Ingersoll-Rand plc — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2014. The filing is by Ingersoll-Rand plc, not Trane Technologies plc; Trane is part of its Climate segment. The security businesses spun off as Allegion in December 2013 are reported as discontinued operations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3,542.9 million | $3,398.4 million | $6,265.9 million | $6,037.4 million |
| Operating income | $463.3 million | $387.5 million | $618.3 million | $507.6 million |
| Operating margin | 13.1% | 11.4% | 9.9% | 8.4% |
| Continuing-operations earnings | $315.2 million | $274.5 million | $395.7 million | $329.9 million |
| Net earnings attributable to Ingersoll-Rand plc | $306.0 million | $317.2 million | $384.9 million | $405.2 million |
| Diluted EPS from continuing operations | $1.13 | $0.89 | $1.39 | $1.06 |
- Revenue rose 4.3% in Q2 and 3.8% in the first half. Management attributed first-half growth chiefly to volume (+3.3%) and pricing (+0.7%), partly offset by currency (-0.2%).
- Operating margin improved as productivity, mix, volume, and pricing gains exceeded inflation and increased investment spending.
- Reported net earnings attributable to the company declined year over year because 2013 included earnings from the now-spun-off security businesses. Q2 discontinued operations were a $4.6 million loss versus $50.2 million income in 2013; first-half results were a $1.7 million loss versus $89.4 million income.
- Q2 effective tax rate was 24.8%, compared with 15.1%; the first-half rate was 24.5%, compared with 13.9%. Management cited the increase in unrecognized tax benefits and, for Q2, certain legal-entity restructuring costs.
Segments
- Climate: Q2 revenue increased 4.3% to $2,748.9 million; segment operating margin rose to 14.2% from 12.5%. First-half revenue increased 4.3% to $4,789.7 million; margin improved to 10.9% from 8.7%.
- Industrial: Q2 revenue increased 4.1% to $794.0 million; margin rose to 16.4% from 15.8%. First-half revenue increased 2.3% to $1,476.2 million, but segment income fell 5.5% to $209.4 million and margin declined to 14.2% from 15.4%, reflecting investment and inflation pressures.
Cash flow, debt and liquidity
- First-half cash from continuing operations was $175.9 million, down from $313.5 million. Working-capital and other asset/liability changes were a $415.3 million use of cash. Total operating cash flow, including discontinued operations, was $120.1 million versus $428.8 million.
- Continuing investing cash outflow was $64.2 million, including $92.6 million of capital expenditures; this was lower than the prior-year outflow of $122.9 million. The period included $30.3 million of dividends received from equity investments.
- Continuing financing cash outflow was $1,055.2 million, principally reflecting $1,012.8 million of share repurchases and $132.8 million of shareholder dividends. Cash declined from $1,937.2 million at year-end to $929.8 million.
- Total debt was $3,562.2 million at June 30, versus $3,521.2 million at December 31; debt-to-total-capital rose to 35.6% from 33.1%. Current debt and maturities increased to $915.7 million, including $498.8 million of 2015 senior notes reclassified as current.
- The company reported $2.0 billion of unused revolving credit facilities and said available cash, operating cash generation, credit lines, and capital-market access should cover anticipated needs. Its $343.0 million debentures have holder put rights; holders may exercise a put on $305.8 million in November 2014.
Outlook, commentary and key risks
- No numerical earnings or revenue guidance is provided. Management expected moderate growth in worldwide construction markets and slow growth in industrial markets for the remainder of 2014, with productivity-program benefits. It noted uneven global commercial construction, slower worldwide industrial activity, continued challenges in U.S. residential and consumer markets, and signs of improvement in U.S. builder/replacement and some commercial HVAC replacement markets.
- The IRS disputes the company’s tax treatment of historical intercompany debt. Proposed additional taxes are approximately $109 million for 2002, plus penalties and interest, and approximately $665 million for 2003–2006, plus penalties and interest. The company contests the claims and says it is adequately reserved, but acknowledges an adverse resolution could materially affect results, financial condition, and cash flows. Unrecognized tax benefits were $357.4 million at June 30.
- Asbestos liabilities were $815.7 million, offset by $313.3 million of recorded probable insurance recoveries. Actual liabilities and recoveries may differ materially from estimates; insurance recovery and litigation remain uncertainties. Environmental reserves were $46.3 million.
- Venezuelan subsidiary balances were translated at the official exchange rate, rather than less favorable SICAD rates, based on management’s expectation that imports would qualify for the official rate. Further devaluation or inability to convert bolivars could adversely affect results and cash flow.
- Management cited economic, demand, currency, commodity, tax, litigation, and productivity risks. It reported no material change in risk factors from the 2013 Form 10-K and no significant second-quarter change in market-risk exposure.
Important facts for investors to verify
- How continuing-operations earnings and cash conversion trend after the Allegion spin-off, and whether working capital remains a substantial cash use.
- The maturity and refinancing plan for 2015 notes and the November 2014 put option on debentures.
- Developments in the IRS tax litigation, reserve adequacy, and effective tax-rate volatility.
- Assumptions behind asbestos liabilities and insurance recoveries, plus progress in related coverage litigation.
- Whether Climate’s margin improvement persists and whether Industrial’s first-half margin decline reverses.
- Actual 2014 share repurchases, dividend funding, and the company’s liquidity after the significant first-half cash reduction.