特靈科技 (TT) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Ingersoll-Rand fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks I would like to turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti.

Good morning. Thank you, Jamie. This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our fourth quarter 2005 conference call. We released earnings this morning at 7:00 a.m. And the release and all the other information should currently be posted on our web site. I'd like to cover the usual housekeeping items. This morning concurrent with our normal phone-in conference call we'll be broadcasting call to our public web site. You'll also find the slides for the presentation on the web site. To participate via the web go to www.irco.com, click on the yellow icon on the home page of the website. Both the call and this presentation will be archived on our web site and will be available late this afternoon. Now, if you would please go to slide number 2.

Before we we again 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 September 30, 2005 10-Q for details on the factors that may influence our results.

Now I'd like to introduce the participants of this morning's call. We have Herb Henkel, Chairman, President and CEO of Ingersoll-Rand; Tim McLevish, Senior Vice President and Chief Financial Officer; and Rich Randall, Vice President and Controller. We'll start the formal presentations with Herb Henkel and we'll go to Tim McLevish, followed by a question and answer period. Herb will start with an overview. If you would please go to slide number 3.

Thank you, Joe, and good morning, everyone. This morning we announced record fourth quarter earnings from continuing operations of $0.81 per share which represents an increase of 27% compared to the fourth quarter of 2004. This was above the upper end of our previous EPS guidance range of $0.75 to $0.79 per share. As with most quarters with diversified industrial companies we had several business units that outperformed our original expectations and others that missed the mark where we're taking focused corrective action. Tim will review the business unit performance in closer detail. Now please go to slide number 4.

Our fourth quarter results also completed a record earnings year for Ingersoll-Rand. Full year earnings per share from continuing operations of $3.09 per share or 31% above last year. For the first time in the history of Ingersoll-Rand we exceeded $10 billion revenue. Full year revenue topped $10.5 billion which was an increase of over 12% and well above our annual revenue growth target. We also made progress increasing our operating margins and return on invested capital despite over $175 million of material cost increases. Now please go to slide number 5.

During the fourth quarter and the full year, our progress reflects our ability to execute our core strategies and to capitalize on positive market conditions. The revenue on earnings increase in 2005 is a direct result of our long range vision dedicated to creating shareholder value by achieving dramatic growth, operational excellence and dual citizenship. We continue to make gains in all of these areas in 2005.

One main focus of building long-term value is related to consistent revenue growth going forward. We continue to emphasize developing innovative products and solutions for customers, expanding highly profitable recurring revenues and executing low risk high return both on acquisitions. Please go to slide number 6.

Our investment in new technologies and solutions has been a major contributor to continued revenue growth over the past several years. We introduced new products in each of our business sectors in 2005 which collectively generated more than $335 million of revenue. These results exceeded our goal of $250 million. During the last three years, we have introduced over $800 million of new product that will generate over $1 billions of revenue in 2006. Innovation will continue to be one of the primary aspects of Ingersoll-Rand's ongoing growth strategy. We have key new products in each business sector that will be introduced during our next five-year planning cycle. Please go to slide number 7.

Also during 2005 we grew our recurring revenue stream, our highly profitable market leading brands and large installed product base will provide significant opportunity to grow going forward. Recurring revenue totaled approximately $2.2 billion for the year, an increase of about 14% compared to 2004. Recurring revenue has increased by 83% since 2000 and accounts now for about 21% of total revenues for 2005. All segments had excellent improvements in recurring revenues for the year. Compact Vehicles, Construction, Industrial and Security all had double digit year over year improvements, and climate control technologies increased by 7% compared to 2004. Please go to slide number 8.

We also supplemented our organic growth during 2005 by completing 15 bolt on acquisitions that added more than $300 million to our full year revenue which is equal to about 3 percentage points of our total growth for the year. We were able to expand the geographic scope of our security business with successful acquisitions in Europe, India, and China.

During 2006 and beyond, we will continue to make high value added bolt-on acquisitions as part of our ongoing strategy to compliment our organic growth. In the event we are unable to acquire businesses that fill a product or market void, we will make the required internal investments necessary to capitalize on the identified opportunity. These investments would include incremental engineering and S & A for new product and market development activities.

Since 2000 we have successfully completed 60 acquisitions adding over $3 billion to our revenue base and extending our geographic reach. We have demonstrated that we have a rigorous discipline process to identify, analyze, and acquire businesses that fit our long term strategy. We have avoided the huge premiums being paid for many public deals and have focused on smaller private organizations where prices have been more reasonable. We continue to believe that the major product lines platforms we have in place will support substantial growth in earnings, cash flow, and return on invested capital. Now please go to slide number 9.

Moving to operational excellence. During the year, we continue to benefit from cost reductions related to productivity investments. Full year operating income improved by 22% with operating margins up a full percentage point to 12.9% despite a $175 million dollar increase in material costs. Annual margins were penalized by about 1.7 percentage points due to material cost increases. For the full year price increases and surcharges helped to partially offset the burden of material cost inflation.

In 2006 we expect to see continued high material, transportation, and energy costs and we will focus on protecting operating margins by increasing productivity and additional pricing actions. Now please go to slide number 10.

During 2005 we continued to improve our business execution by expanding Link Six Sigma and other continuous improvement programs throughout our operations. The early returns from these programs have made a substantial impact on our operations. I am confident that a sustained corporate wide focus in these areas will help to significantly reduce operating costs going forward and reduce working capital requirements. In addition, we expect our operational excellence initiatives to help minimize capital expenditure requirements for additional production capacity.

During 2005, we establish 7 Works Dream Teams across major business processes including Operations Planning, Engineering, Supply Chain, Manufacturing, Services, SG&A, and Human Resources. Our objective is to optimize our major business processes using lean methods to reduce costs in all aspects of our operations while improving the quality and reliability of our products and services. As an example of our focus, during the fourth quarter we conducted nearly 100 [Kasin] events globally accounting for significant productivity improvement. During 2006 we will remain dedicated to implementing our continuous improvement plans. Our business operating system provides us with a long-term competitive advantage across all of our five business sectors. Now please go to slide number 11.

During 2005 we maintained a strong balance sheet. Our debt balance at year end was approximately $2.1 billion or about 1.1 billion of net debt. Our debt to capital ratio is approximately 26.7% which is comfortably below our long-term range target of 30 to 35%. Please go to slide number 12.

During the year, we also lived up to our commitment to deploy cash to create shareholder value. In August 2005, the board of directors increased the quarterly dividend by 28%. The Company's dividend has increased by 68% over the last two years. We will annually review our dividend policy in light of our cash flow expectations to make it consistent with other high grade diversified industrial companies.

You will recall that at the same time the board expanded the Company share repurchase program to $2 billion. For the full year 2005, we repurchased approximately $765 million of shares and repurchased approximately $900 million since the inception of the program. We expect to complete the remaining 1.1 billion of the authorization over the next two years. Now please go to slide number 13.

During 2005, we generated 784 million of available cash flow. This is the 8th consecutive year that we have generated over $600 million for a total of over 5.5 billion over that time span. Please go to slide number 14.

We are encouraged by our operating performance in 2005. We delivered strong overall revenue growth and were able to leverage that growth to make improvements to our operating margins, earnings, and return on capital.

We continue to increase our investments in new product development, penetrating developing regions of the world and building global dense friends. We continue to believe that over the next five years we have a strategy and organizational structure that will yield substantial opportunities to expand revenue and earnings to create additional shareholder value going forward. To that end, I want to reiterate our road map for enhancing enterprise value.

As this chart demonstrates, we start from an unwaivering vision of dramatic growth, operational excellence, and dual citizenship. This vision has been in place since 2000. We established our long-term strategic focus in 2001 and we continue to operate within this strategy.

We're continuing to execute our strategy through critical operational areas which have now been formally certified as the Ingersoll-Rand business operating system. Our process excellence is driven by Link Six Sigma methodologies and we look forward to deriving significant productivity gains and cost efficiencies as we continue implementation of our operating system across the entire enterprise.

We have established important performance measures across several areas of operations. Our continuous improvement against these performance measures will drive our Company's ongoing progress. And progress has been the clear financial impact as reflected by our targets for growth, operational income, EPS, return on invested capital, and cash flow. Now please go to slide number 15.

We believe we can grow organic revenues 4 to 6% for the total company and our cash generation will finance additional bolt on acquisitions to reach 8 to 12% annual revenue growth.

Our plan also indicates that we have substantial opportunities to lean on operations to reduce costs and increase efficiency. We continued to target a 15% operating margin which will be a key driver towards reaching our earnings growth, ROIC, and cash flow goals. Please go to slide number 16.

We have demonstrated a disciplined approach to acquisitions and intend to acquire new product lines and technologies, expand our geographic reach, and accelerate the growth of recurring revenue. We expect to spend about $400 million in acquisitions in 2006.

Additionally, we will enhance the total return to shareholders for our dividend policy. We are targeting our dividend payment to be about 25 to 30% of our three-year average available cash flow.

Finally, as we believe our common shares remains significantly undervalued, we will continue to buy back more of our shares in the open market.

In summary, we continue to successfully execute a sound long-term growth strategy as we enter 2006 we are well positioned to continue delivering profitable growth, strong cash flow and create value for our shareholders. Tim McLevish will now cover Ingersoll-Rand business unit performance in more detail. Tim.

Thanks, Herb and good morning. I'd like to begin my discussion with the quarterly financial results. Please turn to slide 17.

Revenues for the fourth quarter were in excess of $2.7 billion up 10% from the comparable period in 2004. The increase is attributable to growth in all five operating segments with double digit growth in our construction, industrial, and securities technologies segments.

Organic revenue increased by 6% and 7% after excluding the unfavorable impact of currency. The approximate 1% currency impact on revenues was consistent across all of our reported segments.

Operating income for the quarter was $345.7 million up $47.8 million for 16% from 2004. This reflects the margin of 12.7% of revenue, an increase of 60 basis points from the prior year. These continued strong operating results were driven by volume leverage, new product introductions, pricing improvements, and productivity actions that offset the unfavorable effects of inflation and currency.

During the quarter we continued to be negatively impacted by approximately $24 million in raw material, transportation, and energy inflation. We were able to offset the majority of this inflation by savings from our productivity programs and price surcharges.

The quarter also included some one-time items that netted to a pretax benefit of $3 million in continuing operations. Unfavorable life or reserve adjustments and other inventory charges were more than offset by favorable adjustment to previously established reserves.

Moving down the income statement, interest expense was $35 million which was $2 million lower than the fourth quarter of 2004. The year over year improvement resulted from a reduction in our average interest rates partially offset by modestly higher debt levels.

Other income for the quarter was $13.4 million compared to 800,000 in the prior year. Most of the one-time item benefits mentioned earlier fell into the other income while the offsetting expenses were reflected in costs of goods sold. We also benefited by interest on our cash balances.

Our fourth quarter effective tax rate was 15.9% compared to 15.1% in 2004. The increase reflects a higher proportion of income derived from the higher U.S. tax jurisdiction. The overall low rate is attributable to the favorable tax structure and ongoing tax planning initiatives.

Earnings from continuing operations for the fourth quarter was 274.9 million or $0.81 per share which was above our previous guidance range. Our favorable results were attributable to strong markets and improved operating margin.

Earnings from discontinued operations were $18.7 million or $0.06 for the quarter. The ongoing discontinued operations costs totaled $6.3 million net of tax. This cost was offset by $25 million of gain primarily resulting from the final tax adjustments from previously divested businesses. Our total net earnings for the quarter were $291.6 million or $0.87 per share. Please turn to slide 18.

Excluding the favorable impact of CHIZA. Total company revenues grew by 8%. After excluding the unfavorable effect of currency revenue growth was achieved in all of our major geographic regions.

North American revenues were up 9% and constituted approximately 65% of the total.

European revenues were down 2% before adjusting for the unfavorable exchange impact. Excluding currency charges -- changes revenue increased modestly in the region.

Latin America and Asia Pacific grew by 43% and 12% respectively.

I'd now like to take a few minutes and talk about the results of our businesses. Please turn to slide 19.

The Climate Control Technology segment which consisted of the market leading brands Hussmann and Thermo King reported fourth quarter revenues of $763 million, up 4% from the fourth quarter of 2004.

Climate Control America's revenue was up 4% over prior year with strength in transport refrigeration, auxiliary power units, and our contracting business offset by continued softness in our refrigerated display case business. Climate Control International revenues for the fourth quarter were up 3% over last year.

Revenues in Asia Pacific improved as a result of the market growth in display cases, truck and trailer applications. European revenues were down slightly as the unfavorable impact of currency offset modest growth. Fourth quarter operating income for the segment was 89.3 million representing an operating margin of 11.7%, an increase of 70 basis points from the fourth quarter of 2004. The operating margin improvement was driven primarily by favorable business mix. Inflationary cost increases were offset by productivity programs and price realization. Please turn to slide 20.

The Compact Vehicle Technologies segment generated fourth quarter revenues of $657 million up 9% from 2004. Bobcat revenues increased by 12% over the prior year attributable to new product introductions, growing North American markets, and the continued strength of the attachment and after market parts businesses.

Club Car fourth quarter revenues were flat compared with the entire year. Double digit growth in the international markets and growth from utility vehicles offset modest domestic declines attributable to a soft Gulf market and revenue lost from the end of the Pathway program in 2004.

Fourth quarter operating income for the segment was 96.8 million representing an operating margin of 14.7% compared to 15% in the prior year. The decrease in margin is attributable to gross leverage being offset by an unfavorable currency impact and investment in new products. Please turn to slide 21.

The Construction Technologies segment reported fourth quarter revenues of $264 million Up 10% compared to 2004.

Fourth quarter road development revenues decreased 2% due to continued weakness in the Chinese paving market and delays in shipment of our small paver line partially offset by improvement in our worldwide compaction sales.

Bookings showed a strong 12% improvement over the prior year which will provide the foundation for improvements in the first quarter of 2006.

Revenues in the utility equipment and attachment business were up a combined 26% compared to prior year. The substantial revenue growth was fueled by new products and significant recurring revenue expansion.

Fourth quarter operating income for the segment was $9.5 million representing an operating margin of 3.6% compared to 8.3% in the prior year. The reduction in operating margin was attributable to unfavorable one-time costs associated with inventory adjustments and a product recall and fuel campaign on small pavers. Additionally the segment experienced rising material costs particularly in fabricated components, tires, and hydraulics.

As we look forward we are confident the problems that plagued us in 2005 are behind us. As such, we expect margins to sequentially improve due to favorable volume and mix, material and manufacturing productivity, incremental price realization, and the nonreccurence of one-time costs experienced last year. Please turn to slide 22.

Industrial Technologies segment produced fourth quarter revenues of $471 million an 11% increase over the prior year. Air Solutions revenue grew 13% driven by new products and continued recurring revenue growth.

Productive Solutions revenues were up 9% versus prior year due to growth from new products and double digit recurring revenue growth. Fourth quarter operating income for the segment was 57.5 million representing an operating margin of 12.2% compared to 13.5% in the prior year. The decrease in margin is primarily attributable to growth leverage being offset by increased investments and new product developments and business systems in an unfavorable one-time cost associated with the LIPO reserve adjustment. Please turn to slide 23.

Fourth quarter Security Technologies segment revenues were $558 million up 22% compared to 458 million in the fourth quarter of 2004. Excluding the impact of acquisitions and divestitures from both periods revenues were 4% higher than a comparable 2004.

We experienced strong growth in all regions with particular strength in our Electronic Controls Integrated Systems business at 9%. Fourth quarter operating income for the segment was $115 million representing an operating margin of 20.6% compared to 20.5% in the prior year. Please turn to slide 24 and let's move on to the balance sheet.

We finished the quarter with our investment and working capital at 9.6% of revenue which is in line with our target range of less than 10%.

Inventory terms increased from third quarter of the year to our normal levels. The supply chain issues that had plagued us all year abated somewhat in the quarter which allowed us to bring down safety stocks previously built.

The sales outstanding increased slightly year over year reflecting strong international growth and regions where terms are longer than our average. Our days payable outstanding increased by three days helping to offset the small increase in receivables.

At the end of the year, our total debt was $2.1 billion an increase of approximately 200 million compared to the year end 2004. This increase is attributable to the ten-year notes issued during the second quarter of last year to lock in attractive rates. This new debt will replace higher coupon borrowings which mature in the second quarter of 2006.

Our debt to capital ratio at the end of the quarter was 26.7% and 13.6% on a net basis after considering the $1.1 billion of cash we have on hand.

Capital expenditures for the year were $112 million or a little over 1% of revenue while depreciation and amortization expense for the year was $196 million. Our solid balance sheet continues to provide a foundation to support the growth strategy of our Company. Please turn to slide 25.

Before Herb concludes our formal remarks with the outlook, I'd like to take a minute to walk you through the expected impact of FAS 123R in 2006.

For the full year 2006, stock option expenses forecasted to decreased operating margin by approximately 30 basis points and earnings per share by $0.05 to $0.06. We expect the impact to lower first quarter operating margin by approximately 50 basis points and earnings per share by $0.02 to $0.03.

This front end loading of expense is due to the timing of option grants in the first quarter and the immediate expensing requirement for eligible employees. In quarters 2 through 4 we estimate a cost of $0.01 per share each quarter.

Herb will now conclude our formal remarks with the outlook.

Thank you, Tim. Please go to slide number 26.

Over the last several years we have demonstrated that our business model is working and that our strategy is on target. In 2006 we expect to build on the momentum generated in recent years and improve our operating performance across our businesses.

We will also step up our investments in new product development to expand our product portfolio and market development activities to increase our global capabilities, especially in high potential markets such as India and China where we have made a number of recent acquisitions. We will also be increasing our engineering capabilities in the Czech Republic, India, and China.

We will also invest to expand the manufacturing footprint for Bobcat products in China and the Czech Republic and to develop the cold chain in India and China where significant opportunities exist for a climate control expertise.

Our 2006 plan includes approximately 80 million of incremental growth investments. These investment costs will be absorbed through the income statement and are included in our full-year forecast. These investments will contribute to our revenue growth in 2007 and beyond and will help to offset the impact of any potential slowdown in North America.

As we close 2005, we continue to experience solid demand in most of our end markets. Our orders were up about 12% compared to the fourth quarter of 2004, and about 7% excluding acquisitions. Based on these trends, we're expecting organic revenue growth of approximately 6 to 7% for total Ingersoll-Rand for full year 2006. Each of our major business sectors will enjoy positive revenue growth in 2006.

Acquisitions will also provide additional revenue growth for the year, but none are reflected in this forecast. Material, transportation, and energy costs will continue to be an issue as we enter 2006.

2005 full year material costs of $175 million were about $25 million above our original forecast and we're continuing to see high prices for plate steel, copper, aluminum and lead used for batteries. We expect material inflation to add over $100 million to 2006 costs. We're continuing to focus on minimizing the impact of material cost increases making permanent reductions in our operating cost structure through productivity gains.

Operating margins will improve from higher volumes and operating cost reductions. Please go to slide number 27.

Earnings from continuing operations for 2006 are forecast to increase by 12 to 15% to $3.45 to $3.55 per share compared to $3.09 per share in 2005.

In 2006 as Tim described to you, we will recognize $0.05 to $0.06 per share from the expensing of stock options. Including the options expensed, full year EPS from continuing operations are expected to be $3.40 up to $3.50.

We also expect discontinued operations to account for $0.06 per share of costs for the year. This totals to $3.34 to $3.44 per share. This forecast is based on a tax rate of approximately 17%.

Capital expenditures will increase to $175 to $200 million compared to $112 million in 2005 to support a growth strategy. We also expect to generate at least $800 million in available cash flow.

Our baseline plan for 2006 leaves us with undeployed cash and a strong underleverage balance sheet. This cash will be available for high value both on acquisitions, investments and growth initiatives, and share repurchases. The higher revenue combined with improved productivity will drive our year over year earnings growth. Please go to slide number 28.

For the first quarter of 2006, continuing operations are expected to improve by 9 to 15% to $0.73 per share to $0.77 per share. First quarter earnings will be impacted by option expense up to $0.02 to $0.03 per share, which results in earnings from continuing operations of $0.71 to $0.75 per share.

First quarter discontinued operations are forecasted to be about $0.02 per share of costs, the same that we realized in 2005. Therefore, the first quarter 2006 total EPS are expected to be $0.69 to $0.73 per share. Please go to slide number 27.

In closing, 2005 was another record year for our Company. We met and exceeded all of the commitments we made to our shareholders in January, 2005. We are positioned to deliver 2006 results that meet our stated goals for revenue growth, earnings growth, margin improvement, ROIC improvement, and cash flow. In addition, we will combine future bolt-on acquisitions with enhanced organic growth investments to ensure consistent long-term growth in 2007 and beyond. This ends our formal remarks and I'd like to open the floor to your questions. Thank you.

Thank you. [ OPERATOR INSTRUCTIONS]. We will take our first question from Mark Koznarek with FTN Midwest Securities.

Hi, good morning.

Good morning, Mark.

You know, I have a few questions, but I think I'll just you know, comply with the request and focus on the acquisitions and you've mentioned that 300 million of run rate revenue is acquired this year. Can you give us an idea of what multiple you paid for that and what earnings contribution was captured within the current year? You know, within the year just ended?

Well, on balance we did a number of acquisitions. That I say balance it was probably 8 to 9 times EBITDA was the multiple overall. And the earnings contribution as you perhaps know, Mark, you've got purchase accounting adjustments so for practical purposes you step up your inventory to market value at the time of an acquisition, so until you've bled out that higher valued inventory, you have depressed earnings. It usually takes two to three quarters to do so, and so, for instance, the CHIZA it wasn't until the fourth quarter that we really were contributing earnings for the quarter.

Overall, I would say that of - we probably contributed $0.07 in 2005 from the combination of all of our acquisitions. About $28 million.

Okay. So the follow on then is with the , you know, pretty robust environment out here, you know, you're expecting to do a larger amount is your goal for '06. Would you expect to be paying higher multiples and therefore, would we expect to get another, you know, $0.07 to $0.10, you know, proportionally, higher than the $0.07 you just mentioned or because of higher multiples is acquisition likely to be kind of a wash to earnings in this current year?

Well, I think there's two parts of that, Mark. Number one, the 300 million is just the revenue realized in 2005. There are obviously some stub periods which will roll over into 2006 so the number that we actually acquired in revenues was closer to 400 million. But what I see in the environment right now of acquisitions, larger public deals where there are not only strategic buyers but private equity firms, they're becoming very, very pricey and, as I said, we're seeing ourselves tending to do more, make our own, which is why we see the increase in the investment we're making on the engineering and so inside, and we're seeing ourselves turning more to the smaller private type transactions.

So my expectation is that we will continue to see the 8 to 9 times EBITDA type numbers so I don't see the price going up, but I see probably we're going to have to do smaller more of them or do more make in 2006 compared to 2005. And the overall impact is that if you took and you delivered on the 400 million which we are forecasting, I think you're about right as to what the upside would be in those deals.

Okay. Great. Thanks, Herb.

I think the important message to take away Mark, is that we're going to maintain our discipline, we are going to make sure that whatever acquisitions we do are good strategic fits and add value tor our shareholders. And as Herb mentioned, we all always have to make buy options so that if we can deploy our resources into, for instance, hiring some engineers to develop some new products rather than purchase that capability, we'll make the optimum decision.

Thanks, Tim.

We'll go next to Gary McManus with JPMorgan.

Hello, everybody. Can you elaborate further on the fourth quarter margin in the construction technology area? I think you were talking about inventory adjustments, product recall, how much of this would you consider nonrecurring?

Well, we would -- we would hope and expect that the -- you know, all of it is nonrecurring. It is nothing fundamental wrong with the business or the markets. We would -- we have -- we did not consider the fourth quarter of this year our finest hour with our rogue developments. I would roughly break the problems that we had in that business into three large buckets, one of which is that we've been talking about earlier in the year. The inefficiencies in manufacturing due to the supply disruptions and the rising cost of raw materials and availability of those raw materials, probably cost us, if I say -- we think it cost us about $50 million in earnings, the problems that we had and approximately a third of them we would attribute to that type of activity.

We mentioned earlier that we've had problems in China with the curtailment or the slowdown in that market primarily driven by changes by the government and availability of financing for our road machinery and construction equipment purchases. And we've further had a problem partly as a result of the slowdown we had a substantially underperforming distributor that distributes the majority of our Chinese road pavers, and during the quarter we had to terminate that relationship and build a new distribution channel and by the combination of the slow market and the disruption because of our distribution, probably cost us another third of our problems. And we introduced particularly a new product line in the fourth quarter and we ran into some problems and had some warranty costs and some costs associated with the campaign to fix that product. And that was about the other third.

So as you can see, the majority of those problems are behind us. It is not to suggest we -- that business really in these markets should be a 15 plus percent OI margin business. We don't expect in the first quarter to get all the way back there but if you take where we are today and probably expect that we'll get halfway back in the first quarter of 2006 with an expectation over the course of the year we'll complete the recovery.

And the 15 million reference was a fourth quarter number, is that right?

That's a fourth quarter from what we thought we'd realize.

My follow-up is on your 2006 outlook, you said you expect operating margin improvement. And when I do the math I'm having a hard time seeing how your operating margin is going to improve a lot.

I mean, if you look at 6 to 7% organic revenue growth, I assume you'll get a few percentage points more from acquisitions, and maybe -- you know, maybe get hit a little bit on currency but you say 12 to 15% earnings per share growth and that's excluding the FAS 123 impact. But obviously you're going to have a much lower share count which that helped this year, '05 by like 5 percentage points. But it doesn't look like your operating profit growth is going to be much different than your revenue growth. Maybe a little bit better but you're not really suggesting a lot of margin improvement so could you elaborate on that?

Yes. What we're saying is that for '06, when we went into our year -- actually if you go back to third quarter call, our expectation was that material was going to be favorable to the tune of at least 20 to $50 million and as you now heard from us we're actually seeing it go - continuing to go to the other direction. That continues to put more and more pressure. So when I do the math including our productivity, including the raw material increase and so on, we're forecasting to go up somewhere between 0.3 to 0.5300, five hundred basis points. That's it and our numbers of because of the drive that you said comes from the option expense plus what we're seeing on here.

So that's why I said to you, I think it's really important for us to as we go into the year to redouble our focus on the operational excellence type move and spend money and going and doing those 100 plus [Kasin] events because I'm not happy with the improvements that I see on the year over year basis being eaten up by what we have as cost increases.

I also am thrilled when I look and see others forecasting a much more robust price increase than we had built into our numbers. We were talking numbers which were closer to the 1.50 % and reading from brand XYZ that are out there, I'm hearing things like 3%. So we'll need to go back and revisit that to see if we can push harder on those two areas.

Okay, Thank you.

We'll go know to Joel Tiss with Lehman Brothers.

How's it going, guys?

Fine, Joel. Thanks.

Can you talk a little bit more about security and safety, why the operating profits were up so much in there?

The one timers going the wrong direction would be the, you know, one part of it, but I think the second part that you really now have is that we now are seeing the full impact of the profitability of a CHIZA which we had not seen really beforehand.

As i said in the past, the operating profitability for CHIZA runs 15, 17, 18% and once we get down with the famous purchase price accounting in the first three quarters we're actually now starting to see more of a typical run rate that's out there. And so the gross of 9% with the kind of gross margins that we have out there, this is in the fourth quarter business that runs 20 some odd percent in year over year. We're still talking averaging around 17, 18% at least.

Fourth quarter is traditionally a strong quarter for that business. The margins, if you look at last year they're a little bit higher.

So consider it this way, Joel. I look at this is that this fourth quarter result bodes well for the 18% high target we set for ourselves in 2006.

Okay. Can you also give us a little bit of a highlight of some of the new products that we could be looking for in 2006 even if you can't give any sort of specific just sort of areas that they're in and maybe holes that they may be trying to fill?

There's really two pieces to that, Joel. One has to do with the geographic reach and we clearly at this point in time are making product investments in China specifically for products that are suited for the local market.

We find that the air conditioning bus unit that we build that goes on to a Volvo unit in Europe and the U.S. does not work for the Shanghai Municipal Bus company. So we an awful lot now of more design for the region that has capabilities and serviceabilities that are really for that particular region. Those are going to be key. They are in every single one of our businesses. In addition to that, if I go and do reverse security, I think we'll going see more and more as you -- the electrification of [Schlage]. As we see more and more electronic lock solutions replacing the typical lock and cylinder that we have out there.

Compact equipment we have a full robust schedule of both track vehicles as well as loaders as well as excavators that again are suited for mostly European and China type applications.

So I think if I can go across every one of those businesses, we see the ability to again, as we did back in 2001 step up our investment and wind up continuing to grow at levels of $250 to $350 million of brand new introduced products during 2006 and also 2007. Next question, please?

We'll go next to Steven Volkman of Morgan Stanley.

Hey, good morning.

Hi, Steve.

Hey, Herb, it sounded to me like when you talked about your cost increases -- sorry about that. In 2006 being offset by various types of improve productivity et cetera, you really didn't talk much about price and it just seemed like a kind of glaring omission. Is there -- can you just describe the pricing across various businesses and why we shouldn't expect that to be up more?

Well, I said to you what we have -- what we envision right now based on what we see in the competitive marketplace is that we're running number which are closer to like the 1.5% range maybe to 2% unlike others as I said that I was just reading about in the last two days I think they actually pushed for 3%.

We continue to see significant resistance from end channels. If you look at Big Box being a good example or some other construction equipment we find that there are many, many offshore manufacturers, many from Japan who are not raising prices and continue to create a very very competitively placed marketplace.

It's an area as I said to you before, I think we need to push into harder, but right now in our numbers what we have confidence in is delivering somewhere between 1.5, 2% and that's pretty much across the board consistent for all of the business units. It isn't really much stronger in one or much weaker in another.

On balance in 2005 we were able to get a little bit over 2% price increase and we would use the raw material costs inflation and transport inflation obviously to justify increases in 2006 and we'll push through what we can. As Herb pointed out, particularly you get into the Big Box and that becomes a very difficult challenge.

That's understandable. And can you touch a little more on China with respect to the market there? Is that starting to turn at all yet or sort of how do you see them?

I see it if I were to draw this curve for you, being an old engineer type, I would say to you that I've now seen the bottom of the trough, but I haven't seen any real dramatic increase yet. I'm sort of in the inflection point where it's going positive. Our guess is that on the overall construction side of things we were off about 20% in the market side and that going forward now it's going to wind up growing up to where we will wind up probably going up to offset that so that hopefully by the year end 2006 we've actually made back to where we were when we entered 2005. That's our expectations. That was a construction comment.

The other of our businesses remain strong in China. Industrial technology, the air compressor business remains quite strong while coming from quite a small base and security we have good growth expectations in that market and our climate control as also as I mentioned experienced in the strong quarter and a strong quarter in the fourth quarter and we have high hopes for continued strength in 2006.

In 2006, we are actually conducting some market tests both in India as well as China with partners where we're actually going in and putting in the full coal chain coming from the first case in India we're dealing with a company called the India Tobacco Company. They actually grow vegetables so they have farms that we'll be working with them and taking it from there all the way to -- they're going to be putting in stores on a retail basis. Those numbers are not included in ours. They frankly at this point in time are expense items. If we're able to have those be successful there should be even significant upside for Climate Control both in India as well as in China.

Thanks.

We'll go next to David Raso with Citigroup.

Good morning.

Hi, David.

Just looking at the guidance just for apples to apples, if we pull out the options we're looking at roughly 340 to 350. I'm just trying to think through the Company target of 12 to 15% earnings growth. I'm trying to think of the transition especially trying to look out to '07. Obviously, I'm not asking for any '07 guidance here, but the organic growth that we saw in '05, I apologize if I missed it, the numbers I come up with are about 8.5 and 9% organic in '05?

That's right.

The 6 to 7 that you're forecasting for '06, can you help us a bit by breaking it out by businesses and if you have a number for '05. I'm just curious to see the transition between the business segments on what's driving the Company.

Let me see if I can start it this way. Let's do Climate Control, we see that as some low single digit growth going forward to next year. That's about the same level as we've seen. Bobcat, we see that as being low double digits which obviously would be a significant reduction from the run rate that we've had in the past. You know, I told you, I'm going to continue every year, David, to forecast Bobcat's going to grow 10 to 12%. One of these years I might actually be right. But now we're actually forecasting again to be low double digits. Club Car we're forecasting it to be in the low single digit range. Construction Technologies we see that more in the upper single digits. Industrial mid-single, and Security mid-single. And if you put those all together and weight them all out that's where you come up with about 6 to 7% on the organic growth.

Okay. The reason I'd asked -- obviously the stock's been warranted a little higher multiples on sales and EBITDA since last cycle and I think justified given the performance this cycle. But when I try to look out to '07 and I'm just trying to think through while below the operating profit line from repo to acquisitions along the way as well, you can add to the earnings growth. But when I think of this year's guidance already implying kind of 12 to 15, to repeat it in '07 you would think some of these businesses might lose a little steam. Is there something about Hussmann or security and safety or industrial compressors that could step it up in '07? If some of these other businesses that could step it up in '07 if some of these other businesses that are still strong in '06 fade a bit like Thermo or Bobcat?

There's three pieces to that. Okay. Number one and it really ties to us [inaudible] extra investment] I feel the exact same way going into '06 as I did into '01 meaning we've got to step up some of the investments and geographic reach is one of those. So you're seeing [inaudible] and really trying to stepping up. And we feel that as we see potentially residential market in '06, '07 softening in North America, we see the opportunity for much more Bobcat growth going now into the developing regions of the world and frankly our market share in Europe is nowhere near what it is in the U.S. until the equipment.

So we're really trying to focus on getting in the type of products that will wind up going and growing the other parts of the world.

When we made acquisitions in India and China, we also now need to go and leverage channels that are there. So that's why you see the increased investment that we have.

Our forecast numbers for 2006 are strictly organic. As I said, our goal is to go grow and in turn spend another 400 million on acquisitions. If we leverage it the same rate as we did in '05 that would generate another 3 to 4% revenue type growth. But I can't bake it into my forecast because I obviously don't have it yet.

I believe that the investments we will realize, the benefit of from new product development will wind up giving us the goal of 12 to 15% in '07 even as we are working on residential North America getting weaker. Transport refrigeration getting very weak in that time period and still being able to go and deliver on the results. That's why I'm making the investment this year. Never said consistency is the part we're striving for and I want to make the investments now, delivering the plan for '06 at the levels we said and positioning ourselves to where we can accomplish the same level again in '07 and beyond.

And lastly, the spread between price realization and higher costs, be it material, energy, so forth. In '05 it sounded like you didn't quite fully offset it. But the number you threw out on pricing for '06, 1.5 to 2%. And that's roughly about a 185 million from the '05 base. And that's obviously higher than the 100 million higher costs so should I think of the GAAP next year as a positive at this stage or thinking about positive $80 million or so price versus cost?

I think you need to continue to add back into that - remember I said - I'm spending 80 million moe on the S and A side in order to do the pieces that we have. The growth initiatives that I just described to you. Plus, obviously we're still dealing with inflation for our labor costs. So I would say to you I don't consider that as being a positive generator. I see that really again as being its own push.

Well, the 80 million is more investing for the future. I mean the 80 million I refer to is price, costs, but then you said its the labor. Just price versus cost, the 180 versus 100 is a positive - roughly $0.19 on the '05 share count. But how much is labor going up? Is it 2, 3%?

We're talking about 3%.

Great. Thank you very much.

Sure.

We'll go now to Ann Duignan with Bear Stearns.

Hi, good morning. Just a quick clarification. What share count are you using for your '06 EPS calculation?

Well, we continue to buy back, as you know. We're -- well, we bought back 20 million in 2005. We would expect similarly in 2006 and we ended the year at about 350. So at the end of 2006 if you had the similar rate that would drop you down somewhere to 330 some odd level.

So I should use 330 as a year end for '06 and 350 as the year end for '05?

I think that would be about right. Actually, I think those are averages over the year end.

We would average - well we would take the ending share count - it was your ending share count at the end of '05?

About 335.

335. Okay. We'll figure it out from there. Okay. My real question is on Power Works. Herb, you had talked about discontinuing the investment in that business if it didn't meet expectations by year end. It looks like it's still a drag on the operating profit and industrial technologies. Can you give us an update on what you've invested in that business and what you see going forward for that business?

Let me just give you a rough overview for full year 2005. We incurred losses of about $16 million of investments that we made in building out that product, specifically as it related for applications over in Asia Pacific.

And as we wound up the year, what we saw in terms of the fourth quarter was very successful opportunities for both oil and gas applications as you can imagine. Gas and oil being $50 a barrel that has a very positive step. So the environmental applications and the ability of the product to work effectively has at this point in time demonstrated. And what we are now at this time doing is really going and seeing at how fast we can ramp up the actual sales and installations to customers. So the very good news is that we have now two product types, both the 70KW and a 250 that is demonstrated successful application for both environmental as well as for combined heat and energy type savings.

As I look at going back in 2006 now, I am going to continue to make the investment as it is required to support specifically those areas because I am now very, very confident that we have a product that works and we're starting to see customer acceptance. We're not doing peak load shaving as we started a long time ago but we are at this point in time using it for environmental applications very successfully.

And can you remind us, Herb, how much you've invested in that business.

Yes, if I put it together going back since from 1998, we're at over $85 million as to the total investments that have been made. It's been running [inaudible] 20 some odd million for about four years.

And what do you expect -- when do you expect to break even?

I'm looking at breaking even during 2006 or else as I said we would terminate this and right now I'm more optimistic than I was three, six months ago.

And one final quick follow-up. I noticed in your press release that you changed the definition of recurring revenues and obviously conspicuous by its absence was sale of used equipment. Have you indeed revised how you analyze recurring revenues or how you account for recurring revenues or did it just drop off the definition?

We've -- Ann, we've revised the definition a little bit to -- to include components that -- that we think really are -- are going to be recurring. They would include aftermarket parts, they would include service, they would include a recurring attachments, rental, and used equipments.

We left it up to Liz. We didn't change the definition to pull it out.

So it's just missing from the definition in the press release?

Correct.

Okay. Thank you.

We still have nine questions standing by. We'll go now to Jamie Cook of Credit Suisse.

Hi, good morning.

Hi, Jamie.

My first question relates to when I look in the fourth quarter depending on which way I look at the income statement if I look at the unallocated corporate expense or even the other way at the SG&A, the expenses were a little lower than I had anticipated. And I guess my question is, was there anything unusual in the fourth quarter and if so, what? And if -- I guess that's it.

Well, corporate allocated is down a little bit. I mean, we typically think of 25 to $30 million per quarter on average in a given quarter. You know that we -- we do have our stock based liabilities that depending upon our stock price can be anywhere between -- well, they can -- depending on our stock price it can be a swing plus or minus. It turns out in the fourth quarter it was a positive for us. I also mentioned that we had one-time items, the cost associated with them fell in -- in cost of goods sold, the benefits side fell in -- fell in other income, and much of that was in SG&A and -- I mean, some of the benefit was in SG&A and the other income component, well, largely was flowed through into the corporate unallocated so you had some benefit associated with that.

And last, can you just talk a little bit about your expectations for Europe in 2006? Some of your competitors have suggested that that's improving and I'm wondering what you're forecasting when you look out to '06.

When we look at the overall European area what we're seeing is actually there is a pretty significant improvement but do realize that now having CHIZA which gave us a couple hundred million dollars of presence there we're really able to leverage this up. But every single organization that we see is running at least upper single digit type growth over in that region for 2006.

Okay. And that's what you're forecasting?

So the overall number I would think -- I'm thinking along the lines of close to 10% growth for all of Europe on the year over year basis for 06-05.

Okay. Great. Thank you very much.

We'll go now to Jeff Hammond , KeyBanc Capital Market.

I guess besides construction equipment, can you just speak to where you see the most room or which business where you see the most room for operating margin improvement? And then just a clarification on the share count, do you see the 330 million number as -- as average or ending for '06?

We see the 330 as an average for the year of 2006. We ended the year at some 335, 337, our average for 2005 was a little bit over 350.

Okay. And then on the opt margin improvement opportunity?

Well, let me start it this way. I expect significant improvement in Climate Control. If you look into our stationary side of it, we see there with the increased revenues coming from our Wal-Mart contract and again, the renewed growth that we're expecting for transport refrigeration over in Europe, I think you can see some potential significant improvement as we do that in the year over year.

On the construction technology piece I think we already talked about the road development improvement that we need to see going forward.

On the industrial part I think you're also going to see there a movement of at least 2 to 3 margin points. As we wind to continue to really drive and really focus on recurring revenue, because that has us at 20 plus percent type margins and that's where some of the investment on the SG&A side is going to be going. And I want to make sure that we're consistently delivering in securities numbers which are going to be running up in that 17 to 18% going forward. So the improvement there would be to avoid the 13, 14% which included some one-timers that you saw early on in last year.

The industrial -- just to clarify 2 to 3 margin point improvement, that's over what time frame?

From the beginning of the year to the end of the year. When you and I hopefully are having this conversation a year from now, what do I hope to be reporting as to seeing the run rates by fourth quarter 2006.

Okay. Thanks a lot.

We'll go next to Nigel Coe of Deutsche Bank.

Good morning.

Hi, Nigel.

Yeah, just a question on Bobcat's. How would you characterize Bobcat's position in residential versus non-residential [inaudible]. How does that shake out with Bobcat over the next four years?

I think that the residential slowdown would obviously have an impact on a lot of the product that we wind up using to go and to move dirt around the landscaping type applications there. But in terms of a mix, it really is not that significantly different than what we would have in a commercial side. So as we see commercial and nonresident picking up, between that and the regional diversification we expect the demand to be still around 10, 12% year over year.

Okay. And on the tax rates, it tends to move around quite a lot on a quarter by quarter basis and the fourth quarter tends to be a little bit lower. Can you explain some of that variability and what sort of tax rate you see for 2006?

I think we mentioned that we expect approximately 17% in 2006. You know, that's about the level that we expect on a going forward basis in that range. Some of the variability, as you perhaps know, depends upon the geographic mix of our earnings. To the extent that we have more U.S. based income versus international, we're going to see higher because we pay the statutory, you know, 35, 38% in that taxing jurisdiction.

The other thing you see that creates variability is frankly it's the change in the accounting requirements that require a company to take -- use a normalized rates for the year and have any discrete items. So for instance, if we get a tax credit for a [fisc] it has to be discretely taken within the quarter rather than embedded within the rate as you would have done in prior years. It's part accounting change and it's part just the mix you will see some normal variations from quarter to quarter and year to year due to where our earnings come from.

And if I could ask one quick follow on. You mentioned there was some reversals in the margins.

We don't have reversals in the security margins.

Okay. Sorry. I'm through. Thanks.

We'll go next to Eli Lustgarten with Longbow Research.

Good morning. It feels like afternoon at this point. I apologize. I have the Caterpillar going on in the background. Can you hear me?

Yes, we do, Eli.

The $80 million dollar expenses for product development this year, we should almost treat that as an ongoing expense. That's not going to change in '07 and if anything it would go up. Is that a fair way of looking at it?

No, I would say to you that we're expecting to what I refer to as more of one-time as we relate to going and putting channel into place and growing regions. Once you have them you wind up leveraging because you wind up adding the sales people which are more direct. What I'm building up is the indirect infrastructure. We expect to be putting in more air centers. We wound up putting in -- what is consistent what you're talking about is about a third or a quarter of that which will be building up an engineering base which is going to be in the Czech Republic and India. But if I were to break it down for you and I don't have the exact numbers but roughly I think more like 20 to 25 million would be what I would call more recurring versus the other more like 50 plus would be the kind that actually be more related to doing startup at one time.

So that would sort of reverse and or not be in there in '07.

Obviously what you don't see in '06 are really the benefits because we expect its going to take - we're going to wind up putting in several Bobcats [ofs] in China because there is no distribution channel there for compact equipment yet. So during 2006 what you're going to see are all the startup costs, all the training for all the people that are going to be necessary to run that. Then in 20007, you're going to start seeing then the revenue showing up for products that have been specifically designed for sell into that part of the world because there I'm trying to replace frankly the tractor rather than any other type of equipment that's there.

So I think for the next '07 you'll not only see a reduction in the marketing costs, but you'll also see obviously the benefits resulting from the revenue and the profitability from that.

Are we going to be able to hold the 17% tax rate for the next couple of years or will the stock eventually creep up in '07?

It's always going to creep up as our earnings creep up. There is a fixed benefit that we have and so any incremental earnings tend to -- to creep the rate up and again, as I mentioned earlier, the mix of where the earnings come from will have an impact on that. But frankly, we would expect that our international earnings would increase as we go forward which would have a little bit of a downward pressure on the rate.

But to give you the boundary line, what we said in our earnings call I don't remember if it was in the summer or fall quarters, we talked about when we went through our strategic planning process. When we look at the five-year horizon, we look at that as sort of capping out at 20% so that's in the band width between 17 to 20 in the five-year horizon.

And one final question. Every quarter since you bought Hussmann, we've had the same you know, you've got Climate Control problems, Thermo King and Hussmann down shipments and refrigeration stays and run out of nowhere. But the Wal-Mart contract will help but is there any sign of life or hope in that business or do we have to accept that that's not going anywhere for a while until the market industry gets its act together.

If it was not going somewhere it would be going somewhere else. What we have here is finally in the fourth quarter we didn't really go into it before, but on the service business we actually now see double digit OIs. So I think we're making some good progress there.

We continue to struggle in our shipments to where we have very very significant market shares in the Safeway's, the Kroger's, and the Albertsons and until that piece gets resolved our really only growth on this piece is going to be on the stationary side into Wal-Mart in North America and, then frankly, in the rest of the world we have to keep pushing and really growing the Climate Control piece. As I said before, I think we're really now starting to see some significant inroads in to really building that coal chain out into the developing regions in both India as well as China. So I think the U.S. domestic growth as it relates to cases is going to be driven by how well we succeed at Wal-Mart in the near term. And then the mid-term is going to be how well we grow the overall business outside of North America and those numbers at this point in time in our planning process look to be really quite significant.

If you looked at Asia year over year, we're starting to look at numbers that are 25 somewhat percent. You start doing 25% increases it starts overriding, if you will very very limited growth in other parts like the U.S.

And can I get a clarification, in your guide you talked about a significant downturn in the Thermo King business for '07, why would the trailer business have to follow the same downturn as the emission truck [inaudible]?

I think what we're going toward in our planning process is going by the data that we received from the outside world. And what we're trying to do on it -- I guess I would tell you - personally I'm probably more optimistic than what the forecast would be but what I've learned over the years is it's better to plan on the pessimistic into your numbers put your cost structure in place to reflect that because then the activities would drive your performance improvement. And then smile in terms on it if you arrived at numbers better than that.

And so the theory is that as we read through from the truck guys, as they spend more money in the second half of the year to go buy more on the cab side because they're going to wind up having incremental costs for '07 that they'll have less money left to spend on the trailer side. And that's how this thing goes. When they reed through all of the usage for reefers today, it's hard to figure how you would do that because the hauling rates are way up and so were the costs. You know, what they're able to charge.

So I would tell the performance belies what the forecast is, but we went with the traditional act data and just laid that in there.

Okay. Thank you very much.

Sure.

Operator, we're going to take two more questions, please.

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

Good morning, guys.

Good morning.

I have a couple quick follow-ups. Two of them are revenue numbers that you haven't already provided. Could you tell us what the recurring revenue portion of Air Solutions grew at in the fourth quarter?

I think it was 14%. Bear with me. I have to get my brain to recount and give you the right number here. I know it's double digit. The question was -- we have a vote at the table here whether it was 10% or 14%. So let us dig that out for you in one second. Have you got a follow-up while we're looking for that?

I wanted to follow-up on Security Technologies. Two things quickly to touch on there. One, you said 4% organic growth, but I'm guessing there's a currency impact in that number. Could you tell us what it is?

Don't have the -- the currency. There will be a -- The currency would be CHIZA part of it and that's the acquisition side of it, Rob. So I think you take that as the currency -- By about going back, I pulled the numbers up on here we went up under recurring for air specifically it was up 10% in the fourth quarter and 13% for full year.

And your outlook for the coming year assumes double digit growth there or is it starting to slow down now?

No, that's why I said that's part of where the investment is going. So I continued to see that going up in that 8 to 10% type range.

My follow-up on Security was, if I understood you correctly earlier Herb, you were saying you were talking about staying in sort of the 17, 18% range coming year, yet you delivered that in the current year despite some one-timers in -- you know, really, you know, much lower all in margin performance from CHIZA. So why wouldn't we look for some margin expansion in that segment in '06?

Because we -- that's where -- if you were to go back to my $80 million there's a goodly part of it in there, we're actually spending on marketing of trying to really -- with the acquisition of [Fu Hsing] we now and also Bocom we really need to fill up our channel into China. So we're making a significant - putting 42 people, I'm talking about - people that when you add it up its cost you about 8 to 10 million bucks into that part of the world in order to really generate activity in that part of the world.

So what we're seeing is that the activity is going to be again spent on investment to build up the SG&A. In Europe, I need to continue to now take and leverage CHIZA from where it is really strong in the South up into the more of the German speaking parts of the world on the Northern side. So again we need to go spend money. So what you're seeing is the ability to generate 18% plus the ability to spend another almost two points on the on going investments on the SG&A side predominantly. And I need to go after that electronic lock. We are now running test markets on what would be keyless entry electronics solutions for residential and those are hopefully going to be positive and we're expecting to spend a bunch of money to bring those into Big Box and other applications.

We've also done other late year acquisitions and we have the purchase accounting drag on earnings for those with the [Fu Hsing] and the Bocoms and so forth. It would be a modest drag.

Tim, do you have an estimate on what your carry in on revenue from acquisitions that we ought to factor into '06 for that segment?

It's probably about a percent - of carryover from 2005 acquisitions, the full-year impact in 2006, so it would be about a percent.

Okay. Very good.

Rob, nd can I answer your other question on the -- the security was about 1% unfavorable impact exclusive of CHIZA due to currency.

I thought there would be something there. Okay. Thank you.

Yes.

We'll take our final question from Andrew Casey, Prudential Equity Group.

Good morning, Andy.

Mr. Casey?

Guess he went to Cat.

We do have one more question standing by. Would you like to take that instead?

Sure.

We'll go to Alex Blanton with Ingalls Snyder.

Hello?

Yes?

Yes. Alex Blanton here. Herb, just a comment. A bunch of people had to jump off your call at just before 11:00 because you scheduled it at 10:00 one hour before the Caterpillar call which just started 10 minutes ago. I don't know if you knew that, but I had suggested that you move the time to 9:30 or 9:00 in order not to conflict in this way. But the suggestions weren't followed so that's been a problem here for the people on this call.

We'll work on that one, Alex.

I would hope that wouldn't happen again. Now, the question I had and then I'm trying to listen to two calls at once here because I'm tuned in to the Caterpillar call on my other line so I'm missing that call asking this question.

We appreciate where you put your priorities though, Alex.

Okay. The question is this. You mentioned that margins were penalized by $175 million in cost increases. And that you raised prices 1.5 to 2%. Can we assume and this is kind of hypothetical, that if you hadn't had the material costs increases that you would have still raised prices 1.5 to to 2%?

No, I don't --

And then the margins then would have been about 14.6% instead of 12.9. Is that an assumption we can make or not?

I don't think that's a valid assumption, Alex. I mean, what you're facing is customers are responding to competition. There's multiple suppliers in just about every place we go and when we look through this, we really are able to pass on only the quote material type increases with very little extra.

Our biggest improvement is going to be in coming out with the next generation product that provides more profitability for the customer to contract and he's going to be willing to pay for for instance, but overall I would say if we wound up seeing a quote reversal of cost pressures I think we'd see the same kind of pressure on us try ing to go and realize [inaudible] in the marketplace. That happened to us back in 2004 before the material set to go up. We've said before, Alex, that's kind of how our expectation of price increases will come is when we introduce new product with new value added to the customer and we're able to price it higher, but selling the same product at a higher price really is difficult to justify in absence of raw material cost increases.

Okay. And then you have the lien manufacturing as well. Right?

Right.

Which can get you some margin improvements.

Yes, we're targeting $50 million of that for the year but I'm telling you right now on a sheet of paper rather than action plans. That's why I said we need to spend the money to go after that.

Okay. I see --

Go to your other -- I promise I'll try to talk Mr. Owens and see if he can't postpone his by 30 minutes.

Okay. One way or the other I hope this doesn't happen again. Thanks a lot.

Thanks, Alex. Okay operator.

Did you want to conclude the Q and A session?

I think we'll conclude the Q and A session. Thank you.

You're welcome. That does conclude the Q and A session. Gentlemen, did you have any closing comments?

Yes. Those of you who have not moved to Peoria, there will be an instant replay available today about 12:30 p.m. and and it will be available untill February 3rd. The audio and the slides from today's conference call will be archived on our website in our website and the transcript for the call will be available on the Ingersoll website early next week. Please call me at 201-573-3113. That concludes our call. Thank you very much.

Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation. [OPERATOR INSTRUCTIONS]