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OFFON

INGERSOLL RAND INC.

(IR)
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INGERSOLL RAND : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

07/30/2021 | 04:12pm EDT
The following discussion contains management's discussion and analysis of our
financial condition and results of operations and should be read together with
the unaudited condensed consolidated financial statements and the related notes
thereto included elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs and involve numerous risks and uncertainties, including, but not
limited to, those described in the "Risk Factors" section of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020. Actual results may
differ materially from those contained in any forward-looking statements. You
should carefully read "Special Note Regarding Forward-Looking Statements" in
this Quarterly Report on Form 10-Q.
Overview
Our Company
We are a leading global provider of mission-critical flow creation technologies
and associated aftermarket parts, consumables and services, which we sell across
multiple attractive end-markets. We manufacture one of the broadest and most
complete ranges of compressor, pump, vacuum and blower products in our markets,
which, when combined with our global geographic footprint and application
expertise, allows us to provide differentiated product and service offerings to
our customers. Our products are sold under a collection of premier,
market-leading brands, including Ingersoll Rand, Gardner Denver, CompAir, Nash,
Elmo Rietschle, Robuschi, Thomas, Milton Roy, ARO, Emco Wheaton and Runtech
Systems, which we believe are globally recognized in their respective
end-markets and known for product quality, reliability, efficiency and superior
customer service.
Recent Developments
Sale of Majority Interest in HPS Business
On February 14, 2021, the Company entered into an agreement to sell a majority
interest in its High Pressure Solutions ("HPS") business to private equity firm
American Industrial Partners. In exchange for its majority interest of 55%, the
Company received cash of $278.3 million at closing and retains a 45% common
equity interest in the newly-formed entity comprising the HPS business. This
transaction substantially closed on April 1, 2021. The sale of the majority
interest in the HPS business significantly reduces our direct exposure to the
upstream oil and gas market.
The historical financial results of the HPS Segment are reflected in our
unaudited condensed consolidated financial statements as discontinued
operations. Refer to Note 2 "  Discontinued Operations  " to our unaudited
condensed consolidated financial statements for additional discussion of the
sale of the HPS segment.
Sale of Special Vehicle Technologies Segment
On April 9, 2021, the Company entered into an agreement to sell its Specialty
Vehicle Technologies segment ("SVT" or "Club Car") to private equity firm
Platinum Equity Advisors, LLC for an aggregate purchase price of $1.68 billion.
This transaction substantially closed on June 1, 2021.
The historical financial results of the SVT Segment are reflected in our
unaudited condensed consolidated financial statements as discontinued
operations. Refer to Note 2 "  Discontinued Operations  " to our unaudited
condensed consolidated financial statements for additional discussion of the SVT
divestiture.
Recent and Pending Acquisitions
On June 19, 2021, the Company entered into an agreement to acquire Seepex GmbH,
a global leader in progressive cavity (positive displacement) pump technology,
for €431.5 million. This transaction is expected to close in Q3 2021, subject to
regulatory approvals and customary closing conditions.
On June 25, 2021, the Company entered into an agreement to acquire Maximus
Solutions, a provider of digital controls and Industrial Internet of Things
(IIoT) production management systems for the agritech software and controls
market, for C$135.4 million. This transaction closed on July 30, 2021. Refer to
Note 20 "  Subsequent Event  " to our unaudited condensed consolidated financial
statements for additional discussion of this acquisition.
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Our Segments
Effective upon the presentation of the HPS business as discontinued operations,
the Company began operating with three reportable segments and effective upon
the presentation of the SVT business as discontinued operations, the Company
began operating with two 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, beginning in the three month period ended June 30, 2021, we report
utilizing the two reportable segments of Industrial Technologies and Services
and Precision and Science Technologies. Our Chief Operating Decision Maker
regularly reviews financial information to allocate resources and assess
performance utilizing these reorganized segments. See Note 6 "Goodwill and Other
Intangible Assets" for the allocation of goodwill to the remaining reportable
segments. See Note 17 "Segment Results" for a description of the remaining
reportable segments.
Industrial Technologies and Services
We design, manufacture, market and service a broad range of air and gas
compression, vacuum and blower products, fluid transfer equipment, loading
systems, power tools and lifting equipment, including associated aftermarket
parts, consumables and services. We primarily sell under the Ingersoll Rand,
Gardner Denver, CompAir, Elmo Rietschle, Robuschi, Nash, Emco Wheaton and
Runtech Systems brands. Our customers deploy our products across a wide array of
technologies and applications for use in diverse end-markets. Compressors are
used to increase the pressure of air or gas, vacuum products are used to remove
air or gas in order to reduce the pressure below atmospheric levels, and blower
products are used to produce a high volume of air or gas at low pressure. Almost
every manufacturing and industrial facility, and many service and process
industry applications, use air compression, vacuum and blower products in a
variety of process-critical applications such as the operation of pneumatic
tools, pumps and motion control components, air and gas separation, vacuum
packaging of food products and aeration of waste water, among others. Our liquid
ring vacuum pumps and compressors are used in many power generation, mining, oil
and gas refining and processing, chemical processing and general industrial
applications including flare gas and vapor recovery, geothermal gas removal,
vacuum de-aeration, water extraction in mining and paper and chlorine
compression in petrochemical operations. Our engineered loading systems and
fluid transfer equipment ensure the safe handling and transfer of crude oil,
liquefied natural gas, compressed natural gas, chemicals, and bulk materials.
Our power tools and lifting equipment portfolio includes electric and cordless
fastening systems, pneumatic bolting tools, drilling and material removal tools,
hoists, winches and ergonomic handling devices. Typical applications for these
products include the precision fastening of bolted joints in the production,
assembly and servicing of industrial machinery, on-highway and off-highway
vehicles, aircraft, electronics and other equipment.
Our compression products cover the full range of technologies, including rotary
screw, reciprocating piston, scroll, rotary vane and centrifugal compressors.
Our vacuum products and blowers also cover the full technology spectrum; vacuum
technologies include side channel, liquid ring, claw vacuum, screw, turbo and
rotary vane vacuum pumps among others, while blower technologies include rotary
lobe blowers, screw, claw and vane, side channel and radial blowers. Our liquid
ring vacuum pumps and compressors are highly engineered products specifically
designed for continuous duty in harsh environments to serve a wide range of
applications, including oil and gas refining and processing, mining, chemical
processing and industrial applications. In addition to our vacuum and blower
technology, our engineered fluid loading and transfer equipment and systems
ensure the safe and efficient transportation and transfer of petroleum products
as well as certain other liquid commodity products in a wide range of
industries.
We complement these products with a broad portfolio of service options tailored
to customer needs and a complete range of aftermarket parts, air treatment
equipment, controls and other accessories delivered through our global network
of manufacturing and service locations and distributor partners. The breadth and
depth of our product offering creates incremental business opportunities by
allowing us to cross-sell our full product portfolio and uniquely address
customers' needs in one complete solution.
We sell our products through an integrated network of direct sales
representatives and independent distributors, which is strategically tailored to
meet the dynamics of each target geography or end-market. Our large installed
base also provides for a significant stream of recurring aftermarket revenue.
For example, the useful life of a compressor is, on average, between 10 and 12
years. However, a customer typically services the compressor at regular
intervals, starting within the first two years of purchase and continuing
throughout the life of the product. The cumulative aftermarket revenue generated
by a compressor over the product's life cycle will typically exceed its original
sale price.
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Precision and Science Technologies
We design, manufacture and market a broad range of highly-specialized positive
displacement pumps, fluid management systems and aftermarket parts that provide
liquid and gas dosing, transfer, dispensing, compression, sampling, pressure
management and flow control in specialized or critical applications. Our product
offering covers a range of pump and flow control technologies, including
mechanically- and hydraulically-actuated diaphragm pumps, air-operated diaphragm
and piston pumps, water-powered pumps, peristaltic pumps, gear pumps, flexible
impeller pumps, self-priming centrifugal pumps, syringe pumps, motion control
components, filtration/regulation/lubrication components, gas boosters, high
pressure valves, hydrogen compression systems, liquid and gas sampling systems,
odorant injection systems and more. These offerings are sold under brands that
are highly recognized in their end markets including ARO, Dosatron, Haskel,
Milton Roy, Oberdorfer, Thomas and Welch. Our customer base is composed of a
wide range of end users in markets including medical, laboratory, industrial
manufacturing, water and waste water, chemical processing, energy, food and
beverage, agriculture and others. Our sales are realized primarily through a
combination of independent specialty and national distributors and relationships
directly with original equipment manufacturers ("OEM").
Components of Our Revenue and Expenses
Revenues
We generate revenue from sales of original equipment and associated aftermarket
parts, consumables and services. We sell our products and deliver services both
directly to end-users and through independent distribution channels, depending
on the product line and geography. Revenue derived from short duration contracts
is recognized at a single point in time when control is transferred to the
customer, generally at shipment or when delivery has occurred or as services are
performed. Certain contracts involve significant design engineering to customer
specifications, and depending upon the contractual terms, revenue is recognized
either over the duration of the contract or at contract completion when
equipment is delivered to the customer.
Expenses
Cost of Sales
Cost of sales includes the costs we incur, including purchased materials, labor
and overhead related to manufactured products and aftermarket parts sold during
a period. Depreciation related to manufacturing equipment and facilities is
included in cost of sales. Purchased materials represent the majority of costs
of sales, with steel, aluminum, copper and partially finished castings
representing our most significant material inputs. Stock-based compensation
expense for employees associated with the manufacture of products or delivery of
services to customers is included in cost of sales. We have instituted a global
sourcing strategy to take advantage of coordinated purchasing opportunities of
key materials across our manufacturing plant locations.
Cost of sales for services includes the direct costs we incur, including direct
labor, parts and other overhead costs including depreciation of equipment and
facilities, to deliver repair, maintenance and other field services to our
customers.
Selling and Administrative Expenses
Selling and administrative expenses consist of (i) salaries and other
employee-related expenses for our selling and administrative functions and other
activities not associated with the manufacture of products or delivery of
services to customers; (ii) facility operating expenses for selling and
administrative activities, including office rent, maintenance, depreciation and
insurance; (iii) marketing and direct costs of selling products and services to
customers including internal and external sales commissions; (iv) research and
development expenditures; (v) professional and consultant fees; (vi) expenses
related to our public stock offerings and to establish public company reporting
compliance; (vii) employee related stock-based compensation for our selling and
administrative functions and other activities not associated with the
manufacture of products or delivery of services to customers; and (viii) other
miscellaneous expenses. Certain corporate expenses, including those related to
our shared service centers in the United States and Europe, that directly
benefit our businesses are allocated to our business segments. Certain corporate
administrative expenses, including corporate executive compensation, treasury,
certain information technology, internal audit and tax compliance, are not
allocated to the business segments.
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Amortization of Intangible Assets
Amortization of intangible assets includes the periodic amortization of
intangible assets including customer relationships, tradenames, developed
technology, backlog and internally developed software.
Other Operating Expense, Net
Other operating expense, net includes foreign currency transaction gains and
losses, net, restructuring charges, certain shareholder litigation settlement
recoveries, acquisition and other transaction related expenses and non-cash
charges, losses and gains on asset disposals and other miscellaneous operating
expenses.
Provision for Income Taxes
The provision for income taxes includes U.S. federal, state and local income
taxes and all non-U.S. income taxes. We are subject to income tax in
approximately 46 jurisdictions outside of the United States. Because we conduct
operations on a global basis, our effective tax rate depends, and will continue
to depend, on the geographic distribution of our pre-tax earnings among several
different taxing jurisdictions. Our effective tax rate can also vary based on
changes in the tax rates of the different jurisdictions, the availability of tax
credits and non-deductible items.
Items Affecting our Reported Results
General Economic Conditions and Capital Spending in the Industries We Serve
Our financial results closely follow changes in the industries and end-markets
we serve. Demand for most of our products depends on the level of new capital
investment and planned and unplanned maintenance expenditures by our customers.
The level of capital expenditures depends, in turn, on the general economic
conditions as well as access to capital at reasonable cost. In particular,
demand for our Industrial Technologies and Services products generally
correlates with the rate of total industrial capacity utilization and the rate
of change of industrial production. Capacity utilization rates above 80% have
historically indicated a strong demand environment for industrial equipment. In
the midstream and downstream portions of our Industrial Technologies and
Services segment, overall economic growth and industrial production, as well as
secular trends, impact demand for our products. In our Precision and Science
Technologies segment we expect demand for our products to be driven by favorable
trends, including the growth in healthcare spend and expansion of healthcare
systems due to an aging population requiring medical care and increased
investment in health solutions and safety infrastructures in emerging economies.
Over longer time periods, we believe that demand for all of our products also
tends to follow economic growth patterns indicated by the rates of change in the
GDP around the world, as augmented by secular trends in each segment. Our
ability to grow and our financial performance will also be affected by our
ability to address a variety of challenges and opportunities that are a
consequence of our global operations, including efficiently utilizing our global
sales, manufacturing and distribution capabilities and engineering innovative
new product applications for end-users in a variety of geographic markets.
Foreign Currency Fluctuations
A significant portion of our revenues, approximately 58% for the six month
period ended June 30, 2021, was denominated in currencies other than the U.S.
dollar. Because much of our manufacturing facilities and labor force costs are
outside of the United States, a significant portion of our costs are also
denominated in currencies other than the U.S. dollar. Changes in foreign
exchange rates can therefore impact our results of operations and are quantified
when significant to our discussion.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations are not
comparable from period to period and may not be comparable to our financial
results of operations in future periods. Key factors affecting the comparability
of our results of operations are summarized below.
Acquisition of Ingersoll Rand Industrial
On February 29, 2020, we completed the acquisition of Ingersoll Rand Industrial.
We reorganized our reportable segments as a result of the Ingersoll Rand
Industrial acquisition and formed four new reportable segments.
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•Industrial Technologies and Services segment - Ingersoll Rand Industrial's
Compression Technologies and Services ("CTS") and Power Tools and Lift ("PTL")
businesses joined the legacy Gardner Denver Industrial segment (excluding the
Specialty Pump businesses) and the midstream and downstream portions of the
Gardner Denver Energy segment to form the new "Industrial Technologies and
Services" segment.
•Precision and Science Technologies segment - Ingersoll Rand Industrial's
Precision Flow Systems ("PFS") and ARO businesses joined the legacy Gardner
Denver Medical segment and Specialty Pump businesses from the legacy Gardner
Denver Industrial segment to form the new "Precision and Science Technologies"
segment.
•Specialty Vehicle Technologies segment - Ingersoll Rand Industrial's Club Car
golf, utility and consumer low-speed vehicles business formed the new "Specialty
Vehicle Technologies" segment. On April 9, 2021, we entered into an agreement to
sell the Specialty Vehicle Technologies segment. For additional information, see
"-Recent Developments" above and refer to Note 2 "  Discontinued Operations  "
for discussion on the sale of the Specialty Vehicle Technologies segment that
closed on June 1, 2021.
•High Pressure Solutions segment - The upstream energy portion of the legacy
Gardner Denver Energy segment was disaggregated to form the new "High Pressure
Solutions" segment. For additional information, see "-Recent Developments" above
and refer to Note 2 "  Discontinued Operations  " for discussion on the sale of
the High Pressure Solutions segment that closed on April 1, 2021.
Ingersoll Rand Industrial is included in our results of operations beginning on
the acquisition date (close of business February 29, 2020). Comparability
between the six month periods ended June 30, 2021 and 2020 will be affected by
two months of activity from Ingersoll Rand Industrial.
See Note 3 "  Business Combinations  " to our unaudited condensed consolidated
financial statements included elsewhere in this Form 10-Q for further discussion
of the acquisition of Ingersoll Rand Industrial.
Impact of Coronavirus (COVID-19)
We continue to assess and actively manage the impact of the ongoing COVID-19
pandemic on our global operations and also the operations of our suppliers and
customers. Demand for our products was negatively impacted throughout the
majority of 2020 as a result of the pandemic. Demand began to improve in the
fourth quarter of 2020 and accelerated in the first half of 2021 as markets
strengthened and gained greater visibility to vaccine roll-out strategies in
various regions. Order rates in the first half of 2021 were particularly strong
and we believe represents some deferred demand from 2020. In order to position
ourselves to fulfill demand we continue to monitor the supply chain closely and
are taking proactive steps to ensure continuity of supply. We are adhering to
all state and country mandates and guidelines wherever we operate. Currently all
our major manufacturing locations in the United States, United Kingdom, Germany,
Italy, Brazil and China are operational. We have taken certain actions to reduce
costs and preserve cash given the uncertain environment. The degree to which the
pandemic will continue to impact our operations, and the operations of our
customers and suppliers remains uncertain. See "The COVID-19 pandemic has
adversely affected our business and results of operations, and could have a
material and adverse effect on our business, results of operations and financial
condition in the future" in Part I Item 1A. "Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2020.
Restructuring and Other Business Transformation Initiatives
Subsequent to the acquisition of Ingersoll Rand Industrial, we announced a
restructuring program ("2020 Plan") to drive efficiencies and synergies, reduce
the number of facilities and optimize operating margins within our merged
Company. We expect total expenses of approximately $350.0 million related to
workforce reductions, lease termination costs, other facility rationalization
costs and other business related transformation costs from 2020 until 2022. We
expect to realize approximately $300.0 million in annualized cost synergies by
the end of 2022. We continue to evaluate operating efficiencies and anticipate
incurring additional costs in the coming years in connection with these
activities, but we are unable to estimate those amounts at this time as such
plans are not yet finalized.
For the three month period ended June 30, 2021, expense of $6.8 million was
recognized within "Other operating expense, net" in the Condensed Consolidated
Statements of Operations ($2.5 million for Industrial Technologies and
Services, $(0.2) million for Precision and Science Technologies and $4.5
million for Corporate). For the six month period ended June 30, 2021, expense of
$9.2 million was recognized within "Other operating expense, net" in the
Condensed Consolidated Statements of Operations ($4.2 million for Industrial
Technologies and Services, $0.1 million for Precision and Science Technologies
and $4.9 million for Corporate). Through June 30, 2021, we recognized expense
related to the 2020 Plan of $74.5 million, $7.0 million, and $10.9 million for
Industrial Technologies and Services, Precision and Science Technologies, and
Corporate, respectively.
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Outlook
Industrial Technologies and Services Segment
The mission-critical nature of our products across manufacturing processes
drives a demand environment and outlook that are correlated with global and
regional industrial production, capacity utilization and long-term GDP growth.
Economic conditions remain uncertain with regard to COVID-19, and its impact on
end markets, however, recent order rates have begun to improve as markets
strengthened and gained greater visibility to vaccine roll-out strategies in
various regions. In the second quarter of 2021, we had $1,204.0 million of
orders in our Industrial Technologies and Services segment, an increase of 52.8%
over the second quarter of 2020.
Precision and Science Technologies Segment
During the COVID-19 pandemic, the Precision and Science Technologies segment has
seen increased demand for our vacuum pump and compressor solutions used in
respirator and ventilator applications. Demand of other products and services
which had been negatively impacted in 2020 have begun to recover in 2021 as
markets strengthened and gained greater visibility to vaccine roll-out
strategies in various regions. In the second quarter of 2021, we had $255.2
million of orders in our Precision and Science Technologies segment, an increase
of 26.8% over 2020.
How We Assess the Performance of Our Business
We manage operations through the two business segments described above. In
addition to our consolidated GAAP financial measures, we review various non-GAAP
financial measures, including Adjusted EBITDA, Adjusted Net Income and Free Cash
Flow.
We believe Adjusted EBITDA and Adjusted Net Income are helpful supplemental
measures to assist us and investors in evaluating our operating results as they
exclude certain items whose fluctuation from period to period do not necessarily
correspond to changes in the operations of our business. Adjusted EBITDA
represents net income (loss) before interest, taxes, depreciation, amortization
and certain non-cash, non-recurring and other adjustment items. We believe that
the adjustments applied in presenting Adjusted EBITDA are appropriate to provide
additional information to investors about certain material non-cash items and
about non-recurring items that we do not expect to continue at the same level in
the future. Adjusted Net Income is defined as net income (loss) including
interest, depreciation and amortization of non-acquisition related intangible
assets and excluding other items used to calculate Adjusted EBITDA and further
adjusted for the tax effect of these exclusions.
We use Free Cash Flow to review the liquidity of our operations. We measure Free
Cash Flow as cash flows from operating activities less capital expenditures. We
believe Free Cash Flow is a useful supplemental financial measure for us and
investors in assessing our ability to pursue business opportunities and
investments and to service our debt. Free Cash Flow is not a measure of our
liquidity under GAAP and should not be considered as an alternative to cash
flows from operating activities.
Management and our board of directors regularly use these measures as tools in
evaluating our operating and financial performance and in establishing
discretionary annual compensation. Such measures are provided in addition to,
and should not be considered to be a substitute for, or superior to, the
comparable measures under GAAP. In addition, we believe that Adjusted EBITDA,
Adjusted Net Income and Free Cash Flow are frequently used by investors and
other interested parties in the evaluation of issuers, many of which also
present Adjusted EBITDA, Adjusted Net Income and Free Cash Flow when reporting
their results in an effort to facilitate an understanding of their operating and
financial results and liquidity.
Adjusted EBITDA, Adjusted Net Income and Free Cash Flow should not be considered
as alternatives to net income (loss) or any other performance measure derived in
accordance with GAAP, or as alternatives to cash flow from operating activities
as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income and Free
Cash Flow have limitations as analytical tools, and you should not consider such
measures either in isolation or as substitutes for analyzing our results as
reported under GAAP.
See "Non-GAAP Financial Measures" below for reconciliation information.
Results of Continuing Operations
Consolidated results should be read in conjunction with the segment results
section herein and Note 17 "  Segment Results  " to our unaudited condensed
consolidated financial statements included elsewhere in this Form 10-Q, which
provides more detailed
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discussions concerning certain components of our Condensed Consolidated
Statements of Operations. All intercompany accounts and transactions have been
eliminated within the consolidated results.
The following table presents selected Consolidated Results of Operations of our
business for the three and six month periods ended June 30, 2021 and 2020.

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