Business context and reporting period
Form 10-Q for the quarter and six months ended June 30, 2009, filed August 6, 2009. The filing is by Ingersoll-Rand plc; the reported financial statements cover the predecessor Bermuda company, Ingersoll-Rand Company Limited, through June 30. The company operates in four segments: Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies, and Security Technologies. Comparisons are affected by the June 2008 acquisition of Trane, included for only 25 days in second-quarter 2008 results.
The parent-company reorganization from Bermuda to Ireland became effective July 1, 2009, after the reporting date. Existing shareholders received ordinary shares of the Irish parent.
Key financial metrics
| Metric | Three months ended June 30, 2009 | Three months ended June 30, 2008 | Six months ended June 30, 2009 | Six months ended June 30, 2008 |
|---|---|---|---|---|
| Revenue | $3,473.8 million | $3,080.8 million | $6,406.7 million | $5,244.1 million |
| Operating income | $250.6 million | $361.6 million | $300.5 million | $608.6 million |
| Operating margin | 7.2% | 11.7% | 4.7% | 11.6% |
| Net earnings attributable to parent | $122.1 million | $256.1 million | $95.3 million | $437.7 million |
| Diluted earnings per share | $0.38 | $0.88 | $0.29 | $1.54 |
- For Q2, cost of goods sold was 73.1% of revenue, versus 71.3%; selling and administrative expense was 19.7%, versus 17.0%. Interest expense rose to $81.9 million from $45.6 million.
- First-half continuing operating cash flow was $900.5 million, compared with cash used of $494.4 million in 2008. Capital expenditures were $113.8 million. Cash and equivalents at June 30 were $792.9 million.
- Total debt was $4,721.9 million, down from $5,124.1 million at December 31, 2008; debt-to-total-capital was 40.9%, versus 43.1%. Unused committed revolving credit facilities totaled $2.25 billion. Commercial paper outstanding was $574.3 million.
- Current assets were $5,074.0 million and current liabilities $4,370.4 million. Shareholders’ equity totaled $6,836.9 million.
- The company sold $1.0 billion of long-term notes in April, using proceeds to repay its $950 million bridge-loan balance. The receivables purchase facility has a $325 million maximum capacity; management expected it to provide an additional $150 million to $200 million of liquidity.
Material changes versus the prior comparable period
- Q2 revenue increased 12.8%, but the filing attributes a 19.6% negative volume/product-mix effect and a 3.7% negative currency effect; the Trane acquisition added 35.0%. First-half revenue rose 22.2%, with a 22.0% negative volume/product-mix effect and a 47.3% acquisition contribution.
- Profitability weakened sharply as lower volumes, unfavorable currency effects, and lower margins in the acquired Trane business outweighed productivity measures and modest pricing gains. Q2 operating income fell about 31%; first-half operating income fell about 51%.
- All four segments reported lower Q2 revenue year over year apart from the acquisition-distorted Air Conditioning comparison. Climate Control Technologies revenue fell 31.4%, Industrial Technologies 33.0%, and Security Technologies 19.9%. Security operating margin increased to 19.7% from 18.4%; margins fell in Climate Control and Industrial Technologies.
- First-half cash generation improved substantially from 2008, when operating cash flow was affected by an approximately $700 million tax payment. Management cited better receivables collections and inventory management.
- Restructuring charges were $41.1 million in Q2 and $52.0 million in the first half, versus $6.5 million and $10.3 million, respectively, in 2008.
Outlook, management commentary, risks and unusual items
- Management said weak worldwide economic conditions and reduced demand were expected to negatively affect 2009 results, particularly in North America and Western Europe. It noted slight-to-moderate growth in China and Latin America as a partial offset and currency risk from U.S. dollar strength.
- Management projected a 2009 annual tax rate of approximately 18%. The company expanded its restructuring program to projected costs of approximately $140 million; it reported $122.7 million incurred since the fourth quarter of 2008. Expected annual pretax savings were approximately $160 million in 2009 and $200 million in 2010.
- In March 2009, the company announced a reduction in its quarterly dividend from $0.18 to $0.07 per share, effective with the September payment, to reduce debt and support liquidity.
- Asbestos-related liabilities were $1,159.0 million, with $405.4 million of probable insurance recoveries, at June 30. Outcomes depend on claims, settlement costs, insurance coverage, and insurer solvency. Environmental reserves were $97.2 million.
- An EU competition investigation concerning former Trane bathroom-fixtures businesses could produce a fine; the filing cites a potential maximum of approximately $1.1 billion, with an expected indemnity from WABCO Europe, whose ability to pay depends on its funding capacity.
- The IRS disputed the treatment of intercompany debt in the company’s 2001–2002 tax filings. If proposed adjustments were upheld, additional tax for 2002 could be approximately $190 million plus interest. The company contests the matter and says it is adequately reserved.
- The company disclosed ongoing SEC and DOJ discussions concerning potential anti-corruption issues involving Trane and another China-related matter. It warned that enforcement action or a breach of its existing DOJ deferred prosecution agreement could adversely affect the business.
- Other notable items include $634.1 million in product warranty liabilities and $110.6 million of Trane performance and energy-savings guarantees. Management considered significant losses on those guarantees remote.
Most important facts for investors to verify
- Whether operating margins and segment demand stabilize, and whether restructuring savings are achieved on schedule.
- How much of reported revenue and cash generation depends on acquisition timing, receivables sales, and working-capital movements.
- Debt maturities, commercial-paper access, the fourth-quarter 2009 debenture put option of approximately $306.5 million, and the availability of revolving credit.
- The reduced dividend’s ongoing status and the extent to which cash is directed to debt reduction.
- Developments in asbestos insurance recoveries, the EU investigation and indemnity, IRS disputes, and the disclosed anti-corruption matters.
- The financial and tax consequences, if any, of the July 1 reorganization to Ireland; the filing cautions that proposed U.S. legislative or regulatory changes could affect expected benefits.