伊頓 (ETN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2010 Cooper Industries earnings conference call.

I will be your coordinator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

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

I would now like to turn the conference over to your host for today, Mr.

Mark Doheny, Director of Investor Relations.

Please proceed.

Thank you, operator.

Welcome to the Cooper Industries second quarter 2010 earnings conference call.

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

We have posted a presentation on our website that we'll refer to throughout this call.

If you would like to review this presentation, please go to the Investors section of our website, www.cooperindustries.com.

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 in the Company's annual report on Form 10-K and other recent SEC filings.

In addition, comments made here may include non-GAAP finance measures.

To they extent that they have anticipated, reconciliation of those measures and most directly comparable GAAP measures are included in the press release and the web presentation.

Now let me turn the call over to Kirk.

Thanks, Mark.

Good morning.

We're pleased to report today that after 18 months of declining core revenues, Cooper Industries is growing again.

It's been a long and painful recession, the deepest our Company has faced in over 50 years, but despite all the adversity and negative news, our 28,000 employees remain dedicated and worked extremely hard to allow our Company to emerge from this crisis more competitive and better positioned than at any time in our history.

It was just a year ago we were reporting revenues down 26% and earnings down 4%.

But today we're happy to report that our core revenues are up, and our margins are back to strong double-digit returns.

We have the best new product pipeline than at any time in our history, filled things with LED, smart grid, wireless communications.

We continue to add to our global footprint, expanding in places like Brazil, Turkey and continuing to invest in Korea, China, southeast Asia and the Middle East.

We have our best service rates in over 10 years.

Our factories are achieving record quality and safety levels.

We continue to hire engineering and marketing and sales resources.

And we maintain a balance sheet that allows us great flexibility to invest in our future while returning profits to our shareholders.

If you would now turn to page two of the exhibits, I'll comment more specifically on the second quarter.

Our total revenues were up 5.3%, $1.336 billion with our core of 4.8%.

In Energy and Safety Solutions, we were up 1%, and 1% at the core.

Electrical Products Group was up 7%, with the core up 6%; and our Tools had a terrific quarter, up 19% with the core up 17%.

We continue to improve our order rates.

Our overall book-to-bill was 106% for the quarter.

I'll break it out by segments in a minute.

Our operating margins were 13.7%, up 70 basis points from the first quarter and up very nicely over last year, 390 basis points.

So again, just modest volume increase on the adjusted cost basis generates very strong returns.

Our Energy and Safety Solutions business had margins of 16.9%, Electrical Products Group 14.8%, and Tools at 12.8%.

Our year-to-date cash flow of $223 million was very strong and puts us on track for our 10th consecutive year of free cash flow exceeding recurring income.

Tools Joint Venture is complete, and of course our new CFO is on board.

And so in less than a quarter Dave has accepted the offer, moved to Houston, attended all of our strategy sessions and now in a few minutes will report on our second quarter earnings results.

And I think this is a great reflection of Terry and the organization and the quality of the team that we have in our finance organization and certainly Dave's capability of stepping right into Terry's role.

So in summary, a solid quarter and a very weak sort of economic backdrop.

If you turn to page three, end market conditions becoming extremely difficult to predict.

But let me approach the end markets a little differently on this call, trying to give you a little bit more color by commenting on the conditions relative to our expectations from the beginning of the year, or our outlook meeting back in February.

The industrial or MRO business was certainly stronger in the second quarter, Bussmann tools, some B-Line and Crouse-Hinds showing some very strong growth and momentum.

Commercial was better.

The market's not down as bad as we expected due to remodeling and energy-efficient new products.

Utility is slower to recover, but continues to build a solid backlog and we expect that the market will recover as the economy improves, and residential was worse.

Retail and housing certainly backed up in the second quarter and now we expect the full year relatively flat, versus up 3% to 6% that we had forecasted.

And so the take-away on page three says it all.

It's a very choppy and uneven domestic market that moves quite a bit month to month.

The good news is there's continued strength in the emerging markets, which is about $800 million to $900 million of exposure for Cooper.

If you turn to page four, I'll comment now on the three business segments.

Energy and Safety Solutions, again which makes up Power Systems, Cooper Crouse-Hinds, and Cooper Safety which is the European platform.

As I mentioned last call in April, ESS is a mid to late cycle segment and it is consistent with our first quarter -- our sales were up less than Electrical Products Group, but the book-to-bill was stronger.

So our book-to-bill for this group was 109%, with the best performance at Cooper Power Systems at 115%.

We're very active globally on large gas, refinery, and chemical projects, and we held margins flat with the first quarter at 16.9%, but up very nicely over last year's 14.7% despite a very competitive transfer market and higher commodity prices versus last year.

We still remain confident about the long-term outlook for ESS, Energy Safety and Solutions, but a slower economic recovery, drilling moratorium in the Gulf Coast certainly give us reasons to be cautious.

On the Electrical Products Group, page five, again as I said in the first quarter, a much shorter cycle, more domestic segment of our electrical group, but they had a very solid second quarter.

Our core sales were with up 6% with strong performance across all the segments of our Bussmann business, electrical transportation, and electronics.

B-Line had solid single digit growth, and wiring devices, and lighting were flat to down low single digits.

Our book-to-bill remained positive in the quarter at 103%.

International remained strong.

Retail was essentially flat with some wins and losses, but again, still remain very cautious about the health of the US construction industry, with office vacancy rates at 17%, rents falling, and unemployment near 10%.

Margins and cash flow, Electrical Products Group were terrific.

The margins were up 250 basis points over last year and up 50 basis points over the first quarter.

Lastly, for our Tools Group, page six, I can't say enough positive about the way this team has performed amongst all the distractions around them for the last nine months.

The core sales at Tools were up 17% and we're seeing very strong demand in professional and power tools segments.

International business was strong, and our team did an excellent job leveraging the volume to get margins to 12.8%, up very nicely over the first quarter, 8.2%, and certainly well above last year's [ROS] of 2.1%.

Our joint venture with Danaher is now complete and off to a solid start.

Now let me turn the call over to Dave to provide you additional details on our Tools joint venture, the quarter, and update you on our full year guidance.

Thanks, Kirk and I'm certainly very glad to be here and reporting on my first quarter with Cooper.

Turning to slide seven, before I discuss the results of the quarter, I do want to provide you a further update on the Tools joint venture.

We announced the completion of the Tools joint venture on July 6th.

For the second quarter, you will see the continuation of the reporting for the Tools segment.

However, going forward, the JV will be deconsolidated and accounted for as equity investment.

Although the JV was technically completed early in our third quarter, as we previously had discussed, in the second quarter we were required to record a non-cash charge of $93.7 million or $0.55 per share related primarily to the recognition of cumulative translation losses.

We're certainly very excited to have this transaction completed and we continue to believe that there are substantial synergies and value creation potential for this business.

Going forward, our guidance will of course include the anticipated income impact from this investment.

So turning to the quarter on page eight.

Revenue for the second quarter was $1.3 billion, which is a 5.3% increase over the second quarter of 2009.

The core revenue increase was 4.8%, with acquisitions making up the difference.

The impact of FX was immaterial in total.

Price realization was again slightly negative in the quarter.

It was, however, less than 1%, which is a slight improvement from the first quarter.

So on a volume basis, sales were up over 6%.

In addition to solid reported results, we saw our backlog as Kirk mentioned continue to build with a book-to-bill at 106%.

Our industrial and MRO type businesses continue to show the most strength.

Our utility business was also positive, just not the same degree.

So similar to Q1, we're seeing strong demand in our tools, electronics, and Bussmann electrical businesses.

Sales outside the US were 39% of total sales.

The US continued to be weaker than our international markets, with the US up just under 4%.

International markets in total were up 7.5%, led by Latin America and Asia.

Western Europe was down 1%.

However, when adjusted for the FX impact, Western Europe was actually up 5%.

So we're certainly glad to see stability in the European region.

As shown in this morning's release, we reported on a GAAP basis $0.25 per share compared to $0.53 per share in last year's second quarter.

The $0.25 includes the non-cash charge we took as a result of the Tools JV.

Excluding this charge, fully diluted earnings per share were $0.80, which is a 51% increase over the second quarter of 2009.

So we're very pleased with the performance of our businesses, given the fact global markets are for the most part not providing a significant lift.

So this performance is a result of the solid execution of our teams as we remain focused on cost management, while continuing to invest in our strategic growth initiatives.

Turning to slide nine, gross margins increased almost 300 basis points to 33% in the second quarter, as compared to last year's second quarter.

We continue to have very good execution on productivity, and the realization of the prior cost actions.

Gross margins were impacted by slightly negative price realization.

However, the majority of our businesses have implemented price increases, some late in the quarter, some early in the third quarter, especially in those that are heavy steel content products.

So we expect going forward to have modestly positive price realization in the back half and maintain our strategy of offsetting net inflation with price.

This is assumed in our back half guidance.

Selling, general, and administrative expense for the quarter as a percent of sales was 19.1% compared to 19.6% in the prior year second quarter, 50 basis point decline, and again this does include the leveraging on volume, but also we continue to invest in our core initiatives.

General corporate expense was $21.3 million as compared to $21 million a year ago.

We expect general corporate expense to be similar for the third and fourth quarters, absent legal or other charges.

So turning to slide 10, excluding the Tools charge, operating earnings increased 46% to $183.1 million.

Our operating margin increased 390 basis points to 13.7% from 9.8% in the second quarter of 2009.

Slide 11, our net interest expense decreased $4.8 million from a year ago.

This is primarily as a result of the reduced debt balance.

Excluding the impact of the Tools charge, our effective income tax rate for the second quarter was 21.1% versus 17.8% for the second quarter of 2009.

Going forward, we expect the third quarter tax rate to be in the range of 18.5% to 19.5%, and the fourth quarter rate to be in the range of 14% to 15%.

These projections are subject to change based on the actual global distribution of income and other discrete factors.

Our second quarter continued income increased 52% to $135.3 million.

So turning to slide 12, from a segment standpoint, sales for the energy and safety segment or ESS increased 1% to $614.4 million, with currency negatively impacting sales by about 1%.

Acquisitions were a positive impact by about 1%, and price as I mentioned was a negative and reduced sales by about 1%.

This segment certainly could be classified as later cycle, and again we continue to gain momentum based on the book-to-bill performance, with a positive certainly in the quarter.

So on flattish sales, we were quite pleased with the operating margin improvement of 220 basis points to 16.9% level.

On slide 13, Electrical Products Group, segment sales increased 7% for the quarter.

Currency translation increased revenue by approximately 0.5%.

Pricing in this segment was also about 1% negative and there was no contribution from acquisitions.

This segment benefited from strong MRO demand and strong demand for electronics.

Electrical Products Group operating margin improved 250 basis points to 14.8% versus the second quarter of 2009.

This was again driven by productivity, new products, and a contribution from volume.

The Tools segment on page 14, Tools as Kirk mentioned had a very strong quarter, with sales increased 19%.

Currency was a positive of about 2%.

Pricing was flat for the quarter, so this is really a true story about true volume increases.

With the retail side of the business being flattish, there was strong demand on the industrial and professional sides of the business.

Certainly a big highlight for the segment was the improvement in operating margins from 2.1% a year ago to 12.8% for the second quarter of this year.

Turning our attention to cash flow, slide 15.

We continue to have a very solid cash performance.

The teams are very committed to improving working capital performance to offset the increase in working capital required as we begin experiencing top line growth.

During the second quarter, our free cash flow was $152.5 million, which brings our first half performance to $222.5 million.

I would add, this is our second best first half performance in our history and it's second only to last year's all-time record, which was driven by the liquidation of the balance sheet.

So again, very pleased with the performance from a cash standpoint.

Our balance sheet continues to be in great shape, with our debt to total capitalization net of cash at 14.2% at the end of the quarter, and this compares to 15.7% at the end of 2009 and 21.3% a year ago.

Looking at working capital a little bit finer on page 16, the teams again continued to be very focused on our working capital metrics to offset the use of cash resulting from growth.

Inventory decreased 6% from a year ago and the turns improved from 6.1 to 6.9.

With regard to accounts receivable, we were also successful in reducing our DSO by three days during the quarter.

Our payables increased by 14%, with our DPO increasing from 42 to 48 days.

All of this results in our working capital turns improving to 5.7 as compared to 4.8 a year ago.

Slide 17, capital expenditures were $15.3 million in the second quarter.

This compares to $27.2 million in the second quarter of 2009.

Some of the capital expenditures we're anticipating to occur in the first half have slipped into the second half.

A few of the more significant are facility expansions and facility acquisitions in the US, Asia, and Romania.

We continue to expect our full year CapEx will be in the $100 million to $110 million range.

In the second quarter of 2010, we purchased 1.4 million shares of our common stock and issued approximately 600,000 shares.

This means for the first half we have purchased 2 million shares and issued a total of 1.4 million.

In April, we purchased the assets Eka Systems, which provides us RF technology for our energy automation systems smart grid solutions portfolio, and this significantly expands our market capabilities.

With our balance sheet in great shape and with our consistent strong cash flow generation, we have tremendous flexibility to fund organic and acquisition growth, pay a competitive dividend, and continue to purchase our stock.

On page 18, new slide.

We wanted to walk from our prior guidance to our current guidance for the year.

So we've increased our full year guidance to $2.95 to $3.10 per share.

This chart summarizes the drivers of the increase.

The businesses are performing better than expected.

This, along with an improved tax rate forecast, increases our view for the year by $0.18 to $0.20 per share.

This would be across the three businesses and also include a better outlook for the Tools business.

We're expecting a negative impact from currency of approximately $0.04 per share when compared to our currency assumptions in the April guidance.

Additionally, we're seeing a negative impact in the back half of the year of approximately $0.10 related to purchase accounting, and certain restructuring activities for the Tools JV.

Again, this is offset partially by a better performance for that business.

We're showing the two separately.

On page 19, with [PT] as the backdrop, this summarizes our view of the third quarter full year.

For the third quarter we're forecasting revenues to increase 2% to 5% with both segments up in that same range.

Including the items highlighted on slide 18, we're projecting GAAP earnings per share to be in the range of $0.75 to $0.80 per share in the third quarter.

This guidance includes estimated contribution from the Tools JV of $0.05 to $0.07 per share.

At this point, I would add we're assuming a similar contribution from the Tools business in the fourth quarter as well.

For the year, we're forecasting revenue to increase 1% to 4%, and earnings per share including restructuring to increase 20% to 26% from the $2.95 to $3.10 range.

We're expecting, as Kirk mentioned, our full year free cash flow to be in excess of $500 million, and for 2010 to be the 10th year where free cash flow exceeds recurring income.

Now I'll turn the call back over to Kirk for concluding comments.

Great.

Thanks, Dave.

In summary, I think the teams delivered a very solid quarter.

We saw core growth for the first time in 18 months.

We had great earnings and free cash flow leverage off of that volume.

Our end markets are modestly improving.

The long cycle businesses are gaining momentum.

But again, we remain very cautious regarding the pace of the economic recovery.

Our portfolio is now 100% aligned around electrical with the closure of the Tools joint venture.

We're well positioned to capitalize on global trends and emerging technologies in energy efficiency, improved reliability, global infrastructure, and safety and protection.

And of course we have an exceptional balance sheet and great cash flow.

We're aggressively funding core investments in new products, globalization, and customer loyalty.

Our M&A pipeline is building, both from new platforms and geographies, and of course we're returning cash to our shareholders through dividends and continued repurchases in the open market.

With that, I'll turn the call back to Mark, and we'll take your questions.

Thanks, Kirk.

At this point, we'd like to open up the call for questions.

Operator, first question please.

(Operator Instructions).

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

Please proceed.

Hi.

Good -- I guess it's still morning there, guys, and afternoon here.

But I think this is our fifth or sixth straight conference call in a row.

So hopefully I'll ask the right -- I won't ask you about your backlog of post it notes or some question from the 3M call.

Can we talk a little bit about utility?

Because we're hearing some mixed signals on new spend.

Some of the utes are talking about picking up spend.

There's been a fair amount of storms in the Midwest.

It's been hot in the northeast.

Some aren't.

Maybe can break down a little bit between distribution side and the transmission side, and just talk a little bit to what you're seeing across the board there in more detail?

Yes.

I mean, I think everybody's got a different participation.

So let me try to give you a little more color.

Our backlog, as in the first quarter, is building nicely.

I mean, 115% book-to-bill in Power Systems is very good.

At this point last year, Scott, we were draining the backlog, so certainly feel very good about building it back up now at a pretty good rate.

The mix is a little bit different too.

The transformer business has been up, but a little harder for us to get pricing there, and with commodity prices we've seen a squeeze on the margins there.

The switch gear business and capacitor businesses are fine.

Building some backlog, and expect to have some growth in the back half of the year.

And the EAS smart grid business had actually negative sales in the quarter, but this happens from time to time, and the amount of quotation activity is way up.

So that's a spotty piece of the business that comes and goes.

Still very confident that there's some big orders and business out there for us to win, but for the quarter it was actually negative on shipments.

So still optimistic that there's going to be some good business and activity around that end of it.

The financial markets and access to capital for the utilities is fine, and most of the spend is not on new construction or new development.

It's on improving the reliability of the aging grid.

So that's where the money is being poured into.

Okay.

Can you talk sequentially pricing in transformers because that's -- I think your pricing, if I had to quantify it, I think I'm remembering it being down somewhere around 8% or 9%.

Is that -- it's weakening or -- ?

It's flat sequentially.

Transformer business, Scott, it's -- when you're low on volume, guys do some crazy things, and it's been just a little harder for us to pull price in that.

So I wouldn't say the second quarter got any worse.

About flat with the first quarter.

Okay.

And then just last question on energy efficiency.

You always highlight that as a positive.

Is there any way to quantify it?

I mean, I know it's somewhere a little bit less than 20% of your total business mix, but any way you can quantify within that core, up 6%, like how big of a driver energy efficiency itself is in electrical products?

Yes, Scott.

When you talk about the lighting energy efficient products, that was up double digits.

So that was a nice driver for us, nice offset for some of the new construction weakness.

Backlog built nicely in lighting as well, Scott.

We're up 30% plus to 35% plus in our backlog in our lighting business.

As I mentioned, we didn't see the dropoff.

I think there was more retrofit and energy efficiency demand in the lighting side going on than we would have anticipated from the beginning of the year.

I think the construction market is as ugly as we thought, but I think there's more churn on remodeling and stuff going on out there that is offsetting some of the lack of demand on construction, new construction.

Okay.

Thanks, guys.

Thanks, Scott.

Your next question comes from the line of Chris Glynn of Oppenheimer.

Please proceed.

Thanks.

Good afternoon, morning, and on the lighting, 35% backlog build, that's pretty striking.

What does that compare to?

Compare to -- that's from the first of the year.

I'm sorry, does that answer the question?

Yes, that's --

From the first of the year it's up over 35%, right.

Okay.

Just wondering about how you're viewing your overall visibility right now, given that the [ENS] segment underperformed your guidance in the quarter.

You got it back in EPG, but does that suggest that visibility is still a little wishy washy?

No.

I would say -- I don't think it was too far off of our expectations.

I would say that the utility side is still building backlog and we didn't see growth on the sale side.

So the sales side was essentially flat, and I think Chris now as you back into the back half of the year, as we said on the call in the first quarter, that you'll see now sales catch up.

Eventually got to ship that backlog of course.

The Crouse business is building momentum.

And what hit us in the first quarter is that safety business, which is all European.

So it's all pound and Euro, and so his volume was still pretty good and we're still growing in Europe.

But the FX at the end of the day took a chunk out of that.

And so no, I would say we are on track for the Energy and Safety Solutions business.

I think we feel good about it.

Okay.

That's helpful.

And then just an update on the acquisition outlook, prospects for deals within the year and alternatively maybe some acceleration of share repurchase if you're entertaining that?

The outlook on the M&A side is very good.

We've been adding resources into the businesses.

And so as you know, Chris, we build up the ideas in the pipeline from the businesses, so very active across the industrial and most all the businesses, the new platforms and such.

So seeing a lot of opportunities.

The bulk of them still range in that somewhere between $30 million to $150 million bolt-on purchase price, historic type of stuff you've seen out of us.

But we are also focused on some larger properties.

I've said this in the past.

Our balance sheet certainly warrants the ability to do that, and there's some larger things that we're looking at as well.

You're never certain on these things.

You've got to work the math and the personalities and all the discussions.

So nothing imminent, but that's where I'm spending a bulk of my time, since of course Neil came on early in the year and I gave Neil four of the businesses -- the Electrical Products Group, he's managing those day-to-day.

So I am spending more of my time, as is Tom and as is Dave, on some larger M&A.

Thanks, Kirk.

Thank you, Chris.

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

Please proceed.

Good morning.

Too many conference calls already.

That's good for us, bad for you, Eli.

We've been going crazy all day (inaudible).

Dave, can you explain the new tax, what's going on with the tax rate, what's driving it down, and what we should use for tax rate for 2011 for the tool business?

Is something else happening?

Not really related to the tool business.

There's a couple things you'll always have with us and many multi-national corporations.

The distribution of income can certainly move that tax rate around a bit, and that's really the story from the second quarter to the third quarter.

As we look out to the fourth quarter, we did give guidance for the tax rate for the fourth quarter based on our view, again, number one of the distribution of income.

But also our prediction or projection that there will be some discrete tax item benefits.

So that 14% to 15% versus 18.5% to 19% is really due to discrete items that at this point we wanted to put into the guidance given the fact we know that they're there.

2011, probably a little bit early, combination of things.

We've don't have our business plan done, so I can't answer the first question of distribution of income, and we're obviously watching what's going on around the world in terms of government actions on tax rates.

So a little premature to give you any kind of change from the view we have for this year.

Would it be -- would you expect it to be subject to something else happening back in the 18% to 19% range.

Yes, it's probably 20%, maybe a little bit higher.

Again, our hope is obviously that we see more growth in the US next year that will actually move our tax rate up a bit.

So assuming the US side of our business continues to grow, we'll probably be 20%, low 20s.

And Eli, this is Mark.

Like we said before, the incremental earnings, you put that in as sort of the 35% range.

So it fluctuates based on we had a big drop as the earnings dropped last year.

So as you model it out, the 35% is probably a good way to think about it.

Again, like Dave said, very early to start forecasting for 2011 on the tax rate.

Good way to think about it.

Technicality.

JV restructuring charges and purchase accounting, are there all going to be just this year?

Do we get them next year?

Are they ongoing?

The purchase accounting will all be this year.

Predominantly you'll see that third quarter, and there's an amortization of the inventory stepup, which is one of the more significant pieces.

We had a little bit of that in the fourth quarter.

Restructuringwise, what we have in there is what Dave identified as the initial.

And again, now that we're together, we can actively manage that business together with our JV partners and we talked about synergies being driven from that business and there may be further activities down the road.

But again, too early at this point to give you any prediction on that.

We certainly haven't gotten through all those plans with all the appropriate people, and you can assume that those are going to be paid for by the synergies that we drive.

So the purchase accounting goes away and the restructuring goes on depending on what [business] costs.

Right.

Details and stuff, working capital that you showed an improvement, financial improvement, [does include] the Tools business -- how does it change if you pull out the Tools business?

Not going to significantly change.

Improvement was across -- the improvement was across the board, all businesses, so I don't think it was -- the working capital improvement was not as heavily related to the Tools business.

Can you talk about -- going through the segment you talk about non-res not being as bad as it was, remodeling, looking at [civic].

Give me some color what's going on in non-res, particularly as we go into next year?

Starting to hear a little bit about project movement.

Can you talk about what's going on there?

Yes.

Well, of course this year is kind of what it is -- commercial down, office down, manufacturing, institutional all down.

Some of the forecasts that we see expect some low single digit growth next year.

Healthcare, schools, government, and infrastructure to be up.

So we're modestly optimistic.

Our vitality index in the business Eli is running about 32%.

So the LED wave is alive and well.

The lighting controls business is actually still seeing positive growth, double-digit growth.

It's off a relatively small base compared to the whole business.

And then we expect to see residential pick up sometime later this year or early next year.

It's been a little slow to develop.

It's been a couple steps forward and a couple steps back, but at some point you're going to come off of 400,000 starts and begin to rebuild on the residential side.

So it's not getting any worse.

It seems to have bottomed out.

But we're not forecasting any significant improvement either in residential or nonresidential in the back half of this year.

Thank you.

Your next question comes from the line of Julian Mitchell of Credit Suisse.

Please proceed.

Hi.

Thanks.

I had two questions.

One was on the pricing in your non-transformer business, the nonutility business overall, how do you see that moving over the balance of the year and how much easier is it to put in price increases there than in I think like transformers?

And then secondly, on the R&D growth, that's something that obviously you've been pushing out the last couple of years.

Could you talk a bit about the R&D spend in the first half and what you expect for this year?

Thanks.

On the pricing front, I would start off by saying it's never easy to get pricing in any product.

Something customers obviously don't like.

It's tough particularly in an environment where volume is down globally, pricing is not the easiest.

I would say the transformer pricing is probably worse than the fleet average by quite a bit.

But overall, I would say it varies.

We have some businesses that are as traditionally we do covering all of their material inflation with pricing.

We have some that have been heavy consumers of certain commodities like steel that are seeing increased inflation in the back half, so they've had to take some pretty dramatic actions.

We've had some price increases in the low -- or high single digits to low double digits in some business units.

So I think our feeling is that many of the businesses outside of the transformer will probably have better success.

Transformers we need to see a little more volume demand as Kirk mentioned to kind of stabilize that market and fill up factories a bit and maybe see the industry be a little more stable on the pricing side of things.

But more than, what, half the businesses went out in the second quarter.

Most of those increases went out late in the second quarter.

So we'll see how well we're able to pull the pricing increases.

Several of them went out end of June, July 1.

So pretty consistent across the board.

And as Dave mentioned, we had a little bit of a negative on the price material economics in the quarter, but expect that to turn positive again because of these actions that were taken late in the second quarter.

On the R&D side, this is typically the time of year that we're out doing the strategy sessions, Julian, and I would tell you that all of the businesses have peak vitality indexes.

In some of the businesses, we've added significant resources in the engineering organizations.

And so we are doing a better job on identifying through marketing and product management organizations and local products for local markets around the world.

It's not so much a huge step up in R&D spending.

I think it's a better alignment of the marketing, product management resources, redefining their roles and responsibilities, and again leveraging the engineering dollars and resources.

So we've come out of this downturn with a better set of new products across the board in all parts of the world, whether it has to do with the LED technology or wireless communications, really in all of our businesses.

And so I think we are set up very well for some significant core growth when these markets begin to expand again.

Okay.

Thanks.

Thanks.

Your next question comes from the line of Shawn Severson of ThinkEquity.

Wondering if you could give us some more color on the lighting side of the business and the retrofit.

Have you had to take any specific steps with your sales and distribution force to target that market and develop that market more than you would have in the past, maybe new construction focus historically.

Yes, you work with your agents and when we come out with the new product, the outdoor LED new product launch for example, we go on a road show and we go to all the different markets and teach them the economics, the payback, and how to sell the financials of the new lighting technology.

And it was very, very well received.

I think a lot of us in the industry know and see LEDs quite often, but the average person in the field doesn't really know and see the stuff.

So lighting architects, contractors, specifiers don't get a chance to necessarily travel to Peachtree City and see our development center, things like that.

So we put it on a road show and bring it to our customers and lighting agents.

I would say as well, it's definitely shaping somewhat our product development.

You think about a new build and the access one has to what you need to get into versus a retrofit and there are a lot of really exciting new products coming out of not only the lighting business, but others that are really headed for the retrofit market.

So it makes it easier for a contractor or DIYer to take out something that's less efficient and put in a more efficient product.

So definitely shaping the product development side as well.

Are you approaching it from a systems solutions standpoint, so that when you go into retrofit opportunities that you're selling a complete energy efficient solution ranging from LEDs, possibly or lead sensors, controls, any software that would be required, and you're presenting the ROI pitch to them?

Or are you still pretty much just selling components and cherry picking into that market?

No, it depends on the application.

But if you're selling to Federal Express or UPS, you're selling to the CFO to relamp all their distribution centers, millions of square feet from coast to coast.

If you're selling to a national account, whether it's a grocery store account or a retail account, you're mixing and matching aesthetics with energy efficiency again coast to coast.

In some applications, though, in an office building, you are selling the occupancy sensor solution with cosmetics.

One of the beauties of our package of course is not only do we have all the different venues, the indoor, the outdoor and all the different things, we have 20 plus different brands that are specified brands and we do the whole soup to nuts.

Whether it's recessed or it's a wall wash or it's entry level or it's outdoor parking lot, we can do the whole project.

So I think -- I've said it all along, that the change in LED source, whether it was incandescent many years ago, or if it was high pressure sodium -- all the times there's a change in the source, it tends to regentrify the entire lighting fixture industry.

And if you play this one smartly, the big lighting manufacturers are certainly in a great place to play this transformation from old technology, frankly, to just revolutionalizing the whole industry.

There's never been in a better time to be in the lighting side.

The construction market is what it is.

You're going to have to fight that.

Eventually when that comes out, you're selling higher price points.

You're selling occupancy sensors.

You're selling dimmers.

You're selling the software and the lighting controls, and that's why we made those acquisitions to get into that side of the business, because we do see those as very complementary to a solution sell.

And quickly on utilities, you said for smart grid component that quoting activity is picking up.

Is that large investor owned utilities or are these independents?

Just trying to figure out where some of that activity is coming from because certainly a lot of mixed signals from the big public utilities on anything related to smart grid.

I think at the end of the day that this whole stimulus money jammed up the whole process because there was all kinds of debates over who owned the IP and funding and physically was going to sign what kind of agreements and things like that.

Everything got jammed up there for a while.

We're seeing it on actually both sides.

This heat wave running across the Midwest this summer has certainly driven more quotations and more activity around this area.

I would say in both parts, both the publicly traded and small co-ops and munis as well.

Thank you.

The integration with Eka Systems is going real well.

I was out there last week, and I think the guys are off to a fine start.

We're integrating the Yukon system into the wireless technology of Eka Systems.

The teams have had a chance to get together and compare notes.

And now we're joint bidding projects that before we would just bid on the power line carrier technology.

And there may be a piece of RF.

Now we can bid the whole piece of it.

So that's going to -- I think that's going to work out to be a terrific complementary acquisition.

Seems like we've got a terrific talented group of people back in Maryland there.

Thank you.

Your next question comes from the line of Ajay Kejriwal of FBR Capital Markets.

Please proceed.

Thank you.

Hi.

Just on emerging markets, maybe if you can provide some numbers there.

I heard international was up 7.5% and you gave the Western European number up 5% on an organic basis, but emerging markets, decent exposure for you now, so any color there?

Up almost 10% on the core.

Developing markets across the Company up almost 10% overall.

China was strong double digits.

Southeast Asia, still strong.

Middle East has been sort of flat.

We had a big commercial business in Dubai and that's obviously taken a slower step back, but beginning to recover in some of the other areas down there.

And South America, is ticking back up with Mexico and some of our businesses across Brazil.

We're still relatively small in South America.

Mexico we always had a bigger piece, but all up nicely.

And that's been a very consistent -- that developing emerging markets has been very consistent quarter to quarter now for a couple quarters.

We're very encouraged and we're pouring more resources into that, of course.

Maybe a little more color on restructuring, looks like you're doing slightly more, at least since your third quarter guidance, $0.01 to $0.02 additional restructuring.

Maybe you could clarify how much of that's related to the Tools JV or is it just the rest of the business?

And maybe if you could remind us what's your full year restructuring expectation, has that changed versus last quarter?

On the slide, I think it was $0.18, where we walked through the guidance.

The $0.04 you see for the year, the $0.02 in the third quarter, $0.02 in the fourth quarter is exclusively related to the Tools JV.

Over and above that, there's not anything new.

We've not announced anything.

I think we said last quarter that what you see going forward is the normal kind of productivity activities, we're pushing productivity.

So having probably buried in our numbers, $0.01 to $0.02 every quarter that's related to productivity type restructuring.

I think our first quarter estimate was about $0.10 and I think we're still right in that range.

There's nothing new or additional.

Okay.

Thanks.

Your next question comes from the line of Jeff Sprague of Vertical Research Partners.

Please proceed.

Thanks.

Hello, everyone.

Most of the operational questions have been asked but, just one quick one on Bussmann, and then I've got a couple housekeeping things.

Kirk, to the extent that people deferred maintenance, how much of the catch-up there do you think has been reflected in Bussmann and maybe other businesses?

So a little bit different twist than just thinking about inventory refill, but in the context of maybe what was put on the shelf from a maintenance and repair basis and could possibly come back?

I think, Jeff, that it's just factory utilization.

If you don't run those auto factories, truck factories, machine shops, component factories and such, you just don't consume any fuses.

And as you saw just wild spikes in some of that output that you've actually been seeing from some of the peers and other people in the space over the last couple weeks here now, you can see what's going on in these huge volume increases on the industrial production side.

And so I don't think anybody has really picked up inventory.

We've been able to keep pace with the demands, but I don't think there's been any more inventory put into the channel and I don't think any of it was because of really deferred maintenance.

It was just idleization of existing factories.

So we feel pretty good.

The book-to-bill we keep close tabs on that business.

And in all three segments, the transportation segment, the electrical segment, and even electronics of course, all had a very strong quarter globally across the board.

Just so I'm clear on Tools and how to model it going forward, we'll see it as an equity income line.

Will that be after tax?

Will it show up in your P&L on a net of tax basis?

It will be pretax.

Pretax.

And does the fact that it's pretax in any way skew how we think about your tax rate now that you've got these Danaher related earnings in the mix?

Is there any peculiarity there?

No, it won't have an impact on overall tax rate.

At the beginning of the year, we'll still give you guidance and add the two electrical groups, and then we'll give you, Jeff, an equity income number for the Tools JV.

And then we'll update you quarterly on how we did -- even though we don't have day-to-day operating control, we'll update you on how we did with that equity income from the JV.

And the comment that -- I'm not sure I got it right, but the comment that there's $0.05 to $0.07 from Tools in the third quarter -- is that the operating contribution, net of the purchase accounting and other negatives that flow through it in the quarter?

Yes, that is correct.

Okay.

All right.

I think I'm good.

Thank you.

Thanks, Jeff.

Your next question comes from the line of Rich Kwas of Wells Fargo.

Please proceed.

Hi.

Good morning over there.

Kirk, could you just discuss about lighting, being the base lighting business excluding LED what you're seeing there?

Acuity talked about some pricing pressure there.

Phillips alluded to it.

What are you seeing on that front?

We had a good quarter.

We tend to focus more on incremental leverage and keeping some pricing discipline in the marketplace.

I think that that's one of the businesses that we are out with a price increase in the back half of the second quarter.

But the products business of course has gotten more competitive on the pricing side.

We see some competitors doing some tough things.

But overall, pretty good overall, margins still expanding on flattish to slightly negative volumes.

So I would say, again, that was one of the ones I put in -- probably did a little better than our original outlook from the beginning of the year.

Okay.

And then as we look at cash here, and building it, and I know you talked about potential larger acquisitions, but what are the thoughts on share repurchases at this point?

I mean, I know you did a little bit here in the second quarter, but how are you looking at this stock?

We did more than a little bit in the last three years.

We bought back 23 million to 24 million shares, I think our average price was $39.

So we're good there.

I think it -- we certainly will consider it.

We've done it.

We took up the dividend, Rich, as you know.

And we never cut it over the 2009 period, of course.

So it wasn't a restoration of an existing dividend.

It was actually an increase.

So -- but we're obviously pretty interested in growing internationally and finding more size and scale to get us around the world.

I think said in the last six months, we were tied up with the joint venture.

Very complicated deal.

You've got to do due diligence on each other.

You've got to separate it from the two businesses.

You've got to figure out all the compensation, pension, and management issues and all the things going on.

So our teams did a heck of a job and were fairly consumed with that.

Now that that's closed, of course, it allows us to go focus our resources elsewhere.

As you know, we tend to be pretty disciplined on what we'll pay.

We have a pretty good process now around the M&A side.

We've done over 30 deals in the last four or five years.

But we've got some terrific new technologies and platforms and if I could find something that's interesting that gets me deeper into a new technology or emerging technology that fits.

We're not looking for a new leg -- we've said that all along.

But we think the spaces we're in are huge.

We want to get bigger internationally so that's going to take some size and scale and we'll use the balance sheet to make acquisitions in some of those markets where we don't have a good footprint.

We're very consistent with that.

But we'll be patient.

We're not in any hurry to do anything.

We think we've got a terrific set of businesses lined up for a good year this year.

And we think we'll grow earnings nicely next year.

We'll see good core growth.

We've had very productive strategy sessions with our businesses.

They've all emerged like I said from this downturn with a better sense of where they want to play.

More international focus, more new products, better working capital characteristics, and better margins in a shorter period of time, given what we just went through.

So the cost work is more or less behind us.

A lots of the new product pipeline stuff is done, and we feel pretty good coming out of where we are right now with that balance sheet that we have behind us.

Last question, just -- you alluded to harsh and hazardous experiencing potentially experiencing a little bit of a hiccup related to the ban or potential ban on offshore drilling.

I mean, how long did you -- I know it's early and it's tough to predict, but how are you thinking about that right now, the potential impact as you look out the next 12 months?

Well, it was a slower first half than we would have hoped on the overall oil and gas side.

We see it both through B-Line, which is cable tray, and we see it of course through Crouse-Hinds.

The piece that we're happy about though is there's a lot of good project work going on globally, and there's some big projects going on in the Middle East.

There's some big projects going on in Australia -- these large steel products and things like that.

It's hard for us to quantify what's going to happen in the Gulf Coast, but of course we had lighting products and electrical products across all of those businesses.

That Pauluhn acquisition, that was in particular where they played is that offshore lighting platforms.

And so I read an article yesterday about not everybody has left there but hopefully they can resolve all those issues and kind of get back to some business as usual and make those investments and keep that moving forward.

It's hard to say, Rich.

If you look at our order rates at Crouse and at B-Line and you look at the amount of activity on these global projects, we're optimistic that we'll start seeing some pickup in the back half of the year again.

Okay.

Great.

Thanks so much.

Thanks, Rich.

Your next question comes from the line of Anthony Kure of KeyBanc.

Please proceed.

Hi, guys.

Just a couple questions.

Just want to clarify something on the top line guidance as we switch with Tools not being a piece of the picture any more from the top line perspective.

If I look at what your presentation was last quarter, it looks like Energy and Safety Solutions, the expectation for 2010 is a little bit better and then electrical products, electrical products is -- I'm sorry, electrical products is a little bit better and energy and safety a little worse.

And then excluding Tools, which was supposed to be the fast grower, it that what we're seeing on the top line as far as the reduction in the guidance, just the absence of the faster growing Tools?

Well, Tools took a bigger dip.

So it came back out of the trough a little quicker.

I would say that the utility business revenue growth has been slower to develop than we would have originally estimated but again, with the backlog building it will be a question of timing.

So we're booking the orders, and the question there will of timing.

I think we're cautiously optimistic about the ability on Crouse, and I would say the FX impact of the safety business -- don't forget, that ESS business is 50% international and the Electrical Products Group is only 20% international.

So you have a heavier headwind on the currency.

So I would say utilities slower to develop, currency a bigger headwind than we had anticipated in the first quarter would be the two biggest contributors to that conclusion that you drew.

But your numbers are correct.

And then just switching to transformers real quick, if you could just maybe size that, how big that's been traditionally for Cooper?

Obviously it probably fell off with the utilities falling off the last couple years.

How big is that traditionally?

About $300 million on $1 billion business, rough math, about 30% of that business.

Okay.

And how far is it down from, say, the peak?

Well it was actually up in the quarter, but down from the peak, Mark, we'd have to go back and look.

That would take us a couple minutes.

We can get back to you.

You could talk to Mark offline and get that number.

It's probably down, my guess would be down 25%.

It's probably gone down roughly $100 million, rough math.

I would say at least, yes.

Okay.

Thank you.

It was down -- the whole power business last year was down rough math 25%.

It was probably down in line with the rest of it, and it hasn't come back much.

It's stabilized to slightly up.

So I think that's a pretty close number, $100 million.

But Mark will check it and get back to you.

Okay.

Thank you guys.

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

Please proceed.

Lot of interest today.

You're hiding back there.

You're late in the queue.

Did you sleep in this morning?

No, just hear what everybody says.

Get off one call, on another.

You could have put me on earlier.

Margins were sideways in energy in the quarter.

I'm assuming that's a function of the Crouse business being slightly under pressure in the quarter.

Is that right?

That's my group, too, Bob.

It's embarrassing.

I almost got off the call with nobody noticing that, right.

16.9%, we peaked on those at around 19%.

I'd say more Power Systems, Bosch, on the transformer side.

It wasn't a Europe issue.

Europe margins were strong.

It was not a Crouse issue.

Crouse margins were strong.

It was a Power Systems issue and primarily on the transformer side of it.

Here's the point.

To get to your guidance, looks like margins in the third quarter have to go up 50 to 100 basis points.

Is that correct?

And how are you going to get there?

Our businesses by segment, the guidance implies relatively flat.

On top of that -- I did, as I mentioned, the price increases will have a positive impact, although very slight -- will go from less than 1% down to positive pricing.

Material costs will be up, but net-net we will have a small pick-up there.

But for the most part, that with productivity, there's not a significant change.

Well, okay.

So you're looking at your two remaining electrical businesses having margins in the third quarter consistent with the just reported?

Is that what you're saying?

Yes.

And Tools was earning around that $0.05 to $0.07.

You think about $0.70 in the first quarter, $0.80 in the third quarter, $0.80 in the second quarter, $0.80 in the third quarter, and $0.80 in the fourth quarter gets you to the $3.10, which is the high end of our guidance.

I'll get my slide rule out.

Your abacus.

Going back to Tools, does the $0.09 number in the third quarter reflect a Cooper revenue and margin equivalent to what you reported in the second quarter or better or worse?

No, I think it's -- the net number for Tools in the third quarter estimate was $0.05 to $0.07.

That's all in.

That's consistent with the performance of the third quarter, having taken out the restructuring charge, Bob, and the purchase accounting.

It's a net number.

What I'm getting at is you guys haven't talked about the synergies yet for the tools business.

I think Terry in the last call, when I said good-bye to him last quarter, you said I would hear him again.

I think he's in the background someplace.

He's working on something else today.

So we threw him out.

He's not even here today.

I guess the point would be is it time to talk about synergies in the Tools business?

Too early.

They just put it together.

You've got to give them some time.

There's additional restructuring around Tools, of course, Bob, stuff to combine different things that they've got.

I think they've had one Board meeting.

They're going to figure out how to put the sales teams together around the world, in our industrial power tools business with their China team.

They didn't have a big footprint in South America.

Getting our stuff into Sears, helping them get into some of our key accounts in Europe.

But I think it's very early, and again what we're assuming in our estimate for the back half of the year is sort of that $0.05 to $0.07 a share in the third quarter and in the fourth quarter the same thing, net of restructuring and purchase accounting and then they'll propose the budget to us and we'll get the synergies as we head into 2011.

And I think you'll see some good news out of 2011.

I think so too.

Thanks very much.

Great.

Thanks, Bob.

And there are no further questions.

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

Doheny for closing remarks.

Thank you for joining us today.

Please feel free to contact me with any follow-up questions that you may have.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.