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Morningstar | Ingersoll Rand Reports Strong Q4 Results to Close Out a Great 2018; Sees Continued Growth in 2019

Narrow-moat rated Ingersoll Rand reported strong fourth-quarter results, which featured 8% year-over-year top-line growth to $3.9 billion, a 90-basis-point increase in adjusted operating margin to 12%, and a 29% increase in adjusted EPS from continuing operations to $1.32. Total organic bookings during the quarter were up 17% year over year driven by bookings growth across all of Ingersoll Rand's business lines. On a full-year basis, total revenue grew 10% year over year (9% organic) to $15.7 billion, adjusted operating margin expanded 60 basis points to 12.8%, and adjusted EPS from continuing operations grew 24% to $5.61. Based on current conditions, management expects another strong year in 2019; the team expects reported revenue to increase 4% to 5%, adjusted operating margin to range between 13.1% and 13.6%, and adjusted EPS from continuing operations of $6.15 to $6.35 per share. While Ingersoll Rand's 2019 guidance aligns with our previous expectations, and our long-term outlook is unchanged, we do expect to increase our $99 per share fair value estimate by less than 5% due to the time value of money as we roll our valuation model forward.

In terms of segment performance, the climate segment grew fourth-quarter sales 9% year over year to $3 billion and reported a 20% increase in bookings during the quarter. The climate segment's robust booking activity was aided by a large multi-year commercial heating, ventilation, and air-conditioning order. Excluding this win, bookings increased a still-strong 13%. Climate adjusted operating margin expanded 40 basis points to 13.3% due to effective cost management and volume gains. Industrial segment sales increased 4% year over year (6% organic) to approximately $900 million and bookings also increased 4%. The segment's adjusted operating margin improved 40 basis points to 13.6% due to the same factors that favorably impacted climate segment margins.

While Ingersoll Rand met or exceeded its full-year 2018 expectations for revenue growth, adjusted operating margin expansion, and adjusted earnings growth, the firm missed its goal of achieving a free cash flow conversion ratio in excess of 100%. Ingersoll Rand's actual adjusted free cash flow conversion ratio was 82%. This miss can be attributed to above-average working capital investments needed to support very strong demand trends throughout 2018 and into 2019. However, management expects the company's free cash flow conversion ratio to improve to over 100% in 2019.