Business context and reporting period
Ingersoll-Rand plc (the registrant identified in the filing; now associated with Trane Technologies) reported unaudited results for the three months ended March 31, 2019, compared with the first quarter of 2018. Its Climate segment includes HVAC, building services and transport temperature-control businesses; Industrial includes productivity and fluid-management equipment and Club Car.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenues | $3,575.9 million | $3,384.5 million | +5.7% |
| Operating income | $318.5 million | $243.4 million | +$75.1 million |
| Operating margin | 8.9% | 7.2% | +1.7 percentage points |
| Earnings from continuing operations | $205.8 million | $133.5 million | +$72.3 million |
| Net earnings attributable to shareholders | $199.9 million | $120.4 million | +$79.5 million |
| Diluted EPS | $0.82 | $0.48 | +$0.34 |
| Continuing operating cash flow | $(37.1) million | $(45.8) million | $8.7 million less cash used |
Revenue growth reflected volume/product mix of 5.8% and pricing of 2.3%, partly offset by 2.4% unfavorable currency translation. Climate revenue rose 7.4% to $2,803.7 million; Industrial revenue was nearly flat, down 0.3% to $772.2 million. Segment operating margins were 11.2% for Climate (10.0% prior year) and 10.9% for Industrial (7.7%).
Cash used in continuing operations improved year over year, but working-capital changes consumed $400.5 million, primarily reflecting seasonal inventory growth and higher receivables. Capital expenditures were $60.8 million. Cash and cash equivalents were $1,907.4 million at quarter-end, versus $903.4 million at year-end 2018; the increase largely reflected financing proceeds, not operating cash generation.
Total debt was $5,600.9 million at March 31, versus $4,091.3 million at December 31, 2018; the debt-to-total-capital ratio rose to 44.7% from 36.7%. The company issued $1.5 billion of senior notes in March to fund the pending PFS acquisition. Its $2.0 billion of revolving credit commitments was unused. Current assets were $7,084.7 million and current liabilities $4,488.5 million.
Material changes and notable items
- Operating income growth reflected pricing above material inflation, productivity benefits, higher volume/mix and lower restructuring costs. Interest expense declined $22.0 million year over year, partly because Q1 2018 included costs associated with redeeming senior notes. Other expense worsened to $18.8 million from $4.0 million, including higher pension-related expense.
- Restructuring charges fell to $17.1 million from $44.4 million. The quarter included announced manufacturing-facility closures and consolidations; $42.1 million remained accrued at March 31, most expected to be paid within one year.
- Effective income tax rate was 17.3%, versus 19.8%, with the company citing share-based payment tax benefits, the Foreign Derived Intangible Income deduction and lower-tax non-U.S. earnings, partly offset by state and local taxes and nondeductible expenses.
- Adoption of lease accounting standard ASC 842 on January 1, 2019 added an initial $521 million of right-of-use assets and lease liabilities without a retained-earnings impact. At March 31, operating-lease right-of-use assets were $526.6 million and lease liabilities totaled $531.6 million.
- Share repurchases were $250 million in the quarter; approximately $1.25 billion remained authorized. The quarterly dividend was $0.53 per share, increased from $0.45 in 2018.
Outlook, transactions and risks
Management expected positive growth in both Climate and Industrial in 2019, citing supportive HVAC replacement, service and aftermarket demand, U.S. residential and commercial momentum, generally supportive global industrial markets, new products and productivity initiatives. Management said available cash, credit lines and capital-market access were expected to fund operations, investment, dividends, repurchases, restructuring and acquisitions. The filing provides no specific revenue or EPS guidance figures.
After quarter-end, the seller accepted the company’s approximately $1.45 billion cash offer for precision flow systems management business PFS, subject to customary closing conditions and regulatory approvals; closing was expected around mid-2019. In April, the company also announced a proposed Reverse Morris Trust transaction: its Industrial businesses would be spun off and combined with Gardner Denver, with existing Ingersoll-Rand shareholders expected to own 50.1% of IndustrialCo. ClimateCo would receive $1.9 billion in cash. Closing was expected by early 2020, subject to approvals, tax opinions and other conditions.
Risks include uncertainty over completing the proposed separation/combination, integration and realization of expected benefits, transaction-related distraction and costs, and the prospect that the remaining Climate-focused company would be less diversified. The company also disclosed asbestos, environmental, product-liability, tax and other proceedings. Asbestos liabilities were $592.3 million, with $261.2 million of probable insurance recoveries recorded; actual claims and recoveries could differ materially from estimates. Management stated that, except as disclosed, pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether PFS closed on the expected timetable and at what final purchase price and financing cost.
- Progress, conditions and final terms of the Gardner Denver transaction, including expected cash proceeds, ownership split, tax treatment and closing timing.
- Whether operating cash flow improves as seasonal working-capital investment reverses, given negative Q1 operating cash flow and debt-funded cash growth.
- Debt levels, interest expense and liquidity after the PFS acquisition and any separation-related transactions.
- Developments in asbestos claims, insurance recoveries and tax examinations that could change recorded liabilities or cash requirements.