IR-10Q-09.30.2013-Q3
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________
FORM 10-Q
_______________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-34400
_______________________________ 
INGERSOLL-RAND PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
_______________________________
Ireland
98-0626632
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
170/175 Lakeview Dr.
Airside Business Park
Swords, Co. Dublin
Ireland
(Address of principal executive offices, including zip code)
+(353) (0) 18707400
(Registrant’s telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x   NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” "accelerated filer," and "smaller reporting company," in Rule 12b-2 of the Exchange Act.

Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x
The number of ordinary shares outstanding of Ingersoll-Rand plc as of October 11, 2013 was 288,086,571.


Table of Contents

INGERSOLL-RAND PLC
FORM 10-Q
INDEX

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


Table of Contents

PART I-FINANCIAL INFORMATION

Item 1.
Financial Statements

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

 
$
3,592.8

 
$
10,794.5

 
$
10,564.7

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

 
(111.4
)
 
4.5

Operating income
376.6

 
447.8

 
1,053.0

 
1,137.7

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

 
17.4

 
(2.7
)
 
21.2

Earnings before income taxes
279.2

 
404.6

 
823.5

 
966.8

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

 
339.3

 
604.3

 
808.9

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

 
327.0

 
600.1

 
802.2

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

 
$
321.6

 
$
571.1

 
$
783.0

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

 
$
333.9

 
$
575.3

 
$
789.7

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

 
$
321.6

 
$
571.1

 
$
783.0

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

 
$
1.09

 
$
1.94

 
$
2.58

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

 
$
1.05

 
$
1.93

 
$
2.56

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.57

 
$
1.07

 
$
1.92

 
$
2.52

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

 
$
1.03

 
$
1.91

 
$
2.50

Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
291.6

 
307.7

 
295.9

 
305.4

Diluted
295.5

 
312.0

 
299.8

 
312.9

Dividends declared per ordinary share
$
0.21

 
$
0.16

 
$
0.42

 
$
0.32

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
311.6

 
$
485.7

 
$
645.2

 
$
912.5

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

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

 
$
491.8

 
$
619.0

 
$
904.9

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

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

 
$
882.1

Accounts and notes receivable, net
2,443.1

 
2,157.5

Inventories
1,447.5

 
1,308.8

Other current assets
655.2

 
594.3

Total current assets
5,629.7

 
4,942.7

Property, plant and equipment, net
1,651.7

 
1,652.6

Goodwill
6,061.8

 
6,138.9

Intangible assets, net
4,099.1

 
4,200.9

Other noncurrent assets
1,559.7

 
1,557.8

Total assets
$
19,002.0

 
$
18,492.9

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

 
$
1,230.2

Accrued compensation and benefits
541.9

 
506.8

Accrued expenses and other current liabilities
1,532.9

 
1,460.6

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

 
963.7

Total current liabilities
3,848.6

 
4,161.3

Long-term debt
3,154.1

 
2,269.3

Postemployment and other benefit liabilities
1,809.1

 
1,823.2

Deferred and noncurrent income taxes
1,653.0

 
1,592.8

Other noncurrent liabilities
1,350.6

 
1,417.0

Total liabilities
11,815.4

 
11,263.6

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

 
295.6

Capital in excess of par value
472.3

 
1,014.5

Retained earnings
6,806.7

 
6,358.7

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

 
7,147.8

Noncontrolling interest
91.9

 
81.5

Total equity
7,186.6

 
7,229.3

Total liabilities and equity
$
19,002.0

 
$
18,492.9

See accompanying notes to condensed consolidated financial statements.


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

 
$
802.2

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

 
6.7

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

 
(4.5
)
Depreciation and amortization
282.1

 
285.4

Stock settled share-based compensation
53.8

 
34.7

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

 
25.8

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

 
822.9

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

 
735.5

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

 
12.8

Proceeds from business dispositions, net of cash sold
4.7

 
—

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

 
36.0

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

 
66.1

Proceeds from long-term debt
1,546.2

 
—

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

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

 
(0.4
)
Proceeds from shares issued under incentive plans
192.4

 
57.7

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

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

 
1,160.7

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

 
$
929.6

See accompanying notes to condensed consolidated financial statements.


3
Table of Contents

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

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


Note 3 – Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, "Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires enhanced disclosures including both gross and net information about financial and derivative instruments eligible for offset or subject to an enforceable master netting arrangement or similar agreement. This new guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The requirements of ASU 2011-11 did not have an impact on the condensed consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." ASU 2013-01 clarifies the scope of ASU 2011-11 to apply to derivative instruments that are offset or subject to an enforceable master netting arrangement or similar agreement. This clarified guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The revised requirements of ASU 2013-01 did not have an impact on the condensed consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" (AOCI). ASU 2013-02 requires a rollforward of changes in AOCI by component and information about significant reclassifications from AOCI to Net earnings to be presented in one location, either on the face of the financial statements or in the notes. This new guidance is effective for fiscal years beginning after December 15, 2012 and subsequent interim periods. The requirements of ASU 2013-02 did not have a material impact on the Company's condensed consolidated financial statements. The revised disclosure requirements are reflected in Note 11.
Recently Issued Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements where the total obligation is fixed at the reporting date, and for which no specific guidance currently exists. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company is currently assessing the impact, if any, on the condensed consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 clarifies the application of GAAP to the release of cumulative translation adjustments related to changes of ownership in or within foreign entities, including step acquisitions. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods.
In July 2013, the FASB issued ASU 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." ASU 2013-10 allows the Fed Funds Effective Swap Rate (OIS) to be designated as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not anticipate the requirements of ASU 2013-10 will have a material impact on the condensed consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company is currently assessing the impact, if any, on the condensed consolidated financial statements.
Note 4 – Inventories
Depending on the business, U.S. inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method or the lower of cost or market using the first-in, first-out (FIFO) method. Non-U.S. inventories are primarily stated at the lower of cost or market using the FIFO method.

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


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

 
$
501.9

Work-in-process
150.4

 
109.6

Finished goods
906.3

 
800.2

 
1,551.2

 
1,411.7

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

 
$
1,308.8

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

 
$
2,317.1

 
$
368.7

 
$
922.5

 
$
8,978.9

Accumulated impairment
(839.8
)
 
(1,656.2
)
 
—

 
(344.0
)
 
(2,840.0
)
 
4,530.8

 
660.9

 
368.7

 
578.5

 
6,138.9

Acquisitions and adjustments *
(1.4
)
 
17.7

 
1.1

 
(17.4
)
 
—

Impairment losses **
—


—


—

 
(111.4
)
 
(111.4
)
Currency translation
27.4

 
—

 
1.6

 
5.3

 
34.3

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

 
2,334.8

 
371.4

 
910.4

 
9,013.2

Accumulated impairment
(839.8
)
 
(1,656.2
)
 
—

 
(455.4
)
 
(2,951.4
)
 
$
4,556.8

 
$
678.6

 
$
371.4

 
$
455.0

 
$
6,061.8

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

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


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

 
$
(147.4
)
 
$
53.0

 
$
203.2

 
$
(134.4
)
 
$
68.8

Customer relationships
 
1,970.9

 
(608.5
)
 
1,362.4

 
1,966.8

 
(523.6
)
 
1,443.2

Trademarks (finite-lived)
 
100.2

 
(35.7
)
 
64.5

 
98.0

 
(32.1
)
 
65.9

Other
 
71.3

 
(63.1
)
 
8.2

 
71.4

 
(59.4
)
 
12.0

Total finite-lived intangible assets
 
2,342.8

 
$
(854.7
)
 
1,488.1

 
2,339.4

 
$
(749.5
)
 
1,589.9

Trademarks (indefinite-lived)
 
2,611.0

 
 
 
2,611.0

 
2,611.0

 
 
 
2,611.0

Total
 
$
4,953.8

 
 
 
$
4,099.1

 
$
4,950.4

 
 
 
$
4,200.9

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

 
$
343.0

6.000% Senior notes due 2013
—


600.0

Other current maturities of long-term debt
9.9

 
10.8

Other short-term borrowings
20.3

 
9.9

Total
$
373.2

 
$
963.7

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

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


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

 
$
655.0

5.50% Senior notes due 2015
197.6

 
196.4

4.75% Senior notes due 2015
299.8

 
299.7

6.875% Senior notes due 2018
749.5

 
749.4

2.875% Senior notes due 2019
349.5

 
—

9.00% Debentures due 2021
125.0

 
125.0

4.250% Senior notes due 2023
698.7

 
—

7.20% Debentures due 2014-2025
82.5

 
90.0

6.48% Debentures due 2025
149.7

 
149.7

5.750% Senior notes due 2043
498.0

 
—

Other loans and notes
3.8

 
4.1

Total
$
3,154.1

 
$
2,269.3

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

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

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


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

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


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

 

 

 

Currency derivatives
$
0.4

 
$
0.1

 
$
3.1

 
$
4.6

Derivatives not designated as hedges:

 

 

 

Currency derivatives
11.6

 
4.6

 
8.2

 
7.1

Total derivatives
$
12.0

 
$
4.7

 
$
11.3

 
$
11.7

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

Interest rate swaps
—

 
—

 
Interest expense
 
0.2

 
—

Interest rate locks
—

 
—

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

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

 
$
27.8

Total

 
$
12.7

 
$
27.8

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

Interest rate swaps
10.5

 
—

 
Interest expense
 
0.2

 
—

Interest rate locks
—

 
—

 
Interest expense
 
(2.2
)
 
(2.3
)
Total
$
4.7

 
$
(1.9
)
 

 
$
(9.6
)
 
$
(1.2
)

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


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

Total

 
$
(28.3
)
 
$
35.9

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

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

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

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


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

 
$
23.5

 
$
66.3

 
$
73.0

Interest cost
39.9

 
40.9

 
118.2

 
122.3

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

 

 

 

Prior service costs
1.2

 
1.3

 
3.6

 
4.0

Plan net actuarial losses
17.8

 
15.7

 
48.8

 
45.0

Net periodic pension benefit cost
36.9

 
37.5

 
110.8

 
114.8

Net curtailment and settlement losses
—

 
0.4

 
—

 
4.5

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

 
$
37.9

 
$
110.8

 
$
119.3

Amounts recorded in continuing operations
$
33.9

 
$
36.6

 
$
103.2

 
$
112.2

Amounts recorded in discontinued operations
3.0

 
1.3

 
7.6

 
7.1

Total
$
36.9

 
$
37.9

 
$
110.8

 
$
119.3

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

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


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

 
$
1.6

 
$
5.0

 
$
5.5

Interest cost
6.0

 
7.0

 
19.4

 
23.2

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

 
5.3

 
5.4

Net periodic postretirement benefit cost
$
4.8

 
$
6.1

 
$
21.8

 
$
26.6

Amounts recorded in continuing operations
$
3.2

 
$
4.4

 
$
14.0

 
$
17.5

Amounts recorded in discontinued operations
1.6

 
1.7

 
7.8

 
9.1

Total
$
4.8

 
$
6.1

 
$
21.8

 
$
26.6

Note 10 – Fair Value Measurement
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a framework that utilizes the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
•
Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
•
Level 3 – Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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


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

 
$
—

 
$
—

 
$
20.1

Derivative instruments
—

 
12.0

 
—

 
12.0

Total asset recurring fair value measurements
$
20.1

 
$
12.0

 
$
—

 
$
32.1

Liabilities:

 

 

 

Derivative instruments
$
—

 
$
11.3

 
$
—

 
$
11.3

Total liability recurring fair value measurements
$
—

 
$
11.3

 
$
—

 
$
11.3

Financial instruments not carried at fair value
 
 
 
 
 
 
 
Total debt
$
—

 
$
3,778.1

 
$
—

 
$
3,778.1

Total financial instruments not carried at fair value
$
—

 
$
3,778.1

 
$
—

 
$
3,778.1

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

 
$
—

 
$
—

 
$
16.7

Derivative instruments
—

 
4.7

 
—

 
4.7

Total asset recurring fair value measurements
$
16.7

 
$
4.7

 
$
—

 
$
21.4

Liabilities:

 

 

 

Derivative instruments
$
—

 
$
11.7

 
$
—

 
$
11.7

Total liability recurring fair value measurements
$
—

 
$
11.7

 
$
—

 
$
11.7

Financial instruments not carried at fair value
 
 
 
 
 
 
 
Total debt
$
—

 
$
3,663.1

 
$
—

 
$
3,663.1

Total financial instruments not carried at fair value
$
—

 
$
3,663.1

 
$
—

 
$
3,663.1

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

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


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

Shares issued under incentive plans, net
6.9

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

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

 
$
81.5

 
$
7,229.3

Net earnings
571.1

 
29.0

 
600.1

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

 
—

 
18.6

Pension and OPEB adjustments, net of tax
32.0

 
—

 
32.0

Total comprehensive income
619.0

 
26.2

 
645.2

Share-based compensation
53.8

 
—

 
53.8

Dividends declared to noncontrolling interests
—

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

 
(123.0
)
Shares issued under incentive plans, net
192.3

 
—

 
192.3

Repurchase of ordinary shares
(795.2
)
 
—

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

 
$
91.9

 
$
7,186.6


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


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

 
$
88.1

 
$
7,012.4

Net earnings
783.0

 
19.2

 
802.2

Currency translation
58.4

 
(10.3
)
 
48.1

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

 
—

 
5.2

Pension and OPEB adjustments, net of tax
58.3

 
(1.3
)
 
57.0

Total comprehensive income
904.9

 
7.6

 
912.5

Share-based compensation
34.7

 
—

 
34.7

Settlement of Exchangeable Senior Notes
(4.5
)
 
—

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

 
(0.4
)
Dividends declared to noncontrolling interests
—

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

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

 
—

 
3.3

Shares issued under incentive plans, net
57.7

 
—

 
57.7

Repurchase of ordinary shares
(374.9
)
 
—

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

 
$
84.2

 
$
7,530.0

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

 
$
(521.0
)
Other comprehensive income before reclassifications
 
9.4

 
(1.1
)
 
(2.7
)
 
5.6

Amounts reclassified from accumulated other comprehensive income
 
9.6

 
49.8

 
—

 
59.4

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

 
(17.0
)
September 30, 2013
 
$
17.3

 
$
(932.2
)
 
$
441.9

 
$
(473.0
)


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


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

 
$
2.2

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

 
7.6

 
 Cost of goods sold
 
 
2.7

 
9.6

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

 
8.9

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

 
54.1

 
 (a)
 
 
16.2

 
49.8

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

 
33.1

 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
13.5

 
$
42.0

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

 
$
4.2

 
$
17.5

 
$
1.7

RSUs
5.5

 
5.1

 
21.9

 
17.1

PSUs
4.5

 
6.4

 
15.8

 
16.3

Deferred compensation
0.3

 
(0.4
)
 
1.2

 
(0.5
)
Other
0.9

 
0.4

 
1.7

 
1.9

Pre-tax expense
15.5

 
15.7

 
58.1

 
36.5

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

 
$
9.7

 
$
35.9

 
$
22.5


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



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

 
$
16.54

 
1,463,352

 
$
13.67

RSUs
575,176

 
$
52.92

 
636,622

 
$
40.69

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

 
5.1 years

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

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


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

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

 
$
1.4

 
$
23.5

 
$
11.2

Residential Solutions
—

 
—

 
—

 
0.2

Industrial Technologies
0.3

 
0.3

 
5.4

 
7.8

Security Technologies
1.0

 
(0.1
)
 
5.6

 
7.8

Corporate and Other
6.4

 
0.5

 
9.2

 
2.6

Total
$
10.3

 
$
2.1

 
$
43.7

 
$
29.6

Cost of goods sold
$
1.1

 
$
0.7

 
$
15.2

 
$
12.1

Selling and administrative expenses
9.2

 
1.4

 
28.5

 
17.5

Total
$
10.3

 
$
2.1

 
$
43.7

 
$
29.6

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

 
$
—

 
$
2.1

 
$
3.1

 
$
1.9

 
$
11.8

Additions, net of reversals
23.5

 
—

 
5.4

 
5.6

 
9.2

 
43.7

Cash and non-cash uses
(22.9
)
 
—

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

 
—

 
—

 
—

 
(0.1
)
September 30, 2013
$
5.2

 
$
—

 
$
1.6

 
$
5.0

 
$
2.5

 
$
14.3

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

2012
 
2013
 
2012
Interest income
$
3.6

 
$
4.0

 
$
9.6

 
$
12.6

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

 
1.7

 
(1.6
)
 
(4.3
)
Other
4.8

 
13.0

 
6.4

 
17.0

Other, net
$
6.0

 
$
17.4

 
$
(2.7
)
 
$
21.2


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


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

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


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

 
$
—

 
$
—

 
$
—

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

 
—

 
—

 
3.2

Tax benefit (expense)
3.5

 
1.3

 
19.2

 
30.5

Discontinued operations, net of tax
$
(2.5
)
 
$
(12.3
)
 
$
(4.2
)
 
$
(6.7
)
In November 2007, the Company completed the sale of its Bobcat, Utility Equipment and Attachments businesses (collectively, Compact Equipment) to Doosan Infracore for gross proceeds of approximately $4.9 billion, subject to post-closing purchase price adjustments. Compact Equipment manufactured and sold compact equipment, including skid-steer loaders, compact track loaders, mini-excavators and telescopic tool handlers; portable air compressors, generators and light towers; general-purpose light construction equipment; and attachments. During the second quarter of 2012, Doosan Infracore paid the Company a total of $46.5 million to settle outstanding receivables and disputed post-closing matters.
Discontinued operations, net of tax from previously sold businesses is mainly related to postretirement benefits, product liability, worker's compensation, legal costs (mostly asbestos-related), and tax effects of post-closing purchase price adjustments.
Note 17 – Earnings Per Share (EPS)
Basic EPS is calculated by dividing Net earnings attributable to IR-Ireland by the weighted-average number of ordinary shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the denominator of the basic EPS calculation for the effect of all potentially dilutive ordinary shares, which in the Company’s case, includes shares issuable under share-based compensation plans and the effects of the Exchangeable Senior Notes settled in April 2012. The following table summarizes the weighted-average number of ordinary shares outstanding for basic and diluted earnings per share calculations for the three and nine months ended September 30:
 
Three months ended

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

 
307.7

 
295.9

 
305.4

Shares issuable under incentive stock plans
3.9

 
4.3

 
3.9

 
3.5

Exchangeable Senior Notes
—

 
—

 
—

 
4.0

Weighted-average number of diluted shares
295.5

 
312.0

 
299.8

 
312.9

Anti-dilutive shares
1.0

 
2.6

 
1.1

 
5.8


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


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

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

 
$
1,941.7

 
$
5,700.4

 
$
5,570.6

Residential Solutions
609.5

 
558.6

 
1,786.5

 
1,632.7

Industrial Technologies
721.9

 
701.6

 
2,165.1

 
2,180.6

Security Technologies
392.3

 
390.9

 
1,142.5

 
1,180.8

Total
$
3,749.5

 
$
3,592.8

 
$
10,794.5

 
$
10,564.7

Segment operating income
 
 
 
 
 
 
 
Climate Solutions (a)
$
279.8

 
$
247.0

 
$
632.0

 
$
579.6

Residential Solutions
66.0

 
45.4

 
152.6

 
86.3

Industrial Technologies
116.2

 
106.6

 
340.8

 
332.5

Security Technologies (b) (c)
103.8

 
83.9

 
248.8

 
236.2

Total
$
565.8

 
$
482.9

 
$
1,374.2

 
$
1,234.6

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