特靈科技 (TT) 2002 Q4 法說會逐字稿

Please stand by, we are about to begin. Welcome to the Ingersoll-Rand earnings conference call. This call is being recorded. With us from the company, chairman, president and chief executive officer, Mr. Herbert Henkle and Joseph Fimbianti. For opening remarks I would like to turn the call over to Mr. Joe Fimbianti.

Good afternoon for those on the east coast, this is Joe Fimbianti and I'm the director of relations for Ingersoll-Rand. We released earnings at 7:00 A.M. this morning and the release is currently posted on our website. I would like to cover some house keeping items before we begin. This afternoon concurrent with our normal phone-in conference call, we will be broadcasting the call through our public website. You will find a slide presentation on the call on the website. To participate via the web go to www.irco dtedcome. Click on the yellow link on the left hand side of the screen. Both the call and presentation will be archived on our website and will be available late this afternoon.

Now if you would please go to slide number 2. Before we begin, let me remind everyone that there will be forward looking discussion this afternoon which is covered by our Safe Harbor Statement. Please refer to our 10 q for details on factors that may influence results. Now I would like to introduce the participants on this call for this afternoon. We have Herbert Henkle, the chairman, president and CEO. Our Senior Vice President and CFO and Rich Randall, vice president and comptroller. We will start with a presentation by Herbert Henkle and Timothy McLevish and followed by a question and answer period. Herbert Henkle will start. Please go to slide three.

good afternoon, everyone. Thank you for joining us on our fourth quarter 2002 conference call. This morning we reported net earnings of $1.19 per share for the fourth quarter and $3.10 for the full year. Both of these results have been adjusted for restructuring and productivity enhancement charges. We reclassified the engineered solutions segment as a discontinued operation which now appears as a single line item, net of tax on our financial statements. On a comparable basis, our fourth quarter earnings are up 70% over 2001. Our earnings are above the forecast that we discussed with you in October. The higher results were mainly caused by three factors.

First, our operating results were stronger than forecast overall which added about 20 cents to earnings. This was especially true at ThermalKing, air solutions, bobcat, Club Car and across our entire security and safety sector. Second, our full year earnings from on going tax initiatives were higher than expected which added about 5 cents per share for the quarter. And finally, the CTO anti-dumping was higher than the $50 million than we built in. This had a positive impact of 9 cents to the earnings. Since the payment relates to the bearings business it's included in our discontinued operations number. Please go to slide number 4. Overall, the year concluded on a positive note. Even though demand in many of our key end markets remain stagnant, our order rate pattern for the fourth quarter was positive for all of our four sectors. Primarily due to new products and share gains. Our order rate was up about 4% in the fourth quarter compared to last year.

Excluding Dresser Rand, fourth quarter orders were up about 12% compared to 2001. There was a considerable variance by business. ThermalKing, air solutions, bobcat and security and safety had had double digit order increases compared to last year but we had declining order activity at dresser Rand and road machinery. Our order improvements in most cases were against easy comparisons from last year's depressed fourth quarter. On a macroeconomic basis, most of our end markets in the construction and the industrial end markets remain sluggish at the end of December. With many uncertainties in the markets in which we operate, we remain cautious and do not believe that it would be prudent to conclude that improved current activity levels that an indicator that a general end market recovery is under way. Despite the erratic and sluggish demand picture for most of 2002, we did manage to achieve a number of notable successes for the year and we saw major facets of our long-term strategy traction, specifically related to product integration, recurring revenue growth. Now please go to slide number 5. Most notably, we met our free cash flow target for generating over $500 million in cash for the 5th consecutive year by focusing on operational excellence in cost reduction and working capital management. This line portrays the difference in our cash flow capability for the last two years compared to the prior industrial recession in the early 1990s. A decade ago. IR had negative cash flow compared to $1 billion we generated over the last two years. The -- transformation has allowed us to continue to invest in innovative new products despite a weaker economy. These investments will accelerate our progress over the next several years. Now please go to slide number 6. During the quarter we also completed the final stages of our restructuring program. Total restructuring and productivity costs for the quarter were approximately $35 million and we have spent $460 million since the inception of the program. We have closed 29 plants. We reduced head count by approximately 7,000. Restructuring and productivity actions had a positive effect on margins in the quarter and are part of the reason for improved performance. The programs added approximately 50 cents to earnings for full year 2002 and we reached our $200 million annual cost savings goal that we set when we launched the project.

Now please go to slide number 7. We made significant progress in developing our recurring revenue stream during 2002 both at Hussman and at air solution despite the difficult economic environment experience by our end customers. Our comprehensive service offerings for supermarket and convenience stores continue to gain traction during the quarter with 400 additional locations being added. We now have approximately 3,300 stores from several different supermarket chains covered in our national service contract program. You may recall that we had about 800 locations under contract at the end of 2001. We are targeting to have at least 5,000 locations in the program by the end of next year. Total parts service and installation revenue for Hussman accounted for over 38% of the revenue for the quarter, and 33% of revenues for full year 2002. Please go to slide number 8. During 2002, we also began to see the positive benefits from our retail solutions initiative which sells the full range of IR products and services to supermarkets and convenience store customers. Total revenues for retail solutions was approximately $32 million.

We had a major order from Wal-Mart for Dura-Matic Automated Doors for their neighborhood market stores. There will be 30 to 50 stores opened in the next year and it will total over 200 stores. The total value of the door program is about $6 million. And we are negotiating a service package on the doors which could add an additional $6 million. We completed a national service agreement with Costco for their warehouse stores which means maintaining refrigeration equipment and monitoring. Our 2002 revenues from this relationship was approximately $3 million and we expect to increase that to achieve $7 million in 2003. Now please go to slide number 9. Air solutions also continued to grow its service in total aftermarket business during the quarter.

Total service revenues for 2002 grew by approximately 10% despite weak end market demands for complete units. The total number of long term service contracts doubled and we added over 4,500 new air care contracts for a total of 8,000 worldwide. Over 40% of these contracts are outside the U.S. confirming that we are adding value to customers all around the globe. For the full year, 47% of air solutions revenues relate to the aftermarket activities. Also, it's worth mentioning that air solutions service business is highly profitable with average operating margins exceeding 20%. Operating margins on service increased by 2 percentage points in 2002 from increased revenue volumes and operating streamlining. Now please go to slide number 10. Because of our strong cash flow, we have been able to reinvest in our businesses during this recent downturn and have developed a number of successful new products that have been really well received by our customers and like to update you on our progress. A number of new products in the air solutions business began to yield results in 2002.

The Nirvana line of air compressors had sales of $20 million and increased our 50 to 100 horsepower market share by 8 points in North America and we gained 5 points of market share in Europe. The products energy cost savings of over 20% compared to conventional units has been a major selling point. In 2003, we are expecting to introduce other innovative design. The Pegasus small rotary launched in 2002 has already sold over 1,900 units and achieved about $12 million in sales. We also introduced a new small rotary product made for the market in China. Now please go to slide number 11. The energy systems business continued to develop its product line and refined its end market focus. In 2002, our 70 K W unit demand was limited to co-application applications due to high natural gas prices and electricity supplies.

Today marketing and product development are focusing on opportunities for the environmental market specifically in the areas of landfills and waste water treatment for a micro turban is employed to burn affluent gases such as methane to generate electricity. Our first 250 K's W units were built in December of 2002 and first shipments are expected to be made in April of 2003. Please go to slide number 12. Bobcat enjoyed higher sales and market share in 2002 despite weak end markets because of recently introduced next generations of compact equipment. These product ranges include several sizes of track loaders and all-wheel steer bobcat, the versa handler, telescopic tool handler and walk-behind product line. Please go to slide number 13.

And in December, we introduced the newest product family, the tool cat. An all wheel steer, all-wheel drive vehicle that combines the features of compact loaders and utility vehicles. And like all bobcat products, the tool cat can use multiple attachments to satisfy customer needs from digging to cutting grass to material handling and to hauling. This I believe is a great example of IR innovation. At its introduction in November, one magazine editor wrote, and I quote "it defies all existing categories". We have a number of other new products in the pipeline to expand our market share which we expect to introduce over the next few years. Our strategy is to continue to grow our core compact equipment business by introducing additional innovative flexible low-cost tool handle products that replace large expensive single purpose pieces of equipment.

Now please go to slide number 14. During the second quarter we made an important bolt on accusation that expanded our presence in the electronics security market. We acquired electronic technologies corporation, also known a ETC, a nationwide provider of specialty security system integration for access control, close circuit monitoring. They have 36 offices over the United States and has over 4500 customers such as IBM and Citicorp. This access has expanded the product line in North America and our solutions strategy in the area of access control, time and attain DBS reporting and asset tracking. Additionally we would be able to pull through magnetic locks and hand readers. We expect to expand our presence in the integration market going forward because it's a key driver for our security growth.

ETC revenues was $40 million. We believe that we can grow our integration business to over $200 million in revenue to internal growth and further bolt on acquisitions. Go to slide number 15. During 2002, we continued our business portfolio realignment by announcing the sale of our engineered solutions business to the Timkin company. I believe most of you are aware of the mechanics of the transaction. The proceeds will consist of $700 million in cash and $140 million of Timkin common stock for a total of $840 million. Additionally, we will receive 80% of the CDO anti-dumping benefits for 2003 and 2004. Which should amount to $50 million annually. The transaction is expected to close by the end of the first quarter. Today we received EU anti-trust approval. Now all regulatory requirements are complete.

Our current plans are to use the proceeds to pay down the debt which comes due the first quarter. The improvement in our debt to capital ratio will enable us to use the free cash flow generated from operations in 2003 for bolt on accusations and share repurchase. Go to slide number 16. 2002 was a challenging year in many ways and we were able to meet those challenges and move forward and make progress. As we began 2002, we set out two key financial metrics to judge our performance. First, earnings of $3 to $3.25 per share and secondly, free cash flow of minimum $500 million. We are able to hit or exceed these targets by executing our strategies. Our strong cash flow allowed us to reinvest in the future.

Our strategy to drive organic growth with new product innovation and aftermarket services is showing positive results and we are making progress in our portfolio realignment with high return bolt on acquisitions and divesture of nonstrategic operations. The plant closings and the resulting product relocations are now behind us and our market shares are holding at high levels giving us a strong base to rapidly expand earnings when the end markets recover. Timothy McLevish will now cover IR's in more detail.

thank you and good afternoon. I would like to begin my discussion with the quarterly results. As herb mentioned earlier, we are moving forward with the sale of our engineered solutions business. In accordance with GAAP, they have been reclassified to discontinued operations and are showing net of applicable taxes. We have restated 2001 to be in a comparable basis. Please turn to slide 17. Reported revenues for the fourth quarter were up 7.4% to $2.4 billion. This increase is largely contributable to double digit revenue increases at ThermalKing, dresser Rand, club car, air solutions, and portable power. On an organic basis, revenues were up by 6.5% compared to last year's fourth quarter.

Excluding restructuring and productivity investments, operating income for the fourth quarter was $192.1 million, or 8% of revenues compared to 7% last year. This is stated on a comparable basis to exclude goodwill ammoritization. Interest expense was 53 .3 million compared to $61.2 million in last year's fourth quarter. The decrease of $8 million resulted from ongoing debt management, principally lowered the levels and lowered interest rates. Other expense for the fourth quarter was approximately $4.3 million compared to an expensive $19.4 million in last year's fourth quarter. The changes attributable to the timing of certain nonrecurring items. I would like to take a moment to talk about taxes. Our full year effective tax rate was 18.2% which is 1.8-points better than our anticipated rate of 20%.

For the year, we realized tax benefits associated with the reincorporation which amounted to the higher end of our 40 to $60 million target. These benefits in conjunction with additional tax strategies implemented in the fourth quarter resulted in an overall lower tax rate for the year. Since we had been providing for taxes at a 20% rate for the first three quarters, the fourth quarter provision reflects a credit adjustment to achieve the full year rate. Engineered solutions which constitutes most of the operations numbers, derives most of its profits in the United States. Consequently, discontinued operations which is reported net of tax carries an effective tax rate of 39%. Continuing operations, therefore, had be a effective tax rate of 9.9% for the full year of 2002. Going forward, we anticipate our 2003 tax rate on a continuing operations to be approximately 14%. Up from the 2002 rate of 9.9%. The increase is predominantly due to anticipation that a higher proportion of earnings will be derived from the U.S. in 2003. Net earnings from continuing operations for the fourth quarter were $140.1 million or 82 cents diluted earnings per share.

As mentioned a few moments ago, the results of engineered solutions have been reclassified into discontinued operations and are shell of net of tax. In addition to the earnings from engineered solutions, discontinued operations includes $68 million of benefits from reimbursement payments of U.S. customs for anti-dumping claims and certain other legacy costs associated with previously disposed businesses. Our total net earnings for the quarter were $202.9 million or $1.19 compared to 70 cents in last year's fourth quarter. Please turn to slide 18. On a geographic basis, full year North American revenues were up about 2% and constitute about 64% of total revenues. European served area reported revenue growth of 4% compared to last year and that represents about 22% of our total revenues. Asia-Pacific and Latin America were up about 23% compared to last year and make up 10% and 4% total revenues respectively. I would like to take a few minutes to talk about the results of our continuing operations. This review is on a comparable basis adjusted to exclude charges related to restructuring and productivity investments and goodwill and amortization in both years. Please turn to slide 19. The climate control sector which includes Hussman and ThermalKing reported fourth quarter revenues of $697 million, an increase of 5% compared to last year's fourth quarter. Operating income for the sector was $41 million. Representing an operation -- operating margin of 5.9% which is comparable to last year. Hussman revenues for the fourth quarter were down 3% year over year as weaker revenues in North America were offset by modest gains internationally. We continue to see cautious spending on refrigerated readied display cases by certain major U.S. market chains. We have seen a shift in volumes away from the more upscale grocery stores toward the discount stores which mirrors recent trends in consumer spending and negatively impacts our margins. ThermalKing revenues were up over 17% compared to last year's fourth quarter due to strong growth in our North American truck and trailer markets and our worldwide container business. Based on this trend and industry data, we believe that the markets for refrigerated transportation are beginning to recover. Please turn to slide 20. Air and productivity solutions reported fourth quarter revenues of $349 million compared to $322 million last year. A 9% increase resulting primarily from a 15% growth in air solutions revenue. Recurring revenues and air solutions were up 13% and constituted 47% of air solutions total revenue for the quarter. Operating margins were 9.4 % up from 3.5% last year due primarily in the increase of higher margin aftermarket business. Please turn to slide 21. Dresser ran revenues for the quarter were $347 million, up from $310 million last year. An increase of 12%. Our complete unit revenues which include purchase components that are sold or passed through to customers at low margins were up 15% while our more profitable aftermarket business was up 9%. Operating income improved to $28 million compared to $25.6 million last year. Our back logs remain strong. Excluding purchase components, the back log totalled $565 million at year end which is up 10% compared to last year. Please turn to slide 22. The infrastructure sector reported fourth quarter revenues of $663 million up almost 9% compared to last year.

Principally as a result of new product introductions and higher market shares of bobcat and Club Car. We have faired well despite modest industry contractions and competitive pricing. Bobcat revenues increased more than 5% as a result of market share gains in the loader and excavator markets. New product introductions and stabilized pricing. Club Car is benefiting in the pathway contract with General Motors which has offset the impact of the sluggish North American market. Operating margins for the infrastructure sector were 6.5% of revenues compared to a slightly weaker 6.3% last year driven by higher margins in both bobcat and Club Car. Please turn to slide 23. The security and safety sector continues to report strong results. The sector reported revenues of $388 million, a 6% improvement compared to last year. On an organic basis, revenues were up slightly. Modest growth in both commercial and residential markets was boosted by strong performance in our solutions business. Operating margins were strong, 19.9% compared to 18.1% last year.

The increase in margin percentage reflects increased sales of our highly profitable electronic products and software. Partially off set by continued investment in new products and markets. Please turn to slide 24. Let's move on to the balance sheet. We continue to focus on managing our working capital to make sure it's in line with our activities levels. At year end, working capital as a percentage of annual revenues was 4.1%. A 90 basis point improvement over last year. The cash conversion cycle has improved by three days compared to last year driven by inventory and receivable management. We maintain our focus on working capital management as we go forward. We did benefit about 1 1/2 percentage point from a $25 million increase in discounted receivables which we did in preparation for changes resulting for the plant disposition of engineered solutions. Beginning in 2003, we will restate our working capital through revenues ratio to exclude the benefit of associated with discounting receivables. Our full year cash flow of $572 million exceed our target of $500 million. This was driven by strong earnings, good working capital management and by maintaining capital expenditures at prudent levels and contributing to cash flow was the increase of discounted receivables as we mentioned.

Please turn to slide 25. Capital expenditures for the fourth quarter were $45 million including about $8 million related to engineered solutions. Full year capital expenditures including about $39 million for engineered solutions was about $159 million which was in line with our plans. At the end the fourth quarter, our debt to capital ratio was 47.5% which is 130 basis points higher than last year. The change reflects our ongoing debt reduction efforts offset by the impact of the good will impairment charge and the pension equity charge. -- excluding the charges was debt to capital ratio was 41.7%. That levels at year end was $3.2 billion compared to $3.5 billion at the end of last year's fourth quarter. Herb will conclude our formal remarks with the outlook for the rest of the year.

thank you. Please go to slide number 26. Our recent order pattern does not indicate any rapid near term improvement and most of our major North American markets and we are seeing growing weakness in Europe.

Based on the current sluggish macroeconomic environment, diluted EPS for total operations is expected to be in the range of $3.10, to $3.30. This estimate is based on a 14% full year tax rate. In this uncertain market, we are continuing to focus on reducing our material costs and making permanent reductions in our operating cost structure through productivity gains. Our full year forecast includes an increase in pension expense equal to approximately 35 cents per share and approximately $50 million of pretaxed CDO payments in the fourth quarter of 2003. Additionally, the forecast includes the results of engineered solutions for the first quarter. Now please go to slide number 27. First quarter 2003 earnings are expected to be in the range of 60 to 65 cents per share including 8 cents of earnings from discontinued operations. Continuing operations are projected at 52 to 57 cents per share compared to 51 cents last year. We are expecting the same slow economic conditions we experienced in the fourth quarter and we expect to offset pension and medical costs increases with improved productivity at our operations. Now please go to slide number 28. This ends our formal remarks and I would like to open the floor to your questions. Thank you.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star king followed by the digit one on your touch-tone phone. If you are using a speaker phone, make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order you signal us and we will take as many questions as time permits. Limit yourself to one question and a follow-up. If you have further questions, please resignal. Once again, please press star 1 to ask a question. We will pause a moment to assemble the roster. And our first question, Alex Blanton, Engles and Snyder

could you remind us how long these anti-dumping payments are expected to continue.

right now I would tell you that we are confident based on the activity level that they will be going through 2003 and most likely through 2004. There is a significant backlog, but we think there may be legislation issues that may change in the future. Right now very high confidence for 2003 as well as I think 2004.

I was wondering how we would think about the earnings guidance and the earnings that were reported. These anti-dumping payments are in a way a special item. Might not continue forever and they are not generated by operations and the same is true as discontinue the operations which you have included in your earnings and you have excluded restructuring charges. I'm wondering how you are thinking about that. Why would you include things that won't continue in the earnings that you are emphasizing to us?

I will answer it this way. The anti-dumping, frankly, we have incurred costs and had that impact our pricing over the last few years. So I think they now frankly bring back some of the profitability that we lost both from the -- we spend about $2 million a year in preparing all the paperwork and everything that's necessary to get this process through. So doesn't come at a free ride. I consider this as part of the, quote, purchase price, as we sold the company and I consider it as part of the operating results from the company during the two-year horizon. But we realize this discontinued will go away in 2004. I'm counting on continuing operations and redeployment of the proceeds we receive for the sale of this company to be able to go and replace those earnings which much better returns and more higher growth, frankly, going forward. we have partitioned that out and the expected CDO payment in 2003 is $50 million. Want to strip that out of the $3.10, it carries about a 39% tax rate on the domestic income. but I'm aware of it. We are counting on replacing those earnings and increasing them as we redeploy the $800 million plus for this transaction.

I should point out that the CDO payments in 2002 as will be in 2003 are and will be included in the discontinued operations.

our next question, Steve from Morgan Stanley. Your line is open. are you there, Steve? We'll go on to the next question. Solomon Smith Barney. David.

I'm trying to get a feel of the moving parts here. The anti-dumping credit, first of all being factored in the 8 cents from DIS -- obviously they will lose money in the first quarter?

We are showing the CDO in our math showing up in the fourth quarter. So we don't have that included in the first quarter number. In other words, what you are seeing in the first quarter results is from the operating. We only record the CDO as it's realized and it shows up in November and December.

so the 8 cents is the operations. The 50 million pretaxed which nets about 19 cents. That 19 percent is in the 320 guidance?

That's correct.

so just kind of put -- 3.10 to $3.30. the lower tax rate, it's up year over year. I would use 20% tax rate and then it was three. The 14% lower tax rate, you are saying year over year that's request going to be a -- a drag for you, 9.9 -- you said up to 14.

that's correct. We ended the full year this year from commuting operations at 9.9%.

I was using 20 I can't do the exact math.

-- It's 14 precisely.

thank you. You have negative 14 from the tax, negative 35 from the pension. So it's negative 59. And then we have the anti-dumping credit, another negative 11. So we are negative 70 off the 3.10 base. I'm trying to understand -- the cost savings you have the full year of cost savings. The restructuring is officially done?

That's correct.

can we walk between 2.40 and 3.20. How much savings and ThermalKing.

we started at $3.10. First the disk op at 65 cents so 2.45 in continuing operations. We anticipate some improvement in volume and productivity and restructuring savings of $50 million year on year. So that is about 25 cents. Some volume will be 50 to 25 cents depending on how the year shapes up. The pension expansion previously identified would add 35 cents of cost. The reduced debt levels would generate about 11 cents worth a reduced interest expense. We have some other miscellaneous items and other income that will be about 7 cents worth of improvement and results. The taxes previously identified would cost us about 14 cents and after tax earnings and we expect some change in the shares outstanding which would reduce our earnings per share a bit, probably 3 cents.

and one last follow 7 -- When you do that that comes to 2.97 to 3.17.

then the 8 cents gets you 3.10 to -- Essentially 13.

the cost and discontinued operations.

and the follow-up, in that 50 to 75 cents operationally, the mix -- and ThermalKing coming back is a big leverage story there, put some takes on the quarter the air solutions business is probably the biggest surprise to me in the sense that you had services growing faster than complete goods the whole year. And we had mix still net hurting us when you gave the good color on each business. The mix was a drag of 16-17% on the operating. What swung so much this quarter that that changed the dynamic there?

We have two pieces going on. I would tell you that not only are the new products providing good solutions for the customers, they are providing good profitability for our company. The profitability margins of the units, the Nirvana and Pegasus are significantly higher than what we have on the more traditional Syntac-type products. Additionally as we condition to see it increase in the service margin, we have gained well over 2 more points in the last place. That represents 47% of 9 ref -- of the revenues. My optimism as I look forward and I come with that optimism tough these days. My optimism in the 50 to 75 cents and going forward and most of the areas that we are recovering are in the high margin at ThermalKing and we always talked about that which we rode down the hill is the piece that is coming back. Bobcat as we introduced the Toolcart and so on we have strong margins. The exact same thing as the growth is coming up in air solutions. So the good news for us really is that in many of the areas where we are seeing -- And I'm talking about 3-4% net volume improvements at about 35% margin, if you multiply that out, that's how you get a good number of 50 to 75 cents.

thank you, very much.

Our next question David Bleustien with UBS warburg.

you mentioned does the 14% rate match what you expect your cash taxes to be?

It should largely. There is probably a little bit of deferred taxes but that should match the cash taxes.

and then second, can you break down how much of the tax rate is derived from EBIT and low tax rate Diamondbacks and how much is derived from financial infrastructure.

that's a level of detail I'm not prepared to disclose.

and my follow-up, can you give us an update on whether or not you are seeing any retaliatory from congress related to Bermuda or has the whole thing started to subside.

as a matter of fact, along that line, there was a bill that was passed last night in the senate that related to what senator Wellstone in Minnesota had brought up awhile back. What the intent was to limit the purchase by the government specifically related to homeland security and the question with the -- about the defense side for those companies that are incorporating at the effective date that it goes into effect. My answer to you is that I think that some people who may have disagreed with the moderate chop that we made -- with the move that we made are all agreeing to the fact that what we did is legal and is above board and therefore putting in legislation is inappropriate. And that's being thought of as going forward is legislation that impacts people now going forward that's it. It's not that it's disappeared, but I think it has gone to the point where people are assessing this as being something that was done. It was approved by shareholders and people going forward here on are advised and know what the consequences are as a business decision and make their choices accordingly.

good for you.

Our next question from Ann [INAUDIBLE] Sanford Bernstein.

hello, again. My questions is around the Hussman recurring revenues business. Of the 3300 stores covered by your national contracts, can you give us color on how those break out, convenience stores versus grocery stores and the value of convenience stores contracts versus grocery store contracts and then you had told us earlier in the year that the services business for Hussman was low margin. Has there been any progress made there or can you give us some guidance on profitability of the service business in that sector.

my shorthand will have to improve to deal with all this. Let me try. The profitability at Hussman has gone up about 1 to 2 margin points from the beginning of the year to where we are now. And I would tell you it is probably going back to the question that I think it was David had asked before, the profitability improvement in that business for this year I expect to be significant, dramatic, big, because we have identified the areas and we have the things in place to make the improvement. As your question was, year to year, it was up less than 2 percentage points which puts it into single digits. When I get into what we have in the stores that are there, it is still at this point in time predominantly supermarkets. And when we talk about the supermarkets, we are talking about, and again they vary.

In some cases we do display cases, but the number I use in the back of my envelope now is that I do about $3,000 a month of this average service business per supermarket and it's down around $500 per month for the typical convenience store. And just look and see that although right now today our mixes that we have many more -- it's like 2 out of three are supermarkets that as we go forward does even more for convenience stores that are out there. What we have done at this time is we have gone and taken the earnings of air solutions which I described to you beforehand as being right now in the 20s on the margin side and they frankly are insuring the best practice of teaching and mentoring the folks at the Hussman part and I think that's why you will see a significant improvement there this year. Did I get all your pieces?

Thank you.

Joel [INAUDIBLE] from Lehman brothers.

hey, guys, how are you doing? Wondering if you can give us a sense on your residential focus businesses. If you can give us a sense of if we expect tougher comps there from just consumer slowing down versus your new product introductions and just how do you get there?

If I look at the res side of it, what I would say is that residential, if you try to tie it to new housing as it relates to the bobcat, you would have a tough time. We are dealing with the landscapers doing the backyard and a lot of the installed homes. Our coring will with new housing is very weak. So we really go more from the activity we get back from the bobcat dealers and our actual retails as we saw them in the fourth quarter and now where we are continued to be up a couple percent to where we are last year. I don't see that falling off if the new housing goes off.

when I get into the security safety side, which is the other piece, there we again have probably 8 out of 10 of the dollars that are spent are in the aftermarket side. So I pay more attention there candidly to what's going on in big box and then into the consumer spent whatsoever on the remodeling. And I guess the only thing I look at that's the downside is what you and I have been listening to as to our friends down in Atlanta, possibly talking about are they going to be slowing down, are there a number of new stores opening and so on. I said that represents 10% of our business. When I add this up to get to the long winded answer, my numbers were going forward is that we are looking at although the SSA, the markets overall are down somewhere in the 1 to 3% level, our exposure to them with the aftermarket side shows them being up 2 to 3% if things continue where they are right now.

okay. And my next one I will glue two together. Who is losing market share in compressors and are you expect the bearings divesture to be neutral?

Let me answer the second part. Obviously if you look at our full year numbers as we forecast going from $3.10 to $3.30, what we are looking at there is being able to offset and trade if you will the operating income from discontinued with the exception of the 13 cents we have in our plan, that would be, if you add it up, being about break even. Second -- and that's the schedule to go through at the end of the first quarter. What was the second piece?

Who is losing share in compressors. if I look through, it I guess it would in general turns out to be a company called atlas cop co-.

I was focusing on the area of 50 to horse side. We had a long way to go. It's coming out of their numbers.

thank you.

Our next question, John Inch with Merrill Lynch.

thank you. I want to ask about cash flow. In you did 570 in free cash it implies 600. Could you give us the operating cash number and specifically to how much cash flow was derived from working capital?

The operating cash flow was the full year 2002?

Just for the quarter.

I'm sorry. About $600. operating cash flow is $600 million. That's full year 2002. We tend not to look from quarter to quarter basis of cash flow. It's a year to date number is how we measure it. The quarter to quarter change is not something we focus on capital expenditures for the year were $125 million. Dividends were 115. That's from the operation standpoint. Obviously this gets more confusing. Discontinued operations generated about $109 million. That was offset by -- we have about $102 million restructuring so that brings us to the 572.

and then the follow-up is your guidance is for $400 million. And I guess the question is, what is causing -- even though you got earnings going up, what's causing the degradation? I'm assuming because you are assuming top line numbers you will need to build capital.

we anticipate building working capital as we build the top line. You need to point out that the discontinued operations that I pointed -- pointed out is $110 million worth of contribution to our 570 this year. Subtract that out of 570 and you are down to 470 and there are increment build in investment.

and lastly on the Cap Ex front, what are you thinking of in terms of Cap Ex? Can you talk about -- We came in the same range of 150 to 157 in our thinking. And we have seen some really neat ideas presented by our operating units for continuing to invest in the next generation Nirvanas and tool cats and so on. We are actually, if you look at taking out the engineered solutions still spending the same number of Cap Ex. We had a couple of very good returns proposed to us for increasing our manufacturing food print at low cost areas. But in general, it's to continue to invest in the areas of new generation products, going and doing productivity improvements. When I give you that cash flow number of the 400, it included in there spending between 150 and 175 of Cap Ex. That brings us closer to 2% of revenues or the 1 1/2, where we were before --.

Our next question from Mark Pudner at Midwest research.

it looks like it's slowed down sequentially excluding accusation you said it was flat in the quarter and up 6% in third quarter. Can we go through that a little bit? Whether the dynamics?

We saw in the fourth quarter you saw that the number was up 6% and so it actually picked up steam at the end. And we actually the slower periods were in the second and third and going back to what we had. The biggest increase we saw in that was in the solutions side of the business. I think with a we picked up were some of our orders slowing down going into the area of big box. The dynamics overall, I would say what we look at is this will be a marketplace where we think we can grow somewhere in the range of 6% for a full year in 2003.

that would include the ETC accusation?

Yeah. Which is $40 million going to hopefully $60 million, $50 million. We continue to get significant improvement in the commercial side. We are looking at -- here is the way I add up the year if I look at that time in general. If you go back to 2002 looked like, we were up three in the first, up five in the second and then we wound up like up 6 and so. I think this year is not going to be much different than that. new product pieces that are doing very well are the E-bolt, replacing some of the mechanical locks. Our electronics is going from 100 to 124 million. So I expect 6% revenue increase to be very doable on the organic side from where we are for security and safety in 2003.

back to the original question, I still not sure why things slowed down here in the fourth quarter relative to the pace of growth in the third quarter. Third quarter was up 11% total. Fourth is up 6%.

I think what you are seeing at this point in time is that the 11% reflected some abnormal things that it's just not sustainable base on the macroeconomics that we are seeing. The number of new store openings. We are starting to see that what we had we had lower comparables. If you go back into the third quarter of last year, the home depot adjusted their inventories we saw reduction in the orders going out overall. More was big box related and inventory adjustment related than anything else.

and then are the major investments in the electronic locks and some of the other initiatives and security and safety behind us, you know, in other words is the margin likely to be same in 03 manufacture versus '02?

The level of activity markets that we are doing in investing is not reduced in 2002 over 2001. The margin improvement that you saw at the end more reflected the fact that when you sale interflex software and match it up with the magnetic pieces and put it out there the Marge be -- margins are 74%. That's what caused that margin to go up. I'm continuing to invest more and more. We have the third generations hand readers going in. The electronic locks, we continue to invest in those things. But I think what you see are the profitability level where we are at right now is sustainable going forward.

okay. Thank you.

our next question, Jerry McMainous, JP Morgan.

in a previous question, you were talking '03 should benefit from lower interest expense.

$21 million.

if you are getting -- if you will generate $400 million in free cash flow and you are not getting it from day one but spread out through the year and plus getting -- I don't know if you want to count the Timkin stock where you sell the used debt, I think you would have a much lower interest expense than what you are suggesting, just $20 million. Are you assuming some of the free cash flow is not used for debt reduction or is used for other measure.

that's correct. I think we identified earlier that we will use the proceeds from the divesture, the $700 million that we expect to receive in the first quarter to pay down -- we have $700 million worth of debt coming due with about a 6 3/4 coupon on it. That is the assumption we have used. We have a 6 month lockup on the Timkin shares and consequently we will see how that plays out over the third and fourth quarter of the year but we have not reflect on expectation -- we have not reflected in our projections that we will sell those shares and use the cash to further pay down debt. And further, we expect that free cash flow we would use for accusation or share repurchase.

and secondly, the $50 million, the CDO payment you expect this year, that's your 80% share, that's not the full amount?

Correct. if you look at the number from 2002 and 2001 and we wind up factoring it down 80%, that is a conservative number.

but I'm just curious on your confidence in forecasting any number at all. You gave a forecast for the third quarter conference call was substantially higher. You said can't pay it all and maybe that's a small probability. I'm curious on your confidence in that $50 million number.

we know what we generated as revenue in the products that are impacted and doing the calculations. There is a backlog that exists for the CDO payments going back to the last 10-plus years. So I'm working off a historical base. And as we see the math being done by the folks in Washington as they make these payments, I just as the time goes on and we continue to see them processing them at the level that they are. If they wind up going forward, it's a high probability that they will, we wind up at or higher than the number I have given you. If you go back when we did the transaction, I said at the time we announced it I put a risk assess $29 million and as the time continues to go forward and we continue to see what the payout levels are, the receipts that we had in 2002 were $72 million. And when we look at 2003, the math should be comparable to that stuff. That's why when we put in $50 million, I would say I applied the high risk investment.

Our next question, Barry Banister, Legg Mason.

congratulations. A lot of good things. When I look at your $150 million Cap Ex bearing versus 123 bearing in '02, you made it sound like you were more excited about the product development but you have been under-spending depreciation for several years. Isn't this unwinding and under spendings situation and would you give it a comparable depreciation number for '02 and '03 against that 123 and 150-175?

I think that the big disconnect I would have with you in this area is that, remember, I shut down 29 factors. Obviously I spent that money on the past to put them up there and so what I had been doing at this point in time is not replacing brick and mortar which I had done in the past. We continued to aggressively look for opportunities to invest for new product development ideas, be that the Nirvanas or whatever else they are. When I look at our depreciation number, I would say it comes from as a basis of having a held of a lot more rel -- hell of a lot more real estate. The kind of things we are doing is we have a company -- Log TD in the Czech Republic where we have outsourced the manufacturing to them to portable air compressors in the European marketplace. Now that I have eliminated that Cap Ex requirement for the brick and mortar I would have had to put there, that's the kind of stuff that's distorting what's there. This is not releasing, if you will, against of the pent of depend for -- demand for the brick and mortar. This is recognizing that I still have plenty of brick and mortar capacity sitting throughout the U.S. that I could use for the next ten years.

if Tim would give us the comparable depreciation dollar numbers and then my follow-on question, to make the numbers in '03 bring the tax rate down to do so, given we have a rising budget deficit, wouldn't that be tempting fate on the legislative front? That's a drop seeing that part of it came from financing rather than local. Seems like a big drop. What made you take that kind of a step given the macro back drop with Washington.

let me answer your first question on the depreciation. Normal course we have $210 million which includes engineered solutions so if you strip that out, it's about $165 million so that's the level you should anticipate for 2003. Relative to our tax situation -- that's the tax structure that we put in place and employed these strategies and we think that we have thought it through well and carefully and we have invited the IRS to come in and look at the structure that we put together. We think it's the right thing to do for our company and our share holders. We can't control what happens in congress, but we hope they will -- this will highlight to them the disadvantage that U.S. companies are under compared to competing with their global competitors and they will consider that in their legislation.

thanks.

Our next question, Robert McCarthy, Robert W. Baird

good afternoon. in a way you have touched on outlook for top line for a couple of the segments in '03 I wonder if you would step through them. If you listen to your rhetoric in optimism about new product and increased service contract volume, 6% at safety and security, I just have trouble reconciling that with only expecting 3 to 4% on volume.

there are obviously you heard the optimism and I will give you the rest of the pictures. The areas that continue to worry me are those that have to do with funding that comes from government. Our road development in North America, I'm very concerned about because we have seen state funds have dried up. That business can have a significant down side. We see a lot of those areas getting very weak both domestically and internationally and that's a large part of our business. The other area I would tell you I continue to worry about has to do with the industrial side of our business.

I think the rest of the world is not doing a heck of a lot different than we are on our Cap Ex side. As we look at our productivity solutions, industrial solution side that will continue to see significant pressure on more of the durable side. I think air compressor whole goods will be a challenge for us except when we put the new stuff in there. Dresser Rand whole goods, the service business going up. When I look at the industrial piece and I continue to worry about the stationary refrigerator phase. We have two diverging storage.

Stationary stuff, Safeways of the world going down while I'm starting to see some recovery on the transport refridge are the -- refrigeration side. Industrial weakening and then getting over into the infrastructure side, what I see there is bobcat continue to hold its own as a result of new product. But if I strip out new product and where we are going, I see that as many of our competitors would as being basically flat to down. Club Car continues to gain market share, but overall new golf course construction -- I'm going down to the pg -- PGA this weekend and when I listen to folks, 400 new golf courses built typically, 18 whole equivalent is down to 50 to 75. So I think there is pressure in that area. -- as utilization of the inventories that are out there continues to be an issue. I gave you the first part where I think the upside are and what I gave you is the downside is to collectively when you lay that all in, and superimpose on top of that, the direction of Europe, if you look at the full year numbers, you saw it was up.

yeah.

fourth quarter Europe was off 4% on the comparable basis year over year. I see the entire macros of Europe getting to be very questionable for us. Concern -- I got the optimism in the first piece and add in all the other parts and that's how you wind up with a number that's somewhere between how pessimistic you want to be to be at zero and that's about the band width you wind up with.

in terms of helping us with smaller detail, could you talk about what impact pricing in aggregate and currency in aggregate had on '02 numbers? What you are assuming for '03. And I'm wondering if the 7 cents of miscellaneous other income benefit that you were describing, Tim might include asset gains on getting on 29 properties?

We do have some properties out there that we would anticipate selling over the course of the coming months.

but not in the cash flow numbers that you heard so far.

there are some gains and losses that we don't anticipate incurring in 2003'.

to the question of currency impact on top and bottom line, '02, '03?

for -- currency for transactions in fourth quarter was $6 million. Pricing I would tell you overall is if is look at the overall number, I look at this next year, 2003, the kind of ballpark I would tell you we are running in is from zero to minus 1% collectively, which is consistent with what we had in the last year of going. Again, that range I would tell you that road, we had more price than in other areas. Our math when we lay in the numbers that you are looking at is something pretty flat. We try to offset when we look at productivity we try to offset any potential pressure that shows up on the pricing side. And pricing today has got more finance terms attached to it than I see anything else. It looks like in the automotive business and we are starting to see things that -- zero percent financing on a piece of construction equipment. We are starting to see strengthening in pricing relating to our containers.

collectively I put it in as a push between what we wind up doing on terms and conditions and what we wind up trying to accomplish and focusing on getting higher profitability product out the door and mix.

thank you.

Our next question, Coleman Joanna Shatney Goldman Sachs

what's an unallocated expense that made it double from go up 10 million from where it was in the third quarter.

it's actually as we carved out discontinued operations engineered solutions it actually is unallocated caps that doesn't get absorbed by the engineered solutions.

okay. So went from one area into the other. Help me understand what happens to that number in '03. Is that something that goes away after we divest it?

Well, it does not automatically go away. We need to work on driving our corporate costs down to accommodate that and we have those -- we will work it down over the first quarter and first half of the year.

you mentioned cash stock repurchase vaguely and you expected the share base to dilute the earnings numbers. What's the reality here on buying back stock in terms of priority and what level of stock price makes it just not even on the table for discussion?

Well, as we pointed out, we will bring our balance sheet better into lines with using the proceeds of the Torrington sale with an expectation that our free cash flow will be available and our first priority would to obtain accusations that will generate profits. To the extent that our share price is low, that becomes also -- and the potential for bolts on accusations that can add value we will consider share repurchase in that equation.

it's clearly second to the accusations?

Well, but I don't anticipate. If we think about 150 to $200 million worth of bolt on accusations is what we could identify and absorb over the coming year. That does leave us additional free cash flow to look at share repurchases.

and the rating agencies are fine with the $700 million of debt reduction? You don't need more?

They would prefer us to pay more debt down.

okay. I will get back to you. Thanks.

Our next question, Andy Casey, Prudential securities.

I guess a lot of the questions have been answered. Within climate control, can we walk through the margins in the quarter. You had a pretty significant uptake off a low base in ThermalKing which probably saw some pretty good incremental revenues. Was that all offset by the shift in Hussman?

I guess I would say that if you look -- let's do fourth quarter, the number I remember is that we wound up seeing the operating income margin going up almost 6 points. And I saw in terms of a corresponding almost 4% reduction at Hussman based on the stuff going down. If you look at the numbers because the Hussman piece was almost twice of 1123 times the size collectively that's why you are seeing the whole thing wind up pushing out. You have the total dollar increase of 1 offsetting the increase of the other. The display case revenue to give you an example why the mix is going on the Hussman side and the quarter display cases were off year over year by 11%. While installation service was up 12. And if you look at the difference between those, two you can see the significant -- to go back to the question Ann requests asks, you are going down to a 45% margin down. So that reduction was offset by the improvements that we saw in the performance at ThermalKing.

and then kind of going forward in terms of just continued weak supermarket and are you looking for continued contraction out of them that would continue to offset improvements in ThermalKing? Or are we at bottom with a little downside so the upside of ThermalKing that you see coming offsets that going forward?

We read and talk to the customers and the large national U.S. chains and what we see there actually I would say is a flattening rather than a continued degradation. It's not a bigger hill to climb but seems like at this point in time it starts getting better in the second half of the year because [INAUDIBLE] In our forecast envision the [INAUDIBLE] United Nations we see like a stabilization at the level where it is and continued improvement on the service side which is important for us to get the service margin up in the next 12 months.

okay. And then kind of moving over to infrastructure, bobcat, earlier today and previously had announced 2, 2 1/2% price increase realizing that you compete with a part of their line instead of the whole thing, is that reflected in what you are seeing in the marketplace with the compact equipment? Are you gaining pricing primarily on the new products that you put out there?

I'm glad my attorney is not here. I would start off by, go Kack! We did not count on incremental price to deliver operating improvements. That would be above and beyond sort of what our expectations are. But I would point out that the other part you have to look at is the total percentage of cat's business that is on a head's up against us is relatively small. And if they raise the large single purpose piece of equipment side, that makes us even more competitive than as we try it go in with our smaller type piece. But I did not make any price expectations into the numbers I was giving you beforehand. And again, Cat's matchup is small. They have in this point in time roughly 10% of the compact equipment side when it gets into the mini excavator. That's a small portion of their business.

thanks.

Our next question Jeff Saulk with shoe view.

just a few more questions on your security and safety business. I was also wondering why you saw that slowdown in organic growth in q 4 to the 6% and maybe could you explore how that development has been within the institutional, the commercial and the residential market and how you see those three segments developing going forward if -- do we need to worry about the fund -- government funding under the institutional segment there as you mentioned before?

I would say to you that if I look at the constitutional piece, that continues to be very strong. Again, our biggest piece when we talk about constitution would have to do with schools and hospitals. That's really where the biggest usage is and we continue to see on going requirements for the security and safety applications as they switch into the electronic and [INAUDIBLE] and we see that continue to be strong. The weakest piece we look at is as it gets into the more traditional construction-type activity because with office ok pansies being where they are, there is not a lot of movement going on. That's probably the softest piece and soft in my mine means it's a flat year of the year. We continue to see multi-family as a big opportunity. But the yield there is very low. We need to push it. The residential side, again, if I assume residential equals not new housing starts with the consumer marketplace, our biggest impact there had to do with the inventory adjustment and the slowdown of activity that we saw in some the big box customers over the fourth quarter.

okay.

And we have a question, Karen Ubleheart government of Singapore.

I don't mean to beat a dead horse, but I'm still having trouble with this tax rate. Can you help -- I don't know any other company that can get a 14% tax rate. Can you help me aside from the big benefit, what are some of the things that you are doing that enable you to have an ongoing 14% tax rate? I'm having trouble conceptually getting there.

there are some things that we -- some credits that we take advantage ever just like every other company out there with foreign sales corporations and other credits. But frankly the preponderance of the lower... of the reduction from the statutory rate is attributable to our foreign income being taxed at a considerably lower rate than U.S. statutory. There is some interest -- intercompany interest Diamondbacks that we are able to take that reduce some of our tax rate as well, but the majority of it is attributable to the shifting of the lower taxation on foreign profits.

not that different than other companies in your foreign -- you know, your sales structure, I don't think.

you have to look at the two pieces. One, as we got 40% of our stuff outside and then obviously that 40% is taxed what the local rate rather than the U.S. rate. And there is the intercompany between the U.S. and the Bermuda base. Those pieces together and believe me, that's why we brought the IRS in here. I thought this was going to be 20 when we went through it and when we add the whole thing up -- again, realize some of this has to do with the fact that the engineer the piece is out. And that was obviously 39%. That's basically if you wind up taking from the 20 we had talked about and then take out the 39% that we were running at Torrington, that right there takes you down to 16 to start with. That's the biggest delta from how I got in my own math how you get from one number down to the other one. That was a big step. You took out our profitability in the bearings side is heavily driven northern American automotive. When you strip out the bearing piece, you are taking out of that which was residential -- resident here and that's why there is so much dropping down from 20 to 16 just from that activity alone. And the rest came from the fact that we see more improvement. If you look at our growth in Asia-Pacific, it was up 20 and as that continues to grow you will see that becoming a larger part.

we also, we have a relatively low earnings base. We expect that the rate as our earnings would increase in subsequent years as the markets turn around that the rates will climb up a bit, particularly as U.S. increases.

because the benefit we received is fixed dollar number. If it's lower, it gives you a percentage rate that's that much more noticeable. As the earnings go up, you will see the percentage getting back to the 20%.

okay. And then also on the market share comments, would you referenced several businesses in compressors in particular, can you just reit rat what your market share gains -- re-iterate what your market share gains were and what percentage of the market are we talking about? 2 percentage? Talked about the range but I don't know what the size of the pie is.

what I was talking about specifically when talking about the Nirvana was in the 50 to 100 horsepower range, we were up 8 percentage points in North America and five in Europe. If you look at that, that represents -- again, if you want to include service, take it out on your math? It's a big difference.

yeah.

50% I told you of our revenue in my mine I would tell you that I have to throw service in there it's hard to discount that. I got 8 million air compressors out there. My goal in life is to get the service work off of. It's hard not to include that in the numbers. When I put that in I would tell you that the niche I talked about is going to be somewhere less than 10%.

and without service?

Well, without service, then it is almost 15.

now that's helpful. Thank you.

And we have follow-up questions. Our first from Sanford Bernstein.

hi, again. My question this time is around power works. Herb, maybe you can give us a status update and tell us how much you spent this year? How much do you think you will spend next year. The indication of volumes. And when do you think you will break even?

Break even 2004. 2003 -- it's an amazing world in which we live as to how ever since we started the natural gas prices have triple. There is a conspiracy out there. What I look at is we are seeing for this year our focus is strictly on the 250 -- the 70 is out there and does great. Every laundry in the world should use this thing because of the payback. But our break even plan is going to be in the range of between 300 and 400 units which we realize in 2004 and that has to do with whether it's a 250 kw or a 70 kw unit. The activity level in all of 2002, when I add in the development of the 250, the improvements and -- on the 70 and plus all of the investments that we made in the multi-fuels shall remember how to get hydrogen sulfide and use methane to run the whole thing, we spent north of $35 million.

$35 million in 2002?

Right.

how much have you spent on the program net to date?

Net to date we are around 70. If I go back to 1990 timeframe.

About -- So you ramp newspaper '03?

We are looking at going somewhere in the order of couple hundred units.

okay. Is your strategy still to go direct to market yourselves or have you had a change in heart in thinking through an alliance or partnerships?

Remember, we have actually a partnership with Seemens that has to do but it's a hybrid unit that's looking into the fuel cell but that to me that's a multi-year solution that's out there. When it comes to how we go to market, we are right now directly ourselves approaching companies like 3 M where they are going to turn off volatiles for their solution, we are going into industrial waste water treatment-type facilities. But as I wind up going and I was over in China just around Christmas time and I met there with change high electric and there we are partnering with them as we get their 250 units in the basement of all the multi-story family buildings that they are putting in the area of Shanghai. It's a mix strategy of alliances that it will be important and we are dealing with our own customer group and will go on our own and we will get a fixed at home on the environmental side where the math is compelling, turning free methane or waste gas into electricity is better than arguing about spark spread that's upside down.

okay. I would also say though that selling micro turbine into the waste water sector is a long hard process.

and remember, I said I stayed away in my conversations on that point. I am not talking about municipalities. We were talking about industrial generators that have to fill out these EPA forms every month. We are talking about going into the industrial space to start with. And not going into -- and our environmental fight we are not identifying it as industrial large plant offshoots. We are talking about 50,000 in North America to go after. I'm staying away from municipalities. I agree with you. That. That's a long road. we will take two more questions and then we will cut off.

next question, John inch from Merrill Lynch.

I want to ask with the potential tax deductability for dividends and obviously your Bermuda status, how are you thinking about sort of trading off the prospectus of using your cash flow for a share repurchase versus dividends? Is it still premature to think about this? Or does this -- the Bermuda status imply that if we won't get the deductability as other companies we will go for share repurchase?

I wouldn't spend that money yet if you are planning on getting a tax relief on that one.

other issues.

I'm serious. I'm saying when you really get into this piece, remember, it had to do with I was at a meeting where we had folks in Washington who were going through this and what's double taxation mean and how they allocate it and what's taxable. And I would tell you that we are saying, let me see how this plays out as to whether or not this even happens and if it does, then we will worry about the impact. Right now I will tell you, I don't see this as having a significant impact. If it does go through and you heard it here, low probability.

can you comment on your own view toward paying dividends versus share repurchase?

It gets back to at what point, but clearly one of the first digit is 3 in my stock price I look at that and instead of crying I look at that as a great opportunity to create value by going and picking that up. When it gets to be a 5 or a 6 that would change the math. So right now at this point in time I would have to comment the fact that it would appear to be a very inexpensive accusation price.

thank you.

Our next question, Barry Bannister, Legg Mason.

on the 180 basis points of noticeable security and safety margin improvement, you mentioned it was electronics products, but how much of that was internally developed with all of the R and D you expanded in the years and how much was recent accusations? As a follow-up for a dinosaur here, would you give me the bearings breakout in sales and profits for the fourth quarter so I will know?

Let me do the last one. I think my colleagues at Timkin said they are in a quiet period and we have received a note this morning advising me of that fact. So I cannot really give you a lot. But let me give you if you go back on a macro-type basis. A business that runs $1.2 billion in revenue and has a typical 8 to 9% operating income margin. I would give you that. That's what I'm able. I can't give you the fourth quarter because of the Timkin guys. And then the second piece, when you get into, what came out of this increase in the margin side, the goodly amount of it is that it came from the solutions piece and the solutions piece is mostly at this time coming from things that were developed internally and or were added on in 2000 time frame. The answer really is more virtually are internal if you include it being something we bought several years ago. The rest came from the other pieces inside.

thanks a lot.

And due to time constraints, I would like to turn the conference back over to you for any additional comments.

thank you, very much. We will wrap this marathon up now. There will be an instant replay available of the conference call at approximately 5:00 P.M. It will be available until January 30th, 2003. The call in number is as follows, 719-457-0820, and the pass code is 551504. Please call me. Again, I'm Joe Fimbianti if you have additional questions at 201-573-3113. That concluded our call. Thank you again.

This concludes today's conference. Thank you for your participation. You may disconnect.