伊頓 (ETN) 2004 Q2 法說會逐字稿

Good afternoon, my name is Constance and I will be your conference facilitator.

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

If you would like to withdraw your question, press star, then the number two on your telephone keypad.

Thank you.

Rich Bajenski, Vice President Investor Relations, you may begin your conference.

Thank you, Constance and welcome everyone to our second quarter earnings review.

With me this morning, or this afternoon, depending upon where you are in the time zones is John Riley, Chairman, President and Chief Executive Officer of Cooper Industries and Terry Klebe, Senior Vice President and Chief Financial Officer.

Before proceeding with our 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 the control of the company and actual results may differ materially from those anticipated by Cooper.

A discussion of these factors may be found in the company's annual report on Form 10-K and other recent SEC filings.

In addition, comments made here may include non-GAAP financial measures.

Reconciliations of those measures to the most directly comparable GAAP measures are included in our press release on the quarter's results just released today and are posted on Cooper's Web site in the Investor Center at the Management Presentation section.

And lastly, this call is a copyrighted presentation of Cooper Industries Limited and is intended for the exclusive use of our participating audience.

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

Having concluded with those comments, let me turn this over to John Riley and Terry Klebe to give you some further detail on the results of the quarter.

John?

Thank you, Rich.

Good morning and thanks for being with us to review our second quarter results and the company's outlook for the balance of this year.

Before we proceed, let me first remind you that Terry, Rich, Kirk Hachigian and I will be hosting our normal mid-year business outlook meeting in New York on August 18th to give you even more information on these and other subjects of importance to the company.

Please feel free to contact Rich Bajenski if you'd like to attend.

We hope to see you there.

I'll begin this morning's discussion by saying that we had a very good second quarter, and that we're pleased with our results.

We reported strong second quarter 2004 net income of $83.9 million, or 89 cents per share.

That compares with net income of $72.4 million or 78 cents per share in the second quarter of 2003.

Please keep in mind that the second quarter of 2003 included $8.6 million or about 9 cents per share after-tax income from the reversal of a restructuring accrual.

Including this item, diluted 2004 earnings per share increased 29% compared to the prior-year period.

Revenues for the second quarter were $1.11 billion, up almost 10% compared to just over $1 billion in the same period 2003.

Sales of our Electrical Products were up 11%, reflecting revenue growth in all of our electrical businesses.

Sales of Tools & Hardware were up 5%, driven by higher sales of hand tools to improving industrial and electronic markets and a nice increase in sales of new hand tool products to the retail market channel.

These gains more than offset the negative impact of an expected reduction in shipments of large automated assembly equipment to the automotive market during the quarter.

Operating earnings for the second quarter 2004 were $122.1 million compared to $113.6 million for last year's second quarter.

Excluding the previously mentioned 2003 restructuring accrual reversal, operating earnings increased 23% over the same period last year.

Now, those are the numbers.

From a qualitative standpoint, we generated strong, core revenue growth and our operating margins continued to show solid year-over-year improvement despite higher material, energy and transportation costs.

Credit for that goes to our employees who are working hard to maximize the global scope of our businesses and leverage the breadth of our product lines.

This effort, coupled with improving market conditions, continues to positively impact our performance.

Our financial condition improved as well during the quarter.

Our debt -to-total capitalization ratio net of cash at June 30, 2004 was 29.8%, down nicely from 31.6% at the prior quarter's end.

We achieved this level even after spending approximately $55 million to repurchase about 1 million shares of our stock during the quarter.

Second quarter free cash flow totaled $138.8 million, bringing our year-to-date free cash flow to $188.2 million.

And rather than delay, I'll take this opportunity now to say that we expect to comfortably exceed the $300 million free cash flow objective we had originally set for the year.

Terry will give you more detail on this in a few minutes.

Looking at things on a year-to-date basis, revenues for the first half of 2004 were 2.17 billion compared to 1.97 billion for the same period 2003.

Earnings for the first half of 2004 were $1.70 per share, up from $1.39 per share for the same period 2003.

Net income for the first six months of 2004 was $161.6 million, compared to $129 million for the first six months of last year.

Operating earnings in the first half of 2004 were $236.3 million compared to 204.4 million for the 2003 first half.

During the first half of 2004, earnings per share increased 31% compared to the prior-year period, excluding the previously mentioned restructuring accrual reversal.

The bottom line is that the past three months represented another period of solid revenue and earnings growth for the company.

Additionally, key internal improvement initiatives are contributing to significant gains in operational performance.

We enter the second half of 2004 with confidence.

Confidence that we are executing the right programs the right way for the benefit of all of our shareholders.

I'll now turn things over to Terry and Rich, who will give you more detail on our second quarter and year-to-date results.

Terry?

Thank you, John.

Before I turn to earnings for the quarter, I'll provide some highlights on our cash flow and balance sheet.

As John mentioned, for the second quarter we generated free cash flow of 139 million compared to 116 million in last year's second quarter.

Year-to-date free cash flow was 188 million compared to 90 million in last year's first half.

As John mentioned, we expect continued strong execution on generating free cash flow and we expect to exceed our goal of generating free cash flow in excess of earnings for the year.

With the 10% revenue growth in the second quarter of 2004, we invested 39 million in operating working capital during the quarter.

Execution on our companywide initiatives continued to deliver results with solid improvement in operating working capital efficiencies, reducing the advancement required to support the top line growth.

Our inventory turns for the quarter improved to 5.4 turns from 4.6 turns in 2003.

Day sales outstanding improved two days compared to the prior-year quarter.

And improvement in accounts payable provided 13 million of cash flow, reducing our investment in operating working capital for the quarter to 39 million.

This compares to 43 million investment in last year's second quarter.

Year-to-date, we've invested 72 million in operating working capital compared to 65 million last year.

We do have a significant difference between the first half of 2004 and the first half of 2003 in the reported cash flows from changes in deferred income taxes, changes in accounts payable and accrued liabilities, and changes in other assets and liabilities.

These items provide 113 million in cash flow in 2004 and utilize 4 million in cash flow in 2003.

The differences between the periods is primarily related to the following: Improvement in performance on accounts payable of 44 million, timing differences of prepayments to our Viva Trust for employees benefits of 60 million.

On this item, we typically make prepayments at the end of each year to generate income tax deduction.

At the end of 2002, we did not make a prepayment but did make this prepayment during the first quarter of 2003.

Differences in the receipt and payment of income taxes added 11 million.

Also, the accrual reversal of 14 million in 2003 make up the difference.

We also had increases in 2004 incentive comp and volume-related sales incentives.

Our capital expenditures in the first half of 2004 totaled 39 million compared to 34 million last year.

Our capital expenditures will increase as the year progresses with spending on new products, our new China facility, the wiring devices headquarters relocation, and investment in our enterprise business system.

We continue to forecast capital expenditures to be 100 to 110 million for the year.

In the second half of 2004, we will make Viva contributions and we will have increased tax payments.

In addition, capital expenditures will be higher in the second half of 2004.

Even considering these timing differences, our free cash flow is forecast to exceed 325 million for the year.

During the quarter, we purchased 1 million shares of common stock and year-to-date we have purchased 3 million shares for a total cash outlay of 165 million.

During the first half of the year, we issued 889,000 shares from stock option exercises and matches to our 401-K and other stock programs.

As John mentioned, our balance sheet remains in great shape with our debt to total capitalization net of cash at 29.8% on June 30th, 2004.

Turning to the results for the second quarter.

In the second quarter of 2003, an accrual for financial advisor fees related to the strategic alternative evaluation was reversed.

This accrual totaled 14.3 million, and had an after-tax benefit of 8.6 million, which equals 9 cents per share.

All references I make to comparable results exclude this item.

The results for the second quarter came in stronger than we had forecast back in April.

For the second quarter, revenues increased 9.7% with currency translation contributing 1.3 % and a nominal amount from the small acquisition completed in the first quarter.

Our revenue growth excluding currency translation compared to the prior year period was greater in the second quarter than in the first quarter of 2004.

Unlike the first quarter, where retail channel sales contributed about 300 basis points of our core growth, in the second quarter, most of our growth was in distribution and other market channels.

In last quarter's conference call, I indicated we had a very strong March.

April was also very strong driven by continued strong retail shipments and some advanced buys in front of price increases.

As we expected, retail customer inventory builds in the first four months of the year led to reduced retail shipments in May and June.

However, other key market sales continue to grow with June coming in with very solid revenue growth and ending the quarter with solid order backlog.

Material cost inflation continued to escalate early in the quarter and leveled off creating a continuing challenge throughout the quarter.

We aggressively went after sales price increases and efficiencies and for the quarter delivered a 29% increase in comparable earnings per share on a 9.7% revenue increase.

The comparability of our second quarter 2004 results with the second quarter of 2003 continues to be impacted by Cooper voluntarily adopting effective January 1st, 2003, a new method of accounting for stock-based compensation that results in the expensing of all stock-based compensation on a prospective basis.

In the second quarter of 2004, our total expense related to stock-based compensation increased approximately 5 million over the second quarter of 2003.

During the quarter, we also increased accruals for incentive pay as a result of better than forecasted results anticipated for the year.

Both the long-term stock base and current year incentive pay accruals increased compared to the first quarter of 2004 impacting general corporate expense and the segment results for the quarter by approximately 3 million.

For 2004, our pension and other post employment benefit expense are anticipated to be lower than 2003 by approximately 9 million, reflecting the net benefit of the 2002 and 2003 additional funding of our pension plans and improved market performance in 2003.

This decrease in expense offsets increased medical and insurance expense.

As a result, we did not experience a headwind in 2004 like we experienced in 2003 from these type of expenses.

Entering into swap agreements on 300 million of debt in the third quarter of 2003, along with higher cash balances reduced net interest expense approximately 2 million for the quarter compared to the prior-year quarter.

Our effective tax rate, excluding the impact of the second quarter 2003 accrual reversal was 20% for the three-month and six-month periods ended June 30, 2004 and 2003.

We are currently forecasting a 20% effective tax rate for 2004.

However, earnings growth beyond our current forecast for the year could result in the effective tax rate beginning to increase, especially if the earnings growth is in the United States.

For the quarter, our Electrical Products segment revenues increased 10.7% compared to the prior year and our Tools segment revenues increased 4.9%.

Translation, increased Electrical Products revenues approximately 1.3%, and Tools revenues, approximately 1.7% for the quarter compared to the prior-year quarter.

In our Electrical Products segment, excluding translation, all of our businesses experienced year-over-year increases in core revenue with the strongest increases in the commercial and industrial electronics and utility markets.

Sales into the primary channels to market grew strongly with the exception of retail sales.

Following an increase of greater than 20% in the first quarter, retail channel sales declined in the second quarter of 2004, slightly in excess of 10%.

As we expected would occur, during the second quarter, some retail customers adjusted inventory levels to more normal levels following a strong inventory build during the first four months of the year.

Nevertheless, year-to-date our sales through retail channel have grown from 5% to 10%.

The good news is that both our global and North American sales through distribution grew 14% to 15% during the second quarter of 2004 compared to the prior-year quarter.

Electrical Products markets remain competitive but we are seeing acceptance of price increases in the market.

For the quarter, we estimate that overall pricing was up slightly.

This is a great improvement from the experience in the last few years where we were faced with negative pricing.

In our Tools business, excluding translation, the hand tools business had strong revenue increases in the quarter compared to the year-ago period.

The strength was strongest in the retail channel driven by new product introduction.

Power tools experienced strong revenue growth in North America industrial sales, which was more than offset by the anticipated lower assembly equipment shipments.

Overall, cost of sales, as a percentage of revenue, improved 100 basis points to 69.9% from 70.9% in last year's second quarter.

Electrical Products cost of sales improved 90 basis points from the prior year to 69.1%, driven by the benefits from the restructuring programs completed last year and ongoing productivity initiatives.

This compares to 69% cost of sales in Electrical in the first quarter of 2004.

Tools cost of sales in the second quarter was 73.2%.

This was an improvement of 280 basis points from the prior year quarter and was 30 basis points higher than the first quarter of 2004.

Benefits from restructuring programs and continuing actions to reduce the cost base of the business in both segments were partially offset by increased material costs.

During the quarter, material costs escalated more than we had forecast back in April.

In April we were forecasting that commodity price increases would likely exceed sales price realization and incremental cost reduction actions by around 5 million.

Our estimation is that we have approximately 6 million negative impact in the second quarter.

Selling, general, administrative for the quarter as a percentage of sales was 19.1% compared to 19.3% in the prior year second quarter.

Increased stock-based compensation and other incentive compensation was more than offset by the sales leverage.

For a total SG&A expense perspective, we were up 17 million in the second quarter of 2004 compared to the prior-year quarter.

Of the 17 million increase in the SG&A in the second quarter compared to the second quarter of 2003, approximately 3 million is a result of translating our international operations into U.S. dollars with the balance primarily volume related in the increased stock-based and other incentive compensation expense.

Now, flipping over to the segment reporting.

I'll start out by discussing general, corporate, and other expense.

For the second quarter of 2004, we reported 19.9 million in general, corporate, and other expense.

This compares to 16.9 million in the comparable quarter of 2003.

Stock-based and incentive compensation accounted for substantially all of the increase.

We delivered a very nice increase in segment earnings for the quarter, up 22.2% over the prior-year comparable quarter.

Electrical Products was up 18.5% on a 10.7% revenue increase and Tools was up 80% on a 4.9% revenue increase.

Our Electrical Products segment return on sales increased to 13.9% from 13% in the second quarter of 2003 and increased 30 basis points from the first quarter of 2004.

The benefits of cost reduction efforts and efficiencies from higher volumes were tempered by increased material costs and higher incentive paid accruals.

Our Tool segment return on sales increased to 7% compared to 4.1% in the prior-year second quarter, and increased 20 basis points from the first quarter of 2004.

Benefits from factory closings and increased volumes in hand tools leveraged the cost structure.

These benefits were partially offset by the lack of volume in the assembly equipment business following the record shipments in 2003.

For the first six months of 2004, revenues increased in Electrical Products by 10.7% and Tools by 8.8%.

Translation, increased Electrical sales 2.1% and Tool sales 3.7%.

Electrical Products return on sales increased 110 basis points to 13.8% and Tools return on sales increased 280 basis points to 6.9%.

Rich will provide further comments on the regions and our individual business revenue trends.

Rich?

Thank you, Terry.

Following up on Terry's comments about our performance for the quarter, let me discuss the performance of our businesses on a business line basis and then on a geographic basis.

First on Electrical Products where revenues were up 11% in total, our core revenues were up 10%.

Looking at our businesses individually, all of them had an improvement over the prior year of greater than 5% in core sales.

Those that increased in the vicinity of 5 to 10% included our Crouse-Hinds business, our lighting, our member operations and our wiring device businesses.

Those that increased by 10% or more this past quarter in core sales included our B-Line operations, Bussman and power systems.

Turning to a geographic analysis, revenues for our businesses in the United States and Canada were up in the neighborhood of 10 to 12%.

The industrial market demand (technical difficulty) activity continues to sustain the growth in the sales for our lighting fixtures and wiring devices despite the anticipated inventory adjustments that occurred in the retail channel.

And lastly, in the U.S. and Canada, increased maintenance spending by utilities, primarily focused on system reliability products, led to growth in sales of electrical distribution and transmission equipment.

In Europe, excluding translation, our revenues increased approximately 4 to 6%.

While local markets have been fairly subdued, we achieved good growth as a result of our stepped-up focus on new product development and introductions, growing market penetration in this region and some increase in export markets served from this base.

And in Latin America, excluding translation, our revenues increased about 12 to 14%.

Here local sales increases were led by the continuing growth of our power systems business in this region.

And lastly, in the Asia Pacific region, we're very happy to report that our sales continued to grow as we focused more of our resources and expand our presence here.

Turning to Tools & Hardware, where revenues increased 5% on a core basis we were up about 3%.

Our power tool business overall was about flat, while our hand tool businesses rose about 5 to 10% in this past quarter.

Geographically, our U.S. and Canadian operations saw revenue increase of approximately 10 to 12% with the revenue increase being primarily a reflection of improved industrial and electronic markets and strong retail channel demand for new hand tool products.

In Europe, excluding translation, our revenues declined about 13 to 15%.

This year-to-year decline in the segment sales is the result of the lower assembly equipment shipments that have occurred in this region primarily focused on the European automotive industry.

Otherwise, our local market demand for both hand tools and power tools has stayed fairly static.

And in Latin America, excluding translation, revenues increased 2 to 4%.

Here demand has primarily been influenced by our growing presence and focus on market opportunities in this particular region.

That quickly wraps up my review for the businesses.

Let me turn this over to John for some further comments.

John?

Thanks, Rich.

Before we move on to a discussion on the balance of the year, let me update you on the Federal-Mogul situation.

First, we received 3,816 new Abex claims during the quarter.

We settled 1,247 claims during the period.

We ended the quarter with 59,599 claims outstanding, compared to 57,030 claims outstanding at the end of the first quarter.

Our average indemnity payment per claim ended the second quarter at $2143 compared to $1932 at the end of the first quarter.

As I've mentioned before, we're focusing on settling serious cases set for trial and any low-value cases that can be settled for less than defense costs.

Our second quarter numbers are consistent with this focus and reflect the high relative percentage of serious cases settled during the quarter.

However, you should be aware that during the quarter we spent time working to settle some large blocks of low-value claims, too, and since the end of the quarter, we finalized settlements of over 13,000 of these claims.

Including these recent settlements, we now have roughly 46,000 claims pending and an average indemnity payment per claim of $1,782 below even our 2003 year-end levels.

Finally, as some of you are likely aware, Federal-Mogul did in fact commence the mailing of its plan of reorganization and disclosure statement to its creditors on July 12, 2004.

For those of you who may not have seen the document, it includes a disclosure that Cooper and others have been negotiating with the asbestos committee, the futures claimants representatives, and others to resolve the Abex liabilities within the bankruptcy process.

The document states that the negotiations are continuing and that the plan and disclosure statement will be amended if negotiations result in agreement among parties.

As I'm sure you'll understand, that's all I can report to you on this matter at this time.

Now, before moving on to question-and-answers, I'll summarize by saying that while we're pleased with the company's performance to date, we do remain keenly focused on maximizing the earnings potential of our franchise throughout the balance of the year.

We feel we're gaining market presence as more and more customers recognize the benefits of Coopers' broad range of quality products, services, and solutions.

Further, our internal improvement initiatives are enhancing productivity and controlling costs and creating a unified technology platform across all of our businesses are resulting in higher levels of productivity throughout the company.

We also continue to strengthen and enhance our global footprint through greater penetration of emerging markets and greater low-cost manufacturing capabilities.

We're encouraged by the improvement that we have seen in several of our key market sectors.

That said, we, like others, continue to battle the higher costs of materials, energy, and transportation that I mentioned earlier.

While we expect this pressure to continue, we're confident that recent actions to increase prices and accelerate cost control and productivity programs, will mitigate most of the impact of these rising costs over the balance of the year.

Consequently, as we indicated in this morning's press release, we've decided to raise our 2004 earnings outlook to a range of $3.40 to $3.55 per share.

A very solid improvement to the comparable $2.83 per share we earned in 2004.

I'll ask Terry to give you some more flavor on the detail on this updated outlook now.

Terry?

Thanks, John.

For the third quarter, back in April we were anticipating certain material cost increases to flatten out and in some cases decline over the balance of the year.

Recently, scrap steel, a major component of certain steel products, shot back up over the highs experienced earlier in the year.

We expect to experience a challenging environment in the third quarter and the remainder of the year on commodity costs.

As it stands today, the third quarter material costs, net of incremental sourcing cost reductions versus price realization, looks slightly better than the second quarter and the fourth quarter looks flat to slightly positive.

That being said, we are forecasting a strong third quarter with earnings per share up 17% to 24% over the prior year.

Revenues are expected to increase 5% to 8% over the 2003 third quarter, including 1% to 2% from currency translation.

Electrical revenues are expected to increase 7% to 9%, and Tools revenues are expected to decrease 0 to 5%.

Our return on sales in both segments are anticipated to increase from the prior year with return on sales for Electrical, 13.3 quarters to 14% and Tools, 6% to 8%.

General, corporate, and other expense will increase from the prior-year quarter primarily due to the increased stock-based compensation and is anticipated to be in the 18 million to 19 million range.

Interest expense is anticipated to be 17 to 18 million.

Earnings per share are projected to be 88 cents to 93 cents per share, with average diluted shares of 94 to 95 million.

Our outlook for the year is as follows: For the year, revenues are expected to increase 7% to 9%, including 1% to 2% from currency translation.

For our Electrical Products business, our outlook is for revenues to increase 8% to 10%.

In Tools, our forecast is for revenues to increase 3% to 5%.

We do not have the order book for the large assembly equipment shipments we experienced in 2003, and anticipate declines in the assembly equipment shipments for 2004, more than offset by improvements in industrial and retail sales.

For the year, our return on sales for Electrical is forecast to be 13.5 to 14% range, and our Tools return on sales is forecasted to be in the 7% to 9% range.

General, corporate, and other expense is forecasted to be 75 to 80 million range, and net interest expense is anticipated to be 70 million plus or minus.

As I mentioned earlier, our effective income tax rate is expected to remain at 20%.

We currently anticipate diluted shares to average approximately 95 million shares.

And as John said, we anticipate earnings per share of 340 to 3.55 per share.

I'll now turn the conference call back to John.

Thank you, Terry and Rich.

Constance, I think it's now time to take a few questions.

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

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

Your first question comes from Jeff Sprague.

Thanks.

Good afternoon, everybody.

Afternoon, Jeff.

How are you?

Good.

Just a couple of questions.

Actually I don't know if it was just us or it had happened across the conference, but Rich kind of blanked out for about a minute when he was talking about U.S. Electrical.

So I just have a couple of questions there and I apologize if everyone else already heard the answer to these.

Why don't we do that right now, Jeff?

Let's have Rich just cover once again what he said about Electrical.

How's that?

Sounds good.

That will get everybody covered here.

We're looking at U.S. and Canadian operations producing a revenue increase of 10 to 12%.

With the industrial market areas being the primary drivers that continues to provide expanding demand here leading to increased sales for our circuit protection devices, our support systems and our other electrical products serving this market.

The electronics markets have continued to provide good demand for fuses and other circuit protection devices and electronic enclosures.

The renovation remodeling and maintenance activity continues to sustain the growth in the sales of our lighting fixtures and wiring devices.

And that has more than offset the anticipated inventory adjustments that has led to a slowdown in the retail channel.

And lastly, the increased maintenance spending by utilities, which has been, in our area, focused on the systems reliability product area led to growth in sales for all, across the board for our electrical distribution and transmission equipment.

That cover it for you?

That does.

And can you give us a sense of how much price you got in the electrical markets in the quarter and, you know, what, you know, kind of what your current, you know, catalog looks like or your, the pricing that you have in place looking at it in the second half of the year?

Let me, Jeff, let me begin by saying that I think, I'll have Terry follow-up with the numbers on that question.

We've now increased prices, to my knowledge, at almost, well, every business that we have, including the Tools businesses.

So we feel good that the process is in place and started and we're on our way.

So that's good.

There are some things that may need even additional price increases based on the recent trends in steel.

We thought originally that the steel had peaked out in just this last August or just this, earlier this month.

We heard that some of these folks are talking about raising prices again.

I think it's generally effective around August 1st.

So we need to double back and take a look at that.

But based on the, I'll ask Terry to comment now based on the price increases that we've already put in place and how that, he sees that rolling through the P&Ls, not just in the second quarter but over the balance of the year.

Terry?

In the second quarter we had a positive price across the electrical business, close to half a per cent.

Clearly, that's, you know, during the quarter, we were implementing price increases throughout the quarter.

As we roll into the third quarter, we would expect that to be north of 1%, and a little bit higher than that in the fourth quarter.

The challenge has been the material cost increases, which our current estimation as we roll those up is we are probably about 20 million higher on material costs than we were, 15 to 20 million higher than they were at the, in April when we rolled it out.

So that 15 to $20 million is kind of a full-year --

Yes, yes, it is, Jeff.

And I'm sorry.

That's 15 to 20 million above what you expected, or that's the headwind?

That's above what we had rolled up in April which we were at 40 to 45 back in April.

That's right.

And John or Terry, you know, what you're seeing going on with the utilities?

I mean, are people just covering their rear end here trying to avoid, you know, kind of strains on the grid, or do you think there's something a little bit more significant going on in terms of people's spending?

I think, the way I look at this, Jeff, it's sort of three things to look at.

One is historic, what have they been doing over the last couple years, and I think there's no doubt that they've been sort of strapped for cash and have done very little investing in the maintenance, well, not just the maintenance, the infrastructure area, but the maintenance and repair area.

And so I think what we're seeing now is people being more realistic about the money that needs to be put back into their systems just to maintain what they've got, and so that's a real positive at this current point.

We're actually very pleased with what we're seeing in some of those [order] trends, the business has been pleasantly surprising to us on the upside.

So we think that's going to continue because I think people, A, have, I won't say neglected it, but have been shaving what they could out of expenditures in the maintenance and repair area for the last couple of years and they now recognize that you just can't keep doing that.

Clearly, some of that is a little bit of covering concern about, you know, not being on a headline related to a blackout within their region.

But it's more than that.

It's not just trying to cover up publicity kind of stuff.

It's actually looking at these systems and saying we've got to start reinvesting in the maintenance and repair of these systems.

I think that from the standpoint of a longer term look, we don't see anybody making big moves or anything in the government area that is going to drive this overall systemwide, countrywide system upgrade of the electrical system at this point.

Although, I think all the statistics would, you know, and all of the data that you look at, we'll say that that, it's inevitable that that will come in some way, shape, or form, I guess the only question now is in what way, shape, or form will it come.

So, you know, all in, we're positive about the near-term outlook of that business and we're positive about the long-term outlook for that business, and with those kind of trends, our folks now are looking at sort of next generation of technology products that's going to continue to allow the utilities to reduce their operating costs, which I think is the thing that they're most interested in.

So we feel pretty good about it.

Thanks.

Your next question comes from Deane Dray.

Thank you.

If we just come back to the price topic again.

And did you get a sense of whether you all are ahead of the curve or behind the curve in getting price?

And in particular, was there, has there been, and is it too early to see any competitive response?

We talked about this last quarter, whether that you might opt to hold off and try to pick up some share without trying to come up with [true] price.

So where does that stand so far?

I think generally, Deane, that we're pretty much in line with what the competition has at least announced in terms of announced price increases.

I think these things affect companies different ways.

We ultimately will get to the same place but they will affect companies different ways based on backlog, based on mix of sales, et cetera, et cetera, et cetera.

So I think generally speaking, we are comfortable that we are in line with what the industry is doing in the pricing area.

You know, I think the bottom line is, all of us need to do this because of the cost increases we've seen and, I would anticipate, if I were going to guess, I would guess that we may even see a little bit better price increases than we've anticipated in our second quarter look.

Having said that, what we don't know is what's going to happen to the material costs going forward.

And we're not real pleased with this latest announcement on some of these categories of steel, we just don't understand that, but time will tell where we come out on that.

And for your steel, how much of that is under contract or how much are you subjected to the spot-market?

I don't, I can't answer that right now.

I don't know, Deane.

We can probably give you an update on that at the August meeting.

Appreciate it.

And then just a quick question.

No mention about asbestos, not asbestos, there's plenty about that, about acquisitions.

And, you know, without maybe with the RSA acquisition, the spigot might have been opened.

Where does that stand, what's the pipeline look and what should expectations be?

I think generally speaking the pipeline continues to build in a general sense certainly from the standpoint of what we want to look at, which are generally bolt-on acquisitions to the businesses we have at this point, and we're mobilizing to look at other areas within, probably within the Electrical group.

So the pipeline is getting a little stronger.

We've been looking at a lot of things.

Some things right now look a little bit more attractive to us than others and, you know, we're feeling pretty good about where we are in terms of looking at things.

We're not going to do something stupid.

It'll fit with, you know, generally, we would, it will look something like an RSA acquisition, which I think basically the discussions we've had with a lot of people.

On that little one people recognize where we're headed and how that fits and that's kind of the conclusion one should come from.

That's kind of what you should look forward to going forward.

And, you know, it's all a question in our mind of what kind of return can you expect out of these acquisitions and, you know, our standards there are pretty high and we're not going to come off of those standards.

And in the meantime, you know, we've continued to buy back a few shares of stock and that's not a bad investment either.

Good.

Thank you.

Your next question comes from Scott Davis.

Hi, guys.

Hope you can hear me.

I'm on my cell phone here.

We're fine, Scott.

We can hear you fine.

Thanks.

I want to go back to Jeff's question.

I did lose a little bit of your speech here and I guess I think what I heard was that distribution was strong up about 14% and the retail channels were weaker.

I'm not sure if you gave a number there.

Can you talk a little bit about what you're seeing in the retail channels and also distribution and the inventory adjustments?

I guess kind of the real question here is how comfortable are you that the inventory adjustment in retail is the reason why it's weaker and how comfortable are you that the strength in distribution isn't also as a result of an inventory build?

Okay.

Scott, on the retail side, we knew they were building inventory in the first quarter of the year and actually through April and that's why last quarter, if you recall, I made a comment that we didn't expect that to hold up.

We believe now, based on what the order trends are in the first part of July and discussions I've had with the two businesses in Electrical that are the primary suppliers, as we roll into July, the trends are back to normal, they look pretty good.

So we would expect going forward to be more of a normalized rate on the retail side, which we were down a little bit north of 10% on the retail sales in the second quarter, following a strong 20-plus percent increase in the first quarter.

So overall, our sales are up in retail five to ten, which is fairly normal for that channel.

On the distribution side of it, discussions with our customers are, their investors are pretty normal for this time of year, and the sales trends out the door are still looking good.

The distribution channel seems to be very positive with the sales down to the end user.

Okay.

That's good.

And it sounds like to me that you have a little bit more confidence in your, in, A, the outlook on asbestos but also your ability to kind of fence in and forecast what your liability is here.

And I think in some disclosures you've talked in terms of kind of a 200 to $400 million liability.

Is that still the case, or can you narrow that down a little bit more for us?

Well, Scott, as I mentioned, and I hope you understand this, I wanted to, I really, because we're in the middle of these discussions with these parties, that's a difficult question for me to answer with a specific.

And frankly at this point I'd prefer not to give you an answer in that.

I hope you understand that.

But generally speaking, I think the statistics that we give people every quarter, one would come away concluding that we're continuing to, A, manage that situation reasonably well during this period of time of continuing discussion.

And over a period, reasonable period of time here going forward, we should come to some conclusion as to whether or not we will be a participant in the bankruptcy trust or we will decide to approach the situation differently.

So I think it's probably a little bit premature to get into specifics on that at this point.

But we're certainly, you know, we're comfortable with what we've said on this thing so far and we'll see where that takes us going forward.

Completely fair.

Thanks, guys, I appreciate it.

You're welcome.

Your next question comes from Bob Cornell.

Yeah, thanks, everybody.

Hi, Bob.

You know, in the lighting business, one of your competitors, the Hubbell Corp. reported earlier this week and, you know, they talked about, you know, getting their act together with regard to the LCI acquisition they made a while back and they're getting a rep organization in place and they implied they were getting some market share back they lost a couple years ago.

I mean, has that been visible in your business?

You know, possibly a contribution to the, you know, the little bit lighter sales there this quarter?

I would say not, Bob.

I didn't, I read their press release, I did not have a chance to read their transcript thoroughly, but, you know, I'd say that the 5 to 10% increase in lighting sales during the quarter, which I think is the range that Rich had them in, considering the retail market being down is pretty significant.

So whatever they've said they've done in terms of improved sales in that area, I would suggest that we probably have participated in that also.

And keep in mind that, you know, there are other, two other relatively big players in this market, and one should probably look at all of those statistics in terms of the performance of not just Hubbell, which is a significant participant but also Acuity, which is a significant participant and I guess JEM Light Thomas, which is also a significant participant.

But in the context of looking at that, I think one has to look at the breakdown of where those sales go and where we participate versus some of the others participate.

So, for example, I don't, I can't speak for them, but my perception is that Hubbell does not do a big job in the retail markets, so one would have to take that weighting effect into consideration as you compare those sales trends.

Well, and Bob.

Just add to that a little bit.

You know, as Rich said, our lighting business was up 5 to 10% in revenues, and I'd mentioned our retail business was slightly down a little bit higher than 10%.

So I'd conclude that by, I mean, we don't feel we're losing market share at all.

In fact, feel at least equal if not above.

Okay.

Fair enough.

You know, inside the utility business, I mean you have the, you know, the Kyle business, the switch gear, the high-tech stuff then you have the transform business.

I mean, how actually, you know, is the transform business doing these days?

Are you getting, you know, some better volumes there and are you getting better pricing?

I mean, how's the competition looking in that business?

You know, generally is that transform business more profitable than last year?

Just what's the spin on that business?

Rich, I don't have anything in my book about that right now.

Rich may have a little bit about that, but Rich do you have anything on that?

I think Terry's got some information there.

Our transformer business is up on the volume side of it, pretty much in line with the overall power system revenue increases.

The profitability is a challenge on that from the standpoint that getting the material cost increases pass through a price takes a little bit longer to do because of the blanket orders that utilities have that we typically enter into late in the year.

That being said, I have to say our power business kept the margins pretty good shape compared to the first quarter.

Overall because of Kyle I would imagine.

Well, I think it's fair to say that most, a lot of the, most of the product lines did pretty well in that business during the quarter and that's not to say that there's been a deterioration in transformers because we've done a pretty good job moving some of that work to the Mexican affiliate that we have, so that's coming along pretty well.

But generally speaking, we're reasonably pleased with what's going on at power at this point.

That leaves one off the wall question.

What was your thoughts around the Black & Decker price paid for the Pantera Tools business?

I don't really have a thought on it, Bob, we didn't really spend a lot of time on that.

That's not an area that we participate in.

I guess all I can say is, based on what I saw in terms of market reaction, the folks that should know should be most interested in that, felt at Black & Decker got a pretty reasonable price on it and it certainly was, the first day or two reaction, I didn't, I haven't looked at it since.

So, you know, I wouldn't consider it to be based on the numbers and statistics that I did glance at, I wouldn't consider it to be, I'd say it was sort of in the middle of the sweet spot in terms of what one might hope to do.

Absolutely.

Not too low, not too high but, you know, good luck to them.

They think that obviously it appears to have fit strategically for them and I wish them good luck.

Amen.

Thanks very much, guys.

Your next question comes from Dan Toshaba.

Before we take this question I just want to alert people.

This will be my last question, mindful of everybody's time during this busy earnings announcement so happy we'll be happy to take this question from Dan and then we'll conclude our call.

Hi, guys, good afternoon and good quarter.

Thank you, Dan.

John, the cash at the end of the quarter was very strong on the balance sheet and you raised your cash flow targets and the outlook looks very good.

How do you think about the various alternatives for cash, for distributing some of that cash over the next maybe 12, 24 months and specifically between dividends, which you already have pretty good dividends, obviously stock buy backs, and acquisitions?

And if you address acquisitions, could you just give us a little bit more color in terms of, do you prefer smaller acquisitions, mid-sized, how do you think about your cash in applying it?

Well, let me give you an answer on the last part of the question first, and that's acquisitions.

I think it's fair to say that people will see us being more active in the acquisition arena going forward.

That is assuming we can find things that give us a reasonable return on our investment.

In terms of size, I think one would probably expect to see smaller bolt-on a combination of smaller and medium-sized bolt-on acquisitions.

What do we mean by that in terms of size?

I would suggest that that range is somewhere between 10, $20 million on the low side and maybe upwards of 50 to $75 million on the upside.

Maybe a little bit higher than that, but probably at the outset that's probably the range that we would typically be in.

So that's kind of where we are on that.

And we think we're well positioned to do that.

We've got a very good balance sheet.

Now, in terms of the next six months going forward, let's limit it to that.

I think appropriately, you've indicated that our dividend is, our dividend certainly is not substandard.

So I don't know that there's a compelling reason to have to do something there.

Having said that, I have not discussed that in detail with our board and I think that will be a subject of discussion going forward and should be a subject of discussion going forward.

As a discussion of additional share repurchase should also be a discussion.

Because I think bottom line is, with the one exception of positioning to handle the Federal-Mogul situation really we can be quite flexible on any one of those three alternatives, I think, going forward.

And, again, I think that's a subject that we're probably going to be discussing in earnest with our board over the next, certainly over the next two to three months.

Okay.

Great.

Thanks a lot.

Uh-huh.

John, any concluding comments before we close our call?

Just one.

I just want to say thank you Constance for your help and thanks to all of you for joining us this morning.

We look forward to seeing many of you on August 18th in New York and more importantly, we look forward to giving you a strong finish for Cooper Industries for the balance of the year.

So with that, again, Constance, thank you for your help and thanks to all of you for joining us.

Thank you.

Thank you, sir.

And this concludes today's conference call.

You may now disconnect at this time.