伊頓 (ETN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Cooper Industries Limited earnings conference call.

My name is Katina and I will be your coordinator today.

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

[OPERATOR INSTRUCTIONS].

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Jon Safran, Director of Investor Relations.

Please proceed.

Thank you, Katina.

Good morning, everyone.

Welcome to the Cooper Industries' first 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 web site related to the first quarter results, which we'll refer to throughout the call.

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

Before we proceed, let me remind everyone the 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 today.

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 for the most directly comparable GAAP measures are included in the press release.

And now, let me turn the call over to Kirk.

Good morning.

After just concluding a record year in 2006, where we saw our revenues up 10% and earnings per share up 25%, it appears we are picking up in 2007 just where we left off last year.

If you turn to page number 2 of our handout, the first quarter was a great start to a new year.

Total company revenue up 12%, with acquisitions and foreign exchange contributing roughly 5% of that growth.

Electrical products was up 14% with acquisitions contributing 4% and foreign exchange contributing 1%.

Tools up 2%, and when you exclude the effect of foreign exchange, revenues were roughly flat in the quarter.

Three of our four end markets were expanding.

Our smallest end market, residential, was down as anticipated, and we completed three acquisitions during the quarter with a combined revenue of approximately $100 million.

WPI, which is part of our harsh heavy duty and highly specified connector rollup strategy, Cybectec, which is a hardware and software company, which designs system solutions for the utility industry, focused primarily on substation automation, it's complimentary to our Camden Technologies acquisition, which we completed in August of 2006 and Polaron, which manufactures lighting controls for office, healthcare, education and other nonresidential markets.

Our earnings per share for the quarter were $0.71, up $0.25 from last year.

Strong operating leverage, favorable pricing and strong SG&A leverage all contributed to the nice rise.

Net income for the quarter was up 22% to $132 million.

Electrical products' return on sales were a healthy 16%, up 90 basis points year-over-year, and we had 22% leverage on incremental sales.

Tools return on sales was 11.9% segment return, up 230 basis points over last year, driven primarily by mix, productivity and price.

And our first quarter free cash flow is $52 million versus $9 million last year, putting us in solid shape to deliver our seventh consecutive year where our free cash flow will exceed our net income.

The key business drivers in the quarter were utility spending, strong across all products, across all markets worldwide.

We announced yesterday that PG&E has selected Cannon Demand Management Solutions to provide a system for peak demand management, worth between $28 to $40 million over the next three years.

We see global strength in industrial demand, North American factory utilization north of 80%, mining utilization, better than 90%, oil and gas investment was stable, and aerospace spending was still strong.

We saw growth in nonresidential construction, with particular strengths in office, healthcare, education, and lodging, and we continue to see strong growth in adjacent industries of office furniture, HVAC and switch gear manufacturing, which leads to us believe nonresidential construction will stay strong for some time.

We saw global infrastructure growth with strong spending in capital expenditures and infrastructure.

Solid execution on price realization and we delivered strong productivity and MVP from our MVP program across the board, focusing on execution with few to no plant moves scheduled for 2007.

Our issues or challenges for the quarter were obviously a slowing residential retail market, affecting our lighting, wiring devices, and tool divisions.

Margin pressure from materials and metals and energy costs, after seeing brief relief early in the quarter, copper, electrical, steel, oil, all back to near record highs.

And some economic uncertainty, with higher labor inflation, commodity prices, and some private mortgage defaults, and we saw some slowness in Canada and some regional markets in the U.S.

Turning to slide number four of the handout for the electrical products segment, we had a very strong performance from Cooper Power Systems, Cooper Crouse-Hinds, Cooper Bussman, Cooper B-Line and Cooper Menvier.

Overall, the sales in worldwide electrical distribution were up double digits.

Electrical retail was down mid-single digits and our utility sales were up very strong double digits with orders, again in excess of shipments for the fifth quarter in a row.

Electrical sales for developing markets was up over 25% with continued strength in China, Southeast Asia, the Middle East and Latin America.

Turning to page number five of the handout, for the tools group, the first quarter revenues were up 2%, driven primarily by joining products and power tools being up nicely, while hand tools and automated systems were soft.

Tools international business saw solid growth for the quarter.

And now, let me turn the call over to Terry for additional details on the quarter, and to update you on our outlook for the full year of 2007.

Thanks, Kirk.

As Kirk mentioned, we had a great first quarter.

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

On slide six, as Kirk noted, the free cash flow for the first quarter of 2007 was $52 million compared to $9 million in the first quarter of 2006, and as is typical in the first quarter, annual customer and employee incentives are paid, which results in the lowest free cash flow generating quarter of the year.

Cooper's strategic initiatives continue to drive performance and we anticipate delivering the seventh year in a row where free cash flow exceeds income for continuing operations.

Our balance sheet remains in great shape as our debt-to-total capitalization, net of cash at 21.7%, on March 31st, compared to 19.1% at the end of the year, and 22.8% on March 31st, 2006.

This was after spending $18 million on common stock purchases net of proceeds and $124 million on acquisitions during the first quarter.

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

Turning to side seven, our inventory turns in the first quarter of 2007 were flat with 2006 at 5.9 turns.

The dollar investment in inventory is impacted by the increased material costs compared to a year ago, as well as the acquisitions completed during the quarter, and the inventory build and the division that went live in our global enterprise business system, right after the end of the quarter.

We should see improvement as 2007 progresses.

On receivables, we reduced our days sales outstanding in the first quarter of 2007 by 2 days, to 65 days, compared to the first quarter of 2006.

A very nice improvement to start the year out.

We also improved our payable performance in the first quarter of 2007, and we will continue to move suppliers to the terms closer to the terms that our customers demand.

As a result, our operating working capital turns improved ed to 5.1 turns compared to 4.9 turns in the first quarter of 2006.

Overall, a great performance in the first quarter of 2007 on operating working capital, considering our initiatives to improve customer service and acquisitions.

On slide eight, our capital expenditures were up 32% in the first quarter of 2007 to $22 million.

For the year, we continued to expect capital expenditures of 110 to 120 million.

During the first quarter, our Board of Directors approved a two-for-one stock split and a 14% increase in our dividend to $0.84 per share, reflective of the strong financial results and expectations of continuing strong growth in earnings and cash flow.

In the 2007 first quarter, we purchased 860,000 shares of our common stock, spending $39 million against proceeds from issuances of 21.5 million.

In the first quarter we issued 1.6 million shares for stock option exercises, matches to our 401(k) and other stock programs.

As a result, our outstanding shares increased by approximately 800,000 shares in the first quarter.

Under existing Board of Director authorizations, we can purchase an additional 7.3 million shares plus the shares issued for stock option exercises, and other stock programs each year.

Also during the quarter, Standard & Poor's increased their credit rating on our long-term debt to A, and our short-term debt to A1.

One last comment on our balance sheet.

On January 1st, 2007, we were required to account for income tax reserves differently.

This new rule referred to as FIN number 48 only impacted the balance sheet and required us to increase income tax reserves, $27 million with an offsetting charge to retained earnings.

The FIN 48 rules are very mechanical and they i overstate the tax reserves in relation to what we anticipate will ultimately be paid in tax audit settlements.

Turning to the results for the first quarter, in slide nine.

Today, we reported revenue increase of 12.3%, with electrical performing very well and tools coming in at the low end of the forecast.

As Kirk mentioned, the top line growth was aided by currency translation and acquisitions, which contributed 5% to the revenue growth in the quarter.

We reported $0.71 in earnings per share, versus our forecast of $0.64 to 64 to $0.66.

The results were driven primarily by above forecast performance in the power systems business and international operations.

Additionally, customer orders in advance of and the clean out of open orders prior to the go-live of our final North American division to transition on to our global enterprise business system, added probably close to $0.02 to earnings per share during the quarter.

The significant weakening of the U.S.

dollar against the Euro and Sterling added an additional $0.01 per share to the quarter.

As I mentioned in our February 2007 outlook investor meeting, we had a very strong January.

This was followed by an okay February, and a strong March.

On the 12% total company revenue increase, we leveraged to a 25% earnings per share increase.

If you recall, in the fourth quarter of 2006, we received for the first time since 2002, a payment from Belden under the agreement related to the IPO of Belden in 1993.

We didn't receive any payments from the Belden in the first quarter and therefore did not recognize any income.

On slide 10, our overall cost of sales as a percentage of revenue improved 40 basis points resulting in gross margins increasing to 32.2%, from 31.8% in last year's first quarter.

We have higher overall price realization in the first 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 strong organic growth was composed of approximately one half volume and one half price realization.

As I mentioned in the January conference call, we expected significant cost increases in electrical grade steel and certain other commodities that have become part of the products in our power systems business.

And with copper price increases over the last year, the Bussman business also had significant cost increases.

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

Also, our recent acquisitions are having the impact on our reported improvement margins, leverage, and return on sales with purchase accounting and the amortization of intangibles, acquisitions have lower earnings than our base business in the early period after consummation of the acquisition.

All that being said, we had great execution on underlying productivity in the quarter.

Selling, general, administrative expense for the quarter and the percent of sales was 18.3%, compared to 19.1 the prior year first quarter.

Our continued investment in our global growth and initiatives were leveraged by the revenue growth.

Turning to slide 11.

Solid execution on cost initiatives while continuing to invest in our company wide growth initiatives and great execution across our businesses on price realizations drove a 24% increase in operating income and our operating margins up 130 basis points to 13.9%.

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

Our net interest expense was up $800,000, compared to the 2006 first quarter.

Slightly higher interest rates account for the majority of the increase.

Our effective income tax rate for the first quarter was 27.1%, versus 25.5% for the first quarter of 2006.

The increase in the tax rate is primarily from the incremental income being taxed at the statutory U.S., federal and state tax rate.

Despite the higher interest expense, and the higher tax rate in the quarter, our net income increased 22% on 12% revenue increase.

Turning to the segments in slide 13.

For the quarter, our electrical product segment revenues increased 14.1%, currency translation contributed about 1% for the revenues and acquisitions contributed approximately 4% for the revenue growth.

The strong organic growth of 9% was approximately one half volume and one half price utilization in the first quarter, with both Bussman and Power Systems needing and realizing the price increases to cover increases in material costs.

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

Electrical distribution revenues were up low double digits with very strong growth outside of North America, and solid growth in North America.

Our power systems business had a great quarter with revenues excluding acquisitions up strong double digits and backlogs, once again, exceeding sales in the quarter.

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

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

Electrical retail sales declined in the mid single digits in the first quarter of 2007, compared to the first quarter of last year.

Overall, the electrical product segment earnings increased 21%, and return on sales increased 90 basis points to 16%, from 15.1% in the first quarter of 2006.

Turning to the tools segment on slide 14.

In our tools business, sales were flat, excluding currency translation.

We continue to see solid revenue and earnings growth in aerospace and in industrial channels with the exception of motor vehicle end markets.

Retail sales were down low double digits, as a result of customer inventory reductions, and softness in the residential market.

Tools operating increased 26% on sales increase of 2%.

And our tools operating margin as a percentage of sales increased 230 basis points to 11.9%.

Before turning the call back to Kirk for his final comments, I will provide brief comments on Federal-Mogul Inversion Legislation and our forecast for the second quarter and the year.

Turning to slide 15, on Federal-Mogul asbestos.

The voting by creditors was completed on April 6th with over 94% of the Abex creditors voting in favor of the plan.

The Federal-Mogul parties are currently addressing the normal type of objections to the plans and working through the discovery proceedings.

The presiding judge has set aside June 18th for the confirmation hearing.

In regard to inversion legislation, first some background for those of you that are not familiar with what has been happening on the legislative front.

In 2004, Congress addressed inversions and passed legislation that in effect made it very difficult to invert.

As of the case several times in 2006 and prior years and recently, there have been attachments to legislation in the Senate to eliminate the tax benefit of a few companies that inverted after March 2002 and before the 2004 legislation.

The proposed Senate legislation is retroactive in that it changes the date of legislation passed by Congress in 2004 to target four companies that inverted between March 2002 and the date of the legislation which would include Cooper.

Previous attempts at this type of legislation by the Senate Finance Committee have failed in the House of Representatives, and there continues to be strong opposition in the House of Representatives and the Ways and Means Committee.

Coopers' senior management and division president continue to meet with our representatives to insure they understand the facts and our views, including that any legislation should treat all multinational companies equally, whether incorporated in the United States or foreign jurisdictions, and we abide by the tax laws in effect at the time of the inversion, which by the way, includes our shareholders having to pay gains on the stock based on the fair market value at the time of the inversion.

In addition, our tax rate is, in fact, higher than a large number of multinational companies.

With our current structure, we have limited circumstances where we do not provide for tax on our international subsidiaries owned by Cooper U.S.

and its subs.

This is why you did not see us do a so-called expatriation of cash back to the U.S.

and pay the reduced tax rate in 2005.

As I mentioned, many members of the Congress are opposed to retroactive legislation, including several members of the House and Ways and Means Committee, and we are optimistic that inversion legislation will not pass.

Turning to slide 16, our second quarter and year outlook.

In the second quarter, we are forecasting revenues to increase 12% to 14% with electrical up 13 to 15% and tools up 1 to 5%.

Acquisitions are forecast to contribute close to 4% for the revenue growth and currency translation close to 2%, leaving a forecasted 6% to 8% core revenue growth.

Earnings per share are forecasted to be in the range of $0.72 to $0.76 per share, an increase of 13% to 19%.

One thing to keep in mind is that earnings per share in the second quarter in mind is that earnings per share in the second quarter is impacted approximately $0.02 per share from the pull forwards of sales into the first quarter that we experienced as a result of the go-live business in our enterprise business system.

For the full year, we are now forecasting a top line growth of 10% to 13%.

Acquisitions add slightly over 3% to the revenue growth, and currency translation over 1%.

We are increasing the top end of our earnings forecast $0.10 per share from the $2.90 to $2.98 we provided in February.

Earnings per share are now forecast to be in the range $2.95 to $3.08 per share, an increase of 14 to 19%.

I also want everyone to be aware that we may end up recording a significant income tax accrual reversal in the second quarter.

As counterintuitive as it sounds, a portion of this reversal would include the amount we were required to report when we adopted FIN 48 on January 1.

We are close to finalizing negotiations on disputes related to transactions involving government securities in the 2000 to 2003 time frame.

Our forecasts for the second quarter of year do not include any impact for this item.

Let me turn the call back to Kirk for final comments.

Thank you, Terry.

We are obviously very pleased with our start to the new year, especially when you consider that the first quarter of 2006 we were up against pretty different comps, where earnings per share were up 25% versus the first quarter of 2005.

We continue to see our end market diversity generate strong core growth for the company.

We feel good about the utility, industrial, and nonresidential markets.

We see the international markets remaining strong, total developing market revenue for the first quarter was up 24% to $200 million.

We still see tremendous opportunity on the global side.

Five businesses had orders reach greater than sales with two divisions with orders equal to sales so we continue to see momentum as we head into the second quarter of 2007.

Our teams are executing well, delivering productivity, price and working capital.

The M & A pipeline remains active.

Existing deals are performing at or above expected levels, and our balance sheet remains in outstanding shape, providing great flexibility for the company in the long term.

So we expect to see 2007 be another outstanding year for Cooper Industries.

Now, before I turn the call back over to Jon, I just want to call your attention to the appointment of Larry Kingsley, the CEO of Idex Corporation, and Mark Thompson, the CEO of Fairchild Semiconductor to Cooper's Board.

As we continue to develop our business operating model, drive globalization, and invest in leading edge technologies, we are very fortunate to have such talent joining our board.

Jon, I'll turn the call back over to you.

Thank you, Kirk and Terry.

At this point, we're going to open up the call for questions.

Out of respect to others in the queue, please limit your follow-up questions.

Operator?

[OPERATOR INSTRUCTIONS] Your first question will come from the line of Nicole Parent, representing Credit Suisse.

Please proceed.

Good afternoon.

Hey, Nicole.

I guess can you just flush out a little bit more the margin expansion in both electrical products and tools.

Is it a combination of better volumes also productivity initiatives coming through?

And I guess with respect to tools when I think about the weakness there, you still have better numbers than I was looking for.

Yes, let me take the first piece.

I will ask Terry to fill in the blanks.

Overall, really good mix.

Power systems did a really nice job.

The whole company did a nice job on productivity.

So continuing the momentum that we left the year with last year on the productivity side.

Very good price realization.

Way out ahead of it, as we have been for quite sometime.

And mix and a good blend of the right businesses and the right space.

Terry, do you have anything else?

No, I think that's right.

We have price utilization, recovery of all of our material costs, great productivity, and as Kirk mentioned, pretty even mix across our businesses.

And there was good SG&A leverage in the quarter as well.

On the tools side, they left last year with a lot of improvement.

Going into this year, they had good sales mix in the first quarter.

As a mentioned, retail was down, which tends to be lower margins.

Our electronics sales, as well as our power tool industrial tools and aerospace tools had good sales performance, which helped their margins.

Okay.

Great.

And just more specifically on lighting, you guys tiered up growing in the high single digits.

Can you give us a sense on the revenue side what you did and then also just -- this is an area of restructuring for you.

You came out of it, exiting '06 at a good rate.

Can you just talk about where you think you will be in '07?

Yes, let me just be careful on the comment on restructuring.

It's always been in the numbers that we sort of just self-fund whatever restructuring we have done for the last several years.

I think the last time we had any restructuring per se was three or four years ago.

Ongoing right.

The C&I business, which is the outdoor space which is nonresidential, non-retail, was up good midsingle digits.

And the retail business was down single digits.

So I -- I saw two of our competitors announce ahead of us this week and a couple of weeks back, we certainly closed the gap, and are at parity on the revenue side and our margins expanded in the quarter, Nicole.

We don't even talk about it as an issue, anymore.

I think we have certainly turned the corner and well on our way to continued strong performance as we go forward.

Great, thank you.

Thank you.

The next question will come from the line of Bob Cornell representing Lehman Brothers.

Please proceed.

Indeed he does represent Lehman Brothers.

Kirk, you ran by the businesses quickly and clearly, you talk about power being very strong.

You just gave a review of lighting.

Maybe if you could touch on some of the other units, Crouse.

I know you like to talk about them.

But give us more insight by business unit.

Sure, Bob.

Let me start with the power business.

The utility business.

We said now for five quarters the order rate has been stronger than the shipment rate.

We were out with a number of customers on the East Coast in the course of the quarter.

And continue to be very, very impressed with the capital spending, the need for more automation, more sensing technology, more productivity.

They have got pretty good balance sheets, and I think we are right in our sweet spot there.

Internationally, on the utility side, again, booming.

China, Korea, Middle East, across the board.

As I said.

It really is a nice level load on demand across all product lines and power systems.

So continues to be very favorable.

Oil and gas, metals, mining, still strong.

We saw --

Are you talking now about Crouse -- are you talking about oil and gas?

Yes, that would be Crouse and B-Line.

Because B-Line sells quite a bit into the Gulf Coast, into that table trade space.

Bussmann's factory automation, factory utilization rates drives Bussmann.

Good strong demand.

Some of that Terry mentioned was a full forward on the SAP go live line.

And the European business is certainly seeing some strength, as I think everybody else in the industrial space is across the board.

The only real weakness I would say in the quarter were wiring devices because a heavy piece of that business is retail, and residential and that piece of the lighting business and a piece of tools business that both addressed retail and residential as Terry pointed out.

Yes, another question.

How about the assembly tool portion of tools.

I mean, is that down?

Are we out of it?

No, we have been minimizing our exposure.

We have been cutting off the quotation on those large lines.

As we said before, we would provide some of the equipment on the line, but then we are taking the assembly and the installation risk on the whole project.

We have been minimizing that over time and the pieces that we love of that business, the industrial power tools, the with weller, the international, we are all very strong in the quarter.

And, again, we have got a great team on the ground.

We have got really good products.

It's a global business.

They had great margin expansion and we continue to work the balance sheet there.

We have got some real opportunities still on the balance sheet in the tools business.

Yes, I should have asked before.

Could you flesh out the Cannon order you mentioned?

Are there more of those?

Could you give a little color around that, please?

Yes, that's just sort of a leading tip of the iceberg on top of what we can do in that space.

But, you think about the utilities, Bob, they are putting in $1 billion of capacity on generation for maybe five to ten days of peak demand in the summer months.

And so if they can reduce that peak demand and put off that $1 billion of investment for four or five or six years, it's significant leverage for the utilities.

So that space is interesting for us.

The substation automation, the capacitor automation banks, it puts us in a whole another -- we were saying -- we used to go out and talk to the utility customers.

We would talk about service rates and pricing and blanket agreements and now we spend all the time talking about automation, sensing technology, what the grid of the future will look like.

And, again, as I mentioned we bought this CybecTec business which is a nice compliment to what we have in that business.

It does sound good.

Thank you very much.

Thank you, Bob.

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

Please proceed.

Hi, everyone, it's Jeff Sprague.

Hey, just a follow-up on the Cannon question, Kirk.

Yes.

To what extent was being part of Cooper a key driver there?

Was -- did you bring other things to the table that pushed that order over the table or was this something that was kind of underway?

The Cannon guys certainly have been developing this business and the technology.

I give that team and the leadership there all the credit in the world.

I think what helps is having the Cooper financial statement behind them, so when somebody looks at placing a multiple year order of that significance, certainly it's helpful to note that it's part of a New York Stock Exchange Fortune 500 company that's got our balance sheet and our credit risk and everything else that goes with it.

Again, as we go to talk to our utility customers, they know -- most of them know of Cannon or have heard of Cybectec and some of these other properties so we can help to go in there and market.

I think, Jeff, we are just on the early stages of being able to sort out of complementary strength of both businesses.

It is been less than a year and I think the sky is the limit and I think there's significant opportunity down the road.

One of the reasons I was wondering is I think they have another supplier.

I'm wondering if you guys actually knocked them out or you are sharing that business with somebody.

Yes.

I would rather not comment on that.

We can take that offline.

Another question on kind of the price versus volume dynamic.

I can't remember.

It's probably happened, but I can't remember a time that half your revenue growth was price.

I'm just wondering, you know, although that's all good, does that give you any pause about kind of the volume price mix and whether or not price is sustainable if volume starts drifting down into kind of the lower single digits?

Jeff, a lot of our price realization in the first quarter came out of -- was a direct result of the run up of copper prices, as well as the significant increases in core electrical grade steel.

And both of them -- both of those, fortunately, impact a business that is heavily MRO, 30-some thousand SKUs.

So it's much easier to hold on to price increase and get price increase in that business.

So on the utility side, those businesses passing through that cost -- tends not to be a big issue based on where demand is and even if it slackens off fairly significantly, we should be able to hold that.

And I would say, Jeff, on the volume, the international volume equation was very, very positive, and, a lot of Asian business, the Middle East business, there's not a lot of FX in that.

You saw the GDP numbers out of China in the last day or so.

There's some real demand on the infrastructure and the industrial side around the world.

And then just on the -- on the price cost question, so you guys are basically at parity, is that kind of the take away commentary?

Yes, we are pretty close.

We could be just slightly ahead, like we were in the fourth quarter.

Great.

Thank you very much.

Your next question will come from the line of Elana Wood, representing Merrill Lynch.

Please proceed.

Hi, Elana.

Terry, what should we be using as a full year tax rate?

Is 27% reasonable?

Yes, we should round the 27 rate, absent the credit I talked about in the second quarter.

Okay.

And then Kirk, wondering where you think inventory levels in the electrical distribution channels stand today.

Do you think there's reasonable relative to forecast activity levels?

I do.

Again in getting out and seeing what the customers of little concern to really any of them.

And, we saw some slowness, as I said in some regions around the U.S.

in the quarter, but this has happened.

Before we have seen some spotty markets and that kind of rolls back.

But, no, I think -- I would say moderate to even on the low side.

I don't see anybody out there with excess inventory at this point in the channel, for sure and especially on the electrical or the utility side.

I mean, lead times and deliveries seem to be the biggest concern on that side.

Okay.

I just wanted to double check.

It looks like the Federal-Mogul confirmation hearing has been pushed out about a month and a half to mid-June.

I assume you still expect to wrap this up by the end of second quarter?

Is that fair?

Yes, but to be fair, I thought we would wrap this up two years ago.

So my ability to project a bankruptcy hearings and court disclosures and, you know, different things that go on, assuming that everything stays on track, I'm -- we have a specific date from the judge and everybody has an appointment now.

And she did grant some people an extra week or two here and there, but, again, I think as Terry said, it's all typical in this process as we talk to the outside counsel.

I think the judge decides something in mid-June is very reasonable.

Lastly, can you give us a brief update on Cooper Connection?

Any new developments or progress on that initiative?

No, as we said before, we are rolling it out internationally.

Very effective overseas.

I'm going over to Singapore in the next few weeks.

We have got the whole Southeast Asia team together.

We had our whole management team in Europe together, expanding in eastern Europe, expanding in the Nordic countries.

The U.S.

we continue to add bells and whistles even features to the program.

And we continue to drive it along.

We continue to add resources.

So, no, we are very -- very happy with the program.

Everything is running smoothly on that side of it.

Okay.

Thank you.

Thank you, Elana.

Your next question will come from the line of Robert McCarthy, representing Banc of America Securities.

Please proceed.

Hello, everyone.

Hey, Rob.

First on lighting, it looks like you got mid-single digit growth in the quarter on the core basis, but I think one of your stated objectives this year, Kirk was to begin to close the gap or take some share there.

What gives you confidence that we're going to start to see that going forward, given the fact that you are still lagging your competitors?

Well, no, as I said, I had a chance to look at two of the larger competitors in that space because they had their public releases in the last two weeks.

And if you look at them, I think we are right there.

If you look at the CMI side of it, which is the outdoor lighting and non-residential retail space, we are in parity.

On the retail side, we may have done, frankly a little bit better.

Our margins were up in the quarter and, the share thing, I don't really -- we don't talk a lot about taking share.

I think that's sort of a tricky equation, because we are certainly not willing to succeed price or take bad business.

I think all along we have been moving away from some channels and business that's not been profitable for us.

We have done it on the tool side.

We have done it on the lighting side and we are very careful about what business and margins we can make that business work for the company.

Some of the competitors have actually commented that there seems to be a move from big box back into more moding around brands and moving away from private label.

Given the sweetness you have seen there, do you think you are losing share there or do you think that could reverse in your favor in the coming quarters?

On the retail side, we have lost share over the last three or four years and again, that's by design.

They have come up with these outrageous demands that frankly we have not been willing to bend on.

You have to be very careful.

If you price halo at retail at $4 and you think you are going to get Halo at $6 in electrical distribution, you are kidding yourselves.

Whatever you do on retail can spill over if you are not careful.

So we are pretty disciplined in how we manage the two channels.

Yes, I think retail is good in some instances but it has very limited applications on large projects in some areas, But there are a fewer number of SKUs and you have higher volumes, and it's a little easier to serve that market.

So we keep a foot in both camps and I think there's a reason why you want to do that.

I think we can make both work.

Could you talk about the variance in 2Q '07 for your tools assumption.

I mean is that just a question you don't know or is there some short-term economics?

What drives that into range?

Well, you are dealing with relatively small numbers here on the top line, Rob, and it does vary considerably on how much of the project business ships during the quarter, et cetera.

So that business tends to have a little more variability on the top line.

So it's more of a timing issue than anything else?

Correct.

Okay.

And then you can comment on kind of your full year kind of implied free cash flow assumptions given your strong start to the year?

Well, let me comment overall.

This is one of my areas of focus this year with the division presidents and the leadership team, Rob, as I said earlier, while we have made some great progress in the cash flow in the quarter, which is impressive over the first quarter last year and the first quarter is usually the weakest quarter, I still think we could look at some working capital as a percent of sales and you benchmark ourselves to the industry's best in class.

There's still a lot of work that we can go do.

And so I -- and a macro level, we have been focused on this.

We have been challenging the guys a little harder on this, and, again, out of the box I think we made some good progress out of the first quarter.

I will let Terry comment on the rest of the year specifically.

There's some variability between working capital drawdowns into cash, et cetera.

But overall, if we are growing double digit top line, we can get cash -- free cash flows to equal our income, we consider that a pretty -- pretty good performance considering you are going to have to invest more with the top line growth especially on the receivables side.

All right.

Fair enough.

Thanks for your time, gentlemen.

Thanks, Rob.

Your next question come will come from the line of Deane Dray, representing Goldman Sachs.

Thank you.

I would like to get some more color on the progression in the quarter.

We heard from one of your top distributors today that February was soft for them, and Terry's remarks it sounds as though February was the softest quarter for you.

What was going on that month then and how did March rebound?

Sure, Deane.

As we said, we were up a nice, strong double digits in January.

We had a great January.

February came back a little softer and that was pretty much across the board, across all of our businesses.

And then March came right back strong.

So it is hard to distinguish exactly what was going on out in the market place.

You know, we can only guess that there was some nervousness about how -- how large the inventory levels should be or how high inventories should be for the quarter.

But whatever it was, it seems to have corrected?

Well, that's the difficulty in forecasting these days with all the uncertainty out there overall.

It seems to bounce around a little bit.

Okay.

Second question is -- relates to your incremental margins on electrical.

And given how strong pricing has been, I would have thought to see a little bit stronger on the incrementals and these are actually the lowest you have had in a couple of years.

What else is at play here?

And what do you expect to show in terms of incremental margins?

Well, Deane, what happens is if you get, $5 million of price and it costs you $5 million to recover $5 million in costs, it actually drives you down on your -- on the calculation, or the published amount.

So really the pricing has a fairly significant impact when you have as large of pricing we did in the quarter.

Secondly, acquisitions tend to come in at the lower margins which dilutes you a little bit and third, the Euro and the Sterling appreciate against the dollar about 10% in the quarter from a year ago, which that has no leverage on it.

Sure.

I would imagine out of those three factors, the pricing being as an offset to the commodity costs is the largest of the three?

Yes.

Sure.

That's helpful.

And then the last question, you mentioned M & A and I believe at the analyst meeting you talked about or the Kirk talked about 60 in assets being in due diligence.

Could you give us an update as to what the pipeline looks like and expectations for transactions over the balance of the year?

Yes, they are always hard to predict.

We have got a number of properties at different phases of the pipeline.

We have got a small one that we should be announcing in the next 30 days that fit in with our fire platform globally and then the rest of it is a little bit tricky.

Again, we are on a first round on some pieces but just hard to predict, Deane, of course, what you will close.

Most of them are still in the same sort of profile that we have been looking at, right?

High spec, technology, global, nice -- nice margins on an EBITDA side of it that we could fit into the existing platforms that we have been talking about.

Nothing significant in size.

IE, over $300 million in purchase price, and obviously nothing on the transformational side that we are looking at at this point.

All very consistent.

Thank you.

Your next question will come from the line of Chris Kotowicz representing AG Edwards.

Hi, guys.

Hi, Chris.

A question on Cannon.

You gave some more color, I guess when Jeff dug into that.

My question is did the relationship that you had, the licensing agreement with Census AMDF play into winning that work?

No, different.

A different piece of work on it, but demand management and it had nothing to do with the false sensing technology.

Okay.

I guess I was thinking more in line with the wireless piece of it.

No.

This is all over the power line.

It's over power line, correct.

Okay.

Are you getting the sense that we're on the -- kind of leading edge of a wave of direct load control implementation ahead of some of these big AMI systems that we keep hearing but not actually seeing come through.

I think the utilities are very intrigued.

I think there's very strong economics to support the investment.

I think the utility, it is a new space for them and the technologies that are out there are different, and I think it takes them some time to decide which platform or technology they want to make a long-term commitment to.

And so I think the more you can be agnostic to different technologies out there, the better off you are.

And, again, I think we spend some time on this at our outlook.

There's multiple pieces of this.

The attraction to us getting to this space is primarily the substation automation and some of these other capacitor bank technologies and some of these other areas.

But, again, there's a very, very interesting field going on with the demand management, and the whole AMI technology as well.

Sort of seemed like you got players popping up out of the woodwork on kind of the whole spectrum.

I mean, do you work on kind of the whole spectrum.

I mean, do you think that -- do we still have a lot of people out there that are thinking they can play here that don't have like the backing of a company like Cooper.

I wouldn't want to speculate.

I mean, there are, of course, other people out there with emerging technologies but I think you have to have some size and some scale and what we have been looking at are companies that have proven technology.

They have been out there for a long period of time.

They have a really good -- it's really good, documented, acceptance of the technology and that's where we are focused.

Okay.

And then switching to commodities for my follow-up, I guess.

Copper was up again.

It sounds to us in listening to, you know, calls from the second half of last year, like most companies eased up on their hedging programs.

I mean does that imply that we are looking at not only the pricing power that you got here, but as we get into the second half of the year, you are looking at, like, round two, round three, maybe now it's round six of home price increases and, at what point do we say -- I think this was sort of brought up earlier, do we start to crush the volume demand?

Well, Chris, I have to tell you, we thought that there would be some issues with that as we moved through the -- moved through last year, and that's one of the reasons why we were not quite as bullish on the utility market.

There has been significant price increases over the last two years, but contrary to that, demand seems to be holding up very well.

And the hedging piece of that?

I mean is that going to be in anyway a factor that you don't have as much of your costs?

Because it seems like that got sort of deferred, right?

You probably should have passed more of these costs on last year, but you didn't have to because of the hedging.

We don't operate that way.

I don't allow our businesses to use the hedging in setting prices policies driving it.

We back it out of the numbers to make sure that we get out ahead of the game.

Okay.

Great.

Thanks, guys.

Good.

Your next question will come from the line of Min Cho representing FBR.

Please proceed.

Oh, sorry about that.

Thank you for taking my question.

First of all, can you quantify the dilutive impact of the acquisitions in the quarter?

They probably cost us somewhere in the 20 plus basis points on ROS in electrical.

Okay.

And also can you break out -- Terry, can you break out the price versus volume mix within the powers systems unit?

We typically don't like to disclose specific businesses and what they are doing on price.

As -- there's competitors listening, et cetera.

Okay.

But it kind of sounded like from your commentary that price didn't play as big an impact in that market specialty, given that demand is relatively strong there.

I think there is a couple of things in the power systems market.

Every competitor is subject to the same material cost structure and so it tends to not be as big an issue in that market.

Okay.

And then in your power systems market, is there any way you can break out the growth in the traditional power systems product, versus the new tech solutions that you're starting to offer?

.

Are you still seeing an acceleration in that growth, in

Yes.

That was a take away.

Really all products across all geographies.

So very strong capacitors, transformers, switch gear, across the board.

Absolutely.

Okay.

As I commented, we had very strong double digit growth in power systems excluding acquisitions.

So that would not include the Cannon business, as well as the one we just acquired, Cybectec.

Okay.

And then Terry, one final question, you mentioned that there was a $0.02 pull forward from the EVS system going live in this quarter.

Do you, to the best of your knowledge think that pull forward came from the second quarter or more evenly distributed throughout the year?

Most of that would have come from the second quarter because it was our Bussman North American business, which tends to be primarily MRO-type businesses.

Okay.

Great.

Thank you.

Thank you.

Your final question will come from the line of Eli Lustgarten, representing Longbow Securities.

Please proceed.

I usually never get the last one.

Good afternoon, gentlemen.

You get the last word, Eli.

The last word.

Can we expand on the pull forward just for a second.

The $0.02 was that volume and price and product, gross margin?

How does that work in the electrical group?

I mean, it's a little hard to understand why all of a sudden that would show up in the quarter.

Well, of course we notified all of our clients or our customers, Eli that we were going live the second of April and so they all had an opportunity to place orders ahead of that.

So there would be no disruption in customer service during the period.

So, yes, it is hard to quantify exactly how much, but we do know that customers did pull forward sales as well as in preparation of the go live.

We made sure we would ship what we could.

And do you have any idea how much volume that was?

It's very difficult to say, but probably in the 5-plus million range.

So it's not a big deal.

With the strength, is there any chance that any of your recent strength with anticipation of prices going up and up, because the costs that there's some prebuying in pricing?

No, our price increases Eli have been spread out over the fourth quarter, so we are getting some carry forward into the new year and spread out over the first quarter.

So it's -- it's -- if there's not a significant date out there -- now, lighting has an April date, but I don't -- I don't think any of it is related to specifically price increases that have been announced and not acted on..

I guess I was referring to is it generally felt that copper pricing would sort of pass through in the $2.50 to $3 range, not in the $3.50 range throughout the market place.

And then as they back over $3.50, you anticipate that there's another Big Wave coming in costs.

Is there any possibility that may have an impact?

No, as I get out with customers, I think it's really all related to demand, and I don't -- I don't hear any of that Eli.

Okay.

I was just curious.

One other question, on the tools business, in order to get -- if you look at some of the forecasts, somewhere we have to start getting mid to upper single digit -- midsingle digit comparisons in tools.

Do we have the business booked for that?

Is it just trying to spend 1 or 2% or somewhere you have to get more.

Well, you know, again once we work ourselves through the assembly of year-over-year comps, again, there's some larger shipments and such.

As I said, the retail business because of the housing situation is down.

We saw a real good solid double digit growth on some of the international and Weller line and the industrial power tools, which is primarily military, aerospace, and other industrial applications.

So we saw some real growth.

It's really a -- you've got to look at the standard deviation.

It's not that every business was gnat in that business.

There's some real growth and then there are some pieces that we intentionally tried to minimize that were down.

So I think we're on track for where we want to be on that business.

Two final quick questions.

Tax rate for '08, will it go up a little bit from '07?

Is that sort of the game plan?

Generally, the tax rate will go up by the incremental earnings being taxed at, say, 36% or so.

That's why it would go up a little bit.

And the final question, you did $100 million of revenue acquisition.

I think you said $124 million.

What would you be happy with for completed acquisitions at this point?

Our stated goal each year is about 5% of revenue, so about $250 million on a full-year basis, but, again, we stay very disciplined.

If we find a $500 million chunk that works, we will do it.

But if we don't find anything that works, we sit tight and be patient.

We've got guidelines and we've got theories, but the reality is strategic fit, and then we look at the synergies that we can bring, access to the market, you know, productivity, cost synergies, et cetera, and then -- and then we look at the financial returns, what we have to pay to buy the assets.

During your comments, you said you were looking at $300 million, and there's a good chance you can go well over the 250 goal.

Yes.

But, again, as early on, and you know when you get invited to the first round with 10 other guys, what's the probability of buying that at, and I put zero at it.

You just work your way through the pipeline.

Okay.

Thank you.

Thank you.

There are no further questions at this time.

I would now like to turn the presentation back over to Mr.

Jon Safran for closing remarks.

Okay.

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

With that, thank you for joining us today.

Thank you for your participation on today's conference.

This concludes your presentation.

You may now disconnect.

Good day.