Eaton Corporation, PLC (ETN)

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Eaton (ETN)

Q2 2011 Earnings Call

July 25, 2011 10:00 am ET

Executives

Richard Fearon - Vice Chairman and Chief Financial & Planning Officer

Donald Bullock - Senior Vice President of Investor Relations

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

Analysts

Ann Duignan - JP Morgan Chase & Co

Edward Wheeler - Buckingham Research Group, Inc.

Joshua Pokrzywinski - MKM Partners LLC

Stephen Volkmann - Jefferies & Company, Inc.

Brian Rayle - Northcoast Research

Jeffrey Hammond - KeyBanc Capital Markets Inc.

Terry Darling - Goldman Sachs Group Inc.

Jason Feldman - UBS Investment Bank

Eli Lustgarten - Longbow Research LLC

Andrew Casey - Wells Fargo Securities, LLC

Peter Chang - Crédit Suisse AG

Jeffrey Sprague - Citigroup

Mark Koznarek - Cleveland Research Company

Christopher Glynn - Oppenheimer & Co. Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Eaton Corporation Second Quarter Earnings Call. [Operator Instructions] And as a reminder, this call is being recorded. I'll now turn the conference over to Senior Vice President, Investor Relations, Don Bullock. Please go ahead.

Donald Bullock

Good morning. I'm Don Bullock, Senior Vice President of Investor Relations. Welcome to Eaton's Second Quarter 2011 Earnings 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 third quarter 2011 and full year 2011 net income per share and operating earnings per share; third 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 include a presentation on second quarter results, which can be accessed on the Investor Relations web page. Additional financial information is available in today's press release, which is located on the Eaton's homepage at www.eaton.com. At this point, I'll turn it over to Sandy. Sandy?

Alexander Cutler

Thanks, Don, and good morning, everyone. Thanks for joining us this morning. We're completing obviously a very strong second quarter, which for us signified a strong first half and what we expect to be a record year in both sales and profits in our 100th anniversary year. I'm sure you've all had the chance to read our press release, our operating earnings per share of $0.97, up 47% versus last year, $0.04 higher than the midpoint of our guidance that we provided in our April call, and with the tax rate in line with our guidance that we did provide in April.

Net income per share was also $0.97, up 47%. Sales were up some 21% at $4,090 million, confirmation of strong continued momentum in our markets. The markets were up some 12% from a year ago in the quarter. 26% of our sales came from developing countries, and the year-to-year increase on those sales from developing countries were some 30%. And our quarterly segment profit margin of 13.9% was an all-time record, and obviously underpinned what had been our full year guidance of 14% for segment margins. As you'll see, as we go through this pack that we're raising it to 14.5% for the full year, this year.

We turn to Chart #4, entitled Comparison to Second Quarter Guidance. Obviously, the midpoint of our guidance that we provided in our April conference call was $0.93. We saw a just marginally lower markets than we had expected that accounted for about $0.01, and an improved performance for our cost of operations at $0.05. And that's what led us to the $0.97 reported operating earnings per share of just over 4% versus the midpoint of our second quarterly guidance.

If we move to Chart 5. You saw many of these figures, obviously, in the press release. Our sales were up some 8% from the first quarter, which we think references the continued strong momentum in our marketplaces. The 13.9% operating margin does encapsulate the roughly $25 million of uncovered commodity costs that we had shared with you in the April conference call that we expected during the second quarter. It came in very much in line with that, and that's about 0.6 point.

Market growth of 12%. We outgrew by about 2 points (sic) [2%]. Acquisition revenues accounted for 1 point (sic) [1%] and then ForEx accounted for about 6 points (sic) [6%]. And that's the overall elements that led to the 21% increase in year-to-year sales during the quarter.

Moving into the individual segments. If we move to Chart #6, the Electrical - Americas segment. Sales of just over $1 billion in the quarter, up some 7% from the first quarter. 16% year-to-year of strong, we think, revenue performance. Market was up about 10%, and you can see the elements of outgrowth, acquisition and ForEx. 14% operating margin in the quarter. Bookings up some 9%. The great strength we're continuing to see here is more on the industrial side of the marketplaces. We believe the U.S. nonresidential markets are close to a bottom and that's very much reflected in the bookings that we're seeing here during the second quarter, and the fact that our bookings year-to-year are up quite strongly in the nonresidential marketplace.

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