents management fees and expenses paid to KKR, including a monitoring agreement termination fee of $16.2 million paid in the nine months ended September 30, 2017. |
| (c)b) | Restructuring and related business transformation costs consist of the following:following. |
| | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Restructuring charges | | $ | 30.6 | | | $ | 0.8 | | | $ | 72.2 | | | $ | 2.8 | |
Facility reorganization, relocation and other costs | | | 0.1 | | | | 0.5 | | | | 0.5 | | | | 1.1 | |
Other, net | | | 1.5 | | | | 0.7 | | | | 1.7 | | | | 2.2 | |
Total restructuring and related business transformation costs | | $ | 32.2 | | | $ | 2.0 | | | $ | 74.4 | | | $ | 6.1 | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Restructuring charges | | $ | 2.8 | | | $ | 3.0 | | | $ | 4.9 | | | $ | 15.4 | |
Severance, sign-on, relocation and executive search costs | | | 0.6 | | | | 5.7 | | | | 2.2 | | | | 12.7 | |
Facility reorganization, relocation and other costs | | | 1.0 | | | | 2.9 | | | | 3.9 | | | | 6.5 | |
Information technology infrastructure transformation | | | 0.8 | | | | 0.6 | | | | 3.4 | | | | 1.0 | |
(Gains) losses on asset and business disposals | | | (0.6 | ) | | | 1.7 | | | | 2.0 | | | | 1.6 | |
Consultant and other advisor fees | | | 0.5 | | | | 3.2 | | | | 1.7 | | | | 6.9 | |
Other, net | | | 1.2 | | | | 1.1 | | | | 2.4 | | | | 2.1 | |
Total restructuring and related business transformation costs | | $ | 6.3 | | | $ | 18.2 | | | $ | 20.5 | | | $ | 46.2 | |
| (d)c) | Represents costs associated with successful and/or abandoned acquisitions, 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 estimated environmental remediation costs and losses relating to a former production facility. |
| (f) | Represents expenses related to the Company’s initial stock offering. |
| (g) | Represents third party expenses to comply with the requirements of Sarbanes-Oxley in 2018 and the accelerated adoption of the new revenue recognition standard (ASC 606 - Revenue from Contracts with Customers) in the first quarter of 2018, one year ahead of the required adoption date for a private company. These expenses were previously included in ‘Expenses related to initial stock offering’ and prior periods have been restated to conform to current period presentation. |
| (h)d) | Represents stock-based compensation expense recognized for stock options outstandingthe three month and six month periods ended June 30, 2020 of $12.7 million and $16.2 million, respectively, decreased by $0.5 million for the three months and nine monthssix month period ended SeptemberJune 30, 2017 of $7.8 million and $69.2 million, respectively, and DSUs granted2020 due to employees at the date of the initial public offering for the three months and nine months ended September 30, 2017 of $2.0 million and $96.8 million, respectively. See Note 9 “Stock-Based Compensation”.costs associated with employer taxes. |
Represents stock-based compensation expense recognized for the three month and six month periods ended June 30, 2019 of $6.0 million and $13.6 million, respectively, increased by $0.2 million and $1.2 million for the three month and six month periods ended June 30, 2019, respectively, due to costs associated with employer taxes.
| (i)e) | Represents losses on extinguishment of debt recognized on the redemption of the senior notes and pay down of a portion of the Original Dollar Term Loan Facility with proceeds fromU.S. term loan and the initial public offering in May 2017($50.4 million) and in connection with the refinancingamendment of the Original Dollar Term Loan Facility and Euro Term Loan Facility in August 2017 ($34.1 million).revolving credit facility. |
| (j)f) | Represents an insurance recovery of the Company’ shareholder litigation settlement in 2014. |
| g) | Includes (i) foreign exchange gains and losses, (ii) effects of amortization of prior service costs and amortization of gainslosses in pension and other postretirement benefits (OPEB)postemployment (“OPEB”) expense, (iii)(ii) certain legal and compliance costs and (iv)(iii) other miscellaneous adjustments. |
Note 16.17. Related Party Transactions
Affiliates of KKR participated as (i) a lender in the Company’s Senior Secured Credit Facilities discussed in Note 8, “Debt,” (ii) an underwriter in the Company’s initial public offering, and (iii) a providerFacilities. As of services for the debt refinancing transaction. KKR exited its position in the Dollar Term Loan Facility dueJune 30, 2020, during 2015 and did not hold a position in the Dollar Term Loan Facility due 2020 or the Euro Term Loan Facility due 2020 until their extinguishment on August 17, 2017. KKR held a position in the Euro Term Loan Facility due 2024 of €50.0€44.9 million for and a position in the periodDollar Term Loan B of August 17, 2017$39.9 million.
The Company incurred and paid underwriting fees of $0.8 million and $7.5 million in the three and six month periods ended June 30, 2020, respectively, to September 30, 2017. KKR Capital Markets LLC, an affiliate of our Sponsor, acted as an underwriter in connection with the initial public offering of the Company’s stock and received underwriter discounts and commissions of approximately $8.9 million. In August 2017, KKR, Capital Markets LLC received $1.5 million for services rendered in connection with the debt refinancing transaction.term loan transactions discussed in Note 8.
The Company entered into a monitoring agreement, dated July 30, 2013, with KKR pursuant to which KKR will provide management, consulting and financial advisory services to the Company and its divisions, subsidiaries, parent entities and controlled affiliates. Under the terms of the monitoring agreement the Company is, among other things, obligated to pay KKR (or such affiliate(s) as KKR designates) an aggregate annual management fee in the initial annual amount of $3.5 million, payable in arrears at the end of each fiscal quarter, plus upon request all reasonable out of pocket expenses ($0.0 million and $0.7 million of expenses were incurred for the three month periods ended September 30, 2017 and 2016 and $0.0 million and $0.7 million of expenses were incurred for the nine month periods ended September 30, 2017 and 2016) incurred in connection with the provision of services under the agreement. The management fee increases at a rate of 5% per year effective on January 1, 2014. In connection with the Company’s initial public offering, the monitoring agreement was terminated in accordance with its terms and the Company paid a termination fee of $16.2 million during the nine month period ended September 30, 2017 which is included in the “Selling and administrative expenses” line of the Condensed Consolidated Statements of Operations. The Company incurred management fees to KKR of $1.1 million and $3.0 million for the nine month periods ended September 30, 2017 and 2016, respectively.
Note 17. Income 18. (Loss) Earnings Per Share
The computations of basic and diluted income (loss)earnings per share are as follows:follows.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 28.0 | | | $ | (13.0 | ) | | $ | (125.1 | ) | | $ | (27.0 | ) |
Less: Net income (loss) attributable to noncontrolling interests | | | - | | | | (0.1 | ) | | | 0.1 | | | | (0.6 | ) |
Net Income (Loss) Attributable to Gardner Denver Holdings, Inc. | | $ | 28.0 | | | $ | (12.9 | ) | | $ | (125.2 | ) | | $ | (26.4 | ) |
Income (Loss) per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.14 | | | $ | (0.09 | ) | | $ | (0.71 | ) | | $ | (0.18 | ) |
Diluted | | $ | 0.13 | | | $ | (0.09 | ) | | $ | (0.71 | ) | | $ | (0.18 | ) |
Average shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 201.3 | | | | 148.8 | | | | 175.7 | | | | 148.8 | |
Dilutive effect of share-based awards | | | 6.8 | | | | - | | | | - | | | | - | |
Diluted | | | 208.1 | | | | 148.8 | | | | 175.7 | | | | 148.8 | |
| | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Net (loss) income attributable to Ingersoll Rand Inc. | | $ | (177.6 | ) | | $ | 44.9 | | | $ | (214.4 | ) | | $ | 92.1 | |
Average shares outstanding | | | | | | | | | | | | | | | | |
Basic | | | 417.0 | | | | 203.4 | | | | 347.2 | | | | 202.5 | |
Diluted | | | 417.0 | | | | 208.9 | | | | 347.2 | | | | 208.4 | |
Earnings per share | | | | | | | | | | | | | | | | |
Basic | | $ | (0.43 | ) | | $ | 0.22 | | | $ | (0.62 | ) | | $ | 0.45 | |
Diluted | | $ | (0.43 | ) | | $ | 0.21 | | | $ | (0.62 | ) | | $ | 0.44 | |
The DSUs described in Note 916, “Stock-Based Compensation” areCompensation Plans” to the consolidated financial statements in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019 were considered outstanding shares for the purpose of computing basic earnings per share because they will becomewere issued solely upon the passage of time.
For the ninethree month periodperiods ended SeptemberJune 30, 20172020 and 2019, there were 12.33.8 million potentially dilutive stock-based awardsand 1.8 million anti-dilutive shares that were not included in the computation of diluted lossearnings per share because their inclusion would have been anti-dilutive.
share. For both the three and ninesix month periods ended SeptemberJune 30, 20162020 and 2019, there were 15.03.9 million potentially dilutive stock-based awardsand 1.8 million anti-dilutive shares that were not included in the computation of diluted lossearnings per share because their inclusion would have been anti-dilutive.share.
34Note 19. Subsequent Events
As discussed further in Note 1 “Basis of Presentation and Related Accounting Pronouncements”, the Company initiated a tender offer on June 22, 2020 to purchase shares of its subsidiary, IR India Limited, from noncontrolling shareholders pursuant to regulatory requirements of the Securities Exchange Board of India. The tender period ended on July 3, 2020. Approximately 6% of outstanding shares were tendered for an aggregate offer price of $14.9 million. Settlement of accepted tender offers occurred on July 17, 2020. As a result, the Company’s ownership interest in IR India Limited increased from approximately 74% as of June 30, 2020 to approximately 80%. The Company is required by SEBI regulations to take necessary steps to decrease the non-public shareholding of IR India Limited below 75% within twelve months of the date the non-public shareholding exceeded 75%.
ItemITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 prospectus dated May 11, 2017 (the “Prospectus”), as filed withAnnual Report on Form 10-K for the Securitiesfiscal year ended December 31, 2019, and Exchange Commission (the “SEC”)our Quarterly Report on May 15, 2017 pursuant to Rule 424(b)(4) underForm 10-Q for the Securities Act of 1933, as amended, as such risk factors may be updated from time to time in our periodic filings with the SEC.quarterly period ended March 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 control and compression equipmentcreation technologies and associated aftermarket parts, consumables and services, which we sell across multiple attractive end-markets within the industrial, energy and medical industries.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 Robuschi, Elmo Rietschle and Thomas,Runtech Systems, which we believe are globally recognized in their respective end-markets and known for product quality, reliability, efficiency and superior customer service.
Our Segments
WeSubsequent to the acquisition of Ingersoll Rand Industrial, we reorganized our reportable segments. As a result, we no longer report our results of operations throughunder the three reportable segments: Industrials,segments of Industrial, Energy and Medical. Instead, we report utilizing the four reportable segments of Industrial Technologies and Services, Precision and Science Technologies, High Pressure Solutions 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.
IndustrialsIndustrial 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,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 Industrials 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.
EnergyPrecision 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”).
High Pressure Solutions
We design, manufacture, market and service a diverse range of positive displacement pumps, liquid ring vacuum pumps, compressors and integrated systems engineered fluid loading and transfer equipment and associated aftermarket parts, consumables and services. The highly engineered products offered by our EnergyHigh Pressure Solutions segment serve customers acrossin the upstream downstream and midstream energy markets,market, as well as petrochemical processing, transportation and general industrial sectors. We are one of the largest suppliers of equipment and associated aftermarket parts, consumables and services for the upstream energy applications that we serve.
MedicalOur positive displacement pumps are fit-for-purpose to meet the demands and challenges of modern unconventional drilling and hydraulic fracturing activity. Our offering includes mission-critical oil and gas drilling pumps, frac pumps and well servicing pumps, in addition to sales of associated consumables used in the operation of our pumps. The products we sell into upstream energy applications are highly aftermarket-intensive, and so we support these products in the field with one of the industry’s most comprehensive service networks, which encompasses locations across all major basins and shale plays in the North American land market. This service network is critical to serving our customers and, by supporting them in the field, to generating demand for new original equipment sales and aftermarket parts, consumables, service and repair sales which in aggregate are often multiples of the value of the original equipment.
The Company’s customers provide drilling, completions and well services to oil and gas operators, particularly in the major basins and plays in the North American land market. The Company is one of the leading suppliers in these upstream energy applications and has long-standing customer relationships.
Specialty Vehicle Technologies
We design, manufacture and market a broad range of highly specializedgolf 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 liquid and precision syringe pumpsdiesel-powered vehicles, accessories and compressorsaftermarket parts. Service offerings include repair and maintenance, short-term rentals and digital connectivity services that are specified by medicalenable fleet management, entertainment and laboratory equipment suppliers and integrated into their final equipment for use in applications, such as oxygen therapy, blood dialysis, patient monitoring, laboratory sterilization and wound treatment, among others. We offer a comprehensive product portfolio across a breadth of pump technologies to address the medical and laboratory sciences pump and fluid handling industry, as well as a range of end-use vacuum products for laboratory science applications, and we recently expanded into liquid pumps and automated liquid handling components and systems.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 our highly engineered, application-critical productsoriginal equipment and by providing associated aftermarket parts, consumables and services. We sell our products and deliver aftermarket services both directly to end-users and through independent distribution channels, depending on the product line and geography. Below is a description of our revenues by segment and factors impacting total revenues.
Industrials Revenue
Our Industrials Segment Revenues are generated primarily through sales of air compression, vacuum and blower products to customers in multiple industries and geographies. A significant portion of our sales in the Industrials segment are made to independent distributors. Revenue derived from short duration contracts is recognized at a single point in time when products are shipped or delivered, title and risk of loss are passedcontrol is transferred to the customer, and collection is reasonably assured. Our large installed base of products in our Industrials segment drives demand for recurring aftermarket support services primarily composed of replacement parts sales to our distribution partners and, to a lesser extent, by directly providing replacement parts and repair and maintenance services to end customers. Revenue for services is recognizedgenerally at shipment or when delivery has occurred or as services are performed. Historically, our shipments and revenues have peaked during the fourth quarter as our customers seek to fully utilize annual capital spending budgets.
Energy Revenue
Our Energy Segment Revenues are generated primarily through sales of positive displacement pumps, liquid ring vacuum pumps, compressors and integrated systems and engineered fluid loading and transfer equipment and associated aftermarket parts, consumables and services for use primarily in upstream, midstream, downstream and petrochemical end-markets across multiple geographies. Certain contracts with customers ininvolve significant design engineering to customer specifications, and depending upon the mid- and downstream and petrochemical markets are higher sales value and often have longer lead times and involve more application specific engineering. Revenuecontractual terms, revenue is recognized for these arrangements wheneither over the duration of the contract or at contract completion when equipment is complete or substantially complete, provided all other revenue recognition criteria have been met. The arrangement is considered substantially complete when the Company receives acceptance and remaining tasks are perfunctory or inconsequential and in control of the Company. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined to be probable. As a result, the timing of these contracts can result in significant variation in reported revenue from quarter to quarter. Our large installed base of products in our Energy segment drives demand for recurring aftermarket support services to customers, including replacement parts, consumables and repair and maintenance services. The mix of aftermarket to original equipment revenue within the Energy segment is impacted by trends in upstream energy activity in North America. Revenue for services is recognized when services are performed. In response to customer demand for faster access to aftermarket parts and repair services, we expanded our direct aftermarket service locations in our Energy segment, particularly in North American markets driven by upstream energy activity. Energy segment products and aftermarket parts, consumables and services are sold both directly to end customers and through independent distributors, depending on the product category and geography.
Medical Revenue
Our Medical Segment Revenues are generated primarily through sales of highly specialized gas, liquid and precision syringe pumps that are specified by medical and laboratory equipment suppliers for use in medical and laboratory applications. Our products are often subject to extensive collaborative design and specification requirements, as they are generally components specifically designed for, and integrated into, our customers’ products. Revenue is recognized when products are shipped or delivered title and risk of loss pass to the customer, and collection is reasonably assured. Our Medical segment has no substantive aftermarket revenues.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) sponsor feesexpenses related to our public stock offerings and expenses;to establish public company reporting compliance; (vii) employee related stock-based compensation for our selling and (vii)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.
Amortization of Intangible Assets
Amortization of intangible assets includes the periodic amortization of intangible assets recognized when an affiliate of KKR acquired us on July 30, 2013 and intangible assets recognized in connection with businesses we acquired since July 30, 2013, including customer relationships, trademarks, developed technology, backlog and trademarks.internally developed software.
Impairment of Goodwill and Other Intangible Assets
Impairment of goodwill and other intangible assets includes non-cash charges we recognized for the impairment of goodwill and other intangible assets.
Other Operating Expense, netNet
Other operating expense, net includes foreign currency transaction gains and losses, net, restructuring charges, certain shareholder litigation settlement recoveries, acquisition related expenses and contract settlementnon-cash charges, losses environmental remediation, stock-based compensation expense,and gains on asset disposals and other miscellaneous operating expenses.
Benefit or Provision for Income Taxes
The benefit or 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 3048 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 IndustrialsIndustrial 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 EnergyIndustrial Technologies and Services segment, overall economic growth and industrial production, as well as secular trends, impact demand for our products. In our High Pressure Solutions segment, demand for our products that serve upstream energy end-markets are influenced heavily by energy prices and the expectation as to future trends in those prices. Energy prices have historically been cyclical in nature and are affected by a wide range of factors. AsIn addition to energy prices, start improving from low levels observed in the first half of 2016, we have observed increases indemand for our upstream energy products are positively impacted by increasing global land rig count, drilled but uncompleted wells, global land rig count, wellsthe level of hydraulic fracturing intensity and footage drilledactivity measured by horsepower utilization and lateral lengths as well as drilling and completion capital expenditures to positively impact our results of operations. In the midstream and downstream portions of our Energy segment, overall economic growth and industrial production, as well as secular trends, impact demand for our products.expenditures. In our MedicalPrecision 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 61%48% for the yearsix month period ended December 31, 2016,June 30, 2020, 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.
Seasonality
Historically, our shipments and revenues have peaked during the fourth quarter as our customers seek to fully utilize annual capital spending budgets. Also, our EMEA operations generally experience a slowdown during July, August and December holiday seasons. General economic conditions may, however, impact future seasonal variations.
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.
UpstreamAcquisition 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.
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.
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.
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.
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 and six month periods ended June 30, 2020 and 2019 will be affected by three months and four months of activity from Ingersoll Rand Industrial, respectively. Subsequent to the date of acquisition, in the six month period ended June 30, 2020, the Ingersoll Rand Industrial acquisition contributed $659.2 million, $156.4 million, and $304.2 million of revenue to the Industrial Technologies and Services, Precision and Science Technologies and Specialty Vehicle Technologies segments, respectively.
See Note 2 “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 COVID-19 pandemic on our global operations and also the operations of our suppliers and customers. Overall demand for our products has decreased as a result of the pandemic, which impacted our operating results for the three and six month periods ended June 30, 2020. 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. In some countries, such as India and South Africa, our facilities have opened up throughout the three month period ended June 30, 2020, in accordance with country mandates and guidelines. We are taking certain actions to reduce costs and preserve cash given the rapidly changing environment. The length of time the pandemic will 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 II Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.
Conditions in oil and gas markets
During the six month period ended June 30, 2020, oil prices dropped significantly due to declines in demand resulting from the COVID-19 pandemic and risks of significant production increases from Saudi Arabia and Russia. We sell products and provide services to customers ininto upstream energy markets, primarily in our High Pressure Solutions segment, that are influenced heavily by oil and natural gas prices and the United States. Forexpectation of the upstream energy end-market,future prices of those commodities. As a result of decreases in oil prices, we experienced a reduction in demand and consequently pricing within our Energy segment we manufacture pumps and associated aftermarket products and services used in drilling, hydraulic fracturing and well service applications, while inHigh Pressure Solutions segment.
We believe it is helpful to consider the impact of our Industrials segment we sell dry bulk frac sand blowers, which are used in hydraulic fracturing operations. We refer to these products and services in the Energy and Industrial segments as “upstream energy.” Our Medical segment is not exposedexposure to the upstream energy industry.market in evaluating our 2019 and 2020 Segment Revenue and Segment Adjusted EBITDA for our High Pressure Solutions segment, in order to better understand other drivers of our performance during those periods, including operational improvements.
Our exposureRestructuring and Other Business Transformation Initiatives
Subsequent to upstream energy production levels, coupled with reduced exploration activitythe acquisition of Ingersoll Rand Industrial, we announced a restructuring program (“2020 Plan”) to drive efficiencies and synergies, reduce the deferralnumber of maintenancefacilities and growth capital expendituresoptimize 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 $250.0 million in annualized cost synergies by upstream energy companies, negatively impacted our financial resultsthe end of 2022. We continue to evaluate operating efficiencies and anticipate incurring additional costs in the first half of 2016.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.
The average daily closing of West Texas Intermediate spot market crude oil prices for the nine month period ended SeptemberThrough June 30, 2017 increased2020, $72.2 million was charged to $49.30 from $41.35expense through “Other operating expense, net” in the same period in 2016. As a result, there has been increased exploration activityCondensed Consolidated Statements of Operations ($57.6 million for Industrial Technologies and capital expenditures by upstream energy companies. According to Baker Hughes, Inc., the average weekly U.S. land rig count increased to 841 during the nine month period ended September 30, 2017 from 459 in 2016,Services, $4.9 million for Precision and according to Spears & Associates, Inc., the annual average monthly new wells drilled in the United States increased to 1,944Science Technologies, $4.1 million for the nine month period ended September 30, 2017 compared to 1,244 in the same period in 2016. We have experienced significant improvement in demandHigh Pressure Solutions, $0.7 million for our upstream energy productsSpecialty Vehicle Technologies and services in the three and nine month periods ended September 30, 2017.$4.9 million for Corporate).
Sponsor Management Fees and Expenses
Through the date of our initial public offering, our Sponsor charged an annual management fee, as well as expenses for services provided under a monitoring agreement. As the date of our initial public offering, the monitoring agreement was terminated and a fee was paid of $16.2 million during the nine month period ended September 30, 2017.
Stock-based Compensation
Under the terms of the 2013 Plan, subsequent to the initial public offering, the Company recognized stock-based compensation expense of approximately $69.2 million related to time-based and performance-based stock options. As of September 30, 2017, there was $12.9 million of unrecognized stock-based compensation expense related to outstanding stock options that will be recognized in future periods. The Company also recognized $96.8 million of compensation expense related to a grant of 5.5 million deferred stock units (“DSU”) to employees at the date of the initial public offering. The Company expects to make stock-based awards to employees and recognize stock-based compensation expenses in future periods.
Outlook
IndustrialsIndustrial Technologies and Services Segment
The mission-critical nature of our Industrials products across manufacturing processes drives a demand environment and outlook that are highly correlated with global and regional industrial production, capacity utilization and long-term GDP growth. Due to the uncertainty of current economic conditions associated with COVID-19, and its impact on end markets, our near-term visibility is limited. In the United States and Europe, we are poised to continue benefiting from expected growth in real GDP, along with an expected rebound in industrial production activity in 2017 and 2018. In APAC, despite the recent deceleration, GDP growth remains robust. In the thirdsecond quarter of 2017,2020, we had $294.4$787.9 million of orders in our IndustrialsIndustrial Technologies and Services segment, an increase of 14%85.7% over the thirdsecond quarter of 2016, or an 11% increase on a constant currency basis.2019. Approximately $475.0 million of these orders relate to the acquisition of Ingersoll Rand Industrial.
EnergyPrecision and Science Technologies Segment
Our EnergyDuring the COVID-19 pandemic, the Precision and Science Technologies segment has a diverse rangeseen increased demand for our vacuum pump and compressor solutions used in respirator and ventilator applications. Demand of equipment and associated aftermarket parts, consumablesother products and services have been curtailed as a result of the COVID-19 pandemic and near-term visibility is limited. In the second quarter of 2020, we had $201.3 million of orders in our Precision and Science Technologies segment, an increase of 137.7% over 2019. Approximately $113.4 million of these orders relate to the acquisition of Ingersoll Rand Industrial.
High Pressure Solutions Segment
The demand and outlook for a number of market sectors with energy exposure, spanning upstream, midstream, downstream and petrochemical applications. Demand for certainthe majority of our EnergyHigh Pressure Solutions products has historically corresponded toand services are influenced heavily by the supply and demand dynamics related to oil and natural gas products, and hashave been influenced by oil and natural gas prices, the level and intensity of hydraulic fracturing activity, global land rig count, drilling activity and other economic factors. These factors have caused the level of demand for certain of our Energy products to change at times (both positively and negatively) and we expect these trends to continue in the future. In the third quarter of 2017, we had $251.1 million of orders in our Energy segment, an increase of 48% over the third quarter of 2016, or a 46% increase on a constant currency basis.
An increased number of drilling rigs have reentered the market as crude oil prices have improved from lowpoints observed during the first half of 2016 and the number of drilled but uncompleted wells has grown 72%and other economic factors. The COVID-19 pandemic and related economic repercussions have negatively impacted the global demand for oil and natural gas. These conditions were compounded by the risks of significant production increases from December 2013 to September 2017. We believe we are well positioned to benefit from the expected growth in drilling rigsSaudi Arabia and improvements in crude oil prices. In addition, secular industry trends that are driving increased demand of newer, fit-for-purpose equipment with innovations that increase productivity and are increasing the frequency of replacement, refurbishment and upgrade cycles of pumping equipment and associated consumable products used in drilling and particularly hydraulic fracturing activity by increasing the intensity of such activities. As a result of our expanded direct aftermarket service locations, particularly within North America, we believe we are well positioned to benefit from both the increasing intensity of hydraulic fracturing activity and the increaseRussia in the backlogfirst half of drilled but uncompleted wells. We2020, resulting in downward pressure on commodity prices. While the ultimate duration of these conditions is unknown, we expect both trends to positively impact our hydraulic fracturing and drilling product mix and our aftermarket to original equipment ratio within the Energy segment.
Our midstream and downstream products provide relatively stablereduced demand with attractive, long-term growth trends related to an expected increase in the production and transportation of hydrocarbons. Demand for our petrochemical industry products correlates with growth into persist through 2020. In the development of new petrochemical plants as well as activity levels therein. Advancements in the development of unconventional natural gas resources in North America over the past decade have resulted in the abundant availability of locally-sourced natural gas as feedstock for petrochemical plants in North America, supporting long-term growth.
Medical Segment
We believe that demand for products and services in the Medical space will continue to benefit from attractive secular growth trends in the aging population requiring medical care, emerging economies modernizing and expanding their healthcare systems and increased investment globally in health solutions. In addition, we expect growing demand for higher healthcare efficiency, requiring premium and high performance systems. During 2016, we focused on the development and introduction of new products and applications to access the liquid pump market, leveraging our technology and expertise in gas pumps. We expect 2017 to be a transition year; while a large customer has elected to dual source its requirements for gas pumps, we are also expanding into the liquid pump market and diversifying our customer base. Revenues for the thirdsecond quarter of 2017 increased 7% when excluding the impacts of foreign currency and the dual sourcing customer transition. In the third quarter of 2017,2020, we had $61.1$12.8 million of orders in our MedicalHigh Pressure Solutions segment, an increasea decrease of 19%86.9% over the thirdsecond quarter of 2016, or2019.
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 second quarter of 2020, we had $208.2 million of orders in our Specialty Vehicle Technologies segment and are entering the second half with a 17% increase on a constant currency basis.solid backlog position.
How We Assess the Performance of Our Business
We manage operations through the threefour business segments described above. In addition to our consolidated GAAP financial measures, we review various non-GAAP financial measures, including “AdjustedAdjusted EBITDA,” “Adjusted Adjusted Net Income”Income and “FreeFree 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 lossincome (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 loss(loss) income 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 loss(loss) income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a 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.
Included in our discussion of our consolidated and segment results below are changes in revenues and Adjusted EBITDA on a Constant Currency basis. Constant Currency information compares results between periods as if exchange rates had remained constant period over period. We define Constant Currency revenues and Adjusted EBITDA as total revenues and Adjusted EBITDA excluding the impact of foreign exchange rate movements and use it to determine the Constant Currency revenue and Adjusted EBITDA growth on a year-over-year basis. Constant Currency revenues and Adjusted EBITDA are calculated by translating current period revenues and Adjusted EBITDA using corresponding prior period exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a Constant Currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP. See “Results of Operations—Non-GAAP“Non-GAAP Financial Measures” below for reconciliation information.
Results of Operations
Consolidated results should be read in conjunction with the segment results section herein and the Segment Results noteNote 16 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this report,Form 10-Q, which provides more detailed discussions concerning certain components of our consolidated statementsCondensed Consolidated Statements of operations.Operations. All intercompany accounts and transactions have been eliminated within the consolidated results.
The following table presents selected consolidated resultsConsolidated Results of operationsOperations of our business for the three month and ninesix month periods ended SeptemberJune 30, 20172020 and 2016:2019.
| | | For the Three Month | | | For the Six Month | |
| | | Period Ended | | | Period Ended | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | June 30, | | | June 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Condensed Consolidated Statement of Operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 649.6 | | | $ | 462.6 | | | $ | 1,710.4 | | | $ | 1,361.6 | | | $ | 1,264.4 | | | $ | 629.1 | | | $ | 2,064.3 | | | $ | 1,249.4 | |
Cost of sales | | | 395.7 | | | | 298.4 | | | | 1,066.0 | | | | 867.1 | | | | 904.4 | | | | 394.7 | | | | 1,459.8 | | | | 784.5 | |
Gross profit | | | 253.9 | | | | 164.2 | | | | 644.4 | | | | 494.5 | | | | 360.0 | | | | 234.4 | | | | 604.5 | | | | 464.9 | |
Selling and administrative expenses | | | 111.1 | | | | 100.9 | | | | 339.1 | | | | 310.3 | | | | 247.7 | | | | 110.7 | | | | 403.1 | | | | 227.7 | |
Amortization of intangible assets | | | 29.5 | | | | 30.7 | | | | 87.6 | | | | 90.8 | | | | 114.6 | | | | 30.9 | | | | 169.8 | | | | 62.3 | |
Impairment of other intangible assets | | | - | | | | - | | | | - | | | | 1.5 | | |
Other operating expense, net | | | 17.4 | | | | 12.4 | | | | 186.7 | | | | 26.1 | | | | 49.9 | | | | 18.2 | | | | 150.6 | | | | 20.0 | |
Operating income | | | 95.9 | | | | 20.2 | | | | 31.0 | | | | 65.8 | | |
Operating (loss) income | | | | (52.2 | ) | | | 74.6 | | | | (119.0 | ) | | | 154.9 | |
Interest expense | | | 30.1 | | | | 43.0 | | | | 115.4 | | | | 128.7 | | | | 30.8 | | | | 22.4 | | | | 57.9 | | | | 44.8 | |
Loss on extinguishment of debt | | | 34.1 | | | | - | | | | 84.5 | | | | - | | | | - | | | | 0.2 | | | | 2.0 | | | | 0.2 | |
Other income, net | | | (0.7 | ) | | | (0.7 | ) | | | (2.6 | ) | | | (2.6 | ) | | | (2.3 | ) | | | (1.2 | ) | | | (2.5 | ) | | | (2.5 | ) |
Income (loss) before income taxes | | | 32.4 | | | | (22.1 | ) | | | (166.3 | ) | | | (60.3 | ) | |
Provision (benefit) for income taxes | | | 4.4 | | | | (9.1 | ) | | | (41.2 | ) | | | (33.3 | ) | |
Net income (loss) | | | 28.0 | | | | (13.0 | ) | | | (125.1 | ) | | | (27.0 | ) | |
Less: Net (loss) income attributable to noncontrolling interest | | | - | | | | (0.1 | ) | | | 0.1 | | | | (0.6 | ) | |
Net income (loss) attributable to Gardner Denver Holdings, Inc. | | $ | 28.0 | | | $ | (12.9 | ) | | $ | (125.2 | ) | | $ | (26.4 | ) | |
Income before income taxes | | | | (80.7 | ) | | | 53.2 | | | | (176.4 | ) | | | 112.4 | |
Provision for income taxes | | | | 95.8 | | | | 8.3 | | | | 37.0 | | | | 20.3 | |
Net (loss) income | | | | (176.5 | ) | | | 44.9 | | | | (213.4 | ) | | | 92.1 | |
Less: Net income attributable to noncontrolling interests | | | | 1.1 | | | | - | | | | 1.0 | | | | - | |
Net (Loss) Income Attributable to Ingersoll Rand Inc. | | | $ | (177.6 | ) | | $ | 44.9 | | | $ | (214.4 | ) | | $ | 92.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percentage of Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 39.1 | % | | | 35.5 | % | | | 37.7 | % | | | 36.3 | % | | | 28.5 | % | | | 37.3 | % | | | 29.3 | % | | | 37.2 | % |
Selling and administrative expenses | | | 17.1 | % | | | 21.8 | % | | | 19.8 | % | | | 22.8 | % | | | 19.6 | % | | | 17.6 | % | | | 19.5 | % | | | 18.2 | % |
Operating income | | | 14.8 | % | | | 4.4 | % | | | 1.8 | % | | | 4.8 | % | |
Net income (loss) | | | 4.3 | % | | | (2.8 | %) | | | (7.3 | %) | | | (2.0 | %) | |
Operating (loss) income | | | | (4.1 | %) | | | 11.9 | % | | | (5.8 | %) | | | 12.4 | % |
Net (loss) income | | | | (14.0 | %) | | | 7.1 | % | | | (10.3 | %) | | | 7.4 | % |
Adjusted EBITDA | | | 25.4 | % | | | 19.2 | % | | | 22.7 | % | | | 18.5 | % | | | 19.1 | % | | | 23.3 | % | | | 18.8 | % | | | 22.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA(1) | | | 164.7 | | | | 89.0 | | | | 388.9 | | | | 252.3 | | | $ | 241.2 | | | $ | 146.3 | | | $ | 389.0 | | | $ | 285.3 | |
Adjusted Net Income (1) | | | 85.2 | | | | 23.3 | | | | 149.2 | | | | 67.2 | | | | 129.9 | | | | 88.5 | | | | 205.0 | | | | 166.7 | |
Cash flows - operating activities | | | 63.9 | | | | 37.8 | | | | 83.9 | | | | 106.8 | | | | 247.4 | | | | 61.4 | | | | 315.8 | | | | 130.1 | |
Cash flows - investing activities | | | (2.4 | ) | | | (34.0 | ) | | | (43.1 | ) | | | (59.8 | ) | | | (15.8 | ) | | | (10.0 | ) | | | 17.3 | | | | (24.5 | ) |
Cash flows - financing activities | | | (9.1 | ) | | | (8.3 | ) | | | (8.2 | ) | | | (30.8 | ) | | | 378.8 | | | | 1.2 | | | | 336.9 | | | | (16.1 | ) |
Free Cash Flow (1) | | | 54.3 | | | | 17.5 | | | | 47.5 | | | | 60.5 | | | | 230.3 | | | | 50.8 | | | | 290.4 | | | | 105.4 | |
| (1) | See the “Non-GAAP Financial Measures” section included in this Quarterly Report for a reconciliation to the nearestcomparable GAAP measure. |
Revenues
Revenues for the three month period ended SeptemberJune 30, 20172020 were $649.6$1,264.4 million, an increase of $187.0$635.3 million, or 40.4%101.0%, compared to $462.6$629.1 million for the same three month period in 2016.2019. The increase in revenues was primarily due primarily to higher revenue from upstream energy exposed markets (27.3% or $126.1 million), higher volume in other markets in our Energy segment as well as in our Industrials segmentacquisitions, including acquisitions and netIngersoll Rand Industrial of divestitures (9.9% or $45.6 million), by the favorable impact of foreign currencies (2.5% or $11.4 million), and improved pricing in other markets in our Energy segment as well as in our Industrials and Medical segments (1.1% or $5.0 million),$828.0 million, partially offset by lower volume including acquisitionsvolumes due to the effects of COVID-19 in our MedicalIndustrial Technologies and Services segment (0.2% or $1.1 million).of $89.8 million and our High Pressure Solutions segment of $96.6 million. The percentage of consolidated revenues derived from aftermarket parts and services was 40.5%33.9% in the three month period ended SeptemberJune 30, 20172020 compared to 37.6%37.4% in the same three month period in 2016.2019.
Revenues for the ninesix month period ended SeptemberJune 30, 20172020 were $1,710.4$2,064.3 million, an increase of $348.8$814.9 million, or 25.6%65.2%, compared to $1,361.6$1,249.4 million for the same ninesix month period in 2016.2019. The increase in revenues was primarily due primarily to higher revenues from upstream energy exposed markets (22.6% or $308.0 million), higher volume in other markets in our Energy segment as well as in our Industrials segmentacquisitions, including acquisitions and netIngersoll Rand Industrial of divestitures (2.4% or $32.6 million), and improved pricing (0.9% or $12.6 million),$1,122.9 million partially offset by lower volumes due to the effects of COVID-19 in our Industrial Technologies and Services segment of $152.6 million and in our High Pressure Solutions segment of $126.1 million, as well as unfavorable impact of foreign currencies (0.2% or $2.9 million), and lower volume including acquisitions in our Medical segment (0.1% or $1.5 million).of $20.6 million. The percentage of consolidated revenues derived from aftermarket parts and services was 42.1%35.9% in the ninesix month period ended SeptemberJune 30, 20172020 compared to 34.9%38.4% in the same ninesix month period in 2016.2019.
Gross Profit
Gross profit for the three month period ended SeptemberJune 30, 20172020 was $253.9$360.0 million, an increase of $89.7$125.6 million, or 54.6%53.6%, compared to $164.2$234.4 million for the same three month period in 2016,2019, and as a percentage of revenues was 39.1%28.5% for the three month period ended SeptemberJune 30, 20172020 and 35.5%37.3% for the same three month period in 2016.2019. The increase reflects higher revenues from upstream energy exposed markets, higher volume in other markets in our Energy segment as well as in our Industrials segmentgross profit is primarily due to acquisitions, including acquisitions and net of divestitures, improved pricing in our Industrials, Energy and Medical segments, and by favorable impact of foreign currencies,Ingersoll Rand Industrial, partially offset by the runoff of the fair valuation adjustments related to purchase price allocation from inventory into cost of sales, lower volume including acquisitionsvolumes due to the effects of COVID-19 in our Medical segment.Industrial Technologies and Services segment and our High Pressure Solutions segment, and unfavorable product mixes. The decrease 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 and unfavorable product mixes.
Gross profit for the ninesix month period ended SeptemberJune 30, 20172020 was $644.4$604.5 million, an increase of $149.9$139.6 million, or 30.3%30.0%, compared to $494.5$464.9 million infor the same ninesix month period in 2016,2019, and as a percentage of revenues was 37.7%29.3% for the ninesix month period ended SeptemberJune 30, 20172020 and 36.3%37.2% for the same ninesix month period in 2016.2019. The increase reflects higher revenues from upstream energy exposed markets, higher volume in other markets in our Energy segment as well as in our Industrials segmentgross profit is primarily due to acquisitions, including acquisitions, improved pricing in our Industrials and Medical segments,Ingersoll Rand Industrial, partially offset by the unfavorable impactrunoff of foreign currencies,the fair valuation adjustments related to purchase price allocation from inventory into cost of sales, lower volumevolumes due to the effects of COVID-19 in our MedicalIndustrial Technologies and Services segment including acquisitions, and lower pricingour High pressure segment, and unfavorable product mixes. The decrease in other markets in our Energy segment.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 and unfavorable product mixes.
Selling and Administrative Expenses
Selling and administrative expenses were $111.1$247.7 million for the three month period ended SeptemberJune 30, 2017,2020, an increase of $10.2$137.0 million, or 10.1%123.8%, compared to $100.9$110.7 million for the same three month period in 2016.2019. Selling and administrative expenses as a percentage of revenues decreasedincreased to 17.1%19.6% for the three month period ended SeptemberJune 30, 20172020 from 21.8%17.6% in the same three month period in 2016.2019. The increase in selling and administrative expenses is primarily reflects higher salary and other employee related costs, and professional and consulting fees,due to acquisitions, including Ingersoll Rand Industrial, partially offset by a declinedecrease in Sponsor fees.advertising expenses and employee related expenses including salaries and wages, within our legacy business units.
Selling and administrative expenses were $339.1$403.1 million for the ninesix month period ended SeptemberJune 30, 2017,2020, an increase of $28.8$175.4 million, or 9.3%77.0%, compared to $310.3$227.7 million for the same ninesix month period in 2016.2019. Selling and administrative expenses as a percentage of revenues decreasedincreased to 19.8%19.5% for the ninesix month period ended SeptemberJune 30, 20172020 from 22.8%18.2% in the same ninesix month period in 2016.2019. The increase in selling and administrative expenses is primarily reflect a sponsor monitoring termination fee, expenses relateddue to our initial public offering, higher professional and consulting fees, higher salary and other employee costs,acquisitions, including Ingersoll Rand Industrial, partially offset by lower facilities operating expenses. Excluding Sponsor feesa decrease in advertising expenses and initial public offeringemployee related expenses sellingincluding salaries and administrative expenses as a percentage of revenues decreased to 18.6% for the nine month period ended September 30, 2017 from 22.5% in the same nine month period in 2016.wages, within our legacy business units.
Amortization of Intangible Assets
Amortization of intangible assets was $29.5$114.6 million for the three month period ended SeptemberJune 30, 2017 and $30.7 million for the three month period ended September 30, 2016. The decrease was primarily due to changes in foreign currencies.
Amortization2020, an increase of intangible assets was $87.6 million for the nine month period ended September 30, 2017, a decrease of $3.2$83.7 million, compared to $90.8 million in the same nine month period in 2016. The decrease was primarily due to changes in foreign currencies and intangibles which became fully amortized in 2016.
Other Operating Expense, Net
Other operating expense, net for the three month period ended September 30, 2017 was $17.4 million, an increase of $5.0 million, compared to $12.4$30.9 million in the same three month period in 2016.2019. The increase was primarily due to the recognitionamortization of stock-based compensation expense for stock options and deferred stock units ($9.8 million), partially offset by lower employee severance costs ($4.7 million).intangible assets related to the acquisition of Ingersoll Rand Industrial.
Other operating expense, netAmortization of intangible assets was $169.8 million for the ninesix month period ended SeptemberJune 30, 2017 was $186.7 million,2020, an increase of $160.6$107.5 million, compared to $26.1$62.3 million in the same ninesix month period in 2016.2019. The increase was primarily due to the recognitionamortization of stock-based compensation expense for stock options and deferred stock units ($166.0 million), a portion of which ($156.2 million) wasintangible assets related to our initial public offering, an increase in foreign currency losses (gains),the acquisition of Ingersoll Rand Industrial.
Other Operating Expense, Net
Other operating expense, net ($8.9 million), and a charge for environmental remediation expense ($0.9 million) partially offset by a decrease in restructuring charges, net ($10.5 million).
Interest Expense
Interest expensewas $49.9 million for the three month period ended SeptemberJune 30, 2017 was $30.1 million, a decrease2020, an increase of $12.9$31.7 million, compared to $43.0$18.2 million in the same three month period in 2016.2019. The decreaseincrease was primarily due to reduced debt as a resulthigher restructuring charges of debt payments made with the proceeds from the Company’s initial public offering,$29.8 million and a flat weighted-average interest ratehigher foreign currency transaction losses, net of approximately 6.0% in 2017$4.6 million partially offset by lower acquisition related expenses and 2016.non-cash charges of $4.1 million.
InterestOther operating expense, net was $150.6 million for the ninesix month period ended SeptemberJune 30, 2017 was $115.4 million, a decrease2020, an increase of $13.3$130.6 million, compared to $128.7$20.0 million in the same ninesix month period in 2016.2019. The decreaseincrease was primarily due to reduced debt ashigher restructuring charges of $69.4 million, higher acquisition related expenses and non-cash charges of $49.3 million, lower shareholder litigation recoveries of $6.0 million and higher foreign currency transaction losses, net of $4.1 million.
Interest Expense
Interest expense was $30.8 million for the three month period ended June 30, 2020, an increase of $8.4 million, compared to $22.4 million in the same three month period in 2019. The increase was primarily due to the addition of a result of debt payments made$1,900 million term loan entered into in conjunction with the proceeds from the Company’s initial public offering,acquisition of Ingersoll Rand Industrial, partially offset by a higherdecrease in the weighted-average interest rate. The weighted average interest rate was approximately 3.4% for the three month period ended June 30, 2020 and 5.5% in the same period in 2019.
Interest expense was $57.9 million for the six month period ended June 30, 2020, an increase of approximately 6.2% in 2017$13.1 million, compared to 6.0%$44.8 million in 2016.the same six month period in 2019. The increase was primarily due to the addition of a $1,900 million term loan entered into in conjunction with the acquisition of Ingersoll Rand Industrial, partially offset by a decrease in the weighted-average interest rate. The weighted average interest rate was approximately 4.2% for the six month period ended June 30, 2020 and 5.4% in the same period in 2019.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $2.0 million for the six month period ended June 30, 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 $0.7$2.3 million and $1.2 million in the three month periodmonths ended SeptemberJune 30, 20172020 and 2016, respectively, consisting2019, respectively. The increase was primarily due to the increase in other components of investment income and realized and unrealized gains and losses on investments.net periodic benefit cost.
Other income, net was $2.6$2.5 million in each of the ninesix month periodperiods ended SeptemberJune 30, 20172020 and 2016, respectively, consisting primarily of investment income and realized and unrealized gains and losses on investments.2019.
Provision (Benefit) for Income Taxes
The provision for income taxes was $4.4$95.8 million resulting in a 13.6%(118.7%) effective income tax provision rate for the three month period ended SeptemberJune 30, 2017,2020, compared to a benefitprovision for income taxes of $9.1$8.3 million resulting in a 41.3%15.6% effective income tax benefitprovision rate in the same three month period in 2016.2019. The increase in the tax provision for the three month period ended June 30, 2020 is primarily due to a reduction in the pre-tax book income in jurisdictions with lower effective tax rates combined with significant earnings in jurisdictions with higher tax rates. The reduction in pre-tax book income is mainly from the COVID-19 global pandemic, the transaction costs associated with the acquisition of Ingersoll Rand Industrial, and additional amortization and depreciation expense associated with the purchase price step up adjustments.
The provision for income taxes was $37.0 million resulting in a (21.0%) effective income tax provision rate for the six month period ended June 30, 2020, compared to a provision for income taxes of $20.3 million resulting in a 18.1% effective income tax provision rate in the same six month period in 2019. The increase in the tax provision for the six month period ended June 30, 2020 is primarily due is primarily due to a reduction in the increasepre-tax book income in jurisdictions with lower effective tax rates combined with significant earnings in jurisdictions with higher tax rates. The reduction in pre-tax income. The decrease inbook income is mainly from the effective income tax rate is primarily due toCOVID-19 global pandemic, the decrease in the U.S. loss at a higher tax rate combined with an increase in foreign profits at a lower tax rate.
The benefit for income taxes was $41.2 million resulting in a 24.8% effective income benefit tax rate for the nine month period ended September 30, 2017, compared to a benefit for income taxes of $33.3 million resulting in a 55.2% effective income tax benefit rate in the same nine month period in 2016. The decrease in the provision for income taxes is due to the increase of the pre-tax loss. The significant loss in the U.S. was caused by one-time expensestransaction costs associated with the Company’s initial public offering. This included offering-related expenses, early termination fees relating toacquisition of Ingersoll Rand Industrial, and additional amortization and depreciation expense associated with the pay down of debt, and stock-based compensation expense. The decrease in the effective income tax rate is primarily due to these expenses being benefited at a lower tax rate.purchase price step up adjustments.
Net (Loss) Income (Loss)
The net incomeNet loss was $28.0$176.5 million for the three month period ended SeptemberJune 30, 20172020 compared to a net lossincome of $13.0$44.9 million in the same three month period in 2016.2019. The increasedecrease in net income was primarily due to higher selling and administrative expenses, increased other operating expenses, net, higher amortization and a higher provision for income on higher revenues, gross profit and lower interest expense,taxes, partially offset by stock-based compensation expense and losshigher gross profit on extinguishment of debt.increased revenues.
The netNet loss was $125.1$213.4 million for the ninesix month period ended SeptemberJune 30, 20172020 compared to a net lossincome of $27.0$92.1 million in the same ninesix month period in 2016.2019. The increaseddecrease in net lossincome was primarily due to higher selling and administrative expenses, associated with the initial public offering, stock-based compensation expense,increased other operating expenses, net, higher amortization and loss on the extinguishment of debt,a higher provision for income taxes, partially offset by higher revenues and gross profit.profit on increased revenues.
Adjusted EBITDA
Adjusted EBITDA increased $75.7$94.9 million to $164.7$241.2 million for the three month period ended SeptemberJune 30, 20172020 compared to $89.0$146.3 million in the same three month period in 2016.2019. Adjusted EBITDA as a percentage of revenues increased 620 decreased 420basis points to 25.4%19.1% for the three month period ended SeptemberJune 30, 20172020 from 19.2%23.3% for the same three month period in 2016.2019. The increase in Adjusted EBITDA was primarily due to higher volume in our Energy segment and Industrials segmentacquisitions, including acquisitions and netIngersoll Rand Industrial of divestitures of ($80.9 million), improved pricing ($9.8 million), and the favorable impact of foreign currencies ($3.3 million),$176.2 million, partially offset by higher selling and administrative costs ($11.3 million), higher material and other manufacturing costs ($5.8 million) and lower organic sales volume including acquisitionsof $68.7 million. The decrease in our Medical segment ($1.2 million).
Adjusted EBITDA increased $136.6 million to $388.9 million for the nine month period ended September 30, 2017 compared to $252.3 million in the same nine month period in 2016. Adjusted EBITDA as a percentage of revenues is primarily attributable to unfavorable margin mix due to the acquisition and inclusion of Ingersoll Rand Industrial results in the three month period ended June 30, 2020.
Adjusted EBITDA increased 420 $103.7 million to $389.0 million for the six month period ended June 30, 2020 compared to $285.3 million in the same six month period in 2019. Adjusted EBITDA as a percentage of revenues decreased 400basis points to 22.7%18.8% for the ninesix month period ended SeptemberJune 30, 20172020 from 18.5%22.8% for the same ninesix month period in 2016.2019. The increase in Adjusted EBITDA was primarily due to higher volume in our Energy segment and Industrials segmentacquisitions, including acquisitions and netIngersoll Rand Industrial of divestitures ($135.1 million), lower material and other manufacturing costs ($2.6 million), and improved pricing ($15.9 million),$226.9 million, partially offset by higher sellinglower organic sales volume of $109.0 million. The decrease in Adjusted EBITDA as a percentage of revenues is primarily attributable to unfavorable margin mix due to the acquisition and administration expenses ($13.7 million), lower volume including acquisitionsinclusion of Ingersoll Rand Industrial results in our Medical segment ($2.6 million), and the unfavorable impact of foreign currencies ($0.7 million).six month period ended June 30, 2020.
Adjusted Net Income
Adjusted Net Income increased $61.9$41.4 million to $85.2$129.9 million for the three month period ended SeptemberJune 30, 2017,2020 compared to $23.3$88.5 million in the same three month period in 2016.2019. The increase was primarily due to increased Adjusted EBITDA, and lower interest expense, partially offset by higher interest and depreciation expenses and an increase in theincreased income tax provision, as adjusted.
Adjusted Net Income increased $82.0$38.3 million to $149.2$205.0 million for the ninesix month period ended SeptemberJune 30, 20172020 compared to $67.2$166.7 million in the same ninesix month period in 2016.2019. The increase was primarily due to increased Adjusted EBITDA, and lower interest expense, partially offset by higher interest and depreciation expenses and an increase in theincreased income tax provision, as adjusted.
Non-GAAP Financial Measures
Set forth below are the reconciliations of Net (Loss) Income (Loss) to Adjusted EBITDA and Adjusted Net Income and Cash Flows from Operating Activities to Free Cash Flow:Flow.
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Net Income (Loss) (1) | | $ | 28.0 | | | $ | (13.0 | ) | | $ | (125.1 | ) | | $ | (27.0 | ) | |
Net (Loss) Income | | | $ | (176.5 | ) | | $ | 44.9 | | | $ | (213.4 | ) | | $ | 92.1 | |
Plus: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 30.1 | | | | 43.0 | | | | 115.4 | | | | 128.7 | | | | 30.8 | | | | 22.4 | | | | 57.9 | | | | 44.8 | |
Provision (benefit) for income taxes | | | 4.4 | | | | (9.1 | ) | | | (41.2 | ) | | | (33.3 | ) | |
Depreciation expense | | | 13.9 | | | | 12.2 | | | | 39.3 | | | | 36.1 | | |
Provision for income taxes | | | | 95.8 | | | | 8.3 | | | | 37.0 | | | | 20.3 | |
Depreciation expense (a) | | | | 28.4 | | | | 13.5 | | | | 44.3 | | | | 27.6 | |
Amortization expense (a)(b) | | | 29.5 | | | | 30.7 | | | | 87.6 | | | | 90.8 | | | | 114.6 | | | | 30.9 | | | | 169.8 | | | | 62.3 | |
Impairment of goodwill and other intangible assets (b) | | | - | | | | - | | | | - | | | | 1.5 | | |
Sponsor fees and expenses (c) | | | - | | | | 1.8 | | | | 17.3 | | | | 3.8 | | |
Restructuring and related business transformation costs (d) | | | 6.3 | | | | 18.2 | | | | 20.5 | | | | 46.2 | | |
Acquisition related expenses and non-cash charges (e) | | | 1.2 | | | | 1.9 | | | | 3.1 | | | | 3.6 | | |
Environmental remediation loss reserve (f) | | | - | | | | - | | | | 0.9 | | | | - | | |
Expenses related to initial stock offering (g) | | | 0.5 | | | | - | | | | 3.6 | | | | - | | |
Establish public company financial reporting compliance (h) | | | 3.8 | | | | 0.1 | | | | 7.2 | | | | 0.1 | | |
Stock-based compensation (i) | | | 9.8 | | | | - | | | | 166.0 | | | | - | | |
Loss on extinguishment of debt (j) | | | 34.1 | | | | - | | | | 84.5 | | | | - | | |
Other adjustments (k) | | | 3.1 | | | | 3.2 | | | | 9.8 | | | | 1.8 | | |
Restructuring and related business transformation costs (c) | | | | 32.2 | | | | 2.0 | | | | 74.4 | | | | 6.1 | |
Acquisition related expenses and non-cash charges (d) | | | | 95.9 | | | | 17.1 | | | | 192.1 | | | | 18.7 | |
Stock-based compensation (e) | | | | 12.7 | | | | 6.2 | | | | 15.7 | | | | 14.8 | |
Foreign currency transaction losses, net | | | | 5.2 | | | | 0.6 | | | | 7.8 | | | | 3.7 | |
Loss on extinguishment of debt (f) | | | | - | | | | 0.2 | | | | 2.0 | | | | 0.2 | |
Shareholder litigation settlement recoveries (g) | | | | - | | | | - | | | | - | | | | (6.0 | ) |
Other adjustments (h) | | | | 2.1 | | | | 0.2 | | | | 1.4 | | | | 0.7 | |
Adjusted EBITDA | | $ | 164.7 | | | $ | 89.0 | | | $ | 388.9 | | | $ | 252.3 | | | $ | 241.2 | | | $ | 146.3 | | | $ | 389.0 | | | $ | 285.3 | |
Minus: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 30.1 | | | | 43.0 | | | | 115.4 | | | | 128.7 | | | $ | 30.8 | | | $ | 22.4 | | | $ | 57.9 | | | $ | 44.8 | |
Income tax provision, as adjusted (l) | | | 33.3 | | | | 7.4 | | | | 77.8 | | | | 12.7 | | |
Income tax provision, as adjusted (i) | | | | 46.9 | | | | 19.2 | | | | 73.2 | | | | 40.5 | |
Depreciation expense | | | 13.9 | | | | 12.2 | | | | 39.3 | | | | 36.1 | | | | 28.4 | | | | 13.5 | | | | 44.3 | | | | 27.6 | |
Amortization of non-acquisition related intangible assets | | | 2.2 | | | | 3.1 | | | | 7.2 | | | | 7.6 | | | | 5.2 | | | | 2.7 | | | | 8.6 | | | | 5.7 | |
Adjusted Net Income | | $ | 85.2 | | | $ | 23.3 | | | $ | 149.2 | | | $ | 67.2 | | | $ | 129.9 | | | $ | 88.5 | | | $ | 205.0 | | | $ | 166.7 | |
Free Cash Flow | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows - operating activities | | | 63.9 | | | | 37.8 | | | | 83.9 | | | | 106.8 | | | $ | 247.4 | | | $ | 61.4 | | | $ | 315.8 | | | $ | 130.1 | |
Minus: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | 9.6 | | | | 20.3 | | | | 36.4 | | | | 46.3 | | | | 17.1 | | | | 10.6 | | | | 25.4 | | | | 24.7 | |
Free Cash Flow | | $ | 54.3 | | | $ | 17.5 | | | $ | 47.5 | | | $ | 60.5 | | | $ | 230.3 | | | $ | 50.8 | | | $ | 290.4 | | | $ | 105.4 | |
| (1)a) | In the fourth quarterDepreciation and amortization expense excludes $1.5 million and $2.7 million of fiscal year 2016, the Company modified its methodology for presenting reconciling items from Net Income (Loss). The reconciling itemsdepreciation of rental equipment for the three month and ninesix month periods ended SeptemberJune 30, 2016 have been reclassified to conform to the methodology used in the three month and nine month periods ended September 30, 2017, and include the following:2020. |
| (a)b) | Represents $27.3$109.4 million and $27.6$28.2 million of amortization of intangible assets arising from the KKR transactionacquisition of Ingersoll Rand Industrial and other acquisitions (customer relationships, technology and trademarks) and $2.2$5.2 million and $3.1$2.7 million of amortization of non-acquisition related intangible assets, in each case for the three month periods ended SeptemberJune 30, 20172020 and 2016, respectively. Represents $80.4 million and $83.2 million of amortization of intangible assets arising from the KKR transaction and other acquisitions (customer relationships and trademarks) and $7.2 million and $7.6 million of amortization of non-acquisition related intangible assets, in each case for the nine month periods ended September 30, 2017 and 2016,2019, respectively. |
Represents $161.2 million and $56.6 million of amortization of intangible assets arising from the acquisition of Ingersoll Rand Industrial and other acquisitions (customer relationships, technology and trademarks) and $8.6 million and $5.7 million of amortization of non-acquisition related intangible assets, in each case for the six month periods ended June 30, 2020 and 2019, respectively.
c)Restructuring and related business transformation costs consisted of the following.
| | For the Three Month Period Ended June 30, | | | For the Six Month Period Ended June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Restructuring charges | | $ | 30.6 | | | | 0.8 | | | $ | 72.2 | | | | 2.8 | |
Facility reorganization, relocation and other costs | | | 0.1 | | | | 0.5 | | | | 0.5 | | | | 1.1 | |
Other, net | | | 1.5 | | | | 0.7 | | | | 1.7 | | | | 2.2 | |
Total restructuring and related business transformation costs | | $ | 32.2 | | | $ | 2.0 | | | $ | 74.4 | | | $ | 6.1 | |
| (b) | Represents non-cash charges for impairment of goodwill and other intangible assets. |
| (c) | Represents management fees and expenses paid to KKR, including a monitoring agreement termination fee of $16.2 million paid in the nine month period ended September 30, 2017. |
| (d) | Restructuring and related business transformation costs consist of the following: |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Restructuring charges | | $ | 2.8 | | | $ | 3.0 | | | $ | 4.9 | | | $ | 15.4 | |
Severance, sign-on, relocation and executive search costs | | | 0.6 | | | | 5.7 | | | | 2.2 | | | | 12.7 | |
Facility reorganization, relocation and other costs | | | 1.0 | | | | 2.9 | | | | 3.9 | | | | 6.5 | |
Information technology infrastructure transformation | | | 0.8 | | | | 0.6 | | | | 3.4 | | | | 1.0 | |
(Gains) losses on asset and business disposals | | | (0.6 | ) | | | 1.7 | | | | 2.0 | | | | 1.6 | |
Consultant and other advisor fees | | | 0.5 | | | | 3.2 | | | | 1.7 | | | | 6.9 | |
Other, net | | | 1.2 | | | | 1.1 | | | | 2.4 | | | | 2.1 | |
Total restructuring and related business transformation costs | | $ | 6.3 | | | $ | 18.2 | | | $ | 20.5 | | | $ | 46.2 | |
| (e)d) | Represents costs associated with successful and/or abandoned acquisitions, 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. |
| (f) | Represents estimated environmental remediation costs and losses relating to a former production facility. |
| (g) | Represents expenses related to the Company’s initial stock offering. |
| (h) | Represents third party expenses to comply with the requirements of Sarbanes-Oxley in 2018 and the accelerated adoption of the new revenue recognition standard (ASC 606 - Revenue from Contracts with Customers) in the first quarter of 2018, one year ahead of the required adoption date for a private company. These expenses were previously included in ‘Expenses related to initial stock offering’ and prior periods have been restated to conform to current period presentation. |
| (i)e) | Represents stock-based compensation expense recognized for stock options outstandingthe three month and six month periods ended June 30, 2020 of $12.7 million and $16.2 million, respectively, decreased by $0.5 million for the three months and nine monthssix month period ended SeptemberJune 30, 2017 of $7.8 million and $69.2 million, respectively, and DSUs granted2020 due to employees at the date of the initial public offering for the three months and nine months ended September 30, 2017 of $2.0 million and $96.8 million, respectively. See Note 9 “Stock-Based Compensation”.costs associated with employer taxes. |
Represents stock-based compensation expense recognized for the three month and six month periods ended June 30, 2019 of $6.0 million and $13.6 million, respectively, increased by $0.2 million and $1.2 million for the three month and six month periods ended June 30, 2019, respectively, due to costs associated with employer taxes.
| (j)f) | Represents losses on extinguishment of debt recognized on the redemption of the senior notes and pay down of a portion of the Original Dollar Term Loan Facility with proceeds fromU.S. term loan and the initial public offering in May 2017 ($50.4 million) and in connection with the refinancingamendment of the Original Dollar Term Loan Facility and Euro Term Loan Facilityrevolving credit facility. |
g) | Represents an insurance recovery of the Company’ shareholder litigation settlement in August 2017 ($34.1 million).2014. |
| (k)h) | Includes (i) foreign exchange gains and losses, (ii) effects of the amortization of prior service costs and amortization of gainslosses in pension and other postemployment benefits (OPEB)(‘‘OPEB’’) expense, (iii)(ii) certain legal and compliance costs and (iv)(iii) other miscellaneous adjustments. |
| (l)i) | Represents the Company’sour 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 Net 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 Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Provision (Benefit) for income taxes | | $ | 4.4 | | | $ | (9.1 | ) | | $ | (41.2 | ) | | $ | (33.3 | ) |
Tax impact of pre-tax income adjustments | | | 30.3 | | | | 16.4 | | | | 119.0 | | | | 43.9 | |
Discrete tax items | | | (1.4 | ) | | | 0.1 | | | | - | | | | 2.1 | |
Income tax provision, as adjusted | | $ | 33.3 | | | $ | 7.4 | | | $ | 77.8 | | | $ | 12.7 | |
| | For the Three Month | | | For the Six Month | |
| | Period Ended | | | Period Ended | |
| | June 30, | | | June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Provision for income taxes | | $ | 95.8 | | | $ | 8.3 | | | $ | 37.0 | | | $ | 20.3 | |
Tax impact of pre-tax income adjustments | | | (48.4 | ) | | | 10.8 | | | | 40.8 | | | | 20.5 | |
Discrete tax items | | | (0.5 | ) | | | 0.1 | | | | (4.6 | ) | | | (0.3 | ) |
Income tax provision, as adjusted | | $ | 46.9 | | | $ | 19.2 | | | $ | 73.2 | | | $ | 40.5 | |
Segment Results
Effective February 29, 2020, as a result of the acquisition of Ingersoll Rand Industrial, we reorganized our segments. We now classify our businessesbusiness into threefour segments: Industrials, EnergyIndustrial Technologies and Medical.
Services, Precision and Science Technologies, High Pressure Solutions and Specialty Vehicle Technologies. Our Corporate operations (as described below) are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results“Results of Operations” discussion above. We recasted 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 Segmentssegments 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 Segmentsegment measurements provided to and evaluated by the chief operating decision maker are described in Note 1516 “Segment Results” in the “Notes to Condensed Consolidated Financial Statements”our unaudited condensed consolidated financial statements included elsewhere in this Report.Form 10-Q.
Included in our discussion of our segment results below are changes in Segment Revenues and Segment Adjusted EBITDA on a Constant Currency basis. Constant Currency information compares results between periods as if exchange rates had remained constant period over period. We define Constant Currency as changes in Segment Revenues and Segment Adjusted EBITDA excluding the impact of foreign exchange rate movements. We use these measures to determine the Constant Currency Segment Revenues and Segment Adjusted EBITDA growth on a year-on-year basis. Constant Currency Segment Revenues and Segment Adjusted EBITDA are calculated by translating current period Segment Revenues and Segment Adjusted EBITDA using prior period exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
Segment Results for the Three and NineSix Month Periods Ended SeptemberJune 30, 20172020 and 20162019
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 SegmentsSegments.
Industrial Technologies and illustrate, on a percentage basis, the impact of foreign currency fluctuations on Segment Revenues and Segment Adjusted EBITDA growth.
IndustrialsServices Segment Results
| | | | | | | | | | | Constant Currency Percent Change | | |
| | For the Three Months Ended September 30, | | | Percent Change | | For the Three Month Period Ended June 30, | | | Percent Change | |
| | 2017 | | | 2016 | | | 2017 vs. 2016 | | | 2017 vs. 2016 | | | 2020 | | | 2019 | | | 2020 vs. 2019 | |
Segment Revenues | | $ | 288.2 | | | $ | 265.6 | | | | 8.5 | % | | | 5.9 | % | | $ | 829.6 | | | $ | 427.6 | | | | 94.0 | % |
Segment Adjusted EBITDA | | $ | 63.1 | | | $ | 55.6 | | | | 13.5 | % | | | 10.1 | % | | $ | 183.8 | | | $ | 96.7 | | | | 90.1 | % |
Segment Margin | | | 21.9 | % | | | 20.9 | % | | | | | | | | | | | 22.2 | % | | | 22.6 | % | | (40) bps | |
Segment Revenues for the three month period ended SeptemberJune 30, 20172020 were $288.2$829.6 million, an increase of $22.6$402.0 million, or 8.5%94.0%, compared to $265.6$427.6 million in the same three month period in 2016.2019. The increase in Segment Revenues was due to higher volumeacquisitions, including acquisitions and netIngersoll Rand Industrial of divestitures (4.5%$496.7 million or 12.0 million), the favorable impact of foreign currencies (2.6% or $6.9 million)116.2%, and higher pricing (1.4% or $3.7 million). The percentage of Segment Revenues derived from aftermarket parts and services was 33.4% in the three month period ended September 30, 2017 compared to 35.6% in the same three month period in 2016.
Segment Adjusted EBITDA for the three month period ended September 30, 2017 was $63.1 million, an increase of $7.5$4.7 million or 13.5%, compared to $55.6 million in the same three month period in 2016. Segment Adjusted EBITDA Margin increased 100 basis points to 21.9% from 20.9% in 2016. The increase in Segment Adjusted EBITDA was due primarily to higher volume including acquisitions and net of divestitures ($4.3 million), improved pricing ($3.7 million), the favorable impact of foreign currencies ($1.9 million)1.1%, partially offset by higher material and other manufacturing costs ($2.2 million), and higher selling and administrative expense ($0.2 million).
| | | | | | | | | | | Constant Currency Percent Change | |
| | For the Nine Months Ended September 30, | | | Percent Change |
| | 2017 | | | 2016 | | | 2017 vs. 2016 | | | 2017 vs. 2016 | |
Segment Revenues | | $ | 819.0 | | | $ | 803.6 | | | | 1.9 | % | | | 2.3 | % |
Segment Adjusted EBITDA | | $ | 173.7 | | | $ | 156.2 | | | | 11.2 | % | | | 11.7 | % |
Segment Margin | | | 21.2 | % | | | 19.4 | % | | | | | | | | |
Segment Revenues for the nine month period ended September 30, 2017 were $819.0 million, an increaselower organic volumes of $15.4$89.8 million or 1.9%, compared to $803.6 million in the same nine month period in 2016. The increase in Segment Revenues was due to improved pricing (1.4% or $11.4 million)21.0%, and higher volume including acquisitions and net of divestitures (0.9% or $6.7 million), partially offset by the unfavorable impact of foreign currencies (0.4%of $9.7 million or $2.7 million)2.3%. The percentage of Segment Revenues derived from aftermarket parts and service was 34.6%39.5% in the nine month period ended September 30, 2017, compared to 35.0% in the same nine month period in 2016.
Segment Adjusted EBITDA for the nine month period ended September 30, 2017 was $173.7 million, an increase of $17.5 million, or 11.2%, compared to $156.2 million in the same nine month period in 2016. Segment Adjusted EBITDA Margin increased 180 basis points to 21.2% from 19.4% in 2016. The increase in Segment Adjusted EBITDA was due primarily to improved pricing ($11.4 million), lower material and other manufacturing costs ($4.8 million), higher volume including acquisitions and net of divestitures ($1.2 million), lower selling and administrative expense ($0.9 million), partially offset by the unfavorable impact of foreign currencies ($0.8 million).
Energy Segment Results
| | For the Three Months Ended September 30, | | | Percent Change | | | Constant Currency Percent Change | |
| | 2017 | | | 2016 | | | 2017 vs. 2016 | | | 2017 vs. 2016 | |
Segment Revenues | | $ | 301.6 | | | $ | 137.9 | | | | 118.7 | % | | | 115.9 | % |
Segment Adjusted EBITDA | | $ | 98.6 | | | $ | 22.0 | | | | 348.2 | % | | | 342.7 | % |
Segment Margin | | | 32.7 | % | | | 16.0 | % | | | | | | | | |
Segment Revenues for the three month period ended SeptemberJune 30, 2017 were $301.6 million, an increase of $163.7 million, or 118.7%,2020 compared to $137.9 million32.2% in the same three month period in 2016. The increase in Segment Revenues was due to higher revenues from upstream energy exposed markets (91.4% or $126.1 million), higher volume in other markets of our Energy segment (24.4% or $33.6 million), the favorable impact of foreign currencies (2.5% or $3.4 million), and improved pricing in other markets of our Energy segment (0.4% or $0.6 million). The percentage of Segment Revenues derived from aftermarket parts and services was 54.7% in the three month period ended September 30, 2017 compared to 57.7% in the same three month period in 2016.2019.
Segment Adjusted EBITDA for the three month period ended SeptemberJune 30, 20172020 was $98.6$183.8 million, an increase of $76.6$87.1 million, or 348.2% compared to $22.090.1%, from $96.7 million in the same three month period in 2016.2019. Segment Adjusted EBITDA Margin increased 1670decreased 40 basis points to 32.7%22.2% from 16.0%22.6% in 2016.2019. The increase in Segment Adjusted EBITDA was primarily due primarily to higher volume ($76.8 million), , improved pricing ($5.3 million),acquisitions, including Ingersoll Rand Industrial of $115.4 million or 119.3% and the favorable impactlower selling and administrative costs of foreign currencies ($1.3 million)$16.0 million or 16.5%, partially offset by higher materiallower organic sales volume of $36.2 million or 37.4% and manufacturing costs ($4.1 million),unfavorable product mix of $11.7 million or 12.1%. The decrease in Adjusted EBITDA as a percentage of revenues is primarily attributable to unfavorable margin mix due to the acquisition and higher selling and administrative expense ($2.7 million).inclusion of Ingersoll Rand Industrial results in the three month period ended June 30, 2020.
| | For the Six Month Period Ended June 30, | | | Percent Change | |
| | 2020 | | | 2019 | | | 2020 vs. 2019 | |
Segment Revenues | | $ | 1,333.6 | | | $ | 832.7 | | | | 60.2 | % |
Segment Adjusted EBITDA | | $ | 278.6 | | | $ | 182.2 | | | | 52.9 | % |
Segment Margin | | | 20.9 | % | | | 21.9 | % | | (100) bps | |
| | | | | | | | | | | Constant Currency Percent Change | |
| | For the Nine Months Ended September 30, | | | Percent Change | |
| | 2017 | | | 2016 | | | 2017 vs. 2016 | | | 2017 vs. 2016 | |
Segment Revenues | | $ | 719.4 | | | $ | 385.8 | | | | 86.5 | % | | | 86.3 | % |
Segment Adjusted EBITDA | | $ | 199.2 | | | $ | 70.2 | | | | 183.8 | % | | | 183.2 | % |
Segment Margin | | | 27.7 | % | | | 18.2 | % | | | | | | | | |
Segment Revenues for the ninesix month period ended SeptemberJune 30, 20172020 were $719.4$1,333.6 million, an increase of $333.6$500.9 million, or 86.5%60.2%, compared to $385.8$832.7 million in the same ninesix month period in 2016.2019. The increase in Segment Revenues was primarily due toacquisitions, including of Ingersoll Rand Industrial of $660.8 million or 79.4%, and higher revenues from upstream energy exposed markets (79.8%pricing of $10.3 million or $308.0 million)1.2%, higherpartially offset by lower organic volume in other markets of our Energy segment (6.7%$152.6 million or $25.8 million)18.3%, the favorableand unfavorable impact of foreign currencies (0.2%of $17.7 million or $0.4 million), partially offset by pricing (0.2% or $0.6 million)2.1%. The percentage of Segment Revenues derived from aftermarket parts and service was 59.9%39.6% in the ninesix month period ended SeptemberJune 30, 20172020 compared to 50.3%32.3% in the same ninesix month period in 2016.2019.
Segment Adjusted EBITDA for the ninesix month period ended SeptemberJune 30, 20172020 was $199.2$278.6 million, an increase of $129.0$96.4 million, or 183.8%52.9%, compared to $70.2from $182.2 million in the same ninesix month period in 2016.2019. Segment Adjusted EBITDA Margin increased 950decreased 100 basis points to 27.7%20.9% from 18.2%21.9% in 2016.2019. The increase in Segment Adjusted EBITDA was primarily due primarily to acquisitions, including Ingersoll Rand Industrial of $142.3 million or 78.1%, higher volume ($134.0 million), improved pricing ($2.7 million),of $10.3 million or 5.7% and the favorable impactlower selling and administrative costs of foreign currencies ($0.2 million)$20.5 million or 11.3%, partially offset by higher materiallower organic sales volumes of $61.5 million or 33.8% and other manufacturing costs ($4.4 million)unfavorable margin mix of $12.9 million or 7.1%. The decrease in Adjusted EBITDA as a percentage of revenues is primarily attributable to unfavorable product mix due to the acquisition and higher sellinginclusion of Ingersoll Rand Industrial results in the six month period ended June 30, 2020.
Precision and administrative expense ($3.5 million).
MedicalScience Technologies Segment Results
| | | | | | | | | | | Constant Currency Percent Change | | |
| | For the Three Months Ended September 30, | | | Percent Change | | | For the Three Month Period Ended June 30, | | | Percent Change | |
| | 2017 | | | 2016 | | | 2017 vs. 2016 | | | 2017 vs. 2016 | | | 2020 | | | 2019 | | | 2020 vs. 2019 | |
Segment Revenues | | $ | 59.8 | | | $ | 59.1 | | | | 1.2 | % | | | (0.9 | %) | | $ | 195.8 | | | $ | 82.0 | | | | 138.8 | % |
Segment Adjusted EBITDA | | $ | 16.8 | | | $ | 16.6 | | | | 1.2 | % | | | (1.4 | %) | | $ | 59.3 | | | $ | 24.6 | | | | 141.1 | % |
Segment Margin | | | 28.1 | % | | | 28.1 | % | | | | | | | | | | | 30.3 | % | | | 30.0 | % | | 30 bps | |
Segment Revenues for the three month period ended SeptemberJune 30, 20172020 were $59.8$195.8 million, an increase of $0.7$113.8 million, or 1.2%138.8%, compared to $59.1$82.0 million in the same three month period in 2016.2019. The increase in Segment Revenues was primarily due to the favorable impactacquisitions, including Ingersoll Rand Industrial of foreign currencies (1.7% or $1.0 million), and improved pricing (1.3% or $0.8 million), partially offset by lower volume including acquisitions (1.8% or $1.1 million). The percentage of Segment Revenues derived from aftermarket parts and services was 3.3% in the three month period ended September 30, 2017 compared to 0.0% in the same three month period in 2016.
Segment Adjusted EBITDA for the three month period ended September 30, 2017 was $16.8 million, an increase of $0.2$113.7 million or 1.2%, compared to $16.6 million in the same three month period in 2016. Segment Adjusted EBITDA Margin was 28.1%, flat with the same three month period in 2016. The increase in Segment Adjusted EBITDA was due primarily to improved pricing ($0.8 million), lower material and other manufacturing costs ($0.2 million), the favorable impact of foreign currencies ($0.3 million), and lower selling and administrative expense ($0.1 million), partially offset by lower volume including acquisitions ($1.2 million).
| | | | | | | | | | | Constant Currency Percent Change | |
| | For the Nine Months Ended September 30, | | | Percent Change | |
| | 2017 | | | 2016 | | | 2017 vs. 2016 | | | 2017 vs. 2016 | |
Segment Revenues | | $ | 172.0 | | | $ | 172.2 | | | | (0.1 | %) | | | 0.2 | % |
Segment Adjusted EBITDA | | $ | 46.9 | | | $ | 44.7 | | | | 4.9 | % | | | 5.1 | % |
Segment Margin | | | 27.3 | % | | | 26.0 | % | | | | | | | | |
Segment Revenues for the nine month period ended September 30, 2017 were $172.0 million, a decrease of $0.2 million, or 0.1%, compared to $172.2 million in the same nine month period in 2016. The decrease in Segment Revenues was due to lower volume including acquisitions (0.8% or $1.5 million), and the unfavorable impact of foreign currencies (0.3% or $0.5 million), partially offset by improved pricing (1.1% or $1.8 million)138.7%. The percentage of Segment Revenues derived from aftermarket parts and service was 3.8%13.6% in the ninethree month period ended SeptemberJune 30, 20172020 compared to 0.0%2.6% in the same ninethree month period in 2016.2019.
Segment Adjusted EBITDA for the ninethree month period ended SeptemberJune 30, 20172020 was $46.9$59.3 million, an increase of $2.2$34.7 million, or 4.9% compared to $44.7141.1%, from $24.6 million in the same ninethree month period in 2016.2019. Segment Adjusted EBITDA Margin increased 13030 basis points to 27.3%30.3% from 26.0%30.0% in 2016.2019. The increase in Segment Adjusted EBITDA was primarily due to acquisitions, including Ingersoll Rand Industrial of $32.4 million or 131.7% and higher pricing of $2.2 million or 8.9%.
| | For the Six Month Period Ended June 30, | | | Percent Change | |
| | 2020 | | | 2019 | | | 2020 vs. 2019 | |
Segment Revenues | | $ | 308.6 | | | $ | 161.3 | | | | 91.3 | % |
Segment Adjusted EBITDA | | $ | 92.2 | | | $ | 47.8 | | | | 92.9 | % |
Segment Margin | | | 29.9 | % | | | 29.6 | % | | 30 bps | |
Segment Revenues for the six month period ended June 30, 2020 were $308.6 million, an increase of $147.3 million, or 91.3%, compared to $161.3 million in the same six month period in 2019. The increase in Segment Revenues was primarily due to improved pricing ($1.8 million), lower selling and administrative expense ($1.7 million), and lower material and other manufacturing costs ($1.5 million)acquisitions, including of Ingersoll Rand Industrial of $157.8 million or 97.8%, partially offset by lower organic volume of $11.2 million or 6.9%. The percentage of Segment Revenues derived from aftermarket parts and service was 13.1% in the six month period ended June 30, 2020 compared to 3.0% in the same six month period in 2019.
Segment Adjusted EBITDA for the six month period ended June 30, 2020 was $92.2 million, an increase of $44.4 million, or 92.9%, from $47.8 million in the same six month period in 2019. Segment Adjusted EBITDA Margin increased 30 basis points to 29.9% from 29.6% in 2019. The increase in Segment Adjusted EBITDA was primarily due to acquisitions, including acquisitions ($2.6 million)Ingersoll Rand Industrial of $45.0 million or 94.1%, and the unfavorable impacthigher pricing of foreign currencies ($0.2 million)$2.9 million or 6.1%, partially offset by lower organic sales volume of $4.6 million or 9.6%.
High Pressure Solutions Segment Results
| | For the Three Month Period Ended June 30, | | | Percent Change | |
| | 2020 | | | 2019 | | | 2020 vs. 2019 | |
Segment Revenues | | $ | 21.5 | | | $ | 119.5 | | | | (82.0 | %) |
Segment Adjusted EBITDA | | $ | (15.2 | ) | | $ | 32.1 | | | | (147.4 | %) |
Segment Margin | | | (70.7 | %) | | | 26.9 | % | | (9,760) bps | |
Segment Revenues for the three month period ended June 30, 2020 were $21.5 million, a decrease of $98.0 million, or 82.0%, compared to $119.5 million in the same three month period in 2019. The decrease in Segment Revenues was primarily due to lower volumes of $96.6 million or 80.8% and lower pricing of $1.4 million or 1.2%, as a result of the current downturn in the upstream energy market. The percentage of Segment Revenues derived from aftermarket parts and service was 83.7% in the three month period ended June 30, 2020 compared to 79.6% in the same three month period in 2019.
Segment Adjusted EBITDA for the three month period ended June 30, 2020 was $(15.2) million, a decrease of $47.3 million, or 147.4%, from $32.1 million in the same three month period in 2019.
Segment Adjusted EBITDA Margin decreased 9,760 basis points to (70.7%) from 26.9% in 2019. The decrease in Segment Adjusted EBITDA was primarily due to lower sales volume of $32.1 million or 100.0%, higher selling and administrative expenses of $11.4 million or 35.5% which was primarily due to an increase in the allowance for doubtful accounts of $12.5 million as a result of a customer filing for Chapter 11 bankruptcy protection, and lower pricing of $2.8 million or 8.7%.
| | For the Six Month Period Ended June 30, | | | Percent Change | |
| | 2020 | | | 2019 | | | 2020 vs. 2019 | |
Segment Revenues | | $ | 117.8 | | | $ | 255.4 | | | | (53.9 | %) |
Segment Adjusted EBITDA | | $ | 8.3 | | | $ | 73.9 | | | | (88.8 | %) |
Segment Margin | | | 7.0 | % | | | 28.9 | % | | (2,190) bps | |
Segment Revenues for the six month period ended June 30, 2020 were $117.8 million, a decrease of $137.6 million, or 53.9%, compared to $255.4 million in the same six month period in 2019. The decrease in Segment Revenues was primarily due to lower volumes of $126.1 million or 49.4% and lower pricing of $10.8 million or 4.2%, as a result of the current downturn in the upstream energy market. The percentage of Segment Revenues derived from aftermarket parts and service was 86.4% in the six month period ended June 30, 2020 compared to 80.7% in the same six month period in 2019.
Segment Adjusted EBITDA for the six month period ended June 30, 2020 was $8.3 million, a decrease of $65.6 million, or 88.8%, from $73.9 million in the same six month period in 2019. Segment Adjusted EBITDA Margin decreased 2,190 basis points to 7.0% from 28.9% in 2019. The decrease in Segment Adjusted EBITDA was primarily due to lower sales volume of $43.0 million or 58.2%, lower pricing of $10.8 million or 14.6%, and higher selling and administrative expenses of $10.1 million or 13.7% which was primarily due to an increase in the allowance for doubtful accounts of $12.5 million as a result of a customer filing for Chapter 11 bankruptcy protection.
Specialty Vehicle Technologies Segment Results
The Specialty Vehicle Technologies segment was created subsequent to the acquisition of Ingersoll Rand Industrial. Therefore, comparative prior period information was not part of our consolidated results.
Segment Revenues for the three and six month periods ended June 30, 2020 were $217.5 million and $304.3 million, respectively. The percentage of Segment Revenues derived from aftermarket parts and service was 26.4% and 23.5% in the three and six month periods ended June 30, 2020, respectively.
Segment Adjusted EBITDA for the three and six month periods ended June 30, 2020 was $41.0 million and $55.1 million, respectively. Adjusted EBITDA as a percentage of revenue was 18.9% and 18.1% for the three and six month periods ended June 30, 2020, respectively.
Liquidity and Capital Resources
Our operations and strategic objectives require continuing investment. Ourinvestment resources include cash generated from operations and borrowings under our Revolving Credit Facility and the Receivables Financing Agreement. At September
As of June 30, 2017, the Company2020, we had $8.0$85.3 million of outstanding letters of credit written against the Revolving Credit Facility and $352.0$1,014.7 million of unused availability. The CompanyWe also had $33.2$26.6 million of letters of credit outstanding against the Receivables Financing Agreement and $82.1$39.1 million of unused availability. On June 30, 2017, we entered into the first amendment to the Receivables Financing Agreement which increased the aggregated borrowing capacity by $50.0 million to $125.0 million governed by a borrowing base and also extended the term to June 30, 2020.
See the description of these line-of-credit resources as well as our outstanding debt obligations in Note 8 “Debt” to the Condensed Consolidated Financial Statements.consolidated financial statements in our annual report on Form 10-K for the fiscal year ended December 31, 2019 and Note 8 ‘‘Debt’’ to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.
As of SeptemberJune 30, 2017 and 2016, the Company was2020, we were in compliance with all of itsour 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.
| | September 30, 2017 | | | December 31, 2016 | | | June 30, 2020 | | | December 31, 2019 | |
Cash and cash equivalents | | $ | 303.0 | | | $ | 255.8 | | | $ | 1,173.6 | | | $ | 505.5 | |
Short-term borrowings and current maturities of long-term debt | | | 21.1 | | | | 24.5 | | | | 39.8 | | | | 7.6 | |
Long-term debt | | | 2,006.9 | | | | 2,753.8 | | | | 3,816.7 | | | | 1,603.8 | |
Total debt | | $ | 2,028.0 | | | $ | 2,778.3 | | | $ | 3,856.5 | | | $ | 1,611.4 | |
We can increase the borrowing availability under the senior secured credit agreement that we and certain of our subsidiaries entered into with UBS AG, Stamford Branch, as administrative agent, and other agents and lenders party thereto on July 30, 2013, as amended by Amendment No. 1 on March 4, 2016 and Amendment No. 2 on August 17, 2017 (the “SeniorSenior Secured Credit Facilities”),Facilities by up to $250$1,600.0 million in the form of additional commitments under the senior secured revolving credit facility (the “RevolvingRevolving Credit Facility”) thereunderFacility 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 senior secured term loan facilities under the Senior Secured Credit 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. For a complete description ofSee Note 10 “Debt” to the consolidated financial statements in our credit facilities, refer toannual report on Form 10-K for the fiscal year ended December 31, 2019 and Note 8 “Debt”‘‘Debt’’ to our unaudited condensed consolidated financial statements included elsewhere in the “Notes to the Condensed Consolidated Financial Statements.”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.Facilities and the Receivables Financing Agreement. 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 and our major equity holders, including KKR and its affiliates, may from time to time, seek to repurchase debt securities that we have issued orrepay loans that we have borrowed, including the notes and borrowings under the Senior Secured Credit Facilities, in privately negotiated or open market transactions, by tender offer or otherwise.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 and the Receivables Financing Agreement, 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 or the Receivables Financing Agreement 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.
The majorityA substantial portion of our cash is in jurisdictions outside of the U.S. However, we believe our U.S. operations will generate sufficient cash flows from operations along with our availability under the Revolving Credit Facility and the Receivables Financing Agreement to satisfy our cash needs in the U.S. As a result of the KKR transaction and the significant increase in our long-term debt balance as of July 30, 2013, we modified our former assertion concerning the permanentUnited States. We do not assert ASC 740-30 (formerly APB 23) indefinite reinvestment of undistributedour historical non-U.S. earnings foror future non-U.S. subsidiaries in theseearnings. The Company records a deferred foreign operations. We intendtax liability to repatriate certaincover all estimated withholding, state income tax and foreign income tax associated with repatriating all non-U.S. earnings forback to the purpose of servicing our Senior Secured Credit Facilities in the future, which will result in net U.S. tax liabilities as these foreign earnings are distributed. Accordingly, we recorded aUnited States. Our deferred income tax liability and the balance at Septemberas of June 30, 20172020 was $78.2$30.3 million associated with the repatriationwhich primarily consisted of certain foreign earnings based upon accumulated earnings of approximately $200.0 million.withholding taxes.
Working Capital
| | September 30, 2017 | | | December 31, 2016 | | | June 30, 2020 | | | December 31, 2019 | |
Net Working Capital: | | | | | | | | | | | | |
Current assets | | $ | 1,403.4 | | | $ | 1,188.5 | | | $ | 3,326.8 | | | $ | 1,543.9 | |
Less: Current liabilities | | | 559.6 | | | | 497.9 | | | | 1,478.2 | | | | 574.6 | |
Net working capital | | $ | 843.8 | | | $ | 690.6 | | | $ | 1,848.6 | | | $ | 969.3 | |
| | | | | | | | | | | | | | | | |
Operating Working Capital: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | 531.6 | | | $ | 441.6 | | |
Accounts receivable and contract assets | | | $ | 975.4 | | | $ | 488.1 | |
Plus: Inventories (excluding LIFO) | | | 491.7 | | | | 428.0 | | | | 1,013.4 | | | | 489.5 | |
Less: Accounts payable | | | 263.6 | | | | 214.9 | | | | 683.5 | | | | 322.9 | |
Less: Advance payments on sales contracts | | | 55.5 | | | | 43.0 | | |
Less: Contract liabilities | | | | 159.9 | | | | 51.7 | |
Operating working capital | | $ | 704.2 | | | $ | 611.7 | | | $ | 1,145.4 | | | $ | 603.0 | |
In the second quarter of 2017 we revised our definition of operating working capital to, accounts receivable, plus inventories excluding LIFO, less accounts payable, less advance payments on sales contracts. Prior periods have been restated to conform to the current presentation. Net working capital increased $153.2$879.3 million to $843.8$1,848.6 million at Septemberas of June 30, 20172020 from $690.6$969.3 million atas of December 31, 2016.2019. Operating working capital increased $92.5$542.4 million to $704.2$1,145.4 million at Septemberas of June 30, 20172020 from $611.7$603.0 million atas of December 31, 20162019. The increase in operating working capital is primarily due to higher accounts receivable and higher inventories, partially offset by higher accounts payable and advance payments on sales contracts. higher contract liabilities.
The increase in accounts receivablesreceivable was primarily due to significantly higher revenues and the differenceacquisition of Ingersoll Rand Industrial of which $575.6 million is included in the June 30, 2020 balance, partially offset by lower sales mix betweenin the second quarter of 2020 compared to the fourth quarter of 2016 and2019. The increase in contract assets was primarily due to the third quarteracquisition of 2017. A higher portionIngersoll Rand Industrial of revenueswhich $17.5 million is included in the fourth quarter of 2016 were relatedJune 30, 2020 balance and due to highly engineered solution product contracts with higher advance payments aheadthe timing of revenue recognition than in the third quarter of 2017.and billing on our overtime contracts. The increase in inventories was primarily dueattributable to higher inventory costs related to projects expected to ship laterthe acquisition of Ingersoll Rand Industrial of which $498.1 million is included in the year and additions to inventory in anticipation of increased demand for certain products.June 30, 2020 balance. The increase in accounts payablespayable was primarily due to the increaseacquisition of Ingersoll Rand Industrial of which $415.3 million is included in inventoriesthe June 30, 2020 balance and the timing of vendor cash disbursements. The increase in advance payments on sales contractscontract liabilities was primarily due to an increased levelthe acquisition of Ingersoll Rand Industrial of which $103.2 million is included in process engineered to order contracts at the end of the third quarter of 2017 compared to the end of the fourth quarter of 2016.June 30, 2020 balance.
Cash Flows
| | For the Nine Months Ended September 30, | |
| | 2017 | | | 2016 | |
Cash flows - operating activities | | $ | 83.9 | | | $ | 106.8 | |
Cash flows - investing activities | | | (43.1 | ) | | | (59.8 | ) |
Cash flows - financing activities | | | (8.2 | ) | | | (30.8 | ) |
Free cash flow (1) | | | 47.5 | | | | 60.5 | |
The following table reflects the major categories of cash flows for the six month periods ended June 30, 2020 and 2019, respectively.
| | For the Six Month Period Ended June 30, | |
| | 2020 | | | 2019 | |
Cash flows - operating activities | | $ | 315.8 | | | $ | 130.1 | |
Cash flows - investing activities | | | 17.3 | | | | (24.5 | ) |
Cash flows - financing activities | | | 336.9 | | | | (16.1 | ) |
Free cash flow(1) | | | 290.4 | | | | 105.4 | |
| (1) | See the “Non-GAAP Financial Measures” section included in this Quarterly Report for a reconciliation to the nearest GAAP measure. |
Operating Activities
Cash provided by operating activities decreased $22.9increased $185.7 million to $83.9$315.8 million infor the ninesix month period ended SeptemberJune 30, 201720202 from $106.8$130.1 million in the same ninesix month period in 2016,2019, primarily due to cash used by operating working capital of $55.4 milliona larger reduction in the nine month period ended September 30, 2017 compared to cash provided by operating working capital of $49.5 millionaccounts receivable and increases in the same period in 2016 as well as increased cash paid for taxesaccrued liabilities and higher incentive compensation,accounts payable, partially offset by higher gross profits on increased revenueslower net income (excluding non-cash charges for amortization and decreased cash paid for interest. Changes in accounts receivable used cashdepreciation, stock-based compensation expense, foreign currency transaction losses, net, deferred income taxes and non-cash adjustments to carrying value of $65.9 million in the nine month period ended September 30, 2017 compared to generating cash of $18.1 million in the same nine month period in 2016. Changes in inventory used cash of $36.4 million in the nine month period ended September 30, 2017 compared to using cash of $3.8 million in the same nine month period in 2016. Changes in accounts payable generated cash of $39.8 million in the nine month period ended September 30, 2017 compared to generating cash of $21.3 million in the same nine month period ended September 30, 2016. Changes in advance payments on sales contracts generated cash of $7.1 million in the nine month period ended September 30, 2017 compared to generating cash of $13.9 million in the same nine month period ended September 30, 2016.LIFO inventories).
Investing Activities
Cash usedprovided (used in) by in investing activities included capital expenditures of $36.4$25.4 million and $46.3$24.7 million for the ninesix month periods ended SeptemberJune 30, 20172020 and 2016,2019, respectively. We currently expect capital expenditures to total approximately $50.0Cash acquired in a business combination was $41.3 million to $60.0 million forin the full year in 2017. Cashsix month period ended June 30, 2020 and cash paid in business combinations for the ninethree month periodsperiod ended SeptemberJune 30, 2017 and 2016 were $18.8 million and $18.8 million, respectively. Proceeds from the termination of derivatives for the nine month periods ended September 30, 2017 and 2016 were $6.2 million and $0.0 million, respectively. Net proceeds from business divestitures and disposals of property, plant and equipment were $5.9 million and $5.3 million for the nine month periods ended September 30, 2017 and 2016, respectively.2019 was $0.5 million.
Financing Activities
Cash usedprovided by financing activities of $8.2$336.9 million for the ninesix month period ended SeptemberJune 30, 2017 reflects a premium paid on2020 primarily reflected proceeds from long term debt of $1,980.1 million offset by repayments of long term debt of $1,599.6 million and payments of debt issuance costs of $46.6 million.
Cash used in financing activities of $16.1 million for the extinguishmentsix month period ended June 30, 2019 reflected repayments of senior noteslong-term borrowings of $29.7$28.8 million, purchases of treasury stock of $2.6$17.1 million, purchasespayments of sharescontingent consideration of noncontrolling interests of $5.2$2.0 million the paymentand payments of debt issuance costs of $2.9 million, and net repayments of long-term borrowings of $861.5$0.3 million, partially offset by proceeds from the issuancestock option exercises of common stock, net of share issuance costs of $893.3 million. Cash used by financing activities of $30.8 million for the nine month period ended September 30, 2016 reflects net repayments of long-term borrowings of $19.1 million, purchases of treasury stock of $12.6 million, and the payment of debt issuance costs of $1.1 million, partially offset by the proceeds from the issuance of common stock of $2.9$32.1 million.
Free Cash Flow
Free cash flow decreased $13.0increased $185.0 million to a free cash inflow of $47.5$290.4 million in the ninesix month period ended SeptemberJune 30, 20172020 from a free cash inflow of $60.5$105.4 million in the same ninesix month period in 2016. The decrease in free cash flow was2019 primarily due to decreasedincreased cash flows fromprovided by operating activities of $22.9 million partially offset by decreased capital expenditures of $9.9 million in the nine month period ended September 30, 2017 compared to the same period in 2016.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.
Contractual Obligations
The following table and accompanying disclosures summarizesummarizes our significant contractual obligations at Septemberfuture minimum payments as of June 30, 2017, and the effects such obligations are expected to have on our liquidity and cash flow in future periods:2020.
| | | | | Payments Due by Period | | | | | Payments Due by Period | |
(dollars in millions) Contractual Obligations | | Total | | | Remainder of 2017 | | | | 2018-2019 | | | | 2020-2021 | | | After 2022 | | |
Contractual Obligations | | | Total | | Remainder of 2020 | | | 2021-2022 | | | 2023-2024 | | Thereafter | |
Debt(1) | | $ | 2,013.8 | | | $ | 5.2 | | | $ | 40.9 | | | $ | 40.9 | | | $ | 1,926.8 | | | $ | 3,894.0 | | $ | 19.5 | | $ | 78.1 | | $ | 78.1 | | $ | 3,718.3 | |
Estimated interest payments (1)(2) | | | 688.9 | | | | 25.9 | | | | 221.2 | | | | 198.9 | | | | 242.9 | | | | 530.0 | | | 45.9 | | | 161.0 | | | 158.2 | | | 164.9 | |
Capital leases | | | 19.3 | | | | 0.4 | | | | 3.5 | | | | 3.8 | | | | 11.6 | | |
Finance leases | | | | 17.6 | | | 0.4 | | | 1.6 | | | 2.1 | | | 13.5 | |
Operating leases(3) | | | 75.2 | | | | 6.7 | | | | 38.8 | | | | 17.2 | | | | 12.5 | | | | 170.3 | | | 25.8 | | | 82.7 | | | 40.5 | | | 21.3 | |
Purchase obligations (2) | | | 320.0 | | | | 238.7 | | | | 80.0 | | | | 0.9 | | | | 0.4 | | |
Total | | $ | 3,117.2 | | | $ | 276.9 | | | $ | 384.4 | | | $ | 261.7 | | | $ | 2,194.2 | | | $ | 4,611.9 | | $ | 91.6 | | $ | 323.4 | | $ | 278.9 | | $ | 3,918.0 | |
(1) | As of February 28, 2020, we entered into an additional $1,900.0 million term loan in connection with the acquisition of Ingersoll Rand Industrial and as of June 29, 2020, we entered into a $400.0 million term loan. See Note 8 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further details. |
(1)(2) | Estimated interest payments for variable rate termlong-term debt were calculated as follows: for fixed-rate debt and term debt, interest was calculated based on applicable rates and payment dates; for variable-rate debt and/or non-term debt, interest rates and payment dates were estimated based on management’s determination of the principal amortization schedulesmost likely scenarios for each relevant debt instrument. The increase of estimated interest payments since our previously disclosed contractual obligations on Form 10-K for the fiscal year ended December 31, 2019 was due to the $1,900.0 million term loan and $400.0 million term loan as defined in the Senior Secured Credit Facilities using three month LIBOR interest rate yield curves and the fixed rates on our interest rate swap contracts. No borrowings or outstanding balances on the variable rate revolving credit facility are anticipated during the analysis period.discussed above. |
| (2)(3) | PurchaseThe acquisition of Ingersoll Rand Industrial increased our operating leases significantly from our previously disclosed contractual obligations consist primarily of agreements to purchase inventory or services made inon Form 10-K for the normal course of business to meet operational requirements. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which we are contractually obligated as of September 30, 2017. For this reason, these amounts will not provide a complete and reliable indicatorfiscal year ended December 31, 2019. Approximately $105.5 million of our expected future cash outflows.total operating leases related to the acquisition of Ingersoll Rand Industrial as June 30, 2020 |
We entered into purchase obligations which consist primarily of agreements to purchase inventory or services made in the normal course of business to meet operational requirements. We are currently assessing these agreements and the enforceability of the contracts in the context of the COVID-19 pandemic. We believe that we are positioned to meet all current purchase obligations, but will continue to assess due to the rapidly changing environment.
Critical Accounting Policies and Estimates
Management has evaluated the accounting policiesestimates used in the preparation of the Company’s condensed consolidated financial statements and related notes and believe those policiesestimates to be reasonable and appropriate. Certain of these accounting policiesestimates 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 Prospectus, in thesection “Critical Accounting Policies and Estimates” section of “Management’s“Item 7. Management’s Discussion and Analysis”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 “Notesfiscal year ended December 31, 2019 except for the additional critical accounting estimate below.
Business Combinations
We apply the acquisition method of accounting with respect to Consolidated Financial Statements.” There have been no material changesthe identifiable assets and liabilities of a business combination and record the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. The excess of the cost of the acquired business and the fair value of the assets acquired and liabilities assumed is recognized as goodwill. Estimates of fair value represent management’s best estimate of assumptions and about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates, market comparables and others. Inputs used are generally obtained from historical data supplemented by current and anticipated market conditions and growth rates.
Significant judgment is required in estimating the fair value of identifiable intangible assets and in assigning their respective useful lives. The fair value estimates are based on historical information and on future expectations and assumptions deemed reasonable by management, but which are inherently uncertain. See Note 2 “Business Combinations” to our critical accounting policies as comparedcondensed consolidated financial statements included elsewhere in this Form 10-Q for further information regarding the fair value determination of each of the classes of identifiable intangible assets. Determining the useful life of an intangible asset also requires judgment. Certain intangibles are expected to have indefinite lives while certain other identifiable intangible assets have determinable lives. The useful lives of identifiable intangibles with determinable useful lives is based on a variety of factors, including but not limited to, the critical accounting policies described incompetitive environment, product cycles, order life cycles, historical customer attrition rates, market share, operating plans and the Prospectus.macroeconomic environment. The costs of determinable-lived intangible assets are amortized to expense over the estimated useful life.
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 1815 “Contingencies” to the condensed consolidated financial statements. We believe that as of June 30, 2020, there have been no material changes to the Consolidated Financial Statementsenvironmental matters disclosed in our Prospectusannual report on Form 10-K for the fiscal year ended December 31, 2016. We believe that at September 30, 2017, there have been no material change to this information.2019.
Recent Accounting Pronouncements
The information set forth in Note 1 “Condensed Consolidated Financial Statements” to our Condensed Consolidated Financial Statements under Part I,1 Item 1 “Financial Statements” under the heading “Recently Issued Accounting Pronouncements” is incorporated herein by reference.
ItemITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 maintaining a mixture of fixed and variable debt, and from time to time, use pay-fixed interest rate swaps 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 net investment cross-currency interest rate swaps.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 monthly.
As of SeptemberJune 30, 2017,2020, there have been no material changes to our market risk assessment previously disclosed in the Prospectus.annual report on Form 10-K for the fiscal year ended December 31, 2019.
ItemITEM 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. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal control over financial reporting of a recently acquired business may be omitted from management’s evaluation of disclosure controls and procedures, management is excluding an assessment of such internal controls of Ingersoll Rand Industrial from its evaluation of the effectiveness of the Company’s disclosure controls and procedures. The Company acquired Ingersoll Rand Industrial on February 29, 2020. Based on thattheir 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 Overover Financial Reporting: There hasReporting
Except as described below, there have not been any changechanges 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.
53As mentioned above, on February 29, 2020, we completed the acquisition of Ingersoll Rand Industrial. As part of our ongoing integration of Ingersoll Rand Industrial, we continue to incorporate our controls and procedures into the Ingersoll Rand Industrial subsidiaries and to expand our company-wide controls to reflect the risks inherent in an acquisition of this size and complexity.
PART II. OTHER INFORMATION
ItemPART II. | OTHER INFORMATION |
The information set forth in Note 1415 “Contingencies” to our Condensed Consolidated Financial Statements under Part I Item 1 “Financial Statements,” is incorporated herein by reference.
AsExcept as set forth in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, as of
SeptemberJune 30,
2017,2020, there have been no material changes to our risk factors included in
our annual report on Form 10-K for the
Prospectus.year ended December 31, 2019 (the “Annual Report”).
| Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On May 17, 2017, we completed an initial public offering
The following table contains detail related to the repurchase of our common stock in which we issued and sold 47,495,000 shares of common stock, including 6,195,000 shares of common stock pursuant to the exercise in full of the underwriters’ option to purchase additional shares. The shares sold in the offering were registered under the Securities Act pursuant to our Registration Statement on Form S-1 (File No. 333-216320), which was declared effective by the SEC on May 11, 2017. The common stock is listedbased on the New York Stock Exchange underdate of trade during the symbol “GDI.” The Company’s shares of common stock were sold at an initial offering price of $20.00 per share, which generated net proceeds of approximately $897.7 million to the Company, after deducting underwriting discounts and commissions of approximately $52.2 million. We estimated that we incurred offering expenses of approximately $4.6 million (exclusive of underwriting discounts and commissions). We used the net proceeds from this offering to redeem all $575.0 million aggregate principal amount of our Senior Notes, including applicable redemption premiums, to repay $276.8 million of borrowings under our U.S. dollar-denominated senior secured term loan facility and to pay related fees and expenses.three month period ended June 30, 2020.
| | Total Number of | | | Average Price Paid | | | Total Number of Shares Purchased as Part of Publicly Announced | | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the | |
2020 Second Quarter Months | | Shares Purchased(1) | | | Per Share(2) | | | Plans or Programs (3) | | | Plans or Programs (3) | |
April 1, 2020 - April 30, 2020 | | | - | | | $ | - | | | | - | | | $ | 220,756,556 | |
May 1, 2020 - May 31, 2020 | | | 17,185 | | | $ | 28.94 | | | | - | | | $ | 220,756,556 | |
June 1, 2020 - June 30, 2020 | | | 406 | | | $ | 33.18 | | | | - | | | $ | 220,756,556 | |
Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., KKR Capital Markets LLC and UBS Securities LLC acted as joint bookrunning managers and as representatives of the underwriters in the offering. Piper Jaffray & Co., Deutsche Bank Securities Inc., Robert W. Baird & Co. Incorporated, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC were also bookrunners in the offering. William Blair & Company, L.L.C., Stifel, Nicolaus & Company, Incorporated, HSBC Securities (USA) Inc., Macquarie Capital (USA) Inc., Credit Agricole Securities (USA) Inc. and Mizuho Securities USA LLC acted as co-managers in the offering.
(1) | All of the shares purchased during the three month period ended June 30, 2020 were in connection with net exercises of stock options. |
(2) | The average price paid per share includes brokerage commissions. |
(3) | On August 1, 2018, the Company announced that our Board of Directors had approved a share repurchase program which authorized the repurchase of up to $250.0 million of the Company’s outstanding common stock over the next two years, effective August 1, 2018 until and including July 31, 2020. For a further description of the share repurchase program, see Note 24 ‘‘Share Repurchase Program’’ to our consolidated financial statements in the annual report on Form 10-K for the fiscal year ended December 31, 2019. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
ITEM 4. | MINE SAFETY DISCLOSURES |
Defaults Upon Senior Securities |
None.
Not applicable.
| Other InformationOTHER INFORMATION |
Exhibits |
The following is a list of all exhibits filed or furnished as part of this report: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 |
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| 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). |
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| 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). |
| |
| Joinder Agreement and Amendment No. 26 to the Credit Agreement, dated as of August 17, 2017,June 29, 2020, among Gardner Denver Holdings,Ingersoll Rand Inc., Gardner Denver, Inc., Ingersoll-Rand Services Company, GD German Holdings II GmbH, GD First (UK) Limited, UBS AG, Stamford Branch, as administrative agent,Gardner Denver Holdings Ltd., Citibank, N.A., and the lenders and other parties and lenders party thereto.thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed by the registrant on August 18, 2017 (File no. 001-38095)July 1, 2020). |
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| Transition Agreement, dated June 12, 2020, between Ingersoll Rand Inc. and Emily Weaver. |
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| Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
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| Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
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| 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) |
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| 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) |
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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 |
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101.SCH | Inline XBRL Taxonomy Extension SchemaScheme Document |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101) |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure 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 state of affairs as of the date they were made or at any other time.
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: October 27, 2017August 4, 2020 | GARDNER DENVER HOLDINGS,INGERSOLL RAND INC. |
| | |
| By: | /s/ Mark R. SweeneyMichael J. Scheske | |
| Name: Mark R. SweeneyMichael J. Scheske |
| Vice President and Chief Accounting Officer |
Corporate Controller | (Principal Accounting Officer) |