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 our audited consolidated financial statements and related notes to our consolidated financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under the "Special Note Regarding Forward-Looking Statements," "Item 1A. Risk Factors" and elsewhere in this Form 10-K.
Executive Overview
Our Company
Ingersoll Rand is a global market leader with a broad range of innovative and mission-critical air, fluid, energy and medical technologies, providing services and solutions to increase industrial productivity and efficiency. 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, includingIngersoll Rand ,Gardner Denver, Nash ,CompAir , Thomas,Milton Roy ,Seepex , Elmo Rietschle, ARO, Robuschi, Emco Wheaton and Runtech Systems, 23
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which we believe are globally recognized in their respective end-markets and known for product quality, reliability, efficiency and superior customer service.
These attributes, along with over 160 years of engineering heritage, generate strong brand loyalty for our products and foster long-standing customer relationships, which we believe have resulted in leading market positions within each of our operating segments. We have sales in all major geographic markets and our diverse customer base utilizes our products across a wide array of end-markets that have favorable near- and long-term growth prospects, including industrial manufacturing, energy, transportation, medical and laboratory sciences, food and beverage packaging and chemical processing. Our products and services are critical to the processes and systems in which they are utilized, which are often complex and function in harsh conditions where the cost of failure or downtime is high. However, our products and services typically represent only a small portion of the costs of the overall systems or functions that they support. As a result, our customers place a high value on our application expertise, product reliability and the responsiveness of our service. To support our customers and market presence, we maintain significant global scale with 61 key manufacturing facilities, approximately 39 complementary service and repair centers across six continents and approximately 16,000 employees worldwide as ofDecember 31, 2021 . The process-critical nature of our product applications, coupled with the standard wear and tear replacement cycles associated with the usage of our products, generates opportunities to support customers with our broad portfolio of aftermarket parts, consumables and services. Customers place a high value on minimizing any time their operations are offline. As a result, the availability of replacement parts, consumables and our repair and support services are key components of our value proposition. Our large installed base of products provides a recurring revenue stream through our aftermarket parts, consumables and services offerings. As a result, our aftermarket revenue is significant, representing 36.2% of total Company revenue and approximately 40.7% of our Industrial Technologies and Services segment's revenue in 2021.
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 unique 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) employee related stock-based compensation for our selling and administrative functions and (vii) other miscellaneous expenses. Certain corporate expenses, including those related to our shared service centers inthe United States andEurope , 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. 24
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Amortization of Intangible Assets
Amortization of intangible assets includes the periodic amortization of intangible assets - including customer relationships, tradenames, developed technology, backlog and internally developed software.
Impairment of Other Intangible Assets
Impairment of other intangible assets represents the recognition of non-cash charges to reduce the carrying value of intangible assets other than goodwill to their fair value.
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 (Benefit) for Income Taxes
The provision or benefit for income taxes includesU.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 ofthe 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 year endedDecember 31, 2021 , was denominated in currencies other than theU.S. dollar. Because much of our manufacturing facilities and labor force costs are outside ofthe United States , a significant portion of our costs are also denominated in currencies other than theU.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
OnFebruary 29, 2020 , we completed the acquisition ofIngersoll Rand Industrial .Ingersoll Rand Industrial is included in our results of operations beginning on the acquisition date (close of businessFebruary 29, 2020 ). Comparability between the years 25
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endedDecember 31, 2021 and 2020 will be affected by the inclusion of twelve months of activity fromIngersoll Rand Industrial in 2021 compared to only ten months of activity in 2020.
See Note 4 "Business Combinations" to our audited consolidated financial
statements included elsewhere in this Form 10-K for further discussion of the
acquisition of
Other acquisitions
Part of our strategy for growth is to acquire complementary flow control and compression equipment businesses, which provide access to new technologies or geographies or improve our aftermarket offerings. In addition to theIngersoll Rand Industrial transaction discussed above, we have acquired several other businesses during the three year period endedDecember 31, 2021 . While these acquisitions are not individually significant or significant in the aggregate, they may be relevant when comparing our results from period to period.
See Note 4 "Business Combinations" to our audited consolidated financial statements included elsewhere in this Form 10-K for further discussion of these acquisitions.
Impact of Coronavirus (COVID-19)
We continue to assess and actively manage the impact of the ongoing COVID-19 pandemic on our global operations and also the operations of our suppliers and customers. Demand for our products was negatively impacted throughout the majority of 2020 as a result of the pandemic. Demand began to improve in the fourth quarter of 2020 and accelerated in the first half of 2021 as markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions. Order rates in the first half of 2021 were particularly strong and we believe represent some deferred demand from 2020. In order to position ourselves to fulfill demand we continue to monitor the supply chain closely and are taking proactive steps to ensure continuity of supply. We are adhering to all state and country mandates and guidelines wherever we operate. Currently all our major manufacturing locations are operational. We have taken certain actions to reduce costs and preserve cash given the uncertain environment. The degree to which the pandemic will continue to impact our operations, and the operations of our customers and suppliers remains uncertain. See "The COVID-19 pandemic could have a material and adverse effect on our business, results of operations and financial condition in the future" in Part II Item 1A. "Risk Factors" included elsewhere in this Form 10-K.
Restructuring and Other Business Transformation Initiatives
We continue to implement business transformation initiatives. A key element of those business transformation initiatives was restructuring programs within our Industrial Technologies and Services and Precision and Science Technologies segments, as well as at the Corporate level. Restructuring charges, program related facility reorganization, relocation and other costs, and related capital expenditures were impacted most significantly. Subsequent to the acquisition ofIngersoll Rand Industrial , we announced a restructuring program ("2020 Plan") to drive efficiencies and synergies, reduce the number of facilities and optimize operating margin within the merged Company. For the years endedDecember 31, 2021 and 2020,$13.4 million and$83.0 million , respectively, were charged to expense related to this restructuring program. ThroughDecember 31, 2021 , we recognized expense related to the 2020 Plan of$78.7 million ,$6.9 million and$10.8 million for Industrial Technologies and Services, Precision and Science Technologies and Corporate, respectively.
Stock-Based Compensation Expense
For the years endedDecember 31, 2021 and 2020, we incurred stock-based compensation expense of approximately$87.2 million and$47.5 million , respectively. The increase from 2020 was primarily due to the$150 million equity grant to nearly 16,000 employees worldwide announced in the third quarter of 2020. See Note 18 " Stock-Based Compensation " to our audited consolidated financial statements included elsewhere in this Form 10-K for further discussion around our stock-based compensation expense.
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
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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. Included in our discussion of our consolidated and segment results below are changes in revenues and Adjusted EBITDA on a Constant Currency basis. Constant Currency information compares results between periods as if exchange rates had remained constant period over period. We define Constant Currency revenues and Adjusted EBITDA as total revenues and Adjusted EBITDA excluding the impact of foreign exchange rate movements and use it to determine the Constant Currency revenue and Adjusted EBITDA growth on a year-over-year basis. Constant Currency revenues and Adjusted EBITDA are calculated by translating current period revenues and Adjusted EBITDA using corresponding prior period exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a Constant Currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
For further information regarding these measures, see "Non-GAAP Financial Measures" below.
Results of Continuing Operations
Consolidated results should be read in conjunction with segment results and the Segment Information notes to our audited consolidated financial statements included elsewhere in this Form 10-K, which provide more detailed discussions concerning certain components of our consolidated statements of operations. All intercompany accounts and transactions have been eliminated within the consolidated results. This section discusses our results of continuing operations for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . For a discussion and analysis of the year endedDecember 31, 2020 , compared to the same in 2019, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our
An nual Report on F orm 10- K for the year ended
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Consolidated Results of Operations for the Years EndedDecember 31, 2021 and 2020 Year Ended December 31, 2021 2020 Consolidated Statements of Operations Revenues$ 5,152.4 $ 3,973.2 Cost of sales 3,163.9 2,568.3 Gross Profit 1,988.5 1,404.9 Selling and administrative expenses 1,028.0 789.3 Amortization of intangible assets 332.9 335.1 Impairment of other intangible assets - 19.9 Other operating expense, net 61.9 201.0 Operating Income 565.7 59.6 Interest expense 87.7 111.1 Loss on extinguishment of debt 9.0 2.0 Other income, net (44.0) (8.1) Income (Loss) Before Income Taxes 513.0 (45.4) Provision (benefit) for income taxes (21.8) 11.4 Loss on equity method investments (11.4) - Income (Loss) from Continuing Operations 523.4 (56.8) Income from discontinued operations, net of tax 41.6 24.4 Net Income (Loss) 565.0 (32.4) Less: Net income attributable to noncontrolling interests 2.5 0.9 Net Income (Loss) Attributable to Ingersoll Rand Inc.$ 562.5 $ (33.3) Percentage of Revenues Gross profit 38.6 % 35.4 % Selling and administrative expenses 20.0 % 19.9 % Operating income 11.0 % 1.5 % Income (loss) from continuing operations 10.2 % (1.4) % Adjusted EBITDA(1) 23.1 % 22.1 % Other Financial Data Adjusted EBITDA(1)$ 1,191.9 $ 878.1 Adjusted net income(1) 881.4 520.0 Cash flows - operating activities 627.8 653.5 Cash flows - investing activities (1,029.4) (31.3) Cash flows - financing activities (1,157.0) 328.7 Free cash flow(1) 563.7 611.5
(1)See "Non-GAAP Financial Measures" below for a reconciliation to the most directly comparable GAAP measure.
Revenues
Revenues for 2021 were$5,152.4 million , an increase of$1,179.2 million , or 29.7%, compared to$3,973.2 million in 2020. The increase in revenues was primarily due to acquisitions, includingIngersoll Rand Industrial , of$537.5 million and organic volume growth in our Industrial Technologies and Services segment of$330.3 million . The increase due to acquisitions is impacted by the inclusion of twelve months of activity fromIngersoll Rand Industrial in 2021 compared to only ten months of activity in 2020. Organic volume growth in 2021 partially reflects the adverse impact of COVID-19 in 2020. The percentage of consolidated revenues derived from aftermarket parts and services was 36.2% in 2021 compared to 35.5% in 2020. 28
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Gross Profit
Gross profit in 2021 was$1,988.5 million , an increase of$583.6 million , or 41.5%, compared to$1,404.9 million in 2020, and as a percentage of revenues was 38.6% in 2021 and 35.4% in 2020. The increase in gross profit is primarily due to acquisitions, includingIngersoll Rand Industrial , higher volumes in our Industrial Technologies and Services segment, and the runoff of the fair valuation adjustments related to the acquisition ofIngersoll Rand Industrial impacting cost of sales in 2020 that did not recur in 2021. The increase due to acquisitions is impacted by the inclusion of twelve months of activity fromIngersoll Rand Industrial in 2021 compared to only ten months of activity in 2020. The increase in gross profit as a percentage of revenues is primarily due to the runoff of the fair valuation adjustments related to the acquisition ofIngersoll Rand Industrial impacting cost of sales in 2020 that did not recur in 2021.
Selling and Administrative Expenses
Selling and administrative expenses were$1,028.0 million in 2021, an increase of$238.7 million , or 30.2%, compared to$789.3 million in 2020. Selling and administrative expenses as a percentage of revenues increased to 20.0% in 2021 from 19.9% in 2020. This increase in selling and administrative expenses was primarily due to acquisitions, includingIngersoll Rand Industrial , and increased incentive compensation.
Amortization of Intangible Assets
Amortization of intangible assets was$332.9 million in 2021, a decrease of$2.2 million compared to$335.1 million in 2020. The decrease was primarily due to certain intangible assets, primarily backlog, related to the acquisition ofIngersoll Rand Industrial becoming fully amortized, partially offset by the inclusion of twelve months of activity fromIngersoll Rand Industrial in 2021 compared to only ten months of activity in 2020 as well as intangible assets acquired in 2021.
Impairment of Intangible Assets
Impairment of intangible assets was$19.9 million in 2020 due to the impairment of two tradenames in the Industrial Technologies and Services segment. There were no impairments recognized during the year endedDecember 31, 2021 . See Note 9 "Goodwill and Other Intangible Assets" to our consolidated financial statements included elsewhere in this Form 10-K for further details.
Other Operating Expense, Net
Other operating expense, net was$61.9 million in 2021, a decrease of$139.1 million compared to$201.0 million in 2020. The decrease was primarily due to lower restructuring charges of$69.6 million , lower acquisition related expenses of$38.0 million , and higher foreign currency transaction gains, net of$30.6 million . Interest Expense
Interest expense was
Loss on Extinguishment of Debt
Loss on extinguishment of debt was$9.0 million in 2021, which was related to the payoff of the Dollar Term Loan Series A. Loss on extinguishment of debt was$2.0 million in 2020, which was related to the refinancing of the Original Dollar Term Loan and the Original Euro Term Loan. See Note 11 "Debt" to our audited consolidated financial statements included elsewhere in this Form 10-K for further details. Other Income, Net
Other income, net, was
Provision for Income Taxes
The benefit for income taxes was$21.8 million resulting in a (4.2)% effective tax rate in 2021 compared to a provision for income taxes of$11.4 million resulting in a (25.1)% effective tax provision rate in 2020. The decrease in the tax provision and the change in the effective tax rate is primarily due to an increase in the pre-tax book income in jurisdictions with lower effective 29
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tax rates combined with lower earnings in jurisdictions with higher tax rates. The rate increase was mitigated by the release of unrecognized tax reserves as a result of the lapse of the limitation on statutes, a benefit associated with the final settlement on the merger transaction, a one-time restructuring benefit, and foreign tax credit utilization.
Net Income (Loss)
Net income was$565.0 million in 2021 compared to net loss of$(32.4) million in 2020. The increase in net income was primarily due to higher gross profit on increased revenues and lower other operating expenses, net, partially offset by higher selling and administrative expenses.
Adjusted EBITDA
Adjusted EBITDA increased$313.8 million to$1,191.9 million in 2021 compared to$878.1 million in 2020. Adjusted EBITDA as a percentage of revenues increased 100 basis points to 23.1% in 2021 from 22.1% in 2020. The increase in Adjusted EBITDA was primarily due to higher organic sales volume of$157.6 million , improved pricing of$139.0 million and acquisitions, includingIngersoll Rand Industrial , of$127.5 million , partially offset by increased selling and administrative expenses. The increase in Adjusted EBITDA as a percentage of revenues is primarily attributable to organic growth in our Industrial Technologies and Services segment.
Adjusted Net Income
Adjusted Net Income increased$361.4 million to$881.4 million in 2021 compared to$520.0 million in 2020. The increase was primarily due to higher Adjusted EBITDA, lower income tax provision, as adjusted and lower interest expense. 30
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Non-GAAP Financial Measures
Set forth below are reconciliations of net income (loss) to Adjusted EBITDA and
Adjusted Net Income and cash flows from operating activities to Free Cash Flow.
For additional information regarding Adjusted EBITDA and Adjusted Net Income,
see "How We Assess the Performance of Our Business" above.
Year Ended December 31,
2021 2020
Net Income (Loss) $ 565.0 $ (32.4)
Less: Income from discontinued operations 121.0 26.0
Less: Income tax provision from discontinued operations (79.4) (1.6)
Income (loss) from continuing operations, net of tax 523.4 (56.8)
Plus:
Interest expense 87.7 111.1 Provision for income taxes (21.8) 11.4 Depreciation expense(a) 85.1 75.3 Amortization expense(b) 332.9 335.1 Impairment of other intangible assets - 19.9 Restructuring and related business transformation costs(c) 18.8 88.0 Acquisition related expenses and non-cash charges(d) 65.2 181.5 Stock-based compensation(e) 95.9 47.0 Foreign currency transaction losses (gains), net (12.0) 18.6 Loss on equity method investments 11.4 - Loss on extinguishment of debt 9.0 2.0 Adjustments to LIFO inventories(f) 33.2 39.8 Gain on settlement of post-acquisition contingencies (30.1) - Other adjustments(g) (6.8) 5.2 Adjusted EBITDA$ 1,191.9 $ 878.1 Minus: Interest expense $ 87.7$ 111.1 Income tax provision, as adjusted(h) 120.7 163.6 Depreciation expense 85.1 75.3 Amortization of non-acquisition related intangible assets 17.0 8.1 Adjusted Net Income $
881.4
Free Cash Flow from Continuing Operations: Cash flows from operating activities from continuing operations$ 627.8 $ 653.5 Minus: Capital expenditures 64.1 42.0 Free Cash Flow from Continuing Operations $
563.7
(a)Depreciation expense excludes
(b)Represents$315.9 million and$327.0 million of amortization of intangible assets arising from the acquisition ofIngersoll Rand Industrial and other acquisitions (customer relationships, technology, tradenames and backlog) and$17.0 million and$8.1 million of amortization of non-acquisition related intangible assets, in each case for the years endedDecember 31, 2021 and 2020, respectively. 31
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(c)Restructuring and related business transformation costs consisted of the
following.
Year Ended December 31,
2021 2020
Restructuring charges $ 13.4 $ 83.0
Facility reorganization, relocation and other costs 3.1 2.1
Other, net 2.3 2.9
Total restructuring and related business transformation costs
(d)Represents costs associated with successful and abandoned acquisitions, including third-party expenses, post-closure integration costs (including certain incentive and non-incentive cash compensation costs), and non-cash charges and credits arising from fair value purchase accounting adjustments.
(e)Represents stock-based compensation expense recognized for the year ended
Represents stock-based compensation expense recognized for the year ended
(f)For the year endedDecember 31, 2021 , represents$33.2 million of LIFO reserve changes. For the year endedDecember 31, 2020 , includes$4.2 million of LIFO reserve changes and$35.6 million to reduce the carrying value of inventories acquired in the merger withIngersoll Rand Industrial accounted for under the LIFO method. We have reclassified the amounts in 2020 from "Other adjustments" and "Acquisition related expenses and non-cash charges," respectively, to conform to the current year presentation.
(g)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.
(h)Represents our income tax provision adjusted for the tax effect of pre-tax
items excluded from Adjusted Net Income and the removal of applicable discrete
tax items. The tax effect of pre-tax items excluded from Adjusted Net Income is
computed using the statutory tax rate related to the jurisdiction that was
impacted by the adjustment after taking into account the impact of permanent
differences and valuation allowances. Discrete tax items include changes in tax
laws or rates, changes in uncertain tax positions relating to prior years and
changes in valuation allowances.
The income tax provision, as adjusted for each of the periods presented below
consists of the following.
Year Ended December 31,
2021 2020
Provision (benefit) for income taxes $ (21.8) $ 11.4
Tax impact of pre-tax income adjustments 97.6
156.6
Discrete tax items 44.9
(4.4)
Income tax provision, as adjusted$ 120.7 $ 163.6 Segment Results We classify our business into two segments: Industrial Technologies and Services and Precision and Science Technologies. Our Corporate operations (as described below) are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above. 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 ("CODM") are described in Note 23 "Segment Information" to our audited consolidated financial statements included elsewhere in this Form 10-K.
Included in our discussion of our segment results below are changes in Segment
Revenues and Segment Adjusted EBITDA on a Constant Currency basis. Constant
Currency information compares results between periods as if exchange rates had
remained constant period over period. We define Constant Currency as changes in
Segment Revenues and Segment Adjusted EBITDA excluding the impact of foreign
exchange rate movements. We use these measures to determine the Constant
Currency Segment Revenues and Segment Adjusted EBITDA growth on a year-on-year
basis. Constant Currency Segment Revenues and Segment Adjusted EBITDA are
calculated by translating current period Segment Revenues and Segment Adjusted
EBITDA using prior period exchange rates. These results should be considered in
addition to, not as a substitute for, results reported in accordance with GAAP.
Results on a constant currency basis, as we present them, may not be comparable
to similarly titled measures used by other companies and are not a measure of
performance presented in accordance with GAAP.
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Segment Results for Years Ended
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 and illustrates, on a percentage basis, the impact of foreign currency fluctuations on Segment Revenues and Segment Adjusted EBITDA growth.
Industrial Technologies and Services Segment Results
Years Ended December 31, Percent Change
2021 2020 2021 vs. 2020
Segment Revenues $ 4,161.0 $ 3,248.2 28.1 %
Segment Adjusted EBITDA $ 1,033.7 $ 759.8 36.0 %
Segment Margin 24.8 % 23.4 % 140 bps
2021 vs. 2020
Segment Revenues for 2021 were $4,161.0 million , an increase of $912.8 million ,
or 28.1%, compared to $3,248.2 million in 2020. The increase in Segment Revenues
was primarily due to acquisitions, including Ingersoll Rand Industrial , of
$377.5 million or 11.6%, higher volume of $330.3 million or 10.2%, improved
pricing of $118.7 million or 3.7% and favorable impact of foreign currencies of
$86.3 million or 2.7%. The percentage of Segment Revenues derived from
aftermarket parts and service was 40.7% in 2021 compared to 40.2% in 2020.
Segment Adjusted EBITDA in 2021 was $1,033.7 million , an increase of $273.9
million , or 36.0%, from $759.8 million in 2020. Segment Adjusted EBITDA Margin
increased 140 bps to 24.8% from 23.4% in 2020. The increase in Segment Adjusted
EBITDA was primarily due to higher organic sales volumes of $125.9 million or
16.6%, improved pricing of $118.7 million or 15.6%, acquisitions, including
Ingersoll Rand Industrial , of $93.4 million or 12.3% and favorable impact of
foreign currencies of $23.0 million or 3.0%, partially offset by higher selling
and administrative expenses of $60.9 million or 8.0% and unfavorable margin mix
of $20.7 million or 2.7%.
Precision and Science Technologies Segment Results
Years Ended December 31, Percent Change
2021 2020 2021 vs. 2020
Segment Revenues $ 991.4 $ 725.0 36.7 %
Segment Adjusted EBITDA $ 291.4 $ 220.2 32.3 %
Segment Margin 29.4 % 30.4 % (100) bps
2021 vs. 2020
Segment Revenues for 2021 were $991.4 million , an increase of $266.4 million , or
36.7%, compared to $725.0 million in 2020. The increase in Segment Revenues was
primarily due to acquisitions, including Ingersoll Rand Industrial , of $160.0
million or 22.1%, higher volume of $70.4 million or 9.7%, improved pricing of
$20.3 million or 2.8% and favorable impact of foreign currencies of $15.7
million or 2.2%. The percentage of Segment Revenues derived from aftermarket
parts and service was 17.1% in 2021 compared to 14.6% in 2020.
Segment Adjusted EBITDA in 2021 was $291.4 million , an increase of $71.2
million , or 32.3%, from $220.2 million in 2020. Segment Adjusted EBITDA Margin
decreased 100 bps to 29.4% from 30.4% in 2020. The increase in Segment Adjusted
EBITDA was due primarily to acquisitions, including Ingersoll Rand Industrial ,
of $36.1 million or 16.4%, higher volume of $31.7 million or 14.4%, improved
pricing of $20.3 million or 9.2%, partially offset by higher selling and
administrative expenses of $13.0 million or 5.9%.
Orders
Industrial Technologies and Services
The mission-critical nature of our Industrial Technologies and Services segment 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. In the fourth quarter of 2021, we had$1,201.1 million of orders in our Industrial Technologies and Services segment, an increase of 20.5% over the fourth quarter of 2020. 33
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Precision and Science Technologies Segment
During 2021, the Precision and Science Technologies segment has seen increased demand for our products, particularly related to life science and specialty applications. In the fourth quarter of 2021, we booked$305.9 million of orders in our Precision and Science Technologies segment, an increase of 38.9% over the fourth quarter of 2020.
Results of Discontinued Operations
Results of Discontinued Operations - SVT
The following table presents selected Consolidated Results of Operations of our
business for the years ended
2021 2020
Revenues $ 430.9 $ 741.4
Cost of sales 321.3 564.6
Gross profit 109.6 176.8
Selling and administrative expenses 35.7 63.0
Amortization of intangible assets 10.4 37.1
Gain on sale (298.3) -
Other operating expense, net 18.1 1.7
Income Before Income Taxes 343.7 75.0
Provision for income taxes 87.1 12.9
Income from Discontinued Operations, Net of Tax
Revenues
Revenues for 2021 were$430.9 million , a decrease of$310.5 million , or 41.9%, compared to$741.4 million in 2020. The decrease in revenues from discontinued operations was primarily due to the sale of SVT being substantially completed onJune 1, 2021 . Refer to Note 3 "Discontinued Operations" to our consolidated financial statements for additional discussion.
Gross Profit
Gross profit for 2021 was$109.6 million , a decrease of$67.2 million , or 38.0%, compared to$176.8 million for 2020, and as a percentage of revenues was 25.4% for the year endedDecember 31, 2021 and 23.8% in 2020. The decrease in gross profit is primarily due to the sale being substantially completed onJune 1, 2021 . Gain on Sale
Gain on sale for the year ended
Other Operating Expense (Income), Net
Other operating expense, net was$18.1 million for the year endedDecember 31, 2021 , an increase of$16.4 million , compared to$1.7 million in 2020. The increase was primarily due to higher separation related expenses and non-cash charges of$17.2 million , partially offset by lower restructuring charges of$0.8 million .
Provision (Benefit) for Income Taxes
The provision for income taxes for income taxes was$87.1 million , resulting in a 25.3% effective income tax rate for the year endedDecember 31, 2021 , compared to a provision for income taxes of$12.9 million resulting in a 17.2% effective income tax rate in the same period in 2020. The increase in the tax provision in 2021 is primarily due to one-time discrete items associated with the sale of the SVT business. 34
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Results of Discontinued Operations - HPS
The following table presents selected Consolidated Results of Operations of our
business for the years ended
2021 2020
Revenues $ 71.9 $ 195.6
Cost of sales 60.2 163.9
Gross profit 11.7 31.7
Selling and administrative expenses 5.3 42.5
Amortization of intangible assets 2.4 23.6 Loss on sale 207.7 - Other operating expense, net 19.0 14.5 Operating Loss (222.7) (48.9) Other expense, net - 0.1 Loss Before Income Taxes (222.7) (49.0) Benefit for income taxes (7.7) (11.3) Loss from Discontinued Operations, Net of Tax$ (215.0) $ (37.7) Revenues Revenues for 2021 were$71.9 million , a decrease of$123.7 million , or 63.2%, compared to$195.6 million in 2020. The decrease in revenues from discontinued operations was primarily due to the sale of HPS being substantially completed onApril 1, 2021 . Refer to Note 3 "Discontinued Operations" to our consolidated financial statements for additional discussion.
Gross Profit
Gross profit for 2021 was$11.7 million , a decrease of$20.0 million , or 63.1%, compared to$31.7 million in 2020, and as a percentage of revenues was 16.3% for the year endedDecember 31, 2021 and 16.2% in 2020. The decrease in gross profit is primarily due to the sale being substantially completed onApril 1, 2021 .
Loss on Sale
Loss on sale for 2021 of
Other Operating Expense, Net
Other operating expense, net were$19.0 million for 2021, an increase of$4.5 million , compared to$14.5 million in 2020. The increase was primarily due to expenses incurred in connection with the separation of$14.4 million , partially offset by lower restructuring charges of$8.5 million .
Provision (Benefit) for Income Taxes
The benefit for income taxes was$7.7 million , resulting in a 3.5% effective income tax rate for year endedDecember 31, 2021 , compared to a benefit for income taxes of$11.3 million resulting in a 23.1% effective income tax rate in 2020. The decrease in the tax benefit in 2021 is primarily due to one-time discrete items associated with the sale of the HPS business. 35
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Unaudited Quarterly Results of Operations
(in millions, except per Year Ended December 31, 2021(1) Year Ended December 31, 2020 share amounts) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenues$ 1,129.5 $ 1,279.1 $ 1,325.0 $ 1,418.8 $ 616.8 $ 1,025.4 $ 1,112.5 $ 1,218.5 Gross profit$ 452.1 $ 512.7 $ 514.3 $ 509.4 $ 203.3 $ 308.6 $ 430.0 $ 463.0 Operating income (loss)$ 121.3 $ 140.1 $ 163.9 $ 140.4 $ (79.3) $ (45.0) $ 69.0 $ 114.9 Income (loss) from continuing operations, net of tax$ 90.1 $ 138.3 $ 131.0 $ 164.0 $ (41.3) $ (151.9) $ 30.0 $ 106.4 Income (loss) from discontinued operations, net of tax$ (180.2) $ 96.3 $
(4.2)
$ (90.1) $ 234.6 $ 126.8 $ 293.7 $ (36.9) $ (176.5) $ 29.9 $ 151.1 Net income (loss) attributable to Ingersoll Rand Inc.$ (90.4) $ 233.9 $ 126.0 $ 293.0 $ (36.8) $ (177.6) $ 29.5 $ 151.6 Weighted average shares, basic 419.2 419.9 412.3 407.8 277.3 417.0 417.6 418.4 Weighted average shares, diluted 425.9 426.8 418.5 413.4 277.3 417.0 422.0 424.5 Basic earnings (loss) per share of common stock from continuing operations$ 0.21 $ 0.33 $ 0.32 $ 0.40 $ (0.15) $ (0.37) $ 0.07 $ 0.26 Basic earnings (loss) per share of common stock from discontinued operations$ (0.43) $ 0.23 $ (0.01) $ 0.32 $ 0.02 $ (0.06) $ -$ 0.11 Basic earnings (loss) per share of common stock$ (0.22) $ 0.56 $ 0.31 $ 0.72 $ (0.13) $ (0.43) $ 0.07 $ 0.36 Diluted earnings (loss) per share of common stock from continuing operations$ 0.21 $ 0.32 $ 0.31 $ 0.40 $ (0.15) $ (0.37) $ 0.07 $ 0.25 Diluted earnings (loss) per share of common stock from discontinued operations$ (0.42) $ 0.23 $ (0.01) $ 0.31 $ 0.02 $ (0.06) $ -$ 0.11 Diluted earnings (loss) per share of common stock$ (0.21) $ 0.55 $ 0.30 $ 0.71 $ (0.13) $ (0.43) $ 0.07 $ 0.36 Adjusted EBITDA(2)$ 244.0 $ 292.1 $ 313.7 $ 342.1 $ 112.2 $ 217.5 $ 251.7 $ 296.7 (1)See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting the Comparability of our Results of Operations." 36
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(2)Set forth below are the reconciliations of Net Income to Adjusted EBITDA
Year Ended December 31, 2021 Year Ended December 31, 2020
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Net Income (Loss) $ (90.1) $ 234.6 $ 126.8 $ 293.7 $ (36.9) $ (176.5) $ 29.9 $ 151.1
Less: Income (loss) from discontinued
operations (177.8) 258.5 (7.6) 47.9 12.5 (7.2) 5.3 15.4
Less: Income tax benefit (provision) from discontinued operations (2.4) (162.2) 3.4 81.8 (8.1) (17.4) (5.4)
29.3
Income (loss) from continuing operations, net of tax 90.1 138.3 131.0 164.0 (41.3) (151.9) 30.0 106.4 Plus: Interest expense 23.1 22.7 22.5 19.4 27.1 30.8 28.8 24.4 Provision (benefit) for income taxes 10.6 12.5 2.7 (47.6) (66.9) 78.4 12.8 (12.9) Depreciation expense 20.3 21.0 21.2 22.6 12.3 22.5 19.8 20.7 Amortization expense 84.2 80.3 80.3 88.1 46.7 96.4 97.0 95.0 Impairment of other intangible assets - - - - - - 19.9 - Restructuring and related business transformation costs(a) 2.7 6.7 3.1 6.3 38.6 31.0 10.0 8.4 Acquisition related expenses and non-cash charges(b) 10.5 14.3 14.4 26.0 89.5 54.7 14.7 22.6 Stock-based compensation(c) 21.6 21.5 29.8 23.0 2.8 12.1 11.9 20.2 Loss on equity method investments - 0.7 2.2 8.5 - - - - Loss on extinguishment of debt - - 9.0 - 2.0 - - - Foreign currency transaction losses (gains), net (18.1) 3.4 1.1 1.6 2.0 4.9 5.8 5.9 Adjustments to LIFO inventories(d) - - - 33.2 - 35.6 - 4.2 Gain on settlement of post-acquisition contingencies(e) - (30.1) - - - - - - Other adjustments(f) (1.0) 0.8 (3.6) (3.0) (0.6) 3.0 1.0 1.8 Adjusted EBITDA$ 244.0 $ 292.1 $ 313.7 $ 342.1 $ 112.2 $ 217.5 $ 251.7 $ 296.7 (a)Restructuring and related business transformation costs consist of (i) restructuring charges, (ii) severance, sign-on, relocation and executive search costs, (iii) facility reorganization, relocation and other costs, (iv) information technology infrastructure transformation, (v) gains and losses on asset disposals, (vi) consultant and other advisor fees and (vii) other miscellaneous costs.
(b)Represents costs associated with successful and abandoned acquisitions, including third-party expenses, post-closure integration costs (including certain incentive and non-incentive cash compensation costs) and non-cash charges and credits arising from fair value purchase accounting adjustments.
(c)Represents stock-based compensation expense recognized for stock options
outstanding for the year ended
Represents stock-based compensation expense recognized for the year ended
(d)For the year endedDecember 31, 2021 , represents$33.2 million of LIFO reserve changes. For the year endedDecember 31, 2020 , includes$4.2 million of LIFO reserve changes and$35.6 million to reduce the carrying value of inventories acquired in the merger withIngersoll Rand Industrial accounted for under the LIFO method. We have reclassified the amounts in 2020 from "Other adjustments" and "Acquisition related expenses and non-cash charges," respectively, to conform to the current year presentation.
(e)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.
(f)Includes (i) effects of 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.
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.
For a description of our material indebtedness, see Note 11 "Debt" to our audited consolidated financial statements included elsewhere in this Form 10-K.
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As of
As of
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.
Year Ended December 31,
2021 2020
Cash and cash equivalents $ 2,109.6 $ 1,750.9
Short-term borrowings and current maturities of long-term debt $ 38.8 $ 40.4
Long-term debt 3,401.8 3,859.1
Total debt $ 3,440.6 $ 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 Senior Secured Credit
Facilities if certain specified conditions are met under the credit agreement
governing the Senior Secured Credit Facilities. Our liquidity requirements are
significant primarily due to debt service requirements. See Note 11 "Debt" to
our audited consolidated financial statements included elsewhere in this Form
10-K 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. 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 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.
We may from time to time repurchase shares of our common stock in the open
market at prevailing market prices (including through a Rule 10b5-1 plan), in
privately negotiated transactions, a combination thereof or through other
transactions. The actual timing, number, manner and value of any shares
repurchased will depend on several factors, including the market price of our
stock, general market and economic conditions, our liquidity requirements,
applicable legal requirements and other business considerations.
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 December 31,
2021 is $49.6 million which consists mainly of withholding taxes.
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Working Capital
For the Years Ended December 31,
2021 2020
Net Working Capital
Current assets $ 4,114.9 $ 3,862.1
Less: Current liabilities 1,467.7 1,498.6
Net working capital $ 2,647.2 $ 2,363.5
Operating Working Capital
Accounts receivable and contract assets $ 1,009.4 $ 922.2
Plus: Inventories (excluding LIFO) 878.6 707.9
Less: Accounts payable 670.5 536.4
Less: Contract liabilities 242.1 164.6
Operating working capital $ 975.4 $ 929.1
Net working capital increased $283.7 million to $2,647.2 million as of
December 31, 2021 from $2,363.5 million as of December 31, 2020 . Operating
working capital increased $46.3 million to $975.4 million as of December 31,
2021 from $929.1 million as of December 31, 2020 . Operating working capital as
of December 31, 2021 was 18.9% of 2021 revenues as compared to 23.4% as of
December 31, 2020 as a percentage of 2020 revenues. The increase in operating
working capital was primarily due to higher inventories and higher accounts
receivable, partially offset by higher accounts payable and higher contract
liabilities. The increase in accounts receivable was primarily due to the
increase in revenue in the fourth quarter of 2021 compared to the fourth quarter
of 2020 and to acquisitions completed in 2021. The increase in inventory was
primarily attributable 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 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 years
ended
2021 2020
Cash flows provided by (used in) continuing operations: Cash flows provided by operating activities
$ 627.8 $ 653.5 Cash flows used in investing activities (1,029.4)
(31.3)
Cash flows provided by (used in) financing activities (1,157.0)
328.7
Net cash provided by discontinued operations 1,931.4 254.2 Free cash flow (1) 563.7 611.5
(1)See "Non-GAAP Financial Measures" for a reconciliation to the most directly comparable GAAP measure.
Operating activities
Cash provided by operating activities decreased
Operating working capital used cash of$3.0 million in 2021 compared to generating cash of$171.3 million in 2020. Changes in account receivables used cash of$62.5 million in 2021 compared to generating cash of$52.4 million in 2020. Changes in contract assets used cash of$0.4 million in 2021 compared to using cash of$11.7 million in 2020. Changes in inventory used cash of$134.4 million in 2021 compared to generating cash of$159.0 million in 2020. Changes in accounts payable generated cash of$118.2 million in 2021 compared to using cash of$43.4 million in 2020. Changes in contract liabilities generated cash of$76.1 million in 2021 compared to generating cash of$15.0 million in 2020.
Investing activities
Cash flows used in investing activities included capital expenditures of$64.1 million (1.2% of consolidated revenues) and$42.0 million (1.1% of consolidated revenues) in 2021 and 2020, respectively. We expect capital expenditures will be approximately 39
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2% of consolidated revenues in 2022. Cash acquired (paid) in business combinations was$(974.8) million in 2021 and$9.0 million in 2020. Net proceeds from the disposal of property, plant and equipment were$9.5 million and$1.7 million in 2021 and 2020, respectively.
Financing activities
Cash used in financing activities of$1,157.0 million in 2021 is primarily due to purchases of treasury stock of$736.8 million , repayments of long-term debt of$435.7 million , and cash dividends on common stock of$8.2 million , offset by proceeds from stock option exercises of$23.7 million . Cash provided by financing activities of$328.7 million in 2020 is primarily due to proceeds from long-term debt of$1,980.1 million , offset by repayments of long-term debt of$1,619.1 million and payments of debt issuance costs of$47.8 million . Also included are proceeds from stock option exercises of$22.7 million and a net usage of cash of$3.0 million related to the purchase and sale of noncontrolling interests of ourIndia subsidiary. See Note 13 "Stockholders' Equity and Noncontrolling Interests" to our audited consolidated financial statements included elsewhere in this Form 10-K for further details.
Discontinued Operations
Cash provided by discontinued operations increased$1,677.2 million to$1,931.4 million in 2021 from$254.2 million in 2020, primarily due to proceeds from sale of discontinued operations. Free cash flow
Free cash flow decreased
Purchase Obligations
Purchase obligations consist primarily of agreements to purchase inventory or services made in the normal course of business to meet operational requirements. As ofDecember 31, 2021 , the Company had purchase of obligations of$441.2 million , with$371.5 million payable in the next 12 months. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which we are contractually obligated as ofDecember 31, 2021 . For this reason, these amounts will not provide a complete and reliable indicator of our expected future cash outflows.
Contingencies
We are a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature for a company of our size and in our sector. We believe that such proceedings, lawsuits and administrative actions will not materially adversely affect our operations, financial condition, liquidity or competitive position. We have accrued liabilities and other liabilities on our consolidated balance sheet, including a total litigation reserve of$136.9 million as ofDecember 31, 2021 with respect to potential liability arising from our asbestos-related litigation. Other than our asbestos-related litigation reserves, we only have de minimis accrued liabilities and other liabilities on our consolidated balance sheet with respect to other legal proceedings, lawsuits and administrative actions. A more detailed discussion of certain of these proceedings, lawsuits and administrative actions is set forth in "Item 3. Legal Proceedings."
Critical Accounting Policies
Accounting policies discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. Certain of these policies include estimates and assumptions. These estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effect based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of goodwill, intangibles and long-lived assets, increases in reserves for contingencies, establishment of valuation allowances on deferred tax assets and increase in tax liabilities, among other effects. Also see Note 1 "Summary of Significant Accounting Policies" to our audited consolidated financial statements included elsewhere in this Form 10-K, which discusses the significant accounting policies that we have selected from acceptable alternatives.
Business Combinations
We apply the acquisition method of accounting with respect to the identifiable
assets and liabilities of a business combination and record the assets acquired
and liabilities assumed at their estimated fair values as of the acquisition
date. The excess of the
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cost of the acquired business and the fair value of the assets acquired and liabilities assumed is recognized as goodwill. Estimates of fair value represent management's best estimate of assumptions and about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates, market comparables and others. Inputs used are generally obtained from historical data supplemented by current and anticipated market conditions and growth rates. Significant judgment is required in estimating the fair value of identifiable intangible assets and in assigning their respective useful lives. The fair value estimates are based on historical information and on future expectations and assumptions deemed reasonable by management, but which are inherently uncertain. See Note 3 "Business Combinations" to our consolidated financial statements included elsewhere in this Form 10-K for further information regarding the fair value determination of each of the classes of identifiable intangible assets. Determining the useful life of an intangible asset also requires judgment. Certain intangibles are expected to have indefinite lives while certain other identifiable intangible assets have determinable lives. The useful lives of identifiable intangibles with determinable useful lives are based on a variety of factors, including but not limited to, the competitive environment, product cycles, order life cycles, historical customer attrition rates, market share, operating plans and the macroeconomic environment. The costs of determinable-lived intangible assets are amortized to expense over the estimated useful life.
Impairment of
We test goodwill for impairment annually in the fourth quarter of each year using data as ofOctober 1 of that year and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Upon adoption of ASU 2019-04, the impairment test consists of comparing the fair value of the reporting unit to the carrying value of the reporting unit. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; provided, the loss recognized cannot exceed the total amount of goodwill allocated to the reporting unit. If applicable, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. We determined fair values for all of the reporting units using a combination of the income and market multiples approaches which are weighted 75% and 25%, respectively. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our 2021 reporting unit valuations ranged from 8.5% to 9.5%. Additionally, we assumed 3.0% terminal growth rates for all reporting units, except a single reporting unit in which we determined it most appropriate to assume an 2.0% terminal growth rate due to it being closely aligned to the GDP percentage growth rate. Under the market multiples approach, fair value is determined based on multiples derived from the stock prices of publicly traded guideline companies to develop a business enterprise value ("BEV") for our reporting units. The application of the market multiples method entails the development of book value multiples based on the market value of the guideline companies. The multiples are developed by first calculating the market value of equity of the guideline companies and then adjusting these multiples for cash and debt to arrive at a BEV multiple. Identifying appropriate guideline companies and computing appropriate market multiples is subjective. We considered various public companies that had reasonably similar qualitative factors as our reporting units while also considering quantitative factors such as revenue growth, profitability and total assets. With the exception of one reporting unit formed through a recent acquisition, the estimated fair values of our reporting units were well in excess of their carrying values. The carrying value of the recently-formed reporting unit was approximately equal to its fair value due to the close proximity of the acquisition date to the impairment testing date. The estimated fair values of all other reporting units were at least 47% higher than their carrying values and therefore, no impairments were identified. We test intangible assets with indefinite lives for impairment annually utilizing a discounted cash flow valuation referred to as the relief from royalty method. We estimated forecasted revenues for a period of five years with discount rates ranging from 9.0% to 10.0%, terminal growth rates of 2.0 % to 3.0%, and royalty rates ranging from 0.5% to 4.0%. As a result of this test, there were no impairments recognized during the year endedDecember 31, 2021 . We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. 41
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Also see Note 9 "
Income Taxes
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. The Tax Cuts and Jobs Act, enacted onDecember 22, 2017 , created a new requirement that certain income (i.e., Global intangible low taxed income ("GILTI")) earned by controlled foreign corporations ("CFC") must be included currently in the gross income of the CFCs'U.S. shareholder. GILTI is the excess of the shareholder's "net CFC tested income" over the net deemed tangible income return, which is currently defined as the excess of (1) 10% of the aggregate of theU.S. shareholder's pro rata share of the qualified business asset investment of each CFC with respect to which it is aU.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. UnderU.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on futureU.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factoring such amounts into a company's measurement of its deferred taxes (the "deferred method"). The Company has determined that it will follow the period cost method (option 1 above) going forward. The tax provision for the year endedDecember 31, 2021 reflects this decision. All of the additional calculations and rule changes found in the Tax Act have been considered in the tax provision for the year endedDecember 31, 2021 . The Company recorded a tax expense of$11.7 million in 2021 for the GILTI provisions of the Tax Act. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. Amounts recorded for deferred tax assets related to tax attribute carryforwards, net of valuation allowances, were$38.0 million and$40.7 million as ofDecember 31, 2021 and 2020, respectively, with the decrease related to utilizing the attributes.
Loss Contingencies
Loss contingencies are uncertain and unresolved matters that arise in the
ordinary course of business and result from events or actions by others that
have the potential to result in a future loss. Such contingencies include, but
are not limited to, asbestos and silica related litigation, environmental
obligations, litigation, regulatory proceedings, product quality and losses
resulting from other events and developments.
When a loss is considered probable and reasonably estimable, we record a
liability in the amount of our best estimate for the ultimate loss. When there
appears to be a range of possible costs with equal likelihood, liabilities are
based on the low-end of such range. However, the likelihood of a loss with
respect to a particular contingency is often difficult to predict and
determining a meaningful estimate of the loss or a range of loss may not be
practicable based on the information available and the potential effect of
future events and decisions by third parties that will determine the ultimate
resolution of the contingency. In particular, as it relates to estimating
asbestos and silica contingencies, there are a number of key variables and
assumptions including the number and type of new claims to be filed each year,
the resolution or outcome of these claims, the average cost of resolution of
each new claim, the amount of insurance available, allocation methodologies, the
contractual terms with each insurer with whom we have reached settlements, the
resolution of coverage issues with other excess insurance carriers with whom we
have not yet achieved settlements and the solvency risk with respect to our
insurance carriers. Moreover, it is not uncommon for such matters to be resolved
over many years, during which time relevant developments and new information
must be continuously evaluated to determine both the likelihood of potential
loss and whether it is possible to reasonably estimate a range of possible loss.
When a loss is probable but a reasonable estimate cannot be made, disclosure is
provided.
Disclosure also is provided when it is reasonably possible that a loss will be
incurred or when it is reasonably possible that the amount of a loss will exceed
the recorded provision. We regularly review all contingencies to determine
whether the likelihood of loss has changed and to assess whether a reasonable
estimate of the loss or range of loss can be made. As discussed above,
development of a meaningful estimate of loss or a range of potential loss is
complex when the outcome is directly dependent on
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negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low.
Recent Accounting Pronouncements
See Note 2 "New Accounting Standards" to our audited consolidated financial statements included elsewhere in this Form 10-K for a discussion of recent accounting standards.
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