INGERSOLL-RAND PLC, 10-K filed on 2/26/2010
Annual Report
Statement Of Income Alternative (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Net revenues
$ 13,195.3 
$ 13,227.4 
$ 8,763.1 
Cost of goods sold
(9,645.1)
(9,748.1)
(6,272.0)
Selling and administrative expenses
(2,708.6)
(2,343.1)
(1,433.3)
Asset impairment
0.0 
(3,710.0)
0.0 
Operating income (loss)
841.6 
(2,573.8)
1,057.8 
Interest expense
(302.2)
(245.4)
(136.2)
Other, net
19.7 
63.2 
30.2 
Earnings (loss) before income taxes
559.1 
(2,756.0)
951.8 
Benefit (provision) for income taxes
(71.3)
208.6 
(204.4)
Earnings (loss) from continuing operations
487.8 
(2,547.4)
747.4 
Discontinued operations, net of tax
(11.6)
(57.4)
3,242.6 
Net earnings (loss)
476.2 
(2,604.8)
3,990.0 
Less: Net earnings attributable to noncontrolling interests
(24.9)
(20.0)
(23.3)
Net earnings (loss) attributable to Ingersoll-Rand plc
451.3 
(2,624.8)
3,966.7 
Amounts attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
Continuing operations
462.9 
(2,567.4)
733.1 
Discontinued operations
(11.6)
(57.4)
3,233.6 
Net earnings (loss) attributable to Ingersoll-Rand plc
451.3 
(2,624.8)
3,966.7 
Earnings (loss) per share attributable to Ingersoll-Rand plc ordinary shareholders:
 
 
 
Basic:
 
 
 
Continuing operations
1.45 
(8.54)
2.52 
Discontinued operations
(0.04)
(0.19)
11.12 
Net earnings (loss)
1.41 
(8.73)
13.64 
Diluted:
 
 
 
Continuing operations
1.41 
(8.54)
2.48 
Discontinued operations
(0.04)
(0.19)
10.95 
Net earnings (loss)
$ 1.37 
$ (8.73)
$ 13.43 
Statement Of Financial Position Classified (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$ 876.7 
$ 550.2 
Accounts and notes receivable, net
2,120.2 
2,512.1 
Inventories
1,193.2 
1,615.1 
Other current assets
637.2 
722.3 
Total current assets
4,827.3 
5,399.7 
Property, plant and equipment, net
1,912.8 
1,968.5 
Goodwill
6,606.0 
6,620.1 
Intangible assets, net
5,042.8 
5,214.1 
Other noncurrent assets
1,602.1 
1,722.1 
Total assets
19,991.0 
20,924.5 
LIABILITIES AND EQUITY
 
 
Current liabilities:
 
 
Accounts payable
1,079.0 
1,046.5 
Accrued compensation and benefits
492.8 
508.8 
Accrued expenses and other current liabilities
1,529.7 
1,605.7 
Short-term borrowings and current maturities of long-term debt
876.7 
2,350.4 
Total current liabilities
3,978.2 
5,511.4 
Long-term debt
3,219.9 
2,773.7 
Postemployment and other benefit liabilities
1,954.2 
1,865.5 
Deferred and noncurrent income taxes
1,933.3 
2,184.8 
Other noncurrent liabilities
1,699.7 
1,827.0 
Total liabilities
12,785.3 
14,162.4 
Shareholders' equity:
 
 
Ingersoll-Rand plc shareholders' equity
 
 
Common shares, $1 par value (320,616,056 and 370,813,037 shares issued at December 31, 2009 and 2008, respectively, and net of 26,074 and 52,020,439 shares owned by subsidiary at December 31, 2009 and 2008, respectively)
320.6 
318.8 
Capital in excess of par value
2,377.6 
2,246.0 
Retained earnings
4,837.9 
4,547.4 
Accumulated other comprehensive income (loss)
(434.3)
(450.8)
Total Ingersoll-Rand plc shareholders' equity
7,101.8 
6,661.4 
Noncontrolling interests
103.9 
100.7 
Total shareholders' equity
7,205.7 
6,762.1 
Total liabilities and shareholders' equity
$ 19,991.0 
$ 20,924.5 
Statement Of Financial Position Classified (Parenthetical) (USD $)
Dec. 31, 2009
Dec. 31, 2008
Common shares, par value
$ 1 
$ 1 
Common shares, shares issued
320,616,056 
370,813,037 
Common shares, shares owned by subsidiary
26,074 
52,020,439 
Statement Of Shareholders Equity And Other Comprehensive Income (USD $)
In Millions
Common stock
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income (loss)
Noncontrolling Interest
Comprehensive income
Total
1/1/2007 - 12/31/2007
 
 
 
 
 
 
 
Beginning Balance
$ 306.8 
$ 0.0 
$ 5,456.1 
$ (358.1)
$ 73.6 
 
$ 5,478.4 
Beginning Balance (in shares)
306.8 
 
 
 
 
 
 
Adoption of FIN 48
 
 
(145.6)
 
 
 
(145.6)
Net earnings (loss)
 
 
3,966.7 
 
23.3 
3,990.0 
3,990.0 
Currency translation
 
 
 
411.9 
6.3 
418.2 
418.2 
Change in value of marketable securities and cash flow hedges, net of tax of $0.8 in 2009, $2.7 in 2008 and $1.7 in 2007
 
 
 
(2.2)
 
(2.2)
(2.2)
Pension and OPEB adjustments, net of tax of ($4.6) in 2009, $254.8 in 2008 and $130.0 in 2007
 
 
 
194.9 
 
194.9 
194.9 
Total comprehensive income
 
 
 
 
 
4,600.9 
 
Effects of measurement date change pursuant to FASB Statement No. 158
 
 
 
 
 
 
 
Service cost, interest cost and expected return on plan assets for December 1 - December 31, 2007, net of tax of $1.4
 
 
 
 
 
 
 
Amortization of net transition obligation, prior service cost and net actuarial losses for December 1 - December 31, 2007, net of tax of $1.4
 
 
 
 
 
 
 
Shares issued under incentive stock plans
5.5 
191.1 
 
 
 
 
196.6 
Shares issued under incentive stock plans (in shares)
5.5 
 
 
 
 
 
 
Repurchase of common shares by subsidiary
(39.7)
(281.6)
(1,678.6)
 
 
 
(1,999.9)
Issuance of exchangeable notes
 
 
 
 
 
 
 
Repurchase of common shares by subsidiary (in shares)
(39.7)
 
 
 
 
 
 
Treasury shares issued as Trane merger consideration
 
 
 
 
 
 
 
Treasury shares issued as Trane merger consideration (in shares)
 
 
 
 
 
 
 
Conversion of Trane options to IR options
 
 
 
 
 
 
 
Share-based compensation
 
90.5 
 
 
 
 
90.5 
Acquisition (divestiture) of noncontrolling interests
 
 
 
 
(0.3)
 
(0.3)
Dividends to noncontrolling interests
 
 
 
 
(5.4)
 
(5.4)
Cash dividends, declared and paid ($0.50 in 2009, $0.72 in 2008 and $0.72 in 2007 per share)
 
 
(209.8)
 
 
 
(209.8)
Other
 
 
 
 
 
 
 
Ending Balance
272.6 
0.0 
7,388.8 
246.5 
97.5 
 
8,005.4 
Ending Balance (in shares)
272.6 
 
 
 
 
 
 
1/1/2008 - 12/31/2008
 
 
 
 
 
 
 
Beginning Balance
272.6 
0.0 
7,388.8 
246.5 
97.5 
 
8,005.4 
Beginning Balance (in shares)
272.6 
 
 
 
 
 
 
Adoption of FIN 48
 
 
 
 
 
 
 
Net earnings (loss)
 
 
(2,624.8)
 
20.0 
(2,604.8)
(2,604.8)
Currency translation
 
 
 
(238.8)
(7.0)
(245.8)
(245.8)
Change in value of marketable securities and cash flow hedges, net of tax of $0.8 in 2009, $2.7 in 2008 and $1.7 in 2007
 
 
 
3.5 
 
3.5 
3.5 
Pension and OPEB adjustments, net of tax of ($4.6) in 2009, $254.8 in 2008 and $130.0 in 2007
 
 
 
(463.3)
 
(463.3)
(463.3)
Total comprehensive income
 
 
 
 
 
(3,310.4)
 
Effects of measurement date change pursuant to FASB Statement No. 158
 
 
 
 
 
 
 
Service cost, interest cost and expected return on plan assets for December 1 - December 31, 2007, net of tax of $1.4
 
 
(2.4)
 
 
 
(2.4)
Amortization of net transition obligation, prior service cost and net actuarial losses for December 1 - December 31, 2007, net of tax of $1.4
 
 
(1.3)
1.3 
 
 
0.0 
Shares issued under incentive stock plans
0.8 
31.2 
 
 
 
 
32.0 
Shares issued under incentive stock plans (in shares)
0.8 
 
 
 
 
 
 
Repurchase of common shares by subsidiary
 
(2.0)
 
 
 
 
(2.0)
Issuance of exchangeable notes
 
 
 
 
 
 
 
Repurchase of common shares by subsidiary (in shares)
 
 
 
 
 
 
 
Treasury shares issued as Trane merger consideration
45.4 
1,989.7 
 
 
 
 
2,035.1 
Treasury shares issued as Trane merger consideration (in shares)
45.4 
 
 
 
 
 
 
Conversion of Trane options to IR options
 
184.0 
 
 
 
 
184.0 
Share-based compensation
 
43.1 
 
 
 
 
43.1 
Acquisition (divestiture) of noncontrolling interests
 
 
 
 
7.7 
 
7.7 
Dividends to noncontrolling interests
 
 
 
 
(17.5)
 
(17.5)
Cash dividends, declared and paid ($0.50 in 2009, $0.72 in 2008 and $0.72 in 2007 per share)
 
 
(212.9)
 
 
 
(212.9)
Other
 
 
 
 
 
 
 
Ending Balance
318.8 
2,246.0 
4,547.4 
(450.8)
100.7 
 
6,762.1 
Ending Balance (in shares)
318.8 
 
 
 
 
 
 
1/1/2009 - 12/31/2009
 
 
 
 
 
 
 
Beginning Balance
318.8 
2,246.0 
4,547.4 
(450.8)
100.7 
 
6,762.1 
Beginning Balance (in shares)
318.8 
 
 
 
 
 
 
Adoption of FIN 48
 
 
 
 
 
 
 
Net earnings (loss)
 
 
451.3 
 
24.9 
476.2 
476.2 
Currency translation
 
 
 
67.3 
 
67.3 
67.3 
Change in value of marketable securities and cash flow hedges, net of tax of $0.8 in 2009, $2.7 in 2008 and $1.7 in 2007
 
 
 
(0.8)
 
(0.8)
(0.8)
Pension and OPEB adjustments, net of tax of ($4.6) in 2009, $254.8 in 2008 and $130.0 in 2007
 
 
 
(50.0)
 
(50.0)
(50.0)
Total comprehensive income
 
 
 
 
 
492.7 
 
Effects of measurement date change pursuant to FASB Statement No. 158
 
 
 
 
 
 
 
Service cost, interest cost and expected return on plan assets for December 1 - December 31, 2007, net of tax of $1.4
 
 
 
 
 
 
 
Amortization of net transition obligation, prior service cost and net actuarial losses for December 1 - December 31, 2007, net of tax of $1.4
 
 
 
 
 
 
 
Shares issued under incentive stock plans
1.8 
26.1 
 
 
 
 
27.9 
Shares issued under incentive stock plans (in shares)
1.8 
 
 
 
 
 
 
Repurchase of common shares by subsidiary
 
 
 
 
 
 
 
Issuance of exchangeable notes
 
38.7 
 
 
 
 
38.7 
Repurchase of common shares by subsidiary (in shares)
 
 
 
 
 
 
 
Treasury shares issued as Trane merger consideration
 
 
 
 
 
 
 
Treasury shares issued as Trane merger consideration (in shares)
 
 
 
 
 
 
 
Conversion of Trane options to IR options
 
 
 
 
 
 
 
Share-based compensation
 
68.2 
 
 
 
 
68.2 
Acquisition (divestiture) of noncontrolling interests
 
(0.1)
 
 
(1.4)
 
(1.5)
Dividends to noncontrolling interests
 
 
 
 
(20.2)
 
(20.2)
Cash dividends, declared and paid ($0.50 in 2009, $0.72 in 2008 and $0.72 in 2007 per share)
 
 
(160.8)
 
 
 
(160.8)
Other
 
(1.3)
 
 
(0.1)
 
(1.4)
Ending Balance
320.6 
2,377.6 
4,837.9 
(434.3)
103.9 
 
7,205.7 
Ending Balance (in shares)
320.6 
 
 
 
 
 
 
Statement Of Shareholders Equity And Other Comprehensive Income (Parenthetical) (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Change in value of marketable securities and cash flow hedges, tax
$ 0.8 
$ 2.7 
$ 1.7 
Pension and OPEB adjustments, tax
(4.6)
254.8 
130.0 
Service cost, interest cost and expected return on plan assets for December 1 - December 31, 2007, tax
 
1.4 
 
Amortization of net transition obligation, prior service cost and net actuarial losses for December 1 - December 31, 2007, tax
 
1.4 
 
Cash dividends, declared and paid, per share
$ 0.50 
$ 0.72 
$ 0.72 
Statement Of Cash Flows Indirect (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ 476.2 
$ (2,604.8)
$ 3,990.0 
Loss (income) from discontinued operations, net of tax
11.6 
57.4 
(3,242.6)
Adjustments to arrive at net cash provided by (used in) operating activities:
 
 
 
Asset impairment charge
0.0 
3,710.0 
0.0 
Depreciation and amortization
424.9 
453.1 
138.8 
(Gain)/loss on sale of property, plant and equipment
2.5 
(0.1)
(0.7)
Equity earnings, net of dividends
3.2 
9.9 
(1.0)
Stock settled share based compensation
68.3 
42.3 
31.0 
Deferred income taxes
(32.0)
(334.0)
146.6 
Other items
169.5 
(35.8)
30.6 
Changes in other assets and liabilities
 
 
 
(Increase) decrease in:
 
 
 
Accounts and notes receivable
427.2 
245.3 
46.2 
Inventories
430.8 
120.7 
75.4 
Other current and noncurrent assets
271.7 
119.9 
(32.3)
Increase (decrease) in:
 
 
 
Accounts payable
28.1 
(208.5)
(88.1)
Other current and noncurrent liabilities
(530.5)
(1,201.1)
(267.6)
Net cash (used in) provided by continuing operating activities
1,751.5 
374.3 
826.3 
Net cash (used in) provided by discontinued operating activities
(16.9)
(25.9)
75.2 
Cash flows from investing activities:
 
 
 
Capital expenditures
(204.2)
(306.0)
(119.7)
Proceeds from sale of property, plant and equipment
22.2 
77.4 
14.2 
Acquisitions, net of cash acquired
0.0 
(7,107.3)
(25.7)
Proceeds from business dispositions, net of cash
0.0 
52.9 
6,154.3 
Proceeds from sales and maturities of marketable securities
0.0 
7.8 
0.7 
Other
(0.7)
(31.2)
28.6 
Net cash (used in) provided by continuing investing activities
(182.7)
(7,306.4)
6,052.4 
Net cash (used in) provided by discontinued investing activities
0.0 
0.0 
(57.7)
Cash flows from financing activities:
 
 
 
Proceeds from bridge loan
196.0 
2,950.0 
0.0 
Payments of bridge loan
(950.0)
(2,196.0)
0.0 
Commercial paper program (net)
(998.7)
998.7 
(378.0)
Other short-term borrowings (net)
(57.6)
5.8 
(31.9)
Proceeds from long-term debt
1,010.3 
1,610.4 
2.0 
Payments of long-term debt
(210.5)
(384.5)
(141.8)
Net proceeds (repayments) in debt
(1,010.5)
2,984.4 
(549.7)
Settlement of cross currency swap
(26.9)
0.0 
0.0 
Debt issue costs
(16.1)
(23.0)
0.0 
Proceeds from exercise of stock options
27.2 
18.5 
160.2 
Excess tax benefit from share based compensation
0.7 
13.1 
36.1 
Dividends paid to noncontrolling interests
(20.2)
(17.5)
(5.4)
Dividends paid to ordinary shareholders
(160.8)
(212.9)
(209.8)
Acquisition of noncontrolling interest
(1.5)
0.0 
0.0 
Repurchase of common shares by subsidiary
0.0 
(2.0)
(1,999.9)
Net cash (used in) provided by continuing financing activities
(1,208.1)
2,760.6 
(2,568.5)
Net cash (used in) provided by discontinued financing activities
Effect of exchange rate changes on cash and cash equivalents
(17.3)
12.3 
51.8 
Net increase (decrease) in cash and cash equivalents
326.5 
(4,185.1)
4,379.5 
Cash and cash equivalents - beginning of period
550.2 
4,735.3 
355.8 
Cash and cash equivalents - end of period
876.7 
550.2 
4,735.3 
Cash paid during the year for:
 
 
 
Interest, net of amounts capitalized
209.8 
81.7 
95.3 
Income taxes, net of refunds
$ 71.5 
$ 1,058.0 
$ 470.1 
DESCRIPTION OF COMPANY
DESCRIPTION OF COMPANY

NOTE 1 – DESCRIPTION OF COMPANY

Ingersoll-Rand plc (IR-Ireland), an Irish public limited company, and its consolidated subsidiaries (the Company) is a diversified, global company that provides products, services and solutions to enhance the quality and comfort of air in homes and buildings, transport and protect food and perishables, secure homes and commercial properties, and increase industrial productivity and efficiency. The Company’s business segments consist of Climate Solutions, Residential Solutions, Industrial Technologies and Security Technologies, each with strong brands and leading positions within their respective markets. The Company generates revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as Club Car®, Hussmann®, Ingersoll-Rand®, Schlage®, Thermo King® and Trane®.

On July 1, 2009, Ingersoll-Rand Company Limited (IR-Limited), a Bermuda company, completed a reorganization to change the jurisdiction of incorporation of the parent company of Ingersoll Rand from Bermuda to Ireland. As a result, IR-Ireland replaced IR-Limited as the ultimate parent company effective July 1, 2009. All references related to the Company prior to July 1, 2009 relate to IR-Limited.

THE REORGANIZATION
THE REORGANIZATION

NOTE 2 – THE REORGANIZATION

On March 5, 2009, the Company’s board of directors approved a reorganization that would change the jurisdiction of incorporation of the parent company from Bermuda to Ireland (the Ireland Reorganization). The first step in the Ireland Reorganization was the establishment of IR-Limited’s tax residency in Ireland, which occurred in March 2009. Subsequently, IR-Ireland replaced IR-Limited as the ultimate parent company pursuant to a scheme of arrangement under Bermuda law (the Scheme of Arrangement). Major milestones to complete the Scheme of Arrangement were as follows:

 

   

On April 1, 2009, IR-Limited formed IR-Ireland as a direct subsidiary.

 

   

On April 20, 2009, IR-Limited petitioned the Supreme Court of Bermuda to order the calling of a meeting of the Class A common shareholders of IR-Limited to approve the Scheme of Arrangement.

 

   

On April 23, 2009, the Supreme Court of Bermuda ordered IR-Limited to seek the approval of its Class A common shareholders on the Scheme of Arrangement.

 

   

On June 3, 2009, IR-Limited received the requisite approval from its Class A common shareholders.

 

   

On June 11, 2009, the Supreme Court of Bermuda issued an order (the Sanction Order) approving the Scheme of Arrangement.

On June 30, 2009, IR-Limited filed the Sanction Order with the Bermuda Registrar of Companies and, at 12:01 a.m. on July 1, 2009 (the Transaction Time) the following steps occurred simultaneously:

 

   

All fractional shares of IR-Limited held of record were cancelled and IR-Limited paid to each holder of fractional shares that were cancelled an amount based on the average of the high and low trading prices of the IR-Limited Class A common shares on the New York Stock Exchange on June 29, 2009.

 

   

All previously outstanding whole Class A common shares of IR-Limited were cancelled.

 

   

IR-Limited issued to IR-Ireland 319,166,220 Class A common shares.

 

   

IR-Ireland issued 319,166,220 ordinary shares to holders of whole IR-Limited Class A common shares that were cancelled as a part of the Scheme of Arrangement.

 

 

   

All previously outstanding ordinary shares of IR-Ireland held by IR-Limited and its nominees were acquired by IR-Ireland and cancelled for no consideration.

As a result of the Ireland Reorganization, IR-Limited became a wholly-owned subsidiary of IR-Ireland and the Class A common shareholders of IR-Limited became ordinary shareholders of IR-Ireland. All references related to the Company prior to July 1, 2009 relate to IR-Limited.

The Ireland Reorganization did not have a material impact on the Company’s financial results. Ingersoll-Rand plc will continue to be subject to United States Securities and Exchange Commission reporting requirements and prepare financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Shares of Ingersoll-Rand plc will continue to trade on the New York Stock Exchange under the symbol “IR”, the same symbol under which the Ingersoll-Rand Company Limited Class A common shares previously traded.

See Note 18 for a discussion of the modifications made to the Company’s equity-based plans. See Notes 13 and 25 for a discussion of certain modifications to the indentures governing the Company’s outstanding notes, medium-term notes and debentures and the documents relating to the Company’s commercial paper program.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies used in the preparation of the accompanying financial statements follows:

Basis of Presentation:  The accompanying consolidated financial statements reflect the consolidated operations of the Company and have been prepared in accordance with GAAP as defined by the Financial Accounting Standards Board (FASB) within the FASB Accounting Standards Codification (FASB ASC). In the opinion of management, the accompanying consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated results for the periods presented.

The Company adopted the FASB’s new standard for accounting for noncontrolling interests on January 1, 2009. A noncontrolling interest in a subsidiary is considered an ownership interest that should now be reported as equity in the consolidated financial statements. As a result, the Company now includes noncontrolling interests as a component of Total shareholders’ equity in the Consolidated Balance Sheet and the earnings attributable to noncontrolling interests are now presented as an adjustment from Net earnings (loss) used to arrive at Net earnings (loss) attributable to Ingersoll-Rand plc in the Consolidated Statement of Income. Prior to the adoption of this new standard, earnings associated with noncontrolling interests were reported as a component of Other, net.

As discussed in Note 4, the Company acquired Trane Inc. (Trane) at the close of business on June 5, 2008 (the Acquisition Date). The results of operations of Trane have been included in the consolidated statements of income and cash flows for the year ended December 31, 2009. The consolidated statements of income and cash flows for the year ended December 31, 2008 includes the results of Trane since the Acquisition Date.

Certain reclassifications of amounts reported in prior years have been made to conform to the 2009 classification.

Reorganization:  IR-Ireland is the successor to IR-Limited following a corporate reorganization that became effective on July 1, 2009 (the Ireland Reorganization). IR-Limited is the successor to Ingersoll-Rand Company, a New Jersey corporation (IR-New Jersey), following a corporate reorganization that occurred on December 31, 2001 (the Bermuda Reorganization). Both the Ireland Reorganization and the Bermuda Reorganization were accounted for as a reorganization of entities under common control and accordingly, did not result in any changes to the consolidated amounts of assets, liabilities and shareholders’ equity.

 

 

Principles of Consolidation:  The consolidated financial statements include all majority-owned subsidiaries of the Company. Partially-owned equity affiliates are accounted for under the equity method. The Company is also required to consolidate variable interest entities in which it bears a majority of the risk to the entities’ potential losses or stands to gain from a majority of the entities’ expected returns. Intercompany accounts and transactions have been eliminated. The assets, liabilities, results of operations and cash flows of all discontinued operations have been separately reported as discontinued operations and held for sale for all periods presented.

Use of Estimates:  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates are based on several factors including the facts and circumstances available at the time the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probable future outcome. Some of the more significant estimates include accounting for doubtful accounts, useful lives of property, plant and equipment and intangible assets, purchase price allocations of acquired businesses, valuation of assets including goodwill and other intangible assets, product warranties, sales allowances, pension plans, postretirement benefits other than pensions, taxes, environmental costs, product liability, asbestos matters and other contingencies. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of operations in the period that they are determined.

Currency Translation:  Assets and liabilities of non-U.S. subsidiaries, where the functional currency is not the U.S. dollar, have been translated at year-end exchange rates, and income and expenses accounts have been translated using average exchange rates throughout the year. Adjustments resulting from the process of translating an entity’s financial statements into the U.S. dollar have been recorded in the equity section of the balance sheet within Accumulated other comprehensive income (loss). Transactions that are denominated in a currency other than an entity’s functional currency are subject to changes in exchange rates with the resulting gains and losses recorded within net earnings.

Cash and Cash Equivalents:  Cash and cash equivalents include cash on hand, demand deposits and all highly liquid investments with original maturities at the time of purchase of three months or less.

Marketable Securities:  The Company has classified its marketable securities as available-for-sale in accordance with GAAP. Available-for-sale marketable securities are accounted for at market prices, with the unrealized gain or loss, less applicable deferred income taxes, recorded within Accumulated other comprehensive income (loss). If any of the Company’s marketable securities experience other than temporary declines in value as defined by GAAP, a loss is recorded in the Consolidated Statement of Income.

Inventories:  Depending on the business, U.S. inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method or the lower of cost or market using the first-in, first-out (FIFO) method. Non-U.S. inventories are primarily stated at the lower of cost or market using the FIFO method. At December 31, 2009 and 2008, approximately 44% and 45%, respectively, of all inventory utilized the LIFO method.

Allowance for Doubtful Accounts:  The Company has provided an allowance for doubtful accounts reserve which represents the best estimate of probable loss inherent in the Company’s account receivables portfolio. This estimate is based upon company policy, derived from knowledge of its end markets, customer base and products. The Company reserved $57.6 million and $52.1 million for doubtful accounts as of December 31, 2009 and 2008, respectively.

 

 

Property, Plant and Equipment:  Property, plant and equipment are stated at cost, less accumulated depreciation. Assets placed in service are recorded at cost and depreciated using the straight-line method over the estimated useful life of the asset except for leasehold improvements, which are depreciated over the shorter of their economic useful life or their lease term. The range of useful lives used to depreciate property, plant and equipment is as follows:

 

Buildings

   10 to 50 years

Machinery and equipment

   3 to 15 years

Software

   2 to 7 years

Repair and maintenance costs that do not extend the useful life of the asset are charged against earnings as incurred. Major replacements and significant improvements that increase asset values and extend useful lives are capitalized.

The Company assesses the recoverability of the carrying value of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets.

Goodwill and Intangible Assets:  The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, adjustments may be recorded.

In accordance with GAAP, goodwill and other indefinite-lived intangible assets are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.

Recoverability of goodwill is measured at the reporting unit level and determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.

Recoverability of other indefinite-lived intangible assets is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.

Intangible assets such as patents, customer-related intangible assets and other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:

 

Customer relationships

   20 years   

Trademarks

   25 years   

Completed technology/patents

   10 years   

Other

   10 years  * 

* Excludes intangibles acquired and fully expensed in the year of acquisition.

 

 

Recoverability of intangible assets with finite useful lives is assessed in the same manner as property, plant and equipment as described above.

Income Taxes:  Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The Company recognizes future tax benefits, such as net operating losses and non-U.S. tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. The Company regularly reviews the recoverability of its deferred tax assets considering its historic profitability, projected future taxable income, timing of the reversals of existing temporary differences and the feasibility of its tax planning strategies. Where appropriate, the Company records a valuation allowance with respect to a future tax benefit.

Product Warranties:  Warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience. The Company assesses the adequacy of its liabilities and will make adjustments as necessary based on known or anticipated warranty claims, or as new information becomes available.

Treasury Stock:  The Company, through one of its consolidated subsidiaries, has repurchased its common shares from time to time in the open market and in privately negotiated transactions as authorized by the Board of Directors. These repurchases are based upon current market conditions and the discretion of management. Amounts are recorded at cost and included within the Shareholders’ equity section. For the year ended December 31, 2008, common shares owned by the Company amounted to 52.0 million. During 2009, the Company cancelled approximately 52.0 million treasury shares in anticipation of the Ireland Reorganization.

Revenue Recognition:  Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. Delivery generally occurs when the title and the risks and rewards of ownership have substantially transferred to the customer. Revenue from maintenance contracts or extended warranties is recognized on a straight-line basis over the life of the contract, unless another method is more representative of the costs incurred. The Company enters into agreements that contain multiple elements, such as equipment, installation and service revenue. For multiple-element arrangements, the Company recognizes revenue for delivered elements when the delivered item has stand-alone value to the customer, fair values of undelivered elements are known, customer acceptance has occurred, and only customary refund or return rights exist related to the delivered elements. Revenues from certain of our equipment and the related installation sold under construction-type contracts are recorded using the percentage-of-completion method in accordance with GAAP.

Environmental Costs:  The Company is subject to laws and regulations relating to protecting the environment. Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to existing conditions caused by past operations, which do not contribute to current or future revenues, are expensed. Liabilities for remediation costs are recorded when they are probable and can be reasonably estimated, generally no later than the completion of feasibility studies or the Company’s commitment to a plan of action. The assessment of this liability, which is calculated based on existing technology, does not reflect any offset for possible recoveries from insurance companies, and is not discounted.

Asbestos Matters:  Certain wholly-owned subsidiaries of the Company are named as defendants in asbestos-related lawsuits in state and federal courts. The Company records a liability for its actual and anticipated future claims as well as an asset for anticipated insurance settlements. Although the Company was neither a manufacturer nor producer of asbestos, some of its formerly manufactured components from third party suppliers utilized asbestos related components. As a result, amounts related to asbestos are recorded within Discontinued operations, net of tax, except for amounts related to Trane asbestos liabilities, which are recorded in continuing operations. Refer to Note 23 for further details of asbestos related matters.

 

 

Research and Development Costs:  The Company conducts research and development activities for the purpose of developing and improving new products and services. These expenditures, including qualifying engineering costs, are expensed when incurred. For the years ended December 31, 2009, 2008 and 2007, these expenditures amounted to $257.4 million, $204.6 million and $128.6 million, respectively. The Company also incurs engineering costs that are not considered research and development expenditures.

Software Costs:  The Company follows the guidance outlined in FASB ASC 350, “Intangibles – Goodwill and Other” (ASC 350) for all software developed or obtained for internal use, which requires companies to capitalize certain internal-use software costs once specific criteria are met and subsequently amortize these costs over the software’s useful life, which ranges from 2 to 7 years.

Employee Benefit Plans:  The Company provides a range of benefits to eligible employees and retired employees, including pensions, postretirement and post-employment benefits. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, employee mortality and turnover rates, and health-care cost trend rates. Actuaries perform the required calculations to determine expense in accordance with generally accepted accounting principles in the United States. Actual results may differ from the actuarial assumptions and are generally accumulated and amortized into earnings over future periods. These amounts are generally recognized into Shareholders’ equity on an annual basis. The Company reviews its actuarial assumptions at each measurement date and makes modifications to the assumptions based on current rates and trends, if appropriate. In 2008, the Company changed the measurement date for all defined benefit plans from November 30 to December 31, as required by GAAP.

Loss Contingencies:  Liabilities are recorded for various contingencies arising in the normal course of business, including litigation and administrative proceedings, environmental matters, product liability, product warranty, worker’s compensation and other claims. The Company has recorded reserves in the financial statements related to these matters, which are developed using input derived from actuarial estimates and historical and anticipated experience data depending on the nature of the reserve, and in certain instances with consultation of legal counsel, internal and external consultants and engineers. Subject to the uncertainties inherent in estimating future costs for these types of liabilities, the Company believes its estimated reserves are reasonable and does not believe the final determination of the liabilities with respect to these matters would have a material effect on the financial condition, results of operations, liquidity or cash flows of the Company for any year.

Derivative Instruments:  The Company periodically enters into cash flow and other hedge transactions to specifically hedge exposure to various risks related to interest rates, currency rates and commodity pricing. The Company recognizes all derivatives on the consolidated balance sheet at their fair value as either assets or liabilities. For cash flow designated hedges, the effective portion of the changes in fair value of the derivative contract are recorded in Accumulated other comprehensive income (loss), net of taxes, and are recognized in the income statement at the time earnings are affected by the hedged transaction. For other derivative transactions, the changes in the fair value of the derivative contract are recognized in the Consolidated Statement of Income.

Recently Adopted Accounting Pronouncements:

FASB ASC 715, “Compensation – Retirement Benefits,” (ASC 715) requires an entity to measure its defined benefit plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position. The measurement date provisions of ASC 715 are effective for the Company for the fiscal year ending December 31, 2008. The Company has adopted the measurement provisions of ASC 715, which resulted in an after-tax charge to Retained earnings in the amount of $3.7 million ($6.5 million pre-tax) in 2008. Plans acquired during 2008 were not impacted by this change.

Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740, “Income Taxes,” (ASC 740) which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. As a result of adopting these provisions of ASC 740 as of January 1, 2007, the Company recorded additional liabilities to its previously established reserves, and corresponding decrease in Retained earnings of $145.6 million.

In September 2006, the FASB issued revised guidance within FASB ASC 820, “Fair Value Measurements and Disclosures” (ASC 820) to provide a framework for measuring fair value that is based on the assumptions market participants would use when pricing an asset or liability. ASC 820 also establishes a fair value hierarchy that prioritizes the information to develop those assumptions. Additionally, the guidance expands the disclosures about fair value measurements to include disclosing the fair value measurements of assets or liabilities within each level of the fair value hierarchy. These provisions of ASC 820 are effective for the Company starting on January 1, 2008. In accordance with ASC 820, the Company has delayed its implementation of these provisions for the fair value of goodwill, indefinite-lived intangible assets and nonfinancial long-lived assets and liabilities. Refer to Note 16 for a full discussion of these provisions of ASC 820.

In February 2007, the FASB issued revised guidance within FASB ASC 825, “Financial Instruments” (ASC 825) which allows companies the option, at specified election dates, to measure financial assets and liabilities at their current fair value, with the corresponding changes in fair value from period to period recognized in the income statement. Additionally, ASC 825 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. These provisions of ASC 825 are effective for the Company starting on January 1, 2008. As of December 31, 2009, the Company has not elected the option available under ASC 825.

In December 2007, the FASB issued revised guidance to address the financial accounting and reporting for business combinations, which can be found in FASB ASC 805, “Business Combinations” (ASC 805). ASC 805 supersedes SFAS 141, “Business Combinations” and retains the fundamental requirements set forth therein regarding the purchase method of accounting. However, it expands the guidance to enable proper recognition and measurement, at fair value, the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquired business. In addition, ASC 805 introduces new accounting guidance on how to recognize and measure contingent consideration, contingencies, acquisition and restructuring costs. These provisions of ASC 805 are effective for acquisitions occurring after January 1, 2009.

In December 2007, the FASB issued revised guidance within FASB ASC 810, “Consolidations” (ASC 810) which clarifies that a noncontrolling interest in a subsidiary represents an ownership interest that should be reported as equity in the consolidated financial statements. In addition, ASC 810 requires expanded income statement presentation and disclosures that clearly identify and distinguish between the interests of the Company and the interests of the non-controlling owners of the subsidiary. ASC 810, as it relates to noncontrolling interests in consolidated financial statements, is effective for the Company starting on January 1, 2009.

In March 2008, the FASB issued revised guidance within FASB ASC 815, “Derivatives and Hedging” (ASC 815), which amends and expands the disclosures previously required. ASC 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The expanded disclosure requirements found in ASC 815 as they relate to the modifications made in March 2008 are effective for the Company starting on January 1, 2009. See Note 14 for a discussion of these provisions of ASC 815.

In May 2008, the FASB issued revised guidance within FASB ASC 470, “Debt” (ASC 470) which requires us to allocate between debt and equity the proceeds of the Company’s exchangeable notes, in a manner that reflects the Company’s nonconvertible debt borrowing rate. In addition, the Company is required to amortize any discount into earnings over a period of three years. These provisions of ASC 470 became applicable to the Company during the second quarter of 2009, upon issuance of the exchangeable senior notes in April 2009.

 

 

Recently Issued Accounting Pronouncements:

In June 2009, the FASB issued revised guidance within ASC 810. These revisions eliminate FASB Interpretation 46(R)’s exceptions to consolidating qualifying special-purpose entities, contain new criteria for determining the primary beneficiary, and increase the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. ASC 810 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FASB Interpretation 46(R)’s provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. These provisions of ASC 810 are effective as of the beginning of the first fiscal year beginning after November 15, 2009, and for interim periods within that first period, with earlier adoption prohibited. The Company is currently assessing the potential impacts, if any, on its consolidated financial statements.

In June 2009, the FASB issued revised guidance within FASB ASC 860, “Transfers and Servicing” (ASC 860). These revisions eliminate the concept of a qualifying special-purpose entity, create more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarify other sale-accounting criteria, and change the initial measurement of a transferor’s interest in transferred financial assets. These provisions of ASC 860 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009 and in interim periods within those fiscal years with earlier adoption prohibited. The Company is currently assessing the potential impacts, if any, on its consolidated financial statements.

ACQUISITION OF TRANE INC.
ACQUISITION OF TRANE INC.

NOTE 4 – ACQUISITION OF TRANE INC.

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

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

The components of the purchase price were as follows:

 

In billions      

Cash consideration

   $           7.3

Stock consideration (Issuance of 45.4 million IR-Limited Class A common shares)

     2.0

Estimated fair value of Trane stock options converted to 7.4 million IR-Limited stock options

     0.2

Transaction costs

     0.1

Total

   $ 9.6

 

 

The Company allocated the purchase price of Trane to the estimated fair value of assets acquired and liabilities assumed upon acquisition in accordance with Statement of Financial Accounting Standard No. 141, “Business Combinations” (SFAS 141). The following table summarizes the fair values of the Trane assets acquired and liabilities assumed at the Acquisition Date.

 

In millions    June 5,
2008

Current assets:

  

Cash and cash equivalents

   $ 317.5

Accounts and notes receivable

     1,194.2

Inventories

     970.5

Other current assets

     467.2

Total current assets

     2,949.4

Property, plant and equipment

     1,035.4

Goodwill

     5,525.8

Intangible assets

     5,576.0

Other noncurrent assets

     764.6

Total assets

   $     15,851.2

Current liabilities:

  

Accounts payable

   $ 562.9

Accrued compensation and benefits

     225.7

Accrued expenses and other current liabilities

     1,079.3

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

     254.3

Total current liabilities

     2,122.2

Long-term debt

     476.3

Postemployment and other benefit liabilities

     313.7

Deferred income taxes

     2,308.3

Other noncurrent liabilities

     1,012.7

Minority interests

     7.7

Total liabilities and minority interests

   $ 6,240.9

Net assets acquired

   $ 9,610.3

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

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

 

 

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

 

In millions    Useful life    Amount

Tradenames

   Indefinite    $     3,418.0

Customer relationships

   17 - 18 Years      1,871.0

Completed technology/patents

   5 - 15 Years      158.0

In-process research and development

   Expensed      26.0

License agreement

   7 Years      4.0

Backlog

   1 - 6 Months      99.0

Total

        $ 5,576.0

The Company has allocated $3,418.0 million to tradenames, primarily related to the Trane brand. Management considered many factors in the determination that it will account for the asset as an indefinite lived intangible asset, including the current market leadership position of the brand as well as recognition worldwide in the industry. Therefore, in accordance with ASC 350, indefinite-lived tradenames will not be amortized, but instead will be tested for impairment at least annually (more frequently if certain indicators are present).

In addition, the Company assigned $26.0 million to in-process research and development assets that were expensed at the date of acquisition in accordance with GAAP. The expenses are included in general and administrative expenses.

The excess of the purchase price over the amounts allocated to specific assets and liabilities is included in goodwill, and amounted to $5,525.8 million. The premium in the purchase price paid by the Company for the acquisition of Trane reflects the establishment of a business offering high value equipment, systems and services necessary for delivering solutions across the temperature spectrum for indoor, stationary and transport applications worldwide. The Company anticipates realizing significant operational and cost synergies. Anticipated synergies include purchase material savings through supplier rationalization and procurement leverage, improvement in manufacturing costs and lower general and administrative costs. Longer term, the Company expects to benefit from synergies related to service revenue expansion, leverage of distribution channels and cross selling through certain vertical markets.

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

The following unaudited pro forma information for the year ended December 31, 2008 assumes the acquisition of Trane occurred as of the beginning of the period presented:

 

In millions    2008     2007

Net revenues

   $   16,356.9      $   16,200.9

Earnings from continuing operations attributable to Ingersoll-Rand plc common shareholders

     (2,590.3     724.8

In addition, for the year ended December 31, 2008, the Company has included $91.8 million as an increase to interest expense associated with the borrowings to fund (a) the cash portion of the purchase price and (b) the out-of-pocket transaction costs associated with the acquisition.

 

 

For the year ended December 31, 2008, the Company recognized a pre-tax, non-cash charge of $3.7 billion related to the impairment of goodwill and indefinite-lived assets, which is reflected in the pro forma results presented above. For a further discussion of impairment related matters, see Note 5 in the consolidated financial statements.

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

ASSET IMPAIRMENT
ASSET IMPAIRMENT

NOTE 5 – ASSET IMPAIRMENT

The Company has significant goodwill and indefinite-lived intangible assets related to acquisitions. The Company’s goodwill and other indefinite-lived intangible assets are tested and reviewed annually for impairment during the fourth quarter or when there is a significant change in events circumstances that indicate that the fair value of an asset may be less than the carrying amount of the asset.

2008 Impairment Test

Due to the deterioration in the worldwide equity and credit markets and a tightening of industrial and retail end markets in the fourth quarter of 2008, the Company’s market capitalization declined well below its book value. In addition, the weakening worldwide economic conditions resulted in the Company’s projected 2009 financial performance to decline. As a result, the Company updated its impairment testing through December 31, 2008.

The following table summarizes by reportable segment, the asset impairment charges taken during 2008:

 

In millions    Goodwill    Intangible
Assets
   Marketable
Securities
   Total

Climate Solutions

   $ 840.0    $ 400.0    $ -      $ 1,240.0

Residential Solutions

     1,656.0      454.0      -        2,110.0

Security Technologies

     344.0      6.0      10.0      360.0

Total

   $     2,840.0    $        860.0    $         10.0    $     3,710.0

Goodwill

Recoverability of goodwill impairment is measured at the reporting unit level and determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.

The calculation of estimated fair value is based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach), with each method being equally weighted in the calculation. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit, as determined in the first step of the goodwill impairment test, was the price paid to acquire that reporting unit.

Based on the estimated fair value and book value of our reporting units, the Company recorded an impairment charge to goodwill in the fourth quarter of 2008 of approximately $2,840.0 million.

 

 

Indefinite-lived Intangible Assets

Recoverability of other indefinite-lived intangible assets (i.e. Tradenames) is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.

The calculation of estimated fair value is determined on a relief from royalty methodology (income approach), which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning the asset. The present value of the after-tax cost savings (i.e. royalty relief) indicates the estimated fair value of the asset.

Based on the estimated fair value and book value of our Tradenames, the Company recorded an impairment charge to certain tradenames in the fourth quarter of 2008 of approximately $860.0 million.

Marketable Securities

Investments in marketable securities are recorded at cost and subsequently measured at fair value. These assets are periodically reviewed at the individual security level to determine if any decline in value is considered to be other than temporary.

In the fourth quarter of 2008, the Company determined that its investment in certain marketable securities was other than temporarily impaired by approximately $10.0 million. This analysis was based on the current trading value of the publicly listed marketable security in addition to other qualitative factors of the operating business environment in which the security is held.

2009 Impairment Test

In the fourth quarter of 2009, the Company performed its annual impairment test on goodwill and other indefinite-lived intangible assets. As a result, the Company determined that the fair value of the reporting units and indefinite-lived intangible assets exceeded their respective carrying values. Therefore, no impairment charges were recorded during 2009.

RESTRUCTURING ACTIVITIES
RESTRUCTURING ACTIVITIES

NOTE 6 – RESTRUCTURING ACTIVITIES

Restructuring charges recorded during the year ended December 31, 2009, 2008 and 2007 were as follows:

 

In millions    2009    2008    2007

Climate Solutions

   $ 37.7    $ 50.2    $ 22.4

Residential Solutions

     8.9      11.9      -  

Industrial Technologies

     27.1      9.6      1.0

Security Technologies

     24.5      6.8      5.3

Corporate and Other

     13.2             12.4      -  

Total

   $ 111.4    $ 90.9    $ 28.7
 
 

Cost of goods sold

   $ 58.3    $ 56.7    $ 24.8

Selling and administrative

     53.1      34.2      3.9

Total

   $         111.4    $ 90.9    $         28.7

 

 

The changes in the restructuring reserve were as follows:

 

In millions    Climate
Solutions
    Residential
Solutions
    Industrial
Technologies
    Security
Technologies
    Corporate
and Other
    Total  

December 31, 2007

   $ 20.8      $ -        $ 0.7      $ 4.0      $ -        $ 25.5   

Additions

     50.2        11.9        9.6        6.8        12.4        90.9   

Purchase accounting

     2.8        0.4        -          -          11.6        14.8   

Cash and non-cash uses

     (32.9     (4.3     (7.6     (4.2     (18.5     (67.5

Currency translation

     0.6        -          -          0.2        -          0.8   

December 31, 2008

     41.5        8.0        2.7        6.8        5.5        64.5   

Additions

     37.7        10.9        27.1        26.3        13.2        115.2   

Reversals

     -          (2.0     -          (1.8     -          (3.8

Cash and non-cash uses

         (59.3     (9.1         (25.5         (13.4         (10.4         (117.7

Currency translation

     (3.6     -          -          0.3        -          (3.3

December 31, 2009

   $ 16.3      $     7.8      $ 4.3      $ 18.2      $ 8.3      $ 54.9   

During the first three quarters of 2008, the Company incurred costs of approximately $20 million associated with various restructuring activities as a part of an ongoing effort to increase efficiencies across multiple lines of business. In October 2008, the Company announced an enterprise-wide restructuring program necessitated by the severe economic downturn. This program included streamlining the footprint of manufacturing facilities and reducing the general and administrative cost base across all sectors of the company. Projected costs totaled $110 million when the program was announced, of which $71 million was incurred during the fourth quarter of 2008.

During the year ended December 31, 2009, the Company expanded the scope of the restructuring program. Since the beginning of the fourth quarter of 2008, the Company has incurred approximately $182.1 million associated with these restructuring actions. As of December 31, 2009, the Company had $54.9 million accrued for workforce reductions and the consolidation of manufacturing facilities.

Restructuring actions taken in the Climate Solutions sector include the closure of one manufacturing facility in Asia and workforce reductions in all regions. As of December 31, 2009, the Climate Solutions sector had incurred approximately $87 million since the fourth quarter of 2008.

Restructuring actions taken in the Residential Solutions sector include general workforce reductions due to a revised organizational structure within the sector. As of December 31, 2009, the Residential Solutions sector had incurred approximately $19 million since the fourth quarter of 2008.

Restructuring actions taken in the Industrial Technologies sector include the consolidation of manufacturing facilities in the Americas and general workforce reductions across all regions. As of December 31, 2009, the Industrial Technologies sector had incurred approximately $32 million since the fourth quarter of 2008.

Restructuring actions taken in the Security Technologies sector include the consolidation of manufacturing facilities in the Americas region and general workforce reductions in Europe and the Americas. As of December 31, 2009, the Security Technologies sector had incurred approximately $29 million since the fourth quarter of 2008.

Corporate costs primarily related to the consolidation of administrative offices in the U.S. As of December 31, 2009, the corporate costs totaled approximately $15 million since the fourth quarter of 2008.

 

MARKETABLE SECURITIES
MARKETABLE SECURITIES

NOTE 7 – MARKETABLE SECURITIES

At December 31, marketable securities were as follows:

 

      2009    2008
In millions    Amortized
cost or
cost
   Unrealized
gains
   Fair
value
   Amortized
cost or
cost
   Unrealized
losses
   Fair
value

Long-term marketable securities:

                 

Equity securities

   $ 6.7    $ 5.1    $ 11.8    $ 6.7    $ (0.2)    $ 6.5

Total

   $       6.7    $       5.1    $       11.8    $       6.7    $     (0.2)    $       6.5

Long-term marketable securities are included within Other noncurrent assets in the Consolidated Balance Sheet.

During 2008, the Company’s long-term marketable securities experienced other than temporary declines in value as defined by GAAP. The Company recognized a loss of approximately $10 million related to investments within the Security Technologies segment in the fourth quarter of 2008. The loss is included in Asset impairment on the Consolidated Statement of Income. For a further discussion of impairment related matters, see Note 5 in the consolidated financial statements.

INVENTORIES
INVENTORIES

NOTE 8 – INVENTORIES

At December 31, the major classes of inventory were as follows:

 

In millions    2009     2008  

Raw materials

   $ 353.6      $ 446.9   

Work-in-process

     222.4        301.7   

Finished goods

     700.1        980.0   
     1,276.1        1,728.6   

LIFO reserve

     (82.9     (113.5

Total

   $     1,193.2      $     1,615.1   
PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT

NOTE 9 – PROPERTY, PLANT AND EQUIPMENT

At December 31, the major classes of property, plant and equipment were as follows:

 

In millions    2009      2008  

Land

   $ 122.0       $ 111.3   

Buildings

     760.6         776.6   

Machinery and equipment

     1,875.8         1,787.1   

Software

     453.3         345.5   
     3,211.7         3,020.5   

Accumulated depreciation

     (1,298.9      (1,052.0

Total

   $     1,912.8       $     1,968.5   

Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $262.1 million, $201.2 million and $112.3 million, which include amounts for software amortization of $47.3 million, $35.5 million and $17.5 million, respectively.

During 2009, the Company purchased property, plant and equipment totaling approximately $39 million, with a corresponding increase in liabilities. This represents a non-cash investing activity and is therefore not included in the statement of cash flows until the property, plant and equipment is paid for in accordance with GAAP.

 

 

GOODWILL
GOODWILL

NOTE 10 – GOODWILL

The changes in the carrying amount of goodwill are as follows:

 

In millions    Climate
Solutions
    Residential
Solutions
    Industrial
Technologies
    Security
Technologies
    Total  

December 31, 2007

   $ 2,613.8      $ 74.9      $     371.9      $     932.7      $ 3,993.3   

Acquisitions and adjustments *

     3,275.8        2,255.2        5.4        20.6        5,557.0   

Currency translation

     (37.9     -          (7.5     (44.8     (90.2

Impairment

     (839.8     (1,656.2     -          (344.0     (2,840.0

December 31, 2008

     5,011.9        673.9        369.8        564.5        6,620.1   

Acquisitions and adjustments *

     (12.5     8.4        -          -          (4.1

Currency translation

     (21.1     -          3.1        8.0        (10.0

December 31, 2009

   $     4,978.3      $ 682.3      $ 372.9      $ 572.5      $     6,606.0   

* Includes adjustments related to final purchase price allocation adjustments.

The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, adjustments may be recorded.

In June 2008, the Company acquired the Trane commercial HVAC business and the Trane residential HVAC businesses and recorded $5.5 billion of goodwill associated with the transaction. The results of the Trane commercial HVAC business are reported within the Climate Solutions segment and the Trane residential HVAC business is reported within the Residential Solutions segment. See Note 4 for a further discussion regarding goodwill associated with the acquisition of Trane.

As a result of the annual impairment testing in the fourth quarter of 2008, the Company recognized a pre-tax, non-cash charge of $2,840.0 million related to the impairment of goodwill. The Company does not have any accumulated impairment losses subsequent to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” other than the amounts recorded in 2008. See Note 5 for a further discussion of impairment related matters.

In the fourth quarter of 2009, the Company reduced its goodwill by approximately $37 million in the Climate Solutions and Residential Solutions segments related to the acquisition of Trane. These adjustments primarily relate to an overstatement of net deferred tax liabilities established during purchase accounting and represent accounting errors. The Company does not believe that the accounting errors are material to any of its previously issued financial statements and therefore, has not adjusted any prior period amounts.

INTANGIBLE ASSETS
INTANGIBLE ASSETS

NOTE 11 –INTANGIBLE ASSETS

The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at December 31:

 

In millions    2009     2008  

Customer relationships

   $     2,358.4      $     2,368.2   

Completed technologies/patents

     204.0        203.1   

Other

     188.1        189.6   

Trademarks (finite-lived)

     111.2        109.3   

Total gross finite-lived intangible assets

     2,861.7        2,870.2   

Accumulated amortization

     (533.0     (378.5

Total net finite-lived intangible assets

     2,328.7        2,491.7   

Trademarks (indefinite-lived)

     2,714.1        2,722.4   

Total

   $ 5,042.8      $ 5,214.1   

 

 

At December 31, 2009, the Company had $5.0 billion of intangible assets. The Company amortizes intangible assets with finite useful lives on a straight-line basis over their estimated economic lives in accordance with GAAP. Indefinite-lived intangible assets are not subject to amortization, but instead, are tested for impairment at least annually (more frequently if certain indicators are present).

Intangible asset amortization expense for 2009, 2008 and 2007 was $156.4 million, $226.3 million and $25.2 million, respectively. The increase in 2008 is attributable to the Company’s acquisition of Trane on June 5, 2008, which includes $125.0 million of non-recurring amortization expense related to the fair value allocation of purchase price to backlog and in-process research and development costs. The non-recurring amortization expense is included in Accumulated amortization and the associated gross asset is included in Other in the above table. See Note 4 for a further discussion on the acquisition of Trane.

Estimated amortization expense on existing intangible assets is approximately $163 million for each of the next five fiscal years.

ACCOUNTS RECEIVABLE PURCHASE AGREEMENTS
ACCOUNTS RECEIVABLE PURCHASE AGREEMENTS

NOTE 12 – ACCOUNTS RECEIVABLE PURCHASE AGREEMENTS

In connection with the acquisition of Trane, the Company acquired Trane’s accounts receivable purchase agreement (the Trane Facility) in the U.S. As part of this Facility, Trane formed a special-purpose entity (SPE) for the sole purpose of buying and selling receivables generated by Trane. Trane irrevocably and without recourse, transferred all eligible accounts receivable to the SPE, which, in turn, sold undivided ownership interests in them to a conduit administered by the participating bank. The assets of the SPE were not available to pay the claims of Trane or any of its subsidiaries.

The undivided interests in the receivables sold to the conduit as a part of the Trane Facility were removed from the balance sheet since they met the applicable criteria under GAAP. Trane’s interests in the receivables retained by the Company were recorded at its allocated carrying amount, less an appropriate reserve for doubtful accounts, in the balance sheet as of December 31, 2008. To the extent that the consideration received was less than the allocated carrying value of the receivables sold, losses were recognized at the time of sale.

On March 31, 2009, the Company entered into new accounts receivable purchase agreements (the Expanded IR Facility), to expand the existing accounts receivable purchase agreement. The Expanded IR Facility superseded the Trane Facility. As of December 31, 2009, there are no interests in the receivables retained by the Company related to the Trane Facility.

Under the Expanded IR Facility, the Company continuously sold, through certain consolidated special purpose vehicles, designated pools of eligible trade receivables to an affiliated master special purpose vehicle (MSPV) which, in turn, sold undivided ownership interests to three conduits administered by unaffiliated financial institutions.

The maximum purchase limit of the three conduits was $325.0 million. The Company paid commitment fees on the aggregate amount of the liquidity commitments of the financial institutions under the facility (which was 102% of the maximum purchase limit) and an additional program fee on the aggregate amounts purchased under the facility by the conduits to the extent funded through the issuance of commercial paper or other securities.

The MSPV was not designed to be a qualifying SPE since the MSPV transferred assets representing undivided ownership interests in the accounts receivables it held to the conduits. The Company concluded that the MSPV was a variable interest entity (VIE) whereby the Company was deemed the primary beneficiary and subsequently consolidated the MSPV. Accordingly, accounts receivable balances were not removed from the balance sheet until the undivided ownership interests were sold to the conduits. The remaining trade receivables transferred into the MSPV but not sold to the conduits remained in Accounts and notes receivable, net. The interests in the receivables retained by the Company were exposed to the first risk of loss for any uncollectible amounts in the receivables sold under the facility. The Company provided no other forms of continued financial support related to the undivided interests transferred to the conduits. Although the special purpose vehicles were consolidated by the Company, they were separate corporate entities with their assets legally isolated from the Company and thus not available to satisfy claims of the Company.

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

 

In millions    December 31,
2009
   December 31,
2008

Outstanding balance of receivables sold to SPE

   $         544.2    $         149.5

Net balance of interest in the receivables retained

     544.2      83.6

Net interests sold to conduits

     -        62.8

At December 31, 2009, the outstanding balance of eligible trade receivables sold to the MSPV was $544.2 million. However, no net interests have been sold to any of the three conduits administered by unaffiliated financial institutions.

The Company serviced, administered and collected the receivables on behalf of the MSPV and the conduits and received a servicing fee of 0.75% per annum on the outstanding balance of the serviced receivables. As the Company estimated that the fee it received from the conduits, including other ancillary fees received, were adequate compensation for its obligation to service these receivables, the fair value was zero and no servicing assets or liabilities were recognized.

During the year ended December 31, 2009, the Company recorded a cash outflow of approximately $63 million within cash flow from operations, which represented the decrease in the net interests in the receivables sold to the conduits.

The Company records as a loss on sale the difference between the receivables sold and net cash proceeds received. The loss on sale recorded for the years ended December 31, 2009 and 2008 were as follows:

 

In millions    2009    2008

Loss on sale of receivables

   $         4.0    $         2.0
DEBT AND CREDIT FACILITIES
DEBT AND CREDIT FACILITIES

NOTE 13 – DEBT AND CREDIT FACILITIES

At December 31, short-term borrowings and current maturities of long-term debt consisted of the following:

 

In millions    2009    2008

Commercial paper program

   $ -      $ 998.7

Senior unsecured bridge loan facility

     -        754.0

Debentures with put feature

     343.6      345.7

Current maturities of long-term debt

     526.5      200.4

Other short-term borrowings

     6.6      51.6

Total

   $     876.7    $     2,350.4

The weighted-average interest rate for total short-term borrowings and current maturities of long-term debt at December 31, 2009 and 2008 was 5.4% and 4.8%, respectively.

 

 

At December 31, long-term debt excluding current maturities consisted of:

 

In millions   2009      2008

Senior floating rate notes due 2010

  $ -        $ 250.0

7.625% Senior notes due 2010

    -          261.2

4.50% Exchangeable senior notes due 2012

    315.0        -  

6.000% Senior notes due 2013

    599.8        599.8

9.50% Senior notes due 2014

    655.0        -  

5.50% Senior notes due 2015

    199.7        199.6

4.75% Senior notes due 2015

    299.3        299.2

6.875% Senior notes due 2018

    749.1        749.0

9.00% Debentures due 2021

    125.0        125.0

7.20% Debentures due 2010-2025

    112.5        120.0

6.48% Debentures due 2025

    149.7        149.7

Other loans and notes, at end-of-year average interest rates of 5.85% in 2009 and 5.68% in 2008, maturing in various amounts to 2017

    14.8        20.2

Total

  $     3,219.9      $      2,773.7

The fair value of the Company’s debt at December 31, 2009 and 2008 was $4,459.6 million and $4,927.4 million, respectively. The fair value of long-term debt was primarily based upon quoted market values.

At December 31, 2009, long-term debt retirements are as follows:

 

In millions      

2010

   $ 870.1

2011

     19.7

2012

     324.2

2013

     607.8

2014

     661.8

Thereafter

     1,606.4

Total

   $       4,090.0

Commercial Paper Program

The Company uses borrowings under our commercial paper program for general corporate purposes. As of December 31, 2009, the Company had no outstanding commercial paper borrowings after paying down $998.7 million during 2009. The Company funded these payments primarily using cash generated from operations.

Senior Unsecured Bridge Loan Facility

In connection with the Trane acquisition, the Company entered into a $3.9 billion senior unsecured bridge loan facility, with a 364-day term. The Company drew down $2.95 billion against the bridge loan facility in June 2008. The proceeds, along with cash on hand and the issuance of $1.5 billion of commercial paper, were used to fund the cash component of the consideration paid for the acquisition as well as to pay related fees and expenses incurred in connection with the acquisition.

In addition, the Company repaid $2.0 billion of the outstanding balance of the bridge loan facility during the third quarter of 2008. The Company used a combination of cash flows from operations and cash on hand, in addition to the $1.6 billion in proceeds received from the issuance of long-term debt. As of December 31, 2008, the outstanding balance of the senior unsecured bridge loan facility was $754 million after a $196 million payment in the fourth quarter of 2008. In the first quarter of 2009, the Company borrowed an additional $196 million under the facility, increasing the outstanding balance to $950.0 million as of March 31, 2009. The Company repaid the outstanding balance in April 2009 with proceeds from the long-term debt issuance as discussed below and terminated the facility.

 

 

Debentures with Put Feature

At December 31, 2008, the Company had outstanding $345.7 million of fixed rate debentures which only requires early repayment at the option of the holder. These debentures contain a put feature that the holders may exercise on each anniversary of the issuance date. If exercised, the Company is obligated to repay in whole or in part, at the holder’s option, the outstanding principal amount (plus accrued and unpaid interest) of the debentures held by the holder. If these options are not exercised, the final maturity dates would range between 2027 and 2028.

In 2009, holders of these debentures chose to exercise the put feature on $2.1 million of the remaining debentures. As a result, the Company had $343.6 million debentures outstanding at December 31, 2009.

Senior Notes Due 2014

In April 2009, the Company issued $655 million of 9.5% Senior Notes through its wholly-owned subsidiary, Ingersoll-Rand Global Holding Company Limited (IR-Global). The notes are fully and unconditionally guaranteed by each of IR-Ireland, IR-Limited and Ingersoll-Rand International Holding Limited (IR-International), another wholly-owned indirect subsidiary of IR-Limited. Interest on the fixed rate notes will be paid twice a year in arrears. The Company has the option to redeem them in whole or in part at any time, and from time to time, prior to their stated maturity date at redemption prices set forth in the indenture agreement. The notes are subject to certain customary covenants, however, none of these covenants are considered restrictive to the Company’s operations.

Exchangeable Senior Notes Due 2012

In April 2009, The Company issued $345 million of 4.5% Exchangeable Senior Notes through its wholly-owned subsidiary, IR-Global. The notes are fully and unconditionally guaranteed by each of IR-Ireland, IR-Limited and IR-International. Interest on the exchangeable notes will be paid twice a year in arrears. Holders may exchange their notes at their option prior to November 15, 2011 in accordance with specified circumstances set forth in the indenture agreement or anytime on or after November 15, 2011 through their scheduled maturity in April 2012. Upon exchange, the notes will be paid in cash up to the aggregate principal amount of the notes to be exchanged, the remainder due on the option feature, if any, will be paid in cash, the Company’s ordinary shares or a combination thereof at the option of the Company. The notes are subject to certain customary covenants, however, none of these covenants are considered restrictive to the Company’s operations.

The Company allocated approximately $305 million of the gross proceeds to debt, with the remaining discount of approximately $40 million (approximately $39 million after allocated fees) recorded within equity. Additionally, the Company will amortize the discount into earnings over a three-year period.

Other Debt

In August 2008, the Company filed a universal shelf registration statement with the Securities and Exchange Commission (SEC) for an indeterminate amount of securities for future issuance and issued $1.6 billion of long-term debt pursuant to the shelf registration statement. This issuance consisted of $250 million Senior Floating Rate Notes due in 2010, $600 million 6.000% Senior Notes due in 2013 and $750 million 6.875% Senior Notes due in 2018. These notes are fully and unconditionally guaranteed by IR-Limited, which directly owns 100% of the subsidiary issuer, IR Global Holding Company Limited. The net proceeds from the offering were used to partially reduce the amount outstanding under the senior unsecured bridge loan facility.

At December 31, 2008, the Company’s committed revolving credit facilities totaled $3.0 billion, of which $750 million expired in June 2009, and was not renewed. At December 31, 2009, the Company’s committed revolving credit facilities totaled $2.25 billion, of which $1.25 billion expires in August 2010 and $1.0 billion expires in June 2011. These lines are unused and provide support for the Company’s commercial paper program as well as for other general corporate purposes. In addition, other available non-U.S. lines of credit were $993.3 million, of which $823.9 million were unused at December 31, 2009. These lines provide support for bank guarantees, letters of credit and other general corporate purposes.

 

 

Modifications Relating to the Reorganization

In connection with the Ireland Reorganization discussed in Note 2, on July 1, 2009 at 12:01 A.M. (the Transaction Time), IR-Limited completed the transfer of all the outstanding shares of IR-Global to IR-International, whereupon IR-International assumed the obligations of IR-Limited as an issuer or guarantor, as the case may be, under the indentures governing the Company’s outstanding notes, medium-term notes and debentures. IR-Ireland and IR-Limited also fully and unconditionally guarantee the payment obligations of IR-International, IR-Global and Ingersoll-Rand Company (IR-New Jersey), a wholly-owned indirect subsidiary of IR-Limited incorporated in New Jersey, as the case may be, as the issuers of debt securities under these indentures. Neither IR-Ireland nor IR-Limited intends to issue guarantees in respect of any indebtedness incurred by Trane. In addition, any securities issued by the Company that were convertible, exchangeable or exercisable into Class A common shares of IR-Limited became convertible, exchangeable or exercisable, as the case may be, into the ordinary shares of IR-Ireland.

On July 1, 2009, IR-Global amended and restated its commercial paper program (the Commercial Paper Program) pursuant to which IR-Global may issue, on a private placement basis, unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $2.25 billion. Under the Commercial Paper Program, IR-Global may issue notes from time to time, and the proceeds of the financing will be used for general corporate purposes. Each of IR-Ireland, IR-Limited and IR-International has provided an irrevocable and unconditional guarantee for the notes issued under the Commercial Paper Program.

Pursuant to the terms of the credit facility entered into on August 12, 2005 and our credit facility entered into on June 27, 2008 (the Credit Facilities), at the Transaction Time, IR-Ireland and IR-International became guarantors to such Credit Facilities. In connection therewith, IR-Ireland and IR-International entered into Addendums on July 1, 2009 to become parties to the Credit Facilities.

FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS

NOTE 14 – FINANCIAL INSTRUMENTS

In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage risks associated with interest rate, currency rate, commodity price and share-based compensation exposures. These financial instruments are not used for trading or speculative purposes.

On the date a derivative contract is entered into, the Company designates the derivative instrument either as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability, or as an undesignated derivative. The Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.

The Company also assesses both at the inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are highly effective in offsetting the changes in the cash flows of the hedged item. Any ineffective portion of a derivative instrument’s change in fair value is recorded in the income statement in the period of change. If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument would be recorded in the income statement.

The fair market value of derivative instruments are determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.

Currency and Commodity Hedging Instruments

The notional amounts of the Company’s currency derivatives, excluding the cross currency swap described below, were $884.8 million and $920.4 million at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, a loss of $1.5 million and a gain of $7.6 million, net of tax, respectively, was included in Accumulated other comprehensive income (AOCI) related to the fair value of the Company’s currency derivatives designated as accounting hedges. The amount expected to be reclassified into earnings over the next twelve months is $1.5 million. The actual amounts that will be reclassified to earnings may vary from this amount as a result of changes in market conditions. Gains and losses associated with the Company’s currency derivatives not designated as hedges are recorded in earnings as changes in fair value occur. At December 31, 2009, the maximum term of the Company’s currency derivatives was 12 months.

As a result of the acquisition of Trane in June 2008, the Company assumed a cross currency swap that fixed in U.S. dollars, the currency cash flows on the £60.0 million 8.25% senior notes. These notes matured on June 1, 2009 along with the cross currency swap. The cross currency swap met the criteria to be accounted for as a foreign currency cash flow hedge, which allowed for deferral of any associated gains or losses within AOCI until settlement. The deferred gain remaining in AOCI related to the cross currency swap was released into earnings upon maturity.

The Company had no commodity derivatives outstanding as of December 31, 2009. The notional amount of the Company’s commodity derivatives was $21.3 million at December 31, 2008. During 2008, the Company discontinued the use of hedge accounting for the commodity hedges at which time the Company recognized into the income statement all deferred gains and losses related to the commodity hedges at the time of discontinuance. All further gains and losses associated with the Company’s commodity derivatives were recorded in earnings as changes in fair value occurred.

Other Hedging Instruments

During the third quarter of 2008, the Company entered into interest rate locks for the forecasted issuance of approximately $1.4 billion of Senior Notes due in 2013 and 2018. These interest rate locks met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate locks were deferred in AOCI. No further gain or loss will be deferred in AOCI related to these interest rate locks as the contracts were effectively terminated upon issuance of the underlying debt. However, the amount of AOCI associated with these interest rate locks at the time of termination will be recognized into interest expense over the term of the notes. At December 31, 2009 and 2008, $12.6 million and $14.4 million, respectively, of deferred losses remained in AOCI related to these interest rate locks. The amount expected to be reclassified into interest expense over the next twelve months is $1.8 million.

In August 2006, the Company entered into two total return swaps (the Swaps) which were derivative instruments used to hedge the Company’s exposure to changes in its share-based compensation expense. The aggregate notional amount of the Swaps was approximately $52.6 million. On June 11, 2007, the Company terminated a portion of the Swaps for net cash proceeds of $3.8 million. The Company settled the remaining portion of the Swaps on August 6, 2007, for net cash proceeds of $13.8 million. The gains and losses associated with the Swaps were recorded within Selling and administrative expenses.

In March 2005, the Company entered into interest rate locks for the forecasted issuance of $300 million of Senior Notes due 2015. These interest rate locks met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate locks were deferred in AOCI. No further gain or loss will be deferred in AOCI related to these interest rate locks as the contracts were effectively terminated upon issuance of the underlying debt. However, the amount of AOCI associated with these interest rate locks at the time of termination will be recognized into interest expense over the term of the notes. At December 31, 2009 and 2008, $6.5 million and $7.6 million, respectively, of deferred losses remained in AOCI related to these interest rate locks. The amount expected to be reclassified into interest expense over the next twelve months is $1.1 million.

 

 

The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheet as of December 31, 2009:

 

In millions    Asset
derivatives
   Liability
derivatives

Derivatives designated as accounting hedges:

     

Currency derivatives

   $ 0.3    $ 2.7

Derivatives not designated as accounting hedges:

     

Currency derivatives

     7.0      5.2

Total derivatives

   $         7.3    $         7.9

Asset and liability derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities, respectively, on the Consolidated Balance Sheet.

The following table represents the amounts associated with derivatives designated as hedges affecting the Consolidated Statement of Income and AOCI for the year ended December 31, 2009:

 

In millions    Amount of gain (loss)
deferred in AOCI
    Location of gain
(loss) reclassified from
AOCI and recognized
into earnings
     Amount of gain
(loss) reclassified from
AOCI and recognized
into earnings
 

Currency derivatives

     (7.1   Other, net      $ 5.3   

Interest rate locks

     -        Interest expense        (2.8

Total

   $         (7.1          $         2.5   

The following table represents the amounts associated with derivatives not designated as hedges affecting the Consolidated Statement of Income for the year ended December 31, 2009:

 

In millions    Location of gain (loss)      Amount of gain (loss)  

Currency derivatives

   Other, net      $ 64.2  * 

Commodity derivatives

   Other, net        1.8   

Total

          $         66.0   

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

Concentration of Credit Risk

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

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments.

 

PENSIONS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
PENSIONS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

NOTE 15 – PENSIONS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Pension Plans

The Company has noncontributory pension plans covering substantially all non-Trane U.S. employees and maintains a pension plan for non-collectively bargained U.S. employees of Trane, whereby eligible employees may elect to participate and receive a credit equal to 3% of eligible pay. Effective January 1, 2010, non-collectively bargained U.S. employees of Trane began to participate in the Company’s main pension plan for U.S. non-collectively bargained employees. In addition, the Company maintains pension plans for Trane U.S. collectively bargained employees. Certain non-U.S. employees in other countries, including Trane employees, are covered by pension plans.

Most of the Company’s pension plans for U.S. non-collectively bargained employees provided benefits on a final average pay formula. The Company’s U.S. collectively bargained pension plans, including those covering employees of Trane, generally provide benefits based on a flat benefit formula. Generally, non-U.S. plans provide benefits based on earnings and years of service. The Company maintains additional other supplemental benefit plans for officers and other key employees.

In 2008, the Company adopted the measurement date provision of ASC 715 which required the measurement of plan assets and benefit obligations as of the date of the year-end financial statements. The Company recorded a one-time after-tax pension charge of $1.2 million to Retained earnings ($1.8 million pre-tax) as a result of changing the measurement date from November 30th to December 31st.

As a result of the acquisition of Trane in the second quarter of 2008, the Company assumed net obligations of $67.7 million, which consisted of noncurrent pension assets of $1.4 million and current and noncurrent pension benefit liabilities of $69.1 million. In connection with the sale of Compact Equipment and the Road Development business unit during 2007, the Company settled its obligation for pension benefits for all current and former employees related to these divestitures. In addition, certain of the Company’s U.S. plans and the U.K. plan were remeasured as of the sale dates.

 

 

The following table details information regarding the Company’s pension plans at December 31:

 

In millions    2009      2008  

Change in benefit obligations:

     

Benefit obligation at beginning of year

   $ 3,217.3       $ 2,572.4   

Service cost

     65.4         58.5   

Interest cost

     197.2         182.8   

Employee contributions

     2.8         2.6   

Acquisitions

     -           799.2   

Amendments

     9.2         12.0   

Actuarial (gains) losses

     290.1         (9.6

Benefits paid

     (227.9      (232.7

Currency translation

     63.1         (200.7

Curtailments and settlements

     (21.6      (1.1

Adjustment due to adoption of ASC 715 measurement date provisions

     -           2.6   

Other, including expenses paid

     3.3         31.3   

Benefit obligation at end of year

   $     3,598.9       $     3,217.3   

 

Change in plan assets:

     

Fair value at beginning of year

   $ 2,363.1       $ 2,500.9   

Actual return on assets

     403.6         (523.2

Company contributions

     113.5         64.1   

Employee contributions

     2.8         2.6   

Acquisitions

     -           731.5   

Benefits paid

     (227.9      (232.7

Currency translation

     49.4         (165.8

Settlements

     (11.9      (0.9

Adjustment due to adoption of ASC 715 measurement date provisions

     -           (42.5

Other, including expenses paid

     3.3         29.1   

Fair value of assets end of year

   $ 2,695.9       $ 2,363.1   

 

Funded status:

     

Plan assets less than the benefit obligations

   $ (903.0    $ (854.2

Amounts included in the balance sheet:

     

Other noncurrent assets

   $ 1.1       $ 0.2   

Accrued compensation and benefits

     (11.7      (26.0

Post employment and other benefit liabilities

     (892.4      (828.4

Net amount recognized

   $ (903.0    $ (854.2

It is the Company’s objective to contribute to the pension plans to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required. However, certain plans are not or cannot be funded due to either legal or tax requirements in certain jurisdictions. As of December 31, 2009, approximately six percent of our projected benefit obligation relates to plans that cannot be funded.

 

 

The pretax amounts recognized in Accumulated other comprehensive income (loss) were as follows:

 

In millions    Net
transition
obligation
    Prior
service
cost
    Net
actuarial
losses
    Total  

December 31, 2008

   $ (0.3   $ (42.7   $ (1,105.7   $ (1,148.7

Current year changes recorded to Accumulated other comprehensive income (loss)

     -          (9.3     (65.3     (74.6

Amortization reclassified to earnings

     0.2        8.5        59.4        68.1   

Settlements/curtailments reclassified to earnings

     -          1.8        9.9        11.7   

Currency translation and other

     -          -          (26.5     (26.5

December 31, 2009

   $     (0.1   $     (41.7   $     (1,128.2   $     (1,170.0

 

Weighted-average assumptions used:

             

Benefit obligations at December 31,

   2009       2008   

Discount rate:

     

U.S. plans

   5.75    6.25

Non-U.S. plans

   5.50    6.50

Rate of compensation increase:

     

U.S. plans

   4.00    4.00

Non-U.S. plans

   4.75    4.50

The accumulated benefit obligation for all defined benefit pension plans was $3,442.2 million and $3,082.7 million at December 31, 2009 and 2008, respectively. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations more than plan assets were $3,529.6 million, $3,382.7 million and $2,629.8 million, respectively, as of December 31, 2009, and $3,194.8 million, $3,066.0 million and $2,345.0 million, respectively, as of December 31, 2008.

Pension benefit payments are expected to be paid as follows:

 

In millions      

2010

   $ 230.9

2011

     230.7

2012

     220.7

2013

     228.5

2014

     235.9

2015 - 2019

         1,276.9

 

 

The components of the Company’s pension related costs for the years ended December 31, include the following:

 

In millions    2009     2008     2007  

Service cost

   $        65.4      $ 58.5      $ 52.0   

Interest cost

     197.2             182.8             164.3   

Expected return on plan assets

     (178.4     (230.1     (228.7

Net amortization of:

      

Prior service costs

     8.5        8.8        9.2   

Transition amount

     0.2        0.7        0.9   

Plan net actuarial losses

     59.4        10.3        13.8   

Net periodic pension benefit cost

     152.3        31.0        11.5   

Net curtailment and settlement (gains) losses

     2.0        2.3        63.5   

Net periodic pension benefit cost after net curtailment and settlement (gains) losses

   $ 154.3      $ 33.3      $ 75.0   
   

Amounts recorded in continuing operations

   $ 142.9      $ 44.8      $ 20.6   

Amounts recorded in discontinued operations

     11.4        (11.5     54.4   

Total

   $ 154.3      $ 33.3      $ 75.0   

The curtailment and settlement losses in 2009 are associated with restructuring of operations. The curtailment and settlement losses in 2008 are associated with lump sum distributions under supplemental benefit plans for officers and other key employees. The curtailment and settlement gains and losses in 2007 are associated with the divestiture of Compact Equipment and the Road Development business unit.

Pension expense for 2010 is projected to be approximately $167 million, utilizing the assumptions for calculating the pension benefit obligations at the end of 2009. The amounts expected to be recognized in net periodic pension cost during the year ended 2010 for the net transition obligation, prior service cost and plan net actuarial losses are $0.1 million, $8.8 million and $56.9 million, respectively.

Weighted-average assumptions used:

 

Net periodic pension cost for the year ended December 31,

     2009         2008         2007   

Discount rate:

              

U.S. plans

              

For the period January 1 to April 30

     6.25      6.25      5.50

For the period May 1 to November 30 *

     6.25      6.25      5.75

For the period December 1 to December 31

     6.25      6.25      6.25

Non-U.S. plans

              

For the period January 1 to April 30

     6.50      6.00      5.00

For the period May 1 to November 30 *

     6.50      6.00      5.50

For the period December 1 to December 31

     6.50      6.00      6.00

Rate of compensation increase:

              

U.S. plans

     4.00      4.00      4.00

Non-U.S. plans

              

For the period January 1 to April 30

     4.50      4.50      4.25

For the period May 1 to November 30 *

     4.50      4.50      4.35

For the period December 1 to December 31

     4.50      4.50      4.50

Expected return on plan assets:

              

U.S. plans

     7.75      8.50      8.50

Non-U.S. plans

     7.25      7.25      7.25

* Trane plans were valued at acquisition date assuming 6.75% for the discount rate, 4.00% for the rate of compensation increase and 8.25% for the expected return on plan assets

 

 

The expected long-term rate of return on plan assets reflects the average rate of returns expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return on plan assets is based on what is achievable given the plan’s investment policy, the types of assets held and target asset allocations. The expected long-term rate of return is determined as of the measurement date. The Company reviews each plan and its historical returns and target asset allocations to determine the appropriate expected long-term rate of return on plan assets to be used.

The Company’s investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, minimizes required company contributions, at the appropriate levels of risk; and to meet any statutory and regulatory requirements. Key investment management decisions reviewed regularly are asset allocations and investment manager performance. Asset/liability modeling (ALM) studies are used as the basis for global asset allocation decisions and are updated as required.

Based on ALM studies, the Company has set its target strategic global asset allocations for its plans to be broadly 40% equities and 60% debt and real estate. Asset allocations are reviewed at least quarterly and appropriate adjustments are made as necessary.

The fair values of the Company’s pension plan assets at December 31, 2009 by asset category are as follows:

 

     Fair value measurements   

Total

fair value

 
In millions    Level 1    Level 2     Level 3   

Cash and cash equivalents

   $     28.1    $ 23.3      $ -      $ 51.4   

Equity investments:

          

Common and preferred stocks (a)

     94.9      -          -        94.9   

Commingled funds – equity specialty (b)

     -        1,141.2        -        1,141.2   
     94.9      1,141.2        -        1,236.1   

Fixed income investments:

          

U.S. government and agency obligations (c)

     -        405.8        -        405.8   

Corporate and non-U.S. bonds

     -        497.2        -        497.2   

Asset-backed and mortgage-backed securities

     -        230.3        -        230.3   

Commingled funds – fixed income specialty (d)

     21.5      233.4        -        254.9   

Other fixed income (e)

     -        -          21.3      21.3   
     21.5      1,366.7        21.3      1,409.5   

Derivatives

     -        (1.0     -        (1.0

Real estate (f)

     -        -          25.0      25.0   

Other (g)

     -        -          35.4      35.4   

Total assets at fair value

   $ 144.5    $ 2,530.2      $ 81.7    $ 2,756.4   

Receivables and payables, net

             (60.5

Net assets available for benefits

                         $ 2,695.9   
(a)

This class represents developed market equities of actively managed funds. Investment holdings include common stocks, preferred stocks and American Depository Receipts.

(b)

This class includes commingled funds managed by investment managers that focuses on equity investments. It includes both indexed and actively managed funds.

(c)

This class represents U.S. treasuries and state and municipal bonds.

(d)

This class comprises commingled funds actively managed by investment managers that focuses on fixed income securities.

(e)

This class includes insurance contracts with guaranteed income portion as well as sovereign debts.

(f)

This class includes several private equity funds that invest in real estate. It includes both direct investment funds and funds-of-funds.

(g)

This investment comprises the Company’s non-significant foreign pension plan assets. It mostly includes insurance contracts.

 

 

See Note 16 for additional information related to the fair value hierarchy defined by FASB ASC 820, “Fair Value Measurements and Disclosures” (ASC 820).

The Company made contributions to its pension plans of $113.5 million in 2009, $64.1 million in 2008, and $25.5 million in 2007. The Company currently projects that it will contribute approximately $85 million to its plans worldwide in 2010. The Company’s policy allows it to fund an amount, which could be in excess of or less than the pension cost expensed, subject to the limitations imposed by current tax regulations. The Company anticipates funding the plans in 2010 in accordance with contributions required by funding regulations or the laws of each jurisdiction.

Most of the Company’s U.S. employees are covered by savings and other defined contribution plans. Employer contributions are determined based on criteria specific to the individual plans and amounted to approximately $86.0 million (including $50.6 million for Trane plans), $78.8 million (including $43.5 million for Trane plans), and $47.8 million in 2009, 2008 and 2007, respectively. The Company’s contributions relating to non-U.S. defined contribution plans and other non-U.S. benefit plans were $19.5 million (including $1.7 million for Trane plans), $16.3 million (including $3.8 million for Trane plans) and $11.4 million in 2009, 2008 and 2007, respectively.

Postretirement Benefits Other Than Pensions

The Company sponsors several postretirement plans that cover certain eligible employees, including certain Trane employees since the Acquisition Date. These plans provide for health-care benefits, and in some instances, life insurance benefits. Postretirement health plans generally are contributory and contributions are adjusted annually. Generally, life insurance plans for retirees are primarily noncontributory. The Company funds the postretirement benefit costs principally on a pay-as-you-go basis.

In 2008, the Company adopted the measurement date provision of ASC 715 which required the measurement of plan assets and benefit obligations as of the date of the year-end financial statements. The Company recorded a one-time after-tax charge for postretirement benefits of $2.5 million to Retained earnings ($4.7 million pre-tax) as a result of changing the measurement date from November 30th to December 31st.

As a result of the acquisition of Trane in the second quarter of 2008, the Company assumed unfunded obligations for retirement benefits other than pensions in the amount of $268.9 million. In connection with the sale of Compact Equipment and the Road Development business unit during 2007, the Company settled its obligation for postretirement benefits for all current and former employees related to these divestitures. In addition, the Company’s U.S. postretirement plan was remeasured as of the sale dates.

 

 

The following table details information regarding the Company’s postretirement plans at December 31:

 

In millions    2009     2008  

Change in benefit obligations:

    

Benefit obligation at beginning of year

   $     946.2      $     649.8   

Service cost

     9.0        7.3   

Interest cost

     55.8        49.7   

Plan participants’ contributions

     21.5        14.9   

Actuarial (gains) losses

     32.6        16.6   

Benefits paid, net of Medicare Part D subsidy *

     (87.4     (69.9

Settlements/curtailments

     (3.7     -     

Adjustments due to adoption of ASC 715 measurement date provision

     -          3.6   

Acquisition

     -          268.9   

Amendments

     3.0        -     

Other

     2.4        5.3   

Benefit obligations at end of year

 

   $ 979.4      $ 946.2   

* Amounts are net of Medicare Part D subsidy of $5.5 and $9.5 million in 2009 and 2008, respectively

 

                

Funded status:

    

Plan assets less than benefit obligations

   $ (979.4   $ (946.2

Amounts included in the balance sheet:

    

Accrued compensation and benefits

   $ (77.1   $ (70.4

Postemployment and other benefit liabilities

     (902.3     (875.8

Total

   $     (979.4   $     (946.2

The pretax amounts recognized in Accumulated other comprehensive income (loss) were as follows:

 

In millions      Prior
service
gains
     Net
actuarial
losses
     Total  

Balance at December 31, 2008

     $ 10.8       $ (192.7    $ (181.9

Current year changes recorded to Accumulatedother comprehensive income (loss)

       (3.0      (32.6      (35.6

Amortization reclassified to earnings

       (3.2      11.6         8.4   

Settlements/curtailments reclassified to earnings

       (0.4      3.6         3.2   

Currency translation and other

       (0.1      (0.2      (0.3

Balance at December 31, 2009

     $     4.1       $     (210.3    $     (206.2

 

 

The components of net periodic postretirement benefit (income) cost for the years ended December 31, were as follows:

 

In millions    2009      2008      2007  

Service cost

   $ 9.0       $ 7.3       $ 11.8   

Interest cost

     55.8         49.7         54.2   

Net amortization of prior service gains

     (3.2      (3.4      (3.8

Net amortization of net actuarial losses

     11.6                16.2         15.9   

Net periodic postretirement benefit cost

     73.2         69.8         78.1   

Net curtailment and settlement (gains) losses

     (0.5      -           (265.9

Net periodic postretirement benefit (income) cost after net curtailment and settlement (gains) losses

   $ 72.7       $ 69.8       $ (187.8
   
   

Amounts recorded in continuing operations

   $ 43.9       $ 38.4       $ 22.7   

Amounts recorded in discontinued operations

     28.8         31.4         (210.5

Total

   $         72.7       $ 69.8       $         (187.8

The curtailment and settlement gains and losses in 2009 are associated with the restructuring of U.S. operations. The curtailment and settlement gains and losses in 2007 are associated with the divestiture of Compact Equipment and the Road Development business unit. Postretirement cost for 2010 is projected to be $76 million. Amounts expected to be recognized in net periodic postretirement benefits cost in 2010 for prior service gains and plan net actuarial losses are $2.9 million and $16.6 million, respectively.

 

Assumptions:      2009      2008      2007

Weighted-average discount rate assumption to determine:

              

Benefit obligations at December 31

     5.50%      6.25%      6.00%

Net periodic benefit cost

              

For the period January 1 to April 30

     6.25%      6.00%      5.50%

For the period May 1 to November 30 *

     6.25%      6.00%      5.75%

For the period December 1 to December 31

     6.25%      6.00%      6.00%

Assumed health-care cost trend rates at December 31:

              

Current year medical inflation

     9.25%      11.00%      11.00%

Ultimate inflation rate

     5.00%      5.25%      5.25%

Year that the rate reaches the ultimate trend rate

     2021      2015      2014

* Trane plans were valued assuming a 6.50% discount rate at the acquisition date.

A 1% change in the medical trend rate assumed for postretirement benefits would have the following effects at December 31, 2009:

 

In millions    1%
Increase
     1%
Decrease
 

Effect on total of service and interest cost components

   $ 2.0      $ (1.8

Effect on postretirement benefit obligation

             40.9                (34.9

 

 

Benefit payments for postretirement benefits, which are net of expected plan participant contributions and Medicare Part D subsidy, are expected to be paid as follows:

 

In millions      

2010

   $ 79.2

2011

     82.8

2012

     82.6

2013

     82.2

2014

     84.4

2015 - 2019

             410.4
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

NOTE 16 – FAIR VALUE MEASUREMENTS

ASC 820 establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The Company adopted this provision of ASC 820 on January 1, 2008. However, the Company has delayed its implementation of the provision of ASC 820 for the fair value of goodwill, indefinite-lived intangible assets and nonfinancial long-lived assets as allowed under GAAP. The fair value hierarchy outlined in ASC 820 is comprised of three levels that are described below:

 

   

Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

   

Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities.

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

Assets and liabilities measured at fair value on a recurring basis at December 31, 2009 are as follows:

 

     Fair value measurements   

Total

fair value

In millions    Level 1    Level 2    Level 3   

Assets:

           

Cash and cash equivalents

   $     876.7    $ -      $ -      $ 876.7

Marketable securities

     11.8      -        -        11.8

Derivative instruments

     -        7.3      -        7.3

Benefit trust assets

     17.6      147.7      -        165.3

Total

   $ 906.1    $ 155.0    $ -      $     1,061.1

Liabilities:

           

Derivative instruments

   $ -      $ 7.9    $ -      $ 7.9

Benefit liabilities

     18.6      178.5      -        197.1

Total

   $ 18.6    $     186.4    $     -      $ 205.0

 

 

See Note 15 for disclosure of fair value measurements related to the Company’s pension assets.

ASC 820 defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of its financial assets and liabilities using the following methodologies:

 

   

Cash and cash equivalents – These amounts include cash on hand, demand deposits and all highly liquid investments with original maturities at the time of purchase of three months or less and are held in U.S and non-U.S. currencies.

 

   

Marketable securities – These securities include investments in publically traded stock of non-U.S. companies held by non-U.S. subsidiaries of the Company. The fair value is obtained for the securities based on observable market prices quoted on public stock exchanges.

 

   

Derivatives instruments – These instruments include forward contracts related to non-U.S. currencies. The fair value of the derivative instruments are determined based on a pricing model that uses inputs from actively quoted currency markets that are readily accessible and observable.

 

   

Benefit trust assets – These assets include money market funds and insurance contracts that are the underlying for the benefit assets. The fair value of the assets is based on observable market prices quoted in a readily accessible and observable market.

 

   

Benefit liabilities – These liabilities include deferred compensation and executive death benefits. The fair value is based on the underlying investment portfolio of the deferred compensation and the specific benefits guaranteed in a death benefit contract with each executive.

Effective January 1, 2008, the Company also adopted the provisions of FASB ASC 825, “Financial Instruments” (ASC 825) that allow companies the option, at specified election dates, to measure financial assets and liabilities at their current fair value, with the corresponding changes in fair value from period to period recognized in the income statement. Additionally, ASC 825 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. As of December 31, 2009, the Company has not elected to utilize the fair value option on any of its financial assets or liabilities.

SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY

NOTE 17 – SHAREHOLDERS’ EQUITY

Ingersoll-Rand Company Limited, a Bermuda Company (IR-Limited), was the successor to Ingersoll-Rand Company, a New Jersey Company (IR-New Jersey) following a corporate reorganization that became effective on December 31, 2001 (the Bermuda Reorganization). Upon consummation, the shares of IR-New Jersey common stock were cancelled and all previous holders were issued IR-Limited Class A common shares. The Bermuda Reorganization was accounted for as a reorganization of entities under common control and accordingly, did not result in any changes to the consolidated amounts of assets, liabilities and shareholders’ equity.

Ingersoll-Rand plc, an Irish public limited company (IR-Ireland), is the successor to IR-Limited, following a corporate reorganization that became effective on July 1, 2009 (the Ireland Reorganization). Upon consummation, the shares of IR-Limited Class A common shares were cancelled and all previous holders were issued IR-Ireland ordinary shares. The Ireland Reorganization was accounted for as a reorganization of entities under common control and accordingly, did not result in any changes to the consolidated amounts of assets, liabilities and shareholders’ equity. See Note 2 for a further discussion of the Ireland Reorganization.

 

 

Common Stock

At December 31, 2009, a reconciliation of common shares is as follows:

 

In millions    Total

December 31, 2008

   318.8

Shares issued under incentive plans

   1.8

December 31, 2009

           320.6

The authorized share capital of IR-Ireland is $1,175,010,000, consisting of (1) 1,175,000,000 common shares, par value $1.00 per share, and (2) 10,000,000 preference shares, par value $0.001 per share. No preference shares were outstanding at December 31, 2009 or 2008.

Treasury Stock

The Company treats common shares of the parent owned by a subsidiary as treasury stock. These shares are recorded at cost and included in the Shareholders’ equity section. At December 31, 2007, Class A common shares of IR-Limited owned by the Company amounted to 97.4 million. As a result of the acquisition of Trane in June 2008, the Company issued 45.4 million IR-Limited Class A common shares to fund the equity portion of the consideration. In June 2009, IR-Limited cancelled the remaining 52.0 million shares in anticipation of the Ireland Reorganization that became effective on July 1, 2009.

Accumulated Other Comprehensive Income (Loss)

The components of Accumulated other comprehensive income (loss) are as follows:

 

In millions    2009        2008  

Foreign currency translation adjustment

   $      504.3         $      437.0   

Change in fair value of derivatives qualifyingas cash flow hedges, net of tax

     (8.6        (2.4

Unrealized loss on marketable securities, net of tax

     (4.7        (10.1

Pension and postretirement obligation adjustments, net of tax

     (925.3        (875.3

Accumulated other comprehensive income (loss)

   $ (434.3      $ (450.8
SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

NOTE 18 – SHARE-BASED COMPENSATION

The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its consolidated financial statements.

On June 3, 2009, the shareholders of the Company approved the amendment and restatement of the Incentive Stock Plan of 2007, which authorizes the Company to issue stock options and other share-based incentives. As a result, the total number of shares authorized by the shareholders was increased to 27.0 million, of which 15.0 million remains available as of December 31, 2009 for future incentive awards.

Modifications Relating to the Reorganization

In connection with the Ireland Reorganization discussed in Note 2, on July 1, 2009, IR-Ireland assumed the existing obligations of IR-Limited under the equity incentive plans and other similar employee award plans of Ingersoll Rand (collectively, the Plans), including all awards issued thereunder. Furthermore, the Plans were amended by IR-Limited to provide (1) that ordinary shares of IR-Ireland will be issued, held available or used to measure benefits as appropriate under the Plans, in lieu of the Class A common shares of IR-Limited, including upon exercise of any options or share appreciation rights or upon the vesting of restricted stock units or performance units issued under those Plans; and (2) for the appropriate substitution of IR-Ireland for IR-Limited in those Plans.

 

 

Stock Options / Restricted Stock Units

On February 12, 2009, the Compensation Committee of the Company’s Board of Directors approved a change to the Company’s equity grant approach whereby options are no longer used as the predominant equity vehicle for eligible participants; instead a mix of options and restricted stock units (RSUs) are utilized. The RSUs vest ratably over three years and any accrued dividends will be paid in cash at the time of vesting. As a result of this change, eligible participants received (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs under the Company’s Incentive Stock Plan of 2007.

The average fair value of the stock options granted for the year ended December 31, 2009 and 2008 was estimated to be $5.82 per share and $11.56 per share, respectively, using the Black-Scholes option-pricing model. The following assumptions were used:

 

      2009      2008  

Dividend yield

   1.97    1.58

Volatility

   43.19    31.48

Risk-free rate of return

   1.76    2.95

Expected life

   5.10 years       5.36 years   

The fair value of each of the Company’s stock option awards is expensed on a straight-line basis over the required service period, which is generally the three-year vesting period of the options. However, for options granted to retirement eligible employees, the Company recognizes expense for the fair value of the options at the grant date. Expected volatility is based on the historical volatility from traded options on the Company’s stock. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Historical data is used to estimate forfeitures within the Company’s valuation model. The Company’s expected life of the stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.

Changes in options outstanding under the plans for the years 2007, 2008 and 2009 are as follows:

 

     Shares
subject to
option
    Weighted-
average
exercise price
  Aggregate
intrinsic
value (millions)
  Weighted-
average
remaining life

December 31, 2006

  19,164,942        31.54    

Granted

  3,528,225        43.77    

Exercised

  (5,386,093     29.70    

Cancelled

  (882,183     41.16          

December 31, 2007

  16,424,891        34.25    

Granted

  5,088,599        40.48    

Trane options exchanged for IR options

  7,408,134        18.50    

Exercised

  (685,508     26.56          

Cancelled

  (1,020,889     39.84    

December 31, 2008

  27,215,227        31.11    

Granted

  4,165,032        17.34    

Exercised

  (1,543,323     21.45    

Cancelled

  (1,978,853     31.99          

Outstanding December 31, 2009

  27,858,083      $         29.54   $         232.8   5.2
 
 

Exercisable December 31, 2009

  20,030,794      $ 29.68   $ 159.7   4.0

As part of the acquisition of Trane, 7.4 million Trane options were converted at the option of the holders into options to acquire shares of IR-Limited Class A common shares based on the option exchange ratio set forth in the merger agreement.

 

 

The following table summarizes information concerning currently outstanding and exercisable options:

 

     Options outstanding   Options exercisable
Range of
exercise price
  Number
outstanding at
December 31,
2009
  Weighted-
average
remaining
life
  Weighted-
average
exercise
price
  Number
exercisable at
December 31,
2009
  Weighted-
average
remaining
life
  Weighted-
average
exercise
price

$    0.00

   -     $     10.00   111,804   0.7   $ 8.62   111,804   0.7   $ 8.62

10.01

   -       20.00   8,273,001   5.4     14.57   4,420,993   2.3     12.63

20.01

   -       30.00   3,502,277   3.7     22.89   3,495,277   3.7     22.89

30.01

   -       40.00   11,759,090   5.0     37.24   9,777,400   4.4     36.93

40.01

   -       50.00   4,047,245   6.9     43.20   2,143,322   6.4     43.08

50.01

   -       60.00   164,666   6.9     52.50   81,998   6.2     53.39

$    4.76

   -     $     55.22   27,858,083   5.2   $       29.54   20,030,794   4.0   $       29.68

At December 31, 2009, there was $28.2 million of total unrecognized compensation cost from stock option arrangements granted under the plan, which is related to unvested shares of non-retirement eligible employees. This compensation will be recognized over the required service period, which is generally the three-year vesting period. The aggregate intrinsic value of options exercised during the year ended December 31, 2009 and 2008 was $16.5 million and $9.2 million, respectively.

Generally, stock options vest ratably over a three-year period from their date of grant and expire at the end of ten years.

On February 12, 2009, the Company granted annual RSU awards. The fair value of each of the Company’s RSU awards is measured as the grant-date price of the Company’s shares and is expensed on a straight-line basis over the three year vesting period. For RSUs granted to retirement eligible employees, the Company recognizes expense for the fair value of the RSUs at the grant date. RSUs vest ratably over a three-year period.

The following table summarizes RSU activity during the year ended December 31, 2009:

 

      RSUs     Weighted-
average grant
date fair value

Outstanding and unvested at December 31, 2008

   -        $ -  

Granted

   921,182        16.85

Vested

   (6,521     16.85

Cancelled

   (49,905     16.85

Outstanding and unvested at December 31, 2009

   864,756      $ 16.85

At December 31, 2009, there was $7.9 million of total unrecognized compensation cost from RSU arrangements granted under the plan, which is related to unvested shares of non-retirement eligible employees. This compensation will be recognized over the required service period, which is generally the three-year vesting period.

 

 

SARs

All SARs outstanding as of December 31, 2009 are vested and expire ten years from the date of grant. All SARs exercised are settled with the Company’s ordinary shares.

The following table summarizes the information for currently outstanding SARs:

 

     

Shares
subject

to exercise

    Weighted-
average
exercise price
   Aggregate
intrinsic
value (millions)
   Weighted-
average
remaining life

December 31, 2006

   1,693,754      $ 33.11      

Granted

   -          -        

Exercised

   (476,400     30.31      

Cancelled

   (47,377     34.72            

December 31, 2007

   1,169,977        33.99      

Granted

   -          -        

Exercised

   (40,636     27.98      

Cancelled

   (55,869     37.85            

December 31, 2008

   1,073,472        34.02      

Granted

   -          -        

Exercised

   (29,038     22.73      

Cancelled

   (73,662     36.18            

Outstanding December 31, 2009

   970,772      $ 34.19    $ 3.4    3.4
 
 

Exercisable December 31, 2009

   970,772      $         34.19    $             3.4    3.4

Note: The Company did not grant SARS during 2007, 2008, and 2009 and does not anticipate further granting in the future.

Performance Shares

The Company has a Performance Share Program (PSP) for key employees. The program provides awards based on performance against pre-established objectives. The target award level is expressed as a number of the Company’s ordinary shares. All PSP awards are settled in the form of ordinary shares.

On February 12, 2009, the Compensation Committee determined the PSP awards for the performance year 2008. In doing so, primary emphasis was placed on financial objectives in light of the current economic environment. The 2008 PSP awards have a one-year vesting period.

On October 4, 2008, the Compensation Committee approved certain changes to the Company’s long-term incentive compensation programs to be implemented beginning with the 2009 performance year. Under these changes, the performance period under the Company’s PSP Program was changed from one year to three years starting with year 2009 in order to increase the long-term nature of incentive compensation for PSP participants. In addition, these PSP awards are based on the Company’s relative EPS growth as compared to the industrial group of companies in the S&P 500 Index over the three-year performance period. To transition between the previous one-year PSP program and the revised three year PSP program, there is a one-time PSP award with a two-year performance period for 2009 through 2010, which is based on the Company’s EPS growth relative to the industrial group of companies in the S&P 500 Index and the publicly announced Trane acquisition synergy savings.

 

 

Deferred Compensation

The Company allows key employees to defer a portion of their eligible compensation into a number of investment choices, including ordinary share equivalents. Any amounts invested in ordinary share equivalents will be settled in ordinary shares at the time of distribution.

Other Plans

The Company maintains a shareholder-approved Management Incentive Unit Award Plan. Under the plan, participating key employees were awarded incentive units. When dividends are paid on ordinary shares, phantom dividends are awarded to unit holders, one-half of which is paid in cash, the remaining half of which is credited to the participants’ accounts in the form of ordinary share equivalents. The value of the actual incentive units is never paid to participants, and only the fair value of accumulated ordinary share equivalents is paid in cash upon the participants’ retirement. The number of ordinary share equivalents credited to participants’ accounts at December 31, 2009 is 109,480.

The Company has issued stock grants as an incentive plan for certain key employees, with varying vesting periods. All stock grants are settled with the Company’s ordinary shares. At December 31, 2009, there were 278,802 stock grants outstanding, all of which were vested.

Compensation Expense

Share-based compensation expense is included in Selling and administrative expenses. The following table summarizes the expenses recognized:

 

In millions      2009      2008      2007

Stock options

     $ 36.8      $ 39.5      $ 21.4

RSUs

       6.6        -          -  

Performance shares

       22.4        2.1        11.3

Deferred compensation

       2.7        2.1        1.8

SARs and other

       2.4        1.5        1.0

Pre-tax expense

       70.9        45.2        35.5

Tax benefit

       27.1        17.3        13.6

After tax expense

     $ 43.8      $ 27.9      $ 21.9
 
 

Amounts recorded in continuing operations

     $ 43.8      $ 27.9      $ 21.9

Amounts recorded in discontinued operations

       -          -          3.9

Total

     $ 43.8      $ 27.9      $ 25.8
OTHER, NET
OTHER, NET

NOTE 19 – OTHER, NET

At December 31, the components of Other, net were as follows:

 

In millions      2009      2008      2007  

Interest income

     $ 13.3       $ 95.6       $  36.2   

Currency gain (loss)

       (36.1      (41.9      (2.8

Earnings from equity investments

       8.1         3.4         1.0   

Other

       34.4         6.1         (4.2

Other, net

     $ 19.7       $ 63.2       $ 30.2   

Included in currency exchange gains (losses) above is a $24 million charge recorded in the fourth quarter of 2009, associated with the recent devaluation in the Venezuelan Bolivar. At December 31, 2009, the Company remeasured its foreign currency receivables and payables associated with the Venezuelan Bolivar at the parallel rate of 6.0 Bolivars for each U.S. dollar, based on the Company’s inability to settle certain transactions through the official government channels in an expeditious manner. Previously, the Company remeasured all foreign currency transactions at the official rate of 2.15 Bolivars for each U.S. dollar. In addition, effective January 1, 2010, Venezuela has been designated highly inflationary, as the blended Consumer Price Index/National Consumer Price Index reached cumulative three-year inflation in excess of 100% during the fourth quarter of 2009. As such, all future foreign currency fluctuations will be recorded in income.

In the fourth quarter of 2009, the Company recorded income of approximately $25 million primarily related to a favorable settlement with an insurance carrier associated with a portion of the Company’s asbestos obligation, which is included in other in the table above.

INCOME TAXES
INCOME TAXES

NOTE 20 – INCOME TAXES

Earnings (loss) before income taxes for the years ended December 31 were taxed within the following jurisdictions:

 

In millions      2009      2008      2007  

United States

     $ (305.5    $ (3,564.5    $ (197.1

Non-U.S.

       864.6         808.5             1,148.9   

Total

     $     559.1       $ (2,756.0    $ 951.8   

The components of Provision (benefit) for income taxes for the years ended December 31 were as follows:

 

In millions    2009    2008    2007

Current tax expense (benefit):

        

United States

   $     (24.2)    $ (4.9)    $ (83.6)

Non U.S.

     127.5      130.3      141.4

Total:

     103.3      125.4      57.8

Deferred tax expense (benefit):

        

United States

     7.8      (312.4)      131.1

Non U.S.

     (39.8)      (21.6)      15.5

Total:

     (32.0)      (334.0)      146.6

Total tax expense (benefit):

        

United States

     (16.4)      (317.3)      47.5

Non U.S.

     87.7      108.7      156.9

Total

   $ 71.3    $     (208.6)    $     204.4

The Provision (benefit) for income taxes differs from the amount of income taxes determined by applying the applicable U.S. statutory income tax rate to pretax income, as a result of the following differences:

 

     Percent of pretax income  
      2009      2008      2007  

Statutory U.S. rate

   35.0%       35.0%       35.0%   

Increase (decrease) in rates resulting from:

        

Non-U.S. operations

   (21.4    9.4       (21.0

State and local income taxes, net of U.S. tax

   9.7       (0.3    (0.1

Non-deductible impairment charge

   -         (35.1    -     

Tax reserves (including uncertain tax position reserves)

   (3.5    (2.5    8.0   

Provision to return and other true-up adjustments

   (6.4    1.0       1.0   

Other adjustments

   (0.6    -         (1.1

Effective tax rate

   12.8%       7.5%       21.8%   

 

 

Tax incentives, in the form of tax holidays, have been granted in certain jurisdictions to encourage industrial development. The expiration of these tax holidays varies by country. The most significant tax holiday relates to the Company’s qualifying locations in Ireland, which were granted a 10% tax rate through 2010. The benefit for the tax holidays for the year ended December 31, 2009 and 2008 was $1.4 million and $4.1 million, respectively.

At December 31, a summary of the deferred tax accounts were as follows:

 

In millions    2009     2008  

Deferred tax assets:

    

Inventory and accounts receivable

   $ 40.1      $ 29.3   

Fixed assets and intangibles

     16.0        23.5   

Postemployment and other benefit liabilities

     928.4        833.8   

Product liability

     293.0        324.8   

Other reserves and accruals

     269.4        198.4   

Net operating losses and credit carryforwards

     954.7        750.2   

Other

     107.4        248.8   

Gross deferred tax assets

     2,609.0        2,408.8   

Less: deferred tax valuation allowances

     (353.7     (247.8

Deferred tax assets net of valuation allowances

   $         2,255.3      $     2,161.0   

Deferred tax liabilities:

    

Inventory and accounts receivable

   $ (54.6   $ (60.0

Fixed assets and intangibles

     (2,360.2     (2,368.4

Postemployment and other benefit liabilities

     (2.5     (7.5

Other reserves and accruals

     (13.5     (5.8

Other

     (99.6     (77.5

Gross deferred tax liability

     (2,530.4     (2,519.2

Net deferred tax assets (liabilities)

   $ (275.1   $ (358.2

At December 31, 2009, no deferred taxes have been provided for any portion of the $6.0 billion of undistributed earnings of the Company’s subsidiaries, since these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries, and it is not practicable to estimate the amount of additional taxes which may be payable upon distribution.

At December 31, 2009, the Company had the following operating loss and tax credit carryforwards available to offset taxable income in prior and future years:

 

In millions    Amount    Expiration
Period

U.S. Federal net operating loss carryforwards

   $ 1,381.6    2010-2029

U.S. Federal credit carryforwards

     70.1    2014-2029

U.S. State net operating loss carryforwards

     3,312.3    2010-2029

Non-U.S. net operating loss carryforwards

     1,251.6    2010-Unlimited

Non-U.S. credit carryforwards

     9.5    Unlimited

The U.S. state net operating loss carryforwards were incurred in various jurisdictions. The non-U.S. net operating loss carryforwards were incurred in various jurisdictions, predominantly in Belgium, Brazil, Germany, the Netherlands, Spain, Switzerland and the United Kingdom.

 

 

Activity associated with the Company’s valuation allowance is as follows:

 

In millions      2009      2008      2007  

Beginning balance

     $ 247.8       $ 210.1       $ 184.2   

Increase to valuation allowance

       167.1         66.7         56.4   

Decrease to valuation allowance

       (17.8      (7.5      (29.2

Other deductions

       (4.9      -           -     

Write off against valuation allowance

       (41.3      -           -     

Acquisition and purchase accounting

       (38.9      12.3         2.7   

Accumulated other comprehensive income (loss)

       41.7         (33.8      (4.0

Ending balance

     $ 353.7       $ 247.8       $ 210.1   

Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740, “Income Taxes,” (ASC 740) which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, ASC 740 provides guidance on the recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. As a result of adopting these provisions of ASC 740 as of January 1, 2007, the company recorded additional liabilities to its previously established reserves, and a corresponding decrease in retained earnings of $145.6 million.

The Company has total unrecognized tax benefits of $525.1 million and $589.6 million as of December 31, 2009, and December 31, 2008, respectively. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate are $453.4 million as of December 31, 2009. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

In millions      2009      2008      2007  

Beginning balance

     $ 589.6       $ 379.8       $ 457.0   

Additions based on tax positions related to the current year

       25.2         28.8         22.5   

Additions based on tax positions related to acquisitions

       -           190.4         -     

Additions based on tax positions related to prior years

       80.5         60.6         68.0   

Reductions based on tax positions related to prior years

       (121.8      (55.4      (33.4

Reductions related to settlements with tax authorities

       (33.4      (1.3      (141.0

Reductions related to lapses of statute of limitations

       (18.9      (3.8      (0.6

Translation (gain)/loss

       3.9         (9.5      7.3   

Ending balance

     $ 525.1       $ 589.6       $ 379.8   

In connection with Trane’s spin-off of WABCO, Trane and WABCO entered into a tax sharing agreement for the allocation of pre spin-off taxes. Of the total unrecognized tax benefit of $525.1 million at December 31, 2009, WABCO has agreed to indemnify Trane for $28.3 million, which is reflected in an other long-term receivable account.

The Company records interest and penalties associated with the uncertain tax positions within its Provision for income taxes. The Company had reserves associated with interest and penalties, net of tax, of $80.3 million and $91.3 million at December 31, 2009, and December 31, 2008, respectively. For the year ended December 31, 2009 and December 31, 2008, the Company recognized $6.3 million and $20.7 million, respectively, in interest and penalties net of tax related to these uncertain tax positions.

It is reasonably possible that the total amount of unrecognized tax benefits could change within 12 months as a result of settlements of ongoing tax examinations resulting in a decrease of approximately $8.2 million in the unrecognized tax benefits.

 

 

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Brazil, Canada, Germany, Ireland, Italy, the Netherlands and the United States. In general, the examination of the Company’s material tax returns is completed for the years prior to 2000, with certain matters being resolved through appeals and litigation.

The Internal Revenue Service (IRS) has completed the examination of the Company’s federal income tax returns through the 2000 tax year and has issued a notice proposing adjustments. The principal proposed adjustment relates to the disallowance of certain capital losses. In order to reduce the potential interest expense associated with this matter, the Company made a payment of $217 million in the third quarter of 2007, which reduced the Company’s total liability for uncertain tax positions by $141 million. Similarly, during the third quarter of 2008, the Company made an additional payment of $55.1 million related to a potential penalty assessment plus accrued interest on this matter. During the fourth quarter of 2009, the Company reached a settlement of this matter with the IRS which resulted in no additional payments or charges.

On July 20, 2007, the Company received a notice from the IRS containing proposed adjustments to the Company’s tax filings in connection with an audit of the 2001 and 2002 tax years. The IRS did not contest the validity of the Company’s reincorporation in Bermuda. The most significant adjustments proposed by the IRS involve treating the entire intercompany debt incurred in connection with the Company’s reincorporation in Bermuda as equity. As a result of this recharacterization, the IRS disallowed the deduction of interest paid on the debt and imposed dividend withholding taxes on the payments denominated as interest. The IRS also asserted an alternative argument to be applied if the intercompany debt is respected as debt. In that circumstance the IRS proposed to ignore the entities that hold the debt and to which the interest was paid and impose 30% withholding tax on a portion of the interest payments as if they were made directly to a company that was not eligible for reduced U.S withholding tax under a U.S income tax treaty. The IRS asserted under this alternative theory that the Company owes additional taxes with respect to 2002 of approximately $84 million plus interest. If either of these positions were upheld in their entirety the Company would be required to record additional charges. The Company strongly disagreed with the view of the IRS and filed a protest with the IRS in the third quarter of 2007.

On January 12, 2010, the Company received an amended notice from the IRS eliminating its assertion that the intercompany debt incurred in connection with the Company’s reincorporation in Bermuda should be treated as equity. However, the IRS continues to assert the alternative position described above and proposes adjustments to the Company’s 2001 and 2002 tax filings. In addition, the IRS provided notice on January 19, 2010, that it is assessing penalties of 30% on the asserted underpayment of tax described above.

The Company has and intends to continue to vigorously contest these proposed adjustments. The Company, in consultation with its outside advisors, carefully considered the form and substance of the Company’s intercompany financing arrangements including the actions necessary to qualify for the benefits of the applicable U.S. income tax treaties. The Company believes that these financing arrangements are in accordance with the laws of the relevant jurisdictions including the U.S., that the entities involved should be respected and that the interest payments qualify for the U.S income tax treaty benefits claimed.

 

 

Although the outcome of this matter cannot be predicted with certainty, based upon an analysis of the strength of its position, the Company believes that it is adequately reserved for this matter. As the Company moves forward to resolve this matter with the IRS, it is reasonably possible that the reserves established may be adjusted within the next 12 months. However, the Company does not expect that the ultimate resolution will have a material adverse impact on its future results of operations or financial position. At this time, the IRS has not proposed any similar adjustments for years subsequent to 2002. However, if all or a portion of these adjustments proposed by the IRS are ultimately sustained, it is likely to also affect subsequent tax years.

The Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with GAAP. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in the provision for income taxes.

During 2009, the Company identified certain accounting errors associated with its previously reported income tax balance sheet accounts. The Company corrected these errors in 2009, which resulted in a tax benefit for the year of $13 million recorded to continuing operations, of which $10 million was recorded in the fourth quarter, and a tax charge for the year of $29 million recorded to discontinued operations. The Company does not believe that the accounting errors are material to 2009 or to any of its previously issued financial statements. As a result, the Company did not adjust any prior period amounts.

In addition, during the fourth quarter of 2009, the Company recorded a tax charge of approximately $54 million (net of federal benefit) associated with increasing its deferred tax asset valuation allowances for state net operating losses. In addition, the Company wrote-off foreign tax credit carryforwards and recorded a tax charge of $42 million in the third quarter of 2009.

DIVESTITURES AND DISCONTINUED OPERATIONS
DIVESTITURES AND DISCONTINUED OPERATIONS

NOTE 21 – DIVESTITURES AND DISCONTINUED OPERATIONS

The components of discontinued operations for the years ended December 31 are as follows:

 

In millions    2009    2008    2007

Revenues

   $ -      $ 15.3    $     2,957.8
 
 

Pre-tax earnings (loss) from operations

     (60.5)      (50.3)      (82.5)

Pre-tax gain (loss) on sale

     1.6      (5.2)      4,391.6

Tax benefit (expense)

     47.3      (1.9)      (1,066.5)

Discontinued operations, net

   $     (11.6)    $     (57.4)    $ 3,242.6

During 2009, the Company recorded a tax benefit of $28 million primarily associated with reducing its liability for unrecognized tax benefits, and a tax charge of $29 million associated with correcting immaterial accounting errors. See Note 20 for a further description of these tax matters.

Pre-tax loss from operations in 2007 includes a non-cash charge of $449.0 million related to the Company’s liability for all pending and estimated future asbestos claims through 2053 as discussed below in “Other Discontinued Operations”.

Discontinued operations by business for the years ended December 31 are as follows:

 

In millions      2009      2008      2007

Compact Equipment, net of tax

     $ (30.6)      $  (11.7)      $ 2,927.1

Road Development, net of tax

       9.0        (29.8)        681.5

Other discontinued operations, net of tax

       10.0        (15.9)        (366.0)

Total discontinued operations, net of tax

     $     (11.6)      $     (57.4)      $     3,242.6

 

 

Compact Equipment Divestiture

On July 29, 2007, the Company agreed to sell its Bobcat, Utility Equipment and Attachments businesses (collectively, Compact Equipment) to Doosan Infracore for gross proceeds of approximately $4.9 billion, subject to post-closing purchase price adjustments. The sale was completed on November 30, 2007. We are currently in the process of resolving the final purchase price adjustments with Doosan Infracore.

Compact Equipment manufactured and sold compact equipment, including skid-steer loaders, compact track loaders, mini-excavators and telescopic tool handlers; portable air compressors, generators and light towers; general-purpose light construction equipment; and attachments. The Company accounted for Compact Equipment as discontinued operations within the income statement.

Net revenues and after-tax earnings of Compact Equipment for the years ended December 31 were as follows:

 

In millions      2009      2008      2007

Net revenues

     $ -        $ 15.3      $  2,705.9
 
 

After-tax earnings (loss) from operations

     $ 7.2      $ (0.6)      $ 275.1

Gain (loss) on sale, net of tax

       (37.8)        (11.1)        2,652.0

Total discontinued operations, net of tax

     $  (30.6)      $  (11.7)      $ 2,927.1

Road Development Divestiture

On February 27, 2007, the Company agreed to sell its Road Development business unit to AB Volvo (publ) for cash proceeds of approximately $1.3 billion. The sale was completed on April 30, 2007.

The Road Development business unit manufactured and sold asphalt paving equipment, compaction equipment, milling machines and construction-related material handling equipment. The Company accounted for the Road Development business unit as discontinued operations within the income statement.

Net revenues and after-tax earnings of the Road Development business unit for the years ended December 31 were as follows:

 

In millions      2009      2008      2007

Net revenues

     $ -      $ -      $  251.9
 
 

After-tax earnings (loss) from operations

     $         0.8      $  (0.4)      $ 37.8

Gain (loss) on sale, net of tax

       8.2        (29.4)        643.7

Total discontinued operations, net of tax

     $ 9.0      $         (29.8)      $         681.5

Other Discontinued Operations

The Company also has retained costs from previously sold businesses that mainly include costs related to postretirement benefits, product liability and legal costs (mostly asbestos-related). The components of other discontinued operations for the years ended December 31 were as follows:

 

In millions      2009      2008      2007

Retained costs, net of tax

     $ 4.4      $  (16.7)      $  (340.9)

Net gain (loss) on disposals, net of tax

       5.6        0.8        (25.1)

Total discontinued operations, net of tax

     $         10.0      $     (15.9)      $     (366.0)

During the fourth quarter of 2007, the Company recorded a non-cash charge of $449.0 million ($277 million after-tax) related to the Company’s liability for all pending and estimated future asbestos claims through 2053. Refer to Note 23 for further details on asbestos-related matters.

 

EARNINGS PER SHARE (EPS)
EARNINGS PER SHARE (EPS)

NOTE 22 – EARNINGS PER SHARE (EPS)

Basic EPS is calculated by dividing Net earnings (loss) attibutable to Ingersoll-Rand plc by the weighted-average number of common shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potentially dilutive common shares, which in the Company’s case, includes shares issuable under share-based compensation plans and the effects of the Exchangeable Senior Notes issued in April 2009. The following table summarizes the weighted-average number of common shares outstanding for basic and diluted earnings per share calculations:

 

In millions      2009  &