Business context and reporting period
Ingersoll-Rand plc filed this unaudited Form 10-Q for the quarter ended September 30, 2016. Its Climate segment includes Trane and American Standard HVAC, building services and Thermo King; Industrial includes compressed-air systems, tools, material handling and Club Car products. Results below compare Q3 and the first nine months of 2016 with the corresponding 2015 periods. Amounts are in U.S. dollars.
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3,567.8m | $3,486.9m | $10,150.1m | $9,974.9m |
| Operating income | $503.7m | $475.4m | $1,226.2m | $1,098.7m |
| Operating margin | 14.1% | 13.6% | 12.1% | 11.0% |
| Net earnings attributable to plc | $377.4m | $300.9m | $1,277.4m | $431.1m |
| Diluted EPS, including discontinued operations | $1.44 | $1.12 | $4.89 | $1.60 |
Q3 revenue rose 2.3%; operating income increased $28.3m. Q3 Climate revenue grew 2.9% and Industrial revenue was nearly flat. Climate margin improved to 16.6% from 15.5%, while Industrial margin fell to 10.9% from 13.9%. For the nine months, Climate revenue increased 3.3%, but Industrial revenue declined 3.5%; segment margins were 14.8% and 9.7%, respectively.
Nine-month net earnings and EPS include a $397.8m pretax gain on the sale of the remaining Hussmann equity investment. The 2016 nine-month effective tax rate was 14.8%, versus 50.2% in 2015; the filing attributes much of the difference to the Hussmann gain’s tax treatment and a 2015 tax charge related to an IRS agreement. Q3 effective tax rates were 18.5% and 26.4%, respectively.
Cash from continuing operating activities was $1,008.3m for the first nine months, versus $280.2m a year earlier. Continuing investing activities provided $288.4m, including $422.5m of Hussmann sale proceeds; the prior-year period used $1,110.5m, including substantial acquisition spending. Continuing financing activities used $631.6m, including $250.1m of share repurchases and $245.6m of dividends. Capital expenditures were $127.5m, compared with $173.3m.
At September 30, cash and equivalents were $1,504.6m, total debt was $4,069.9m, and debt-to-total-capital was 37.3%, down from 41.8% at December 31, 2015. The company had $2.0bn of unused revolving credit commitments. Current assets were $5,714.5m and current liabilities were $3,703.4m. Cash increased from $736.8m at year-end, principally reflecting the Hussmann proceeds and operating cash generation.
Material changes versus the prior comparable period
- Q3 growth came primarily from Climate volumes, especially commercial and residential HVAC; pricing and acquisitions also contributed. Foreign exchange partially offset growth.
- Operating margin improved year over year in both the Q3 consolidated result and nine-month consolidated result, led by Climate pricing, productivity and mix. Industrial’s weaker volume and mix, productivity and investment costs pressured its margins.
- Nine-month earnings rose sharply, but comparison is affected by the $397.8m Hussmann gain and the unusually high 2015 tax provision.
- Operating cash flow improved substantially, with management citing improved earnings and working-capital management. The 2015 comparison also included acquisition outlays and a large working-capital use.
Outlook, management commentary, risks and unusual items
Management described current conditions as challenging, with moderate U.S. residential and commercial construction growth, slow non-residential construction growth in Europe and Asia, steady HVAC replacement and aftermarket activity, and weak industrial equipment markets. It expected slow-to-moderate global construction growth and weak industrial markets, alongside continued productivity benefits. The filing provides no quantified earnings or revenue guidance.
- Management stated cash, operating cash generation, committed credit lines and capital-market access were expected to meet U.S. and non-U.S. operating and capital needs for at least the next 12 months. It noted that $904.0m of cash was held by non-U.S. subsidiaries and that repatriating permanently reinvested funds to the U.S. could trigger taxes.
- In October 2016, after quarter-end, the company announced a 25% increase in its quarterly dividend, from $0.32 to $0.40 per share, beginning with the December payment. It had $416.6m remaining under its share-repurchase authorization at September 30.
- Asbestos-related liabilities were $651.5m, with $277.7m of probable insurance recoveries recorded. Management cautioned actual liabilities and recoveries could differ substantially from estimates; recoveries depend on claim outcomes, coverage disputes and insurer solvency. Settlements with insurers contributed to discontinued-operations income and cash flow.
- A customer lawsuit concerning a 2001 commercial HVAC contract seeks $71.6m in damages plus treble damages. The company denied liability, had not accrued a material amount, and reported trial was scheduled for January 2017. Environmental reserves were $41.2m.
- Other identified risks include economic and industrial demand, competition, taxes and tax audits, currency and interest-rate movements, commodity costs, litigation, acquisitions, impairment, climate and weather, cybersecurity, and potential U.S. tax-law changes. Management reported no material change in risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time Hussmann gain, tax-rate differences and asbestos-related settlements, versus recurring operations.
- Whether continued Climate growth and margin gains can offset persistent Industrial weakness and its margin pressure.
- Working-capital trends and cash generation excluding Hussmann proceeds; confirm the capacity to fund increased dividends and repurchases while managing debt.
- Developments in the HVAC customer lawsuit and the estimates, insurance coverage and collectability underlying asbestos liabilities and recoveries.
- Tax exposures and the treatment of foreign cash, including the potential cost of repatriation.