01—Abstract
Summary
Summary of the 10-K filed February 14, 2014. Cited figures are marked; the original filing is the authoritative source.
Ingersoll-Rand plc (NYSE: IR, later Trane Technologies) closed 2013 with net revenues of $12.35 billiona, up 3.0% year over year, driven by Climate segment volume gains and modest pricing.
Operating margin was flat at 8.9%, and operating income rose to $1.105 billionb from $1.072 billion. Reported net earnings attributable to shareholders fell to $618.8 million from $1,018.6 million, mainly because 2012 included a large discontinued-operations gain and 2013 carried $128 million of Allegion spin-off costs and a $51 million tax charge tied to a change in permanent reinvestment assertion. Diluted continuing-operations EPS was $2.08, versus $2.49 in 2012.
The December 1, 2013 spin-off of the commercial and residential security businesses as Allegion plc is the defining event of the year. Going forward, the company is a two-segment business: Climate (2013 revenue $9.4 billionc, segment margin 9.9%) and Industrial (revenue $2.9 billion, segment margin 15.5%). Balance sheet leverage rose, with total debt of $3.5 billion and a debt-to-capital ratio of 33.1%, after $1.55 billion of new senior notes funded redemptions and spin-related expenses.
Cash rose to $1.94 billiond, supported by a $1.27 billion transfer from Allegion. The company repurchased $1.2 billion of shares in 2013, and management announced a 19% dividend increase to $0.25 per quarter plus a new $1.5 billion buyback authorization for 2014. Key investor risks include the IRS dispute over 2001-2006 interest deductions on intercompany debt, which the IRS values at roughly $665 million of additional tax plus penalties and interest, though management believes reserves are adequate.
The company also carries $846 million of asbestos liabilities against $322 million of insurance recovery assets, and faces tax exposure tied to the Allegion spin-off and to its Irish redomicile. Weak commercial construction and a shift toward lower-SEER residential units continue to weigh on demand, while more than 40% of revenue comes from outside the U.S.
02—Key points
Key Highlights
- Net revenues rose 3.0% to $12.35 billion, driven by volume in Climate and better pricing across both segments.
- Operating margin held at 8.9%; operating income increased to $1.105 billion, though restructuring costs rose to $82.3 million.
- Net earnings attributable to shareholders fell to $618.8 million (diluted EPS $2.07) from $1,018.6 million, reflecting 2012's large discontinued-operations gain and 2013 spin-related charges.
- Allegion spin-off (December 1, 2013) left a standalone Climate ($9.4B revenue, 9.9% segment margin) and Industrial ($2.9B revenue, 15.5% margin) company.
- Total debt of $3.5 billion and a 33.1% debt-to-capital ratio after issuing $1.55 billion of senior notes; cash ended the year at $1.94 billion.
- Shareholder returns: 20.8 million shares repurchased for $1.2 billion in 2013, dividend raised to $0.25 per quarter, and a new $1.5 billion buyback authorized for 2014.
- Principal legal and tax risk: IRS claims tied to 2001-2006 intercompany debt interest totaling roughly $665 million plus penalties and interest, which management says are adequately reserved and are being contested.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Trane Technologies kept $0.05.
- Revenue$12.35B100.0%
- Cost of revenue−$8.72B70.6%
- Gross profit$3.63B29.4%
- Operating costs−$2.52B20.4%
- Operating income$1.10B8.9%
- Interest, other & tax−$486.2M3.9%
- Net income$618.8M5.0%
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 14, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $12.35B$11.99B | +3.0% |
| Cost of Revenue | $8.72B$8.53B | +2.2% |
| Gross Profit | $3.63B$3.45B | +5.0% |
| R&D Expenses | $218.20M$235.40M | −7.3% |
| SG&A Expenses | $2.52B$2.38B | +5.9% |
| Operating Income | $1.10B$1.07B | +3.1% |
| Interest Expense | $278.80M$252.00M | +10.6% |
| Net Income | $618.80M$1.02B | −39.2% |
| EPS (Basic) | $2.11$3.35 | −37.0% |
| EPS (Diluted) | $2.07$3.28 | −36.9% |
| Shares Outstanding (Basic) | 294.10M303.90M | −3.2% |
| Shares Outstanding (Diluted) | 298.30M310.60M | −4.0% |
05—Questions
Frequently Asked Questions
What was the impact of the Allegion spin-off on Ingersoll-Rand's financial results?
Allegion's results are now reported as discontinued operations, so continuing operations reflect only Climate and Industrial. Discontinued operations contributed just $13.3 million of net earnings in 2013, compared with $252.0 million in 2012, because of $128 million of spin costs and a $111.4 million goodwill impairment. Shareholders received one Allegion share for every three IR shares held on the record date, and the company received $1.27 billion of borrowings tied to Allegion.
Is the IRS dispute a significant risk to investors?
It is the largest identified contingent exposure. The IRS asserts about $665 million of additional tax for 2003-2006 on interest paid on the 2001 intercompany debt, plus 30% and 20% penalties and interest, and it also asserts a 2002 liability of about $109 million. Management has vigorously contested these claims and believes its reserves are adequate, but it acknowledges that an adverse outcome could require material additional charges.
How strong is the balance sheet and liquidity position?
Liquidity is solid. Cash was $1.94 billion at year-end and $2.0 billion of committed revolving credit facilities was undrawn, supporting the $2 billion commercial paper program. Debt is mostly fixed-rate, with no financial covenants on public debt, and the company holds investment-grade ratings of Baa2/BBB. Total debt rose to $3.5 billion, and the debt-to-capital ratio increased to 33.1% from 30.9%.
What is the outlook for shareholder returns in 2014?
Management expects to fund a larger quarterly dividend of $0.25, up from $0.21, beginning with the March 2014 payment, and a new $1.5 billion share repurchase program expected to start in the second quarter of 2014. Capital expenditures are projected at about $250 million for 2014, and management expects cash flow and credit lines to cover these commitments.
What are the main exposures from demand and geography?
Demand is sensitive to commercial and residential construction, which together make up 61% of revenue, and to weather, since Trane sales peak in the second and third quarters. More than 40% of 2013 revenue came from outside the U.S., so currency moves matter; a 10% adverse currency move would produce an approximately $107.8 million unrealized loss on the firmly committed derivative book. Asbestos exposure is also material, with a net liability of about $524 million after insurance receivables.
06—Continue