Business context and reporting period
Ingersoll-Rand plc (NYSE: IR), an Irish-incorporated global manufacturer and services provider, filed this Form 10-K for the fiscal year ended December 31, 2009. The filing is for the full year, not a standalone fourth-quarter report; it also provides unaudited quarterly results. The company reported four segments: Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies. In July 2009, the parent company reorganized from Bermuda to Ireland; the company said the change did not materially affect financial results. The filing does not identify Trane Technologies as the registrant.
Financial performance and position
| Metric | 2009 | 2008 |
|---|---|---|
| Net revenue | $13.195 billion | $13.227 billion |
| Operating income (loss) | $841.6 million | $(2.574) billion |
| Operating margin | 6.4% | (19.5)% reported |
| Net earnings (loss) attributable to shareholders | $451.3 million | $(2.625) billion |
| Diluted EPS | $1.37 | $(8.73) |
| Cash from continuing operations | $1.752 billion | $374.3 million |
| Cash and cash equivalents at year-end | $876.7 million | $550.2 million |
| Total debt at year-end | $4.097 billion | $5.124 billion |
| Debt-to-total-capital ratio | 36.2% | 43.1% |
2009 continuing-operations earnings attributable to shareholders were $462.9 million; discontinued operations contributed a loss of $11.6 million. Gross margin was 26.9% (cost of goods sold was 73.1% of revenue), while selling and administrative expense was 20.5% of revenue. Capital expenditures were $204.2 million. No standalone full-year free cash flow figure is stated in the supplied filing text.
Fourth-quarter 2009 revenue was $3.306 billion, operating income $222.7 million and net earnings attributable to shareholders $139.4 million (diluted EPS $0.42). Fourth-quarter 2008 included a $3.710 billion non-cash impairment charge.
Material changes versus the prior comparable period
- Revenue decreased 0.2% year over year. Trane’s inclusion for a full year in 2009 added $2.096 billion versus 2008, when results included Trane only from its June 5 acquisition date. Excluding Trane, revenue fell 16.1%, principally from lower volume and product mix; pricing partly offset the decline.
- Operating results rebounded from the 2008 reported loss, which included the $3.710 billion impairment. Excluding that impairment, operating margin fell by 2.2 percentage points year over year, reflecting lower volumes, adverse currency effects and weaker margins in the acquired Trane businesses.
- Operating cash flow increased to $1.752 billion from $374.3 million, helped by improved receivables collections and inventory management; 2008 cash flow had also been reduced by roughly $700 million of tax payments.
- Total debt declined by about $1.028 billion and the debt-to-capital ratio fell 6.9 percentage points. The company issued $1.0 billion of long-term debt in 2009, used proceeds to repay its $950 million bridge-loan balance, and repaid $998.7 million of commercial paper.
- Segment reporting was realigned in the fourth quarter: the former Trane air-conditioning segment was split into Climate Solutions and Residential Solutions, and residential security moved from Security Technologies. The company reported 2009 segment revenue of $7.294 billion, $2.002 billion, $2.181 billion and $1.719 billion, respectively; segment comparisons should be read with the realignment in mind.
Outlook, management commentary, risks and unusual items
- Management expected weak U.S. and European non-residential construction markets to continue affecting 2010 results, while some end markets showed signs of stabilization at depressed levels. No numeric earnings or revenue guidance was provided.
- Restructuring actions initiated in late 2008 generated approximately $194 million of annual pretax savings for 2009. Cumulative restructuring costs since the fourth quarter of 2008 were about $182.1 million; 2009 costs were $111.4 million. Management estimated 2010 capital expenditures of approximately $250 million.
- Liquidity: management expected cash, operating cash flow, committed facilities and capital-market access to cover operating and capital needs. At year-end, the company had $876.7 million cash, $4.097 billion debt, and $2.25 billion of unused committed revolving facilities, plus $823.9 million of unused non-U.S. credit lines. A $1.25 billion revolving facility was due to expire in August 2010. The company reported no outstanding commercial paper.
- Debt service, benefit obligations and contingencies remain relevant: contractual cash obligations totaled $7.499 billion, including $4.129 billion principal on long-term debt and $1.831 billion interest. Pension underfunding was $903.0 million and postretirement benefit obligations were $979.4 million. Expected 2010 pension contributions were about $85 million.
- Legal and tax uncertainties include the European Commission bathroom-fixtures investigation. A maximum fine could reach $1.1 billion, subject to a potential leniency reduction; WABCO Europe agreed to indemnify Trane, but the company disclosed uncertainty about WABCO’s ability to fund that obligation. The IRS continued to dispute 2001–2002 tax positions; its alternative claim was approximately $84 million plus interest, and it gave notice of 30% penalties in January 2010. Management said it would contest the matter and believed reserves were adequate.
- The company disclosed ongoing FCPA-related discussions and investigations involving Trane and other matters, as well as legacy asbestos claims. At year-end, asbestos liabilities were $1.113 billion and related insurance-recovery assets were $424.2 million; amounts depend on claim experience, insurance coverage and insurer solvency. Environmental reserves were $93.3 million, with $10.8 million spent on remediation in 2009.
- Unusual items included a $25 million fourth-quarter insurance settlement related primarily to asbestos obligations and a $24 million fourth-quarter charge tied to Venezuelan bolivar devaluation. Venezuela was designated highly inflationary effective January 1, 2010, with future currency fluctuations to be recorded in income.
- PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of December 31, 2009.
Important facts for investors to verify
- Review the full audited statements and notes, particularly cash-flow drivers, debt maturities, receivables-purchase arrangements and the 2010 revolving-credit expiration.
- Assess whether operating performance can recover as construction, HVAC, transport refrigeration and industrial markets improve, and distinguish underlying trends from the full-year Trane consolidation and segment realignment.
- Track the outcome and funding of the European Commission matter, IRS audit and FCPA inquiries, including the enforceability and financial capacity behind indemnities.
- Evaluate asbestos and environmental reserve adequacy against claims activity, insurance recoveries and potential changes in assumptions.
- Check the sustainability of restructuring savings and margins, and the implications of pension funding, dividend capacity under Irish law, and the company’s stated absence of numeric 2010 earnings guidance.