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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2003

or

For the transition period from __________ to __________

Commission File Number 1-985

 
INGERSOLL-RAND COMPANY LIMITED
(Exact name of registrant as specified in its charter)

(441) 295-2838
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X     No       

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes   X     No       

The number of Class A common shares outstanding as of April 30, 2003 was 169,384,182.

Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements

                                                        INGERSOLL-RAND COMPANY LIMITED
                                             CONDENSED CONSOLIDATED INCOME STATEMENT

INGERSOLL-RAND COMPANY LIMITED
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 months ended March 31, 2003 and 2002. 

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Ingersoll-Rand Company Limited (the Company or IR-Limited) Annual Report on Form 10-K for the year ended December 31, 2002.  The accompanying condensed consolidated financial statements restate the quarter ended March 31, 2002 amounts previously presented to report the Company's Engineered Solutions Segment as discontinued operations.

The Company holds marketable securities, which it classifies as available for sale.  These securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.

Note 2 - Under the Company's incentive stock plans, approved in 1990, 1995, and 1998, key employees have been granted options to purchase Class A common shares.  The Company continues to account for these plans under the recognition and measurement principles of APB No. 25, "Accounting for Stock Issued to Employees."  Accordingly, no compensation expense is recognized for employee stock options since options granted are at prices not less than fair market value at the date of grant.  The plans also authorize stock appreciation rights and stock awards, which result in compensation expense.  Additionally, the Company maintains a shareholder-approved Management Incentive Unit Award Plan, which results in compensation expense, as well as an Executive Deferred Compensation Plan and a Director Deferred Compensation Plan that have not been approved by shareholders and that result in compensation expense.

The following table is presented in accordance with Statement of Financial Accounting Standard No. (SFAS) 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" and illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:

Note 3-Effective February 16, 2003, the Company continued its business portfolio realignment by selling its Engineered Solutions Segment (the Business), previously included as part of the Company's Industrial Solutions Sector, to The Timken Company (Timken).  The consideration received consisted of approximately $700 million in cash and approximately 9.4 million shares of Timken common stock valued at $140 million at the date of sale.  The Company realized an after-tax gain of $53.4 million on the disposition, which is included in "Discontinued operations, net of tax."  The gain is subject to working capital and other final purchase price adjustments.  The Company recorded additional costs and liabilities primarily relating to employee benefits in the calculation of the after-tax gain.  The Business consisted of the Company's worldwide operations relating to precision bearings and motion-control components and assemblies, and included the Torrington, Fafnir, Kilian, Nadella and IRB brands.  The Business employed approximately 10,000 people and operated 27 plants throughout the world. 

Discontinued operations also includes costs related to Ingersoll-Dresser Pump Company (IDP), which was sold in 2000.  These costs include employee benefits and product liability.

Net sales and pretax earnings for discontinued operations is as follows:

The assets and liabilities of discontinued operations included in assets held for sale and liabilities held for sale represent the assets and liabilities of the Company's Engineered Solutions Segment and are as follows:

In accordance with the purchase agreement, certain assets and liabilities, such as environmental, product liability, tax, and employee-related costs, of the Company's Engineered Solutions Segment were retained by the Company, and have been excluded from the above presentation. Additionally, the Company has guaranteed Timken a specified value for its ownership interest in a joint venture when it is sold pursuant to certain terms of the joint venture agreement.  The Company has determined that the amount, if any, to be paid in respect of this guarantee would be immaterial. 

Note 4 - During the third quarter of 2000, the Company commenced a restructuring program, which included actions such as plant rationalizations, organizational realignments consistent with the Company's new market-based structure and the consolidation of back-office processes.  During the fourth quarter of 2001, the Company commenced a second restructuring program to further reduce the general and administrative expenses across the Company.  These programs include certain costs that are identified in Staff Accounting Bulletin 100, "Restructuring and Impairment Charges," and Emerging Issues Task Force (EITF) 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)," as restructuring charges, as well as other related costs that do not meet the criteria to be classified as restructuring charges.  Nonrecurring costs associated with these activities not qualifying as restructuring charges are referred to as "productivity investments" and have been charged to "Cost of goods sold" and "Selling and administrative expenses."  Substantially all cash payments are expected to be paid by the end of the third quarter of 2003.  Remaining amounts relate primarily to ongoing lease commitments and employee related liabilities. The Company realized lower costs and improved customer service in all segments as a result of these actions. The Company manages the 2000 and 2001 programs as a single restructuring program.  Therefore, all comments regarding restructure activity refer to both programs combined.

The total employee terminations related to the restructuring program are expected to be approximately 5,000.  These terminations included both the salaried and hourly employee groups.  All 21 of the manufacturing facilities were closed at March 31, 2003. 

A reconciliation of the consolidated restructuring reserve for the Phase I and Phase II programs is as follows:

Details by segment of the above reconciliation are as follows:

Climate Control
As of December 31, 2002, all identified manufacturing locations had been closed, the outsourcing of certain product manufacturing was completed and all 1,419 employees were terminated.

A reconciliation of the restructuring reserve for the Phase II program is as follows:

Air and Productivity Solutions
As of December 31, 2002, all identified manufacturing locations had been closed.  Employees terminated as of March 31, 2003 were 1,393, with an additional 15 employees to be terminated by the end of the second quarter of 2003.

A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:

Dresser-Rand
As of December 31, 2002, the organizational realignment and the closure of the non-manufacturing locations were complete.  As of March 31, 2003, 385 employees were terminated, with an additional three employees to be terminated by the end of the second quarter of 2003.

A reconciliation of the restructuring reserve for the Phase II program is as follows:

Infrastructure
As of December 31, 2002, all identified manufacturing locations had been closed.  As of March 31, 2003, 776 employees were terminated, with an additional five employee terminations expected by the end of the second quarter of 2003.

A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:

Security and Safety
As of December 31, 2002, all identified manufacturing locations had been closed.  As of March 31, 2003, 519 employees were terminated, with an additional 21 employee terminations expected by the end of the second quarter of 2003.

A reconciliation of the restructuring reserve for the Phase I program is as follows:

Corporate Center
As of March 31, 2003, 217 employees were terminated, with an additional 179 in staff reductions related to outsourcing of back-office functions expected in 2003.  The savings associated with the corporate restructuring activities are realized in the segments due to the reduction of employees in business units' back office operations.

A reconciliation of the restructuring reserve for the Phase I and Phase II programs is as follows:

Note 5 - Inventories are stated at cost, which is not in excess of market.  Most U.S. manufactured inventories, excluding the Climate Control and Dresser-Rand Segments, are valued on the last-in, first-out (LIFO) method.  All other inventories are valued using the first-in, first-out (FIFO) method.  The composition of inventories was as follows:

Note 6 - The changes in the carrying amount of goodwill for the three months ended March 31, 2003, is as follows:

* Represents goodwill related to current year acquisitions or adjustments as a result of final allocations of purchase price.

The following table sets forth the gross amount and accumulated amortization of the Company's intangible assets:

Intangible asset amortization expense for the first quarter of 2003 and 2002 was $10.8 million and $8.7 million, respectively.  Estimated intangible asset amortization expense for each of the next five fiscal years is expected to be $38.9 million in 2004, $37.2 million in 2005, $36.1 million in 2006, $24.1 million in 2007, and $21.9 million in 2008.

Note 7 - Information on basic and diluted shares is as follows:

Diluted earnings per share computations for the three months ended March 31, 2003 and 2002, excluded the weighted average effect of the assumed exercise of approximately 11.4 million and 5.1 million shares issuable under incentive stock plans, respectively.  These shares were excluded because the effect would be anti-dilutive.

Note 8 - The components of comprehensive income are as follows:

Included in accumulated other comprehensive income at March 31, 2003, is $1.3 million related to the fair value of derivatives qualifying as cash flow hedges, of which $2.4 million of expense is expected to be reclassified to earnings over the twelve-month period ending March 31, 2004.  Additionally, $1.1 million, related to an interest rate swap used as a cash flow hedge of the forecasted issuance of debt, will be reclassified to earnings over the two-year period beginning April 1, 2004.  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 quarter in connection with forecasted transactions that were no longer considered probable of occurring.  At March 31, 2003, the maximum term of derivative instruments that hedge forecasted transactions, for foreign currency and commodity hedges, was twelve months.

In connection with the sale of the Engineered Solutions Segment to Timken effective February 16, 2003, the Company received approximately 9.4 million shares of Timken common stock valued at $140 million at the time of sale.  In the first quarter of 2003, the Company recorded an unrealized gain of $4.2 million, net of tax, on the appreciation of the Timken shares.

The first quarter 2003 sale of the Company's Engineered Solutions Segment was a significant event to the Company's largest U.S. pension plan. Most eligible U.S. employees of the Engineered Solutions Segment were covered by this plan.  A remeasurement of that plan's assets and obligations was required as of the date of the sale.   The assumptions used to remeasure this plan as of the date of sale were a discount rate of 6.50%, a 4.00% rate of compensation increase and an expected return on plan assets of 8.75%.  As a result of this remeasurement, the Company recognized an increase in its additional minimum pension liability, with an after-tax charge to equity of $57.6 million.  

Note 9 - In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued.  FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The required disclosures and a roll-forward of product warranty liabilities are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company has fully adopted FIN 45 and its impact was not material.

In connection with the disposition of certain businesses and facilities the Company has indemnified the purchasers for the expected cost of remediation of environmental contamination, if any, existing on the date of disposition.  Such expected costs are accrued when environmental assessments are made or remedial efforts are probable and the costs can be reasonably estimated.

The Company extends a variety of financial, market value and product performance guarantees to third parties.  There have been no material changes to guarantees outstanding since December 31, 2002.

Warranty accruals are recorded at the time of sale and are estimated based upon product warranty terms and historical experience.  Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available.  The following table represents the changes in the product warranty liability for the first quarter of 2003: 

Note 10 - A summary of operations by reportable segment is as follows: