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MarketScreener Homepage  >  Equities  >  Nyse  >  Ingersoll-Rand    IR   IE00B6330302

INGERSOLL-RAND

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INGERSOLL RAND : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/12/2019 | 02:40pm EST
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 Item 1A. Risk
Factors in this Annual Report on Form 10-K. 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 Annual Report.
Overview
Organization
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 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 markets have seen
continued momentum in the United States, positively impacting the results of our
HVAC businesses. Global Industrial markets remain largely supportive of
continued growth in both equipment and services. While geopolitical uncertainty
exists in markets such as Europe, Asia and Latin America, we are confident we
will continue our strong performance globally. In 2019, we expect positive
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 that are highly
differentiated 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
Acquisitions and Equity Investments
We continue to be active with strategic acquisitions and investments. During
2018, acquisitions and equity method investments, net of cash acquired totaled
$285.2 million. Related amounts in 2017 and 2016 were $157.6 million and $9.2
million, respectively.
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, focuses 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.

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In January 2018, we acquired 100% of the outstanding stock of ICS Group Holdings
Limited (ICS Cool Energy). The acquired business, reported within the Climate
segment, specializes in the temporary rental of energy efficient chillers for
commercial and industrial buildings across Europe. It also sells, permanently
installs and services high performance temperature control systems for all types
of industrial processes.
During 2017, we acquired several businesses, including channel acquisitions,
that complement existing products and services. Acquisitions within the Climate
segment primarily consisted of independent dealers which support the ongoing
strategy to expand our distribution network in North America. Other acquisitions
within the segment strengthen our product portfolio. Acquisitions within the
Industrial segment primarily consisted of a telematics business which builds
upon our growing portfolio of connected assets. In addition, other acquisitions
within the segment expand sales and service channels across the globe.
On February 6, 2019, we entered into a final, binding and irrevocable offer
letter with Silver II GP Holdings S.C.A., an affiliate of BC Partners Advisors
L.P. and The Carlyle Group (the Seller) pursuant to which we made a binding
offer to acquire the precision flow systems management business (the Business)
for approximately $1.45 billion in cash, subject to working capital and certain
other adjustments (the Acquisition). The Business is a manufacturer of precision
flow control equipment including electric diaphragm pumps and controls that
serve the global water, oil and gas, agriculture, industrial and specialty
market segments. The offer is subject to completion of information and
consultation processes with employee representative bodies of the Business in
applicable jurisdictions. If the offer is accepted, completion of the
Acquisition would be subject to customary closing conditions and expected to
close mid-year 2019 subject to regulatory approvals. The results of the Business
will be included in our consolidated financial statements as of the date of
acquisition and reported within the Industrial segment.
Share Repurchase Program and Dividends
Share repurchases are made from time to time in accordance with management's
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 under a share repurchase program
(the 2017 Authorization) upon completion of the prior authorized share
repurchase program. Repurchases under the 2017 Authorization began in May 2017
and ended in December 2018, completing the program. 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. However, no material amounts
were repurchased under this program during 2018.
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 and an 83% increase since the beginning of 2016.
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.
Tax Cuts and Job Act
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the Act) which
made 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 provided guidance on accounting for the tax effects of the
Act and allowed for adjustments to provisional amounts during a measurement
period of up to one year.  In accordance with SAB 118, we 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 the fourth quarter of 2017. We completed the accounting for the income
tax effects of the Act during 2018 and recorded $9.0 million of net measurement
period adjustments as a component of Provision for income taxes during the year
to increase the net provisional income tax benefit recorded as of December 31,
2017.
Sale of Hussmann Equity Investment
During 2011, we completed the sale of a controlling interest of our Hussmann
refrigerated display case business (Hussmann) to a newly-formed affiliate of
private equity firm Clayton Dubilier & Rice, LLC (CD&R).  Per the terms of the
agreement, CD&R's ownership interest in Hussmann at the acquisition date was 60%
with the remaining 40% being retained by us. As a result, we accounted for our
interest in Hussmann using the equity method of accounting.

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On December 21, 2015, we announced we would sell our remaining equity interest
in Hussmann as part of a transaction in which Panasonic Corporation would
acquire 100 percent of Hussmann's outstanding shares. The transaction was
completed on April 1, 2016. We received net proceeds of $422.5 million for our
interest and recognized a gain of $397.8 million on the sale.
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 revenues, Operating income or the Balance Sheet.
On January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-09,
"Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting" (ASU 2016-09) which simplified several aspects
of the accounting for employee share-based payment transactions. The standard
made several modifications to the accounting for forfeitures, employer tax
withholding on share-based compensation and the financial statement presentation
of excess tax benefits or deficiencies. In addition, ASU 2016-09 clarified the
statement of cash flows presentation for certain components of share-based
awards. We applied the cash flow presentation requirements retrospectively.
On January 1, 2017, we adopted ASU No. 2017-07, "Compensation-Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost" (ASU 2017-07) which required a
company to present the service cost component of net periodic benefit cost in
the same income statement line as other employee compensation costs with the
remaining components of net periodic benefit cost presented separately from the
service cost component and outside of any subtotal of operating income. We
applied the presentation requirements retrospectively.
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
                                                                                             2018       2017
                                                                                             % of       % of
Dollar amounts in millions                    2018           2017        Period Change     Revenues   Revenues
Net revenues                              $ 15,668.2$ 14,197.6     $   

1,470.6

Cost of goods sold                         (10,847.6 )     (9,811.6 )         (1,036.0 )    69.2%      69.1%
Selling and administrative expenses         (2,903.2 )     (2,720.7 )           (182.5 )    18.5%      19.2%
Operating income                             1,917.4        1,665.3              252.1      12.2%      11.7%
Interest expense                              (220.7 )       (215.8 )             (4.9 )
Other income/(expense), net                    (36.4 )        (31.6 )             (4.8 )
Earnings before income taxes                 1,660.3        1,417.9              242.4
Provision for income taxes                    (281.3 )        (80.2 )           (201.1 )
Earnings from continuing operations          1,379.0        1,337.7         

41.3

Discontinued operations, net of tax            (21.5 )        (25.4 )              3.9
Net earnings                              $  1,357.5$  1,312.3     $         45.2


Net Revenues

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Net revenues for the year ended December 31, 2018 increased by 10.4%, or
$1,470.6 million, compared with the same period of 2017. The components of the
period change are as follows:
Volume/product mix    7.3 %
Acquisitions          1.1 %
Pricing               1.6 %
Currency translation  0.4 %
Total                10.4 %


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 are as follows:
Dollar amounts in millions    2018          2017       % change
Climate                    $ 12,343.8$ 11,167.5     10.5%
Industrial                    3,324.4       3,030.1      9.7%
Total                      $ 15,668.2$ 14,197.6


Climate
Net revenues for the year ended December 31, 2018 increased by 10.5% or $1,176.3
million, compared with the same period of 2017. The components of the period
change are as follows:
Volume/product mix    7.6 %
Acquisitions          1.1 %
Pricing               1.5 %
Currency translation  0.3 %
Total                10.5 %


Industrial
Net revenues for the year ended December 31, 2018 increased by 9.7% or $294.3
million, compared with the same period of 2017. The components of the period
change are as follows:
Volume/product mix   6.3 %
Acquisitions         0.9 %
Pricing              1.6 %
Currency translation 0.9 %
Total                9.7 %


Operating Income/Margin
Operating margin increased to 12.2% for the year ended December 31, 2018,
compared with 11.7% for the same period of 2017. The increase was primarily
driven by higher volumes and favorable product mix (0.9%) as well as pricing
improvements in excess of material inflation (0.1%). These amounts were
partially offset by investments and restructuring spending (0.5%).

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Our Operating income and Operating margin by segment are as follows:

                                           2018 Operating      2017 

Operating Period 2018 Operating 2017 Operating Dollar amounts in millions

                Income (Expense)    Income (Expense)      Change        Margin           Margin
Climate                                   $    1,766.2$    1,572.7$   193.5       14.3 %           14.1 %
Industrial                                       405.3               357.6             47.7       12.2 %           11.8 %
Unallocated corporate expense                   (254.1 )            (265.0 )           10.9        N/A              N/A
Total                                     $    1,917.4$    1,665.3$   252.1       12.2 %           11.7 %


Climate
Operating margin increased to 14.3% for the year ended December 31, 2018,
compared with 14.1% for the same period of 2017. The increase was primarily
driven by higher volumes and favorable product mix. Other inflation in excess of
productivity benefits, investments and restructuring spending partially offset
the benefits.
Industrial
Operating margin increased to 12.2% for the year ended December 31, 2018
compared with 11.8% for the same period of 2017. The increase was primarily
driven by higher volumes and favorable product mix, productivity benefits in
excess of other inflation and pricing improvements in excess of material
inflation. These amounts were partially offset by investments and restructuring
spending.
Unallocated Corporate Expense
Unallocated corporate expense for the year ended December 31, 2018 decreased by
4.1% or $10.9 million, compared with the same period of 2017. Lower functional
costs from productivity projects more than offset compensation and benefit
charges related to variable compensation.
Interest Expense
Interest expense for the year ended December 31, 2018 increased by $4.9 million
compared with the same period of 2017. During 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.
Other income/(expense), net
The components of Other income/(expense), net, for the years ended December 31
are as follows:
In millions                                       2018        2017       Period Change
Interest income                                 $   6.4$   9.4$        (3.0 )
Exchange gain (loss)                              (17.6 )      (8.8 )            (8.8 )
Other components of net periodic benefit cost     (21.9 )     (31.0 )             9.1
Other activity, net                                (3.3 )      (1.2 )            (2.1 )
Other income/(expense), net                     $ (36.4 )$ (31.6 )$        (4.8 )


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 include costs 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
The 2018 effective tax rate was 16.9% which is lower than the U.S. Statutory
rate of 21% primarily due to the measurement period adjustment related to the
change in permanent reinvestment assertion on unremitted earnings of certain
foreign subsidiaries, the deduction for Foreign Derived Intangible Income, the
recognition of excess tax benefits from employee share based payments and a
reduction in a valuation allowance for certain state net deferred tax assets.
This decrease was partially offset by the measurement period adjustment related
to a valuation allowance on excess foreign tax credits, U.S. state and local
income taxes

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and certain non-deductible employee expenses. In addition, the reduction was
also driven by earnings in non-U.S. jurisdictions, which in aggregate, have a
lower effective tax rate. Revenues from non-U.S. jurisdictions accounts for
approximately 36% of our total revenues, such that a material portion of our
pretax income was earned and taxed outside the U.S. at rates ranging from 0% to
38%. When comparing the results of multiple reporting periods, among other
factors, the mix of earnings between U.S. and foreign jurisdictions can cause
variability in our overall effective tax rate.
The 2017 effective tax rate was 5.7% which is lower than the U.S. Statutory rate
of 35% primarily due to the remeasurement of our net U.S. deferred tax
liabilities, the premium paid related to the early retirement of certain
intercompany debt obligations, the recognition of a claim for refund related to
previously paid interest and the recognition of excess tax benefits from
employee shared based payments. In the aggregate, these items decreased the
effective tax rate by 37.9%. This decrease was partially offset by the
transition tax cost, a change in permanent reinvestment assertion on the
unremitted earnings of certain foreign subsidiaries and a non-cash charge
related to the establishment of a valuation allowance on certain net deferred
tax assets in Brazil. In the aggregate these items increased the effective tax
rate by 13.7%. In addition, the reduction was also driven by earnings in
non-U.S. jurisdictions, which in aggregate, have a lower effective tax rate.
Revenues from non-U.S. jurisdictions accounts for approximately 35% of our total
revenues, such that a material portion of our pretax income was earned and taxed
outside the U.S. at rates ranging from 0% to 38%. When comparing the results of
multiple reporting periods, among other factors, the mix of earnings between
U.S. and foreign jurisdictions can cause variability in our overall effective
tax rate.
Discontinued Operations
The components of Discontinued operations, net of tax for the years ended
December 31 are as follows:
In millions                                          2018           2017        Period Change
Pre-tax earnings (loss) from discontinued
operations                                       $    (85.5 )$    (34.0 )$       (51.5 )
Tax benefit (expense)                                  64.0            8.6              55.4
Discontinued operations, net of tax              $    (21.5 )   $    (25.4 

) $ 3.9



Discontinued operations are retained costs from previously sold businesses
including postretirement benefits, product liability and legal costs. In
addition, we include 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 our liability for potential
future claims. A portion of the tax benefit (expense) in each period represents
adjustments for certain tax matters associated with the 2013 spin-off of our
commercial and residential security business, now an independent public company
operating under the name of Allegion plc (Allegion).

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

                                                                                              2017       2016
                                                                                              % of       % of
Dollar amounts in millions                      2017           2016        Period Change    Revenues   Revenues
Net revenues                                $ 14,197.6$ 13,508.9     $ 

688.7

Cost of goods sold                            (9,811.6 )     (9,307.9 )          (503.7 )    69.1%      68.9%
Selling and administrative expenses           (2,720.7 )     (2,597.8 )          (122.9 )    19.2%      19.2%
Operating income                               1,665.3        1,603.2              62.1      11.7%      11.9%
Interest expense                                (215.8 )       (221.5 )             5.7
Other income/(expense), net                      (31.6 )        359.6            (391.2 )
Earnings before income taxes                   1,417.9        1,741.3            (323.4 )
Provision for income taxes                       (80.2 )       (281.5 )           201.3
Earnings from continuing operations            1,337.7        1,459.8            (122.1 )
Discontinued operations, net of tax              (25.4 )         32.9             (58.3 )
Net earnings                                $  1,312.3$  1,492.7$      (180.4 )



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Net Revenues
Net revenues for the year ended December 31, 2017 increased by 5.1%, or $688.7
million, compared with the same period of 2016. The components of the period
change are as follows:
Volume/product mix   4.4 %
Pricing              0.3 %
Currency translation 0.4 %
Total                5.1 %


The increase was primarily driven by higher volumes in both our Climate and
Industrial segments. Additionally, improved pricing and favorable foreign
currency exchange rate movements further contributed to the year-over-year
increase.
Our Revenues by segment are as follows:
Dollar amounts in millions      2017          2016       % change
Climate                      $ 11,167.5$ 10,545.0      5.9%
Industrial                      3,030.1       2,963.9      2.2%
Total                        $ 14,197.6$ 13,508.9


Climate
Net revenues for the year ended December 31, 2017 increased by 5.9% or $622.5
million, compared with the same period of 2016. The components of the period
change are as follows:
Volume/product mix   5.4 %
Pricing              0.2 %
Currency translation 0.3 %
Total                5.9 %


Industrial
Net revenues for the year ended December 31, 2017 increased by 2.2%, or $66.2
million, compared with the same period of 2016. The components of the period
change are as follows:
Volume/product mix   0.7 %
Pricing              1.0 %
Currency translation 0.5 %
Total                2.2 %


Operating Income/Margin
Operating margin decreased to 11.7% for the year ended December 31, 2017,
compared with 11.9% for the same period of 2016. The decrease was primarily
driven by material inflation in excess of pricing improvements (0.7%)
investments and restructuring spending (0.7%). These amounts were partially
offset by productivity benefits in excess of other inflation (0.6%) and higher
volumes and favorable product mix (0.6%).

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Our Operating income and Operating margin by segment are as follows:

                                          2017 Operating      2016 Operating                     2017 Operating   2016 Operating
Dollar amounts in millions               Income (Expense)    Income (Expense)     Period Change      Margin           Margin
Climate                                  $    1,572.7$    1,537.5$        35.2       14.1 %           14.6 %
Industrial                                      357.6               300.3                 57.3       11.8 %           10.1 %
Unallocated corporate expense                  (265.0 )            (234.6 )      $       (30.4 )      N/A              N/A
Total                                    $    1,665.3$    1,603.2$        62.1       11.7 %           11.9 %


Climate
Operating margin decreased to 14.1% for the year ended December 31, 2017,
compared with 14.6% for the same period of 2016. The decrease was primarily
driven by material inflation in excess of pricing improvements, investments and
restructuring spending. These amounts were partially offset by productivity
benefits in excess of other inflation and higher volumes and favorable product
mix.
Industrial
Operating margin increased to 11.8% for the year ended December 31, 2017,
compared with 10.1% for the same period of 2016. The increase was primarily
driven by higher volumes and favorable product mix. In addition, the segment
benefited from productivity benefits in excess of other inflation, the
non-recurrence of capitalized costs related to new product engineering and
development that were reclassified to the income statement, pricing improvements
in excess of material inflation and favorable foreign currency exchange rate
movements. These amounts were partially offset by investments and restructuring
spending.
Unallocated Corporate Expense
Unallocated corporate expense for the year ended December 31, 2017 increased by
13.0% or $30.4 million, compared with the same period of 2016. The increase in
expense primarily relates to costs associated with acquisition efforts, higher
employee benefit costs and stock-based compensation as well as planned incubator
investments in technologies that benefit our business.
Interest Expense
Interest expense for the year ended December 31, 2017 decreased by $5.7 million
compared with the same period of 2016. The decrease relates primarily to changes
in short-term financing arrangements and other items.
Other income/(expense), net
The components of Other income/(expense), net, for the years ended December 31
are as follows:
In millions                                       2017        2016       Period Change
Interest income                                 $   9.4$   8.0     $         1.4
Exchange gain (loss)                               (8.8 )      (2.0 )            (6.8 )
Other components of net periodic benefit cost     (31.0 )     (30.1 )            (0.9 )
Income (loss) from equity investment                  -        (0.8 )       

0.8

Gain on sale of Hussmann equity investment            -       397.8            (397.8 )
Other activity, net                                (1.2 )     (13.3 )            12.1
Other income/(expense), net                     $ (31.6 )$ 359.6$      (391.2 )


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 include costs 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. Other activity, net for the year ended December 31, 2016 includes
a charge of $16.4 million for the settlement of a lawsuit originally filed by a
customer in 2012. The lawsuit related to a commercial HVAC contract entered into
in 2001, prior to our acquisition of Trane. The charge represents the settlement
and related legal costs recognized during the fourth quarter of 2016.

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Provision for Income Taxes
The 2017 effective tax rate was 5.7% which is lower than the U.S. Statutory rate
of 35% primarily due to the remeasurement of our net U.S. deferred tax
liabilities, the premium paid related to the early retirement of certain
intercompany debt obligations, the recognition of a claim for refund related to
previously paid interest and the recognition of excess tax benefits from
employee shared based payments. In the aggregate, these items decreased the
effective tax rate by 37.9%. This decrease was partially offset by the
transition tax cost, a change in permanent reinvestment assertion on the
unremitted earnings of certain foreign subsidiaries and a non-cash charge
related to the establishment of a valuation allowance on certain net deferred
tax assets in Brazil. In the aggregate these items increased the effective tax
rate by 13.7%. In addition, the reduction was also driven by earnings in
non-U.S. jurisdictions, which in aggregate, have a lower effective tax rate.
Revenues from non-U.S. jurisdictions accounts for approximately 35% of our total
revenues, such that a material portion of our pretax income was earned and taxed
outside the U.S. at rates ranging from 0% to 38%. When comparing the results of
multiple reporting periods, among other factors, the mix of earnings between
U.S. and foreign jurisdictions can cause variability in our overall effective
tax rate.
The 2016 effective tax rate was 16.2% which is lower than the U.S. Statutory
rate of 35% primarily due to the tax treatment of the Hussmann gain. The gain,
which is not subject to tax under the relevant local tax laws, decreased the
effective tax rate by 4.8%. In addition, the reduction was also driven by
earnings in non-U.S. jurisdictions, which in aggregate, have a lower effective
tax rate. Revenues from non-U.S. jurisdictions accounts for approximately 35% of
our total revenues, such that a material portion of our pretax income was earned
and taxed outside the U.S. at rates ranging from 0% to 38%. When comparing the
results of multiple reporting periods, among other factors, the mix of earnings
between U.S. and foreign jurisdictions can cause variability in our overall
effective tax rate.
Discontinued Operations
The components of Discontinued operations, net of tax for the years ended
December 31 are as follows:
In millions                                          2017           2016        Period Change
Pre-tax earnings (loss) from discontinued
operations                                       $    (34.0 )$     28.1$       (62.1 )
Tax benefit (expense)                                   8.6            4.8               3.8
Discontinued operations, net of tax              $    (25.4 )$     32.9

$ (58.3 )



Discontinued operations are retained costs from previously sold businesses
including postretirement benefits, product liability and legal costs. In
addition, we include 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. For the year ended December 31, 2016, ongoing costs were more
than offset by asbestos-related settlements with various insurance carriers. A
portion of the tax benefit (expense) in each period represents adjustments for
certain tax matters associated with the 2013 spin-off of our commercial and
residential security business, now an independent public company operating under
the name of Allegion.
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


• Dividend payments


• 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 December 31, 2018, we had $903.4 million of cash and cash equivalents on
hand, of which $689.7 million 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

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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 in 2017, additional
repatriation 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 December 31, 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 management's
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 under a share repurchase program
(the 2017 Authorization) upon completion of the prior authorized share
repurchase program. Repurchases under the 2017 Authorization began in May 2017
and ended in December 2018, completing the program. 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. However, no material amounts
were repurchased under this program during 2018. 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 and an
83% increase since the beginning of 2016. We continue to be active with
acquisitions and joint venture activity. Since the beginning of 2017, 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 periods ended December 31:
In millions                                          2018            2017   

2016

Cash and cash equivalents                        $     903.4$  1,549.4$  1,714.7
Short-term borrowings and current maturities
of long-term debt (1)                                  350.6        1,107.0          360.8
Long-term debt (1)                                   3,740.7        2,957.0        3,709.4
Total debt                                           4,091.3        4,064.0        4,070.2

Total Ingersoll-Rand plc shareholders' equity 7,022.7 7,140.3

       6,643.8
Total equity                                         7,064.8        7,206.9        6,718.3
Debt-to-total capital ratio                             36.7 %         36.1 %         37.7 %


(1) During the first quarter of 2018, the Company redeemed its 6.875% senior
notes due 2018 and its 2.875% senior notes due 2019. In addition, the Company
issued $1.15 billion principal amount of senior notes during February 2018.
Debt and Credit Facilities
Our short-term obligations primarily consists of current maturities of long-term
debt. In addition, 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.  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 $2.0 billion as of
December 31, 2018. We had no commercial paper outstanding at December 31, 2018
and December 31, 2017.  See Note 7 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 2020 and 2048.  In addition, we maintain two
5-year, $1.0 billion revolving credit facilities.  Each senior unsecured credit
facility, one of which matures in March 2021 and the other in April 2023,
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 December 31, 2018 and December 31, 2017. See Note 7 and Note 21
to the Consolidated Financial Statements for additional information regarding
the terms of our long-term obligations and their related guarantees.

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Pension Plans
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. Our approach to asset allocation is
to increase fixed income assets as the plan's funded status improves. We monitor
plan funded status and asset allocation regularly in addition to investment
manager performance. In addition, 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. See Note 10 to the Consolidated Financial
Statements for additional information regarding pensions.
Cash Flows
The following table reflects the major categories of cash flows for the years
ended December 31, respectively. For additional details, please see the
Consolidated Statements of Cash Flows in the Consolidated Financial Statements.
In millions                                          2018           2017    

2016

Net cash provided by (used in) continuing
operating activities                             $  1,474.5$  1,561.6$  1,433.0
Net cash provided by (used in) investing
activities                                           (629.4 )       (374.7 )        240.1
Net cash provided by (used in) financing
activities                                         (1,378.8 )     (1,432.5 )       (726.9 )


Operating Activities
Net cash provided by continuing operating activities for the year ended
December 31, 2018 was $1,474.5 million, of which net income provided $1,662.0
million after adjusting for non-cash transactions. Changes in other assets and
liabilities used $187.5 million. Improvements in accounts payable were offset by
higher accounts receivable and inventory balances. Net cash provided by
continuing operating activities for the year ended December 31, 2017 was
$1,561.6 million, of which net income provided $1,642.1 million after adjusting
for non-cash transactions. Changes in other assets and liabilities used $80.5
million. Improvements in accounts payable were offset by higher accounts
receivable and inventory balances. Net cash provided by continuing operating
activities for the year ended December 31, 2016 was $1,433.0 million, of which
net income provided $1,449.8 million after adjusting for non-cash transactions.
Changes in other assets and liabilities used $16.8 million. Improvements in
accounts payable were offset by higher accounts receivable balances.
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, investments in joint ventures and divestitures. During
the year ended December 31, 2018, net cash used in investing activities from
continuing operations was $629.4 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 $285.2 million. Other outflows included capital
expenditures which totaled $365.6 million. Net cash used in investing activities
from continuing operations for the year ended December 31, 2017 was $374.7
million. The primary driver of the outflow is attributable to capital
expenditures of $221.3 million. In addition, we acquired several businesses that
complement existing products and services. Cash paid for acquisitions, net of
cash acquired, was $157.6 million during the year. During the year ended
December 31, 2016, net cash provided by investing activities from continuing
operations was $240.1 million. The primary driver of the inflow is attributable
to the proceeds of $422.5 million received from the sale of our Hussmann equity
interest. This amount was partially offset by capital expenditures during the
year.
Financing Activities
Cash flows from financing activities represent 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 stock and debt transactions. During the
year ended December 31, 2018, net cash used in financing activities from
continuing operations was $1,378.8 million. Primary drivers of the cash outflow
related to the repurchase of 9.7 million ordinary shares totaling $900.2 million
and $479.5 million of dividends paid to ordinary shareholders. In addition, we
issued $1.15 billion of senior notes which was predominately offset by the
redemption of $1.1 billion of senior notes. During the year ended December 31,
2017, net cash used in financing activities from continuing operations was
$1,432.5 million. Primary drivers of the cash outflow related to the repurchase
of 11.8 million ordinary shares totaling $1,016.9 million and $430.1 million of
dividends paid to ordinary shareholders. Net cash used in financing activities
from continuing operations for the year ended December 31, 2016 was $726.9
million. Primary drivers of the cash outflow related to the repurchase of 4.9
million ordinary shares totaling $250.1 million and $348.6 million of dividends
paid to ordinary shareholders. In addition, we repaid our outstanding commercial
paper balance during the year.

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Discontinued Operations
Cash flows from discontinued operations primarily represent ongoing costs
associated with postretirement benefits, product liability and legal costs from
previously sold businesses. Net cash used in discontinued operating activities
during the year ended December 31, 2018 was $66.7 million and primarily related
to ongoing costs. Net cash used in discontinued operating activities for the
year ended December 31, 2017 was $38.1 million. Ongoing costs were partially
offset by asbestos-related settlements reached with various insurance carriers
during the year. Net cash provided by discontinued operating activities during
the year ended December 31, 2016 was $88.9 million and included asbestos-related
settlements reached with various insurance carriers during the year as well as
cash proceeds on the sale of property related to a previously sold business.
These amounts more than offset ongoing costs.
Capital Resources
Based on historical performance and current expectations, we believe our cash
and cash equivalents balance, the cash generated from our operations, our
committed credit lines and our expected ability to access capital markets will
satisfy our working capital needs, capital expenditures, dividends, share
repurchases, upcoming debt maturities, and other liquidity requirements
associated with our operations for the foreseeable future.
Capital expenditures were $365.6 million, $221.3 million and $182.7 million for
the years ended December 31, 2018, 2017 and 2016, respectively. Our investments
continue to improve manufacturing productivity, reduce costs, provide
environmental enhancements, upgrade information technology infrastructure and
security and advanced technologies for existing facilities. The capital
expenditure program for 2019 is estimated to be approximately $300 million,
including amounts approved in prior periods. Many of these projects are subject
to review and cancellation at our option without incurring substantial charges.
For financial market risk impacting the Company, see Item 7A. "Quantitative and
Qualitative Disclosure About Market Risk."
Capitalization
In addition to cash on hand and operating cash flow, we maintain significant
credit availability under our Commercial Paper Program. Our ability to borrow at
a cost-effective rate under the Commercial Paper Program is contingent upon
maintaining an investment-grade credit rating. As of December 31, 2018, our
credit ratings were as follows:
                      Short-term   Long-term
Moody's                  P-2         Baa2
Standard and Poor's      A-2          BBB


The credit ratings set forth above are not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
Our public debt does not contain financial covenants and our revolving credit
lines have a debt-to-total capital covenant of 65%. As of December 31, 2018, our
debt-to-total capital ratio was 36.7% and significantly beneath this limit.
Contractual Obligations
The following table summarizes our contractual cash obligations by required
payment period:
                             Less than           1 - 3          3 - 5         More than
In millions                   1 year             years          years          5 years         Total
Short-term debt            $         -        $        -     $        -     $         -     $        -
Long-term debt                   350.6   (a)       740.2          715.0         2,314.7     $  4,120.5
Interest payments on
long-term debt                   186.5             355.1          298.6         1,394.0        2,234.2
Purchase obligations             946.0                 -              -               -          946.0
Operating leases                 197.1             259.4          110.6            42.7          609.8
Total contractual cash
obligations                $   1,680.2$  1,354.7$  1,124.2

$ 3,751.4$ 7,910.5

(a) Includes $343.0 million of debt redeemable at the option of the holder.

The scheduled maturities of these bonds range between 2027 and 2028.



Future expected obligations under our pension and postretirement benefit plans,
income taxes, environmental, asbestos-related, and product liability matters
have not been included in the contractual cash obligations table above.

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Pensions

At December 31, 2018, we had a net unfunded liability of $698.4 million, which
consists of noncurrent pension assets of $49.9 million and current and
non-current pension benefit liabilities of $748.3 million. It is our objective
to contribute to the pension plans to ensure adequate funds are available in the
plans to make benefit payments to plan participants and beneficiaries when
required. We currently project that we will contribute approximately $104
million to our plans worldwide in 2019. The timing and amounts of future
contributions are dependent upon the funding status of the plan, which is
expected to vary as a result of changes in interest rates, returns on underlying
assets, and other factors. Therefore, pension contributions have been excluded
from the preceding table. See Note 10 to the Consolidated Financial Statements
for additional information regarding pensions.
Postretirement Benefits Other than Pensions
At December 31, 2018, we had postretirement benefit obligations of $442.7
million. We fund postretirement benefit costs principally on a pay-as-you-go
basis as medical costs are incurred by covered retiree populations. Benefit
payments, which are net of expected plan participant contributions and Medicare
Part D subsidy, are expected to be approximately $46 million in 2019. Because
benefit payments are not required to be funded in advance, and the timing and
amounts of future payments are dependent on the cost of benefits for retirees
covered by the plan, they have been excluded from the preceding table. See Note
10 to the Consolidated Financial Statements for additional information regarding
postretirement benefits other than pensions.
Income Taxes
At December 31, 2018, we have total unrecognized tax benefits for uncertain tax
positions of $83.0 million and $20.7 million of related accrued interest and
penalties, net of tax. The liability has been excluded from the preceding table
as we are unable to reasonably estimate the amount and period in which these
liabilities might be paid. See Note 16 to the Consolidated Financial Statements
for additional information regarding income taxes, including unrecognized tax
benefits.
Contingent Liabilities
We are involved in various litigation, claims and administrative proceedings,
including those related to environmental, asbestos-related, and product
liability matters. We believe that these liabilities are subject to the
uncertainties inherent in estimating future costs for contingent liabilities,
and will likely be resolved over an extended period of time. Because the timing
and amounts of potential future cash flows are uncertain, they have been
excluded from the preceding table. See Note 20 to the Consolidated Financial
Statements for additional information regarding contingent liabilities.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of financial statements in conformity with
those accounting principles requires management to use judgment 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 these estimates. If updated
information or actual amounts are different from previous estimates, the
revisions are included in our results for the period in which they become known.
The following is a summary of certain accounting estimates and assumptions made
by management that we consider critical.
•    Allowance for doubtful accounts - We maintain an allowance for doubtful

accounts receivable which represents our best estimate of probable loss

inherent in our accounts receivable portfolio. This estimate is based upon

our two step policy that results in the total recorded allowance for

doubtful accounts. The first step is to record a portfolio reserve based on

the aging of the outstanding accounts receivable portfolio and our

historical experience with our end markets, customer base and products. The

second step is to create a specific reserve for significant accounts as to

which the customer's ability to satisfy their financial obligation to us is

in doubt due to circumstances such as bankruptcy, deteriorating operating

results or financial position. In these circumstances, management uses its

judgment to record an allowance based on the best estimate of probable loss,

     factoring in such considerations as the market value of collateral, if
     applicable. Actual results could differ from those estimates. These
     estimates and assumptions are reviewed periodically, and the effects of

changes, if any, are reflected in the statement of operations in the period

that they are determined.

Goodwill and indefinite-lived intangible assets - We have significant

goodwill and indefinite-lived intangible assets on our balance sheet related

     to acquisitions. These assets are tested and reviewed annually during the
     fourth quarter for impairment or when there is a significant change in
     events or circumstances that indicate that the fair value of an asset is
     more likely than not less than the carrying amount of the asset.



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Impairment of goodwill is assessed at the reporting unit level and begins with a
qualitative assessment to determine if it is more likely than not that the fair
value of each reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the goodwill impairment test
under ASC 350, "Intangibles-Goodwill and Other," (ASC 350). For those reporting
units that bypass or fail the qualitative assessment, the test compares the
carrying amount of the reporting unit to its estimated fair value. If the
estimated fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not impaired. To the extent that the carrying value of
the reporting unit exceeds its estimated fair value, an impairment loss would be
recognized for the amount by which the reporting unit's carrying amount exceeds
its fair value, not to exceed the carrying amount of goodwill in that reporting
unit.
As quoted market prices are not available for our reporting units, the
calculation of their estimated fair value is determined using three valuation
techniques: a discounted cash flow model (an income approach), a market-adjusted
multiple of earnings and revenues (a market approach), and a similar
transactions method (also a market approach). The discounted cash flow approach
relies on our estimates of future cash flows and explicitly addresses factors
such as timing, growth and margins, with due consideration given to forecasting
risk. The earnings and revenue multiple approach reflects the market's
expectations for future growth and risk, with adjustments to account for
differences between the guideline publicly traded companies and the subject
reporting units. The similar transactions method considers prices paid in
transactions that have recently occurred in our industry or in related
industries. These valuation techniques are weighted 50%, 40% and 10%,
respectively.
Impairment of other intangible assets with indefinite useful lives is first
assessed using a qualitative assessment to determine whether it is more likely
than not that an indefinite-lived intangible asset is impaired. This assessment
is used as a basis for determining whether it is necessary to calculate the fair
value of an indefinite-lived intangible asset. For those indefinite-lived assets
where it is required, a fair value is determined on a relief from royalty
methodology (income approach) which is based on the implied royalty paid, at an
appropriate discount rate, to license the use of an asset rather than owning the
asset. The present value of the after-tax cost savings (i.e. royalty relief)
indicates the estimated fair value of the asset. Any excess of the carrying
value over the estimated fair value would be recognized as an impairment loss
equal to that excess.
The determination of the estimated fair value and the implied fair value of
goodwill and other indefinite-lived intangible assets requires us to make
assumptions about estimated cash flows, including profit margins, long-term
forecasts, discount rates and terminal growth rates. We developed these
assumptions based on the market and geographic risks unique to each reporting
unit. For our annual impairment testing performed during the fourth quarter of
2018, we calculated the fair value for each of the reporting units and
indefinite-lived intangibles. Based on the results of these calculations and
further outlined below, we determined that the fair value of the reporting units
and indefinite-lived intangible assets exceeded their respective carrying
values. The estimates of fair value are based on the best information available
as of the date of the assessment, which primarily incorporates management
assumptions about expected future cash flows.
Goodwill - Under the income approach, we assumed a forecasted cash flow period
of five years with discount rates ranging from 11.0% to 14.0% and terminal
growth rates ranging from 3.0% to 4.5%. Under the guideline public company
method, we used an adjusted multiple ranging from 6.5 to 13.5 of projected
earnings before interest, taxes, depreciation and amortization (EBITDA) based on
the market information of comparable companies. Additionally, we compared the
estimated aggregate fair value of our reporting units to our overall market
capitalization. For all reporting units except one in Latin America, the excess
of the estimated fair value over carrying value (expressed as a percentage of
carrying value) was a minimum of 75%. A significant increase in the discount
rate, decrease in the long-term growth rate, or substantial reductions in our
end markets and volume assumptions could have a negative impact on the estimated
fair value of these reporting units. The one reporting unit with a percentage of
carrying value less than 75% exceeded its carrying value by 1.1%. The reporting
unit, reported within the Climate segment, has approximately $190 million of
goodwill at the testing date. With all other assumptions and trends remaining
constant for each independent variable, a 0.5% increase in the discount rate
combined with a 0.5% decrease in the long-term growth rate would result in an
approximate $15 million impairment for this reporting unit.
Other Indefinite-lived intangible assets - In testing our other indefinite-lived
intangible assets for impairment, we assumed forecasted revenues for a period of
five years with discount rates ranging from 11.0% to 15.5%, terminal growth
rates of 3.0%, and royalty rates ranging from 0.5% to 4.5%. For all tradenames,
the excess of the estimated fair value over carrying value (expressed as a
percentage of carrying value) was a minimum of 74%, with the exception of one.
The tradename, reported within our Climate segment, had an excess of the
estimated fair value over carrying value of approximately 19% (9% in 2017) and
an approximate carrying value of $15 million at December 31, 2018. A significant
increase in the discount rate, decrease in the long-term growth rate, decrease
in the royalty rate or substantial reductions in our end markets and volume
assumptions could have a negative impact on the estimated fair values of any of
our tradenames. In addition, the Company has three recently acquired tradenames
now subject to our annual impairment test. Combined, these tradenames have a
carrying value of approximately $14 million, each with an estimated fair value
over carrying value of under 10%

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as expected. Due to their recent valuation upon acquisition, small variations in
our estimates and assumptions could impact their fair value.
Long-lived assets and finite-lived intangibles - Long-lived assets and
finite-lived intangibles are reviewed for impairment whenever events or changes
in business circumstances indicate that the carrying amount of an asset may not
be fully recoverable. Assets are grouped with other assets and liabilities at
the lowest level for which identifiable cash flows can be generated. Impairment
in the carrying value of an asset would be recognized whenever anticipated
future undiscounted cash flows from an asset are less than its carrying value.
The impairment is measured as the amount by which the carrying value exceeds the
fair value of the asset as determined by an estimate of discounted cash flows.
Changes in business conditions could potentially require future adjustments to
these valuations.
•    Loss contingencies - Liabilities are recorded for various contingencies

arising in the normal course of business, including litigation and

administrative proceedings, environmental and asbestos matters and product

liability, product warranty, worker's compensation and other claims. We have

recorded reserves in the financial statements related to these matters,

     which are developed using input derived from actuarial estimates and
     historical and anticipated experience data depending on the nature of the
     reserve, and in certain instances with consultation of legal counsel,
     internal and external consultants and engineers. Subject to the
     uncertainties inherent in estimating future costs for these types of
     liabilities, we believe our estimated reserves are reasonable and do not

believe the final determination of the liabilities with respect to these

matters would have a material effect on our financial condition, results of

operations, liquidity or cash flows for any year.

• Asbestos matters - Certain of our wholly-owned subsidiaries and former

companies are named as defendants in asbestos-related lawsuits in state and

federal courts. We record a liability for our actual and anticipated future

claims as well as an asset for anticipated insurance settlements.

Asbestos-related defense costs are excluded from the asbestos claims

liability and are recorded separately as services are incurred. None of our

existing or previously-owned businesses were a producer or manufacturer of

asbestos. We record certain income and expenses associated with our asbestos

liabilities and corresponding insurance recoveries within Discontinued

operations, net of tax, as they relate to previously divested businesses,

except for amounts associated with Trane's asbestos liabilities and

corresponding insurance recoveries which are recorded within continuing

operations. See Note 20 to the Consolidated Financial Statements for further

     information regarding asbestos-related matters.


•    Revenue recognition - Revenue is recognized 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 our 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 our revenues are recognized over

time as the customer simultaneously receives control as we perform work

under a contract. We adopted ASC 606 on January 1, 2018 using the modified

retrospective approach. Refer to Note 2, "Summary of Significant Accounting

Policies" and Note 11, "Revenue" for additional information related to the

adoption of ASC 606.



The transaction price allocated to performance obligations reflects our
expectations about the consideration we 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. Our
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, coupons, and rebates where the customer does not have to provide any
additional requirements to receive the discount. We record an accrual (contra
receivable) and a sales deduction for our 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 our
best estimate determined using the expected value method. We consider historical
data in determining our 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.
We enter 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, we utilize 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 we will estimate standalone selling price based on
our best estimate. We recognize revenue for delivered goods or services when the
delivered good or service is distinct,

                                       34

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Table of Contents

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. • Income taxes - Deferred tax assets and liabilities are determined based on

temporary differences between financial reporting and tax bases of assets

and liabilities, applying enacted tax rates expected to be in effect for the

year in which the differences are expected to reverse. We recognize future

tax benefits, such as net operating losses and tax credits, to the extent

that realizing these benefits is considered in our judgment to be more

likely than not. We regularly review the recoverability of our deferred tax

assets considering our historic profitability, projected future taxable

income, timing of the reversals of existing temporary differences and the

feasibility of our tax planning strategies. Where appropriate, we record a

valuation allowance with respect to a future tax benefit.



The provision for income taxes involves a significant amount of management
judgment regarding interpretation of relevant facts and laws in the
jurisdictions in which we operate. Future changes in applicable laws, projected
levels of taxable income, and tax planning could change the effective tax rate
and tax balances recorded by us. In addition, tax authorities periodically
review income tax returns filed by us and can raise issues regarding our filing
positions, timing and amount of income or deductions, and the allocation of
income among the jurisdictions in which we operate. 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. We believe that we have adequately provided for any reasonably
foreseeable resolution of these matters. We will adjust our estimate if
significant events so dictate. To the extent that the ultimate results differ
from our original or adjusted estimates, the effect will be recorded in the
provision for income taxes in the period that the matter is finally resolved.
•    Employee benefit plans - We provide a range of benefits to eligible

employees and retirees, including pensions, postretirement and

postemployment benefits. Determining the cost associated with such benefits

is dependent on various actuarial assumptions including discount rates,

expected return on plan assets, compensation increases, mortality, turnover

rates and healthcare cost trend rates. Actuarial valuations are performed to

determine expense in accordance with GAAP. Actual results may differ from

the actuarial assumptions and are generally accumulated and amortized into

earnings over future periods. We review our actuarial assumptions at each

measurement date and make modifications to the assumptions based on current

rates and trends, if appropriate. The discount rate, the rate of

compensation increase and the expected long-term rates of return on plan

assets are determined as of each measurement date.



The rate of compensation increase is dependent on expected future compensation
levels. The expected long-term rate of return on plan assets reflects the
average rate of returns expected on the funds invested or to be invested to
provide for the benefits included in the projected benefit obligation. The
expected long-term rate of return on plan assets is based on what is achievable
given the plan's investment policy, the types of assets held and the target
asset allocation. The expected long-term rate of return is determined as of each
measurement date. We believe that the assumptions utilized in recording our
obligations under our plans are reasonable based on input from our actuaries,
outside investment advisors and information as to assumptions used by plan
sponsors.
Changes in any of the assumptions can have an impact on the net periodic pension
cost or postretirement benefit cost. Estimated sensitivities to the expected
2019 net periodic pension cost of a 0.25% rate decline in the two basic
assumptions are as follows: the decline in the discount rate would increase
expense by approximately $7.2 million and the decline in the estimated return on
assets would increase expense by approximately $6.7 million. A 0.25% rate
decrease in the discount rate for postretirement benefits would increase
expected 2019 net periodic postretirement benefit cost by $0.7 million and a
1.0% increase in the healthcare cost trend rate would increase the service and
interest cost by approximately $0.4 million.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recent
accounting pronouncements.

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