3

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INGERSOLL-RAND COMPANY LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Description of Company

Ingersoll-Rand Company Limited (IR Limited), a Bermuda company, and its consolidated subsidiaries (we, our or the Company) is a leading innovation and solutions provider with strong brands and leading positions within its markets. The Company operates in four business segments: Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies and Security Technologies. The Company generates revenue and cash primarily through the design, manufacture, sale and service of a diverse portfolio of industrial and commercial products that include well-recognized, premium brand names such as Club Car®, Hussmann®, Ingersoll Rand®, Schlage®, Thermo King® and Trane®.

Note 2– Basis of Presentation

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated unaudited results for the interim periods presented. Certain reclassifications of amounts reported in prior years have been made to conform to the 2008 classification.

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

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

Note 3 – Acquisition of Trane Inc.

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

The Company paid a combination of (i) 0.23 of an IR 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:

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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 following table summarizes the preliminary fair values of the Trane assets acquired and liabilities assumed at the Acquisition Date. The Company is in the process of finalizing the fair values of certain assets and liabilities, thus, the allocation of the purchase price is subject to refinement. The Company anticipates finalizing purchase accounting in the fourth quarter of 2008.

		June 5,
In millions		2008
Current assets:
Cash and cash equivalents		$	317.5
Accounts and notes receivable			1,185.6
Inventories			970.5
Other current assets			376.4
Total current assets			2,850.0
Property, plant and equipment			1,180.7
Goodwill			5,393.1
Intangible assets			5,547.7
Other noncurrent assets			721.9
Total assets		$	15,693.4
Current liabilities:
Accounts payable		$	562.9
Accrued compensation and benefits			218.5
Accrued expenses and other current liabilities			1,006.9
Short-term borrowings and current maturities of long-term debt			254.3
Total current liabilities			2,042.6
Long-term debt			476.3
Postemployment and other benefit liabilities			314.6
Deferred income taxes			2,237.5
Other noncurrent liabilities			1,006.2
Minority interests			7.7
Total liabilities and minority interests		$	6,084.9
Net assets acquired		$	9,608.5

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

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

In millions		Useful life			Amount
Tradenames			Indefinite		$	3,198.0
Customer relationships			18 Years			2,014.0
Completed technology/patents			10 Years			158.0
In-process research and development			Expensed			26.0
License agreement			7 Years			40.7
Backlog			6 Months			111.0
Total					$	5,547.7

The Company has allocated $3,198.0 million to tradenames, primarily related to the Trane brand. Management considered many factors in the determination that it will account for the asset as an indefinite lived intangible asset, including the current market leadership position of the brand as well as recognition worldwide in the industry. Therefore, in accordance with Statement of Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, tradenames will not be amortized, but instead will be tested for impairment at least annually (more frequently if certain indicators are present).

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 Financial Accounting Standards Board (FASB) Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.” The expenses are included in general and administrative expenses.

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

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

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

		Nine months ended
		September 30,
In millions		2008			2007
Net revenues		$	12,691.0		$	12,060.8
Pre-tax profit			863.5			694.7
Net earnings		$	703.0		$	562.0
Basic earnings per common share		$	2.20		$	1.65
Diluted earnings per common share		$	2.17		$	1.61

The unaudited pro forma financial information for the nine months ended September 30, 2008 include $19.5 million of non-recurring purchase accounting charges associated with the fair value allocation of purchase price to backlog, inventory and in-process research and development costs. The comparative amount for the nine months ended September 30, 2007 was $113.1 million.

In addition, for the nine months ended September 30, 2008, the Company has included $81.3 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. The comparative amount for the nine months ended September 30, 2007 was $146.9 million.

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.

Note 4 – Divestitures and Discontinued Operations

The components of discontinued operations for the three and nine months ended September 30 are as follows:

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		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Revenues		$	0.1		$	714.0		$	15.3		$	2,410.8
Pre-tax earnings (loss) from operations			(11.0	)		93.6			(34.0	)		295.2
Pre-tax gain (loss) on sale			0.1			1.1			(5.5	)		805.8
Tax expense			4.9			(25.7	)		(2.9	)		(215.0	)
Discontinued operations, net of tax		$	(6.0	)	$	69.0		$	(42.4	)	$	886.0

Discontinued operations by business for the three and nine months ended September 30 is as follows:

		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Compact Equipment, net of tax		$	-		$	84.5		$	(22.9	)	$	226.7
Road Development, net of tax			-			1.1			(1.8	)		695.2
Other discontinued operations, net of tax			(6.0	)		(16.6	)		(17.7	)		(35.9	)
Total discontinued operations, net of tax		$	(6.0	)	$	69.0		$	(42.4	)	$	886.0

Compact Equipment Divestiture

On July 29, 2007, the Company agreed to sell its Bobcat, Utility Equipment and Attachments business units (collectively, Compact Equipment) to Doosan Infracore for gross proceeds of approximately $4.9 billion. The sale was completed on November 30, 2007. The purchase price is subject to post-closing adjustments which could result in a favorable or unfavorable adjustment to the gain on sale when ultimately resolved.

Compact Equipment manufactures and sells compact equipment, including skid-steer loaders, compact track loaders, mini-excavators and telescopic tool handlers; portable air compressors, generators and light towers; general-purpose light construction equipment; and attachments. The Company has accounted for Compact Equipment as discontinued operations for all periods presented in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).

Net revenues and after-tax earnings of Compact Equipment for the three and nine months ended September 30 are as follows:

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		September 30,			December 31,
In millions		2008			2007
Raw materials		$	480.0		$	323.2
Work-in-process			351.0			163.4
Finished goods			1,106.2			424.9
Sub-total			1,937.2			911.5
LIFO reserve			(142.1	)		(84.3	)
Total		$	1,795.1		$	827.2

At September 30, 2008, approximately 50% of all inventory utilized the LIFO method compared to approximately 20% at December 31, 2007. The increase is primarily attributable to the Company’s acquisition of Trane. See Note 3 for a further discussion on the Trane acquisition.

 

Note 6 –Goodwill

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

		Air
		Conditioning			Climate
		Systems			Control			Industrial			Security
In millions		and Services			Technologies			Technologies			Technologies			Total
December 31, 2007		$	-		$	2,613.8		$	371.9		$	1,007.6		$	3,993.3
Acquisitions and adjustments*			5,393.1			-			5.6			23.3			5,422.0
Translation			-			(11.9	)		(1.3	)		(15.8	)		(29.0	)
September 30, 3008		$	5,393.1		$	2,601.9		$	376.2		$	1,015.1		$	9,386.3

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

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

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

Note 7 – Intangible Assets

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

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		September 30,			December 31,
In millions		2008			2007
Customer relationships		$	2,514.2		$	502.4
Trademarks			3,478.9			283.8
Patents			202.4			38.2
Other			236.5			53.4
Total gross intangible assets			6,432.0			877.8
Accumulated amortization			(330.7	)		(153.2	)
Total		$	6,101.3		$	724.6

As of September 30, 2008 and December 31, 2007, the Company had $3,366.5 million and $169.3 million, respectively, of indefinite lived intangible assets. The increase is attributable to the Company’s acquisition of Trane on June 5, 2008. These assets are not subject to amortization in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” but instead, will be tested for impairment at least annually (more frequently if certain indicators are present).

Intangible asset amortization expense was $128.9 million and $6.2 million for the three months ended September 30, 2008 and 2007, respectively. The increase is attributable to the Company’s acquisition of Trane on June 5, 2008, which includes $86.3 million of non-recurring amortization expense related to the fair value allocation of purchase price to backlog and in-process research and development costs. See Note 3 for a further discussion on the acquisition of Trane.

For the nine months ended September 30, 2008 and 2007, intangible asset amortization was $178.0 million and $18.4 million, respectively. The increase is attributable to the Company’s acquisition of Trane on June 5, 2008, which includes $112.8 million of non-recurring amortization expense related to the fair value allocation of purchase price to backlog and in-process research and development costs. See Note 3 for a further discussion on the acquisition of Trane.

Estimated amortization expense on existing intangible assets is approximately $170 million for each of the next five fiscal years.

Note 8 – Accounts Receivable Securitization Agreements

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

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

		September 30,
In millions		2008
Outstanding balance of receivables sold to SPE		$	243.1
Net retained interest			152.5
Advances from conduits			99.6

 

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

Note 9 – Debt and Credit Facilities

At September 30, 2008 and December 31, 2007, short-term borrowings and current maturities of long-term debt consisted of the following:

		September 30,			December 31,
In millions		2008			2007
Commerical paper program		$	958.2		$	-
Bridge loan facility			950.0			-
Current maturities of long-term debt			756.1			681.1
Other short-term borrowings			66.3			59.9
Total		$	2,730.6		$	741.0

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

		September 30,			December 31,
In millions		2008			2007
Senior floating rate notes due 2010		$	250.0		$	-
7.625% Senior notes due 2010			279.5			-
6.000% Senior notes due 2013			599.7			-
5.50% Senior notes due 2015			188.7			-
4.75% Senior notes due 2015			299.2			299.1
6.875% Senior notes due 2018			748.9			-
9.00% Debentures due 2021			125.0			125.0
7.20% Debentures due 2007 - 2025			120.0			127.5
6.48% Debentures due 2025			149.7			149.7
Other loans and notes			24.4			11.4
Total		$	2,785.1		$	712.7

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In connection with the acquisition of Trane, the Company entered into a $3.9 billion senior unsecured bridge loan facility, with a 364-day term, which was subsequently reduced to $3.4 billion. The Company drew down $2.95 billion against the bridge loan facility in June 2008. The proceeds, along with cash on hand as well as 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 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.

During the third quarter, the Company repaid $2.0 billion of the outstanding balance of the bridge loan facility. 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. In October 2008, the Company reduced the bridge loan facility size to $950 million.

During the second quarter, the Company entered into a $1.0 billion senior unsecured revolving credit agreement with a three year term. This three-year credit facility will be used to support working capital, the commercial paper program and for other general corporate purposes.

In addition to the three-year credit facility, the Company has committed revolving credit facilities consisting of two lines totaling $2.0 billion, of which $750 million expires in June 2009 and $1.25 billion expires in August 2010. These lines were unused and provide support for other financing instruments, such as letter of credit as required in the normal course of business as well as support for the commercial paper program.

At September 30, 2008, the Company had outstanding $547.9 million of 30-year fixed rate debentures which requires early repayment only 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 October 2008, holders of these debentures chose to exercise the put feature on approximately $248 million of the debentures, which will be repaid in November 2008. In the first quarter of 2009, holders of these debentures will have the option to exercise the put feature on approximately $40 million of the remaining debentures. In the fourth quarter of 2009, holders of these debentures will have the option to exercise the put feature on approximately $260 million of the remaining debentures.

Note 10 –Pension Plans

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The components of the Company’s pension related costs for the three and nine months ended September 30 are as follows:

		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Service cost		$	18.1		$	10.4		$	42.8		$	39.6
Interest cost			52.4			41.7			133.7			124.3
Expected return on plan assets			(64.9	)		(57.5	)		(167.8	)		(173.4	)
Net amortization of:
Prior service costs			2.4			2.3			6.6			7.0
Transition amount			0.2			0.2			0.6			0.6
Plan net actuarial losses			3.5			2.9			8.3			10.8
Net periodic pension benefit cost			11.7			-			24.2			8.9
Net curtailment and settlement (gains) losses			1.2			(3.6	)		2.5			20.7
Net periodic pension benefit cost after net curtailment and settlement (gains) losses		$	12.9		$	(3.6	)	$	26.7		$	29.6
Amounts recorded in continuing operations		$	16.5		$	1.8		$	37.6		$	16.8
Amounts recorded in discontinued operations			(3.6	)		(5.4	)		(10.9	)		12.8
Total		$	12.9		$	(3.6	)	$	26.7		$	29.6

The Company made employer contributions of $18.6 million and $18.1 million to its pension plans during the nine months ended September 30, 2008 and 2007, respectively.

The curtailment and settlement losses in 2008 are associated with lump sum distributions under supplemental benefit plans for officers and other key employees. The curtailment and settlement losses in 2007 are associated with the sale of the Road Development business unit on April 30, 2007. In addition, certain of the Company’s pension plans, primarily in the U.S., were remeasured as of the April 30, 2007 sale date and the discount rate used was increased from 5.5% to 5.75%.

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

Note 11 – Postretirement Benefits Other Than Pensions

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

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The components of net periodic postretirement benefit cost for the three and nine months ended September 30 are as follows:

		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Service cost		$	4.2		$	3.0		$	7.2		$	9.2
Interest cost			14.3			13.9			34.9			42.0
Net amortization of prior service gains			(0.8	)		(1.0	)		(2.6	)		(3.1	)
Net amortization of net actuarial losses			3.7			4.4			11.1			13.9
Net periodic postretirement benefit cost			21.4			20.3			50.6			62.0
Net curtailment and settlement (gains) losses			-			(2.9	)		-			(26.3	)
Net periodic postretirement benefit (gains) costs after curtailment and settlement gains		$	21.4		$	17.4		$	50.6		$	35.7
Amounts recorded in continuing operations		$	14.0		$	6.7		$	28.4		$	20.3
Amounts recorded in discontinued operations			7.4			10.7			22.2			15.4
Total		$	21.4		$	17.4		$	50.6		$	35.7

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

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

Note 12 – Shareholders’ Equity

At September 30, 2008, the reconciliation of Class A common shares is as follows:

In millions		Total
December 31, 2007			272.6
Shares issued under incentive plans			0.8
Merger consideration (See Note 3)			45.4
September 30, 2008			318.8

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

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		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Net earnings		$	227.7		$	266.6		$	665.4		$	1,448.2
Other comprehensive income (loss):
Foreign currency translation adjustment			(258.7	)		153.8			(18.2	)		221.6
Change in fair value of derivatives qualifying as cash flow hedges, net of tax			(13.7	)		0.7			(10.0	)		(5.1	)
Unrealized gain (loss) on marketable securities, net of tax			(1.3	)		(1.1	)		(3.6	)		(0.8	)
Pension and other postretirement benefits liability adjustment, net of tax			18.1			1.9			27.1			144.1
Comprehensive income		$	(27.9	)	$	421.9		$	660.7		$	1,808.0

Included in accumulated other comprehensive income is the estimated value of the Company’s currency hedges. At September 30, 2008 and 2007, the currency hedges had a projected gain of $2.1 million and a projected loss of $7.0 million, net of tax, respectively. Also included in accumulated other comprehensive income are projected losses of $22.7 million related to interest rate locks, all of which qualified as cash flow hedges. The amounts expected to be reclassified to earnings over the next twelve months for the currency hedges and interest rate locks is $2.1 million and $2.8 million, respectively. The actual amounts that will be reclassified to earnings may vary from this amount as a result of changes in market conditions. The projected fair value of all currency and commodity derivatives at September 30, 2008 and 2007 was a loss of $18.1 million and a gain of $20.5 million, respectively.

During the first quarter of 2008, the Company determined that four of its forecasted cash flow hedges were ineffective, as the underlying forecasted transactions were no longer considered probable of occurring. The Company dedesignated these hedges and recorded a gain of $0.3 million within “Other, net.”

As a result of the acquisition of Trane, the Company assumed a cross currency swap to lock the foreign currency cash flows on its £60.0 million 8.25% senior notes due June 1, 2009, into the U.S. dollar. At the inception of the swap, it qualified as a cash flow hedging instrument under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). As such, the fair value has been deferred in Other Comprehensive Income (OCI) until the time the cash flows affect earnings. At September 30, 2008, the cross currency swap had a loss of $17.3 million.

Note 13 – Restructuring Activities

Restructuring charges recorded during the three months ended September 30, 2008 were as follows:

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		Air
		Conditioning			Climate
		Systems			Control			Industrial			Security			Corporate
In millions		and Services			Technologies			Technologies			Technologies			and Other			Total
Cost of goods sold		$	-		$	1.2		$	(0.1	)	$	0.4		$	-		$	1.5
Selling and administrative			-			(0.2	)		-			0.1			8.5			8.4
Total		$	-		$	1.0		$	(0.1	)	$	0.5		$	8.5		$	9.9

Restructuring charges recorded during the nine months ended September 30, 2008 were as follows:

		Air
		Conditioning			Climate
		Systems			Control			Industrial			Security			Corporate
In millions		and Services			Technologies			Technologies			Technologies			and Other			Total
Cost of goods sold		$	-		$	0.8		$	2.5		$	2.4		$	-		$	5.7
Selling and administrative			2.0			0.3			1.8			(0.1	)		10.5			14.5
Total		$	2.0		$	1.1		$	4.3		$	2.3		$	10.5		$	20.2

The changes in the restructuring reserve were as follows:

		Air
		Conditioning			Climate
		Systems			Control			Industrial			Security			Corporate
In millions		and Services			Technologies			Technologies			Technologies			and Other			Total
December 31, 2007		$	-		$	20.8		$	0.7		$	4.0		$	-		$	25.5
Additions			2.0			1.1			4.3			2.3			10.5			20.2
Purchase accounting			13.8			-			-			-			-			13.8
Cash and non-cash uses			(10.4	)		(20.7	)		(4.6	)		(2.9	)		(0.8	)		(39.4	)
Currency translation			-			0.7			(0.2	)		(0.1	)		-			0.4
September 30, 2008		$	5.4		$	1.9		$	0.2		$	3.3		$	9.7		$	20.5

During 2007, the Company initiated restructuring actions relating to ongoing cost reduction efforts across each of its sectors. These actions included both workforce reductions as well as the consolidation of manufacturing facilities.

Actions taken in the Climate Control Technologies sector included a rationalization of manufacturing facilities in the U.S., Europe and Asia that resulted in the closure of a U.S. plant, two European plants and a Japanese plant. Industrial Technologies consolidated a manufacturing process at a U.S. plant in addition to other administrative functions within the sector. Security Technologies conducted a consolidation of administrative functions throughout the European sales area. Corporate costs related to workforce reductions.

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As of September 30, 2008, the Company had $20.5 million accrued for the workforce reductions and consolidation of manufacturing facilities, of which a majority will be paid throughout the remainder of 2008.

In October 2008, the Company announced plans to initiate enterprise-wide restructuring actions. These actions include streamlining the footprint of manufacturing facilities and reducing the general and administrative cost base. Projected costs will approximate $110 million with a majority of the costs expected to be incurred in 2008.

Note 14 – Share-Based Compensation

The Company records share-based compensation under the provisions of SFAS No. 123 (revised 2004), “Share Based Payment,” which requires companies to measure all employee share-based compensation awards using a fair value method and recognize compensation expense for an amount equal to the fair value of the share-based payment issued in its consolidated financial statements.

On June 6, 2007, the shareholders of the Company approved the Incentive Stock Plan of 2007, which authorizes the Company to issue stock options and other share-based incentives. The total number of shares authorized by the shareholders is 14.0 million, of which 8.7 million remains available for future incentive awards. The plan replaces the Incentive Stock Plan of 1998, which expired in May 2007.

Stock Options

The average fair value of the options granted for the nine months ended September 30, 2008 and September 30, 2007 were $11.59 and $11.06, respectively, using the Black-Scholes option-pricing model. The following weighted-average assumptions were used:

		2008			2007
Dividend yield			1.58	%		1.75	%
Volatility			31.49	%		26.10	%
Risk-free rate of return			2.95	%		4.71	%
Expected life			5.4 years			4.7 years

 

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

Changes in the options outstanding under the plans for the nine months ended September 30, 2008 were as follows:

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		Shares			Weighted-			Aggregate			Weighted-
		subject			average			intrinsic			average
		to option			exercise price			value (millions)			remaining life
December 31, 2007			16,424,891		$	34.25
Granted			5,074,599			40.54
Trane options exchanged for
Ingersoll Rand options			7,408,134			18.50
Exercised			(678,767	)		26.74
Cancelled			(695,214	)		41.58
Outstanding September 30, 2008			27,533,643		$	31.17		$	129.1			5.7
Exercisable September 30, 2008			20,163,360		$	27.48		$	129.1			4.6

 

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.

SARs

SARs generally vest ratably over a three-year period from the date of grant and expire at the end of ten years. All exercised SARs are settled with the Company’s Class A common shares.

The following table summarizes the information for currently outstanding SARs for the nine months ended September 30, 2008:

		Shares			Weighted-			Aggregate			Weighted-
		subject			average			intrinsic			average
		to option			exercise price			value (millions)			remaining life
December 31, 2007			1,169,977		$	33.99
Granted			-			-
Exercised			(40,636	)		27.98
Cancelled			(51,386	)		37.74
Outstanding September 30, 2008			1,077,955		$	34.04		$	2.1			4.6
Exercisable September 30, 2008			993,575		$	33.58		$	2.1			4.5

The Company did not grant SARS during the nine months ended September 30, 2008 and does not anticipate further granting in the future.

Performance Shares

The Company has a Performance Share Program (PSP) for key employees. The program provides annual awards for the achievement of pre-established long-term strategic initiatives and annual financial performance of the Company. The annual target award level is expressed as a number of the Company’s Class A common shares.

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Deferred Compensation

The Company allows key employees and non-employee directors to defer a portion of their eligible compensation into a number of investment choices, including Class A common share equivalents. Effective August 1, 2007, the deferred compensation plans were amended to provide that any amounts invested in the Class A common share equivalents will be settled in Class A common shares at the time of distribution. Previously, these amounts were settled in cash.

Compensation Expense

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

		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Stock options		$	7.4		$	5.0		$	31.1		$	20.7
SARs			0.1			-			(0.1	)		0.5
Performance shares			1.2			2.4			3.6			8.2
Deferred compensation			0.5			(0.3	)		1.1			2.2
Other			0.5			0.2			1.1			0.5
Pre-tax expense			9.7			7.3			36.8			32.1
Tax benefit			(3.7	)		(2.8	)		(14.1	)		(12.3	)
After tax expense		$	6.0		$	4.5		$	22.7		$	19.8
Amounts recorded in continuing operations		$	6.0		$	3.7		$	22.7		$	16.8
Amounts recorded in discontinued operations			-			0.8			-			3.0
Total		$	6.0		$	4.5		$	22.7		$	19.8

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

For the three and nine months ended September 30, 2007, the Company recorded a loss of $5.1 million and a gain of $15.5 million, respectively, associated with the Swaps. The gains and losses associated with the Swaps are recorded within selling and administrative expenses.

Note 15 – Other, Net

The components of “Other, net” for the three and nine months ended September 30 are as follows:

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		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Interest income		$	9.9		$	5.0		$	86.9		$	14.9
Exchange gain (loss)			(11.0	)		(8.1	)		(15.5	)		0.6
Minority interests			(5.5	)		(4.5	)		(15.9	)		(11.6	)
Earnings from equity investments			1.4			-			2.6			0.1
Other			1.5			-			3.3			(3.1	)
Other, net		$	(3.7	)	$	(7.6	)	$	61.4		$	0.9

Note 16 – Income Taxes

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109” (FIN 48), which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. As a result of adopting FIN 48, the Company recorded additional liabilities to its previously established reserves, and a corresponding decrease in retained earnings of $145.6 million. Total unrecognized tax benefits as of September 30, 2008 and December 31, 2007 were $571.6 million and $379.8 million, respectively. The increase is primarily related to the inclusion of unrecognized tax positions attributable to the Trane business.

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

The Internal Revenue Service (IRS) has completed the examination of the Company’s federal income tax returns through the 2000 tax year and has issued a notice proposing adjustments. The principle proposed adjustment relates to the disallowance of certain capital losses. The Company disputed the IRS position and protests have been filed with the IRS Appeals Division. In order to reduce the potential interest expense associated with this matter, the Company made a payment of $217 million in the third quarter of 2007, which reduced the Company’s total liability for uncertain tax positions by $141 million. 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. The Company continues negotiating with the IRS on the ultimate settlement of this matter. The issues raised by the IRS associated with the capital loss transaction are not related to the Company's reorganization in Bermuda, or the Company's intercompany debt structure.

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On July 20, 2007, the Company and its consolidated subsidiaries received a notice from the IRS containing proposed adjustments to the Company’s tax filings in connection with an audit of the 2001 and 2002 tax years. The IRS did not contest the validity of the Company’s reincorporation in Bermuda. The most significant adjustments proposed by the IRS involve treating the entire intercompany debt incurred in connection with the Company’s reincorporation in Bermuda as equity. As a result of this recharacterization, the IRS has disallowed the deduction of interest paid on the debt and imposed dividend withholding taxes on the payments denominated as interest. These adjustments proposed by the IRS, if upheld in their entirety, would result in additional taxes with respect to 2002 of approximately $190 million plus interest, and would require the Company to record additional charges associated with this matter. At this time, the IRS has not yet begun their examination of the Company’s tax filings for years subsequent to 2002. However, if these adjustments or a portion of these adjustments proposed by the IRS are ultimately sustained, it is likely to also affect subsequent tax years.

The Company strongly disagrees with the view of the IRS and filed a protest with the IRS in the third quarter of 2007. Going forward, the Company intends to vigorously contest these proposed adjustments. The Company, in consultation with its outside advisors, carefully considered many factors in determining the terms of the intercompany debt, including the obligor’s ability to service the debt and the availability of equivalent financing from unrelated parties, two factors prominently cited by the IRS in denying debt treatment. The Company believes that its characterization of that obligation as debt for tax purposes was supported by the relevant facts and legal authorities at the time of its creation. The subsequent financial results of the relevant companies, including the actual cash flow generated by operations and the production of significant additional cash flow from dispositions have confirmed the ability to service this debt. Although the outcome of this matter cannot be predicted with certainty, based upon an analysis of the strength of its position, the Company believes that it is adequately reserved for this matter. As the Company moves forward to resolve this matter with the IRS, it is reasonably possible that the reserves established may be adjusted within the next 12 months. However, the Company does not expect that the ultimate resolution will have a material adverse impact on its future results of operations or financial position.

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

 

Note 17– Earnings Per Share (EPS)

Basic EPS is calculated by dividing net earnings (income available to common shareholders) by the weighted-average number of Class A common shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potentially dilutive common shares, which in the Company’s case, includes shares issuable under share-based compensation plans. The following table summarizes the weighted-average number of Class A common shares outstanding for basic and diluted earnings per share calculations:

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		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Weighted-average number of basic shares			320.2			283.4			293.9			296.2
Shares issuable under incentive stock plans			3.9			5.4			3.6			4.3
Weighted-average number of diluted shares			324.1			288.8			297.5			300.5
Anti-dilutive shares			13.6			0.1			5.4			0.3

Note 18 –Business Segment Information

The Company classifies its business into four reportable segments based on industry and market focus: Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies and Security Technologies.

In connection with the acquisition of Trane, the Company expanded its reportable segments to include the Air Conditioning Systems and Services segment. The results of Trane’s operations are presented within this segment. The reported results for the nine months ended September 30, 2008 reflect activity since the Acquisition Date (June 6, 2008 through September 30, 2008).

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

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

		Three months ended						Nine months ended
		September 30,						September 30,
In millions		2008			2007			2008			2007
Net revenues