Cooper Exceeds Estimates

Cooper Industries Plc (CBE) reported better-than-expected results for the second quarter of 2010, and management upped its guidance for the year.

The company reported earnings per share from continuing operations of 80 cents on revenues of $1.34 billion. The Zacks Consensus EPS estimate for the quarter was 76 cents while revenue estimate was $1.30 billion.

For the quarter, there was a non-cash post-tax charge of $93.7 million or 55 cents per share related to the formation of the Tools Joint Venture with Danaher Corporation (DHR).

Segment Results

Energy & Safety Solutions segment revenues for the second quarter of 2010 increased 0.8% to $614.4 million, compared with $609.7 million in the corresponding prior-year quarter. Core revenues were 0.6% higher than comparable prior-year periods with currency translation reducing reported revenues by 0.9% and acquisitions adding 1.1% for the most recent quarter. Segment operating margin improved 220 basis points to 16.9% compared with the prior-year period. Book-to-bill ratio for this group was 1.09, with the best performance in Cooper Power Systems at 1.15.

Electrical Products Group segment revenues for the most recent quarter increased 6.9% to $557.6 million. Core revenues were 6.4% higher than comparable prior-year period with currency translation increasing reported results by 0.5% for the quarter. This segment benefited from strong MRO demand and strong demand for electronics. Electrical Products Group had an operating margin of  14.8%. Book-to-bill ratio remained positive for the segment at 1.03.

Tools segment revenues for the quarter were $164.7 million, an increase of 18.8% from the prior-year period. Excluding the effects of currency translation, core revenues for the quarter were 16.7% higher than the prior-year quarter. With the retail side of the business being flattish, there was a very strong demand in professional and power tools segments. Operating margin was 12.8% for the segment.

Sales outside the U.S. were 39% of total sales. The U.S. continued to be weaker than international markets with the U.S. up just under 4% year over year. International markets in total were up 7.5% led by Latin America and Asia. Western Europe was down 1%.

The company continued to add to global footprint expanding in places like Brazil, Turkey, and continuing to invest in Kore , China, Southeast Asia and the Middle East. It delivered the best service parameters in over 10 years. Its factories are currently achieving high quality and safety levels.

On July 6, 2010, Cooper announced the completion of the Joint Venture, named Apex Tool Group, LLC. Cooper and Danaher Corporation own a 50% stake each in the JV. The product portfolio of the company is at present 100% aligned around Electrical with the closure of the Tools Joint Venture and it is well positioned to capitalize on global trends and emerging technologies in energy efficiency, improved reliability, global infrastructure, and safety and protection.

Cash Flow and Balance Sheet

During the second quarter, free cash flow was $152.5 million, which brings our first half performance to $222.5 million. The company’s  balance sheet continues to be in great shape with debt to total capitalization net of cash at 14.2% at the end of the quarter and this compares with 15.7% at the end of 2009 and 21.3% a year ago. The company was successful in reducing Days Sales Outstanding (DSO) by three days during the quarter. Payment Outstanding increased from 42 to 48 days. Overall, this resulted in working capital turns improving to 5.7 as compared with 4.8 a year ago.

Estimates Moving Higher

The company raised guidance for earnings per share from continuing operations for 2010 to $3.10 from $2.95. This estimate reflects adjusted revenue growth of 1% - 4% for the year, after taking into account the revenue loss from the deconsolidated Tools segment. For the third quarter, the company expects revenue growth of 2% - 5% along with earnings per share of 75 - 80 cents.

We currently have a Neutral recommendation on Cooper Industries plc.

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