01—Abstract
Summary
Summary of the 10-K filed February 13, 2017. Cited figures are marked; the original filing is the authoritative source.
Ingersoll-Rand plc (NYSE: IR; ticker shown as TT in the request) reported 2016 net revenues of $13.51 billiona, up 1.6% from $13.30 billion in 2015, driven primarily by a 2.2% volume/mix gain.
Growth was concentrated in the Climate segment (revenues up 3.1% to $10.5 billionb, with commercial and residential HVAC strength), while the Industrial segment declined 3.7% to $2.96 billion on weak global industrial markets. Operating margin improved to 11.6% from 11.0%, led by Climate, where margin rose to 14.5% from 12.7% on pricing and productivity. Industrial margin fell to 10.0% from 12.1% on unfavorable product mix.
Reported net earnings attributable to shareholders more than doubled to $1,476.2 millionc ($5.65 diluted EPS), but this figure is inflated by a $397.8 million one-time gain on the sale of the Hussmann equity stake and a lower effective tax rate of 16.2% (versus 43.3% in 2015, which included a $227 million IRS settlement charge). Excluding these items, underlying earnings growth was considerably more modest, and investors should look at operating income ($1,573.1 million, up 7.9%) as the cleaner indicator of operating performance. Cash generation and capital returns were solid.
Operating cash flow from continuing operations was $1,411.3 million, and cash on hand rose to $1,714.7 milliond. Management raised the quarterly dividend 25% to $0.40 per share starting December 2016 and authorized a new $1.5 billion share repurchase program in February 2017, with about $417 million remaining under the existing program.
Total debt declined to $4.07 billion and the debt-to-total-capital ratio improved to 37.7% from 41.8%. Key watch items include exposure to non-residential markets in Europe and Asia, industrial demand, currency translation (a 1.0% revenue headwind), asbestos liabilities, and the tax risks related to the 2013 Allegion spin-off and Irish corporate structure.
02—Key points
Key Highlights
- Net revenues rose 1.6% to $13.51 billion, with volume/mix contributing 2.2 points, while Climate grew 3.1% and Industrial fell 3.7%.
- Operating income increased 7.9% to $1.57 billion, and operating margin expanded to 11.6% from 11.0%, driven by Climate margin improvement to 14.5%.
- Industrial segment margin contracted to 10.0% from 12.1% due to unfavorable volume and product mix in weak industrial end markets.
- Reported net earnings of $1.48 billion (diluted EPS $5.65) were boosted by a $397.8 million gain on the Hussmann stake sale and a 16.2% effective tax rate, so underlying growth is lower than headline figures suggest.
- Operating cash flow was $1.41 billion from continuing operations; cash rose to $1.71 billion and debt-to-total-capital improved to 37.7%.
- Shareholder returns were increased: the quarterly dividend rose 25% to $0.40 per share, and a new $1.5 billion share repurchase program was authorized in February 2017.
- Backlog reached $2.20 billion at year-end 2016, up from $2.13 billion, with Climate backlog growing while Industrial backlog declined.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Trane Technologies kept $0.11.
- Revenue$13.51B100.0%
- Cost of revenue−$9.31B68.9%
- Gross profit$4.20B31.1%
- Operating costs−$2.60B19.2%
- Operating income$1.60B11.9%
- Interest, other & tax−$127.0M0.9%
- Net income$1.48B10.9%
Where FY2016 revenue went
$13.51B- Cost of revenue: $9.31B, 69% of revenue
- SG&A: $2.60B, 19% of revenue
- Net income: $1.48B, 11% of revenue
- R&D: $207.9M, 1.5% of revenue
- Interest, other & tax: $127.0M, 0.9% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 13, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $13.51B$13.30B | +1.6% |
| Cost of Revenue | $9.31B$9.28B | +0.3% |
| Gross Profit | $4.20B$4.02B | +4.4% |
| R&D Expenses | $207.90M$205.90M | +1.0% |
| SG&A Expenses | $2.60B$2.53B | +2.6% |
| Operating Income | $1.60B$1.49B | +7.5% |
| Interest Expense | $221.50M$223.00M | −0.7% |
| Net Income | $1.48B$664.60M | +122.1% |
| EPS (Basic) | $5.70$2.51 | +127.1% |
| EPS (Diluted) | $5.65$2.48 | +127.8% |
| Shares Outstanding (Basic) | 259.20M265.10M | −2.2% |
| Shares Outstanding (Diluted) | 261.70M267.80M | −2.3% |
05—Questions
Frequently Asked Questions
Why did reported earnings more than double in 2016 if revenue grew only 1.6%?
Net earnings attributable to shareholders rose to $1,476.2 million from $664.6 million mainly because 2015 included a $227 million charge to settle the IRS dispute and a $52 million tax charge tied to a change in permanent reinvestment assertions. In 2016, the company also recorded a $397.8 million pre-tax gain on the sale of its Hussmann equity interest, and its effective tax rate fell to 16.2% from 43.3%. Operating income, which excludes these items, grew a more modest 7.9%.
How are the two business segments performing?
Climate (about 78% of revenue) is the stronger segment, with revenues up 3.1% to $10.5 billion and segment margin up to 14.5%, driven by strong U.S. residential and commercial HVAC demand, pricing and productivity. Industrial revenues fell 3.7% to $2.96 billion, and segment margin dropped to 10.0% on weaker volumes in global industrial markets, unfavorable product mix and investment spending. Management expects moderate growth in Climate and continued soft conditions in Industrial.
What is the company doing with its capital?
The company is returning cash to shareholders. The quarterly dividend was raised from $0.32 to $0.40 per share, effective with the December 2016 payment, and dividends paid totaled $348.6 million in 2016. The company repurchased 4.9 million shares for $250.1 million in 2016, has about $417 million left under the 2014 program, and authorized a new $1.5 billion program in February 2017. It also used cash to reduce commercial paper and total debt. Management says available cash flow, credit lines and capital market access will fund these commitments.
What are the main risks flagged in the filing?
Key risks include exposure to cyclical construction and industrial end markets, with commercial and residential HVAC representing 63% of revenue; global operating risks across many emerging markets; currency fluctuations, which reduced revenue by 1.0% in 2016; commodity price volatility for steel, copper and aluminum; potential goodwill and intangible impairments (goodwill of $5.7 billion and indefinite-lived intangibles of $2.7 billion); asbestos claims, with liabilities of about $631 million offset by roughly $273 million of insurance assets; and tax exposure from the 2013 Allegion spin-off and the company's Irish structure. Climate-related refrigerant regulation is also a long-term risk to the product portfolio.
How strong is the balance sheet and liquidity position?
The balance sheet is solid. Total debt fell to $4.07 billion from $4.22 billion, and the debt-to-total-capital ratio improved to 37.7%. Cash and equivalents rose to $1.71 billion, though $980 million of that was held by non-U.S. subsidiaries. The company has $2.0 billion in undrawn revolving credit facilities supporting its $2.0 billion commercial paper program, with no commercial paper outstanding at year-end. Its credit ratings are Baa2 (Moody's) and BBB (S&P), and its public debt has no financial covenants.
06—Continue