特靈科技 (TT) 2006 Q1 法說會逐字稿

Good day, and welcome to the Ingersoll-Rand first quarter 2006 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like the turn the call over to the Director of Investor Relations, Mr. Joseph Fimbianti. Please go ahead, sir.

Thank you, Sylvester. Good morning. This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our first quarter 2006 conference call. We released earnings at 7 a.m. this morning and our release is currently posted on the website. I would like to cover the usual housekeeping items before we begin. This morning, concurrent with our normal phone-in conference call, we'll be broadcasting the call over our public website. There you will also find the slide presentation for the call. Participate via the web go to www.irco.com, click on the yellow icon on the home page of the website. The call and the presentation will be archived on the website and will be available later this afternoon. Now, if you would please go to slide number 2. Before we begin, I would like to remind everyone that there will be forward-looking discussion this morning, which is covered by our Safe Harbor statement. Please refer to our form 10-K for the year 2005 for details on the factors that may influence results.

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

Thank you, Joe, and good morning, everyone. Today we announced record revenues and record first quarter earnings of $0.76 per share which is a 19% increase compared to last year. Overall, our financial performance exceeded our initial forecast for the quarter. Tim will review the quarter and our business unit performance in greater detail this morning. Please go to slide number 4. As we entered 2006, our major construction and industrial end markets generally experienced excellent activity levels. Total revenue growth was about 10%, which was above our original expectations of 6% to 7%. Organic revenue increased by over 9%, despite a headwind of about 2% due to currency. We also successfully expanded our highly profitable recurring revenue stream. Recurring revenue for the first quarter totaled $562 million, an increase of 15% compared to 2005, and equal to about 21% of our total sales. Orders remain very robust, and we're up approximately 13% compared to strong activity level last year, and our total backlog increased by over $300 million. I am happy to report that the order growth is across the board with double-digit order improvement in all of our businesses. The only caveat at this point on the total order growth, is that we believe that the warm weather and scheduled price increases pulled some second quarter orders forward. However, we currently are expecting strong sustained demand for the balance of 2006 for our major end markets.

Since most of you are familiar with our corporate strategy, I wanted to address some topics of interest raised by our shareholders, and after that, Tim's presentation, I will talk about the outlook. Please go to slide number 5. The first topic I would like to cover is stepped-up investment spending for 2006. For 2006, we expect to invest about $80 million more than last year on new product development and expanding our global presence in high potential markets such as India and China, where we have made a number of recent acquisitions.

These investments covered numerous individuals projects that include all of our five business sectors. Some of the key investments will expand our product development capability by opening new engineering centers in the Czech Republic, in India, and in China.. We will also invest to expand manufacturing for Bobcat products in China and the Czech Republic, and to develop the cold chain in India and China where significant opportunities exist for Climate Control expertise. Additionally we will make investment to expand our security product line and extend its market coverage.

As I noted last quarter all of these investments will be observed through the P&L and are included in our forecast. We spent approximately $12 million on these programs in the first quarter and expect to spend about $20 to $25 million per quarter for the balance of 2006. These investments are expected to add over $200 million to 2007 revenues, and $300 million to 2008 revenues. This will be an important offset to any slowdown that might occur going forward.

Please go to slide number 6. Secondly, there is usually a high level of interest in our investment priorities for our strong available cash flow which we now target at $850 to $900 million for 2006. Last quarter, we said for 2006 we plan to invest about $400 to $600 million in bolt-on acquisitions about $150 million per quarter, or $600 million for the full year, in share buyback. We continue to continue to expect to make accretive value-creating acquisitions in 2006. Prices are continued to escalate, and we're finding it more difficult to make investments that clearly make our hurdle rates, and earned a return above the cost of capital. We do not believe it makes sense to get larger from a revenue standpoint without creating additional shareholder value. We will remain committed to creating value with bolt-on acquisitions, but we will probably be at the lower end of our target range at about $400 million. We purchased about 4.1 million shares in the first quarter for $163 million. We currently expect to step up share repurchase activity for the balance of the year, given our strong outlook and our belief that our shares are undervalued at at current levels. We are now targeting to repurchase about $800 million of shares for full-year 2006.

Please go to slide number 7. A third topic of interest is the shape of the North American heavy truck cycle and its impact on Thermo King. The key take-away here is that we do not currently expect the market to drop precipitously in 2006 or in 2007, and we have some offsets if it does start to see weakness in 2008. Let's put this into proper perspective. First, North American heavy-truck new equipment makes up about 25% of Thermo King's total volume. That's about $400 million or less than 4% of total Ingersoll-Rand revenue. Activity in the refrigerated trailer market in the first quarter has been stronger than expected, and our orders are up compared to last year. Our full-year revenue forecast for North American refrigerated trailers is now up 5% to 10%, compared to a slight decline we expected when we gave our initial guidance back in January. Also, truck orders and shipments are substantially ahead of the growth rate of refrigerated trailers. This is consistent with the usual pattern before a new emission standard goes into effect. Fleet owners purchased the cabs first to beat the emissions standards, and eventually they need to purchase the trailers. All the trucks shipped in 2006 will be the base of refrigerated tail -- excuse me, refrigerated trailer sales in 2007.

Overseas markets are rebounding from 2005 levels and should also provide expanded sales for transport refrigeration in 2006 and 2007. Orders and shipments of reefer units for heavy trucks in Europe have improved in the first quarter after being down for about 18 months. If Europe follows its normal cyclical pattern, sales should continue to expand for the next several years. We've also begun to open new markets for Thermo King in Asia. One very notable prospect is our investment to develop the cold chain in India. We currently are working with ITC, that's the India Tobacco Company, in India to provide transport and stationary refrigeration products to prevent spoilage of agricultural commodities. At this point the ultimate potential of the project is difficult to determine, but we believe it could provide us with considerable upside in the very near future. We will keep you posted on our progress going forward.

Please go to slide number 8. Finally, the real ace in the hole for Thermo King is the TriPac auxiliary power unit. We believe there will be excellent growth in the auxiliary power unit market in the years ahead. We also believe we have a competitive advantage, since we have the most efficient unit in the market, a strong distribution network and the most recognized brand. For those of you that are unfamiliar with these type of products, the TriPac system involves stand-alone power units that are added to over-the-road trucks to provide truck engine preheating, battery charging, truck cab sleeper compartment Climate Control, and electric power for lights and appliances. By using the TriPac, a driver does not have to run the main diesel engine. The growth of TriPac is tied to the development of more stringent anti-idling laws and the high cost of diesel fuel.

Currently over 30 states and municipalities have restrictions on the length of time that trucks can idle their main diesel engines. This is a particular problem for over-the-road trucks that will usually idle their main diesel engines for up to ten hours at night to provide heat, air conditioning, and power for the truck's sleeping compartment. The stricter enforcement of those laws is resulting in increased fines for those that violate these laws. Also, with the high cost of fuels, fleet and fleet owner-operators suffer high cost to run their engines at night. Long haul trucks waste millions of gallons each year while idling.

Our TriPac system is a stand-alone unit that substantially reduces fuel consumption and engine maintenance cost, and usually has a pay back of less than 15 months. There is a great deal of opportunity in this market. We believe there are over 750,000 trucks that are potential customers for auxiliary power units and plus, annual additions of over 100,000 vehicles. With over 50% current market share, and a net dealer price of about $5,700 per unit, you can see the market potential is very, very large.

Market demand has been growing sharply. Last year, Thermo King TriPac revenues were about $40 million with about 90 to $100 million of revenue expected for 2006. TriPac has solid, double-digit margins, and we're continue to refine the product's design and to reduce its cost. TriPac will also provide a sales boost over the next several years and should help us to offset any slowing of truck sales in the North American market. So, yes, the demand for heavy trucks in the North American market is cyclical, but we're taking aggressive steps to minimize the impact on our revenues and our earnings.

Now please go to slide number nine. Another source of investor interest has been the connection between Bobcat sales and new housing starts in North America. About 75% of Bobcat sales are to North America, and housing is an important market that includes new starts, remodeling, rehab, and landscaping. However, Bobcat's expansive and growing product line and attachments business serve a broad array of end markets and geographies and are not tied to any single need.

We dusted off the Bobcat market archives and the historical data indicates that in the business's early history there was a reasonably strong correlation to new starts, but as the Bobcat product line evolved from only skid-steer loaders to mini-excavators, track vehicles, and telehandlers, and as attachments made the machine more versatile, Bobcat sales continued to expand into areas beyond the new housing market. Today, Bobcat sales are more tied to the general health of the North American and European economies rather than one specific sector.

During 2006, housing starts are expected to decline by anywhere from 5% to 10% while Bobcat revenues are forecasted to increase by over 10%. There is obviously a great deal of additional detail on these topics that we can't cover today due to time constraints of our call. We would be happy to discus these topics with you off line.

Now please go to slide number 10. Overall, we had an excellent first quarter, and we expect to enjoy a record year for revenues, earnings, and available cash flow. We continue to execute a sound long-term growth strategy, and to deploy our cash to generate greater value for shareholders. We also believe our diversified portfolio of businesses and our lean business model will dampen the impact of future market cycles on our North American business. Tim McLevish will now cover Ingersoll-Rand's business unit performance in more detail. Tim?

Thank you, Herb, and good morning. I would like to begin my discussions with the quarterly financial results. Please turn to slide 11. Revenues for the first quarter were $2.7 billion, up 10% from the comparable period in 2005. This increase is attributable to growth in all five operating segments, with double-digit growth in our compact vehicle and construction technology segments. Revenue increased by 12% after excluding the unfavorable impact of currency. The approximate 2% currency impact on revenues was consistent across all of our reported segments.

Operating income for the quarter was $341.1 million, up $44.2 million or 15% from 2005, due to higher volumes, price increases, and productivity improvement actions. These favorable items were partially offset by approximately $43 million of higher material, energy, and transportation costs. First quarter operating margin of 12.6% increased compared with 12.1% last year. During the quarter, we experienced several one-time or year on year non-comparable items that netted to a small negative effect.

Based upon a thorough study and analysis, we adjusted our estimate for bad debt in light of various business and economic factors, including our historical and expected write-off experience, the changes to our business portfolio, and a new insurance policy, which significantly limits our bad debt loss exposure.

First quarter 2006 operating income was positively impacted by $20 million, related to the change in estimate. Additionally there were several notable item that, in total, negatively impacted first quarter operating income by approximately $24 million. These items included the expensing of stock options under FAS 123, unfavorable currency costs, and other one-time adjustments.

Moving down the income statement, interest spent was approximately $35 million, which was $2 million lower than the first quarter of 2005. The year-over-year improvement resulted from a reduction in our average interest rates, as we have paid down higher coupon debt, partially offset by modestly higher debt levels.

Other income for the quarter was $3.7 million, compared to $7.3 million in 2005. The decrease was primarily due to foreign exchange losses and reduced interest income. Our first quarter effective tax rate was 15.4%, which reflects our full-year projected rate of 16.5%, offset by a one-time benefit of $3.4 million. Earnings from continuing operations for the first quarter were $262.3 million or $0.79 per share, which was above our previous guidance range of $0.71 to $0.75. Discontinued operations reflects the cost, net of tax, of $9.1 million, which is our ongoing legacy cost associated with divested businesses. Our total net earnings for the quarter were $253.2 million or $0.76 per share.

Please turn to slide 12. First quarter 2006 earnings per share of $0.76 was $0.12 or 19% higher than the first quarter of 2005. $0.15 of the increase was driven by growth leverage and favorable pricing. Productivity actions essentially offset inflationary costs, and we invested an incremental $0.03 per share to drive future growth. The quarter also included other favorable and unfavorable items that net to a negligible Impact on EPS. Unfavorable effects of currency,a higher year-over-year effective tax rate, and expenses associated with the adoption of FAS 123 were offset by the favorable effects of the share buyback program and one-time items.

Please turn to slide 13. Our overall 10% revenue increase reflected solid growth in all of our major geographic regions. North America revenues were up 10% and constituted approximately 65% of the total. European revenues were up 7% before adjusting for the unfavorable exchange impact. Excluding currency, we delivered double-digit growth in the region. Asia Pacific and Latin America grew by 12% and 30% respectively. I would now like to take a few minutes to talk about the results of our businesses.

Please turn to slide 14. The Climate Control Technologies segment, which consists of the market-leading brands Hussmann and Thermo King, reported first quarter revenues of $684 million, up 7% from the first quarter of 2005. Climate Control Americas revenues were up 7% over prior year, with growth across all of our businesses. Climate Control International revenues for the first quarter were up 6% over last year, with double-digit growth, after excluding the unfavorable effect of currency. Revenues in Europe improved as growth in truck, trailer, and marine container offset declines in refrigerated cases and contracting. Asia Pacific revenues declined, mainly due to lower bus air conditioning sales in China.

First quarter operating income for the segment was $69.2 million, representing an operating margin of 10.1%, an increase of 70 basis points from the first quarter of last year. The operating margin improvement was driven primarily by growth leverage, and operational improvements, partially offset by increased material costs.

Please turn to slide 15. The Compact Vehicle Technologies segment generated first quarter revenues of $735 million, up 11% from 2005. Bobcat revenues increased by 12% over the prior year, attributable to new product introductions, growing North American markets, and the continued strength of the aftermarket parts and attachments businesses. Club Car first quarter revenues increased by 10% over first quarter 2005. The strong growth was driven by market share gains in golf cars, new utility vehicles, and a 15% increase in recurring revenues. First quarter operating income for the segment was $121.2 million, representing an operating margin of 16.5%, consistent with the prior year as growth leverage and operating improvements were offset by inflation.

Please turn to slide 16. The Construction Technology segment reported first quarter revenues of $329 million, up 22% compared to 2005. First quarter Road Development revenues increased by 17%, primarily due to ongoing strength in the North American road development market and strong recurring revenue growth, supported by improved manufacturing performance. Revenues in the Utility Equipment and Attachment businesses were up a combined 30% compared to the prior year, with growth in all regions. The substantial revenue growth was fueled by utility equipment product line expansion, our growing attachments business, and significant increases in recurring revenue.

First quarter operating income for the segment was $38.6 million, representing an operating margin of 11.7%. This reflects significantly improved performance from the fourth quarter of 2005, as we drove operational improvements within our road development business. Year-over-year segment operating margins improved by 2.2 percentage points. The increase is attributable to growth leverage and operational improvements that were partially offset by higher material costs and increased investment to enhance the quality and reliability of our small paver line. As we look forward, we continue to expect margins to improve, due to favorable volume and mix, material and manufacturing productivity, incremental price realization, and the non-recurrence of one-time costs and operational issues experienced in 2005.

Please turn to slide 17. The Industrial Technologies segment produced first quarter revenues of $439 million, a 9% increase over prior year. Air Solutions revenue grew by 8%, driven by growth in all geographic regions and continued strong recurring revenue growth. Productivity Solutions revenues were up 11% versus prior year ,due to expanding activity in the traditional industrial and fluid handling markets, growth of new cordless tools for commercial and industrial applications, and strong recurring revenue growth. First quarter operating income for the segment was $58.2 million, representing an operating margin of 13.3% compared to 11.7% in 2005. The increase in margin is primarily attributable to growth leverage and favorable mix, as material costs increases were offset by productivity actions.

Please turn to slide 18. First quarter Security Technology segments revenues were $525 million, up 8% compared to $486 million in the first quarter of 2005, and up 10% after excluding currency changes. We experienced solid growth in all regions during the quarter. Americas revenues were up 6% while revenues in Europe were up 8% before adjusting for the unfavorable exchange impact. Adjusting for currency, we experienced double digit growth in the region. Asia Pacific revenues doubled in the strength of our bolt-on acquisitions.

First quarter operating income for the segment was $79.6 million, representing operating margin of 15.2%, compared to 14.2% in the prior year. Product activity and gross leverage were offset by unfavorable geographic revenue mix, increased material costs, and incremental investment spending to drive future growth. For the full year, we continued to forecast the segment's margins in the range of 17% to 18% of revenues. Our lower first quarter margin of 15.2% reflects business seasonality and higher cost to integrate our recent acquisitions into our core business. Moving forward, we are focused on sequentially improving our margins to arrive at the full-year forecasted range.

Please turn to slide 19, and let's move on to the balance sheet. We finished the quarter with our investment and operating working capital at 12.1% of revenues, favorable to the 12.3% in the prior year. First quarter inventory turns increased to 5.4 times from 5.0 in the first quarter last year. As we continued to drive strong top-line growth, supply chain issues remain a challenge in parts of the company. However, the supply chain issues we experienced last year are subsiding, and we are bringing our safety stock levels down, while maintaining our service levels. Operational excellence programs are helping to further improve our inventory turns. Day sales outstanding was flat to prior year, as reductions in domestic DSO were offset by increases in international, where terms are longer than our company average. Our days payable outstanding increased by four days helping to drive additional cash flow. At the end of the quarter our debt -- our total debt was $2.1 billion, an increase of approximately $100 million, compared to the first quarter of 2005. Our debt-to-capital ratio at the end of the quarter was 26.1%, and 15.9% on a net basis. Capital expenditures for the quarter were $34 million, or a little over 1% of revenues, while depreciation and amortization expense for the quarter was $48 million. Our solid balance sheet continues to provide a foundation to support growth strategy of our company. Herb will now conclude our formal remarks with the outlook.

Thank you, Tim. Please go to slide number 20. Over the last several years, we have demonstrated that our business model is working, and that our strategy is on target. In 2006, we are building on the momentum generated in recent years to improve operating performance across our businesses. As I noted earlier, activity in our end markets continued to experience solid demand, and our orders were up about 13% compared to the first quarter of 2005. From our recent order pattern, we see continued strength in our worldwide markets. Material and transportation costs will continue to be an issue for 2006. First quarter costs were up about $43 million above last year. For the quarter we continued to experience high steel prices, accelerating costs for copper, aluminum, and zinc, and higher energy-driven transportation costs. We now expect material inflation to add about $125 million to $140 million to our 2006 costs, which is $25 to $40 million above our previous forecast of $100 million. We also expect a headwind of about $30 million from freight and transport costs. We continue to focus on minimizing the impact of these cost increases by making permanent reductions in our operating cost structure through productivity gains and by implementing lean processes throughout the organization, while also increasing price and surcharges to cover these additional costs.

Please go to slide number 21. We have increased our forecast for continuing operations, full-year 2006, to a range of $3.50 to $3.60 per share, compared to $3.09 per share in 2005. Included in our 2006 full-year estimate is $16 million or about $0.03 per share from the expensing of options. We also expect discontinued operations to account for about $0.08 per share of costs for the year. This totals to $3.42 to $3.52 per share. The forecast is based on a tax rate of approximately 16.5% and represents an increase of 14% to 18% compared to 2005. We've also raised our full-year forecast for available cash flow to a range of $850 to $900 million.

Please go to slide number 22. For the second quarter, higher revenue combined with pricing and improved productivity will drive year-over-year earnings growth. For the second quarter of 2006, continuing operations are expected to improve to $0.92 per share to $0.97 per share. Second quarter discontinued operations are forecasted to be about $0.02 per share of costs, the same as we experienced in 2005. Second quarter 2006 total EPS is expected to be $0.90 to $0.95 per share. Option expense is expected to approximately be $0.01 per share. This forecast reflects 10% to 16% improvement in total EPS, compared to the second quarter of 2005.

Please go to slide number 23. We're off to a strong start for the year, and we expect record revenues and record earnings for 2006. This ends our formal remarks, and I would now like to open the floor to your questions. Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll take our first question from Jeff Hammond with Keybanc Capital Markets.

Hi. Good morning.

Hi, Jeff.

I guess on the construction margins, can you give us about -- you said that those -- you expect those to improve, certainly good improvement, in this quarter. Can you give us a sense for full year, and then also comment on what you're seeing in China relative to your previous comments?

Let me start off this way, that what we see is for the full year, we'll be up in the low- to mid-teens. I think that if I were an optimist I'd say 15% and probably on the pessimist side be probably 12% to 13%. A lot of that does have to do with the question you really raise, which has to do with what do we see as the increase in our forecast in China. We are able to resume our sales through distribution we established in the first quarter, and that will be upside for us as we continue to go forward. Overall activity, however, in China continues to be at less than what it was in 2004 levels. It's up from last year 2005, but still down 20% from the year before, so to the degree that that recovers, with approximately 50% gross margins in every every sale that we put through there, that'll have a big impact of whether we hit 13% or 15%.

Okay. Great. And then, Tim, you mentioned the $20 million favorable item. Where did that hit in the P&L? Was that corporate expense or on the business unit or in --

It was -- it was actually spread across the business units approximately equally, and it would have fallen in the SG&A line.

[OPERATOR INSTRUCTIONS] We'll take our next question from David Raso with Citigroup.

Yes, hi. You mentioned the maybe pull forward of some sales in front of price increases. Given the cost assumptions for the rest of the year that you've increased some of the material costs, transportation costs, can you highlight where those price increases are, when they were communicated? I'm just trying to get a feel for the price versus cost, because when I think about the bad debt provision, some of the tax rate help, given the strength in your end markets, I am surprised we're just not seeing any leverage at the gross profit level. Can you help articulate where the price increases are, order of magnitude and so forth?

During the -- because of the seasonality of many of our businesses, David, most of our price increases go into effect during the second quarter. One that comes to mind specifically would be Bobcat going into effect in May. And so when the orders that are received during the first quarter all come in, obviously, at previous year type pricing. When we do comparison on year-over-year first-quarter actual price realized, it turns out to be around 1.7% compared to what it was excuse me, 1.7% realized, although the gross price increase published runs probably closer to 3%. As we go forward now, we expect that the price increase will go up to where we'll realize anywhere between 2.5% to 3%, rather than the 1-point-some-odd percent we've been running so far. So, we've had in the first quarter, a very, very limited price increase, and we realized, obviously, significant increases, and the most impacted ones were really in Climate Control and in Security because of copper and zinc increases.

Okay. I am just trying to think through -- I know, obviously, not managing the company versus street numbers, but I am just trying to think about we had $0.05 from a bad debt, the provision being lowered, the couple pennies from the tax rate, but your businesses right now, when it come to the end markets, the revenue growth, is superior to what you thought. When you look at the way the guidance was raised, a lot of it was the bad debt, the lower tax rate. I am just trying it think through, are we raising prices enough? Were they -- maybe we're a little slower to raise prices than we should have? I am just trying to understand why the leverage is all of a sudden gone from a company for a couple years surprise on the upside on the leverage, to all of a sudden, two quarters in a row, it is all coming from the SG&A line to keep the numbers intact.

Well, David, we've -- I mean the $20 million we reflected from bad debt adjustment, as we mentioned, was really offset by one-time or non-comparable other items. When you reflect over the full year, our expectation is we have $0.05 worth of -- $0.05 or so worth of option expense which is new to us. There were a number of other one-time adjustments. Clearly we try to raise prices as the market will allow us to, and there is always a lag between the time of the actual increase and what ultimately is realized, but our expectation is, between price increases and price surcharges, that we should offset the raw material increases, and we should be bringing to the bottom line the benefits of our productivity programs.

So, what I want you to hear from me, David, is the fact that yes, there was $20 million in the first quarter on the positive side, and yes, there was $24 million on the negative side. Net all in, the impact was minus four for that quarter. So I don't see that we wound up having a disproportion. I think you see if you go back, with every quarter you will wind up running into one time it's on the plus, and one time's on the minus --

No, I appreciate the currency and stock options are not something that are -- that's the cost of doing business. We knew about the options. Currency is what it is. So, I appreciate that, and Tim, if later, if you can just help us with why the fourth quarter balance sheet was restated a little bit? I didn't see in anything in the release. I'm not sure if it's significant, but just -- just a little color on why some of the restates in the balance sheet last quarter.

Nope. I don't -- I honestly don't think, David, that there was a restatement.

If I go back to the last release, just the -- your accrued expenses went up about $76 million, other assets went up $84 million. I mean the total -- the total assets and liabilities and equity total the same. It's just the moving parts. Just when it comes to the cash flow, I was just curious why the accrued expenses get restated up from 967 to 105.3.

From the balance sheet standpoint, comparable balance sheet or from the cash flow statement?

Obviously the cash flow implications from moving your balance sheet items, and correct me, and we can talk off line, but the accrued expenses, I thought was reported at 967, the liability in the fourth quarter report for the fourth quarter balance sheet, but now when you show this first quarter report, and you look back at December 31, '05 balance sheet, it is now up to 105.3.

We shouldn't have a restat -- there was no restatement of the balance sheet. We'll have to take that off line, David.

I appreciate that. Thank you.

We'll take our next question from Joel Tiss with Lehman Brothers.

Hi, guys, how are you doing?

Hey, Joe.

Just, first a clarification.you said -- I heard you say something about you have 50% market share in the APU market. Is that right?

Over 50, I said.

Okay. Over 50. Can you give us the components of the corporate expense in the quarter, and then a little bit of a sense of what's going to be in there going forward?

The corporate unallocated expense?

Yeah.

Well, $25 million is the typical $25, $26 million is a typical -- typical quarterly. What variation you typically will see in there, for instance, if you go back to last year, it is going to move mostly because of the stock-based liabilities that we carry. There is between that and some other compensation accrual adjustments, that it reflected about a $10 million increase from last year, but those were really credits as the first quarter of last year our stock, actually over the course of the quarter, declined, and we took credits back in. But $25, $26 million is the kind of the normalized quarterly corporate unallocated number you should expect.

Okay. All right. And can you just share any signs that you're seeing in terms of Bobcat as we work our way through 2006, supply, demand still tight, or you guys starting to catch up on demand a little bit? Just a little bit of insight for the rest of the year? Thank you.

I'd give it -- the story this way on it, Joel, that we were tight last year on mini-excavators, and we're doing better in that area. Last year we tried to go and deliver 40% more and we think we realized 23%, 25% more. This year as order levels are now running into more into teens, as to increases, we see our service level getting back to much more respectable and consistent levels, and field inventories, I think, are close to where they should be. I think that as we look forward now to where that type of equipment will wind up having 10%, 12% growth going forward, we will be able to service the debt at a very high respectable level.

Great. Thank you so much.

We'll take our next question from Jamie Cook with Cred --

Hi, good morning.

Hi, Jamie.

My first question, could you talk a little bit about the European market. It was up 7% which is better than I thought. Was there any sequential improvement if we look at the quarter, in sort of the trends you're seeing by country, or however you can break it down?

I would say to you that what surprised us was the strength in the Germanic part. of Europe. We thought we would see it in other parts, but the Germanic part was actually higher than we had thought overall. And as we finished off the first quarter, the activity level continued to be quite robust across the board. So, we are, at this point in time, pleasantly surprised by the consistency and the magnitude of the growth that we're seeing across all of our businesses there. The only negative we actually had was on stationary refrigeration that we saw supermarket business dropping off, but all the transport side was really strong.

Okay. And then just second, can you just provide a little more color, you're pulling back on acquisitions, which you should, if the prices are getting too high. I guess, what are multiples looking like today, versus what we talked about in the fourth quarter, and is there any specific segments or markets where it is pricier than other?

What we find is that they're mostly driven by size. Once a acquisition turns out to be in the several hundreds of millions of dollars of business, we're finding an awful lot of private equity money showing up in addition to the more traditional acquirers like ourselves, and what we find, at this point in time, is that EBITDA multiples are getting into double digit. That makes it very, very challenging, if it is not really a business that you can provide a lot of synergies to, so we, at this point in time, continue to focus on those that are product-line extensions and geographic reach examples for us. I'm not saying our pipeline is full. It's just that our disappointment rate is high, because what we find is that what our bids are that we feel meet our hurdle rates, we turn out to be not close to some of the acquisition prices being paid. So, we'll keep focusing. and obviously, the ones we'll win on are the ones where we have the most synergy, and that's probably good for us.

We'll take our next question from Ann Duignan with Bear Stearns.

Hi. Good morning, guys. Just a clarification on Climate Controls, that's the only business that you don't actually break out Thermo King versus Hussmann. All the other businesses, you break out subcomponents and is give us color on both. Could you give me color on Thermo King versus Hussmann in the quarter given how strong the reefers build was.

Well, it's really funny on -- Ann, that we saw the reefer build but, I tell you, that's in our backlog. Let me just start it that way. When I look at the activity level, I will give you specifics by -- by the pieces here. When we look at the Americas to start with, what we see is that the Hussmann stationary type stuff was up about 5%, while all the pieces of the transport, now, that's truck, that's bus, and all the stuff thrown in there, was up over 8%. That's where collectively you wind up then with a 7% when you go there. And as we saw, the bookings level in the end of the first quarter and what our forecast on booking activities is for both stationary as well as for transport. We're getting close to 20%, we believe in the second quarter. Now, some of the that is as a result of the Wal-Mart business we're getting into stationary, but I think we're just start to go see the bookings from that ACT data that you probably saw over the last couple of days, and it is not reflected in our first quarter numbers, but it sure looks like it will be there for the second and the third quarter.

Okay. And ITW noted yesterday that they are beginning to see some activity at the grocery level now. Obviously, they were talking about specialty grocery and of course, they sell slicers and dicers, which might be a little different to refrigerated display cases, but are you seeing any activity at the grocery level, anything that wasn't there last year that signs of final recovery?

Well, I would say -- I think there is two pieces to it. What we have, which is not a public press release yet, but I guess I am going to make it public as we speak, we're just in the process of signing our contract for Safeway which is for between $250 and $300 million for the next three years. So that level of activity that they're forecasting would obviously be a positive for us, compared to what we've seen in the past. Then there is the Wal-Mart growth, and we're starting to see other areas that they're picking up in general. I think there is a lot of pent up issues yet, as several of the larger chains, at this point in time, are looking for new owners. So, activity level for us, I've said as I look at the second quarter, we expect the total Hussmann business to be up somewhere in the 6% to 8% range, while we're looking at the transport side being probably even stronger than that, if the ACT data continues to hold.

Okay, and forgive me if I didn't catch it, but when will you start delivering products on the Safeway contract?

That is a contract which was expiring and has now been renewed, and now will continue to be in for the next three years. So this is a continue. It is not a new contract, in the sense that it was a customer we had before. What it says is that we renewed the contract with higher volumes for the next three years.

We'll take our next question from Gary Mcmanus with J.P. Morgan.

Hey. Good morning. Just a clarification of that $24 million that offsets the $20 million in bad debt allowance. You said three items, stock expense, currency, and one-time. I guess stock expense I see in the release is $8 million. Can you break up the other two that adds to 24.

There is actually, and there are three major ones, but there are quite a number of them. We incurred higher what we call OSME, which is obsolete and slow moving inventory, particularly related to Bobcat where we had new product introductions and found that we had raw materials and whip, et cetera, related to the previous version, so we wrote off some inventory there. We had a little bit of true-up of bonuses from year end, when the bonus actually came in a little bit higher than we had accrued for. You mentioned the FAS 123. We had some additional launch costs associated with introduction of new products, and we had some other inventory adjustments. The total of them came in to about $24 million.

How about -- what was the currency part of it?

Currency was about $5 million.

Okay. And just talk a little bit about acquisition activity in the first quarter, how many deals did you do? What was the revenues acquired, and how much did you pay for these acquisitions?

During the first quarter we closed 0 new deals.

Nothing?

Nothing.

Okay. And you're comfortable that $400 million will be reached.

Everything, as you know, Gary, there seems to be they run in spurts. I would say the activity level we have makes me very confident to give you the forecast of 400. I was concerned about 600 at this point in time, so that's why I think the 400 is the right level.

Okay. Thanks.

We'll take our next question from Andrew Casey with Prudential Equity Group.

Good morning

Good morning, Andy.

First a clarification on Gary's last question. I think it ties into David's issue with gross margin. How much of the 24 headwind that you ran into that you just described was in gross profit or cost of goods versus SG&A?

The majority of it was in cost of goods sold.

Okay. So going forward that should pretty much evaporate?

I would expect, yes.

Yes. [inaudible] some-odd million was in cost of goods, obviously, at Bobcat and those kind of things.

Okay, so the concern is basically on one historical quarter, and goes away forward. The question on the '06 $80 million investment. You have $200 million growth forecast in revenues for '07 and then more in '08. What sort of incremental margin do you think we should put on that?

20 to 25%.

Okay. Thank you.

We'll take our next question from Robert Mccarthy with Robert W. Baird.

Good morning, gentlemen.

Hi, Rob.

Can you talk a little bit more about the change in your raw material or input cost inflation forecast? I am wondering specifically, one, if any part of the increase in your forecast is related to an increase in your underlying sales growth forecast for the full year, and then secondly, how much of the increase in your outlook was actually realized already in the first quarter?

Well, when I look through it, we really have to go with break it down into all the total commodities that were there. I said to you that we had over $35 million that we saw in the first quarter, above and beyond what we thought was going to be there.

That was most of the -- really that's -- you're talking about the increment.

Right.

Right. Okay. And can you give us any help on breaking down the $12 million of incremental investment spending among the segments? I gather the largest portion was in Security Technologies.

Yeah. You've got four in Security and roughly two, plus or minus a little bit, in each of the other four.

Very good. Thank you.

We'll take our next question from Nigel Coe with -- from Deutsche Bank.

Yeah, thanks for that. You talked about the 13% order growth in the first quarter and you mentioned that some of that might have come in ahead of the price increase. But, given that your price increases tend to come in in the second quarter, doesn't happen every year, and secondly, can you give a little bit of sense on the order flow during the quarter? Did it accelerate from January to March or de -- decelerate?

Actually, the thing is, January and February were very strong. March was closer to on target. And that's why we thought and turned on it that there was some early end, because of the warm weather plus with the anticipation -- we actually published a price list back in January, so I think people got to see it earlier on. Let's just make sure that we also, magnitude wise, on it, Nigel, I am still talking about revenues going forward being in the 7% to 8% type level, so it isn't that we see them falling off. It is just that we don't think it is 10-plus%. We think it's going to be more like 7% or 8% going toward.

That's a little bit better than we had previously

We thought it would be 6% to 7% to start with. We think it's up to 7% to 8% now. And If we're wrong and that order level actually reflects the activity level, we will be very thrilled to go and have another 10% for the second half of the year.

No, I agree it is a great number. Secondly, I am sorry if I missed this, but you talked about commodity inflation for the balance of the year. The price increases you're planning now in the second quarter, does that offset the inflation or are you slightly negative on that?

We're expecting that the price increase realization should substantially offset the raw material increases.

Okay. Very good. Thanks.

We'll take our next question from Barry Bannister, Stifel Nicolaus.

Hi. Good quarter, guys.

Thanks, Barry.

Quick question on you on Electronic Access and Security. It seems like your three-year average margin has been about 18.3 in that division, and you're guiding to 17 to 18 for the year, despite the last few year's improvement in general levels of non-residential and residential construction. How much of that is price pressure from the inability to pass through materials to big-box retailers, and how much of that is attributable to investments in Electronic Access Security?

I think you have to add a third one, too, Barry, which really has to do with our European business. When we acquired CISA, we bring in, just to make it rough numbers, $300 million of revenue that, by the time you look at the operation, you get into the amortization of the goodwill and so on, you're talking about operating margins that run around 12%, 12.5%. So that creates some drag. So, you have that at 12-some-odd percent. When we look at our installation of Security Solutions, the integrated type business, that's also something which runs in the low- to mid-teens. It's that, and then you get into what you have as material costs that you're not able to pass through in big box. But, I gave them to you in terms of as to I think the sequence, in terms of the most impact to the lesser impact.

And do you anticipate in the future because of the sale of securities software upgrade packages that you will increasingly skew the results to the fourth quarter for that division?

Well, I tell you we sure are seeing that on our installation for the security package. If I look at the ones that we have with Interflex and so on, as we keep being amazed by that we do this on the project. We sort of record them as we go. So obviously, at first you pull the wire, and all you're getting is direct labor, and then you wind up putting in some of the cameras which are buyouts, and then you wind up doing the software at the end. So clearly as we see more of our fourth quarter project closes, we're seeing, as you saw in the fourth quarter last year, more of a spike at that time.

Okay. Great. Thanks a lot.

Software carries significant margins. The first quarter of this year came in where we would have expected considering all of the variables that Herb talked about. Obviously the first quarter margin is significant. The kind of 20-plus is what we normally would expect that that quarter, and the first quarter is obviously the weakest .

And we'll take our next question from Ana Recinos with UBS.

Good morning. It's actually David Bleustein. Two quick questions. The first one is can you talk a little bit about the timing of the realization of the price increase, and what is the current lead time between the Bobcat order, like the first order that will be placed after the implementation of the price increase, and first unit that will get shipped with that price increase in it?

The best way to describe it, David, is you wind up getting the -- the order has to come in on Feb -- excuse me on May first, and on average it will get shipped at the end of May. So that -- yes they just planned it that way. So count on the fact you're going to be seeing at most a one-month participation level, if you will, in the second quarter, and then you will see it go full up full time when you get to third quarter. And when I look at the same thing is true in our security business. So overall what we're seeing is going to be somewhere between one month to, let's say, half a quarter. That'll be in in the price increases in the second quarter, and then full realization as we get into the third.

Terrific. And then given the environment out there for acquisitions, do you think there are any of your businesses that the private market might value more so than you do?

That's a hard question to answer. I would say to you that we will assess any phone call that we get that would give us a opportunity to consider that part, but as of right now I would tell you that the businesses that we have in place, we believe meet our financial hurdle rates. And so what would have to be received to represent to the board would be a proposal that would be significantly in excess of that performance level.

Perfect. Thanks a bunch.

And we'll take a follow-up from Ann Duignan.

Hi. I just wanted to clarify something you mentioned there. I think you said that the $24 million of offset to your $20 million gain was reflected in cost of goods and as one time. But help me understand option expensing, that's going to be ongoing, FX, as currency stays at current levels, that's going to be ongoing at least through the year.

The majority of the expense is going to be in cost of goods sold, right?

But options, they're not in cost of goods.

Options is not in cost of goods sold. But the ongoing options reduced, the first quarter is 3/4 of the option expense during the year.

Well, yeah, and part of that is driven by the fact that you pull forward your options vesting.

No. That has nothing to do with that.

That reduce the amount that you're paying for options

-- to reduce the overall amount, but the timing within the year is unaffected by pulling forward.

I understand that, but that's an ongoing cost and not a one-time.

Correct.

Okay. So, all of the $24 million is not one-time?

That's correct.

And it's not all in cost of goods?

That's correct, but the majority of it is.

Okay. Okay. I just wanted to clarify that.

The OSME is a big piece of it, and the product launch costs and so forth would be reflected in there in cost of goods sold. Obviously a larger majority of the foreign exchange is going to be there as well

But the new product introductions and the investment in new products, that's ongoing also?

It was higher in the quarter.

The only thingwe're talking about, Ann, is really comparing it to 2005 to give a reference point as to what was in one, and what was not in the other,

Yeah, I just thought it was a bit misleading to say that most of the costs were one-time when in effect --

I think we characterized them as one time or year on year non-comparable, and I think that's pretty reflective.

Okay and yeah, and I agree with that. That's fine. Thank you.

We'll take our next question from Alex Blanton with Ingalls Snyder.

Good morning.

Good morning, Alex.

Could you give us a little more detail on what you're expecting in the housing market specifically as it would impact Bobcat for the year? You mentioned that in the opening remarks but you went over it fairly quickly.

What I said, Alex, is what we see the forecast today to the outside is people talking about single-family housing starts being off 5%, the estimates say they're off 10%. What we're saying is when we ran our numbers through, we assumed what if happens if housing starts were off 10%. And where it says that in light of that type of a marketplace, we would still be up at least 10% to 12% year-over-year. So Bobcat revenues up 10% to 12% even in the marketplace that is experiencing as much as a 10% reduction in new housing starts.

I was just wondered about that. Bobcat was up 10% in the first quarter, and housing was not off.

That's because there is -- the comment really, Alex, is the fact that there is not much correlation to new housing starts. It has much more to do with the overall economic activity. That's what I am saying, the investor questions about gee, what happens when it goes off 10%. I'm saying is it's really, frankly, it's not that it's irrelevant, it is probably less than 10% of the total activity is driven by new housing starts. There's much more going in other areas. So we're fine there.

Okay. That's good. Second question is just a clarification on something that Robert Mccarthy asked about earlier. These numbers that you give for material cost increases, transportation, energy and so on, $43 million you mentioned, and the $125 to $140 million for the year, are those volume adjusteds? In other words, if your volume increases, do those go up accordingly, or do they -- or are they volume adjusted so that they -- they're at the per unit?

I mean a component -- Rob had a good point -- is that to the extent that we had -- have reflected a little higher growth expectations for 2006, that is a component of the increase in expected raw materials.

The numbers you're hearing from us are with our current forecast baked in those numbers.

Okay. So, those are really the actual numbers, and if sales increase even more those would go up even more.

That's correct.

The revenues are up 7% to 8%. That's the type of activity level you'd see on the total cost of the material.

Okay. Thank you.

We'll take our next question from Gary McManus, J.P. Morgan

Yeah, just one quick follow-up. What's your current share count at the end of the quarter, and what's your share count assumption for your forecast for the earnings per share in the second quarter and full-year '06?

We're anticipating -- we're above 332 million for the quarter average.

And about 330 by the time we're done at the second quarter.

The average for the full year obviously it's the -- when you look at the full-year earnings it is reflecting the average over the course of the year, and you're looking up 328 or 330.

I'm sorry. 328 to 330 million?

That's our expectation for the average -- the weighted average for the year.

Just to follow up, I hate to beat a dead horse here with bad debt, the $20 million, was that in your original first quarter guidance of $0.69 to $0.73.

No, it was not.

Okay. Thanks.

Gentlemen, there appears to be no further questions.

Okay. Thank you very much. We're going to wrap up, and again. thank you all for joining us. There'll be an instant replay of today's conference call available at approximately 12:30 p.m. It will be available until April 30th, 2006. The call-in number is as follows. 888-203-1112, and the pass code is 3449658. And the international number is 719-457-0820. The audio on the slides from today's conference call will also be archived on our website, and finally the transcript of the conference call will be available on the Ingersoll-Rand website next week. Please call me. Again, this is Joe Fimbianti. If you have any additional questions, I'm not at my normal number today, so if you'd please try to reach me at 704-655-5248, and I will be back in the office on Monday. This concludes the call. Thank you very much.

This does conclude today's conference call. At this time you may disconnect.