伊頓 (ETN) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Cooper Industries earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to Mr. Jon Safran, Director of Investor Relations.

Please proceed, sir.

Welcome to the Cooper Industries fourth 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 the call.

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

Before we proceed, let the me remind everyone that comments made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements are subject to various risks and uncertainties, many of which are outside the control of the Company and 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 that 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 Kirk.

Good morning, thank you, Jon.

I assume everybody has had access to our exhibits that we've posted on our website.

In a nutshell, the fourth quarter was an outstanding finish to an outstanding year.

If you turn to slide number two, the fourth quarter revenues were the strongest for the entire year, delivering earnings per share growth of nearly two times our top line growth rate, in line with the strong results we delivered in the first three quarters of 2006.

For the full year we delivered organic growth of 8%, with an incremental 2% from acquisitions and foreign exchange and earnings per share of $5.16, up 25% from 2005. 2006 marked the first time in our 173-year history that the Cooper [Inaudible] crossed the $5 billion revenue mark.

Turning to page three.

The total company revenue growth was 13% for the fourth quarter.

Electrical products was up 14%, 3% from acquisitions and 1% from foreign exchange.

Tools up 6% with 2% contributed from foreign exchange.

Three of the four end markets we are expanding with very strong international sales across all of our businesses.

Earnings per share from continuing operations were $1.38, up 25% from the fourth quarter 2005.

We had strong operating leverage, favorable pricing, and great leverage on SG&A.

Income from continuing operations was up 24%, to $128 million.

Electrical products return on sales was at 15.8%, up 140 basis points over last year, and leverage was 25% on incremental sales.

For the full year electrical margins came in at 15.9%, up 130 basis points.

Tools return on sales, 11.8%, up 120 basis points over last year.

Leverage was strong at 31% on incremental sales driven primarily by strong productivity.

Lastly, fourth quarter cash flow was $200 million, 156% of net income.

For the full year cash flow came in at $535 million, up $45 million over a very strong performance in 2005 and 2006 was the sixth consecutive year that our cash flow has exceeded our income from continued operations.

The key drivers in the quarter, the utility spending continues to be strong, particularly in transformers, switch gear, capacitors, and regulators.

Industrial demand remains solid with industrial production up now for 13 straight quarters and factory utilization at 81.8% in November, driven primarily off of higher utilization in oil and gas, aerospace, exports, and high technology.

Nonresidential construction continues to firm, improving office rents, lower vacancy rates, lower commodity costs should all improve spending in 2007.

We had strength in the quarter from schools, industrial, healthcare, and lodging.

And the team delivered outstanding performance on our productivity initiative exceeding 3% of cost of goods sold and our best results since the inception of the program in 2003.

On the issues or challenges in the fourth quarter, as we expected we have a slowing residential retail market, sales down nearly 9% for the quarter.

And we had softness at lighting and hand tools in particular.

We experienced margin pressure from continued materials and energy costs, but they were well offset by good execution on our pricing programs.

And lastly, while we had overall service levels improving, we were disappointed that we made no progress on our inventory turns for all of 2006.

Turning to slide five of our handouts for the electrical products segments.

We had very strong performance from Cooper Power Systems, Cooper Crouse-Hinds, Cooper Bussmann, Cooper B-Line, and Cooper Menvier.

Overall, sales in electrical distribution were up high single digits.

Retail and electrical was down 8%.

And our utility sales were up over 30% with orders again in excess of shipments for the fourth quarter in a row.

For the full year, orders were well in excess of shipments and we maintained strong momentum as we enter 2007.

Electrical sales in developing markets was up over 40% with continued strength in China, Southeast Asia, the Middle East, and Latin America.

Total international sales for electrical were up 17%.

For the tools group, slide number six, the fourth quarter revenue increased by 6%, driven by power tools up 13%, led by strong shipments at our automated systems business and a solid performance at industrial power tools.

Our hand tools had low single digit growth with strong shipments at Weller, partially offset by flat sales at hand tools and a decline in our chain business.

Tool sales in developing markets was up 17%, while total international tool sales were up 12%.

Now, let me turn the call over to Terry for additional details on the quarter, the full year results, and an update on our 2007 outlook.

Thanks, Kirk.

As Kirk mentioned we have an outstanding fourth quarter.

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

On slide seven, as Kirk noted our free cash flow for 2006 was 535 million, compared to 490 million for 2005.

Cooper strategic initiatives continue to drive performance, resulting in the sixth year in a row that free cash flow has exceeded income from continuing operations.

Our balance sheet remains in great shape, with our debt-to-total capitalization net of cash at 19.1%, on December 31, 2006, compared to 20.5% on December 31, 2005.

This was after spending $175 million on common stock purchases, net of proceeds and 280 million on acquisitions during the year.

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

Turning to slide eight.

Our inventory turns in 2006 were flat with 2005 at 6.1 turns.

The dollar investment in the inventory is impacted by the increase in material costs compared to a year ago, as well as the acquisitions completed during the year.

In 2006, there was a lot of focus on customer service and improving processes.

We should see improvement in 2007.

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

On receivables, we reduced our day sales outstanding in 2006 by two days to 63 days.

A very nice improvement.

We also improved our payables performance in 2006 and will continue to move suppliers to terms closer to the terms our customers demand.

As a result our operating work in capital turns improved to 5.2 turns compared to 4.9 turns in 2005.

Overall, a good performance in 2006 on the operating working capital, considering our initiatives to improve customer service and the acquisitions.

We are continuing to develop and deploy robust tools made possible by our enterprise business system and integrating these tools into our operating processes to drive further improvement.

On slide nine, our capital expenditures were down 12% in 2006 to 85 million.

Customer constraints on vendor delivery of equipment and installation impacted our capital expenditures in late 2006 and therefore in 2007, there will be an increase in capital expenditures.

Capital expenditures in 2006 included equipment capacity additions in the power systems division and ongoing implementation of our global enterprise business system.

We now have over 3.5 billion of our revenues on the new business system, and we are operating in 13 countries and nine languages.

We are also beating our cost reduction objectives.

In the 2006 fourth quarter, we purchased 27,900 shares of our common stock, spending 2.5 million, against proceeds from issuances of 8.1 million.

For the year, we purchased 3.1 million shares at an average price of $85.55.

And issued 2.7 million shares for stock option exercises, matches to our 401K and other stock programs.

As a result, our outstanding shares decreased by approximately 400,000 shares in 2006.

Under existing Board of Directors authorizations, we can purchase an additional 3.7 million shares, plus the shares issued for stock option exercises, and other stock programs during the year.

One last comment on our balance sheet.

Some of you may have noticed some fairly large changes in deferred income tax and other noncurrent assets, postretirement benefit and other long-term liabilities.

At year-end we were required to account for pension and other postretirement benefits under a new accounting rule.

This new rule only impacted the balance sheet and required us to account for previously unrecognized pension and postretirement assets and liability on the balance sheet.

The net of the accounting was an 8 million charged to equity.

Turning to the results for the fourth quarter in slide 10.

First, there were a few items that impacted our results in both the fourth quarter of 2005 and the fourth quarter of 2006.

I will cover these items first and then go through the results for the quarter.

Our results for the fourth quarter of 2006 include $0.03 per share benefit from the recent extension of the R&D credit.

There was no R&D tax credit benefit recognized in the prior quarters, therefore the full year benefit flowed into the fourth quarter.

During the 2006 fourth quarter, we also were required to take a pretax charge of 4.1 million on a settlement of our salaried pension plan.

Greater than anticipated lump sum settlements from the plan triggered a requirement under the accounting rules to recognize this expense.

In December, we also received for the first time since 2002, a payment from Belden under the agreement related to the IPO of Belden in 1993.

As part of the Belden IPO transaction, we stepped up the basis in Belden with the agreement that Cooper would receive 90% of the benefit of the step up in years when Belden recognized the benefit in their tax returns.

We recognized approximately 5 million in pretax income for the December payment which was offset by increases in litigation and environmental reserves.

We have somewhere in the 50 million plus range remaining that could be received from Belden under the agreement, but it's all contingent on Belden's future tax position, and whether they can utilize the benefit to reduce their federal and state income tax payments.

As we go forward, we will clearly communicate when any of this income is included in our forecast and actual results.

As a reminder, the prior year fourth quarter included a net expense of $0.03 per share from the SG&A and other actions.

In 2005, we also incurred a 4 million cost related to the withdrawal from a multi employer pension plan, that was essentially offset by a lower fourth quarter income tax rate.

In 2005's fourth quarter, these actions decreased segment operating income by approximately 5 million pretax, increased general corporate expense by approximately 2 million pretax, and reduced our tax expense by approximately 2 million.

Back three months ago, we forecast fourth quarter revenues to increase 8% to 10%, and today we reported a revenue increase of 13.1% with electrical performing very well and tools coming in at the low end of the forecast.

The top line growth was aided by the weak dollar in the quarter, which added 1.6% to the revenue growth.

Acquisitions contributed 2.5% to the revenue growth in the quarter.

As Kirk mentioned, we reported $1.38 in earnings per share, versus our forecast of $1.26 to $1.32.

As I mentioned earlier, the extension of the R&D credit added $0.03 to earnings per share and this was not included in our forecast.

As I mentioned, we incurred 4.1 million charge during the quarter for a settlement in our salary pension plan.

This curtailment was not included in our forecast.

As I mentioned earlier, it was a consequence of greater than expected withdrawals from the pension plan.

On the 13% total company revenue increase, we leveraged to a 25% earnings per share increase, driven by operating performance, a lower average share count and the R&D credit included in our tax rate.

On slide 11, our overall cost of sales as a percentage of revenue improved 60 basis points resulting in gross margins, increasing to 32% from 31.4% in last year's fourth quarter.

Great execution of productivity and the increased volume drove the improvement.

As is typical in the fourth quarter, our sales mix is not as favorable as the second and third quarter.

We also had higher overall price realization in the fourth quarter to offset the increase in copper, electrical grade steel, transformer oil and certain other metals.

This impacts our gross margin as well as our leverage realization.

Our overall price utilization increased in the quarter compared to prior quarters and contributed slightly over 4% to revenue growth.

In the fourth quarter, our Bussmann and power systems business had the highest cost inflation and were successful in realizing price to offset the impact of inflation.

As I said before, our operating practices is always to look ahead and attempt to drive pricing to offset material inflation as it occurs and not play catch-up.

Overall, we have been very successful in achieving price to stay at least even with material cost inflation and the fourth quarter was no exception.

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

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

The exception is electrical grade steel and certain other commodities that have become part of the products in our power systems business.

In this business, we anticipate continued price realization to offset material costs in 2007, and we'll have considerable price carryover from the pricing actions implemented in the second half of 2006.

Selling, general, and administrative expense for the quarter as a percentage of sales was 18.4%, compared to 19.4% in the prior year fourth quarter.

The 2005 quarter would have been approximately 19.2% excluding the incremental costs related to the CEO transition, and SG&A reduction program net of benefits.

Therefore, even excluding this item, a very solid performance.

From a segment reporting perspective, for the fourth quarter of 2006, we reported 20.8 million in general, corporate, and other expense, compared to 21.8 million in the comparable quarter of 2005.

As I mentioned earlier, in 2005, there's approximately 2 million of costs related to the CEO transition, and SG&A productivity actions.

Excluding this item, general corporate expense was up less than 1 million from primarily higher incentive compensation and impact from the portion of the pension plan settlement that relates to corporate.

Turning to slide 12.

Solid execution on cost initiatives while continuing to invest in our companywide growth initiatives and great execution across our businesses and price realization drove a 29% increase in operating income and our operating margin up 160 basis points to 13.6%.

Continuing to slide 13, on net interest expense, our tax rate, and income.

Our net interest expense was relatively flat compared to the 2005 fourth quarter.

Lower average outstanding debt and higher cash balances were offset by higher interest rates.

Our effective income tax rate for the fourth quarter was 24.3%, versus the 25.6% for the first nine months of 2006.

Excluding the R&D credit, the income tax rate for the fourth quarter of the year would have been close to the 25.6% rate for the first nine months.

The prior year fourth quarter rate was 19.6%, which included approximately a 2 million adjustment to bring the rate for the year, to the actual full year rate.

Overall in the quarter, our net income increased 24% on a 13% revenue increase.

Turning to the segment in slide 14.

For the quarter, our electrical prime segment revenues increased 14.5%.

Excluding currency translations, revenues increased 13% with acquisitions contributing 3% to the revenue growth.

Price realization was close to 5% in the fourth quarter with both Bussmann and power systems needing and realizing the price increases to cover the increase in material and energy costs.

Core revenue growth for electrical products was strong in all regions of the world, with Asia Pacific, Latin America, and Middle East having the strongest growth.

Electrical distribution was up high single digits and our utility business was up over 20% excluding acquisitions.

We experienced continued strength in industrial utility market and improving nonresidential construction.

In the quarter we are pleasantly surprised by the strong shipments in the utility sector.

Where, due to customer budget constraints at year end, we typically see weaker fourth quarter shipments.

Our softest channel was the retail channel where revenues, as expected, declined in the electrical segment.

As we discussed in our last two conference calls, revenues impacted by the loss of lighting shelf space in the big box retailers on import products.

Electrical retail sales declined in the high single digits in the fourth quarter of 2006, compared to the fourth quarter of last year; however, excluding the lighting line loss at the big box retailers electrical retail revenues were close to flat, reflective of a softer residential market.

Overall, electrical product segment earnings increased 25% and return on sales increased 140 basis points to 15.8%, and 14.4% in the fourth quarter of 2005.

Turning to the tool segment on slide 15.

In our tools business, sales increased 6% with currency translation increasing sales 2.4%.

We continue to see solid revenue and earnings growth in industrial and commercial channels; however, retail sales were down high single digits as a result of the loss of chain business a year ago at one of the big box retailers.

Customer inventory reduction and softness in the residential markets.

Shipments of assembly equipment were up nicely, but below our forecast as a customer delayed part of the shipment.

Tools, operating earnings increased 18%, and sales increase of 6%.

And our tools reported -- our reported tools operating margin as a percentage of sales increased 120 basis points to 11.8%.

Now, turning to the full year results on slide 16.

Our outlook for the year started at $4.60 to $4.75 and ended the year with earnings per share from continuing operations of $5.16.

In other words, we beat the top end of our forecast by $0.41 per share.

As we told everyone in our 2006 outlook meeting, the markets could be stronger than we anticipated.

Our outlook was for utility markets to grow 5% to 6%, and industrial 5% plus.

Growth considerably exceeded our 2006 outlook in these two markets.

For nonresidential and residential, our outlook was pretty close for the year.

While market growth was a big contributor, we also outperformed on our productivity initiatives and did a great job on managing price and growing in international markets.

Our sales and marketing and globalization initiatives delivered solid results and our productivity and enterprise business systems initiatives continued to gain momentum and we built a strong acquisition pipeline and completed strategic acquisitions that will deliver in 2007.

Turning to slide 17 on the summary for 2006 full year, revenues increased 11% on electrical products and our tools business revenues increased 4%.

There was great leverage execution of the bottom line with electrical segment earnings increasing 20% and tools segment operating earnings increasing 28%.

Return on sales increased 130 basis points in electrical and 220 basis points in tools.

Earnings per share from continuing operations was up a strong 25%.

Free cash flow conversion was 110% of continuing earnings.

Before turning the call back to Kirk, I will provide a brief comment on our 2007 outlook.

We'll be providing a detailed 2007 outlook at our meeting on February 21, in New York City.

Turning to slide 18.

For the year, we are forecasting a top line growth of 7% to 10%.

Acquisition, net of divestitures adds slightly over 2% to the revenue growth.

Earnings per share are forecast to be in the range of $5.80 to $5.95 per share, an increase of 12% to 15%.

In the first quarter, of 2005, we are forecasting revenues to increase 7% to 9%, with electrical up 8% to 10% and tools up 1% to 5%.

Earnings per share is forecast to be in the range of $1.25 to $1.30 per share, an increase of 10% to 14% against a very strong first quarter of 2006.

Kirk will provide a wrap-up on 2006 results and comment on the 2007 outlook.

Kirk?

Thank you, Terry.

In summary, 2006 results demonstrate the strength of our portfolio, the effectiveness of our strategy, and the quality of the Cooper leadership team.

Cooper's initiatives and enablers drove organic growth, earnings per share, and free cash flow to all-time highs.

After four years of heavy investment in these programs 2006 we realized the exceptional returns on our investment.

Heading into 2007, we continue to see strength in energy, utility, aerospace, global infrastructure with upsides in nonresidential construction.

Our acquisition pipeline remains full.

We completed four deals in 2006, with WPI at the first of the year, and expect to announce a small acquisition with Cooper Power Systems in the near term.

Again, we continue to gain momentum around our disciplined approach.

The Company remains in outstanding financial shape after the share repurchases and acquisitions of 2006.

We preserved great flexibility as we move into 2007, and our strategy of balancing profitable growth, margin expansion and free cash flow is paying off.

And lastly, we believe all the pieces are in place for 2007 to be another strong performance.

Now, I will turn the call back over to John.

Thanks, Kirk.

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

Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Bob Cornell with Lehman Brothers.

Please proceed.

Yes, hi, everybody.

Great quarter.

Maybe you could shed a little more light on the two businesses, power and lighting.

I mean, the -- up 20% organic, I think you said and orders in excess of sales, Kirk.

I mean, how much visibility do you have down the road in that regard and maybe some more insight into what's going on.

Yes, Bob.

Good.

Of all of our businesses with a pretty good back, that's the one.

We feel pretty good out to at least June.

Sort of a six-month look at the backlog.

We had four quarters in a row where orders were greater than shipments.

The business ramped up nicely over the course of the year.

I talked to division president here just the other day.

Orders continue to come in at a pretty good rate for the first part of 2007.

So we remain optimistic.

The C&I business is being more aggressive right now and the international piece is picking up.

And so we feel pretty good about that overall.

I don't think our business is predicated on storms or weather per se.

I think it's just good, strong, fundamental demand.

On lighting, we had good, strong midsingle digit growth on the C&I business, which is a good refreshing sign for us.

Quote activity continues to pick up.

The retail business, as Terry described was down.

Our past dues are way down.

Our service rates have improved.

Our lead times have decreased.

And so we are feeling that we made the turn on that business as well and expect to gain momentum as nonresidential picks up over the course of 2007.

Are you getting the profitability up in that business?

Yes.

Yes, we have a price increase out in the first quarter.

And the margins never really suffered much.

It was really more of a top line issue with that business.

They got strong productivity and finished with a bang as the year progressed.

I think we'll see an expansion of margins there as well.

Let's follow-up on the price.

I'm surprised that price is up 4 percentage points.

That's the largest number I have heard so far in any of these calls.

How would you compare that to your cost increases and now that we have got some raws coming down, are you going to see the tail wind at all in '07?

Maybe just flesh out that thought.

Bob, the reason you saw the better price realization as the year moved on is what happened with copper, aluminum and then in the power systems business, with both transformer oil as well as core steel.

Yes.

We had implemented those price increases in the third quarter.

So most of those had already been implemented at the start of the fourth quarter.

Those -- really it was Bussmann and power systems that drove the big increase in net price realization.

But on the other side of that they did have the cost increases.

Copper is starting to come down now, Terry, right?

Right.

On the Bussmann business, we'd anticipate retaining most of the price increases we get in that business because it's a very broad product line.

Huge number of SKUs, et cetera.

And power systems with more material content, normally you would say that it's be tougher to maintain that and we have some of those prices that are based on what happens in the the marketplace, but I will qualify that because in 2007, there are fairly significant increases in core electrical steel and a couple of the other products that go into that business.

So there will be continued strong price realization as we move into 2007.

Yes, final question from me.

You talked about the acquisition pipeline being, I think you said sizable or something, Kirk.

I mean, are you looking at little deals?

Big deals?

The cash has been building up.

Are you about to expand the size of any of these deals.

Mostly still small bolt-on, complementary, small -- less than 100 million, Bob, but we are looking at big deals.

The problem tends to be pricing on the larger deals, right?

And so the asking price and the auction situation, and we try to stay more disciplined around that approach.

But I would say by and large, the majority of them are small.

There's nothing that you would be surprised in the near term on a size perspective.

Okay.

Thanks very much, guys.

Thank you.

Your next question comes from the line of Robert McCarthy with Banc of America.

Please proceed.

Good morning, everyone.

Congratulations on yet another good quarter.

Thank you, Robert.

In terms of nonresidential construction, and maybe you could tie in what you are seeing in that market right now and how it could -- how that kind of drives your guidance, because I think you are alluding to kind of 7 to 10% in terms of overall growth in '07, and just talk about what you are kind of seeing in your markets right now?

We'll break it out in February and give you all the details.

But we are certainly expecting a GDP growth in '07 less than it was, for sure, in the first half of '06.

Right.

So 2.5 to 3%.

You still have low interest rates.

You still have low unemployment, you certainly have weakness on the residential, automotive, and light truck, and light construction, but the strength we are seeing is oil and gas, mining, aerospace, commercial, aircraft engines, military, that whole space.

And on the nonresidential side, again, if you look at the recent reports at Otis or Carrier or GE Industrial, or Eaton's electrical business, we feel good and we are seeing what they are seeing.

Good, strong, quotation activity, affirming of the nonresi base.

And lastly, I throw on top of all of that, the international markets.

Europe is still improving and the developing countries, I don't see any slowing at all as we exited 2006, certainly.

And it seems like you really turned around the performance of tools and hardware.

The growth has picked up there.

And despite weathering some difficult issues at the retail level it looks like the margins have picked up pretty significantly.

Could we expect it as an opportunity down the line, perhaps to monetize that business, will you continue to invest in growth there?

How do you think about that business going forward?

Look, I think we've said all along, there's still a ton of money on the balance sheet.

There's still a ton of opportunity on the margin slide.

There's some real technology in that business around Weller, around industrial power tools, which is the Boeing, Airbus, very complex technical drilling tools.

And so as long as we continue to see opportunity on it and our balance sheet is in the shape that it is in, we are certainly not motivated.

We like the global position.

It gives us size and scale around the world and frankly, I'm not interested in shrinking the size of the Company.

No, I think that's fairly clear.

And, then, I think you alluded to in your press release the financial condition of the Company, in particular, the net debt-to-cap and the obvious question, I think Bob touched on is capital redeployment and size of acquisitions going forward.

You mentioned the difficult pricing in the larger auctions that are going on out there, but do you see yourself perhaps more internationally focused, or more focused on harsh and hazardous and utility versus doubling down on electrical footprint perhaps domestically or North America?

Do you see just -- you have more of an outward international focus in terms of acquisitions.

I think the answer is yes, that everything that we look at tends to have an international space to it, tends to have a technology bend to it.

You could argue Cannon Technologies did not have a real big international play to it, but it certainly met our criteria on technology and services and getting us into a new adjacency for that business.

But I think by and large, when you look at Crouse, when you look at Bussmann, when you look at those kinds of businesses, international plays a strong piece to it.

On the capital structure side, we will sit down with the Board in February.

We will look at the dividend.

Given where we are on the dividend policy, we need to relook that with the Board, but we are going to stay disciplined.

The right opportunities will come and we will just be patient about it.

We said our model would be 5% organic with 5% acquired and I think we're pretty good with that as we head into 2007.

Thanks so much.

Great, Rob.

Thanks.

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

Please proceed.

Just a follow-up on that point, Kirk.

What is the embedded assumption on organic growth for '07?

Is that a 5% did we hear you just say?

Yes, I think -- Terry, what was the breakout as we go into '07, the breakout of -- I think it was about two acquisition and maybe one FX.

There's 2% acquisitions, no FX in our outlook for next year.

And how about on pricing?

Again, this was a robust quarter for price realization.

A lot of that came from the raw materials.

How much of that 5% or so is baked into pricing?

We'll get into that more at the outlook meeting, but in general, -- we'll see the price utilization at this point moderating as the year goes on.

Because if you recall this year, you end up with a lot of the inflation happening early in 2006.

So year-over-year, you will see more price realization in the front half of the year than the back half of the year.

But net/net, it probably won't be significantly different than it was this year, which will be in the 2 to 3% max.

All right.

And then just switching gears over to the latest acquisition, the WPI, Kirk, just give us an overview as to where that fits in terms of adding customers, adding particular options for -- in the Crouse-Hinds business, and is this something that you would expect to build out further?

The answer is yes.

It's something we talked about as a platform for -- at our 2006 outlook.

We owned the business in Crouse-Hinds called Rubber Molded Products that did a lot of ship to shore and hazardous harsh connector types of businesses.

Tom and the team did a great job identifying and understanding this space.

WPI specifically was 75% military and aerospace, 10% industrial, and about 5% instrumentation.

We're looking at other properties, of course, in that space and at the outlook, we'll roll up on how big we think we can get this entire platform for us.

There's a lot of interesting pieces.

There's undersea connectors.

There's offshore platform connectors, there's hot, heavy duty types of environments and we think we have got a real competence in this and we are building a real size and scale on this business.

It's a global business for us.

We will continue to make acquisitions around this platform, absolutely.

Is that related to explosion proof as part of the synergy?

It's not -- I wouldn't call them explosion proof connectors, but they are heavy duty in hazardous environments.

And that's our differentiation.

So space application, undersea applications.

If you go to an offshore platform, you are exposed to salt environments.

So that would be the spaces we would define in.

Great.

Thank you.

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

Please proceed.

Thanks.

Hello, everyone.

Hi, Jeff.

Just a couple of things, Kirk.

On non-res, just first definitionally, when you talk about non-res, are you excluding things like oil and gas, and utility work and stuff that in a broader definition would be considered non-res?

Is your--?

Yes, that's fair, Jeff.

We are talking about everything but residential.

We put all of that other stuff into industrial.

Right.

All the MRO business in the Gulf Coast.

We put all of that into industrial, correct.

I'm sorry.

And then -- so do you actually expect your non-res business to grow faster in '07 than it did in '06?

And how much did it grow in '06?

No, I would say -- I think that's the wild card for us in '07.

If you ask me about one of the spaces I feel least confident about as far as where is it going to go, I would tell you it's the non-res space because there's some conflicting numbers out there.

But if you look at the HVAC scene, if you look at the other people who have a pretty good look at this, they are all pretty confident that this spending is going to continue to increase.

I try to get out with architects, I try to get out with contractors.

And if you listen to them, again, they are fairly optimistic.

I would say the growth rate could be kind of flat or slightily better than '06.

I wouldn't say that we are confident it will be significantly better.

And, Jeff, in '06, we did not perform as well as we would like to in our lighting business, which is primarily into that nonresidential side of it.

So net/net I would have to say when we look at '07 as we see it today, we will probably be flattish on the market side of it, but we will probably pick up a little bit from just better performance in '07.

Great.

And then just switching gears a little bit.

Actually 5% price in electrical, and, again some of that is catch-up and Terry said the rate of change will moderate as the year progresses but we are still looking at price up basically in line with volume growth.

I'm just wondering if there's a thought about the sustainability of that level of price.

If volume growth is moderating to 5%, 4%, or so, even if there are cost pressures, does it get more difficult to hang on to price?

Jeff, I think the piece that everybody is missing is utilization at the industrial level.

The issue in the utility business, the power systems business is that the lead times are out as well.

So if you don't have excess capacity -- and that's the same issue in Bussmann, I would say.

And so as long as you have demand at sort of current levels, I think you have a higher chance of hanging on to the price increases and being aggressive in that area.

If you ended up in a situation where all the demand went away and factories were underutilized then competitors tend to chase incremental business with price.

I don't see anybody out there really chasing business on price right now.

Right.

And then Terry made a couple of comments about corporate, it was a little bit lower than I expected.

Kirk, is this a little bit of what you were signaling about some of the opportunities there and maybe if you could give us a guidance comment on corporate for '07?

No, I think we are pretty much sized physically the way we are.

There's some external fees and expansions that we -- we are tightening up.

And so it's our use of outside advisors and resources.

As we said before, we are going to move the headquarters mid-year this year.

We go from six floors down to four floors.

So there's trimming around the edges but I think by and large, we are pretty much where we are, and this is just a day-to-day management of some budgets and things that come across the -- come across the headquarters from time to time.

And I just had one last question.

Just on the acquisitions, I mean, I know you have been a little reluctant to share a ton of financial data for competitive and other reasons, but I'm wondering if you could maybe aggregate what you did?

You spent $280 million.

What did you actually buy in sales and kind of the average margin rate or the EBITDA that came with that $280 million.

Well, it's probably pretty close.

We don't have it in front of us, Jeff.

What we can do is pull it together.

I don't have any problem giving you that number.

Just let me give you top of my head.

It would probably be about 80% of the purchase price would be about sales, as a guiding.

Well, we had 10 which was high--.

That was a different one, right.

That would skew the numbers.

I can follow-up on that.

Yes, why don't you follow -- I think it's probably not a good activity to try to estimate these.

But normally pretty much in line with decent multiples of EBITDA and they are generally pretty good EBITDA businesses and don't need a lot of -- we are not buying things at 2, 3% Jeff and trying to get them to 15.

The issue you run into, Jeff, is because of the acquisition accounting, you end up not being very accretive on those acquisitions in the first year.

So we roll into -- into next year, it won't be as robust in the first year on those acquisitions and then it grows from there.

I'm actually more interested in maybe getting my arms around the ROIC profile or what you're doing as opposed to near term accretion.

But I'll follow-up.

That's fine.

I will pass the baton.

Thanks, Jeff.

Your next can he comes from the line of Nicole Parent from Credit Suisse.

Please proceed.

Good afternoon, guys.

Hi, Nicole.

Just with respect to the strength of electrical products, could you talk about your win rates there?

And I guess maybe give us a sense of any share gains you realized in '06, where they were, and then is that a function of competitor weakness and/or maybe give us some perspective on your new product pipeline and how you see that all playing out as we roll forward to '07?

I tell you that for all of '06, Nicole, we had five businesses that had double digit growth.

So it was pretty -- pretty broad brushed, as you would imagine.

To say specifically that we took share from a competitor, I don't know.

I think that in '06 we certainly lost share on the lighting side.

The other businesses, they would be a tough call.

The international certainly helped us as the course of the year went on.

I think the new product introductions, we talked to you about a Vitality Index that went from about 7% in 2002, when we started measuring it and the best we can tell, we are up to 13, 14% in 2006, so that number has doubled which we feel pretty good about.

What else?

I think the Cooper connection certainly delivered very, very strong numbers for us over the course of the year.

Good splits on nationals, large independents, and small independents.

We had good growth across the board there.

But it wasn't a single factor in a single market with a single business.

It was pretty strong and broad based.

That's great to hear.

I guess could you just give us an update on Federal Mogul and how you see that?

Okay.

Realizing.

Sure, Nicole.

It's Terry.

Federal Mogul filed their fourth amended plan on November 20, I believe, which that plan includes the settlement with Cooper for the [NUMO AVEX] liabilities.

The hearing on the adequacy of the disclosure statement is scheduled February 2, and that is just a hearing on the adequacy of the disclosure statement itself.

Now there's -- once that is approved, the amended plan will be submitted to creditors for vote.

The voting period is 45 days.

Once the vote is obtained then the confirmation hearing will be set by the judge.

So everything to date, there's nothing unusual that's happened.

I mean, you see a lot of numerous objections filed, et cetera, but that's all very typical in these types of things.

So it's proceeding slower than we would like, but everything is proceeding as we thought it would.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from the line of Elana Wood.

Please proceed.

Thank you.

I'm wondering what type of margin improvement you are baking into your EPS guidance for this year.

We have -- in order to get the earnings increase clearly, we will have margin expansion, but I would rather talk about that and get into the details of that when we talk about our 2007 outlook.

Okay.

And then just going back to your comments that you made around C&I lighting trends.

You said a little bit, you are marginally more positive than your peers.

Is it fair to say you might be taking some share.

I think we are coming out of a bigger hole than our peers, let me put it that way.

There's no question, ours was a self-inflicted wound in 2006.

If we can perform at the same level that our two top competitors did in 2006, we would be very happy with that.

And then what are the prospects for a dividend increase this year and/or share repurchase beyond the -- the 3 to 4 million or so to offset share creep.

I guess I hate to comment on that before I get in front of the Board.

We will make a proposal to the Board of course, the Board asks us about this frequently, and we'll go out and do a peer benchmarking.

We are already working on the analysis and look at the S&P and payout ratios, et cetera, as you would expect us to.

And make a recommendation to the Board in February.

Okay.

And then just lastly, tax rate for this year, 26%?

Does that sound reasonable?

Well, the rate typically will go up 35 to 37% on the incremental earnings.

So one way to look at it is take the '06 rate and then add 35% or 36% to that on the incremental earnings, it will probably be pretty close.

Okay.

Thank you.

Your next question comes from the line of Christopher Glynn with CIBC World Markets.

Please proceed.

A couple of questions on the utility business.

Wondering if you are getting a good broad picture on how the utility CapEx budgets are shaping out?

I know you said your pipeline, you have good visibility through maybe June or so, but just in general, how they are budgeting?

We had Florida Power at our management meeting down in Miami and spent some time with them.

And I will be out at a show, I think in the next two weeks out in San Diego.

But the conversations that we have had and the forecast that we have had with them is a lot of it is going back and, again, driving productivity, improving old and aged infrastructure, and we don't see a dramatic -- certainly pulling back in any sense on the utilities spending.

So we expect '07 to be strong compared to '06, and some of that will be pricing there.

But we don't see anything slowing down on the utility side.

Again, if you look at our momentum over the course of '06, I would tell you that in the second quarter, we were nervous about the increased demand because we thought it was a prebuy for the storms in the summer and then we just blew right through the pre buy and right into the third and fourth quarters and continued the momentum even exiting the year.

So, again, in the fourth quarter we still had orders well in excess of our shipments for the quarter as well, which was surprising to us, frankly.

Okay.

And do you have a sense of any shifting undercurrent within the utility CapEx budgets as far as transmission, distribution, generation, if anything, in particular mixwise might change?

No.

And the data -- our guys ran some analysis and they looked at the average age of the pole mount and the transfers out there.

The fact is all of this is stuff is at end of life.

So the question is are the utilities going to wait for all this to fail or they are going to go out and start doing some preventative maintenance?

I think that they are in a position now to start doing more preventative maintenancing.

If their balance sheets are cleaned up they are getting better government support.

I think overall the mood is very positive.

Okay.

And then a quick one on Cannon.

Just if you have anything anecdotal on if that is starting to spread its wings out of its traditional Minnesota-type regional business.

It is.

And as we sort of look, it's early but as we look at the order rate, it's ahead of our projections.

The team has integrated well.

We have left them alone which is our integration plan and they are off and running.

It's interesting.

As the division president down there told me, that it just gives you a whole different set of technology to talk to our customers about.

Substation automation, and load management, and it really -- it just changes the whole profile of the way we think about our business.

So we are convinced we made the right deal.

It's performing ahead of plan.

And we have done a great job, I think integrating this team and the leadership over there who really is at the end of the day is the brains behind that business.

Great.

Thanks very much.

Thank you, Chris.

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

Please proceed.

Hi and good afternoon, everybody.

I wanted to go back to a couple of issues.

First of all, lighting, and just a little bit of a perspective on is the market getting more rational?

I guess what I'm asking is that I know price was a -- was certainly not enough to overcome your raw material issues in '06, and my understanding is the market was somewhat irrational when it relates to prices.

Has that changed?

Is there some change at the margin going on there that leads you to be more confident here?

Well, Scott, our issue was not price, right?

If you can't ship on time, and your backlogs are growing, I think you have lost customer confidence.

And no matter what your prices, they are not going to buy from you.

If you looked at the other two in the space, they had great growth, and they had great margin expansion commensurate with their revenue side.

I give them a lot of credit for doing a good job selling service, selling breadth of product line and all the things that we try to do.

Now, I think our issues are behind us.

As a said our past dues are down.

Our new product pipeline is robust.

Our service rates are good.

And I think we are going to start getting our fair share of that overall market.

I just think that we will perform a lot better.

We changed out a lot of people in '06 mid year, the division president the CFO, the VP of HR.

And those are tough things to go through.

Okay.

But the team, I think is in pretty good shape and I think the business is in pretty good shape.

Scott, what you look at is predictability versus their forecasts and such.

These guys have been very, very strong since the third quarter, really.

So I'm confident.

Right.

I guess I didn't realize it was self-inflicted.

That's interesting.

Absolutely.

On the cost side, I haven't really heard you talk about this in a while.

I'm sure you will address this at your meeting in a few weeks here, but what inning do you guys think you are in now, and kind of your -- your movement in manufacturing, your low cost regions, your rationalization, things just to address more the cost side of the equation?

Again, I think we're just getting started.

We're bringing in -- we will talk to you at the outlook.

We are taking in the MVP tools, and we are going to broaden them to some more work on Lean.

We are convinced that we didn't get the inventory lift that we wanted to in '06 because we didn't have the right processes in place it.

It really does come back and it starts with the sales and operating forecast, the S&OP process.

And so we're going back and reteaching the tools around S&IO and leaning out the factories and we think there are several hundred million dollars in working capital still on our balance sheet on that metric.

In fact, we had one of the Cooper University teams study that specifically and do some external benchmarking for us.

And they came back with exactly that number, $200 million.

So I think that we're just really getting going.

We've got the guys engaged.

We are increasing our utilization from existing fixed assets.

We are pretty positive.

I see no reason at all that we wouldn't get 3% productivity again, next year in 2007.

Makes sense.

Lastly, how great of a read do you have on how much inventory is out there in your key channels?

Is it something where you have got the type of relationship with your distributors where you can really get a good feel for where inventories lie or is it something where you're pretty much month to month relying on--?

Well, I think on the retail side, I had heard of a number of different cases anecdotally and from other people outside of our space, specifically that the large retailers really took down their inventories in the fourth quarter.

And we saw January orders from the big box come back pretty strong.

I was out at a show -- an electrical distribution and I don't think anybody took in inventory to get to rebate numbers in the fourth quarter.

So I -- I think -- I would know pretty well if some of the large guys or some of the large independents took in a bunch of inventory.

We didn't see any of that.

I think our inventory both on the retail side and the electrical distribution are in fine shape.

I didn't see anything that would suggest that there's excess inventory in the channel.

Fair enough.

Thanks, guys.

This concludes the question-and-answer session of today's call.

I would now like to turn the call over of to Jon Safran for closing remarks.

Please proceed.

Okay.

As we conclude this call, let me remind our listeners that they may follow-up with me for additional questions or clarifications.

I would also like to invite everyone to join us for our 2007 investor outlook meeting, which will be held at the New York Mandarin Oriental hotel on Wednesday, February 21.

We will begin presentations around 8:30 a.m. and end by 11 a.m.

As we did last year, we will have presentations from both corporate executives and division presidents.

A formal announcement for this event will go out shortly.

With that, thank you for joining us today.

This concludes the presentation.

You may all now disconnect.

Good day.