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Ingersoll Rand (NYSE:TT) is set to release its second-quarter earnings on July 27. Reporting adjusted EPS of $0.50 in the first quarter, Ingersoll Rand shocked analysts who had estimated earnings of $0.37. Will the company do the same in the second quarter? Let's take a look at some things we're likely to hear about when it reports.

Positive climate change

Of Ingersoll Rand's two operating segments, climate and industrial, it's the former that management believes will be responsible for driving the company's near-term growth in profitability.

Last quarter, the climate segment proved more successful than the industrial segment at reining in costs and reported a year-over-year operating margin expansion of 270 basis points (bps) -- from 7% to 9.7%. The industrial segment, conversely, reported a year-over-year 110 bps contraction in its operating margin, falling from 10.3% to 9.2%.

Image Source: Ingersoll Rand Corporate Website.

Although management acknowledges that both segments benefited from pricing improvements, it says product mix had a favorable impact on the climate segment's performance. The industrial segment, though, suffered from an unfavorable product mix.

Look for more of the same from the two segments in the second quarter. In fact, management believes the difference in profitability between the two is becoming even more pronounced. During the last earnings presentation, it provided an upward revision of the climate segment's adjusted operating margin for fiscal 2016. Previously, it had guided for the margin to fall between 13.25% and 13.75%; the revised range is 14% to 14.5%. The industrial segment, originally expected to have an adjusted operating margin between 13% to 13.75%, has a new range of 12% to 12.5%.

Why the big adjustment?

Although management has guided for EPS from continuing operations to fall between $2.75 and $2.80 in the second quarter, it has also provided guidance for an adjusted range of $1.27 to $1.32. What's the deal with that? The answer: the Hussmann deal.

The company will be including the net proceeds it received for the sale of its equity stake in Hussmann to Panasonic. As a result, management is backing out the negative-$0.01 effect from restructuring and the $1.49 from the Hussmann proceeds.

In terms of the effect on fiscal 2016 guidance, management is estimating reported EPS to fall between $5.39 and $5.54. When the Hussmann and restructuring effects are removed, the range becomes $3.95 to $4.10, representing an increase of 6% to 10% over fiscal 2015.

No capital guarantees

Early in the second quarter, management said it recognized an opportunity that was just too good to pass up. With shares trading at a 20% discount to the company's peer group, management deployed $250 million toward buying back stock, which was trading at $51 per share. Share buybacks are a hotly debated topic among investors. Many people believe that executives aren't very adept at identifying opportune times to buy back stock. In this case, though, management proved to be quite adroit -- shares have risen about 33% since the buyback.

According to Morningstar, shares are currently trading at 24 times trailing earnings -- a slight discount to the 25.2 multiple at which the industry is trading. However, they seem richly valued in terms of the company's cash flow. Shares are trading at 18.7 times the three-year average cash flow. With an industry average of 16.1 times cash flow, it's likely that another buyback isn't coming anytime soon.

Investors should look for commentary on capital allocation plans, but they shouldn't be surprised if management elects to do nothing. Besides the buyback, the company raised its annual dividend 10% last quarter. And on the conference call, Michael Lamach, the company's chairman, president, and CEO, revealed the company's position: "We also feel patient. We feel like we don't have to -- we're not compelled to do anything around M&A."

The takeaway

Although management believes that the industrial side of the business is facing some near-term challenges, it remains bullish -- not only on the second quarter but the rest of fiscal 2016 as well. And management isn't only optimistic about its bottom line. Excluding the restructuring charges and Hussmann proceeds, management is forecasting between $950 million and $1 billion in free cash flow for fiscal 2016. With shares currently trading near the 52-week high, the market seems to already be confident that the company will execute. The proof is in the pudding, though, so we'll have to keep checking in at the end of each quarter to see the quality of the pudding that the company is serving up.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.