特靈科技 (TT) 2006 Q3 法說會逐字稿

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

Thank you very much.

This is Joe Fimbianti, Director of Investor Relations for Ingersoll-Rand. Welcome to our third quarter 2006 conference call. We released our earnings at 7:00 a.m. this morning and the release is posted on our Web site. This morning concurrent with the normal phone-in conference call, we will also be broadcasting the call through our public Web site. There you'll find the slide presentation for our call. I understand talking to some of you that we had some problems with the vender this morning as far as getting the slides out. We have e-mailed the slides to all of the participants, but you can, in fact, find the presentation -- it should be posted on the Web site. If you just click on the yellow link, you should be able to download the slides, and I apologize for the inconvenience. Both the call and presentation will be archived on our Web site and will be available later this afternoon.

So if you'd please go to slide number 2, before we begin, I'd like to remind everyone that there will be forward-looking discussion this morning, which is covered by our Safe Harbor Statement. Please refer to our June 30, 2006, Form 10-Q for details on factors that may influence results. I'd 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'll start with a formal presentation by Herb Henkel, then to go Tim McLevish, followed by a question-and-answer period. Herb Henkel will start with an overview. Now if you'll please go to slide number 3. Herb?

Thank you, Joe, and good morning, everyone.

Today we announced third quarter earnings of $0.76 per share which included a $0.09 from a higher tax provision related to prior periods. Excluding the charge, earnings from operations were $0.85 per share. Our overall financial performance was in the midrange of our forecast for the quarter of $0.82 to $0.87 per share. During the quarter, we continued to see solid activity in our major commercial construction, industrial, and transport refrigeration end markets in most of the world. However, U.S. residential building activity deteriorated in the third quarter more sharply than we had previously forecasted. The lower activity and the expectation of soft markets going forward caused a sharp decline in compact equipment shipments in North America and slowing activity in the residential security market. Now please go to slide 4.

Total revenue growth for the quarter was about 6%, which is about 4% organic growth with 1% from acquisitions and about 1% from currency. We were at the low end of our 6 to 8% revenue growth targets for the quarter, but there was a wide disparity in results by business unit. As you can see, we had double digit revenue growth at Climate Control, Construction, Industrial, and Security. Unfortunately, we had disappointing operating leverage in these four sectors, which is primarily related to higher-than-expected material cost inflation and higher transportation costs. Tim will review the quarterly results and our business unit performance in greater detail later this morning. We expanded our recurring revenue stream for the quarter at a double digit rate. Recurring revenues were $615 million, an increase of about 11% compared to 2005 and equal to about 22% of sales year-to-date. We had a sharp contraction in revenues at Compact Vehicle which was related to Bobcat in North America.

I'd like to take a few minutes to talk about the components of the decline at Bobcat in greater detail, so please go to slide number 5. Over past several quarters, we have spent a great deal of time analyzing the historic movement of Bobcat North America volumes in conjunction with residential investment and housing starts. The historical data on residential construction demonstrates a low level of correlation with Bobcat and a great deal of volatility, both of which make it difficult to use as a forecasting tool. Historically, there has been an 8-month to 13-month lag between the initial decline in residential construction and a decrease in Bobcat retail sales. However, this cycle has not followed historical trends. There has been a coincident decline in housing starts, residential investment, and loader sales. Not only is this the first time we've seen this pattern, but the decline in residential activity has been particularly severe from historical standards with housing starts down over 25% between January and August 2006. Now please go to slide number 6.

This slide details the retail sales of compact loaders in North America for the last seven quarters. The year-over-year deterioration is much more severe than our initial expectations. Bobcat retail sales in 2005 generally corresponded with industry activity. For 2006, Bobcat retail volumes have lagged somewhat behind the total industry as we've attempted to hold the line on pricing in the face of deteriorating industry fundamentals. Additionally, the rapid decline in retail activity also surprised many of our dealers, who had built inventories in the first half of the year. In response, they cut orders sharply in the third quarter to balance their inventory levels. The decline in retail activity, coupled with dealer inventory reduction, caused a steep decline in Bobcat factory shipments and operating margins. We expect a continuing year-over-year decline in the compact equipment market in the fourth quarter and additional Bobcat dealer inventory reductions. We're making adjustments in operations to compensate for this declining revenue. Please go to slide number 7.

We have deconstructed the year-to-year changes in Bobcat revenues into its base components. North America machine volume declined approximately 30% and was partially offset by higher international and recurring revenue growth. About 10 points of the change was related to the decline of industry retail sales. We believe about 5 points of the decline is attributable to shipments to the rental channel. Rental companies usually adjust their buying patterns at the first sign of a downturn. 15 points, or about half of the decline, was tied to inventory reductions at our distributors. Last year, we increased field inventory to meet expanding demand. In 2006, we've been proactively managing down distribution inventories. Dealers also took fewer units into their rental fleets in 2006 compared to last year's third quarter. Also, 2005 Bobcat revenues benefited from the clean up after two Gulf Coast hurricanes. Last year, there were two major hurricanes. This year, there were none. We estimate that the difference was about $30 million of revenue quarter-over-quarter. Now please go to slide number 8.

Putting the decline of Bobcat aside for a moment, we did have some positives during the third quarter. Our other major business segments had revenue growths of over 10%, which exceeded our previous forecast for the quarter. Club Car also recorded double digit revenue growth and improved margins. We also had an 11% growth in recurring revenues. We also continued to invest in product and channel development during the quarter. We had several key introductions in the quarter and expect to have major product introductions in all of our business segments in the second half of this year. Revenues from new products developed in 2006 and expansion of distribution capabilities overseas will help offset soft construction machinery markets in North America.

I would now like to update you on some of the major topics of interest related to our operations investment strategy and end market activity. And after that, Tim's presentation, I'll talk about the outlook for the third quarter and the full year 2006, so please go to slide number 9. First of all, I would like to update our stepped up investment spending for 2006. In January, we indicated that we expected to spend about $80 million above last year in growth initiatives that cover all five of our business sectors. We spent about 20 million in the third quarter and about 52 million year-to-date. The remaining investment will largely be completed in the fourth quarter, although I expect a few million dollars in spending to carry over into 2007. We continue to expect that these new program investments will add $200 million to 2007 revenues and 300 million to 2008 revenues. Please go to slide number 10. Secondly, in the third quarter, we continued to pursue our program to add high-value bolt-on acquisitions. We closed three transactions in September and October, which should add over $100 million to 2007 revenues. These transactions will expand our product range and aftermarket parts volume in the Industrial Technologies business and expand our global business for construction machinery attachments. We remain committed to our disciplined approach to pursuing bolt-on acquisitions that create value. We're continuing to assess opportunities in several markets for the balance of 2006. Now please go to slide number 11.

As we indicated in our August 2nd press release, we greatly accelerated our share repurchase for the third quarter. We purchased approximately 16 million shares in the third quarter for about $610 million. For perspective, for the first half of the year, we purchased about 9 million shares for about $384 million. Additionally, during the month of October, we purchased an additional 2.6 million shares for about $100 million to complete the $2 billion program authorized by our Board of Directors. We have repurchased approximately 51 million shares since the inception of the program and have reduced our outstanding share count by about 14%. We will be reviewing a new proposal for an additional share repurchase authorization with our Board at our regularly-scheduled meeting in early December. Now please go to slide number 12.

Overall, this was a challenging quarter. Quite frankly, our results were disappointing to me. Even though we maintained solid earnings and made progress against many of our long-term strategic priorities, our overall performance at Bobcat and our poor operating leverage at our other four major sectors was unsatisfactory. We're taking immediate actions in the fourth quarter to minimize the effects of the downturn in Bobcat's North American markets. These actions will include both cost control and right-sizing actions where warranted. We expect to realize the full benefits of these corrective actions in 2007.

Tim will now cover the business unit performance. Tim?

Thanks, Herb, and good morning.

I would like to begin my discussion with the quarterly financial results. Please turn to slide 13. Revenues for the third quarter were $2.8 billion, up 6% from 2005. This increase is attributable to double digit growth across four of our operating segments, with a decrease of 15% in our Compact Vehicle Technologies segment. Operating income for the quarter was $357.7 million, up $17.7 million or 5% from 2005. This increase was driven by higher volume, improved pricing, and lower corporate costs, partially offset by approximately $65 million of higher material and transportation costs and approximately $20 million in increased growth investments. Third quarter operating margin of 12.9% was consistent with the prior-year operating margin of 13%. Moving down the income statement, interest expense was $31 million, which was $4.5 million lower than third quarter of 2005. This decrease was attributable to lower average debt balances. Other expense for the quarter was $300,000 compared with $9.6 million of income for 2005. The year-over-year difference was attributable to decreased interest income on lower cash balances, increased minority interest expense due to earnings of new joint venture companies, and lower income from partially-owned affiliates.

Our third quarter tax rate was 22.2%, which included a $27 million addition to rate was 22.2%, which included a $27 million addition to tax reserves. This was in response to a notice received from the IRS containing proposed adjustments to the Company's filings for the 1998 through 2000 tax years. The principal proposed adjustments consist of the disallowance of certain capital losses taken in the Company's tax returns in 1999 and 2000. The Company disputes the IRS's position and intends to contest the proposed disallowance. After taking this charge into account, we believe that we are adequately reserved for the ultimate resolution of this issue. I would like the point out that the issues raised in the notice are not related to the Company's reorganization in Bermuda. Excluding the $27 million charge, the tax rate for the quarter would have been 13.9% compared to 18.5% in the third quarter of 2005. The 13.9% rate included a year-to-date adjustment to a revised full-year effective tax rate of 15.8%. The decrease from our previously guided full-year rate of 16.7% is attributable to a lower earnings outlook and a lower proportion of income derived from the higher U.S. tax jurisdiction. Earnings from continuing operations for the third quarter were $254 million or $0.79 per share while discontinued operations reflect the cost, net of tax, of $10.2 million or $0.03 per share. Total net earnings for the quarter were $243.8 million or $0.76 per share.

I would now like to walk you through two EPS bridges which will help explain the changes from our previous guidance range and from last year's third quarter. Please turn to slide 14. First I will bridge our previous outlook to our third quarter results. Our previously guided range for continuing operations was $0.85 to $0.90. Actual EPS from continuing operations was $0.79, or $0.88 after adding back $27 million to net income for the tax charge. While the $0.88 comparable results fell in the middle of the guidance range, operating results were $0.07 unfavorable due to geographic mix, higher than anticipated commodity inflation, and manufacturing inefficiencies resulting from the unexpected decline in production volumes at our Bobcat factories. Offsetting the operations decline was $0.08 of favorability resulting from lower corporate costs, primarily attributable to lower stock-based liability expense, the acceleration of our share repurchase program, and the year-to-date adjustment to lower the full-year tax rate. Please turn now to slide 15.

In bridging last year's EPS to this year's results, third quarter 2005 EPS from continuing operations of $0.75 increased by $0.13 to this year's comparable $0.88. Operations increased by $0.07 as price and growth leverage offset unfavorable geographic mix, net material inflation, and manufacturing inefficiencies at Bobcat. This increase was partially offset by $0.05 per share of increased growth investments. The remaining $0.11 of EPS increase is attributable to a reduced share count resulting from the acceleration of our share buyback program, a reduced tax rate, and lower corporate costs. Please turn to slide 16.

In reviewing third quarter year-over-year revenue growth by major geographic region, strong international gains accounted for all of the Company's 6% increase. Revenues in the Americas were flat as declines in Bobcat and Road Development offset growth in the rest of our business portfolio. Third quarter revenues in the European region increased by 17%. Robust markets, our increased focus on emerging markets, and favorable currency helped to drive double digit increases across all of our operating segments. Asia Pacific revenues increased by 25% from strong organic growth and bolt-on acquisitions. China and India grew by 77% and 40%, respectively.

I would now like to take a few minutes to talk about the results of our businesses. Please turn to slide 17. Climate Control Technologies reported third quarter revenues of $826 million, up 14% from the third quarter of last year. Climate Control Americas revenues were up 15% over prior year, with growth across all of our businesses. Transport Refrigeration increased in all major product categories. The North American refrigerated trailer market continued its steady growth with shipments up about 8% compared to last year. We expect to see solid Thermo King growth for the balance of 2006 and 2007 refrigerated trailer volume to be flat to up slightly from 2006. Shipments of the TriPac Auxiliary Power Unit increased sharply compared to last year and are expected to reach $90 million for full-year 2006. Stationary Refrigeration grew on increased case shipments and higher service and installation business. Climate Control International revenues for the third quarter were up 13% over last year. Revenues in Europe increased significantly from last year, primarily driven by improvements in display case and refrigerated trailer shipments. Additionally, we had positive year-over-year sea going container growth in the third quarter despite soft end markets. The third quarter operating income for the segment was $103.7 million, with an operating margin of 12.6% compared with 11.3% last year. The operating margin increase was attributable to improved pricing, gross leverage, and productivity, offsetting significant material cost inflation. Please turn to slide 18.

Compact Vehicle Technologies segment generated third quarter revenues of $540 million, down 15% from 2005. Bobcat revenues decreased by 22% compared to last year, due to a 35% decline in North America, partially offset by an 18% growth in international markets. The decrease was attributable to an unexpectedly severe deterioration in North American markets, a related decline in shipments to distributors to reduce field inventories, and difficult prior year comparables attributable to sales supporting last year's hurricane clean up efforts. Club Car revenues increased by 13% over 2005. The growth was driven by higher sales of transport and utility vehicles and double digit gains in the after market and international markets. Third quarter operating income for the segment was $62.9 million for an operating margin of 11.6%. Year-over-year segment margin decreased by 3 percentage points due to volume deleveraging in the highly profitable North American region, which resulted in the manufacturing absorption reduction and mix-related margin degradation. In light of softening North American markets, we're actively reducing our overhead costs -- our overhead and cost structure consistent with lower demand levels. In addition, new product introductions in North America and Europe and productivity improvements will mitigate the North American slowdown. Please turn to slide 19.

Construction Technologies reported third quarter revenues of $325 million, up 11% compared with 2005. Road Development revenues increased 2% with gains in international markets offsetting declines in U.S. compaction and paving. Higher costs for oil-based materials are reducing paving activity in domestic markets. Revenues in the utility equipment and attachment businesses were up a combined 23% compared with the prior year. The growth was well-balanced with double digit growth across all three geographic regions. Segment operating income for the quarter was $34.2 million. The operating margin of 10.5% was up 1.3 percentage points over prior year. The increase was from higher volumes and productivity improvements that were partially offset by unfavorable mix, material inflation, and increased investments. Please turn to slide 20.

The Industrial Technologies segment produced third quarter revenues of $486 million, an 11% increase over prior year. Air Solutions revenues grew by 13%, as favorable worldwide industrial markets supported higher revenues in all major geographic regions. Recurring revenues improved by 8% over the prior year. Productivity Solutions revenues were up 9% from new products, increased recurring revenues and strong international growth. Segment operating income was $62.9 million, representing an operating margin of 12.9% compared with 14% in 2005. There were two primary factors that accounted for the margin reduction. One was unfavorable mix as complete unit growth outpaced gains in the higher margin parts business. Another was supply chain inefficiencies attributable to carryover costs from the previous quarter's Naroda, India, plant strike and higher air freight costs to expedite materials to meet customer requirements. These items were partially offset by growth leverage and improved pricing. Please turn to slide 21.

Third quarter Security Technologies segment revenues were $590 million, up 12% compared with 527 million in the third quarter of 2005. Revenues increased in all regions during the quarter. America's revenues were up 6%. This increase was attributable to solid growth in the commercial segment and increased residential shipments despite a slowing market. Revenues in the European region were up 16%, half of the growth was due to favorable currency and acquisitions, while the other half was attributable to higher volumes and improved pricing. Asia Pacific revenues were up sharply, primarily due to bolt-on acquisitions. Security's operating income was $105 million, representing an operating margin of 17.8% compared with 19.3% last year. The decrease in margin was attributable to unfavorable geographic mix, continued material inflation, and incremental growth investments, partially offset by the growth leverage, improved pricing, and productivity.

Now let's move on to the balance sheet. Please turn to slide 22. We finished the quarter with our investment in operating working capital at 13.5% of revenues, compared to 12% in the third quarter of last year. Third quarter inventory turns declined to 5 turns compared with 5.4 last year. All of the decrease in turns was attributable to increased inventory at Bobcat due to the sharp reduction in demand, coupled with our inability to reduce long lead time suppliers. This issue is being addressed in the current quarter as we appropriately adjust our purchases to lower demand levels. Day sales outstanding increased to 67 days from 62 days in 2005 due to increased international growth, where terms are longer than the domestic average, and to the termination of a discounting program in Europe. Days payable outstanding increased by 9, offsetting the receivable increase. At the end of the quarter, our total debt was $2.1 billion, which is consistent with last year's $2.2 billion level. Our debt-to-capital ratio at the end of the quarter was 26.6% remaining below our target range of 30 to 35%. Capital expenditures for the quarter were $56 million, or 2% of revenues while depreciation and amortization expense was $49 million. Our solid balance sheet continues to provide a foundation to support the growth strategies of our Company.

Herb will now conclude our formal remarks with the outlook. Herb?

Thank you, Tim. Please go to slide number 23.

As I noted earlier, many of our key end markets including commercial construction, general industrial, refrigerated trucks and supermarket remain firm during the quarter. Our orders were up about 4% compared to the third quarter of 2005. There was a wide disparity in activity by sector with order growth at four sectors and a double digit decline in Compact Equipment due to Bobcat. We see continued moderate growth in most of our worldwide markets except for North American residential for the balance of 2006. We expect our revenues to increase about 3% in the fourth quarter compared to 2005, despite an expected double digit revenue decline at Bobcat. Material and transportation costs will continue to be a major issue for the balance of 2006. Third quarter costs were about $65 million above last year. For the quarter, we continue to experience high prices for steel, copper, aluminum, and zinc, and higher transportation costs. We now expect material inflation to add about 215 to $220 million to our 2006 cost, which is approximately 30 million above our previous forecast of 180 to 190 million and more than double our original forecast for 2006 of $100 million. We're continuing to focus on minimizing the impact of these cost increases by making permanent reductions in our operating cost structure throughout the productivity gains and by implementing lean processes throughout the organization. We're also increasing prices and surcharges to cover additional costs wherever possible. We're also implementing other accelerated cost containment activities, including workforce reductions throughout the Company. The cost of these actions should approximate about $0.02 per share and are included in our forecast. We expect to return about $0.06 to $0.08 per share of benefits to 2007 earnings from these right-sizing costs. Now please go to slide number 24.

Based on the expected macroeconomic environment and our current order pattern, we expect fourth quarter earnings of $0.70 to $0.75 per share. Earnings from continuing operations are expected to be $0.74 to $0.79 per share with discontinued operations at $0.04 per share of cost. The downward revision in our forecast is primarily attributable to declines in Bobcat North America and residential security products as well as larger than expected increases in material costs for non-ferrous metals. The fourth quarter EPS forecast reflects a tax rate of approximately 15.8%. Now please go to slide number 25.

The projected fourth quarter earnings brings our forecast for full-year EPS to $3.16 to $3.21 per share. Earnings from continuing operations are expected to be $3.28 to $3.33 per share or $3.37 to $3.42 per share excluding the third quarter tax charge. This represents a 9% to an 11% year-over-year increase compared to $3.09 for 2005. Full-year discontinued operations are forecast at $0.12 of cost. We also expect full-year cash flow to approximate $800 million, which is consistent with our new earnings projection.

This ends our formal remarks, and I'd now like to open the floor to your questions. Thank you.

[OPERATOR INSTRUCTIONS]. Alex Blanton, Ingalls & Snyder.

Good morning. Just a clarification. The tax adjustment you talked about in the third quarter, that belongs to earlier quarters this year?

No. It actually, Alex, belongs to a tax adjustment on a disallowance of the IRS in their audit of 1998 through 2000 tax years.

Okay. So this is -- this belongs to prior years, so it's in the nature of an extraordinary item, then?

I'm not sure your definition of extraordinary item, but certainly it is out of period adjustment. But we received notification of the IRS's assessment during the -- or subsequent to the quarter, but it fell within the requirements to reflect it in the quarter.

Alex, we had a reserve set up for this activity, but they then came up with some additional charges in terms of some penalties that were not included in our existing reserve, so in accordance with GAAP, we reviewed our reserves and raised them accordingly, but they reflect an activity that took place back in '98 to 2000.

Okay. So what I'm getting at is the issue of whether or not analysts are going to include this in their estimates. Your guidance that you've given, does it exclude it or include it?

The full-year guidance excludes -- it includes the tax charge.

The guidance of $3.28 to $3.33 includes that?

Right.

Okay. Because -- well, First Call we'll have to sort that out as to --

I'm sure they will [inaudible] to get that.

What the balance of the analysts are looking.

Alex, look at slide 25, if you will. You'll see what we did there is we show the operations and then at the bottom, you see the excluding what [inaudible] back in. Okay?

Right. Down below. Okay. Secondly, on the Bobcat business. In the -- last time you talked about it in July, you spent a great deal of time talking about the rubber track Bobcats versus the wheeled ones, pointing out that the rubber track items were up more than 20% year-over-year, while the wheeled skid steers were down 5 to 10%. And that that -- you felt that that trend would continue, that the rubber tracks would continue to take share from the wheeled version. Could you update us on that for this quarter? Did it continue? And just what is the situation there?

The trend of customers choosing to use track vehicles instead of just wheeled, regular-tired, that continues to make process. Unfortunately, what we saw was the overall activity level just drop precipitously across both categories.

Which dropped the most?

The wheeled.

And do you have any numbers on that? For example, compare the drop in the rubber with the drop in the wheel?

I'm sure that the folks from Peoria and other parts of the world that are listening in would love me to give you that information, but I'm afraid I really don't think that's a good idea, Alex.

Oh, but you did on the -- the last time, you told us it was up more than 20% while the wheeled was down.

I guess what I'm saying to you is that I think that if I look at how much information we put out there -- let's just say that you see the overall activity level and we continue to see customers making preference for track versus wheeled, but not enough to offset the overall reduction in activity we're seeing in the marketplace.

Okay. Thank you.

Ann Duignan, Bear Stearns.

Hi, good morning.

Good morning, Ann.

Herb, my question's on Thermo King, your outlook for next year is now flat and that's pretty consistent with what we heard earlier in the week at a truck outlook conference. You had expected last quarter that Thermo King would be up next year by -- well, you assumed that lack of buying this year of about 7 or 8,000 units would be reflected next year. What changed during the quarter for you to revise that outlook?

Actually, the outlook and what Tim said, Ann, was the fact that it was going to be from flat to up single digits, and so what we're seeing is that we do not see a reduction at all. If you take the number of trucks sold in 2006 and you put the appropriate 12% of them going into some sort of a refrigerated type unit going forward and you compare that to the number of reapers sold this year, you find that there actually is an existing backlog that we will be selling into for next year. Depending on if that is 12% or 11% or 13% in that bandwidth, we see it from being pessimistically flat to up 5 to 7%. It all depends on whether it's going to be 12 or 13% that get converted. So I mean, for us, I think really the important part we like to leave you with is we do not see a degradation of next year results. To us, the question is whether or not there's upside in the North American. I would also like to just sort of point something out in the order magnitude. We focus an awful lot in these conversations on trailer in America. I will tell you that at this point in time, when I look at a fourth quarter 2006 revenues, we are -- in [eaten] what our European area, we are there at this point in time at 75% of the volume level of North America. And North America, as we say, for the next year, should be flat to up slightly. We're seeing ESA this year going up over 20%. So collectively, when you put together the trailer part, we're actually seeing that up as being about a double digit number for next year.

Okay, Herb. I guess I would disagree with you on your analysis of the trailer demand at 12%, because I think you should actually average this year's truck demand with next year's demand since we know that there's a pull forward this year.

Yes, we -- Ann, you're -- obviously, that's why they pay you the big bucks. We look at how we wind up taking this year's forecast and next year's forecast and take 12% of that number and that's what we're basing the forecast on.

And given your outlook right now, given what you can see for next year, Herb, given the slowdown in construction and some of your primary end markets, do you still feel confident right now that you can grow earnings double digit next year?

I wish I could give you a very simple yes or no answer to that, but I think it'd be better if I gave you more of a qualitative because that's obviously something we're digging into in great detail. And let me -- if you'd allow me to give you more of a detailed look. When I look at Climate Control, we see that -- we just talked about the transport side. We also think there that we have on our stationary side some continued robust growth as we look at it going forward. If I move over into the Compact Vehicles Technologies side, that's the one that worries me and trying to get a feel for how significant and for how long their degradation is going to take place in North America. That's the one we're really still looking at. But our expectation right now is that what we saw in the third quarter's going to be like that again in the fourth quarter and probably continue on into the first and second quarter of next year. The biggest question is, what will happen to -- inventory levels, because we've taken several thousand units out already. So to me, that's the big crap shoot.

If I move over into the Construction Equipment side, we expect with new products and other activity going on there that they will be up again next year in spite of, I think, continued weakness in North American road construction. If I look at Industrial Technologies, there's where I think we have the most strong double digit upside around the world. Security, negative is residential, North America offset by continuing strength in the commercial and the industrial side on a global basis. So when I add that all in together, the biggest variable that we're really struggling through yet has to do with our material inflation. If you remember -- go back to my comments, we started off thinking that this year our cost structure was going to have $100 million of year-over-year increases. We're winding up now with well north of 200 million. That incremental $100 million is $0.25 a share. That, to me, is the one we're really working on the most right now to see what this 2007 material cost structure will look like because that'll have the biggest impact on my being able to answer your question as to whether or not we're going to have robust double digit earnings growth or, frankly, in terms of only single digits growth. I'm sorry I can't give you more specific, but that's how the we see the variables that we're working very diligently right now. We've got to do something with this material cost side until we can improve the leverage we're seeing on the growth of new products going forward.

Okay. Thanks, Herb. One real quick [detop] question. What was your share count at the end of the quarter, or what share count are you assuming for Q4?

The share count at the end of the quarter was 312 million. We bought a few more back during the quarter, so we ended the quarter at 309. So that really should be -- I mean, absent, as I think we referenced, we will go to our Board and have discussion of a new share repurchase program, but the old one is finished so we essentially should remain at 309 for the quarter.

Okay. Thank you. I'll get back in line.

Andrew Obin, Merrill Lynch.

Yes, good morning. I have a question on the outlook for the fourth quarter. If I look at the reduction in guidance, that looks like $0.20 to $0.25. And if I try to extrapolate that the reduction in Bobcat will be similar to what we've seen in this quarter, it still leaves a very significant gap that -- and even if you're saying that Security Technologies is the missing link -- even if a quarter of the business goes away, let's say to 30% [decremental] margin, just a quarter of the revenue evaporates, it still only accounts for maybe $0.10, $0.11. And I'm just trying to understand, what does this $0.20, $0.25 mean. What else is happening beyond Bobcat? How bad is Security Technologies, and as I said, what else is happening there?

Well, let me -- let me see if I can give you that bridge as we look at it. First of all, in the category of volume, price, and mix, we had previously given guidance of about 6 to 8% growth, we've now taken that down to 3%. And that, obviously, is what you said before about Bobcat North America. It has something to do with our road construction in North America and residential security. If you take and put that in, we dollarize that to about $0.15, so that difference in revenue plus the pricing reductions that we're seeing and the mix, where it is in Europe, Asia, versus in the U.S., that's about $0.15. We then see the increase in material inflation adding about another $0.04, most of that coming from -- we're now locked in at about $3.50 per pound of copper, nickle, and stuff like that for predominately Security and Climate Control. We then have also in our fourth quarter, we estimate about $0.03 for manufacturing inefficiencies and that, frankly, relates specifically to the strike that we had out at Bobcat and the shutdown that we had as a result of that. In addition to that, we have also about $0.02 that are in there which have to do with the restructuring. Remember, we said in our note we had about $8 million assumed of construction activity. And so when you add those all up that's how you wind up coming up with about 20 "some odd" cents.

And the second question is just thinking about the residential exposure at Security Technologies, my assumption was that between big box and distributor, it's roughly a quarter of the revenues. Am I off-base here?

No. No, your math is absolutely right. The piece that we have to multiply it by, though, Andrew, is the fact that -- that the hardware into the residential, both through big box as well as through the standard distribution that we would have -- the rest of the locksmiths, that is material that we wind up selling at over 20% margins. And so when you see a degradation of those revenues, you see a significant 40% deleveraging coming through that.

And just -- the final sort of a top-down question, as I'm looking at the quarter and as I've been looking over the past couple of quarters, the growth has not been an issue, but the margin has been consistently lower than expectations outside of Bobcat. And even in this quarter, you've highlighted that growth in Europe and Asia is very, very robust. And the question I have, are we finding out that the growth outside of North America is less profitable than we thought? Is that a long-term issue for us?

I would say to you that the disappointment in the margin performance is not because of the geographic activity. We expected when we did our work going in that as we introduced compaction into Europe -- we're actually shipping product from the U.S. to Europe and we're going to go convert it over next year to European. So I expected the degradation in margin there. That's not the disappointing part. The real disappointing part has, frankly, been in our material as well as some of our manufacturing issues that we really had to struggle through this year. And so I'm looking next year as how we wind up improving our material cost and then really getting the full benefit of the new products that are going in. We have in many instances really raised up the number of new product developments, and when we introduce those in general, they end up coming in at less than the full margin and it takes us a while. Let me give you an example. We started -- this year, we started off with our APU at Thermo King. When we started off with that, our initial cost levels were ones that generated single digit margins by the time you were done. Now as we finish up $90 million worth of manufacturing, we're seeing them contribute at well into the mid-teens. And so what you're really catching there is a lot of the growth is at less than what the existing traditional margin has been like as we try to bring them up to full speed and therefore get the full benefit as we go forward.

But you don't get a sense that your pricing power is gone, right, going into next year?

No, I don't see that, but I think in terms on it that there will be more pressure in areas such as compact equipment as you can imagine with the slowdown there. But I think overall, I'm saying is that when we look at this year, our net price realization was just shy of 2%, and I think that going forward for next year we'll be targeting similar-type numbers again.

Thank you very much.

David Raso, Citigroup.

Good morning.

Good morning, David.

Kind of a bigger picture question. Obviously when the current management first came in, the focus was to reduce cyclicality, and you proactively shifted the business mix pretty materially. And I'm just trying to think through, what are we seeing in the earnings cyclicality now to potentially rethink some of the business mix? For the fourth quarter, if you can help me with, what's the year-over-year cost hit expected for the quarter? Roughly 40 million, 35 million for the fourth quarter?

Raw material costs, year-over-year is $71 million is our expectation.

For the fourth quarter?

For the fourth quarter over fourth quarter '05.

Okay. So back to the bigger picture question. Obviously, it looks like then for the fourth quarter, just kind of roughing the numbers and maybe you can help us with the tax rate for the fourth quarter, but the operating leverage would still be material enough where there's some cyclicality. Obviously, a little bit -- maybe more than we'd like to see given the overall strategy of the Company. How should I think about as we go further into '07, if we continue to see the earnings cyclicality maybe greater than the overall strategy of the Company, at what point do we readdress the mix again the way we did when we first came in -- I guess, what, seven years ago now?

I think that's an ongoing project. We just went through a strategic review with our Board last month and we laid out what our expectations were. The businesses we have, market leaders, they still have cycles. I would tell you that the biggest surprise to me personally this year is that we -- I expected personally that we would see Bobcat slowing down in 2007. That's based on historical data that we saw out there. That is why we wound up in 2006 putting in the extra $80 million of effort to try to go and get ahead of that curve by having 200 to $300 million of revenue next year to offset that stuff. Unfortunately, it didn't work out that way, it turned out to be coincidental rather than a delay basis. So our -- continuing to look at this, David, is to keep looking at how we wind up taking all these businesses and managing our way through that. Well, I need to do a better job here is putting our Company in the position to where we got a better chance of visibility of seeing it coming earlier on. The fact is that when you look at a very profitable business like Bobcat, part of the problem is that the profitability is attributable to the fact we have a very, very vertically integrated company. And if you do not do a good job of forecasting downturns, you get stuck with what are in the midterm variable costs but in the short-term all fixed costs. So I don't think this is as much a question of the mix of our businesses as it is our ability to manage and better forecast when the downturns are coming and to put the actions in place before we wind up having to react to them.

But I guess that's the very nature of the challenge of every cyclical business, especially with high overhead costs. So kind of back to the overall question, you're not going to be able to forecast every peak and trough exactly, and the business is proving itself to be what it is. I mean, it's still a pretty cyclical business and it's above average margin business for you and we're seeing the implications of a cyclical business turning down driving the overall company to not quite perform as the strategy's been, to make it a less cyclical more of a diversified industrial.

I think what it demonstrated, David, is the fact that we do not yet have enough non-North American content. If you look at [seeing is our growth is that], but when you're multiplying by 25% compared to 75%, you have to do 3 to 1 in order to cover that part. And so our strategy continues to be one of increasing the global exposure to really reduce a lot of the U.S. cyclical that we're going to have.

I guess the challenge there is the skids to your product which dominates that division is still largely a North American product and the Chinese market hasn't accepted it more than 5, 6, 700 units so far. So to get the international business big enough to offset it, you're talking many years.

I think there's the second part, though, which is that you're right, we are predominantly a loader company. That's where we have the leading share, and what we have just now introduced is a new range of some mini-excavators where I would say to you for the last five years, we have not done a good job of getting market share growth. And we now have several key competitors, Caterpillar and Kubota specifically, that we're going to be going and trying to get our share back of the revenues that we lost there. So new product introduction continues to be the way to go. I'm not throwing a Bobcat out because they got a down two quarters. What I need to do is do a better job in terms of managing through the cycles by coming up with more new products and, frankly, more parts around the world. For next year, for instance, we're going to be moving a lot of the European sales into European manufacturing source. That will significantly improve our ability to go and really respond to the demand, which is largely mini-excavators for the European marketplace. So I think we're going to keep working through and how to go and take a very, very good company and turn it into a great company.

And last, on cyclicality, the inventory adjustment in Bobcat, the planned shutdowns for the fourth quarter, where do we expect to be starting '07 production versus retail? Now, retail's a debatable end market, kind of a guesstimate issue. But truly production back in line, when are you planning to be there? Is that by the start of the year?

We're expecting that to be done by the end of this year.

Okay. Thank you very much.

Sure.

Andrew Casey, Wachovia.

Good morning.

Good morning, Andy.

Just one quick clarification. When you were going through your monologue, was I accurate in that you said 20 million of the investment in new product generation is pushed into '07?

No.

Okay.

[inaudible] -- expect that -- I said that 20 -- we expect that we will be done -- I will have at most, I think, 3 to 5 carrying over into 2007.

Okay, thanks.

We spent 20 million in the third quarter and we expect to spend about 20 million in the fourth quarter, although I think the first quarter was a little bit shy, so there'll be a little bit of carry over into '07.

There are some real key product launches that are still scheduled in front of us for this year, so we expect that we will be done, I said, close to the 75 out of the 80.

Okay. Thanks for the clarification.

Mark Koznarek, Cleveland Research.

Hi, good morning.

Hi, Mark.

The fourth quarter outlook, we're looking for 3% revenue growth and I'm wondering if you could give us some directional comments about the separate segments in particular, the compact side because of these cross currents, we got the strike, we got the inventory reduction so you' have to underproduce.

Well, let me sort of give them to you as we look at them on a sector-by-sector type basis. When we look at Climate Control, we're still expecting something in the upper single digit, 8 to 10% type range. When you get into the Compact Vehicle, we're looking at that being around minus 15%, plus or minus 1 there. So minus 14, minus 16%. When we look at the Construction Technologies piece, we so that where attachments continue to be strong, and utility strong and North American road being weaker, so we see that being in about the 5 to 7% level. We look at the Industrial side, we continue to see air and so on strong. So we're looking at that being somewhere in the, let's say, 13 to 15% range. And then we looked at Security Technologies, we see that all slowing down to where it's going to be somewhere in the low single digit range, probably 2 to 3. If you add that all up, and [turn on it] you wind up, because of the minus 15% you got in the Compact Vehicles side, that's how you wind up coming up about 3% as sort of an average number.

Let me give you a little further breakout of the Bobcat piece of it. Of the 15% Herb referenced, that's about 20 -- 25% expectation in North America with -- down with about 10% added back from international. And of that 25%, 10, 12 of it or low teens would be attributable to actual retail demand, and probably a 10% or so would be attributable to further drawdown of the field inventories. That's reference with what I think David asked earlier about the inventory levels at year end.

So included in our plans, Mark, is very clearly the idea we are not doing shelf loading programs or putting out large floor plans and so on. We're taking the inventory levels down in the field so that we don't drag this thing out and just totally mess up the pricing going forward.

Okay. Now when we consider these expectations, the big swing seems to be Security Technologies slowing down a lot to 2 to 3% versus a double digit here. So what's -- what is the impact there? Is it --

Americas.

Is it on the commercial as well as residential?

I think what you're really looking at this thing is that it -- when you look at the entire piece, it really is mostly into the big box -- we're -- maybe we're pessimistic, but we're expecting to see a significant reduction of inventories in big box. I think when -- if I look so far at our bookings levels and so on like that, we're talking about in the tens of millions of dollars that we expect that our -- the good news is we've got a lot of shelf space at the Depot and Lowe's and Menards and so on, and then obviously, I think we're going to wind up see that reduced. So we're anticipating the fact that they will also do a significant pullback on their inventory levels. Maybe we're being overly pessimistic, but that's what we're telling you, that's what we're anticipating that they can do the same thing.

Okay. And for the current quarter, for Security Technologies with Americas up 6, could you split out the residential versus the commercial there?

Let me just give it to you that residential was up slightly. And I'm talking about low single digit while the commercial stuff was up double digit.

Okay. Thanks very much.

You're welcome.

Joel Tiss, Lehman Brothers.

Hey, guys. How you doing?

Hi, Joel.

I wonder if you can just help us understand. Like, you seemed to sail right through 2004, 2005, when raw material prices were increasing at their fastest rate and be really feeling it more in '06 than we're hearing from almost anyone else. Can you just help like us put that in context a little bit and help us understand what the trends are there?

What happened, Joel, is that we were very clever by going and putting ourselves into long-term contracts that carried us through the first -- generally, we were out 18 months in many of our commodities. And we started running out of those long-term contracts at very attractive rates in the latter part of 2005. And that's when you start hearing from us was on here. And that we went all the way from -- if I give you an example, if I look at like the material increases we saw, we were up over 150% in some of our non-ferrous type stuff. We had not ever seen those kind of increase in 2004 and 2005.

Yes, what we -- what you've seen the last couple of years is steel increases, as you look at machinery companies which are heavily dependent upon that and that hit our machinery and our Bobcat business. This year, the majority of the increases have really fallen in the non-ferrous that's hit our Climate Control and our Security. For instance, year-over-year in the third quarter, copper price doubled and zinc price tripled. That had a significant impact on both of those businesses.

So we had over $100 million of 2006 commodity related to non-ferrous that applies to both Security as well as to the Climate Control parts of our business. So maybe the big difference is the fact that many of the other businesses -- I hear what you're saying, Joel, I don't hear the same kind of conversation from many of the others. But I think many others -- if we were talking strictly about our steel and steel-related, steel, on the full year going forward, was only up $30 million in the year-over-year basis. So if you take 30 million, that's an irrelevant type number. I said we had more than triple that. And when we get into a bunch of others, the copper stuff I said was probably the biggest one. So for us, the challenge is as we now wind up -- and obviously I'm terrified of going and locking in at long-term at $3.50 a pound, so we're mostly in the spot market. And so we are therefore really hanging out there when it happens now versus where we had 18 months' worth of protection back in '04 and '05.

Okay. That's good-- that's great. Can you talk about some of the trends in the road development market and what maybe like medium term how you see that market evolving? Thanks.

Yes, I'll tell that Europe for us is an area where we have traditionally done very well on paving and we're now also going and becoming, hopefully, a significant player on the compaction side and we're introducing a whole line that's really also going to go into a lot of the repaving type work by going in and doing some clean up work and getting into an awful lot of the milling activities. We don't see the marketplace there growing tremendously. Matter of fact, the U.S., we continue to see pressures being applied to the number of miles of road being constructed as a result of what's going on with the cost of the raw material oil base. So for us, looking at it for the next quarter and into next year, we continue to have a question mark about growth in North America and continued nice, GDP-plus type growth in Europe. And then we see some real gangbuster growth going over into both India and China, again, as they wind up becoming markets that are very attractive for us. And I would tell you the biggest growth market we saw in 2006 was Russia.

Okay. Thanks very much.

We also -- we also would expect Europe, as Herb referenced, this year we have invested in developing the market for the compaction in Europe that we historically have not participated in a significant way. As we've developed new products and we're developing the manufacturing capability in Europe to do that, our cost structure will improve considerably and the lead times and so forth for ordering. The other thing is, as Herb mentioned, we have a new milling line coming out -- coming out now that we expect should benefit us in 2007.

David Bleustein, UBS.

Good morning.

Hi, David.

Couple -- just a couple quick follow ons. If I understand your answer to the raw materials question, then your raw materials comps from a non-ferrous perspective should get easy by Q1 of '07?

I would hope so.

Okay. And then the next thing, in response to Dave Raso's question, in -- you believe the Bobcat field inventories will be at an appropriate level by the end of the calendar year?

Yes. I said that if we look at -- there was interesting news that came out yesterday, as you saw, on the residential -- I don't know if that was a one-month blip that could be corrected later on. But if we have, at this point in time, hit the bottom and starting to, if you will, go horizontal at the activity level, we think that the rate at which we see the de-inventory stocking taking place, that we should be cleaned up by the end of the year. Because our -- usually with a we're targeting, David, is that obviously the entire thing of months on hand is all predicated on what your forecast for demand going forward. So if we're forecasting the demand level be flat from where it has been running now, then we should be in good shape. If it continues to deteriorate, or the belief is that it'll continue to deteriorate, then people will continue to take the inventory level down.

Got you. And what -- go ahead.

I was just going to say, give you a little bit more color on the question on the non-ferrous materials and the effect of the comps. The quarter over quarter -- we saw from the 2006 effect from the prior year, first quarter was up about $10 million, second quarter, about $20 million, third quarter, $30 million, and the fourth quarter, over $40 million. So that's how you will kind of deal with the comps.

But if you hold copper and zinc prices flat at today's levels, what would that number be in Q1 of next year?

30 million negative.

30 million negative.

Right.

All right. And then one of your competitors mentioned gaining some market share in the skid steer loaders. The question I have for you is -- and you mentioned you were holding the line on price. What does holding the line on price mean? Does that mean flat, does that mean down 2%? What was skid steer pricing like in the quarter and what does it look like in Q4?

When we were targeting to get 3 to 5% type increases, we were actually at this point in time relatively flat.

All right. And what would your outlook be for Q4 and then into early next year?

I think that when we looked in our math going forward, we saw that we continue to have the same kind of pricing pressure in the North American marketplace and continue to have strong sales and attractive pricing in the rest of the world, mostly Europe. A key part for us, David, has to do with the new product introductions. I will just give you an example. We had a mismatch where we were trying to sell a mini-excavator which had a target price -- list price of 5,000 higher than a comparable unit that was out there from competitor X and Y. We came out now with a new unit that was "defeatured" that now winds up being very evenly priced with them. And so instead of having to go and to take our $5,000 premium and try and go absorb it as cost reductions or price reduction, we now see the ability to go and to sell and this new unit has a very, very attractive gross margin for us. That's the kind of activity level we see going forward. And on the skid steer piece of it, we had on the very, very low entry price point version not had a good market share. I mean, we lost some share there. We had other people coming in with new entries and, frankly, you'll see as part of the program that we're introducing is something that goes back to try to recapture that because that's really what is the entry price point for going into the [rental] marketplace.

Okay. Two last little ones. The -- some of the growth in Climate Control Americas came from auxiliary power units. I guess the question is, when you think about incremental volumes from those new products, should we think about those coming in at a margin, like 10 to 13%, or at an incremental margin, more like 25 to 30? I mean, are they on separate production lines and therefore don't give you leverage?

Yes, they -- that's a good example, Dave, of what we were talking before about where we're introducing product and having to drive up the profitability. The APU, it is manufactured in a plant that we had, so I didn't have to put in brick and mortar, but I had to put in the entire assembly line and tool up for it. And so as we gear up for that, the initial stuff going out, as I said, actually in that one was more in the upper single digit by the time we got rolling, to where now at the end of the year, we're actually now contributing at the 13%-plus margin side. So it is in most cases not one that you wind up starting with at a incremental 25, you start more with the 10 to 15 and then build up to full rate, 12, 18 months later.

And then last question, I promise. Tim, tax rate for 2007?

Well, I would hold to my previous guidance that says we will remain -- we will remain under 20%. I would say it's going to be somewhere between our current rates. With some improvement in earnings next year, we'll be somewhere between our current rate of 15.8 for 2006 and 20%.

Got you. Thanks a bunch.

We're going to take two more questions, operator, please.

Jamie Cook, Credit Suisse.

Hi, good morning. My first question, can we just follow-up on Andrew Obin's question talking about profitability overseas. Just because that area of the business should be growing faster versus North America, if we look at the different segments, where is -- you mentioned in Compact -- on the Compact Equipment side, that the geographic mix issues should be fixed next year because you'll start producing in Europe. But as we look at the other four segments, are the mix between North America and overseas -- are the profitability comparable?

Let me do it in reverse sequence, if I can. If I look at Security, you'll find that it's actually lower in Europe than it is in North America, predominantly because of the hardware discussion we had before. And what we need to do there is to continue to drive more of our software business in the Interflex line which has got very attractive margins, but that's still a work in progress. So that one, actually, as Security grows in Europe, it's at lower levels than we have currently on average for the Company. If I move over into the Industrial side, the Industrial one really is a mixed bag. We do real well there, just like in the U.S., on parts. We do not do as well there when it gets into some of the whole goods. And so for us as you -- and that's what you saw as part of the mix issue this year. So we have to go and do better on getting the local content manufacturing costs for the European part of it. So if you have more European sales on whole goods in the Industrial side, it is not a positive, it's slightly negative. If I look over to the Construction side, that, frankly, for us in the past was just as good in Europe, frankly, even better because we had some of our road paving business that was even higher margin than what we had here in the U.S. So Construction is not a degradation. If I look over into Bobcat, it traditionally has been lower profit because of, A, manufacturing location, but, B, also because that there are less skid steer sold there and more mini-excavators sold and they have lower margins. So that continues to be one of where we need to get manufacturing taken care of. Climate Control is more profitable in Europe than it is in North America.

Okay. And you touched on Europe in each of these. What are your margins like in Asia Pacific?

Asia Pacific is, actually, with the exception of where we're doing some start-up work is in general better than what it is in North America.

Okay. And then my last question, there's conflicting views out there about commercial construction in the U.S., whether residential will bring that down or whether material costs are the slowing U.S. economy. I guess, can you talk a little bit about your -- or what you're seeing on the commercial construction side and what your expectations are going forward?

So far, we have not seen any kind of a slowdown on the commercial side. And our expectation as we look into 2007, though, is that we would be really surprised if it didn't have somewhat of a moderation in the second half of next year, at least the historical graphs tend to show that way. But look what happened on the residential side this year. So for us, though, right now, as we do our initial planning for 2007, we look at that as being something that would have potential downside pressure on the second half of next year.

Great. Thank you very much.

Robert McCarthy, Baird.

Good morning, guys.

Hi, Rob.

Can I get you to clarify two things and then I have a question for you. You talked about a 30% decline at Bobcat in North America in the careful analysis that you presented, but then in the segment disclosure, I think it says 35. Maybe that was U.S. only -- I'm a little confused?

The 35 is on a base of North America. So the North American market on the North American 2005 was down 35%, but that reflects 30% of the total Bobcat.

All right. And the 100 million of --

Hey, Rob, just for further --

-- acquisition impact in '07, that's a gross number, right, that's not carryover?

That is a full-year impact for next year. There's very little of that in this year's number at all. It's almost all 100% clean.

Okay. All right.

But there's a further clarification from Mr. Fimbianti.

Hey, Rob, we can take that offline. It's just a matter of what -- it's a matter of different bases, and I can take you through the math on it, so it shouldn't be a problem.

Okay. That's fine. My real question is, can we get you to -- since it seems to me that today's events -- what? -- produce a greater focus on what's happening in the rest of the business as well. Would you go through each of the other segments outside of Compact Vehicle and talk about what your order growth was in the quarter, how that compared with last quarter, did you see any trends in the quarter?

Let me say it this way, if I can sort of get into the activity level. When I look at it on -- let's start with Climate Control. On Climate Control, we continue to see a very, very nice ongoing order pattern there. There's some seasonality, obviously, but I'm talking about in general the activity levels of both stationary as well as transport side continues to hold up all right.

Okay. Stable.

Yes.

Okay.

If I then get into the construction side, there, I would say that it bifurcates. What you see is on road in North America, it gets weaker where a lot of the attachments [so on and stuff] continues to remain relatively strong. And if you add the two pieces together, you see it slowing down slightly. Industrial is one that we probably have the most upside. We have been capacity constrained because we totally did not see the level of -- the strength that is actually out there. So we see their capacity constraint. And as we now build in -- bring in some additional capacity both in U.S., Europe, and China, and so on, we actually see that directionally as being plus from where we're sitting.

So you saw order rates accelerate in the quarter?

Yes, but remember the acceleration was because we're actually increasing capacity. A lot of the -- a lot of the air stuff we do on it, Rob, is on made to order. And so if you don't have the ability to produce it, they just go somewhere else because they've got a project to bring online. And so as we have extra capacity, we see that going up. So I don't -- I'm not saying that necessarily the demand is increasing, just our ability to meet it is. And so the net is the same, but you wind up getting bigger bookings.

Okay.

And the last area on the Securities side, I'd tell that we continue to see the Americas stuff being really now slowed down and the residential side, but the rest holding up fine.

But you didn't see either -- you didn't -- I hear you saying no deceleration in commercial, but I'm not hearing acceleration either?

That's -- that's -- you heard correct.

Okay. All right. Thank you. That's all.

Sure.

Okay. We're going to wrap up now. Thank you very much for joining us this morning. There'll be an instant replay of today's conference call available at approximately 1:00 p.m. today and it'll be available until November 3rd, 2006. The call-in number is 888-203-1112 and the pass code is 3676457. The international call-in number is 719-457-0820. The audio and the slides for today's conference call will also be archived on our Web site. And finally, the transcript of this call should be available on the IR Web site sometime next week. If you have any additional questions or clarifications, please call me. I'm not at my regular office, which is 201-573-3313. So you can call and leave me a message, or you can try and get -- reach me here at 704-655-5515. Thank you very much, again, and that concludes our call.