特靈科技 (TT) 2003 Q3 法說會逐字稿

Good day, everyone. And welcome to the Ingersoll-Rand third quarter 2003 earnings conference call. Today's conference is being recorded. With us from the company is the chairman, president, and chief executive officer, Mr. Herb Henkel, the chief financial officer, Mr. Tim McLevish, and Mr. Joseph Fimbianti, the director of investor relations. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Fimbianti. Please go ahead.

Good morning. This is Joe Fimbianti. I'm director of investor relations for Ingersoll-Rand. Welcome to our third quarter 2003 conference call. We released earnings at 7:00 a.m. this morning. The release is posted on our website. I would like to cover some housekeeping items, as usual, before we begin. This morning, concurrent with our normal phone and conference call, we will be broadcasting the call through our public website. There you will also find the slides for the presentation for this call. To 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 the presentation will be archived on our website, and will be available sometime this afternoon.

Now, please go to slide number 2. Before we begin, I would like to remind everyone that there will be forward-looking discussion this morning, which is covered by our safe-harbor statement. Please refer to our June 30, 2003 form 10Q for details on the factors that may influence the results. I would like to introduce the participants of this morning's call. We have Herb Henkel, chairman, president and CEO of Ingersoll-Rand, Tim McLevish, our Senior Vice President and Chief Financial Officer, and Rich Randall, Vice President and controller. We will start with a formal presentation by Herb Henkel and Tim McLevish, followed by a question and answer period. Herb Henkel will start with an overview. Now, if you would please go to he slide number 3.

Thank you, Joe. And good morning, everyone. Welcome to our third quarter 2003 conference call. This morning, we reported Net earnings of 88 cents per share which includes both continuing, as well as discontinued operations. Our total earnings increased 73%, compared to the third quarter of 2003. And earnings from continuing operations almost doubled. Our EPS from continuing operations was 88 cents per share, which is well above the upper end of the 74 to 79 percent range we provided during our second quarter conference call in July. Our ongoing legacy costs for discontinued operations were $9.5 million during the quarter. We realized a $10.8 million gain from the sale of two of our small nonstrategic businesses, WaterJet, a cutting equipment manufacturer, and Laidlaw, a distribution business that's based in the United Kingdom. Both businesses had annual revenues of approximately $30 million. Now please go to slide number 4.

The tone of business and our overall activity level for the quarter improved compared to last year and was roughly comparable to the second quarter of this year. However, I still believe it's a little bit early to declare that, quote, the recovery is here. And then market demand in some of our key industrial construction and end markets remain sluggish. When I spoke to you in our second quarter conference call, I reported that we were able to outgrow our endmarket(ph) and to gain market share through product innovation and the expansion of our recurring revenue stream. That pattern of success continued through the third quarter as we saw clear indicators that the value of proposition we present is truly resonating with our customers. We saw a continued momentum build in our revenue growth from the second quarter and our earnings were driven by strong revenue increases and improved operating margins, which reached 9.8% during the quarter.

Third quarter revenue growth was approximately 14%, of which 8% was organic, 3% was attributed to foreign exchange, and 3% was the result of additional buyout revenues at Dresser-Rand. Our organic growth number of 8% is also an improvement on the 6% organic growth result we recorded in the second quarter of this year. All four of our business sectors experienced growth during the quarter, compared to third quarter of last year. Specifically, we achieved 19% growth at Bobcat, 12% at Thermo King, 10% at air solutions, and 35% at Dresser-Rand, excluding their buyout components. And looking at our overall third quarter results all the key metrics by which we measure ourselves indicate that we are continuing to make progress in executing our strategy and that, clearly, our strategy is working. Now, please go to slide number 5.

Now I would like to update you on our successes for the third quarter by taking you through the three components of our IR vision statement. The drive shareholder value through dramatic growth, operational excellence and dual citizenship. Now, please go to slide number 6. First, focusing on dramatic growth. Despite the persistence of some uncertain market conditions, we achieved strong revenue growth. As we discussed with you previously, our growth strategy is built around developing and delivering innovative products and solutions, growing our stream of recurring revenue, and leveraging bolt-on(ph) acquisitions. Now, please go to slide number 7.

I would now like to tell you about some of our emerging innovation successes. Our investments in new products and technologies has been one of the prime reasons that we've continued to increase revenues, in spite of some difficult end market conditions. During the third quarter we saw increased customer acceptance of our new products, as these new solutions were tested in day-to-day operations and our customers realized the benefits of these solutions. For example, on our last call I spoke to you about Hamburg Suit, a major marine transport company that have purchased 2500 of our climate control sector's Therma King Magnum refrigeration units, because of their efficiency and the capability to hold temperatures at 30 degrees below 0 Fahrenheit. During the third quarter this customer, Hamburg Suit purchased an additional 1,000 magnum units, as they looked to leverage our innovative low temperature capability to pursue marketshare, and premium shipping rates in a highly competitive seafood trade. And the performance of the magnum hasn't gone unnoticed by the rest of the international transportation industry. Another one of the leading international carriers, Orient Overseas Container Line Limited; they purchased 800 magnum units during the quarter, which is a great indicator of the industry's view of magnum as a competitive differentiator. This is an excellent example of the Ingersoll-Rand enterprise delivering innovative solutions that provide a competitive advantage for our customers, solutions that shift our customers' business landscapes to help them achieve increased revenues and increased profits. Now, please go to slide number 8.

We also saw increased customer industry acceptance in our infrastructure sector during the quarter, as Bobcat's new product sales continued to drive strong revenue and market share result, despite constrained overall end market activity. Our investments in innovation are clearly paying off at Bobcat. All all-wheel steer skid loader and our track loader, both none traditional skid steer products, have created their own place in the market as customers recognize the benefits of these innovative products, and increasingly choose them for contract equipment needs. Additionally, the tool cut continued to deliver strong retail sales during the quarter, and is fueling our push towards a full year goal of $100 million in revenue from Bobcat's new product sales. The tool cat strong customer acceptance has also been complimented by positive accolades from trade publications and industry experts. Diesel progress recently named tool cat the off highway vehicle of the year, lauding tool cat as the most innovative product that the magazine has seen in the last 12 months. By the way, this is the second year in a row that Bobcat has captured the off highway award for diesel progress. Last year the Bobcat A 220 the industry's first all wheel steer skid loader won that award. Over the next several years we will continue to execute an aggressive schedule for new product introductions at Bobcat. Please go to slide number 9.

In our industrial solutions sector, our innovative Nirvana air compressor reaped the benefits of continued and growing customer and industry acceptance during the quarter, while our productivity solutions business launched an innovative new product that's driving very strong revenue and profit gains. Despite the depressed level of industrial production in many key North American and European markets, we have continued to grow our air solution business. Third quarter orders improved by more than 14%, following similar 1st and 2nd quarter sales growth results. We shipped more than 800 Nirvana 1 and Nirvana 2 units during the quarter, as Nirvana line continues to create demand because of its recognition as a customer solution that delivers bottom line results. Now, please go to slide number 10.

In our productivity solutions business we strengthened our market leading position and composite impact tools by introducing the first titanium pneumatic impact wrench on the market. Our innovative new half inch and three eighth inch tools are the lightest and most powerful impact wrenches available. Through the third quarter, our titanium impact program has posted a sales increase of 32% in the air tool category, compared to the same period in 2002. Now, please go to slide number 11.

During the third quarter, we also continued to deliver on our goal of growing our stream of recurring revenue. Our large installed base and powerful market leading brands provide us with significant opportunity to span revenue and profitability. Recurring revenues totaled a record $664 million for the third quarter, an increase of approximately 16% compared to the third quarter of 2002, and a 22% increase compared to the third quarter of 2001. Recurring revenues now account for 26% of our total revenues for the quarter. Hussmann and air solutions have been our major focus for recurring revenue expansion and both made solid gains in the quarter. Please go to slide 12. Our Hussmann service offerings to supermarkets and convenience stores also expanded during the quarter, adding over 500 locations. We now service more than 4900 locations for several major retail chains. Total parts, service, and installation revenue increased by 19%, compared to the third quarter of last year and comprised 34% of total sales. Please go to slide number 13.

In air solutions, we achieved a recurring revenue increase of 10% during the quarter. This accounted for over 48% of the total revenue for the air solutions business. We've booked over 11,750 air care contracts, an increase of 39% compared to year end 2002. And our total contract growth is on target to exceed 13,000 by the end of this year, which would be a 50% increase compared to the end of last year. Additionally, this service business maintained its operating margins at over 20%, while requiring no incremental investment. Now, please go to slide number 14. From a bolt-on acquisition standpoint during the third quarter we acquired stock of integrated access systems including its Geoffrey(ph) industries division. IAS provide specialty security systems integration solutions, serving as the single source for integrating facilities access control technologies, closed circuit television and alarm monitoring systems. IAS has eight offices throughout the United States and had revenues of approximately $27 million in 2002. IAS has been integrated into our electronic technologies corporation business which we acquired in the second quarter of 2002. Geoffrey industries has been integrated into Interflex Business Unit, an acquisition we made several years ago. This acquisition will enhance our ability to provide customers with the complete solution for managing openings, people, and assets. Now, please go to slide number 15.

Now focusing on operational excellence. During the quarter, we continued to benefit from cost reductions associated with our restructuring and our productivity investments and we are on target to deliver on our goal of realizing a full year EPS benefit of 25 cents from restructuring activities. We maintained our focus on managing the things we can control. Managing costs and inventories, improving our working capital turns, and maintaining high levels of customer service. Please go to slide number 16.

During the quarter, we continued to use the principles of lean manufacturing as the framework for our lean branch process improvement initiative within our Hussmann branch operations. The goal of lean branch is to implement lean processes to establish best bench branch practices, which will then be applied throughout the company. This initiative is focused on three critical areas. Back office consolidation, technician productivity, and parts sourcing (ph). We've also further (ph) our effort to better leverage our Thermo King parts purchasing and distribution infrastructure, to benefit optimum service operation. Currently, we are sourcing approx. 30% of our Hussmann repair parts through Thermo King. We expect this number to continue to increase through the fourth quarter of this year. From a results standpoint we are pleased with the success of lean branch on the year to date basis. Our Hussmann branch operating revenues have increased 14% year over year, and our operating earnings (ph) have improved by 45%. We expect these results to continue to improve as our implementation of this initiative progresses. Our target remains to reach a 15% operating margin during 2004. Now, please go to slide number 17.

Also from an operational excellence standpoint, specifically regarding our ability to leverage process excellence in our key customer relationships, our security and safety Schlage business was recently named supplier of the year by Lowe's home improvement warehouse, the world's second largest home improvement retailer. Schlage was selected from approximately 25,000 Lowe's vendors for the honor, which recognizes Schlage's product innovation, merchandising, on time delivers and superior quality. To quote Lowe's announcement on the award, Schlage is a true leader in the hardware category and we are pleased to name them best of the best. Schlage was also recently voted number one by professional builders, professional remodellers, and architects, as the most preferred and most used lock brand. This type of recognition by a large customer like Lowe's and by the end users of our products are realtime, real world indicators of the success of our enterprise commitment to be recognized as a proven source of proven solutions. Now, please go to slide number 18.

Now focusing on dual citizenship. We continue to see the incremental growth and operational excellence benefits of the enterprise strategic initiatives we launched last year. We have two great examples to tell you about. First, I will update you on the progress of our retail solutions initiative. Last year our retail sales totaled approximately $32 million. This year we already achieved more than $65 million and are on target to achieve our full year goal of 85 to $90 million of incremental revenue from retail solutions. Please go to slide number 19.

I also want to provide an update on our IR works and IR supplier solution initiatives. Following their launch last year IR works, which focuses on enterprise wide cross-selling opportunities, and IR supplier solutions, which target sales to our key suppliers had combined total sales of about $6.2 million. This year, through the third quarter, these two initiatives have already achieved total sales of approximately $28 million and are on target for a full year goal of $40 million. This success is significant for 3 major reasons: First, the rate of revenue growth is very favorable. Second, like IR retail solutions, both of these businesses require very little investment and have very low overhead. So the result is very high profitable incremental growth. And third, the success of initiatives like IR works and IR supplier solutions are terrific positive indicators of our effectiveness in transforming our culture and the way our sales force goes to market. All around the globe, sales managers from IR's diverse businesses are meeting and working together to generate quality cross selling sales leads, and converting them to sales win. This is very encouraging as we look forward. Now, please go to slide number 20.

Overall, this was another very successful quarter for our company. We were able to meet or exceed our targets and we believe that our results clearly demonstrate that our investments in innovation, as well as the operational improvements that we continue to make, are building a stronger enterprise that's able to perform well in all market conditions. By continuing to execute our strategy, we expect to maintain our track record for strong cash generation, and to continue using our free cash flow to fund further profitable growth and innovation. Tim McLevish will now cover IR's business unit performance in more detail.

Thank you Herb. And good morning. I would like to begin my discussion with the quarterly financial results. We continue to report the results of divested businesses, including engineered solutions as part of discontinued operations net of applicable taxes. We have restated 2002 to be on a comparable basis. Please turn to slide 21.

Reported revenues for the third quarter were up 14% to $2.5 billion. The increase is largely attributable to double digit growth at our Thermo King, Bobcat, air solutions and Dresser-Rand business units. Organic revenues, excluding the impact of the Dresser-Rand buyouts, and the favorable impact of currency, totaling approx. 6%, were up about 8% compared to last year's third quarter. Operating income for the third quarter was $224.3 million or 8.9% of revenues. Margins have increased by over 2 percentage points compared to last year's third quarter. These strong operating results are being driven by revenue growth and cost control. I would like to take a moment to discuss year-over-year costs that are included in our quarterly results. Our third quarter 2003 includes approximately $22 million of increased pension and medical costs. $11.9 million of costs associated with the appreciation of previously awarded stock based compensation, and $11.9 million in productivity investments. Prior year results include $14.6 million in restructuring and productivity investments. Moving down the income statement. Interest expense was $42.4 million, compared to $58.7 million in last year's third quarter. Approximately $10 million is a reduction in interest expense. It is directly related to the retirement of 700 million of debt from the proceeds of the engineered solutions divestiture. The balance of year-over-year improvement is related to additional debt reduction and lower interest rates. Other expense for the quarter was $3.7 million compared to 0 expense in last year's third quarter. This year's expense was reduced by $3.8 million of said adjustments (ph) attributable to prior periods between 1999 and 2003. The increase is largely attributable to the favorable impact of insurance claim proceeds recorded in the prior year and year-over-year changes in currency.

Our third quarter effective tax rate was 14% compared to 13.1% in prior year. We continue to expect our effective tax rate to be approximately 14% for the full year. Debt earnings from continuing operations for the third quarter were $153.3 million or 88 cents per share, which significantly exceeded our original third quarter guidance of 70 to 75 cents. Discontinued operations, which includes the legacy cost of engineered solutions and other previously divested businesses reflected an after tax loss of $9.5 million or 6 cents per share in the third quarter. Also included was a net gain on the sale of the water jet and Laidlaw businesses of $10.8 million, or 6 cents per share. Our total net earnings for the quarter were $154.6 million or 88 cents per share compared to $89.3 million or 53 cents in last year's third quarter. Please turn to slide 22. Our 14% revenue growth which included 3% favorable currency show increases in all geographic regions. North America revenues were up about 9% and constitute approx. 65% of total revenues. The European served area revenue growth, after removing the favorable impact of Dresser-Rand buyouts, was 27% compared to last year. Approximately half of that amount was the impact of currency. Asia Pacific was up 1% and Latin America was up approximately 3% versus 2002. I would now like to take a few minutes to talk about the results of our segments. Please turn to slide 23.

The climate control segment which includes Hussmann and Thermo King reported third quarter revenues of $684 million an increase of about 7%, or 4% excluding currency, compared to last year's third quarter. Operating income for the sector was $67 million, representing an operating margin of 9.8%, which reflects an increase of more than 3 percentage points compared to last year. The operating margin improvement is being driven by Thermo King revenue growth leverage, favorable price movement, and the benefits from our productivity improvement programs. Hussmann revenues for the third quarter were up 2% year-over-year due primarily to the impact of currency. We continue to see depressed spending on refrigerated display cases across many of the major U.S. supermarket chains. As the industry continues to experience turbulence and financial uncertainty. This shortfall was offset by an increase in recurring revenues, which were up 19% from the prior year. Profit margins from our branch service operations continue to improve due to our lean branch initiative. Thermo King revenues were up 12% or 8% excluding currency, due to strong growth in our worldwide truck, trailer, and bus businesses, as well as continued strength in our aftermarket business. This trend and supporting industry data indicate that the markets for refrigerated transportation are in recovery. Please turn to slide 24.

The air and productivity solutions segment reported third quarter revenues of $348 million representing a 9% increase year-over-year. Air solutions reported 10% of growth revenues, or 6%, excluding currency, driven by new products and services. Recurring revenues were up 10%, and constituted 48% of the total. Productivity solutions revenues increased by 6% over the third quarter of last year. Operating margins for the segment were 7.6% of revenues compared to 3.3% last year. Please note that last year's margin was 6.1% before restructuring charges. Year-over-year improvement was attributable to revenue growth, new product margins and ongoing productivity improvement programs. Please turn to slide 25.

The Dresser-Rand segment reported revenues for the quarter of $379 million, up from $231 million last year, an increase of 61% (ph). Revenues, excluding purchase components (ph) were up 35%, while our recurring revenues were up 31%. Operating income was $5.9 million or 1.6% of revenues, versus last year's operating revenues of $9.1million, or 3.9% of revenues. Included in this year's operating income were a $1.1 million out of period adjustment to correct for accounting errors dating back to 1999. Additionally the results were affected by restructuring costs and the effect of an inventory reduction totaling $11.2 million. Absent the nonrecurring costs we are on track with our profit improvement program. Dresser-Rand backlog was $481 million at the end of the third quarter. Please turn to slide 26.

The infrastructure sector reported third quarter revenues of $692 million, up 11% compared to last year and operating margins of 9.8% of revenues, compared to 7.2% of last year. Bobcat revenues increased 19%, or 15% excluding currency. The increase was attributable to improving North American markets, growth in new products, and improved rental(ph) activity. The IR branded businesses showed 7% increase in revenue, 4% excluding currency, compared to a weaker (ph) quarter last year. Club Car showed flat revenues with market share gains offsetting generally soft markets. Sector operating income improved to $67.7 million or 9.8% of revenues, compared to $44.7 million or 7.2% of revenues last year. The operating income improvements were attributable to revenue growth leverage and the benefits of our productivity improvement programs. Please turn to slide 27.

Security and safety continues to report strong results. The segment reported revenues of $417 million, a 6% improvement compared to last year. Revenue growth was 5%, excluding the impact of currency. Year-over-year growth is largely attributable to solid performance in our mechanical businesses and strong growth of 20% in our worldwide solutions business. Operating margins were 21.2%, compared to 18% last year. The 3 percentage point margin increase reflected the impact of solid north American volumes, favorable product mix, and cost control. Security and safety ended the quarter with a strong backorder. Please turn to slide 28, and let's move on to the balance sheet.

Our working capital management program continued to show progress in the third quarter. Working capital was 8.6% of revenues compared to 10.6% for the comparable period last year. Please turn to slide 29.

At the end of the third quarter, our total debt was $2.4 billion, an improvement of $1billion (ph) over last year. The improvement was largely attributable to repayment of $700 million of debt. In addition our free cash flow was used to further reduce debt levels in the quarter. Our debt to capital ratio for the quarter was 36.3%, compared to the prior year's ratio of 48.1%. During the month of October we terminated our asset securization (ph) program. Re-purchase of approx. $240 million in receivables will be funded by short term borrowing. Inclusive of this change, our debt to capital ratio is expected to be at the low end of our target ratio of 35 to 40 percent by year end. Capital expenditures for third quarter were (?), about the same as last year. We expect to spend $125 million for the full year of 2003. Herb will now conclude our formal remarks with the outlook for the fourth quarter and full year 2003.

Thank you, Tim. Please go to slide 30. As I noted to you earlier, our end market activity continued to show big signs of improvement during the third quarter. Although we remain cautious, our order activity improved during the quarter and we anticipate a gradual improvement in most of our major construction and industrial markets during the remainder of 2003. More specifically, by business, we anticipate that our climate control sector will see fourth quarter activity, similar to the pattern we saw in the third quarter. We expect that supermarket expenditures for display cases from our major customers will remain depressed while the growth of our service revenues as well as increased profits from efficiency gains will help improve our margins. Thermo King is expected to continue its upward growth trajectory with improved sales and operating margin results. While our industrial solutions sector will continue to face slow growing end market in North America and Europe, we expect to continue growing through new product and service revenue gains.

At Dresser-Rand, end markets will remain strong as we close the year. Year-over-year revenue gains at Dresser-Rand will be much below what we achieved during the first three quarters of this year, as they have managed to dampen the swings in their revenues. Their operating margins are expected to be in the range of 8% to 10%, based on restructuring and cost reduction activities. Our infrastructure sector would also see a mixed picture. Bobcat is expected to have a strong fourth quarter, as new product sales accelerate in an improving market. We expect road machinery and portable power to see very modest growth in a difficult North American market, which will be offset by growth in the rest of the world. And Club Car will have its usually seasonally slow fourth quarter. Our security and safety sector should maintain its momentum in the electronics solutions business with double digit-plus growth. Meanwhile, our traditional security hardware business will continue to grow due to modest end market growth and market share gains. Operating margins in the fourth quarter are expected to be in the 18% to 19% range as we accelerate investments in our security solutions business to ensure future growth. In aggregate, we expect organic revenue growth in the fourth quarter to be approximately 4% to 5%. Now please go to slide number 31.

We currently expect EPS for the fourth quarter of 2003 to be in the range of 93 cents to $1.03. This includes 86 cents to 94 cents from continuing operations, and approximately 7 cents to 9 cents of net aftertax earnings per share from discontinued operations. Now please go to slide number 32.

We are updating our full year diluted EPS projection for total operations to be $3.20 to $3.30. Incorporating the gain on the sale of divested businesses of 37 cents per share would bring the range of reported EPS to $3.57 to $3.67 for the full year 2003. Now please go to slide number 33.

Overall, this was a positive quarter. We made strong progress in executing our long range plan. Our results reflect the viability of our strategy, and the ability to deliver strong performance for our investors. From a dramatic growth standpoint, we continue to drive profitable growth by developing and delivering innovative solutions for our customers, and by growing and improving the profitability of our recurring revenue stream. We achieved excellent organic growth results of 8%, which is above the top end of our targeted 4 to 6% range. From an operational excellence focus, we maintained our pursuit of continuous improvement to gain the full benefits of our restructuring and productivity investments, and to achieve permanent reductions in our operating cost structure. Our sectors that are still below the stated goal of 15% operating margins have moved solidly in that direction, and the remaining sector, security and safety, maintains strong margins in excess of 20%. And from a dual citizenship standpoint, we continue to leverage the benefits of power of collaboration, as we maximize the strength of the entire IR enterprise to drive improved results across all of our businesses. We strengthened our balance sheet and now our debt to capital ratio of 36% which is at the lower end of our 35% to 40% target range. Finally, we are on track to reach our full year earnings forecast of $3.20 to $3.30 per share in our free cash flow target of over $400 million. Clearly, I believe we are executing our strategy. Now please go to slide number 34.

This ends our formal remarks. I would like to now open the floor to your questions. Thank you.

Thank you. The question and answer session will be conducted electronically. If you do wish to signal for a question you may do so by pressing star 1 on your touch tone phone at this time. We will come to you in the order that you signal and we will take as many questions as time permits. Once again that is star 1 on your touch tone phone at this time for questions. And at the request of the company, please limit yourself to one question and one problem. Our first question will come from David Raso , Salomon Smith Barney.

Hi, good morning. Ah, a clarification first. The Dresser-Rand fourth quarter margin.

Yes.

Did you say 9 to 10%?

I am sorry I said in the 8 to 10%.

And the security and safety.

I said 18 to 19.

That's helpful. What I am struggling with a little bit on the guidance, Dresser-Rand -- let's say the growth does slow tremendously, only 5% after the tour of growth we have seen. That margin you are implying still gives you a pretty large sequential improvement in profit, somewhat reminiscent of when the business is more seasonal, strong fourth quarter RAND and profits from third. And the way I am running the numbers it looks like Dresser-Rand would give you about $26 million of incremental profit in the fourth versus the third. But what your guidance is implying is ex Dresser-Rand, the third to fourth quarter your core profits drop about 12%. And the security and safety margin comment helped explain some of it. But given the momentum in some of your businesses, I am not sure what you are implying about our end markets or your company's performance in your segments to have core profits down that much sequentially, given you think the macrobackdrop gives you a little more momentum, from 3rd to 4th this year, than it did last year.

Yeah, David, directionally, you are right. Dresser-Rand should have considerable recovery from the third quarter into the fourth. We are not implying that there is weakness in any of our other end markets or other businesses. We pointed out security and safety reduction is a component of that. In part, some of the reduction in security and safety as a result of some of the investments we are making in that business that were anticipated in the third quarter kind of got pushed into the fourth quarter. So, there is some impact from that. Dresser-Rand actually will undertake, or is continuing to do restructuring and productivity investments in that business, that will take some of that upside away that you talked about. We are also seeing a bit heavier medical costs in some of, or all of our businesses that will eat into that a little bit.

Tim, sequentially more medical in the fourth, from third .

It is ramping up a little bit from the third to the fourth quarter. It is a couple million, a few million dollars, perhaps. It is not a massive piece. And the value of the dollar has strengthened since the third quarter. And we will see a few cents of FX impact.

If you strip out Dresser-Rand last year, ex -restructuring; if your ex Dresser-Rand businesses were up 5% in operating profit. It seems dramatic, up 5 to now down 12. But some of those items are helpful.

Some of what you are seeing, David, is we are in some generally improving markets and some of the normal seasonality we would normally except to see from the third quarter to the fourth quarter is kind of being dampened in that kind of uptick.

May I assure you that Hussmann is not getting the sequentially growth it normally gets.

Hussmann, the difficult markets, yes. And they aren't seeing as much normal uptick in the fourth quarter that we otherwise would expect to see.

Okay, Thank you very much.

And we'll take our next question from David Blumestein with UBS. Just a couple of follow-ups. First, is there any financial impact on the repurchase of the $240 million in receivables? No.

No. I mean other than the balance sheet. There is no P&L impact.

Okay, and here is the question. Can you talk to the profitability of the Hussmann aftermarket operations in the current quarter, and how that sequentially changed from Q1 and Q2?

Beginning of the year we were talking about profitability that was running to below 5%. That subsequently improved to whereby the time we now got to the end of the third quarter we were actually running at 8.7%, very close to the 9% level. And we target the fourth quarter to be around 10%.

A final question. Given the improvement in the balance sheet and the cash flow generation, any chance for a share repurchase? Or where should we be expecting you to go next?

Well, I mean we are not prepared to announce a share repurchase at this point. We still have authorization under our previous repurchase authorization. But we need to balance with further debt reduction and our investments we might consider.

Alright, terrific, thanks.

And we will take our next question from Steven Volkmann, with Morgan Stanley.

Good morning.

Hi, Steve.

Just a question on part of the restructuring, I guess that's been done there this year was aimed at getting your costs in the sort of entry level product down to a point where you could start to play in that part of the market where, I guess, you haven't really historically. And some of your competitors still look like they are selling some cases. I am just curious, where you feel you are in that process.

I think that what you saw at the FMI show out at Chicago back in May was a product launch or an enterprise more of a mass produced product rather than the one of a kind that I think Hussmann was more noted for.

I think we are at this point in time introducing those to customers. What we see is that they take a time until they actually wind up being received by the customers. Right now our biggest potential customer for that is obviously Wal-Mart, and there are some significant quotations that are out right now which will be resolved in the next few weeks, and I think then we will see in the fourth quarter and the first quarter of next year the actual implementation of those quote more standard priced products.

Okay, great; and just on the service business on both air solutions and in the refrigeration, you know, margin targets of 15 plus percent normally, at least I think of service business as lower margin overall. Can you just sort of tell us how you get there?

Rather than speculating, let me specifically speak to what we do in air, which has a 50 before reporting which is running together in of 20%. A key part of this is obviously the productivity of the operation. And a very, very important driver for the profitability has to do with the replacement parts. Replacement parts, in general, we find have gross margins; we are about 50 to 60% or higher.

To the degree that you are able to have 20 to 30% of the total revenue actually being parts which have this kind of gross margin, followed up with hopefully five plus hours of billable hours for each technician and you leverage the back room and you get parts coming through a Thermo King operation, we see the combination of all of those takes us frankly quite north of 15%. The parts is the critical piece. If we were not in the parts business, I would not be so robust, if you will, in my enthusiasm for why this aftermarket business is so strong for us.

That makes sense, thanks.

Our next question comes from Gary McManus with J.P. Morgan.

You give a margin expectation for Dresser-Rand, but you know it's hard to predict the revenues there, can you give, kind of, some rough order of magnitude of what kind of revenues you expect from Dresser-Rand in the fourth quarter.

If we are looking at Dresser-Rand, I would say to being flat to up to maybe 2%. So the bandwidth I would give you, Gary, would be like minus 2 to plus 2. Cause you know, we have backlog that we work off. But we also have an awful lot of revamps that actually are booked and billed and processed in the period. That's the band width. It is actually down to -- I guess you would average it out to 0.

Dresser-Rand has a very strong fourth quarter of 2002. So you are dealing off of a strong base.

So, when you say flat, you are talking year-over-year, not sequentially.

That's right.

And you said, I mean, but there are some buyouts in there, so 8 to 10% margin, you don't get any margin on the buyouts, that's impressive. But you also said in answering Dave Raso's question that you are gonna still have some productivity investments in their numbers as well?

That's correct.

But not to the same extent that we saw in the third quarter, the $11 million or so?

That's right.

And just secondly, just following up on Dave Blumestein's question on cash flow priorities, how about acquisition? You have got the balance sheet down to a more normal level. Is it a Hussmann or Thermo King type of acquisition, 1 to $2 billion in size, would you consider it right now?

I would consider it, Gary, only if it had compelling mathematics. And I would say to you is that right now those are hard to see. With difficult market conditions for many companies, expectations for pricing I find for the larger acquisitions frankly reflects the future or maybe what it was in the past rather than what it looks like today. So, I think our near term focus will continue to be more on the IAS, ETC type of bolt-on acquisitions that will probably be below the hundreds of millions of dollar level, and do more of those.

Okay, great. Thanks.

Michael Regan with CSFB.

Thank you. I was wondering if we could just, ah, dig into security a little bit. Really I would say blowout margins in that business for the quarter. And much stronger on a year-over-year basis than we have seen. Was part of it the absence of spending on new products and some of that got shifted into the fourth quarter? Because you already mentioned that's going to bring margins back down into the 18 to 19% range.

Let me go over that. There are really two parts to security and safety. One the Schlage, more mechanical type business where obviously you have the commercial as well as the retail. Commercial continues to be a tough marketplace. But if you look at office construction and so on, those are having tough times. But we continue to see very strong activities in the hospitals and other institutional type buildings. Our retail, through big box, continues to be up slightly as we continue to get market share although total same store sales are not really that robust, i.e. they have not grown that much. But we see our electronics solutions business has grown some 20%. That business has margins which are in the teens; the Schlage business is in the 20s. But when you look at the magnitude of what we were doing, we came up with 21%. We did not cut back on really programs that we are looking at. It just so happens that you will see in the fourth quarter some of the programs that we were looking to kick off happened to hit into the fourth. They could have just as well been in the third. But the customers were not ready to accept that part. So I am expecting to see an increment of $4 or $5 million of expense going into quote start-ups of new products, E-bolts and things of that nature. When we look at that business going forward we continue to see stronger shelf space in retail, continued tough conditions in commercial, that we are offsetting with new products. And then on the electronic access control we are continuing to see double digit growth in that area.

David, last year we had about $5 million worth of productivity restructuring charges in the fourth quarter. On a comparable basis you would be looking at 19.3% last year, versus 21% this quarterer. I'm sorry, Michael.

And our next question comes from Andrew Casey with Prudential.

Good morning.

Hi.

Question on the 8% organic versus the expected 4 to 6. Can you kind of give a sense as to where the surprises occurred versus your initial expectation?

I broke it down for you by sector. Clearly, I was positive going into the quarter on Bobcat, and I was pleasantly surprised on the upside. 15%, excluding currency. That's a pretty robust number considering the economics that were in place. Dresser-Rand, we saw a lot more activity. And candidly, I think this is the key part that the management team there is working on to try to get rid of some of the seasonality we had in the business. And I guess the third real key driver that was a real positive surprise for me had to be on Thermo King. We expected it to come out of its downed area where it was in the past but it increased in every single element around the world. So, I think those were the key drivers that exceeded our expectations.

Okay, thanks. On a follow-up to that, going into the fourth quarter is Thermo King growth on a year-over-year basis hitting harder comparisons or is some of the bulkiness in orders that you may have seen from the large trance ocean shippers kind of abating? Help me with that.

Yeah, I think when you look at where we are for Thermo King full year, we do see that the quarters have been against weaker comparisons last year.

I mean, we were really in the trough in the first quarter. So we were up over 20 some odd percent. And then we wound up now in this quarter we are up like about 12%, and we think the fourth quarter should be somewhere in the 6 to 8% type range. So it is comparisons against harder comps, although I think 6 to 8% growth. Why, I tell you, I would like to have a luck of those in a lot of different places.

Sure. Thanks.

We will go next to JoAnne Shatney with Goldman Sachs.

Good morning.

Hi, JoAnne.

Maybe I had this mistaken, but my impression was that the Ream corporation of Bermuda limits basically isolates a certain amount of dollars of income from taxation and as that net income number, ah, protect income actually grows, so should your tax rate. Can you just help us out with how it is staying at 14%. Is it the structure you set up in Ireland and how do you think about that going forward, as earnings come back with the recovery.

You are right, as the earnings do grow, we would get additional pretax income and it would tend to push the rate up. However, what we are seeing for the third and fourth quarter of this year, we still anticipate it being 14%. And we have given guidance that going forward in the next couple of years we are going to stay under the 20% range. So, you see some flex there in the next couple of years. It very much is dependent on the mix of where the income is. And, we have worked hard to make sure that we are optimizing that rate with our investment in IRI, the Irish subsidiary where we are, we came up with, we are operating out of our Bobcat unit all of the international operations are being pushed through Ireland right now. So that helps with our structure and our rates.

Okay, if you guys could give us more help on the order rates in the previous conference call you guys had talked about how you had blown the doors off. Can you just kind of walk us through what you saw on a month by month basis with September -- I know it seasonally is the strongest month of the quarter, but if you can just walk us through on the growth rates on incoming orders, both in the U.S. and then also in Europe.

I guess the best way to describe it, I am starting to see more of the traditional orders compared to what we had seen before. We saw the first and second month of the quarter being basically what we had planned. And then the third month came out to be exceptionally strong. So we are seeing more -- that's the second quarter in a row now, where we saw that kind of, rather than what we had seen before, where it was stronger, then got weaker. And so the order pattern was in terms of on an F-plan (ph) level, had a very, very strong close in September.

Are you seeing that in Europe, too, Herb.

Yeah. Yeah, across the board. I don't know if we all had bigger vacations, or so, and we got back to work harder but it was across the board. The only one that was contra to that, JoAnne, was in Asia. I think we are still seeing some of the hangover effect still of the S.A.R.S. stuff, because we are obviously involved in a lot of transportation issues there. That's the only place that was different.

Thermo King in Asia was a bit soft and their order is particularly soft in the bus segment in Asia.

The next question comes from Jeff Hammond with McDonald Investments.

Hi, good morning. Could you update us on how the Nirvana introduction is impacting share. You talked about market share gains earlier. Are you holding at a higher level, continuing to gain share, and maybe touch upon the oil free Nirvana introduction. Where does that stand?

The market share where we reported the 8 to 10% improvement last quarter continues to grow as we continue to have success from Nirvana 1 and 2. Oil free is at this point in time in the very, very near future introduction, which we are very positive on, having similar types of potential upside market impact.

Okay, now, a quick clarification on the security and safety investments, you had said 4 to 5 million of investments in the fourth quarter. Does that carry over on a quarterly basis into 2004?

No. These are one time events that have to do with the introduction of a new program either at key account type activity or a new product type launch. So they are related to a specific event rather than being an ongoing recurring type thing.

Okay thank you.

We will go now to Barry Banister with Legg Mason.

Good morning, still.

Hi there.

Just a question with a related follow-up on free cash flow. ,At what level, Tim, of our debt would you not be able to go below, for fear of losing some of the intercompany borrowing that relates to our Bermuda tax rate?

I think those are -- we -- the intercompany and the external are substantially disconnected. I mean, we are not in any danger at our current levels. And I am not concerned about that, Barry, in our anticipated future.

Okay. And then on the related follow-up concerning free cash flow, your Cap Ex at $125 million seems to be well below the depreciation portion of DNA. And if you would just give me the D, the A, the D & A and also if your sales were, lets just say to increase by a third over the next two to three years, where would you see your Cap Ex going relative to your depreciation rate. I understand it is below now, but we are talking a third more sales in two to three years.

I think the first thing we can start off with is why our levels are at $125 million is, frankly, because of the efficiencies we are able to drive in operations. What we reported is that over the last 12 months we were able to produce 17% more dollar value product on the same square footage going through. I would tell you that as I looked, and we put together a five year plan we just presented to the board a few weeks ago, that brick and mortar with the exception of geographic requirements in order to do business further in a different part of the world, whether it be in Europe or Asia or somewhere, we do not have any, quote, brick and mortar type requirements in our key plan.

So as a result of going forward, the idea of having somewhere around 1.25 to 1.5% of revenue on Cap Ex goes all the way up to and including our doubling the size of the company. Most of the Cap Ex that we are doing has to do with new product introductions, toolings and/or machining (ph) capabilities that are required for those areas. So, that's the macropart. I'll let Tim give you the part on the D and A side, okay?

D and A is a little over $200 million a year, and 80 to 85% of that is depreciation, the remainder amortization.

Thanks a lot guys.

Steve Haggerty with Merrill Lynch.

Just two quick questions. Can you talk a little bit about the different trends you are seeing in infrastructure, the trends that are helping drive the strong results at Bobcat in the current quarter and going forward, and the trends that make you more cautious in the outlook for road machinery and portable power.

Well, let me do the negative, and wind up by the positive. The negative has to do with the T 21 bill and the funding that I would see as a (ph) serious question as states continue to have revenue problems, based on the taxes that are out there. As a result we are concerned about North America. We continue to see real strength in Asia Pacific but that percent obviously is relatively small compared to the North American marketplace. If I move over into the compact equipment side, we really get there is, we have small contractors who are our predominant customer group. And they are very, very busy doing backyard works for you and myself in our homes and do landscape activities around around other types of schools and campuses. So we see in turn, that the small contractor who is now trying to bill at a hundred dollars an hour for the work continues to be a growing customer segment.

Okay, just a quick follow up, in terms of the booking of the gain of sale on the Timken shares. When will that occur, and how will it be booked?

It'll be booked in the 4th quarter. And it'll come as other income. About a $7 million gain.

Thank you.

And our next question comes from Robert McCarthy with Robert W. Baird & Company

Good morning, gentlemen.

Good morning.

Herb, could you clarify first what you were saying about Hussmann margins earlier in response to a question? You mentioned numbers of 8.7 and 10. Is that the service business only?

Yes, we were talking strictly on the service business, right.

Okay, so what kinds of progress are we making, I realize you have got a lot of head wind in the equipment business, but what kind of progress are we making there? Was equipment above 5 in the quarter finally?

Yes, it was. You can actually add 1.8 to that number. We are actually very, very close to 7% in the quarter.

On the equipment business independent of the service piece?

Yes.

Very good. And can you talk a little more about -- I was a little surprised to see the size of the restructuring accrual at Dresser-Rand. You know, coming after a period of, you know, fairly intensive restructuring. What sparks another round, I guess is what I would want to know.

A further reduction of 450 people that are in the indirect and the SG&A area.

Is this something that was contemplated at the beginning of the year? Or is this a midstream, midyear adjustment?

No, this is a, you know, one we wound up knowing that our goal as a management leadership team was to improve the performance of Dresser-Rand we met with their team and put together a game plan very similar, in fact, to what we went through with IR a couple of years ago. And what we laid out was basically an 18 month program with three phases. We are now in the process of going through phase 2. And there is a phase 3 yet to come. So what we tried to do is really look at what it was that was able to lean out their manufacturing facilities. We have now through puts from 18 months down to 6 to 8 months. That can frankly freeze up an awful lot of people that we had beforehand.

So what you are seeing here is a second wave of reducing the overhead structure and also leaning out in the manufacturing process. And I except this to continue through the first quarter of next year. Just like we did in IR, at Dresser-Rand we have a service business, aftermarket business, and we also have a, quote, large capital business. And we are really now focusing on doing both of those.

And the 8 to 10% number from margin you are talking about for fourth quarter, just to be clear, does include the impact of incremental productivity investments.

That's correct. That is an all in number that we report.

Mark Koznarek with Midwest Research.

Good morning.

Hi, Mark.

Just to clarify that last one, on Dresser-Rand you expect to have more restructuring expense in fourth quarter on top of this third quarter expense?

That's correct.

It is about 4 or $5 million is our expectations.

Okay. Great. The question I had was the air and productivity. Which I know it is not all air solutions, but if we just assume that it is, if roughly half the business is service, and that's at 20% margin, how can the total be 7.6% margin? Does that mean the OEM business is losing that degree of money? If so, what is the trajectory for improvement.

Well Mark, remember included also in this sector's results are the numbers for our energy systems investments. So the micro turban that we are continuing to develop those are still showing up at this point in time. We are talking there about total costs for this year are somewhere around $24 million. So those numbers are also included in that entire sector's output.

And you are seeing productivity as well into the mix.

Productivity solutions.

Okay, lets see if we throw that 24 back in, that would -- let's see. Roughly suggests that we would be around 10%. And again, that gets you to around break even for the OEM business. You know, which still doesn't sound great. So is that roughly correct? What should we be expecting for the OEM compressor business going forward?

You have productivity into that mix.

Yeah, air and productivity solution numbers are included in that stuff, mark.

Okay. So maybe I should just ask directly, how is the OEM side of compressors doing and what can you except out of it going forward.

The OEM side is low single digit profitability when you compare all the numbers that are there. Because, when you look at air overall like we describe in the margins it is still an area we need do better in. That's why we needed to introduce Nirvana, which has better margins and get into the oil free solution (ph). That clearly doesn't come up to the same level of performance in the aftermarket which is obviously also why we are driving the aftermarket business there.

Okay, and one final detail there is how much earnings per share came from currency this quarter?

I think it was maybe a couple of pennies. It was about $4 million is the currency impact. Primarily obviously came from Europe with the Euro.

Thanks very much.

And we will take our next question from Ann (?) with Bear Stearns.

Hi, guys.

Good morning, Ann.

Just a couple of follow-up questions. Looking forward to Thermo King, if we look historically, sales of reofficers (ph) have been about 13% of sales of class 8 trucks. Is that still an applicable ratio to use going forward or has anything changed?

I think it is very similar to that. Maybe its 15 or so, Ann, but I think it is in the same level.

When we look into '04 that's a ratio we should be keeping in the back of our mind?

I don't see any anomalies. We are not going to go to 58 footers, so I think the ratio will stay pretty constant there.

As a second follow-up. For your dual citizenship sales, where do the sales get reported and where do the costs get reported.

The sales get reported by the business unit whose products they are and the costs winds up showing up also in those quote business units.

Okay, so there is no additional corporate costs (ph) or allocations because of this?

No. I would say to you we are talking about 4 to 8 people that are actually involved until, quote, pulling together the activity. And their job is to create the introduction of one sales person to the other.

Okay, and then just as a final follow-up on Dresser-Rand. That business seems to be a large source of volatility from quarter to quarter. Is there any bright spot in terms of selling the business?

I think I would focus on the -- our job for 2004 is that we wind up realizing 40% of the profits in the first half and 60% of the profits in the second half as we try to eliminate the volatility. Some of the things that you are seeing are related to the buyout that we have been doing practically for customer convenience so that we would be able to provide an entire package. When we wound up doing those pieces we are now seeing in terms of a much more level flow going forward. Our aftermarket pricing on our buyout quote (ph) changes. I think we are going to improve the profitability and also improve process and the consistency in the quarter to quarter earnings.

Does that make it an easier sell or are you saying you are now considering retaining that business?

Remember I told you our job is to turn this into increasing shareholder value. And, when we looked at the five year plan we still are challenged with the customers that we have and the cycles that this thing goes through. To me, this is one that continues to need work in order to get it to the stated levels of profitability and ROIC. I see improvement, Ann, but I do not yet see the targeted endzone that we were going after. And that means we have two options, keep working on it to make it better or find someone else who is going to be paying us a fair value for it. Both options are on the table.

Okay, thanks.

And our next question, gentlemen, will come from Karen Engle Hart (ph) with the Government of Singapore Investment Corp.

Hi. You answered a couple of them. Number 1, can you just verify on capital spending going forward. Did you say 1.25 to 1.5% of revenues?

Yes, that's correct.

Okay and then, you mentioned in the release one time accounting benefit. Did you quantify that?

Yeah, it was the ones in other income?

Yes.

It was $3.8 million.

Okay. And what was that related to?

Well, it was, it was actually -- we identified some issues on the balance sheet that date back to as far back as 1999. There actually you may know it is a Dresser-Rand. We cleaned up a number of old items there. On the Dresser-Rand side you saw that there was a charge in Dresser-Rand, the net of them was about $2.5 million. It is really just cleaning up some old items, some inventory thing. Some old purchase reserve that's sat out there from the year 2000.

Hey Karen, if I can give you something further on the Cap Ex. When we sold Torrington, when we sold what was the most Cap Ex intensive charge. If you were to go and look at the Cap Ex going in the past (ph) as a percent that would have increased the level up to like 2%. That's why we are now running below, because we took the 5% off the table.

Okay. That's helpful. And, one other thing. Why don't you give cash flow?

During the year, the quarter to quarter cash flow?

Yes.

Won't be a meaningful number for you, because we build working capital and so forth in the first half of the year and we draw that down over the second half. You would be surprised that we are going hit our full year cash flow number if you just looked at the first couple of quarters.

I know, but everybody in the equipment business has that same problem and you are the only one that I know that doesn't release cash flow.

I'll tell you what, we'll look at that. We are not trying to hide it.

No, it is good. It is nothing to hide.

No, that's why I am saying. But the volatility was so high based on what you happen to close out at the end of the given quarter; sometimes is on the receivables side rather than in the till. For me I think the key part behind this is we will this year go well over the 400 number again. And that includes the proceeds from divestitures and so on.

It;s just good to see. I mean we can adjust for the seasonality.

Well if that helps you we will certainly put that on our lookout list.

We'll take our next question from Dabona (ph) with Chilton Investment Company.

I just wanted to ask why you changed your outlook for Timkin (ph) in 2003, and also what your outlook is for 2004.

Well, we don't have perfect visibility into that. That's something accumulated by the customs department and we get some reports that had suggested our original $50 million expectation was based upon some reduction of where it was last year and the level of activity. We have gotten some information that just suggested that it's a number more consistent with what we now reflect.

Okay.

And, going into '04 -- as you know, we only get 80% according to our arrangement with Timken. We only get 80% of those proceeds. As we look into '04, there is greater uncertainty as time goes on, as to whether the CEO will continue to be with us. We are having a difficult time anticipating what that might be.

You are at $50 million before you said that. So --

We originally had anticipated $50 million. Now we are thinking it is more like 35, $40 million.

For '04?

For '03. If we were to pick a number for '04, it is probably more like 20, $25 million.

Okay. Thank you.

We will go next to Clint Newford with (?)

Hi, gentlemen. Have you done any preliminary work now, or yet on what your pension (ph0 head wind will be next year with the reduced discount rate?

We have already reduced our rate on the largest of our plans. We are at 6.5 on that. As you know, we have had considerable appreciation in asset value. You know, normally, November 30th is our measurement date for our pension. It turned out that as a result of the divestiture of Torrington this past year we had to re-measure in February. So, we are sitting at a relatively low -- I think the Dow was at about 8,200 when we remeasured. So we have seen considerable improvement in our asset values, and at that time we also reduced our discount rate, so I am actually anticipating a reduction in pension expense, going into 2004.

And gentlemen, we have a follow-up question from David Raso with Solomon Smith Barney.

We restated the balance sheet a couple of times with viscop and some of the balance sheets don't go that far back, so I don't have a clean history. But if you look at inventory sales rates right now. It is now below 40 days. It is one of the lowest I think you have had ever . Given the fourth quarter, inventory typically goes down sequentially. I'm just trying to think through, what's going on, with some individual businesses where the inventory is fairly depleted. And that's where the business is being run now, going forward. It is just suggesting going into '04 it could be an upward bias to the product schedule given how low inventories are. I just want to make sure I am not seeing a change in how businesses are run.

We have mentioned before, we are aggressively trying to manage(ph) our working capital to lower levels. You know, that's being accomplished by better sales and operations planning, it is being accomplished by more lean manufacturing to enable us to reduce the cycle time. It is obviously our intention to reduce that. And we are quite comfortable as that draws down.

I do not know any business,David, where we have quote an inventory issue at this time with the possible exception of one plant in Bismarck, where they are working feverishly to pump out the demand where that's going on. That's only one area where we are quote living close to the level that we have.

Well, speaking of Bismarck and that business segment in general, pricing, can you give us some help on pricing trends in these businesses? It appears some of your equipment businesses on the infrastructure side could be looking to raise price soon. Can you give us help? Thermo King revenues are obviously up. Pricing essential there. Can you help us?

I would say if you were to look finally -- let me give you a macro. That says overall I actually see a positive number when I look at our quarter for pricing. That's the first time I can cheer in four years. If I look at it specifically in that what I think was publicly disclosed the fact that there are price increases now taking place when it gets to the infrastructure type businesses; roads and so on. And as we look at the Thermo King as describe there, obviously that as that equation turns out perhaps higher demands, we are starting to see some real positives, and as we improve and bring out the magnum type products we are starting to really see in terms of the ability to charge, if you will, fairly for the value that we are creating extra. Overall I am starting to see now actually an uptick on pricing compared to the downward pressures that we had beforehand. The only one I tell you that I continue to see difficulty in is road specifically in the North American marketplace. That's the one that comes to the top of my mind as a pressure issue.

Two quick ones. Maybe more for Tim. The legacy costs I thought they were running at 7.2. And they came in at 9.5. Are there incremental costs now in there that we should be modeling in 9.5 per quarter of legacy?

Yeah, 5 to 6 cents per quarter is probably a good number for that. We have picked up some additional -- obviously with some costs associated with engineered solutions that will continue.

And lastly, the (?), higher profile for a lot of people. What is the guidance you can give on the costs associated with the stock base comp (ph) going forward?

I am praying it is a big number, David.

Can you help us with some range of when the stock goes up over a level?

Yeah, I mean, put it this way. Over the quarter we saw $4.5 worth of stock price increase. And we saw this level, you know $11 million worth of charge associated with it.

And that relationship should hold, roughly 2.5 times, kind of dollar per share versus millions of dollars of higher costs to you.

I think that's a good relationship. Although, having said that, we are looking for ways that we can essentially hedge that. But right now it becomes a little bit difficult from an accounting standpoint. But we are looking to see for a way we can address that.

Thank you very much.

Operator we will take one more question, please.

And our final question, gentlemen, will come from Barry Banister with Legg Mason.

Okay, ah, by the way it was great two quarters in a row, Herb.

Hopefully a sign of things to come, Barry.

Thanks. The OPAB portion of the CDO seems to be going up, while the CDO amount is going down and probably disappears in a year or two. What is the growth rate of that discontinued OP portion since, it does seem to have this below the line swing factor every time we get a quarterly earnings report?

Barry, you said the OPEM?

The 14 cents that you cited in the press release, related to the legacy costs of the discontinued operations.

Okay, yeah, as -- I mean, what we saw is we have a couple more discontinued businesses that we add into the mix this quarter with WaterJet and with Laidlaw, which brought in some continued discontinued operations cost. And we are still kind of getting to a neutral point or not a neutral point, but getting to an ongoing cost relationship with Torrington. Obviously we are still carrying some of the severance costs there from people and we are still carrying some of the runoff of medical benefits and so forth. We still expect it to be kind of a 5 to 6 cents legacy cost per quarter.

Okay, so you don't see a significant growth rate change in the legacy costs whereas others are seeing it on the medical side quite a bit.

I think that's reflected in the 5 to 6.

That's included in that number.

Okay, and then just lastly, when we look at climate control and compressors you talk often about service contracts. I'm trying to gauge whether these are 90 days cancelable contracts or one year tie-ins. Exactly, how are they structured, so that we can at least be confident that you will retain the customers you have added not just grow them.

You are usually talking about a one year commitment, that winds up then being reviewed and renewed hopefully when that is completed. The pricing is set up. And sometimes there are time and material. And sometimes they are fixed for a given location. But in general, the duration that we tell you is, one year with a review and a renewal by both parties at that time.

Has attrition been an issue? It's pretty early to say.

No, I would tell you, actually, the thing that's been an issue for us is in some of the fixed cost contracts. We now know the difference I would tell you personally, how much it costs to repair a supermarket that has 7 year old display cases in it, versus one that is brand new. So those kind of learnings are helping us to quote in our pricing model, as we wind up going forward. That's the kind of learning I would tell you is more important than anything else. I think some of the customers got a heck of a deal from us at the beginning and we are now adjusting some of those pricing points.

Thank you very much.

Sure. Thank you.

And gentlemen, that will conclude our question and answer session. I would like to turn the conference back to you for any additional or closing comments.

Thank you very much. We are wrapping up now. Thank you for joining us. There will be an instant replay of today's conference call available at approximately 3 p.m. today. And it will be available until October 29th. The call in number is 888-203-1112. And the pass code is is 537861. And the international call-in number is 719-457-0820. The audio and the slides of today's conference call will be archived on our website. And, finally, the transcript of this conference call will be available on the Ingersoll-Rand website, hopefully at the end of next week. Please call me, again, this is Joe Fimbianti, if you have additional questions, I'm at 201-573-3113. This concludes our call. Thank you.

Thank you for your participation in today's conference call. You may disconnect at this time.