INGERSOLL RAND INC. 
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
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
Our Segments
Subsequent to the acquisition of
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,
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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,
High Pressure Solutions
We design, manufacture, market and service a diverse range of positive displacement pumps, integrated systems and associated aftermarket parts, consumables and services. The highly engineered products offered by our High Pressure Solutions segment serve customers in the upstream energy market, as well as petrochemical processing, transportation and general industrial sectors. We are one of the largest suppliers of equipment and associated aftermarket parts, consumables and services for the upstream energy applications that we serve.
Our positive displacement pumps are fit-for-purpose to meet the demands and challenges of modern unconventional drilling and hydraulic fracturing activity. Our offering includes mission-critical oil and gas drilling pumps, frac pumps and well servicing pumps, in addition to sales of associated consumables used in the operation of our pumps. The products we sell into upstream energy applications are highly aftermarket-intensive, and so we support these products in the field with one of the industry's most comprehensive service networks, which encompasses locations across all major basins and shale plays in the North American land market. This service network is critical to serving our customers and, by supporting them in the field, to generating demand for new original equipment sales and aftermarket parts, consumables, service and repair sales which in aggregate are often multiples of the value of the original equipment.
The Company's customers provide drilling, completions and well services to oil and gas operators, particularly in the major basins and plays in the North American land market. The Company is one of the leading suppliers in these upstream energy applications and has long-standing customer relationships.
Specialty Vehicle Technologies
We design, manufacture and market golf car and other low speed vehicles for commercial utility and personal transportation under the Club Car ® brand. Product offerings include new and used electric, gas and diesel-powered vehicles, accessories and aftermarket parts. Service offerings include repair and maintenance, short-term rentals and digital connectivity services that enable fleet management, entertainment and provide enhanced end-user experience.
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Sales of golf car fleets and turf utility vehicles are primarily derived from golf courses owners and operators around the world. Utility, all-wheel drive, and multi passenger transport vehicles are used in commercial and maintenance applications at resorts and hospitality sites, government agencies and municipalities, manufacturing and construction firms, sports and other areas, colleges and universities and other commercial establishments. Our consumer vehicles are generally sold to individuals and families for personal transportation in residential communities, camp grounds and vacation locations. All of our low speed vehicles are highly featured, and highly customized for their application and are available in multiple colors, fabrics, power trains and accessories. The majority of sales are derived through a global network of independent distributors and dealers. We also sell our products directly to certain customers within the golf industry, through company-owned sales resources.
Components of Our Revenue and Expenses
Revenues
We generate revenue from sales of 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 materials inputs. Stock-based compensation expense for employees associated with the manufacture of products or delivery of services to customers is included in cost of sales. We have instituted a global sourcing strategy to take advantage of coordinated purchasing opportunities of key materials across our manufacturing plant locations.
Cost of sales for services includes the direct costs we incur, including direct labor, parts and other overhead costs including depreciation of equipment and facilities, to deliver repair, maintenance and other field services to our customers.
Selling and Administrative Expenses
Selling and administrative expenses consist of (i) salaries and other
employee-related expenses for our selling and administrative functions and other
activities not associated with the manufacture of products or delivery of
services to customers; (ii) facility operating expenses for selling and
administrative activities, including office rent, maintenance, depreciation and
insurance; (iii) marketing and direct costs of selling products and services to
customers including internal and external sales commissions; (iv) research and
development expenditures; (v) professional and consultant fees; (vi) 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
Amortization of Intangible Assets
Amortization of intangible assets includes the periodic amortization of intangible assets including customer relationships, trademarks, developed technology, backlog and internally developed software.
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Other Operating Expense, Net
Other operating expense, net includes foreign currency transaction gains and losses, net, restructuring charges, certain shareholder litigation settlement recoveries, acquisition 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
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 High Pressure Solutions segment, demand for our products that serve upstream energy end-markets are influenced heavily by energy prices and the expectation as to future trends in those prices. Energy prices have historically been cyclical in nature and are affected by a wide range of factors. In addition to energy prices, demand for our upstream energy products are positively impacted by increasing global land rig count, drilled but uncompleted wells, the level of hydraulic fracturing intensity and activity measured by horsepower utilization and lateral lengths as well as drilling and completion capital expenditures. 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 48% for the six month
period ended
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
On
• Industrial Technologies and Services segment -
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.
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• Precision and Science Technologies segment -
Precision Flow Systems ("PFS") and ARO businesses joined the legacy Gardner
Denver Medical segment and Specialty Pump businesses from the legacy Gardner
Denver Industrial segment to form the new "Precision and Science Technologies"
segment.
• High Pressure Solutions segment - The upstream energy portion of the legacy
Gardner Denver Energy segment was disaggregated to form the new "High Pressure Solutions" segment.
• Specialty Vehicle Technologies segment -
golf, utility and consumer low-speed vehicles business formed the new "Specialty Vehicle Technologies" segment.
See Note 2 "Business Combinations" to our unaudited condensed consolidated
financial statements included elsewhere in this Form 10-Q for further discussion
of the acquisition of
Impact of Coronavirus (COVID-19)
We continue to assess and actively manage the impact of the COVID-19 pandemic on
our global operations and also the operations of our suppliers and customers.
Overall demand for our products has decreased as a result of the pandemic, which
impacted our operating results for the three and six month periods ended
Conditions in oil and gas markets
During the six month period ended
We believe it is helpful to consider the impact of our exposure to the upstream energy market in evaluating our 2019 and 2020 Segment Revenue and Segment Adjusted EBITDA for our High Pressure Solutions segment, in order to better understand other drivers of our performance during those periods, including operational improvements.
Restructuring and Other Business Transformation Initiatives
Subsequent to the acquisition of
Through
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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.
Due to the uncertainty of current economic conditions associated with COVID-19,
and its impact on end markets, our near-term visibility is limited. In the
second quarter of 2020, we had
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
have been curtailed as a result of the COVID-19 pandemic and near-term
visibility is limited. In the second quarter of 2020, we had
High Pressure Solutions Segment
The demand and outlook for the majority of our High Pressure Solutions products
and services are influenced heavily by the supply and demand dynamics related to
oil and natural gas products, and have been influenced by oil and natural gas
prices, the level and intensity of hydraulic fracturing activity, global land
rig count, the number of drilled but uncompleted wells and other economic
factors. The COVID-19 pandemic and related economic repercussions have
negatively impacted the global demand for oil and natural gas. These conditions
were compounded by the risks of significant production increases from
Specialty Vehicle Technologies Segment
During 2020, the Specialty Vehicle Technologies segment is seeing consistent
demand in golf end markets along with record demand for consumer vehicle and
aftermarket parts offerings. This has helped to offset demand pressure in the
commercial end markets as the COVID-19 pandemic continues to impact the
hospitality and resort industries. In the second quarter of 2020, we had
How We Assess the Performance of Our Business
We manage operations through the four 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 (loss) income including interest, depreciation and amortization of non-acquisition related intangible assets and excluding other items used to calculate Adjusted EBITDA and further adjusted for the tax effect of these exclusions.
We use Free Cash Flow to review the liquidity of our operations. We measure Free Cash Flow as cash flows from operating activities less capital expenditures. We believe Free Cash Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows from operating activities.
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Management and our board of directors regularly use these measures as tools in evaluating our operating and financial performance and in establishing discretionary annual compensation. Such measures are provided in addition to, and should not be considered to be a substitute for, or superior to, the comparable measures under GAAP. In addition, we believe that Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are frequently used by investors and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income and Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity.
Adjusted EBITDA, Adjusted Net Income and Free Cash Flow should not be considered as alternatives to net (loss) income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
See "Non-GAAP Financial Measures" below for reconciliation information.
Results of Operations
Consolidated results should be read in conjunction with the segment results section herein and Note 16 "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.
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The following table presents selected Consolidated Results of Operations of our
business for the three and six month periods ended
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