伊頓 (ETN) 2003 Q1 法說會逐字稿

Good morning.

My name is May, and I will be your conference facilitator.

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

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

After the speaker's 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 one on your telephone key pad.

If you would like to withdraw your question, press star, then the number 2 on your telephone key pad.

At this time I will now turn the call over to Mr. Bajenski.

Sir you may begin your conference.

Thank you, May.

Before I start my comments, I would like to point out to the operator of the call, there seems to be some significant background noise on our side.

If they could give some attention to that, maybe we could have it corrected during this call.

Before we go on with our proceedings, 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 risks and uncertainties, many of which are outside the control of the company, such as 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.

In addition, comments made here may include non-GAAP financial measures as recently defined by regulation (g).

Reconciliations of those measures to the most directly comparable GAAP measures are posted on Cooper's web site in the investor center at the management presentation section under the tab for this presentation.

This call also is a copyrighted presentation of Cooper Industries Limited.

It is intended for the explicit use of the participating audience.

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

Having said that, let me -- to have us join us on this presentation, Mr. John Riley, Chairman, President, and Chief Executive Officer of Cooper Industries.

John?

Thank you, Rich.

Once again, thanks to all of you for being with us this morning.

I should note that in addition to Rich, Terry Klebe, our Chief Financial Officer is also with me here today, and both Rich and Terry will be helping in the discussion of our first quarter 2003 results and outlook for the balance of the year.

This morning, we announced that our earnings for the first quarter were 61 cents a share, up from 52 cents per share reported last year.

Terry and Rich will fill you in on the details in a few minutes, but let me first give you my overall thoughts on the quarter.

Revenues for the quarter were down.

That's not bad considering the overall state of our end user markets.

Our operating margins were up nicely despite a decline in revenues, and we're very happy with that And finally. net income was up 16%, reflecting both this improved operating performance and the lower tax rate that we've enjoyed since May of last year.

Suffice to say that despite continued weakness in several of our key markets, we think we're off to a reasonably good start for 2003.

We're also on track to meet our cash flow commitment, and we're making real progress advancing several important initiatives that we believe are key to securing our future growth and profitability.

First, we implemented a new management structure for our Cooper connection program.

That will allow us to work more closely and more definitively with our customers.

Second, we made good progress on our new enterprise business system during the quarter.

We've selected a software platform and are moving forward with key design and development initiatives.

Ultimately, this system will provide important data transparency across all of our businesses, allowing us to further reduce business process and logistics cost.

Third, we're on plan executing our previously announced program to close ten plants to appropriately sized manufacturing capacity to marketplace demand.

We have completed two of the ten facility closures, and three other plant closures are now in process.

We've also completed the planned structural reorganization of our power systems business, which will generate significant annual savings.

Also, and anecdotally, late in the quarter we announced and introduced our new company-wide get connected communications program to all of our employees.

This program is designed to engage all of our employees in important strategic initiatives being implemented across the company, including Cooper connection, strategic sourcing, our new better business enterprise system, and our planned conversion to a shared services organization structure.

Finally, our balance sheet also remains in good shape at the end of the first quarter.

Our debt to total capitalization net of cash was a very comfortable 37.5% at quarter end, and that compares with 39.7% at the same time last year.

So all things considered, we feel very good about where we are and the opportunities we see ahead of us.

Before we go there, I'm going to ask Terry and Rich to give you more detail on our first quarter performance.

Terry?

Thank you, John.

I'm pleased to be with you and to have a chance to review our results for the first quarter of 2003.

Consistent with the practice we began with the year end 2002 earnings release, the first quarter earnings includes a preliminary balance sheet and cash flow statement.

I hope you find this all useful.

But you should be aware that this information is preliminary.

Our final balance sheet and cash flows will be detailed in our quarterly 10-Q.

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

I am going to start with comments on our cash flow statement balance sheet.

First, let me tell you why we are off to a great start for the year on pre cash flow.

We reported pre cash flow of a -$26m compared to free cash flow of $31m in the first quarter of 2002.

How can I be upbeat about these results?

If you notice, the cash flow statement reflects a reduction of $71.3m in 2003 and an increase in 2002 of $13.2m for the change in other in assets and liabilities in our balance sheet.

Of this $84m difference between the two quarters, $57m related to the timing of the pre funding of Viva Trust.

Viva is a vehicle that we use for pre funding certain employee benefits.

The funding decision on these is driven by the timing of the income tax deductions utilized in managing our tax payments.

At the end of the first quarter, we had pre funded $55m of expenses that will reverse during the year.

You will notice in our balance sheet correspondingly that other current assets increased approximately $55m from December 31st, 2002.

In addition, there was a $37m swing in the tax-related accounts in the cash flows between March 31st, 2003, and 2002, included in changes and other assets and liabilities.

To be fair, this change between periods has to be reduced by the increase in deferred income tax expense of $26m between the periods.

In other words, all told, there is only an $11m reduced cash flow for the first quarter 2003 compared to 2002 for income taxes.

The bottom line is that after adjusting for the timing of the Viva pre funding, our free cash flow matches last year's results very favorably.

You can see why we're off to a great start to the year on generating free cash flow and well on our way to meeting our cash flow objectives and generating free cash flow in excess of earnings for the year.

Looking at working capital, cash flow from changes in operating working capital and accrued liabilities were relatively similar in 2003 and 2002.

Albeit driven by different factors.

We built an inventory of 48 million during the first quarter of 2003 versus an inventory reduction of 12 million in 2002.

The inventory build in the first quarter of 2003 was partially due to the manufacturing of assembly equipment orders that will ship in the second quarter, temporary inventory builds as we close factories and relocate product line, and quite frankly not as good production planning as we have come to expect from our operations.

In the the prior year quarter Inventory reductions were offset by reductions of $65m in accounts payable in accrued liabilities..

We are continuing our drive to improve dating sales outstanding in the inventory turns.

The real drivers to sustain improvement, and expect to end the year with nice improvements in both areas.

Capital expenditures in the first quarter of 2003 were about $5m higher than the prior year quarter.

Most of that increase is from an initial payment on our enterprise business system.

From the proceeds of our 2002 long-term debt issuance, we repaid debt maturities of $167m in the first quarter.

This reduces our debt to total capitalization to 38.8% at the end of the first quarter versus 41.8% December 31st, 2002, and 39.8% at March 31st, 2002.

We also ended the quarter with $71m in cash.

Net of cash, our debt to total capitalization was 37.5%, compared to 36.2% at December 31st, 2002, and, importantly, 39.6% at the end of the first quarter of 2002.

You will notice we also purchased 152,500 shares of common stock for $5.4m during the first quarter.

Clearly, our balance sheet remains in great shape.

We have solid additional debt capacity, and, importantly, we will have a very solid year generating free cash flow.

Next, in terms of the results for the quarter.

As John mentioned, we achieved our earnings plan for the quarter despite revenues coming in lower than we would desire and no income from the agreement related to the (inaudible) 1993 IPO.

Compared to the prior year, revenues tracked pretty close to the trends we published on our web site each month.

We had very nice improvement in gross profit and return on sales across our businesses.

This was despite significant increases, insurance, medical, pension, and other normal economic salary and other expense increases.

Comparability of our first quarter 2003 results with the first quarter 2002 result is impacted by Cooper's adopting a new method of accounting for stock based compensation effective January 1st, 2003, the lack of any build in the income, the change during 2002 in our debt structure through the issuance of $575m in long-term fixed high pressure rate debt, and a lower tax rate resulting from our reincorporation in Bermuda.

In the first quarter of 2003, our expense related to stock-based compensation increased $2.2m over the comparable quarter of 2002.

As we just previously discussed, we are now expensing options and other stock-based compensation on a prospective basis.

In the first quarter of 2002, we did not recognize any income related to an agreement arising from the 1993 IPO (inaudible) by Cooper.

Under this agreement Belden and Cooper made an election that increased the tax bases of certain Belden assets with Cooper entitled to 90% of the profits realized by Belden .

With the recent announcement by Belden of reduced forecasted earnings, we concluded that it was appropriate to take a conservative approach –to recognizing earnings under this agreement.

Our 2002 earnings under this agreement were $12m, are approximately 8 cents per share after U.S. income taxes which is about 2 cents per quarter.

We currently estimated that our future benefit from the Belden agreement to be in the $70m to $80m range.

However, we did not anticipate reporting income from this agreement until such time as Belden's business conditions improve.

In 2002 we also locked in our long-term debt structure, and as of March 31st, 2003, we did not have any debentures due until 2005.

We accomplished this through the issuance of $570m in long-term fixed rate debt, replacing all of our commercial paper borrowed.

The impact of the interest rate increase over 2002 was $4.4m in additional expense, offset by reduction of $1.2m in expense as a result of lower net debt levels.

Our effective tax rate was 20% in the first quarter of 2003, compared to 31.75% in the first quarter of 2002.

Using a 20% rate for both quarters, the 2002 earnings per share would have been 61 cents.

In addition, as discussed in our outlook for 2003, Cooper, like a number of other companies, has had to absorb abnormally high increases in the actuarially derived pension and other post employment benefit expenses due to the decline in the interest rate and the stock market performance over the last two years.

We have also had to absorb large increases in insurance costs and double-digit health care cost increases.

These three items alone decrease third quarter earnings per share by approximately 5 cents per share.

In summary, we obtained a 9 cents per share benefit from the inversion, a 2 cents per share decrease due to the absence of Belden income, a 3 cents per share decrease from expensing off stock compensation and restructuring our debt profile, and a 5 cents decrease from increased pension and other post employment costs, employee medical costs and insurance cost increases.

In other words, despite overall lower revenues than the prior year quarter, a tough pricing environment, and significant cost increases, we delivered approximately 10 cents per share of other net operating cost reductions in the quarter.

And, very importantly, just about every one of our businesses delivered on the objective of meaningful margin improvement in the quarter.

I will turn to some specifics on our results.

For the quarter, our revenues were down 1.8% compared to the prior year, with our electrical product segment down 1.9% and our tools segment down 1.2%.

Translation, increased revenue, 1.7% for the quarter compared to the prior year, with translation increasing electrical product revenues 1.5% and tools revenues 2.9%.

There were mixed results across our business , driven to some extent by the uncertainties with the war and the overall economies around the world.

As expected, we continue to experience weak commercial construction, telecom, and utility markets.

Industrial markets, on the other hand, were mixed, and electronics showed improvements both in our busmen and tool businesses.

Our sales for the retail market were down slightly as a result of the standards change for ground fault indicator wiring devices where by the new product sales were limited as the old design was liquidated across the market and customers reduced overall inventory levels.

Overall, sequentially from the fourth quarter of 2002, we really did not see much change in the overall markets.

In our electrical products segment, we believe the markets we serve were down approximately 3% and pricing down between 1% and 2% compared to a year ago.

The good news is that we believe the pricing environment has improved over the last couple of quarters, and overall, will continue to improve throughout the year.

We believe the market and price declines were partially offset by new product introductions, representing slightly over 1% of sales and a slight increase in our market share.

Our sales in North America, through electrical distribution, were only down about 1% compared to the prior year quarter, indicating that our Cooper connection programs are beginning to gain traction.

In our tools business, we believe the markets we serve were overall down mid single digits compared to the year-ago period.

In these businesses, we are not experiencing net price deflation and new product introductions exceed 2% of sales.

The quarter was also impacted by $4m in lower assembly equipment shipments in the prior year quarter, relating primarily to the timing of shipment for these make-to-order products versus any real change in the market.

Just about every business contributed to higher gross margin in the quarter with our cost of goods sold declined 70.4% from 71.9% in the first quarter of 2002, and a sequential improvement of (inaudible) percent from the fourth quarter of 2002.

Sales mix overall positive for the quarter.

The majority of the improvement came from the significant cost reduction actions completed in 2002 that more than offset the significant medical insurance and other benefit cost increases.

Expense related to our factory closings announced in the fourth quarter of 2000 were not significant in the quarter as a majority of that expense that couldn't be accrued will begin hitting in the second quarter.

These projects are progressing on time, within budget, and we are on track to meet or exceed the planned cost reductions.

Turning to SG&A.

Selling general administrative for the quarter as a percentage of sales increased to 20.1% from 19% in the first quarter of 2002.

While the first quarter is historically the highest quarter of the year, there are a number of factors that influenced this increase.

Clearly, one of the discrete items that impacts comparability of SG&A with the prior year is the actuarial increase expense of pension plans resulting from the weak equities securities market in 2002 and 2001.

Let me explain why this impacts SG&A so dramatically.

Most of Cooper's hourly employees participate in defining contribution plans which are not impacted by any increase in pension expense.

On the other hand, substantially all U.S. salaried employees participated in the Cooper's U.S. pension plan.

With over 50% of salaried employees included in SG&A, the increase in pension expense for the year of in excess of $10m disproportionately hits SG&A expense.

Another year-to-year substantial increase results from what's happening in insurance markets over the past year.

From a total SG&A expense perspective, we are up $7.1m for the first quarter over the prior-year quarter, and a relatively similar amount compared to most quarters in 2002.

In dollar terms, SG&A increased in excess of $3m as a result of translating our international operations into U.S. dollars.

Increases in medical, pensions, and insurance increased expense in excess of $4m, and our stock-based compensation $2.2m over 2002.

In addition, in 2003, we have established the Cooper connection regional sales force and are continuing to invest in our company-wide initiatives to improve productivity and reduce our cost structure.

In summary, we had a net increase in SG&A, excluding translation of approximately $4m.

Our fourth quarter restructuring and other productivity initiatives are estimated at a reduced SG&A by in excess of $5m.

These improvements were more than offset by the substantial increases I discussed, as well as our investments for the future.

It is important to note that we are purposely not bringing our sales and marketing costs down prorate with 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.

While we continue to drive down costs and are not being short sighted in making the investments we believe are prudent for the future success of the company.

Said another way, our strategy is to position the company for growth, invest in initiatives that will substantially reduce our cost structure over the next few years.

We do not anticipate that SG&A as a percentage of sales will -- I'm sorry, we do anticipate that SG&A as a percentage of sales will decline in subsequent quarters with the normal seasonality of revenues and continued benefits from efforts to control costs.

Flipping over to our segment reporting, I'll start out by discussing general corporate and other expense.

For the first quarter of 2003, we reported $16m in general corporate and other expense compared to $8.7m in the comparable quarter of 2002.

The majority of the items impacting SG&A on the traditional income statement also impact general, corporate, and other in the segment presentation.

Specifically, increase in our stock-based compensation of approximately $2.2m.

In regard to insurance, medical, and pension and other post-employment benefits, the corporate other expense bears a disproportionate share of the increase in expense.

This resulted in two factors.

First, corporate incurs the expense for general liability insurance.

Second, corporate absorbs all pension and medical expense related to former employees that that were part of divested businesses unrelated to our electrical and tools businesses.

However, the most significant item driving the increase in general corporate and other relates to the $3m of Belden income in 2002.

Historically, items such as the Belden income have been so small that they do not deserve a separate line item and have been included as part of cost of sales.

In addition, other than the Belden income, which has been very consistent amount each quarter -- there have not been any significant other income amounts.

As we reported Belden income in 2003, our cost of sales as a percentage of revenue would have been 70.1% versus 70.4% reported.

Our net income would have been $58.6m and our earnings per share would have been 63 cents.

Aside from the difficult market conditions and cost pressures, we delivered a very nice increase in our return on sales.

Our electrical products segment return on sales increased to 13.2% from 12.5% in the first quarter of 2002, and from 11.8% in the fourth quarter of 2002.

As I mentioned earlier, we had meaningful improvement in just about every business during the quarter as the 2002 cost reduction actions and efficiencies were delivered.

Our tools segment return on sales increased to 4.2% and 3.2% in the first quarter of 2002; however, decreased from the 6.3% reported in the fourth quarter of 2002.

While sequential improvements are being realized in both tool businesses, the return on sales is skewed by the relatively small dollars reported for earnings.

By any measure, it was a tough operating environment in the first quarter.

However, even with increasing costs in certain areas and lower revenues compared to the first quarter of 2002, we did deliver overall on our plan for the first quarter.

With that, I will turn it over to Rich to provide a few more details.

Thank you, Terry and John.

As is our usual practice, let me circle this around and take a look at our two businesses in terms of how they performed on a geographic basis during this past quarter.

First with electrical products, where overall revenues were down 2%.

In North America we saw our revenues for electrical products decline in the neighborhood of 3 to 5%.

Where the primary influence has been the continued softness in commercial construction markets and some retail channel inventory adjustments that have led to slightly lower sales of lighting fixtures and wiring devices.

The utility product marketplace, that is demand for transformers and related power products, is off once again as continued uncertainty in the regulatory environment affects investments in the capital projects that are so important to this business area.

We have seen some stabilization of industrial markets that have contributed to modest revenue gains for our hazardous duty electrical products and for circle protection products.

However, in the project market area, that which is so important coming from energy and petro chemical demand for our hazardous duty electrical products, their demand continues to stay weak.

Lastly, demand for other electrical circuit protection products continues to pick up in a few selected electronic marketplaces.

In Europe, excluding translation, our revenues declined about 2 to 4%.

Here, the decline in construction markets have impacted overall the sales of lighting and security products, though this has been somewhat offset by market share gains in a few product areas.

In Latin America, excluding translation, our revenues have improved in the neighborhood of 15 to 20%.

Our growing presence in the Latin American marketplace is a direct result of our continuing efforts to grow our local business in Mexico and be a broader player in the Latin American market arena.

Turning to tools and hardware, where revenues declined overall 1%, in North America, our revenues were down approximately 2 to 4%.

Principally the result of slowing industrial markets and a drop in local airframe production.

This has been somewhat offset by improved demand for tools used in electronic assembly markets.

In Europe, excluding translation, our revenues declined 10 to 15%, and this is primarily differences in shipping schedules of large -- several large automotive related assembly equipment orders this year compared to last.

In Latin America, excluding translation, our revenues increased in the neighborhood of 5 to 10%.

Again, demand has been impacted by improved economic activity in this region and our growing presence in Mexico.

With that quick review of things as our businesses have performed around the world, let me turn this over to John Riley for some following comments.

Thanks, Rich.

Now, before we take questions, let's take a few minutes to cover two areas that Rich indeed receives questions on on a regular basis. asbestos and our view of the economy going forward.

First, I'm pleased to report, we've had very good recent asbestos experience.

We received less than 200 -- 200 new claims during the quarter, and resolved almost 4,000 claims, 3,950 to be exact, by quarter end.

During the quarter we also spend a lot of time working to resolve several other large blocks of claims.

And just this week we finalized approximately 13,400 of these claims.

As we stand today, our claims pending and average indemnity payments are both well below year-end 2002 levels.

Including these recent settlements, we now have roughly 54,000 claims pending, and our average indemnity claim is down to about 1,075.

Additionally, we're encouraged that the Federal-Mogul bankruptcy process is proceeding as expected, and that our government officials appear to be actively working to bring about an overall solution to the asbestos situation in general.

As I said, overall, some pretty good news here.

Let me conclude with a few comments on outlook.

Clearly, the economy remains our biggest challenge and realistically, we're doubtful we will see any improvement until the second half of the year.

That said, we're now conservatively estimating that the second quarter 2003 earnings will be in the range of 65 to 70 cents a share.

In light of current market conditions, we also now expect our earnings for the year will be at or near the low end of our previously stated 285 to 305 earnings per share range.

And consistent with the approach taken in the first quarter, you should know that these projections do not include any income from the agreement related to the 1993 IPO Belden.

As Terry mentioned, this agreement resulted in approximately $3m of pretax income per year -- per quarter and a aggregate about 8 cents of earnings per share for the year.

I'm going to ask Terry to give more details on our expectations for the quarter and the year.

Terry?

Thank you, John.

As John mentioned we are not forecasting significant economic changes from those experienced in the first quarter.

Our electrical products business, our outlook is for a similar decline in revenue as experienced in the first quarter.

That is comparing it to the second quarter of 2002.

In tools, reported revenues will probably be up double digits, due primarily to the shipment of two large assembly equipment orders versus any real market economical changes.

Our cost of sales as a percentage of revenue are forecast to improve greater than 50 basis points, excluding two assembly system shipments in the second quarter.

I want to make everybody aware of these shipments.

They totaled approximately $20m and they include components purchased and passed through to the customer at nominal markup, which will distort our reported improvement in cost of sales as a percentage of revenue in the second quarter.

Our cost of sales will also be absorbing in excess of $4m of expense in the second quarter related to the fourth quarter 2002 announced factory closings.

General and administrative expense are forecasted to be similar to the first quarter in dollar terms.

Our return on sales for electrical is forecasted to be 13%, plus or minus, and our tools returns on sales are forecast to be 4%, plus or minus.

As with cost of sales as a percentage of revenues, the tools return on sales will be depressed by the two largest assembly equipment shipments previously mentioned.

Interest expense and our income tax rate of 20% are expected to remain relatively constant with the first quarter reported amounts.

There are, however, two items that I will make everyone aware of that will impact the second quarter reported results.

First, for the second quarter of 2002 -- I'm sorry, for the second quarter, we will report an unfavorable comparison with the prior year related to our inversion.

We were required to retroactively adjust our effective tax rate for the calendar year 2002 during the second quarter, resulting in an abnormally low tax rate for the quarter.

This will result in approximately a 2 cents per share on the favorable impact for the inversion on results for the quarter.

Second, as disclosed in our annual report, we have a remaining accrual of $14.3m related to the 2001 strategic evaluation.

In the second quarter, it is very likely that our obligation for paying the accrued amounts will terminate, with no payment due, and we will reverse the accrual.

The net impact would be approximately 10 cents per share after U.S. federal income taxes.

Our outlook for the second quarter, importantly, does not include this item.

With that, I will turn it back over to John for some concluding remarks.

Thanks, Terry.

Well, we've given you lots of information this morning and lots of detail which we will be answering questions on in just a minute.

But let me summarize by saying that while we can't control the economy and its impact on the markets we serve, we can control our costs and we can maintain a course of prudent financial management, and we're sure we're doing that.

We're doing the right things by investing in programs that will provide what we call a sustainable competitive advantage, and our ongoing focus on programs to enhance our product offerings take advantage of our global manufacturing and sourcing opportunities and maximize our marketplace strengths, will ultimately reward all of our stakeholders.

With that, May, we will begin to take questions.

Thanks very much.

At this time, I would like to remind everyone, if you would like to ask a question, please press star and then the number one on your telephone key pad.

If you're on a speaker phone, please pick up the handset before asking your question.

Your first question comes from Bob Cornell.

Good afternoon, you guys.

Good morning, Bob.

How are you?

First question is, in the guidance of the year, the 285 to 305, does that include the dime that you just mentioned with regard to this reserve reversal here in the second quarter?

No, it does not, Bob.

Okay.

Well, you know, then the issue is, you know, if you look at that range, you know, the second half imputed range is like $1.59 to $1.74.

I don't think characteristically Cooper’s earnigs pattern in that second half loaded, I mean maybe give a little insight why the sort of market trends you see now will result in that level of earnings in the second half.

Bob, this is Rich Bajenski.

I'm going to start in here and let Terry chime in.

One of the factors to keep in mind as we look at the outcome for the year is the events -- or the projects in the fourth quarter charge are going to cost us some expense in the first quarter, as they have.

They're going to continue to cost us some expense in the second.

They're probably going to push to either side of break even in terms of P&L in the third, and they will be net positive contributing to earnings in the fourth.

So we're going to get that swing within the quarters and certainly --

You want to put some numbers on those things, Rich?

I think Terry gave you a net cost of about $4m in the second quarter.

We're looking for that to be about a break-even for the third quarter, and we're looking for about $5m or better cumulative benefit for the year, so I guess that means we need to have about a $10m benefit in the fourth quarter.

Mm-hmm.

Okay.

That would probably be the biggest swing factor on abnormal circumstances for us at this point in time.

I'll give Terry a chance to see if there's anything else that comes to mind on the numbers.

One follow-up while Terry thinks.

You said you missed the revenue target in the quarter.

Where was the miss and what are the trends in those businesses now?

I'd have to say that it was really across just about all of our businesses.

The quarter -- we were anticipating a relatively flat quarter originally, flat to maybe slightly, very slightly down.

And that, quite frankly, it came in a little bit weaker than that, and we're anticipating that in the second quarter, although there's pieces of the market where we continue to see some promising increases.

I mean, as we mentioned, the electronics market is starting to pick up; industrial market, albeit relatively flat, as Rich mentioned, had some promising areas in the MRO-type activity.

The misses, Bob, were in power systems and the utility spending side of the business.

I'd say that was one of the bigger misses, although their earnings actually came in pretty well, considering the volume shortfall that they had.

And then there were more moderate misses, compared to what we thought was going to happen -- this is not compared to last year but what we thought was going to happen, a little bit in wiring devices, a little bit in lighting, Crouse and Busman look reasonably good.

The lighting and wiring device shortfalls were modest, but -- and mostly related to modest shortfalls on the retail side of the business and on the commercial construction side of the business.

John, while you're on the phone, I mean, on your comments you mentioned this enterprise business system you're putting in place.

A lot of us lived through your implementation of SAP , going back a number of years.

What's going on here?

We need to live through this again?

I don't think use listen to it again.

I think we've got a very good program put in place.

We have decided to put in SAP across the company.

We'll do that first at two of our businesses that need new business systems, Crouse-Hinds and Lighting.

I think we've got a very good team mobilized both with the SAP side of the business and also our side of the business, and I'm pretty confident that we're going to put this thing in a reasonably efficient manner.

Certainly learned a lot of lessons in what we did in prior years at power systems and tools, but I'm feeling pretty good about it.

I'm even more encouraged after we've done some benchmarking work in terms of logistics cost and back-office costs, that there will be significant savings coming out of this program over the long-term.

So I'm feeling very good about it.

And I'll add one other comment to that.

We really only had one business that ran into trouble on the implementation in the past, and that business did a big-bang implementation.

It had a couple of other issues.

Actually, our other two businesses that implemented went fairly smoothly.

As John mentioned, we have learned a lot from that.

We also are taking a very pragmatic approach to how we are doing this, and I am very confident you won't see any disruptions as we move forward.

Bob, one clarification on your comment on the range.

What we've said is that we think -- we think a more appropriate number is the lower end of that range, and that does not include, as Terry said, any income from the reversal of this accrual that was set up regarding our strategic process, and obviously we're not anticipating any income in 2003 from the tax-sharing agreement with Belden.

We think the lower end of that range is probably a more appropriate number, considering the weakness in the market that we saw, general weakness in the market that we saw in the first quarter, that we're not really anticipating any big turn-around in the second quarter, but we are anticipating some modest improvement over time in the third and fourth quarters in that estimate.

Robert Cornell;

I got it.

Thanks.

Yup.

Your next question comes from Jeffrey Sprague.

Thanks.

Good afternoon.

Hi, Jeff.

How are you?

Good.

I'm doing good.

Thanks, John.

On the asbestos, I just wonder, you know, given that you've had some favorable trends, are you feeling -- I don't know.

Are you feeling any different about actually participating in the Mogul trust, or do you think your participation may be a little less costly to you from a cash contribution standpoint, given that the lawyers are on the run a little bit?

Any color commentary around that issue?

Well, yeah, it's a good question, and it's one that, frankly, I've thought about a lot.

And it is a fair question considering all of the things that are going on there.

I guess where I come out on it is that we would probably lean more towards participating in the Federal-Mogul trust, continuing to lean that way.

I'm not sure I have any real way of putting economic numbers on the different alternatives, but I do believe that certainty is probably worth a lot in this area as it relates to the market's perception of us and our future.

That said, I think that probably brings me back to the idea that participating in the trust, as long as the terms and conditions are reasonable, is probably the right way to go.

And that's kind of where we are at this point.

You know, things are changing in this market.

You've got this government discussion -- I think somebody mentioned to me -- I didn't see the article, but there is apparently an article in the New York times either yesterday or today --

Today.

-- about what's going on in Washington.

I think I know what it's all about.

It has to do with this master trust kind of thing.

So we're up to speed generally on those concepts.

But, again, you know, in my mind, it's a question of dollars and cents and reasonableness, and with the kicker being certainty versus uncertainty, and I think I'd lean more towards certainty.

the comment was also made about your distribution being down about 1% and you thought you gained share.

I looked at Granger, up 1% in the quarter.

I know they're a broader measure than the electrical channels.

Can you put color on whether you did better than the channel overall in the quarter?

One item on the Granger thing, if I recall from their numbers.

A lot of that came out of specialty markets, government-type arrangements they had, and I believe I had saw something that -- over in the real industrial markets, they were actually down.

Okay.

Let me add a little bit more color to that, if I can?

We've taken a look at some of the other recent announcements that have come up by some of our peers in this area, and it appears to us that the markets overall have been down and that our decline of about 1% has not been as steep as the market.

The examples we would look at would be Hubble electrical business, X – acquisitions and the Thomas electrical business, both of which were down in the mid single digit area, Panters and closure business which were down ever so slightly but still down year over year, examples of what's been going on in the market as we're trying to execute this Cooper Connection program across.

I think it's also fair to say that this last tranche of cost that we put in and manpower that we put in Cooper Connection, it's not fair at this early point to make measure of that investment.

I think that investment will show its merits and build over a two, three, four, five-quarter period of time.

But again, I guess, Jeff, one thing that is probably obvious in our answer to you, I think it's probably pretty clear that we're keeping an eye on what other people are doing and using that as a benchmark, a measurement, for how we're doing and how our investments are paying off.

That's one of the things we presented at your conference a while ago, and that is that is a measure of how we want to look at the business, and that's stay up with and outperform that peer group in terms of top-line growth.

And that will be the true test of how well all these investments pay off.

Right now it looks okay.

It looks okay.

Would you also just comment on electronics, you know, and what end markets you're actually seeing improvement and kind of the magnitude of the improvement?

Is it just bouncing off really depressed levels or has there been some measurable uptick in activity there?

This is Rich Bajenski.

I think the more proper characterization is a bouncing off of depressed levels.

From a prospective point of view, our electronics business today is probably no more than 2 to 3% of Cooper's overall revenues, and it's pretty well split between what goes to the telecom infrastructure marketplace, switching stations and so on, which are Busman-related products, as well as the personal communication devices, cell phones, Blackberries, pages and so on, which also are Busman products.

We're seeing the communication device marketplace, which went through a very -- well, prolonged period of downturn in late 2000, 2001, beginning to pick up again.

We're seeing those devices, with new features and such, get out in the marketplace, and there seems to be some growing activity in that area.

The telecom infrastructure marketplace, the Lucents, Nortels, and so on, are not putting a lot of new capital investment into capacity or major activity in their current structure, so we're not seeing a lot of demand for that type of product there.

Right.

Thanks a lot.

Your next question comes from Daniel Khoshaba.

(inaudible)I'm sitting in for Daniel Khoshaba.

How are you?

Hi John, how are you?

I'm well.

Thank you.

A little follow-up.

Can you give us a sense of where you are seeing the weakness in terms of replacement versus new demand, and also which product lines you are seeing pricing pressures in?

I'll take the question on the replacement versus product.

Actually, the MRO market place for Crouse-Hinds products has been one area of slight improvement for us in this fairly depressed industrial marketplace.

The project side of that business, which for Crouse is very dependent upon the energy and petrochemical build marketplace, continues to be soft.

In the commercial construction marketplace, there is a lot of renovation work continuing to go on, while the new structure marketplace has all the appearances of declines that will persist for a while yet, partly because of overbuilding, partly because of the current economic climate.

And we expect that we'll see that, the impact in our overall business, which, said differently, means we're going to be delivering more product to the marketplace through distributors and retail channels than we will deliver the market place through large product bids out of our electrical products area.

I think it's also fair to say that the residential side of the business is held -- has held up relatively well, both on new construction and renovation.

We did very well in the last couple of quarters on the incandescent lines, which are more residentially oriented, than fluorescent, for example, which would be more inclined to go into commercial building projects.

And it's also fair to say that I think almost all of the spending that you're seeing on the power system side of the business -- I wouldn't say all of it, but a good portion of it -- is now in maintenance and replacement and modest additions to systems -- modest system expansion as opposed to major projects which, frankly, just aren't getting the capital attention of the utilities -- for good reason.

Because these folks have some balance sheet issues that they need to get squared away, and they're working very hard to do that.

And one of the ways of doing that is to delay major capital expansions and just keep the systems that you have running, running on a consistent basis and upgrade them to the extent that you can afford to do it, and that's what we're seeing.

Okay.

Thanks.

In terms of pricing pressure ...

Terry?

On the pricing side, if you go from year to year, the highest pricing pressure has been on the lighting side of the business and the B-Line business, B-Line primarily driven to how much that marketplace has dropped.

A lot of excess capacity there.

When you look at it from a trend rate, we're really seeing, you know, quarter to quarter trend rate, you're really seeing -- well, we're looking at very little increase in pricing pressure period to period.

In fact, we'll see next quarter how well the increases in lighting stick.

Okay.

Thank you.

Your next question comes from Eli Lustgarten.

Good morning or afternoon, depending on where you are.

Hi Eli How are you?

Not bad.

I have a budget question.

The $16m SG&A corporate expense number in the segment is that the rate for the rest of the year, 16 and a quarter?

This is Rich Bajenski.

We expect our corporate expense for the year is going to be in the 65 to 70 range, so it's going to be --

60 and a quarter.

Pretty much so.

It may increase slightly, just from the -- purely from the impact of expensing options, Eli.

It won't be a huge number.

Okay.

But so it will be 16, 17m a quarter, something like that.

Roughly yes.

the 285 to 305 range that you gave at the beginning of the year, that originally included money from Belden, didn't it?

Yes.

In an effect to go to the lower end of the range, the only change is pulled out Belden.

You know, basically

285 to 305, if you were 295, you'd take out 8 cents, you're going to be 287.

That would put you down --

Simplistically, yes, that would be one way to approach it, Eli.

In fact, as we look at the current economic environment and the results in our businesses from the progress we've been putting in, things will be -- we're anticipating they will be a little bit different than they were before.

As we gave our forecast earlier in the year, we were looking for top-line growth in the neighborhood of 0 to 5%.

I think under the current circumstances, with what we've got behind us in the first quarter and the current activity in the marketplace, probably something in the neighborhood of 2 to 3% overall growth is probably more likely, sort of in the middle part of that range.

We think we will be do little bit better on the cost of goods sold of a percent of revenues.

We were looking at 50 basis point pop, improvement in that relationship.

Given where things are headed right now, we're comfortable that we'll do better than the 50 basis points.

On the other hand, we are going to have about a 50 basis point decrement to the relationship of, SG&A expense.

As we already noted coming from factors that are on our plate right now.

The interest expense looks roughly in the same ballpark, $75m to $80mm Our tax rates are not anticipated to vary from what we have forecast before.

I think all those taken into account, you can summarize it quickly by saying that the only real difference is that the Belden number is out of it.

In reality, we've seen some pluses and minuses.

Overall, we're happy with them.

I understand the conversation, but it just sounded like the real change through the lower end is just the Belden numbers.

The pluses and minuses do work out that way.

I think the real change from the upper end is the elimination of any income from Belden, plus a less optimistic view of getting from 0 to 5% on the top-side sales increase.

Eli, I would add to that that clearly the revenue side is weaker than we would like.

However, on the cost side, we are taking out more costs than we had projected.

So, you know, different components of it get you to about the same --

Same level, yeah.

Right.

In that light, if, on a segment basis, you talk about where you think margins for the electrical and tool and hardware will wind up for the end of the year?

Pretty much what we had earlier projected, Eli.

I think we will see our margins for electrical it will be in 13% or thereabouts range.

Maybe a little better if things continue to do as we think.

Tools will be in the 5% area.

And the real variability in the tools area, which can be variable, is going to depend upon the timing and the value of the shipments that Terry alluded to earlier.

Are there any more shipments in the -- in the second half of the year that we have to worry about timing issues?

We have some that could potentially ship in the fourth quarter, and that will have some impact on the margin number, as well as revenues reported for the business.

But those are not in the 285 to 305?

In the general forecasts, you don't have those shipments in there right now.

I think we have it in as an average project rate in the third and fourth quarter.

The reason we don't have the specifics in there, Eli, is when you get to the fourth quarter, a lot of those shipments depend on customer acceptance and his scheduling in terms of their expansion plan.

So we've basically averaged it in over a period of time.

One final question.

Federal-Mogul filing of its reorganization plan I think has a June 11th hearing.

My question is can you give us some timing of when the decision to be part of the trust is going to be made?

In Federal-Mogul -- you know, exit bankruptcy without having an agreement with you in some form?

Well, they could do that, I guess, if they wanted to --

But then you have a suit against them, don't up, if they abrogated?

I'm not sure about a suit.

I'd have to go back and look at what the details of all of that are.

Let me talk a little bit about the timing on it.

Number one, they filed their plan -- I guess it was yesterday or the day before, or another draft of the plan, let me put it that way.

It's quite an expansive document.

There is nothing in this document that, based on our preliminary look at it, surprised us at all.

It's very much in line.

There's still lots of Is to be dotted and Ts to be crossed and blanks to be filled in, many of which relate to situations with people like Cooper -- we're not the only one with some sort of contingent liability there.

So that has to be filled in.

I was not aware that they had set the date.

What I saw was that they had not set the date yet for the court hearing.

If what you say is true --

It might have changed.

Might have set one.

Whatever.

If what you say is true and the court has set the date for that, then that would lead me to conclude that the Court is giving them until that period of time to complete the document and also get the concurrence of all of the interested parties, which is the biggest piece of this going forward.

Now, all parties have to sign off on this agreement, this reorganization, in order for the court to ultimately approve the reorganization and for them to come out of bankruptcy.

And that's my -- the extent of my limited knowledge in terms of the legal aspects of the business.

But I think it's a good thing.

If the court sets a date.

Therefore, there will be pressure on all people to move along and get their act in order and get their position in this document and then get that approved by the various constituencies, which include the asbestos committee, the futures committee, and the creditors committee, as I understand it.

Thank you.

Operator, mindful of our time, we'll take one more question.

Your final question comes from Nicole Parent.

Good morning guys.

Good morning, Nicole.

Just to follow up on Eli's question, I'm not sure you clarified the cost savings in the quarter.

I'm also trying to get a sense, based on what you said with revenues, I think in the 2 to 3% for the full year now versus the prior range of 0 to 5.

I mean, given that that I think you said second quarter was going to be down, similar to first quarter.

So we are down 2%.

Margins are obviously coming in a little bit better.

To even get to the low end of the range, you're assuming kind of double digit increases in the back half of the year, which seem aggressive to me in light of the current environment.

And then I guess, could you just comment a little bit more on the cost savings that you're expecting for the full year versus margin impact?

In the first quarter your revenues missed my forecast but beat my OP.

Obviously the conversion rate is better.

How should we think about that for the year?

This is Rich.

A lot of questions in there.

And Nicole we may not get them all answered from a number perspective.

Let me put a profile of our businesses together for you for the year.

After the second quarter, which we think will be down.

Our estimate is that it will be down versus the prior year's second quarter, about the same order of magnitude as the first quarter was down from the first quarter.

From that point forward, we're basically looking for relatively flat revenues quarter to quarter on a sequential basis, which would show some nice increases versus last year, because last year's economic climate and Cooper's overall fortunes were basically declining through the second half of the year.

That should lead to something in the neighborhood of mid single digits types of year-over-year year increases in the third and fourth quarter.

We can reconcile with your schedule, but if we're not looking for double-digit increases in revenues, in either the quarter or the second half.

I would second that.

We need to do some work with you on that, Nicole, because we're not anywhere near double-digit increase year over year on revenues in the second half of the year in our estimates.

I think that's fair.

And I suspect --

There's a glitch here some place.

One of the items that I will point out is Rich's overall comment on revenues in the second quarter excludes this $20m or so on this assembly equipment shipments which, overall for the quarter, we could very well end up relatively flat on revenues.

Yeah, that's right.

Right.

Because it's included for the full year, right?

Yes, it is.

Exactly.

Yeah.

Okay.

And that's a significant point.

The net of it is, what Terry just said and, frankly, I think we're looking at, as I recall -- I don't have it right in front of me.

As I recall in the second half of the year we're looking at revenue increases in the 4 to 5% range year over year or something like that.

It's in that ballpark.

I guess on the margins.

Margins will be up -- we said plus or minus 50 basis points.

I think --

No --

Outlook meeting, and I think, Rich, we're probably up in the 50 to 100 basis points now.

Less than a hundred but certainly moving up above the 50 basis points.

I was more interested in the contribution this quarter versus the rest of the year.

You know, the mix versus cost restructuring benefits.

We're certainly going to get more benefits out of the cost restructuring in the fourth quarter than any other Q4 in quarter in the year.

One is because there will be less expenses coming up in that period of time, and we will get the cumulative benefit of all the changes that are being made.

So you will see that impacting the margins of both businesses, electrical and tools, in the fourth quarter on a progressive basis.

Great.

And I guess just one last question for Rich.

Could you give us a little bit more specificity by business of what the percent change in revenue actually was?

Sure.

I would be glad to do so.

If you look at the first quarter versus a year ago, we saw some moderate increases in our businesses -- less than 5% but nice moderate increases for Busman, Crouse-Hinds, versus a year ago.

We had relatively flat sales year to year for wiring devices.

We had moderate single digit declines of less than 5% in our lighting fixture business and year to year deadlines in the neighborhood of 5 to 10% of power systems for (inaudible) B-Line.

Those would all be excluding currency impacts to the extent that we can take them out.

Thanks.

You're most welcome.

May, I think that does it for today.

We appreciate everybody being with us.

Thanks for your time and attention, and obviously Rich will be available to answer any follow-up calls you may have about the information we've discussed on this morning's call.

But we'll look forward to seeing you again -- I guess we'll see some of you at the EPG conference coming up in a couple of weeks, and we'll have our next conference call sometime in --

In July.

-- in July.

Thanks.

Thanks very much.

This concludes today's Cooper Industries first quarter earnings conference call.

You may now disconnect.