伊頓 (ETN) 2001 Q1 法說會逐字稿

COOPER INDUSTRIES INC. CONFERENCE CALL

Ladies and gentlemen, thank you for standing by. Welcome to the Cooper Industries first quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question you will need to press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded, today, Tuesday April 24th, 2001. Before we proceed, let me remind everyone that comments made by Cooper representatives during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside the control of the company, such as the level of the market demand, competitive pressures, and future economic conditions. A discussion of these factors may be found in the company's annual report on Form 10-K and other recent SEC filings. This call is a copyrighted presentation of Cooper Industries Inc. and is intended for the exclusive use of the participating audience. No rebroadcast, transcription, or other use of this presentation may be done without the express or written consent of Cooper Industries. I would now like to turn the conference over to Mr. John H. Riley, Chairman, President, and Chief Executive Officer for Cooper Industries. Please go ahead Sir.

Thank you Ken, and welcome to all of you who are with us this afternoon. I am here with Bradley McWilliams our Chief Financial Officer, and Richard J. Bajenski, our Vice President of Investor Relations, and again we thank you for being with us. As most of you know, we announced our first quarter results earlier this morning. First quarter earnings were 60 cents per share, compared to 89 cents per share last year. The 60 cents was in line with the revised earnings guidance we gave on March 16th. That guidance reflected difficult market conditions across most of Cooper's businesses. To put it all in a nutshell, the economic slowdown which began in the latter half of 2000, frankly had become much more severe and pervasive than we had previously anticipated, and additionally, the telecommunications and electronics industries, which generate some significant growth for us in 2000, measurably weakened in the quarter. Now looking at our two segments, the electrical product segments, as you will hear in a minute, recorded an 8% revenue growth compared to the prior year quarter. That was driven primarily by acquisitions. Without acquisitions, segment revenues declined by 5%. Virtually all of the North American markets we served, in electrical products, performed below levels originally forecasted. Let me give you some color on that. The two hardest hit units were Bussmann and B-Line, negatively impacted by the slowdown in telecom and electronic markets, as major customers rescheduled and/or cancelled order releases. Additionally, our Crouse-Hinds energy-related businesses did not pickup as expected, and while writing the orders in sales held up reasonably well, pricing in that market was more difficult than we thought it would be when we entered the beginning of the year.

The utility markets also softened due to uncertainty, related to the gloomy overall economic outlook. The one bright spot to the quarter was our European-based Menvier Lighting and Security business, which posted results in line with expectations for the quarter. On the tools and hardware side, first quarter revenues were down 7% from last year. Here again, the slowing US economy produced lower demand in both industrial and retail sales channels, as inventories were being reduced throughout the supply chain. Our soft domestic automotive industry also impacted power tool revenues, and that was offset, fortunately, to a slight degree by solid shipments of automated assembly equipment in Europe. As we mentioned on the 16th, we saw the economy beginning to slow late last year and took some actions to buffer our performance from declining market conditions, things like hiring freezes, capital expenditure rescheduling, and some other spending costs. We are now accelerating and supplementing these actions, to appropriately size our operations to these lower market conditions and maximize cash generation. For example, we have implemented a program to reduce operating cost through reductions in headcount and factory schedules. In addition, we are accelerating the completion of low cost manufacturing facilities in Mexico, and the outsourcing of certain products through our joint venture partners in China to help reduce production cost. The net effect of all of that will be the elimination of 2000 plus jobs system wide and lower overall labor costs. On the capital side of the business, all but the most critical capital projects are being deferred until we see a sign of recovery, and we are currently projecting capital spending for the year at some thing south of $150 million. Spending is also being tightly controlled across the board,

and there you see the usual suspects, travel costs, entertainment costs, etc, etc, etc. By year-end, our cash flow should be in the $200 million range, give or take. Our debt-to-total capitalization for the year is currently projected in the 35% to 45% range. So, between now and the end of the year, it has tightened down to the hatches and weather the storm, and I will now turn it over to Brad to give you some more detail on balance sheet, and Rich some more detail on segment earnings.

Thank you John. I will start off by running down the P&L, revenues increased 5% from 1.04 billion to 1.1 billion and this is after negative translation of 18.4 million for the quarter or roughly 2%. Without acquisitions and translations, our base revenues were actually down 4%. The cost of sales side at 768.9 million, 2.7 percentage points higher than the quarter of the last year as percent of revenue 70.2 versus 67.5. This was pointed out in our press release. This was primarily caused by lower than planned volume causing manufacturing inefficiencies, and in some cases, we had lower prices, as John mentioned. Without acquisitions for the year, cost of sales was 70.1 or 2.6 percentage points higher, so acquisition took very little impact. SG&A expenses were up 13% for the quarter from 176.4 to 199.5, as a percent of sales, we went from 17 to 18.2, and of this, 0.2 percentage points of the increase was caused by acquisitions. Negative average was a result of planning for much higher volumes is what has caused this increase in percentage. Goodwill increased from 13.4 to 14.8 million, reflecting the acquisitions that we did last year. Operating earnings for the quarter declined from 147.4 to 111.9, a 24% decrease. Interest expense increased from 18.3 million to 25.1 million, reflecting increased debt from acquisitions.

Income before taxes was 86.8 million, compared to 129.1 last year. Income taxes decreased in accordance with the decrease in income, and we held by our effective rate steady at 35%, as some of our tax planning projects offset the increased cost by the fixed charge from goodwill. Net income after taxes was 56.4 million versus 83.9 last year. Diluted net income per share for the quarter, as John mentioned, 60 cents compared to 89 last year. Our average diluted shares outstanding went from 94.4 to 94.7. Earnings per share excluding goodwill, amount of tax, and nonrecurring items was 73 cents per share, compared to a dollar one last year, and the amount added back for this year was 12.3 versus 11.2 million last year. Turning now to some balance sheet items, depreciation expense was is up to 31.2 million from 26.6 million last year, reflecting our higher capital expenditures over the past year, and our capex was down from last year to 39.6 million from 51.5, as we significantly slowed down our capital expenditures and deferred some major projects. Capital structure, our debt ended up at a billion 589.4 versus a billion 293.7 last year, and our equity ended up at a billion 925.8 versus a billion 751.8 last year, and our debt-to-total capital this year is 45.2 versus 42.5 for last year.

Our return on shareholders equity was 11.8%. Looking now to some cash flow data, as I mentioned above, goodwill amortization was 14.8, depreciation expense was 31.2, net cash used by operations was 34.5 million; this compares to cash provided of 45.4 last year now an $80 million swing. Of this amount, 27.5 million was a result of the lower income, and we had last year, as our business was growing, we added $30 million to our tax liability as an accrual, and this year we came into the year with a slight prepaid and there was no accrual necessary, and therefore that 30 million is a difference in working capital. Turning now to the other elements of working capital, our accounts payable were down by 52.2 million during the quarter as business slowed, and we paid off some liabilities that we had deferred at the end of last year. Accounts receivable, 842.9 as a percent of sales, we were 19.2 compared to 19.5 last year, and if you look at last year's 331 receivables, we were actually down 55.2 million or 6.8% without acquisitions. Our inventories were 737.3, up from 706.9 at the end of last year, and our returns were 4.3 versus 4.6. Without acquisitions; however, we significantly improved our inventories. They were down 26.9 million from 661.8 last year to 634.5, a 4% decrease, and without acquisitions, our returns were 4.4.

Capital expenditures for the quarter were 39.6 million, as I mentioned, and we actually paid up 32.7 million of dividends during the quarter, and with that I'll turn it over to Rich for some further data on the segments and geographic data.

Thank you Brad and John. A quick review of our two businesses, electrical products, and tools and hardware, in terms of their operations during the quarter. First of all, for electrical products with revenues showing a recorded increase of 8%; that increase was derived in the following fashion, 14 percentage points of revenue increase came from acquisitions made in the past year. Translation or the impact of the currency on our businesses was at negative 2% to revenues in this past quarter, leaving our prior year base showing a decline of 4%. Geographically, when you look across our businesses, in North America, if you exclude the impact of acquisition, revenues were down about 0% to 5%, with the electronics demand for data and telecom applications declining significantly and being the primary contributor there. At the same time, utility demand is off, as spending focuses at the utility levels on improving generating capacity and net on transmission lines. The industrial MRO spending side of our business slowed, while corporate demand remains low, and this had an impact across demand for construction materials of all types at Cooper. On the other hand, though subject to greater pricing pressures, our lighting fixture sales increased in the past quarter, both as a result of new products and an okay residential construction marketplace. In Europe, excluding acquisitions and translation, our revenues were down between 0% and 5%. Now, the member comparisons are still difficult due to acquisition, relocation, disruptions that occurred in the latter part of last year. Setting that aside, our international energy and petrochemical project demand for construction materials produced out of our European facilities improved in this past quarter. And general industrial economic environment in Europe at this time is okay and remained so for the remainder of our operations.

In Latin America, in electrical products, excluding acquisitions and translation, our revenues were down between 0% and 5%, and here we're seeing some impact and some slowdown in infrastructure investment in Mexico which has had some impact on our construction materials and power products that service that marketplace. In terms of operating margin, our operating margin for the quarter was 11.3%; excluding acquisitions, the core margin of our business was 12.2, which compares to 15.9% in last year's first quarter. The impacts of this is about equally contributed to it by both lower volumes and the impact of factory inefficiencies, as well as shared by the impact from increased price competition through the available business that's out there and the negative impact of mix within our businesses. So we've got an equal spread between those two factors and their impact on that lower margin. Turning to tools and hardware for the quarter, revenues declined 7%. Our prior year base in tools and hardware was down about 4% and translation impacts of foreign currency took another 3 percentage points out of revenue growth for that net of [down to 7]. Geographically, in North America, and excluding acquisitions for our tools and hardware business, our revenues were down between 5% and 10%. And here the industrial and retail channels continue to be the primary contributor as we see them continue to payback inventories in the face of slowing economic activity. At the same time, slowing capital spending for auto and other durable good assembly applications has reduced demand for our power tools. In Europe, excluding acquisition and translation, we saw a rather healthy increase in the neighborhood of between 20% and 25% in revenues there. Most of this being attributable to good shipments of assembly equipment and a favorable industrial climate for our power and tools businesses.

In Latin America, excluding acquisitions and translation, we saw a decrease of between 5% and 10% of revenues, again caused by slowing of spending in Mexico and some weakness in Brazil. On the operating margin front, we reported operating margins of 9.1% this past quarter. No impact of acquisitions on this and a decline year-over-year in margins was both a reflection of lower volumes and operating efficiencies that come with it and some increase in competitive pressures in our hand tool business. These two factors contributed equally or nearly equally to the decline in the margin amount for the quarter. That's a quick look summary of our two business segments. Let me turn this back to John for some further comments on the quarter.

Thank you Rich and Brad. Let me just finish that up and say that is what it is for the first quarter. Again, our results reported are pretty much in line with what we had talked about on the 16th of March. At that time, I also promised you that I would come back at our earnings conference call and give you a view of how we saw the balance of the year developing, which I'm happy to do now. First the second quarter, lets' talk about the market. Frankly, I don't expect to see any significant change in demand levels over the next 90 days. That said, our results should show decent improvement over the first quarter levels. Major cost improvement programs will continue to gain momentum and add to our results. The headcount reductions that I talked about will begin to take effect, although they will not be fully effective because of some costs to get these people out until later in the year, but they will nonetheless have a positive impact on the quarter. Operating variances will improve and mix may also improve, although there is no guarantee on that one. Now what does that leave me for the quarter, that leaves me 0 to 70 cents for the quarter, most likely in the 70 to 75 cent range for the quarter, and that's how I see the second quarter developing. For the year, as I mentioned in our press release, I'm currently comfortable with the analysts consensus estimates for the year, and just to be clear on that, my understanding is that that number is $3.26 a share. Free cash flow for the year was roughly $200 million for the year, and again by the year-end debt-to-total cap should be comfortably in the 35% to 45% range. So with that, that's kind of how I see the second quarter in the year developing, I don't know that we have a lot more to add to this, other than to answer any questions you may have. So Richard or Brad do you have anything else you want to share.

No John. Let's go ahead and take question.

Fine, we will go ahead and take the questions Ken, thank-you.

Thank-you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3 on your pushbutton phone. If you are using a speakerphone, please pickup your handset before entering your request. One moment please for the first question. Our first question comes from Robert T. Cornell with Lehman Brothers. Please go ahead Sir.

Good morning everybody. Since you guys gave us the pre-announcement on 16th of March, about a month ago, I was just wondering if you had seen any different market conditions, you know, so far in April in electrical on way or another?

The answer is generally no change from first quarter levels. The two bright spots that I would suggest would be bright spots, and it could be bright spots, and that is, we did see, in April, at least in the preliminary numbers what appeared to be a modest positive pickup at the Crouse-Hinds Explosion Proof Business both in Europe and in North America, and I think it's fair to say that Menvier, the European operation, is holding it's own very well, at least through the end of April. Those are the two that I can point to, Bob, other than that, I would say it's pretty much as we saw it during the first quarter of 2001.

The other thing is you guys mentioned the inventory issue in tools which some other companies referenced. Do you have any ability to see where that inventory liquidation process is? How much of it has run its course? How much more we have to go?

I don't personally have any knowledge of that. I'm not sure where our tools guys come out on that, but I haven't heard anything specifically there, and frankly, I haven't asked this specific question. Brad may have some insight into that or Rich, but I'm sorry I can't answer your question.

Bob, the latest I've heard is that the sale crew at the retail level is still higher than our order or shipping levels. So, we're still, at this point, not fully participating in the current level of activity that's taking place at the retail level, and that's some part of our tools business. The bigger part would be in the industrial distributor side.

I think that's fair Bob. I think where the tools people are getting, our tools folks are getting hurt, mostly now it's on the industrial side of the equation, more so than they are on the retail side of the equation.

Okay. Thanks.

Our next question comes from Jeffrey Sprague with Salomon Smith Barney. Please go ahead with your question.

Hi, good afternoon. John, I guess my question really is kind of around the guidance, and I guess simply put it, it doesn't appear that there is a great deal of visibility in the business right now and you just indicated you're not sure where the channel inventories are. So, if I look at the guidance, you're basically looking at doing a $1.30 in the first half and $2 in the second half. So, you got earnings up 50% in the second half over the first half, and I just wonder where the confidence in that statement originates from? How much of it is cost reductions that you think you've got real visibility on versus some anticipation that things are snapping back in some of these markets?

Well, there is some modest anticipation of improvement over the second half of the year, Jeff. Although I would say that it is, in our judgment, the numbers we've looked at, it is truly a modest number. I am talking about kicking back from first half levels. Let's assume 5% and 5% over the balance of the year, that big numbers. The biggest piece of this equation will come out of the cost side of the equation. There is no doubt in my mind that the strategic sourcing initiative is generating significant and growing savings. There is no doubt in my mind that the cutback of 2000 plus jobs will have a very positive impact on our cost base. There is no doubt in my mind that bringing on stream, in maturing the lighting operation in Mexico, the Menvier restructuring that we completed at pretty much at year end in the UK, growing anticipation of savings out of the wiring device group, and to a certain extent, some modest savings at this point in tools in the fourth quarter as they begin to move work into the new plant they are building, plus the outsourcing issues, I think it's going to be, if you ask me for a number, I would say it's probably two-thirds to three-quarters, cost driven, and probably a third to 25% volume driven, but we've tried to do this on the basis of being very realistic and reasonably conservative on the top-line. Now, whether or not our conservatism is as much as it should be, that's always a judgment call. I'm projecting the kind of numbers, the 326 number, based on significant top-line growth over the balance of the year. Now, let me just clear something up about visibility.

I spoke, as a matter of fact, I think I spoke at your conference sometime in March 1st. I was asked the question, specifically, how does the quarter look? I think my answer specifically was, we really won't know until about the middle of March, how the quarter really will shape up. I think I said that January was soft, February was a little bit stronger and had shown some signs of improvement, in fact, on a daily order average basis, almost every one of our divisions in February showed sequential improvement over January, and that was the reason for that, let's call that optimism at that time. But I did say that about the middle of March, we would have all the February numbers in, and we would have numbers in pretty much for the first week to 10 days of March, and if there was something to tell you, we would tell you at that point in time, and that's exactly what we did. I don't think you should misread that as being some lack of visibility into things. We just thought things were getting better, and they didn't better, and candidly at our businesses, you know, we're running with 30 to 40 days of backlog at the beginning of any month, half to maybe two-thirds of that is shippable, we rely on the mailbag for a fair amount of our business in the quarter and it just wasn't there in the month of March. Actually, March turned negative on a sequential orders basis from February as I recall. So, that's what was behind it. That's it. I don't know much more to say about it other than I don't think we've done overly optimistic on the top-line projection for the balance of the year, and we're driving it on a cost basis and we'll see how we come home.

Could you also, John, just give us some color given that, you've kind of tried to accelerate this effort, and I guess that really just got underway in March, if that's when things really started to come apart. So, in terms of getting the people out and getting the actions done, how far long would you say you were, you know, if you look at the 2000 people, will they all be out in the second quarter or is that something that takes place over the course of the year?

I think the majority of that will be of the second quarter. Well, clearly you're looking at equivalent units here, for example, anybody who is a temporary employee has probably gone by now. Anybody who is, you take into consideration four-day weeks on some of our process, those things are implemented now. The cutbacks of permanent employees are going on now. I would say that the majority of those people will be out of here in the second quarter. There may be some spillover Jeff, early in the third quarter as we ramp up some of these low cost locations, but it ain't going go much further into the year than July, you know, it would be done. Now in the meantime, obviously, we've got some severance cost, we've got some switching cost, and so on and so forth. So, the real impact of that will likely be more significant in the third quarter than it would be in the second quarter, and then sequentially stronger in the fourth quarter.

And you'll run that severance and relate it through the P&L on the quarter as opposed to a charge?

Yes, that's our current plan.

Great, thanks a lot guys.

Which is typically what we have done. So, it's not any change. It's just that we don't have any reason to change from what we have done in the past in that regard.

Thank-you.

Eli Lustgarten with HC Wainwright. Please go ahead with your question.

Good afternoon.

Hi Eli.

I have three sort of technical questions. One, shares, you had some share creep, do you intend to stop it in the quarter? Two, interest charges, and three, general corporate expense for the rest of the year? And then I have one sector question.

We'll go ahead with the share creep. I think it was like 300, I don't remember the number you have gave him Brad, but you gave him two numbers on shares.

Yeah it was 300,000 shares.

Yeah, exactly. 300,000 total in net debt

It was 94 - 2 at the end of the year and 94 - 4 a year ago, and 94 - 7, so you creped to half a million since the end of the year.

Yeah, some of that would be the exercise of stock options. It would be our normal allocation of shares.

Perhaps the question is do you intend to stop it or do you intend to let whatever happen to the share, are you going to buy back stock to stop the share creep?

First of all, we don't expect that to be a linear thing, so we would not have a 2 million share creep. The number would be a little under 1 million shares. I would think for the year, and that's allocation of matching shares in our [________________] etc., and right now we don't have any plans to buy back shares. We don't have authority as long as we're over 45%, which right now we are, but we'll certainly readdress it as the year goes on and when we do that authority.

Eli, we've had our cash flow number for the year and we are down in the 35% to 40% range, debt to total capital range by the end of the year, and we will certainly be down moving into the fourth quarter. We will address the share creep issue at that time. I think our position on it has been clear. We are not willing to let shares creep, go too far out of line before we buy back and just level it out, but we will see as the balance sheet comes into better order as the year progresses.

Eli, in answer to your questions about some of the numbers in the outlook for the year. Let me see if I can address some of those for you and others when I have them. In terms of general corporate expense for the year, we are looking for something in the $35 to $40 million expense category. As John mentioned, in terms of cash flow numbers, we express our capital spending to be below 150 million this year. Our depreciation expense should be somewhere in the neighborhood of 130 to 135 million and amortization to be somewhere between 60 and 65 million. At this point, we are looking for a net reduction in working capital for the year that should be also a small contributor to our overall cash flow for the year.

Charges. Interest charges,

Interest charges? Let me just address the whole P&L for you in that case. When you look for revenues, we've fairly tightened our core businesses this year, with the acquisition carry open, acquisitions were made last year, we had B-Line in May and Eagle in March. We will probably see a total reported revenues to be up between 0% and 5%. For operating income on that, we think we're probably going to see year-to-year EBITDA being down about 5% to 10%. So, we are going to see return on sales that's somewhere around 121/2% plus or minus. Interest expense given our current debt load and our expectations of cash flow and to pay that down through the year, we think will come at around $95 million. Our cash rate we anticipate will stay at about 35% and John has given you our current look at what we think that results in terms of earnings per share for the year. We are anticipating our share count to be somewhere in the neighborhood of about 95 million.

Thank-you.

Welcome.

Our next question comes from Michael Regan with Credit Suisse First Boston. Please go ahead with your question.

John, if I did the math correctly based on your guidance that core electrical revenues were down 5%, and margins came in around 12 - 2 on a $42 million decline in revenues there was a $36 million decline in operating profit, and if I take your guidance for the second quarter and do some similar numbers, it's a $48 million decline in revenues and about $36 million decline in profits for electrical, and it goes back to a question that I asked in the pre-announcement conference call. This is really an unprecedented level of decremental margins in terms of lost sales and lost operating income, which implies a sort of sick locality to the business that's never had been there before, and I am wondering in the last month whether or not you've gotten any additional insight into what's going on and whether or not something's fundamentally changed in the business.

Mike, I think the answer is I don't sense anything that's fundamentally changing in the business. I just think these are unprecedented times as they reflect on the businesses we are in. For example, as I mentioned that it seems to me that the problem we've got is our highest margin businesses are getting hit the worse Bussmann and Crouse-Hinds, where Crouse-Hinds hasn't recovered, let's put it that way, and Bussmann has gotten hit pretty badly with this telecom and electronics situation, so I don't think these things are going to stay with these businesses forever. It's just a whole bunch of bad circumstances at the same time. So, my answer to you is that I still don't think there is anything fundamentally different here. Going forward, you know, volume for us will be a big bonus in terms of not only the returns on the volume we are lacking, but also filling up some of our plans and getting some of that leverage going again. The mix effect is going to come back. There is no question about that. We have seen some pricing deterioration, as we mentioned I think on the 16th, in our lighting business in particular, but my view on that is, hey look, we are a price leader, but I am not going to sit there and watch somebody take our marketshare away from me. It just isn't gonna happen and then when the market comes back we will have the same share or better, and we should be in a position to better leverage the pricing side of the equation. I understand your question, and I have given it some deep thought about whether or not there is something fundamentally changing here, and I keep coming back to saying I don't think so.

To that point John, I mean, essentially the volatility of Bussmann. I think what I am realizing now at least is how profitable Bussmann was impacting your numbers, lets say late 1999 and through 2000, and core electrical margins were able to stay roughly flat throughout 2000 before acquisitions, but really what it sounds like is that Bussmann was very profitable, and there was some underlying deterioration in profitability in the other businesses. So, really what we've got is Bussmann is a lot more volatile, higher highs and lower lows, and then the rest of the base businesses are less profitable than they have ever been, is that the right way to think about it?

I don't think so because Mike you know you have pluses and minuses, and I don't think we've made any mystery of Bussmann, Bussmann is a high margin business, and frankly when you have a high margin business growing at double-digit rates like it has over the last 2 or 3 years; it's a big plus. On the other hand, we have had our other highest margin business Crouse-Hinds, which has basically been in sort of a modest overall downturn, but certainly no upturn as these consolidations have occurred in the energy markets. So, I mean there is a lot of pluses and there is a lot of minuses, but on an average, I think that what you are seeing now is just a vicious, vicious market out there, and in terms of speed of downturn and our job now is to take as much cost out of this thing as we possibly can over the shortest possible time without destroying the marketshare and position that we've built up over time, and I think we are going to get there. Again, I don't think fundamentally, there is anything different there. We have always had some mix effect from one business to the other, but it is what it is. Now, I would say this, in fairness to your question and it may actually answer your question, last year was not a very good year for our lighting business. We had the revenue, but we did not have the margins on our lighting business because the cost of disruption on the Mexican plant and consolidation and moving. So, if there was one business in our portfolio that under performed where we thought they would be, and under performed were they historically had been last year, would have been our lighting business. So, we've lighting down, lets say Crouse-Hinds still flat, Bussmann was doing very well, I guess whether I am missing anything. Power System was doing okay, and Menvier was the same situation as our lighting business.

So, again once you get behind the numbers and you sort through them, I think it makes a lot more sense, obviously we have better visibility into that than you do, that's kind of the overall explanation.

Can I jump to the acquisitions? You had hoped in mid-March that the acquisitions would be less accretive but still accretive by a couple of pennies. It seems doing the number that they were probably diluted by a couple of pennies, and I am wondering if they sort of worsened as the quarter went off from the original expectation?

The answer to your conclusion is not so, they were accretive by about a penny. When I say accretive, I am taking their operating earnings minus their interest cost, plus the amortization which is included in the operating earnings, but I think they were accretive by a penny, maybe 2 for the quarter. We had actually anticipated them being accretive in the 7 to 8 cents ranges as I recall, but I don't recall exactly what that number was.

And Brad if I could just jump to the cash flow.

Yes, Mike.

We, in the quarter, with the free cash flow, sort of, are down 70 million or so from the first quarter. What's going to change there, as we go through the year to keep your free cash flow sort of flat year-over-year which is what John was implying with his 200 plus million after dividends.

Well, first you said plus or minus in the 200 neighborhood. Income was down 27.5 million that accounted for 27.5 million of the cash shortfall. There was this $30 million tax liability issue that was a one-time event.

In the quarter?

In the quarter.

Okay.

So that's not going to continue, also.

That's not going to continue for the whole year, that swaps itself in the second quarter, is that what you're saying?

No, what I am saying is that we added 30 million to liabilities last year that we didn't pay, and we didn't have that situation in the first quarter of this year.

But you're not going to have it for all of 2001.

Correct.

Okay, so far net income is down 2001 over 2000, 60 million, and you don't have the 30 million so you're 100 million in the whole, I am just wondering where you will make it up to get flat?

Michael, I have to apologize. I did not bring my schedule or I would be able to tell you that specifically, and I don't have the schedule right in front of me, and I apologize for that.

No problem John, I will follow up with Richard if I have to. Thank-you.

Okay.

Our next question comes from Martin Sankey with Goldman Sachs. Please go ahead with your question.

Good afternoon John.

How are you?

Alright. Back in March, when you described what took place in the quarter, you said that up to 30-cent decrement to expectations. Do you feel that about 20 cents of it was volume related and about 10 cents because of rate sizing and rationalizations. Could you roll us forward as to how you view that going in the second quarter and into the second half of the year?

Martin, this is Rich, actually just trying to paraphrase your question for you, just to make sure we understand it. You were talking with regards to what we actually said in terms of outlook for the quarter.

Yeah.

Roughly 30 cents down from what was when the street estimate was about 90 cents. Actually, I think it was more than a street estimates, those are our own early expectations for the quarter down to 60-cent outlook for the quarter with that decrement being roughly two-thirds driven by the volume, the variances that incurred with that, and the other part being related to the cost of getting the business resized. Is that correct?

Yeah.

Okay, you wanted to know how we would take that and extrapolate it to the year?

To the second quarter and to the rest of the year, yes.

At this point, Martin I think there is going to be very little, well, they will be a little bit of swing because as we get through the latter part of the year, we're expecting that what would be cost of, what we call right sizing, actually will begin to generate some benefits. At this point, I will have to tell you I don't have the net of those and whether there is going to strong positive to the contribution for year, but we expect them to be one of the contributors to an improvement in our overall businesses. Now, relative to what we've thought, at one time I think the estimate was around 10 for the year. I think if that's the nature of your question, I think that overall magnitude of things is kind of going to run in the neighborhood of approximately some kind of an equal split between variances, lower volumes, pricing pressures, it's called as market forces and reactions to them types of things, and the overall cost of having to make some adjustments in our businesses. And I will admit the fact that at this point without having a schedule in front of me that, that is a best guess.

Okay, my other question is as follows. You've spoken of some business improvements as we move into the second half of the year. Could you be a little bit more specific as to how you see the business units going forward through the remainder of the year?

Yeah, I think that generally speaking, if you split this down into markets Martin, I think the best would be to do it that way. We are not anticipating much turn up in the electronics marketplace in our forecast until the fourth quarter of the year and then it's just a modest turn up, so that takes care of electronics that sort of sits where it is for the next second quarter and third quarter and then begins to turn up modestly in the fourth quarter. If you look at the construction markets, again, we're thinking that construction markets are going to may be modest positive in the second quarter some of that is seasonal, some of that is the lower interest rates that have been reduced in terms of home mortgages, that kind of thing, but no great shakes in terms of turn up in the second quarter, we think that is going to turn a bit more positive in the third and the fourth quarters and grow some momentum as the year goes on. In the industrial and utility markets, which have been particularly hard hit in the first quarter, we are not forecasting any turn up in those in the second quarter, we're really not looking for much maybe a mixed bag over the balance in the year beyond that, and I am missing one that I can't put my finger on now in terms of the other major markets, it is electronic utility, industrial utility, sorry I am drawing a blank here but give me minute. I am sorry, energy, how could I miss that thing. We are forecasting that energy, if you'll bear with me just a minute, I can pretty much give you this, all I want is one second Martin, if you don't mind. In energy, we're not forecasting any change in the second quarter over the first quarter. We're forecasting a modest positive impact in the third quarter and then a bit more positive in the fourth quarter, so energy sort of builds momentum,

beginning with some positive news in the third quarter and then a little bit more positive news in the fourth quarter. So to summarize, electronics, second quarter no change in the first quarter, still negative in terms of being weak down in the third quarter, perhaps not quite as bad as it has been in the first two quarters, and then maybe a modestly positive turnaround in the fourth quarter. Construction built some momentum in the second quarter from the first quarter, little bit more in the third quarter, and hopefully some more in the fourth quarter. Utility, industrial stays pretty flat, turns up a bit in the fourth quarter but nothing significant, and then energy stays flat second quarter over first quarter, built momentum in the third quarter and gets in the more positive territory in the fourth quarter. Generally speaking, we are not looking with a lot of optimism as I said before in terms of this pickup in the second quarter. If we see anything we're likely to see it on the construction side of the business, mostly related to lower interest rates and mostly related to all mortgages being down as well and at historically low interest rate levels, up third quarter and then hopefully some more pickup in the fourth quarter.

Okay, so if we were to look at this in a little bit more granular detail, you would say that the tools business would look very much like the first quarter and the second quarter than possibly moving towards a flatter [organic] volume in the third and perhaps positive in the fourth.

You could come to that conclusion, yeah, that wouldn't be far off, it is a matter of degrees, but I think directionally that's probably the way we see it.

Okay, and you have yet to address European markets versus North America.

I think, the European markets held up reasonably well in the first quarter, as a matter of fact, they were the business that was closest to top-line plan in the quarter or the market that was closest to top-line plan in the first quarter and actually did reasonably well with their plan on the bottom line because of some of these costs reductions and cost actions. All I can tell you is that short a time to ago is within the week. We have checked with our European folks, and they have indicated that they have not seen any change in the second quarter compared to the first quarter which we knew is relatively positive news considering some of the things that we have been reading in the newspaper about some other difficulties with some other companies in the European arena. It appears as though those difficulties are centered around, again, the electronics and telecom kind of markets, and the businesses we have in Europe today are generally not in that arena. They are more in the general economic arenas. So, hopefully that will holdup, and we're planning on that holding up for the second quarter. We're expecting them to come close to the top-line plan, and if they are not on top-line, we still think that they have enough cost opportunity that they will be to plan for earnings.

Okay, thank-you.

You're more than welcome.

Our next question comes from Cliff Ransom with State Street Research. Please go ahead with your question.

Good Afternoon Gentlemen. In the first quarter, were you consciously slowing your production out of your factories? Let me ask my question and then you can answer it this way. I'm trying to, because you have such short cycle businesses, as you said 30 to 40 days, I'm trying to figure out, as you wound up with unabsorbed manufacturing variances in the first quarter, which you are cutting back in response to demand pictures, that gets basically booked into inventory and I'm trying to figure out when it then hits the P&L. Did most of that effect occur, soon enough, in the first quarter, that id it's a first quarter P&L effect, or do I have to plan on, kind of, ducking in terms of margin in the second quarter, because of what was produced in the first quarter?

Well, inventories were actually up in the first quarter over year-end inventories. However, we did have significant operating variances, because they were lower than what we had anticipated. We had budgeted much higher inventories, so we did slow production, we just didn't slow it enough. I'm not sure I understand your question with respect to the second quarter, you know...

...to the extent that you built stuff in the first quarter, but it doesn't get shipped until the second quarter. You have embedded in that absorption rates which are negative from the first quarter.

Well, our variances have flowed through to the P&L. They are not built into the inventory.

Okay.

So there would be no charge in the second quarter...

if you are asking is there some flow through impact from variances in the second quarter from first quarter activity - the answer is no.

Yeah, that's right.

Okay.

Now you may have variances in the second quarter, but they will, in effect, stand on their own, and they will depend on how quickly we drive some of that cost down.

Right. I'm also struck and I know that FD makes you cautious, but there's a spread in your debt-to-total capital range for the year, that's big enough to drive a rather large truck through?

Are you talking about the 35 and 40%?

Yeah. Tell me what the main parameters are that what produced the swing of 10 percentage points?

It would be obviously, earnings, capital spending, inventory, working capital, I mean, I can give you a closer number, the spread will be 35 to 40, that's an accurate spread. I'm confident we will be in that spread. If you are looking to narrow it, I would say somewhere in the middle of that range would be a reasonable assumption, at this point.

Okay.

I don't have any problem telling you that...

No. I understand it's, I mean, you got to admit, you just did..

If I tell you 47.5, you know, I ...

No. No. No. I got it. I got it.

I'd take a lot of grief for being 30.1 or something, but you, you are in the ball park...

Let me reiterate what Richard said too, if we look at our capex, last year, we spent $197.5 million, and this year we're expecting to be a little south of 150, so there's 50 million of cash flow on a year-over-year basis coming out of capital expenditures.

Okay. And then the last question is ...

Cliff. Cliff, let me add one comment to this, your line of question. I think it's a good line of questions because I think it raises a good point, and at least in my mind. You know, most of us in the manufacturing sector we've been on, a kind of a roll, for the last 3 to 4 to 5 years. And sometimes when things are going like that, you know, you focus on certain things and other things sometimes get overlooked a little bit. The good that comes out of this downturn is, it makes you look in every nook and cranny going forward, and you know, that's a positive, right now, that's going on here, that's not to say we've got a lot of stuff that we've missed, but there, you know, you raise some questions and you ask some questions about cash flow; you ask questions about do we really need to spend all this capital on an on-going basis, all of those kind of questions. Are we better off outsourcing, is this the thing that kicks us over into outsourcing versus doing it ourselves in some situations. So, again, it's sort of like the saying, you know, when you get lemons, the question is can you make lemonade out of it. That's kind of where, I come on out on it, this is going to force us to really bore in on some things that potentially have been opportunities that we just quite didn't see or never get to when things were going a little bit better, and I don't that you need, frankly, to Cooper. I think, every company in the manufacturing arena, right now, probably would tell you the same thing, but I can tell you that specifically about us. So, that's kind of where we are headed with this.

On the outsourcing question, I guess, conventional wisdom says you outsource more in bad times, but isn't that precisely when you want to keep every dollar of margin for yourself?

It all depends on what the situation is in , and I think, they are all specific situations you have to look at, I can point to a project that's going on now, in our wiring device business, where we are talking about outsourcing certain product lines to highly, highly automated and efficient suppliers that basically we will end up getting the benefit of lower costs, probably equal or improved quality, and yet we won't be putting a penny into it from the standpoint of capital. So, I mean, each of these things has to be measured on its own merit, but I thing, they can go one way or the other but we got to look at them.

Okay. And then my last question is the pace of inventory de-stocking, at retail it really started with a vengeance last year, but it seems for you, and for most of your peers, on the industrial side of the house to have accelerated really in the last, say two months, where its gotten virulent. Should we assume, do you think, based on your knowledge of these businesses, us looking in as outsiders that the retail will come back first or will the industrial come back, just because they tend to have faster reaction times than some of the retailers?

I think the retailers will come back first, because I think they've cut inventories pretty aggressively, and again, though it depends on the end-user. The end-user being the consumer, consumer confidence picks up, then retailing should come back pretty well. I think it will take a little bit more time for the industrial markets to comeback, but that's just my personal read on it.

Thank-you. That'll do me. Thank-you.

Thank-you Cliff. Ken, I think we'll take one more question, if we have one, if not we can button things up.

All right Sir. Our last question today comes from Richard Schneider with Dupont Capital Management. Please go ahead with your question Sir.

You've got me in under the WIRE, John.

Richard, its always a pleasure.

Now, I won't to get away from this here. I want to walk in terms of your long-term goals as you've stated them before, and whether we have to re-base in order to achieve your long-term goals going forward.

When you say re-base Richard, in what respect do you mean that?

In terms of, if you're saying low double-digit, do we have to start from what this year is as opposed to what last year was. Do you think you can ever catch up, to get on the trend line, that you would have had if your earnings had gone up, 10% this year?

Would you take in between, Richard, as an answer. No, I don't think that could be smart. The answer is I don't know. I think we're going to have to see a little bit more about what happens in these markets this year, and look at it that way. I think you could make an argument that double-digit growth should be much easier with the lower base coming out of this year, but overall over the launch I'm still comfortable with that 10-11-12% growth rate that we've been aiming for. Frankly, if we hadn't run into this economic downturn, I think, we probably would have been very close to that this year, so..

I suspect, may be all right on this, that one of your problems is that last year the electronics and telecom business was just too strong, it was not a sustainable rate of growth, so the offset to that is there any part of last year, which was unusually depressed, so that if you'd average that out, you would have been in that equilibrium.

The answer is yes, and I think, that's what I was alluding to before when I spoke about the performance of the lighting business in terms of their operating margins, and also the Menvier business in terms of its operating margins.

Okay, all right, thank-You.

Thank-you for being with us and we look forward to speaking with you again soon in the future. Thank-you.

Ladies and gentlemen that does conclude your conference for today. You may all disconnect and thank you for participating.