Business context and reporting period
Ingersoll-Rand plc’s unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the same period in 2017. The filing reports two segments: Climate, including Trane, American Standard and Thermo King, and Industrial. The filing’s registrant is Ingersoll-Rand plc; it does not use the name Trane Technologies.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $3,384.5 million | $3,000.6 million |
| Operating income / margin | $243.4 million / 7.2% | $215.0 million / 7.2% |
| Earnings from continuing operations | $133.5 million | $127.6 million |
| Net earnings attributable to ordinary shareholders | $120.4 million | $117.1 million |
| Diluted EPS | $0.48 | $0.45 |
| Continuing operating cash flow | $(45.8) million | $(33.3) million |
| Cash and cash equivalents at quarter-end | $1,175.1 million | $1,549.4 million at Dec. 31, 2017 |
| Total debt at quarter-end | $4,350.7 million | $4,064.0 million at Dec. 31, 2017 |
Revenue increased 12.8%, driven by volume/product mix (7.7 percentage points), currency translation (3.2), acquisitions (1.2) and pricing (0.7). Climate revenue rose 12.3% to $2,609.8 million and operating margin improved to 10.0% from 9.4%. Industrial revenue rose 14.5% to $774.7 million, but operating income declined to $59.9 million from $65.8 million and margin fell to 7.7% from 9.7%.
Operating cash outflow reflected a $330.7 million use from changes in assets and liabilities, primarily seasonal inventory growth. Total operating cash flow, including discontinued operations, was negative $66.2 million. Continuing investing cash outflow was $257.7 million, including $201.6 million for acquisitions and $52.8 million of capital expenditures. Cash declined $374.3 million during the quarter. The debt-to-total-capital ratio increased to 37.9% from 36.1% at year-end; $2.0 billion of revolving credit commitments were unused.
Material changes and unusual items
- Interest expense rose $18.9 million to $72.9 million. The company issued $1.15 billion of notes and redeemed $750 million of 6.875% notes due 2018 and $350 million of 2.875% notes due 2019. Early redemption included $15.4 million of premium expense and $1.2 million of unamortized costs.
- Restructuring charges were $44.4 million versus $32.7 million; the quarter included plans to close an Industrial manufacturing facility outside the U.S. and relocate production. The restructuring reserve was $51.8 million at March 31, mostly expected to be paid within one year.
- Discontinued operations generated a $9.4 million after-tax loss, mainly associated with retained obligations including asbestos matters.
- The company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $2.4 million. The standard had no material effect on reported revenue or operating income; certain customized Industrial contracts now qualify for revenue recognition over time.
Outlook, commentary and risks
Management described HVAC replacement and aftermarket demand as strong, with continued U.S. residential and commercial construction momentum. It characterized Europe, Middle East and Asia non-residential markets as mixed and global Industrial markets as improving. Its outlook was for moderate Climate growth and Industrial market improvement, supported by operational excellence, product launches and productivity programs; no numerical earnings or revenue guidance was provided.
Management said existing cash, operating cash generation, committed credit lines and expected capital-market access should fund operations and planned capital needs. It also expected resources to support dividends, repurchases, restructuring and acquisitions. The company declared dividends of $0.45 per share. The Tax Cuts and Jobs Act tax accounting remained provisional; no adjustment to prior estimates was made in Q1. The Q1 effective tax rate was 19.8%, versus 18.4% a year earlier.
Key uncertainties include economic and customer-demand conditions, competition, rates and borrowing costs, currency and commodity movements, tax-law changes and audits, acquisitions and joint ventures, cybersecurity and data privacy, and litigation. Asbestos liabilities were $584.9 million, with $260.9 million of probable insurance recoveries; actual claims and recoveries may differ materially from estimates. Environmental reserves were $43.1 million. Trane had approximately $393 million of long-term performance guarantees; the company reported no significant losses to date and considered significant future losses remote.
Important facts for investors to verify
- Whether revenue growth and segment trends persisted, particularly the decline in Industrial segment margin.
- Whether seasonal working-capital investment reversed and operating cash flow improved over the rest of the year.
- Debt and interest-cost effects following the note issuance and refinancing, and the availability and use of revolving facilities.
- Progress and costs from the Industrial facility closure, restructuring actions, acquisitions and the planned Mitsubishi joint venture.
- Final tax-law estimates, asbestos liability and insurance-recovery assumptions, and exposure to cybersecurity or other legal contingencies.