伊頓 (ETN) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

And welcome to the third quarter 2005 Cooper Industries earnings conference call.

My name is Bill, and I will be your conference coordinator for today.

At this time all participants are in a listen-only mode.

However, we will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS].

As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's presentation Mr. Richard Bajenski, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Bill, and good morning.

Welcome everybody to our call.

To conduct our call today we have with us Kirk Hachigan, Chief Executive Officer and President of Cooper Industries, and Terry Klebe, Senior Vice President and Chief Financial Officer.

Before we begin 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 Annual Report on Form 10-K and other recent SEC filings.

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

Reconciliations of those measures to the most directly comparable GAAP measures are posted on Cooper's website in the Investor Center at the "Management Presentation" section to the extent that we have anticipated them.

This call also is a copyrighted presentation of Cooper Industries Limited and is intended for the exclusive use of this participating audience.

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

While having said that, let me begin our call by introducing Kirk Hachigan.

Kirk?

Good morning.

Thank you for joining our third quarter 2005 earnings conference call.

I assume by now you all have had a chance to get a copy of the third quarter notes that we have posted on our website.

So, let me begin with a summary for the quarter.

Solid end market demand execution on marketing programs and pricing actions led to an overall 6% revenue increase, while electrical being up 8%.

It's the second quarter now in a row that we've been over a billion dollars in revenue, and that's record revenue for our electrical group.

Tools down 3% on revenue driven by weak results primarily at Cooper Power Tools division.

Our earnings per share for the quarter were $1.08 up 14% exceeding our third quarter guidance of $1 to $1.05 at a record quarter.

The second time north of a $1 a share.

Our net income was up 14% to $102 million, while electrical products return on sales was at 15.4% up 160 basis points.

Our best performance since the third quarter of 2001.

Tools and hardware return on sales at 8.5%, down 120 basis points reflecting, again, lower volume at Cooper Power Tools.

Year-to-date cash flow $235 million. $100 million improvement in the quarter with our debt-to-total-capital at 24% versus 28% last year despite buying back 2.5 million shares year-to-date.

The key drivers to our strong third quarter quarterly results at a macro level was strong industrial demand both domestically and overseas, higher utility spending, global energy investment around the world, solid price realization, and realized productivity through our manufacturing variance program.

On the issues or challenges side for the quarter, flat commercial construction, declining automotive activity, materials and energy inflation, and service rates which were negatively impacted by higher throughputs, EBS implementation, and several factory relocations.

Annualizing the revenue trends for the quarter by segment let me begin with the Electrical Products group, page four.

In distribution, stronger demand from industrial and energy markets drove excellent results at Crouse-Hinds, Bussmann, and Cooper B-Line.

At retail solid growth through "big box" and other retailers despite giving up a product category at Lighting, wiring devices and Bussmann posted substantially stronger results.

And in the utility channel continued demand for systems upgrades and, obviously, repair and construction for the damaged hurricane region drove orders significantly in excess shipments for the quarter.

Revenue trends by region.

The U.S. and Canada I think I've covered.

In Europe we see growing demand for IEC products for both local installation and export to the Middle East and the rest of the world.

Crouse-Hinds, Bussmann, and Menvier Lighting, Emergency Lighting and Fire products were positively impacted.

In the rest of the world we continue to see strong activity across the Middle East and Asia.

For Tools, the tools' revenue performance was really two very different stories.

At Cooper Power Tools, which is probably close to 30% of the revenue for the group, revenue was down double-digits driven by soft demand on the automotive assembly business with weakness at GM, Volkswagen and Audi.

And timing of some key aerospace projects at Airbus, Boeing, and several large defense contractors.

At Hand Tools, which is 70% of the tools group, revenues were up high single-digits driven by strong results at retail and industrial distribution.

In summary, the third quarter results were our best in well over three years reflecting continued strength in our end markets, positive pricing to offset higher commodity and energy prices, and reflecting the strength and breadth of our product portfolio.

Now, let me turn it over to Terry to give you some more details on our third quarter performance.

Thanks, Kirk.

First, I'd like to remind everybody that the exhibits are posted on our website under "Management Presentations" in the Investor Center at www.cooperindustries.com.

And I will be referring to those exhibits as I walk through the results for the quarter.

First, turning to our cash flow and balance sheet.

On Slide 6 you'll note that our free cash flow for the first nine months of 2005 was 235 million compared to 305 million for the first nine months of 2004.

For the third quarter we generated free cash flow of 98 million compared to 117 million in last year's third quarter.

On October 1st we went live with our Power Systems business and our Mexico business on our Enterprise Business System and built working capital and preparations.

Both implementations went well, and we're working down the working capital over the next 60 days.

We continue to be on track to generate free cash flow in excess of net income for the year.

Our balance sheet remains in great shape with our debt-to-total-capitalization net of cash at 24.1% on September 30th.

We were optimistic -- opportunistic in the third quarter and accelerated our stock buyback spending 89 million against proceeds from issuance of 14 million resulting in our net debt-to-total-capitalization remaining essentially flat with last quarter.

In the fourth quarter we will be issuing 325 million of debt with a seven-year maturity.

This debt replaces the Euro denominated debt with a U.S. dollar carrying value of 361 million at September 30th.

We have already locked in the seven-year interest rate and swapped into Euros.

We are very pleased that we're able to replace the existing Euro debt with a 6.25% interest rate with a very attractive Euro interest rate of approximately 3.5%.

During the first nine months of 2005, we've repaid debt of 270 million including the payment of 152 million of medium-term notes that matured.

In addition to the Euro debt refinancing and debt paydown, we have 77 million of medium-term notes that mature in the fourth quarter, which will be paid off with available cash.

After the refinancing and debt repayments, we'll have around a billion of outstanding debt with maturity schedules spread out from 2007 through 2012.

Our debt and capital structure are in great shape and provides us outstanding flexibility.

Turning to Slide 7, our inventory turns improved to 5.9 turns from 5.6 turns in 2004's first nine months.

The dollar investment in inventory is impacted by the increased material costs compared to a year ago, as well as the preparation for business system implementations and an [issuance] list to improve customer service.

A very solid improvement overall.

On receivables, our day sales outstanding were up one day compared to 2004 impacted by the strong September sales.

Operating working capital turns improved to 4.5 turns compared to 5.4 turns in 2004 reflecting continued improvement.

On Slide 8 or capital expenditures are up 12% for the first nine months of 2005.

Capital expenditures in 2005 include our Thomas A. Edison Research and Development Center in China completed in June of this year.

This facility has 170,000 square feet of manufacturing and office space and is our primary research and development center in China.

It also houses the commercial and manufacturing operations for our power capacitor joint venture with Shanghai Electric, our strategic sourcing operations, and local manufacturing for several product lines.

The other major 2005 capital project is our ongoing implementation of our global Enterprise Business System.

We now have over 2.5 billion of our revenue on the new business system, and we are operating in nine countries and six languages, and we are also exceeding our cost reduction objectives.

Capital expenditure forecasts for the year are currently forecast at 110 million plus or minus driven by the implementation of our Enterprise Business System, new products and capacity expansion projects.

Through September we've purchased 2.5 million shares of common stock against the issuance of 1.6 million shares for stock option exercise that matches to our 401(k) and other stock programs.

As I mentioned, during the third quarter we took advantage of market conditions and stepped up our purchases with 1.4 million shares acquired.

At a minimum we expect to purchase the dilution resulting from stock issuances in the fourth quarter.

Depending on cash forecasts for investments and acquisition, debt repayments and other purposes, we may purchase additional shares under our current 5 million Board authorization.

Turning to the results for the third quarter in Slide 9.

Back three months ago, we forecast third quarter earnings of $1 to a $1.05 inclusive of $0.04 to $0.06 in costs from our SG&A and other productivity actions.

Today we reported earnings per share of $1.08 and I'll provide you some flavor on the great performance over our estimate.

First our electrical segment significantly outperformed with our tools segment underperforming the forecast.

During the quarter the combination of the SG&A actions and cost related to the CEO transition resulted in us incurring approximately $0.07 per share in incremental SG&A costs net of benefits.

We anticipated $0.04 to $0.06 of the incremental costs for the third quarter.

The sales from initial orders from the two hurricanes that caused substantial property damage in the Gulf Coast aided to offset these incremental costs.

On the 6% total revenue increase, we leveraged to a 14% earnings per share increase inclusive of additional incremental costs incurred in the quarter.

On Slide 10 our overall cost of sales at a percentage of revenue improved 160 basis points resulting in gross margin increasing to 31.6% from 30% in last year's third quarter.

Once, again, our operations delivered in realizing price increases to offset pressures from commodity, energy and transportation cost increases.

Selling, general, and administrative for the quarter as a percentage of sales was 19.5% compared to 18.6% in the prior year third quarter.

During the third quarter the SG&A incremental costs increased our SG&A as a percentage of sales by an excess of 50 basis points.

Excluding these items, we would have seen very nice leverage on SG&A in the quarter.

From a segment reporting perspective for the third quarter of 2005, we reported 27 million in general corporate, and "other" expense compared to 19 million in the comparable quarter of 2004.

As I mentioned in last year's conference call in July we began implementing actions to combine certain corporate functions and drive efficiencies made possible by the investments we are making and have made over the past two years.

These actions, together with incremental costs related to the CEO transition added approximately 5 million to general corporate expense and the SG&A in the quarter.

In regard to the CEO transition in the fourth quarter John Riley retires.

The expense related to stock-based grants made in the second quarter, as well as earlier grants are being accelerated to recognize the expense through his retirement date.

The remainder of the increase from 2004 to 2005 relates primarily to the third year of our expensing stock-based compensation and increased audit and compliance costs.

Turning to Slide 11, solid execution on revenue and cost initiatives while continuing to invest in our companywide initiatives and great execution across our businesses on price utilization drove a 12% increase in operating income and our operating margin up 70 basis points to 12.1%.

Continuing to Slide 12 on net interest expense or tax rate and net income.

Our net interest expense decreased 500,000 over the prior year quarter driven by lower net outstanding debt and higher interest rates on our cash investments.

Before the year is over, we will repay 229 million of medium-term notes with interest rates in excess of 6% and refinance and pay down our 6.25% Euro 300 million debt.

With the debt retirements and refinancing the Euro debt at 3.5% our interest expense and interest coverage will significantly improve as we enter 2006.

Our effective tax rate remains at 21.5% during the third quarter.

Of course, the actual rate for 2005 will be termed by the level of our earnings, the jurisdictions in which the earnings are taxable as the year concludes.

Overall, even with some challenges in increased costs in the quarter, our net increase income increased 14% on 6% revenue increase.

Turning to the segments in Slide 13.

For the quarter our Electrical Product segment revenues increased 8% compared to the prior year with currency translation and a small contribution from acquisitions contributing less than 1%.

Electrical sales ended the quarter with a strong finish aided by the hurricane rebuilding efforts and the strong investment in global energy infrastructure.

Overall, electrical product segments earnings increased 20.6% and return on sales increased 160 basis points to 15.4%.

As Kirk mentioned, this is our strongest return on sales performance since the third quarter of 2001.

Turning to the Tools segment on Slide 14.

Now, our tools business sales declined 3% with currency translation contributing close to 2% to sales.

We continued to see solid revenue and earnings growth in hand tools with sales increasing in the mid to high single-digits with both retail and industrial markets strong.

However, shipments of assembly equipment were down 9 million and power tool sales were weak in both the U.S. and Europe.

Tools operating earnings decreased 15% on the sales decline of 3%.

The tools segment had around 2 million of cost incurred net of savings related to the SG&A productivity actions in the third quarter that impacted their reported performance.

As a result, our reported tools operating margin as a percentage of sales declined 120 basis points to 8.5% against the strong third quarter of 2004 performance.

Before turning the conference call back to Kirk, I will provide you with the details of our forecast for the remainder of the year.

Turning to Slide 15.

We are raising our forecast for the year to a range of 402 to 407 per share.

This forecast includes an additional $0.03 to $0.04 in costs that will be incurred in the fourth quarter of 2005 related to the SG&A incremental costs bringing our total for these costs net of savings to an excess of $0.10 per share for the year.

In the fourth quarter we now expect currency translation to be slightly negative.

For our electrical products segment we had a very strong finish in last year's fourth quarter.

And this year, we have two fewer business days in the quarter.

As a result, our outlook is for revenues to increase 4% to 5% and return on sales of 14.75% plus or minus.

We are forecasting tools revenues to be relatively flat for the fourth quarter primarily resulting from lower orders and backlog in the assembly equipment business and weak power tool demand.

Our return for sales and tools is forecast in the 8 to 10% range.

General and other corporate expenses forecast to be in the 22 million to 24 million range inclusive of the SG&A incremental costs.

Net interest expense anticipated to be in the 14 to 15 million range and our effective tax rate is expected to be in the 21% to 22% range.

We currently anticipate diluted shares to average approximately 94 to 95 million shares in the fourth quarter and for the fifth year in a row our free cash flow is forecast to exceed or earnings for the year.

That concludes my comments on the details for the quarter and our guidance.

I'll turn the conference call back to Kirk for some overall comments.

Thank you, Terry.

In summary, general market conditions are expected to remain solid for the balance of 2005.

We continue to see strength in global manufacturing output, utility spending, and energy-related investments.

Electrical products delivered very strong results in the quarter.

Again, 85% of our sales are in electrical products group.

Revenue up 8%, return on sales 15.4.

Again, exceeding our targets that we laid out for you in August of '03 in Peachtree City.

And I'll point out that we achieved these results in two years versus our forecast of three years.

Hand tools executed well.

The power tools turn around is slow in developing, specifically related to some market conditions and specific customer timing issues.

Our free cash flow is on track to exceed net income as Terry mentioned for the fifth consecutive year.

Our strong balance sheet continues to add flexibility for our overall strategic imperatives.

Margin growth and cash flow initiatives are all delivering solid results.

We're well-positioned for '05 and beyond.

And we know that the Cooper operating model now is delivering the positive results that we're seeing and we're leveraging our size and scale to improve our overall performance.

Our current outlook and results in higher guidance for 2005, again, we began this year from 395 to 412.

Today we're raising that guidance from 412 to 417 excluding the $0.10 in SG&A and productivity actions that Terry mentioned.

Now, before we go to questions, let me just give you some details on our asbestos claims and an update as to where we are with regard to the overall process with Federal-Mogul.

We had 1,199 new claims filed during the quarter.

We had 4,152 claims resolved.

Our claims outstanding as of September 30, 2005 totaled 38,726 compared to 46,700 at the end of 2004 and 41,679 as of June 30, 2005.

The average indemnity payments as of September 30, 2005 was 2,062 compared to 1,911 at the end of 2004 and 2,130 as of the end of June 30, 2005.

Now, with regard to the overall process, recently Federal-Mogul and its constituents in the Chapter 11 proceedings have announced that they have reached an agreement with U.K.

Administrators of Federal-Mogul's local affiliates.

And if this milestone brings Federal-Mogul closer to emergings from bankruptcy in the U.S. and the U.K.

As mentioned in previous conference calls any settlements we might reach to participate in the 524(g) Trust would likely occur close to the time of Federal-Mogul's emergence from bankruptcy.

I can tell you that we have had active negotiations with representatives of various constituents in the Federal-Mogul Chapter 11 case.

And while no agreement has been finalized, it is possible within the next few weeks we could sign an agreement that would lead to a resolution of all of our Abex asbestos claims through a 524(g) Trust.

If an agreement is reached it will likely include up-front payment of cash, stock, along with a note for additional annual cash payments that could extend over 25 years.

The amount of the annual cash payments will likely be reduced by insurance proceeds reduced -- received during this period.

If we were to reach a settlement on these terms, it would likely result in additional charge to discontinued operations.

This charge would reflect 25 years of undiscounted cash outflows, a premium being paid for certainty, and [conservative] insurance recovery assumptions.

There are numerous scenarios on insurance recoveries over a very extended time horizon, and we are actively working with our experts to determine an appropriate insurance recovery scenario in the event that a settlement is signed.

From a cash flow perspective a settlement on terms being discussed would preserve Cooper's balance sheet and allow us to continue to grow the Company through acquisitions and return the cash to our shareholders through dividends and stock repurchases.

I remind everybody that we are in an active negotiations.

We have not signed a settlement agreement, and there is significant uncertainty as to whether any agreement will be finalized.

In addition, any settlement is subject to bankruptcy court approval, voting by the current claimants and other matters.

I also need to be clear that if we reach a settlement prior to the filing of our third quarter 10-Q report with the Securities Exchange Commission, the settlement will be recorded in our third quarter results.

This means that the financial statements released today and filed on Form 8-K would be revised.

If a settlement is not reached, the financial statements accompanying the press release will stand as released.

I hope that everyone will respect that we are in active negotiations on this matter and at this point cannot add any further comment in the Q&A.

Now, I'll turn it back to Rich to open it up for Q&A.

Thank you all for participating in our earlier part.

Bill, we'll start the Q&A questions, if you may.

Thank you very much, sir. [OPERATOR INSTRUCTIONS].

And our first question comes from the line of Mr. Deane Dray of Goldman Sachs.

Please proceed.

Thank you very much.

Hi, gentleman.

Could we get some additional color regarding some of the comments on the end market, especially the utility and commercial construction?

But if you could start first on the hurricane impact?

One of the lessons we learned from Mr. Riley was that when a hurricane is always -- it's a net benefit where you'll get utility teams coming into the area expected as a plus, but those utility teams are not working in their home areas and so you end up seeing a fallout there.

So is it -- how do you size the net benefit here?

Deane, as we look through it -- and you have to remember that last year there were I think three or four different hurricanes through Florida around the same time during the hurricane season.

The net impact, obviously, these are much more destructive in size and magnitude, and we do believe there are obviously extensive rebuilding needs with the utilities, which is obviously Cooper Power Systems, and in particular this one because of the Gulf Coast being on the industrial oil and gas.

And so that means Crouse-Hinds, B-Line, Cooper Lighting, Bussmann, Hand Tools and Power Tools.

And then on a commercial and residential side, Cooper Lighting and Cooper Wiring devices.

The best that we can net it out, though, we think there probably was $0.01 to $0.02 a share in the quarter that was realized from the direct result of the hurricane in the third quarter.

With regard to commercial construction, it's 25 -- or 24% of our sales roughly.

We still see the market as being modestly flat, and we've experienced some service issues in the quarter really because of some issues that we've had internally.

But we think the business is overall well-positioned to -- so when that market does recover that we should, again, experience the upside on that market recovering as well.

Kirk, when you say the flat commercial construction, were you referring to the large projects, and those are the ones that --?

Yes, exactly.

It's always hard whether an addition to a hospital or a new wing to a university is whether that's a large project or -- but, yes, we're referring to new construction versus renovation on the commercial side, sure.

And what was pricing in impact for the quarter in electrical products?

It was positive.

Roughly 2%, plus or minus a little bit.

But it was positive.

Plus or minus 2?

About 2%, yes.

Okay.

And just -- I appreciate hearing what you've given in terms of the asbestos update and wish you the best in the negotiations.

Thank you.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next questions comes from the line of Mr. Bob Cornell of Lehman Brothers.

Please proceed.

Hey, everybody.

I pass along my best wishes on the asbestos as well.

Kirk, on -- just going back to the Katrina effort, one of your competitors yesterday said that they were -- had huge orders as you suggested, the big backlog and power exiting this quarter.

And they also mentioned that because of the issues around the Gulf as you suggested there will be a big benefit to the harsh and hazardous business, which is one of your sweet spot businesses.

I mean, could you just elaborate a little more on the exit rate of orders and backlog in some of those businesses and the fact that that business might be better than expected going out extending into '06?

I think, Bob, I think the issue is a broader issue because we were seeing very positive results in that space prior to the hurricane.

If you go back in time, when energy prices went from 26, $27 a barrel to the high 30s, it actually had an opposite impact.

It stopped people from making investments because they were capitalizing on the quote-unquote higher prices in the 30s.

And then all of a sudden what happened is people realized it was more a macro shift in supply and demand, and there are a lot of other issues; shortage of refinery capacity and other things.

Then I think the hurricane came along and really magnified an already accelerating situation.

The oil prices stayed in the 50s and 60s for a prolonged period, and then people no longer realized they could put off the investment.

So we were seeing strong fundamentals in that business throughout the first half of the year.

Obviously, accelerated during the third quarter.

Cooper Power Systems has been running overtime, weekends trying to help repair the damaged area.

But we're running it at pretty high utilization rates across that business.

One of our facilities was impacted by a few days because of the hurricane itself.

But as we've said all along, we see the fundamentals of the utility business and the fundamentals of the worldwide energy, and that talks about mining.

It talks about offshore.

It talks about gas refining, petrochemicals, chemicals as being an exciting place to be.

And as you point out, we have a wonderful position and a great business in that space.

Yes, I get you.

A follow-up question.

It occurs to me listening to the call today with regard to the SG&A increase, and the corporate restructuring, if you look around Cooper, are we going to hear about further restructurings as we look forward in businesses that might need some work out in '06 and '07?

I mean, is this it, or are we looking at more stuff going forward?

Bob, this is Terry.

There clearly -- there's a normal run rate of what you would refer to as [indiscernible] moves, small factories being taken out, et cetera, which will continue obviously '06, '07 and into the future.

But at this point we don't see anything of significance other than the normal run rate for those type of activities.

And I'm sorry, when did you say the pay back was going to be for the moves that you took in the second half of this year?

Clearly, we will recognize part of that in the third and fourth quarter.

So the numbers I provide are net of the savings for that.

Going into '06, there will be about a 10% -- or $0.10 a share reduction or benefit as we roll into '06.

Okay.

Thanks.

Thank you, Bob.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Jeffrey Sprague of Citigroup.

Please proceed.

Thanks.

Good afternoon, everyone.

Hello, Jeff.

I guess just to clarify on Bob's question for a second before I get into mine.

I mean you always have some restructuring, and I would expect you to always kind of note what's going on.

But should we expect this to be kind of the last time or one of the few times we have got kind of two sets of numbers where we have got this big identifiable thing going on where we have got kind of a with and without construct on the guidance?

Jeff, yes, look, I think historically if you look at Cooper's track record on this topic we've been very consistent.

Unless it's an unusual or a very large type of an activity, we don't pull it out of the numbers separately.

We have historically always baked it into the numbers.

And my personal belief is we'll continue to do that.

Now, what we did mid year this year which really because of the transaction -- or the transition between John and myself, and we decided to pull that out and just talk about that one separately.

If you go back in time I think you would have to go all the way back to 2001 when the economy really kind of fell on its ear and there were numerous additional plant closures above and beyond a normal run rate, was the last time we pointed something out as being a special item.

And so I think you should think about us going forward as including the restructuring charges in our quarterly numbers.

And Jeff, I'd like to point out, we did not -- we're not disclosing those in the base financials as restructuring or unusual items.

We're just pointing them out.

Right.

No, that's great.

That's what I thought.

I just was unsure from that prior answer.

And just maybe, Kirk, can you share with us a little bit your view on acquisitions here?

I mean you've had a little longer to settle in in the corner office, and you've had a few months under your belt with your new business development leader.

What's going on on that front?

Are there interesting things to do?

Is there a pipeline?

What should we expect as we look out over the next year or so?

Yes, I mean, I think it is, Jeff.

I mean the first is, I've been obviously very busy with the transition and particularly on asbestos.

I've been meeting with our outside counsels, as you would imagine, and getting myself educated on all the issues around that topic.

So unfortunately I've been consumed by that.

With that said, though, O'Grady has been on board now since May.

He's had a chance to go through a strategy cycle with all of our businesses.

We just got back from a week in Europe last week.

We have a very healthy list of potential acquisitions that we're going after.

We have hired and built out his organization in the field.

So we have hired people into business development rolls specifically in businesses where we're focused on acquisitions.

And their role in the process is to learn the industry and learn the competitors and learn the markets and then Tom will be a facilitator on the deal side of this.

And we think that's going to be a very effective organizational structure as we go forward.

But I am spending more and more of my time.

We've got a number of acquisitions that we are actively pursuing.

And as we've said, 3 to 5% of our revenue growth on a go-forward basis we hope to come from acquisitions.

But, Jeff, you're certainly aware of what's going on in some of the pricing of the larger deals.

And we're not going to do anything dumb on that side of it.

So we're going to be cautious in how we evaluate these things and the returns and such that we look for on our cash that we spend.

And should we view this little step up in share purchases as kind of the modulator of this whole equation?

Well, yes, if you take the -- different people's models out there -- in the quarter we thought our stock ops were at an attractive level.

For whatever reason people sort of left us alone a little bit there, and so we became more aggressive.

We had the cash and our pipeline is certainly capable of being funded through that existing balance sheet.

So we saw it as an opportunity, sure.

But it's more opportunistic as opposed to just a trade-off versus acquisitions necessarily?

Well, Jeff, as we've said before, the bottom end of our range on net debt-to-total-cap is about 30%.

So anytime we drop below that level, we actively forecast out, look out to see what's the potential on acquisitions, et cetera.

And well in those types of periods of times will accelerate our stock buybacks a little bit.

And then just one last one on nonres.

I think everyone's discussion on this still is kind of when this turns, not if.

But I'm wondering if "if" is becoming at least a relevant question.

Are there construction cost issues or other things that you see or would give you concern in general that this market just never really gets going to a significant degree?

I think my first comment, Jeff, would be that we don't really need it to be any better than it is to deliver very solid results overall.

Obviously, we would benefit from an uptick on that side of the business.

But to your point you have got higher material costs, you've got higher interest rates, and vacancy rates are still not great.

But, Jeff, I don't spend a lot of time trying to forecast where that's going to come out and how it's going to play out.

It's been delayed a couple of different times by several quarters.

And it's not bad, but it's been down for several years.

And we would certainly take and love to see that part of the market pick up, sure.

But at this point there's nothing really in --?

I've tried to forecast it a few different times, Jeff.

I mean we were seeing quote activity pick up for a while there, and it just didn't -- the projects didn't get released.

I mean we've talked to our guys about it.

They've got lumber and cement and steel prices up.

And Greenspan keeps ticking up the interest rates.

It's hard to fore -- I'm just tired of forecasting it, I guess.

That's kind of the way I'm feeling.

Yes.

Thanks for the color.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mr. Scott Davis of Morgan Stanley.

Please proceed.

Great.

Thanks, guys.

I wanted to talk a little bit about the tools business.

And despite the fact that sales were down 3%, if you back out the charge it looked like margins were actually flat, which seemed pretty positive to me.

Can you talk about maybe a little granularity on -- was that positive mix, was it benefits of past restructuring or anything else that kind of came through and held those margins up?

As we said, Scott, it's really two different stories.

I mean very different stories.

Hand tools performed exceptionally well.

Revenues were up strong.

Margin expansion was good.

They've really gotten benefits out of the MVP program, Manufacturing Variance Program, driving strong productivity and, again, as you said, seeing the benefits of some of the restructuring actions.

On the power tool side there has been, again, another heavy dose of sort of restructuring and some plant closures over time, and that's what you're seeing as the benefit on the margin side even with lower volumes.

But we think the timing issues will help us and will straighten out our revenue side on the power side.

And we gave you guys targets on tools at around 12% plus or minus back on the second quarter conference call.

And we're still comfortable with those estimates.

Okay.

Moving onto electrical products and just not to be nitpicky, but your growth slowed a bit.

You were at the run rate most of this year at about 9% growth.

You did 8% this quarter, and you were at 11% for most of last year.

If you back out pricing, it implies kind of unit volumes probably somewhere between 5 and 6%.

I guess a couple of different questions there.

Obviously, a little bit of a slowdown.

One, is it possible that it has anything to do with maybe some inventory destocking going on at the customer level right now?

Or does it have anything to do with price elasticity and with higher prices maybe you've lost a little bit of share or people are buying less of certain products?

Or anything else that may be impacting growth or any visibility that that growth rate may actually start to pick up here in the later fall?

Scott, this is Terry.

Let me answer that.

The growth rate actually on the core volumes is -- has actually improved a little bit throughout the year.

The impact you see on the topline is partially driven by the impact of translation.

We are coming down significantly on the Euro.

In fact, Euro was negative influence in the third quarter.

So you go from a positive on the electrical side specifically, a very positive translation exchange to a flattish translation or very small translation impact.

And also, you remember last year there were pretty significant price increases that went into effect to cover the material costs.

Year-over-year the impact of that price increase is smaller.

So net-net volumewise it's actually not a bad story.

Okay.

Thanks for the clarification.

One last quick clarification.

On the Katrina rebuild, I know the initial -- obviously, you get a fair amount of utility spend initially.

But at some point the actual rebuild starts to impact a broader group of your -- or a broader subset of SKUs.

How do you kind of see that playing out in 2006?

Is this something that accelerates through 2006?

Is this something that kind of stays at current levels at the tail end?

Does it oscillate?

I'm just trying to think in terms of forecasting that.

Well, initially, Scott, what the utilities do is obviously just try to get power restored.

And so they're less concerned about power quality and power disruptions in some of the other products.

So they're just primarily interested in transformers to get the lines back up and power back on.

Then what they normally do is go back and fix the grid with reliability and equality and performance issues.

So we see that dragging out over time, correct.

Okay, but beyond kind of the T&D side of it, if you think about base electrical products and lighting and everything else -- [multiple speakers.]

Oh, I think you're looking at -- I don't know if you saw it or not, but there's now -- like the House just passed a refinery bill which will reduce the maze of permits and some of the -- and lower some of the state and federal environmental regulations around investment and that side of it.

I think when you look at the amount of investment -- I don't want to give any figures, put there's a large percent of the petrochemical refinery and chemical capacity that is still down, and so you're going to see significant investment in that area.

And so I -- and, again, this is all on the face of higher energy prices worldwide and higher demand.

So, no, I think the broader -- the B-Line, the Power Tools, I think you're going to see an accelerated baseline of growth there for a while, yes.

Okay.

Perfect.

Thanks, guys.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Don MacDougall of Banc of America Securities.

Please proceed.

Good afternoon, gentlemen.

Good afternoon, Don.

Could we expand the discussion around raw materials a bit?

You noted pricing was up 2%.

Estimate of raw material impact, and is that something that we see tailing off going forward?

Is it something that holds about the same?

And in particular on the energy front how much exposure in your cost structure do you have to higher natural gas and oil either direct or indirect?

Let me try and answer that, Don.

From the -- if you look at the actual metal side of it, clearly the impact of that has diminished throughout the year on the inflation side of it.

Of course, offsetting some of that has been the energy increases.

Now, energy has less of an impact on us than the metals price increases, but still a fair amount of increase especially on our power systems business where we consume a lot in the manufacturing process, as well as oil for transformers.

But probably as big as the bigger impact is more on the transportation side of it moving product across the oceans as well as within the actual markets themselves.

So, first I'd say metals cost is the highest, second is probably transportation, and third is probably energy impact, Don.

If we looked at 2% price increase, do you think your raw materials -- do you think that will offset your raw materials to such that you picked something up on price or do you think it was a wash?

Net through the third quarter I would say it was maybe slightly on the plus side including transportation and energy costs.

Okay.

We feel pretty good about our pricing disciplines in the marketplace and where we're at.

Okay.

Jumping over to, maybe more of a macro view.

You've discussed the nonresidential market in some detail.

What's your view of residential here as we sit?

A lot of the home building stocks have been under pressure lately.

The markets obviously discounting some kind of a slowing.

Have you seen anything in your activity to suggest that -- I know it's not a huge percentage of your revenue, but where you do touch that market, what's your forward look there?

It's about 18% of our total revenue.

And the way we get at that is through a lot of our electrical -- smaller electrical distributors and some of that we think comes through some of the "big box."

In the quarter it held up actually very well.

We had originally started this year with a down 5% on residential for the exact reasons you're counting.

But I think the piece here that may be new again is the rebuild in the Gulf Coast and in the South.

A number of the homes were destroyed and flooded, and so you could see a wide expansion there on the residential side.

But I'm with you, Don.

This thing has got to cool off.

I mean the interest rates going up and the material costs going up has got to take its toll here at some point.

But I'll tell you in the quarter we didn't see anything that would suggest that.

Okay.

Just stepping back a little bit, Kirk, as I look at your overall view of things in an answer to a previous question, you had said, "look you're not necessarily going to get into the forecasting game for nonres."

But you seem to be pretty confident about the forward look in saying that, "look you can continue to perform well even if that market doesn't turn."

The market right now is much more concerned about '06 probably than '05.

So any commentary that you can make on how the trajectory looks into '06?

It's interesting.

I mean I think what this quarter proved -- and I was never 100% confident and you never are.

But what this quarter proved is the businesses realized upslide they can convert the upside to the bottom line.

And we went into the quarter with a pretty reasonable estimate on where we thought we would come out.

And certainly there was some beyond our control sort of events that gave us some wind in our sails.

And like I said, I think we converted well to the bottom line.

We're very comfortable with the outlook for our end markets as we look at '06.

The utility, the industrial, the energy space are very comfortable with all those spaces.

And we have a high concentration in each of those markets.

We have got great breadth.

We've got great diversity.

And I think the results or the stability of the results or the predictability of our results are all a factor of that.

So we have always sort of laid out that there would be some double-digit earnings targets set out for '06.

We don't see that changing significantly.

We're in the process of rolling up our budgets and going out and visiting the businesses over the next couple of months.

And as you know in February we will come out and we'll bring a couple of operating guys with us this time and we'll lay it all out for you.

Great.

Thank you for your help, and good results.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mr. Alex Rygiel of Friedman, Billings Ramsey.

Please proceed.

Thank you.

My question surrounds the service rates issues that you had in the quarter.

What was the issue specifically?

How did you correct it?

And how was it different than the issues in the second quarter?

Well, as I commented in my prepared comments, there was a broad range of several different issues across several different businesses.

So this isn't one issue with one business.

It tends to be complicated in a few different businesses.

But I think primarily the drivers were higher utilization rates and then higher throughput.

Second, as you know we went live in a couple of our facilities on the EBS implementation.

And third is, I think you see stress from time to time of some of these relocations that we did historically.

And not everything has necessarily settled down on the supply chain side, vendor components, timing and deliveries, and things like that.

These moves are -- it always looks easy on paper, but when it comes down to the pure execution of them, they're obviously more complicated than you would imagine.

Perfect.

Thank you.

Good.

This is Rich Bajenski.

Mindful of our time we'll take one further question and then we'll release you for the day.

Thank you very much, sir.

And that last question comes from the line of Barry Haynes of Sage Asset Management.

Please proceed, sir.

Hi.

Snuck in under the wire.

I wonder within electrical if you could just give us a little color by some of the subsegments in terms of which segments you're seeing accelerating growth, which segments you're seeing more like steady growth, and which, if any, are you seeing no growth or -- I wouldn't think you're seeing declines anywhere, but maybe there are some.

Thanks.

As I said on the industrial side, obviously factory utilization rates are up.

And so our exposure on the industrial side we're seeing solid growth.

On our exposure to the utility side we're seeing solid growth.

On our exposure to the oil and gas and energy markets we're seeing solid growth.

I'd tell you on residential -- or retail, we saw good growth in the quarter, not as strong as the others, but good growth.

Commercial construction was essentially flat for us in the quarter.

And as we said the automotive and the aerospace in the quarter because of some timing reasons more on the aerospace side, were flat to down.

And then second, I have just two quick follow-ups.

One is in terms of the incoming orders that you think were related to the hurricane, of the orders you've gotten so far roughly how much of that was delivered in the third quarter versus how much will be delivered in the fourth quarter?

Well, it's hard to say what -- the Gulf Coast was always a big market for us anyway;

B-Line, Cable Tray, Crouse-Hinds -- many of our businesses.

And so it's hard because our orders come through distribution, but of course we work specifications and such with the end-users.

It's very difficult to write and know exactly what's coming hurricane-related and what isn't.

I mean I think the comment that I made earlier was about a penny or two in the quarter.

But we continue to see strength on our order rates in this market and along those end markets.

So we think that strength will continue through the fourth quarter.

Okay.

And then final follow-up is given those strong markets and the extra business from the hurricane, within electrical you did 8% revenue growth in the third quarter yet you're only predicting 4 to 5% in the fourth quarter.

Is there any reason that the fourth given the positive tone should be less by that much than the third?

This is Terry.

Let me try and answer that for you.

If you go back to last year, we had very, very strong end to the year, especially in our Power Systems business, B-Line business, a couple of the others.

So we have difficult comparisons with the prior year and the way the holidays fall this year we really have two fewer shipping days during the quarter.

And the third thing is, of course, in the fourth quarter translation right now is forecast to be a negative amount, which impacts the total topline.

Great.

I appreciate that.

Thanks so much.

Well, I want to thank you all for spending this day with us or this time with us on our results for the third quarter.

Thank you once again.

Thank you very much, gentlemen.

And thank you, ladies and gentlemen, for participating in our conference call today.

This concludes the presentation, and you may now disconnect.

Have a good day.