SEC Filing Summary: Ingersoll-Rand plc, Form 10-Q
Entity and period: This is Ingersoll-Rand plc’s quarterly report for the quarter ended September 30, 2009, filed November 6, 2009. The filing identifies Ingersoll-Rand plc as the issuer; Trane was an acquired business and a major part of its operations. The company reorganized its parent jurisdiction from Bermuda to Ireland effective July 1, 2009, with no material effect on reported results.
Business context and results
The diversified manufacturer and services provider reported four segments: Air Conditioning Systems and Services (Trane), Climate Control Technologies, Industrial Technologies and Security Technologies. Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $3,482.7 | $4,313.2 | $9,889.4 | $9,557.3 |
| Operating income | $318.3 | $347.4 | $618.8 | $956.0 |
| Operating margin | 9.1% | 8.1% | 6.3% | 10.0% |
| Net earnings attributable to Ingersoll-Rand plc | $216.6 | $227.7 | $311.9 | $665.4 |
| Diluted EPS | $0.65 | $0.70 | $0.96 | $2.24 |
- Cash flow: Nine-month cash from continuing operations was $1,502.3, versus $13.5 a year earlier; investing cash outflow was $137.3 versus $7,211.1, largely reflecting the prior-year Trane acquisition. Financing cash outflow was $1,158.5 versus $3,190.6 of inflow.
- Liquidity and debt: September 30 cash was $743.9. Total debt was $4,132.4, down from $5,124.1 at year-end 2008; debt-to-total-capital was 36.5%, down from 43.1%. Current assets were $4,772.2 and current liabilities $4,030.0. The company had $2.25 billion of unused committed revolving facilities.
- Other metrics: Nine-month interest expense rose to $225.8 from $156.4. The quarterly dividend was reduced from $0.18 to $0.07 per share, effective with the September 2009 payment. Nine-month pension cost after curtailments and settlements was $113.7, versus $26.7 in 2008.
Changes versus the comparable period
- Third-quarter revenue fell 19.3%, primarily from a 17.4% volume/product-mix decline, with additional adverse currency impact. All four segments faced lower demand. Q3 operating income declined, but margin increased to 9.1%; management attributed much of the year-over-year margin improvement to $108.4 million of nonrecurring Trane purchase-accounting costs in Q3 2008, alongside productivity and cost reductions.
- For the first nine months, revenue increased 3.5%, but the comparison is materially affected by the June 2008 Trane acquisition: 2009 included Trane for the full period, while 2008 included it only from June 5. The filing attributes 23.0% revenue growth to the acquisition, offset by lower volume/product mix and currency.
- Nine-month operating income fell 35.3% and margin declined to 6.3%. Management cited lower volumes, unfavorable currency, lower margins in the acquired Trane business, and $61.7 million of restructuring charges. Higher selling and administrative costs and interest expense also weighed on results.
- Climate Control Technologies and Industrial Technologies had particularly pronounced nine-month revenue declines (31.7% and 29.9%, respectively). Security Technologies revenue declined 18.6%, while its margin improved to 19.0% from 18.3%.
Outlook, management commentary and risks
- Management expected 2009 results to be negatively affected by weak North American and Western European markets, partially offset by slight-to-moderate growth in China and Latin America. A stronger U.S. dollar was also identified as a revenue headwind. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- The company expanded its enterprise restructuring program; projected total costs were approximately $277 million. It reported $132.4 million incurred since the fourth quarter of 2008 and $30.3 million accrued at quarter-end. Combined productivity and restructuring actions were expected to generate annual pretax savings of approximately $195 million in 2009 and $145 million in 2010.
- Management said available cash, operating cash generation, the receivables program, committed credit lines and anticipated capital-market access should meet operating and capital needs for the foreseeable future. Approximately $306.5 million of debentures could be put to the company in Q4 2009.
- Contingencies: The IRS disputed tax treatment of intercompany debt; proposed 2002 adjustments could mean approximately $190 million plus interest, and the company was contesting the matter. Unrecognized tax benefits were $552.6 million. The filing also disclosed possible FCPA issues involving Trane under review by the SEC and DOJ.
- Trane and certain former subsidiaries faced a European Commission competition investigation. A maximum fine could be as high as $1.1 billion, subject to potential leniency reduction; WABCO Europe had agreed to indemnify Trane, but its ability to pay depended on its funding capacity.
- At September 30, asbestos liabilities were $1,147.1 million and probable insurance-recovery assets were $409.3 million. The filing cautions that actual liabilities and recoveries could differ significantly from estimates. Environmental reserves were $94.6 million. Trane service-contract performance guarantees totaled $160.3 million; management considered significant losses remote.
- The company planned to realign reporting segments in Q4 2009, combining commercial HVAC and refrigeration businesses under Climate Solutions and creating Residential Solutions. This was intended to improve integration and achieve cost synergies.
Key facts for investors to verify
- Separate the underlying operating trend from acquisition-related comparability effects and 2008 Trane purchase-accounting charges.
- Assess whether reported operating cash flow is sustainable, including the effect of working-capital improvements and receivables sales; the filing reports a $143 million operating cash inflow from increased receivables interests sold to conduits.
- Review debt maturities, the Q4 debenture put exposure, and the cost and terms of the April 2009 debt issuance, including the 9.5% senior notes.
- Track restructuring costs against projected savings and confirm delivery of expected savings and segment-realignment benefits.
- Monitor resolution and funding of the IRS, European Commission, FCPA, asbestos and environmental matters, including the reliability of insurance recoveries and indemnification.
- Consider that the filing reports correction of tax accounting errors in Q3 without restating prior periods; management said the errors were not material to projected annual results or previously issued statements.