Business context and reporting period
This summary covers Ingersoll-Rand plc’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010, filed November 1, 2010. The company is a diversified manufacturer and service provider, reporting Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies. Trane is among its brands; the filing’s registrant is Ingersoll-Rand plc, not Trane Technologies.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $3,730.3 | $3,458.9 | $10,367.4 | $9,820.8 |
| Operating income | $408.2 | $324.6 | $933.9 | $645.2 |
| Operating margin | 10.9% | 9.4% | 9.0% | 6.6% |
| Continuing-operations earnings | $277.1 | $233.5 | $563.3 | $373.3 |
| Net earnings attributable to Ingersoll-Rand | $232.2 | $216.6 | $430.1 | $311.9 |
| Diluted EPS, continuing operations | $0.80 | $0.69 | $1.62 | $1.09 |
| Diluted net EPS | $0.68 | $0.65 | $1.27 | $0.96 |
- Q3 revenue increased 7.8% year over year, driven mainly by higher volumes; operating margin expanded 1.5 percentage points. For the nine months, revenue rose 5.6% and operating margin expanded 2.4 points. Productivity and restructuring savings helped offset higher material and other costs.
- Discontinued operations reduced net earnings by $39.5 million in Q3 and $117.7 million year to date, versus losses of $10.9 million and $45.0 million in the comparable 2009 periods.
- Continuing operating cash flow was $582.5 million for the nine months, down from $1,515.4 million. Management attributed the comparison chiefly to working-capital movements, including increased inventory, and noted a $242 million discretionary pension contribution during Q3. Capital expenditures were $117.3 million; continuing investing cash use was $110.6 million.
- At September 30, cash was $810.7 million; total debt was $3,661.2 million, comprising $738.4 million current and $2,922.8 million long-term debt. Net debt was approximately $2,850.5 million. The debt-to-total-capital ratio was 32.2%, compared with 36.2% at year-end 2009. Current assets were $5,514.9 million and current liabilities $4,338.1 million.
- The company reported $2.0 billion of committed, unused revolving credit facilities and no commercial paper outstanding. A $343.6 million debenture tranche had a November 2010 holder put option on $306.4 million; management expected sufficient liquidity to meet any resulting repayment.
Material changes versus the prior comparable period
- All four continuing segments increased revenue for the nine-month period except Security Technologies, which declined 3.3%. Industrial Technologies had the strongest growth: revenue rose 13.5% and operating income 114.2%. Climate Solutions revenue rose 5.7% and operating income 32.7%; Residential Solutions revenue rose 4.4% and operating income 52.0%. Security Technologies operating income fell 1.6%.
- Q3 segment performance was mixed: Industrial Technologies revenue increased 22.5%, Climate Solutions 9.1%, and Residential Solutions 1.1%; Security Technologies declined 6.1%. Residential Solutions operating income declined 4.8% and Security Technologies operating income declined 4.9%.
- Continuing operating cash flow was materially lower than in 2009, when cash generation included a $143 million inflow related to receivables financing. The receivables purchase facility was terminated in February 2010.
- Total debt declined from $4,096.6 million at December 31, 2009 to $3,661.2 million at September 30, 2010. The company paid $523.1 million of long-term debt during the first nine months.
Outlook, management commentary, risks and unusual items
- Management described end markets as stabilized at depressed levels. U.S. and European non-residential construction remained weak; modest growth in some other major markets was expected to continue, alongside benefits from restructuring and productivity programs. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
- Excluding a $40.5 million non-cash tax charge tied to U.S. healthcare legislation, management projected an approximately 20% annual effective tax rate for 2010. The charge relates to future reductions in tax benefits for Medicare Part D retiree drug subsidies.
- KOXKA’s European refrigerated display-case business was sold on October 4, 2010. The company recorded an additional $15.1 million after-tax impairment in Q3; the earlier Q2 impairment was $38.8 million after tax. Energy Systems was classified as held for sale and discontinued operations, with an $8.3 million after-tax impairment; a letter of intent to sell it was signed October 19, with completion expected in Q4.
- Restructuring charges were $15.0 million in Q3 and $34.6 million year to date, compared with $9.7 million and $60.5 million in 2009. The remaining restructuring reserve was $36.5 million and was expected to be paid within one year.
- Significant exposures include the IRS dispute over 2001–2002 taxes, for which the IRS asserted approximately $84 million plus interest and penalties; the company contests the assessment and says it is adequately reserved. Unrecognized tax benefits totaled $533.8 million.
- The company disclosed ongoing SEC and DOJ inquiries into potential FCPA and other anti-corruption issues, with possible fines, penalties and other adverse outcomes. Its Oil for Food deferred prosecution agreement expired October 31, 2010, though the DOJ could pursue matters if it alleges a breach.
- At September 30, asbestos-related liabilities were $1,067.8 million and probable insurance recoveries were $370.0 million. Environmental reserves were $84.4 million. Product warranty liabilities were $633.2 million. Trane service-contract commitments and performance guarantees totaled $177.9 million; management reported no significant losses and considered significant future losses remote.
- A European Commission fine relating to former businesses was paid by WABCO, which is obligated to indemnify Trane; the filing says the payment had no impact on consolidated results or cash flow. An appeal remained pending.
- Management stated disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter. The filing also says previously identified guarantor-statement intercompany errors were immaterial and did not affect consolidated results.
Investor verification priorities
- Confirm the filing entity and security: this is Ingersoll-Rand plc’s 2010 Form 10-Q, not a filing by Trane Technologies.
- Assess the sustainability of margin gains and the pace of recovery in non-residential construction, residential HVAC, and commercial security markets.
- Reconcile the sharp year-over-year decline in operating cash flow, especially working-capital changes, inventory, and pension contributions.
- Review near-term liquidity needs, including the November debenture put option and exchangeable notes classified as current and potentially exchangeable in Q4.
- Track discontinued-operation impairments and completion terms for the KOXKA and Energy Systems divestitures.
- Monitor resolution and potential financial effects of the IRS matter, FCPA/DOJ/SEC inquiries, asbestos claims and recoveries, and environmental obligations.