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Ingersoll-Rand Beats Expectations

IR

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Ingersoll-Rand Plc (IR - Analyst Report) reported adjusted earnings per share (EPS) of $1.15 in its second quarter of 2012 compared to 92 cents per share in the year-ago quarter and 31 cents per share in the last quarter, comprehensively beating the Zacks Consensus Estimate of 90 cents.

The record earnings were primarily driven by the company’s improved operational efficiency. The company’s earnings surpassed management’s prior guidance range of 85 cents to 90 cents per share for the quarter.

Revenues

Sales amounted to $3.8 billion; declining 7% year over year but increasing 21.3% sequentially. Total revenue, excluding the recently divested Hussmann business and the impact of currency translation, were up approximately 3% year over year.

Revenue in the quarter was within management’s guidance range of $3.8 billion to $3.9 billion. However, sales missed the Zacks Consensus Estimate of $3.9 billion.

Geographically, revenues from U.S. markets escalated 4% annually, whereas revenues from international operations grew 5% (1% excluding currency).

Segment-wise, Climate Solutions delivered sales of approximately $2 billion, decreased 13.2% year over year but surged 18.4% sequentially. The year-over-year decline in revenue was primarily due to weakened sales in Asia and Europe.

The Industrial Technologies segment posted revenues of $790.3 million, ameliorated 2.4% year over year and 14.7% sequentially. The annual surge was a result of increased Air and productivity sales across Asia and America.

Revenues from the Residential Solutions segment increased 3.2% year over year and 54.6% sequentially to $652.5 million in the second quarter of 2012. The year-over-year growth was primarily led by improved sales in the residential security and Residential Heating, Ventilating and Air-Conditioning (HVAC) segments.

Finally, the Security Technologies segment recorded sales of $411.4 million, down 2.5% year over year but up 8.7% sequentially. The year-over-year decline was primarily due to the weakened sales in the overseas business offsetting the high sales in Americas.

Margins

Adjusted operating margin for the second quarter of 2012 came in at 12.4% compared with 12.2% in the year-ago quarter and 6.7% in the previous quarter. The company’s improved price structure and high productivity neutralized the negative effects of inflationary pressures, unfavorable product mix and currency conversion, which resulted in the annual and sequential rise in operating margin.

The effective adjusted tax rate came in at 11.4% in the second quarter of 2012 compared with 23.2% in the year-ago quarter.

Balance Sheet and Cash Flows

The company had a cash balance of $0.9 billion at the end of the quarter versus $1.1 billion at the end of the previous quarter. Debt balance was $3.3 billion at the end of the quarter versus $3.6 billion at the end of the previous quarter.

Cash flow from operating activities for the first six months of 2012 amounted to $305.6 million. Capital expenditure for the period was $113.8 million, while available cash flow was $191.8 million.

Share Repurchase

Ingersoll-Rand repurchased 2.2 million shares worth $90 million as of July 19, 2012. For fiscal 2012, the company expects to repurchase shares worth $800 million in order to complete its $2 billion share repurchase program.  

Outlook

For the third quarter of 2012, management expects revenues to fall within $3.6 billion to $3.7 billion with EPS from continuing operations between 95 cents and $1.00. The tax rate is projected to be at 17% for the quarter.

The company expects that the Refrigerated transport market and commercial HVAC business in North America will improve in the upcoming quarter. However, HVAC sales in Europe and the commercial construction market in North America are likely to be low due to the ongoing weakness in demand.

In 2012, Ingersoll-Rand projects revenues between $14 billion and $14.2 billion. The revenue is likely to be negatively impacted by currency translation. EPS for 2012 is targeted to be in the range of $3.15 – $3.25. The tax rate is projected to be at 19% for the quarter. The available cash flow expected to be $1.1 billion by the end of 2012.

Our Recommendation

Ingersoll-Rand currently has a Zacks Rank #3, which implies a short-term (1-3 months) Hold rating on the stock.

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