Description
Filed with the SEC from Aug 09 to Aug 15:
Ingersoll-Rand (IR)
Trian Fund Management, which holds a stake in Ingersoll-Rand jointly with the California State Teachers' Retirement System (Calstrs), saw its founding partner Nelson Peltz added to Ingersoll's board after the big, diversified manufacturer of commercial and industrial machinery expanded it from 11 to 12 directors.
BUSINESS OVERVIEW
Overview
Ingersoll-Rand plc (IR-Ireland), an Irish public limited company, and its consolidated subsidiaries (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 becoming a world leader in creating safe, comfortable and efficient environments, as well as to become a more diversified company with strong growth and profitability prospects, we began transforming our enterprise portfolio in recent years by divesting cyclical, low-growth and asset-intensive businesses. In addition, our acquisition strategy has helped deliver more consistent revenue and earnings performance across all phases of the economic cycle. Aside from our portfolio transformation, 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 our Company.
On July 1, 2009, Ingersoll-Rand Company Limited (IR-Limited), a Bermuda company, completed a reorganization to change the jurisdiction of incorporation of our parent company from Bermuda to Ireland (the Ireland Reorganization). As a result, IR-Ireland replaced IR-Limited as the ultimate parent company effective July 1, 2009. The Ireland Reorganization was accounted for as a reorganization of entities under common control and accordingly, did not result in any changes to the consolidated amounts of assets, liabilities and equity. In conjunction with the Ireland Reorganization, IR-Limited became a wholly-owned subsidiary of IR-Ireland and the Class A common shareholders of IR-Limited became ordinary shareholders of IR-Ireland. All references related to the Company prior to July 1, 2009 relate to IR-Limited.
The Ireland Reorganization did not have a material impact on our financial results. IR-Ireland continues to be subject to United States Securities and Exchange Commission (SEC) reporting requirements and prepares financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Shares of IR-Ireland continue to trade on the New York Stock Exchange under the symbol “IR”, the same symbol under which the IR-Limited Class A common shares previously traded.
Recent Acquisitions and Divestitures
Divested Operations
On September 30, 2011, we completed a transaction 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). This transaction included the equipment business and certain of the service branches in the U.S. and Canada, and the equipment, service and installation businesses in Mexico, Chile, Australia, New Zealand, and Japan (Hussmann Business). The transaction allowed Hussmann Parent the option to acquire the remaining North American Hussmann service and installation branches (Hussmann Branches). Hussmann Parent completed the acquisition of the Hussmann Branches on November 30, 2011. The Hussmann Business and Branches, which were reported as part of the Climate Solutions segment through their respective transaction dates, manufacture, market, distribute, install, and service refrigerated display merchandising equipment, refrigeration systems, over the counter parts, and other commercial and industrial refrigeration applications. The transaction included, among other things, our ownership of common stock of Hussmann Parent, such that following the sale, CD&R would own cumulative convertible participating preferred stock of Hussmann Parent, initially representing 60% of the outstanding capital stock (on an as-converted basis) of Hussmann Parent, and we would own all of the common stock, initially representing the remaining 40% of the outstanding capital stock (on an as-converted basis) of Hussmann Parent. See "Divestitures and Discontinued Operations" within Management's Discussion and Analysis and also Note 17 to the Consolidated Financial Statements for a further 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. This business, which was previously reported as part of the Security Technologies segment, designs, installs and services security systems. As a result of the sale, we have reported this business as a discontinued operation for all periods presented.
On December 30, 2010, we completed the divestiture of our gas microturbine generator business, which was sold under the Energy Systems brand, to Flex Energy, Inc. The business, which was previously reported as part of the Industrial Technologies segment, designs, manufactures, markets, distributes, and services gas powered microturbine generators which feature energy efficient design and low emissions technology. As a result of the sale, we have reported this business as a discontinued operation for all periods presented.
On October 4, 2010, we completed the divestiture of our European refrigerated display case business, which was sold under the KOXKA brand, to an affiliate of American Industrial Acquisition Corporation (AIAC Group). The business, which was previously reported as part of the Climate Solutions segment, designs, manufactures and markets commercial refrigeration equipment through sales branches and a network of distributors throughout Europe, Africa and the Middle East. 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 17 to the Consolidated Financial Statements for a further discussion of our discontinued operations.
Business Segments
Our business segments provide products, services and solutions used to increase the efficiency and productivity of both industrial and commercial operations and homes, as well as improve the security, safety, health and comfort of people around the world.
Our business segments are as follows:
Climate Solutions
Our Climate Solutions segment delivers energy-efficient refrigeration and Heating, Ventilation and Air Conditioning (HVAC) throughout the world. Encompassing the transport 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, which had 2011 net revenues of $ 8.3 billion , includes the market-leading brands of Thermo King and Trane.
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, which had 2011 net revenues of $ 2.0 billion , is comprised of well-known brands like American Standard ® , Schlage and Trane.
Industrial Technologies
Our Industrial Technologies segment provides products, services and solutions that enhance energy efficiency, productivity and operations. It offers our global customers a diverse and innovative range of products including compressed air systems, tools, pumps, fluid and material handling systems, as well as golf, utility, and rough terrain vehicles. It also includes a diverse range of service offerings including full coverage and preventative maintenance service contracts, service parts, installation, and remanufactured compressors and tools. This segment, which had 2011 net revenues of $ 2.9 billion , includes the Club Car, Ingersoll Rand, and ARO ® market-leading brands.
Security Technologies
Our Security Technologies segment is a leading global provider of products and services that make environments safe, secure and productive. The segment’s market-leading products include electronic and biometric access control systems and software, locks and locksets, door closers, exit devices, steel doors and frames, as well as time, attendance and personnel scheduling systems. These products serve a wide range of markets including the commercial construction market, healthcare, retail, and transport industries as well as educational and governmental facilities. This segment, which had 2011 net revenues of $ 1.6 billion , includes the CISA ® , LCN ® , Schlage and Von Duprin ® market-leading brands.
Competitive Conditions
Our products are sold in highly competitive markets throughout the world. Due to the diversity of these products and the variety of markets served, we encounter a wide variety of competitors that vary by product line. They include well-established regional or specialized competitors, as well as larger U.S. and non-U.S. corporations or divisions of larger companies.
The principal methods of competition in these markets relate to price, quality, delivery, service and support, technology and innovation. We believe that we are one of the leading manufacturers in the world of HVAC systems and services, air compression systems, transport temperature control products, air tools, and golf and utility vehicles. In addition, we believe we are a leading supplier in U.S. markets for architectural hardware products, mechanical locks and electronic and biometric access-control technologies.
Distribution
Our products are distributed by a number of methods, which we believe are appropriate to the type of product. U.S. sales are made through branch sales offices and through distributors, dealers and large retailers across the country. Non-U.S. sales are made through numerous subsidiary sales and service companies with a supporting chain of distributors throughout the world.
Customers
We have no customer that accounted for more than 10% of our consolidated net revenues in 2011 , 2010 or 2009 . No material part of our business is dependent upon a single customer or a small group of customers; therefore, the loss of any one customer would not have a material adverse effect on our results of operations or cash flows.
Raw Materials
We manufacture many of the components included in our products, which requires us to employ a wide variety of commodities. Principal commodities, such as steel, copper and aluminum, are purchased from a large number of independent sources around the world. In the past, higher prices for some commodities, particularly steel and non-ferrous metals, have caused pricing pressures in some of our businesses; we have historically been able to pass certain of these cost increases on to customers in the form of price increases.
We believe that available sources of supply will generally be sufficient for the foreseeable future. There have been no commodity shortages which have had a material adverse effect on our businesses. However, significant changes in certain material costs may have an adverse impact on our costs and operating margins. To mitigate this potential impact, we enter into long-term supply contracts in order to manage our exposure to potential supply disruptions.
Working Capital
We manufacture products that usually must be readily available to meet our customers’ rapid delivery requirements. Therefore, we maintain an adequate level of working capital to support our business needs and our customers’ requirements. Such working capital requirements are not, however, in the opinion of management, materially different from those experienced by our major competitors. We believe our sales and payment terms are competitive in and appropriate for the markets in which we compete.
Seasonality
Demand for certain segments of our products and services is influenced by weather conditions. For instance, Trane's sales have historically tended to be seasonally higher in the second and third quarters of the year because, in the U.S. and other northern hemisphere markets, summer is the peak season for sales of air conditioning systems and services. Therefore, results of any quarterly period may not be indicative of expected results for a full year and unexpected cool trends or unseasonably warm trends during the summer season could negatively or positively affect certain segments of our business and impact overall results of operations.
Research and Development
We engage in research and development activities in an effort to introduce new products, enhance existing product effectiveness, increase safety, improve ease of use and reliability as well as expand the various applications for which our products may be appropriate. In addition, we continually evaluate developing technologies in areas that we believe will enhance our business for possible investment or acquisition. We anticipate that we will continue to make significant expenditures for research and development activities as we look to maintain and improve our competitive position. Research and development expenditures, including qualifying engineering costs, were approximately $ 257.3 million in 2011 , $ 244.0 million in 2010 and $ 255.0 million in 2009 .
Patents and Licenses
We own numerous patents and patent applications, and are licensed under others. Although in aggregate we consider our patents and licenses to be valuable to our operations, we do not believe that our business is materially dependent on a single patent or license or any group of them. In our opinion, engineering, production skills and experience are more responsible for our market position than our patents and/or licenses.
Environmental Matters
We continue to be dedicated to an environmental program intended to reduce the utilization and generation of hazardous materials during the manufacturing process as well as to remediate identified environmental concerns. As to the latter, we are currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former manufacturing facilities.
We are sometimes a party to environmental lawsuits and claims and have received notices of potential violations of environmental laws and regulations from the Environmental Protection Agency and similar state authorities. We have been also identified as a potentially responsible party (PRP) for cleanup costs associated with off-site waste disposal at federal Superfund and state remediation sites. For all such sites, there are other PRPs and, in most instances, our involvement is minimal.
In estimating our liability, we have assumed that we will not bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based on our understanding of the parties’ financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future.
We incurred $ 3.1 million , $ 1.0 million , and $2.5 million of expenses during the years ended December 31, 2011 , 2010 , and 2009 , respectively, for environmental remediation at sites presently or formerly owned or leased by us. As of December 31, 2011 and 2010 , we have recorded reserves for environmental matters of $ 71.7 million and $ 81.0 million , respectively. Of these amounts $ 51.3 million and $ 56.3 million relate to remediation of sites previously disposed by us. Environmental reserves are classified as Accrued expenses and other current liabilities, or Other noncurrent liabilities based on their expected term. Our total current environmental reserve at December 31, 2011 and 2010 was $ 26.9 million and $ 28.1 million , respectively. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
For a further discussion of our potential environmental liabilities, see also Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Environmental and Asbestos Matters as well as Note 19 to the Consolidated Financial Statements.
Asbestos Matters
Certain of our wholly-owned subsidiaries are named as defendants in asbestos-related lawsuits in U.S. state and federal courts. In virtually all of the suits, a large number of other companies have also been named as defendants. The vast majority of those claims have been filed against either Ingersoll-Rand Company (IR-New Jersey) or Trane and generally allege injury caused by exposure to asbestos contained in certain historical products sold by IR-New Jersey or Trane, primarily pumps, boilers and railroad brake shoes. Neither IR-New Jersey nor Trane was a producer or manufacturer of asbestos, however, some formerly manufactured products utilized asbestos-containing components such as gaskets and packings purchased from third-party suppliers.
See also the discussion under Part I, Item 3, Legal Proceedings, and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Environmental and Asbestos Matters as well as Note 19 to the Consolidated Financial Statements.
Employees
As of December 31, 2011 , we employed approximately 52,000 people throughout the world.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by us at http://www.sec.gov.
In addition, this Annual Report on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on our Internet website (http://www.ingersollrand.com) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The Board of Directors of the Company has also adopted and posted in the Investor Relations section of the Company’s website our Corporate Governance Guidelines and charters for each of the Board’s standing committees. The contents of the Company’s website are not incorporated by reference in this report.
Certifications
New York Stock Exchange Annual Chief Executive Officer Certification
The Company’s Chief Executive Officer submitted to the New York Stock Exchange the Annual CEO Certification as the Company’s compliance with the New York Stock Exchange’s corporate governance listing standards required by Section 303A.12 of the New York Stock Exchange’s listing standards.
CEO BACKGROUND
Ann C. Berzin – age 60, director since 2001
• Chairman and Chief Executive Officer of Financial Guaranty Insurance Company (insurer of municipal bonds and structured finance obligations), a subsidiary of General Electric Capital Corporation, from 1992 to 2001.
• Current Directorships:
â–Ş Exelon Corporation
â–Ş Kindred Healthcare, Inc.
• Other Directorships Held in the Past Five Years:
â–Ş Constellation Energy Group, Inc.
Ms. Berzin’s extensive experience in finance at a global diversified industrial firm and her expertise in complex investment and financial products and services bring critical insight to the Company’s financial affairs, including its borrowings, capitalization, and liquidity. In addition, Ms. Berzin’s relationships across the global financial community strengthen Ingersoll Rand’s access to capital markets. Her board memberships provide deep understanding of trends in the energy and healthcare sectors, both of which present ongoing challenges and opportunities for Ingersoll Rand.
John Bruton – age 64, director since 2010
• European Union Commission Head of Delegation to the United States from 2004 to 2009.
• Prime Minister of the Republic of Ireland from 1994 to 1997.
• Current Directorships:
â–Ş Montpelier Re Holding Ltd.
• Other Directorships Held in the Past Five Years: None
Mr. Bruton’s long and successful career of public service on behalf of Ireland and Europe provides extraordinary insight into critical regional and global economic, social and political issues, all of which directly influence the successful execution of the Company’s strategic plan. In particular, Mr. Bruton’s leadership role in transforming Ireland into one of the world’s leading economies during his tenure, as well as in preparing the governing document for managing the Euro, lend substantial authority to Ingersoll Rand’s economic and financial oversight.
Jared L. Cohon – age 64, director since 2008
• President of Carnegie Mellon University since 1997 and also appointed Professor of Civil and Environmental Engineering and Professor of Engineering and Public Policy.
• Current Directorships:
â–Ş Lexmark, Inc.
• Other Directorships Held in the Past Five Years:
â–Ş Mellon Financial Services Corporation
â–Ş Trane Inc. (formerly American Standard)
• Other Activities:
â–Ş Appointed by President George W. Bush to serve on his Homeland Security Advisory Council in 2002 and reappointed in 2010 by President Barack Obama.
Dr. Cohon’s extensive career in academics, including 14 years as president of an institution known throughout the world for its leadership in the fields of computer science, robotics, and advanced-technology teaching and research, offers the Company tremendous insight into the latest developments in areas critical to commercial innovation and manufacturing process improvement. A member of the National Academy of Engineering, Dr. Cohon is a recognized authority on environmental and water resources systems analysis and management. As such, Dr. Cohon also brings unique perspectives on sustainable business practices, both within our own operations and on behalf of our customers and communities. In 2008 and 2009, at the request of Congress, Dr. Cohon chaired the National Research Council Committee that produced the report, “Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use.” Finally, Dr. Cohon’s more than nine years of service as a member of Trane Inc.’s (formerly American Standard) board of directors provides critical insight into that part of the Company’s business.
Gary D. Forsee – age 62, director since 2007
• President, University of Missouri System from 2008 to 2011.
• Chairman of the Board (from 2006 to 2007) and Chief Executive Officer (from 2005 to 2007) of Sprint Nextel Corporation (a telecommunications company).
• Current Directorships:
â–Ş Great Plains Energy Inc.
• Other Directorships Held in the Past Five Years:
â–Ş Goodyear Tire & Rubber Co.
â–Ş Sprint Nextel Corporation
• Other Activities:
â–Ş Trustee, National Board of Trustees, Boy Scouts of America
â–Ş Trustee, Midwest Research Institute
â–Ş Executive Advisory Board, Wind Point Partners
In addition to his broad operational and financial expertise, Mr. Forsee’s experience as chairman and chief executive officer with the third largest U.S. firm in the global telecommunications industry offers a deep understanding of the challenges and opportunities within markets experiencing significant technology-driven change. His recent role as president of a major university system provides insight into the Company’s talent development initiatives, which remain a critical enabler of Ingersoll Rand’s long-term success. Mr. Forsee’s membership on the board of an energy services utility also benefits the Company as it seeks to achieve more energy-efficient operations and customer solutions.
Peter C. Godsoe – age 73, director since 1998
• Chairman of the Board and Chief Executive Officer of The Bank of Nova Scotia (a Canadian-based international bank) from 1995 until his retirement in 2004.
• Current Directorships:
â–Ş Onex Corporation
â–Ş Rogers Communications Inc.
• Other Directorships Held in the Past Five Years:
â–Ş Barrick Gold Corporation
â–Ş Lonmin plc
â–Ş Sobeys Inc.
â–Ş Templeton Emerging Markets Investment Trust plc
• Other Activities:
â–Ş Director, Perimeter Institute for Theoretical Physics
â–Ş Director, Canadian Centre for Diversity
â–Ş Director, Mount Sinai Hospital
â–Ş Director, The Warranty Group
Mr. Godsoe’s nearly four decades of experience with a major Canadian bank, including a decade as its chairman and chief executive officer, brings valuable discernment to all aspects of Ingersoll Rand’s financial affairs. His international perspective provides important insight into global financial markets and his deep understanding of financial instruments lends critical guidance for the Company’s financing arrangements and overall financial position. The Company also benefits from Mr. Godsoe’s board memberships, which comprise or have comprised mining, telecommunications and private equity firms that enhance our visibility into key economic trends and technological developments.
Edward E. Hagenlocker – age 72, director since 2008
• Vice-Chairman of Ford Motor Company (an automobile manufacturer) from 1996 until his retirement in 1999.
• Chairman of Visteon Automotive Systems (a manufacturer and supplier of automobile products) from 1997 to 1999.
• Current Directorships:
â–Ş AmeriSourceBergen Corporation
• Other Directorships Held in the Past Five Years:
â–Ş Alcatel-Lucent
â–Ş Air Products and Chemicals, Inc.
â–Ş Trane Inc. (formerly American Standard)
Mr. Hagenlocker’s nearly 35 years in the automotive industry, including experience as the vice chairman of the largest independent U.S. automotive company and as chairman of a major automotive systems supplier, brings to Ingersoll Rand extensive expertise in global manufacturing, engineering, design, marketing and channel management, as well as consumer-focused business disciplines. Mr. Hagenlocker’s seven years of service as a member of Trane Inc.’s (formerly American Standard) board of directors provides critical insight into that part of the Company’s business. In addition, his board memberships include businesses engaged in the manufacture of specialty and atmospheric gases for industrial processes, which provides insight into new technologies for our operations, and pharmaceutical distribution and services, which enhances our understanding of trends and developments in the healthcare sector.
Constance J. Horner – age 70, director since 1994
• Guest Scholar at the Brookings Institution (a non-partisan research institute) from 1993 to 2005.
• Commissioner of U.S. Commission on Civil Rights from 1993 to 1998.
• Assistant to the President and Director of Presidential Personnel from 1991 to 1993.
• Deputy Secretary, U.S. Department of Health and Human Services from 1989 to 1991.
• Current Directorships:
â–Ş Pfizer Inc.
â–Ş Prudential Financial, Inc.
• Other Directorships Held in the Past Five Years: None
• Other Activities:
â–Ş Trustee, The Prudential Foundation
â–Ş Fellow, National Academy of Public Administration
Ms. Horner’s substantial leadership experience and public-policy expertise resulting from her service in two presidential administrations and several U.S. government departments provide Ingersoll Rand with important perspective on matters that directly affect the Company’s operations and financial affairs. In particular, Ms. Horner has deep insight into employee relations, talent development, diversity, operational management and healthcare through her leadership positions at various federal departments and commissions. Ms. Horner’s board memberships afford ongoing engagement in the areas of healthcare, risk management and financial services, all of which have a direct influence on Ingersoll Rand’s success.
Michael W. Lamach – age 48, Chairman since June 2010 and director since February 2010
• President and Chief Executive Officer (since February 2010) of the Company.
• President and Chief Operating Officer of the Company from February 2009 to February 2010.
• Senior Vice President and President, Trane Commercial Systems, of the Company from June 2008 to September 2009.
• Senior Vice President and President, Security Technologies, of the Company from February 2004 to June 2008.
• Current Directorships:
â–Ş Iron Mountain Incorporated
• Other Directorships Held in the Past Five Years: None
Mr. Lamach’s extensive career of successfully leading global businesses, including eight years with Ingersoll Rand, brings significant experience and expertise to the Company’s management and governance. His 27 years of business leadership encompass global automotive components, controls, security and HVAC systems businesses, representing a broad and diverse range of products and services, markets, channels, applied technologies and operational profiles. In his most recent role as president and chief operating officer of the Company, he was instrumental in driving strong productivity improvement and cost savings across the Company’s global operations. Mr. Lamach’s board membership with a leading information management systems firm provides ongoing insight into trends and developments in the critical areas of data security and information protection and retention.
Theodore E. Martin – age 72, director since 1996
• President and Chief Executive Officer of Barnes Group Inc. (manufacturer and distributor of automotive and aircraft components and maintenance products) from 1995 until his retirement in 1998.
• Current Directorships:
â–Ş C. R. Bard, Inc.
• Other Directorships Held in the Past Five Years:
â–Ş Applied Biosystems, Inc. (formerly known as Applera Corporation)
â–Ş Unisys Corporation
• Other Activities:
â–Ş Chairman, Edna McConnell Clark Foundation
â–Ş Trustee (emeritus), Syracuse University
Mr. Martin’s experience as chief executive officer of a diversified global industrial firm lends valuable and direct expertise across all aspects of Ingersoll Rand’s operational and financial activities. In particular, Mr. Martin’s leadership of a large industrial manufacturing organization provides practical insight to help drive the Company’s long-term productivity initiatives. His board memberships, which include organizations at the forefront of healthcare products and information technology, enhance the Company’s access to important developments in these sectors.
Richard J. Swift – age 67, Lead Director since 2010 and director since 1995
• Chairman of Financial Accounting Standards Advisory Council from 2002 to 2006.
• Chairman, President and Chief Executive Officer of Foster Wheeler Ltd. (provider of design, engineering, construction, manufacturing, management and environmental services) from 1994 to 2001.
• Current Directorships:
â–Ş CVS Caremark Corporation
â–Ş Hubbell Incorporated
â–Ş Kaman Corporation
â–Ş Public Service Enterprise Group
• Other Directorships Held in the Past Five Years: None
Mr. Swift’s experience as chairman and chief executive officer of a global engineering firm and his five-year leadership of the advisory organization to a major accounting standards board imparts substantial expertise to all of the Company’s operational and financial matters. His leadership of an organization that was instrumental in some of the world’s most significant engineering projects provides unique insight into the complex systems involved in the efficient and effective development of buildings and industrial operations, which represent key global market segments for Ingersoll Rand’s products and services. Mr. Swift’s board memberships include firms engaged in the manufacture and distribution of industrial, electrical and electronic products, which directly correspond to key elements of the Company’s growth and operational strategies.
Tony L. White – age 65, director since 1997
• Chairman, President and Chief Executive Officer of Applied Biosystems Inc. (a developer, manufacturer and marketer of life science systems and genomic information products) from 1995 until his retirement in 2008.
• Current Directorships:
â–Ş C.R. Bard, Inc.
â–Ş CVS Caremark Corporation
• Other Directorships Held in the Past Five Years:
â–Ş Applied Biosystems Inc. (formerly known as Applera Corporation)
Mr. White’s extensive management experience, including 13 years as chairman and chief executive officer of an advanced-technology life sciences firm, provides substantial expertise and guidance across all aspects of Ingersoll Rand’s operational and financial affairs. In particular, Mr. White’s leadership of an organization whose success was directly connected to innovation and applied technologies aligns with the Company’s focus on innovation as a key source of growth. The Company benefits from Mr. White’s ongoing board memberships, where developments related to biotechnology and healthcare delivery systems can offer instructive process methodologies to accelerate our innovation efforts.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Organization
We are 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 becoming a world leader in creating safe, comfortable and efficient environments, as well as to become a more diversified company with strong growth and profitability prospects, we began transforming our enterprise portfolio in recent years by divesting cyclical, low-growth and asset-intensive businesses. In addition, our acquisition strategy has helped deliver more consistent revenue and earnings performance across all phases of the economic cycle. Aside from our portfolio transformation, 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 our Company.
On July 1, 2009, IR-Limited, a Bermuda company, completed a reorganization to change the jurisdiction of incorporation of our parent company from Bermuda to Ireland. As a result, IR-Ireland replaced IR-Limited as the ultimate parent company effective July 1, 2009. The Ireland Reorganization was accounted for as a reorganization of entities under common control and accordingly, did not result in any changes to the consolidated amounts of assets, liabilities and equity. In conjunction with the Ireland Reorganization, IR-Limited became a wholly-owned subsidiary of IR-Ireland and the Class A common shareholders of IR-Limited became ordinary shareholders of IR-Ireland. All references related to the Company prior to July 1, 2009 relate to IR-Limited.
The Ireland Reorganization did not have a material impact on our financial results. IR-Ireland continues to be subject to SEC reporting requirements and prepares financial statements in accordance with GAAP. Shares of IR-Ireland continue to trade on the New York Stock Exchange under the symbol “IR”, the same symbol under which the IR-Limited Class A common shares previously traded.
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.
Since the onset of the economic downturn in 2008, we have seen weaker demand for many of our products and services across each of our businesses. Current market conditions continue to impact our financial results. For example, depressed residential and consumer markets are impacting the operating results in our residential HVAC and golf equipment businesses. The residential HVAC business is also being impacted by a mix shift to units with a lower Seasonal Energy Efficiency Rating (SEER). Stagnant building activity is negatively impacting the results of our Security business. However, we have seen sustained recoveries in the worldwide industrial and refrigerated transport markets, global parts and service activity and across most of our businesses in Asia. We believe the North American commercial HVAC market is also slowly recovering. As economic conditions continue to stabilize, we expect modest revenue growth along with the continued benefits of restructuring savings 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.
Significant events in 2011
Dividend Increase and Share Repurchase Program
In April 2011, we increased our quarterly stock dividend from $ 0.07 to $ 0.12 per share beginning with our June 2011 payment. In addition, 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. During the year ended December 31, 2011 , we repurchased 36.3 million shares for approximately $ 1.2 billion . 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.
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. This business, which was previously reported as part of the Security Technologies segment, designs, installs and services security systems. 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 17 to the Consolidated Financial Statements for a further discussion of our discontinued operations.
Divested Operations
On September 30, 2011, we completed a transaction 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). This transaction included the equipment business and certain of the service branches in the U.S. and Canada, and the equipment, service and installation businesses in Mexico, Chile, Australia, New Zealand, and Japan (Hussmann Business). The transaction allowed Hussmann Parent the option to acquire the remaining North American Hussmann service and installation branches (Hussmann Branches). Hussmann Parent completed the acquisition of the Hussmann Branches on November 30, 2011. The Hussmann Business and Branches, which were reported as part of the Climate Solutions segment through their respective transaction dates, manufacture, market, distribute, install, and service refrigerated display merchandising equipment, refrigeration systems, over the counter parts, and other commercial and industrial refrigeration applications.
The assets and liabilities related to the Hussmann Business and Branches are classified as held for sale for all historical periods presented. However, the business does not qualify for treatment as a discontinued operation as the final deal terms included, among other things, an ongoing equity ownership interest by us in Hussmann Parent which now owns the Hussmann Business and Branches. See "Divestitures and Discontinued Operations" within Management's Discussion and Analysis and also Note 17 to the Consolidated Financial Statements for a further discussion of our divested operations.
Venezuela Devaluation
During the fourth quarter of 2009, the blended Consumer Price Index/National Consumer Price Index of Venezuela reached a cumulative three-year inflation rate in excess of 100%. As a result, Venezuela was designated as highly inflationary effective January 1, 2010. Accordingly, the U.S. dollar was determined to be the functional currency of our Venezuelan subsidiaries and all foreign currency fluctuations during 2011 and 2010 have been recorded in Other, net.
At December 31, 2009, we remeasured our foreign currency receivables and payables associated with the Venezuelan Bolivar at the parallel rate of 6.0 Bolivars for each U.S. dollar. This was based on our inability to settle certain transactions through the official government channels in an expeditious manner. Previously, we remeasured all foreign currency transactions at the official rate of 2.15 Bolivars to the U.S. dollar. As a result, we recorded a $ 24 million charge in the fourth quarter of 2009 associated with the devaluation.
On May 17, 2010, the government of Venezuela effectively closed down the parallel market claiming it was a significant cause of inflation in Venezuela. On June 9, 2010, a new parallel market (SITME) opened under control of the Central Bank at which time the Company began utilizing it for currency exchange, subject to any limitations under local regulations. Effective August 2011, we began utilizing the official rate (now 4.29 Bolivars to the U.S. dollar) for re-measurement purposes due to our increased ability to settle transactions at that rate.
Significant events in 2010
Discontinued Operations
On December 30, 2010, we completed the divestiture of our gas microturbine generator business, which was sold under the Energy Systems brand, to Flex Energy, Inc. The business, which was previously reported as part of the Industrial Technologies segment, designs, manufactures, markets, distributes, and services gas powered microturbine generators which feature energy efficient design and low emissions technology. As a result of the sale, we have reported this business as a discontinued operation for all periods presented.
On October 4, 2010, we completed the divestiture of our European refrigerated display case business, which was sold under the KOXKA brand, to an affiliate of American Industrial Acquisition Corporation (AIAC Group). The business, which was previously reported as part of the Climate Solutions segment, designs, manufactures and markets commercial refrigeration equipment through sales branches and a network of distributors throughout Europe, Africa and the Middle East. 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 17 to the Consolidated Financial Statements for a further discussion of our discontinued operations.
Healthcare Reform
In March 2010, the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Bill of 2010 (collectively, the Healthcare Reform Legislation) were signed into law. As a result, effective 2013, the tax benefits available to us will be reduced to the extent our prescription drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program. Although the provisions of the Healthcare Reform Legislation relating to the retiree drug subsidy program do not take effect until 2013, we are required to recognize the full accounting impact in our financial statements in the reporting period in which the Healthcare Reform Legislation is enacted. As retiree healthcare liabilities and related tax impacts are already reflected in our financial statements, the Healthcare Reform Legislation resulted in a non-cash charge to income tax expense in the first quarter of 2010 of $ 40.5 million .
Currently, our retiree medical plans receive the retiree drug subsidy under Medicare Part D. No later than 2014, a significant portion of the drug coverage will be moved to an Employer Group Waiver Plan while retaining the same benefit provisions. This change resulted in an actuarial gain which decreased our December 31, 2010 retiree medical plan liability, as well as the net actuarial losses in other comprehensive income by $ 41.1 million .
We will continue to monitor the Healthcare Reform Legislation to review provisions which could impact our accounting for retiree medical benefits in future periods. We may consider future plan amendments, which may have accounting implications as further regulations are promulgated and interpretations of the legislation become available. Additionally, we continue to monitor the individual market place for post-65 retiree medical coverage and will consider amendments to our health plans, which may have accounting implications on our plans.
The Healthcare Reform Legislation could also impact our accounting for income taxes in future periods. We will continue to assess the accounting implications of the Healthcare Reform Legislation.
Significant events in 2009
In the fourth quarter of 2009, we realigned our external reporting structure to more closely reflect our corporate and business strategies and to promote additional productivity and growth. Our segments are as follows: Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies. As part of the change, we eliminated the Air Conditioning Systems and Services segment which represented the acquired Trane business and created two new reportable segments, the Climate Solutions segment and the Residential Solutions segment.
During 2009, we completed a comprehensive financing program that significantly enhanced our liquidity and debt profile. Significant actions included the repayment of the outstanding balance of our senior unsecured bridge loan facility with the proceeds from the issuance of $ 1.0 billion of long-term debt (Senior Notes and Exchangeable Senior Notes) and the expansion of our Trane accounts receivable purchase program to encompass originators from all four of our business segments. In addition, we reduced our quarterly stock dividend from $ 0.18 per share to $ 0.07 per share, effective with our September 2009 payment. On February 17, 2010, we terminated the expanded accounts receivable purchase program prior to its expiration in March 2010.
In the fourth quarter of 2008, we initiated enterprise-wide restructuring actions in order to streamline both our manufacturing footprint and our general and administrative cost base. We incurred approximately $109.0 million of costs associated with this program during 2009. These combined restructuring actions generated approximately $155 million of annual pretax savings for 2010. We continue to invest in ongoing restructuring activities in an effort to increase efficiencies across all of our businesses.
Operating Income/Margin
Operating margin for the year ended December 31, 2011 decreased to 5.8% from 9.0% for the same period in 2010 . Included in Operating income for 2011 is a $ 646.9 million loss on sale/asset impairment charge related to the divestiture of Hussmann, which had a 4.4 point impact on 2011 operating margin. Excluding the loss on sale/asset impairment, operating margin increased by 1.2 points. The increase was primarily due to improved pricing across all sectors, the realization of benefits resulting from restructuring programs and productivity actions, and higher volumes. These improvements were partially offset by unfavorable revenue mix within our Residential Solutions and Security Technologies segments, as well as increased investment spending and increased material and other costs. Also included in Operating income for 2011 is 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 2011.
Operating margin for the year ended December 31, 2010 increased to 9.0% from 6.8% for the same period in 2009 . The benefit of higher volumes, productivity actions and restructuring programs more than offset the negative effect of increased material costs. Also, included in Operating income was $ 45.3 million of charges associated with ongoing restructuring actions compared to $ 109.0 million recorded in 2009. These costs had a 0.3 point and 0.8 point impact on operating margin in 2010 and 2009 , respectively.
Provision for Income Taxes
The 2011 tax provision of $ 187.2 million included an $ 88.9 million Hussmann related tax benefit. For the year ended December 31, 2011 , the effective tax rate, excluding the Hussmann Loss on sale/asset impairment and the Hussmann related tax benefit, was 21.9% compared to 22.6% in 2010 . The 2011 tax rate was below the U.S. Statutory rate of 35.0% primarily due to earnings in non-U.S. jurisdictions, which, in aggregate, have a lower effective rate and net changes in our valuation allowances, partially offset by the accrual of a previously unrecorded future withholding tax liability and net increases in our liability for unrecognized tax benefits. Included in the 2010 effective rate was a $40.5 million non-cash charge to income tax expense related to the Healthcare Reform Legislation, partially offset by net changes in our valuation allowance.
For the year ended December 31, 2010 , the effective tax rate was 22.6% compared to 13.7% in 2009 . The 2010 tax rate was below the U.S. Statutory rate of 35.0% primarily due to earnings in non-U.S. jurisdictions, which, in aggregate, have a lower effective rate. The 8.9 point increase in the effective rate is primarily the result of a $ 40.5 million non-cash charge to income tax expense related to the Healthcare Reform Legislation as well as changes in geographical mix of earnings, offset by net changes in our valuation allowances.
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 Heating, Ventilation and Air Conditioning (HVAC) throughout the world. Encompassing the transport 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 the Hussmann Business and Branches, respectively, 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 is not reported in Segment operating income. During the year ended December 31, 2011, we recorded a pre-tax loss on sale/asset impairment charge related to the Hussmann divestiture totaling $ 647 million . 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 17 to the Consolidated Financial Statements for a further discussion of our divested operations.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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 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 begin 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 and Asian 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 continue to stabilize, we expect modest 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.
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 pro gram. During the six months ended June 30, 2012 , we repurchased 0.9 million shares for approximately $ 35.0 million . 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). The Hussmann divestiture, which was originally announced on April 21, 2011 and anticipated to be a sale of 100% of our interest in Hussmann, with no retained ongoing interest, met the criteria for classification as held for sale and for treatment as discontinued operations in accordance with GAAP as reported in our first and second quarter of 2011 Form 10-Q filings. During the third quarter of 2011, we negotiated the final terms of the transaction to include our ownership of common stock of Hussmann Parent, which represents significant continuing involvement. Therefore, Hussmann no longer qualified for reporting treatment as a discontinued operation. The results of Hussmann are now 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.
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 six months ended June 30, 2011 , we recorded a pre-tax asset impairment charge related to the Hussmann divestiture totaling $ 200.5 million and $ 386.8 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.
Divestitures and Discontinued Operations
Divested Operations
Hussmann Divestiture
On September 30, 2011, we completed a transaction 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). This transaction included the equipment business and certain of the service branches in the U.S. and Canada, and the equipment, service and installation businesses in Mexico, Chile, Australia, New Zealand, and Japan (Hussmann Business). The final transaction allowed Hussmann Parent the option to acquire the remaining North American Hussmann service and installation branches (Hussmann Branches). Hussmann Parent completed the acquisition of the Hussmann Branches on November 30, 2011. The Hussmann Business and Branches, which are reported as part of the Climate Solutions segment, manufacture, market, distribute, install, and service refrigerated display merchandising equipment, refrigeration systems, over the counter parts, and other commercial and industrial refrigeration applications.
The Hussmann Business divestiture was originally announced on April 21, 2011 and met the criteria for classification as held for sale treatment in accordance with GAAP during the first quarter of 2011. We classified the assets and liabilities of the Hussmann Business as held for sale and reported the results in discontinued operations in the first and second quarter of 2011 Form 10-Q filings. The Company recognized a $ 200.5 million and $ 386.8 million pre-tax impairment loss to write the net assets down to their estimated fair value during the three and six months ended June 30, 2011 , respectively.
During the third quarter of 2011, we negotiated the final transaction to sell the Hussmann Business and Branches to CD&R in exchange for $ 370 million in cash, subject to purchase price adjustments, and common stock of Hussmann Parent, such that following the sale, CD&R would own cumulative convertible participating preferred stock of Hussmann Parent, initially representing 60% of the outstanding capital stock (on an as-converted basis) of Hussmann Parent, and we would own all of the common stock, initially representing the remaining 40% of the outstanding capital stock (on an as-converted basis) of Hussmann Parent. Our ownership of common stock of Hussmann represents significant continuing involvement. Therefore, the results of the Hussmann Business and Branches are included in continuing operations for all periods presented. Based on these terms, we recorded a total pre-tax loss on sale/asset impairment charge of $ 646.9 million during the full year 2011.
CONF CALL
Janet Pfeffer - VP-Business Development & Investor Relations
Thank you, Mary. Good morning, everyone. Welcome to Ingersoll-Rand second quarter 2012 conference call. We released earnings at 7 am this morning and the release is posted on our website. We will be broadcasting, in addition to this call, through our website at ingersollrand.com, where you will find the slide presentation that we will be using this morning.
If you would please go to slide two. Statements made in today's call that are not historical facts are considered forward-looking statements and are pursuant to the Safe Harbor provisions of Federal Securities Law. Please see our SEC filings for a description of some of the factors that may cause actual results to vary from anticipated. This release also contains non-GAAP measures, which are explained in the financial tables attached to our news release.
Now, I would like to introduce the participants on this morning's call. We have Mike Lamach, Chairman and CEO; Steve Shawley, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations.
Please go to slide three, and I’ll turn it over to Mike.
Mike Lamach - Chairman and Chief Executive Officer
Thanks, Janet. Good morning and thank you all for joining us on today. Adjusted earnings per share from continuing operations for the second quarter were $1.15. That's $0.27 above the midpoint of our guidance range of $0.85 to $0.90. I'll breakdown the outperformance in the next slide, but it was about $0.12 from operations, with remainder related for the free tax items.
Particularly given the uneven market environment during the quarter, we were very pleased with our ability to navigate the situation and to deliver above our commitments based on solid operational performance in all the businesses.
Markets were generally in line with our outlook with slow growth environment although we saw deterioration in several overseas markets and somewhat better than expected growth in North America.
U.S. revenue, excluding Hussmann were up 4% in the quarter. The revenues from international operations were up 1% when excluding foreign exchange. Foreign exchange negatively impacted international revenues by 6%.
Focusing on a couple of reasons that I'm sure are of interest to you. Revenues in Western Europe, were down high teens, revenues in China were on a reported basis with increases in industrial offset by lower revenues a Climate and Security. The lower revenues from securities are dependent on the timing of large projects.
In aggregate for the second quarter, we saw flat revenues excluding Hussmann refrigeration business from the 2011 comparison. Revenues excluding foreign exchange were up 3%, excluding FX.
We experienced moderate growth in revenues and industrial and low growth Climate and Security. Residential revenues were up 3% year-over-year. Excluding Hussmann, orders were up 1% and up 3% excluding currency.
Operating margin for the quarter was 12.4%, up 20 basis points versus prior year. If we exclude Hussmann and the property of sale gain from last year, margins in the second quarter were up 70 basis points from second quarter of 2011.
Margins improved from pricing and productivity, partially offset by unfavorable mix, currency and higher restructuring and investment spending year-over-year as we discussed in the April earnings call.
We are particularly encouraged by the results of residential, which were right on forecast and show the 150 basis points in margin improvement. Industrial posted a new record margin level of 17% with margin increases in all regions.
Climate increased margins 100 basis points on a comparable basis even in the face of challenging mix between HVAC and Thermo King. And finally, Security delivered margins of 20% despite some heavy restructuring spend in the quarter continuing soft markets.
All of our businesses continue to realize positive pricing and in the second quarter, our pricing outpaced material inflation for the fifth consecutive quarter. Our focus on operational excellence, which includes pricing, lean, sourcing, functional support and innovation, delivered excellent result in the quarter and enabled us to effectively navigate increasingly volatile global market conditions.
Please go to slide four. We exceeded the midpoint of our guidance of $0.88 by $0.27, $0.12 of that feat was from operations with a $0.01 negative from the combination of price, which was slightly positive, and headwinds and volume, mix of foreign exchange.
Given the volatility in the markets and currency in the quarter, we were pleased with the performance. Productivity inflation were $0.08 better than expectation as the pipelines delivered productivity and we saw moderation of material and other inflation.
Other items such as interest expense and share count netted together came in $0.02 positive. Our underlying tax rate was a couple of points lower in the quarter and you will see that we're carrying that lower rate into the outlook for the balance of the year. That gives you a $0.03 benefit in Q2. That brings the operational EPS to an even dollar.
We have discrete tax items of total $0.15 positive in the quarter was primarily due to our recent tax law change in Spain that enabled us to recognize some loss carry forwards. Interestingly, we were in a position to benefit from that because of some entity restructuring and integration, we had done a couple of years ago. That brings us to $1.15 of earnings.
Again, I am very encouraged by operational outperformance in the face of market currency challenges, which we expect to; continue to present challenges in the second half of the year.
Now, Steve will take you through quarterly results in more detail.
Steve Shawley - Senior Vice President and Chief Financial Officer
Thanks Mike. Please go to slide number five. Orders for the second quarter 2012 were up 1%, overall and 3% excluding currency. Excluding currency, we saw positive year-over-year bookings in all sectors except security, which continues to face challenge markets.
Global commercial HVAC bookings were up low single digits. Transport demand was down, high single digits with a slight increase in North America more than offset by soft European truck trailer orders and lower marine demand.
Industrial orders were up 2% with order growth in all regions partially offset by currency. Residential HVAC and security bookings were up low teens. Commercial Security orders in the quarter were down 10% impacted by the timing of large project orders in Asia as well as slower activity in currency in Europe, while North America was down only slightly.
Please go to slide six. Here is a look at the revenue trends by segment. Note that that the Climate and total data beginning in the fourth quarter of last year excludes Hussmann from the comparisons.
Second quarter revenues were flat versus last year and were up 3% excluding currency. Revenues excluding currency shown on the bottom of the chart gives a better view of our organic growth.
Climate revenues increased 2%. Industrial had moderating growth of 6%. Residential was up 3% and Commercial Security revenues were up 1%. I'll give you more color on each sector in a few slides. On a geographic basis, revenues were up 4% in the U.S. and down 5% in international markets, up 1% internationally, if you exclude foreign exchange.
Please go to slide number seven. This chart walks us through the change in operating margins from second quarter 2011 of 12.3% to second quarter 2012, which was 12.4%. This data excludes Hussmann for comparison purposes.
Volume, negative mix and foreign exchange taken together create a 100-basis point headwind in the margins. Our pricing programs continue to outpace material inflation adding 160 basis points to margin.
Productivity offset other inflation was 110 basis points accretive to the margins. Year-over-year investments in other items were higher by 160 basis points, including a 60-basis point impact from the absence of the gain we recognized last year, when we saw the restructured facility in China. It was also a 30-basis point impact from higher restructuring, increased non-restructuring cost reduction and growth investments had a 70-basis point impact on the quarter.
In the grey box, in the upper right corner, you can see that revenue leverage was during the quarter at 29%. Leverage was 165% when you exclude last year's property sale gain.
Please go to slide number eight. The climate solutions segment includes, Trane commercial HVAC, and some are being transport refrigeration.
Total revenues for the second quarter were almost $2 billion and is down 1% when excluding Hussmann from last year. Revenue was up 2% excluding foreign exchange. Global Commercial HVAC orders were up 2%, with global equipment orders up slightly and Parts and Services up mid-single digits.
Orders were mid-single digits in Americas, but were down in both, Europe and Asia. Trane's commercial HVAC second quarter revenues were up 2%. HVAC revenues in North America and Latin America were mid-single digits.
Revenues in Europe, Middle East were down on a reported basis and flat when excluding currency. Revenues in Asia were flat, up slightly when excluding currency. Commercial HVAC equipment revenues increased low single digits. HVAC parts, services and solutions revenue was up mid-single digits versus prior year.
Thermo King orders were down high single-digits in the second quarter. Revenues were also down high single digits with over half of the decline coming through the currency. Worldwide refrigerator truck and trailer revenues were down mid-single digits with an increase in North America more than offset by declining volume and currency in Europe.
The Marine Container business was down over 20% versus last year. The operating margin for Climate Solutions was 12.1% in the quarter, a 20 basis point decrease versus second quarter 2011, excluding Hussmann, but a 100 basis point improvement when excluding the property gain from the prior year comparison. Price and productivity more than offset inflation, higher restructuring and spending on investment initiatives.
Please go to slide number nine. Industrial Technologies second quarter revenues were $790 million, up 2% on a reported basis and up 6% excluding FX. Air and productivity revenues increased 4% versus last year and were up 8% excluding currency.
Revenue in the Americas was up high-single digits. Although we saw organic growth in all regions, overseas revenues were down on a reported basis with currency. Air and productivity orders were up slightly on a reported basis, and up 6% excluding FX.
Club Car revenues in the quarter were down slightly and orders were up 6% versus prior year. Industrial's operating margin of 70% set a record for the quarter. Margins were up 140 basis points compared with last year's higher revenues pricing and productivity were somewhat offset by inflation, higher investment spending and currency.
Please go to slide number 10. In the residential business second quarter revenues of $653 million, were up 3% compared with last year on both, the reported basis and excluding foreign exchange.
Bookings were up 13% with mid-teen increases in both, HVAC and Security. Our residential HVAC revenues were up slightly versus last year. Unitary, unit shipments were up high-single digits, 13, 14 SEER share of the market was higher than prior year as mix continues to ship to the low end of the range, validating our strategy to add products to address that SEER range more effectively.
We do see some encouraging movement in the past couple of months towards 410A systems. Four R-22 units remained a significant portion of the unitary market. We now believe R-22 market units will be down 5% for the year, which is good news for the industry.
Our R-22 mix will of course be up given our full participation in that part of the market for all of 2012. Revenues for the residential security portion of the sec that were up mid-teens with increases in the new builder channel big box and South American customer volumes.
Sector operating margin of 7.9% was up 150 basis points compared with 2011. Improved pricing and productivity more than offset inflation and adverse mix.
Please go to slide 11. Revenues for Security Technologies were $411 million, down 3% and up 1% excluding currency. America's revenues were up slightly as pricing exceeded lower volume. Overseas revenues were down 8%, mainly from currency. Global bookings were down 10%, primarily impacted by timing of large projects in Asia, in currency. The Americas were down slightly.
Operating margin for the quarter was 20%, down 180 basis points from last year, as productivity and price realization were offset by higher restructuring and investment spending, inflation and unfavorable revenue mix.
Please go to 12. Our focus on working capital was unwavering. We finished the second quarter with working capital of 3.3% of revenues, an improvement of 1.1 percentage points versus the second quarter of 2011, and similar to our performance in the first quarter.
Please go to slide 13. Available cash flow in the second quarter was $228 million. As anticipated; we resumed our share repurchase in June. We repurchased about 900,000 shares in the second quarter. Now, purchased 2.2 million shares through yesterday.
We now expect to spend approximately $800 million on share repurchase this year. With that spend, we would complete our current $2 billion authorization. With the increased repurchases, we are updating our expected average diluted share count for the year from $315 million to $311 million shares.
Given our solid balance sheet and cash flow performance, we will probably go to the board for another review of the dividend late this year similar to last year, and also look to re-up the share repurchase authorization at that time.
With that I will turn it back to Mike to take you through the forecast.
Mike Lamach - Chairman and Chief Executive Officer
Okay. Thanks, Steve. Let's go to slide 14. Our revenue outlook for 2012 is $14 billion to $14.2 billion, $100 million lower at the midpoint versus our prior guidance due to currency and softer markets in Europe and Asia.
We had a very subdued view of Europe entering into the year. We expected it to be down even that constant currency for the year. It's gotten marginally worst in the past couple of months which caused us to reduce our forecast for Western Europe.
We have seen improved results in the Middle East and Eastern Europe, which should be helping to offset that softness. We've seen increases in our Climate, Security and ITS. Overall, we now expect revenues from Europe, Middle East, India and Africa taking the go to be down in the low to mid-teens including currency impact.
Asia specifically, China has been somewhat softer than our prior forecast. Although we still expect Asia to be out for the year, we had trimmed the revenue growth expectations by about 5 percentage points for the mid-teens to the high single-digits.
Activity in the U.S. has been little stronger in commercial HVAC and industrial refrigerator transport markets are expected to have moderate year-over-year growth in North America and the decline in Western Europe. We see continuing slow growth in residential markets, where we have had some positive movement in replacement systems.
As Steve said, we expect R-22 and low-SEER units to remain a significant of the portion of the market in 2012. For commercial security, we expect to see a continuation of challenging conditions in the U.S. non-residential new construction market for the next year, particularly in our key institutional markets. Additionally, foreign exchange will continue to be a headwind in 2012 adversely impacting growth by about two points.
In total, we expect annual revenues to be flat to up 2%, compared with 2011 revenue of $14 billion, excluding Hussmann. Excluding FX, the organic growth rate is 2% to 4%.
Please go to slide 15. We are updating our full-year EPS from continuing operations guidance to a range of $3.15 to $3.25, an increase of $0.20 at the midpoint. $0.15 of increase comes from the tax discrete you saw on second quarter. We expect there to be another $0.02 positive of discrete tax benefit between the third quarter and fourth quarter. It will be positive $0.08 from third and $0.06 negative in the fourth quarter. It will net the $0.02 positive.
We are flowing those through for the year. Remaining $0.03 of the net impact of the lower share count, given our increased repurchases and lower ongoing tax rate partially offset by the impact from the lower revenue forecast. Based on our forecast, we continue to expect to generate available cash flow of about $1.1 billion.
Third quarter revenues are forecast to be $3.6 billion to $3.7 billion. Revenues on a comparable basis, including Hussmann are forecast to be flat to up 2% versus the third quarter of 2011. That includes FX, which will be a headwind of about three points. That means including foreign exchange revenues will be up 3% and 5%.
Third quarter earnings per share are forecast to be $0.95 to $1. We're assuming share count 311 million shares and tax rate of 17%. That rate reflects an ongoing rate of 23% as well as the impact of the estimated positive discrete tax item of $26 million, which then brings the rate down to the 17%.
Please go to slide 16. We're pleased to have delivered a solid second quarter. We had strong overall operational leverage and margin gains and commercial HVAC and our Residential and Industrial businesses.
For the balance of 2012, we see mixed demand patterns with steady, slow growth in North America, declining markets in Europe and slowing growth in Asia. Currency translation will continue to impact our second half results. We will get ongoing benefit from price and lower inflation.
We're focused on continued change and improvements; ensure that we are managing our business optimally across the spectrum of economic conditions. Our focus is on positioning our company to continue to grow consolidated earnings and cash flow with very little help or possibly no help from revenue growth.
We continue to feel good about our progress. We have a portfolio of outstanding market-leading brands. We continue to demonstrate our ability to generate high levels of cash flow even in the face of a challenging backdrop. The longer term attractiveness of the end markets in which we operate and our competitive positioning will allow us to befit of those sectors if economy improve. Our management team is committed and is actually managing the company to generate sustainable, profitable growth.
As I said before, we are not waiting for macroeconomic lift to improve our businesses, so we're practically working to reduce cost and invest in our growth markets.
Now, Steve and I will be happy to take your questions.
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