Trane Technologies Plc quarterly report, Q2 FY2017

Business context and reporting period

Ingersoll-Rand plc filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. Its Climate segment includes HVAC, building services and transport refrigeration; Industrial includes compressed-air systems, tools, material handling and low-speed vehicles.

Financial performance and liquidity

All amounts are U.S. dollars. Q2 and six-month comparisons are with the corresponding 2016 periods.

• Q2 revenue increased 6.0%; six-month revenue increased 5.0%. Volume and product mix drove most of the growth, with pricing contributing and currency translation reducing growth.
• Q2 Climate revenue rose 7.1% to $3,143.8 million; segment operating margin was 16.8% versus 16.9%. Industrial revenue rose 1.5% to $764.6 million; margin improved to 12.1% from 9.3%.
• Six-month Climate revenue grew 6.2% to $5,467.9 million, while margin declined to 13.6% from 13.9%. Industrial revenue grew 0.5% to $1,441.1 million; margin rose to 11.0% from 9.4%.
• Operating cash flow from continuing operations was $422.3 million for the first half, versus $402.9 million. Capital expenditures were $79.5 million; continuing investing cash outflow was $118.9 million. Continuing financing cash outflow was $766.9 million, including $575.2 million of share repurchases and $204.8 million of dividends.
• Cash and equivalents were $1,310.1 million at June 30, down from $1,714.7 million at year-end. Total debt was $4,065.8 million, broadly unchanged from $4,070.2 million; debt-to-total-capital was 37.4% versus 37.7%. The company reported $2.0 billion of unused revolving credit commitments.
• Current assets were $5,855.0 million and current liabilities $3,903.5 million. Management said cash, operating cash generation, committed credit lines and market access should fund U.S. and non-U.S. needs for at least the next 12 months.

Material changes versus the prior comparable period

• Reported earnings fell sharply because 2016 included a $397.8 million gain on the sale of the remaining Hussmann equity investment. The transaction generated $422.5 million in proceeds in 2016; there was no comparable gain in 2017. Thus, lower reported net income does not reflect the direction of operating income, which increased.
• Q2 operating margin improved 0.4 percentage points, while the first-half margin was unchanged. Productivity and volume/mix helped; material inflation, restructuring and investment spending, and currency effects were offsets.
• First-half share repurchases increased to $575.2 million from $250.1 million. A new $1.5 billion repurchase authorization began in May; approximately $1.3 billion remained at June 30.
• The effective tax rate for the first half was 25.7%, versus 13.1% in 2016, when the Hussmann gain received favorable tax treatment. In Q2 2017, the company recorded an approximately $33 million valuation allowance against Brazilian deferred tax assets amid weaker forecasts.

Outlook, management commentary, risks and unusual items

• Management expected moderate growth in Climate and continued soft markets in Industrial, with operational excellence, new product launches and productivity initiatives supporting results. It cited strong HVAC replacement and aftermarket demand and U.S. residential and commercial construction momentum; non-residential Europe and Asia remained challenged, and global Industrial markets were described as flat.
• No numerical revenue or earnings guidance was provided in the supplied filing text. Management expected available resources to support operations, capital needs, the increased dividend, repurchases and restructuring.
• First-half restructuring charges were $38.2 million, versus $13.5 million a year earlier. The company announced plans to close three manufacturing facilities during 2017; $17.1 million of restructuring costs was accrued at June 30, with most expected to be paid within one year.
• Asbestos-related liabilities totaled $595.9 million, against $261.3 million of probable insurance recoveries; environmental reserves were $41.9 million. The filing notes uncertainty in future claims, settlement costs, insurance coverage and insurer solvency. Management generally did not expect pending legal matters to materially affect the company, subject to the contingencies disclosed.
• Trane had $374.3 million of long-term service and maintenance performance guarantees extending through 2036; the company reported no significant losses to date and considered significant future losses remote.
• Principal stated risks include economic and political conditions, demand and competition, tax audits and changes in tax law, litigation, interest and currency movements, commodity costs, impairments, weather and climate effects, cybersecurity, and acquisition execution.

Important facts for investors to verify

• How much of revenue growth and margin performance reflects recurring demand and productivity versus seasonality, product mix, pricing and currency?
• How should the 2016 Hussmann gain and the 2017 Brazil deferred-tax valuation allowance be separated from underlying earnings and tax-rate trends?
• Can operating cash flow sustain planned dividends, share repurchases and restructuring while managing working capital and debt?
• What are the execution costs, savings timetable and expected payback from the announced facility closures and other restructuring actions?
• How sensitive are asbestos-related net exposures to claim trends and insurance recoverability, and what additional cash requirements could arise?