Filing summary: Ingersoll-Rand plc, first quarter 2010
Entity note: The supplied filing is Ingersoll-Rand plc’s Form 10-Q, not a filing under the name Trane Technologies. Trane was part of the company’s Climate Solutions and Residential Solutions businesses. The quarter ended March 31, 2010; amounts below are in millions of dollars except per-share data and percentages.
Business context and reporting period
Ingersoll-Rand was a diversified global manufacturer and services provider, reporting four segments: Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies. The company reorganized its parent domicile from Bermuda to Ireland in July 2009; it said the reorganization did not materially affect financial results. Segment reporting was realigned in late 2009, so year-over-year segment comparisons use the revised structure.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Revenue | $2,953.4 | $2,932.9; up 0.7% |
| Operating income / margin | $133.5 / 4.5% | $49.9 / 1.7% |
| Continuing-operations earnings attributable to shareholders | $11.8; diluted EPS $0.04 | Loss of $20.4; diluted EPS loss of $0.06 |
| Net earnings attributable to shareholders | $1.4; diluted EPS approximately $0.00 | Loss of $26.7; diluted EPS loss of $0.08 |
| Continuing operating cash flow | Use of $52.4 | Provided $52.0 |
| Capital expenditures | $34.3 | $58.9 |
| Cash and cash equivalents | $599.1 at March 31 | $876.7 at December 31, 2009 |
| Total debt | $3,931.3 | $4,096.6 at December 31, 2009 |
| Current assets / current liabilities | $4,820.0 / $4,206.4 | $4,827.3 / $4,293.2 at December 31, 2009 |
| Debt-to-total-capital ratio | 35.5% | 36.2% at December 31, 2009 |
Revenue growth reflected a 2.2% favorable currency impact, partly offset by lower volume/product mix, pricing and the Venezuelan bolivar devaluation. Cost of goods sold fell to 73.6% of revenue from 75.2%; selling and administrative expense fell to 21.9% from 23.1%. Management attributed the margin improvement mainly to productivity, restructuring savings, cost reductions and acquisition synergies, which more than offset lower volumes and material inflation.
Operating cash flow weakened primarily as working capital increased, including higher inventory as markets stabilized. Investing cash use was $35.9, while financing cash use was $183.2, including approximately $262 million of long-term debt repayments, partly offset by commercial paper borrowings. Cash declined $277.6 during the quarter. The company reported $2.25 billion of unused committed revolving credit facilities, with $1.25 billion expiring in August 2010 and $1.0 billion in June 2011.
Segment revenue and operating income were: Climate Solutions $1,620.5 and $30.2; Residential Solutions $395.4 and $14.7; Industrial Technologies $544.7 and $59.3; Security Technologies $392.8 and $64.8. Operating income improved substantially in the first three segments; Security Technologies revenue declined 2.4% and operating income was essentially flat.
Material changes versus the prior comparable period
- Operating income rose $83.6, with operating margin increasing 2.8 percentage points. Revenue was nearly flat, while lower cost ratios reflected productivity and restructuring benefits.
- The company moved from a continuing-operations loss to earnings, but the $40.5 non-cash tax charge related to 2010 healthcare legislation materially reduced reported earnings.
- Continuing operating cash flow shifted from a $52.0 inflow to a $52.4 outflow. Management linked the 2010 outflow partly to higher inventory following year-end.
- Total debt declined $165.3 from year-end, while cash fell $277.6. The quarterly dividend declared was $0.07 per share, compared with $0.36 in Q1 2009; the company had reduced its quarterly dividend to $0.07 effective with the September 2009 payment.
Outlook, risks, contingencies and unusual items
- Outlook: Management expected depressed conditions to continue in 2010, with U.S. and European non-residential construction remaining weak. It anticipated modest overall revenue growth as conditions stabilized, alongside continued restructuring savings and productivity benefits. It projected an approximately 18% 2010 annual effective tax rate excluding the first-quarter healthcare-related charge. It believed cash, operating cash generation, credit lines and expected capital-market access would meet operating and capital needs for the foreseeable future.
- Tax and healthcare legislation: The first-quarter tax provision was $54.0 and included a $40.5 non-cash charge from the change in tax treatment of Medicare Part D retiree drug subsidies. The filing reports $522.1 of unrecognized tax benefits at March 31. The IRS continued to pursue proposed adjustments for 2001–2002; its remaining alternative position alleged approximately $84 million of additional tax for 2002 plus interest, with penalties also asserted. The company disputed the claims and said it was adequately reserved.
- Debt and liquidity: $318.3 of exchangeable senior notes was classified as short-term because holders could exchange the notes in Q2 2010 after a sales-price condition was met. Holders could also put up to $306.4 of debentures in November 2010; management said it expected sufficient liquidity to repay any exercised puts. The expanded receivables purchase facility was terminated in February 2010.
- Legal and other exposures: Asbestos liabilities and related probable insurance recovery assets were $1,097.5 and $409.7, respectively, at March 31. Environmental reserves were $90.1. A European Commission investigation concerning former Trane businesses could result in a stated maximum fine of up to $1.1 billion if imposed; WABCO Europe agreed to indemnify Trane, but its ability to pay depends on future funding capacity. The company also disclosed ongoing SEC/DOJ discussions over potential anti-corruption matters involving Trane and a China business, following earlier Oil for Food settlements.
- Other unusual items: Discontinued operations produced a $10.4 after-tax loss, mainly from other retained costs, including postretirement, product-liability and legal expenses. Ongoing restructuring charges were $10.4 in Q1 2010, with $44.6 accrued at quarter-end; most was expected to be paid during the rest of 2010. Venezuela became highly inflationary for accounting purposes effective January 1, 2010, affecting reported results.
Important facts for investors to verify
- Confirm the magnitude and sustainability of operating-margin improvement, separating recurring productivity gains from currency effects, restructuring charges and changing volumes.
- Track working-capital needs and operating cash conversion, given the quarterly cash outflow and increase in inventory.
- Review upcoming liquidity demands, including exchangeable notes and debenture put rights, and the timing and availability of revolving credit facilities.
- Assess the potential range, timing and reserve adequacy for the IRS dispute, asbestos liabilities and insurance recoveries, and the European Commission matter and related indemnity.
- Check whether the expected modest revenue growth and approximately 18% tax rate excluding the one-time charge remain consistent with subsequent company disclosures.