Ingersoll Rand Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; audited statements compare FY2020 with FY2019 and FY2018. The company became Ingersoll Rand Inc. after completing its merger with Ingersoll Rand Industrial on February 29, 2020. FY2020 includes ten months of the acquired business, making year-over-year comparisons substantially affected by the transaction.
Business context and results
The company supplies industrial compression, vacuum, pump and blower technologies, precision and medical flow products, Club Car vehicles, and upstream-energy pumping solutions. Its four reporting segments are Industrial Technologies and Services (ITS), Precision and Science Technologies (PST), Specialty Vehicle Technologies (SVT), and High Pressure Solutions (HPS). Aftermarket products and services were 36.1% of 2020 revenue. The company operated in more than 175 countries.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $4,910.2 million | $2,451.9 million |
| Gross profit / margin | $1,613.4 million / 32.9% | $911.7 million / 37.2% |
| Operating income / margin | $85.7 million / 1.7% | $275.3 million / 11.2% |
| Net income (loss) attributable to Ingersoll Rand | $(33.3) million; diluted EPS $(0.09) | $159.1 million; diluted EPS $0.76 |
| Adjusted EBITDA (non-GAAP) / margin | $1,017.6 million / 20.7% | $561.7 million / 22.9% |
| Adjusted net income (non-GAAP) | $599.0 million | $329.3 million |
| Operating cash flow / free cash flow (non-GAAP) | $914.3 million / $865.6 million | $343.3 million / $300.1 million |
| Capital expenditures | $48.7 million | $43.2 million |
FY2020 revenue grew 100.3%, primarily because the acquisition contributed $2,934.9 million; lower volumes related to COVID-19 reduced revenue in ITS and HPS. Adjusted EBITDA also benefited from the acquisition, while its margin declined 220 basis points. Reported profitability was weighed down by acquisition-related amortization, integration and restructuring costs, and weaker HPS results.
Segments and quarterly performance
- ITS: Revenue was $3,248.2 million, up 91.0%; Segment Adjusted EBITDA was $759.8 million and margin was 23.4%. The acquired business contributed $1,787.4 million of segment revenue.
- PST: Revenue was $725.0 million, up 129.0%; Segment Adjusted EBITDA was $220.2 million and margin was 30.4%. The acquired business contributed $406.1 million of segment revenue.
- SVT: Acquired with no prior-year comparable results; revenue was $741.4 million and Segment Adjusted EBITDA was $138.6 million, a margin of 18.7%.
- HPS: Revenue fell 55.0% to $195.6 million; Segment Adjusted EBITDA fell 89.7% to $12.1 million, with margin declining to 6.2% from 26.9%, amid weak upstream energy activity.
In Q4 2020, revenue was $1,510.7 million, operating income $130.4 million, net income $151.1 million, diluted EPS $0.36, and Adjusted EBITDA $344.4 million. Q4 2019 revenue was $605.8 million and Adjusted EBITDA was $134.6 million; the comparison is heavily affected by the acquisition. Q4 orders increased 154.8% in ITS and 202.6% in PST, while HPS orders declined 50.9%; the filing attributes substantial portions of the ITS and PST order increases to the acquired businesses.
Financial position, liquidity, and capital
- At year-end, cash and cash equivalents were $1,750.9 million and total debt was $3,899.5 million, implying net debt of approximately $2.15 billion. The company reported no borrowings under its $1.1 billion revolving facility; $101.9 million of letters of credit left $998.1 million available.
- Operating cash flow rose to $914.3 million; free cash flow, defined by the company as operating cash flow less capital expenditures, was $865.6 million. Management said available cash and revolver capacity were expected to fund foreseeable obligations, subject to economic and operating conditions.
- Working capital increased to $2,363.5 million, while operating working capital rose to $1,118.0 million. Operating working capital was 22.8% of revenue versus 24.6% in 2019.
- Debt was principally variable-rate term loans, generally maturing in 2027; the company reported compliance with debt covenants and no default. A 100-basis-point rate increase was estimated to raise annual interest expense by $35.1 million. The filing also identifies the transition from LIBOR and other reference rates as a financing risk.
- Capital expenditures are expected to be 1.5%–2.0% of consolidated revenue in 2021. No common dividends were paid in 2020 or 2019, and the company does not intend to pay cash dividends in the foreseeable future.
Outlook, material developments, and risks
- Management reported limited near-term visibility because of COVID-19 and uncertainty in customer and supplier markets. Most major manufacturing locations were operating at year-end; the company continued cost and cash-preservation measures. No consolidated revenue or earnings guidance was provided in the filing.
- The 2020–2022 restructuring plan is expected to incur approximately $350 million of costs and deliver approximately $300 million of annualized cost synergies by the end of 2022. FY2020 restructuring charges were $92.9 million. Savings and timing are not assured.
- On February 14, 2021, the company agreed to sell its majority HPS interest to American Industrial Partners for $300 million cash while retaining a 45% ownership interest. The sale was expected to close in the first half of 2021, subject to approvals and customary conditions. The company expected a $195 million–$235 million loss, including estimated transaction fees, upon classification as held for sale. HPS remained in continuing operations at December 31, 2020.
- The company completed its acquisition of Tuthill Vacuum and Blower Systems for approximately $184 million in cash on January 31, 2021.
- Key risks include pandemic-related demand and operating disruption; integration and synergy execution; cyclical industrial markets and volatile oil and gas activity; foreign exchange exposure; raw-material and single-source supplier disruption; leverage, variable interest rates and benchmark-rate transition; and impairment risk. Goodwill and other intangible assets totaled $11.0 billion, or 69% of assets. The company recorded a $19.9 million impairment of two ITS tradenames; no goodwill impairment was recorded.
- Contingencies include asbestos and silica litigation. The company recorded a $131.4 million litigation reserve and a $132.1 million insurance recovery receivable; collection and claim outcomes remain uncertain. Environmental liabilities accrued were $13.7 million. Management stated ordinary legal proceedings were not expected to materially affect the company, while noting outcomes could differ.
- The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Management excluded the acquired Ingersoll Rand Industrial business from its internal-control assessment for 2020; that business represented 60% of consolidated revenue and 16% of assets, excluding goodwill and intangibles.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying organic performance and assess the durability of margins and cash generation.
- Track completion and accounting for the HPS sale, including the final proceeds, retained-interest terms, and realized loss versus the estimated $195 million–$235 million.
- Monitor restructuring spending against the $350 million expected cost and evidence of the targeted $300 million annualized synergies.
- Review debt reduction, interest-rate sensitivity, refinancing capacity, and the transition away from LIBOR-based borrowing.
- Assess HPS customer credit exposure and oilfield demand, as well as the timing and collection of asbestos-related insurance recoveries.
- Evaluate the assumptions supporting the acquired intangible values and goodwill, particularly given pandemic uncertainty and the limited valuation headroom at two reporting units.