伊頓 (ETN) 2002 Q3 法說會逐字稿

Ladies and Gentlemen, please continue to stand by.

Your conference will begin momentarily.

Once again, please continue to stand by, and thank you for your patience.

Ladies and Gentlemen, thank you for standing by.

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

At this time, all participants are in a listen-only mode.

At the end, we will have a question-and-answer session.

As a reminder, this call is being recorded, Tuesday, October 22nd, 2002.

Before we proceed, let me remind everyone that comments made 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 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 Limited and is intended for the excusive use of the participating audience.

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

I would now like to turn this conference over to Mr. H. John Riley, Chairman, President and CEO of Cooper Industries.

Please go ahead, sir.

Thanks, April.

And thanks to all of you who are with us this morning.

As usual, Bradley McWilliams, our Chief Financial Officer and Rich Bajenski, our Vice President of Investor Relations are with me to answer any questions you may have.

As most of you know by now, we released our third quarter results this morning.

I'll take a minute at the outset here to summarize our announcement for those of you who may not have been able to see our release in detail.

First, we reported that our share earnings for the quarter were 68 cents per share.

And that was about what we expected for the period.

Our earnings for this quarter included a 7 cent per share benefit from a lower tax rate related to our recent re-incorporation in Bermuda, and another 13 cent per share, related to the January 1, 2002 change in accounting for goodwill.

Our revenues for the quarter were just barely under $1 billion.

That's 5% below last years third quarter.

Our operating earnings for the quarter totalled $102.5 million, 30% lower than the third quarter of 2001.

Simply stated, all of this reflects the fact that we saw no meaningful change for the better in our markets during the third quarter.

While residential construction and the retail sides of our business held up relatively well, we saw no change for the better in our important, industrial utility and commercial construction markets.

And, indeed, commercial construction activity continued to lose some momentum as the quarter evolved.

Appropriately, we continued to conservatively manage our business to reduce debt and further lower our cost base.

And we're convinced these efforts are working.

Our free cash flow for the third quarter was a very strong, $104 million, bringing year-to-date free cash flow to $269 million, compared to $189 million for the same period last year.

Our debt-to-total capitalization ratio, net of cash on our balance sheet at September 30, 2002 was 37.3%.

That's down from 37.9% at the end of the second quarter and 40.9% at 2001 third quarter end.

Operationally, we continued to aggressively invest in important sales and marketing and new product development initatives.

I can't stress that enough.

We are convinced this is the right thing to do for the long term.

Additionally, low cost manufacturing is allowing us to further streamline our production footprint.

We plan to take a fourth quarter pretax charge of approximately $30 million to close 10 more manufacturing facilities over the next 12 to 15 months.

We expect this action will result in cumulative net savings of over $35 million by the year 2004.

During the quarter, we also repurchased approximately 1.2 million shares of our stock in the open market at an average price of $30 per share.

And we plan to continue this program, too, over the balance of the year.

We think market conditions make this a very opportune time to use our strong cash position to enhance long-term value for our shareholders through share repurchase.

Frankly, we're confident that our strategic business initiatives and restructuring efforts are positioning this company for enhance the profitability and market leadership when the economy recovers.

There's a time to reap and a time to sow.

And we think this is the time to sow.

We had very good news on the asbestos front from the standpoint of our statistics, we'll be reporting on our 10-Q that as of June 30th, 2002, we had 63,317 claims pending.

That number at the end of September is 58,510 claims pending.

We had a relatively small, 2,696 new claims filed for the quarter.

The average indemnity cost of those has now moved down to about $812 per claim.

That's also good news.

So with that, I'll turn the mike over to Brad to cover the balance sheet and some other items of financial interest to all of you.

Thank you.

Thank you, John.

Good morning, everybody.

I'll start off by running down the P&L.

Some of it will duplicate what John said, but in case you missed it, revenues decreased 5% from $1051.8 billion, to $999.3 million.

This quarter.

There was negligible effect from translation in the aggregate.

The second quarters revenue of $1,001.2 billion, we were basically flat compared to that.

Cost of sales came in at $710.3 million.

This is five percentage points less than last quarter as a percent of revenue 71.1 versus 71.6.

We're continuing to reduce head count throughout the year, we have year-to-date.

We are at 1155 hourly people have been laid off.

In the SG&A area, expenses were up 4.9% for the quarter from 177.8 in the second quarter, to 186.5 in the third quarter.

AS a percent of sales, we were up from 7.8 last quarter to 18.7 this quarter.

This reflects ongoing salary increases, increased expenses and -- in retiree medical, in pensions, et cetera.

Our pensions are running about $1 million a quarter higher than they did last year.

Also, we have put some new money into various product development in sales and marketing programs.

Year-to-date head count decrease in the salaried area is 294.

A goodwill amortization went from $15.3 million last year to zero this year as a result of FASB 142.

Operating earnings for the quarter decreased from $106.8 in the second quarter to $102.5, as we continue to see extremely competitive conditions.

Interest expense increased from 18.8 last year to 19.6 this year.

This reflects our fixing $300 million dollars of debt earlier this year at a five-year rate, which was significantly higher than a commercial paper rate well over 300 basis points higher.

Income before taxes was 82.9, compared to 89.4 last quarter and 111.9 in the third quarter of last year.

Income taxes decreased from $37.6 million last year to $19.7 this year.

This is primarily caused from two factors.

One, the goodwill is not hitting our P&L this year, and the inversion has decreased rate of tax as well.

As a percent of income, we've gone from 33.6 to 23.8.

And we are expecting our total year rate for this year to be about 24%.

That income after taxes was $63.2 billion versus $74.3 million last year and 73.9 for the quarter.

Diluted net income per share for the quarter was 68 cents, compared to 78 cents last year.

As John noted, seven cents of the 68 came from the lower tax rate resulting from our re-incorporation in Bermuda.

Our average diluted shares outstanding decreased from $95.6 million last year to $93.2 million this year as we have purchased shares.

Turning now to some other financial statistics, depreciation expense for the quarter was $31 million, down from $31.9 last year, reflecting our lower capital expenditures over this past year.

Our CAP-X continued to come down.

It was $15.3 million for the quarter versus $22.1 for the year, and we're now expecting our CAP-X for the entire year to be somewhere in the $70 million dollar range.

Our capital structure, our debt, continued to come down. $1, 265.2 billion versus $1,406.6 billion last year.

This reflects very strong cash flow over the past year.

Equity is up to $2,050.2 billion, versus $2,008.4 billion last year, and our debt-to-total cap, 38.2 versus 41.2 last year, reflecting again, the strong cash flow.

We were down from 39.2 at the end of the second quarter.

And as John mentioned, as of 9/30, we were at a 33.3% debt to cap.

Our return on shareholders equity was 12.3 % compared to 14.9 last year.

Depreciation expense, as I mentioned was $31 million.

Our net cash provided by operations was $118 million.

And after CAP-X and equipment sales, the free cash flow, as John mentioned, was $103.7 million, and on a year-to-date basis, we're at $269 million..

And I should not that this is after making pension contributions in the third quarter of some $26.5 million.

Our inventories came in at $607.5 million compared to $700.4 million the end of the third quarter last year and $616.3 million at the end of last quarter as we continued to decrease our inventories as we have been all year.

Our turns were 4.4, versus 4.3 last year.

Accounts payable and accrued liabilities came down from 42.4 -- excuse me.

I've made a mistake here. 4 -- at 446.9 for the quarter.

As business has slowed.

Accounts receivable, were $781.8 million as a percent of sales, we were at 19.7, down from 19.9 last quarter.

As previously mentioned, capital expenditures for the quarter were $15.3 million and dividends paid out were 32.2.

With that, I'm going to turn it over to Rich for further details on the segment.

Thank you, Brad.

Good morning, everyone.

Quick review of our individual business segments, electrical products and tools and hardware will follow.

First for electrical products, for the quarter we were down 3%, operating income declined 22% and operating margin for this quarter was 12.4%.

Looking at revenues, 3% decline for our businesses was somewhat impacted by translation.

Our prior year base declined about 2% and we achieved about a 1% benefit to revenue growth this quarter from translation impacts.

In the past, several people have shown some interest in how our individual segments have done.

Let me review that quickly here on a year-to-year base, there were three of our businesses who had a single-digit increases.

That would be our bussman operation, our wiring device business and our [Inaudible] business.

We had two businesses who had moderate single-digit year-to-year decline in revenues, our lighting business and power systems business.

And year-to-year declines in approximately the 10% to 15% range were experienced by [Inaudible].

Now, looking to the performance of our electrical products segment on a regional basis, in North America, the revenues for electrical products declined about 5%.

Here, demand for electronics provided some modest increases.

We saw pickup across most of our markets.

We do continue to see continuing softness in the industrial and commercial , which has resulted in lower revenues in our lighting, our construction materials and our closure to businesses.

We have seen some benefit from growth in the residential markets.

Felt that growth has slowed somewhat.

We nevertheless have had positive offset for our lighting systems and wiring device systems.

In the lighting systems and wiring device systems.

In utility, for product distribution, demand is off as a result of continued uncertainty in the regulatory environment.

And a reluctance to invest within the utility marketplace.

Normally, hazardous electrical products, mostly as a result of slowdowns in the energy and petro- chemical markets.

In Europe, excluding translation, our revenues were down just slightly.

In the European marketplace, the demand for electrical construction materials remains solid but softened a little bit, as demand for international applications pretty much around the world has eased a little bit.

Nevertheless, our business has achieved some positive shift in their market position, despite their relatively soft European economy.

In Latin America, excluding translation, our revenues were down slightly in that region.

Business activity has remained stable in our most important market, which is Mexico with some offsets in the Brazilian marketplace.

Turning now to our tools and hardware business.

Revenues declined 13% and our operating margin for the quarter was 4.8.

Base revenues were down about 14%.

And we achieved about a 1% improvement in revenue growth year to year from quick translation of courtesy changes.

Relative to the two individual businesses are hand tools and power tools, for the 13% decline in overall revenues.

Power tools were off nearly one quarter from the prior year's levels.

Again, on a regional basis, in North America, our revenues declined approximately 8%, principally the result of slowing markets here.

And also a continuing drop in production and declines we are all seeing across the electronic assembly marketplace.

In Europe, excluding translation, our revenues declined approximately one third.

Mostly driven by the somewhat cyclical automotive assembly shipment for our power tools business, reflecting prior year's decline in capital projects.

Also somewhat impacted by the overall demand, which remains slow, a measure of just a generally soft European economy.

In Latin America, excluding translation, revenues declined approximately 15%.

And this marketplace has been impacted by the slowing industrial activity in Brazil and some moderate softness in Mexico.

To wrap things up for Cooper overall, revenues were down 5%.

That decline was about 6% for our base businesses, 1% benefit from translation of currencies for a net of 5% for the quarter.

That summarizes it for the two businesses.

I'll turn this back to John Riley for closing comments.

Thank you, Rich.

Let me now turn your attention to the fourth quarter outlook.

And I'll do this by sort of breaking down our thoughts for both segments, both our electrical segments and follow it up with the tool segments.

In the electrical area, we think retail spending should hold up reasonably well for the next 90 days.

That should be good for our lighting business and the other business wiring light that serve the retail markets as part of their prime focus.

However, I have to tell you that we don't expect to see much improvement in our industrial or utility markets, and we do expect to see further deterioration in the construction markets.

We go through these cycles in commercial construction and it's quite amazing to me how every so often, we run into this overbuilding period.

And I think it's fairly clear to watch that that's occurring at the present time in the commercial construction markets.

So we expect that to weaken over the next 90 to 180 days.

But all in all, overall revenues for electrical, we think, are likely to be flat from last year but off a few percent compared to the third quarter numbers and that's primarily reflecting seasonal trends in that business.

On the earnings side, we think earnings in electrical will be off compared to last year in the third quarter, primarily due to low order rates and factory absorption costs, continued inventory reductions and driving cash flow and unfavorable product mix, as the commercial construction market weakens.

It's fair to say that some of the earnings will also be affected by the additional sales and marketing expenses that we have decided to put back into our businesses as we go forward.

On the tools side of the equation, our fourth quarter tools picture should be positive compared to both last year in the third quarter, and that's primarily due to scheduling automotive assembly shipments in Europe, and frankly what we perceived was a modest improvement in hand tools demand in North America.

Earnings for tools will be up for the third quarter, but still below last year.

Unfavorable mix, translated in costs related to duplicate facilities and it will account for most of the shortfall to last year.

Nevertheless, I can say, things are beginning to feel a little bit better in this part of our business, as we go forward.

All in all, I expect our fourth quarter earnings to be in the 60 to 65 cents a share range.

And that should bring our total earnings for a year to about $2.60 cents a share.

The free cash flow number is outstanding.

We're currently forecasting that number to exceed $350 million.

You know, I think Brad mentioned that reflects also a $25 to $26 million pension plan contribution in the third quarter.

And I think Brad is planning to take that number up to something like $40 million by the end of the year.

And it is well in excess of anything we've ever seen in our businesses.

Our businesses are doing a great job on the cash flow side of the businesses.

It's a question of making lemonade out of lemons, and I think from that perspective, they're doing very well.

I'll remind you once again, that separate and apart from this, we're planning to take the charge in the reign of $30 million to cover a good portion of the costs of taking 10 additional facilities out of our system by the end of 2003.

And we expect these projects to add close to net, close to $10 million to our 2003 earnings, and $35 million to our earnings in 2004.

Let me summarize by saying, and I think it's fair to say, that 2002 is the year that some people, especially those in the manufacturing sector, might rather forget.

Now, having said that, I firmly believe that from a qualitative standpoint, Cooper will finish the year far ahead of where we started.

We'll have much better sales and marketing programs in place.

We'll be getting more out of less, as far as our plants are concerned.

Our balance sheet will end the year in excellent shape.

And while you can say that things haven't been good this year, they'll get better.

They always do.

And when they do, we believe we'll perform better than ever compared to the competition.

And with that, I think it's now time, April, to open our lines up for questions.

Thank you very much.

Thank you, sir.

Ladies and Gentlemen, if you'd like to register a question, please press the 1, followed by the 4 on your telephone.

You'll hear a three-tone prompt to acknowledge your request.

If your question has been answered and you'd like to withdraw your question, please press the 1, followed by the 3.

If you are using a speaker phone, please lift your handset before entering your question.

Our first question comes from Martin Sinky with Goldman Sachs.

Please go ahead with your question.

Good morning.

Martin Syke with Goldman Sachs.

How much numbers have continued to improve as at this time year progresses?

And it sound it's -- how much of it is coming from improved -- improving your working capital versus and reducing the CAP-X as opposed to taking -- as opposed to net income?

We'll let Rich walk you through those.

I think he's got those numbers for you.

Martin.

You're talking about year-to-date, Martin.

Yes, because the $40 million pension contribution was not anticipated much coming into the year.

And yet --

Good point.

Okay.

Martin, I'm going to take a little different tack here.

But if gets to the point I've been looking at, trailing four quarters of cash flow.

And on a basis of cash flow from operations after capital pending with the sales of the plant property and equipment, that number for this year will be about $450 million.

Relative to a year ago, that number was $522 million.

We're on good track when you consider the big difference in earnings there.

If you look at the differences there, net income over that four-quarter period is down by about 85 million.

Depreciation expense is about the same.

The real contribution in what's going on in our businesses is a significant reduction in working capital.

Over the last year, from the end of the third quarter this year, back to the third quarter of last year, we've reduce our working capital by about $126 million.

That's where a lot of our effort has been put.

That's where a lot of our focus has been in this current environment for our businesses, and it is yielding very positive results for us.

On the other side, as we have reduced our taxes, as a result of our reincorporation of such, we have lower accrued taxes and deferred taxes.

So that's been an offset during this period of time to the tune of $85 or $86 million dollars.

And the other asset would be the contribution we have been making for the pension plan, which for the last 12 months, this is about a negative $27 million dollars.

The real benefit here, the real story here, has been in the period of difficult markets and difficult operating margins.

We have been paying attention to the opportunities within our balance sheet for our businesses.

And prudently so.

Been working that, working capital down.

Uh-huh.

Okay.

And...

Okay.

I'll get back into queue.

Thanks.

Thank you.

April?

The next question comes from the line of Dan Coshaba with Deutsche Banc.

Please proceed with your question.

Hi.

Good afternoon, everyone.

Hi.

You didn't mention anything about the Cooper connection programs.

Can you shed some light on some of the successes you're having there and what we can expect to see out of that program next year?

I think the real question -- let me tell you how we track it down.

It's always obviously difficult to do this business by business because we know what's happening in each of our businesses that comprise the Cooper connection.

But it's hard for us to necessarily call those out to other people's results.

Having said that, I think Rich sort of keeps a tab on how our sales numbers look on a quarterly basis compared to some other people that we would believe we would be direct competitors with.

So I'm just going to ask him to sort of run through those.

I don't think it's appropriate necessarily to name names, Rich, but these would be sort of the people you typically, Dan, would think that we would compete with in the marketplace.

Fair enough.

Just to do it rather quickly.

Just loo to look at the bigger broad market players, which is the same market we're in.

Ours was down 3.8% this past quarter versus a year ago.

Two rather significant players in that marketplace have both recently reported for the quarter, declines in the neighborhood of 8% and 7% on comparable basis.

I see -- I think this is as best as one can in a short period of time, that differentiation which is probably good indicators of the marketplace, are as much of a result of what's going on in Cooper connections as anything else in our businesses.

I think it's also as you look at the general lighting, there are other players out there who relate to the marketing sales and their individual lighting fixture sales.

We have been keeping traction of about the same level of declines, in the neighborhood of 2 to 3%.

I think what that says is the Cooper connection business, in the lighting market particularly, is benefiting us, like other people's programs are benefiting from a consolidation within the marketplace.

You're seeing a lot of that going on.

And we think we're getting at least our share of that, maybe even more of that going on in the business.

So that's a real quick rundown just from a competitor viewpoint perspective.

Okay.

Thanks, Rich.

If I could just have a quick follow-up.

Dan, before you do that -- you can have it, but I'd like to make a comment about that issue also.

And this is just my gut feel on Cooper connection.

Number one, I think this is absolutely the right direction to go, regarding the challenges that all manufacturers are going to be facing as these markets consolidate going forward.

So I have no doubt in my mind that we have put together the right program at the right time.

I would also say, and I think our operating guys, both Ralph Jackson and Kirk Hachigian would say that the Cooper Connection, even at this point, in the anecdotal evidence, is positive that Rich just went true, but even at this point, is not banging away on all eight cylinders.

There's still more to come out of this program and we have been learning as we go along.

We're quite pleased so far.

But we're continuing to invest and we're absolutely convince Thursday is the right thing to do going forward.

And ultimately, it will turn around to increase market share for us going forward.

So we feel good about the anecdotal evidence.

We feel good about what we're hearing from our people.

We feel good about the goods and losses that we're hearing about and what some of the customers are saying about the program and its benefits.

So we feel real positive.

So on that note, I'll let you ask your second question.

Great.

Thank you.

The wiring device business was up in the quarter, one of the bright spots.

Was that related to the new Lowe's business, and if so, is that being phased in, that relationship, slowly?

Or was it all in the quarter?

This is Rich here with an answer for you on that.

Yes, the Lowe's business has been some of the contributor for some of the improvement on the wiring devices on a quarter-by-quarter base.

We actually saw it reflected in the performances businesses in the lat -- latter part of last year.

And we have accumulated essentially the whole shelf space there at -- 's out -- Lowe's.

So it's been accumulating over a period of time.

But it's important to say, too, that the wiring device business is one of those very obvious benefitors from the Cooper Connection program.

We have been able to use the strength of the brands, the strengths of the market position that we enjoy in our other product lines to open doors, gain introductions, and get more attention on the wiring device positions than we believe we would have gotten otherwise.

Also, having said that, though, we need to acknowledge the fact that the wiring device business does participate to some extent to the residential market place, and that is one marketplace which has had a positive overall trend, up to this period of time.

And they're doing their darndest to make sure that that opportunity doesn't get away from them.

Okay.

Thank you.

The next question comes from the line of Ted Wheeler with Buckingham Research.

Please go ahead with your question.

Good morning, all.

Good morning, Ted.

Couple of questions.

The attributable earnings of tax change move to Bermuda was a little different, I guess, from maybe what I was expecting.

Is there any change in sources of earnings that is changing the impact of Bermuda?

Or did I just have it wrong?

I don't know what you had.

This is Rich here.

I think there are probably details for us, but on a real quick answer, we were expecting about 26, 27, 28 cents.

In the second quarter, we had a catchup to bring our year-to-date rate in line.

So we saw 13 cents' benefit.

In the second quarter that was comprised of 5 cents that would have naturally occurred there and another 8 cents of catchup.

We expected the remaining part of the year to run out about equal, 7 cents this quarter and another 7 ents or -- cents or so fourth quarter.

Okay.

I've got it now.

I had a slightly higher number but that's fine.

Now, the other question, in looking at the pension contribution, I wonder if you could walk me through your return on the pension contribution.

I'm assuming it's voluntary.

And maybe that's not right.

But it would seem to me maybe buying back stock would give you a greater return than putting money into the pension plan?

Well, we felt like it was prudent to put money into the pension plan.

Last year, we only put $1.4 million into our pension plans.

This year, in September - September, we put approximately $26.5 million dollars into our pension plans.

These are, you know, we have a number of defined benefit plans.

And these are all that group.

Plans.

And we felt like it was prudent with the market, you know, having fallen often, you know, we --

Sure.

We felt like we wanted to keep the funding level up there where it's at a reasonable level and it is a very reasonable level.

You know, there's been a lot of information coming out on pensions and I should point out, we are expecting an other comprehensive income hit to our equity at year end.

Obviously it's not determinable at this point in time.

But we expected to be -- expect it to be in the 50 to 100 million-dollar area.

And we will be disclosing something on this in our 10-Q that we file for this past quarter.

This results from again the interest rate environment, the discount rate assumption is lower, which increases that amount.

It is not a P&L charge, though.

It is an another comprehensive income charge that goes directly against equity.

So we felt like you know, it was prudent to put funds into the plan since we basically had put very little in in the last couple of years.

Okay.

And lastly, can you segregate out or do you have a guesstimate if there is pricing attributable?

I know pricing is extremely difficult.

But is there incremental pricing?

There may be a small amount, Ted.

We're actually zeroing in on that now that we have our complete database in place now.

And I probably would be more comfortable answering that question maybe next quarter after we have a chance to analyze all that data.

We finally got our database such that we can now look at customer, we can look at sales growth, we can look at rebate levels.

We can compare that to the prior year levels.

And to be fair, I don't think our folks have had a chance at this point to really go through that as thoroughly as I would like to give them the chance to go through.

But I think ultimately, there will be very little difference between old pricing level and new pricing level.

There may be some things that are caught in the transition here where a discount might have been given at one level of the organization as opposed to the higher level of the organization.

But over time, those will be sifted out.

I think our biggest pricing issue right now, based on everything I can see in terms of our businesses, is probably focused on the lighting business year-to-year.

And I don't think that's frankly related to Cooper Connection.

I think that's more related to the consolidation going on in the lighting industry and positioning for market position along with frankly, the commercial dropoff in construction, which is having some impact on those kinds of products.

I think that would be the bigger one.

And I don't think that's related to Cooper Connection.

And pressures from retail also.

Yeah.

Just.

I'm sorry. 1 more if I could.

Any update on the Federal bankruptcy?

The latest that I have, and this is as of a couple days ago.

Actually, it says as of yesterday, now that I think about it.

Seems like a couple of days ago.

But we have now been advised that Federal has petitioned to the court to have their plan, the date that their plan of reorganization is required to the court to be extended by another 90 days.

You'll recall that they had until November 1st to file this plan.

And I think 90 days will take them out to sometime in the first quarter of next year.

My sense is that they are getting, base the on everything we know, that they are getting much closer to filing that plan of reorganization.

And we'll look forward to seeing what that is, hopefully sometime in early 2003.

In the meantime, I think we've got a pretty good handle on the case load here as I gave you the numbers before.

Those all look pretty good.

I'm quite comfortable with the way our folks are managing this.

I think they're doing a very good job on it.

I think the other side of the equation is getting our balance sheet in order so that we can be in a position to satisfy any requirement that we may have going forward in terms of participation and trust and those kinds of things.

And I feel quite good about that.

So all in all, I would much prefer to have there plan of reorganization on the table right now so we we're could be sitting down, talking in ernest with the involved parties.

But the bankruptcy system being what it is, it tends to delay and stretch these things out longer than most people would like.

But it is what it is, and it's not something that -- timing is not something that we control.

That's controlled by the courts.

Thank you.

The next question comes from the line of Nicole Parent with Banc of America Securities.

Please proceed with your question.

Good morning, guys.

Good morning.

Just a couple of quick follow-ups.

I guess with respect to your comments on the end markets, I think I got everything.

But I want you to put it in the context of the last time we heard it from you, which was the August meeting.

Sounds like residential and retail are actually trending a little better sequentially?

I would say probably sideways, but at pretty good levels.

I mean, in fairness, I think the latest housing start numbers were pretty good as I recall.

That's pretty good.

They dipped down a little bit.

But then they've picked up that last report.

So I'd say that's trending pretty good, pretty sideways.

Retail, I haven't seen any real reason to get pessimistic on that, compared to what we saw in the past.

There was obviously some recent announcements by the folks at Wal-Mart and some of the other people about same-store sales being a little bit less robust than they had been forecasting before.

But even then, there's still 3, 4, 5 percentage growth.

So that's pretty good.

I don't see much at all happening in the industrial markets over the next 90 to 120 days.

Although I will say this, we are actually enjoying better business levels at our bussman business, which is good.

That's sort of a sign that people are beginning to spend some dollars on maintenance and there may very well be some pent-up demand there that may be going forward.

But overall, I think the industrial markets for us are going to be pretty flat.

Utility markets, I don't sense the utilities spending anything more than they need to spend.

Fortunately, we're pretty well positioned for our product lines so there's decent volumes there.

But nothing to write home about.

Commercial construction.

Oh.

Commercial construction, you know, I -- I've been in these businesses for 30-plus years, close to 40 years.

And I will tell you, I am -- I just continue to be astounded how the office building market just goes in the -- cycles of build it up, build it up, start it start it, start it.

And then all of a sudden, they're overbuilt.

And I think you're starting to see that in the United States now.

Some of that is related to the cutbacks that we're all reading about.

Certainly the San Francisco market would be one.

To be fair, I think the Houston market is going to be overbuilt here, if it isn't already.

And that's related to layoffs.

But even then, I think we're getting to the point where some of the these buildings have to be finished out before that picks up in any significant way.

The good news, obviously, is that there is some renovation and repair and buildout work going on within these buildings that are already built.

And that's good for our lighting business.

But overall, it's really not a real positive market right now.

And I guess --

Out of all of the markets we talked about the last time, the one that I think has flipped off more than any of the other ones would probably be commercial construction.

And I know it's a tiny piece of total revenues, but I think anecdotaly on the margin, it looked like August for some other players on the space eroded further.

Any thoughts on what you're seeing there?

Excuse me.

I think it's fair to say we saw some positive teleco business.

No, those are fuses and circuit devices that are put in other electronic development.

That was modestly positive in the third quarter.

But we haven't seen anything on the enclosure side of the business, which would impact either v-line or parts.

Okay.

And I guess also, could you give us a little bit of color on the manufacturing facility closures?

I realize you might be limited with what you can say, but in terms of the numbers?

And I think you said $10 million in '03, and the rest in '04?

Yeah, the $10 million is the net number.

There will be certain expenses that we cannot accrue or not reserve for and the net number in open '03 is something in the range of $10 million, as I recall.

But once we -- we think we can get all of these done in 2003 and put all of that cost behind us.

And then the total would be in the effective of let's say $35 million in 2004.

We have 10 facilities that we're pretty sure we're going to be closing.

I think that's probably a pretty good number.

We also have three of our businesses where we'll be doing some restructuring and some cutbacks in staff at those businesses, which is all part of the no closure, no office closure related to that first save, but costs will come out.

Unfortunately, I -- well, let me just say this.

Well, I - we haven't really talked to the people who would be affected in the facility, so I'm note in a position to tell you what they are.

But I think when we roll this out, this will all make very good sense to you.

And as you know, we have been adding capacity and low-cost locations both China, Mexico, some in India, and over this period of time, we've kind of had some duplicate costs that we've been sucking up here, going forward, just to make sure we were comfortable that we had the facilities in place and the capabilities -- skills and capabilities in place to start transferring some of this work.

And some of this is related to that.

Some of it is related to just simply consolidating U.S. plants into U.S. plants.

So it will be a combination of things going forward.

Okay.

And I guess lastly, just one follow-up on the pension.

Brad, what are the assumptions that you're using for the discount rate and the return on the plans?

We're using, for this year, which, you know, we did the computation in January 1, we used Haiti 1/2% on the -- 8 1/2% on the assumed return and used seven% on the discount rate.

And do you -- 7% on the discount rate.

And do you anticipate changes next year?

Yeah, I think it will depend on what happens with interest rates.

But I think that certainly if we came down, we wouldn't come down more than a half a point on the assumed reality of return.

And maybe -- rate of return.

And maybe as much as a half point on the discount fact.

I think it will probably be 6 1/2, -- 6 3/4 in that range.

Okay.

Great.

Thanks.

I think, Nicole, it's fair to say that -- and I'll give Brad and his folks a lot of credit.

They've spent a lot of time over the last 90 days working with outside consultants and folks who deal with this on a day-to-day basis.

And I think we've got a very good handle on -- number one, I think our plans are in good shape.

I think the funding is in good shape.

And I think we're taking on a relative basis, a relatively conservative view of this whole situation.

So I think most people, when the day is done, will look at our positioning on this and conclude that we're pretty conservative, -- conclude that we're pretty conservative, pretty good shape.

And we feel good about where we are right now.

Great.

Thank you.

The next question comes from the line of Martin Syke of Goldman Sachs.

Please go ahead with your follow-up.

Thank you.

Can we start talking about materials and how -- and the ability to pass it through to the system?

I think in terms of plastics, steel and so on?

Yeah.

I'll make a quick overview of this.

I know that John has had more detailed reviews of the business on this.

But on a real quick overview, the general indicators we have seen is that with the exception of steel, most of our material costs of late have been fairly benign.

There was a period of time early in the year when a lot of that was coming down.

But things seem to have leveled off overall.

And there hasn't been much of a -- therefore a cost impetus to push prices along with that.

On the other hand, steel, which jumped up rather quickly in the latter part of the first quarter and through a good part of the second quarter.

In certain product areas, we in our competition were able to get through price increases.

Now, in aggregate, when all is said and done, we don't believe we recovered the full increases that we experienced in the marketplace.

But we did get some recovery in this deal content area.

And that would be in areas in our construction materials and also our lighting fixtures businesses, most notably.

On the other side, one of the benefits of our strategic sourcing program has been such that we have put ourselves in a position to use market courses globally to keep our overall materiality cost negligence very good shape.

Rather than relying upon a thin base of local suppliers for a lot of our facilities, we've gone to global contracts, with -- for commodities and large-scale usage as a product.

And getting the economy so that purchases as well as being able to take advantage of the global overall impact on prices rather than just local impact on prices.

And that has been positive for us in the last couple of years.

Do you have anything else further to add on that, John?

No.

I don't think -- Martin, I think Rich is right.

The one commodity we've seen prices go up on or cost goes up on would be steel.

I think he's absolutely right we we've seen some recovery of that increase, but not nearly as much as we should.

We should be seeing more there.

And you know, our position on this is we're not satisfied that we're getting full value for what we're providing to the marketplace.

And we're going to try to continue to push these prices to levels that make sense.

Not overly -- overprice said, but priced in terms of what we're providing in terms of service and benefits to the marketplace and with our product lines.

So we'll continue to do that.

And some of that will be in terms of the list price increases.

And some of that will be through reduction of discount prices, all of the above.

But it is not a friendly pricing environment out there today.

I don't want to mislead you.

It's a very difficult market.

And you gotta keep taking the costs oust business.

I don't think there's any -- out of the business.

I don't think there's any question in our mind that that's going to be the long-term answer.

We're not particularly enthused about closing plants right and left, but on the other hand, that's just what the market is demanding and that's what we're going to have to do.

John?

Yes.

You were very careful to limit your market prognosis indications to the next 90 to 120 days.

How do you see 2003 as a whole playing out in your relevant markets?

And how are you setting up your positions in terms of planning assumptions?

We're based -- how I see it and what we tell them to do are maybe two different things.

I think they probably are.

But at the risk of getting myself in the middle here, I'll give you that.

We basically told our folks, look, we're beginning now to enter the budgeting cycle.

We'll be reviewing budgets, I think, the first couple of weeks in December.

Ask having those discussions in ernest.

And we basically said, you tell us how you're going to manage in an environment where there is no top line growth.

And what do you need to do from a cost perspective to offset the impact of any kind of cost increases that you may see coming down the road.

Now, obviously some people externally and I can assure you some people internally think that's a little bit harsh.

But it is what it is.

And that's not a bad place to be starting your planning cycle from.

From a macro standpoint, I feel that the industrial markets are eventually going to begin picking up here.

I don't know that it will be by leaps and bounds, but I think it will be a positive trend upwards.

These have been void of maintenance spending, a lot of capital investment.

And as capital investment picks up, albeit modestly, that will be good for our industrial businesses, I am also somewhat positive on the utility side of the business in the sense that at some point, people will have to invest in improving power quality, improving line safety and distribution lost and I think we're pretty well positioned in those businesses also.

I am very positive about the packages we're putting together in terms of the Cooper Connection so that should be a positive.

I think residential, if interest rates stay down and we don't see a lot more layoffs across the country, or let's say economic panic in terms of a main street usa, I think the residential markets will hold up reasonably well.

I'm not, as you probably have surmised, I'm not real bullish on the commercial construction markets.

And to Nicole's point, I'm not overly bullish on the telecom markets either.

I think they have a long way to go before they turn around.

So that's how I envision 2003 developing.

So our future in 2003 is really dependent on -- it's not as market-dependent as it normally might be.

That is all positive.

And some of that will be positive for us.

But if we can continue to take costs out of the business, if Cooper connection continues to make some progress, we've got some things going on -- you know, if our new product developments center in China begins to produce new products for our wiring device business, and you can go on and on and on with these things that are going on.

I think those will all be incrementally, albeit modest, but in total, pretty good positives going forward.

Okay.

Couple more questions.

First, using Cooper as a microcosm for corporate America, now what -- you know, you believe that industrial capital spending will pick up somewhat?

I guess your capital budget was way down this year.

I -- I don't know what the ultimate number is going to be.

What do you think you're going to spend next year?

I don't have a good number right now.

I think this year will probably be what? $75 million range?

Something like that.

I don't have a real good number for you.

I prefer to look at some of these budgets.

I can tell you this.

I don't know -- l know we won't be quite as capital intensive in our approach to businesses going forward as perhaps we have been in the past, certainly five to 10 years ago, where the answer was let's buy a new machine tool and put two or three of these in a plant of -- plant.

I think our answer is going to be more from the perspective of sending money to consolidate things, perhaps new facilities, which is good capital spending.

But a fair amount of money devoted to intellectually information systems and improving the flow of those kinds of things through our facilities, et cetera, et cetera, et cetera.

There's a lot of work to be done there still.

So --

We've still got a lot of back office costs that we can get to, but we can't get to that without spending mono information technology and, frankly, the human resources in certain cases, either outside or internally, to make those things happen.

Right.

So my point -- auto point being, no big increment?

I don't think big increment. $105 million, $110 million.

That actually is a pretty big increment for this year.

But you have to remember it is a pretty big spending across all industrial.

Okay.

I got three more -- two more very quick questions.

One is in electronic power production questions, ie bussman --

How many questions do you have?

Two more.

Do I get to pick?

Go ahead.

With bussman, is that the industrial business or is that the electronics side, which is picking up?

Actually, on the third quarter, it was a little bit of both.

It was some of both, actually, I should say.

Now, keep in mind that 2002 or 2001, the second half for sure was a pretty bleak time for our busman business as the electronic side began literally not to slow down on orders but cancel orders and you saw this downturn to carry through on spending.

But overall, both were up pretty nicely.

Martin, keep in mind on the electronics side, what we are seeing is one of the impetises there.

This is not the electronics that go into cell phones and so forth.

But that came out of a situation back at the third and fourth quarter of last year.

But the switching station apparatus area has picked up for that type of product.

And the normal electrical side of the business, we are seeing a response just primarily driven by maintenance spending in industrial facilities.

Uh-huh.

Okay.

And last question, I promise.

The question of the moment, Schneider and Lagront seems to be back on again.

What does that do to the competitive landscape?

Well, I'm not exactly sure where that sits right now.

I do know that the court, my understanding is that the court indicated in their ruling that the commission had erred in considering their judgment -- this and that this -- the combination of Schneider and Lagrand could be -- could proceed.

Now, I'm also reading some things that are saying that there are still some issues relating to anti-competitive situations within the country of France.

And there is also some things related to the agreement that has been struck between Schneider and this investment group of which I guess KKR is a part of.

There's some breakup fees and those kinds of things.

So I think it will be to be determined where that ends up and, you know, I think well, you know, how I feel about competitors.

Good competitors are good competitors.

I don't have any problem with that.

And if it goes together, and are good competitor, that's fine with me.

I am happy that we are in Bermuda, because I think that will give us at least a reasonable -- a better chance of facing off competitively over the long term with our foreign competition, and as I said all along, all I care about is a level playing field.

You know, I can handle it from there.

That exhausts our time.

We want to thank you all for joining us on this conference call.

Of course if you have further interest of our operational performance for the quarter, our 10-Q will be coming out in a couple of weeks.

I'll also be glad to take follow-up questions by telephone as they arise.

Thank you again.

Thank you.

April?

Sir, did you want to take any more questions.

No.

All right.

Thank you, sir.

Ladies and Gentlemen, that does conclude your conference call for today.

Ask that you please disconnect your line.