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 |
or
[ |
|
] |
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-985
INGERSOLL-RAND
COMPANY LIMITED
(Exact name of registrant as specified
in its charter)
Bermuda |
|
75-2993910 |
Clarendon House 2 Church St Hamilton HM 11, Bermuda (Address of principal executive offices) |
(441) 295 -2838
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes X No
The number of Class A common shares outstanding as of July 31, 2003 was 171,298,804.
INGERSOLL-RAND COMPANY LIMITED |
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FORM 10-Q |
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INDEX |
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PART I | FINANCIAL INFORMATION |
Item 1 - Financial Statements | |
Condensed Consolidated Income
Statement for the three and six months ended June 30, 2003 and 2002 |
|
Condensed Consolidated Balance
Sheet at June 30, 2003 and December 31, 2002 |
|
Condensed Consolidated
Statement of Cash Flows for the six months ended June 30, 2003 and 2002 |
|
Notes to Condensed Consolidated Financial Statements | |
Item 2 - Management's Discussion and Analysis of Financial Condition | |
and Results of Operations | |
Item 3 - Quantitative and Qualitative Disclosures about Market Risk | |
Item 4 - Controls and Procedures | |
PART II | OTHER INFORMATION |
Item 3 - Legal Proceedings | |
Item 4 - Submission of Matters to a Vote of Security Holders | |
Item 6 - Exhibits and Reports on Form 8-K | |
SIGNATURES | |
CERTIFICATIONS | |
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
INGERSOLL-RAND COMPANY LIMITED | |||||
CONDENSED CONSOLIDATED INCOME STATEMENT | |||||
Three months ended |
Six months ended | ||||
June 30, |
June 30, |
||||
In millions, except per share amounts |
2003 |
2002 |
2003 |
2002 |
|
Net sales | $ 2,525.1 | $ 2,266.4 | $ 4,723.8 | $ 4,283.4 | |
Cost of goods sold | 1,907.6 | 1,730.0 | 3,597.1 | 3,260.0 | |
Selling and administrative expenses | 398.0 | 353.9 | 741.8 | 679.8 | |
Restructuring charges | - | 7.0 | - | 17.2 | |
Operating income | 219.5 | 175.5 | 384.9 | 326.4 | |
Interest expense | (44.0) | (59.1) | (94.1) | (118.3) | |
Other income (expense), net | 2.6 | (10.9) | (4.0) | (20.8) | |
Earnings before income taxes | 178.1 | 105.5 | 286.8 | 187.3 | |
Provision for income taxes | 25.0 | 14.4 | 40.2 | 25.7 | |
Earnings from continuing operations | 153.1 | 91.1 | 246.6 | 161.6 | |
Discontinued operations, net of tax | (13.8) | 16.3 | 45.9 | 26.7 | |
Earnings before cumulative effect of change | |||||
in accounting principle | 139.3 | 107.4 | 292.5 | 188.3 | |
Cumulative effect of change in accounting | |||||
principle, net of tax | - | - | - | (634.5) | |
Net earnings (loss) | $ 139.3 | $ 107.4 | $ 292.5 | $ (446.2) | |
Basic earnings (loss) per common share: | |||||
Earnings from continuing operations | $ 0.90 | $ 0.54 | $ 1.46 | $ 0.96 | |
Discontinued operations, net of tax | (0.08) | 0.10 | 0.27 | 0.16 | |
Earnings before cumulative effect | |||||
of change in accounting principle | 0.82 | 0.64 | 1.73 | 1.12 | |
Cumulative effect of change in | |||||
accounting principle, net of tax | - | - | - | (3.76) | |
Net earnings (loss) | $ 0.82 | $ 0.64 | $ 1.73 | $ (2.64) | |
Diluted earnings (loss) per common share: | |||||
Earnings from continuing operations | $ 0.89 | $ 0.53 | $ 1.45 | $ 0.95 | |
Discontinued operations, net of tax | (0.08) | 0.10 | 0.27 | 0.15 | |
Earnings before cumulative effect | |||||
of change in accounting principle | 0.81 | 0.63 | 1.72 | 1.10 | |
Cumulative effect of change in | |||||
accounting principle, net of tax | - | - | - | (3.72) | |
Net earnings (loss) | $ 0.81 | $ 0.63 | $ 1.72 | $ (2.62) | |
See accompanying notes to condensed consolidated financial statements. | |||||
INGERSOLL-RAND COMPANY LIMITED |
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CONDENSED CONSOLIDATED BALANCE SHEET |
||||
In millions |
June 30, 2003 |
December 31, 2002 |
||
ASSETS | ||||
Current assets: | ||||
Cash and cash equivalents |
$ 108.1 |
$ 342.2 | ||
Marketable securities | 165.6 | 1.8 | ||
Accounts and notes receivable, net | 1,505.4 | 1,405.3 | ||
Inventories | 1,222.4 | 1,189.8 | ||
Prepaid expenses and deferred income taxes | 254.2 | 379.3 | ||
Assets held for sale | - | 794.0 | ||
Total current assets | 3,255.7 | 4,112.4 | ||
Property, plant and equipment, net | 1,243.2 | 1,279.9 | ||
Goodwill | 4,093.1 | 4,005.5 | ||
Intangible assets, net | 890.4 | 890.9 | ||
Other assets | 743.0 | 520.9 | ||
Total assets | $ 10,225.4 | $ 10,809.6 | ||
LIABILITIES AND EQUITY | ||||
Current liabilities: | ||||
$ 727.0 |
$ 730.3 |
|||
Accrued expenses and other current liabilities | 1,409.1 | 1,617.1 | ||
Loans payable | 699.3 | 1,155.5 | ||
Liabilities held for sale | - | 295.2 | ||
Total current liabilities | 2,835.4 | 3,798.1 | ||
Long-term debt | 1,836.2 | 2,092.1 | ||
Postemployment and other benefit liabilities | 1,292.4 | 1,123.5 | ||
Other noncurrent liabilities | 412.2 | 317.7 | ||
Total liabilities | 6,376.2 | 7,331.4 | ||
Shareholders' equity: | ||||
Class A common shares | 169.7 | 169.2 | ||
Other shareholders' equity | 4,071.2 | 3,822.1 | ||
Accumulated other comprehensive income | (391.7) | (513.1) | ||
Total shareholders' equity | 3,849.2 | 3,478.2 | ||
Total liabilities and shareholders' equity | $ 10,225.4 | $ 10,809.6 | ||
See accompanying notes to condensed consolidated financial statements. | ||||
INGERSOLL-RAND COMPANY LIMITED |
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS |
|||
Six months ended June 30, |
|||
In millions |
2003 |
2002 |
|
Cash flows from operating activities: | |||
Earnings from continuing operations before cumulative | |||
effect of change in accounting principle | $ 246.6 | $ 161.6 | |
Adjustments to arrive at net cash used in operating activities: | |||
Restructure of operations | - | 17.2 | |
Depreciation and amortization |
101.2 |
97.4 | |
Changes in other assets and liabilities, net | (496.1) | (300.2) | |
Other, net | 11.1 | (2.7) | |
Net cash used in operating activities | (137.2) | (26.7) | |
Cash flows from investing activities: | |||
Capital expenditures | (50.1) | (55.9) | |
Investments and acquisitions, net of cash |
- |
(85.2) |
|
Proceeds from business disposition |
699.3 |
- |
|
Proceeds from sale of property, plant and equipment | 19.8 | 17.9 | |
Other, net | (5.1) | (6.7) | |
Net cash provided by (used in) investing activities | 663.9 | (129.9) | |
Cash flows from financing activities: | |||
Increase in short-term borrowings | 21.0 | 138.7 | |
Proceeds from long-term debt | 3.3 | 1.5 | |
Payments of long-term debt | (742.4) | (7.2) | |
Net change in debt | (718.1) | 133.0 | |
Dividends paid | (57.6) | (57.3) | |
Proceeds from exercise of stock options | 13.7 | 35.6 | |
Net cash (used in) provided by financing activities |
(762.0) |
111.3 | |
Net cash (used in) provided by discontinued operations | (8.0) | 47.8 | |
Effect of exchange rate changes on cash and cash equivalents | 9.2 | 7.4 | |
Net (decrease) increase in cash and cash equivalents | (234.1) | 9.9 | |
Cash and cash equivalents - beginning of period | 342.2 | 114.0 | |
Cash and cash equivalents - end of period | $ 108.1 | $ 123.9 | |
See accompanying notes to condensed consolidated financial statements. | |||
INGERSOLL-RAND
COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (including normal recurring accruals) necessary to present fairly the consolidated unaudited financial position and results of operations for the three and six months ended June 30, 2003 and 2002.
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Ingersoll-Rand Company Limited (the Company or IR-Limited) Annual Report on Form 10-K for the year ended December 31, 2002. The accompanying condensed consolidated financial statements restate the three and six months ended June 30, 2002 amounts previously presented to report the Company's Engineered Solutions Segment as discontinued operations.
The Company holds marketable securities, which it classifies as available for sale. These securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.
Note 2 - Under the Company's incentive stock plans, approved in 1990, 1995, and 1998, key employees have been granted options to purchase Class A common shares. The Company continues to account for these plans under the recognition and measurement principles of APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense is recognized for employee stock options since options granted are at prices not less than fair market value at the date of grant. The plans also authorize stock appreciation rights and stock awards, which result in compensation expense. Additionally, the Company maintains a shareholder-approved Management Incentive Unit Award Plan, which results in compensation expense, as well as an Executive Deferred Compensation Plan and a Director Deferred Compensation Plan that have not been approved by shareholders and that result in compensation expense.
The following table is presented in accordance with Statement of Financial Accounting Standard (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" and illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
Three months |
Six months |
||||||
ended June 30, |
ended June 30, | ||||||
In millions, except per share amounts |
2003 |
2002 |
2003 |
2002 |
|||
Net earnings (loss), as reported |
$139.3 |
$107.4 |
$292.5 |
$(446.2) |
|||
Add: Stock-based employee compensation | |||||||
expense included in reported net | |||||||
income, net of tax |
9.7 |
1.0 |
7.2 |
7.7 |
|||
Deduct: Total stock-based employee compensation | |||||||
expense determined under fair value based | |||||||
method for all awards, net of tax |
16.2 |
7.9 |
20.7 |
22.2 |
|||
Pro forma net earnings (loss) | $ 132.8 | $ 100.5 | $ 279.0 | $ (460.7) | |||
Basic earnings (loss) per share: | |||||||
As reported | $ 0.82 | $ 0.64 | $ 1.73 | $ (2.64) | |||
Pro forma | 0.78 | 0.59 | 1.65 | (2.73) | |||
Diluted earnings (loss) per share: | |||||||
As reported | $ 0.81 | $ 0.63 | $ 1.72 | $ (2.62) | |||
Pro forma | 0.78 | 0.59 | 1.64 | (2.71) | |||
Note 3-Effective February 16, 2003, the Company continued its business portfolio realignment by selling its Engineered Solutions Segment (the Business), previously included as part of the Company's Industrial Solutions Sector, to The Timken Company (Timken). The consideration received consisted of approximately $700 million in cash and approximately 9.4 million shares of Timken common stock valued at $140 million at the date of sale. The Company realized an after-tax gain of $53.1 million on the disposition, which is included in "Discontinued operations, net of tax." The gain is subject to working capital and other final purchase price adjustments. The Company recorded additional costs and liabilities primarily relating to employee benefits in the calculation of the after-tax gain. The Business consisted of the Company's worldwide operations related to precision bearings and motion-control components and assemblies, and included the Torrington, Fafnir, Kilian, Nadella and IRB brands. The Business employed approximately 10,000 people and operated 27 plants throughout the world.
Discontinued operations also includes costs related to Ingersoll-Dresser Pump Company (IDP), which was sold in 2000. These costs include retained employee benefits and product liability.
Net sales and pretax (loss) earnings for discontinued operations are as follows:
Three months ended |
Six months ended |
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June 30, |
June 30, |
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In millions | 2003 | 2002 | 2003 | 2002 | |||
Net sales | $ - | $ 321.0 | $ 145.0 | $ 609.9 | |||
Pretax (loss) earnings | (20.2) | 26.3 | (10.5) | 43.0 | |||
The assets and liabilities of discontinued operations included in assets held for sale and liabilities held for sale represent the assets and liabilities of the Company's Engineered Solutions Segment and are as follows:
In millions |
December 31, 2002 |
|
Assets | ||
Current assets |
$ 322.3 |
|
Investments in and advances with partially owned equity companies | 104.2 | |
Property, plant and equipment, net | 350.6 | |
Goodwill and other intangible assets, net | 8.6 | |
Other assets and deferred income taxes | 8.3 | |
Assets held for sale | $ 794.0 | |
Liabilities | ||
Current liabilities | $ 219.0 | |
Other liabilities | 76.2 | |
Liabilities held for sale | $ 295.2 | |
In accordance with the purchase agreement, certain assets and liabilities, such as environmental, product liability, tax, and employee-related costs, of the Company's Engineered Solutions Segment were retained by the Company, and have been excluded from the above presentation. Additionally, the Company guaranteed Timken a specified value for its ownership interest in a joint venture when it is sold pursuant to certain terms of the joint venture agreement. During the second quarter, this ownership interest was sold and the Company was not required to pay any amount relating to this guarantee.
Note 4 - During the third quarter of 2000, the Company commenced a restructuring program, which included actions such as plant rationalizations, organizational realignments consistent with the Company's new market-based structure and the consolidation of back-office processes. During the fourth quarter of 2001, the Company commenced a second restructuring program primarily to reduce the general and administrative expenses across the Company. These programs include certain costs that are identified in Staff Accounting Bulletin 100, "Restructuring and Impairment Charges," and Emerging Issues Task Force (EITF) 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," as restructuring charges, as well as other related costs that do not meet the criteria to be classified as restructuring charges. Nonrecurring costs associated with these activities not qualifying as restructuring charges are referred to as "productivity investments" and have been charged to "Cost of goods sold" and "Selling and administrative expenses." Substantially all cash payments, except those relating to the Corporate Center, are expected to be paid by the end of 2003. Remaining amounts relate primarily to ongoing lease commitments and employee related liabilities. The Company realized lower costs and improved customer service in all segments as a result of these actions. The Company manages the 2000 and 2001 programs as a single restructuring program. Therefore, all comments regarding restructure activity refer to both programs combined.
The total employee terminations related to the restructuring program are expected to be approximately 5,000. As of June 30, 2003, all segments, except Corporate Center, have either completed their employee terminations, or have a minimal number of employees (less than 20) still expected to be terminated. These terminations included both the salaried and hourly employee groups. All 21 of the manufacturing facilities were closed at December 31, 2002.
A reconciliation of the consolidated restructuring reserve for the Phase I and Phase II programs is as follows:
Employee | ||||||
termination |
Facility |
|||||
In millions | costs |
exit costs |
Total |
|||
Balance at December 31, 2002 |
$ 20.1 |
$ 6.2 |
$ 26.3 |
|||
Cash payments |
(8.8) |
(2.2) |
(11.0) |
|||
Balance at June 30, 2003 |
$ 11.3 |
$ 4.0 |
$15.3 |
|||
Details by segment of the above reconciliation are as follows:
Climate
Control
As
of December 31, 2002, all identified manufacturing locations had been closed,
the outsourcing of certain product manufacturing was completed and all
identified employees were terminated.
A reconciliation of the restructuring reserve for the Phase II program is as follows:
Employee |
|||||||
termination |
Facility |
||||||
costs |
exit costs |
Total |
|||||
In millions |
Phase II |
Phase II |
Phase II |
||||
Balance at December 31, 2002 |
$ 2.2 |
$ 2.7 |
$ 4.9 |
||||
Cash payments |
(0.8) |
(0.9) |
(1.7) |
||||
Balance at June 30, 2003 |
$ 1.4 |
$ 1.8 |
$ 3.2 |
||||
Air and Productivity Solutions
As
of December 31, 2002, all identified manufacturing locations had been
closed. As of June 30, 2003, a minimal
number of employees are still expected to be terminated.
A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:
Employee |
||||
termination costs |
||||
In millions | Phase I | Phase II | ||
Balance at December 31, 2002 |
$ 0.6 |
$ 2.6 |
||
Cash payments |
(0.6) |
(0.9) |
||
Balance at June 30, 2003 |
$ - |
$ 1.7 |
||
Dresser-Rand
As
of December 31, 2002, the organizational realignment and the closure of the
non-manufacturing locations were complete.
As of June 30, 2003, all identified employees were terminated.
A reconciliation of the restructuring reserve for the Phase II program is as follows:
Employee | |||||||
termination |
Facility |
||||||
costs |
exit costs |
Total |
|||||
In millions |
Phase II |
Phase II |
Phase II |
||||
Balance at December 31, 2002 | $ 3.2 | $ 0.5 | $ 3.7 | ||||
Cash payments | (2.7) | - | (2.7) | ||||
Balance at June 30, 2003 | $ 0.5 | $ 0.5 | $ 1.0 | ||||
Infrastructure
As
of December 31, 2002, all identified manufacturing locations had been
closed. As of June 30, 2003, a minimal
number of employees are still expected to be terminated.
A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:
Employee |
Facility |
||||||||
termination costs |
exit costs |
Total |
|||||||
In millions |
Phase I |
Phase II |
Phase II |
Phase I |
Phase II |
||||
Balance at December 31, 2002 |
$ 1.5 |
$ 0.1 | $ 0.6 | $ 1.5 | $ 0.7 | ||||
Cash payments | (1.1) | (0.1) | (0.4) | (1.1) | (0.5) | ||||
Balance at June 30, 2003 | $ 0.4 | $ - | $ 0.2 | $ 0.4 | $ 0.2 | ||||
Security
and Safety
As
of December 31, 2002, all identified manufacturing locations had been
closed. As of June 30, 2003, a minimal
number of employees are still expected to be terminated.
A reconciliation of the restructuring reserve for the Phase I program is as follows:
Employee |
|||||||
termination |
Facility |
||||||
costs |
exit costs |
Total |
|||||
In millions |
Phase I |
Phase I |
Phase I |
||||
Balance at December 31, 2002 | $ 0.7 | $ 2.4 |
$ 3.1 |
||||
Cash payments | (0.2) | (0.9) | (1.1) | ||||
Balance at June 30, 2003 | $ 0.5 |
$ 1.5 |
$ 2.0 |
||||
Corporate
Center
As
of June 30, 2003, 218 employees were terminated, with an additional 178 in
staff reductions related to outsourcing of back-office functions
remaining. The Company has recently
begun an evaluation to consider revising the original scope of the accounts payable
portion of the outsourcing project. Pending the outcome of this evaluation and discussions with the
third party outsourcing firm, it is possible that the number of employees to be
terminated may be reduced, in which case a corresponding amount of the
remaining accrual would be reversed. The
Company expects to complete this evaluation in the third quarter of 2003.
The savings associated with the corporate restructuring activities are realized in the segments due to the reduction of employees in business units' back office operations.
A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:
Employee |
||||
termination costs |
||||
In millions |
Phase I |
Phase II |
||
Balance at December 31, 2002 | $ 2.8 |
$ 6.4 |
||
Cash payments |
(2.3) |
(0.1) |
||
Balance at June 30, 2003 | $ 0.5 | $ 6.3 | ||
Note 5 - Inventories are stated at cost, which is not in excess of market. Most U.S. manufactured inventories, excluding the Climate Control and Dresser-Rand Segments, are valued on the last-in, first-out (LIFO) method. All other inventories are valued using the first-in, first-out (FIFO) method. The composition of inventories is as follows:
In millions |
June 30, 2003 |
December 31, 2002 |
||
Raw materials and supplies |
$ 308.5 |
$ 307.1 |
||
Work-in-process |
311.4 |
361.4 |
||
Finished goods |
711.0 |
628.7 |
||
1,330.9 |
1,297.2 |
|||
Less - LIFO reserve |
108.5 |
107.4 |
||
Total |
$ 1,222.4 |
$ 1,189.8 |
||
Note 6 - The changes in the carrying amount of goodwill for the six months ended June 30, 2003, is as follows:
Air and |
||||||||||||
Climate |
Productivity |
Dresser- |
Security |
|||||||||
In millions | Control |
Solutions |
Rand |
Infrastructure |
and Safety |
Total |
||||||
Balance at December 31, 2002 |
$ 2,476.3 |
$ 108.7 |
$ 24.4 |
$ 895.1 |
$ 501.0 |
$ 4,005.5 |
||||||
Additions and adjustments | ||||||||||||
to goodwill* | 0.1 | - | - |
(0.5) |
0.8 | 0.4 | ||||||
Translation adjustments | 61.8 | 2.6 | - |
4.2 |
18.6 | 87.2 | ||||||
Balance at June 30, 2003 |
$ 2,538.2 |
$ 111.3 |
$ 24.4 |
$ 898.8 |
$ 520.4 | $ 4,093.1 | ||||||
* Represents adjustments as a result of final allocations of purchase price.
The following table sets forth the gross amount and accumulated amortization of the Company's intangible assets:
June 30, 2003 |
December 31, 2002 |
|||||||
Gross |
Accumulated |
Gross | Accumulated | |||||
In millions |
amount |
amortization |
amount | amortization | ||||
Customer relationships |
$ 383.7 |
$ 29.6 |
$ 383.7 |
$ 24.5 |
||||
Installed service base |
235.8 |
19.7 |
235.8 |
16.8 |
||||
Software | 114.7 |
25.7 |
101.4 |
16.6 |
||||
Trademarks | 7.1 |
6.1 |
7.1 |
5.9 |
||||
Other | 68.6 |
31.9 |
62.1 |
28.9 |
||||
Total amortizable intangible assets | 809.9 |
113.0 |
790.1 |
92.7 |
||||
Total indefinite lived intangible assets - trademark | 193.5 |
- |
193.5 |
- |
||||
Total |
$ 1,003.4 |
$ 113.0 |
$ 983.6 |
$ 92.7 |
||||
Intangible asset amortization expense for the three months ended June 30, 2003 and 2002 was $11.3 million and $7.1 million, respectively. Intangible asset amortization expense for the six months ended June 30, 2003 and 2002 was $22.1 million and $15.8 million, respectively. Estimated intangible asset amortization expense for each of the next five fiscal years is expected to be $42.1 million in 2004, $40.4 million in 2005, $39.3 million in 2006, $26.7 million in 2007, and $21.8 million in 2008.
During the six months ended June 30, 2003, the Company recorded software additions in the amount of $11.0 million, with an amortization period of five years. During the second quarter of 2003, the Company abandoned certain software it was in the process of implementing. The Company recorded in "Cost of goods sold" a non-cash charge of approximately $5.5 million associated with this decision. Additionally, in the second quarter of 2003, the Company reclassified $10.7 million of software, and related accumulated amortization of $1.1 million, which was previously recorded as property, plant and equipment.
Note 7 - Information on basic and diluted shares is as follows:
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
In millions |
2003 |
2002 |
2003 |
2002 | |||
Weighted-average number of basic shares |
169.5 |
169.0 |
169.4 |
168.7 |
|||
Shares issuable under incentive stock plans |
1.4 |
2.2 |
0.9 |
1.8 |
|||
Weighted-average number of diluted shares |
170.9 |
171.2 |
170.3 |
170.5 |
|||
Diluted earnings per share computations for the three months ended June 30, 2003 and 2002 excluded the weighted-average effect of the assumed exercise of approximately 5.5 million and 4.7 million shares issuable under stock benefit plans, respectively. Excluded for the six months ended June 30, 2003 and 2002 were 6.7 million and 5.1 million shares, respectively. These shares were excluded because the effect on the computation of earnings per share would be anti-dilutive.
Note 8 -The components of comprehensive income are as follows:
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
In millions |
2003 |
2002 |
2003 |
2002 |
|||
Net earnings (loss) | $139.3 | $107.4 | $292.5 | $(446.2) | |||
Other comprehensive income (loss): | |||||||
Foreign currency translation adjustment | 122.3 | 103.5 | 179.3 |
77.3 |
|||
Change in fair value of derivatives qualifying | |||||||
as cash flow hedges, net of tax | (11.4) | 0.5 | (15.4) |
0.5 |
|||
Unrealized gain on marketable securities, net of tax | 10.9 | - | 15.1 | - | |||
Minimum pension liability adjustment, net of tax | - | - | (57.6) | - | |||
Comprehensive income (loss) | $ 261.1 | $211.4 | $ 413.9 | $(368.4) | |||
Included in accumulated other comprehensive income at June 30, 2003, is $12.7 million related to the fair value of derivatives qualifying as cash flow hedges, of which $13.6 million of expense is expected to be reclassified to earnings over the twelve-month period ending June 30, 2004. Additionally, $0.9 million, related to an interest rate swap used as a cash flow hedge of the forecasted issuance of debt, will be reclassified to earnings over the two-year period beginning July 1, 2004. The actual amounts that will be reclassified to earnings over the next twelve months will vary from this amount as a result of changes in market conditions. No amounts were reclassified to earnings during the quarter in connection with forecasted transactions that were no longer considered probable of occurring. At June 30, 2003, the maximum term of derivative instruments that hedge forecasted transactions, for foreign currency and commodity hedges, was 12 months.
In connection with the sale of the Engineered Solutions Segment to Timken, effective February 16, 2003, the Company received approximately 9.4 million shares of Timken common stock valued at $140 million at the time of sale. For the three and six months ended June 30, 2003, the Company recorded unrealized gains of $10.9 million, net of tax, and $15.1 million, net of tax, respectively, on the appreciation of the Timken shares.
The first quarter 2003 sale of the Company's Engineered Solutions Segment was a significant event to the Company's largest U.S. pension plan. Most eligible U.S. employees of the Engineered Solutions Segment were covered by this plan. A remeasurement of that plan's assets and obligations was required as of the date of the sale. The assumptions used to remeasure this plan as of the date of sale were a discount rate of 6.50%, a 4.00% rate of compensation increase and an expected return on plan assets of 8.75%. As a result of this remeasurement, the Company recognized an increase in its additional minimum pension liability, with an after-tax charge to equity of $57.6 million in the first quarter of 2003.
Note 9 - The Company is involved in various litigations, claims and administrative proceedings, including environmental and product liability matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, management believes that the liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.
In assessing its potential environmental liability, the Company bases its estimates on current laws and regulations and current remediation technologies. The Company does not discount its liability or assume any insurance recoveries.
IR-New Jersey, a Company subsidiary, is a defendant in numerous 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 claims against IR-New Jersey generally allege injury caused by exposure to asbestos contained in certain of IR-New Jersey's products. Although IR-New Jersey was neither a producer nor a manufacturer of asbestos, some of its formerly manufactured products utilized asbestos-containing components such as gaskets purchased from third-party suppliers
In assessing its potential asbestos liability, the Company bases its estimates on current laws, an assessment of the nature of current claims, its claims settlement experience and insurance coverage. All claims resolved to date have been dismissed or settled, and IR-New Jersey's average settlement amount per claim has been nominal. For the six months ended June 30, 2003, total costs for settlement and defense of asbestos claims after insurance recoveries and net of tax were approximately $7.7 million, as compared to $13.0 million for the full year 2002. The Company believes that its reserves and insurance are adequate to cover its asbestos liabilities and the costs of defending against them.
In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The required disclosures and a roll-forward of product warranty liabilities are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has fully adopted FIN 45 and its impact was not material.
The Company sells product on a continuous basis under various arrangements through institutions that provide leasing and product financing alternatives to retail and wholesale customers. Under these arrangements, the Company is contingently liable for loan guarantees and residual values of equipment of approximately $21.0 million including consideration of ultimate net loss provisions. The risk of loss to the Company is minimal, and historically, only immaterial losses have been incurred relating to these arrangements since the fair value of the underlying equipment that serves as collateral is generally in excess of the contingent liability. Management believes these guarantees will not adversely affect the condensed consolidated financial statements.
Beginning in 2005, the Company could be required to purchase its partner's interest in a joint venture. Currently, the Company estimates the target purchase price for the remaining 70 percent interest to be approximately $230 million, however, this price is contingent upon the future operating performance of the joint venture.
The Company has remained contingently liable for approximately $46.7 million relating to performance bonds associated with prior sale of products of IDP, which the Company divested in 2000. The acquirer of IDP is the primary obligor under these performances bonds, however, should the acquirer default under these arrangements the Company would be required to satisfy these financial obligations.
The Company is contingently liable for customs duties in certain non-U.S. countries which totaled $6.4 million at June 30, 2003. These amounts are not accrued as the Company intends on exporting the product to another country for final sale. In the normal course of business, the Company has issued several third party guarantees, on behalf of suppliers, distributors and a joint venture partner, which were less then $10 million at June 30, 2003.
In connection with the disposition of certain businesses and facilities the Company has indemnified the purchases for the expected cost of remediation of environment contamination, if any, existing on the date of disposition. Such expected costs are accrued when environmental assessments are made or remedial efforts are probable and the costs can be reasonably estimated.
The following table represents the changes in the product warrant liability for the six months ended June 30, 2003.
In millions | |
Balance at December 31, 2002 | $ 136.0 |
Reductions for payments | (38.8) |
Accruals for warranties issued during the period | 40.8 |
Changes to accruals related to preexisting warranties | (4.4) |
Balance at June 30, 2003 | $ 133.6 |
Note 10 - A summary of operations by reportable segment is as follows:
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
In millions |
2003 |
2002 |
2003 |
2002 |
|||
Net sales | |||||||
Climate Control |
$ 655.6 |
$ 615.2 |
$ 1,213.1 |
$ 1,129.7 |
|||
Industrial Solutions: | |||||||
Air and Productivity Solutions | 352.9 | 323.1 | 673.2 | 633.2 | |||
Dresser-Rand | 337.1 | 234.7 | 615.2 | 446.5 | |||
690.0 | 557.8 | 1,288.4 | 1,079.7 | ||||
Infrastructure | 791.2 | 729.3 | 1,452.3 | 1,364.4 | |||
Security and Safety | 388.3 | 364.1 | 770.0 | 709.6 | |||
Total | $ 2,525.1 | $ 2,266.4 | $ 4,723.8 | $ 4,283.4 | |||
Operating income (loss) | |||||||
Climate Control | $ 55.3 | $ 37.3 | $ 80.4 | $ 60.5 | |||
Industrial Solutions: | |||||||
Air and Productivity Solutions | 21.6 | 13.9 | 45.2 | 39.5 | |||
Dresser-Rand | 8.0 | 0.2 | 12.2 | (0.2) | |||
29.6 | 14.1 | 57.4 | 39.3 | ||||
Infrastructure | 100.5 | 89.7 | 169.1 | 152.4 | |||
Security and Safety | 66.6 | 64.3 | 137.1 | 130.4 | |||
Unallocated corporate expense | (32.5) | (29.9) | (59.1) | (56.2) | |||
Total | $ 219.5 | $ 175.5 | $ 384.9 | $ 326.4 | |||
No significant changes in long-lived assets by geographic area have occurred since December 31, 2002. | |||||||
Note 11 - As part of the reorganization, IR-Limited guaranteed all of the issued public debt securities of Ingersoll-Rand Company (IR-New Jersey.) The subsidiary issuer, IR-New Jersey, is 100% owned by the parent, IR-Limited, the guarantees are full and unconditional, and no other subsidiary of the Company guarantees the securities. The following condensed consolidated financial information for IR-Limited, IR-New Jersey, and all their other subsidiaries is included so that separate financial statements of IR-New Jersey are not required to be filed with the U.S. Securities and Exchange Commission.
IR-Limited issued Class B common shares to IR-New Jersey in exchange for a $3.6 billion note and shares of certain IR-New Jersey subsidiaries. The note, which is due in 2011, has a fixed rate of interest of 11 percent per annum payable semi-annually and imposes certain restrictive covenants upon IR-New Jersey. The Class B common shares are non-voting and pay dividends comparable to the Class A common shares. In 2002, IR-Limited contributed the note to a wholly owned subsidiary, which subsequently contributed portions of the note to several other subsidiaries, all of which are included in "Other Subsidiaries" below. Accordingly, the subsidiaries of IR-Limited remain creditors of IR-New Jersey.
The condensed consolidating financial statements present IR-Limited and IR-New Jersey investments in their subsidiaries 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.
Condensed Consolidating Income Statement | ||||||||||
For the three months ended June 30, 2003 | ||||||||||
IR- | IR- | Other | Consolidating | IR-Limited | ||||||
In millions | Limited | New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Net sales | $ - | $ 332.5 | $ 2,192.6 | $ - | $ 2,525.1 | |||||
Cost of goods sold | - | 261.9 | 1,645.7 | - | 1,907.6 | |||||
Selling and administrative expenses | - | 103.2 | 294.8 | - | 398.0 | |||||
Operating income | - | (32.6) | 252.1 | - | 219.5 | |||||
Equity earnings in affiliates (net of tax) | 154.8 | 133.8 | 18.2 | (306.8) | - | |||||
Interest expense | - | (34.3) | (9.7) | - | (44.0) | |||||
Intercompany interest and fees | (1.4) | (98.6) | 100.0 | - | - | |||||
Other income (expense), net | (0.3) | (16.0) | 18.9 | - | 2.6 | |||||
Earnings before income taxes | 153.1 | (47.7) | 379.5 | (306.8) | 178.1 | |||||
(Benefit) provision for income taxes | - | (65.9) | 90.9 | - | 25.0 | |||||
Earnings (loss) from continuing operations | 153.1 | 18.2 | 288.6 | (306.8) | 153.1 | |||||
Discontinued operations, net of tax | (13.8) | (13.5) | (32.2) | 45.7 | (13.8) | |||||
Net earnings (loss) | $ 139.3 | $ 4.7 | $ 256.4 | $ (261.1) | $ 139.3 | |||||
Condensed Consolidating Income Statement | ||||||||||
For the three months ended June 30, 2002 | ||||||||||
IR- | IR- | Other | Consolidating | IR-Limited | ||||||
In millions | Limited | New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Net sales | $ - | $ 344.5 | $ 1,921.9 | $ - | $ 2,266.4 | |||||
Cost of goods sold | - | 255.3 | 1,474.7 | - | 1,730.0 | |||||
Selling and administrative expenses | - | 75.4 | 278.5 | - | 353.9 | |||||
Restructuring charges | - | 3.6 | 3.4 | - | 7.0 | |||||
Operating income | - | 10.2 | 165.3 | - | 175.5 | |||||
Equity earnings in affiliates (net of tax) | ||||||||||
before the cumulative effect of change in | ||||||||||
accounting principle | 91.3 | 63.7 | (40.5) | (114.5) | - | |||||
Interest expense | - | (45.9) | (13.2) | - | (59.1) | |||||
Intercompany interest and fees | (0.2) | (95.9) | 96.1 | - | - | |||||
Other income (expense), net | - | (11.2) | 0.3 | - | (10.9) | |||||
Earnings before income taxes | 91.1 | (79.1) | 208.0 | (114.5) | 105.5 | |||||
(Benefit) provision for income taxes | - | (49.5) | 63.9 | - | 14.4 | |||||
Earnings (loss) from continuing operations | 91.1 | (29.6) | 144.1 | (114.5) | 91.1 | |||||
Discontinued operations, net of tax | 16.3 | 15.8 | 14.5 | (30.3) | 16.3 | |||||
Net earnings (loss) | $ 107.4 | $ (13.8) | $ 158.6 | $ (144.8) | $ 107.4 | |||||
Condensed Consolidating Income Statement | ||||||||||
For the six months ended June 30, 2003 | ||||||||||
IR- | IR- | Other | Consolidating | IR-Limited | ||||||
In millions | Limited | New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Net sales | $ - | $ 618.4 | $ 4,105.4 | $ - | $ 4,723.8 | |||||
Cost of goods sold | - | 501.5 | 3,095.6 | - | 3,597.1 | |||||
Selling and administrative expenses | - | 175.7 | 566.1 | - | 741.8 | |||||
Operating income | - | (58.8) | 443.7 | - | 384.9 | |||||
Equity earnings in affiliates (net of tax) | 249.6 | 206.9 | (32.8) | (423.7) | - | |||||
Interest expense | - | (75.8) | (18.3) | - | (94.1) | |||||
Intercompany interest and fees | (2.8) | (217.1) | 219.9 | - | - | |||||
Other income (expense), net | (0.2) | (23.9) | 20.1 | - | (4.0) | |||||
Earnings before income taxes | 246.6 | (168.7) | 632.6 | (423.7) | 286.8 | |||||
(Benefit) provision for income taxes | - | (135.9) | 176.1 | - | 40.2 | |||||
Earnings (loss) from continuing operations | 246.6 | (32.8) | 456.5 | (423.7) | 246.6 | |||||
Discontinued operations, net of tax | 45.9 | 78.2 | (8.8) | (69.4) | 45.9 | |||||
Net earnings (loss) | $ 292.5 | $ 45.4 | $ 447.7 | $ (493.1) | $ 292.5 | |||||
Condensed Consolidating Income Statement | ||||||||||
For the six months ended June 30, 2002 | ||||||||||
IR- | IR- | Other | Consolidating | IR-Limited | ||||||
In millions |
Limited |
New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Net sales | $ - | $ 621.2 | $ 3,662.2 | $ - | $ 4,283.4 | |||||
Cost of goods sold | - | 459.9 | 2,800.1 | - | 3,260.0 | |||||
Selling and administrative expenses | - | 140.5 | 539.3 | - | 679.8 | |||||
Restructuring charges | - | 9.4 | 7.8 | - | 17.2 | |||||
Operating income | - | 11.4 | 315.0 | - | 326.4 | |||||
Equity earnings in affiliates (net of tax) | ||||||||||
before the cumulative effect of change in | ||||||||||
accounting principle | 61.6 | 145.5 | (40.5) | (166.6) | - | |||||
Interest expense | - | (93.8) | (24.5) | - | (118.3) | |||||
Intercompany interest and fees | 100.0 | (191.3) | 91.3 | - | - | |||||
Other income (expense), net | - | (17.4) | (3.4) | - | (20.8) | |||||
Earnings before income taxes | 161.6 | (145.6) | 337.9 | (166.6) | 187.3 | |||||
(Benefit) provision for income taxes | - | (105.1) | 130.8 | - | 25.7 | |||||
Earnings (loss) from continuing operations | 161.6 | (40.5) | 207.1 | (166.6) | 161.6 | |||||
Discontinued operations, net of tax | 26.7 | 27.4 | 26.6 | (54.0) | 26.7 | |||||
Earnings (loss) before cumulative effect | ||||||||||
of change in accounting principle | 188.3 | (13.1) | 233.7 | (220.6) | 188.3 | |||||
Cumulative effect of change in accounting | ||||||||||
principle, net of tax | (634.5) | (634.5) | (634.5) | 1,269.0 | (634.5) | |||||
Net (loss) earnings | $ (446.2) | $ (647.6) | $ (400.8) | $ 1,048.4 | $ (446.2) | |||||
Condensed Consolidating Balance Sheet | ||||||||||
June 30, 2003 | ||||||||||
Other | Consolidating | IR-Limited | ||||||||
In millions | IR-Limited | IR-New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Current assets: | ||||||||||
Cash and cash equivalents | $ - | $ 5.4 | $ 102.7 | $ - | $ 108.1 | |||||
Marketable securities | - | 164.5 | 1.1 | - | 165.6 | |||||
Accounts and notes receivable, net | 0.9 | 201.3 | 1,303.2 | - | 1,505.4 | |||||
Inventories, net | - | 164.8 | 1,057.6 | - | 1,222.4 | |||||
Prepaid expenses and deferred income taxes | 50.6 | 203.6 | - | 254.2 | ||||||
Accounts and notes receivable affiliates | - | - | 10,504.6 | (10,504.6) | - | |||||
Total current assets | 0.9 | 586.6 | 13,172.8 | (10,504.6) | 3,255.7 | |||||
Investment in affiliates | 4,187.0 | 12,453.0 | 3,695.9 | (20,335.9) | - | |||||
Property, plant and equipment, net | - | 265.4 | 977.8 | - | 1,243.2 | |||||
Intangible assets, net | - | 163.9 | 4,819.6 | - | 4,983.5 | |||||
Other assets | - | 134.6 | 608.4 | - | 743.0 | |||||
Total assets | $ 4,187.9 | $ 13,603.5 | $ 23,274.5 | $ (30,840.5) | $ 10,225.4 | |||||
Current liabilities: | ||||||||||
Accounts payable and accruals | $ 4.7 | $ 276.3 | $ 1,855.1 | $ - | $ 2,136.1 | |||||
12.0 | 564.9 | 122.4 | - | 699.3 | ||||||
Accounts and note payable affiliates | 322.0 | 3,027.9 | 7,154.7 | (10,504.6) | - | |||||
Total current liabilities | 338.7 | 3,869.1 | 9,132.2 | (10,504.6) | 2,835.4 | |||||
Long-term debt | - | 1,604.4 | 231.8 | - | 1,836.2 | |||||
Note payable affiliate | - | 3,647.4 | - | (3,647.4) | - | |||||
Other noncurrent liabilities | - | 25.0 | 1,679.6 | - | 1,704.6 | |||||
Total liabilities | 338.7 | 9,145.9 | 11,043.6 | (14,152.0) | 6,376.2 | |||||
Shareholders' equity: | ||||||||||
Class A common shares | 169.7 | - | - | - | 169.7 | |||||
Class B common shares | 135.3 | - | - | (135.3) | - | |||||
Common shares | - | 2,362.8 | (2,362.8) | - | ||||||
Other shareholders' equity | 8,754.9 | 5,353.5 | 14,568.8 | (24,606.0) | 4,071.2 | |||||
Accumulated other comprehensive income | (70.3) | (420.9) | (35.3) | 134.8 | (391.7) | |||||
8,989.6 | 4,932.6 | 16,896.3 | (26,969.3) | 3,849.2 | ||||||
Less: Contra account | (5,140.4) | (475.0) | (4,665.4) | 10,280.8 | - | |||||
Total shareholders' equity | 3,849.2 | 4,457.6 | 12,230.9 | (16,688.5) | 3,849.2 | |||||
Total liabilities and equity | $ 4,187.9 | $ 13,603.5 | $ 23,274.5 | $ (30,840.5) | $ 10,225.4 | |||||
Condensed Consolidating Balance Sheet | ||||||||||
December 31, 2002 | ||||||||||
Other | Consolidating | IR-Limited | ||||||||
In millions | IR-Limited | IR-New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Current assets: | ||||||||||
Cash and cash equivalents | $ - | $ 209.0 | $ 133.2 | $ - | $ 342.2 | |||||
Marketable securities | - | - | 1.8 | - | 1.8 | |||||
Accounts and notes receivable, net | - | 113.6 | 1,291.7 | - | 1,405.3 | |||||
Inventories, net | - | 136.1 | 1,053.7 | - | 1,189.8 | |||||
Prepaid expenses and deferred income taxes | - | 55.2 | 324.1 | - | 379.3 | |||||
Assets held for sale | - | 1.4 | 792.6 | - | 794.0 | |||||
Accounts and notes receivable affiliates | 1.3 | - | 10,554.3 | (10,555.6) | - | |||||
Total current assets | 1.3 | 515.3 | 14,151.4 | (10,555.6) | 4,112.4 | |||||
Investment in affiliates | 3,768.6 | 12,239.1 | 3,313.6 | (19,321.3) | - | |||||
Property, plant and equipment, net | - | 265.0 | 1,014.9 | - | 1,279.9 | |||||
Intangible assets, net | - | 173.3 | 4,723.1 | - | 4,896.4 | |||||
Other assets | 0.1 | (37.8) | 558.6 | - | 520.9 | |||||
Total assets | $ 3,770.0 | $ 13,154.9 | $ 23,761.6 | $ (29,876.9) | $ 10,809.6 | |||||
Current liabilities: | ||||||||||
Accounts payable and accruals | $ - | $ 104.3 | $ 2,243.1 | $ - | $ 2,347.4 | |||||
Loans payable | - | 1,073.2 | 82.3 | - | 1,155.5 | |||||
Liabilities held for sale | - | - | 295.2 | - | 295.2 | |||||
Accounts and note payable affiliates | 291.8 | 3,236.7 | 7,027.1 | (10,555.6) | - | |||||
Total current liabilities | 291.8 | 4,414.2 | 9,647.7 | (10,555.6) | 3,798.1 | |||||
Long-term debt | - | 1,854.8 | 237.3 | - | 2,092.1 | |||||
Note payable affiliate | - | 3,647.4 | - | (3,647.4) | - | |||||
Other noncurrent liabilities | - | 95.6 | 1,345.6 | - | 1,441.2 | |||||
Total liabilities | 291.8 | 10,012.0 | 11,230.6 | (14,203.0) | 7,331.4 | |||||
Shareholders' equity: | ||||||||||
Class A common shares | 169.2 | - | - | - | 169.2 | |||||
Class B common shares | 135.3 | - | - | (135.3) | - | |||||
Common shares | - | - | 2,362.8 | (2,362.8) | - | |||||
Other shareholders' equity | 8,551.7 | 4,040.8 | 15,034.2 | (23,804.6) | 3,822.1 | |||||
Accumulated other comprehensive income | (191.6) | (418.9) | (158.6) | 256.0 | (513.1) | |||||
8,664.6 | 3,621.9 | 17,238.4 | (26,046.7) | 3,478.2 | ||||||
Less: Contra account | (5,186.4) | (479.0) | (4,707.4) | 10,372.8 | - | |||||
Total shareholders' equity | 3,478.2 | 3,142.9 | 12,531.0 | (15,673.9) | 3,478.2 | |||||
Total liabilities and equity | $ 3,770.0 | $ 13,154.9 | $ 23,761.6 | $ (29,876.9) | $ 10,809.6 | |||||
Condensed Consolidating Statement of Cash Flows | ||||||||||
For the six months ended June 30, 2003 | ||||||||||
IR- | IR- | Other | Consolidating | IR-Limited | ||||||
In millions | Limited | New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Net cash provided by (used in) operating activities | $ 34.9 | $ 178.6 | $ (350.7) | $ - | $ (137.2) | |||||
Cash flows from investing activities: | ||||||||||
Capital expenditures | - |
(10.5) |
(39.6) | - | (50.1) | |||||
Proceeds from business disposition | 43.0 |
395.5 |
260.8 | - | 699.3 | |||||
Proceeds from sale of property, plant and | ||||||||||
equipment | - | - | 19.8 | - | 19.8 | |||||
Other, net | - | - | (5.1) | - | (5.1) | |||||
Net cash provided by investing activities | 43.0 | 385.0 | 235.9 | - | 663.9 | |||||
Cash flows from financing activities: | ||||||||||
Net change in debt | 12.0 | (758.7) | 28.6 | - | (718.1) | |||||
Dividends (paid) received | (103.6) | 4.0 | 42.0 | - | (57.6) | |||||
Proceeds from the exercise of stock options | 13.7 | - | - | - | 13.7 | |||||
Net cash (used in) provided by financing activities | (77.9) | (754.7) | 70.6 | - | (762.0) | |||||
Net cash (used in) by discontinued operations | - | (12.5) | 4.5 | - | (8.0) | |||||
Effect of exchange rate changes on cash and | ||||||||||
cash equivalents | - | - | 9.2 | - | 9.2 | |||||
Net decrease in cash and cash equivalents | - | (203.6) | (30.5) | - | (234.1) | |||||
Cash and cash equivalents - beginning of period | - | 209.0 | 133.2 | - | 342.2 | |||||
Cash and cash equivalents - end of period | $ - | $ 5.4 | $ 102.7 | $ - | $ 108.1 | |||||
Condensed Consolidating Statement of Cash Flows | ||||||||||
For the six months ended June 30, 2002 | ||||||||||
IR- | IR- | Other | Consolidating | IR-Limited | ||||||
In millions | Limited | New Jersey | Subsidiaries | Adjustments | Consolidated | |||||
Net cash provided by (used in) operating activities | $ 67.7 | $ (68.0) | $ (26.4) | $ - | $ (26.7) | |||||
Cash flows from investing activities: | ||||||||||
Capital expenditures | - | (8.0) | (47.9) | - | (55.9) | |||||
Investments and acquisitions, net of cash | - | - | (85.2) | - | (85.2) | |||||
Proceeds from sale of property, plant and | ||||||||||
equipment | - | 1.9 | 16.0 | - | 17.9 | |||||
Other, net | - | - | (6.7) | - | (6.7) | |||||
Net cash used in investing activities | - | (6.1) | (123.8) | - | (129.9) | |||||
Cash flows from financing activities: | ||||||||||
Net change in debt | - | 113.6 | 19.4 | - | 133.0 | |||||
Dividends (paid) received | (103.3) | 3.8 | 42.2 | - | (57.3) | |||||
Proceeds from the exercise of stock options | 35.6 | - | - | - | 35.6 | |||||
Net cash (used in) provided by financing activities | (67.7) | 117.4 | 61.6 | - | 111.3 | |||||
Net cash provided by discontinued operations | - | (7.4) | 55.2 | - | 47.8 | |||||
Effect of exchange rate changes on cash and | ||||||||||
cash equivalents | - | - | 7.4 | - | 7.4 | |||||
Net increase (decrease) in cash and cash equivalents | - | 35.9 | (26.0) | - | 9.9 | |||||
Cash and cash equivalents - beginning of period | - | 23.4 | 90.6 | - | 114.0 | |||||
Cash and cash equivalents - end of period | $ - | $ 59.3 | $ 64.6 | $ - | $ 123.9 | |||||
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INGERSOLL-RAND COMPANY
LIMITED
MANAGEMENT'S DISCUSSIONS
AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - Three Months Ended June 30, 2003 and 2002
Earnings
from continuing operations for the second quarter of 2003 were $153.1 million,
or diluted earnings per share of $0.89, compared with $91.1 million and $0.53
diluted earnings per share in the comparable quarter of 2002.
Three months ended June 30, |
||||
Dollar amounts in millions |
2003 |
2002 |
||
Net sales | $ 2,525.1 | $ 2,266.4 | ||
Cost of goods sold |
1,907.6 |
1,730.0 | ||
Selling and administrative expenses |
398.0 |
353.9 |
||
Restructuring charges |
- |
7.0 |
||
Operating income |
$ 219.5 |
$ 175.5 |
||
Operating margin |
8.7% |
7.7% |
||
Cost of goods sold and selling and administrative expenses in 2002 include $8.2 million of charges for productivity investments. Productivity investments consist of costs for equipment moving, facility redesign, employee relocation and retraining, and systems enhancements. Charges for productivity investments are expensed as incurred. See "Restructuring Charges" for further discussion.
Net Sales
Revenues for the second quarter of 2003 increased by
approximately 11% over the comparable quarter of 2002. Currency translation accounted for
approximately 5% of the increase, while higher volumes accounted for approximately
4%. The remaining increase was mainly
attributable to the results of acquisitions and pricing. Sales across all business segments were
higher. The Company continues to make
progress in increasing recurring revenues, which include revenues derived from
installation, parts and service. Total
recurring revenues accounted for 24% of total revenues.
Cost
of Goods Sold
Cost of goods sold in the second quarter of 2003 was 75.5%
of sales as compared to 76.3% in 2002.
The decrease was mainly due the benefits associated with the
restructuring programs and increased productivity, and the elimination of
charges related to productivity investments, which were $6.3 million in
2002. These benefits were partially
offset by increased pension and other employee benefit costs.
Selling and Administrative
Expenses
Selling
and administrative expenses in the second quarter of 2003 were 15.8% of sales
as compared to 15.6% in 2002. The
benefits associated with the restructuring programs and increased productivity,
as well as the elimination of charges related to productivity investments,
which were $1.9 million in 2002 had a positive effect. These benefits were more than offset by
higher pension and other employee benefit costs.
Operating Income
Operating income for the second quarter of 2003 increased
by approximately 25%. The increase was
mainly due to the benefits associated with the restructuring programs and
increased productivity, the elimination of costs associated with restructuring
and productivity investments, pricing, higher volumes, and the effects of
currency translation. These positive
results were partially offset by increased pension and other employee benefit
costs.
Interest Expense
Interest expense for the second quarter of 2003 was $44.0
million, a decrease of $15.1 million from the second quarter of 2002. The decrease is attributable to lower
year-over-year debt levels resulting primarily from the repayment of $700
million of debt in the first quarter of 2003, and a decline in short-term
interest rates.
Other
Income (Expense), net
Other
income (expense), net includes foreign exchange activities, equity in earnings
of partially owned affiliates, minority interests, and other miscellaneous
income and expense items. Other income
(expense), net aggregated $2.6 million of income in the second quarter of 2003
as compared with $10.9 million of expense in 2002, primarily related to higher
foreign exchange gains.
Provision for Income Taxes
The
Company's second quarter 2003 provision for income taxes was $25.0 million, as
compared to $14.4 million in 2002. The
Company's effective tax rate of 14% for the second quarter of 2003 is
consistent with the 13.7% effective tax rate for continuing operations for the
second quarter of 2002. The Company is
carefully monitoring the current legislative activity concerning inversions and
is confident it will be able to achieve an effective tax rate of 14% for
2003.
Backlog
Incoming orders for the second quarter of 2003 totaled
$2.4 billion, which was comparable to the second quarter of 2002. The Company's backlog of orders at June 30,
2003, believed to be firm, was $1.5 billion, which approximates the balance
from December 31, 2002.
Discontinued Operations
Effective February 16, 2003, the Company continued its
business portfolio realignment by selling its Engineered Solutions Segment (the
Business), part of the Company's Industrial Solutions Sector, to The Timken
Company (Timken). The consideration
received consisted of approximately $700 million in cash and approximately 9.4
million shares of Timken common stock valued at $140 million at the date of
sale. The gain is subject to working
capital and other final purchase price adjustments.
Discontinued operations, net of tax, for the second quarter of 2003, amounted to $13.8 million of expense, which includes a $5.9 million charge for the repayment of excess antidumping receipts and continuing costs of the Business. The remaining portion of discontinued operations includes costs relative to Ingersoll-Dresser Pump Company (IDP), which was sold in 2000. IDP costs include employee benefits and product liability costs. Discontinued operations, net of tax, for the second quarter of 2002, amounted to $16.3 million of income, which includes the results of the Business and IDP costs.
Results of Operations - Six Months Ended June 30, 2003 and 2002
Earnings
from continuing operations for the six months ended June 30, 2003 were $246.6
million, or diluted earnings per share of $1.45, compared with $161.6 million
and $0.95 diluted earnings per share in the comparable period of 2002.
Six months ended June 30, |
||||
Dollar amounts in millions |
2003 |
2002 |
||
Net sales |
$ 4,723.8 |
$ 4,283.4 |
||
Cost of goods sold |
3,597.1 |
3,260.0 |
||
Selling and administrative expenses |
741.8 |
679.8 |
||
Restructuring charges |
- |
17.2 |
||
Operating income |
$ 384.9 |
$ 326.4 |
||
Operating margin |
8.1% |
7.6% |
||
Cost of goods sold and selling and administrative expenses in 2002 include $17.9 million of charges for productivity investments. Productivity investments consist of costs for equipment moving, facility redesign, employee relocation and retraining, and systems enhancements. Charges for productivity investments are expensed as incurred. See "Restructuring Charges" for further discussion.
Net Sales
Revenues for the six months ended June 30, 2003, increased
by approximately 10% over the comparable period of 2002. Currency translation accounted for
approximately 5% of the increase, while higher volumes accounted for
approximately 3%. The remaining
increase was mainly attributable to the results of acquisitions and
pricing. Sales across all business
segments were higher. The Company
continues to make progress in increasing recurring revenues, which include
revenues derived from installation, parts and service. Total recurring revenues accounted for 25%
of total revenues for the six months ended June 30, 2003.
Cost of Goods Sold
Cost of goods sold for the six months ended June 30, 2003
and 2002, were 76.1% of sales. The
benefits associated with the restructuring programs and increased productivity,
and the elimination of charges related to productivity investments, which were
$13.7 million in 2002, were offset by increased pension and other employee
benefit costs.
Selling and Administrative Expenses
Selling
and administrative expenses for the six months ended June 30, 2003, were 15.7%
of sales as compared to 15.9% in 2002.
The benefits associated with the restructuring programs and increased
productivity, as well as the elimination of charges related to productivity
investments, which were $4.2 million in 2002 had a positive effect. These benefits were partially offset by
higher pension and other employee benefit costs.
Operating Income
Operating income for the six months ended June 30, 2003,
increased by approximately 18%. The
increase was mainly due to the benefits associated with the restructuring
programs and increased productivity, the elimination of costs associated with
restructuring and productivity investments, pricing, higher volumes, and the
effects of currency translation. These
positive results were partially offset by increased pension and other employee
benefit costs.
Interest Expense
Interest expense for the six months ended June 30, 2003,
was $94.1 million, a decrease of $24.2 million from the comparable period of
2002. The decrease is attributable to
lower year-over-year debt levels resulting primarily from the repayment of $700
million of debt in the first quarter of 2003, and a decline in short-term
interest rates.
Other
Income (Expense), net
Other income (expense), net includes
foreign exchange activities, equity in earnings of partially owned affiliates,
minority interests, and other miscellaneous income and expense items. Other income (expense), net aggregated $4.0
million of expense for the six months ended June 30, 2003, as compared with
$20.8 million of expense in 2002.
Higher foreign exchange gains and lower miscellaneous expense items
accounted for the majority of the change.
Provision for Income Taxes
The
Company's provision for income taxes for the six months ended June 30, 2003,
was $40.2 million, as compared to $25.7 million in 2002. The Company's effective tax rate of 14% for
the six months ended June 30, 2003, is consistent with the 13.7% effective tax
rate for continuing operations for the comparable period of 2002.
Discontinued Operations
Discontinued operations, net of tax, for the six months
ended June 30, 2003, amounted to $45.9 million, which includes the gain on sale
of $53.4 million and a $5.9 million charge for the repayment of excess antidumping
receipts. The remaining portion of
discontinued operations includes the results of the Business until its sale and
costs relative to Ingersoll-Dresser Pump Company (IDP), which was sold in 2000. IDP costs include employee benefits and
product liability costs. Discontinued
operations, net of tax, for the six months ended June 30, 2002, amounted to
$26.7 million, which includes the results of the Business and IDP costs.
Restructuring
Charges
During the
third quarter of 2000, the Company commenced a restructuring program, which
included such actions as plant rationalizations, organizational realignments
consistent with the Company's new market-based structure and the consolidation
of back-office processes. During the
fourth quarter of 2001, the Company commenced a second restructuring program
primarily to reduce the general and administrative expenses across the
Company. These programs include certain
costs that are identified in Staff Accounting Bulletin 100 and Emerging Issues
Task Force (EITF) 94-3 as restructuring, as well as other related costs that do
not meet the criteria to be classified as restructuring charges. Nonrecurring costs associated with these
activities not qualifying as restructuring charges are referred to as
"productivity investments" and have been charged to "Cost of sales" and
"Selling and administrative expenses. Substantially all cash payments, except
those relating to the Corporate Center, are expected to be paid by the end of
2003. Remaining amounts relate
primarily to ongoing lease commitments and employee related liabilities. The Company realized lower costs and
improved customer service in all segments as a result of these actions. The Company manages the 2000 and 2001
programs as a single restructuring program.
Therefore, all comments regarding restructure activity refer to both
programs combined.
The total employee terminations related to the restructuring program are expected to be approximately 5,000. As of June 30, 2003, all segments, except Corporate Center, have either completed their employee terminations, or have a minimal number of employees (less than 20) still expected to be terminated. These terminations included both the salaried and hourly employee groups. All 21 of the manufacturing facilities were closed at December 31, 2002.
The planned benefit of the program is estimated to be approximately $200 million on an annual basis once fully implemented. Due to the timing of completion of facility-related projects, the first year of full realization of the benefits is expected to be 2003.
A reconciliation of the consolidated restructuring reserve for the Phase I and Phase II programs is as follows:
Employee | ||||||
termination |
Facility |
|||||
In millions | costs |
exit costs |
Total |
|||
Balance at December 31, 2002 |
$ 20.1 |
$ 6.2 |
$ 26.3 |
|||
Cash payments |
(8.8) |
(2.2) |
(11.0) |
|||
Balance at June 30, 2003 |
$ 11.3 |
$ 4.0 |
$15.3 |
|||
Climate
Control
As
of December 31, 2002, all identified manufacturing locations had been closed,
the outsourcing of certain product manufacturing was completed and all
identified employees were terminated.
It is estimated that this Segment has realized its expected annual
savings of approximately $35 million.
A reconciliation of the restructuring reserve for the Phase II program is as follows:
Employee |
|||||||
termination |
Facility |
||||||
costs |
exit costs |
Total |
|||||
In millions |
Phase II |
Phase II |
Phase II |
||||
Balance at December 31, 2002 |
$ 2.2 |
$ 2.7 |
$ 4.9 |
||||
Cash payments |
(0.8) |
(0.9) |
(1.7) |
||||
Balance at June 30, 2003 |
$ 1.4 |
$ 1.8 |
$ 3.2 |
||||
Air and Productivity Solutions
As
of December 31, 2002, all identified manufacturing locations had been
closed. As of June 30, 2003, a minimal
number of employees are still expected to be terminated. It is estimated that this Segment has
realized its expected annual savings of approximately $60 million.
A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:
Employee |
||||
termination costs |
||||
In millions | Phase I | Phase II | ||
Balance at December 31, 2002 |
$ 0.6 |
$ 2.6 |
||
Cash payments |
(0.6) |
(0.9) |
||
Balance at June 30, 2003 |
$ - |
$ 1.7 |
||
Dresser-Rand
As
of December 31, 2002, the organizational realignment and the closure of the
non-manufacturing locations were complete.
As of June 30, 2003, all identified employees were terminated. The expected annual savings is approximately
$48 million. It is estimated that this
Segment has realized approximately $38 million of savings.
A reconciliation of the restructuring reserve for the Phase II program is as follows:
Employee | |||||||
termination |
Facility |
||||||
costs |
exit costs |
Total |
|||||
In millions |
Phase II |
Phase II |
Phase II |
||||
Balance at December 31, 2002 | $ 3.2 | $ 0.5 | $ 3.7 | ||||
Cash payments | (2.7) | - | (2.7) | ||||
Balance at June 30, 2003 | $ 0.5 | $ 0.5 | $ 1.0 | ||||
Infrastructure
As of December 31, 2002, all identified manufacturing
locations had been closed. As of June
30, 2003, a minimal number of employees are still expected to be
terminated. It is estimated that this
Segment has realized its expected annual savings of approximately $29 million.
A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:
Employee |
Facility |
||||||||
termination costs |
exit costs |
Total |
|||||||
In millions |
Phase I |
Phase II |
Phase II |
Phase I |
Phase II |
||||
Balance at December 31, 2002 |
$ 1.5 |
$ 0.1 | $ 0.6 | $ 1.5 | $ 0.7 | ||||
Cash payments | (1.1) | (0.1) | (0.4) | (1.1) | (0.5) | ||||
Balance at June 30, 2003 | $ 0.4 | $ - | $ 0.2 | $ 0.4 | $ 0.2 | ||||
Security
and Safety
As
of December 31, 2002, all identified manufacturing locations had been
closed. As of June 30, 2003, a minimal
number of employees are still expected to be terminated. The expected annual savings is
approximately $39 million. It is
estimated that this Segment has realized approximately $26 million of savings.
A reconciliation of the restructuring reserve for the Phase I program is as follows:
Employee |
|||||||
termination |
Facility |
||||||
costs |
exit costs |
Total |
|||||
In millions |
Phase I |
Phase I |
Phase I |
||||
Balance at December 31, 2002 | $ 0.7 | $ 2.4 |
$ 3.1 |
||||
Cash payments | (0.2) | (0.9) | (1.1) | ||||
Balance at June 30, 2003 | $ 0.5 |
$ 1.5 |
$ 2.0 |
||||
Corporate
Center
As
of June 30, 2003, 218 employees were terminated, with an additional 178 in
staff reductions related to outsourcing of back-office functions
remaining. The Company has recently
begun an evaluation to consider revising the original scope of the accounts
payable portion of the outsourcing project.
Pending the outcome of this evaluation and discussions with the third
party outsourcing firm, it is possible that the number of employees to be
terminated may be reduced, in which case a corresponding amount of the
remaining accrual would be reversed.
The Company expects to complete this evaluation in the third quarter of
2003.
The savings associated with the corporate restructuring activities are realized in the segments due to the reduction of employees in business units' back office operations.
A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:
Employee |
||||
termination costs |
||||
In millions |
Phase I |
Phase II |
||
Balance at December 31, 2002 | $ 2.8 |
$ 6.4 |
||
Cash payments |
(2.3) |
(0.1) |
||
Balance at June 30, 2003 | $ 0.5 | $ 6.3 | ||
Review of Business Segments
Climate Control
Climate Control is engaged in the design, manufacture, sale and service
of transport temperature control units, HVAC systems, refrigerated display
merchandisers, beverage coolers, and walk-in storage coolers and freezers. It includes the market leading brands of
Thermo King and Hussmann.
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
Dollar amounts in millions |
2003 |
2002 |
2003 |
2002 |
|||
Net sales |
$ 655.6 |
$ 615.2 |
$ 1,213.1 |
$ 1,129.7 |
|||
Operating income |
55.3 |
37.3 |
80.4 |
60.5 |
|||
Operating margin |
8.4% |
6.1% |
6.6% |
5.4% |
|||
Revenues for the second quarter of 2003 increased by approximately 7% compared to 2002. The effects of currency translation accounted for approximately 5% of the increase in revenues. The remaining increase was mainly due to favorable pricing and the results of acquisitions, which were partially offset by lower volumes. Operating income and margins in the second quarter of 2003 increased significantly. The estimated benefits associated with the restructuring programs and improved productivity and favorable pricing, increased operating income by $9.6 million and $9.7 million, respectively. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $4.7 million in the second quarter of 2002. These positive effects were partially offset by lower volumes and product mix, and higher pension and other employee benefit costs.
Revenues for the six months ended June 30, 2003, increased by approximately 7% compared to 2002. The effects of currency translation accounted for approximately 4% of the increase in revenues. The remaining increase was mainly due to favorable pricing and the results of acquisitions. Operating income and margins for the six months ended June 30, 2003, increased significantly. The estimated benefits associated with the restructuring programs and improved productivity and favorable pricing, increased operating income by $16.4 million and $15.1 million, respectively. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $10.0 million during the six months ended June 30, 2002. These positive effects were partially offset by other charges, such as higher pension and other employee benefit costs.
Industrial
Solutions
Industrial
Solutions is composed of a diverse group of businesses focused on providing solutions
to enhance customers' industrial efficiency.
Industrial Solutions consists of the Air and Productivity Solutions
Segment and the Dresser-Rand Segment.
Air
and Productivity Solutions
Air
and Productivity Solutions is engaged in the design, manufacture, sale and
service of air compressors, fluid products, microturbines and industrial
tools.
Three months ended | Six months ended | ||||||
June 30, |
June 30, |
||||||
Dollar amounts in millions |
2003 |
2002 |
2003 |
2002 | |||
Net sales |
$ 352.9 |
$ 323.1 |
$ 673.2 |
$ 633.2 |
|||
Operating income |
21.6 |
13.9 |
45.2 |
39.5 |
|||
Operating margin |
6.1% |
4.3% |
6.7% |
6.2% |
|||
Revenues for the second quarter of 2003 increased by approximately 9% compared to 2002. The effects of currency translation and higher volumes increased revenue by approximately 5% and 4%, respectively. Operating income and margins also rose in 2003. The estimated benefits associated with the restructuring programs and improved productivity increased operating income by $7.4 million, while higher volumes and product mix also had a positive effect of $6.3 million. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $3.1 million in the second quarter of 2002. These positive effects were partially offset by other items such as higher pension and other employee benefit costs, and costs associated with centralizing manufacturing operations in lower cost geographic areas.
Revenues for the six months ended June 30, 2003, increased by approximately 6% compared to 2002. The effects of currency translation accounted for approximately 5% of the increase in revenues. The remaining increase was due to higher volumes and favorable pricing. Operating income and margins also rose in 2003. The estimated benefits associated with the restructuring programs and improved productivity increased operating income by $12.8 million, while higher volumes and product mix also had a positive effect of $6.6 million. These positive effects were partially offset by other items such as higher pension and other employee benefit costs, and costs associated with centralizing manufacturing operations in lower cost geographic areas.
Dresser-Rand
Dresser-Rand is
engaged in the design, manufacture, sale and service of gas compressors, gas
and steam turbines, and generators.
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
Dollar amounts in millions |
2003 |
2002 |
2003 |
2002 |
|||
Net sales | $ 337.1 | $ 234.7 |
$ 615.2 |
$ 446.5 |
|||
Operating income (loss) |
8.0 |
0.2 |
12.2 |
(0.2) |
|||
Operating margin |
2.4% |
0.1% |
2.0% |
- |
|||
Revenues for the second quarter of 2003 increased by approximately 44% compared to 2002. Higher volumes accounted for 36% of the change, while the effects of currency translation and pricing accounted for the remainder. Operating income and margins also increased substantially. Higher volumes and favorable pricing contributed $7.8 million and $5.8 million, respectively, and were partially offset by higher pension and other employee benefit costs. Additionally, revenues and margins were impacted by certain large components that are purchased by Dresser-Rand on behalf of customers and passed through at lower margins. Reported revenues for the second quarter of 2003 and 2002 include $78.7 million and $42.2 million, respectively, of sales related to these certain large components.
Revenues for the six months ended June 30, 2003, increased by approximately 38% compared to 2002. Higher volumes accounted for 30% of the change, while the effects of currency translation and pricing accounted for the remainder. Operating income and margins also increased substantially. Higher volumes and favorable pricing contributed $9.1 million and $10.9 million, respectively, and were partially offset by higher pension and other employee benefit costs. Additionally, revenues and margins were impacted by certain large components that are purchased by Dresser-Rand on behalf of customers and passed through at lower margins. Reported revenues for the six months ended June 30, 2003 and 2002, include $132.4 million and $76.0 million, respectively, of sales related to these certain large components.
Infrastructure
Infrastructure
is engaged in the design, manufacture, sale and service of skid-steer loaders,
mini-excavators, electric and gasoline powered golf and utility vehicles,
portable compressors and light towers, road construction and repair equipment,
and a broad line of drills and drill accessories. It includes products such as Bobcat, Club Car, Portable Power, Road
Development and Specialty Equipment.
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
Dollar amounts in millions |
2003 |
2002 |
2003 |
2002 |
|||
Net sales | $ 791.2 | $ 729.3 | $ 1,452.3 | $ 1,364.4 | |||
Operating income | 100.5 | 89.7 | 169.1 | 152.4 | |||
Operating margin | 12.7% | 12.3% | 11.6% | 11.2% | |||
Revenues for the second quarter of 2003 increased by approximately 8% compared to 2002. The effects of currency translation accounted for approximately 5% of the change, while higher volumes also had a positive impact. Operating income and margins improved in 2003. The estimated benefits associated with the restructuring programs and improved productivity, the benefits of currency translation, and improved pricing increased operating income by $6.3 million, $9.7 million, and $1.5 million, respectively. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $1.9 million in the second quarter of 2002. These positive effects were partially offset by higher pension and other employee benefit costs, as well as other items, such as increased bad debt expense.
Revenues for the six months ended June 30, 2003, increased by approximately 6% compared to 2002. The effects of currency translation accounted for approximately 5% of the change, while favorable pricing also had a positive impact. Operating income and margins improved in 2003. The estimated benefits associated with the restructuring programs and improved productivity, and the benefits of currency translation increased operating income by $10.3 million and $17.0 million, respectively. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $9.8 million for the six months ended June 30, 2002. These positive effects were partially offset by higher pension and other employee benefit costs, as well as other items, such as increased bad debt expense and costs related to the Segment's financial services initiative.
Security
and Safety
Security
and Safety is engaged in the design, manufacture, sale and service of locks,
door closers, exit devices, door control hardware, doors and frames, decorative
hardware, and electronic and biometric access control systems.
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
Dollar amounts in millions |
2003 |
2002 |
2003 |
2002 |
|||
Net sales | $ 388.3 |
$ 364.1 |
$ 770.0 |
$ 709.6 |
|||
Operating income |
66.6 |
64.3 |
137.1 |
130.4 |
|||
Operating margin |
17.2% |
17.7% |
17.8% |
18.4% |
|||
Revenues for the second quarter of 2003 increased by approximately 7% compared to 2002. The results from acquisitions increased revenues by approximately 4%. The remaining increase in revenues was mainly due to currency translation and favorable pricing. Operating income was slightly higher while operating margins declined slightly. Favorable pricing and the estimated benefits associated with the restructuring programs and improved productivity increased operating income by $2.2 million and $3.2 million, respectively. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $2.4 million in the second quarter of 2002. These positive effects were partially offset by higher pension and other employee benefit costs, and increased product investments.
Revenues for the six months ended June 30, 2003, increased by approximately 9% compared to 2002. The results from acquisitions increased revenues by approximately 4%. The remaining increase in revenues was mainly due to currency translation and higher volumes. Operating income and operating margins increased in 2003. The estimated benefits associated with the restructuring programs and improved productivity, and favorable pricing increased operating income by $7.1 million and $6.5 million, respectively. Additionally, there were no charges for restructuring and productivity investments in 2003. These charges amounted to $4.5 million for the six months ended June 30, 2002. These positive effects were partially offset by higher pension and other employee benefit costs, and increased product investments.
Liquidity and Capital Resources
The
Company's debt-to-total capital ratio at June 30, 2003, was approximately 39%,
compared with 48% reported at December 31, 2002. The decrease is primarily related to the repayment of $700
million of current maturities of long-term debt. This debt was retired with the proceeds from the sale of the
Engineered Solutions Segment. The
Company's public debt has no financial covenants and its $2.0 billion revolving
credit line has a debt-to-total capital covenant of 65%, which is calculated
excluding certain non-cash items.
The Company's working capital was $420.3 million at June 30, 2003, compared to $314.3 million at December 31, 2002. The change was due to the repayment of $700 million of current maturities of long-term debt, partially offset by the sale of the Engineered Solutions Segment.
During the three and six months ended June 30, 2003, foreign currency translation adjustments resulted in a net increase of $122.3 million and $179.3 million, respectively, in shareholders' equity. Currency fluctuations in the euro accounted for the majority of the change. Unrealized gains on marketable securities, net of tax, classified as available for sale amounted to $10.9 million and $15.1 million for the three and six months ended June 30, 2003, respectively.
The Company recently announced its plans to make a voluntary pension contribution of $150 million to $200 million during the third quarter of 2003, in order to enhance the funding level for current and future needs. Additionally, the Company announced that its board of directors approved an increase in the Company's quarterly dividend from $0.17 per share to $0.19 per share.
Environmental and Asbestos Matters
The Company is 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 is identified as a potentially responsible party (PRP) for
cleanup costs associated with off-site waste disposal at federal Superfund and
state remediation sites, including sites as to which the Company's records
disclose no involvement or as to which the Company's liability has not been
fully determined. For all sites there
are other PRPs, and in most instances the Company's site involvement is
minimal.
In estimating its liability, the Company has assumed it will not bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on the parties' financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future.
Although uncertainties regarding environmental technology, U.S. federal and state laws and regulations and individual site information make estimating the liability difficult, management believes that the total liability for the cost of remediation and environmental lawsuits and claims will not have a material effect on the financial condition, results of operations, liquidity or cash flows of the Company for any year. It should be noted that when the Company estimates its liability for environmental matters, such estimates are based on current technologies, and the Company does not discount its liability or assume any insurance recoveries.
IR-New Jersey, a Company subsidiary, is a defendant in numerous 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 claims against IR-New Jersey generally allege injury caused by exposure to asbestos contained in certain of IR-New Jersey's products. Although IR-New Jersey was neither a producer nor a manufacturer of asbestos, some of its formerly manufactured products utilized asbestos-containing components, such as gaskets purchased from third-party suppliers.
All claims resolved to date have been dismissed or settled, and IR-New Jersey's average settlement amount per claim has been nominal. For the six months ended June 30, 2003, total costs for settlement and defense of asbestos claims after insurance recoveries and net of tax were approximately $7.7 million, as compared to $13.0 million for the full year 2002. The Company believes that its reserves and insurance are adequate to cover its asbestos liabilities and the costs of defending against them, and that these asbestos liabilities are not likely to have a material adverse effect on its financial position, results of operations, liquidity or cash flows.
New Accounting Standards
In April 2003,
Statement of Financial Accounting Standard (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" was
issued. The standard amends and
clarifies financial reporting for derivative instruments and for hedging
activities accounted for under SFAS No. 133 and is effective for contracts
entered into or modified, and for hedges designated, after June 30, 2003. Adoption of this standard is not expected to
have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In May 2003, SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity" was issued. The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of the standard is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The required disclosures and a roll-forward of product warranty liabilities are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has fully adopted FIN 45 and its impact was not material.
In January 2003, FIN 46, "Consolidation of Variable Interest Entities" was issued. FIN 46 provides guidance on consolidating variable interest entities and applies immediately to variable interests created after January 31, 2003. The guidelines of the interpretation will become applicable for the Company in its third quarter 2003 financial statements for variable interest entities created before February 1, 2003. The interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack certain specified characteristics. The Company has reviewed FIN 46 to determine its impact, if any, on future periods, and does not anticipate any material accounting or disclosure requirement under the provisions of the interpretation.
In January 2003, EITF 00-21: "Accounting for Revenue Arrangements with Multiple Deliverables" was released. EITF 00-21 clarifies the timing and recognition of revenue from certain transactions that include the delivery and performance of multiple products or services. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has adopted EITF 00-21 and has determined its impact will not be material.
Safe Harbor Statement
Information provided by the Company in reports such as
this report on Form 10-Q, in press releases and in statements made by employees
in oral discussions, to the extent the information is not historical fact,
constitutes "forward looking statements" within the meaning of regulations
under the Securities Exchange Act of 1933 and the Securities Exchange Act of
1934. Forward-looking statements by
their nature involve risk and uncertainty.
The Company cautions that a variety of factors, including but not limited to the following, could cause business conditions and results to differ from those expected by the Company: changes in the rate of economic growth in the United States and in other major international economies; significant changes in trade, monetary and fiscal policies worldwide; tax legislation; currency fluctuations among the U.S. dollar and other currencies; demand for Company products and services; distributor inventory levels; failure to achieve the Company's productivity targets; and competitor actions including unanticipated pricing actions or new product introductions.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to fluctuations in the price of major raw materials used in the manufacturing process, foreign currency fluctuations and interest rate changes. From time to time the Company enters into agreements to reduce its raw material, foreign currency and interest rate risks. To minimize the risk of counter party non-performance, such agreements are made only through major financial institutions with significant experience in such financial instruments.
The Company generates foreign currency exposures in the normal course of business. To mitigate the risk from foreign currency exchange rate fluctuations, the Company will generally enter into forward currency exchange contracts or options for the purchase or sale of a currency in accordance with the Company's policies and procedures. The Company applies a sensitivity analysis when measuring its exposure to currency fluctuations. The sensitivity analysis is a measurement of the potential loss in fair value based on a percentage increase or decrease in exchange rates against the U.S. dollar.
The Company maintains significant operations in countries other than the U.S.; therefore, the movement of the U.S. dollar against foreign currencies has an impact on the Company's financial position. Generally, the functional currency of the Company's non-U.S. subsidiaries is their local currency. The Company manages exposure to changes in foreign currency exchange rates through its normal operations and financing activities, as well as through the use of forward exchange contracts and options. The Company attempts, through its hedging activities, to mitigate the impact on income of changes in foreign exchange rates.
Reorganization as a Bermuda Company and Related Risk Factors
On December 31, 2001, IR-New Jersey was effectively reorganized as IR-Limited, a Bermuda company (the Reorganization). The Company believes that the Reorganization has enabled it to begin to realize a variety of potential, financial and strategic benefits, including to:
- help enhance business growth;
- create a more favorable corporate structure for expansion of the Company's current business;
- improve expected cash flow
for use in investing in the development of higher-growth product lines and
and higher-growth businesses;
- improve expected cash flow for use in reducing the amount of the Company's debt;
- reduce the Company's worldwide effective tax rate;
- enable the Company to implement its business strategy more effectively; and
- expand the Company's investor base as its shares may become more attractive to non-U.S. investors.
To
consummate the Reorganization, IR Merger Corporation, a New Jersey corporation,
merged into IR-New Jersey, with IR-New Jersey as the surviving company. Upon the merger, IR-New Jersey became a
wholly-owned, indirect subsidiary of the Company, and the outstanding shares of
IR-New Jersey common stock were automatically cancelled in exchange for the
issue of the Company's Class A common shares.
In addition, as part of the Reorganization, IR-New Jersey and certain of
its subsidiaries transferred shares of certain existing subsidiaries and issued
certain debt to the Company in exchange for 135,250,003 shares of the Company's
Class B common shares, such amount of shares being subject to adjustment based
on the results of final valuation of the transferred subsidiaries. The number of Class B common shares issued
had an aggregate value equal to the fair market value of the shares of the
subsidiaries transferred (the transferred shares) and the amount of debt issued
to the Company based on the market value of IR-New Jersey common stock at the
effective time of the merger. Prior to
the
Reorganization, neither the Company nor IR-Merger Corporation had any
significant assets or capitalization or engaged in any business or other
activities other than in connection with formation and the merger and related
reorganization transactions.
The Reorganization will expose the Company to the risks described below. In addition, the Company cannot be assured that the anticipated benefits of the Reorganization will be realized.
The Reorganization and related transfers of assets could result in a taxable gain.
There
is a possibility of U.S. withholding tax if the Internal Revenue Service
successfully disputes the value of the transferred shares. Therefore, while the Company believes that
neither IR-New Jersey nor
the Company will incur significant U.S. federal income or withholding taxes as
a result of the transfer of the transferred shares, its projections are not
binding on the Internal Revenue Service.
The Company cannot be assured that its anticipated tax costs with
respect to the transferred shares will be borne out, that the Internal Revenue
Service will not contest its determination, or that the Internal Revenue
Service will not succeed in any such contest.
Certain of the Company's shareholders may be subject to additional tax if the Company or any of its non-U.S. subsidiaries are considered a "controlled foreign corporation" or "CFC" under current U.S. tax laws.
A non-U.S. corporation (a foreign corporation), such as the Company, will constitute a "controlled foreign corporation" or "CFC" for U.S. federal income tax purposes if U.S. shareholders owning (directly, indirectly, or constructively) 10% or more of the foreign corporation's total combined voting power collectively own (directly, indirectly, or constructively) more than 50% of the total combined voting power or total value of the foreign corporation's shares. Following the merger and as of December 31, 2001, IR-New Jersey, through its ownership of the non-voting Class B common shares, owned approximately 45% of the total value of the Company's shares. As a consequence, any Class A common shareholder who is considered to own 10% of the voting power in the Company could cause the Company's non-U.S. subsidiaries or (if the Internal Revenue Service successfully takes the position that the Class B common shares held by IR-New Jersey in the Company are voting shares) the Company itself to be treated as a CFC.
If the Company or any of its foreign subsidiaries are treated as a CFC, this status should have no adverse effect on any of the Company's shareholders who do not own (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of the Company's shares or the shares of any of its foreign subsidiaries. If, however, the Company or any of its foreign subsidiaries are treated as a CFC for an uninterrupted period of 30 days or more during any taxable year, any U.S. shareholder who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock of the Company or the subsidiary on any day during the taxable year and who directly or indirectly owns any stock in the corporation the last day of such year in which it is a CFC will have to include in its gross income for U.S. federal income tax purposes its pro rata share of the corporation's "subpart F income" relating to the period during which the corporation is a CFC.
In addition, the gain on the sale of the Company's shares, if treated as a CFC, realized by such a shareholder would be treated as ordinary income to the extent of the shareholder's proportionate share of the Company's and its CFC subsidiaries' undistributed earnings and profits accumulated during the shareholder's holding period of the shares while the Company is a CFC.
If the U.S. shareholder is a corporation, however, it may be eligible to credit against its U.S. tax liability with respect to these potential inclusions foreign taxes paid on the earnings and profits associated with the included income. A disposition of shares by a U.S. shareholder may result in termination of the Company's CFC status or the CFC status of its foreign subsidiaries.
The Internal Revenue Service and non-U.S. taxing authorities may not agree with the Company's tax treatment of various items relating to the Reorganization.
The Company believes that the Reorganization will help enhance its business growth and cash flow and reduce its worldwide effective tax rate. However, the Company cannot give any assurance as to the amount of taxes it will pay as a result of or after the Reorganization. The amount of taxes it will pay will depend in part on the treatment given the Company by the taxing authorities in the jurisdictions in which it operates.
The Company may become subject to U.S. corporate income tax, which would reduce its net income.
Prior
to the Reorganization, IR-New Jersey was subject to U.S. corporate income tax
on its worldwide income. After the
Reorganization, the earnings of IR-New Jersey and its U.S. subsidiaries
continue to be subject to U.S. corporate income tax. The Company believes that as a result of the Reorganization its
non-U.S. operations will generally not be subject to U.S. tax other than
withholding taxes. However, if the
Internal Revenue Service successfully contends that the Company or any of its
non-U.S. affiliates are
engaged in a trade or business in the U.S., the Company or that non-U.S.
affiliate would, subject to possible income tax treaty exemptions, be required
to pay U.S. corporate income tax and/or branch profits tax on income that is
effectively connected with such trade or business.
Changes in laws or regulations could adversely affect the Company and its subsidiaries.
Changes in tax laws, treaties or regulations or the interpretation or enforcement thereof could adversely affect the tax consequences of the Reorganization to the Company and its subsidiaries. In this connection, bills have been introduced in the United States Congress which, if enacted, could substantially reduce or eliminate the tax benefits resulting from the Reorganization.
There are also proposed legislative and regulatory actions which could reduce or eliminate the ability of the Company or its subsidiaries to enter into contracts with governmental authorities.
The enforcement of judgments in shareholder suits against the Company may be more difficult than it would have been to enforce shareholder suits against IR-New Jersey.
The Company has been advised that a judgment for the payment of money rendered by a court in the United States based on civil liability would not be automatically enforceable in Bermuda. It has also been advised that with respect to a final and conclusive judgment obtained in a court of competent jurisdiction in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty), a Bermuda court would be expected to enforce a judgment based thereon, provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of Bermuda, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of Bermuda, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda and (f) there is due compliance with the correct procedures under the laws of Bermuda.
As a result, it may be difficult for a holder of the Company's securities to effect service of process within the United States or to enforce judgments obtained against the Company in U.S. courts. The Company has irrevocably agreed that it may be served with process with respect to actions based on offers and sales of securities made in the United States by having Ingersoll-Rand Company, 200 Chestnut Ridge Road, Woodcliff Lake, New Jersey 07677, be its U.S. agent appointed for that purpose.
A Bermuda court may impose civil liability on the Company or its directors or officers in a suit brought in the Supreme Court of Bermuda against the Company or such persons with respect to a violation of U.S. federal securities laws, provided that the facts surrounding such violation would constitute or give rise to a cause of action under Bermuda law.
Item 4 - Controls and Procedures
As of the end of the quarter ended June 30, 2003, the Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
PART II OTHER INFORMATION
Item 3 - Legal Proceedings
In the normal course of business, the Company is involved in a variety of
lawsuits, claims and legal proceedings, including commercial and contract
disputes, employment matters, product liability claims, environmental
liabilities and intellectual property disputes. In the opinion of the
Company, pending legal matters, are not expected to have a material adverse
effect on the results of operations, financial condition, liquidity or cash
flows.
See also the discussion under Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, Environmental and Asbestos Matters, and also Item 1, Note 9 to the Condensed Consolidated Financial Statements.
Item 4 - Submission of Matters to a Vote of
Security Holders
Results of votes held at the Company's Annual General Meeting of
Shareholders. Incorporated by reference to Form 8-K, dated May 29, 2003.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits |
|
Exhibit No. |
Description |
10 |
Employment Agreement with Sharon Elliott, Senior Vice President. |
99.1 |
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a). |
99.2 |
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a). |
99.3 |
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. |
(b) Reports on Form 8-K |
A Current Report on Form 8-K (Item 5) dated May 29, 2003, reporting results of votes held at the Company's Annual General Meeting of Shareholders; and (Item 9) reporting the filing of Exhibit 99-Press release of Ingersoll-Rand Company Limited. |
A Current Report on Form 8-K (Item 9) dated July 17, 2003, reporting the filing of Exhibit 99.1-Press release of Ingersoll-Rand Company Limited. |
INGERSOLL-RAND COMPANY LIMITED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INGERSOLL-RAND COMPANY LIMITED
(Registrant)
Date: August 13, 2003 /s/ Timothy R.
McLevish
Timothy R. McLevish, Senior Vice
President
and Chief Financial Officer
Principal Financial Officer
Date: August 13, 2003 /s/ Richard W. Randall
Richard W. Randall, Vice President
and
Controller
Principal Accounting Officer