10-Q 1 v122295_10q.htm 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 June 30, 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)

75-2993910
(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 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 Accelerated filer Non-accelerated filer 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 NO x

The number of Class A common shares outstanding as of July 31, 2008 was 318,526,858.
 

 
INGERSOLL-RAND COMPANY LIMITED

FORM 10-Q

INDEX

PART I
FINANCIAL INFORMATION
 
         
 
Item 1
-
Financial Statements
 
         
 
   
Condensed Consolidated Income Statement for the three and six months ended June 30, 2008 and 2007
1
         
     
Condensed Consolidated Balance Sheet at June 30, 2008 and December 31, 2007
2
         
     
Condensed Consolidated Statement of Cash Flows for the three and six months ended June 30, 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
38
         
 
Item 3
-
Quantitative and Qualitative Disclosures about Market Risk
59
         
 
Item 4
-
Controls and Procedures
59
         
PART II
OTHER INFORMATION
 
         
 
Item 1
-
Legal Proceedings
59
         
 
Item 1A
-
Risk Factors
61
         
 
Item 4
-
Submission of Matters to a Vote of Security Holders
65
         
 
Item 6
-
Exhibits
65
         
SIGNATURES
     
70
         
CERTIFICATIONS
       
 
i


Item 1. Financial Statements     

INGERSOLL-RAND COMPANY LIMITED
CONDENSED CONSOLIDATED INCOME STATEMENT
(Unaudited)
 
   
Three months ended
 
Six months ended 
 
   
June 30,
 
June 30,
 
In millions, except per share amounts
 
2008
 
2007
 
2008
 
2007
 
Net revenues
 
$
3,080.8
 
$
2,224.6
 
$
5,244.1
 
$
4,200.8
 
Cost of goods sold
   
(2,196.1
)
 
(1,589.7
)
 
(3,737.1
)
 
(3,005.6
)
Selling and administrative expenses
   
(523.1
)
 
(360.8
)
 
(898.4
)
 
(712.5
)
Operating income
   
361.6
   
274.1
   
608.6
   
482.7
 
Interest expense
   
(45.6
)
 
(30.8
)
 
(73.1
)
 
(66.5
)
Other, net
   
26.2
   
8.6
   
65.5
   
8.5
 
Earnings before income taxes
   
342.2
   
251.9
   
601.0
   
424.7
 
Provision for income taxes
   
(79.7
)
 
(43.9
)
 
(126.8
)
 
(60.1
)
Earnings from continuing operations
   
262.5
   
208.0
   
474.2
   
364.6
 
Discontinued operations, net of tax
   
(6.4
)
 
756.1
   
(36.5
)
 
817.0
 
Net earnings
 
$
256.1
 
$
964.1
 
$
437.7
 
$
1,181.6
 
                           
Basic earnings per common share:
                         
Continuing operations
 
$
0.91
 
$
0.69
 
$
1.69
 
$
1.20
 
Discontinued operations
   
(0.02
)
 
2.52
   
(0.13
)
 
2.70
 
Net earnings
 
$
0.89
 
$
3.21
 
$
1.56
 
$
3.90
 
                           
Diluted earnings per common share:
                         
Continuing operations
 
$
0.90
 
$
0.68
 
$
1.67
 
$
1.19
 
Discontinued operations
   
(0.02
)
 
2.49
   
(0.13
)
 
2.66
 
Net earnings
 
$
0.88
 
$
3.17
 
$
1.54
 
$
3.85
 
                           
Dividends per common share
 
$
0.18
 
$
0.18
 
$
0.36
 
$
0.36
 

See accompanying notes to condensed consolidated financial statements. 

1


CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)

   
June 30,
 
December 31,
 
In millions
 
2008
 
2007
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
787.3
 
$
4,735.3
 
Accounts and notes receivable
   
3,072.0
   
1,660.7
 
Inventories
   
1,800.5
   
827.2
 
Other current assets
   
915.2
   
477.5
 
Total current assets
   
6,575.0
   
7,700.7
 
               
Property, plant and equipment, net
   
2,128.3
   
904.9
 
Goodwill
   
10,174.3
   
3,993.3
 
Intangible assets, net
   
5,224.0
   
724.6
 
Other noncurrent assets
   
1,782.1
   
1,052.7
 
Total assets
 
$
25,883.7
 
$
14,376.2
 
               
LIABILITIES AND EQUITY
             
Current liabilities:
             
Accounts payable
 
$
1,348.5
 
$
721.2
 
Accrued compensation and benefits
   
479.9
   
338.9
 
Accrued expenses and other current liabilities
   
1,622.7
   
1,434.6
 
Short-term borrowings and current maturities of long-term debt
   
4,768.8
   
741.0
 
Total current liabilities
   
8,219.9
   
3,235.7
 
 
             
Long-term debt
   
1,189.9
   
712.7
 
Postemployment and other benefit liabilities
   
1,300.0
   
941.9
 
Deferred income taxes
   
2,440.2
   
539.9
 
Other noncurrent liabilities
   
1,837.7
   
940.6
 
Minority interests
   
103.5
   
97.5
 
               
Shareholders' equity:
             
Class A common shares
   
318.5
   
272.6
 
Capital in excess of par value
   
2,248.2
   
-
 
Retained earnings
   
7,728.3
   
7,388.8
 
Accumulated other comprehensive income (loss)
   
497.5
   
246.5
 
Total shareholders' equity
   
10,792.5
   
7,907.9
 
Total liabilities and shareholders' equity
 
$
25,883.7
 
$
14,376.2
 

See accompanying notes to condensed consolidated financial statements. 

2


INGERSOLL-RAND COMPANY LIMITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

   
Six months ended June 30,
 
In millions
 
2008
 
2007
 
Cash flows from operating activities:
             
Net earnings
 
$
437.7
 
$
1,181.6
 
(Income) loss from discontinued operations, net of tax
   
36.5
   
(817.0
)
Adjustments to arrive at net cash provided by (used in) operating activities:
             
Depreciation and amortization
   
127.2
   
70.7
 
Stock settled share-based compensation
   
26.4
   
17.8
 
Changes in other assets and liabilities, net
   
(1,183.9
)
 
(250.1
)
Other, net
   
50.8
   
0.5
 
Net cash provided by (used in) continuing operating activities
   
(505.3
)
 
203.5
 
Net cash provided by (used in) discontinued operating activities
   
(20.0
)
 
8.0
 
               
Cash flows from investing activities:
             
Capital expenditures
   
(104.7
)
 
(57.9
)
Proceeds from sale of property, plant and equipment
   
23.0
   
9.0
 
Acquisitions, net of cash acquired ($320.4 in 2008)
   
(7,085.5
)
 
(3.7
)
Proceeds from business dispositions, net of cash
   
9.7
   
1,291.7
 
Other, net
   
(19.1
)
 
3.5
 
Net cash provided by (used in) continuing investing activities
   
(7,176.6
)
 
1,242.6
 
Net cash provided by (used in) discontinued investing activities
   
-
   
(39.8
)
               
Cash flows from financing activities:
             
Increase (decrease) in short-term borrowings
   
3,901.0
   
(383.3
)
Payments of long-term debt
   
(134.5
)
 
(11.2
)
Net change in debt
   
3,766.5
   
(394.5
)
Debt issuance costs
   
(11.4
)
 
-
 
Dividends paid
   
(98.2
)
 
(109.6
)
Proceeds from exercise of stock options
   
11.6
   
121.4
 
Repurchase of common shares by subsidiary
   
(2.0
)
 
(846.5
)
Other, net
   
18.5
   
-
 
Net cash provided by (used in) continuing financing activities
   
3,685.0
   
(1,229.2
)
Net cash provided by (used in) discontinued financing activities
   
-
   
-
 
Effect of exchange rate changes on cash and cash equivalents
   
68.9
   
9.1
 
Net increase (decrease) in cash and cash equivalents
   
(3,948.0
)
 
194.2
 
Cash and cash equivalents - beginning of period
   
4,735.3
   
355.8
 
Cash and cash equivalents - end of period
 
$
787.3
 
$
550.0
 

See accompanying notes to condensed consolidated financial statements. 

3


INGERSOLL-RAND COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Description of Company
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 its markets. The Company operates in four business segments: Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies and Security Technologies. The Company generates revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as Club Car®, Hussmann®, Ingersoll Rand®, Schlage®, Thermo King® and Trane®.

Note 2– 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 results for the interim periods presented. Certain reclassifications of amounts reported in prior years have been made to conform to the 2008 classification.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Ingersoll-Rand Company Limited Annual Report on Form 10-K for the year ended December 31, 2007.

As discussed in Note 3, the Company acquired Trane Inc. (Trane) at the close of business on June 5, 2008 (the Acquisition Date). As a result of the acquisition, the results of the operations of Trane have been included in the statement of financial position at June 30, 2008 and the consolidated statements of operations and cash flows since the Acquisition Date.

Note 3 – Acquisition of Trane Inc.
At the close of business on June 5, 2008, the Company completed its previously announced acquisition of 100% of the outstanding common shares of Trane. Trane, formerly American Standard Companies Inc., provides systems and services that enhance the quality and comfort of the air in homes and buildings around the world. Trane’s systems and services have leading positions in premium commercial, residential, institutional and industrial markets, a reputation for reliability, high quality and product innovation and a powerful distribution network. Trane’s 2007 annual revenues were $7.5 billion.

The Company paid a combination of (i) 0.23 of an IR Limted Class A common share and (ii) $36.50 in cash, without interest, for each outstanding share of Trane common stock. The total cost of the acquisition was approximately $9.6 billion, including change in control payments and direct costs of the transaction. The Company financed the cash portion of the acquisition with a combination of cash on hand, commercial paper and a 364-day senior unsecured bridge loan facility.
 
4

 
The components of the purchase price were as follows:

In billions    
 
 
 
Cash consideration
 
$
7.3
 
Stock consideration (Issuance of 45.4 million IR Limited Class A common shares)
   
2.0
 
Estimated fair value of Trane stock options converted to 7.9 million IR Limited stock options
   
0.2
 
Transaction costs
   
0.1
 
Total    
 
$
9.6
 

The following table summarizes the preliminary fair values of the Trane assets acquired and liabilities assumed at the Acquisition Date. The Company is in the process of finalizing the preliminary fair values of certain assets and liabilities, thus, the allocation of the purchase price is subject to refinement.

   
June 5,
 
In millions
 
2008
 
Current assets:
       
Cash and cash equivalents
 
$
317.5
 
Accounts and notes receivable
   
1,185.6
 
Inventories
   
944.2
 
Other current assets
   
396.0
 
Total current assets
   
2,843.3
 
         
Property, plant and equipment
   
1,174.9
 
Goodwill
   
6,062.4
 
Intangible assets
   
4,520.0
 
Other noncurrent assets
   
722.6
 
Total assets
 
$
15,323.2
 
         
Current liabilities:
       
Accounts payable
 
$
562.9
 
Accrued compensation and benefits
   
212.7
 
Accrued expenses and other current liabilities
   
1,030.4
 
Short-term borrowings and current maturities of long-term debt
   
254.3
 
Total current liabilities
   
2,060.3
 
 
       
Long-term debt
   
476.3
 
Postemployment and other benefit liabilities
   
310.3
 
Deferred income taxes
   
1,681.9
 
Other noncurrent liabilities
   
1,177.0
 
Minority interests
   
7.7
 
Total liabilities and minority interests
 
$
5,713.5
 
Net assets acquired
 
$
9,609.7
 

5

 
Cash and cash equivalents, accounts and notes receivable, accounts payable and accrued compensation and benefits were stated at their historical carrying values, which approximates their fair value, given the short-term nature of these assets and liabilities.

Inventories were recorded at fair value, based on computations which considered many factors, including the future estimated selling price of the inventory, the cost to dispose of the inventory, as well as the replacement cost of the inventory, where applicable.

The Company recorded property, plant and equipment at its preliminary estimated fair value, based on adjustments recorded in recent acquisitions of other companies with assets similar to Trane.

The Company recorded intangible assets based on their estimated fair value, and consisted of the following:

In millions
 
 Useful life 
 
 Amount 
 
Tradenames
   
Indefinite
 
$
1,644.0
 
Customer relationships
   
25 Years
   
2,736.0
 
Completed technology/patents
   
5 Years
   
95.0
 
In process research and development
   
Expensed
   
23.0
 
Backlog
   
6 Months
   
22.0
 
Total
   
 
$
4,520.0
 
 
The Company has allocated $1,644.0 million to tradenames, primarily related to the Trane brand. Management considered many factors in the determination that it will account for the asset as an indefinite lived intangible asset, including the current market leadership position of the brand as well as recognition worldwide in the industry. Therefore, in accordance with Statement of Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, tradenames will not be amortized but instead, will be tested for impairment at least annually (more frequently if certain indicators are present).

The Company will have a valuation performed on property, plant and equipment, identified intangible assets, pension and post employment and other liabilities and, as such, the fair value recorded for the assets above could change upon the conclusion of the valuation.

The excess of the purchase price over the amounts allocated to specific assets and liabilities is included in goodwill, and amounted to $6,062.4 million. The premium in the purchase price paid by the Company for the acquisition of Trane reflects the establishment of $11 billion of businesses offering high value equipment, systems and services necessary for delivering solutions across the temperature spectrum for indoor, stationary and transport applications worldwide. The Company anticipates realizing significant operational and cost synergies. Anticipated synergies include purchase material savings through supplier rationalization and procurement leverage, improvement in manufacturing costs and lower general and administrative costs. Longer term, the Company expects to benefit from synergies related to service revenue expansion, leverage of distribution channels and cross selling through certain vertical markets.
 
6

 
In addition, Trane will be able to leverage the Company’s global footprint to enhance their historically U.S. based revenue generation. Lastly, the combined business will improve the Company’s highly regarded Hussmann and Thermo King brands with Trane’s position as a leader in the commercial and residential climate control industry. These combined factors primarily contributed to a purchase price in excess of the fair value of the net tangible assets acquired.

The following unaudited pro forma information assumes the acquisition of Trane occurred as of the beginning of the respective periods presented.

   
Three months ended
 
Six months ended 
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
                   
Net revenues
 
$
4,506.7
 
$
4,262.3
 
$
8,381.4
 
$
7,846.0
 
Pre-tax profit
   
374.3
   
354.4
   
649.9
   
533.8
 
Net earnings
 
$
285.1
 
$
272.3
 
$
506.1
 
$
422.6
 
Basic earnings per common share
 
$
0.89
 
$
0.79
 
$
1.58
 
$
1.21
 
Diluted earnings per common share
 
$
0.88
 
$
0.77
 
$
1.56
 
$
1.19
 

The unaudited pro forma financial information for the three months ended June 30, 2008 and 2007 include $55.9 million of non-recurring purchase accounting charges associated with the fair value allocation of purchase price to backlog, inventory and in-process research and development costs. Comparative amounts for the six months ended June 30, 2008 and 2007 were $71.9 million.

In addition, for the three months ended June 30, 2008 and 2007, the Company has included $24.1 million and $34.0 million, respectively, as an increase to interest expense associated with the borrowings to fund (a) the cash portion of the purchase price and (b) the out-of-pocket transaction costs associated with the acquisition. Comparative amounts for the six months ended June 30, 2008 and 2007 were $58.2 million and $68.4 million, respectively.

The unaudited pro forma information does not purport to be indicative of the results that actually would have been achieved had the operations been combined during the periods presented nor is it intended to be a projection of future results or trends.
 
7

 
Note 4 – Divestitures and Discontinued Operations
The components of discontinued operations for the three and six months ended June 30 are as follows:

 
 
Three months ended
 
Six months ended 
 
 
 
June 30,
 
June 30,
 
In millions
 
 2008 
 
 2007 
 
 2008 
 
 2007 
 
Revenues
 
$
5.6
 
$
837.0
 
$
15.2
 
$
1,696.8
 
 
   
   
   
   
 
Pre-tax earnings (loss) from operations
   
(11.8
)
 
119.7
   
(23.0
)
 
201.5
 
Pre-tax gain (loss) on sale
   
(1.5
)
 
804.5
   
(5.6
)
 
804.7
 
Tax expense
   
6.9
   
(168.1
)
 
(7.9
)
 
(189.2
)
Discontinued operations, net of tax
 
$
(6.4
)
$
756.1
 
$
(36.5
)
$
817.0
 

Discontinued operations by business for the three and six months ended June 30 is as follows:

 
 
Three months ended
 
Six months ended 
 
 
 
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Compact Equipment, net of tax
 
$
1.5
 
$
81.7
 
$
(22.9
)
$
142.3
 
Road Development, net of tax
   
(1.8
)
 
678.2
   
(1.8
)
 
694.1
 
Other discontinued operations, net of tax
   
(6.1
)
 
(3.8
)
 
(11.8
)
 
(19.4
)
Total discontinued operations, net of tax
 
$
(6.4
)
$
756.1
 
$
(36.5
)
$
817.0
 

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 SFAS 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 and six months ended June 30 are as follows:
 
 
 
Three months ended
 
Six months ended 
 
 
 
June 30,
 
June 30,
 
In millions
 
 2008 
 
 2007 
 
 2008 
 
 2007 
 
Net revenues
 
$
5.6
 
$
759.8
 
$
15.2
 
$
1,452.4
 
 
   
   
   
   
 
Earnings from operations, net of tax
   
(0.3
)
 
81.7
   
0.1
   
142.3
 
Gain on sale, net of tax
   
1.8
   
-
   
(23.0
)
 
-
 
Total discontinued operations, net of tax
 
$
1.5
 
$
81.7
 
$
(22.9
)
$
142.3
 

8


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 and six months ended June 30 are as follows:
 
 
 
Three months ended
 
Six months ended 
 
 
 
June 30,
 
June 30,
 
In millions
 
 2008 
 
 2007 
 
 2008 
 
 2007 
 
Net revenues
 
$
-
 
$
77.2
 
$
-
 
$
244.4
 
 
   
   
   
   
 
Earnings from operations, net of tax
   
(0.1
)
 
2.5
   
(0.1
)
 
18.4
 
Gain on sale, net of tax
   
(1.7
)
 
675.7
   
(1.7
)
 
675.7
 
Total discontinued operations, net of tax
 
$
(1.8
)
$
678.2
 
$
(1.8
)
$
694.1
 

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 and six months ended June 30 are as follows:

 
 
Three months ended
 
Six months ended 
 
 
 
June 30,
 
June 30,
 
In millions
 
 2008 
 
 2007 
 
 2008 
 
 2007 
 
Retained costs, net of tax
 
$
(6.1
)
$
(3.9
)
$
(11.8
)
$
(19.6
)
Net gain on disposals, net of tax
   
-
   
0.1
   
-
   
0.2
 
Total discontinued operations, net of tax
 
$
(6.1
)
$
(3.8
)
$
(11.8
)
$
(19.4
)

Retained costs, net of tax for the six months ended June 30, 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 5Inventories
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.
 
9

 
The major classes of inventory are as follows:
 
   
June 30,
 
December 31,
 
In millions
 
 2008 
 
 2007 
 
Raw materials
 
$
477.7
 
$
323.2
 
Work-in-process
   
348.2
   
163.4
 
Finished goods
   
1,111.3
   
424.9
 
Sub-total
   
1,937.2
   
911.5
 
LIFO reserve
   
(136.7
)
 
(84.3
)
Total
 
$
1,800.5
 
$
827.2
 

At June 30, 2008, approximately 50% of all inventory utilized the LIFO method compared to 20% at December 31, 2007. The increase is primarily attributable to the Company’s acquisition of Trane. See Note 3 for a further discussion on the acquisition of Trane.
 
Note 6 Goodwill
The changes in the carrying amount of goodwill are as follows:

   
Air 
                 
   
Conditioning
 
 Climate 
             
   
Systems 
 
Control
 
Industrial
 
Security
     
In millions
 
and Services
 
Technologies
 
Technologies
 
Technologies
 
Total
 
December 31, 2007
 
$
-
 
$
2,613.8
 
$
371.9
 
$
1,007.6
 
$
3,993.3
 
Acquisitions and adjustments*
   
6,062.4
   
-
   
4.1
   
22.9
   
6,089.4
 
Translation
   
-
   
44.6
   
6.9
   
40.1
   
91.6
 
June 30, 3008
 
$
6,062.4
 
$
2,658.4
 
$
382.9
 
$
1,070.6
 
$
10,174.3
 
 
* 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.

See Note 3 for a further discussion regarding goodwill associated with the Trane acquisition, which the Company recorded in the Air Conditioning Systems and Services segment.
 
10

 
Note 7 – Intangible Assets
The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets:
 
   
June 30,
 
December 31,
 
In millions
 
2008
 
2007
 
Customer relationships
 
$
3,246.7
 
$
502.4
 
Trademarks
   
1,938.4
   
283.8
 
Patents
   
140.7
   
38.2
 
Other
   
104.3
   
53.4
 
Total gross intangible assets
   
5,430.1
   
877.8
 
Accumulated amortization
   
(206.1
)
 
(153.2
)
Total
 
$
5,224.0
 
$
724.6
 

As of June 30, 2008 and December 31, 2007, the Company had $1,816.4 million and $169.3 million of indefinite lived intangible assets, which are not subject to amortization in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The increase is attributable to the Company’s acquisition of Trane. See Note 3 for a further discussion on the acquisition of Trane.
 
Intangible asset amortization expense was $42.2 million and $6.1 million for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, intangible asset amortization was $49.1 million and $12.2 million, respectively. Estimated amortization expense on existing intangible assets is approximately $170 million for each of the next five fiscal years.

Note 8 – Accounts Receivable Securitization Agreements
In association with the acquisition of Trane, the consolidated financial statements include Trane’s accounts receivable securitization agreement (the Facility) in the U.S. As part of this Facility, Trane formed special-purpose entities (SPE’s) that are included in the condensed consolidated financial statements for the sole purpose of buying and selling receivables generated by Trane. Trane irrevocably and without recourse, transfers all eligible accounts receivable to the SPE’s, which in turn, sell them, or undivided ownerships in them, to conduits administered by the banks. The assets of the SPE’s are not available to pay the claims of Trane or any of its subsidiaries.

The receivables sold are removed from the balance sheet since they meet the applicable criteria of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. Trane’s retained interest is recorded at fair value in the balance sheet. To the extent that the cash received and value of the retained interest is less than the net book value of the receivable sold, losses are recognized at the time of sale. For the 25 days ended June 30, 2008, the losses amounted to $0.3 million. The receivables represented by the retained interest are exposed to the risk of loss for any uncollectible amounts in the pool of receivables sold under this arrangement.

The following is a summary of receivables sold to the financing facilities:

   
 June 30, 
 
In millions
 
 2008 
 
Outstanding balance of receivables sold to SPE's
 
$
318.1
 
Net retained interest
   
182.6
 
Advances from conduits
   
121.7
 

11

 
The advances from conduits include amounts due to the conduits for the collections of receivables under the servicing agreement.

Note 9 – Debt and Credit Facilities
At June 30, 2008 and December 31, 2007, short-term borrowings and current maturities of long-term debt consisted of the following:

   
June 30,
 
December 31,
 
In millions
 
2008
 
2007
 
Commerical paper program
 
$
925.9
 
$
-
 
Bridge loan facility
   
2,950.0
   
-
 
Current maturities of long-term debt
   
796.0
   
681.1
 
Other short-term borrowings
   
96.9
   
59.9
 
Total
 
$
4,768.8
 
$
741.0
 

At June 30, 2008 and December 31, 2007, long-term debt excluding current maturities consisted of:

   
 June 30, 
 
 December 31, 
 
In millions
 
 2008 
 
 2007 
 
7.625% Senior notes due 2010
 
$
279.4
 
$
-
 
5.50% Senior notes due 2015
   
188.7
   
-
 
4.75% Senior notes due 2015
   
299.2
   
299.1
 
9.00% Debentures due 2021
   
125.0
   
125.0
 
7.20% Debentures due 2007 - 2025
   
120.0
   
127.5
 
6.48% Debentures due 2025
   
149.7
   
149.7
 
Other loans and notes, at end of year average interest rates of 4.32%
             
in 2008 and 4.32% in 2007, maturing in various amounts to 2016
   
27.9
   
11.4
 
Total
 
$
1,189.9
 
$
712.7
 
 
In connection with the Trane acquisition, the Company entered into a new $3.9 billion senior unsecured bridge loan facility, with a term of 364 days. Subsequently, the Company reduced the facility size by $0.5 billion. As of June 30, 2008, the Company has drawn $2.95 billion against the bridge facility, with the remaining $0.45 billion available for future use. The proceeds of the agreement were used to pay a portion of the cash component of the consideration paid for the acquisition as well as to pay related fees and expenses incurred.

The Company also entered into a new $1.0 billion senior unsecured revolving credit agreement with a three year term. The credit facility will be used to support working capital, the commercial paper programs and for other general corporate purposes.
 
In addition, the Company’s committed revolving credit facilities consisted of two five-year lines totaling $2.0 billion, of which $750 million expires in June 2009 and $1.25 billion expires in August 2010. These lines were unused and provide support for other financing instruments, such as letter of credit and comfort letters as required in the normal course of business as well as support for the commercial paper program.
 
12

 
As a result of the Trane acquisition described in Note 3, the Company assumed a cross currency swap to fix the foreign currency cash flows on its £60.0 million 8.25% senior notes due June 1, 2009, into the functional currency of the Company. At the inception of the cross currency swap, the swap qualified as a cash flow hedging instrument under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As such the fair value of the cross currency swap has been deferred in Other Comprehensive Income (OCI) until the time the cash flows affect earnings. At June 30, 2008, the cross currency swap had a loss of $5.7 million.

Note 10 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 and six months ended June 30 are as follows:
 
   
Three months ended
 
Six months ended 
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Service cost
 
$
13.3
 
$
14.3
 
$
24.7
 
$
29.2
 
Interest cost
   
42.8
   
41.1
   
81.3
   
82.6
 
Expected return on plan assets
   
(53.8
)
 
(57.7
)
 
(102.9
)
 
(115.9
)
Net amortization of:
   
                   
Prior service costs
   
2.1
   
2.3
   
4.2
   
4.7
 
Transition amount
   
0.2
   
0.2
   
0.4
   
0.4
 
Plan net actuarial losses
   
2.4
   
3.3
   
4.8
   
7.9
 
Net periodic pension benefit cost
   
7.0
   
3.5
   
12.5
   
8.9
 
Net curtailment and settlement (gains) losses
   
-
   
24.3
   
1.3
   
24.3
 
Net periodic pension benefit cost after net curtailment and settlement (gains) losses
 
$
7.0
 
$
27.8
 
$
13.8
 
$
33.2
 
                           
Amounts recorded in continuing operations
 
$
10.6
 
$
6.7
 
$
21.1
 
$
15.0
 
Amounts recorded in discontinued operations
   
(3.6
)
 
21.1
   
(7.3
)
 
18.2
 
Total
 
$
7.0
 
$
27.8
 
$
13.8
 
$
33.2
 

The Company made employer contributions of $11.8 million and $13.0 million to its pension plans during the six months ended June 30, 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. The curtailment and settlement losses in 2007 are associated with the sale of the Road Development business unit on April 30, 2007. In addition, certain of the Company’s pension plans, primarily in the U.S., were remeasured as of the April 30, 2007 sale date and the discount rate used was increased from 5.5% to 5.75%.
 
13

 
As discussed in Note 3, the Company assumed obligations for pension benefits associated with the acquisition of Trane. The Company is in the process of measuring the pension plans as of the Acquisition Date. The preliminary estimate of plan assets and projected benefit obligation is $719.0 million and $773.8 million, respectively.

Note 11 – 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 and six months ended June 30 are as follows:

   
Three months ended
 
Six months ended 
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Service cost
 
$
2.0
 
$
3.0
 
$
3.0
 
$
6.2
 
Interest cost
   
11.1
   
14.0
   
20.6
   
28.1
 
Net amortization of prior service gains
   
(0.9
)
 
(1.0
)
 
(1.8
)
 
(2.1
)
Net amortization of net actuarial losses
   
3.7
   
4.6
   
7.4
   
9.5
 
Net periodic postretirement benefit cost
   
15.9
   
20.6
   
29.2
   
41.7
 
Net curtailment and settlement (gains) losses
   
-
   
(23.4
)
 
-
   
(23.4
)
Net periodic postretirement benefit (gains) costs after curtailment and settlement gains
 
$
15.9
 
$
(2.8
)
$
29.2
 
$
18.3
 
                           
Amounts recorded in continuing operations
 
$
8.5
 
$
6.8
 
$
14.4
 
$
13.6
 
Amounts recorded in discontinued operations
   
7.4
   
(9.6
)
 
14.8
   
4.7
 
Total
 
$
15.9
 
$
(2.8
)
$
29.2
 
$
18.3
 

The curtailment and settlement gains in 2007 are associated with the sale of the Road Development business unit on April 30, 2007. In addition, the Company’s postretirement plan was remeasured as of the April 30, 2007 sale date and the discount rate used was increased from 5.5% to 5.75%.

As discussed in Note 3, the Company assumed unfunded obligations for postretirement benefits other than pensions associated with the acquisition of Trane. The Company is in the process of measuring the postretirement plans as of the Acquisition Date. The preliminary estimate of the projected benefit obligation is $267.1 million.
 
14

 
Note 12 – Stockholders Equity
At June 30, 2008, the reconciliation of Class A common shares is as follows:

In millions
 
Total
 
December 31, 2007
   
272.6
 
Shares issued under incentive plans
   
0.5
 
Merger consideration (See Note 3)
   
45.4
 
June 30, 2008
   
318.5
 

The components of comprehensive income for the three and six months ended June 30 are as follows:

   
Three months ended
 
Six months ended 
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Net earnings
 
$
256.1
 
$
964.1
 
$
437.7
 
$
1,181.6
 
Other comprehensive income (loss):
                         
Foreign currency translation adjustment
   
9.4
   
32.2
   
240.5
   
67.8
 
Change in fair value of derivatives qualifying as cash flow hedges, net of tax
   
(3.4
)
 
(5.8
)
 
3.7
   
(5.9
)
Unrealized gain (loss) on marketable securities, net of tax
   
(0.8
)
 
0.8
   
(2.2
)
 
0.3
 
Pension and other postretirement benefits liability adjustment, net of tax
   
4.4
   
135.3
   
9.0
   
142.2
 
Comprehensive income
 
$
265.7
 
$
1,126.6
 
$
688.7
 
$
1,386.0
 

Included in accumulated other comprehensive income is the estimated value of the Company’s currency and commodity hedges. At June 30, 2008 and 2007, the currency hedges had a projected loss of $0.1 million and $4.1 million, net of tax, respectively. At June 30, 2008 and 2007, the commodity hedges had a projected gain of $0.6 million and a projected loss of $0.6 million, net of tax, respectively. Also included in accumulated other comprehensive income are projected losses of $8.1 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 $0.1 million, $0.6 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 June 30, 2008 and 2007 was a loss of $6.5 million and a gain of $2.5 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.

As a result of the Trane acquisition described in Note 3, the Company assumed a cross currency swap to fix the foreign currency cash flows on its £60.0 million 8.25% senior notes due June 1, 2009, into the functional currency of the Company. At the inception of the cross currency swap, the swap qualified as a cash flow hedging instrument under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As such the fair value of the cross currency swap has been deferred in OCI until the time the cash flows effect earnings. At June 30, 2008, the cross currency swap had a loss of $5.7 million.
 
15

 
Note 13 – Restructuring Activities
Restructuring charges recorded during the three months ended June 30, 2008 were as follows:
 
In millions
 
Air
Conditioning
Systems
and Services
 
Climate
Control
Technologies
 
Industrial
Technologies
 
Security
Technologies
 
Corporate
and Other
 
Total
 
Cost of goods sold
 
$
-
 
$
(0.9
)
$
0.5
 
$
2.0
 
$
-
 
$
1.6
 
Selling and administrative
   
2.0
   
-
   
1.1
   
(0.2
)
 
2.0
   
4.9
 
Total
 
$
2.0
 
$
(0.9
)
$
1.6
 
$
1.8
 
$
2.0
 
$
6.5
 

Restructuring charges recorded during the six months ended June 30, 2008 were as follows:

In millions
 
Air
Conditioning
Systems
and Services
 
Climate
Control
Technologies
 
Industrial
Technologies
 
Security
Technologies
 
Corporate
and Other
 
Total
 
Cost of goods sold
 
$
-
 
$
(0.4
)
$
2.6
 
$
2.0
 
$
-
 
$
4.2
 
Selling and administrative
   
2.0
   
0.5
   
1.8
   
(0.2
)
 
2.0
   
6.1
 
Total
 
$
2.0
 
$
0.1
 
$
4.4
 
$
1.8
 
$
2.0
 
$
10.3
 

The changes in the restructuring reserve were as follows:

In millions
 
Air
Conditioning
Systems
and Services
 
Climate
Control
Technologies
 
Industrial
Technologies
 
Security
Technologies
 
Corporate
and Other
 
Total
 
December 31, 2007
 
$
-
 
$
20.8
 
$
0.7
 
$
4.0
 
$
-
 
$
25.5
 
Additions
   
2.0
   
0.1
   
4.4
   
1.8
   
2.0
   
10.3
 
Purchase accounting
   
11.5
   
-
   
-
   
-
   
-
   
11.5
 
Cash and non-cash uses
   
-
   
(18.2
)
 
(4.6
)
 
(2.4
)
 
-
   
(25.2
)
Currency translation
   
-
   
1.0
   
(0.1
)
 
0.2
   
-
   
1.1
 
June 30, 2008
 
$
13.5
 
$
3.7
 
$
0.4
 
$
3.6
 
$
2.0
 
$
23.2
 
 
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. Corporate costs related to workforce reductions.
 
16

 
In connection with the acquisition, at the Acquisition Date, the Company began formulating a plan to exit or restructure certain activities. The Company recorded purchase accounting liabilities of $11.5 million primarily related to employee severance and related costs in connection with the preliminary plan as well as approving the continuation of all existing restructuring and exit plans.

As of June 30, 2008, the Company had $23.2 million accrued for the workforce reductions and consolidation of manufacturing facilities, of which a majority will be paid throughout the remainder of 2008.

Note 14 – 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 8.5 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 options granted for the six months ended June 30, 2008 and June 30, 2007 were $11.60 and $11.06, respectively, using the Black-Scholes option-pricing model. The following weighted average assumptions were used:

 
 
2008
 
2007
 
Dividend yield
   
1.58
%
 
1.75
%
Volatility
   
31.50
%
 
26.10
%
Risk-free rate of return
   
2.95
%
 
4.71
%
Expected life
   
5.4 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.
 
17

Changes in the options outstanding under the plans for the six months ended June 30, 2008 were 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
   
4,992,599
   
40.60
   
   
 
Trane options exchanged for Ingersoll Rand options
   
7,907,176
   
17.97
   
   
 
Exercised
   
(376,505
)
 
30.06
   
   
 
Cancelled
   
(348,855
)
 
40.54
   
     
   
    
 
Outstanding June 30, 2008
   
28,599,306
 
$
30.84
 
$
232.1
   
5.9
 
Exercisable June 30, 2008
   
21,053,612
 
$
27.04
 
$
232.1
   
4.8
 

As part of the acquisition of Trane, 7.9 million Trane options were converted at the option of the holders into options to acquire shares of IR Limited Class A common shares based on the option exchange ratio set forth in the merger agreement.

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 six months ended June 30, 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
   
(38,636
)
 
27.77
   
   
 
Cancelled
   
(41,986
)
 
37.41
   
  
   
  
 
Outstanding June 30, 2008
   
1,089,355
 
$
34.08
 
$
4.7
   
4.9
 
Exercisable June 30, 2008
   
999,132
 
$
33.60
 
$
4.7
   
4.8
 

Note: The Company did not grant SARS during the six months ended June 30, 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.
 
18

 
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.

Compensation Expense
Share-based compensation expense is included in Selling and administrative expenses. The following table summarizes the expenses recognized for the three and six months ended June 30:

   
Three months ended
 
Six months ended
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Stock options
 
$
10.4
 
$
4.3
 
$
23.7
 
$
15.7
 
SARs
   
0.1
   
0.1
   
(0.2
)
 
0.5
 
Performance shares
   
1.6
   
1.6
   
2.4
   
5.8
 
Deferred compensation
   
(0.6
)
 
1.5
   
0.6
   
2.5
 
Other
   
0.3
   
-
   
0.6
   
0.2
 
Pre-tax expense
   
11.8
   
7.5
   
27.1
   
24.7
 
Tax benefit
   
(4.5
)
 
(2.9
)
 
(10.4
)
 
(9.4
)
After tax expense
 
$
7.3
 
$
4.6
 
$
16.7
 
$
15.3
 
 
                         
Amounts recorded in continuing operations
 
$
7.3
 
$
3.8
 
$
16.7
 
$
12.9
 
Amounts recorded in discontinued operations
   
-
   
0.8
   
-
   
2.4
 
Total
 
$
7.3
 
$
4.6
 
$
16.7
 
$
15.3
 

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 six months ended June 30, 2007, the Company recorded a gain of $16.8 million associated with the Swaps. The gains and losses associated with the Swaps are recorded within Selling and administrative expenses.

19


Note 15 – Other, Net
The components of Other, net for the three and six months ended June 30 are as follows:

 
 
Three months ended
 
Six months ended
 
 
 
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Interest income
 
$
31.5
 
$
7.0
 
$
77.1
 
$
9.9
 
Exchange gain (loss)
   
(2.9
)
 
8.5
   
(4.5
)
 
8.7
 
Minority interests
   
(6.5
)
 
(3.8
)
 
(10.4
)
 
(7.1
)
Earnings from equity investments
   
1.2
   
-
   
1.2
   
-
 
Other
   
2.9
   
(3.1
)
 
2.1
   
(3.0
)
Other, net
 
$
26.2
 
$
8.6
 
$
65.5
 
$
8.5
 
 
For the three and six months ended June 30, 2008, the year-over-year increase is primarily associated with higher interest income amounts, a result of larger average cash balances during the first half of 2008. The large balance is attributable to the sale of the Road Development business unit and Compact Equipment during 2007.

Note 16 – 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 June 30, 2008 and December 31, 2007 were $565.9 million and $379.8 million, respectively. The increase is primarily related to the inclusion of unrecognized tax positions attributable to the Trane business.

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.

20


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 17 – 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:

21


   
Three months ended
 
Six months ended
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Weighted-average number of basic shares
   
287.4
   
299.9
   
280.6
   
303.1
 
Shares issuable under incentive stock plans
   
3.7
   
4.4
   
3.1
   
3.9
 
Weighted-average number of diluted shares
   
291.1
   
304.3
   
283.7
   
307.0
 
Anti-dilutive shares
   
5.6
   
2.6
   
7.1
   
2.0
 
 
Note 18 –Business Segment Information
The Company classifies its business into four reportable segments based on industry and market focus: Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies and Security Technologies.

As discussed in Note 3, the Company acquired Trane at the close of business on June 5, 2008. As a result, the Company expanded its reportable segments to include the Air Conditioning Systems and Services segment. The results of Trane’s operations are presented within this segment. The reported results for revenue and operating income reflect activity since the Acquisition Date (June 6, 2008 through June 30, 2008).

As a result of the divestitures of Compact Equipment and the Road Development business unit during 2007, the Company realigned its operating and reporting segments to better reflect its market focus. Segment information for all periods has been revised to exclude the results of the Bobcat, Utility Equipment, Attachments and Road Development business units.

A summary of operations by reportable segment as of June 30 is as follows:

   
Three months ended
 
Six months ended
 
   
June 30,
 
June 30,
 
In millions
 
2008
 
2007
 
2008
 
2007
 
Net revenues
                 
Air Conditioning Systems and Services
 
$
697.9
 
$
-
 
$
697.9
 
$
-
 
Climate Control Technologies