Business context and reporting period
Ingersoll-Rand plc (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Its Climate segment includes Trane and American Standard HVAC and Thermo King; Industrial includes compressors, tools, fluid management and Club Car products.
Financial results and liquidity
- Second-quarter revenue: $3.688 billion, up 2.4% year over year. Operating income was $505.2 million, with a 13.7% operating margin versus 12.6%. Net earnings attributable to shareholders were $747.6 million, or $2.86 diluted EPS, versus $78.9 million, or $0.29.
- First-half revenue: $6.582 billion, up 1.5%. Operating income was $722.5 million and operating margin was 11.0%, versus $623.3 million and 9.6%. Net earnings attributable to shareholders were $900.0 million, or $3.44 diluted EPS, versus $130.2 million, or $0.48.
- Segments: Q2 Climate revenue rose 4.2% and operating income increased to $493.9 million (margin 16.8%, up from 14.3%). Industrial revenue fell 4.0%; operating income declined to $68.8 million (margin 9.1%, down from 11.6%). First-half trends were similar: Climate revenue +3.5%, Industrial revenue -5.3%.
- Cash flow: First-half cash from continuing operations was $394.5 million, compared with $183.7 million. Continuing investing activities provided $332.7 million, including Hussmann sale proceeds; continuing financing activities used $562.8 million. Cash increased $192.0 million to $928.8 million.
- Debt and liquidity: Total debt was $4.086 billion, down from $4.218 billion at year-end; cash exceeded short-term borrowings and current maturities of $361.2 million. Debt-to-total-capital was 38.7%, versus 41.8%. The company had $2.0 billion of unused revolving credit commitments. Current assets were $5.393 billion and current liabilities $3.767 billion.
- Shareholder returns: First-half dividends paid were $162.5 million; 4.9 million shares were repurchased for $250.1 million. The quarterly dividend increased 10%, from $0.29 to $0.32 per share.
Material changes and unusual items
Second-quarter and first-half earnings include a $397.8 million pretax gain on the April 1 sale of the company’s remaining Hussmann equity interest; net proceeds were $422.5 million. The gain substantially lifted reported pretax and net earnings and was largely untaxed under applicable local tax law. First-half effective tax rate was 13.1%, compared with 70.5% in 2015; the prior-year rate reflected a tax charge related to an IRS agreement. Accordingly, headline earnings growth is not a straightforward measure of recurring operating performance.
Operating margin improved overall, principally from pricing above material inflation and productivity. Climate benefited from volume and pricing; Industrial was pressured by weaker volumes and mix, currency, and higher investment and restructuring costs. The company also reported higher corporate expense. First-half operating cash flow improved, though working-capital changes used $323.2 million.
Outlook, commentary and risks
Management described residential and commercial construction in the U.S. as growing moderately, HVAC replacement and aftermarket demand as steady, and industrial markets as weak. It expected slow-to-moderate growth in global construction and weak industrial markets, with continued productivity benefits. No quantified earnings or revenue guidance is provided in the filing. Management said cash, operating cash generation and available financing should cover U.S. and non-U.S. operating and capital needs for at least the next 12 months.
Risks include economic and political conditions, demand, competition, foreign exchange, commodity prices, interest rates and funding access, taxes, litigation, acquisitions, impairment, weather and cybersecurity. Asbestos liabilities were $675.3 million, with $294.0 million of probable insurance recoveries; management cautioned actual liabilities and recoveries may differ materially. Environmental reserves were $41.8 million. A customer HVAC-contract lawsuit seeks $71.6 million in economic damages plus treble damages; the company denies liability, had not accrued a material amount, and trial was scheduled for September 2016. Trane also had $407.9 million of long-term performance guarantees, with significant losses considered remote. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating performance from the Hussmann gain and assess the resulting effect on earnings and tax rate.
- Track Industrial segment volumes, margins and whether weak market conditions persist, alongside Climate growth and margin performance.
- Review working-capital trends and the sustainability of operating cash flow, especially after the Hussmann proceeds are excluded.
- Monitor debt maturities, the $343 million puttable debentures, use of revolving facilities, and planned dividends and repurchases.
- Follow developments in asbestos insurance recoveries, environmental matters and the HVAC lawsuit, including potential changes to recorded estimates.