Eaton Corporation, PLC (ETN)

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Eaton Corporation (ETN)

Q3 2010 Earnings Call

October 20, 2010 10:00 am ET

Executives

Bill Hartman - VP, IR

Sandy Cutler - Chairman and CEO

Rick Fearon - Vice Chairman and CFO

Analysts

Jamie Cook - Credit Suisse

David Raso - ISI Group

Eli Lustgarten - Longbow Research

Chris Glenn - Oppenheimer & Co.

Meredith Taylor - Barclays Capital

Nigel Coe - Deutsche Bank Securities

Andy Casey - Wells Fargo Securities

Tim Denoyer - Wolfe Trahan & Co.

Andrew Obin - BofA Merrill Lynch

Tim Thein - Citi

Jason Feldman - UBS

Robert Mccarthy - Robert W. Baird & Co.

Presentation

Operator

Welcome to the Eaton Corporation Third Quarter Earnings Conference. (Operator Instructions). I would now like to turn the conference over to Vice President of Investor Relations, Mr. Bill Hartman. Please go ahead, sir.

Bill Hartman

Good morning everyone and welcome to Eaton's third quarter 2010 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO, and Rick Fearon, Vice Chairman and CFO. As it has been our practice, we will begin today's call with comments from Sandy and that will be followed by a question-and-answer session.

As a reminder, the information provided in our call today will include forward-looking statements concerning the fourth quarter of 2010 and full year 2010 for net income per share, operating earnings per share, fourth quarter and full year revenues, description of our worldwide markets and growth in relation to these markets and growth from acquisitions.

These statements should be used with caution and are subject to various risks and uncertainties, many of which are the outside of the company’s control. Factors that could cause results to differ materially from those are listed in our 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 our third quarter results, which can be accessed on the Investor Relations page at eaton.com. Additional information is available in today's press release, which is also loaded on Eaton's home page at eaton.com.

With that, I would like to turn the session over to Sandy Cutler. Sandy?

Sandy Cutler

I hope you all have the presentation available. I am going to start on page 3 of this morning. We had a very strong third quarter from many different perspectives and the summary of the quarter is that our confidence is building and our forward visibility continues to improve.

We had call on February of this year at our New York City meeting we shared with you a multiyear outlook for our likely performance during this economic cycle. There were a couple of high points I just want to build upon as we think about our third quarter. We had set for this next time period we really felt that our annual compound revenue would be between 12% and 14% and you recall within that was a market growth of 7% per year.

We said that we expected to exceed our all time record operating earnings per share by 2012 and that was exceeding the record that we set in 2007 and by 2014 we expect to have a 200 basis points of expansion of segment margins over our previous record of 13% and achieved $2 billion of operating cash flow.

Since we shared those projections with you at the end of February of this year, we upped our full year guidance three times including today, so as we have talked in numerous different forums, it is a reasonable expectation that we are running ahead of that original performance forecast.

With that let me comment a little bit on our third quarter. If you go to the chart 3, operating earnings per share, you saw the announcement $1.60, net income per share $1.57, up 38% from a year ago. That was based on sales in the quarter that were up 18%, but significantly this level of revenues is still down 17% from the peak, which we achieved in the second quarter of 2008. We believe there is more to come here in terms of rebuilding our momentum.

25% of the sales importantly coming from developing countries, which you will recall continue to grow at quite a premium to what we are seeing in developed nations around the world.

Our sales were up 6% sequentially from the second quarter. A good quarter of operating cash flow of 11.8% of sales $420 million and very significantly our segment margins of 13.4% nearly matched our all time record margins which were 13.5% for a quarter despite our volumes being down as we mentioned before.

Our full year operating earnings per share forecast is 10% now better than our July forecast. You recall we came in to the third and fourth quarter forecasting that the operating earnings per share would be a midpoint would be a $1.35, obviously with our $1.60 achieved in the third quarter we beat it handsomely and we have raised our guidance to $1.60 for the fourth quarter. If you look simply at the second half, we have increased our guidance by 90% versus what we shared with you at the end of the second quarter, obviously a very significant move.

If you move to chart 4, a quick reconciliation, as just mentioned, midpoint of our guidance has been $1.35. Our market came in slightly better than we thought they would in the third quarter that added about $0.10. Our operating performance added another $0.08 of improved performance even better than we had anticipated a real reflection of our cost basis really coming through in all benefits of the work we have done over the last several years. Slightly lower tax rate we had guided to the 14% in the quarter and when came in at 11.7% as you saw some improvement from currency primarily driven by the euro rebound in the third quarter so totaling $1.60 a really good quarter.

If you move to page 5, both these numbers are pretty self explanatory, 18% sales increase, 14 points of that came from market growth, 4 from outgrowth, 1 from acquisition and negative 1 from ForEx, significantly when you compare the third quarter to the second quarter of 2010 as I mentioned before the quarter-to-quarter sequential revenue was up 6%. The segment operating profit was up 16%. The net income was up 16%, so continuing to capture real leverage as we are climb back up the volume curve here.

If you turn to chart 6, of the first of our segments, this is the Electrical Americas segment, volumes up some 15% versus the second quarter of 8%, so continuing to see good recovery there. The margins 14.6% we are really pleased with and lets remember this is the low point in the economic cycle for this business, nonresidential construction still down very significantly and this strong quarterly performances one of the reasons you will see that we have raised our guidance as we get to the back of this packet for this segment in terms of operating margins this year.

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