01—Abstract
Summary
Summary of the 10-K filed February 13, 2015. Cited figures are marked; the original filing is the authoritative source.
Ingersoll-Rand plc (NYSE: IR, ticker shown in the filing) reported a solid 2014.
Net revenues rose 4.4% to $12.89 billiona on 4.6% volume/mix gains, with operating margin expanding 200 basis points to 10.9% from 8.9%, driven by productivity savings and lower restructuring spending. Diluted EPS from continuing operations was $3.27, up from $2.08, and net earnings attributable to the company were $931.7 million. Climate segment revenue reached $9.9 billion with segment margin of 12.1%, while Industrial revenue of $3.0 billion saw margin slip to 14.7% on higher investment spending.
Note that the filing describes the company as Ingersoll-Rand plc, and the ticker and segment names are as stated in the document. Capital deployment was aggressive. The company repurchased 23.0 million shares for $1.4 billionb, raised its quarterly dividend 12% to $0.29 beginning March 2015, and issued $1.1 billion of senior notes in October 2014 to refinance near-term maturities and fund the $850 million acquisition of Cameron's Centrifugal Compression division, which closed January 1, 2015.
Total debt rose to $4.22 billionc, the debt-to-total-capital ratio climbed to 41.1% from 33.1%, and cash fell to $1.71 billion. Operating cash flow from continuing operations improved to $992 million. The main investor overhang is tax and legal exposure.
The IRS asserts roughly $665 milliond of additional taxes, interest and penalties tied to interest payments on intercompany 2001 Debt for 2002 through 2006, which the company is contesting and says it has adequately reserved. Asbestos liabilities total $776.6 million against a $335.7 million insurance receivable. Investors should also note the 2013 Allegion spin-off tax risks and the ongoing IRS audit of 2007-2011.
02—Key points
Key Highlights
- Net revenues grew 4.4% to $12.89 billion, driven by 4.6% volume/mix, with Climate up 4.9% and Industrial up 2.6%.
- Operating margin expanded to 10.9% from 8.9%, led by productivity benefits and lower restructuring costs of $12.5 million versus $82.3 million in 2013.
- Diluted EPS from continuing operations was $3.27 versus $2.08 in 2013; net earnings attributable to the company were $931.7 million.
- Climate segment operating margin improved to 12.1%; Industrial margin declined to 14.7% due to higher investment spending.
- Shareholder returns were significant: $1.4 billion of buybacks in 2014 and a dividend increase from $0.25 to $0.29 per quarter starting March 2015.
- Balance sheet leverage rose: total debt reached $4.22 billion and debt-to-total-capital increased to 41.1% from 33.1%, following $1.1 billion of new senior notes.
- Major contingent exposures include a $665 million IRS assertion on 2001 intercompany debt for 2003-2006 and $776.6 million in asbestos liabilities, partially offset by a $335.7 million insurance receivable.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Trane Technologies kept $0.07.
- Revenue$12.89B100.0%
- Cost of revenue−$8.98B69.7%
- Gross profit$3.91B30.3%
- Operating costs−$2.50B19.4%
- Operating income$1.40B10.9%
- Interest, other & tax−$473.0M3.7%
- Net income$931.7M7.2%
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 13, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $12.89B$12.35B | +4.4% |
| Cost of Revenue | $8.98B$8.72B | +3.0% |
| Gross Profit | $3.91B$3.63B | +7.7% |
| R&D Expenses | $212.30M$218.20M | −2.7% |
| SG&A Expenses | $2.50B$2.52B | −0.8% |
| Operating Income | $1.40B$1.10B | +27.1% |
| Interest Expense | $225.30M$278.80M | −19.2% |
| Net Income | $931.70M$618.80M | +50.6% |
| EPS (Basic) | $3.44$2.11 | +63.0% |
| EPS (Diluted) | $3.40$2.07 | +64.3% |
| Shares Outstanding (Basic) | 270.50M294.10M | −8.0% |
| Shares Outstanding (Diluted) | 274.30M298.30M | −8.0% |
05—Questions
Frequently Asked Questions
How strong was the company's operating performance in 2014?
Performance improved meaningfully. Revenue rose 4.4% to $12.89 billion, operating income increased about 27% to $1.40 billion, and operating margin widened to 10.9%. Gains came mainly from volume growth, productivity savings exceeding inflation, and lower restructuring charges, partly offset by higher investment spending in Industrial.
What is the IRS dispute, and how much could it cost?
The IRS is challenging the tax treatment of intercompany interest on debt incurred in the 2001 Bermuda reincorporation. It asserts about $109 million for 2002 plus about $665 million for 2003-2006, including roughly $455 million of withholding tax and $210 million of income tax on deemed dividends, plus penalties and interest. The company disagrees, is contesting the assessments in Tax Court and through protests, and believes its reserves are adequate, though outcomes are uncertain and could require additional charges.
Why did debt increase and what is the Cameron acquisition?
In October 2014 the company issued $1.1 billion of senior notes due 2020, 2024 and 2044, using proceeds to redeem $500 million of 2015 notes and to fund the $850 million purchase of Cameron International's Centrifugal Compression division, completed January 1, 2015. Total debt increased to $4.22 billion, and the debt-to-total-capital ratio rose to 41.1%, still well inside the 65% covenant on revolving credit lines.
How much capital is being returned to shareholders, and is it sustainable?
In 2014 the company repurchased 23.0 million shares for $1.4 billion and paid $264.7 million in dividends. The quarterly dividend rises to $0.29 from March 2015, and $916.6 million remained authorized under the repurchase program at year end. Management expects operating cash flow ($992 million from continuing operations in 2014), committed credit lines and capital market access to fund these commitments, though 2014 buybacks and dividends exceeded operating cash flow, which is a point to monitor.
06—Continue