伊頓 (ETN) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Cooper Industries second quarter earnings release conference call.

During the presentation, all participants will be in listen-only mode.

Afterward you will be invited to participate in the question-and-answer session.

At that time, if you have a question please press 1, followed by 4 on your telephone.

As a reminder, this conference is being recorded Tuesday, July 23rd, 2002. Before we proceed, let me remind everyone that the comments made by Cooper representatives during this call my include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

The statements are subject to various risks and uncertainties, many of which are outside the control of the company, such as the level of 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 incorporated and intended for the exclusive use of the participating audience.

No rebroadcast, transcription or other use of this presentation may be made without the expressed, written consent of Cooper Industries.

I would like to turn the conference over to Mr. John Riley, chairman, president and CEO of Cooper Industries.

Please go ahead.

Thank you.

Welcome all of you who are with us by phone or webcast.

As usual, Bradley McWilliams our CFO and Ridge (inaudible), our vice president of investor relations are with me.

We have a lot of ground to cover.

So, let's get started. We released second quarter results earlier this morning and considering overall market demand levels, I think we had a reasonably good quarter.

Let me give you some highlights.

First, we reported 78 cents per share earnings, including 13 cent per share benefit of reincorporation in Bermuda.

Brad will give more detail on how the number was calculated in a few minutes. Second, for the first time in a while, we saw a sequential all be it modest improvement in overall order rates.

Additionally we saw solid upward movement in Electric Products and cash generated by the tools business.

In speaking of cash, we continue to produce a lot of it.

Free cash flow for the quarter totaled $132 million, bringing our year to date free cash flow to over $160 million, compared to $74 million at the same time last year.

Adjusted to cash (inaudible) would have been 37.9%.

Significantly below 42.6% at the same time last year.

Again, Brad will give you more color on our cash generation capabilities in a few minutes. We also completed 300 million debt of offering during the quarter and a very attractive 5.25% rate.

Also very good considering existing market conditions.

Finally, we had a very good quarter on the asbestos front.

New claims were down.

We had only 1770 new claims in the period.

Settlement cost showed little change from prior periods and we have assumed total control of all Behave (phonetic) management matters, which we view as a real positive going forward from the standpoint of cost containment. We got a lot done in the past 90 days, despite tough market conditions.

We are convinced all of this will pay dividends when demand in the primary markets returns to more normal levels.

I will discuss our outlook for the balance of the year.

First, let me turn things over to Brad and Ridge to give you a detailed review of the quarter.

Thank you, John.

Good morning, everybody.

I will give you further details on the balance sheet and cash flow.

Revenues decreased 6.7%, from a billion 073 to a billion 001 this year.

This is after negligible affect from translation.

Compared to first quarter of 975 million, we had a 2.7% sequential increase.

Soft of sales at 716.6 million was three points less than last quarter as percent of revenue. 61 6 versus 71 9.

We continue to reduce hourly headcount.

We had reduction of 765 in the first quarter and it brings us to 1248 year to date. SG and A expenses were down 4% for the quarter from 185.2 in the first quarter to 177.8 in the second quarter as percent of sales we came down from 19% to 17.8%.

Again, this reflects our continued reductions in headcount.

We had 34 reduction of 34 for the quarter.

We have had 261 on the year to date basis. Goodwill amortization was zero this year as a result of SFAS 142, compared to 15.3 million last year.

Operating earnings for the quarter increased from 88.4 million in the first quarter to 106.8 million in the second quarter.

Interest expense decreased from 22.4 million to 17.4 million this year, reflecting the reduced debt levels from our strong cash flow over the prior year.

In Income before taxes was 89.4 million, compared to 71.5 million last quarter and 104.6 for the second quarter of last year.

Income taxes decreased from 22.7 in the first quarter to 15.5.

In the second quarter, a reduced rate as a result of not having to charge earnings for goodwill and the catch-up effect from accounting for the inversion.

As a percent of income, taxes decreased from 31.8% in the first quarter to 17%. Our rate for the year should approximate 24%.

The higher - the low rate in the second quarter was basically catching up for the first quarter's rate at 31.8.

We expect our rate for the year to be approximately 24% and we expect next year's rate to be approximately 22%. Net income after taxes was 73.9 versus 68 million last year and 48.8 for the last quarter.

Diluted net income for share for the quarter was 78 cents, compared to 72 last year and 52 last quarter.

As John mentioned, 13 cents of the 78 came from our lower tax rate as a result of the aversion.

Our average diluted shares decrease Friday nor.6 million last year to 94.4 million this year.

Turning now to other financial statistics on the balance sheet and cash flow. Depreciation expense for the quarter was 30.7 million, down from 31.4 last year, reflecting lower capital expenditures over the last year.

Our capex was down from last year.

We are down at 13.3 for the quarter, compared to 29.8 last year.

I might point out last year we had two significant Mexican plants under construction.

A little higher level than normal.

We are now expecting our capex for the year to be in the 90 to 95 million dollar range.

Debt came in at a billion 322.1, versus billion 461.8 last year.

Equity was 2 billion 054.6, versus billion 968.2 last year.

Debt to total cap, 39.2% versus 42.6% last year.

Again, reflecting our strong cash flow for the year. We were down from 39.8% at the end of the first quarter and had is despite the fact that we had some 68 million dollars of cash on our balance sheet at 630, which has been used to pay down commercial paper that matured since the first of July.

We would have been at a level of 37.9%.

Return on average shareholders equity was 14.6%, compared to 15% last year.

Looking at cash flow data, depreciation expense, as mentioned, was 30.7 million for the quarter.

Net cash provided by operations was 141.2 million, compared to 174.6 last year, after capex and equipment sales.

Our free cash flow was 132.2 million and on a year to date basis, we have had free cash flow of 165 million.

Inventories came in at 616.3, compared to 734.6 at the end of the second quarter last year and 657.4 million at the end of last quarter.

Comprehend Significant reductions as we continue to take down our inventory.

Our turns improved from 4.2 to 4.4 this year.

Accounts payable and accrued liabilities came down 42.4 million to 446.9, as business remains slow and we have cut back our manufacturing.

Accounts receivable were 798.3 million, as percent of sales we were at 19.9%, the same percentage as the end of the first quarter, compared to last year, we are down by $23 million or 2.8%. As previously mentioned our capex for the quarter was 13.3 and we paid out dividends of 32.6 million.

With that, I will turn over to Ridge for details on the segments.

Thank you, Brad and John.

Good morning, everyone.

Following our comments on Electric Products and Tools and Hardware.

First, Electric Products.

Revenues for this segment were down 4% for the quarter.

In this quarter there were no additions or depressments results from translation effects or devestitures.

Looking at the revenue trend across geographic regions.

In North America, revenue was down 5%.

In North America we continue to see demand for electronic circuit protection products picking up, while sales in the other electronic marketplace for enclosures continue to be lowered from the telecom markets.

There is continued softness in construction markets, hence slowing residential markets, resulting in lower revenue in lighting, wiring devices and industrial support business out of b-line operations.

Transformers and related power products continues off as we continue to see uncertainty in the regulatory environment that affects long-term investments and capital projects for the industry.

Domestic demand for electrical products is stable in the MRO and new project marketplace. Turning to Europe, excluding translation, revenues declined 3 to 5%.

In Europe particularly, international demand for electrical construction materials out of the energy marketplace from around the world remains relatively unchanged, though at low levels.

All other European-based businesses predominantly fuse and lighting continue to experience some impact from the slow economic activity in that marketplace.

In Latin America, revenues increased slightly as a result of business activity that remains stable in our most important marketplace for Electric Products, which is Mexico. In summary, across our Electric Products businesses our revenues for the second quarter were about 3% better than those in the first quarter.

While we acknowledge the year-to-year slow down we are seeing in the marketplaces, certainly the trends we are seeing in our businesses indicate we are experiencing some leveling of market demand.

The operating margins for Electric Products was 12.8% for the year, driven by increased pricing competition, lower volumes and the impact of the factory inefficiencies that account for the year to year incline.

Again, on a sequential basis, we have seen improvement in operating results.

A nice impact as we see the results of stabilizing volumes and cost management programs we have pursued during this time. Turning to Tools and Hardware.

Our revenues in Tools declined 18% for the quarter, versus the prior year.

Again, no impact on these numbers from either translation or acquisition activity.

Geographically our North America business saw decline of 15%, translated to the result of slower markets and continued decline in demand out of electrical assembly applications.

In Europe, excluding translation, revenues declined sharply down 35%.

This decline is driven by the capital spending cycle of our customer-base there, which is significantly concentrated in the auto assembly market place.

Shipments of assembly equipment are in a trough.

It is important to note, we are beginning to see orders showing increase. Overall, set Thanksgiving aside, our power tool demand in Europe remains slow, but on a fairly good level, measure of the current state of the European economy.

In Latin America, excluding translation, revenues were down 10 to 12%, this impact is a measure of the slowing economic activity that has occurred recently in Brazil.

Mexico remains currently stable. In terms of operating margins for Tools, our margin for the quarter was about 2 and a half percent, an important factor has been the inclusion of 2-and-a half million dollar non-cash charge to account for the peso devaluation impact on dollar-denominated loan for financing our operations in Mexico.

Setting that aside, our cash focused efforts for this business continue to be focused on driving up inventories and the impact of lower volumes, operating efficiencies, offsetting the overall benefits of otherwise cost improvement activities that have gone on in this business.

To wrap it up for the revenues for the quarter, Cooper Industries were down 7%, no cumulative impact from acquisitions or from translation in the past quarter.

That summarizes the two businesses for this period.

Back to John.

Thank you, Ridge and Brad.

Before taking questions, I want to spend a few minutes on our outlook for the balance of the year.

I want to remind you we will provide more detail on the outlook at our mid-year meeting, which I believe is scheduled for August 13th in New York.

So, hopefully, you can get that on your calendar. Let me start by saying despite what we are reading in the newspapers about improving economy and economy that is rapidly growing or beginning to rapidly grow, reality is in the markets we serve, conditions are not good.

Things have not rebounded as positively as most predicted earlier this year.

Frankly and unfortunately, it is clear the significant second half recovery we expected to see in the markets we serve is simply not going to happen.

Now, internal, our own people and industry consensus forecast, now point to little, if any recovery in our primary markets over the balance of the year. Let me give you a little color on that.

Industrial Chemicals activity will remain sluggish.

There will be little capital spending by industry in general over that period of time.

Telecom and electrical markets have bottomed.

To be blunt, they have yet to show any real strength in terms of pick-up.

The construction markets, good news and bad news.

Residential construction has been strong.

Nonresidential construction, commercial and industrial construction continues to slow.

To be honest with you, we have made a little bit of change in our outlook for the residential sector.

We are more negative on that than earlier in the year, primarily because we are concerned about the impact of personnel wealth and confidence in the stock market on people's willingness to spend money for new housing going forward. That may be more negative than some people think we should be, but it is what it is.

In light of that, we expect our top line to be flat over the balance of the year.

Our outlook for 2002 earnings to be in the range of 265 to 2 75 a share, including approximately 25 to 30 cents from reincorporation.

Free cash flow will still be good, about $350 million for the year, including the impact of Bermuda. These are our best estimates at this time.

I will say it could be better.

But, it will take some increase in demand to be better.

Markets being what they are, we are planning to continue the size of employment levels and manufacturing capacity to prevailing lower conditions.

Further, we also believe that it is timely to resume our previously approved share buyback program using strong free cash flow to acquire Cooper shares in the current environment, we think provides additional long-term value to shareholders.

There are two parameters on the program.

First, we have an outstanding authorization to buy back 4.2 million shares.

Second, I would like to keep debt to total cap to under 40% by year end. That said, it means we will likely rebuy those shares from time to time over the next 6 months or so.

I still think that is a great investment for shareholders.

With that, I think Amanda, we are probably ready to take questions and proceed from there.

Thank you. 00:20:33

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 4 on your telephone.

You will hear a prompt to acknowledge your request.

If your question has been answered, you may withdraw by pressing the 1 and 3.

If you are on speaker phone, pick up your handset before entering your question.

One moment.

The first question comes from Robert Cornell with Lehman Brothers.

Good morning.

You know, if you take your guidance of 265 or 275 and subtract first half, you are looking at 40 in earnings in the second half and 70 cents per quarter.

Can you give more visibility into what the third quarter might look like and maybe the fourth quarter?

Are we looking at sort of comparable numbers down from the second quarter over the balance of the year?

Not down a lot, but close.

Pretty flat, Bob, is what it comes down to.

Subtract Bermuda out of the second quarter and you come out to 65 cents a share.

I think we have got forecast another 7 or 8 cents, give or take each quarter for Bermuda for the final two quarters of the year, the third and fourth, which would get you in the 60 - mid-60 range for that.

That reflects continued driving inventory out of the system, the cost of doing that.

That is not insignificant, by the way.

We are running our factories at plow levels to drive the cash out of the business, which is the prudent thing to do considering market conditions. In addition, we are not real optimistic on the price line for the second half of the year because we think revenues will stay relatively flat and it will be a competitive market.

I think it is generally described as being flat for the next quarters.

Calibrate one other thought.

You guys have been restructuring for about a year now.

You showed a chart last summer or winter with arrows all over the place.

We are seeing sequential gains in revenue.

So, with sequential gains in revenue in order to stay looking better and the restructuring coming to a completion, why wouldn't we see more operating leverage than you are suggesting in the guidance?

Two reasons.

The sequential revenues you saw second quarter over first quarter were not forecasting that for the balance of the year.

We are saying top line will be flat.

So, secondly, we are going to continue to take cost out of the business and we will be paying for that as you go.

Thirdly, and I think the biggest element in this thing is the price compression we have seen across all of our markets over the last 12 to 18 months.

I think everybody is seeing that price compression.

The person who is gaining at this point now is the person who is the end user of the products and they are probably getting products at a reasonable price.

One final thought. (talking over one another.)

Say that again.

One final thought.

I am sure everyone on this conference call - what business are you seeing the most price compression?

Generally across the board.

I don't think there is any business we have that is not seeing price compression.

We certainly have seen it probably more so in the telecom and electronics markets.

That is bus and B-line primarily.

We have seen price compression in lighting and we are seeing continued price pressure in our Power Systems business.

Wiring device business seems to have held up reasonably well.

Europe, we have seen price pressure there in the last two or three months, frankly.

More than we had seen earlier in the year and late last year. Of course, we have seen price pressure in the tools business on the power tools side as people scramble to fill up their plants for that activity.

Thanks, John.

The next question is from Martin Sakey can Goldman Sachs.

Please go ahead.

Okay.

I have three quick questions.

First, your free cash flow forecast, you have raised from 300 before inversion to 330 after inversion to 350.

Where are you getting the additional cash flow, particularly given weaker than expected earnings?

This is Ridge.

We started thinking it was 300 or 325.

In May discussions, we were looking at 325 or better number.

Certainly we are now incorporating those, the partial year benefit of Bermuda in that number.

That should be worth about $20 to $25 million of additional cash flow.

Our capital spending numbers continue to come down.

We started the year with capital spending expectation that was in excess of $100 million.

To the best of my knowledge early on in the year was quite a bit above that.

We are looking at 90 to 95 million.

And I think that probably has an opportunity yet, as well. The other side is we have made good progress on the inventory side, in tools in particular, but continue the tension in other parts of the businesses.

In the electrical side of the business.

We are looking for them to be a solid contributor.

I think that is fair, Martin.

Ridge hit the nail on the head.

The inventory is coming out of operations.

It is fair to say interest expense will be down lower than we had originally anticipated.

Net tax payments will be down basically for two reasons.

One is lower earnings and the other is Bermuda inversion.

That is a little bit lower than we had thought.

So, you know, it is a lot of pieces, 10 million here, 12 million there etcetera.

That is how it rings up to roughly $350 million range.

Okay.

My second question is can you make some attempt to try to separate out the sequential gains from the seasonal gains, for example, if you look at the average of the prior six years, sequentially operating profit margins increased by approximately 150 basis points per year between the first and second quarter.

This year, it is 90 and there is also been a significant seasonal increase in revenues between the first and the second quarter.

So, could you try to make some attempt to separate out what you deem as seasonal versus real economic or progress?

Ridge may have more detail.

He has been looking at the numbers.

But, let me say this.

I am not - there is always a seasonal impact in our businesses or historically has been second quarter over first quarter, I think that is fair to say.

Frankly, I looked at this when the numbers came out and have been looking at them for three or four days.

Personally I can't get tight enough to make a judgment on - you are asking a hell of a good question.

It is a question we are asking ourselves.

How much is seasonal?

How much is real pick-up?

Frankly, that is one of the reasons we are probably more pessimistic going forward than maybe some people think we might have been.

Martin, I can't offer much more color than what John has said.

In our historical numbers, the experience we have seen has been in a trend marketplace on the uptrend.

Therefore, you can see good seasonal activity as we have come out of the winter months into the activity more heavily active months that we have in spring and early summer.

In the current environment, where the economy in the markets we have been, continues to be in decline on year to year basis. Only most recently exhibiting leveling off.

We don't have that underlying economic momentum that you could then apply seasonality to try to divide those two.

Net bottom line, yes, the spring and early summer tends to be better than the winter quarter.

We don't see anything significantly in the numbers to give us evidence that there is much seasonality occurring in the business.

Okay.

My last question is John, in your preamble you talk body having a good quarter with respect to asbestos.

Could you sort of talk through the - what sorts of things have been happening in a little more detail?

Yeah.

As you know, we - this thing was laid on us 6 months ago or 9 months ago in terms of the issue of - number one, I should say that - and you may have read this.

The courts have provided forward Federal-Mogul to file their reorganization plan.

That does not suggest - I am not suggesting that couldn't be extended further, but I think the general perception is that they will have their reorganization plan in order sometime no later than November of this year.

Again, I can't speak for them, but general speculation of the parties that are all involved.

The real answer will have to come from Federal-Mogul.

Having said that, I think we started this process by saying we felt this was a serious situation, but manageable. We felt that the actual cash out of pocket cost for this situation were going to be roughly $4 million a year after insurance.

I would say that now that we have had a chance to look at this, I am comfortable that we had those numbers pretty close to being right.

I think those are the parameters we are dealing with.

The good news in the quarter, we had obviously 1770 new claims.

That is significantly lower than the new claim totals we have seen over the last two or three quarters, as I recall, Ridge and Brad, they were in the 3 to 4000 range.

That is a relatively small number of new claims. We settled out about 560 to 600 claims, some of which by the way, were dismissed, some of the more serious cases.

The average indemnity payment per claim is still staying about where it was - let's call it 900 to 950 claim range.

We will have exact numbers on there when we do the official filing.

That is ballpark.

That is good.

The more important thing that happened during the quarter from my perspective, we did finally complete the transition of all of this case management for these claims under our control, as opposed to working through third parties that had been doing this work for Federal-Mogul. That has resulted in us finding some claims that were in that stack that had already been paid for and were duplicate claims.

We found things like claims that were not necessarily - not Apex claims, they were related to other product lines sold by Federal-Mogul that we had nothing to do with or Apex had nothing to do with.

We had a chance to get in there and clean that thing out.

I think we are really in good shape right now in terms of management and control.

Numbers aside, the numbers were good, as I have already told you.

They were not bad, they were good.

That aside, I think the most positive thing from my perspective, I am confident we are in a position of managing these claims ourselves with our insurance carriers and I am always more comfortable when I am doing it myself.

Our experience has been we are more comfortable doing it ourselves because we are better able to manage this.

I think we will manage to a lower level of claims than originally anticipated.

Okay.

One quick follow-up.

You mentioned that you have had a opportunity to scrub the case load.

Would that scrub up mean you have been able to take a significant number out of the claims, the case claim load number?

I don't know.

I can't tell you what the exact numbers were, but there - the numbers still pending are something like 63,000.

It hasn't increased or decreased.

It hasn't increased significantly from the last period in time.

We will know - we will give everybody that detail obviously in the filing.

I think we have been pretty clear and open in terms of what that means.

We will cover all that.

Generally speaking, I think things got cleaned out here.

Okay.

Thanks.

Jeff Sprague with Salomon Smith Barney.

Please go ahead with your question.

Hi, good afternoon, everyone.

Jim, I want to go back to kind of the restructuring question that really kind of Bob started with.

If you look at midpoint of the range, we are talking 270 for the year.

You got 50 cents of goodwill.

You got 30 cents from the tax.

I mean, we are talking about $1.90 type number on the old basis, which is half of what you earned in 2000.

It looks like from my vantage point, maybe revenues will be 6 or 7, 8% below what they were in 2000.

Just that amount of negative leverage just really strikes me as extraordinary for this portfolio. I am just wondering, is there something going on really in the profitability structure of the businesses that is undergoing secular erosion as opposed to cyclical?

You did address the pricing, but could you give us more color on what to expect from margins going forward as we pull out of this thing and the ability to get pricing going forward?

Jeff, this is Ridge.

Let me start and give John a chance to chime in as he chooses here.

Your observations are correct in terms of what has been impacting our businesses.

I will point to a couple of things.

In the current market conditions and current operating state of the businesses, we think that the absolutely right thing to be doing in Tools business is driving the cash out of the business in the inventory area.

The margins we are seeing in tools are 3 to 4% range.

Directly reflective of our decisions to run our plants even in these current slack demand from marketplace, at lower rates.

We have some operations running on four-day work weeks as such in order to keep inventories down in response to the marketplace and take them to lower levels.

We got well paid for that in the first quarter, about 15 million dollars of cash flow out of the tools business through inventory reduction in the first quarter.

I believe we got another 30 million or thereabouts in the second quarter.

Would I like to see that reflected in margins and have a nice number?

You bet.

In the circumstances and the fact that lower inventory pay long-term dividends, I think this is the right decision to make. Another point I would add, the impact on pricing is not one to be taken well recognition of.

There has been absolute compression in pricing in some of the businesses.

On the other hand, we have enjoyed benign cost marketplace.

The impact to margin line has been felt, but it has symptomatic benign cost structure. Looking forward with the forecast we have got, we are looking at margins for electrical on flat revenues for the rest of the year to be approaching 12 and a half to 13% range.

Those aren't the margins we think to be normal, but don't think we will get to normal margins until we see revenues in the 900 million or better basis.

We are not there at this point in time.

There is a significant amount of leverage or deleverage in the businesses as we are sized probably more optimally to the 900 million plus range than the current forecast for revenues for the next two quarters.

What do you think normal margins are at 900 plus? 900 to 950?

Still in the range we talked about the last call.

I run that calculation.

We just ran it and it was 14% plus, wasn't it?

Clearly at that level, we think 14% is a place to be.

After adjusting for goodwill, that is below the 16% reported in the past.

We had billion dollar revenue quarters in the past, as well.

I think, Jeff, the issue is how much of this productivity improvement has been given back to the over the last 12 to 18 months?

I am not sure, I don't think the electrical products market is unique.

That has happened across the board in a lot of businesses, certainly industrial-type businesses.

The real issue is how much of the productivity can you get back as things begin to turn up?

You know, you look for better pricing than you have been able to get during a period of time when people had their choice of who they get product from.

There is a lot of capacity available.

The only thing we have seen so far in terms of pricing are businesses heavily steel-oriented. We got a b-line increase.

Couple of pieces of Crouse in (inaudible) those are all positive, but not enough to carry us in the near term over the next 6 months.

Ridge hit the nail on the head.

This price compression is a real issue and has been a real issue for almost everybody in the industry, I think.

In And how quickly that comes back, that is the big card in my opinion.

Volumes will ultimately come back.

That will fill up the plants and that will get rid of the variances you are run.

We have run order of magnitude, we have run for the first 6 months is something in the range of 20 million dollars, give or take of negative variances in the plants over the first 6 months of the year.

You are flushing out a lot of cash as you do it.

That coupled with moving things around and paying as you go, it all adds up.

No question about it. The real issue, the real question will be what happens to pricing over the long term?

Okay.

Just a couple of follow-ups regarding the tax.

Maybe I was misinterpreting what you meant by 5-cent benefit in the quarter.

But, I took the 5 cents grossed it to 4.7 million dollars and added to your x number of 15 and a half.

Doing that on the pre-tax number, I get an adjusted tax rate of 22.6% instead of 17 that you showed.

Basically what we are doing, Jeff, is picking up for the first quarter.

If we did it from May 22nd, the effective date, the annual benefits up 55 million.

That is about a million a week.

Okay.

That is how we got to the five cents per share if we were doing it linear, a nickel a share.

We are required to compute the effective rate for the year and do a cap-catch-up for the first quarter, up through May 22nd.

That is how we arrived at 17% in order to get to the effective rate for the whole year, approximating 24%.

I see.

The rate next year should be about 22.

If you were looking at this year, if we had a full year of it, in that range, as well.

There has been agitation in Congress about all sorts of things, including not doing business with people who have done inversions.

I don't imagine you have government revenue, but maybe you are selling tools -

4.1 million.

Not a big deal.

In most products, we can identify what goes through distribution, but in terms of direct sales last year, 4.1 million across all divisions.

Not very significant.

Right.

That's all I have.

Another comment.

Editorial comment on the government sales, Jeff.

It seems strange to me you would penalize a company that is just moved to Bermuda and not be able to sell to the government, while any foreign company that isn't paying their fair share of taxes like we are can sell to the government and continue to sell to the government.

There is a lot of inequity in the argument.

I think the concern we have is Congress is going to do irrational things that will make life miserable for a lot of people in the coming years.

Our position is we completed the reincorporation and think it is the right thing to do for shareholders.

We continue to believe that.

We will all obviously do whatever the current laws and regulations require us to do going forward.

One last thing, if I could.

Maybe Brad or Ridge, do you have margin numbers for segments last year x goodwill?

I do have them.

For electrical products, excluding goodwill in the second quarter they were 14.3%, operating income 125.9.

Tools and hardware 12.3, and operating income would have been 23.8 million.

Thanks a lot, guys.

The next question comes from Nicole Perish with Banc of America Securities.

Good morning.

Specifically, did you give us the cash spent in the quarter over and above the insurance? John, you said it was about 4 million, did you give us the actual number?

No.

The 4 million is the amount that we expect to be spending on annual basis after insurance.

Right.

About 12 million preinsurance.

We have not calculated the actual spend in this quarter.

All those costs on an earnings basis will be charged against the reserves we have in place.

No pnl impact from it.

We have not calculated that.

They are trending would (inaudible) at 1.1 million range you gave in the first quarter is this

I don't remember the number.

It will be - the indemnity payments will be pretty much the same.

I don't think they will be far off from the first quarter.

You will see an increase in the aggregate defense costs I think of about 2 or 3 million or maybe more than we normally would have.

That 2 or 3 million is all related to the transition from Federal-Mogul, their attorneys and processing system, to our attorneys, our process.

In other words, we have duplicate legal costs in the second quarter as we completed this transition.

We also had software and some hardware costs that we just paid out during that period of time that are included in the defense fees.

That is the only area that you should see any kind of an increase quarter over quarter. It won't be much, 2 owe 3 million more than you typically expect to see.

Legal fees have been running in the 2 million dollar range, increase quarter over quarter in aggregate.

They will probably be 4 to 5 million for the second quarter.

But, about half of that will go away going forward.

Okay.

I know we spent a lot of time talking about pricing in aggregate how much was it down in the quarter and where were the largest declines?

I know Teleco continues to be tough, but it is only 6 or 7%.

Nicole, this is Ridge.

In aggregate, we probably saw more than a percentage point, but probably no more than 3% in aggregate for the businesses.

The biggest impact we are seeing right now has been in the lighting side of the business, driven by slow demand out of the primary marketplace, which is the commercial construction marketplace, which is seeing compression or has contributed to compression in pricing there.

We continue to see a lot of pushback from utilities in the transformer side of the business. Now, we just tipped off our two biggest businesses in terms of revenue for the business.

They will drive the aggregate numbers.

As John said, I don't think we can sight a business where we have seen a pick-up.

We have seen some opportunity to raise prices in steel-related products because of the recent tariffs.

That is beginning to work through the industry.

We are certainly looking for every opportunity to support that where we can. Hopefully that will ease up some of this over the next 6 months or so.

That is about the only bright news on the pricing front.

I think if you ran down the businesses, Crouse-Hinds has held their own reasonably well.

Bussmann has had moderate price pressure.

Certainly more significant on the electronic and telecom side of the business.

Lighting has seen more pricing than - it has always been a competitive market, but more competitive right now than it has been.

I think as Ridge identified, that is one of the bigger issues.

B-line is in a very difficult pricing environment because of the lack of available business on the non-residential construction side, including industrial and commercial construction, which is slowing. Let me think, wiring devices had modest price compression.

Actually, a little bit more than they like to see on the residential side of the business, again, because of some industry dynamics.

Menger I would put in the same category, moderate.

Power in the category of more severe.

If you look at it overall, we are looking at probably 2 and a half percent.

I wouldn't argue with that. 2 to 3 percent range overall probably.

That for the rest of the year, too, compared to last year.

We don't look for any improvement this year.

Okay.

And I guess with respect to revenues in the quarter, could you give us by business listing, kind of what revenues did?

You kind of set out modestly up and down, more granularity there?

At some point, foreign exchange may help you a little bit?

On the foreign exchange front, yeah, we may get help on reported revenue basis.

But, I don't expect we will see it dropping down into impact on earnings.

I think most of you are aware we tend to support our businesses in foreign currency with debt in these currencies.

We get a built-in off-set on interest expense side for any movement contrary or positive from foreign exchange activity.

We did a 300 million dollar bond euro, 300 million euro issue in 2000.

That interest expense has to be adjusted as we adjust income.

Ridge, on the segments.

Nicole, I don't have in information at hand.

Sequential changes in the businesses.

You looking for sequential changes is that correct?

Or year over year?

Year over year would be great if you have it.

Maybe she can give you a call afterward.

I will be glad to answer.

Rather than limit it, give Ridge a few hours or maybe the day to get that information and anybody who wants it who is on the call, we can make it available to you.

Lastly as a follow-up, John, I can understand to some extent a level of conservatism, but your core volumes actually in electrical are improved.

We walked through seasonality issues.

You noted orders are picking up.

I guess as you look at - if I slam out my revenue forecast and the gang goes back to the issue of what is the true sustainable margin rate given all the restructuring you have done and significantly below where it has been historically - I guess I am trying to figure out from a perspective within each of the businesses, where are you seeing the biggest changes in profitabilities at the core market level?

One

One thing I might add, we are in the process of restructuring in the sense that our lighting plant in Mexico, because of decreased volumes, you know we haven't got everything up and going there yet.

We are about 50% capacity.

We have other things we want to move down there.

We are having variances at this point in time.

We are forecasting them for the balance of the year.

So, I think it is really going to be next year before we can really see a return to what I would consider more normal margins.

We don't expect to see them this year because we are taking inventory out and have taken 50 million dollars of inventory out this year already.

We will be taking out some more.

Nicole, let me help you.

I found something.

I don't have expect numbers on the first question, but this will help you understand the margin issue or answer the margin question.

Year over year second quarter sales by unit, Crouse-Hinds about flat.

Bussmann, up a little bit; actually up not bad.

You got to remember we started to see in the second quarter of last year, this downturn in telecom and electronics.

Lighting off.

Wiring device about flat.

B-line off significantly year to year because of the construction markets, the nonresidential and commercial construction.

Menger about flat.

Power systems off less say mid-range, compared to the other businesses.

Generally speaking, those sort of trends would be reflected in what is going on in the margins, with a couple of exceptions. Crouse-Hinds, I think margins have held up reasonably well.

Bussmann, margins are still off even though sales are up, because of the pricing on the electronic and telecom side of the business.

Lighting margins will be off because of the pricing in that area.

Wiring device probably held up reasonably well.

B-line margins are off because of volume issues, plus pricing.

Mengor about flat, actually a little bit better.

Let's see, what else?

Cooper Power systems - actually, not bad.

They held up reasonably well and volumes have been down.

It is a mixed bag.

It goes here and there a lot.

Thank you.

The next question comes from Ely (inaudible) with HC Wainright.

Couple of follow-up on the issues.

Let's talk about Tools and Hardware.

The margin includes 2 million noncash charge?

That is right.

Will that continue?

No.

Do you expect margins to stay that poor in the sector for the rest of the year or do we get the benefit of 2 and a half million or better than that?

I think it will go back up.

That 2 and a half relates to the peso to the dollar.

We had loans to build the Mexican plant.

We were expecting to repay them fairly quickly and did not make the election to treat it as an investment to hit equity.

It hit pnl. We don't expect that to continue.

Do you expect to stay in the 3 to 4% range?

No, I think by the time the year is done, 4 to 5% range.

That will get better and volume should stay flat from 156 million level, right?

That is correct.

The answer is yes and there will be some - the automotive assembly business shipments will pick up in the fourth quarter.

Let's assume that is correct, you told us 12 and a half to 13% margins in electrical.

You can't get to your numbers of 265 and 275.

You did 65 cents in the quarter in the second quarter, you said 7 or 8 cents to Bermuda, that would give you 72 or 74 cents.

What do you predict to deteriorate to get you into the range? you tell me better numbers than tool and hardware.

Electrical doesn't get worse and the margins stay the same.

Are you talk being second quarter?

The 65 cents before the tax adjustment - you have to add Bermuda, low 70s if everything looks like the second quarter.

And you took a penalty of a couple of pennies from the 2 and a half million peso charge.

Are you predicting something to get worse or the numbers have to be upper end or better than the range you have given.

I am not going to hedge on this.

I don't want to sound like I am hedging because I am not.

Not knowing what your model looks like versus knowing what our model looks like.

I took your second quarter and said what will get worse in order for your numbers to be in your range?

You have to predict something will get worse.

Your second quarter numbers are worse than you are predicting for the rest of the year.

Margins are better, same in electrical. (inaudible).

What gets worse?

The best I can suggest is send me your model.

It has nothing to do with my model.

Your second quarter you reported 65 cents before tax effects. 65 cents and 32% tax rate.

Right?

Yeah.

If you raise 7 or 8 cents for Bermuda, that quarter has penalty from the peso devaluation charge of couple of pennies.

So, what gets worse to get you - you only need 70 cents per quarter to get to 270.

What gets worse (inaudible)?

We will walk through it.

Margins for electrical were 12.8%.

We are looking for 12 and a half to 13 for the year basically, holding margins through the year.

You said 12 and a half, the first quarter is 11 2.

You have to do that or higher.

You had to be 12 8.

This is not coming together. (inaudible) volume deteriorating.

What gets worse in the quarter to hold the numbers the way you are? using 12 8 for the rest of the year, get margin down to 12 and a half.

You are not predicting things to get worse in electrical or predicting things to get better in tools and hardware, yet giving us numbers -

If you take into account the benefit from Bermuda, our operating performance from our businesses in the third and fourth quarter will be below that of the second quarter modestly.

I think that was the first question we had.

My question is where tools and hardwares go up because they are depressed from that and electrical can't go down and meet your target number.

Where does it go down?

That is my question?

Well, one thing, Ely, that we haven't talked about, we did this bond offering any expense will be up a little bit.

We locked in coupon at 5 and a quarter, as John mentioned on 300 million dollars.

We paid off commercial paper that we had been paying at rate of 2%.

Interest expense will be up 2 million a quarter or so.

Yeah. that is part of it.

I am trying to find out if you are predicting something to get worse.

Your forecast predicts something to get worse in order to have it.

I don't have unit by unit in front of me.

It is hard to look at this specifically.

If I had that in front of me, I think I could answer your question.

I think for the most part, revenues for the electrical business, I am not going to speculate.

I would rather look at the numbers, I think they are off a little bit third quarter over second quarter.

It is not by leaps and bounds, but a penny here or there.

That kind of thing.

All right.

I will do it off line with you.

Give us a chance to look at what your question is.

I understand the question clearly, I don't think you are going to find anything way out of line to satisfy your question.

But, generally speaking, it says it will be pretty flat top line from here going out, I think is where we came out.

There could be mix issues in there.

Thank you.

One more question.

Our final question comes from Ted Wheeler with Buckingham Research.

Hi, guys.

Back in the somewhere in the proceedings you talked about maybe a fairly reasonable chance that the November 15th deadline for the filing would be met and there would be a filing by Federal-Mogul, on what basis does your feeling that that might hold as a timeframe come?

I guess there must be progress on negotiations, would that be correct?

Federal-Mogul had a date of August 1 and petitioned the court for extension to November 1.

That was granted because the other groups that are working on their own plan of reorganization, the creditor group did not have a plan ready.

I think the - what we are hearing is that people are making progress and continuing to work on it.

I think Federal-Mogul is going to be shooting to try to come up with the plan by November 1.

If they don't, it is certainly possible that the creditors committee will come up with their plan to file with the court.

So, they did not object to the extension from August 1, but they could object to the extension if it goes beyond November 1.

I think the feeling is that everybody is going to push hard to try to get some sort of plan filed by November 1.

Good.

Thank you.

We don't have detailed inside information other than what we know, the filing state and also you mentioned people talking to each other.

We are aware there are discussions going on.

There has to be discussions going on that would lead up to something like this.

So, we have had preliminary discussions with folks about our interest and our desires.

That is basically all we know right now.

Thanks for the comment.

In the meantime, the situation is being well managed.

Sounds it.

Yeah.

Okay.

That is it for today.

I wish we had better news going forward.

Hopefully things will be better than we are anticipating, but at this point, our view is as we started in year out, saying look, it is going to be a punky first half and a better second half.

Let's maintain a conservative look in terms of what we are doing here to drive cash out of the business.

Position our cost base, as well as we can position it going forward.

I think we have been reasonably successful on both fronts.

We are concerned as we mentioned about pricing.

That has been harsher than anticipated.

On the other hand, I think we are doing the right things and proceeding in the right manner.

We have had some questions about the share buyback program today.

In my view, look, we have got plenty of cash, great cash flow and it is the right investment for us to make at this point in time as long as we maintain what I want to maintain is flexibility on my balance sheet and conservative balance sheet.

I feel good about that going forward. We will be back to some of you who have had questions that we didn't answer and will follow-up through Ridge on those.

Have a good day and we will talk to you later.

Thanks.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you disconnect 01:06:07 your line.