Eaton Corporation, PLC (ETN)

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Eaton (ETN)

Q4 2011 Earnings Call

January 26, 2012 10:00 am ET

Executives

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

Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer

Donald H. Bullock - Senior Vice President of Investor Relations

Analysts

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Ingrid Aja - JP Morgan Chase & Co, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Eli S. Lustgarten - Longbow Research LLC

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Terry Darling - Goldman Sachs Group Inc., Research Division

David Raso - ISI Group Inc., Research Division

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Eaton Corporation Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And I would now like to turn the conference over to our host, Mr. Don Bullock. Please go ahead.

Donald H. Bullock

Good morning. I'm Don Bullock, Senior Vice President, Investor Relations. Welcome to Eaton's Fourth Quarter and Full Year 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'll 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 first quarter 2012, full year 2012 net income per share and operating earnings per share; full year 2012 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 fourth quarter results, which can be accessed on the Investor Relations page. We've placed our earnings presentation and released the materials out early this morning, earlier than normal, since many of you have a number of calls today. We want to be mindful of that, and we will conduct the call concluding at 11 p.m. Additional information is available today in today's press release, which is located on Eaton's homepage, www.eaton.com.

At this point, I'll turn it over to Sandy.

Alexander M. Cutler

Great. Thanks, Don, and welcome, everybody. Thanks for joining us. I'm going to work from the documents that Don mentioned, and I'm on Page 3 to start, labeled Highlights of Fourth Quarter Results. And we had a very strong quarter filled with a number of records, although we did fall just short of the midpoint of our guidance.

Just to highlight a couple of the points that are on the chart that you see, our sales were up some 10%. Our operating profits, $1.08, per share. We're up 27% from last year. Net income per share, $1.07, was up 30% from last year. So I'm really delighted with that performance.

Emerging markets were about 26% of our sales. And as you saw in our press release, they were about 27% for the full year. That really reflects -- a theme we'll talk about a little later when we talk about end markets that we saw, emerging markets continued to weaken through the fourth quarter.

You put all that together, and we had a record year in 2011, our 100th year. It was our first time we had revenues over $16 billion. Our sales were actually up 17% from 2010. Our earnings per share were up 44% from 2010 and 19% above our all-time previous record, which was in 2007. And importantly, our segment operating margins at 14.2% were up 1.5 points and obviously great progress toward that goal we've discussed with you of 16%.

All of this sets the foundation for, we believe, another record year in 2012. And that gave us the confidence to increase our dividend by 12%. You saw as part of our press release this morning, from $0.34 per share to $0.38 per share.

Moving to Chart 4. This is a reconciliation to the midpoint of our guidance for the fourth quarter. You'll recall that, that midpoint guidance was $1.11, which was a 31% increase over last year. We actually ended up achieving $1.08 at the bottom of the chart, which was 27%.

We did encounter lower market growth that we had anticipated in the fourth quarter. It's approximately $200 million of volume. We outlined in the press release, so I won't spend time on it right now. Where it occurred was primarily in our Electrical business.

We had higher corporate expenses in the quarter. We indicated that they came in about $0.05 higher than we thought. If you recall the quarterly progression of our corporate expenses were about $45 million in the first quarter, $54 million in the second quarter, $56 million in the third quarter, and we had provided full year guidance that we thought we'd be close to about the $260 million when we started the year.

We had anticipated it would be on the order of about $80 million from the fourth quarter. As you saw, it came in at $102 million. And really, that's primarily the result of the fact that as shipments were a little lower than we anticipated, our inventories ended up being a little higher. And that incremental $20-plus million dollars of expense was primarily driven by the higher LIFO expense, as I mentioned with our inventories remaining a little higher than we had estimated.

The lack of the commodity hedge recovery that we note on this chart, you'll recall in the third quarter, we had taken mark-to-market adjustments for our commodity hedges of approximately $22 million. And that had been about $0.06. And if you recall in that reconciliation, we said we would not repeat -- or we did not expect that we would have another mark-to-market in the fourth quarter. We did not. But we had expected that we might get about $0.02 of recovery. And with commodity prices not really changing fundamentally from where they were at the end of the third quarter, we did not realize that additional income. So that was about a negative $0.02.

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