Business context and reporting period
This is Ingersoll-Rand plc’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The filing covers the predecessor corporate name associated with today’s Trane Technologies. Its Climate segment includes HVAC, building services and transport temperature-control products; Industrial includes compressed-air systems, tools, material handling and low-speed vehicles.
Financial performance
Unless noted otherwise, dollar amounts are in millions. Comparisons are with the same 2017 period.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $4,030.9 | $3,670.5 | $11,773.1 | $10,579.5 |
| Operating income | $587.0 | $506.1 | $1,470.7 | $1,278.7 |
| Operating margin | 14.6% | 13.8% | 12.5% | 12.1% |
| Net earnings attributable to shareholders | $515.1 | $367.0 | $1,083.6 | $842.7 |
| Diluted EPS | $2.06 | $1.43 | $4.32 | $3.24 |
- Revenue growth: Q3 revenue increased 9.8%; management attributed growth mainly to volume and product mix, with contributions from pricing and acquisitions, partly offset by unfavorable currency. Nine-month revenue rose 11.3%, including favorable currency effects.
- Segments: Q3 Climate revenue was $3,238.7, up 10.2%, with a 16.5% operating margin versus 16.3%. Industrial revenue was $792.2, up 8.3%, with a 14.0% margin versus 12.2%. For nine months, segment margins were 14.8% for Climate and 12.0% for Industrial.
- Cash flow: Nine-month cash from continuing operations was $946.4, versus $890.8. Capital expenditures were $251.2; continuing free cash flow was approximately $695.2, calculated as operating cash flow less capital expenditures. Working-capital changes used $573.8, principally reflecting higher inventory and receivables.
- Liquidity and debt: Cash was $1,022.5 at September 30, down from $1,549.4 at year-end 2017. Total debt was $4,090.4, compared with $4,064.0; debt-to-total capital was 35.8%, versus 36.1%. The company reported $2.0 billion of unused revolving credit facilities and no commercial-paper borrowings.
Material changes and notable items
- Q3 revenue rose $360.4 and operating income rose $80.9 year over year. Management cited pricing and productivity gains, higher volume and acquisitions; material and other inflation, investment and restructuring costs, and currency headwinds were offsets.
- Nine-month net earnings from continuing operations increased to $1,123.1 from $849.7. The effective tax rate fell to 12.5% from 22.3%; the 2018 rate benefited from $75.5 of Tax Cuts and Jobs Act measurement-period adjustments and a $28.5 reduction in a state deferred-tax valuation allowance. Q3 included $77.1 of tax-law measurement-period adjustments. These items materially affect period comparisons.
- The company issued $1.15 billion of senior notes and redeemed $1.1 billion of older notes. The early redemption generated $16.6 of premium expense and unamortized costs in interest expense. Long-term debt increased, while current debt maturities fell substantially.
- Share repurchases totaled $514.1 during the first nine months; dividends paid to ordinary shareholders were $351.2. The quarterly dividend was increased from $0.45 to $0.53 per share, beginning with the September payment. In October 2018, the board authorized a further $1.5 billion repurchase program after completion of the existing authorization.
- Restructuring charges were $71.6 for the first nine months, versus $48.2 in 2017. Actions included planned manufacturing-facility closures and production transfers; $52.3 remained accrued at quarter-end.
- Acquisitions and equity-method investments used $281.5 of cash, including the ICS Group acquisition and a 50% Mitsubishi Electric joint venture focused on VRF and ductless HVAC systems.
Outlook, risks and contingencies
- Management expected growth in both segments in 2018, supported by operational-excellence initiatives, product launches and productivity programs. It described U.S. HVAC replacement, services, controls and aftermarket demand as strong, with continued momentum in U.S. residential and commercial construction; markets in Europe, the Middle East and Asia were mixed. No specific numerical earnings or revenue guidance is provided in the filing text.
- Management said available cash, cash generation, credit lines and capital-market access were expected to cover operating and capital needs, dividends, repurchases, restructuring and acquisitions. It also stated that no current plans existed to repatriate cash from subsidiaries for which permanent reinvestment is asserted.
- Risks include economic and market conditions, customer demand, competition, tariffs and trade measures, commodity costs, currency and interest-rate movements, tax-law changes and audits, acquisitions, cybersecurity, weather and climate events, and litigation. The filing reported no material change to previously disclosed risk factors.
- Asbestos-related liabilities were $560.7, with $249.5 of probable insurance recoveries recorded; actual claims, coverage outcomes and insurer solvency could cause significant variation. Environmental reserves were $41.7. Management said pending legal matters were not expected to have a material adverse impact, subject to the uncertainties described.
- The company expected adoption of the leases standard on January 1, 2019 to materially increase reported assets and liabilities, but not materially affect cash flows or the income statement.
Investor verification points
- Separate underlying operating growth from tax benefits and other unusual items when assessing the earnings and EPS increase.
- Review working-capital trends and the effect of seasonal inventory and receivables on cash conversion.
- Track debt maturities, refinancing costs, cash balances and the use of revolving facilities alongside planned shareholder returns.
- Monitor execution and cash costs of restructuring, acquisitions and the Mitsubishi joint venture, as well as the resulting segment margins.
- Assess asbestos liability and insurance-recovery assumptions, and the timing and balance-sheet impact of lease-standard adoption.