伊頓 (ETN) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Ben and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Cooper Industries fourth quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Before we proceed, let me remind everyone, under the Private Securities Litigation Reform Act of 1995.

These statements are subject to various risks and uncertainties, many of which are outside of the control of the company, such as 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 event SEC. filings.

This call is a copy righted presentation of Cooper Industries limited and is intended for the exclusive use of the participating audience.

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

At this time I would like to introduce Mr. John Riley, chairman, president, and chief executive officer of Cooper Industries.

Thank you, Ben.

Welcome to all of you who have joined us for our first conference call of 2003.

I would also like to welcome Terry Klebe to today's call.

Terry was appointed Coopers chief financial officer effective January 1, 2003.

This is his first time with us on the call.

And as always, Richard Bajendki (ph), our vice president of investor relations is with us here this morning in Houston.

We would like to accomplish three things on today's call.

First, we would like to review our fourth quarter and full year 2002 year end results.

Second, we would like to give you a broad overview on how we see things shaping up for 2003.

And, third, we will try to answer any question you may have about other things that are going on or in and around our businesses.

I would also like to remind everyone that we will be providing much more detail on all of these subjects when we visit New York on February 26.

Please feel free to visit with Rich after our call to get more details on the time and place of our out look 2003 presentation.

Now a review of our fourth quarter and 2002 results.

This morning we announced fourth quarter 2003 -- 2002 earnings of 62 correct a share before nonrecurring charges.

That number and our resulting $2.60 per share for the year were very much in line with the projections we gave you in October during our third quarter earnings conference call.

Earlier today, we also announced that we took a .32 cent per share, fourth quarter after tax charge related to closing 10 manufacturing facilities and reorganizing several of our businesses.

This is a slightly higher but much more refined number than the estimate we gave you in mid October.

Finally, we announced that our fourth quarter free cash flow totaled $161 million, bringing our free cash flow for the year to $428 million, and, to my knowledge, the highest in Cooper's history.

By year end, we reduced our debt -- to 36.2%, down significantly from 38.9% net of cash, on December 31, 2001.

All things considered, I think our folks did a pretty good job managing their way through a very difficult business environment.

Respectable earnings, dynamite cash flow, completion of our offshore reincorporation, the effect active management of the federal MOGRAL bankruptcy situation and continued progress on our Coopers sales initiative, our strategic sourcing program and our moves to low cost labor locations, that all adds up to a pretty productive year to me and I hope you feel the same.

With that I will ask Terry and rich to provide you with more detail on our 2002 results.

Terry?

Good morning.

I am pleased to be with you to have this chance to review our results for the fourth quarter and full year of 2002.

As you know, this is my first conference call as Cooper's CFO.

While I have had the chance to meet some of you I look forward to meeting all of you in person over the months ahead.

I am not the only thing that is new about today's earnings announcement and call

.

Many of you have probably noticed that today's earnings release contains expanded information including a preliminary balance sheet and cash flow statement.

I hope you find this very useful.

You should be aware that this information is preliminary.

Our final balance sheet and cash flows will be detailed in our annual report in 10K.

Nevertheless, the data we've released should be subject to very little change when finalized.

I am going to start with a couple of comments on the results from our aggressive initiatives to improve our asset utilization and position for the future.

First, our capital expand tours in 2002 totaled $7.8 million, a 36% decline from 2001, with depreciation expense of $121.7 million for 2002, our capital expenditures equal 60% of the depreciation.

However, for the past three and five years, on average, we have invested at a higher rate than depreciation.

What's happened?

Over the last two years, our investments have shifted from major physical infrastructure projects to new product development and efficiency initiatives.

On the working capital front we had an outstanding year.

Our receivables day sales outstanding decreased by six days and this is only half the story as our receivables team also minimized collection problems throughout the year in these difficult markets.

Inventory decreased by 90.4 million and inventory turns increased by 4.5 from 4.3 in 2001.

Offsetting some of the cash flow benefit was a balance sheet decline of 89.2 million in accounts payable as we reduced purchases while working down the inventories.

Also at the end of 2002, we are in a position of funding bank account -- we were not in a position of funding bank accounts from commercial paper borrowings due to our cash position.

Also during the year, we took a very conservative approach, issued $575 million face value, long-term debt.

By issuing the debt we limited our exposure to the turbulence in the commercial paper market and locked in the funds to replace debt maturing in 2003.

As you notice, at the end of the year, we had $302 million in cash on our balance sheet.

During the first quarter, approximately $170 million in long-term debt will be paid off.

As John mentioned, our debt-to-total capitalization net of cash at year end was 36.2% versus 38.9% at December 31, 2001.

A couple of items to note.

In the fourth quarter, we purchased 628,000 shares of common stock for 20.9 million bringing total purchases in 2002 to $2.8 million shares at a cost of 90.3 million.

Had we not purchased our common stock our debt to total capitalization net of cash would have ended the year at 33.2%, well below the 35% to 45% we target.

Second, as we previously disclosed, we anticipate a year end decrease in our equity to reflect the funded status of some of our pension plans.

This non-cash charged equity after tax was 33.4 million.

Clearly, our balance sheet's in great shape and we have solid debt to net capacity.

Now turning to pensions, in regard to the pension plan, the December 31, 2002 valuation utilized a discount rate and expected return on assets of 7% and 8.5% respectively.

As compared to the prior year, we reduced our discount rate one quarter percent and left our return on assets at 8.5 percent.

We have historically been at the conservative end of the spectrum on assumptions and believe our current assumptions will be well within the norm.

During 2002, we did make cash contributions to the plans of 35.7 million, versus 5.4 million in 2001.

For 2003, we are projecting cash contributions of 14.5 million.

We expect our 2003 pension expense to increase from 16.7 million in 2002 to 26 million, which equates to approximately 8 cent per share.

In 2002, our pension expense increased 5.1 million from the prior year.

In addition, our expense related to other post employment benefits increased 5.2 million in 2002, and will increase an additional 1.2 million in 2003.

Now on the cash flow front, clearly we had an outstanding year.

Net cash from operating activities defined as cash flow from operations less the net investment of capital into our businesses increased 36% to $428 million.

While the current business environment naturally frees up working capital, we have and continue to drive improvements in both day sales outstanding and inventory turns which are the real drivers to sustainable improvements.

The next highlight some of the results for our quarter end year.

With the accounting rule change for good will amortization on January 1, 2002, our inversion and nonrecurring items, I believe, is important to take a moment and advice you on a couple of details included in our results.

Our net income, before nonrecurring items for fourth quarter 2002 was $57.6 million, our earnings per share of .62 cent compared to $57.1 million or .60 cent per share in 2001.

The 20002 earnings per share of .62 cent includes a .6 benefit from our inversion.

The prior year includes good will amortization, which, if eliminated, would increase the 20001 earnings per share from 60 cent to 74 cent per share.

Just to clarify, the inversion expense is 3 cent for the quarter comprised of 6 cent in net income before nonrecurring items offset by 3 cent not included in the nonrecurring charge.

For the quarter, our revenues were relatively flat with the prior year and down slightly over 1% sequentially from the third quarter.

Translation, increased revenues approximately 1% for the quarter compared to the prior year.

Our typical sales pattern has the first and fourth quarter revenues being lower than the second and third and therefore we feel good overall on where we ended up, considering the tough marketplaces we continue to encounter.

Throughout the quarter, we continued to experience weak construction, industrial and utility markets, resulting in sales declines in these markets by our Krause Hines, B line, lighting, power systems and tools businesses compared to the prior year quarter.

Continued strength in the retail markets offset a large portion of these declines.

While the sales mix has allowed us to remain -- maintain relatively flat sales with the prior year's quarter, it does impact our gross margins, as product sold into industrial and commercial markets are more specified and unique and generally carry a higher margin.

Sales mix and continued production variances were the primary drivers for our cost of goods sold, increasing to 71.3% from 71.1% in the third quarter.

Compared to the prior year quarter, our cost of goods sold increased from 70.7 to 71.3% from 70.7%.

This was a combination of sales mix, pricing pressure, lower production efficiencies as we brought inventory levels down.

Now, selling general administrative for the quarter, as a percent of sales was equal to the third quarter 2002, excluding a 2.2 million write off of receivables due to bankruptcy of a customer, compared to the prior year, fourth quarter SG&A has increased 1.5 points.

The comparables to the prior year are impacted by several factors.

First, for 2001, we did not achieve performance targets for incentive plan payouts.

In the 2002 fourth quarter, we have a $3.5 million increase in incentive compensation related to targets on cash flow being significantly exceeded.

Second, as we previously discussed, we are not bringing our sales and marketing costs down prorate can sales decline and, in fact, are expanding our efforts in programs such as the Cooper connection.

We also continue to invest in initiatives to improve our business and are absorbing increase in benefit plan costs.

Interest expense for the quarter increased 2.2 million compared to the prior year.

This was primarily as a result of the issuance of $275 million and 5.5% notes earlier in the year.

During the fourth quarter, as John mentioned, we did incur a 39.1 million pre-tax charge to close 10 manufacturing facilities.

This charge includes $13.7 million in asset write downs, $18.3 million in severance and benefits and 7.1 million in other costs.

Now, the workplace decline from these actions will be in excess of 500.

Weave anticipate a benefit in 2003 net of expenses incurred as the facilities close in excess of $5 million.

And by 2004, a cumulative benefit in excess of $35 million.

Taking these facilities out of our system reduces our manufacturing square footage approximately 7%.

Now let me put the quarter in perspective with the year.

By any measurement, 2002 was a very challenging year.

It was not much to get overly excited about and a lot of the marketplaces that we participate paste in.

Industrial markets bounced along the bottom, relatively consistent with the trends at the end of 2001.

Commercial construction weakened, retail remains strong, electronics started to improve and Telecom was dead.

The result was the comparables on revenues with the prior year were significantly unfavorable early in the year.

Reduced volumes, pricing pressures and product mix drove our cost of sales from $69 -- from 69.9% in 2001 to 71.5% in 2002.

Productivity improvements and material cost reductions only partially offset negative production, variances, pricing pressures and product changes.

Selling general administrative increased 1.3 points year over year, driven Biff 6% decline in sales.

Our decision to continue to invest in sales and marketing and other initiatives to position those for the future.

Overall, we performed well compared to companies serving similar markets and never lost focus on continuing to invest for the future.

Our interest expense did decline $10.2 million in 2002, as the reduction in average debt levels -- partially offset by our decision to limit our exposure in the commercial paper market and place long-term debt to cover 2003 maturities.

Our tax rate declined from 31.75% to 24% primarily from our inversion.

This increased our earnings per share approximately 24 cent for the year, and positioned us as a global competitor.

At this point, I will turn it over to Rich to provide further detail on our segments.

Thank you, Terry.

As Terry has described some of the primary drivers for activity in our businesses, let me add to that with the description of some of the impact on our individual divisions, and then a quick review of how our businesses performed on a regional basis.

First, in the electrical products area where products were relative flat versus the prior year, some of our businesses an outstanding quarter, with increases of 10% or greater occurring in the busman operations and in our wiring device businesses.

A greater part of our businesses experienced relatively flat sales for the year, lighting, power systems being among those.

We saw moderate single digit declines in the cross Hines business and reflecting the rather extreme state of affairs in the electronics and our marketplace, our B line businesses were down more than 10%.

On the -- -- revenues nor New York America declined 1 to 3%.

The demand for electronics protection markets has picked up and has been a nice driver for business in our busman operation overall.

Nevertheless, continued softness in the commercial construction and industrial markets resulted in lower revenues for lighting for industrial support systems, for construction materials, and our closures businesses.

No growth and residential markets slowed they provide offset for our lighting and wiring device businesses.

In the material area, product demand nor transformers and related products is off as there continues to be a significant amount of uncertainty in the regulatory environment that has investigated the -- by the utility players.

And the continued weakness and demand for hazards through the electrical products from energy and petro chemical products continues.

In Europe, the region experienced a bout of decline to 2 to 4% including the impact of translation N this region, the demand for electrical construction materials and continued applications continues to be soft and we improve our market position despite a market demand from projects.

Latin America experienced a revenue improvement of between five and 10 percent.

With business activity there being relatively stable in the most important market, that being Mexico.

In Asia, a growing market presence for us, we continue to experience moderate growth as we expand our activities and involvement in that particular region.

In the tools and hardware area, we saw a decline in revenues of about 1% overall.

For our two divisions within the area, our performance was on the positive side, modestly so for a hand tool business, with -- excuse me -- was a modest decline for hand tool business with a modest increase in the -- coming out of our power tool operations.

Regionally, North American tools and hardware saw a decline of two to 4 percent, this being principally the result of slowing industrial markets, a drop in airframe reduction and continued declines in demand for electronic assembly products.

In Europe, excluding translation, our revenues increased in the neighborhood of three to 5 percent.

The somewhat cyclical automotive industry businesses had a good shipping quarter and provided favorable comparisons, nevertheless overall when you look at Europe, the industry demand that affects so many of our products in that marketplace continues to be relatively flat.

In Latin America, excluding translation, our revenues declined in the neighborhood of five to 10 percent.

Demand here has been impacted by the effect of the slowing economic activity in Brazil and some moderate soft innocence our Mexican demand.

In Asia Pacific, much like it is in our electrical area, continues to be a focus of growth for us and has provided moderate growth as we expand our activities in that region.

For sales overall then, Cooper Industries' revenues were generally flat.

Our prior year's base, our core businesses were down about 1%.

We received a modest benefit from translation to level things off to a relatively flat year to year performance.

Core revenues were down about 1%, translation offset that with about a 1% increase, leading to the flat performance there in that segment.

In our tools business, prior year's base on core revenues were down 2%.

Translation provided us about a 1% benefit for a total decline reported of about 1%.

With that revealed, let me turn this back to John Riley.

Thank you, Rich.

I hope you found Rich and Terry's comments helpful.

Now before moving on to 2003, I would like to give you our latest information on the federal MOGAL and the asbestos situation.

It's our understanding federal MOGAL is working on it's reef organization and the plan for submitted this for court approval remains uncertain but most people are speculating a first pass is likely in the march or April time frame.

That seems reasonable to us but, again, time will tell, and the ball seems to be in their court at this point.

In the meantime, we expect to continue to closely manage existing and new AVIX claims which we have been doing since the filing of the federal MOGAL bankruptcy and I would say so far so good.

Now let me give you numbers in terms of the status of these claims as of December 31, '02 compared to the status of the situation on December 31 '01.

That's the easiest way to give you a sense of how the claims are being handled.

As of December 31, '02.

For the time period August '98 through December 31, '02, a total of 103,133 claims have been filed.

That same number, as of December 31, 2001, was 81,342.

In other words, during 2002, 21,791 claims were filed.

By way the contrast, that same number for all of 2001 was 48,043.

I might add that the 21,791 that was filed during 2002 included 9,036 claims filed in December of 2002 quickly in advance of the 1-1-03 change in Mississippi law which limits claims filing jurisdiction.

So had they not been there, we would have had an even lower number of claims filed in the year 2002.

Claims resolved: Cumulative as of 12-31-02, 31,991.

Cumulative as the 12312001, 171090 or 14,901 claims were resolved during 2002.

Claims balance would be the difference of those two, which was 71,142 as of 12-31-02 versus 64,252 as of 12-31-01, or an increase of claims balance of 6890 claims as of December 312002 for the calendar year 2002.

Again, I call to your attention that over 9,000 of those claims were filed in the last month of the year.

A that not occurred obviously we would have had a reduction in the claims filed in 2002.

Indemnity payments as of December 31, 2002, were 11,037 per claimed versus 1,060 per claimed in 2001.

That reflects the completion of our -- from August 1999 through December 2001 audit of all of these expenses and it includes the settlement of 561 claims in the fourth quarter of 2002, of which about 25% were what we would consider to be more serious claims which we decided not to take to the legal system, through the legal system.

Our defense cost for the same periods, as of December 31, 2002, totaled defense cost since August 1998 were $38 million and that number at the end of 2001 was 25,000.

You can run through the math and calculations.

I think that will do it for you.

At a roughly 2/3, 1/3 insurance recovery split which we think is a relative live conservative number, the total out-of-pocket cost is going to be running somewhere in the 5 to 5.5 million range cash out of Cooper's pocket.

When we originally looked at this, we looked at between four and $5 million so we can all agree it's in the ballpark of where we thought it would be.

All in, pretty favorable news and relatively well-managed situation, certainly for the year 2002.

Well that's pretty much it for 2002.

We will be happy to try and answer any questions you may have about the past year in a few minutes but know I would like to take a few minutes to summarize our thoughts on the year ahead.

We mentioned in our press release this morning that we expect our earnings for 2003 will likely be in the 2.85 to 3.05 range.

Starting from the top, we're not expecting any improvement in the key markets over the next year.

We're forecasting that residential construction will likely drop off a little for the whole year in general.

As a result, our sales will be up only modestly, and then only due to an increased market penetration, driven by our connection program and our new product development programs.

We expect our margins to improve about a point next year compared to this year as we continue to drive down sourcing costs, close plants, and continue to move loaf cost labor location -- to low-cost labor locations.

SG&A expense, as Terry mentioned, will remain flat year over year reflecting the cost of the currently in place programs that Terry spoke about and new investments in lean manufacturing and electronic information systems which we will begin to implement across the country.

That's it for the operating side of the business.

Additionally, a lower tax rate and a lower share count will add between 15 to 16 cent per share to earnings.

But as Terry mentioned, additional stock options and pension expense will offset most of this benefit.

Net, net, net, we expect 2003 earnings per share to be up by a sold double digit amount on a very modest sales increase.

And assuming that occurs, our free cash flows should be $275 million or above for the year.

Now, we look forward to presenting our plan to accomplish this in more detail in our meeting in February, but for now, I think then we're ready to take questions.

At this time I would like to remind everyone, in order to ask a question, simply press star then the number 1 on your telephone keypad.

We pause for just a moment to compile the Q and A roster.

First question is from Bob Cornell (ph) of Lehman Brothers.

Good afternoon, everybody.

Hi, Bob, how are you?

Two questions, one on lighting and then one on accounting.

On the lighting, have you continued to hold on to the hair you gained, you know, with the compression of the L.C.A. and Hubbell businesses or are these people starting to push back?

And what is going on with the pricing in that market?

I don't think we see any evidence of any loss of share in our lighting business, Bob --

You gained some share, you said, as a result of that organization's -- you know, reshuffling of their businesses and was wondering if you held on to that or started to slip back in their direction.

I think we're at least holding our own in that market.

It's a little bit difficult to measure at this point in terms of where all of that share is.

But our best measure is looking at the publicly stated numbers of the companies that we compete with, either as they reported as independent companies, for example, in the Thomas situation or perhaps as a subset to some of a product line in other companies which tends to be the case in acute, for example.

And I think our numbers gate that we are at least holding our own.

We probably have gained a little bit of share from the turmoil that is going on in the market now related to some of the acquisitions that took place, specifically, the LCA acquisition.

And that's to have been expected because there are a lot of changes and agents and switching and so on and so forth that goes on.

But, you know, we don't see any reason that we would -- that we would slide back from where we are.

The question is how much more share can we take by leveraging that lighting package as part of our overall Cooper connection package.

We still have a lot of room to move there.

How about on the pricing point?

You guys were talking pricing aggressively earlier year.

What happened there?

I don't think it has changed.

It's competitive pricing in the electronics area.

It's actually a little less competitive on the tool side of the business but it certainly is competitive on the electrical side of the bills.

A lot of capacity out there, limited number of business opportunities.

And I think people are measuring how much of that work do they want to take to keep their plants running and to offset some of their overhead costs, and it's sort of at a marginal state at this point.

But I think year over year, in electrical products, you're probably looking at -- I don't know.

I haven't looked at the final numbers.

In some cases these are estimates but you could be losing as much as a point 1/2, two-points in this market, I think, in the current environment.

Compared to where they were a year ago.

One follow up accounting question.

You know, you guys, I think, are on a program to take your -- your manufacturing plant count from 118 plants down to 90 or something like that, and this is one piece of that process.

Have you considered gist going to an all-in reporting process as opposed to including the charges not in this quarter as an in time item reflect County the fact this restructuring will be ongoing and there will be a likely charge in 2004 and 2005 that will deal with the global manufacturing footprint change?

We haven't really focused specifically on that.

I think our past practice has been to take most of this to the P&L, assuming it's a plant here or a plant there.

But where we had a major program, for example, the 10 plant program we're talking now, I think our past practice has been to take that as a one-time charge, and I'm not sure I see any reason to change it at this point, as long as we're in a position where we can give the market enough heads up to know what we're doing and what -- and roughly what it's going to cost, which is what we did frankly in October when we mentioned that we would be taking this charge and it looked like it would be something in the order of the magnitude of 10 plants.

Obviously, we're not in total control of that situation.

There may be some changes in reporting requirements or changes in methodology that -- methodology that are dictated by the accounting authorities and whatever they tell us that we must do, we will certainly do it!

1OK, thanks.

Next question is from Jeff Sprague (ph) of Salomon Smith Barney.

Hi, good afternoon.

Just to follow up on that for a moment, you know, you are shutting plants in North America on balance and adding in low cost areas.

Your Honor, when all is said and done, is your overall square footage lower?

Are you finding better and different ways to run plants, in addition to moving them off shore?

How should we think about your total square footage two tore three years from now?

I think there's obviously a transition period that takes place, but actually, this latest said of moves, the 10 plants, rich you had a number that you had calculated with our operating guys in terms of did this really -- it's a very good question, Jeff, because that's really where the rubber hits the road.

Are you really taking your (inaudible) and I don't recall what that number is.

I thought you said it was something in the eight, 9% --

For the 10 plants in the charge that were taken in the fourth quarter, there was a -- those plants will effectively reduce our square footage in place in the beginning of 2002 by about 7%.

In addition we have, as John mentioned, on a regular basis been looking at our facilities and determining what was the right footprint for a given operations and other changes have been made in recent years of and beyond what -- excuse me, recent quarters, above and beyond what was taken in the fourth quarter charge.

When you net those plants in over the period of 2002, we will have taken out or we have indicated we take out about 9% of our square footage.

We will continue to be worked on in this area, to capacity management side of this business becomes a very important, particularly as you mentioned, we continue to move some of that effective production to places like Mexico.

The numbers, the 7 and the 9% are net reductions, not the grocery deductions going on in North America?

Those are the net reductions.

Net reductions across the global platform?

Right.

To be fair, Jeff, in terms of how I look at it, is, you know, the about to do that, in this for example is the payoff of prior investments we made by putting square footage in the lower cost locations.

So it -- it tends to be sort of -- you add some in a low cost location and your total square footage goes up a bit.

But ultimately you should be able to flush that out and more, and I think on this particular situation, we're in a position where we can take advantage of what the square footage we put in place in Mexico, for example, in tools, our china joint venture, some of the of the -- the plant over in low cost, those kinds of things.

But the real question is, does the overall trend of dollars and sales were square footage keep going down and that's why it's going.

Dollars footage per square foot goes up and I believe we're in that phase right now.

And could carrier, Rich, give us the cash restructure spending for 2002 and what you expect for 2003?

As I mentioned, Jeff, our charge was that -- there's an asset report portion of that right off, and if I recall we had about $18 million in severance.

So you have the 18.three in severance and the 17.1 in other.

That's primarily the cash component of the other charge I guess?

Yes.

And most of that money will be paid out in 2000 and three.

Heavier in the first half of the year.

A lot of these plant closings were kicked off in late -- late in the year.

And so we will be spending more cash probably in the first, second quarter, tailing off through the end of the year.

If I recall, the last plant is slated to be closed down in September of 2003.

So most of that cash will outflow during that period of time.

Just one other odd and end here, the tax rate for 2003, you still using something like 22, then, for the full year tax rate in 2003?

For '03 we're looking at a tax rate right around 20%.

OK.

Great.

Thanks a lot.

You're welcome.

Next question is from Eli Garten (ph) of H.C. Wainright.

Good afternoon.

Or good morning depending on where you are.

Couple of questions.

Originally the Bermuda benefit was supposed to be, you know, you give a prior year 55 cent, it was 27 cent in the year, and are you telling us it's going to be much less than in the in '03 than the .45 cent we thought originally?

It sounds like a bigger number.

Let me try and answer that, Eli, for you.

In 2002, we had a net 24 % and we're looking at somewhere around an increment of 14 cent in 2003 which brings you to 38.

The piece of the equation that has had a significant impact is the downturn in the economy, which has brought our earnings down fairly significantly over the last year, year 1/2.

Are you including some restructuring costs in that, too?

Yes.

What would it be -- we used 260, not in 62 cent in the quarter, not 30 cent in the quarter and therefore the benefit for Bermuda was 7 cent in the quarter, 7 cent not 4 cent.

Used to be you had 41 since through 2003 based on the numbers we presented for 2003 on the inversion.

So it would be 41 cent, up a bit.

But it really -- it's actually income driven.

It depends on how much earnings -- your earnings are and that's what the essential difference is.

When we projected to 55 cent it was back at the time we put this program to our shareholders when the economy was in a different condition than it is today.

In our anticipation of our revenue and earnings stream was much higher than we had had --

I recognize that but I wouldn't go as low as 38 percent.

Actually it's 41 cent excluding the impact from the charge.

So we're going to go with the 14 cent?

You will get 14 cent in 2003.

What are interest charges going to be in 2003?

The rate will be something like, what, 5.8, something like that.

We don't have any floating.

It's all fixed actually.

We're actually, Eli, for 2003, you will see an increase in the interest expense over 2002 and that is driven from the fact that we got out of the commercial paper market and into fixed rate debt.

Lower debt, continued decline in debt but higher overall rate because of the floating (inaudible).

The 74 1/2 you reported?

What did we report --

74 1/2.

It will be probably somewhere in the $74-$75 million range.

In the electrical equipment, the predecessor said you a 2.2 million charge for somebody going -- a distributor going bankrupt and some other charges for other initiatives.

Those are all still in the operating numbers before the restructuring, correct?

Absolutely.

Their numbers look a lot better.

Is there any other -- you know, can you give us some idea in both electrical products and also in tools and hardware what the impact of the -- you know, non-normal operations, increased spending, increased initiative, increased charges are, what are you holding down and also what are you holding down value, how much liquidation and what are you doing to impact it because I assume you're going to continue that program?

There are a lot of questions wrapped up in there.

Let me see if I can touch on a couple of them for you Eli.

These are subjects that will be better prepared to -- not that we're not well prepared now but I think we will have a better format to answer this for you when we're in New York on the 26th of February.

At an 8:00 meeting?.

8:30 start, we will open the doors at 8:00, it will be at the Saint Regent Hotel as we have in the past and we will get more details out to everybody shortly.

The $2.2 million write off for customer bankruptcy was in the electrical products area.

If you were to take that into account, the electrical products margins in the fourth quarter, which was 11.8% will be boosted by a further 2.which keeps us on par with where we were in the prior quarter.

The other activity, as you know, probably our most significant focus in inventory was in the tools and hardware business on -- when you look at a single business focus but there was not a Cooper Industries that did not get attention in the inventory area.

A lot of progress was made in all of our segments for the year.

But that in perspective as Terry gave the numbers, we took a good -- we improved our inventory turns by .2, which in a declining market placement that we were, in essence, producing at the low incoming rates to achieve that.

I don't have the exact impact per segment.

We can look into that one and share it with you when we're in New York.

But it's a hundred million dollars worth of inventory that came out of the system is the bottom line.

And over all in the electrical --

I think it's close to $100 million.

-- in the electrical area, you know, we were very successful in efficiencies, lower material cost, which net-net, we really pretty much offset the pricing issues and in the economy.

Where we really got hit was the production variances from what rich discussed.

So net-net, we have an opportunity of probably around a point, one point ROS as we move forward and take the production inefficiencies out of the system.

Just one clarification, are you saying incrementally 2002 versus 2003 change that there's an incremental increase that will be out or are you producing closer to retail or --

In '03 versus 02 we expect to continue is have contribution to our work flow out of working capital and that will be in predominantly in the inventory area.

So again we will be -- and we're looking for a relatively flat market activity but some improved revenues coming out of the Cooper program.

Modestly rising revenues but taking inventories out.

Another year of running our factories below sales rates.

OK.

Thank you.

Next question comes from Ted Wheeler (ph) of Buckingham Research (ph).

Good morning, Ted.

How are you?

On that last point, I think you mentioned earlier, a hundred basis point inefficiency issue is kind of rolling through the system now due to inventory take out.

And in your margin expectation of 100 basis point improvement, do you anticipate some improvement in that aspect of the equation?

The answer is, part of that hundred basis point improvement would be better utilization of the assets that are currently in place.

Two things: One, a modest increase in sales absent any market increase-driven increase in sales and, two, less square footage as we go through, which is less overhead, which is less all of the above, so to speak.

And we will increase -- we intend to see improvement all through next year, you know, starting out the year with all of the plant closures, you know, we will be absorbing more expense than benefit.

But toward the latter part of the year, we should be picking up a lot of those inefficiencies out of the system.

Yes, we haven't changed our mind overall on the long-term, Ted, on the impact of the closures on those facilities.

We're still in the $35 cumulative range for those savings.

I think we have cranked into the budget for 2003 -- I don't remember exactly -- but it's something between 5 and 7.$5 million.

It's sort of in that range.

It's been moving around a little bit but it will end up in that range.

And that is good.

I feel very good at this point.

We just got back from a very major management meeting that we held with all of our division folks and staffs and sort of intro speculative look at where we are, where the markets are, what we tried to put in place over the last two years, how do we feel about it, what is working, what isn't working.

And I think we all came away with that, from that meeting saying, look, this keeper connection thing is the right thing to do, we see no evidence that it's doing anything but favorable things for us.

And, indeed, we have been in some instances our own worst enemy getting up and running and used it to it and working on this program and I think that will be a positive going forward.

We feel very good about how we position this low cost labor market issue.

We can't really be unhappy at all with the strategic sourcing issue, so we're now at a point where we believe that those three things are sort of pillars of the future performance improvement for the company, if you will.

And I think collectively, we all agreed that we're ready to begin to move on to certainly the planning and probably the initial implementation of the next of those four for five pillars and that is, the logistics and contribution and working together on an electronic basis from division to division to consolidate some back office functions in those kinds of things.

That will be one of the things - when I've mentioned in the press release it was a Hokey comment I was told by my folks here but this " get connected " that's what you will hear more about in February, why we feel that's the right thing to do, how we think we will position it and what invest -- how are we going to invest in that going forward.

That's very important.

And I was -- I was delighted with the overall acceptance of, hey, this is the way the markets are going.

We have a terrific set of assets here to put together, and we will position these so that the customers will, indeed, over a period of time see us as the preferred supplier of choice for their needs.

So I -- I think that's -- I think I feel -- we feel very good about that.

Obviously, 2003 is a year that we would like very much to put the asbestos issue behind us.

I think we have done a good job managing that, and I think, frankly, we're pretty well positioned to do that and we're ready to move when others are ready to move and get that thing behind us, too.

So I think that's -- that's terrific.

And, of course, we had a long discussion about ethical behavior and financial reporting, and I'm delighted to report that so far we have not had any issues in that area, and I am absolutely convinced that this crowd that we were with are absolutely sure their hear not going to have any issues in that area.

So it was a great meeting.

But more importantly, everybody felt good about what we had put in place and the direction we were moving in and I'm kind of giving you a capsule summary of that meeting, but I hope that is helpful.

On the -- are you in a position to, you know, have some harder numbers on the keeper connection impact?

Yes.

We will have some comparisons on that.

Could you share that?

Do you think it added -- do you have an incremental percentage or some way of expressing it.

I don't have it right in front of me now.

And I think the guys are finalizing some of those numbers.

But I think it's fair to say for those product lines, we're convinced that the sales decline we saw in 2002 was a much lesser rate than what we saw from what we considered to be some of our peer companies

On the outlook for the market, a year ago you considered yourself more conservative than others in pushing out expectations to the second half, of course it went the other way, and, you know, now you're saying really nothing, no light, no up tick until 12 months or so.

What has really changed?

I realize what has changed in the past.

What changed in your forecasting methodology today versus perhaps other times out there that give you a no-upturn year?

When we started to look at this earlier in the year in terms of the budget processing we were looking at charts that indicated that -- was beginning to pick up, the quarter to quarter production change in the activity had turned positive in the third quarter and lo and behold in the fourth quarter they turned back negative again.

So we're uncertain as to when that will turn up.

That's the way we put our plan together.

We don't see much hope at all for the commercial construction activity market.

That seems to us that if it holds its own, it's going to be probably not -- not a bad year.

And there is every likelihood or there's every possibility that might even slide a little bit further before it begins to come back.

But in aggregate nor the year there's not going to be a hell of a lot of change in that market.

We're concerned about the consumer, and it's -- you know, the impact of the economy on the consumer.

And importantly, in the residential construction market.

We're pleased with the numbers that we keep seeing coming out of residential construction.

But I think collectively, we kind of have taken a more conservative approach and said, look, you can't necessarily bank your plan on those things staying at those high-end lofty levels or even growing from there.

So I think that's generally -- we haven't changed much in terms of our feelings about the telecom and -- market or even the European markets.

We might even be a little more favorable on the European situation.

It held up better than we thought it would in 2002.

So just generally, I think it's a general gut feel that says, hey, look, you know, we're not seeing much on paper in terms of reports, other than residential construction that's carrying the ball here.

And, of course, the retail sector didn't have a shining fourth quarter, so that's kind of -- as we move through the quarter, I will admit, we progressively reduced our expect tanks for the economic conditions for 2003 and frankly at this point I think that's probably a prudent thing to do and plan accordingly.

If it picks up, it picks up.

That's good news.

That's helpful.

Thanks.

Lastly, what's your cap-ex and depreciation?

Cap-ex we're looking at between a hundred and hundred and 10 million.

That includes -- we're going to be putting in a major system that will -- on the information technologies side, which drives that number up 10, 15 million from where we would otherwise be.

What, depreciation might scale up just a little?

Yes, depreciation, I believe, is going to be in the $120-$125 million.

OK.

And the I.T. spending, what kind of functions are you putting in or upgrading?

Well, Ted, what Terry was referring to, was we have two businesses.

Our Krause sign business and lighting businesses, where their business systems are due to be revamped.

What we're going to do here is -- and we have been working with both of those groups with power corporate folks to decide on a business system that will work in both cases, and we're going to try to kill two birds with one stone and I think we're going to going to be pretty successful with it.

One bird is they need the new business systems to run their businesses.

As Krause signs expanded globally, it's different from when they had the old business system.

Obviously as Cooper lighting has grown through acquisitions and plants all over the place, that one needs to be revamped, too.

So we need to put those -- we would need to put those in and of themselves regardless of what we want to do, in terms of this getting connected initiative.

But what we're going to do is to try to design a system and interchange so those two businesses will be sort of the prototype for future investments in that area and see how we can put this together so that they can share common resources, going forward.

So it's really a two-prong program on the I.T. structure.

One so to put in place up to date systems needed in two of our significant divisions but even more importantly, put in place the prototype for which is going to be our electronic footprint going forward.

OK.

Since the prototype -- sorry I'm taking so long.

But the getting connected prototype, would be replicated through this five or six other divisions that are part of the Cooper connection in some future date.

Over time.

That's correct.

Do the other parts of the company also need the first part, the new system upgrade or are we looking at several years of this kind of spending?

The other businesses are in pretty good shape.

Our -- business which is also a electrical business would be slated to come on as a similar system.

But it will take several years to do.

And clearly, we're going to do this, do it right.

And we're not going disrupt our businesses.

The time it takes to do that, it will take.

We have always -- we have never disagreed.

I know there have been a lot of different varying opinions on what to do in terms of this tying all of our businesses, anybody's business together electronically.

We have never disagreed that that was the right thing to do.

We have always disagreed in terms of the timing and being ready to do it and doing it right.

There has been a lot of money poured down the drain on some of these systems in the past, and we have down our fair share.

We have done thank of that ourselves frankly so we're feeling pretty comfortable with how we're approaching this at this point and one of the critical elements is it takes buy ins from all of your divisions and we have gotten to the point we have that by them now.

Being mindful of our time, we'll ask our modulator to take one more question.

Go ahead, Ben.

Your last question comes from Robert Chapman (ph) of Chapman Capital.

The Danner (ph) transaction that was proposed to and potentially other transactions proposed to you by others in their group, there's people out there where the trades are trading today, being Cooper shares.

When you resolve your asbestos problems through the MOGAL bankruptcy that you're working on now, do you think it would be possible that you would entertain strategic alternatives again, since it has been reported from the press that the asbestos issues impeded your ability to get a definitive agreement in the past discussion?

Let me just say about that, I'm not going to speculate on that process or what it may mean in the future.

But I would say this, Robert.

I think most people as a result of what we have done over the last several year, including how we reacted to that process, I have had several people, and I'm delighted to hear this and I'm pleased to hear this say, look, being what they are, some things don't work out, some things do but there was never any doubt in these investors minds that what we were trying to do was max mime shareholder value and that's what we're here for and we think we have a plan and we think we have got a strategy that will maximize and drive shareholder value regardless of what happens around us, and we will deal with the external factors as they come along and take those into consideration.

That's all I can tell you.

You know, we have put together a fine platform here.

We have been more than willing to entertain ideas in terms of how to buy it, how to maximize shareholder value.

We haven't been afraid to buy back shares for those of you who think that is the way to go.

We paid a very solid dividend for those who think that is the way to go, and we will just continue to do the things we think are right for the shareholders overall.

While I appreciate your response, with all due respect, the value of the Danner deal was worth $60 per share, your top trades in the mid 30s.

If you want to maximize shareholder value, can you explain to me if that was proposed to you post asbestos resolution why wouldn't that be a no-brainer to accept if you want to maximize shareholder value rather than preserve your job?

I'm not going to respond to the last comment.

I think that's not something that I need to respond to for the majority of the people on this call.

But I'm not going to speculate either so I will just leave it at that.

I look forward to your truly maximizing shareholder value.

Thank you.

With that I want to thank all of you for joining us for this call.

As mentioned earlier, we will be in New York City on February 26th, the morning of that day, with our first of two annual presentations that we do and in terms of out look and updates for our businesses.

For further information on that it will be sent to most of you shortly and we look forward to you being with us, either in person or on the conference call that will occur concurrently with that presentation.

Thank you all and have a good afternoon.

This concludes the Cooper Industries fourth quarter earnings conference call.

You may now disconnect.