01—Abstract
Summary
Summary of the 10-K filed February 18, 2020. Cited figures are marked; the original filing is the authoritative source.
Ingersoll-Rand plc (NYSE: IR, to be renamed Trane Technologies plc) reported 2019 net revenues of $16.6 billiona, up 5.9% year over year, driven mainly by 4.0 points of volume growth, with acquisitions and pricing adding 1.5 and 1.7 points, partly offset by 1.3 points of currency headwind.
Operating income rose 5.2% to $2.02 billionb, and operating margin held flat at 12.2% as pricing and productivity offset inflation, unfavorable mix, and roughly $95 million of Industrial separation costs plus $12.9 million of PFS deal costs. Diluted EPS from continuing operations was $5.61, up from $5.43, and net earnings attributable to the company were $1.41 billion. The Climate segment, the business that will carry the Trane Technologies name, generated $13.1 billion of revenue and a 14.6% segment margin, while Industrial generated $3.5 billion at a 12.9% margin.
The central investor issue is the pending Reverse Morris Trust transaction, under which the Industrial segment will be spun off and combined with Gardner Denver (GDI), with expected close in early 2020. Existing shareholders will hold 50.1% of the combined Ingersoll-Rand Inc., and the remaining Trane Technologies will receive $1.9 billionc in cash. Management expects the remaining company to be less diversified, with a climate-control focus, and separation costs are projected at the high end of a $150 to $200 million range.
The company also disclosed a CFO transition, with Susan Carter retiring and Christopher Kuehn succeeding her at closing. Balance sheet leverage increased meaningfully. Total debt rose to $5.57 billiond from $4.09 billion after $1.5 billion of senior notes issued to fund the $1.46 billion PFS acquisition, and the debt-to-total-capital ratio rose to 43.3% from 36.7%.
Free cash flow, calculated as operating cash flow less capex, was about $1.7 billion, and the company returned roughly $1.26 billion to shareholders through $750 million of buybacks and $510 million of dividends. Management expects to hold the quarterly dividend at $0.53 through 2020. Key risks disclosed include asbestos liabilities of about $547 million, a goodwill and intangibles base of roughly $9.0 billion, commodity and tariff exposure, and the tax and deal-execution uncertainties of the separation.
02—Key points
Key Highlights
- Revenue grew 5.9% to $16.6 billion, led by 4.0 points of volume and 1.7 points of pricing, while currency subtracted 1.3 points.
- Operating income rose 5.2% to $2.02 billion, with operating margin flat at 12.2% despite separation and PFS acquisition costs of roughly $108 million combined.
- Diluted EPS from continuing operations was $5.61, up from $5.43 in 2018.
- Pending Reverse Morris Trust with Gardner Denver spins off the Industrial segment (about $3.5 billion of 2019 revenue); existing shareholders will own 50.1% of the combined Ingersoll-Rand Inc., and Trane Technologies will receive $1.9 billion in cash, with closing expected in early 2020.
- Total debt increased to $5.57 billion from $4.09 billion, pushing the debt-to-total-capital ratio to 43.3%, after $1.5 billion of notes funded the $1.46 billion PFS acquisition.
- Shareholder returns totaled about $1.26 billion in 2019, including $750 million of buybacks and $510 million of dividends; the quarterly dividend is expected to stay at $0.53 through 2020.
- Climate segment (the future Trane Technologies) delivered $13.1 billion of revenue at a 14.6% segment margin, up 30 basis points, with volume growth of 5.2%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Trane Technologies kept $0.11.
- Revenue$13.08B100.0%
- Cost of revenue−$9.09B69.5%
- Gross profit$3.99B30.5%
- Operating costs−$2.32B17.7%
- Operating income$1.67B12.8%
- Interest, other & tax−$241.6M1.8%
- Net income$1.43B10.9%
Where FY2019 revenue went
$13.08B- Cost of revenue: $9.09B, 69% of revenue
- SG&A: $2.32B, 18% of revenue
- Net income: $1.43B, 11% of revenue
- R&D: $174.2M, 1.3% of revenue
- Interest, other & tax: $241.6M, 1.8% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 18, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $13.08B$12.34B | +5.9% |
| Cost of Revenue | $9.09B$8.58B | +5.9% |
| Gross Profit | $3.99B$3.76B | +6.1% |
| R&D Expenses | $174.20M$166.70M | +4.5% |
| SG&A Expenses | $2.32B$2.25B | +3.2% |
| Operating Income | $1.67B$1.51B | +10.4% |
| Interest Expense | $242.80M$221.00M | +9.9% |
| Net Income | $1.43B$1.36B | +5.2% |
| EPS (Basic) | $5.84$5.41 | +7.9% |
| EPS (Diluted) | $5.77$5.35 | +7.9% |
| Shares Outstanding (Basic) | 241.60M247.20M | −2.3% |
| Shares Outstanding (Diluted) | 244.40M250.10M | −2.3% |
05—Questions
Frequently Asked Questions
What happens to the company's structure after the pending transaction closes?
The Industrial segment will be spun off to shareholders and merged with Gardner Denver, forming a combined company to be named Ingersoll-Rand Inc. under the IR ticker. The remaining Climate business (HVAC and transport refrigeration) will be renamed Trane Technologies plc under the TT ticker. Trane Technologies will receive $1.9 billion in cash, and existing shareholders will own 50.1% of the combined Ingersoll-Rand Inc.
Why did debt and leverage rise sharply in 2019?
The company issued $1.5 billion of senior notes in March 2019 to finance the $1.46 billion acquisition of Precision Flow Systems. Total debt climbed to $5.57 billion from $4.09 billion, and the debt-to-total-capital ratio increased to 43.3% from 36.7%. The public debt has no financial covenants, and the revolving credit lines carry a 65% debt-to-total-capital covenant that the company is well within.
How strong was cash generation in 2019?
Net cash from continuing operating activities was $1.96 billion, up from $1.47 billion, driven by higher earnings and working capital discipline. After capital expenditures of $254 million, free cash flow was roughly $1.7 billion, which funded $750 million of share repurchases and $510 million of dividends.
What are the main legal and financial liability risks investors should monitor?
The most significant contingent liability is asbestos: the company carries about $547 million of asbestos-related liabilities against roughly $304 million of expected insurance recoveries. Its auditor identified this as a critical audit matter. Environmental reserves total about $43 million, and the company also faces goodwill and indefinite-lived intangible impairment risk, with $9.0 billion of combined balances at year-end.
What is the outlook for 2020 management has signaled?
Management expects growth in the HVAC markets and at the enterprise level in 2020, supported by operational excellence, new product launches, and sales programs. It expects softer Transport markets and continued weakness in short-cycle Industrial investment. Capital expenditures are planned at roughly 1% to 2% of revenue, and pension contributions are projected at about $90 million.
06—Continue