Business Combinations

3 Months Ended

Mar. 31, 2020

Note 2. Business Combinations

Ingersoll Rand Industrial Acquisition

On February 29, 2020, Ingersoll Rand completed the acquisition of Ingersoll Rand Industrial for the total estimated purchase consideration of approximately $6,937.0 million which represents Ingersoll Rand common stock with a fair value of $6,919.5 million and the balance equal to the fair value attributable to pre-acquisition service for replacement equity awards and deferred compensation arrangements settled in shares (or valued by reference to shares) of Ingersoll Rand common stock and reimbursement of retirement funding obligation. Ingersoll Rand Industrial is a global provider of mission-critical flow control and compression equipment and associated aftermarket parts, consumables and services. Ingersoll Rand acquired Ingersoll Rand Industrial to extend and enhance its portfolio of products to address market opportunities in the compressor, blower, pump and other industrial product markets.

Immediately prior to the merger, Trane Technologies plc (formerly known as Ingersoll-Rand plc) (“Old IR” or “Trane Technologies”) completed a spin-off in which it distributed one share of common stock of Ingersoll-Rand Industrial US. Holdco, Inc. (“SpinCo”), par value $0.01 per share, for each share of Old IR, outstanding as of the record date for the spin-off on February 24, 2020. In accordance with the merger agreement by and among Ingersoll Rand, Old IR, SpinCo and Charm Merger Sub Inc, a wholly owned subsidiary of Ingersoll Rand (“Merger Sub”), Merger Sub merged with and into SpinCo (the “acquisition”) and each share of common stock of SpinCo, par value $0.01 per share (“SpinCo common stock”), issued and outstanding immediately prior to the acquisition was converted into the right to receive 0.8824 shares of common stock of Ingersoll Rand, par value $0.01 per share (“Ingersoll Rand common stock”). Immediately after the consummation of the acquisition, approximately 50.1% of the outstanding shares of Ingersoll Rand common stock on a fully-diluted basis was held by SpinCo stockholders and approximately 49.9% of the outstanding shares of the Company common stock on a fully-diluted basis was held by pre-acquisition Ingersoll Rand stockholders. Since Ingersoll Rand (formerly named Gardner Denver Holdings, Inc.) is the accounting acquirer, the fair value of the equity issued by Ingersoll Rand to SpinCo stockholders in the acquisition was determined by reference to the market price of Ingersoll Rand common stock. Accordingly, the purchase consideration below reflects the estimated fair value of the Ingersoll Rand shares issued in exchange for shares of SpinCo common stock in the acquisition, which is based on the final closing price of shares of Ingersoll Rand common stock prior to the effective time of the acquisition on February 28, 2020 of $32.79 per share. The Company incurred approximately $87.3 million in total acquisition-related costs in connection with the acquisition, including approximately $42.3 million in the three month period ended March 31, 2020 recorded to “Other operating expenses, net” in the Condensed Consolidated Statements of Operations. In addition, the Company incurred $1.0 million in registration fees in connection with issuing shares in the acquisition of Ingersoll Rand Industrial. The $1.0 million reduced “Capital in excess of par value” of the Condensed Consolidated Balance Sheets.

Preliminary Purchase Price Allocation

In accordance with the FASB’s ASC 805 Business Combinations, Ingersoll Rand was determined to be the accounting acquirer. As such, Ingersoll Rand applied the acquisition method of accounting with respect to the identifiable assets and liabilities of Ingersoll Rand Industrial, which have been measured at estimated fair value as of the date of the business combination.

Ingersoll Rand Industrial’s assets and liabilities were measured at estimated fair values at February 29, 2020, primarily using Level 3 inputs except for debt, which was measured using Level 2 inputs and non-controlling interests, which was measured using Level 1 inputs. Estimates of fair value represent management’s best estimate of assumptions 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 were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates.

The following table summarizes the preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed by Ingersoll Rand, with the excess of purchase price over the fair value of Ingersoll Rand Industrial’s net assets recorded as goodwill. Due to the timing of the business combination and the magnitude of and multi-jurisdictional nature of the net assets acquired, at March 31, 2020 the valuation process to determine the fair values is not complete and further adjustments are expected in fiscal year 2020. The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available, including the refinement of market participant assumptions and finalization of tax returns in the pre-acquisition period. As the Company finalizes the fair value of assets acquired and liabilities assumed, as well as finalizes working capital adjustments, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition. The Company will reflect measurement period adjustments in the period in which the adjustments are determined.

The aggregate purchase consideration has been preliminarily allocated as follows.

Purchase Price
Fair value of Ingersoll Rand common stock issued for Ingersoll Rand
Industrial outstanding common stock⁽¹⁾	$	6,919.5
Fair value attributable to pre-merger service for replacement equity awards⁽²⁾		8.6
Fair value attributable to pre-merger service for deferred compensation plan⁽³⁾		8.9
Total purchase consideration	$	6,937.0

Purchase Price Allocation
Cash	$	41.3
Accounts receivable		579.9
Inventory		576.2
Other current assets		136.9
Property, plant and equipment		520.0
Goodwill		4,278.2
Intangible assets		4,501.3
Other noncurrent assets		269.8
Total current liabilities, including current maturities of long-term debt of $19.0 million		(830.6	)
Deferred tax liability		(900.6	)
Long-term debt, net of debt issuance costs and an original issue discount		(1,851.7	)
Other noncurrent liabilities		(310.4	)
Noncontrolling interest		(73.3	)
	$	6,937.0

⁽¹⁾

Represents the fair value of 211,023,522 shares of the Company’s common stock issued for Ingersoll Rand Industrial outstanding common stock multiplied by $32.79, the price per share of common stock as of the closing price on February 28, 2020.

⁽²⁾

Represents the fair value of the replacement equity awards to the extent those related to services provided by the employee of Ingersoll Rand Industrial prior to closing. See Note 9 “Stock-Based Compensation Plan” for additional information about the replacement equity awards.

⁽³⁾

Represents the fair value of the deferred compensation plan to be settled in equity. See Note 7 “Benefit Plans” for additional information about the deferred compensation plan.

Summary of Significant Fair Value Methods

The methods used to determine the preliminary fair value of significant identifiable assets and liabilities included in the preliminary allocation of purchase price are discussed below. The final fair value determination may differ from this preliminary determination.

Inventories

Acquired inventory is comprised of finished goods, work in process and raw materials. The preliminary fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The preliminary fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The preliminary fair value of raw materials and supplies was determined based on replacement cost which approximates historical carrying value. The preliminary fair value step-up of $102.3 million of inventories measured on a First In First Out (“FIFO”) basis is amortized to “Cost of sales” in the condensed consolidated financial statements as the inventory is sold, which is expected to be a period of four months from the acquisition date. For inventories measured on a Last In First Out (“LIFO”) basis, the acquired inventory becomes the LIFO base layer inventory.

Property, Plant and Equipment

The preliminary fair value of property, plant and equipment was primarily calculated using replacement costs adjusted for the age and condition of the asset, with the exception of real property which was calculated using the market approach, and is summarized below.

Land	$	38.8
Buildings		177.4
Machinery and equipment		255.9
Office furniture and equipment		13.2
Other		0.9
Construction in progress		33.8
Preliminary fair value of property, plant and equipment	$	520.0

Identifiable Intangible Assets

The estimated preliminary fair value and weighted average useful life of the Ingersoll Rand Industrial identifiable intangible assets are as follows.

	Fair Value		Weighted average useful life (years)
Tradenames⁽¹⁾	$	1,427.0	Indefinite
Developed technology⁽²⁾		145.0		6
Customer relationships⁽³⁾		2,805.0		21
Backlog⁽⁴⁾		90.9	< 1
Other⁽⁵⁾		33.4		4
Preliminary fair value of identfiable intangible assets	$	4,501.3

⁽¹⁾

Tradenames were identified from brands of Ingersoll Rand Industrial. The preliminary fair value of tradenames were determined using a relief from royalty methodology which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset. The discount rate used was determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital and weighted average return on assets. Tradenames are expected to have an indefinite useful life.

⁽²⁾

Developed technology was identified from the products of Ingersoll Rand Industrial. Preliminary fair values were determined using a relief from royalty methodology with similar methodology and assumptions as described in the tradename description above. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.

⁽³⁾

Customer relationships represent the preliminary fair value of existing relationships with the Ingersoll Rand Industrial customers. Its preliminary fair value was determined using the Multi-Period Excess Earning Method which involves isolating the net earnings attributable to the asset being measured based on present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The valuation includes a valuation of the assembled workforce, using the Cost Approach, for purposes of calculating contributory asset charges to be used in the Multi-Period Excess Earning Method valuations. The economic useful life was determined based on historical customer attrition rates.

⁽⁴⁾

Backlog primarily relates to the dollar value of purchase arrangements with customers, effective, as of a given point in time, that are based on mutually agreed terms which, in some cases, may still be subject to completion of written documentation and may be changed or cancelled by the customer, often without penalty. Ingersoll Rand Industrial’s backlog consists of these arrangements with assigned shipment dates expected, in most cases, within three to twelve months. The preliminary fair value was determined using the Multi-Period Excess Earning Method. The economic useful life is based on the time to fulfill the outstanding order backlog obligation.

⁽⁵⁾

Other intangible assets is primarily comprised of software.

The Company believes that the amounts of purchased intangible assets recorded represent the preliminary fair values of and approximates the amounts a market participant would pay for these intangible assets as of the acquisition date.

Leases, including lease liabilities and right-of-use (“ROU”) assets

Lease liabilities, included in “Accrued liabilities” and “Other non-current liabilities” in the Condensed Consolidated Balance Sheets, at the acquisition date, are remeasured at the present value of the future minimum lease payments over the remaining lease term and the incremental borrowing rate of Ingersoll Rand as if the acquired leases were new leases as of the acquisition date. ROU assets included in “Other assets” in the Condensed Consolidated Balance Sheets as of the acquisition date, are equal to the amount of the lease liability at the acquisition date adjusted for any off-market terms of the lease. The remaining lease term is based on the remaining term at the acquisition date plus any renewal or extension options that the Company is reasonably certain will be exercised.

Pension and Other Postretirement Liabilities

Ingersoll Rand recognized a pretax net liability representing the net funded status of Ingersoll Rand Industrial’s defined-benefit pension and other postretirement benefit (“OPEB”) plans. See Note 7 “Benefit Plans” for further information on the pension and OPEB arrangements.

Long-Term Debt

Ingersoll Rand Services Company incurred $1,900.0 million of indebtedness under the Credit Agreement dated as of February 28, 2020 among Ingersoll Rand Services Company, as borrower, Citibank, N.A. as administrative agent and collateral agent and the lenders party thereto (the “Senior Secured Credit Facility”) prior to the closing of the acquisition, and the indebtedness under the Senior Secured Credit Facility will mature February 28, 2027 (or, if such date is not a business day the first business day thereafter). Ingersoll Rand incurred a total of $26.9 million debt issuance costs associated with the $1,900.0 million loan under the Senior Secured Credit Facility. The $1,900.0 million of indebtedness under the Credit Agreement was reduced by a $2.4 million original issue discount.

The fair value for long term debt is determined based on the total indebtedness less debt issuance costs as the debt consummated at the time of closing of the acquisition.

Deferred Income Tax Assets and Liabilities

The acquisition was structured as a merger and therefore, the Company assumed the historical tax basis of Ingersoll Rand Industrial’s assets and liabilities. The deferred income tax assets and liabilities include the expected future federal, state and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the acquisition in the jurisdictions in which legal title of the underlying asset or liability resides. See Note 13. “Income Taxes” for further information related to income taxes.

Noncontrolling Interests

Ingersoll Rand Industrial has a 74% controlling interest in Ingersoll-Rand India Limited. Therefore, there is a 26% non-controlling interest in Ingersoll-Rand India Limited. Ingersoll-Rand India Limited is a public company in India and listed on stock exchanges in India. Ingersoll Rand’s preliminary fair value of non-controlling interest is based on market quote of Indian Rupee 639.2 per share, available on the last trading day on February 28, 2020 prior to the closing date of the acquisition. Considering non-controlling shares of 8.2 million, the preliminary fair value of non-controlling interest is $73.3 million.

Other Assets Acquired and Liabilities Assumed (excluding Goodwill)

The Company utilized the carrying values, net of allowances, to value accounts receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represented the fair value of those items at the acquisition date.

Goodwill

The excess of the consideration for the acquisition over the preliminary fair value of net assets acquired was recorded as goodwill. The estimated goodwill recognized is attributable primarily to expected synergies and expanded market opportunities from combining the Company’s operations with those of Ingersoll Rand Industrial. The goodwill created in the acquisition is not expected to be deductible for tax purposes and is subject to material revision as the purchase price allocation is completed. Goodwill arising from the acquisition has been allocated to the Industrial Technologies and Services, High Pressure Solutions, Precision and Science Technologies and Specialty Vehicle Technologies reporting segments. See Note 5. “Goodwill and Other Intangible Assets” for the allocation of goodwill to segments.

Results of Ingersoll Rand Industrial Subsequent to the Acquisition

The operating results of Ingersoll Rand Industrial have been included in the Company’s condensed consolidated financial statements for the three month period ended March 31, 2020 from the acquisition date. The Company’s condensed consolidated statements of operations for the three month period ended March 31, 2020 included revenues of $293.4 million and a net loss of $33.3 million which includes the effects of purchase accounting adjustments, primarily changes in amortization of intangible assets, depreciation of property, plant and equipment and amortization of stepped up inventory.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the combined results of operations for the Company and Ingersoll Rand Industrial as if the acquisition had been completed on January 1, 2019. The pro forma results have been prepared for comparative purposes only, and do not necessarily represent what the revenue or results of operations would have been had the acquisition been completed on January 1, 2019. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved.

The unaudited pro forma information includes adjustments for the preliminary purchase price accounting impact (including, but not limited to, amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs related to the fair value adjustment to long-term debt, transaction costs and related tax impacts) and the alignment of accounting policies.

The table below reflects the impact of material and nonrecurring adjustments to the unaudited pro forma results for the three month periods ended March 31, 2020 and 2019 that are directly attributable to the acquisition.

	For the Three Month Period Ended March 31,
	2020			2019
(Decrease) increase to expense as a result of inventory fair value adjustment, net of tax		(31.1	)		74.7
(Decrease) increase to expense as a result of transaction costs, net of tax		(38.1	)		78.6

The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of the Company’s condensed consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2019 or of the results of the Company’s future results of operations of the combined businesses.

	For the Three Month Period Ended March 31,
	2020			2019
Revenues	$	1,269.8		$	1,500.0
Net loss		(0.2	)		(110.5	)

Transactions with Trane Technologies

Certain agreements have been entered into between Ingersoll Rand and Trane Technologies plc, including, among others, an Employee Matters Agreement, a Real Estate Matters Agreement, a Tax Matters Agreement, an Intellectual Property Matters Agreement and a Transition Services Agreement each dated February 29, 2020. The Transition Services Agreement has a term of twenty four calendar months. Charges for services under the agreement will be determined on an allocated cost basis, subject to an overall annual aggregate cap. During the three month period ended March 31, 2020, the Company incurred $2.4 million of charges under the Transition Service Agreement.

Acquisition of Air Compressors and Blowers North Limited

On August 19, 2019, the Company acquired Air Compressors and Blowers North Limited (“ACBN”), a provider of vacuum pumps, blowers and compressors. The Company acquired certain assets of ACBN for total consideration of $7.0 million, which consisted of cash payments of $5.9 million and a $1.1 million deferred payment. The deferred payment is expected to be paid by the end of the first quarter of 2021 and is recorded in “Other liabilities” in the Condensed Consolidated Balance Sheets. The revenues and operating income of ACBN are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Industrial Technologies and Services segment. The goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition of Oina VV AB

On July 3, 2019, the Company acquired Oina VV AB (“Oina”) which specializes in customized pump solutions for liquid handling processes for use in medical, process and industrial applications. The Company acquired all of the assets and assumed certain liabilities of Oina for total consideration, net of cash acquired, of $10.0 million, which consisted of cash payments of $5.6 million, a $1.6 million holdback, and up to $2.8 million in contingent earn-out provisions. The Company made payments of $0.8 million in the three month period ended March 31, 2020, related to the contingent earn-out provisions. The $1.6 million holdback is expected to be paid by the end of the fourth quarter of 2021 and is recorded in “Other liabilities” in the Condensed Consolidated Balance Sheets. The revenues and operating income of Oina are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Precision and Science Technologies segment. None of the goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition Revenues and Operating Income

The revenue and operating income of the ACBN and Oina acquisitions for the three month period ended March 31, 2020, was $2.3 million and $0.1 million, respectively.

Pro forma information regarding these acquisitions has not been provided as they did not have a material impact on the Company’s Condensed Consolidated Statements of Operations individually or in the aggregate.