特靈科技 (TT) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Ingersoll-Rand third quarter 2004 earnings conference call. This call is being recorded. With us today, from the Company, is the Chairman, President and Chief Executive Officer Mr. Herb Henkel, Tim McLevish, the Chief Financial Officer, and the Director of Investor Relations, Mr. Joe Fimbianti. At this time, I would like to turn the call over to you, Mr. Fimbianti. Please go ahead, sir.

Sorry, we're getting a lead feedback here. We'll try and correct it. Both the call and the presentation will be archived on our website and it will be available later this afternoon. Now please go to Slide No. 2. Before we begin, let me remind everyone that there will be forward-looking discussions on this morning's call, which is covered by our Safe Harbor statement. Please refer to our June 30, 2004, Form 10-Q with the details and factors that may have influenced our results. I'd like to introduce the participants on the call this morning. We have Herb Henkel, Chairman, President and CEO of Ingersoll-Rand, Tim McLevish, our Senior Vice President and Chief Financial Officer, and Rich Randall, our Vice President and Controller. We'll start with the former presentation with remarks by Herb Henkel and Tim McLevish, followed by a question-and-answer period. Herb Henkel will start with an overview. Would you please go to Slide No. 3.

Thank you, Joe. And good morning, everyone. Welcome to our third quarter 2004 conference call. This morning we reported net earnings of $1.36 per share, which includes earnings from continuing operations of $1.18 per share and discontinued operations of 18 cents per share. The current and historical results have been restated to include Dresser-Rand as a discontinued operation, reflecting its pending sale to first reserve which is scheduled to be completed by the end of October. Earnings per share from total operations were $1.23, which was above our original expectations for the quarter of $1.10 to $1.15, and about 50% ahead of last year's third quarter. Now please go to Slide No. 4. End market activity and our overall order level for the third quarter improved compared to last year. Virtually all of our end markets have maintained momentum in the U.S. and European economies, and Asia continues to demonstrate an excellent growth pattern. During this period of market recovery and growth, our revenue has grown faster than the underlying end markets we serve. We have gained market share through innovative products and solutions. We've also expanded our recurring revenue stream. Our core businesses generated substantially higher revenues compared to last year. Our overall revenues for the quarter were up by about 15%. Three of our business segments generated double-digit revenue growth rates in the third quarter. Infrastructure grew at 32%, Industrial Solutions at 15%, Security and Safety at 11%, while Climate Control grew at 2%.

Now please go to Slide No. 5. Operating margins also improved during the quarter. Margins benefited from increased revenue growth, and our ongoing efforts to drive-down costs by adopting lean [six sigma] and other continuous improvement processes. Price increases and surcharges also helped to partially offset the accelerating impact of material cost inflation. Tim will discuss material cost and productivity in greater detail during his presentation. As a result of these actions, total operating margins improved to 11.7% of sales, compared to 10.3% last year. Year-to-date margins are 11.9%, compared to 9.3% last year. We're making progress towards our goal of 15% margins. During the quarter, we continued to execute our long-range plan to drive our top-line growth and improve our processes and cost structure. We also announced the last major business line divestiture with the agreement to sell Dresser-Rand to First Reserve Corp. The sale of Dresser-Rand is important for 2 reasons. First of all, our focus on operational effectiveness caused a significant improvement in Dresser-Rand results. Dresser-Rand achieved the targeted 10% operating margins in the third quarter. Because of this improvement, we were able to sell Dresser-Rand for $1.2 billion, a price consistent with its full-value. Rather than the sharp discounts to value we were faced with when the unit was underperforming. Secondly, with the sale of Dresser-Rand, we have largely completed our portfolio transformation to being a diversified industrial company. Now please go to Slide No. 6. You may recall that in the year 2000, we extensively reviewed all of our businesses, assessing their strategic growth potential, economic returns and asset intensity. We communicated our assessment using an easily understood color code, "Green" for businesses which had growth and income return potential consistent with our goals; "Yellow" for businesses that had a deficiency in either growth or returns; and "Red" for businesses which we knew we would sell.

Please go to Slide No. 7. Thermo King has become part of the Climate Control segment which has leading positions worldwide in both stationary and transport refrigeration. This business now has a growing service component which makes up about 25% of its total sector revenues. The acquisitions, cost and capacity reductions, as well as global growth will allow this business to grow profitably in the future. Our Infrastructure segment had 2 green businesses. Bobcat and Club Car which have grown stronger since 2000 from new product platforms and lean manufacturing implementation. We've also added products, brought down costs, and increased efficiency in road machinery, portable power and utility products. All of these product areas have bright futures with growth rates and economic returns well-above traditional heavy construction companies. Air compressors and tools has become Industrial Solutions. These businesses are now working together to develop and implement solutions for industrial customers. New innovative products, the dramatic growth of the Solutions business and cost reduction activity have expanded growth potential and operating margins substantially. We have also a strong and growing position in Asia/Pacific's expanding industrial markets. Our Architectural Hardware business in recent years has solidified and expanded its position, in both residential and commercial markets. Now, referred to as Security and Safety, it is a leader in mechanical, electronic and biometric security systems. This business has demonstrated double-digit none cylindrical growth in revenues and operating profits with a high level of ROIC.

Now please go to Slide No. 8. We divested low growth, asset intensive businesses which in total had revenues of about $3.3 billion. With the pending sale of Dresser-Rand we've now divested all of the businesses which did not meet our requirements for growth and returns going forward. Please go to Slide No. 9. We've also made over 30 acquisitions since 2000. We solidified our position in the Stationary Refrigeration business, and also substantially increased our service capability. We added 2 new compact equipment lines to Bobcat, and we acquired capabilities in electronic security, biometrics, software and integration. We also added new branch operations to Thermo King, Bobcat, and Industrial Solutions to expand our recurring revenue. Now, please go to Slide No. 10. We have substantially transformed our business over the last several years. Historically, a heavy machinery and construction company, IR today is a highly diversified business. In fact, roughly half of our revenues now come from the non-traditional markets of Security and Safety, and Climate Control. Industrial Solutions is geographically diverse, and generates about 40% of its total revenues from high margin, aftermarket parts, and service business. In addition, business that we call "Infrastructure" does not bear any resemblance to the other large heavy construction equipment manufacturers that we're often compared to. Most of its revenue, and approximately 23% of IR's total revenues, are generated by Bobcat and Club Car. These 2 companies have a history of generating substantial growth through innovation and high operating margins. They do not cycle like heavy equipment companies, and have higher growth rates, earnings, and returns on invested capital.

Finally, about 10% of our portfolio is made up of machinery and equipment that serves road and highway construction and maintenance. This business does not follow the same cycle as most heavy equipment markets, and has excellent profit margins. We believe that future growth in Asia will help to balance the traditional cycles of the North American Road Development market. Additionally, about 20% of road machineries total revenues are from aftermarket parts. As a result of these improvements, we now have a very solid $9 billion diversified industrial company. We believe the platforms now in place, Security and Safety, Climate Control, Industrial Solutions, and Infrastructure will allow for substantial future growth in earnings, margins, and ROIC. Now please go to Slide No. 11. We've just completed our long-range plan, and reconfirmed our financial targets going forward. Our goal is to grow organic revenue by 4 to 6% in a world economy growing by 2 to 3%. We also plan to make bolt-on acquisitions, to add another 4 to 6% to annual growth. During the planned period, we will achieve our 15% operating margin goal. We also intend to grow earnings by 12 to 15% per year, and to hit and exceed a 15% ROIC. We will fund the growth internally with our free cash flow which we expect to be at least $500 million each year.

Now please go to Slide No. 12. We will deploy our free cash flow to create shareholder value. Our bolt-on acquisitions will be focused on our four growth platforms. We do not require a fifth business platform to meet our targets. We intend to add new product lines and technologies, expand our geographic reach, and to accelerate the growth of recurring revenue. Additionally, we will enhance the total return to shareholders through our dividend policy. We are targeting our dividend payment to be about 25 to 30% of our 3-year average free cash flow. We also expect our dividend yield to be consistent with other high quality diversified industrial companies. Finally, as we believe our common shares are significantly undervalued, we expect to buyback more of our shares in the open market. In August, our Board of Directors approved a 10 million share buyback. We have repurchased about 4 million shares year-to-date and we intend to repurchase at least 1 million shares per quarter going forward. Now please go to Slide No. 13. During the third quarter our focus on innovation again helped to drive our revenue growth. We continue to expect that new product sales for 2004 will generate more than $300 million in revenues, adding more than 3% to our organic growth.

Now please go to Slide No. 14. At Air Solutions, the strength in industrial markets and traction of new products and solutions drove in 18% year-over-year growth in bookings and sales for the quarter. We are gaining market share with the Nirvana product lines, both in the oil flooded and in new oil-free design and in the compact Unigy compressor. Unigy orders and shipments have doubled year-to-date and Unigy has gained 9 points of market share. The product has received 4 awards for innovation and was certified in the UK as a energy-savings device, which makes it eligible for rebates from the Government that equal 50% of the purchase price. Now please go to Slide No. 15. Strong markets in North America and new product launches are driving Bobcat sales to record levels in 2004. Sales for the third quarter were up over 30% compared to last year. We expect to continue the flow of products into the markets in the fourth quarter, and we expect to introduce 15 new products for the full-year 2004. Order levels are so strong that we have decided to delay introduction of 8 additional new products into 2005, so that we do not further disrupt our existing manufacturing output flow. Please go to Slide No. 16. Club Car revenues are up about 28% in a sluggish market, as the precedent product line introduced at the beginning of 2004 continues to gain market share. The product also has realized an average selling price that is almost 10% above previous models. Additionally, the 4x4 Rough-terrain Utility Vehicle continues to gain customer acceptance during the quarter. We have shipped over 2000 units through September 2004, and the order file remains strong. We also announced in September that Club Car will private label the 4x4 to Husqvarna, a marketer of high quality, outdoor power equipment for forestry, landscaping and lawn and garden markets. This new relationship will not only will help to grow volumes, but will increase the market acceptance of the product.

Now, please go to Slide No. 17. We are encouraged by our operating performance in the third quarter. We delivered strong overall growth and we're able to leverage that growth to make substantial improvements to our earnings. We're on target to deliver improved earnings and increased cash flow in the future. Our ability to execute our core strategies and large part accounts for our consistent, strong performance. These strategies have been focused on generating dramatic growth in global markets, investing in innovations that will provide the greatest value to our customers, and implementing processes to drive continuous improvement in the efficiency and productivity of our operations. We've also demonstrated our ability to grow recurring revenues, enhancing our operating margins, offsetting cylindricality, and differentiating IR still further as an adept solution provider. Clearly we're on the right course to achieve our profit growth and return on capital targets. I would like to now turn it over to Tim McLevish who will now cover IR's business unit performance in more detail. Tim?

Thank you, Herb. And good morning. I'd like to begin my discussion with the quarterly financial results. Please note that due to the pending sale of Dresser-Rand the results of that business have been reclassified to discontinued operations, net-of-tax for the third quarter of 2004, and all prior periods. Please turn to Slide 18. Revenues for the third quarter were $2.4 billion, up 15% from the comparable period last year. The increase is attributable to double-digit growth in our Infrastructure, Industrial Solutions, and Security and Safety segments. Excluding the favorable impact of currency revenues increased 13%. The 2% currency impact on revenues was consistent across all of our reported segments. Operating income for the third quarter was $278.2 million, or 11.7% of revenues, up 1.4 percentage points compared to prior-year. These continued strong operating results were driven by revenue growth leverage, price improvement, new product introductions, and operational improvements. I would like to take a moment to discuss certain year-over-year items that are included in our reported results.

The quarter included approximately $11 million in productivity investments, an increase of $3 million from the prior-year. This was offset by approximately $4 million of currency benefits. The results for the quarter were negatively impacted by approximately $44 million in raw material cost inflation, mostly attributable to steel, non-ferrous metals and plastics. The impact of these cost increases were substantially offset by savings from our material productivity programs, product price increases, and surcharges. Prices for our key commodities are expected to remain high, and will continue to challenge us through the remainder of the year. Moving down the income statement, interest expense was $36 million, compared to $42 million in last year's third quarter. The year-over-year improvement resulted from a $400 million reduction in our debt levels. Other income for the quarter was $5.1 million compared to $3.9 million expense last year. The improvement included incremental income from partially owned affiliates of $3 million and a favorable currency impact of $3.7 million. Our third quarter effective tax rate was 17%, compared to 13% in prior-year. The higher rate is due to the increase in our full-year earnings outlook, and to the disproportionate growth in earnings occurring in the U.S. tax jurisdiction which carries a higher statutory rate. Overall, this favorable rate reflects the benefits of our ongoing tax planning initiatives.

Net earnings from continuing operations for the third quarter were $205.6 million or $1.18 per share, which exceeded our guidance. Earnings from discontinued operations were 18 cents for the quarter. This was comprised of 13 cents from additional gain in sale, and a net 5 cents related to ongoing discontinued operations. The gain was related to the sale of the remaining Drilling Solutions businesses and final settlement of the working capital adjustments from the sale of the Engineer Solutions business. Ongoing discontinued operations included 8 cents of Dresser-Rand earnings for the quarter, offset by retained costs of previously divested businesses which totaled the 3 cents. Our total net earnings for the quarter were $237.8 million or $1.36, compared to 154.6 million or 88 cents last year. Please turn to Slide 19. Our revenue growth of 15% was driven by increases in all major geographic regions. North American revenues were up 13% and constituted approximately 66% of the total. European revenue growth was 12%, approximately 2/3 of which was from the impact of currency. Asia Pacific experienced an increase of 29%, and Latin America grew 15%. I would now like to take a few minutes to talk about the results of our businesses.

Please turn to Slide 20. The Climate Control segment, which consists of the market-leading brands Hussmann and Thermo King reported third quarter revenues of $694 million. This represents an increase of 2% compared to 2003. Strong revenue growth in our international markets was offset by declines in North America. Operating income for the segment was $79 million, representing an operating margin of 11.3%, up more than 1.5 percentage points from the prior-year. The operating margin improvement was driven by favorable product mix and continuing operational improvements. Climate Control America's revenue was down 4% due to declines in the bus and display case businesses, partially offset by continued strength in our Thermo King truck and trailer business. Climate Control international revenues for the quarter were up 11% year-over-year, 6% excluding the impact of currency. Both European transport and display case markets showed solid gains versus the prior-year. Revenues in Asia Pacific improved as well, primarily driven by improved display case growth. Please turn to Slide 21. The Industrial Solutions segment reported third quarter revenues of $399 million, a 15% increase over prior-year. Air Solutions reported a 18% growth in revenue, driven by new product sales and increased service business. Recurring revenues were up 13%, and constituted 46% of the total. Productivity Solutions revenues were up 8% versus prior-year, due largely to strength in the industrial assembly business and new product introductions. Operating margins for the segment was 11.6% of revenue, up from 7.6% last year. The year-over-year increase was attributable to significant revenue leverage, growth in our service business, new product margins, and the benefits of our productivity improvement program.

Please turn to Slide 22. The Infrastructure segment reported third quarter revenues of $812 million, up 32% from 2003. Revenues of each business in this segment improved by strong double-digit rates with continued strength in order patterns. Operating margins were 12.2% of revenues, compared to 9.7% in the prior-year. Bobcat revenues increased 32%. The increase was attributable to strong North American markets, attachment product sales, and the strength of our aftermarket business. Road development revenues increased 39%, largely driven by strong North American markets. Club Car revenues were up 28% from prior-year, largely due to strong demand for the new Precedent golf car and continued market share growth. Segment operating income improved to $99 million or 12.2% of revenues, compared to 59 million or 9.7% in 2003. The improvement was due to leverage from increased volume, new product introductions and productivity improvements. These strong results overcame the negative $25 million impact of raw material price increases in the quarter. Please turn to Slide 23. The Security and Safety segment continues to report strong results. Revenues of $463 million were up 11% from prior-year. The increase was largely attributable to continued strength in North American commercial and residential hardware markets. Additionally, our Electronic Access Control and Worldwide Solutions businesses grew by 14% in the quarter. Operating margins were 16.5%, compared to 21.2% last year. Our North American mechanical hardware business continues to realize good growth and consistently strong margins. The overall segment margin decrease reflects continued investment in new product developments, approximately $8 million of raw material cost increases, and $10 million costs related to our Kryptonite lock business.

Please turn to Slide 24. Let's move on to the balance sheet. Our working Capital Management program produced good results. We finished the quarter with our investment and working capital at 9.9% of revenues, which is below our target of 10%. The working capital performance was largely attributable to an improvement in our inventory turns from 6.1 to 6.3 times and a 2 day improvement in our days payable with a modest deterioration in day sales outstanding. At the end of the third quarter, our total debt was $2 billion, a reduction of over $400 million compared to the third quarter of 2003. Our debt to capital ratio at the end of the quarter was under 29%. This compares to 33% at the beginning of the year, and 36% this time last year. Capital expenditures for the quarter were $21 million, or about 1% of revenue compared to last year's of $23 million. Depreciation and amortization expense for the third quarter was $43 million versus 45 million in 2003. We are pleased with the continued progress made in improving our balance sheet, as it continues to provide a solid foundation to support our strategy in the future. Herb will now conclude our formal remarks with the outlook for the fourth quarter.

Thank you, Tim. Please go to Slide No. 25. Activity in most of our major industrial and construction end markets continued to improve in the third quarter. Our order level was up about 6%, compared to reasonably strong comparisons from 2003. From this recent order pattern, we see a continuation of this level of growth in most North American and European markets, and robust growth in Asia for the balance of the year, and then on into 2005. Based on these anticipated improvements, fourth quarter earnings from total operations are expected to be in the range of $1.13 to $1.23 per share. Continuing operations, EPS of $1.16 to $1.26 reflects the continued strength and improvement in our operations. Fourth quarter discontinued operation costs of 3 cents reflects 4 cents of ongoing legacy costs and 1 cent of profit from one month of Dresser-Rand operations. Our prior forecast for the fourth quarter of 2004 reflected a full-quarter of Dresser-Rand earnings totally 13 cents per share. Fourth quarter revenue growth is expected to be at our long-term target range of 6 to 8% as our markets approach long-term sustainable growth rates. Additionally, year-over-year revenue gains from currency will diminish in the fourth quarter and be about 1%. The fourth quarter also reflects a tax rate of 15%, which is slightly below our previous forecast of 16%.

Now please go to Slide No. 26. We are increasing our full-year diluted EPS forecast from total operations to be $4.80 to $4.90. This represents more than a 43% increase compared to $3.34 from total operations in 2003. The full-year 2004 forecast also excludes the gains from the sales of Drill Solutions and Dresser-Rand. Free cash flow for full-year 2004 is expected to approximate $550 million. This is consistent with our prior forecast, but has been adjusted to reflect the sale of Dresser-Rand and a recent quarterly dividend increase to 25 cents per share. In summary, 2004 will demonstrate that we're executing our strategy, delivering enhanced shareholder value, and prepared to deliver an even stronger and better 2005. Now please go to Slide No. 27. This ends our formal remarks, I'd like to open the floor to your questions. Thank you.

[OPERATOR INSTRUCTIONS] Gary McManus, J.P. Morgan.

Just looking at the fourth quarter outlook and if we just talk continuing operations only you're saying 1.16 to 1.26 and if I look at the third quarter, you did $1.18 but if I take out the $10 million impact from the Kryptonite, that would kind of move that up about 5 cents or so, so you really did about $1.23. So it looks like you're really not assuming much improvement in the fourth quarter versus the third quarter. And I think some of your businesses tend to be seasonally stronger, like Hussmann, I think there's more production days and so forth. So can you address the fourth quarter outlook which doesn't seem to be much growth sequentially?

Well, actually, Gary, most of our businesses have stronger third quarter, our strongest quarters are second and third quarter. The fourth quarter tends to be softer across most of our businesses, Hussmann actually fourth quarter usually is -- it's okay early in the quarter. It's about probably average with the third quarter. But generally across most of our business I would say that fourth quarter is a weaker quarter.

The biggest contributor, if you look at the volume increases in the thir quarter was in the infrastructure sector. And as we get to the end of the road construction section, we wind up seeing a reduction, if you will, of shipments coming out of both road developments, as well as what our traditional high season is in Bobcat. Those are really the drivers as to why it doesn't go as much as you might think on it, Gary.

Okay. Just conceptually, looking at the Dresser-Rand divestiture, is it -- do you view it as an accretive or dilutive transaction in terms of the loss operating income versus the cash proceeds? And obviously, it depends what you do with the cash, but you make some assumptions there.

Yeah. I think what you look at is that obviously in the fourth quarter, what our assumptions include is the fact that we have 1 cent of earnings compared to the 13 cents we forecasted when we did this call at the end of the second quarter. We're assuming in the number that we have that what we wind up getting is interest which amounts to about 2 cents instead of the 12 cents that were there. So that's the 10 cents dilutive in the fourth quarter. We expect to redeploy that very, very efficiently in the areas of the bolt-ons that we talked about, as well as some share buyback. And obviously, those 2 areas, we'll see what happens in 2005. We expect to make up that hole in 2005, but obviously it is not going to be something that we make up in November and December of this year.

I was not talking about Dresser being dilutive on a fourth quarter basis, I was doing Pro Forma on a full-year basis. It looks like -- I mean, my math would suggest it is a slightly dilutive transaction given the loss profitability for the full-year for Dresser-Rand versus the -- .

Yes. I mean you had the key issue there is depending upon how we redeploy the cash. And as Herb mentioned it is certainly our expectation that we're going to do both on acquisition, share repurchases that ultimately will make it a accretive transaction. Short-term certainly in the fourth quarter there is a peak earnings for Dresser-Rand in the fourth quarter, so it is hard to overcome that and deploying that cash in the short-term makes it considerably dilutive in the quarter. But in 2005, it demands upon what opportunities present themselves, and how quickly and how we can redeploy that at good returns.

Stephen Volkmann, Morgan Stanley.

I guess I'll just keep this thread going here. Herb, a couple of things on your sort of cash redeployment here. Talking about -- it looks to me like you may have stepped up a little bit your bolt-on acquisition target in terms of that contribution to core growth and correct me if I'm wrong on that. But it looks like, if you want to do what you said on your slide that we should be seeing kind of 4 to $500 million a year in bolt-ons, which is pretty much all your free cash flow, at least as you targeted it there on the slide. So it -- can you just talk about whether there's been a change there?

Steve, if you go back -- all the way back frankly to 2000, we're saying that our assumption was always that we would have organic growth in the 4 to 6% range and that we would then be going and doing bolt-ons, which we said is that as we have our balance sheet strength and ability to go on to do another, basically 400 to 600 billion in any given year. Obviously, what I am counting and what we're doing there is we are using some of the cash proceeds we have realized as a result of the sale of Drill, plus what we have now with Dresser coming in, that over the next, I think, 1 year to 18 months you'll see us on the upper-end of that range as we try to redeploy. And as Gary asked before, effectively replace the earnings with businesses that have long-term prospects. So over the long-term I continue to again to see us doing 400 -- 300 to 400 in that range, but in the near-term we certainly are going to be stepping up a little bit in order to redeploy the cash that we now have. We have over $2 billion that we got as a result of the divestitures over the last 12, 18 months.

Okay. Good. That was kind of my follow-up. I mean, you guys have a ton of cash and given that you could complete your entire repurchase program, do all of the dividend stuff that you want to do, and make acquisitions at the high-end of the range and still have a lot of excess liquidity. I mean, is there any thought about anything like a special dividend, a special repurchase? How do you think about this extra slug of cash that is still there?

I look at that as how we create long-term shareholder value out of it rather than a one-time event, Steve. I think that we have the ability now with the balance sheet and the operating results going forward to really strengthen our Company to have it become a really quality, diversified, industrial type company. So I don't look at one time events, I look at this as to how we really redefine the Company into a core that really has growth of companies that have fees of 20-plus percent.

Does that suggest we could see kind of high-cash balances for a little while then or --

I think you'll continue to see us have high-cash balances until we windup going and redeploying it effectively, yes.

Alex Blanton, Ingalls & Snyder.

I would like to focus on the margins in Security and Safety. You gave us some numbers there that were included in the total; 8 million in raw material cost increases.

And 10 million were basically for Kryptonite.

Right. Exactly what were those? I know what the Kryptonite lock costs were caused by. But what were they?

Well, what you have is really a -- predominantly, as you see the -- what we offer to all of our customers is that if you have a Kryptonite cylindrical lock that now has been actively shown as to how you could potentially try to defeat that lock. That if you have one of those we will windup replacing it for you at no cost with what is an upgraded system which no longer has a cylindrical lock. It frankly looks more like the traditional Schlage-type key system. There are about 500 some odd-thousand of those that are out there. And we make a forecast as to how many of those we think coming back. You multiply that by the material cost, plus the cost of handling that transaction back and forth, and that's why we put in a number. Now, I think that what we have is a very comprehensive number. But obviously if you are going to go reserve for this thing, you do it at a level that you think can cover all of the issues that are out there outstanding.

Okay. So we have a one shot user?

Yes, sir, one shot. What we have been -- as I said Alex, we estimated that there were as many as 500,000 that would still be out there. It's kind of hard to figure how many of you got a bike locked up versus how many are not around. But we think we put in what I would call is a very, very large percentage of those coming back. So far I would tell you, just to give you motive of magnitude. I told you the number was 500,000, the last number I saw last night was we had gotten back 38,900.

Okay. I'm finished with that topic. On $8 million of raw material costs unrecovered. Why not?

One of the unfortunate things when doing business with Big Box, they're not a very understanding group of channel partners. And we have contracts where we were unable to pass through any kind of a price increase to those folks.

Okay. And that will continue then?

That's correct. And that's why I said we're looking at how we windup going and improving. So our forecast, which I will give you right now, we're talking about a Q4 margin that runs at 20%. If you took out -- that is the Kryptonite stuff, in the third quarter we were really running at about 18.5. And we see now in terms of the fourth quarter being somewhere between 19.9 and 20% -- including that.

Yes. For that quarter, if you added -- if you took out those costs you're not recovering, your margins would still be down. They were 21.5, 21.2, they'd be 20.4 this year even without those 2 items. Why is that?

Because if you looked at our businesses that we continued to invest in on the biometrics and the other type of electronic access control. We continue to make investments in the [S&A] side and we're looking at those coming through at about 15% versus the traditional mechanical hardware stuff which comes in at 22 to 25%.

We're growing our international revenues as well, as we invest in growing in Asia and Europe and that's carrying lower margins --.

-- and that's the S&A side. So I see that as -- if you look at 2003, we averaged about, oh, a total of about 20 to 20.5%. In 2004, we're looking at being somewhere around into the 19 some odd percent range full-year. And then for next year I expect it to be in the 19 to 20% range again.

Andy Casey, Prudential Equity.

A couple of questions, in terms of the order growth rate in 6% in the quarter and sequentially down a little bit, was that impacted by the move of Dresser-Rand to kind of discontinued ops or was it just bully that you are running into more difficult ops?

Now, really there is a fair number of moving parts within the tax rate. But the biggest fact really was as we have reclassified Dresser-Rand into discontinued operations. We pulled that piece of it out and it brought the remaining balances up a little bit.

That was an answer to order growth rate?

I'm sorry. I was -- I'm sorry, I misconstrued your question. I thought we were talking tax rate. Andy, ask me again, please?

Growth rate and earnings in the revenue.

Yes. If you look at the second quarter growth rate, and then look at the third quarter order growth rate, there was a sequential decline. And I'm wondering if that sequential decline was impacted by the removal of Dresser-Rand from that quarter?

Yes. If you look at the third quarter, Andy, is that if I look at the bookings overall, Climate Control was off about 3, Industrial Solutions was up like 16, Infrastructure was up 8, and Securities was up 7.8. So overall, total IR without Dresser runs around 6%. Dresser during that time actually had bookings that increased over 24%, which would have had IR full-in, with Dresser included at almost 8%.

Okay. Thanks. And within Climate Control, the North America decrease, I'm still trying to understand that. Can you break the decrease down a little bit more? Earlier in '04, you talked about removing some low margin fixed-cost contracts. Is that still affecting the rates?

Yes. Let me break it down for you this way, Andy. If I look at -- we talked that overall, the transport refrigeration side was really up almost 10% -- approximately 10% in the third quarter. So the reductions that they're looking at really were in the service, contract installation side, and the equipment, stationary display case side. The display case side was off over 5%. And total operating revenues from our contracting business was up about -- excuse me, it was off about 9% on a year-over-year basis. So that continues to show the significant reductions we took in some of those fixed-cost contracts. So we're almost off 9% in service and aftermarket, and we're off about, as I said, almost 6% on the display case side. That's what drove the 2% debt number.

Making up with good strength.

David Russell, Smith Barney.

Just one clarification on Dresser's. So essentially 12 cents that's absent now. Because the deal is closing after 1 month. The guidance for the fourth quarter kind of apples-to-apples would have been 1.25 to 1.35 if Dresser was there for the full-quarter?

Yes, that's right, bolt-ons back in.

And the only other variable is the tax rate, you still have about 1% less?

That's correct.

So a couple of pennies there?

That's correct.

On the net cost issue, you gave us the -- the costs were up 44 and then you said they were materially offset. Do you have a net number? What was the net inflation, up 44 million on the costs?

Well, if you take for the quarter we were actually -- our productivity in the quarter was probably 25, 26. You know, we've stated that there's probably -- we've targeted $120 million for the year that we target for material productivity improvements. And so that's probably 26 million for the quarter of the $44 million for inflation. But there's a $20 million Delta there. So we saw probably 10 -- 10 cents net.

And for the 4th quarter? Do you --?

I'm sorry.

Do you expect --?

$10 million net a nickel EPS impact.

And for the fourth quarter do you expect the net impact to be more or less than we just experienced?

We're targeting somewhere a similar amount of material inflation in the fourth quarter, and we have productivity probably somewhere in about the same range. So I would expect a very similar impact in the fourth quarter. If you add in some of the price increases and surcharges that we've applied, we start to pick up some of those, so that helps to defray it a little bit.

Ann Duignan, Bear Stearns.

Just a clarification on Climate Control. Revenues were up like 2%, but I think at the beginning you guys had mentioned that FX contributed 2 percentage growth to all of the businesses; is that correct? Or did I miss something?

That is about correct.

So Climate Control was flat ex-currency?

That would be about correct.

Okay, okay, I just wanted to make sure that I had that accurately.

Yes, that's pretty close, Ann.

Okay. On the surcharges versus prices, could you just give us a little bit of color as to which end markets you are applying price increases versus which end markets you are applying surcharges and what the rationale is? Obviously, it's probably customer driven or market driven. But if you could just give us color on surcharges versus permanent price increases?

Ann, you would make a very good customer. The issues that we have in many of our contracts where we have a longer term contract, we obviously had to go and to rely on material surcharges as being the way to change the contractually agreed-upon price beforehand. Versus if we sell one-of-a-kind when it gets into, let's say a Bobcat or so on, and we windup treating that as being a price increase. And so what I would say to you in general what we have seen is price increase realizations which run somewhere in the 1 to 2% range for, like, Climate Control; 2% in road; and 2 to 3% in Bobcat. We tried to, frankly, get away from doing it, just to surcharges going more onto permanent price increases because I candidly expect that we'll see this continuing on into 2005. So our customers at this point in time are seeing more of what is deemed as a permanent price increase because the material surcharges are not expected to go away in 2005 than we had originally incurring in this year.

And that makes perfect sense, obviously. Can you give us a sense of your total sales, what percent is to OEM versus what percent is to distribution or what percent is --?

Yes, it is not OEM really, it is just the fact that we may have an agreement -- let's give an example. We would have a pricing agreement with United Rental -- I'll just use them as an example -- a lesson example. There would be maybe a price for the entire year and there we would have to go and put through a price increase based on material surcharges, that translates into maybe like 200 some odd million dollars of our business, the rest would all be on a one-of-a-kind and therefore price increase activity.

So of your total revenues then --?

Except for things like what we do in Big Box, as well as into those kind of, like, large chain-type permanent contracts. I would pet that we have more than 80% of our revenues coming into -- where I say I can put through price increases and less than 20% where I have to go with some sort of material surcharge.

Okay. That's great. That's exactly what I was trying to understand. Thanks.

And just overall to get the math on the things. So what we're seeing is, if I just give you some examples of how we see the acceleration, in the first quarter we reported in terms of audited inflation and material of about 10-some odd million dollars, the second quarter it raised itself to 25 as some of our buying contracts sort of expired, and then we see in the third quarter we raised, as Tim said before over 44 million, and I see about another 40 million showing up 2004, fourth quarter. And so it gives us a full-year of about $120 million of raw material increases which we're able to offset by almost the same number of dollars in gross productivity where we're negotiating different things and changing VAVE. So on an overall full-year basis the good news is we had the productivity. The bad news is that it was almost offset completely dollar-for-dollar with what we saw in material increases.

Andrew Obin, Merrill Lynch.

I have a question on dividends, you noted that you want your dividends to be, I guess, 25 to 30% of your trailing, is it net income or free cash flow?

Free cash flow.

If I only look, I guess, at your net income line, I mean that should grow by -- I assume that should grow in line with net income as well, right, by --?

That's right, yes.

That would imply that if I look at your trailing numbers that we can see another sort of dividend increase, 20% plus, this year and next year. Is that the right way of thinking about it?

Mathematically that is exactly what I would conclude as well, doing the math that way, Andrew.

The second question is looking at 2005, can you talk about just sort of what you guys are thinking about '05? Because I think there is a fear that things are not going to get much better in '05, given how strong growth we had in '04. Could you talk just big picture stuff what you're seeing for '05?

Yes. What I think -- I hoped I tried to relay when I talked about the fourth quarter, Andrew, is that we see the fourth quarter continuing on into next year, so that when we talk about our market place for 2005, we see it providing us the opportunity to have organic growth, which is in the targeted range of the 4 to 6%. We see that as a very, very doable, sustainable-type growth pattern going through next year. And then you add on to that what we'll be doing on the bolt-ons, but overall I'm saying market wise, as I said, I think we're now starting to see our businesses have what is long-term, sustainable levels that generate 4 to 6% organic growth opportunities for us.

And in terms of thinking about dilution from Dresser-Rand and just looking at the estimates for next year, and I know that you have haven't spoken about it. But should I be thinking that you would be able to offset dilution from Dresser-Rand next year? Should I be thinking that I should incorporate some dilution from Dresser into my next year's estimates? How are you guys thinking about it?

I'm looking at how we windup redeploying the proceeds to basically offset what we have. I said our bolt-ons we've talked about and that's why I mentioned it being in the 400 to 600 million range. If you were to just take that as sort of the starting point that's what I would be looking to use to replace part of what we had in Dresser-Rand earnings for this year.

That's what I was thinking that dilution will be offset or am I better off taking it out of my numbers for now?

Well, I can't give you advice on what I would do if I were doing your forecasting, see I'm telling you what I look at for our Company. I see the fact that we're going to continue to really invest in new products. Remember we talked about $300 million of innovation for this year, that is not a one-time phenomena, that is something that I want to continue on an ongoing basis. So if we have markets that are growing in the 4 to 6% range, add innovation on top of that and do bolt-ons, I think you can see full-in that you're going to be talking about replacing all of those probed revenues and profits that were attributable to Dresser in this year. They were only 4 to 5% to start with, they just got to 10% really in the third quarter. So if you look at the total dollars and earnings that they generated, I would be personally very, very disappointed if we were not able to redeploy the cash and actually come up with upside. That is why we did this.

Joanna Shatney, Goldman Sachs.

Herb, since you just came out of your long-term planning program and you are still committed to the 15% margin goal, I'm assuming it is still for every business unit has to get to that goal, can you talk about how we can get Hussmann there? Is there anything new that we need to watch? I'm looking more specifically on the actual original equipment side of things. And can you also address the same question for the original equipment side of Air Compressors, because I think both of those businesses are where there might be some real incremental opportunity to improve?

Yes, let me start off with the air piece and build up to the [crashendo] with the display case one. On the air side, as we continue to introduce their Nirvanas, as well as the Unigys and so on, we are now seeing that we are able to really get very profitable unit growth and profits which we did not have, as I said, beforehand. So if you look at the profitability in our Air Solutions business, I think that it will be well north to 15% in the next very, very few years. And then you add on to that a profit of over 20-some odd percent in the aftermarket piece and I think you are going to see a very, very attractive picture going forward.

What kind of mix do you need to have on the air solution side between the Nirvana on those newer technologies and the regular centrifugal to get to the 15% margins on OE?

I think if you look at the rate of growth, it is really how we windup getting more oil -- the biggest improvement, Joanna, is going to on how we get oil-free to replace oil flooded when we get into some of our sales in the offshore-type parts of the world. And what we want to do is to be able to get to where oil-free starts becoming a meaningful number. Right now it is a very, very, very small part of our business. So if we can get the oil-free, Unigys, Nirvana type things to be something like 20, 25% of our total revenues. I feel that if you then do that cumulative margin number you are going to get there, because 50% of our revenue already comes from services which are north of 20%. Our China growth is the biggest growth that is going to do that.

Can you get to 25% by '05 or is that something that is going to take longer?

I think we're going to be able to do that even sooner than that because as we see our China and offshore markets, because our customers are opening up plants there, we'll actually I think accelerate that rate rather than get there slower. So I think the curve there ramps up quite nicely. The display case side, our biggest way to get to the 15% margins is really driven off the volume. That is where the real critical issue is right now. We have significantly reduced our manufacturing costs. We have set up a very, very efficient design and process that we're implementing going into what we call the "universal case" which is acceptable all the way from a Wal-Mart through the larger national US-type chains. And now our trick in terms is to make sure that we get the volume up, because that's really how we lever up at that. And in our 15% goal they make the cut as well during the 5-year horizon.

And if we just look at your order book and say all right Hussmann's later cycle, should we start to see something in the Ingersoll's reported orders from Hussmann's original equipment side?

I think you'll see some starting to show up already in the fourth quarter of this year. The biggest challenge for us is how fast we windup seeing the China market grow. We have forecasts from customers there that show 1,000 to 2,000 new stores in the next 2 to 3-year horizon. We are equipped and prepared to go in and supply them those needs that they have. The challenge really gets to being, is how fast to make those investments.

Barry Bannister, Legg Mason.

Did the deceleration in orders from pretty good clip, as I recall, in second quarter, refresh my memory, to about 6% in the third quarter take you by surprise and perhaps contribute to the somewhat tepid guidance on the fourth quarter, given that the fourth quarter is normally a fairly strong quarter for Ingersoll-Rand?

No. I would say to you that we think that what we're looking at at this time is order levels that we thought we would frankly have gotten to already last year. I'm not surprised. I thought that the 6% level that we would be seeing would be something that would continue going forward. The revenue increase of that you've seen is really as we windup working down our backlog. The good news for us so far on the year-to-date basis, as I look at 2004 versus 2003 our backlog is still up 200 million compared to last year. So as our orders continue to come in, at the 6-plus percent level that we're talking about, I expect we'll continue to see them, you know, pretty good shipments going along with that. But it didn't surprise me. And it really is one that we think we're more like at this sustainable level now.

Six versus, what was last quarter again?

We were talking about being up over 12%.

Right. So that is a pretty big drop. Now, let me ask you a question about this replacement of the earnings. I thought Dresser-Rand was going to do about 45 or 50 cents in '05 with 11 cents of buybacks from 4 million shares and 6 cents of interest income you've got to make up about 28 to 33 cents in my model. That would necessitate buying at 15 times earnings about 900 million to a $1 billion worth of companies next year. Are you pretty much coming out and saying that you are going to buy up to $1 billion of sales next year -- or $1 billion of companies next year?

No. What I said is that I think that what we have is about -- we said -- just make the numbers being in the 400 to 600 range to start with. We do not see anything -- we're not buying a big leg. We would have to be very fortunate to find that many bolt-ons to get that kind of volume. The rest we are looking at is really coming out from ongoing improvements in our new product introductions, our global growth opportunities, and so on. So we're really looking at the 4-core businesses really continuing to step-up in our organic growth rate.

David Bleustein, UBS Financial Services.

It's late so I'll just make them real quick. Herb, just to clarify, the $1.13 to $1.23, if you had -- still had Dresser-Rand would be a $1.23 to $1.33, right? The 13 minus the 1 cent minus the 2 cents of interest?

Yes, exactly. You got 10 cents more, Dave.

Okay, 10 cents. Okay, and then on page 11 are you comfortable with the 12 to 15% EPS growth in '05?

What we said is our minimum target growth going forward was in the 12 to 15% level and I am comfortable with that statement.

Even with the Dresser-Rand potential dilution?

That's what I said.

Jeff Hammond, Keybanc Capital Market.

You gave the price realization, I think, year-to-date for Climate and Infrastructure. Do you have that for the other segments, or was there any?

Yes. The increase is the thing that we put through ranged about 1 to 2% for the rest.

Okay. And then specific to Air Solutions, looks like the equipment side grew north of 20% this quarter. How would you characterize market demand versus what you are gaining in market share, and maybe talk geographically where there might be more strength versus less?

Yes. I would say to that it clearly is a combination. And it is hard to say which is due to new product versus what is due to -- how many should you buy because of demand over the new product versus how much because it is a new product. But overall I'm saying that we continue to see very strong growth in China and we're starting to see some very, very good robust growth in North America as well. Both areas continue to I think have a lot of upside for us.

Mark Koznarek, Midwest Research.

Just a couple of wrap-ups. The share buyback, how much is your -- sort of the range of the normal option creep per quarter?

On an annual basis, Mark, if we had like a -- if you look at the number of shares that we're issuing, we're issuing about 2.5 million to 3 million shares at most per year. So if I assume that we windup having a comparable return, if you will, based at the burn, you would have to put 2.5 to 3 million as sort of being the number.

And so you're not talking about 1 million a quarter net? It's -- that's the gross amount and then option creep?

That's right.

You're offsetting it, and coming out a little bit a head? Okay. And then any update on that big Hussmann Award with the big guys out there?

Yes. As I said, I hope this is a multi-year deal because it would not be worth the pain and suffering to do this for just 1 year. There has not been any formal contract announced. We continue to see increase in our activity level, domestically we're up north of 20% from where we were with them a year-ago. But there has not been any kind of a formal announcement. You'll see -- believe me, you'll be the third to know as that goes through. But right now we continue to work on a off-contract, if you will, type basis with them.

Tyroon Kahana, Wellington Management.

Herb, I'm just listening to your targets in terms of operating margins and kind of top-line and things, and if you believe what you've been telling people in terms of the 15% operating margin, I guess I'm really surprised that you're not willing to be more aggressive on share buyback. And I don't want to beat a dead horse here but a million shares a quarter sounds kind of paltry to me given the cash flow that this Company is generating and also given the current condition of the balance sheet. And I'm just wondering why you wouldn't step in and maybe take out 10% of the market cap of this Company because you've got the window, and if you believe what you are saying, then you've got a much higher earnings level coming out in 2006 time frame?

Let me start off by one, is that if I didn't believe it, I wouldn't say it. I think that we are, and I think if you look at our performance over the last couple of years, as we've gone through this transformation, I think we're delivering on what we said we would do. What I say about the share buyback is that as we talked about the earnings, as I answered the previous question, what I'm doing in our conversation is setting a floor for expectations. If we continue to see a stock price which has a PE of 10 to 12 or something like that on there, it clearly is a very, very good investment for our shareholders to increase and step-up to a share buyback. If we were $100 stock today, we would probably be -- you and I would probably be having a different conversation about what the best way is to redeploy our assets. So to the degree that our stock stays at what I think is a really disappointing PE level, I totally agree with you that shareholder value will be creative by going and making a much more significant stock buyback. But I'm not making into my expectations the fact that the stock is not going to go up. I'm hoping that we're able to demonstrate why we should be valued fully. If that does not happen, you are absolutely right. We will see that we have much more of a quote share buyback than what we're currently talking about. So I just look at this being -- I'm talking about redeploying it assuming that you do not have an aberration called a "very low stock price."

Robert McCarthy, Baird Asset Management.

That's actually Robert W. Baird. Herb, I have not heard a specific -- what do I want -- progress report in terms of return on invested capital. If you hit your targets over the next couple of years, where -- and I mean literally '05, '06 -- where should return on capital go in the near-term?

I would say to you that you are right about when we expect across the 15% threshold and we're talking heading north at 17%. And what I'm talking about is a 5-year planning horizon, Rob. We're talking about 17, 18%. We are going to be about 13% this year. And if you look at the math we just laid out you will see you are going to windup going up 15, 16, 17 plus% and approaching 18% in the planned period.

Okay. Thank you. And as a follow-up, how concerned are you about the serious weakness that we've seen in North American reefer orders over the last several months?

I was very concerned for about a month and then I guess less concerned as I saw and turned on that some of the activity is starting to pick back up again. Going in the year, we forecasted about 29,000 units, then euphoria hit and we thought we were well on our way to 35 to 40 and the numbers now that we're looking at are in the 30 to 32 type level, which still is up obviously significantly from last year. If you recall that famous graph we show about peak-to-trough, it would say that the peak is not reached until we get well north of 45,000. So I think this is just a short-term little hiccup in between. You hear a lot of reasons, whether it is shortage of truck drivers. I think a big part, Rob, that showed up which surprised people is when the trailer manufacturers put through a 10 to 12% price increase during the third quarter. I think that caused an awful lot of consternation of about, wow, do I really do this? And you are seeing as a result of that a buildup of some inventories I think in the Channels. I think as people see that that is the cost with the raw material increases there they will windup resuming their buying pattern because they are very profitable when they make the runs. I think they just have to swallow what this 10, 12% increase is going to do to them on their unit cost for the trailer itself.

Marty Polack, NWQ Investment Management.

Yes, just a couple of questions. When you guys talk about free cash flow and you mention 550 this year, you're not -- you're excluding the dividends as in that calculation, right? In other words, that's --?

That's already -- that's paid for, yes.

All right. So effectively you're adding back almost on an annualized basis another buck a share, another 170 million. How about working capital?

Working capital, you see as we're running somewhere between the 1, 1.5% of sales type number.

Okay. So essentially working capital is in use here?

It has already been taken out before you get to remaining free cash flow number.

So essentially --?

I'm sorry. I was talking about changes in the inventory. Is that what you're getting at? I was talking about -- I'm sorry, I misspoke, I was talking about capital expenditures. I was not listening, excuse me.

Working capital is -- as you -- as we reported, we run about 10% working capital of revenues. As we ramp up revenues it is a little bit greater usage than that. We are probably talking about 12, 13% incremental use of working capital as revenues grow.

Okay. With regard to CapEx, and, you know, the numbers clearly just continue to look incredibly low for a company that's investing so aggressively in the business and even talking about leaving some new products on the table, sounds like whatever -- some of the organic growth opportunity you're seeing essentially not being deferred just because you have got so much on your plate.

Yeah, what we have Marty is that in our process, we windup expensing most of the activity. Everything that you look at shows up in either my cost of goods or in my SG&A line. What we -- the only thing that we capitalize when we get into our new products are if we have to buy new equipment, and new tooling to go across that equipment to make it. So if at Bobcat we introduce 15 new products and we're able to run it across the same strip, as the same sheet metal equipment, the same powder paint line and so on, we windup not showing any kind of increased CapEx to do that. The engineering is all expensed as we go. That's what you're really see. If I added that back in, you'd see that the number was really a lot higher.

Okay. So effectively it is understood that the number is -- from a quality standpoint of view is very high, suggesting you're absorbing a lot of these expenses --?

Yes. What you are seeing is that the plant group -- I think that the most important graph that I would steer you to is the one that shows the output per square foot of our manufacturing. And if you go back and you see that we're up over 50% in throughput per square foot compared to where we were 3 years ago, and that means obviously that I'm not putting up brick and mortar in order to do that, and I'm running it across the same manufacturing line that we had before. Everything that we do is mix model, so I do not have to set up new assembly lines. It is really just -- it now gets to be more of a capacity issue running through that same plant.

I mean, have you defined that number of, let's say, those costs across an entire enterprise. How much in effect is there in this core absorption of costs that obviously generate revenues once the products are introduced? On an annual basis, what type of number is kind of the expense line that effects the entire enterprise?

I think that we're about 1.5 to 2% of sales that really ties into that part. So if you do that you're somewhere between 150 and $200 million.

Yes. Last question, just other comments that were made about share repurchase. I guess in a sense there is a catch-22 out there. To get the stock price up so you can effectively indicate -- there is a price that buying back stock doesn't make so much sense. It is almost as if the notion is the reason we're not buying back stock is that there is a confidence that the stock could go up. While that may be true. It seems that you are not putting your best foot forward by providing perhaps the real clearest signal, which is that, especially with this billion dollars coming in on the sale of Dresser, that we're still left with this notion of very underleveraged balance sheet, and a current PE multiple on sort of the '05 expectations, that is extremely low. And not stepping up to the plate here, just doesn't make sense if really is the conviction that you describe is the case. It is almost, again, the catch-22. I think if you've got an understanding that the stock can go up from here, yeah, you know it would make sense to wait. But maybe that's what the market does want to see, a more aggressive posture towards the share repurchase. That is just our point of view.

I heard what you said. Operator, we'll take 2 more questions please.

Joel Tiss, Lehman Brothers. Mr. Tiss, your line is open.

I think he is probably in the Caterpillar call by now.

Alex Mitchell, Scopist Asset Management.

I want to ask are you affected at all by the recent tax law change, the repatriation of offshore --?

We're -- I mean, that was just passed by the -- both Houses of the Congress. It has not even been signed by the President at this point. It is really too new to assess at this point. We're certainly studying what's -- what's out there. We think quite frankly preliminary read would suggest that there are some opportunities for us in the fourth quarter. Overall, we're pleased. We think it's going to be favorable for us.

I think though let's make sure we're clear, there is the entire issue of our re-incorporating in Bermuda. In this new tax law this is finally something that would be behind us legally. We windup having a new law which says that any company that winds up potentially re-incorporating prior to March 2003, all the benefits and all the activities they had would be grandfathered. So that would definitely take any of those kind of questions off the table completely.

So that risk is gone.

That's what I'm saying. That's a risk that's gone. And then we get into about the trade-offs between [F.I.S.K.] and all the other stuff that is there, that is the part that Tim was talking about we need to look through. What the final pieces will look like. But the piece I think that is the most important to me is that finally once and for all it gets rid of any kind of a, "Yeah, but what is the potential of having to swim back from Bermuda?"

Is the net going to be additive though?

I think it will be. Because when I looked through it -- remember, we still manufacture over 45% of our products in the U.S. So as we produce the Bobcats in North Dakota and ship them out, we will, based on the rules that they have on there, participate in that lower tax -- the statutory tax rate that's going to go down, that will impact us there, so we'll benefit from that side.

No, I meant the repatriation of offshore income?

We have a modest amount of benefit resulting from that. We have a little bit of stranded cash in some countries. But it is not going to be -- it is not going to be a significant one for us.

No.

And just on the share repurchase, and I know you are probably tired of answering this, but is it -- are you signaling I guess that the million shares per quarter, that's a minimum --?

That's what I said.

-- commitment? For a minimum?

I'm going to underline --.

Not an average necessarily.

I said -- I will go back and I think that if you can playback the tape, what you will hear is the words that I said is that "at a minimum of."

And gentlemen I'll turn the call back over to you for any additional and closing remarks.

Thank you very much. We're going to wrap-up right now. And thank you for rejoining us. There will be an instant replay of today's conference call available at approximately 3:00 p.m. today. It will be available until October the 28th. The call-in number is 888-203-1112. And the pass code is 954339. The international 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 the conference call will be available on the Ingersoll-Rand website next week. Also please call me, I'm Joe Fimbianti, if you have any additional questions at 201-573-3113. That concludes the call. Thank you again.

That does conclude today's conference call. I'd like to thank you everyone for their participation. You may now disconnect.