01—Abstract
Summary
Summary of the 10-K filed February 12, 2019. Cited figures are marked; the original filing is the authoritative source.
Ingersoll-Rand plc (NYSE: IR; ticker shown as IR in this filing) reported a strong 2018 with net revenues up 10.4% to $15,668.2 milliona, driven mainly by volume/product mix (7.3 points), with acquisitions (1.1), pricing (1.6) and currency (0.4) contributing the rest.
Operating income rose 15.1% to $1,917.4 millionb, and operating margin expanded to 12.2% from 11.7%. Both segments grew: Climate revenue rose 10.5% to $12,343.8 million with a 14.3% segment margin, and Industrial rose 9.7% to $3,324.4 million with a 12.2% margin. Diluted EPS from continuing operations was $5.43, up from $5.14.
Total backlog grew to $3.43 billionc from $2.50 billion, with Climate backlog up nearly 48%. Management guided to positive growth in both segments for 2019. Cash generation was solid but capital returns were heavy.
Operating cash flow from continuing operations was $1,474.5 milliond, capital expenditures were $365.6 million (up from $221.3 million), and the company repurchased $900.2 million of shares and paid $479.5 million in dividends. Cash fell to $903.4 million from $1,549.4 million. The quarterly dividend was raised 18% to $0.53 per share.
Total debt was $4.09 billion, with a debt-to-total-capital ratio of 36.7%, and the company is rated Baa2/BBB. Net debt-funded activity included $1.15 billion of new senior notes used to refinance maturing debt. Key risks for investors include a $6.0 billion goodwill balance, of which one Climate Latin America reporting unit exceeded its carrying value by only 1.1%.
Ongoing asbestos liabilities of roughly $612 million are partly offset by insurance receivables of $268 million. The Tax Cuts and Jobs Act produced a $30 million net benefit in 2017 that was finalized in 2018. Subsequent to year end, the company agreed to acquire the precision flow systems business from Silver II for approximately $1.45 billion in cash, expected to close mid-2019.
02—Key points
Key Highlights
- Net revenues rose 10.4% to $15,668.2 million, led by 7.3 points of volume/product mix growth across both segments.
- Operating income increased 15.1% to $1,917.4 million, with operating margin expanding 50 basis points to 12.2%.
- Climate segment (79% of revenue) delivered $12,343.8 million in revenue at a 14.3% segment margin; Industrial delivered $3,324.4 million at a 12.2% margin.
- Backlog increased 37% to $3,429.2 million at year-end 2018, with Climate backlog up 48% to $2,914.4 million.
- Diluted EPS from continuing operations was $5.43 versus $5.14 in 2017; net earnings attributable to the company were $1,337.6 million.
- Shareholder returns were significant: $900.2 million in buybacks and $479.5 million in dividends, with the quarterly dividend raised 18% to $0.53.
- Pending $1.45 billion acquisition of the precision flow systems business (announced February 6, 2019) is expected to close mid-2019 and would be reported in the Industrial segment.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Trane Technologies kept $0.11.
- Revenue$12.34B100.0%
- Cost of revenue−$8.58B69.5%
- Gross profit$3.76B30.5%
- Operating costs−$2.25B18.2%
- Operating income$1.51B12.2%
- Interest, other & tax−$154.6M1.3%
- Net income$1.36B11.0%
Where FY2018 revenue went
$12.34B- Cost of revenue: $8.58B, 70% of revenue
- SG&A: $2.25B, 18% of revenue
- Net income: $1.36B, 11% of revenue
- R&D: $166.7M, 1.4% of revenue
- Interest, other & tax: $154.6M, 1.3% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 12, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $12.34B$14.20B | −13.1% |
| Cost of Revenue | $8.58B$9.81B | −12.5% |
| Gross Profit | $3.76B$4.39B | −14.2% |
| R&D Expenses | $166.70M$210.80M | −20.9% |
| SG&A Expenses | $2.25B$2.72B | −17.3% |
| Operating Income | $1.51B$1.67B | −9.2% |
| Interest Expense | $221.00M$215.80M | +2.4% |
| Net Income | $1.36B$1.30B | +4.2% |
| EPS (Basic) | $5.41$5.11 | +5.9% |
| EPS (Diluted) | $5.35$5.05 | +5.9% |
| Shares Outstanding (Basic) | 247.20M254.90M | −3.0% |
| Shares Outstanding (Diluted) | 250.10M258.10M | −3.1% |
05—Questions
Frequently Asked Questions
How strong was the company's 2018 revenue and profit growth?
Net revenues grew 10.4% to $15.7 billion, with volume/product mix contributing most of the increase. Operating income rose 15.1% to $1.9 billion and operating margin improved to 12.2% from 11.7%, indicating good operating leverage on higher volumes and pricing.
What drove the increase in backlog and what does it signal?
Total backlog rose to $3.43 billion from $2.50 billion, with Climate backlog up about 48%. Management expects to ship most of the year-end backlog during 2019, which supports management's guidance for positive growth in both segments next year.
Is the company's balance sheet and liquidity under pressure?
Not materially. Total debt was $4.09 billion with a 36.7% debt-to-total-capital ratio, well below the 65% covenant. Cash fell to $903 million after heavy buybacks and dividends, but the company holds $2.0 billion of undrawn committed credit lines and an investment-grade rating (Baa2/BBB), and it has no financial covenants on its public debt.
What are the main risks flagged in the filing?
Key risks include global economic and currency exposure (about 36% of revenue is non-U.S.), commodity price inflation for steel, copper and aluminum, cyclical end markets, climate-related refrigerant regulation, cybersecurity, and asbestos litigation. The filing also highlights goodwill risk in the Climate Latin America unit, whose fair value exceeded carrying value by only 1.1%.
06—Continue