伊頓 (ETN) 2003 Q3 法說會逐字稿

Good afternoon.

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

At this time I will like to welcome everyone to the Cooper Industries’ third quarter earnings release conference call.

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

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

If you would like to ask a question during this time, press star and then the number one on your telephone key pad.

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

Thank you, Mr. Bajenski, you may begin your conference.

Thank you, Tony and welcome everyone to our 3rd quarter conference call.

With me today is John Riley, Chairman, President and Chief Executive Officer of Cooper Industries, and Terry Klebe, Senior Vice President and Chief Financial Officer.

Before we proceed with this conference call, let me remind everyone that comments made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements are subject to various risks and uncertainties, many of which are outside of the control of the company such as the level of market demand, competitive pressures and future economic conditions.

A full 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, reconciliations of those measures to the most directly comparable GAAP measures are posted on Cooper's website in the investor center at the management presentation section.

In addition, this call is a copywrited presentation of Cooper Industries, Ltd and is intended for the exclusive use of the participating audience.

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

Having said that, let me turn this over to John Riley.

H. John Riley, Jr.: Thanks, Rich, and good morning and thanks to you too for being with us.

This morning we will be discussing our 2003 third quarter results and our outlook for the balance of the year.

In a few minutes, Terry Klebe and Rich will be giving you more detailed reports on both of those subjects.

Before we do, I would like to give you my perspective on our 3rd quarter performance.

Simply stated, we are encouraged by what we saw in the quarter.

Indeed, it was one of our better quarters in some time.

Our sales totaled 1 billion 48 million up 5% over the same period last year.

Net income was $70.6 million compared to $63.2 million last year.

And our free cash flow remained very strong totaling $122 million for the quarter.

Now apart from the big numbers we are encouraged by several other things that we saw during the quarter.

Excluding the impact of currency, our core electrical product segment sales showed a positive year to year comparison for the first time since the second quarter of 2000.

In addition, our electrical margins improved once again to 13.4% up from 13% in the second quarter and 12.4% in last year's third quarter.

Our tools business also performed as expected for the quarter.

Sales totalled $185 million, up 21% from last year's $155 million.

Despite much of this increase being related to shipments of large automated assembly equipment systems, our margins held their own, more important, our hand tools business increased nicely during the quarter.

Again, something we haven't seen in quite some time.

Our balance sheet continued to strengthen.

Our debt-to-total capitalization, net of cash, at quarter end was 32%.

Down from 35.4% at the end of the second quarter, and 37.3% at the same time last year.

Our people are doing a great job on cash flow.

As we mentioned in our press release this morning, we are now forecasting that our free cash flow for the year will be comfortably in excess of $300 million, well above our original $275 million target we had previously established for the year.

And finally, we continue to make good progress advancing each of the five major initiatives we identified as critical for our future success.

Global expansion; marketing leverage, which we dubbed the Cooper Connection program;

Strategic sourcing; manufacturing productivity improvement ; and implementation of an integrated business system to improve information flow and ultimately reduce costs across the company.

With that, I will now turn things over to Terry and Rich who will give you more detail on our third quarter performance.

Thanks, John.

First I am going to discuss our cash flow and balance sheet starting with some additional granularity on our very strong free cash flow.

For the 9 months, cash flow from changes in operating working capital, defined as receivables, inventory and accounts payable was an investment of $50 million in 2003 compared to a contribution of $24 million in 2002.

The temporary inventory bills incurred in the first half of the year as we closed factories, relocated product lines, are pretty much behind us with an inventory reduction of $23 million for the first 9 months of 2003.

Importantly, our inventory turns for the first nine months of 2003 improved to 5 turns compared to 4.4 turns in the comparable period in 2002.

I'm pleased to report we are on track to meet or exceed the targets we set out for 2003 inventory management programs.

Turning to accounts receivable at September 30th, receivable days of sales outstanding improved two days compared to 2002.

And receivables as a percentage of sales improved to 19.2% from 19.6% in 2002.

While the statistics are an improvement from 2002 performance, we did lose some ground compared to the 2003 second quarter due to higher shipments in September including the large assembly equipment shipments John mentioned.

We will have a nice improvement in the fourth quarter.

We also benefited in 2003 from our new tax structure implemented in May of 2002 with year to date deferred income tax expense of $64 million greater than in the comparable period in 2002.

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

In 2002, we generated $43 million and in 2003 generated $1 million of cash.

This difference of $42 million primarily relates to the timing of prepayments for employee benefits, other than pensions, and the contribution to pension plans of $17 million in 2003 compared to $34 million in the first nine months of 2002.

Our capital expenditures year to date were about $11 million higher than the prior year period.

Over half of the increase relates to investment in our Enterprise Business System.

We now anticipate capital expenditures will end the year in the range of 80 to $90 million.

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

Year to date we have purchased 152,500 shares for a total of $5.4 million.

As John mentioned, our debt-to-total capitalization net of cash was 32% at September 30th compared to 36.2 at December 31st, 2002.

Clearly our balance sheet remains in great shape.

We have powerful additional debt capacity and we will have another very strong year generating free cash flow.

The results for the third quarter are right in line with the guidance we provided.

Earnings per share are up 10.3% on a 4.9% increase in revenue for the quarter compared to the prior year quarter.

The effective tax rate was 20% compared to 23.7% last year reflective of the May 2002 completion of our reincorporation and the 2003 tax rate reflecting a full year benefit.

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

As I've previously discussed, under the agreement Belden Cooper made an election to increase the tax basis of certain Belden assets with Cooper entitled to 90% of the benefit realized by Belden.

Belden's ability to realize this benefit is primarily dependent on their level of taxable income.

We continue to take a conservative approach to recognizing earnings under this agreement and do not anticipate reporting income until such time as Belden's business conditions improve.

This decision during the first quarter of 2003 reduced our 2003 earnings forecast by 10 cents per share.

For the quarter, not recognizing Belden income, cost us slightly less than 3 cents per share and the full year benefit of the inversion added about 3 cents per share.

Now, a couple of items on the comparability of our third quarter 2003 results with the third quarter 2002 results.

First, they were -- we adopted- voluntarily adopted effective January 1, 2003, a new method of accounting for stock based compensation which results in the expensing of all stock based compensation on a perspective basis.

In the third quarter of 2003, our total expense related to stock based compensation increased $2.8 million over the comparable quarter of 2002.

During the third quarter, we did take advantage of a steep increase in the interest yield curve and entered into swap agreements effectively converting fixed interest rates on $300 million of debt in the variable rates.

Entering into the swap agreements reduced interest expense approximately $800,000 for the quarter.

For the fourth quarter, we see -- we will see a benefit in lower interest expense of approximately $1.6 million from the swaps.

During the quarter, we issued 1.3 million shares of common stock from the exercise of options and our employee stock purchase plan.

For the 9 months, we have issued 1.6 million shares primarily under these programs.

Our average diluted shares increased 900,000 shares from the prior year quarter, and 1.4 million shares sequentially from the second quarter of 2003.

Overall for the quarter, higher diluted shares cost us 1 cent per share from the guidance we provided at the beginning of the quarter.

In addition, as discussed in our outlook for 2003, Cooper, like a lot of other companies, has had to absorb continued increases in pension and other post employment, benefit expense, due to the impact of the declines in interest rates and the poor stock market performance in 2001 and 2002.

We’ve also had to absorb an abnormally large increases in insurance costs and health care costs.

These items decreased 3rd quarter earnings per share by approximately 5 cents.

In summary, comparing earnings per share from the third quarter 2002 to the third quarter of 2003, the lower effective tax rate, nonrecognition of Belden income, higher stock-based compensation expense, lower interest expense, increased pension and other benefit costs, insurance cost increases, and higher diluted shares cost us about a net of 6 cents per share.

In other words, we delivered a nice improvement of approximately 13 cents per share from other net operating activities in the quarter including about a 2 cent per share net benefit from our 2002 restructuring program.

For the quarter, our revenues increased 4.9% compared to the prior year with our electrical product segment up 2% and our tool segment up 21.2%.

Translation, increased revenues approximately 2% for the quarter compared to the prior year with translation increasing electrical products revenue 1% and tools revenues 5%.

Overall, sequentially from the second quarter of 2003, revenues were up 3.7% with electrical up 2.6% and tools up 9.1%.

In our electrical products segments, all of our businesses experienced year over year increased revenues in the low single digits, excluding translation, with the exception of our European division and electrical support and closures division.

These two divisions were down low single digits reflective of a weak European economy and persistent weakness in the telecommunications and nonresidential construction markets.

Our read is that overall electrical product markets have bottomed out, maybe slightly negative for the quarter compared to the prior year quarter with our electrical businesses overall performing better than the market.

Our sales through North American electrical distribution increased, offset somewhat by slower retail sales.

Retail has been a seesaw this year in our lighting business.

Last quarter we saw a nice increase and this quarter a decrease as large customers adjusted their inventory levels.

Pricing in electrical products remains competitive but not at the levels experienced in 2002.

In our tools business, both the hand tools and power tool businesses at increased revenues excluding translation compared to the prior year.

The third quarter was impacted, as John mentioned, by assembly equipment shipment exceeding the prior year quarter by approximately $26 million.

North American aerospace, automotive and other industrial markets remain challenging.

Aside from assembly equipment, increased sales were driven primarily by new product introductions into the retail market by our hand tools operation.

The improvement in our reported gross margin is tempered by the impact from the assembly equipment sales during the quarter.

Overall, cost of sales improved to 71% from 71.1% last year.

Electrical products improved 120 basis points from the prior year to 69.7%.

This is an improvement from the 70% cost of sales in electrical in the second quarter of 2003.

Tools gave up 260 basis points from the prior year to 76.9%, driven by the assembly equipment shipment.

This was a 90 basis point higher cost of sales compared to the second quarter of 2003.

As we have previously discussed, assembly equipment and shipments include so-called pass through components which are part of the system but purchased by our business and built with very nominal margins.

Benefits from our factory closings announced in the fourth quarter of 2000 exceeded expense and had a positive impact of approximately $1.5 million on cost of sales.

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

Selling, general and administration, costs for the quarter as a percent of the sales were relatively flat increasing 10 basis points from the prior year quarter and improving 50 basis points from the 19.3% reported in the second quarter of 2003.

From a total SG&A expense perspective, we are up $10.8 million for the third quarter over the prior year quarter and $2.4 million sequentially from the second quarter of 2003.

The sequential increase from the second quarter is primarily volume driven, partially offset by net cost reductions.

Of the $10.8 million increase in SG&A in the third quarter compared to the third quarter of 2002, approximately $4 million is a result of translating our international operations into U.S. dollars.

Medical, pension and insurance expenses increased in excess of $5 million.

Our stock base compensation expense increased $2.8 million over the comparable quarter of 2002.

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

Benefits from our 4th quarter 2002 restructuring and other cost reduction actions are mitigating a significant portion of these cost increases.

Whipping over to our segment reporting I will start out by discussing general corporate and other expense.

For the third quarter of 2003, we reported $17.6 million in general corporate and other expense compared to $16.9 million in the second quarter of 2003 and $9.7 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.

The increases from the prior year quarter relate to the same items discussed in the second quarter conference call in our outlook presentation in February of 2003.

Specifically our stock based compensation resulted in a $2.8 million increase.

We also increased certain incentive compensation accruals by approximately $1 million in the quarter to reflect performance exceeding cash flow targets.

A significant item driving the increase in general corporate and other relates to the $3 million in Belden income in 2002.

Again, we did not recognize income related to Belden in the third quarter and have not recognized any income year to date.

Insurance, medical and pension and other post employment benefits account for the majority of the remaining increase offset partially by cost reduction actions.

We did deliver a very nice increase in segment earnings for the quarter up 10.7%.

Electrical products was up 9.9%, a 2% revenue increase and tools was up 21.6%, a 21.2% revenue increase.

Compared to the second quarter, our segment earnings improvement was assisted by our plant closing and product line relocation.

As discussed in the second quarter call, we are over the hump on the relocations and are on track for improvement performance in the third and fourth quarter.

Incremental net benefit of restructuring was approximately $2.5 million primarily impacting electrical.

Our electrical products segment returns on sales increased to 13.4% from 12.4% in the third quarter of 2002 and from 13% in the second quarter of 2003.

We had meaningful margin improvement in most of our businesses during the quarter.

Our tools segment return on sales was flat with the prior year at 4.8% and up 70 basis points from the second quarter.

As we have stated, third quarter margin and earnings were impacted primarily by shipments of lower margin assembly equipment.

Year to date, for the nine months ended September 30, 2003, revenues increased 1.4% with electrical products essentially flat and tools up 9.6%.

Translation, increased electrical sales approximately 2% and tool sales approximately 5%.

Diluted earnings per share increased to $2.05 per share year to date, excluding the 9 cents from the reversal of the accrual discussed in the prior conference call.

This compares to $1.98 for the nine months ended September 30th, 2002.

By year-to-year basis, the following items impact the performance.

Lower effective tax rate contributed 10 cents per share.

Not recognizing Belden income cost us 8 cents per share.

Increases in pension, other post employment benefits, medical and insurance expense depressed earnings approximately 15 cents per share.

Increases in stock based compensation, decreased earnings approximately 8 cents per share.

Higher interest expense from our new debt structure partially offset by lower net debt levels increased expense 4 cents per share.

If you add the pluses and minuses, we had roughly a 30 cent per share increase from other net operational improvements.

In other words, we more than offset price pressures and economic and other expense increases.

Overall, our segment return on sales were up 70 basis points to 11.5% with electrical products up 90 basis points to 13% and tools up 80 basis points to 4.4%.

All tolled, the first nine months of 2003 was a difficult economic environment with economists continually shifting out the beginning of an economic recovery.

We met the challenge by overcoming cost increases while continuing to invest in the future and delivering very respectable results in this tough environment.

With that, I will turn it over to Rich who will provide some additional information on our regional sales and business sales.

Thank you, Terry.

Real quick, expansion on some the comments that Terry made in regards to how our businesses performed by region.

First for electrical products where our core revenues were up 1%, overall revenues up a solid 2% for the quarter.

In our U.S. and Canadian region our revenues overall were relatively unchanged.

In this area, industrial and commercial market demand has improved moderately leading to greater sales of hazardous duty electrical products, lighting fixtures and wiring devices.

While a pickup in electronics markets has led to better sales of circuit protection devices.

In addition, residential construction’s resilience continued to affect sales of lighting fixtures and wiring devices in the retail hardware home center channel.

However, as Terry noted, in this period this gain was offset by the effects of inventory adjustments in the channel as retailers tuned their stocks to perspective demand.

And the utility area, product demand remains slow as the continued uncertainty in the regulatory environment affects investments in capital projects.

In Europe, excluding translation, revenues declined approximately 1 to 3% in this past quarter.

Soft commercial markets in this region have impacted sales for several of our products which was somewhat offset by growth in industrial construction materials markets.

And in Latin America, excluding translation our revenues rose approximately 25%.

Excuse me, over 25%.

Here, our continuing efforts to expand our local business in this region was aided somewhat by new power systems businesses.

Turning to tools and hardware, revenues where rose 21% overall and core or base revenues were up 16% overall.

In the U.S. / Canadian region we saw revenues roughly the same as they were a year ago.

Principally the results of soft industrial markets offset by improved hand tool sales at retail and hardware home center arena.

In Europe, excluding translation, revenues increased more than 75% this past period.

Primarily the year to year difference is in the shipping schedules of several large automotive related assembly equipment orders as noted earlier.

In Latin America, excluding translation, our revenues increased approximately 10%.

In this particular region demand has been impacted by improved economic activity as well as growth in our presence in Mexico.

That's a quick wrap up for our businesses geographically.

Let me turn this conversation back to John Riley for some other thoughts on the performance of the quarter.

H. John Riley, Jr.: Thanks.

Before moving on to our outlook for the current quarter, I would like now give you a brief update on the Federal-Mogul asbestos situation.

I'm always pleased to report we saw no significant change in the Federal-Mogul ABEX asbestos situation during the quarter.

As of the end of the period we had 62,182 claims outstanding and that compares to 71,142 at year end 2002.

Our average indemnity payment per claim as of the end of the quarter was $1206.00, again, compared to the end of last year which was $1,137.

During the quarter, we received 4,657 new claims, a little less than normal for the period and we settled 525 claims concentrating mostly during the quarter on cases with higher risk profiles.

We also continue to have dialogue with the parties that are involved in the Federal-Mogul reorganization progress -- process, these discussions are continuing and although we’ve reached no firm agreement regarding our involvement, I would describe these conversations as open, cooperative and business-like.

Time will tell.

Now on to the fourth quarter.

As I said earlier, we are encouraged by our third quarter performance despite what most people would agree continues to be a lack luster operating environment for manufacturing companies.

We had a solid quarter and we're well positioned to improve our future performance.

And despite uncertain market conditions, we anticipate generating fourth quarter 2003 earnings in the range of 75 to 77 cents per share.

Significantly improved from the 62 cents per share we earned in the fourth quarter of 2002 excluding restructuring charges.

Furthermore, we now expect our free cash flow will comfortably exceed $300 million for the year.

And more important, we expect to enter 2004, whatever it brings, with continued positive momentum.

I am now going to ask Terry to give you some more detail on those fourth quarter projections which I think you will find useful.

Thanks, John.

For the fourth quarter we are forecasting similar economic conditions from those experienced in the third quarter and better than the economic conditions experienced last year.

For our electrical product businesses, our outlook is for a 1% to 3% revenue increase over the prior year quarter.

In tools, revenues will probably be up 5% to 10%.

The increase is primarily related to translation, assembly equipment shipments and increased retail sales.

Our cost of sales as a percentage of revenue are forecast to improve primarily as a result of the increased benefits from the 2002 restructuring and a lower proportion of assembly equipment shipment.

Selling, general, administration expenses are forecasted to trend favorably as percentage of revenue from the leverage of increased sales and continued actions to control costs.

Our return on sales for electrical is forecast to be in the 13% to 13 1/2% range and our tools return on sales is forecasted to be in the 6% to 8% range.

Net interest expense is anticipated to be in the 16 1/2 to 17 1/2 million range and our income tax rate is expected to be 20%.

Sequentially from the third quarter, we anticipate the normal seasonal decline of 2 to 4% in revenue.

The impact of this normal sequential decline in volume is anticipated to be offset at the earnings line through the benefits of the 2002 restructuring and other cost improvement initiatives.

If you run the numbers on the low end of our earnings per share forecast, earnings per share will be up an excess of 20% over the prior year quarter, excluding the restructuring charge.

Incrementally from the third quarter we anticipate realizing approximately 3 cents per share net benefit from the 2002 restructuring program.

We currently anticipate diluted shares to be in excess of $95 million, somewhat offsetting the gains from lower interest expense and improved operating performance.

I’d like to wrap up with some great news and additional items that could impact the fourth quarter.

None of the items I will now discuss are included in the comments John or I have made on the forecasted fourth quarter or year operating results in cash flow.

First the great news.

We have had a tax refund claims outstanding primarily for 1994 through 1996, but impacting all the way back to 1988 with the IRS for several years.

These claims had to first be settled with the IRS then reviewed and approved by the joint committee on taxation of Congress.

Substantially all the issue relates to the timing of deductions.

In other words, our position that was we were entitled to deductions through our tax planning and early years and the counter-argument was that these deductions were for future years.

Contrary to my skepticism, we have prevailed on a majority of the items.

Together with the interests, the refunds, will be approximately $76 million.

We were currently analyzing the recording of the settlement.

Due to the uncertainties related to the refund, interest had not previously been recognized.

We anticipate interest income on the refunds of at least $23 million in the fourth quarter.

We are also evaluating certain discretionary items that could impact the fourth quarter.

For example, we are looking at prefunding our Cooper Foundation similar to what we have done in the past.

We are also looking at accelerating certain future cost reduction plans.

For example, we anticipated completing the restructuring of wiring devices in 2005 and 2006.

We are currently evaluating the feasibility of accelerating this restructuring.

We are also evaluating the annuitization of a portion of a U.K. pension plan.

With that I will turn it back to John.

H. John Riley, Jr.: Well, I think you get the flavor of our comments.

We think we had a very good third quarter.

Things seem to be falling in place pretty nicely and very consistent with the message that we discussed with many of you in August in Peachtree City, Georgia.

Obviously, we were not aware of the tax refund at this time so that becomes icing on the cake for this year.

The real focus here is organizing ourself to compete effectively in an increasingly global environment and I think we are doing the right things there.

So with that, I think we are now in a position to take questions.

Tony, as we introduce the questioners, I would like to ask the questioners to help us in facilitating the flow of questions by restraining your questions to one primary question and a follow-up if necessary and then allow the subsequent questioners in the queue to ask their questions.

If you have further questions, if you'll resubmit to the queue we will be glad to take you in due time.

At this time, I would like to remind everyone, if you do have a question, please press star then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Dan Khoshaba of Deutsche Banc.

Hi.

John, your comments seem to suggest that in addition to seeing a positive quarter over quarter result in your electrical products business in the quarter, that you might be witnessing an improved economy.

If that's the case, can you expand a little bit and give us also perhaps a window into what you are seeing in the fourth quarter?

H. John Riley, Jr.: Let me do that quickly and take it by segment.

For us and I think most people on the call noticed, but let me remind them.

About 30% of our business is directed towards what we would consider to be the basic construction markets that's new construction and renovation and repair.

And I would say the way we see it, the residential construction market should hold up relatively well over the balance of the year and probably into –certainly into the first quarter of next year.

The commercial construction markets, we think are getting close to bottoming if they have not bottomed already.

Although we are not anticipating in our numbers for the next 90 to 120 days, certainly that period of time, any significant pickup.

It could even turn down a little bit more but it's getting close probably to an inflection point in our judgment.

The industrial side of the equation which is something in the 25 to 30% piece of our business we think has clearly bottomed.

There are some increased spending on maintenance and repair, not a lot of large new capital investments but some evidence of increased spending on maintenance and repair in that market and we are hopeful that is going to continue throughout the fourth quarter and indeed pick up over the course of 2004.

Certainly, one of the drivers in that will be manufacturing employment which again has sort of reached an inflection point and probably will sort of roll along the bottom of that for maybe 90 days or 120 days.

Again, eventually people will begin to hire people back as they've taken their inventories out of both the distribution channel and their own inventories.

The utility business which is about 15% of our business, we think is not going to show great increases over the short term, but certainly it will not decline, in our judgment, and that's driven by a heightened awareness of the lack of maintenance spending on a lot of the systems across the country.

We are not anticipating any major significant investments to expand and improve infrastructure, but there is a heightened awareness in our judgment in the large utility market and customer base that some of the things that had been delayed for a period of time can't continue to be delayed.

So it will be a modest positive.

Retail markets should hold up reasonably well.

That's about 10 to 15% of our business.

We don't see much at all in our smaller business pieces which are the Telecom markets, we don't see much there.

But we do see some modest pickup again in the electronics side of the business.

And I think generally speaking what we have seen and what I'm suggesting here is consistent with what we read into the reports the most recent reports from other people in the marketplace we serve.

Thanks.

Your next question comes Mas Siddiqui from Jefferies and Company.

H. John Riley, Jr.: Good morning.

I guess the first question I’ll ask John is, can you talk a little bit about M&A activity and strategically what you are seeing out there, and if there is any update.

You mentioned in the past to investors that some businesses like tools or parts of that may not necessarily be core going forward.

You hired a new head of strategic activity.

If you can give us an update in that area, please.

H. John Riley, Jr.: Obviously we made some recent announcements here at Cooper that could signal some things for us.

We obviously just this past week introduced that we took - brought on board a new individual to our senior management team who essentially will head up the strategic planning and business development area, a fellow named Tom Kellagher, who joined us from Penzoil Quaker State, where he was CFO, and prior to that he was roughly 10 years with McKenzie & Company working on strategic development kind of projects.

We are very enthused to have Tom on board.

I think he is very enthused to be with us.

One of the areas of focus will be him coordinating and working with our operating people in terms of expansion opportunities outside as opposed to internal product development.

So I think we are going to be doing a lot more work on that.

Now, there are some reasons why he is on board now.

One, obviously we were focused on improving our balance sheet which is now in very good condition and will continue to get in even better condition as we go forward.

So we are now in a position where we think we have the financial wherewithal to again begin to reenter that area with a heightened sense of awareness.

So that's a good thing.

In terms of the market out there, there are lots of things that are being talked about, lots of things that are being floated around.

For the most part, for the most part I would say that at least at the current moment many of those things are pieces of other companies that those companies don't want.

And we look at all of them.

We have chosen not to participate in any of them to date.

But we will be more active obviously as we go forward.

I think the key here is to maintain your focus on what you do well and I think we have been very clear on what we look for, common distribution channel, we like the electrical products area.

We like those kinds of businesses.

And to the extent that they become available or we can generate that level of interest ourself through our own management team talking to other management teams, we will be doing that as much as we can.

The tools situations is not changed.

Bottom line is the tools business is at a low point in its cyclical nature.

I don't think that there is any reason for us to be doing anything other than what we are doing right now with tools and that's running the business, improving the margins and we are beginning to see some of that occurring and we will continue to do that.

What the future brings, who knows.

Right now we are focused on getting increased earnings and cash flow out of the tools business in 2004.

Thanks, John.

And quick follow-up clarification from Terry.

Terry, when you talked about the cash at the end, the refund specifically in the press release you mentioned $300 million in free cash flow is the number you are comfortable with.

Can you clarify for us if it's $76 million is the total amount of the refund?

I didn't quite get the amount of interest on that and is that accretive on top of the $300?

Can you clarify that?

Yes.

The $75 million of cash on the refund, 75, $76 million is not included in any of the numbers on cash flow that we discussed.

So it's incremental to it.

And the $23 million?

The $23 million of interest income is not included in any of the numbers we provided on the forecast for the fourth quarter.

Okay, thank you.

That's all incremental.

Your next question comes from Jeff Spage of Smith Barney.

Hi, it’s Jeff Sprague.

Just one additional follow-up, I guess on this tax issue.

Terry, do we think of the amount of the refund plus the amount of I guess the back interest on this as kind of the P&L flexibility that you have?

In other words, is there a $99 million P&L gain which you are now off looking for the restructuring offsets for?

Or is it different number?

Jeff, on the -- other than the interest portion of it, the rest of it is already on our balance sheet.

Primarily in deferred tax accounts.

So we have a $23 million P&L gain basically?

Exactly.

Pre-tax.

Pre-tax.

And just on cash taxes putting this aside, what is – as you had a year to kind of get comfortable with the inversion and everything and think about tax planning, what should we think about for a cash tax rate?

Is it going to be running meaningfully below your accrued rate?

Or should they stay fairly close moving forward?

We would anticipate, absent any change in tax regulation, that our accrued rate, ie, the 20%. would be above our cash payment rate.

I think you would be safe to estimate going forward into 2004 our cash payment rate would probably be in the end of 15%.

Okay.

Is that about where it's looking for '03 also?

Or it’s higher than that in 03?

In '03, the cash payment rate will be fairly low, probably very low because of the impact -- in 2002, we did the restructuring of our tax organization company organization, legal structure, but really didn't get the cash -- much of the cash benefit in '02, most of it came in '03.

We do have a little bit of a catchup.

Okay.

Great.

And maybe for Rich or for whoever, on the segment color Rich, you hit it all pretty quickly because the message was everything was up about the same.

But I wonder if you can give us a little bit of color if you have it on how things may be exited to quarter and if there is any particular areas in terms of product areas, whether it's lighting or wiring or anywhere else, that kind of jumps out as showing a little bit different trend.

H. John Riley, Jr.: Let me start off with that.

Rich, I guess I'm whoever but I guess I will let you answer the question.

John, you are never whoever.

Not a term we've applied here.

Exactly, so I will start off with that and let whoever pick up if they choose to.

In terms of the quarter, you are correct.

Most of our businesses were up in the quarter, but all pretty much in the same general tenor.

Modest single digit increases excluding the impact from FX.

A couple of our business got a big impact from FX but looking at core activity, spouse(ph) had a good quarter as did wiring devices.

Less so from lighting, bussman and power systems but all doing pretty good.

B-line and Menvier both saw some declines in their businesses.

Menvier we would look primarily to the state of the European economy as being a primary contributor.

Nothing seems to be taking shape there to change those current trends.

B-line is mostly reflective of what continues to be a soft Telecom marketplace.

This is basic installations as opposed to renovation types of things.

And just some general continued weakness in the core of their business which is the support business which goes into the industrial and commercial marketplace.

With that, if anybody else wants to pick up about more recent trends?

No, I don't have anything to add to that. (inadible)

Okay.

And I guess one other quick one.

With the cash flow where it is, and the balance sheet where it is, why aren’t you guys at least jumping on the share creek?

Any thought there about a little bit of share repurchase, while you are sorting out what you want to do on the M&A front?

H. John Riley, Jr.: We are currently looking at that pretty closely and -- well, it's a subject that we need to look at and I think respond with one of those options.

Especially when you look at the share accrete.

Our next question comes from Nicole Parent

Good morning, guys.

I guess I was hoping to get a little bit more color.

When I think about the quarter and the core growth you have seen particularly in wiring devices, Bussman, you had some reasonable comps that you stillhave up.

I guess you have been cautiously optimistic in the second quarter.

You sound -- your tone is more decidedly positive.

As we roll forward into '04, how should we think about and how are you factoring in the percolating orders translating into hard sales as you look ahead for next year?

H. John Riley, Jr.: This is John.

Let me just say about next year.

We haven't really given any indication of what next year looks like.

But having said that, let me just say that I'd probably repeat the comments in terms of directionally where we think these markets are going that we gave to Dan earlier in the call and that is that we think residential construction should hold up reasonably well.

We don't think it's perhaps going to be quite as strong as it was in the year 2003.

But still a relatively strong market on a historical basis.

We think commercial construction will eventually turn up but not likely until maybe the second half of next year.

We think industrial production will gradually move up.

We think utility spending will continue to gradually o move up.

We think retail will remain strong.

We really have pretty good hopes for the electronics market and the Telecom markets rebounding a little bit stronger than they did this year.

Having said all of that, the direction we have given to our folks in the field for budget preparation for 2004 is, look, we are not about to be planning our future, the next 12 months, on some buoyant market just happening overnight.

So I think we are basically focusing them on a very modest increase in sales and tell us what you are going to do if you don't get any increase in sales.

Directionally that's what we are looking at.

If the market comes our way, then it's all to all of our benefit.

And that's kind of the way we look at it.

Obviously continue to focus on cash flow and one thing we are not going to cut out is we have identified and established these five major objectives across the company that we spoke to you about in Peachtree City, and we firmly believe that those are critical to the long term future and success of the company.

And we are not going to back off or start gouging those objectives.

It's critical that we establish this global position from a sales and marketing and manufacturing standpoint.

It's critical that we continue to put in place our EBS system and it's critical that we put in place an integrated manufacturing productivity improvement program and those things are going to get done and we will -- if we have to cut back on some other expenses to finance them, that's what we will do.

But I think that's our approach looking forward.

Terry, would you add anything to that?

No, that's exactly right.

Where we are at today clearly with the actions we have taken on a very modest revenue increase, our earnings next year will be in the double digits range.

And the real wild card is what's the revenue side do?

How good does it get?

And I guess, Terry, could you give us a little bit more color on the Enterprise Business System and implementation?

Sure.

We are right on track.

Maybe even a slightly ahead on it.

We start rolling out first sites in the first quarter of next year.

We will have some expense next year primarily driven by the fact that we will have some severance costs next year as we have to take out people as the systems are rolled out.

But everything is in great shape.

And moving along very well.

Okay.

And I guess one last question for John.

John, you indicated on the Federal-Mogul discussions are progressing along nicely.

Any idea in terms of timing when we could expect some type of outcome from those discussions?

H. John Riley, Jr.: Yeah.

Let me clarify the comment you just made about moving along nicely.

From our perspective it's moving along the way we anticipated it would move and we are very comfortable that we are managing this situation very well.

Now, let me talk a little bit about timing because there is obviously been some recent rhetoric in news and press releases about the timing of this whole thing as it relates to Federal-Mogul's emergence from bankruptcy.

Just a matter of perspective, a few facts.

First I think most of you probably have read that Federal-Mogul asked the bankruptcy judge for the right to extend the time that they would be required to file their plan of reorganization.

This was a request that was made on the back of several other extensions that the judge granted.

I think most of you know that that extension for the exclusive right to file that plan was denied by the judge.

What that means is that others, a.k.a. the Creditors Committee et al, now have an equal right to file a plan with the court.

And a few days ago I guess, maybe within the last couple of weeks, the Creditors Committee issued a press release indicating that they were working to file a plan and that they anticipated that that plan may even be filed by year end.

Yesterday Federal-Mogul issued a press release indicating that the reorganization could require up to another year from the current date.

Now, let me just say this, I don't have any intention of getting involved in this sort of dueling press release situation.

But having said that, I think from our perspective we have to go back to the basics.

We really do know and have a good handle on what this liability is.

We know what our insurance coverage is and we had good success in terms of accessing that insurance and we are continuing to expand that access as we speak.

We know what our cash flow is and we know that we have done a reasonably good job.

I think most people would agree we have done a reasonably good job of handling it.

While we can't speak for anybody in this process, especially the judge involved in the case, it seems to us that his actions to date would indicate that he prefers a sooner than rather than later approach to putting this matter to rest.

And it seems to us that that approach is the best for all people with that objective in mind.

Actually, I mentioned something about the creditor's press release.

It was not a press release.

It was in a statement that they made in a motion filed with the court.

So when you are looking at that on this, you have to look at the public information plus the court filings.

Just to clarify that point.

Anyhow, in the meantime, we are continuing to manage it and hopefully we will see the judge pushing this along to a sooner rather than later conclusion.

And I guess, John, to elaborate on one of the points you just made, you said you are working to expanding access to the insurance as we speak.

What exactly do you mean?

H. John Riley, Jr.: Well, each of these insurance policies that are in this let's say roughly $900 million to $1 billion coverage, each of these have to be -- the coverage has to be confirmed on a policy by policy basis.

And as you move through the initial layers of some policy coverage in a given period of time and that coverage is exhausted, you move to the next layer and that becomes again another negotiation or another discussion with the insurance coverage about how that coverage is going to work, what's covered, so on and so forth.

We have done a pretty good job in that.

It's a mechanical process and subject -- but you do have to go through that process.

Great.

Thank you.

Your next question comes from Michael Regan of CSFB.

Thanks.

John, if we think about electrical and look out to 2004, you got substantial margin improvement this year, kind of irrespective of volume.

And have continued to restructure and move things, obviously, some of that came from mix.

But as we think about next year, how should we think about what kind of margin improvement you can have even if volume is again flat if the markets don't continue to turn up?

H. John Riley, Jr.: I'm a little bit challenged by the question because I don't really have a lot of numbers that I’ve looked at so far that would tell me exactly how that's going to fall in place.

But obviously we moved from roughly 13% in -- what did we have in the first quarter? 12.7, to 13 to 13.4.

So we are clearly moving in to the upper 13% range as we exit the year.

So I think if I were to use a benchmark, I would probably start with that and then hopefully we will be able to add something to that next year.

One of the hold cards here are these costs of putting these programs in place that we’ll have to put into those segments.

I think directionally, we are moving from -- we said this year we would be on average something around 13.

We said that this is for electrical.

And we said that on average we thought that a going normalized rate for that business probably would be in the 15% range.

And I think that that's going to be a gradual improvement over the next two to three years absent even the economic up turn.

And I think for tools we said 5 this year.

And we said something in the 9, 10% range over the long haul.

So I think you could expect to see some additional improvement.

Obviously if we had more volume, you would see a bigger jump in those numbers.

So I think that's about the best I can do for you at this point in time.

Without knowing -- looking at the budgets.

Thank you.

Your next question comes from Tony Boase of A.G. Edwards.

Before you ask your question, I am going to interrupt this, if I could, for a second.

Mindful of our time and those who have been on the queue for us for an hour, we will take Tony’s question and then we will summarize and wrap up this meeting.

Thanks.

Just on, Terry mentioned pension, health and Belden is in the stock purchase or the stock expense.

As being impacts in '03.

Have you given some thought as to what kind of impact we would see from those in '04 and whether some of the activities you are doing next year can offset that incremental impact?

Sure, Tony.

This year we saw about just on the pension and OPEPS we had an increase of about $12 million over the prior year.

Going into '04, clearly we haven't run the actuarial valuations are done at the end of the year, and all that, but I would anticipate, at this point in time, that this increase would be more in the low few million dollars on it.

Pension -- or I'm sorry, stock comp expense, we are doing that prospectively.

So we will have another year tacked on.

We haven't run the numbers on that yet.

My best guess at the moment would be we are probably talking about an incremental expense probably in the 4 to 6 cent range on that (technical difficulty).

Insurance will be up a little bit, but not like 2003 was.

So we do have a little bit of head wind from those things.

On the other hand, we have from our 2002 restructuring, we will have a very nice carry over from that, probably to the tune of 25 / $30 million for this year flushes out which is incremental benefit.

Plus we have a lot of these programs John mentioned.

Albeit they cost us money to do, a lot of those start delivering benefit also.

So just net / net wrapping that up, we understand we have to offset some of those things.

We have programs in place to do that.

And that's why I can make the comment that we are comfortable, absent even a big economic increase, i.e., very modest revenue increase, we can still have the double digit earnings increase without having in front of me all the budget information for '04.

H. John Riley, Jr.: Let me now take a moment to wrap this thing up.

Obviously I think that everybody here is enthused about what we have been able to accomplish in the third quarter.

We are looking forward to the challenge of the fourth quarter with a little help from the economy we should be doing very well in the fourth quarter.

I think this is a time and you can tell from some of the questions where people begin to focus on the year 2004.

I think we outlined for you in August the programs that are going on and just reflecting on Michael's question, I want to remind everybody that in February, right after our Board meeting, we do have these meetings scheduled in New York where we will come down and lay out in chapter and verse what the assumptions are and what our projections are for the year.

I think that's currently scheduled for somewhere between February 25th and 28th.

That will be firmed up shortly and you should be hearing from Rich on that shortly, is that right?

That's correct.

H. John Riley, Jr.: So with that, Tony, I think we appreciate your help and we appreciate the questions that we’ve had.

Obviously all important to all of our listeners and again once again thanks for your participation.

We look forward to speaking to you after the first of the year.

Thanks.

This concludes today's teleconference.

You may now disconnect.