Business context and reporting period
Ingersoll-Rand plc (NYSE: IR), an Irish-domiciled global industrial company whose portfolio included Trane, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Its four reportable segments were Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Important comparability note: The final Hussmann transaction left the company with a 40% equity interest and significant continuing involvement. Accordingly, Hussmann results were presented in continuing operations for all periods in this filing, rather than as discontinued operations as they had been reported in the first half of 2011.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $3,928.5 | $3,730.3 | $11,328.2 | $10,367.4 |
| Operating income | $179.7 | $410.7 | $518.8 | $942.7 |
| Net earnings attributable to Ingersoll-Rand plc | $86.2 | $232.2 | $100.9 | $430.1 |
| Diluted earnings per share | $0.25 | $0.68 | $0.29 | $1.27 |
- Revenue and margins: Revenue rose 5.3% in Q3 and 9.3% year to date. Reported operating margin was 4.6% in both 2011 periods, versus 11.0% in Q3 2010 and 9.1% in the first nine months of 2010. Hussmann sale and impairment charges of $264.8 in Q3 and $651.6 year to date materially reduced reported margins. Excluding those charges, management said operating margin improved 0.3 percentage points in Q3 and 1.3 points year to date, citing pricing, productivity and restructuring savings, partly offset by mix, investment and material costs.
- Cash flow: Continuing operating cash flow was $763.0 for the first nine months, versus $582.5 in 2010. Continuing investing activities provided $255.1, including $336.7 of net proceeds from business dispositions; they used $110.6 in 2010. Continuing financing activities used $650.3, versus $490.7, mainly reflecting $575.6 of share repurchases and higher dividends. Capital expenditures were $129.1.
- Liquidity and debt: At September 30, cash and equivalents were $1,403.8; total debt was $3,641.0, including $760.0 of short-term borrowings and current maturities. The debt-to-total-capital ratio was 32.2%, compared with 31.3% at year-end 2010. The company had $2.0 billion of unused committed revolving credit facilities. Current assets were $5,936.1 and current liabilities $4,333.3.
- Other balance-sheet measures: Total assets were $19,502.4 and total equity $7,678.7 at September 30. Cash increased from $1,014.3 at December 31, 2010; total debt declined from $3,683.9.
- Dividends and repurchases: The quarterly dividend was increased from $0.07 to $0.12 per share beginning with the June 2011 payment. The company repurchased 17.3 million shares for $575.6 in the first nine months under a $2.0 billion authorization.
Material changes versus the prior comparable period
- Climate Solutions revenue increased 8.0% in Q3 and 11.2% year to date; segment operating income increased 20.2% and 39.9%, respectively. Results benefited from pricing, volume and productivity, with material-cost and investment increases as offsets.
- Residential Solutions revenue fell 12.3% in Q3 and 2.6% year to date. Segment operating income declined 67.1% and 53.1%, respectively, amid weak residential demand, lower volumes, adverse mix and inflation.
- Industrial Technologies revenue increased 11.6% in Q3 and 17.6% year to date; segment operating income rose 20.8% and 37.2%.
- Security Technologies revenue increased 6.9% in Q3 and 3.8% year to date. Segment operating income fell 2.3% in Q3 and increased 2.6% year to date; Q3 margin narrowed from 22.1% to 20.2%.
- The Hussmann sale generated $433 of stated consideration: $354 cash after purchase-price adjustments and a $79 equity interest. The company recorded a $265 pretax sale/impairment loss in Q3; the year-to-date charge was $652. It expects to account for its Hussmann investment using the equity method from Q4 2011.
Outlook, management commentary, risks and unusual items
- Outlook: Management expected modest revenue growth as economic conditions stabilized, alongside continued benefits from restructuring and productivity programs. It projected a 2011 annual effective tax rate of approximately 24%, excluding Hussmann-related tax benefits. No specific full-year revenue or earnings guidance was provided in the filing text.
- Markets: Management described continuing weakness in residential and consumer markets, including residential HVAC and golf equipment, and a shift toward lower-SEER residential HVAC units. It cited sustained recovery in worldwide industrial and refrigerated transport markets, parts and service activity, and most Asian businesses, with a gradual North American commercial HVAC recovery.
- Taxes: Q3 tax provision was $29.2 and included an $84 Hussmann-related tax benefit, partly offset by $43 of discrete tax charges. For nine months, the provision was $168.4 and included the same $84 benefit, partly offset by approximately $59 of discrete charges. The company also reported correcting tax accounting errors in 2011, recording an approximately $35 tax charge, including $30 in Q3; it said the errors were not material to 2011 or previously issued statements.
- Contingencies: The IRS continued to assert tax adjustments for 2001–2002, including approximately $84 of additional tax for 2002 plus interest and asserted penalties. The company contested the position and said it was adequately reserved; total unrecognized tax benefits were $561.2 at September 30. The filing says resolution could affect reserves and potentially subsequent tax years.
- Legal and product liabilities: The company disclosed asbestos-related liabilities of $953.4 and probable insurance recoveries of $319.3, both subject to estimation and insurer-solvency uncertainty. It also disclosed a Dresser-Rand employee incentive-plan dispute: a court ruling limited maximum damages to approximately $95 million, while the company recorded a further $6 pretax charge in Q3 and intended to appeal. Warranty liabilities were $641.5.
- Other risks: Management identified economic and demand conditions, competition, taxes and audits, litigation, interest and currency movements, raw-material and energy costs, productivity execution, possible asset impairments, and potential legislation affecting tax benefits associated with non-U.S. incorporation. Management said no material change to previously disclosed risk factors occurred in the quarter.
Investor verification priorities
- Reconcile the Hussmann sale consideration, retained 40% interest, $265 Q3 and $652 year-to-date charges, and the resulting change in continuing-operations presentation.
- Assess underlying operating performance separately from Hussmann charges, including the stated adjusted margin improvement and segment trends—especially Residential Solutions.
- Review cash generation and the use of proceeds, including share repurchases, dividends, working-capital investment and the available credit facilities.
- Track the near-term debt obligations, including the $338 exchangeable notes due in 2012 and the November 2011 put option on $306.4 of debentures; management said it expected sufficient liquidity to meet any put repayments.
- Monitor the IRS dispute and unrecognized tax benefits, the Dresser-Rand litigation, and the estimates and recoverability of asbestos insurance assets.
- Check subsequent filings for Hussmann’s equity-method results, final purchase-price adjustments, and developments affecting the company’s modest-growth and tax-rate outlook.