Business context and reporting period
Ingersoll-Rand plc (NYSE: IR; now Trane Technologies) filed this Form 10-K for the fiscal year ended December 31, 2013, with fourth-quarter comparisons also provided. Its continuing businesses were Climate (Trane and American Standard HVAC, building services and Thermo King) and Industrial (compressed-air systems, tools, fluid handling and Club Car vehicles). The company completed the spin-off of its commercial and residential security businesses, now Allegion, on December 1, 2013; those results are presented as discontinued operations.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. Annual revenue and operating margin reflect continuing operations; reported net earnings include discontinued operations.
| Metric | 2013 | 2012 |
|---|---|---|
| Net revenue | $12,350.5 | $11,988.3 |
| Operating income / margin | $1,105.0 / 8.9% | $1,071.9 / 8.9% |
| Earnings from continuing operations | $640.6 | $792.0 |
| Net earnings attributable to shareholders | $618.8 | $1,018.6 |
| Diluted EPS, continuing operations | $2.08 | $2.49 |
| Operating cash flow, continuing operations | $877.7 | $868.1 |
| Cash and cash equivalents | $1,937.2 | $708.4 |
| Total debt | $3,521.2 | $3,229.4 |
| Debt-to-total-capital ratio | 33.1% | 30.9% |
Annual revenue rose 3.0%, mainly on higher Climate volume and improved pricing in both segments. Operating margin was unchanged: price and productivity gains were offset by higher investment and restructuring costs. Continuing-operations earnings fell despite higher operating income, reflecting a higher effective tax rate (22.8% versus 6.6% in 2012) and higher interest expense, including a $45.6 million debt-redemption premium. The 2012 tax rate benefited from a roughly $140 million valuation-allowance reduction.
Fourth-quarter revenue was $3,098.9 million versus $2,924.0 million; operating income was $218.0 million versus $247.4 million; net earnings attributable to shareholders were $47.7 million versus $235.6 million; and diluted EPS was $0.16 versus $0.78. Quarterly figures were recast for the Allegion spin-off.
Climate revenue increased 4.1% to $9,414.0 million and segment margin improved to 9.9% from 9.0%. Industrial revenue edged down 0.3% to $2,936.5 million; segment margin remained 15.5%. Continuing-operations capital expenditures were $242.2 million, and investing cash flow was negative $213.2 million. The company had $2.0 billion of unused revolving credit facilities and no commercial paper outstanding at year-end.
Material changes, outlook and risks
- Portfolio and organization: Allegion was spun off; the company realigned reporting into Climate and Industrial in Q4. The spin-off generated tax and transaction costs, and its 2013 discontinued-operation results included a $111.4 million noncash goodwill impairment.
- Debt and capital returns: The company issued $1.55 billion of notes in June and redeemed $1.255 billion of higher-coupon notes in July, incurring the redemption premium. It repurchased 20.8 million shares for about $1.2 billion in 2013. In February 2014, it announced a quarterly dividend increase from $0.21 to $0.25 and authorized a new $1.5 billion buyback after completion of the existing program.
- Management outlook: Management anticipated slight revenue growth as conditions stabilized, with benefits from restructuring and productivity initiatives. It described commercial construction and worldwide industrial equipment markets as weak or uneven, while U.S. residential HVAC markets were improving; lower-SEER product mix remained a headwind. Planned 2014 capital expenditures were approximately $250 million.
- Tax uncertainty: The IRS asserted approximately $109 million of tax for 2002, plus penalties and interest, and proposed approximately $665 million of additional tax for 2003–2006, also plus penalties and interest. The company contested the assessments, stated it believed reserves were adequate, and warned that an adverse outcome could materially affect results, financial condition and cash flows. It also recorded a $51 million tax charge after changing its reinvestment assertion for approximately $740 million of foreign earnings.
- Other exposures: Year-end asbestos liabilities were $846.2 million, with $321.8 million of probable insurance recoveries; recovery and claim estimates remain uncertain. Environmental reserves were $47.9 million. Other risks include global and currency exposure, commodities and energy costs, weather and construction cycles, regulation, cybersecurity, and achieving expected spin-off and restructuring benefits.
Most important facts for investors to verify
- Reconcile continuing-operations earnings, reported net earnings and EPS to the spin-off accounting, tax charges and other nonrecurring items.
- Track the IRS disputes, related reserves and any developments affecting the proposed 2002–2006 tax assessments.
- Assess whether revenue growth and Climate margin improvement continue, particularly amid commercial HVAC and industrial market weakness.
- Evaluate cash generation and capital allocation against higher debt, planned buybacks, dividend increases and 2014 capital spending.
- Monitor asbestos insurance recoverability and other legal, environmental and pension obligations.