Ingersoll-Rand plc — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing is by Ingersoll-Rand plc, the issuer name at the time; it reports four segments: Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies.
Financial performance
- Third-quarter revenue: $3.593 billion, down 8.1% year over year. The absence of divested Hussmann revenue accounted for 7.2 percentage points of the decline; pricing added 1.3 points.
- Third-quarter earnings: Operating income was $447.8 million (12.5% margin), versus $180.5 million (4.6%) a year earlier, when results included a $264.8 million Hussmann sale/impairment charge. Excluding that charge, operating margin improved 1.1 percentage points. Net earnings attributable to shareholders were $321.6 million; diluted EPS was $1.03, versus $86.2 million and $0.25.
- Nine-month revenue and earnings: Revenue was $10.565 billion, down 6.3%. Operating income was $1.138 billion (10.8% margin), versus $521.0 million (4.6%); the 2011 comparison included a $651.6 million Hussmann charge. Excluding that charge, management reported a 0.4-point margin improvement. Shareholder-attributable net earnings were $783.0 million and diluted EPS was $2.50, versus $100.9 million and $0.29.
- Segments: For the quarter, Residential Solutions revenue rose 10.7% and operating income rose 138.9%; Industrial Technologies revenue rose 0.7% and operating income 11.2%. Climate Solutions revenue fell 15.2%, largely due to Hussmann, and Security Technologies revenue fell 6.8%. Security Technologies’ nine-month operating margin declined to 20.0% from 20.7%.
- Cash flow: Nine-month continuing operating cash flow was $822.9 million, up from $768.8 million. Total operating cash flow, including discontinued operations, was $735.5 million. Continuing investing activities used $158.1 million, including $170.9 million of capital expenditures; continuing financing activities used $837.4 million.
- Liquidity and debt: Cash was $929.6 million, down from $1.161 billion at year-end 2011. Total debt was $3.296 billion, down from $3.643 billion; debt-to-total-capital was 30.4%, versus 34.2%. The company had $2.0 billion in unused revolving facilities. A $600 million senior-note maturity due in 2013 was classified as current.
- Other metrics: Current assets were $5.230 billion and current liabilities $4.326 billion. Dividends declared were $0.16 per share for the quarter. Nine-month share repurchases totaled approximately $374.7 million.
Changes, outlook and management commentary
- Revenue comparisons were materially affected by the 2011 Hussmann divestiture; the company retained an equity-method interest, which had declined to 37.2% by September 30, 2012. The 2011 results also included the divested security installation and service business as discontinued operations.
- Management cited pricing gains and productivity improvements, partly offset by currency effects, investment spending and adverse product mix. It described residential and consumer markets as challenging, commercial construction as stagnant, and international markets as pressured; it noted moderate growth in American industrial markets and North American refrigerated transport.
- Management expected slight revenue growth as conditions stabilized, with benefits from restructuring and productivity programs. It projected a 2012 annual effective tax rate of approximately 19%. The filing provides no specific full-year revenue or EPS guidance.
- Restructuring charges were $29.6 million for the first nine months, versus $19.3 million a year earlier; most of the $15.4 million accrued at quarter-end was expected to be paid within a year.
Risks, contingencies and unusual items
- Control weakness: Management concluded disclosure controls were ineffective because of a material weakness in controls over deferred-tax balances and valuation allowances. An out-of-period tax adjustment was recorded in the second quarter. Remediation was underway but not yet considered complete; management expected completion by the year-end 2012 close.
- Tax dispute: The IRS continues to assert approximately $84 million of additional 2002 tax, plus interest, and a 30% penalty, concerning withholding-tax treatment. The company disputes the position and says it is adequately reserved, but an adverse outcome could materially affect results, financial condition and cash flows.
- Asbestos: Recorded asbestos liabilities were $888.4 million, with $327.5 million of probable insurance recoveries. The company cautioned that actual liabilities and recoveries could differ significantly from estimates; some insurance coverage remains disputed.
- Other exposures: Environmental reserves were $67.3 million. Trane also had $429.8 million of long-term service and performance guarantees; management reported no significant losses to date and considered significant future losses remote.
- Tax adjustment: The nine-month tax provision included a $61 million net discrete benefit, including a $54 million out-of-period adjustment related to a Spanish tax-law change; management said the adjustment was not material to projected 2012 results or prior interim statements.
Most important facts for investors to verify
- How much of revenue and margin trends reflects underlying demand versus the Hussmann divestiture and other portfolio changes.
- Whether the tax-accounting material weakness is remediated and whether the IRS dispute or other tax examinations change the company’s reserves.
- Whether operating cash flow remains sufficient amid lower cash balances, debt maturities, dividends and share repurchases.
- Whether Climate Solutions and Security Technologies recover from market and volume pressure, and whether Residential Solutions’ improvement persists.
- Whether asbestos insurance recoveries, environmental obligations and restructuring costs develop in line with recorded estimates.