10-Q 1 q2601.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-985 INGERSOLL-RAND COMPANY Exact name of registrant as specified in its charter New Jersey 13-5156640 State of incorporation I.R.S. Employer Identification No. Woodcliff Lake, New Jersey 07677 Address of principal executive offices Zip Code (201) 573-0123 Telephone number of principal executive offices Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes . X . No . . . The number of shares of common stock outstanding as of July 30, 2001 was 168,385,245. INGERSOLL-RAND COMPANY FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Condensed Consolidated Balance Sheet at June 30, 2001 and December 31, 2000 Condensed Consolidated Income Statement for the three and six months ended June 30, 2001 and 2000 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Part II. OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders Item 6 - Exhibits and Reports on Form 8-K SIGNATURES INGERSOLL-RAND COMPANY CONDENSED CONSOLIDATED BALANCE SHEET (in millions) ASSETS June 30, December 31, 2001 2000 Current assets: Cash and cash equivalents $ 57.6 $ 74.4 Marketable securities 5.9 125.6 Accounts and notes receivable, net 1,357.3 1,323.5 Inventories 1,106.8 1,022.9 Prepaid expenses and deferred income taxes 159.4 164.0 Assets held for sale 586.7 612.4 Total current assets 3,273.7 3,322.8 Investments in and advances with partially owned equity affiliates 159.6 167.6 Property, plant and equipment, at cost 2,408.2 2,417.9 Less - accumulated depreciation 935.1 889.9 Net property, plant and equipment 1,473.1 1,528.0 Intangible assets, net 5,158.7 5,105.3 Deferred income taxes 117.4 114.1 Other assets 337.1 290.7 Total assets $10,519.6 $10,528.5 LIABILITIES AND EQUITY Current liabilities: Accounts payable and accruals $ 1,568.5 $ 1,698.7 Loans payable 938.8 2,121.8 Income taxes 31.6 146.1 Total current liabilities 2,538.9 3,966.6 Long-term debt 2,992.1 1,540.1 Postemployment liabilities 819.8 824.8 Minority interests 111.8 110.5 Other liabilities 199.7 188.8 6,662.3 6,630.8 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company - 402.5 Shareholders' equity: Common stock 360.5 343.1 Other shareholders' equity 3,811.6 3,398.7 Accumulated other comprehensive income (314.8) (246.6) Total shareholders' equity 3,857.3 3,495.2 Total liabilities and equity $10,519.6 $10,528.5 See accompanying notes to condensed consolidated financial statements. INGERSOLL-RAND COMPANY CONDENSED CONSOLIDATED INCOME STATEMENT (in millions except per share figures) Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 Net sales $2,285.6 $2,232.9 $4,405.2 $4,253.3 Cost of goods sold 1,782.8 1,614.8 3,420.5 3,096.4 Selling and administrative expenses 319.1 269.6 625.5 539.1 Restructuring charges 8.3 - 30.0 - Operating income 175.4 348.5 329.2 617.8 Interest expense (62.1) (55.3) (128.0) (103.5) Other income (expense), net (4.6) (4.0) 1.7 (1.2) Minority interests (5.6) (12.7) (14.1) (20.1) Results from assets held for sale (net of tax) (6.1) (5.7) (14.3) (13.6) Earnings before income taxes 97.0 270.8 174.5 479.4 Provision for income taxes 34.1 93.1 62.3 170.0 Earnings from continuing operations 62.9 177.7 112.2 309.4 Discontinued operations (net of tax) - (2.3) - 2.0 Net earnings $ 62.9 $ 175.4 $ 112.2 $ 311.4 Basic earnings per common share Continuing operations $ 0.38 $ 1.10 $ 0.69 $ 1.92 Discontinued operations - (0.01) - 0.01 $ 0.38 $ 1.09 $ 0.69 $ 1.93 Diluted earnings per common share Continuing operations $ 0.38 $ 1.09 $ 0.69 $ 1.90 Discontinued operations - (0.01) - 0.01 $ 0.38 $ 1.08 $ 0.69 $ 1.91 Dividends per share $ 0.17 $ 0.17 $ 0.34 $ 0.34 See accompanying notes to condensed consolidated financial statements. INGERSOLL-RAND COMPANY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) Six months ended June 30, 2001 2000 Cash flows from operating activities: Income from continuing operations $ 112.2 $ 309.4 Adjustments to arrive at net cash provided by operating activities: Restructure of operations 30.0 - Depreciation and amortization 170.2 135.3 Changes in other asset and liabilities, net (465.0) (339.0) Other, net 16.8 24.3 Net cash (used in) provided by operating activities (135.8) 130.0 Cash flows from investing activities: Capital expenditures (76.6) (74.6) Acquisitions, net of cash (103.5) (2,286.8) Proceeds from business dispositions 17.5 79.7 Decrease in marketable securities 94.4 0.3 Other, net 18.2 22.9 Net cash used in investing activities (50.0) (2,258.5) Cash flows from financing activities: Net change in debt 276.2 2,094.1 Purchase of treasury stock (58.1) (77.8) Dividends paid (55.9) (55.2) Proceeds from exercise of stock options 8.5 5.7 Net cash provided by financing activities 170.7 1,966.8 Net cash provided by discontinued operations - 24.5 Effect of exchange rate changes on cash and and cash equivalents (1.7) (5.3) Net decrease in cash and cash equivalents (16.8) (142.5) Cash and cash equivalents - beginning of period 74.4 222.9 Cash and cash equivalents - end of period $ 57.6 $ 80.4 See accompanying notes to condensed consolidated financial statements. INGERSOLL-RAND COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (including normal recurring accruals) necessary to present fairly the consolidated unaudited financial position and results of operations for the three and six months ended June 30, 2001 and 2000. Note 2 - During the third quarter of 2000, the company began a restructuring program which includes such actions as plant rationalizations, organizational realignments consistent with the company's new market-based structure and the consolidation of back- office processes. Restructuring charges incurred consist of costs associated with severance and other employee termination benefits, and facility exit costs including lease terminations. Charges related to employee severance and other employee termination costs cover approximately 3,800 employees, of which 81% have been terminated as of June 30, 2001. The restructuring plan is expected to be substantially complete by the end of 2001. The company recorded pretax restructuring charges by business segment for the six months ended June 30, 2001 as follows: In millions Climate Control $10.9 Industrial Productivity: Air Solutions 1.3 Bearings and Components 10.5 Industrial Products 0.1 Infrastructure 2.9 Security and Safety 1.3 Corporate 3.0 Total $30.0 A reconciliation of the restructuring provision is as follows: Employee termination Facility In millions costs exit costs Total Provision $65.8 $10.4 $76.2 Cash payments (31.6) (0.5) (32.1) Asset write-offs - (7.7) (7.7) Balance at December 31, 2000 34.2 2.2 36.4 Provision 27.4 2.6 30.0 Cash payments (37.7) (1.5) (39.2) Asset write-offs - (2.0) (2.0) Balance at June 30, 2001 $23.9 $ 1.3 $25.2 Note 3 - The company continues the process to sell the Dresser-Rand Company (D-R). D-R's results were reclassified on the condensed consolidated income statement into results from assets held for sale, net of tax for the three and six months ended June 30, 2000 from discontinued operations, net of tax. The net assets of D-R have been included in assets held for sale on the condensed balance sheet for all periods presented. The company continues its efforts to complete the sale of D-R. Note 4 - In June 2001, the company acquired the assets of ITO Emniyet Kilit Sistemleri A. (ITO Kilit), a leading manufacturer and distributor of locks, cylinders and keys in the Turkish market. The acquisition includes ITO Kilit's manufacturing facility in Duzce, Turkey, and advanced-technology lock and cylinder production equipment. Also in June 2001, the company acquired Superstav, spol. s.r.o., a manufacturer of compact tractor loader backhoes located in the Czech Republic, and its U.S. distributor. Due to the timing of these acquisitions, the investment in these companies has been included at June 30, 2001 on the balance sheet in other assets. In May 2001, the company acquired National Refrigeration Services, Inc. (NRS), a leading provider of commercial refrigeration products and services for food storage distribution and display throughout the United States. NRS serves customers in a variety of commercial refrigeration applications, including supermarkets, convenience stores, food processors, food service facilities, government institutions, cold storage warehouses, and distribution facilities. In March 2001, the company acquired, for common stock and cash, Taylor Industries, Inc. (Taylor) and an affiliate business, Taylor Refrigeration. Taylor distributes, installs and services refrigeration equipment, food service equipment and electric doors. In June 2000, the company acquired Hussmann International, Inc. (Hussmann), for approximately $1.7 billion in cash after taking into account amounts paid for outstanding stock options, debt retirement, employee contracts and transaction costs. Hussmann's business is the design, production, installation and service of merchandising and refrigeration systems for the global food industry. The results of Hussmann's operations have been included in the consolidated financial statements from the acquisition date. The following pro forma consolidated results for the six months ended June 30, 2000 reflect the acquisition as though it occurred at the beginning of the period after adjustments for interest on acquisition debt, depreciation and amortization of assets, including goodwill. (in millions, except per share amounts): For the six months ended June 30, 2000 Sales $4,887.1 Net earnings 280.6 Basic earnings per common share Continuing operations $ 1.73 Discontinued operations 0.01 $ 1.74 Diluted earnings per common share Continuing operations $ 1.71 Discontinued operations 0.01 $ 1.72 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 respective period. Further, the pro forma results are not intended to be a projection of future results of the combined companies. Historically, Hussmann's operating profits tend to be more heavily concentrated during the second half of the year. Acquisitions are accounted for as purchases. The purchase price for each acquisition is allocated to the acquired assets and liabilities based on their estimated fair values. All purchase accounting is finalized within a year of the acquisition. The company classifies as goodwill the cost in excess of the fair value of the net assets acquired. Such excess cost is being amortized on a straight-line basis not to exceed forty years. Intangible assets also represent costs allocated to patents and trademarks and other specifically identifiable assets arising from the acquisition. These assets are being amortized over their estimated useful lives. Note 5 - Inventories are stated at cost, which is not in excess of market. Most domestically manufactured inventories, excluding the Climate Control Sector, are valued on the last-in, first-out (LIFO) method. The Climate Control Sector and foreign manufactured inventories are valued using the first-in, first-out (FIFO) method. The composition of inventories for the balance sheets presented were as follows (in millions): June 30, December 31, 2001 2000 Raw materials and supplies $ 274.3 $ 280.2 Work-in-process 248.4 231.7 Finished goods 729.9 654.4 1,252.6 1,166.3 Less - LIFO reserve 145.8 143.4 Total $1,106.8 $1,022.9 Note 6 - The Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, and its amendments, became effective for the company on January 1, 2001. The statement 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. If a derivative qualifies for cash flow hedge accounting the effective portion of changes in fair value is recorded temporarily in other comprehensive income then recognized in earnings along with the related effects of the hedged items. If a derivative qualifies for fair value hedge accounting, the changes in fair value of the derivative and the hedged item are recognized currently in earnings. There was no ineffective portion of hedges reported in earnings in the first six months of 2001. The company operates internationally, with manufacturing and sales facilities in various locations around the world and utilizes primarily forward and option contracts to manage its foreign currency and commodity exposures, primarily related to forecasted transactions. Of the approximate $1.2 million, after tax, recorded in equity at January 1, 2001, upon the adoption of these new standards, $0.7 million was reclassified to earnings during the first six months of 2001. Of the $0.5 million recorded in equity at June 30, 2001, $0.5 million is expected to be reclassified to earnings over the 12-month period ending June 30, 2002. The actual amounts that will be reclassified to earnings over the next twelve months will vary from this amount as a result of changes in market conditions. No amounts were reclassified to earnings during the first six months in connection with forecasted transactions that were no longer considered probable of occurring. At June 30, 2001, the maximum term of derivative instruments that hedge forecasted transactions, for both foreign currency and commodity hedges, was twelve months. The company also utilized an interest rate swap as a cash flow hedge of the forecasted issuance of debt that occurred during the second quarter. Approximately $2.6 million was included in accumulated other comprehensive income at June 30, 2001 related to this transaction. Derivatives not designated as hedges primarily consist of options and forward contracts. Although these instruments are effective as hedges from an economic perspective, they do not qualify for hedge accounting under SFAS No. 133, as amended. Note 7 - Information on basic and diluted earnings per share is as follows (in millions): Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 Average number of basic shares 164.1 161.5 162.5 161.7 Shares issuable assuming exercise under incentive stock plans 1.5 1.3 1.3 1.4 Average number of diluted shares 165.6 162.8 163.8 163.1 Note 8 - The components of comprehensive income (loss) are as follows (in millions): Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 Net earnings $ 62.9 $175.4 $112.2 $311.4 Other comprehensive income (loss) Foreign currency equity adjustment (18.7) (40.8) (52.3) (58.6) Cumulative effect of change in accounting principal (SFAS No. 133), net of tax - - (1.2) - Cash flow hedges: Unrealized gain, net of tax 2.3 - 1.0 - Reclassification adjustments, net of tax 0.2 - 0.7 - Reclassification to realized on marketable securities, net of tax - - (16.4) - Comprehensive income $ 46.7 $134.6 $ 44.0 $252.8 Note 9 - A summary of operations by reportable segment is as follows: Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 Sales Climate Control $ 610.3 $ 398.6 $1,125.4 $ 723.0 Industrial Productivity Air Solutions 205.9 217.8 402.6 414.4 Bearings and Components 270.0 314.8 542.3 621.6 Industrial Products 247.6 276.0 505.2 529.2 723.5 808.6 1,450.1 1,565.2 Infrastructure Development 606.4 669.7 1,149.3 1,273.3 Security and Safety 345.4 356.0 680.4 691.8 Total $2,285.6 $2,232.9 $4,405.2 $4,253.3 Operating income Climate Control $ 11.5 $ 48.8 $ 1.1 $ 87.5 Industrial Productivity Air Solutions 5.4 25.5 22.9 45.3 Bearings and Components 20.4 50.2 35.7 82.8 Industrial Products 19.1 39.9 52.8 76.1 44.9 115.6 111.4 204.2 Infrastructure Development 82.7 126.0 145.0 222.9 Security and Safety 56.3 75.3 110.6 138.2 Unallocated corporate expense (20.0) (17.2) (38.9) (35.0) Total $175.4 $348.5 $329.2 $617.8 No significant changes in assets by geographic area have occurred since December 31, 2000. INGERSOLL-RAND COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net sales for the second quarter of 2001 were $2.3 billion, operating income was $175.4 million and earnings from continuing operations were $62.9 million or $0.38 diluted earnings per share (DEPS). Operating income included $8.3 million of restructure charges and $31.4 million of productivity investments. Excluding charges relating to restructure and productivity investments, DEPS were $0.55. The second quarter of 2000 did not include any charges for restructure or productivity investments. The second quarter of 2001 includes a full quarter of Hussmann results which was acquired June 2000. For the second quarter of 2000, the company's sales were approximately $2.2 billion, with operating income of $348.5 million and earnings from continuing operations of $177.7 million or $1.09 DEPS. Net sales for the three months ended June 30, 2001 were $2.3 billion, an increase of 2% over last year's second quarter. Excluding Hussmann, net sales decreased by 10% compared to last year's second quarter. The decline was primarily due to lower North American revenues caused by deteriorating end markets, delayed customers' purchasing and continued weakness in the economy. Cost of goods sold, and selling and administrative expenses in the second quarter of 2001 include charges for productivity investments. Productivity investments consist of costs for equipment moving, facility redesign, employee relocation and retraining, and systems enhancements. Charges for productivity investments are expensed as incurred. All business segments incurred productivity investments. Productivity investments recorded as cost of sales and selling and administrative expenses for the second quarter of 2001 were $26.7 million and $4.7 million, respectively. Cost of goods sold in the second quarter of 2001 was 78.0% of sales as compared to 72.3% in the comparable quarter of 2000. The increase in the ratio of cost of goods sold to sales was due to the inclusion of productivity investments, Hussmann, reduced volume, unfavorable product mix and some pricing pressure. In addition, the company is continuing to spend on key product development projects, particularly the Powerworks microturbines. The ratio of selling and administrative expenses to sales was 14.0% for the second quarter of 2001, as compared to 12.1% for the second quarter of 2000. Excluding productivity investments, the ratio of selling and administrative expenses to sales for the second quarter of 2001 was 13.8%. Hussmann's earnings have historically followed a distinct seasonal pattern with two-thirds of the earnings produced in the second half of the year, while selling and administrative expenses are incurred fairly evenly throughout the year. Restructuring charges for the second quarter of 2001 were $8.3 million. The restructuring program began in the third quarter of 2000 and is expected to be substantially complete by the end of 2001. Restructuring charges include $5.9 million of severance and other employee termination costs, while facility exit costs totaled $2.4 million. Charges related to employee severance and other employee termination costs cover approximately 3,800 employees, of which 81% have been terminated as of June 30, 2001. For the three months ended June 30, 2001, the company recorded pretax restructuring charges for the Industrial Productivity Sector of $4.8 million, Security and Safety Sector of $0.5 million, and Corporate of $3.0 million. Operating income for the second quarter of 2001 totaled $175.4 million, a decrease of $173.1 million over the $348.5 million reported for last year's second quarter. Excluding productivity and restructure charges, operating income was $215.1 million, a decrease of $133.4 million from 2000's second quarter. Interest expense for the second quarter of 2001 was $6.8 million higher than last year's second quarter. The purchase of Hussmann added $28.1 million and $5.2 million of interest expense to the second quarter of 2001 and 2000, respectively. Excluding Hussmann- related interest expense, interest expense for the second quarter of 2001 was $16.1 million below last year's level. The decrease is attributable to lower average debt balances and interest rates during the comparable periods. Additionally, interest expense from the debt required to purchase D-R has been classified as a component of results from assets held for sale (net of tax) and was not included in interest expense. Other income (expense), net, aggregated $4.6 million of net expense for the second quarter of 2001, as compared to $4.0 million of net expense for the three months ended June 30, 2000. The change was due to decreased earnings from partially-owned equity companies, increased miscellaneous expenses, which were offset by gains in foreign currency activity. Minority interest decreased from the second quarter of 2000 by $7.1 million. Charges associated with the company's equity-linked securities decreased from $6.3 million last quarter to $2.4 million due to their conversion to common stock in mid-May 2001. Additionally, earnings from consolidated entities in which the company has a majority ownership declined. Results from assets held for sale, net of tax, reflects the operating loss of D-R. D-R's second quarter net loss of $6.1 million included one-time after tax charges of $1.5 million for charges relating to organizational realignments. Excluding these charges, D-R's net loss amounted to $4.6 million, compared to $5.7 million net loss in the second quarter of 2000. D-R's earnings also include interest expense, net of tax on debt incurred for the acquisition and amortization of goodwill. The company's effective tax rate for continuing operations for the second quarter of the year was 35.2% as compared to 34.4% for the three months ended June 30, 2000. Excluding D-R, the company's effective tax rate was 33.0%. The tax rate excluding D-R for the third and fourth quarters of the current year is expected to be 33.0%. Earnings from discontinued operations (net of tax) for 2000 were the results of Ingersoll-Dresser Pump Company (IDP) which was sold in the third quarter of 2000. Incoming orders for the second quarter of the year approximated $2.3 billion, which was higher than last year's second quarter total. Excluding Hussmann, incoming orders decreased by approximately $200 million from $2.1 billion to $1.9 billion. The company's backlog of orders at June 30, 2001, believed by it to be firm, was $1.2 billion, which was higher than the backlog at December 31, 2000. Excluding Hussmann, backlog at June 30. 2001 was approximately $100 million less than the prior year. The company estimates that approximately 90% of the backlog will be shipped during the next twelve months. A comparison of key income statement amounts between the six months ended June 30, is as follows: Net sales for the six months ended June 30, 2001 approximated $4.4 billion, an increase of 3.6% over last year's six month period. Excluding Hussmann, net sales decreased over last year's comparable period by 9%. The ratio of cost of goods sold to sales for the first six months of the year was 77.6% compared to last year's ratio of 72.8%. Included in cost of goods sold for the six months ended June 30, 2001 were charges related to productivity investments of $39.1 million. The increase in the ratio of cost of goods sold to sales was due to the inclusion of productivity investments, Hussmann, reduced volume, unfavorable product mix and some pricing pressure. In addition, the company increased spending on product development, particularly the Powerworks microturbines. The ratio of selling and administrative expenses to sales was 14.2% for the first two quarters of 2001, as compared to 12.7% for the comparable 2000 period. The period includes $14.4 million of charges related to productivity investments. Hussmann's earnings have historically followed a distinct seasonal pattern with two-thirds of the earnings produced in the second half of the year, while selling and administrative expenses are incurred fairly evenly throughout the year. The company has undertaken a restructuring and productivity investments program, which began in the third quarter of 2000. Restructuring charges for the six months ended June 30, 2001 were $30.0 million. Additionally, after tax charges of $4.8 million for organizational realignments were incurred by D-R and have been included in the results from the assets held for sale, net of taxes. Productivity investments charges of $53.5 million were included in cost of goods sold and selling and administrative expenses. Operating income for the six months ended June 30, 2001 totaled $329.2 million, a decrease of $288.6 million from the $617.8 million reported for 2000's first six months. Other income (expense), net, aggregated $1.7 million of net income for the first six months of the year, as compared to $1.2 million of net expense for the six months ended June 30, 2000. The net increase was due to the gain of $8.8 million on the sale of the stock received as part of the sale of the reciprocating gas compressor packaging and rental business of D-R, an increase in income from currency transactions offset by a decrease in earnings from partially owned equity companies and an increase in miscellaneous expenses. Minority interest decreased by $6.0 million during the first six months of 2001 over last year's six month total mainly as a result of the conversion of equity-linked securities into approximately 8.3 million common shares in May 2001 which eliminated the charges associated with the securities. Interest expense for the first six months of 2001 was $128.0 million, which was $24.5 million higher than last year's comparable period. Increased expense associated with debt issued to acquire Hussmann was partially offset by lower average debt balances and interest rates during the comparable periods. Additionally, interest expense from the debt required to purchase D-R has been classified as a component of results from assets held for sale (net of tax) and was not included in interest expense. The company's effective tax rate for the continuing operations first six months of the year was 35.7% as compared to 35.5% for the six months ended June 30, 2000. Excluding D-R, the company's effective tax rate was 33.0%. The tax rate excluding D-R for the remainder of the current year is expected to be 33.0%. Earnings from discontinued operations (net of tax) for the first two quarters of 2000 were the result of IDP, which was sold in the third quarter of 2000. Second-Quarter Business Segment Review The Climate Control Sector includes Thermo King transport temperature control equipment and Hussmann International, the world leader in display case refrigeration, which was acquired on June 14, 2000. The sector's second quarter revenues totaled $610.3 million, an increase of 53% compared to last year, reflecting the inclusion of Hussmann. Thermo King revenues decreased by 18% due to a significant decline in the truck and trailer market. The effect was lessened by an increase in the bus air conditioning and seagoing container business. Operating income for the second quarter, excluding productivity investments of $11.6 million, was $23.1 million. Operating margins declined primarily because of the inclusion of Hussmann results (including goodwill amortization), the significant decline in the truck and trailer volume, and the unfavorable effects of currency. Hussmann added revenues of $327.5 million and contributed $8.8 million of operating income to the second quarter's results. The Industrial Productivity Sector is composed of a group of businesses focused on providing solutions for customers to enhance industrial efficiency. Revenues of $723.5 million decreased by approximately 11% compared to the amount reported for the three months ended June 30, 2000. Operating income decreased to $60.3 million, excluding restructure charges of $4.8 million and productivity investments of $10.6 million. All businesses in the sector reported a decrease in operating margins for the second quarter of the year. The Industrial Productivity Sector consists of three segments: Air Solutions, a provider of equipment and services for compressed air systems, had revenues in the second quarter of $205.9 million, a decline of 5% compared to 2000, due to lower demand for larger compressors used in industrial applications. Operating income decreased to $13.1 million excluding restructure charges of $1.3 million and productivity investments of $6.4 million. Excluding productivity investments and restructure charges, operating margins decreased to 6.4% of sales in the second quarter of the year, as compared to 11.7% in the comparable 2000 quarter. Bearings and Components provides motion control technologies to the automotive and industrial markets. Revenues for the quarter declined by 14.2% to $270.0 million due to lower volumes in the U.S. auto- motive and industrial equipment markets. Excluding restructure charges of $3.4 million and productivity investments of $3.5 million, operating income for the second quarter decreased by $22.9 million to $27.3 million. Excluding productivity investments and restructure charges, operating margins decreased from approximately 16% to 10%. Industrial Products includes Club Car golf cars and utility vehicles, tools, fluid products equipment, and the independent power business. Reported revenues of $247.6 million in the second quarter decreased by $28.4 million, compared to the second quarter of 2000. Operating income, excluding charges for restructuring of $0.1 million and productivity investments of $0.7 million, was $19.9 million for the second quarter of the year, a decrease of $20.0 million from the prior year's comparable quarter due to decreased demand at Club Car and the fluid products business. Operating margins for the segment also declined due to increased spending on new product introduction, particularly the Powerworks microturbine. The Infrastructure Development Sector includes Bobcat compact equipment, road pavers and compactors, portable power products, and drilling equipment. This sector's revenues for the second quarter totaled $606.4 million, a decrease of 9% from last year's second quarter. Operating income, excluding productivity investments of $3.7 million, was $86.4 million, a decrease of $39.6 million from the comparable quarter last year. The sector's revenues and margins were negatively impacted by weaker demand in the North American road development, portable power and compact equipment markets as well as dramatically reduced demand from large U.S. rental companies. The Security and Safety Sector includes architectural hardware products and electronic access-control technologies. For this sector, second quarter revenues decreased by 3% to $345.4 million, when compared to the comparable quarter in the prior year. Operating income, excluding charges of $0.5 million for restructuring and $5.5 million for productivity investments, decreased by $13.0 million to $62.3 million. This sector's operating income margin decreased to 18% of sales for the quarter, as compared to 21% for the second quarter of 2000. Revenues decreased due to inventory reductions by commercial distributors and slowing consumer demand for residential products. Operating margins decreased due to lower volumes and increased development spending in the electronic security solutions business. Liquidity and Capital Resources The company's working capital at June 30, 2001 was $734.8 million, which reflects a significant increase from the negative working capital balance of $643.8 million at December 31, 2000. The primary reason for this change is the refinancing of $1.4 billion short-term debt to long- term. The company's debt-to-total capital ratio at June 30, 2001 was 50% compared with 48% reported at December 31, 2000. The company's cash and cash equivalents totaled $57.6 million at June 30, 2001, down from the $74.4 million at December 31, 2000. During the first six months of the year, cash flows from operating activities used $135.8 million, investing activities used $50.0 million and financing activities provided $170.7 million Receivables totaled $1.4 billion at June 30, 2001, which represents an increase of $33.8 million over the amount reported at December 31, 2000. Acquisitions and foreign currency translation nearly offset each other. The increase is due to extension of credit terms for certain customers. Inventories totaled $1.1 billion at June 30, 2001, which represents an increase of $83.9 million from the year-end balance. The increase is primarily due to the decline in demand in the first half of 2001 and acquisitions, offset by foreign currency translation. Assets held for sale were $586.7 million at June 30, 2001, a decrease of $25.7 million over the December 31, 2000 balance. This change was comprised of the decrease in net assets, primarily working capital, as well as the net loss recorded by D-R for the first six months of 2001. Intangible assets increased by approximately $53.4 million during the first six months of 2001. Acquisitions increased the account balance by approximately $47.7 million during the first six months of the year. Amortization expense for the first six months of the year was $80.1 million. The remaining change is attributed to foreign currency translation and final purchase accounting adjustments for the Hussmann acquisition of approximately $60 million. Other assets totaled $337.1 million at June 30, 2001, an increase of $46.4 million from the December 31, 2000 balance, primarily due to investments in companies acquired at the end of June 2001. Loans payable totaled $938.8 million at June 30, 2001 as compared to $2.1 billion at December 31, 2000. During the first six months of 2001, the company refinanced $1.4 billion of short-term debt with long-term debt, which included $600 million of 5.75% notes maturing in 2003, $575 million of 6.25% notes maturing in 2006, and $250 million of 5.80% notes maturing in 2004. The company also repaid $596.7 million of current maturities of long-term debt. The remainder of the change was attributable to short-term debt changes and translation. During the second quarter of 2001, the company established a $2.5 billion line of credit with a number of banks to support the commercial paper program and general corporate borrowings. In May 2001, the company's equity-linked securities were converted into 8.3 million common shares, and approximately $32 million of new long-term debt. During the first six months of 2001, the company repurchased approximately 1.3 million shares of the company's common stock. Approximately 350,000 were used in connection with an acquisition. During the first six months of 2001, foreign currency translation adjustments resulted in a net decrease of $52.3 million in shareholders' equity, caused primarily by the strengthening of the U.S. dollar against European currencies. Environmental Matters 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 28 federal Superfund and state remediation sites, excluding sites as to which the company's records disclose no involvement or as to which the company's liability has been fully determined. For all sites, there are other PRPs and in most instances, the company's site involvement is minimal. In estimating its liability, the company has not assumed that it will bear the entire cost of remediation of any site to the exclusion of other PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on the parties' financial condition and probable contributions on a per site basis. Additional lawsuits and claims involving environmental matters are likely to arise from time to time in the future. Although uncertainties regarding environmental technology, state and federal laws and regulations and individual site information make estimating the liability difficult, management believes that the total liability for the cost of remediation and environmental lawsuits and claims will not have a material effect on the financial condition, results of operations, liquidity or cash flows of the company for any year. It should be noted that when the company estimates its liability for environmental matters, such estimates are based on current technologies, and the company does not discount its liability or assume any insurance recoveries. Acquisitions In June 2001, the company acquired Superstav, spol. s.r.o., a manufacturer of compact tractor loader backhoes located in the Czech Republic, and its U.S. distributor. In June 2001, the company acquired the assets of ITO Emniyet Kilit Sistemleri A. (ITO Kilit), a leading manufacturer and distributor of locks, cylinders and keys in the Turkish market. The acquisition includes ITO Kilit's manufacturing facility in Duzce, Turkey, and advanced-technology lock and cylinder production equipment. In May 2001, the company acquired National Refrigeration Services, Inc. (NRS), a leading provider of commercial refrigeration products and services for food storage distribution and display throughout the United States. NRS serves customers in a variety of commercial refrigeration applications, including supermarkets, convenience stores, food processors, food service facilities, government institutions, cold storage warehouses, and distribution facilities. In March 2001, the company acquired, for common stock and cash, Taylor Industries, Inc. (Taylor) and an affiliate business, Taylor Refrigeration. Taylor distributes, installs and services refrigeration equipment, food service equipment and electric doors. New Accounting Standard In September 2000, the Financial Accounting Standards Board (FASB), issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement revises the accounting standards for securitizations and other transfers of financial assets and collateral and requires certain disclosures. This statement is effective for transfers and services of financial assets occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material effect on the company's consolidated financial position, consolidated results of operations, or liquidity. In June 2001, the FASB issued two statements, Statement 141, "Business Combinations", and Statement 142, "Goodwill and Other Intangible Assets", that amend APB Opinion No. 16, "Business Combinations, and supersede APB Opinion No. 17, "Intangible Assets." The two statements modify the method of accounting for business combinations entered into after June 30, 2001 and address the accounting for intangible assets. Beginning January 1, 2002, the company will no longer amortize goodwill, but will, however, evaluate for impairment annually. We are currently reviewing the statements to determine their effect on the Company. Safe Harbor Statement Information provided by the company in reports such as this report on Form 10-Q, in press releases and in statements made by employees in oral discussions, to the extent the information is not historical fact, constitutes "forward looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward looking statements by their nature involve risk and uncertainty. The company cautions that a variety of factors, including but not limited to the following, could cause business conditions and results to differ from those expected by the company: changes in the rate of economic growth in the United States and in other major international economies; significant changes in trade, monetary and fiscal policies worldwide; currency fluctuations among the U.S. dollar and other currencies; demand for company products and services; distributor inventory levels; failure to achieve the company's productivity targets; and competitor actions including unanticipated pricing actions or new product introductions. Quantitative and Qualitative Disclosures about Market Risk There has been no significant change in the company's exposure to market risk during the first six months of 2001. For discussion of the company's exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosure about Market Risk, contained in the company's Annual Report incorporated by reference in Form 10-K for the calendar year 2000. INGERSOLL-RAND COMPANY PART II OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders of the company held on May 2, 2001, the shareholders, in addition to electing directors, acted upon the approval of amendment of Incentive Stock Plan of 1998, and ratified the appointment of PricewaterhouseCoopers LLP as independent accountants of the company for the year ending December 31, 2001. The shareholders voted as follows on the following matters: 1. Election of directors of the First Class to hold office for three years. The voting result for each nominee is as follows: Name Votes For Votes Withheld Peter C. Godsoe 133,659,785 1,510,835 Constance J. Horner 133,606,914 1,563,706 Orin R. Smith 133,646,473 1,524,147 Joseph P. Flannery, Herbert L. Henkel, H. William Lichtenberger, Theodore E. Martin, Richard J. Swift, and Tony L. White all continue as directors of the company. 2. A vote of 99,778,610 votes for, 34,193,971 votes against, and 1,198,039 votes abstaining reapproved the amendment of the Incentive Stock Plan of 1998. 3. The reappointment of the company's independent accountants was approved by a vote of 129,525,308 votes for, 5,063,446 votes against, and 581,866 votes abstaining. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 10(i)(a) Credit Agreement dated July 2, 2001, among Ingersoll-Rand Company and Citibank N.A. and Deutsche Banc Alex. Brown Inc. (5 year term) 10(i)(b) Credit Agreement dated July 2, 2001, among Ingersoll-Rand Company and Citibank N.A. and Deutsche Bank Alex. Brown Inc. (364 day term) 12 Computations of Ratios of Earnings to Fixed Charges (b) Reports on Form 8-K None INGERSOLL-RAND COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INGERSOLL-RAND COMPANY (Registrant) Date August 2, 2001 /S/ D.W. Devonshire D.W. Devonshire, Executive Vice President & Chief Financial Officer Principal Financial Officer Date August 2, 2001 /S/ S.R. Shawley S.R. Shawley, Vice President & Controller Principal Accounting Officer