伊頓 (ETN) 2004 Q3 法說會逐字稿

Good afternoon.

I'm Michelle and I will be your conference facilitator.

At this time, I would 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 questions and answer period.

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

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

Thank you.

Mr. Bajenski, you may begin.

Thank you everyone for joining us today.

Before we proceed, 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.

Actual results may differ materially from those anticipated by Cooper.

A discussion of these factors may be found in the Company's recent filings, our annual report on Form K and other SEC reports.

This call is a copywrited presentation of Cooper Industries Ltd. and is intended for the exclusive use of the participating audience.

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

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

At this time, I'll turn this call over to John Riley for our opening comments.

Thanks Rich.

Good morning, and as usual, we're pleased that so many of you were able join us to review the Company's Third Quarter results.

Clearly, we had another very good quarter.

As I mentioned in this morning's press release, I'm pleased with our performance.

We achieved solid topline growth and strong double digit improvement in both earnings -- operating earnings and earnings per share.

Our revenues for the 2004 third quarter increased 9% to $1.14 billion, compared to $1.05 billion for the same period last year.

Operating earnings for the quarter increased 22% to $130.2 million, compared with $106.6 million, again in last year's third quarter.

And of equal importance, third quarter net income rose 27% to $89.3 million or 95 cents per share diluted, compared with net income of $70.6 million, or 75 cents per share diluted for the third quarter of 2003.

I might add and call your attention to the fact that, during the quarter, we raised our effective tax rate for 2004 to 20.4%, from 20.0%.

That resulted in a 21.1% tax rate for the third quarter.

Terry will fill you in on what's behind this change in tax rate in a few minutes.

We also had a very strong free cash flow period.

Third quarter free cash flow was $116.7 million, driving our debt to total capitalization ratio, net of cash, on September 30, to 28.1%, down from 29.8%, at June 30, 2004.

The Company's year-to-date free cash flow now totals $304.9 million, up 44% over last year's comparable results.

Our third quarter performance reflects the implementation of a disciplined concentrated strategy, designed to continuously improve our operating performance and our capital structure.

This has had a positive impact on our year-to-date results as well.

Revenues for the first 9 months of 2004 were $3.31 billion, up almost 10% compared to $3.02 billion for the same period in 2003.

Operating earnings for the first 9 months of 2004 were approximately $367 million, up 18% compared with $311 million, again, for the comparable period 2003.

And that's despite our 2003 results including 8 points -- 8.6 million, or roughly 9 cents per share after tax, for the reversal of an accrual related to the Company's previous strategic review of alternatives.

Net income for the first 9 months of 2004 was $250.9 million, up 25.7%, compared to $199 million for the first 9 months of last year.

Again, adjusted for last year's accrual reversal, earnings per share for the first 9 months of 2004 were $2.65, up 29%, compared to 2005, for the same period, 2003.

I'm also pleased to report to you today that, as we prepare to wrap up 2004, we're continuing to make good progress implementing each of our five key businesses improvement initiatives.

Coordinated sales and marketing efforts are beginning to pay dividends in many regions of the country.

Another positive, we're also now well on our way to being better positioned to sell our products worldwide.

We worked hard to gain new customers and to serve traditional customers, as they too look for global business.

It's no longer enough to just sell our products in our traditional markets.

And I'm confident that we're positioning the right people in all the right places to find these opportunities around the world.

Beyond this, our strategic sourcing program is enabling us to offset much of the negative impact of rising raw material, energy and transportation costs.

And the basics of our company-wide MVP productivity improvement program are also now firmly in place.

The past several months haven't been easy on the manufacturing industry.

Several commodities we use to make our finished products, things like steel and copper and aluminum, have all escalated significantly in price, as have energy and transportation costs.

Without our combined purchasing efforts and elimination of non-valuated costs through our MVP productivity improvement initiative, we wouldn't be as well positioned going forward, as we are today.

Finally, several of our locations are up and running using the common enterprise business system that will eventually tie together all of our worldwide operations in a more efficient manner.

Again, more savings to come from this area going forward.

All of this said, I think it's now time to ask Terry and Rich to provide you with some additional detail on our performance during the quarter.

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 third quarter, we generated free cash flow of 117 million compared to 122 million in last year's third quarter.

Year-to-date, free cash flow of 305 million, compared to 211 million last year.

That's more than 1.2 times net income.

In the fourth quarter, we anticipate funding our Viva Trust, making the U.S.

Federal tax payments, and buying out a leased manufacturing facility.

In addition, we may improve the funding level of our pension plans with additional cash contributions.

But, inclusive of these fourth quarter cash payments, we expect to comfortably exceed our goal of generating free cash flow in excess of net income for the year.

With the 9% revenue growth in the third quarter of 2004, we invested 5 million in operating working capital during the quarter.

Execution on our company-wide initiatives continue to deliver results, with solid improvement in operating working capital efficiencies, minimizing the investment required to support the topline growth.

For the quarter, our inventory turns improved to 5.7 turns from 5.1 turns in 2003.

And our day sales outstanding improved 3 days compared to the prior-year quarter.

We do have a significant difference between the first 9 months of 2004 and the first 9 months of 2003, in reported cash flow from changes in deferred income taxes and changes in other assets and liabilities.

These items provide 115 million in cash flow in 2004, and 63 million of cash flow in 2003.

The difference between the periods is primarily related to the timing difference on prepayments to our Viva Trust for employee benefits of approximately 60 million.

In 2003, we made a large prepayment in the first quarter, and in 2004, we have not made any large prepayments to date.

Our capital expenditures in the first 9 months of 2004, totaled 64 million, compared to 54 million last year.

Our capital expenditures in the fourth quarter will include the purchase of a leased facility for approximately 14 million, in spending on our new China facility, the wiring device headquarters relocation, and investment in our enterprise business system.

We anticipate the capital expenditures to be in the 100 to 110 million for the year.

During the quarter, we purchased 694,000 shares of common stock and year-to-date, we've purchased 3.7 million shares for a total cash outlay of 203 million.

During the first nine months of the year, we issued 1.4 million shares from stock option exercises, matches to our 401-K program, and other stock programs.

Our balance sheet remains in great shape, with our debt total capitalization net of cash at 28.1% on September 30th.

Now, turning to the results for the third quarter.

The results for the third quarter came in stronger than we had forecast back in July.

The third quarter revenues increased 8.7%, with currency translation contributing 1.7%, a nominal amount from the small acquisition completed in the first quarter.

As expected, our revenue growth includes overcoming large assembly equipment sales in the third quarter of last year in our tools segment.

Also as expected, retail channel sales moved back to a normal pattern after very strong first quarter and lower second quarter shipments.

With the United States contributing more heavily to our earnings growth in the third quarter, we increased our expected income tax rate for the year to 20.4% from 20%.

This resulted in third quarter income tax rate being 21.1% and had the affect of reducing earnings per share by about 1 cent.

Steel and energy costs inflation continued to escalate in the third quarter creating a continuing challenge throughout the period.

We aggressively went after sales price increases and efficiency and, for the quarter, delivered a 27% increase in earnings per share on an 8.7% revenue increase.

As I have mentioned in previous calls, the comparability of our third quarter 2004 results with the third quarter of 2003 results, continues to be impacted by Cooper voluntarily adopting, effective January 1, 2003, a new method of accounting for stock-based compensation.

That results in the expensing of all stock based compensation on a prospective basis.

It now looks like companies that did not adopt the accounting rules for expensing all stock-based compensation will be required to do so during 2005.

This is good news, as far as I am concerned, as the negative impact on our earnings that we have taken over the past two years will be on an equal basis to other companies, once everyone is required to expense all stock-based compensation.

In the third quarter of 2004, our total expense related to stock-based compensation increased approximately 2 million over the third quarter of 2003.

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

This decrease in expense offsets increased medical insurance expense.

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

Net interest expense was approximately 1 million lower for the quarter, compared to the prior-year quarter, primarily resulting from earnings of the higher cash balance.

For the quarter, our electrical products revenues increased 10.6% compared to the prior year, and our tools segment revenue increased 0.3%.

Translation increased electrical products revenues approximately 1.6% and tools revenues, approximately 2.1% 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 electronics and utility markets.

Sales into the primary channels to market, grew nicely across the board.

As we expected would occur during the third quarter, retail channel sales returned to a normal trend.

Sales trends remained positive throughout the quarter.

In the prior year quarter, we are running relatively flat through August in our year-over-year comparables and then, in September, saw the signs of rebound in the markets with a strong 2003 September performance.

In 2004, we saw a more consistent sales trend throughout the quarter.

Electrical markets remain competitive but we're (are seeing) acceptance of price increases in the market.

For the quarter, we estimate that overall pricing was up between 1% and 2%.

In our tools business, we expected revenues for the quarter to decline 0 to 5%, resulting from the large assembly equipment sales in 2003.

We ended the quarter with sales increasing slightly, driven by increased sales of all product lines, except for assembly equipment.

Overall, cost of sales as a percentage of revenue improved 100 basis points to 70%, from 71% in last year's third quarter.

Electrical products, cost of sales improved 20 basis points from the prior year, to 69.5%.

Though a nice improvement, sales mix and pressure from material costs increases limited the improvement from the prior year.

Tools cost of sales in the third quarter was 72.5%.

This was an improvement of 440 basis points from the prior-year quarter.

Sales mix was a significant contributor to this improvement, as last year, we shipped a couple of large low-margin assembly equipment orders.

Overall, benefits from strategic sourcing, MVP and other productivity actions, contributed to a lower cost base in both segments that was partially offset by increased material costs.

During the quarter, steel and energy costs escalated more then we had forecast back in July.

In July, we were forecasting that commodity price increases would likely exceed sales price realization by less than the approximately 6 million we experienced in the second quarter of 2004.

While material and energy prices clearly increased at a faster rate than we forecast, we executed and drove price increases to offset the inflation.

Our estimation is that we had approximately a 4 to 5 million negative impact in the third quarter.

Selling general and administrative expenses for the quarter, as a percent of sales, was 18.6%, compared to 18.8% in the prior year third quarter.

Maintaining cost control has allowed us to leverage the revenue growth.

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

For a total SG&A expense perspective, we are up 14 million in the third quarter of 2004, compared to the prior-year quarter.

Of the 14 million increase in SG&A, in the third quarter compared to the third quarter of 2003, approximately 3 million is a result of translating our international operations into U.S. dollars, with the balance primarily volume-related and increased stock-based compensation expense.

Now, flipping over to the segment reporting, I'll start out by discussing general corporate and other expense.

For the third quarter of 2004, we reported 19.3 million in general corporate and other expense, compared to 17.6 million in the comparable quarter of 2003.

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

We delivered a very nice increase in segment earnings for the quarter, up 20.4% over the prior year, comparable quarter.

Electrical products was up 14% and tools was up 103%.

Our electrical products segment return on sales increased to 13.8% from 13.4% in the third quarter of 2003, and decreased 10 basis-points from the second quarter of 2004.

The benefits of cost reduction efforts and efficiencies from higher volumes were tempered by increased material costs and the impact of sales mix.

During the quarter, we experienced the strongest sales improvements in our lower margins divisions, wiring device, B-Line and power systems.

This was accompanied by softer North American hazardous duty project business and northern European sales, both of which tend to be in the higher margin sales.

Our tools segment return on sales increased to 9.7%, compared to 4.8% in the prior year third quarter and increased 270 basis-points from the second quarter of 2004.

The segment benefited from the product prior year factory closings and good sales mix, resulting from lower shipments of lower margin assembly equipment orders.

Before I turn the conference call all over to Rich, I have a couple of comments on the tax legislation that Congress recently passed.

This tax legislation is very good news.

There are no retroactive or other punitive provisions that will impact our income tax rate.

Our initial analysis is that the legislation should have a relatively neutral effect on our overall effective tax rate.

Again, very good news for us.

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

Thank you, Terry.

A quick review of how our individual business segments - electrical products, tools and hardware - fared in the quarter.

First, in summary, to remind you, revenues for electrical products were up 11% this past quarter, with an operating earnings improvement of 14%, which led to operating margin of 13.8.

The revenue increase of 11% included a benefit from translation of approximately 2% leading to an overall core increase in revenues of 9%.

Within our divisions, that 9% was achieved in the general following way.

Increases of 10% or more were achieved in B-Line, Power Systems and our Wiring Device businesses.

Increases of between 5 and 10% this past quarter were achieved in our Bussman and our Lighting operations, and increases of up to 5% were achieved in Crouse-Hinds and Menvier.

Geographically, for electrical products, looking first at the U.S. and Canadian marketplace, our revenues increased approximately 10%.

Here, increased maintenance spending by utilities, primarily focused on system reliability, continued to lead to growth in sales for our electrical distribution and transmission equipment.

In addition, demand from major retailers returned to more normal levels following the second quarter's inventory adjustments, and this was reflected in the sales of our lighting fixtures and wiring device businesses.

Also, ongoing renovation, remodeling, and maintenance activity in the commercial and the industrial marketplaces, contributed to the growth in sales of lighting fixtures as well as wiring devices.

The Industrial spending continues in factories and continues to sustain the increased sales that we've seen of circuit protection devices, support systems and other electrical products and the improving electronic markets have led to better demand for fuses, other circuit protection devices and our and enclosure business.

In Europe, excluding translation, revenues increased between 3 and 5% this past quarter.

And despite the relatively slack markets, we have achieved continued growth in our major product areas with some additional contribution coming from exports from this market.

In Latin America, excluding translation, revenues increased also between 3 and 5%, where local sales increases were led by the sale of products for the industrial and utility applications area.

A few words about Asia-Pacific, a growing area for us.

Our sales continue to expand in this region as we gain momentum from our continuing focus and resource commitments to the Chinese and the Southern Pacific marketplace.

Turning to tools and hardware, revenues increased just slightly this past quarter, leading to an overall operating income increase of 103%, that produced an operating margin of 9.7 this past quarter.

The -- while revenues were relatively flat, we saw a contribution from translation of about 2%, so core over base revenues were down about 2% year-on-year for the quarter.

That year-to-year decline was reflected in the lower shipments of assembly equipments, shipments to the automotive project industry.

Otherwise, and absent those shipments, growing industrial demand led to better overall sales of both our hand and power tools.

Net, our hand tools were up in the neighborhood of 5 to 10%, and our power tools, excluding the assembly equipment shipments, also would have been up in the neighborhood of about 5 to 10%.

Geographically, in the U.S. and Canada, our revenues for our tools businesses increased approximately 10 to 12%, with the increases reflecting the improved industrial and electronic markets for our hand tools as well as for our power tools.

In Europe, excluding translation, reported revenues declined about 25 to 30%.

That year-on-year decline in the segment sales is the direct result of lower assembly equipment shipments to the European automotive industry.

Otherwise, regional demand for our hand and power tools was about the same as it was last year's third quarter.

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

We continue to achieve growth here from the expanded product focus we have in this region and market penetration.

That's my quick wrap-up on those points.

I'll turn it back to John for continuing comments.

Thanks, Rich.

Now, before we move into questions, let me take a minute to update you on the Federal-Mogul situation and our outlook for the balance of the year.

We received approximately 7,900 new asbestos claims during the quarter.

We resolved over 20,000 claims during the same period, leaving us with roughly, 47,000 outstanding claims at the end of the quarter.

Also, at the end of the quarter, the average indemnity payment claim now stands at $1,778, compared to an average of 2,148 at the end of the second quarter, and 1,846 at the end of last year.

These numbers will be reported in more detail in our upcoming 10-Q.

As I reported at the end of the second quarter, discussions with all involved parties are continuing in an effort to bring this matter to a conclusion that, one way or another, is in the best long term interest of all of the stakeholders.

As far as the outlook for the year is concerned, let me say that, looking ahead, pricing actions are focused on low cost manufacturing and strategic sourcing, and our investments in business system's technology should allow us to successfully confront rising costs of raw materials, transportation and energy.

Again, costs which today are substantially higher then we anticipated at the beginning of 2004.

Likewise, several new product introductions and outgoing programs to increase our global market share, should broaden our customer base and generate solid incremental core revenue growth for our businesses.

While we expect to see a normal sequential revenue decline in the fourth quarter, these growth and profitability improvement initiatives will allow us to continue to report solid results for the balance of 2004.

Consequently, as we mentioned in this morning's press release, we now expect that our 2004 earnings will approximate $3.55 a share, the high end of our previously announced estimate for the year.

Terry will now give you some additional detail on our fourth quarter forecast.

Terry?

Thanks, John.

In the fourth quarter, we expect to continue to experience a challenging environment on commodity costs.

We're closely watching steel, transportation, and energy costs and the overall inflation in 2004 on component and part purchases, as these vendors demand price increases.

We also are continuing to push through price increases.

If all goes as planned, we should achieve close to parity, with price realization offsetting material cost increases in the fourth quarter.

As you might expect, this area will continue to be subjected to market forces in the fourth quarter, and can drive pluses and minuses to our forecast.

However, overall, the execution by our businesses on price increases has been commendable.

And expectation is that we'll continue to execute well in this area.

We are forecasting earnings per share for the year to be at the high end of our previous guidance of our $3.55.

This equates to a fourth quarter earnings per share of 90 cents, plus or minus.

Revenues are expected increase 5 to 7% over the 2003 fourth quarter, with a nominal impact from currency translation.

Electrical revenues are expected increase 6% to 8%, and tools revenues are expected to be in the range of minus 2% to plus 3%.

We anticipate electrical volumes to remain strong for the balance of the year.

However, year-over-year revenue increases are a much tougher comparable, as in the prior year, we began to experience a market rebound beginning in September of 2003.

And, we do not anticipate currency benefits in the quarter.

Tools year-over-year revenue increases will be depressed by the shipments of assembly equipment systems in the fourth quarter of 2003 that will not repeat in 2004.

We're not forecasting much of a change in our sales mix in the fourth quarter and anticipate the stronger year-over-year growth to continue in our lower margin businesses.

In the fourth quarter, our return on sales in both segments is impacted by the normal inefficiencies of the extended holiday season and lower volumes.

We anticipate return on sales in both segments to increase from the prior year with return on sales for electrical, 13.5%, plus or minus, and tools, 8 to 10%.

General corporate and other expense, will increase from the prior-year quarter, primarily due to increased stock-based compensation and is anticipated to be in the 18 million to 20 million range.

Interest expense is anticipated to be around 17 million, plus or minus.

And average diluted shares are expected to be in the 95 million to 95.5 million range for the quarter.

At this point , I'll turn the conference call back to John.

Thanks, Terry.

Let me wrap things up by saying, by any measure, 2004 will be a very good year for Cooper Industries.

And beyond that, I have confidence that our Cooper team will continue to drive further improvement in our operating performance and our financial position.

As I mentioned earlier, the disciplined execution of our strategy is resulting in increased daily benefits from our key internal improvement programs, despite the harsh reality of higher material, transportation, and energy costs and heightened global competition.

But it is what it is.

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

Thank you, at this time, I would like to remind everyone, if you would like to ask a question, press star and the number 1 on your telephone keypad.

Your first question comes from the line of Deane Dray with Goldman Sachs.

Thank you.

Question is on the price and material costs issue.

And we've heard from a number of companies that the raw material costs escalated faster than they were able to put through price increases.

Really not hearing that from you.

So, it sounds like you were successful in getting the price increases.

Did I hear correctly, 1 to 2%?

And have we seen the full benefit of that yet?

So is that -- did some of those price increases come late in the quarter?

And what sort of benefit we will we see next quarter there and how much more might you be able to do?

Terry, why don't you handle it.

For the quarter, Deane, I would have to give credit to our operations, because they were on top of it.

We saw our steel prices increasing early in the quarter.

Of course, everybody has seen what energy prices do.

We continued to push price increases through.

I also will tell you, that I personally believe, we were ahead of most companies on starting the price -- getting price increases.

So, we are probably realizing those faster than some.

And, in getting there, overcoming some of the areas that are tough to get price increases ahead of time, i.e., businesses like our power systems business that has blanket orders with customers and backlog.

So, I would attribute it largely to our operations getting ahead of the game on the price increase side.

Yes, there is some carryover into the fourth quarter from getting those price increases, and that helps us get to a parity level, or an estimated parity level in the fourth quarter.

So when you talk about parity in the fourth quarter, just roughly, how much of that gap is closed from pricing and how much of that gap gets closed from all the productivity initiatives, whether it's sourcing, low-cost manufacturing, or MVP.

How does that split between those two?

I think we're going to hand up, Deane, on the material cost side, just on the steel cost, which is the information I have, or metals cost, we will close the gap to close to zero on the metals side.

We also have to overcome, you know, what's happening today, as clearly, these cost increases start filtering down into the component part purchases and those types of things.

And that will be offset by our other productivity - additional sourcing benefits and some other benefits.

So, to answer your question, we have a ways to go on really realizing total price parity, and realizing those incremental benefits that we're getting from our other programs.

But, these price increases continue to roll in to 2005, so we'll be in good shape going into next year.

I think it's fair to set that the net quarter-to-quarter, year-to-year increase will be better margins this year than it was last year.

Last question related to this.

We talked about this -- I asked about this before.

What has there been in the way of competitive response to your price increases and is there been any shift of market shares so far?

And, you know, is there any issue there in the next couple of quarters?

Well, Deane, it's hard to quantify that.

But, let me give you some -- a few comments on that.

These are not easy discussions - these price increases - in putting these things out and telling these customers that cost of materials have gone up, cost of oil has gone up, cost of transportation has gone up.

I mean, on the surface, you would think that would be a pretty logical conversation.

It's not that the customer-base doesn't understand the reason you must increase prices.

But, having said that, they haven't seen price increases for a long time, so, again, these are not necessarily easy conversations.

In some cases, you have a certain class of customer that understands it and, indeed, they see it as an opportunity to pass through some price (indiscernible) themselves to their end users.

Primarily in the distribution market.

You have other customers that don't see it that way at all and they want to take all of that opportunity and put it in their pocket.

So, in some cases, you're faced with the decision of what are you going to do with the price.

Our position has been -- this is needed, this is the price, and this is what we're going to do.

Now, the bet there, obviously, is that the rest of the marketplace follows the leader.

And I think, generally speaking, we have been a pretty good leader in this whole area.

I wouldn't say we're that the absolute saint in the world, but we're generally speaking, I think we've tended to try and lead the pack.

So, that may result in a project or two being lost here or there, but, you know, that's the price of the price increase and, if your products are good, your quality is good, your deliveries are good, and your service is good, in terms of bringing materials and bringing orders to these customers, then ultimately, they will come back to where they were at the beginning and things will equalize.

It's hard for me to say, you know -- we know now what everybody's announced in the price increase.

The question isn't really the announcement.

The question is, the will of implementing that price increase going forward.

And that's always a little bit dicey.

But that's not any different than business as usual two or three years ago before this, sort of, no-price-increase situation began.

You do what you need to do and you do it the right way, with some style and grace and you move on and I think that's where we are in the equation right now.

Thank you.

Your next question comes from Bob Cornell with Lehman Brothers.

Hi, Bob.

Hi, how you doing?

I'm well, thanks, how are you?

Yeah, looks like it.

A couple of questions.

First of all, what was the Federal-Mogul actual quarterly expense.

You went through the case load and the settlements but not the -- at least I didn't hear the actual hit to earnings.

I don't have it. -- right in front of me, Bob.

I have to go through a calculation and it probably wouldn't--

Bob, everything that -- the expenses we're paying are charged against the reserve.

You'll see the reserve went down quarter-over-quarter.

We had a very light insurance recovery quarter, which is not -- that generally happens towards the end of the year.

So, we've built quite a backlog on insurance recoveries, which, quite frankly, you'll see that building the reserve after the first of year.

You can look at the two balance sheets and see how much was charged against them.

It's fair to remember that we booked the payments to the reserve and we don't book the insurance until we get the cash.

Thanks on that point.

Maybe, you know, John, you could go back.

You went through the commentary about shareholder interest and what you're doing strategically.

Maybe just flush that point out a bit.

Earlier in the year, you guys seemed hopeful you could reach an agreement and I think -- where is Federal-Mogul's plans right now?

I think they have a December deadline?

What's the story there?

The answer is, you know, our discussions are really with several parties.

One is this asbestos committee, which represents the current asbestos claimants - those people that have already made claims.

There's another committee that works as a subset of the asbestos committee that's called a futures committee and they represent the people that could potentially be impacted by this going forward - unknown claims.

And this is all done on a forecasted basis.

Then there's obviously the Federal-Mogul people, who are involved in this from the standpoint of those two other parties being satisfied -- being able to satisfy the Court that there's adequate resources and assets in the form of insurance coverage, proceeds, cash, perhaps, those kinds of things to satisfy all of the ongoing -- current and ongoing obligations of the claimants, both current and forecast.

So, what I described to you, as you may probably have picked up is, it tends to be a very complicated kind of conversation when you're dealing with people about participation in the trust or -- and what the price of that participation may or may not be, and also, the other option of just looking at the ongoing forecast for liabilities going forward and what that may or may not be.

That's what's really -- when you really come down to it, this is all about dollars and cents and about surety.

And that's kind of where we are in the middle of that conversation.

I can't you a lot more insight than that at this point.

But, you know, in terms of timing, there are several -- it's our understanding there are several issues that are still sort of swirling around the Federal-Mogul emergence from bankruptcy.

I have to idea what -- how they will affect the timing of that.

I would think that this thing could come to a conclusion, certainly, as early as the fourth quarter of this year.

May take a little bit longer, but I'm not really privy to all of that.

So, we're just continuing to have discussions and grinding through the number crunching and, it will take us to some point, we will know what the price of poker is supposed to be here in the eyes of the other parties and make a decision.

One follow-up question.

You guys didn't say anything about restructuring in the quarterly results.

At one point you were taking your plant down from 118 to 108.

And I think there was a shadow plan to take it down below that -- I mean, where are you with with regard to your footprint?

What is your capacity utilization?

What was the restructuring cost in the quarter and that type of thing?

I don't know what the capacity utilization is right now, Bob.

But just as a philosophical point, we've taken the position that in today's day and age, restructuring is a way of life.

That includes, not only downsizing specific plants, but closing a plant or two or combining a plant or two, and all of that is included in our results.

I don't have a number for it to give you this morning.

Terry, I'm not sure you have a number either.

But, you know, our view is these things are part of life.

And they're included in the results.

The only exception to that, in my judgment, should be where we have something that I would consider to be significant and major in terms of restructuring and that kind of thing we would address as we did, I guess it was at the end of 2003, to close that series of plants, most of which have been concluded -- 2002, I guess it was, that we announced that.

And that would be, you know, the only time that I would think we would look at some sort of restructuring charge, so to speak.

Other than that -- you know, you can pick and choose 100 different little pieces here and add them up and the answer is, yeah, they are technically things you're doing to restructure and improve or steamline your business.

But, if it's constant quarter-over-quarter or year-over-year, it seems to us that that's a normal course of doing business.

And Bob, we do have two or three plants that we are downsizing and will be closing.

We're taking those costs, as we go here.

And that will continue into the future.

That's just, as John said, that's a fact of life.

Okay, thanks.

To ask a question, please press star and the number one on your telephone keypad.

Your next question comes from the line of Dan Khoshaba with KSA Capital Partners.

Good morning, Dan, how are you?

Great, thank you, how are you guys.

I hope things are going well with you.

They're going very well.

Thank you.

I was wondering, kind of a philosophical inquiry really.

If you look at your guidance for this year, 2004, with a quarter left, it looks like revenues are going to come in roughly where they were in the year 2002, perhaps just a little bit lower.

And interest expense will be a little bit lower.

But all earnings will also be quite a bit lower from a similar revenue base back in 2002.

You guys have done a good job of moving your work force, obviously, to lower cost regions in the world.

You've done some restructuring.

Is there anything that's happened in the business, other than -- maybe this is all raw material costs, I dont know.

But other than raw material costs that have (indiscernible) margins or perhaps, made the business a little bit more competitive?

I think, Dan, there's a couple of things that have a fair amount of impact on it.

One, which is a little bit beyond our control, which is pension expense and (indiscernible) expense, if you go back to the 2002 type time frame, was close to zero, if not an income number, versus today, you know, it's more in the 10 or 20 million range.

So, there's a difference in cost base on that.

I think secondly, if you look at where the volumes were and which product lines in 2002 versus 2004, there's quite a bit of difference.

The retail markets, partially driven by what's happened in residential, continued to grow during that period.

And, what we characterize as the more profitable markets, tended to decline and those markets have not gotten back to where we'd like them to be.

Right.

And the other big fact is, we are expensing stock-based compensation.

That takes a 10-20 plus million hit to our earnings.

So there's three factors.

One is pension.

One is the expensing of stock options -- four factors.

One is raw materials.

And the fourth one -- it looks like that lower margin -- correct me if I'm wrong -- is primarily in tools and hardware.

Tools and hardware and wiring device, you know.

And B-Line.

Right.

Okay.

Thanks, guys.

Your next question is from Jeff Sprague.

Good morning, Jeff.

I guess Jeff is not there, Michelle.

Let's try it again.

Michelle?

One moment, sir, for your next question.

Thank you.

It comes from Jeff Sprague with Smith Barney.

Can you hear me?

I can hear you now, Jeff.

Okay.

It's always that dangerous mute button, isn't it?

Actually, it wasn't the mute button.

I'm having some kind of telephonic problems here today.

Anyhow, a couple of--

Maybe we ought to go into telephones what do you think, Jeff?

Kind of reminds me of Hubble and Pulse Com (ph).

Don't go there.

Okay.

On pension, I'm wondering if you can give us a little bit of color.

So, it's a tail wind in '04.

But, looking at, you know, kind of the stubbornness, the discount rates here and everything else, its starts to flip back on you in '05.

We are just in process -- in fact, next week, of meeting with our actuaries to go through that.

So I have very preliminary data on that, Jeff, but my expectation, at this point, would be we wouldn't see a big swing between '04 and '05.

Okay.

And I'm wondering, if we could drill in a little bit more into power.

Can you, to the extent you can measure it -- well, first, we don't always break out these segments in fine detail.

Could you give us a little bit more direct color on how strong power actually was in quarter and then give some color around what benefit, maybe, the storms would have had down in Florida?

Rich can you the color on the volumes.

I can talk about the Florida thing.

Rich, you want to try that?

Jeff, I'll put this into perspective.

Power has been our -- one or our most consistently strong performing businesses all through this year, which has been a very pleasant production out of that business for us.

They were up in double digits in the first quarter, versus the prior year, the second quarter versus the prior year, and also here in the third quarter.

We have not seen the things blowing themselves away up into the 20%.

We're more up in the mid-teens to low teens types of year-on-year performance.

I think it depends on the product lines, Jeff.

If you're into transmission line stuff, where storms blow them down, arrestors, fusing, those kinds of things, the breakout of those product lines probably does approach, as I recall, does approach 20% volume increases.

Some of the other things in the product line, like reclosures and sectionalizers wouldn't be nearly that high.

And they wouldn't be, sort of, storm driven.

Let me make a comment about the storms.

Obviously, storms are good for business and -- I can't deny that there would be a net positive impact of the storms on our power systems business during the quarter that these storms occur.

It is a net positive.

Having said that, we're always skeptical -- a little bit skeptical on how net positive these things are.

To us, would it have been 5 to $10 million worth of revenue?

The answer -- in our power business -- the answer might be something like 5, plus or minus, maybe as much as 10, but somewhere in that range.

But if you think about this, when you have people clamoring for materials down in those areas, in order to get those deliveries, you're basically taking those deliveries away from -- in many cases, you're taking some of deliveries away from other regions of the country.

So, there is some leakage there in your overall business volume.

And secondly, take, for example, right here in Houston, Center Point Energy here in Houston, sent multiple crews -- multiple of their crews with equipment, down to the Florida area to help those guys out and I understand that that was that was done by several of these utilities across the country.

Certainly, the ones in the southwest and midwest and so on and so forth.

If those guys -- linemen are hanging material in Florida, they're not hanging material here in Texas.

So, again, it's not, in my judgment, it's not quite as buoyant as some of these numbers might occur, related to just the storm.

Net positive, but I don't think that's what's really driving the power systems business in volume.

The fact of the matter is, the attention to maintenance, the attention to quality, the attention to capacity on their systems -- getting more out of the same system -- has risen in the eyes and hearts of these utilities.

Again, they are trying their best to avoid major capital expansion and the way to do that is to upgrade their system.

Secondly, they obviously, don't want to have their name on the front page of the Wall Street Journal on not spending enough money on maintenance and having a blackout.

And thirdly, and equally as important, a year and a half ago, their financial position wasn't good at all.

I think it's fair to say, most of these utilities have done -- are they perfect yet?

Are they back in great shape yet?

No, they're not.

But they've done a very good job of beginning to repair their balance sheet so that they have access to funding to make these investments.

And I expect this to continue for the next 6 to 12 months and then we'll see where it goes from there.

Will it be quite as buoyant as it is this year?

Maybe not.

Maybe because we have fewer storms.

Maybe because they've done a little bit more work this year than they would anticipate doing next year.

But still, not a bad business outlook in my judgment.

Jeff, I'll add that our business of power systems is probably right around 80% made to order.

So, to John's comment, you know, that's why we struggle with getting a net increase -- a big net increase when you have a storm, because you're displacing other customers out of the queue to get it shipped fast for the areas that were damaged in the country.

We probably only have about 15 or 20% of our product that I would characterize as shelf goods.

Can we just -- bottom line is we like the space.

We think it's been under-invested in and we think there's technology things that are going to occur that provide new product opportunities.

And that's why we like it.

In going forward, I've always said, as you know, it's actually our best cash flow business.

Probably our best -- it is our best inventory turnover business, so it has characteristics that are very good overall for the Company.

That's kind of how we see it.

Others may see it differently but that's our view.

Can you shed any regional light on -- is there any distinction to be drawn regionally on which utilities are spending money and secondarily, kind of, to a point you made as part of that answer -- what kind of legs do you think this does have in absence of Federal legislation?

It seems like some states have done some things that have jump-started some of the spending and, as you said, many of these utilities are covering their own rear ends also.

But what kind of follow-through do you think we get without some over-arching legislation?

Well, I think you've got probably a period of time of a year at least, that you going to get some follow-through.

Beyond that, I don't know, it's hard to say.

We probably need to read what happens in 2005 as we go along.

On the legislation front, I don't know.

I guess I'm the -- I'm always the resident skeptic on Federal legislation.

I think that some of these bills they're talking about would be net positives, but, I'm just not willing to bet our future on Federal legislation solving my problems.

So, I think it comes back down to broad product line, being able to service the total utilities need, get products in there that save these guys money and reduce their -- improve their efficiencies.

I just think that's the best way to go about this.

Sitting there waiting for Federal legislation to your problems, in my judgment, is a -- is not the way to go about this.

Now, if it comes and it's positive, that's a good thing.

Again, I wouldn't stake my future on it.

I understand you're not waiting.

I wonder if some of your customers are waiting.

It sounds like they're not.

Perhaps, they are.

I understand what you're saying.

Perhaps they are to a certain extend.

On the other hand, Federal legislation can help them in the sense -- that would probably help them most in terms of the investment side of the business and making their investments more efficient and, I haven't really thought about this, but maybe even this tax bill would be helpful to some of them in terms of accelerated depreciation and those kinds of things.

I would have to look at that.

Thanks a lot.

Mindful of everybody's time, we'll take one final question here and we'll give some completing remarks and wrap this up.

The last question, please.

Your final question comes from the line of Tony Boase with A.G. Edwards.

Thanks.

Just squeezed under the wire here.

On, just going on asbestos for a minute, there's some companies out there that think a government solution would be less expensive, you know, the searching out a channeling injunction.

What's your thought on that?

It sounds like maybe you don't have that much faith in the government to helping out on this issue.

But, do you think that's true, that it would be less expensive and if it is, you know, what are you doing to maybe pursue that?

Well, you know, we're -- we have people who represent us in Washington on a number of matters, one of which is asbestos legislation, Tony.

And I think you're familiar that there have been certainly, several draft approaches to this put together on the one hand, the Republican Party. and on the other hand, the Democratic Party.

Most of this has been done, I think, in the Senate arena.

There have been very pointed discussions between, I think, the Senate Leader, Frist, and the Minority Leader, Tom Daschle, on this.

It includes the input from manufacturers like us, it includes the input from the insurance industry and, I'm sure, it includes the input from the plaintiff's bar and all of the above.

The Way that this is being proposed is to establish a fund of to be determined amount, that would be financed by the government, by the insurance companies, by the manufacturers.

And the last that I knew, the proposal was that the participation level would be an annual contribution to this fund, and the amount of the contribution would depend on various levels of potential liability or forecast liability, to be determined.

But, in some cases, it might mean putting in 5 million a year and, in some cases, it might mean, as I recall, putting in something as much as 20 million a year or maybe even 25 million a year.

The good news is that, if that were to come to the front and be approved, then there would at least put certainty into this whole area, not for just people like us in our situation but for all manufacturers.

And you know, certainty is not a bad thing, assuming you can carry the cash flow load.

And I think, under any reasonable scenario, we would be able to carry that cash flow load with our ability to produce and generate cash.

So, if you ask me what's the perfect solution to this, I think in this case, I'd reverse my earlier comment I made.

A perfect solution for us would be a good government bill that -- perhaps, this is the way to go.

Again, it depends on dollars and cents.

I don't think you would have any choice.

If it was a national solution, you'd have to participate.

That's kind of where it is.

Just one housekeeping question.

As far as raw materials go, I guess in mid-August, you stated that you thought it was -- I think it was 55 to 65 million annual impact.

Today, what's your estimate?

Terry can give you that, I think.

Tony, today we're looking north of 70 million.

Okay.

And sorry, one other follow-up.

I didn't hear what the pricing benefit for tools and hardware was in the quarter.

We didn't talk about specific divisions or segments, Tony.

But tools and hardware tends to be a little better pricing environment because of their mix than the electrical side does.

So, they tend to get a quicker pass through on the price realization.

So, I would -- without looking at specific numbers, I would suspect they were probably fairly close to parity in the third quarter.

Thanks a lot.

Good quarter, too.

Thanks very much.

John, closing comments?

I have nothing more to add other than my ending comments before we started questions, and that is, obviously, we think 2004 is a going to be a very good year for the Company.

We're now in the process of putting our views and budgets together.

We're reasonably confident that 2005 is going to be another good year for the company.

And how good will determine when have a chance to roll all the things up and look at all the factors.

Again, we think this year's going to be a good year and 2005 could be a good year, too, and will be a good year for the Company.

With that, we'll look forward to speaking to you again in January on our 2004 results.

And then, I think we have a meeting scheduled in early February to take you through our outlook for all of 2005.

And we'll look forward to seeing you then too, if not before.

Thanks your for your attention and time.

Thank you, ladies and gentlemen, this concludes today's Cooper Industries third quarter earnings conference call.

You may now disconnect.