10-Q 1 ir-10qx09302013xq3.htm 10-Q IR-10Q-09.30.2013-Q3
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 September 30, 2013
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 001-34400
_______________________________ 
INGERSOLL-RAND PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
_______________________________
Ireland
98-0626632
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
170/175 Lakeview Dr.
Airside Business Park
Swords, Co. Dublin
Ireland
(Address of principal executive offices, including zip code)
+(353) (0) 18707400
(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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x   NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” "accelerated filer," and "smaller reporting company," in Rule 12b-2 of the Exchange Act.

Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
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 ordinary shares outstanding of Ingersoll-Rand plc as of October 11, 2013 was 288,086,571.



INGERSOLL-RAND PLC
FORM 10-Q
INDEX

 
 
 
 
 
 
Item 1 -
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2 -
 
 
 
Item 3 -
 
 
 
Item 4 -
 
 
 
 
 
Item 1 -
 
 
 
Item 1A -
 
 
 
Item 2 -
 
 
 
Item 6 -
 
 



PART I-FINANCIAL INFORMATION

Item 1.
Financial Statements

INGERSOLL-RAND PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
In millions, except per share amounts
2013
 
2012
 
2013
 
2012
Net revenues
$
3,749.5

 
$
3,592.8

 
$
10,794.5

 
$
10,564.7

Cost of goods sold
(2,504.7
)
 
(2,454.4
)
 
(7,375.5
)
 
(7,347.7
)
Selling and administrative expenses
(756.8
)
 
(690.6
)
 
(2,254.6
)
 
(2,083.8
)
Gain (loss) on sale/asset impairment
(111.4
)
 
—

 
(111.4
)
 
4.5

Operating income
376.6

 
447.8

 
1,053.0

 
1,137.7

Interest expense
(103.4
)
 
(60.6
)
 
(226.8
)
 
(192.1
)
Other, net
6.0

 
17.4

 
(2.7
)
 
21.2

Earnings before income taxes
279.2

 
404.6

 
823.5

 
966.8

Provision for income taxes
(95.8
)
 
(65.3
)
 
(219.2
)
 
(157.9
)
Earnings from continuing operations
183.4

 
339.3

 
604.3

 
808.9

Discontinued operations, net of tax
(2.5
)
 
(12.3
)
 
(4.2
)
 
(6.7
)
Net earnings
180.9

 
327.0

 
600.1

 
802.2

Less: Net earnings attributable to noncontrolling interests
(15.0
)
 
(5.4
)
 
(29.0
)
 
(19.2
)
Net earnings attributable to Ingersoll-Rand plc
$
165.9

 
$
321.6

 
$
571.1

 
$
783.0

Amounts attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
 
 
 
 
Continuing operations
$
168.4

 
$
333.9

 
$
575.3

 
$
789.7

Discontinued operations
(2.5
)
 
(12.3
)
 
(4.2
)
 
(6.7
)
Net earnings
$
165.9

 
$
321.6

 
$
571.1

 
$
783.0

Earnings (loss) per share attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.58

 
$
1.09

 
$
1.94

 
$
2.58

Discontinued operations
(0.01
)
 
(0.04
)
 
(0.01
)
 
(0.02
)
Net earnings
$
0.57

 
$
1.05

 
$
1.93

 
$
2.56

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.57

 
$
1.07

 
$
1.92

 
$
2.52

Discontinued operations
(0.01
)
 
(0.04
)
 
(0.01
)
 
(0.02
)
Net earnings
$
0.56

 
$
1.03

 
$
1.91

 
$
2.50

Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
291.6

 
307.7

 
295.9

 
305.4

Diluted
295.5

 
312.0

 
299.8

 
312.9

Dividends declared per ordinary share
$
0.21

 
$
0.16

 
$
0.42

 
$
0.32

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
311.6

 
$
485.7

 
$
645.2

 
$
912.5

Less: Total comprehensive (income) loss attributable to noncontrolling interests
(20.1
)
 
6.1

 
(26.2
)
 
(7.6
)
Total comprehensive income (loss) attributable to Ingersoll-Rand plc
$
291.5

 
$
491.8

 
$
619.0

 
$
904.9

See accompanying notes to condensed consolidated financial statements.

1

INGERSOLL-RAND PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,083.9

 
$
882.1

Accounts and notes receivable, net
2,443.1

 
2,157.5

Inventories
1,447.5

 
1,308.8

Other current assets
655.2

 
594.3

Total current assets
5,629.7

 
4,942.7

Property, plant and equipment, net
1,651.7

 
1,652.6

Goodwill
6,061.8

 
6,138.9

Intangible assets, net
4,099.1

 
4,200.9

Other noncurrent assets
1,559.7

 
1,557.8

Total assets
$
19,002.0

 
$
18,492.9

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,400.6

 
$
1,230.2

Accrued compensation and benefits
541.9

 
506.8

Accrued expenses and other current liabilities
1,532.9

 
1,460.6

Short-term borrowings and current maturities of long-term debt
373.2

 
963.7

Total current liabilities
3,848.6

 
4,161.3

Long-term debt
3,154.1

 
2,269.3

Postemployment and other benefit liabilities
1,809.1

 
1,823.2

Deferred and noncurrent income taxes
1,653.0

 
1,592.8

Other noncurrent liabilities
1,350.6

 
1,417.0

Total liabilities
11,815.4

 
11,263.6

Equity:
 
 
 
Ingersoll-Rand plc shareholders’ equity:
 
 
 
Ordinary shares
288.7

 
295.6

Capital in excess of par value
472.3

 
1,014.5

Retained earnings
6,806.7

 
6,358.7

Accumulated other comprehensive income (loss)
(473.0
)
 
(521.0
)
Total Ingersoll-Rand plc shareholders’ equity
7,094.7

 
7,147.8

Noncontrolling interest
91.9

 
81.5

Total equity
7,186.6

 
7,229.3

Total liabilities and equity
$
19,002.0

 
$
18,492.9

See accompanying notes to condensed consolidated financial statements.


2

INGERSOLL-RAND PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months ended
 
September 30,
In millions
2013
 
2012
Cash flows from operating activities:
 
 
 
Net earnings
$
600.1

 
$
802.2

(Income) loss from discontinued operations, net of tax
4.2

 
6.7

Adjustments to arrive at net cash provided by (used in) operating activities:
 
 
 
(Gain) loss on sale/asset impairment
111.4

 
(4.5
)
Depreciation and amortization
282.1

 
285.4

Stock settled share-based compensation
53.8

 
34.7

(Gain) loss on sale of property, plant and equipment
(18.6
)
 
(3.8
)
Changes in other assets and liabilities, net
(186.1
)
 
(323.6
)
Other, net
108.3

 
25.8

Net cash provided by (used in) continuing operating activities
955.2

 
822.9

Net cash provided by (used in) discontinued operating activities
(4.1
)
 
(87.4
)
Net cash provided by (used in) operating activities
951.1

 
735.5

Cash flows from investing activities:
 
 
 
Capital expenditures
(187.6
)
 
(170.9
)
Proceeds from sale of property, plant and equipment
32.4

 
12.8

Proceeds from business dispositions, net of cash sold
4.7

 
—

Net cash provided by (used in) continuing investing activities
(150.5
)
 
(158.1
)
Net cash provided by (used in) discontinued investing activities
—

 
36.0

Net cash provided by (used in) investing activities
(150.5
)
 
(122.1
)
Cash flows from financing activities:
 
 
 
Short-term borrowings, net
12.6

 
66.1

Proceeds from long-term debt
1,546.2

 
—

Payments of long-term debt
(1,263.9
)
 
(417.6
)
Net proceeds (repayments) in debt
294.9

 
(351.5
)
Debt issuance costs
(13.2
)
 
(2.5
)
Dividends paid to ordinary shareholders
(183.0
)
 
(145.1
)
Dividends paid to noncontrolling interests
(18.1
)
 
(16.2
)
Acquisition/divestiture of noncontrolling interests
—

 
(0.4
)
Proceeds from shares issued under incentive plans
192.4

 
57.7

Repurchase of ordinary shares
(795.2
)
 
(374.9
)
Other, net
(0.1
)
 
(4.5
)
Net cash provided by (used in) continuing financing activities
(522.3
)
 
(837.4
)
Effect of exchange rate changes on cash and cash equivalents
(76.5
)
 
(7.1
)
Net increase (decrease) in cash and cash equivalents
201.8

 
(231.1
)
Cash and cash equivalents - beginning of period
882.1

 
1,160.7

Cash and cash equivalents - end of period
$
1,083.9

 
$
929.6

See accompanying notes to condensed consolidated financial statements.


3

INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ingersoll-Rand plc (IR-Ireland), an Irish public limited company, and its consolidated subsidiaries (collectively, the Company), reflect the consolidated operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission (SEC) interim reporting requirements. Accordingly, the accompanying condensed consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP) for full financial statements and should be read in conjunction with the consolidated financial statements included in the IR-Ireland Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the condensed consolidated results for the interim periods presented. Certain reclassifications of amounts reported in prior years have been made to conform to the 2013 classification.
Note 2 – Proposed Spin-Off Transaction
In December 2012, the Company's Board of Directors announced a plan to spin off the commercial and residential security businesses. The separation will result in two stand-alone companies: Ingersoll-Rand plc; and Allegion plc, a leading global provider of electronic and mechanical security products and services, delivering comprehensive solutions to commercial and residential customers. This new company’s portfolio of brands will include Schlage®, Von Duprin®, LCN®, CISA®, and Interflex®.
The completion of the spin-off is subject to certain customary conditions, unless waived by Ingersoll Rand, including receipt of regulatory approvals; the receipt of a private letter ruling from the U.S. Internal Revenue Service (IRS) and opinions of tax counsel confirming that the distribution and certain transactions entered into in connection with the distribution generally will be tax-free to Ingersoll Rand and its shareholders for U.S. federal income tax purposes, except for cash received in lieu of fractional shares; execution of intercompany agreements; effectiveness of appropriate filings with the SEC; and final approval of the transactions contemplated by the spin-off, as may be required under Irish law. There can be no assurance that any separation transaction will ultimately occur, or, if one does occur, its terms or timing. The disclosures and financial statements within these condensed consolidated financial statements include the results of operations, financial position, and cash flows of the commercial and residential security businesses as continuing operations.
Upon completion of the spin-off, Allegion plc will hold the commercial and residential security businesses and will become an independent publicly traded company. Allegion plc is an Irish public limited company.
During the three and nine months ended September 30, 2013, the Company incurred $25.7 million and $57.7 million of professional service fees related to the proposed spin-off, respectively. These costs are reported in Selling and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income.
Allegion Debt Structure
In relation to the proposed spin-off of our commercial and residential security businesses, our indirect, wholly owned subsidiary, Allegion US Holding Company Inc. (Allegion Holdings) expects to have approximately $1.3 billion of indebtedness at the time of the spin-off, the net proceeds of which will be distributed to IR-Ireland prior to the spin-off. In addition, Allegion Holdings expects to have a senior secured revolving credit facility permitting borrowings of up to $500 million.
Senior Notes
In October 2013, Allegion Holdings issued $300 million of its 5.75% senior notes due 2021. The senior notes accrue interest at the rate of 5.75% per annum, payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 2014. The senior notes will mature on October 1, 2021. The proceeds from the issuance will be held in escrow until prior to the consummation of the spin-off, when the net proceeds will be distributed to the Company.
Senior Secured Term Loan Facilities
In September 2013, Allegion Holdings completed the syndication of $1 billion of senior secured term loan facilities. The Term Facilities consist of (i) a Term A Facility in an aggregate principal amount of $500 million due in 2018 and (ii) a Term B Facility in an aggregate principal amount of $500 million due in 2020 (the loans under such Term Facilities, the Term Loans). The net proceeds of the Term Loans will be drawn and distributed to the Company prior to the consummation of the spin-off.
The Company will not be a guarantor or obligor with respect to the Senior Notes, the Senior Secured Term Loan Facilities, or the Senior Secured Revolving Credit Facility.

4
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Note 3 – Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, "Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires enhanced disclosures including both gross and net information about financial and derivative instruments eligible for offset or subject to an enforceable master netting arrangement or similar agreement. This new guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The requirements of ASU 2011-11 did not have an impact on the condensed consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." ASU 2013-01 clarifies the scope of ASU 2011-11 to apply to derivative instruments that are offset or subject to an enforceable master netting arrangement or similar agreement. This clarified guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The revised requirements of ASU 2013-01 did not have an impact on the condensed consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (AOCI). ASU 2013-02 requires a rollforward of changes in AOCI by component and information about significant reclassifications from AOCI to Net earnings to be presented in one location, either on the face of the financial statements or in the notes. This new guidance is effective for fiscal years beginning after December 15, 2012 and subsequent interim periods. The requirements of ASU 2013-02 did not have a material impact on the Company's condensed consolidated financial statements. The revised disclosure requirements are reflected in Note 11.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements where the total obligation is fixed at the reporting date, and for which no specific guidance currently exists. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company is currently assessing the impact, if any, on the condensed consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 clarifies the application of GAAP to the release of cumulative translation adjustments related to changes of ownership in or within foreign entities, including step acquisitions. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods.
In July 2013, the FASB issued ASU 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." ASU 2013-10 allows the Fed Funds Effective Swap Rate (OIS) to be designated as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not anticipate the requirements of ASU 2013-10 will have a material impact on the condensed consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company is currently assessing the impact, if any, on the condensed consolidated financial statements.
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.

5
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The major classes of inventory were as follows:
In millions
September 30,
2013
 
December 31,
2012
Raw materials
$
494.5

 
$
501.9

Work-in-process
150.4

 
109.6

Finished goods
906.3

 
800.2

 
1,551.2

 
1,411.7

LIFO reserve
(103.7
)
 
(102.9
)
Total
$
1,447.5

 
$
1,308.8

Note 5 – Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 were as follows:  
In millions
Climate
Solutions
 
Residential
Solutions
 
Industrial
Technologies
 
Security
Technologies
 
Total
Balance as of December 31, 2012
 
 
 
 
 
 
 
 
 
Goodwill (gross)
$
5,370.6

 
$
2,317.1

 
$
368.7

 
$
922.5

 
$
8,978.9

Accumulated impairment
(839.8
)
 
(1,656.2
)
 
—

 
(344.0
)
 
(2,840.0
)
 
4,530.8

 
660.9

 
368.7

 
578.5

 
6,138.9

Acquisitions and adjustments *
(1.4
)
 
17.7

 
1.1

 
(17.4
)
 
—

Impairment losses **
—


—


—

 
(111.4
)
 
(111.4
)
Currency translation
27.4

 
—

 
1.6

 
5.3

 
34.3

Balance as of September 30, 2013
 
 
 
 
 
 
 
 
 
Goodwill (gross)
5,396.6

 
2,334.8

 
371.4

 
910.4

 
9,013.2

Accumulated impairment
(839.8
)
 
(1,656.2
)
 
—

 
(455.4
)
 
(2,951.4
)
 
$
4,556.8

 
$
678.6

 
$
371.4

 
$
455.0

 
$
6,061.8

* During 2013, the Company made reclassifications to goodwill across all segments, including a reclassification of goodwill related to a product line transfer from the Security Technologies segment to the Residential Solutions segment.
** The Company performed an interim impairment test on goodwill of its Security Technologies Europe, Middle East, India, and Africa ("EMEIA") reporting unit during the third quarter of 2013. In its 2012 Form 10-K filing, the Company disclosed that the fair value of its Security Technologies EMEIA reporting unit exceeded its carrying value by 2.5% as of October 1, 2012. The Company continued to monitor the close proximity of the reporting unit's carrying value compared to its fair value and, in the third quarter, determined it was required to complete the first step of a two-step interim impairment test, as defined under U.S. GAAP. The first step of the goodwill impairment test compares the carrying value of a reporting unit to its estimated fair value. The results of the third quarter 2013 interim impairment test indicated that the estimated fair value of the Security Technologies EMEIA reporting unit was less than its carrying value; consequently, the Company completed the second step of the interim impairment test which resulted in a $111.4 million non-cash pre-tax goodwill impairment charge.

6
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Note 6 – Intangible Assets
The gross amount of the Company’s intangible assets and related accumulated amortization were as follows:
 
 
September 30, 2013
 
December 31, 2012
In millions
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Completed technologies/patents
 
$
200.4

 
$
(147.4
)
 
$
53.0

 
$
203.2

 
$
(134.4
)
 
$
68.8

Customer relationships
 
1,970.9

 
(608.5
)
 
1,362.4

 
1,966.8

 
(523.6
)
 
1,443.2

Trademarks (finite-lived)
 
100.2

 
(35.7
)
 
64.5

 
98.0

 
(32.1
)
 
65.9

Other
 
71.3

 
(63.1
)
 
8.2

 
71.4

 
(59.4
)
 
12.0

Total finite-lived intangible assets
 
2,342.8

 
$
(854.7
)
 
1,488.1

 
2,339.4

 
$
(749.5
)
 
1,589.9

Trademarks (indefinite-lived)
 
2,611.0

 
 
 
2,611.0

 
2,611.0

 
 
 
2,611.0

Total
 
$
4,953.8

 
 
 
$
4,099.1

 
$
4,950.4

 
 
 
$
4,200.9

Intangible asset amortization expense was $34.7 million and $34.5 million for the three months ended September 30, 2013 and 2012, respectively. Intangible asset amortization expense was $104.0 million and $104.7 million for the nine months ended September 30, 2013 and 2012, respectively.
Note 7 – Debt and Credit Facilities
Short-term borrowings and current maturities of long-term debt consisted of the following:
In millions
September 30,
2013
 
December 31,
2012
Debentures with put feature
$
343.0

 
$
343.0

6.000% Senior notes due 2013
—


600.0

Other current maturities of long-term debt
9.9

 
10.8

Other short-term borrowings
20.3

 
9.9

Total
$
373.2

 
$
963.7

Commercial Paper Program
The Company uses borrowings under its commercial paper program for general corporate purposes. The Company had no commercial paper outstanding at September 30, 2013 or December 31, 2012.
Debentures with Put Feature
At September 30, 2013 and December 31, 2012, the Company had $343.0 million of fixed rate debentures outstanding, which only require early repayment at the option of the holder. These debentures contain a put feature that the holders may exercise on each anniversary of the issuance date, subject to a notice requirement. If exercised, the Company is obligated to repay in whole or in part, at the holder’s option, the outstanding principal amount (plus accrued and unpaid interest) of the debentures held by the holder. If these options are not exercised, the final maturity dates would range between 2027 and 2028.
Holders of these debentures had the option to exercise the put feature on $37.2 million of the outstanding debentures in February 2013, subject to the notice requirement. No exercises were made.

7
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Long-term debt, excluding current maturities, consisted of the following:
In millions
September 30,
2013
 
December 31,
2012
9.500% Senior notes due 2014
$
—

 
$
655.0

5.50% Senior notes due 2015
197.6

 
196.4

4.75% Senior notes due 2015
299.8

 
299.7

6.875% Senior notes due 2018
749.5

 
749.4

2.875% Senior notes due 2019
349.5

 
—

9.00% Debentures due 2021
125.0

 
125.0

4.250% Senior notes due 2023
698.7

 
—

7.20% Debentures due 2014-2025
82.5

 
90.0

6.48% Debentures due 2025
149.7

 
149.7

5.750% Senior notes due 2043
498.0

 
—

Other loans and notes
3.8

 
4.1

Total
$
3,154.1

 
$
2,269.3

Senior Notes due 2019, 2023, and 2043
In June 2013, the Company issued $1.55 billion principal amount of Senior Notes in three tranches through its wholly-owned subsidiary, Ingersoll-Rand Global Holding Company Limited (IR-Global) pursuant to Rule 144A of the U.S. Securities Act of 1933 (Securities Act). The tranches consist of $350 million of 2.875% Senior Notes due in 2019, $700 million of 4.250% Senior Notes due in 2023, and $500 million of 5.750% Senior Notes due in 2043. The notes are fully and unconditionally guaranteed by each of IR-Ireland, Ingersoll-Rand Company Limited (IR-Limited), and Ingersoll-Rand International Holding Limited (IR-International). Interest on the notes will be paid twice a year in arrears. The Company has the option to redeem the notes in whole or in part at any time, and from time to time, prior to their stated maturity date at redemption prices set forth in the indenture agreement. The notes are subject to certain customary covenants, however, none of these covenants are considered restrictive to the Company’s operations. In connection with the issuance of each series of notes, IR-Global, the Guarantors and the initial purchasers of the notes entered into a Registration Rights Agreement. Each Registration Rights Agreement requires IR-Global and the Guarantors to use their commercially reasonable efforts to execute an effective exchange offer registration statement with the SEC no later than 365 days after the closing date of the notes offering and to complete an exchange offer within 30 business days of such effective date. If a registration default occurs additional interest shall accrue on the notes. The proceeds from these notes were used to fund the July 2013 redemption of $600 million of 6.000% Senior Notes due 2013 and $655 million of 9.500% Senior Notes due 2014 and to fund expenses related to the spin-off of the commercial and residential security businesses, with any remaining proceeds to be used for general corporate purposes.
In July 2013, the Company fully redeemed the outstanding principal amount of $600 million of its 6.000% Senior Notes due 2013 and $655 million of its 9.500% Senior Notes due 2014, resulting in $45.6 million of redemption premium expense recorded in the third quarter of 2013 in Interest expense.
Credit Facilities
As of September 30, 2013, the Company has a 5-year, $1.0 billion revolving credit facility maturing on March 15, 2017, and a 4-year, $1.0 billion revolving credit facility maturing on May 20, 2015, through its wholly-owned subsidiary, IR-Global.
IR-Ireland, IR-Limited, and IR-International have each provided an irrevocable and unconditional guarantee for these credit facilities. The total committed revolving credit facilities of $2.0 billion are unused and provide support for the Company's commercial paper program, as well as other general corporate purposes.

Note 8 – Financial Instruments
In the normal course of business, the Company may use various financial instruments, including derivative instruments, to manage the risks associated with interest rate and currency rate exposures. These financial instruments are not used for trading or speculative purposes.

8
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


On the date a derivative contract is entered into, the Company designates the derivative instrument as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability, or as an undesignated derivative. The Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.
The fair market value of derivative instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.
The Company assesses at inception, and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are highly effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be a highly effective hedge, the fair market value changes of the instrument are recorded to AOCI.
Any ineffective portion of a derivative instrument’s change in fair value is recorded in Net earnings in the period of change. If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in Net earnings.
Currency Hedging Instruments
The notional amount of the Company’s currency derivatives was $1,669.5 million and $1,656.7 million at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, a loss of $2.5 million and $4.0 million, net of tax, respectively, was included in AOCI related to the fair value of the Company’s currency derivatives designated as accounting hedges. The amount expected to be reclassified into Net earnings over the next twelve months is a loss of $2.5 million. The actual amounts that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions. Gains and losses associated with the Company’s currency derivatives not designated as hedges are recorded in Net earnings as changes in fair value occur. At September 30, 2013, the maximum term of the Company’s currency derivatives was approximately twelve months.
Other Derivative Instruments
In February 2013, the Company entered into forward starting interest rate swaps for $750.0 million of the forecasted issuance of $1.2 billion of Senior Notes due in 2023 and 2043. These interest rate swaps met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate swaps were recognized in AOCI. No further gain or loss will be recognized in AOCI related to these interest rate swaps as the contracts were terminated upon the June 2013 issuance of the underlying debt. The amount of AOCI associated with these interest rate swaps at the time of termination will be recognized in Interest expense over the term of the notes. At September 30, 2013, $10.3 million of gains remained in AOCI related to these interest rate swaps. The amount expected to be reclassified into Interest expense over the next twelve months is $0.7 million.
During the third quarter of 2008, the Company entered into interest rate locks for the forecasted issuance of approximately $1.4 billion of Senior Notes due in 2013 and 2018. These interest rate locks met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate locks were recognized in AOCI. No further gain or loss will be recognized in AOCI related to these interest rate locks as the contracts were effectively terminated upon issuance of the underlying debt. However, the amount of AOCI associated with these interest rate locks at the time of termination will be recognized into Interest expense over the term of the notes. At September 30, 2013 and December 31, 2012, $5.9 million and $7.2 million, respectively, of losses remained in AOCI related to these interest rate locks. The amount related to the Senior Notes due in 2018 expected to be reclassified into Interest expense over the next twelve months is $1.2 million.
In March 2005, the Company entered into interest rate locks for the forecasted issuance of $300 million of Senior Notes due 2015. These interest rate locks met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate locks were recognized in AOCI. No further gain or loss will be recognized in AOCI related to these interest rate locks as the contracts were effectively terminated upon issuance of the underlying debt. However, the amount of AOCI associated with these interest rate locks at the time of termination will be recognized into Interest expense over the term of the notes. At September 30, 2013 and December 31, 2012, $2.1 million and $3.1 million, respectively, of losses remained in AOCI related to these interest rate locks. The amount expected to be reclassified into Interest expense over the next twelve months is $1.3 million.

9
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The fair values of derivative instruments included within the Condensed Consolidated Balance Sheets were as follows:
 
Asset derivatives
 
Liability derivatives
In millions
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
Derivatives designated as hedges:

 

 

 

Currency derivatives
$
0.4

 
$
0.1

 
$
3.1

 
$
4.6

Derivatives not designated as hedges:

 

 

 

Currency derivatives
11.6

 
4.6

 
8.2

 
7.1

Total derivatives
$
12.0

 
$
4.7

 
$
11.3

 
$
11.7

Asset and liability derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities, respectively.
The amounts associated with derivatives designated as hedges affecting Net earnings and AOCI for the three months ended September 30 were as follows:
  
Amount of gain (loss)
recognized in AOCI
 
Location of gain
(loss) reclassified from
AOCI and recognized
into Net earnings
 
Amount of gain (loss)
reclassified from AOCI and
recognized into Net earnings
In millions
2013
 
2012
 
 
2013
 
2012
Currency derivatives
$
(1.6
)
 
$
(1.7
)
 
Cost of goods sold
 
$
(2.3
)
 
$
0.2

Interest rate swaps
—

 
—

 
Interest expense
 
0.2

 
—

Interest rate locks
—

 
—

 
Interest expense
 
(0.6
)
 
(0.8
)
Total
$
(1.6
)
 
$
(1.7
)
 

 
$
(2.7
)
 
$
(0.6
)
The amounts associated with derivatives not designated as hedges affecting Net earnings for the three months ended September 30 were as follows:
  
Location of gain (loss)         
recognized in Net earnings
 
Amount of gain (loss)         
recognized in Net earnings
In millions
2013
 
2012
Currency derivatives
Other, net
 
$
12.7

 
$
27.8

Total

 
$
12.7

 
$
27.8

The gains and losses associated with the Company’s undesignated currency derivatives are materially offset in Net earnings by changes in the fair value of the underlying transactions.
The following table represents the amounts associated with derivatives designated as hedges affecting Net earnings and AOCI for the nine months ended September 30:
  
Amount of gain (loss)
recognized in AOCI
 
Location of gain
(loss) reclassified from
AOCI and recognized
into Net earnings
 
Amount of gain (loss)
reclassified from AOCI and
recognized into Net earnings
In millions
2013
 
2012
 
 
2013
 
2012
Currency derivatives
$
(5.8
)
 
$
(1.9
)
 
Cost of goods sold
 
$
(7.6
)
 
$
1.1

Interest rate swaps
10.5

 
—

 
Interest expense
 
0.2

 
—

Interest rate locks
—

 
—

 
Interest expense
 
(2.2
)
 
(2.3
)
Total
$
4.7

 
$
(1.9
)
 

 
$
(9.6
)
 
$
(1.2
)

10
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The following table represents the amounts associated with derivatives not designated as hedges affecting Net earnings for the nine months ended September 30:
  
Location of gain (loss)         
recognized in Net earnings
 
Amount of gain (loss)         
recognized in Net earnings
In millions
2013
 
2012
Currency derivatives
Other, net
 
$
(28.3
)
 
$
35.9

Total

 
$
(28.3
)
 
$
35.9

The gains and losses associated with the Company’s undesignated currency derivatives are materially offset in Net earnings by changes in the fair value of the underlying transactions.

Concentration of Credit Risk
The counterparties to the Company’s forward contracts consist of a number of investment grade major international financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However, the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no significant credit risk to the Company.

Note 9 – Pensions and Postretirement Benefits Other than Pensions
The Company sponsors several U.S. defined benefit and defined contribution plans covering substantially all of our U.S. employees. Additionally, the Company has many non-U.S. defined benefit and defined contribution plans covering eligible non-U.S. employees. Postretirement benefits, other than pensions, provide healthcare benefits, and in some instances, life insurance benefits for certain eligible retired employees.
Pension Plans
The noncontributory defined benefit pension plans covering non-collectively bargained U.S. employees provide benefits on an average pay formula while most plans for collectively bargained U.S. employees provide benefits on a flat dollar benefit formula. The non-U.S. pension plans generally provide benefits based on earnings and years of service. The Company also maintains additional other supplemental plans for officers and other key employees.
In June 2012, the Board of Directors approved amendments to the Company's retirement plans for certain U.S. and Puerto Rico non-bargained employees. Eligible non-bargained employees hired prior to July 1, 2012 were given a choice of remaining in their respective defined benefit plan until the plan freezes on December 31, 2022 or freezing their accrued benefits in their respective defined benefit plan as of December 31, 2012 and receiving an additional 2% non-matching Company contribution into the Company's applicable defined contribution plan. Eligible employees hired or rehired on or after July 1, 2012 automatically receive the 2% non-matching Company contribution into the applicable defined contribution plan in lieu of participating in the defined benefit plan. Beginning January 1, 2023, all eligible employees will receive the 2% non-matching contribution into the applicable defined contribution plan. As a result of these changes, the Company's projected benefit obligations for the amended plans were remeasured in June 2012, which included updating the discount rate assumption to 4.00% from the 4.25% assumed at December 31, 2011. The amendments resulted in a 2012 curtailment loss of $4.0 million. The amendment and remeasurement resulted in an increase of $1.0 million to the projected benefit obligation, an increase of $29.4 million to the plan assets, an actuarial gain of $28.4 million and a credit of $4.0 million to prior service cost during 2012.

11
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The components of the Company’s net periodic pension benefit costs for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Service cost
$
20.2

 
$
23.5

 
$
66.3

 
$
73.0

Interest cost
39.9

 
40.9

 
118.2

 
122.3

Expected return on plan assets
(42.2
)
 
(43.9
)
 
(126.1
)
 
(129.5
)
Net amortization of:

 

 

 

Prior service costs
1.2

 
1.3

 
3.6

 
4.0

Plan net actuarial losses
17.8

 
15.7

 
48.8

 
45.0

Net periodic pension benefit cost
36.9

 
37.5

 
110.8

 
114.8

Net curtailment and settlement losses
—

 
0.4

 
—

 
4.5

Net periodic pension benefit cost after net curtailment and  settlement losses
$
36.9

 
$
37.9

 
$
110.8

 
$
119.3

Amounts recorded in continuing operations
$
33.9

 
$
36.6

 
$
103.2

 
$
112.2

Amounts recorded in discontinued operations
3.0

 
1.3

 
7.6

 
7.1

Total
$
36.9

 
$
37.9

 
$
110.8

 
$
119.3

The Company made required and discretionary employer contributions of $45.3 million and $34.6 million to its defined benefit pension plans during the nine months ended September 30, 2013 and 2012, respectively.
The curtailment and settlement losses in 2012 are associated with lump sum distributions under supplemental benefit plans for officers and other key employees.
Postretirement Benefits Other Than Pensions
The Company sponsors several postretirement plans that provide for healthcare benefits, and in some instances, life insurance benefits that cover certain eligible retired employees. The Company funds postretirement benefit obligations principally on a pay as you go basis. Generally, postretirement health benefits are contributory with contributions adjusted annually. Life insurance plans for retirees are primarily noncontributory.
In February 2012, the Board of Directors approved amendments to its postretirement medical plan with respect to post-65 retiree medical coverage. Effective January 1, 2013, the Company discontinued offering company-sponsored retiree medical coverage for certain individuals age 65 and older. The Company transitioned affected individuals to coverage through the individual Medicare market and will provide a tax-advantaged subsidy to those retirees eligible for subsidized company coverage that can be used toward reimbursing premiums and other qualified medical expenses for individual Medicare supplemental coverage that is purchased through our third-party Medicare coordinator. As a result of these changes, the Company's projected benefit obligations were remeasured in February 2012, which included updating the discount rate assumption to 3.75% from the 4.00% assumed at December 31, 2011. The remeasurement resulted in a decrease of $40.5 million to the projected benefit obligation, an actuarial loss of $21.3 million and a credit of $61.8 million to prior service cost.

12
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The components of net periodic postretirement benefit cost for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Service cost
$
1.6

 
$
1.6

 
$
5.0

 
$
5.5

Interest cost
6.0

 
7.0

 
19.4

 
23.2

Net amortization of:
 
 
 
 
 
 
 
Prior service gains
(2.7
)
 
(2.6
)
 
(7.9
)
 
(7.5
)
Net actuarial losses
(0.1
)
 
0.1

 
5.3

 
5.4

Net periodic postretirement benefit cost
$
4.8

 
$
6.1

 
$
21.8

 
$
26.6

Amounts recorded in continuing operations
$
3.2

 
$
4.4

 
$
14.0

 
$
17.5

Amounts recorded in discontinued operations
1.6

 
1.7

 
7.8

 
9.1

Total
$
4.8

 
$
6.1

 
$
21.8

 
$
26.6

Note 10 – Fair Value Measurement
Fair value is defined 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. Fair value measurements are based on a framework that utilizes 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 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.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

13
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Assets and liabilities measured at fair value at September 30, 2013 were as follows:
 
Fair value measurements
 
Total
fair value
In millions
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Recurring fair value measurements
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Marketable securities
$
20.1

 
$
—

 
$
—

 
$
20.1

Derivative instruments
—

 
12.0

 
—

 
12.0

Total asset recurring fair value measurements
$
20.1

 
$
12.0

 
$
—

 
$
32.1

Liabilities:

 

 

 

Derivative instruments
$
—

 
$
11.3

 
$
—

 
$
11.3

Total liability recurring fair value measurements
$
—

 
$
11.3

 
$
—

 
$
11.3

Financial instruments not carried at fair value
 
 
 
 
 
 
 
Total debt
$
—

 
$
3,778.1

 
$
—

 
$
3,778.1

Total financial instruments not carried at fair value
$
—

 
$
3,778.1

 
$
—

 
$
3,778.1

Assets and liabilities measured at fair value at December 31, 2012 were as follows:
 
Fair value measurements
 
Total
fair value
In millions
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Recurring fair value measurements
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Marketable securities
$
16.7

 
$
—

 
$
—

 
$
16.7

Derivative instruments
—

 
4.7

 
—

 
4.7

Total asset recurring fair value measurements
$
16.7

 
$
4.7

 
$
—

 
$
21.4

Liabilities:

 

 

 

Derivative instruments
$
—

 
$
11.7

 
$
—

 
$
11.7

Total liability recurring fair value measurements
$
—

 
$
11.7

 
$
—

 
$
11.7

Financial instruments not carried at fair value
 
 
 
 
 
 
 
Total debt
$
—

 
$
3,663.1

 
$
—

 
$
3,663.1

Total financial instruments not carried at fair value
$
—

 
$
3,663.1

 
$
—

 
$
3,663.1

The Company determines the fair value of its financial assets and liabilities using the following methodologies:
•
Marketable securities – These securities include investments in publicly 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.
•
Derivative instruments – These instruments include forward contracts related to non-U.S. currencies and forward starting interest rate swaps. The fair value of the derivative instruments are determined based on a pricing model that uses inputs from actively quoted currency markets that are readily accessible and observable.
•
Debt – These securities are recorded at cost and include fixed-rate debentures, with a put feature, maturing in 2027 and 2028, which only require early prepayment at the option of the holder; and other fixed-rate debentures and senior notes maturing through 2043. The fair value of the long-term debt instruments is obtained based on observable market prices quoted on public exchanges for similar instruments.

14
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings are a reasonable estimate of their fair value due to the short-term nature of these instruments.
These methodologies used by the Company to determine the fair value of its financial assets and liabilities at September 30, 2013 are the same as those used at December 31, 2012. There have been no significant transfers between Level 1 and Level 2 categories.
Note 11 – Equity
The reconciliation of Ordinary shares is as follows:
In millions
Total
December 31, 2012
295.6

Shares issued under incentive plans, net
6.9

Repurchase of ordinary shares
(13.8
)
September 30, 2013
288.7

During the nine months ended September 30, 2013, the Company repurchased 13.8 million shares for $795.2 million as a part of its share repurchase programs. These repurchases were accounted for as a reduction of Ordinary shares and Capital in excess of par value as they were canceled upon repurchase.
The components of Equity for the nine months ended September 30, 2013 were as follows:
In millions
IR-Ireland
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2012
$
7,147.8

 
$
81.5

 
$
7,229.3

Net earnings
571.1

 
29.0

 
600.1

Currency translation
(2.7
)
 
(2.8
)
 
(5.5
)
Change in value of marketable securities and derivatives qualifying as cash flow hedges, net of tax
18.6

 
—

 
18.6

Pension and OPEB adjustments, net of tax
32.0

 
—

 
32.0

Total comprehensive income
619.0

 
26.2

 
645.2

Share-based compensation
53.8

 
—

 
53.8

Dividends declared to noncontrolling interests
—

 
(15.8
)
 
(15.8
)
Dividends declared to ordinary shareholders
(123.0
)
 
—

 
(123.0
)
Shares issued under incentive plans, net
192.3

 
—

 
192.3

Repurchase of ordinary shares
(795.2
)
 
—

 
(795.2
)
Balance at September 30, 2013
$
7,094.7

 
$
91.9

 
$
7,186.6


15
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The components of Equity for the nine months ended September 30, 2012 were as follows:
In millions
IR-Ireland
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2011
$
6,924.3

 
$
88.1

 
$
7,012.4

Net earnings
783.0

 
19.2

 
802.2

Currency translation
58.4

 
(10.3
)
 
48.1

Change in value of marketable securities and derivatives qualifying as cash flow hedges, net of tax
5.2

 
—

 
5.2

Pension and OPEB adjustments, net of tax
58.3

 
(1.3
)
 
57.0

Total comprehensive income
904.9

 
7.6

 
912.5

Share-based compensation
34.7

 
—

 
34.7

Settlement of Exchangeable Senior Notes
(4.5
)
 
—

 
(4.5
)
Acquisition/divestiture of noncontrolling interests
(1.2
)
 
0.8

 
(0.4
)
Dividends declared to noncontrolling interests
—

 
(12.3
)
 
(12.3
)
Dividends declared to ordinary shareholders
(98.5
)
 
—

 
(98.5
)
Accretion of Exchangeable Senior Notes from Temporary equity
3.3

 
—

 
3.3

Shares issued under incentive plans, net
57.7

 
—

 
57.7

Repurchase of ordinary shares
(374.9
)
 
—

 
(374.9
)
Balance at September 30, 2012
$
7,445.8

 
$
84.2

 
$
7,530.0

Other Comprehensive Income (Loss)
The changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2013 are as follows:
In millions
 
Cash flow hedges and marketable securities
 
Pension and OPEB Items
 
Foreign Currency Items
 
Total
December 31, 2012
 
$
(1.4
)
 
$
(964.2
)
 
$
444.6

 
$
(521.0
)
Other comprehensive income before reclassifications
 
9.4

 
(1.1
)
 
(2.7
)
 
5.6

Amounts reclassified from accumulated other comprehensive income
 
9.6

 
49.8

 
—

 
59.4

Tax (expense) benefit
 
(0.3
)
 
(16.7
)
 
—

 
(17.0
)
September 30, 2013
 
$
17.3

 
$
(932.2
)
 
$
441.9

 
$
(473.0
)


16
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The reclassifications out of Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2013 were as follows:
 
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
 
In millions
 
Three months ended
 
Nine months ended
 
Statement of Comprehensive Income Line Item
Reclasses below represent (Income) loss to the Statement of Comprehensive Income
 
 
 
 
 
 
 
Gains and losses on cash flow hedges:
 
 
 
 
 
 
Interest rate locks
 
$
0.6

 
$
2.2

 
 Interest expense
Interest rate swaps
 
(0.2
)
 
(0.2
)
 
 Interest expense
Foreign exchange contracts
 
2.3

 
7.6

 
 Cost of goods sold
 
 
2.7

 
9.6

 
 Earnings before income taxes
 
 
(0.2
)
 
(0.7
)
 
 Provision for income taxes
 
 
2.5

 
8.9

 
 
 
 
 
 
 
 
 
Defined benefit pension items:
 
 
 
 
 
 
Amortization of:
 
 
 
 
 
 
Prior-service (gains) costs
 
$
(1.5
)
 
$
(4.3
)
 
 (a)
Actuarial (gains) losses
 
17.7

 
54.1

 
 (a)
 
 
16.2

 
49.8

 
 Earnings before income taxes
 
 
(5.2
)
 
(16.7
)
 
 Provision for income taxes
 
 
11.0

 
33.1

 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
13.5

 
$
42.0

 
 
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost and net periodic postretirement benefit cost (see Note 9 for additional details).
Note 12 – Share-Based Compensation
The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units (RSUs), performance share units (PSUs) and deferred compensation.
Compensation Expense
Share-based compensation expense relates to continuing operations and is included in Selling and administrative expenses. The expenses recognized for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Stock options
$
4.3

 
$
4.2

 
$
17.5

 
$
1.7

RSUs
5.5

 
5.1

 
21.9

 
17.1

PSUs
4.5

 
6.4

 
15.8

 
16.3

Deferred compensation
0.3

 
(0.4
)
 
1.2

 
(0.5
)
Other
0.9

 
0.4

 
1.7

 
1.9

Pre-tax expense
15.5

 
15.7

 
58.1

 
36.5

Tax benefit
(5.9
)
 
(6.0
)
 
(22.2
)
 
(14.0
)
After-tax expense
$
9.6

 
$
9.7

 
$
35.9

 
$
22.5


17
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)



During the first quarter of 2012, the Company recorded a correcting adjustment resulting in the reversal of $13.5 million ($8.3 million after tax) of previously charged compensation expense related to the accounting for stock option forfeitures. The Company concluded the correcting adjustment is not material to 2012 or to any of its previously issued annual or interim financial statements.
Stock Options/RSUs
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. Grants issued during the nine months ended September 30 were as follows:
 
2013
 
2012
 
Number
granted
 
Weighted-
average fair
value per award
 
Number
granted
 
Weighted-
average fair
value per award
Stock options
1,338,402

 
$
16.54

 
1,463,352

 
$
13.67

RSUs
575,176

 
$
52.92

 
636,622

 
$
40.69

The fair value of each of the Company’s stock option and RSU awards is expensed on a straight-line basis over the required service period, which is generally the 3-year vesting period. However, for stock options and RSUs granted to retirement eligible employees, the Company recognizes expense for the fair value at the grant date.
The average fair value of the stock options granted is determined using the Black-Scholes option-pricing model. The following assumptions were used during the nine months ended September 30:
 
 
2013
 
2012
Dividend yield
 
1.60
%
 
1.33
%
Volatility
 
42.15
%
 
43.60
%
Risk-free rate of return
 
0.85
%
 
0.92
%
Expected life
 
5.1 years

 
5.1 years

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 expected life of the Company's stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.
PSUs
The Company has a Performance Share Program for key employees. The program provides awards in the form of PSUs based on performance against pre-established objectives. The annual target award level is expressed as a number of the Company's ordinary shares. All PSUs are settled in the form of ordinary shares unless deferred. During the nine months ended September 30, 2013, the Company granted PSUs with a maximum award level of approximately 0.5 million shares.
Awards granted in 2011 are based upon the Company's relative earnings-per-share (EPS) growth as compared to the industrial group of companies in the S&P 500 Index over the three-year performance period.
Awards granted after 2011 are based 50% upon a performance condition, measured at each reporting period by relative EPS growth to the industrial group of companies in the S&P 500 Index and the fair market value of the Company's stock on the date of grant, and 50% upon a market condition, measured by the Company's relative total shareholder return (TSR) as compared to the TSR of the industrial group of companies in the S&P 500 Index over the three-year performance period. The fair value of the market condition is estimated using a Monte Carlo Simulation approach in a risk-neutral framework based upon historical volatility, risk-free rates and correlation matrix.
Deferred Compensation
The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices, including its ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares of the Company at the time of distribution.

18
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Other Plans
The Company has issued stock grants as an incentive plan to certain key employees, with varying vesting periods. All stock grants are settled with the Company’s ordinary shares.

Note 13 – Restructuring Activities
Restructuring charges recorded during the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Climate Solutions
$
2.6

 
$
1.4

 
$
23.5

 
$
11.2

Residential Solutions
—

 
—

 
—

 
0.2

Industrial Technologies
0.3

 
0.3

 
5.4

 
7.8

Security Technologies
1.0

 
(0.1
)
 
5.6

 
7.8

Corporate and Other
6.4

 
0.5

 
9.2

 
2.6

Total
$
10.3

 
$
2.1

 
$
43.7

 
$
29.6

Cost of goods sold
$
1.1

 
$
0.7

 
$
15.2

 
$
12.1

Selling and administrative expenses
9.2

 
1.4

 
28.5

 
17.5

Total
$
10.3

 
$
2.1

 
$
43.7

 
$
29.6

The changes in the restructuring reserve during the nine months ended September 30, 2013 were as follows:
In millions
Climate
Solutions
 
Residential
Solutions
 
Industrial
Technologies
 
Security
Technologies
 
Corporate
and Other
 
Total
December 31, 2012
$
4.7

 
$
—

 
$
2.1

 
$
3.1

 
$
1.9

 
$
11.8

Additions, net of reversals
23.5

 
—

 
5.4

 
5.6

 
9.2

 
43.7

Cash and non-cash uses
(22.9
)
 
—

 
(5.9
)
 
(3.7
)
 
(8.6
)
 
(41.1
)
Currency translation
(0.1
)
 
—

 
—

 
—

 
—

 
(0.1
)
September 30, 2013
$
5.2

 
$
—

 
$
1.6

 
$
5.0

 
$
2.5

 
$
14.3

The 2013 charges primarily represent termination benefits to improve the Company's cost structure. The 2012 actions included workforce reductions, as well as the consolidation of manufacturing facilities, in an effort to increase efficiencies across multiple lines of business. As of September 30, 2013, the Company had $14.3 million accrued for costs associated with its ongoing restructuring actions, of which a majority will be paid within one year.
In addition to the 2013 restructuring charges described above, the Company incurred $0.6 million of non-qualified restructuring charges during the nine months ended September 30, 2013, which represent costs that are directly attributable to restructuring activities, but do not fall into the severance, exit or disposal category. These non-qualified restructuring charges were incurred to improve the Company's cost structure.
Note 14 – Other, Net
The components of Other, net for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2013

2012
 
2013
 
2012
Interest income
$
3.6

 
$
4.0

 
$
9.6

 
$
12.6

Exchange gain (loss)
(3.4
)
 
(1.3
)
 
(17.1
)
 
(4.1
)
Earnings (loss) from equity investments
1.0

 
1.7

 
(1.6
)
 
(4.3
)
Other
4.8

 
13.0

 
6.4

 
17.0

Other, net
$
6.0

 
$
17.4

 
$
(2.7
)
 
$
21.2


19
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Included within Earnings (loss) from equity investments for the three months ended September 30, 2013 and 2012 is $1.0 million and $1.7 million of equity income on the Hussmann equity investment, respectively. Included within Earnings (loss) from equity investments for the nine months ended September 30, 2013 and 2012 is $1.6 million and $4.3 million of equity losses on the Hussmann equity investment, respectively. The Company's ownership percentage in Hussmann Parent, an affiliate of private equity firm Clayton Dubilier & Rice, LLC, was 37.2% as of September 30, 2013 and is recorded using the equity method of accounting.  The Company's equity investment in the Hussmann Parent is reported within Other noncurrent assets.
In February 2013, the government of Venezuela announced a devaluation of the Bolivar, from the pre-existing exchange rate of 4.29 Bolivars to the U.S. dollar to 6.3 Bolivars to the U.S. dollar. As a result of the devaluation, the Company realized a foreign currency translation loss of approximately $10.0 million, which is included in Exchange gain (loss) for the nine months ended September 30, 2013.
Note 15 – Income Taxes
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, 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 Brazil, Canada, China, Germany, Ireland, Italy, the Netherlands and the United States. In general, the examination of the Company’s material tax returns is complete for the years prior to 2001, with certain matters being resolved through appeals and litigation.
In 2007, the Company 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 IRS proposed to ignore the entities that hold the intercompany debt incurred in connection with the Company's reincorporation in Bermuda and to which the interest was paid and impose 30% withholding tax on a portion of the interest payments as if they were made directly to a company that was not eligible for reduced U.S. withholding tax under a U.S. income tax treaty. The IRS asserted that the Company owes additional taxes with respect to 2002 of approximately $84 million plus interest. The Company strongly disagreed with the view of the IRS and filed a protest. In 2010, the Company received an amended notice from the IRS assessing penalties of 30% on the asserted underpayment of tax described above.
The Company has so far been unsuccessful in resolving this dispute and recently received a Notice of Deficiency from the IRS for 2002. When a taxpayer receives a Notice of Deficiency, it has 90 days to file a petition in the United States Tax Court, or it must pay the tax. The Company intends to file a petition in the Tax Court within the 90 day time limit, which expires in early November 2013.
Recently the IRS examination team auditing the Company's 2003-2006 tax years provided Notices of Proposed Adjustment (NOPAs) related to the Company's interest payments on the intercompany debt issued in connection with its reincorporation in Bermuda. In these notices, which reflect the examination team's written position but are not a formal assertion of tax owed, the IRS asserts that the Company owes a total of approximately $665 million of additional taxes, as described more fully below, in connection with these interest payments for the 2003-2006 period, plus penalties and interest on these unpaid taxes.
In these NOPAs, the IRS continues to take the position on this intercompany debt, which was retired at the end of 2011, that it previously took for the Company's 2002 tax year and which is described above. As a result of this recharacterization, the IRS asserts that the Company owes approximately $455 million of withholding tax for 2003-2006 plus 30% penalties.
The IRS also proposes to extend its position further and to treat all of the interest income from this intercompany debt as “earned” by IR-Limited and, as a result, recharacterize the distributions made by IR-Limited during the 2002-2006 tax years as taxable dividends instead of as a return of capital. Consequently the IRS asserts that the Company owes approximately $210 million of income tax on these dividends plus penalties of 20%.
Although the Company expects it to do so, the IRS has not yet proposed any similar adjustments for years subsequent to 2006, as the federal income tax audits for those years are still in process or have not yet begun. In addition, the Company does not know how the IRS will apply its position to the different facts presented in those years or whether the IRS will take a similar position in future audits with respect to intercompany debt instruments not outstanding in prior years.

20
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The Company has vigorously contested all of these proposed adjustments and intends to continue to do so. Although the outcome of these matters cannot be predicted with certainty, based upon an analysis of the merits of the Company's position the Company believes that it is adequately reserved under the applicable accounting standards for these matters and does not expect that the ultimate resolution will have a material adverse impact on its future results of operations, financial condition, or cash flows. As the Company moves forward to resolve these matters with the IRS, the reserves established may be adjusted. Although the Company continues to contest the IRS's position, there can be no assurance that it will be successful. If the IRS's position with respect to the 2002-2006 tax years is ultimately sustained the Company would be required to record additional charges and the resulting liability will have a material adverse impact on its future results of operations, financial condition and cash flows.
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 GAAP. 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.
Total unrecognized tax benefits as of September 30, 2013 and December 31, 2012 were $550.0 million and $533.7 million, respectively.
Note 16 – Discontinued Operations
The components of Discontinued operations, net of tax for the three and nine months ended September 30 were as follows:  
 
Three months ended
 
Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Net revenues
$
—

 
$
—

 
$
—

 
$
—

Pre-tax earnings (loss) from operations
$
(6.0
)
 
$
(13.6
)
 
$
(23.4
)
 
$
(40.4
)
Pre-tax gain (loss) on sale
—

 
—

 
—

 
3.2

Tax benefit (expense)
3.5

 
1.3

 
19.2

 
30.5

Discontinued operations, net of tax
$
(2.5
)
 
$
(12.3
)
 
$
(4.2
)
 
$
(6.7
)
In November 2007, the Company completed the sale of its Bobcat, Utility Equipment and Attachments businesses (collectively, Compact Equipment) to Doosan Infracore for gross proceeds of approximately $4.9 billion, subject to post-closing purchase price adjustments. Compact Equipment manufactured and sold 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. During the second quarter of 2012, Doosan Infracore paid the Company a total of $46.5 million to settle outstanding receivables and disputed post-closing matters.
Discontinued operations, net of tax from previously sold businesses is mainly related to postretirement benefits, product liability, worker's compensation, legal costs (mostly asbestos-related), and tax effects of post-closing purchase price adjustments.
Note 17 – Earnings Per Share (EPS)
Basic EPS is calculated by dividing Net earnings attributable to IR-Ireland by the weighted-average number of ordinary 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 ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans and the effects of the Exchangeable Senior Notes settled in April 2012. The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per share calculations for the three and nine months ended September 30:
 
Three months ended

Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Weighted-average number of basic shares
291.6

 
307.7

 
295.9

 
305.4

Shares issuable under incentive stock plans
3.9

 
4.3

 
3.9

 
3.5

Exchangeable Senior Notes
—

 
—

 
—

 
4.0

Weighted-average number of diluted shares
295.5

 
312.0

 
299.8

 
312.9

Anti-dilutive shares
1.0

 
2.6

 
1.1

 
5.8


21
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The Company settled all remaining outstanding Exchangeable Senior Notes in April 2012. As a result, the Company paid $357.0 million in cash and issued 10.8 million ordinary shares to settle the principal, interest and equity portion of the notes.
Note 18 – Business Segment Information
The Company classifies its businesses into the following four reportable segments based on industry and market focus: Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies.
Segment operating income is the measure of profit and loss that the Company's chief operating decision maker uses to evaluate the financial performance of the business and as the basis for performance reviews, compensation and resource allocation. For these reasons, the Company believes that Segment operating income represents the most relevant measure of segment profit and loss. The Company may exclude certain charges or gains from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base its operating decisions.
A summary of operations by reportable segment for the three and nine months ended September 30 was as follows:
 
Three months ended

Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Net revenues
 
 
 
 
 
 
 
Climate Solutions
$
2,025.8

 
$
1,941.7

 
$
5,700.4

 
$
5,570.6

Residential Solutions
609.5

 
558.6

 
1,786.5

 
1,632.7

Industrial Technologies
721.9

 
701.6

 
2,165.1

 
2,180.6

Security Technologies
392.3

 
390.9

 
1,142.5

 
1,180.8

Total
$
3,749.5

 
$
3,592.8

 
$
10,794.5

 
$
10,564.7

Segment operating income
 
 
 
 
 
 
 
Climate Solutions (a)
$
279.8

 
$
247.0

 
$
632.0

 
$
579.6

Residential Solutions
66.0

 
45.4

 
152.6

 
86.3

Industrial Technologies
116.2

 
106.6

 
340.8

 
332.5

Security Technologies (b) (c)
103.8

 
83.9

 
248.8

 
236.2

Total
$
565.8

 
$
482.9

 
$
1,374.2

 
$
1,234.6

Reconciliation to Operating income
 
 
 
 
 
 
 
Gain (loss) on sale/asset impairment (a) (b)
(111.4
)
 
—

 
(111.4
)
 
4.5

Unallocated corporate expense
(77.8
)
 
(35.1
)
 
(209.8
)
 
(101.4
)
Operating income
$
376.6

 
$
447.8

 
$
1,053.0

 
$
1,137.7

(a) During the nine months ended September 30, 2012, the Company recorded $4.5 million of purchase price adjustments related to the 2011 Hussmann sale. These amounts have been excluded from Segment operating income within the Climate Solutions segment as management excludes these charges from Operating income when making operating decisions about the business.
(b) During the three and nine months ended September 30, 2013, the Company recorded a non-cash, goodwill impairment charge of $111.4 million. These amounts have been excluded from Segment operating income of Security Technologies segment as management excludes these charges from Operating income when making operating decisions about the business.
(c) Results for the three and nine months ended September 30, 2013, include a $21.5 million gain on a property sale in China.
Note 19 – Commitments and Contingencies
The Company is involved in various litigations, claims and administrative proceedings, including those related to environmental, asbestos, 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, except as expressly set forth in this note, management believes that any liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.
Environmental 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

22
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


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 on our understanding of 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 three months ended September 30, 2013 and 2012, the Company incurred $0.7 million and $0.2 million, respectively, of expenses for environmental remediation at sites presently or formerly owned or leased by us. For the nine months ended September 30, 2013 and 2012, the Company incurred expenses of $3.2 million and $4.1 million, respectively. As of September 30, 2013 and December 31, 2012, the Company has recorded reserves for environmental matters of $59.8 million and $65.9 million, respectively. Of these amounts, $44.8 million and $47.3 million relate to remediation of sites previously disposed by the Company. Environmental reserves are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on their expected term. The Company's total current environmental reserve at September 30, 2013 and December 31, 2012 was $16.3 million and $22.2 million, respectively. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain.
Asbestos-Related 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 have been filed against either Ingersoll-Rand Company (IR-New Jersey) or Trane U.S. Inc. (Trane) and generally allege injury caused by exposure to asbestos contained in certain historical products sold by IR-New Jersey or Trane, primarily pumps, boilers and railroad brake shoes. Neither IR-New Jersey nor Trane was a producer or manufacturer of asbestos, however, some formerly manufactured products utilized asbestos-containing components such as gaskets and packings purchased from third-party suppliers.
The Company engages an outside expert to assist in calculating an estimate of the Company’s total liability for pending and unasserted future asbestos-related claims and annually performs a detailed analysis with the assistance of an outside expert to update its estimated asbestos-related assets and liabilities. The methodology used 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:
•
the outside expert’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;
•
the outside expert’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;
•
adjustments to the future average settlement value of claims, to take into account both inflation and the age of the claimant population; and
•
an analysis of the period over which the Company has and is likely to resolve asbestos-related claims against it in the future.

23
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


At September 30, 2013 and December 31, 2012, over 80 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.
The Company’s liability for asbestos-related matters and the asset for probable asbestos-related insurance recoveries were included in the following balance sheet accounts:
In millions
September 30,
2013
 
December 31,
2012
Accrued expenses and other current liabilities
$
69.1

 
$
69.1

Other noncurrent liabilities
766.2

 
810.4

Total asbestos-related liabilities
$
835.3

 
$
879.5

Other current assets
$
22.4

 
$
22.5

Other noncurrent assets
293.2

 
297.8

Total asset for probable asbestos-related insurance recoveries
$
315.6

 
$
320.3

The Company's asbestos insurance receivable related to IR-New Jersey and Trane was $126.2 million and $189.4 million at September 30, 2013, and $125.5 million and $194.8 million at December 31, 2012, respectively.
The (costs) income associated with the settlement and defense of asbestos-related claims after insurance recoveries for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Continuing operations
$
2.7

 
$
7.4

 
$
(2.3
)
 
$
6.4

Discontinued operations
(1.5
)
 
(4.7
)
 
(6.4
)
 
(9.7
)
Total
$
1.2

 
$
2.7

 
$
(8.7
)
 
$
(3.3
)
IR-New Jersey records 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. Income and expenses associated with Trane’s asbestos liabilities and corresponding insurance recoveries are recorded within continuing operations.
Trane has now settled claims regarding asbestos coverage with most of its insurers. The settlements collectively account for approximately 95% of its recorded asbestos-related insurance receivable as of September 30, 2013. Most of Trane’s settlement agreements constitute “coverage-in-place” arrangements, in which the insurer signatories agree to reimburse Trane for specified portions of its costs for asbestos bodily injury claims and Trane agrees to certain claims-handling protocols and grants to the insurer signatories certain releases and indemnifications. Trane remains in litigation in an action that Trane filed in November 2010 in the Circuit Court for La Crosse County, Wisconsin, relating to claims for insurance coverage for a subset of Trane's historical asbestos-related liabilities.
In January 2012, IR-New Jersey filed an action in the Superior Court of New Jersey, Middlesex County, seeking a declaratory judgment and other relief regarding the Company's rights to defense and indemnity for asbestos claims. The defendants are several dozen solvent insurance companies, including companies that had been paying a portion of IR-New Jersey's asbestos claim defense and indemnity costs. The action involves IR-New Jersey's unexhausted insurance policies applicable to the asbestos claims that are not subject to any settlement agreement. The responding defendants generally challenged the Company's right to recovery, and raised various coverage defenses.
The Company continually monitors the status of pending litigation that could impact the allocation of asbestos claims against the Company's various insurance policies. The Company has concluded that its IR-New Jersey insurance receivable is probable of recovery because of the following factors:
•
a review of other companies in circumstances comparable to IR-New Jersey, including Trane, and the success of other companies in recovering under their insurance policies, including Trane's favorable settlement discussed above;

24
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


•
the Company's confidence in its right to recovery under the terms of its policies and pursuant to applicable law; and
•
the Company's history of receiving payments under the IR-New Jersey insurance program, including under policies that had been the subject of prior litigation.
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 calculations vary significantly from actual results. Key variables in these assumptions 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.
Other
Standard product warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience. The Company assesses the adequacy of its liabilities and will make adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available.
The changes in the standard product warranty liability for the nine months ended September 30 were as follows:
In millions
2013
 
2012
Balance at beginning of period
$
263.1

 
$
264.4

Reductions for payments
(124.9
)
 
(114.8
)
Accruals for warranties issued during the current period
117.6

 
117.4

Changes to accruals related to preexisting warranties
(0.1
)
 
(1.3
)
Translation
0.1

 
(0.1
)
Balance at end of period
$
255.8

 
$
265.6

Standard product warranty liabilities are classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on their expected term. The Company's total current standard product warranty reserve at September 30, 2013 and December 31, 2012 was $138.4 million and $147.4 million, respectively.
The Company's extended warranty liability represents the deferred revenue associated with its extended warranty contracts and is amortized into Revenue on a straight-line basis over the life of the contract, unless another method is more representative of the costs incurred. The Company assesses the adequacy of its liability by evaluating the expected costs under its existing contracts to ensure these expected costs do not exceed the extended warranty liability.
The changes in the extended warranty liability for the nine months ended September 30 were as follows:
In millions
2013
 
2012
Balance at beginning of period
$
375.1

 
$
372.0

Amortization of deferred revenue for the period
(78.6
)
 
(76.5
)
Additions for extended warranties issued during the period
66.7

 
80.1

Changes to accruals related to preexisting warranties
3.0

 
2.5

Translation
(0.2
)
 
0.4

Balance at end of period
$
366.0

 
$
378.5


25
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


The extended warranty liability is classified as Accrued expenses and other current liabilities or Other noncurrent liabilities based on the timing of when the deferred revenue is expected to be amortized into Revenue. The Company's total current extended warranty liability at September 30, 2013 and December 31, 2012 was $96.6 million and $98.5 million, respectively. For the nine months ended September 30, 2013 and 2012, the Company incurred costs of $48.6 million and $42.9 million, respectively, related to extended warranties.
Trane has commitments and performance guarantees, including energy savings guarantees, totaling $427.6 million extending from 2013-2032. These guarantees are provided under long-term service and maintenance contracts related to its air conditioning equipment and system controls. Through September 30, 2013, the Company has experienced no significant losses under such arrangements and considers the probability of any significant future losses to be remote.
Note 20 – Guarantor Financial Information
Ingersoll-Rand plc, an Irish public limited company (IR-Ireland), is the successor to Ingersoll-Rand Company Limited, a Bermuda company (IR-Limited), following a corporate reorganization that became effective on July 1, 2009 (the Ireland Reorganization). IR-Limited is the successor to Ingersoll-Rand Company, a New Jersey corporation (IR-New Jersey), following a corporate reorganization that occurred on December 31, 2001 (the Bermuda Reorganization).
As part of the Bermuda Reorganization, IR-New Jersey and certain of its subsidiaries hold non-voting, Class B common shares of IR-Limited. In addition, IR-Limited fully and unconditionally guaranteed all of the issued public debt securities of IR-New Jersey. IR-New Jersey unconditionally guaranteed payment of the principal and interest on IR-Limited's 4.75% Senior Notes due in 2015 in the aggregate principal amount of $300.0 million. The guarantee is unsecured and provided on an unsubordinated basis. The guarantee ranks equally in right of payment with all of the existing and future unsecured and unsubordinated debt of IR-New Jersey.
As part of the Ireland Reorganization, the guarantor financial statements were revised to present IR-Ireland as the ultimate parent company and Ingersoll-Rand International Holding Limited (IR-International) as a stand-alone subsidiary. In addition, the guarantee structure was updated to reflect the newly created legal structure under which (i) IR-International assumed the obligations of IR-Limited as issuer or guarantor, as the case may be, and (ii) IR-Ireland and IR-Limited fully and unconditionally guaranteed the obligations under the various indentures covering the currently outstanding public debt of IR-International, Ingersoll-Rand Global Holding Company Limited (IR-Global), and IR-New Jersey. Neither IR-Ireland nor IR-Limited has issued or intends to issue guarantees in respect of any public indebtedness incurred by Trane. Also as part of the Ireland Reorganization, IR-Limited transferred all the shares of IR-Global to IR-International in exchange for a note payable that initially approximated $15.0 billion, which was then immediately reduced by the settlement of net intercompany payables of $4.1 billion. At September 30, 2013, $10.8 billion remains outstanding.
The condensed consolidating financial statements present the investments of IR-Ireland, IR-Limited, IR-Global, IR-International and IR-New Jersey using the equity method of accounting. Intercompany investments in the non-voting Class B common shares are accounted for on the cost method and are reduced by intercompany dividends. In accordance with GAAP, the amounts related to the issuance of the Class B shares have been recorded as a reduction of Total equity. The Notes payable affiliate continues to be reflected on the Condensed Consolidating Balance Sheet of IR-International and is enforceable in accordance with their terms.
The following condensed consolidating financial information for IR-Ireland, IR-Limited, IR-Global, IR-International, and IR-New Jersey, and all their other subsidiaries is included so that separate financial statements of IR-Ireland, IR-Limited, IR-Global, IR-International and IR-New Jersey are not required to be filed with the SEC. IR-Ireland's subsidiary debt issuers and guarantors are directly or indirectly 100% owned by IR-Ireland and the guarantees are full and unconditional and joint and several.


26
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Statement of Comprehensive Income
For the three months ended September 30, 2013
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
IR Ireland
Consolidated
Net revenues
$
—

 
$
—

 
$
—

 
$
—

 
$
236.3

 
$
3,513.2

 
$
—

 
$
3,749.5

Cost of goods sold
—

 
—

 
—

 
—

 
(136.0
)
 
(2,368.7
)
 
—

 
(2,504.7
)
Selling and administrative expenses
(10.7
)
 
—

 
—

 
(0.2
)
 
(131.1
)
 
(614.8
)
 
—

 
(756.8
)
Gain (loss) on sale/asset impairment
—

 
—

 
—

 
—

 
—

 
(111.4
)
 
—

 
(111.4
)
Operating income (loss)
(10.7
)
 
—

 
—

 
(0.2
)
 
(30.8
)
 
418.3

 
—

 
376.6

Equity earnings (loss) in affiliates, net of tax
177.7

 
177.8

 
192.0

 
280.1

 
9.1

 
166.5

 
(1,003.2
)
 
—

Interest expense
—

 
—

 
(4.0
)
 
(82.9
)
 
(12.3
)
 
(4.2
)
 
—

 
(103.4
)
Intercompany interest and fees
(3.6
)
 
—

 
(8.0
)
 
(8.1
)
 
(1.1
)
 
20.8

 
—

 
—

Other, net
0.8

 
—

 
0.5

 
—

 
27.9

 
(13.7
)
 
(9.5
)
 
6.0

Earnings (loss) before income taxes
164.2

 
177.8

 
180.5

 
188.9

 
(7.2
)
 
587.7

 
(1,012.7
)
 
279.2

Benefit (provision) for income taxes
1.7

 
—

 
—

 
—

 
(0.9
)
 
(96.6
)
 
—

 
(95.8
)
Earnings (loss) from continuing operations
165.9

 
177.8

 
180.5

 
188.9

 
(8.1
)
 
491.1

 
(1,012.7
)
 
183.4

Discontinued operations, net of tax
—

 
—

 
—

 
—

 
(5.8
)
 
3.3

 
—

 
(2.5
)
Net earnings (loss)
165.9

 
177.8

 
180.5

 
188.9

 
(13.9
)
 
494.4

 
(1,012.7
)
 
180.9

Less: Net earnings attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(24.5
)
 
9.5

 
(15.0
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
165.9

 
$
177.8

 
$
180.5

 
$
188.9

 
$
(13.9
)
 
$
469.9

 
$
(1,003.2
)
 
$
165.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
291.5

 
303.3

 
180.9

 
189.0

 
(9.4
)
 
620.3

 
(1,264.0
)
 
311.6

Less: Total comprehensive (income) loss attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(29.6
)
 
9.5

 
(20.1
)
Total comprehensive income (loss) attributable to Ingersoll-Rand plc
$
291.5

 
$
303.3

 
$
180.9

 
$
189.0

 
$
(9.4
)
 
$
590.7

 
$
(1,254.5
)
 
$
291.5



27
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Statement of Comprehensive Income
For the nine months ended September 30, 2013
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
IR Ireland
Consolidated
Net revenues
$
—

 
$
—

 
$
—

 
$
—

 
$
698.3

 
$
10,096.2

 
$
—

 
$
10,794.5

Cost of goods sold
—

 
—

 
—

 
—

 
(417.9
)
 
(6,957.6
)
 
—

 
(7,375.5
)
Selling and administrative expenses
(19.0
)
 
—

 
—

 
(0.7
)
 
(357.0
)
 
(1,877.9
)
 
—

 
(2,254.6
)
Gain (loss) on sale/asset impairment
—

 
—

 
—

 
—

 
—

 
(111.4
)
 
—

 
(111.4
)
Operating income (loss)
(19.0
)
 
—

 
—

 
(0.7
)
 
(76.6
)
 
1,149.3

 
—

 
1,053.0

Equity earnings (loss) in affiliates, net of tax
595.2

 
595.3

 
639.0

 
819.9

 
119.3

 
643.6

 
(3,412.3
)
 
—

Interest expense
—

 
—

 
(11.9
)
 
(164.3
)
 
(37.1
)
 
(13.5
)
 
—

 
(226.8
)
Intercompany interest and fees
(9.9
)
 
—

 
(25.3
)
 
(26.8
)
 
(1.8
)
 
63.8

 
—

 
—

Other, net
1.3

 
—

 
1.8

 
0.8

 
25.1

 
(7.7
)
 
(24.0
)
 
(2.7
)
Earnings (loss) before income taxes
567.6

 
595.3

 
603.6

 
628.9

 
28.9

 
1,835.5

 
(3,436.3
)
 
823.5

Benefit (provision) for income taxes
3.5

 
—

 
—

 
—

 
34.2

 
(256.9
)
 
—

 
(219.2
)
Earnings (loss) from continuing operations
571.1

 
595.3

 
603.6

 
628.9

 
63.1

 
1,578.6

 
(3,436.3
)
 
604.3

Discontinued operations, net of tax
—

 
—

 
—

 
—

 
(23.2
)
 
19.0

 
—

 
(4.2
)
Net earnings (loss)
571.1

 
595.3

 
603.6

 
628.9

 
39.9

 
1,597.6

 
(3,436.3
)
 
600.1

Less: Net earnings attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(53.0
)
 
24.0

 
(29.0
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
571.1

 
$
595.3

 
$
603.6

 
$
628.9

 
$
39.9

 
$
1,544.6

 
$
(3,412.3
)
 
$
571.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
619.0

 
642.8

 
604.6

 
640.5

 
55.1

 
1,619.2

 
(3,536.0
)
 
645.2

Less: Total comprehensive (income) loss attributable to noncontrolling interests
—

 
—

 
—

 
—

 
2.5

 
(52.7
)
 
24.0

 
(26.2
)
Total comprehensive income (loss) attributable to Ingersoll-Rand plc
$
619.0

 
$
642.8

 
$
604.6

 
$
640.5

 
$
57.6

 
$
1,566.5

 
$
(3,512.0
)
 
$
619.0



28
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Statement of Comprehensive Income
For the three months ended September 30, 2012
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
IR Ireland
Consolidated
Net revenues
$
—

 
$
—

 
$
—

 
$
—

 
$
236.4

 
$
3,356.4

 
$
—

 
$
3,592.8

Cost of goods sold
—

 
—

 
—

 
—

 
(148.5
)
 
(2,305.9
)
 
—

 
(2,454.4
)
Selling and administrative expenses
(3.9
)
 
—

 
—

 
(0.1
)
 
(82.5
)
 
(604.1
)
 
—

 
(690.6
)
Gain (loss) on sale/asset impairment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Operating income (loss)
(3.9
)
 
—

 
—

 
(0.1
)
 
5.4

 
446.4

 
—

 
447.8

Equity earnings (loss) in affiliates, net of tax
329.7

 
329.7

 
334.5

 
387.7

 
47.0

 
346.6

 
(1,775.2
)
 
—

Interest expense
—

 
—

 
(3.9
)
 
(39.7
)
 
(12.3
)
 
(4.7
)
 
—

 
(60.6
)
Intercompany interest and fees
(2.3
)
 
—

 
(12.3
)
 
(12.9
)
 
0.3

 
27.2

 
—

 
—

Other, net
(3.0
)
 
—

 
0.1

 
—

 
29.8

 
(2.9
)
 
(6.6
)
 
17.4

Earnings (loss) before income taxes
320.5

 
329.7

 
318.4

 
335.0

 
70.2

 
812.6

 
(1,781.8
)
 
404.6

Benefit (provision) for income taxes
1.1

 
—

 
—

 
—

 
(19.8
)
 
(46.6
)
 
—

 
(65.3
)
Earnings (loss) from continuing operations
321.6

 
329.7

 
318.4

 
335.0

 
50.4

 
766.0

 
(1,781.8
)
 
339.3

Discontinued operations, net of tax
—

 
—

 
—

 
—

 
(22.4
)
 
10.1

 
—

 
(12.3
)
Net earnings (loss)
321.6

 
329.7

 
318.4

 
335.0

 
28.0

 
776.1

 
(1,781.8
)
 
327.0

Less: Net earnings attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(12.0
)
 
6.6

 
(5.4
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
321.6

 
$
329.7

 
$
318.4

 
$
335.0

 
$
28.0

 
$
764.1

 
$
(1,775.2
)
 
$
321.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
491.8

 
500.0

 
318.7

 
335.1

 
23.4

 
938.7

 
(2,122.0
)
 
485.7

Less: Total comprehensive (income) loss attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(0.5
)
 
6.6

 
6.1

Total comprehensive income (loss) attributable to Ingersoll-Rand plc
$
491.8

 
$
500.0

 
$
318.7

 
$
335.1

 
$
23.4

 
$
938.2

 
$
(2,115.4
)
 
$
491.8



29
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Statement of Comprehensive Income
For the nine months ended September 30, 2012
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
IR Ireland
Consolidated
Net revenues
$
—

 
$
—

 
$
—

 
$
—

 
$
693.3

 
$
9,871.4

 
$
—

 
$
10,564.7

Cost of goods sold
—

 
—

 
—

 
—

 
(444.3
)
 
(6,903.4
)
 
—

 
(7,347.7
)
Selling and administrative expenses
(9.3
)
 
(0.3
)
 
—

 
(0.6
)
 
(242.6
)
 
(1,831.0
)
 
—

 
(2,083.8
)
Gain (loss) on sale/asset impairment
—

 
—

 
—

 
—

 
—

 
4.5

 
—

 
4.5

Operating income (loss)
(9.3
)
 
(0.3
)
 
—

 
(0.6
)
 
6.4

 
1,141.5

 
—

 
1,137.7

Equity earnings (loss) in affiliates, net of tax
800.0

 
599.4

 
653.3

 
1,020.0

 
182.7

 
773.4

 
(4,028.8
)
 
—

Interest expense
—

 
(0.1
)
 
(11.8
)
 
(128.5
)
 
(37.4
)
 
(14.3
)
 
—

 
(192.1
)
Intercompany interest and fees
(7.2
)
 
—

 
(34.6
)
 
(36.7
)
 
0.1

 
78.4

 
—

 
—

Other, net
(2.9
)
 
—

 
0.5

 
(200.7
)
 
31.3

 
9.8

 
183.2

 
21.2

Earnings (loss) before income taxes
780.6

 
599.0

 
607.4

 
653.5

 
183.1

 
1,988.8

 
(3,845.6
)
 
966.8

Benefit (provision) for income taxes
2.4

 
—

 
—

 
—

 
(16.5
)
 
(143.8
)
 
—

 
(157.9
)
Earnings (loss) from continuing operations
783.0

 
599.0

 
607.4

 
653.5

 
166.6

 
1,845.0

 
(3,845.6
)
 
808.9

Discontinued operations, net of tax
—

 
—

 
—

 
—

 
(0.6
)
 
(6.1
)
 
—

 
(6.7
)
Net earnings (loss)
783.0

 
599.0

 
607.4

 
653.5

 
166.0

 
1,838.9

 
(3,845.6
)
 
802.2

Less: Net earnings attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(37.0
)
 
17.8

 
(19.2
)
Net earnings (loss) attributable to Ingersoll-Rand plc
$
783.0

 
$
599.0

 
$
607.4

 
$
653.5

 
$
166.0

 
$
1,801.9

 
$
(3,827.8
)
 
$
783.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
904.9

 
721.0

 
608.3

 
653.3

 
217.6

 
1,897.0

 
(4,089.6
)
 
912.5

Less: Total comprehensive (income) loss attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(25.4
)
 
17.8

 
(7.6
)
Total comprehensive income (loss) attributable to Ingersoll-Rand plc
$
904.9

 
$
721.0

 
$
608.3

 
$
653.3

 
$
217.6

 
$
1,871.6

 
$
(4,071.8
)
 
$
904.9



30
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Balance Sheet
September 30, 2013
 
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
IR Ireland
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
—

 
$
0.8

 
$
99.1

 
$
984.0

 
$
—

 
$
1,083.9

Accounts and notes receivable, net
—

 
—

 
—

 
—

 
126.4

 
2,316.7

 
—

 
2,443.1

Inventories
—

 
—

 
—

 
—

 
76.1

 
1,371.4

 
—

 
1,447.5

Other current assets
0.2

 
—

 
3.5

 
0.9

 
148.1

 
502.5

 
—

 
655.2

Accounts and notes receivable affiliates
128.3

 
3,039.2

 
2.2

 
2,376.8

 
10,068.5

 
26,002.4

 
(41,617.4
)
 
—

Total current assets
128.5

 
3,039.2

 
5.7

 
2,378.5

 
10,518.2

 
31,177.0

 
(41,617.4
)
 
5,629.7

Investment in affiliates
9,503.6

 
7,657.0

 
21,825.5

 
19,428.7

 
8,322.2

 
100,694.4

 
(167,431.4
)
 
—

Property, plant and equipment, net
—

 
—

 
—

 
0.1

 
272.7

 
1,378.9

 
—

 
1,651.7

Intangible assets, net
—

 
—

 
—

 
—

 
83.7

 
10,077.2

 
—

 
10,160.9

Other noncurrent assets
—

 
—

 
0.3

 
19.6

 
880.0

 
659.8

 
—

 
1,559.7

Total assets
$
9,632.1

 
$
10,696.2

 
$
21,831.5

 
$
21,826.9

 
$
20,076.8

 
$
143,987.3

 
$
(209,048.8
)
 
$
19,002.0

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accruals
$
7.5

 
$
—

 
$
6.3

 
$
26.5

 
$
473.6

 
$
2,961.5

 
$
—

 
$
3,475.4

Short-term borrowings and current maturities of long-term debt
—

 
—

 
—

 
—

 
350.5

 
22.7

 
—

 
373.2

Accounts and note payable affiliates
2,529.9

 
34.2

 
4,924.4

 
7,647.2

 
14,830.6

 
11,294.5

 
(41,260.8
)
 
—

Total current liabilities
2,537.4

 
34.2

 
4,930.7

 
7,673.7

 
15,654.7

 
14,278.7

 
(41,260.8
)
 
3,848.6

Long-term debt
—

 
—

 
299.8

 
2,295.6

 
357.2

 
201.5

 
—

 
3,154.1

Note payable affiliate
—

 
—

 
10,755.7

 
—

 
—

 
—

 
(10,755.7
)
 
—

Other noncurrent liabilities
—

 
—

 
3.8

 
—

 
1,591.2

 
3,217.7

 
—

 
4,812.7

Total liabilities
2,537.4

 
34.2

 
15,990.0

 
9,969.3

 
17,603.1

 
17,697.9

 
(52,016.5
)
 
11,815.4

Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
7,094.7

 
10,662.0

 
5,841.5

 
11,857.6

 
2,473.7

 
126,289.4

 
(157,032.3
)
 
7,186.6

Total liabilities and equity
$
9,632.1

 
$
10,696.2

 
$
21,831.5

 
$
21,826.9

 
$
20,076.8

 
$
143,987.3

 
$
(209,048.8
)
 
$
19,002.0



31
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Balance Sheet
December 31, 2012
 
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
IR Ireland
Consolidated
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
—

 
$
61.9

 
$
59.1

 
$
761.1

 
$
—

 
$
882.1

Accounts and notes receivable, net
—

 
—

 
—

 
—

 
128.8

 
2,028.7

 
—

 
2,157.5

Inventories
—

 
—

 
—

 
—

 
73.1

 
1,235.7

 
—

 
1,308.8

Other current assets
0.1

 
—

 
0.1

 
0.2

 
149.3

 
444.6

 
—

 
594.3

Accounts and notes receivable affiliates
148.9

 
3,039.2

 
2.0

 
2,189.0

 
8,669.5

 
23,772.0

 
(37,820.6
)
 
—

Total current assets
149.0

 
3,039.2

 
2.1

 
2,251.1

 
9,079.8

 
28,242.1

 
(37,820.6
)
 
4,942.7

Investment in affiliates
8,885.1

 
7,095.3

 
21,185.6

 
18,589.8

 
8,179.9

 
99,205.0

 
(163,140.7
)
 
—

Property, plant and equipment, net
—

 
—

 
—

 
0.2

 
254.0

 
1,398.4

 
—

 
1,652.6

Intangible assets, net
—

 
—

 
—

 
—

 
83.8

 
10,256.0

 
—

 
10,339.8

Other noncurrent assets
—

 
—

 
0.5

 
10.0

 
867.3

 
680.0

 
—

 
1,557.8

Total assets
$
9,034.1

 
$
10,134.5

 
$
21,188.2

 
$
20,851.1

 
$
18,464.8

 
$
139,781.5

 
$
(200,961.3
)
 
$
18,492.9

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accruals
$
70.5

 
$
—

 
$
4.0

 
$
46.0

 
$
420.2

 
$
2,656.9

 
$
—

 
$
3,197.6

Short-term borrowings and current maturities of long-term debt
—

 
—

 
—

 
600.0

 
350.5

 
13.2

 
—

 
963.7

Accounts and note payable affiliates
1,734.3

 
34.3

 
4,888.9

 
7,602.2

 
13,337.7

 
9,867.6

 
(37,465.0
)
 
—

Total current liabilities
1,804.8

 
34.3

 
4,892.9

 
8,248.2

 
14,108.4

 
12,537.7

 
(37,465.0
)
 
4,161.3

Long-term debt
—

 
—

 
299.7

 
1,404.4

 
364.7

 
200.5

 
—

 
2,269.3

Note payable affiliate
—

 
—

 
10,755.7

 
—

 
—

 
—

 
(10,755.7
)
 
—

Other noncurrent liabilities
—

 
4.3

 
3.8

 
—

 
1,620.0

 
3,204.9

 
—

 
4,833.0

Total liabilities
1,804.8

 
38.6

 
15,952.1

 
9,652.6

 
16,093.1

 
15,943.1

 
(48,220.7
)
 
11,263.6

Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
7,229.3

 
10,095.9

 
5,236.1

 
11,198.5

 
2,371.7

 
123,838.4

 
(152,740.6
)
 
7,229.3

Total liabilities and equity
$
9,034.1

 
$
10,134.5

 
$
21,188.2

 
$
20,851.1

 
$
18,464.8

 
$
139,781.5

 
$
(200,961.3
)
 
$
18,492.9



32
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2013
 
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating Adjustments
 
IR Ireland
Consolidated
Net cash provided by (used in) continuing operating activities
$
(17.7
)
 
$
—

 
$
(10.1
)
 
$
(164.2
)
 
$
(76.5
)
 
$
1,228.8

 
$
(5.1
)
 
$
955.2

Net cash provided by (used in) discontinued operating activities
—

 
—

 
—

 
—

 
(23.2
)
 
19.1

 
—

 
(4.1
)
Net cash provided by (used in) operating activities
(17.7
)
 
—

 
(10.1
)
 
(164.2
)
 
(99.7
)
 
1,247.9

 
(5.1
)
 
951.1

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
—

 
—

 
—

 
(50.1
)
 
(137.5
)
 
—

 
(187.6
)
Proceeds from sale of property, plant and equipment
—

 
—

 
—

 
—

 
0.5

 
31.9

 
—

 
32.4

Proceeds from business disposition, net of cash
—

 
—

 
—

 
—

 
—

 
4.7

 
—

 
4.7

Net cash provided by (used in) continuing investing activities
—

 
—

 
—

 
—

 
(49.6
)
 
(100.9
)
 
—

 
(150.5
)
Net cash provided by (used in) discontinued investing activities
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net cash provided by (used in) investing activities
—

 
—

 
—

 
—

 
(49.6
)
 
(100.9
)
 
—

 
(150.5
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds (repayments) in debt
—

 
—

 
—

 
291.2

 
(7.5
)
 
11.2

 
—

 
294.9

Debt issuance costs
—

 
—

 
—

 
(13.2
)
 
—

 
—

 
—

 
(13.2
)
Net inter-company proceeds (payments)
803.5

 
—

 
10.1

 
(174.9
)
 
196.8

 
(835.5
)
 
—

 
—

Dividends paid
(183.0
)
 
—

 
—

 
—

 
—

 
(23.2
)
 
5.1

 
(201.1
)
Acquisition/divestiture of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Proceeds from shares issued under incentive plans
192.4

 
—

 
—

 
—

 
—

 
—

 
—

 
192.4

Repurchase of ordinary shares
(795.2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(795.2
)
Other, net
—

 
—

 
—

 
—

 
—

 
(0.1
)
 
—

 
(0.1
)
Net cash provided by (used in) continuing financing activities
17.7

 
—

 
10.1

 
103.1

 
189.3

 
(847.6
)
 
5.1

 
(522.3
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
—

 
—

 
—

 
(76.5
)
 
—

 
(76.5
)
Net increase (decrease) in cash and cash equivalents
—

 
—

 
—

 
(61.1
)
 
40.0

 
222.9

 
—

 
201.8

Cash and cash equivalents - beginning of period
—

 
—

 
—

 
61.9

 
59.1

 
761.1

 
—

 
882.1

Cash and cash equivalents - end of period
$
—

 
$
—

 
$
—

 
$
0.8

 
$
99.1

 
$
984.0

 
$
—

 
$
1,083.9



33
INGERSOLL-RAND PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)


Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2012
 
In millions
IR
Ireland
 
IR
Limited
 
IR
International
 
IR Global
 
IR New
Jersey
 
Other
Subsidiaries
 
Consolidating Adjustments
 
IR Ireland
Consolidated
Net cash provided by (used in) continuing operating activities
$
(12.2
)
 
$
(0.4
)
 
$
(11.3
)
 
$
(216.8
)
 
$
(108.8
)
 
$
1,488.9

 
$
(316.5
)
 
$
822.9

Net cash provided by (used in) discontinued operating activities
—

 
—

 
—

 
—

 
(0.6
)
 
(86.8
)
 
—

 
(87.4
)
Net cash provided by (used in) operating activities
(12.2
)
 
(0.4
)
 
(11.3
)
 
(216.8
)
 
(109.4
)
 
1,402.1

 
(316.5
)
 
735.5

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
—

 
—

 
—

 
(49.3
)
 
(121.6
)
 
—

 
(170.9
)
Proceeds from sale of property, plant and equipment
—

 
—

 
—

 
—

 
—

 
12.8

 
—

 
12.8

Net cash provided by (used in) continuing investing activities
—

 
—

 
—

 
—

 
(49.3
)
 
(108.8
)
 
—

 
(158.1
)
Net cash provided by (used in) discontinued investing activities
—

 
—

 
—

 
—

 
—

 
36.0

 
—

 
36.0

Net cash provided by (used in) investing activities
—

 
—

 
—

 
—

 
(49.3
)
 
(72.8
)
 
—

 
(122.1
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds (repayments) in debt
—

 
—

 
—

 
(280.5
)
 
(8.6
)
 
(62.4
)
 
—

 
(351.5
)
Debt issuance costs
—

 
—

 
—

 
(2.5
)
 
—

 
—

 
—

 
(2.5
)
Net inter-company proceeds (payments)
479.4

 
0.4

 
11.3

 
258.0

 
108.9

 
(858.0
)
 
—

 
—

Dividends paid
(145.1
)
 
—

 
—

 
—

 
—

 
(332.7
)
 
316.5

 
(161.3
)
Acquisition/divestiture of noncontrolling interests
(0.4
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(0.4
)
Proceeds from shares issued under incentive plans
57.7

 
—

 
—

 
—

 
—

 
—

 
—

 
57.7

Repurchase of ordinary shares
(374.9
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(374.9
)
Other, net
(4.5
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(4.5
)
Net cash provided by (used in) continuing financing activities
12.2

 
0.4

 
11.3

 
(25.0
)
 
100.3

 
(1,253.1
)
 
316.5

 
(837.4
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
—

 
—

 
—

 
(7.1
)
 
—

 
(7.1
)
Net increase (decrease) in cash and cash equivalents
—

 
—

 
—

 
(241.8
)
 
(58.4
)
 
69.1

 
—

 
(231.1
)
Cash and cash equivalents - beginning of period
—

 
—

 
—

 
241.8

 
77.8

 
841.1

 
—

 
1,160.7

Cash and cash equivalents - end of period
$
—

 
$
—

 
$
—

 
$
—

 
$
19.4

 
$
910.2

 
$
—

 
$
929.6



34

Item 2 – 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 the Part II, Item 1A – Risk Factors in the Quarterly Report on Form 10-Q for the period ended June 30, 2013 and under Part I, Item 1A – Risk Factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2012. 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 plc (IR-Ireland), an Irish public limited company, and its consolidated subsidiaries (collectively, we, our, the Company) is a diversified, global company that provides products, services and solutions to enhance the quality and comfort of air in homes and buildings, transport and protect food and perishables, secure homes and commercial properties, and increase industrial productivity and efficiency. Our business segments consist of Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies, each with strong brands and leading positions within their respective markets. 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®, Ingersoll-Rand®, Schlage®, Thermo King® and Trane®.
To achieve our mission of being a world leader in creating safe, comfortable and efficient environments, we continue to focus on increasing our recurring revenue stream from parts, service, used equipment and rentals; and to continuously improve the efficiencies and capabilities of the products and services of our high-potential businesses. We also continue to focus on operational excellence strategies as a central theme to improving the earnings and cash flows of our Company.
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. Our geographic and industry diversity, as well as the diversity of our product sales and services, has helped mitigate the impact of any one industry or the economy of any single country on our 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.
Current market conditions, including challenges in international markets, continue to impact our financial results. Uneven global commercial new construction activity is negatively impacting the results of our Security Technologies segment and commercial Heating, Ventilation and Air Conditioning (HVAC) business. However, we believe the commercial HVAC equipment replacement and aftermarket is slowly recovering. We have seen slower worldwide industrial equipment and aftermarket activity. While U.S. residential and consumer markets continue to be a challenge, we are beginning to see improvements in the U.S. new builder and replacement markets. The residential HVAC business also continues to be impacted by a mix shift to units with a lower Seasonal Energy Efficiency Rating (SEER). As economic conditions stabilize, we expect slight revenue growth along with benefits from restructuring and productivity programs.
Despite the current market environment, we believe we have a solid foundation of global brands and leading market shares in all of our major product lines. Our growing geographic and industry diversity coupled with our large installed product base provides growth opportunities within our service, parts and replacement revenue streams. In addition, we are investing substantial resources to innovate and develop new products and services, which we expect will drive our future growth.
Recent Developments
Goodwill Impairment
As discussed further under "Critical Accounting Policies" we performed an interim goodwill impairment test on our Security Technologies - EMEIA reporting unit. For the three and nine months ended September 30, 2013 we recorded a non-cash, pre-tax goodwill impairment charge of $111.4 million ($106.2 million after-tax). This charge had no impact on our cash flows or our compliance with debt covenants.

35

Senior Notes due 2019, 2023, and 2043
In June 2013, we issued $1.55 billion principal amount of Senior Notes in three tranches through our wholly-owned subsidiary, Ingersoll-Rand Global Holding Company Limited (IR-Global) pursuant to Rule 144A of the U.S. Securities Act of 1933 (Securities Act). The tranches consist of $350 million of 2.875% Senior Notes due in 2019, $700 million of 4.250% Senior Notes due in 2023, and $500 million of 5.750% Senior Notes due in 2043. The notes are fully and unconditionally guaranteed by each of IR-Ireland, Ingersoll-Rand Company Limited (IR-Limited), and Ingersoll-Rand International Holding Limited (IR-International). Interest on the notes will be paid twice a year in arrears. The Company has the option to redeem the notes in whole or in part at any time, and from time to time, prior to their stated maturity date at redemption prices set forth in the indenture agreement. The notes are subject to certain customary covenants, however, none of these covenants are considered restrictive to the Company’s operations. In connection with the issuance of each series of notes, IR-Global, the Guarantors and the initial purchasers of the notes entered into a Registration Rights Agreement. Each Registration Rights Agreement requires IR-Global and the Guarantors to use their commercially reasonable efforts to execute an effective exchange offer registration statement with the SEC no later than 365 days after the closing date of the notes offering and to complete an exchange offer within 30 business days of such effective date. If a registration default occurs additional interest shall accrue on the notes. The proceeds from these notes were used to fund the July 2013 redemption of $600 million of 6.000% Senior Notes due 2013 and $655 million of 9.500% Senior Notes due 2014 and to fund expenses related to the spin-off of the commercial and residential security businesses, with any remaining proceeds to be used for general corporate purposes. Related to this redemption, the Company recorded $45.6 million of premium expense in the third quarter of 2013 in Interest expense.
IRS Exam Results
In 2007, we received a notice from the Internal Revenue Service (IRS) containing proposed adjustments to our tax filings in connection with an audit of the 2001 and 2002 tax years. The IRS did not contest the validity of our reincorporation in Bermuda. The IRS proposed to ignore the entities that hold the intercompany debt incurred in connection with our reincorporation in Bermuda and to which the interest was paid and impose 30% withholding tax on a portion of the interest payments as if they were made directly to a company that was not eligible for reduced U.S. withholding tax under a U.S. income tax treaty. The IRS asserted that we owe additional taxes with respect to 2002 of approximately $84 million plus interest. We strongly disagreed with the view of the IRS and filed a protest. In 2010, we received an amended notice from the IRS assessing penalties of 30% on the asserted underpayment of tax described above.
We have so far been unsuccessful in resolving this dispute and recently received a Notice of Deficiency from the IRS for 2002. When a taxpayer receives a Notice of Deficiency, it has 90 days to pay the tax or file a petition in the United States Tax Court. The Company intends to file a petition in Tax Court within the 90 day time limit.
Recently the IRS examination team auditing the Company's 2003-2006 tax years provided Notices of Proposed Adjustment (NOPAs) related to our interest payments on the intercompany debt issued in connection with our reincorporation in Bermuda. In these notices, which reflect the examination team's written position but are not a formal assertion of tax owed, the IRS asserts that we owe a total of approximately $665 million of additional taxes, as described more fully below, in connection with these interest payments for the 2003-2006 period, plus penalties and interest on these unpaid taxes.
In these NOPAs, the IRS continues to take the position on this intercompany debt, which was retired at the end of 2011, that it previously took for our 2002 tax year and which is described above. As a result of this recharacterization, the IRS asserts that we owe approximately $455 million of withholding tax for 2003-2006 plus 30% penalties.
The IRS also proposes to extend its position further and to treat all of the interest income from the intercompany debt as “earned” by Ingersoll-Rand Company Limited (IR-Limited) and, as a result, recharacterize the distributions made by IR-Limited during the 2002-2006 tax years as taxable dividends instead of as a return of capital. Consequently the IRS asserts that we owe approximately $210 million of income tax on these dividends plus penalties of 20%.
Although we expect it to do so, the IRS has not yet proposed any similar adjustments for years subsequent to 2006, as the federal income tax audits for those years are still in process or have not yet begun. In addition, we do not know how the IRS will apply its position to the different facts presented in those years or whether the IRS will take a similar position in future audits with respect to intercompany debt instruments not outstanding in prior years.
We have vigorously contested all of these proposed adjustments and intend to continue to do so. Although the outcome of these matters cannot be predicted with certainty, based upon an analysis of the merits of our position we believe that we are adequately reserved under the applicable accounting standards for these matters and do not expect that the ultimate resolution will have a material adverse impact on our future results of operations, financial condition, or cash flows. As we move forward to resolve these matters with the IRS, the reserves established may be adjusted. Although we continue to contest the IRS's position, there can be no assurance that we will be successful. If the IRS's position with respect to the 2002-2006 tax years is ultimately sustained

36

we would be required to record additional charges and the resulting liability will have a material adverse impact on our future results of operations, financial condition and cash flows.
Venezuela Devaluation
In February 2013, the government of Venezuela announced a devaluation of the Bolivar, from the pre-existing exchange rate of 4.29 Bolivars to the U.S. dollar to 6.3 Bolivars to the U.S. dollar.  We have four subsidiaries with operations in Venezuela. As a result of the devaluation, we realized a foreign currency translation loss of approximately $10.0 million. Further devaluation of the Bolivar could negatively impact our results of operations, financial condition, or cash flows. For additional information, refer to the “Risk Factors” discussion contained in our Annual Report on Form 10-K for the period ended December 31, 2012.
Proposed Spin-Off Transaction
In December 2012, our Board of Directors announced a plan to spin off our commercial and residential security businesses. The separation will result in two stand-alone companies: Ingersoll-Rand plc, a world leader in creating comfortable, sustainable and efficient environments through its industrial, transport refrigeration, and HVAC businesses; and Allegion plc, a leading global provider of electronic and mechanical security products and services, delivering comprehensive solutions to commercial and residential customers. This new company’s portfolio of brands will include Schlage, Von Duprin®, LCN®, CISA®, and Interflex®.
We expect the spin-off, which is intended to be tax free to shareholders, to be completed prior to year-end 2013. However, the completion of the spin-off is subject to certain customary conditions, unless waived by Ingersoll Rand, including receipt of regulatory approvals; the receipt of a private letter ruling from the IRS and opinions of tax counsel confirming that the distribution and certain transactions entered into in connection with the distribution generally will be tax-free to Ingersoll Rand and its shareholders for U.S. federal income tax purposes, except for cash received in lieu of fractional shares; execution of intercompany agreements; effectiveness of appropriate filings with the U.S. Securities and Exchange Commission; and final approval of the transactions contemplated by the spin-off, as may be required under Irish law. There can be no assurance that any separation transaction will ultimately occur, or, if one does occur, its terms or timing. The disclosures within this Management's Discussion and Analysis of Financial Condition and Results of Operations include the results of operations, financial position, and cash flows of the commercial and residential security businesses as continuing operations.
Upon completion of the spin-off, Allegion plc will hold the commercial and residential security businesses and will become an independent publicly traded company. Allegion plc is an Irish public limited company.
During the three and nine months ended September 30, 2013, we incurred $25.7 million and $57.7 million of professional service fees related to the proposed spin-off, respectively. These costs are reported in Selling and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income. The full year 2013 forecast for spin-off related costs and restructuring activities is approximately $0.70 per share, after tax. See Note 13 for a discussion of restructuring activities.
Allegion Debt Structure
In relation to the proposed spin-off of our commercial and residential security businesses, our indirect, wholly owned subsidiary, Allegion US Holding Company Inc. ("Allegion Holdings") expects to have approximately $1.3 billion of indebtedness at the time of the spin-off, the net proceeds of which will be distributed to the Company prior to the spin-off. In addition, Allegion Holdings expects to have a senior secured revolving credit facility permitting borrowings of up to $500 million.
Senior Notes
On October 4, 2013, Allegion Holdings issued $300 million of its 5.75% senior notes due 2021. The senior notes accrue interest at the rate of 5.75% per annum, payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 2014. The senior notes will mature on October 1, 2021. The proceeds from the issuance will be held in escrow until prior to the consumation of the spin-off, when the net proceeds will be distributed to the Company.
Senior Secured Term Loan Facilities
On September 27, 2013, Allegion Holdings completed the syndication of $1.0 billion of senior secured term loan facilities. The Term Facilities consist of (i) a Term A Facility in an aggregate principal amount of $500 million due in 2018 and (ii) a Term B Facility in an aggregate principal amount of $500 million due in 2020 (the loans under such Term Facilities, the “Term Loans”). The net proceeds of the Term Loans will be drawn and distributed to the Company prior to the consummation of the spin-off.
The Company will not be a guarantor or obligor with respect to the Senior Notes, the Senior Secured Term Loan Facilities, or the Senior Secured Revolving Credit Facility.
2012 Dividend Increase and 2013 Share Repurchase Program
In December 2012, we announced an increase in our quarterly stock dividend from $0.16 to $0.21 per share beginning with our March 2013 payment. In December 2012, our Board of Directors authorized the repurchase of up to $2.0 billion of our ordinary shares under a new share repurchase program upon completion of the 2011 share repurchase program. The new share repurchase

37

program began in April 2013. During the nine months ended September 30, 2013, we repurchased 13.8 million shares for $795.2 million. These repurchases will be accounted for as a reduction of Ordinary shares and Capital in excess of par value as they will be canceled upon repurchase.
2011 Share Repurchase Program
Our 2011 share repurchase program was authorized by our Board of Directors in April 2011 and was completed in April 2013. During the year ended December 31, 2012, we repurchased 18.4 million shares for approximately $0.8 billion, excluding commissions. These repurchases were accounted for as a reduction of Ordinary shares and Capital in excess of par value as they were canceled upon repurchase.
Pension and Other Postretirement Plan Amendments
In June 2012, our Board of Directors approved amendments to our retirement plans for certain U.S. and Puerto Rico non-bargained employees. Eligible non-bargained employees hired prior to July 1, 2012 were given a choice of remaining in their respective defined benefit plan until the plan freezes on December 31, 2022 or freezing their accrued benefits in their respective defined benefit plan as of December 31, 2012 and receiving an additional 2% non-matching Company contribution into the Company's applicable defined contribution plan. Eligible employees hired or rehired on or after July 1, 2012 automatically receive the 2% non-matching Company contribution into the applicable defined contribution plan in lieu of participating in the defined benefit plan. Beginning January 1, 2023, all eligible employees will receive the 2% non-matching contribution into the applicable defined contribution plan.
In February 2012, our Board of Directors approved amendments to our postretirement medical plan with respect to post-65 retiree medical coverage. Effective January 1, 2013, we discontinued offering company-sponsored retiree medical coverage for certain individuals age 65 and older. We transitioned affected individuals to coverage through the individual Medicare market and will provide a tax-advantaged subsidy to those retirees eligible for subsidized company coverage that can be used toward reimbursing premiums and other qualified medical expenses for individual Medicare supplemental coverage that is purchased through our third-party Medicare coordinator.

38

Results of Operations – Three Months Ended September 30
In millions, except per share amounts
2013
 
% of
revenues
 
2012
 
% of
revenues
Net revenues
$
3,749.5

 
 
 
$
3,592.8

 
 
Cost of goods sold
(2,504.7
)
 
66.8
%
 
(2,454.4
)
 
68.3
%
Selling and administrative expenses
(756.8
)
 
20.2
%
 
(690.6
)
 
19.2
%
Gain (loss) on sale/asset impairment
(111.4
)
 
3.0
%
 
—

 
—
%
Operating income
376.6

 
10.0
%
 
447.8

 
12.5
%
Interest expense
(103.4
)
 
 
 
(60.6
)
 
 
Other, net
6.0

 
 
 
17.4

 
 
Earnings before income taxes
279.2

 
 
 
404.6

 
 
Provision for income taxes
(95.8
)
 
 
 
(65.3
)
 
 
Earnings from continuing operations
183.4

 
 
 
339.3

 
 
Discontinued operations, net of tax
(2.5
)
 
 
 
(12.3
)
 
 
Net earnings
180.9

 
 
 
327.0

 
 
Less: Net earnings attributable to noncontrolling interests
(15.0
)
 
 
 
(5.4
)
 
 
Net earnings attributable to Ingersoll-Rand plc
$
165.9

 
 
 
$
321.6

 
 
Diluted net earnings (loss) per ordinary share attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
 
 
 
 
Continuing operations
$
0.57

 
 
 
$
1.07

 
 
Discontinued operations
(0.01
)
 
 
 
(0.04
)
 
 
Net earnings
$
0.56

 
 
 
$
1.03

 
 
The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented.
Net Revenues
Net revenues for the three months ended September 30, 2013 increased by 4.4%, or $156.7 million, compared with the same period in 2012, which resulted from the following:
Volume
3.4
%
Pricing
0.9
%
Currency exchange rates
0.1
%
Total
4.4
%
The increase in revenues was primarily driven by volume improvements within the Climate Solutions, Residential Solutions, and Industrial Technologies segments, as well as improved pricing across all segments.
Operating Income/Margin
Operating margin for the three months ended September 30, 2013 decreased to 10.0% from 12.5% for the same period of 2012. The decline was primarily due to a $111.4 million non-cash, goodwill impairment charge (3.1%) and increased investment spending (0.7%), including $25.7 million of spin-related costs, partially offset by improved pricing (0.6%), favorable product mix and volume (0.4%) and improved productivity benefits in excess of other inflation (0.2%).
Interest Expense
Interest expense for the three months ended September 30, 2013 increased $42.8 million, compared with the same period of 2012, primarily as a result of the redemption premium expense incurred during the July 2013 debt redemption discussed in Liquidity and Capital Resources.

39

Other, Net
The components of Other, net for the three months ended September 30 were as follows:
In millions
2013
 
2012
Interest income
$
3.6

 
$
4.0

Exchange gain (loss)
(3.4
)
 
(1.3
)
Earnings (loss) from equity investments
1.0

 
1.7

Other
4.8

 
13.0

Other, net
$
6.0

 
$
17.4

The decrease in Other, net for the three months ended September 30, 2013 resulted primarily from higher foreign currency losses and lower reserve adjustments.
Included within Earnings (loss) from equity investments for the three months ended September 30, 2013 and 2012 is $1.0 million of income and $1.7 million of losses on the Hussmann equity investment, respectively. The Company's ownership percentage in Hussmann Parent, an affiliate of private equity firm Clayton Dubilier & Rice, LLC, was 37.2% as of September 30, 2013 and is recorded using the equity method of accounting.  The Company's equity investment in the Hussmann Parent is reported within Other noncurrent assets.
Provision for Income Taxes
For the three months ended September 30, 2013, the effective tax rate was 34.3%, which is higher than the 27% projected effective rate for 2013, primarily due to the impact of the non-deductible goodwill impairment charge and various tax law changes in the quarter. For the three months ended September 30, 2012, the effective tax rate was 16.1%, which included a net discrete tax benefit of $29 million, primarily resulting from a reduction in valuation allowances in Spain and Brazil on certain deferred tax assets, partially offset by increases to the liability for unrecognized tax benefits. The 2013 annual effective tax rate is below the U.S. statutory rate of 35.0% primarily due to earnings in non-U.S. jurisdictions, which, in aggregate, have a lower effective rate.  Revenues from non-U.S. jurisdictions account for approximately 40% of our total revenues, such that a material portion of our pretax income is earned and taxed outside the U.S. at rates ranging from 0% to 38%.  When comparing the results of multiple reporting periods, among other factors, the mix of earnings between U.S. and foreign jurisdictions can cause variability on our overall effective tax rate.

40

Results of Operations – Nine Months Ended September 30
In millions, except per share amounts
2013
 
% of
revenues
 
2012
 
% of
revenues
Net revenues
$
10,794.5

 
 
 
$
10,564.7

 
 
Cost of goods sold
(7,375.5
)
 
68.3
%
 
(7,347.7
)
 
69.5
 %
Selling and administrative expenses
(2,254.6
)
 
20.9
%
 
(2,083.8
)
 
19.7
 %
Gain (loss) on sale/asset impairment
(111.4
)
 
1.0
%
 
4.5

 
—
 %
Operating income
1,053.0

 
9.8
%
 
1,137.7

 
10.8
 %
Interest expense
(226.8
)
 
 
 
(192.1
)
 
 
Other, net
(2.7
)
 
 
 
21.2

 
 
Earnings before income taxes
823.5

 
 
 
966.8

 
 
Provision for income taxes
(219.2
)
 
 
 
(157.9
)
 
 
Earnings from continuing operations
604.3

 
 
 
808.9

 
 
Discontinued operations, net of tax
(4.2
)
 
 
 
(6.7
)
 
 
Net earnings
600.1

 
 
 
802.2

 
 
Less: Net earnings attributable to noncontrolling interests
(29.0
)
 
 
 
(19.2
)
 
 
Net earnings attributable to Ingersoll-Rand plc
$
571.1

 
 
 
$
783.0

 
 
Diluted net earnings (loss) per ordinary share attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
 
 
 
 
Continuing operations
$
1.92

 
 
 
$
2.52

 
 
Discontinued operations
(0.01
)
 
 
 
(0.02
)
 
 
Net earnings
$
1.91

 
 
 
$
2.50

 
 
The discussions that follow describe the significant factors contributing to the changes in our results of operations for the periods presented.
Net Revenues
Net revenues for the nine months ended September 30, 2013 increased by 2.2%, or $229.8 million, compared with the same period in 2012, which resulted from the following:
Volume
1.2
%
Pricing
1.0
%
Total
2.2
%
The increase in revenues was primarily driven by volume improvements within the Climate Solutions, Residential Solutions, and Security Technologies segments, as well as improved pricing across all segments.
Operating Income/Margin
Operating margin for the nine months ended September 30, 2013 decreased to 9.8% from 10.8% for the same period of 2012. The decline was primarily due to increased investment spending (2.6%), including $57.7 million of spin-related costs, unfavorable product mix and volume (1.1%) and a $111.4 million non-cash, goodwill impairment charge (1.0%), partially offset by improved pricing in excess of material inflation (2.1%) and productivity benefits in excess of other inflation (1.5%).

41

Interest Expense
Interest expense for the nine months ended September 30, 2013 increased $34.7 million, compared with the same period of 2012, primarily as a result of the redemption premium expense incurred during the July 2013 debt redemption discussed in Liquidity and Capital Resources.
Other, Net
The components of Other, net for the nine months ended September 30 are as follows:
In millions
2013
 
2012
Interest income
$
9.6

 
$
12.6

Exchange gain (loss)
(17.1
)
 
(4.1
)
Earnings (loss) from equity investments
(1.6
)
 
(4.3
)
Other
6.4

 
17.0

Other, net
$
(2.7
)
 
$
21.2

The decrease in Other, net for the nine months ended September 30, 2013 resulted primarily from lower reserve adjustments and foreign currency losses, including a realized foreign currency translation loss of $10.0 million related to the devaluation of the Venezuelan Bolivar.
Included within Earnings (loss) from equity investments for the nine months ended September 30, 2013 and 2012 is $1.6 million and $4.3 million of losses on the Hussmann equity investment, respectively. The Company's ownership percentage in Hussmann Parent, an affiliate of private equity firm Clayton Dubilier & Rice, LLC, was 37.2% as of September 30, 2013 and is recorded using the equity method of accounting. The Company's equity investment in the Hussmann Parent is reported within Other noncurrent assets.
Provision for Income Taxes
For the nine months ended September 30, 2013 the effective tax rate was 26.6%. For the nine months ended September 30, 2012 the effective tax rate was 16.3%, which included a discrete tax benefit of $61 million, primarily resulting from a reduction in valuation allowances in Spain and Brazil on certain deferred tax assets, partially offset by increases to the liability for unrecognized tax benefits. The effective tax rate for the nine months ended September 30, 2013 is lower than the U.S. statutory rate of 35.0% primarily due to earnings in non-U.S. jurisdictions, which, in aggregate, have a lower effective rate.  Revenues from non-U.S. jurisdictions account for approximately 40% of our total revenues, such that a material portion of our pretax income is earned and taxed outside the U.S. at rates ranging from 0% to 38%.  When comparing the results of multiple reporting periods, among other factors, the mix of earnings between U.S. and foreign jurisdictions can cause variability on our overall effective tax rate.




42


Review of Business Segments
The segment discussions that follow describe the significant factors contributing to the changes in results for each segment included in continuing operations.
Segment operating income is the measure of profit and loss that our chief operating decision maker uses to evaluate the financial performance of the business and as the basis for performance reviews, compensation and resource allocation. For these reasons, we believe that Segment operating income represents the most relevant measure of segment profit and loss. Management may exclude certain charges or gains from Operating income to arrive at a Segment operating income that is a more meaningful measure of profit and loss upon which to base its operating decisions. We define Segment operating margin as Segment operating income as a percentage of Net revenues.
Climate Solutions
Our Climate Solutions segment delivers energy-efficient refrigeration and HVAC throughout the world. Encompassing the transport refrigeration markets, as well as the commercial HVAC markets, this segment offers customers a broad range of products, services and solutions to manage controlled temperature environments. This segment includes the market-leading brands of Thermo King and Trane.
Segment operating results for Climate Solutions for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
Dollar amounts in millions
2013
 
2012
 
% change
 
2013
 
2012
 
% change
Net revenues
$
2,025.8

 
$
1,941.7

 
4.3
%
 
$
5,700.4

 
$
5,570.6

 
2.3
%
Segment operating income
279.8

 
247.0

 
13.3
%
 
632.0

 
579.6

 
9.0
%
Segment operating margin
13.8
%
 
12.7
%
 
 
 
11.1
%
 
10.4
%
 
 
Net revenues for the three months ended September 30, 2013 increased by 4.3%, or $84.1 million, compared with the same period of 2012, primarily related to higher volumes (3.6%) and improved pricing (0.9%).
Segment operating margin improved to 13.8% for the three months ended September 30, 2013, compared to 12.7% for the same period of 2012. The improvement was primarily driven by pricing improvements in excess of material inflation (0.8%) and favorable volume/product mix (0.5%), partially offset by increased investment spending (0.5%).
Net revenues for the nine months ended September 30, 2013 increased by 2.3%, or $129.8 million, compared with the same period of 2012, primarily related to higher volumes (1.5%) and improved pricing (1.1%).
Segment operating margin improved to 11.1% for the nine months ended September 30, 2013, compared to 10.4% for the same period of 2012. The improvement was primarily driven by pricing improvements in excess of material inflation (0.9%) and productivity benefits in excess of other inflation (0.5%), partially offset by increased investment and restructuring spending (0.6%).
Our Trane commercial HVAC business continues to be impacted by weakness in the worldwide commercial building markets. However, Trane commercial HVAC revenues increased due to improvements in both equipment and parts, services, and solutions revenues. Net revenues in our transport businesses increased driven by improvements in the Americas and Europe.
Residential Solutions
Our Residential Solutions segment provides safety, comfort and efficiency to homeowners throughout North America and parts of South America. It offers customers a broad range of products, services and solutions including mechanical and electronic locks, energy-efficient HVAC systems, indoor air quality solutions, advanced controls, portable security systems and remote home management. This segment is comprised of well-known brands like American Standard®, Schlage and Trane.
Segment operating results for Residential Solutions for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
Dollar amounts in millions
2013
 
2012
 
% change
 
2013
 
2012
 
% change
Net revenues
$
609.5

 
$
558.6

 
9.1
%
 
$
1,786.5

 
$
1,632.7

 
9.4
%
Segment operating income
66.0

 
45.4

 
45.4
%
 
152.6

 
86.3

 
76.8
%
Segment operating margin
10.8
%
 
8.1
%
 
 
 
8.5
%
 
5.3
%
 
 

43

Net revenues for the three months ended September 30, 2013 increased by 9.1%, or $50.9 million, compared with the same period of 2012. The increase was primarily due to higher volumes (5.6%), improved pricing (1.2%), and approximately $16 million of 2013 revenues related to a product line transferred from the Security Technologies segment (2.9%).
Segment operating margin improved to 10.8% for the three months ended September 30, 2013, compared to 8.1% for the same period of 2012. The increase was primarily driven by productivity benefits in excess of other inflation (1.7%), pricing improvements in excess of material inflation (0.9%), and improved volume/product mix (0.6%), partially offset by increased investment spending (0.2%).
Net revenues for the nine months ended September 30, 2013 increased by 9.4%, or $153.8 million, compared with the same period of 2012. The increase was primarily due to higher volumes (5.0%), improved pricing (1.7%), and $51.7 million of 2013 revenues related to a product line transferred from the Security Technologies segment (3.2%).
Segment operating margin improved to 8.5% for the nine months ended September 30, 2013, compared to 5.3% for the same period of 2012. The increase was primarily driven by productivity benefits in excess of other inflation (2.4%) and pricing improvements in excess of material inflation (1.6%), partially offset by unfavorable volume/product mix (0.1%).
Trane residential HVAC revenues increased due to improved activity levels in new residential construction. These improvements were slightly offset by a continued mix shift to lower SEER units. Residential security revenues increased as a result of improved sales to new builder markets and big box retailers in the United States and South America.
Industrial Technologies
Our Industrial Technologies segment provides products, services and solutions that enhance energy efficiency, productivity and operations. It offers our global customers a diverse and innovative range of products including compressed air systems, tools, pumps, fluid and material handling systems, as well as golf, utility, and rough terrain vehicles. It also includes a diverse range of service offerings including full coverage and preventative maintenance service contracts, service parts, installation, and remanufactured compressors and tools. This segment includes the Club Car, Ingersoll Rand, and ARO® market-leading brands.
Segment operating results for Industrial Technologies for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
Dollar amounts in millions
2013
 
2012
 
% change
 
2013
 
2012
 
% change
Net revenues
$
721.9

 
$
701.6

 
2.9
%
 
$
2,165.1

 
$
2,180.6

 
(0.7
)%
Segment operating income
116.2

 
106.6

 
9.0
%
 
340.8

 
332.5

 
2.5
 %
Segment operating margin
16.1
%
 
15.2
%
 
 
 
15.7
%
 
15.2
%
 
 
Net revenues for the three months ended September 30, 2013 increased by 2.9%, or $20.3 million, compared with the same period of 2012. The increase was primarily due to higher volumes (1.2%) and improved pricing (0.7%).
Segment operating margin improved to 16.1% for the three months ended September 30, 2013, compared to 15.2% for the same period of 2012. The increase was primarily due to productivity benefits in excess of other inflation (1.4%), partially offset by unfavorable product mix (0.4%).
Net revenues for the nine months ended September 30, 2013 decreased by 0.7%, or $15.5 million, compared with the same period of 2012. The decrease was primarily related to lower volumes (1.8%), partially offset by improved pricing (0.7%).
Segment operating margin improved to 15.7% for the nine months ended September 30, 2013, compared to 15.2% for the same period of 2012. The increase was primarily driven by productivity benefits in excess of other inflation (1.6%), partially offset by unfavorable volume/product mix (1.1%).
Air and Productivity revenues increased due to growth in Europe, partially offset by declines in the Americas. Club Car revenues increased due to growth in the golf car and utility vehicle markets.
Security Technologies
Our Security Technologies segment is a leading global provider of products and services that make environments safe, secure and productive. The segment’s market-leading products include electronic and biometric access control systems and software, locks and locksets, door closers, exit devices, steel doors and frames, as well as time, attendance and personnel scheduling systems. These products serve a wide range of markets including the commercial construction market, healthcare, retail, and transport industries as well as educational and governmental facilities. This segment includes the CISA®, LCN®, Schlage and Von Duprin® market-leading brands.

44

During the three months ended September 30, 2013, the Company recorded a non-cash pre-tax goodwill impairment charge of $111.4 million, which has been excluded from these results.
Segment operating results for Security Technologies for the three and nine months ended September 30 were as follows:
 
Three months ended
 
Nine months ended
Dollar amounts in millions
2013
 
2012
 
% change
 
2013
 
2012
 
% change
Net revenues
$
392.3

 
$
390.9

 
0.4
%
 
$
1,142.5

 
$
1,180.8

 
(3.2
)%
Segment operating income
103.8

 
83.9

 
23.7
%
 
248.8

 
236.2

 
5.3
 %
Segment operating margin
26.5
%
 
21.5
%
 
 
 
21.8
%
 
20.0
%
 
 
Net revenues for the three months ended September 30, 2013 increased by 0.4%, or $1.4 million, compared with the same period of 2012. The increase was primarily due to higher volumes (3.9%) and improved pricing (0.6%), partially offset by $17.7 million of 2012 revenues related to a product line transferred to the Residential Solutions segment (4.5%).
Segment operating margin improved to 26.5% for the three months ended September 30, 2013, compared to 21.5% for the same period of 2012. The increase was primarily due to a $21.5 million gain on a property sale in China (5.5%), favorable volume/product mix (0.7%) and pricing improvements in excess of other inflation (0.4%), partially offset by other inflation in excess of productivity benefits (1.2%) and increased investment spending (0.8%).
Net revenues for the nine months ended September 30, 2013 decreased by 3.2%, or $38.3 million, compared with the same period of 2012. The decrease was primarily driven by $58.5 million of 2012 revenues related to a product line transferred to the Residential Solutions segment (5.0%), partially offset by higher volumes (1.2%) and improved pricing (0.5%).
Segment operating margin improved to 21.8% for the nine months ended September 30, 2013 compared to 20.0% for the same period of 2012. The increase was primarily due to a $21.5 million gain on a property sale in China (1.8%) and pricing improvements in excess of material inflation (0.2%), partially offset by increased investment spending (0.5%).
Segment results increased slightly in all geographic regions, but non-residential construction markets continue to show mixed results in the Americas and Europe.
Discontinued Operations
The components of Discontinued operations, net of tax for the three and nine months ended September 30 were as follows:
 
Three months ended

Nine months ended
In millions
2013
 
2012
 
2013
 
2012
Net revenues
$
—

 
$
—

 
$
—

 
$
—

Pre-tax earnings (loss) from operations
$
(6.0
)
 
$
(13.6
)
 
$
(23.4
)
 
$
(40.4
)
Pre-tax gain (loss) on sale
—

 
—

 
—

 
3.2

Tax benefit (expense)
3.5

 
1.3

 
19.2

 
30.5

Discontinued operations, net of tax
$
(2.5
)
 
$
(12.3
)
 
$
(4.2
)
 
$
(6.7
)
In November 2007, we completed the sale of our Bobcat, Utility Equipment and Attachments businesses (collectively, Compact Equipment) to Doosan Infracore for gross proceeds of approximately $4.9 billion, subject to post-closing purchase price adjustments. Compact Equipment manufactured and sold 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. During the second quarter of 2012, Doosan Infracore paid the Company a total of $46.5 million to settle outstanding receivables and disputed post-closing matters.
Discontinued operations, net of tax from previously sold businesses is mainly related to postretirement benefits, product liability, worker's compensation, legal costs (mostly asbestos-related), and tax effects of post-closing purchase price adjustments.
Liquidity and Capital Resources
We earn a significant amount of our operating income in jurisdictions where it is deemed to be permanently reinvested. Our most prominent jurisdiction of operation is the U.S. We currently do not intend nor foresee a need to repatriate funds to the U.S., and no provision for U.S. income taxes has been made with respect to such earnings. We expect existing cash and cash equivalents available to the U.S., the cash generated by our U.S. operations, our committed credit lines, as well as our expected ability to access the capital markets, will be sufficient to fund our U.S. operating and capital needs for at least the next twelve months and

45

thereafter for the foreseeable future. In addition, we expect existing non-U.S. cash and cash equivalents and the cash generated by our non-U.S. operations will be sufficient to fund our non-U.S. operating and capital needs for at least the next twelve months and thereafter for the foreseeable future. Should we require more capital in the U.S. than is generated by our U.S. operations, and we determine that repatriation of non-U.S. cash is necessary, such amounts would be subject to U.S. federal income taxes.
In December 2012, we announced an increase in our quarterly ordinary share dividend from $0.16 to $0.21 per share beginning with our March 2013 payment. In addition, our Board of Directors authorized the repurchase of up to $2.0 billion of our ordinary shares under a new share repurchase program upon completion of the current share repurchase program. These repurchases will be accounted for as a reduction of Ordinary shares and Capital in excess of par value as they will be canceled upon repurchase. We commenced purchases under this new repurchase program in April 2013. During the nine months ended September 30, 2013, we repurchased 13.8 million shares for $795.2 million. We expect our available cash flow, committed credit lines and access to the capital markets will be sufficient to fund the increased dividend and share repurchases.
The following table contains several key measures to gauge our financial condition and liquidity at the period ended:
In millions
September 30,
2013
 
December 31,
2012
Cash and cash equivalents
$
1,083.9

 
$
882.1

Short-term borrowings and current maturities of long-term debt
373.2

 
963.7

Long-term debt
3,154.1

 
2,269.3

Total debt
3,527.3

 
3,233.0

Total Ingersoll-Rand plc shareholders’ equity
7,094.7

 
7,147.8

Total equity
7,186.6

 
7,229.3

Debt-to-total capital ratio
32.9
%
 
30.9
%
Short-term borrowings and current maturities of long-term debt consisted of the following:
In millions
September 30,
2013
 
December 31,
2012
Debentures with put feature
$
343.0

 
$
343.0

6.000% Senior notes due 2013
—

 
600.0

Other current maturities of long-term debt
9.9

 
10.8

Other short-term borrowings
20.3

 
9.9

Total
$
373.2

 
$
963.7

Commercial Paper Program
We use borrowings under our commercial paper program for general corporate purposes. The Company had no commercial paper outstanding at September 30, 2013 or December 31, 2012.
Debentures with Put Feature
At September 30, 2013 and December 31, 2012, we had $343.0 million of fixed rate debentures outstanding, which only require early repayment at the option of the holder. These debentures contain a put feature that the holders may exercise on each anniversary of the issuance date, subject to a notice requirement. If exercised, we are obligated to repay in whole or in part, at the holder’s option, the outstanding principal amount (plus accrued and unpaid interest) of the debentures held by the holder. If these options are not exercised, the final maturity dates would range between 2027 and 2028.
Holders of these debentures had the option to exercise the put feature on $37.2 million of the outstanding debentures in February 2013, subject to the notice requirement. No exercises were made. Holders of the remaining $305.8 million in outstanding debentures had the option to exercise the put feature, subject to the notice requirement, on the remaining $305.8 million outstanding debentures in November 2013. No material notifications were received.
Senior Notes due 2019, 2023, and 2043
In June 2013, we issued $1.55 billion principal amount of Senior Notes in three tranches through our wholly-owned subsidiary, IR-Global pursuant to Rule 144A of the Securities Act. The tranches consist of $350 million of 2.875% Senior Notes due in 2019, $700 million of 4.250% Senior Notes due in 2023, and $500 million of 5.750% Senior Notes due in 2043. In connection with the

46

issuance of each series of notes, IR-Global, the Guarantors and the initial purchasers of the notes entered into a Registration Rights Agreement. Each Registration Rights Agreement requires IR-Global and the Guarantors to use their commercially reasonable efforts to execute an effective exchange offer registration statement with the SEC no later than 365 days after the closing date of the notes offering and to complete an exchange offer within 30 business days of such effective date. If a registration default occurs additional interest shall accrue on the notes. The proceeds from these notes were used to fund the July 2013 redemption of $600 million of 6.000% Senior Notes due 2013 and $655 million of 9.500% Senior Notes due 2014 and to fund expenses related to the spin-off of the commercial and residential security businesses, with any remaining proceeds to be used for general corporate purposes.
In July 2013, we fully redeemed the outstanding principal amount of $600 million of our 6.000% Senior Notes due 2013 and $655 million of our 9.500% Senior Notes due 2014, resulting in $45.6 million of redemption premium expense, which will be recorded in the third quarter of 2013 in Interest expense.
Other
As of September 30, 2013, we have a 5-year, $1.0 billion revolving credit facility maturing on March 15, 2017, and a 4-year, $1.0 billion revolving credit facility maturing on May 20, 2015, through our wholly-owned subsidiary, IR-Global.
IR-Ireland, IR-Limited, and IR-International have each provided an irrevocable and unconditional guarantee for these credit facilities. The total committed revolving credit facilities of $2.0 billion are unused and provide support for our commercial paper program, as well as other general corporate purposes.
Cash Flows
The following table reflects the major categories of cash flows for the nine months ended September 30. For additional details, see the Condensed Consolidated Statements of Cash Flows in the condensed consolidated financial statements.
In millions
2013
 
2012
Operating cash flow provided by (used in) continuing operations
$
955.2

 
$
822.9

Investing cash flow provided by (used in) continuing operations
(150.5
)
 
(158.1
)
Financing cash flow provided by (used in) continuing operations
(522.3
)
 
(837.4
)
Operating Activities
Net cash provided by continuing operating activities during the nine months ended September 30, 2013 was $955.2 million, compared with net cash provided by continuing operating activities of $822.9 million during the comparable period in 2012. Operating cash flows for the nine months ended September 30, 2013 reflect positive changes in hedge accounting and income tax balances and improvements in working capital management, partially offset by lower earnings.
Investing Activities
Net cash used in continuing investing activities during the nine months ended September 30, 2013 was $150.5 million, compared with $158.1 million during the comparable period of 2012. The change in investing activities is primarily attributable to proceeds from a property sale in China, partially offset by an increase in capital expenditures during the nine months ended September 30, 2013.
Financing Activities
Net cash used in continuing financing activities during the nine months ended September 30, 2013 was $522.3 million, compared with net cash used in continuing financing activities of $837.4 million during the comparable period in 2012. The change in financing activities is primarily related to proceeds from issuance of long term debt of $1,546.2 million, partially offset by higher repayments of long term debt in 2013 and increased repurchase of ordinary shares.
Pensions
Our investment objective in managing defined benefit plan assets is to ensure that all present and future benefit obligations are met as they come due. We seek to achieve this goal while trying to mitigate volatility in plan funded status, contribution and expense by better matching the characteristics of the plan assets to that of the plan liabilities. We use a dynamic approach to asset allocation whereby a plan's allocation to fixed income assets increases progressively over time towards an ultimate target of 90% as a plan moves toward full funding. We monitor plan funded status and asset allocation regularly in addition to investment manager performance.

47

We monitor the impact of market conditions on our defined benefit plans on a regular basis. None of our defined benefit pension plans have experienced a significant impact on their liquidity due to the volatility in the markets. For further details on pension plan activity, see Note 9 to the condensed consolidated financial statements.
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, 2012.
Commitments and Contingencies
We are involved in various litigations, claims and administrative proceedings, including those related to asbestos, 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, except as expressly set forth in Note 19 to the condensed consolidated financial statements, management believes that the liability which may result from these legal matters would not have a material adverse effect on our financial condition, results of operations, liquidity or cash flows.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.
Management believes there have been no significant policy changes during the nine months ended September 30, 2013, to the items that we disclosed as our critical accounting policies in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012. However, the following are expanded disclosures for our existing Allowance for doubtful accounts and Revenue recognition policies as well as an update to our goodwill impairment discussion included in our critical accounting policies in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012:  
Allowance for doubtful accounts - We maintain an allowance for doubtful accounts receivable which represents our best estimate of probable loss inherent in our accounts receivable portfolio. This estimate is based upon our two step policy that results in the total recorded allowance for doubtful accounts.  The first step is to create a specific reserve for significant accounts as to which the customer's ability to satisfy their financial obligation to the Company is in doubt due to circumstances such as bankruptcy, deteriorating operating results or financial position.  In these circumstances, management uses its judgment to record an allowance based on the best estimate of probable loss, factoring in such considerations as the market value of collateral, if applicable.  The second step is to record a portfolio reserve based on the aging of the outstanding accounts receivable portfolio and the Company's historical experience with our end markets, customer base and products.  Actual results could differ from those estimates. These estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of operations in the period that they are determined.
Revenue recognition - Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) the price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. Delivery generally occurs when the title and the risks and rewards of ownership have substantially transferred to the customer.  Both the persuasive evidence of a sales arrangement and fixed or determinable price criteria are deemed to be satisfied upon receipt of an executed and legally binding sales agreement or contract that clearly defines the terms and conditions of the transaction including the respective obligations of the parties.  If the defined terms and conditions allow variability in all or a component of the price, revenue is not recognized until such time that the price becomes fixed or determinable.  At the point of sale, the Company validates that existence of an enforceable claim that requires payment within a reasonable amount of time and assesses the collectability of that claim.  If collectability is not deemed to be reasonably assured, then revenue recognition is deferred until such time that collectability becomes probable or cash is received.  Delivery is not considered to have occurred until the customer has taken title and assumed the risks and rewards of ownership. Service and installation revenue are recognized when earned.  In some instances, customer acceptance provisions are included in sales arrangements to give the buyer the ability to ensure the delivered product or service meets the criteria established in the order.  In these instances, revenue recognition is deferred until the acceptance terms specified in the arrangement are fulfilled through customer acceptance or a demonstration that established criteria have been satisfied.  If uncertainty exists about customer acceptance, revenue is not recognized until acceptance has occurred.   

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We offer various sales incentive programs to our customers, dealers, and distributors.  Sales incentive programs do not preclude revenue recognition, but do require an accrual for the Company's best estimate of expected activity.  Examples of the sales incentives that are accrued for as a contra receivable and sales deduction at the point of sale include, but are not limited to, discounts (i.e. net 30 type), coupons, and rebates where the customer does not have to provide any additional requirements to receive the discount. Sales returns and customer disputes involving a question of quantity or price are also accounted for as a reduction in revenue and a contra receivable.  At December 31, 2012 and 2011, the Company had a customer claim accrual (contra receivable) of $23.0 million and $22.0 million, respectively. All other incentives or incentive programs where the customer is required to reach a certain sales level, remain a customer for a certain period of time, provide a rebate form or is subject to additional requirements are accounted for as a reduction of revenue and establishment of a liability.  At December 31, 2012 and 2011, the Company had a sales incentive accrual of $82.4 million and $76.9 million, respectively.  Each of these accruals represents the best estimate the Company expects to pay related to previously sold units.  These estimates are reviewed regularly for accuracy.  If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material impact on the Consolidated Financial Statements.
The Company enters into maintenance and extended warranty contracts with customers.  Revenue related to these services is recognized on a straight-line basis over the life of the contract, unless sufficient historical evidence indicates that the cost of providing these services is incurred on an other than straight-line basis.  In these circumstances, revenue is recognized over the contract period in proportion to the costs expected to be incurred in performing the service.
The Company, primarily through its Climate Solutions and Security Technologies segments, provides equipment (e.g. HVAC, security), integrated solutions, and installation designed to customer specifications through construction-type contracts.  The term of these types of contracts is typically less than one year, but can be as long as three years.  Revenues related to these contracts are recognized using the percentage-of-completion method in accordance with GAAP.  This measure of progress toward completion, utilized to recognize sales and profits, is based on the proportion of actual cost incurred to date as compared to the total estimate of contract costs at completion.  The timing of revenue recognition often differs from the invoicing schedule to the customer, with revenue recognition in advance of customer invoicing recorded to unbilled accounts receivable and invoicing in advance of revenue recognition recorded to deferred revenue.  At December 31, 2012, all recorded receivables (billed and unbilled) are due within one year.  The Company re-evaluates its contract estimates periodically and reflects changes in estimates in the current period using the cumulative catch-up method.  These periodic reviews have not historically resulted in significant adjustments.   If estimated contract costs are in excess of contract revenues, then the excess costs are accrued.
We enter into sales arrangements that contain multiple elements, such as equipment, installation and service revenue. For multiple element arrangements, each element is evaluated to determine the separate units of accounting.  The total arrangement consideration is then allocated to the separate units of accounting based on their relative selling price at the inception of the arrangement. The relative selling price is determined using vendor specific objective evidence (VSOE) of selling price, if it exists; otherwise, third-party evidence (TPE) of selling price is used. If neither VSOE nor TPE of selling price exists for a deliverable, a best estimate of the selling price is developed for that deliverable.  The Company primarily utilizes VSOE to determine its relative selling price. The Company recognizes revenue for delivered elements when the delivered item has stand-alone value to the customer, the basic revenue recognition criteria have been met, and only customary refund or return rights related to the delivered elements exist.
Goodwill and indefinite-lived intangible assets – We have significant goodwill and indefinite-lived intangible assets on our balance sheet related to acquisitions. Our goodwill and other indefinite-lived intangible assets are tested and reviewed annually during the fourth quarter for impairment or when there is a significant change in events or circumstances that indicate that the fair value of an asset is more likely than not less than the carrying amount of the asset.
Recoverability of goodwill is measured at the reporting unit level and begins with a qualitative assessment to determine if it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test included in U.S. GAAP. For those reporting units where it is required, the first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit's carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.
As quoted market prices are not available for our reporting units, the calculation of their estimated fair value in step one is based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with each method being equally weighted in the calculation. We believe an equal weighting of both approaches is appropriate. The income approach relies on the Company's estimates of future cash flows and explicitly addresses factors such as timing, growth and margins, with due consideration given to forecasting risk. The market approach reflects the

49

market's expectations for future growth and risk, with adjustments to account for differences between the guideline publicly traded companies and the subject reporting units.
In step 2, the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit, as determined in the first step of the goodwill impairment test, was the price paid to acquire that reporting unit.
Recoverability of other intangible assets with indefinite useful lives is first assessed using a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. This assessment is used as a basis for determining whether it is necessary to calculate the fair value of an indefinite-lived intangible asset. For those indefinite-lived assets where it is required, a fair value is determined on a relief from royalty methodology (income approach) which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
The determination of the estimated fair value and the implied fair value of goodwill and other indefinite-lived intangible assets requires us to make assumptions about estimated cash flows, including profit margins, long-term forecasts, discount rates and terminal growth rates. We developed these assumptions based on the market and geographic risks unique to each reporting unit.
2013 Interim Impairment Test
As discussed under "2012 Impairment Test," the estimated fair value of our Security Technologies - EMEIA reporting unit exceeded its carrying value by 2.5% as of October 1, 2012. We continued to monitor the close proximity of the reporting unit's carrying value compared to its fair value and determined that we were required to complete the first step of the two-step impairment test in the third quarter of 2013. The results of our impairment test indicated that the estimated fair value of our EMEIA reporting unit was less than its carrying value; consequently, we performed the second step of the impairment test to quantify the amount of the non-cash, goodwill impairment charge. For the three months ended September 30, 2013 we recorded a non-cash, pre-tax goodwill impairment charge of $111.4 million ($106.2 million after-tax). This charge had no impact on our cash flows or our compliance with debt covenants.
During 2013, we renegotiated a significant joint venture contract within our Security Technologies - Asia Pacific reporting unit and moved the related product line to our Residential Solutions segment. As a result of these business changes, we completed the first step of the two-step impairment test. The results of our third quarter 2013 impairment test indicated that the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value) was less than 15%. This reporting unit has goodwill of approximately $91 million.
Our Security Technologies - Asia Pacific reporting unit exceeded its carrying value by 2.0% as of July 1, 2013. We have provided below additional assumptions and a sensitivity analysis. Under the income approach we assumed a weighted average discount rate of 14.1%, near term growth rates ranging from 5.6% to 11.3% and a terminal growth rate of 4.0%. Under the market approach, we assumed a weighted average implied multiple of 10.9 and 9.6 times projected 2013 and 2014 EBITDA, respectively, based on industry market data. Holding other assumptions constant, a 0.5% increase in the discount rate would result in a $5.0 million decrease in the estimated fair value of the reporting unit, a 0.5% decrease in the long-term growth rate would result in a $3.0 million decrease in the estimated fair value of the reporting unit and a 5.0% decrease in the selected market multiples would result in a $5.0 million decrease in the estimated fair value of the reporting unit. Each of these scenarios individually would result in the reporting unit failing step 1.
2012 Impairment Test

For our annual impairment testing performed during the fourth quarter of 2012, we concluded it was necessary to calculate the fair value for each of the reporting units and indefinite-lived intangibles. Based on the results of these calculations, we determined that the fair value of the reporting units and indefinite-lived intangible assets exceeded their respective carrying values. The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows.
Goodwill - Under the income approach, we assumed a forecasted cash flow period of five years with discount rates ranging from 10.0% to 15.5%, near term growth rates ranging from (3.5)% to 14.8% and terminal growth rates ranging from 2.5% to 4.0%. Under the market approach, we used an adjusted multiple ranging from 6.6 to 9.2 of projected earnings before interest, taxes, depreciation and amortization (EBITDA) and 0.8 to 1.8 of projected revenues based on the market information of

50

comparable companies. Additionally, we compared the estimated aggregate fair value of our reporting units to our overall market capitalization.
For all reporting units except two, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value) was a minimum of 15%. The two reporting units with a percentage of carrying value less than 15%, reported within the Residential Solutions and Security Technologies segments, exceeded their carrying value by 14.4% and 2.5%, respectively. These reporting units have goodwill of approximately $599 million and $190 million, respectively.
For the specific Security Technologies reporting unit that exceeded its carrying value by less than 5%, we have provided below additional assumptions and a sensitivity analysis. Under the income approach we assumed a discount rate of 10%, near term growth rates ranging from (1.1)% to 5% and a terminal growth rate of 2.5%. Under the market approach, we assumed a weighted average multiple of 7.8 and 7.1 times projected 2012 and 2013 EBITDA, respectively, and a multiple of 0.8 times projected 2012 and 2013 revenue, based on industry market data. Holding other assumptions constant, a 1.0% increase in the discount rate would result in a $20 million decrease in the estimated fair value of the reporting unit, a 1.0% decrease in the long-term growth rate would result in a $15 million decrease in the estimated fair value of the reporting unit and a 5.0% decrease in the selected market multiples would result in a $15 million decrease in the estimated fair value of the reporting unit. Each of these scenarios individually would result in the reporting unit failing step 1.
Assessing the fair value of goodwill includes, among other things, making key assumptions for estimating future cash flows and appropriate market multiples. These assumptions are subject to a high degree of judgment and complexity. We make every effort to estimate future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in assumptions and estimates may affect the estimated fair value of the reporting unit, and could result in impairment charges in future periods. Factors that have the potential to create variances in the estimated fair value of the reporting unit include but are not limited to the following:
•
Decreases in estimated market sizes or market growth rates due to greater-than-expected declines in volumes, pricing pressures or disruptive technology;
•
Declines in our market share and penetration assumptions due to increased competition or an inability to develop or launch new products;
•
The impacts of the European sovereign debt crisis, including greater-than-expected declines in pricing, reductions in volumes, or fluctuations in foreign exchange rates;
•
The level of success of on-going and future research and development efforts, including those related to recent acquisitions, and increases in the research and development costs necessary to obtain regulatory approvals and launch new products;
•
Increase in the price or decrease in the availability of key commodities and the impact of higher energy prices;
•
Increases in our market-participant risk-adjusted weighted-average cost of capital; and
•
Changes in the structure of our business as a result of future reorganizations or divestitures of assets or businesses.
Other Indefinite-lived intangible assets - In testing our other indefinite-lived intangible assets for impairment, we assumed forecasted revenues for a period of five years with discount rates ranging from 12.0% to 12.5%, terminal growth rates ranging from 2.5% to 3.0%, and royalty rates ranging from 3.0% to 5.0%. The fair values of our Trane and American Standard tradenames exceeded their respective carrying amounts by less than 15%. The two tradenames exceeded their carrying value by 10.5% and 13.0%, respectively. The carrying values of these tradenames are approximately $2,497 million and $105 million, respectively, at December 31, 2012.
A significant increase in the discount rate, decrease in the long-term growth rate, decrease in the royalty rate or substantial reductions in our end markets and volume assumptions could have a negative impact on their estimated fair values of any of our tradenames.

Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, "Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires enhanced disclosures including both gross and net information about financial and derivative instruments eligible for offset or subject to an enforceable master netting arrangement

51

or similar agreement. This new guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The requirements of ASU 2011-11 did not have an impact on the condensed consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." ASU 2013-01 clarifies the scope of ASU 2011-11 to apply to derivative instruments that are offset or subject to an enforceable master netting arrangement or similar agreement. This clarified guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The revised requirements of ASU 2013-01 did not have an impact on the condensed consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (AOCI). ASU 2013-02 requires a rollforward of changes in AOCI by component and information about significant reclassifications from AOCI to Net earnings to be presented in one location, either on the face of the financial statements or in the notes. This new guidance is effective for fiscal years beginning after December 15, 2012 and subsequent interim periods. The requirements of ASU 2013-02 did not have a material impact on the Company's condensed consolidated financial statements. The revised disclosure requirements are reflected in Note 11.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements where the total obligation is fixed at the reporting date, and for which no specific guidance currently exists. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. We are currently assessing the impact, if any, on the condensed consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 clarifies the application of GAAP to the release of cumulative translation adjustments related to changes of ownership in or within foreign entities, including step acquisitions. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods.
In July 2013, the FASB issued ASU 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." ASU 2013-10 allows the Fed Funds Effective Swap Rate (OIS) to be designated as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not anticipate the requirements of ASU 2013-10 will have a material impact on the condensed consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. We are currently assessing the impact, if any, on the condensed consolidated financial statements.
Other than as discussed above, management believes there have been no significant changes during the nine months ended September 30, 2013, to the items we disclosed as our recently adopted accounting pronouncements in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the period ended December 31, 2012. For a further discussion, refer to the “Recent Accounting Pronouncements” discussion contained therein.
Safe Harbor Statement
Certain statements in this report, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “forecast,” “outlook,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” or the negative thereof or variations thereon or similar terminology generally intended to identify forward-looking statements.

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Forward-looking statements may relate to such matters as projections of revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, share or debt repurchases or other financial items; any statements of the plans, strategies and objectives of management for future operations, including those relating to any statements concerning expected development, performance or market share relating to our products and services; any statements regarding future economic conditions or our performance; any statements regarding pending investigations, claims or disputes, including those relating to the Internal Revenue Service audit of our consolidated subsidiaries' tax filings; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on our forward-looking statements. You are advised to review any further disclosures we make on related subjects in materials we file with or furnish to the SEC. Forward-looking statements speak only as of the date they are made and are not guarantees of future performance. They are subject to future events, risks and uncertainties - many of which are beyond our control - as well as potentially inaccurate assumptions, that could cause actual results to differ materially from our expectations and projections. We do not undertake to update any forward-looking statements.
Factors that might affect our forward-looking statements include, among other things:
•
overall economic, political and business conditions in the markets in which we operate;
•
the demand for our products and services;
•
competitive factors in the industries in which we compete;
•
changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);
•
the outcome of any litigation, governmental investigations or proceedings;
•
the outcome of any income tax audits or settlements;
•
interest rate fluctuations and other changes in borrowing costs;
•
other capital market conditions, including availability of funding sources and currency exchange rate fluctuations;
•
availability of and fluctuations in the prices of key commodities and the impact of higher energy prices;
•
the ability to achieve cost savings in connection with our productivity programs;
•
potential further impairment of our goodwill, indefinite-lived intangible assets and/or our long-lived assets;
•
the possible effects on us of future legislation in the U.S. that may limit or eliminate potential U.S. tax benefits resulting from our incorporation in a non-U.S. jurisdiction, such as Ireland, or deny U.S. government contracts to us based upon our incorporation in such non-U.S. jurisdiction; and
•
our ability to complete the proposed spin-off of our commercial and residential security businesses and fully realize the expected benefits of such transaction.
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There may also be other factors that have not been anticipated or that are not described in our periodic filings with the SEC, generally because we did not believe them to be significant at the time, which could cause results to differ materially from our expectations.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk
There has been no significant change in our exposure to market risk during the third quarter of 2013. 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, 2012.
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 September 30, 2013, 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

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accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, 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 third quarter of 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial and contract disputes, employment matters, product liability claims, asbestos-related claims, environmental liabilities, intellectual property disputes and tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of operations, financial condition, liquidity or cash flows.
Tax-Related Matters
In 2007, we received a notice from the Internal Revenue Service (IRS) containing proposed adjustments to our tax filings in connection with an audit of the 2001 and 2002 tax years. The IRS did not contest the validity of our reincorporation in Bermuda. The IRS proposed to ignore the entities that hold the intercompany debt incurred in connection with our reincorporation in Bermuda and to which the interest was paid and impose 30% withholding tax on a portion of the interest payments as if they were made directly to a company that was not eligible for reduced U.S. withholding tax under a U.S. income tax treaty. The IRS asserted that we owe additional taxes with respect to 2002 of approximately $84 million plus interest. We strongly disagreed with the view of the IRS and filed a protest. In 2010, we received an amended notice from the IRS assessing penalties of 30% on the asserted underpayment of tax described above.
We have so far been unsuccessful in resolving this dispute and recently received a Notice of Deficiency from the IRS for 2002. When a taxpayer receives a Notice of Deficiency, it has 90 days to file a petition in the United States Tax Court, or it must pay the tax. The Company intends to file a petition in Tax Court within the 90 day time limit, which expires in early November 2013.
Recently the IRS examination team auditing the Company's 2003-2006 tax years provided Notices of Proposed Adjustment (NOPAs) related to our interest payments on the intercompany debt issued in connection with our reincorporation in Bermuda. In these notices, which reflect the examination team's written position but are not a formal assertion of tax owed, the IRS asserts that we owe a total of approximately $665 million of additional taxes, as described more fully below, in connection with these interest payments for the 2003-2006 period, plus penalties and interest on these unpaid taxes.
In these NOPAs, the IRS continues to take the position on this intercompany debt, which was retired at the end of 2011, that it previously took for our 2002 tax year and which is described above. As a result of this recharacterization, the IRS asserts that we owe approximately $455 million of withholding tax for 2003-2006 plus 30% penalties.
The IRS also proposes to extend its position further and to treat all of the interest income from this intercompany debt as “earned” by Ingersoll-Rand Company Limited (IR-Limited) and, as a result, recharacterize the distributions made by IR-Limited during the 2002-2006 tax years as taxable dividends instead of as a return of capital. Consequently the IRS asserts that we owe approximately $210 million of income tax on these dividends plus penalties of 20%.
Although we expect it to do so, the IRS has not yet proposed any similar adjustments for years subsequent to 2006, as the federal income tax audits for those years are still in process or have not yet begun. In addition, we do not know how the IRS will apply its position to the different facts presented in those years or whether the IRS will take a similar position in future audits with respect to intercompany debt instruments not outstanding in prior years.
We have vigorously contested all of these proposed adjustments and intend to continue to do so. Although the outcome of these matters cannot be predicted with certainty, based upon an analysis of the merits of our position we believe that we are adequately reserved under the applicable accounting standards for these matters and do not expect that the ultimate resolution will have a material adverse impact on our future results of operations, financial condition, or cash flows. As we move forward to resolve these matters with the IRS, the reserves established may be adjusted. Although we continue to contest the IRS's position, there can be no assurance that we will be successful. If the IRS's position with respect to the 2002-2006 tax years is ultimately sustained we would be required to record additional charges and the resulting liability will have a material adverse impact on our future results of operations, financial condition and cash flows.
For a further discussion of tax matters, see Note 15 to the condensed consolidated financial statements.
Asbestos-Related 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

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claims have been filed against either Ingersoll Rand Company (IR-New Jersey) or Trane and generally allege injury caused by exposure to asbestos contained in certain historical products sold by IR-New Jersey or Trane, primarily pumps, boilers and railroad brake shoes. Neither IR-New Jersey nor Trane was a producer or manufacturer of asbestos, however, some formerly manufactured products utilized asbestos-containing components such as gaskets and packings purchased from third-party suppliers.
See also the discussion contained in our Annual Report on Form 10-K for the period ended December 31, 2012 under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Environmental and Asbestos Matters and also Note 19 to the condensed consolidated financial statements in this Form 10-Q.

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Item 1A – Risk Factors
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the period ended December 31, 2012 and our Quarterly Report on Form 10-Q for the period ended June 30, 2013. For a further discussion of our Risk Factors, refer to the “Risk Factors” discussion contained in our Annual Report on Form 10-K for the period ended December 31, 2012 and our Quarterly Report on Form 10-Q for the period ended June 30, 2013.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table provides information with respect to purchases by the Company of its ordinary shares during the third quarter of 2013:
 
Period
 
Total number of shares purchased (000's) (a) (b)
 
Average price paid per share (a) (b)
 
Total number of shares purchased as part of program (000's) (a)
 
Approximate dollar value of shares still available to be purchased under the program ($000's) (a)
July 1 - July 31
 
1,901.5

 
$
58.11

 
1,901.5

 
$
1,415,926

August 1 - August 31
 
1,767.8

 
61.24

 
1,747.4

 
1,308,933

September 1 - September 30
 
1,584.4

 
63.10

 
1,584.3

 
1,208,963

Total
 
5,253.7

 
$
60.67

 
5,233.2

 
 
(a) In December 2012, our Board of Directors authorized the repurchase of up to $2.0 billion of our ordinary shares under a new share repurchase program upon completion of the 2011 share repurchase program. The new share repurchase program began in April 2013. Based on market conditions, share repurchases will be made from time to time in the open market and in privately negotiated transactions at the discretion of management. The repurchase program does not have a prescribed expiration date.
(b) We may also reacquire shares outside of the repurchase program from time to time in connection with the surrender of shares to cover taxes on vesting of share based awards. In August and September, 20,435 and 182 shares, respectively, were reacquired in transactions outside the repurchase programs.



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Item 6 – Exhibits
(a) Exhibits
Exhibit No.
 
Description
 
Method of Filing
 
 
 
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.
 
Furnished herewith.
 
 
 
101     
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Comprehensive Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statement of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.
 
Furnished herewith.


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INGERSOLL-RAND PLC
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 PLC
(Registrant)
 
 
 
Date:
October 23, 2013
/S/    SUSAN K. CARTER        
 
 
Susan K. Carter, Senior Vice President
and Chief Financial Officer
Principal Financial Officer
 
 
 
Date:
October 23, 2013
/S/    RICHARD J. WELLER        
 
 
Richard J. Weller, Vice President and
Corporate Controller
Principal Accounting Officer


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