Eaton Corporation, PLC (ETN)

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Eaton (ETN)

Q3 2012 Earnings Call

October 31, 2012 10:00 am ET

Executives

Donald H. Bullock - Senior Vice President of Investor Relations

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

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

Analysts

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

Jeffrey T. Sprague - Vertical Research Partners, LLC

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

David Raso - ISI Group Inc., Research Division

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

Eli S. Lustgarten - Longbow Research LLC

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

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

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eaton Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And I'd 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 of Investor Relations. Welcome to Eaton's Third Quarter 2012 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.

This presentation today contains certain forward-looking statements. Many factors could cause actual results to differ materially from those in these statements, including those set forth in our Form 10-K filed with the SEC on February 24, 2012, any unanticipated delay or failure to close the Cooper acquisition.

This presentation includes certain non-GAAP measures as defined by SEC rules. A reconciliation of those measures to the most directly comparable GAAP equivalent is provided in the Investor Relations section of our website at www.eaton.com.

At this point, I'll turn the call to Sandy.

Alexander M. Cutler

Great. Thanks, Don, and welcome, everyone. I know a number of you are experiencing some telecommunication challenges this morning post-hurricane, so I'm going to try to call out the relevant numbers as we go through the individual pages of our presentation in case some of you have not been able to pull that down.

I'm on Page 3 of our presentation, I'm going to start my comments this morning. Obviously, we reported operating earnings per share of $1.07 this morning, net income of $1.02. Sales were down from a year ago. They were $3.95 billion this year, down some 4% from a year ago. The largest element really contributing to that was negative ForEx of 4 points.

Our end markets were down 1% this quarter, reflecting the deceleration in markets that I spoke about at a number of investor conferences during the third quarter, and our sales from emerging nations continued to be a little weaker than they were a year ago, now about 24%, whereas they peaked around 28%.

Segment margins had a strong 14.6% and then a strong quarterly operating cash flow of $606 million, which we expect to strengthen further in the fourth quarter as we noted in our earnings release. And this individual quarter would've been about 10% higher if we had not ended on a weekend, and I think many of you are aware that when you end on a weekend, your accounts receivable or collections tend to drop over into that next week.

If we move to Chart #4, you'll recall at the time of our second quarter earnings call that we did not provide specific guidance for the third quarter. But deductively, if you looked at the difference between our full year guidance and what we achieved in the first half, that's really what we've tried to display to you in that box on the left side of this chart, which says that in the first half, we achieved operating EPS of $2.08. That would've meant deductively the second half would've been approximately $2.27, and that we had indicated the quarters would be fairly similar, and that's where we simply divided that number by 2 to come out to a reference point for -- here for the third quarter of $1.14.

Against that $1.14, you can see that the big change was we lost about $0.17 of earnings due to lower markets. And they were about $250 million of lower volume than we had anticipated when we started the quarter. And you can see our lower tax rate allowed us to claw back $0.10 of that so that we were able to report $1.07 for the quarter.

Turning to Chart #5. This is the financial summary for the corporation. A couple of comments. First of all, if you look in the light green or blue box on the lower left-hand corner where it says market growth negative 1%, you'll recall in the second quarter, market growth was 3%. And so once again, this is a deceleration or downshifting in the economy we saw in a number of our end markets that really started to hit us in August and accelerated quite quickly in September. And this is the exact move that I was talking about in these investor conferences that it was going to be difficult to call in September because September is such a large month within the quarter, yet we were seeing pretty choppy activity from a number of our customers.

We were able to exercise very strong expense control, and particularly as these markets, as we will detail, weakened in our Hydraulics, Truck and Automotive businesses during the quarter. You also saw that higher interest expense and lower other income accounted for virtually the entire difference of the $20 million of lower net income between the third quarter of 2011 and the third quarter 2012.

Sales were down some 3% from the second quarter. And you can see we're reporting 1% undergrowth in terms of versus our markets. And frankly, that's largely a mismatch between the quick reduction, a rapid reduction in OEM production levels in Hydraulics, Truck and Automotive during the end of this quarter versus the indexes that we use to measure end markets and those markets which tend to be either retail, sales or production levels.

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