特靈科技 (TT) 2002 Q3 法說會逐字稿

Good day, everyone and welcome to the Ingersoll-Rand third quarter 2002 earnings results conference call. Today's call is being recorded. With us today from the company is the Chairman, President, and Chief Executive Officer, Mr. Herbert Hinkle, the Chief Financial Officer, Mr. Timothy McLevish, and the Director of Investor Relations, Mr. Joseph Vendiante. At this time for opening remarks, I'll turn the call over to Mr. Vendiante. Please go ahead sir.

Good morning. Welcome to our third quarter 2002 conference call. We released our earnings at seven AM this morning, and you should find the release posted on our website. I'd like to cover some housekeeping items before we begin. This morning, concurrent with our normal phone in conference calls, we will be broadcasting the call through our website. There you will find the slide presentation that goes along with the call. To participate via the web, go to www.irco.com and click on the yellow link on the left hand side of the screen. Please note that all the slides will be immediately available to you and we will prompt you when the change is.

Both the call and the presentation is archived on our website and will be available later this afternoon. Now if you please go to slide number two. Before we begin, I would like to remind everyone that there will be forward-looking discussions this morning, which is covered in our safe harbor statement. Please refer to our second quarter 2002 10-Q for details on factors that may influence results. I would like to introduce the participants of this morning's call; we have Bert Hinkle, Chairman, President, and CEO; Mr. McLevish, our Senior Vice President and CFO, and Rich Randall, our Vice President Controller. We will start with formal presentation by Bert Hinkle and Mr. McLevish, followed by a question and answer period. Bert Hinkle will now start with an overview. Now if you would please go to slide number three.

Thank you, Joe, and good morning everyone. Thank you for joining us on our conference call. This morning we reported net earnings from continuing operations at 51 cents per share, which is in line with our previous guidance. Theses results were adjusted for restructuring and activity charges, and the new good will accounting standard we adopted in the first quarter of this year. The impact of the restructuring and productivity charges, and the good will on our businesses can be found on schedule number four, which is attached to our third quarter press release.

Please move on to slide number four. The macroeconomic environment in our third quarter was decidedly slower than the first half of the year. IR's major markets continued to perform in what I call a sluggish activity pattern. General industrial, stationary, and refrigeration, and construction machinery markets continued to be weak while declining year over year activity levels. We did have pockets of improvement during the quarter, but overall demand levels remain stagnant. We experienced a decline in our order rates for the third quarter, with total year over year incoming orders for the third quarter up about one percent. When we exclude aquisitions they were down one percent. By comparison, second quarter orders were up about five percent when compared to last year, and year to date orders at the end of the second quarter were up about three percent. Third quarter orders improved compared to last year at ThermalKing, security and safety, and all of the infrastructure businesses except Club Car, which was down slightly. Year to date, 47% of air solution revenues are related to after-market activities. Now, please go slide number 8. The energy system business continues to develop its product line and develop its in-market focus even as delays limit sales opportunities for the market turbulence. Marketing and product development are focusing on opportunities for the environmental market, especially in the area of landfill and waste water treatment. We have begun testing prototypes of the new 250 kilowatt unit targeted for landfill and waste water treatment applications where we're converting methane gases to kill watts and electricity. We're targeting to build the first 250 kilowatt commercial units in December of this year for shipment in the beginning of 2003. That addresses the financial end market issues for the 3rd Quarter. Please go to slide number 9. Now I'd like to take a moment to talk about an issue that many of us and you have been following relative to our position to change our place in Bermuda at the end of last year. As you know, we made this decision to help overcome significant competitive disadvantages and to put IR on a level playing field with our global competitors. The change does not, in any way, affect our commitment to the United States. We took the step openly with overwhelming support from our shareholders and in full compliance with the law. For the purpose of supporting our continued growth in the United States and around the rest of the world. Given all of these factors, we believe strongly that it would be unfair to retroactively penalize our company along the lines of some proposals made in Congress. For best decision made on existing law to benefit our many shareholders. One major factor is that our shareholders, following the existing tax rules, already paid a substantial tax, as much as $100 million that, cannot be rolled back. I want you to know that we're working closely with members of Congress and others on this issue. On the merits, we think most members of Congress will agree with us that policy should not be changed retroactively to punish companies for taking internal, legal steps to compete globally. Please go on to slide No. 10. And finally, I'd like to discuss the proposed sale of the engineered solutions to the [INAUDIBLE] company which we announced last night. I think most of you are aware of the mechanics of the transaction, the proceeds to IR will consist of $700 million in cash and $140 million of tipton common stock for a total of $840 million. The total after-tax proceeds will approximate $760 million, which includes $620 million at the closing and the remainder when the timkin stock is sold. Additionally, we will receive 100% of the anti-dumping benefit associated with the bearings business in 2002 and 80% of the benefit that is realized in 2003 and 2004. This transaction is expected close by the end of the 3rd Quarter of 2003. We will be required to receive the normal government regulatory approvals and a transaction remains subject to debt and equity financing. We currently do not contemplate any major regulatory impediments to completing the transaction in a timely fashion. Our current plans are to use the froze pay down debt, to get return on business and key growth markets or to repurchase IR shares. We decided to sell the engineered solutions business after much thought and analysis. This business is a market leader and historically has been a strong financial performer. This reflects the sound management of the engineered solution business and the group's strong reputation for quality, service and innovation. However, as we have discussed in the past, the engineered solutions business does not fit well with our long-term strategic vision for IR. Consistent with the strategy, we have communicated to you over the last several years, our management team continually reviews our portfolio of businesses to ensure that they correspond with the company's long-term strategy for growth as well as operational and financial performance. Part of that focuses on each business's ability to meet our aggressive growth plans as well it's add value and gain benefit from other parts of the IR family. Bearing industry requires rationalization and is consolidating on a worldwide basis. Even though our engineered solutions business is one of the strongest performers in the industry, our choices about the future were clear. We need to get larger, primarily through acquisitions or to divest the business to another strong industry player for which engineered solutions represents better strategic fit than as part of IR. We believe that as a business moves forward, engineered solution and its people will gain the advantage of opportunity and to provide a stronger strategic fit with Timkin than currently exists as being part of IR. We will continue to keep you informed as the sales process concludes during the next few months. All in all, we continue to make progress in the quarter despite continued sluggish end market conditions. Tim will now cover IR's business unit in more detail. Tim?

Thanks, Herb and good morning. Please turn to slide 11. Reported revenues for the 3rd Quarter were up 6% to.$5 billion. This is largely attributable to double digit revenue increases at security and safe, dresser rand thermal king and engineered solutions. At an organic basis, revenues were up about 4% compared to last year's 3rd Quarter. Excluding structuring and productivity investments, operating income for 3rd quarter was $189.8 million or 7.5% of revenues compared to 9% last year stated a comparable basis which excludes goodwill amortization. Interest expense was $59.1 million compared to $66.1 million in last year's 3rd Quarter. The decrease of $7 million resulted from lower debt levels and lower interest rates. Our effective tax rate for the quarter, excluding restructuring, was 20%.

We anticipate maintaining the 20% rate for the remainder of the year and into 2003. Net earnings for the 3rd Quarter were 104 million, or 61 cents diluted earnings per share, which is slightly above our previous guidance. During the 3rd Quarter we realized certain gains which we had previously anticipated to be realized in the 4th Quarter. These gains were booked to other income. Without these gains, we would have been in the middle of our previous estimated earnings range of 55 to 60 cents per share.

Now I'd like to take a few minutes to talk about the results of our operations. This review is on a comparable basis, adjusted to exclude charges related to the restructuring and productivity investments and goodwill families that both years. Please turn to slide 12. The climate control sector, which includes Husman and ThermalKing, reported 3rd Quarter revenues of $340 million and operating income of $41 million. Operating margins for the sector declined to 6.5% of revenues, principally as a result of an unfavorable shift in product mix at Hussman and thermal king. Hussman revenues were down 10% year-over-year as weaker revenues in North America were partially offset by modest gains in Europe.

We continue to see cautious spending on refrigerated display cases by certain U.S. supermarket chains. We have seen a shift in volumes away from the more upscale grocery stores toward the discount stores, which nears recent trends in consumer spending and negatively impacts our margins. ThermalKing revenues were up over 10% compared to last year's 3rd Quarter, due to acquisitions and growth in our worldwide container business and the European truck and trailer business. The North American market for refrigerated trailers continues to show signs of improvement.

In addition, the European truck and trailer markets were up over 20% compared to last year's 3rd Quarter. Based this trend and industry data, we believe that this market has reached a trough and is beginning to recover. We are hopeful that this recovery will continue to crystalize. Please turn to slide 13. Air and productivity solutions reported 3rd Quarter revenues of $328 million, compared to $321 million last year, a modest increase resulting primarily from a 12% growth in service revenues.

Operating margins were down 40 basis points to 6.1% of revenues, due primarily to our ongoing investment in the energy systems business, which is reported in this segment. Please turn to slide 14. [INAUDIBLE] revenues for the quarter were $231 million, up from $208 million last year, an increase of 11%. Our complete unit revenues, which include purchase components that are sold or passed through to customers at low margins, were up 18% while our more profitable after market business was up about 6%.

As a result of the volume increase and ongoing cost reduction activities, operating income improved to $9.1 million compared to $6.5 million last year. Backlog and bookings continue to be strong. Excluding purchase components, the backlog totaled $625 million at September 30th, which is comparable to the strong levels at the end of the 2nd Quarter.

Please turn to slide 15. Engineered solutions reported revenues of $295 million, up 16% over last year's 3rd Quarter, in large part due to the acquisition of Nedala in the 4th Quarter of 2001. Organically, revenues were up about 5%. Increased automotive and light truck volume offset lower industrial and after-market revenues. Operating income amounted to $17 million or 5.7% of revenues compared to 8% last year. The decline in margins is due primarily to the impact of Nedala, product mix and certain employee benefits and insurance costs. Please turn to slide 16.

The infrastructure sector reported 3rd quarter revenues of $624 million, up 8% compared to last year, principally as a result of new product introductions and higher market shares as bobcat and club car. We have fared well despite modest industry reaction and pricing. Bobcat revenues increased by about 10% as a result of market share gains in both the loader and excavator markets and a stablization in pricing. Club Car is benefiting from the pathway contract with General Motors, which has offset the impact of a 24% decline in North American new golf course openings. Road machinery revenues increased modestly as higher sales to international markets offset declining North American volumes.

Revenues, however, were substantially below our forecast. Operating margins for the infrastructure sector were 7.5% of revenues compared to a weak 8% last year, reflecting lowe demand in our higher in product lines and softness in the U.S. construction markets. Please turn to slide 17. The security and safety sector continues to report strong results. The sector reported revenues of $401 million, an 11% improvement compared to last year.

On an organic basis, excluding the positive impact on our businesses, kryptonite and ETC, revenues were up 6%. An upward trend in the residential and electronic access markets was partially offset by a softening in the commercial markets. Operating margins were a strong 18.8% compared to 21.1% last year. The decline in margin percentage reflects the continued investment in our electronic securities solution business and investments in product, regional and market-related growth initiatives. Please turn to slide 18.

Moving on to the balance sheet, working capital, as a percentage of annual revenues, was 8.7%, a 210-basis point improvement over last year's 3rd quarter. We continue to focus on reducing our working capital to ensure it is in line with activity levels and within our target range of below 10% of revenues. Our cash conversion cycle has improved by about three days compared to last year. Primarily in the area of receivables and payables. We will maintain our focus on continuing to improve working capital management.

Please turn to slide 19. Capital expenditures for the 3rd Quarter were $36 million, compared to $31 million last year. We anticipate full year Cap Ex to approximate $150 million, which is in line with our plans. At the end of the 3rd quarter, our debt to total capital ratio was 48.1%, which is 110 basis points lower than the 3rd quarter last year. The change reflects our ongoing debt reduction efforts, offset by the impact of goodwill impairment charge we reported last quarter. Debt levels at the end of the quarter were $3.4 million compared to $3.9 billion at the end of last year's 3rd quarter.

Looking ahead to one of the consequences of the current economic climate and the decline in stock market levels is the impact on our pension costs. The decline in pension asset values has resulted in the potential need for additional expenditure going forward. Based occurrent stock market levels, our preliminary estimates suggest that the incremental earnings impact for IR in 2003 will be roughly 25 to 30 cents per share. This estimate will crystalize following a review of pension assets after the measurement date, which is scheduled for the end of November. Herb will now conclude our formal remarks with the outlook for the rest of the year.

Thank you, Tim. Please go to slide No. 20. The sluggish new order intake for the 3rd quarter highlights how the weak macro environment has negatively impacted our end market demand. We also continue to see the choppy month on month order patterns consistent with earlier in the year. The 3rd quarter ended with disappointing results in September after a relatively strong start, repeating the experience of the first and 2nd quarters. During our last conference call in July, we indicated that there was growing uncertainty about end market prospects for the second half of the year. At that time, we indicated that there was a 25 cent risk to full year EPS, most of it occurring in the 4th quarter.

We continue to see that level of risk in our current -- excuse me, our current 4th Quarter projections. Please go to slide number 21. More specifically by business unit, climate controls current forecast for the 4th Quarter has deteriorated somewhat since our last guidance. We see better prospects at ThermalKing and North America and Europe, which are more than offset by weakening at Hussman North America. Industrial solutions and dresser rand's prospects for the 4th quarter have not changed material from our last previous outlook. At infrastructure, expected 4th quarter performance has declined.

Bobcat expectations have not changed but we have seen declining forecast for the IR branded products in road machinery, portable power and drills. Security and safety is expected performance for the 4th quarter has not changed and should remain at high levels. Please go to slide number 22. 4th quarter earnings will be higher than the 3rd quarter driven by seasonal improvements at dresser rand and Hussman, however, the quarterly increase at Hussman won't be as large as our original expectations. Additionally morning as was the case last year, we expect a pre-tax benefit of 50 to $60 million from an anti-dumping payment which is designed to compensate us for the negative impact on pricing due to the dumping of bearings on the U.S. marketplace.

Based on these factors, we expect 4th quarter results to be between 84 cents to $1.09, which would give us $2.75 to $3 for full years earnings per share, consistent with the current consensus estimate. Please go to slide number 23. Free cash flow is expected to be approximately00 million before restructuring and productivity investments. This will be the fifth consecutive year we will accomplish this performance level. This assumes that our full year capital expenditures will be about $150 million, which is what Tim had reported to you. And that we will maintain working capital levels roughly consistent last year. This ends our formal remarks. Now I'd like to open the floor to questions. Thank you.

Thank you, gentlemen. Today's question and answer session will be conducted electronically. If you would like to ask a question, do so by pressing the star key followed by the digit 1 on your touch-tone phone. If you are on a speaker phone, be sure your mute function is turned off to allow your signal to reach our equipment. So that everyone may get a chance to ask their question, we ask that you limit yourself, please, to one question with one follow-up. You may then resignal. Again, it is star 1 for questions. We will go first to David at Solomon Smith Barney.

Good morning.

Good morning, David.

One top level question and kind of squeezed into a more operating question. After the bearing sale, assuming it gets completed early '03, where do we stand on the portfolio, dresser has always been discussed as potentially for sale why do we stand after bearing across-the-board?

What I had described in the past, David, was that as we looked at our five-year objectives of organic growth, operating margin level, cash flow and ROIC, we had at that time three areas that were not living up to our expectations that we needed to continue to work. The first area was dresser and rand, showing improvement not yet hitting the level of performance I was describing to you. The second performance issue was at the bearings business. And the third one is in our specialty equipment, which is the traditional rock drilling and mining type, roughly a $300 million business.

So, when I take that in its aggregate, what we're talking about is continuing to work the improvement at [INAUDIBLE]. We'd have to look at alternatives. And the other piece being the $300 million specialty equipment. Everything else we have in our portfolio, subject to as you know, always continues improvement, does meet the hurdle rates I described to you.

But -- are we in a holding pattern besides those two other businesses now that bearings isn't sold?

Well, you know as well as I do that our task here is to drive continued improvement shareholder value. The thing I would have to tell you is this is the kind of issue we have to work everyday going forward and never put into a holding pattern.

Okay.

And the second, to the operating, climate control, I mean the only negative I can see in the results is organic growth up 4%, excluding restructuring charges, margins still down 70 basis points. Obviously it's mix related, but if you drilled down, you'd see how Hussman is hurting the climate control compliance. ThermalKing in North America is a big operating in particular. Going into the 4th quarter, what should we expect the drag Hussman versus thermal king, especially getting more power out of ThermalKing in the 4th than in the 3rd. Characterize that, year-over-year margins in the climate control 4th quarter versus 4th quarter.

I think if I try to give you the individual pieces, obviously we are looking for improvement in the ThermalKing and the North America as it gets into the trailer side. But that piece is not enough to offset what we see as the lower than what we originally had forecasted case business coming out of the Hussman side. So, net all into that one, we're going to wind up continuing to see a lower margin as a result of that. In 2001, our overall margin levels, if I remember the 4th quarter, was about 6%. And as I look now, adding in the improvements that we did, a lot of the plants that we shut down, David, were there.

So, we're going to go up to about 8 or 9%, all in for the 4th quarter, while we originally targeted it to be closer to 10-plus percent.

But up year-over-year?

Yes, but that's relative to six.

I say to you yes, it is improvement-wise, but being [INAUDIBLE] to the fact that the display case business which is a higher margin -- the display case business for Hussman has the relative same impact as to the ThermalKing part. We show improvement going from 6 to 8 to 9. We've seen improvement in the container stuff and on the truck side, but all in, 6 going to 8 to 9.

Thank you very much.

Sure.

We'll go next to Alex. Your line is open.

Hello?

Good morning, Alex.

Good morning. You haven't said anything about next year, or very little. Could you give us an idea of what you might be expecting.

Your idea that you say you expected some additional pension costs and it strikes me also, could you comment on the fact that the kind of choppiness and -- and uncertainty that you're seeing in the markets this year isn't that typical of the first month's of recovery in the economy and -- when businessman are uncertain as to whether the recovery will continue. Wouldn't you expect if it does continue that things would be substantially better? -- next year as people start to finally replace equipment they've been postponing?

I hope you're right. I would tell you that as we have described here in the past, now, this is qualitative and fact-based looking into the rear view mirror and not a forecast for the future.

But what we have always said in the past, when we looked at our business models it was always a very strong correlation to when ThermalKing North America truck and trailer went then we wound up seeing some improvements six to nine months later. Many of you will remember that. Based on the cycle that we see this time around, I'm hoping that the dynamic have not changed that we're seeing in the beginning side of it. I'm not sure, obviously.

If I was to look at that, as we are putting together our budgets right now for the 2003 levels, we are, at this point in time, basically assuming that the world does not get a lot better and drive our cost structure from that basis and tell you we can respond very quickly to it if there were some uptick. So, looking to next year in the budgeting right now, we're not baking in tremendous improvement, we're banking operating improvements from all the restructuring activities we've done. The kind of nerve things you're describing that you mentioned we're looking at is yes, if the dow doesn't go up, obviously we base the stuff at the end of November, we're looking at a potential pension.

Insurance, which is another 10, $20 million type number, risk management becomes an issue, could hit us. What we've experienced so far looking at the forecast for next year is overall healthcare coverage for employees looks like it's in a bandwidth of plus 6 to plus 12%. I have to give you the net number. Those are the negative pieces we have to deal with in our planning process. We're starting off with the assumption next year has no upside on the revenue side, but there are a lot of improvements we're working on.

So, all in, you're right, I didn't say anything about 2003 because our practice, which was I like to stick to, is we now focus on the 4th quarter and when we get to the next one, I will given you a rundown on 2003. This time around I have to tell you what's the impact of hopefully a transition of our Forrington business moving out. So, there is a lot of moving parts and I continue to be positive about next year. I wouldn't classify myself as being optimistic about next year.

I don't know if you've noticed, but the -- probably have, that the machinery stocks, including Ingersoll-Rand have really not been in bear markets over the last two years. The cyclical low was actually two years ago in October. And they had a little downtick here at the end a couple of weeks ago, but the action in the stock seems to indicate that these stocks are going to be leaders in the next whole phase -- seems, Alex, I would do -- we said today that our bandwidth was 2.75 to $3. If you look at the stock trading around 35, I would tell you that is not higher than what we had as traditional multiples all the way through the '90s.

Yep.

If I look at for next year and I'm repeating external guidance numbers, not giving you forecast, okay?

Yes.

The number you have out there is 3 20-something. If you did that, it is only the number we're talking about, being 11 times next year's earnings. I guess that would give you hope, if you will, that there is strong Juniper side there. We expect to drive for us next year's stuff.

Thanks.

You're welcome.

Next we go John Inch at Merrill Lynch.

Thank you, good morning.

Hi, John.

Firstly, Tim, on the healthcare -- excuse me, on the pension side, the 25 to 30 cents, does that include expectations of increased healthcare costs or purely pension?

That is purely pension, John.

Okay.

Those are kind of predicated on a dow as it is today and at the end of November, if it sits at that level, we will have to take an equity charge that essentially translates into reduced earnings the 25 to 30 cent range.

And what about an infusion into the plan of cash?

We will look at them. That's an alternative. We're not required by the risk of rules at our current status. We won't be required to -- to put cash into it.

But that's a trade-off we will have to look at. That obviously trades off with the equity charge and the potential earnings there.

Okay. My questions on the sale are bearings, can you give us one, the magnitude of the perspective gain. Secondly; there a chance to possibly offset this gain with some kind of other charge or restructuring activity? And thirdly, what were -- what would be the goodwill and intangibles associated with engineering solutions?

Thank you, John, I'd like to give you a level that is as follows. We said that we're going get the -- the transaction has $700 million in cash and what I said in my release to you is that we expect after-tax net proceeds from that part to be $620 million. Okay? So that would giving you obviously the number that is there. Then you can go add to that. We assume in our math of 760 total proceeds that the stock is at a -- at 140, which one would obviously assume that the stock price does not move.

The stock price is divided by the number shares we get, driven by whatever the stock price is at the time of the public offering. That's the level we'd like to leave it at today, saying that all in, we wind up having a tax bill of about $80 million on the 700 in cash. So, I think you can do with the tax rate and everything else would be from that.

And just -- the goodwill or intangibles associated with the division that come out?

If we have intangibles, they're little.

Perfect. Thank you.

Thanks.

We will go next to Jerry McManus at JP Morgan.

Good morning, everyone.

Good morning, Jerry.

Can you go through just the financial pro forma effect of this transaction and some of the things I'd like to hear is what forms of DNA, Cap Ex was. It looks to me like it could be dilutive. I wonder, just take me through the numbers so I can get a better understanding what kind of impact it will have on Ingersoll.

You've seen the P&L impact, that's broken out as separate segment and I think the first nine months were about $63 million worth of OI. There's probably 500, $5350 million worth of assets on the balance sheet. Our annual amortization depreciation is in the range of about $45 million and on that business traditionally we spend lower than the DNA, probably in the 35 to $40 million in Cap Ex.

But it just doesn't seep like the cash you're going get from the business is going to cover the lost profits. What kind of dilutive impact will the deal have? I have to make an assumption of what you're going to do with the proceeds. But if you reduce debt -- maybe give me what the interest would be on the debt reduction, that would be helpful.

I mean, you know the proceeds and you -- if you wanted to assume that we're going to pay down -- pay down debt, our average interest rate is about 7% in the short-term.

If you're replacing -- if you're going to replace that with a reduction of CP, you're not going to get there terms of dilution, but we hope to use some of it or use the large portion of it to reduce dealt as we have about $700 million coming through in the 1st quarter of next year and the remainder of the proceeds and operating cash flow will hopefully return -- return across the capital returns plus and we help to makeover all an accretive transaction.

The math, Jerry, is if we take the debt, use the $800 million, use it as an average number, remember, it is two parts, it is collectively, the tax number we have, at 7%, that's $56 million against the company that's doing OI between 90 and $100 million, with us at 45 DA and we have about $40 million Cap Ex. So, if you net those out, you can see there would be a slight level down, but obviously we're looking at another payment piece. As you do the math, remember what I had said to you is the fact that we get this year 100% of the CDO and next year, 80% as well as the year thereafter. So, you'd have to add that back in. The payment at this point in time is a variable that I don't know, but if you look at it and say if you look at historically, we last year had 50 to 60. This year at that level.

If I take 80% of that number and risk effect it, it is about another $30 million. And if you go back, the overall impact that Torington had, they had an effective tax rate of 40% because virtually all of the profit is here in the United States. If you add tax effect that, you're going to find that we're close to the break-even level. Assuming we want to use it for paying down debt.

And can you talk just about how the deal came about? Were you actively shopping it? Did that he approach you, you approach them? And why Timkin stock as opposed getting all cash?

Well, if you look at how these work, anyone in the bearing industry would probably agree with the fact that consolidation is really the way to major the remaining companies companies thrive in the future. We had said openly we were not one of those looking to bear down on debt on the bearing side. We have been contacted by those who whom the bearing business is the future. They, being one of them am and how we wound up with the equity piece, really has to do with striking a transaction that winds up meeting also their position as on how much debt they're able to have on their balance sheet and achieve their financial status.

And our comfort level, this level of equity at 10 or 11% of the total company; one that after six months of holding it we could exit at least 140 and if you read their report, they should realize wonderful synergies and improvements this year that there will be upside beyond that.

Thank you.

Next we go to Ann at Sanford Bernstein.

Hi, guys, it is Ann.

Hi.

Question on your working Cal [INAUDIBLE]. Joe, I'm delighted to see you've reinstated accounts payable to reflect --

Ann, you've been a great influence on him! [ Laughter ]

Appreciate that!

We appreciate it, too, Ann.

Thanks! Now my problem is I -- the -- your numbers, no matter what I do. If I take just accounts receivables, inventories and pure payables, we get a number of about 22.3% of sales versus last year at 11.9. Association we see a degradation. My assumption is there are accruals in the accounts payable numbers that you use.

That's correct, Ann.

Why it's in the --

There are a variety of miscellaneous things. The biggest piece is accrued payroll and salaries and benefits and so forth, which is, you know it shifts easily $100 million from quarter-to-quarter. It happens to be up from last quarter by about that amount. It has a lot to do with the timing of when payroll is run relative to the last day of the quarter and so far forth.

Okay. So the improvement really is just payables. If I look at inventories by our calculation, days hand has actually increased or, you know, carrying more inventories for your sales level this quarter versus the same quarter last year.

I'd say they're about -- about flat, you know it depends upon when you calculate days, you're coming into heavier sales periods and so forth. But based inventory on hand, probably flat with where it was last year.

I've got the cheat sheet in front in of me. It says Ann's cheat sheet and inventory days using our math of 2001 was 81.9. And 2002 was 82.06789 I think that's relatively flat.

What should we expect to be the year end? Most of your peers are focusing on production and inventories.

First digit will be a 6.

In inventory days.

In inventory days. Yes, we expect the exact same thing. Especially if you look at the [INAUDIBLE] risks. They don't have longer lead times. We expect them to move through. We will go from something that is closer 70 days than 80 days by the time we're done in the 4th quarter.

That's great. The second part of my question, then; around the micro business and power works. How much did you invest in the business this quarter and where do you expect to invest at the end of the year? And then we had talked earlier, Herb, you expected the [INAUDIBLE] break even in 2003, is that still your expectation?

Let me see if I can take all of these, you're cheating on one question at a time why I look at what we spent in the 3rd quarter on energy systems overall, our total investment was running at approximately $9 million. And that's up from last year where we were spending about 7.

Our full year run rate that we're looking as we look at what we're doing when we bring on the 250 will be in the 29 to 30 level, up slightly, you know, from where we were last year. The upside, depending if we get in some of the manufacturing could be up to 35. That's the bandwidth. Has a lot to to do weather the 250 goes in December or in January. Right now I will tell you that with as lackluster a performance we're seeing on the industrial to commercial side of the business that, until we really get these units out, it will probably be more like the end of 2003, 2004 until we get the break even level. Right now I was doing the math, our break-even point is about 400 units.

Okay.

Okay. And that right now -- California, we refer to the Enron effect now, think we need to have the next power surge of next summer in order to really make this thing boom going forward. Because our year to date, to give you a magnitude on it. Year to date we're talking about having only 55 units out there. That's how slow things have gotten in the industrial commercial side.

Those 55 will be the smaller 70s.

Those are all 70s, yeah, we have at this time out there, the 70s, the 2 ons are in the protesto type, not yet commercially available. And the interesting piece, it is like building -- for you with the automotive background, building a V-8 versus a V-6. We find there is much higher margin in the 250 side. That will reduce the break-even point I described to you.

Okay.

Okay?

Okay. Thanks.

Next to Barry Banister at Legg Mason.

Gentlemen, how are you?

Hi, Barry.

I know it's been difficult. Any feels like the 7th quarter of 2001. [ Laughter ]

Well said.

But, you know, frankly let's just be realistic here,recent years, buying companies at more than one-time sales and selling them at less than one-time sales hasn't really done a good job for the numbers of the company. And one thing you're not is cash poor. You generated 4 to $5 million in free cash in the last year during a significant recession for industrial.

And by my estimates, including the Timkin and you're looking at $2 billion potentially in the next two years. And I think I speak for more than one shareholder in the line when I say we'd rather you give the money back than spend it on acquisitions or pay down on paper. But I haven't really heard a lot of enthusiasm out of you with regard to perhaps share buybacks instead of these other options. So, what are your thoughts on buybacks? How high up in your list is that?

Let me start off with what I pointed out, Barry, during my comments. I look at -- we have debt, which is the initiative, which we state we wanted to get to the 40% level. That's in the ballpark. And then the next priority is an even one between both on acquisition that's have significant returns and share buyback. Since 1997, we've purchased about 12 million shares, we have not, obviously in the last year done a lot of that, but at $35 a share, I think that would be a very, very compelling argue why it would be a good investment to go in to and buy there rather than make significant acquisition, that's for sure.

What I said in the past is we look now at running anywhere between 150 and $250 million a year as to what we identify as very attractive, security and safety type bolt on acquisitions and in the rest are really going to be in terms of going forward and providing shareholder value. I agree with you there.

On the same subject of cash received, you know, I don't want dive choke on his sandwich, but, you know, given that you had an advisor on the Timkin deal and it's been a choppy stock, any deal going to be saddled with? What are you going to do with that?

We have a six-month lock up and after the six months, we will have to assess at that point. It is not our attempt to be long-term investors in that stock. We will have to look at it at that point.

So, a bought deal and offering are still options for you.

Sure.

Thanks.

And we will go next to Joanna at Goldman Sachs.

Good morning.

Looking at the pension and insurance stuff, we have a 35 to 45 cent hurt we have to offset.

I know we're getting some from cost reduction about, a dime, and we're going to spend less, but where is the incremental going to come from to get to us growth rates outside of volume?

Let me start, if I can, again, telling you that we're obviously very active at this time,the midst of putting together the 2003. What I would tell you, though; that -- we are fully aware and agree with the bumps in the road that we have to climb over. We're doing that in our math as we look at it. The optimism, I would tell you, or the positive spin was I give you on this has to do with what we're seeing as to the increased growth and our incurring revenue stream and we continue to make progress in new product intros.

If I can cite as one example, it has to do with Bobcat. Look at the macros out there and look in terms of seeing where we are on a year to date. I mean revenues a year to date basis are up 10% over a year ago. And that is with rentals being absolutely in the dump for us, down in the 40s. We see some of that coming back. So, there are market niches, there are certain vertical markets we go after, where we think we have the where with all to get a [INAUDIBLE] share. We took an order at air solutions for a GM plant where we're doing an energy audit. That turned into a $6.7 odd million order. Now we're doing all 43 of their plans.

So, I would have to build it for you on a building block by building block basis, but tell you I see a lot more at this point in time, where there is a pipeline, as I said to you, we started off with the flew product development and the recurring marketplace, it is really starting to show.

Okay. So it's share gain and maybe better margins in the after market business jerks that is very, very true, yes.

And we're seeing the trends are in our favor in terms of our higher margin businesses tending to be on the upswing.

Thermalking seems to -- there is some indication that thermal king is coming back, as I mentioned earlier. Bobcat continues strong. Those are the higher end of our mix of businesses.

Okay, my follow-up is more related to the Torington divestiture. It is not the earnings dilution, but the cash flow. Because the way I always thought of the bearings business is that the cash generate year for doing some of the [INAUDIBLE] and investments we need to do, maybe the higher growth businesses, you know, how calling make me comfortable with the fact that we're losing like 25 to 30% of the free cash flow every year? How can you redeploy that in any other way to offset that?

Well, I guess what I'd have to start off in saying that when you look at their forecast for cash flow, it's about equal with OI, which they will just make the math numbers between 90 and 100. That's the total contribution. And then you go can and we wind up having a Cap Ex being almost equal within 5ds million of what goes on.

In it. Right.

Remember, you have an on average higher tax rate in the bids. You have a 40% tax rate in that. So, when you get that number, you -- if you recall, we get the CDO payment.

Yep.

When you add it all up, if you did that math you'd find you wind up with brackets around the number.

Okay. What's the tax rate on those -- the -- the -- the into dumping thing?

I think we pay a U.S. statutory of 38% range.

Okay. Thanks.

Sure.

And we'll go next to David Bluestein at UBS Warburg.

Good morning. Still, good morning. You made a comment, I thought I heard you say the risk adjusted value of the CDO payment was $30 million.

Yeah.

Are you implying there is a 30, 40% chance that the duties don't get paid next year?

I guess when you try to put a conservative spin to it, you say am I guaranteeing that's going to be there? No, there could be legislation that could change it between now and then. I think the 2003 one from my understanding of the legislation at this point in time, wire give you a probability of 90-plus percent. Okay, that's going to happen. And then if you took the number we had last year, this year plus 50 and take 80% of that and that's why I came up with the number.

When I look at 2004, then I would tell you that I reduced the profitability to 50% because I'm sure there will be WTO conversations that take place next April that could have an 18-month impact that rolls into 2004. So, the takeaway, David, is the fact that next year we have a high probability of getting 80% of a number that should be comparable to what we should have. And the following year we knock it down to 50%. This is based on what I think may come out of a WTO type stuff. The law has to change for the payment not to materialize. So, it has to be an active [INAUDIBLE] makes that happen.

Understood. All right. What are your capital spending plans for 2003? And are any of your businesses bumping up against any forms of capacity restraints?

Let me take the last please. You can extrapolate the first answer. We have, as a result of all the freeing up of the plants we have done, we are operating at levels where capacity for the next few years and going to the end of the planning cycle, would require no brick and mortar unless we moved to a new location for cost reduction basis, so, the cap yex number we're looking at next year would reflect what we're doing for new products and productivity improvements with a payback of two years or less. It would be hard to see how the number is going to go up.

We have a considerable amount of restructuring in the last few years and upgraded our mix of manufacturing facilities that would reduce overall the level of spending required. So, at our current levels, I would expect into the near futures.

Okay, terrific. Thanks.

Next we will go to Michael Reagan at Credit Suisse First Boston.

Thank you. First for Tim, should we be concerned at all about a potential write-off relative to pension and any debts relative to equity?

Relative to -- you mean if we take an equity charge?

Just, does an equity charge run the risk of triggering any potential debt covenance relative to equity?

I'm quite sure we don't have debt covenance that would have a problem if we took an equity charge. As I mentioned earlier, at the Dow where it currently is, at the end of the year we have to make an assessment. There is a potential for 400 or $500 million of equity charge. It is purely a balance sheet transaction. It shouldn't, in any way, be a problem from a debt covenance standpoint.

Okay, great.

Excuse me, one piece we need going forward, there are 10,500 employees in the Torington operation that obviously move out of this, so, there is a significant impact on pension requirement as a result of that going forward. We will have to bake that into our numbers, as well.

Good point.

All right?

That's a lot of people.

I'm sorry, go ahead.

I was just going to ask if there was any crucial detail? You gave some, but just sort off the lack of refer ladies and gentlemen within infrastructure, obviously mix hurts, but if you broke it down between sort of volume mix and price could you give us some sense by sort of product or unit?

I would say to you that when I -- when I look at the issues that bothered me when it got to the deleveraging or not leveraging at the level we'd like see, a key part was in road development. What we were seeing there was price reductions at a range of 5%. That's the one that would be the biggest piece that was there and the next part we were realizing was frankly an issue that had to do with our channel partners. We were seeing more and more problems. We had three distributors that went into bankruptcy. We had to get our equipment out and move elsewhere. [INAUDIBLE] channel issues, one caused the other is a good way to describe it to you.

Those are the two that were really driving the biggest [INAUDIBLE] we had. So, you know, the last piece behind it is we didn't really have a lot of acquisition-type revenues driving anything. The biggest number one was price issues that came up and wrote development. Number two, really had to do with more channel partners, because of them having tough times in the environment in which we operate.

Channel partners across the board or just at road?

Call it the IR branded stuff, Michael. It had 20 do with people participating in everything from the portable power, road development and also specialty equipment.

Goch -- gotcha. Thank you.

Next we will go to Eli at HC Wainwright.

Good afternoon at this point.

Hi, Eli.

Hi. Two questions, one, first of all, back to the tension issue, the numbers you gave us, impact assume a change of rate of return? And are you changing the rate of return impact? And with that section, with the sale of engineered solution, do you assume the pension liability historically and how do you handle it in the accounting?

First to the agreement with the sale engineering solutions. We will retain a responsibility for the -- the retired -- the inactive and retired folks from the -- from the bearing business. They will assume responsibility and up until close it is our responsibility -- they will pick up responsibility going forward. Our assumptions for the pension plan clearly it will be year-end, we will have to look at them. But we expect there is probably a modest pressure on the downside on pressure returns and probably modest downside pressure on the -- the discount rate.

What are the assumptions at this point?

We have a 9% return assumption on the assets and I think we're at 7.25% on discount rates.

Uh-huh.

So, if you had to change the numbers, would that impact the -- the charge that you told us the impact -- What I've given you reflects what our best expectations of -- of what those assumptions will be at year end.

So, you have it bake aid into the numbers?

We do.

Okay. And then the other question, it is a real concern that investors have is the growth is rate of Ingersoll-Rand. Every time you sell something you know, there may be good strategic reasons for sale and I'm not -- I don't disagree with what you're doing, but you have to fight not to make them dilutive. And given the nature of portfolio mix, there is a real question that's developed, what is the longer term growth rate of the company given the lack of ability to -- both on anything significant to enhance the growth rate.

And I understand the change of to services and, you know, internal mix, but do you feel any internal pressure to finally have to go out and make significant acquisitions to enhance the growth rate or think you can get double digit on a sustained basis, not a cyclical basis, based on the current portfolio.

Based on the portfolio excluding the engineered solutions, Eli, we have, as I like at it, a very, very credible shot at a sustained rate of five to 6% organic growth and then add onto that the bolt-ons that will generate another 4 to 5%. So, all in, the 8 to 10% on a consistent 5-plus year going forward type basis is what I'm much signing on for.

All right. I guess the question, it hasn't been done in so long that the requestion whether there is the horsepower to do it at this point?

I guess that's my job, then, to convince you and the rest of the shareholders in terms of when you start seeing it, that it's there. I hope we will be able to continue demonstrating that going forward next year. I would tell you that the kind of things we're looking at now on the acquisition, I told you, a key part for me is to have a platform on which to build. I think we do those in place. The acquisitions you've been seeing from us is the kind of thing we want to keep doing. They show up at 30, 40 million at a time.

If you add them up and do half a dozen of those, you get the returns that will drive the growth consistently.

All right. Thank you.

We're going to take two more questions here, please.

All right, next we go Robert McCarthy at Robert W. Baird.

Good morning, guys.

Good morning, Robert.

Could you tell us what the special gains were that you recognized in other income that I gather giving you like 3 or 4 cents in the quarter?

Yes, we had insurance settlements from a fire we had at the plant -- at one of our plants earlier in the year. And then we -- we sold -- we sold some redundant property that we had been holed.

I got the impact right about, 3 to 4 cents?

4 to 5 cents.

Okay. My other question has to do with the profitability in air and productivity solutions segment. You'll taken, of course, significant you know, restructuring actions in those businesses as you have all of them, you've got a major shift in sales mix going on, towards the service businesses where you're having great success signing new contracts, et cetera.

You know, I don't see much in terms of your to year swing in the investment in power works. So, I'm struggling to understand why we wouldn't be seeing margin expansion there. Does it have something to do with front-loaded costs associated with service contracts or -- can you help me?

We really did -- in order to get the numbers -- to see the growth I described to you that we've had in the service side, we've added on a -- a very large service [INAUDIBLE] to go on to do the audits and the other pieces there. We also continue invest in other type of energy systems for the next generation. So, our big movement at this point in time is, excuse me, on the SG&A front-end loading as we wind up dealing with putting in the service capability to deliver the results and then the second part is that as we continue to go in and invest big time into the oil-free air and into the nirvana type product applications.

So --

So, historically we had a 10% year-over-year reduction in whole goods and now that number is flat to up 1. So, what you're seeing is the investment in getting that turn around and that -- we have less than 20% market share in the oil free and we need to focus out and have about 80. We need our fair share, which is to flip that piece around. And the other [INAUDIBLE] that, is slow, where we have not seen the margin improvement has been on the tool side. That's captured inside there.

Of course.

If you recall, we introduced a new product range, we acquired a company over in China and wound up taking the super ray product. If you go to your local Wal-Mart, you will see a computer branded power force type range. We geared up and have all the start-up costs associated with that, as well. Getting back to what Eli asked before, you're seeing some of the costs be loaded in to generate the growth engine.

Can you talk about what the curve is going to look like on the service business?

I mean it -- I mean, you know, obviously you continues to have very strong growth objectives for that business. Does it mean through '03 we -- we'll still be investing and it's later when we start to see the -- you know, the anticipated positive margin impact that business?

The positive margin impact occurs in 2003. You will start to see it roll in. We put in about 900 technicians around the U.S. and then it gets to the billable hours. What we're now seeing in terms of is that improvement, starting to come through, so, if I look, we don't need add the technicians next year, it is a matter of getting through put. Next year you will start to see the improvement. Geting back to this, what are the drivers of our improvement next year?

There is a key part right there. We find if we start up a new branch it starts in the 5 to 8% margin type level. When we get to the top quartile we're 25 to 28. So, the degree that I can move from that 4th quarter aisle to the 1st quarter aisle happens in 12 months. That's why if you time lane that it will show up sometime next year rather than 2004.

Good, we will be looking forward to it.

Me, too.

We will take your last question today from Boyd Poston at AG Edwards Asset Management.

Yes, two questions, one clarification. On the [INAUDIBLE], when you said 625 was the backlog at the end of the 1st quarter and 625 apt the end of the 2nd quarter, what was the number at the end of the 3rd quarter last year?

505.

Okay.

And then the second question, on display cases and Hussman and the whole acquisition, can you give us a little feel as to, yeah, the industry is not doing well, it's kiss pointing again in the 4th quarter, yet Hill Phoenix had a lot of bullish statements about their business throughout the year. More business than traditional supermarket chains, gaining business, can you discuss that situation?

I guess I would say to you that clearly Wal-Mart was not one of the much large core customers of Hussman going into it. They really focused more on the Albertsons, the Krogers, the Safeways, so on. We had to go in and "earn" that business at Wal-Mart. That's been everything from doing their front doors, which we now have a contract on to being one of the three suppliers on the display cases. Now we're getting our share. We don't have the 50% we have in other locations, but clearly that's the place. So, we have not been in the chain which has had the most growth, which has obviously been the Wal-Mart side of things, but we see that continuing to change.

I think the market share numbers that other people may be touting reflects the disproportionate growth or that large share growth in this one customer growth, with a much lower share piece than we had traditionally. I will tell you as of this point in time, the progress we made, we are now in n as a key service provider to them, not only for display cases, but also HVAC. That's going in in the test case and a couple of regions around the countryside. We are continuing to make inroads, we're now one of three of suppliers on the display case and hope to become one of two in the not too far future.

We have strong relationships with them internationally.

And the traditional supermarkets, has your market share decreased at all?

No, not at all. I would say to you, I would tell you I would probably tell you the opposite direction there. It is just that I have a growing share in what has been a rather lackluster piece of it.

Uh-huh. Okay, thank you.

You're welcome.

Okay. We're going wrap up now. Thank you for joining us. We will be announcing our 4th quarter results on Thursday, January 23rd and that is in 2003. We will also talk about full-year 2003 at that point.

There will be an instant replay of today's conference call available at approximately 3:00 p.m. today until October 24th. The call in number is as follows, 719-457-0820. Passcode is 573225. Audio and slides from today's conference call will be archived on our website. And finally, the transcript of the conference call will be available on the Ingersoll-Rand website, probably mid to late-next week. Please call me if you have additional questions at 201-573-3113. That concludes our call and thank you.

Ladies and gentlemen, thank you so much for your participation in today's Ingersoll-Rand conference call. You may disconnect at this time.