Eaton Corporation, PLC (ETN)

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Eaton Corporation (ETN)

Q1 2010 Earnings Call

April 20, 2010 10:00 am ET

Executives

Bill Hartman - IR

Sandy Cutler - Chairman and CEO

Rick Fearon - Vice Chairman and CFO

Analysts

Steve Oakland

David Raso

Eli Lustgarten

Ann Duignan

Jamie Cook

Rob Wertheimer

Jeff Hammond

Andy Casey

Mark Koznarek

Presentation

Operator

Ladies and Gentlemen, thank you for standing by. And welcome to the Eaton Corporation first quarter earnings conference call. (Operator Instructions). I’d now like to turn the conference over to Mr. Bill Hartman. Please go ahead, sir.

Bill Hartman

Thank you very much. Good morning everyone and welcome to Eaton's first quarter earnings conference call for the year 2010. Joining me this morning are Sandy Cutler, Chairman and CEO, and Rick Fearon, Vice Chairman and Chief Financial Officer. As has been our practice in the past, we will start today's call with some comments from Sandy, followed by a question-and-answer session.

As a reminder, the information that we are providing in our conference call today will include some forward-looking statements concerning the second quarter of 2010, the full year 2010 on net income and operating earnings per share and second quarter and full year 2010 revenues, comments on our worldwide markets, our growth in relation to these end markets and our growth from acquisitions.

These comments all need to be used with caution and are subject to the 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 first quarter results which can be accessed on the Investor Relations page. Additional financial information is available in today's press release, which is located on Eaton's home page at www.eaton.com.

And with those preliminary comments my pleasure to turn the meeting over to Sandy Cutler. Sandy?

Sandy Cutler

Thanks Bill. Good morning. Thanks everyone for joining us I’m going to work off of the presentation. I hope you’ve all been able to access it at this point. Bill covered the forward-looking statement. So I am going to move right to page three in your packet the highlights of the first quarter. We had a very strong first quarter. We are very pleased with it and certainly a very different quarter than we experienced a year ago at this time operating income per share of $0.95 excluding the non-cash Medicare Part D charge of $0.14 it would have been $1.09 net income per share of $0.91 and again excluding that non-cash charge of would have been $1.05. Sales were 3.1 billion; up 10% roughly flat was the fourth quarter which you will remember was 31, our end markets grew up 45 for the quarter from 24% of our sales coming from the developing countries where we continue to see the recovery outpacing what’s going on in the developed nations. And our operating cash flow was a negative $162 million that’s after pension contributions of 326 million. And so a fairly difficult first quarter for us and those of you who follow us know that our cash flow tends to accelerate in the second, third and fourth quarter.

Moving to page four, a quick reconciliation of our first quarter guidance, performance versus guidance, you will recall the midpoint of our guidance was $0.85 that’s the midpoint that we set for operating earnings per share in our February New York Analyst Meeting it had been $0.80 prior to that. We obviously reported operating earnings per share of $0.95. I mentioned the impact of the Medicare Part D of $0.14 our tax rate not including the Medicare Part D adjustment, it was at about 4% versus the 12% that we had mentioned that was embedded in our guidance for the first quarter. So that was about a $0.09 positive and we’ve taken it out of this reconciliation so that without the tax impact from those two items, our operating performance is about $1 versus $0.85 so an 18% improvement over our guidance. Actually 25% higher than the guidance we’ve provided in January when we started the quarter.

Now when you get inside the $0.15 of improved performance about $0.13 of that came right out of the operating performance of the businesses and about $0.02 came out of some lower spending in a variety of different corporate line items on the income statement. A year ago some of you may have noted that our other income and expense category was significantly different than we had this year. That was not the basis for our guidance in 2010. You recall a year ago we experienced a period of quite a bit of currency fluctuation. We actually had a large loss associated with that in the first quarter this year. We had not anticipated that this year and that obviously was reflected when we gave our guidance earlier this year and talked about a year ago in which we did not anticipate anywhere near the currency volatility that we saw a year ago.

Moving into page five, total financial summary, I think you’ve seen all these numbers I won’t go through each of them. I would simply point out that the $347 million of segment operating profit that you see in the first quarter 2010 column on the second line that does include one quarter of the $225 million of other costs that we talked about that would come back into our operations this year. So we are really very pleased that in spite of having stopped many of the what we call the special or other cost actions we took last year that were temporary in nature we were able to report that the strong operating results for first quarter. If you saw in our press release our market growth was 4% we did outgrow in end market by a percent of their Forex impact was about 5% in adding up to our overall 10% of sales.

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