伊頓 (ETN) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Cooper Industries Limited earnings conference call.

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

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

We will be facilitating a question-and-answer session toward the end of the conference.

(OPERATOR INSTRUCTIONS)

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

Jon Safran, Director of Investor Relations.

You may proceed.

Thank you, Becky.

Welcome everyone to the Cooper Industries's third quarter 2008 earnings conference call.

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

We have posted a presentation on our website that we will refer to throughout the call.

If you would like to view this presentation, please go to the Investor Center section of our website, www.cooperindustries.com, and click on the hyperlink for Management Presentations.

As a reminder, 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 therefore actual results may differ materially from those anticipated by Cooper.

A discussion of these factors may be found on 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, reconciliation of these measures to the most directly comparable GAAP measure are included in the press release and the web presentation.

And now let me turn the call over to Kirk.

Good morning.

As many of you know, Cooper is celebrating its 175th year anniversary this year, and as you can imagine, this company has seen its share of economic cycles, technology shifts, war, and general adversity.

What has allowed great companies such as Cooper to strengthen and build throughout these difficult times are our dedicated and talented employees, our strong process and accountability-based culture, a clear and executable strategy, and our ability to learn and consistently reinvent ourselves based on changing market trends.

Clearly based on everything we have seen and experienced over the last six weeks, we have entered a period of unprecedented volatility and uncertainty.

What I can assure the stakeholders of Cooper Industries is that this company is well positioned for these volatile times and we are taking aggressive proactive actions, some discussed today, and other contingency plans that will enable us to address the short-term economic conditions while we allow ourselves to continue to focus on our long-term strategy and maximize long-term shareholder value.

The exhibits posted on our website for today's call build upon those that we have shown in the past, but have also been modified so we can properly align the investor community with our short-term achievements, and also how we're positioned to respond to the current economic situation.

If you turn to page 2 of the handout, our team delivered an exceptional third quarter.

Our total revenues were up 15%, 7% of that core -- again, demonstrating the quality and the breadth of our portfolio.

Our electrical products group was up 17% -- 8% from the core, 8% from acquisitions, and 1% from foreign exchange, and our tools division delivered plus 1% growth, minus 3% core in a very, very difficult economy.

We continue to see strong growth in industrial, energy, and utility.

In fact, those trends remain consistent with the first half of 2008.

Residential and retail was still weak and commercial sales began to soften.

We continue to see strong international growth, with now representing 38% of our sales was up 20% in the third quarter.

Our earnings per share of $0.97 were up 17%, and that was on top of earnings per share growth last year of 20%.

Electrical products return on sales was 16.4%, down 80 basis points, partially diluted by acquisitions, mix, and steep inventory liquidation.

Tools return on sales was 11.9%, up 90 basis points and year to date free cash flow was strong at $473 million, up over $100 million from last year.

And again, we expect 2008 to be our eighth consecutive year where our free cash flow will exceed our net income.

If you turn to page 3, I'll talk about the end market conditions.

Industrial markets are 38% of our sales, and experienced mixed results.

Automotive, aerospace, and general industrial are slow, while we continue to see strong sales in oil and gas, refining, and petrochemical with particular strength overseas.

Our order rates in the third quarter were solid, and are trending at expected levels as we enter the fourth quarter.

Commercial markets at 26% of our sales held up well in the third quarter, but we continue to anticipate an accelerated drop in overall activity as we enter the fourth quarter and all of 2009.

Slowing overall business activity, poor retail sales, and non-existent credit will lead to a contracting market.

Overseas activities, new products, and energy efficiency retrofits should provide some relief.

Utility markets at 22% of our sales have solid order rates and we continue to forecast growth.

Aged infrastructure, reliability products, and international sales remain strong.

And lastly, residential shows no signs of improvement, with housing starts at 17-year lows, and our sales down 7% in the quarter.

If you turn to page 4, for the electrical product segment, which is 88% of our sales in the quarter, we saw solid industrial demand particularly in the energy markets, strong North American demand through electrical distribution channel, strong international sales up over 20%, utility demand was up double digits, and retail sales down mid single digits.

Total electrical orders were approximately equal to shipments in electrical products, and in a quarter where our sales were up 17%, we consider this a good indicator of the momentum into Q4.

But we're very cautious given the macroeconomic environment.

Lastly, acquisitions, mix, inventory liquidation, and rapid steel inflation drove electrical margins down to 16.4% or down 80 basis points.

Turning to page 5 of the handout for the tools group.

We had a very solid performance across the board in a very difficult economy.

Despite softening retail sales, weakening automotive, and Boeing's strike, sales were still up 1%.

Our order rates were roughly equal to sales, and our margins expanded by 90 basis points over last year, driven particularly by productivity, positive mix from exiting the assembly line business, and aggressive pricing actions.

Now let me turn the call over to Terry to provide additional comments on the quarter, update you on our capital structure, and provide guidance for the remainder of 2008.

Thanks, Kirk.

As Kirk mentioned, we delivered a great third quarter, even with the credit card markets freezing up toward the end of September.

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

On Slide 6, our free cash flow for the first nine months of 2008 was $473 million, compared to $373 million, in the first nine months of 2007 -- a 27% increase.

Great execution during the third quarter drove third quarter free cash flow up 21% over the prior year.

Cooper's strategic initiatives continue to drive performance and as Kirk mentioned, we anticipate delivering the eighth year in a row where free cash flow exceeds reoccurring income.

Our balance sheet remains in great shape, with our debt to total capitalization net of cash and investments at 24.3% on September 30th, compared to 24.8% on December 31st, 2007, and at 20.9% a year ago.

Over the last 12 months we have funded $412 million in acquisitions, $165 million in dividends, and $364 million in stock buybacks net of proceeds.

That totals to $941 million while maintaining a very conservative capital structure.

While interest expense increased $5 million in the third quarter of 2008 compared to last year, our share count is down close to 10 million shares or 6% of our shares, and our net to EBITDA is only 1.1 times.

Our debt and capital structure are in great shape and we have outstanding flexibility to capitalize on the opportunities.

Turning to Slide 7, our inventory turns in the first nine months of 2008 improved to 6.6 turns, compared to 6.2 turns in the first nine months of 2007.

And this is with the dollar investment inventory impact by increased material costs compared to a year ago, as well as the MTL acquisition completed in February, and other acquisitions completed this 2007.

In the third quarter, we aggressively went after reducing inventory levels, and expect to continue to do so in the fourth quarter to ensure we do not build inventory in a period where our customers will likely be cautious in taking down their inventory.

Our receivables days sales outstanding decreased by 4 days to 63 days.

As you can see by our results with the current credit crisis, we are aggressively monitoring credit and collections.

Our operating working capital turns increased to 5.4 turns, compared to 5.2 turns in the first nine months of 2007.

Overall, a solid performance with room to continue to improve.

On Slide 8, our capital expenditures increased $4.5 million in the first nine months of 2008, and we expect for the year for capital expenditures to continue to be in the $120 million to $130 million range.

In the third quarter, we purchased 1.1 million shares of our common stock, spending $42 million against proceeds from issuance of $6 million.

Through September 30th, we have purchased 7.8 million shares, spending $325 million against proceeds from issuance of $17 million.

We did issue $1.6 million shares for stock options, matches to 401k and other programs here to date.

As a result, year to date our outstanding shares decreased by 6.2 million shares.

Under existing board authorizations as of September 30th, we can purchase up to 9.6 million shares.

In October we received $141 million from the Federal-Mogul bankruptcy and we purchased 3.3 million shares for $111 million, capitalizing on the weak stock market in October.

Our balance sheet is in great shape, and we consistently generate very strong cash flow, and as a result we continue to have tremendous flexibility fund both organic and acquisition-growth, pay a competitive dividend, and purchase our common stock.

Turning to Slide 9, as everyone knows, the credit markets have been in turmoil.

Commercial paper markets during certain days have experienced interest rate volatility and lower demand.

The good news is the government's actions to buy commercial paper and other activities should calm these markets over time.

We have maintained a small presence in the commercial paper market to keep our name out there, but do not need any issuances to fund our cash needs.

We are currently forecasting, excluding acquisitions and further share buyback, to end 2008 with no commercial paper outstanding and cash in excess of $450 million.

We do have a couple of small acquisitions that could close by year end, but clearly have more than ample cash to fund them.

As we look forward to 2009, we have our $500 million credit facility maturing in November, and $270 million in notes also maturing in November 2009.

We have been in discussions with our banks on renewing the credit facility, and at this point there's no indication we'll have issues replacing the current facility.

We likely will have a new facility in place in the first half of 2009.

As for the debt maturity, we are going to operate as if we have to retire this debt until such time as interest rates are attractive.

With no commercial paper issuances and the retirement to the $270 million debt, our forecast is to have in excess of $600 million of capital available for acquisitions and stock buybacks through the end of 2009.

Bottom line is that we have more than adequate liquidity without any reliance on the credit markets, and absent additional stock buybacks or acquisitions, we'd end 2008 with net debt to EBITDA significantly below 1 to 1, and we -- and 2009 with net debt of less than $355 million, and be essentially debt free in 2010.

Before turning to the results for the third quarter, I'll cover Federal-Mogul asbestos on Slide 10.

At the end of September, the judge presiding over the Federal-Mogul bankruptcy ruled we could not participation in the Federal-Mogul 524(g) asbestos trust.

While we and the other parties involved believe the judge erred in the ruling, we concluded that appealing and continuing to drag out the outcome was not in our best interest.

We believe the liability is very manageable and ultimately it will be much more economical to resolve the cases through the tort system that would have been through contributions to the Federal-Mogul 524(g) trust.

As our financial statements previously were prepared as if we'd participated in 524(g) trust, we had to revise them to present insurance assets as a receivable and the estimated liability based on projections of future indemnity and defense cost.

As a result, we recognized a $0.09 per share discontinued operations gain from the revised accounting in the third quarter.

Now we accrued 45 years of indemnity cost estimated at $460 million and 45 years of defense costs estimated at $355 million.

These amounts are not discounted, which would decrease the liability by over 40%.

Insurance receivables of $192 million were recorded.

Insurance receivable only represents insurance in place agreement and settlements.

We will collect additional insurance as we enter into agreements with insurance carriers.

Over the last three years, our indemnity and defense costs net of insurance have averaged less than $25 million a year.

As the last time in any asbestos products were produced by ABEX was in the '70s, the population that can claim exposure is steadily declining, and should make the management of the liability easier as time goes on.

Now, turning to the results for the third quarter in Slide 11.

First there were items that impacted both the third quarter of 2008 and 2007.

In the third quarter, we recorded discrete tax accrual items of $18.3 million, primarily related to the expiration of statutes of limitations.

This item increased third quarter earnings per share at $0.11.

In the prior-year third quarter, we recognized $23.5 million of Belden net income, partially offset by $6.4 million in legal accruals related to old previously disposed of operations.

These two items increased our earnings per share by $0.10 in the third quarter of 2007.

Excluding these unusual items, our earnings per share would have been $0.97 in the third quarter of 2008 and $0.83 in the third quarter of 2007, a 17% increase.

In the third quarter of 2008, excluding the tax accrual adjustment, our effective tax rate was 26.5%.

As I'm sure you are aware, the accounting rules require us to reflect tax strategies and other events in the period they are actually implemented.

As a result, the rate would have been 28%, except that the first six months were at a higher tax rate and the impact to bring the nine months rate to 28% flows through the third quarter.

This catchup added $0.02 earnings per share in the third quarter.

On the third quarter, we are also required to take a $3.9 million pre-tax charge for the curtailment of an international pension plan.

We started freezing this plan and discontinuing it back in 2006, and finally got approval, which meant the plan had to be revalued and we had to take a charge when that event occurred.

This charge decreased the electrical products earnings in our reported EPS by approximately $0.02.

Turning to Slide 12, year to date, in 2008, unusual items totaled $0.10 per share; in the prior year, $0.44 per share.

Excluding the unusual items, in the first nine months of 2008, continuing income per share totaled $2.75 compared to $2.31 in the prior year, a 19% increase.

Turning to Slide 13.

Today we reported a revenue increase of 15%, aided by currency translation, which added 1%, and acquisitions, which added 7%, leaving a 7% core revenue growth.

Revenues were at the top end of our forecast, with the electrical segment exceeding the forecast and tools falling short of the forecast.

Revenues tracked through the quarter at a relatively consistent rate each month.

However, we saw the reactionary effect of the credit crisis and media coverage in late September where we saw stock-type product sales becoming volatile and demand weakness in some products.

October to date has been mixed, with a pickup in activity in some product lines and continued slowness in others.

Clearly, our customers are going to be cautious on carrying inventory over the next couple of quarters.

Growth in businesses serving energy markets continued with double-digit growth, and our utility business posted double-digit growth.

We delivered core revenue growth in every electrical division except one in the tools segment.

Interesting, even with all of the negative indicators and news flow and a volatile end to September, our orders remained strong in the quarter, with orders exceeding shipments in electrical.

Tools on the other hand had sales exceeding orders.

Exclusive of the unusual items I covered previously, we reported $0.97 earnings per share, a 17% increase.

Our results were impacted by product mix and slowing our manufacturing production and material inflation during the quarter, which I'll touch on in a minute, but overall, we performed very well in a tough economic environment.

I discussed in our February 2008 outlook meeting that reducing our share count would be a nice contributor to our earnings per share growth in 2008.

Simply taking the reported lower share count, 6% of our earnings per share growth was from stock buybacks.

However, as you know, this is more like 4% when you consider the additional interest expense incurred to finance the share buybacks.

Turning to slide 14.

As I mentioned earlier, acquisitions contributed over 7% to our revenue growth.

The incremental revenue from acquisitions contributed slightly over 10% return on sales, with higher selling and administrative costs.

Our gross margin declined 60 basis points resulting in the gross margins being 32.3% in 2008, versus 32.9% in last year's third quarter.

Gross margins were impacted by sales mix within the electrical segment, and our intentional reduction in production volumes to bring inventory levels down.

Steel and certain other metals and energy have increased significantly year-over-year, creating a challenging environment.

In the third quarter, material inflation alone was $29 million in excess of our forecast at the beginning of the year.

As I mentioned last quarter, our tools group in the second quarter did not recover price in excess of material costs, primarily due to LIFO inventory accounting, which requires expensing of material cost increases in the current period.

Pleased to report that tools did achieve adequate pricing, to offset the increased material costs in the third quarter.

We did, however, see two of our larger businesses challenged with material inflation in the third quarter.

Both of these businesses are in LIFO inventory accounting for the US operations and did not achieve adequate pricing to offset material inflation, and probably were not as aggressive as we would like on achieving price versus sales volume.

Both of these businesses due to their backlog will continue to impact margins in the fourth quarter.

Selling, general, and administrative expenses for the quarter as a percentage of sales were 17.8%, compared to 18% in the third quarter of last year.

Incremental impact of acquisitions added 30 basis points to selling and administrative costs as a percentage of sales, so you can include this -- a very nice improvement and reflective of the action we have been taking in the last 12 months to reduce cost.

From a segment-reporting perspective, the third quarter of 2008, reported $23.9 million in general, corporate, and other expense, compared to $23.3 million in the comparable quarter of 2007, excluding the $6.4 million of unusual items.

Turning to Slide 15, operating earnings increased 12%, excluding the unusual items in the third quarter of 2007, with operating margin declining 30 basis points to 14.5%.

Continuing to Slide 16 on net interest expense, our tax rate, and net income.

Our net interest expense was up $5 million in the quarter, driven primarily by the acquisitions and stock buybacks.

Exclusive of unusual items, our effective income tax rate in the third quarter is 26.5%, and I mentioned earlier, this reflects the catchup effect of the tax rate in the third quarter of 2008.

A great job by our tax team successfully implementing tax improvements in the third quarter that drove the rate down.

Now in the fourth quarter, our rate will reflect the R&D credit that passed into law in October, which will likely result in the fourth quarter tax rate in the 26% to 26.5% range.

For the year we are currently forecasted around a 27.5% to 27.75% tax rate excluding unusual items.

Our income from continuing operations increased 12%, a 15% revenue increase, excluding the unusual items.

Turning to the segments, and Slide 17, for the quarter, our electrical product segment revenues increased 17%, excluding currency translation of 0.7%, and incremental revenue from acquisitions of 8%, with core revenues growing 8%.

Price realization represented close to 3% of the growth.

The businesses serving the energy market continue to excel, with core revenues up double digits against tough comparables, and our international operations also continued to perform well.

Electrical retail sales were down mid-single digits, driven by the continued weakness in residential and light commercial end markets.

Our lighting business more than offset the retail channel weakness with solid sales increases in the commercial industrial market, and delivered low single-digit core revenue growth in a very challenging market.

Our power systems utility business grew core revenues double digits, aided by the hurricane that hit the Gulf Coast.

Revenue growth for electrical products was strong both in the US and internationally.

Developing-country revenue growth was 25%, and electrical distribution revenue was up double digits, with very strong growth in both North America and the rest of the world.

As I mentioned previously, our softest channel was retail.

We declined mid-single digits.

The residential market continues to be weak, partially offset by new customers and products.

Overall, electrical product segment earnings increased 11%, and return on sales declined 80 basis points to 16.4% from 17.2% in the third quarter of 2007.

Excluding the incremental impact from acquisitions, return on sales would have been 16.8% and would have been 17%, excluding the pension curtailment charge.

As I mentioned earlier, sales mix and material inflation and inventory reduction efforts decreased return on sales.

Turning to the tools segment on Slide 18, in our tools business, sales increased 1% with currency translation contributing 4% of the growth.

We had tough quarter on the top line for tools.

The Boeing strike, a tough motor vehicle end market, and close to a double-digit decline in retail sales impacted results.

However, great execution, with tools operating earnings increasing 10%.

Our tools operating margin as percentage of sales increased 90 basis points to 11.9%.

The results were aided by the benefit from the prior-year downsizing of an international facility and favorable product mix.

Turning to slide 19, last quarter we said absent a significant global or US economic downturn that we would continue to remain confident that we would deliver double-digit earnings increases in these tougher economic times.

The unprecedented turmoil in the credit markets and the significant impact on the forecasted growth rates in the global economies will impact Cooper as well as most other companies.

We believe it is prudent to take additional actions now to adjust our cost structure.

Before year end, we anticipate reducing our global work force over 1,000 employees.

We anticipate severance charge of $20 million to $22 million in the fourth quarter, and expect to realize a benefit of over $50 million annually.

We are also additionally evaluating plans and consolidating production volumes and other contingency planning.

We will be conducting our annual business reviews over the next couple of months in developing our 2009 forecast.

We currently anticipate that our utility business and most of our businesses serving industrial markets will continue to show growth for 2009, albeit at what may be a low single-digit rate.

It is likely that commercial and residential markets will be tough in 2009.

However, developing markets should have reasonable growth in energy efficiency products, and new platforms should offset some of this weakness.

And as I know the question will be raised, pension expense and currency translation will be a headwind; however, the lower share count should offset these headwinds.

We do not have a crystal ball on how long or deep the recession will be.

However, we are proactively adjusting our cost structure in advance of a slowdown and continuing to position Cooper to outperform in what looks like will be a tough environment over the next year or so.

Before turning the call back to Kirk for his final comments, I'll provide comments on our forecast for the fourth quarter and year.

Turning to Slide 20.

In the fourth quarter, we're forecasting revenues to increase 7% to 9%, with electrical up 9% to 12, and tools down 5% to 10%.

Core revenue growth is forecast to be low single digits.

We anticipate that customers will reduce inventory levels during the fourth quarter, and believe it is prudent to assume that we will not experience the normal customer purchasing to achieve year-end incentives.

In tools, we're forecasting very weak retail sales for the Christmas holiday and weakness across tools and markets.

Typically the fourth quarter is the strongest quarter for tools.

This year it is unlikely that we will experience the normal sales and earnings pattern in the fourth quarter.

Earnings per share are forecast to be in the range of $0.83 to $0.92 per share, flat to up 11% from the $0.83 we reported in the fourth quarter of last year, exclusive of unusual items.

As I indicated, we expect customers to react to the credit crisis and significantly reduce inventories.

We are likewise factoring into our forecast extended holiday manufacturing facility shutdowns to ensure that we do not build inventory.

We implemented contingency plans and are aggressively reducing headcounts and discretionary spending to prepare us for what will be a more challenging environment.

This guidance does not include the severance or other charges in the fourth quarter.

For the full year, we're forecasting our top line to grow 12% to 14%, and excluding unusual items in the fourth quarter charge, we're forecasting $3.58 to $3.67 earnings per share.

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

Thank you, Terry.

Turning to page 21, as Terry and I have reviewed, we are extremely well positioned to continue to execute our long-term strategy.

The core to that strategy is our alignment around our business initiatives.

These initiatives enable us to deliver strong results, but more importantly will allow us to outperform in a weakening environment.

Customer loyalty, Cooper connection, C3 innovation, and globalization have dramatically accelerated our core growth profile and allowed us to penetrate new and expanding markets around the world.

We have also built strong process capabilities around strategic sourcing, value engineering, lean and productivity -- driving margins and free cash flow to record levels.

Lastly, over the last several years, we have made significant changes in our management team to allow us to execute these initiatives, including operating a major structure.

We have developed a culture around accountability, and created incentive programs that reward pay for performance.

On page 2, I want to make it perfectly clear that we're facing in to the reality of this new economy.

While the credit markets are frozen, we've position the company with great liquidity and continue to invest and return capital to our shareholders.

Of our dividend is secure, and further share repurchases remain an option.

We anticipate commercial construction to have significantly weakened over the coming quarters, and we have taken today's salary actions in anticipation of slowing and have other contingency plans in place.

We will continue to invest in emerging new technologies, including LEDs, lighting controls, mass notification, and will expand our global footprint to offset weakness in North America and western Europe.

Our acquisition integrations are on track.

We expect our industrial businesses to continue to grow, albeit at a slower rate, emphasis on energy, energy efficiency, safety, and developing market infrastructure should offset a slowing mature market.

We will continue to fight for share in the declining housing and residential markets.

These markets will be attractive and growing over the next few years.

And lastly, we will offset the FX and pension expense with additional share repurchases at attractive prices.

Heading in to 2009, we have a heavier emphasis on cost management and cash flow, but will continue to invest in key growth opportunities, acquisitions, and other ways to maximize shareholder value.

Thank you, and let me turn the call back over to Jon to take your questions.

Thanks, Kirk.

At this point we can open up the call for questions.

I just want to remind our listeners to please enter the queue using your own name.

Out of respect for others waiting to ask a question, we will not take questions from people who enter the call queue using someone else's name.

Becky, first question, please?

Your first question comes from the line of Bob Cornell of Barclays Capital.

You may proceed.

Hey, everybody.

Both Terry and Kirk touched on this.

But let's go over the decline on electrical margins again.

How does that break down?

And how does it look going forward again, if you don't mind?

Bob, the -- there's 40 basis point impact from the incremental impact of acquisitions, and 20 basis points from the pension curtailment charge we took in the third quarter.

So we -- absent the acquisitions and that charge, we would have been at 17%.

Okay.

Now you did mention that you are behind the eight-ball on price costs.

Could you just get in to that a little bit, why did that happen?

Which business are involved, where you are in the catchup?

And I heard a comment about backlog in the fourth quarter.

Bob, it's Kirk.

As you think about a tightening economy, I think we found at it little harder to pass through some steel more than anything else in the quarter.

Which is a little unusual, but I think if you look at the core growth rate, which I thought was exceptional for the quarter, that was the trade off.

I think the other piece of it too was the declining inventories.

We took a harder approach on factory efficiencies and not running the factories for efficiencies and probably taking a bigger bite out of the inventories in anticipation of the slowing economy.

And that certainly showed up in the free cash flow as well.

Okay.

And what implicitly is the margin you are looking at in the electrical in the fourth quarter and guidance just -- that isn't clear.

On the fourth quarter we intend to continue to go aggressively after inventory.

The worst thing would be to enter 2009 with excess inventory, and we're not going to let that happen.

So that will have some impact, and typically the fourth quarter is lower volume, and we are shut down in factories toward the end of the year.

So I would anticipate that we would probably be running somewhere in the 16% or so margins on electrical.

I'll give a caveat on that, is -- as you can see in in the fourth quarter, we have a pretty broad earnings estimate for the fourth quarter.

The markets are extremely volatile, currency rates have bounced all over the place over the last, at least three, four weeks, and as I mentioned, we are not real comfortable on what the customers will do at the end of the year to reach incentive goals, as well as how much destocking they are going to do, which can impact with the margins overall being electrical as well as tools.

I think the other thing we have talked about in the past too, Bob, when you get those margins up to 17% electrical, you got to be careful managing percentages.

Because you'll basically shrink the business if you don't take 16% to 16.5% incremental margin business -- that's a bad decision long term on cash flow and overall growth of earnings.

So I don't -- I think there's a little over much attention brought to the percentages versus the absolute cash flow and the absolute performance of the earnings.

Got it.

Just one final question for Terry, when you go back to the asbestos settlement plan A, plan B, what are you running through the P&L now with regard to asbestos if anything?

I think a lot of it's coming out of reserve?

Compared to what you are reflecting in actual -- your '08 period costs, what will be reflected in the period costs going forward under plan B?

Absent additional insurance collections and changes to the accrual, which we anticipate we will reevaluate that once a year toward the end of the year 00 the only thing that flows through P&L is the internal cost related to our attorneys that work on that, which -- that flows through continuing operations, but --

What ballpark is that, is that about a $5 million number?

What is that?

No, it's -- probably -- I don't have that number, but my guess Bob, it's more like $1 million to $1.5 million.

So that doesn't change -- it's not a headwind in '09 versus '08?

The same number?

No, it should be relatively consistent.

Okay.

Thanks a lot.

Pass the baton.

And your next question comes from the line of Nicole Parent of Credit Swiss.

You may proceed.

Good afternoon.

Hey, Nicole.

Kirk, could you give us a bit more color on commercial soft ending?

I guess with respect to orders, quotations, inquiries, cancellations, you alluded to international still being a positive offset, maybe flesh that out a little bit?

It's tough, because if I looked purely at the numbers, Nicole, in the third quarter -- our book-to-bill rate, our core growth rate -- it doesn't look any different than say the second quarter did or really any of the quarters over the last two years.

It was solid.

We saw good quotation activity, and -- and again, in a quarter where you grow revenue 17%, if your order rates are equal to that plus or minus a small fraction, it would suggest that you have good momentum going out.

But I think what makes us nervous out there on this commercial construction side is the availability of credit.

If you look at the ABI numbers, if you look at the ISM numbers, I mean -- we don't see anything in our business yet that would suggest where this thing is going to go, but I think if you look at the external macro numbers, you have got to believe that this thing is going to fall off dramatically, probably not too bad in the fourth quarter, but certainly into the first quarter of '09 and continued through most of '09 would be our guess at this point.

Okay.

But I think it's more macro anecdotal things that we're looking at that would suggest that.

If you look at the backlog at lighting, for instance, on the commercial side, held up very well in the quarter, didn't burn in to any backlog of power systems.

If you look at those internal indicators that we would normally look at, even into the month of October, still feel pretty good.

But I think you are naive if you're looking out the back window to drive the car forward.

I think it's just crazy in this market.

Agreed.

Could you maybe give us a sense -- when you talked about electrical, you said shipments equals orders?

Was that across the board in each of the businesses or any major differences across the businesses within electrical?

No, it was pretty consistent across all of our businesses.

And as Kirk said, when we look at our order rate through the quarter, they were pretty consistent -- July, August, September.

If it wouldn't have been for all of the news and happenings late in September, quite frankly we would have had much better flow business, because that did impact our lighting business on the stock business, Bussman business on the industrial side, and that's why we have the comment, quite frankly on a little bit of the mix going into the quarter.

But it also makes us a little -- makes sure we want to plan ahead, because we saw the volatility that the news flow did on the inventory and the stocking by our customers.

So we'll see how it plays out toward the end of the year, but that's why we have some caution there.

I think on the international side, Nicole, I read the papers like everybody else.

I just came back from a trip.

I was in China, India, the Middle East.

We still have tremendous opportunity over there.

It's -- even if we're doing $100 million in some of these markets, it's very small penetration.

We're putting in distribution centers.

We're putting in local manufacturing.

We're still scaling up our teams in access to the market, so I think we can still grow those things significantly as we move into this 2009 as well.

Great.

And then just one last one on capital allocation priorities.

Obviously where -- the stock is where it is, you talked, Terry, a little bit about share buyback authorization.

Maybe give us a sense when you think about buyback versus M&A?

And I know you alluded to a couple of small things that you might get done in the fourth quarter, but as you look over the next six months?

Well, our view on the M&A side is it's going to be difficult to reach agreement on the outlook on a lot of these acquisitions -- has a significant impact on the valuation of it.

So, as we look forward, at least for the next six months or so, I think it's going to be a little tough to get the sellers and buyers to agree on the valuation and price.

So my guess at this point is that you won't see a lot of acquisition activity over the next six months, which will mean we'll have a lot of capital available to buy back shares if we --

And Nicole, if you look at our business model, we'll take down CapEx next year, because in a slowing economy, we won't need the CapEx we've been running on.

And if you hold your inventories and receivables flat because you are not growing, our cash flow characteristics ought to get better in a flatter, slowing economy.

Our expectation is we can throw off any more cash next year than we threw off this year if we do a right job managing the balance sheet.

And as we've discussed, taking down the inventory into the fourth quarter is part of that plan.

Okay.

Thank you.

Great.

And your next question comes from the line of Jeff Sprague of Citi Investment Research.

You may proceed.

Thank you, good morning.

Hi, Jeff.

Kirk, on the issue of price, this difficulty of pushing price forward in Q3, are you starting to herein get more of the dialogue of actually people asking for price back on the downside?

And obviously you have a delayed reaction on cost, but your customers are certainly watching cost come down from a headline basis.

Hey, Jeff, I'll field part of that question anyway.

Part of what's going on in the marketplace is steel, carbon steel year-over-year is up 67% yet on -- but sequentially it has been coming down.

And of course a lot of the other commodities have been coming down, some of them relatively rapidly, so clearly you get this dichotomy where price in the market is tougher because everybody reads the same thing you and I read.

And that's exacerbated by the fact that we're on LIFO inventory, a big piece of our businesses.

So we ended up taking a charge or an expense in the third quarter to the tune of $16 million to $17 million because we're on LIFO.

And quite frankly, we underestimated a little bit on what that impact was going to be.

We had originally thought that would be somewhere in the $10 million to $12 million, and it was a little bit higher.

So those two things drove us a little bit on the price material economics.

The good news on being on LIFO, of course, is you are not delaying that into the future periods,

But I would say commercially Jeff, in a quarter where we grew the core and electrical at 8% -- probably not feeling much pressure on the decline, or on the pricing.

And it's our expectation that we'll be able to hold a lot of the price increases that we have put in the marketplace.

I think again as people read the economic news out there, you are probably a little less likely to want to push hard on price commercially in the marketplace.

So I would say this quarter we probably erred a little bit more on the side of taking growth, and not so much on pushing price through commercially in the market, and I think we'll live through that through the first quarter, and it -- but it won't be a big issue.

I don't think it will be a big issue.

And Kirk or Terry, I was just wondering if you could address the payback on the charge.

You are getting 2X benefit relative of the charge.

Usually we think of these things as being a 1X proposition.

Why is this particular cost-saving action so lucrative?

All -- everything that is in those numbers, Jeff, is pure taking out the individuals and the work force.

It's all salaried work force.

So there is nothing buried in there for other charges for writing down assets or those type of things.

And you have some of that on the drawing board as you think about preparing for next year also, it sounds like?

We have had contingency planning going on for 1.5 years now, so we had a lot of plans.

We could trigger some additional moves, et cetera, and we always do some of that.

But depending on what starts with the -- what the market starts looking like in this 2009 as we go through the planning process, we may trigger some of those.

And Jeff, if you look at our businesses, they are not -- other than power systems, they are not really capital intensive businesses with giant brick and mortar.

If you go back and look at the last five years of how we have grown the company, we haven't added any significant brick and mortar in the US or Europe.

So for us to scale the business back is primarily through work force reductions and salary reductions, and I think that's the approach we took going after this first slug here, is trying to resize ourselves at the salaried level first, and trying to take a first look at what this thing is going to look like as we go out six months from here.

And finally on the storm impact, can you articulate what that was, and what you think the tail might be?

Is at it one or two quarter thing from here?

Or is it about played out?

It's a mix, Jeff, and actually that did impact us a slight bit on the electrical side because it clearly kicked in like in the wiring device, because of the low stocking in the channel, so we have $1 million or $2 million extra on the wiring side of it.

It impacted the power systems business, because clearly pole transformer demand went way up, and we added shifts, et cetera, to kick out more.

Now part of that was -- of course our plant is in Texas, so we didn't exactly have a great work force for a week or two, and it took a while to ramp that up.

So we probably got $3 million to $5 million of revenue in the third quarter.

Some of that will flow in to the fourth quarter, but most of that will primarily be on the utility side.

Thanks a lot.

And also it tends to be a little lower margin product line.

And there will still be some residual [CRAUS] pickup over time, but they're still assessing a lot of that, and that will be a slow gradual.

Kirk, just one more.

I mean, are you -- are you getting any vibes of people reconsidering oil patch projects?

We've got kind of a sixth handle on oil right now.

It doesn't sound like anything like that is materializing in the near term.

I just wonder if the tone of conversation is starting to change a little bit?

Jeff, I would say almost the opposite.

I was in India, and Southeast Asia -- all of those Asia countries want to be independent, even sort of quote unquote when the next cycle comes back.

Vietnam, Southeast Asia, China is going to put in these refining and exploration.

India is going on what little they have on upgrading their refineries.

I can't tell you how bold Saudi Arabia still is.

If you look at our order trends, in North America and around the world, we saw a little slowness in Europe, but outside of that, I think the spending patterns, and the capital outlay is still very, very strong, Jeff.

Thanks a lot.

And your next question comes from the line of Christopher Glynn of Oppenheimer.

You may proceed.

Hey, good afternoon.

Hi, Chris.

So on the inventory liquidation, wondering if you could quantify a little bit of what that is, and with the further liquidations in the fourth quarter, if that gets you to where you want to be with a tough demand environment next year, or if this is going to be with us indefinitely?

Well, I think -- it got us in a nice position going in to the fourth quarter, Chris, and I would expect that we will do about a similar reduction in the fourth quarter.

It's a little difficult to predict that exactly, because it depends on the volume that's flowing through there and the day-to-day demand out there on the order book, which, like I said earlier, we have a pretty wide range in the fourth quarter right now on that side of it.

But in any event, we expect to be rightsized on the inventory as we enter in to 2009, and we do not intend to build inventory in the first quarter of next year, which typically happens somewhat between -- because of seasonality of the business.

We will not see that typical build.

So key metrics for us, we're on top of it with everybody, and we'll keep adjusting that as we look at the forward demand.

Chris, I would even say on our compensation plans, we're looking at a heavier rate weighting on the cash portion going in to 2009, because we want to make explicitly clear that we don't run the plants for efficiency or productivity and really want to focus on the working capital.

We have had good progress.

You saw the numbers that Terry showed on inventory turns and some of the progress, but I think cash flow and managing these businesses for cash is going to become more relevant over the next 12 to 18 months.

Okay.

And any way to quantify what the impact was even roughly in the quarter from those inventory actions?

The electrical.

Its's hard to quantify the exact number, Chris, but I would suspect that that had somewhere in the 10 plus basis point impact.

Okay.

And the $50 million in savings from the headcount reductions, when would you expect to hit the run rate on that?

We have started actions today on it, and it will go throughout the fourth quarter, so we'll get some impact in the fourth quarter.

Most of it will roll, of course into 2009 with lower employment.

And we expect to have them all of them done by the end of this year, so you would have the full benefit into 2009, Chris.

Great.

Thanks a lot.

Thank you.

And your next question comes from the line of Deane Dray of Goldman Sachs.

You may proceed.

Hey, everybody.

At the beginning of the year, Kirk, you talked about having a six-month visibility across your businesses, based upon backlog, based upon project work and so forth.

As it stands today with the credit market uncertainty, economic uncertainty, how much has that visibility shrunk, and how confident are you over the next couple of quarters, and so forth?

Yes, it's a great question.

Again, if I look at the metrics of though third quarter, I get briefing book for these conference calls of course 1.5 weeks in advance, and I go through all of the metrics, so you look at the book to bill ratio, you look at the incoming trend ratio.

And I can look for two years at what our core growth rate trends were.

And in all of the metrics that we look at, I would tell you the third quarter is as solid as any quarter we have had in the last two to three years, and we have great momentum heading in to the fourth quarter, which ought to carry the fourth quarter and the first quarter easily in to '09.

But with that said, most of our end users rely on capital from small distributors to building new retail strip centers and commercial buildings, and things like that.

And I am extremely concerned that there's enough indicators out there that you are seeing that come to a quick end.

And some reason -- for some reason it's not quite showing up in our order trends yet, and so that's why I'm concerned.

Our MRO business, our short-term business will still be good solid replacement business.

Most of our industrial business is not new construction, it's replacement business.

So I think that will do very well, but even still, when you see the weakening automotive sector, you see Boeing on strike, none of that is good for the industrial base of this economy.

So even there, I'm concerned if we aren't running the factories how much MRO business are these places going to use and consume?

The macro piece of me makes me much more cautious than looking at the specific metrics of the third quarter, if that's clear at all to you.

And Deane, I would like to add to that, what concerned us was the extreme volatility we saw in that stocking business right at the end of September, and it makes us very, very cautious on events that could happen in the fourth quarter, et cetera.

I don't think our distributors are sitting on a lot of inventory.

I think the channel is pretty clear there.

I have seen them order smaller quantities on stocking items than the normal size stocking, and we have not seen any defaults or delinquencies out of our payment schedules out of our distributors as well.

So there's nothing going on there, and we're keeping an eye on that.

I got to tell you, you don't have to be a genius to pick up a newspaper to figure out what is going on out there.

I appreciate that.

A couple of quick questions on the asbestos side.

It's kind of ironic in the middle of all of this you had to get the asbestos issue, and you did get it resolved and plan B looks to be pretty much a non-event.

Two questions.

One is, you got that cash payment from the trust, and did it end up being a little bit more than you were expecting?

That's really the -- the agreement was, Deane, that they had to pay us the equivalent of interest on it while it sat from the time they got out of bankruptcy until they paid it to us.

Okay.

Good, and then what is the plan here?

You -- will litigate these on an ongoing basis?

Or could you seek some other remedies?

Maybe partial indemnification?

What should the expectation be?

There's other things you can do.

There's other options out there for us on insurance and other ways of managing through this.

But I think at this point it's too early to speculate on any of those.

That's fair.

Thank you.

Thank you.

And your next question comes from the line of Alex Rygiel of FBR.

Kirk and Terry, I want to compliment you on recognizing the risks of the stormclouds out there and starting to plan for them now.

You did highlight one segment of your business, that has a pretty favorable outlook in 2009 -- that being your utility segment.

Could you expand on pluses and minuses across either your inventory or your customer's inventory, storm impact, wind farm activity, metering, new construction, so on and so forth.

Just highlight some of the pluses and minuses in that segment next year?

First of all, Alex, on the reliability products, switch-gear products, capacitor banks, and general replacement business in the US -- strong.

As of late the transformer business, because of the hurricane, as Terry mentioned -- we put the second and third shift on [Nachedoches], and that picked up -- tends not be the greatest margin business for us, but that picked up -- where that had normally dropped off because of the housing market being slow, and that's a infrastructure project for the housing market.

The overseas business is very strong, and I will tell you the EAS business continues to be strong, and we continue to look at little niche acquisitions in that space to augment the other two acquisitions that we have made on the EAS site.

So that's a place you can see us continue to be active.

Very helpful

But it feels pretty good to us overall.

That's a space on the oil and gas side -- we expect that to be a marketers space we continue to see good strength into 2009 as well.

Perfect.

Thank you.

Thanks, Alex.

And your next question comes from the line of Scott Davis of Morgan Stanley.

You may proceed.

Okay.

Hi, guys.

Hi, doom and gloom.

Hey, call me doom and gloom.

You guys are the doom and gloom today.

I'm cheery compared to you guys.

I knew eventually you could come to realize that things are falling apart.

Come to the dark side, I guess.

Yes, come in to my world.

Excuse me if I zoned out and somebody asked this question already.

But I don't think you mentioned energy retrofit and that's one area that I'm trying to gauge how recession proof that business is going to be.

Do you have a sense if that's a business that when times are tough people just give up on it, or is this all full speed ahead?

Here is what you do with -- as a leader, right?

I mean, we are still building our R&D center down at lighting, we're still looking at some interesting technologies around LEDs.

We're still hiring very talented and very sophisticated people on electronics, and design engineers and such.

Whether that is an area that people pull back on because they look at their capital budgets and say even though it is a two-year payback, I could probably delay this for another year, we're going to continue to invest down that path.

Occupancy sensors, fluorescents, energy efficiency in the LED space and the control space are going to be -- continue to be areas that we're going to protect and continue to fund.

My guess, Scott, is you'll see some pullback in that area.

When people are retrofitting you'll see them put in energy efficiency products, but I'm concerned you not be able to stimulate the demand that you could have maybe three or four months ago when which were talking about this the last time.

Okay.

Makes sense.

And a couple of clarification questions -- when we talk about -- obviously an awful lot has changed since even you folks were at our conference just a month ago, and commodity prices have started to come back pretty drastically.

When do you have this -- let's assume you are behind the price cost curve now because of FIFO, but obviously steel and copper prices come in a lot, so when do you hit this cross-over point where you are actually capturing a little bit of margin, even if it's near term before you have to give it back?

Is that a near-term issue -- ?

We were talking about it, Scott.

We haven't gotten a negative purchase price variance -- I think it has been four or five years.

We have a strategic sourcing department.

If you go back six to seven years ago, and you've been in this job long enough that you remember we used to report productivity and negative purchase price variance, because we could negotiate contracts and actually get deflation.

We have had inflation now for five or six years, and we've had to push commercial prices through.

And I think '09 looks easier if you get deflation on the backside of it, and people act in a rational way, and we can hold -- not take a price increase, just hold market pricing relatively flat, you'll get a net [kick].

So I think there is something there -- as Terry said, though, the biggest commodity we consume is still steel, and the one commodity that's up year-over-year is still 65% to 68% -- is steel.

So it is starting to roll over and with the automotive industry flat on its back, I would expect to continue to see that roll down.

But that would be the biggest help that we could get.

Oil will help because of freight costs and all of the other stuff.

But steel will be the biggest single help that we can get on the cost of goods sold side for Cooper.

I said FIFO, but I meant to say LIFO.

So you actually got a benefit earlier.

And then my last question -- on share repurchase you were pretty aggressive in Q3, and again, I know you did talk about this a little bit, but what -- give us a little bit of an indication of -- to come.

You had some one-time issues there in Q3 that allowed you to step up a little bit more aggressively.

That's all good.

What is left -- is share purchase now funded out of cash from operations or are you actually willing to lever up a little bit?

No, we have got the $275 million coming due in '09, and as Terry said, we're going to prepare ourselves to pay that off and not have to go to the credit markets if we don't like the rates to place that debt.

So we will preserve that, and I think that we can look at additional free cash flow.

I'm not sure we want to go to the credit markets to repurchase shares, but I think we'll have ample cash to continue to buy back shares as we see fit.

I don't want to take us, Scott, out of the M&A game either.

Because I think prices are going to come back into a very nice perspective here in the near term, and we have several things on the books that we're still looking at.

So I'm not pulling away from the idea that which want to grow the company.

We have done these niche acquisitions to build out these interesting platforms.

It was $600 million of new stuff that was less cyclical, higher growing, more spec, and that's stuff that is going to help us weather this storm.

That stuff is still in pretty good shape and still growing out there.

We'll use a balanced strategy.

But I think this year you can see kind of how we came at it and a little bit more aggressive at it, because I think the stock price just doesn't reflect the value of the company.

Great.

Great.

I applaud your efforts.

I thought last quarter you guys were a little bit in la-la land, but you seem to be coming into reality, so congrats.

I'll take that as a compliment.

We're having a rough day.

Thanks, Scott.

Thank you for joining us on the call today.

As always, please feel free to follow up with me with questions or clarifications you may have.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.