伊頓 (ETN) 2006 Q3 法說會逐字稿

Good day and welcome to your Q3 2006 Cooper Industries earnings conference call. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the conference over to your host, Mr. Jon Safran, Director of Investor Relations.

Welcome to Cooper Industries third quarter earnings conference call.

With me today is Kirk Hachigian, Chairman and Chief Executive Officer; and Terry Klebe, Senior Vice President and Chief Financial Officer.

As mentioned in our press release, we have posted a presentation on our website related to this quarter's earnings, which we will refer to throughout this call.

If you would like to view or download the presentation, please go to the investor center section of our website, www.cooperindustries.com and click on the hyperlink for management presentations.

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 of the control of the Company and as a result actual results may differ materially from those anticipated by Cooper.

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

In addition, comments made here may include non-GAAP financial measures to the extent they have been anticipated, reconciliations of those measures to the most directly comparable GAAP measures are included in the press release.

Now let me turn the call over to Terry.

Before turning the call over to Kirk, some of you have met Jon Safran, our new Director of Investor Relations.

Jon joined us from Dell, where he held positions in Investor Relations and finance.

At Cooper, Jon has a dual role that includes broadening his experience in acquisitions area and heading up our Investor Relations program.

I am very pleased that we have contracted Jon to join the Cooper team and I'm sure all of you will join my enthusiasm as you have a chance to work with John.

Kirk?

Good morning.

I assume everyone has had access to our exhibits posted own our website.

Let me begin by thanking our team again, for delivering one of our best performances on record.

With three quarters of the year behind us, we continue to deliver beyond our expectations and have continued to raise our guidance for the full year.

While I hate to keep repeating myself, if you like the first quarter and the second quarter, you have to be very pleased with today's results.

Highlights for the third quarter--Continued very strong revenue growth with total company revenue up 9%, 1.6 from acquisitions and 1% from foreign exchange.

Electrical product revenues up 10% in-line with the first quarter up 10, second quarter up 9.

Our tools business was up 2%, again, level with the first quarter, up 2% and the second quarter up 3.

Three of our four key end markets are expanding with nonresidential construction and utility appearing to be early in their cycle.

Earnings per share in quarter, $1.37 up 27% from last year.

We had strong operating leverage, favorable pricing and mix, and a lower interest expense and share count.

Income from continuing operations up 26% to $128 million.

Electrical products return on sales was 16.5%, up 110 basis points from last year and our best performance since peak margins of 2000, the leverage was 28% on every incremental sales dollar.

We had great year-over-year performance and great sequential improvement as we passed through 2006.

The tools return on sales came in at 13%, up 450 basis points over last year, benefiting from strong productivity and good mix in the quarter.

The third quarter free cash flow came in at $194 million, 152% of income from continuing operations and were up $100 million over last year and on track for our sixth consecutive year of cash flow in excess of income from continued operations.

Key drivers for the third quarter results were strong industrial demand, industrial production remains steady with factory utilization up over 82%.

Utility spending continues to be robust with strong order rates and shipments.

Commercial construction is improving, office vacancy rates are declining, strong year-over-year spending on commercial construction and we're seeing strength in early cycle businesses, like HVAC switch gear, and building automation and controls.

Global energy infrastructure and investment continues despite recent declines in oil and gas prices and we had great execution on our MVP productivity program, with 3% cost of goods sold productivity year-to-date.

For issues and challenges for the quarter, we saw a slowing residential construction market and weak automotive output.

We still had margin pressure from metals and energy prices, although August and September showed some modest relief, and our lighting and assembly business within power tools were certainly not performing at full potential.

In the lighting business, our commercial sales were strong or good, and residential retail sales were down with flat margins overall.

On slide 4 of the hand out for electrical products segment, we had very strong performances at Cooper Crouse-Hinds, Cooper Bussmann, Cooper B-Line, Cooper Power Systems, and Cooper Menvier.

Overall, sales at electrical distribution were up double digits.

Electrical retail was down mid-single digits and our utility sales were up over 20%, with orders again, well in excess of shipments now for the third quarter in a row.

Electrical sales to developing markets was up over 20%, with strength in China, South America, Mexico, and the Middle East.

For the tools group, page 5, the third quarter revenue was up 2%, with Cooper Power tools up 6 and hand tools up only 1.

We expect the revenue for the tools group to accelerate to the 6 to 10% range in the fourth quarter driven by continued improved shipments at Cooper Power Tools.

Overall, we continue to be very pleased with the progress we're making with our tools group, selecting better margin business, and realizing the benefits of productivity programs put in place.

Now let me turn the call over to Terry for additional details on the quarter and to revise our outlook for the fourth quarter and for the full year.

Terry.

Thanks, Kirk.

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

On slide 6, as Kirk mentioned, our free cash flow for the first nine months of 2006 was 335 million compared to 235 million for the first nine months of 2005.

With the strong 2006 free cash flow to date, we are in good position to achieve the sixth year in a row where free cash flow exceeds income from continuing operations.

During the quarter, we purchased 900,000 shares of common stock for 76 million and received 11.2 million during the quarter from option exercises.

During the quarter, we acquired Cannon Technologies an electrical fuse business in China for 195 million in cash.

Through September 30, 2006, we funded 279 million in acquisitions and 262 million in stock buybacks.

Even with the acquisitions and stock purchases, our balance sheet remains in great shape.

Our debt to total capitalization net of cash was 24.6% at September 30, 2006, only up 50 basis points from September 30, 2005.

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

Turning to slide 7, our inventory turns of 5.9 through September 30, were flat with the prior year, continuing strong demand in our efforts to improve customer service has put pressure on inventory performance.

However, by year end, we expect performance to improve.

On receivables, our day sales outstanding decreased 2 days to 67 days compared to 2005, while growth in international markets, which includes VAT tax and receivables put pressure on day sales outstanding, we have managed to improve overall and continue to focus in this area.

Our initiatives to improve payables performance continue to pay off.

We've improved quite a bit on moving supplier terms closer to the terms our customers demand of us.

Overall, as a result, our operating working capital turns improved to 4.9 turns to compared to 4.5 turns in 2005.

Now while we have consistently improved our working capital performance over the past few years, we strongly believe there's considerable additional improvements that can be achieved.

Turning to slide 8, our capital expenditures were down 19% in the first nine months of 2006 compared to the same period last year, the 58.1 million.

While we have improved capital expenditures in excess of this level of spending, the higher sales volume we have been experiencing slows down the ability to quickly deploy the capital without risking customer service.

Capital expenditures will increase in the fourth quarter as a number of projects are in process related to equipment capacity expansion.

For the year, we currently are forecasting capital expenditures of 100 to 105 million.

In the first nine months of 2006, we purchased 3.1 million shares of our common stock against issuances of 2.4 million for option exercises, 401K matches, and payout of performance and restricted shares.

As we have previously stated, our intention is to purchase shares at least equal to the number of shares issued.

When our debt to total capitalization is below 30%, we will likely purchase additional shares, especially when the stock market softens.

For the first nine months of 2006, our purchases have exceeded issuances by 700,000.

Turning to the results for the third quarter and slide 9.

Revenues in the third quarter continue to be strong and increased 8.6% over the prior year period.

In the third quarter, acquisitions contributed 1.6% to revenues and currency translations 1%.

Earnings per share increased 27% to $1.37 per share exceeding our forecast of earnings per share of $1.28 to $1.35.

Revenues came in at the higher end of our estimate, and a lower share count driven by stock buybacks contributed to the performance.

Sales mix was favorable in both segments, which was also a driver to the performance.

On an 8.6% total company revenue increase, we leveraged to a 27% earnings per share increase driven by operating performance and lower interest expense partially offset by a higher effective tax rate.

Just to remind everyone, our reported results include stock-based compensation expense, expenses on our initiatives, as well as items that could be considered nonrecurring or unusual.

As has been our practice over the last few years, we do not attempt to segregate such costs as a nonrecurring item.

However, we do disclose unusual type items that impact results and line items in the financial statements.

In this regard, in the prior year third quarter, we incurred $0.07 per share of costs related to our action plans on selling, general, and administrative and other costs and the retirement of Kirk's predecessor.

The 2005 third quarter actions reduced tool segments, pretax earnings approximately 2.5 million and increased general corporate expense by close to 6 million.

In the 2006 third quarter, our tool segment earnings include a 1 million pretax gain on the sale of property and our general corporate expense includes approximately 3.5 million in severance, legal, and due diligence costs.

I do not consider these costs nonrecurring as from time to time we'll incur higher levels of these types of costs.

In last quarter's conference call, I noted that we were selling the assets of a small product line and expect to realize a gain.

This sale occurred in July, and we recognized a 4 million gain.

We also recognized a write-off of in-process research and development costs on the Cannon acquisition which was slightly over 4 million.

Both of these items are included in the electrical segment earnings, but since they close to offset each other , there is no net impact on the segment.

On slide 10, our overall cost of sales as a percentage of revenue improved 90 basis points, resulting in gross margins increasing to 32.5% from 31.6% in last year's third quarter.

In the second quarter of this year, we implemented additional price increases to offset the significant copper, aluminum, zinc, and other metal price increases we experienced this year.

Our operating practice is to always look ahead and attempt to drive pricing to offset material inflation as it occurs and not play catch-up.

We overall have been very successful in achieving price to stay at least even with material cost inflation.

In the third quarter, we once again achieved adequate pricing to offset the material inflation we are experiencing.

Recently, prices of many of the metals we consume have stabilized and energy costs have declined.

If these costs continue to stabilize, it will alleviate some of the pressure on achieving price to offset cost as we roll into 2007.

As we noted in our outlook meeting and at the first quarter earnings conference call, in 2006, we expected to turn the corner on realizing the benefits from our investments and again to leverage selling and administrative costs.

In the third quarter, selling, general, and administrative expense increased 2% on 8.6% revenue increase, as a result SG&A expense as a percent of sales were 18.3% compared to 19.5% in the prior year third quarter.

Nice leverage, no matter what you include or exclude as unusual or higher than normal selling and administrative expense in the current year quarter or prior year comparable quarter.

From a segment, reporting perspective, general, corporate, and other expense decreased 3.2 million to 24.1 million compared to the third quarter of 2005.

As I mentioned earlier, both the current and prior year include higher expenses than our normalized run rate.

Turning to slide 11, solid execution on cost initiatives while continuing to invest in our companywide growth initiatives along with the volume leverage and positive sales mix drove a 27% increase in operating income and our operating margin up 210 basis points to 14.2%.

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

Our net interest expense decreased 2.5 million from the prior year quarter driven by lower outstanding debt and favorable average interest rates as a result of last year's debt issuance and effective 3.55% interest rate.

During the third quarter of 2006, we spent 195 million cash for acquisitions, which increased our net interest expense for the quarter.

Our effective income tax rate for the third quarter of 2006 was 25.7% versus the 21.5% for the third quarter of 2005, an increase of 420 basis points and a slight increase from the 25.5% rate in the first half of the year.

The increase is driven by the incremental earnings over the prior year being taxed at 36 to 37% incremental tax rate.

Net income in the third quarter of 2006 increased 26%, slightly less than the 27% increase in earnings per share as a result of lower average shares outstanding.

Turning to the segments in slide 13, for the quarter, our electrical product segment revenues increased 9.7%.

Acquisitions contributed 1.9% of the revenue increase and currency translation, 0.9%.

Core revenue growth for electrical products was strong in all regions of the world.

Electrical and distribution and utility were up double digits driven by continued strength in industrial and utility markets and in improving commercial construction.

As we discussed in our last conference call, revenue will be impacted by the loss of lighting shelf space in the big box retailers on lower margin import products.

Electrical retail sales declined in the third quarter of 2006 compared to the third quarter of the same period last year.

However, excluding the lighting line losses at the big box retailers, electrical retail revenues were flat with the prior year period, reflective of a softer residential construction market.

Electrical operating margins increased to 16.5%, a 110 basis point improvement from the third quarter of 2005.

Lower sales in the lower margin retail market and strong growth in energy and industrial markets provided a good sales mix.

In addition, while our utility business operating margins continued to be below the segment average, the business has been able to achieve efficiencies in pricing and continues to improve its operating margins.

As expected, the acquisition of Cannon Technologies in mid August slightly diluted return on sales for the segment.

In summary, electrical product segment earnings increased 18% on a 10% revenue increase, continuing the trend of great leverage on incremental sales.

Turning to tools segment on slide 14, in our tools business, sales increased 2.4% with currency translation representing 1.5% of the sales increase.

Revenues were impacted by the loss of the Home Depot chain business and soft retail sales in the quarter.

Both Power Tools and Hand Tools industrial and commercial sales increased in the high single digits.

Shipments of assembly equipment declined in the quarter compared to the prior year quarter which suppressed the overall third quarter topline growth.

Shipments of these assembly equipment can vary significantly quarter to quarter and while we had low shipments this quarter, we expect high shipments of assembly equipment in the fourth quarter.

Tool segment operating margins increased to 13% in the third quarter of 2006 compared to the third quarter of 2005.

As I mentioned earlier, 2005 third quarter included a 2.5 million of cost related to action programs we implemented and the 2006 includes 1 million gain on sale of a property.

However, even excluding the gain, tools operating margin exceeded 12% driven by strong industrial sales and lower sales of the lower margin assembly equipment and sales into the retail chain.

Before turning the conference call back to Kirk, I'll cover the fourth quarter and full-year outlook.

Turning to slide 15, our outlook for the year started at $4.60 to $4.75.

With today's guidance at $5.04 to $5.10 per share from continuing operations, we've increased the high end of our forecast $0.35 per share as the year has developed.

Our topline outlook has improved from 5% to 7% growth to our current outlook of 8% to 9% growth.

Industrial, energy, and utility markets have been very strong and we have seen an improvement in nonresidential construction.

Our sales and marketing and globalization initiatives are delivering solid results and our productivity and enterprise business systems initiatives are continuing to gain momentum.

Turning to slide 16.

Turning to the forecast for the year.

First, for the year we are forecasting a topline growth of 8% to 9%.

Acquisitions net of divestitures added close to 1.5% to the revenue growth.

Electrical 2006 revenues are forecast to increase 9% to 10% and tools revenues are forecast to increase 3% to 5%.

Acquisitions net of divestitures in currency add close to 2% to the electrical product segment growth.

Continuing earnings per share are now forecast to increase to a range of $5.04 to $5.10.

For the fourth quarter of 2006, we're forecasting revenues increase 8% to 10%, with electrical increasing 8% to 10% and tools revenues increasing 6% to 10%.

Acquisitions net of divestitures add approximately 1.5% to the Company's revenue growth and close to 2% to the electrical product segment revenue growth.

As is typical, we will have lower return on sales in the electrical segment in the fourth quarter compared to the second and third quarter.

The second and third quarters have the highest end user activity related to construction and maintenance and repair, and with the fourth quarter sales mix typically less favorable.

In addition, holiday shut downs impact our factory absorption.

In the tool segment, heavier shipments of lower margin assembly equipment will decrease operating margins, but we anticipate tools continuing to post double digit operating margins in the fourth quarter.

The wide range of tools revenue growth is driven by assembly and equipment shipment.

It's difficult to predict when customers will delay shipments into 2007.

Earnings per share from continuing operations are forecast to increase 15% to 20% and be in the range of $1.26 to $1.32 per share.

Kirk will now provide a wrap-up on 2006 third quarter.

Kirk.

Thank you, Terry.

In summary, I think clearly that our end market balance in mix supports continued strong core growth.

Clearly we're seeing the benefits of the attractiveness of our end markets served and our diversified portfolio.

The Cooper connection, new products and globalization are improving our overall growth outlook.

We had solid core growth with key customers.

Our new products delivered improved margins and mix, the European economy is improving with Mexico, South America, Middle East, and Asian markets all very strong.

Our initiatives on EBS, MVP and sourcing are driving higher margin expansion and free cash flow.

Our strategy of balanced, profitable growth with margin expansion and free cash flow is certainly paying off.

We completed the strategic acquisition of Cannon Technologies for Cooper Power Systems, moving us from a hardware provider to a solutions provider.

We are looking at other opportunities in the utility space and other attractive targeted markets.

Our balance sheet remains strong, which supports our investments in core growth, strategic acquisitions, share repurchases, and to continue our dividend policy.

And we announced a third consecutive increase to our full year guidance of $5.04, to $5.10.

Again, as Terry mentioned, raising the high end of our guidance by $0.35

Lastly, let me welcome Kevin McDonald, our new Senior Vice President and General Counsel; and Jim Williams, our new Senior Vice President of Human Resources to the Cooper leadership team.

Thank you.

Now I'll turn the call back over to Jon.

Thanks, Kirk.

At this point, I would like to open up the call call for a few questions.

Please do not enter the question queue if you have called in using a name other than your own.

[OPERATOR INSTRUCTIONS] Bob Cornell, Lehman Brothers.

Thanks.

Good quarter, obviously.

Stocks are reflecting it.

Kirk, you mentioned that the businesses that weren't up so up to full potential were lighting and assembly tools.

Maybe just go back into both those businesses and talk about where they are and what's underway to get those to full potential?

Yes, Bob.

As you know, lighting is our largest division and we have been working hard to put the foundation and the basic building blocks together there.

I would say at this point, as you probably know, there are no plant moves underway.

The factories and the material flow is stable.

Our factory variances are improving.

The lead times are decreasing in the business and our service levels and past dues are at least at parody with our historic levels.

With that all in place, I think the key to that business is for us to be out there capturing a larger share of the product business.

Which is going to take some time.

You have larger cycles, you're out there quoting larger pieces of businesses.

And I think -- when we went in the trough that we hit, we lost some business, no question.

It's just going to take us some time to recover.

We've got the product pipeline, we have a competitive cost structure through Mexico and China and we've made the right leadership changes in the business.

So I expect it's just going to take some time.

The margins were flat, which is still double digit margins for that business, so pretty good.

The one piece of the Power Tools business is the assembly business.

Gary's been digging through that with his team and we're evaluating different pieces of that business and how we can make money in that business.

There's always been that pass-through part of that business that we have not been overly excited with.

It just has low margins, it's in a tough space.

As we head into 2007, we've taken a lot of cost actions, productivity actions, but certainly our focus in that business is doing more on the industrial Power Tools and on the aftermarket business and we're going to have to look at that business more strategically and figure out what parts of it we want to be in and whether or not we want to be doing the entire assembly line that we have in the past.

That's where we've had trouble is quoting and getting our costs in line on those large full assembly line businesses.

A follow-up, Kirk, you did mention that, I think there was a lighting price increase recently that will impact fourth quarter and '07, is that the case for you guys as well?

I think the last time we went out with an increase in lighting was around the June time frame.

That's the last I heard of it.

I may not be fully current on that, but I have not heard of anything more recent than that, Bob, I can't comment.

I guess the final question is, you say the utilities order book to bill is a positive, one company in its earnings period noted that they thought there was an inventory build because of an absence of storms.

Have you done a perspective on that?.

I think the difference is a shelf good business versus a made to order business.

Our business is predominantly made to order and so we have pretty good visibility going out and lead times have stretched out a bit.

I think the utilities have spent most of their capital budgets for this year.

Our fourth quarter obviously, is pretty well in place at this point because of the nature of the business, but I think the others on that side are probably more on the shelf goods side, Bob, than on the made to order side.

Got it.

Thanks a lot.

Jeff Sprague with Citigroup.

Just to pick up on the utility question first, was that -- I don't know if it's 20 or 20 plus, Kirk, on utility.

Is that all organic, or does that include some of the Cannon?

Jeff, this is Terry, that includes the Cannon revenues.

We had about 12, 13 million of Cannon revenues that hit the third quarter.

So X that, utilities up, what, closer to 10 organic?

No, be closer to 15, I believe.

Kirk, could you elaborate on the point you were trying to make when you referenced HVACs which gives building automation and control.

I think you characterized it as earlier cycle, are you -- that's your view on commercial construction and early signs of return, is that the takeaway from that comment?

Normally what you see three big parts of the commercial project, or an office building project.

Right?

It's the power and it's the lighting controls and such.

So you look a the HVAC business and you see what their order rates are looking like and we're pretty encouraged by the strength that we see there.

Quotation levels are up, there's an architectural guide or index that we look at and we're pretty encouraged by all that.

We saw some pretty strong organic numbers in that whole space for the quarter.

I'm just wondering on, I think Terry alluded to it, maybe it was you, Kirk, but cost going into '07, some things like nickle and zinc are tricky, obviously maybe some of the steel is coming down.

What is your all-in thought on cost in '07 versus '6.

Is it actually up year-over-year, or could it actually be down?

Well, for us, Jeff, cost in '07 will probably be overall up because of the power systems business on transformers and regulators.

There's cost increases on transformer oil, which may or may not stick depending on the energy crisis and then core steel has gone up significantly.

Now that does not impact our price cost equation, because we have those products indexed to a market rate when we ship them.

Other than that impact, right now looking out first half of the year we'll probably see inflation, the back half of it as prices stayed where they're at today, we see a benefit.

And just one final question on tax rate, Terry, a lot of your peers, who are not Bermuda companies are sporting 25, 26% tax rates these days.

I'm just wondering what the opportunity is to get that lower and why it hasn't moved lower recently?

Most companies that post those kind of rates are not taxing the income in some of their foreign jurisdictions in the U.S.

In other words, they've elected to say it's permanently invested in those low income tax jurisdictions.

We don't do that and we're limited, at this point, from doing it, Jeff.

Because we have a relatively low US income tax rate and we have issues with absorbing foreign tax credits.

To date, we haven't elected to make those representations that we're permanently investing some of that foreign income, but we could do that in the future.

So what is your cash tax rate going to be for the year, roughly, you think?

Probably about where it's at now, somewhere between 25.5 and 25.7%.

Great, thanks a lot.

Scott Davis with Morgan Stanley.

Great, Thanks, guys, and again, good numbers.

It's been a while since we've been able to talk about the tools business in such a positive light and so I have a couple questions.

First one, if you could just refresh our memories a little bit on the customer mix of where the actual end markets are with this tools business versus commercial, industrial, retail.

The hand tools business is about 70% the whole group is about 70% Hand Tools, 30% Power Tools.

Within the Hand Tools business, you have almost a split between retail and industrial distribution, right?

And then on the Power Tools side, you have industrial Power Tools, you have the assembly businesses, and then you have what we call accessories, bits and pockets, and replacement parts.

We've talked about this in the past, we find the industrial Power Tools business and the bits and sockets business obviously very attractive.

This is Airbus, aerospace, real technology, multiple composite materials.

Good margin business.

We've had trouble around pieces of the assembly lines, as I mentioned earlier.

On the Hand Tools side, there's a gem in there called Weller.

There is a couple other precision tool business around this joining technology nd then you've got pretty much your standard crescent wrenches, Lufkin, tape measurers, Mickelson files, but very highly branded preferred products in any retail application.

It's a pretty good mix between heavy industrial, some real technology on the assembly side and then some pretty heavy branded pieces.

The one piece of the portfolio we never really cared much for because of the margins and the lack of technology was the small chain business and that one we've just been managing cash flow and the margins on that business.

Overall, it's a pretty good mix of three or four different pieces, with the Weller, industrial Power Tools, and bits and sockets being the most attractive.

Then I know this might be a tough question to answer, but margins up 240 basis points sequentially is really quite a big jump and you alluded that some of that was mix and some of it was productivity.

Is there any feel for how -- if you had to guess in how you broke it out between productivity and mix, where that contribution would come from?

Scott, this is Terry.

I don't have good information I would like to share on that, but a big piece of it has been productivity from comparing to the prior year.

Because we took out quite a bit of cost in 2005 on this business, so we have that.

But I would say as big of a contributor to this has been really getting the power tools business, the sales force reinvigorated.

Getting out with our products into the market, et cetera.

Sounds great.

Thanks, guys.

Thanks, Scott.

Deane Dray of Goldman Sachs.

Just a follow-up on the questions on pricing.

How much did price contribute to organic growth this quarter?

Deane, Terry, it's between 1 and 2%.

And what's your expectations, in answering Jeff's question about the material cost head winds expectations in '07 being more of a headwind in the first half then that benefit in the second half -- what sort of -- I know we don't have '07 estimates honed in yet, but what are you expecting happens to price in this environment, especially as you start seeing metals stabilize, energy coming down, how sticky will your recent price increases be?

Deane, I think the point is around capacity utilization.

As long as the industrial utility commercial construction markets stay pretty much where they are, I think you could hang on to most of what you've got out there in the market, right?

I don't expect that -- we shouldn't be able to at least maintain where we are and if not continue to take price increases.

We've talked about in this business all along is that manufacturers push the price increases to distribution, good distribution understands that and passes it long and it works pretty well if you execute it well.

And in an inflationary time, we've been able to execute pretty well.

I would imagine with commodity prices stabilizing and even backing up a little bit, we'll be able to hang on to a majority of that.

That's sort of backed into the 70s and 80s scenario.

That's a personal belief.

I think there's -- we'll have to see.

But again, we've said all along, we've got leadership in most of our businesses and we'll try and get out there and lead by example.

Very good.

And then, second question.

It goes to Kirk in your prepared remarks, you talked about Cannon.

The more we've learned about this, it really does look like it could be a game changer for Cooper in terms of adding capabilities for smart grid management for your utility customers.

You just take us through that next level of detail in this whole move from more of a hardware to a solutions provider, where did the synergies of your current businesses, what kind bolt-on or adjacent markets are there?

Well, we're obviously pretty excited about this.

As we step back from the power systems business, we spent a lot of time trying to understand the global market, the adjacencies and other ancillary product areas that we could get involved with.

And this business Cannon gave us really three great pieces.

It gave us this Yukon software platform, which really gives us the ability to automate the existing components that we sell.

And that was a very unique solution that really nobody else can provide.

The networking solution plus the hardware, there's nobody out there that can replicate that.

It also gave us some two-way automated meter reading.

Again, that was sort of an ancillary benefit that we got from this business.

What we bring to Cannon in understanding the size and the ownership of Cannon is a 70-person direct sales force of engineers across the country.

We bring this $1 billion hardware business along side of it.

We have relationship embedded sales and marketing people in these key utility accounts.

So I think the marriage is just perfect.

This is a business that's been growing on its own over 50% organically and then you throw in the Cooper resources, the Cooper management team, the sales force, I think you've got all the pieces to take this to the next level.

We're looking at other acquisitions in this space.

Tom, our head of business development came out of Roper, he understands the technology, he understands the space.

We think this is a first step in multiple things that we can do in this area.

It's pretty exciting for us.

It's where we want to take the Company.

Right?

We want to go to more value-added, more technology, more intellectual property around our components and our products.

So it fit perfectly into our long-term strategy.

Very good.

And just a last quick follow-up for Terry, expectations for any gains in the fourth quarter on the horizon so far?

No, there's nothing built into our forecast on gains or unusual items.

Great, thank you.

Before taking the next call, I need to correct myself.

I picked up an incorrect number on Cannon.

Cannon had about 6 million of revenue in the third quarter, power systems sales were over 20% excluding Cannon.

And I think I'd said 15%, I picked up a wrong number on that, 12 million in revenue.

Is that clear, Jeff?

Okay, hope we got it.

You can follow-up with John if you have any questions.

Nicole Parent of Credit Suisse.

Good afternoon.

I guess first, could you quantify and characterize your residential exposure, I guess with respect to sales and then the impact on margins, particularly when you think about the sell-through at retail?

Slightly less than 20% of the total portfolio, Nicole.

And that's across lighting, wiring devices, hand tools, a little bit of Bussmann and a little bit of Menvier.

The question on margin, that business, that space was down for us in the quarter.

I said at the retail level, mid-single digits.

It tends to be some of our tougher margin business when you look at wiring devices, for example, the residential sector is a tougher margin space and we've been trying to balance our exposure in that space for a while and we think that '07 can continue to be slightly soft there, but I think we do a pretty good job overall.

Let me ask Terry if he has got anything to add.

I have a couple of comments.

I think when we redo this, the chart we've been showing on our different markets.

Residential, and -- at the end of this year, we'll probably represent about 17% of our revenues, and that's because it hasn't grown in the last few years like the rest of our businesses have grown.

We do not have the exposure to the home builders directly, as we do not have contracts with home builders.

Most of the exposure today in residential is the Halo product line on lighting, Hand Tools, as Kirk mentioned, has a very significant retail exposure that goes into -- sold through residential as well as other home uses, et cetera, and then after that, the exposure is pretty small in the rest of our business, except for wiring devices, which has about a 50% of their portfolio is exposed to retail residential.

But some of those businesses operate on a little bit different dynamics, like wiring device, a lot of their sales are into renovation -- painting, when homes are repainted, et cetera.

We don't expect quite the dramatic decrease on the residential side that some people may be exposed to.

Terrific, thanks.

With respect to M&A, given the strength of the tools margins in the quarter, does it make you rethink acquisitions or divestitures in that part of the portfolio?

And secondarily, how quickly do we think we can get back to the prior peak margin in tools of 14, 15%?

We'll come out with guidance on the peak margins, Nicole, I'ms sure as we look at '07, we just haven't had a chance to get out for budgets, we're going to be going out in the next couple of weeks after our board meetings.

On the M&A side, we've said all along that there's balance sheet opportunity in the tools group.

We said that there's an international opportunity for us to grow the business better, you're starting to see the growth rates pick up on the tools business and you're certainly seeing the margins expand.

Our strategy overall was not to shrink the Company by divesting significant assets, but to use the cash flow and our size and scale to acquire alike businesses.

We've been looking at some spaces in the Power Tools side.

If there's technology, if it's global, if it's an interesting product line, if fits an adjacency we would certainly look at it on the Power Tools side, on the Weller side would be another space that we've looked at, but I think overall, our model is intact.

Right?

Organic growth is somewhere between GDP plus a common point because it's a new product, the globalization, the initiatives, and then augment that with 4 or 5% of acquired growth over a long period of time and we're targeting that 8 to 10% top line growth and I think this quarter was right in the middle of those numbers.

We're getting a little stronger organic because the economy is good.

We've got good diversification in our portfolio.

The M&A activity is just stepping up.

I think we should see more of that as we go forward.

We've been pretty happy with the properties we bought.

They all fit the model, they're all doing exceptionally well.

In fact, most of them are performing at the top end of our integration strategy plans to start with.

So we're pretty pleased.

I guess just one last one, even though you haven't finished the budgeting process, could you give us any early read on big picture view of the world in 2007?

We're pretty happy with where we're leaving '06.

Your balance sheet is in great shape, you're seeing great growth out of industrial still, you're seeing great growth out of utility?

Our backlog now looks out to six months.

We've got pretty good visibility at the half of the year next year.

We see non revenue construction improving as we go forward.

We've got to do a better job executing there, that's our problem.

International markets, Europe is getting better, Middle East is strong, Asia is strong, we're pretty encouraged.

We're feeling that we should go out and see some pretty good numbers from the businesses.

I don't think -- the residential will certainly be down, our productivity plans are in place, we've got more focus on that than we have ever had.

There's more working capital improvements on the balance sheet.

I don't think we're anywhere near world class on working capital, there's a lot of work we can do there as well.

Overall, I think we're pretty optimistic leaving, or heading into the fourth quarter anyway.

Great.

Keep it up, thanks.

Robert McCarthy of Banc of America.

Hello, everyone.

A couple of questions.

One, commercial construction definitely you seem very bullish there for prospects going into '07, there has been from some of your competitors a more moderate view of, at least in volume growth for '07, could you comment on what you're seeing and your perspective again, on commercial construction going into '07?

I think again, Rob, when you look at the HVAC guys, they're seeing increased order, quotation rates, they're seeing some pretty strong organic growth.

When you look at the likes of Eaton, the guys on the large power switch gear side, they're seeing an improvement, an optimistic outlook.

Building automation and controls, the types of Honeywell, again, refer to great strength in that, that's the line we're looking at and three or four key indicators.

When you look at some to the basic Dodge reports others, and as you see a moderation of material inflation, right, copper, cement, lumber, the cost to construct, that would give you reason to be optimistic.

Again, if you look at vacancy rates, and office prices, they seem to be strong at vacancy rates declining.

On average, we're not looking for robust nonresidential, but I think there'll be good balance and different mix that will make it an attractive market and certainly growth in 2007 on a volume basis over 2006.

Understood.

Then on the utility side, it looks like we could be looking into what could be more of a longer term phenomenon, several years in terms of expansion.

Can you talk about what you're seeing in terms of growth and maybe some complexion in terms of, are you seeing more on the distribution side, are you seeing any expansion activity on the transmission side?

Any kind of complexion into the utility at all?

In the second quarter, we were a little bit cautious about the order rates and such and wondering if people were getting prepared for a rough summer, but, it's interesting, as the summer progressed and you saw some excessive heat but really no storms, we're looking carefully at the order rates and seeing if things would mitigate down and they really haven't.

In fact, the fourth quarter order rates are still relatively strong for this type of year.

Right?

You obviously have some cyclicality in order rates as the year goes on, but we're still ahead of last year and order rates continue to look strong.

The lead times are out.

That's something that we have to do a better job on some of our Lean production activities to bring in our cycle times and to get some more capacity online, but I think you're right.

I think what you're seeing is a fundamental shift in investment strategy by the utilities.

It's the H-grid, it's the improved demand from industrial demand, while the residential market is slowing down, they've already built for seven, eight years a higher level of residential construction, bigger rooms, more air-conditioning, more cellular phones, per capita consumption is going up of electricity.

So I think just there's more demand on the existing old grid.

And most of our business, Rob, as you know, is on the distribution side not on the transmission side.

So I can't really comment with any specificity on the transmission side.

Understood.

Then just a couple more questions real quick.

On pricing and lighting, there has been some commentary of some softness in that end market and just looking at your portfolio and the fact that you commented that you have a competitive cost structure now, is that something going forward that you would think you would get a little bit more competitive on pricing for large project business to get share, or is it something you're looking at, or how would you evaluate that?

Well, look, I think there's no question that we've lost share because we had not bad pricing but bad lead times and bad service.

We've got our lead times under control, we've got our service rates under control and we're going to go back out in the market and get some of that share back that we've lost.

No question.

But I think the market is more about aesthetics, it's more about getting ourself speced in.

I think we've got one of the best agencies out in the marketplace, we've got a full line, we've got terrific brands, we've been investing in the product pipeline for the last several years, so I think we're ready to go.

Do you have to be competitive in the marketplace?

Absolutely.

Large projects are always going to come down to some pricing discussions, but at the end of the day, we have to reestablish ourselves as a reliable, short lead time, high quality producer of lighting products and I think we can do that in short order.

And just finally, and this is it, just any incremental update on asbestos that we should think about?

This is Terry, really nothing.

Everything is progressing.

Right now I would tell you that the expectation would be that Federal-Mogul would be filing their plan, full plan in the next few weeks.

So it's probably, at this point, likely they'll have confirmation early in '07.

Early in '07.

Thank you for your time, gentlemen.

[Chris Connell], with , A.G. Edwards.

Good morning, nice quarter, guys.

I've got a couple questions on deal activity.

You talked a little bit about that.

I guess I wanted to get a sense, do you have any larger deals than what you've done here recently, anything bigger than Cannon, or is too early to really say?

We have looked at some larger things.

What we're trying to do is sort of exercise the team.

There were some costs in the quarter associated with some due diligence on a piece that we looked at.

Large is a relative term, but, yes, sure, we were out in Europe a week ago, we were looking at things in the 5, $600 million area.

All very early stage preliminary types of things.

But I think it's a good practice to look at everything, big and small.

Do you think most of the activity near term is going to be more on the bolt-on level as opposed to maybe mini platforms?

Yes.

We've said that all along.

Whether it's big or small, it will be in the space that we know, it will be around the businesses that we have.

Again, I think, as I define our businesses, they're very broad, they're in very broad markets.

Again, if you look at Cooper Power Systems, perfect example.

Whether you define us as being on the networking software side or not, we certainly did.

We're opening up our definition of these spaces.

Bussmann is over current protection, whether it's on your PDA, whether it's in a factory automatization industrial application or whether it's on a transportation caterpillar truck, all that is our space, it's a global business.

We bought this small company in China.

So, yes, we're not running out of things to look at, but I would say absolutely we are not looking look at a new leg.

Switching over to wiring devices, I guess you're about to get another competitor there on the residential side?

Do you guys have any comments on that?

Does that really change the competitive structure of that piece of the market at all, or is that just another mouth that's trying to be fed?

I'm not going to comment specifically on competitors or their products or their strategy, but you know the space, right, and right now the residential space is certainly one of our only markets that's down.

The second piece, I think that you already know is, is that space pretty well served by three pretty big guys.

Right?

Levinson, ourselves, and a division of [Inaudible] which is TNF.

So that market is not underserved.

It's a pretty competitive market to start with and as I said, our strategy is different.

Our strategy is to move more specification.

We've moved the value added team. we want to be closer to the end user on specification of design and more technology.

Again, I think, Cannon, [Novatof], FR-3, InView, Wheel Lock, NEDC.

All very consistent examples of the direction we want to take our business.

Thanks.

Thank you.

Sir, I have no further questions for you at this time.

Okay.

As we conclude this call, let me remind our listeners that they may follow-up with me for additional questions and clarification and with that, thanks for joining us today.

Thank you, sir.

Thank you, again, ladies and gentlemen, this brings your conference call to a close.

Please feel free to disconnect your lines now at any time.