Edgar Filing: INGERSOLL RAND CO LTD

Unassociated Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 1-985

INGERSOLL-RAND COMPANY LIMITED

(Exact name of registrant as specified in its charter)

Bermuda		75-2993910
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Clarendon House

2 Church Street

Hamilton HM 11, Bermuda

(Address of principal executive offices)

(441) 295-2838

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

The number of Class A common shares outstanding as of May 8, 2007 was 301,626,886.

INGERSOLL-RAND COMPANY LIMITED

FORM 10-Q

INDEX

PART I	FINANCIAL INFORMATION

	Item 1	-	Financial Statements

			Condensed Consolidated Income Statement for the three
			months ended March 31, 2007 and 2006	1

			Condensed Consolidated Balance Sheet at March 31, 2007
			and December 31, 2006	2

			Condensed Consolidated Statement of Cash Flows for the
			three months ended March 31, 2007 and 2006	3

			Notes to Condensed Consolidated Financial Statements	4

	Item 2	-	Management's Discussion and Analysis of Financial Condition
			and Results of Operations	20

	Item 3	-	Quantitative and Qualitative Disclosures about Market Risk	31

	Item 4	-	Controls and Procedures	31

PART II	OTHER INFORMATION

	Item 1	-	Legal Proceedings	31

	Item 1A	-	Risk Factors	32

	Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	32

	Item 6	-	Exhibits	32

SIGNATURES				33

CERTIFICATIONS

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

INGERSOLL-RAND COMPANY LIMITED

CONDENSED CONSOLIDATED INCOME STATEMENT

(Unaudited)

	Three months ended
	March 31,
In millions, except per share amounts	2007			2006
Net revenues	$	2,668.1		$	2,523.2
Cost of goods sold		1,953.0			1,851.2
Selling and administrative expenses		415.2			354.7
Operating income		299.9			317.3
Interest expense		(35.6	)		(35.3	)
Other income (expense), net		(3.3	)		3.9
Earnings before income taxes		261.0			285.9
Provision for income taxes		44.5			41.5
Earnings from continuing operations		216.5			244.4
Discontinued operations, net of tax		1.0			8.8
Net earnings	$	217.5		$	253.2

Basic earnings per common share:
Continuing operations	$	0.71		$	0.74
Discontinued operations		-			0.03
Net earnings	$	0.71		$	0.77

Diluted earnings per common share:
Continuing operations	$	0.70		$	0.73
Discontinued operations		-			0.03
Net earnings	$	0.70		$	0.76

Dividends per common share	$	0.18		$	0.16

See accompanying Notes to Condensed Consolidated Financial Statements.

INGERSOLL-RAND COMPANY LIMITED

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

	March 31,			December 31,
In millions	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	304.6		$	355.8
Marketable securities		0.6			0.7
Accounts and notes receivable, less allowance of		1,860.6			1,847.3
$14.0 in 2007 and $15.6 in 2006
Inventories		1,249.5			1,178.5
Prepaid expenses and deferred income taxes		534.3			396.0
Assets held for sale		628.8			601.9
Total current assets		4,578.4			4,380.2

Property, plant and equipment, net		1,149.5			1,131.3
Goodwill		4,534.5			4,505.9
Intangible assets, net		731.5			735.3
Other assets		1,417.1			1,393.2
Total assets	$	12,411.0		$	12,145.9

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	922.7		$	989.3
Accrued compensation and benefits		292.0			364.9
Accrued expenses and other current liabilities		951.4			1,061.1
Loans payable and current maturities of long-term debt		1,186.8			1,079.4
Liabilities held for sale		198.3			187.3
Total current liabilities		3,551.2			3,682.0

Long-term debt		903.0			905.2
Postemployment and other benefit liabilities		1,393.5			1,390.0
Other noncurrent liabilities		1,177.2			763.9
Total liabilities		7,024.9			6,741.1

Shareholders' equity:
Class A common shares		305.3			306.8
Retained earnings		5,397.0			5,456.1
Accumulated other comprehensive income (loss)		(316.2	)		(358.1	)
Total shareholders' equity		5,386.1			5,404.8
Total liabilities and shareholders' equity	$	12,411.0		$	12,145.9

See accompanying Notes to Condensed Consolidated Financial Statements.

INGERSOLL-RAND COMPANY LIMITED

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
In millions	2007			2006
Cash flows from operating activities:
Net earnings	$	217.5		$	253.2
Loss (income) from discontinued operations, net of tax		(1.0	)		(8.8	)
Adjustments to arrive at net cash provided by (used in) operating activities:
Depreciation and amortization		43.6			46.2
Stock settled share-based compensation		11.9			8.2
Changes in other assets and liabilities, net		(112.5	)		(154.3	)
Other, net		(105.6	)		(105.8	)
Net cash provided by (used in) continuing operating activities		53.9			38.7
Net cash provided by (used in) discontinued operating activities		(8.1	)		(10.9	)

Cash flows from investing activities:
Capital expenditures		(47.0	)		(36.0	)
Proceeds from sale of property, plant and equipment		2.2			1.9
Acquisitions, net of cash acquired		(7.8	)		(26.8	)
Proceeds from sales and maturities of marketable securities		0.1			109.9
Other, net		(0.1	)		(0.6	)
Net cash provided by (used in) continuing investing activities		(52.6	)		48.4
Net cash provided by (used in) discontinued investing activities		(4.7	)		(2.3	)

Cash flows from financing activities:
Increase (decrease) in short-term borrowings		104.1			(9.0	)
Proceeds from long-term debt		-			0.8
Payments of long-term debt		(1.9	)		(5.5	)
Net change in debt		102.2			(13.7	)
Dividends paid		(55.3	)		(52.3	)
Proceeds from exercise of stock options		44.7			45.7
Repurchase of common shares by subsidiary		(133.6	)		(163.5	)
Net cash provided by (used in) continuing financing activities		(42.0	)		(183.8	)
Net cash provided by (used in) discontinued financing activities		-			-

Effect of exchange rate changes on cash and cash equivalents		2.3			6.9

Net increase (decrease) in cash and cash equivalents		(51.2	)		(103.0	)
Cash and cash equivalents - beginning of period		355.8			876.0
Cash and cash equivalents - end of period	$	304.6		$	773.0

See accompanying Notes to Condensed Consolidated Financial Statements.

INGERSOLL-RAND COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated unaudited financial position at March 31, 2007, and results of operations and cash flows for the three months ended March 31, 2007 and 2006.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Ingersoll-Rand Company Limited (the Company or IR-Limited) Annual Report on Form 10-K for the year ended December 31, 2006.

As a result of the divestiture of the Road Development business unit, the Company realigned its operating and reporting segments to better reflect its market focus. The former Compact Vehicle Technologies segment and the Construction Technologies segment, excluding the Road Development business, were aggregated into one segment - Compact Equipment Technologies. Prior year results have been reclassified to conform to this change.

Note 2 - Divestitures and Discontinued Operations

The components of discontinued operations for the three months ended March 31, were as follows:

In millions	2007			2006
Road Development, net of tax	$	16.5		$	17.9
Other discontinued operations, net of tax		(15.5	)		(9.1	)
Total discontinued operations, net of tax	$	1.0		$	8.8

Road Development Divestiture

On February 27, 2007, the Company agreed to sell its Road Development business unit to AB Volvo (publ) for cash proceeds of approximately $1.3 billion. The sale was completed on April 30, 2007, in all countries except for India, which closed on May 4, 2007. The sale is expected to generate net cash proceeds of approximately $1.05 billion.

The Road Development business unit manufactures and sells asphalt paving equipment, compaction equipment, milling machines, and construction-related material handling equipment. The Company has accounted for the Road Development business unit as discontinued operations and has classified the assets and liabilities sold to AB Volvo as held for sale for all periods presented in accordance with Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Net revenues and after-tax earnings of the Road Development business unit for the three months ended March 31, were as follows:

In millions	2007		2006
Net revenues	$	167.7	$	187.8
After-tax earnings		16.5		17.9

Assets and liabilities recorded as held for sale on the condensed consolidated balance sheet were as follows:

	March 31,		December 31,
In millions	2007		2006
Assets
Current assets	$	351.9	$	317.6
Property, plant and equipment, net		138.6		145.0
Goodwill and other intangible assets, net		99.8		99.8
Other assets and deferred income taxes		38.5		39.5
Assets held for sale	$	628.8	$	601.9

Liabilities
Current liabilities	$	124.5	$	118.9
Non-current liabilities		73.8		68.4
Liabilities held for sale	$	198.3	$	187.3

Other Discontinued Operations

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

In millions	2007			2006
Retained (costs) income, net of tax	$	(15.6	)	$	(9.3	)
Net gain on disposals, net of tax		0.1			0.2
Total other discontinued operations, net of tax	$	(15.5	)	$	(9.1	)

Note 3 - Inventories

Inventories are stated at the lower of cost or market. Most U.S. manufactured inventories, excluding the Climate Control Technologies segment, are valued on the last-in, first-out (LIFO) method. All other inventories are valued using the first-in, first-out (FIFO) method. The composition of inventories was as follows:

	March 31,		December 31,
In millions	2007		2006
Raw materials and supplies	$	463.0	$	480.5
Work-in-process		222.2		208.2
Finished goods		706.0		633.9
		1,391.2		1,322.6
Less - LIFO reserve		141.7		144.1
Total	$	1,249.5	$	1,178.5

Note 4 - Goodwill and Other Intangible Assets

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

	Climate		Compact
	Control		Equipment		Industrial		Security
In millions	Technologies		Technologies		Technologies		Technologies		Total
Balance at December 31, 2006	$	2,545.1	$	852.7	$	157.2	$	950.9	$	4,505.9
Acquisitions and adjustments*		-		4.2		4.7		3.3		12.2
Translation		7.4		0.3		1.1		7.6		16.4
Balance at March 31, 2007	$	2,552.5	$	857.2	$	163.0	$	961.8	$	4,534.5

* Includes current year adjustments related to final purchase price allocation adjustments.

The Company initially records to goodwill the excess of the purchase price over the preliminary fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, the Company may record an adjustment to goodwill.

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

	March 31, 2007				December 31, 2006
	Gross		Accumulated		Gross		Accumulated
In millions	amount		amortization		amount		amortization
Customer relationships	$	511.8	$	77.1	$	510.2	$	72.9
Trademarks		106.8		11.4		105.0		10.0
Patents		38.2		26.5		38.4		25.9
Other		49.2		24.8		49.9		24.2
Total amortizable intangible assets		706.0		139.8		703.5		133.0
Indefinite-lived intangible assets		165.3		-		164.8		-
Total	$	871.3	$	139.8	$	868.3	$	133.0

Intangible asset amortization expense was $6.8 million and $6.5 million for the three months ended March 31, 2007 and 2006, respectively. Estimated intangible asset amortization expense for each of the next five years is expected to approximate $26 million.

Note 5 - Postretirement Benefits Other Than Pensions

The Company sponsors several postretirement plans that cover certain eligible employees. These plans provide for health care benefits and, in some instances, life insurance benefits. Postretirement health plans generally are contributory and contributions are adjusted annually. Life insurance plans for retirees are primarily noncontributory. The Company funds the postretirement benefit costs principally on a pay-as-you-go basis. The components of net periodic postretirement benefits cost for the three months ended March 31, were as follows:

In millions	2007			2006
Service cost	$	3.2		$	2.7
Interest cost		14.1			13.6
Net amortization of prior service gains		(1.1	)		(1.0	)
Net amortization of net actuarial losses		4.9			4.6
Net periodic postretirement benefits cost*	$	21.1		$	19.9

*Amounts include costs reported in continuing and discontinued operations

Note 6 - Pension Plans

The Company sponsors several noncontributory pension plans that cover substantially all U.S. employees. In addition, certain non-U.S. employees in other countries are covered by pension plans. The Company’s pension plans for U.S. non-collectively bargained employees provide benefits on a modest final average pay formula. The Company’s U.S. collectively bargained pension plans principally provide benefits based on a flat benefit formula. Non-U.S. plans provide benefits based on earnings and years of service. The Company maintains additional other supplemental benefit plans for officers and other key employees. The components of the Company’s pension-related costs for the three months ended March 31, were the following:

In millions	2007			2006
Service cost	$	14.9		$	14.4
Interest cost		41.5			39.9
Expected return on plan assets		(58.2	)		(54.1	)
Net amortization of:
Prior service costs		2.4			2.1
Transition amount		0.2			0.2
Plan net acturial losses		4.6			6.6
Net periodic pension cost*	$	5.4		$	9.1

*Amounts include costs reported in continuing and discontinued operations

The Company made employer contributions of $7.9 million and $5.0 million to its pension plans in the first quarter of 2007 and 2006, respectively.

Note 7 - Share-Based Compensation

The Company’s Incentive Stock Plan of 1998 authorizes the Company to issue stock options and other share-based incentives. Total shares authorized by the shareholders is 60.0 million, of which approximately 14.0 million remains available for future incentive awards. The Company’s ability to grant future stock options and other share based incentives under its Incentive Stock Plan of 1998 expires in May 2007.

Stock Options

The average fair value of the stock options granted for the three months ended March 31, 2007 and 2006 was estimated to be $11.06 and $10.42, respectively, using the Black-Scholes option-pricing model. The following assumptions were used:

	2007			2006
Dividend yield		1.75	%		1.49	%
Volatility		26.10	%		27.70	%
Risk-free rate of return		4.71	%		4.47	%
Expected life		4.70 years			4.42 years

Expected volatility is based on the historical volatility from traded options on the Company’s stock. The risk-free rate of interest for periods within the contractual life of the stock option award 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. The Company uses historical data to estimate forfeitures within its valuation model. The Company’s expected life of the stock option awards is derived from historical experience and represents the period of time that awards are expected to be outstanding.

Changes in the options outstanding under the plans for the three months ended March 31, 2007 was as follows:

	Shares subject to option			Weighted- average exercise price		Aggregate intrinsic value (millions)		Weighted- average remaining life
December 31, 2006		19,164,942		$	31.53
Granted		3,299,230			43.13
Exercised		(1,598,581	)		28.13
Cancelled		(58,631	)		39.49
Outstanding March 31, 2007		20,806,960		$	33.61	$	203.2		6.7
Exercisable March 31, 2007		15,504,623		$	30.82	$	194.5		5.8

SARs

SARs generally vest ratably over a three-year period from the date of grant and expire at the end of ten years. Effective August 2, 2006, all exercised SARs will be settled in the Company’s Class A common shares. Previously, exercised SARs were paid in cash.

The following table summarizes the information for currently outstanding SARs for the three months ended March 31, 2007:

	Shares subject to option			Weighted- average exercise price		Aggregate intrinsic value (millions)		Weighted- average remaining life
December 31, 2006		1,693,754		$	33.11
Granted*		-			-
Exercised		(196,315	)		30.93
Cancelled		(11,438	)		31.85
Outstanding March 31, 2007		1,486,001		$	33.40	$	14.9		6.7
Exercisable March 31, 2007		1,063,563		$	31.13	$	13.1		6.2

* As of the end of 2006, the Company no longer expects to grant SARs

Performance Shares

The Company has a Performance Share Program (PSP) for key employees. The program provides annual awards for the achievement of pre-established long-term strategic initiatives and annual financial performance of the Company. The annual target award level is expressed as a number of the Company’s Class A common shares and for performance year 2006 the award was paid in cash. On April 17, 2007 and effective for the performance year 2007, the Compensation Committee of the Board of Directors of the Company approved a revision to the PSP program such that all PSP awards will be paid in Class A common shares rather than in cash and all of those shares will vest one year after the date of grant. As a result of these changes, a larger portion of the Company’s executive compensation program will be directly linked to the performance of the Company’s Class A common shares, thus further aligning the interests of executives with those of our shareholders.

Deferred Compensation

The Company allows key employees and non-employee directors to defer a portion of their eligible compensation into a number of investment choices, including Class A common share equivalents. The portion deferred into Class A common share equivalents is currently subject to market fluctuations based on the Company’s share price. Effective August 2, 2006, the Company eliminated the provision in the deferred compensation plans making plan participants eligible to receive a 20% supplemental amount on deferrals invested for five years in the Company's Class A common share equivalents. In addition, effective August 2, 2006, the Company vested the previously awarded, but unvested, portions of the 20% supplemental amount awarded under the deferred compensation plans.

Other Plans

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

Stock grants were issued prior to February 2000 as an incentive plan for certain key employees, with varying vesting periods. Effective August 2, 2006, all remaining stock grants will be settled with the Company’s Class A common shares rather than cash.

Compensation Expense

Share-based compensation expense is included in Selling and administrative expenses. The following table summarizes the expenses recognized for the three months ended March 31:

In millions	2007		2006
Stock options	$	11.4	$	8.2
SARs		0.4		3.3
Performance shares		4.2		4.5
Deferred compensation		1.0		2.9
Other		0.3		0.5
Pre-tax expense		17.3		19.4
Tax benefit		6.6		7.4
After tax expense	$	10.7	$	12.0

In August 2006, the Company entered into two total return swaps (the Swaps) which are derivative instruments used to hedge the Company's exposure to changes in its share-based compensation expense. The aggregate notional amount of the Swaps is approximately $52.6 million, and the aggregate fair value of the Swaps was $8.0 million as of March 31, 2007. For the three months ended March 31, 2007, the Company recorded income of $5.9 million within Selling and administrative expenses, associated with the change in fair value of the swaps during the period.

Note 8 - Income Taxes

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109” (FIN 48), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. As a result of adopting FIN 48, the company recorded additional liabilities, to its previously established reserves, and a corresponding decrease in retained earnings of $145.6 million.

The Company has total unrecognized tax benefits of $457.0 million as of January 1, 2007. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate are $394.9 million as of January 1, 2007.

The Company records interest and penalties associated with the uncertain tax positions within its provision for income taxes on its income statement. As of January 1, 2007, the Company had reserves totaling $88.0 million associated with interest and penalties, net of tax. For the three months ended March 31, 2007, the Company recognized $2.9 million in interest and penalties net of tax related to these uncertain tax positions.

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

The IRS has completed the examination of the Company’s federal income tax returns through the 2000 tax year and has issued a notice proposing adjustments. The principle proposed adjustment relates to the disallowance of certain capital losses. The Company disputes the IRS position and protests have been filed with the IRS Appeals Division. It is reasonably possible that in order to reduce the potential interest expense, the Company may make a payment within the next 12 months with respect to the capital loss disallowance. The potential payment of tax and accrued interest of approximately $200 million will reduce the Company’s total unrecognized tax position by approximately $140 million.

The IRS is in the process of examining the Company’s tax returns for tax years 2001 and 2002. The Company has been actively engaged in discussions with the IRS regarding issues related to the Company’s reincorporation into Bermuda in 2001.

The Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with FIN 48. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in the provision for income taxes.

Note 9 - Comprehensive Income

The components of comprehensive income for the quarters ended March 31, were as follows:

In millions	2007			2006
Net earnings	$	217.5		$	253.2
Other comprehensive income (loss):
Foreign currency translation adjustment		35.5			53.3
Change in fair value of derivatives qualifying as cash flow
hedges, net of tax		-			(4.1	)
Unrealized gain (loss) on marketable securities, net of tax		(0.5	)		(0.7	)
Pension and other postretirement benefits liability adjustment, net of tax		6.9			-
Comprehensive income	$	259.4		$	301.7

Note 10 - Weighted-Average Common Shares

Basic earnings per share is computed by dividing net earnings by the weighted-average number of Class A common shares outstanding. Dilutive earnings per share is computed by dividing net earnings by the weighted-average number of Class A common shares outstanding as well as potentially dilutive common shares, which in the Company’s case, includes shares issuable under share-based compensation plans. The following table details the weighted-average number of Class A common shares outstanding for basic and diluted earnings per share calculations:

	Three months ended March 31,
In millions	2007		2006
Weighted-average number of basic shares		306.8		328.8
Shares issuable under incentive stock plans		3.5		3.6
Weighted-average number of diluted shares		310.3		332.4
Anti-dilutive shares		4.0		1.7

Note 11 - Commitments and Contingencies

The Company is involved in various litigations, claims and administrative proceedings, including environmental and product liability matters. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, management believes that the liability which may result from these legal matters would not have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

Environmental remediation costs are determined on a site-by-site basis and accruals are made when it is probable a liability exists and the cost can be reasonably estimated. The Company estimates the amount of recurring and non-recurring costs at each site using internal and external experts. In arriving at cost estimates the following factors are considered: the type of contaminant, the stage of the clean up, applicable law and existing technology. These estimates, and the resultant accruals, are reviewed and updated quarterly to reflect changes in facts and law. The Company does not discount its liability or assume any insurance recoveries when environmental liabilities are recorded.

Certain wholly owned subsidiaries of the Company are named as defendants in asbestos-related lawsuits in state and federal courts. In virtually all of the suits, a large number of other companies have also been named as defendants. The vast majority of those claims has been filed against Ingersoll-Rand Company (IR-New Jersey), and generally allege injury caused by exposure to asbestos contained in certain of IR-New Jersey’s products. Although IR-New Jersey was neither a producer nor a manufacturer of asbestos, some of its formerly manufactured products utilized asbestos-containing components, such as gaskets purchased from third-party suppliers.

All asbestos-related claims resolved to date have been dismissed or settled. For the three month period ended March 31, 2007, total costs for settlement and defense of asbestos claims after insurance recoveries and net of tax were approximately $12 million. With the assistance of independent advisors, the Company performs a thorough analysis, updated periodically, of its actual and anticipated future asbestos liabilities projected seven years in the future. Based upon such analysis, the Company believes that its reserves and insurance are adequate to cover its asbestos liabilities, and that these asbestos liabilities are not likely to have a material adverse effect on its financial position, results of operations, liquidity or cash flows.

Legislation recently under consideration in Congress concerns pending and future asbestos-related personal injury claims. Whether and when such legislation will become law, and the final provisions of such legislation, are unknown. Consequently, the Company cannot predict with any reasonable degree of certainty what effect, if any, such legislation would have upon the Company’s financial position, results of operations or cash flows.

In connection with the disposition of certain businesses and facilities the Company has indemnified the purchasers for the expected cost of remediation of environmental contamination, if any, existing on the date of disposition. Such expected costs are accrued when environmental assessments are made or remedial efforts are probable and the costs can be reasonably estimated.

As previously reported, on November 10, 2004, the Securities and Exchange Commission (SEC) issued an Order directing that a number of public companies, including the Company, provide information relating to their participation in transactions under the United Nations’ Oil for Food Program. Upon receipt of the Order, the Company undertook a thorough review of its participation in the Program, provided the SEC with information responsive to the Order and provided additional information requested by the SEC. During a March 27, 2007 meeting with the SEC, at which a representative of the Department of Justice (DOJ) was also present, the Company began discussions concerning the resolution of this matter with both the SEC and DOJ. These discussions are ongoing and the Company will continue to cooperate fully with the SEC and DOJ in this matter.

The Company sells products on a continuous basis under various arrangements through institutions that provide leasing and product financing alternatives to retail and wholesale customers. Under these arrangements, the Company is contingently liable for loan guarantees and residual values of equipment of approximately $20.7 million, including consideration of ultimate net loss provisions. The risk of loss to the Company is minimal, and historically, only immaterial losses have been incurred related to these arrangements since the fair value of the underlying equipment that serves as collateral is generally in excess of the contingent liability. Management believes these guarantees will not adversely affect the condensed consolidated financial statements.

The Company remains contingently liable for approximately $13.8 million relating to performance bonds associated with prior sale of products of Ingersoll-Dresser Pump Company (IDP), which the Company divested in 2000. The acquirer of IDP is the primary obligor under these performance bonds. However, should the acquirer default under these arrangements, the Company would be required to satisfy these financial obligations. The obligation extends through 2008.

The following table represents the changes in the product warranty liability for the three months ended March 31, respectively:

In millions	2007			2006
Balance at beginning of period	$	186.6		$	177.0
Reductions for payments		(26.1	)		(22.4	)
Accruals for warranties issued during the period		30.3			22.8
Changes to accruals related to preexisting warranties		(0.8	)		(1.9	)
Acquisitions		0.1			-
Translation		1.1			1.1
Balance at end of period	$	191.2		$	176.6

Note 12 - Business Segment Information

The Company classifies its business into four reportable segments based on industry and market focus: Climate Control Technologies, Compact Equipment Technologies, Industrial Technologies and Security Technologies.

As discussed in Note 1, the Company realigned its operating and reporting segments. As a result, the former Compact Vehicle Technologies segment and the Construction Technologies segment, excluding the Road Development business, were aggregated into one segment - Compact Equipment Technologies. The Compact Equipment Technologies segment includes the Bobcat and Club Car brands as well as the Utility Equipment and Attachment businesses. Prior year results have been reclassified to conform to this change. A summary of operations by reportable segment is as follows:

	Three months ended March 31,
In millions	2007		2006
Net revenues
Climate Control Technologies	$	728.9	$	683.6
Compact Equipment Technologies		875.1		875.7
Industrial Technologies		484.5		439.1
Security Technologies		579.6		524.8
Total	$	2,668.1	$	2,523.2

Operating income
Climate Control Technologies	$	69.4		$	69.2
Compact Equipment Technologies		111.4			136.4
Industrial Technologies		64.6			58.2
Security Technologies		90.7			79.6
Unallocated corporate expense		(36.2	)		(26.1	)
Total	$	299.9		$	317.3

Long-lived assets by geographic area for the periods ended March 31, 2007 and December 31, 2006 were as follows:

In millions	March 31, 2007		December 31, 2006
United States	$	797.2	$	789.9
Non-U.S.		918.6		911.8
Total	$	1,715.8	$	1,701.7

Note 13 - IR-New Jersey

IR-Limited has guaranteed all of the issued public debt securities of IR-New Jersey. The subsidiary issuer, IR-New Jersey, is 100% owned by the parent, IR-Limited; the guarantees are full and unconditional, and no other subsidiary of the Company guarantees the securities. The following condensed consolidated financial information for IR-Limited, IR-New Jersey, and all their other subsidiaries is included so that separate financial statements of IR-New Jersey are not required to be filed with the SEC.

The condensed consolidating financial statements present IR-Limited and IR-New Jersey investments in their subsidiaries using the equity method of accounting. Inter-company investments in the non-voting Class B common shares are accounted for on the cost method and are reduced by inter-company dividends.

Condensed Consolidating Income Statement

For the three months ended March 31, 2007

	IR			IR			Other			Consolidating			IR Limited
In millions	Limited			New Jersey			Subsidiaries			Adjustments			Consolidated
Net revenues	$	-		$	296.0		$	2,372.1		$	-		$	2,668.1
Cost of goods sold		-			215.1			1,737.9			-			1,953.0
Selling and administrative expenses		11.5			95.0			308.7			-			415.2
Operating income		(11.5	)		(14.1	)		325.5			-			299.9
Equity earnings in affiliates (net of tax)		249.9			115.5			1.5			(366.9	)		-
Interest expense		(11.0	)		(17.0	)		(7.6	)		-			(35.6	)
Intercompany interest and fees		(10.2	)		(118.6	)		128.8			-			-
Other income (expense), net		0.3			(0.4	)		(3.2	)		-			(3.3	)
Earnings (loss) before income taxes		217.5			(34.6	)		445.0			(366.9	)		261.0
(Benefit) provision for income taxes		-			(44.7	)		89.2			-			44.5
Earnings (loss) from continuing operations		217.5			10.1			355.8			(366.9	)		216.5
Discontinued operations, net of tax		-			(8.6	)		9.6			-			1.0
Net earnings (loss)	$	217.5		$	1.5		$	365.4		$	(366.9	)	$	217.5

Condensed Consolidating Income Statement

For the three months ended March 31, 2006

	IR			IR			Other			Consolidating			IR Limited
In millions	Limited			New Jersey			Subsidiaries			Adjustments			Consolidated
Net revenues	$	-		$	289.3		$	2,233.9		$	-		$	2,523.2
Cost of goods sold		-			220.9			1,630.3			-			1,851.2
Selling and administrative expenses		8.2			78.8			267.7			-			354.7
Operating income		(8.2	)		(10.4	)		335.9			-			317.3
Equity earnings in affiliates (net of tax)		276.4			148.5			47.6			(472.5	)		-
Interest expense		(3.8	)		(25.3	)		(6.2	)		-			(35.3	)
Intercompany interest and fees		(11.4	)		(120.2	)		131.6			-			-
Other income (expense), net		0.2			(0.5	)		4.2			-			3.9
Earnings (loss) before income taxes		253.2			(7.9	)		513.1			(472.5	)		285.9
(Benefit) provision for income taxes		-			(53.9	)		95.4			-			41.5
Earnings (loss) from continuing operations		253.2			46.0			417.7			(472.5	)		244.4
Discontinued operations, net of tax		-			1.6			7.2			-			8.8
Net earnings (loss)	$	253.2		$	47.6		$	424.9		$	(472.5	)	$	253.2

Condensed Colnsolidating Balance Sheet

March 31, 2007

	IR			IR			Other			Consolidating			IR Limited
In millions	Limited			New Jersey			Subsidiaries			Adjustments			Consolidated
Current assets:
Cash and cash equivalents	$	-		$	34.1		$	270.5		$	-		$	304.6
Marketable securities		-			-			0.6			-			0.6
Accounts and notes receivable, net		0.2			199.2			1,661.2			-			1,860.6
Inventories, net		-			138.3			1,111.2			-			1,249.5
Prepaid expenses and deferred income taxes		1.1			482.2			51.0			-			534.3
Assets held for sale		-			307.3			321.5			-			628.8
Accounts and notes receivable affiliates		966.8			2,763.6			27,060.3			(30,790.7	)		-
Total current assets		968.1			3,924.7			30,476.3			(30,790.7	)		4,578.4

Investment in affiliates		7,200.2			11,691.3			30,935.9			(49,827.4	)		-
Property, plant and equipment, net		-			181.8			967.7			-			1,149.5
Intangible assets, net		-			81.7			5,184.3			-			5,266.0
Other assets		1.6			1,286.5			129.0			-			1,417.1
Total assets	$	8,169.9		$	17,166.0		$	67,693.2		$	(80,618.1	)	$	12,411.0

Current liabilities:
Accounts payable and accruals	$	9.9		$	290.6		$	1,865.6		$	-		$	2,166.1
Current maturities of long-term debt
and loans payable		486.5			597.7			102.6			-			1,186.8
Liabilities held for sale		-			140.8			57.5			-			198.3
Accounts and note payable affiliates		809.5			7,178.2			22,803.0			(30,790.7	)		-
Total current liabilities		1,305.9			8,207.3			24,828.7			(30,790.7	)		3,551.2

Long-term debt		299.0			410.3			193.7			-			903.0
Note payable affiliate		950.0			2,697.4			-			(3,647.4	)		-
Other noncurrent liabilities		228.9			2,171.7			170.1			-			2,570.7
Total liabilities		2,783.8			13,486.7			25,192.5			(34,438.1	)		7,024.9

Shareholders' equity:
Class A common shares		366.2			-			(60.9	)		-			305.3
Class B common shares		270.6			-			-			(270.6	)		-
Common shares		-			-			2,362.8			(2,362.8	)		-
Other shareholders' equity		9,282.1			4,723.9			44,072.2			(52,681.2	)		5,397.0
Accumulated other comprehensive income		5.3			(617.1	)		237.0			58.6			(316.2	)
		9,924.2			4,106.8			46,611.1			(55,256.0	)		5,386.1
Less: Contra account		(4,538.1	)		(427.5	)		(4,110.4	)		9,076.0			-
Total shareholders' equity		5,386.1			3,679.3			42,500.7			(46,180.0	)		5,386.1
Total liabilities and equity	$	8,169.9		$	17,166.0		$	67,693.2		$	(80,618.1	)	$	12,411.0

Condensed Consolidating Balance Sheet

December 31, 2006

	IR			IR			Other			Consolidating			IR Limited
In millions	Limited			New Jersey			Subsidiaries			Adjustments			Consolidated
Current assets:
Cash and cash equivalents	$	1.7		$	81.6		$	272.5		$	-		$	355.8
Marketable securities		-			-			0.7			-			0.7
Accounts and notes receivable, net		0.3			212.8			1,634.2			-			1,847.3
Inventories, net		-			123.5			1,055.0			-			1,178.5
Prepaid expenses and deferred income taxes		0.4			378.6			17.0			-			396.0
Assets held for sale		-			291.9			310.0			-			601.9
Accounts and notes receivable affiliates		921.4			2,662.1			26,537.6			(30,121.1	)		-
Total current assets		923.8			3,750.5			29,827.0			(30,121.1	)		4,380.2

Investment in affiliates		7,130.9			11,565.2			31,009.6			(49,705.7	)		-
Property, plant and equipment, net		-			178.6			952.7			-			1,131.3
Intangible assets, net		-			81.1			5,160.1			-			5,241.2
Other assets		1.7			1,256.8			134.7			-			1,393.2
Total assets	$	8,056.4		$	16,832.2		$	67,084.1		$	(79,826.8	)	$	12,145.9

Current liabilities:
Accounts payable and accruals	$	6.3		$	416.6		$	1,992.4		$	-		$	2,415.3
Current maturities of long-term debt
and loans payable		378.0			596.8			104.6			-			1,079.4
Liabilities held for sale		-			129.1			58.2			-			187.3
Accounts and note payable affiliates		779.0			7,035.7			22,306.4			(30,121.1	)		-
Total current liabilities		1,163.3			8,178.2			24,461.6			(30,121.1	)		3,682.0

Long-term debt		299.0			411.3			194.9			-			905.2
Note payable affiliate		950.0			2,697.4			-			(3,647.4	)		-
Other noncurrent liabilities		239.3			1,789.5			125.1			-			2,153.9
Total liabilities		2,651.6			13,076.4			24,781.6			(33,768.5	)		6,741.1

Shareholders' equity:
Class A common shares		364.5			-			(57.7	)		-			306.8
Class B common shares		270.6			-			-			(270.6	)		-
Common shares		-			-			2,362.8			(2,362.8	)		-
Other shareholders' equity		9,403.3			4,815.3			43,957.1			(52,719.6	)		5,456.1
Accumulated other comprehensive income		(36.4	)		(627.9	)		205.7			100.5			(358.1	)
		10,002.0			4,187.4			46,467.9			(55,252.5	)		5,404.8
Less: Contra account		(4,597.2	)		(431.6	)		(4,165.4	)		9,194.2			-
Total shareholders' equity		5,404.8			3,755.8			42,302.5			(46,058.3	)		5,404.8
Total liabilities and equity	$	8,056.4		$	16,832.2		$	67,084.1		$	(79,826.8	)	$	12,145.9

Condensed Consolidating Statement of Cash Flows

For the three months ended March 31, 2007

	IR			IR			Other			IR Limited
In millions	Limited			New Jersey			Subsidiaries			Consolidated
Net cash provided by (used in) continuing operating activities	$	(15.2	)	$	(83.5	)	$	152.6		$	53.9
Net cash provided by (used in) discontinued operating activities		-			(5.2	)		(2.9	)		(8.1	)

Cash flows from investing activities:
Capital expenditures		-			(8.6	)		(38.4	)		(47.0	)
Proceeds from sale of property, plant and equipment		-			-			2.2			2.2
Acquisitions, net of cash		-			(0.6	)		(7.2	)		(7.8	)
Proceeds from sales and maturities of marketable securities		-			-			0.1			0.1
Other, net		-			-			(0.1	)		(0.1	)
Net cash provided by (use in) continuing investing activities		-			(9.2	)		(43.4	)		(52.6	)
Net cash provided by (used in) discontinued investing activities		-			(4.1	)		(0.6	)		(4.7	)

Cash flows from financing activities:
Net change in debt		108.5			(1.0	)		(5.3	)		102.2
Net inter-company proceeds (payments)		(25.3	)		51.4			(26.1	)		-
Dividends (paid) received		(114.4	)		4.1			55.0			(55.3	)
Proceeds from the exercise of stock options		44.7			-			-			44.7
Repurchase of common shares by subsidiary		-			-			(133.6	)		(133.6	)
Net cash provided by (used in) continuing financing activities		13.5			54.5			(110.0	)		(42.0	)
Net cash provided by (used in) discontinued financing activities		-			-			-			-

Effect of exchange rate changes on cash and cash equivalents		-			-			2.3			2.3

Net increase (decrease) in cash and cash equivalents		(1.7	)		(47.5	)		(2.0	)		(51.2	)
Cash and cash equivalents - beginning of period		1.7			81.6			272.5			355.8
Cash and cash equivalents - end of period	$	-		$	34.1		$	270.5		$	304.6

Condensed Consolidating Statement of Cash Flows

For the three months ended March 31, 2006

	IR			IR			Other			IR Limited
In millions	Limited			New Jersey			Subsidiaries			Consolidated
Net cash provided by (used in) continuing operating activities	$	(12.9	)	$	(84.8	)	$	136.4		$	38.7
Net cash provided by (used in) discontinued operating activities		-			(7.9	)		(3.0	)		(10.9	)

Cash flows from investing activities:
Capital expenditures		-			(6.8	)		(29.2	)		(36.0	)
Proceeds from sale of property, plant and equipment		-			0.3			1.6			1.9
Acquisitions, net of cash		-			-			(26.8	)		(26.8	)
Proceeds from sales and maturities of marketable securities		-			-			109.9			109.9
Other, net		-			-			(0.6	)		(0.6	)
Net cash provided by (use in) continuing investing activities		-			(6.5	)		54.9			48.4
Net cash provided by (used in) discontinued investing activities		-			(1.8	)		(0.5	)		(2.3	)

Cash flows from financing activities:
Net change in debt		-			(0.1	)		(13.6	)		(13.7	)
Net inter-company proceeds (payments)		59.0			108.2			(167.2	)		-
Dividends (paid) received		(95.6	)		3.7			39.6			(52.3	)
Proceeds from the exercise of stock options		45.7			-			-			45.7
Repurchase of common shares by subsidiary		-			-			(163.5	)		(163.5	)
Net cash provided by (used in) continuing financing activities		9.1			111.8			(304.7	)		(183.8	)
Net cash provided by (used in) discontinued financing activities		-			-			-