伊頓 (ETN) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Cooper Industries 2005 fourth quarter conference call.

My name is Latesha, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I will now turn the call over to your host for today's call, Mr. Richard Bajenski, Vice President, Investor Relations.

Please proceed, sir.

Thank you.

Good morning.

And welcome to our fourth quarter conference call.

This is Richard Bajenski, Vice President of Investor Relations and with me is Kirk Hachigian, Cooper's President and Chief Executive Officer and Terry Klebe, Senior Vice President and Chief Financial Officer.

We have posted on our website a set of exhibits related to this earnings's quarter's earnings, and we will be referring to them during the call.

The exhibits may be viewed or downloaded at cooperindustries.com at the Investor tab under the Management Presentation section.

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 annual report on form 10K and other recent SEC filings.

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

To the extent that they have been anticipated, reconciliations of those measures to the most directly comparable GAAP measures are included in our press release.

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

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

Now let me turn the call over to Kirk Hachigian.

Good morning.

Before we get into the details of our fourth quarter performance, let me give you an update on our proposed asbestos settlement.

As you may recall, on December 19, 2005 conference call, we laid out the terms and conditions of our agreement with Federal Mogul bankruptcy parties for our participation in the 524G Trust.

One of the key terms of this agreement was that Cooper Industries would be granted a stay on all existing claims by January 29, 2006.

Last Friday, the federal bankruptcy judge denied Federal Mogul's motion for this stay.

The principal reasons given for the judge not granting the stay was the lack of a specific timetable for Federal Mogul's emergence from bankruptcy and a lack of specific information on what the Trust would pay claimants with different medical conditions.

Because the parties to the proposed agreement were not able to perform on this specific condition of our agreement, there will have to be a renegotiation of the terms of our settlement.

Our interest in renegotiating the existing agreement will depend on when Federal Mogul finalizes a specific timetable for confirmation, when and if we're ultimately granted our stay, and how much additional defense and indemnity costs Cooper will incur over this period.

As we clearly stated on the conference call on December 19th, Cooper cannot be part of a 524G Trust if and until Federal Mogul ultimately exits bankruptcy.

Until a stay is granted or Federal Mogul obtains confirmation, Cooper will continue to manage the ABEX cases as we have over the past four years and will work with the parties involved to reach a revised settlement.

Now, let me turn the call over to Terry Klebe to give you a little bit more detail upon the accounting side of the situation.

Thanks, Kirk.

As Kirk mentioned, unfortunately, a critical component of the proposed settlement, being the bankruptcy court stay was not granted by the court last Friday.

For my financial reporting perspective, this puts us in a difficult situation as there are different financial accounting treatments, depending on what transpires prior to the filing of our annual report on form 10K for the year ended December 31st, 2005.

We released our fourth quarter and year results excluding any adjustments to the discontinued operations accrual; however, before we file our 10K, there may be adjustments to the financial statement.

If we reach a renegotiated agreement before we file our 10K, we will be required to adjust the financial statements we release today to reflect the proposed settlement.

There is also the possibility that before we file our form 10K, we conclude that we will be unable to reach an agreement that would allow us to participate in the Federal Mogul 524G asbestos trust, or we could be in a position where we know essentially no more than we know today.

Clearly under a settlement agreement, the adjusted liability net of insurance is probably well beyond what would be recorded under other alternatives.

There is also the possibility, of course, that we adjust the liability and record very conservative insurance recoveries that exceed the existing net accrual under a scenario whereby a settlement is not reached by the time we file our form 10K.

Therefore, it would be inappropriate at this time to release financial statements with a significant adjustments that are not backed by a settlement agreement.

Before we file our form 10K, we will be working to increase the clarity around these matters.

Clearly, a complicated situation, but we believe it would be in the best interest of everyone to not delay our earnings release.

Now, earlier this month, we had concluded on the impact of recording the proposed settlement in the financial statement, and I will provide you with some details.

On on discount basis, the settlement value before insurance at December 31st, 2005, was 724.7 million.

This is comprised of 122.5 million cash, 1.4 million shares of our common stock valued at the year-end closing price, and 20 million a year for 25 years.

Our insurance recovery, had we recorded the proposed agreement, we would have recorded a 71 million insurance recovery for amounts we have paid on defense and indemnity.

We also would have recorded less than 20% insurance recovery of the future payments that are expected to ultimately be paid out of the Trust.

As we entered into settlements and insurance in place agreements in the future, it was anticipated that we would be required to record gains resulting in signifi - - resulting in significant increases in the ultimate recovery percentage.

This is important to note.

The insurance recovery is not what we or our outside advisor believed is a most likely amounts to be recovered.

As is unfortunately the norm for insurance claims, litigation or threatened litigation will likely be required to reach agreements with insurance carriers.

Under conservative accounting recoveries would therefore not be recorded until such time as the insurance carriers have made firm offers or entered into agreements.

With a very conservative insurance recovery, had we recorded the undiscounted proposed settlement, the fourth quarter charge, net of income tax benefits, would have been in the 225 to 275 million range.

From a balance sheet perspective, the charge would have increased our net debt to total capitalization modestly to approximately 20.5%, and as I discussed in our December 19 conference call, the cash outflows, net of tax benefits, were very manageable.

Now, let me turn the call back to Kirk for our fourth quarter results.

I'm now referring to page two on our management presentation.

For the fourth quarter, 2005, we reported solid revenue performance at electrical products up 4.3%, and a modest underperformance by tools, down 1.8%.

Total Company revenue was up 3.2%, which was in line with our guidance given in October of 3 to 5%.

We had solid end market demand in key industrial and commercial markets.

On the industrial markets, we had solid performance at Crouse-Hinds, Bussmann, and B-Line.

And commercial was primarily driven by education, health care, retail, warehouse and distribution spending.

Earnings per share came in at $1.10, up 17% from prior year.

And net income came in at 104, up 17% as well.

Both were driven by leverage from MVP productivity programs, favorable pricing, EBS efficiencies, an improved debt structure, and a lower tax rate.

The key drivers - - performance drivers for the fourth quarter were strong industrial demand; industrial production grew for the ninth straight quarter.

Solid capital spending.

Factory utilizations at 80% was the first time since October of 2000 that we crossed the 80% level.

Continued strength on the utilities side, overall demand, hurricane rebuild, and grid upgrades.

Our backlog grew 40% to over $200 million.

Global energy and infrastructure spending, strengthened oil and gas and mining, favorable price realization, and productivity/MVP programs delivered just over 2% variable cost productivity.

the challenges for the fourth quarter included lost share at Cooper Power Tools, and certainly tough comparables at Cooper Lighting and Cooper Power Systems.

If you remember, the fourth quarter 2004, electrical was up 11%, driven primarily by strong performance at Cooper Lighting, and Cooper Power Systems.

We had two fewer shipping days in the fourth quarter.

They were negatively impacted by 60 basis points because of FX, foreign exchange.

We also returned to more normalized year-end distributor purchases, the Cooper Connection had a very strong overall performance, and there was less forward buying at year-end to reach incentive thresholds.

We also will move to a program to try to level load our Cooper Power Systems facilities to improve through put and efficiencies, move to a more - - flat shipments during the course of the quarter and again exited the year with a very heavy backlog at Cooper Power Systems.

overall Electrical distributor revenues remain strong, Industrial continued the momentum we've seen throughout the year, and commercial construction was stable to slightly improving.

Retail spending was another mixed quarter with wiring devices in Bussmann showing strong gains, while Lighting succeeded some share with a key big box customer.

Overseas in the quarter: China, the Middle East, Latin America contributed a strong double digit electrical sales gain in developing country, with the U.K. being flat - - excuse me, U.K. being weak with France and Germany being flat.

So overall Electrical revenue came in roughly as expected.

Trends for the Tools business, as has been the case all year, Hand Tools delivered a solid revenue growth in the quarter while Cooper Power Tools suffered a double digit decline.

The majority of the weakness at Cooper Power Tools was on the automotive assembly side and the overseas tool business continued to grow strongly in developing countries but was slightly negative in Germany.

We appear to have bottomed out on the automotive assembly business.

And have stable backlog in place and we expect flat to modest revenue growth as we move into 2006.

Now, let me turn the call back to Terry to give you further details on the quarter.

Thanks, Kirk.

Before turning to the earnings for the quarter, I will provide some highlights on our cash flow and balance sheet.

On slide six, you will note that our free cash flow for 2005 was 490 million, compared to 383 million for 2004.

For the fourth quarter, we generate free cash flow of 255 million, compared to 78 million in last year's fourth quarter.

Cooper strategic initiatives continued to drive performance resulting in the fifth year in a row that free cash flows exceeded net income for continuing operations.

And in 2005, by a large percentage.

Our balance sheet remains in great shape, with our debt to total capitalization net of cash at 19%; an improvement of 7.1 points from the year-end December 31st, 2004 debt of a total capitalization of 26.1%.

In the fourth quarter, we issued 325 million of debt with a seven-year maturity.

This debt replaced a majority of the Euro denominated debt that matured in October 2005.

This dollar denominated debt was swapped into Euros.

We are very pleased that we were able to replace the maturing Euro debt carrying at 6.25% interest rate with debt having a very attractive Euro interest rate of approximately 3.50%.

During 2005, the outstanding debt in our balance sheet was reduced by 440 million; at December 31st, 2005, we have approximately 1 billion of outstanding debt, with maturity schedules spread out from 2007 through 2012.

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

our inventory turns in 2005 improved to 6.1 turns from 5.8 turns in 2004 .

The dollar investment in inventory is impacted by the increased material costs compared to a year ago, as well as the preparation for business systems implementations and initiatives to improve customer service.

But even with these factors, a very solid improvement overall.

However, we still have several divisions with inventory turns below five turns.

A lot of opportunity for further improvement.

On receivables we reduced our day sales outstanding in 2005 by one day to 65 days.

We have room for improvement on receivables and this will be a focus in 2006.

We also improved our payable performance in 2005.

As a result, our operating working capital turns improved to 4.9 turns compared to 4.6 turns in 2004.

Overall, a good performance in 2005 on operating working capital, especially considering our initiatives to improve customer service, and the initial inventory build and the inefficiencies as we implemented our enterprise business system.

We are continuing to develop and deploy robust tools made possible by our enterprise business system, implementation and integrating these tools into our MVP initiatives.

Both the MVP and EBS tools will drive further improvement [inaudible] working capital performance as we move forward.

On slide eight, our capital expenditures were down 6% from 2005 to 97 million.

Capital expenditures in 2005 include our Thomas A. Edison research and development center in China, completed in June of 2005 and ongoing implementation of our global enterprise business system.

We now have over 3 billion of our revenues on the new business systems, and we are operating in nine countries and six languages.

We are also beating our cost reduction objectives.

In the 2005 fourth quarter, we purchased 630,000 shares of our common stock, spending 45 million against proceeds from issuances of 18 million.

For the year, we purchased 3.1 million shares at an average price of $67.22 and issued 2.2 million shares for stock option exercises, matches to our 401K, and other stock programs.

As a result, our outstanding shares decreased by approximately 1 million shares in 2005.

In 2005, we returned, net of proceeds from issuances, 138 million of our free cash flow to shareholders through stock transactions.

Under existing board of directors' authorization, we can purchase an additional 4.1 million shares, plus the shares issued for stock option exercises, and other stock programs each year.

Now, turning to the results for the fourth quarter in slide nine.

Back three months ago, we forecast fourth quarter revenues increase 3% to 5%, and we reported a revenue increase of 3.2%, with electrical performing very well, and tools slightly underperforming the forecast.

There are a number of factors that impacted year-over-year revenue growth, as Kirk mentioned.

And I will expound upon some of those.

First, the U.S. dollar was stronger than we forecast and decreased revenue 0.6 percentage points.

Second, as we commented last quarter, and in the fourth quarter of 2004 conference call, we had an unusually strong 2004 month of December.

In fact, it was one of the strongest months of 2004 with five of our electrical divisions, and one of our tools businesses posting double digit revenue growth.

In December, 2005, we returned to a more normal December trend as many customers had reached sales incentive levels earlier in the year, and customer inventory levels were at a more normal level.

And there were two less shipping days in the fourth quarter of 2005.

And third, the historical practice at Power Systems to back-end load customer commitments in the last two weeks of the quarter.

This practice was inefficient, and as part of our strategic initiatives to improve manufacturing and operating performance, we work toto balance the factory loads at our power System business.

Customer commitments and shipments were more normalized, which probably moved an excess of 5 million in shipments into 2006.

Retail channel sales growth for both Tools and Lighting was negative in the fourth quarter of 2005, compared to a strong fourth quarter of 2004.

In Tools, the decline was driven by inventory reduction efforts, by a large customer, and in Lighting, at least partially by our conceding a private line earlier in the year over pricing.

Last, we had service issues in our Lighting business at two factories that impacted our ability to service customers.

By year end, the significant issues at one factory had been corrected and significant progress had been made at the other factory.

As Kirk mentioned, we reported $1.10 in earnings per share versus our forecast of $1.00 to $1.05.

There are several items that impacted our results for the quarter.

Last quarter, I commented a combination of the SG&A actions and costs related to the CEO transition were anticipated to result in us incurring approximately $0.10 per share in incremental SG&A costs net of benefits for the year.

If you recall, the third quarter was impacted by $0.07 per share.

The fourth quarter impact, net of benefits, was as expected: $0.03 per share.

Now, late in the fourth quarter, we received the information from the trustee on the multi-employer pension plan related to the closure of our wiring devices Long Island City facility.

Back in 2003, we estimated costs of exiting this multi-employer pension plan at 12 million.

Due to weak investment performance and low discount - - lower discount rates, our final obligation is 4 million higher than the estimate.

The 4 million expense is reflected in our electrical products result and cost of goods sold in the quarter.

In the fourth quarter of 2005, we also benefited from lower average debt levels and interest rates from debt refinancing, as well as greater earnings on cash investments and a slightly lower effective tax rate.

For the year, our effective tax rate is 21%, and as we had - - 21.5% effective tax rate in the first three quarter, the fourth quarter was benefited by approximately $0.03 per share to bring the year to a 21% effective tax rate.

On the 3% total Company revenue increase, we leveraged to a 17% earnings per share increase, inclusive of the incremental costs incurred in the quarter and the lower interest expense and effective tax rate.

On slide ten, our overall cost of sales as a percentage of revenue improved 140 basis points resulting in gross margins increasing to 31.4%, from 30% in last year's fourth quarter.

Excluding the charge for exiting the multi-employer pension plan, gross margins increased 180 basis points.

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

Selling, general, administrative expense for the quarter as a percentage of sales was 19.4%, compared to 18.7% in the prior year fourth quarter.

During the fourth quarter, the SG&A incremental costs related to the CEO transition, and SG&A reduction programs, net of benefits, increased SG&A as a percentage of sales by in excess of 20 basis points.

From a segment reporting perspective, for the fourth quarter of 2005, we reported 21.8 million in general corporate and other expense compared to 19.7 million in the comparable quarter of 2004.

As I mentioned in last quarter's conference call, we began implementing actions to find certain corporate functions and drive efficiencies made possible by the investments we're making and have made over the las - - past two years.

These actions, together with the incremental costs related to the CEO transition, added approximately 1.7 million to general corporate expense in accordant.

I also want to remind everyone that 2005 was the third year we have expensed all stock-based compensation.

With three-year vesting on options, 2006 and future years will only reflect the change in the number and value of stock-based compensation granted and, of course, any changes in the accounting rules.

Turning to slide 11, even with the incremental unusual costs in the 2005 fourth quarter, solid execution on cost initiatives, while continuing to invest in our Companywide initiatives and great execution across our businesses, on price realization, drove a 9% increase in operating income, and our operating margin is up 70 basis points to 12%.

Continuing to slide 12, on net interest expense, our tax rate and net income.

Our net interest expense decreased 4 million from the prior quarter - - prior year quarter, driven by lower outstanding debt, and higher cash balances, and interest rates on our cash investments.

Our treasury team did an outstanding job refinancing our 6.25% Euro, 300 million debt.

The refinanced debt is at 3.55%, and was executed at lower rates than forecast, and will set us up for a much lower interest expense for 2006.

Our effective income tax rate for the year is 21%, versus the 21.5% during the first nine months.

This slight decline in the rate resulted in a 19.6% rate for the fourth quarter.

Overall, with some challenges, and increased costs in the quarter, our net income increased 17% on 3% revenue increase.

Turning to the segments, in slide 13; for the quarter, our electrical product segment revenues increased 4.3%.

Excluding currency translations, revenues increased 5% at the top end of the range we forecast.

As I discussed earlier, Electrical sales are a difficult comparison to the prior year fourth quarter and a more normal December close to year.

Overall, Electrical product segment earnings increased 10.3% and return on sales increased 70 basis points to 14.4%, from 13.7 in the fourth quarter of 2004.

Excluding the 4 million multi-employer pension expense, electrical segment earnings increased 13.4%, and return on sales increased 120 basis points to 14.9%.

Turning to the Tool segment, on slide 14; now our tools business sales declined 1.8%, with currency translation decreasing sales 0.5%.

We continue to see solid revenue and earnings growth in Hand Tools.

However, retail sales had a difficult comparable with the prior year quarter and were further depressed by actions to reduce inventories at a large customer.

That being said, Hand Tool sales increased in the mid single digits.

However, shipments of assembly equipment were down 7 million, and Power Tool sales were weak in both the U.S. and Europe.

Tools operating earnings increased 3.5% on a sales decline of 1.8%.

The tool segment had around 1.5 million costs incurred, net of savings, related to the SG&A productivity actions in the fourth quarter that impacted the reported results.

Our reported Tools operating margin as a percentage of sales increased 50 basis points to 10.6%.

Kirk will now provide a wrap-up on the 2005 results and comment on our 2006 outlook.

Kirk?

Thank you, Terry.

Turning to page 15, to recap the full year, total Company revenue up 6% on top of a 10% increase last year.

Electrical products up 7%, on top of an 11% increase last year.

And Tools down 1, on top of a 5% gain for 2004.

Our margins on electrical products ended the year at 14.6, up 90 basis points.

And tools at 9.1, up 60 basis points.

Earnings per share came in at the 4.12, that's up 15%, again inclusive of all restructuring and all option-related expenses.

And terrific performance on cash flow at $490 million, 1.3 times net, and over $100 million increase over last year.

In summary, the balance and breadth of our portfolio generated strong and stable core growth, allowing Cooper to report its highest revenue in over 10 years, despite a lackluster growth in one of our biggest end markets.

Solid execution on strategic sourcing, productivity and pricing programs offset higher energy and commodity inflation.

The Cooper initiatives drove improved results in revenue growth, margin expansion, and free cash flow.

The Cooper connection grew faster than the overall Electrical segment, globalization drove two times developing country growth than the total Company growth.

On EBS, we put 60% of the Company's revenue on the new system.

Strategic sourcing minimized overall inflationary pressures.

And we delivered over 2% productivity on a cost of goods sold basis.

Our cash flow exceeded income from continuing operations for the fifth consecutive year.

Again, our best performance in over 10 years.

We paid off approximately $400 million of debt and refinanced over $300 million at almost half the interest rate of the previous debt.

We also repurchased 3.1 million shares of stock at an average price of $67 a share.

Page 18 dates back to our August 2003 presentation in Peach Tree City.

These are the new revised margin targets and certainly we're pleased that 2005 is nice progress toward our overall objective of 17% on Electrical, and 12% on Tools.

Looking forward to 2006, for the full year, we expect total Company revenue to be up between 4 and 6%, electrical up 5 to 7, with tools up 1 to 3.

Earnings per share up 12 to 15% at $4.60 to $4.75 a share, and we expect the first quarter to return to a more normalized core growth rate at 4 to 6%, again with earnings per share up between 12 and 15%.

In summary, general market conditions are expected to remain strong in 2006.

Continue the momentum in industrial, utility, energy, and aerospace and pockets of growth in non-[resi]construction, with upside certainly continuing in our penetration programs of international markets.

We have a Companywide focus on the customer in our service rates which should accelerate our core growth rate.

We expect Cooper Power Tools to stabilize in 2006.

And believe our operating models continues to deliver strong benefits in revenue growth, improving margins and strong cash flow.

And as Terry said, our balance sheet is in outstanding shape, providing additional flexibility.

In fact later today, we will announce the acquisition of [Nova Toss] a 7 million-dollar manufacturer of motion control devices and a bolt-on acquisition to Cooper Wiring Devices and G & H Technologies, a $20 million manufacturer of highly engineered customized connectors for the aerospace defense and underseas markets.

G & H is a bolt-on acquisition to our Crouse-Hinds rubber molded products business unit which serves the military, aviation, industrial and entertainment industries.

These two acquisitions follow a similar strategy and successful integration of RSA into Cooper Lighting and MEDC into Crouse-Hinds.

Now before I turn the call back over to Rich, let me take a moment to thank John Riley as he moves forward to the next phase of his career.

As many of you know John retired on December 1st of last year after 43 years with Cooper Industries and in three weeks John will attend his last Cooper board meeting and step down as Chairman.

Today, Cooper Industries is a very different Company has it than it was in 1995 when John took over as chairman.

The portfolio has shifted from a commodity low margin product automotive drapery hardware to a focused collection of leading branded centered around electrical products and tools.

We're a more global Company with better growth prospect, a stronger balance sheet and significantly better cash flow.

John has served this Company with dedication, loyalty and integrity.

The entire Cooper team wants to express our gratitude and extend our best wishes to he and his entire family.

Having just closed a record 2005, I cannot think of a better way of capping a 43-year career.

Let me now turn the call back to Rich for final comments and then open the call for questions.

One last comment before the operator opens the Q&A.

For several years, we have published monthly the rolling 90-day revenue trends for our business segments, and our intent was to help investor investors understand the underlying revenue trends as we moved through a quarter.

It has become clear for some time, and in particular over the last three months, that the rolling 90-day data is not serving its intended purpose.

Specifically at the time of our third quarter conference call, after having reported an 8% increase in the revenues for our electrical products segment for the third quarter, we forecasted that the fourth quarter revenues for the segment would be up about 4 to 5%, in part due to the very strong revenue month in December of 2004.

The interim rolling 90-day data for October, November showed revenues trending upward; first at 8 to 10% and then at 9 to 11% respectively before settling in at the 4% level we just reported for the December 2005 period.

In line with the guidance we have provided in October and including the discussion of the strong mixed number of comparables.

Clearly, the rolling 90-day data has not been the helpful device we had intended it to be, and as a result we have discontinued publishing that data.

We will continue to provide quarterly guidance, like that included in today's conference call and believe that this will be a more reliable reference for our investors.

Now we will take questions.

Operator?

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone.

If your question has been answered, or you wish to withdraw your question, please press star, followed by two.

Please press star one to begin.

Your first question comes from the line of Nicholas Heymann with Prudential.

Please proceed.

Hello.

Actually this is Carl Edwards with Java Research.

A couple of questions.

Kirk, what are the risks moving forward for some of the major raw materials in the rest of '06?

I think you've seen, we've all seen copper go to record levels and I've seen steel now begin to climb back down.

I'm not in the business of forecasting commodity prices going out.

I think the issue is over the last two year, they have been extremely volatile and the initiatives that we have in place responded well to the volatility.

So if we continue to see inflation or wild gyrations in commodity prices, I think the organization now is very well equipped to deal with that.

You talked earlier in the call about about strategic sourcing.

You said that it would be able to offset the higher commodity prices, what are some of the supply type initiatives do you put in place or are going to be putting in place in '06 and do you expect to see to keep the higher commodity costs in line?

The strategic sourcing initiative was launched in 2000, and there is a number of difference principles around the program that we have talked about in the past;

E auctions, leveraging our supplying, and purchasing more from low cost countries.

We're in excess of about 38% of our material buy now from low cost countries, and that's something we will discuss at our outlook meeting on March 1st in New York City.

Okay.

And what would you say for major '06's, I guess raw materials, that is concerning you for the rest of the year?

Does Terry have a thought?

Going into 2006, clearly everybody is seeing what has happened in copper prices and aside from copper price, it is primarily energy costs, and derivatives from the energy costs, and so those are really right now the two primary commodities that have heavy inflationary pressures.

And final question, I really like what I'm hearing today on the call.

Kirk, for the rest of '06 and '07, what would you say are the top challenges and how do you plan to accomplish them?

I think we are going to have an outlook meeting in New York on March 1st, I believe, and we will get into that at that point.

Okay.

Thank you very much.

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

Please proceed.

Thank you.

A question on the asbestos announcement and then one on guidance.

Regarding asbestos, did you all disclose this quarter what the year-end claims outstanding were?

They had been clearly benign for the past couple of quarters.

Was there any change?

No, Dean, let me give you the actuals.

New clients filed for the year were 4,562.

Claims pending at the end of 2005 were 38,435.

Average indemnity payment was $2,055.

Great, so that 38,000 year-end was comparable and didn't know if like you had any meaningful change whatsoever?

It was actually down from 46,700 from the end of 2004, Dean.

I was just looking at it from the third quarter.

Yes.

All right.

So then if I just step back and based upon the announcement, worst case is you would be back to litigating through the court system, and you - - if I heard it correctly, there'd be a chance that you would increase your reserve?

And what would that be based on?

It doesn't sound like plans had changed.

So why would there - - or payments have changed.

Why would you necessarily have to revisit your reserves?

Dean, what we would probably - - what we are looking at is based on where we're at today, where in the range would we record a liability?

Right now, the 171 million we have on our balance sheet is based on a settlement agreement that we had sometime ago, and we were within the range of possible outcomes.

We're relooking at that and deciding how - - whether we will take a very conservative posture on insurance and increase the liability side.

We just don't know at this point until we go through further negotiations and decide where this is going to end up.

Okay.

We will stay tuned on that.

But in the meantime, cash flow remains strong, and that would not be a material portion of free cash flow, is that correct?

That's correct.

Okay.

Good.

And then on guidance, the 4 to 6%, could you - - for '06, could you give us what that assumption is in terms of volume and price for the Company as a whole, in both segments, if you could?

Dean, we would rather spend the time on March 1 rolling into the specifics of it.

How about for the quarter then, volume versus price and what the trends have been?

I don't have it in front of me.

For the fourth quarter of 2005, pricing was slightly over 1% on it, and the rest made up of - - of course there is negative translation of about a 0.5%.

A very small amount from acquisitions.

So the core growth was the delta.

Great.

Thank you.

Thanks, Dean.

Your next question comes from the line of Don McDougall with Banc of America Securities.

Please proceed.

Good afternoon, gentlemen.

Good afternoon, Don.

Kirk, you had said in your comments that are you seeing some pockets of strength in the non[resi]construction markets.

Could you maybe elaborate a little bit more and perhaps give us some color on at least directionally how you saw that market unfold in 2005?

Well, as we went into the year we were a little bit more, I guess, optimistic about non[resi]construction, and in the first half of the year really didn't see much pickup at all.

And then as the year materialized, I think there were some good opportunities that we saw in education, health care, retail, and on some of the warehouse distribution side of the business.

There are some pretty large projects going on.

If you read the research, there is certainly a number of people because office vacancy rates now have declined and the cost for office space has increased that the people are expecting a fairly robust year in 2006. ie, like 5% kind of growth non[resi]commercial construction.

And if that materializes that will be significantly better than what we saw this year and will certainly be a welcome relief.

Count us in that camp but what have you - - in the 4 to 6%, I know you are going to give us some more color in March, but can you give us a general sense for - - is that predicated on environment exactly the same as '05?

We wouldn't - - that's exactly right, Don, we wouldn't - - we wouldn't bet a forecast like that with a heavy recovery in there so it is a modest assumption on commercial construction, sure.

Okay.

We think the utility and the industrial markets and some of what we're seeing overseas will certainly carry the day as it did this year, and I would think if we had a substantial pickup on the non[resi]commercial side, sure that would give us reason to be even more optimistic.

Jumping over to the utility market, I guess kind of the same exercise, how this year played out clearly, there is - - there has been some more spending.

Some of it may be weather-related.

We had unusual hurricane activity.

Can we pars that out a little bit and try to get to what you think the real underlying recovery and demand is in T & D spending?

We're going to have Mike [Stessil], the President of Cooper Power Systems with us on March 1st in New York, and he will certainly then drill into this, but I think the simple answer is that while there was some hurricane-related expense, if you go back to the previous year, there were four or five smaller, less impactful hurricanes that year, and so I think now, the rebuilding programs or the - - getting the power back online has been completed but there is going to be significant spending for the foreseeable future as they rebuild developments and get the housing back up and the infrastructure back up, so I think it is a pretty good end market segment.

It is just hard to split out exactly what now is hurricane-related and what is continuous MRO spending or upgrade spending, but we think it is going to be, for the foreseeable future, this is not a six-month pop; this is going to be a sustainable, lasting normalized core growth rate as we go forward.

And one final one, and again, end market related, residential will probably end up being at least in the first half of the year, I think better than you had expected and maybe toward the end of the year, it had tailed off.

Is that a fair characterization of what you saw and how does that business feel going into '06?

We had actually forecasted actually [resi] being worse for the whole year and it actually stayed up pretty good the whole year.

Even though new housing starts and such is starting to drop off and inventory picked up on the builder's side, we still had pretty good experience on the [resi] side for 2005.

Our forecast for 2006 is a slight downward projection.

It is not a bust or a steep fall.

It is a softening certainly of the [expectication] of that market being able to sustain itself in 2005 - - or in 2006, excuse me.

Thanks for the color.

Your next question comes from the line of Nicole Parent with Credit Suisse.

Please proceed.

Good afternoon, guys.

Hi, Nicole.

I guess with respect to the long-term margin targets, could you talk a little bit about the biggest drivers to the upward revision?

And I guess maybe in the context of end markets, the old line businesses, or the Cooper initiatives?

Well, have you a combination of several things.

One is that there seems to be a fairly good market for pricing power today, and that was coming off, if you look back at when our margins peaked in 2000, there was pretty good pricing power in that marketplace as well, and so I think you're getting a better roll on pricing versus inflation.

Certainly, the productivity programs, Nicole, that we put in place over the last four years are driving terrific improvement.

I think there's benefits coming out of the EBS implementation across the board.

We certainly see a difference in the businesses that are on the system for six months.

Versus the businesses that aren't on the system.

And I think there is continued benefit, although we are taking inflation on our sourcing program, I think we are mitigating the larger increases on the raw materials and the transportation and buys because we are more effective in our program there.

So, I think by and large, the guys are doing a terrific job running the factories, and driving the benefits.

We have over 1,000 employees trained now on the tools, and Terry has done a great job making sure that we can measure the benefits all the way down to the P&L, and so we don't book programs or book benefits if we can measure it and see it in the P&L.

And then we tied the compensation program to the overall productivity program.

Great.

And I guess in light of the new head of Tools, could you just talk a little bit about the mandate that he has in, I guess that you gave him when you hired him?

Yes, [Gary's] got a very strong background; he had been with General Electric for about 12 years and with [Danner] for about nine years, and so he he comes with very good process experience.

He ran a very large business prior to joining us.

He's got a great mindset for the customer.

And working globally.

So other than to get the Power Tools business back on the proper trajectory, we've been disappointed with the performance there for the better part of 2005.

He is a fresh addition, and he brings a different set of skill sets to the management team, and we had a great interaction with him at my staff meeting after our management meeting - - our year-end management meeting we had down in Miami in January so he is off to a great start; he is learning the business, but we have high hopes for [Gary].

Great, and one last one.

You noted in the press release sales to the retail channel were down.

You also ceded some share issues in lighting.

You can talk a little bit about how we should think about the retail market as we move into '06?

Well, overall, I think retail is still, a very, very important channel us to and as we said there's different pieces that come up and go down.

One of the large retailers made a vertical acquisition into a chain and hardware company, and so we lost the share that we had had there there supplying them.

And on the Lighting side, there's always wins and losses that come in and move out.

We have focused on good profits versus bad profits.

Good customers versus bad customers.

And so at times, as I've always said, that we will not provide the Cooper brands and the Cooper service and the Cooper quality and the Cooper innovation at rock bottom prices.

And so it is disappointing not to have the business, we try to go get - - everything we do to secure that share, but there's times when we just as soon as step on the sideline and not take the business.

Yes.

And we saw it come through in the margin.

Thank you.

Thank you.

Your next question comes from the line of Bob Cornell with Lehman Brothers.

Please proceed.

Hey, everybody.

First of all, a couple of housekeeping questions.

What should we be using for interest expense this year as a part of the guidance, as the dollar refinancing paid the debt down, you're running at 12 and change per quarter.

What does that number look like, Terry?

And the corporate expense, too.

Bob, we will provide you detailed guidance in March.

I will make one observation, just for early on here, and that is that we will see significant interest expense reduction in 2006.

However, our effective tax rate will go up and will essentially offset that.

As I've talked about, our tax structure is such that incrementally tax - - income taxes go - - are about 36 to 37% on the incremental earnings.

So our growth that Kirk mentioned in the first quarter and for the year is primarily coming out of operating results.

Yes, that leads to my next question which is the contribution margin on electrical was accelerating through this year, and looks to me on a rough basis, it was like 37.9 the quarter and even without the 4 million charge taken out of it, what sort of contribution margin do you figure for '06 in Electrical if you think that way and what's the variability there?

Bob, we have to pull it back.

We're really not prepared at this time to dig through.

We wrapped up all of the budgets and we're making year-end adjustments based on the closing numbers that the divisions reported.

You can imagine we've been a little bit tied up over the last three or four days on these other issues.

Got it.

Let me ask another question then.

I'm sorry.

Would you give me a little more detail on what is really going on in the Power Tool business?

You had mentioned that your people could be working through the problems in the first half of the year, but what really caused the problems in Power Tool, and what have you done to correct them, and why do have you confidence that it is going to be better in the second half?

The challenge that we gave the other general manager that we had down there was to really keep Hand Tools on the track that it had been on for a number of years which would be constantly improving their inventory turns, cash flow and their margins and they continued to do that well.

I think we made too many management changes at Cooper Power Tools, and took on too many plant relocations, and too many issues simultaneously.

And the team was not able to digest or successfully execute the number of issues that they were trying to deal with.

So what we've done is we've tried to simplify the business and reduce the number of things that they are focused often and try to focus on the revenue equation for right now and restabilize the business.

The reason we're confident, Bob, is that business has a pretty decent backlog that you can look at and the business that we look at going forward, the year-over-year comps get better of course, because we were down so much last year, but we have a pretty good look at the backlog and where the business is going, and so we feel pretty confident we will get that one back up on its feet.

That business all along, I always felt it had better technology; this is not stuff that you find at a retail shelf, this is stuff that you find in Boeing or Air Bus, or very high-end industrial manufacturers.

And so there are few competitors in the space.

The competitors that are in the space do very, very well, have very good margins, and our business had significantly better margins than it has today and while we' done some things on the productivity side and made some team changes we're going to stabilize the business now and and do everything we can to encourage them to get back on track.

Let me ask one other final question if you don't mind it.

A number of you guys and your competitors, Huebel, Thomas Best, yourself have made I.T. types of changes.

Has there been any response in distribution in terms of acceptance of these I.T. changes and as a result any sort of market share changes among the - - those three players, that typically sell in - - [overlapping speakers]

I don't think so.

Longer term have you the better ability - - for us for example as we think about the Cooper connection, we have five or six businesses that deliver material to exactly the same customer base or distributor base and so long-term can you think about back end consolidation and distribution and logistic consolidation, we have single customer service, and you give your customers the ability to go in and look at inventory and look at the year to date purchases and all those types of things and I think it gives you massive opportunities of things you can go do, but I tell you right now, the three major players behave themselves pretty well and I don't think there is any significant share shift going on right now, no.

Thanks.

Your next question comes from the line of Jeffrey Sprague with Citigroup.

Please proceed.

Thanks.

Good afternoon.

I guess excuse me for my cynicism, but I take a little bit of exception with your decision on orders.

You know, the stock has gone from 70 to 80 in the last two months of the year.

And it is not as if the stock's taken a header today because revenues were suddenly weaker than somebody thought and they couldn't interpret the order; it just kind of seems like an unjustified decision on maybe one odd month over a period of a number of years that you reported orders.

Jeff, what I tell you is that the decision wasn't made in the last month.

This is something we had been kicking around for the better part of about six or nine months.

And this is one of the things that I sort of inherited, which is that posting of that number, and I was never really comfortable with it, because at the end of every quarter, we do an earnings conference call, and we give you a pretty good look at the next quarter, and so I would say the fact that we use this quarter as an excuse to point out the reasons why we did it would be more the situation than this quarter made up our minds on a decision.

It just kind of feels we're getting less and less, though, Kirk.

We used to get kind of detail on the vertical segments and now we will get an anecdote or two, but we don't get the same detail there, and now the orders are going away, it just makes it a little cloudier.

That is certainly not our intent, Jeff and we will take some time to think about it and we can talk about it in New York as well.

We are open your suggestions.

We are trying to give you more clarity and better visibility, not less, but again we don't want to mislead you with specific numbers on a specific business that really frankly aren't relevant or monthly trends that are going to deceive the - - you tend to be a little bit more sophisticated and watch us maybe a little bit more closely than others, so I think that's what we're trying to end up with is a clearer picture and not less - - not less accuracy.

Fair enough.

On the - - on kind of the question of big box and distribution and everything, what are your longer-term thoughts about the threat of Home Depot, maybe Lowe's some point, entering industrial distribution?

I mean certainly the distribution franchise that you have in some of these businesses is probably part and parcel of why the margins are where they're at and electrical businesses, and HVac businesses and things like that, and it would seem like over time, as those guys elbow into that space, maybe it causes some threat to the margin structure in the industry.

Well, certainly, Home Depot's recently announcement of Hughes, Jeff, goes to your point.

You know, Home Depot had been a fairly large customer prior to that, Hughes has been over $100 million customer of ours combined as well.

So that puts Home Depot/Hughes up to a very, very high number.

The good news in all of that, though, is the business that we do with them is a very highly specified - - Cooper Lighting projects, Cooper Power Systems, and so our view of the world is the more features and benefits and technology that you have, the better off your service is.

You have to constantly drive productivity, obviously, and we continue to make investments or acquisitions around businesses that have additional products and features and technology to bring to that distribution base.

If you're making nails or hardware, I would absolutely be concerned.

But I think given our position out there, and where we want to take the business as we go forward, we're certainly aware of those issues, and we continue to try to manage around them.

And just one last thing, I don't see these deals necessarily on the tape yet.

What is it you're doing in motion control?

What piece of motion control are you entering or - -

It is a small company out in the West Coast that we have acquired.

It is a company called [Nova Toss], they make motion detection sensors that go into room occupancy sensors, and also they have applications in lighting in the warehousing area.

For example if there is no motion down a row or a column or an aisle, for five or ten minutes, it will shut itself off and then when some motion comes in because someone is looking for an item, it will click the lights on.

So it is all around energy efficiency.

All right.

Thanks a lot.

The G & H acquisition, Jeff, is around rubber molded plaque to [crow pine] the harsh, hazardous, heavy duty environment type of an application.

Thanks a lot.

This is Rich Bajenski.

We will take one more question and then conclude our call.

Operator?

Your final question comes from the line of Scott Davis with Morgan Stanley.

Please proceed.

Thanks, Operator.

And good afternoon, everybody.

I wanted to move back to your capital structure and the free cash flow generation and as you showed, quite effectively, on page 6, your net debt to cap is down to 19%.

I know certainly you've got the overhang still with Federal Mogul but when you think, Kirk, in particular, when you think about the optimal capital structure or where you would like to get back to, or where at least is realistic over the next couple of years, what type of numbers come to mind?

Scott, we've always said we would be comfortable with 30 to 40% kind of debt to total capital.

We have been as high as 43% and kept our rating where it is today.

Tom O'Grady has just been on board since May and just getting started.

He's got a couple of good things that we're coming to the market with.

As you said, we still haven't reached final closure on the asbestos topic.

And so those are the things that we think about in our capital structure.

Hang on.

Terry's got one more point.

Scott, I would just make this comment, and I think Kirk has said this before.

The markets on the price of properties in an up-cycle tend to be expensive.

We will maintain a capital structure that is fairly conservative during this cycle.

And won't let the cash burn through our pockets, but Kirk is right, typically we're in a 30 to 40% net debt to total capital structure.

During times when it is difficult to execute acquisitions, because of price on it, we'd clearly be down, at the lower end of that, and probably more in the 30 and maybe even below that.

And maintain that over the next couple of years.

When you all take into consideration some of your acquisition candidates, does your Bermuda tax rate help the economics in the transaction?

Or is that not something you tend to play into it?

It does, but we don't factor it into it.

Okay.

And the acquisition, Scott, to be clear, it has to make sense on its own and it shouldn't pass our threshold because of a tax rate.

Okay.

Fair enough.

And last question, just on Tools and Hardware, clearly you've mentioned progress in margins, growth still a little sluggish;

I wasn't clear in the prior question that we really got an answer to what's the - - I guess what the real agenda for the new hire is.

Is it to get the growth rate back up?

Or is it to retrench from businesses that are less profitable and continue to allow volumes to go down?

No, no, no.

And that's probably the area that we've been most frustrated with, was a pure revenue issue.

We like the margins in the business but it is hard to drive productivity and margin expansion when you're dropping your top line by double digits.

So no, his mandate is purely a growth mandate.

We like the segments of that business.

There is an industrial Power Tool, there is automotive assembly, and there is the bits and sockets or the accessories.

They all have good margins.

They are all global businesses, they're all well positioned with great brands, and that's sort of the frustration we haven't done better on that business.

Okay.

That's clear.

Thanks, guys.

Thank you.

Thank you everyone for joining us today.

As we conclude this call let me remind our listeners that we will hold the investor presentation on the morning of March 1st in New York City.

The meeting will be webcast and those who are interested in attending in person should contact me by phone or by email.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may all disconnect.

Good day.