伊頓 (ETN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Cooper Industries, Ltd.

earnings conference call.

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

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

We will facilitate a question-and-answer session towards the end of this conference.

(OPERATOR I INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

John Safran, director of investor relations and corporate development.

Please proceed, sir.

Thank you, Shaquana.

Welcome to the Cooper Industries' third quarter earnings conference call.

With me today is Kirk Hachigian, chairman and chief executive officer, and Terry Klebe, SVP and chief financial officer.

As mentioned in our press release, we have posted a presentation on our web site related to the third quarter results which we will refer to throughout the call.

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

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

These statements are subjects to various risks and uncertainties, many of which are outside the control of the compan.

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.

I assume you've all had a chance to read our earnings release this morning and have had the access to the exhibits that we posted on our web site.

Let me begin today by thanking our team for again delivering what we expect to be another record year performance on multiple fronts.

With three quarters of 2007 now complete, we see another full year of double-digit revenue growth and 20-plus percent EPS growth on a comparable basis.

Our portfolio strength and diversity combined with a highly effective business model prove again to be a winning combination for our shareholders.

In addition we continue to have great strategic flexibility by preserving the strength of our BS and improving our overall working capital efficiency as we move forward.

Turning to the specifics of the third quarter performance, we had very strong revenue growth with a total company revenue of 14.2% and a very strong quarter growth rate of 9% which has been the best in over ten years.

Electrical products, up 15%, with tools up 7%.

We had strong growth in industrial, utility and nonresidential construction markets while residential was down as anticipated.

We have a good balance with the right exposure to the right markets.

We had a very strong performance at our international group for the quarter.

Total international sales were up nearly 30%, with developing countries up close to 40%.

We had great strength in Asia, the Middle East and Eastern Europe, and we continue to see great momentum building around our global initiatives.

EPS for the quarter were $0.83, up 20% from the third quarter of 2006.

We had very good execution on cost containment both on the variable and base cost productivity.

Let me point out that this 20% EPS growth in the quarter was on top of 27% for the third quarter last year.

So again, not easy comps.

Electrical products return on sales was 17.2%, up 70 basis points, our best electrical margins in over five years and solid incremental leverage.

Our tools return on sales was 11%, down 200 basis points as expected due to a large automotive systems shipment in Europe.

YTD free cash flow came in at $373 million versus $335 million last year, and again we are on track to deliver our seventh consecutive year of free cash flow in excess of income from continued operations.

Turning to Page 3 of the handout.

For the electrical products segment, the key drivers in the quarter were strong utility demand particularly in C&I and reliability products, solid industrial demand with factory utilization at 82%.

We had very strong international demand for industrial and infrastructure projects, particularly a global energy markets.

Firm commercial construction spending with strength in small schools, governments, offices and large commercial projects.

Five out of seven of our businesses delivered double-digit sales growth, and total electrical shipments were roughly equal to orders in the quarter.

And we had solid execution of pricing policies and productivity with electrical margins, again exceeding 17%.

Issues facing the electrical segment during the quarter were continued slowing in residential and retail markets, followed by credit markets and continuing pressure on metals and energy costs.

In summary, core electrical growth was 10%, acquisitions and foreign exchange adding an additional 5% to the growth rate, and solid incremental leverage of nearly 22%.

The bottom line is our electrical segment delivered an outstanding quarter.

Turning to Page 4.

For the tools group, we saw strong shipments in general industrial tools [welding] and automated systems, again including that European shipment.

We continue to hold our position in retail and are gaining traction in key and international markets.

While our margins at tools were negatively impacted by a lower margin shipment of assembly systems we deliver solid productivity and continue to improve the working capital position within the tools group.

Now let me turn the call over to Terry to provide additional updates on the quarter and give you an update on our full-year outlook.

Thanks, Kirk.

As Kirk mentioned we had a great third quarter.

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

On slide five, as Kirk noted our free cash flow for the first nine months of 2007 was $373 million, compared to $335 million in the first nine months of 2006.

We continue to anticipate delivering a seventh year in a row where free cash flow exceeds the income from continuing operations excluding the income tax adjustments.

During the third quarter we capitalized on the softness in Cooper's stock price and purchased approximately 4 million shares at an average price of $50.34 per share for a total cash outlay of $201 million.

For the nine months of 2007 we have spent $220 million on stock purchases, that's net of proceeds and $194.5 million on acquisition.

Our debt and capital structure remain in great shape even after the stock buybacks and acquisitions with net debt to total capitalization at 20.9% on September 30, compared to 19.7% on June 30, and 19.1% on December 31, 2006.

We continue to have outstanding flexibility.

Turning to slide six.

Our inventory turns in the first nine months of 2007 were 6.2 turns, up from 5.9 turns in the first nine months of 2006.

The dollar investment inventory is impacted by the increased material costs compared to a year ago, as well as the acquisitions completed during the first nine months of 2007.

We expect continued improvements through the end of the year.

On receivables, our DSO as of September 30 were flat with the prior year period excluding the nonoperating receivable from Belden.

This receivable was paid on October 1, 2007.

The improvement we are making on DSOs are offset somewhat by the impact of the strong international growth where commercial terms tend to be longer.

Payables reflect our continuing initiatives to move suppliers to terms that are closer to the terms our customers demand.

As a result, excluding the Belden receivable, our operating working capital returns improved to 5.2 turns compared to 4.9 turns in the first nine months of 2006.

Overall, a solid performance in the first nine months of 2007 on working capital, considering our initiatives to improve customer service and acquisitions.

On slide seven, our CapEx were up 57% in the first nine months of 2007 to $91 million.

For the year we continued to expect CapEx of $110 to $120 million, an increase over 2006 of 30% to 40%.

As I mentioned in 2007 third quarter, we purchased approximately 400 million shares of our common stock, spending $201 million.

Proceeds from issuances totaled $5 million in the quarter.

In the third quarter we issued 365,000 shares for stock option exercises, matches to our 401K and other stock programs.

For the first nine months of the year we've purchased 5.5 million shares against issuances of 3.3 million shares.

Turning to the results for the third quarter on slide eight.

Before discussing the operating results, I'll cover the unusual item in the quarter.

In 1993, Cooper executed initial public offering of Belden.

For tax purposes there's a step-up in tax basis and agreement entered into between Cooper and Belden where Belden would pay 90% of the tax benefit it realized from the step-up.

From 1993 until 2002, we consistently receive $10 to $12 million a year, but beginning in 2002, Belden began to incur net operating losses for tax purposes.

In 2006 Belden began to again realize benefits from the step-up and made a payment in the fourth quarter of last year.

As I noted on our last conference call, we also received a small payment in the second quarter of this year.

In September, Belden filed a 2006 U.S.

Federal tax return, and we met with them to agree upon the impact from the benefit of the tax basis step-up.

It now appears that Belden continues to maintain its current level of taxable income.

In 2008, substantially all the benefit from the tax basis step-up will then be realized by Belden.

Payments are due from Belden 15 days after the date estimated payments for current year taxes are due with a [true up] when an actual tax return is filed.

The September 15 payment, the actual cash was received in October with income of $23.5 million recognized in the third quarter.

It's currently estimated that we will recognize another $10 million in the fourth quarter and could recognize another $20 to $30 million in 2008.

However, I caution everyone that we have no control over Belden's tax planning strategy or their entering into a transaction that could significant alter the timing.

The rights of the Belden tax sharing agreement are held by a subsidiary in a jurisdiction with little income taxation.

The $23.5 million of income therefore flows to the bottom line and added $0.13 EPS to the quarter.

We've also been in negotiations to resolve a couple of old, previous operations lawsuits whereby we've been incurring legal fees over the last several years.

But we believe that we have no liability.

From a business perspective we would like to settle these lawsuits and get them behind us.

As a result we accrued $6.4 million pretax which is $0.03 per share in the third quarter.

Our reported GAAP results were $0.93 per share for the quarter, but excluding these items we came in at $0.83 per share.

Turning to slide nine.

Today we reported a revenue increase of 14.2% which I might add is a higher growth rate than the prior two quarters.

Electrical exceeded, and tools came in at the high-end of the forecast.

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

We reported $0.83 per share in earnings excluding the Belden legal items which is $0.01 per share over the high-end of our guidance of $0.82 per share.

Our aggressive stock buybacks during the quarter added less than $0.01 per share, and from a purist's perspective around $0.005 per share, considering the interest on the funds utilized to buy back the shares.

Another great quarter with 20% comparable EPS growth and up against tough comps of 27% EPS growth in last year's third quarter.

The results were driven by strong performance in the Power Systems utility business, our Crouse-Hinds hash and hazardous business and exceptional performance in our international operations.

A 14% total company revenue increase, we leveraged to a 20% EPS increase exclusive of the Belden income and legal accruals.

On slide ten, our overall cost of sales as a percentage of revenue improved 40 basis points resulting in GMs increasing to 32.9% from 32.5% in last year's third quarter.

Our strong organic growth was composed of approximately two-thirds volume and one-third price realization.

As anticipated we had higher overall price realization in the first and second quarter compared to the third quarter to offset the increase in copper, electrical grade steel and transformer oil.

Year-over-year, inflation impacted these commodities naturally moderates as the year progresses, and there were several price increases implemented in 2006 offset the rapid cost increases we experienced last year.

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

Overall, our earnings leverage was impacted by the low-margin Assemble Systems projects shift in our tools business.

Also, our recent acquisitions are having an impact on our reported improvement margins, leverage and return on sales.

With purchase accounting and the amortization of intangibles, acquisitions have lower earnings on our base business in the early period after consummation of the acquisition.

Overall, acquisitions contributed 3% to revenue growth with the incremental revenue contributing an average return on sales in the low double digits.

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

Selling, general and administrative expense for the quarter as a percentage of revenue was 18% compared to 18.3% in the prior year third quarter excluding the legal accrual of $6.4 million.

General corporate and in a segment income statement presentation increased from $24.1 million to $29.7 million.

Excluding the increased legal fees, however, general,corporate declined $800,000.

We continue to invest in our global growth and other initiatives and at the same time realize the benefits from these investments, leveraging the revenue growth into earnings and cash flow.

Turning to Slide 11.

Solid execution on cost initiatives while continuing to invest in our company, like growth initiatives and great execution, have crossed our businesses.

Our price realization drove a 19% increase in operating income and our operating margins up 60 basis points to 14.8%.

And that excludes the legal accruals and Belden income.

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

Our net interest expense decreased $1.7 million compared to the 2006 third quarter.

In the second quarter we issued $300 million of debt and effective interest rate of 5.75%.

In the first couple of days of July, retired $300 million in debt at a higher effective rate.

The lower overall interest expense on debt and the higher rates on cash investments accounted for the decrease in interest expense.

Our effective income tax rate excluding the Belden income for the third quarter of 2007 was 27.3% versus 25.7% for the third 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 tax rate in the quarter our net income excluding the Belden income and legal accruals increased 19% on the 14% revenue increase.

Turning to the segments and Slide 13.

For the quarter our electrical product segment revenues increased 15.5%, currency translation contributed 1.7% to revenues ,and acquisitions contributed 3.8% to the revenue growth.

The strong organic growth of 10% was approximately two-thirds volume and one-third price realization in the third quarter.

Core revenue growth for electrical products was strong in all regions of the world with Asia Pacific and the Middle East continuing to have its strongest growth.

The electrical distribution revenues were up double digits again this quarter with strong growth in North America and Europe.

Our Power Systems business has another great quarter with revenues excluding acquisitions up double digits against very tough comps from the prior year.

I'm also very pleased with our performance in the North America residential market.

In this challenging market, sales through the North America's retail channel declined modest single digits.

Overall, electrical product segment earnings increased 20% and return on sales increased 70 basis points to 17.2% from 16.5% in the third quarter of 2006.

Our incremental earnings leveraged at 22%, the same as the first two quarters.

As I mentioned in prior earnings release calls, this significantly understates the true leverage we are receiving.

Incremental revenues from acquisitions, diluted return on sales approximately 20 basis points and on incremental earnings leverage by over 300 basis points.

When you consider that currency translation and price that recovers material costs and inflation dilute earnings leverage and the acquisitions take a couple of years to achieve segment margins, we continue to have terrific leverage to the bottom line.

Turning to the tools segment on Slide 14, in our tools business sales increased 6.5% with currency translation adding 3.3% to the sales increase.

We continue to see solid revenue and earnings growth in aerospace but weak sales to motor vehicle end markets.

Retail sales were flat with the prior year quarter as a result of new products and new customers offsetting softness in residential markets.

As we explained in the July conference call we expected tools operating earnings to decline this quarter compared to the prior year quarter.

And they declined $2.3 million.

Our reported tools operating margin as a percentage of sales decreased 200 basis points to 11%.

As I said in last quarters conference call, shipments of low margin Assembly Systems was going to drive an increase in revenue but diluted operating margin and depressed earnings in the tools group this quarter.

The Assembly Systems business is transitioning from complete assembly system to fastening station and smaller installation.

Operating margins were also impacted by the sales mix of hand and power tools and the strength of Latin America currencies which impacted the cost of sourced product from this region.

Turning to Slide 15.

In our fourth quarter and year outlook.

In the fourth quarter we are forecasting revenues to increase 12% to 14% with electrical up 12% to 14% and tools up 5% to 10%.

Acquisitions are forecast to contribute close to 3% to revenue growth and currency translation between 1% and 2% leaving forecasted 7% to 9% core revenue growth.

EPS are forecast to be in the range of $0.79 to $0.83 per share, an increase of 14% to 20%.

For the full year we are now forecasting a topline growth of 12% to 14% with acquisition adding slightly over 3% to revenue growth and currency translation a little bit over 1.5%.

The fourth quarter is typically the strongest quarter for our tools business, and we expect earnings to exceed the prior year quarter for this segment.

For electrical, the second and third quarter are our strongest margin quarters driven by seasonality and sales mix.

Therefore the return on sales is expected to increase nicely from the prior year but below the third quarter peak.

EPS for the year excluding Belden income and legal accruals are now forecast to be in the range of $3.11 to $3.15 per share, an increase of 21% to 22%.

We are of course very pleased with our performance in 2007.

We started the year with a forecast of $2.90 to $2.98 per share and are now at $3.11 to $3.15 per share.

Our execution and return on investment in international growth exceeded our expectation, and utility and industrial markets were stronger than forecasted at the beginning of the year.

And we expect a great finish to a great year.

Now before turning the call back to Kirk for his final comments, I'll provide some brief comments on the Federal-ogul bankruptcy.

The judge presiding over the Federal-Mogul bankruptcy case heard final arguments on October 1 and 2.

At these hearings the judge indicated that she was sympathetic to Federal-Mogul having to renegotiate its debt if the bankruptcy plan was not approved by year-end.

She indicated that an option was for her to approve Federal-Mogul's overall plan which includes our Plan B.

for the (inaudible) asbestos settlement and then supplement the confirmation order for Plan A once she completed deliberations.

If you recall, Plan A.

is where we participate in Federal-Mogul's 524 (g) trust ,and Plan B is where we receive $138 million to retain the liability.

At this time the judge has not issued any orders, and nothing is changed on our reporting and accounting for the issue.

The Federal-Mogul parties in Cooper continue to work towards the approval Plan A.

While we would like to reach finality and participate in the 524 (g) trust ,the liability is very manageable as a population that could have been exposed to agents.

And a number of states have enacted legislation and procedures limiting nonimpaired claims.

New cases have been less than 500 per quarter for the last three quarters, and the total outstanding cases are close to flat with year-end 2006.

So, in other words, if the judge decides to just approve Plan B, we would not think of this as a negative.

We've learned a lot about managing the liabilities and receiving $138 million versus having to pay out $248 million is a positive swing in our capital structure of close to $400 million.

We anticipate some indication from the judge in the next several weeks.

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

Thank you, Terry.

In summary we have delivered a very solid performance through the first three quarters of 2007 with revenue up 13% and EPS from continuing operations up 22%.

Our end market diversity is generating strong quarter growth.

We are penetrating faster growing markets that have lesscyclicality and solid profit margins.

In addition, our growing presence in international continues to build momentum, and we can continue to enhance our core growth rate through this initiative.

Our teams are executing well, delivering productivity, price and working capital, and are executing on the fundamentals, expanding margins and generating strong free cash flow.

Our M&A pipeline is active and probably the most interesting that we've seen in the last five years.

And our BS remains an outstanding shape with over $1 billion of firepower.

And so we expect a strong close to another record year.

Lastly as we look forward into 2008 and beyond, we are well-positioned to manage our business in a world full of uncertainty and opportunity.

Our portfolio is in great shape.

We have our 31,000 employees focused on the right priorities.

We are well-positioned to take advantage of key, long-term global trends around energy demand, energy efficiency and reliability, global infrastructure investment and safety and protection.

And we have the talent or the people resources and the financial flexibility to execute our long-term strategy.

Thank you.

And now let me turn the call back to John for your questions.

Thanks, Kirk.

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

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Deane Dray with Goldman Sachs.

Please proceed.

Goes back to slide three.

And interesting, you called out as one of the drivers, utility spending.

And Kirk, we go back to the analyst meeting earlier this year.

You surprised us with an outlook of 10% to 15% growth in utility spending.

How has that played out for the year?

You thought you might be in a position to grow faster than that with the addition of Cannon.

There's certainly different segments within the overall utility business.

I'd say the international has played out stronger, Deane, than we thought we would be, the reliability and the C&I markets obviously with the commercial construction the way it is, the C&I business where we have put some additional resources and some additional focus has rolled out better than we thought it would.

And then certainly on the demand management and the AMI space has always had a faster growth rate than the core business, and we've been getting favorable pricing because of the commodity inflation, of course.

Terry, you have anything else to --

I think we began the year believing that Power Systems was going to grow in the 10% to 15% range.

Demand has been stronger the first nine months, significantly stronger than that.

We've been growing acquisitions in the -- we've grown acquisitions in the high teens at least over the last three quarters.

And we haven't seen any inclement weather, Deane, in the last two years.

There haven't been any significant storms or tough weather that would drive demand.

is is pretty much all MRO organic kind of demand out of the utility space.

I understand.

Did I hear you correctly in the prepared remarks saying that electrical distribution was up double digits?

Right.

Globally we are up double digits over both in Europe and North America.

And then just last question on price.

It was clear you said volume was two-thirds of core revenue growth and pricing a third.

What's your outlook for pricing here?

Do you continue to have pricing power in this market?

But if we're seeing some softness in some of the non-resi business, what happens to your pricing power in that environment?

At this point I would say we are pretty disciplined in our pricing and will not take business at lower margins.

So I'm pretty comfortable we are going to be in a pretty good shape all the way through 2008 overall on the pricing side even if there is some softness.

We have not lost margins on the retail side.

Our the residential side with that downturn which is -- that's generally our tougher market.

So pretty comfortable.

I don't have data yet.

We are just getting in the process of doing our budget cycle on what the outlook is for the second half of 2008 as far as price versus volume.

But I would guess at this point we will see a couple points of price next year.

Thank you.

Your next question comes from the line of Elana Wood with Merrill Lynch.

Please proceed.

Good afternoon.

I was wondering if Bussmann sales growth is back on track after the SAP go-live earlier in the year?

Yes, that was one of the double-digit growth businesses, Elana, and most of the issues behind us, still some issues that you sort of still work through in implementing the SAP, but I'd certainly say the worse is behind us and each month the business is learning how to use the system and not facing the headwinds we did in the first quarter that we implemented the new system.

Okay.

Great.

Then turning to lighting, how much was C&I volume up, and was there any positive impact from price?

The C&I business was up nearly almost double digit and the retail business as you'd imagine was down, Terry, you have the break on how much was price?

We've got some price, low single-digit pricing overall on our lighting business.

As Kirk mentioned residential business was down and C&I was up nicely.

Okay.

And then turning to tools and hardware margins.

Looking at next quarter, is it possible that it will be up year-over-year on a high single-digit topline increase, or do you think that product mix and adverse currency might still pressure margins?

Our forecast is we'll be up nicely over the third quarter and nicely over the fourth quarter.

We still have some pieces of some assembly shipment business that could depress margins a little bit, but overall, return on sales will be up, our forecast to be up significantly over the second quarter and nicely over the fourth quarter.

Just lastly, if we strip out the 30% international growth, how much does that suggest the U.S.

business is trending up, and how may that compare to last quarter?

It was pretty positive, Deana.

It was solid high-end single digits, and you know, as we sort of said we saw real positives across the board.

The international, the industrial, the utility, the electrical distribution, you know, retail, Terry said, was only down four.

So certainly we held our own in a pretty difficult market there.

Hard to find anything real negative about the core growth of the overall businesses.

It was just it was that good.

Okay.

Thank you.

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

Please proceed.

Hi, everybody.

You know, you mentioned Power & Lighting, but I wonder if you could give us a view about what you see in the non-res market looking out at lighting in particular, an update on the quote activity, book-to-bill, and previously you said visibility at the middle of '08 I think.

What does that visibility look like now?

Bob, as we look out you still have favorable interest rates in unemployment.

hen we look at the other ancillary businesses that play in in that space, like HVAC, we take a look at the elevator business, the order rate was up 21%, we look at the fire and security types of guys.

Again if you look at the switch gear, low voltage switch gear people, the Eatons, Schneiders, G.E.s of the world, all very, very favorable numbers.

The architectural billing index, you look at September you can analyze the commercial versus the residential.

We look at our quote activity, the project activity, office rents that were up 2.3% in the third quarter.

Vacancy rents, rates that are the lowest in six years.

And you have this natural demand for energy efficiency in retrofit.

Not too much that we believe will slow it down dramatically.

Is that way going to be a slower growth than '07?

Probably yes.

We are seeing some slowness of the retail, small retail projects.

And, of course, the access to credit is a concern.

And we'll see how that works itself through the system.

But right now we are not seeing anything dramatically different than what we predicted in our trajectory is certainly out through at least the first couple of quarters of next year that suggest there is still going to be growth in that market.

I would ask a similar question on utility.

Utility came in ahead of what you thought.

Glad they were, and that's without any sort of storm activity as you mentioned.

Do you have an idea just talking to customers about what demands is going to be like in '08 at this point?

Are people beginning to indicate to you what they want, the blanket contracts, that type of thing?

If you look at the balance sheets of the utilities they continue to improve.

here is still the whole MRO, the life expectancy of your average transformer, [you're out in your end of life.] There just hasn't been a lot of stress on the existing grid, but I think that could change with a moment's notice.

And the international markets, Bob, are just booming.

The China market, the Middle East, South America, all very, very strong.

So again we continue to be very optimistic across the board.

Of course there are segments of that, product line segments that are showing some weakness, but you have some pretty tough comps there, too, year-over-year so that was expected that eventually you are going to see single-digit growth rates and such as we go forward in that business.

I guess the final question is that, you know, on the residential side you guys did better than probably anyone would have thought.

I know you moved out of some big box lines and maybe sort of flush out why that business did relatively better than one might have thought?

We have -- our chief marketing officer has been really focused on the retail site.

We've been pulling the businesses together way, they're gathering more comprehensive strategy with a couple of the key retail accounts, so we penetrate them more broadly with a kind of a Cooper Connection look and feel to it.

And as we said before, some quarters, if you go back two years, Bob, we probably lost some line reviews and some share in there when the market was growing.

And I think now the shoe is, maybe, on the other foot.

We're probably doing a little bit better than some other people.

But net/net we continue to be optimistic there, and opportunistic, really, because we have to be careful with those accounts from time to time.

They have outrageous demands, and we are very careful about what we offer them.

Got it.

Thanks, Kirk.

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

Please proceed.

Good afternoon, this is Russell, Nicole's associate.

I could tell by the voice.

First question is, I was hoping to get more clarity on the legal expenses in the quarter.

What specifically the issues here?

These are our couple old legacy liabilities that go back probably ten years or more.

And we've been paying legal fees, fighting battles over, bleeding out these for years now.

And we've entered into negotiations of both just to stop the quarter-to-quarter legal bleeding and see if we can get it behind us.

It wouldn't be prudent to talk any more specifically about any specific cases, Russell.

Alright.

Great.

One last one in terms of M&A activity, have you guys seen any prices come down over the last quarter, and does it change anything in terms of activity going forward?

That would be my biggest issue.

Right, the pipeline is [inaudible], we are seeing more interesting properties than we've ever seen.

I think we have something close to ten or 15 letters of intent out.

But the question will still be expectations of valuation, and are you projecting the last three years kind of revenue growth into the next three years which I would argue may be a little choppier.

And you are still looking at 13, 14 times earnings, and I think those things will have to come back in line.

So I think that will be the challenge.

We never project which deals are going to close, but we are certainly more active and certainly seeing a lot better properties and a lot better opportunities that are strategically great fits for us either because they are international or because they're in spaces that we want to grow, and we've talked to you about these platforms that we are trying to build out.

So there's nothing new there, but it's just consistency of the same strategy we've been executing over the last couple of years.

Alright.

Great.

Thanks so much, guys.

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

Please proceed.

Thanks.

Good afternoon.

Just following up on the deal question, Kirk, any change in kind of the landscape in terms of who you are seeing in the deals?

And I guess the question is maybe the private equity guys that drifted away a little bit.

But I'm wondering on the weak dollar if you're seeing maybe more international competition for deals creep in.

I think that we are seeing more deals come from market, Jeff, because maybe some of these private sellers are now viewing the window of maybe closing from where they could have gotten out of the peak or such, right?

So guys that were not in the market or not interested in selling were seeing a lot of properties coming back to us that we've been tracking for a while.

I would say that we are not seeing any private equity on really any of these deals per se, but we will see when they close and who ends up buying some of the properties.

But the thing I'd be cautious about id the expectations of multiples of EBITDA.

I'm not sure that realization has reset itself on the market yet.

So again we are cautious.

here's nothing that we have to own, but there's some properties we'd like to own, and we prioritize what we are looking at ,and then we are willing to pay a little bit more for a quality-A property, and we are just cautious on things that we view as more opportunistic.

You mentioned the billion dollars in firepower, I mean if everything broke the right way, could you put everything to work in a short period of time?

Is that the kind of magnitude we are talking about or not quite?

There is certainly a couple hundred million dollars we can see closing between now and the end of the year.

We have signed letters of intent.

We are in the due diligence process.

You never know what turns up in that process on the environmental side or other sides.

I think that $200 million between now and the year could be announced.

And I think that if you roll forward, if you look at the cash flow, we are going to generate in the fourth quarter and then depending on what you use for Plan A or Plan B, Jeff, on asbestos has a big difference.

As Terry said it's almost a $400 million swing in our capital structure.

But we have plenty of room to continue to be opportunistic on repurchases.

We look at dividend in the first quarter and continue down a path that we are on on M&A.

We are not limited by our capital structure in any of the deals we are looking at.

Just finally, Terry, could you remind us on Belden?

Is there any kind of terminal event in this thing, if they hit some kind of threshold in the agreement unwinds, or does this kind of continue into perpetuity depending on what their profitability and other actions look like?

What happens is, easy way to think of it, Jeff, we step up the tax basis of that business back in '93.

It gave a 15-year amortization of most of that step-up.

So if they were to continue without losses, tax losses in 2002 period they would have probably been completely over with in 2008.

And so we went through this period.

We didn't recognize any income on it.

And that's why we are getting the big chunks of income hitting us right now and expect to in 2008.

So the answer to your question is, at the end of 2008, it would probably be unlikely there would be a lot of money left to collect under that agreement.

It could end up being less than a few hundred thousand.

Great.

Thanks a lot.

[Caller Instructions].

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

Please proceed.

Hi, thanks for taking the question, folks.

One thing that was never clear to me is with international growing so much faster than U.S.

Is there a mix shift benefit or the opposite on margins?

People would ask that question when your international margins are higher than the U.S.

No, think about it Scott.

The mix of what we have, it's the Crouse business, it's the Bussmann business, it's the Power Systems business.

And think about what it's not.

It's not wiring devices, it's not lighting generally.

So the mix ends up being at least at our average 17% kind of margins on the electrical side.

It's certainly not dilutive is the way I would answer the question.

Go ahead, Terry, Have you got any?

It can depend a little bit by the amount of project business it is, what type of project business.

But generally pretty consistent across the world.

Okay.

Another question.

I mean, do you guys have a sense of where your customer inventories are right now?

I think in pretty good shape across the board.

We are seeing some guys now starting to look at thresholds on the Cooper Connection rebates and such.

I've heard some large distributors trying to get ready now for the year-end and see where they are in crossing thresholds.

So when they are talking about that, and I know they have room to go on the inventory side, but I don't know of any issues out there per se either on the retail side or on the electrical distribution side or even on the utility side that would give us any concerns that there will be some softness in the fourth quarter due to some inventory readjustments.

Okay.

I guess it's a little bit of a premature question, I hope or I suppose, but what changes in your business plan if we walk into a little bit of a soft spot here, considerably softer I guess in what we are seeing right now in the U.S., do you pull back on CapEx?

Is it as simple as that, or are there some other things to kind of avoid some of the margin erosion we saw in the last cycle at Cooper?

Well, I think, Scott, it's a great question, and I think we are completely different company than the last cycle, right?

We've got significantly lower cost structure.

We've taken out a number of facilities and realigned our physical cost structure.

We've been driving this variable cost productivity program for the last five years.

We have different leadership cross the company.

We've got 38% of our COGS from low cost countries.

And I think our business is much more broad and diverse and not so reliant on telecom and some of the very specific markets that hit us the last time.

We are also driving right now core growth rate that's sort of double our business model, right?

We said our core growth rate would be about 5%, 3% GEP.

And sort of 2% from these other initiatives, and then we would acquire five, and I would maintain that you'd probably see us step up our M&A activity in the face of a more difficult global economy if that were to occur.

And we would generate more growth out of acquisitions because we would be more opportunistic on that side than we were in the last downturn.

In the last downturn, we retrenched, had to restructure, and had to sort all these issues out.

And our BS was levered up heading into the problem at 43%, 44%.

Right now we are at 21%, and that will get better if with don't do any deals or lay into the stock any more in the fourth quarter than we did in the third quarter.

So I think it's completely different.

We are certainly well aware of the choppiness out there.

We are watching our SG&A.

We are getting more focused on the productivity side.

We are more focused on the working capital side.

But, you know, I think we can do reasonably well, and I think this quarter should.

Who would think that this quarter would have been our strongest core growth rate in ten years and the best margins in electrical in five years?

So I think it goes to show the power of the business model, and we will still see.

We are still untested in some of this, but so far so good.

Okay.

Great.

Thanks.

Your next question comes from the line of Alex Rygiel with FBR.

Please proceed.

Thank you very much.

Is it safe to assume that your acquisition strategy will continue to focus on the smaller singles and doubles rather than the big homeruns?

Well, you see the problem on the bigger homeruns, Alex, is that the pricing gets more misaligned the bigger you go.

So I think the answer is $100 million, $200 million purchase price probably the sweet spot for us right now, and I think that's probably safe to say.

Not that we are not trying to attract and land some of the bigger ones, but we just seem to find pricing that's 30% higher than where we are in a lot of those cases.

Great.

What is so interesting about your pipeline today?

Is it geography?

Is it the growth opportunity in those businesses?

It's the quality of the properties, Alex.

They are more international, and they are better properties than we probably even knew that were out there.

The more we dig and the more our people get into these spaces, the better understanding we have of what the potential opportunity is, there is more technology, there are more specified and they are more international in their nature.

And we can find them to be very exciting properties for us to own long-term.

Lastly are you looking at any other sort of alternative energy like equipment companies, particularly maybe sollar or anything of that nature?

Well, Crouse gets into a lot of different spaces.

They get into the biofuels.

They get into the wind.

Bussmann gets into the wind with the utility surge protection.

Power Systems gets into some of that space.

When you talk about ethanol plants, that's a sweet spot for Crouse-Hinds.

So, the answer is yes, but it's sort of more, maybe one step removed than you would think of being the manufacturer of solar cells or any of those types of things directly.

Fair enough.

Thank you very much.

Thank you.

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

Please proceed.

Good afternoon, everyone.

With respect to acquisitions, I guess I'll beat a dead horse here.

Just in terms of what you're seeing, obviously you've been focused on a good technology position and obviously on an international focus.

Given the fact though that you've probably seen some of the froth come out of some private deals domestically, and you've had some management successions and some high-profile properties in North America, is it possible, and given the fact that you have Cooper Connection and three good electrical distribution business for a lot of leverage that you can get out of the model, would you think about in terms of your acquisition mix perhaps doubling down on North American exposure, or would there be any kind of shift in the strategic landscape in terms of maybe doing some consolidation in some select end markets for you?

Rob, I'll have to tell everybody that we do not -- we look at properties and opportunities, we do not dwell on international or specific properties.

We look at opportunities to fill out the portfolio.

We have broad product lines, broad needs and opportunities there, so we always are looking at properties in North America, as well as international.

So it shouldn't surprise anybody if we find great properties in the U.S.

that we would by them.

We bought some -- Wheelock and MadahCom are both US-based companies, MadahCom with great international exposure.

So we are not focused on just international or preference to international, but we would like to expand our IC product line.

Should we see a bigger bang in the US, then?

Well, we're looking.

There's a couple in the pipeline that are in that range that are direct fits over existing businesses that would go through electrical distribution and complement the Cooper Connection.

One of the benefits we have in the U.S.

is that we have breadth and size and scale through electrical distribution.

And we've sort of used that chart in the past.

If you take away the large breaker guys and switch gear guys, the low voltage switch gear guys, we are sort of the largest to most typical electrical distributors.

If you look at who their suppliers are, and you take away the big boys, as I say and the lamp guys and wire and cable guys, Cooper is generally right in there at three or four.

So we've got in good position with the nationals, the independents and the very small distributors in this country.

And we do view that as an asset that we can bring to bear on buying a product line type of a company and taking it through our channel.

I agree with you.

Have you seen valuations in that specific area come down?

It depends on the size of the property again.

I can sort of draw this line.

The bigger the property, it just seems to go for a price that almost is sort of unimaginable.

You can make the math work.

Even we can't make the math work.

But the smaller properties, $50 to $100 million properties can work nicely.

Alright.

I will leave it there.

Thank you, Rob.

Your next question comes from the line of Eli Lustgarten with Longbow Securities.

Please proceed.

Good morning, almost good afternoon, depending on where you are, I guess.

Two quick questions, most of the things have been asked.

One, are you seeing anything at all that is suggesting there's any slowing of activity in Europe at this point?

I mean, we've seen a lot of forecast for European economic growth being slashed at this point for 2008.

Are you seeing anything at all as far as changing field of --

No, we had very strong growth in Europe across the (inaudible) safety business that we have over there.

And the Crouse-Hinds business over there is a big player, of course.

And so we saw, if you take out FX in local currency very strong double-digit growth there.

I've read some things where people are now cutting back some of the G.E.P.

forecasts in Europe, but Eastern Europe was very strong as well as we mentioned.

I don't see anything yet but we're cautious.

Then you talked a lot about -- nobody asked about tools and hardware anymore for maybe a good reason.

But with the change in product mix away from the low margin Assembly business, are we looking at a potential step-up in profitability of that sector over the next year or so?

I'm not saying you are going to get to electrical margins but into the teens as opposed to struggling for double digits?

Eli, I would say that for 2008 we would be expecting some step-up in profitabilityas we wind down this Assembly Systems business over there.

But we also are faced with some mixed markets there.

That business, power tools side, has a piece that serves motor vehicle both in Europe and North America.

So it depends on what happens to that industry as we move forward.

And then they do have about 20%, a little over 20% residential exposure which is a tough call.

The Weller business is attractive.

The industrial power tools, aerospace part of it is attractive, the international part of it is attractive.

But as Terry said there are some parts of it that are just tougher margin businesses and some of the hand tool businesses and some of the others.

The other thing is the working capital opportunities is still significant over there.

Probably the biggest of any of the divisions in the whole company.

On the working capital percent of sales calculation, Eli, on the inventory receivables, we've got some room to still move.

They've done nice things, are implementing lean and are making some real good strong inroads, but I think the cash flow of that business are to be significantly greater than its income for the next couple of years.

And the tax rate for next year, is it going much from the 27.3% that we are at now?

Right now our model is, it will go up on the incremental earnings approximately the Federal and state incremental rate.

Although we will implement a couple of tax planning that will bring it down a little bit from that.

Does it go over 28% at this point or does it stay --

Overall it will probably go up over 28%.

Alright.

Thank you.

Thank you, Eli.

At this time I would now like to turn the call back over to Mr.

Jon Safran for closing remarks.

Okay.

As we conclude this call, I would like to remind our listeners that they may follow up with me for additional questions or clarifications.

And with that, thank you for joining us today.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.