The Daily Magic Formula Stock for 11/14/2008 is Cooper Industries Ltd. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is 50-75 %.
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The term â€śCooperâ€ť refers to the registrant, Cooper Industries, Ltd., which was incorporated under the laws of Bermuda on May 22, 2001, and became the successor-registrant to Cooper Industries, Inc. on May 22, 2002.
Cooper operates in two business segments: Electrical Products and Tools. Cooper manufactures, markets and sells its products and provides services throughout the world. Cooper has manufacturing facilities in 23 countries and currently employs approximately 31,500 people. Operations in the United States are conducted by wholly-owned subsidiaries of Cooper, organized by the two business segments. Activities outside the United States contribute significantly to the revenues and operating earnings of both segments of Cooper. These activities are conducted in major commercial countries by wholly-owned subsidiaries and jointly-owned companies, the management of which is structured through Cooperâ€™s two business segments. As a result of operations outside the United States, sales and distribution networks are maintained throughout most of the industrialized world. Cooper generally believes that there are no substantial differences in the business risks associated with operations outside the United States compared with United States activities, although Cooper is subject to certain political and economic uncertainties encountered in activities outside the United States, including trade barriers and restrictions on the exchange and fluctuations of currency. Cooper generates the most non-U.S. revenues in Canada, Germany, France, Mexico and the United Kingdom. Cooper has operations in India, Malaysia and China and has several joint ventures with operations in China. Investments in emerging markets such as India, Malaysia and China are subject to greater risks related to economic and political uncertainties as compared to most countries where Cooper has operations. Exhibit 21.0 contains a list of Cooperâ€™s subsidiaries.
Financial information with respect to Cooperâ€™s industry segments and geographic areas is contained in Note 15 of the Notes to the Consolidated Financial Statements. A discussion of acquisitions and divestitures is included in Notes 3, 7 and 16 of the Notes to the Consolidated Financial Statements.
With its two business segments, Cooper serves four major markets: the industrial, commercial, utility and residential markets. Cooper also serves the electronics and telecommunications markets. Markets for Cooperâ€™s products and services are worldwide, though the United States is the largest market. Within the United States, there is no material geographic concentration by state or region. Cooper experiences substantial competition in both of its business segments. The number and size of competitors vary considerably depending on the product line. Cooper cannot specify with exactitude the number of competitors in each product category or their relative market position. However, most operating units experience significant competition from both larger and smaller companies with the key competitive factors being customer and end-user service, price, quality, brand name and availability. Cooper considers its reputation as a manufacturer of a broad line of quality products and premier brands to be an important factor in its businesses. Cooper believes that it is among the leading manufacturers in the world of electrical distribution equipment, wiring devices, support systems, hazardous duty electrical equipment, lighting fixtures, emergency lighting, fuses, nonpower hand tools and industrial power tools.
Cooperâ€™s research and development activities are for purposes of improving existing products and services and originating new products. During 2007, approximately $105.7 million was spent for research and development activities as compared with approximately $83.5 million in 2006 and $71.5 million in 2005. Cooper obtains and holds patents on products and designs in the United States and many other countries where operations are conducted or products are sold. Although in the aggregate Cooperâ€™s patents are important in the operation of its businesses, the loss by expiration or otherwise of any one patent or license or group of patents or licenses would not materially affect its business.
Cooper does not presently anticipate that compliance with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending or earnings during 2008. Cooper has been a party to administrative and legal proceedings with governmental agencies that have arisen under statutory provisions regulating the discharge or potential discharge of material into the environment. Orders and decrees consented to by Cooper, or currently under negotiation with state regulatory agencies, have contained agreed-upon timetables for fulfilling reporting or remediation obligations or maintaining specified air and water discharge levels in connection with permits for the operations of various plants. Cooper believes it is in compliance with the orders and decrees, and such compliance is not material to the business or financial condition of Cooper. For additional information concerning Cooperâ€™s accruals for environmental liabilities, see Note 7 of the Notes to the Consolidated Financial Statements.
Approximately 60 percent of the United States hourly production work force of Cooper is employed in 44 manufacturing facilities, distribution centers and warehouses not covered by labor agreements. Numerous agreements covering approximately 40 percent of all hourly production employees exist with 17 bargaining units at 19 operations in the United States and with various unions at 32 operations in other countries. During 2007, new agreements were concluded covering hourly production employees at 3 operations in the United States. Cooper considers its employee relations to be excellent.
Sales backlog at December 31, 2007 was approximately $722.6 million, all of which is for delivery during 2008, compared with backlog of approximately $677.6 million at December 31, 2006.
Cooperâ€™s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available, free of charge, at the â€śInvestor Centerâ€ť tab on Cooperâ€™s website (www.cooperindustries.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities Exchange Commission.
The following describes the business conducted by each of Cooperâ€™s business segments. Additional information regarding the products, markets and distribution methods for each segment is set forth in the table at the end of this Item. Information concerning market conditions, as well as information concerning revenues and operating earnings for each segment, is included under â€śItem 7. Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations.â€ť
The Electrical Products segment manufactures, markets and sells electrical and circuit protection products, including fittings, support systems, enclosures, specialty connectors, wiring devices, plugs, receptacles, lighting fixtures and controls, hazardous duty electrical equipment, fuses, emergency lighting, fire detection and mass notification systems and security products for use in residential, commercial and industrial construction, maintenance and repair applications. The segment also manufactures, markets and sells products for use by utilities and in industry for electrical power transmission and distribution, including distribution switchgear, transformers, transformer terminations and accessories, capacitors, voltage regulators, surge arresters, energy automation solutions and other related power systems components.
The principal raw material requirements include: steel, copper, aluminum, aluminum ingots, brass, tin, lead, plastics, electronic components and insulating materials including transformer oil. These raw materials are available from and supplied by numerous sources located in the United States and other countries, although there are limited sources of supply for electrical core steel and transformer oil that Cooper uses in electrical power transmission and distribution products.
Demand for electrical products follows general economic conditions and is generally sensitive to activity in the commercial and residential construction markets, industrial production levels, electronic component production and spending by utilities for replacements, expansions and efficiency improvements. The segmentâ€™s product lines are marketed directly to original equipment manufacturers and utilities and to a variety of end users through major distributor chains, retail home centers, hardware outlets and thousands of independent distributors.
The Tools segment manufactures, markets and sells hand tools for industrial, construction, electronics and consumer markets; automated assembly systems for industrial markets; and electric and pneumatic industrial power tools, related electronics and software control and monitoring systems for general industry, primarily automotive and aerospace manufacturers.
The principal raw material requirements include: flat and bar stock steel, brass, copper, fiberglass, aluminum, metal castings and forgings, wood, plastic pellets and plastic sheet. These materials are available from and supplied by numerous sources located in the United States and other countries.
Demand for nonpowered hand tools, assembly systems and industrial power tools is driven by employment levels and industrial activity in major industrial countries and by consumer spending. In addition, demand for industrial power tools is influenced by automotive and aerospace production and general industrial production. The segmentâ€™s products are sold by a company sales force, independent distributors and retailers.
Fuses and circuit protection products are utilized in products for the construction, industrial, transportation and consumer markets and to manufacturers in the electrical, electronic, telecommunications and transportation industries. Lighting fixtures are utilized in residential construction, industrial, institutional and commercial building complexes, shopping centers, parking lots, roadways, and sports facilities. Electrical power products are used by utilities and commercial and industrial power users. Electrical construction materials are used in commercial, residential and industrial projects, by utilities, airports and wastewater treatment plants and in the process and energy industries. Emergency lighting, fire detection and security systems are installed in residential, commercial and industrial applications. Support systems and enclosures are used in industrial, commercial and telecommunications complexes. Wiring devices are used in the construction, renovation, maintenance and repair of residential, commercial, industrial and institutional buildings.
Principal Distribution Methods
Products are sold through distributors for use in general construction and renovation, plant maintenance, process and energy applications, shopping centers, parking lots, sports facilities, and data processing and telecommunications systems; through distributors and direct to utilities and manufacturers for use in electronic equipment for consumer, industrial, government and military applications; through distributors and direct to retail home centers and hardware outlets; and direct to original equipment manufacturers of appliances, tools, machinery and electronic equipment.
Power tools and assembly systems are used by general industrial manufacturers, particularly durable goods producers and original equipment manufacturers, such as those in the aerospace and automobile industries. Hand tools are used in a variety of industrial, electronics, agricultural, construction and consumer applications.
Principal Distribution Methods
Products are sold through distributors and agents to general industry, particularly automotive and aircraft; through distributors and wholesalers to hardware stores, lumberyards and department stores; and direct to original equipment manufacturers, home centers, specialty stores, department stores, mass merchandisers and hardware outlets.
ROBERT M. DEVLIN
Member â€“ Executive Committee and Management Development and Compensation Committee
Director since 1997
Mr. Devlin is Chairman of Curragh Capital Partners, a private equity firm. He is a principal owner and director of Forethought Financial Group, Inc., a life insurance and financial services company, and a senior advisor to Lazard, Inc. investment banking firm. He is also a director of Discover Financial Services and LKQ Corporation.
LINDA A. HILL
Member â€“Management Development and Compensation Committee
Director since 1994
Ms. Hill is a Professor at the Harvard Business School. She joined the faculty of Harvard Business School in 1984 as an Assistant Professor in organizational behavior and human resource management. She was named Associate Professor in 1991, Professor in 1995 and the Wallace Brett Donham Professor of Business Administration in 1997. She is also a director of State Street Corporation.
JAMES J. POSTL
Member â€“ Audit Committee and
Committee on Nominations and
Director since 2003
Mr. Postl served as President and Chief Executive Officer of Pennzoil Quaker State Company, a petroleum products company, from May 2000 until October 2002 when he retired. He joined Pennzoil in October 1998 as President and Chief Operating Officer. He is also a director of Centex Corporation, Northwest Airlines Corp. and the American Balanced Fund.
IVOR J. EVANS
Chairman â€“ Committee on
Member â€“ Management
Director since 2003
Mr. Evans is an operating partner of Thayer Capital Partners, a private equity firm. He previously served as Vice Chairman of Union Pacific Corporation and its principal operating company, Union Pacific Railroad Company, a rail carrier and transportation company, until February 2005. He was named Vice Chairman in January 2004 and previously served as President and Chief Operating Officer of Union Pacific Railroad Company since 1998. He is also a director of ArvinMeritor, Inc., Spirit Aerosystems Holdings, Inc., and Textron Inc.
KIRK S. HACHIGIAN
Chairman â€“ Executive Committee
Director since 2004
Mr. Hachigian is Chairman, President and Chief Executive Officer of Cooper Industries, Ltd. He was named Chairman in February 2006, President and Chief Executive Officer in May 2005, President and Chief Operating Officer in August 2004, Chief Operating Officer in December 2003, Executive Vice President and Chief Operating Officer, Electrical Products in December 2002, and Executive Vice President, Operations in April 2001. He is also a director of Trane, Inc.
LAWRENCE D. KINGSLEY
Member â€” Management
Development and Compensation
Director since 2007
Mr. Kingsley is Chairman, President and Chief Executive Officer of IDEX Corporation, an engineered industrial products company. He was named Chairman in April 2006, President and Chief Executive Officer in March 2005 and Chief Operating Officer in August 2004. He previously held various executive positions with Danaher Corporation, a manufacturer of industrial and consumer products, serving as Corporate Vice President and Group Executive for the Sensors and Controls business from March 2004 to August 2004; President, Industrial Controls Group from April 2002 to July 2004; and President, Motion Group, Special Purpose Systems from January 2001 to March 2002. He is also a director of IDEX Corporation.
JAMES R. WILSON
Member â€“ Audit Committee
Director since 1997
Mr. Wilson served as Chairman, President and Chief Executive Officer of Cordant Technologies Inc. from 1995 until 2000, when he retired.
STEPHEN G. BUTLER
Chairman â€“ Audit Committee
Director since 2002
Mr. Butler served as Chairman and Chief Executive of the accounting firm, KPMG LLP, from 1996 until June 2002, when he retired. He is also a director of ConAgra Foods, Inc. and Ford Motor Company.
DAN F. SMITH
Chairman â€“ Management Development
and Compensation Committee
Member â€“ Executive Committee
Director since 1998
Mr. Smith served as President and Chief Executive Officer of Lyondell Chemical Company, a petrochemicals and refining operations company, from 1996 until January 2008 when Lyondell Chemical Company became a subsidiary of Lyondell Basell Industries AF S.C.A. From November 1988 until December 2007, he served as a member of the Board of Lyondell Chemical Company and served as the Boardâ€™s Chairman from May 2007 until December 2007. From 1997 until January 2008, he also served as Chief Executive Officer and a member of the Partnership Governance Committee of Equistar Chemicals, LP. He also has served as the Chief Executive Officer of Millennium Chemicals Inc. from December 2004 until January 2008. Equistar Chemicals, LP and Millennium Chemicals Inc. are wholly owned subsidiaries of Lyondell.
GERALD B. SMITH
Deputy Chairman and Presiding
Member â€“ Audit Committee,
Committee on Nominations and
Corporate Governance and
Director since 2000
Mr. Smith is Chairman and Chief Executive Officer of Smith Graham & Company, an investment management firm that he founded in 1990. He is also a director of The Charles Schwab Family of Funds and Chairman of the Audit Committee of ONEOK Partners, L.P.
MARK S. THOMPSON
Member â€” Committee on
Nominations and Corporate
Director since 2007
Dr. Thompson has served as President and Chief Executive Officer of Fairchild Semiconductor International, Inc., a company providing semiconductor solutions, since April 2005. He previously served as Executive Vice President, Manufacturing and Technology Group, since December 2004. Prior to joining Fairchild Semiconductor, he was President and Chief Executive Officer of Big Bear Networks, Inc., a company providing optoelectronic network solutions, since August 2001. Previously, he was Vice President and General Manager of Tyco Electronics Power Components Division. He is also a director of American Science and Engineering, Inc. and Fairchild Semiconductor International, Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
Results of Operations
See the geographic information included in Note 15 of the Notes to the Consolidated Financial Statements for a summary of revenues by country.
2007 vs. 2006 Revenues Revenues for 2007 increased 14% compared to 2006. The impact of currency translation was 2%, while acquisitions added approximately 4% in revenues.
Electrical Products segment revenues for 2007, which represented 87% of revenues, increased approximately 15% compared to 2006. Currency translation represented 2% of the revenue growth. The impact of acquisitions increased segment revenues by approximately 4%. Six of the seven Electrical Products segment businesses posted revenue growth during 2007. Sales growth was a result of strong demand from the utility and industrial markets, international expansion and solid demand from U.S. nonresidential construction. Continued softness in the U.S. residential markets partially offset these increases.
Tools segment revenues for 2007, which represented 13% of revenues, increased approximately 5% compared to 2006, with currency translation representing 3% of the increase. Sales increases were driven by solid demand from aerospace, partially offset by soft demand in the motor vehicle end markets. Retail sales compared to 2006 were down slightly in a challenging U.S. market.
2006 vs. 2005 Revenues Revenues for 2006 increased 10% compared to 2005. The impact of currency translation was nominal, while acquisitions, net of a small divestiture, added approximately 2% in revenues.
Electrical Products segment revenues for 2006, which represented 85% of revenues, increased approximately 11% compared to 2005. Currency translation had a nominal impact on 2006 revenues. The impact of acquisitions, net of a small divestiture, increased segment revenues by approximately 2%. All of the Electrical Products segment businesses posted revenue growth during 2006. Sales growth was a result of strong demand from industrial and utility markets, improvement in non-residential construction demand and successful expansion into developing international markets. These gains more than offset a decline in retail sales due to an overall slowdown in the residential market and ceding product lines in the channel over prices.
Tools segment revenues for 2006, which represented 15% of revenues, increased approximately 4% compared to 2005. Currency translation increased revenues by approximately 1%. Increased sales of hand tools were driven by new product introductions, strength in industrial markets and international expansion. These gains offset the loss of chain product position at a major retailer and the overall slowdown in the residential market. Demand for industrial power tools strengthened and strong fourth quarter shipments led to modest year over year growth in revenue from the automated systems business.
Cooper measures the performance of its businesses exclusive of financing expenses. All costs directly attributable to operating businesses are included in segment operating earnings. Corporate overhead costs, including costs of traditional headquarters activities, such as treasury, are not allocated to the businesses. See Note 15 of the Notes to the Consolidated Financial Statements.
2007 vs. 2006 Segment Operating Earnings Segment Operating Earnings were $942.2 million in 2007 compared to $788.8 million in 2006.
Electrical Products segment 2007 operating earnings increased 21% to $848.2 million from $703.2 million for 2006. Return on revenues was 16.6% for 2007 compared to 15.9% for 2006. The increase was primarily due to leverage on fixed costs due to higher sales volumes and continued execution on productivity initiatives and lean manufacturing programs.
Tools segment 2007 operating earnings increased 10% to $94.0 million compared to $85.6 million for 2006. Return on revenues was 11.8% compared to 11.3% in 2006. The modest core growth in sales volume was further leveraged through focus on productivity activities and cost reductions.
2006 vs. 2005 Segment Operating Earnings Segment Operating Earnings were $788.8 million in 2006 compared to $651.7 million in 2005.
Electrical Products segment 2006 operating earnings increased 20% to $703.2 million from $585.0 million for 2005. Return on revenues was 15.9% for 2006 compared to 14.6% for 2005. The increase was primarily due to leverage of fixed costs on higher volume, favorable pricing offsetting inflation in production material costs, strong execution on productivity improvement initiatives, and a shift in sales mix away from the lower margin retail channel.
Tools segment 2006 operating earnings increased 28% to $85.6 million compared to $66.7 million for 2005. Return on revenues was 11.3% compared to 9.1% in 2005. The increase reflects leverage on fixed costs due to increased volume, improved sales mix, price increase realization and successful cost reduction initiatives.
Restructuring During the fourth quarter of 2003, Cooper recorded net restructuring charges of $16.9 million, or $13.6 million after taxes ($.07 per diluted common share). This represented costs associated with restructuring projects undertaken in 2003 of $18.4 million, partially offset by a $1.5 million adjustment of estimates for restructuring projects initiated in 2002.
The most significant action included in the charges was an announcement of the closing of Cooper Wiring Devicesâ€™ manufacturing operations in New York City. This action included plans for the withdrawal from a multiple-employer pension plan. Cooper recorded a $12.5 million obligation as an estimate of Cooperâ€™s portion of unfunded benefit obligations of the plan. In 2005, Cooper finalized activities related to withdrawal from the multi-employer pension plan and recorded an additional $4.0 million pre-tax charge. The multiple-employer pension obligation was satisfied with a cash payment of $14.1 million in October 2006 representing full and final payment of the withdrawal liability. The remaining $5.9 million charge in 2003 primarily represented severance for announced employment reductions at several locations. As of December 31, 2007 and 2006, Cooper had paid $5.9 million and $5.9 million, respectively, for these actions, all of which was for severance costs.
General Corporate Expense General Corporate expense increased $3.4 million during 2007 to $98.1 million compared to $94.7 million for 2006. General Corporate expense includes $8.8 million and $4.8 million in 2007 and 2006, respectively, for legal and environmental costs related to businesses disposed of in prior years. Excluding these costs, General Corporate expense decreased $0.6 million in 2007 to $89.3 million compared to $89.9 million in 2006. The decrease in 2007 is primarily related to continued cost containment.
General Corporate expenses increased $2.8 million during 2006 to $94.7 million compared to $91.9 million for 2005. General Corporate expense includes $4.8 million in 2006 for legal and environmental costs related to businesses disposed of in prior years, and includes $6.5 million in 2005 for retirement and other costs related to senior executives. Excluding these items, General Corporate expense increased $4.5 million in 2006 primarily as a result of increased incentive compensation costs.
Income from Belden agreement Income from Belden agreement was $33.1 million in 2007 compared to $5.1 million during 2006. In 1993, Cooper completed an initial public offering of the stock of Belden, formerly a division of Cooper. Under the agreement, Belden and Cooper made an election that increased the tax basis of certain Belden assets. Belden is required to pay Cooper ninety percent of the amount by which Belden has actually reduced tax payments that would otherwise have been payable if the increase in the tax basis of assets had not occurred, as realized principally over fifteen years. If Belden does not have sufficient future taxable income, it is possible that Belden will not be able to utilize the tax deductions arising from the increase in the tax basis of the assets resulting in a tax loss carryforward. Belden is not obligated to pay Cooper until a tax loss carryforward is utilized. Belden can carry any loss forward twenty years to offset future taxable income. Cooper estimates that between $40 and $45 million in future payments potentially remain under the Belden agreement. The timing and ultimate receipt of future payment are contingent upon the ultimate taxable income Belden reports each year.
Interest Expense, Net Interest expense, net for 2007 decreased $0.5 million from 2006 as a result of lower average interest rates offsetting higher average debt balances. Average debt balances were $1.05 billion and $1.04 billion and average interest rates were 5.64% and 5.70% for 2007 and 2006, respectively.
Cooperâ€™s $300 million, 5.25% senior unsecured notes, which were issued in June 2002, matured in July 2007. Interest-rate swaps that effectively converted this fixed-rate debt to variable-rate debt also matured at that time (see Note 17 of the Notes to the Consolidated Financial Statements). On June 18, 2007, Cooperâ€™s wholly-owned subsidiary, Cooper US, Inc., issued $300 million of senior unsecured notes due in 2017. The fixed rate notes have an interest coupon of 6.10% and are guaranteed by Cooper and certain of its principal operating subsidiaries. Proceeds from the financing were used to repay the maturing 5.25% notes. Combined with interest rate hedges implemented in anticipation of the offering, the 6.10% notes will have an effective annual cost to Cooper of 5.75%.
Interest expense, net for 2006 decreased $13.3 million from 2005 as a result of both lower average debt balances and average interest rates. Average debt balances were $1.04 billion and $1.26 billion, and average interest rates were 5.70% and 5.87% for 2006 and 2005, respectively. The decline in the average interest rates was primarily the result of conversion of debt balances to lower interest-rate debt. The debt balance during 2005 included 6.25%, 300 million Euro bonds that matured in October 2005. Cooper partially funded repayment of this Euro bond debt with $325 million, 5.25% senior unsecured notes maturing in 2012. Proceeds from the notes were swapped to â‚¬ 272.6 million with cross-currency interest-rate swaps, effectively converting the seven-year U.S. notes to seven-year Euro notes with an annual interest rate of 3.55%.
Income Tax Expense The effective tax rate attributable to continuing operations was 16.2% for 2007, 25.2% for 2006 and 21.0% for 2005.
The decrease in the 2007 rate is primarily due to an $83.8 million ($.45 per share) reduction of income tax expense associated principally with finalized settlements with the Internal Revenue Service related to the 2000 through 2004 tax years, the expiration of the statute of limitation regarding certain potential tax exposure matters, changes to state and international valuation allowances and tax benefits of international reorganizations. Excluding these tax expense reductions, as well as the General Corporate costs related to businesses disposed of in prior years and income from Belden as discussed above, the effective tax rate for 2007 was 27.3%.
The increase in tax rate in 2006 compared to 2005 was primarily related to increased taxable earnings in 2006 without a corresponding increase in tax benefits.
Charge Related to Discontinued Operations In the second quarter of 2006, Cooper recorded an additional charge of $20.3 million, net of an $11.4 million income tax benefit, related to potential asbestos obligations regarding the Automotive Products segment, which was sold in 1998. In the fourth quarter of 2005, Cooper concluded that additional charges of $227.2 million, net of a $127.8 million income tax benefit related to this matter were required in order to adjust the existing accrual to amounts within the likely range of outcomes. See Note 16 of the Notes to the Consolidated Financial Statements.
Diluted Earnings Per Share Diluted earnings per share from continuing operations was $3.73 in 2007, $2.58 in 2006, and $2.06 in 2005. The income from the Belden agreement, increased legal and environmental costs on businesses disposed of in prior years, and income tax reduction discussed above increased 2007 diluted earnings per share from continuing operations by $.59.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Three Months Ended September 30, 2008 Compared With Three Months Ended September 30, 2007
Income from continuing operations for the third quarter of 2008 was $189.2 million on revenues of $1,727.7 million compared with 2007 third quarter income from continuing operations of $171.9 million on revenues of $1,501.3 million. Third quarter 2008 diluted earnings per share from continuing operations were $1.08 compared to $.93 in the 2007 third quarter. The third quarter 2008 results include tax benefits from settlements and other discrete tax adjustments that increased earnings per share from continuing operations by $.11 per share. The third quarter 2007 results from continuing operations included $23.5 million income under an agreement with Belden and $6.4 million (pre-tax) of expenses related to certain legal matters. The net of these items increased third quarter 2007 diluted earnings per share from continuing operations by $.10 per share.
Revenues for the third quarter of 2008 increased 15% compared to the third quarter of 2007. The impact of acquisitions and currency translation increased reported revenues by slightly over 8% for the quarter.
Electrical Products segment revenues increased 17% compared to the third quarter of 2007. The impact of acquisitions increased revenues by over 8% for the quarter and favorable currency translation increased reported revenues nearly 1% for the quarter. The increase in revenues for Electrical Products segment reflects improvement in the industrial, utility and energy markets with international market initiatives providing further growth in the third quarter of 2008. The continued softness in the U.S. residential markets and slowing in selected European markets partially offset the segmentâ€™s overall revenue growth.
Tools segment revenues for the third quarter of 2008 increased 1% from the third quarter of 2007. Excluding the effects of currency translation, revenues for the quarter were approximately 3% lower than 2007 third quarter on declining North American aerospace, retail and automotive results and weaker European demand partially offset by increased revenue in Asia and the rest of the world.
Costs and Expenses:
Cost of sales, as a percentage of revenues, was 67.7% for the third quarter of 2008 compared to 67.1% for the comparable 2007 quarter. The increase in the cost of sales was primarily related to mix of products sold, material price inflation and reduced production levels.
Electrical Products segment cost of sales, as a percentage of revenues, was 67.5% for the third quarter of 2008 compared to 66.6% for the third quarter of 2007. The increase in cost of sales as a percentage of revenues in comparison to the prior year third quarter was due to product mix, material price inflation and reduced leverage in certain facilities due to lower production volumes. Tools segment cost of sales, as a percentage of revenues, was 69.0% for the third quarter of 2008 compared to 70.1% for the third quarter of 2007. The decrease in the cost of sales percentage was due to product mix with a higher level of Professional Tools, productivity improvement initiatives and the impact of cost actions taken, including the previously announced downsizing of an international facility. This downsizing and related cash payments will be completed in 2008.
Selling and administrative expenses, as a percentage of revenues, for the third quarter of 2008 was 17.8% compared to 18.4% for the third quarter of 2007. The decrease in percentage is reflective of the higher revenue levels and cost reduction actions taken in 2008 partially offset by higher selling and administrative expenses for acquired companies.
Electrical Products segment selling and administrative expenses, as a percentage of revenues for the third quarter of 2008, were 16.1% compared to 16.2% for the third quarter of 2007. The decrease in percentage reflects the higher overall percentages seen in the newly acquired operations, investment in resources to support international growth offset by leverage on higher revenues and cost control activities implemented in 2008.
Tools segment selling and administrative expenses, as a percentage of revenues for the third quarter of 2008, were 19.1% compared to 18.9% for the third quarter of 2007. The increase in selling and administrative expenses, as a percentage of revenues, reflects the impact of lower volumes partially offset by cost reduction actions.
Income of $23.5 million from the Belden agreement was recognized in the 2007 third quarter. In 1993, Cooper completed an initial public offering of the stock of Belden, formerly a division of Cooper. Under the agreement, Belden and Cooper made an election that increased the tax basis of certain Belden assets. Belden is required to pay Cooper ninety percent of the amount by which Belden has actually reduced tax payments that would otherwise have been payable if the increase in the tax basis of assets had not occurred, as realized principally over fifteen years. If Belden does not have sufficient future taxable income, it is possible that Belden will not be able to utilize the tax deductions arising from the increase in the tax basis of the assets resulting in a tax loss carryforward. Belden is not obligated to pay Cooper until a tax loss carryforward is utilized. Belden can carry any loss forward twenty years to offset future taxable income. Cooper estimates that between $40 and $45 million in future payments potentially remain under the Belden agreement. The timing and ultimate receipt of future payments are contingent upon the ultimate taxable income Belden reports each year.
Net interest expense in the third quarter of 2008 increased $5.0 million from the 2007 third quarter, primarily as a result of the March 27, 2008 issuance of $300 million of senior unsecured notes and the utilization of debt financing to partially fund acquisitions and share repurchases. Average debt balances were $1.33 billion and $1.04 billion and average interest rates were 5.2% and 5.4% for the third quarter of 2008 and 2007, respectively.
Electrical Products segment third quarter 2008 operating earnings increased 11% to $249.7 million from $224.2 million for the same quarter of last year. The increase resulted from higher revenues, incremental earnings from acquisitions, and execution on productivity improvement initiatives offset partially by unfavorable product mix and material price inflation.
Tools segment third quarter 2008 operating earnings were $24.1 million compared to $22.0 million in the third quarter of 2007. The increase is the result of favorable product mix and cost improvements from the downsizing of an international facility and productivity initiatives which were partially offset by higher material costs and the impact from lower volumes.
General Corporate expense decreased $5.8 million to $23.9 million for the third quarter of 2008 compared to $29.7 million during the same period of 2007. The third quarter of 2007 results included $6.4 million of incremental legal costs. Absent these items, general corporate expense increased by $0.6 million primarily from normal inflation offset partially by cost reduction initiatives.
The effective tax rate was 18.7% for the third quarter of 2008 and 24.5% for the third quarter of 2007. Cooper reduced income tax expense by $18.3 million during the three months ended September 30, 2008 for discrete tax items primarily related to statute expirations and state tax settlements. The third quarter 2007 effective tax rate was lower due to the income from the Belden agreement being taxed in a foreign jurisdiction at a significantly lower rate than the U.S. statutory rate. Excluding the discrete tax items and the income from the Belden agreement, Cooperâ€™s effective tax rate for the three months ended September 30, 2008 and 2007 was 26.5% and 27.3%. This decrease is primarily related to the implementation of tax strategies that reduced the forecasted annual effective tax rate expected for 2008 to 28.0% resulting in the impact of this lower rate compared to the 28.7% effective tax rate recognized in the first six months of 2008 being reflected in the third quarter 2008 results.
Income Related to Discontinued Operations:
In the third quarter of 2008, Cooper recorded income from discontinued operations of $16.6 million, net of a $9.4 million income tax expense (or $.09 per diluted share) related to its asbestos liability regarding the Automotive Products segment, which was sold in 1998. On September 30, 2008, the Bankruptcy Court denied the Modified Plan A Settlement resulting in Cooper not participating in the Federal-Mogul 524(g) trust. As a result of not participating in the trust, Cooper, has revised its accrual for the Pneumo-Abex asbestos liability and related insurance recoveries in the third quarter of 2008 based on resolution through the tort system. See Note 13 of the Notes to the Consolidated Financial Statements.
Welcome everyone to the Cooper Industries third quarter 2008 earnings conference call. With me today is Kirk Hachigian, Chairman and Chief Executive Officer and Terry Klebe, Senior Vice President and Chief Financial Officer. We have posted a presentation on our website that we will refer to throughout the call. If youâ€™d like to view this presentation please go to the investorâ€™s center of our website www.CooperIndustries.com and click on the hyperlink for management presentations.
As a reminder, comments made during this call may include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside 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 companyâ€™s annual report on Form 10K and other recent SEC filings.
In addition, comments made here may include non-GAAP financial measures. To the extent they have been anticipated, reconciliations of these measures to the most directly comparable GAAP measure are included in the press release and the web presentation. Now, let me turn the call over to Kirk.
Kirk S. Hachigian
As many of you know Cooper is celebrating its 175th anniversary this year and as you can imagine this company has seen its share of economic cycles, technology shifts, wars and general adversity. What has allowed create companies such as Cooper to strengthen and build throughout these difficult times are our dedicated and talented employees, our strong process and accountability based culture, a clear and executable strategy and our ability to learn and consistently reinvent ourselves based on changing market trends.
Clearly based on everything weâ€™ve seen and experienced over the last six weeks, weâ€™ve entered a period of unprecedented volatility and uncertainty. What I can assure the stakeholders of Cooper industries is that this company is well positioned for these volatile times and weâ€™re taking aggressive pro-active actions, some discussed today and others contingency plans that will enable us to address the short term economic conditions while we allow ourselves to continue to focus on our long term strategy and maximize long term shareholder value.
The exhibits posted on our website for todayâ€™s call build upon those that we have shown in the past but have also been modified so that we can properly align the investor community with our shorter achievements and also how weâ€™re positioned to respond to the current economic situation. If you turn to page 2 of the handout our team delivered an exceptional third quarter.
Our total revenues were up 15%, 7% of that core again demonstrating the quality and breadth of our portfolio. Our electrical products group was up 17%, 8% from the core, 8% from acquisitions and 1% from foreign exchange and out tools division delivered plus 1% growth minus 3% core in a very, very difficult economy. We continue to see strong growth in industrial, energy and utility. In fact, those trends remain consistent with the first half of 2008.
Residential and retail was still weak and commercial sales began to soften. We continue to see strong international growth with now representing 38% of our sales, was up 20% in the third quarter. Our earnings per share of $0.97 were up 17% and that was on top of earnings per share growth last year of 20%. Electrical products return on sales was 16.4%, down 80 basis points partially diluted by acquisitions, mix and steep inventory liquidation.
Tools return on sale was 11.9%, up 90 basis points. Year-to-date free cash flow was strong at $473 million, up over $100 million from last year and again we expect 2008 to be our 8th consecutive year where our free cash flow will exceed our net income. If you turn to page 3 Iâ€™ll talk about the end market conditions. Industrial markets are 38% of our sales, experienced mixed results. Automotive, aerospace and general industrial are slow while we continue to see strong sales in oil and gas, refining and petrochemical with particular strength overseas.
Our order rates in the third quarter were solid and our trending expected levels as we enter the fourth quarter. Commercial markets are 26% of our sales, held up well in the third quarter but we continue to anticipate an accelerated drop in overall activity as we enter the fourth quarter and all of 2009. Slowing overall business activity, poor retail sales and non-existing credit will lead to a contract marketing.
Overseas activities, new products and energy efficiency retro fits should provide some relief. Utility markets are 22% of our sales, had solid order rates and we continue to forecast growth. Aged infrastructure, reliability products and international sales remain strong. Lastly, residential shows no signs of improvement with housing starts at 17 year lows and our sales down 7% in the quarter.
If you turn to page 4, for the electrical products segment which is 88% of our sales in the quarter, we saw solid industrial demand particularly on the energy markets, strong North America demand through electrical distribution channel, strong international sales up over 20%, utility demand was up double digits and retail sales down mid single digits. Total electrical orders were approximately equal to shipments in electrical products and in a quarter where our sales were up 17% we consider this a good indicator of the momentum in to Q4. But, weâ€™re very cautious given the macroeconomic environment.
Lastly, acquisitions, mix, inventory liquidation and rapid steel inflation drove electrical margins down to 16.4% or down 80 basis points. Turning to page 5 of the handout for the tools group. We had a very solid performance across the board in a very difficult economy. Despite softening retail sales, weakening automotive and Boeingâ€™s strike, sales were still up 1%, our order rates were roughly equal to sales and our margins expanded by 90 basis points over last year driven particularly by productivity, positive mix from existing the assembly line business and aggressive pricing actions.
Now, let me turn the call over to Terry to provide you some additional comments on the quarter, update you on our capital structure and provide guidance for the remainder of 2008.
Terry A. Klebe
As Kirk mentioned, we delivered a great third quarter even with the credit markets freezing up towards the end of September. Before turning to the earnings for the quarter Iâ€™ll provide some highlights on our free cash flow, balance sheet and liquidity. On slide 6 our free cash flow for the first nine months of 2008 was $473 million compared to $373 million in the first nine months of 2007, a 27% increase.
Great execution during the third quarter drove third quarter free cash flow up 21% over the prior year. Cooperâ€™s strategic initiatives continue to drive performance and as Kirk mentioned, we anticipated delivering the 8th year in a row where free cash flow exceeds recurring income. Our balance sheet remains in great shape with our debt to total capitalization net of cash and investments at 24.3% on September 30th compared to 24.8% on December 31, 2007 and at 20.9% a year ago.
Over the last 12 months weâ€™ve funded $412 million in acquisitions, $165 million in dividends and $364 million in stock buybacks net of proceeds. That totals to $941 million while maintaining a very conservative capital structure. While interest expense increased $5 million in the third quarter of 2008 compared to last year, our share count is down close to 10 million shares or 6% of our shares and our net to EBITDA is only 1.1 times.
Our debt and capital structure is in great shape and we have outstanding flexibility to capitalize on opportunities. Turning to slide 7, our inventory turns in the first nine months of 2008 improved to 6.6 turns compared to 6.2 turns in the first nine months of 2007. This is with the $1 investment in inventory impact by increased material costs compared to a year ago as well as the MTL acquisition completed in February and other acquisitions completed in 2007.
In the third quarter we aggressively went after reducing inventory levels and expect to continue to do so in the fourth quarter to ensure we do not build inventory in a period where our customers will likely be cautious in taking down their inventory. Our receivables days sales outstanding decreased by four days to 63 days. As you can see by our results with the current credit crisis we are aggressively monitoring credit and collections.
Our operating working capital returns increased to 5.4 turns compared to 5.2 turns in the first nine months of 2007. Overall, a solid performance with room to continue to improve. On slide 8, our capital expenditures increased $4.5 million in the first nine months of 2008 and we expect for the year for capital expenditures to continue to be in the $120 to $130 million range. In the third quarter we purchased 1.1 million shares of our common stock spending $42 million against proceeds from the issuance of 6 million.
Through September 30th we have purchased 7.8 million shares spending $325 million against proceeds from the issuance of 17 million. We did issue 1.6 million shares for stock options, matches to 401K and other programs year-to-date. But, as a result, year-to-date, our outstanding shares decrease by 6.2 million shares. Under existing board authorizations, as of September 30th we can purchase up to an additional 9.6 million shares.
In October we received $141 million from the Federal-Mogul bankruptcy and we purchased 3.3 million shares for $111 million to capitalize on the weak stock market in October. Our balance sheet is in great shape and we consistently generate very strong cash flow and as a result we continue to have tremendous flexibility to fund both organic and acquisition growth, pay a competitive dividend and purchase our common stock.
Turning to slide 9, as everyone knows, the credit markets have been in turmoil. Commercial paper markets during certain days that experienced interest rate volatility and lower demand. The good news is the governmentâ€™s actions to buy commercial paper and other activities should calm these markets over time. Weâ€™ve maintained a small presence in the commercial paper markets to keep our name out there but do not need any issuances to fund our cash needs.
We are currently forecasting excluding acquisitions and further share buybacks to end 2008 with no commercial paper outstanding and cash in excess of $450 million. We do have a couple of small acquisitions that could close by year-end but clearly have more than ample cash to fund them. As we look forward to 2009, we have our $500 million credit facility maturing in November and $270 million in notes also maturing in November 2009.
Weâ€™ve been in discussions with our banks on renewing the credit facility and at this point thereâ€™s no indication that weâ€™ll have issues replacing the current facility. We likely will have a new facility in place in the first half of 2009. As for the debt maturity, we are going to operate as if we have to retire this debt until such time as interest rates are attractive. With no commercial paper issuances and the retirement of the $270 million in debt, our forecast is to have in excess of $600 million of capital available for acquisitions and stock buybacks through the end of 2009.
The bottom line is that we have more than adequate liquidity without any reliance on the credit markets and absent any additional stock buybacks or acquisitions weâ€™d end 2008 with net debt to EBITDA significantly below 1 to 1 and weâ€™d end 2009 with net debt of less than $355 million and be essentially debt free in 2010. Before turning to the results for the third quarter, Iâ€™ll cover Federal-Mogul asbestos on slide 10.
At the end of September, the judge presiding over the Federal-Mogul bankruptcy ruled that we could not participate in the Federal-Mogul 524(g) asbestos trust. While we and the other parties involved believe the judge erred in the ruling, we concluded that appealing and continuing to drag out the outcome was not in our best interest. We believe the liability is very manageable and ultimately it will be much more economical to resolve the cases through the tort system than it would have been through contributions to the Federal-Mogul 524(g) trust.
As our financial statements previously were prepared as if we participated in the 524(g) trust, we had to revise them to present insurance assets as a receivable and the estimated liability based on projects of future indemnity and defense costs. As a result we recognized a $0.09 per share discounted operation gain from the revised accounting in the third quarter. Now, we accrued 45 years of indemnity costs estimated at $460 million and 45 years of defense costs estimated at $355 million.
These amounts are not discounted which would decrease the liability by over 40%. Insurance receivables of $192 million were recorded. The insurance receivable only represents insurance in place agreements and settlements. We will collect additional insurance as we enter in to agreements with insurance carriers. Over the last three years our indemnity and defense costs net of insurance have averaged less than $25 million a year.
The last time any asbestos products were produced by Avex was in the 70s. The population that can claim exposure is steadily declining and should make the management of the liability easier as time goes on. Now turning to the results for the third quarter on slide 11. First there were items that impacted both the third quarter of 2008 and 2007. In the third quarter we recorded discreet tax accrual items of $18.3 million primarily related to the expiration of statutes of limitations.
This item increased third quarter earnings per share $0.11. In the prior year third quarter we recognized $23.5 million of Belden income partially offset by $6.4 million in legal accruals related to old previously disposed of operations. These two items increased our earnings per share by $0.10 in the third quarter of 2007. Excluding these unusual items, our earnings per share would have been $0.97 in the third quarter of 2007 and $0.83 in the third quarter of 2007, a 17% increase.
In the third quarter 2008 excluding the tax accrual adjustments, our effective tax rate was 26.5%. As I am sure you are aware, the accounting rules require us to reflect tax strategies and other events in the period they are actually implemented. As a result the rate would have been 28% except that the first six months were at a higher tax rate and the impact to bring the nine months rate to 28% flows through the third quarter.
This catch up added $0.02 earnings per share in the third quarter. Now, in the third quarter we were also required to take a $3.9 million pre-tax charge for the curtailment of an international pension plan. We started freezing this plan and discontinuing it back in 2006 and finally got approval which meant the plan had to be revalued and we had to take a charge when that event occurred. This charge decreased electrical products earnings and our reported EPS by approximately $0.02.
Turning to slide 12, year-to-date in 2008 unusual items totaled $0.10 per share in the prior year $0.44 per share. Excluding the unusual items, the first nine months of 2008 continuing income per share totaled $2.75 compared to $2.31 in the prior year an 19% increase. Turning to slide 13, today we reported a revenue increase of 15% aided by currency translation which added 1% and acquisitions which added 7% leaving a 7% core revenue growth.
Revenues were at the top end of our forecast with the electrical segment exceeding the forecast and tools falling short of the forecast. Revenues tracked through the quarter at a relatively consistent rate each month. However, we saw the reactionary effect of the credit crisis and media coverage in late September where we saw stock type product sales becoming volatile and demand weakness in some products.
October to date has been mixed with a pickup in activity in some product lines and continued slowness in others. Clearly, our customers are going to be cautious on carrying inventory over the next couple of quarters. Growth in businesses serving energy markets is continued with double digit growth and our utility business posted double digit growth. We delivered core revenue growth in every electrical division except one in the tool segment.
Interesting, even with all the negative indicators and news flow and a volatile end to September, our orders remain strong in the quarters with orders exceeding shipments in electrical. Tools on the other hand had sales exceeding orders. Exclusive of the unusual items I covered previously, we reported $0.97 earnings per share, a 17% increase.
Now, our results were impacted by product mix and slowing our manufacturing production and material inflation during the quarter which Iâ€™ll touch on in a minute. But, overall we performed very well in a tough economic environment. I discussed in our February, 2008 outlook meeting that reducing our share count would be a nice contributor to our earnings per share growth in 2008. Simply taking the reported lower share count, 6% of our earnings per share growth was from stock buybacks.
However, as you know, this is more like 4% when you consider the additional interest expense incurred to finance the share buybacks. Turning to slide 14, as I mentioned earlier, acquisitions contributed over 7% to our revenue growth. The incremental revenue from acquisitions contributed slightly over 10% return on sales with higher selling and administrative costs. Our gross margin declined 60 basis points resulting in the gross margins being 32.3% in 2008 versus 32.9% in last yearâ€™s third quarter.
Gross margins were impacted by sales mix within the electrical segment and our intentional reduction in production volumes to bring inventory levels down. Steel and certain other metals and energy have increased significantly year-over-year creating a challenging environment. In the third quarter material inflation alone was $29 million in excess of our forecast at the beginning of the year.
As I mentioned last quarter, our tools group in the second quarter did not recover price in excess of material costs primarily due to LIFO inventory accounting which requires the expensing of material cost increases in the current period. Iâ€™m pleased to report that tools did achieve adequate pricing to offset the increased material costs in the third quarter. We did however see two of our larger businesses challenged with material inflation in the third quarter.
Both of these businesses are in LIFO inventory accounting for their US operations and did not achieve adequate pricing to offset material inflation and probably were not as aggressive as weâ€™d like on achieving price versus sales volume. Both of these businesses due to their backlog will continue to impact margins in the fourth quarter.
Selling, general & administrative expenses for the quarter as a percentage of sales were 17.8% compared to 18% in the third quarter of last year. Incremental impact of acquisitions added 30 basis points to selling and administrative costs as a percentage of sales and include a very nice improvement in reflecting of the actions that weâ€™ve been taking in the last 12 months to reduce costs.
From a segment reporting perspective, the third quarter of 2008 reported $23.9 million in general corporate and other expense compared to $23.3 million in the comparable quarter of 2007 excluding the $6.4 million of unusual items. During to slide 15 operating earnings increased 12% excluding the unusual items in the third quarter of 2007 with operating margin declining 30 basis points to 14.5%.
Continuing to slide 16 on net interest expense, our tax rate and net income. Our next interest expense was up $5 million in the quarter driven primarily by the acquisitions and stock buybacks. Exclusive of unusual items our effective income tax rate for the third quarter was 26.5% and as I mentioned earlier, this reflects the catch up effect of the tax rate in the third quarter of 2008. A great job by our tax team successfully implementing tax improvements in the third quarter that drove the rate down.
Now, in the fourth quarter our rate well reflect the R&D credit that passed in to law in October which will likely result in the fourth quarter tax rate in the 26% to 26.5% range. For the year, weâ€™re currently forecasting around a 27.5% to 27.75% tax rate excluding unusual items. Our income from continuing operations increased 12% on a 15% revenue increase excluding the unusual items.
Turning to the segments and slide 17. For the quarter our electrical products segment increased 17% excluding currency translation of 0.7% and incremental revenue from acquisitions of 8% with core revenues growing 8%. Price realization represented close to 3% of the growth. The businesses serving the energy market continue to excel with core revenues up double digits against tough comparables. Our international operations also continued to perform well.
Electrical retail sales were down mid-single digits driven by the continuous weakness in residential and light commercial end markets. Our lighting business more than offset the retail channel weakness with solid sales increases in the commercial industrial market and delivered low single-digit core revenue growth in a very challenging market.
Our power systems utility business grew core revenues double digits aided by the hurricane that hit the Gulf Coast.
Revenue growth for electrical products was strong both in the US and internationally. Developing country revenue growth was 25% and electrical distribution revenue was up double digits with very strong growth in both North America and the rest of the world. As I mentioned previously, our softest channel was retail where we declined mid-single digits. The residential market continues to be weak partially offset by new customers and products.
Overall, electrical product segment earnings increased 11% and return on sales declined 80 basis points to 16.4% from 17.2% in the third quarter of 2007. Excluding the incremental impact from acquisitions, return on sales would have been 16.8% and would have been 17% excluding the pension curtailment charge. As I mentioned earlier, sales mix and material inflation and inventory reduction efforts decreased return on sales.
Turning to the tools segment on slide 18. In our tools business sales increased 1% with currency translation contributing 4% of the growth. We had a tough quarter on the top line for tools. The Boeing strike, a tough motor vehicle end market and close to a double-digit decline in retail sales impacted results. However great execution with tools operating earnings increasing 10%. Our tools operating margin as a percentage of sales increased 90 basis points to 11.9%. The results were aided by the benefit from the prior year downsizing of an international facility and favorable product mix.
Turning to slide 19. Last quarter we said absent a significant global or US economic downturn, we continue to remain confident that we can deliver double-digit earnings increases in these tougher economic times. Beyond the unprecedented turmoil in the credit markets and the significant impact on the forecasted growth rates in the global economies will impact Cooper as well as most other companies.
We believe itâ€™s prudent to take additional actions now to adjust our cost structure. Before year end we anticipate reducing our global workforce over 1,000 employees. We anticipate a severance charge of $20 million to $22 million in the fourth quarter and expect to realize a benefit of over $50 million annually. We are also additionally evaluating plans and consolidating production volumes and other contingency planning.
We will be conducting our annual business reviews over the next couple of months and developing our 2009 forecast. We currently anticipate that our utility business and most of our businesses serving industrial markets will continue to show growth for 2009 albeit at what may be a low single-digit rate. It is likely that commercial and residential markets will be tough in 2009. However developing markets should have reasonable growth in energy efficiency products and new platforms should offset some of this weakness.
As I know the question will be raised, pension expense and currency translation will be a headwind. However the lower share count should offset these headwinds.
Now we do not have a crystal ball on how long or deep the recession will be; however we are proactively adjusting our cost structure in advance of a slowdown and continuing to position Cooper to outperform in what looks like will be a tough environment over the next year or so. Before turning the call back to Kirk for his final comments, Iâ€™ll provide comments on our forecast for the fourth quarter and year.
Turning to slide 20, in the fourth quarter weâ€™re forecasting revenues to increase 7% to 9% with electrical up 9% to 12% and tools down 5% to 10%. Core revenue growth is forecast to be low single digits. We anticipate that customers will reduce inventory levels in the fourth quarter and believe it is prudent to assume that we will not experiencing the normal customer purchasing to achieve year-end incentives.
In tools weâ€™re forecasting very weak retail sales for the Christmas holiday and weakness across tools end markets. Typically, the fourth quarter is the strongest quarter for tools. This year is it is unlikely that we will experiencing the normal sales and earnings pattern in the fourth quarter. Earnings per share are forecast to be in the range of $0.83 to $0.92 per share flat to up 11% from the $0.83 we reported in the fourth quarter of last year exclusive unusual items.
As I indicated we expect customers to react to the credit crisis and significantly reduce inventories. We are likewise factoring in to our forecast extended holiday manufacturing facility shutdowns to ensure that we do not build inventory. We implemented contingency plans and are aggressively reducing headcounts and discretionary spending to prepare us for what will be a more challenging environment. This guidance does not include the severance or other charges in the fourth quarter.
For the full year weâ€™re forecasting our top line to grow 12% to 14% and excluding unusual items in the fourth quarter charge weâ€™re forecasting $3.58 to $3.67 earnings per share. Let me turn the call back to Kirk for his final comments.
Kirk S. Hachigian
Turning to page 21, as Terry and I have reviewed we are extremely well positioned to continue to execute our long term strategy. Core to that strategy is our alignment around our business initiatives. These initiatives enable us to deliver exceptional results in a strong economy but even more importantly will allow us to outperform in a weakening environment. Customer loyalty, Cooper Connections, C3, innovation and globalization have dramatically accelerated our core growth profile and allowed us to penetrate new and expanding markets around the world.
Weâ€™ve also built strong process capabilities around strategic sourcing, value engineering, lean and productivity, driving margins and free cash flows to record levels. Lastly, over the last several years weâ€™ve made significant changes to our management team to allow us to execute these initiatives including operating a major structure. Weâ€™ve developed a culture around accountability and weâ€™ve created incentive programs that reward pay for performance.
On page 2 I want to make it perfectly clear that weâ€™re facing in to the reality of this new economy. While the credit markets have frozen weâ€™ve positioned the company with great liquidity and to continue to invest and return capital to our shareholders. Our dividend is secure and further share repurchases remain an option. We anticipate commercial construction to have significantly weakened over the coming quarters and taken todayâ€™s [inaudible] reactions in anticipation of slowing and have other contingency plans in place.
We will continue to invest in emerging new technologies including LEDs, lighting controls, mass notification and weâ€™ll expand our global footprint to offset weakness in North America and western Europe. Our acquisition integrations are on track. We expect our industrial businesses to continue to grow albeit at a slower rate. Emphasis on energy, energy efficiency, safety and developing market infrastructure should offset a slowing mature market.
We will continue to fight for share in the declining housing and residential markets. These markets will be attractive and growing over the next few years. Lastly, we will offset the fx and pension expense with additional share repurchases at attractive prices. Heading in to 2009, we have a heavier emphasis on cost management and cash flow but weâ€™ll continue to invest in key growth opportunities, acquisitions and other ways to maximize shareholder value.
Let me turn the call back over Jon to take your questions.
At this point weâ€™re going to open up the call to questions. I just want to remind our listeners to please enter the queue using your own name. Out of respect to others waiting to ask a question we will not take questions to people who enter the call queue using someone elseâ€™s name.