Question-and-Answer Session
Operator
Our first question comes from Robert Cornell – Barclays Capital.
Robert Cornell – Barclays Capital
Both Terry and Kirk touched on this but let’s go over the decline in electrical margins again. How did that break down and how does it look going forward? Again, if you don’t mind.
Terry A. Klebe
There’s 40 basis point impact from the incremental impact of acquisitions and 20 basis points from the pension curtailment charge we took in the third quarter. So, absent acquisitions and that charge we would have been at 17%.
Robert Cornell – Barclays Capital
You did mention that you’re behind the eight ball on price costs. Can you just get in to that a little bit and why did that happen? Which businesses are involved? Where you are on the catch up? I heard your comment about backlog in the fourth quarter.
Kirk S. Hachigian
So as you think about a tightening economy, I think we found it a little harder to pass through some steel more than anything else in the quarter which was a little unusual but I think if you looked at the core growth rate which I thought was exceptional for the quarter that was sort of the trade off. I think the other piece of it too was the decline in inventories.
We took a harder approach on factory efficiencies and not running the factories for efficiencies and probably taking a bigger bit out of the inventories in participation of a slowing economy. That certainly showed up in the free cash flow as well.
Robert Cornell – Barclays Capital
What implicitly is the margin you’re looking at in the electrical in the fourth quarter in guidance? That isn’t clear.
Terry A. Klebe
On the fourth quarter we intend to continue to go aggressively after inventory. The worse thing would be to enter 2009 with excess inventory and we’re not going to let that happen. So, that will have some impact and typically the fourth quarter is lower volume and we are shut down in factories towards the end of the year. So I’d anticipate that we would probably be running somewhere in the 16% or so margins on electrical.
I’ll give a caveat on that. As you can see in the fourth quarter we have a pretty broad earnings estimate for the fourth quarter. The markets are extremely volatile, currency rates have bounced all over the place over the last at least three or four weeks and as I mentioned we are not real comfortable on what the customers will do at the end of the year to reach incentive goals as well as how much destocking they’re going to do which can impact what the margins overall will be in electrical as well as tool.
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