Eaton Corporation, PLC (ETN)

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Eaton (ETN)

Q1 2011 Earnings Call

April 20, 2011 10:00 am ET

Executives

William Hartman - Senior Vice President of Investor Relations

Richard Fearon - Vice Chairman and Chief Financial & Planning Officer

Donald Bullock - Vice President and General Manager of General Products Division - Automotive Group

Alexander Cutler - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Ann Duignan - JP Morgan Chase & Co

Joshua Pokrzywinski - MKM Partners LLC

Stephen Volkmann - Jefferies & Company, Inc.

Jeffrey Hammond - KeyBanc Capital Markets Inc.

Jeffrey Sprague - Vertical Research Partners Inc.

Terry Darling - Goldman Sachs Group Inc.

Andrew Casey - Wells Fargo Securities, LLC

Eli Lustgarten - Longbow Research LLC

Terry Darling - Goldman Sachs

Robert Wertheimer - Morgan Stanley

Robert McCarthy - Robert W. Baird & Co. Incorporated

David Raso - ISI Group Inc.

Jamie Cook - Crédit Suisse AG

Timothy Thein - Citigroup Inc

Nigel Coe - Deutsche Bank AG

Christopher Glynn - Oppenheimer & Co. Inc.

Mark Koznarek - Cleveland Research Company

Presentation

Donald Bullock

Conference Call. Joining me this morning are Sandy Cutler, Chairman and CEO; and Rick Fearon, Vice Chairman and CFO. As has been our practice, we will begin today's call with comments from Sandy, followed by a question-and-answer session.

The information provided on our conference call today will include forward-looking statements concerning the second quarter 2011 and full year 2011 net income per share and operating earnings per share, second quarter and full year 2011 revenues, our worldwide markets, our growth in relation to end markets and our growth from acquisitions. Those statements should be used with caution and are subject to various risks and uncertainties, many of which are outside 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've included a presentation on the first quarter results, which can be accessed on the Investor Relations webpage. Additional financial information is available in today's press release which is located at Eaton's homepage at www.eaton.com. I'll turn it over to Sandy.

Alexander Cutler

Great. Thanks, Don, and let me add my welcome to all of you for joining us this morning. I'm going to work from the set of exhibits that Don referenced and so if you'll move to Page 3, it's entitled Highlights of First Quarter Results. We're really pleased to have a strong start to what we continue to believe is going to be a record year in both sales and profits in Eaton's 100th anniversary year and so just highlighting what's on this chart, operating earnings per share obviously at $0.84 here in the quarter. That was $0.04 above the increased guidance that we provided at our February Analyst Meeting on February 25 and obviously $0.09 above the preliminary guidance we provided in our January conference call, so very pleased getting off to a strong start. Net income per share of $0.83, up 80% from a year ago. Sales, up some 23% at $3.8 billion, confirmation of the continued strong momentum in our business and really the advantages of the broad diversification we have across many markets. End markets were up some 14%, a little bit stronger than we had originally anticipated, so again, we think still building momentum in our markets. And 26% of the sales significantly came from developing countries, obviously where the fastest growth is currently.

If we turn to Page 4, just a quick analysis of our results versus the guidance we provided at the end of February. The midpoint of our guidance for operating earnings per share was $0.80; the higher markets than we expected in the first quarter, obviously good news, contributed about $0.03; higher other income than a year ago, still within the half of 1% band that we provided in terms of the guidance for this category but it was higher than the year ago by about $0.02; then a higher tax rate than we had anticipated here in the first quarter, a negative $0.01, and that's what leads to the $0.84 of operating earnings per share, up 85% since a year ago. As I mentioned, that's a 5% improvement over our prior guidance, and it's actually a 12% improvement over the midpoint of $0.75 that we had originally provided in our January guidance for the first quarter. So all in all, a very strong start to what we believe is going to be a record year.

If we turn to Page 5, titled Financial Summary, just a couple of items to draw your attention to. And if you've read the press release and earnings release, you've seen most of these numbers already. Let me just start on the green box that's on the lower left-hand column, up 14% market growth over a year ago; outgrowth of five points, a real confirmation that the products and the services we're offering are garnering increased share and helping us enter new territories. And then if you drop to the bottom of that green box, second line from the bottom, ForEx, a 2-point impact. And you recall coming into this year, we thought the likely impact of ForEx would be neutral. You'll see when we talk a little bit about guidance, we now think that there'll be several hundred million dollars of increased revenue from ForEx, about a 2% contribution here in the first quarter, coming primarily from changes in the relative value of the euro and the Brazilian real.

Now if you pop back up to the column that is titled First Quarter 2011, segment operating margin of 13%. That is consistent with the guidance we provided for this year, where we talked about, during the first half, we expected about $50 million of uncovered commodity costs. We said that would be likely to be split pretty equally between the first and second quarter, and we did incur about $25 million or about half of what we had said, and that's the primary reason that that margin is a little lower than some of you had estimated but it was consistent with our guidance.

If we move to the next page and just quickly take you through our individual operating segments, our Electrical Americas segment, a very strong quarter, met our margin expectations, beat what we would have thought would have been volume and what is always the seasonally weak first quarter. You'll note that volume is down from the fourth quarter about 4%. That's pretty much in line what generally happens fourth quarter to first quarter. Remember, there's a large construction-related portion of this business and then also the single-phased power quality market always is one that starts a little bit more slowly early in the year and builds in the second, third and fourth quarter. Very pleased with the 14% margin, really delighted when you look at the market growth, some 14%. We're continuing to outgrow. Our bookings were up again, a very solid 21%. And I'd be glad to talk more about the individual market segments that are contributing to that.

Strong industrial markets, I think you're hearing that not only from us but from others that that activity is quite strong in the Americas. And we are revising our full year market growth for this segment from 6% up to 7%, really due to two primary drivers: industrial, which I mentioned; and then second, a stronger non-residential. We are beginning to see that market come back. We're increasingly confident that our forecast, that it will bottom by midyear, is correct. And again, we'd be glad to talk more about that when we have some time for questions.

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