FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-985
INGERSOLL-RAND COMPANY
Exact name of registrant as specified in its charter
New Jersey 13-5156640
State of incorporation I.R.S. Employer Identification No.
Woodcliff Lake, New Jersey 07675
Address of principal executive offices Zip Code
(201) 573-0123
Telephone number of principal executive offices
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 . . .
The number of shares of common stock outstanding as of October 31,
1998 was 164,425,096.
INGERSOLL-RAND COMPANY
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet at September 30, 1998
and December 31, 1997
Condensed Consolidated Income Statement for the three and
nine months ended September 30, 1998 and 1997
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II.OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
INGERSOLL-RAND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
Current assets:
Cash and cash equivalents $ 97.2 $ 104.9
Marketable securities 5.7 6.9
Accounts and notes receivable, net of
allowance for doubtful accounts 1,237.8 1,281.5
Inventories 959.1 854.8
Deferred taxes and prepaid expenses 287.4 296.8
Total current assets 2,587.2 2,544.9
Investments and advances:
Dresser-Rand Company 141.0 115.0
Partially-owned equity companies 182.0 213.0
323.0 328.0
Property, plant and equipment, at cost 2,416.4 2,275.2
Less - accumulated depreciation 1,097.4 992.0
Net property, plant and equipment 1,319.0 1,283.2
Intangible assets, net 3,802.7 3,833.0
Deferred income taxes 198.8 214.9
Other assets 220.1 211.6
Total assets $8,450.8 $8,415.6
LIABILITIES AND EQUITY
Current liabilities:
Loans payable $ 256.3 $ 925.1
Accounts payable and accruals 1,565.4 1,402.7
Total current liabilities 1,821.7 2,327.8
Long-term debt 2,426.7 2,528.0
Postemployment liabilities 960.2 937.1
Minority interests 134.0 127.9
Other liabilities 152.1 153.4
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the company 402.5 _
Shareholders' equity:
Common stock 337.0 334.8
Other shareholders' equity 2,383.0 2,163.0
Accumulated other comprehensive income (166.4) (156.4)
Total shareholders' equity 2,553.6 2,341.4
Total liabilities and equity $8,450.8 $8,415.6
See accompanying notes to condensed consolidated financial statements.
INGERSOLL-RAND COMPANY
CONDENSED CONSOLIDATED INCOME STATEMENT
(in millions except per share figures)
<TABLE>
<S> <S>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $2,020.0 $1,694.0 $6,209.1 $5,170.8
Cost of goods sold 1,484.1 1,250.8 4,564.9 3,834.7
Administrative, selling and service
engineering expenses 285.7 263.5 894.1 780.2
Operating income 250.2 179.7 750.1 555.9
Interest expense (58.4) (26.1) (185.6) (83.1)
Other income (expense), net (10.3) (0.5) (9.6) (7.1)
Dresser-Rand income 9.6 8.0 20.6 17.5
Minority interests (5.9) (4.5) (18.3) (15.1)
Earnings before income taxes 185.2 156.6 557.2 468.1
Provision for income taxes 65.8 59.5 197.8 181.6
Net earnings $ 119.4 $ 97.1 $ 359.4 $ 286.5
Basic earnings per common share $ 0.73 $ 0.60 $ 2.19 $ 1.76
Diluted earnings per common share $ 0.72 $ 0.58 $ 2.17 $ 1.74
Dividends per common share $ 0.150 $ 0.150 $ 0.450 $ 0.423
See accompanying notes to condensed consolidated financial statements.
</TABLE>
INGERSOLL-RAND COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Nine months ended
September 30,
1998 1997
Cash flows from operating activities:
Net earnings $ 359.4 $ 286.5
Adjustments to arrive at net cash
provided by operating activities:
Depreciation and amortization 213.9 149.8
Gain on sale of businesses (6.6) (3.9)
Gain on sale of property, plant and equipment (7.5) (2.3)
Net equity earnings/loss, net of dividends (26.7) (24.5)
Minority interest, net of dividends 16.7 15.2
Deferred income taxes 10.1 2.7
Other items 4.3 21.8
Changes in other assets and liabilities, net 79.4 (44.7)
Net cash provided by operating activities 643.0 400.6
Cash flows from investing activities:
Capital expenditures (161.9) (115.5)
Proceeds from sales of property, plant
and equipment 21.9 14.9
Acquisitions, net of cash (53.7) (328.9)
Proceeds from business dispositions 58.0 249.5
Increase in marketable securities 1.4 (2.0)
Cash advances (to) from equity companies 2.0 16.0
Net cash used in investing activities (132.3) (166.0)
Cash flows from financing activities:
Decrease in short-term borrowings (624.3) (50.6)
Proceeds from long-term debt 0.1 2.2
Payments of long-term debt (145.3) (133.7)
Net change in debt (769.5) (182.1)
Issuance of equity-linked securities 402.5 -
Issuance costs and fees (12.8) -
Net proceeds from issuance of
equity-linked securities 389.7 -
Purchase of treasury stock (93.7) (20.2)
Dividends paid (73.7) (69.0)
Proceeds from exercise of stock options 26.4 39.9
Net cash used in financing activities (520.8) (231.4)
Effect of exchange rate changes
on cash and cash equivalents 2.4 20.0
Net(decrease)increase in cash and cash
equivalents (7.7) 23.2
Cash and cash equivalents - beginning of period 104.9 184.1
Cash and cash equivalents - end of period $ 97.2 $ 207.3
See accompanying notes to condensed consolidated financial statements.
INGERSOLL-RAND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments (including
normal recurring accruals) necessary to present fairly the
consolidated unaudited financial position and results of operations
for the three and nine months ended September 30, 1998 and 1997.
Certain reclassifications have been made to prior year amounts to
conform to the current presentation.
NOTE 2 - In the first quarter of 1998, the company acquired for
approximately $15.4 million in cash, substantially all the assets of
Johnstone Pump Company (Johnstone). Johnstone manufactures
industrial piston pumps, automated dispensing systems and related
products for use primarily in the automotive industry. Johnstone's
results have been reported as part of the Production Equipment Group.
Also in the first quarter of 1998, the company acquired for
approximately $16 million in cash, the door hardware technology and
intellectual property relating to residential door locksets from the
Master Lock unit of Fortune Brands, Inc. The Master Lock transaction
covers patents and certain manufacturing assets used to produce
residential locks, excluding padlocks. The door lockset technology
has been incorporated into the Architectural Hardware Group. In the
third quarter of 1998, the company acquired full ownership of GHH
- -RAND, a manufacturer of air ends for air compressors. The company
previously owned 50% of GHH-RAND. In addition, during the first nine
months of 1998, the company purchased several smaller businesses.
These transactions have been accounted for as purchases, with the
results included since their respective acquisition dates. Pro forma
results, assuming the acquisitions had occurred at the beginning of
the year, would not have been significantly different than those
reported.
NOTE 3 - In the first quarter of 1998, the company completed the sale
of Ing. G. Klemm Bohrtechnik GmbH, which had been reported as part of
the Construction and Mining Group. Also in the first nine months of
the year, the company sold certain assets of Ingersoll-Rand
Architectural Hardware Group Limited (formerly Newman Tonks Group
Limited). Sales proceeds approximated the book value of these assets.
The assets sold were classified as assets held for sale at December
31, 1997. In the third quarter of 1998, the company sold the Spra-
Coupe product line, which was reported as part of the Melroe Company.
The sale price of approximately $35 million resulted in a $9 million
gain.
NOTE 4 - On October 31, 1997, the company acquired Thermo King
Corporation (Thermo King) for approximately $2.56 billion in cash.
Thermo King is the world leader in the transport temperature control
business for trailers, truck bodies, seagoing containers, buses and
light-rail cars. This transaction has been accounted for as a
purchase, with the results included since its acquisition date. The
following unaudited pro forma consolidated results of operations for
the nine months ended September 30, 1997, reflect the acquisition as
though it occurred at the beginning of the period after adjustments
for the impact of interest on acquisition debt, and depreciation and
amortization of assets, including goodwill, to reflect the purchase
price allocation (in millions except per share amounts):
For the nine months ended September 30 1997
Sales $5,939.2
Net earnings 281.6
Basic earnings per share $ 1.73
Diluted earnings per share 1.71
The above pro forma results are not necessarily indicative of what
the actual results would have been had the acquisition occurred at
the beginning of the period. Further, the pro forma results are not
intended to be a projection of future results of the combined
companies.
NOTE 5 - On April 3, 1997, the company completed the acquisition of
Newman Tonks Group PLC (Newman Tonks), for approximately $370
million. Newman Tonks is a leading manufacturer, specifier and
supplier of branded architectural hardware products. This
transaction has been accounted for as a purchase, with the results
included since its acquisition date. Pro forma results assuming
Newman Tonks had been acquired at the beginning of the year would
not have been significantly different than those reported.
NOTE 6 - On February 14, 1997, the company sold the Clark-Hurth
Components Group (Clark-Hurth) for approximately $241.5 million of
net cash. Clark-Hurth results were reported as part of the
Engineered Equipment Segment. This group's 1997 results inclusive
of the sale transaction, produced operating income for the first
quarter of 1997 of approximately $2.7 million, but on an after-tax
basis, reduced net earnings by approximately $3.6 million.
NOTE 7 - Inventories of appropriate domestic manufactured standard
products are valued on the last-in, first-out (LIFO) method and all
other inventories are valued using the first-in, first-out (FIFO)
method. The composition of inventories for the balance sheets
presented were as follows (in millions):
September 30, December 31,
1998 1997
Raw materials and supplies $ 194.3 $ 174.1
Work-in-process 283.0 218.6
Finished goods 637.4 613.8
1,114.7 1,006.5
Less - LIFO reserve 155.6 151.7
Total $ 959.1 $ 854.8
Work-in-process inventories are stated after deducting customer
progress payments of $20.0 million at September 30, 1998 and
$17.8 million at December 31, 1997.
NOTE 8 - The company's investment in the Dresser-Rand partnership
at September 30, 1998 and December 31, 1997, was $170.3 million
and $154.7 million, respectively. The company owed Dresser-Rand
$29.3 million and $39.7 million at September 30, 1998 and
December 31, 1997, respectively. Net sales of Dresser-Rand were
$873.8 million for the nine months ended September 30, 1998 and
$861.4 million for the nine months ended September 30, 1997; and
gross profit was $168.9 million and $164.7 million, respectively.
Dresser-Rand's net income for the nine months ended September 30,
1998 was $42.0 million, as compared to $35.7 million for the nine
months ended September 30, 1997.
The summarized financial position of Dresser-Rand was as follows
(in millions):
September 30, December 31,
1998 1997
Current assets $513.4 $488.4
Property, plant and
equipment, net 226.1 248.2
Other assets and investments 47.1 54.1
786.6 790.7
Deduct:
Current liabilities 272.7 368.4
Noncurrent liabilities 167.0 195.8
439.7 564.2
Net partners' equity
and advances $346.9 $226.5
NOTE 9 - In March 1998, the company, together with Ingersoll
Financing I, a Delaware statutory business trust of the company
(Finance Trust), issued an aggregate of (a) 16,100,000 equity-
linked securities, and (b) 1,610,000 Finance Trust 6.22% capital
securities, each with a $25 stated liquidation amount (the
capital securities). The equity-linked securities consisted of
(a) 14,490,000 income equity-linked securities (income
securities), and (b) 1,610,000 growth equity-linked securities
(growth securities).
Each equity-linked security consists of a unit comprised of (a)
a contract to purchase from the company no later than May 16,
2001, a number of shares of the company's common stock
determined in accordance with a specified formula and to receive
an annual contract adjustment payment until May 15, 2001 of
0.53%, (in the case of an income security), or 0.78% (in the
case of a growth security), and (b) either beneficial ownership
of a capital security (in the case of an income security), or a
1/40 undivided beneficial interest in a zero coupon U.S.
Treasury Security maturing May 15, 2001 (in the case
of a growth security). Under the terms of the stock purchase
contracts, the company will issue between 6.9 million and 8.3
million common shares by May 16, 2001. The capital securities
associated with the income securities and the U.S. Treasury
Securities associated with the growth securities have been
pledged as collateral to secure the holders' obligations in
respect of the common stock purchase contracts.
The capital securities were issued by the Finance Trust and are
entitled to a distribution rate of 6.22% per annum of their $25
stated liquidation amount. The Finance Trust utilized the proceeds
from the issuance of the equity-linked and capital securities to
purchase $402.5 million of the company's 6.22% Debentures due
May 16, 2003. The Debentures are the sole asset of the Finance
Trust. The interest rate on the 6.22% Debentures and the
distribution rate on the capital securities and common securities
of the Finance Trust are to be reset, subject to certain limitations,
effective May 16, 2001.
The company has recorded the present value of the contract
adjustment payments, totalling $6.4 million, as a liability and
a reduction of shareholders' equity. The liability will be
reduced as the contract adjustment payments are made. The
company has the right to defer the contract adjustment payments
and the payment of interest on the 6.22% Debentures, but any
such election will subject the company to restrictions on the
payment of dividends on, and redemption of, its outstanding
shares of common stock, and on the payment of interest on, or
redemption of, debt securities of the company junior in rank to
the 6.22% Debentures.
The company incurred costs of approximately $12.8 million in
connection with the issuance of the equity-linked securities and the
capital securities. The portion of such costs which relate to the
issuance of the stock purchase contracts has been recorded as a
reduction of shareholders'equity.
NOTE 10 - On August 6, 1997, the board of directors of the company
declared a three-for-two stock split in the form of a stock dividend.
The additional shares were distributed on September 2, 1997 to
shareholders of record on August 19, 1997. Par value per share of
common stock remained at $2.00 per share. The stock split has been
reflected in the accompanying financial statements and all
accompanying per share information for all periods presented has
been restated to reflect the stock split.
NOTE 11 - The company adopted Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" effective January 1, 1998. SFAS No.
128 replaced the presentation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Information on
basic and diluted earnings per share is as follows (in millions
except per share figures):
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Net earnings $119.4 $97.1 $359.4 $286.5
Average number of basic
shares 163.6 163.9 163.8 163.1
Shares issuable assuming
exercise under incentive
stock plans 1.6 1.7 1.9 1.5
Average number of diluted
shares 165.2 165.6 165.7 164.6
Basic earnings per share $0.73 $0.60 $2.19 $1.76
Diluted earnings per share $0.72 $0.58 $2.17 $1.74
All earnings per share amounts for all periods have been restated
to conform to the SFAS No. 128 requirements. The adoption did not
have a material effect on the calculation of earnings per
share.
NOTE 12 - The company adopted SFAS No. 130 "Reporting Comprehensive
Income" effective January 1, 1998. The statement requires minimum
pension liability adjustments, unrealized gains or losses on
available-for-sale securities and foreign currency translation
adjustments to be included in other comprehensive income.
The components of comprehensive income are as follows (in millions):
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Net income $119.4 $ 97.1 $359.4 $286.5
Other comprehensive income:
Foreign currency
equity adjustments 17.8 (12.8) (10.0) (64.7)
Comprehensive income $137.2 $ 84.3 $349.4 $221.8
NOTE 13 - SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" requires companies to report financial and
descriptive information about its operating segments in financial
statements for interim and annual periods. The statement also
requires additional disclosures regarding products and services,
geographic areas of operation, and major customers. SFAS No. 131
will be effective for the year ending December 31, 1998. The
company will comply as required.
NOTE 14 - SFAS No. 132 "Employers' Disclosures about Pensions and
Other Postretirement Benefits - an amendment of FASB Statement Nos.
87, 88, and 106" requires revised disclosures about pension and
other postretirement benefit plans. The company will comply with
the disclosure requirements of this pronouncement for the year
ending December 31, 1998.
NOTE 15 - SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value.
The company will adopt SFAS No. 133 by January 1, 2000, and is
currently evaluating the impact this statement may have on the
company's financial statements.
INGERSOLL-RAND COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The company's results for the third quarter of the year
established a new record. Sales totalled $2.0 billion, operating
income was $250.3 million and net earnings reached $119.4 million
(72 cents per diluted share). For the third quarter of 1997, the
company reported sales of $1.7 billion, operating income of $179.7
million and net earnings of $97.1 million (58 cents per diluted
share).
The third quarter of 1998 includes the results from the October
31, 1997 acquisition of Thermo King Corporation (Thermo King).
Thermo King's operations for the third quarter of the year
generated sales of $291.7 million, which produced $36.3 million of
operating income after the effect of estimated purchase accounting
adjustments. Thermo King's results for the third quarter of the
year were adversely affected by Hurricane Georges, which forced
closure of the plants in Puerto Rico for approximately ten days
due to area flooding and lack of electricity. The closure reduced
the group's operating income by an estimated $4 million, which
should be recouped during the fourth quarter. After the allocation
of approximately $37 million of acquisition interest costs and
related income tax benefits, Thermo King's results for the third
quarter of the year were essentially at the breakeven level.
A comparison of key income statement amounts between the third
quarters, is as follows:
o Net sales for the third quarter of 1998 totalled $2.0 billion,
an increase of 19 percent over the amount reported for the
three months ended September 30, 1997. After excluding Thermo
King's third quarter sales, the increase was 2.0 percent over
last year's third quarter. Currency negatively impacted the
year-to-year comparison by approximately one percent.
o The ratio of cost of goods sold to sales for the third quarter
of 1998 improved to 73.5 percent from the comparable third
quarter ratio of 73.8 percent in 1997. Excluding Thermo King,
the overall ratio improved to 72.8 percent from 73.8 percent
over 1997's third quarter ratio.
o The company did not have any partial liquidations of LIFO
(last-in, first-out) inventories during the third quarters of
either 1998 or 1997.
o The ratio of administrative, selling and service engineering
expenses to sales was 14.1 percent for the three months ended
September 30, 1998, as compared to 15.6 percent for the third
quarter of 1997. Excluding Thermo King's results from the third
quarter of 1998, the ratio of administrative, selling and service
engineering expenses to sales reflected an improvement over last
year's third quarter.
o Operating income for the third quarter of 1998 totalled $250.3
million, as compared to $179.7 million for last year's third
quarter. The ratio of operating income to sales in 1998 was
12.4 percent, as compared to 10.6 percent for the three months
ended September 30, 1997. Excluding the results of Thermo King,
adjusted third quarter 1998 operating income reflected a 19-
percent improvement over the amount reported for the three
months ended September 30, 1997.
o Other income (expense), net, aggregated $10.3 million of net
expense for the three months ended September 30, 1998, as
compared to $0.5 million of expense for the third quarter of
1997. This $9.8 million unfavorable change is the net effect
of the following:
(i) a $13.2 million unfavorable change in the company's results for
foreign currency activity;
(ii) reductions of $2.2 million in equity earnings from the company's
partially-owned affiliates, and
(iii) the benefit of higher third quarter gains on the sales of
excess assets and lower costs of a miscellaneous nature.
o The company's profits from its 49-percent interest in Dresser-
Rand Company totalled $9.6 million for the third quarter of
1998, reflecting a 20 percent improvement over the $8.0 million
reported for the three months ended September 30, 1997. The
increase is attributed to operational efficiencies derived from
prior initiatives and cost-containment programs.
o The company's charge for minority interests totalled $5.9
million for the third quarter of the year versus $4.5 million
in 1997. This change is attributed to a stronger performance
in net earnings by these consolidated entities, principally
Ingersoll-Dresser Pump Company (IDP).
o Interest expense for the third quarter of 1998 was $58.4
million, and included approximately $37.5 million attributable
to the Thermo King acquisition.
o The company's effective tax rate for the third quarter of the
year was 35.5 percent. Last year's third quarter tax rate was
38.0 percent. The company's effective tax rate for the full
year of 1997 was 38.0 percent. The current year's estimated
effective tax rate of 35.5 percent reflects benefits associated
with Thermo King's operations.
The consolidated results for the third quarter of the year
benefitted from the combination of business improvements in a
number of the company's domestic and foreign markets and a
continued emphasis on the company's productivity-improvement and
sourcing programs. Incoming orders for the third quarter of the
year totalled $2.0 billion, which was an increase of 14.5 percent
over last year's third quarter total. Bookings excluding the
effect of the Thermo King acquisition, equalled last year's level
despite order reductions due to the General Motors strike, a
reduction in orders from our Asian markets and a one-percent
unfavorable currency impact. The company's backlog of orders at
September 30, 1998, believed by it to be firm, was $1.6 billion,
which was approximately 6.2 percent higher than the backlog at
December 31, 1997. The company estimates that approximately 90
percent of the backlog will be shipped during the next twelve
months.
A comparison of key income statement amounts between the first
nine months of both years is as follows:
o Net sales for the first nine months of 1998 were $1.0 billion
above last year's first nine months. Excluding noncomparable
units from both periods (Thermo King, Clark Hurth Components
Group and Newman Tonks Group Limited), adjusted sales for the
first nine months of 1998 reflected a modest increase over
last year's adjusted first nine months total.
o The ratio of cost of goods sold to sales for the first nine
months of 1998 improved to 73.5 percent from 74.2 percent
reported in the same period of 1997. Excluding noncomparable
items from both periods, the adjusted ratio of cost of goods
sold to sales reflected a 1.1 percent improvement in 1998, when
compared to 1997.
o The company did not have any partial liquidations of LIFO (last
in, first out) inventories during the first nine months of
1998. However, partial liquidations of LIFO inventories during
the first nine months of 1997 lowered cost of goods sold by
$1.4 million.
o The ratio of administrative, selling and service engineering
expenses to sales was 14.4 percent for the first nine months of
1998, as compared to 15.1 percent for the first nine months of
1997. This improvement is primarily attributed to the
inclusion of the results of Thermo King, which traditionally
has had a lower ratio of selling and administrative expenses to
sales than the company's historical lines.
o Operating income for the first nine months of 1998 totalled
$750.2 million and reflects an increase of $194.3 million (or
35.0 percent) over the amount reported for last year's first
nine months. The ratio of operating income to sales in 1998
was 12.1 percent, as compared to 10.7 percent for the first
nine months of the prior year. After adjusting both periods
for noncomparable items, the adjusted 1998 operating income
margin also reflects a marked increase over the adjusted 1997
margin. This improvement is the effect of a strong U.S.
economy and the company's aggressive productivity-improvement
and sourcing programs.
o Other income (expense), net, aggregated $9.6 million of net
expense for the nine months ended September 30, 1998, as
compared to $7.1 million of net expense in the first nine
months of 1997. This increased expense is attributed to
unfavorable movement in foreign currency activity, lower
earnings from partially-owned equity companies, offset by
gains from the sale of surplus assets and a reduction in
miscellaneous expenses during the first nine months of 1998
as compared to the first nine months of 1997.
o The company's pretax profits for its 49 percent interest in
Dresser-Rand Company totalled $20.6 million for the first nine
months of 1998, reflecting a 17.7 percent improvement over the
$17.5 million reported for the first nine months of 1997.
o The company's charge for minority interests totalled $18.3
million for the first nine months of 1998 versus $15.1 million
for the comparable 1997 period. Increased earnings from IDP
accounted for approximately $2.7 million of this change with
the balance relating to the company's operations in India and
China.
o Interest expense for the first nine months of the year totalled
$185.5 million, as compared to $83.1 million for the first nine
months of last year. Interest expense related to the Thermo King
acquisition was approximately $115.7 million.
o The company's effective tax rate for the first nine months of
1998 was 35.5 percent. The effective tax rate for the first
nine months of 1997 was 38.8 percent, but was 38.0 percent for
the full year. The effective tax rate for last year's first
quarter included a $7.2 million charge relating to the 1997
sale of Clark-Hurth Components Group. The projected effective
tax rate for 1998 is 35.5 percent and reflects benefits
associated with Thermo King's operations.
Liquidity and Capital Resources
In the first quarter of 1998, the company completed the financing
for the acquisition of Thermo King with the issuance of $402.5
million of equity-linked securities (Note 9). The net proceeds from
this financing were used to reduce a portion of the company's short
term borrowings, which were originally issued to satisfy a portion
of the cash requirements for the October 31, 1997 acquisition of
Thermo King. As a result of the issuance of the equity-linked
securities and a strong cash flow performance from the company's
operations, working capital increased by $548.4 million to $765.5
million at September 30, 1998, from the December 31, 1997 balance of
$217.1 million. The current ratio increased to 1.4 to 1.0 at the
end of the first nine months from 1.1 to 1.0 at the end of 1997.
The company's debt-to-total capital ratio at September 30, 1998
totalled 46 percent, which reflects a significant improvement from
the 58 percent reported at December 31, 1997.
The company's cash and cash equivalents totalled $97.2 million
at September 30, 1998, a decrease from $104.9 million at December
31, 1997. In evaluating the net change in cash and cash
equivalents, cash flows from operating, investing and financing
activities, and the effect of exchange rate movements must be
considered. Cash flows from operating activities provided $643.0
million, investing activities used $132.3 million and financing
activities used $520.8 million. Exchange rate changes during the
first nine months of 1998 increased cash and cash equivalents by
$2.4 million.
Receivables totalled $1.2 billion at September 30, 1998, which
represents a $43.7 million decrease over the amount reported at
December 31, 1997. This decrease was the net effect of
dispositions and aggressive collection efforts offset by
acquisitions and currency translation.
Inventories totalled $959.1 million at September 30, 1998, which
represents an increase of $104.3 million over the year-end balance
of $854.8 million. The net increase is the result of building
inventory to fulfill orders in the fourth quarter.
Intangible assets decreased by approximately $30.3 million
during the first nine months of 1998. Intangibles were impacted
mainly by amortization, which was offset by currency translation
and increased goodwill and other intangibles due to 1998
acquisitions.
Long term debt, including current maturities, at September 30,
1998, totalled $2.5 billion, which is approximately $200 million
lower than the balance at December 31, 1997. The company's debt-to-
total capital ratio was 46 percent at September 30, 1998, which
represented a significant reduction from December 31, 1997,
principally due to the issuance of $402.5 million of equity-linked
securities and debt repayments.
During the first nine months of 1998, foreign currency
translation adjustments resulted in a net decrease of approximately
$10.0 million in shareholders' equity, caused by the strengthening
of the U.S. dollar against other currencies. Currency changes in
Australia, Canada, India, Japan, and New Zealand accounted for
almost all of this change.
Year 2000
The company has in place a year 2000 compliance program to
address the issues raised by computer date programs using the last
two digits of a year. Pursuant to its year 2000 program, the
company reviewed its computer information systems, computer
hardware and embedded technology used in the company's products and
processes. This review was designed to identify which computer
systems and embedded technology might fail to correctly process the
year 2000. Based upon this review, which is now complete, the
company is replacing, modifying and/or upgrading certain computer
systems and embedded technology with the objective being that no
significant systems or devices will malfunction as the result of
failing to correctly process the year 2000. The company, through
the use of both internal resources and outside consultants, is
actively engaged in this replacement, modification and upgrading
and expects to substantially complete its remediation program and
testing by the end of 1998. Based upon a review of its products,
the company has determined that all products currently being
produced by it are year 2000 compliant.
The total estimated cost of the year 2000 compliance program
is approximately $60 million. Management estimates that as of
September 30, 1998, total cost incurred to date has been
approximately $45 million. Although the company has incurred
expenses prior to 1997, these costs were not separately identified.
The company will continue to fund the cost of the year 2000
compliance program through operating cash flow.
In addition to its internal review process, the company has
contacted suppliers and distributors on the year 2000 issue to
minimize problems in its supply and distribution chains. Most
major suppliers have given assurances that their ability to supply
the company will not be affected by the year 2000 issue; however,
the company cannot assure timely compliance of third-parties and
may be adversely affected by failure of a significant third party
to become year 2000 compliant.
The company believes that the costs to address the issues
raised by the year 2000 problem will not have a material impact on
the company's financial condition, results of operations, liquidity
or cash flows for any year. The schedule for successful completion
of the year 2000 program and the estimated costs are based upon
certain assumptions by management on future events, including the
continued availability of qualified resources to implement the
program and current costs for such resources.
If the company fails to successfully complete a significant
portion of its year 2000 compliance program, such failure may have
a material adverse impact on the company's financial condition.
Currently management does not consider the possibility of such a
failure to be reasonably likely; however, in the event management's
assessment changes an appropriate contingency plan will be
developed.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of
the European Union are scheduled to establish fixed conversion
rates between their existing sovereign currencies and the euro.
The participating countries have agreed to adopt the euro as their
common legal currency on that date.
The company has begun to identify and ensure that all euro
conversion compliance issues are addressed. At this time, the
company cannot predict the impact of the euro conversion on the
company, because of the numerous uncertainties associated with the
euro conversion compliance, such as the effect on the company of
noncompliance by third parties.
Environmental Matters
The company has been and continues to be dedicated to an
environmental program to reduce the utilization and generation of
hazardous materials during the manufacturing process and to
remediate identified environmental concerns. As to the latter, the
company currently is engaged in site investigations and remedial
activities to address environmental cleanup from past operations at
current and former manufacturing facilities.
The company is a party to environmental lawsuits and claims,
and has received notices of potential violations of environmental
laws and regulations from the Environmental Protection Agency and
similar state authorities. It is identified as a potentially
responsible party (PRP) for cleanup costs associated with off-site
waste disposal at approximately 36 federal Superfund and state
remediation sites, excluding sites as to which the company's
records disclose no involvement or as to which the company's
liability has been fully determined. For all sites, there are
other PRPs and in most instances, the company's site involvement is
minimal. In estimating its liability, the company has not assumed
that it will bear the entire cost of remediation of any site to the
exclusion of other PRPs who may be jointly and severally liable.
The ability of other PRPs to participate has been taken into
account, based generally on the parties' financial condition and
probable contributions on a per site basis. Additional lawsuits
and claims involving environmental matters are likely to arise from
time to time in the future.
Although uncertainties regarding environmental technology, state
and federal laws and regulations and individual site information
make estimating the liability difficult, management believes that
the total liability for the cost of remediation and environmental
lawsuits and claims will not have a material effect on the
financial condition, results of operations, liquidity or cash flows
of the company for any year. It should be noted that when the
company estimates its liability for environmental matters, such
estimates are based on current technologies, and the company does
not discount its liability or assume any insurance recoveries.
Acquisitions
In the first quarter of 1998, the company acquired for
approximately $15.4 million in cash, substantially all of the
assets of Johnstone Pump Company (Johnstone). Johnstone
manufactures industrial piston pumps, automated dispensing systems
and related products for use primarily in the automotive industry.
Also in the first quarter of 1998, the company acquired for
approximately $16 million in cash, the door hardware technology and
intellectual property relating to residential door locksets from
the Master Lock unit of Fortune Brands, Inc. The Master Lock
transaction covers patents and some manufacturing assets used to
produce residential locks, excluding padlocks. In the third
quarter of 1998, the company acquired full ownership of GHH-RAND,
a manufacturer of air ends for air compressors. The company
previously owned 50% of GHH-RAND.
On October 31, 1997, the company acquired Thermo King for
approximately $2.56 billion in cash. Thermo King is the world
leader in the transport temperature control business for trailers,
truck bodies, seagoing containers, buses and light-rail cars.
On April 3, 1997, the company completed the acquisition of
Newman Tonks Group PLC, a producer of architectural hardware, for
approximately $370 million. Newman Tonks Group PLC is a leading
manufacturer, specifier and supplier of branded architectural
hardware products and is based in Birmingham, England.
Dispositions
In the first quarter of 1998, the company completed the sale of
Ing. G. Klemm Bohrtechnik GmbH, which had been reported as part of
the Construction and Mining Group. Also in the first nine months
of 1998, the company sold certain assets of Ingersoll-Rand
Architectural Hardware Group Limited (formerly Newman Tonks Group
Limited). Sales proceeds approximated the book value of these assets.
The assets sold were classified as assets held for sale at December
31, 1997. In the third quarter of 1998 the company sold the Spra-
Coupe product line which was reported as part of the Melroe Company.
On February 14, 1997, the company sold the Clark-Hurth
Components Group for approximately $241.5 million of net cash.
Clark-Hurth Components Group's results were reported as part of the
Engineered Equipment Segment. This group's 1997 results inclusive
of the sale transaction, produced operating income for the first
quarter of $2.7 million, but on an after-tax basis, reduced net
earnings by approximately $3.6 million.
Third-quarter Business Segment Review
The Standard Machinery Segment reported sales of $790.4 million
during the third quarter of 1998, which represents a 3.6-percent
increase from the $762.8 million for the same quarter of last year.
Operating income for the quarter was $108.1 million and represents
an impressive 21.1-percent improvement over the $89.3 million
reported for the three months ended September 30, 1997. For the
first nine months of 1998, the segment's net sales totalled
$2,458.9 million, which was 5.3 percent above the $2,334.8 million
reported for the comparable 1997 period. Operating income for the
first nine months of the year totalled $333.7 million, which
represents an improvement of 17.3 percent over the $284.6 million
reported for the first nine months of 1997. All of the groups
within the segment reported improvements in both operating income
and operating income margins versus 1997's third quarter, with the
exception of the Air Compressor Group due to the softness in Asian
markets.
The Engineered Equipment Segment is comprised solely of IDP
since the February 14, 1997 sale of the Clark-Hurth Components
Group. IDP's sales for the third quarter of the year totalled
$217.8 million which reflects a 9.6 percent increase over last
year's third quarter level of $198.8 million. Operating income for
the quarter totalled $11.8 million, which reflects a 28.3 percent
improvement over last year's $9.2 million. For the first nine
months of 1998, IDP reported sales of $639.8 million, which was up
slightly from 1997's first nine months total of $613.3 million.
Operating income for the first nine months of the year was $37.4
million, reflecting a 13.7-percent improvement over the $32.9
million reported for the first three quarters of 1997. IDP's
results for both the third quarter and first nine months of the
year reflects the benefits of improving markets and the effects of
the actions taken late last year.
The Bearings, Locks and Tools Segment reported sales of $720.1
million for the three months ended September 30, 1998, which
reflects a modest reduction from last year's third-quarter total of
$732.4 million. However, operating income was $104.9 million and
reflects an impressive 12.9-percent improvement over 1997's third
quarter level of $92.9 million. For the first nine months of 1998,
the segment reported net sales of $2.2 billion, which reflects a
modest improvement over the amount reported in the comparable
period of 1997. Operating income for the first nine months of 1998
totalled $296.9 million which was $25.5 million (or 9.4 percent),
higher than the $271.4 million reported for the nine months ended
September 30, 1997.
The Bearings and Components Group's sales in the third quarter
of 1998 were approximately 4.5 percent lower than the amount
reported for last year's third quarter. However, operating income
for the quarter reflected a modest increase over 1997's third
quarter, despite the effect of the General Motors strike. Sales
and operating income of the Bearings and Components Group for the
nine months ended September 30, 1998 reflected a reduction of 3.9
percent and 7.1 percent, respectively, from last year's levels.
The Architectural Hardware Group reported a 9.6-percent increase
in its quarterly sales comparison and a 27.2-percent improvement in
operating income from 1997's third quarter. Sales and operating
income for the nine months ended September 30, 1998 improved by
17.0 percent and 32.0 percent, respectively, from the first nine
months of 1997. This marked increase was attributed to the
benefits derived from aggressive productivity-improvement and
sourcing programs.
The Production Equipment Group's sales and operating income for
the third quarter of 1998 decreased 14.9 percent and 11.2 percent
respectively, below the amounts reported for the three months ended
September 30, 1997. Sales and operating income for the nine months
ended September 30, 1998 reflected a reduction of approximately
10.2 percent and 13.3 percent, respectively, from the amount
reported for the first nine months of 1997. The shortfall in the
Production Equipment Group's results for the third quarter and
first nine months was attributable principally to decreased sales
and operating performance at the Automated Production Systems
Division.
On October 31, 1997, the company acquired Thermo King, the world
leader in the transport temperature control market. For the third
quarter of 1998, Thermo King reported sales of $291.7 million and
generated $36.3 million of operating income, after the effect of
estimated purchase accounting adjustments. After the allocation of
acquisition interest costs, Thermo King results were essentially
breakeven for the third quarter of the year. For the first nine
months of 1998, Thermo King reported sales of $898.0 million which
generated $119.6 million of operating income. Thermo King's
performance remains strong despite the impact of lost production at
the plants in Puerto Rico due to Hurricane Georges. The company
believes that its results will continue to be accretive to earnings
for the balance of the year.
Forward-Looking Statements
Information provided by the company in reports such as this
report on Form 10-Q, in press releases and in statements made by
employees in oral discussions may constitute or contain "forward-
looking statements" as that term is defined in the Private
Securities Litigation Reform Act of 1995 or by the Securities and
Exchange Commission in its rules, regulations and releases. Forward-
looking statements represent the company's expectations concerning
future events and, by their nature, involve risk and uncertainty.
The company cautions investors that forward-looking statements
are not guarantees of future performance. A variety of factors
could cause business conditions and actual results to differ
materially from expected results contained in forward-looking
statements. The company includes among those factors the
following: changes in the rate of economic growth in the United
States and in other major international economies; impacts of
unusual items resulting from ongoing evaluations of organizational
structures, business strategies and acquisitions and dispositions;
significant changes in trade, monetary and fiscal policies
worldwide; currency fluctuations among the U.S. dollar and other
currencies; demand for company products; distributor inventory
levels; performance issues with key suppliers and subcontractors;
impact of the year 2000; failure to achieve the company's
productivity targets; costs and effects of unanticipated legal and
administrative proceedings; and, competitor actions, such as
unanticipated pricing actions or cost reduction strategies and
entry into direct product line competition.
PART II. OTHER INFORMATION
Item 6 - Exhibits and reports on Form 8-K
None.
INGERSOLL-RAND COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INGERSOLL-RAND COMPANY
(Registrant)
Date November 13, 1998 /S/ D.W. Devonshire
D.W. Devonshire, Senior Vice
President & Chief Financial
Officer
Principal Financial Officer
Date November 13, 1998 /S/ S.R. Shawley
S.R. Shawley, Controller
Principal Accounting Officer
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