Business context and reporting period
Ingersoll-Rand plc (the issuer named in the filing; not Trane Technologies) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. Trane is among the company’s brands and businesses. The company reports Climate Solutions, Residential Solutions, Industrial Technologies, and Security Technologies.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2009 period.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $3,703.4 | $3,451.7 | $6,639.0 | $6,369.6 |
| Operating income | $383.0 | $259.1 | $521.0 | $318.5 |
| Operating margin | 10.3% | 7.5% | 7.8% | 5.0% |
| Continuing-operations earnings | $262.2 | $145.7 | $283.1 | $138.5 |
| Net earnings attributable to Ingersoll-Rand | $196.4 | $122.1 | $197.9 | $95.3 |
| Diluted EPS, continuing operations | $0.76 | $0.43 | $0.81 | $0.39 |
| Diluted EPS, total | $0.58 | $0.38 | $0.59 | $0.29 |
- Revenue rose 7.3% in Q2 and 4.2% for the first half. Management attributed growth mainly to higher volume/product mix; pricing was slightly negative. Venezuelan bolivar devaluation reduced reported revenue by $21.1 million in Q2 and $35.8 million for the half year.
- Margin improvement reflected higher volumes, productivity, and restructuring savings, partly offset by higher material and other costs. Selling and administrative expense fell year over year in both periods.
- Segment performance was strongest in Industrial Technologies and Residential Solutions. Security Technologies revenue declined 1.4% in Q2 and 1.9% for the half; Climate Solutions revenue increased 6.0% and 3.8%, respectively.
Cash flow, debt and liquidity
- First-half cash from continuing operations was $294.9 million, down from $919.6 million. Management cited working-capital movements, including increased inventory as markets stabilized. Capital expenditures were $72.3 million; continuing investing cash outflow was $72.5 million.
- Continuing financing cash outflow was $240.4 million. Cash declined by $55.1 million during the half to $821.6 million.
- Total debt was $3,885.1 million, down from $4,096.6 million at year-end 2009; cash exceeded short-term borrowings by $153.6 million. Debt-to-total-capital was 35.1%, versus 36.2% at year-end. Current assets were $5,781.7 million and current liabilities $4,877.5 million.
- The company had $2.0 billion in unused committed revolving credit facilities. A $1.0 billion, three-year facility signed in May 2010 replaced a $1.25 billion facility due to mature in August 2010.
- Management said available cash, operating cash generation, credit lines, and expected capital-market access should cover operating and capital needs for the foreseeable future. The filing provides no earnings-per-share or revenue guidance.
Material changes, outlook and significant items
- Management described end markets as stabilizing but still depressed, with U.S. and European non-residential construction expected to remain weak. It anticipated modest revenue growth in other markets and continued benefits from productivity and restructuring actions.
- The company announced plans to sell its European KOXKA stationary refrigeration business and agreed to a sale on July 29, subject to customary conditions, targeting completion by the end of September 2010. It recorded a $38.8 million impairment; discontinued operations included a $60.3 million Q2 loss and a $75.1 million first-half loss, net of tax.
- The first-half tax provision included a $40.5 million non-cash charge from healthcare legislation relating to retiree drug subsidies. Excluding that charge, management projected an approximately 19% 2010 annual effective tax rate.
- Holders could put up to $306.4 million of debentures in November 2010. Exchangeable notes totaling $321.7 million were classified as current because they could be exchangeable at holders’ option in Q3 2010.
- Contingencies include an IRS dispute over 2001–2002 tax filings; the IRS asserts an alternative position involving approximately $84 million of tax plus interest and has proposed penalties. The company contests the matter and says it is adequately reserved; the filing notes reserves could change.
- Gross asbestos liabilities were $1,081.0 million and probable insurance-recovery assets were $373.1 million at June 30. Environmental reserves were $84.9 million. Management cautioned that estimates and recoveries remain uncertain.
- A European Commission fine of approximately $400 million against former American Standard entities was subject to an indemnification from WABCO. Ingersoll-Rand recorded a receivable and corresponding liability and reported no effect on consolidated results.
- The company disclosed ongoing investigations and discussions with the SEC and DOJ concerning potential FCPA issues involving Trane and a business in China; further enforcement action could adversely affect the company. It also cited economic conditions, demand, competition, taxes, litigation, currencies, raw-material costs, and restructuring execution as risks.
Most important facts for investors to verify
- Whether the KOXKA divestiture closed as planned and the final sale proceeds and impact.
- Whether operating cash flow and working capital improved after the first-half decline.
- The status and potential cash impact of the exchangeable notes and November debenture put options.
- Updates to the IRS dispute, asbestos reserves and insurance recoveries, and FCPA-related inquiries.
- Whether modest growth and margin gains persisted despite weak construction markets and currency effects.