Eaton Corporation, PLC (ETN)

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Eaton Corporation (ETN)

Q2 2010 Earnings Call

July 21, 2010 10:00 am ET

Executives

Bill Hartman - IR

Sandy Cutler - Chairman and CEO

Rick Fearon - Vice Chairman and CFO

Analysts

Meredith Taylor - Barclays Capital

Eli Lustgarten - Longbow Research

Steve Volkmann - Jefferies

Ann Duignan - JP Morgan Securities

Rob Wertheimer - Morgan Stanley

Jeff Hammond - Keybanc Capital Market

Andy Casey - Wells Fargo

Terry Darling - Goldman Sachs

Chris Glynn - Oppenheimer & Co.

Andrew Obin - BofA Merrill Lynch

Tim Denovar - Wolfe Trahan & Co

Mark Koznarek - Cleveland Research

Nigel Coe - Deutsche Bank Securities

Jason Feldman - UBS

Robert McCarthy - Robert W. Baird & Co

Presentation

Operator

Welcome to the Eaton Corporation Second 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.

Bill Hartman

Thank you very much. Good morning everyone and welcome to Eaton's second quarter 2010 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO, and Rick Fearon, Vice Chairman and Chief Financial Officer. As has been our practice, we will begin today's call with 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 third quarter of 2010, full year 2010 with regards to net income per share, operating earnings per share, third quarter and full year 2010 revenues, and discussion of our worldwide markets, our growth in relation to those end markets and any growth we will have from acquisitions.

These statements should be as 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 the second quarter results, which can be accessed on the Eaton's Investor Relations page. Additional information is also available in today's press release, which is loaded on Eaton's home page at www.eaton.com.

Then with those comments I would like to turn the session over to Sandy Cutler. Sandy?

Sandy Cutler

Thanks Bill. Welcome everybody. I am going to work off of the certain exhibits that Bill referred to that are posted on our investor webpage. As Bill covered the forward-looking statement on page two, I am going to move right to page three, titled, highlights of second quarter results.

We obviously had a very strong quarter, reporting operating earnings per share of $1.36, net income per share of $1.33. The big change in the month and the quarter versus our own guidance has to do with the top-line where our markets were considerably stronger than we had they were going to be. Our sales were up some 16%, up 9% from the first quarter, so continuing a very solid trend of volume recovery.

I would note however that we are still down 21% from our peak quarter in the second quarter of 2008. So that when you look at our profitability, we are really quite pleased with how strong our profitability is still while we are recovering back to previous peak levels.

Operating cash flow was strong at $469 million in the quarter. It’s a reflection of our confidence not only in our performance this year and for the balance of this year but also looking into 2011, we have increased our dividend by 16% moving from $0.50 per quarter up to $0.58 per quarter. You got a chance to look at our guidance for the year; we narrowed the midpoint from the range from $0.30 to $0.20 and then raised the midpoint by $0.55. So a strong increase in terms of looking into the second half as well as capitalizing on the strong second quarter we had.

If you look at that period of April through December that obviously includes the second quarter. That increase in operating EPS for the year was a 16% increase. It’s obviously a 12% increase if you only look at the full year and the difference obviously is the first quarter didn’t change.

If we move to page four, titled comparison of the second quarter, a quick reconciliation against our midpoint of our guidance for operating earnings per share for the second quarter you recall it was a $1.15. We had a higher end markets, they grew about 3% faster than we thought they might have grown. They came in about 12% in our guidance, we thought they will go around 9%. That contributed about $0.17. Our tax rate came in slightly lower than our guidance. You recall we provided guidance for the second quarter of 12% and actually came in at 9%. That makes the $0.21 difference leaving us up to a $1.36, obviously a very big quarter.

Now moving to page five, a quick financial summary, I think you all have seen these numbers before. They are, the 16% sales growth came 12 point from market growth, 4 point from outgrowth. As we talked at the end of the last quarter Forex has been moving back to a neutral point and if you see that here again no impact and really we had no acquisition impact in the quarter either.

I would note that versus the first quarter of 2010 we moved up from a 11.2% segment operating margin to 12.2%, so very pleased with that increase in profitability coming back strongly as the volumes are coming back.

If we move in to the individual business segment, just to give you a couple of highlights, let’s move to chart six titled Electrical-Americas segment, a very strong quarter. Again, you can see while the market did decrease, we were really pleased to record a slight increase in sales.

I think again, this reflects the really strong performance in this business, in both top-line and in bottom line in a year that many investors were very concerned with the non-residential construction driver in this business, caused this business to have a very poor year we were having a very good year. I think that again speaks to the breadth of businesses we have within this business.

So, 13.5% operating margin, sales of 1%. Second quarter bookings up 27%, much stronger than I think people expected and really reflecting strong industrial markets, that’s the beginning of the mid-cycle businesses starting to come back.

Very strong single phase and three phase power quality markets; very strong activity in infrastructure; our stimulus booking are now as for the end of the quarter at $360 million, so very much on track of what we need to be able to ship the 500 million this year.

Also, we think very significantly, there was really not significant distributor restocking has occurred. Distributors are experiencing more shipments from stock, but an awful a lot of that stock is still being shifted on a quick basis, so the distributor inventories are building significantly. We think that is out ahead of us, as the industry surpassed these starts to come up to higher levels.

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