Ingersoll-Rand plc (NYSE: IR) — Q2 2019 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2019. The issuer was Ingersoll-Rand plc, with Climate and Industrial segments; the filing describes a planned separation of Industrial and combination with Gardner Denver. The supplied filing does not identify the issuer as Trane Technologies.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4,527.8m | $4,357.7m | $8,103.7m | $7,742.2m |
| Operating income | $650.5m | $640.3m | $969.0m | $883.7m |
| Operating margin | 14.4% | 14.7% | 12.0% | 11.4% |
| Net earnings attributable to Ingersoll-Rand plc | $456.1m | $448.1m | $656.0m | $568.5m |
| Diluted EPS, net earnings | $1.86 | $1.79 | $2.68 | $2.26 |
| Operating cash flow, continuing operations | Not separately stated | Not separately stated | $421.6m | $414.5m |
- Q2 revenue rose 3.9%; management attributed the increase to volume/product mix, pricing and acquisitions, partly offset by unfavorable currency. Q2 Climate revenue increased 3.5%, while Industrial increased 5.4%.
- Q2 operating margin declined 0.3 percentage points. Pricing and productivity benefits were offset by restructuring and investment spending, PFS acquisition and separation transaction costs, acquisition-related inventory/backlog charges, and currency effects. Climate margin rose to 17.0%; Industrial margin fell to 12.1%.
- For the first half, revenue grew 4.7% and operating margin increased 0.6 percentage points. Climate and Industrial margins were 14.4% and 11.5%, respectively.
- Q2 continuing-operations earnings were $465.9m; first-half continuing-operations earnings were $671.7m. First-half effective tax rate was 19.8%, versus 21.4% a year earlier.
Cash, debt and liquidity
- At June 30, cash and equivalents were $875.6m, total debt was $5,749.8m, and total equity was $7,172.9m. Debt-to-total-capital was 44.5%, versus 36.7% at December 31, 2018.
- First-half operating cash flow from continuing operations was $421.6m. Continuing investing used $1,587.3m, primarily for acquisitions, and continuing financing provided $1,159.3m. Cash declined $27.8m from year-end.
- The company spent $1,477.6m on acquisitions and equity-method investments, including the PFS acquisition; capital expenditures were $116.7m. Financing included $1.5bn of senior-note proceeds, $259.4m of ordinary-share dividends and $250.0m of share repurchases.
- The $2.0bn revolving credit facilities were unused. Cash and available credit, among other sources, were expected by management to meet operating and capital needs for at least the next 12 months.
Material changes, outlook and risks
- In May 2019, the company acquired Precision Flow Systems for approximately $1.46bn net of cash acquired, financed with senior notes. Purchase-price allocation remained preliminary; the acquisition added $888m of goodwill.
- The proposed Reverse Morris Trust transaction would spin off Industrial and combine it with Gardner Denver to form IndustrialCo; Climate would remain as ClimateCo. Closing was expected by early 2020, subject to shareholder and regulatory approvals and other conditions. Existing Ingersoll-Rand shareholders were expected to own 50.1% of IndustrialCo. The company estimated separation costs of $150m–$200m through early 2020.
- Management cited generally positive market conditions and expected positive growth in both segments in 2019, supported by demand, new products and productivity initiatives. The filing provides no specific full-year revenue or earnings guidance.
- Key transaction uncertainties include approvals, timing, costs, integration, anticipated synergies, retention of key personnel and possible litigation. Other stated risks include economic and geopolitical conditions, customer demand, currency, interest rates, commodities, tax matters and legal proceedings.
- Asbestos liabilities were $577.5m, partly offset by $257.0m of probable insurance recoveries. The company noted that actual liabilities and recoveries could differ materially from estimates. Environmental reserves were $43.2m; management said pending legal matters were not expected to have a material adverse effect.
- Restructuring charges were $43.5m for the first half, with $42.9m accrued at June 30. Adoption of lease accounting in January 2019 added a $521m right-of-use asset and lease liability at transition, with no retained-earnings impact.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2; it also reported no material change in market-risk exposure.
Investor verification priorities
- Confirm progress, final terms, approvals, closing timing and total costs for the proposed Industrial separation and Gardner Denver combination.
- Track PFS performance, integration, final purchase accounting and the effect of acquisition-related debt and charges on margins and cash generation.
- Assess working-capital cash use, debt maturities and refinancing needs, and leverage after the acquisition and transaction-related spending.
- Review segment order trends, pricing, volume/mix and currency impacts against management’s qualitative 2019 growth outlook.
- Monitor asbestos claims and insurance recoveries, tax exposures, restructuring execution and the expected separation costs.