Business context and reporting period
This is Ingersoll-Rand plc’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Although the request identifies Trane Technologies plc, the filing issuer named in the source is Ingersoll-Rand plc. The company reported Climate (HVAC, building services and transport temperature control) and Industrial businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4,357.7 | $3,908.4 | $7,742.2 | $6,909.0 |
| Operating income | $640.3 | $557.6 | $883.7 | $772.6 |
| Operating margin | 14.7% | 14.3% | 11.4% | 11.2% |
| Continuing-operations earnings | $458.5 | $353.9 | $592.0 | $481.5 |
| Net earnings attributable to Ingersoll-Rand plc | $448.1 | $358.6 | $568.5 | $475.7 |
| Diluted EPS, continuing operations | $1.82 | $1.35 | $2.32 | $1.82 |
| Diluted EPS, total | $1.79 | $1.38 | $2.26 | $1.82 |
- Q2 revenue rose 11.5%; management attributed growth to volume/product mix (7.5 percentage points), acquisitions (1.0), pricing (1.4) and currency (1.6). Six-month revenue increased 12.1% on similar drivers.
- Q2 Climate revenue increased 11.1% and Industrial revenue 13.0%. Segment operating income was $582.7 for Climate and $121.2 for Industrial; margins were 16.7% and 14.0%, respectively. Six-month segment margins were 13.8% and 11.1%.
- Q2 operating margin improved 0.4 percentage points, mainly from volume/mix and pricing above material inflation, partly offset by investment, restructuring and acquisition amortization. For the first half, margin improved 0.2 points; inflation and spending partly offset volume/mix benefits.
- Q2 continuing operating cash flow was $414.5 for the first half, versus $422.3 a year earlier. Working-capital changes used $466.4, reflecting seasonal inventory growth and higher receivables. Total operating cash flow, including discontinued operations, was $377.7 versus $405.5.
- First-half investing cash use was $444.9, including $281.5 for acquisitions and equity-method investments and $163.4 of capital expenditures. Financing cash use was $491.4, including $221.8 of ordinary-share dividends and $500.1 of share repurchases.
- At June 30, cash was $969.5 (about $0.9 billion held by non-U.S. subsidiaries); total debt was $4,338.5, versus $4,064.0 at year-end 2017. Debt-to-total-capital was 38.9%, up from 36.1%. The company had $2.0 billion of unused revolving credit commitments and $249.0 of commercial paper outstanding.
- Total current assets were $6,161.7 and current liabilities $4,752.7. Cash declined from $1,549.4 at December 31, 2017. The filing states management expects cash, operating flows, committed credit lines and market access to meet U.S. and non-U.S. needs for at least the next 12 months and thereafter for the foreseeable future.
Material changes and notable items
- In February 2018, the company issued $1.15 billion of senior notes and used proceeds in March to redeem $1.10 billion of notes. Early redemption generated $15.4 of premium expense and $1.2 of unamortized costs in interest expense; first-half interest expense increased $15.1 year over year.
- First-half acquisitions and joint-venture investment totaled $281.5 net of cash acquired. The principal acquisition was ICS Group Holdings, a European temporary chiller-rental business; in May the company completed a 50% Climate-segment joint venture with Mitsubishi Electric.
- The company repurchased approximately $500 million of shares in the first half, leaving about $400 million under its $1.5 billion authorization. It announced an 18% increase in the quarterly dividend, from $0.45 to $0.53 per share, beginning with the September 2018 payment.
- First-half restructuring charges were $51.5, versus $38.2 in 2017, including $37.2 in Industrial. The company announced closure of a non-U.S. Industrial manufacturing facility and relocation of production; $42.1 remained accrued at June 30, most expected to be paid within a year.
- The first-half effective tax rate was 21.4%, compared with 25.7%. Tax accounting for the 2017 U.S. Tax Cuts and Jobs Act remained provisional; Q2 measurement-period adjustments reduced provisional tax amounts by $1.6 net.
- ASC 606 was adopted January 1, 2018. Its reported effects were not material to overall revenue or operating income; it accelerated recognition for certain customized Industrial contracts. Comparative periods were not restated.
Outlook, commentary and risks
Management described current economic trends as positive across its segments, citing strong HVAC replacement, service, controls and aftermarket demand; continued U.S. residential and commercial construction momentum; and growth in global Industrial equipment and services markets. It expected growth in both segments in 2018, supported by operational excellence, new products and productivity programs. The filing provides no specific full-year revenue, earnings or cash-flow guidance.
Key uncertainties include economic and political conditions, customer demand and capital spending, competition, tariffs and trade restrictions, commodity prices, currency and interest-rate movements, tax-law changes and audits, litigation, acquisitions, information-security events, weather and potential asset impairments. The filing says there were no material changes to previously disclosed risk factors and no significant change in market-risk exposure in the quarter.
Contingencies include environmental and product-liability matters and asbestos claims. At June 30, recorded asbestos liabilities were $565.3, with $256.0 of probable insurance-recovery assets; actual liabilities and recoveries may differ materially from estimates. Environmental reserves were $42.8. Trane also had approximately $450 million of energy-savings performance guarantees extending through 2038; management considered significant future losses remote. Discontinued operations included a $5.9 after-tax Q2 loss, primarily involving retained costs and asbestos matters from previously sold businesses.
Investor verification checklist
- Confirm issuer identity and corporate-name history: this filing is for Ingersoll-Rand plc, not an issuer titled Trane Technologies plc.
- Assess whether working-capital needs, especially receivables and inventory, affect cash conversion and full-year cash generation.
- Track debt, refinancing costs, commercial-paper usage, and the effect of dividends and repurchases on liquidity and leverage.
- Review segment demand, pricing versus material inflation, restructuring execution, and whether margin improvement continues.
- Monitor final Tax Cuts and Jobs Act accounting, tax audits, and the uncertain asbestos liability and insurance recoveries.
- Check whether management’s qualitative 2018 growth outlook is supported by subsequent reported results; this filing gives no numerical full-year guidance.