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From The Survey: Ingersoll-Rand
Ingersoll-Rand (IR), the 12th oldest continually listed company on the New York Stock Exchange, comes from humble beginnings as a machinery manufacturer. Its roots can be traced back to the late 19th century, and the conglomerate now operates across a diverse group of global business platforms. Last year, the company’s products and services reached customers in more than 100 countries.
In 1871, Simon Ingersoll patented his design for a steam-powered rock drill. His invention, however, was considered ineffective until Henry Sergeant replaced steam with a compressed air operating system a few years later. Sergeant, who financed the original blueprints, purchased the rights to Ingersoll’s patents and effectively cut the designer out of any profits that accumulated from selling their drills to the New York Construction industry. Around the same time, and in the same city, Addison Rand founded a firm to develop a similar machine for his brother’s mining company. It did not take long before both businesses grew into well-established enterprises. Indeed, their products played a part in both the Panama Canal and Mount Rushmore projects.
The Ingersoll-Sergeant Drill Company, as it became known in 1888, and the Rand Drill Company merged in 1905 after both were purchased by members of the Grace family. Within its first five years, the newly formed Ingersoll-Rand Company broadened its reach by attaining the Imperial Pneumatic Tool Company and A.S. Cameron Steam Pump Works. Not long after, it acquired J.G. Leyner Engineering Works Company and Ingersall-Rand began mass production of its invention – the jackhammer drill.
Ingersoll-Rand has stuck with its philosophy of expansion through acquisitions ever since. Now headquartered in Ireland, the $14 billion-a-year conglomerate is made up of market-leading brands that reach a global customer base. Products range from decorative hardware to security systems.
Business Breakdown By Segment
The Climate Solutions sector provides a range of products and services to manage temperature environments and is the company’s largest source of revenue. It consists of well-known names like Trane, which provides heating, ventilation, air conditioning (HVAC) systems, building services, and advanced temperature controls for homes and commercial buildings. Thermo King, a prominent brand in transport temperature control, also makes a significant contribution to the business.
The Industrial Technologies segment offers a wide assortment of products that surround a customer’s energy usage. This includes Club Car, a leading provider of golf carts and utility vehicles, as well as traditional power tools, pumps, compressed air systems, and solutions to minimize energy costs.
Residential Solutions include mechanical and electric locks, portable security systems, remote home management, and parts of Trane’s heating and air conditioning products to provide homeowners with safety and comfort.
The smallest branch in term of sales and earnings is the Securities Technologies brands. However, the breadth of products that are classified within the unit is extensive, ranging from exit devices and steel doors to biometric access control systems.
Trimming the Fat
Over the past two years, Ingersoll-Rand has been bolstering its business by focusing on core markets. Likewise, IR may prune its portfolio to increase shareholder value. The company sold the majority of its Hussmann business to a private equity firm in September of 2011 for $370 million in order to expedite a share repurchase program. The deal left Ingersoll-Rand with a 40% stake in the operation. Additionally, the board approved plans to spin off the commercial and residential security businesses. This will allow both Ingersoll-Rand and the new security company more flexibility with their capital resources to execute growth strategies. The separation should be completed by the end of 2013, and management expects the top line to fall around 15% during the following year as a result. However, because the transaction includes parts of two segments, we would not be surprised if it takes longer to incorporate the new company.
Underperforming revenue growth is largely attributable to the current lackluster economic environment. Industrial sluggishness in the United States and pronounced weakness in Europe have impacted HVAC revenues, which declined slightly in the March, 2013 quarter compared to the same period last year. However, management’s commitment to enhancing operating efficiencies has been impressive. We are looking for improved annual margins across all core businesses during the next two years, despite the likely lethargic recovery scenario in mature economies.
That said, it is important to consider each end market that the diversified global corporation touches. Fortunately for Ingersoll, the hodgepodge of industries and geographic locations it serves has helped to mitigate any negative impact that a single sector could have had on consolidated earnings. The company has frequently turned to divestitures in order to fund purchases that better align operations with stability and growth initiatives. For example, management gave up its Road Development Business and part of its Utility and Attachments business to finance the $10.1 billion Trane deal in 2007.
The equity should appeal to a variety of portfolios. Quarterly dividends have increased for three consecutive years (an annual dividend has been paid since 1910), the Board recently gave the thumbs up to a $2 billion buyback program, and adjusted operating margins should improve with the greater economic picture. Clearly, management is responding to pressure from institutional investors.
It will be interesting to see where management focuses funds after the commercial and residential security spinoff is completed. Ingersoll has a number of options, but we anticipate that additions to the Residential Solutions unit and returning a steady stream of capital to shareholders sit atop the list.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.