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IR > SEC Filings for IR > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for INGERSOLL-RAND PLC

Form 10-Q for INGERSOLL-RAND PLC


25-Oct-2012

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q and under Part I, Item 1A - Risk Factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report. Overview
Organizational
Ingersoll-Rand plc (IR-Ireland), an Irish public limited company, and its consolidated subsidiaries (collectively, we, our, the Company) is a diversified, global company that provides products, services and solutions to enhance the quality and comfort of air in homes and buildings, transport and protect food and perishables, secure homes and commercial properties, and increase industrial productivity and efficiency. Our business segments consist of Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies, each with strong brands and leading positions within their respective markets. We generate revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as Club Car®, Ingersoll-Rand®, Schlage®, Thermo King® and Trane®.
To achieve our mission of being a world leader in creating safe, comfortable and efficient environments, we continue to focus on increasing our recurring revenue stream from parts, service, used equipment and rentals; and to continuously improve the efficiencies and capabilities of the products and services of our high-potential businesses. We also continue to focus on operational excellence strategies as a central theme to improving the earnings and cash flows of our Company.
Trends and Economic Events
We are a global corporation with worldwide operations. As a global business, our operations are affected by worldwide, regional and industry-specific economic factors, as well as political factors, wherever we operate or do business. Our geographic and industry diversity, as well as the diversity of our product sales and services, has helped mitigate the impact of any one industry or the economy of any single country on our consolidated operating results.
Given the broad range of products manufactured and geographic markets served, management uses a variety of factors to predict the outlook for the Company. We monitor key competitors and customers in order to gauge relative performance and the outlook for the future. In addition, our order rates are indicative of future revenue and thus a key measure of anticipated performance. In those industry segments where we are a capital equipment provider, revenues depend on the capital expenditure budgets and spending patterns of our customers, who may delay or accelerate purchases in reaction to changes in their businesses and in the economy.
Current market conditions, including challenges in international markets, continue to impact our financial results. While residential and consumer markets continue to be a challenge as new single-family housing construction and consumer confidence remain at low levels, we are beginning to see slight improvements in the new builder markets. The residential Heating, Ventilation and Air Conditioning (HVAC) business also continues to be impacted by a mix shift to units with a lower Seasonal Energy Efficiency Rating (SEER). Stagnant commercial construction activity is negatively impacting the results of our Security Technologies segment. However, we have seen moderate growth in the American industrial markets, and the North American refrigerated transport market. We believe the commercial HVAC equipment replacement and aftermarket is also slowly recovering. As economic conditions stabilize, we expect slight revenue growth along with benefits from restructuring and productivity programs. Despite the current market environment, we believe we have a solid foundation of global brands and leading market shares in all of our major product lines. Our growing geographic and industry diversity coupled with our large installed product base provides growth opportunities within our service, parts and replacement revenue streams. In addition, we are investing substantial resources to innovate and develop new products and services which we expect will drive our future growth.


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Recent Developments
Pension and Other Postretirement Plan Amendments On June 8, 2012, our Board of Directors approved amendments to our retirement pension plans for certain U.S. and Puerto Rico non-bargained employees. All eligible non-bargained employees hired prior to July 1, 2012 will be given a choice of remaining in the applicable defined benefit plan until the plans freeze on December 31, 2022 or freezing their accrued benefits in their respective defined benefit plans as of December 31, 2012 and receiving an additional 2% non-matching Company contribution into the Company's applicable defined contribution plan. Employees who elect to remain in a defined benefit plan until the plan freezes on December 31, 2022 will receive the 2% non-matching contribution into the applicable defined contribution savings plan beginning January 1, 2023.
On February 1, 2012, our Board of Directors approved healthcare benefit amendments to our postretirement plans for post-65 retiree medical coverage. Effective January 1, 2013, we will discontinue offering company-sponsored retiree medical coverage for certain individuals 65 and older.
See Note 8 to the condensed consolidated financial statements for a further discussion of these amendments.
Dividend Increase and Share Repurchase Program In April 2011, our Board of Directors authorized the repurchase of up to $2.0 billion of our ordinary shares under a new share repurchase program. On June 8, 2011, we commenced share repurchases under this program. As of December 31, 2011, we repurchased 36.3 million shares for approximately $1.2 billion under this program. During the nine months ended September 30, 2012, we repurchased 8.4 million shares for approximately $374.7 million, excluding commissions. These repurchases were accounted for as a reduction of Ordinary shares and Capital in excess of par value as they were canceled upon repurchase. In December 2011, we announced an increase in our quarterly stock dividend from $0.12 per share to $0.16 per share beginning with our March 2012 payment. Divested Operations
On September 30, 2011 and November 30, 2011, we completed transactions to sell our Hussmann refrigerated display case business to a newly-formed affiliate (Hussmann Parent) of private equity firm Clayton Dubilier & Rice, LLC (CD&R). We negotiated the final terms of the transaction to include our ownership of a portion of the common stock of Hussmann Parent, which represents significant continuing involvement. Therefore, the results of Hussmann are included in continuing operations for all periods presented, with our ownership interest reported using the equity method of accounting subsequent to September 30, 2011. See "Divestitures and Discontinued Operations" within Management's Discussion and Analysis and also Note 15 to the condensed consolidated financial statements for a discussion of our divested operations. Discontinued Operations
On December 30, 2011, we completed the divestiture of our security installation and service business, which was sold under the Integrated Systems and Services brand in the United States and Canada, to Kratos Public Safety & Security Solutions, Inc. As a result of the sale, we have reported this business as a discontinued operation for all periods presented. See "Divestitures and Discontinued Operations" within Management's Discussion and Analysis and also Note 15 to the condensed consolidated financial statements for a discussion of our discontinued operations.


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Results of Operations - Three Months Ended September 30, 2012 and 2011

                                                          % of                        % of
In millions, except per share amounts       2012        revenues        2011        revenues
Net revenues                            $  3,592.8                  $  3,910.1
Cost of goods sold                        (2,454.4 )       68.3 %     (2,756.2 )       70.5 %
Selling and administrative expenses         (690.6 )       19.2 %       (708.6 )       18.1 %
Gain (loss) on sale/asset impairment             -            - %       (264.8 )        6.8 %
Operating income                             447.8         12.5 %        180.5          4.6 %
Interest expense                             (60.6 )                     (69.7 )
Other, net                                    17.4                        21.3
Earnings before income taxes                 404.6                       132.1
Provision for income taxes                   (65.3 )                     (28.4 )
Earnings from continuing operations          339.3                       103.7
Discontinued operations, net of tax          (12.3 )                     (10.2 )
Net earnings                                 327.0                        93.5
Less: Net earnings attributable to
noncontrolling interests                      (5.4 )                      (7.3 )
Net earnings attributable to
Ingersoll-Rand plc                      $    321.6                  $     86.2
Diluted net earnings (loss) per
ordinary share attributable to
Ingersoll-Rand plc ordinary
shareholders:
Continuing operations                   $     1.07                  $     0.28
Discontinued operations                      (0.04 )                     (0.03 )
Net earnings                            $     1.03                  $     0.25

The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented. Net Revenues
Net revenues for the three months ended September 30, 2012 decreased by 8.1%, or $317.3 million, compared with the same period in 2011, which resulted from the following:
Pricing 1.3 %
Volume/product mix (0.1 )%
Currency exchange rates (2.1 )%
Hussmann (7.2 )%
Total (8.1 )%

The decrease in revenues was primarily driven by the absence of Hussmann in the three months ended September 30, 2012, which contributed $281.8 million of revenue in the same period in 2011. This decrease was partially offset by improved pricing across all segments and higher volumes within the Residential Solutions and Industrial Technologies business segments. Operating Income/Margin
Operating margin for the three months ended September 30, 2012 increased to 12.5% from 4.6% for the same period of 2011. Included in Operating income for the three months ended September 30, 2011 is a $265 million loss on sale/asset impairment charge related to the divestiture of Hussmann, which had a 6.8 point impact on 2011 operating margin. Excluding this loss on sale/asset impairment charge, operating margin for the third quarter of 2012 increased by 1.1 points compared to the same period of 2011. The increase was primarily due to improved pricing across all sectors in excess of material inflation and productivity benefits in excess of other inflation. These improvements were partially offset by unfavorable volume/product mix, unfavorable currency impacts, and increased investment spending.


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Interest Expense
Interest expense for the three months ended September 30, 2012 decreased $9.1
million compared with the same period of 2011 primarily as a result of lower
average debt balances for the three months ended September 30, 2012.
Other, Net
The components of Other, net for the three months ended September 30 were as
follows:
In millions                               2012      2011
Interest income                         $  4.0     $  8.0
Exchange gain (loss)                      (1.3 )     11.2
Earnings (loss) from equity investments    1.7          -
Other                                     13.0        2.1
Other, net                              $ 17.4     $ 21.3

The decrease in Other, net for the three months ended September 30, 2012 resulted primarily from foreign currency losses and decreased interest income due to lower average cash balances during 2012. These decreases were partially offset by $1.7 million of equity income on the Hussmann equity investment, and other activity primarily related to adjustments to actual and expected insurance recoveries as a result of a settlement.
Provision for Income Taxes
Our tax provision for the three months ended September 30, 2012 was $65.3 million. The tax provision included a net discrete tax benefit of $29 million, primarily resulting from a reduction in valuation allowances in Spain and Brazil on certain deferred tax assets, partially offset by increases to the liability for unrecognized tax benefits. We project the annual effective rate for 2012 to be approximately 19%. Our tax provision for the three months ended September 30, 2011 was $28.4 million.


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Results of Operations - Nine months ended September 30, 2012 and 2011

                                                          % of                         % of
In millions, except per share amounts       2012        revenues         2011        revenues
Net revenues                            $ 10,564.7                   $ 11,275.3
Cost of goods sold                        (7,347.7 )       69.5  %     (7,987.7 )       70.8 %
Selling and administrative expenses       (2,083.8 )       19.7  %     (2,115.0 )       18.8 %
Gain (loss) on sale/asset impairment           4.5            -  %       (651.6 )        5.8 %
Operating income                           1,137.7         10.8  %        521.0          4.6 %
Interest expense                            (192.1 )                     (209.7 )
Other, net                                    21.2                         28.6
Earnings before income taxes                 966.8                        339.9
Provision for income taxes                  (157.9 )                     (169.0 )
Earnings from continuing operations          808.9                        170.9
Discontinued operations, net of tax           (6.7 )                      (49.7 )
Net earnings                                 802.2                        121.2
Less: Net earnings attributable to
noncontrolling interests                     (19.2 )                      (20.3 )
Net earnings attributable to
Ingersoll-Rand plc                      $    783.0                   $    100.9
Diluted net earnings (loss) per
ordinary share attributable to
Ingersoll-Rand plc ordinary
shareholders:
Continuing operations                   $     2.52                   $     0.43
Discontinued operations                      (0.02 )                      (0.14 )
Net earnings                            $     2.50                   $     0.29

The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented. Net Revenues
Net revenues for the nine months ended September 30, 2012 decreased by 6.3%, or $710.6 million, compared with the same period in 2011, which resulted from the following:
Pricing 1.7 %
Volume/product mix 0.7 %
Currency exchange rates (1.8 )%
Hussmann (6.9 )%
Total (6.3 )%

The decrease in revenues was primarily driven by the absence of Hussmann in the nine months ended September 30, 2012, which contributed $781.7 million of revenue in the same period in 2011. This decrease was partially offset by improved pricing across all segments and higher volumes within the Residential Solutions and Industrial Technologies business segments. Operating Income/Margin
Operating margin for the nine months ended September 30, 2012 increased to 10.8% from 4.6% for the same period of 2011. Included in Operating income for the nine months ended September 30, 2011 is a $652 million loss on sale/asset impairment charge related to the divestiture of Hussmann, which had a 5.8 point impact on 2011 operating margin. Excluding this loss on sale/asset impairment charge, operating margin for the nine months ended September 30, 2012 increased by 0.4 points compared to the same period of 2011. The increase was primarily due to improved pricing across all sectors in excess of material inflation, the realization of productivity benefits in excess of other inflation, and the effect of the stock option forfeiture adjustment discussed in Note 11 to the condensed consolidated financial statements. These increases were partially offset by increased investment spending and unfavorable foreign currency impacts. Also included in Operating income for the nine months ended September 30,


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2011 was a $23 million gain associated with the sale of assets from a restructured business in China. This gain had a 0.2 point impact on operating margin for the nine months ended September 30, 2011. Interest Expense
Interest expense for the nine months ended September 30, 2012 decreased $17.6 million compared with the same period of 2011 primarily as a result of lower average debt balances for the nine months ended September 30, 2012. Other, Net
The components of Other, net for the nine months ended September 30 are as follows:

In millions                               2012      2011
Interest income                         $ 12.6     $ 19.8
Exchange gain (loss)                      (4.1 )      3.6
Earnings (loss) from equity investments   (4.3 )        -
Other                                     17.0        5.2
Other, net                              $ 21.2     $ 28.6

The decrease in Other, net for the nine months ended September 30, 2012 resulted primarily from foreign currency losses, decreased interest income due to lower average cash balances in 2012, and $4.3 million of equity loss on the Hussmann equity investment. These decreases were partially offset by other activity primarily related to adjustments to actual and expected insurance recoveries as a result of a settlement.
Provision for Income Taxes
Our tax provision for the nine months ended September 30, 2012 was $157.9 million. The tax provision included a net discrete tax benefit of $61 million, primarily resulting from a reduction in valuation allowances in Spain and Brazil on certain deferred tax assets, partially offset by increases to the liability for unrecognized tax benefits. We project the annual effective rate for 2012 to be approximately 19%. Our tax provision for the nine months ended September 30, 2011 was $169.0 million.


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Review of Business Segments
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations.
Segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for performance reviews, compensation and resource allocation. For these reasons, we believe that Segment operating income represents the most relevant measure of segment profit and loss. Management may exclude certain charges or gains from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base its operating decisions. We define Segment operating margin as Segment operating income as a percentage of Net revenues. Climate Solutions
Our Climate Solutions segment delivers energy-efficient refrigeration and HVAC throughout the world. Encompassing the transport refrigeration markets as well as the commercial HVAC markets, this segment offers customers a broad range of products, services and solutions to manage controlled temperature environments. This segment includes the market-leading brands of Thermo King and Trane.

On September 30, 2011 and November 30, 2011, we completed transactions to sell Hussmann to a newly-formed affiliate (Hussmann Parent) of private equity firm Clayton Dubilier & Rice, LLC (CD&R). As part of the deal terms we have an ongoing equity interest in Hussmann Parent, therefore operating results continue to be recorded within continuing operations. However, subsequent to the respective transaction dates our earnings from this equity interest are not reported in Segment operating income. During the three and nine months ended September 30, 2011, we recorded a pre-tax loss on sale/asset impairment charge related to the Hussmann divestiture totaling $264.8 million and $651.6 million, respectively. These charges have been excluded from Segment operating income within the Climate Solutions segment as management excludes these charges from Operating income when making operating decisions about the business. See "Divestitures and Discontinued Operations" within Management's Discussion and Analysis and also Note 15 to the condensed consolidated financial statements for a further discussion of our divested operations.
2011 Net revenues and Segment operating income for the Climate Solutions segment includes the operating results of Hussmann prior to the sale. The operating results for Hussmann for the three and nine months ended September 30, 2011, were as follows:

In millions               Three months ended     Nine months ended
Net revenues             $             281.8    $             781.7
Segment operating income $              30.1    $              56.1

Segment operating results for Climate Solutions for the three and nine months ended September 30, were as follows:

                                        Three months ended                       Nine months ended
Dollar amounts in millions        2012          2011       % change       2012          2011        % change
Net revenues                   $ 1,941.7     $ 2,289.7      (15.2 )%   $ 5,570.6     $ 6,380.0       (12.7 )%
Segment operating income           247.0         264.3       (6.5 )%       579.6         631.7        (8.2 )%

Segment operating margin 12.7 % 11.5 % 10.4 % 9.9 %

Net revenues for the three months ended September 30, 2012 decreased by 15.2%, or $348.0 million, compared with the same period of 2011, primarily resulting from the absence of Hussmann activity in 2012 (12%). Excluding the impact of Hussmann, Net revenues for the Climate Solutions segment decreased 3%. This decrease was primarily driven by unfavorable currency impacts (2%) and lower volumes (2%), partially offset by improved pricing (1%).
Segment operating income for the three months ended September 30, 2012 decreased by 6.5%, or $17.3 million, compared with the same period of 2011. Included in 2011 Segment operating income is $30.1 million of income related to Hussmann. The 2011 results of Hussmann had a 0.2 point impact on 2011 Segment operating margin. Excluding these items, margin improved to 12.7% due to pricing improvements in excess of material inflation ($37 million) and productivity benefits in excess of other inflation ($16 million), partially offset by unfavorable volume/product mix ($24 million), unfavorable currency impacts ($12 million), and increased investment spending ($5 million).


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Net revenues for the nine months ended September 30, 2012 decreased by 12.7%, or $809.4 million, compared with the same period of 2011, primarily resulting from the absence of Hussmann activity in 2012 (12%). Excluding the impact of Hussmann, Net revenues for the Climate Solutions segment decreased by 1%. This decrease was primarily driven by unfavorable currency impacts (2%), partially offset by improved pricing (1%).

Segment operating income for the nine months ended September 30, 2012 decreased by 8.2%, or $52.1 million, compared with the same period of 2011. Included in 2011 Segment operating income is $56.1 million of income related to Hussmann and a $23 million gain associated with the sale of assets from a restructured business in China. The 2011 results of Hussmann and the gain on sale had a net zero impact on 2011 Segment operating margin. Excluding these items, margin improved to 10.4% due to pricing improvements in excess of material inflation ($104 million) and productivity benefits in excess of other inflation ($24 million), partially offset by increased investment spending ($41 million), unfavorable volume/product mix ($31 million), and unfavorable currency impacts ($27 million).
Trane commercial HVAC revenues declined as slight growth within our parts, services and solutions markets in the Americas were more than offset by declines in Europe. Net revenues in our transport businesses declined slightly as growth in the Americas was more than offset by declines in Europe and Asia. Residential Solutions
Our Residential Solutions segment provides safety, comfort and efficiency to homeowners throughout North America and parts of South America. It offers customers a broad range of products, services and solutions including mechanical and electronic locks, energy-efficient HVAC systems, indoor air quality solutions, advanced controls, portable security systems and remote home management. This segment is comprised of well-known brands like American Standard®, Schlage and Trane.
Segment operating results for Residential Solutions for the three and nine months ended September 30, were as follows:

                                  Three months ended                     Nine months ended
Dollar amounts in millions   2012        2011      % change       2012          2011       % change
Net revenues               $ 558.6     $ 504.4        10.7 %   $ 1,632.7     $ 1,569.8         4.0 %
Segment operating income      45.4        19.0       138.9 %        86.3          67.2        28.4 %
Segment operating margin       8.1 %       3.8 %                     5.3 %         4.3 %

Net revenues for the three months ended September 30, 2012 increased by 10.7%, or $54.2 million, compared with the same period of 2011. The increase was primarily related to higher volumes (10%) and improved pricing (1%). Segment operating income for the three months ended September 30, 2012 increased by 138.9%, or $26.4 million, compared with the same period of 2011. The increase, which improved Segment operating margin to 8.1% from 3.8%, was primarily driven by productivity benefits in excess of other inflation ($14 million) and pricing improvements in excess of material inflation ($7 million). Net revenues for the nine months ended September 30, 2012 increased by 4.0%, or $62.9 million, compared with the same period of 2011. The increase was primarily . . .

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