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Ingersoll-Rand Plc (IR - Analyst Report) reported fourth quarter 2013 net income of $47.6 million or 16 cents per share compared with $235.6 million or 78 cents per share in the year-earlier quarter. The sharp decline in earnings was primarily due to high operating costs.

Excluding non-recurring items, adjusted earnings from continuing operations for the reported quarter were 61 cents per share compared with 52 cents in the year-ago quarter. Adjusted earnings from continuing operations marginally beat the Zacks Consensus Estimate by a penny.

For full year 2013, net income was $618.8 million or $2.07 per share compared with $1,018.6 million or $3.28 per share in the previous year. Excluding non-recurring items, adjusted earnings from continuing operations for 2013 were $2.67 per share compared with $2.57 in 2012. Adjusted earnings from continuing operations for 2013 exceeded the Zacks Consensus Estimate by 5 cents.

Quarterly revenues of $3,098.9 million missed the Zacks Consensus Estimate of $3,193 million and rose 6% year over year. Revenues from the U.S. and the International segment were up 6% each compared with the year-ago period. For full year 2013, Ingersoll recorded revenues of $12,350.5 million compared with $11,988.3 million in the prior year.

Segment Performance

Effective fourth quarter 2013, Ingersoll realigned its financial reporting structure into two segments, namely Climate and Industrial. Ingersoll made the change to focus on its core businesses following the spin-off of its commercial and residential security businesses into a standalone company called Allegion plc Ordinary Shares (ALLE - Analyst Report).

Climate segment delivered sales of approximately $2,327.5 million in fourth quarter 2013 compared with $2,158.7 million in the year-ago quarter. The year-over-year increase was driven by increase in commercial HVAC (heating, ventilation, and air conditioning) revenues in Americas, Europe and Asia and slight increase in revenues from parts, services and solutions. Revenues from the Thermo King sub-segment also increased by a low-teen percentage.

Industrial segment posted revenues of $771 million in the fourth quarter, up 1% year over year due to flat volume in the Americas and Asia, and gains in Europe. Air compressors and industrial products revenues increased slightly in the reported quarter with a flat year-over-year performance in the Americas, a low-single digit percentage decline in Europe and low-single digit percentage gain in Asia.

Margins

Operating margin for the fourth quarter of 2013 was 7.0% compared with 8.5% in the year-ago quarter. Consolidated adjusted operating margin stood at 8.5% and remained flat year over year.

Adjusted operating margin for Climate segment was 10% for the reported quarter and improved by 0.6 percentage points year over year due to higher volumes and productivity gains, partially offset by inflation. Adjusted operating margin for Industrial segment was 16.1% and remained flat on a comparable basis with 2012, as improved productivity were offset by inflation and investments.

Balance Sheet and Cash Flows

At year-end 2013, cash and cash equivalents aggregated $1.9 billion compared with $0.7 billion in the year-ago period. Long-term debt increased to $3,153.5 million from $2,266.5 million at year-end 2012. Net cash from operating activities for 2013 came in at $1,170.4 million compared with $1,181.0 million in the prior year. Capital expenditure for the year remained almost flat at $242.2 million.

Share Repurchase

The company repurchased approximately 7 million shares for approximately $420 million in the reported quarter as part of its $2 billion share repurchase program, to bring its tally to 21 million shares for approximately $1.2 billion during full-year 2013. The company expects to complete this stock buyback program by the end of the first quarter of 2014. Ingersoll has approved a new $1.5 billion share repurchase program that will commence on the completion of the existing program.

Update on Spin-off

In Dec 2012, Ingersoll approved a plan to spin off its commercial and residential security businesses. The company completed the divestiture on Dec 1, 2013. The new security company is an Irish plc named Allegion.

Dividend Hike

Ingersoll increased its quarterly dividend by 19% year over year to 25 cents per share. The increased dividend is payable on Mar 31, 2014 to shareholders of record on Mar 14.

Outlook

For full year 2014, management expects revenues to increase by 3%-4% year over year due to slow-to-moderate growth in global industrial and construction markets. Adjusted earnings from continuing operations are expected to be between $3.05 and $3.20.  Reported earnings for 2014 are expected to be in the range of $2.95-$3.10. Free cash flow for the year is expected to be $900 million.

For first quarter 2014, Ingersoll projects revenues to increase by 2%-3% year over year. Adjusted earnings from continuing operations are expected to be in the range of 23 cents to 28 cents per share, with reported earnings in the range of 21 cents to 26 cents per share.

Moving Forward

Ingersoll shares fell in pre-market trading as investors probably expected it to comfortably beat the revenue and earnings estimates.

Ingersoll currently carries a Zacks Rank #3 (Hold). Other stocks that are worth a look in the industry include Graco Inc. (GGG - Snapshot Report) and The Middleby Corp. (MIDD - Analyst Report), both of which carry a Zacks Rank #2 (Buy).

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