Eaton Corporation, PLC (ETN)

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Eaton Corporation (ETN)

Q4 2009 Earnings Call

January 25, 2010 10:00 am ET

Executives

William Hartman – VP IR

Alexander Cutler – CEO

Richard Fearon – CFO

Analysts

Eli Lustgarten - Longbow Research

David Raso - Isi Group

Ann Duignan – JPMorgan

Robert Wertheimer - Morgan Stanley

Jeffrey Hammond - Keybanc Capital Markets

[Terry Darling – Goldman Sachs]

Robert Cornell - Barclays Capital

Nigel Coe - Deutsche Bank Securities

[Tim Thane – No Company Listed]

Christopher Glynn - Oppenheimer & Co.

Jamie Cook - Credit Suisse

Mark Koznarek - Cleveland Research Company

Andrew Casey - Wells Fargo Securities

Ted Wheeler – [Buckingham Research Group]

Dan Dowd – Sanford Bernstein

Rob McCarthy – No Company Listed

Presentation

Operator

Welcome to the Eaton Corporation fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Bill Hartman. Please go ahead, sir.

William Hartman

Thank you. Good morning everyone. Welcome to Eaton's fourth quarter and full-year 2009 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO, and Richard Fearon, Vice Chairman and Chief Financial and Planning Officer. As has been our practice, we will begin today's call with comments from Alexander, followed by a question-and-answer session.

As a reminder, the information provided in our conference call today will include forward-looking statements concerning the first 2010 and full year 2010 net income per share and operating earnings per share, full-year 2010 estimates on revenue, our worldwide markets, our growth in relation to those markets and our growth from acquisitions.

These statements should be used with caution and are subject to various risks and uncertainties many of which are outside of the company’s control. Factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in today's press release and related Form 8-K filing. As a reminder, we have included a presentation on the fourth quarter results which can be accessed on the Investor Relations page of eaton.com. Additional information is available in today's press release, which is also located on Eaton's home page at www.eaton.com.

With that, I would like to turn the meeting over to Alexander Cutler.

Alexander Cutler

Thanks William and let me welcome everybody. Thanks for joining us this morning. We have both a very strong quarter and we think some exciting guidance relative to 2010 to go through with you this morning. I am going to work from the presentation that Bill mentioned so if you have that in front of you I would ask you to turn to page three, highlights from the fourth quarter.

Before I walk through these numbers with you in the ten some years we have been doing these forums, the audience has changed a great deal and is obviously much broader than it once was. So let me start by thanking first our customers for their continued confidence in what has been a challenging year, 2009, especially to thank our employees whose focus and sacrifice throughout this year has really made an extraordinary difference in diverting a very difficult economic environment into what we think were very strong results at the end of this year.

Turning to our results, obviously on this sheet you can see our operating earnings were up some 25% year-over-year. Obviously also stronger than the guidance we provided for the fourth quarter. Net income per share also up 1.8%. Our sales of $3.1 billion down 10% from a year ago so we think it is significant obviously that our earnings were up on down sales and reflects all of the work we have done this year to really get our cost structure and our balance sheet situated to really deal well in this environment.

End markets down still some 15% but clearly better than we saw earlier in the year and that has continued in every quarter this year. Some 25% of our sales now from developed nations. Operating cash flow, the beat goes on there and obviously very strong performance for the fourth quarter. Operating cash flow was $469 million and for the full year a free cash flow record of $1.2 billion. Embedded in both those figures in terms of the operating cash flow achievement as well as free cash flow achievement are very substantial and we think permanent movements in our working capital.

Days on hand were down some 19 days from the year-ago fourth quarter. Also down three days from the end of the third quarter and our DSO was down seven days from year-end 2008 and four days from the third quarter. So not simply a reduction in dollars on the balance sheet but a real change in the efficiency of our working capital during the year.

As we turn to chart four, a quick comparison to our fourth quarter guidance. Obviously the guidance we provided for operating earnings per share for the fourth quarter was $1.20. We had higher RIF expense during this quarter. We detailed in our earnings announcement we did take some action in a number of our late cycle businesses and some of our mid-cycle businesses to further trim our cost structure. This cost us about $24 million or $0.17 per share more than we anticipated when we put our $1.20 guidance together.

Our RIF savings came in a little lower than we had estimated. Really nothing material there but about $12 million difference or $0.08. So about $0.25 of pressure from those two items which then were more than made up for the fact that a tax credit came in at about 25% instead of the 17% we had anticipated at the beginning of the quarter but the real big news is the improved performance of the businesses of $0.32 really continuing that very strong momentum we saw in the third quarter in this respect.

Our actual came in at about $1.35, about 12.5% above our guidance and our revenues were about what we expected at about $3.1 billion. The full year markets finished down about 21% as we anticipated really for the full second half of last year.

Turning to page five, just a quick summary that highlights a couple of figures on this chart. You have seen them all at this point. Obviously the $3.1 billion in sales, 11.1% operating margin at the segment level that compared to 10.9% in the third quarter and 8.2% in the second quarter and 4.2% in the first quarter. I think that gives you a sense of the rate of improvement throughout this year.

Market growth, as we mentioned, on the lower left hand corner of the chart, down about 15% in the fourth quarter and FOREX slipped from the earlier quarters in the year now contributing about 5% to sales. All that nets out to the 10% reduction in our sales for the quarter.

If I ask you to turn to chart six, starting into our individual business segments, electrical Americas segment sales of $827 million. That was down from the third quarter of $843 million. If you recall this segment peaked in the second quarter of this year as we have seen these markets continue to run off during this year and I will talk more about that next in a couple of charts. Strong continued margins in this business. 15.2% in the quarter. We commented in the press release it would have been 16.1% except we did have to take some additional reduction in force charges to help ready ourselves for the market as we continue to see the non-residential segment of this portion weakening.

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