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 June 30, 2007
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 1-985
INGERSOLL-RAND
COMPANY LIMITED
(Exact
name of registrant as specified in its charter)
|
75-2993910
|
|
(I.R.S.
Employer Identification
No.)
|
Clarendon
House
2
Church Street
Hamilton
HM 11, Bermuda
(Address
of principal executive offices)
(441)
295-2838
(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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer o Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
o
NO x
The
number of Class A common shares outstanding as of August 3, 2007 was
286,657,308.
INGERSOLL-RAND
COMPANY LIMITED
FORM
10-Q
INDEX
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1 -
|
Financial
Statements |
|
|
|
|
|
|
|
Condensed
Consolidated Income Statement for the three and six months ended
June 30,
2007 and 2006
|
1
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheet at June 30, 2007 and December 31,
2006
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Cash Flows for the three and six months
ended
June 30, 2007 and 2006
|
3
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
|
|
|
|
|
Item
2 - |
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
|
|
|
|
|
Item
3 - |
Quantitative
and Qualitative Disclosures about Market Risk
|
39
|
|
|
|
|
|
Item
4 -
|
Controls
and Procedures |
39
|
|
|
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
40
|
|
|
|
|
|
Item
1 -
|
Legal
Proceedings |
40
|
|
|
|
|
|
Item
1A -
|
Risk
Factors |
40
|
|
|
|
|
|
Item
2 -
|
Unregistered
Sales of Equity Securities and Use of Proceeds |
41
|
|
|
|
|
|
Item
6 -
|
Exhibits |
42
|
|
|
|
|
SIGNATURES
|
|
|
43
|
|
|
|
|
CERTIFICATIONS
|
|
|
|
Part
I - FINANCIAL INFORMATION
Item
I
- Financial Statements
INGERSOLL-RAND
COMPANY LIMITED
CONDENSED
CONSOLIDATED INCOME STATEMENT
(Unaudited)
|
|
Three
months ended June 30,
|
|
Six
months ended June 30,
|
|
In
millions, except per share amounts
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
2,224.6
|
|
$
|
2,048.0
|
|
$
|
4,200.8
|
|
$
|
3,852.7
|
|
Cost
of goods sold
|
|
|
1,589.7
|
|
|
1,463.1
|
|
|
3,005.6
|
|
|
2,763.8
|
|
Selling
and administrative expenses
|
|
|
360.8
|
|
|
332.4
|
|
|
712.5
|
|
|
638.5
|
|
Operating
income
|
|
|
274.1
|
|
|
252.5
|
|
|
482.7
|
|
|
450.4
|
|
Interest
expense
|
|
|
(30.8
|
)
|
|
(30.8
|
)
|
|
(66.5
|
)
|
|
(66.0
|
)
|
Other
income (expense), net
|
|
|
8.6
|
|
|
(6.2
|
)
|
|
8.5
|
|
|
0.1
|
|
Earnings
before income taxes
|
|
|
251.9
|
|
|
215.5
|
|
|
424.7
|
|
|
384.5
|
|
Provision
for income taxes
|
|
|
43.9
|
|
|
18.4
|
|
|
60.1
|
|
|
29.9
|
|
Earnings
from continuing operations
|
|
|
208.0
|
|
|
197.1
|
|
|
364.6
|
|
|
354.6
|
|
Discontinued
operations, net of tax
|
|
|
756.1
|
|
|
116.4
|
|
|
817.0
|
|
|
212.1
|
|
Net
earnings
|
|
$
|
964.1
|
|
$
|
313.5
|
|
$
|
1,181.6
|
|
$
|
566.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.69
|
|
$
|
0.60
|
|
$
|
1.20
|
|
$
|
1.08
|
|
Discontinued
operations, net of tax
|
|
|
2.52
|
|
|
0.36
|
|
|
2.70
|
|
|
0.65
|
|
Net
earnings
|
|
$
|
3.21
|
|
$
|
0.96
|
|
$
|
3.90
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.68
|
|
$
|
0.60
|
|
$
|
1.19
|
|
$
|
1.07
|
|
Discontinued
operations, net of tax
|
|
|
2.49
|
|
|
0.35
|
|
|
2.66
|
|
|
0.64
|
|
Net
earnings
|
|
$
|
3.17
|
|
$
|
0.95
|
|
$
|
3.85
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.18
|
|
$
|
0.16
|
|
$
|
0.36
|
|
$
|
0.32
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
INGERSOLL-RAND
COMPANY LIMITED
CONDENSED
CONSOLIDATED BALANCE SHEET
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
In
millions
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
460.2
|
|
$
|
273.1
|
|
Marketable
securities
|
|
|
0.7
|
|
|
0.7
|
|
Accounts
and notes receivable, less allowance of $10.6 in 2007 and $8.3
in
2006
|
|
|
1,644.0
|
|
|
1,481.7
|
|
Inventories
|
|
|
919.3
|
|
|
833.1
|
|
Prepaid
expenses and deferred income taxes
|
|
|
509.6
|
|
|
355.5
|
|
Assets
held for sale
|
|
|
2,130.6
|
|
|
2,589.9
|
|
Total
current assets
|
|
|
5,664.4
|
|
|
5,534.0
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
873.3
|
|
|
866.7
|
|
Goodwill
|
|
|
3,877.5
|
|
|
3,837.2
|
|
Intangible
assets, net
|
|
|
707.0
|
|
|
712.8
|
|
Other
assets
|
|
|
1,284.1
|
|
|
1,195.2
|
|
Total
assets
|
|
$
|
12,406.3
|
|
$
|
12,145.9
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
685.1
|
|
$
|
757.6
|
|
Accrued
compensation and benefits
|
|
|
295.3
|
|
|
305.0
|
|
Accrued
expenses and other current liabilities
|
|
|
672.0
|
|
|
697.8
|
|
Loans
payable and current maturities of long-term debt
|
|
|
686.7
|
|
|
1,075.8
|
|
Liabilities
held for sale
|
|
|
1,239.2
|
|
|
1,288.5
|
|
Total
current liabilities
|
|
|
3,578.3
|
|
|
4,124.7
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
894.5
|
|
|
895.7
|
|
Postemployment
and other benefit liabilities
|
|
|
985.0
|
|
|
1,044.7
|
|
Other
noncurrent liabilities
|
|
|
1,116.1
|
|
|
676.0
|
|
Total
liabilities
|
|
|
6,573.9
|
|
|
6,741.1
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Class
A common shares
|
|
|
293.4
|
|
|
306.8
|
|
Retained
earnings
|
|
|
5,692.7
|
|
|
5,456.1
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(153.7
|
)
|
|
(358.1
|
)
|
Total
shareholders' equity
|
|
|
5,832.4
|
|
|
5,404.8
|
|
Total
liabilities and shareholders' equity
|
|
$
|
12,406.3
|
|
$
|
12,145.9
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
INGERSOLL-RAND
COMPANY LIMITED
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
Six
months ended June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,181.6
|
|
$
|
566.7
|
|
Income
from discontinued operations, net of tax
|
|
|
(817.0
|
)
|
|
(212.1
|
)
|
Adjustments
to arrive at net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
70.6
|
|
|
75.5
|
|
Stock
settled share-based compensation
|
|
|
17.8
|
|
|
11.5
|
|
Changes
in other assets and liabilities, net
|
|
|
(375.0
|
)
|
|
(124.7
|
)
|
Other,
net
|
|
|
21.1
|
|
|
(89.9
|
)
|
Net
cash provided by (used in) continuing operating activities
|
|
|
99.1
|
|
|
227.0
|
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
99.1
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(57.8
|
)
|
|
(75.8
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
9.0
|
|
|
1.1
|
|
Acquisitions,
net of cash acquired
|
|
|
(3.7
|
)
|
|
(28.5
|
)
|
Proceeds
from sales and maturities of marketable securities
|
|
|
0.1
|
|
|
155.9
|
|
Proceeds
from business disposition, net of cash of $23.4
|
|
|
1,291.7
|
|
|
-
|
|
Other,
net
|
|
|
3.4
|
|
|
(1.9
|
)
|
Net
cash provided by (used in) continuing investing activities
|
|
|
1,242.7
|
|
|
50.8
|
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
(34.2
|
)
|
|
(24.5
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term borrowings
|
|
|
(383.2
|
)
|
|
20.0
|
|
Proceeds
from long-term debt
|
|
|
1.6
|
|
|
1.9
|
|
Payments
of long-term debt
|
|
|
(12.4
|
)
|
|
(508.2
|
)
|
Net
change in debt
|
|
|
(394.0
|
)
|
|
(486.3
|
)
|
Dividends
paid
|
|
|
(109.6
|
)
|
|
(105.0
|
)
|
Proceeds
from exercise of stock options
|
|
|
121.4
|
|
|
81.4
|
|
Repurchase
of common shares by subsidiary
|
|
|
(846.5
|
)
|
|
(383.7
|
)
|
Net
cash provided by (used in) continuing financing activities
|
|
|
(1,228.7
|
)
|
|
(893.6
|
)
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
9.1
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
187.1
|
|
|
(618.8
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
273.1
|
|
|
828.9
|
|
Cash
and cash equivalents - end of period
|
|
$
|
460.2
|
|
$
|
210.1
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
INGERSOLL-RAND
COMPANY LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1–
Basis
of Presentation
In
the
opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments, which include normal recurring adjustments,
necessary to present fairly the consolidated unaudited financial position at
June 30, 2007, and results of operations and cash flows for the three and six
months ended June 30, 2007 and 2006.
The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Ingersoll-Rand Company Limited (the Company or IR-Limited) Annual Report on
Form
10-K for the year ended December 31, 2006.
As
a
result of the divestiture of the Road Development business unit and the pending
sale of Bobcat, Utility Equipment and Attachments business units, the Company
realigned its operating and reporting segments to better reflect its market
focus. The Company’s Bobcat, Utility Equipment, Attachments and Road Development
business units are now being reported as discontinued operations. The Company’s
Club Car business unit is now included in the Industrial Technologies segment.
Prior year results have been reclassified to conform to this
change.
Sale
of Compact Equipment Business
On
July
29, 2007, the Company agreed to sell its Bobcat, Utility Equipment and
Attachments businesses (collectively, Compact Equipment) to Doosan Infracore
for
cash proceeds of approximately $4.9 billion. The sale is subject to customary
closing conditions and is targeted to close early in the 2007 fourth
quarter.
The
Compact Equipment business manufactures and sells compact equipment, including
skid-steer loaders, compact track loaders, mini-excavators and telescopic tool
handlers; portable air compressors, generators, and light towers;
general-purpose light construction equipment; and attachments. For full-year
2006 these businesses collectively generated approximately $2.6 billion in
revenues. The sale includes manufacturing facilities in Gwinner and Bismarck,
North Dakota; Carrollton, Georgia; Litchfield, Minnesota; Petersburg, Virginia;
Wujiang, China; Dobris, Czech Republic; Lyon and Pontchateau, France; Slane,
Ireland; and Tredegar, Wales. The Compact Equipment business employs
approximately 5,700 people worldwide.
Note
2 – Divestitures and Discontinued Operations
The
components of discontinued operations for the three and six months ended June
30, were as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Road
Development, net of tax
|
|
$
|
678.2
|
|
$
|
27.7
|
|
$
|
694.1
|
|
$
|
45.1
|
|
Compact
Equipment, net of tax
|
|
|
81.7
|
|
|
97.3
|
|
|
142.3
|
|
|
184.8
|
|
Other
discontinued operations, net of tax
|
|
|
(3.8
|
)
|
|
(8.6
|
)
|
|
(19.4
|
)
|
|
(17.8
|
)
|
Total
discontinued operations, net of tax
|
|
$
|
756.1
|
|
$
|
116.4
|
|
$
|
817.0
|
|
$
|
212.1
|
|
Compact
Equipment
As
noted
in Note 1 above, on July 29, 2007, the Company agreed to sell its Compact
Equipment business. The Company has accounted for the Compact Equipment business
as discontinued operations and has classified the assets and liabilities as
held
for sale for all periods presented in accordance with Statement of Financial
Accounting Standard No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”.
Net
revenues and after-tax earnings of Compact Equipment for the three and six
months ended June 30, were as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
759.8
|
|
$
|
765.8
|
|
$
|
1,452.4
|
|
$
|
1,484.9
|
|
After-tax
earnings
|
|
|
81.7
|
|
|
97.3
|
|
|
142.3
|
|
|
184.8
|
|
Assets
and liabilities recorded as held for sale on the condensed consolidated balance
sheet were as follows:
In
millions
|
|
June 30,
2007
|
|
December 31,
2006
|
|
Assets
|
|
|
|
|
|
Current
assets
|
|
$
|
924.0
|
|
$
|
834.2
|
|
Property,
plant and equipment, net
|
|
|
293.6
|
|
|
264.6
|
|
Goodwill
and other intangible assets, net
|
|
|
694.8
|
|
|
691.3
|
|
Other
assets and deferred income taxes
|
|
|
218.2
|
|
|
197.9
|
|
Assets
held for sale
|
|
$
|
2,130.6
|
|
$
|
1,988.0
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
762.6
|
|
$
|
658.5
|
|
Noncurrent
liabilities
|
|
|
476.6
|
|
|
442.7
|
|
Liabilities
held for sale
|
|
$
|
1,239.2
|
|
$
|
1,101.2
|
|
Road
Development Divestiture
On
February 27, 2007, the Company agreed to sell its Road Development business
unit
to AB Volvo (publ) for cash proceeds of approximately $1.3 billion. The sale
was
completed on April 30, 2007, in all countries except for India, which closed
on
May 4, 2007.
The
Road
Development business unit manufactures and sells asphalt paving equipment,
compaction equipment, milling machines, and construction-related material
handling equipment. The Company has accounted for the Road Development business
unit as discontinued operations and has classified the assets and liabilities
sold to AB Volvo as held for sale for all periods presented in accordance with
Statement of Financial Accounting Standard No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”.
Net
revenues and after-tax earnings of the Road Development business unit for the
three and six months ended June 30, were as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
77.2
|
|
$
|
228.1
|
|
$
|
244.4
|
|
$
|
415.3
|
|
After-tax
earnings from operations
|
|
$
|
2.5
|
|
$
|
27.7
|
|
$
|
18.4
|
|
$
|
45.1
|
|
Gain
on sale, net of tax of $128.6
|
|
|
675.7
|
|
|
-
|
|
|
675.7
|
|
|
-
|
|
Total
discontinued operations
|
|
$
|
678.2
|
|
$
|
27.7
|
|
$
|
694.1
|
|
$
|
45.1
|
|
Assets
and liabilities recorded as held for sale on the condensed consolidated balance
sheet were as follows:
|
|
December
31,
|
|
In
millions
|
|
2006
|
|
Assets
|
|
|
|
Current
assets
|
|
$
|
317.6
|
|
Property,
plant and equipment, net
|
|
|
145.0
|
|
Goodwill
and other intangible assets, net
|
|
|
99.8
|
|
Other
assets and deferred income taxes
|
|
|
39.5
|
|
Assets
held for sale
|
|
$
|
601.9
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
liabilities
|
|
$
|
118.9
|
|
Noncurrent
liabilities
|
|
|
68.4
|
|
Liabilities
held for sale
|
|
$
|
187.3
|
|
Other
Discontinued Operations
The
Company also has other retained costs for discontinued operations that mainly
include costs related to postretirement benefits and product and legal costs
(mostly asbestos-related) from previously sold businesses. The components of
other discontinued operations for the three and six months ended June 30, were
as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Retained
costs, net of tax
|
|
$
|
(3.9
|
)
|
$
|
(8.8
|
)
|
$
|
(19.6
|
)
|
$
|
(18.2
|
)
|
Net
gain on disposals, net of tax
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
Total
other discontinued operations, net of tax
|
|
$
|
(3.8
|
)
|
$
|
(8.6
|
)
|
$
|
(19.4
|
)
|
$
|
(17.8
|
)
|
Note
3 –
Inventories
Inventories
are stated at the lower of cost or market. Most U.S. manufactured inventories,
excluding the Climate Control Technologies segment, are valued on the last-in,
first-out (LIFO) method. All other inventories are valued using the first-in,
first-out (FIFO) method. The composition of inventories was as
follows:
|
|
June
30,
|
|
December
31,
|
|
In
millions
|
|
2007
|
|
2006
|
|
Raw
materials and supplies
|
|
$
|
379.8
|
|
$
|
353.8
|
|
Work-in-process
|
|
|
191.7
|
|
|
186.3
|
|
Finished
goods
|
|
|
445.5
|
|
|
401.3
|
|
|
|
|
1,017.0
|
|
|
941.4
|
|
Less
- LIFO reserve
|
|
|
97.7
|
|
|
108.3
|
|
Total
|
|
$
|
919.3
|
|
$
|
833.1
|
|
Note
4 – Goodwill
and Other Intangible Assets
The
changes in the carrying amount of goodwill were as follows:
In
millions
|
|
Climate
Control
Technologies
|
|
Industrial
Technologies
|
|
Security
Technologies
|
|
Total
|
|
Balance
at December 31, 2006
|
|
$
|
2,545.1
|
|
$
|
341.2
|
|
$
|
950.9
|
|
$
|
3,837.2
|
|
Acquisitions
and adjustments*
|
|
|
-
|
|
|
4.8
|
|
|
3.3
|
|
|
8.1
|
|
Translation
|
|
|
14.0
|
|
|
2.3
|
|
|
15.9
|
|
|
32.2
|
|
Balance
at June 30, 2007
|
|
$
|
2,559.1
|
|
$
|
348.3
|
|
$
|
970.1
|
|
$
|
3,877.5
|
|
*
Includes
current year adjustments related to final purchase price allocation
adjustments.
The
Company initially records to goodwill the excess of the purchase price over
the
preliminary fair value of the net assets acquired. Once the final valuation
has
been performed for each acquisition, the Company may record an adjustment to
goodwill.
The
following table sets forth the gross amount and accumulated amortization of
the
Company’s intangible assets:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
In
millions
|
|
Gross
amount
|
|
Accumulated
amortization
|
|
Gross
amount
|
|
Accumulated
amortization
|
|
Customer
relationships
|
|
$
|
492.3
|
|
$
|
79.0
|
|
$
|
489.6
|
|
$
|
71.8
|
|
Trademarks
|
|
|
105.3
|
|
|
12.2
|
|
|
102.6
|
|
|
9.8
|
|
Patents
|
|
|
31.9
|
|
|
19.4
|
|
|
30.5
|
|
|
18.2
|
|
Other
|
|
|
47.9
|
|
|
25.4
|
|
|
48.9
|
|
|
23.7
|
|
Total
amortizable intangible assets
|
|
|
677.4
|
|
|
136.0
|
|
|
671.6
|
|
|
123.5
|
|
Indefinite-lived
intangible assets
|
|
|
165.6
|
|
|
-
|
|
|
164.7
|
|
|
-
|
|
Total
|
|
$
|
843.0
|
|
$
|
136.0
|
|
$
|
836.3
|
|
$
|
123.5
|
|
Intangible
asset amortization expense for the three months ended June 30, 2007 and 2006,
was $6.1 million and $6.3 million, respectively. Intangible asset amortization
expense for the six months ended June 30, 2007 and 2006, was $12.2 million
and
$12.5 million, respectively. Estimated intangible asset amortization expense
for
each of the next five years is expected to approximate $25 million.
Note
5 – Postretirement Benefits Other Than Pensions
The
Company sponsors several postretirement plans that cover certain eligible
employees. These plans provide for health care benefits and, in some instances,
life insurance benefits. Postretirement health plans generally are contributory
and contributions are adjusted annually. Life insurance plans for retirees
are primarily noncontributory. The Company funds the postretirement benefit
costs principally on a pay-as-you-go basis. The components of net periodic
postretirement benefits cost for the three and six months ended June 30, were
as
follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
3.0
|
|
$
|
2.7
|
|
$
|
6.2
|
|
$
|
5.4
|
|
Interest
cost
|
|
|
14.0
|
|
|
13.6
|
|
|
28.1
|
|
|
27.2
|
|
Net
amortization of prior service gains
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
(2.1
|
)
|
|
(2.0
|
)
|
Net
amortization of net actuarial losses
|
|
|
4.6
|
|
|
4.6
|
|
|
9.5
|
|
|
9.2
|
|
Net
periodic postretirement benefits cost
|
|
|
20.6
|
|
|
19.9
|
|
|
41.7
|
|
|
39.8
|
|
Curtailment
and settlement gains
|
|
|
(23.4
|
)
|
|
-
|
|
|
(23.4
|
)
|
|
-
|
|
Net
periodic postretirement benefit (gains) costs after curtailment and
settlement gains
|
|
$
|
(2.8
|
)
|
$
|
19.9
|
|
$
|
18.3
|
|
$
|
39.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recorded in continuing operations
|
|
$
|
6.8
|
|
$
|
6.8
|
|
$
|
13.6
|
|
$
|
13.5
|
|
Amounts
recorded in discontinued operations
|
|
|
(9.6
|
)
|
|
13.1
|
|
|
4.7
|
|
|
26.3
|
|
Total
|
|
$
|
(2.8
|
)
|
$
|
19.9
|
|
$
|
18.3
|
|
$
|
39.8
|
|
The
curtailment and settlement gains in 2007 are associated with the sale of the
Road Development business unit on April 30, 2007. In addition, the Company’s
U.S. postretirement plan was remeasured as of the sale date and the discount
rate used was increased from 5.5% to 5.75%.
Note
6 – Pension
Plans
The
Company sponsors several noncontributory pension plans that cover substantially
all U.S. employees. In addition, certain non-U.S. employees in other countries
are covered by pension plans. The Company’s pension plans for U.S.
non-collectively bargained employees provide benefits on a modest final average
pay formula. The Company’s U.S. collectively bargained pension plans principally
provide benefits based on a flat benefit formula. Non-U.S. plans provide
benefits based on earnings and years of service. The Company maintains
additional other supplemental benefit plans for officers and other key
employees. The components of the Company’s pension-related costs for the three
and six months ended June 30, were as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
14.3
|
|
$
|
14.4
|
|
$
|
29.2
|
|
$
|
28.8
|
|
Interest
cost
|
|
|
41.1
|
|
|
40.3
|
|
|
82.6
|
|
|
80.2
|
|
Expected
return on plan assets
|
|
|
(57.7
|
)
|
|
(54.5
|
)
|
|
(115.9
|
)
|
|
(108.6
|
)
|
Net
amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs
|
|
|
2.3
|
|
|
2.1
|
|
|
4.7
|
|
|
4.2
|
|
Transition
amount
|
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
Plan
net acturial losses
|
|
|
3.3
|
|
|
6.7
|
|
|
7.9
|
|
|
13.3
|
|
Net
periodic pension cost
|
|
|
3.5
|
|
|
9.2
|
|
|
8.9
|
|
|
18.3
|
|
Curtailment
and settlement losses
|
|
|
24.3
|
|
|
-
|
|
|
24.3
|
|
|
-
|
|
Net
periodic pension costs after curtailment and settlement
losses
|
|
$
|
27.8
|
|
$
|
9.2
|
|
$
|
33.2
|
|
$
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recorded in continuing operations
|
|
$
|
6.7
|
|
$
|
10.2
|
|
$
|
15.0
|
|
$
|
20.1
|
|
Amounts
recorded in discontinued operations
|
|
|
21.1
|
|
|
(1.0
|
)
|
|
18.2
|
|
|
(1.8
|
)
|
Total
|
|
$
|
27.8
|
|
$
|
9.2
|
|
$
|
33.2
|
|
$
|
18.3
|
|
The
Company made employer contributions of $13.0 million and $13.4 million to its
pension plans during the six months ended June 30, 2007 and 2006,
respectively.
The
curtailment and settlement losses in 2007 are associated with the sale of the
Road Development business unit on April 30, 2007. In addition, certain of the
Company’s pension plans, primarily in the U.S., were remeasured as of the sale
date and the discount rate used was increased from 5.5% to 5.75%.
Note
7 –
Share-Based Compensation
On
June
6, 2007, the shareholders of the Company approved the Incentive Stock Plan
of
2007, which authorizes the Company to issue stock options and other share-based
incentives. The total number of shares authorized by the shareholders is 14.0
million, of which 13.9 million remains available for future incentive awards.
Stock
Options
The
average fair value of the stock options granted under the Incentive Stock Plan
of 1998 for the six months ended June 30, 2007 and 2006 was estimated to be
$11.06 per share and $10.42 per share, respectively, using the Black-Scholes
option-pricing model. The following assumptions were used:
|
|
2007
|
|
2006
|
|
Dividend
yield
|
|
|
1.75
|
%
|
|
1.49
|
%
|
Volatility
|
|
|
26.10
|
%
|
|
27.70
|
%
|
Risk-free
rate of return
|
|
|
4.71
|
%
|
|
4.47
|
%
|
Expected
life
|
|
|
4.70
years
|
|
|
4.42
years
|
|
Expected
volatility is based on the historical volatility from traded options on the
Company’s stock. The risk-free rate of interest for periods within the
contractual life of the stock option award is based on the yield curve of a
zero-coupon U.S. Treasury bond on the date the award is granted with a maturity
equal to the expected life of the award. The Company uses historical data to
estimate forfeitures within its valuation model. The Company’s expected life of
the stock option awards is derived from historical experience and represents
the
period of time that awards are expected to be outstanding.
Changes
in the options outstanding under the plans for the six months ended June 30,
2007 was as follows:
|
|
Shares
subject
to option
|
|
Weighted-
average
exercise price
|
|
Aggregate
intrinsic
value (millions)
|
|
Weighted-
average
remaining life
|
|
December
31, 2006
|
|
|
19,164,942
|
|
$
|
31.53
|
|
|
|
|
|
|
|
Granted
|
|
|
3,367,725
|
|
|
43.28
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,126,249
|
)
|
|
29.42
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(312,017
|
)
|
|
40.78
|
|
|
|
|
|
|
|
Outstanding
June 30, 2007
|
|
|
18,094,401
|
|
$
|
34.04
|
|
$
|
376.4
|
|
|
6.6
|
|
Exercisable
June 30, 2007
|
|
|
11,532,138
|
|
$
|
29.99
|
|
$
|
286.4
|
|
|
5.4
|
|
SARs
SARs
generally vest ratably over a three-year period from the date of grant and
expire at the end of ten years. Effective August 2, 2006, all exercised SARs
will be settled in the Company’s Class A common shares. Previously, exercised
SARs were paid in cash.
The
following table summarizes the information for currently outstanding SARs for
the six months ended June 30, 2007:
|
|
Shares
subject
to option
|
|
Weighted-
average
exercise price
|
|
Aggregate
intrinsic
value (millions)
|
|
Weighted-
average
remaining life
|
|
December
31, 2006
|
|
|
1,693,754
|
|
$
|
33.11
|
|
|
|
|
|
|
|
Granted*
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(354,621
|
)
|
|
30.69
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(35,347
|
)
|
|
34.30
|
|
|
|
|
|
|
|
Outstanding
June 30, 2007
|
|
|
1,303,786
|
|
$
|
33.71
|
|
$
|
27.5
|
|
|
6.5
|
|
Exercisable
June 30, 2007
|
|
|
904,924
|
|
$
|
31.34
|
|
$
|
21.3
|
|
|
5.8
|
|
*
As of the end of 2006, the Company no longer expects to grant SARs
Performance
Shares
The
Company has a Performance Share Program (PSP) for key employees. The
program provides annual awards for the achievement of pre-established long-term
strategic initiatives and annual financial performance of the Company. The
annual target award level is expressed as a number of the Company’s Class
A
common shares and for performance year 2006 the award was paid in cash. On
April
17, 2007, and effective for the performance year 2007, the Compensation
Committee of the Board of Directors of the Company approved a revision to the
PSP program such that all
PSP
awards will be paid in Class A common shares rather than in cash and, except
for
retirement-eligible employees, all of those shares will vest one year after
the
date of grant. As a result of these changes, a larger portion of the Company’s
executive compensation program will be directly linked to the performance of
the
Company’s Class A common shares, thus further aligning the interests of
executives with those of our shareholders.
Deferred
Compensation
The
Company allows key employees and non-employee directors to defer a portion
of
their eligible compensation into a number of investment choices, including
Class
A common share equivalents. Effective
August 2, 2006, the Company eliminated the provision in the deferred
compensation plans making plan participants eligible to receive a 20%
supplemental amount on deferrals in the Company's Class A common share
equivalents. In addition, effective August 2, 2006, the Company vested the
previously awarded, but unvested, portions of the 20% supplemental amount
awarded under the deferred compensation plans.
As
of
June 30, 2007, the portion deferred into Class A common share equivalents was
subject to market fluctuations based on the Company’s share price. Effective
August 1, 2007, the deferred compensation plans were amended to provide that
any
amounts invested in the Class A common share equivalents will be settled in
Class A common shares at the time of distribution, rather than
cash.
Other
Plans
The
Company maintains a shareholder-approved Management Incentive Unit Award Plan.
Under the plan, participating key employees were awarded incentive units. When
dividends are paid on Class A common shares, dividends are awarded to unit
holders, one-half of which is paid in cash and the remaining half of which
is
credited to the participants’ account in the form of Class A common share
equivalents. The value of the actual incentive units is never paid to
participants, and only the fair value of accumulated Class A common share
equivalents is paid in cash upon the participants’ retirement.
Stock
grants were issued prior to February 2000 as an incentive plan for certain
key
employees, with varying vesting periods. Effective August 2, 2006, all remaining
stock grants will be settled with the Company’s Class A common shares rather
than cash.
Compensation
Expense
Share-based
compensation expense is included in selling and administrative expenses. The
following table summarizes the expenses recognized for the three and six months
ended June 30:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Stock
options
|
|
$
|
4.3
|
|
$
|
3.4
|
|
$
|
15.7
|
|
$
|
11.6
|
|
SARs
|
|
|
0.1
|
|
|
2.7
|
|
|
0.5
|
|
|
6.0
|
|
Performance
shares
|
|
|
1.6
|
|
|
4.6
|
|
|
5.8
|
|
|
9.1
|
|
Deferred
compensation
|
|
|
1.5
|
|
|
2.7
|
|
|
2.5
|
|
|
5.7
|
|
Other
|
|
|
-
|
|
|
0.4
|
|
|
0.2
|
|
|
0.8
|
|
Pre-tax
expense
|
|
|
7.5
|
|
|
13.8
|
|
|
24.7
|
|
|
33.2
|
|
Tax
benefit
|
|
|
2.9
|
|
|
5.3
|
|
|
9.4
|
|
|
12.7
|
|
After
tax expense
|
|
$
|
4.6
|
|
$
|
8.5
|
|
$
|
15.3
|
|
$
|
20.5
|
|
In
August
2006, the Company entered into two total return swaps (the Swaps) which are
derivative instruments used to hedge the Company's exposure to changes in its
share-based compensation expense. The aggregate notional amount of the Swaps
was
approximately $52.6 million. On June 11, 2007, the Company terminated a portion
of the Swaps for net cash proceeds of $3.8 million. As a result of this
termination the Swaps aggregate notional value was approximately $41.3 million.
As of June 30, 2007 the aggregate fair value of the Swaps was $18.9 million.
The
Company settled the remaining portion of the Swaps in the third quarter of
2007.
For the six months ended June 30, 2007, the Company recorded income of $16.8
million within selling and administrative expenses, associated with the change
in fair value of the swaps during the period.
Note
8 – Income
Taxes
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB
Statement 109” (FIN 48), which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. Additionally, FIN
48
provides guidance on the recognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. As a result
of
adopting FIN 48, the company recorded additional liabilities, to its previously
established reserves, and a corresponding decrease in retained earnings of
$145.6 million.
The
Company has total unrecognized tax benefits of $457.0 million as of January
1,
2007. The amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate are $394.9 million as of January 1, 2007.
The
Company records interest and penalties associated with the uncertain tax
positions within its provision for income taxes on its income statement. As
of
January 1, 2007, the Company had reserves totaling $88.0 million associated
with
interest and penalties, net of tax. For the three and six months ended June
30,
2007, the Company recognized $4.9 million and $7.8 million, respectively, in
interest and penalties net of tax related to these uncertain tax positions.
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, U.S. and non-U.S. tax authorities
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 Germany, Italy, the Netherlands and the United
States. In general, the examination of the Company’s material tax returns is
completed for the years prior to 2000.
The
IRS
has completed the examination of the Company’s federal income tax returns
through the 2000 tax year and has issued a notice proposing adjustments. The
principle proposed adjustment relates to the disallowance of certain capital
losses. The Company disputes the IRS position and protests have been filed
with
the IRS Appeals Division. In order to reduce the potential interest expense,
the
Company expects
to make a payment in the third quarter 2007 of approximately $200 million with
respect to this matter, which will reduce the Company’s total unrecognized tax
position by $140 million.
On
July
20, 2007, the Company and its consolidated subsidiaries received a notice from
the Internal Revenue Service (IRS) containing proposed adjustments to the
Company’s tax filings in connection with an audit of the 2001 and 2002 tax
years. The IRS did not contest the validity of the Company’s reincorporation in
Bermuda. The most significant adjustments proposed by the IRS involve treating
the intercompany debt incurred in connection with the Company’s reincorporation
in Bermuda as equity. As a result of this recharacterization, the IRS has
disallowed the deduction of interest paid on the debt and imposed dividend
withholding taxes on the payments denominated as interest. These adjustments
proposed by the IRS, if upheld in their entirety, would result in additional
taxes with respect to 2002 of approximately $190 million plus interest, and
would require the Company to record additional charges associated with this
matter. At this time, the IRS has not yet begun their examination of the
Company’s tax filings for years subsequent to 2002. However, if these
adjustments or a portion of these adjustments proposed by the IRS are ultimately
sustained, it is likely to also affect subsequent tax years.
The
Company strongly disagrees with the view of the IRS and intends to vigorously
contest these proposed adjustments. The Company, in consultation with its
outside advisors, carefully considered many factors in determining the terms
of
the intercompany debt including the obligor’s ability to service the debt and
the availability of equivalent financing from unrelated parties, two factors
prominently cited by the IRS in denying debt treatment. The Company believes
that its characterization of that obligation as debt for tax purposes was
supported by the relevant facts and legal authorities at the time of its
creation. The subsequent financial results of the relevant companies, including
the actual cash flow generated by operations and the production of significant
additional cash flow from dispositions have confirmed the ability to service
this debt. Although the outcome of this matter cannot be predicted with
certainty, based upon an analysis of the strength of its position, the Company
believes that it is adequately reserved for this matter. As the Company moves
forward to resolve this matter with the IRS, it is reasonably possible that
the
reserves established may be adjusted within the next 12 months. However, the
Company does not expect that the ultimate resolution will have a material
adverse impact on its future results of operations or financial
position.
The
Company believes that it has adequately provided for any reasonably foreseeable
resolution of any tax disputes, but will adjust its reserves if events so
dictate in accordance with FIN 48. To the extent that the ultimate results
differ from the original or adjusted estimates of the Company, the effect will
be recorded in the provision for income taxes.
Note
9 –
Comprehensive
Income
The
components of comprehensive income for the three and six months ended June
30,
were as follows:
|
|
Three months ended
June 30,
|
|
Six
months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
earnings
|
|
$
|
964.1
|
|
$
|
313.5
|
|
$
|
1,181.6
|
|
$
|
566.7
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
32.2
|
|
|
82.5
|
|
|
67.8
|
|
|
135.7
|
|
Change
in fair value of derivatives qualifying as cash flow hedges,
net of tax
|
|
|
(5.8
|
)
|
|
(3.1
|
)
|
|
(5.9
|
)
|
|
(7.2
|
)
|
Unrealized
gain (loss) on marketable securities, net of
tax
|
|
|
0.8
|
|
|
0.4
|
|
|
0.3
|
|
|
0.3
|
|
Pension
and other postretirement benefits liability adjustment, net of
tax
|
|
|
135.3
|
|
|
-
|
|
|
142.2
|
|
|
-
|
|
Comprehensive
income
|
|
$
|
1,126.6
|
|
$
|
393.3
|
|
$
|
1,386.0
|
|
$
|
695.5
|
|
Note
10–Weighted-Average
Common Shares
Basic
earnings per share is computed by dividing net earnings by the weighted-average
number of Class A common shares outstanding. Diluted earnings per share is
computed by dividing net earnings by the weighted-average number of Class A
common shares outstanding as well as potentially dilutive common shares, which
in the Company’s case, includes shares issuable under share-based compensation
plans. The following table details the weighted-average number of Class A common
shares outstanding for basic and diluted earnings per share
calculations:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted-average
number of basic shares
|
|
|
299.9
|
|
|
327.1
|
|
|
303.1
|
|
|
327.9
|
|
Shares
issuable under incentive stock plans
|
|
|
4.4
|
|
|
3.7
|
|
|
3.9
|
|
|
3.6
|
|
Weighted-average
number of diluted shares
|
|
|
304.3
|
|
|
330.8
|
|
|
307.0
|
|
|
331.5
|
|
Anti-dilutive
shares
|
|
|
2.6
|
|
|
2.3
|
|
|
2.0
|
|
|
-
|
|
Note
11 – Commitments
and Contingencies
The
Company is involved in various litigations, claims and administrative
proceedings, including 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, management believes that the 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
remediation costs are determined on a site-by-site basis and accruals are made
when it is probable a liability exists and the cost can be reasonably estimated.
The Company estimates the amount of recurring and non-recurring costs at each
site using internal and external experts. In arriving at cost estimates the
following factors are considered: the type of contaminant, the stage of the
clean up, applicable law and existing technology. These estimates, and the
resultant accruals, are reviewed and updated quarterly to reflect changes in
facts and law. The Company does not discount its liability or assume any
insurance recoveries when environmental liabilities are recorded.
Certain
wholly owned subsidiaries of the Company 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 has been filed against Ingersoll-Rand Company
(IR-New
Jersey), and generally allege injury caused by exposure to asbestos contained
in
certain of IR-New Jersey’s products. Although IR-New Jersey was neither a
producer nor a manufacturer of asbestos, some of its formerly manufactured
products utilized asbestos-containing components, such as gaskets purchased
from
third-party suppliers.
All
asbestos-related claims resolved to date have been dismissed or settled. For
the
three and six month periods ended June 30, 2007, total costs for settlement
and
defense of asbestos claims after insurance recoveries and net of tax were
approximately $8 million and $20 million, respectively. With the assistance
of
independent advisors, the Company performs a thorough analysis, updated
periodically, of its actual and anticipated future asbestos liabilities
projected seven years in the future. Based upon such analysis, the Company
believes that its reserves and insurance are adequate to cover its asbestos
liabilities.
In
connection with the disposition of certain businesses and facilities the Company
has indemnified the purchasers for the expected cost of remediation of
environmental contamination, if any, existing on the date of disposition. Such
expected costs are accrued when environmental assessments are made or remedial
efforts are probable and the costs can be reasonably estimated.
As
previously reported, on November 10, 2004, the Securities and Exchange
Commission (SEC) issued an Order directing that a number of public companies,
including the Company, provide information relating to their participation
in
transactions under the United Nations’ Oil for Food Program. Upon receipt of the
Order, the Company undertook a thorough review of its participation in the
Program, provided the SEC with information responsive to the Order and provided
additional information requested by the SEC. During a March 27, 2007 meeting
with the SEC, at which a representative of the Department of Justice (DOJ)
was
also present, the Company began discussions concerning the resolution of this
matter with both the SEC and DOJ. These discussions are ongoing and the Company
will continue to cooperate fully with the SEC and DOJ in this matter. In
addition, on July 10, 2007, representatives of the Italian Guardia di Finanza
(Financial Police) requested documents from Ingersoll-Rand Italiana S.p.A
pertaining to certain Oil For Food transactions undertaken by that subsidiary
of
the Company. Such transactions have previously been reported to the SEC and
DOJ,
and the Company will continue to cooperate fully with the Italian authorities
in
this matter.
The
Company sells products on a continuous basis under various arrangements through
institutions that provide leasing and product financing alternatives to retail
and wholesale customers. Under these arrangements, the Company is contingently
liable for loan guarantees and residual values of equipment of approximately
$25.5 million, including consideration of ultimate net loss provisions. The
risk
of loss to the Company is minimal, and historically, only immaterial losses
have
been incurred related to these arrangements since the fair value of the
underlying equipment that serves as collateral is generally in excess of the
contingent liability. Management believes these guarantees will not adversely
affect the condensed consolidated financial statements.
The
Company remains contingently liable for approximately $13.8 million relating
to
performance bonds associated with prior sale of products of Ingersoll-Dresser
Pump Company (IDP), which the Company divested in 2000. The acquirer of IDP
is
the primary obligor under these performance bonds. However, should the acquirer
default under these arrangements, the Company would be required to satisfy
these
financial obligations. The obligation extends through 2008.
The
following table represents the changes in the product warranty liability for
the
six months ended June 30, respectively:
In
millions
|
|
2007
|
|
2006
|
|
Balance
at beginning of period
|
|
$
|
137.1
|
|
$
|
135.2
|
|
Reductions
for payments
|
|
|
(35.6
|
)
|
|
(33.3
|
)
|
Accruals
for warranties issued during the period
|
|
|
42.8
|
|
|
35.7
|
|
Changes
to accruals related to preexisting warranties
|
|
|
(1.0
|
)
|
|
(0.2
|
)
|
Acquisitions
|
|
|
0.1
|
|
|
0.1
|
|
Translation
|
|
|
1.5
|
|
|
2.4
|
|
Balance
at end of period
|
|
$
|
144.9
|
|
$
|
139.9
|
|
Note
12 –Business
Segment Information
The
Company classifies its business into three reportable segments based on industry
and market focus: Climate Control Technologies, Industrial Technologies and
Security Technologies.
As
discussed in Note 1, the Company realigned its operating and reporting segments.
The Company’s Bobcat, Utility Equipment, Attachments and Road Development
business units are now being reported as discontinued operations. The Company’s
Club Car business unit is now included in the Industrial Technologies segment.
Prior year results have been reclassified to conform to this change. A summary
of operations by reportable segment is as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
In
millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
|
|
|
|
|
|
|
|
Climate
Control Technologies
|
|
$
|
846.0
|
|
$
|
798.0
|
|
$
|
1,574.9
|
|
$
|
1,481.6
|
|
Industrial
Technologies
|
|
|
749.9
|
|
|
667.1
|
|
|
1,417.6
|
|
|
1,263.4
|
|
Security
Technologies
|
|
|
628.7
|
|
|
582.9
|
|
|
1,208.3
|
|
|
1,107.7
|
|
Total
|
|
$
|
2,224.6
|
|
$
|
2,048.0
|
|
$
|
4,200.8
|
|
$
|
3,852.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Climate
Control Technologies
|
|
$
|
99.8
|
|
$
|
88.4
|
|
$
|
169.2
|
|
$
|
157.6
|
|
Industrial
Technologies
|
|
|
109.3
|
|
|
95.5
|
|
|
200.9
|
|
|
177.2
|
|
Security
Technologies
|
|
|
108.3
|
|
|
98.0
|
|
|
199.0
|
|
|
177.6
|
|
Unallocated
corporate expense
|
|
|
(43.3
|
)
|
|
(29.4
|
)
|
|
(86.4
|
)
|
|
(62.0
|
)
|
Total
|
|
$
|
274.1
|
|
$
|
252.5
|
|
$
|
482.7
|
|
$
|
450.4
|
|
Long-lived
assets by geographic area for the periods ended June 30, 2007 and December
31,
2006 were as follows:
|
|
June
30,
|
|
December
31,
|
|
In
millions
|
|
2007
|
|
2006
|
|
United
States
|
|
$
|
535.9
|
|
$
|
502.8
|
|
Non-U.S.
|
|
|
878.8
|
|
|
911.9
|
|
Total
|
|
$
|
1,414.7
|
|
$
|
1,414.7
|
|
Note
13 – IR-New Jersey
IR-Limited
has guaranteed all of the issued public debt securities of IR-New Jersey. The
subsidiary issuer, IR-New Jersey, is 100% owned by the parent, IR-Limited;
the
guarantees are full and unconditional, and no other subsidiary of the Company
guarantees the securities. The following condensed consolidated financial
information for IR-Limited, IR-New Jersey, and all their other subsidiaries
is
included so that separate financial statements of IR-New Jersey are not required
to be filed with the SEC.
The
condensed consolidating financial statements present IR-Limited and IR-New
Jersey investments in their subsidiaries using the equity method of accounting.
Inter-company investments in the non-voting Class B common shares are accounted
for on the cost method and are reduced by inter-company
dividends.
Condensed
Consolidating Income Statement
For
the
three months ended June 30, 2007
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
Consolidating
Adjustments
|
|
IR
Limited Consolidated
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
236.1
|
|
$
|
1,988.5
|
|
$
|
-
|
|
$
|
2,224.6
|
|
Cost
of goods sold
|
|
|
-
|
|
|
162.2
|
|
|
1,427.5
|
|
|
-
|
|
|
1,589.7
|
|
Selling
and administrative expenses
|
|
|
4.5
|
|
|
77.9
|
|
|
278.4
|
|
|
-
|
|
|
360.8
|
|
Operating
income
|
|
|
(4.5
|
)
|
|
(4.0
|
)
|
|
282.6
|
|
|
-
|
|
|
274.1
|
|
Equity
earnings in affiliates (net of tax)
|
|
|
993.2
|
|
|
107.3
|
|
|
347.3
|
|
|
(1,447.8
|
)
|
|
-
|
|
Interest
expense
|
|
|
(6.6
|
)
|
|
(17.8
|
)
|
|
(6.4
|
)
|
|
-
|
|
|
(30.8
|
)
|
Intercompany
interest and fees
|
|
|
(15.2
|
)
|
|
(117.5
|
)
|
|
132.7
|
|
|
-
|
|
|
-
|
|
Other
income (expense), net
|
|
|
(2.8
|
)
|
|
23.4
|
|
|
(12.0
|
)
|
|
-
|
|
|
8.6
|
|
Earnings
(loss) before income taxes
|
|
|
964.1
|
|
|
(8.6
|
)
|
|
744.2
|
|
|
(1,447.8
|
)
|
|
251.9
|
|
(Benefit)
provision for income taxes
|
|
|
-
|
|
|
(24.4
|
)
|
|
68.3
|
|
|
-
|
|
|
43.9
|
|
Earnings
(loss) from continuing operations
|
|
|
964.1
|
|
|
15.8
|
|
|
675.9
|
|
|
(1,447.8
|
)
|
|
208.0
|
|
Discontinued
operations, net of tax
|
|
|
-
|
|
|
331.5
|
|
|
424.6
|
|
|
-
|
|
|
756.1
|
|
Net
earnings (loss)
|
|
$
|
964.1
|
|
$
|
347.3
|
|
$
|
1,100.5
|
|
$
|
(1,447.8
|
)
|
$
|
964.1
|
|
Condensed
Consolidating Income Statement
For
the
six months ended June 30, 2007
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
Consolidating
Adjustments
|
|
IR
Limited Consolidated
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
459.0
|
|
$
|
3,741.8
|
|
$
|
-
|
|
$
|
4,200.8
|
|
Cost
of goods sold
|
|
|
-
|
|
|
320.0
|
|
|
2,685.6
|
|
|
-
|
|
|
3,005.6
|
|
Selling
and administrative expenses
|
|
|
16.0
|
|
|
161.9
|
|
|
534.6
|
|
|
-
|
|
|
712.5
|
|
Operating
income
|
|
|
(16.0
|
)
|
|
(22.9
|
)
|
|
521.6
|
|
|
-
|
|
|
482.7
|
|
Equity
earnings in affiliates (net of tax)
|
|
|
1,243.1
|
|
|
222.8
|
|
|
348.8
|
|
|
(1,814.7
|
)
|
|
-
|
|
Interest
expense
|
|
|
(17.6
|
)
|
|
(35.0
|
)
|
|
(13.9
|
)
|
|
-
|
|
|
(66.5
|
)
|
Intercompany
interest and fees
|
|
|
(25.4
|
)
|
|
(236.1
|
)
|
|
261.5
|
|
|
-
|
|
|
-
|
|
Other
income (expense), net
|
|
|
(2.5
|
)
|
|
23.0
|
|
|
(12.0
|
)
|
|
-
|
|
|
8.5
|
|
Earnings
(loss) before income taxes
|
|
|
1,181.6
|
|
|
(48.2
|
)
|
|
1,106.0
|
|
|
(1,814.7
|
)
|
|
424.7
|
|
(Benefit)
provision for income taxes
|
|
|
-
|
|
|
(69.1
|
)
|
|
129.2
|
|
|
-
|
|
|
60.1
|
|
Earnings
(loss) from continuing operations
|
|
|
1,181.6
|
|
|
20.9
|
|
|
976.8
|
|
|
(1,814.7
|
)
|
|
364.6
|
|
Discontinued
operations, net of tax
|
|
|
-
|
|
|
327.9
|
|
|
489.1
|
|
|
-
|
|
|
817.0
|
|
Net
earnings (loss)
|
|
$
|
1,181.6
|
|
$
|
348.8
|
|
$
|
1,465.9
|
|
$
|
(1,814.7
|
)
|
$
|
1,181.6
|
|
Condensed
Consolidating Income Statement
For
the
three months ended June 30, 2006
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
Consolidating
Adjustments
|
|
IR
Limited Consolidated
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
233.8
|
|
$
|
1,814.2
|
|
$
|
-
|
|
$
|
2,048.0
|
|
Cost
of goods sold
|
|
|
-
|
|
|
165.6
|
|
|
1,297.5
|
|
|
-
|
|
|
1,463.1
|
|
Selling
and administrative expenses
|
|
|
3.4
|
|
|
66.4
|
|
|
262.6
|
|
|
-
|
|
|
332.4
|
|
Operating
income
|
|
|
(3.4
|
)
|
|
1.8
|
|
|
254.1
|
|
|
-
|
|
|
252.5
|
|
Equity
earnings in affiliates (net of tax)
|
|
|
329.5
|
|
|
169.5
|
|
|
10.9
|
|
|
(509.9
|
)
|
|
-
|
|
Interest
expense
|
|
|
(4.6
|
)
|
|
(20.1
|
)
|
|
(6.1
|
)
|
|
-
|
|
|
(30.8
|
)
|
Intercompany
interest and fees
|
|
|
(7.2
|
)
|
|
(235.5
|
)
|
|
242.7
|
|
|
-
|
|
|
-
|
|
Other
income (expense), net
|
|
|
(0.8
|
)
|
|
23.5
|
|
|
(28.9
|
)
|
|
-
|
|
|
(6.2
|
)
|
Earnings
(loss) before income taxes
|
|
|
313.5
|
|
|
(60.8
|
)
|
|
472.7
|
|
|
(509.9
|
)
|
|
215.5
|
|
(Benefit)
provision for income taxes
|
|
|
-
|
|
|
(62.6
|
)
|
|
81.0
|
|
|
-
|
|
|
18.4
|
|
Earnings
(loss) from continuing operations
|
|
|
313.5
|
|
|
1.8
|
|
|
391.7
|
|
|
(509.9
|
)
|
|
197.1
|
|
Discontinued
operations, net of tax
|
|
|
-
|
|
|
9.1
|
|
|
107.3
|
|
|
-
|
|
|
116.4
|
|
Net
earnings (loss)
|
|
$
|
313.5
|
|
$
|
10.9
|
|
$
|
499.0
|
|
$
|
(509.9
|
)
|
$
|
313.5
|
|
Condensed
Consolidating Income Statement
For
the
six months ended June 30, 2006
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
Consolidating
Adjustments
|
|
IR
Limited Consolidated
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
453.8
|
|
$
|
3,398.9
|
|
$
|
-
|
|
$
|
3,852.7
|
|
Cost
of goods sold
|
|
|
-
|
|
|
330.8
|
|
|
2,433.0
|
|
|
-
|
|
|
2,763.8
|
|
Selling
and administrative expenses
|
|
|
11.6
|
|
|
133.8
|
|
|
493.1
|
|
|
-
|
|
|
638.5
|
|
Operating
income
|
|
|
(11.6
|
)
|
|
(10.8
|
)
|
|
472.8
|
|
|
-
|
|
|
450.4
|
|
Equity
earnings in affiliates (net of tax)
|
|
|
605.9
|
|
|
318.0
|
|
|
58.2
|
|
|
(982.1
|
)
|
|
-
|
|
Interest
expense
|
|
|
(8.4
|
)
|
|
(45.6
|
)
|
|
(12.0
|
)
|
|
-
|
|
|
(66.0
|
)
|
Intercompany
interest and fees
|
|
|
(18.6
|
)
|
|
(355.7
|
)
|
|
374.3
|
|
|
-
|
|
|
-
|
|
Other
income (expense), net
|
|
|
(0.6
|
)
|
|
23.0
|
|
|
(22.3
|
)
|
|
-
|
|
|
0.1
|
|
Earnings
(loss) before income taxes
|
|
|
566.7
|
|
|
(71.1
|
)
|
|
871.0
|
|
|
(982.1
|
)
|
|
384.5
|
|
(Benefit)
provision for income taxes
|
|
|
-
|
|
|
(116.2
|
)
|
|
146.1
|
|
|
-
|
|
|
29.9
|
|
Earnings
(loss) from continuing operations
|
|
|
566.7
|
|
|
45.1
|
|
|
724.9
|
|
|
(982.1
|
)
|
|
354.6
|
|
Discontinued
operations, net of tax
|
|
|
-
|
|
|
13.1
|
|
|
199.0
|
|
|
-
|
|
|
212.1
|
|
Net
earnings (loss)
|
|
$
|
566.7
|
|
$
|
58.2
|
|
$
|
923.9
|
|
$
|
(982.1
|
)
|
$
|
566.7
|
|
Condensed
Consolidating Balance Sheet
June
30,
2007
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
Consolidating
Adjustments
|
|
IR
Limited Consolidated
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5.9
|
|
$
|
173.8
|
|
$
|
280.5
|
|
$
|
-
|
|
$
|
460.2
|
|
Marketable
securities
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
|
-
|
|
|
0.7
|
|
Accounts
and notes receivable, net
|
|
|
1.8
|
|
|
219.2
|
|
|
1,423.0
|
|
|
-
|
|
|
1,644.0
|
|
Inventories,
net
|
|
|
-
|
|
|
114.6
|
|
|
804.7
|
|
|
-
|
|
|
919.3
|
|
Prepaid
expenses and deferred income taxes
|
|
|
-
|
|
|
479.9
|
|
|
29.7
|
|
|
-
|
|
|
509.6
|
|
Assets
held for sale
|
|
|
-
|
|
|
238.0
|
|
|
1,892.6
|
|
|
-
|
|
|
2,130.6
|
|
Accounts
and notes receivable affiliates
|
|
|
550.9
|
|
|
3,107.9
|
|
|
27,384.3
|
|
|
(31,043.1
|
)
|
|
-
|
|
Total
current assets
|
|
|
558.6
|
|
|
4,333.4
|
|
|
31,815.5
|
|
|
(31,043.1
|
)
|
|
5,664.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates
|
|
|
7,706.3
|
|
|
11,946.2
|
|
|
30,905.6
|
|
|
(50,558.1
|
)
|
|
-
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
164.4
|
|
|
708.9
|
|
|
-
|
|
|
873.3
|
|
Intangible
assets, net
|
|
|
-
|
|
|
79.1
|
|
|
4,505.4
|
|
|
-
|
|
|
4,584.5
|
|
Other
assets
|
|
|
1.6
|
|
|
1,223.8
|
|
|
58.7
|
|
|
-
|
|
|
1,284.1
|
|
Total
assets
|
|
$
|
8,266.5
|
|
$
|
17,746.9
|
|
$
|
67,994.1
|
|
$
|
(81,601.2
|
)
|
$
|
12,406.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accruals
|
|
$
|
6.5
|
|
$
|
207.6
|
|
$
|
1,438.3
|
|
$
|
-
|
|
$
|
1,652.4
|
|
Current
maturities of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
loans payable
|
|
|
-
|
|
|
589.1
|
|
|
97.6
|
|
|
-
|
|
|
686.7
|
|
Liabilities
held for sale
|
|
|
-
|
|
|
454.3
|
|
|
784.9
|
|
|
-
|
|
|
1,239.2
|
|
Accounts
and note payable affiliates
|
|
|
960.3
|
|
|
7,291.3
|
|
|
22,791.5
|
|
|
(31,043.1
|
)
|
|
-
|
|
Total
current liabilities
|
|
|
966.8
|
|
|
8,542.3
|
|
|
25,112.3
|
|
|
(31,043.1
|
)
|
|
3,578.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
299.1
|
|
|
410.7
|
|
|
184.7
|
|
|
-
|
|
|
894.5
|
|
Note
payable affiliate
|
|
|
950.0
|
|
|
2,697.4
|
|
|
-
|
|
|
(3,647.4
|
)
|
|
-
|
|
Other
noncurrent liabilities
|
|
|
218.2
|
|
|
1,821.5
|
|
|
61.4
|
|
|
-
|
|
|
2,101.1
|
|
Total
liabilities
|
|
|
2,434.1
|
|
|
13,471.9
|
|
|
25,358.4
|
|
|
(34,690.5
|
)
|
|
6,573.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common shares
|
|
|
368.7
|
|
|
-
|
|
|
(75.3
|
)
|
|
-
|
|
|
293.4
|
|
Class
B common shares
|
|
|
270.6
|
|
|
-
|
|
|
-
|
|
|
(270.6
|
)
|
|
-
|
|
Common
shares
|
|
|
-
|
|
|
-
|
|
|
2,362.8
|
|
|
(2,362.8
|
)
|
|
-
|
|
Other
shareholders' equity
|
|
|
9,503.0
|
|
|
5,163.2
|
|
|
44,155.2
|
|
|
(53,128.7
|
)
|
|
5,692.7
|
|
Accumulated
other comprehensive income (loss)
|
|
|
167.8
|
|
|
(464.8
|
)
|
|
247.1
|
|
|
(103.8
|
)
|
|
(153.7
|
)
|
|
|
|
10,310.1
|
|
|
4,698.4
|
|
|
46,689.8
|
|
|
(55,865.9
|
)
|
|
5,832.4
|
|
Less:
Contra account
|
|
|
(4,477.7
|
)
|
|
(423.4
|
)
|
|
(4,054.1
|
)
|
|
8,955.2
|
|
|
-
|
|
Total
shareholders' equity
|
|
|
5,832.4
|
|
|
4,275.0
|
|
|
42,635.7
|
|
|
(46,910.7
|
)
|
|
5,832.4
|
|
Total
liabilities and equity
|
|
$
|
8,266.5
|
|
$
|
17,746.9
|
|
$
|
67,994.1
|
|
$
|
(81,601.2
|
)
|
$
|
12,406.3
|
|
Condensed
Consolidating Balance Sheet
December
31, 2006
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
Consolidating
Adjustments
|
|
IR
Limited Consolidated
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1.7
|
|
$
|
81.6
|
|
$
|
189.8
|
|
$
|
-
|
|
$
|
273.1
|
|
Marketable
securities
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
|
-
|
|
|
0.7
|
|
Accounts
and notes receivable, net
|
|
|
0.3
|
|
|
177.6
|
|
|
1,303.8
|
|
|
-
|
|
|
1,481.7
|
|
Inventories,
net
|
|
|
-
|
|
|
92.5
|
|
|
740.6
|
|
|
-
|
|
|
833.1
|
|
Prepaid
expenses and deferred income taxes
|
|
|
0.4
|
|
|
375.4
|
|
|
(20.3
|
)
|
|
-
|
|
|
355.5
|
|
Assets
held for sale
|
|
|
-
|
|
|
494.4
|
|
|
2,095.5
|
|
|
-
|
|
|
2,589.9
|
|
Accounts
and notes receivable affiliates
|
|
|
921.4
|
|
|
2,662.1
|
|
|
26,537.6
|
|
|
(30,121.1
|
)
|
|
-
|
|
Total
current assets
|
|
|
923.8
|
|
|
3,883.6
|
|
|
30,847.7
|
|
|
(30,121.1
|
)
|
|
5,534.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates
|
|
|
7,130.9
|
|
|
11,565.2
|
|
|
31,003.2
|
|
|
(49,699.3
|
)
|
|
-
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
170.0
|
|
|
696.7
|
|
|
-
|
|
|
866.7
|
|
Intangible
assets, net
|
|
|
-
|
|
|
78.4
|
|
|
4,471.6
|
|
|
-
|
|
|
4,550.0
|
|
Other
assets
|
|
|
1.7
|
|
|
1,135.0
|
|
|
58.5
|
|
|
-
|
|
|
1,195.2
|
|
Total
assets
|
|
$
|
8,056.4
|
|
$
|
16,832.2
|
|
$
|
67,077.7
|
|
$
|
(79,820.4
|
)
|
$
|
12,145.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accruals
|
|
$
|
6.3
|
|
$
|
360.5
|
|
$
|
1,393.6
|
|
$
|
-
|
|
$
|
1,760.4
|
|
Current
maturities of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
loans payable
|
|
|
378.0
|
|
|
596.8
|
|
|
101.0
|
|
|
-
|
|
|
1,075.8
|
|
Liabilities
held for sale
|
|
|
-
|
|
|
539.9
|
|
|
748.6
|
|
|
-
|
|
|
1,288.5
|
|
Accounts
and note payable affiliates
|
|
|
779.0
|
|
|
7,035.7
|
|
|
22,306.4
|
|
|
(30,121.1
|
)
|
|
-
|
|
Total
current liabilities
|
|
|
1,163.3
|
|
|
8,532.9
|
|
|
24,549.6
|
|
|
(30,121.1
|
)
|
|
4,124.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
299.0
|
|
|
411.3
|
|
|
185.4
|
|
|
-
|
|
|
895.7
|
|
Note
payable affiliate
|
|
|
950.0
|
|
|
2,697.4
|
|
|
-
|
|
|
(3,647.4
|
)
|
|
-
|
|
Other
noncurrent liabilities
|
|
|
239.3
|
|
|
1,434.8
|
|
|
46.6
|
|
|
-
|
|
|
1,720.7
|
|
Total
liabilities
|
|
|
2,651.6
|
|
|
13,076.4
|
|
|
24,781.6
|
|
|
(33,768.5
|
)
|
|
6,741.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common shares
|
|
|
364.5
|
|
|
-
|
|
|
(57.7
|
)
|
|
-
|
|
|
306.8
|
|
Class
B common shares
|
|
|
270.6
|
|
|
-
|
|
|
-
|
|
|
(270.6
|
)
|
|
-
|
|
Common
shares
|
|
|
-
|
|
|
-
|
|
|
2,362.8
|
|
|
(2,362.8
|
)
|
|
-
|
|
Other
shareholders' equity
|
|
|
9,403.3
|
|
|
4,815.3
|
|
|
43,950.7
|
|
|
(52,713.2
|
)
|
|
5,456.1
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(36.4
|
)
|
|
(627.9
|
)
|
|
205.7
|
|
|
100.5
|
|
|
(358.1
|
)
|
|
|
|
10,002.0
|
|
|
4,187.4
|
|
|
46,461.5
|
|
|
(55,246.1
|
)
|
|
5,404.8
|
|
Less:
Contra account
|
|
|
(4,597.2
|
)
|
|
(431.6
|
)
|
|
(4,165.4
|
)
|
|
9,194.2
|
|
|
-
|
|
Total
shareholders' equity
|
|
|
5,404.8
|
|
|
3,755.8
|
|
|
42,296.1
|
|
|
(46,051.9
|
)
|
|
5,404.8
|
|
Total
liabilities and equity
|
|
$
|
8,056.4
|
|
$
|
16,832.2
|
|
$
|
67,077.7
|
|
$
|
(79,820.4
|
)
|
$
|
12,145.9
|
|
Condensed
Consolidating Statement of Cash Flows
For
the
six months ended June 30, 2007
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
IR
Limited Consolidated
|
|
Net
cash provided by (used in) continuing operating activities
|
|
$
|
(41.2
|
)
|
$
|
(346.5
|
)
|
$
|
486.8
|
|
$
|
99.1
|
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
-
|
|
|
(15.2
|
)
|
|
114.3
|
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
(12.4
|
)
|
|
(45.4
|
)
|
|
(57.8
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
-
|
|
|
3.1
|
|
|
5.9
|
|
|
9.0
|
|
Acquisitions,
net of cash
|
|
|
-
|
|
|
(0.6
|
)
|
|
(3.1
|
)
|
|
(3.7
|
)
|
Proceeds
from business disposition, net of cash of $23.4
|
|
|
-
|
|
|
630.1
|
|
|
661.6
|
|
|
1,291.7
|
|
Proceeds
from sales and maturities of marketable securities
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
Other,
net
|
|
|
-
|
|
|
3.5
|
|
|
(0.1
|
)
|
|
3.4
|
|
Net
cash provided by (used in) continuing investing activities
|
|
|
-
|
|
|
623.7
|
|
|
619.0
|
|
|
1,242.7
|
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
-
|
|
|
(0.2
|
)
|
|
(34.0
|
)
|
|
(34.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in debt
|
|
|
(378.0
|
)
|
|
(8.3
|
)
|
|
(7.7
|
)
|
|
(394.0
|
)
|
Net
inter-company proceeds (payments)
|
|
|
531.1
|
|
|
(169.5
|
)
|
|
(361.6
|
)
|
|
-
|
|
Dividends
(paid) received
|
|
|
(229.1
|
)
|
|
8.2
|
|
|
111.3
|
|
|
(109.6
|
)
|
Proceeds
from the exercise of stock options
|
|
|
121.4
|
|
|
-
|
|
|
-
|
|
|
121.4
|
|
Repurchase
of common shares by subsidiary
|
|
|
-
|
|
|
-
|
|
|
(846.5
|
)
|
|
(846.5
|
)
|
Net
cash provided by (used in) continuing financing activities
|
|
|
45.4
|
|
|
(169.6
|
)
|
|
(1,104.5
|
)
|
|
(1,228.7
|
)
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
-
|
|
|
9.1
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4.2
|
|
|
92.2
|
|
|
90.7
|
|
|
187.1
|
|
Cash
and cash equivalents - beginning of period
|
|
|
1.7
|
|
|
81.6
|
|
|
189.8
|
|
|
273.1
|
|
Cash
and cash equivalents - end of period
|
|
$
|
5.9
|
|
$
|
173.8
|
|
$
|
280.5
|
|
$
|
460.2
|
|
Condensed
Consolidating Statement of Cash Flows
For
the
six months ended June 30, 2006
In
millions
|
|
IR
Limited
|
|
IR
New
Jersey
|
|
Other
Subsidiaries
|
|
IR
Limited Consolidated
|
|
Net
cash provided by (used in) continuing operating activities
|
|
$
|
(40.2
|
)
|
$
|
(175.7
|
)
|
$
|
442.9
|
|
$
|
227.0
|
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
-
|
|
|
39.6
|
|
|
(36.0
|
)
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
(25.3
|
)
|
|
(50.5
|
)
|
|
(75.8
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
-
|
|
|
0.5
|
|
|
0.6
|
|
|
1.1
|
|
Acquisitions,
net of cash
|
|
|
-
|
|
|
-
|
|
|
(28.5
|
)
|
|
(28.5
|
)
|
Proceeds
from business disposition
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds
from sales and maturities of marketable securities
|
|
|
-
|
|
|
-
|
|
|
155.9
|
|
|
155.9
|
|
Other,
net
|
|
|
-
|
|
|
-
|
|
|
(1.9
|
)
|
|
(1.9
|
)
|
Net
cash provided by (used in) continuing investing activities
|
|
|
-
|
|
|
(24.8
|
)
|
|
75.6
|
|
|
50.8
|
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
-
|
|
|
(3.0
|
)
|
|
(21.5
|
)
|
|
(24.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in debt
|
|
|
38.5
|
|
|
(497.8
|
)
|
|
(27.0
|
)
|
|
(486.3
|
)
|
Net
inter-company proceeds (payments)
|
|
|
94.6
|
|
|
453.0
|
|
|
(547.6
|
)
|
|
-
|
|
Dividends
(paid) received
|
|
|
(199.2
|
)
|
|
7.4
|
|
|
86.8
|
|
|
(105.0
|
)
|
Proceeds
from the exercise of stock options
|
|
|
81.4
|
|
|
-
|
|
|
-
|
|
|
81.4
|
|
Repurchase
of common shares by subsidiary
|
|
|
-
|
|
|
-
|
|
|
(383.7
|
)
|
|
(383.7
|
)
|
Net
cash provided by (used in) continuing financing activities
|
|
|
15.3
|
|
|
(37.4
|
)
|
|
(871.5
|
)
|
|
(893.6
|
)
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
-
|
|
|
17.9
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(24.9
|
)
|
|
(201.3
|
)
|
|
(392.6
|
)
|
|
(618.8
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
25.5
|
|
|
207.1
|
|
|
596.3
|
|
|
828.9
|
|
Cash
and cash equivalents - end of period
|
|
$
|
0.6
|
|
$
|
5.8
|
|
$
|
203.7
|
|
$
|
210.1
|
|
Item
2
–
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
INGERSOLL-RAND
COMPANY LIMITED
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, 2006. 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
Ingersoll-Rand
Company Limited (we, our or the Company) is a leading innovation and solutions
provider with strong brands and leading positions within its markets. Our
business segments consist of Climate Control Technologies, Industrial
Technologies and Security Technologies. The Company generates 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 Club Car®, Hussmann®, Ingersoll Rand®, Schlage® and
Thermo King®.
We
seek
to drive shareholder value by achieving:
|
·
|
Dramatic
Growth, by developing innovative products and solutions that improve
our
customers’ operations, expanding highly profitable recurring revenues and
executing low-risk, high-return bolt-on
acquisitions;
|
|
·
|
Operational
Excellence, by fostering a lean culture of continuous improvement
and cost
control; and
|
|
·
|
Dual
Citizenship, by encouraging our employees’ active collaboration with
colleagues across business units and geographic regions to achieve
superior business results.
|
To
achieve these goals and to become a more diversified company with strong growth
prospects, we continue to transform our product portfolio by divesting cyclical,
low-growth, and asset-intensive businesses. We continue to focus on increasing
our recurring revenue stream, which includes revenues from parts, service,
used
equipment and rentals. We also intend to continuously improve the efficiencies,
capabilities, and products and services of our high-potential businesses. We
expect to use our strong operating cash flow for bolt-on acquisitions, share
buybacks, capital expenditures and dividend enhancements.
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.
However, due to our geographic and industry diversity, as well as the diversity
of our product sales and services, the impact of any one industry or the economy
of any single country on the consolidated operating results is limited. Given
the broad range of products manufactured and geographic markets served,
management uses a variety of factors to predict the outlook for the Company.
The
Company monitors key competitors and customers to gauge relative performance
and
the outlook for the future. In addition, 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.
Our
revenues for the first six months of 2007 have increased approximately 9%
compared with the same period of 2006. Improved markets, new product
introductions, product volume, pricing improvements and a favorable currency
impact drove this growth. We have been able to increase prices and add
surcharges to help mitigate the impact of cost inflation during the quarter.
We
expect to see continued high material and energy costs during the next year,
which we plan to offset by increased productivity and pricing actions. We have
generated positive cash flows from operating activities during the first half
of
2007 and expect to continue to produce positive operating cash flows for the
foreseeable future.
Our
major
end markets in Europe, Asia Pacific and Latin America experienced significant
growth during the second quarter of 2007. This growth helped to offset the
on-going weakness in the North American end markets.
Recent
Developments
|
· |
On
July 29, 2007, the Company agreed to sell its Bobcat, Utility Equipment
and Attachments businesses (collectively, Compact Equipment) to Doosan
Infracore for cash proceeds of approximately $4.9 billion. The sale
is
subject to customary closing conditions and is targeted to close
early in
the 2007 fourth quarter.
|
The
Compact Equipment business manufactures and sells compact equipment, including
skid-steer loaders, compact track loaders, mini-excavators and telescopic tool
handlers; portable air compressors, generators, and light towers;
general-purpose light construction equipment; and attachments. For full-year
2006 these businesses collectively generated approximately $2.6 billion in
revenues. The sale includes manufacturing facilities in Gwinner and Bismarck,
North Dakota; Carrollton, Georgia; Litchfield, Minnesota; Petersburg, Virginia;
Wujiang, China; Dobris, Czech Republic; Lyon and Pontchateau, France; Slane,
Ireland; and Tredegar, Wales. The Compact Equipment business employs
approximately 5,700 people worldwide.
|
·
|
On
April 30, 2007, the Company completed its sale of its Road Development
business unit to AB Volvo (publ) in all countries except for India,
which
closed on May 4, 2007, for cash proceeds of approximately $1.3 billion.
The Company recorded a gain on sale of $675.7 million (net of tax
of
$128.6 million).
|
|
·
|
During
the six months ended June 30, 2007, the Company repurchased 17.6
million
Class A common shares at a cost of $846.5 million. Subsequently,
the
Company repurchased an additional 7.0 million Class A common shares
as of
August 3, 2007, at a total cost of $377.3 million. Also on May 14,
2007,
the Company’s board of directors expanded the share-repurchase program
from $2 billion to $4 billion.
|
|
·
|
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of
FASB
Statement 109” (FIN 48), which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain
tax positions taken or expected to be taken in a tax return. As a
result
of adopting FIN 48 as of January 1, 2007, the Company recorded additional
liabilities to its previously established reserves, and a corresponding
decrease in retained earnings of $145.6 million. See Note 8 to the
Company’s condensed consolidated financial statements for further
description of FIN 48 and the related impacts of
adoption.
|
|
·
|
On
July 20, 2007, the Company and its consolidated subsidiaries received
a
notice from the Internal Revenue Service (IRS) containing proposed
adjustments to the Company’s tax filings in connection with an audit of
the 2001 and 2002 tax years. The IRS did not contest the validity
of the
Company’s reincorporation in Bermuda. The most significant adjustments
proposed by the IRS involve treating the intercompany debt incurred
in
connection with the Company’s reincorporation in Bermuda as equity. As a
result of this recharacterization, the IRS has disallowed the deduction
of
interest paid on the debt and imposed dividend withholding taxes
on the
payments denominated as interest. These adjustments proposed by the
IRS,
if upheld in their entirety, would result in additional taxes with
respect
to 2002 of approximately $190 million plus interest, and would require
the
Company to record additional charges associated with this matter.
At this
time, the IRS has not yet begun their examination of the Company’s tax
filings for years subsequent to 2002. However, if these adjustments
or a
portion of these adjustments proposed by the IRS are ultimately sustained,
it is likely to also affect subsequent tax
years.
|
The
Company strongly disagrees with the view of the IRS and intends to vigorously
contest these proposed adjustments. The Company, in consultation with its
outside advisors, carefully considered many factors in determining the terms
of
the intercompany debt including the obligor’s ability to service the debt and
the availability of equivalent financing from unrelated parties, two factors
prominently cited by the IRS in denying debt treatment. The Company believes
that its characterization of that obligation as debt for tax purposes was
supported by the relevant facts and legal authorities at the time of its
creation. The subsequent financial results of the relevant companies, including
the actual cash flow generated by operations and the production of significant
additional cash flow from dispositions have confirmed the ability to service
this debt. Although the outcome of this matter cannot be predicted with
certainty, based upon an analysis of the strength of its position, the Company
believes that it is adequately reserved for this matter. As the Company moves
forward to resolve this matter with the IRS, it is reasonably possible that
the
reserves established may be adjusted within the next 12 months. However, the
Company does not expect that the ultimate resolution will have a material
adverse impact on its future results of operations or financial
position.
Results
of Operations – Three Months Ended June 30, 2007 and
2006
|
|
Three
months ended June 30,
|
|
Dollar
amounts in millions, except per share amounts
|
|
2007
|
|
%
of
revenues
|
|
2006
|
|
%
of
revenues
|
|
Net
revenues
|
|
$
|
2,224.6
|
|
|
|
|
$
|
2,048.0
|
|
|
|
|
Cost
of goods sold
|
|
|
1,589.7
|
|
|
71.5%
|
|
|
1,463.1
|
|
|
71.5%
|
|
Selling
and administrative expenses
|
|
|
360.8
|
|
|
16.2%
|
|
|
332.4
|
|
|
16.2%
|
|
Operating
income
|
|
|
274.1
|
|
|
12.3%
|
|
|
252.5
|
|
|
12.3%
|
|
Interest
expense
|
|
|
(30.8
|
)
|
|
|
|
|
(30.8
|
)
|
|
|
|
Other
income (expense), net
|
|
|
8.6
|
|
|
|
|
|
(6.2
|
)
|
|
|
|
Earnings
before income taxes
|
|
|
251.9
|
|
|
|
|
|
215.5
|
|
|
|
|
Provision
for income taxes
|
|
|
43.9
|
|
|
|
|
|
18.4
|
|
|
|
|
Earnings
from continuing operations
|
|
|
208.0
|
|
|
|
|
|
197.1
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
756.1
|
|
|
|
|
|
116.4
|
|
|
|
|
Net
earnings
|
|
$
|
964.1
|
|
|
|
|
$
|
313.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.68
|
|
|
|
|
$
|
0.60
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
2.49
|
|
|
|
|
|
0.35
|
|
|
|
|
Net
earnings
|
|
$
|
3.17
|
|
|
|
|
$
|
0.95
|
|
|
|
|
Net
Revenues
Net
revenues for the second quarter of 2007 increased by 8.6%, or $176.6 million,
compared with the same period of 2006, primarily due to higher volumes (4%),
improved pricing (2%), a favorable currency impact (2%) and acquisitions. Strong
international markets, especially in Europe, Asia Pacific and Latin America,
offset continued weakness in the North American markets. The Company also
continues to make progress in increasing recurring revenues, which improved
by
11% over the second quarter of 2006 and accounted for 19% of net
revenues.
Cost
of Goods Sold
Cost
of
goods sold as a percentage of revenue remained consistent in the second quarter
of 2007 compared with 2006, as increased sales were offset by higher material
costs, due to commodity price increases.
Selling
and Administrative Expenses
Selling
and administrative expenses as a percentage of revenue remained consistent
in
the second quarter of 2007 compared with the same period of 2006. The increase
in sales was offset by additional costs related to acquisitions and investments
in new product development of approximately $7 million and increased regulatory
and compliance costs of approximately $11 million.
Operating
Income
Operating
income for the second quarter of 2007 increased by 8.6%, or $21.6 million,
compared with the same period of 2006, mainly due to revenue growth, higher
productivity and increased pricing partially offset by higher commodity prices
and unfavorable product mix.
Interest
Expense
Interest
expense for the second quarter of 2007 remained consistent with the same
period
of 2006.
Other
Income (Expense), Net
Other
income (expense), net includes currency gains and losses, equity in earnings
of
partially owned affiliates, minority interests, and other miscellaneous income
and expense items. Other income (expense), net increased by $14.8 million
in the
second quarter of 2007 compared with the same period of 2006 due to a favorable
currency impact. The increase was mainly due to a favorable currency impact
($16.4 million), partially offset by other miscellaneous expenses ($1.1
million).
Provision
for Income Taxes
The
Company’s second quarter 2007 effective tax rate was 17.4%, compared with 8.6%
in the second quarter of 2006. The rate for the second quarter of 2007 reflects
an expected annual rate of 15.1% before discrete items. The rate for the
second
quarter of 2006 reflects an expected annual rate of 9.2% before discrete
items.
The increase in the expected annual effective tax rate was mainly due to
higher
interest costs resulting from our adoption of FIN 48, as well as increased
tax
costs primarily associated with intercompany cash movements to fund our share
repurchase program.
Discontinued
Operations
The
components of discontinued operations for the three months ended June 30,
are as
follows:
In
millions
|
|
2007
|
|
2006
|
|
Road
Development, net of tax
|
|
$
|
678.2
|
|
$
|
27.7
|
|
Compact
Equipment, net of tax
|
|
|
81.7
|
|
|
97.3
|
|
Other
discontinued operations, net of tax
|
|
|
(3.8
|
)
|
|
(8.6
|
)
|
Total
discontinued operations, net of tax
|
|
$
|
756.1
|
|
$
|
116.4
|
|
Compact
Equipment
As
noted
in the Recent Developments section, on July 29, 2007, the Company agreed
to sell
its Compact Equipment business. The Company has accounted for the Compact
Equipment business as discontinued operations and has classified the assets
and
liabilities as held for sale for all periods presented in accordance
with Statement of Financial Accounting Standard No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”.
Net
revenues and after-tax earnings of Compact Equipment for the three months
ended
June 30, were as follows:
In
millions
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
759.8
|
|
$
|
765.8
|
|
After-tax
earnings
|
|
|
81.7
|
|
|
97.3
|
|
Road
Development Divestiture
On
April
30, 2007, the Company completed the sale of its Road Development business
unit
to AB Volvo (publ) in all countries except for India, which closed on May
4,
2007, for cash proceeds of approximately $1.3 billion. The Road Development
business unit manufactures and sells asphalt paving equipment, compaction
equipment, milling machines, and construction-related material handling
equipment. The Company has accounted for the Road Development business unit
as
discontinued operations and has classified the assets and liabilities sold
to AB
Volvo as held for sale for all periods presented in accordance with Statement
of
Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”.
Net
revenues and after-tax earnings of the Road Development business unit for
the
three months ended June 30, were:
In
millions
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
77.2
|
|
$
|
228.1
|
|
After-tax
earnings from operations
|
|
$
|
2.5
|
|
$
|
27.7
|
|
Gain
on sale, net of tax of $128.6
|
|
|
675.7
|
|
|
-
|
|
Total
discontinued operations
|
|
$
|
678.2
|
|
$
|
27.7
|
|
Other
Discontinued Operations
The
Company also has other retained costs for discontinued operations that mainly
include costs related to postretirement benefits and product and legal costs
(mostly asbestos-related) from previously sold businesses. The components
of
other discontinued operations for the three months ended June 30, are as
follows:
In
millions
|
|
2007
|
|
2006
|
|
Retained
costs, net of tax
|
|
$
|
(3.9
|
)
|
$
|
(8.8
|
)
|
Net
gain on disposals, net of tax
|
|
|
0.1
|
|
|
0.2
|
|
Total
other discontinued operations, net of tax
|
|
$
|
(3.8
|
)
|
$
|
(8.6
|
)
|
Results
of Operations – Six Months Ended June 30, 2007 and
2006
|
|
Six
months ended June 30,
|
|
Dollar
amounts in millions, except per share amounts
|
|
2007
|
|
%
of
revenues
|
|
2006
|
|
%
of
revenues
|
|
Net
revenues
|
|
$
|
4,200.8
|
|
|
|
|
$
|
3,852.7
|
|
|
|
|
Cost
of goods sold
|
|
|
3,005.6
|
|
|
71.5%
|
|
|
2,763.8
|
|
|
71.7%
|
|
Selling
and administrative expenses
|
|
|
712.5
|
|
|
17.0%
|
|
|
638.5
|
|
|
16.6%
|
|
Operating
income
|
|
|
482.7
|
|
|
11.5%
|
|
|
450.4
|
|
|
11.7%
|
|
Interest
expense
|
|
|
(66.5
|
)
|
|
|
|
|
(66.0
|
)
|
|
|
|
Other
income (expense), net
|
|
|
8.5
|
|
|
|
|
|
0.1
|
|
|
|
|
Earnings
before income taxes
|
|
|
424.7
|
|
|
|
|
|
384.5
|
|
|
|
|
Provision
for income taxes
|
|
|
60.1
|
|
|
|
|
|
29.9
|
|
|
|
|
Earnings
from continuing operations
|
|
|
364.6
|
|
|
|
|
|
354.6
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
817.0
|
|
|
|
|
|
212.1
|
|
|
|
|
Net
earnings
|
|
$
|
1,181.6
|
|
|
|
|
$
|
566.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
1.19
|
|
|
|
|
$
|
1.07
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
2.66
|
|
|
|
|
|
0.64
|
|
|
|
|
Net
earnings
|
|
$
|
3.85
|
|
|
|
|
$
|
1.71
|
|
|
|
|
Net
Revenues
Net
revenues for the first half of 2007 increased by 9.0%, or $348.1 million,
compared with the same period of 2006, primarily due to higher volumes (4%),
improved pricing (3%), a favorable currency impact (2%) and acquisitions.
Strong
international markets, especially in Europe, Asia Pacific and Latin America,
offset continued weakness in the North American end markets. The Company
also
continues to make progress in increasing recurring revenues, which increased
by
9% over the first half of 2006 and accounted for 18% of net
revenues.
Cost
of Goods Sold
Cost
of
goods sold as a percentage of revenue decreased slightly during the first
half
of 2007 compared with the same period of 2006, as increased sales were partially
offset by higher material costs, due to commodity price increases.
Selling
and Administrative Expenses
Selling
and administrative expenses as a percentage of revenue increased during the
first half of 2007 compared with the same period of 2006. This increase was
mainly due to the year-over-year increase in costs related to acquisitions
and
investments in new product development of approximately $17 million, increased
regulatory and compliance costs of approximately $21 million and a favorable
reduction to the Company’s doubtful accounts reserve of $20.5 million that was
made in the first quarter of 2006.
Operating
Income
Operating
income for the first half of 2007 increased by 7.2%, or $32.3 million, compared
with the same period of 2006, mainly due to increased revenues, improved
pricing
and productivity actions, partially offset by higher commodity prices and
investments in new product and market development.
Interest
Expense
Interest
expense for first half of 2007 remained consistent with the same period of
2006.
Other
Income (Expense), Net
Other
income (expense), net includes currency gains and losses, equity in earnings
of
partially owned affiliates, minority interests, and other miscellaneous income
and expense items. Other income (expense), net increased by $8.4 million in
the
first half of 2007 compared with the same period of 2006. This increase was
mainly due to a favorable currency impact ($22.9 million), partially offset
by
an adjustment in 2006 to a reserve no longer deemed necessary ($8.7
million).
Provision
for Income Taxes
The
Company’s effective tax rate for the first half of 2007 was 14.2%, compared with
7.8% in the first half of 2006. The rate for the first half of 2007 reflects
an
expected annual rate of 15.1% before discrete items. The rate for the first
half
of 2006 reflects an expected annual rate of 9.2% before discrete items. The
increase in the expected annual effective tax rate was mainly due to higher
interest costs resulting from our adoption of FIN 48, as well as increased
tax
costs primarily associated with intercompany cash movements to fund our share
repurchase program.
Discontinued
Operations
The
components of discontinued operations for the six months ended June 30, are
as
follows:
In
millions
|
|
2007
|
|
2006
|
|
Road
Development, net of tax
|
|
$
|
694.1
|
|
$
|
45.1
|
|
Compact
Equipment, net of tax
|
|
|
142.3
|
|
|
184.8
|
|
Other
discontinued operations, net of tax
|
|
|
(19.4
|
)
|
|
(17.8
|
)
|
Total
discontinued operations, net of tax
|
|
$
|
817.0
|
|
$
|
212.1
|
|
Compact
Equipment
As
noted
in the Recent Developments section, on July 29, 2007, the Company agreed to
sell
its Compact Equipment business. The Company has accounted for the Compact
Equipment business as discontinued operations and has classified the assets
and
liabilities as held for sale for all periods presented in accordance with
Statement of Financial Accounting Standard No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”. Net revenues and after-tax
earnings of Compact Equipment for the six months ended June 30, were as
follows:
In
millions
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
1,452.4
|
|
$
|
1,484.9
|
|
After-tax
earnings
|
|
|
142.3
|
|
|
184.8
|
|
Road
Development Divestiture
Net
revenues and after-tax earnings of the Road Development business unit for the
six months ended June 30, were:
In
millions
|
|
2007
|
|
2006
|
|
Net
revenues
|
|
$
|
244.4
|
|
$
|
415.3
|
|
After-tax
earnings from operations
|
|
$
|
18.4
|
|
$
|
45.1
|
|
Gain
on sale, net of tax of $128.6
|
|
|
675.7
|
|
|
-
|
|
Total
discontinued operations
|
|
$
|
694.1
|
|
$
|
45.1
|
|
Other
Discontinued Operations
The
Company also has other retained costs for discontinued operations that mainly
include costs related to postretirement benefits and product and legal costs
(mostly asbestos-related) from previously sold businesses. The components of
other discontinued operations for the six months ended June 30, are as
follows:
In
millions
|
|
2007
|
|
2006
|
|
Retained
costs, net of tax
|
|
$
|
(19.6
|
)
|
$
|
(18.2
|
)
|
Net
gain on disposals, net of tax
|
|
|
0.2
|
|
|
0.4
|
|
Total
other discontinued operations, net of tax
|
|
$
|
(19.4
|
)
|
$
|
(17.8
|
)
|
Review
of Business Segments
As
a
result of the divestiture of the Road Development business unit and the pending
sale of Bobcat, Utility Equipment and Attachments business units (see Note
1),
the Company realigned its operating and reporting segments to better reflect
its
market focus. The Company’s Bobcat, Utility Equipment, Attachments and Road
Development business units are now being reported as discontinued operations.
The Company’s Club Car business unit is now included in the Industrial
Technologies segment. Prior year results have been reclassified to conform
to
this change.
Climate
Control Technologies
Climate
Control Technologies provides solutions to transport, preserve, store and
display temperature-sensitive products by engaging in the design, manufacture,
sale and service of transport temperature control units, HVAC systems,
refrigerated display merchandisers, beverage coolers, and walk-in storage
coolers and freezers. The segment includes the Thermo King and Hussmann
brands.
|
|
Three
months ended June 30,
|
|
Six
months ended June 30,
|
|
Dollar
amounts in millions
|
|
2007
|
|
2006
|
|
%
change
|
|
2007
|
|
2006
|
|
%
change
|
|
Net
revenues
|
|
$
|
846.0
|
|
$
|
798.0
|
|
|
6.0%
|
|
$
|
1,574.9
|
|
$
|
1,481.6
|
|
|
6.3%
|
|
Operating
income
|
|
|
99.8
|
|
|
88.4
|
|
|
12.9%
|
|
|
169.2
|
|
|
157.6
|
|
|
7.4%
|
|
Operating
margin
|
|
|
11.8
|
%
|
|
11.1
|
%
|
|
|
|
|
10.7
|
%
|
|
10.6
|
%
|
|
|
|
Net
revenues for the second quarter of 2007 increased by 6.0%, or $48.0 million,
compared with the same period of 2006, primarily resulting from a favorable
currency impact (3%), higher volumes (2%), and improved pricing. Operating
income increased during the second quarter of 2007, primarily due to improved
pricing ($12 million) and a favorable currency impact ($3 million). These
increases were partially
offset by lower productivity ($5 million) and higher net material costs ($4
million). In the second quarter of 2006 operating income was negatively impacted
by costs associated with inventory reserves and adjustments ($11 million).
Net
revenues for the first half of 2007 increased by 6.3%, or $93.3 million,
compared with the same period of 2006, primarily resulting from higher volumes
(3%), favorable currency impact (2%) and improved pricing (2%). Operating income
increased in the first half of 2007, primarily due to improved pricing ($23
million) and a favorable currency impact ($7 million). These increases were
partially offset by lower productivity ($13 million) and higher net material
costs ($11 million).
Net
revenues grew in the Europe and Asia Pacific regions during the second quarter
of 2007, benefiting from strong truck and trailer sales and year-over-year
gains
in bus and aftermarket parts. These gains were partially offset by reduced
sales
of sea-going containers and lower activity levels in the North American trailer
markets. Worldwide revenues for display cases and contracting increased with
revenue growth in all regions.
Industrial
Technologies
Industrial
Technologies is focused on providing solutions to enhance customers’ industrial
and energy efficiency, mainly by engaging in the design, manufacture, sale
and
service of compressed air systems, tools, fluid and material handling, energy
generation systems and golf vehicles. The segment includes the Air Solutions,
Productivity Solutions and Club Car businesses.
|
|
Three
months ended June 30,
|
|
Six
months ended June 30,
|
|
Dollar
amounts in millions
|
|
2007
|
|
2006
|
|
%
change
|
|
2007
|
|
2006
|
|
%
change
|
|
Net
revenues
|
|
$
|
749.9
|
|
$
|
667.1
|
|
|
12.4%
|
|
$
|
1,417.6
|
|
$
|
1,263.4
|
|
|
12.2%
|
|
Operating
income
|
|
|
109.3
|
|
|
95.5
|
|
|
14.5%
|
|
|
200.9
|
|
|
177.2
|
|
|
13.4%
|
|
Operating
margin
|
|
|
14.6
|
%
|
|
14.3
|
%
|
|
|
|
|
14.2
|
%
|
|
14.0
|
%
|
|
|
|
Net
revenues for the second quarter of 2007 increased by 12.4%, or $82.8 million,
compared with the same period of 2006, mainly resulting from higher volumes
(7%), acquisitions (2%), improved pricing (2%) and a favorable currency impact.
Operating income for the second quarter of 2007 increased primarily due to
improved pricing ($10 million) and higher volumes ($8 million). These
improvements were partially offset by higher material costs ($4 million) and
investments in new product and market development ($3 million). In the second
quarter of 2006, operating income was negatively impacted by a labor dispute
in
India.
Net
revenues for the first half of 2007 increased by 12.2%, or $154.2 million,
compared with the same period of 2006, mainly resulting from higher volumes
(6%), acquisitions (3%), improved pricing (2%), and a favorable currency impact.
Operating income for the first half of 2007 increased primarily due to improved
pricing ($22 million) and higher volumes ($11 million), partially offset by
investments in new product and market development ($8 million).
Air
Solutions revenues increased 19% compared with the second quarter of 2006,
mainly driven by favorable worldwide industrial markets for complete air
compressors and increased recurring revenues. Productivity Solutions revenues
remained consistent with the second quarter 2006, mainly due to growth
in
the
industrial fluid and handling markets outside of North America. This growth
was
offset by declines in the domestic automotive and large retail markets. Club
Car
revenues increased 10% compared with the second quarter of 2006, mainly due
to
growth in recurring revenues, utility and 4x4 vehicles and ongoing market shares
gains in a soft golf market.
Security
Technologies
Security
Technologies is engaged in the design, manufacture, sale and service of
mechanical and electronic security products, biometric access control systems
and security and scheduling software. The segment includes the Schlage, LCN,
CISA and Von Duprin brands.
|
|
Three
months ended June 30,
|
|
Six
months ended June
30,
|
|
Dollar
amounts in millions
|
|
2007
|
|
2006
|
|
%
change
|
|
2007
|
|
2006
|
|
%
change
|
|
Net
revenues
|
|
$
|
628.7
|
|
$
|
582.9
|
|
|
7.9%
|
|
$
|
1,208.3
|
|
$
|
1,107.7
|
|
|
9.1%
|
|
Operating
income
|
|
|
108.3
|
|
|
98.0
|
|
|
10.5%
|
|
|
199.0
|
|
|
177.6
|
|
|
12.0%
|
|
Operating
margin
|
|
|
17.2
|
%
|
|
16.8
|
%
|
|
|
|
|
16.5
|
%
|
|
16.0
|
%
|
|
|
|
Net
revenues for the second quarter of 2007 increased by 7.9%, or $45.8 million,
compared with the same period of 2006, mainly resulting from improved pricing
(4%), higher volumes (3%) and a favorable currency impact. Operating income
increased in the second quarter of 2006, primarily due to improved pricing
($24
million), partially offset by unfavorable product mix and higher net material
costs ($10 million).
Net
revenues for the first half of 2007 increased by 9.1%, or $100.6 million,
compared with the same period of 2006, mainly resulting from improved pricing
(4%), higher volumes and product mix (3%), and a favorable currency impact
(2%).
Operating income increased in the first half of 2006, primarily due to improved
pricing ($44 million), partially offset by unfavorable product mix ($10 million)
and higher net material costs ($6 million).
Net
revenues grew in all regions during the quarter benefiting from strong worldwide
commercial construction markets, especially in schools, universities and health
care. Integration revenues of electronic, biometric and mechanical products
also
increased. Revenues from large customers increased due to the introduction
of
residential electronic products and new product designs, which helped offset
a
declining North American residential market.
Liquidity
and Capital Resources
The
Company generates significant cash flow from operating activities. We believe
that we will be able to meet our current and long term liquidity and capital
requirements, through our cash flow from operating activities, existing cash
and
cash equivalents, available borrowings under existing credit facilities, and
our
ability to obtain future external financing.
Cash
Flows
Dollar
amounts in millions
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Operating
cash flow provided by (used in) continuing operations
|
|
$
|
99.1
|
|
$
|
227.0
|
|
Investing
cash flow provided by (used in) continuing operations
|
|
|
1,242.7
|
|
|
50.8
|
|
Financing
cash flow provided by (used in) continuing operations
|
|
|
(1,228.7
|
)
|
|
(893.6
|
)
|
Operating
Activities
Net
cash
provided by continuing operating activities during the six months ended June
30,
2007, was $99.1 million, compared with $227.0 million during the comparable
period in 2006. The change in operating activities is primarily related to
larger growth in working capital during the six months ended 2007 than the
growth experienced in 2006, partially offset by increased earnings in 2007.
Investing
Activities
Net
cash
provided by investing activities during the six months ended June 30, 2007,
was
$1,242.7 million, compared with $50.8 million during the comparable period
of
2006. The change in investing activities is primarily attributable to net
proceeds from the sale of Road Development of $1,291.7 million during the six
months ended June 30, 2007. During the six months ended June 30, 2006, proceeds
from the sales and maturities of marketable securities of $155.9 million was
partially offset by cash used for capital expenditures and acquisitions of
$75.8
million and $28.5 million, respectively.
Financing
Activities
Net
cash
used in financing activities during the six months ended June 30, 2007, was
$1,228.7 million compared with $893.6 million during the comparable period
in
2006. The increase in cash used in financing activities is primarily due to
the
repurchase of Class A common shares during the first half of 2007 of $846.5
million as compared to $383.7 million during the first half of 2006. In
addition, repayment of net short-term borrowings was $383.2 million during
the
first half of 2007 compared to net short-term borrowings of $20.0 million during
the first half of 2006.
Other
Liquidity Measures
The
following table contains several key measures to gauge the Company’s financial
condition and liquidity for the periods ended:
Dollar
amounts in millions
|
|
June
30, 2007
|
|
December
31, 2006
|
|
Cash
and cash equivalents
|
|
$
|
460.2
|
|
$
|
273.1
|
|
Working
capital
|
|
|
2,086.1
|
|
|
1,409.3
|
|
Total
debt
|
|
|
1,581.2
|
|
|
1,971.5
|
|
Total
shareholders' equity
|
|
|
5,832.4
|
|
|
5,404.8
|
|
Debt-to-total
capital ratio
|
|
|
21.1
|
%
|
|
26.5
|
%
|
The
Company’s working capital increased $676.8 million during the first half of
2007. The change was primarily due to an increase of $187.1 million in cash
and
cash equivalents, an increase of $86.2 million in
inventory, an increase of $154.1 million in prepaid expenses and deferred income
taxes and a decrease of $389.1 million in loans payable and current maturities
of long-term debt. These changes were partially offset by a decrease of $459.3
million in assets held for sale.
The
Company’s debt levels at June 30, 2007, decreased by $390.3 million from the
debt levels at December 31, 2006. This decrease was mainly due to the repayment
of $383.2 million of short-term borrowings of which a majority relates to the
Company’s commercial paper program.
The
Company’s debt-to-total capital ratio decreased from December 31, 2006 to June
30, 2007, primarily due to lower debt levels. The Company traditionally
maintains significant availability under our lines of credit and commercial
paper program to meet our short-term liquidity requirements. As of June 30,
2007, amounts available under these facilities totaled $2.0
billion.
Days
sales outstanding for the first half of 2007 was approximately 65 days, which
is
consistent with the same period in 2006.
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, 2006.
Contingencies,
Environmental and Asbestos Matters
The
Company is involved in various litigations, claims and administrative
proceedings, including 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, management believes that the 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
remediation costs are determined on a site-by-site basis and accruals are made
when it is probable a liability exists and the cost can be reasonably estimated.
The Company estimates the amount of recurring and non-recurring costs at each
site using internal and external experts. In arriving at cost estimates the
following factors are considered: the type of contaminant, the stage of the
clean up, applicable law and existing technology. These estimates, and the
resultant accruals, are reviewed and updated quarterly to reflect changes in
facts and law. The Company does not discount its liability or assume any
insurance recoveries when environmental liabilities are recorded.
Certain
wholly owned subsidiaries of the Company 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 has been filed against IR-New Jersey, and
generally allege injury caused by exposure to asbestos contained in certain
of
IR-New Jersey’s products. Although IR-New Jersey was neither a producer nor a
manufacturer of asbestos, some of its formerly manufactured products utilized
asbestos-containing components, such as gaskets purchased from third-party
suppliers.
All
asbestos-related claims resolved to date have been dismissed or settled. For
the
three and six month periods ended June 30, 2007, total costs for settlement
and
defense of asbestos claims after insurance recoveries and net of tax were
approximately $8 million and $20 million, respectively. With the assistance
of
independent advisors, the Company performs a thorough analysis, updated
periodically, of its
actual and anticipated future asbestos liabilities projected seven years in
the
future. Based upon such analysis, the Company believes that its reserves and
insurance are adequate to cover its asbestos liabilities.
In
connection with the disposition of certain businesses and facilities the Company
has indemnified the purchasers for the expected cost of remediation of
environmental contamination, if any, existing on the date of disposition. Such
expected costs are accrued when environmental assessments are made or remedial
efforts are probable and the costs can be reasonably estimated.
As
previously reported, on November 10, 2004, the Securities and Exchange
Commission (SEC) issued an Order directing that a number of public companies,
including the Company, provide information relating to their participation
in
transactions under the United Nations’ Oil for Food Program. Upon receipt of the
Order, the Company undertook a thorough review of its participation in the
Program, provided the SEC with information responsive to the Order and provided
additional information requested by the SEC. During a March 27, 2007 meeting
with the SEC, at which a representative of the Department of Justice (DOJ)
was
also present, the Company began discussions concerning the resolution of this
matter with both the SEC and DOJ. These discussions are ongoing and the Company
will continue to cooperate fully with the SEC and DOJ in this matter. In
addition, on July 10, 2007, representatives of the Italian Guardia di Finanza
(Financial Police) requested documents from Ingersoll-Rand Italiana S.p.A
pertaining to certain Oil For Food transactions undertaken by that subsidiary
of
the Company. Such transactions have previously been reported to the SEC and
DOJ,
and the Company will continue to cooperate fully with the Italian authorities
in
this matter.
Critical
Accounting Policies
Management’s
discussion and analysis of the Company’s financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts
of
assets, liabilities, sales and expenses, and related disclosure of contingent
assets and liabilities. The Company bases these estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
Management
believes there have been no significant changes during the three months ended
June 30, 2007, to the items that the Company disclosed as its critical
accounting policies and estimates in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006, except for the accounting for
uncertain tax positions as described below.
Income
Taxes
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation
of FASB Statement 109” (FIN 48), which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. Additionally, FIN
48
provides guidance on the recognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. As a result
of
adopting FIN 48, the company recorded additional liabilities, to its previously
established reserves, and a corresponding decrease in retained earnings of
$145.6 million.
The
IRS
has completed the examination of the Company’s federal income tax returns
through the 2000 tax year and has issued a notice proposing adjustments. The
principle proposed adjustment relates to the disallowance of certain capital
losses. The Company disputes the IRS position and protests have been filed
with
the IRS Appeals Division. In order to reduce the potential interest expense,
the
Company expects to make a payment in the third quarter 2007 of approximately
$200 million with respect to this matter, which will reduce the Company’s total
unrecognized tax position by $140 million.
On
July
20, 2007, the Company and its consolidated subsidiaries received a notice from
the Internal Revenue Service (IRS) containing proposed adjustments to the
Company’s tax filings in connection with an audit of the 2001 and 2002 tax
years. The IRS did not contest the validity of the Company’s reincorporation in
Bermuda. The most significant adjustments proposed by the IRS involve treating
the intercompany debt incurred in connection with the Company’s reincorporation
in Bermuda as equity. As a result of this recharacterization, the IRS has
disallowed the deduction of interest paid on the debt and imposed dividend
withholding taxes on the payments denominated as interest. These adjustments
proposed by the IRS, if upheld in their entirety, would result in additional
taxes with respect to 2002 of approximately $190 million plus interest, and
would require the Company to record additional charges associated with this
matter. At this time, the IRS has not yet begun their examination of the
Company’s tax filings for years subsequent to 2002. However, if these
adjustments or a portion of these adjustments proposed by the IRS are ultimately
sustained, it is likely to also affect subsequent tax years.
The
Company strongly disagrees with the view of the IRS and intends to vigorously
contest these proposed adjustments. The Company, in consultation with its
outside advisors, carefully considered many factors in determining the terms
of
the intercompany debt including the obligor’s ability to service the debt and
the availability of equivalent financing from unrelated parties, two factors
prominently cited by the IRS in denying debt treatment. The Company believes
that its characterization of that obligation as debt for tax purposes was
supported by the relevant facts and legal authorities at the time of its
creation. The subsequent financial results of the relevant companies, including
the actual cash flow generated by operations and the production of significant
additional cash flow from dispositions have confirmed the ability to service
this debt. Although the outcome of this matter cannot be predicted with
certainty, based upon an analysis of the strength of its position, the Company
believes that it is adequately reserved for this matter. As the Company moves
forward to resolve this matter with the IRS, it is reasonably possible that
the
reserves established may be adjusted within the next 12 months. However, the
Company does not expect that the ultimate resolution will have a material
adverse impact on its future results of operations or financial position.
The
Company believes that it has adequately provided for any reasonably foreseeable
resolution of any tax disputes, but will adjust its reserves if events so
dictate in accordance with FIN 48. To the extent that the ultimate results
differ from the original or adjusted estimates of the Company, the effect will
be recorded in the provision for income taxes. See Note 8 to the Company’s
condensed consolidated financial statements for a further description of FIN
48
and the related impacts.
New
Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standard
No.
157, “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a framework for
measuring fair value that is based on the assumptions market participants would
use when pricing an asset or liability and establishes a fair value hierarchy
that prioritizes the information to develop those assumptions. Additionally,
the
standard expands the disclosures about fair value measurements to include
disclosing the fair value measurements of assets or liabilities within each
level of the fair value hierarchy. SFAS 157 is effective for
the
Company starting on January 1, 2008. The Company is currently evaluating the
impact on its financial statements of adopting SFAS 157.
In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159). SFAS 159 permits companies the option, at specified election dates,
to measure financial assets and liabilities at their current fair value, with
the corresponding changes in fair value from period to period recognized in
the
income statement. Additionally, SFAS 159 establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar assets and liabilities. SFAS 159
is
effective for the Company starting on January 1, 2008. The Company is currently
evaluating the impact on its financial statements of adopting SFAS
159.
Safe
Harbor Statement
Information
provided by the Company in reports such as this quarterly report on Form 10-Q,
in press releases and in statements made by employees in oral discussions,
to
the extent the information is not historical fact, may be deemed to be
“forward-looking statements” within the meaning of federal securities laws.
These statements are based on currently available information and are based
on
our current expectations and projections about future events. These statements
are subject to risks and uncertainties that could cause actual results,
performance or achievements to differ materially from anticipated results,
performance or achievements.
These
risks and uncertainties include, but are not limited to: fluctuations in the
condition of, and the overall political landscape of, the economies in which
we
operate; our competitive environment; material changes in technology or
technology substitution; our ability to attract, train and retain
highly-qualified employees; unanticipated climatic changes; changes in
governmental regulation; the costs and effects of legal and administrative
proceedings; changes
in tax laws, tax treaties or tax regulations or the interpretation or
enforcement thereof; currency
fluctuations;
our
ability to complete acquisitions on financially attractive terms and
successfully integrate them with our other businesses; and the impact of new
accounting standards. Undue reliance should not be placed on such
forward-looking statements as they speak only as of the date made. Additional
information regarding these and other risks and uncertainties is contained
in
our periodic filings with the SEC, including, but not limited to, our Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.
Item
3
- Quantitative and Qualitative Disclosures about Market Risk
There
has
been no significant change in our exposure to market risk during the second
quarter of 2007. 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, 2006.
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 June 30, 2007, 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,
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 second quarter of 2007 that has materially affected, or
is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II OTHER INFORMATION
Item
1
– Legal
Proceedings
In
the
normal course of business, the Company is involved in a variety of lawsuits,
claims and legal proceedings, including commercial and contract disputes,
employment matters, product liability claims, environmental liabilities and
intellectual property disputes. In the opinion of the Company, pending
legal matters are not expected to have a material adverse effect on the results
of operations, financial condition, liquidity or cash flows.
As
previously reported, on November 10, 2004, the Securities and Exchange
Commission (SEC) issued an Order directing that a number of public companies,
including the Company, provide information relating to their participation
in
transactions under the United Nations’ Oil for Food Program. Upon receipt of the
Order, the Company undertook a thorough review of its participation in the
Program, provided the SEC with information responsive to the Order and provided
additional information requested by the SEC. During a March 27, 2007 meeting
with the SEC, at which a representative of the Department of Justice (DOJ)
was
also present, the Company began discussions concerning the resolution of this
matter with both the SEC and DOJ. These discussions are ongoing and the Company
will continue to cooperate fully with the SEC and DOJ in this matter. In
addition, on July 10, 2007, representatives of the Italian Guardia di Finanza
(Financial Police) requested documents from Ingersoll-Rand Italiana S.p.A
pertaining to certain Oil For Food transactions undertaken by that subsidiary
of
the Company. Such transactions have previously been reported to the SEC and
DOJ,
and the Company will continue to cooperate fully with the Italian authorities
in
this matter.
See
also
the discussion under the section titled “Contingencies, Environmental and
Asbestos Matters” of Part I, Item 2, Management’s Discussion and Analysis of
Financial Condition and Results of Operations and also Part I, Item 1, Note
11
to the Condensed Consolidated Financial Statements.
Item
1A – Risk Factors
There
have been no material changes to our risk factors and uncertainties during
the
second quarter of 2007, except as noted below. For a discussion of the Risk
Factors, refer to Part I, Item 1A, “Risk Factors,” contained in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2006.
On
July
20, 2007, the Company and its consolidated subsidiaries received a notice from
the Internal Revenue Service (IRS) containing proposed adjustments to the
Company’s tax filings in connection with an audit of the 2001 and 2002 tax
years. The IRS did not contest the validity of the Company’s reincorporation in
Bermuda. The most significant adjustments proposed by the IRS involve treating
the intercompany debt incurred in connection with the Company’s reincorporation
in Bermuda as equity. As a result of this recharacterization, the IRS has
disallowed the deduction of interest paid on the debt and imposed
dividend withholding taxes on the payments denominated as interest. These
adjustments proposed by the IRS, if upheld in their entirety, would result
in
additional taxes with respect to 2002 of approximately $190 million plus
interest, and would require the Company to record additional charges associated
with this matter. At this time, the IRS has not yet begun their examination
of
the Company’s tax filings for years subsequent to 2002. However, if these
adjustments or a portion of these adjustments proposed by the IRS are ultimately
sustained, it is likely to also affect subsequent tax years.
The
Company strongly disagrees with the view of the IRS and intends to vigorously
contest these proposed adjustments. The Company, in consultation with its
outside advisors, carefully considered many factors in determining the terms
of
the intercompany debt including the obligor’s ability to service the debt and
the availability of equivalent financing from unrelated parties, two factors
prominently cited by the IRS in denying debt treatment. The Company believes
that its characterization of that obligation as debt for tax purposes was
supported by the relevant facts and legal authorities at the time of its
creation. The subsequent financial results of the relevant companies, including
the actual cash flow generated by operations and the production of significant
additional cash flow from dispositions have confirmed the ability to service
this debt. Although the outcome of this matter cannot be predicted with
certainty, based upon an analysis of the strength of its position, the Company
believes that it is adequately reserved for this matter. As the Company moves
forward to resolve this matter with the IRS, it is reasonably possible that
the
reserves established may be adjusted within the next 12 months. However, the
Company does not expect that the ultimate resolution will have a material
adverse impact on its future results of operations or financial position.
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 by the Company
of
its Class A common shares during the second quarter of 2007:
Period
|
|
Total
number of shares purchased (000's)
|
|
Average price
paid per share
|
|
Total
number of shares purchased as part of program (000's)
|
|
Approximate
dollar value of shares still available to be purchased
under the program ($000's)
|
|
4/01/2007
- 4/30/2007
|
|
|
3,300.0
|
|
$
|
44.36
|
|
|
3,300.0
|
|
$
|
1,719,940
|
|
5/01/2007
- 5/31/2007
|
|
|
5,195.3
|
|
|
48.26
|
|
|
5,195.3
|
|
|
3,469,135
|
|
6/01/2007
- 6/30/2007
|
|
|
6,016.0
|
|
|
52.44
|
|
|
6,016.0
|
|
|
3,153,546
|
|
Total
|
|
|
14,511.3
|
|
|
|
|
|
14,511.3
|
|
|
|
|
In
December 2006, the Company’s Board of Directors authorized a new share
repurchase program to repurchase up to $2 billion worth of Class A common
shares. This program was expanded to $4 billion by
the
Company’s board of directors on May 14, 2007. Based on market conditions, share
repurchases will be made from time to time in the open market and in privately
negotiated transactions at the discretion of management. Class A common shares
owned by a subsidiary are treated as treasury shares and are recorded at cost.
Item
4
– Submission of Matters to a Vote of Security Holders
The
Annual General Meeting of Shareholders of the Company was held on June 6, 2007.
The items voted upon by the Company’s shareholders included nominations to elect
seven members of the Company’s board of directors, adoption of the Incentive
Plan of 2007, the appointment of independent auditors and a shareholder proposal
requiring a shareholder vote on an advisory resolution with respect to executive
compensation. The shareholders voted as follows on the following
matters:
The
elections of each of the following directors to hold office for a one-year
term
expiring in 2008 were approved by the following votes:
|
|
Votes
For
|
|
Votes
Withheld
|
|
G.D.
Forsee
|
|
|
248,247,905
|
|
|
21,629,261
|
|
P.C.
Godsoe
|
|
|
239,371,972
|
|
|
30,505,194
|
|
C.J.
Horner
|
|
|
248,038,291
|
|
|
21,838,875
|
|
T.E.
Martin
|
|
|
243,942,272
|
|
|
25,943,894
|
|
P.
Nachtigal
|
|
|
256,135,401
|
|
|
13,741,765
|
|
O.R.
Smith
|
|
|
247,688,002
|
|
|
22,189,164
|
|
R.J.
Swift
|
|
|
255,495,428
|
|
|
14,381,738
|
|
The
Incentive Plan of 2007 was approved by a vote of 213,329,112 shares voting
for,
21,090,889 shares voting against, 2,624,987 shares abstaining and 32,832,178
shares not voting.
The
reappointment of the Company’s independent auditors, PricewaterhouseCoopers, was
approved by a vote of 264,433,732 shares voting for, 3,608,758 shares voting
against, and 1,834,676 shares abstaining.
The
shareholder proposal requiring a shareholder vote on an advisory resolution
with
respect to executive compensation was approved by a vote of 129,456,984 shares
voting for, 98,781,870 shares voting against, 8,806,134 shares abstaining and
32,832,178 shares not voting.
Item
6
– Exhibits
(a) Exhibits
|
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
|
|
|
|
32
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer Pursuant to
Rule
13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
|
INGERSOLL-RAND
COMPANY LIMITED
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
COMPANY LIMITED
(Registrant)
|
|
|
|
|
|
Date: August
8, 2007 |
|
/s/ Timothy
R. McLevish |
|
Timothy
R. McLevish, Senior Vice President |
|
and
Chief Financial Officer
|
|
|
|
|
|
Principal
Financial Officer
|
|
|
|
Date: August
8, 2007 |
|
/s/ Richard
W. Randall |
|
Richard
W. Randall, Vice President and |
|
Controller
|
|
|
|
Principal
Accounting Officer
|