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 June 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 July 24, 1998 was
165,246,381.
INGERSOLL-RAND COMPANY
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997
Condensed Consolidated Income Statement for the three and
six months ended June 30, 1998 and 1997
Condensed Consolidated Statement of Cash Flows for the six
months ended June 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 4 - Submission of Matters to a Vote of Security Holders
SIGNATURES
INGERSOLL-RAND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
ASSETS
June 30, December 31,
1998 1997
Current assets:
Cash and cash equivalents $ 108.5 $ 104.9
Marketable securities 10.6 6.9
Accounts and notes receivable, net of
allowance for doubtful accounts 1,320.2 1,281.5
Inventories 903.4 854.8
Deferred taxes and prepaid expenses 255.4 250.3
Assets held for sale 32.1 46.5
Total current assets 2,630.2 2,544.9
Investments and advances:
Dresser-Rand Company 135.4 115.0
Partially-owned equity companies 202.7 213.0
338.1 328.0
Property, plant and equipment, at cost 2,337.6 2,275.2
Less - accumulated depreciation 1,047.1 992.0
Net property, plant and equipment 1,290.5 1,283.2
Intangible assets, net 3,795.6 3,833.0
Deferred income taxes 200.6 214.9
Other assets 225.7 211.6
Total assets $8,480.7 $8,415.6
LIABILITIES AND EQUITY
Current liabilities:
Loans payable $ 356.8 $ 925.1
Accounts payable and accruals 1,497.5 1,402.7
Total current liabilities 1,854.3 2,327.8
Long-term debt 2,527.5 2,528.0
Postemployment liabilities 954.3 937.1
Other liabilities 151.3 153.4
Minority interests 119.0 127.9
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company 402.5 -
Shareholders' equity:
Common stock 336.6 334.8
Other shareholders' equity 2,319.4 2,163.0
Accumulated other comprehensive income (184.2) (156.4)
Total shareholders' equity 2,471.8 2,341.4
Total liabilities and equity $8,480.7 $8,415.6
See accompanying notes to condensed consolidated financial statements.
<TABLE>
INGERSOLL-RAND COMPANY
CONDENSED CONSOLIDATED INCOME STATEMENT
(in millions except per share figures)
<S> <S>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $2,186.2 $1,837.4 $4,189.1 $3,476.8
Cost of goods sold 1,596.7 1,355.5 3,080.8 2,583.9
Administrative, selling and service
engineering expenses 303.2 272.3 608.4 516.7
Operating income 286.3 209.6 499.9 376.2
Interest expense (64.4) (29.1) (127.2) (57.0)
Other income (expense), net (4.0) (0.9) 0.8 (6.6)
Dresser-Rand income 9.2 8.0 11.0 9.5
Minority interests (8.7) (7.7) (12.4) (10.6)
Earnings before income taxes 218.4 179.9 372.1 311.5
Provision for income taxes 77.5 68.3 132.1 122.1
Net earnings $ 140.9 $ 111.6 $ 240.0 $ 189.4
Basic earnings per common share $ 0.86 $ 0.68 $ 1.46 $ 1.16
Diluted earnings per common share $ 0.85 $ 0.68 $ 1.45 $ 1.16
Dividends per common share $ 0.150 $ 0.137 $ 0.300 $ 0.274
See accompanying notes to condensed consolidated financial statements.
</TABLE>
INGERSOLL-RAND COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
Six months ended
June 30,
1998 1997
Cash flows from operating activities:
Net earnings $ 240.0 $ 189.4
Adjustments to arrive at net cash
provided by operating activities:
Depreciation and amortization 143.5 100.2
Gain on sale of businesses -- (5.8)
Gain on sale of property, plant and equipment (5.5) (2.1)
Net equity earnings/loss, net of dividends (16.5) (12.6)
Minority interests, net of dividends 11.6 10.6
Deferred income taxes 11.3 4.2
Other items 9.0 16.6
Changes in other assets and liabilities, net (9.1) (119.5)
Net cash provided by operating activities 384.3 181.0
Cash flows from investing activities:
Capital expenditures (119.8) (75.3)
Proceeds from sales of property, plant
and equipment 20.6 13.9
Acquisitions, net of cash (35.0) (328.9)
Proceeds from business dispositions 19.5 244.2
Increase in marketable securities (3.9) (0.7)
Cash advances (to) from equity companies (3.7) 4.7
Net cash used in investing activities (122.3) (142.1)
Cash flows from financing activities:
Decrease in short-term borrowings (566.2) (52.7)
Proceeds from long-term debt -- 2.0
Payments of long-term debt (0.6) (1.0)
Net change in debt (566.8) (51.7)
Issuance of equity-linked securities 402.5 --
Issuance costs and fees (12.3) --
Net proceeds from issuance of
equity-linked securities 390.2 --
Purchase of treasury stock (51.8) --
Dividends paid (49.2) (44.5)
Proceeds from exercise of stock options 20.7 34.1
Net cash used in financing activities (256.9) (62.1)
Effect of exchange rate changes
on cash and cash equivalents (1.5) 12.5
Net increase (decrease) in cash and cash
equivalents 3.6 (10.7)
Cash and cash equivalents - beginning of period 104.9 184.1
Cash and cash equivalents - end of period $ 108.5 $ 173.4
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 six months ended June 30, 1998 and 1997. Certain
reclassifications have been made to prior year amounts to conform to
the current year 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 some manufacturing assets used to produce
residential locks, excluding padlocks. The door lockset technology
has been incorporated into the Architectural Hardware Group. In the
second quarter of 1998, the company purchased additional operations
for approximately $3.6 million in cash. 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 and second
quarters, 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.
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 six months ended June 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 six months ended June 30 1997
Sales $3,983.1
Net earnings 183.1
Basic earnings per share $ 1.12
Diluted earnings per share 1.12
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):
June 30, December 31,
1998 1997
Raw materials and supplies $ 170.3 $ 174.1
Work-in-process 261.5 218.6
Finished goods 625.9 613.8
1,057.7 1,006.5
Less - LIFO reserve 154.3 151.7
Total $ 903.4 $ 854.8
Work-in-process inventories are stated after deducting customer
progress payments of $21.8 million at June 30, 1998 and $17.8
million at December 31, 1997.
NOTE 8 - The company's investment in the Dresser-Rand partnership
at June 30, 1998 and December 31, 1997, was $163.8 million and
$154.7 million, respectively. The company owed Dresser-Rand
$28.4 million and $39.7 million at June 30, 1998 and December 31,
1997, respectively. Net sales of Dresser-Rand were $592.1
million for the six months ended June 30, 1998 and $563.0 million
for the six months ended June 30, 1997; and gross profit was
$102.5 million and $107.9 million, respectively.
Dresser-Rand's net income for the six months ended June 30, 1998
was $22.4 million, as compared to $19.4 million for the six
months ended June 30, 1997.
The summarized financial position of Dresser-Rand was as follows
(in millions):
June 30, December 31,
1998 1997
Current assets $ 518.2 $ 488.4
Property, plant and
equipment, net 230.9 248.2
Other assets and investments 44.4 54.1
793.5 790.7
Deduct:
Current liabilities 296.9 368.4
Noncurrent liabilities 168.7 195.8
465.6 564.2
Net partners' equity
and advances $ 327.9 $ 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, totaling $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 $12.3 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
shareowners 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 have
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 shares figures):
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
Net earnings $140.9 $111.6 $240.0 $189.4
Average number of basic shares 163.9 163.1 163.9 162.7
Shares issuable assuming
exercise under incentive
stock plans 2.0 1.2 2.1 1.2
Average number of diluted
shares 165.9 164.3 166.0 163.9
Basic earnings per shares $ 0.86 $ 0.68 $ 1.46 $ 1.16
Diluted earnings per share $ 0.85 $ 0.68 $ 1.45 $ 1.16
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 EPS.
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
adjustment, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive
income.
The components of comprehensive income are as follows (in millions):
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
Net income $140.9 $111.6 $240.0 $189.4
Other comprehensive income -
Foreign currency equity
adjustment (8.9) (2.5) (27.8) (51.9)
Comprehensive income $132.0 $109.1 $212.2 $137.5
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 second quarter of the year established
a new record. Sales totalled $2.2 billion, operating income was
$286.3 million and net earnings reached $140.9 million (85 cents per
diluted share). For the second quarter of 1997, the company reported
sales of $1.8 billion, operating income of $209.6 million and net
earnings of $111.6 million (68 cents per diluted share).
The second quarter of 1998 includes the results from the October 31,
1997 acquisition of Thermo King Corporation (Thermo King). Thermo
King's operations for the second quarter of the year generated sales
of $317.4 million which produced $43.9 million of operating income,
after the effect of estimated purchase accounting adjustments. After
the allocation of approximately $38 million of acquisition interest
costs and related income tax benefits, Thermo King contributed
approximately five cents per share to the company's results for the
second quarter.
A comparison of key income statement amounts between the second
quarters, is as follows:
o Net sales for the second quarter of 1998 totalled $2.2 billion,
an increase of 19 percent over the amount reported for the three
months ended June 30, 1997. After excluding Thermo King's
second quarter sales, the increase was 1.7 percent over last
year's second quarter. This included the effect of approximately
a 1.5 percent unfavorable change caused by currency.
o The ratio of cost of goods sold to sales for the second quarter
of 1998 improved to 73.0 percent from the comparable second
quarter ratio of 73.8 percent in 1997. After excluding the
effects of Thermo King, the overall ratio improved to 72.6
percent from 73.8 percent over last year's second quarter ratio.
o The company did not have any partial liquidations of LIFO (last-
in, first-out) inventories during the second quarter of 1998.
However, partial liquidations of LIFO inventories during the
second quarter of 1997 lowered costs of goods sold by $1.4
million in 1997.
o The ratio of administrative, selling and service engineering
expenses to sales was 13.9 percent for the three months ended
June 30, 1998, as compared to 14.8 percent for the second
quarter of 1997. After excluding Thermo King's results from the
second quarter of 1998, the adjusted ratio of administrative,
selling and service engineering expenses to sales still reflects
a modest improvement over last year's second quarter ratio.
o Operating income for the second quarter of 1998 totalled $286.3
million, as compared to $209.6 million for last year's second
quarter. The ratio of operating income to sales in 1998 was
13.1 percent, as compared to 11.4 percent for the three months
ended June 30, 1997. Excluding the results of Thermo King from
the current quarter, adjusted second quarter 1998 operating
income would reflect a 16-percent improvement over the amount
reported for the three months ended June 30, 1997.
o Other income (expense), net, aggregated $4.0 million of net
expense for the three months ended June 30, 1998, as compared to
$0.9 million of expense for the second quarter of 1997. This
$3.1 million unfavorable change is attributed principally to
reductions in equity earnings from the company's partially owned
affiliates.
o The company's profits from its 49 percent interest in Dresser-
Rand Company totalled $9.2 million for the second quarter of
1998, reflecting a 15 percent improvement over the $8.0 million
reported for the three months ended June 30, 1997. The increase
is attributed to stronger sales coupled with benefits derived
from last year's restructuring activities.
o The company's charge for minority interests totalled $8.7
million for the second quarter of the year versus $7.7 million
in 1997. This change is attributed to a stronger performance in
net earnings by these consolidated entities, principally
Ingersoll-Dresser Pump Company (IDP) and the company's
operations in India and China, during the comparable periods.
o Interest expense for the second quarter of 1998 was $64.4
million and included approximately $44 million attributable to
the Thermo King and Newman Tonks acquisitions, offset by a
reduction of interest rates on long-term borrowings.
o The company's effective tax rate for the second quarter of the
year was 35.5 percent. Last year's second 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 second 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 second quarter of the year
totalled $2.1 billion which was an increase of 18.8 percent over last
year's second quarter total. Bookings excluding the effect of the
Thermo King acquisition, equaled last year's level despite order
reductions due to the General Motors strike, a reduction in orders
from our Asian markets and a 1.5 percent unfavorable currency impact.
The company's backlog of orders at June 30, 1998, believed by it to
be firm, was $1.7 billion, which was approximately 13 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
half of both years is as follows:
o Net sales for the first half of 1998 were $712.3 million above
last year's first half. Excluding noncomparable units from both
periods(Thermo King, Clark Hurth and Newman Tonks), adjusted
sales for the first six months of 1998 reflected a modest
increase over last year's adjusted first half total.
o The ratio of cost of goods sold to sales for the first six
months of 1998 improved to 73.5 percent from 74.3 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 six months of 1998.
However, partial liquidations of LIFO inventories during the
first half of 1997 lowered cost of goods sold by $1.4 million.
o The ratio of administrative, selling and service engineering
expenses to sales was 14.5 percent for the first six months of
1998, as compared to 14.9 percent for the first half 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 administration expenses to sales than the
company's historical lines.
o Operating income for the first six months of 1998 totalled
$499.9 million and reflects an increase of $123.7 million (or
32.9 percent) over the amount reported for last year's first
half. The ratio of operating income to sales in 1998 was 11.9
percent, as compared to 10.8 percent for the first six months of
the prior year. After adjusting both periods for noncomparable
items, the adjusted 1998 operating income margin also reflects a
marked improvement over the adjusted 1997 margin. This
improvement is the effect of an improved U.S. economy and the
company's aggressive productivity improvement and sourcing
programs.
o Other income (expense), net, aggregated $0.8 million of net
income for the six months ended June 30, 1998, as compared to
$6.6 million of net expense in the first half of 1997. This
favorable change is attributed to a positive movement in foreign
currency activity, higher earnings from partially-owned equity
companies, gains from the sale of surplus assets and a reduction
in miscellaneous expenses during the first six months of 1998 as
compared to the first half of 1997.
o The company's pretax profits for its 49 percent interest in
Dresser-Rand Company totalled $11.0 million for the first half
of 1998, reflecting a modest improvement over the $9.5 million
reported for the first six months of 1997.
o The company's charge for minority interests totalled $12.4
million for the first six months of 1998 versus $10.6 million
for the comparable 1997 period. Increased earnings from IDP
accounted for approximately $1 million of this change with the
balance relating to the company's operations in India and China.
o Interest expense for the first six months of the year totalled
$127.2 million, as compared to $57.0 million for the first half
of last year. Interest expense related to the Thermo King
acquisition was approximately $80 million, which was partially
offset by lower interest rates on long term debt.
o The company's effective tax rate for the first half of 1998 was
35.5 percent. The effective tax rate for the first half of 1997
was 39.2 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. 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 six months 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 both the issuance of the
equity-linked securities and a strong cash flow performance from the
company's operations, working capital increased by $558.8 million to
$775.9 million at June 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 six months from the 1.1 to 1.0 at the end of 1997.
The company's debt-to-total capital ratio at June 30, 1998 totalled
49 percent, which reflects a significant improvement from the 58
percent reported at December 31, 1997.
The company's cash and cash equivalents totalled $108.5 million
at June 30, 1998, up slightly from the $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 $384.3 million, investing
activities used $122.3 million and financing activities used $256.9
million. Exchange rate changes during the first six months of 1998
decreased cash and cash equivalents by $1.5 million.
Receivables totalled $1.3 billion at June 30, 1998, which
represents a $38.7 million increase over the amount reported at
December 31, 1997. The increase was attributed to higher sales,
partially offset by the effect of foreign currency translation.
Inventories totalled $903.4 million at June 30, 1998, which
represents an increase of $48.6 million over the year-end balance of
$854.8 million. The net increase is the result of building inventory
to fulfill orders in the third quarter offset by foreign currency
translation applicable to international inventories.
Intangible assets decreased by approximately $37.4 million
during the first six months of 1998. Intangibles were impacted
mainly by amortization, which was offset by increased goodwill and
other intangibles due to 1998 acquisitions.
Long term debt, including current maturities, at June 30, 1998,
totalled $2.7 billion, which approximates the balance at December 31,
1997. The company's debt-to-total capital ratio was 49 percent at
June 30, 1998, which represented a significant reduction from the 58
percent reported at December 31, 1997, principally due to the
issuance of $402.5 million of equity-linked securities and debt
repayments.
During the first six months of 1998, foreign currency
translation adjustments resulted in a net decrease of approximately
$27.8 million in shareholders' equity, caused by the strengthening of
the U.S. dollar against other currencies. Currency changes in
Australia, Canada, France, Germany, India, Ireland, Japan, New
Zealand, Singapore and the United Kingdom, 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. The
review of company products revealed that substantially all products
are year 2000 compliant. Remediation of noncompliant products is
currently underway.
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 operation, 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 35 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 PRP's 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 PRP's
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
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, a producer of architectural hardware, for approximately
$370 million. Newman Tonks is a leading manufacturer, specifier and
supplier of branded architectural hardware products and is based in
Birmingham, England.
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.
Dispositions
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 $2.7 million, but on an after-tax basis, reduced net earnings by
approximately $3.6 million.
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 and second
quarters, 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.
Second-quarter Business Segment Review
The Standard Machinery Segment reported sales of $880.2 million
during the second quarter of 1998, which represents a 5.5-percent
increase from the $834.5 million for the same quarter of last year.
Operating income for the quarter was $132.8 million and represents an
impressive 18.4-percent improvement over the $112.2 million reported
for the three months ended June 30, 1997. For the first half of
1998, the segment's net sales totalled $1,668.5 million, which was
6.1-percent above the $1,572.0 million reported for the comparable
1997 period. Operating income for the first half of the year
totalled $225.6 million, which represents an improvement of 15.5
percent over the $195.3 million reported for the first six months of
1997.
All of the group's within the segment reported improvements in
both operating income and operating income margins versus 1997's
second quarter, with the exception of the Air Compressor Group which
matched last year's sales and operating income level's despite the
softness in Asian markets.
The Engineered Equipment Segment is comprised solely of IDP since
the February 14, 1997 sale of the Clark-Hurth Group. IDP's sales for
the second quarter of the year totalled $231.8 million which reflects
a modest increase over last year's second quarter level of $221.2
million. However, operating income for the quarter totalled $19.2
million, which reflects a 17.1 percent improvement over last year's
$16.4 million. For the first half of 1998, IDP reported sales of
$422.0 million, which was up slightly from 1997's first half total of
$414.6 million. Operating income for the first six months of the
year was $25.7 million, reflecting a modest improvement over the
$23.7 million reported for the first two quarters of 1997. IDP's
results for both the second quarter and first half of the year
reflects the benefits of improving markets and the effects of the
restructuring actions taken late last year.
The Bearings, Locks and Tools Segment reported sales of $756.8
million for the three months ended June 30, 1998, which reflects a
modest reduction from last year's second-quarter total of $781.7
million. However, operating income was $103.8 million and reflects
an impressive 11.3-percent improvement over 1997's second quarter
level of $93.3 million. For the first six months of 1998, the
segment reported net sales of $1.5 billion, which reflects a modest
improvement over the amount reported in the comparable period of
1997. Operating income for the first half of 1998 totalled $192.0
million compared to $178.5 million reported for the six months ended
June 30, 1997. Since its April 3, 1997 acquisition, Newman Tonks
results are included in this segment.
The Bearings and Components Group's sales in the second quarter of
1998 were approximately five-percent lower than the amount reported
for last year's second quarter. Operating income for the quarter
decreased by a comparable rate, principally due to the effect of the
General Motors strike. Sales and operating income of the Bearings
and Components Group for the six months ended June 30, 1998 also
reflected a reduction of 3.6 percent and 10.5 percent, respectively,
from last year's levels.
The Architectural Hardware Group's results for the second quarters
of both 1998 and 1997 include the full effect of the operations of
Newman Tonks, which was acquired on April 3, 1997. For the second
quarter of 1998, the group reported a modest increase in its
quarterly sales comparison; however, the quarterly improvement in
operating income was substantial. This marked increase was
attributed to the benefits from aggressive productivity-improvement
and sourcing programs.
The Production Equipment Group's sales and operating income for
the second quarter of 1998 were approximately ten-percent below the
amounts reported for the three months ended June 30, 1997. Sales and
operating income for the six months ended June 30, 1998 reflected a
reduction of approximately eight percent and 14 percent,
respectively, below the amount reported for the first half of 1997.
The shortfall in the Production Equipment Group's results for both
the second quarter and first half was attributed to decreased sales
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 second
quarter of 1998, Thermo King reported sales of $317.4 million and
generated $43.9 million of operating income, after the effect of
estimated purchase accounting adjustments. After the allocation of
acquisition interest costs, Thermo King contributed approximately
five cents per share to the company's results for the second quarter
of the year. For the first half of 1998, Thermo King reported sales
of $606.3 million which generated $83.2 million of operating income.
For the first six months of 1998, Thermo King contributed
approximately eight cents per share to the company's results for the
first half of the year. Thermo King's performance remains strong and
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.
INGERSOLL-RAND COMPANY
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the company held on
April 24, 1998, the shareholders, in addition to electing directors,
ratified the appointment of Price Waterhouse LLP as independent
accountants of the company for the year ending December 31, 1998. The
shareholders voted as follows on the following matters:
1. Election of directors. The voting result for each nominee is as
follows:
Name Votes For Votes Withheld
Constance J. Horner 139,900,452 2,276,197
Orin R. Smith 140,146,770 2,129,879
J. Frank Travis 140,057,208 2,119,441
2. A proposal adopting the company's Incentive Stock Plan of 1998 was
approved by a count of 112,847,081 votes for, 16,914,981 votes
against, 803,017 votes abstaining, and 11,611,570 not voting.
3. The reappointment of the company's independent accountants was
approved by a count of 141,534,226 votes for, 261,927 votes
against, and 380,496 votes abstaining.
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 August 14, 1998 /S/ D.W. Devonshire
D.W. Devonshire, Senior Vice
President & Chief Financial
Officer
Principal Financial Officer
Date August 14, 1998 /S/ S.R. Shawley
S.R. Shawley, Controller
Principal Accounting Officer
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