伊頓 (ETN) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Corporation fourth quarter earnings conference call.

At this time, all participants are in a listen-only mode, and later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions) I would now like to tern the conference over to your host, Mr. Don Bullock.

Please go ahead, sir.

Good morning.

I'm Don Bullock, Senior Vice President of Investor Relations.

Welcome to Eaton's fourth 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 will begin today's call with comments from Sandy followed by a question-and-answer session.

This presentation we'll cover today contains certain forward-looking statements.

Many factors could cause actual results to differ from those in the statements, including those set forth in our Form 10-K filed with the SEC on February 24, 2012.

This presentation also includes certain non-GAAP measures as defined by SEC rules.

A reconciliation of those measures to the most direct comparable GAAP equivalent is provided in the Investor Relations section of our Web site at www.eaton.com.

Sandy?

Great.

Thanks, Don, and thank you all for joining us this morning.

I'm going to work from the information that is contained in the earnings presentation that was posted on our Web page, so I hope you each have that in front of you.

I would like to take a little bit more time than we normally do to introduce this call to really address three different subjects.

First, the fourth quarter, and I'll attempt to try to unravel some of the complexity for you that is associated with the closing of Cooper and the many costs which impacted the month of December.

Secondly, to talk about our 2013 economic outlook and our earnings update.

And it really is, as many you of will recall, it's our first guidance update since July since we have been in a relative quiet period since we updated in July.

And then, third, to update you on the Cooper acquisition and the integration and I would tell you just in summary the deal is everything we hoped it would be and more.

And we will give you a little bit of an update of that as we go this morning, and then more detail when we get together in New York at the very beginning of March.

So if you will turn to the third page in the presentation, just a couple of comments on the fourth quarter, and once again, you will recall at the end of our third quarter earnings conference call, we said this quarter was going to be a complex quarter because we were going to have three months of Eaton's results, one month of Cooper results, and then the long list of items related to the closing of Cooper that includes transaction costs, financing costs, the additional shares, the purchase price accounting adjustments, and they obviously make these statements a little bit more complex to interpret.

So if you step back, a couple of summary comments and then we will take you through a couple of charts that I hope you will find helpful in trying to reconcile some of the large pieces.

We reported operating earnings per share of $0.82, a net income of $0.46.

That's, obviously, a $0.36 difference between the two.

And of that $0.36 difference, $0.32 are the transaction costs.

That's the $152 million of transaction costs that you also would have found in our mid-year filings, so that's the same number that we have been talking about since that time period.

And then $0.04 of acquisition integration costs.

Sales for the quarter, for the fourth quarter, were $4.3 billion, up 7%, again, a little built of a complicated construct within that, 14 points, or 14 points of the 7% came from acquisitions, a negative 5 from markets, so obviously markets came off versus the second or third quarter when we reported markets down 2%.

And ForEx about a negative 1% and undergrowth about a negative 1%.

Very strong cash flow in the fourth quarter of $687 million.

And I will talk a little bit about the beneficial impact it has had upon our ability to pay back our bridge loan in just a couple of minutes.

And then, obviously, all of this underlines the fact that we completed the Cooper acquisition on November 30.

Part of the reason we mention that here is that so many of you who saw presentations from us, starting in May and then during the balance of the year, know that our pro formas for 2013 that we had showed for the Cooper acquisition, anticipated the deal would close, because we simply didn't know what day it would actually close, on January 1. The fact that we closed it a month earlier than those pro formas were constructed is why we've been able to pull some of these costs into December that we will be talking about.

If we go to chart 4, a quick reconciliation of our fourth quarter EPS numbers, again, let's start with the net income per share on the top line of $0.46, the transaction-related costs of $152 million, and, again, that is the same number that was included in our mid-year filings, $0.04, about $24 million, of acquisition integration charges.

And of that, about $11 million of that $24 million related to the Cooper deal.

That gets you to operating earnings per share of $0.82.

And then we elected in the fourth quarter to take restructuring costs of about $50 million.

I will take you through those as we go through each of the segments.

But really, the rationale for why we felt that was important is that the markets decreased further than we initially thought they would in the fourth quarter, and our own view is that this slowdown we saw happening as the world economy and the US economy downshifted during the third and fourth quarter is likely to continue in its early part 2013.

And we felt it was prudent to get these costs out to allow us to operate well in a little lower market than we might have anticipated, say, a year ago.

And then, adding back that $0.14 you get to the $0.90 adjusted operating earnings per share, which we think is roughly akin to the basis on which many of you did your estimates in terms of your own view as to how we would do here in the fourth quarter.

If we turn to chart 5, now a little comparison versus last year, because we know many of you are trying to really understand year-on-year performance, and so last year, the fourth quarter 2011, our operating EPS was $1.08.

The net Cooper impact, by the time you take all of the items that pertain to this transaction, so that is the one month of operating results of December, it is the very significant international tax benefits that we referenced in our notes, it is the financing costs, it is the additional shares, and it is the purchase price accounting, and, obviously, a very complex and lengthy group of items, that's a positive $0.03 in terms of the impact on the quarter.

The lower tax rate for Eaton, and this is Eaton alone, so you can think of it as Eaton Classic, if you want, was about a $0.04 benefit.

As you saw in the note attached to our statements, that $0.04 really came from foreign tax credit utilization, a little lower international provision, some favorable mix, and what does favorable mix mean?

It means that in the countries that have the higher tax rates we had less income in those than we had estimated.

Lower end market growth, I think one of the big highlights in terms of really trying to understand what is happening in our end markets, about an $0.18 impact.

This is that difference, as I mentioned, between a 2% down, as we were in anticipation of coming in, we were 5 points lower versus a year ago than we had anticipated here in the -- or than a year ago in terms of our markets, and that throws off somewhere in the order of $120 million, $125 million of less volume.

Most of that lower market was in Hydraulics and was in our Vehicle segments.

We will talk a little bit more about that.

Our restructuring costs of $50 million, that is a $0.14 negative, and then ForEx, a fairly small impact.

That's how you get to the $0.82.

And remember, the $0.82 does not include the $152 million of the significant items transaction costs from the Cooper deal.

If we turn now to the segments and we will take you through those, let's go to page 6, overall results for the Company.

Just I would add I think most of these numbers on this page speak for themselves.

Sales up 7%.

Obviously, net income down by some 51% for all of the reasons I just itemized in terms of the significant impact of the Cooper transaction, plus the $50 million of restructuring costs that we took.

The acquisitions on the left-hand side in the greenish box, that 14% positive, that is about $580 million of sales in the quarter that came from acquisitions.

And then if are you trying to kind of track our progress, since the third quarter of 2012, our sales then were $3.95 billion, obviously in this quarter, helped by acquisition revenue of some $580 million, we were at $4.3 billion.

Jumping into the individual segments, if you turn to Electrical Americas segment, again, another terrific quarter from this business.

Our overall volume is up 3%, operating profit up 11%, margins at 16.7%.

We think very significantly in the look-forward dimension here, orders really strong, up 11%.

And a little bit surprising, we had equal strength in the power distribution side of the business and the power quality business.

Now that is not to say the markets were equally strong, but we had a number of very large wins in the power quality area that we think boosted our results a little bit higher than you find in the end markets because as we look at the strength, the strength in the markets themselves has been US residential and non-residential.

The power quality market has still been slow as we've been talking about.

And what we're really particularly excited about is continuing strong tone in January, as we're seeing booking activity here in this last [slide.]

A number of you have asked questions about Hurricane Sandy in terms of how it impacted us.

As you can appreciate, it is hard to estimate because some of these orders come through the distribution partners and some of them, we have orders come direct, but our best estimate is in the fourth quarter it was somewhere on the order of about $25 million in orders and we think that is likely to repeat again in the first quarter because not all of the repairs and services were able to be completed in the fourth quarter.

Just one last comment on this chart, what I think is overall very good news, is the Rolec acquisition, remember that is the acquisition of the Chilean-based electrical business we bought, is what you're seeing, causing the 3% positive growth from acquisitions.

And that's about $26 million of revenue in the quarter.

If we move to the next chart, chart 8, this is the Electrical Rest of World segment, I think good news here, again, that you will recall the third quarter our volume was $686 million, so volume is up about 4% from the third quarter, 2% from a year ago,, as you can see.

We were able to hold a 10% margin in spite of the fact that these markets are not back to where they have been historically.

It is the first quarter of sales and booking growth in over a year.

So the way I would characterize this is we've seen the combination of the European and Asian markets stabilize.

Europe, I would call, a little bit more stable.

We are beginning to see growth again in Asia.

We did take some restructuring costs in this segment that reduced our margins by about 40 basis points, about $2.5 million of costs.

And that really was to continue to realign employment levels, most especially in Europe, but to some smaller degree in Asia-Pacific.

These markets, you will recall in the third quarter, we had reported to you were down about 6%.

We think they're down about 5% in the fourth quarter.

But I would say the tone feels a little bit better in this area in terms of us finding bottom and now being able to record a quarter of some improvement in terms of both sales and bookings.

Chart 9, the next chart, is the Cooper segment.

Really not much annotation on this particular chart.

This represents one month, again, this is the month of December.

We think very strong performance.

And the comments about the end markets that I made in both our Electrical Americas and Rest of World are very applicable here.

Cooper, obviously, with its strong, strength in addition to residential and non-residential, remember, has these very strong participation in industrial end markets and utility end markets.

If we move to the Hydraulics segment, complex set of items here within Hydraulics.

Overall, you recall in the second quarter, we felt that the markets were up about 2%.

Third quarter, they were down 4%.

Fourth quarter, down 11%.

And what is happening from an end market point of view here, what is really happening here is ha we're continuing to see the construction markets, which you recall are a fairly big exposure for us, they were made slightly larger by our acquisition of the Jeil acquisition that we made, that was the Korean hydraulics manufacturer, are continuing to be down hard from an order perspective.

As you will recall, our own view on this has been that we had a number of large customers who over built inventory early in the year and they have been aggressively trimming inventory since then.

I think you've seen many of those announcements out in the marketplace.

So with the market down 11%, we felt it was very appropriate that we needed to restructure.

And so we took restructuring costs, as you see, impacted our margins by about 250 basis points, about $17 million of costs, a general global employment resizing, two plant closings and downsizing at two other plants.

We believe that that sizes us for how we think the year will begin which is, obviously, slower than it began last year.

And then as we try to get a feel for where the strength, or weakness is going to come from, a booking side, I would typify it as saying while there has been some weakness on the distributor side, the big weakness has been on the OEM side, most particularly in the construction area, then followed by agriculture.

The one good piece of news here is that China, which you will recall, we have a fairly large exposure to, and has been quite weak here for a couple of years, we are beginning to see better tone in January.

And I would not yet announce this as a break out but it has been the first indication of better tone than we've seen in a better part of a year and some months.

If we move to the Aerospace segment, shipments up about 4% from our third quarter of $419 million, up about 1% from a year ago.

And I would say the market action is very similar to that which we've described to you before, with the strengthening on the commercial side, the weakness being on the defense side.

Bookings down 4%, and that really is the inter-play of the particular orders that came in during the quarter.

But, again, I would say stronger on commercial, weaker on defense.

After market up about 3%.

We elected to take some restructuring costs in this business, as well, about $4 million of costs, one small plant closing, and some reorganization of our work force.

And we think,again, that it sizes us well going into 2013.

Chart 12, the Truck segment, again, you will recall we have been watching this market decelerate on a global basis through this year in the second quarter.

We reported to you that we felt that the market grew about 3% in the third quarter, down about 8%, and fourth quarter, down about 13%.

And within that 13%, because I know a number of you follow elements in here, the big news here is Europe down over 30%, and Brazil down in the mid-30%, US down about 14%.

So as a result, again, of the view that we've seen that these markets, particularly in Brazil, had not come hope as we had hoped and we think are likely to start out slower this year, although we do think it will be a year of growth in Brazil, we elected to take about $7.5 million of restructuring costs to reduce our employment primarily in South America.

That impacted these margins, but we still think they're pretty healthy margins on volume that is down some 8% from the third quarter and 26% from a year ago.

Moving to chart 13, the Automotive segment, again, we talked to you in the third quarter that we saw the European markets for Automotive really begin to crack in the third quarter, and that decelerated even further in the fourth quarter.

Second quarter, we had said, that the worldwide marks were up 1%.

Third quarter, they were flat with Europe beginning to decline.

The fourth quarter, down 7%, with Europe down 23% from a year ago.

So pretty good growth in the US.

We've all been reading those notes.

And you will hear we think that this year 2013 will be a year of about $15 million in terms of retail sales in the US.

But the real weakness is Europe.

And Europe was down, as I mentioned, 5% in the third quarter from a year ago, down 23% in the fourth quarter.

And so we undertook actions to really reduce employment in Europe, that impacted our margins by 270 basis points, about $9.5 million.

And that's the primary reason that these margins are down as they are here in this particular quarter.

That's a quick overview of the fourth quarter segment results.

If I could ask everyone to move to chart 14, we've got a number of pieces of information that I think will be helpful to you in terms of understanding both our reporting, and then how we're thinking about 2013.

Let me start with new segment reporting for 2013.

There is no change to our reporting for Hydraulics or Aerospace.

But there are some new reporting segments that I wanted to cover with you here, and then give you a little bit of background as you think about what is in these individual segments.

We will be reporting our electrical results in two segments.

The first called Electrical Products, the second called Electrical Systems and Services.

We've listed to the right-hand side of -- or middle and right-hand side of this chart the traditional products that will fit into both of those, and so I hope that is helpful to you in trying to understand how you kind of map our different products and the Cooper products to these segments.

They do have slightly different geographic representation within them, and I wanted to give a quick rundown on that.

The Electrical Products segment is about 50% in the US, about 10% in the other Americas, about 28% in EMEA,and remember EMEA includes Middle East and Africa, not just Europe, and about 12% in Asia-Pac.

For the Electrical Systems and Services, it is about 58% US, 17% other Americas, 14% EMEA, and about 11% Asia-Pac.

Hopefully, that gives you a feel for the slightly different geographic representations, and we will talk more about that when we get down to our meeting in New York at the beginning of March.

Similarly, if you ask end market drivers for those businesses, the Electrical Products segment, about a third is non-residential and about a third is industrial.

And then you've got about 15% to 16% that is residential, 15% to 16% that is power quality, and about 3% utility.

Similarly if you go to the Electrical Systems and Services segment, about 28% nonresidential, 29% industrial.

Almost no residential in this, it is about 1 point and then 22% utility and 20% power quality.

Again, I hope that gives you kind of an orientation of thinking about these two new segments.

And then the Vehicle segment, which will encompass our truck and automotive drive train and power train systems, that business is now about 50% driven by truck and bus, and about 48% by light vehicle, and then ag making up the remainder, just a couple of points.

And then if you think about it from a geographic point of view, it is just over 40% in the US and about 30% in the other Americas, about 19% in EMEA, and about 10% in Asia-Pacific.

So I know a lot of data there, but I know you will be interested in trying to -- how to think about these particular segments and we thought that might be helpful to you.

If we turn to chart 15, our 2013 end market growth forecast, I would guess some of you are looking at these numbers and saying, gee, they feel a little conservative.

Our own view is having watched how different fiscal policy debates have impacted growth in the fourth quarter, the prospects, we think have some churn still in Europe as Europe is trying to settle.

The recovery coming in, in Asia-Pacific, more so as we go through the year, and a year where we just saw ourselves come off a 0.1% growth rate here in the fourth quarter in the US, we think this set of economics is prudent and not having us get out in front of our skis early in the year, and that certainly, as we've watched the last three years, we've all seen that people's economic forecasts have started strong at the beginning of the year and then have waned as we have gone through the year.

So hopefully that gives you some feel for our thinking on these numbers.

I think the numbers on the charts speak for themselves.

I thought I would just gill you a little color behind them.

In the Electrical two segments here, we are assuming that the non-residential market here in the US is up 4% to 5%, that residential is up on the order of 11% and that corresponds to about 1 million housing starts.

Industrial is up about 2%, and power equality remains slow at 2%.

And then when you get outside the US, we're basically assuming that Europe is flat and that Asia-Pacific improves about 5% to 6%.

Within Hydraulics, I think the US number speaks for itself.

When we get outside the US, we think Europe will be down on the order of about another 4%.

Asia-Pacific is still not fully stabilized, down 2%, Latin America, down 4%.

In the Aerospace side, that 1% in the US is that mix that you heard us talk about the last couple of years, about an 8% positive on commercial, about a negative 6% on defense.

And then in the Vehicle index here, which, NAFTA heavy duty of about [270,000] in terms of the truck market, US light vehicle retail sales, about 15 million, and when you get outside the US, EMEA down 1%, Asia-Pacific up 9% and Latin America about 8%.

And so when you roll all this together, and I know one of the themes everybody has been trying to understand, is people's geographic balance, and we think Eaton's geographic balance is working for it.

And I will come back and talk about that.

We will be about 50% in the US, about 50% outside the US.

That's a little different than Eaton was prior to acquiring Cooper.

Cooper was a little bit more US oriented or less international.

That's what that accounting for that change from the 45%/55% now to the 50%/50%.

When you look inside the 50% for non-US, that is about 18% of our revenues will be in Europe, about 3% Middle East and Africa, about 14% in Latin America and Canada, and about 15% in Asia-Pacific.

So if your pencils are still burning why don't we turn to page 16 here.

Our margin expectations for this year, obviously, you can see we think that our Electrical Products and Electrical Systems and Services have strong margins and those do incorporate the synergies as well as the base operations for the businesses.

Hydraulics at about 13.5%, Aerospace, 14%, Vehicle, 16%.

So overall, Eaton consolidated margins 15%, which will be a new high for us in terms of guidance we've provided for an individual year for overall segments.

We recognize that in the Electrical Products and Electrical Systems and Services, it may be a little difficult to try to figure out exactly what the revenues will be for these, so let us help you a little bit on that one.

Our estimate is at this point is that Electrical Products will have revenues on the order of about $7 billion in 2013.

Electrical Systems and Services will be about $6.9 billion.

So they are awfully lose to one another in terms of total volume.

Turning to chart 17, this is our 2013 operating EPS guidance.

As you can see, the midpoint of our guidance is $4.25, with a 40%, or roughly -- $0.40 or roughly 10% range.

And you can see that our first quarter midpoint is $0.75, with about a $0.10 range.

Both numbers include a $0.06 charge, if you will, for the Cooper inventory purchase price adjustments, to finish that purchase price adjustment.

So said another way, without that, the midpoint of the first quarter would have been about $0.81.

Chart 18, I think the start of some of the good news in terms of the Cooper acquisition is that you will recall, and the way we've tried to show this to you, is that the two columns that are labeled original projections, both for operating EPS and for cash operating EPS, go back to the presentations we made in May when we announced this transaction.

So you will recall at that time, that we thought that we would close the deal on January, or we were projecting for the pro forma's purposes, that we would close the deal on January 1. You can see, obviously, that now, with the benefit of having closed and taking many of those costs in the fourth quarter, that our accretion, operating EPS accretion, will be about $0.15, $0.25 better than we estimated.

And then you can see a $0.05 benefit every year going forward.

Similarly, you see a fairly similar benefit in terms of the cash operating EPS accretion.

At the back of our presentation, we have included on page 24, labeled Appendix 1, the detail that gives you the insight as to why those changed.

We don't propose to spend a lot of time on it here on the call today.

We will talk more about it in New York.

But suffice it to say, the business is operating at a little higher revenue and very attractive margins.

We are realizing our synergies a little faster here in 2013 with about two-thirds of that benefit coming from faster integration of corporate SG&A, and about a third from faster realization of supply chain benefits.

You saw the financing information earlier this year that was beneficial in terms of the lower interest rate and that's helping us to the tune of about $0.05.

And then there are a number of purchase price accounting items that the timing and magnitude are slightly different than we had anticipated and, obviously, those are tough things to estimate before you actually get in and work all of the details.

So I think the good news here in terms of, we're off and running and ahead of schedule in this regard.

Chart 19 deals with our debt financing.

Again, I think good news here.

I think I will let you read through the page, but I think the really good news here is that as a result of the stronger cash flow of the business, and the facts of the Apex Tools joint venture, which was the joint venture between Cooper and Danaher, has been sold and the deal concluded and the cash having been received by Eaton, we were able to totally repay the bridge loan on the first of February.

And so as a result of that, we're a little ahead of where we planned on being from a financing point of view.

Our Board will address our first quarter dividend later this month.

We mentioned that in our press release.

The other thing I wanted to note is that unlike the Moeller and Phoenixtec acquisitions where we had announced our plans to include equity as part of the financing, we have no such plans and had no such plans as it relates to this particular one.

So I think the way you simply read this chart is we're ahead of plan in terms of the cash flow and our ability to repay debt, and that's good news.

And we were able to finance at a lower cost.

Chart 20, the 2013 EPS bridge, our traditional bridge, just a couple of points annotation on this.

Obviously, our 2012 actual operating EPS of $3.94, the acquisitions and that is Cooper, that is Jeil, that is SEL, that is Gycom, and that's Rolec, and you put all of those together and it will be about $2.48.

That includes the synergies for those, as well.

The organic growth at about a 33% margin, and some of you may look at the 33% and say, gee, that's stronger than you guided last year.

That is right, because we have included in that the lack of the $50 million charge we just took in the fourth quarter, plus the 2013 benefits.

And so we really felt it was appropriate to use the higher margin.

One the negatives, higher number of shares, our shares this year we expect to be about 474 million shares, so you see that impact there.

Other corporate expense items, primarily intangibles and interest, and much of these first two, but not all of this second one, pertain to the Cooper acquisition.

Higher tax rate and then increase in pension expense, all of that leading to about a negative $2.94 and that's how we get to the midpoint of our guidance of $4.25.

Chart 21, the next chart, simply gives you kind of a recap of some of the key elements that support our guidance.

Overall revenue growth of about $900 million, so that is about 5%.

Acquisition revenue of $6 billion, that's about 37%.

So overall growth of 42% in terms of our revenues.

Of that $6 billion, about $5.8 billion are the three acquisitions in the electrical business, Gycom, Rolec and Cooper.

And about $200,000 are the two acquisitions in Hydraulics, that being SEL and Jeil.

Incremental margin, I mentioned 33%.

Tax rate of 7% to 9%, in line with our expectations when we announced the Cooper deal last spring and reflects the -- as you remember, the $160 million of synergies that we said we would get on the tax line.

I already mentioned the operating EPS guidance.

And then we think very strong cash flow for this next year, operating cash flow of $2.6 billion to $2.7 billion.

Free cash flow of $1.9 billion to $2.0 billion.

Obviously, the difference being $700 million is our anticipated CapEx expenditure level.

So all of that, and we appreciate your patience in listening to all of those details.

It brings us to our summary on page 22, is that we think 2013 is a year of modest global GDP growth, and as a result, modest market growth for our end markets.

And it is likely to start slower and strengthen as we get through the year.

I would describe it as cautious optimism.

Some of you may describe it as conservative.

We think it is the appropriate place to be at this point.

In response to the slower growth market growth in the fourth quarter in Hydraulics and Vehicle in particular we did undertake these restructuring activities that we think position ourselves to deal with what we think is going to be a little slower start this year economically.

The Cooper acquisition, as I said before, it is everything we expected it to be and more.

We're delighted to have it completed, to be done with so many of the issues necessary to have to close this transaction.

And we're now in the process of running it and really pleased that we're ahead of schedule in terms of our synergy activities and our financing plans, and we will provide some more color on those synergy plans when we're together in New York.

And then the last two points, I would say, is that really pleased, obviously, we're now expecting the accretion from Cooper this year.

And it is not only this year, because we raised that accretion by $0.05 going forward in the forward years, as well.

We believe that Eaton's business and geographic balance is really working.

So even in a year where we saw Hydraulics be quite weak last year, and we think likely to be a weaker year this year, I think you're seeing the strength of this overall franchise and its earnings capability and certainly the cash flow capability.

So with that, Don, we will turn things back to you and we will open things up for questions.

Thank you.

(Operator Instructions)

Our first question this morning comes from Jeff Sprague from Vertical Research.

Thank you, everyone.

Good morning.

Good morning, Jeff.

Sandy, could you just address big picture how to think about the portfolio going forward?

Obviously, the combination of the vehicle assets has some of us kind of speculating on what the future might hold.

Anything you could share there about what is next for the Eaton portfolio?

Nothing different, Jeff, than I've said in numerous forums really since we announced the Cooper transaction, is that we have changed our segment reporting to respond to kind of the changes in the Company at this point.

But it doesn't presage any other moves at this point.

We like the portfolio we're with.

We like the products that we've got and the capabilities, and we're really quite enthused about some of the new products and earning capability in a number of the features, a number of the products, where we simply don't have as great market support right now in terms of end markets.

That will come back again.

Great.

And I was also just wondering, I believe Kirk Hachigian was going to move over and help with the integration for awhile.

Is he still there and kind of what is he up to in the integration process?

Yes, Kirk is working with us in the integration activity and on a number of individual projects.

I won't go into all of those projects, but we're really grateful he is part of our team in that regard.

So that is working out just as we anticipated.

And then just really one final one.

On Hydraulics, could you just elaborate a little bit more on where you think the channel inventories are, your growth forecast is what it is, but in terms of how things play out over the course of the year, could you give a little bit more texture there?

Yes, I think the big issue, Jeff, there is not so much our channel inventory, if you will, but I think it is the inventory of our customers because there is where you're seeing, in a lot of the mobile markets, you're seeing dealer inventories that are quite strong.

And they have been that way for some time.

And that's why you're tending to see order levels or production levels down below end market demand at this point.

And we've commented a couple of times during the second half of last year, we think many people felt that the second half of 2012 was going to be a growth time, and so as they were building inventories during the first and second quarters, they built inventories on increased demand and actually demand fell away.

And so that's why you're seeing so much written about dealers being overpopulated with inventory.

That was particularly true in Asia, but it is true in Europe and true in the US as well.

We think that takes some time to burn off.

Thanks.

Congrats on the deal.

Thank you.

Our next question comes from Ann Duignan with JPMorgan.

Hi, good morning.

Good morning, Ann.

Good morning.

Sandy, can you talk a little bit more about where you are seeing the upside surprise from the Cooper deal?

You talk about it being all you expected it to be and more.

Can you just give us some more color on that?

Just from the synergy point of view, as I mentioned, about, we're off to a faster start in 2013.

And so we've not increased future year guidance on that at this point.

But the fact that we're getting it, the SG&A savings, and some of the procurement or supply chain savings, is, I think, a reflection of how well the teams have come together.

As we've gotten the chance to spend time with the teams, and the businesses and with channel partners and end customers, and the reaction is just really very, very good.

So we will spend some more time chatting about it when we're in New York.

But I think you can recall that one of the areas that we had talked about that many people had raised questions about were, gee, how are you really going to get sales synergies in this transaction, and I would tell you that it feels really good at this point.

And about half of the sales synergies we had been anticipating came from increasing our scope of our solutions into key verticals such as oil and gas or mining or broad construction segments and data centers, and that feels really good.

And the other half was going to come from what we could do together in developing economies where one company was significantly stronger than the other, and we think one can pull the other ahead.

And the other is increased relevancy to our global partners, our global channel partners, and our ability to really take our service business and have it provide support to traditional Cooper businesses, because you recall Cooper did not have its own service entity.

All of that is -- I would tell you is winning out really well, and without getting out ahead of Tom's presentation that he will share with you in early March, I would say we're really quite encouraged.

Okay.

That's helpful.

Thank you.

And then you noted during the call that you are beginning to hear a better tone out of Asia.

Again, if you could give us a little bit more color where exactly, what exactly are you hearing out there and is it just a wish and a prayer at this point, or is quotation activity, order activity, actually picking up?

Thanks.

Great question, Ann.

And I would say I no longer buy the whispers because we've been listening to the whispers for two years and they haven't panned out, so we're really looking at the orders, and our January order tone was better and I'm speaking specifically to China because that is the big one that is really going to move this.

And so from the mobile, and this is basically construction, we have actually seen a level of activity that is quite different.

I'm going to tell you, this is a heart beat, this is not yet the patient jumping off the bed and running around the room.

It feels better than it has in some time.

Now, of course, everyone is trying to speculate not just on Hydraulics, but in other markets, how quickly will the Chinese economy come back.

Our own view is that we may get back to a legitimate 7% to 8% in GDP in 2013 versus what we feel is a GDP that may have been over valued by as much as 50% versus the official numbers that have been reported for 2012.

So we are encouraged, but I would call it we're not wildly ebullient about what is happening yet in China.

Just for real quick clarification, Sandy, you said orders were better in January or order tone was better?

Orders.

Orders.

Okay.

I will get back in line.

Appreciate it.

Thanks, guys.

Our next question comes from Andy Kaplowitz with Barclays.

Good morning, guys.

This is (inaudible) on for Andy.

How are you?

Good.

Can you, can you talk about in Electrical Americas, you talked about strength in non-residential markets, can you give us some color on where you're seeing the strength and what is driving that?

Remember, we've got a pretty big front end as we've talked about in this business, and we've done very well and with a number of major projects, be they for industrial buildings, be they for data centers, be they for large municipal applications.

And so, I think one of the keys here is that as we've continued to strengthen our franchise, we have continued to grow our market share.

And so we've seen really pretty much across the board strength.

I know there have been a number of reports from other firms that have talked about weakness in non-residential.

That has not been our experience here during the fourth quarter and it is not what we're seeing in the first quarter.

When you look at the US private put-in-place data, you see a pretty balanced view of that market again, with -- that's the government data -- showing growth in the great majority of the end markets.

I think there are 12 segments if I remember there.

And I think all but two, if I remember offhand, were positive in the quarter.

So we read the same comments about people talking about weakness in non-residential, and that is not our experience.

Okay.

That's great.

That's very helpful.

And then just a quick follow-up.

In Aerospace, you noted the continuing, or ongoing decline in defense markets, and you also talked about the budget noise that we've had here.

I'm wondering with some form of sequestration seemingly increasingly likely, are you able to quantify the impact of potential budget cuts to your Aerospace business?

And do you have any of that assumed in your forecast?

Let me just say, we've got our best assumptions but having said that, until you actually see which programs are impacted, but as I've said we won't know, but in our comment at a number of forums that it seems to us pretty clear the joint strike fighter, that the new tanker, that a number of the heavy lift helicopters, a number of the unmanned vehicles are going to continue to be funded.

And those are areas where Eaton has very good participation.

So we're pretty comfortable that this marketplace assumption of a negative 6% takes into impact -- or takes into consideration prospective impact that we will see.

So we think we're well positioned in a pie that got smaller.

Okay.

That's great.

Thanks very much, guys.

Our next question comes from David Raso with the ISI Group.

Hi, good morning.

Hi, David.

Just so I'm clear about the synergies.

You previously spoke of total operating synergies of $375 million, $260 million being cost out, and $115 million sales synergies.

Are we not increasing those targets today?

Is this just simply a function of timing?

Yes, we have not increased the synergies.

And what I said is that we're getting at synergies more quickly in year one, that being 2013, so that is what you saw us take up.

We're, obviously, into this transaction now for two months.

And we're not comfortable taking up the overall projections at this point.

We will describe to you in a little bit more detail when we get together in early March what some of the specific activities are, and why we're feeling pretty good about them at this point.

But I would describe it as a little too early, David.

And related to the comment, you said the $160 million of cash management and tax benefits, just trying to think through then if that is what the original target, and still the target, how that relates to the tax rate for the combined entity?

The 7% to 9% for '13 was a little lower than I was expecting.

Should I take the $160 million comment holding still as that's what you were always thinking about the tax rate for '13 and going forward, that it is an 8% type tax rate?

Yes, the $160 million, we've not specifically -- specifically to your question, we've not changed it.

The $160 million and the 7% to 9% are right in line with -- the 7% to 9% is right in line with what we anticipated, although we never quoted a tax rate.

We gave the guidance, if you recall, take Cooper's results, take our results, add on the pre-tax synergies and take off the $160 million and that is what puts us in the 7% to 9%.

In terms of will it always be 7% to 9%?

We can't tell you it will always be 7% to 9%.

I suspect it may drift up by a point or two over multiple years, but that is our best estimate at this point.

And not different than we anticipated.

And regarding your outlook for the US, for construction, it seems like you bumped up thoughts on residential, industrial and power quality, but despite the positive commentary you have on non-residential, you're still in that mid-single-digit type forecast.

Is there any reason you bumped up the others but are not comfortable with bumping up the non-residential?

I would say non-residential has come back, and so we're operating off of bigger numbers.

And I would say the residential issue is that we were perhaps a little conservative on residential, and I would say maybe a little bit more in the middle of the pack.

The power quality market, actually 2%, is well below the secular growth rate for power quality.

And we saw really during 2013, or excuse me, '12, a pretty slow year in power quality.

It was actually a little less than that 2%.

We think it still is likely to carry into early next year.

It is going to be a little slower.

Our own bookings, and that may have been a little bit confusing, were really quite good in power quality in the fourth quarter.

But that was more the result of us being very successful on a number of large projects, not only in the US, but around the world.

So no, I wouldn't say -- I think we're still quite bullish on the overall non-residential, but we think 4% to 5% at a time where you're going to see US GDP growth be somewhere around 2% is a pretty good number.

And lastly, looking at it in the, call it Classic Eaton way, the Electrical Americas stand alone, for 2012, the margins ex-restructuring were just about a shade below 17%, 16.7%.

Could you even give us 2013 Electrical Americas margin guidance stand alone?

I know are you going to morph them together, but how are you thinking about that stand alone business '13 versus '12?

We don't have a stand alone business anymore.

We have integrated the businesses and so we can't give you a bridge, Dave, that kind of takes you from one organization structure to another organization structure.

All we can do is provide the guidance on the two new segments.

Okay.

I appreciate it.

Thank you.

Thanks.

Our next question comes from Eli Lustgarten with Longbow Securities.

Good morning, everyone.

Good morning, Eli.

Just one clarification.

The $4.25 midpoint includes the $0.06 purchase price accounting for inventory on Cooper, so it would be $4.31 if we [ex-ed] that out?

That is correct.

Just as the first quarter $0.75 includes it so that would be $0.81 if you ex-ed it out.

And that is the only charge you expect this year?

You expect this expense to finish it?

That finishes the purchase price inventory adjustment.

And you gave us, tax rate would be similar to up a little bit.

Is there any pension, and things like that, impact once you put the companies together, greater cash use would have to be contributed to plans or anything like that, from the combination?

Eli, it is Rick.

No, Cooper's plan is essentially fully funded.

It is in the high 90% funding.

And so there really isn't any drag from Cooper's pension plans.

And there is no change for you guys either in '13?

No, we have a $0.04 increase in terms of pension expense, yes.

Which is largely a function of a lower discount rate.

And in terms of pension funding, Eli, as we had mentioned, due to the transportation act, the required funding has gone down in the state, so we made our pension contribution for 2013 in January.

It is $176 million.

And that should be our entire contribution for the qualified plan in '13.

And can we talk a little bit about cost and pricing across the Company at this point?

Copper has gone up a little bit at this point.

The combination of businesses, and with the weakness in Hydraulics, it has affected some pricing pressures across the Company.

Can you give us some idea what is going on cost wise, which I assume would probably be some sort of tailwind for you guys this year?

And particularly pricing?

Yes, obviously, it's early in the year to know, but our assumption and our plans here is that we have not assumed either accretion or dilution from the impact of commodity prices versus pricing.

And so we think it is likely to be a fairly stable year.

So everything is a wash according to the marketplace?

Yes.

And one final question.

Your Hydraulics numbers would show a lot of weakness, is this a tale of two halves where you expect Hydraulics to be quite weak for the first half of '13 with positive comparisons in the second half or could you give some color, the split of the year?

Yes, I think our view is very much as you articulated, Eli, is what it is going to take time to burn off these inventories.

And as you've listened to some of the big construction companies talk, they've all talked about stronger second half than the first half.

And we think certainly in China where you don't tend to get the OEMs talking about their forward forecast, that's exactly what they've been indicating in terms of their burn-off.

I think the key thing to watch here, though, is going to be does end market demand burn off these retail inventories quickly enough to allow that to happen?

I think that is really going to be the key issue.

And fortunately, there is a fair amount of public data out there on retail inventories.

So I think that is an issue we can all kind of keep an eye on.

All right.

Thank you very much.

Yes.

Our next question comes from Jeff Hammond with KeyBanc.

Hi, guys.

Hi.

Just on this '13 bridge, I see $2.48 from acquisitions, and then if you take the shares, corporate, intangibles, interest, $2.73 for a kind of $0.25 net dilution.

Can you bridge that versus the $0.15 accretion?

Yes, Jeff, you're right that it can be a little confusing moving from one to another and because they're constructed slightly differently we really can't give you an easy bridge to it.

Some of the information that is built into other corporate expense, for example, relates to Eaton and some relates to -- or Classic Eaton -- and some to Cooper in the transaction.

And the tax rate, similarly, you have to pull it apart.

And it, obviously, it doesn't serve us any purpose going forward.

And so is it our best representation we can give you.

Okay.

So there is moving pieces within shares and corporate expense on legacy Eaton, where that is not a clean --

Absolutely, yes.

Okay.

And then just can you give a rationale, and maybe just one or two lines about how you're splitting the electrical businesses?

Well, let me kind of step back.

For people who have been around the electrical industry for some time, generally there, and you've heard us talk about this when we've talked about what creates a lower and higher beta in terms of earnings streams for electrical businesses, is that there is kind of two different parts of the business.

And that is how we run -- that's how we run the business now today, is that the products business, and as you can see, both Eaton and Cooper had products businesses.

Those businesses tend to flow through distribution channels to a little larger degree, and have historically tended to have a little less beta through the economic cycle.

The projects business, or some people call them assembly, some people call them systems, tends to be a business that has got a little longer lead times.

It tends to operate off of backlog.

And it tends to have a little bit more of a beta through the cycle because it relates a little bit more to new construction, if you would, in that regard, is the second.

So the industry, generally, will think about products and will talk about the systems and services.

That is why we've organized our business, we run it that way, and that's why we're going to report that way.

Okay.

That's great.

Thanks, guys.

Our next question comes from Andy Casey with Wells Fargo.

Thanks.

Good morning, everybody.

Hi, Andy.

First, clarification, it is small, but in Q4 was there any contribution from Apex Tools?

I don't have the number, Andy.

It is a very, very modest contribution.

Okay.

And then within the guidance for European electrical exposure, then NAFTA Class A truck, are you implicitly expecting a back half improvement to get full year flat after a weaker first half?

Let me deal with the first one.

In terms of NAFTA heavy duty, you obviously saw the orders that came out for January, just over 20, so those are kind of annualizing on a seasonable basis sort of about 246.

Our plan is 270.

So, yes, we would anticipate that things will get marginally stronger as we go through the year.

In Europe, we're fairly flat.

We don't talk about a big recovery in Europe.

We think there is kind of malaise that we're dealing with, is what we're likely to see, pretty much through '13, so we're not calling for a big recovery in Europe.

Okay.

And then -- thank you for that.

On the post-quarter activity, in terms of the cash inflow from Apex, and the bridge loan, how much of that $1.67 billion bridge loan is represented on the balance sheet at the end of '12?

Well, we had paid down by the end of the quarter, we had paid off $1 billion of it.

So we had about -- a little over -- a little less than $700 million was on the balance sheet at the end of the year.

Okay.

Thank you.

And then outside of the pension contribution you referred to earlier, how should we look at cash allocation, because clearly '13 looks like a pretty healthy free cash flow year?

I mentioned before, about $700 million, so it is pretty close to that general 3% guideline that we used as CapEx as a percent of our overall sales.

We will, obviously, our Board will be addressing the dividend as we have our next meeting here.

As we mentioned, just to allay any fears, we announced this back in May, we did not plan on changing our dividend policy, which you know has been to increase our dividend in line with our view of future earnings.

And so our Board will obviously make that decision at their meeting and they will then be able to fix the date as well as the amount.

But no such considerations of us reducing our dividend.

And I think you will see us acting in concert with our policy that I've stated, but I just can't comment on a number there yet until after our Board meets.

We really don't have big lumps in terms of our debt financing until we start to get out a year or two.

I think, Rick, the first big one is in '14?

Yes, we have term debt maturing of about $307 million in '13.

And then, Andy, our term debt that is maturing in '14 is about $550 million.

But those are still relatively modest numbers, given the size of this cash flow.

And I would just complete the last piece, as we've stated, I think consistently since we announced the deal in May, is that our primary use of cash will to be reduce debt.

And so we will take advantage of, obviously, those term opportunities to do so.

But as you are correctly noted, the cash flows that we've guided to today are pretty fulsome, and that is one of the things that has us pretty excited about this transaction combining with the base power of Eaton is that our cash flow moves up very substantially.

And as a result, let me just complete that thought, the acquisition issue, many people have asked us about our acquisition policy, or activities going forward.

We've said that we thought we would be largely out of the M&A market for a couple of years.

And that is indeed still our plan.

Okay.

Thank you very much.

Yes.

Our next question comes from Brian Jacoby with Goldman Sachs.

Thanks, guys.

You got most of them on the last one, but just on the free cash flow, so if you have about, a little north of $800 million in debt to be able to pay down over the next couple of years, it sounds like then, obviously, you have other things like the dividend and share buybacks and so forth.

Is the pension completely off the table, where you would not put additional discretionary contributions into that?

Or is that a possibility that that could be on the docket, as well?

Yes, I wouldn't rule out any possible action, but I would say at this stage, we don't contemplate putting additional money into the pension.

Now, next year, obviously, it depends on the discount rate.

It depends on the returns that we get on the plan's assets and there probably is a contribution next year that is a little bit more than the $176 million we put in this year, but I wouldn't imagine the pension is going to be a big user of cash relative to the size of the cash flow.

Okay.

And so, again, to be clear, the debt reduction is mainly just going to be from maturing, bond maturities over the next few years, have you no other like means by which you plan on paying down debt?

Well, our expectation right now is that we will take advantage of the term maturities, but as our cash builds, we will, obviously, look at other ways to manage that debt balance, and there may be opportunities to pay some of that down in other ways.

Okay.

Great.

Thank you.

Our next question comes from Josh Pokrzywinski with MKM Partners.

Hi, good morning, guys, thanks for fitting me in.

Good morning, Josh.

Just on the acquisition close here, and I guess some of the changes to accretion, am I to interpret the change in how you guys are looking at the step-up in inventory, the adjustments there, as Cooper bleeding down inventory into the close?

No, this is an accounting convention that purchase price accounting requires, and essentially, Josh, what you have to do is you have to take existing Cooper inventory, and you have to then market the fair market value, so that is looking at the realizable value less the distribution cost, and it simply is a convention of purchase price accounting.

So it effectively erases some of the normal profit that Cooper would have earned.

Okay.

I guess what I meant by that is the fact that it is an add-back, suggests that there was less inventory to mark up.

No, it turned out that you also have to take it through LIFO layer, so it turns out to be a much more complicated calculation.

We didn't have that information prior to the transaction.

And when we took it through all of the calculations, it turned out to be a lesser number.

But it is not really a function of a market change in Cooper levels of inventory?

Got you.

And then, I guess, just a related question, maybe I misunderstood the comment earlier on the call, that the initial $0.10 of dilution that you guys were expecting assumed a January 1 close?

When we put the pro formas together and shared them with investors in May, we had, before that pro forma, had assumed that the deal would close on January 1. So it would only affect 2013.

In fact, we closed earlier is why many of these costs were incurred in December.

And we had mentioned in our third quarter conference call that our expectation was that we would be closing in 2012, and that we would have a lot of these individual items we've detailed today would impact the fourth quarter.

Got you.

So is there an easy way to just parse out what that $0.25 -- I'm sorry, what the $0.15 versus the $0.10 of dilution would have looked like assuming a January 1, or is that the bulk of the adjustment here?

That's the bulk of the adjustment.

And really, if you look back on your Appendix number 1, that's what we tried to give you, it is the very last chart in the page 24, and that's what we tried to give you, that reconciliation of how 2013 has been changed as a result of pulling ahead and then what the impacts were.

So that's how you get your $0.25 change.

It is pretty well detailed back there.

Got you.

And then, I guess, just one last one before I let you go, is when will you guys kind of judge the initial integration, kind of grade yourselves on that?

Should we expect kind of an update by quarter or maybe a couple of quarters from now?

Just getting a sense of when -- if there is upside on the synergy front, when we might start to see that, or get a read on that?

We have an opportunity, obviously, to speak to that on a quarterly basis.

We do have a meeting coming up in New York in early March.

And I would say that is probably the next chance we've really got to talk about that.

But I guess I would just reiterate again, this is a $13.2 billion acquisition with over 30,000 employees, and we've owned it for two months.

So while we're very enthused about it, as well, we want to be sure that any numbers we share with you have the benefit of some vetting, and so, hopefully, we will have something a little more to share with you in early March.

Loud and clear.

Appreciate it.

And our last question today comes from Ted Wheeler with Buckingham Research.

Hi, guys, thank you very much.

Hi, Ted.

A lot of details.

Maybe if I could just kind of hit a couple other ones.

What should we -- what does the future corporate expense, what should we expect for that?

Well, if you look at corporate expense, per quarter, we think it is going to be in the $83 million-ish kind of range.

Okay.

And then the OPEB and pension, that should pretty much stay the way -- well, it might go up a little bit.

What would that look like?

We think the pension, in total, it is going to be pension and OPEB of about $42 million a quarter.

Okay, okay.

And then the -- I guess the interest expense, we can calculate that, that is going to move around, but that should come down from the fourth quarter rate, I guess, is that correct?

The fourth quarter includes a lot of amortization of things like the bridge loan.

Essentially, you take the bridge loan, you put it on your balance sheet, when you end up closing a transaction, you end up writing off the bridge costs.

So those are some of the $152 million of transaction fees.

Are in that line?

Yes.

Okay.

You are going to probably have a number that is around $300 million.

Okay, okay.

And then just if I could, back on the margins, could you maybe indicate what is the new electrical pieces margins?

I know it is hard because Cooper is only in there for a month, but maybe if you could just give us the '12 margins for those two new units, and either include or exclude the restructuring or however you want to lay that out for us, that would be helpful?

We can't give you that information yet, Ted.

As you can imagine, we are in the process of bringing a lot of different things together.

At the time that we start to publish the actual results for those segments, then we will provide the historical information for them.

I guess the total Company 13.6% for '12, includes those segments, of course.

I mean it is the Company.

It is the Company, yes, that's correct.

And those -- that margin includes the restructuring costs.

The $20 million -- I guess it is $24 million of restructuring items.

That was in the fourth quarter, the $24 million.

Right.

You're talking about the acquisition integration charges?

The $24 million?

No, I was talking about the -- I think it was -- well, maybe I'm -- you delineated restructuring charges for each segment, and then there is $11 million in corporate, I guess?

Yes, and there is a separate $50 million of restructuring charges, that the great majority is in the segments and then you've got a small amount in corporate.

Right.

I guess I was just trying to reference the total Company in your bridge, have you 13% -- I misspoke.

13.8% is your actual margin?

Correct.

That includes, I think, the restructuring costs, but does not include the acquisition costs?

Yes.

Correct.

Okay.

Great.

Thank you.

Thank you.

With that, we will be available to answer questions, or I will be available to answer questions, follow-up questions, for the remainder of the day.

So we thank you, again, for participating in our call today.

Thank you.

And ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.