伊頓 (ETN) 2003 Q2 法說會逐字稿

About afternoon.

My name is Tahshiba and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Cooper Industries second 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 simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question press star then 2.

Thank you.

Mr. Bajenski, you may begin your conference.

Welcome everyone.

Before we proceed with our call this afternoon 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 rare various risks and uncertainties many of which are outside the control of the company such as the level of market demand, competitive pressures, and future economic conditions.

A discussion of these issues are on the form 10-K and other Securities & Exchange S.E.C. filings.

In addition comments, made here may include nonGAAP financial measures.

Reconciliations of those measures to the most directly comparable GAAP measures are posted on the Cooper Website.

And finally this copy call is a copyrighted presentation of Cooper Industries Ltd. and intended for the exclusive use of the audience.

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

Having said that, let me turn this over to John Riley, Chairman, President and Chief Executive Officer of Cooper Industries, Ltd.

We appreciate your continuing interest in Cooper.

Despite some very tough market conditions I think most people would agree that we performed pretty well during a very difficult period.

Our revenues held up well, exceeding $1 billion for the quarter.

Our core earnings for the quarter totaled 69 cents a share, the high end of our most recent projection for the period.

Our free cash flow for the quarter was just over $115 million.

Putting us squarely on track to meet or exceed our $275 million free cash flow objective for the year.

And our balance sheet continued to strengthen, taking into account $169 million of cash on hand at quarter end, our debt to total capitalization on June 30 was 35.4%, approaching the lower end of our targeted debt to total capitalization range.

Additionally, we were pleased to see sequentially improved margins for both our electrical products and tools businesses.

All in all, I think we had solid numbers that are headed in the right direction.

We also made very good progress advancing several important strategic initiatives during the quarter.

A look at our recent sales trends tells us that we continue to outperform our base markets.

Customer support for initiatives like our Cooper Connection program continue to increase, across the growing list of independent, regional, and national electrical wholesalers.

Our position in retail markets also remains on a positive trend.

Our cost position continues to improve as well.

We're seeing additional benefits from our strategic sourcing efforts, and the manufacturing capacity rationalization program we kicked off in the fourth quarter of last year.

This program is now poised to make a positive contribution to our third and fourth quarter earnings.

Finally, as we mentioned in this morning's press release, development of a new company wide enterprise business system that will tie together all of our operating units and allow us to further reduce our costs is now actively underway.

As we mentioned last quarter, this is a very large project that will be carefully put in place over the next 36 months.

A big project for sure, but the more our people get into it, the more excited they are about its potential.

With that overview, let me now turn things over to Terry and Rich to give you a more detailed look at our performance for the quarter.

Terry.

Thank you John.

First I'm going to start with discussing our cash flow statement and balance sheet.

As John mentioned, we reported free cash flow for the second quarter of $116 million bringing the year to date free cash flow to $90 million.

This compares with $163 million through June 30th, 2002.

As you recall, the full year 2002 was a record year, with $428 million in free cash flow.

Our objective this year is for an excess of $275 million in free cash flow, and a net income conversion rate in excess of 100%.

Based on where we were at June 30th, we feel very confident about achieving this objective.

For the first six months cash flow from changes in offering working capital which is defined as receivables inventory and accounts payable was an investment of $65 million compared to a liquidation of $16 million in the prior first half.

We've built $18 million during the first half of 2003 of inventory, versus a reduction of $58 million in 2002.

The inventory build we had in the first quarter of 2003 was reduced by $31 million, as the temporary build we encountered in the first quarter as we closed factories and relocated product lines, were partially liquidated.

At this point, our only significant inventory build is our power tools business due to plant moves and the increased level of business in our assembly equipment.

Most of our businesses are running at lower inventory levels than December 31st, 2002.

Reflective of these improvements is our inventory turns for the six months of 2003 improving to 4.7 turns compared to 4.4 turns in the comparable period of 2002.

In the first half of 2003, days sales outstanding decreased four days compared to 2002 and receivables as a percentage of sales declined 18.9% from 19.9% in 2002.

We're continuing our efforts to drive improved days sales outstanding and inventory turns which we consider the real measurements of sustainable improvements.

We also benefited in the first half of 2003 from our new tax structure implemented in May 2002.

With deferred tax expense of $44 million greater than the comparable period in 2002.

The only other significant change between periods from operating activity is the change in other assets and liabilities.

In 2002 in this area, we generated $22 million, and in 2003 used $15 million.

This difference of $37 million relates primarily to timing differences on prepayments for employee benefits other than pensions, and corresponds to the increase in other current assets on our balance sheet.

Our capital expenditures year to date were about $6.1 million higher than the prior-year period.

Over half of this increase relates to payments on our enterprise business systems.

From the proceeds of our 2002 long term debt issuances we repaid debt maturities of $167 million in the first half, which reduced our debt to total capitalization to 38.6% at June 30th.

This compares to 41.8% at December 31st, 2002.

We also ended the quarter with $169 million of cash.

As John mentioned, our debt to total capitalization net of cash was 35.4% at June 30th, compared to 36.2% at December 31st, 2002.

We did not purchase shares of our common stock in the second quarter.

However, in the first quarter we did purchase 152,500 shares of common stock for $5.4 million.

Clearly, our balance sheet remains in great shape.

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

The results for the second quarter and first half are right in line with the guidance we provided earlier in the quarter.

Overall, we continue to navigate choppy waters on the revenue side with no clear trends.

April was a good month, May was weak, and June, especially the latter half of the month, relatively strong.

As I noted in the first quarter conference call, an accrual for financial advisor fees recorded at the end of 2001 related to the strategic alternative evaluation, would likely be reversed in the second quarter.

This accrual totaled $14.3 million and was established in 2001 with a U.S. tax rate of 40%.

The reversal of this accrual had an after-tax benefit in the quarter of $8.6 million, which is equal to 9 cents per share.

The higher effective tax rate on this item increased our effective tax rate to 23% for the quarter.

Excluding this item, our second quarter tax rate was 20%.

The same rate as the first quarter.

The background on this accrual was, in end of 2001, we recorded the contractual amount due for strategic or for financial advisors.

In the second quarter of 2002, that agreement was renegotiated.

And in the second quarter of this year, those conditions that were prevalent in that agreement expired, hence the accrual was reversed.

Turning next to income taxes.

In the second quarter of 2002, we consummated our reincorporation and accordingly reported a tax rate in the second quarter that brought our year to date rate in line with our new lower rate.

As a result, our effective tax rate was 17.3% in the second quarter of 2002.

This brought the effective rate for the first half of 2002 to 23.7%, equal to the annual rate for all of 2002.

In other words, the second quarter of 2002 included a 6 cent per share effective tax rate catch up to increased second quarter earnings and decreased first quarter earnings by the same amount with no impact for the six-month effective tax rate.

Our full year 2003 effective tax rate, exclusive of the impact to the accrual reversal is lower than 2002, primarily as a result of the benefit from our reincorporation for a full year in 2003.

Using a 20% rate for both 2003 and 2002 quarters, excluding the impact of the accrual reversal results from earnings per share of 69 cents and 76 cents comparable.

The comparability of our second quarter 2003 results with the second quarter of 2002 results was also impacted by Cooper adopting a new method of accounting for stock based compensation effect effective January 1st in this year.

Also, the lack of any Belden (ph) income in 2003, the change during 2002 in our debt structure through issuance of long term fixed rate debt and significant increases in insurance and pension expense.

I'll put some numbers to these impacts.

In the second quarter of 2003 our total expense related to stock-based compensation increased $4.5 million over the comparable quarter of 2002.

As we have previously discussed, we voluntarily adopted the new accounting requirements to expense all stock-based compensation.

The second quarter increase in expense is greater than the first quarter driven by two items.

First, the grants were made in February, resulting in the first quarter not reflecting a full three months of expense.

Second, the second quarter of 2002, performance share payout expectations were decreased as a result of economic downturn.

You should expect an incremental expense over 2002 of $3 the million to $4 million in each of the third and four quarters of 2003 for this item.

As with the first quarter of 2003, we did not recognize any income related to an agreement arising from the 1993 IPO of Belden by Cooper.

Under this agreement, Cooper is entitled to 90% of the benefit realized by Belden on a tax step-up in assets.

Belden's ability to realize benefit is driven by their taxable income.

We've taken a conservative approach to recognizing earnings under this agreement.

Our 2002 earnings were $12 million or 8 cents a share after income taxes, or about 2 cents per quarter.

As I mentioned in last quarter's conference call, we do have approximately $70 million to $80 million of future benefits that we could realize under this agreement.

However, we do not anticipate reporting income until such time as Belden's business conditions approximately $70 million to $80 million of future benefits that we could realize under this agreement.

However, we do not anticipate reporting income until such time as Belden's business conditions improve.

The decision during the first quarter of 2003 to suspend recognition of Belden income will reduce our 2000 earnings by 10 cents a share, which is in the guidance we provided.

In 2002, the locking-in of long term debt was accomplished through the $575 million of long term fixed rate debt.

This replaced all commercial paper borrowings.

Impact to us was a $3.4 million increase in additional expense related to the rate differences.

This increase was offset by $1.3 million in reduced expense due to lower debt levels.

In addition, as discussed in our outlook for 2003, Cooper, like a number of companies, has had to absorb continued increases in pension and other postemployment benefits.

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

These items decreased second quarter earnings per share by approximately 5 cents per share.

In summary, comparing earnings per share from the second quarter of 2002 to the second quarter of 2003, the effective tax rate difference cost us 2 cents, exclusive of the accrual reversal in 2003, not recognizing Belden income, 2 cents, higher stock based compensation expense 4 cents, higher interest expense 2 cents.

Increased pension and other postemployment benefits, medical and insurance, increased our expense 5 cents.

In other words, despite tough economic conditions that especially impact our higher margin product lines, a tough pricing environment and significant cost increases we delivered a nice improvement from other net operating activities in the quarter.

Turning to some specifics on our results.

For the first quarter, our revenues increased 1%, compared to the prior year, with our electrical products segment down .5%.

And our tools segment up 8.9%.

Translations increased revenue of approximately 2.5% for the quarter compared to the prior year, with translations increasing electrical products revenues 2%, and tools revenues 5%.

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

Industrial markets were mixed and retail showed a nice improvement.

Overall sequentially from the first quarter of 2003, revenues were up 5.5% with electrical up 4.3% and tools up 11.9%.

Pricing remains competitive in the slow markets, but not at the levels experienced in 2002.

In our Tools businesses, pricing overall is relatively flat.

The quarter was impacted by $10 million in higher international assembly equipment shipments in the prior-year quarter.

For tools, we have a fairly high backlog in the international assembly equipment business that will continue to drive year-over-year sales improvement.

With the weak aviation, automotive and industrial markets for power tools, we're very pleased to have this business.

While the initial orders are at lower margins, incumbency is important to us and provides us with a nice ongoing opportunity for tools and replacement components.

However, the higher proportion of lower margin assembly equipment business will impact average margins for this segment.

Most of our businesses contributed to higher gross margins in the quarter, with our cost of goods sold declining to 70.9% from 71.6% in the second quarter of 2002.

Electrical products cost of goods sold was 70%, the same as the first quarter of 2003.

Tools cost of goods sold increased to 76% from 73% in the first quarter of 2003, primarily as a result of lower margin assembly equipment sales, in the second quarter, and factory relocations.

A majority of the overall improvement came from the significant cost reduction (inaudible) in 2002 that more than offset the significant medical, insurance and other benefit cost increases.

Expenses related to our factory closings announced in the fourth quarter of 2002 had a negative impact of approximately $2 million on our Tools performance.

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

Selling general and administrative for the quarter as a percent of sales increased to 19.3% from 17.8% in the second quarter of 2002 while improving from the 20.1% reported in the first quarter of 2003.

Disbaz's (ph) impacted greater than cost of goods sold on our pension cost increases, as Cooper has a salaried pension plan and really does not have a lot of employees covered under pension plans on the hourly side.

So this expense hits SG&A much greater than other areas on our income statement.

Other factors significantly impacting SG&A is what's happened in the insurance markets over the past year.

From a total SG&A expense perspective, we are up $17.1 million for the second quarter over the prior year quarter, and $2.6 million sequentially from the first quarter of 2003.

This sequential increase from the first quarter is primarily volume-driven.

In dollar terms, SG&A increased in the second quarter compared to the second quarter of 2002 in excess of $4 million, as a result of translating our international operations into U.S. dollars.

Increases in medical, pension insurance, increased in excess of $5 million.

Our stock based compensation increased expense $4.5 million and in addition, as John mentioned, we have established several initiatives that are going to position us moving forward, including Cooper Connection, regional sales forces and other productivity improvement programs.

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 cost.

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

We report $16.9 in general corporate and other expense compared to $16 million in the first quarter of 2003, and $5.1 million 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.

Increase in stock based compensation for the full second quarter versus part of a quarter in the first quarter was the primary driver of the increase, sequential increase.

The increase from the prior-year quarter relates to the same items discussed in the first quarter conference call and in our outlook presented in February 2003.

That is, stock-based compensation $4.5 million, increased medical pension and other, disproportionately impacts corporate, general due to the fact that discontinued operations benefits go into this tool -- into this line.

And, a significant item increasing general corporate and other relates to the $3 million of Belden income of 2002 versus zero in 2003.

Looking at margins.

Aside from the difficult market conditions and cost pressures we delivered a very nice increase in segment earns earnings.

Compared to the first quarter our segment earnings improvement is tempered by sales mix and our plant closing and product line relocations.

No surprises here on the plant closings and product line relocations, in that the first quarter we know that most of the disruption expense would occur in the second quarter.

The direct incremental net expense of our facility closings was slightly more than $2 million primarily impacting tools.

As you know, taking down production lines and bringing them back up in another location is naturally disruptive and involves a new learning process at the new location that does not occur on Day 1.

We are over the hump on the relocations and are on track for improved performance in the third and fourth quarter.

Our electrical products segment return on sales increased to 13% from 12.8% in the second quarter of 2002 and from 12.5% in the first quarter of 2003.

We had meaningful improvement in most of our businesses during the quarter, as the 2002 cost reduction actions and efficiencies were delivered.

Electrical products return on sales earnings improvements are somewhat tempered by our sales mix.

In the first quarter of 2003, the retail side of our business was down slightly compared to the first quarter of 2002.

As we had forecasted, the second quarter retail sales were up double digit compared to 2002, offsetting most of the weakness in the nonresidential construction markets.

With the retail side of our business is more skewed to high volume, lower margin (inaudible) products than our traditional channel.

Our tools segment return on sales increased to 4.1% from 2.5% in the second quarter of 2002, and is on par with the 4.2% in the first quarter of 2003.

This year's second quarter margin and earnings for tools were low due to a loss on -- the prior year it had a loss on dollar-denominated loan.

The current year's margin and earnings are impacted by the expenses and disruptions of factory closings and the shipments of assembly equipment orders.

By any measure, it continues to be a tough offering environment in the second quarter.

However, even with increasing costs in certain areas we delivered overall on our plan for the second quarter.

First half results, revenues declined .4% compared to the same period in 2002, with electrical down 1.2% and tools up 3.9. translation, increased electrical sales, 2% and tools sales 4%.

With that, I'll turn it over to Rich, who will bring you some more details on our geographics and specific business results.

Thank you Terry.

Looking at our businesses on a segment basis across the global arena, first electrical products where revenues for this quarter were down less than 1%.

Our revenues there were achieved by a contribution from translation of approximately 2% which offset a decline in the prior year's base of about 2% for a net decline of just slightly less than 1% year on year.

Looking across the business geographically in North America, our revenues for our electrical businesses were off in the neighborhood of 3% to 5%, with continued softness in the commercial and construction markets having led to lower sales in this market for lighting fixtures, wiring devices and electrical support products.

In addition utility product demand continues to be off as the continued uncertainty in the regulatory environment (audiocut-off)

hello, operator?

Yes, may I continue?

Yes, sir.

Sorry.

We had an interruption in our telephone hookup.

Repeating on Latin American, excluding translation, revenues were relatively flat in our Latin American marketplace.

And moving on to Asia Pacific we saw a decline of about five to 10% in the fast growing though somewhat volatile marketplace.

In the tools and hardware area, as Terry mentioned our revenues were up 9% this past quarter, versus the prior year, with a solid 4% increase in the core business and in addition, about 5% from translation.

In North America our revenues declined approximately 2% to 4%, principally the result of soft industrial markets and a drop in the airframe production area.

Europe, our revenues increased in the neighborhood of 20% to 25%, primarily this difference reflects the very strong shipping schedules of the several large automotive related assembly equipment orders that have been referenced earlier.

In Latin America, excluding translation our revenues were up approximately 10% with growth continuing to grow in this region particularly in Mexico and in Asia we continue to experience modest growth in this area as well.

Well, that's my quick summary on the geographic basis.

To John Riley, I'll turn this over to some follow-up comments.

Thanks Rich.

Moving on to address any questions you may have he I'd like to bring you up to date on the latest information we have regarding the Federal Mogul situation.

First I'm pleased to report that our ABEX claims filed versus claims resolved activity was quite favorable.

We received 5,438 claims during the period, we resolved 14,748 over the same time period.

Our pending claims dropped to 58,050 compared to 67,360 pending and the end of the first quarter.

The average indemnity payment for claims settled declined as well.

That number stands at $1166 per claim, compared to $1368 at the end of the first quarter.

During the quarter we also continued to have dialogue with parties working on Federal Mogul's plan of reorganization and, it seems clear to us that Federal Mogul up is working hard to expedite the filing of their plan with the bankruptcy court although no court hearing date has yet been scheduled.

The exact timing of that filing will of course be controlled with Federal Mogul as they work through various aspects of that plan.

In the meantime I think our folks have done a very good job managing this situation and we expect this fine performance to continue through resolution of this matter.

Moving on to our outlook for the balance of the year, let me begin by saying that there's quite a persistently negative environment, our sales have held up Reasonably well to date.

We're pleased with that and we are encouraged that some people are predicting that the manufacturing sector of the nation's economy is about to begin a period of slow, steady improvement.

That said, we remain cautious about the near term outlook for our markets.

While we expect residential construction and retail spending to hold up reasonably well, and we're encouraged that some part of our industrial and electronic markets have shown modest signs of life, we're concerned with the economic situation in Europe and are quite sure that commercial construction and telecom markets will remain depressed for some time to come.

Based on this, we're forecasting that our third quarter 2003 earnings will be in the range of 73 to 77 cents a share, and that our earnings for all of 2003 will be in the range of $2.80 to $2.85 per share.

Now, just to be clear these projections do not include any income from the agreement related to the 1993 public offering of Belden that Terry mentioned, which contributed 8 cents per share to our earnings last year.

Additionally our projection for this year excludes the 9 cent restructuring reversal included in our second quarter results.

Terry is now going to give you a short list of details supporting our projections for the quarter and the year.

Terry.

Thanks John.

For electrical products business, our outlook is for a two to 3% revenue increase over the prior-year quarter.

The forecast increase assumes some pickup in economic activity and the normal summer increased volume.

In tools, reported revenues will probably be up 15% to 20%.

The increase is primarily related to translation in assembly equipment shipments.

Other than this we are not anticipating much improvement in the tool market conditions.

Our cost of sales as a percentage of revenue are forecast to improve further in electrical products.

However, cost of sales for tools and hardware as a percentage of revenue are expected to increase, primarily as a result of the increased proportion of assembly equipment sales.

Overall, costs of sales will be relatively flat compared to the prior year.

Selling and general administrative expenses are forecast to trend favorably as a percentage of revenue from the leveraged increased in sales and continuing actions to control cost.

Our return on sales for electrical is forecasted to be greater than 13%, and for tools, to be 5% plus or minus.

Interest expense, in our income tax rate of 20% are expected to remain relatively constant with the second quarter.

With that, I'll turn it back to John.

I think it's now time to take our questions from our listeners.

But before I begin to lose some of you or possibly lose some of you, let me remind you that we will be hosting our mid year analyst conference on August 20th.

In the Atlanta area.

We have a good group signed up already and look forward to others joining us as well.

If you've misplaced your invitation and response card please feel free to call or e-mail Richard Bajenski's office.

Tashiba it's time to take our first question.

If you would like to ask a question please press star then the number 1 on your telephone key pad.

Our first question comes from Dan Koshaba of Deutsche Banc.

Hi guys.

I think it was Terry that said at the end of the quarter you guys had seen some strength in some businesses.

Question A, what businesses did you see some pickup, and then B have has that continued into the first few weeks of July?

Dan, this is Terry.

I have to say it was pretty consistent across all of our businesses.

In fact it was consistent across all the businesses.

A pretty significant pickup toward the end of the second half of June.

Looking into July, it's very difficult to predict with the way the marketplaces are now, reacting, it's up and down, so at this point we're hopeful it's a continuing trend but you know, being cautious.

Right.

Okay.

Was that demand coming primarily

from distributors who were restocking or were they seeing increased, you know, demand at the --

Dan, are you there?

Hello?

Tashiba?

Yes, sir.

I'm sorry are we cut off there?

Mr. --

Let me answer Dan's question.

I'm assuming that everybody is still remaining on the line.

The question was did we see that coming from Distributors?

And indeed did they see that coming from their end users as opposed to inventory restocking and things like that?

I think for the most part the inventory situation at the distributor level is in pretty good shape right now.

They've been draining down inventories now for probably the last 12 to 18 months, maybe even 24 months.

So we don't consider the inventory levels out in the field to be a big problem anymore for us in terms of draining down inventories.

I'd have to say that most of these distributors probably placed these orders to satisfy customer needs and/or to prepare for what he they think would be the normal seasonal upturn of building in the third quarter.

Your next question comes from Tony Bose from A.G. Edwards.

On the $2 million for expense in tools for the second quarter, is that gone by the third quarter and would you see the full benefit of that in the third quarter, and how much would be offset just by I guess the mix?

For tools in the third quarter, the expense will be lower, but they will still be incurring expenses.

The factory is closed but they're in the process of bringing those production lines up.

Overall we will have a net benefit in the third quarter, because electrical is through a couple of their big news.

The mix side of it on our power tool business, the assembly piece of that business is creeping up toward the 40% to 50% of that total business, which doesn't have a negative impact on our margins.

So at this point, we believe that it will end up being around the 5% ROS in the third quarter.

In the fourth quarter we will see some pickup, as the restructuring is behind us.

Tony, I don't have my schedule right in front of me.

Apologize for that.

But -- excuse me -- I think we were talking about closing something like ten, 11, 12 plants here.

And at this point we're pretty much about three-quarters of the way through closing those facilities.

The remaining plants will be finished up over the next two quarters.

And I think the way we have looked at these numbers and run them is that we've had a net cost in the first and second quarters of this year that will turn modestly positive in the third quarter and then significantly positive in the fourth quarter of this year.

But in terms of overall tracking, in terms of our goal to take the roughly $35 million worth of total cost out of the equation, which will see a lot of benefit in 2004 from, I think we're pretty much right on that schedule, if not a little bit ahead of that schedule.

And it appears to me that the cost of closing will be very much in line with the reserve that we established for that.

Now, obviously, we're taking some of this expense to P&L, on a pay as you go basis, because of the accounting rules.

But all in all, I think that whole -- that whole capacity rationalization is on hand and in hand so to speak.

What would get to you a 77 cent number for the third quarter or a $2.85 for the full year?

Well, I think it all depends on what happens in the markets and demand.

I think that's the real swinging number in the whole equation.

I'm very comfortable with the cost side of the equation, in terms of what we're doing.

I have no doubt we're doing the right things.

I think our people have done a very good job tightening down where they can, without sacrificing expenses that are going to give us future benefits, like these plant closing programs or Cooper Connection or those kinds of programs.

And so it really comes down to from here on out the volume side of the equation, to get us to the higher end of those numbers.

And lastly, have you talked -- ever -- about kind of a leverage number so for every incremental dollar or sale?

What does that -- what actually drops to the bottom line?

I haven't done that.

I guess we've gotten those numbers, we've looked at those numbers but we've never really talked about it.

But obviously with the kind of margins overall that we have in our business, if you look at past margin performance of these business in better times it gives you a pretty good sense that there's significant leveraging potential, with not significant volume increases here.

So you know, the argument has always been, what are the peak margins of businesses?

Certainly in better pricing times, everybody knows what they were.

Everybody can do those calculations.

But they are obviously significant.

Our electrical businesses are capable of producing margins significantly higher than the 13% level and obviously the tools business, if we get some activity in the aerospace and automotive and general industry area is fully capable of producing returns that are well in the double-digit range above the double-digit range.

So I think there is significant leveraging potential.

Thanks very much.

You're more than welcome.

Next question comes from Jeff Sprague of Smith Barney.

Hi.

Good morning Jeff.

Good morning, good afternoon.

John, I guess first on the issue of cash deployment, you are at the lower end of your leverage ratio, the cash flow's been pretty good.

How should we think about deployment of cash going forward, acquisition, share repurchase, dividends, kind of those and other alternatives you might be looking at?

Let me say from an overall standpoint I think Jeff, most people have understood that I've been -- my view is that we want to have a reasonably conservative balance sheet certainly during this transition period of time as we work our way through the Federal Mogul situation, No. 1.

So I don't think that changes until we get resolution in that matter, and then we'll know exactly where we are on the balance sheet.

But time will tell, what that answer is.

And I'm hopeful that we will have that answer, certainly, sooner rather than later.

But again, as I said that depends on the Federal Mogul people.

They're working hard on it.

I don't have any doubt in my mind about that.

So again, we're hopeful that that will be sooner rather than later.

As far as dividend is concerned, I think we pay a very fair and full dividend at this point.

That certainly has been enhanced with the tax rules in terms of the benefits from those dividends.

So I think we're in fairly good shape, certainly paying a dividend that's at the higher end of the range of our peer group.

And I don't see any reason to change that at this point.

That may change as we get through things with Federal Mogul but again time will tell on that.

In terms of the question of share buy-back, we've had a very nice improvement on our share price.

I'm happy with that.

I really would like to begin to add a bullet to our gun here, so to speak, going forward, and that is to get back into the building the businesses that we have through some complementary acquisitions.

We've been obviously very quiet on that front.

But I think ultimately, we will want to get back into that, in a moderate, in a measured way, that we can guarantee that we're going to get very significant returns out of whatever we do there.

So I think when the day is done it will come down to a reasonable balance between -- after we get the Federal Mogul situation put behind us, I think it will be a reasonable balance between investments in building our businesses both internally and externally through acquisitions, and the alternative, the obvious alternative, buying back shares.

Now, we haven't really even bought back our creep shares for this year yet.

So we may look at something modest in that regard over the second half of the year.

But I think that probably is the best expectation I can give you.

On the notion of acquisitions, John, would you characterize yourself in the recent past as kind of been in the flow of what's out there but just passing for the reasons you just mentioned.

Or have you really kind of, turned off the spotlight for a while, and now you're going to turn it back on and start searching a little bit more actively?

No, I think we've been in the flow of things.

I think we've basically seen everything that you've seen occur.

We've had a look at everything you've seen occur over the last six to 12 to 18 months.

Frankly, there were some things that we considered, and our view was that on a couple of these smaller ones, we had the capability to design and develop these product lines our self, and it would be a much more economical way for us to do that.

Frankly, I think you'll hear some of that when you're down at the lighting operation in August.

We'll have some examples of why we would go to internal development versus acquiring, and those generally would be product lines.

We've looked at some bigger things, obviously, and decided that frankly, they were not the kind of things that -- they were not the kind of properties we thought were worth the value that people were looking for.

So I don't think we're missing anything.

I think we're just obviously been very selective over the last six to 12 to 18 months.

And just one quick follow-up for Rich.

I dropped off the call somehow when you were doing your geographic review of electrical.

I got North America down 3 to 5.

Can you give me the other regions real quickly?

We seem to have had a communications glitch here but North America for electrical was down 3 to 5 Europe excluding translation was down about zero to 2.

Latin America was essentially flat and Asia Pacific was off slightly in the 5% to 10% range.

Thanks a lot.

Your next question comes from Masroor Siddiqui (ph) of Jefferies & Company.

Good afternoon.

Couple of questions, can you talk about the asbestos situation, John?

You touched on Federal Mogul and everything is proceeding there.

How does the Hatch asbestos bill potentially affect, if it's accretive, what would supersede what, if you could give clarity it would be a good thing.

The Hatch bill as I understand it, has been prepared.

And my understanding is that it's going to be released out of committee into the senate for discussion.

There is currently really no consensus backing on the Hatch bill.

There's some objections that we've read about from the insurance industry.

There are some objections from some of the larger manufacturing companies.

So I think if there is consensus on the Hatch bill, it will have to be hashed out in the full senate.

At least that's what our Washington folks are telling us.

And that is not an easy thing to do.

So I don't have any reason to put odds on this.

But there's a lot of work to be done for the Hatch bill to go through.

Having said that, I think from a manufacturing perspective, having a vehicle like the Hatch bill assuming the terms are reasonable would be a good thing from the standpoint of putting closure to this whole asbestos thing from an industry-wide perspective.

And it would be good for Cooper, it would be good for Federal Mogul, it would be good for a lot of people.

So I encourage those folks in Washington to give this due consideration and to go from there.

Having said that, I think we're doing okay, that we in terms of handling the situation, we've always said that we had decent insurance coverage.

We've always said that we had good experience handling these.

And I think that we will proceed to do that.

So that's about all I can tell you on that front.

I guess what I'm saying is, to put it another way, we're not sitting here waiting for the Hatch bill to bail us out of this situation.

We're working actively to work with the Federal Mogul people and to participate in what appears to be their desire to establish an asbestos trust to correct their problems.

Okay.

So to follow up on that then, what are the next couple of milestones you would point us towards in the Federal Mogul resolution?

I think the next milestone will be Federal Mogul's filing of their more expanded plan of reorganization.

I wish I could give you timing on that.

But I'm not in control of that.

That's a time frame that only Federal Mogul can give to the market.

But obviously, we're hopeful that that is sooner rather than later.

If I were going to put a quantity fire on sooner rather than later, I would say that we think that's going to happen, hopeful that's going to happen sometime late in the third quarter early in the fourth quarter.

But that's just a guess.

The last quick thing, I've been in and out of this call because of technical issues and others, I apologize, you've tightened the range from 280 to 285, and I heard some questions about operating leverage.

I guess my question would be the consensus numbers for 2004, I'm not sure you commented on them or not, do you feel there is enough operating leverage in the business to get back to those numbers or too early to say at this point?

To get to which numbers?

consensus '04 which is around the 3.30 range.

Rich may know better than I do but the only consensus that I know of is for 2003, I think that is a thorough consensus.

We have not yet put out a -- our view on 2004, and one shouldn't expect that until we've had a chance to do our own budgeting work and get a little closer to the end of the year and see what the state of the economy is.

Okay, thanks.

You're welcome.

Next question comes from Nicole Parent from Banc of America Securities.

Could you give us a little more color from individual business segment within individual product, wiring devices --

Glad to do that for you Nicole.

Year on year performance in the second quarter we saw a moderate increase in wiring device business, increase of less than 5% year on year.

Flat sales in our lighting business year on year, combination of good experience in the retail side and good support on the residential side, but continuing to be influenced on what's going on in commercial and industrial activity.

Moderate single digit declines in, and a year to year decline in the neighborhood of 5% to 10% in our power systems business, reflective of what's happening in the utility side.

Nicole, I'll add to that.

All of those businesses were up reasonably nicely.

Q2 over Q1.

With the -- well, I guess the exception, a little bit zero to five up on Cooper Lighting and I think the weakest business we would have had during the second quarter would have been the European business.

Okay.

I guess Rich, do you have an aim aggregate core number for the company in terms of revenues when you put it all out, is it down about 2%?

If you take the whole thing together with Cooper being up 1% on reported basis, we're down about 2% in core with 3 percentage point contribution coming out of translation.

Great.

And then one last question.

John I think you alluded in your final comments that you saw a little bit of strengthening in the electronics business.

Yesterday a competitor indicated that electronics looks like it's looking better.

What are you seeing there?

What I'm referring to is we've seen some pickup on that side of the business on the business that is primarily involved there that would be Bussmann.

And we've seen some increase in request for quoting activity on the packaging side of that business, out of the B-line business although B-line hasn't seen any real orders from that quoting activity yet.

What is the normal time lag?

The way things are going these days, it could be good one quarter and off another quarter.

Generally I see if things are moving in the right direction you're probably looking at something in the 90 to 180-daytime frame.

I don't think any of these things are going to turn around in the next 90 days.

I mean, you pretty much have visibility there.

The real question quill will be what's going to happen in the fourth quarter from a demand standpoint and then what's going to happen beginning in the first, second and third quarters of next year.

Thank you.

You're welcome.

One question.

Our last question comes from Michael Regan of CSFB.

John, how are you?

Fine thanks.

It sounds like your top line experience is kind of in line of what your biggest public competitors have talked about and they've all talked about increasingly or not increasingly but continued difficult price.

Given the low volumes, and it just remains a bit of a surprise, just given that you know these are relatively -- thee are markets where you guys all have relatively big share, and are smart competitors.

I'm just wondering kind of what gets people off the price game and stop beating each other up marriage wise and back to trying to drive good profitability and profit?

I guess Michael, the missing link in the whole equation at this point almost has to be back to this, what happens to volume?

And I think what we're all faced with is a situation where generally speaking, we're all moving some of our operations to lower-cost locations which is positive for margins.

On the other hand, it leaves some of the existing plants with lower capacity utilization rates than we typically have had in the past, and that's why you have to actively move to begin to consolidate that remaining capacity.

I mean, that's the bottom line reason for us taking ten to 12 plants out of the equation.

That takes some time.

But if volume comes back, I think with the combination of the reduced operational structure, as you take these plants out, with the combination of the cost savings that you can generate through some of the offshore manufacturing, I think that's what -- that will be a big plus in terms of the margin line.

Now --

But isn't it a bit of a zero-sum game, John, if everybody is doing it?

Yes.

I think the answer is in -- that in my mind should make people more aggressive on the price side of the equation.

We're getting a little bit of price on our lighting business.

But I have to tell you, not as much as we would like to get based on what we had originally anticipated.

And it's spotty.

One month it looks okay, the next month it looks lousy.

So I think that will be a question of where do the peak margins on these businesses that have historically had very high peak margins, where will they be in a lower-pricing environment?

And I think we're going to be prepared to answer that when we get to our meeting in August in Peach Tree City.

Do you think you'll be able to lay out a scenario in Peach Tree City that helps us know that in electrical you hit margins of 18%, looks like if you come in this year the trough will be at 12, you can lay out what you expect the peak and trough to be over the next cycle?

Absolutely.

I think frankly that's what we should be laying out for you.

I hope so.

That would be great.

Thank you.

Thank you Michael.

Thank you for your time and thanks for your time and attention.

I apologize for the technical glitch.

Obviously if there is information that any of you have missed that you always want to follow up on, I have the pleasure of telling people call Rich.

But please do that.

And don't forget, if you're planning on attending our analyst conference in August in Peachtree City outside of Atlanta, please get your reservation in so we can do the proper planning and treat you all well.

Thanks very much.

Thank you for participating in today's teleconference.

You may now all disconnect.