-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/MMReyh9fTBz2AVepfUFK/uNSEDRObLbXQYc7/Hzt8RLaG+/iTfWlr9PdA9Ygdc ONFzkblmjAfvUOxpk27aHA== 0000050485-00-000001.txt : 20000331 0000050485-00-000001.hdr.sgml : 20000331 ACCESSION NUMBER: 0000050485-00-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INGERSOLL RAND CO CENTRAL INDEX KEY: 0000050485 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 135156640 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00985 FILM NUMBER: 588026 BUSINESS ADDRESS: STREET 1: 200 CHESTNUT RIDGE RD STREET 2: PO BOX 8738 CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07675 BUSINESS PHONE: 2015730123 MAIL ADDRESS: STREET 1: 200 CHESTNUT RIDGE ROAD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07675 10-K 1 12 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 No. 1-985 INGERSOLL-RAND COMPANY (Exact name of registrant as specified in its charter) New Jersey 13-5156640 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Woodcliff Lake, New Jersey 07675 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(201)573-0123 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Series A Preference Stock Purchase Rights New York, London and Amsterdam Common Stock, $2 par value New York, London and Amsterdam Income PRIDES New York Growth PRIDES New York Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of common stock held by nonaffiliates on February 29, 2000 was $6,205,708,872 based on the closing price of such stock on the New York Stock Exchange. This includes the shares owned by the Registrant's Leveraged Employee Stock Ownership Plan. The number of shares of common stock outstanding as of February 29, 2000 was 162,210,632. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Shareholders for fiscal year ended December 31, 1999. With the exception of those portions which are incorporated by reference into Parts I, II and IV of this Form 10-K Annual Report, the 1999 Annual Report to Shareholders is not to be deemed filed as part of this report. Proxy Statement for Annual Meeting of Shareholders to be held on May 3, 2000. See Part III of this Form 10-K Annual Report for portions incorporated by reference. (A definitive proxy statement has been filed with the Commission since the close of the fiscal year). PART I Item 1. BUSINESS Ingersoll-Rand Company (the company) was organized in 1905 under the laws of the State of New Jersey as a consolidation of Ingersoll-Sergeant Drill Company and the Rand Drill Company, whose businesses were established in the early 1870's. Over the years, the company has supplemented its original business, which consisted primarily of the manufacture and sale of rock drilling equipment, with additional products which have been developed internally or obtained through acquisition. On August 12, 1999, the company announced its intention to dispose of its interest in Dresser-Rand Company (D-R), a joint venture involved in the reciprocating compressor and turbo machinery business, and Ingersoll-Dresser Pump Company (IDP), a joint venture involved in the pump equipment business. On October 5, 1999, the joint venture partner, as permitted under the joint venture agreements, elected to sell its share of the joint ventures to the company. Effective December 31, 1999, the company completed the purchase of the joint venture partner's 49% share of IDP for a net purchase price of approximately $377 million payable by the issuance of a promissory note, which was redeemed On January 14, 2000. The acquisition of the joint venture partner's 51% share of D-R was completed on February 2, 2000 and is estimated at a net purchase price of approximately $536 million. The net assets have been reported as assets held for sale in the company's financial statements. Historically, IDP had been reported as part of the Engineered Products Segment, while D-R had been reported as equity in earnings of partially- owned affiliates. On February 10, 2000, the company agreed to sell its IDP unit to the Flowserve Corporation for $775 million in cash. The transaction is subject to regulatory approval and is expected to close during the second quarter of 2000. The company intends to divest D-R in the near future. On March 30, 1999, the company completed the acquisition of Harrow Industries, Inc. (Harrow), a leading manufacturer of access control technologies, architectural hardware, and decorative bath fittings and accessories. The purchase price was approximately $160 million, which included the assumption of certain debt. The acquisition has been accounted for as a purchase and, accordingly, the purchase price was allocated to the acquired assets and assumed liabilities based on their estimated fair values. During the third quarter, the company received proceeds of $47.0 million, which approximated book value on the sale of a portion of the Harrow assets. In December 1999, the company also sold certain net assets of the Automation Division. The transaction resulted in a net gain of approximately $4.4 million. The company also made several minor dispositions during 1999. Products The company manufactures and sells primarily nonelectrical machinery and equipment. Principal products include the following: Air balancers Hoists Air compressors & Hydraulic breakers accessories Lubrication equipment Air dryers Micro turbines Air logic controls Material handling equipment Air motors Mining equipment Air and electric tools Needle roller bearings Architectural columns Paving equipment Asphalt compactors Piston pumps Asphalt pavers Pneumatic breakers Automated dispensing systems Pneumatic cylinders Automatic doors Pneumatic valves Automotive components Portable compressors Ball bearings Portable generators Bath fittings and accessories Portable light towers Blasthole drills Road-building machinery Blowers Rock drills Compact hydraulic excavators Rock stabilizers Construction equipment Roller bearings Diaphragm pumps Rotary drills Door closers and controls Rough-terrain material handlers Door locks, latches & Skid-steer loaders locksets Soil compactors Door and door frames (steel) Spray-coating systems Drilling equipment and accessories Submersible pumps Electrical security products Telescopic material handlers Engine-starting systems Transport temperature control Exit devices systems Extrusion pump systems Utility vehicles Fastener-tightening Waterjet-cutting systems systems Fluid-handling equipment Water-well drills Golf cars Winches These products are sold primarily under the company's name and also under other names including ABG, Blaw-Knox, Bobcat, Charles Maire, Club Car, Dixie-Pacific, Dor-O-Matic, Ecoair, Fafnir, Falcon, Glynn-Johnson, Johnstone, LCN, Legge, Monarch, Montabert, Normbau, Schlage, Steelcraft, Thermo King, Torrington, Von Duprin and Zimmerman. During the past three years, the division of the company's sales between capital goods and expendables has been in the approximate ratio of 63 percent and 37 percent, respectively. The company generally defines as expendables those products which are not capitalized by the ultimate user. Examples of such products are parts sold for replacement purposes, power tools and needle bearings. Additional information on the company's business and financial information about industry segments is presented in Note 18 to the Consolidated Financial Statements included in the company's Annual Report to Shareholders for 1999, incorporated by reference in this Form 10-K Annual Report. Distribution The company's products are distributed by a number of methods which the company believes are appropriate to the type of product. Sales are made domestically through branch sales offices and through distributorships and dealers across the United States. International sales are made through approximately 75 subsidiary sales and service companies with a supporting chain of distributors in over 100 countries. Working Capital The products manufactured by the company must usually be readily available to meet rapid delivery requirements. Such working capital requirements are not, however, in the opinion of management, materially different from those experienced by the company's major competitors. Customers No material part of the company's business is dependent upon a single customer or very few customers, the loss of any one of which would have a material adverse effect on the company's operations. Competitive Conditions The company's products are sold in highly competitive markets throughout the world against products produced by both foreign and domestic corporations. The principal methods of competition in these markets relate to price, quality and service. The company believes that it is one of the leading manufacturers in the world of a broad line of air compression systems, anti- friction bearings, construction equipment, transport temperature control products, air tools, golf cars and utility vehicles. In addition, the company believes it is a leading supplier in domestic markets for locks, other door hardware products, skid- steer loaders and asphalt paving equipment. International Operations Sales to customers outside the United States accounted for approximately 34 percent of the consolidated net sales in 1999. Sales outside of the United States are made in more than 100 countries; therefore, the attendant risks of manufacturing or selling in a particular country, such as nationalization and establishment of common markets, would not have a significant effect on the company's international operations. Raw Materials The company manufactures many of the components included in its products. The principal raw materials required for the manufacture of the company's products are purchased from numerous suppliers, and the company believes that available sources of supply will generally be sufficient for its needs for the foreseeable future. Backlog The company's approximate backlog of orders at December 31, 1999, believed by it to be firm, was $210 million for the Specialty Vehicles Segment, $310 million for the Air & Temperature Control Segment, $132 million for the Hardware & Tools Segment and $296 million for the Engineered Products Segment as compared to $248 million, $304 million, $189 million and $345 million, respectively, at December 31, 1998. These backlog figures are based on orders received. While the major portion of the company's products are built in advance of order and either shipped or assembled from stock, orders for specialized machinery or specific customer application are submitted with extensive lead time and are often subject to revision, deferral, cancellation or termination. The company estimates that approximately 90 percent of the backlog will be shipped during the next twelve months. Research and Development The company maintains extensive research and development facilities for experimenting, testing and developing high quality products. The company employs approximately 1,763 professional employees for its research and development activities. The company spent $186.2 million in 1999, $169.6 million in 1998 and $138.2 million in 1997 on research and development. Patents and Licenses The company owns numerous patents and patent applications and is licensed under others. While it considers that in the aggregate its patents and licenses are valuable, it does not believe that its business is materially dependent on its patents or licenses or any group of them. In the company's opinion, engineering and production skills, and experience are more responsible for its market position than patents or licenses. 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. During 1999, the company spent approximately $8 million on capital projects for pollution abatement and control and an additional $6 million for environmental remediation expenditures at sites presently or formerly owned or leased by the company. It should be noted that these amounts are difficult to estimate because environmental improvement costs are generally a part of the overall improvement costs at a particular plant, and the accurate estimate of which portion of an improvement or a capital expenditure relates to an environmental improvement is difficult to ascertain. The company believes that these expenditure levels will continue and may increase over time. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain. 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 30 federal Superfund and state remediations 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 assumed it will not 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 contribution 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. Employees There are approximately 46,000 employees of the company throughout the world, of whom approximately 29,000 work in the United States and 17,000 in foreign countries. The company believes relations with its employees are good. Item 2. PROPERTIES The company's executive offices are located at Woodcliff Lake, New Jersey. Manufacturing and assembly operations are conducted in 53 plants in the United States; 4 plants in Canada; 29 plants in Europe; 13 plants in Asia, and 4 plants in Latin America. The company also maintains various warehouses, offices and repair centers throughout the world. Substantially all plant facilities are owned by the company and the remainder are under long-term lease. The company believes that its plants and equipment have been well maintained and are generally in good condition. The reportable segments for which the facilities are primarily used are described below. Facilities under long-term lease are included below and are not significant to each operating segment's total number of plants or square footage. Specialty Vehicles The Specialty Vehicle Segment designs, manufactures and markets powered vehicles that play a niche role in such fields as infrastructure development, commercial construction and material movement. This segment's products include machinery regularly used in general manufacturing and in industries such as mining and construction. This segment's branded products include Bobcat skid-steer loaders and compact hydraulic excavators, Club Car golf cars and industrial vehicles, Blaw-Knox and ABG pavers, and Ingersoll-Rand compactors, drilling equipment and rough-terrain material handlers. The segment's manufacturing locations are as follows: Approximate Number of Plants Square Footage Domestic 7 2,906,000 International 4 604,000 Total 11 3,510,000 Air & Temperature Control The Air and Temperature Control Segment focuses on markets requiring air and refrigerant-gas compression technology and services. This segment's branded products include Thermo King transport temperature-control equipment, and Ingersoll-Rand air compressors. The segment's manufacturing facilities are as follows: Approximate Number of Plants Square Footage Domestic 10 2,398,000 International 17 2,179,000 Total 27 4,577,000 Hardware and Tools The Hardware and Tools Segment concentrates on manufacturing, marketing, and managing the distribution channels required to reach end user customers seeking products that enhance productivity and security in the industrial, construction, and do- it-yourself markets. This segment includes architectural hardware products, such as Schlage locks, Von Duprin exit devices, door-control hardware, steel doors, power operated doors and architectural columns, and tools and related industrial- production equipment. The segment's manufacturing facilities are as follows: Approximate Number of Plants Square Footage Domestic 21 3,611,000 International 20 2,118,000 Total 41 5,729,000 Engineered Products The Engineered Products Segment is comprised of highly engineered application products that are sold on a specific contract design basis. Plants of IDP are no longer included as it has been designated as discontinued operations. This segment's products include Torrington and Fafnir bearings and components The segment's manufacturing facilities are as follows: Approximate Number of Plants Square Footage Domestic 15 3,544,000 International 9 1,719,000 Total 24 5,263,000 Item 3. LEGAL PROCEEDINGS In the normal course of business, the company is involved in a variety of lawsuits, claims and legal proceedings, including proceedings for off-site waste disposal cleanup of approximately 30 sites under federal Superfund and similar state laws. In the opinion of the company, pending legal matters, are not expected to have a material adverse effect on the results of operations, financial condition, liquidity or cash flows. See also the discussion under Item 1 - Environmental Matters. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the company's security holders during the last quarter of its fiscal year ended December 31, 1999. The following information is included in accordance with the provision of Part III, Item 10. Date of Service as Principal Occupation and an Executive Other Information Name and Age Officer for Past Five Years James E. Perrella(64) 5/4/77 Chairman of the Board and Director (President 1993- April 1999, and Chief Executive Officer 1993-October 1999) Herbert L. Henkel(51) 4/5/99 Chief Executive Officer (since October 1999), President and Director (since April 1999) (Chief Operating Officer April 1999 - October 1999; Textron President, February 1999 - March 1999 and Chief Operating Officer, 1998 - March 1999; President of Textron's Industrial Products Segment 1994- 1998) Brian D. Jellison(54) 2/7/96 Executive Vice President (Vice President and President of the Architectural Hardware Group, 1995 - 1998) Steven T. Martin(59) 5/2/96 Executive Vice President (Vice President, 1996-1998 and President of Production Equipment Group, 1995-1998) David W. Devonshire(54) 1/12/98 Executive Vice President (since January 2000) and Chief Financial Officer, (Senior Vice President and Chief Financial Officer 1998 - January 2000, Senior Vice President and Chief Financial Officer, Owens Corning 1993 - 1997) Patricia Nachtigal(53) 11/2/88 Vice President and General Counsel Nicholas J. Pishotti(59) 4/10/95 Vice President, Strategic Technologies (General Manager, Aircraft Engine Sourcing Department, General Electric Company, 1988-1995) Steven R. Shawley(47) 6/1/98 Vice President and Controller (Controller June 1998-July 1999, Thermo King Business Unit Controller 1994-1998) No family relationship exists between any of the above-listed executive officers of the company. All officers are elected to hold office for one year or until their successors are elected and qualify. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the principal market for the company's common stock and related stockholder matters are as follows: Quarterly share prices and dividends for the common stock are shown in the following tabulation. The common shares are listed on the New York Stock Exchange and also on the London and Amsterdam exchanges. Common Stock High Low Dividend 1999 First quarter $52 7/16 $44 5/8 $.15 Second quarter 73 13/16 49 7/8 .15 Third quarter 67 11/16 53 .17 Fourth quarter 58 1/2 44 7/8 .17 High Low Dividend 1998 First quarter $49 1/4 $36 1/2 $.15 Second quarter 54 41 .15 Third quarter 47 5/8 34 7/8 .15 Fourth quarter 52 1/8 34 .15 The Bank of New York (Church Street Station, P.O. Box 11258, New York, NY 10286-1258, (800)524-4458) is the transfer agent, registrar and dividend reinvestment agent. There are no significant restrictions on the payment of dividends. The approximate number of record holders of common stock as of February 29, 2000 was 11,510. On February 11, 2000 the company completed the acquisition of substantially all the assets of Neal Manufacturing Company in exchange for 145,000 shares of the company's common stock. These shares were previously held as treasury stock and had not been registered. Item 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1999, is as follows (in millions except per share amounts): December 31 1999 1998 1997 1996 1995 Net sales $7,666.7 $7,384.7 $6,239.1 $5,846.9 $4,936.1 Earnings from continuing operations 544.9 455.5 358.6 324.7 243.8 Total assets 8,400.2 7,926.4 8,033.8 5,232.2 5,132.2 Long-term debt 2,113.3 2,166.0 2,528.0 1,163.8 1,304.4 Shareholders' equity 3,083.0 2,730.1 2,364.8 2,109.9 1,801.5 Basic earnings per share Continuing operations $3.33 $2.78 $2.20 $2.01 $1.53 Discontinued operations 0.28 0.33 0.13 0.21 0.17 Diluted earnings per share Continuing operations $3.29 $2.75 $2.18 $2.00 $1.52 Discontinued operations 0.28 0.33 0.13 0.21 0.17 Dividends per common Share 0.64 0.60 0.57 0.52 0.49 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Background: In August 1999, the company notified Dresser Industries (a wholly owned subsidiary of Halliburton Company) of its desire to terminate their two joint ventures. The ventures are Dresser-Rand Company (D-R), a producer of reciprocating compressors and turbomachinery products, and Ingersoll-Dresser Pump Company (IDP) a manufacturer of pumps used in industrial, commercial and municipal applications. In accordance with the terms of the joint venture agreements, the company gave notice that it wanted to sell its 49% interest in D-R and its 51% interest in IDP to Dresser Industries. Under the governing agreements, Dresser Industries had the option to either buy one or both of the joint ventures from or sell one or both of the joint ventures to Ingersoll-Rand. However, the company also announced that if Dresser Industries elected to sell its shares in these joint ventures back to Ingersoll-Rand, the company would divest of these units as soon as practical. On October 5, 1999, the company was notified by Dresser Industries that it had elected to sell its interests in the joint ventures to the company. In accordance with the company's decision to sell these units, as soon as practical, after they were purchased from Dresser Industries, their results (and related activity) have been reclassified as "Discontinued operations (net of tax)" in the accompanying Consolidated Statement of Income for the three years ended December 31, 1999. In addition, the net assets of these units have been reclassified as "Assets held for sale" on the accompanying Consolidated Balance Sheet. Unless otherwise noted, amounts, percentages and ratios discussed in this financial review and management analysis do not include discontinued operations. On February 9, 2000 the company agreed to sell IDP to Flowserve Corporation for $775.0 million in cash. 1999 Compared to 1998 The company reported another year of record earnings in 1999. These achievements were the result of a strong domestic economy, moderate economic growth in selected international markets, and continued success of the company's asset-management, strategic- sourcing and productivity-improvement programs. Sales for 1999 totalled $7.7 billion, which generated $1,099.3 million of operating income and $544.9 million of net earnings from continuing operations ($3.29 diluted earnings per share). Net earnings from discontinued operations totalled $46.2 million ($0.28 diluted earnings per share). For 1998, sales were $7.4 billion, which generated $969.1 million of operating income and produced net earnings from continuing operations for the year of $455.5 million ($2.75 diluted earnings per share). In 1998, net earnings from discontinued operations totalled $53.6 million ($0.33 diluted earnings per share). A comparison of key financial data between 1999 and 1998 follows: o Net sales in 1999 amounted to $7.7 billion, reflecting 3.8% improvement over the 1998 total of $7.4 billion. o Cost of goods sold in 1999 was 71.9% of sales, compared to 73.0% in 1998. The ratio of cost of goods sold to sales reflected a marked improvement in 1999 compared to 1998 based on the continued success of the company's asset-management, strategic-sourcing and productivity-improvement programs. o Administrative, selling and service engineering expenses were 13.7% of sales in 1999, compared to 13.9% for 1998. This decrease is attributable to the company's cost-containment programs. o Operating income for the year totalled $1,099.3 million, a 13.4% increase over 1998 operating income of $969.1 million. The ratio of operating income to sales in 1999 was 14.3%, compared to 13.1% for the prior year. This improvement was the combined effect of the company's aggressive productivity- improvement and procurement programs, and the continued stability of domestic markets. o Interest expense for the year totalled $203.1 million versus $224.1 million for 1998. The reduction in interest expense totalled $21.0 million principally due to lower average outstanding debt balances during 1999 when compared to the prior year. o Other income (expense), net, is the sum of foreign exchange activities, equity in earnings of partially owned affiliates, and other miscellaneous income and expense items. In 1999, these activities resulted in a net expense of $22.3 million, an unfavorable change of $7.0 million compared to the 1998 net other expense of $15.3 million. This change was caused by lower earnings from partially owned affiliate companies, lower miscellaneous income and higher miscellaneous expenses, which were offset by a favorable change in foreign currency activity in 1999 when compared to the prior year. o The company's charges for minority interests are composed of two items: (1) charges associated with the company's equity- linked securities (issued during the first quarter of 1998), which totalled $25.6 million in 1999 and $19.7 million in 1998; and (2) interests of minority owners (less than 50 %) in a consolidated unit of the company, which totalled $3.5 million in 1999 and $3.8 million in 1998. o The company's effective tax rate for both 1999 and 1998 was 35.5%. The variance from the 35.0% statutory rate primarily was due to lower tax rates associated with foreign earnings, the foreign sales corporation, favorable tax benefits associated with income earned in Puerto Rico, offset by the effect of state and local taxes and the nondeductibility of a portion of goodwill. o Discontinued operations (net of tax) for 1999 amounted to $46.2 million, which was $7.4 million lower than the $53.6 million for the year ended December 31, 1998. This category represents the company's 49% interest in the earnings of D-R and the company's 51% interest in IDP, net of appropriate taxes. As previously announced, the company intends to divest these businesses; therefore, their net operating results have been classified as "discontinued operations." The partnership earnings in 1999 were both approximately 20% below their 1998 levels. Additional information on discontinued operations is contained throughout this report and in Note 2 to the Consolidated Financial Statements. At December 31, 1999, employment totalled 46,062. This represents a slight decrease from last year's level of 46,525. Outlook The company's outlook for 2000 is for continued strong improvement in operating results based on a scenario of moderate worldwide growth. Most of the company's end markets including car production, housing, commercial construction and road paving, have a positive outlook. These expectations will be supported by aggressive asset-management, strategic-sourcing and productivity-improvement programs. Review of Business Segments Specialty Vehicles Specialty Vehicles Segment sales were $2.3 billion, an increase of 7.7% over the $2.2 billion reported for 1998. Operating income for 1999 totalled $405.3 million, representing an increase of 21.6% over last year's total of $333.3 million. All major product lines reported improvements in sales, operating income and operating margins for the year. Air and Temperature Control The Air and Temperature Control Segment reported sales of $2.2 billion, which almost equalled last year's level. However, operating income for 1999 totalled $286.7 million, reflecting a 9.2% improvement over the $262.5 million reported for 1998. Thermo King's sales in 1999 reflected a modest increase over 1998's level, but operating income increased by approximately 5%. The air compressor business reported a modest decrease in sales for the year; however, operating income increased by more than 15%. Hardware and Tools The Hardware and Tools Segment sales increased by 8.7% to $1.9 billion. Operating income for the year was $320.3 million, an increase of $32.0 million from $288.3 million reported for 1998. Architectural hardware products reported increases of 15.5% in sales and 13.3% in operating income. Industrial production equipment reported lower sales in 1999, but a 4% increase in operating income. Engineered Products The Engineered Products Segment only includes the results of the company's bearings and components products. The results for IDP, which were formerly included in this segment, have been reclassified to discontinued operations. Sales for bearings and components in 1999 reflect a 1% decrease from the prior year, but operating income increased by 5%, when compared to 1998, due to continued cost improvement programs. Liquidity and Capital Resources During 1999, the company continued to make progress in improving its liquidity and capital resources through its aggressive asset management programs and the ability to generate $836.5 million of cash flow from its operations. These actions contributed to the company's reduction in its debt-to-total capital ratio from 44% at the end of last year to 42% at December 31, 1999. In addition, adjusting the December 31, 1999, short-term liability for the purchase of the remaining interest in IDP lowers the debt-to- total capital ratio 38%. The following table contains several key measures used by management to gauge the company's financial performance: 1999 1998 1997 Working capital (in millions) $1,129 $737 $342 Current ratio 1.6 1.5 1.2 Debt-to-total capital ratio 42% 44% 59% Average working capital to net sales 11.8% 10.7% 16.6% Average days outstanding in receivables 46.2 48.8 53.5 Average months' supply of inventory 2.4 2.4 2.5 Note: Working capital includes assets held for sale. The company maintains significant operations in foreign countries; therefore, the movement of the U.S. dollar against foreign currencies has an impact on the company's financial position. Generally, the functional currency of the company's foreign subsidiaries is their local currency. The company manages exposure to changes in foreign currency exchange rates through its normal operating and financing activities, as well as through the use of forward exchange contracts and options. The company attempts, through its hedging activities, to mitigate the impact on income of changes in foreign exchange rates. Additionally, the company maintains operations in countries where the company transacts business in U.S. dollars. The functional currency of these operations is the U.S. dollar. (Additional information on the company's use of financial instruments can be found in Note 8 to the Consolidated Financial Statements.) The following points highlight the financial results and financial condition of the company's operations with the impact of foreign currency translation where appropriate: o Cash and cash equivalents totalled $222.9 million at December 31, 1999, a $179.4 million increase from the prior year-end balance of $43.5 million. Cash flows from operating activities provided $836.5 million, investing activities used $237.0 million and financing activities used $445.1 million. Exchange rate changes during 1999 decreased cash and cash equivalents by $7.8 million. o Receivables totalled $988.5 million at December 31, 1999, compared to $963.7 million at the prior year end, a net increase of $24.8 million. The increase is attributable to higher sales activity during the later part of the fourth quarter and acquisitions, which were offset by reductions caused by exchange rate changes during 1999. The company focuses on decreasing its receivables base through its asset- management program, which produced a reduction in the average days outstanding in receivables to 46.2 days from the 1998 level of 48.8 days. o Inventories amounted to $742.1 million at December 31, 1999, a decrease of $82.7 million from last year's level of $824.8 million. The net reduction to inventories during 1999 is the net result of the reduction caused by exchange rate changes during the year of $31.5 million, the company's effort to reduce inventories, and the net effect of reductions caused by dispositions exceeding increases from acquisitions. o Prepaid expenses totalled $60.7 million at the end of the year, $5.0 million higher than the balance at December 31, 1998. The increase is associated with a general increase in prepaid expense accounts from acquired companies during the year. o Assets held for sale totalled $799.7 million. This reflects an increase of $399.6 million over the December 31, 1998, balance of $400.1 million. The account balance at the end of 1998 primarily represents the company's investments in their ventures in IDP and D-R, which are now identified as discontinued operations. (See Note 2 to the Consolidated Financial Statements.) During the current year, this account was increased by the operating results of the joint ventures and the December 31, 1999, purchase of the remaining 49% interest in IDP for $377.0 million as well as the net change in the assets and liabilities of IDP. On February 2, 2000, the company purchased the remaining 51% interest in D-R that it did not previously own for an additional payment of $536.0 million. o Deferred income taxes (current) of $53.9 million at December 31, 1999, represented the deferred tax benefit of the difference between the book and tax values of various current assets and liabilities. The components of the balance are included in Note 15 to the Consolidated Financial Statements. o Investments in and advances with partially owned equity affiliates at December 31, 1999, totalled $198.2 million, an increase of $14.6 million over the 1998 balance of $183.6 million. This category includes the company's investments in partially owned equity affiliates (i.e. 50% or less ownership). Income and dividends from the investments in partially owned equity affiliates were $9.5 million and $6.4 million, respectively, in 1999. Amounts due to these units increased $1.5 million from December 31, 1998. Currency movements were the primary cause of the remaining change in the account balance. o Net property, plant and equipment increased by $3.5 million in 1999 to a year-end balance of $1,240.2 million. Capital expenditures in 1999 totalled $190.5 million, and acquisitions (net of dispositions) added $2.7 million. Foreign exchange fluctuations decreased net fixed assets by approximately $21.2 million. The remaining net decrease was the result of depreciation and sales and retirements. o Intangible assets, net, totalled $3,726.3 million at December 31, 1999, as compared to $3,765.8 million at December 31, 1998, for a net decrease of $39.5 million. The amortization expense for the current year was $112.8 million. Acquisition activity and the effects of foreign currency translation accounted for the balance of the change. o Deferred income taxes (noncurrent) totalled $158.0 million at December 31, 1999, an amount that was $48.0 million lower than the 1998 balance. The components comprising the balance at December 31, 1999, can be found in Note 15 to the Consolidated Financial Statements. o Other assets totalled $209.2 million at year end, an increase of $33.5 million from the 1998 balance, primarily due to an increase in prepaid pensions of $32.0 million. o Accounts payable and accruals totalled $1,224.4 million at December 31, 1999, a decrease of $60.0 million from last year's balance of $1,284.4 million. Reduced inventory levels at year end and acquisitions, net of dispositions, along with the timing of payrolls and benefits accounted for the reduction in 1999. o Loans payable including current maturities of long-term debt, were $495.5 million at the end of 1999, which reflects a $177.5 million increase from the $318.0 million level at December 31, 1998. Approximately $252.2 million of current maturities of long-term debt were repaid in 1999. The balance at the end of 1999 included a $377.0 million note payable issued in connection with the company's purchase of the remaining interest in the IDP joint venture. Excluding this item, loans payable would have reflected a reduction from the 1998 year-end balance of approximately $200.0 million. The effect of translation activity during 1999 had a minimal effect on the account balance during the year. o Long-term debt, excluding current maturities, totalled $2,113.3 million, a reduction of approximately $52.7 million from the prior year's balance of $2,166.0 million. Reductions in long- term debt of $73.1 million represent the reclassification of the current maturities of long-term debt to loans payable. Long- term financings for plant and office expansions accounted for the modest increase in debt activity for the year. Foreign exchange activity had a minimal effect on the account balance during the year. o Postemployment and other benefit liabilities at December 31, 1999, totalled $805.0 million, a decrease of $15.5 million from the December 31, 1998, balance. Postemployment liabilities include medical and life insurance postretirement benefits, long-term pension and other noncurrent benefit accruals. (See Notes 16 and 17 to the Consolidated Financial Statements for additional information.) o Minority interest liabilities at December 31, 1999, totalled $95.7 million, which represents a net increase of $62.1 million over the balance at the end of the prior year. This liability represents the ownership interests of other entities in certain consolidated subsidiaries of the company. The increase for 1999 primarily represents an equity interest purchase by a vendor in an entity controlled by the company. o Other liabilities (noncurrent) at December 31, 1999, totalled $161.8 million, an increase of $9.3 million over the balance at December 31, 1998. The increase is associated with acquisitions during 1999. These obligations are not expected to be paid in the next year. Generally, these accruals cover environmental, insurance, legal and other long-term contractual obligations. Other information concerning the company's financial resources, commitments and plans is as follows: The average short-term borrowings outstanding, excluding current maturities of long-term debt, was $104.8 million in 1999, compared to $314.8 million in 1998. The weighted average interest rate during 1999 was 6.6%, compared to 6.3% during the previous year. The maximum amounts outstanding during 1999 and 1998 were $422.4 million and $794.1 million, respectively. The company had $1.3 billion in domestic short-term credit lines and $750.0 million in long-term credit lines at December 31, 1999 all of which were unused. Additionally, $599.8 million of foreign credit lines were available for working capital purposes, $527.3 million of which was used at the end of the year. These facilities exceed projected requirements for 2000 and provide direct support for commercial paper and indirect support for other financial instruments, such as letters of credit and comfort letters. In 1999, foreign currency translation adjustments decreased shareholders' equity by $46.5 million. This change was due to the strengthening of the U.S. dollar against other currencies in countries where the company has significant operations. Currency changes in the euro, euro-linked currencies and the British pound accounted for nearly all of the change. The company utilizes two wholly owned special purpose subsidiaries to purchase accounts and notes receivable at a discount from the company on a continuous basis. These special purpose subsidiaries simultaneously sell an undivided interest in these accounts and notes receivable to a financial institution up to a maximum of $170.0 million. The agreements between the special purpose corporations and the financial institution are renewable annually. The company intends to renew these agreements at their expiration dates with either the current or another financial institution. The company is retained as the servicer of the pooled receivables. At December 31, 1999 and 1998, $170.0 million of such receivables remained uncollected. Capital expenditures were $190.5 million and $200.9 million in 1999 and 1998, respectively. The company continues investing to improve manufacturing productivity, reduce costs, and provide environmental enhancements and advanced technologies for existing facilities. The capital expenditure program for 2000 is estimated at approximately $210.0 million, including amounts approved in prior periods. There are no planned projects, either individually or in the aggregate, that represent a material commitment for the company. Many of these projects are subject to review and cancellation at the option of the company without incurring substantial charges. Financial Market Risk The company generates foreign currency exposures in the normal course of business. To mitigate the risk from foreign currency exchange rate fluctuations, the company will generally enter into forward currency exchange contracts for the purchase or sale of a currency in accordance with the company's policies and procedures. The company applies sensitivity analysis and value at risk (VAR) techniques when measuring the company's exposure to currency fluctuations. VAR is a measurement of the estimated loss in fair value until currency positions can be neutralized, recessed or liquidated and assumes a 95% confidence level with normal market conditions. The potential one-day loss, as of December 31, 1999, was $1.1 million and it is considered insignificant in relation to the company's results of operations and shareholders' equity. With regard to interest rate risk, the effect of a hypothetical 1% increase in interest rates, across all maturities, would decrease the estimated fair value of the company's long-term debt at December 31, 1999, from $2,083.9 million to an estimated fair value of $2,004.1 million. Environmental Matters The company 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. During 1999, the company spent approximately $8.0 million on capital projects for pollution abatement and control, and an additional $6.0 million for environmental remediation expenditures at sites presently or formerly owned or leased by the company. It should be noted that these amounts are difficult to estimate because environmental improvement costs are generally a part of the overall improvement costs at a particular plant. Therefore, the accurate estimate of which portion of an improvement or a capital expenditure relates to an environmental improvement is difficult to ascertain. The company believes that these expenditure levels will continue and may increase over time. Given the evolving nature of environmental laws, regulations and technology, the ultimate cost of future compliance is uncertain. 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 30 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 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. Forward-looking Statements This annual report contains not only historical information, but also forward-looking statements regarding expectations for future company performance. Forward-looking statements involve risk and uncertainty. See the company's 1999 Annual Report on Form 10-K for a discussion of factors which could cause future results to differ from current expectations. 1998 Compared to 1997 Sales for 1998 totalled $7.4 billion, which generated $969.1 million of operating income and $455.5 million of net earnings from continuing operations ($2.75 diluted earnings per share). Net income from discontinued operations totalled $53.6 million in 1998 ($0.33 diluted earnings per share). The company's results for 1998 included a full year's benefit from the October 31, 1997, acquisition of Thermo King Corporation (Thermo King). Thermo King reported 1998 sales of $1.2 billion with an operating income contribution of $159.3 million and net earnings of $24.0 million or 15 cents diluted earnings per share after the allocation of acquisition interest expense and the related tax benefit. The company's results for 1997 were sales of $6.2 billion, which generated $723.5 million of operating income and produced net earnings from continuing operations of $358.6 million for the year ($2.18 diluted earnings per share). In 1997, net income from discontinued operations was $21.9 million (or $0.13 diluted earnings per share). Thermo King generated $176.9 million of sales and produced an operating loss of $0.2 million, after goodwill amortization and the effect of estimated purchase accounting adjustments for the last two months of 1997. Thermo King's net loss for this two-month period was $11.3 million (seven cents diluted earnings per share) after the allocation of acquisition interest expense of $27.3 million. Excluding Thermo King's results from both years, 1998 sales increased modestly, with an 11.9% increase in operating income resulting in a significant increase of 17% in net earnings from continuing operations for 1998 over the adjusted 1997 results. A comparison of key financial data between 1998 and 1997 follows: o Net sales in 1998 were $7.4 billion, reflecting an 18.4% improvement over the 1997 total of $6.2 billion. Excluding Thermo King's results from both years, adjusted sales for 1998 increased by 2% over the 1997 adjusted total. o Cost of goods sold in 1998 was 73.0% of sales, compared to 73.9% in 1997. Excluding Thermo King's results from both years, the adjusted ratio of cost of goods sold to sales reflected a marked improvement in 1998, compared to 1997. o Administrative, selling and service engineering expenses were 13.9% of sales in 1998, compared to 14.5% for 1997. This decrease is primarily attributable to the inclusion of Thermo King, which traditionally had a lower ratio of selling and administrative expenses to sales than the company's historical lines of business. o Operating income for the year totalled $969.1 million, a 33.9% increase over 1997 operating income of $723.5 million. The ratio of operating income to sales in 1998 was 13.1%, compared to 11.6% for the prior year. After excluding Thermo King's results from both years, adjusted 1998 operating income still reflects a double-digit improvement over the adjusted 1997 results. This improvement was the combined effect of the company's aggressive productivity-improvement and procurement programs, and the continued stability of domestic markets. o Interest expense for the year totalled $224.1 million versus $135.2 million for 1997. Interest expense associated with the debt incurred for the Thermo King acquisition totalled approximately $129.3 million in 1998 (excluding costs related to the company's equity-linked securities) and $27.3 million for the last two months of 1997. o Other income (expense), net, is the sum of foreign exchange activities, equity in earnings of partially owned affiliates, and other miscellaneous income and expense items. In 1998, these activities resulted in a net expense of $15.3 million, an unfavorable change of $9.0 million compared to the 1997 net other expense of $6.3 million. This change was caused by lower earnings from partially owned affiliates and higher foreign exchange losses of $8.2 million in 1998, offset by lower net miscellaneous income and expense items. o The company's charges for minority interests are composed of two items: (1) $19.7 million of charges associated with the company's equity-linked securities issued during the first quarter of 1998; and (2) interests of minority owners (less than 50%) in a consolidated unit of the company which totalled $3.8 million in 1998 and $3.6 million in 1997. o The company's effective tax rate for 1998 was 35.5%, which improved from the 38.0% reported for the prior year due to a full-year favorable tax benefit associated with the Thermo King acquisition. The variance from the 35.0% statutory rate primarily was due to tax rates associated with foreign earnings, the foreign sales corporation, favorable tax benefits associated with the income earned in Puerto Rico, the effect of state and local taxes and the nondeductibility of a portion of goodwill. o Discontinued operations (net of tax) for 1998 amounted to $53.6 million, which was more than double 1997's results of $21.9 million. This category represents the company's 49% interest in the earnings of D-R and the company's 51% interest in IDP reduced by appropriate taxes. As previously announced, the company intends to divest these units; therefore, their net operating results have been classified as "discontinued operations." The net earnings from these partnerships in 1998 were both substantially above their 1997 levels. These increases were the result of a stronger economic climate for their products, coupled with the fact that both operations recorded a total of $60.0 million of restructuring charges during 1997 to reduce their headcount and to close underperforming operations. (See Note 2 to the Consolidated Financial Statements for additional information.) At December 31, 1998, employment totalled 46,525. This represents a slight decrease from the prior year's level of 46,567. During 1998, the company made significant progress in improving its liquidity and capital resources by (1) completing the financing of the Thermo King acquisition with the issuance of $402.5 million of equity-linked securities during the first quarter of the year, and (2) reducing the company's debt by an additional $570.9 million, which was generated from the company's strong cash flow during the year. The proceeds from the equity-linked securities were used to reduce the company's short-term borrowings, which were originally issued to satisfy a portion of the cash requirements for the acquisition of Thermo King on October 31, 1997. These actions primarily contributed to the company's reduction in its debt-to-total capital ratio from 59% at the end of 1997 to 44% at December 31, 1998. The following points highlight the financial results and financial condition of the company's operations with the impact of foreign currency translation where appropriate: o Cash and cash equivalents totalled $43.5 million at December 31, 1998, a $23.0 million reduction from the prior year-end balance of $66.5 million. Cash flows from operating activities provided $859.6 million, investing activities used $161.9 million and financing activities used $741.8 million. Exchange rate changes during 1998 increased cash and cash equivalents by $1.0 million. o Marketable securities totalled $2.0 million at the end of 1998, $1.8 million below the balance at December 31, 1997. The net reduction was due to maturity and exchange rate changes. o Receivables totalled $963.7 million at December 31, 1998, compared to $1,080.7 million at the end of 1997, a net decrease of $117.0 million. The decrease is attributable to improved cash collections and reductions from dispositions. The company focuses on decreasing its receivables base through its asset- management program, which produced a reduction in the average days outstanding in receivables to 48.8 days from the 1997 level of 53.5 days. o Inventories amounted to $824.8 million at December 31, 1998, an increase of $84.3 million from 1997's level of $740.5 million. Inventory increases at year end in anticipation of early 1999 shipments were the primary reason for the increase. The company's emphasis on inventory control was demonstrated by the reduction of the average months' supply of inventory to 2.4 months at December 31, 1998, compared to 2.5 months at the prior year end. o Prepaid expenses totalled $55.7 million at the end of 1998, $23.7 million lower than the balance at December 31, 1997. Changes in prepaid pension assets and a general reduction in other prepaid assets were the reasons for the reduction in the account balance. o Assets held for sale totalled $400.1 million at December 31, 1998, and reflects an increase of $11.0 million over the December 31, 1997, balance of $389.1 million. The account balance at the end of both years primarily represents the company's investments in IDP and D-R, which are now identified as discontinued operations. (See Note 2 to the Consolidated Financial Statements.) During 1998, this account was increased by the operating results of the joint ventures and was reduced by changes in the net assets. In addition, the account balance was also reduced by approximately $22.5 million, for other asset dispositions not involving either IDP or D-R. o Deferred income taxes (current) of $68.8 million at December 31, 1998, represented the deferred tax benefit of the difference between the book and tax values of various current assets and liabilities. The components of the balance are included in Note 15 to the Consolidated Financial Statements. o Investments in and advances with partially owned equity affiliates at December 31, 1998, totalled $183.6 million, $16.1 million below the 1997 balance of $199.7 million. Income and dividends from partially owned equity affiliates were $13.6 million and $6.7 million, respectively. Amounts due from these units decreased $12.6 million from December 31, 1997. Currency movements and acquisitions were the primary cause of the remaining change in the account balance. o Net property, plant and equipment increased by $63.0 million in 1998 to a year-end balance of $1,236.7 million. Capital expenditures in 1998 totalled $200.9 million, and acquisitions (net of dispositions) added $13.0 million. Foreign exchange fluctuations increased net fixed assets by approximately $3.6 million. The remaining net decrease was the result of depreciation and sales and retirements. o Intangible assets, net, totalled $3,765.8 million at December 31, 1998, as compared to $3,822.4 million at December 31, 1997, for a net decrease of $56.6 million. The amortization expense for 1998 was $110.1 million. Acquisition activity and the effects of foreign currency translation accounted for the balance of the change. o Deferred income taxes (noncurrent) totalled $206.0 million at December 31, 1998. This total was $26.3 million higher than the 1997 balance. The components comprising the balance at December 31, 1998, can be found in Note 15 to the Consolidated Financial Statements. o Other assets totalled $175.7 million at the end of 1998, a decrease of $31.6 million from the December 31, 1997, balance of $207.3 million. Other assets decreased by approximately $25.0 million due to a decrease in prepaid pensions and a general reduction in other noncurrent assets. Foreign exchange activity in 1998 had a minimal effect on the account balance during the year. o Accounts payable and accruals totalled $1,284.4 million at December 31, 1998, an increase of $109.1 million from last year's balance of $1,175.3 million. Increased inventory levels at year end and acquisitions, net of dispositions, along with the timing of payrolls and benefits account for the increase in 1998. o Loans payable, including current maturities on long-term debt, were $318.0 million at the end of 1998, which reflects a $605.8 million reduction from the $923.8 million level at December 31, 1997. Proceeds of $389.6 million from the issuance of the company's equity-linked securities were used to reduce short- term debt during the year. Current maturities of long-term debt increased the account balance by an additional $251.8 million. In addition, the company also repaid approximately $261.2 million of current maturities of long-term debt. o Long-term debt, excluding current maturities, totalled $2,166.0 million, a reduction of approximately $362.1 million from the prior year's balance of $2,528.1 million. Reductions in long- term debt of $251.8 million represent the reclassification of the current maturities of long-term debt to loans payable. In addition, the company repaid $110.0 million of long-term debt with accelerated payments during the year. Foreign exchange activity had a minimal effect on the account balance during the year. o Postemployment and other benefit liabilities at December 31, 1998, totalled $820.5 million, a decrease of $41.6 million from the December 31, 1997, balance. Postemployment liabilities include medical and life insurance postretirement benefits, long-term pension and other noncurrent postemployment accruals. (See Notes 16 and 17 to the Consolidated Financial Statements for additional information). o Minority interest liabilities at December 31, 1998, totalled $33.6 million, which represents a net increase of $10.1 million over the balance at the end of the prior year. This liability represents the ownership interests of other entities in selected consolidated subsidiaries of the company. The change in the account balance for 1998 was due to earnings, advances and changes in ownership participation. o Other liabilities (noncurrent) at December 31, 1998, totalled $152.5 million, which reflected an increase of $6.5 million over the balance at December 31, 1997. These obligations are not expected to be paid in the next year. Generally, these accruals cover environmental, insurance, legal and other long- term contractual obligations. Other information concerning the company's financial resources, commitments and plans is as follows: The average short-term borrowings outstanding, excluding current maturities of long-term debt, was $314.8 million in 1998, compared to $376.0 million in 1997. The weighted average interest rate during 1998 was 6.3%, compared to 6.2% during the previous year. The maximum amounts outstanding during 1998 and 1997, were $794.1 million and $2,433.0 million, respectively. The company had $1.0 billion in domestic short-term credit lines at December 31, 1998, and $436.2 million of foreign credit lines available for working capital purposes, $1.4 billion of which was unused at the end of the year. In 1998, foreign currency translation adjustments increased shareholders' equity by $2.5 million. This change was due to the minor weakening of the U.S. dollar against other currencies in countries where the company has significant operations. Currency changes in France, Germany, and Japan accounted for nearly all of the change. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information under the caption "Financial Market Risk" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) The consolidated financial statements and the report thereon of PricewaterhouseCoopers LLP dated February 1, 2000, are included as Exhibit 13 - the Annual Report to Shareholders for 1998. (b) The unaudited quarterly financial data for the two-year period ended December 31, 1999, is as follows (in millions except per share amounts): Net Cost of Operating Net 1999 sales goods sold income earnings First quarter $1,891.1 $1,390.2 $ 238.6 $121.1 Second quarter 2,042.0 1,468.4 304.8 166.6 Third quarter 1,846.1 1,324.7 272.9 137.5 Fourth quarter 1,887.5 1,331.7 283.0 165.9 Year 1999 $7,666.7 $5,515.0 $1,099.3 $591.1 Net Cost of Operating Net 1998 sales goods sold income earnings First quarter $1,812.7 $1,341.9 $ 206.6 $ 99.1 Second quarter 1,954.4 1,429.5 266.8 140.9 Third quarter 1,802.3 1,320.1 237.0 119.4 Fourth quarter 1,815.3 1,296.3 258.7 149.7 Year 1998 $7,384.7 $5,387.8 $ 969.1 $509.1 All amounts shown have been restated to reflect discontinued operations. 1999 1998 Basic Diluted Basic Diluted earnings earnings earnings earnings per per per per common common common common share share share share First quarter $0.74 $0.73 $0.60 $0.60 Second quarter 1.01 0.99 0.86 0.85 Third quarter 0.84 0.83 0.73 0.72 Fourth quarter 1.02 1.01 0.92 0.91 Year $3.61 $3.57 $3.11 $3.08 Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is (i) incorporated by reference in this Form 10-K Annual Report from pages 1 through 5, and 17 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 3, 2000, and (ii) included after Item 4 in Part I of this Form 10-K Annual Report. Item 11. EXECUTIVE COMPENSATION Information on executive compensation is incorporated by reference in this Form 10-K Annual Report from pages 7 through 17 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 3, 2000. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on security ownership of directors and nominees, directors and officers as a group and certain beneficial owners is incorporated by reference in this Form 10-K Annual Report on pages 4 and 5 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 3, 2000. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 is incorporated by reference in this Form 10-K Annual Report from page 17 of the company's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 3, 2000. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. and 2. Financial statements and financial statement schedules The financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated February 1, 2000, included as Exhibit 13 and the unaudited quarterly financial data included in Part II Item 8(b) are incorporated by reference in this Form 10-K Annual Report. The financial statement schedule listed in the accompanying index should be read in conjunction with the financial statements in such Annual Report to Shareholders for 1999. Separate financial statements for all 50 percent or less owned companies, accounted for by the equity method have been omitted because no individual entity constitutes a significant subsidiary. (b) Reports on Form 8-K None 3. Exhibits The exhibits listed on the accompanying index to exhibits are filed as part of this Form 10-K Annual Report. INGERSOLL-RAND COMPANY INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (Item 14 (a) 1 and 2) Form 10-K Consolidated Financial Statements: Report of independent accountants * Consolidated balance sheet at December 31, 1999 and 1998 * For the years ended December 31, 1999, 1998 and 1997: Consolidated statement of income * Consolidated statement of shareholders' equity * Consolidated statement of cash flows * Notes to consolidated financial statements * Selected unaudited quarterly financial data ** Financial Statement Schedule: Report of independent accountants on financial statement schedule See below Consolidated schedule for the years ended December 31, 1999, 1998 and 1997: Schedule II -- Valuation and Qualifying Accounts See below * See Exhibit 13 - Ingersoll-Rand Company Annual Report to Shareholders for 1999. ** See Item 8 Financial Statements and Supplementary Data. Financial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Ingersoll-Rand Company: Our audits of the consolidated financial statements referred to in our report dated February 1, 2000, appearing in the 1999 Annual Report to Shareholders of Ingersoll-Rand Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /S/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey February 1, 2000 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-38367, No. 333- 37019, and No. 333-34029) and to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-42133, No. 333-19445, No. 333-67257, No. 333-00829, and No. 33-35229) of Ingersoll-Rand Company of our report dated February 1, 2000 relating to the financial statements, which appears in the 1999 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 1, 2000 relating to the financial statement schedule, which appears in this Form 10-K. /S/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey March 29, 2000 SCHEDULE II INGERSOLL-RAND COMPANY VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997 (Amounts in millions) Additions charged to Balance at costs and Balance beginning expenses Deductions at end Description of year (*) (**) of year 1999 Doubtful accounts $ 35.4 $ 8.7 $ 10.7 $ 33.4 1998 Doubtful accounts $ 29.4 $ 10.5 $ 4.5 $ 35.4 1997 Doubtful accounts $ 29.8 $ 10.8 $ 11.2 $ 29.4 (*) "Additions" include foreign currency translation. (**) "Deductions" include accounts and advances written off, less recoveries. INGERSOLL-RAND COMPANY INDEX TO EXHIBITS (Item 14(a)) Description 3 (i) Restated Certificate of Incorporation of Ingersoll-Rand Company, as amended through May 28, 1992. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 3 (ii) Amendment to Restated Certificate of Incorporation of Ingersoll-Rand Company filed May 28, 1992. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 3 (iii) Amendment to Restated Certificate of Incorporation of Ingersoll-Rand Company filed August 20, 1997. Incorporated by reference to Form S-3 filed October 2, 1997. 3 (iv) By-Laws of Ingersoll-Rand Company, as amended through October 1, 1999. Filed herewith. 4 (i) Rights Agreement, dated as of November 9, 1998. Incorporated by reference from Form 8-A/A of Ingersoll- Rand Company filed on November 13, 1998. 4 (ii) Indenture, dated as of August 1, 1986 between Ingersoll- Rand Company and The Bank of New York, as Trustee, as supplemented. Incorporated by reference to Exhibits 4.1, 4.2 and 4.3 of the company's Form S-3 Registration Statement No. 33-39474. 4(iii) Purchase Contract Agreement dated as of March 23, 1998 between Ingersoll-Rand Company and The Bank of New York, as Purchase Contract Agent. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 4(iv) Pledge Agreement dated as of March 23, 1998 between Ingersoll-Rand Company and The Chase Manhattan Bank, as Collateral Agent, Custodial Agent and Securities Intermediary. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 4(v) Indenture dated as of March 23, 1998 between Ingersoll-Rand Company and The Bank of New York, as trustee. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 4(vi) First Supplemental Indenture dated as of March 23, 1998 between Ingersoll-Rand Company and The Bank of New York, as trustee. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 4(vii) Amended and Restated Declaration of Trust for Ingersoll- Rand Financing I, a Delaware statutory business trust, dated March 23, 1998. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 4(viii) Guarantee Agreement dated as of March 23, 1998, between Ingersoll-Rand Company and The First National Bank of Chicago, as trustee. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 4 (ix) (a) Ingersoll-Rand Company is a party to several long-term debt instruments under which in each case the total amount of securities authorized does not exceed 10% of the total assets of Ingersoll-Rand Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, Ingersoll-Rand Company agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10 (iii) The following exhibits constitute management contracts or compensatory plans or arrangements required by Item 601 of Regulation S-K. 10 (iii) (a) Management Incentive Unit Plan of Ingersoll- Rand Company. Amendment to the Management Incentive Unit Plan, effective January 1, 1982. Amendment to the Management Incentive Unit Plan, effective January 1, 1987. Amendment to the Management Incentive Unit Plan, effective June 3, 1987. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (b) Ingersoll-Rand Company Directors Deferred Compensation and Stock Award Plan. Incorporated by reference to Form 10-K for the year ended December 31, 1996, filed March 26, 1997. 10 (iii) (c) Description of Bonus Arrangement for Executive Vice Presidents of Ingersoll-Rand Company. Filed herewith. 10 (iii) (d) Description of Bonus Arrangement for Chairman, President and Staff Officers. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (e) Amended and Restated Form of Change of Control Agreement as of March 1, 1999 with Chairman of Ingersoll-Rand Company. Incorporated by reference to Form 10-K of Ingersoll- Rand Company for the year ended December 31, 1998, filed March 30, 1999. 10 (iii) (f) Amended and Restated Form of Change of Control Agreement as of March 1, 1999, with selected executive officers other than Chairman of Ingersoll-Rand Company. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 10 (iii) (g) Executive Supplementary Retirement Agreement for selected executive officers. Incorporated by reference to Form 10- K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (h) Executive Supplementary Retirement Agreement for selected executive officers. Incorporated by reference to Form 10- K for the year ended December 31, 1996, filed March 26, 1997. 10 (iii) (i) Forms of insurance and related letter agreements with certain executive officers. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (j) Incentive Stock Plan of 1990 of Ingersoll-Rand Company. Incorporated by reference to Form 10-K of Ingersoll- Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (k) Restated Supplemental Pension Plan. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1995, filed March 29, 1996. 10 (iii) (l) Supplemental Stock and Savings Investment Plan effective as of January 1, 1989. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (m) Supplemental Retirement Account Plan effective as of January 1, 1989. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1993, filed March 30, 1994. 10 (iii) (n) Incentive Stock Plan of 1995 of Ingersoll-Rand Company. Incorporated by reference to the Notice of 1995 Annual Meeting of Shareholders and Proxy Statement dated March 15, 1995. See Appendix A of the Proxy Statement dated March 15, 1995. 10 (iii) (o) Senior Executive Performance Plan. Incorporated by reference to the Notice of 1995 Annual Meeting of Shareholders and Proxy Statement dated March 15, 1995. See Appendix B of the Proxy Statement dated March 15, 1995. 10 (iii) (p) Amended and Restated Elected Officers Supplemental Plan. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1998, filed March 30, 1999. 10 (iii) (q) Selected Executive Officer Employment Agreement. Incorporated by reference to Form 10-K of Ingersoll-Rand Company for the year ended December 31, 1995, filed March 29, 1996. 10 (iii) (r) Executive Deferred Compensation and Stock Award Plan. Incorporated by reference to Form 10-K for the year ended December 31, 1996, filed March 26, 1997. 10 (iii) (s) Chief Financial Officer Employment Agreement. Incorporated by reference to Form 10-K for the year ended December 31, 1997, filed March 6, 1998. 10 (iii) (t) Incentive Stock Plan of 1998 of Ingersoll-Rand Company. Incorporated by reference to Appendix A to the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 17, 1998. 10 (iii) (u) Composite Employment Agreement with Chief Executive Officer. Filed herewith. 11 Computation of Earnings Per Share. Filed herewith. 12 Computations of Ratios of Earnings to Fixed Charges. Filed herewith. 13 Ingersoll-Rand Company Annual Report to Shareholders for 1999. Not deemed to be filed as part of this report except to the extent incorporated by reference. Filed herewith. 21 List of Subsidiaries of Ingersoll-Rand Company. Filed herewith. 27 Financial Data Schedule. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By /S/ David W. Devonshire Date March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date President,Chief Executive Officer and Director (Principal /S/ Herbert L. Henkel Executive Officer) March 30, 2000 (Herbert L. Henkel) Executive Vice President,Chief Financial Officer (Principal /S/ David W. Devonshire Financial Officer) March 30, 2000 (David W. Devonshire) Vice President and Controller (Principal /S/ Steven R. Shawley Accounting Officer) March 30, 2000 (Steven R. Shawley) /S/ James E. Perrella Chairman and Director March 30, 2000 (James E. Perrella) /S/ Joseph P. Flannery Director March 30, 2000 (Joseph P. Flannery) /S/ Peter C. Godsoe Director March 30, 2000 (Peter C. Godsoe) /S/ Constance J. Horner Director March 30, 2000 (Constance J. Horner) /S/ H. William Lichtenberger Director March 30, 2000 (H. William Lichtenberger) /S/ Theodore E. Martin Director March 30, 2000 (Theodore E. Martin) /S/ Orin R. Smith Director March 30, 2000 (Orin R. Smith) /S/ Richard J. Swift Director March 30, 2000 (Richard J. Swift) /S/ Tony L. White Director March 30, 2000 (Tony L. White) EX-3 2 Exhibit 3 (iv) BY-LAWS of INGERSOLL-RAND COMPANY As amended through October 1, 1999 BY-LAWS of INGERSOLL-RAND COMPANY ARTICLE I. STOCKHOLDERS' MEETINGS Section 1. Annual Meeting: The annual meeting of the Stockholders of the Company shall be held on the fourth Thursday of April, in each year, or such other date as the Board of Directors may determine, at such hour and at such place within or without the State of New Jersey as may be fixed by the Board of Directors and stated in the notice of the meeting, for the election of Directors of the Company and for the transaction of such other business as may come before it in accordance with the provisions of these By-Laws. At any such annual meeting of Stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors, or (b) by any Stockholder entitled to vote at such meeting who complies with the procedures set forth in this Section 1. Any Stockholder entitled to vote at such meeting may propose business to be included in the agenda of such meeting only if written notice of such Stockholder's intent is given to the Secretary of the Company, either by personal delivery or by United States mail, postage prepaid, not later than 90 days in advance of the anniversary of the immediately preceding annual meeting or if the date of the annual meeting of Stockholders occurs more than 30 days before or 60 days after the anniversary of such immediately preceding annual meeting, not later than the close of business on the seventh day following the date on which notice of such meeting is given to Stockholders. A Stockholder's notice to the Secretary shall set forth in writing as to each matter such Stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company's books, of the Stockholder proposing such business, (c) the class and number of shares of the Company which are beneficially owned by the Stockholder and (d) any material interest of the Stockholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1. The officer of the Company or other person presiding at the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1, and, if such officer or other person should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 2. Special Meetings: Special meetings of the Stockholders may be held at the principal office of the Company in the State of New Jersey or at such other place within or without said State as may from time to time be designated by the Board of Directors and stated in the notice of the meeting, whenever called in writing by the Chairman of the Board, the Vice-Chairman or the President or by vote of a majority of the Board of Directors. At any special meeting of the Stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors and such business shall be confined to the object or objects stated in the notice thereof. Section 3. Quorum: Unless otherwise provided in the Certificate of Incorporation of this Company or by statute, the presence in person or by proxy of the holders of record of the shares entitled to cast a majority of the votes at any meeting of the Stockholders shall constitute a quorum at such meeting. Whenever the holders of any class or series of shares are entitled to vote separately on a specified item of business, the presence in person or by proxy of the holders of record of the shares of such class or series entitled to cast a majority of the votes thereon shall constitute a quorum for the transaction of such specified item of business. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed by these By-Laws for an annual meeting, or as fixed by notice, as above provided for a special meeting, a majority in interest of the Stockholders present, in person or by proxy, may adjourn from time to time without notice other than announcement at the meeting until the holders of the amount of stock requisite to constitute a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 4. Organization: The Chairman of the Board shall call meetings of the Stockholders to order and shall act as chairman of such meetings. In the absence of the Chairman of the Board, or if he so designates, the Chief Executive Officer, or in his absence, the Vice Chairman, the President, an Executive Vice President shall preside, and in the absence of any of the foregoing officers, the Stockholders present, or the Board of Directors, may appoint any stockholder to act as chairman of any meeting. The Secretary of the Company shall act as Secretary of all meetings of the Stockholders. In the absence of the Secretary at any meeting of the Stockholders, the presiding officer, may appoint any person to act as Secretary of the meeting. Section 5. Voting: At each meeting of the Stockholders, every Stockholder shall be entitled to vote in person or by proxy appointed by instrument in writing subscribed by such Stockholder or by his duly authorized attorney and delivered to the inspectors at the meeting. The votes for Directors and, upon demand of any Stockholder, the votes upon any question before the meeting shall be by ballot. Section 6. Inspectors: At each annual stated meeting of the Stockholders for the election of Directors, the presiding officer of such meeting shall appoint two persons to act as inspectors, who shall be sworn to perform their duties in accordance with the laws of the State of New Jersey, and who shall return a formal certificate. Section 7. Organization: The Board of Directors shall annually elect one of its members to be Chairman of the Board and shall fill any vacancy in the position of Chairman of the Board at such time and in such manner as the Board of Directors shall determine. The Chairman of the Board shall preside at meetings of the Board of Directors and lead the Board in fulfilling its responsibilities as defined in Section 1 of this Article II and, in particular, its responsibilities to oversee the performance of the Company. The Board of Directors may also elect one or more of its members to serve as a Vice Chairman of the Board who shall have such duties and responsibilities as are provided by these By-Laws or may be determined by the Board of Directors. In the absence of the Chairman of the Board, the Chief Executive Officer, or in his absence, the Vice Chairman of the Board, or in his absence, a member of the Board selected by the members present, shall preside at meetings of the Board. Section 8. Nominations of Directors: Nominations for the election of Directors may be made by the Board of Directors or any Stockholder entitled to vote for the election of Directors. Any Stockholder entitled to vote for the election of Directors at a meeting or to express a consent in writing without a meeting may nominate a person or persons for election as a Director only if written notice of such Stockholder's intent to make such nomination is given to the Secretary of the Company, either by personal delivery or United States mail, postage prepaid, not later than (a) with respect to an election to be held at an annual meeting of Stockholders, 90 days in advance of the anniversary of the immediately preceding annual meeting or if the date of the annual meeting of Stockholders occurs more than 30 days before or 60 days after the anniversary of such immediately preceding annual meeting, not later than the close of business on the seventh day following the date on which notice of such meeting is given to Stockholders and (b) in the case of any Stockholder who wishes to nominate a person or persons for election as a Director pursuant to consents in writing by Stockholders without a meeting (to the extent election by such consents is permitted under applicable law and the Company's Certificate of Incorporation), 60 days in advance of the date on which materials soliciting such consents are first mailed to Stockholders or, if no such materials are required to be mailed under applicable law, 60 days in advance of the date on which the first such consent in writing is executed. Each such notice shall set forth the name and address of the Stockholder who intends to make the nomination and of the person or persons to be nominated for election as a Director, a representation that the Stockholder is a holder of record of stock of the Company entitled to vote at such meeting or to express such consent in writing and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or to execute such a consent in writing to elect such person or persons as a Director, a description of all arrangements or understandings between the Stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations for election as a Director are to be made by the Stockholder, such other information regarding each nominee proposed by such Stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission if such nominee had been nominated, or was intended to be nominated, for election as a Director by the Board of Directors, and the consent of each nominee to serve as a Director of the Company if so elected. The Board of Directors may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. ARTICLE II. BOARD OF DIRECTORS Section 1. Number and Election: The business and property of the Company shall be managed by a Board of ten Directors. The number of Directors may be altered from time to time by the alteration of these By-Laws, provided that, as required by the Restated Certificate of Incorporation, the Board shall never consist of less than eight members. As provided in the Restated Certificate of Incorporation, the Board of Directors shall be divided into three classes, two consisting of three Directors each and the remaining consisting of four Directors. At each annual election, the successors to the Directors of the class whose terms shall expire in that year shall be elected to hold office for a term of three years, so that the term of office of one class of Directors shall expire in each year. Each Director shall serve for the term for which such Director shall have been elected and until such Director's successor shall have been duly elected. Notwithstanding the foregoing provisions of this Section 1, if and as long as the Restated Certificate of Incorporation provides for the election of additional Directors by class or classes of stock, such additional Directors shall be elected in the manner and for the term provided in the Restated Certificate of Incorporation. Section 2. Vacancies: Subject to any requirements of the Certificate of Incorporation with respect to the filling of vacancies among additional Directors elected by a class or classes of stock, if the office of any Director becomes vacant, the remaining Directors may, by a majority vote, elect a successor who shall hold office until the next succeeding annual meeting of the Stockholders and until his successor shall have been elected and qualified. Section 3. Place of Meetings: The Directors may hold their meetings and may have an office and keep the books of the Company (except as otherwise may be provided for by law) in such place or places in the State of New Jersey or outside of the State of New Jersey as the Board from time to time may determine. Section 4. Regular Meetings: Regular meetings of the Board of Directors shall be held at such times and intervals as the Board may from time to time determine. It shall be the duty of the Secretary to send a notice to each of the Directors at his address as it appears on the books of the Company at least two (2) days before the holding of each regular meeting, but a failure of the Secretary to send such notice shall not invalidate any proceedings of the said Board. Section 5. Special Meetings: Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or the Vice-Chairman or the President, or by one-third (1/3) of the Directors for the time being in office. The Secretary shall give notice of each special meeting by mailing the same at least two (2) days before the meeting, or by telegraphing the same at least one (1) day before the meeting to each Director, but such notice may be waived by any Director. At any meeting at which every Director shall be present, even without notice, any business may be transacted. Section 6. Quorum: Six (6) members of the Board of Directors, but not less than one-third (1/3) of the entire Board, shall constitute a quorum for the transaction of business; but if at any meeting of the Board there be less than a quorum present, those present may adjourn the meeting from time to time. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board may determine. Section 7. Director Emeritus: The Board of Directors may appoint a person who has served with distinction and who has retired from the Board upon reaching mandatory retirement as provided herein to the position of Director Emeritus. A Director Emeritus shall be invited to attend all meetings of the Board and shall receive the same compensation as that paid to outside Directors. While serving as a Director Emeritus, he shall not be considered a retired director for pension benefit purposes; however, any pension benefits to which he may be entitled will commence upon his cessation of service as a Director Emeritus. He shall be appointed by the Board for a one-year term and may be reappointed from time to time by action of the Board. While the presence of a Director Emeritus at a Board meeting will not be considered for quorum or voting purposes, nevertheless, his advice and counsel on all matters to come before the Board is invited. ARTICLE III. COMMITTEES The Board of Directors may appoint from their number such standing committees as they deem best and to the extent permitted by statute may invest them with such of their own powers as they may deem advisable, subject to such conditions as they may prescribe. ARTICLE IV. OFFICERS Section 1. Officers: The officers of the Company to be elected by the Board of Directors shall include a Chief Executive Officer (who shall be a member of the Board), President, Treasurer and Secretary and may also include one or more Vice Chairmen, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, and such other officers as the Board of Directors shall deem necessary or otherwise appropriate to elect. A person may hold any number of offices simultaneously. Any elected officer may be removed at any time with or without cause by the Board or by the committee or superior officer upon whom such power of removal may be conferred. Section 2. Powers and Duties: The Chief Executive Officer of the Company shall have executive responsibility for the general conduct of the business and affairs of the Company. He may appoint and remove assistant officers. He shall exercise such other powers, authority and responsibilities as the Board of Directors may determine. Other officers shall have all the usual and customary powers and shall perform all the usual and customary duties incident to their respective offices and, in addition thereto and to any duties specifically prescribed by any subsequent provisions of these By-Laws, they shall respectively perform such other general or special duties as may from time to time be assigned to them by the Board of Directors or the Chief Executive Officer. The Board of Directors may appoint an officer to act as Chief Financial Officer of the Company, who shall have responsibility for the financial affairs of the Company. He will be responsible for the preparation of the financial statements of the Company, and such other duties as from time to time may be assigned to him by the Board of Directors or the Chief Executive Officer. The Board of Directors may appoint an officer to act as General Counsel of the Company, who shall have responsibility for the legal affairs of the Company. The Board of Directors may appoint the Controller to be the principal accounting and financial control officer of the Company. Securities of other corporations or interests in other entities held by the Company may be voted by the Chairman of the Board or by any other person designated by the Board of Directors or Chief Executive Officer."; and further Section 3. Term: The executive officers elected by the Board of Directors shall hold office for one year or until their successors are elected and qualify. The Chairman, and any Vice-Chairman, shall be elected by the Directors from among their own number. One person may hold more than one office. ARTICLE V. BILLS, NOTES, AND CHECKS All bills, notes, checks or other negotiable instruments of the Company shall be made in the name of the Company and shall be signed by two executive officers or by any two persons duly authorized by the Board of Directors. No officers or agents of the Company, either singly or together shall have power to make any bill, note or check or other negotiable instrument in the name of the Company to bind the Company thereby, except as in this Article prescribed and provided. No officer or agent of this Company shall have power to endorse in the name, for or in behalf of the Company, any note, bill of exchange, draft, check or other written instrument for the payment of money, save only for purposes of the discount or the collection of the said instrument, unless thereunto duly and specially authorized by the vote of the Directors of this Company entered on the minutes of said Board. ARTICLE VI. CAPITAL STOCK Section 1. Certificates for Shares: The certificates for shares of the capital stock of the Company shall be in such form not inconsistent with the Certificate of Incorporation as shall be prepared or be approved by the Board of Directors. The certificates shall be signed by or bear thereon the facsimile signature of the Chairman, the Vice-Chairman, President, or an Executive Vice President, or a Vice President, and also be signed by or bear thereon the facsimile signature of the Treasurer or an Assistant Treasurer. The certificates shall be consecutively numbered. The name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be entered in the Company's books. Section 2. Transfers: Shares of the capital stock of the Company shall be transferred only on the books of the Company by the holder thereof in person or by his attorney, upon surrender of the certificate or certificates properly endorsed. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Company. The Board of Directors may appoint Transfer Agents and Stock Registrars and may require all stock certificates to bear the signatures of such a Transfer Agent and of such a Registrar of Transfers, or any of them. The stock transfer books may be closed for such period next preceding any Stockholders' meeting, or the payment of dividends as the Board of Directors may from time to time determine, and during such period no stock shall be transferable. The Board of Directors may also fix in advance a date not more than 60 nor less than 10 days preceding the date of any meeting of Stockholders, nor more than 60 days preceding the date for the payment of any dividend on the Common Stock or any series of Preference Stock, or the date for allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the Stockholders entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such dividend, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock. In such cases only Stockholders of record on the date so fixed shall be entitled to such notice of and vote at such meeting, or to receive payment of such dividend, or allotment of rights, or to exercise such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the Company after any such record date fixed as aforesaid. Section 3. Lost Stock Certificates: In case any stock certificate shall be lost, the Board of Directors may order a new certificate to be issued in its place upon receiving such proof of loss and such security therefor as may be satisfactory to it. ARTICLE VII. THE CORPORATE SEAL The Corporate Seal of the Company shall consist of a circle formed by the words "Ingersoll-Rand Company" and the letters "N. J." with the words "Corporate Seal" and the figures "1905" in the center. The Seal shall be attested by the signature of the Secretary or the Assistant Secretary or of the Treasurer or the Assistant Treasurer. When authorized by the Board of Directors, the Secretary shall affix the Seal, or cause it to be affixed, to all documents executed on behalf of the Company. The Board of Directors may also specifically or generally authorize other persons to affix the Seal. ARTICLE VIII. REACQUIRED SHARES When shares of the Company are reacquired by the Company by purchase, by redemption or by their conversion into other shares of the Company, such shares shall be treated by the Company as treasury shares, unless and to the extent the Board of Directors determines at any time that any such shares shall be cancelled. ARTICLE IX. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS Section 1. Right to Indemnification: Each person who was or is made a party or is threatened to be made a party to or is involved in any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, or any appeal therein or any inquiry or investigation which could lead to such action, suit or proceeding ("proceeding"), by reason of his or her being or having been a Director or officer of the Company or of any constituent corporation absorbed by the Company in a consolidation or merger, or by reason of his or her being or having been a Director, officer, trustee, employee or agent of any other corporation (domestic or foreign) or of any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (whether or not for profit), serving as such at the request of the Company or of any such constituent corporation, or the legal representative of any such Director, officer, trustee, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent permitted by the New Jersey Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said Act permitted prior to such amendment), from and against any and all reasonable costs, disbursements and attorneys' fees, and any and all amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties, incurred or suffered in connection with any such proceeding, and such indemnification shall continue as to a person who has ceased to be a Director, officer, trustee, employee or agent and shall inure to the benefit of his or her heirs, executors, administrators and assigns; provided, however, that there shall be no indemnification hereunder with respect to any settlement or other nonadjudicated disposition of any proceeding unless the Company has given its prior consent to such settlement or disposition. The right to indemnification conferred in this Section 1 shall be a contract right and shall include the right to be paid by the Company the expenses incurred in connection with any proceeding in advance of the final disposition of such proceeding as authorized by the Board of Directors; provided, however, that, if the New Jersey Business Corporation Act so requires, the payment of such expenses incurred by a Director or officer in his or her capacity as a Director or officer in advance of the final disposition of a proceeding shall be made only upon receipt by the Company of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it shall ultimately be determined that such Director or officer is not entitled to be indemnified under this Section 1 or otherwise. The Company may, by action of its Board of Directors, provide for indemnification and advancement of expenses to employees and agents of the Company with the same scope and effect as the foregoing indemnification of Directors and officers. Section 2. Right of Claimant to Bring Suit: If a claim under Section 1 of this Article IX is not paid in full by the Company within thirty days after a written request has been received by the Company, the claimant may at any time thereafter apply to a court for an award of indemnification by the Company for the unpaid amount of the claim and, if successful on the merits or otherwise in connection with any proceeding, or in the defense of any claim, issue or matter therein, the claimant shall be entitled also to be paid by the Company any and all expenses incurred or suffered in connection with such proceeding. It shall be a defense to any such action (other than an action brought to enforce a claim for the advancement of expenses incurred in connection with any proceeding where the required undertaking, if any, has been tendered to the Company) that the claimant has not met the standard of conduct which makes it permissible under the New Jersey Business Corporation Act for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such proceeding that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the New Jersey Business Corporation Act, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, nor the termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Non-Exclusivity of Rights: The right to indemnification and advancement of expenses provided by or granted pursuant to this Article IX shall not exclude or be exclusive of any other rights, including the right to be indemnified against any and all reasonable costs, disbursements and attorneys' fees, and any and all amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties incurred or suffered in proceedings by or in the right of the Company, to which any person may be entitled under a certificate of incorporation, by-law, agreement, vote of stockholders, or otherwise, provided that no indemnification shall be made to or on behalf of any person if a judgment or other final adjudication adverse to such person establishes that such person has not met the applicable standard of conduct required to be met under the New Jersey Business Corporation Act. ARTICLE X. AMENDMENTS The Board of Directors may, by a majority vote of the entire Board, make By-Laws and from time to time alter, amend or repeal any By-Law, but any By-Law made by the Board of Directors may be altered or repealed by the Stockholders at any annual or special meeting. Notice of such proposed alteration, amendment or repeal of any By-Law shall be included in the notice of the meeting of the Directors or Stockholders. ARTICLE XI. AUDITORS The Board of Directors may appoint a firm of certified public accountants to audit the books and accounts of the Company for the calendar year in which such appointment is made. EX-10 3 Exhibit 10(iii) (c) DESCRIPTION OF BONUS ARRANGEMENT FOR EXECUTIVE VICE PRESIDENTS OF INGERSOLL-RAND COMPANY There is no formal document setting forth this arrangement. However, as set forth in the Company's 2000 Proxy Statement, subject to the approval of the Board of Directors which approves the amount of each award, the Compensation and Benefits Committee will approve bonus arrangements for the Executive Vice Presidents. These officers may receive bonuses attributable to 2000 dependent upon the Company's attainment of predetermined earnings per share goals. The amount of such bonus is discretionary and is subject to general guidelines. Discretionary bonuses may be paid in the event that corporate goals are not met. EX-10 4 Exhibit 10 (iii)(u) COMPOSITE EMPLOYMENT AGREEMENT WITH CHIEF EXECUTIVE OFFICER Mr. Herbert L. Henkel 4 Spinney Lane North Kingstown, RI 02852 Dear Herb: On behalf of Chairman Jim Perrella and Ingersoll-Rand's Board of Directors, I am pleased to confirm our invitation to you to become Chief Operating Officer, Chief Executive Officer-designate and a member of our Board of Directors. (Note: Your formal election will be May 4, 1999 at our next Board meeting.) Our Board is delighted you will join Ingersoll-Rand and looks forward to your leadership as we continue to grow our company for the benefit of customers, employees and shareholders. The following confirms the terms and conditions of our offer: Salary Your starting salary as Chief Operating Officer will be at an annual rate of $750,000 paid monthly. When you are promoted to Chief Executive Officer on October 1, 1999, your salary will be increased to $850,000. Annual Incentive Your minimum annual incentive bonus for 1999 will be $725,000. Annual bonuses are typically paid in February following Board approval. Ingersoll-Rand does not have a "target" incentive plan for its COO, CEO or Chairman. Rather, the Board considers individual contributions to operating results achieved. Recent awards, based on achievement of the company's earnings goal, have been in the range of 100% of salary and higher. Stock Options You will be granted a special 200,000 share initial stock option award which will be priced on the trading day immediately preceding the public announcement of your appointment. This special award will vest 100% on January 1, 2004. In all other respects, the terms of the company's incentive stock plan will apply. (See Attachment A - Stock Option Award) Your first regular award under the company's incentive stock plan will be 100,000 shares priced in the same fashion as described above for the special initial stock option award. You will receive a subsequent award of 50,000 shares on October 1, 1999. These two awards vest one-third per year over three years. Thereafter, additional awards could be made in February (or our normal option time) or at the point of further promotion. Stock Grants You will receive an initial grant of 43,000 shares of restricted stock under the company's long term incentive plan. Of this grant, 18,000 pertain to company performance in 1999 and 25,000 pertain to company performance in 2000. Under the plan, the company must achieve annual earnings per share growth over the period 1998 through 2000 of 12% per year compounded. If the company achieves $3.16 earnings per share in 1999, you will receive 18,000 shares of stock in February 2000. You will be eligible for an additional 25,000 shares for 2000 based on the company achieving either 12% earnings per share growth in 2000, or a total of 12% per year compounded over the 1998- 2000 period. Thereafter, a new three-year long-term incentive plan will be adopted subject to approval of our Board of Directors. (See Attachment B - Stock Grant Agreement - Sample) Issues Relating to Non-Vested Textron Options and Restricted Stock Options You will receive 6,300 shares of restricted stock, 3,000 of which will vest in July 1999 and 3,300 of which will vest in June 2000. These shares are intended to reflect the value of Textron options which will not be vested during Textron employment. Retention Grant You will receive a grant of 60,000 shares of restricted stock effective on your employment as replacement for 30,000 shares of Textron stock which required you to remain with Textron until 2002. This new grant will vest on January 1, 2003. Pension Plan You will participate in the company's Qualified Defined Pension Plan (See Attachment C) and the Elected Officers' Supplemental Program (See Attachment D). Your benefit under these plans, assuming retirement at age 62 the normal retirement age for officers, will be 65% of your base salary, plus the average of your five highest out of your last six annual incentive bonuses. Your Textron service and vested terminated Textron pension benefit will be taken into account in determining the value of your pension. Your pension benefit accrual will be as follows: Retirement Replacement Points o 1.90 points per year for each year of Textron service 22.8 pt. (12x1.90) o 5.78 points per year for each of the first five years with Ingersoll-Rand 28.9 pt. (5x5.78) o 1.90 points per year for each of the subsequent years of service with Ingersoll-Rand, up to age 62 13.3 pt. (7x1.90) Totaling 65% at age 62 65.0 pt. If you work past age 62, you will get an additional 1.9 points per year of service. Ten Year Annuity An important part of retirement income for Ingersoll- Rand officers is the company's ten-year annuity program. In your case this benefit, commencing at age 62, is $125,000 per year for the ten-year period. In the event of your death, the benefit is payable to your beneficiary to the extent not already paid. You will be enrolled in this program upon your completion of enrollment procedures, including a physical examination, the sole purpose of which is to establish the cost of the underlying insurance product associated with this benefit. Employee Benefits The enclosed summaries describe many of our benefit programs. Please note that medical and dental coverage commences on the first day of the month following 30 days of employment. Therefore, you may wish to temporarily maintain your Textron coverage in force through COBRA to assure full continuity of coverage. (See Attachment E - Connect to Select 99) Life Insurance You will be entitled to purchase supplemental life insurance of up to 4x your annual earnings. This four times limit may be provided through Northwestern Mutual Life (up to 1x pay) and CIGNA (the additional 3x pay). If you enroll for at least 1x annual earnings (the Northwestern Mutual piece), you will be able to carry 1x final annual earnings into retirement. The cost at your age is from 42 to 50 cents per thousand. Long Term Disability Insurance The company offers a special LTD plan to its officers. The plan is employee-paid and the benefit tax-free). Your benefit would be $20,000 per month maximum with offsets for income from other company-funded sources including Social Security and Workers' Compensation. The cost is about $1.20 per $100 of covered compensation. Relocation You will receive the full benefits of the company's relocation program for transferring homeowners. A complete description of this plan is in the attached document. (See Attachment F) In connection with your relocation, Cendant, our relocation service supplier, will purchase your home for $870,000. You will receive $150,000 for expense reimbursement in excess of that normally provided under our regular policy. You may also engage interim housing for up to one year for you and your family in the process of relocating to Northern New Jersey. Vacation You will be entitled to paid vacation in accordance with company policy but in no event less than four weeks per calendar year. Personal Use of Company Aircraft You will be entitled to use time on the company's aircraft lease contract for your personal travel. Such use will incur imputed income to the extent required under Internal Revenue Service regulation and company policy. Generally, this means you will be charged first class airfare for yourself and accompanying dependents for personal use of company aircraft. Country Club You will have corporate membership in your name or that of the company in country clubs required for business. As we indicated, Ingersoll-Rand does not provide a personal country club membership for any of its officers. Automobile You will have the use of a company-provided automobile under the terms of the company's executive automobile program. Broadly, this means you can select from any US-made sedan or a Jaguar. Tax, Estate and Financial Planning You are eligible for the company's Tax, Estate and Financial Planning service provided by the Ayco Corporation to officers. Severance In the unlikely event you are involuntarily terminated by the Company without cause or you terminate because you are not made CEO or Chairman, you will receive severance pay equal to two times your annual base salary plus your last (or committed) bonus, i.e., 2(salary+bonus). In addition, under these circumstances, you will receive the stock grants related to your non-vested Textron options and retention shares, i.e., 6,300 shares and 60,000 respectively, totaling 66,300 shares of Ingersoll-Rand common stock Change in Control Ingersoll-Rand's change-in-control as described on Page 16 of the 1998 proxy applies to you. (See Attachment G - - 1998 Proxy Statement) Severance and Change-in- control are non-duplicative benefits. Official Company Plan Documents Descriptions of compensation and benefit plans in this letter are necessarily summaries. In case of conflict, the official company plan documents are the final authority. Drug Test Our offer is contingent upon satisfactorily passing a drug test and fulfilling the requirements of the Immigration Reform and Control Act of 1986. Herb, I know I speak for Jim Perrella and our entire Board of Directors when I say we are extremely pleased you will join our company and we will enjoy an important and mutually rewarding long-term relationship. Please confirm your acceptance of our offer with your signature on a return copy to me. Best regards, /S/Donald H. Rice Donald H. Rice Vice President ACCEPTED: /S/Herbert L. Henkel Herbert L. Henkel Attachments A. 10 (iii) (t) Incentive Stock Plan of 1998 of Ingersoll-Rand Company. Incorporated by reference to Appendix A to the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 17, 1998. B. 10 (iii) (t) Incentive Stock Plan of 1998 of Ingersoll-Rand Company. Incorporated by reference to Appendix A to the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 17, 1998. C. Pension Plan Number One D. 10 (iii)(h) Executive Supplementary Retirement Agreement for selected executive officers. Incorporated by reference to Form 10-K for the year ended December 31, 1996, filed March 26, 1997. E. Connect to Select 99 - Basic Employee Benefits F. Ingersoll-Rand Transferred Homeowner Relocation Policy G. 10 (iii)(f) Amended and Restated Form of Change of Control Agreement as of March 1, 1999 with Chief Executive Officer of Ingersoll-Rand Company. Incorporated by reference to Form 10-K of Ingersoll- Rand Company for the year ended December 31, 1998, filed March 30, 1999. EX-11 5 Exhibit 11 INGERSOLL-RAND COMPANY COMPUTATION OF EARNINGS PER SHARE (In millions of dollars except for shares and per share amounts) Years ended December 31, 1999 1998 1997 1996 1995 Earnings from continuing operations applicable to common stock $544.9 $455.5 $358.6 $324.7 $243.8 Earnings from discontinued operations applicable to common stock $ 46.2 $ 53.6 $ 21.9 $ 33.3 $ 26.5 Net earnings applicable to common stock............. $591.1 $509.1 $380.5 $358.0 $270.3 Average number of common shares outstanding.......... 163,644,073 163,669,777 163,206,932 161,238,547 159,103,617 Number of common shares issuable assuming exercise under incentive stock plans.. 2,108,724 1,812,035 1,617,803 1,031,137 495,479 Average number of outstanding shares for diluted earnings per share calculations.......... 165,752,797 165,481,812 164,824,735 162,269,684 159,599,096 Basic earnings per share from continuing operations $3.33 $2.78 $2.20 $2.01 $1.53 Basic earnings per share from discontinued operations $0.28 $0.33 $0.13 $0.21 $0.17 Basic earnings per share....................... $3.61 $3.11 $2.33 $2.22 $1.70 Diluted earnings per share from continuing operations $3.29 $2.75 $2.18 $2.00 $1.52 Diluted earnings per share from discontinued operations $0.28 $0.33 $0.13 $0.21 $0.17 Diluted earnings per share........................ $3.57 $3.08 $2.31 $2.21 $1.69
Note: All common share and per share amounts have been adjusted for the 3-for-2 stock split which was made in the form of a stock dividend in August of 1997. EX-12 6 EXHIBIT 12 INGERSOLL-RAND COMPANY COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollar Amounts in Millions) Years Ended December 31, Fixed charges: 1999 1998 1997 1996 1995 Interest expense........................... $204.5 $225.9 $137.5 $120.9 $ 88.3 Amortization of debt discount and expense.. 6.7 7.0 2.0 1.5 0.8 Rentals (one-third of rentals)............. 23.9 23.8 23.3 20.3 19.5 Capitalized interest....................... 4.0 4.0 3.2 4.6 3.5 Equity-linked security charges............ 25.6 19.7 0.0 0.0 0.0 Total fixed charges.......................... $264.7 $280.4 $166.0 $147.3 $112.1 Net earnings from continuing operations $544.9 $455.5 $358.6 $324.7 $243.8 Add: Minority income of majority- owned subsidiaries.................. 29.1 23.5 3.6 1.5 1.8 Taxes on income from continuing operations.......................... 299.9 250.7 219.8 190.7 143.2 Fixed charges......................... 264.7 280.4 166.0 147.3 112.1 Less: Capitalized interest.................. 4.0 4.0 3.2 4.6 3.5 Undistributed earnings (losses) from less than 50% owned affiliates...... 1.7 2.8 7.2 10.1 11.2 Earnings available for fixed charges ....... $1,132.9 $1,003.3 $737.6 $649.5 $486.2 Ratio of earnings to fixed charges .......... 4.28 3.58 4.44 4.41 4.34 Undistributed earnings (losses) from less than 50% owned affiliates: Equity in earnings (losses)............ $ 3.9 $ 4.0 $ 9.3 $ 12.1 $ 13.3 Less: Amounts distributed............... 2.2 1.2 2.1 2.0 $ 2.1 Undistributed earnings (losses) from less-than 50% owned affiliates........... $ 1.7 $ 2.8 $ 7.2 $ 10.1 $ 11.2 All amounts have been restated to reflect discontinued operations.
EX-13 7 Exhibit 13 INGERSOLL-RAND 1999 ANNUAL REPORT TO SHAREHOLDERS Consolidated Statement of Income In millions except per share amounts For the years ended December 31 1999 1998 1997 Net sales $7,666.7 $7,384.7 $6,239.1 Cost of goods sold 5,515.0 5,387.8 4,613.0 Administrative, selling and service engineering expenses 1,052.4 1,027.8 902.6 Operating income 1,099.3 969.1 723.5 Interest expense (203.1) (224.1) (135.2) Other income (expense), net (22.3) (15.3) (6.3) Minority interests (29.1) (23.5) (3.6) Earnings before income taxes 844.8 706.2 578.4 Provision for income taxes 299.9 250.7 219.8 Earnings from continuing operations 544.9 455.5 358.6 Discontinued operations (net of tax) 46.2 53.6 21.9 Net earnings $ 591.1 $ 509.1 $380.5 Basic earnings per share Continuing operations $3.33 $2.78 $2.20 Discontinued operations 0.28 0.33 0.13 $3.61 $3.11 $2.33 Diluted earnings per share Continuing operations $3.29 $2.75 $2.18 Discontinued operations 0.28 0.33 0.13 $3.57 $3.08 $2.31 See accompanying Notes to Consolidated Financial Statements. Consolidated Balance Sheet In millions except share amounts December 31 1999 1998 Assets Current assets: Cash and cash equivalents $ 222.9 $ 43.5 Marketable securities 0.5 2.0 Accounts and notes receivable, less allowance for doubtful accounts of $33.4 in 1999 and $35.4 in 1998 988.5 963.7 Inventories 742.1 824.8 Prepaid expenses 60.7 55.7 Assets held for sale 799.7 400.1 Deferred income taxes 53.9 68.8 2,868.3 2,358.6 Investments in and advances with partially owned equity affiliates 198.2 183.6 Property, plant and equipment, at cost: Land and buildings 570.3 569.4 Machinery and equipment 1,514.6 1,492.3 2,084.9 2,061.7 Less-accumulated depreciation 844.7 825.0 1,240.2 1,236.7 Intangible assets, net 3,726.3 3,765.8 Deferred income taxes 158.0 206.0 Other assets 209.2 175.7 $8,400.2 $7,926.4 Liabilities and Equity Current liabilities: Accounts payable and accruals $1,224.4 $1,284.4 Loans payable 495.5 318.0 Income taxes 19.0 18.8 1,738.9 1,621.2 Long-term debt 2,113.3 2,166.0 Postemployment and other benefit liabilities 805.0 820.5 Minority interests 95.7 33.6 Other liabilities 161.8 152.5 4,914.7 4,793.8 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company 402.5 402.5 Shareholders' equity: Common stock, $2 par value, authorized 600,000,000 shares; issued: 1999-171,168,096; 1998-168,883,779 342.3 337.8 Capital in excess of par value 237.8 133.4 Retained earnings 3,053.1 2,567.3 3,633.2 3,038.5 Unallocated LESOP shares, at cost (16.5) (27.0) Treasury stock, at cost (356.7) (150.9) Accumulated other comprehensive income (177.0) (130.5) Shareholders' equity 3,083.0 2,730.1 $8,400.2 $7,926.4 See accompanying Notes to Consolidated Financial Statements. Consolidated Statement of Shareholders' Equity In millions Capital in Accumulated Total excess other shareholders' Common stock of par Retained Unallocated Treasury comprehensive Comprehensive equity Amount Shares value earnings LESOP stock income income Balance at December 31, 1996 $2,109.9 $220.6 110.3 $143.5 $1,869.6 $(55.6) $(11.5) $(56.7) Net earnings 380.5 380.5 $380.5 Foreign currency translation (76.3) (76.3) (76.3) Reclassification adjustment 3.1 Total comprehensive income $307.3 Issuance of shares under stock plans 2.8 0.1 0.1 2.7 Exercise of stock options 52.6 2.7 1.3 49.9 Stock split 3-for-2 - 111.4 55.7 (111.4) Allocation of LESOP shares 21.9 7.7 14.2 Purchase of treasury shares (33.0) (33.0) Cash dividends (93.6) (93.6) Balance at December 31, 1997 2,364.8 334.8 167.4 92.4 2,156.5 (41.4) (44.5) (133.0) Net earnings 509.1 509.1 509.1 Foreign currency translation 2.5 2.5 2.5 Total comprehensive income $511.6 Issuance of shares under stock plans 2.2 0.1 0.1 2.1 Exercise of stock options 45.8 2.9 1.4 42.9 Issuance of equity-linked securities (16.4) (16.4) Allocation of LESOP shares 26.8 12.4 14.4 Purchase of treasury shares (106.4) (106.4) Cash dividends (98.3) (98.3) Balance at December 31, 1998 2,730.1 337.8 168.9 133.4 2,567.3 (27.0) (150.9) (130.5) Net earnings 591.1 591.1 591.1 Foreign currency translation (46.5) (46.5) (46.5) Total comprehensive income $544.6 Issuance of shares under stock plans 3.0 0.1 0.1 2.9 Exercise of stock options 91.8 4.4 2.2 87.4 Allocation of LESOP shares 24.6 14.1 10.5 Purchase of treasury shares (205.8) (205.8) Cash dividends (105.3) (105.3) Balance at December 31, 1999 $3,083.0 $ 342.3 171.2 $237.8 $3,053.1 $(16.5) $(356.7) $(177.0) See accompanying Notes to Consolidated Financial Statements.
Consolidated Statement of Cash Flows In millions For the years ended December 31 1999 1998 1997 Cash flows from operating activities: Income from continuing operations $544.9 $455.5 $358.6 Adjustments to arrive at net cash provided by operating activities: Depreciation and amortization 272.4 263.6 192.2 Gain on sale of businesses (14.6) (6.6) (7.7) Gain on sale of property, plant and equipment (3.4) (8.9) (3.2) Minority interests, net of dividends (0.2) 0.7 3.4 Equity earnings/losses, net of dividends (3.1) (6.9) (10.9) Deferred income taxes 41.8 6.2 (9.7) Other items 40.9 26.7 41.8 Changes in assets and liabilities (Increase) decrease in: Accounts and notes receivable (57.7) 109.3 0.2 Inventories 56.7 (76.0) 53.0 Other current and noncurrent assets 12.8 21.0 (3.1) (Decrease) increase in: Accounts payable and accruals (55.6) 86.0 39.6 Other current and noncurrent liabilities 1.6 (11.0) 13.4 Net cash provided by operating activities 836.5 859.6 667.6 Cash flows from investing activities: Capital expenditures (190.5) (200.9) (169.8) Proceeds from sales of property, plant and equipment 30.4 22.9 34.6 Proceeds from business dispositions 84.8 58.0 252.8 Acquisitions, net of cash* (161.2) (55.6) (2,891.3) Decrease (increase) in marketable securities 1.5 1.8 (0.1) Cash (invested in) or advances (to) from equity companies (2.0) 11.9 5.0 Net cash used in investing activities (237.0) (161.9) (2,768.8) Cash flows from financing activities: (Decrease) increase in short-term borrowings (36.8) (711.9) 685.6 Debt issuance costs - - (19.1) Proceeds from long-term debt 21.5 0.2 1,508.6 Payments of long-term debt (252.2) (261.2) (133.8) Net change in debt (267.5) (972.9) 2,041.3 Issuance of equity-linked securities - 402.5 - Equity-linked securities issuance costs and fees - (12.9) - Net proceeds from issuance of equity- linked securities - 389.6 - Proceeds from exercise of stock options 70.2 36.2 43.3 Purchase of treasury stock (205.8) (106.4) (33.0) Dividends paid (105.3) (98.3) (93.6) Other 63.3 10.0 - Net cash (used in) provided by financing activities (445.1) (741.8) 1,958.0 Net cash provided by discontinued operations 32.8 20.1 58.8 Effect of exchange rate changes on cash and cash equivalents (7.8) 1.0 5.8 Net increase (decrease) in cash and cash equivalents 179.4 (23.0) (78.6) Cash and cash equivalents- beginning of year 43.5 66.5 145.1 Cash and cash equivalents-end of year $222.9 $43.5 $66.5 *Acquisitions: Working capital, other than cash $ (61.0) $(13.5) $ (113.8) Property, plant and equipment (13.0) (14.5) (186.6) Intangibles and other assets (101.4) (34.9) (2,739.5) Long-term debt and other liabilities 14.2 7.3 148.6 Net cash used to acquire businesses $(161.2) $(55.6) $(2,891.3) Cash paid during the year for: Interest, net of amounts capitalized $230.4 $206.1 $136.0 Income taxes 217.7 245.4 210.4 The company acquired the remaining 49% interest in IDP in a noncash transaction by issuing a note for $377.0 million. See accompanying Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Ingersoll-Rand is a multinational manufacturer of primarily nonelectrical industrial equipment and components. The company's principal lines of business are air compressors, architectural hardware products, automotive parts and components, construction equipment, golf cars and utility vehicles, pumps, tools and transport temperature control systems. The company's broad product line has applications in numerous industries including automotive, construction, utilities, housing, recreational and transportation, as well as the general industrial market. A summary of significant accounting policies used in the preparation of the accompanying financial statements follows: Principles of Consolidation: The consolidated financial statements include the accounts of all wholly owned and majority owned subsidiaries. Intercompany transactions and balances have been eliminated. Partially owned equity affiliates companiesare accounted for under the equity method. In conformity with generally accepted accounting principles, management has used estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Significant estimates include accounting for doubtful accounts, amortization and depreciation, warranty, sales returns, taxes and environmental and other contingencies. Actual results could differ from those estimates. Reclassifications: Certain reclassifications were made to prior year amounts to conform with the 1999 presentation, including classifying two joint ventures as discontinued operations (see Note 2). Unless otherwise noted, all amounts and percentages disclosed in these Notes do not include discontinued operations. Cash Equivalents: The company considers all highly liquid investments, consisting primarily of time deposits and commercial paper with maturities of three months or less when purchased, to be cash equivalents. Cash equivalents were $73.0 million and $1.9 million at December 31, 1999 and 1998, respectively. Inventories: Inventories are generally stated at cost, which is not in excess of market. Domestically manufactured inventories of 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. Property and Depreciation: The company principally uses accelerated depreciation methods for assets placed in service prior to December 31, 1994. Assets acquired subsequent to that date are depreciated using the straight-line method over their estimated useful lives. Intangible Assets: Intangible assets primarily represent the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Such excess costs are being amortized on a straight-line basis generally over 40 years. Goodwill at December 31, 1999 and 1998, was $3.7 billion. Intangible assets are evaluated for impairment whenever circumstances indicate that the carrying amounts may not be recoverable. Intangible assets also represent costs allocated to patents arising from business acquisitions, and debt issuance costs. These assets are amortized on a straight-line basis over their estimated useful lives. Accumulated amortization at December 31, 1999 and 1998, was $353.5 million and $246.3 million, respectively. Amortization of intangible assets was $112.8 million, $110.1 million and $54.4 million in 1999, 1998 and 1997, respectively. Income Taxes: Deferred taxes are provided on temporary differences between assets and liabilities for financial reporting and tax purposes as measured by enacted tax rates expected to apply when temporary differences are settled or realized. A valuation allowance is established for deferred tax assets for which realization is not likely. Environmental Costs: Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to existing conditions caused by past operations, which do not contribute to current or future revenues, are expensed. Costs to prepare environmental site evaluations and feasibility studies are accrued when the company commits to perform them. Liabilities for remediation costs are recorded when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the company's commitment to a plan of action. The assessment of this liability, which is calculated based on existing technology, does not reflect any offset for possible recoveries from insurance companies and is not discounted. Revenue Recognition: Sales of products are recorded for financial reporting purposes generally when the products are shipped. Provisions for discounts and rebates to customers and other adjustments are generally provided at the time of sale. Research and Development Costs: Research and development expenditures, including qualifying engineering costs, are expensed when incurred and amounted to $186.2 million in 1999, $169.6 million in 1998 and $138.2 million in 1997. Comprehensive Income: Comprehensive income includes net income, and currently in the case of the company, only foreign currency translation adjustments. The amounts shown as reclassification adjustments relate to the accumulated foreign currency translation adjustment of entities that had been sold, and thus included in net earnings of the current period. Foreign Currency: Assets and liabilities of foreign entities, where the local currency is the functional currency, have been translated at year-end exchange rates, and income and expenses have been translated using weighted average-for-the-year exchange rates. Adjustments resulting from translation have been recorded in accumulated other comprehensive income and are included in net earnings only upon sale or liquidation of the underlying foreign investment. For foreign entities where the U.S. dollar is the functional currency, inventory and property balances and related income statement accounts have been translated using historical exchange rates, and resulting gains and losses have been credited or charged to net earnings. Foreign currency transactions and translations recorded in the income statement increased net earnings by $2.5 million in 1999 and decreased net earnings by $8.0 million and $0.1 million in 1998 and 1997, respectively. Accumulated other comprehensive income was decreased in 1999 by $46.5 million, increased in 1998 by $2.5 million and decreased in 1997 by $73.2 million due to foreign currency equity adjustments related to translation and dispositions. The company hedges certain foreign currency transactions and firm foreign currency commitments by entering into forward exchange contracts (forward contracts). Gains and losses associated with currency rate changes on forward contracts hedging foreign currency transactions are recorded currently in income. Gains and losses on forward contracts hedging firm foreign currency commitments are deferred off-balance sheet and included as a component of the related transaction, when recorded; however, a loss is not deferred if deferral would lead to the recognition of a loss in future periods. Cash flows resulting from forward contracts accounted for as hedges of identifiable transactions or events are classified in the same category as the cash flows from the items being hedged. The company also purchases forward contracts to mitigate the exposure of forecasted future cash flows of foreign subsidiaries. These contracts range in duration from one to 12 months. Gains and losses associated with the change in fair market value of these contracts are recorded in other income. Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding as well as dilutive potential common shares, which in the company's case comprise shares issuable under stock benefit plans. The weighted average number of common shares outstanding for basic earnings per share calculations were 163,644,073, 163,669,777 and 163,206,932 for 1999, 1998 and 1997, respectively. For diluted earnings per share purposes, these balances increased by 2,108,724, 1,812,035 and 1,617,803 shares for 1999, 1998 and 1997, respectively, due to the effect of common equivalent shares issuable under the company's stock benefit plans. Stock-based Compensation: SFAS No. 123, "Accounting for Stock- Based Compensation," requires companies to measure employee stock compensation plans based on the fair value method of accounting or to continue to apply APB No. 25, "Accounting for Stock Issued to Employees," and provide pro forma footnote disclosures under the fair value method in SFAS No. 123. The company continues to apply the principles of APB No. 25 and has provided pro forma fair value disclosures in Note 14. New Accounting Standard: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement will become effective beginning January 1, 2001. SFAS No. 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives will be recognized in earnings or other comprehensive income, depending on the designated purpose of the derivative. The company is currently evaluating the impact of adopting the standard and will comply as required. NOTE 2 - DISCONTINUED OPERATIONS: On August 12, 1999, the company announced its intention to dispose of its interest in Dresser-Rand Company (D-R), a joint venture involved in the reciprocating compressor and turbo machinery business, and Ingersoll-Dresser Pump Company (IDP), a joint venture involved in the engineered pump business. On October 5, 1999, the joint venture partner, as permitted under the joint venture agreements, elected to sell its share of the joint ventures to the company. Effective December 31, 1999, the company completed the purchase of IDP by acquiring the joint venture partner's 49% share for a net purchase price of $377.0 million. A note for the full purchase price was issued to the joint venture partner and was redeemed on January 14, 2000. The net assets have been reported as assets held for sale in the accompanying financial statements, and prior periods have been restated to reflect these businesses as discontinued operations. Historically, IDP had been reported as part of the Engineered Products Segment, while D-R had been reported in other income (expense), net. The net assets of discontinued operations included in assets held for sale at December 31, are as follows (in millions): 1999 1998 Cash and cash equivalents $ 49.9 $ 28.5 Other current assets 392.3 416.6 Investments in and advances with partially owned affiliates 146.3 161.1 Property, plant and equipment, net 103.1 110.8 Intangibles and other assets 310.7 42.2 Current liabilities (194.5) (227.6) Other liabilities (74.3) (78.1) Minority interests - (100.0) Cumulative translation adjustment 34.6 22.6 Net assets of discontinued operations held for sale $ 768.1 $ 376.1 Income from discontinued operations included the following results for the years ended December 31 (in millions): 1999 1998 1997 Net sales $837.9 $906.8 $864.2 Operating income 63.9 75.3 36.8 D-R equity earnings 25.4 33.0 9.4 Other income (expense), net 7.4 7.0 4.1 Interest expense (1.4) (1.6) (1.3) Minority interest (23.7) (30.7) (13.7) Earnings before income taxes 71.6 83.0 35.3 Income taxes 25.4 29.4 13.4 Income from discontinued operations $ 46.2 $ 53.6 $ 21.9 The payable to D-R has been netted against the assets held for sale. Results reported separately by either D-R or IDP that are presented on a stand-alone basis may differ from the results based on discontinued operations reporting. NOTE 3 - ACQUISITIONS OF BUSINESSES: On March 30, 1999, the company completed the acquisition of Harrow Industries, Inc. (Harrow), a leading manufacturer of access control technologies, architectural hardware, and decorative bath fittings and accessories. The purchase price was approximately $160.0 million, which included the assumption of certain debt. Since acquisition, the company segregated certain net assets of Harrow that would be sold within twelve months. 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. Also in the first quarter of 1998, the company acquired for approximately $18.0 million in cash certain manufacturing assets used to produce residential locks, excluding padlocks, from the Master Lock unit of Fortune Brands, Inc. In the third quarter of 1998, the company acquired full ownership of GHH-RAND Schraubenkcompressoren GmbH & Co. KG (GHH-RAND), a manufacturer of air ends for air compressors. The company previously owned 50% of GHH-RAND Schraubenkcompressoren GmbH & Co. KG (GHH-RAND). In addition, during 1998, the company purchased several smaller businesses. 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. The following unaudited pro forma consolidated results of operations for the year ended December 31, 1997, reflects the acquisition as though it occurred at the beginning of the year, after adjustments for the impact of interest on acquisition debt and depreciation and amortization of assets. In millions except per share amounts 1997 Sales $7,101.2 Earnings from continuing operations 368.2 Basic earnings per share - continuing operations $2.26 Diluted earnings per share - continuing operations 2.23 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 year. Further, the pro forma results are not intended to be a projection of future results of the combined companies. On April 3, 1997, the company completed the acquisition of Newman Tonks Group PLC (Newman Tonks), a producer of architectural hardware, for approximately $370.0 million. These transactions have been accounted for as purchases and accordingly, each purchase price was allocated to the acquired assets and assumed liabilities based on their estimated fair values. The company has classified as intangible assets the costs in excess of the fair value of the net assets of companies acquired. The results of all acquired operations have been included in the consolidated financial statements from their respective acquisition dates. NOTE 4 - DISPOSITIONS: During the third quarter, the company received proceeds of $47.0 million, which approximated book value on the sale of a portion of the Harrow assets. In December 1999, the company also sold certain net assets of the Automation Division. The transaction resulted in a net gain of approximately $4.4 million. The company also made several minor dispositions during 1999. In the first quarter of 1998, the company completed the sale of Ing. G. Klemm Bohrtechnik GmbH. Also, during 1998, the company sold certain assets of Ingersoll-Rand Architectural Hardware Group Limited (formerly Newman Tonks Group Limited PLC). Sale proceeds approximated the book value of these assets. In the third quarter of 1998, the company sold the Spra-Coupe product line, which was reported as part of the Specialty Vehicles Segment. The sale price of approximately $35.0 million resulted in a $9.0 million gain. On February 14, 1997, the company sold the Clark-Hurth Components Group (Clark-Hurth) for approximately $241.5 million of net cash. This group's 1997 results, inclusive of the sale transaction, produced operating income for the first quarter of approximately $2.7 million, but on an after-tax basis, reduced net earnings by approximately $3.6 million. NOTE 5 - INVENTORIES: At December 31, inventories were as follows: In millions 1999 1998 Raw materials and supplies $ 161.7 $ 166.8 Work-in-process 191.7 195.8 Finished goods 532.9 607.6 886.3 970.2 Less-LIFO reserve 144.2 145.4 Total $ 742.1 $ 824.8 Work-in-process inventories are stated after deducting customer progress payments of $2.0 million in 1999 and $5.6 million in 1998. At December 31, 1999 and 1998, LIFO inventories comprised approximately 51% and 49%, respectively, of consolidated inventories. There were no material liquidations of LIFO layers for all periods presented. NOTE 6 - INVESTMENTS IN PARTIALLY OWNED EQUITY AFFILIATES: The company has numerous investments, ranging from 20% to 50%, in companies that operate in similar lines of business. The company's investments in and amounts due to/(from) partially owned equity affiliates amounted to $197.4 million and $0.8 million, respectively, at December 31, 1999, and $184.3 million and $(0.7) million, respectively, at December 31, 1998. The company's equity in the net earnings of its partially owned equity affiliates was $9.5 million, $13.6 million and $18.5 million in 1999, 1998 and 1997 respectively. The company received dividends based on its equity interests in these companies of $6.4 million, $6.7 million, and $7.6 million in 1999, 1998 and 1997, respectively. Summarized financial information for these partially owned equity affiliates at December 31, and for the years then ended: In millions 1999 1998 Current assets $ 329.8 $ 392.4 Property, plant and equipment, net 260.0 247.2 Other assets 14.1 15.9 Total assets $ 603.9 $ 655.5 Current liabilities $ 171.5 $ 199.5 Long-term debt 61.3 63.1 Other liabilities 22.8 20.9 Total shareholders' equity 348.3 372.0 Total liabilities and equity $ 603.9 $ 655.5 In millions 1999 1998 1997 Net sales $ 609.3 $ 665.8 $ 782.0 Gross profit 88.1 94.9 126.7 Net earnings 19.5 26.1 37.4 NOTE 7 - ACCOUNTS PAYABLE AND ACCRUALS: Accounts payable and accruals at December 31, were: In millions 1999 1998 Accounts payable $ 319.2 $ 371.5 Accrued: Payrolls and benefits 215.1 235.1 Taxes other than income 36.9 39.9 Insurance and claims 116.1 106.6 Postemployment benefits 82.3 63.3 Warranties 57.8 67.5 Interest 60.6 48.1 Other accruals 336.4 352.4 $1,224.4 $1,284.4 NOTE 8 - FINANCIAL INSTRUMENTS: The company, as a large multinational company, maintains significant operations in foreign countries. As a result of these global activities, the company is exposed to changes in foreign currency exchange rates, which affect the results of operations and financial condition. The company manages exposure to changes in foreign currency exchange rates through its normal operating and financing activities, as well as through the use of financial instruments. Generally, the only financial instruments the company utilizes are forward exchange contracts and options. In late 1999, the company began purchasing commodity contracts to hedge a portion of the costs of metals used in its products. Activity for 1999 was minimal. The purpose of the company's hedging activities is to mitigate the impact of changes in foreign currency exchange rates. The company attempts to hedge transaction exposures through natural offsets. To the extent that this is not practicable, major exposure areas considered for hedging include foreign currency denominated receivables and payables, intercompany loans, firm committed transactions, anticipated sales and purchases, and dividends relating to foreign subsidiaries. The following table summarizes by major currency the contractual amounts of the company's forward contracts in U.S. dollars. Foreign currency amounts are translated at year-end rates at the respective reporting date. The "buy" amounts represent the U.S. equivalent of commitments to purchase foreign currencies, and the "sell" amounts represent the U.S. equivalent of commitments to sell foreign currencies. Some of the forward contracts involve the exchange of two foreign currencies according to local needs in foreign subsidiaries. At December 31, the contractual amounts were: In millions 1999 1998 Buy Sell Buy Sell Australian dollars $ - $ 1.4 $ 2.4 $ 11.5 Brazilian reais - - - 13.8 British pounds 29.2 16.3 13.7 158.9 Canadian dollars 107.3 17.9 2.0 42.4 Czech koruna - - - 10.9 Danish krona 14.5 0.8 5.9 5.9 Euro and euro-linked currencies 44.3 5.8 102.8 343.4 Japanese yen 4.9 0.6 2.8 19.7 New Zealand dollars - 2.2 3.0 6.4 Singapore dollars 1.3 11.2 - 11.9 Other 4.4 10.1 0.9 3.6 Total $205.9 $66.3 $133.5 $628.4 Forward contracts utilized by the company have maturities of one to 12 months. The company's forward contracts that hedge transactions or firm commitments do not subject the company to risk due to foreign exchange rate movement, since gains and losses on these contracts generally offset losses and gains on the assets, liabilities or other transactions being hedged. Contracts purchased to mitigate the variability of future cash flows of foreign subsidiaries bear market risk to the extent actual transacted amounts vary from the forecasted amounts. All gains and losses on these contracts have been included in earnings. The counterparties to the company's forward contracts consist of a number of major international financial institutions. The company could be exposed to loss in the event of nonperformance by the counterparties. However, credit ratings and concentration of risk of these financial institutions are monitored on a continuing basis and present no significant credit risk to the company. The carrying value of cash and cash equivalents, marketable securities, accounts receivable, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. The following table summarizes the estimated fair value of the company's remaining financial instruments at December 31: In millions 1999 1998 Long-term debt: Carrying value $2,113.3 $2,166.0 Estimated fair value 2,083.9 2,299.7 Forward contracts: Contract (notional) amounts: Buy contracts $ 205.9 $ 133.5 Sell contracts 66.3 628.4 Fair (market) values: Buy contracts 209.2 142.9 Sell contracts 66.5 635.3 Fair value of long-term debt was determined by reference to the December 31, 1999 and 1998, market values of comparably rated debt instruments. Fair values of forward contracts are based on dealer quotes at the respective reporting dates. NOTE 9 - LONG-TERM DEBT AND CREDIT FACILITIES: At December 31, long-term debt consisted of: In millions 1999 1998 6 7/8% Notes Due 2003 $ 100.0 $ 100.0 6.255% Notes Due 2001 400.0 400.0 9% Debentures Due 2021 125.0 125.0 7.20% Debentures Due 2025 150.0 150.0 6.48% Debentures Due 2025 150.0 150.0 6.391% Debentures Due 2027 200.0 200.0 6.443% Debentures Due 2027 200.0 200.0 Medium-term Notes Due 2001-2028, at an average rate of 6.43% 609.9 679.9 9.75% Clark Debentures Due 2001 100.0 100.0 Clark Medium-term Notes Due 2023, at an average rate of 8.22% 50.2 50.2 Other domestic and foreign loans and notes, at end- of-year average interest rates of 5.756% in 1999 and 6.278% in 1998, maturing in various amounts to 2014 28.2 10.9 $2,113.3 $2,166.0 Debt retirements for the next five years are as follows: $73.1 million in 2000, $736.3 million in 2001, $84.0 million in 2002, $198.3 million in 2003 and $315.5 million in 2004. In December 1998, the company repurchased $110.0 million of its medium-term notes for $116.9 million including accrued interest. The average coupon of the notes repurchased was 6.53% with maturities ranging from 2000 to 2005. At December 31, 1999, the company's committed revolving credit lines consisted of two 364-day lines and a five-year line totalling $1.3 billion and $750.0 million, respectively, both of which were unused. These lines provide support for commercial paper and indirectly provide support for other financing instruments, such as letters of credit and comfort letters, as required in the normal course of business. The company compensates banks for these lines with fees equal to a weighted average of 0.06375% per annum. Available foreign lines of credit were $614.6 million, of which $540.9 million were unused at December 31, 1999. No major cash balances were subject to withdrawal restrictions. At December 31, 1999, and 1998 the average rate of interest for loans payable, excluding the current portion of long-term debt, was 4.186% and 8.306%, respectively. Capitalized interest on construction and other capital projects amounted to $4.0 million, $4.0 million and $3.2 million in 1999, 1998 and 1997, respectively. Interest income, included in other income (expense), net, was $5.4 million, $7.5 million and $11.0 million in 1999, 1998 and 1997, respectively. NOTE 10 - COMMITMENTS AND CONTINGENCIES: The company is involved in various litigations, claims and administrative proceedings, including environmental matters, arising in the normal course of business. In assessing its potential environmental liability, the company bases its estimates on current technologies and does not discount its liability or assume any insurance recoveries. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, management believes that recovery or liability with respect to these matters would not have a material effect on the financial condition, results of operations, liquidity or cash flows of the company for any year. The company has established two wholly owned special purpose subsidiaries to purchase accounts and notes receivable at a discount from the company on a continuous basis. These special purpose subsidiaries simultaneously sell an undivided interest in these accounts and notes receivable to a financial institution up to a maximum of $170.0 million. The agreements between the special purpose corporations and the financial institution expire annually and will be renewed with either the current or another financial institution. The company is retained as the servicer of the pooled receivables. During 1999, 1998 and 1997, such sales of receivables amounted to $781.8 million, $723.7 million and $614.0 million, respectively. At December 31, 1999, $170.0 million of such sold receivables remained uncollected. Receivables, excluding the designated pool of accounts and notes receivable, sold during 1999 and 1998 with recourse, amounted to $57.5 million and $55.4 million, respectively. At December 31, 1999 and 1998, $18.7 million and $12.4 million, respectively, of such receivables sold remained uncollected. As of December 31, 1999, the company had no significant concentrations of credit risk in trade receivables due to the large number of customers which comprised its receivables base and their dispersion across different industries and countries. In the normal course of business, the company has issued several direct and indirect guarantees, including performance letters of credit, totalling approximately $104.0 million at December 31, 1999. The company has also guaranteed the residual value of leased product in the aggregate amount of $39.1 million. Upon the termination of a dealer, a newly selected dealer generally acquires the assets of the prior dealer and assumes any related financial obligation. Accordingly, the risk of loss to the company is minimal, and historically, only immaterial losses have been incurred relating to these arrangements. Management believes these guarantees will not adversely affect the consolidated financial statements. Certain office and warehouse facilities, transportation vehicles and data processing equipment are leased. Total rental expense was $71.6 million in 1999, $71.2 million in 1998 and $69.5 million in 1997. Minimum lease payments required under noncancellable operating leases with terms in excess of one year for the next five years and thereafter, are as follows: $46.3 million in 2000, $37.2 million in 2001, $27.2 million in 2002, $17.9 million in 2003, $15.7 million in 2004 and $25.7 million thereafter. NOTE 11 - EQUITY-LINKED SECURITIES: 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 paid costs of approximately $12.9 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 12 - COMMON STOCK: In May 1997, the board of directors authorized the repurchase of up to 15.0 million shares of the company's common stock at management's discretion. Shares repurchased will be used for general corporate purposes. The number of treasury shares at December 31, 1999, and December 31, 1998, were 8,039,516 and 4,494,930, respectively. In August 1997, the board of directors declared a three-for-two stock split of the company's common stock. The stock split was made in the form of a stock dividend, and was paid on September 2, 1997, to shareholders of record on August 19, 1997. All prior year per share amounts have been restated to reflect the stock split. In November 1998, the company adopted a new shareholder rights plan to replace the plan which expired on December 22, 1998. Under the new plan, one right was distributed for each share of Ingersoll- Rand common stock outstanding at the close of business on December 22, 1998. Initially, the rights are attached to the common stock and are not exercisable. The rights become exercisable and will trade separately from the common stock 10 days following the first public announcement that any person or group has acquired at least 15% of the company's outstanding common stock, or on the 10th day following the commencement or the announcement of an intention to commence a tender offer, which would result in that person or group acquiring beneficial ownership of att least 15 % of the outstanding shares of common stock. Each right would entitle the holder to purchase one-thousandth of a share of Series A Preference Stock at an exercise price of $200. If any person or group acquires 15% or more of the company's common stock, the rights not held by the 15% shareholder would become exercisable to purchase the company's common stock at a 50% discount. The plan provides that, at any time after a person or group becomes an acquiring person and prior to the acquisition by that person or group of 50% or more of the outstanding common stock, the board may exchange the rights (other than the rights held by the acquiring person, which will have become void), at an exchange ratio of one share of common stock per right. The new rights will expire on December 22, 2008, unless earlier redeemed or exchanged by the company, as provided in the rights plan. The company may elect to redeem the rights at $0.01 per right. NOTE 13 - LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN: The company's sponsors a Leveraged Employee Stock Ownership Plan (LESOP) for eligible employees. The LESOP is used to fund certain employee benefit plans. At December 31, 1999, and December 31, 1998, the LESOP held approximately 0.7 million and 1.1 million shares, respectively, which are unallocated. The carrying value0 offor the unallocated shares was $16.5 million and $27.0 million at December 31, 1999, and December 31, 1998, respectively, and is classified as a reduction of shareholders' equity pending allocation to participants. At December 31, 1999, the LESOP owed the company $8.4 million payable in monthly installments through 2001. Company contributions to the LESOP and dividends on unallocated shares are used to make loan principal and interest payments. With each principal and interest payment, the LESOP allocates a portion of the common stock to participating employees. NOTE 14 - INCENTIVE STOCK PLANS: Under the company's Incentive Stock Plans, key employees have been granted options to purchase common shares at prices not less than the fair market value at the date of the grant. Options issued before December 31, 1998, became exercisable one year after the date of the grant and expire at the end of 10 years. Options issued after January 1, 1999, become exercisable ratably over a three year period from their date of grant and expire at the end of 10 years. The plans, approved in 1990, 1995 and 1998, also authorize stock appreciation rights (SARs) and stock awards. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the company continues to account for its stock plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, compensation expense has been recognized for SARs (which were generally settled for cash) and for stock awards. Under SFAS No. 123, compensation cost for the applicable provisions of the company's incentive stock plans would be determined based upon the fair value at the grant date for awards issued since 1996. Applying this methodology would have reduced net earnings and diluted earnings per share by approximately $8.5 million and five cents per share for 1999; $14.7 million and nine cents per share for 1998; and $10.0 million and six cents per share for 1997. On December 15, 1996, the company cancelled SARs which were previously attached to 2,758,500 stock options. Included in the SFAS No. 123 expense for 1997 was approximately $1.5 million (or one cent per share) for the cost of this revocation. The average fair values of the options granted during 1999, 1998 and 1997 were estimated at $14.15, $8.06 and $8.55, respectively, on the date of grant, using the Black-Scholes option-pricing model, which included the following assumptions: 1999 1998 1997 Dividend yield 1.27% 1.42% 1.61% Volatility 29.59% 25.76% 22.59% Risk-free interest rate 4.93% 5.39% 6.52% Forfeiture rate -- -- -- Expected life 4 years 4 years 4 years Changes in options outstanding under the plans were as follows: Shares subject Option Price Weighted average to option range per share exercise price January 1, 1997 5,955,150 $13.83-31.13 $23.25 Granted 2,031,000 30.33-41.28 34.14 Exercised (1,905,250) 13.83-28.54 22.74 Canceled (37,500) 26.21-26.63 26.29 December 31, 1997 6,043,400 $13.83-41.28 $27.06 Granted 2,280,250 37.03-47.03 42.45 Exercised (1,419,525) 13.83-40.47 25.65 Cancelled (69,600) 24.08-41.28 33.75 December 31, 1998 6,834,525 $14.77-47.03 $32.43 Granted 2,816,480 49.09-69.75 50.50 Exercised (2,216,558) 14.77-46.00 31.74 Cancelled (93,590) 26.21-26.63 48.99 December 31, 1999 7,340,857 $15.13-69.75 $39.35 At December 31, 1999, there were 402,050 SARs outstanding with no stock options attached. The company has reserved 10,309,456 shares for future awards at December 31, 1999. In addition, 554,875 440,422 shares of common stock were reserved for future issue, contingent upon attainment of certain performance goals and future service and 229,427 shares have been earned but deferred at December 31, 1999. The following table summarizes information concerning currently outstanding and exercisable options: Options Options outstanding exercisable Weighted Weighted Weighted Number average average Number average Range of outstanding remaining exercise exercisable exercise exercise price at 12/31/99 life price at 12/31/99 price $15.13-$20.00 81,400 1.2 $15.64 81,400 $15.64 20.01- 25.00 1,213,250 4.4 23.06 1,213,250 23.06 25.01- 30.00 663,500 6.4 26.31 663,500 26.31 30.01- 35.00 952,300 7.3 33.65 952,300 33.65 35.01- 40.00 - - - - - 40.01- 45.00 1,630,867 8.1 42.26 1,545,734 42.23 45.01- 50.00 2,254,290 9.1 49.01 68,483 46.45 50.01- 55.00 350,000 9.3 51.46 - - 55.01- 60.00 - - - - - 60.01- 65.00 45,900 9.7 62.59 - - 65.01- 69.75 149,350 9.4 65.93 - - $15.13-$69.75 7,340,857 $39.35 4,524,667 $32.53 The weighted average number of shares exercisable and the weighted average exercise prices were 4,561,025 shares at a price of $27.44 for December 31, 1998, and 4,012,400 shares at a price of $23.47 for December 31, 1997. The company also maintains a shareholder-approved Management Incentive Unit Award Plan. Under the plan, qualifying executives are awarded incentive units. When dividends are paid on common stock, dividends are awarded to unit holders, one-half of which is paid in cash, the remaining half of which is credited to the participant's account in the form of so-called common stock equivalents. The fair value of accumulated common stock equivalents is paid in cash upon the participant's retirement. The number of common stock equivalents credited to participants' accounts at December 31, 1999 and 1998, are315,210 484,341 and 513,470, respectively. NOTE 15 - INCOME TAXES: Earnings before income taxes for the years ended December 31, were taxed within the following jurisdictions: In millions 1999 1998 1997 United States $669.0 $539.9 $452.5 Foreign 175.8 166.3 125.9 Total $844.8 $706.2 $578.4 The provision for income taxes was as follows: In millions 1999 1998 1997 Current tax expense: United States $220.5 $183.2 $176.9 Foreign 37.6 61.3 52.6 Total current 258.1 244.5 229.5 Deferred tax expense: United States 26.4 12.0 (0.9) Foreign 15.4 (5.8) (8.8) Total deferred 41.8 6.2 (9.7) Total provision for income taxes $299.9 $250.7 $219.8 The provision for income taxes differs from the amount of income taxes determined by applying the applicable U.S. statutory income tax rate to pretax income, as a result of the following differences: Percent of pretax income 1999 1998 1997 Statutory U.S. rates 35.0% 35.0% 35.0% Increase (decrease) in rates resulting from: Amortization of goodwill 2.0 2.5 2.1 Foreign operations (1.0) 0.1 (0.4) Foreign sales corporation (1.7) (2.0) (0.9) State and local income taxes, net of U.S. tax 2.1 2.3 1.3 Puerto Rico - Sec 936 Credit (1.8) (2.2) (0.6) Other 0.9 (0.2) 1.5 Effective tax rate 35.5% 35.5% 38.0% A summary of the deferred tax accounts at December 31, follows: In millions 1999 1998 1997 Current deferred assets and (liabilities): Differences between book and tax bases of inventories and receivables $ 21.1 $ 21.4 $ 22.4 Differences between book and tax expense for other employee related benefits and allowances 8.5 16.7 4.5 Other reserves and valuation allowances in excess of tax deductions 35.4 28.3 62.4 Other differences between tax and financial statement values (11.1) 2.4 1.7 Gross current deferred net tax assets 53.9 68.8 91.0 Noncurrent deferred tax assets and (liabilities): Postretirement and postemployment benefits other than pensions in excess of tax deductions 262.4 255.1 255.4 Other reserves in excess of tax expense 119.2 124.0 118.9 Tax depreciation in excess of book depreciation (124.7) (96.0) (95.2) Pension contributions in excess of book expense (38.5) (32.6) (34.2) Taxes provided for unrepatriated foreign earnings (22.5) (22.5) (28.5) Gross noncurrent deferred net tax assets 195.9 228.0 216.4 Less: deferred tax valuation allowances (37.9) (22.0) (36.7) Total net deferred tax assets $211.9 $274.8 $270.7 A total of $22.5 million of deferred taxes have been provided for a portion of the undistributed earnings of subsidiaries operating outside of the United States. As to the remainder, these earnings have been, and under current plans, will continue to be reinvested. Therefore, it is not practicable to estimate the amount of additional taxes which may be payable upon repatriation. NOTE 16 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The company sponsors several postretirement plans that cover most domestic employees. These plans provide for health care benefits and in some instances, life insurance benefits. Postretirement health plans are contributory and are adjusted annually. Life insurance plans are noncontributory. When fulltime employees retire from the company between age 55 and 65, most are eligible to receive, at a cost to the retiree, certain health care benefits identical to those available to active employees. After attaining age 65, an eligible retiree's health care benefit coverage becomes coordinated with Medicare. The company funds the benefit costs principally on a pay-as-you-go basis. Summary information on the company's plans at December 31, was as follows: In millions 1999 1998 Change in benefit obligations: Benefit obligation at beginning of year $ 610.3 $ 567.4 Service cost 8.8 9.6 Interest cost 38.0 38.9 Plan participants' contributions 4.3 3.2 Actuarial (gains)/losses (36.8) 29.6 Benefits paid (58.4) (48.0) Other 0.2 9.6 Benefit obligation at end of year $ 566.4 $ 610.3 Funded status: Plan assets less than benefit obligations $(566.4) $(610.3) Unrecognized: Prior service gains (54.5) (59.0) Plan net gains (55.7) (20.2) Accrued costs in the balance sheet $(676.6) $(689.5) Weighted-average assumptions: Discount rate 7.50% 6.75% Current year medical inflation 6.50% 7.60% Ultimate inflation rate (2003) 5.00% 4.50% The components of net periodic postretirement benefits cost for the years ended December 31, were as follows: In millions 1999 1998 1997 Service cost $ 8.8 $ 9.6 $ 7.3 Interest cost 38.0 38.9 36.3 Net amortization of unrecognized: Prior service gains (4.2) (4.5) (4.5) Plan net gains - - (0.9) Net periodic postretirement benefits cost $42.6 $44.0 $38.2 A 1% change in the medical trend rate assumed for postretirement benefits would have the following effects at December 31, 1999: In millions 1% Increase 1% Decrease Effect on total of service and interest cost components $ 3.6 $ (3.4) Effect on postretirement benefit obligation 47.3 (41.4) NOTE 17 - PENSION PLANS: The company has noncontributory pension plans covering substantially all domestic employees. In addition, certain employees in other countries are covered by pension plans. The company's domestic salaried plans principally provide benefits based on a career average earnings formula. The company's hourly pension plans provide benefits under flat benefit formulas. Foreign plans provide benefits based on earnings and years of service. Most of the foreign plans require employee contributions based on the employee's earnings. In addition, the company maintains other supplemental benefit plans for officers and other key employees. The company's policy is to fund an amount which could be in excess of the pension cost expensed, subject to the limitations imposed by current statutes or tax regulations. Information regarding the company's pension plans in accordance with SFAS No. 132 is as follows: In millions 1999 1998 Change in benefit obligations: Benefit obligation at beginning of year $1,985.7 $1,845.2 Service cost 42.0 37.7 Interest cost 132.1 130.3 Employee contributions 4.5 5.2 Amendments 3.6 19.4 Acquisitions 35.7 5.6 Expenses paid (3.9) (2.6) Actuarial (gains)/losses (113.2) 91.4 Benefits paid (142.4) (143.1) Foreign exchange impact (14.0) (3.9) Other 4.6 0.5 Benefit obligation at end of year $1,934.7 $1,985.7 In millions 1999 1998 Change in plan assets: Fair value at beginning of year $2,133.2 $1,977.0 Actual return on assets 197.7 262.7 Company contributions 17.4 37.7 Employee contributions 4.5 5.2 Acquisitions 48.7 0.8 Expenses paid (3.8) (2.6) In millions 1999 1998 Benefits paid (140.2) (140.6) Foreign exchange impact (10.6) (7.0) Fair value of assets at end of year $2,246.9 $2,133.2 Funded status: Plan assets in excess of benefit obligations $ 312.2 $ 147.5 Unrecognized: Net transition asset 6.9 8.0 Prior service costs 58.1 54.1 Plan net gains (317.2) (186.3) Net amount recognized $ 60.0 $ 23.3 Prepaid/(accrued) costs included in the balance sheet: Prepaid benefit cost $ 136.7 $ 95.0 Accrued benefit liability (79.7) (73.1) Intangible asset 3.0 1.4 Net amount recognized $ 60.0 $ 23.3 Weighted-average assumptions: Discount rate: U.S. plans 7.50% 6.75% International plans 6.00% 6.75% Rate of compensation increase: U.S. plans 5.25% 4.50% International plans 3.50% 4.50% Expected return on plan assets: U.S. plans 9.00% 9.00% International plans 7.75% 8.00% The components of the company's pension costs for the years ended December 31, include the following: In millions 1999 1998 1997 Service cost $ 42.0 $ 37.7 $ 33.4 Interest cost 132.1 130.3 117.7 Expected return on plan assets (183.0) (170.3) (148.6) Net amortization of unrecognized: Prior service costs 5.9 3.7 3.6 Transition amount 0.7 0.7 0.6 Plan net losses 2.9 2.3 0.9 Net pension cost $ 0.6 $ 4.4 $ 7.6 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations more than plan assets were $151.9 million, $117.3 million and $37.7 million, respectively, as of December 31, 1999, and $169.0 million, $136.8 million and $59.1 million, respectively, as of December 31, 1998. Plan investment assets of domestic plans are balanced between equity securities and cash equivalents or debt securities. Assets of foreign plans are invested principally in equity securities. Most of the company's domestic employees are covered by savings and other defined contribution plans. Employer contributions and costs are determined based on criteria specific to the individual plans and amounted to approximately $25.1 million, $29.0 million and $25.0 million in 1999, 1998 and 1997, respectively. The company's costs relating to foreign defined contribution plans, insured plans and other foreign benefit plans were $4.1 million, $5.3 million and $8.6 million in 1999, 1998 and 1997, respectively. NOTE 18 - BUSINESS SEGMENT INFORMATION: Operating segments are defined as components of a company engaging in business activities for which separate financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and allocating resources. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the operating segments results are prepared on a management basis that is consistent with the manner in which the company disaggregates financial information for internal review and decision making. The company evaluates performance based on operating income contribution rates. Intercompany sales transactions are entirely contained within each segment and are eliminated at the segment level. A description of the company's reportable segments is as follows: Specialty Vehicles The Specialty Vehicles Segment designs, manufactures and markets powered vehicles that play a niche role in such fields as infrastructure development, commercial construction and material movement. Specialty Vehicles includes Bobcat skid-steer loaders and compact hydraulic excavators, Club Car golf cars and industrial vehicles, Blaw-Knox and ABG pavers, and Ingersoll-Rand compactors, drilling equipment and rough-terrain material handlers. Air and Temperature Control The Air and Temperature Control Segment focuses on markets requiring air and refrigerant-gas compression technology and services to provide gas pressure for distribution to end users or to maintain a refrigeration cycle. Air and Temperature Control includes Thermo King transport temperature-control equipment and Ingersoll-Rand air compressors. Hardware and Tools The Hardware and Tools Segment concentrates on manufacturing, marketing, and managing the distribution channels required to reach end user customers seeking products that enhance productivity and security in the industrial, construction, and do-it-yourself markets. Hardware and Tools includes architectural hardware products, such as Schlage locks, Von Duprin exit devices, door- control hardware, steel doors, power-operated doors and architectural columns, and tools and related industrial-production equipment. Engineered Products The Engineered Products Segment is composed of highly engineered specific application products that are sold on a contract basis. Engineered Products includes Torrington and Fafnir bearings and components. Sales by destination and long-lived asset by geographic area for the years ended December 31 were as follows: In millions 1999 1998 1997 Sales United States $5,051.5 $4,770.8 $4,003.5 Foreign 2,615.2 2,613.9 2,235.6 Total $7,666.7 $7,384.7 $6,239.1 In millions 1999 1998 Long-lived assets United States $4,247.0 $4,211.9 Foreign 928.7 966.3 Total $5,175.7 $5,178.2 A summary of operations by reportable segments for the years ended December 31, were as follows: Dollar amounts in millions 1999 1998 1997 Specialty Vehicles Sales $2,347.8 $2,180.4 $2,011.8 Operating income 405.3 333.3 226.7 Operating income as % of sales 17.3% 15.3% 11.3% Depreciation and amortization 60.2 59.7 63.3 Air and Temperature Control Sales 2,211.8 2,236.0 1,256.6 Operating income 286.7 262.5 133.7 Operating income as % of sales 13.0% 11.7% 10.6% Depreciation and amortization 106.2 105.4 35.7 Hardware and Tools Sales 1,874.2 1,724.2 1,652.1 Operating income 320.3 288.3 254.8 Operating income as % of sales 17.1% 16.7% 15.4% Depreciation and amortization 52.2 44.8 39.7 Engineered Products Sales 1,232.9 1,244.1 1,318.6 Operating income 144.2 136.9 157.1 Operating income as % of sales 11.7% 11.0% 11.9% Depreciation and amortization 51.6 51.1 52.1 Total Sales $7,666.7 $7,384.7 $6,239.1 Operating income from reportable segments 1,156.5 1,021.0 772.3 Unallocated corporate expenses (57.2) (51.9) (48.8) Total operating income $1,099.3 $ 969.1 $ 723.5 Total operating income as % of sales 14.3% 13.1% 11.6% Depreciation and amortization from reportable segments 270.2 261.0 190.8 Unallocated depreciation and amortization 2.2 2.6 1.4 Total depreciation and amortization $ 272.4 $ 263.6 $ 192.2 NOTE 19 - SUBSEQUENT EVENTS (Unaudited): On February 2, 2000, the company completed the purchase of D-R by acquiring the joint venture partner's 51% share for a net purchase price of approximately $536.0 million in cash. The company intends to divest of this business (see Note 2). On February 9, 2000, the company agreed to sell its IDP unit to the Flowserve Corporation for $775.0 million in cash. The transaction is subject to regulatory approval and is expected to close during the second quarter of 2000. Report of Management The accompanying consolidated financial statements have been prepared by the company. They conform with generally accepted accounting principles and reflect judgments and estimates as to the expected effects of incomplete transactions and events being accounted for currently. The company believes that the accounting systems and related controls that it maintains are sufficient to provide reasonable assurance that assets are safeguarded, transactions are appropriately authorized and recorded, and the financial records are reliable for preparing such financial statements. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting controls must be related to the benefits derived. The company maintains an internal audit function that is responsible for evaluating the adequacy and application of financial and operating controls, and for testing compliance with company policies and procedures. The Audit Committee of the board of directors is comprised entirely of individuals who are not employees of the company. This committee meets periodically with the independent accountants, the internal auditors and management to consider audit results and to discuss significant internal accounting controls, auditing and financial reporting matters. The Audit Committee recommends the selection of the independent accountants, who are then appointed by the board of directors, subject to ratification by the shareholders. The independent accountants are engaged to perform an audit of the consolidated financial statements in accordance with generally accepted auditing standards. Their report follows. /S/David W. Devonshire Executive Vice President and Chief Financial Officer Report of Independent Accountants PricewaterhouseCoopers LLP 400 Campus Drive Florham Park, NJ 07932 February 1, 2000 To the Board of Directors and Shareholders of Ingersoll-Rand Company: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Ingersoll-Rand Company and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/PricewaterhouseCoopers LLP EX-21 8 EXHIBIT 21 LIST OF SUBSIDIARIES OF INGERSOLL-RAND COMPANY The following list represents the principal subsidiaries of the company all of which (except as otherwise indicated) are deemed to be 100% owned, directly or indirectly, and whose financial statements are included in the consolidated statements. The subsidiaries of Ingersoll-Dresser Pump Company (IDP), a general partnership and Dresser-Rand Company, a general partnership, are now owned 100% by the company. The names of particular subsidiaries omitted, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. SUBSIDIARIES OF INGERSOLL-RAND COMPANY Aro International Corporation Delaware Clark Equipment Company Delaware Bobcat Corporation Japan Blaw-Knox Construction Equipment Corporation Delaware I-R-E Medical, Inc. Delaware Clark Industries Company Delaware Blaw-Knox Company England Clark Business Services Corporation Michigan Clark Foreign Sales Corporation Barbados Clark-Hurth Components Marketing Company Delaware Checker Flag Parts, Inc. Minnesota Ingersoll-Rand Italiana S.p.A. Italy Ingersoll-Rand Services & Engineering Company Switzerland Ingersoll-Rand Acceptance Company S.A. Switzerland Ingersoll-Rand Construction Services Inc. Delaware Ingersoll-Rand Investment Company S.A. Switzerland Ingersoll-Rand Best-Matic AB Sweden Melroe Equipment Limited Canada Melroe Parts Trading GmbH Germany Club Car Inc. Delaware Club Car International Inc. Guam Club Car Limited New Zealand Compagnie Ingersoll-Rand France Ingersoll-Rand Equipements de Construction France Etablissements Montabert, S.A. France Montabert GmbH Germany Ingersoll-Rand Equipements de Production, S.A. France S.A. Etablissements Charles Maire France Sambron S.A. France Torrington France S.A.R.L. France D-R Acquisition, LLC Delaware Harrow Industries, Inc. Delaware Harrow Products, Inc. (Delaware) Delaware Harrow Products, Inc. Delaware Recognition Systems, Inc. California IDP Acquisition, LLC Delaware Thermo King Ireland Limited Ireland Thermo King Czech Republic Czech Republic Improved Machinery, Inc. Delaware Industria e Comercio Aro do Brasil Ltda. Brazil Ingersoll-Rand AB Sweden Ingersoll-Rand Argentina S.A.I.C. Argentina Ingersoll-Rand Asia Pacific Inc. Delaware Ingersoll-Rand (Australia) Ltd. Australia Ingersoll-Rand South East Asia (Pte.) ltd. Singapore Ingersoll-Rand Benelux, N.V. Belgium Thermo King Belgium N.V. Belgium Ingersoll-Rand Beteiligungs GmbH Germany ABG Allgemeine Baumaschinen Gesellschaft mbh Germany ABG Verwaltungs GmbH Germany ABG France S.A.R.L. France ABG Iberica S.A. Spain I-R Beteiligungs und Grundstucksverwaltungs GmbH Germany Ingersoll-Rand GmbH Germany Thermo King Deutschland GmbH Germany Ingersoll-Rand Sales Company LLC Delaware Ingersoll-Rand China Limited Delaware Ingersoll-Rand China Investment Company Limited China Ingersoll-Rand (Guilin) Tools Company Limited China Ingersoll-Rand (Wuxi) Road Machinery Company Limited China (92% owned by the company) Thermo King-Dalian Transport China Refrigeration Company, Limited (70% owned by the company) Torrington-Wuxi Bearings Company China Limited (78% owned by the company) Shanghai Ingersoll-Rand Compressor China Limited (80% owned by the company) Ingersoll-Rand Company (Chile) y Cia Ltda. Chile Ingersoll-Rand de Colombia S.A. Colombia Ingersoll-Rand de Puerto Rico, Inc. Puerto Rico Ingersoll-Rand Enhanced Recovery Company Delaware Ingersoll-Rand Europe France Ingersoll-Rand European Holding Company B.V. Netherlands Ingersoll-Rand (India) Limited India (74% owned by the company) Ingersoll-Rand International Foreign Sales Corporation Guam Ingersoll-Rand International Holding Corporation New Jersey Ingersoll-Rand S.A. Switzerland Ingersoll-Rand Equipment & Consulting S.A.R.L. Switzerland Ingersoll-Rand Machinery & Services S.A.R.L. Switzerland Ingersoll-Rand Technical & Services S.A.R.L. Switzerland Ingersoll-Rand Trading S.A. Switzerland Ingersoll-Rand International, Inc. Delaware Ingersoll-Rand International Sales Inc. Delaware Ingersoll-Rand Japan Limited Japan Ingersoll-Rand Manufacturing Co. Delaware Ingersoll-Rand Canada Inc. Canada Torrington Beteiligungs GmbH Germany Torrington GmbH Germany Torrington Nadellager GmbH Germany Ingersoll-Rand (Barbados) Corporation Barbados Ingersoll-Rand World Trade (Ltd.) Bermuda Torrington Inc. Canada Ingersoll-Rand do Brasil Ltda. Brazil Ingersoll-Rand Philippines, Inc. Philippines Ingersoll-Rand S.A. de C.V. Mexico Ingersoll-Rand Sales Company Limited Delaware Ingersoll-Rand European Sales Ltd. England Ingersoll-Rand Holdings Limited England Ingersoll-Rand European Sales Limited England Ingersoll-Rand Company Limited England A/S Parts Limited England Ingersoll-Rand Company (Ireland) Limited Ireland Ingersoll-Rand (New Zealand) Limited New Zealand Ingersoll-Rand Company South Africa (Pty.) Limited South Africa Longrigg Engineering Limited England Roconeco Limited England The Aro Corporation (UK) Limited England The Torrington Company Limit England NT Acquisition Limited England Ingersoll-Rand Architectural Hardware Group Limited England Newman Tonks Management Services Limited England Newman Tonks (Overseas Holdings) Limited England NT Access Limited England NT Architectural Hardware Limited England NT Door Controls Limited England NT Group Properties Limited England NT Laidlaw Limited England NT Legge Limited England NT Martin Roberts Limited England NT Partition Systems Limited England NT Projects Limited England NT Railing Systems Limited England NT Security Limited England Newman Tonks Investments, Inc. Delaware Newman Tonks Holdings, Inc. Delaware Monarch Hardware and Mfg.Co. Inc. Delaware MFP,Inc. Kentucky Newman Tonks, USA, Inc. Delaware Dixie Pacific Manufacturing Company, Inc. Alabama NT Falcon Lock, Inc. California ARMORO, Inc. California NT Dor-O-Matic Inc. Illinois NT Dor-O-Matic Limited England NT Dor-O-Matic Chicago Inc. Illinois NT Dor-O-Matic Detroit Inc. Michigan Dor-O-Matic of Mid Atlantic States, Inc. New Jersey NT USA FSC INC. Barbados NT Randi A/S Denmark NT South Africa South Africa Newman Tonks Brussels NV Belgium Newman Tonks Holdings GmbH Germany NT Normbau Beschlage and Ausstattungs GmbH Germany NT Normbau Iberica Spain Newman Tonks Europe GmbH Germany NT Asia (Hong Kong) Limited Hong Kong NT Asia (Singapore) Limited Singapore NT Dalco Pty Limited Australia Newman Tonks France SA France NT Mustad SA France Ingersoll-Rand Services Company Delaware Ingersoll-Rand Transportation Services Company Delaware Ingersoll-Rand Wadco Tools Ltd. India (74% owned by the company) Ingersoll-Rand Western Hemisphere Trade Corporation Delaware Ingersoll-Rand Worldwide, Inc. Delaware Instrum-Rand (59.1% owned by the company) Russia IR Receivables Funding I Corporation Delaware IR Receivables Funding II Corporation Delaware McCartney Manufacturing Company, Inc. Kansas Northern Research and Engineering Corporation Massachusetts Roconeco Corporation South Carolina S&S Corporation Virginia SBG Holding Corp. Delaware Schlage Lock Company California Ingersoll-Rand Architectural Hardware Limited New Zealand Ingersoll-Rand Architectural Hardware (Australia) Limited Australia Touch-Plate International, Inc. California Von Duprin, Inc. Indiana Schlage de Mexico S.A. de C.V. Mexico Silver Holding Corp. Colorado Woodcliff Insurance Ltd. Bermuda Sonna B.V. Netherlands Sonna Rail B.V. Netherlands Steelcraft Holding Company Delaware The Torrington Company (Delaware) Delaware Industrias del Rodamiento, S.A. Spain Ingersoll-Rand Iberica S.L. Spain Reftrans, S.A. (85% owned by the company) Spain Ingersoll-Rand Liability Management Company Michigan Kilian Manufacturing Corp. Delaware Torrington Holdings, Inc. Delaware Torrington Sales Limited Switzerland Thermo King Corporation Delaware Thermo King Container-Denmark A/S Denmark Thermo King de Puerto Rico, Inc. Delaware Thermo King do Brasil, Ltda. Brazil Thermo King SVC, Inc. Delaware Thermo King Trading Company Delaware Tokyo Ryuki Seizo Co. Ltd. Japan SUBSIDIARIES OF DRESSER-RAND COMPANY Dresser-Rand Argentina, S.A. Argentina Dresser-Rand Machinery Repair Belgie N.V. Belgium Dresser-Rand Canada, Inc. Canada Dresser-Rand C.I. Limited (Cayman Islands) Cayman Is. Dresser-Rand Compression Services S.A.-Switzerland Switzerland Dresser-Rand Compressor Col, Ltd. Shanghai China Dresser-Rand de Mexico S.A. Mexico Dresser-Rand Global Services, LLC Delaware Dresser-Rand Holding Company Delaware Dresser-Rand Asia Pacific Sdn. Bhd. Malaysia Dresser-Rand B.V. Netherlands Dresser-Rand & Enserv Services Sdn. Bhd. Malaysia Dresser-Rand de Venezuela, S.A. Venezuela Dresser-Rand Gesellschaft Mit Beschrankter Haftung Germany Dresser-Rand Japan, Ltd. Japan Dresser-Rand Overseas Sales Company Delaware Dresser-Rand Company Ltd.-UK UK Dresser-Rand (UK) Ltd. UK Dresser-Rand Sales Company S.A. Switzerland Dresser-Rand Services, S.a.r.l. Switzerland Southwest Industries, Inc. Delaware Turbodyne Electric Power Corporation Delaware Dresser-Rand India Private Limited India Dresser-Rand International B.V. Netherlands Dresser-Rand Italia S.r.l. Italy Dresser-Rand (Nigeria) Ltd. Nigeria Dresser-Rand Power, Inc. Delaware Dresser-Rand A/S Norway Dresser-Rand Comercio e Industria Ltda. Brazil Dresser-Rand (SEA) Pte. Ltd. Singapore Dresser-Rand S.A.-France France Dresser-Rand Services B.V. Netherlands Dresser-Rand Czech S.R.O. Czech Rep. Engeturb Turbinas a Vapor Ltda. Brazil Multiphase Power and Processing Technologies, LLC Delaware Paragon Engineering Services, Inc. Texas SUBSIDIARIES OF INGERSOLL-DRESSER PUMP COMPANY Ingersoll-Dresser Pumps de Argentina, S.A. Argentina Ingersoll-Dresser Pumps GmbH Austria Ingersoll-Dresser Pumps do Brazil Brazil Industria e Comercio Ltda. Brazil Ingersoll-Dresser Pump Canada, Inc. Canada Ingersoll-Dresser Pumps de Colombia, S.A. Colombia Ingersoll-Dresser Pompes France IDP Pleuger France IDP International France Deutsche Ingersoll-Dresser Pumpen GmbH Germany Ingersoll-Dresser Pump GmbH Germany Pleuger Worthington GmbH Germany Deutsche Worthington GmbH Germany Ingersoll-Dresser Pumps S.p.A. Italy Worthington S.p.A. Italy Ingersoll-Dresser Pump (Asia) Pte., Ltd. Singapore Ingersoll-Dresser Pump, S.A. Switzerland Ingersoll-Dresser Pump Services Sarl Switzerland ID Pump AG Switzerland Ingersoll-Dresser Pump Nederland B.V. Netherlands Ingersoll-Dresser Pumps (UK), Ltd. England Ingersoll-Dresser Pumps Newark, Ltd. England IDP Alternate Energy Company Delaware Pump Investments, Inc. Delaware Energy Hydro, Inc. Delaware Compania Ingersoll-Dresser Pump, S.A. Spain Ingersoll-Dresser Pumps (Thailand), Ltd. Thailand EX-27 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 DEC-31-1999 233 1 1,022 33 742 2,868 2,085 845 8,400 1,739 2,113 402 0 342 2,741 8,400 7,667 7,667 5,515 5,515 0 0 203 845 300 545 46 0 0 591 3.61 3.57
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