01—Abstract
Summary
Summary of the 10-K filed February 14, 2013. Cited figures are marked; the original filing is the authoritative source.
Ingersoll-Rand plc (NYSE: IR, ticker shown as TT in the request) reported FY2012 net revenues of $14.03 billiona, down 5.1% from $14.78 billion in 2011, almost entirely because the Hussmann refrigerated display case business was divested in late 2011 (a $818.5 million revenue contribution in 2011 is absent in 2012).
Excluding that effect, pricing (+1.6%) and volume/mix (+0.3%) were positive, partly offset by currency (-1.5%). Operating margin rose to 10.7% from 5.8%, but 2011 included a $646.9 millionb Hussmann loss on sale/impairment, so the underlying improvement is more modest. Net earnings attributable to shareholders were $1,018.6 million, or $3.28 diluted EPS, versus $1.01 in 2011.
Continuing-operations diluted EPS was $3.30c. Cash flow from continuing operations was $1,277.7 million, and capital expenditures were $262.6 million. The central investor issue is the announced spin-off of the commercial and residential security businesses (Schlage, LCN, Von Duprin, CISA and others), targeted for completion before year-end 2013 but subject to IRS ruling, regulatory approvals and other conditions.
The filing says the spin-off may not occur as planned. Management also flagged that the remaining company's share price is expected to fall significantly at separation. Capital returns are rising: the quarterly dividend increases from $0.16 to $0.21d beginning March 2013, and a new $2.0 billion repurchase program is expected to begin in 2013.
Balance sheet items to watch include $1.6 billion of 2013-2014 senior note maturities that management expects to refinance, total debt of $3.23 billion (debt-to-capital of 30.9%), and roughly $880 million of asbestos-related net liabilities. The company also carries an unresolved IRS dispute over 2002 intercompany debt, with about $84 million of asserted tax plus penalties, which management believes is adequately reserved.
The Security Technologies and Residential Solutions goodwill cushions were thin (2.5% and 14.4% excess fair value), so further weakness in construction markets could create impairment risk. Security Technologies segment margin held near 20%, while Climate Solutions (the largest segment at $7.4 billion revenue) saw a 10.6% revenue decline, largely from Hussmann, with segment margin improving to 10.4%.
02—Key points
Key Highlights
- Net revenues fell 5.1% to $14.03 billion, driven mainly by the absence of Hussmann ($818.5M of 2011 revenue); pricing grew 1.6% and volume/mix 0.3%.
- Operating margin rose to 10.7% from 5.8%, but the 2011 base included a $646.9M Hussmann loss on sale/impairment; excluding it, margin improved about 0.5 points.
- Diluted EPS of $3.28 versus $1.01 in 2011, with continuing operations diluted EPS of $3.30 versus $1.18.
- Announced spin-off of the commercial and residential security businesses (Schlage, LCN, Von Duprin, etc.), targeted before year-end 2013 but subject to IRS ruling and other conditions that may not be met.
- Shareholder returns are increasing: quarterly dividend raised to $0.21 from $0.16, and a new $2.0 billion share repurchase program is expected to start in 2013, after $0.8 billion repurchased in 2012.
- Total debt of $3.23 billion with debt-to-capital of 30.9%; $600M of 6.0% notes due August 2013 and $655M of 9.5% notes due April 2014 are expected to be refinanced.
- Ongoing legal and tax exposures include asbestos liabilities of $879.5M (net of $320.3M insurance assets) and an IRS dispute over 2002 intercompany debt (about $84M plus interest and penalties), which management believes is adequately reserved.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Trane Technologies kept $0.08.
- Revenue$11.99B100.0%
- Cost of revenue−$8.53B71.2%
- Gross profit$3.45B28.8%
- Operating costs−$2.38B19.9%
- Operating income$1.07B8.9%
- Interest, other & tax−$53.3M0.4%
- Net income$1.02B8.5%
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 14, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $11.99B$12.76B | −6.1% |
| Cost of Revenue | $8.53B$9.28B | −8.0% |
| Gross Profit | $3.45B$3.48B | −0.7% |
| R&D Expenses | $235.40M$218.40M | +7.8% |
| SG&A Expenses | $2.38B$2.40B | −0.5% |
| Operating Income | $1.07B$438.70M | +144.3% |
| Interest Expense | $252.00M$278.50M | −9.5% |
| Net Income | $1.02B$343.20M | +196.8% |
| EPS (Basic) | $3.35$1.06 | +216.0% |
| EPS (Diluted) | $3.28$1.01 | +224.8% |
| Shares Outstanding (Basic) | 303.90M324.80M | −6.4% |
| Shares Outstanding (Diluted) | 310.60M339.30M | −8.5% |
05—Questions
Frequently Asked Questions
What is the status of the proposed spin-off of the security businesses, and what could derail it?
The company announced in December 2012 that it plans to separate its commercial and residential security businesses into an independent Irish plc, targeting completion before year-end 2013. Completion depends on regulatory approvals, a favorable IRS private letter ruling on tax-free treatment, legal opinions, intercompany agreements and Irish law approvals. The filing explicitly states there can be no assurance the transaction will occur or on what terms or timing. Even if it is not completed, the company expects to bear transaction costs and may face distraction and customer or employee uncertainty.
Why did reported revenue decline in 2012, and is the underlying business growing?
Reported revenue fell $747.1 million (5.1%), mostly because Hussmann was sold in late 2011 and contributed $818.5 million of revenue in 2011 but none in 2012. On an underlying basis, pricing added 1.6% and volume/mix added 0.3%, while currency subtracted 1.5%. Segment results were mixed: Climate Solutions revenue fell 10.6% (largely Hussmann), while Residential Solutions (+2.1%) and Industrial Technologies (+3.3%) grew.
How strong is the balance sheet and how is the company returning cash to shareholders?
Total debt was $3.23 billion at year-end 2012, down from $3.64 billion, with cash of $882 million and a debt-to-total-capital ratio of 30.9%. Operating cash flow from continuing operations was $1.28 billion against $262.6 million of capital expenditures. In 2012 the company repurchased $0.8 billion of shares and paid $192 million in dividends. The quarterly dividend will rise to $0.21 in March 2013, and a new $2.0 billion repurchase program is expected to start in 2013. Management expects to refinance the 2013 and 2014 maturities and says existing liquidity is sufficient.
What are the most significant legal and tax risks investors should monitor?
The two main items are asbestos claims and an IRS dispute. Asbestos liabilities were $879.5 million at year-end 2012, offset by $320.3 million of probable insurance recoveries, and the company is in litigation with some insurers. The IRS disputes the tax treatment of intercompany debt from the 2001 Bermuda reincorporation, asserting roughly $84 million of additional 2002 tax plus interest and 30% penalties. Management has reserved for the matter and believes it will not have a material adverse effect, but an adverse outcome could affect future results and cash flows.
Are there impairment risks in goodwill and intangible assets?
Goodwill was $6.1 billion and indefinite-lived intangibles were $2.6 billion at year-end 2012, with no impairment recorded in 2012. However, two goodwill reporting units had cushions of only 14.4% (Residential Solutions) and 2.5% (Security Technologies), and the Trane and American Standard tradenames had cushions of 10.5% and 13.0%. The filing shows that a 1% rise in discount rate would reduce the Security Technologies unit's fair value by about $20 million, enough to trigger failure of step one. Weaker construction markets or a change in the spin-off structure could lead to impairment charges.
06—Continue