特靈科技 (TT) 2003 Q1 法說會逐字稿

Good day and welcome to the Ingersoll-Rand first quarter 2003 earnings results conference call. This call is being recorded. For opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti, go ahead, sir.

Good morning, this is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our first quarter 2003 conference call.

We released our earnings at 7:00 a.m. this morning. The release is currently posted and available on our website. I'd like to cover some housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we will be broadcasting the call through the public website. Participate via the web go to www.irco.com. Click on the yellow link on the left-hand side of the screen. Both the call and this morning's presentation will also be archived on the website and will be available this afternoon.

If you would please go to slide No. 2 now.

Before we begin, let me remind everyone that there will be forward-looking discussion this morning, which is covered in our Safe Harbor statement. Please refer to our March 5, 2003 filing of form 10K for details on factors that may influence results.

Now I'd like to introduce the participants on this morning's call. We have Herbert Henkel, Chairman, President and CEO of Ingersoll-Rand, Timothy McLevish, our Senior Vice President and Chief Financial Officer and Rich Randall, Vice President and Controller. We will start with the formal presentation by Herbert Henkel, then one by Timothy McLevish, followed by a question and answer period. Herb will start with the overview.

If you would please go to slide No. 3.

Thank you, Joe. And good morning, everyone.

Thank you for joining us -- excuse me, thank you for joining us on our first quarter 2003 conference call. This morning, we reported net earnings of 90 cents per share, which includes both continuing and discontinued operations. EPS from continuing operations was 55 cents per share, which is within the 52 to 57-cent guidance range from our call in January. This continued operations had earnings of about 4 cents per share from operating activity and legacy costs compared to our original guidance of 8 cents.

You may recall that our original 8-cent estimate was based on the expectation that we would sell our engineered solutions business at the end of March and would therefore generate a full quarter operating earnings. Since we sold the business halfway through February, our earnings turned out to be proportionately lower than our original estimate. Additionally, since we used the proceeds of this sale to pay down debt, we did increase the quarter's earnings by about 3 cents per share from the reduced interest expense. First quarter earnings from discontinued operations also included a 31-cent gain from the sale of engineered solutions.

Now, please go to slide No. 4. The overall activity in our total business continues to be sluggish and there are no signs of any sustained recover fully either our industrial or our construction-related markets. However, we continue to have pockets of strength during the quarter, primarily due to our execution of the strategy we've been tell you about for the last several quarters. Specifically, I'm referring to innovation, recurring revenue growth and operational excellence. From a business view, we saw very strong results from Dresser-Rand, Thermo King and our security and safety sector.

Our performance for the month of March was consistent with our expectations and our order rates can did not show any noticeable deterioration due to the uncertainty caused by the ongoing conflict in Iraq.

Now please go to slide No. 5. Our orders for the first quarter were up 1.4% compared to last year. There was a wide variation among business segments as is shown on the chart. Climate control orders were flat year-over-year with continued improvements at Thermo King, offset by a decline at Hussmann. Air and productivity orders were up about 10% compared to last year with double-digit gains at air solutions and fluid products and small improvements in our tool business. Dresser-Rand orders were down double-digit. We believe the reduction was caused by the disruption in the Middle Eastern oil production and that this activity will significantly strengthen during the second quarter. Infrastructure orders were up about 5% in generally sluggish end markets and again, easy comparisons. Security and safety orders were up 10% with mid-single-digit growth in the core mechanical business in North America and very strong gains in the solutions business driven by market growth and acquisitions.

The overall picture remains very uncertain due to the current geopolitical situation and the sluggish U.S. economy, which does not point to any major demand improvements as we go into the second quarter.

Now, please go to slide No. 6. Effective February 16, we sold the engineered solutions business to Timken for the previously-reported $700 million of cash and $140 million of Timken stock or 9.4 million shares. We're required to hold the Timken shares until August of this year, after which time we expect to sell them in an orderly fashion. Additionally, we will receive 80% of the CDO anti-dumping benefit in 2003 and in 2004, which we expect a total about $50 million annually. The initial $700 million in proceeds was used to strengthen the balance sheet and we paid down the high coupon debt that came due in the first quarter. This debt reduction will save approximately $40 million in annual interest expense and has move ad our debt to capital ratio to 41%, which is very close to our 40% target. The $400 million of free cash flow generated from operations during this year and the estimated $150 million generated by the sale of the Timken stock will be reinvested into bolt-on acquisitions, further debt reduction and stock buybacks.

Bolt-on acquisitions will continue to be our preferred strategy going forward since we do not require another major platform acquisition to reach our stated growth targets.

Additionally, we are reviewing our dividends policy in light of proposed changes in the tax rules.

Please go to slide No. 7. Also during the quarter, we launched IR international, which will act as our global trading company. IRI, which is what we call it, is an operational excellence initiative that will be responsible for all of IR's export processes, including sales and order management, export inventory management, export financial processes and technology support. IRI will present one face to the customer and will enhance our customer information base and help to us develop cross-selling opportunities. It will also enhance our internal business management, real-time information and advanced reporting capabilities.

The new system will enable our dealers to place orders through Internet-based systems, for equipment, parts and accessories. It will also feature the capability to configure, check and track orders and manage warranty claims. In the future, this system will provide the infrastructure for third party as well as company-owned dealerships. IRI is located in Dublin, Ireland, which will contribute to our future tax planning initiatives since Ireland has a tax rate of 12.5%.

Now, please go to slide No. 8. During the quarter, we also continued to make progress in developing our recurring revenue stream. Recurring revenues were over $560 million for the first quarter, an increase of about 16% compared to last year and 29% compared to 2001. All of our major businesses showed improved after-market volumes, which now comprise 26% of total revenues for the first quarter. This is up from 24% in the first quarter of 2002 and 22% in 2001.

Clearly, our strategy to grow our stream of recurring revenue is working.

Now, please go to slide No. 9. Our air solutions business continued to grow its service and after-market business as well in the first quarter. Total recurring revenue grew by approximately 7% compared to the first quarter of 2002. Air care contracts reached over 9,000 worldwide, an increase of over 1,000 contracts or 13% since year-end. 50% of air solutions business is related to service and after-market.

Now, please go to slide No. 10. Hussmann service offering for supermarkets and convenience stores also expanded during the quarter with the addition of over 600 locations. This now brings the number of locations under contract to over 3,900. We continue to target at least 5,000 locations by the end of 2003. Total parts and service and installation revenue for Hussmann was up 6% in the quarter and comprised 37% of total sales.

Please go to slide No. 11. Related to the Hussmann service offering is a significant process improvement which we call the lean branch initiative. Its goal is to capture and establish best practice and branch procedures, which can be applied throughout the company. This initiative will have important implications for improved Hussmann service profitability. Currently, the profits from Hussmann branches lag substantially below the 20% operating margins on after-market activity enjoyed by our air solutions business. Hussmann branch operating margins range from about 0 to 10% with most in the mid single digits.

From studying the operation, it is apparent that major improvements can be made to redesign the process, to improve technician productivity and to automate transactions. The process improvements will also allow us to align all of our branches with a central after-market parts location, which will reduce part numbers, inventories and purchase costs. The new structure and software will also give us the opportunity to reduce the costs of our back office operations.

There are numerous opportunities to reduce annual costs and increase efficiency in our branch activities. Our target across all IR branch activities is to reduce the annual operating cost by 75 to $100 million. We will keep you updated on our progress in this area as we move through 2003.

Now please go to slide No. 12. I'd also like to update you on some other topics of interest for the first quarter, specifically regarding innovation. The energy systems business continued to develop its product line. Marketing of the product development remains focused on environmental markets for the 250 KW unit and co-generation applications such as commercial laundries for our 70 KW unit.

Order rates improved substantially during the first quarter and we booked 2.6 million watts of micro turbine generated capacity. We now have in place 250 KW unit commitments from customers in the landfill, petro chemical and waste water treatment markets. We also have our first grid, isolated multiunit application in the commercial and industrial segment. We're targeting shipment for the first 250 KW commercial units in July of this year.

Please go to slide 13. Air solution sales of Nirvana and pegasus units continue to expand in the first quarter. During the quarter, we sold over 250 Nirvana units at a substantial price premium compared to our previous product offering. For the second quarter, air solutions will be introducing nirvana 2 in the 125 to 200 horsepower range. This product is expected to provide customers with energy savings exceeding 30%. The 20 to 30 horsepower pegasus unit also sold well during the quarter. A new 40 to 50 horsepower version will be available during the second quarter.

Our new products and our focus on customer solutions has helped fuel our revenue growth. Orders for the first quarter were up by close to 15% compared to last year despite stagnant industrial economies. Additionally, air solutions new, low-cost facility in the Czech republic recently reached full production. The facility was designed as a center of excellence for the assembly and testing of air compressors. The Billing design will also allow it to be expanded quickly and cost effectively to serve other IR businesses.

Now please go to slide No. 14. Bobcat new product sales also contributed to first quarter revenue gains. The tool cat product has had excellent customer acceptance. Bobcat is targeting $100 million in revenue from new products in 2003. We have an aggressive schedule of new product introductions in the next several years, which should continue to fuel the growth of the compact equipment business. Also in the quarter, Bobcat began to ship the first units to the U.S. military as part of an initial $7.5 million order for units to be delivered in 2003. The total contract could grow to about $20 million over the next several years. The loader package covered in this agreement with the U.S. Department of Defense includes a Bobcat model 763 skit field loader and four attachments. These products are being deployed to military bases worldwide, including in the Persian Gulf region.

Now please go to slide No. 15. All in all, this was a challenging quarter but we continue to make progress despite sluggish end market conditions. As I said at the beginning of the call, in spite of the global economy, we are executing our strategy effectively.

While we are unable to control the larger economic and geopolitical conditions in which we operate, we believe the steps we continue to take to improve operating efficiencies, introduce new innovative solutions to customers and make strategic investments, will stimulate consistent growth going forward.

Timothy McLevish will now cover IR's business unit performance in more detail. Tim?

Thank you, Herb.

Good morning, I'd like to begin my discussion with the quarterly results.

As Herb mentioned earlier, we completed the sale to the Timken company in February. In accordance with GAAP, the result of solutions and the gain associated with the sale are classified in discontinued operations and are shown net of applicable taxes. We have restated 2002 to be on a comparable basis.

Please turn to slide 16. Reported revenues for the first quarter were up 9% to $2.2 billion. The increase is largely attributable to double-digit growth at our Thermo King and Dresser-Rand business units and in our security and safety segment. On an organic basis, revenues were up about 8% and excluding the positive impact of currency, revenues were up about 5% compared to last year's first quarter. Operating income for the first quarter was $165.4 million or 7.5% of revenues. Margins were flat compared to last year's first quarter.

I would like to take a moment to discuss certain year-over-year costs that are included in our reported results. Our 2003 results include approximately $19 million of increased pension costs and $2 million of productivity investments. Prior year results include $19.8 million of restructuring and productivity investments. Moving down income statement, interest expense was $50.1 million, compared to $59.2 million in last year's first quarter. Approximately $5 million of the reduction in interest expense is directly related to the retirement of $700 million of debt with the proceeds from the engineered solutions divestiture. The balance of the year-over-year improvement is related to lower overall debt levels and interest rates.

We've continued to aggressively manage our balance sheet to be sure it's in line with our operations. Other expense for the quarter was approximately $6.6 million compared to an expense of $9.9 million in last year's first quarter. The change is largely attributable to certain reclassifications in the current quarter. Our first quarter effective tax rate was 14% compared to 13.8% in prior year. As communicated during our last conference call, we expect to maintain a 14% effective tax rate for the remainder of 2003. This rate reflects our ongoing tax planning initiatives and the associated reincorporation savings.

Net earnings from continuing operations for the first quarter were $93.5 million or 55 cents diluted earnings per share. This is in line with our first quarter guidance. Discontinued operations, net of tax, for the first quarter, was $59.7 million or 35 cents diluted earnings per share. Approximately 4 cents of discontinued operations related to the results of engineered solutions and certain legacy costs associated with previously-disposed businesses. Also included in discontinued operations is the gain on sale of engineered solutions of $53 million or approximately 31 cents.

Our total net earnings for the quarter were $153.2 million or 90 cents compared to 48 cents in last year's first quarter. Our original guidance for the quarter assumed a March 31 effective date for the divestiture of engineered solutions. As Herb mentioned, the transaction closed in mid-February. Consequently, we repaid $700 million of debt mid-quarter and lowered our interest expense by $5 million or 3 cents compared to our guidance. As an offset to this benefit, we had to forego the earnings of engineered solutions for the balance of the first quarter, which we had expected to be approximately 4 cents.

Please turn to slide 17. On a geographic basis, we showed revenue gains in all major regions. Full year North American revenues were up about 7% and constituted about 64% of total revenues. The European serve area reported revenue growth of 9% compared to last year which was largely attributable to currency gains. Asia Pacific and Latin America were up 23% and 9% respectively compared with last year. Approximately 3% of the overall revenue gains were due to favorable currency. However, as we employed cash flow hedges, we did not realize the full benefit of these gains on the bottom line.

I would now like take a few minutes to talk about the results of our segments.

Please turn to slide 18. The climate control segment, which includes Hussmann and Thermo King, reported first quarter revenues of $558 million, an increase of about 8% compared to last year's first quarter. Operating income for the sector was $25 million, representing an operating margin of 4.5%, which is comparable to last year. Hussmann revenues for the first quarter were down 2% year-over-year as weaker revenues in North America were partially offset by modest gains internationally.

We continue to see depressed spending on refrigerated display cases across many of the U.S. supermarket chains. The supermarket industry is experiencing a sustained period of turbulence and financial uncertainty, which has a direct impact on Hussmann's ability to perform at historically superior levels. In addition, we have seen a shift in volumes away from the more upscale grocery stores toward the discount stores, which mirrors trends in consumer spending and negatively impacts our margins.

Thermo King revenues were up 20% or 13% excluding the favorable impact of currency. Due to strong growth in our North American trailer, European truck and trailer and worldwide container businesses. Based on this trend and industry data, we believe that the markets for refrigerated transportation are in recovery.

Please turn to slide 19. Air and productivity solutions segment reported first quarter revenues of $320 million, representing a 3% increase over prior year. The revenue gains result primarily from a 6% growth in air solutions revenues driven by new products and services. Recurring revenues and air solutions were up 7% and constituted 50% of total revenues for the quarter, compared to 47% at year-end last year. Productivity solutions had flat year-over-year revenues.

Operating margins were 7.4% of revenues compared to 8.3% last year reflecting higher operating costs from new product development and growth initiatives.

Please turn to slide 20. The Dresser-Rand segment reported revenues for the quarter of $278 million, up from $212 million last year, an increase of 31%. Our complete unit revenues, which include purchase components that are sold or passed through to customers at low margins were up 53% while our more profitable after-market business was up about 16%. Operating income improved to $4.2 million compared to break-even last year.

We continued to focus on maximizing the returns from this business through operational excellence and driving improved profitability on our complete units. Backlog remains strong at $762 million at quarter-end. Excluding purchase components, the backlog totaled $534 million.

Please turn to slide 21. The infrastructure segment had first quarter revenues of $561 million, up 4% from last year, principally as a result of new product introductions and market share gains at Bobcat and Club Car. We have fared well despite modest industry contraction and competitive pricing. Bobcat revenues increased 3% as a result of new product introductions and stabilized pricing. Club Car had revenue growth of approximately 5%, driven by the GM pathway program, partially offset by the sluggish North American gulf market.

Operating margins for the infrastructure sector were 10.4% of revenues compared to a slighter weaker 9.9% last year, driven by higher margins in Bobcat and Club Car.

Please turn to slide 22. The security and safety segment continues to report strong results. The segment reported revenues of $382 million, an 11% improvement compared to last year. Year-over-year growth was largely attributable to strong performance in North America and on a worldwide solutions business.

As an offset, the prolonged winter in the northeast corridor has had a negative impact on the new construction in that region, which effects our growth in residential and commercial product offerings. On an organic basis, excluding the impact of ETC revenues, revenues were up 7%. Operating margins were -- were a strong 18.5% compared to 19.1% last year.

The lower margin percentage primarily reflects the shift in product and geographic mix.

Please turn to slide 23. Let's move on to the balance sheet. We continue to focus on managing our working capital to ensure it is in line with activity levels. At the end of the first quarter, working capital as a percentage of annualized revenues was 10.1%, or 170-basis point improvement over the comparable period in the prior year. Revenue growth and our ongoing inventory and receivable management program primarily drived the improvement.

As we previously communicated during our fourth quarter earnings call, we have restated our working capital to revenues ratio in all periods to exclude the benefit of discounted receivables. We feel that this ratio now more accurately reflects the working capital investment in our operations.

Please turn to slide 24. In line with our plans, capital expenditures for the first quarter were $25 million, which is unchanged from prior year's first quarter. At the end of the first quarter, our debt to total capital ratio was 41.3%, which is 620 basis points lower than prior year first quarter.

The year-over-year reduction in debt levels is due primarily to the repayment of $700 million of debt with the proceeds from disposition of engineered solutions. The divestiture of engineered solutions qualified as a significant event under the pension accounting rules resulting in a remeasurement of the relevant pension plan. Consequently, we took a pension equity charge of $57.1 million in the first quarter of 2003. Debt levels at the end of the first quarter were $2.6 million, compared to $3.7 million at the end of prior year's first quarter.

Herb will now conclude our formal remarks with the outlook for the second quarter and for the rest of the year.

Thank you, Tim.

Please go to slide No. 25. As I noted earlier, our recent order pattern does not indicate any near-term improvement in most of our major markets. We currently expect EPS for the second quarter in 2003 to be in the range of 70 to 75 cents. This includes 74 to 79 cents from continuing operations, offset by approximately 4 cents of costs relating to discontinued operations.

Please go to slide No. 26. Based on the current and rather uncertain economic environment, we are maintaining our full-year diluted EPS projection.

Full year expectations include continuing operations ranging from $3 to $3.20, discontinued operations of 10 cents, gain on the sale of engineered solutions, which we've already reported of 31 cents, totalling $3.40 to $3.61. In this uncertain market, we're continuing to focus on innovative solutions for our customers, growing recurring revenues, and making permanent reductions in our operating cost stucture throughout with productivity gains. Now please go to Slide 27. This ends our formal remarks and I'd like to open the floor to your questions.Thank you.

Thank you, sir. To ask a question today, press the star key followed by the digit 1 on your touch-tone phone. Again, star 1 on your touch-tone phone. If you're using a speaker phone, be sure your mute function is disengaged. Again, that is star 1. We ask that you please limit yourself to one question and one follow-up question. Again, star 1 for questions.

First we have David Bluestein from UBS. Go ahead, sir.

Good morning.

Hi, David.

The 10 cents related to discontinued operations on slide 26, is that the -- what is in there? Does it include the dumping payment?

Yes it will.

For the full year, yes.

For the full year, so, what that has in there is the first quarter results, the stub period from the engineered solutions plus the cost -- the retained cost such as IDP sales that we have done in the past and so when you add those all in and then add the $50 million that's forecasted, David, in the fourth quarter from the anti-dumping, that's where you wind up with a net EPS of 10 cents.

All righty. And then the interest cost on a quarterly run rate basis, Tim, should that be in the $45 million range now?

Well, it's about $40 million full year.

Okay. Okay. And then as Thermo King recovers and Hussmann continues to struggle, have you reanalyzed the goodwill impairment test at Hussmann?

We will be doing that as we go through our five-year strategic plan this summer. That'd part of the normal cycle we go through. I will tell you up front, the disappointment of Hussmann during the first quarter didn't go unnoticed by our leadership team and this will be fixed during the second quarter and going forward.

Terrific, thanks.

David, the run rate -- full-year run rate will be $45 million. We expect $40 million for the full year as we didn't get the first six weeks of it in this year.

Next we go to Mark with Midwest Research.

Hi, Mark.

Good morning. Just a clarification on your statement of, you know, no sustainable pickup in orders, you know, in the total orders here for the quarter, up only 1%, but, you know, as you look at your slide 5, it looks like orders are doing pretty well across virtually all of your core business and then what's pulling everything down is Dresser-Rand, you know, which used to be an asset held for sale and now, you know, just for accounting purposes it's back in.

So, you know, if you were to look at your core business, is that statement still an accurate one that, you know, the order activity is still, you know, lackluster?

Yeah, I guess I would say to you, my -- when we come out of this downturn, Mark, my expectations are that we're going to be seeing 6-8-plus percent increases and now especially going into the strong second quarter for our construction sides on, frankly, that's why it's relatively disappointing compared to those kinds of numbers. We are seeing increases from where we are, but it's a matter of relativity. It is a low level we're starting from. So, we are seeing increases in the range of 3 to 5%, but when I looked through at what we hoped in terms of an uptick, we're just not seeing that yet.

So, you're getting a seasonal pickup, it's lower than you would expect.

Yeah, when I look at a 5% increase given some of the construction-type pieces, you know, for the first quarter going into the second quarter, that, you know, we usually saw like as much as a 10% or higher on a seasonally-adjusted basis.

Okay. Then I've got a follow-up on the infrastructure, in particular. You know, it looks like versus the same time a year's, you know, margin was down, but when you compare it to the fourth quarter, you know, that business had virtually exactly the same revenues as the fourth quarter and the operating income is sharply higher.

So, what was the big change that is going on in -- and should we look at using this first quarter as sort of the -- the point to build off of and as you get leverage, presumably in the second and third quarter as we get the seasonal strength, do margins improve further off of this first quarter level? Or are we always looking at sort of the year-over-year comps?

This is the beginning of the future, Mark. The first quarter reflects the basis from which we go forward. Let me give you like a snapshot of what the ups and downs were. Included in the first quarter were clear improvements in productivity within Bobcat as well as in Club Car. Offset were some real operating challenges we had in road, specifically as was included in our announcement is that we did have a work stoppage and so we actually had all the costs of moving production of the pavers, which is the Blaw-Knox line, that's now being made in Pennsylvania instead of Illinois like it was before. So, that actually had a pretty good drag, a pretty large drag on the earnings ratios themselves. We saw some improvement in our operations in the drill and we are starting to do better in the portable power.

So, all in, I said three pluses with one minus and as we look at the second quarter and the third and fourth going forward, I think you should be looking at continued improvement in the margin line as we go forward.

Great, that's good to hear. Thank you.

We go next to David Rasso with Smith Barney.

Yes, hi, question on climate control. A key to your earnings leverage is Thermo King. Obviously Hussmann's dragging it down here a bit, given the volumes we're getting in Thermo King and given how high the incremental margins historically are at Thermo King, where is Hussmann profitability now? I know seasonally it's always lower in the first half of the year, but pulling out the anti-dumping credit in the second half of the year, you need more earnings than you did in the first. Hussmann would normally give that to you naturally.

How much can Hussmann drag down, appear that we might now get a few quarters in a row of Thermo King giving us nice growth.

I guess the way I would describe it to you, David, is when I look at the profitability, Hussmann at this point in time is near all in at relatively a break-even type of a proposition. Our improvements going into the second half of the year as we go through the lean branch as well as the normal seasonal improvements, we expect the profitability to increase traditionally as we have had in the past and we're talking about margin points moving well in excess of 5 to 8%.

And given we just got our first quarter without a restructuring charge in a couple of years now and you just hinted at -- that the problems at Hussmann are not going unnoticed at headquarters, is there any restructuring activity coming at Hussmann?

That actually is already ongoing. What we see is the number of cases is off significantly and we actually have continued to adjust our manufacturing footprint, we have announced a significant reduction in scope of operations and our Chino plant out in California.

And in the refocus into our Bridgeton and Monterey type facilities. So, we continue to work the case goods, when I look at where we were from the peak period, are off up to 30 or 40%.

So, that will be within the P&L?

That's all included in the numbers I have described to you, David, that's right.

One last quick one, on the branches, the fixing of the branches, over the last year you've, you know, bought some distributors at Hussmann. Your air compressor business is increasingly taking ownership of our distributors different than the way atlas would do it or Gardner Denver would do it. Trying to understand the employment of capital here. I understand the cost opportunity you described, can you just -- can you let us know where your head is on on owning distribution in pursuit of getting the cost out, obviously that has a return on capital issues.

We're really not guy buying into distribution. What we have on a worldwide basis, David, right now is approximately 50 air centers. These are thousand, 1500-square foot leased operations focusing strictly on providing parts and service to the installed customer group. We're not going in and displacing distributors, we are going in only where distributors do not effectively service parts and then we wind up going. So, the actual cost at this point in time ranges from several-thousand dollars a month of leasing the facility and then a few employees so the total cost per location is very, very, very low.

So, you're purchasing is focused on service parts centers, not really selling hardware, per se.

That's correct. We have not picked up any distributors whatsoever. This is strictly, we go in, we try to work with the local distributor, who is actually selling the whole goods and encouraging to do the parts and service. If they are not willing to do that and the math works out properly, we wind up then setting up a capability. Sometimes we're looking at doing it with the infrastructure store being basically the room that we borrow or we wind up trying to go and leverage it into an existing Hussmann branch so we don't create extra lease costs, but it is minimal cost going in.

Thank you very much.

Sure.

We go next to Steven with Morgan Stanley.

Hello, this is Courtney Cook stepping in for Steve. I wanted to get more details on the pension outlook and the year-over-year comps, especially now without turning to business and how that ramps up throughout the year.

In terms of expense, Courtney?

Yeah, just year-over-year comps?

We expect to spend $75 million a year more on pension expense in 2003 versus 2002.

And you expect that to be spread evenly throughout the year?

It should be spread evenly throughout the year, yes.

Okay. Thanks.

Sure.

We go next to Andy Casey with Prudential Securities.

Good morning.

Good morning, Andy.

Just a question on the Hussmann unit with respect to the recurring revenue. Was there any deterioration in the 3300-base at year-end that if you accounted for it would make the one-two growth higher?

No. What we had was really a seasonal issue of where, in January and the first actually six weeks of the quarter, we had a very, very slow service period which meant we had fixed costs because we didn't lay any technicians off and we had relatively slow pull-through as some of the supermarkets really cut back and were watching their cash flow.

And so really it was more of them postponing the activity level so the number of stores we serviced was the same, but the number of calls we received was down significantly.

Okay. And you expect that trend to turn around by, you know, the -- the peak season in the second half so that you can start attacking the capacity utilization and improve the service margins?

Yes, I believe as we saw in many of our other businesses, what you really have is that you need to keep the ice cream frozen and so they're going to have to go in to do the maintenance work. It will be a catch-up. This is the same phenomenon we saw last year that was happening with Thermo King trailer activity. There were very uncertain times for some of the distribution companies. So, we really expected this to be a "first quarter phenomenon" that will pick up again in the second or third quarters.

Thanks a lot.

We go next to John Inch with Merrill Lynch.

Hussmann branches, Herb, you said operating profit margins, 0 to 10% and this lean branch initiative targeting 75 to $100 million. What's the timing of the 75 to $100 million? How do you see that playing out? And where do you think -- I mean where ultimately do the Hussmann branch settle?

15%, 12 months.

Okay. For the second part of the question is on Bobcat. You mentioned 3% growth yet you're targeting $100 million from new cost initiatives which --

No, from new product introductions, I said, John.

I'm sorry. Are you anticipating or does that imply that Bobcat sees a real ramp in its top line in the second half of the year?

No, actually what I'm suggesting -- well, I will give you some specifics, where we talked about the first quarter being up 3, like 3.5%, I see that significantly improving in the third and fourth quarter, more than double to triple that run rate.

Great. And then just lastly on the pension charge, you said you took a $57 million FAS 87 charge. Do you anticipate more of these as the year progresses?

No, we don't. That was a -- that was a charge to the comprehensive income it was just brought about because of the remeasurement required because of the impact of the divestiture engineered solutions.

That's what I thought. Okay. Thanks, guys.

We have a number of employees that participate in that plan that went with the sale and removing them made us remeasure as of the effect of that date. Incidentally, we adjusted assets to the then market values. We also, at that point, reduced our overall discount rate to 6.5%.

Great, thank you.

What it reflects, John, basically going from -- I think the market was 8800, 8900 down to the level it is now, at about a 6.75 to a 6.5 change in the discount rate. That's what drove it.

Right. Okay. Thank you.

We go next to Gary McManus with JP Morgan.

Good morning.

Hi, Gary.

Going back to the discontinued operations, you said there is legacy costs from previously discounted businesses; that pension and healthcare costs for IDP?

That's part of it. We have a very large facility down in Phillipsburg, that's a legacy cost, okay, it's a 100-year-old fact reach a couple hundred acres, we're in the process of maintaining it and dealing with the environmental stuff in there. It includes those costs.

And it was --

Excuse me, there is also product liability in there.

Yeah, and you're retaining the pension assets and liabilities for Torrington. Looking at the number in the future, will it include that as well?

It will include the ongoing costs for all of our discontinued operations. So, there are some continuing costs for pension and retiree medical.

When I get to the 10 cents you expect for this year, can I assume, you know, you still expect the $50 million, which, you know that,, on an after-tax basis, I think that's 17 cents a share. You got 4 cents of income from the Torrington business during the time you owned it? Is that right? Or was it a little more than that?

About right.

So, you got about 11 cents of legacy costs embedded in the -- in the forecast.

Your model is very correct.

And what was it last year, those legacy costs? Because you sold IDP a few years ago. I mean is this something that's ongoing in '04 and beyond?

Yeah, it is and last year it was, you know, 25 -- 20, $25 million, however, that was not included in discontinued operations. That was reported in other income expense.

Okay, so it was part of the "continuing." So, you know, I guess I'm -- you guys I guess one-time provides restated numbers after the Torrington deal was done. It looks like the income statement is a little bit different than what you provided today.

Right.

So, what's going on there?

Well, we've reclassed those things according to changes in GAAP requirements. We've reclassed them from other income expense into discontinued operations. So, we restated 2002 to be consistent with the way we're reporting going forward.

Okay. And so when I see your second quarter outlook of 74 to 79 from continuing and 4 cents from discontinued, what is the year-ago comparisons?

Year-ago comparison in Q2 was -- was 10 cents, but that -- but that's 10 cents income reflecting, of course, the earnings of engineered solutions.

I'm sorry, I'm talking about your bottom -- your second quarter forecast is -- is 70 to 75 cents plus, you know, there is negative 4 cents from discontinued. What's the year-ago numbers that would be comparable to that?

63 cents, I believe, would be comparable.

From continuing?

Yes.

Okay. And then -- and then who -- there would be discontinued in there, too, or no?

4 cents.

All right. Thanks.

We go next to Barry Banister with Legg Mason.

Hello, how are you?

Hi, Barry.

A couple of questions, the energy systems division, would you recap the losses in '02, the '03 and '04 expectations? And secondly, on Hussmann, would you break out the operating loss or profit margin OE versus all the required service companies that skew the comparisons for us, please, thanks.

Let me do part of number one, relative to the energy solutions. Last year we spent approximately $35 million on all of the developments for both the 70 as well as the 250 and getting into. [ INDISCERNIBLE ] And so on. And this year we expect to spend about an incremental 20. Next year I expect to make profits as we wind up now incrementing -- as I reported, we're starting to take off on the units as they get into environmental and although the spark spread is upside-down in many parts of our country, when we go and use this as a very efficient system and using it for laundries, we're starting to see significant ramp-up in activity. I expect this to be a positive contributor next year and I think during the second and third quarter conference calls, I will be able to give you a better insight into how big the up sight looks like. The second part of the question that --

Is that okay on the energy side, then? You said incremental 20, you mean minus 55 this year --

I'm sorry, incremental meaning out-of-pocket additional cost of $20 million to be spent this year. Cumulative between the two, we're talking about the 50-some odd million. Overall going back a couple of years, we're probably at this point in time somewhere around $75 million, that's our total invested activities.

Great. And just Hussmann OE versus after-market OPM?

When I look at the -- I'm going have to give it to you on the gross margin side of stuff. When we look at the display case business, that's something that runs between 30 and 40% based on who the customer is, whether it's a basic product or whether it's a design specifically for them unique-type item. When we got into the service business, including installation, that's where we had some problems, that's where I said we were running on average in the mid-single digits on the profitability.

Okay. And then just lastly, when I look at this IRI, it's going to to have a 12 1/2 rate, I presume that applies to the international sales. Correct me if I'm wrong. And would you discuss the at-risk Bermuda tax reduction related to the cross-border debt with Bermuda, the borrowings of the corporate versus the holding company, and what portion is at risk and how much this would offset if anything were to transpire in that front?

IRI being located in Ireland and being the trading company, you're right, that's in the flow through there there with a tax rate of 12.5%. That's part of our tax strategies going forward. Relative to Bermuda, what we have today is a zero at risk. I don't know if there's going to be some legislation change tomorrow, but from where we stand as of this point in time, we are not forecasting any kind of a impact going forward.

Okay. Thanks a lot.

I'd like to correct a statement I made a second ago, the Q2 of 2002, 63 cents, included discontinued operations. So, out of continuing operations it was 53 cents.

Next we go to Michael Reagan with Credit Suisse First Boston.

Thanks, Tim, since you brought it up, I'm still a little unclear on the way you're presenting guidance and continuing and discontinuing. Do you say in answer to Gary's question that this has been mandated by GAAP, that when you have legacy expenses related to businesses that you've sold you have to now break them out as discontinued?

When we sell the entirety of the segment, a reported segment, yes, if we sell, for instance, a piece of a business, it is not required, but when we sell the entirety of it, it is carved out and reclassified into the discontinued operations as required by GAAP.

And going forward in the future, until those legacy issues actually either are at -- dealt with, expire or are fully taken care of, you're going to show both continuing and discontinued?

Yes, as required by GAAP, I expect for quite some time because there are some pension and some other expenses that will last for a good deal of time. It is a many-year consideration.

Okay. And can I also clarify that in your presentation of margins by segment for the '02 comparison, you're actually showing '02 margins including the charges that you took last year as opposed to the way you showed them last year, which was excluding the charges.

That's correct. We have removed the -- the breakout of the -- the restructuring and productivity investments and include only reported for both years. And so what you see in comparable periods have -- have -- have the restructuring expense -- the restructuring productivity expenses included in them.

And why is that?

It's because we are no longer breaking out, again, as required or as the SEC is requiring and reg-G, we do not provide pro forma reporting, it is only GAAP-reported financials.

Okay. Thank you.

Sure.

We go next to Robert McCarthy with Robert W. Baird.

Good morning, gentlemen.

Good morning, Robert.

Can I -- not to be a dead horse, but I'm a little -- I'm also confused by what you had to say, Tim, about last year's June quarter results. As I believe the restated and recast financial statements that you provided previously did, indeed, show 53 cents from continuing and 63 cents for reported earnings per share including discontinued.

That's correct.

Okay, so, if you've reclassified something since you provided those statements, why would the numbers be the same as the numbers you already provided? Or maybe we misunderstood and that was the reclass?

Because we've carved discontinued operations, the results from the Torrington sale, the engineered solutions sale from what was reported last year has now pulled those into discontinued operations.

We already had that, Robert, last time we talked, these are not different numbers.

Okay, all right. I understood you wrong.

We did not rechange it again it was once changed to 53 and 10. That was the number that was there.

Okay, all right. You talked about $75 million of incremental pension expenses but I gather that does not include other post retirement benefits.

That's correct.

And would you mind giving us -- Herb, as I look at the Hussmann business, from what I can tell, the equipment business in the first quarter was down something like an 8 to 10% range compared with prior year. So I have, you know, two questions related to that, one, is that the sort of ongoing comparison that you think you may face for the full year? Because, you know, I wonder as the business gets stronger seasonally, in a way, even though you have apples to apples year-to-year, in a way it can get more difficult simply because you're going to a larger revenue base.

Our forecast right now, Robert, is the fact that I'm looking at full-year revenues for Hussmann to be flat with where we were during 2002, which means I expect the first half to be off by about 4 some odd percent and then the second half to be up about 4%.

On an all-end basis with the service business?

Correct.

And then you made reference earlier to case business being down 30 to 40% --

From the peak, if you go back and look at the numbers that we were producing back in '99 -- That's why I said in the peak -- this is like the Thermo King, if you go back to the peak of the cycle, we're seeing quite a movement peak to peak.

All right, thank you.

Sure.

We go next to Joanne Shatney with Goldman Sachs.

I just wanted to look at -- I'm a little confused, instead of trying to get all the restatements and stuff, we can get that later, can we just talk about why there was -- why there is no profit improvement in -- in air -- in productivity solutions? Is it mix, is it the fact that the service business maybe fell below 20% operating profits? What's going on there that year-over-year we saw declines in profitability?

Well, there are a number of things, I mean currency as we talked about had some impact as it did on most of our businesses.

Make sure what we clear here, Joanne, is what we saw obviously is a full reporting out of all of the currency increases because that's how you state it, you divide by the currency rate. We hedged it, which really clipped the corresponding profitability. That's why we said there was a piece right there, we were basically in at $1, $1.01 versus the $1.07-$1.08 rate it went to. That meant everything you reported through that was generated by increased revenue on the currency side really came through at a very, very low rate compared to the profitability of that. That was piece 1. Tim, you want to do the rest?

Yes, there's always a mix, there is a geographic mix unfavorable. Some product mix across that segment. We did ma I can some investments in new products and so forth in it and we actually incurred in the first quarter of this year 2 or $3 million worth of restructuring charges. All of those things together had an impact -- had a negative impact on the margins, but fundamentally, the business is strong and we anticipate recovery in the second quarter and going forward.

And your specific comment about the after market within the air solutions, witness did, during the quarter, see lower parts offset by more completes going through. So, that did have some of that impact, as well. That's one I would just tell you overall I feel very good about going forward from the basis from which we operate, unlike what I said before about one or two of our other businesses.

Is that still at the 15% profit margin?

It is still at the 20% profit margin.

And the restructuring charges that you talked about, Tim, those fell in this quarter?

Yes.

Yes, they did. Right.

And how much money are you investing in this business, I guess not just for this quarter, but maybe for the year?

I don't think there is any real significant difference in that. I mean our R&D levels, when we look at the pegasus and all the other things, that's a normal run rate, still running 1.718% of sales.

Okay. Just to flip back to Hussmann, the -- the issues around the whole inquiry into food distribution; that having any significant impact on either your customer's business confidence or any other direct or indirect impact on Hussmann?

Yes, I think what we saw, as I mentioned before, is that as a result of that uncertainty we saw a real truncating of activities, especially in the first six weeks of the year. I think that's going to pick up again as they sort out who's in and who's out.

Okay. So, just clarity on who's going to be prosecuted is enough to make you feel better?

Yeah, I guess -- I think it really gets to is the immediate knee jerk reaction, Joanne. Everyone can go and shut the wallet for a couple of weeks, but after that, you do have to go back to running the business and keeping things going or else it's a going out of business approach.

Okay, thanks.

We go next to Joe with Lehman Brothers.

Hi, guys, how you doing?

Hi, Joe.

Just on Club Car, how long does that contract with GM last? And when do the comparisons there start to get more difficult?

We -- the GM sales to revenues were shipped out basically throughout the second half of last year. It is at this point in time not yet renewed because the activity has a lot to do with what goes on in the states of California and in New York and right now they have not placed orders for ongoing, so, included in our forecast, are no subsequent transactions.

They're treated for revenue purposes as -- as operating leases so we recognized the revenue over the -- over the period of that. They started in the second half of the year and they're 14-month leases. Toward the third and fourth quarter, they will run out.

Okay. And ex that GM piece, the underlying business is still running down, what, 20% or something?

No, no, no, Club Car, if you look at the revenues is actually relatively flat compared to where they were a year ago. I think you got us confused with the other guys.

All right. And then also on Schlage, do you have a sense of what's happening behind the scenes? It seems like you're gaining shelf space, but the consumer seems to be pulling back, can you give us the guts of what's going on there, please?

Well, what we're seeing, we have to pull that -- the security and safety business that we were seeing very, very strong growth in the solution side, that's the software as well as our electronics, bio metrics and so are are doing very, very well. We saw in the first quarter, still strength in the traditional mechanical hardware side, but what we are seeing now is at the end of the first quarter and into April is some inventory adjustments being made at some of our big box customers as they're starting to see some same-store sales, you know, slowing down. That's what we include in our forecast as we look at this going forward.

So, we continued to do well on shelf space as you're saying, participating in not only the Home Depot's, Lowe's, Menards and all the others, we continue so to see that growing, but there is an inventory pullback by them at the last probably four, six weeks. But what you're seeing is the hardware side of that business remains very strong.

What we're seeing is the majority of the growth in that segment is coming from the solutions side, which carries margins of 13 to 15%, however, when you start with a 20% base, you see a deterioration.

Okay. And then just sticking on the -- sticking on the hardware side, then, then it sounds like we could be flat to slightly down for the balance of the year, is that fair?

No, I'd say that instead of having 7, 8% growth, you're going to be seeing numbers more like 5 to 6.

Okay. Thank you.

Sure.

As a reminder to our participants, that is star 1 for questions. If your question has answered, remove yourself with the pound 2 on the phone. Again, star 1 for questions. We go next to Karen Ubleheart with GIC.

Could you just clarify something, when you were going over in detail in the orders and you said total orders were up, you know, well, it's on your chart, 1.4%, then went through the detail, they were up more, then you talked about the sluggish orders, is this 1.4 sequential? Then you auk talked about the seasonal pop, which is normal. I got confused on whether we were talking year-over-year or quarter-to-quarter.

Year-over-year.

Okay, so the 1.4 is year-over-year.

Right.

And the second comment is the sequential seasonality will be there, but it will be more muted than normal.

Correct.

Okay. Okay. Thank you. I just wanted to clarify that.

Right.

Thank you.

Next to Gene Barron with Capital International.

Hey. I just want to understand what's going on at corporate in terms of corporate expense. When you did the restatement, you know, we moved some numbers around and, you know, corporate has some costs because you divested a business, but if I remember and looking back at my notes from prior conference calls, that amount -- maybe you can talk to that amount, No. 1, and No 2.,I think when you net the amount out you still have a dramatic it looks like an explosion in corporate costs here. You are way above where anywhere else is so there has to be an accounting anomaly or something going on that I don't understand.

Gene, I'm not sure where you're pulling numbers. The unallocated corporate expense is $26 million, virtually identical to where it was last year.

Well, last year included a bunch of "special items." So, if I compare apples to apples, the number that I have for corporate last year is 21 and that's up from -- we originally reported it at 16.7.

We had -- we had about $5 million of restructuring in 2002 and what we have absorbed is an additional $5 million related to the divestiture that wasn't pushed back this year.

That takes me from 16.7 as it was originally reported last year, that's how you originally reported. And if I add $5 million for Torrington stranded costs on the $21 million, you just reported 27.

We have a -- we have -- I need to go back to last year's -- can we take that offline, I'm not -- I'm not connecting with the --

I've been asking this question for four months and I'm still not getting an answer, so, I mean... Yeah, I guess we can take it offline since it seems to be so confusing. Can you explain what these legacy issues are and for what businesses were sold that are going to drive this ongoing discontinued operations charge --

Well, we mentioned that the Ingersoll dresser pump business we sold a couple of years ago has security charges and ongoing pension and retiree medical charges that we have -- that we have retained and on a going-forward basis, as we also mentioned, the Torrington business, we have retained liabilities on a going-forward business.

How much will they be? How long will they persist?

There -- what are they, 13 -- we expect it to be about $13 million a year on a going-forward basis.

After tax?

For -- for Torrington and about $27 million for IDP.

Is that after tax, Tim?

No, it's not. It's before tax.

No after tax?

After tax, total is about 15.

Gene, I can't give you the detailed quantitative, but have the detailed qualitative, if you go Woodcliff Lake, there are more empty chairs that there were a year ago. If you look at the out-of-pocket expenses, whether it has to do with corporate aircraft or the other categories, you will find that they're off. What we owe you and we will get to you, okay, is what's included in these numbers that weren't there last year to increase -- cause this kind of an increase.

What I said is I like to go record saying that our actual year-over-year operating costs for the center are down from where they were a year ago and I will let Tim and Joe we'll be right back to you as to what it is that's now in the bucket that makes the number look that much larger. As an absolute out-of-pocket cost, we are operating at less than what we were a year ago.

And in terms of the discontinued operations, $40 million pretax and how much after tax?

$26 million after tax.

$26 million after tax in total. For how long?

Quite some time. I mean many years.

And are they subject to revision based on, you know, actuarial adjustments or is it a certain cost here?

Most of it is pretty certain. There could be some actuarial costs but that would be a different number.

The cost is selling it off, $3 million a year to operate. It is a couple of hundred acres when trying to sell it off and clean it up and so on. That's the biggest, I think, change you will see over the next 12 to 18 months.

Wasn't that formerly included someplace else on the P&L before?

It was in other income and expense.

Not in corporate. It was below operating income. Okay. Okay, guys, sometimes it's hard to follow all these things that go on in your financials. You have to bear with me I need a little remedial assistance. So, thanks for helping.

We will get with you and straighten out your question on corporate.

We're coming down to the end here. We will take two more questions, please.

Our next question is from a follow-up from David Bluestein with UBS.

Good afternoon, now. I just want to are sure I have the interest expense straight. First quarter was $50 million, but you should get an incremental $5 million of interest savings for having the 700 for the whole quarter next quarter?

Correct.

And on the pension you reduced the discount rate, did you touch the rate of return assumption?

No, we did not.

. That that's it, thank you very much. Got it.

We will take our final question from John Inch with Merrill Lynch.

Yeah, just, Herb, during your opening remarks, you mentioned that Ingersoll-Rand doesn't need to do another platform. I wonder if you could comment on your personal desire to actually build another platform, sort of beyond the present economic situation?

I think that what we have at this time, John, is enough product line extension, enough recurring revenue and global opportunities to go forward to do those effectively, I think we'll get us to our targeted growth rates and that is in the 6-plus percent type level. I think that I do not need that, frankly do not want to. I think we can really return our ROIC by focusing on that activity level rather than putting out another large acquisition now.

Strategically, you're happy with the portfolio, other than maybe a couple of businesses?

Yes, as -- I think we have now identified the opportunities to grow them, save a couple of expressions I've said for the last three some odd years. I think we will continue to go with where we are.

Great, thank you.

Thank you.

Okay, we're going to wrap up now. Thanks for joining us. There will be an instant replay available today at 3:00 p.m.. It will be available until April 24th. The call-in number is 719-457-0820. The passcode is 404724. The audio and slides from today's conference call will be archived on our website. And the transcript from the conference call will be available on the Ingersoll-Rand website probably late next week.

Please call me, again, Joe Fimbianti, if you have any additional questions. I'm at 201-573-3113. I hope everyone has a very happy and safe holiday weekend. Thank you.

Again, that does include the Ingersoll-Rand first quarter 2003 results conference call. At this time, you may disconnect.