Ingersoll-Rand plc Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing issuer is Ingersoll-Rand plc; it is not filed under the later Trane Technologies name. The company operated four segments: Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies. Security businesses remained in continuing operations pending a proposed spin-off.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3,749.5 million | $3,592.8 million | $10,794.5 million | $10,564.7 million |
| Operating income | $376.6 million | $447.8 million | $1,053.0 million | $1,137.7 million |
| Operating margin | 10.0% | 12.5% | 9.8% | 10.8% |
| Net earnings attributable to Ingersoll-Rand | $165.9 million | $321.6 million | $571.1 million | $783.0 million |
| Diluted EPS | $0.56 | $1.03 | $1.91 | $2.50 |
| Operating cash flow, continuing operations | Not provided for the quarter | Not provided for the quarter | $955.2 million | $822.9 million |
- Revenue increased 4.4% in Q3 and 2.2% year to date. For the nine-month period, operating income fell 7.4% and attributable net earnings fell 27.1% year over year.
- Cash and cash equivalents were $1,083.9 million at September 30, 2013, versus $882.1 million at December 31, 2012. Total debt was $3,527.3 million, up from $3,233.0 million; the debt-to-total-capital ratio increased to 32.9% from 30.9%.
- The company had $2.0 billion of unused revolving credit facilities and no commercial paper outstanding. Management said available cash, operating cash generation, credit lines and expected capital-market access should meet U.S. and non-U.S. needs for at least the next 12 months.
- For the nine months, investing cash outflow was $150.5 million, including $187.6 million of capital expenditures. Financing cash outflow was $522.3 million, including $795.2 million of share repurchases and $183.0 million of dividends paid to ordinary shareholders.
Material changes and segment performance
- Q3 margin deterioration reflected a $111.4 million non-cash goodwill impairment, increased investment spending and spin-related costs. The impairment charge was recorded for Security Technologies EMEIA and had no cash-flow or debt-covenant impact.
- Interest expense rose $42.8 million in Q3, primarily due to a $45.6 million premium paid to redeem $1.255 billion of senior notes in July. The company issued $1.55 billion of longer-dated notes in June to fund the redemptions, spin-off expenses and general purposes.
- Climate Solutions revenue grew 4.3% in Q3 and segment margin rose to 13.8%. Residential Solutions revenue grew 9.1% and margin rose to 10.8%. Industrial Technologies revenue grew 2.9% and margin rose to 16.1%. Security Technologies revenue was nearly flat; margin rose to 26.5%, including a $21.5 million gain on a China property sale.
- Reported Residential Solutions growth included revenue transferred from Security Technologies: $16 million in Q3 and $51.7 million year to date. Security Technologies' year-to-date revenue declined 3.2%, partly reflecting that transfer.
Outlook, risks and unusual items
- Management described global conditions as uneven: commercial construction remained weak, industrial equipment and aftermarket activity slowed, and U.S. residential and consumer markets remained challenging. It noted gradual recovery in commercial HVAC replacement and aftermarket activity and improvement in U.S. new-builder and replacement markets. If conditions stabilize, management expected slight revenue growth and benefits from restructuring and productivity programs; no numerical earnings guidance was provided.
- The proposed security-business spin-off was expected before year-end 2013, subject to regulatory, tax, SEC filing, intercompany-agreement and other conditions. Management forecast 2013 spin-off and restructuring costs of approximately $0.70 per share after tax. Allegion Holdings was expected to have about $1.3 billion of debt at separation, plus a revolving facility of up to $500 million; the parent said it would not guarantee or owe that subsidiary debt.
- The IRS asserted approximately $84 million of additional tax for 2002, plus interest and penalties, and issued proposed adjustments totaling about $665 million for 2003–2006, plus penalties and interest. The company disputed the claims, believed it was adequately reserved, but warned that an adverse outcome could materially harm results, financial condition and cash flows. Unrecognized tax benefits totaled $550.0 million at quarter-end.
- Other identified exposures include asbestos liabilities of $835.3 million against recorded probable insurance recoveries of $315.6 million, environmental reserves of $59.8 million, and long-term service and maintenance performance guarantees totaling $427.6 million. Management considered significant losses under the guarantees remote; asbestos recoveries and liabilities remain subject to estimation and insurance-coverage uncertainty.
- A Venezuelan currency devaluation produced an approximately $10.0 million translation loss. The company also cited potential further goodwill or intangible impairment, market weakness, foreign-exchange and commodity-price changes, tax disputes, and the risk that the spin-off may not be completed.
Important facts for investors to verify
- Whether and when the security-business spin-off closed, the final separation terms, and the amount and allocation of debt and proceeds.
- Progress and resolution of the IRS disputes, related reserves, and any subsequent tax assessments or court filings.
- Whether Security Technologies EMEIA or Asia Pacific experienced further impairment, given limited fair-value headroom disclosed for reporting units.
- Underlying operating performance excluding the $111.4 million impairment, $45.6 million debt-redemption premium, spin costs and $21.5 million property-sale gain.
- Cash conversion, debt levels and capital returns after the substantial share repurchases, and developments in asbestos insurance recoveries and other contingencies.