Business context and reporting period
Ingersoll-Rand plc, the registrant identified in this filing (now associated with Trane Technologies), filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Its Climate segment includes Trane, American Standard and Thermo King; its Industrial segment includes compressors, tools, fluid management and Club Car products.
Financial performance
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $3,600.2 million, up 1.6% year over year | $6,488.0 million, up 3.5% |
| Operating income / margin | $452.2 million / 12.6%; prior-year margin 13.1% | $623.3 million / 9.6%; prior-year margin 9.9% |
| Net earnings attributable to Ingersoll-Rand | $78.9 million, versus $306.0 million | $130.2 million, versus $384.9 million |
| Diluted EPS | $0.29, versus $1.12 | $0.48, versus $1.38 |
| Operating cash flow from continuing operations | Not separately reported for the quarter | $183.7 million, versus $187.0 million |
The earnings decline chiefly reflects a $227 million income-tax charge related to the IRS settlement; the effective tax rate was 79.2% for the quarter and 70.5% for the six-month period. Before tax, quarterly earnings were nearly unchanged year over year. Revenue growth reflected higher volume and acquisitions, partly offset by unfavorable currency effects, primarily the euro.
Climate revenue was $2,815.5 million in the quarter, up 2.4%, and segment operating margin was 14.3%, versus 14.2%. Industrial revenue was $784.7 million, down 1.2%, while segment operating margin fell to 11.6% from 16.4%. Industrial profitability was pressured by acquisition-related step-up amortization, weaker volume and mix, currency and investment spending.
Liquidity, debt and capital allocation
At June 30, 2015, cash and equivalents were $779.6 million, compared with $1,705.2 million at year-end 2014. Total debt was $4,394.3 million, up from $4,224.4 million; the debt-to-total-capital ratio rose to 42.7% from 41.1%. The company had $2.0 billion of unused revolving credit facilities. Current assets were $5,528.6 million and current liabilities $4,457.7 million.
Six-month continuing investing cash outflow was $1,051.3 million, including $941.7 million of net acquisition spending and $115.3 million of capital expenditures. Continuing financing activities provided $49.8 million; the company paid $151.3 million in ordinary-share dividends and made no share repurchases under its program during the six months. The quarterly dividend was increased 16%, to $0.29 per share.
Changes, outlook and material items
- On January 1, the company acquired Cameron’s Centrifugal Compression business for approximately $850 million; on March 4, it acquired FRIGOBLOCK for approximately $113 million. Both contributed to reported revenue, while the compression acquisition weighed on Industrial margins.
- An IRS settlement signed July 17, 2015, after the reporting date, resolved tax disputes covering 2002–2011 subject to Joint Committee on Taxation review. The company recorded a $227 million tax charge and expected approximately $375 million of net cash outflow in the second half of 2015. It stated that cash, credit lines and capital-market access should suffice.
- Venezuela’s currency was translated at the SIMADI rate of 192.95 bolivars per U.S. dollar beginning in March, resulting in a $42.6 million first-quarter pretax remeasurement charge. The company continued using that rate through June 30.
- Management described international markets as challenging, with slower worldwide industrial equipment and aftermarket activity. It expected moderate growth in worldwide construction markets and slow growth in industrial markets, alongside productivity benefits, for the remainder of 2015. No specific consolidated revenue or EPS guidance is provided in the supplied filing text.
- Management cited growth opportunities in service, parts and replacement revenue, but flagged sensitivity to economic and political conditions, customer capital spending, currency movements, tax outcomes, acquisition execution and productivity delivery. The filing reported no material change in risk factors from the 2014 Form 10-K.
Other contingencies include asbestos-related liabilities of $751.9 million and probable insurance-recovery assets of $337.6 million at June 30; actual claims and recoveries may differ materially from estimates. Environmental reserves were $44.3 million. Management said other identified legal matters were not expected to have a material adverse effect, subject to disclosed uncertainties.
Important facts for investors to verify
- Whether the IRS settlement received final review and whether the approximately $375 million expected second-half cash outflow was paid as estimated.
- Whether cash generation and the company’s credit facilities remained sufficient after settlement payments, acquisitions and dividends.
- Whether Industrial margins recovered as acquisition-related costs, currency effects, mix and investment spending evolved.
- Whether Climate and Industrial demand, including aftermarket activity and international markets, developed in line with management’s outlook.
- Whether asbestos insurance recoveries and liabilities, and Venezuela currency exposure, changed materially after June 30, 2015.