Unassociated Document
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 March 31, 2008
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)
Bermuda
|
|
75-2993910
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
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
Smaller
reporting company 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 May 2, 2008 was
272,885,519.
INGERSOLL-RAND
COMPANY LIMITED
FORM
10-Q
INDEX
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
Item
1
|
-
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Income Statement for the three months ended March 31,
2008
|
1
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheet at March 31, 2008 and December 31,
2007
|
2
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Cash Flows for the three months ended March
31,
2008 and 2007
|
3
|
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
|
|
|
|
|
|
Item
2
|
-
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
28
|
|
|
|
|
|
|
Item
3
|
-
|
Quantitative
and Qualitative Disclosures about Market Risk
|
44
|
|
|
|
|
|
|
Item
4
|
-
|
Controls
and Procedures
|
44
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
Item
1
|
-
|
Legal
Proceedings
|
44
|
|
|
|
|
|
|
Item
1A
|
-
|
Risk
Factors
|
44
|
|
|
|
|
|
|
Item
2
|
-
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
44
|
|
|
|
|
|
|
Item
6
|
-
|
Exhibits
|
45
|
|
|
|
|
|
SIGNATURES
|
|
|
|
46
|
|
|
|
|
|
CERTIFICATIONS
|
|
|
|
|
Item
1. Financial Statements
INGERSOLL-RAND
COMPANY LIMITED
CONDENSED
CONSOLIDATED INCOME STATEMENT
(Unaudited)
|
|
Three months ended
|
|
|
|
March 31,
|
|
In
millions, except per share amounts
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
$
|
2,163.3
|
|
$
|
1,976.2
|
|
Cost
of goods sold
|
|
|
(1,540.9
|
)
|
|
(1,416.0
|
)
|
Selling
and administrative expenses
|
|
|
(375.4
|
)
|
|
(351.6
|
)
|
Operating
income
|
|
|
247.0
|
|
|
208.6
|
|
Interest
expense
|
|
|
(27.5
|
)
|
|
(35.6
|
)
|
Other,
net
|
|
|
39.4
|
|
|
(0.1
|
)
|
Earnings
before income taxes
|
|
|
258.9
|
|
|
172.9
|
|
Provision
for income taxes
|
|
|
(47.2
|
)
|
|
(16.3
|
)
|
Earnings
from continuing operations
|
|
|
211.7
|
|
|
156.6
|
|
Discontinued
operations, net of tax
|
|
|
(30.1
|
)
|
|
60.9
|
|
Net
earnings
|
|
$
|
181.6
|
|
$
|
217.5
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.77
|
|
$
|
0.51
|
|
Discontinued
operations
|
|
|
(0.11
|
)
|
|
0.20
|
|
Net
earnings
|
|
$
|
0.66
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.77
|
|
$
|
0.50
|
|
Discontinued
operations
|
|
|
(0.11
|
)
|
|
0.20
|
|
Net
earnings
|
|
$
|
0.66
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.18
|
|
$
|
0.18
|
|
See
accompanying notes to condensed consolidated financial
statements.
CONDENSED
CONSOLIDATED BALANCE SHEET
(Unaudited)
|
|
March 31,
|
|
December 31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,068.3
|
|
$
|
4,735.3
|
|
Accounts
and notes receivable, less allowance of $12.4 in 2008 and $12.2 in
2007
|
|
|
1,716.6
|
|
|
1,660.7
|
|
Inventories
|
|
|
909.0
|
|
|
827.2
|
|
Other
current assets
|
|
|
463.2
|
|
|
477.5
|
|
Total
current assets
|
|
|
7,157.1
|
|
|
7,700.7
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
935.3
|
|
|
904.9
|
|
Goodwill
|
|
|
4,110.9
|
|
|
3,993.3
|
|
Intangible
assets, net
|
|
|
740.3
|
|
|
724.6
|
|
Other
noncurrent assets
|
|
|
1,108.5
|
|
|
1,052.7
|
|
Total
assets
|
|
$
|
14,052.1
|
|
$
|
14,376.2
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
768.1
|
|
$
|
721.2
|
|
Accrued
compensation and benefits
|
|
|
260.8
|
|
|
338.9
|
|
Accrued
expenses and other current liabilities
|
|
|
719.6
|
|
|
1,434.6
|
|
Short-term
borrowings and current maturities of long-term debt
|
|
|
750.0
|
|
|
741.0
|
|
Total
current liabilities
|
|
|
2,498.5
|
|
|
3,235.7
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
712.7
|
|
|
712.7
|
|
Postemployment
and other benefit liabilities
|
|
|
937.1
|
|
|
941.9
|
|
Other
noncurrent liabilities
|
|
|
1,488.4
|
|
|
1,480.5
|
|
Minority
interests
|
|
|
96.8
|
|
|
97.5
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Class
A common shares
|
|
|
272.8
|
|
|
272.6
|
|
Capital
in excess of par value
|
|
|
36.6
|
|
|
-
|
|
Retained
earnings
|
|
|
7,521.3
|
|
|
7,388.8
|
|
Accumulated
other comprehensive income (loss)
|
|
|
487.9
|
|
|
246.5
|
|
Total
shareholders' equity
|
|
|
8,318.6
|
|
|
7,907.9
|
|
Total
liabilities and shareholders' equity
|
|
$
|
14,052.1
|
|
$
|
14,376.2
|
|
See
accompanying notes to condensed consolidated financial
statements.
INGERSOLL-RAND
COMPANY LIMITED
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
Three months ended March 31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
181.6
|
|
$
|
217.5
|
|
(Income)
loss from discontinued operations, net of tax
|
|
|
30.1
|
|
|
(60.9
|
)
|
Adjustments
to arrive at net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
38.1
|
|
|
36.0
|
|
Stock
settled share-based compensation
|
|
|
14.0
|
|
|
11.9
|
|
Changes
in other assets and liabilities, net
|
|
|
(944.0
|
)
|
|
(132.6
|
)
|
Other,
net
|
|
|
5.5
|
|
|
7.6
|
|
Net
cash provided by (used in) continuing operating activities
|
|
|
(674.7
|
)
|
|
79.5
|
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
(11.0
|
)
|
|
(33.8
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(37.4
|
)
|
|
(29.5
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
2.1
|
|
|
1.9
|
|
Acquisitions,
net of cash acquired
|
|
|
(30.3
|
)
|
|
(3.6
|
)
|
Proceeds
from business dispositions, net of cash
|
|
|
8.5
|
|
|
-
|
|
Other,
net
|
|
|
5.1
|
|
|
-
|
|
Net
cash provided by (used in) continuing investing activities
|
|
|
(52.0
|
)
|
|
(31.2
|
)
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
-
|
|
|
(26.1
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Increase
in short-term borrowings
|
|
|
7.2
|
|
|
104.1
|
|
Payments
of long-term debt
|
|
|
(0.8
|
)
|
|
(1.9
|
)
|
Net
change in debt
|
|
|
6.4
|
|
|
102.2
|
|
Dividends
paid
|
|
|
(49.1
|
)
|
|
(55.3
|
)
|
Proceeds
from exercise of stock options
|
|
|
4.2
|
|
|
44.7
|
|
Repurchase
of common shares by subsidiary
|
|
|
-
|
|
|
(133.6
|
)
|
Other,
net
|
|
|
25.8
|
|
|
-
|
|
Net
cash provided by (used in) continuing financing activities
|
|
|
(12.7
|
)
|
|
(42.0
|
)
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
-
|
|
|
-
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
83.4
|
|
|
2.4
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(667.0
|
)
|
|
(51.2
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
4,735.3
|
|
|
355.8
|
|
Cash
and cash equivalents - end of period
|
|
$
|
4,068.3
|
|
$
|
304.6
|
|
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
March 31, 2008, and results of operations and cash flows for the three months
ended March 31, 2008 and 2007.
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) Annual Report on Form 10-K for
the
year ended December 31, 2007.
As
a
result of the divestitures of the Road Development, Bobcat, Utility Equipment
and Attachments business units during 2007, the Company realigned its operating
and reporting segments to better reflect its market focus. In addition, the
results of operations and cash flows of all divested businesses have been
separately reported as discontinued operations for all periods
presented.
Note
2–
Announced Acquisition of Trane Inc.
On
December 17, 2007, the Company announced that it had executed a definitive
agreement to acquire Trane Inc., (Trane), formerly American Standard Companies
Inc., in a transaction currently valued at approximately $9.5 billion. Trane
is
a global leader in indoor climate control systems, services and solutions with
2007 annual revenues of $7.45 billion. The transaction is expected to close
in
the second quarter of 2008 and is subject to approval by Trane shareholders,
regulatory approvals and contractual closing conditions. There can be no
assurances that the acquisition will be consummated.
In
connection with the proposed Trane acquisition, each share of Trane’s common
stock (which approximated 195 million at December 31, 2007) will be exchanged
for a combination of (i) 0.23 of an Ingersoll Rand Class A common share and
(ii)
$36.50 in cash, without interest. The Company intends to use a combination
of
cash on hand and debt financing in order to pay for the cash portion of the
consideration. The Company has secured commitments from JPMorgan Chase Bank,
N.A., J.P. Morgan Securities Inc., Credit Suisse, Cayman Islands Branch, Credit
Suisse Securities (USA) LLC, Goldman Sachs Bank USA and Goldman Sachs Credit
Partners L.P. to provide up to $3.9 billion in financing through a 364-day
senior unsecured bridge facility. If unused, the debt commitments will expire
on
September 30, 2008.
Note
3 –
Divestitures and Discontinued Operations
The
components of discontinued operations for the three months ended March 31 are
as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
9.6
|
|
$
|
859.6
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings (loss) from operations
|
|
|
(11.2
|
)
|
|
81.9
|
|
Pre-tax
gain (loss) on sale
|
|
|
(4.1
|
)
|
|
0.1
|
|
Tax
expense
|
|
|
(14.8
|
)
|
|
(21.1
|
)
|
Discontinued
operations, net
|
|
$
|
(30.1
|
)
|
$
|
60.9
|
|
Discontinued
operations by business for the three months ended March 31 are as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Compact
Equipment, net of tax
|
|
$
|
(24.4
|
)
|
$
|
60.5
|
|
Road
Development, net of tax
|
|
|
-
|
|
|
15.9
|
|
Other
discontinued operations, net of tax
|
|
|
(5.7
|
)
|
|
(15.5
|
)
|
Total
discontinued operations, net of tax
|
|
$
|
(30.1
|
)
|
$
|
60.9
|
|
Compact
Equipment Divestiture
On
July
29, 2007, the Company agreed to sell its Bobcat, Utility Equipment and
Attachments business units (collectively, Compact Equipment) to Doosan Infracore
for gross proceeds of approximately $4.9 billion. The sale was completed on
November 30, 2007. The purchase price is subject to post-closing adjustments
which could result in a favorable or unfavorable adjustment to the gain on
sale
when ultimately resolved.
Compact
Equipment 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. The Company has accounted for Compact
Equipment as discontinued operations for all periods presented in accordance
with Statement of Financial Accounting Standard No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (SFAS 144).
Net
revenues and after-tax earnings of Compact Equipment for the three months ended
March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
$
|
9.6
|
|
$
|
692.5
|
|
|
|
|
|
|
|
|
|
After-tax
earnings from operations
|
|
|
0.4
|
|
|
60.5
|
|
Loss
on sale, net of tax of $20.7
|
|
|
(24.8
|
)
|
|
-
|
|
Total
discontinued operations, net of tax
|
|
$
|
(24.4
|
)
|
$
|
60.5
|
|
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 purchase price is subject to post-closing adjustments which
could result in a favorable or unfavorable adjustment to the gain on sale when
ultimately resolved.
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 for all periods presented in accordance with
SFAS 144.
Net
revenues and after-tax earnings of the Road Development business unit for the
three months ended March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
167.1
|
|
|
|
|
|
|
|
|
|
After-tax
earnings from operations
|
|
|
-
|
|
|
15.9
|
|
Total
discontinued operations, net of tax
|
|
$
|
-
|
|
$
|
15.9
|
|
Other
Discontinued Operations
The
Company also has retained costs from previously sold businesses that mainly
include costs related to postretirement benefits, product liability and legal
costs (mostly asbestos-related). The components of other discontinued operations
for the three months ended March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Retained
costs, net of tax
|
|
$
|
(5.7
|
)
|
$
|
(15.6
|
)
|
Net
gain on disposals, net of tax
|
|
|
-
|
|
|
0.1
|
|
Total
discontinued operations, net of tax
|
|
$
|
(5.7
|
)
|
$
|
(15.5
|
)
|
Retained
costs, net of tax for the three months ended March 31, 2008 includes $6.5
million of after-tax costs related to an adverse verdict in a product liability
lawsuit associated with a previously divested business.
Note
4–
Inventories
Depending
on the business, U.S. inventories are stated at the lower of cost or market
using the last-in, first-out (LIFO) method or the lower of cost or market using
the first-in, first-out (FIFO) method. Non-U.S. inventories are primarily stated
at the lower of cost or market using the FIFO method.
The
major
classes of inventory are as follows:
|
|
March
31,
|
|
December
31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
Raw
materials
|
|
$
|
338.2
|
|
$
|
323.2
|
|
Work-in-process
|
|
|
180.8
|
|
|
163.4
|
|
Finished
goods
|
|
|
476.9
|
|
|
424.9
|
|
|
|
|
995.9
|
|
|
911.5
|
|
LIFO
reserve
|
|
|
(86.9
|
)
|
|
(84.3
|
)
|
Total
|
|
$
|
909.0
|
|
$
|
827.2
|
|
Note
5 –
Goodwill
The
changes in the carrying amount of goodwill are as follows:
|
|
Climate
|
|
|
|
|
|
|
|
|
|
Control
|
|
Industrial
|
|
Security
|
|
|
|
In
millions
|
|
Technologies
|
|
Technologies
|
|
Technologies
|
|
Total
|
|
Balance
at December 31, 2007
|
|
$
|
2,613.8
|
|
$
|
371.9
|
|
$
|
1,007.6
|
|
$
|
3,993.3
|
|
Acquisitions
and adjustments*
|
|
|
-
|
|
|
1.9
|
|
|
24.2
|
|
|
26.1
|
|
Translation
|
|
|
45.3
|
|
|
6.4
|
|
|
39.8
|
|
|
91.5
|
|
Balance
at March 31, 2008
|
|
$
|
2,659.1
|
|
$
|
380.2
|
|
$
|
1,071.6
|
|
$
|
4,110.9
|
|
*
Includes current year adjustments related to final purchase price
allocation adjustments.
|
The
Company initially records as 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, adjustments may be recorded.
Note
6 –
Intangible Assets
The
following table sets forth the gross amount and accumulated amortization of
the
Company’s intangible assets:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
In
millions
|
|
amount
|
|
amortization
|
|
amount
|
|
amortization
|
|
Customer
relationships
|
|
$
|
510.8
|
|
$
|
92.1
|
|
$
|
502.4
|
|
$
|
87.4
|
|
Trademarks
|
|
|
122.0
|
|
|
17.7
|
|
|
114.5
|
|
|
15.6
|
|
Patents
|
|
|
39.3
|
|
|
22.4
|
|
|
38.2
|
|
|
21.2
|
|
Other
|
|
|
59.7
|
|
|
31.7
|
|
|
53.4
|
|
|
29.0
|
|
Total
amortizable intangible assets
|
|
|
731.8
|
|
|
163.9
|
|
|
708.5
|
|
|
153.2
|
|
Indefinite-lived
intangible assets
|
|
|
172.4
|
|
|
-
|
|
|
169.3
|
|
|
-
|
|
Total
|
|
$
|
904.2
|
|
$
|
163.9
|
|
$
|
877.8
|
|
$
|
153.2
|
|
Intangible
asset amortization expense was $6.8 million and $6.1 million for the three
months ended March 31, 2008 and 2007, respectively. Estimated amortization
expense on existing intangible assets is approximately $30 million for each
of the next five fiscal years.
Note
7 –
Pension
Plans
The
Company has noncontributory pension plans covering 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 final average pay formula and for
U.S.
collectively bargained employees 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 months ended
March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Service
cost
|
|
$
|
11.4
|
|
$
|
14.9
|
|
Interest
cost
|
|
|
38.5
|
|
|
41.5
|
|
Expected
return on plan assets
|
|
|
(49.1
|
)
|
|
(58.2
|
)
|
Net
amortization of:
|
|
|
|
|
|
|
|
Prior
service costs
|
|
|
2.1
|
|
|
2.4
|
|
Transition
amount
|
|
|
0.2
|
|
|
0.2
|
|
Plan
net actuarial losses
|
|
|
2.4
|
|
|
4.6
|
|
Net
periodic pension benefit cost
|
|
|
5.5
|
|
|
5.4
|
|
Net
curtailment and settlement (gains) losses
|
|
|
1.3
|
|
|
-
|
|
Net
periodic pension benefit cost after net curtailment and settlement
(gains)
losses
|
|
$
|
6.8
|
|
$
|
5.4
|
|
|
|
|
|
|
|
|
|
Amounts
recorded in continuing operations
|
|
$
|
10.5
|
|
$
|
8.3
|
|
Amounts
recorded in discontinued operations
|
|
|
(3.7
|
)
|
|
(2.9
|
)
|
Total
|
|
$
|
6.8
|
|
$
|
5.4
|
|
The
Company made employer contributions of $6.8 million and $7.9 million to its
pension plans during the three months ended March 31, 2008 and 2007,
respectively.
The
curtailment and settlement losses in 2008 are associated with lump sum
distributions under supplemental benefit plans for officers and other key
employees.
Note
8 –
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 benefit cost for the three months
ended March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Service
cost
|
|
$
|
1.0
|
|
$
|
3.2
|
|
Interest
cost
|
|
|
9.5
|
|
|
14.1
|
|
Net
amortization of prior service gains
|
|
|
(0.9
|
)
|
|
(1.1
|
)
|
Net
amortization of net actuarial losses
|
|
|
3.7
|
|
|
4.9
|
|
Net
periodic postretirement benefit cost
|
|
$
|
13.3
|
|
$
|
21.1
|
|
|
|
|
|
|
|
|
|
Amounts
recorded in continuing operations
|
|
$
|
5.9
|
|
$
|
6.8
|
|
Amounts
recorded in discontinued operations
|
|
|
7.4
|
|
|
14.3
|
|
Total
|
|
$
|
13.3
|
|
$
|
21.1
|
|
Note
9–
Comprehensive
Income
The
components of comprehensive income for the three months ended March 31 are
as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Net
earnings
|
|
$
|
181.6
|
|
$
|
217.5
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
231.2
|
|
|
35.5
|
|
Change
in fair value of derivatives qualifying as cash flow hedges, net
of
tax
|
|
|
7.1
|
|
|
-
|
|
Unrealized
gain (loss) on marketable securities, net of tax
|
|
|
(1.5
|
)
|
|
(0.5
|
)
|
Pension
and other postretirement benefits liability adjustment, net of
tax
|
|
|
4.6
|
|
|
6.9
|
|
Comprehensive
income
|
|
$
|
423.0
|
|
$
|
259.4
|
|
Included
in accumulated other comprehensive income is the estimated value of the
Company’s currency and commodity hedges. At March 31, 2008 and 2007, the
currency hedges had a projected gain of $2.0 million and a projected loss of
$1.3 million, net of tax, respectively. At March 31, 2008, the commodity hedges
had a projected gain of $1.0 million, net of tax. At March 31, 2007, the Company
did not have commodity hedges as part of its hedge portfolio. Also included
in
other comprehensive income are projected losses of $8.3 million related to
interest rate locks, all of which qualified as cash flow hedges. The amounts
expected to be reclassified to earnings over the next twelve months for the
currency hedges, commodity hedges and interest rate locks is $2.0 million,
$1.0
million and $1.0 million, respectively. The actual amounts that will be
reclassified to earnings may vary from this amount as a result of changes in
market conditions. The projected fair value of all currency derivatives at
March
31, 2008 and 2007 was a gain of $4.2 million and a loss of $0.1 million,
respectively.
During
the first quarter of 2008, the Company determined that four of its forecasted
cash flow hedges were ineffective, as the underlying forecasted transactions
were no longer considered probable of occurring. The Company dedesignated these
hedges and recorded a gain of $0.3 million within Other, net.
Note
10 –
Restructuring Activities
Restructuring
charges recorded during the three months ended March 31, 2008 were as
follows:
|
|
Climate
|
|
|
|
|
|
|
|
|
|
Control
|
|
Industrial
|
|
Security
|
|
|
|
In
millions
|
|
Technologies
|
|
Technologies
|
|
Technologies
|
|
Total
|
|
Cost
of goods sold
|
|
$
|
0.5
|
|
$
|
2.1
|
|
$
|
-
|
|
$
|
2.6
|
|
Selling
and administrative
|
|
|
0.5
|
|
|
0.7
|
|
|
-
|
|
|
1.2
|
|
Total
|
|
$
|
1.0
|
|
$
|
2.8
|
|
$
|
-
|
|
$
|
3.8
|
|
The
changes in the restructuring reserve were as follows:
|
|
Climate
|
|
|
|
|
|
|
|
|
|
Control
|
|
Industrial
|
|
Security
|
|
|
|
In
millions
|
|
Technologies
|
|
Technologies
|
|
Technologies
|
|
Total
|
|
Balance
at December 31, 2007
|
|
$
|
20.8
|
|
$
|
0.7
|
|
$
|
4.0
|
|
$
|
25.5
|
|
Additions
|
|
|
1.0
|
|
|
2.8
|
|
|
-
|
|
|
3.8
|
|
Cash
and non-cash uses
|
|
|
(10.7
|
)
|
|
(2.2
|
)
|
|
(1.5
|
)
|
|
(14.4
|
)
|
Currency
translation
|
|
|
1.1
|
|
|
-
|
|
|
0.3
|
|
|
1.4
|
|
Balance
at March 31, 2008
|
|
$
|
12.2
|
|
$
|
1.3
|
|
$
|
2.8
|
|
$
|
16.3
|
|
During
2007, the Company initiated restructuring actions relating to ongoing cost
reduction efforts across each of its sectors. These actions include both
workforce reductions as well as the consolidation of manufacturing
facilities.
Actions
taken in the Climate Control Technologies sector include a rationalization
of
manufacturing facilities in the U.S., Europe and Asia that resulted in the
closure of a U.S. plant, two European plants and a Japanese plant. Industrial
Technologies consolidated a manufacturing process at a U.S. plant in addition
to
other administrative functions within the sector. Security Technologies
conducted a consolidation of administrative functions throughout the European
sales area.
As
of
March 31, 2008, the Company had $16.3 million accrued for the workforce
reductions and consolidation of manufacturing facilities, of which a majority
will be paid throughout the remainder of 2008.
Note
11–
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 10.6 million remains available for future incentive awards.
The plan replaces the Incentive Stock Plan of 1998 which expired in May
2007.
Stock
Options
The
average fair value of the stock options granted for the three months ended
March
31, 2008 and 2007 was estimated to be $10.79 per share and $11.06 per share,
respectively, using the Black-Scholes option-pricing model. The following
assumptions were used:
|
|
2008
|
|
2007
|
|
Dividend
yield
|
|
|
1.54
|
%
|
|
1.75
|
%
|
Volatility
|
|
|
31.50
|
%
|
|
26.10
|
%
|
Risk-free
rate of return
|
|
|
2.75
|
%
|
|
4.71
|
%
|
Expected
life
|
|
|
5.1
years
|
|
|
4.7
years
|
|
The
fair
value of each of the Company’s stock option awards is expensed on a
straight-line basis over the required service period, which is generally the
three-year vesting period of the options. However, for options granted to
retirement eligible employees, the Company recognizes expense for the fair
value
of the options at the grant date. Expected volatility is based on the historical
volatility from traded options on the Company’s stock. The risk-free rate of
return 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 term of the
award. Historical data is used to estimate forfeitures within the Company’s
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 three months ended March
31,
2008 was as follows:
|
|
Shares
|
|
Weighted-
|
|
Aggregate
|
|
Weighted-
|
|
|
|
subject
|
|
average
|
|
intrinsic
|
|
average
|
|
|
|
to option
|
|
exercise price
|
|
value (millions)
|
|
remaining life
|
|
December
31, 2007
|
|
|
16,424,891
|
|
$
|
34.25
|
|
|
|
|
|
|
|
Granted
|
|
|
3,202,249
|
|
|
39.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
(126,161
|
)
|
|
33.41
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(149,773
|
)
|
|
40.70
|
|
|
|
|
|
|
|
Outstanding
March 31, 2008
|
|
|
19,351,206
|
|
$
|
34.99
|
|
$
|
187.5
|
|
|
6.2
|
|
Exercisable
March 31, 2008
|
|
|
13,338,900
|
|
$
|
32.38
|
|
$
|
162.8
|
|
|
4.9
|
|
SARs
SARs
generally vest ratably over a three-year period from the date of grant and
expire at the end of ten years. All exercised SARs are settled with the
Company’s Class A common shares.
The
following table summarizes the information for currently outstanding SARs for
the three months ended March 31, 2008:
|
|
Shares
|
|
Weighted-
|
|
Aggregate
|
|
Weighted-
|
|
|
|
subject
|
|
average
|
|
intrinsic
|
|
average
|
|
|
|
to option
|
|
exercise price
|
|
value (millions)
|
|
remaining life
|
|
December
31, 2007
|
|
|
1,169,977
|
|
$
|
33.99
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,874
|
)
|
|
30.15
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(42,600
|
)
|
|
37.44
|
|
|
|
|
|
|
|
Outstanding
March 31, 2008
|
|
|
1,124,503
|
|
$
|
33.87
|
|
$
|
12.0
|
|
|
5.2
|
|
Exercisable
March 31, 2008
|
|
|
1,034,867
|
|
$
|
33.39
|
|
$
|
11.6
|
|
|
5.0
|
|
Note:
The
Company did not grant SARS during the three months ended March 31, 2008 and
does
not anticipate further granting in the future.
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.
On
April
17, 2007, and effective for the performance year 2007, the Compensation
Committee of the Company’s board of directors approved a revision to the PSP
program such that all
PSP
awards will be paid in Class A common shares rather than in cash. In addition,
all shares will vest one year after the date of grant except for
retirement-eligible employees which vest immediately. 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 the Company’s
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 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. Previously, these amounts were settled in 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, phantom 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 common share equivalents
is
paid in cash upon the participants’ retirement.
The
Company has also issued stock grants as an incentive plan for certain key
employees, with varying vesting periods. All stock grants are settled with
the
Company’s Class A common shares.
Compensation
Expense
Share-based
compensation expense is included in Selling and administrative expenses.
The
following table summarizes the expenses recognized for the three months ended
March 31:
In
millions
|
|
2008
|
|
2007
|
|
Stock
options
|
|
$
|
13.3
|
|
$
|
11.4
|
|
SARs
|
|
|
(0.3
|
)
|
|
0.4
|
|
Performance
shares
|
|
|
0.8
|
|
|
4.2
|
|
Deferred
compensation
|
|
|
1.2
|
|
|
1.0
|
|
Other
|
|
|
0.3
|
|
|
0.3
|
|
Pre-tax
expense
|
|
|
15.3
|
|
|
17.3
|
|
Tax
benefit
|
|
|
(5.9
|
)
|
|
(6.6
|
)
|
After
tax expense
|
|
$
|
9.4
|
|
$
|
10.7
|
|
|
|
|
|
|
|
|
|
Amounts
recorded in continuing operations
|
|
$
|
9.4
|
|
$
|
9.2
|
|
Amounts
recorded in discontinued operations
|
|
|
-
|
|
|
1.5
|
|
Total
|
|
$
|
9.4
|
|
$
|
10.7
|
|
In
August
2006, the Company entered into two total return swaps (the Swaps) which were
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. The Company settled the
remaining portion of the Swaps on August 6, 2007, for net cash proceeds of
$13.8
million.
For
the
three months ended March 31, 2007, the Company recorded a gain of $5.9 million
associated with the Swaps. The gains and losses associated with the Swaps
are
recorded within Selling and administrative expenses.
Note
12 – Other, Net
The
components of Other, net for the three months ended March 31 are as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
45.6
|
|
$
|
2.9
|
|
Exchange
gain (loss)
|
|
|
(1.6
|
)
|
|
0.1
|
|
Minority
interests
|
|
|
(3.8
|
)
|
|
(3.2
|
)
|
Earnings
from equity investments
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(0.8
|
)
|
|
0.1
|
|
Other,
net
|
|
$
|
39.4
|
|
$
|
(0.1
|
)
|
Note
13 – 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. Total
unrecognized tax benefits as of March 31, 2008 and December 31, 2007 were
$391.4
million and $379.8 million, respectively.
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, Switzerland
and the
United States. In general, the examination of the Company’s material tax returns
is completed for the years prior to 2000.
The
Internal Revenue Service (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 disputed the IRS position
and protests have been filed with the IRS Appeals Division. In order to reduce
the potential interest expense associated with this matter, the Company made
a
payment of $217 million in the third quarter of 2007, which reduced the
Company’s total liability for uncertain tax positions by $141 million.
The
issues raised by the IRS associated with this payment are not related to
the
Company's reorganization in Bermuda, or the Company's intercompany debt
structure.
On
July
20, 2007, the Company and its consolidated subsidiaries received a notice
from
the 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 entire 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 filed a protest with
the
IRS in the third quarter of 2007. Going forward, the Company 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
14–
Earnings
Per Share (EPS)
Basic
EPS
is calculated by dividing net earnings (income available to common shareholders)
by the weighted-average number of Class A common shares outstanding for the
applicable period. Diluted EPS is calculated after adjusting the denominator
of
the basic EPS calculation for the effect of all potentially dilutive common
shares, which in the Company’s case, includes shares issuable under share-based
compensation plans. The following table summarizes the weighted-average number
of Class A common shares outstanding for basic and diluted earnings per share
calculations:
In
millions
|
|
2008
|
|
2007
|
|
Weighted-average
number of basic shares
|
|
|
273.8
|
|
|
306.8
|
|
Shares
issuable under incentive stock plans
|
|
|
2.5
|
|
|
3.5
|
|
Weighted-average
number of diluted shares
|
|
|
276.3
|
|
|
310.3
|
|
Anti-dilutive
shares
|
|
|
4.3
|
|
|
4.0
|
|
Note
15 –
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
a
result of the divestitures of Compact Equipment and the Road Development
business unit during 2007 (see Note 3), the Company realigned its operating
and
reporting segments to better reflect its market focus. The 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 as of March 31 is as follows:
In
millions
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
|
|
|
|
Climate
Control Technologies
|
|
$
|
798.4
|
|
$
|
728.9
|
|
Industrial
Technologies
|
|
|
743.4
|
|
|
667.7
|
|
Security
Technologies
|
|
|
621.5
|
|
|
579.6
|
|
Total
|
|
$
|
2,163.3
|
|
$
|
1,976.2
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
Climate
Control Technologies
|
|
$
|
80.1
|
|
$
|
69.4
|
|
Industrial
Technologies
|
|
|
97.6
|
|
|
91.6
|
|
Security
Technologies
|
|
|
105.0
|
|
|
90.7
|
|
Unallocated
corporate expense
|
|
|
(35.7
|
)
|
|
(43.1
|
)
|
Total
|
|
$
|
247.0
|
|
$
|
208.6
|
|
Long-lived
assets by geographic area at March 31, 2008 and December 31, 2007 were as
follows:
In
millions
|
|
2008
|
|
2007
|
|
United
States
|
|
$
|
830.3
|
|
$
|
820.5
|
|
Non-U.S.
|
|
|
672.9
|
|
|
639.6
|
|
Total
|
|
$
|
1,503.2
|
|
$
|
1,460.1
|
|
Note
16 – 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.
Environmental
Matters
The
Company continues to be dedicated to an environmental program to reduce the
utilization and generation of hazardous materials during the manufacturing
process and to remediate identified environmental concerns. As to the latter,
the Company is currently engaged in site investigations and remediation
activities to address environmental cleanup from past operations at current
and
former manufacturing facilities.
The
Company is sometimes a party to environmental lawsuits and claims and has
received notices of potential violations of environmental laws and regulations
from the Environmental Protection Agency and similar state authorities. It
has
also been identified as a potentially responsible party (PRP) for cleanup
costs
associated with off-site waste disposal at federal Superfund and state
remediation sites. For all such sites, there are other PRPs and, in most
instances, the Company’s involvement is minimal.
In
estimating its liability, the Company has assumed it will not bear the entire
cost of remediation of any site to the exclusion of other PRPs who may be
jointly and severally liable. The ability of other PRPs to participate has
been
taken into account, based generally on the parties’ financial condition and
probable contributions on a per site basis. Additional lawsuits and claims
involving environmental matters are likely to arise from time to time in
the
future.
During
the first quarter of 2008, the Company spent $2.9 million for environmental
remediation expenditures at sites presently or formerly owned or leased by
us.
As of March 31, 2008 and December 31, 2007, the Company has recorded reserves
for environmental matters of $101.6 million and $101.8 million. The Company
believes that these expenditures and accrual levels will continue and may
increase over time. Given the evolving nature of environmental laws, regulations
and technology, the ultimate cost of future compliance is
uncertain.
Asbestos
Matters
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, primarily pumps and
compressors. 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 and packings purchased from
third-party suppliers.
Prior
to
the fourth quarter of 2007, the Company recorded a liability (which it
periodically updated) for its actual and anticipated future asbestos settlement
costs projected seven years into the future. The Company did not record a
liability for future asbestos settlement costs beyond the seven-year period
covered by its reserve because such costs previously were not reasonably
estimable for the reasons detailed below.
In
the
fourth quarter of 2007, the Company again reviewed its history and experience
with asbestos-related litigation and determined that it had now become possible
to make a reasonable estimate of its total liability for pending and unasserted
potential future asbestos-related claims. This determination was based upon
the
Company’s analysis of developments in asbestos litigation, including the
substantial and continuing decline in the filing of non-malignancy claims
against the Company, the establishment in many jurisdictions of inactive
or
deferral dockets for such claims, the decreased value of non-malignancy
claims because of changes in the legal and judicial treatment of such claims,
increasing focus of the asbestos litigation upon malignancy claims, primarily
those involving mesothelioma, a cancer with a known historical and predictable
future annual incidence rate, and the Company’s substantial accumulated
experience with respect to the resolution of malignancy claims, particularly
mesothelioma claims, filed against it.
Accordingly,
in the fourth quarter of 2007, the Company retained Dr. Thomas Vasquez of
Analysis, Research & Planning Corporation (collectively, “ARPC”) to assist
it in calculating an estimate of the Company’s total liability for pending and
unasserted future asbestos-related claims. ARPC is a respected expert in
performing complex calculations such as this. ARPC has been involved in many
asbestos-related valuations of current and future liabilities, and its valuation
methodologies have been accepted by numerous courts.
The
methodology used by ARPC to project the Company’s total liability for pending
and unasserted potential future asbestos-related claims relied upon and included
the following factors, among others:
|
·
|
ARPC’s
interpretation of a widely accepted forecast of the population
likely to
have been occupationally exposed to
asbestos;
|
|
·
|
epidemiological
studies estimating the number of people likely to develop asbestos-related
diseases such as mesothelioma and lung
cancer;
|
|
·
|
the
Company’s historical experience with the filing of non-malignancy claims
against it and the historical ratio between the numbers of non-malignancy
and lung cancer claims filed against the
Company;
|
|
·
|
ARPC’s
analysis of the number of people likely to file an asbestos-related
personal injury claim against the Company based on such epidemiological
and historical data and the Company’s most recent three-year claims
history;
|
|
·
|
an
analysis of the Company’s pending cases, by type of disease
claimed;
|
|
·
|
an
analysis of the Company’s most recent three-year history to determine the
average settlement and resolution value of claims, by type of disease
claimed;
|
|
·
|
an
adjustment for inflation in the future average settlement value
of claims,
at a 2.5% annual inflation rate, adjusted downward to 1.5% to take
account
of the declining value of claims resulting from the aging of the
claimant
population;
|
|
·
|
an
analysis of the period over which the Company has and is likely
to resolve
asbestos-related claims against it in the
future.
|
Based
on
these factors, ARPC calculated a total estimated liability of $755 million
for the Company to resolve all pending and unasserted potential future claims
through 2053, which is ARPC’s reasonable best estimate of the time it will take
to resolve asbestos-related claims. This amount is on a pre-tax basis, not
discounted for the time-value of money, and excludes the Company’s defense fees
(which will continue to be expensed by the Company as they are incurred).
After
considering ARPC’s analysis and the factors listed above, in the fourth quarter
of 2007, the Company increased its recorded liability for asbestos claims
by
$538 million, from $217 million to $755 million.
In
addition, during the fourth quarter of 2007, the Company recorded an
$89 million increase in its assets for probable asbestos-related insurance
recoveries to $250 million. This represents amounts due to the Company for
previously paid and settled claims and the probable reimbursements relating
to
its estimated liability for pending and future claims. In calculating this
amount, the Company used the estimated asbestos liability for pending and
projected future claims calculated by ARPC. It also considered the amount
of
insurance available, gaps in coverage, allocation methodologies, solvency
ratings and creditworthiness of the insurers, the amounts already recovered
from
and the potential for settlements with insurers, and the terms of existing
settlement agreements with insurers.
During
the fourth quarter of 2007, the Company recorded a non-cash charge to earnings
of discontinued operations of $449 million ($277 million after tax),
which is the difference between the amount by which the Company increased
its
total estimated liability for pending and projected future asbestos-related
claims and the amount that the Company expects to recover from insurers with
respect to that increased liability.
The
amounts recorded by the Company for asbestos-related liabilities and
insurance-related assets are based on currently available information. The
Company’s actual liabilities or insurance recoveries could be significantly
higher or lower than those recorded if assumptions used in the Company’s or
ARPC’s calculations vary significantly from actual results. Key variables in
these assumptions are identified above and include the number and type of
new
claims to be filed each year, the average cost of resolution of each such
new
claim, the resolution of coverage issues with insurance carriers, and the
solvency risk with respect to the Company’s insurance carriers. Furthermore,
predictions with respect to these variables are subject to greater uncertainty
as the projection period lengthens. Other factors that may affect the Company’s
liability include uncertainties surrounding the litigation process from
jurisdiction to jurisdiction and from case to case, reforms that may be made
by
state and federal courts, and the passage of state or federal tort reform
legislation.
The
aggregate amount of the stated limits in insurance policies available to
the
Company for asbestos-related claims, acquired over many years and from many
different carriers, is substantial. However, limitations in that coverage,
primarily due to the considerations described above, are expected to result
in
the projected total liability to claimants substantially exceeding the probable
insurance recovery.
From
receipt of its first asbestos claims more than 25 years ago to December 31,
2007, the Company has resolved (by settlement or by dismissal) approximately
208,000 claims. The total amount of all settlements paid by the Company
(excluding insurance recoveries) and by its insurance carriers is approximately
$308 million, for an average payment per resolved claim of $1,480. The
average payment per claim resolved during the year ended December 31, 2007
was
$7,491. This amount reflects the Company’s emphasis on resolution of higher
value malignancy claims, particularly mesothelioma claims, rather than lower
value non-malignancy claims, which are more heavily represented in the Company’s
historical settlements. The table below provides additional information
regarding asbestos-related claims filed against the Company:
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Open
claims - January 1
|
|
|
77,675
|
|
|
96,294
|
|
|
104,513
|
|
|
105,811
|
|
|
102,968
|
|
|
101,709
|
|
New
claims filed
|
|
|
37,172
|
|
|
30,843
|
|
|
13,541
|
|
|
11,132
|
|
|
6,457
|
|
|
5,398
|
|
Claims
settled
|
|
|
(16,443
|
)
|
|
(21,096
|
)
|
|
(11,503
|
)
|
|
(12,505
|
)
|
|
(6,558
|
)
|
|
(5,005
|
)
|
Claims
dismissed
|
|
|
(2,110
|
)
|
|
(1,528
|
)
|
|
(740
|
)
|
|
(1,470
|
)
|
|
(1,158
|
)
|
|
(1,479
|
)
|
Open
claims - December 31
|
|
|
96,294
|
|
|
104,513
|
|
|
105,811
|
|
|
102,968
|
|
|
101,709
|
|
|
100,623
|
|
Over
90
percent of the open claims against the Company are non-malignancy claims,
many
of which have been placed on inactive or deferral dockets and the vast majority
of which have little or no settlement value against the Company, particularly
in
light of recent changes in the legal and judicial treatment of such claims.
Malignancy
claims accounted for: approximately 73 percent of the Company’s total
asbestos-related settlement payments during the three-year period ended December
31, 2004; approximately 87 percent during the three-year period ended December
31, 2007; and approximately 93 percent in 2007. Non-malignancy claims accounted
for: approximately 27 percent of the Company’s total asbestos-related settlement
payments during the three-year period ended December 31, 2004;
approximately 13 percent during the three-year period ended December 31,
2007; and approximately seven percent in 2007.
For
the
three-months ended March 31, 2008, the Company recorded a net benefit of
$7.5
million associated with the settlement and defense of asbestos claims after
insurance recoveries, compared with a total cost of $12.0 million during
the
three months ended March 31, 2007. At March 31, 2008, the Company's liability
for asbestos related matters and the asset for probable asbestos-related
insurance recoveries totaled $744.4 million and $256.6 million, respectively,
compared to $754.9 million and $249.8 million at December 31, 2007.
The
Company records its income and expenses associated with its asbestos liabilities
and corresponding insurance recoveries within discontinued operations, as
they
relate to previously divested businesses, primarily Ingersoll-Dresser Pump,
which was sold in 2000.
Other
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
$3.5 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
following table represents the changes in the product warranty liability
for the
three months ended March 31:
In
millions
|
|
2008
|
|
2007
|
|
Balance
at beginning of period
|
|
$
|
146.9
|
|
$
|
137.1
|
|
Reductions
for payments
|
|
|
(17.9
|
)
|
|
(20.2
|
)
|
Accruals
for warranties issued during the current period
|
|
|
16.3
|
|
|
24.0
|
|
Changes
to accruals related to preexisting warranties
|
|
|
(0.6
|
)
|
|
(0.3
|
)
|
Acquisitions
|
|
|
-
|
|
|
0.1
|
|
Translation
|
|
|
3.5
|
|
|
1.0
|
|
Balance
at end of period
|
|
$
|
148.2
|
|
$
|
141.7
|
|
The
Company has other contingent liabilities for $8.7 million. These liabilities
primarily result from performance bonds, guarantees and stand-by letters
of
credit associated with the prior sale of products by divested businesses.
Note
17 – Fair Value Measurement
Effective
January 1, 2008, the Company adopted FASB Statement No. 157, “Fair Value
Measurements,” (SFAS 157). SFAS 157 establishes a framework for measuring fair
value that is based on the inputs market participants use to determine the
fair
value of an asset or liability and establishes a fair value hierarchy to
prioritize those inputs. The fair value hierarchy outlined in SFAS 157 is
comprised of three levels that are described below:
|
·
|
Level
1 – Inputs based on quoted prices in active markets for identical assets
or liabilities.
|
|
·
|
Level
2 – Inputs other than Level 1 quoted prices, such as quoted prices
for
similar assets or liabilities; quoted prices in markets that are
not
active; or other inputs that are observable or can be corroborated
by
observable market data for substantially the full term of the asset
or
liability.
|
|
· |
Level
3 – Unobservable inputs based on little or no market activity and that
are
significant to the fair value of the assets and liabilities.
|
Effective
February 12, 2008, the Company adopted FSP SFAS 157-2, “Effective Date of FASB
Statement No. 157,” which defers the application date of the provisions of SFAS
157 for all nonfinancial assets and liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. Due to the deferral, the Company has delayed its implementation of
the
SFAS 157 provisions on the fair value of goodwill, indefinite-lived intangible
assets and nonfinancial long-lived assets.
Assets
and liabilities measured at fair value on a recurring basis for the three
months
ended March 31, 2008 are as follows:
|
|
Fair
value measurements
|
|
Total
|
|
In
millions
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
fair
value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,068.3
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,068.3
|
|
Marketable
securities
|
|
|
11.3
|
|
|
-
|
|
|
-
|
|
|
11.3
|
|
Derivative
instruments
|
|
|
-
|
|
|
7.5
|
|
|
-
|
|
|
7.5
|
|
Benefit
trust assets
|
|
|
-
|
|
|
139.3
|
|
|
-
|
|
|
139.3
|
|
Total
|
|
$
|
4,079.6
|
|
$
|
146.8
|
|
$
|
-
|
|
$
|
4,226.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
$
|
-
|
|
$
|
1.8
|
|
$
|
-
|
|
$
|
1.8
|
|
Benefit
liabilities
|
|
|
-
|
|
|
104.3
|
|
|
-
|
|
|
104.3
|
|
Total
|
|
$
|
-
|
|
$
|
106.1
|
|
$
|
-
|
|
$
|
106.1
|
|
SFAS
157
defines fair value as the exchange price that would be received to sell an
asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between
market participants on the measurement date. The Company determines the fair
value of its financial assets and liabilities using the following
methodologies:
|
·
|
Cash
and cash equivalents –
These amounts include cash on hand, demand deposits and all highly
liquid
investments with original maturities at the time of purchase of
three
months or less and are held in U.S and non-U.S.
currencies.
|
|
·
|
Marketable
securities –
These securities include investments in publically traded stock
of
non-U.S. companies held by non-U.S. subsidiaries of the Company.
The fair
value is obtained for the securities based on observable market
prices
quoted on public stock exchanges.
|
|
·
|
Derivatives
instruments –
These instruments include forward contracts related to non-U.S.
currencies
and commodities. The fair value of the derivative instruments are
determined based on a pricing model that uses inputs from actively
quoted
currency and commodity markets that are readily accessible and
observable.
|
|
·
|
Benefit
trust assets –
These assets include money market funds and insurance contracts
that are
the underlying for the benefit assets. The fair value of the assets
is
based on observable market prices quoted in a readily accessible
and
observable market.
|
|
·
|
Benefit
liabilities –
These liabilities include benefits given to certain executives
of the
Company, including deferred compensation and executive death benefits.
The
fair value is based on the underlying investment portfolio of the
deferred
compensation and the specific benefits guaranteed in a death benefit
contract with each executive.
|
Effective
January 1, 2008, the Company also adopted FASB Statement No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115,” (SFAS 159). SFAS 159 allows the Company
the irrevocable 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. As of
January 1, 2008, the Company has not elected to utilize the fair value option
on
any of its financial assets or liabilities.
Note
18 – Guarantor Financial Information
Ingersoll-Rand
Company Limited (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 consolidating 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 U.S. Securities and
Exchange Commission.
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 March 31, 2008
|
|
IR
|
|
IR
|
|
Other
|
|
Consolidating
|
|
IR
Limited
|
|
In
millions
|
|
Limited
|
|
New
Jersey
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
227.8
|
|
$
|
1,935.5
|
|
$
|
-
|
|
$
|
2,163.3
|
|
Cost
of goods sold
|
|
|
-
|
|
|
(169.4
|
)
|
|
(1,371.5
|
)
|
|
-
|
|
|
(1,540.9
|
)
|
Selling
and administrative expenses
|
|
|
(14.5
|
)
|
|
(75.4
|
)
|
|
(285.5
|
)
|
|
-
|
|
|
(375.4
|
)
|
Operating
income
|
|
|
(14.5
|
)
|
|
(17.0
|
)
|
|
278.5
|
|
|
-
|
|
|
247.0
|
|
Equity
earnings in affiliates (net of tax)
|
|
|
222.0
|
|
|
54.1
|
|
|
(9.2
|
)
|
|
(266.9
|
)
|
|
-
|
|
Interest
expense
|
|
|
(3.9
|
)
|
|
(16.7
|
)
|
|
(6.9
|
)
|
|
-
|
|
|
(27.5
|
)
|
Intercompany
interest and fees
|
|
|
(22.0
|
)
|
|
(61.1
|
)
|
|
83.1
|
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
-
|
|
|
6.5
|
|
|
32.9
|
|
|
-
|
|
|
39.4
|
|
Earnings
(loss) before income taxes
|
|
|
181.6
|
|
|
(34.2
|
)
|
|
378.4
|
|
|
(266.9
|
)
|
|
258.9
|
|
(Benefit)
provision for income taxes
|
|
|
-
|
|
|
20.4
|
|
|
(67.6
|
)
|
|
-
|
|
|
(47.2
|
)
|
Earnings
(loss) from continuing operations
|
|
|
181.6
|
|
|
(13.8
|
)
|
|
310.8
|
|
|
(266.9
|
)
|
|
211.7
|
|
Discontinued
operations, net of tax
|
|
|
-
|
|
|
4.6
|
|
|
(34.7
|
)
|
|
-
|
|
|
(30.1
|
)
|
Net
earnings (loss)
|
|
$
|
181.6
|
|
$
|
(9.2
|
)
|
$
|
276.1
|
|
$
|
(266.9
|
)
|
$
|
181.6
|
|
Condensed
Consolidating Income Statement
For
the
three months ended March 31, 2007
|
|
IR
|
|
IR
|
|
Other
|
|
Consolidating
|
|
IR
Limited
|
|
In
millions
|
|
Limited
|
|
New
Jersey
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
222.9
|
|
$
|
1,753.3
|
|
$
|
-
|
|
$
|
1,976.2
|
|
Cost
of goods sold
|
|
|
-
|
|
|
(157.9
|
)
|
|
(1,258.1
|
)
|
|
-
|
|
|
(1,416.0
|
)
|
Selling
and administrative expenses
|
|
|
(11.5
|
)
|
|
(83.9
|
)
|
|
(256.2
|
)
|
|
-
|
|
|
(351.6
|
)
|
Operating
income
|
|
|
(11.5
|
)
|
|
(18.9
|
)
|
|
239.0
|
|
|
-
|
|
|
208.6
|
|
Equity
earnings in affiliates (net of tax)
|
|
|
249.9
|
|
|
115.5
|
|
|
3.1
|
|
|
(368.5
|
)
|
|
-
|
|
Interest
expense
|
|
|
(11.0
|
)
|
|
(17.2
|
)
|
|
(7.4
|
)
|
|
-
|
|
|
(35.6
|
)
|
Intercompany
interest and fees
|
|
|
(10.2
|
)
|
|
(118.6
|
)
|
|
128.8
|
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
0.3
|
|
|
(0.4
|
)
|
|
-
|
|
|
-
|
|
|
(0.1
|
)
|
Earnings
(loss) before income taxes
|
|
|
217.5
|
|
|
(39.6
|
)
|
|
363.5
|
|
|
(368.5
|
)
|
|
172.9
|
|
(Benefit)
provision for income taxes
|
|
|
-
|
|
|
46.3
|
|
|
(62.6
|
)
|
|
-
|
|
|
(16.3
|
)
|
Earnings
(loss) from continuing operations
|
|
|
217.5
|
|
|
6.7
|
|
|
300.9
|
|
|
(368.5
|
)
|
|
156.6
|
|
Discontinued
operations, net of tax
|
|
|
-
|
|
|
(3.6
|
)
|
|
64.5
|
|
|
-
|
|
|
60.9
|
|
Net
earnings (loss)
|
|
$
|
217.5
|
|
$
|
3.1
|
|
$
|
365.4
|
|
$
|
(368.5
|
)
|
$
|
217.5
|
|
Condensed
Consolidating Balance Sheet
March
31,
2008
|
|
IR
|
|
IR
|
|
Other
|
|
Consolidating
|
|
IR
Limited
|
|
In
millions
|
|
Limited
|
|
New
Jersey
|
|
Subsidiaries
|
|
Adjustments
|
|
Consolidated
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5.1
|
|
$
|
190.4
|
|
$
|
3,872.8
|
|
$
|
-
|
|
$
|
4,068.3
|
|
Accounts
and notes receivable, net
|
|
|
0.1
|
|
|
276.0
|
|
|
1,440.5
|
|
|
-
|
|
|
1,716.6
|
|
Inventories
|
|
|
-
|
|
|
74.5
|
|
|
834.5
|
|
|
-
|
|
|
909.0
|
|
Other
current assets
|
|
|
-
|
|
|
120.7
|
|
|
342.5
|
|
|
-
|
|
|
463.2
|
|
Accounts
and notes receivable affiliates
|
|
|
15.7
|
|
|
6,196.3
|
|
|
26,475.9
|
|
|
(32,687.9
|
)
|
|
-
|
|
Total
current assets
|
|
|
20.9
|
|
|
6,857.9
|
|
|
32,966.2
|
|
|
(32,687.9
|
)
|
|
7,157.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates
|
|
|
10,580.4
|
|
|
9,282.2
|
|
|
40,420.9
|
|
|
(60,283.5
|
)
|
|
-
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
159.4
|
|
|
775.9
|
|
|
-
|
|
|
935.3
|
|
Intangible
assets, net
|
|
|
-
|
|
|
79.9
|
|
|
4,771.3
|
|
|
-
|
|
|
4,851.2
|
|
Other
noncurrent assets
|
|
|
1.3
|
|
|
711.3
|
|
|
395.9
|
|
|
-
|
|
|
1,108.5
|
|
Total
assets
|
|
$
|
10,602.6
|
|
$
|
17,090.7
|
|
$
|
79,330.2
|
|
$
|
(92,971.4
|
)
|
$
|
14,052.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accruals
|
|
$
|
10.8
|
|
$
|
485.3
|
|
$
|
1,252.4
|
|
$
|
-
|
|
$
|
1,748.5
|
|
Short
term borrowings and current maturities of long-term debt
|
|
|
-
|
|
|
554.9
|
|
|
195.1
|
|
|
-
|
|
|
750.0
|
|
Accounts
and note payable affiliates
|
|
|
238.1
|
|
|
6,941.2
|
|
|
25,508.6
|
|
|
(32,687.9
|
)
|
|
-
|
|
Total
current liabilities
|
|
|
248.9
|
|
|
7,981.4
|
|
|
26,956.1
|
|
|
(32,687.9
|
)
|
|
2,498.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
299.1
|
|
|
403.2
|
|
|
10.4
|
|
|
-
|
|
|
712.7
|
|
Note
payable affiliate
|
|
|
1,550.0
|
|
|
2,097.4
|
|
|
-
|
|
|
(3,647.4
|
)
|
|
-
|
|
Other
noncurrent liabilities
|
|
|
186.0
|
|
|
1,925.4
|
|
|
410.9
|
|
|
-
|
|
|
2,522.3
|
|
Total
liabilities
|
|
|
2,284.0
|
|
|
12,407.4
|
|
|
27,377.4
|
|
|
(36,335.3
|
)
|
|
5,733.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common shares
|
|
|
370.3
|
|
|
-
|
|
|
(97.4
|
)
|
|
(0.1
|
)
|
|
272.8
|
|
Class
B common shares
|
|
|
270.6
|
|
|
-
|
|
|
-
|
|
|
(270.6
|
)
|
|
-
|
|
Common
shares
|
|
|
-
|
|
|
-
|
|
|
2,362.8
|
|
|
(2,362.8
|
)
|
|
-
|
|
Other
shareholders' equity
|
|
|
11,149.4
|
|
|
5,389.6
|
|
|
52,687.1
|
|
|
(61,668.2
|
)
|
|
7,557.9
|
|
Accumulated
other comprehensive income (loss)
|
|
|
809.6
|
|
|
(295.2
|
)
|
|
719.9
|
|
|
(746.4
|
)
|
|
487.9
|
|
|
|
|
12,599.9
|
|
|
5,094.4
|
|
|
55,672.4
|
|
|
(65,048.1
|
)
|
|
8,318.6
|
|
Less:
Contra account
|
|
|
(4,281.3
|
)
|
|
(411.1
|
)
|
|
(3,719.6
|
)
|
|
8,412.0
|
|
|
-
|
|
Total
shareholders' equity
|
|
|
8,318.6
|
|
|
4,683.3
|
|
|
51,952.8
|
|
|
(56,636.1
|
)
|
|
8,318.6
|
|
Total
liabilities and equity
|
|
$
|
10,602.6
|
|
$
|
17,090.7
|
|
$
|
79,330.2
|
|
$
|
(92,971.4
|
)
|
$
|
14,052.1
|
|
Condensed
Consolidating Balance Sheet
December
31, 2007
In
millions
|
|
IR Limited
|
|
IR New Jersey
|
|
Other Subsidiaries
|
|
Consolidating Adjustments
|
|
IR Limited
Consolidated
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
0.6
|
|
$
|
545.5
|
|
$
|
4,189.2
|
|
$
|
-
|
|
$
|
4,735.3
|
|
Accounts
and notes receivable, net
|
|
|
0.4
|
|
|
266.4
|
|
|
1,393.9
|
|
|
-
|
|
|
1,660.7
|
|
Inventories
|
|
|
-
|
|
|
78.7
|
|
|
748.5
|
|
|
-
|
|
|
827.2
|
|
Other
current assets
|
|
|
-
|
|
|
137.2
|
|
|
340.3
|
|
|
-
|
|
|
477.5
|
|
Accounts
and notes receivable affiliates
|
|
|
13.5
|
|
|
7,630.2
|
|
|
25,528.6
|
|
|
(33,172.3
|
)
|
|
-
|
|
Total
current assets
|
|
|
14.5
|
|
|
8,658.0
|
|
|
32,200.5
|
|
|
(33,172.3
|
)
|
|
7,700.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates
|
|
|
10,033.7
|
|
|
9,221.1
|
|
|
40,217.2
|
|
|
(59,472.0
|
)
|
|
-
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
152.9
|
|
|
752.0
|
|
|
-
|
|
|
904.9
|
|
Intangible
assets, net
|
|
|
-
|
|
|
79.9
|
|
|
4,638.0
|
|
|
-
|
|
|
4,717.9
|
|
Other
noncurrent assets
|
|
|
1.5
|
|
|
704.6
|
|
|
346.6
|
|
|
-
|
|
|
1,052.7
|
|
Total
assets
|
|
$
|
10,049.7
|
|
$
|
18,816.5
|
|
$
|
78,154.3
|
|
$
|
(92,644.3
|
)
|
$
|
14,376.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accruals
|
|
$
|
6.9
|
|
$
|
529.7
|
|
$
|
1,958.1
|
|
$
|
-
|
|
$
|
2,494.7
|
|
Short
term borrowings and current maturities of long-term debt
|
|
|
-
|
|
|
555.4
|
|
|
185.6
|
|
|
-
|
|
|
741.0
|
|
Accounts
and note payable affiliates
|
|
|
89.1
|
|
|
7,010.2
|
|
|
26,073.0
|
|
|
(33,172.3
|
)
|
|
-
|
|
Total
current liabilities
|
|
|
96.0
|
|
|
8,095.3
|
|
|
28,216.7
|
|
|
(33,172.3
|
)
|
|
3,235.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
299.1
|
|
|
403.2
|
|
|
10.4
|
|
|
-
|
|
|
712.7
|
|
Note
payable affiliate
|
|
|
1,550.0
|
|
|
2,097.4
|
|
|
-
|
|
|
(3,647.4
|
)
|
|
-
|
|
Other
noncurrent liabilities
|
|
|
196.7
|
|
|
1,917.0
|
|
|
406.2
|
|
|
-
|
|
|
2,519.9
|
|
Total
liabilities
|
|
|
2,141.8
|
|
|
12,512.9
|
|
|
28,633.3
|
|
|
(36,819.7
|
)
|
|
6,468.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common shares
|
|
|
370.0
|
|
|
-
|
|
|
(97.4
|
)
|
|
-
|
|
|
272.6
|
|
Class
B common shares
|
|
|
270.6
|
|
|
-
|
|
|
-
|
|
|
(270.6
|
)
|
|
-
|
|
Common
shares
|
|
|
-
|
|
|
-
|
|
|
2,362.8
|
|
|
(2,362.8
|
)
|
|
-
|
|
Other
shareholders' equity
|
|
|
11,046.3
|
|
|
7,039.7
|
|
|
50,533.8
|
|
|
(61,231.0
|
)
|
|
7,388.8
|
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
|
) |
|
503.5
|
|
|
|
)
|
|
246.5 |
|
|
|
|
12,255.4
|
|
|
6,718.8
|
|
|
53,302.7
|
|
|
(64,369.0
|
)
|
|
7,907.9
|
|
Less:
Contra account
|
|
|
(4,347.5
|
)
|
|
(415.2
|
)
|
|
(3,781.7
|
)
|
|
8,544.4
|
|
|
-
|
|
Total
shareholders' equity
|
|
|
7,907.9
|
|
|
6,303.6
|
|
|
49,521.0
|
|
|
(55,824.6
|
)
|
|
7,907.9
|
|
Total
liabilities and equity
|
|
$
|
10,049.7
|
|
$
|
18,816.5
|
|
$
|
78,154.3
|
|
$
|
(92,644.3
|
)
|
$
|
14,376.2
|
|
For
the
three months ended March 31, 2008
In
millions
|
|
IR Limited
|
|
IR New
Jersey
|
|
Other Subsidiaries
|
|
IR
Limited Consolidated
|
|
Net
cash provided by (used in) continuing operating activities
|
|
$
|
(20.8
|
)
|
$
|
(298.5
|
)
|
$
|
(355.4
|
)
|
$
|
(674.7
|
)
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
-
|
|
|
4.5
|
|
|
(15.5
|
)
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
(14.6
|
)
|
|
(22.8
|
)
|
|
(37.4
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
-
|
|
|
-
|
|
|
2.1
|
|
|
2.1
|
|
Acquisitions,
net of cash
|
|
|
-
|
|
|
-
|
|
|
(30.3
|
)
|
|
(30.3
|
)
|
Proceeds
from business disposition, net of cash
|
|
|
-
|
|
|
-
|
|
|
8.5
|
|
|
8.5
|
|
Other,
net
|
|
|
-
|
|
|
5.4
|
|
|
|
)
|
|
5.1
|
|
Net
cash provided by (used in) continuing investing activities
|
|
|
-
|
|
|
(9.2
|
)
|
|
(42.8
|
)
|
|
(52.0
|
)
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in debt
|
|
|
-
|
|
|
(0.5
|
)
|
|
6.9
|
|
|
6.4
|
|
Net
inter-company proceeds (payments)
|
|
|
136.4
|
|
|
(81.3
|
)
|
|
(55.1
|
)
|
|
-
|
|
Dividends
(paid) received
|
|
|
(115.3
|
)
|
|
4.1
|
|
|
62.1
|
|
|
(49.1
|
)
|
Proceeds
from the exercise of stock options
|
|
|
4.2
|
|
|
-
|
|
|
-
|
|
|
4.2
|
|
Repurchase
of common shares by subsidiary
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
-
|
|
|
25.8
|
|
|
-
|
|
|
25.8
|
|
Net
cash provided by (used in) continuing financing activities
|
|
|
25.3
|
|
|
(51.9
|
)
|
|
13.9
|
|
|
(12.7
|
)
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
-
|
|
|
83.4
|
|
|
83.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4.5
|
|
|
(355.1
|
)
|
|
(316.4
|
)
|
|
(667.0
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
0.6
|
|
|
545.5
|
|
|
4,189.2
|
|
|
4,735.3
|
|
Cash
and cash equivalents - end of period
|
|
$
|
5.1
|
|
$
|
190.4
|
|
$
|
3,872.8
|
|
$
|
4,068.3
|
|
For
the
three months ended March 31, 2007
In
millions
|
|
IR Limited
|
|
IR New
Jersey
|
|
Other Subsidiaries
|
|
IR
Limited Consolidated
|
|
Net
cash provided by (used in) continuing operating activities
|
|
$
|
(15.2
|
)
|
$
|
(64.6
|
)
|
$
|
159.3
|
|
$
|
79.5
|
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
-
|
|
|
(24.1
|
)
|
|
(9.7
|
)
|
|
(33.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
(9.1
|
)
|
|
(20.4
|
)
|
|
(29.5
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
-
|
|
|
-
|
|
|
1.9
|
|
|
1.9
|
|
Acquisitions,
net of cash
|
|
|
-
|
|
|
(0.6
|
)
|
|
(3.0
|
)
|
|
(3.6
|
)
|
Proceeds
from business disposition, net of cash
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) continuing investing activities
|
|
|
-
|
|
|
(9.7
|
)
|
|
(21.5
|
)
|
|
(31.2
|
)
|
Net
cash provided by (used in) discontinued investing
activities
|
|
|
-
|
|
|
(3.6
|
)
|
|
(22.5
|
)
|
|
(26.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in debt
|
|
|
108.5
|
|
|
(1.0
|
)
|
|
(5.3
|
)
|
|
102.2
|
|
Net
inter-company proceeds (payments)
|
|
|
(25.3
|
)
|
|
51.4
|
|
|
(26.1
|
)
|
|
-
|
|
Dividends
(paid) received
|
|
|
(114.4
|
)
|
|
4.1
|
|
|
55.0
|
|
|
(55.3
|
)
|
Proceeds
from the exercise of stock options
|
|
|
44.7
|
|
|
-
|
|
|
-
|
|
|
44.7
|
|
Repurchase
of common shares by subsidiary
|
|
|
-
|
|
|
-
|
|
|
(133.6
|
)
|
|
(133.6
|
)
|
Net
cash provided by (used in) continuing financing activities
|
|
|
13.5
|
|
|
54.5
|
|
|
(110.0
|
)
|
|
(42.0
|
)
|
Net
cash provided by (used in) discontinued financing
activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
-
|
|
|
2.4
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1.7
|
)
|
|
(47.5
|
)
|
|
(2.0
|
)
|
|
(51.2
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
1.7
|
|
|
81.6
|
|
|
272.5
|
|
|
355.8
|
|
Cash
and cash equivalents - end of period
|
|
$
|
-
|
|
$
|
34.1
|
|
$
|
270.5
|
|
$
|
304.6
|
|
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, 2007. 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 (IR Limited), a Bermuda company, and its consolidated
subsidiaries (we, our or the Company) is a leading innovation and solutions
provider with strong brands and leading positions within our markets. Our
business segments consist of Climate Control Technologies, Industrial
Technologies and Security Technologies. We generate revenue and cash primarily
through the design, manufacture, sale and service of a diverse portfolio of
industrial and commercial products that include well-recognized, premium brand
names such as 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 strategic 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 transformed our enterprise 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, products and services of our high-potential businesses.
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, our geographic and industry diversity, as well as the diversity of
our
product sales and services, has helped limit the impact of any one industry,
or
the economy of any single country, on the consolidated operating results. Given
the broad range of products manufactured and geographic markets served,
management uses a variety of factors to predict the outlook for the Company.
We
monitor key competitors and customers in order to gauge relative performance
and
the outlook for the future. 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 from continuing operations for the first quarter of 2008 increased
approximately 9.5% compared with the same period of 2007. Strong international
markets, increased recurring revenue, a favorable currency impact, pricing
improvements and higher volumes drove this growth. Our major non-U.S. end
markets experienced significant growth. This growth helped to drive revenue
increases in all three of our operating segments. We have also been able to
increase prices and add surcharges to help mitigate the impact of cost inflation
during the year. We have generated positive cash flows from operating activities
during the first quarter of 2008 and expect to continue to produce positive
operating cash flows for the foreseeable future. For the rest of 2008, we expect
to see slower growth in North America and Western Europe offset by the activity
levels in the developing economies of Eastern Europe, Asia and Latin America.
Recent
Developments –
Acquisitions and Divestitures
On
December 17, 2007, we announced that we had executed a definitive agreement
to
acquire Trane Inc., formerly American Standard Companies Inc., in a transaction
currently valued at approximately $9.5 billion. This transaction, which is
expected to close during the second quarter of 2008, is subject to approval
by
Trane shareholders, regulatory approval and contractual closing conditions.
There can be no assurance that the acquisition will be consummated.
Trane
is
a global leader in indoor climate control systems, services and solutions and
provides systems and services that enhance the quality and comfort of the air
in
homes and buildings around the world. They offer customers a broad range of
energy-efficient heating, ventilation and air conditioning systems;
dehumidifying and air cleaning products; service and parts support; advanced
building controls; and financing solutions. Their systems and services have
leading positions in commercial, residential, institutional and industrial
markets; a reputation for reliability, high quality and product innovation;
and
a powerful distribution network. Trane has more than 29,000 employees and 34
production facilities worldwide, with 2007 annual revenues of $7.45 billion.
On
November 30, 2007, we completed the sale of our Bobcat, Utility Equipment and
Attachments business units (collectively, Compact Equipment) to Doosan Infracore
for cash proceeds of approximately $4.9 billion, subject to post-closing
purchase price adjustments. We recorded a gain on sale of $2,627.2 million
(net
of tax of $959.7 million). Compact Equipment manufactures and sells compact
equipment including skid-steer loaders, compact track loaders, mini-excavators
and telescopic tool handlers; portable air compressors, generators, light
towers; general-purpose light construction equipment; and attachments.
On
April
30, 2007, we completed the sale of our 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, subject to post-closing purchase
price adjustments. We recorded a gain on sale of $634.7 million (net of tax
of
$164.4 million). The Road Development business unit manufactures and sells
asphalt paving equipment, compaction equipment, milling machines and
construction-related material handling equipment.
Results
of Operations
|
|
For the three months ended March 31,
|
|
In
millions, except per share amounts
|
|
2008
|
|
% of revenues
|
|
2007
|
|
% of revenues
|
|
Net
revenues
|
|
$
|
2,163.3
|
|
|
|
|
$
|
1,976.2
|
|
|
|
|
Cost
of goods sold
|
|
|
(1,540.9
|
)
|
|
71.2
|
%
|
|
(1,416.0
|
)
|
|
71.6
|
%
|
Selling
and administrative expenses
|
|
|
(375.4
|
)
|
|
17.4
|
%
|
|
(351.6
|
)
|
|
17.8
|
%
|
Operating
income
|
|
|
247.0
|
|
|
11.4
|
%
|
|
208.6
|
|
|
10.6
|
%
|
Interest
expense
|
|
|
(27.5
|
)
|
|
|
|
|
(35.6
|
)
|
|
|
|
Other,
net
|
|
|
39.4
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
Earnings
before income taxes
|
|
|
258.9
|
|
|
|
|
|
172.9
|
|
|
|
|
Provision
for income taxes
|
|
|
(47.2
|
)
|
|
|
|
|
(16.3
|
)
|
|
|
|
Earnings
from continuing operations
|
|
|
211.7
|
|
|
|
|
|
156.6
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(30.1
|
)
|
|
|
|
|
60.9
|
|
|
|
|
Net
earnings
|
|
$
|
181.6
|
|
|
|
|
$
|
217.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.77
|
|
|
|
|
$
|
0.50
|
|
|
|
|
Discontinued
operations
|
|
|
(0.11
|
)
|
|
|
|
|
0.20
|
|
|
|
|
Net
earnings
|
|
$
|
0.66
|
|
|
|
|
$
|
0.70
|
|
|
|
|
Net
Revenues
Net
revenues for the first quarter of 2008 increased by 9.5%, or $187.1 million,
compared with 2006, which primarily resulted from the following:
Volume/product
mix
|
|
|
1.5
|
%
|
Pricing
|
|
|
2.5
|
%
|
Currency
exchange rates
|
|
|
4.5
|
%
|
Acquisitions
|
|
|
1.0
|
%
|
Total
|
|
|
9.5
|
%
|
Revenues
increased in all three operating segments mainly driven by non-U.S. operations.
Additionally, we continue to make progress in increasing recurring revenues,
which improved by 13% over the first quarter of 2007 and accounted for 19%
of
net revenues for that period.
Cost
of Goods Sold
Cost
of
goods sold as a percentage of revenue decreased slightly in the first quarter
of
2008 compared with the same period of 2007. Increased leverage on higher
revenues and price increases provided a benefit which was partially offset
by
unfavorable mix and higher material costs.
Selling
and Administrative Expenses
Selling
and administrative expenses as a percentage of revenue decreased slightly in
the
first quarter of 2008 compared with the same period of 2007. Increased leverage
on higher revenues and expense reduction was partially offset by investments
in
new product development of approximately $7.9 million and increased regulatory
and compliance costs of $3.3 million.
Operating
Income
Operating
income for the first quarter of 2008 increased by 18.4% or $38.4 million,
compared with the same period of 2007, mainly due to leverage on revenue growth,
expense reduction, productivity actions and improved pricing. These increases
were partially offset by unfavorable business and product mix and higher
commodity costs.
Interest
Expense
Interest
expense for the first quarter of 2008 decreased $8.1 million compared with
the
same period of 2007 due to lower year-over-year debt levels. In addition, during
the first quarter of 2007, we increased our short-term borrowings under our
commercial paper program by $104.1 million.
Other,
Net
The
components of Other, net for the three months ended March 31 are as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
45.6
|
|
$
|
2.9
|
|
Exchange
gain (loss)
|
|
|
(1.6
|
)
|
|
0.1
|
|
Minority
interests
|
|
|
(3.8
|
)
|
|
(3.2
|
)
|
Earnings
from equity investments
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
(0.8
|
)
|
|
0.1
|
|
Other,
net
|
|
$
|
39.4
|
|
$
|
(0.1
|
)
|
The
year-over-year increase is primarily associated with higher interest income
as a
result of larger average cash balances at March 31, 2008. The large balance
is
attributable to the sale of both Compact Equipment and the Road Development
business unit during 2007, which generated proceeds of $6,154.3
million.
Provision
for Income Taxes
Our
first
quarter 2008 effective tax rate was 18.2%, compared with 9.4% in the first
quarter of 2007, reflecting a 2008 expected annual rate of 22.2%, offset by
certain discrete benefits of $10.2 million. The increase in 2008 expected annual
tax rate versus last years expected annual rate as of March 31, 2007 is
primarily attributable to an increase in income earned in higher tax rate
jurisdictions as a result of changes in the Company’s inter-company debt
structure.
Review
of Business Segments
We
classify our businesses into three reportable segments based on industry and
market focus: Climate Control Technologies, Industrial Technologies and Security
Technologies. The segment discussions that follow describe the significant
factors contributing to the changes in results for each segment included in
continuing operations.
Climate
Control Technologies
Climate
Control Technologies provides solutions for customers to transport, preserve,
store and display temperature-sensitive products by engaging in the design,
manufacture, sale and service of transport temperature control units,
refrigerated display merchandisers, beverage coolers, auxiliary power units
and
walk-in storage coolers and freezers. This segment includes the Thermo King,
Hussmann and Koxka brands.
|
|
Three months ended March 31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
% change
|
|
Net
revenues
|
|
$
|
798.4
|
|
$
|
728.9
|
|
|
9.5
|
%
|
Operating
income
|
|
|
80.1
|
|
|
69.4
|
|
|
15.4
|
%
|
Operating
margin
|
|
|
10.0
|
%
|
|
9.5
|
%
|
|
|
|
Net
revenues for the first quarter of 2008 increased by 9.5% or $69.5 million,
compared with the same period of 2007, primarily resulting from a favorable
currency impact (6%) higher volumes (2%), and improved pricing. Operating income
increased during the first quarter of 2008, primarily due to increased
productivity ($13 million), improved pricing ($10 million) and a favorable
currency impact ($5 million). These improvements were offset by investments
in
new product development and productivity improvements ($11 million) and higher
material costs ($7 million).
Net
revenues grew in the European and Asian regions during the first quarter of
2008, benefiting from strong truck and trailer sales in addition to a worldwide
increase in sea-going container, bus and aftermarket revenues. These gains
were
partially offset by sharply lower activity levels in the North American truck
and trailer markets. Revenues for display cases and contracting increased
slightly worldwide. In addition, sales of the TriPac® auxiliary unit increase
during the quarter due to the rising cost of diesel fuel.
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, golf
and
utility vehicles and energy generation systems. This segment includes the
Ingersoll Rand and Club Car brands.
|
|
Three months ended March 31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
% change
|
|
Net
revenues
|
|
$
|
743.4
|
|
$
|
667.7
|
|
|
11.3
|
%
|
Operating
income
|
|
|
97.6
|
|
|
91.6
|
|
|
6.6
|
%
|
Operating
margin
|
|
|
13.1
|
%
|
|
13.7
|
%
|
|
|
|
Net
revenues for the first quarter of 2008 increased by 11.3%, or $75.7 million,
compared with the same period of 2007, mainly resulting from a favorable
currency impact (4%), higher volumes and product mix (3%), acquisitions (2%)
and
improved pricing (2%). Operating income increased during the first quarter
of
2008 primarily due to increased productivity ($15 million), improved pricing
($14 million) and a favorable currency exchange ($6 million). These improvements
were partially offset by higher material costs ($16 million) and investments
in
new product and market development ($4 million).
The
increase in segment revenue was driven by the worldwide increase in the Air
and
Productivity Solutions business. Strong results in Europe, Asia and India in
addition to moderate growth in North America increased revenue year-over-year.
International gains were primarily due to the industrial markets while strong
recurring revenues helped North America. The aftermarket business also
contributed to the first quarter increase. Club Car revenues declined slightly
compared with the first quarter of 2007, mainly due to the ongoing decline
in
the North American golf market. The decline was offset by higher sales of
utility vehicles and increased parts and rental revenue.
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. This segment includes the Schlage, LCN,
Von Duprin and CISA brands.
|
|
Three months ended March 31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
% change
|
|
Net
revenues
|
|
$
|
621.5
|
|
$
|
579.6
|
|
|
7.2
|
%
|
Operating
income
|
|
|
105.0
|
|
|
90.7
|
|
|
15.8
|
%
|
Operating
margin
|
|
|
16.9
|
%
|
|
15.6
|
%
|
|
|
|
Net
revenues for the first quarter of 2008 increased by 7.2%, or $41.9 million,
compared with the same period of 2007, mainly resulting from improved pricing
(4%) and a favorable currency impact (3%). Operating income increased during
the
first quarter of 2008, primarily due to improved pricing ($24 million) and
productivity gains ($17 million), partially offset by unfavorable product mix
($13 million).
Net
revenues grew in all regions during the quarter benefiting from strong
international growth in addition to moderate growth in the commercial
construction market. Residential revenues decreased modestly reflecting a
decline in same store sales at large customers as well as ongoing weakness
in
the new homebuilder channel in North America.
Discontinued
Operations
The
components of discontinued operations for the three months ended March 31 are
as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
9.6
|
|
$
|
859.6
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings (loss) from operations
|
|
|
(11.2
|
)
|
|
81.9
|
|
Pre-tax
gain (loss) on sale
|
|
|
(4.1
|
)
|
|
0.1
|
|
Tax
expense
|
|
|
(14.8
|
)
|
|
(21.1
|
)
|
Discontinued
operations, net
|
|
$
|
(30.1
|
)
|
$
|
60.9
|
|
Discontinued
operations by business for the three months ended March 31 are as
follows:
In
millions
|
|
2008
|
|
2007
|
|
Compact
Equipment, net of tax
|
|
$
|
(24.4
|
)
|
$
|
60.5
|
|
Road
Development, net of tax
|
|
|
-
|
|
|
15.9
|
|
Other
discontinued operations, net of tax
|
|
|
(5.7
|
)
|
|
(15.5
|
)
|
Total
discontinued operations, net of tax
|
|
$
|
(30.1
|
)
|
$
|
60.9
|
|
Compact
Equipment Divestiture
On
July
29, 2007, we agreed to sell our Bobcat, Utility Equipment and Attachments
business units (collectively, Compact Equipment) to Doosan Infracore for gross
proceeds of approximately $4.9 billion. The sale was completed on November
30,
2007. The purchase price is subject to post-closing adjustments which could
result in a favorable or unfavorable adjustment to the gain on sale when
ultimately resolved.
Compact
Equipment 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. We have accounted for Compact Equipment
as discontinued operations for all periods presented in accordance with
Statement of Financial Accounting Standard No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (SFAS 144).
Net
revenues and after-tax earnings of Compact Equipment for the three months ended
March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
$
|
9.6
|
|
$
|
692.5
|
|
|
|
|
|
|
|
|
|
After-tax
earnings from operations
|
|
|
0.4
|
|
|
60.5
|
|
Loss
on sale, net of tax of $20.7
|
|
|
(24.8
|
)
|
|
-
|
|
Total
discontinued operations, net of tax
|
|
$
|
(24.4
|
)
|
$
|
60.5
|
|
Road
Development Divestiture
On
February 27, 2007, we agreed to sell our 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 purchase price is subject to post-closing adjustments which
could result in a favorable or unfavorable adjustment to the gain on sale when
ultimately resolved.
The
Road
Development business unit manufactures and sells asphalt paving equipment,
compaction equipment, milling machines and construction-related material
handling equipment. We have accounted for the Road Development business unit
as
discontinued operations for all periods presented in accordance with SFAS 144.
Net
revenues and after-tax earnings of the Road Development business unit for the
three months ended March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Net
revenues
|
|
$
|
-
|
|
$
|
167.1
|
|
|
|
|
|
|
|
|
|
After-tax
earnings from operations
|
|
|
-
|
|
|
15.9
|
|
Total
discontinued operations, net of tax
|
|
$
|
-
|
|
$
|
15.9
|
|
Other
Discontinued Operations
We
also
have retained costs from previously sold businesses that mainly include costs
related to postretirement benefits, product liability and legal costs (mostly
asbestos-related). The components of other discontinued operations for the
three
months ended March 31 are as follows:
In
millions
|
|
2008
|
|
2007
|
|
Retained
costs, net of tax
|
|
$
|
(5.7
|
)
|
$
|
(15.6
|
)
|
Net
gain on disposals, net of tax
|
|
|
-
|
|
|
0.1
|
|
Total
discontinued operations, net of tax
|
|
$
|
(5.7
|
)
|
$
|
(15.5
|
)
|
Retained
costs, net of tax for the three months ended March 31, 2008 includes $6.5
million of after-tax costs related to an adverse verdict in a product liability
lawsuit associated with a previously divested business.
Liquidity
and Capital Resources
We
generate 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
The
following table reflects the major categories of cash flows for the three months
ended March 31, respectively. For additional details, see the Condensed
Consolidated Statement of Cash Flows in the condensed consolidated financial
statements.
In
millions
|
|
2008
|
|
2007
|
|
Operating
cash flow provided by (used in) continuing operations
|
|
$
|
(674.7
|
)
|
$
|
79.5
|
|
Investing
cash flow provided by (used in) continuing operations
|
|
|
(52.0
|
)
|
|
(31.2
|
)
|
Financing
cash flow provided by (used in) continuing operations
|
|
|
(12.7
|
)
|
|
(42.0
|
)
|
Operating
Activities
Net
cash
used by continuing operating activities during the three months ended March
31,
2008 was $674.7 million, compared with net cash provided by operating activities
of $79.5 million during the comparable period in 2007. The change in operating
cash flows is predominantly related to a tax payment of approximately $700
million paid to various taxing authorities primarily associated with the Compact
Equipment divestiture during the fourth quarter of 2007.
Investing
Activities
Net
cash
used by investing activities during the three months ended March 31, 2008 was
$52.0 million, compared with $31.2 million during the comparable period of
2007.
The change in investing activities is primarily attributable to cash used for
acquisitions. During the three months ended March 31, 2008, cash used for two
bolt-on acquisitions was $30.3 million compared with $3.6 million during the
first three months of 2007.
Financing
Activities
Net
cash
used in financing activities during the three months ended March 31, 2008 was
$12.7 million, compared with $42.0 million during the comparable period in
2007.
During the three months ended March 31, 2008, we did not repurchase any Class
A
common shares compared to the repurchase of 133.6 million Class A common shares
repurchased during the three months ended March 31, 2007. In addition,
short-term borrowings during the three months ended March 31, 2008 were minimal
compared with the same period in 2007.
Other
Liquidity Measures
The
following table contains several key measures to gauge the Company’s financial
condition and liquidity at the period ended:
|
|
March 31,
|
|
December 31,
|
|
In
millions
|
|
2008
|
|
2007
|
|
Cash
and cash equivalents
|
|
$
|
4,068.3
|
|
$
|
4,735.3
|
|
Total
debt
|
|
|
1,462.7
|
|
|
1,453.7
|
|
Total
shareholders' equity
|
|
|
8,318.6
|
|
|
7,907.9
|
|
Debt-to-total
capital ratio
|
|
|
14.8
|
%
|
|
15.4
|
%
|
The
large
cash and cash equivalents balances at March 31, 2008 and December 31, 2007
are
attributable to the sale of both Compact Equipment and the Road Development
business unit during 2007, which generated proceeds of $6,154.3 million. We
expect to utilize a significant portion of the cash and cash equivalents on
hand
to fund the acquisition of Trane in the second quarter of 2008, as explained
further below.
We
traditionally maintain significant availability under our lines of credit and
commercial paper program to meet short-term liquidity requirements. We have
$2.0
billion available under these facilities. Debt levels and our debt-to-total
capital ratio at March 31, 2008 remained consistent with December 31, 2007.
In
connection with the proposed Trane acquisition, each share of Trane’s common
stock (which approximated 195 million at December 31, 2007) will be exchanged
for a combination of (i) 0.23 of an Ingersoll Rand Class A common share and
(ii)
$36.50 in cash, without interest. We intend to use a combination of cash on
hand
and debt financing in order to pay for the cash portion of the consideration.
We
have secured commitments from JPMorgan Chase Bank, N.A., J.P. Morgan Securities
Inc., Credit Suisse, Cayman Islands Branch, Credit Suisse Securities (USA)
LLC,
Goldman Sachs Bank USA and Goldman Sachs Credit Partners L.P. to provide up
to
$3.9 billion in financing through a 364-day senior unsecured bridge facility.
If
unused, the debt commitments will expire on September 30, 2008.
In
2007,
there was significant volatility in the capital markets, which led to an overall
tightening of the credit markets. During 2008, we intend to refinance the bridge
financing primarily with a combination of short-term and long-term debt.
Financing terms will be determined by market conditions at the time of issuance.
As such, we cannot assess the impact of the financing on our future financial
results.
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, 2007.
Commitments
and Contingencies
We
are
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.
Environmental
Matters
We
continue to be dedicated to an environmental program to reduce the utilization
and generation of hazardous materials during the manufacturing process and
to
remediate identified environmental concerns. As to the latter, we are currently
engaged in site investigations and remediation activities to address
environmental cleanup from past operations at current and former manufacturing
facilities.
We
are
sometimes a party to environmental lawsuits and claims and have received notices
of potential violations of environmental laws and regulations from the
Environmental Protection Agency and similar state authorities. We have also
been
identified as a potentially responsible party (PRP) for cleanup costs associated
with off-site waste disposal at federal Superfund and state remediation sites.
For all such sites, there are other PRPs and, in most instances, our involvement
is minimal.
In
estimating our liability, we have assumed we will not bear the entire cost
of
remediation of any site to the exclusion of other PRPs who may be jointly and
severally liable. The ability of other PRPs to participate has been taken into
account, based generally on the parties’ financial condition and probable
contributions on a per site basis. Additional lawsuits and claims involving
environmental matters are likely to arise from time to time in the future.
During
the first quarter of 2008, we spent $2.9 million for environmental remediation
expenditures at sites presently or formerly owned or leased by us. As of March
31, 2008 and December 31, 2007, we have recorded reserves for environmental
matters of $101.6 million and $101.8 million. We believe that these expenditures
and accrual levels will continue and may increase over time. Given the evolving
nature of environmental laws, regulations and technology, the ultimate cost
of
future compliance is uncertain.
Asbestos
Matters
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, primarily pumps and
compressors. 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 and packings purchased from
third-party suppliers.
Prior
to
the fourth quarter of 2007, the Company recorded a liability (which it
periodically updated) for its actual and anticipated future asbestos settlement
costs projected seven years into the future. The Company did not record a
liability for future asbestos settlement costs beyond the seven-year period
covered by its reserve because such costs previously were not reasonably
estimable for the reasons detailed below.
In
the
fourth quarter of 2007, the Company again reviewed its history and experience
with asbestos-related litigation and determined that it had now become possible
to make a reasonable estimate of its total liability for pending and unasserted
potential future asbestos-related claims. This determination was based upon
the
Company’s analysis of developments in asbestos litigation, including the
substantial and continuing decline in the filing of non-malignancy claims
against the Company, the establishment in many jurisdictions of inactive or
deferral dockets for such claims, the decreased value of non-malignancy
claims because of changes in the legal and judicial treatment of such claims,
increasing focus of the asbestos litigation upon malignancy claims, primarily
those involving mesothelioma, a cancer with a known historical and predictable
future annual incidence rate, and the Company’s substantial accumulated
experience with respect to the resolution of malignancy claims, particularly
mesothelioma claims, filed against it.
Accordingly,
in the fourth quarter of 2007, the Company retained Dr. Thomas Vasquez of
Analysis, Research & Planning Corporation (collectively, “ARPC”) to assist
it in calculating an estimate of the Company’s total liability for pending and
unasserted future asbestos-related claims. ARPC is a respected expert in
performing complex calculations such as this. ARPC has been involved in many
asbestos-related valuations of current and future liabilities, and its valuation
methodologies have been accepted by numerous courts.
The
methodology used by ARPC to project the Company’s total liability for pending
and unasserted potential future asbestos-related claims relied upon and included
the following factors, among others:
|
·
|
ARPC’s
interpretation of a widely accepted forecast of the population likely
to
have been occupationally exposed to
asbestos;
|
|
·
|
epidemiological
studies estimating the number of people likely to develop asbestos-related
diseases such as mesothelioma and lung
cancer;
|
|
·
|
the
Company’s historical experience with the filing of non-malignancy claims
against it and the historical ratio between the numbers of non-malignancy
and lung cancer claims filed against the
Company;
|
|
·
|
ARPC’s
analysis of the number of people likely to file an asbestos-related
personal injury claim against the Company based on such epidemiological
and historical data and the Company’s most recent three-year claims
history;
|
|
·
|
an
analysis of the Company’s pending cases, by type of disease
claimed;
|
|
·
|
an
analysis of the Company’s most recent three-year history to determine the
average settlement and resolution value of claims, by type of disease
claimed;
|
|
·
|
an
adjustment for inflation in the future average settlement value of
claims,
at a 2.5% annual inflation rate, adjusted downward to 1.5% to take
account
of the declining value of claims resulting from the aging of the
claimant
population;
|
|
·
|
an
analysis of the period over which the Company has and is likely to
resolve
asbestos-related claims against it in the
future.
|
Based
on
these factors, ARPC calculated a total estimated liability of $755 million
for the Company to resolve all pending and unasserted potential future claims
through 2053, which is ARPC’s reasonable best estimate of the time it will take
to resolve asbestos-related claims. This amount is on a pre-tax basis, not
discounted for the time-value of money, and excludes the Company’s defense fees
(which will continue to be expensed by the Company as they are incurred). After
considering ARPC’s analysis and the factors listed above, in the fourth quarter
of 2007, the Company increased its recorded liability for asbestos claims by
$538 million, from $217 million to $755 million.
In
addition, during the fourth quarter of 2007, the Company recorded an
$89 million increase in its assets for probable asbestos-related insurance
recoveries to $250 million. This represents amounts due to the Company for
previously paid and settled claims and the probable reimbursements relating
to
its estimated liability for pending and future claims. In calculating this
amount, the Company used the estimated asbestos liability for pending and
projected future claims calculated by ARPC. It also considered the amount of
insurance available, gaps in coverage, allocation methodologies, solvency
ratings and creditworthiness of the insurers, the amounts already recovered
from
and the potential for settlements with insurers, and the terms of existing
settlement agreements with insurers.
During
the fourth quarter of 2007, the Company recorded a non-cash charge to earnings
of discontinued operations of $449 million ($277 million after tax),
which is the difference between the amount by which the Company increased its
total estimated liability for pending and projected future asbestos-related
claims and the amount that the Company expects to recover from insurers with
respect to that increased liability.
The
amounts recorded by the Company for asbestos-related liabilities and
insurance-related assets are based on currently available information. The
Company’s actual liabilities or insurance recoveries could be significantly
higher or lower than those recorded if assumptions used in the Company’s or
ARPC’s calculations vary significantly from actual results. Key variables in
these assumptions are identified above and include the number and type of new
claims to be filed each year, the average cost of resolution of each such new
claim, the resolution of coverage issues with insurance carriers, and the
solvency risk with respect to the Company’s insurance carriers. Furthermore,
predictions with respect to these variables are subject to greater uncertainty
as the projection period lengthens. Other factors that may affect the Company’s
liability include uncertainties surrounding the litigation process from
jurisdiction to jurisdiction and from case to case, reforms that may be made
by
state and federal courts, and the passage of state or federal tort reform
legislation.
The
aggregate amount of the stated limits in insurance policies available to the
Company for asbestos-related claims, acquired over many years and from many
different carriers, is substantial. However, limitations in that coverage,
primarily due to the considerations described above, are expected to result
in
the projected total liability to claimants substantially exceeding the probable
insurance recovery.
From
receipt of its first asbestos claims more than 25 years ago to December 31,
2007, the Company has resolved (by settlement or by dismissal) approximately
208,000 claims. The total amount of all settlements paid by the Company
(excluding insurance recoveries) and by its insurance carriers is approximately
$308 million, for an average payment per resolved claim of $1,480. The
average payment per claim resolved during the year ended December 31, 2007
was
$7,491. This amount reflects the Company’s emphasis on resolution of higher
value malignancy claims, particularly mesothelioma claims, rather than lower
value non-malignancy claims, which are more heavily represented in the Company’s
historical settlements. The table below provides additional information
regarding asbestos-related claims filed against the Company:
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Open
claims - January 1
|
|
|
77,675
|
|
|
96,294
|
|
|
104,513
|
|
|
105,811
|
|
|
102,968
|
|
|
101,709
|
|
New
claims filed
|
|
|
37,172
|
|
|
30,843
|
|
|
13,541
|
|
|
11,132
|
|
|
6,457
|
|
|
5,398
|
|
Claims
settled
|
|
|
(16,443
|
)
|
|
(21,096
|
)
|
|
(11,503
|
)
|
|
(12,505
|
)
|
|
(6,558
|
)
|
|
(5,005
|
)
|
Claims
dismissed
|
|
|
(2,110
|
)
|
|
(1,528
|
)
|
|
(740
|
)
|
|
(1,470
|
)
|
|
(1,158
|
)
|
|
(1,479
|
)
|
Open
claims - December 31
|
|
|
96,294
|
|
|
104,513
|
|
|
105,811
|
|
|
102,968
|
|
|
101,709
|
|
|
100,623
|
|
Over
90
percent of the open claims against the Company are non-malignancy claims, many
of which have been placed on inactive or deferral dockets and the vast majority
of which have little or no settlement value against the Company, particularly
in
light of recent changes in the legal and judicial treatment of such claims.
Malignancy
claims accounted for: approximately 73 percent of the Company’s total
asbestos-related settlement payments during the three-year period ended December
31, 2004; approximately 87 percent during the three-year period ended December
31, 2007; and approximately 93 percent in 2007. Non-malignancy claims accounted
for: approximately 27 percent of the Company’s total asbestos-related settlement
payments during the three-year period ended December 31, 2004;
approximately 13 percent during the three-year period ended December 31,
2007; and approximately seven percent in 2007.
For
the
three-months ended March 31, 2008, we recorded a net benefit of $7.5 million
associated with the settlement and defense of asbestos claims after insurance
recoveries, compared with a total cost of $12.0 million during the three months
ended March 31, 2007. At March 31, 2008, our liability for asbestos related
matters and the asset for probable asbestos-related insurance recoveries totaled
$744.4 million and $256.6 million, respectively, compared to $754.9 million
and
$249.8 million at December 31, 2007.
We
record
income and expenses associated with our asbestos liabilities and corresponding
insurance recoveries within discontinued operations, as they relate to
previously divested businesses, primarily Ingersoll-Dresser Pump, which was
sold
in 2000.
Other
We
sell
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, we are contingently liable for loan
guarantees and residual values of equipment of approximately $3.5 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
following table represents the changes in the product warranty liability for
the
three months ended March 31:
In
millions
|
|
2008
|
|
2007
|
|
Balance
at beginning of period
|
|
$
|
146.9
|
|
$
|
137.1
|
|
Reductions
for payments
|
|
|
(17.9
|
)
|
|
(20.2
|
)
|
Accruals
for warranties issued during the current period
|
|
|
16.3
|
|
|
24.0
|
|
Changes
to accruals related to preexisting warranties
|
|
|
(0.6
|
)
|
|
(0.3
|
)
|
Acquisitions
|
|
|
-
|
|
|
0.1
|
|
Translation
|
|
|
3.5
|
|
|
1.0
|
|
Balance
at end of period
|
|
$
|
148.2
|
|
$
|
141.7
|
|
We
have
other contingent liabilities for $8.7 million. These liabilities primarily
result from performance bonds, guarantees and stand-by letters of credit
associated with the prior sale of products by divested businesses.
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 of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues 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
March 31, 2008, 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, 2007.
Recently
Adopted Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158 requires an entity
to recognize in its balance sheet the funded status of its defined benefit
pension and postretirement plans. The standard also requires an entity to
recognize changes in the funded status within Accumulated other comprehensive
income, net of tax, to the extent such changes are not recognized in earnings
as
components of periodic net benefit cost. At December 31, 2006, the Company
adopted the provisions of SFAS 158 for its postretirement and pension plans.
The
adoption of SFAS 158 resulted in a decrease of Total assets of $476.0 million
and Shareholders’ equity of $472.8 million (net of tax of $268.2 million) and an
increase of Total liabilities of $265.0 million.
SFAS
158
also requires an entity to measure its defined benefit plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of
financial position. The measurement date provisions of SFAS 158 are effective
for the Company for the fiscal year ending December 31, 2008. The Company has
adopted the measurement provisions of SFAS 158 which does not have a material
impact on the condensed consolidated financial statements.
In
September 2006, the FASB issued SFAS 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. Refer to Note 17,
Fair
Value Measurements to the condensed consolidated financial statements for a
full
discussion on SFAS 157.
Effective
February 12, 2008, the Company adopted FASB Staff Position (FSP) No. 157-2,
“Effective Date of FASB Statement No. 157” (FSP SFAS 157-2). This FSP delays the
effective date of SFAS 157 for nonfinancial assets and nonfinanical liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis. Due to the deferral, the Company has delayed
its implementation of SFAS 157 provisions on the fair value of goodwill,
indefinite-lived intangible assets and nonfinancial long-lived assets and
liabilities.
In
February 2007, the FASB issued SFAS 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 and did not have a material impact
to the condensed consolidated financial statements.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” (SFAS 141 (R)). This statement addresses financial accounting and
reporting for business combinations and supersedes SFAS 141, “Business
Combinations.” SFAS 141(R) retains the fundamental requirements set forth in
SFAS 141 regarding the purchase method of accounting, but expands the guidance
in order to properly recognize and measure, at fair value, the identifiable
assets acquired, liabilities assumed and any noncontrolling interest in the
acquired business. In addition, the statement introduces new accounting guidance
on how to recognize and measure contingent consideration, contingencies,
acquisition and restructuring costs. SFAS 141(R) is effective for acquisitions
occurring after January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No 51.” It clarifies
that a noncontrolling interest in a subsidiary represents an ownership interest
that should be reported as equity in the consolidated financial statements.
In
addition, the statement requires expanded income statement presentation and
disclosures that clearly identify and distinguish between the interests of
the
Company and the interests of the non-controlling owners of the subsidiary.
SFAS
160 is effective for the Company starting on January 1, 2009. The Company is
currently evaluating the impact of adopting SFAS 160 on its financial
statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of SFAS No. 133. This statement amends and
expands the disclosure requirements of SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities.” It requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS
161
is effective for the Company starting on January 1, 2009. The Company is
currently evaluating the impact of adopting SFAS 161 on its financial
statements.
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, 2007.
Item
3
- Quantitative and Qualitative Disclosures about Market Risk
There
has
been no significant change in our exposure to market risk during the three
months ended March 31, 2008. 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, 2007.
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 March 31, 2008, 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 first quarter of 2008 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
Oil
for Food 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. On October 31, 2007, the Company
announced it had reached settlements with the SEC and DOJ relating to this
matter. Under the terms of the settlements, the Company paid a total of $6.7
million in penalties, interest and disgorgement of profits. The Company has
consented to the entry of a civil injunction in the SEC action and has entered
into a three-year deferred prosecution agreement with the DOJ. Under both
settlements, the Company will implement improvements to its compliance program
that are consistent with its longstanding policy against improper payments.
In
the settlement documents, the Government noted that the Company thoroughly
cooperated with the investigation, that the Company had conducted its own
complete investigation of the conduct at issue, promptly and thoroughly reported
its findings to them, and took prompt remedial measures. In a related matter,
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.
Item
1A – Risk Factors
There
have been no material changes to our risk factors and uncertainties during
the
first quarter of 2008. 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 period ended December 31, 2007.
Item
2
– Unregistered Sales of Equity Securities and Use of Proceeds
None
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:
May 12, 2008
|
/s/
James V. Gelly
|
|
James
V. Gelly, Senior Vice President
|
|
and
Chief Financial Officer
|
|
|
|
Principal
Financial Officer
|
|
|
Date:
May 12, 2008
|
/s/
Richard W. Randall
|
|
Richard
W. Randall, Vice President and
|
|
Controller
|
|
|
|
Principal
Accounting Officer
|