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EX-31.2 - EXHIBIT 31.2 - Trane Technologies plcir-10qx09302018xex312xq3.htm
EX-32 - EXHIBIT 32 - Trane Technologies plcir-10qx09302018xex32xq3.htm
EX-31.1 - EXHIBIT 31.1 - Trane Technologies plcir-10qx09302018xex311xq3.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________
FORM 10-Q
_______________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-34400
_____________________________ 
INGERSOLL-RAND PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
_______________________________
Ireland
98-0626632
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
170/175 Lakeview Dr.
Airside Business Park
Swords, Co. Dublin
Ireland
(Address of principal executive offices, including zip code)
+(353) (0) 18707400
(Registrant’s telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  x   NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
 
 
Emerging growth company
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x
The number of ordinary shares outstanding of Ingersoll-Rand plc as of October 12, 2018 was 245,656,287.



INGERSOLL-RAND PLC
FORM 10-Q
INDEX

 
 
 
 
 
 
Item 1 -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2 -
 
 
 
Item 3 -
 
 
 
Item 4 -
 
 
 
 
 
Item 1 -
 
 
 
Item 1A -
 
 
 
Item 2 -
 
 
 
Item 6 -
 
 




PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements

INGERSOLL-RAND PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
In millions, except per share amounts
2018
 
2017
 
2018
 
2017
Net revenues
$
4,030.9

 
$
3,670.5

 
$
11,773.1

 
$
10,579.5

Cost of goods sold
(2,718.3
)
 
(2,489.9
)
 
(8,102.6
)
 
(7,269.1
)
Selling and administrative expenses
(725.6
)
 
(674.5
)
 
(2,199.8
)
 
(2,031.7
)
Operating income
587.0

 
506.1

 
1,470.7

 
1,278.7

Interest expense
(48.5
)
 
(53.9
)
 
(171.7
)
 
(162.0
)
Other income/(expense), net
(8.5
)
 
(7.6
)
 
(16.0
)
 
(23.8
)
Earnings before income taxes
530.0

 
444.6

 
1,283.0

 
1,092.9

Benefit (provision) for income taxes
1.1

 
(76.4
)
 
(159.9
)
 
(243.2
)
Earnings from continuing operations
531.1

 
368.2

 
1,123.1

 
849.7

Discontinued operations, net of tax
(11.7
)
 
3.7

 
(27.0
)
 
5.5

Net earnings
519.4

 
371.9

 
1,096.1

 
855.2

Less: Net earnings attributable to noncontrolling interests
(4.3
)
 
(4.9
)
 
(12.5
)
 
(12.5
)
Net earnings attributable to Ingersoll-Rand plc
$
515.1

 
$
367.0

 
$
1,083.6

 
$
842.7

Amounts attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
 
 
 
 
Continuing operations
$
526.8

 
$
363.3

 
$
1,110.6

 
$
837.2

Discontinued operations
(11.7
)
 
3.7

 
(27.0
)
 
5.5

Net earnings
$
515.1

 
$
367.0

 
$
1,083.6

 
$
842.7

Earnings (loss) per share attributable to Ingersoll-Rand plc
ordinary shareholders:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
2.14

 
$
1.43

 
$
4.48

 
$
3.27

Discontinued operations
(0.05
)
 
0.02

 
(0.11
)
 
0.02

Net earnings
$
2.09

 
$
1.45

 
$
4.37

 
$
3.29

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
2.11

 
$
1.41

 
$
4.43

 
$
3.22

Discontinued operations
(0.05
)
 
0.02

 
(0.11
)
 
0.02

Net earnings
$
2.06

 
$
1.43

 
$
4.32

 
$
3.24

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
246.4

 
253.3

 
248.1

 
256.4

Diluted
249.5

 
256.7

 
250.9

 
259.7

Dividends declared per ordinary share
$

 
$
0.45

 
$
1.43

 
$
1.25

 
 
 
 
 
 
 
 
Total comprehensive income
$
504.0

 
$
488.5

 
$
952.2

 
$
1,267.8

Less: Total comprehensive income attributable to noncontrolling interests
4.1

 
4.7

 
9.6

 
11.5

Total comprehensive income attributable to Ingersoll-Rand plc
$
499.9

 
$
483.8

 
$
942.6

 
$
1,256.3

See accompanying notes to Condensed Consolidated Financial Statements.

1


INGERSOLL-RAND PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
In millions
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,022.5

 
$
1,549.4

Accounts and notes receivable, net
2,752.1

 
2,477.4

Inventories, net
1,821.4

 
1,555.4

Other current assets
486.6

 
536.9

Total current assets
6,082.6

 
6,119.1

Property, plant and equipment, net
1,673.4

 
1,551.3

Goodwill
5,989.0

 
5,935.7

Intangible assets, net
3,679.7

 
3,742.9

Other noncurrent assets
879.8

 
824.3

Total assets
$
18,304.5

 
$
18,173.3

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,748.7

 
$
1,556.1

Accrued compensation and benefits
504.4

 
509.7

Accrued expenses and other current liabilities
1,720.3

 
1,655.2

Short-term borrowings and current maturities of long-term debt
350.6

 
1,107.0

Total current liabilities
4,324.0

 
4,828.0

Long-term debt
3,739.8

 
2,957.0

Postemployment and other benefit liabilities
1,207.4

 
1,285.3

Deferred and noncurrent income taxes
610.2

 
757.5

Other noncurrent liabilities
1,079.9

 
1,138.6

Total liabilities
10,961.3

 
10,966.4

Equity:
 
 
 
Ingersoll-Rand plc shareholders’ equity:
 
 
 
Ordinary shares
270.1

 
274.0

Ordinary shares held in treasury, at cost
(1,719.4
)
 
(1,719.4
)
Capital in excess of par value
52.4

 
461.3

Retained earnings
9,624.8

 
8,903.2

Accumulated other comprehensive income (loss)
(919.8
)
 
(778.8
)
Total Ingersoll-Rand plc shareholders’ equity
7,308.1

 
7,140.3

Noncontrolling interests
35.1

 
66.6

Total equity
7,343.2

 
7,206.9

Total liabilities and equity
$
18,304.5

 
$
18,173.3

See accompanying notes to Condensed Consolidated Financial Statements.


2


INGERSOLL-RAND PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months ended
 
September 30,
In millions
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
1,096.1

 
$
855.2

Discontinued operations, net of tax
27.0

 
(5.5
)
Adjustments for non-cash transactions:
 
 
 
Asset impairment

 
8.4

Depreciation and amortization
273.0

 
261.9

Gain on sale of joint venture

 
(1.5
)
Changes in assets and liabilities, net
(573.8
)
 
(391.0
)
Other non-cash items, net
124.1

 
163.3

Net cash provided by (used in) continuing operating activities
946.4

 
890.8

Net cash provided by (used in) discontinued operating activities
(49.0
)
 
(17.6
)
Net cash provided by (used in) operating activities
897.4

 
873.2

Cash flows from investing activities:
 
 
 
Capital expenditures
(251.2
)
 
(149.9
)
Acquisitions and equity method investments, net of cash acquired
(281.5
)
 
(60.3
)
Other investing activities, net
12.1

 
3.8

Net cash provided by (used in) continuing investing activities
(520.6
)
 
(206.4
)
Cash flows from financing activities:
 
 
 
Short-term borrowings (payments), net
(6.4
)
 
(4.0
)
Proceeds from long-term debt
1,147.0

 

Payments of long-term debt
(1,122.9
)
 
(7.6
)
Net proceeds (repayments) from debt
17.7

 
(11.6
)
Debt issuance costs
(12.0
)
 
(0.2
)
Dividends paid to ordinary shareholders
(351.2
)
 
(318.0
)
Dividends paid to noncontrolling interests
(41.1
)
 
(15.5
)
Acquisition of noncontrolling interest

 
(6.8
)
Repurchase of ordinary shares
(514.1
)
 
(911.1
)
Other financing activities, net
31.8

 
40.7

Net cash provided by (used in) continuing financing activities
(868.9
)
 
(1,222.5
)
Effect of exchange rate changes on cash and cash equivalents
(34.8
)
 
100.0

Net increase (decrease) in cash and cash equivalents
(526.9
)
 
(455.7
)
Cash and cash equivalents - beginning of period
1,549.4

 
1,714.7

Cash and cash equivalents - end of period
$
1,022.5

 
$
1,259.0

See accompanying notes to Condensed Consolidated Financial Statements.

3


INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ingersoll-Rand plc (Plc or Parent Company), a public limited company incorporated in Ireland in 2009, and its consolidated subsidiaries (collectively, the Company), reflect the consolidated operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission (SEC) interim reporting requirements. Accordingly, the accompanying condensed consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP) for full financial statements and should be read in conjunction with the consolidated financial statements included in the Ingersoll-Rand plc Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary to fairly state the condensed consolidated results for the interim periods presented. Certain reclassifications of amounts reported in prior periods have been made to conform with the current period presentation.
Note 2. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) Accounting Standards Codification is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update (ASU) to communicate changes to the codification. The Company considers the applicability and impact of all ASU's. ASU's not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.
Recently Adopted Accounting Pronouncements
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (ASU 2016-16) which removed the prohibition in Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. As a result, the income tax consequences of an intra-entity transfer of assets other than inventory will be recognized in the current period income statement rather than being deferred until the assets leave the consolidated group. The Company applied ASU 2016-16 on a modified retrospective basis through a cumulative-effect adjustment which reduced Retained earnings by $9.1 million as of January 1, 2018.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (ASC 606), which created a comprehensive, five-step model for revenue recognition that requires a company to recognize revenue to depict the transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Under ASC 606, a company will be required to use more judgment and make more estimates when considering contract terms as well as relevant facts and circumstances when identifying performance obligations, estimating the amount of variable consideration in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted this standard on January 1, 2018 using the modified retrospective approach and recorded a cumulative effect adjustment to increase Retained earnings by $2.4 million with related amounts not materially impacting Net revenuesOperating income or the Balance Sheet. Refer to Note 11, “Revenue,” for a further discussion on the adoption of ASC 606.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract" (ASU 2018-15), which aligns the requirements for capitalizing implementation costs in a cloud-computing arrangement service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. In addition, the guidance also clarifies the presentation requirements for reporting such costs in the financial statements. ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted. The Company is currently assessing the impact of the ASU on its financial statements.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02), which allows companies to reclassify stranded tax effects in Accumulated other comprehensive income (loss) that have been caused by the Tax Cuts and Jobs Act of 2017 (the Act) to Retained earnings for each period in which the effect of the change in the U.S. federal corporate income tax rate is recorded. The FASB has made the reclassification optional. ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is currently assessing the impact of the ASU on its financial statements and whether or not it will exercise the option to reclassify the stranded tax effects caused by the Act.

4


In August 2017, the FASB issued ASU 2017-12, "Derivatives and hedging (Topic 815): Targeted improvements to accounting for hedging activities" (ASU 2017-12). This standard more closely aligns the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. This standard also addresses specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. Additionally, by aligning the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges, and by including the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is presented, the results of an entity’s hedging program and the cost of executing that program will be more visible to users of financial statements. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018 with early adoption permitted. The Company adopted this standard on October 1, 2018 with no material impact to the financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases" (ASU 2016-02), which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The standard also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, which provides an additional transition method to adopt ASU 2016-02. Under the new transition method, an entity initially applies the new leases standard at the adoption date versus at the beginning of the earliest period presented and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected to use this transition method at the adoption date of January 1, 2019. The Company continues to execute on its implementation plan to derive the impact of the ASU on its financial statements and expects to disclose the amount in its 2018 Form 10-K. The adoption is anticipated to have a material impact on assets and liabilities due to the recognition of lease rights and obligations on the Balance Sheet effective January 1, 2019. However, the Company does not expect the adoption to have a material impact to its Statement of Cash Flows or Statement of Comprehensive Income.
Note 3. Inventories
Depending on the business, U.S. inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method or the lower of cost or market using the first-in, first-out (FIFO) method. Non-U.S. inventories are primarily stated at the lower of cost or market using the FIFO method.
The major classes of inventory were as follows:
In millions
September 30,
2018
 
December 31,
2017
Raw materials
$
563.1

 
$
502.8

Work-in-process
220.1

 
180.5

Finished goods
1,108.7

 
941.0

 
1,891.9

 
1,624.3

LIFO reserve
(70.5
)
 
(68.9
)
Total
$
1,821.4

 
$
1,555.4

The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. Reserve balances, primarily related to obsolete and slow-moving inventories, were $120.9 million and $120.3 million at September 30, 2018 and December 31, 2017, respectively.
Note 4. Goodwill
The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired in a business combination. Measurement period adjustments may be recorded once a final valuation has been performed. Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.

5


The changes in the carrying amount of goodwill for the nine months ended September 30, 2018 were as follows:
In millions
Climate
 
Industrial
 
Total
Net balance as of December 31, 2017
$
5,065.1

 
$
870.6

 
$
5,935.7

Acquisitions (1)
114.3

 
1.8

 
116.1

Currency translation
(56.0
)
 
(6.8
)
 
(62.8
)
Net balance as of September 30, 2018
$
5,123.4

 
$
865.6

 
$
5,989.0

(1) Refer to Note 16, "Acquisitions and Divestitures" for more information regarding acquisitions during the period.
The net goodwill balances at September 30, 2018 and December 31, 2017 include $2,496.0 million of accumulated impairment. The accumulated impairment relates entirely to a charge in the fourth quarter of 2008 associated with the Climate segment.
Note 5. Intangible Assets
Indefinite-lived intangible assets are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. All other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives.
The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:
 
 
September 30, 2018
 
December 31, 2017
In millions
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Completed technologies/patents
 
$
207.9

 
$
(181.5
)
 
$
26.4

 
$
209.4

 
$
(177.3
)
 
$
32.1

Customer relationships
 
2,098.6

 
(1,148.1
)
 
950.5

 
2,068.9

 
(1,056.9
)
 
1,012.0

Other
 
84.7

 
(52.6
)
 
32.1

 
93.9

 
(52.7
)
 
41.2

Total finite-lived intangible assets
 
2,391.2

 
(1,382.2
)
 
1,009.0

 
2,372.2

 
(1,286.9
)
 
1,085.3

Trademarks (indefinite-lived)
 
2,670.7

 

 
2,670.7

 
2,657.6

 

 
2,657.6

Total
 
$
5,061.9

 
$
(1,382.2
)
 
$
3,679.7

 
$
5,029.8

 
$
(1,286.9
)
 
$
3,742.9

Intangible asset amortization expense was $34.7 million and $33.3 million for the three months ended September 30, 2018 and 2017, respectively. Intangible asset amortization expense was $105.1 million and $98.1 million for the nine months ended September 30, 2018 and 2017, respectively.
Note 6. Debt and Credit Facilities
Short-term borrowings and current maturities of long-term debt consisted of the following:
In millions
September 30,
2018
 
December 31,
2017
Debentures with put feature
$
343.0

 
$
343.0

6.875% Senior notes due 2018 (1)


749.6

Other current maturities of long-term debt
7.6

 
7.7

Short-term borrowings

 
6.7

Total
$
350.6

 
$
1,107.0

(1) During the first quarter of 2018, the Company redeemed its 6.875% senior notes due 2018.
Commercial Paper Program
The Company uses borrowings under its commercial paper program for general corporate purposes. The maximum aggregate amount of unsecured commercial paper notes available to be issued, on a private placement basis, under the commercial paper program is $2.0 billion as of September 30, 2018. The Company had no outstanding balance under its commercial paper program as of September 30, 2018 and December 31, 2017.

6


Debentures with Put Feature
At September 30, 2018 and December 31, 2017, the Company had $343.0 million of fixed rate debentures outstanding which contain a put feature that the holders may exercise on each anniversary of the issuance date.  If exercised, the Company is obligated to repay in whole or in part, at the holder’s option, the outstanding principal amount of the debentures plus accrued interest. If these options are not exercised, the final contractual maturity dates would range between 2027 and 2028. Holders of these debentures had the option to exercise the put feature on $37.2 million of the outstanding debentures in February 2018, subject to the notice requirement. No material exercises were made.
Long-term debt, excluding current maturities, consisted of the following:
In millions
September 30,
2018
 
December 31,
2017
2.875% Senior notes due 2019 (1)

 
349.4

2.625% Senior notes due 2020
299.3

 
298.9

2.900% Senior notes due 2021
298.1

 

9.000% Debentures due 2021
124.9

 
124.9

4.250% Senior notes due 2023
697.0

 
696.5

7.200% Debentures due 2019-2025
44.8

 
52.3

3.550% Senior notes due 2024
495.7

 
495.2

6.480% Debentures due 2025
149.7

 
149.7

3.750% Senior notes due 2028
544.3

 

5.750% Senior notes due 2043
494.2

 
494.0

4.650% Senior notes due 2044
295.7

 
295.6

4.300% Senior notes due 2048
295.8

 

Other loans and notes
0.3

 
0.5

Total
$
3,739.8

 
$
2,957.0

(1) During the first quarter of 2018, the Company redeemed its 2.875% senior notes due 2019.
Issuance and Redemption of Senior Notes
In February 2018, the Company issued $1.15 billion principal amount of senior notes in three tranches through an indirect, wholly-owned subsidiary. The tranches consist of $300 million aggregate principal amount of 2.900% senior notes due 2021, $550 million aggregate principal amount of 3.750% senior notes due 2028 and $300 million aggregate principal amount of 4.300% senior notes due 2048. The notes are fully and unconditionally guaranteed by each of Ingersoll Rand plc, Ingersoll-Rand Irish Holdings Unlimited Company, Ingersoll-Rand Lux International Holding Company S.à.r.l, Ingersoll-Rand Company and Ingersoll-Rand Luxembourg Finance S.A. The Company has the option to redeem the notes in whole or in part at any time, prior to their stated maturity date at redemption prices set forth in the indenture agreement. The notes are subject to certain customary covenants, however, none of these covenants are considered restrictive to the Company’s operations. In March 2018, the Company used the proceeds to fund the redemption of $750 million aggregate principal amount of 6.875% senior notes due 2018 and $350 million aggregate principal amount of 2.875% senior notes due 2019, with the remainder used for general corporate purposes. As a result of the early redemption, the Company recognized $15.4 million of premium expense and $1.2 million of unamortized costs in Interest expense.
Other Credit Facilities
The Company maintains two 5-year, $1.0 billion revolving credit facilities (the Facilities) through its wholly-owned subsidiaries, Ingersoll-Rand Global Holding Company Limited and Ingersoll-Rand Luxembourg Finance S.A. (collectively, the Borrowers). Each senior unsecured credit facility provides support for the Company's commercial paper program and can be used for working capital and other general corporate purposes. Ingersoll-Rand plc, Ingersoll-Rand Irish Holdings Unlimited Company, Ingersoll-Rand Lux International Holding Company S.à.r.l. and Ingersoll-Rand Company each provide irrevocable and unconditional guarantees for these Facilities.  In addition, each Borrower will guarantee the obligations under the Facilities of the other Borrower. Total commitments of $2.0 billion were unused at September 30, 2018 and December 31, 2017. On April 17, 2018, the Company entered into a new 5-year, $1.0 billion senior unsecured credit facility and terminated its 5-year, $1.0 billion facility set to expire in March 2019. As a result, the current maturity dates of the Facilities are March 2021 and April 2023.

7


Fair Value of Debt
The carrying value of the Company's short-term borrowings is a reasonable estimate of fair value due to the short-term nature of the instruments. The fair value of the Company's debt instruments at September 30, 2018 and December 31, 2017 was $4.2 billion and $4.4 billion, respectively. The Company measures the fair value of its long-term debt instruments for disclosure purposes based upon observable market prices quoted on public exchanges for similar assets. These fair value inputs are considered Level 2 within the fair value hierarchy. The methodologies used by the Company to determine the fair value of its long-term debt instruments at September 30, 2018 are the same as those used at December 31, 2017.
Note 7. Financial Instruments
In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors. These fluctuations can increase the cost of financing, investing and operating the business. The Company may use various financial instruments, including derivative instruments, to manage the risks associated with interest rate and currency rate exposures. These financial instruments are not used for trading or speculative purposes.
On the date a derivative contract is entered into, the Company designates the derivative instrument as a cash flow hedge of a forecasted transaction or as an undesignated derivative. The Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.
The Company assesses at inception, and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are highly effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be a highly effective hedge, the fair market value changes of the instrument are recorded in Accumulated other comprehensive income (AOCI). Any ineffective portion of a derivative instrument’s change in fair value is recorded in Net earnings in the period of change. If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in Net earnings.
The fair values of derivative instruments included within the Condensed Consolidated Balance Sheets were as follows:
 
Derivative assets
 
Derivative liabilities
In millions
September 30,
2018
 
December 31,
2017
 
September 30,
2018
 
December 31,
2017
Derivatives designated as hedges:
 
 
 
 
 
 
 
Currency derivatives designated as hedges
$
0.1

 
$

 
$
1.6

 
$
1.3

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Currency derivatives not designated as hedges
2.4

 
7.2

 
1.0

 
1.2

Total derivatives
$
2.5

 
$
7.2

 
$
2.6

 
$
2.5

Asset and liability derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities, respectively.
Currency Derivative Instruments
The notional amount of the Company’s currency derivatives was $0.5 billion and $0.7 billion at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, a net loss of $1.3 million and a net gain of $1.2 million, net of tax, respectively, was included in AOCI related to the fair value of the Company’s currency derivatives designated as accounting hedges. The amount expected to be reclassified into Net earnings over the next twelve months is a loss of $1.3 million. The actual amounts that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions. Gains and losses associated with the Company’s currency derivatives not designated as hedges are recorded in Net earnings as changes in fair value occur. At September 30, 2018, the maximum term of the Company’s currency derivatives was approximately 12 months.
Other Derivative Instruments
Prior to 2015, the Company utilized forward-starting interest rate swaps and interest rate locks to manage interest rate exposure in periods prior to the anticipated issuance of certain fixed-rate debt. These instruments were designated as cash flow hedges and had a notional amount of $1.3 billion. Consequently, when the contracts were settled upon the issuance of the underlying debt, any realized gains or losses in the fair values of the instruments were deferred into AOCI. These deferred gains or losses are

8


subsequently recognized in Interest expense over the term of the related notes. The net unrecognized gain in AOCI was $6.8 million at September 30, 2018 and $6.6 million at December 31, 2017. The net deferred gain at September 30, 2018 will continue to be amortized over the term of notes with maturities ranging from 2023 to 2044. The amount expected to be amortized over the next twelve months is a net gain of $0.7 million. The Company has no forward-starting interest rate swaps or interest rate lock contracts outstanding at September 30, 2018 or December 31, 2017.

The following table represents the amounts associated with derivatives designated as hedges affecting Net earnings and AOCI for the three months ended September 30:
  
Amount of gain (loss)
recognized in AOCI
 
Location of gain (loss) reclassified from
AOCI and recognized
into Net earnings
 
Amount of gain (loss)
reclassified from AOCI and
recognized into Net earnings
In millions
2018
 
2017
 
 
2018
 
2017
Currency derivatives designated as hedges
$
(1.9
)
 
$
(0.7
)
 
Cost of goods sold
 
$
(0.1
)
 
$
(1.3
)
Interest rate swaps & locks

 

 
Interest expense
 
0.2

 
(0.1
)
Total
$
(1.9
)
 
$
(0.7
)
 
 
 
$
0.1

 
$
(1.4
)
The following table represents the amounts associated with derivatives not designated as hedges affecting Other income/(expense), net for the three months ended September 30:
  
 
Amount of gain (loss)         
recognized in Net earnings
In millions
2018
 
2017
Currency derivatives not designated as hedges
 
$
(6.0
)
 
$
14.5

Total
 
$
(6.0
)
 
$
14.5

The following table represents the amounts associated with derivatives designated as hedges affecting Net earnings and AOCI for the nine months ended September 30:
  
Amount of gain (loss)
recognized in AOCI
 
Location of gain (loss) reclassified from
AOCI and recognized
into Net earnings
 
Amount of gain (loss)
reclassified from AOCI and
recognized into Net earnings
In millions
2018
 
2017
 
 
2018
 
2017
Currency derivatives designated as hedges
$
(0.5
)
 
$
(1.3
)
 
Cost of goods sold
 
$
(0.4
)
 
$
(2.0
)
Interest rate swaps & locks

 

 
Interest expense
 
(0.2
)
 
(0.4
)
Total
$
(0.5
)
 
$
(1.3
)
 

 
$
(0.6
)
 
$
(2.4
)
The following table represents the amounts associated with derivatives not designated as hedges affecting Other income/(expense), net for the nine months ended September 30:
  
 
Amount of gain (loss)
recognized in Net earnings
In millions
2018
 
2017
Currency derivatives not designated as hedges
 
$
(29.1
)
 
$
48.3

Total
 
$
(29.1
)
 
$
48.3

The gains and losses associated with the Company’s undesignated currency derivatives are materially offset in Other income/(expense), net by changes in the fair value of the underlying transactions.

Concentration of Credit Risk
The counterparties to the Company’s forward contracts consist of a number of investment grade major international financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However, the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no significant credit risk to the Company.

9


Note 8. Fair Value Measurements
ASC 820, "Fair Value Measurement," (ASC 820) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:
In millions
Fair Value
 
Fair value measurements
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivative instruments
$
2.5

 
$

 
$
2.5

 
$

Liabilities:
 
 
 
 
 
 
 
Derivative instruments
$
2.6

 
$

 
$
2.6

 
$

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
In millions
Fair Value
 
Fair value measurements
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivative instruments
$
7.2

 
$

 
$
7.2

 
$

Liabilities:
 
 
 
 
 
 
 
Derivative instruments
$
2.5

 
$

 
$
2.5

 
$

Derivative instruments include forward foreign currency contracts and instruments related to non-functional currency balance sheet exposures. The fair value of the derivative instruments are determined based on a pricing model that uses spot rates and forward prices from actively quoted currency markets that are readily accessible and observable.
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. These methodologies used by the Company to determine the fair value of its financial assets and liabilities at September 30, 2018 are the same as those used at December 31, 2017. There have been no transfers between levels of the fair value hierarchy.
Note 9. Pensions and Postretirement Benefits Other than Pensions
The Company sponsors several U.S. defined benefit and defined contribution plans covering substantially all of the Company's U.S. employees. Additionally, the Company has many non-U.S. defined benefit and defined contribution plans covering eligible non-U.S. employees. Postretirement benefits other than pensions (OPEB) provide healthcare benefits, and in some instances, life insurance benefits for certain eligible employees.
Pension Plans
The noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits on a final average pay formula while plans for most collectively bargained U.S. employees provide benefits on a flat dollar benefit formula or a percentage of pay formula. The non-U.S. pension plans generally provide benefits based on earnings and years of service. The Company also maintains additional other supplemental plans for officers and other key or highly compensated employees.

10


The components of the Company’s net periodic pension benefit cost for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Service cost
$
19.0

 
$
17.1

 
$
54.8

 
$
52.8

Interest cost
27.4

 
27.3

 
81.3

 
81.3

Expected return on plan assets
(36.7
)
 
(35.6
)
 
(110.3
)
 
(106.0
)
Net amortization of:
 
 
 
 
 
 
 
Prior service costs
1.1

 
0.9

 
3.2

 
2.8

Net actuarial losses
13.8

 
14.3

 
38.8

 
41.4

Net periodic pension benefit cost
$
24.6

 
$
24.0

 
$
67.8

 
$
72.3

Net curtailment and settlement (gains) losses
1.1

 
1.3

 
2.3

 
3.6

Net periodic pension benefit cost after net curtailment and settlement (gains) losses
$
25.7

 
$
25.3

 
$
70.1

 
$
75.9

Amounts recorded in continuing operations:


 


 


 


      Operating income
$
18.5

 
$
16.3

 
$
53.0

 
$
50.6

      Other income/(expense), net
5.0

 
6.4

 
10.7

 
17.9

Amounts recorded in discontinued operations
2.2

 
2.6

 
6.4

 
7.4

Total
$
25.7

 
$
25.3

 
$
70.1

 
$
75.9

During the nine months ended September 30, 2018, the Company recognized a settlement loss associated with lump sum distributions of a non-US defined benefit plan. During the nine months ended September 30, 2017, the Company recognized a curtailment loss associated with certain defined benefit plan freezes that is effective on January 1, 2022.
The Company made contributions to its defined benefit pension plans of $71.3 million and $77.8 million during the nine months ended September 30, 2018 and 2017, respectively. The Company currently projects that it will contribute approximately $80 million to its plans worldwide in 2018.
Postretirement Benefits Other Than Pensions
The Company sponsors several postretirement plans that provide for healthcare benefits, and in some instances, life insurance benefits that cover certain eligible employees. These plans are unfunded and have no plan assets, but are instead funded by the Company on a pay-as-you-go basis in the form of direct benefit payments. Generally, postretirement health benefits are contributory with contributions adjusted annually. Life insurance plans for retirees are primarily noncontributory.
The components of net periodic postretirement benefit cost for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Service cost
$
0.7

 
$
0.8

 
$
2.1

 
$
2.3

Interest cost
3.2

 
3.2

 
10.8

 
11.7

Net amortization of:
 
 
 
 
 
 
 
Prior service gains
(1.0
)
 
(2.2
)
 
(3.0
)
 
(6.5
)
Net actuarial losses
(0.7
)
 

 
(0.7
)
 

Net periodic postretirement benefit cost
$
2.2

 
$
1.8

 
$
9.2

 
$
7.5

Amounts recorded in continuing operations:


 


 


 


     Operating income
$
0.7

 
$
0.8

 
$
2.1

 
$
2.3

     Other income/(expense), net
1.3

 
0.9

 
5.3

 
3.8

Amounts recorded in discontinued operations
0.2

 
0.1

 
1.8

 
1.4

Total
$
2.2

 
$
1.8

 
$
9.2

 
$
7.5


11


Note 10. Equity
The authorized share capital of Ingersoll-Rand plc is 1,185,040,000 shares, consisting of (1) 1,175,000,000 ordinary shares, par value $1.00 per share, (2) 40,000 ordinary shares, par value EUR 1.00 and (3) 10,000,000 preference shares, par value $0.001 per share. There were no Euro-denominated ordinary shares or preference shares outstanding at September 30, 2018 or December 31, 2017.
Changes in ordinary shares and treasury shares for the nine months ended September 30, 2018 are as follows:
In millions
Ordinary shares issued
 
Ordinary shares held in treasury
December 31, 2017
274.0

 
24.5

Shares issued under incentive plans, net
1.9

 

Repurchase of ordinary shares
(5.8
)
 

September 30, 2018
270.1

 
24.5

Share repurchases are made from time to time in accordance with the Company's capital allocation strategy, subject to market conditions and regulatory requirements. In April 2017, the Company completed a $1.5 billion share repurchase program that began in April 2014. Shares repurchased prior to October 2014 were canceled upon repurchase and accounted for as a reduction of Ordinary shares and Capital in excess of par value, or Retained earnings to the extent Capital in excess of par value was exhausted. Beginning in October 2014, repurchased shares were held in treasury, recognized at cost and presented separately on the balance sheet as a reduction to Equity. In February 2017, the Company's Board of Directors authorized the repurchase of up to $1.5 billion of its ordinary shares (the 2017 Authorization) upon completion of the prior authorized program. Repurchases under the 2017 Authorization, which began in May 2017, totaled approximately $600 million at December 31, 2017 and are held in treasury. During the nine months ended September 30, 2018, the Company repurchased and canceled approximately $514 million of its ordinary shares leaving approximately $386 million remaining under the 2017 Authorization at September 30, 2018. In October 2018, the Company's Board of Directors authorized the repurchase of up to $1.5 billion of its ordinary shares upon completion of the 2017 Authorization.
The components of Equity for the nine months ended September 30, 2018 were as follows:
In millions
Shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2017
$
7,140.3

 
$
66.6

 
$
7,206.9

Net earnings
1,083.6

 
12.5

 
1,096.1

Currency translation
(175.2
)
 
(2.9
)
 
(178.1
)
Derivatives qualifying as cash flow hedges, net of tax
0.1

 

 
0.1

Pension and OPEB adjustments, net of tax
34.1

 

 
34.1

Total comprehensive income (loss)
942.6

 
9.6

 
952.2

Share-based compensation
62.3

 

 
62.3

Adoption of ASC 606
2.4

 

 
2.4

Adoption of ASU 2016-16
(9.1
)
 

 
(9.1
)
Dividends declared to noncontrolling interests

 
(41.1
)
 
(41.1
)
Dividends declared to ordinary shareholders
(352.6
)
 

 
(352.6
)
Shares issued under incentive plans, net of tax benefit
36.3

 

 
36.3

Repurchase of ordinary shares
(514.1
)
 

 
(514.1
)
Balance at September 30, 2018
$
7,308.1

 
$
35.1

 
$
7,343.2


12


The components of Equity for the nine months ended September 30, 2017 were as follows:
In millions
Shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2016
$
6,643.8

 
$
74.5

 
$
6,718.3

Net earnings
842.7

 
12.5

 
855.2

Currency translation
401.4

 
(1.0
)
 
400.4

Derivatives qualifying as cash flow hedges, net of tax
1.1

 

 
1.1

Pension and OPEB adjustments, net of tax
11.1

 

 
11.1

Total comprehensive income (loss)
1,256.3

 
11.5

 
1,267.8

Share-based compensation
53.2

 

 
53.2

Adoption of ASU 2016-09 (1)
15.1

 

 
15.1

Acquisition/divestiture of noncontrolling interests
(5.0
)
 
(2.3
)
 
(7.3
)
Dividends declared to noncontrolling interests

 
(15.5
)
 
(15.5
)
Dividends declared to ordinary shareholders
(318.0
)
 

 
(318.0
)
Shares issued under incentive plans, net of tax benefit
41.9

 

 
41.9

Repurchase of ordinary shares
(911.1
)
 

 
(911.1
)
Balance at September 30, 2017
$
6,776.2

 
$
68.2

 
$
6,844.4

(1) The Company adopted ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09) on January 1, 2017.
Accumulated Other Comprehensive Income (Loss)
The changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2018 are as follows:
In millions
 
Derivative Instruments
 
Pension and OPEB
 
Foreign Currency Translation
 
Total
Balance at December 31, 2017
 
$
4.7

 
$
(494.3
)
 
$
(289.2
)
 
$
(778.8
)
Other comprehensive income (loss) before reclassifications
 
(0.5
)
 
5.2

 
(175.2
)
 
(170.5
)
Amounts reclassified from AOCI
 
0.6

 
38.3

 

 
38.9

Provision for income taxes
 

 
(9.4
)
 

 
(9.4
)
Net current period other comprehensive income (loss)
 
$
0.1

 
$
34.1

 
$
(175.2
)
 
$
(141.0
)
Balance at September 30, 2018
 
$
4.8

 
$
(460.2
)
 
$
(464.4
)
 
$
(919.8
)
The changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2017 are as follows:
In millions
 
Derivative Instruments
 
Pension and OPEB
 
Foreign Currency Translation
 
Total
Balance at December 31, 2016
 
$
2.9

 
$
(554.4
)
 
$
(739.0
)
 
$
(1,290.5
)
Other comprehensive income (loss) before reclassifications
 
(1.3
)
 
(13.8
)
 
401.4

 
386.3

Amounts reclassified from AOCI
 
2.4

 
37.7

 

 
40.1

Provision for income taxes
 

 
(12.8
)
 

 
(12.8
)
Net current period other comprehensive income (loss)
 
$
1.1

 
$
11.1

 
$
401.4

 
$
413.6

Balance at September 30, 2017
 
$
4.0

 
$
(543.3
)
 
$
(337.6
)
 
$
(876.9
)


13


The reclassifications out of Accumulated other comprehensive income (loss) for the three and nine months ended September 30 were as follows:
 
 
Three months ended
 
Nine months ended
In millions
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
 
 
 
 
 
 
 
Reclassifications of deferred (gains) losses (1)
 
$
(0.1
)
 
$
1.4

 
$
0.6

 
$
2.4

Provision for (benefit from) income taxes
 
(0.2
)
 
0.1

 

 
0.3

Reclassifications, net of taxes
 
$
(0.3
)
 
$
1.5

 
$
0.6

 
$
2.7

 
 
 
 
 
 
 
 
 
Pension and Postretirement benefits
 
 
 
 
 
 
 
 
Amortization of service costs (2)
 
$
0.1

 
$
(1.3
)
 
$
0.2

 
$
(3.7
)
Amortization of actuarial losses (2)
 
13.1

 
14.3

 
38.1

 
41.4

Provision for (benefit from) income taxes
 
(2.9
)
 
(4.1
)
 
(9.4
)
 
(12.8
)
Reclassifications, net of taxes
 
$
10.3

 
$
8.9

 
$
28.9

 
$
24.9

 
 
 
 
 
 
 
 
 
Total reclassifications, net of taxes
 
$
10.0

 
$
10.4

 
$
29.5

 
$
27.6

(1) Reclassifications of interest rate swaps and locks are reflected within Interest expense; reclassifications of currency derivatives designated as hedges are reflected in Cost of goods sold.
(2) Reclassifications of the service cost component of pension and postretirement benefit costs are reflected within Operating income; the remaining components are included within Other income/(expense), net.
Note 11. Revenue
The Company recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good or service. A majority of the Company's revenues are recognized at a point-in-time as control is transferred at a distinct point in time per the terms of a contract. However, a portion of the Company's revenues are recognized over time as the customer simultaneously receives control as the Company performs work under a contract.
Performance Obligations
A performance obligation is a distinct good, service or a bundle of goods and services promised in a contract. The Company identifies performance obligations at the inception of a contract and allocates the transaction price to individual performance obligations to faithfully depict the Company’s performance in transferring control of the promised goods or services to the customer.
The following are the primary performance obligations identified by the Company:
Equipment and parts. The Company principally generates revenue from the sale of equipment and parts to customers and recognizes revenue at a point in time when control transfers to the customer. Transfer of control is generally determined based on the shipping terms of the contract. However, certain transactions within the Industrial segment include contracts to design, deliver and build highly engineered or customized equipment which have no alternative use for the Company in the event the customer cancels the contract. In addition, the Company has the right to payment for performance completed to date. As a result, revenues related to these contracts are recognized over time with progress towards completion measured using an input method as the basis to recognize revenue and an estimated profit. To-date efforts for work performed corresponds with and faithfully depicts transfer of control to the customer.
Contracting and Installation. The Company enters into various construction-type contracts to design, deliver and build integrated solutions to meet customer specifications. These transactions, primarily included within the Climate segment, provide services that range from the development and installation of new HVAC systems to the design and integration of critical building systems to optimize energy efficiency and overall performance. These contracts have a typical term of less than one year and are considered a single performance obligation as multiple combined goods and services promised in the contract represent a single output delivered to the customer. Revenues associated with contracting and installation contracts are recognized over time with progress towards completion measured using an input method as the basis to recognize revenue and an estimated profit. To-date efforts for work performed corresponds with and faithfully depicts transfer of control to the customer. 

14


Services and Maintenance. The Company provides various levels of preventative and/or repair and maintenance type service agreements for its customers. The typical length of a contract is 12 months but can be as long as 60 months. Revenues associated with these performance obligations are primarily recognized over time on a straight-line basis over the life of the contract as the customer simultaneously receives and consumes the benefit provided by the Company. However, if historical evidence indicates that the cost of providing these services on a straight-line basis is not appropriate, revenue is recognized over the contract period in proportion to the costs expected to be incurred while performing the service. Certain repair services do not meet the definition of over time revenue recognition as the Company does not transfer control to the customer until the service is completed. As a result, revenue related to these services is recognized at a point in time.
Extended warranties. The Company enters into various warranty contracts with customers related to its products. A standard warranty generally warrants that a product is free from defects in workmanship and materials under normal use and conditions for a certain period of time. The Company’s standard warranty is not considered a distinct performance obligation as it does not provide services to customers beyond assurance that the covered product is free of initial defects. An extended warranty provides a customer with additional time that the Company is liable for covered incidents associated with its products. Extended warranties are purchased separately and can last up to five years. As a result, they are considered separate performance obligations for the Company. Revenue associated with these performance obligations are primarily recognized over time on a straight-line basis over the life of the contract as the customer simultaneously receives and consumes the benefit provided by the Company. However, if historical evidence indicates that the cost of providing these services on a straight-line basis is not appropriate, revenue is recognized over the contract period in proportion to the costs expected to be incurred while performing the service. Refer to Note 19, "Commitments and Contingencies," for more information related to product warranties.
The transaction price allocated to performance obligations reflects the Company’s expectations about the consideration it will be entitled to receive from a customer. To determine the transaction price, variable and noncash consideration are assessed as well as whether a significant financing component exists. The Company’s contracts with customers, dealers and distributors include several forms of sales incentive programs (variable consideration) which are estimated and included in the transaction price. They include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount. The Company records an accrual (contra receivable) and a sales deduction for its best estimate determined using the expected value method. In addition, sales returns and customer disputes involving a question of quantity or price are also accounted for as variable consideration. All other incentives or incentive programs where the customer is required to reach a certain sales level, remain a customer for a certain period of time, provide a rebate form or is subject to additional requirements are accounted for as a reduction of revenue and establishment of a liability for its best estimate determined using the expected value method. The Company considers historical data in determining its best estimates of variable consideration. These estimates are reviewed regularly for appropriateness, considering also whether the estimates should be constrained in order to avoid a significant reversal of revenue recognition in a future period. If updated information or actual amounts are different from previous estimates of variable consideration, the revisions are included in the results for the period in which they become known through a cumulative effect adjustment to revenue.  The Company has performance guarantees related to energy savings contracts that are provided under the maintenance portion of contracting and installation agreements extending from 2018-2038. The Company has experienced no significant losses under such arrangements and considers the probability of any significant future losses to be remote.
The Company enters into sales arrangements that contain multiple goods and services, such as equipment, installation and extended warranties. For these arrangements, each good or service is evaluated to determine whether it represents a distinct performance obligation. The total transaction price is then allocated to the distinct performance obligations based on their relative standalone selling price at the inception of the arrangement. If available, the Company utilizes observable prices for goods or services sold separately to similar customers in similar circumstances to determine its relative standalone selling price. Otherwise, list prices are used if they are determined to be representative of standalone selling prices. If neither of these items are available at contract inception, judgment may be required and the Company will estimate standalone selling price based on its best estimate. The Company recognizes revenue for delivered goods or services when the delivered good or service is distinct, control of the good or service has transferred to the customer, and only customary refund or return rights related to the goods or services exist. The Company excludes from revenues taxes it collects from a customer that are assessed by a government authority. Excluding noncurrent contract liabilities, unsatisfied (or partially unsatisfied) performance obligations as of the end of the reporting period are expected to be recognized as revenue within the next 12 months.

15


Disaggregated Revenue
A summary of Net revenues by destination for the three and nine months ended September 30, 2018 is as follows:
In millions
Three months ended
 
Nine months ended
Climate
 
 
 
     United States
$
2,223.1

 
$
6,345.3

     Non-U.S.
1,015.6

 
2,997.0

Total Climate
$
3,238.7

 
$
9,342.3

Industrial
 
 
 
     United States
$
411.9

 
$
1,277.1

     Non-U.S.
380.3

 
1,153.7

Total Industrial
$
792.2

 
$
2,430.8

A summary of Net revenues by major type of good or service for the three and nine months ended September 30, 2018 is as follows:
In millions
Three months ended
 
Nine months ended
Climate
 
 
 
     Equipment
$
2,153.3

 
$
6,379.6

     Services and parts
1,085.4

 
2,962.7

Total Climate
$
3,238.7

 
$
9,342.3

Industrial
 
 
 
     Equipment
$
466.7

 
$
1,472.2

     Services and parts
325.5

 
958.6

Total Industrial
$
792.2

 
$
2,430.8

Revenue from goods and services transferred to customers at a point in time accounted for approximately 84% of the Company's revenue for the nine months ended September 30, 2018.
Contract Balances
The opening and closing balances of contract assets and contract liabilities arising from contracts with customers for the period ended September 30, 2018 and December 31, 2017 were as follows:
In millions
September 30, 2018
 
December 31, 2017
Contract assets
$
194.8

 
$
166.0

Contract liabilities
857.6

 
814.2

The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheet. In general, the Company receives payments from customers based on a billing schedule established in its contracts. Contract assets relate to the conditional right to consideration for any completed performance under the contract when costs are incurred in excess of billings under the percentage-of-completion methodology. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities relate to payments received in advance of performance under the contract or when the Company has a right to consideration that is unconditional before it transfers a good or service to the customer. Contract liabilities are recognized as revenue as (or when) the Company performs under the contract. During the three and nine months ended September 30, 2018, changes in contract asset and liability balances were not materially impacted by any other factors.
Approximately 35% of the contract liability balance at the beginning of the period is expected to be recognized as revenue during 2019 or thereafter. As a result, substantially all of the remaining balance is expected to be recognized as revenue during 2018. During the three and nine months ended September 30, 2018, approximately 10% and 50% was recognized as revenue, respectively.
ASC 606 adoption impact
Under ASC 606, the majority of the Company’s revenue continues to be recognized on a similar basis as previous accounting standards. However, certain highly engineered products sold to customers within the Industrial segment for which revenue was

16


previously recognized at a point in time meet the criteria of a performance obligation satisfied over time. These contracts consist of equipment that is highly engineered or customized to meet the customer’s requirements. In the event the customer cancels the contract, the Company will have no alternative use for the equipment as well as the right to payment for performance completed to date. This change results in accelerated recognition of revenue and increases the balance of contract assets compared to the previous revenue recognition standard.
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach with a cumulative effect adjustment to increase Retained earnings by $2.4 million. As a result, the Company applied ASC 606 only to contracts that were not completed as of January 1, 2018. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods presented. The Company elected to reflect the aggregate effect of all contract modifications that occurred before the beginning of the earliest period presented in determining the transaction price, identifying the satisfied and unsatisfied performance obligations and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. The effects of this relief are immaterial.
The following table summarizes the impact of adopting ASC 606 on the Company’s Condensed Consolidated Statements of Comprehensive Income:
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
In millions
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Net revenues
$
4,030.9

 
$
4,028.7

 
$
2.2

 
$
11,773.1

 
$
11,763.6

 
$
9.5

Cost of goods sold
(2,718.3
)
 
(2,716.2
)
 
2.1

 
(8,102.6
)
 
(8,094.1
)
 
8.5

Selling and administrative expenses
(725.6
)
 
(725.6
)
 

 
(2,199.8
)
 
(2,199.8
)
 

Operating income
587.0

 
586.9

 
0.1

 
1,470.7

 
1,469.7

 
1.0

Interest expense
(48.5
)
 
(48.5
)
 

 
(171.7
)
 
(171.7
)
 

Other income/(expense), net
(8.5
)
 
(8.5
)
 

 
(16.0
)
 
(16.0
)
 

Earnings before income taxes
530.0

 
529.9

 
0.1

 
1,283.0

 
1,282.0

 
1.0

Benefit (provision) for income taxes
1.1

 
1.1

 

 
(159.9
)
 
(159.7
)
 
0.2

Earnings from continuing operations
$
531.1

 
$
531.0

 
$
0.1

 
$
1,123.1

 
$
1,122.3

 
$
0.8

The following table summarizes the impact of adopting ASC 606 on the Company’s Balance Sheet:
 
September 30, 2018
In millions
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Assets
 
 
 
 
 
     Accounts and notes receivable, net
$
2,752.1

 
$
2,756.6

 
$
(4.5
)
     Inventories, net
1,821.4

 
1,829.9

 
(8.5
)
     Other current assets
486.6

 
473.6

 
13.0

     Other noncurrent assets
879.8

 
879.8

 

 
 
 
 
 
 
Liabilities
 
 
 
 
 
     Accrued expenses and other current liabilities
$
1,720.3

 
$
1,721.1

 
$
(0.8
)
     Deferred and noncurrent income taxes
610.2

 
610.2

 

     Other noncurrent liabilities
1,079.9

 
1,079.9

 

 
 
 
 
 
 
Equity
 
 
 
 
 
     Retained earnings
$
9,624.8

 
$
9,624.0

 
$
0.8


17


Note 12. Share-Based Compensation
The Company accounts for stock-based compensation plans in accordance with ASC 718, "Compensation - Stock Compensation" (ASC 718), which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Company’s share-based compensation plans include programs for stock options, restricted stock units (RSUs), performance share units (PSUs) and deferred compensation.
Compensation Expense
Share-based compensation expense is related to continuing operations and is included in Selling and administrative expenses. The expense recognized for the three and nine months ended September 30 was as follows:
 
Three months ended
 
Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Stock options
$
3.1

 
$
3.6

 
$
21.1

 
$
16.3

RSUs
4.6

 
5.0

 
26.6

 
21.9

Performance shares
4.7

 
4.7

 
16.0

 
15.9

Other
1.9

 
0.7

 
3.9

 
3.8

Pre-tax expense
14.3

 
14.0

 
67.6

 
57.9

Tax benefit
(3.5
)
 
(5.4
)
 
(16.5
)
 
(22.2
)
After-tax expense
$
10.8

 
$
8.6

 
$
51.1

 
$
35.7

Grants issued during the nine months ended September 30 were as follows:
 
2018
 
2017
 
Number
granted
 
Weighted-
average fair
value per award
 
Number
granted
 
Weighted-
average fair
value per award
Stock options
1,524,625

 
$
15.49

 
1,517,235

 
$
13.46

RSUs
317,073

 
$
89.69

 
335,743

 
$
80.36

Performance shares (1)
357,096

 
$
106.06

 
391,772

 
$
93.17

(1) The number of performance shares represents the maximum award level.
Stock Options / RSUs
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. The fair value of each of the Company’s stock option and RSU awards is expensed on a straight-line basis over the required service period, which is generally the 3-year vesting period. However, for stock options and RSUs granted to retirement eligible employees, the Company recognizes an expense for the entire fair value at the grant date.
The average fair value of the stock options granted is determined using the Black-Scholes option-pricing model. The following assumptions were used during the nine months ended September 30:
 
 
2018
 
2017
Dividend yield
 
2.00
%
 
2.00
%
Volatility
 
21.64
%
 
22.46
%
Risk-free rate of return
 
2.48
%
 
1.80
%
Expected life in years
 
4.8

 
4.8


18


A description of the significant assumptions used to estimate the fair value of the stock option awards is as follows:
Volatility - The expected volatility is based on a weighted average of the Company’s implied volatility and the most recent historical volatility of the Company’s stock commensurate with the expected life.
Risk-free rate of return - The Company applies a yield curve of continuous risk-free rates based upon the published U.S. Treasury spot rates on the grant date.
Expected life - The expected life of the Company’s stock option awards represents the weighted-average of the actual period since the grant date for all exercised or canceled options and an expected period for all outstanding options.
Dividend yield - The Company determines the dividend yield based upon the expected quarterly dividend payments as of the grant date and the current fair market value of the Company’s stock.
Forfeiture Rate - The Company analyzes historical data of forfeited options to develop a reasonable expectation of the number of options to forfeit prior to vesting per year. This expected forfeiture rate is applied to the Company’s ongoing compensation expense; however, all expense is adjusted to reflect actual vestings and forfeitures.
Performance Shares
The Company has a Performance Share Program (PSP) for key employees. The program provides awards in the form of PSUs based on performance against pre-established objectives. The annual target award level is expressed as a number of the Company's ordinary shares based on the fair market value of the Company's stock on the date of grant. All PSUs are settled in the form of ordinary shares.
Beginning with the 2018 grant year, PSU awards are earned based 50% upon a performance condition, measured by relative Cash Flow Return on Invested Capital (CROIC) growth to the industrial group of companies in the S&P 500 Index over a 3-year performance period, and 50% upon a market condition, measured by the Company's relative total shareholder return (TSR) as compared to the TSR of the industrial group of companies in the S&P 500 Index over a 3-year performance period. The fair value of the market condition is estimated using a Monte Carlo Simulation approach in a risk-neutral framework based upon historical volatility, risk-free rates and correlation matrix. Awards granted prior to 2018 are earned based 50% upon a performance condition, measured by relative EPS growth to the industrial group of companies in the S&P 500 Index over a 3-year performance period, and 50% upon a market condition, measured by the Company's relative TSR as compared to the TSR of the industrial group of companies in the S&P 500 Index over a 3-year performance period.
Deferred Compensation
The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices, including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.
Note 13. Restructuring Activities
The Company incurs costs associated with announced restructuring initiatives intended to result in improved operating performance, profitability and working capital levels. Actions associated with these initiatives may include workforce reduction, improving manufacturing productivity, realignment of management structures and rationalizing certain assets. The following table details restructuring charges recorded during the three and nine months ended September 30:
 
 
Three months ended
 
Nine months ended
In millions
 
2018

2017
 
2018

2017
Climate
 
$
14.9

 
$
5.5

 
$
23.0

 
$
35.3

Industrial
 
4.8

 
3.8

 
42.0

 
11.9

Corporate and Other
 
0.4

 
0.7

 
6.6

 
1.0

Total
 
$
20.1

 
$
10.0

 
$
71.6

 
$
48.2

 
 


 


 
 
 
 
Cost of goods sold
 
$
15.8

 
$
6.8

 
$
54.8

 
$
39.4

Selling and administrative expenses
 
4.3

 
3.2

 
16.8

 
8.8

Total
 
$
20.1

 
$
10.0

 
$
71.6

 
$
48.2


19


The changes in the restructuring reserve for the nine months ended September 30, 2018 were as follows:
In millions
 
Climate
 
Industrial
 
Corporate
and Other
 
Total
December 31, 2017
 
$
7.4

 
$
6.1

 
$
2.5

 
$
16.0

Additions, net of reversals (1)
 
23.0

 
35.7

 
6.6

 
65.3

Cash paid/other
 
(12.6
)
 
(8.9
)
 
(7.5
)
 
(29.0
)
September 30, 2018
 
$
17.8

 
$
32.9

 
$
1.6

 
$
52.3

(1) Excludes the non-cash costs of asset rationalizations ($6.3 million).
Restructuring actions primarily include workforce reductions as well as the closure and consolidation of manufacturing facilities in an effort to improve the Company's cost structure. During the nine months ended September 30, 2018, costs associated with announced restructuring actions primarily included the following:
the plan to close a Non-U.S. manufacturing facility within the Industrial segment and relocate production to other U.S. and Non-U.S. facilities; and
the notice of intent to close two U.S. manufacturing facilities within the Climate segment and relocate production to another existing U.S. facility.
As of September 30, 2018, the Company had $52.3 million accrued for costs associated with its announced restructuring actions, of which a majority is expected to be paid within one year. These actions primarily relate to workforce reduction benefits. In addition, the Company incurred $1.4 million of non-qualified restructuring charges during the nine months ended September 30, 2018, which represent costs that are directly attributable to restructuring activities, but do not fall into the severance, exit or disposal category. These non-qualified restructuring charges were incurred to improve the Company's cost structure.
Note 14. Other Income/(Expense), Net
The components of Other income/(expense), net for the three and nine months ended September 30 are as follows:
 
Three months ended
 
Nine months ended
In millions
2018

2017
 
2018
 
2017
Interest income
$
0.1

 
$
2.3

 
$
6.3

 
$
6.7

Exchange gain (loss)
(5.1
)
 
(2.0
)
 
(14.2
)
 
(3.5
)
Other components of net periodic benefit cost
(6.3
)
 
(7.3
)
 
(16.0
)
 
(21.7
)
Other activity, net
2.8

 
(0.6
)
 
7.9

 
(5.3
)
Other income/(expense), net
$
(8.5
)
 
$
(7.6
)
 
$
(16.0
)
 
$
(23.8
)
Other income /(expense), net includes the results from activities other than normal business operations such as interest income and foreign currency gains and losses on transactions that are denominated in a currency other than an entity’s functional currency. In addition, the Company includes the components of net periodic benefit cost for pension and post retirement obligations other than the service cost component. Other activity, net includes items associated with Trane U.S. Inc. for the settlement and defense of asbestos-related claims, insurance settlements on asbestos-related matters and the revaluation of asbestos recoveries. Refer to Note 19, "Commitments and Contingencies," for more information regarding asbestos-related matters.
Note 15. Income Taxes
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”) which makes widespread changes to the Internal Revenue Code. The Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously not subject to U.S. tax and creates new income taxes on certain foreign sourced earnings.
The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which provides guidance on accounting for the tax effects of the Act and allows for adjustments to provisional amounts during a measurement period of up to one year. In accordance with SAB 118, the Company has made reasonable estimates related to (1) the remeasurement of U.S. deferred tax balances for the reduction in the tax rate, (2) the liability for the transition tax and (3) the taxes accrued relating to the change in permanent reinvestment assertion for unremitted earnings of certain foreign subsidiaries. As a result, the Company recognized a net provisional income tax benefit of $21.0 million associated with these items in 2017.
The Company continues to evaluate how the provisions of the Act will be accounted for under ASC 740, “Income Taxes” (ASC 740). The analysis is provisional and is subject to change due to the additional time required to accurately calculate and review

20


the complex tax law.  The Company will continue to assess any regulatory guidance that is issued which could have an impact on the provisional estimates.  In addition, the Company is gathering information and performing additional analysis on these estimates, including, but not limited to, the amount of earnings and profits subject to the transition tax, the calculation of foreign tax credits, the local tax treatment of future distributions of unremitted earnings and in regard to the remeasurement of U.S. deferred taxes, the filing of its 2017 federal and state income tax returns. Measurement period adjustments are reported as a component of Provision for income taxes in the reporting period the amounts are determined. The final accounting will be completed no later than one year from the enactment of the Act. 
During the nine months ended September 30, 2018, the Company recognized measurement period adjustments for (1) the remeasurement of U.S. deferred tax balances for the reduction in the tax rate, (2) the liability for the transition tax and (3) the taxes accrued relating to the change in permanent reinvestment assertion for unremitted earnings of certain foreign subsidiaries. A reconciliation of provisional amounts and related measurement period adjustments are as follows:
In millions
Provisional Amounts Reported
 
Measurement Period Adjustments
 
Updated Provisional Amounts
Remeasurement of deferred tax balances
$
(300.6
)
 
$
2.1

 
$
(298.5
)
Transition tax (1)
160.7

 
(65.9
)
 
94.8

Change in permanent reinvestment assertion (1)
118.9

 
(11.7
)
 
107.2

Income tax benefit, net
$
(21.0
)
 
$
(75.5
)
 
$
(96.5
)
(1) Net of foreign tax credits.
During the fourth quarter, the Company will finalize its adjustments to provisional amounts recorded taking into consideration the filing of U.S. State tax returns, the finalization of estimates and any further guidance issued by federal or state governmental authorities on the provisions contained in the Act.
The Company accounts for its Provision for income taxes in accordance with ASC 740, which requires an estimate of the annual effective income tax rate for the full year to be applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year. For the nine months ended September 30, 2018 and September 30, 2017, the Company's effective income tax rate was 12.5% and 22.3%, respectively. The effective income tax rate for the nine months ended September 30, 2018 was lower than the U.S. statutory rate of 21% primarily due to the $75.5 million of measurement period adjustments associated with the Act (of which $77.1 million was recorded during the three months ended September 30, 2018) and a $28.5 million reduction in a deferred tax asset valuation allowance for certain state net deferred tax assets. Measurement period adjustments associated with the transition tax and the change in permanent reinvestment assertion primarily relate to the realization of foreign tax credits and result from the filing of the U.S. Federal income tax return, legislative guidance issued during the quarter and revised projections of future foreign sourced income during the carryforward period. The reduction in the valuation allowance for certain state net deferred tax assets is primarily the result of revised projections of future state taxable income during the carryforward period. In addition, the lower effective income tax rate was driven by excess tax benefits from employee share-based payments and a reduction to the interest liability associated with the Company's unrecognized tax benefits. These amounts were partially offset by U.S. state and local income taxes and certain non-deductible employee expenses. The effective tax rate for the nine months ended September 30, 2017 was lower than the U.S. statutory rate of 35% primarily due to excess tax benefits from employee share-based payments, the provision to return true-up due to the filing of the U.S. Federal income tax return, a reduction of a previously accrued tax liability due to obtaining approval from a local non-U.S. tax authority and earnings in non-U.S. jurisdictions, which in aggregate have a lower effective tax rate. These amounts were partially offset by a non-cash charge during the second quarter of 2017 related to the establishment of a valuation allowance on certain net deferred tax assets in Brazil of approximately $33 million.
Total unrecognized tax benefits as of September 30, 2018 and December 31, 2017 were $120.3 million and $120.5 million, respectively. Although management believes its tax positions and related provisions reflected in the Condensed Consolidated Financial Statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretations of tax laws, developments in case law and closing of statute of limitations. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in Provision for income taxes.
The Provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities

21


periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Brazil, Canada, China, France, Germany, Ireland, Italy, Mexico, Spain, the Netherlands, the United Kingdom and the United States. These examinations on their own, or any subsequent litigation related to the examinations, may result in additional taxes or penalties against the Company. If the ultimate result of these audits differ from
original or adjusted estimates, they could have a material impact on the Company’s tax provision. In general, the examination of the Company’s material tax returns is complete or effectively settled for the years prior to 2008, with certain matters prior to 2008 being resolved through appeals and litigation and also unilateral procedures as provided for under double tax treaties.
Note 16. Acquisitions and Divestitures
Acquisitions and Equity Method Investments
During the nine months ended September 30, 2018, the Company acquired several businesses and entered into a joint venture. The aggregate cash paid, net of cash acquired, totaled $281.5 million and was funded through cash on hand. Acquisitions are recorded using the acquisition method of accounting in accordance with ASC 805 "Business Combinations." As a result, the aggregate price has been allocated to assets acquired and liabilities assumed based on the estimate of fair market value of such assets and liabilities at the date of acquisition. Ownership interests in a joint venture are accounted for under the equity method when the Company does not have a controlling financial interest and reported within Other noncurrent assets on the Balance Sheet.
Primary activity during 2018 relates to the acquisition of ICS Group Holdings Limited in January 2018. The business, reported within the Climate segment, specializes in the temporary rental of energy efficient chillers for commercial and industrial buildings across Europe. In addition, the Company continues to acquire independent dealers to expand its distribution network. Intangible assets associated with these acquisitions totaled $49.8 million and primarily relate to trademarks and customer relationships. Any excess of the purchase price over the estimated fair value of net assets acquired is recognized as goodwill and totaled $116.1 million. For certain acquisitions, the Company is still in the process of valuing the acquired assets and liabilities assumed and will adjust preliminary values, if necessary, through measurement period adjustments once fair value estimates are finalized. The impact of these acquisitions are not considered material to the Company’s results of operations.
In May 2018, the Company completed its investment of a 50% ownership interest in a joint venture with Mitsubishi Electric Corporation (Mitsubishi). The joint venture, reported within the Climate segment, will focus on marketing, selling and supporting variable refrigerant flow (VRF) and ductless heating and air conditioning systems through Trane, American Standard and Mitsubishi channels in the U.S. and select Latin American countries. Ongoing results since the date of investment are accounted for under the equity method and are not considered material to the Company’s results of operations.
Divestitures
The Company has retained costs from previously sold businesses that mainly include expenses related to postretirement benefits, product liability and legal costs (mostly asbestos related). The components of Discontinued operations, net of tax for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Pre-tax earnings (loss) from discontinued operations
$
(16.0
)
 
$
5.8

 
$
(36.7
)
 
$
6.7

Tax benefit (expense)
4.3

 
(2.1
)
 
9.7

 
(1.2
)
Discontinued operations, net of tax
$
(11.7
)
 
$
3.7

 
$
(27.0
)
 
$
5.5

Pre-tax earnings (loss) from discontinued operations includes costs associated with Ingersoll Rand Company for the settlement and defense of asbestos-related claims, insurance settlements on asbestos-related matters and the revaluation of its liability for potential future claims. Refer to Note 19, "Commitments and Contingencies," for more information related to asbestos.

22


Note 17. Earnings Per Share (EPS)
Basic EPS is calculated by dividing Net earnings attributable to Ingersoll-Rand plc by the weighted-average number of ordinary shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans. The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per share calculations for the three and nine months ended September 30:
 
Three months ended

Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Weighted-average number of basic shares
246.4

 
253.3

 
248.1

 
256.4

Shares issuable under incentive stock plans
3.1

 
3.4

 
2.8

 
3.3

Weighted-average number of diluted shares
249.5

 
256.7

 
250.9

 
259.7

Anti-dilutive shares
0.7

 
1.0

 
1.5

 
1.6

Note 18. Business Segment Information
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the operating segments’ results are prepared on a management basis that is consistent with the manner in which the Company prepares financial information for internal review and decision making. The Company largely evaluates performance based on Segment operating income and Segment operating margins. Intercompany sales between segments are considered immaterial.
The Company's Climate segment delivers energy-efficient products and innovative energy services. It includes Trane® and American Standard® Heating & Air Conditioning which provide heating, ventilation and air conditioning (HVAC) systems, and commercial and residential building services, parts, support and controls; energy services and building automation through Trane Building Advantage and Nexia; and Thermo King® transport temperature control solutions.
The Company's Industrial segment delivers products and services that enhance energy efficiency, productivity and operations. It includes compressed air and gas systems and services, power tools, material handling systems, ARO® fluid management equipment, as well as Club Car ® golf, utility and consumer low-speed vehicles.
Segment operating income is the measure of profit and loss that the Company's 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, the Company believes that Segment operating income represents the most relevant measure of segment profit and loss.

23


A summary of operations by reportable segment for the three and nine months ended September 30 was as follows:
 
Three months ended

Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Net revenues
 
 
 
 
 
 
 
Climate
$
3,238.7

 
$
2,939.3

 
$
9,342.3

 
$
8,407.2

Industrial
792.2

 
731.2

 
2,430.8

 
2,172.3

Total
$
4,030.9

 
$
3,670.5

 
$
11,773.1

 
$
10,579.5

Segment operating income
 
 
 
 
 
 
 
Climate
$
535.6

 
$
480.1

 
$
1,378.7

 
$
1,224.5

Industrial
110.7

 
89.0

 
291.8

 
247.0

Unallocated corporate expense
(59.3
)
 
(63.0
)
 
(199.8
)
 
(192.8
)
Operating income
$
587.0

 
$
506.1

 
$
1,470.7

 
$
1,278.7

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the amounts disclosed for long-lived assets by geographic area at December 31, 2017 were inadvertently misstated.  Management determined the disclosure error was not material to the 2017 financial statements. The revised amounts have been included below:  
In millions
December 31, 2017
United States
$
1,878.1

Non-U.S.
758.5

Total
$
2,636.6

Note 19. Commitments and Contingencies
The Company is involved in various litigations, claims and administrative proceedings, including those related to environmental, asbestos, and product liability matters. In accordance with ASC 450, "Contingencies," the Company records accruals for loss contingencies when it is both probable that a liability will be incurred and the amount of the loss can be reasonably estimated. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.
Environmental Matters
The Company continues to be dedicated to environmental and sustainability programs to minimize the use of natural resources, and reduce the utilization and generation of hazardous materials from our manufacturing processes and to remediate identified environmental concerns. As to the latter, the Company is currently engaged in site investigations and remediation activities to address environmental cleanup from past operations at current and former manufacturing facilities.
The Company is sometimes a party to environmental lawsuits and claims and has received notices of potential violations of environmental laws and regulations from the Environmental Protection Agency and similar state authorities. It has also been 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, the Company’s involvement is minimal.
In estimating its liability, the Company has assumed it 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 the Company's 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.
Reserves for environmental matters are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on their expected term. As of September 30, 2018 and December 31, 2017, the Company has recorded reserves for environmental matters of $41.7 million and $41.9 million, respectively. Of these amounts, $36.3 million and $36.8 million, respectively, relate to remediation of sites previously disposed of by the Company.

24


Asbestos-Related Matters
Certain wholly-owned subsidiaries and former companies of ours are named as defendants in asbestos-related lawsuits in 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 or Trane U.S. Inc. (Trane) and generally allege injury caused by exposure to asbestos contained in certain historical products sold by Ingersoll-Rand Company or Trane, primarily pumps, boilers and railroad brake shoes. None of our existing or previously-owned businesses were a producer or manufacturer of asbestos.
The Company engages an outside expert to assist in calculating an estimate of the Company’s total liability for pending and unasserted future asbestos-related claims and annually performs a detailed analysis with the assistance of an outside expert to update its estimated asbestos-related liability. The methodology used to project the Company’s total liability for pending and unasserted potential future asbestos-related claims relied upon and included the following factors, among others:
the outside expert’s interpretation of a widely accepted forecast of the population likely to have been occupationally exposed to asbestos;
epidemiological studies estimating the number of people likely to develop asbestos-related diseases such as mesothelioma and lung cancer;
the Company’s historical experience with the filing of non-malignancy claims and claims alleging other types of malignant diseases filed against the Company relative to the number of lung cancer claims filed against the Company;
the outside expert’s analysis of the number of people likely to file an asbestos-related personal injury claim against the Company based on such epidemiological and historical data and the Company’s most recent three-year claims history;
an analysis of the Company’s pending cases, by type of disease claimed and by year filed;
an analysis of the Company’s most recent three-year history to determine the average settlement and resolution value of claims, by type of disease claimed;
an adjustment for inflation in the future average settlement value of claims, at a 2.5% annual inflation rate, adjusted downward to 1.5% to take account of the declining value of claims resulting from the aging of the claimant population; and
an analysis of the period over which the Company has and is likely to resolve asbestos-related claims against it in the future.
At September 30, 2018 and December 31, 2017, over 80 percent of the open claims against the Company are non-malignancy or unspecified disease claims, many of which have been placed on inactive or deferral dockets and the vast majority of which have little or no settlement value against the Company, particularly in light of recent changes in the legal and judicial treatment of such claims.
The Company’s liability for asbestos-related matters and the asset for probable asbestos-related insurance recoveries were included in the following balance sheet accounts:
In millions
September 30,
2018
 
December 31,
2017
Accrued expenses and other current liabilities
$
47.9

 
$
48.2

Other noncurrent liabilities
512.8

 
556.6

Total asbestos-related liabilities
$
560.7

 
$
604.8

 
 
 
 
Other current assets
$
60.3

 
$
56.1

Other noncurrent assets
189.2

 
210.3

Total asset for probable asbestos-related insurance recoveries
$
249.5

 
$
266.4

The Company's asbestos insurance receivables related to Ingersoll-Rand Company and Trane were $130.5 million and $119.0 million at September 30, 2018, respectively, and $138.5 million and $127.9 million at December 31, 2017, respectively. The receivable attributable to Trane for probable insurance recoveries as of September 30, 2018 is entirely supported by settlement agreements between Trane and the respective insurance carriers. Most of these settlement agreements constitute “coverage-in-place” arrangements, in which the insurer signatories agree to reimburse Trane for specified portions of its costs for asbestos bodily injury claims and Trane agrees to certain claims-handling protocols and grants to the insurer signatories certain releases and indemnifications.

25


The costs associated with the settlement and defense of asbestos-related claims, insurance settlements on asbestos-related matters and the revaluation of the Company's liability for potential future claims are included in the income statement within continuing operations or discontinued operations depending on the business to which they relate. The income (expense) associated with these transactions, for the three and nine months ended September 30, were as follows:
 
Three months ended
 
Nine months ended
In millions
2018
 
2017
 
2018
 
2017
Continuing operations
$
0.5

 
$
0.2

 
$
1.3

 
$
(2.4
)
Discontinued operations
(11.4
)
 
11.5

 
(20.9
)
 
22.9

Total
$
(10.9
)
 
$
11.7

 
$
(19.6
)
 
$
20.5

Ongoing income and expenses associated with Ingersoll-Rand Company's asbestos-related matters are recorded within discontinued operations as they relate to previously divested businesses, primarily Ingersoll-Dresser Pump, which was sold by the Company in 2000. During the second quarter of 2017, the Company reached a settlement with insurance carriers related to Ingersoll Rand Company asbestos matters. Ongoing income and expenses associated with Trane’s asbestos-related matters are recorded within continuing operations.
In 2012 and 2013, Ingersoll-Rand Company filed actions in the Superior Court of New Jersey, Middlesex County, seeking a declaratory judgment and other relief regarding the Company’s rights to defense and indemnity for asbestos claims. The defendants were several dozen solvent insurance companies, including companies that had been paying a portion of Ingersoll-Rand Company’s asbestos claim defense and indemnity costs. The responding defendants generally challenged the Company’s right to recovery, and raised various coverage defenses. Since filing the actions, Ingersoll-Rand Company has settled with approximately two-thirds of the insurer defendants, and has dismissed one of the actions in its entirety.
The Company continually monitors the status of pending litigation that could impact the allocation of asbestos claims against the Company's various insurance policies. The Company has concluded that its Ingersoll-Rand Company insurance receivable is probable of recovery because of the following factors:
Ingersoll-Rand Company has reached favorable settlements regarding asbestos coverage claims for the majority of its recorded asbestos-related insurance receivable;
a review of other companies in circumstances comparable to Ingersoll-Rand Company, including Trane, and the success of other companies in recovering under their insurance policies, including Trane's favorable settlements referenced above;
the Company's confidence in its right to recovery under the terms of its policies and pursuant to applicable law; and
the Company's history of receiving payments under the Ingersoll-Rand Company insurance program, including under policies that had been the subject of prior litigation.
The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets are based on currently available information. The Company’s actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the calculations vary significantly from actual results. Key variables in these assumptions include the number and type of new claims to be filed each year, the average cost of resolution of each such new claim, the resolution of coverage issues with insurance carriers, and the solvency risk with respect to the Company’s insurance carriers. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. Other factors that may affect the Company’s liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be made by state and federal courts, and the passage of state or federal tort reform legislation.
The aggregate amount of the stated limits in insurance policies available to the Company for asbestos-related claims acquired over many years and from many different carriers, is substantial. However, limitations in that coverage, primarily due to the considerations described above, are expected to result in the projected total liability to claimants substantially exceeding the probable insurance recovery.
Warranty Liability
Standard product warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience. The Company assesses the adequacy of its liabilities and will make adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available.

26


The changes in the standard product warranty liability for the nine months ended September 30 were as follows:
In millions
2018
 
2017
Balance at beginning of period
$
270.5

 
$
261.6

Reductions for payments
(120.2
)
 
(107.4
)
Accruals for warranties issued during the current period
122.5

 
101.6

Changes to accruals related to preexisting warranties
5.1

 
4.3

Translation
(1.6
)
 
4.6

Balance at end of period
$
276.3

 
$
264.7

Standard product warranty liabilities are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on their expected term. The Company's total current standard product warranty reserve at September 30, 2018 and December 31, 2017 was $145.1 million and $144.5 million, respectively.
The Company's extended warranty liability represents the deferred revenue associated with its extended warranty contracts and is amortized into Net revenues on a straight-line basis over the life of the contract, unless another method is more representative of the costs incurred. The Company assesses the adequacy of its liability by evaluating the expected costs under its existing contracts to ensure these expected costs do not exceed the extended warranty liability.
The changes in the extended warranty liability for the nine months ended September 30 were as follows:
In millions
2018
 
2017
Balance at beginning of period
$
293.0

 
$
295.9

Amortization of deferred revenue for the period
(84.7
)
 
(83.2
)
Additions for extended warranties issued during the period
83.6

 
80.0

Changes to accruals related to preexisting warranties
0.1

 
0.5

Translation
(0.8
)
 
2.0

Balance at end of period
$
291.2

 
$
295.2

The extended warranty liability is classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on the timing of when the deferred revenue is expected to be amortized into revenue. The Company's total current extended warranty liability at September 30, 2018 and December 31, 2017 was $100.5 million and $100.0 million, respectively.


27


Note 20. Guarantor Financial Information
Ingersoll-Rand plc (Plc or Parent Company) and certain of its 100% directly or indirectly owned subsidiaries provide guarantees of public debt issued by other 100% directly or indirectly owned subsidiaries. The following condensed consolidating financial information is provided so that separate financial statements of these subsidiary issuer and guarantors are not required to be filed with the U.S. Securities and Exchange Commission.
The following table shows the Company’s guarantor relationships as of September 30, 2018:
Parent, issuer or guarantors
Notes issued
Notes guaranteed (1)
Ingersoll-Rand plc (Plc)
None
All registered notes and debentures
Ingersoll-Rand Irish Holdings Unlimited Company (Irish Holdings)
None
All notes issued by Global Holding and Lux Finance
Ingersoll-Rand Lux International Holding Company S.à.r.l. (Lux International)
None
All notes issued by Global Holding and Lux Finance
Ingersoll-Rand Global Holding Company Limited (Global Holding)
2.900% Senior notes due 2021
4.250% Senior notes due 2023
3.750% Senior notes due 2028
5.750% Senior notes due 2043
4.300% Senior notes due 2048
All notes issued by Lux Finance
Ingersoll-Rand Company (New Jersey)
9.000% Debentures due 2021
7.200% Debentures due 2019-2025
6.480% Debentures due 2025
Puttable debentures due 2027-2028
All notes issued by Global Holding and Lux Finance
Ingersoll-Rand Luxembourg Finance S.A. (Lux Finance)
2.625% Notes due 2020
3.550% Notes due 2024
4.650% Notes due 2044
All notes and debentures issued by Global Holding and New Jersey
(1) All subsidiary issuers and all guarantors provide irrevocable guarantees of borrowings, if any, made under revolving credit facilities.
Each subsidiary debt issuer and guarantor is owned 100% directly or indirectly by the Parent Company. Each guarantee is full and unconditional, and provided on a joint and several basis. There are no significant restrictions of the Parent Company, or any guarantor, to obtain funds from its subsidiaries, such as provisions in debt agreements that prohibit dividend payments, loans or advances to the parent by a subsidiary.
Basis of presentation
The following Condensed Consolidating Financial Statements present the financial position, results of operations and cash flows of each issuer or guarantor on a legal entity basis. The financial information for all periods has been presented based on the Company’s legal entity ownerships and guarantees outstanding at September 30, 2018. Assets and liabilities are attributed to each issuer and guarantor generally based on legal entity ownership. Investments in subsidiaries of the Parent Company, subsidiary guarantors and issuers represent the proportionate share of their subsidiaries’ net assets. Certain adjustments are needed to consolidate the Parent Company and its subsidiaries, including the elimination of investments in subsidiaries and related activity that occurs between entities in different columns. These adjustments are presented in the Consolidating Adjustments column. This basis of presentation is intended to comply with the specific reporting requirements for subsidiary issuers and guarantors, and is not intended to present the Company’s financial position or results of operations or cash flows for any other purpose.

28


Condensed Consolidating Statement of Comprehensive Income
For the three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
Net revenues
$

 
$

 
$

 
$

 
$
345.7

 
$

 
$
3,785.3

 
$
(100.1
)
 
$
4,030.9

Cost of goods sold

 

 

 

 
(252.0
)
 

 
(2,566.4
)
 
100.1

 
(2,718.3
)
Selling and administrative expenses
(1.2
)
 

 
(0.2
)
 
(0.1
)
 
(120.5
)
 
(0.3
)
 
(603.3
)
 

 
(725.6
)
Operating income (loss)
(1.2
)
 

 
(0.2
)
 
(0.1
)
 
(26.8
)
 
(0.3
)
 
615.6

 

 
587.0

Equity earnings (loss) in subsidiaries, net of tax
528.0

 
527.3

 
435.1

 
427.4

 
404.8

 
67.5

 

 
(2,390.1
)
 

Interest expense

 

 
0.1

 
(26.7
)
 
(11.5
)
 
(10.3
)
 
(0.1
)
 

 
(48.5
)
Intercompany interest and fees
(11.9
)
 

 
11.6

 
(58.8
)
 
8.8

 
(3.8
)
 
54.1

 

 

Other income/(expense), net

 

 
0.1

 

 
(3.5
)
 

 
(5.1
)
 

 
(8.5
)
Earnings (loss) before income taxes
514.9

 
527.3

 
446.7

 
341.8

 
371.8

 
53.1

 
664.5

 
(2,390.1
)
 
530.0

Benefit (provision) for income taxes
0.2

 

 

 
19.6

 
67.8

 

 
(86.5
)
 

 
1.1

Earnings (loss) from continuing operations
515.1

 
527.3

 
446.7

 
361.4

 
439.6

 
53.1

 
578.0

 
(2,390.1
)
 
531.1

Discontinued operations, net of tax

 

 

 

 
(12.2
)
 

 
0.5

 

 
(11.7
)
Net earnings (loss)
515.1

 
527.3

 
446.7

 
361.4

 
427.4

 
53.1

 
578.5

 
(2,390.1
)
 
519.4

Less: Net earnings attributable to noncontrolling interests

 

 

 

 

 

 
(4.3
)
 

 
(4.3
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
515.1

 
$
527.3

 
$
446.7

 
$
361.4

 
$
427.4

 
$
53.1

 
$
574.2

 
$
(2,390.1
)
 
$
515.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(15.2
)
 
(15.2
)
 
12.3

 
6.3

 
6.5

 
6.9

 
(20.6
)
 
3.8

 
(15.2
)
Comprehensive income (loss) attributable to Ingersoll-Rand plc
$
499.9

 
$
512.1

 
$
459.0

 
$
367.7

 
$
433.9

 
$
60.0

 
$
553.6

 
$
(2,386.3
)
 
$
499.9


29


Condensed Consolidating Statement of Comprehensive Income
For the nine months ended September 30, 2018
In millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
Net revenues
$

 
$

 
$

 
$

 
$
1,038.4

 
$

 
$
11,037.4

 
$
(302.7
)
 
$
11,773.1

Cost of goods sold

 

 

 

 
(758.0
)
 

 
(7,647.3
)
 
302.7

 
(8,102.6
)
Selling and administrative expenses
(7.4
)
 

 
(0.3
)
 
(0.2
)
 
(383.1
)
 
(0.2
)
 
(1,808.6
)
 

 
(2,199.8
)
Operating income (loss)
(7.4
)
 

 
(0.3
)
 
(0.2
)
 
(102.7
)
 
(0.2
)
 
1,581.5

 

 
1,470.7

Equity earnings (loss) in subsidiaries, net of tax
1,113.0

 
1,111.8

 
914.1

 
918.4

 
969.5

 
156.1

 

 
(5,182.9
)
 

Interest expense

 

 
0.1

 
(103.7
)
 
(35.1
)
 
(32.7
)
 
(0.3
)
 

 
(171.7
)
Intercompany interest and fees
(21.4
)
 

 
30.0

 
(137.1
)
 
24.1

 
(7.4
)
 
111.8

 

 

Other income/(expense), net

 

 
(0.1
)
 
0.7

 
(11.6
)
 
0.1

 
(5.1
)
 

 
(16.0
)
Earnings (loss) before income taxes
1,084.2

 
1,111.8

 
943.8

 
678.1

 
844.2

 
115.9

 
1,687.9

 
(5,182.9
)
 
1,283.0

Benefit (provision) for income taxes
(0.6
)
 

 

 
55.1

 
103.0

 

 
(317.4
)
 

 
(159.9
)
Earnings (loss) from continuing operations
1,083.6

 
1,111.8

 
943.8

 
733.2

 
947.2

 
115.9

 
1,370.5

 
(5,182.9
)
 
1,123.1

Discontinued operations, net of tax

 

 

 

 
(29.0
)
 

 
2.0

 

 
(27.0
)
Net earnings (loss)
1,083.6

 
1,111.8

 
943.8

 
733.2

 
918.2

 
115.9

 
1,372.5

 
(5,182.9
)
 
1,096.1

Less: Net earnings attributable to noncontrolling interests

 

 

 

 

 

 
(12.5
)
 

 
(12.5
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
1,083.6

 
$
1,111.8

 
$
943.8

 
$
733.2

 
$
918.2

 
$
115.9

 
$
1,360.0

 
$
(5,182.9
)
 
$
1,083.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(141.0
)
 
(140.6
)
 
(109.8
)
 
(59.7
)
 
(59.9
)
 
(46.4
)
 
(158.2
)
 
574.6

 
(141.0
)
Comprehensive income (loss) attributable to Ingersoll-Rand plc
$
942.6

 
$
971.2

 
$
834.0

 
$
673.5

 
$
858.3

 
$
69.5

 
$
1,201.8

 
$
(4,608.3
)
 
$
942.6


30


Condensed Consolidating Statement of Comprehensive Income
For the three months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
Net revenues
$

 
$

 
$

 
$

 
$
325.5

 
$

 
$
3,436.3

 
$
(91.3
)
 
$
3,670.5

Cost of goods sold

 

 

 

 
(231.6
)
 

 
(2,349.6
)
 
91.3

 
(2,489.9
)
Selling and administrative expenses
(3.8
)
 

 

 

 
(86.2
)
 
(0.1
)
 
(584.4
)
 

 
(674.5
)
Operating income (loss)
(3.8
)
 

 

 

 
7.7

 
(0.1
)
 
502.3

 

 
506.1

Equity earnings (loss) in subsidiaries, net of tax
380.2

 
377.6

 
363.6

 
255.5

 
316.6

 
26.1

 

 
(1,719.6
)
 

Interest expense

 

 

 
(31.7
)
 
(11.8
)
 
(10.2
)
 
(0.2
)
 

 
(53.9
)
Intercompany interest and fees
(9.4
)
 

 
(9.7
)
 
(44.9
)
 
(80.5
)
 
(2.1
)
 
146.6

 

 

Other income/(expense), net

 

 
0.1

 

 
(4.2
)
 

 
(3.5
)
 

 
(7.6
)
Earnings (loss) before income taxes
367.0

 
377.6

 
354.0

 
178.9

 
227.8

 
13.7

 
645.2

 
(1,719.6
)
 
444.6

Benefit (provision) for income taxes

 

 

 
28.0

 
24.3

 

 
(128.7
)
 

 
(76.4
)
Earnings (loss) from continuing operations
367.0

 
377.6

 
354.0

 
206.9

 
252.1

 
13.7

 
516.5

 
(1,719.6
)
 
368.2

Discontinued operations, net of tax

 

 

 

 
3.5

 

 
0.2

 

 
3.7

Net earnings (loss)
367.0

 
377.6

 
354.0

 
206.9

 
255.6

 
13.7

 
516.7

 
(1,719.6
)
 
371.9

Less: Net earnings attributable to noncontrolling interests

 

 

 

 

 

 
(4.9
)
 

 
(4.9
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
367.0

 
$
377.6

 
$
354.0

 
$
206.9

 
$
255.6

 
$
13.7

 
$
511.8

 
$
(1,719.6
)
 
$
367.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
116.8

 
116.6

 
107.4

 
48.6

 
48.6

 
60.5

 
112.5

 
(494.2
)
 
116.8

Comprehensive income (loss) attributable to Ingersoll-Rand plc
$
483.8

 
$
494.2

 
$
461.4

 
$
255.5

 
$
304.2

 
$
74.2

 
$
624.3

 
$
(2,213.8
)
 
$
483.8


31


Condensed Consolidating Statement of Comprehensive Income
For the nine months ended September 30, 2017
in millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
Net revenues
$

 
$

 
$

 
$

 
$
968.3

 
$

 
$
9,883.6

 
$
(272.4
)
 
$
10,579.5

Cost of goods sold

 

 

 

 
(695.3
)
 

 
(6,846.2
)
 
272.4

 
(7,269.1
)
Selling and administrative expenses
(12.0
)
 

 
(0.1
)
 
(0.9
)
 
(308.6
)
 
(0.3
)
 
(1,709.8
)
 

 
(2,031.7
)
Operating income (loss)
(12.0
)
 

 
(0.1
)
 
(0.9
)
 
(35.6
)
 
(0.3
)
 
1,327.6

 

 
1,278.7

Equity earnings (loss) in subsidiaries, net of tax
876.3

 
864.6

 
806.0

 
555.6

 
759.1

 
53.3

 

 
(3,914.9
)
 

Interest expense

 

 

 
(95.2
)
 
(35.6
)
 
(30.6
)
 
(0.6
)
 

 
(162.0
)
Intercompany interest and fees
(22.5
)
 

 
(33.2
)
 
(131.3
)
 
(231.8
)
 
(5.9
)
 
424.7

 

 

Other income/(expense), net

 

 
0.1

 

 
(6.5
)
 

 
(17.4
)
 

 
(23.8
)
Earnings (loss) before income taxes
841.8

 
864.6

 
772.8

 
328.2

 
449.6

 
16.5

 
1,734.3

 
(3,914.9
)
 
1,092.9

Benefit (provision) for income taxes
0.9

 

 

 
82.9

 
102.0

 

 
(429.0
)
 

 
(243.2
)
Earnings (loss) from continuing operations
842.7

 
864.6

 
772.8

 
411.1

 
551.6

 
16.5

 
1,305.3

 
(3,914.9
)
 
849.7

Discontinued operations, net of tax

 

 

 

 
3.9

 

 
1.6

 

 
5.5

Net earnings (loss)
842.7

 
864.6

 
772.8

 
411.1

 
555.5

 
16.5

 
1,306.9

 
(3,914.9
)
 
855.2

Less: Net earnings attributable to noncontrolling interests

 

 

 

 

 

 
(12.5
)
 

 
(12.5
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
842.7

 
$
864.6

 
$
772.8

 
$
411.1

 
$
555.5

 
$
16.5

 
$
1,294.4

 
$
(3,914.9
)
 
$
842.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
413.6

 
412.7

 
383.3

 
262.9

 
262.6

 
120.7

 
409.0

 
(1,851.2
)
 
413.6

Comprehensive income (loss) attributable to Ingersoll-Rand plc
$
1,256.3

 
$
1,277.3

 
$
1,156.1

 
$
674.0

 
$
818.1

 
$
137.2

 
$
1,703.4

 
$
(5,766.1
)
 
$
1,256.3


32


Condensed Consolidating Balance Sheet
September 30, 2018
 
In millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
40.3

 
$

 
$
254.5

 
$

 
$
727.7

 
$

 
$
1,022.5

Accounts and notes receivable, net

 

 
0.2

 

 
170.7

 

 
2,581.2

 

 
2,752.1

Inventories, net

 

 

 

 
168.6

 

 
1,652.8

 

 
1,821.4

Other current assets
0.4

 

 
7.8

 
11.5

 
107.0

 

 
359.9

 

 
486.6

Intercompany receivables
10.8

 

 
574.9

 

 
3,083.2

 

 
6,183.2

 
(9,852.1
)
 

Total current assets
11.2




623.2


11.5


3,784.0




11,504.8


(9,852.1
)

6,082.6

Property, plant and equipment, net

 

 
0.1

 

 
319.2

 

 
1,354.1

 

 
1,673.4

Goodwill and other intangible assets, net

 

 

 

 
430.1

 

 
9,238.6

 

 
9,668.7

Other noncurrent assets

 

 
4.1

 
282.6

 
506.1

 

 
626.1

 
(539.1
)
 
879.8

Investments in consolidated subsidiaries
9,158.2

 
9,115.9

 
3,545.9

 
11,320.5

 
11,536.2

 
1,256.9

 

 
(45,933.6
)
 

Intercompany notes receivable

 

 
1,000.0

 

 

 

 
1,249.7

 
(2,249.7
)
 

Total assets
$
9,169.4


$
9,115.9


$
5,173.3


$
11,614.6


$
16,575.6


$
1,256.9


$
23,973.3


$
(58,574.5
)

$
18,304.5

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
10.8

 
$

 
$
0.2

 
$
22.6

 
$
584.8

 
$
16.7

 
$
3,338.3

 
$

 
$
3,973.4

Short-term borrowings and current maturities of long-term debt

 

 

 

 
350.4

 

 
0.2

 

 
350.6

Intercompany payables
1,850.5

 

 
1,102.3

 
3,437.7

 
2,848.5

 
552.7

 
60.4

 
(9,852.1
)
 

Total current liabilities
1,861.3




1,102.5


3,460.3


3,783.7


569.4


3,398.9


(9,852.1
)

4,324.0

Long-term debt

 

 

 
2,329.4

 
319.4

 
1,090.7

 
0.3

 

 
3,739.8

Other noncurrent liabilities

 

 

 
72.1

 
1,162.0

 

 
2,202.5

 
(539.1
)
 
2,897.5

Intercompany notes payable

 

 

 
2,249.7

 

 

 

 
(2,249.7
)
 

Total liabilities
1,861.3




1,102.5


8,111.5


5,265.1


1,660.1


5,601.7


(12,640.9
)

10,961.3

Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
7,308.1

 
9,115.9

 
4,070.8

 
3,503.1

 
11,310.5

 
(403.2
)
 
18,371.6

 
(45,933.6
)
 
7,343.2

Total liabilities and equity
$
9,169.4


$
9,115.9


$
5,173.3


$
11,614.6


$
16,575.6


$
1,256.9


$
23,973.3


$
(58,574.5
)

$
18,304.5


33




Condensed Consolidating Balance Sheet
December 31, 2017
 
In millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
0.6

 
$

 
$
359.3

 
$

 
$
1,189.5

 
$

 
$
1,549.4

Accounts and notes receivable, net

 

 

 

 
166.5

 

 
2,310.9

 

 
2,477.4

Inventories, net

 

 

 

 
168.5

 

 
1,386.9

 

 
1,555.4

Other current assets
0.2

 

 
5.7

 
112.6

 
76.2

 

 
342.2

 

 
536.9

Intercompany receivables
1,819.1

 
9,912.2

 
2,036.8

 

 
1,849.9

 

 
5,014.8

 
(20,632.8
)
 

Total current assets
1,819.3

 
9,912.2

 
2,043.1

 
112.6

 
2,620.4

 

 
10,244.3

 
(20,632.8
)
 
6,119.1

Property, plant and equipment, net

 

 

 

 
310.6

 

 
1,240.7

 

 
1,551.3

Goodwill and other intangible assets, net

 

 

 

 
436.0

 

 
9,242.6

 

 
9,678.6

Other noncurrent assets

 

 

 
185.4

 
471.1

 

 
550.8

 
(383.0
)
 
824.3

Investments in consolidated subsidiaries
7,318.1

 
1,684.2

 
2,953.9

 
10,480.3

 
10,923.7

 
1,150.9

 

 
(34,511.1
)
 

Total assets
$
9,137.4

 
$
11,596.4

 
$
4,997.0

 
$
10,778.3

 
$
14,761.8

 
$
1,150.9

 
$
21,278.4

 
$
(55,526.9
)
 
$
18,173.3

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
8.5

 
$

 
$
0.2

 
$
27.3

 
$
572.3

 
$
6.9

 
$
3,105.8

 
$

 
$
3,721.0

Short-term borrowings and current maturities of long-term debt

 

 

 
749.6

 
350.4

 

 
7.0

 

 
1,107.0

Intercompany payables
1,988.3

 

 
9,316.7

 
5,481.1

 
1,790.0

 
523.3

 
1,533.4

 
(20,632.8
)
 

Total current liabilities
1,996.8

 

 
9,316.9

 
6,258.0

 
2,712.7

 
530.2

 
4,646.2

 
(20,632.8
)
 
4,828.0

Long-term debt

 

 

 
1,539.9

 
326.8

 
1,089.7

 
0.6

 

 
2,957.0

Other noncurrent liabilities
0.3

 

 

 
92.4

 
1,251.8

 

 
2,219.9

 
(383.0
)
 
3,181.4

Total liabilities
1,997.1

 

 
9,316.9

 
7,890.3

 
4,291.3

 
1,619.9

 
6,866.7

 
(21,015.8
)
 
10,966.4

Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
7,140.3

 
11,596.4

 
(4,319.9
)
 
2,888.0

 
10,470.5

 
(469.0
)
 
14,411.7

 
(34,511.1
)
 
7,206.9

Total liabilities and equity
$
9,137.4

 
$
11,596.4

 
$
4,997.0

 
$
10,778.3

 
$
14,761.8

 
$
1,150.9

 
$
21,278.4

 
$
(55,526.9
)
 
$
18,173.3


34


Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2018
 
in millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) continuing operating activities
$
97.2

 
$
(2.7
)
 
$
17.5

 
$
(116.4
)
 
$
791.7

 
$
(24.7
)
 
$
183.8

 
$

 
$
946.4

Net cash provided by (used in) discontinued operating activities

 

 

 

 
(51.0
)
 

 
2.0

 

 
(49.0
)
Net cash provided by (used in) operating activities
97.2


(2.7
)

17.5


(116.4
)

740.7


(24.7
)

185.8




897.4

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 

 

 

 
(69.0
)
 

 
(182.2
)
 

 
(251.2
)
Acquisitions and equity method investments, net of cash acquired

 

 

 

 

 

 
(281.5
)
 

 
(281.5
)
Other investing activities, net

 

 
(4.0
)
 

 
3.0

 

 
13.1

 

 
12.1

Intercompany investing activities, net
889.7

 
(648.3
)
 
501.0

 

 
(1,205.7
)
 

 
636.4

 
(173.1
)
 

Net cash provided by (used in) continuing investing activities
889.7


(648.3
)

497.0




(1,271.7
)



185.8


(173.1
)

(520.6
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds (repayments) from debt

 

 

 
31.6

 
(7.5
)
 

 
(6.4
)
 

 
17.7

Debt issuance costs

 

 

 
(12.0
)
 

 

 

 

 
(12.0
)
Dividends paid to ordinary shareholders
(351.2
)
 

 

 

 

 

 

 

 
(351.2
)
Dividends paid to noncontrolling interests

 

 

 

 

 

 
(41.1
)
 

 
(41.1
)
Repurchase of ordinary shares
(514.1
)
 

 

 

 

 

 

 

 
(514.1
)
Other financing activities, net
36.3

 

 

 

 
(1.2
)
 

 
(3.3
)
 

 
31.8

Intercompany financing activities, net
(157.9
)
 
651.0

 
(474.8
)
 
96.8

 
434.9

 
24.7

 
(747.8
)
 
173.1

 

Net cash provided by (used in) continuing financing activities
(986.9
)

651.0


(474.8
)

116.4


426.2


24.7


(798.6
)

173.1


(868.9
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

 
(34.8
)
 

 
(34.8
)
Net increase (decrease) in cash and cash equivalents




39.7




(104.8
)



(461.8
)



(526.9
)
Cash and cash equivalents - beginning of period

 

 
0.6

 

 
359.3

 

 
1,189.5

 

 
1,549.4

Cash and cash equivalents - end of period
$

 
$

 
$
40.3

 
$

 
$
254.5

 
$

 
$
727.7

 
$

 
$
1,022.5


35


Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2017

in millions
Plc
 
Irish
Holdings
 
Lux International
 
Global
Holding
 
New
Jersey
 
Lux
Finance
 
Other
Subsidiaries
 
Consolidating
Adjustments
 

Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) continuing operating activities
$
82.7

 
$

 
$
(17.5
)
 
$
(214.2
)
 
$
228.1

 
$
(23.9
)
 
$
835.6

 
$

 
$
890.8

Net cash provided by (used in) discontinued operating activities

 

 

 

 
(15.5
)
 

 
(2.1
)
 

 
(17.6
)
Net cash provided by (used in) operating activities
82.7

 

 
(17.5
)
 
(214.2
)
 
212.6

 
(23.9
)
 
833.5

 

 
873.2

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 

 

 

 
(59.8
)
 

 
(90.1
)
 

 
(149.9
)
Acquisitions and equity method investments, net of cash acquired

 

 

 

 
(2.7
)
 

 
(57.6
)
 

 
(60.3
)
Other investing activities, net

 

 

 

 

 

 
3.8

 

 
3.8

Intercompany investing activities, net

 

 
1,170.9

 
270.1

 
(347.0
)
 
11.7

 
56.2

 
(1,161.9
)
 

Net cash provided by (used in) continuing investing activities

 

 
1,170.9

 
270.1

 
(409.5
)
 
11.7

 
(87.7
)
 
(1,161.9
)
 
(206.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds (repayments) from debt

 

 

 

 
(7.5
)
 

 
(4.1
)
 

 
(11.6
)
Debt issuance costs

 

 

 
(0.2
)
 

 

 

 

 
(0.2
)
Dividends paid to ordinary shareholders
(318.0
)
 

 

 

 

 

 

 

 
(318.0
)
Dividends paid to noncontrolling interests

 

 

 

 

 

 
(15.5
)
 

 
(15.5
)
Acquisition of noncontrolling interest

 

 

 

 

 

 
(6.8
)
 

 
(6.8
)
Repurchase of ordinary shares
(911.1
)
 

 

 

 

 

 

 

 
(911.1
)
Other financing activities, net
41.9

 

 

 

 
(1.2
)
 

 

 

 
40.7

Intercompany financing activities, net
1,104.5

 

 
(1,153.4
)
 
(55.5
)
 
35.8

 
12.2

 
(1,105.5
)
 
1,161.9

 

Net cash provided by (used in) continuing financing activities
(82.7
)
 

 
(1,153.4
)
 
(55.7
)
 
27.1

 
12.2

 
(1,131.9
)
 
1,161.9

 
(1,222.5
)
Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

 
100.0

 

 
100.0

Net increase (decrease) in cash and cash equivalents

 

 

 
0.2

 
(169.8
)
 

 
(286.1
)
 

 
(455.7
)
Cash and cash equivalents - beginning of period

 

 

 

 
634.6

 

 
1,080.1

 

 
1,714.7

Cash and cash equivalents - end of period
$

 
$

 
$

 
$
0.2

 
$
464.8

 
$

 
$
794.0

 
$

 
$
1,259.0


36


Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q; and under Part I, Item 1A – Risk Factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Quarterly Report.
Overview
Organizational
We are a diversified, global company that provides products, services and solutions to enhance the quality, energy efficiency and comfort of air in homes and buildings, transport and protect food and perishables and increase industrial productivity and efficiency. Our business segments consist of Climate and Industrial, both with strong brands and highly differentiated products 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 Ingersoll-Rand®, Trane®, Thermo King®, American Standard®, ARO®, and Club Car®.
To achieve our mission of being a world leader in creating comfortable, sustainable and efficient environments, we continue to focus on growth by increasing our recurring revenue stream from parts, service, controls, used equipment and rentals; and to continuously improve the efficiencies and capabilities of the products and services of our businesses. We also continue to focus on operational excellence strategies as a central theme to improving our earnings and cash flows.
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, and the breadth of our product and services portfolios, have 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. We regularly perform detailed evaluations of the different market segments we are serving to proactively detect trends and to adapt our strategies accordingly. In addition, we believe our order rates are indicative of future revenue and thus are 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 economic conditions are showing positive trends in each of the segments in which we participate. Heating, Ventilation, and Air Conditioning (HVAC) equipment replacement, services, controls and aftermarket continue to experience strong demand. In addition, Residential and Commercial new construction have seen continued momentum in the United States which is positively impacting the results of our HVAC businesses. However, markets in Europe, Middle East and Asia are mixed. Global Industrial markets are showing continued growth in equipment and services. In 2018, we expect growth in both our Climate and Industrial segments, each benefiting from operational excellence initiatives, new product launches and continued productivity programs.
We believe we have a solid foundation of global brands and strong market positions 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
Tax Cuts and Job Act
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”) which makes widespread changes to the Internal Revenue Code. The Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously not subject to U.S. tax and creates new income taxes on certain foreign sourced earnings. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which provides guidance on accounting for the tax effects of the Act and allows for adjustments to provisional amounts during a measurement period of up to one year.  In accordance with SAB 118, we have made reasonable estimates related to (1) the remeasurement of U.S. deferred tax balances for the reduction in the tax rate, (2) the liability for the transition tax and (3) the taxes accrued relating to the change in permanent reinvestment assertion for unremitted earnings of certain foreign subsidiaries. As a result, we recognized a net provisional income tax benefit of $21.0 million associated with these items in 2017. We are continuing to evaluate how the

37


provisions of the Act will be accounted for under ASC 740, “Income Taxes” (ASC 740).  The analysis is provisional and is subject to change due to the additional time required to accurately calculate and review the complex tax law. Measurement period adjustments will be reported as a component of Benefit (Provision) for income taxes in the reporting period the amounts are determined. The final accounting will be completed no later than one year from the enactment of the Act. During the nine months ended September 30, 2018, we recorded net measurement period adjustments of $75.5 million to increase the net provisional income tax benefit recorded as of December 31, 2017.
Issuance and Redemption of Senior Notes
In February 2018, we issued $1.15 billion principal amount of senior notes in three tranches through an indirect, wholly-owned subsidiary. The tranches consist of $300 million aggregate principal amount of 2.900% senior notes due 2021, $550 million aggregate principal amount of 3.750% senior notes due 2028 and $300 million aggregate principal amount of 4.300% senior notes due 2048. In March 2018, we used the proceeds to fund the redemption of $750 million aggregate principal amount of 6.875% senior notes due 2018 and $350 million aggregate principal amount of 2.875% senior notes due 2019, with the remainder used for general corporate purposes.
Acquisitions and Equity Method Investments
During the nine months ended September 30, 2018, we acquired several businesses and entered into a joint venture. The aggregate cash paid, net of cash acquired, totaled $281.5 million and was funded through cash on hand. Acquisition activity during 2018 primarily related to ICS Group Holdings Limited which was acquired in January 2018. The business, reported within the Climate segment, specializes in the temporary rental of energy efficient chillers for commercial and industrial buildings across Europe. In addition, we continue to acquire independent dealers to expand our distribution network. In May 2018, we completed our investment of a 50% ownership interest in a joint venture with Mitsubishi Electric Corporation (Mitsubishi). The joint venture, reported within the Climate segment, will focus on marketing, selling and supporting variable refrigerant flow (VRF) and ductless heating and air conditioning systems through Trane, American Standard and Mitsubishi channels in the U.S. and select Latin American countries.
Share Repurchase Program and Dividends
Share repurchases are made from time to time in accordance with our capital allocation strategy, subject to market conditions and regulatory requirements. In February 2017, our Board of Directors authorized the repurchase of up to $1.5 billion of our ordinary shares (the 2017 Authorization). Repurchases under this program, which began in May 2017, totaled approximately $600 million at December 31, 2017 and are held in treasury. During the nine months ended September 30, 2018, we repurchased and canceled approximately $514 million of our ordinary shares leaving approximately $386 million remaining under the 2017 Authorization at September 30, 2018. In October 2018, our Board of Directors authorized the repurchase of up to $1.5 billion of our ordinary shares upon completion of the 2017 Authorization.
In June 2018, we announced an increase in our quarterly share dividend from $0.45 to $0.53 per ordinary share. This reflects an 18% increase that began with our September 2018 payment.



38


Results of Operations
Our Climate segment delivers energy-efficient products and innovative energy services. It includes Trane® and American Standard® Heating & Air Conditioning which provide heating, ventilation and air conditioning (HVAC) systems, and commercial and residential building services, parts, support and controls; energy services and building automation through Trane Building Advantage and Nexia; and Thermo King® transport temperature control solutions.
Our Industrial segment delivers products and services that enhance energy efficiency, productivity and operations. It includes compressed air and gas systems and services, power tools, material handling systems, ARO® fluid management equipment, as well as Club Car ® golf, utility and consumer low-speed vehicles.
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. We define Segment operating margin as Segment operating income as a percentage of Net revenues.
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" (ASC 606), which created a comprehensive, five-step model for revenue recognition that requires a company to recognize revenue to depict the transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. We adopted this standard on January 1, 2018 using the modified retrospective approach and recorded a cumulative effect adjustment to increase Retained earnings by $2.4 million. Related amounts did not materially impact Net revenuesOperating income or the Balance Sheet.
Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
Dollar amounts in millions
2018
 
2017
 
Period Change
 
2018 % of
revenues
 
2017 % of
revenues
Net revenues
$
4,030.9

 
$
3,670.5

 
$
360.4

 
 
 
 
Cost of goods sold
(2,718.3
)
 
(2,489.9
)
 
(228.4
)
 
67.4
%
 
67.8
%
Selling and administrative expenses
(725.6
)
 
(674.5
)
 
(51.1
)
 
18.0
%
 
18.3
%
Operating income
587.0

 
506.1

 
80.9

 
14.6
%
 
13.8
%
Interest expense
(48.5
)
 
(53.9
)
 
5.4

 
 
 
 
Other income/(expense), net
(8.5
)
 
(7.6
)
 
(0.9
)
 
 
 
 
Earnings before income taxes
530.0

 
444.6

 
85.4

 
 
 
 
Benefit (provision) for income taxes
1.1

 
(76.4
)
 
77.5

 
 
 
 
Earnings from continuing operations
531.1

 
368.2

 
162.9

 
 
 
 
Discontinued operations, net of tax
(11.7
)
 
3.7

 
(15.4
)
 
 
 
 
Net earnings
$
519.4

 
$
371.9

 
$
147.5

 
 
 
 
Net Revenues
Net revenues for the three months ended September 30, 2018 increased by 9.8%, or $360.4 million, compared with the same period in 2017, which resulted from the following:
Volume/product mix
8.0
 %
Acquisitions
1.1
 %
Pricing
1.7
 %
Currency translation
(1.0
)%
Total
9.8
 %
The increase was primarily driven by higher volumes in both our Climate and Industrial segments. Improved pricing, along with incremental revenues from acquisitions, further contributed to the year-over-year increase. However, each segment was impacted by unfavorable foreign currency exchange rate movements.

39


Our revenues by segment for the three month period ended September 30 are as follows:
Dollar amounts in millions
2018
 
2017
 
% change
Climate
$
3,238.7

 
$
2,939.3

 
10.2
%
Industrial
792.2

 
731.2

 
8.3
%
Total
$
4,030.9

 
$
3,670.5

 
 
Climate
Net revenues for the three months ended September 30, 2018 increased by 10.2% or $299.4 million, compared with the same period of 2017. Higher volumes and improved pricing were the primary drivers of the year-over-year increase. The components of the period change are as follows:
Volume/product mix
8.3
 %
Acquisitions
1.1
 %
Pricing
1.7
 %
Currency translation
(0.9
)%
Total
10.2
 %
Industrial
Net revenues for the three months ended September 30, 2018 increased by 8.3% or $61.0 million, compared with the same period of 2017. Higher volumes and improved pricing were the primary drivers of the year-over-year increase. The components of the period change are as follows:
Volume/product mix
7.0
 %
Acquisitions
0.9
 %
Pricing
1.7
 %
Currency translation
(1.3
)%
Total
8.3
 %
Operating Income/Margin
Operating margin increased to 14.6% for the three months ended September 30, 2018 compared to 13.8% for the same period of 2017. The increase was primarily the result of improved pricing and increased productivity. Higher volumes and incremental operating income from acquisitions further contributed to the year-over-year increase. These amounts were partially offset by material and other inflation, higher investment and restructuring spending as well as unfavorable foreign currency exchange rate movements.
Dollar amounts in millions
 
2018 Operating Income (Expense)
 
2017 Operating Income (Expense)
 
Period Change
2018 Operating Margin
 
2017 Operating Margin
Climate
 
$
535.6

 
$
480.1

 
$
55.5

16.5
%
 
16.3
%
Industrial
 
110.7

 
89.0

 
21.7

14.0
%
 
12.2
%
Unallocated corporate expenses
 
(59.3
)
 
(63.0
)
 
3.7

N/A

 
N/A

Total
 
$
587.0

 
$
506.1

 
$
80.9

14.6
%
 
13.8
%
Climate
Operating margin increased to 16.5% for the three months ended September 30, 2018 compared to 16.3% for the same period of 2017. The increase was primarily the result of improved pricing and increased productivity. Higher volumes and incremental operating income from acquisitions further contributed to the year-over-year increase. These amounts were partially offset by material and other inflation, higher investment and restructuring spending.

40


Industrial
Operating margin increased to 14.0% for the three months ended September 30, 2018 compared to 12.2% for the same period of 2017. The increase was primarily the result of higher volumes, improved pricing and increased productivity. In addition, incremental operating income from acquisitions further contributed to the year-over-year increase. These amounts were partially offset by material and other inflation, higher investment and restructuring spending as well as unfavorable foreign currency exchange rate movements.
Unallocated Corporate Expenses
Unallocated corporate expense for the three months ended September 30, 2018 decreased by $3.7 million compared with the same period of 2017.  Lower functional costs and the timing of project spending more than offset compensation and benefit charges related to variable compensation.
Interest Expense
Interest expense for the three months ended September 30, 2018 decreased by $5.4 million compared with the same period of 2017. During the first quarter of 2018, we issued $1.15 billion of senior notes and redeemed $1.1 billion of senior notes. The decrease primarily relates to lower interest rates on the new debt issuance.
Other Income/(Expense), Net
The components of Other income/(expense), net for the three months ended September 30 were as follows:
In millions
2018
 
2017
Interest income
$
0.1

 
$
2.3

Exchange gain (loss)
(5.1
)
 
(2.0
)
Other components of net periodic benefit cost
(6.3
)
 
(7.3
)
Other activity, net
2.8

 
(0.6
)
Other income/(expense), net
$
(8.5
)
 
$
(7.6
)
Other income /(expense), net includes the results from activities other than normal business operations such as interest income and foreign currency gains and losses on transactions that are denominated in a currency other than an entity’s functional currency. In addition, we include the components of net periodic benefit cost for pension and post retirement obligations other than the service cost component. Other activity, net includes items associated with Trane U.S. Inc. (Trane) for the settlement and defense of asbestos-related claims, insurance settlements on asbestos-related matters and the revaluation of its liability for potential future claims.
Provision for Income Taxes
For the three months ended September 30, 2018, our effective tax rate was (0.2)% which is lower than the U.S. Statutory rate of 21% primarily due to $77.1 million of measurement period adjustments associated with the Tax Cuts and Job Act (the "Act") and a $28.5 million reduction in a deferred tax asset valuation allowance for certain state net deferred tax assets. Measurement period adjustments associated with the transition tax and the change in permanent reinvestment assertion primarily relate to the realization of foreign tax credits and result from the filing of the U.S. Federal income tax return, legislative guidance issued during the quarter and revised projections of future foreign sourced income during the carryforward period. The reduction in the valuation allowance for certain state net deferred tax assets is primarily the result of revised projections of future state taxable income during the carryforward period. In addition, the lower effective income tax rate was driven by excess tax benefits from employee share-based payments, the provision to return true-up due to the filing of the U.S. Federal income tax return and the revaluation of deferred taxes associated with changes in U.S. state tax rates. These amounts were partially offset by U.S. state and local income taxes and certain non-deductible employee expenses. The effective tax rate for the three months ended September 30, 2017 was 17.2% which is lower than the U.S. statutory rate of 35% primarily driven by the provision to return true-up due to the filing of the U.S. Federal income tax return, a reduction of a previously accrued tax liability due to obtaining approval from a local non-U.S. tax authority and earnings in non-U.S. jurisdictions, which in aggregate, have a lower effective tax rate. In general, when comparing the results of multiple reporting periods, among other factors, the mix of earnings between U.S. and foreign jurisdictions can cause variability on our overall effective tax rate.

41


Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
In millions, except per share amounts
2018
 
2017
 
Period Change
 
2018 % of
revenues
 
2017 % of
revenues
Net revenues
$
11,773.1

 
$
10,579.5

 
$
1,193.6

 
 
 
 
Cost of goods sold
(8,102.6
)
 
(7,269.1
)
 
(833.5
)
 
68.8
%
 
68.7
%
Selling and administrative expenses
(2,199.8
)
 
(2,031.7
)
 
(168.1
)
 
18.7
%
 
19.2
%
Operating income
1,470.7

 
1,278.7

 
192.0

 
12.5
%
 
12.1
%
Interest expense
(171.7
)
 
(162.0
)
 
(9.7
)
 
 
 
 
Other income/(expense), net
(16.0
)
 
(23.8
)
 
7.8

 
 
 
 
Earnings before income taxes
1,283.0

 
1,092.9

 
190.1

 
 
 
 
Benefit (provision) for income taxes
(159.9
)
 
(243.2
)
 
83.3

 
 
 
 
Earnings from continuing operations
1,123.1

 
849.7

 
273.4

 
 
 
 
Discontinued operations, net of tax
(27.0
)
 
5.5

 
(32.5
)
 
 
 
 
Net earnings
$
1,096.1

 
$
855.2

 
$
240.9

 
 
 
 
Net Revenues
Net revenues for the nine months ended September 30, 2018 increased by 11.3%, or $1,193.6 million, compared with the same period in 2017, which resulted from the following:
Volume/product mix
7.7
%
Acquisitions
1.1
%
Pricing
1.3
%
Currency translation
1.2
%
Total
11.3
%
The increase was primarily driven by higher volumes in both our Climate and Industrial segments. Improved pricing, along with incremental revenues from acquisitions, further contributed to the year-over-year increase. In addition, each segment benefited from favorable foreign currency exchange rate movements.
Our revenues by segment for the nine month period ended September 30 are as follows:
Dollar amounts in millions
2018
 
2017
 
% change
Climate
$
9,342.3

 
$
8,407.2

 
11.1%
Industrial
2,430.8

 
2,172.3

 
11.9%
Total
$
11,773.1

 
$
10,579.5

 
 
Climate
Net revenues for the nine months ended September 30, 2018 increased by 11.1% or $935.1 million, compared with the same period of 2017. Higher volumes and improved pricing were the primary drivers of the year-over-year increase. The components of the period change are as follows:
Volume/product mix
7.9
%
Acquisitions
1.1
%
Pricing
1.2
%
Currency translation
0.9
%
Total
11.1
%

42


Industrial
Net revenues for the nine months ended September 30, 2018 increased by 11.9% or $258.5 million, compared with the same period of 2017. Higher volumes and improved pricing were the primary drivers of the year-over-year increase. The components of the period change are as follows:
Volume/product mix
7.2
%
Acquisitions
1.2
%
Pricing
1.5
%
Currency translation
2.0
%
Total
11.9
%
Operating Income/Margin
Operating margin increased to 12.5% for the nine months ended September 30, 2018 compared to 12.1% for the same period of 2017. The increase was primarily the result of higher volumes, improved pricing and increased productivity. These amounts were partially offset by material and other inflation, higher investment and restructuring spending.
Dollar amounts in millions
 
2018 Operating Income (Expense)
 
2017 Operating Income (Expense)
 
Period Change
2018 Operating Margin
 
2017 Operating Margin
Climate
 
$
1,378.7

 
$
1,224.5

 
$
154.2

14.8
%
 
14.6
%
Industrial
 
291.8

 
247.0

 
44.8

12.0
%
 
11.4
%
Unallocated corporate expenses
 
(199.8
)
 
(192.8
)
 
(7.0
)
N/A

 
N/A

Total
 
$
1,470.7

 
$
1,278.7

 
$
192.0

12.5
%
 
12.1
%
Climate
Operating margin increased to 14.8% for the nine months ended September 30, 2018 compared to 14.6% for the same period of 2017. The increase was primarily the result of improved pricing and increased productivity. Higher volumes and incremental operating income from acquisitions further contributed to the year-over-year increase. These amounts were partially offset by material and other inflation, higher investment and restructuring spending.
Industrial
Operating margin increased to 12.0% for the nine months ended September 30, 2018 compared to 11.4% for the same period of 2017. The increase was primarily the result of higher volumes, improved pricing and increased productivity. These amounts were partially offset by material and other inflation, higher investment and restructuring spending.
Unallocated Corporate Expenses
Unallocated corporate expenses for the nine months ended September 30, 2018 increased by $7.0 million compared with the same period of 2017. Lower functional costs and the timing of project spending were more than offset by higher compensation and benefit charges related to variable compensation and restructuring actions.
Interest Expense
Interest expense for the nine months ended September 30, 2018 increased $9.7 million compared with the same period of 2017. During the first quarter of 2018, we issued $1.15 billion of senior notes and redeemed $1.1 billion of senior notes. The increase primarily relates to the redemption of the senior notes in which we recognized $15.4 million of premium expense and $1.2 million of unamortized costs in Interest expense. This amount was partially offset by lower interest rates on the new senior notes issued during the period.


43


Other Income/(Expense), Net
The components of Other income/(expense), net for the nine months ended September 30 are as follows:
In millions
2018
 
2017
Interest income
$
6.3

 
$
6.7

Exchange gain (loss)
(14.2
)
 
(3.5
)
Other components of net periodic benefit cost
(16.0
)
 
(21.7
)
Other activity, net
7.9

 
(5.3
)
Other income/(expense), net
$
(16.0
)
 
$
(23.8
)
Other income /(expense), net includes the results from activities other than normal business operations such as interest income and foreign currency gains and losses on transactions that are denominated in a currency other than an entity’s functional currency. In addition, we include the components of net periodic benefit cost for pension and post retirement obligations other than the service cost component. Other activity, net includes items associated with Trane for the settlement and defense of asbestos-related claims, insurance settlements on asbestos-related matters and the revaluation of its liability for potential future claims.
Provision for Income Taxes
For the nine months ended September 30, 2018, our effective tax rate was 12.5% which is lower than the U.S. statutory rate of 21% primarily due to the $75.5 million of measurement period adjustments associated with the Act and a $28.5 million reduction in a deferred tax asset valuation allowance for certain state net deferred tax assets. Measurement period adjustments associated with the transition tax and the change in permanent reinvestment assertion primarily relate to the realization of foreign tax credits and result from the filing of the U.S. Federal income tax return, legislative guidance issued during the quarter and revised projections of future foreign sourced income during the carryforward period. The reduction in the valuation allowance for certain state net deferred tax assets is primarily the result of revised projections of future state taxable income during the carryforward period. In addition, the lower effective income tax rate was driven by excess tax benefits from employee share-based payments and a reduction to the interest liability associated with our unrecognized tax benefits. These amounts were partially offset by U.S. state and local income taxes and certain non-deductible employee expenses. The effective tax rate for the nine months ended September 30, 2017 was 22.3% which was lower than the U.S. statutory rate of 35% primarily due to excess tax benefits from employee share-based payments, the provision to return true-up due to the filing of the U.S. Federal income tax return, a reduction of a previously accrued tax liability due to obtaining approval from a local non-U.S. tax authority and earnings in non-U.S. jurisdictions, which in aggregate have a lower effective tax rate. These amounts were partially offset by a non-cash charge during the second quarter of 2017 related to the establishment of a valuation allowance on certain net deferred tax assets in Brazil of approximately $33 million. In general, when comparing the results of multiple reporting periods, among other factors, the mix of earnings between U.S. and foreign jurisdictions can cause variability on our overall effective tax rate.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments and income tax payments. Our cash requirements primarily consist of the following:

Funding of working capital
Funding of capital expenditures
Debt service requirements
Our primary sources of liquidity include cash balances on hand, cash flows from operations, proceeds from debt offerings, commercial paper, and borrowing availability under our existing credit facilities. We earn a significant amount of our operating income in jurisdictions where it is deemed to be permanently reinvested. Our most prominent jurisdiction of operation is the U.S. We expect existing cash and cash equivalents available to the U.S. operations, the cash generated by our U.S. operations, our committed credit lines as well as our expected ability to access the capital and debt markets will be sufficient to fund our U.S. operating and capital needs for at least the next twelve months and thereafter for the foreseeable future. In addition, we expect existing non-U.S. cash and cash equivalents and the cash generated by our non-U.S. operations will be sufficient to fund our non-U.S. operating and capital needs for at least the next twelve months and thereafter for the foreseeable future.
As of September 30, 2018, we had approximately $1.0 billion of cash and cash equivalents on hand, of which approximately $0.7 billion was held by non-U.S. subsidiaries. Cash and cash equivalents held by our non-U.S. subsidiaries are generally available for use in our U.S. operations via intercompany loans, equity infusions or via distributions from direct or indirectly owned non-U.S. subsidiaries for which we do not assert permanent reinvestment. As a result of the Tax Cuts and Jobs Act, additional repatriation

44


opportunities to access cash and cash equivalents held by non-U.S. subsidiaries have been created. In general, repatriation of cash to the U.S. can be completed with no significant incremental U.S. tax. However, to the extent that we repatriate funds from non-U.S. subsidiaries for which we assert permanent reinvestment to fund our U.S. operations, we would be required to accrue and pay applicable non-U.S. taxes. As of September 30, 2018, we currently have no plans to repatriate funds from subsidiaries for which we assert permanent reinvestment.
Share repurchases are made from time to time in accordance with our capital allocation strategy, subject to market conditions and regulatory requirements. In February 2017, our Board of Directors authorized the repurchase of up to $1.5 billion of our ordinary shares (the 2017 Authorization). Repurchases under this program, which began in May 2017, totaled approximately $600 million at December 31, 2017 and are held in treasury. During the nine months ended September 30, 2018, we repurchased and canceled approximately $514 million of our ordinary shares leaving approximately $386 million remaining under the 2017 Authorization at September 30, 2018. In October 2018, our Board of Directors authorized the repurchase of up to $1.5 billion of our ordinary shares upon completion of the 2017 Authorization.
In June 2018, we announced an increase in our quarterly share dividend from $0.45 to $0.53 per ordinary share. This reflects an 18% increase that began with our September 2018 payment. We continue to be active with acquisitions and joint venture activity. Since the beginning of 2018, we entered into a joint venture and acquired several businesses, including channel acquisitions, that complement existing products and services further growing our product portfolio. In addition, we incur ongoing costs associated with restructuring initiatives intended to result in improved operating performance, profitability and working capital levels. Actions associated with these initiatives may include workforce reductions, improving manufacturing productivity, realignment of management structures and rationalizing certain assets. We expect that our available cash flow, committed credit lines and access to the capital markets will be sufficient to fund share repurchases, dividends, ongoing restructuring actions, acquisitions and joint venture activity.
Liquidity
The following table contains several key measures of our financial condition and liquidity at the period ended:
In millions
September 30,
2018
 
December 31,
2017
Cash and cash equivalents
$
1,022.5

 
$
1,549.4

Short-term borrowings and current maturities of long-term debt
350.6

 
1,107.0

Long-term debt
3,739.8

 
2,957.0

Total debt
4,090.4

 
4,064.0

Total Ingersoll-Rand plc shareholders’ equity
7,308.1

 
7,140.3

Total equity
7,343.2

 
7,206.9

Debt-to-total capital ratio
35.8
%
 
36.1
%
Debt and Credit Facilities
Our short-term obligations primarily consist of current maturities of long-term debt and commercial paper.  We have outstanding $343.0 million of fixed rate debentures that contain a put feature that the holders may exercise on each anniversary of the issuance date.  If exercised, we are obligated to repay in whole or in part, at the holder’s option, the outstanding principal amount (plus accrued and unpaid interest) of the debentures held by the holder.  In addition, we also maintain a commercial paper program which is used for general corporate purposes.  Under the program, the maximum aggregate amount of unsecured commercial paper notes available to be issued, on a private placement basis, is $2 billion as of September 30, 2018. We had no outstanding balance under our commercial paper program at September 30, 2018 and December 31, 2017.  See Note 6 to the Consolidated Financial Statements for additional information regarding the terms of our short-term obligations.
Our long-term obligations primarily consist of long-term debt with final maturity dates ranging between 2019 and 2048.  In addition, we maintain two 5-year, $1.0 billion revolving credit facilities.  Each senior unsecured credit facility provides support for our commercial paper program and can be used for working capital and other general corporate purposes. Total commitments of $2.0 billion were unused at September 30, 2018 and December 31, 2017. On April 17, 2018, the Company entered into a new 5-year, $1.0 billion senior unsecured credit facility and terminated its 5-year, $1.0 billion facility set to expire in March 2019. As a result, the current maturity dates of the revolving credit facilities are March 2021 and April 2023.
In February 2018, the Company issued $1.15 billion principal amount of senior notes in three tranches through an indirect, wholly-owned subsidiary. The tranches consist of $300 million aggregate principal amount of 2.900% senior notes due 2021, $550 million aggregate principal amount of 3.750% senior notes due 2028 and $300 million aggregate principal amount of 4.300% senior notes due 2048. In March 2018, the Company used the proceeds to fund the redemption of $750 million aggregate principal amount of

45


6.875% senior notes due 2018 and $350 million aggregate principal amount of 2.875% senior notes due 2019, with the remainder used for general corporate purposes. As a result of the early redemption, the Company recognized $15.4 million of premium expense and $1.2 million of unamortized costs in Interest expense. See Note 6 and Note 20 to the Condensed Consolidated Financial Statements for additional information regarding the terms of our long-term obligations and their related guarantees.
Cash Flows
The following table reflects the major categories of cash flows for the nine months ended September 30. For additional details, see the Condensed Consolidated Statements of Cash Flows in the condensed consolidated financial statements.
In millions
2018
 
2017
Net cash provided by (used in) continuing operating activities
$
946.4

 
$
890.8

Net cash provided by (used in) continuing investing activities
(520.6
)
 
(206.4
)
Net cash provided by (used in) continuing financing activities
(868.9
)
 
(1,222.5
)
Operating Activities
Net cash provided by continuing operating activities for the nine months ended September 30, 2018 was $946.4 million, of which net income provided $1,520.2 million after adjusting for non-cash transactions. Changes in assets and liabilities, net used $573.8 million.  Improvements in accounts payable were more than offset by the seasonal increase to inventory balances and higher outstanding accounts receivable from higher sales volumes. Net cash provided by continuing operating activities for the nine months ended September 30, 2017 was $890.8 million, of which net income provided $1,281.8 million after adjusting for non-cash transactions. Changes in assets and liabilities, net used $391.0 million. Improvements in accounts payable were more than offset by the seasonal increase to inventory balances and higher outstanding accounts receivable.
Investing Activities
Cash flows from investing activities represents inflows and outflows regarding the purchase and sale of assets. Primary activities associated with these items include capital expenditures, proceeds from the sale of property, plant and equipment, acquisitions, investment in joint ventures and divestitures. During the nine months ended September 30, 2018, net cash used in investing activities from continuing operations was $520.6 million. The primary driver of the usage is attributable to the acquisition of several businesses and the investment of a 50% ownership interest in a joint venture with Mitsubishi. The total outflow, net of cash acquired, was $281.5 million. Other outflows included capital expenditures which totaled $251.2 million. Net cash used in investing activities from continuing operations for the nine months ended September 30, 2017 was $206.4 million. The primary driver of the usage was attributable to capital expenditures of $149.9 million. In addition, we acquired several businesses during the period that complement existing products and services. The total outflow for acquisitions, net of cash acquired was $60.3 million during the period.
Financing Activities
Cash flows from financing activities represents inflows and outflows that account for external activities affecting equity and debt. Primary activities associated with these actions include paying dividends to shareholders, repurchasing our own shares, issuing our own stock and debt transactions. During the nine months ended September 30, 2018, net cash used in financing activities from continuing operations was $868.9 million. Primary drivers of the cash outflow include dividends paid to ordinary shareholders of $351.2 million and the repurchase of $514.1 million in ordinary shares. In addition, we issued $1.15 billion of senior notes during the three months ended March 31, 2018. The issuance was predominately offset by the redemption of $1.1 billion of senior notes. Net cash used in financing activities from continuing operations for the nine months ended September 30, 2017 was $1,222.5 million. Dividends paid to ordinary shareholders of $318.0 million and the repurchase of $911.1 million in ordinary shares were the primary drivers of the cash outflow for the period.
Discontinued Operations
Cash flows from discontinued operations primarily represent costs associated with postretirement benefits, product liability and legal costs (mostly asbestos-related) from previously sold businesses. Net cash used in discontinued operating activities for the nine months ended September 30, 2018 and 2017 primarily relates to postretirement benefits and asbestos-related matters. In addition, net cash used in discontinued operating activities for the nine months ended September 30, 2017 includes the proceeds from settlements with insurance carriers related to asbestos.

46


Pensions
Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contribution and expense by better matching the characteristics of the plan assets to that of the plan liabilities. We use a dynamic approach to asset allocation whereby a plan's allocation to fixed income assets increases as the plan's funded status improves. We monitor plan funded status and asset allocation regularly in addition to investment manager performance.
We monitor the impact of market conditions on our defined benefit plans on a regular basis. None of our defined benefit pension plans have experienced a significant impact on their liquidity due to the volatility in the markets. The Company currently projects that it will contribute approximately $80 million to its plans worldwide in 2018. For further details on pension plan activity, see Note 9 to the condensed consolidated financial statements.
For a further discussion of Liquidity and Capital Resources, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in the Company’s Annual Report on Form 10-K for the period ended December 31, 2017.
Commitments and Contingencies
We are involved in various litigations, claims and administrative proceedings, including those related to asbestos, environmental, and product liability matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, except as expressly set forth in Note 19 to the condensed consolidated financial statements, management believes that the liability which may result from these legal matters would not have a material adverse effect on our financial condition, results of operations, liquidity or cash flows.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.
Management believes there have been no significant policy changes during the nine months ended September 30, 2018, to the items that we disclosed as our critical accounting policies in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2017 except for certain policy changes due to the adoption of ASC 606. Refer to Note 2, "Recent Accounting Pronouncements" and Note 11, "Revenue" for additional information related to the adoption of ASC 606.
Recent Accounting Pronouncements
See Note 2 to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Safe Harbor Statement
Certain statements in this report, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “forecast,” “outlook,” “intend,” “strategy,” “plan,” “may,” “could,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” or the negative thereof or variations thereon or similar terminology generally intended to identify forward-looking statements.
Forward-looking statements may relate to such matters as projections of revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, share or debt repurchases or other financial items; any statements of the plans, strategies and objectives of management for future operations, including those relating to any statements concerning expected development, performance or market share relating to our products and services; any statements regarding future economic conditions or our performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. You are advised to review any further disclosures we make on related subjects in materials we

47


file with or furnish to the SEC. Forward-looking statements speak only as of the date they are made and are not guarantees of future performance. They are subject to future events, risks and uncertainties - many of which are beyond our control - as well as potentially inaccurate assumptions, that could cause actual results to differ materially from our expectations and projections. We do not undertake to update any forward-looking statements.
Factors that might affect our forward-looking statements include, among other things:
overall economic, political and business conditions in the markets in which we operate;
the demand for our products and services;
competitive factors in the industries in which we compete;
changes in tax laws and requirements (including tax rate changes, new tax laws, new and/or revised tax law interpretations and any legislation that may limit or eliminate potential tax benefits resulting from our incorporation in a non-U.S. jurisdiction, such as Ireland);
trade protection measures such as import or export restrictions and requirements, the imposition of tariffs and quotas or revocation or material modification of trade agreements;
the outcome of any litigation, governmental investigations or proceedings;
the outcome of any income tax audits or settlements;
interest rate fluctuations and other changes in borrowing costs;
other capital market conditions, including availability of funding sources;
currency exchange rate fluctuations, exchange controls and currency devaluations;
availability of and fluctuations in the prices of key commodities;
impairment of our goodwill, indefinite-lived intangible assets and/or our long-lived assets;
climate change, changes in weather patterns, natural disasters and seasonal fluctuations;
the impact of potential information technology or data security breaches; and
the strategic acquisition of businesses, product lines and joint ventures;
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. There may also be other factors that have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause results to differ materially from our expectations.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the Company’s exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. There has been no significant change in our exposure to market risk as of the third quarter of 2018.
Item 4 – Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2018, that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported when required and the information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting that occurred during the third quarter of 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial and contract disputes, employment matters, product liability claims, asbestos-related claims, environmental liabilities, intellectual property disputes, and tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of operations, financial condition, liquidity or cash flows.
Asbestos-Related Matters
Certain of our wholly-owned subsidiaries and former companies are named as defendants in asbestos-related lawsuits in 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 allege injury caused by exposure to asbestos contained in certain historical products, primarily pumps, boilers and railroad brake shoes. None of our existing or previously-owned businesses were a producer or manufacturer of asbestos.
See also the discussion contained in our Annual Report on Form 10-K for the period ended December 31, 2017 under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and also Note 19 to the condensed consolidated financial statements in this Form 10-Q.
Item 1A – Risk Factors
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the period ended December 31, 2017 and our Quarterly Report on Form 10-Q for the period ended March 31, 2018. For a further discussion of our Risk Factors, refer to the “Risk Factors” discussion contained in our Annual Report on Form 10-K for the period ended December 31, 2017 and our Quarterly Report on Form 10-Q for the period ended March 31, 2018.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases of our ordinary shares during the third quarter of 2018:
Period
 
Total number of shares purchased (000's) (a) (b)
 
Average price paid per share (a) (b)
 
Total number of shares purchased as part of program (000's) (a)
 
Approximate dollar value of shares still available to be purchased under the program ($000's) (a)
July 1- July 30
 
0.2

 
$
90.28

 

 
$
400,017

August 1- August 31
 
145.6

 
96.13

 
145.3

 
386,050

September 1- September 30
 

 

 

 
386,050

Total
 
145.8

 
$
96.12

 
145.3

 
 

(a) Share repurchases are made from time to time in accordance with our capital allocation strategy, subject to market conditions and regulatory requirements. In February 2017, our Board of Directors authorized the repurchase of up to $1.5 billion of our ordinary shares (the 2017 Authorization). In October 2018, our Board of Directors authorized the repurchase of up to $1.5 billion of our ordinary shares upon completion of the 2017 Authorization. Neither repurchase program has a prescribed expiration date.
(b) We may also reacquire shares outside of the repurchase program from time to time in connection with the surrender of shares to cover taxes on vesting of share based awards. We reacquired 191 shares in July and 335 shares in August in transactions outside of the repurchase programs.

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Item 6 – Exhibits
(a) Exhibits
Exhibit No.
 
Description
 
Method of Filing
 
 
 
 
 
 
 
 
31.1
 
 
Filed herewith.
 
 
 
31.2
 
 
Filed herewith.
 
 
 
32   
 
 
Furnished herewith.
 
 
 
101     
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Comprehensive Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.
 
Filed herewith.

50


INGERSOLL-RAND PLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
INGERSOLL-RAND PLC
(Registrant)
 
 
 
Date:
October 24, 2018
/s/ Susan K. Carter
 
 
Susan K. Carter, Senior Vice President
and Chief Financial Officer
Principal Financial Officer
 
 
 
Date:
October 24, 2018
/s/ Christopher J. Kuehn
 
 
Christopher J. Kuehn, Vice President
and Chief Accounting Officer
Principal Accounting Officer


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