伊頓 (ETN) 2010 Q3 法說會逐字稿

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

My name is Francine and I am your operator for today.

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

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

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

Mark Doheny.

Sir, you may proceed.

Thank you, operator.

Welcome to the Cooper Industries third 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 our presentation on our website that we will refer to throughout this call.

If you would like to view 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 of 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 financial measures.

To the extent that they have been anticipated, reconciliations of these measures to the most directly comparable GAAP measures are included in the press release and the web presentation.

Now, let me turn the call over to Kirk.

Great.

Thanks, Mark.

Good morning.

We're very pleased to be reporting today that we're building on the momentum we saw in the second quarter and that 2010 is shaping up to be a nice recovery year off a very challenging 2009 despite the fact that several of our end markets are still not recovering to anywhere near the 2008 levels.

I want to thank our over 28,000 employees worldwide for working so hard to satisfy our customers around the world and delivering such a strong quarter for our shareholders.

As we have discussed in the past, we continue to make the right long-term strategic investments while executing and delivering strong, predictable results quarter to quarter.

In the third quarter, we were also able to take advantage of the volatile markets and our strong balance sheet to repurchase 4.2 million shares of our own stock at just above $43 a share, which we believe is another efficient way to return capital to our long-term shareholders.

If you turn to page 2 of the exhibits now, I will comment specifically on the third quarter.

Our total Electrical revenues were up 8.2%, core was up 8.3%, Energy and Safety Solutions was up 7% with the core being up 8% and Electrical Products Group was up 9% with the core being up 9%.

If you turn now to page three for just a second, there is a pictorial, a graphic pictorial on just how nicely the year has progressed on the revenue side.

The first quarter was negative, second quarter up 3.3%, third quarter, as we just reported, up 8.3% at the core, our best core growth rate in nearly three years.

And if you just skip down to page 16 you can see our outlook for the fourth quarter between 7% and 10%, so a nice continuation on that trend.

Turning back to page 2, our earnings per share were $0.85, up 25% from last year, and our total operating margins were 15.4%, up 210 basis points from an adjusted third quarter 2009, excluding the tools.

Energy and Safety Solutions operating margin was 16.9%, up 30 basis points from last year, and Electrical Products' operating margins were at 16.1%, up 270 basis points from last year.

As a total Company, we levered 33% on incremental revenues, inclusive of acquisitions and restructuring.

Year-to-date, our free cash flow was $335 million, and we are on track for our tenth consecutive year where our free cash flow would exceed recurring income.

And the Tools equity earnings were $10.5 million, or $0.05 a share, at the low end of our guidance of $0.05 to $0.10 a share due to some additional restructuring charges, but the JV is off to a very solid start.

We're very pleased.

In all, a very solid performance in a very challenging macroeconomic environment.

If you turn to page four, I will talk a little about the end market conditions as they improve a little bit better than maybe we had expected.

Industrial MRO remains strong.

Industrial production, ISM, factory utilization continued to be strong with particular strength overseas in Asia, Mexico, and South America.

The commercial markets are flattening out, helped by strong demand in energy efficient products using LED and advanced fluorescent technology.

Utility markets are finally showing some life after they were faced with long hot summer, depleted inventories and a continued aged infrastructure.

Residential continues to remain depressed as the country works through foreclosures, abundant inventory and high unemployment.

In summary, we believe the worst is over, global industrial recovery is leading the way, utilities will be up double digits in the back half of this year, technology and energy efficiency is driving demand to offset weak new commercial construction, and we think there will be a housing recovery beginning in the second half of 2011.

If you turn to page five now, I will comment on our two specific business segments.

First, Energy and Safety Solutions, which is Power Systems, Crouse-Hinds and Safety, our European platform.

As we have mentioned in the past, these our later cycle businesses with about 50% of their sales outside of the US.

Our backlog for this segment is now up 38% since the first of the year, driven mostly by Cooper Power Systems and Cooper Crouse-Heinz.

The Power Systems book-to-bill in the quarter was 110%.

We delivered high single-digit to low double-digit core growth in all three businesses and so the recovery was broad based and we believe will carry into next year.

Overseas activities remain strong and the margins remain strong at 16.9%, with positive volume being offset by higher commodity prices, restructuring charges, a little bit more on the SG&A investment, and mix.

We are becoming more comfortable in our outlook for ESS as spending at the utilities improves, large global oil and gas projects get released and the European markets stabilize.

Turning to page six, electrical products highlights.

Again, shorter cycle, a bit more domestic, but they had another solid quarter with core up 9%.

Industrial production MRO and electronics drove strong growth within all businesses units of Bussmann and double-digit growth at B-Line.

Energy retrofits allowed our nonresidential construction business to remain flat with orders up single mid-digits.

International growth was strong and solid productivity and cost controls provided offsets to higher material costs while allowing margins to expand both sequentially and year-over-year to 16.1%.

We're very pleased at our market breadth, investments in new technology and international expansion have all combined to allow to us to drive strong core growth despite continued softness in new construction in both residential and nonresidential markets.

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

Thanks, Kirk.

Before I cover the quarter, I should mention that many of the slides have been adjusted to exclude the Tools business from the prior year numbers for comparability purposes.

We have noted that on the impacted slides.

So, turning to slide seven, revenue for the third quarter was $1.24 billion, which is an 8.2% increase over the third quarter of 2009.

The core revenue increase was 8.3%, which as Kirk mentioned, is the highest core revenue growth in almost three years.

Revenue decreased 0.9% as a result of impact of currency translation, but acquisitions increased sales in total by 0.8%.

As we did forecast and talked about on our second quarter call, pricing did turn from negative in the first two quarters to positive in the third quarter.

Prices just under 1% positive overall.

Transformer pricing, which we have spent some time talking about, also turned positive for the quarter on a year-over-year basis and went from negative to positive sequentially.

Overall, the net price inflation had a slightly negative impact, still, on our margins as year-over-year inflation worsened.

We expected this to be close to neutral, but we saw the prices of certain commodities accelerate during the quarter, and I think copper is probably the prime example.

But on a year-to-date basis, the price inflation gap is still slightly favorable.

In addition to solid reported results, we saw our backlog continue to build as our total book-to-bill was at 102% with the utility business showing the most strength in orders with 110% book-to-bill.

Sales outside the US were 38% of total sales and if you look at the core breakdown, US core sales increased 7% and the international core revenue was up 10.3% which was led by growth in Latin America.

With respect to western Europe, western Europe was down 3.3% on a US dollar basis.

However, adjusted for currency, so on a local currency basis western Europe was up 4.7%.

As shown in this morning's release, we reported $0.85 in earnings per share from continuing operations compared to $0.68 per share in last year's third quarter, which is a 25% increase on an 8% sales increase, so very, very pleased with the total results.

Turning to slide eight, gross margins increased 140 basis points to 33.8% in the third quarter compared to last year's third quarter.

We continue to have very good execution on productivity and the realization of prior cost actions which more than offset the slight drag from the net of price and inflation.

Selling, general and administrative expense for the quarter as a percent of sales was 19.1% compared to 19.2% in the prior year third quarter, a 10 basis points decline.

We continue to be very focused on SG&A cost controls, but at the same time, we're continuing to invest in strategic growth opportunities, particularly in engineering and commercial resources for our global expansion.

Corporate expense was $22.9 million as compared to $21.5 million a year ago, and we expect general corporate expense to be very similar to the -- in the fourth quarter as it was in the third quarter.

Turning to slide nine, operating earnings increased 26% to $191.4 million.

Our operating margin increased 210 basis points to 15.4% from the adjusted third quarter 2009 operating margin of 13.3%.

Continuing onto slide 10, our net interest expense for the quarter decreased $3.6 million from a year ago, and that's primarily as a result of the reduced net debt balance.

Our effective income tax rate for the third quarter was 20.9% versus 16.2% a year ago.

The 20.9% is above our guidance range of 18.5% to 19.5%, and this is really a result of the higher income level and to some degree, the global distribution of income.

Our expectation for the fourth quarter is for the tax rate to be in the range of 15% to 16%.

That projection is certainly subject to changes based on the actual global distribution income and other discrete items.

Our third quarter continuing income increased 24% to $141.7 million.

A little more color on the segments as we turn to slide 11.

From a segment standpoint, sales for the Energy and Safety Segment, or ESS, increased 7.2% to $655.7 million with currency negatively impacting sales by 1.8% and acquisitions positively impacting sales by 1.5%, and it was very good to see this segment start to show the nice growth that we have talked about as these are the later cycle businesses that is we have expected -- have been expecting to turn the corner.

The segment operating margin increased 30 basis points to 16.9%.

That number does, however, include about $5 million of what I would say is somewhat other than ordinary costs, the majority of which was related to some restructuring in that group, plus some unfavorable mix impact.

Looking at the Electrical Products Group, or EPG group, on slide 12, segment sales increased 9.3% for the quarter, currency impacted sales actually increased revenue by 0.2%, and there was no acquisition contribution.

This segment, as Kirk mentioned, continues to benefit from strong MRO demand and strong demand for electronics.

The Electrical Products Group operating margin improved 270 basis points to 16.1% versus the third quarter of 2009, and this was driven by productivity, new products and the impact of the higher volume level.

We don't have a slide today in here on the deck on Tools, but I would mention that the tools business was basically in line with the expectations, although albeit on the lower end.

Sales were up nicely there, up over 20%, and we saw nice margin improvement as well.

I would mention those sales were strong across most of the geographies and most of their channels So again, as Kirk mentioned, very pleased with where the tools joint venture is heading right now.

On slide 13, I'll touch on cash flow and debt.

Continue to have very solid cash performance.

I would say the teams are very committed to improving working capital performance to offset the increase in working capital required as we continue to see top line growth.

During the third quarter, our free cash flow was $112 million, which brings the year-to-date performance to $334.5 million.

Our balance sheet is in great shape with our debt -- net debt to total capitalization at 17.4% at the end of the quarter.

This is a slight increase from the second quarter, and that increase is really due to the impact of accelerated share buyback during the third quarter.

On slide 14 I will touch further on working capital.

As I mentioned, the teams are very focused on the actual performance metrics as we know that certainly growth will put a pressure on working capital investment.

We were able to increase inventory turns from 6.9 to 7.1.

With regard to accounts receivable, we did reduce the DSO level by one day during the quarter, and DPO remained flat at 46 days.

All of this results in our operating working capital turns improving to 5.8 turns compared to 5.4 in the third quarter of last year.

So, we're very happy with the improvement we have made this year as volume is returned but still believe there is significant opportunities and working capital for us over the long run.

On slide 15, our capital expenditures were $27.7 million in the third quarter of 2010 compared to $14.9 million in the third quarter of 2009.

We have talked about some of the larger projects we have had and in those larger projects have made our spending a little bit more lumpy than usual, as we saw this quarter, and some of that spending may well now roll into next year.

So, with the third quarter results and our fourth quarter expectations, we're adjusting our full year CapEx to a range of $85 million to $95 million for this year.

In the third quarter of 2010 we purchased approximately 4.2 million in shares of our common stock.

This means year-to-date we have purchased 6.2 million shares and issued a total of 1.6 million shares.

Obviously, this third quarter activity was a substantial increase over where we were the first two quarters of the year.

We believe we pay a competitive dividend so we see this buyback as a way to return cash to shareholders and do so -- in doing so without impinging on our ability to fund our growth initiatives.

So our balance sheet is in great shape, and with our consistent strong cash flow, we believe we have tremendous flexibility to fund organic and acquisition growth, pay a competitive dividend and continue to repurchase our common stock.

We'll turn to slide 16 and the outlook for the fourth quarter and for the full year.

For the fourth quarter, we are forecasting revenues to increase 7% to 10% with the ESS segment up 9% to 12%, reflecting the increasing demand in the utility businesses and the EPG segment up 5% to 8%.

Within that performance is the normal seasonal slowdowns that is we experienced within certain businesses.

This forecast includes a negative impact from currency that we're estimating to be about 2% and a 0.6% favorable impact from acquisitions for core revenue growth of almost 10% at the midpoint.

We are projecting GAAP earnings per share to be in the range of $0.80 to $0.84 per share in the fourth quarter, and this compares to a reported number in the fourth quarter of 2009 of $0.76.

So, taking a minute to dissect that a little bit further, if you look back at last year, last year's quarterly report, there was about $0.04 of one-time special favorable items last year, so an adjusted number of $0.72.

So, that's the -- probably the appropriate starting point.

Also this year there will be about $0.01 additional restructuring as we have announced a couple of more facility rationalizations that will be starting in the fourth quarter.

And on top of that, I guess from a business performance standpoint, we're obviously pleased with the net from the business performance, but that's muted a little bit as we're -- our businesses are planning to reduce inventory in the fourth quarter, and that will impact our earnings by approximately $0.03 based on our current estimate.

Also, should mention we're assuming a similar contribution from the Tools JV in the fourth quarter as we recorded in the third quarter.

So, that brings to us the full year.

We're forecasting revenue to increase approximate 3% to 5% and earnings per share, including restructuring, to be in the $3.14 to $3.18 range, which excludes the loss we recognized in the Tools business formation, so that's almost a 30% adjusted increase.

We still expect free cash flow to be in excess of $500 million for the year and this will be the tenth year where free cash flow exceeds recurring income.

Now, I will turn call back over to Kirk for concluding comments.

Great, Dave.

Thanks.

Normally at this point we'd give you a preliminary outlook for 2011, page 17.

We remain very positive.

We are incredibly well positioned to participate in continued slow but stable recovery in most of our end markets.

We believe industrial stays strong, better outlook for oil and gas and with factory utilization modestly improving to the 75% to 78% range.

Utility grows nicely as our backlog is up and customers return to more normal demand patterns.

Commercial construction flattens out and begins to see a recovery in late 2011, but remodeling energy efficiency demand continues to grow and generates net positive growth for the segment.

Residential improves modestly off very depressed 2009/2010 levels.

International continues to be a very exciting opportunity.

China, Korea, southeast Asia all strong, Australia can double for us.

The Middle East, Qatar, Abu Dhabi, Saudi very active, Mexico up double-digits, South America we're under-penetrated.

And new markets such as Turkey, Russia and Africa offer us new exciting opportunities.

On the right side of page 17, we addressed the earnings levers.

We believe, again, we're well positioned to continue to deliver strong earnings leverage.

Our cost structure via our productivity programs and restructuring are in terrific shape.

Price material economics should offset one another.

Our tax rate is a modest headwind offset by lower share count and as you'd expect, we have been conservative with regard to our pension assumptions and expect no material impact in 2011.

Net-net with mid to upper single-digit core growth, we can leverage nicely at the strong double-digit earnings per share growth for 2011.

If you just turn to page 18 now, I will quickly summarize the quarter before we open it up for your questions.

Again, the best core growth rate in nearly three years with our end markets recovering, the portfolio in great shape with utility upgrades now flowing through, energy conservation and alternative energy demand picking up, emerging market infrastructure being a great opportunity for us and of course, the play around safety protection of people, plant and equipment.

We have an outstanding set of new product pipelines across the board, our highest vitality index in our Company's history at nearly 20% and hence, our investments over the cycle have been paying off.

And again, our productivity and cost structure are well aligned and showing terrific earnings leverage particularly this year with 5% top line earnings per share up nearly 30%.

And again, our tenth great year of cash flow and funding the core, the dividend, the buyback and M&A.

We have now five full time business development leaders in seven of our divisions and seeing terrific opportunities across the board.

And we have had a successful transition with the CFO, Terry and Dave have been working closely together the last six months, and we will announce now that Tom is contemplating the same sort of arrangement as Terry did with reducing his day-to-day work load beginning probably in the first quarter of 2011.

Tom will continue to serve us on the Tools JV and work on some special assignments into 2011.

Great portfolio with strong business model developing exceptional results for years to come.

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

Thanks, Kirk.

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

Operator, first question, please.

Thank you, sir.

(Operator Instructions) Our first question from the line of Scott Davis from Morgan Stanley.

Hi.

Good afternoon, guys.

Hey, Scott.

I guess it is morning there.

Since you mentioned it, Tom is cutting his responsibilities a bit.

I think that leads into a great question on M&A.

Obviously, you bought your shares back really nicely, but some of your peers are saying that it is a robust M&A environment, and maybe we can get your sense of whether you feel it is equivalently robust and equivalently interesting as maybe some of your peers are saying.

I think it is.

As we have found, as we put these business development leaders, and I think most of you know by now that our M&A opportunities really emanate from the divisions and their strategy sessions.

We go out and we look at these adjacencies and we look at the emerging faster growth platforms that we have pointed out and as you look around the world and all of these different pieces, there is a endless opportunity -- of potential opportunities for us out there, and it all comes down to pricing and availability and things like that.

But over the last several months, we have been very active, we have a very robust deal flow.

None of them at this point exceptionally large, but more back in our typical wheel house $50 million to $150 million purchased price type of size.

And most of them geographic in nature, giving us broader international scope and most of them, of course, high technology component and high specification component to them, and most all of those are bolt-on fitted to the existing high growth platforms that we've got.

Okay.

My follow-on question is just on transformers, and I was intrigued when you said that prices have turned kind of positive from obviously low levels.

But is that improvement or bottoming in pricing driven by demand?

Is it driven by anything else?

Can you talk a little bit about that market?

Probably a combination of two things.

Number one, they really fell under some severe price pressure a year ago, so I guess in some ways it is somewhat of an easier comp.

But the demand, as we have said, for transformers has been very strong, so I do think that that is driving some of this.And I would say the team has been very good at trying to dig deep on the opportunities and make the best business decisions, so I think there is part of it, probably the third factor of them better managing the business that they're going after.

So I would say all three of those items.

Okay.

But I can't help to ask a question like where is demand necessarily coming from?

Are we -- is it just the stuff is breaking?

I don't remember there being much of a seasonal storm season to write home about --

What happened, Scott is they took down inventories hard in '09 and beginning of 2010, so they're replacing the inventory in the yard.

The second thing is you had an excessively hot summer, and that generates more load on these transformers and third, you have just the underlining average age of the transformer out there 30 years.

So, you have got your normal MRO demand cycle coming back.

We knew this would come back.

They couldn't hold the buying patterns at those historic -- at such a significant level below those historic rates, so not a huge surprise.

It probably took a little longer than we expected to come back, frankly, but it is kind of coming back to these normal levels.

That's where it is coming from, though.

It is encouraging.

Thank you.

Good.

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

Yes, thanks.

I had a couple of questions, please.

The first one is if you could give, just going back to transformers, how roughly versus the prior peak how far off those profits are this year, just a very rough number would be great.

And then secondly, if we think about the value gap and the movement of input costs, obviously, transformers historically always are very sensitive to those, what kind of planning assumption you have for next year on your value gap versus 2010, like I guess for the company overall?

Thanks.

So, let me try to answer the transformer question.

You're just beginning to see he -- we have been talking about the book-to-bill at Power Systems for the first two quarters of the year being very strong.

You're just now beginning to see the volume flow out, so we had just about double digit sales up for Power Systems.

And again, the book-to-bill still at the 110%, so that's very good news.

I mentioned that the backlog of power systems is up nearly 40%, 35% to 40%.

So, as -- the margins will recover as you get volume, that's one of our fixed cost businesses, heavier fixed cost businesses.

So, we are about 300 basis points off the peak margins, and so I think the state of the possible is for that business as a double-digit growth top line next year.

And certainly ,that's a place that we would expect to see significant margin expansion as we layout and get with them to do the budget for next year.

So, I think to your point that that's where we'd look to see significant margin expansion, and that has a huge bearing on that Energy and Safety Group as a whole, because it is so large.

It is a billion dollar business for us.

Did you have anything to add to that, Dave?

No .

Thank you, sir.

Our next question comes from the line of Deane Dray from Citi.

Good day, everybody.

If we could stay in the utility side for a moment, it is very interesting to hear your comment, Kirk, that you are expecting the back end of this year is at an exit rate for double-digits in utility.

And I know you're skewed more to the distribution side, but I also can't help but notice that 2011 arrow goes straight up for utilities.

So, it just begs the question, talk more about what kind of upgrades you're seeing.

Is that smart grid?

Is it Canon?

And how do you see yourself positioned?

Yes, we talked about the EAS business being a little soft in the second quarter, and now you turn right back around and see order rates up 30% in that piece of the business.

And so with order rates up like that, of course you have a little bit of a delay from when you ship it, so that bodes well for next year.

The switch gear business, the transformer business, some of those different pieces that are higher margin for us are strong.

The backlog has been building, and the international, Deane, has seen its backlog and order rates increase at the same rate.

So, the investments we've made across in China and Mexico and places like that are paying dividends, so really strong across the board.

Of course, the smart grid stuff comes and goes but exceptionally strong there.

We have good margins there, so all good news.

Again, with the sales up 10% and the book-to-bill at 110% still, that would bode very well for next year.

Because that takes about six months for us to realize and start bleeding into that backlog, so we're thinking that we could certainly see a double-digit top line in utility for next year.

Great, and then just to follow up on the guidance for the fourth quarter.

If I understood it correctly, there is an incremental $0.01 of additional restructuring that was already in there, so what total restructuring is being done in the fourth quarter,and where are you directing those at this time?

In total, there is about 6 million across the Company.

The largest single project actually comes out of the Power Systems group, they announced, I guess now about three weeks ago that they plan to close a facility and transition that production to other existing facilities.

So, about half of that, or a little over half of that is one facility and a new closure.

Remainder are ongoing or existing restructuring efforts that we have begun that will be proceeding on further this quarter.

What kind of payback are you seeing on those initiatives?

They vary across the board.

I think the Company -- get a lot of credit for the over 10 facilities closed in '09.

Many of those had very quick paybacks.

I would say these are all acceptable, they're, I would say anywhere from a year to maybe worst case, three years in terms of things we're pursuing right now.

Great, thank you.

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

Yes, thanks.

I guess you answered the question I had in mind going along here, the increased comfort level and energy systems, I guess is the attributable to the utility and the intelligent grid.

Is that basically the answer to that question?

Yes, but also Bob, the oil and gas side, on our industrial, our exposure in industrial tends to be heavier oil and gas.

We don't do the drills or directly, but that whole Crouse-Heinz business is heavily exposed, and a big piece of that safety business over in Europe, the MEDC piece of it which is the signals and controls and things are weighted in there as well, so it was a bit muted.

If you look at other suppliers of equipment to energy, there has been a lot of EPC work being done, and now those orders are beginning to come through.

Middle East is very active, southeast Asia is getting active, Australia is active, so we think there is going to be more releases of those projects, so Crouse is a piece of it.

Safety will be a piece of it and then of course, utility up will be a piece of it, so we're feeling pretty good about it in its entirety.

Thanks for the clarification.

You said one other thing I would like to clarify, you said the non-res was flattening but that orders are up.

Did I hear that correctly, and in what context did you mean?

Yes.

So, let me explain it to you.

When I said this year, we're surprised this year.

We know the market is down maybe double-digits, construction, new projects, but the retrofit piece of it has been able to bring it back and offset whatever new construction we're missing with the retrofit.

What I am saying for next year is I think the market is flat to up a couple percent on construction, and then the incremental of the energy efficiency actually brings it up to maybe even mid-single digit kind of growth for us in non-res markets, so that feels better on a year-over-year comp just because the market is not necessarily going down and we still get the kiss from efficiency.

Got that, so that leads me to my last question, which is how should we think in terms of the 2011 guidance?

You talk about the top line mid to upper single-digit top line levered to double-digit earnings growth.

What are some of the puts and takes that would define whether that double-digit is 10% or 20%?

Well, we'll go out and do a detailed bottoms up as you'd expect us to do before we take a swag at that.

But no, I think the overall, the cost structure, Bob, the Company is in terrific shape.

We would like to certainly get back to sort of peak kind of earnings per share types of numbers in our plan, and we've got to go out and do the details, and this will take us a couple of months to roll through it.

Share count is in great shape.

Pension is in great shape.

So, I don't see anything that would be unusual.

Price material, we ought to be able to kind of get back and capture some of that.

You're seeing a heavier inflation on some of these material prices than we probably saw in the past, so that's been a little slippery.

If the world economies get a lot better quickly, you can still see upward pressure on steel, copper and aluminum, so we'll have to fight that one.

But I think as Dave and I sit here and talk to the team, we feel we're in pretty good shape.

There is not a lot of unusual things.

I think my focus and the team's focus right now is almost purely on growth.

It is international growth, it is new products to the market, and it is M&A.

That's where we're spending 70% of our time.

The -- I guess with the volume growth at mid to upper single-digit, I would expect pretty good contribution margin, pretty good fall through from that kind of top line growth.

Would that be the right way to look at it?

I am with you.

I will tell the troops that we're together on this one, Bob.

No, I think if you look at our historics, 20% to 25% would be sort of normal for us.

I think that's fair.

Again, we haven't done detailed math yet, but I wouldn't expect anything less than 20% to 25% incremental.

My model says better than that.

Okay, that's my last question.

I figured it did.

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

Depending on where you are today.

Nice quarter.

Very quickly, one clarification.

What's the tax rate for the fourth quarter for this year and next year?

I missed that.

I think you indicated.

For the fourth quarter of this year, we said 15% to 16% and unfortunately, we're a little bit away from giving you next year.

We're actually rolling out the plan in the next couple of weeks, but my -- just directionally, I would tell you very likely you will see a slight increase in the effective tax rate.

Again, I think we've mentioned before the inversion benefit we have is kind of a fixed number, so a way to look at that would be to take this year's number as your base and take incremental pre-tax and kind of tax that at like a 35%, 36% rate, so that will move your effective rate up a bit, and I think that will get you through until we're able to give you a more refined view.

Book-to-bill for the both sectors, I know you gave utility number and you gave, the whole company was 102%, utilities were 110%, you gave the book-to-bill for each of the two major segments.

Eli, it is 104% for the ESS segment, and it was I think right at 100% for the EPG segment.

When you look at EPG, you had a big margin improvement in the quarter, and volume in the fourth quarter, based on your guidance going to be a little bit lower than the third quarter or so, but probably more comparable to the second quarter.

Can you hold this level of margins or near it, or do we begin to fall back down?

You had a big -- you were 15% last year in the quarter, if I remember correctly, you are at 16.1%.

And are we somewhere in between or could we hold close to 16% in the fourth quarter?

No, we'll see that actually pull back a little bit based on our view right now, and a couple of things, again, I mentioned there is some normal seasonality impacting some of the businesses.

So, we get a little bit of one of our higher margin businesses more affected by that than some of the others.

And then as I mentioned overall for the Company but true in that group, they are also pushing hard to reduce inventories, so there will be a little bit of an absorption hit as they're successful in reducing inventory, so we'll see that number pull back from the 16.1% a bit.

I guess my real question is why are we taking down that inventory that much?

Where is the problem?

What's going on that you want to bring inventories down at this point?

I wouldn't say it is a problem.

I think you have seen it the team has done a nice job improving their inventory performance whether measured in days or turns, but it is not good enough.

Hopefully, you know our culture well enough to know that we're constantly trying to come up with more efficient ways.

One good example, we're really pushing hard on rolling lean through our manufacturing distribution facilities, and one of the paybacks for that and certainly one of the results is reducing throughput times and reducing inventory on the floor and reducing finished stock.

So, it is not as much addressing a problem.

It is more about trying to improve our effectiveness when it comes to working capital deployment.

As far as when we talk about improvement in next year, because utility looks like it is that strong, seems like the incremental margins on ESS next year will be somewhat below what you might have expected because of that mix?

Shouldn't be.

Should be fairly consistent.

Yes.

Thank you.

Our next question comes from the line of Terry Darling from Goldman Sachs.

Thanks, good afternoon, everyone.

Hello, Terry.

Hello Kirk, I'm wondering if you could talk a little bit about what you're seeing in the utility automation space.

There have been delays in some of the smart grid activities and wondering where that business is on track from a growth rate versus some of the numbers you talked about earlier on in the year and how you're thinking about that for 2011?

It is a good question.

As I mentioned, some of these orders and these jobs that you win are a bit spotty.

It is nice to see the order rate up 30% in the third quarter.

We' expect strong double-digit growth next year.

As we mentioned before, we bought that business called Eka which gave us the wireless solution on the AMI.

We had the power line carrier piece it, and I think that group is coming together nicely.

When you buy three, four businesses and try to merge them together, there is cultural integration and marketing and sales integration and SAP integration and all of those kinds of things.

But I would say we're in terrific shape there.

We've got them selling alongside our components business.

The other important ingredient there is that we are now baking in a lot of those features and functionality into our core apparatus, so our smart grid solution on switch gear and things like that are beginning to get traction in the market.

We have got new products coming to market, so all very positive.

Certainly expect very strong double-digit growth on that business and holding margins where they have historically been.

20% plus EBITDA margins on a software business for us is certainly normal.

And, Kirk, the growth in 2010, where is that trajectory, just calibrate the 2011 comment?

I don't have it in front of me.

I'm going to let Mark pull that up.

Slow in the first half, probably a lot stronger in the second half, but I don't know where it nets out though, Terry.

So in terms of the rate of change 2010 versus 2011 sounds --

Very good, because your order rates pick up, almost like the whole business did, right?

We had good strong orders, book-to-bill in the first half with slow sales, and then as we sort of forecasted that the sales would pick up, and now you saw double-digit shipments in the third and you'll see double-digit sales out of Power Systems in the fourth.

And because of that backlog and the continuation on the book-to-bill, that will carry at least into the first six months and probably into the full year in 2011, so that's why we're fairly confident that Power Systems will be up double-digit next year.

Okay .

And then around the book-to-bill comment, 1.02 for the company, 1.1 for utility, you mentioned EPG around 1.

What's running below 1 on the book-to-bill at this

Just about nothing.

The short cycle businesses, that book-to-bill at 1, when your core growth is up 9%, they are short cycle.

They book it and ship pretty much in the same month.

Your wiring device business, a lot of your lighting business that's traditional business, your Bussmann business is almost entirely MRO.

So, that's fairly typical to see those businesses at a sort of 1 to 1 book-to-bill, but there is nobody that was below the 1 to 1, and that's again, very good in an environment where your core was up 8% and 9%.

Okay, and then just lastly on the 2011 outlook, wondering if you could update us on your thoughts on the tools joint venture, both from kind of where you think the organic numbers are looking as well as now that you're into a little bit more, maybe some upside from the synergies that you have been talking about?

Yes, look, as Dave mentioned, they had a terrific top line.

If you make some adjustments for some of the unusuals and such, the -- what we call EBT margins, we're very strong, double-digit, as good as anything that we had seen historically.

Terry Klebe is on the board.

Tom O'Grady is on the board and then Laura Ulz, who is our VP of ops, is on the board.

The two teams getting along great, tremendous opportunity globally, tremendous opportunity on new products and brands and such, so I don't want to get ahead of them.

They're working on their budget like everybody else.

But you will see good, solid core growth and very good leverage on the upside margins coming in nicely.

They've got some restructuring to do, but we couldn't be more pleased.

I don't think there is one thing that we would call out as anything disappointing on that joint venture out of the box.

Okay.

Thank you.

Our next question comes from the line of Christopher Glynn from Oppenheimer.

Thanks.

In what's in the book-to-bill, we didn't really hit on Crouse-Heinz.

It seems like with Power Systems at 110%, that wasn't so much positive.

Just wondering how that's playing out relative to where you would have thought that might have started to cycle a little bit more?

I think 110% is -- let me go back and take exception to your comment.

I think 110% is positive when you look at the shipments up 10%.

So, I think that's pretty good.

Crouse-Heinz is right at the 100% book-to-bill for the quarter.

Year-to-date about 105%, so they're building backlog.

There and the backlog from the beginning of the year is almost up 20% to 25%, but what's important in that business is the new projects and the EPC activity.

And so as we sit down with them, I think you should be thinking about a business like that, somewhere between that 5% to 10% kind of core growth rate next year, and I think that's -- that business is in terrific shape as well.

So, very optimistic about the oil and gas segment, especially with oil prices at the $84, $85 a barrel.

So, we feel pretty good about that.

Okay, I didn't think my book-to-bill comment was as you took it, so --

It is a positive?

If it's a positive, I don't take exception.

And then the EPG, the sequential leverage looked nearly double what it was from the first quarter to the second quarter.

Did you hit on a sweet spot of some fixed cost levers there, or was it more the incremental price cost?

For that business, I would say price cost was helpful but again, we have -- you look at the overall mix of businesses, stronger growth at some of the better margin businesses, so we have got a nice, from a segment standpoint, nice mix benefit.

Okay, thanks.

That's all I have.

Great, Chris.

Thanks.

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

Fellows, can we drill into lighting a little bit more?

And, Kirk, a little bit of color on what's going on there from a volume and price standpoint?

Well, for the quarter, just about at a push, Jeff.

And so as a big business like that comes back and begins to see core growth or flattening out, of course it helps us overall.

And I would say that segment of the market is something that we would expect down the road to still turn positive on us and give us a significant amount of lift.

So, we're still fighting an overall negative headwind from the construction and financing and all of the global economy still trying to work itself out.

So, if we can generate 8% core growth with construction, non-res and resi kind of on their backs, I think it bodes well for 2011 and 2012.

Are you able to get some price in lighting yet, or the market is not there?

It is about flat, it was about flat The other thing I'd point out though, Jeff, I think we mentioned this before.

But about 33% vitality index in that business, so we poured a bunch of money into new products, the LED lab, Dave mentioned the lumpiness of the CapEx.

There was about $10 million we poured into the LED lab in Peachtree City.

So again, we'll do a little bit more restructuring around the edges.

We have got a terrific set of architectural brands and package, so really like where we stand.

We bought those companies around lighting controls and very happy with that, so business is in great shape.

Margins up nicely, and the top line is starting -- the quarter was nice and the sequential improvement in the quarter in lighting was very nice as well, so we're very happy about it.

On Bussmann, you called out both electronics and MRO, which I guess you mean industrial MRO.

Is electronics substantially outperforming the core industrial product?

No.

They're all up strong, and their transportation business is in there, too, Jeff, which is if you looked at Eaton's business on that large truck -- Class A type of stuff, that's where a lot of that would sell into.

So, as those markets, those traditional industrial markets on transportation recover, that was up strong, the electrical was up strong, and the electronics are the chip fuses being sold into consumer electronics and into cell phones and PDAs, all of them up equally as strong globally.

And just trying to think about into 2011, a couple other variance items.

Did Eka end up or is it going to be as dilutive as you thought in 2010, $0.03 or $0.04 or whatever it was?

Yes.

I would say it is consistent with our expectations.

And what kind of restructuring carryover benefits do you have in 2011 versus 2010?

I would probably tell you I would have to wait until we take a look at how the plan rolls off.

Again, we should see our plans next couple of weeks, and that's certainly one of their key deliverables is their restructuring costs and benefits.

I think that's where you're going to get the leverage though, too.

I don't know the exact number, but we'll get all the benefits of all of the programs that we did.

We'll take on some additional ones.

You mentioned Power Systems, but there is some things in lighting that we'll take on and a couple other things around the world as well.

It won't be a heavy year of restructuring in 2011.

It will probably more of a typical kind of year for us.

And, Kirk, just finally for me on share repurchase, obviously you astutely opportunistically bought some stock here.

You still got a lot of flexibility.

You said earlier the deal pipeline is okay, but how should we think about you modulating back and forth between those items?

Do you settle back down to buying the creek for a while and seeing if the M&A evolves, or just what's your general thinking there and on the dividend also?

Yes, I think we took the dividend up 8% this past February.

We never cut it, so that's been a nice trend there.

The repurchases, we had about $1.6 million in the first two, so we're kind of trending down a rate of buy and creep.

But Jeff, when the stop drops to selling 12 or 13 times forward earnings, which is the street earnings, huge opportunity, and the great thing about having liquidity is that you can capitalize on those kinds of opportunities, so we're never shy.

Dave and I were talking this morning, the dollar amount of that we repurchased just in the quarter was equal to our annual dividend, so those shareholders that stayed in the stock for the year got basically a 2X their normal dividend allocation, which is a nice way to return that capital back out.

We do like buying shares.

We have been doing it now consistently, but I think we're in pretty good shape, probably feather that back a little bit.

We look at the dividend in February with as we would normally do it, but we have got some good M&A out there as well, and we can certainly tap into thee credit market which is are extremely cheap.

We have been looking at that.

But the liquidity is not our issue, and I would rather spend a lot more money back into the businesses, into the core and try to bring in another 5% of sales next year, $250 million to $300 million of revenue through acquisition.

We talked a lot about core for 2011, we didn't say anything about acquired growth.

And I certainly think from what I am looking at today we have the opportunity of $200 million to $300 million of acquired growth in addition to that core growth for next year.

So, that's where we're focused right now.

Thanks a lot.

Thanks, Jeff.

Our next question comes from the line of Shannon O'Callaghan from Nomura.

Good afternoon, guys.

Good afternoon.

One was I guess just a follow-up on the acquired growth.

So, you're talking $200 million to $300 million of acquired revenues for 2011, but $50 million to $100 million type purchase price deals, I think.

So, is the pipeline active enough that we could actually see that happen on an -- actually show up in '11 rather than being on annualized basis?

Yes.

As you'd expect, we have been pretty aggressive at this over the summer, getting these guys and in place.

Tom has been flying around the world working on a lot of these different deals.

I hate to say specifically.

We have got a number of letters of intent out with agreements, verbal agreements, signed letter of intents out, so yes, I think it is certainly possible that we could close and then deliver $200 million to $300 million of acquired growth next year.

But with that said, I hold out the caveat if people come back and we're not able to close for environmental issues or tax issues as we go through the due diligence, I think Shannon, you know us well enough to know we won't do anything stupid, and that could go out the window.

So, I hate to forecast these things, but I am feeling good at this point that we have got enough in the hopper that yes, we should be able to deliver $200 million to $300 million of top line through acquired growth next year.

As you know too, most of what we do, we prefer to do negotiated deals, not auctions, so there is not a fixed timeline.

And sometimes you can get something from start to finish in a matter of months, sometimes it is a matter of years.

There's probably just a couple of auctions that we're peeking at around the world right now.

But as Kirk said, very, very active.

I think Tom was in three continents in the last three weeks, just to give you an idea of the business development group's activity level.

And is the size of these deals at $50 million to $100 million, is that a function of how you structured these electrical platforms, that that's just going to be the sweet spot or is it -- or are there bigger things that think will be possible, they're just not out there right now?

We chased some bigger things earlier in the year.

We continue to evaluate bigger things.

The pricing and the economics, though, don't really look that favorable to us.

And so when you look at our traditional metrics of return for shareholders, we can't make the math work, and so we -- just sort of reluctant to do those.

We find the pricing on the smaller bolt-on product lines a lot more reasonable.

We value the -- the value that Cooper can bring to those of global distribution, global brand, easier to get more top line and easier to get more synergy on the cost side, and so the math works a lot better for us.

There is a couple bigger than that, but again, it is back into our traditional somewhere between, I'd say $50 million to $200 million would be fairly typical for us.

There is always small exceptions to that, but right now there is nothing very large beyond that pending that we're focused on.

Okay.

Just quick one on transformers, not to beat the dead horse, but I understand the point about really low inventories in the hot summer and catch-up spending from unsustainably low levels.

As you're talking to customers, what gives you the confidence this that is really a fundamental change of behavior that rides through all of next year?

Well, I think the comments that you just sort of made, that they have an aged infrastructure out there, they know that.

When the capital market seized up, they didn't to want go out into the capital markets and borrow.

Interest rates are, of course, very low for the utilities, and so they're wanting to spend their capital budgets.

So these trends, Shannon, don't tend to go -- it is not lumpy in the utility industry.

They tend to continue and go out for six to 12 months.

So, we were on a down cycle on the order side for the better part of 18 months to just about two years.

So I expect some longevity to this uptick now to get back to normal demand patterns.

And then if construction and energy utilization come back on the industrial side, it will be back to pretty good historic growth rates in that space, so again, I think that's why we're optimistic.

This hasn't been a short one month, two months, this trend has been continuing now since the first of the year.

We have been building backlog in that business now since the first of the year.

If you go back and look at all of our conference calls, we have been talking about the book-to-bill.

It just takes a little longer to show up in the revenue side.

And so I think we're right where we want to be, and I think this thing's got probably 12 to 18 months ahead of it.

Okay, great.

Appreciate it.

Thanks.

Thanks, Shannon.

Ladies and gentlemen, our next question is from the line of Nigel Coe from Deutsche Bank.

Thanks.

Obviously, you've covered a lot of ground here, but I just wanted to briefly come back to the margin on material sales in 2011.

And I understand that Crouse-Heinz is one of our highest margin businesses and certainly, Power Systems got a high fixed cost base.

So, as the businesses get into the upper single-digit growth range next year, why wouldn't your incrementals be significantly above 35% next year?

They will be good.

It depends on Power Systems, of course, where the volume comes from.

Your margins and switch gear and smart grid are very difficult than your margins on transformers, but I do agree with you that the margin, incremental margin improvement at Power Systems and the leverage at the Power Systems is very strong.

And of course, as you said, your margins at Crouse and even safety are better than our average, our overall average, and so those ought to blend up very well as well.

So, we just haven't gone through, Nigel, the math of rolling up all the businesses and doing all the detailed workup, but I think directionally you're correct.

I'd agree with you.

Okay, and then digging a bit deeper into that, so going from 2008 to where we are now, obviously, Power Systems has been a big drag on the ENS segments.

If we adjust for, maybe just price deflation, what impact has that had on the margins in that segment?

Well, it's volume has been a big drag, too.

It's not just -- you've got these fixed factories and you take down the volume 30% and your absorption rate, you can't -- it is not people, it is fixed overhead.

Right.

So your absorption, it is not just the pricing.

And the pricing has been negative as well, so you had a double whammy.

I couldn't break it out off the top of my head like that.

Maybe that's the thing Mark could follow up with you on.

Definitely.

Okay, great.

Thanks.

And our next question comes from the line of Rich Kwas from Wells Fargo Securities.

Hi, guys.

Just two quick ones.

If I hear it right, in terms of 2011, mix should be better next year than it was this year, is that right?

That's a good question.

On that page 17, we actually had mix over on the right, I made them take it off.

You guys would get too overly jubilant.

Yes, you could mix on the right-hand side.

Okay, alright.

Just want to make sure.

You could.

Second thing is, Kirk, on energy efficiency type stuff, are you seeing any disproportionate strength across geographies?

Well, it is a good question.

I was in the Middle East, what, two weeks back and they couldn't stop talking about LED.

In Dohar and in Abu Dhabi, they want everything to be energy efficient.

Of course, Europe has been well ahead of the curve on this for a long time.

Asia same thing.

The Chinese, the Koreans all pushing the LED technology and so, yes, I would say all of those geographic regions are advanced.

We did -- we won $4 million or $5 million on Princess Nora, Big University project in Saudi Arabia.

And I think the US is probably the furthest behind.

Maybe South America is still a little bit behind as well, but no, I think the US has the single most significant upside.

We still burn a lot of incandescent here domestically, and we have been talking about for years that the average age of our lighting systems are over 20 -- 80% is over 20 years old.

So again, another very aged sort of infrastructure that we have today.

And then, so on the US, are you seeing any signs that that's going to turn next year or anything in the quote type stuff that would seem to indicate that maybe there is some growing momentum in the US next year?

Oh, yes.

That's what I was sort of saying.

I think that the offset to the lack of new projects is the amount of retrofit and upgrade.

And so the work that we're doing with ESCOs, the work that we're doing on energy audits, the work we're doing on redesign is significant, up double-digits and still growing, and it is not just LED.

It is T-5 fluorescent, it is electronic ballast versus magnetic ballast, it's more lighting controls.

So, I would say, yes, and the stimulus -- and there is stimulus money available or government money to help you subsidize that, and the paybacks, frankly, are getting down to very attractive, less than two years.

We've revamped all of our factories, all of our industrial distribution centers.

We don't burn HID in any of our facilities.

It is all high bay fluorescent today and it looks beautiful.

Really nice looking, bright white light that is significantly more efficient.

Okay, great.

Thanks.

Good.

Ladies and gentlemen, that concludes the Q&A portion of the presentation.

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

Mark Doheny for closing remarks.

And with that, thanks for joining us today.

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

We thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.