filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Overview
Our Company
We are a leading global provider of mission-critical flow creation technologies and associated aftermarket parts, consumables and services, which we sell across multiple attractive end-markets. We manufacture one of the broadest and most complete ranges of compressor, pump, vacuum and blower products in our markets, which, when combined with our global geographic footprint and application expertise, allows us to provide differentiated product and service offerings to our customers. Our products are sold under a collection of premier, market-leading brands, including Ingersoll Rand, Gardner Denver, 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
Recent and Pending Acquisitions
On July 30, 2021, the Company acquired Maximus Solutions for cash consideration of $110.5 million. The business is a provider of digital controls and Industrial Internet of Things (IIoT) production management systems for the agritech software and controls market.
On August 31, 2021, the Company acquired Seepex GmbH (“Seepex”) for cash consideration of $481.5 million, net of cash acquired. The business is a global leader in progressive cavity pump solutions.
On October 29, 2021, the Company acquired Air Dimensions Inc. for a base purchase price of $70.5 million. The business is a manufacturer of vacuum diaphragm (positive displacement) pumps for environmental applications. Air Dimensions Inc. will be reported within the Precision and Science Technologies segment.
On November 2, 2021, the Company entered into an agreement to acquire Tuthill Pumps, a division of Tuthill Corporation, for $84.6 million. The business is a manufacturer of gear and piston (positive displacement) pumps that primarily serve the chemical, food and beverage, and wastewater markets. This transaction is expected to close in the fourth quarter of 2021, subject to regulatory approvals and customary closing conditions. Upon closing, Tuthill Pumps will be reported within the Precision and Science Technologies segment.
Our Segments
As a result of the HPS and SVT transactions described in Note 2 “Discontinued Operations” to our unaudited condensed consolidated financial statements, the Company now operates with two reportable segments: Industrial Technologies and Services and Precision and Science Technologies. See Note 17 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q 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.
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, Seepex, Thomas, Welch and YZ. 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 North America 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 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 47 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 59% for the nine month period ended September 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. Ingersoll Rand Industrial is included in our results of operations beginning on the acquisition date (close of business February 29, 2020). Comparability between the nine month periods ended September 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 monitor the spread of COVID-19 and its variants and manage the impacts of the pandemic on our global business and our stakeholders. 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. Order rates remained strong during the third quarter of 2021.
Market conditions related to the pandemic and the subsequent economic improvements have contributed to challenges in our global supply chain. Inflationary conditions have negatively impacted the costs we pay for raw materials, labor and logistics. We have also experienced a higher-than-normal rate of delays and shortages in a wide variety of commodities and components we purchase from suppliers. We continue to mitigate these supply chain pressures through various means, including by implementing price increases for our products and services and through increased coordination with suppliers to ensure availability of raw materials. However, we expect these supply chain conditions to continue in the near term.
We are adhering to all state and country mandates and guidelines wherever we operate. All of our major manufacturing locations are currently operational. The degree to which the pandemic and the related market conditions will continue to impact our business is 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 September 30, 2021, expense of $1.1 million was recognized within “Other operating expense, net” in the Condensed Consolidated Statements of Operations ($1.0 million for Industrial Technologies and Services and $0.1 million for Corporate). For the nine month period ended September 30, 2021, expense of $10.3 million was recognized within
“Other operating expense, net” in the Condensed Consolidated Statements of Operations ($5.2 million for Industrial Technologies and Services, $0.1 million for Precision and Science Technologies and $5.0 million for Corporate). Through September 30, 2021, we recognized expense related to the 2020 Plan of $75.5 million, $7.0 million, and $11.0 million for Industrial Technologies and Services, Precision and Science Technologies, and Corporate, respectively.
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 improved as markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions. In the third quarter of 2021, we had $1,231.3 million of orders in our Industrial Technologies and Services segment, an increase of 36.5% over the third 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 third quarter of 2021, we had $266.3 million of orders in our Precision and Science Technologies segment, an increase of 37.0% over the third quarter of 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 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 nine month periods ended September 30, 2021 and 2020.
| For the Three Month Period Ended September 30, | For the Nine Month Period Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Condensed Consolidated Statement of Operations: | |||||||||||||||||||||||
| Revenues | $ | 1,325.0 | $ | 1,112.5 | $ | 3,733.6 | $ | 2,754.7 | |||||||||||||||
| Cost of sales | 810.7 | 682.5 | 2,254.5 | 1,812.8 | |||||||||||||||||||
| Gross profit | 514.3 | 430.0 | 1,479.1 | 941.9 | |||||||||||||||||||
| Selling and administrative expenses | 252.6 | 218.6 | 772.1 | 567.1 | |||||||||||||||||||
| Amortization of intangible assets | 80.3 | 97.0 | 244.8 | 240.1 | |||||||||||||||||||
| Impairment of intangible assets | — | 19.9 | — | 19.9 | |||||||||||||||||||
| Other operating expense, net | 17.5 | 25.5 | 36.9 | 170.1 | |||||||||||||||||||
| Operating income (loss) | 163.9 | 69.0 | 425.3 | (55.3) | |||||||||||||||||||
| Interest expense | 22.5 | 28.8 | 68.3 | 86.7 | |||||||||||||||||||
| Loss on extinguishment of debt | 9.0 | — | 9.0 | 2.0 | |||||||||||||||||||
| Other income, net | (3.5) | (2.6) | (40.1) | (5.1) | |||||||||||||||||||
| Income (loss) before income taxes | 135.9 | 42.8 | 388.1 | (138.9) | |||||||||||||||||||
| Provision for income taxes | 2.7 | 12.8 | 25.8 | 24.3 | |||||||||||||||||||
| Loss on equity method investments | (2.2) | — | (2.9) | — | |||||||||||||||||||
| Income (Loss) from Continuing Operations | 131.0 | 30.0 | 359.4 | (163.2) | |||||||||||||||||||
| Loss from discontinued operations, net of tax | (4.2) | (0.1) | (88.1) | (20.3) | |||||||||||||||||||
| Net income (loss) | 126.8 | 29.9 | 271.3 | (183.5) | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 0.8 | 0.4 | 1.8 | 1.4 | |||||||||||||||||||
| Net income (loss) attributable to Ingersoll Rand Inc. | $ | 126.0 | $ | 29.5 | $ | 269.5 | $ | (184.9) | |||||||||||||||
| Percentage of Revenues: | |||||||||||||||||||||||
| Gross profit | 38.8 | % | 38.7 | % | 39.6 | % | 34.2 | % | |||||||||||||||
| Selling and administrative expenses | 19.1 | % | 19.6 | % | 20.7 | % | 20.6 | % | |||||||||||||||
| Operating income (loss) | 12.4 | % | 6.2 | % | 11.4 | % | (2.0) | % | |||||||||||||||
| Income (loss) from continuing operations | 9.9 | % | 2.7 | % | 9.6 | % | (5.9) | % | |||||||||||||||
| Adjusted EBITDA | 23.7 | % | 22.6 | % | 22.8 | % | 21.1 | % | |||||||||||||||
| Other Financial Data: | |||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 313.7 | $ | 251.7 | $ | 849.8 | 581.4 | ||||||||||||||||
| Adjusted Net Income (1) | 238.6 | 152.3 | 601.4 | 330.1 | |||||||||||||||||||
| Cash flows - operating activities | 146.1 | 193.9 | 380.9 | 390.2 | |||||||||||||||||||
| Cash flows - investing activities | (608.8) | (38.2) | (841.0) | (18.2) | |||||||||||||||||||
| Cash flows - financing activities | (1,132.1) | (19.0) | (1,142.2) | 317.9 | |||||||||||||||||||
| Free Cash Flow (1) | 130.8 | 187.5 | 339.7 | 361.1 |
(1)See the “Non-GAAP Financial Measures” section for a reconciliation to comparable GAAP measure.
Revenues
Revenues for the three month period ended September 30, 2021 were $1,325.0 million, an increase of $212.5 million, or 19.1%, compared to $1,112.5 million for the same three month period in 2020. The increase in revenues was primarily due to higher organic volumes of $108.3 million, higher pricing of $40.8 million, acquisitions of $39.9 million and favorable impact of foreign currencies of $23.5 million. Organic volume growth included the adverse impact of COVID-19 in the three month period ended September 30, 2020. The percentage of consolidated revenues derived from aftermarket parts and services was 36.0% in the three month period ended September 30, 2021 compared to 36.4% in the same three month period in 2020.
Revenues for the nine month period ended September 30, 2021 were $3,733.6 million, an increase of $978.9 million, or 35.5%, compared to $2,754.7 million for the same nine month period in 2020. The increase in revenues was primarily due to acquisitions of $461.2 million, higher organic volumes of $314.9 million, favorable impact of foreign currencies of $115.9 million and higher pricing of $86.9 million. Organic volume growth included the adverse impact of COVID-19 in the nine month period ended September 30, 2020. The percentage of consolidated revenues derived from aftermarket parts and services was 36.3% in the nine month period ended September 30, 2021 compared to 35.3% in the same nine month period in 2020.
Gross Profit
Gross profit for the three month period ended September 30, 2021 was $514.3 million, an increase of $84.3 million, or 19.6%, compared to $430.0 million for the same three month period in 2020, and as a percentage of revenues was 38.8% for the three month period ended September 30, 2021 and 38.7% for the same three month period in 2020. The increase in gross profit is primarily due to higher organic volumes and higher pricing discussed above.
Gross profit for the nine month period ended September 30, 2021 was $1,479.1 million, an increase of $537.2 million, or 57.0%, compared to $941.9 million for the same nine month period in 2020, and as a percentage of revenues was 39.6% for the nine month period ended September 30, 2021 and 34.2% for the same nine month period in 2020. The increase in gross profit is primarily due to acquisitions, including Ingersoll Rand Industrial, and the runoff of the fair valuation adjustments related to purchase price allocation from inventory into cost of sales in the 2020 period that did not recur in the 2021 period. The increase in gross profit as a percentage of revenues is primarily due to the runoff of the fair valuation adjustments related to purchase price allocation from inventory into cost of sales in the 2020 period that did not recur in the 2021 period.
Selling and Administrative Expenses
Selling and administrative expenses were $252.6 million for the three month period ended September 30, 2021, an increase of $34.0 million, or 15.6%, compared to $218.6 million for the same three month period in 2020. Selling and administrative expenses as a percentage of revenues decreased to 19.1% for the three month period ended September 30, 2021 from 19.6% in the same three month period in 2020. The increase in selling and administrative expenses is primarily due to increased incentive compensation.
Selling and administrative expenses were $772.1 million for the nine month period ended September 30, 2021, an increase of $205.0 million, or 36.1%, compared to $567.1 million for the same nine month period in 2020. Selling and administrative expenses as a percentage of revenues increased to 20.7% for the nine month period ended September 30, 2021 from 20.6% in the same nine month period in 2020. The increase in selling and administrative expenses is primarily due to acquisitions, including Ingersoll Rand Industrial and increased incentive compensation.
Amortization of Intangible Assets
Amortization of intangible assets was $80.3 million for the three month period ended September 30, 2021, a decrease of $16.7 million, compared to $97.0 million in the same three month period in 2020. The decrease was primarily due to certain intangible assets, primarily backlog, related to the acquisition of Ingersoll Rand Industrial becoming fully amortized during the second quarter of 2021.
Amortization of intangible assets was $244.8 million for the nine month period ended September 30, 2021, an increase of $4.7 million, compared to $240.1 million in the same nine month period in 2020. The increase was primarily due to the amortization of intangible assets related to the acquisition of Ingersoll Rand Industrial, partially offset by certain intangible assets, primarily backlog, also related to the acquisition of Ingersoll Rand Industrial becoming fully amortized during the period.
Other Operating Expense, Net
Other operating expense, net was $17.5 million for the three month period ended September 30, 2021, a decrease of $8.0 million, compared to $25.5 million in the same three month period in 2020. The decrease was primarily due to lower restructuring charges
of $8.9 million and lower foreign currency transaction losses, net of $4.7 million, partially offset by higher acquisition and other transaction related expenses and non-cash charges of $5.0 million.
Other operating expense, net was $36.9 million for the nine month period ended September 30, 2021, a decrease of $133.2 million, compared to $170.1 million in the same nine month period in 2020. The decrease was primarily due to lower restructuring charges of $67.1 million, lower acquisition and other transaction related expenses and non-cash charges of $39.2 million, and higher foreign currency transaction gains, net of $26.3 million.
Interest Expense
Interest expense was $22.5 million for the three month period ended September 30, 2021, a decrease of $6.3 million, compared to $28.8 million in the same three month period in 2020. The decrease was primarily due to a decrease in the weighted-average interest rate. The weighted average interest rate was approximately 2.0% for the three month period ended September 30, 2021 and 2.8% in the same period in 2020.
Interest expense was $68.3 million for the nine month period ended September 30, 2021, a decrease of $18.4 million, compared to $86.7 million in the same nine month period in 2020. The decrease was primarily due to the weighted average interest rate decreasing to approximately 2.0% for the nine month period ended September 30, 2021 when compared to 3.8% in the same period in 2020.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $9.0 million for the three and nine month periods ended September 30, 2021, which was related to the payoff of the Dollar Term Loan Series A.
Loss on extinguishment of debt was $2.0 million for the nine month period ended September 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 $3.5 million and $2.6 million in the three month periods ended September 30, 2021 and 2020, respectively. The increase was primarily due to a gain on benefit plan settlement.
Other income, net was $40.1 million and $5.1 million in the nine month periods ended September 30, 2021 and 2020, respectively. The increase was primarily due to a gain on post close settlements.
Provision for Income Taxes
The provision for income taxes was $2.7 million resulting in a 2.0% effective income tax provision rate for the three month period ended September 30, 2021, compared to a provision for income taxes of $12.8 million resulting in a 29.9% effective income tax provision rate in the same three month period in 2020. The decrease in the tax provision for the three month period ended September 30, 2021 is primarily due to the benefits associated with the windfall tax deduction and foreign tax credits recognized during this quarter of 2021.
The provision for income taxes was $25.8 million resulting in a 6.6% effective income tax provision rate for the nine month period ended September 30, 2021, compared to a provision for income taxes of $24.3 million resulting in a (17.5)% effective income tax provision rate in the same nine month period in 2020. The increase in the tax provision for the nine month period ended September 30, 2021 is primarily due to an increase in the pretax book income in jurisdictions with higher effective tax rates combined with decreased earnings in jurisdictions with lower tax rates. This rate increase was mitigated by the windfall tax deduction and foreign tax credits recognized during this quarter of 2021.
Net Income (Loss)
Net income was $126.8 million for the three month period ended September 30, 2021 compared to net income of $29.9 million in the same three month period in 2020. The increase in net income was primarily due to higher gross profit on increased revenues, lower amortization of intangible assets, lower provision for income taxes, decreased other operating expenses, net and lower interest expense, partially offset by higher selling and administrative expenses and loss on extinguishment of debt.
Net income was $271.3 million for the nine month period ended September 30, 2021 compared to net loss of $183.5 million in the same nine month period in 2020. The change in net income (loss) was primarily due to higher gross profit on increased revenues, decreased other operating expenses, net, increased other income, net, and lower interest expense, partially offset by higher selling
and administrative expenses, lower income from discontinued operations (see “―Results of Discontinued Operations” below) and higher loss on extinguishment of debt.
Adjusted EBITDA
Adjusted EBITDA increased $62.0 million to $313.7 million for the three month period ended September 30, 2021 compared to $251.7 million in the same three month period in 2020. Adjusted EBITDA as a percentage of revenues increased 110 basis points to 23.7% for the three month period ended September 30, 2021 from 22.6% for the same three month period in 2020. The increase in Adjusted EBITDA was primarily due to higher organic sales volume of $42.5 million, higher pricing of $40.8 million and favorable impact of foreign currencies of $6.7 million, partially offset by higher selling and administrative expenses of $25.7 million. The increase in Adjusted EBITDA as a percentage of revenues is primarily attributable to higher pricing and productivity related actions implemented subsequent to the acquisition of Ingersoll Rand Industrial including procurement initiatives, Innovate 2 Value (“I2V”) initiatives and structural selling and administrative cost actions, partially offset by higher incentive compensation.
Adjusted EBITDA increased $268.4 million to $849.8 million for the nine month period ended September 30, 2021 compared to $581.4 million in the same nine month period in 2020. Adjusted EBITDA as a percentage of revenues increased 170 basis points to 22.8% for the nine month period ended September 30, 2021 from 21.1% for the same nine month period in 2020. The increase in Adjusted EBITDA was primarily due to acquisitions, including Ingersoll Rand Industrial, of $114.8 million, higher organic sales volume of $122.7 million, higher pricing of $86.9 million and favorable impact of foreign currencies of $30.7 million, partially offset by higher selling and administrative expenses of $77.6 million. The increase in Adjusted EBITDA as a percentage of revenues is primarily attributable to higher pricing, productivity related actions implemented subsequent to the acquisition of Ingersoll Rand Industrial including procurement initiatives, I2V initiatives and structural selling and administrative cost actions, partially offset by higher incentive compensation.
Adjusted Net Income
Adjusted Net Income increased $86.3 million to $238.6 million for the three month period ended September 30, 2021 compared to $152.3 million in the same three month period in 2020. The increase was primarily due to increased Adjusted EBITDA, a lower income tax provision, as adjusted and lower interest expense.
Adjusted Net Income increased $271.3 million to $601.4 million for the nine month period ended September 30, 2021 compared to $330.1 million in the same nine month period in 2020. The increase was primarily due to increased Adjusted EBITDA and lower interest expense, partially offset by higher depreciation expense and higher amortization of non-acquisition related intangible assets.
Non-GAAP Financial Measures
Set forth below are the reconciliations of Net Income (Loss) to Adjusted EBITDA and Adjusted Net Income and Cash Flows from Operating Activities to Free Cash Flow.
| For the Three Month Period Ended September 30, | For the Nine Month Period Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net Income (Loss) | $ | 126.8 | $ | 29.9 | $ | 271.3 | $ | (183.5) | |||||||||||||||
| Less: Income (loss) from discontinued operations | (7.6) | 5.3 | 73.1 | 10.6 | |||||||||||||||||||
| Less: Income tax benefit (provision) from discontinued operations | 3.4 | (5.4) | (161.2) | (30.9) | |||||||||||||||||||
| Income (loss) from continuing operations, net of tax | 131.0 | 30.0 | 359.4 | (163.2) | |||||||||||||||||||
| Plus: | |||||||||||||||||||||||
| Interest expense | 22.5 | 28.8 | 68.3 | 86.7 | |||||||||||||||||||
| Provision for income taxes | 2.7 | 12.8 | 25.8 | 24.3 | |||||||||||||||||||
| Depreciation expense (a) | 21.2 | 19.8 | 62.5 | 54.6 | |||||||||||||||||||
| Amortization expense (b) | 80.3 | 97.0 | 244.8 | 240.1 | |||||||||||||||||||
| Impairment of intangible assets | — | 19.9 | — | 19.9 | |||||||||||||||||||
| Restructuring and related business transformation costs (c) | 3.1 | 10.0 | 12.5 | 79.6 | |||||||||||||||||||
| Acquisition related expenses and non-cash charges (d) | 14.4 | 14.7 | 39.2 | 194.5 | |||||||||||||||||||
| Stock-based compensation (e) | 29.8 | 11.9 | 72.9 | 26.8 | |||||||||||||||||||
| Foreign currency transaction losses (gains), net | 1.1 | 5.8 | (13.6) | 12.7 | |||||||||||||||||||
| Loss on equity method investments | 2.2 | — | 2.9 | — | |||||||||||||||||||
| Loss on extinguishment of debt (f) | 9.0 | — | 9.0 | 2.0 | |||||||||||||||||||
| Gain on settlement of post-acquisition contingencies (g) | — | — | (30.1) | — | |||||||||||||||||||
| Other adjustments (h) | (3.6) | 1.0 | (3.8) | 3.4 | |||||||||||||||||||
| Adjusted EBITDA | $ | 313.7 | $ | 251.7 | $ | 849.8 | $ | 581.4 | |||||||||||||||
| Minus: | |||||||||||||||||||||||
| Interest expense | $ | 22.5 | $ | 28.8 | $ | 68.3 | $ | 86.7 | |||||||||||||||
| Income tax provision, as adjusted (i) | 27.2 | 48.8 | 104.8 | 104.9 | |||||||||||||||||||
| Depreciation expense | 21.2 | 19.8 | 62.5 | 54.6 | |||||||||||||||||||
| Amortization of non-acquisition related intangible assets | 4.2 | 2.0 | 12.8 | 5.1 | |||||||||||||||||||
| Adjusted Income from Continuing Operations, Net of Tax | $ | 238.6 | $ | 152.3 | $ | 601.4 | $ | 330.1 | |||||||||||||||
| Free Cash Flow from Continuing Operations: | |||||||||||||||||||||||
| Cash flows - operating activities | $ | 146.1 | $ | 193.9 | $ | 380.9 | $ | 390.2 | |||||||||||||||
| Minus: | |||||||||||||||||||||||
| Capital expenditures | 15.3 | 6.4 | 41.2 | 29.1 | |||||||||||||||||||
| Free Cash Flow from Continuing Operations | $ | 130.8 | $ | 187.5 | $ | 339.7 | $ | 361.1 |
(a)Depreciation expense excludes $1.0 million and $0.5 million of depreciation of rental equipment for the three month periods ended September 30, 2021 and 2020, respectively, and excludes $3.0 million and $1.4 million for the nine month periods ended September 30, 2021 and 2020.
(b)Represents $76.1 million and $95.0 million of amortization of intangible assets arising from the acquisition of Ingersoll Rand Industrial and other acquisitions (customer relationships, technology, tradenames and backlog) and $4.2 million and $2.0 million of amortization of non-acquisition related intangible assets, in each case for the three month periods ended September 30, 2021 and 2020, respectively.
Represents $232.0 million and $235.0 million of amortization of intangible assets arising from the acquisition of Ingersoll Rand Industrial and other acquisitions (customer relationships, technology, tradenames and backlog) and $12.8 million and $5.1 million of amortization of non-acquisition related intangible assets, in each case for the nine month periods ended September 30, 2021 and 2020, respectively.
(c)Restructuring and related business transformation costs consisted of the following.
| For the Three Month Period Ended September 30, | For the Nine Month Period Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Restructuring charges | $ | 1.1 | $ | 10.0 | $ | 10.3 | $ | 77.4 | |||||||||||||||
| Facility reorganization, relocation and other costs | 2.0 | — | 2.0 | 0.5 | |||||||||||||||||||
| Other, net | — | — | 0.2 | 1.7 | |||||||||||||||||||
| Total restructuring and related business transformation costs | $ | 3.1 | $ | 10.0 | $ | 12.5 | $ | 79.6 |
(d)Represents costs associated with successful and/or abandoned acquisitions and divestitures, including third-party expenses, post-closure integration costs (including certain incentive and non-incentive cash compensation costs), and non-cash charges and credits arising from fair value purchase accounting adjustments.
(e)Represents stock-based compensation expense recognized for the three and nine month periods ended September 30, 2021 of $21.9 million and $65.0 million, respectively, and increased by $7.9 million for the three and nine month periods ended September 30, 2021, due to costs associated with employer taxes related to the All-Employee Equity Grant.
Represents stock-based compensation expense recognized for the three and nine month periods ended September 30, 2020 of $11.9 million and $27.3 million, decreased by $0.5 million for the nine month period ended September 30, 2020 due to costs associated with employer taxes.
(f)Represents losses on extinguishment of a portion of the U.S. term loan and the amendment of the revolving credit facility.
(g)Represents a gain on settlement of post-acquisition contingencies outside of the measurement period related to adjustments to the transaction price for retirement plan funding and net working capital.
(h)Includes (i) effects of the amortization of prior service costs and amortization of losses in pension and other postemployment (“OPEB”) expense, (ii) certain legal and compliance costs and (iii) other miscellaneous adjustments.
(i)Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of the applicable discrete tax items. The tax effect of pre-tax items excluded from Adjusted Income is computed using the statutory tax rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances. Discrete tax items include changes in tax laws or rates, changes in uncertain tax positions relating to prior years and changes in valuation allowances. The adjusted amounts are then used to calculate an adjusted provision for the quarter.
The income tax provision, as adjusted for each of the periods presented below consisted of the following.
| For the Three Month Period Ended September 30, | For the Nine Month Period Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Provision for income taxes | $ | 2.7 | $ | 12.8 | $ | 25.8 | $ | 24.3 | |||||||||||||||
| Tax impact of pre-tax income adjustments | 24.8 | 36.0 | 69.4 | 84.6 | |||||||||||||||||||
| Discrete tax items | (0.3) | — | 9.6 | (4.0) | |||||||||||||||||||
| Income tax provision, as adjusted | $ | 27.2 | $ | 48.8 | $ | 104.8 | $ | 104.9 |
Segment Results
We classify our business into two segments: Industrial Technologies and Services and Precision and Science Technologies. Our Corporate operations are not discussed separately as any results that had a significant impact on operating results are included in the “Results of Operations” discussion above. We recast certain prior period amounts to conform to the way we are internally managed and how we monitor segment performance during the current fiscal year.
We evaluate the performance of our segments based on Segment Revenues and Segment Adjusted EBITDA. Segment Adjusted EBITDA is indicative of operational performance and ongoing profitability. Our management closely monitors Segment Adjusted EBITDA to evaluate past performance and identify actions required to improve profitability.
The segment measurements provided to and evaluated by the chief operating decision maker are described in Note 17 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.
Segment Results for the Three and Nine Month Periods Ended September 30, 2021 and 2020
The following tables display Segment Revenues, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin (Segment Adjusted EBITDA as a percentage of Segment Revenues) for each of our Segments.
Industrial Technologies and Services Segment Results
| For the Three Month Period Ended September 30, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 1,070.7 | $ | 902.6 | 18.6 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 272.9 | $ | 216.8 | 25.9 | % | |||||||||||
| Segment Margin | 25.5 | % | 24.0 | % | 150 | bps |
Segment Revenues for the three month period ended September 30, 2021 were $1,070.7 million, an increase of $168.1 million, or 18.6%, compared to $902.6 million in the same three month period in 2020. The increase in Segment Revenues was due to higher organic volumes of $94.8 million or 10.5%, higher pricing of $33.7 million or 3.7%, favorable impact of foreign currencies of $20.3 million or 2.2%, and acquisitions of $19.3 million or 2.1%. Organic volume growth included the adverse impact of COVID-19 in the three month period ended September 30, 2020. The percentage of Segment Revenues derived from aftermarket parts and service was 40.4% in the three month period ended September 30, 2021 compared to 41.5% in the same three month period in 2020.
Segment Adjusted EBITDA for the three month period ended September 30, 2021 was $272.9 million, an increase of $56.1 million, or 25.9%, from $216.8 million in the same three month period in 2020. Segment Adjusted EBITDA Margin increased 150 basis points to 25.5% from 24.0% in 2020. The increase in Segment Adjusted EBITDA was primarily due to higher organic sales volume of $36.5 million or 16.8%, higher pricing of $33.7 million or 15.5%, favorable impact of foreign currencies of $5.8 million or 2.7%, and acquisitions of $6.1 million or 2.8%, partially offset by higher selling and administrative costs of $20.1 million or 9.3%.
| For the Nine Month Period Ended September 30, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 3,032.0 | $ | 2,236.2 | 35.6 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 743.0 | $ | 495.4 | 50.0 | % | |||||||||||
| Segment Margin | 24.5 | % | 22.2 | % | 230 | bps |
Segment Revenues for the nine month period ended September 30, 2021 were $3,032.0 million, an increase of $795.8 million, or 35.6%, compared to $2,236.2 in the same nine month period in 2020. The increase in Segment Revenues was primarily due to acquisitions, including of Ingersoll Rand Industrial, of $356.4 million or 15.9%, higher organic volume of $267.6 million or 12.0%, favorable impact of foreign currencies of $97.3 million or 4.4% and higher pricing of $74.5 million or 3.3%. Organic volume growth included the adverse impact of COVID-19 in the nine month period ended September 30, 2020. The percentage of Segment Revenues derived from aftermarket parts and service was 40.9% in the nine month period ended September 30, 2021 compared to 40.4% in the same nine month period in 2020.
Segment Adjusted EBITDA for the nine month period ended September 30, 2021 was $743.0 million, an increase of $247.6 million, or 50.0%, from $495.4 million in the same nine month period in 2020. Segment Adjusted EBITDA Margin increased 230 bps to 24.5% from 22.2% in 2020. The increase in Segment Adjusted EBITDA was primarily due to higher organic sales volumes of $101.3 million or 20.4%, acquisitions, including Ingersoll Rand Industrial, of $88.8 million or 17.9%, higher pricing of $74.5 million or 15.0%, favorable impact of foreign currencies of $25.8 million or 5.2%, and productivity related procurement and I2V initiatives of $5.6 million or 1.1%, partially offset by higher selling and administrative costs of $42.8 million or 8.6%.
Precision and Science Technologies Segment Results
| For the Three Month Period Ended September 30, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 254.3 | $ | 209.9 | 21.2 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 75.5 | $ | 64.5 | 17.1 | % | |||||||||||
| Segment Margin | 29.7 | % | 30.7 | % | (100) | bps |
Segment Revenues for the three month period ended September 30, 2021 were $254.3 million, an increase of $44.4 million, or 21.2%, compared to $209.9 million in the same three month period in 2020. The increase in Segment Revenues was primarily due to acquisitions of $20.6 million or 9.8%, higher organic volume of $13.5 million or 6.4%, higher pricing of $7.1 million or 3.4%, and favorable impact of foreign currencies of $3.2 million or 1.5%. Organic volume growth included the adverse impact of COVID-19 in the three month period ended September 30, 2020. The percentage of Segment Revenues derived from aftermarket parts and service was 17.3% in the three month period ended September 30, 2021 compared to 14.5% in the same three month period in 2020.
Segment Adjusted EBITDA for the three month period ended September 30, 2021 was $75.5 million, an increase of $11.0 million, or 17.1%, from $64.5 million in the same three month period in 2020. Segment Adjusted EBITDA Margin decreased 100 basis points to 29.7% from 30.7% in 2020. The increase in Segment Adjusted EBITDA was primarily due to higher pricing of $7.1 million or 11.0%, higher organic sales volume of $6.0 million or 9.3%, acquisitions of $3.0 million or 4.7%, and favorable impact of foreign currencies of $1.2 million or 1.9%, partially offset by higher selling and administrative costs of $4.3 million or 6.7%.
| For the Nine Month Period Ended September 30, | Percent Change | ||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 | |||||||||||||||
| Segment Revenues | $ | 701.6 | $ | 518.5 | 35.3 | % | |||||||||||
| Segment Adjusted EBITDA | $ | 213.8 | $ | 156.7 | 36.4 | % | |||||||||||
| Segment Margin | 30.5 | % | 30.2 | % | 30 | bps |
Segment Revenues for the nine month period ended September 30, 2021 were $701.6 million, an increase of $183.1 million, or 35.3%, compared to $518.5 million in the same nine month period in 2020. The increase in Segment Revenues was primarily due to acquisitions, including Ingersoll Rand Industrial, of $104.8 million or 20.2%, higher organic volume of $47.3 million or 9.1%, favorable impact of foreign currencies of $18.6 million or 3.6% and higher pricing of $12.4 million or 2.4%. Organic volume growth included the adverse impact of COVID-19 in the nine month period ended September 30, 2020. The percentage of Segment Revenues derived from aftermarket parts and service was 16.3% in the nine month period ended September 30, 2021 compared to 13.7% in the same nine month period in 2020.
Segment Adjusted EBITDA for the nine month period ended September 30, 2021 was $213.8 million, an increase of $57.1 million, or 36.4%, from $156.7 million in the same nine month period in 2020. Segment Adjusted EBITDA Margin increased 30 bps to 30.5% from 30.2% in 2020. The increase in Segment Adjusted EBITDA was primarily due to acquisitions, including Ingersoll Rand Industrial, of $28.0 million or 17.9%, higher organic sales volume of $21.4 million or 13.7%, higher pricing of $12.4 million or 7.9%, and favorable impact of foreign currencies of $6.7 million or 4.3%, partially offset by higher selling and administrative costs of $6.4 million or 4.1%.
Results of Discontinued Operations
Results of Discontinued Operations - SVT
The following table presents selected Consolidated Results of Operations of our business for the three and nine month periods ended September 30, 2021 and 2020.
| For the Three Month Period Ended September 30, | For the Nine Month Period Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues | $ | 4.4 | $ | 191.1 | $ | 428.7 | $ | 495.3 | |||||||||||||||
| Cost of sales | 4.2 | 140.4 | 319.1 | 379.1 | |||||||||||||||||||
| Gross profit | 0.2 | 50.7 | 109.6 | 116.2 | |||||||||||||||||||
| Selling and administrative expenses | 0.3 | 18.8 | 35.6 | 44.8 | |||||||||||||||||||
| Amortization of intangible assets | — | 11.3 | 10.4 | 26.2 | |||||||||||||||||||
| (Gain) loss on sale | 3.9 | — | (252.8) | — | |||||||||||||||||||
| Other operating expense, net | 1.8 | 0.2 | 18.0 | 0.9 | |||||||||||||||||||
| Income (loss) before income taxes | (5.8) | 20.4 | 298.4 | 44.3 | |||||||||||||||||||
| Provision (benefit) for income taxes | (1.5) | 8.2 | 168.2 | 38.2 | |||||||||||||||||||
| Income (Loss) from Discontinued Operations | $ | (4.3) | $ | 12.2 | $ | 130.2 | $ | 6.1 |
Revenues
Revenues for the three month period ended September 30, 2021 were $4.4 million, a decrease of $186.7 million, or 97.7%, compared to $191.1 million in the same three month period in 2020. The decrease in revenues from discontinued operations was primarily due to the sale being substantially completed on June 1, 2021.
Revenues for the nine month period ended September 30, 2021 were $428.7 million, a decrease of $66.6 million, or 13.4%, compared to $495.3 million in the same nine month period in 2020. The decrease in revenues from discontinued operations was primarily due to five months of activity for the nine month period ended September 30, 2021 compared to seven months in the same nine month period in 2020.
Gross Profit
Gross profit for the three month period ended September 30, 2021 was $0.2 million, a decrease of $50.5 million, or 99.6%, compared to $50.7 million for the same three month period in 2020, and as a percentage of revenues was 4.5% for the three month period ended September 30, 2021 and 26.5% for the same three month period in 2020. The decrease in gross profit is primarily due to the sale being substantially completed on June 1, 2021 as described above.
Gross profit for the nine month period ended September 30, 2021 was $109.6 million, a decrease of $6.6 million, or 5.7%, compared to $116.2 million for the same nine month period in 2020, and as a percentage of revenues was 25.6% for the nine month period ended September 30, 2021 and 23.5% for the same nine month period in 2020. The decrease in gross profit is primarily due to five months of activity for the nine month period ended September 30, 2021 compared to seven months in the same nine month period in 2020 as described above.
Gain on Sale
Gain on sale for the nine month period ended September 30, 2021 of $252.8 million and was due to the purchase price exceeding the carrying value of the SVT business.
Other Operating Expense (Income), Net
Other operating expense (income), net was $1.8 million for the three month period ended September 30, 2021, an increase of $1.6 million, compared to $0.2 million in the same three month period in 2020. The increase was primarily due to higher separation related expenses and non-cash charges of $1.8 million.
Other operating expense, net was $18.0 million for the nine month period ended September 30, 2021, an increase of $17.1 million, compared to $0.9 million in the same nine month period in 2020. The increase was primarily due to higher separation related expenses and non-cash charges of $18.0 million, partially offset by lower restructuring charges of $0.9 million.
Provision (Benefit) for Income Taxes
The benefit for income taxes was $1.5 million resulting in a 25.9% effective income tax rate for the three month period ended September 30, 2021, compared to a provision for income taxes of $8.2 million resulting in a 40.2% effective income tax rate in the same three month period in 2020. The decrease in the tax provision for the three month period ended September 30, 2021 is primarily due to one-time discrete items associated with the sale of the SVT business.
The provision for income taxes was $168.2 million resulting in a 56.4% effective income tax rate for the nine month period ended September 30, 2021, compared to a provision for income taxes of $38.2 million resulting in a 86.2% effective income tax rate in the same nine month period in 2020. The increase in the tax provision for the nine month period ended September 30, 2021 is primarily due to one-time discrete items associated with the sale of the SVT business.
Results of Discontinued Operations - HPS
The following table presents selected Consolidated Results of Operations of our business for the three and nine month periods ended September 30, 2021 and 2020.
| For the Three Month Period Ended September 30, | For the Nine Month Period Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenues | $ | 2.6 | $ | 31.6 | $ | 68.0 | $ | 149.5 | |||||||||||||||
| Cost of sales | 2.4 | 30.3 | 56.8 | 121.1 | |||||||||||||||||||
| Gross profit | 0.2 | 1.3 | 11.2 | 28.4 | |||||||||||||||||||
| Selling and administrative expenses | 0.2 | 8.2 | 5.1 | 36.8 | |||||||||||||||||||
| Amortization of intangible assets | — | 5.9 | 2.4 | 17.7 | |||||||||||||||||||
| Loss on sale | — | — | 211.7 | — | |||||||||||||||||||
| Other operating expense, net | 1.8 | 2.3 | 17.3 | 7.6 | |||||||||||||||||||
| Loss before income taxes | (1.8) | (15.1) | (225.3) | (33.7) | |||||||||||||||||||
| Benefit for income taxes | (1.9) | (2.8) | (7.0) | (7.3) | |||||||||||||||||||
| Income (Loss) from Discontinued Operations | $ | 0.1 | $ | (12.3) | $ | (218.3) | $ | (26.4) |
Revenues
Revenues for the three month period ended September 30, 2021 were $2.6 million, a decrease of $29.0 million, or 91.8%, compared to $31.6 million in the same three month period in 2020. The decrease in revenues from discontinued operations was primarily due to the sale of substantially all of the HPS business on April 1, 2021.
Revenues for the nine month period ended September 30, 2021 were $68.0 million, a decrease of $81.5 million, or 54.5%, compared to $149.5 million in the same nine month period in 2020. The decrease in revenues from discontinued operations was primarily due to three months of activity for the nine month period ended September 30, 2021 compared to nine months in the same nine month period in 2020.
Gross Profit
Gross profit for the three month period ended September 30, 2021 was $0.2 million, a decrease of $1.1 million, or 84.6%, compared to $1.3 million for the same three month period in 2020, and as a percentage of revenues was 7.7% for the three month period ended September 30, 2021 and 4.1% for the same three month period in 2020. The decrease in gross profit is primarily due to the revenue decline described above.
Gross profit for the nine month period ended September 30, 2021 was $11.2 million, a decrease of $17.2 million, or 60.6%, compared to $28.4 million for the same nine month period in 2020, and as a percentage of revenues was 16.5% for the nine month period ended September 30, 2021 and 19.0% for the same nine month period in 2020. The decrease in gross profit is primarily due to the revenue decline described above.
Loss on Sale
Loss on sale for the nine month period ended September 30, 2021 of $211.7 million was a charge taken to reduce the carrying value of the HPS business to the estimated fair value of the net proceeds and residual equity interest from the transaction.
Other Operating Expense, Net
Other operating expense, net was $1.8 million for the three month period ended September 30, 2021, a decrease of $0.5 million, compared to $2.3 million in the same three month period in 2020. The decrease was primarily due to lower restructuring charges of $2.0 million, partially offset by expenses incurred in connection with the separation of $1.8 million.
Other operating expense, net was $17.3 million for the nine month period ended September 30, 2021, an increase of $9.7 million, compared to $7.6 million in the same nine month period in 2020. The increase was primarily due to expenses incurred in connection with the separation of $15.6 million, partially offset by lower restructuring charges of $5.5 million.
Provision (Benefit) for Income Taxes
The benefit for income taxes was $1.9 million resulting in a 105.6% effective income tax rate for the three month period ended September 30, 2021, compared to a benefit for income taxes of $2.8 million resulting in a 18.5% effective income tax rate in the same three month period in 2020. The decrease in the tax benefit for the three month period ended September 30, 2021 is primarily due to one-time discrete items associated with the sale of the HPS business.
The benefit for income taxes was $7.0 million resulting in a 3.1% effective income tax rate for the nine month period ended September 30, 2021, compared to a benefit for income taxes of $7.3 million resulting in a 21.7% effective income tax rate in the same nine month period in 2020. The decrease in the tax benefit for the nine month period ended September 30, 2021 is primarily due to one-time discrete items associated with the sale of the HPS business.
Liquidity and Capital Resources
Our investment resources include cash on hand, cash generated from operations and borrowings under our Revolving Credit Facility. We also have the ability to seek additional secured and unsecured borrowings, subject to Credit Agreement restrictions.
On September 30, 2021, we elected to prepay the Dollar Term Loan Series A outstanding balance of $396.0 million using cash on hand. See the description of the debt prepayment made on September 30, 2021 in Note 9 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further details.
As of September 30, 2021, we had $50.8 million of outstanding letters of credit written against the Revolving Credit Facility and $1,049.2 million of unused availability.
See the description of these line-of-credit resources in Note 10 “Debt” to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended December 31, 2020 and Note 9 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.
As of September 30, 2021, we were in compliance with all of our debt covenants and no event of default had occurred or was ongoing.
Liquidity
A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing cost of operations, working capital and capital expenditures.
| September 30, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 2,033.0 | $ | 1,750.9 | |||||||
| Short-term borrowings and current maturities of long-term debt | $ | 40.1 | $ | 40.4 | |||||||
| Long-term debt | 3,422.2 | 3,859.1 | |||||||||
| Total debt | $ | 3,462.3 | $ | 3,899.5 |
We can increase the borrowing availability under the Senior Secured Credit Facilities by up to $1,600.0 million in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans plus an additional amount so long as
we do not exceed a specified senior secured leverage ratio. We can incur additional secured indebtedness under the term loan facilities if certain specified conditions are met under the credit agreement governing the Senior Secured Credit Facilities. Our liquidity requirements are significant primarily due to debt service requirements. See Note 10 “Debt” to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended December 31, 2020 and Note 9 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further details.
Our principal sources of liquidity have been existing cash and cash equivalents, cash generated from operations and borrowings under the Senior Secured Credit Facilities. Our principal uses of cash will be to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including possible acquisitions. We may also seek to finance capital expenditures under capital leases or other debt arrangements that provide liquidity or favorable borrowing terms. We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. In the event that suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings. As market conditions warrant, we may from time to time, seek to repay loans that we have borrowed, including the borrowings under the Senior Secured Credit Facilities. Based on our current level of operations and available cash, we believe our cash flow from operations, together with availability under the Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements for the foreseeable future. Our business may not generate sufficient cash flows from operations or future borrowings may not be available to us under our Revolving Credit Facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Our ability to do so depends on, among other factors, prevailing economic conditions, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change in control, we could be required to repay or refinance our indebtedness. We may not be able to refinance any of our indebtedness, including the Senior Secured Credit Facilities, on commercially reasonable terms or at all. Any future acquisitions, joint ventures, or other similar transactions may require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms or at all.
A substantial portion of our cash is in jurisdictions outside the United States. We do not assert ASC 740-30 (formerly APB 23) indefinite reinvestment of our historical non-U.S. earnings or future non-U.S. earnings. The Company records a deferred foreign tax liability to cover all estimated withholding, state income tax and foreign income tax associated with repatriating all non-U.S. earnings back to the United States. Our deferred income tax liability as of September 30, 2021 was $47.4 million which primarily consisted of withholding taxes.
Working Capital
| September 30, 2021 | December 31, 2020 | ||||||||||
| Net Working Capital: | |||||||||||
| Current assets of continuing operations: | |||||||||||
| Current assets | $ | 4,030.9 | $ | 3,862.1 | |||||||
| Less: Assets of discontinued operations - current | 28.0 | 337.4 | |||||||||
| Current assets of continuing operations | 4,002.9 | 3,524.7 | |||||||||
| Current liabilities of continuing operations: | |||||||||||
| Current liabilities | 1,632.6 | 1,498.6 | |||||||||
| Less: Liabilities of discontinued operations - current | 27.2 | 212.9 | |||||||||
| Current liabilities of continuing operations | 1,605.4 | 1,285.7 | |||||||||
| Net working capital of continuing operations | $ | 2,397.5 | $ | 2,239.0 | |||||||
| Operating Working Capital: | |||||||||||
| Accounts receivable and contract assets | $ | 986.1 | $ | 922.2 | |||||||
| Plus: Inventories (excluding LIFO) | 854.8 | 707.9 | |||||||||
| Less: Accounts payable | 632.9 | 536.4 | |||||||||
| Less: Contract liabilities (current) | 216.3 | 164.6 | |||||||||
| Operating working capital | $ | 991.7 | $ | 929.1 |
Net working capital of continuing operations increased $158.5 million to $2,397.5 million as of September 30, 2021 from $2,239.0 million as of December 31, 2020. Operating working capital increased $62.6 million to $991.7 million as of September 30, 2021 from $929.1 million as of December 31, 2020. The increase in operating working capital is primarily due to
higher inventories and higher accounts receivable, partially offset by higher accounts payable, higher contract liabilities and lower contract assets.
The increase in accounts receivable was primarily due to the increase in revenue in the third quarter of 2021 compared to the fourth quarter of 2020 and to acquisitions completed in 2021. The decrease in contract assets was primarily due to the timing of revenue recognition and billing on our overtime contracts. The increase in inventories was primarily due to additions to inventory in anticipation of increased demand for certain products and to acquisitions completed in 2021. The increase in accounts payable was primarily due to the timing of vendor cash disbursements. The increase in contract liabilities was primarily due to the timing of customer milestone payments for in-process engineered to order contracts.
Cash Flows
The following table reflects the major categories of cash flows for the nine month periods ended September 30, 2021 and 2020, respectively.
| For the Nine Month Period Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from (used in) continuing operations: | |||||||||||
| Cash flows from operating activities | $ | 380.9 | $ | 390.2 | |||||||
| Cash flows used in investing activities | (841.0) | (18.2) | |||||||||
| Cash flows from (used in) financing activities | (1,142.2) | 317.9 | |||||||||
| Cash flows from discontinued operations | 1,901.9 | 108.0 | |||||||||
| Free cash flow(1) | 339.7 | 361.1 |
(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 $9.3 million to $380.9 million for the nine month period ended September 30, 2021 from $390.2 million in the same nine month period in 2020. This decrease is attributable to an increase in cash paid for income taxes of $230.9 and cash paid for inventories, partially offset by an increase in income from continuing operations. The increase in cash paid for taxes is primarily due to a taxable gain realized on the sale of Club Car. Net cash provided by continuing operations also includes the receipt of a $49.5 million payment from Trane Technologies in the third quarter of 2021 upon finalizing post-closing steps of the Ingersoll Rand Industrial transaction.
Investing Activities
Cash used in investing activities included capital expenditures of $41.2 million and $29.1 million for the nine month periods ended September 30, 2021 and 2020, respectively. Net cash paid in a business combination was $809.3 million in the nine month period ended September 30, 2021 and cash acquired in business combinations for the nine month period ended September 30, 2020 was $9.4 million.
Financing Activities
Cash used in financing activities of $1,142.2 million for the nine month period ended September 30, 2021 primarily reflected purchases of treasury stock of $736.5 million and repayments of long term debt of $425.7 million, partially offset by proceeds from stock option exercises of $20.0 million.
Cash provided by financing activities of $317.9 million for the nine month period ended September 30, 2020 primarily reflected proceeds from long-term debt of $1,980.1 million offset by repayments of long-term debt of $1,609.2 million, payments of debt issuance costs of $47.4 million and payments to acquire noncontrolling interests of $14.9 million.
Discontinued Operations
Cash provided by discontinued operations increased $1,793.9 million to $1,901.9 million for the nine month period ended September 30, 2021 from $108.0 million in the same nine month period in 2020, primarily due to proceeds from sale of discontinued operations.
Free Cash Flow
Free cash flow decreased $21.4 million to $339.7 million in the nine month period ended September 30, 2021 from $361.1 million in the same nine month period in 2020 due to decreased cash provided by operating activities and higher capital expenditures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are materially likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
Management has evaluated the accounting estimates used in the preparation of the Company’s condensed consolidated financial statements and related notes and believe those estimates to be reasonable and appropriate. Certain of these accounting estimates require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the section “Critical Accounting Estimates” of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 1 “Summary of Significant Accounting Policies” of “Item 8. Financial Statements and Supplementary Data” included in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
Environmental Matters
Information with respect to the effect of compliance with environmental protection requirements and resolution of environmental claims on us and our manufacturing operations is contained in Note 16 “Contingencies” to the condensed consolidated financial statements included elsewhere in this Form 10-Q. We believe that as of September 30, 2021, there have been no material changes to the environmental matters disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020.
Recent Accounting Pronouncements
The information set forth in Note 1 “Basis of Presentation and Recent Accounting Pronouncements” to our condensed consolidated financial statements under Part 1 Item 1 “Financial Statements” under the heading “Recently Issued Accounting Pronouncements” is incorporated herein by reference.
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