伊頓 (ETN) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eaton Corporation's first-quarter earnings call.

At this time all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, your conference is being recorded.

I would now like to turn the conference over to your host Mr. Don Bullock.

Please go ahead.

Good morning.

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

Welcome to Eaton's first-quarter 2013 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.

Before turning it over to Sandy, I'd like to cover a couple of items.

First I'd take a moment to draw your attention to page 2 of the presentation for today's call.

Our presentation today contains certain forward-looking statements.

Comments included on page 2 in the presentation outline factors that could cause the actual results to differ from those statements.

These factors are also noted in today's press release and the related Form 8-K.

In addition, this presentation also includes certain non-GAAP measures as defined by the SEC.

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.

With that I'll turn it over to Sandy.

Great.

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

We're delighted to have this chance to cover with you our achievements really of the first quarter.

And maybe just a couple comments to precede talking through the presentation, which I hope you have all had a chance to download this morning.

I'll be working off of those slides.

If you'll turn to slide number 3, this is labeled highlights of our first quarter results.

A couple comments, first this is the first full quarter of results reflecting our acquisition of Cooper Industries.

And as such, you'll note that we are reporting in our new segments that we had outlined to you in our last earnings call.

You'll also note, for those of you who are used to following our earnings calls, that we're not providing any quarterly market growth or outgrowth information on a quarterly basis.

The process of both the acquisition and pulling to get all this information has just made that very difficult for us to do at this time.

So with that, let me start off and just hit these couple points on this first chart.

Again I'm on chart number 3.

Operating earnings per share of $0.84 obviously compares very favorably above the top end of the guidance that we have provided for the first quarter, and against the consensus of $0.79.

Sales were $5.3 billion, obviously a record, of benefiting quite a bit from the acquisition of Cooper and the other acquisitions we concluded last year.

About 40 points from acquisition, a negative 1 from Forex and a negative 5 from organic growth.

Operating cash flow was $100 million, and for those of you who have followed us for some time you know the first quarter is always our weakest quarter in that regard.

We make our pension, largest portion of our pension contributions, in first quarter, this year about $208 million.

It's also the quarter in which we rebuild working capital, coming off technically a burn-down of working capital in the fourth quarter.

And I think very importantly, and I know you're all interested in this subject, the Cooper integration remains right on track, both from a revenue point of view, from a cost-reduction point of view, from our recognizing the working capital and associated tax benefits.

Synergies of about $15 million in the first quarter, you recall, that we are talking about $90 million for the full-year this year.

That equates to about $0.03 all on its own, full-year forecast of keeping the same as $90 million.

And if you think about the first half versus the second half, one of the important sources of slightly higher profits in the second half this year than the first half, is the fact that we would expect these acquisition synergies to accelerate in the second half.

Slightly on the whole deal, we would look at the first half being slightly dilutive, in that $0.15 accretion we call for, basically all happens in the second half of the year.

If we turn to chart number 4, labeled Comparison to First Quarter Guidance, fairly easy reconciliation versus the $0.75 midpoint of the guidance we provided first quarter.

Volumes were lower, about $50 million lower than we thought, and easy way to think about that is, it's primarily Europe.

I think it's EMEA you've been hearing from many companies, but it's about a negative $0.03.

A lower tax rate, you saw at about 5%, and one of the big influences on number is the 2012 R&E credit for both Eaton and previous Cooper, dropping into the first quarter.

That's about $17 million.

It equates to about 4 rate points, so if you want to think about the 5% tax rate in the first quarter, if you added those 4 rate points back, you'd be at roughly 9%.

And in higher incrementals a little stronger operating margins from the businesses than we'd anticipated, and lower corporate expenses.

You recall, we guided to about $83 million of corporate expenses per quarter on average, through the year of 2013.

We came in about $70 million.

So we get a positive $0.10 for that, so obviously up $0.09 from the midpoint of our guidance.

We think it's really solid execution, in what I think has broadly been characterized by many companies as soft global markets, and we think it sets a really solid foundation for the rest of the year.

Moving to chart number 5, Comparison of First Quarter 2013 to Q1 of 2012, a couple, I think, important issues to think through here.

Obviously the acquisition adds revenues and adds segment profits, but as we've talked about on a number of occasions, there's a impact higher shares, higher purchase price accounting and amortization, and higher interest to achieve that.

So let's just walk through the chart real quickly.

Incremental acquisition volume, contributing about $0.59.

And that is the total of the five acquisitions that we completed last year, so about $1.6 billion of volume there.

Lower tax rate, 5% this year, about 15.6% last year, it's a positive $0.13.

The better incrementals, in terms of the continued progress of all our work on productivity, you see about $0.05.

The next two line items, higher number of shares, that's the 475 million shares in the first quarter versus the 340 million last year, about a negative $0.34.

The purchase price accounting and higher amortization, about $0.24.

And if you just get that lower core volume number and drop the higher interest for a minute, that's about $47 million of higher interest.

So if you take the $0.34, the $0.24 and the $0.12 you've got about $0.70 of below-the-segment's higher costs, as a result of the acquisition.

And then lower core volumes, down about $190 million from last year and as we talked about all through last year, we saw markets and hence our volumes declining quarter to quarter, and our Vehicle and our Hydraulics business last year, recall it was a much weaker second half, and that's really what we're seeing here, is the lower volumes in those two businesses in particular.

If we turn to chart 6, I think no big surprises on this chart from those of you who have already read the earnings release in detail.

I'd point out just one number for you to think about here, is our first quarter 2013 segment operating margins of 14%.

That compared to the roughly 12.1% in the fourth quarter.

That's a very good start for us.

And as you'll see in most of our segments we're in very good shape against our full-year guidance, starting right at the beginning of this year.

I mentioned before the acquisition volume of roughly 40 points, and then you see the weak end market activity with the core volume down 5% and Forex being a fairly small change this year, just one point.

Diving right into the segments, and I want to provide you a little bit more detail on these because we recognized we've got some new segments here that take a little getting used to, in terms of knowing what businesses are where.

First, the Electrical Products segment, I'm on chart number 7, this includes several of the traditional Cooper businesses as well as some of the original Eaton Electrical businesses.

So for those of you who are familiar with the Bussman, the Lighting, the B Line Wiring Devices and Safety businesses of Cooper, they are in this segment now.

You see a good start to the year here, with a 14.7% margin.

It is difficult, we recognize, for you to compare first-quarter '13 to the previous year because the previous year would not include the Cooper products.

So you're looking at a 15.7% margin in terms of the Eaton products that would fall into this segment a year ago, in the first quarter of '13 you're seeing a 14.7% margin that are both the Eaton products plus the Cooper products.

I would simply tell you that when you look at the Eaton products within here, the margins were slightly higher than they were a year ago, and so we're pleased with that continued progress.

I reference you down to the slightly green-colored box under sales growth, the acquisition contribution here being some 92%.

That's about $820 million of incremental volume that's come in to this segment for acquisition.

What's going on in the business at this point, continued strength we see in the end markets in the US, in the Middle East, in Latin America.

It's more mixed in Asia-Pacific.

We'll talk a little bit more about that at the conclusion of my comments.

And then I think the big news here is really, is not news, it's that Europe continues to be weak, we're not seeing any form of recovery.

It's slightly weaker than we perhaps thought it was going to be when the year started.

Our combined bookings were down about 3%.

In this particular segment is heavier than the next segment we'll talk about, in terms of items that are stocked by distributors.

And we are fairly confident that we saw distributor de-stocking occur in the first quarter here in the US and in Europe.

I think people are minding their stores tightly trying to figure out what volume would look like in the second quarter this year.

If we move to chart 8, Electrical Systems and Services segment.

Again in this particular segment the traditional Eaton businesses that were included in the segment, plus the Cooper legacy businesses of Crouse-Hinds and the Cooper Power Systems business.

Once again you have this mismatch of what's included in the first quarter of '12 versus the first quarter of '13, because '12 did not include the Cooper information.

However I would tell you when you look within those margins, that the Eaton margins improved fairly significantly within this segment so that it's not simply a mix change here, it's also a driver of performance here.

Once again, market conditions, pretty much the same as I just characterized for the Products segment.

Bookings up in this particular segment by about 2%.

They also came into the year with a very strong backlog in this particular business.

You tend to have more backlog in this segment than you would have in the Products segment.

Once again, if you drop to the slightly green colored box on the left-hand lower corner you'd see acquisitions contributing about 80% to the sales increase.

This is both Cooper, Rolec, which was the Chilean acquisition we did, and Gycom, which was the Northern European, really Scandinavian and Nordic countries acquisitions we did last year.

So again, off to a really good start here with a 14.1% margin right off the bat in the first quarter.

Now moving to Hydraulics, and here we've got a little easier comparisons year to year, because you don't have quite the reconfiguration of the segments having added in the very large Cooper acquisition.

Sales of $756 million, up from the fourth quarter where we were at $693 million, so up about 9% from the fourth quarter.

Quite a rebound in terms of the operating earnings in this segment, 11.9% versus the 7.4% that we reported in the fourth quarter.

I think you'll all recall that in the fourth quarter, we booked about $17 million of restructuring that were aimed at both helping us resize the overall business closing two plants and downsizing two other plants.

I think you're already seeing the beneficial impact of that in our margins.

The acquisition number, again the lower left-hand green box, that 13% represents just under $100 million of additional volume that came in from Jeil and the SEL acquisitions, the two acquisitions we completed in our Hydraulics business last year.

Markets up modestly over the fourth quarter, but I think the bookings information is perhaps the most important information we could talk about here in this segment.

Down 8% compared to a very strong first quarter 2012, and then you'll recall the year ran off after that, but the sheer volume is up nearly 30% from the fourth quarter bookings levels.

So we really believe that we are seeing this business beginning to turn in this regard.

And when you look within that 8%, not surprisingly, the distributor reduction is sort of a mid-single-digit number.

The OEM number is just over 10% negative.

And when you dive inside the distributor data it's not much different by region.

But when you do dive inside the OEM data it's very different by end market, as you would expect, the construction market still being quite weak.

But the big turnaround versus the fourth quarter being [Ag], where it was a very significant negative in the fourth quarter, it's a very significant positive in the first quarter.

So once again, after four quarters of consecutive bookings decline, we've seen a very significant quarter-to-quarter increase in the bookings in our Hydraulics segment.

Moving to chart 10, Aerospace segment, up pre-class volumes compared to the fourth quarter, it was $434 million in the fourth quarter, it's $434 million in the first quarter, but a significant improvement in our margins.

And you'll recall, in the fourth quarter when we reported a 10.4% operating margin, we had booked about $4 million, or 90 basis point, restructuring that was really dealing both with our organization structure, one small plant closing.

We're very pleased with 14.3% operating margin here in the first quarter.

I think here again, examining the bookings is perhaps one of the most important items, as we think about the future here.

Bookings up 7%, which is a great quarter, continued weakness in commercial after-market.

And so as the story is very much the same here, very strong OEM activity.

We were frankly a little surprised that our strong OEM activity was not only on the commercial, but we also had a very strong quarter in terms of military platform bookings as well.

So really solid quarter in our Aerospace business.

Moving to our Vehicles segment, and you'll recall this segment represents now all of the traditional Eaton products in both the Truck business and the Vehicle business.

A very solid quarter again here, $939 million of volume, up 8% from the fourth quarter when we reported $871 million.

Our margins moved up from 11.3% in the fourth quarter to 14.1%.

You'll recall in the fourth quarter, our fourth quarter reflected restructuring of $17 million of expense, about 200 basis points.

We had done some re-sizing in South America and re-sizing in Europe, in light of both the market conditions we saw in those areas of the world.

So again a really solid start in this business and clearly this is one of the businesses where it's easiest to understand the market driver that we're placing our forecast upon this year, is that the first quarter NAFTA heavy duty truck demand was 55,000 units.

We still have a forecast of roughly 270,000 units for the year.

That means by the fourth quarter, we'd be at a run rate of about 78,000.

So quite a ramp as we go through the year, and as you've seen, the bookings have been coming in to support that forecast.

So now if we turn to chart 12, no change on this chart in the upper portion of this area of the chart.

And we'd be prepared to talk about any of the individual indices that you want to during questions.

I would just simply note the new box at the bottom of this page where we say we now expect market growth to be toward the lower end of the range.

You recall, we had said that our outlook for the weighted average of our end markets was 2% to 3%.

We think it's likely to be closer to 2%.

I don't think that's probably a surprise to any of you with all the economic data that's rolled out over the last month and a half.

Obviously the confirmation of the weak GDP here in the US, the fact that the China numbers came out a little lower than some expected, and that Europe seems to be mired in molasses still at this point.

And so we think still, the prudent basis for our forecast is the lower end of this range.

I think the very good news is, with a little slower market start this year, our execution is proving our ability to make it up in terms of higher productivity and pulling in these synergies as we have.

If we turn to chart 13 this is unchanged.

This is our margin expectations by segment, really no new news here.

Chart 14, full-year guidance remains the same.

A range of $4.05 to $4.45 in terms of our operating EPS, with a midpoint of $4.25.

What is new on this chart, obviously, is this is our first specific guidance for the second quarter.

You saw it in our press release this morning, $1.05 to $1.15 operating earnings per share with a midpoint of $1.10.

Chart 15, this was our full-year guidance, it took you from the $3.94 to our guidance of this year, $4.25, no change.

We simply provided this for your ease of your comparisons.

Then chart 16 is the comparison of our first quarter of this year to our second quarter, and I'll walk you through the steps, in terms of what supports our guidance for the second quarter.

First quarter, obviously we just reported our $0.84 operating earnings per share.

We noted in our press release, and if you look back over many years for Eaton, you'll see a fairly strong seasonal impact where our sales generally increased between 5% and 10%, it varies a little bit every year.

And what you'd find is that this additional $0.28 of higher core volume at the targeted incremental that we've talked about for this year, 33%, gives about 7.5%.

So it's roughly $420 million.

You'll also recall, when we gave guidance for this year and reported our fourth quarter earnings in our last call, we identified that the purchase price accounting adjustment for the inventory charges coming out of the acquisition of Cooper, that we had expensed an element of those in the fourth quarter.

And than we expected the final piece, roughly $33 million or $0.06, to be expensed in the first quarter, which indeed was and it was included in our $0.84 result.

So we will not have that $0.06 repeating here in the second quarter.

Additional acquisition synergy realization, I mentioned to you we realized about $15 million in the first quarter.

We are ramping up to get to that full $90 million this year.

We will be at about $20 million pace here in the second quarter that adds $0.01 in the second quarter.

Our tax rate, I mentioned to you, it was 5% in the first quarter.

It will be closer, we believe, to about 10% in the second quarter.

Again we won't have the R&E credit that we did have in the first quarter.

And then corporate expense, I mentioned to you that we ran at about a $70 million level in the first quarter.

That's below the average of what we thought we would run at per quarter this year.

And so we're including the forecast here again of about $83 million, that's up $13 million from the first quarter.

That means about $0.03.

Both, I think, fairly straightforward, five items that lead to the reconciliation between our first quarter $0.84 and the second quarter $1.10.

If you move to chart 17, no changes here.

This is the same guidance that we provided you with at the beginning of the year.

Again, just for your reference and ease of materials.

As we move on to chart 18 then, just a couple points in terms of summary.

Q1 not just for us, but you heard more generally, it was a slow start.

And what we would characterize as sluggish global markets.

You'll recall that many people felt we were conservative when we started this year saying we thought end markets would grow on the order of 2% to 3%.

We think that's the right place to be.

And it leads us to the right orientation in terms of our resources and our productivity requirements.

So very much on track with what we thought.

The Cooper integration, obviously an enormous undertaking, is going really, really well.

And we're just delighted with the progress our team is making there.

And I would say this is a year where our performance is far more dependent upon our execution than global growth.

We did not come into this year assuming global growth was going to bail us out.

We came to this year with the expectation that we would have fairly nominal global growth.

We do have the benefit in a couple of our businesses, of some fairly strong quarter-to-quarter growth that's related more to individual market activity than it is to global growth per se.

And I would call out North American heavy-duty truck as an example of that.

Or the strong seasonal in our Electrical business, which tends to come in much stronger in the second, third and fourth quarter than it does in the first quarter.

But nonetheless, we're really pleased with the first quarter, $0.84 really got there based on execution.

And then a question I know a number of you have is that when will our 10-Q be available?

We thank you for bearing with us in terms of all of the complexities of pulling the accounting for these different firms together at this point through this large acquisition.

We'll have it available later this week.

And hopefully it will have more information that you'll be seeking that will be outlined fully in the 10-Q.

With that down why don't we open things up for questions?

Oh, I should mention that on page 20 of this packet, we did include, again just for your reference, no change here.

The synergies expected from the Cooper Industries acquisition and just felt that would be helpful if you have this reference document there for your work.

So with that why don't we go ahead and open things up?

Turn it to the operator who will give us instructions and then we'll open it to questions.

Thank you.

(Operator Instructions)

Okay, our first question today is from Joe Ritchie with Goldman Sachs.

Good morning, everyone.

Good morning.

Hi.

Sandy, you just mentioned that 2013 is much more highly dependent on your execution and global growth.

Could you shed some light on where you think see the greatest execution risk as you progress through the year?

Yes, I guess I wouldn't characterize them as risks, but I think we've got teams well around them, but certainly the integration of an acquisition the size of Cooper Industries is one that is obviously on all of our target lists.

We also had acquired four other companies last year.

And so each of those five have to be successfully integrated.

I think the first quarter is a good indication of how well we're doing on that.

We're very much on track and you may recall that we actually increased our guidance, if we go back into the February early March time period, for what we expected to get from the Cooper acquisition this year.

Second there are a number of restructuring programs that we kicked off with the roughly $50 million of restructuring costs that we booked in the fourth quarter.

Those are also going quite well.

And then the area that I'm particularly excited about, the vast array of new products that we are launching this year.

And clearly, part of that is how we expect to be able to drive higher bookings activities.

And if I just was to pick a couple of those out of our Electrical business, this whole suite of lean automation and control solutions that are targeting machine builders, off and running well.

For those of you who went to Hanover Fair, you really saw that reception there.

Our new series of modular SF6 suite medium voltage switchgear, another big plus.

For those of you who were at LIGHTFAIR just this last week, you saw us kick off another LED platform with our, something we call WaveStream.

That's the brand name for our new edge-lit LED lighting products.

Really offered at a very attractive price range and really taking that technology into recessed lighting where it has not yet really penetrated.

So I would end with one other big one to be thinking about here and that's what we've done to take -- you've heard us talk about this really premier energy efficiency we have in three-phase, large high-power applications.

We've now moved that down into a product line that's much more the midsize, so it really brings that efficiency to the smaller data centers where there's a fair amount of activity.

So I'd say those are the kind of issues we've got our eyes on in terms of execution.

I'd say they're off to a to a great start this year.

And I think our team well understands the market's not going to make the difference this year.

It's really creating our own growth and creating sources of profits.

And that's where this large acquisition really gives us an additional leg up relative to many others, because we've got a lot to work on where we can create additional profitability.

That's helpful color.

And I guess in your prepared comments, one end market question you did talk a little bit about distributors de-stock in US and Europe.

And I'm trying to square that way with your commentary at the fourth quarter that you expect non-res, specifically US non-res markets, to be up 4% to 5% this year.

So help me understand those dynamics and then what's occurring in the marketplace today?

Surely.

If you think about our Electrical business having two types of activities, I'm going to talk about how they flow through channels not the kind of products.

Those products that are stocked on distributor shelves are a very healthy part of our business, and one that we were really very pleased that the Cooper acquisition brought us an even bigger percentage of those standard products, if you will.

That's where we saw, in January and February in particular, fairly active de-stocking by distributors both here and in the US.

Now, we think that's partially was people readjusting to the fact that maybe the year wasn't going to be the kind of year that some of our distributors thought was going to be originally.

Frankly, I think they've come back a little bit more to where we thought growth rates were going to be this year.

But I think, too, it's so hard when you watch all of the issues of sequestration or other government challenges going on here and Europe, that doesn't give distributors a lot of confidence about putting more inventory on their shelves.

So unlike many quarters, in the first quarter where you see a rapid acceleration of sales quarter to quarter, we didn't see as much of that this year.

I would say on the non-residential side, that tends to be product that is not stocked as much.

That tends to be the Assemblies business if I could characterize it as bid to a particular job or transaction.

They are a pretty good bid activity and so that distributor stocking issue doesn't tend to hit it as much.

You're exactly right, we did come into the year with a non-res forecast of roughly 4% to 5%.

I think that always has been private put-in-place that we've talked about.

I think the piece that everyone's got their eye on right now is what's the government stream of activity?

And obviously with sequestration in place we think that that's a bit of a negative.

So when you look at the total non-res, which would be government and private put-in-place, probably a number that's more like 3% to 4%, versus a number that's like 4% to 5%.

But I would say, frankly that's tuning that sometimes that tight a tuning doesn't really change things that much for us.

That's helpful.

Thanks, Sandy.

I'll get back in queue.

David Raso, ISI.

Hi, good morning.

Good morning, David.

Just trying to think through the implied second-half growth.

And also a question on the modeling for the amortization of intangibles.

Just trying to think through the growth in the second half of the year, it seems to be implying maybe high single-digit, low double-digit.

And I just backed into that based off of what you just said the first quarter to the second quarter on core volume.

Can you help us understand if I'm doing that properly?

I can completely appreciate the Vehicle business, truck being up a lot year over year in the second half, and maybe hydraulics, to some degree as well.

But can you help us, walk us through that second half acceleration of growth?

Maybe try to nail down a little bit more of what are you expecting from the Electrical businesses in the second half, maybe Aerospace?

Sure.

I think a way to think about this, David, if you take our first half, the $0.84 in the mid-point of the $1.10, that's $1.94.

And then if you subtract that $1.94 from the $4.25, you get $2.31 in the second half.

So roughly 46% of the earnings in the first-half, 54% in the second-half, I think you'd find that's within about 2% of what we've generally run most years, if you go back.

Of that $0.37 increase in the second-half, roughly $0.17 of it comes from the Cooper synergies.

And that's the difference between the first half and the second half.

I told you it would be slightly -- and when I say Cooper synergies it's that entire balance of $0.15 for the year so that's got amortization, it's got increased shares, it's got the interest cost, it's got all that in it.

So you've got a little bit of a negative on that in the first-half.

You get roughly $0.17 from second-half.

So now you're dealing with $0.20 difference, half to half, if you will.

And the largest portion of that $0.20 difference then comes from the acceleration, specifically on the North American heavy-duty side, because our forecast of $15 million retail sales for light vehicles here in North America hasn't changed much.

We came into the year thinking that the European automotive market would be only down maybe 2%.

We think that's likely to be more like a 6% and a 7% so that's kind of taking away any plus you find in the automotive side of that marketplace.

So you come back to the heavy duty truck.

And then you come back to the seasonality here where you tend to get that Electrical business, as I mentioned, that tends to come up.

That 7.5% is not a bad number for that business.

It kind of comes up to that second quarter and third quarter being relatively similar, and then comes off just slightly in the fourth quarter.

So then lastly, I would say the Hydraulics business, which we believe, but we can't certify obviously, that we're seeing the bottoming of this bookings activity.

And if we're right in that regard, we're going to start to see some volume pick-up there.

Aerospace we've assumed, not a lot of volume change, that it's pretty, I think for the drop through to the bottom line, it's not a substantial difference.

So I think you're really looking at Vehicle, Hydraulics and Electrical as being those three drivers.

And I do appreciate that.

But maybe Rick, just help me make sure I have these numbers right.

The core volume was down $190 million in the first quarter.

Correct?

Roughly, yes.

And that question, yes, core Eaton, yes.

And if I grow that $425 million in 2Q, that means 2Q will give me about a positive $130 million year over year on core.

So I go into the second half of the year in the hole about $60 million, to try to get to the full year core revenue growth guidance of $900 million.

So based on the older core growth in the second half, get the $900 million?

I understand some of the businesses year over year, they are going to grow a lot more in the second half than we're seeing in the first half.

I'm just making sure I understand the core growth dynamics in the second-half of the year.

Yes, I think, David, maybe we ought to go off-line to work through all the specific numbers.

I tried to give you the overall where we are, we'd be glad to do that subsequently.

And then I have lastly an amortization question, $107 million the first quarter was just a little higher than I would have thought.

Can you help us think that through the rest of the year and full-year number?

David, we continue to think the number is in the neighborhood of $420 million for the full year, so it will be at this level or maybe just a little bit under this level, in some of the later quarters.

And that's not any different than we indicated in our earnings conference call.

I appreciate it.

Thank you.

Julian Mitchell, Credit Suisse.

Firstly on China, I remember you mentioned on the earnings call in January that you'd seen some encouraging order intake activity.

Looking around other companies that have reported, it feels like domestic-focused stuff like construction's a bit better, but stuff that's tied more to exports like factory investment industrial output is still very weak.

I just wondered what your update was on China.

Sure, Julian, thank you.

Your memory of our comments is exactly right.

We had talked about specifically in our hydraulics business in January, which is one of our insights into the construction equipment business there in China, that things have ticked up in China.

I'd say unfortunately they've ticked up and kind of stalled in China, and so we, like others, would, I think, characterize China as not recovering on the pace that it looked like it might have, starting off at the beginning of the year.

It is beginning to recover and 7.7% GDP growth is nothing to sneeze at but it's not the 10% to 12% everyone would love to see.

Our own business in China, if you looked at our actual shipments for China in the first quarter, we're about flat with a year ago.

But when you go within it, I think more instructive is the Vehicle businesses are up pretty nicely.

And so you saw a pretty good quarter of activity there.

I would say that most of the infrastructure-oriented businesses, be that our Electrical or our Hydraulics businesses, were off just slightly in terms of shipment, and all that brings together to be roughly flat.

So that I think our assumption for this year on China, of roughly an 8% GDP increase, feels about right to us but it's not accelerating really, really quickly.

Got it.

Thanks.

And within the Electrical Systems and Service segments, you obviously had a very, very nice margin jumping Q1.

And the margin in that segment in Q1 was sort of already slightly above your full-year target.

I just wonder if there was anything in terms of seasonality that we need to be aware of, or if you could give any sense of what the base full-year margin in 2012 for the Systems and Service receipts was.

In 2012.

Our challenge in 2012 is giving it to you with both Cooper and with Eaton, and that's what we can't at this point.

But what I could tell you, because obviously it is a noticeable change between the 9.2% we reported last year, which was the traditional Eaton businesses, and the 14.1% now, is that it with just the Eaton products, and that's where we've got consistent data, we saw a several-point increase in margins.

And that's some of the work we've been doing in terms of continuing to work on productivity and introduce new products.

So this isn't simply a mix change of having added in the Crouse-Hinds and Power Systems business into that segment.

And so we're really pleased, and we think that is quite sustainable, so when we look at that full-year number, obviously of a 14% margin we started off the first quarter, which typically is a little weaker, with a very strong quarter.

Now it's also a reflection of the fact that, you recall the really outstanding bookings versus market demand that we had in the second, third and fourth quarter, and you're seeing us come right out of the block with, obviously, being able to ship from this very strong backlog.

Got it.

Thanks.

Lastly Electrical Products, the bookings were down about 3% in Q1.

Core sales were down about 4%.

For Q2 is your guidance embedding that that gets back to about flattish year on year?

The revenues?

Yes.

Our thinking, again is that at this volume, if you take our two businesses and put them together this roughly 7.5% increase that's not a bad surrogate for the Electrical business as well.

Obviously as the construction market comes up, in terms of just the bad weather issue, is always an issue in this business, is that you get a bigger quarter there in the second quarter.

So our conversations with distributors, and we had many, is that we think the inventory correction that went on this winter is maybe a little overdone, and there's an opportunity in that regard as we enter the bigger building program.

We haven't talked about one particular market here because I think there's a lot of an understandable focus on non-res.

I think we've all got to keep focus on the fact that residential is, while not back at the levels that we experienced in the 2006 and '07 heydays, it's coming back to more respectable levels, and these are 20% increases year to year.

And that residential really starts to move more quickly as you get into the second and third quarter, from a construction point of view.

Thanks.

Jeff Hammond, KeyBanc.

Hey, good morning, guys.

Good morning, Jeff.

The better incrementals, is that in one or two segments or is that pretty broad-based?

And how do you think about the sustainability?

We still think the right number, Jeff, full-year is to think about roughly this 33% incremental and you'll recall that our guidance at the end of the fourth quarter, the reason we used a 33% this year and the previous year it had been 28%, was that we expensed $50 million of restructuring which we don't anticipate doing this year, and we get the savings from that.

So we still think the 33% is the right number in that regards for this year.

Okay.

And then the order resiliency and some of the strength you talked about last year in Electrical Systems and Services, what's really driving that?

And where do you think you're seeing the out-performance?

I think, and keeping in mind, if you think about our fourth quarter, our fourth quarter where we were talking about the market having, I talk to Electrical right now and I'm putting the two segments together.

We talked about growth had slowed in the second half of last year.

And we think that it has carried over into the first half of this year.

It's consistent with our overall forecast of talking about growth slowing toward the back half of last year and then being fairly low this year globally.

Our bookings continue to be better than market conditions and we think there are a number of reasons to think that will continue.

But you may recall in the fourth quarter last year, we had overall bookings up like 7.5% of the time where the market was barely growing, and most of that got driven by some of what I'd call the Systems business, large projects that we were successful in booking.

We didn't see quite as much of that in terms of that out-growth from the first quarter, but we don't see anything fundamentally that changes that competitive positioning.

And based upon a number of the products that I mentioned earlier to Joe's question, we are launching an unprecedented array of new products in our Electrical business between the base Eaton business and the legacy Copper business.

A number of which are right in the dead center of these big energy issues.

And we've talked a lot about LED in Lighting.

We were well up over 20% in terms of the LED content, in terms of LED product content in our first quarter.

This whole new edge-lit lighting for recessed application we think opens up the biggest segment of the lighting area, and we're right out front.

If you had a chance to read anything about what went on at LIGHTFAIR, so we're really quite bullish in terms of the new products and what that's going to drive for us here.

Okay.

Thanks, guys.

Steve Volkman, Jefferies.

Hi, good morning, guys.

Morning, Steve.

I might be getting a little bit ahead of myself here, but I want wonder, Sandy, as you had another quarter under your belt to look at Cooper, whether you've had any evolution in you're thinking about potential synergies in, say, '14 or '15, and maybe even coming on the sales side as well?

Yes.

I'd say, Steve, not at this point.

But what I would say is that, and I've said it in a couple forums, is that the transaction and the business is everything we hoped it would be and more.

And that's why we were comfortable increasing our original estimate for 2013 from $75 million to $90 million.

That's why we were comfortable increasing our mature year total, even on pretax earnings, up another $30 million, so up to $290 million than we've maintained $160 million in the tax side so all that feels really good.

It's a little early still.

We've got elements of our team that are very heavily involved, I guess I would say, in all of the blocking and tackling to make this happen, But the customer reception, the channel reception, what we see in the cost reduction, we'll get everything that we've talked about.

And I think so importantly, that the broader array of capabilities we've got right now has done nothing but strengthen us in that regard.

So I'd say a little early in terms of taking that next look at that '14, '15, '16, we'll revisit that as we get out toward end of the year and get a couple quarters under our belt.

Great.

Thanks so much.

And then it sounds like you're saying that de-stocking in the Electrical side is has run its course and maybe even got a little overdone.

Similar comments on Hydraulics?

I don't want to put words in your mouth.

No.

I think all these issues, whenever you have channel de-stocking there is a point where you get down to a minimum that you have to have to be able to satisfy daily sales.

Obviously Hydraulics went through four quarters of negative bookings.

And over a year I think you get that pretty well shaken out.

I'd say the market that's been hardest for us to call on Hydraulics, in terms of not only the distributor channel, but also the OEM channel and how much product they've got, finished product, out at their dealers, has been China.

And I would say our insight is not perfect in that regard, because I think we've been fooled a couple times over the last year or two trying to be sure we had our hands on that.

It feels like that starting to turn but that one always takes a little longer than we think.

I would say here in the Electrical business we've got a pretty good handle here in the US and Europe, through our major distributor partners as to where they are in that regard.

We can't get down much under a 30-day stocking or you can't handle the kind of volumes, so our best thinking on this at this point, is we saw it in the first quarter.

We think we've understood it.

We spent a lot of time with our channel partners and we don't expect to see another quarter of it in the second quarter.

Great.

Thanks so much.

And then April, has that unfolded the same way?

And I'll pass it on.

Yes, it's a little, unfortunately for us right now with bringing all our systems together between our traditional Electrical business and Cooper, we're not quite as fully integrated as we will be in a couple months.

So I don't have quite as much up-to-date data for you there.

But, yes, I think the tone is reasonable here in the second quarter and it feels like the season.

I would say the one business we've not talked about here on the call, which has been one of the points of weakness in the electrical industry in the US has been the utility market.

I think versus some of the forecast that were out from the industry associations that forecast utility demand, the first quarter was a weaker quarter in terms of utility demand.

And our own thinking is, for this year is that, while it will be a good year it's probably not going to be a record year.

And that's all reflected in our guidance at this point.

Thank you.

Nathan Jones, Stifel Nicholas.

Morning, guys.

Morning.

Can you comment on, we've seen declines in corporate prices and declines in steel prices over the last couple months at least.

Can you talk about how that flows through pricing in both of your Electrical segments and in general?

I would seem it's easy to pass through pricing on electrical products.

Am I thinking about that the right way?

You're right in terms of, clearly versus a couple years ago, the drum beat doesn't seem to be on a move-up on commodities.

So clearly I think you're seeing pricing in the markets obviously be a little bit more conservative around that as well.

We tend to buy, as we pointed out, more on the spot market than we do on the commodity markets.

Now, the spot markets have come down, but not quite to the degree that the future markets have in that regard.

But we are in a little easier commodity market at the present time than we were a couple years ago, when they were rocketing quarter to quarter and it was very difficult to stay up with them.

That's obviously helpful, in a time period where growth is as low as it is on a global basis.

I'd say when you look at this overall environment, I'd say slow growth, more stable commodities, and that really puts the load on us in terms of executing well.

And that's exactly what we think we were able to do in the first quarter.

Okay.

If I could just jump over to Aerospace, you commented that you had had a strong order quarter from out of the military side of Aerospace.

I think everybody is expecting strength on the commercial side, but maybe not on the military side.

If you could give some more color around that, and whether or not you think it's sustainable?

Our own forecast again is that we'll see the military markets come down by about 6% this year.

We have not changed that view of where things are going to be.

You just can't have every supplier having increases in the military market and come up to a negative 6%.

That's not going to work out.

We do believe that a number of the platforms we're on are the platforms that are going to be consolidated around, such as the joint strike fighter or let me take the new tanker.

A number of the heavy lift rotocraft, and it's on those platforms that we secured additional long-term commitments.

And that's really what helped with this very strong 7% quarter.

So whether it was commercial transport, business jets, military fighters, military transports, we had a very good quarter in that regard.

Now, just recall, remember again in the Aerospace business, you often get orders and then they may ship over some period of time, so it's not always -- it's almost never in one month and out of the next.

And just one more.

It looks to me like you paid off the only debt maturity you have for this year.

You're likely to generate $1 billion-plus in cash even after the dividend for the remainder of the year.

Can you talk about the priorities for that cash?

Yes.

We have just one more slug of debt, term debt that we can pay off this year, if you want to comment on that.

Nathan, that would be in May.

We've got $300 million in May and another $7 million in October.

So another $307 million, but your point is correct.

We have quite substantial cash flow, even considering that.

And our priority as we've said, both for financial and managerial reasons, is that our priority is to use the cash flow to pay down as much debt as we can.

Including to the extent that it makes sense, and we can get good execution, perhaps even paying some debt down by buying it off market.

We did a very small amount of that in the first quarter.

But we will continue to look at that as the year progresses.

And that feeds into obviously what you've seen us do already this year, a 10.5% increase in our dividend we announced in the first quarter.

We've said that as we went through this period of time when we'd be largely out of the M&A market to the points Rick made, is that we maintain our overall commitment in terms of our capital expenditures.

That's roughly $700 million this year.

Our commitment in terms of increasing our dividend in line with our future expectation of our earnings.

That was the 10.5% increase we made in the dividend this year.

Pay down the debt to get us back to a solid A. It means we stay out of the M&A market for any appreciable activity for a couple of years until we get there.

So that's very consistent with what we laid out going back to last May, as to what would be our game plan in terms of the balance sheet.

Great.

Thank you very much.

Ann Duignan, JPMorgan.

Hi, good morning, everybody.

Morning, Ann.

When you were giving your comments, you said -- over here.

Are you guys in Ireland or are you in Cleveland?

We seem to be in the air all the time.

(laughter) No, we're in the States right now.

Okay.

I wanted to ask you, Sandy, if you'd give us a little bit more color on the two Electrical businesses, and their exposures, specifically, to government spending.

I know that Eaton's core business did well the last couple of years on a lot of retro-fitting of government buildings.

Can you give us a little color now on both businesses and their exposure?

Yes.

I wouldn't say it's a major business there.

I'd say the major business really is Aerospace.

You've got a fairly significant piece that relates to military spending.

I would say when you try to think about the non-residential market in the US, and of course this gets a little complex in terms of whether you include road building and other things on it, but the type of stuff that uses electrical equipment, to our best estimate, and believe me this was an estimate so please don't take this to a decimal point, there's 25% to 30% of the total market that relates to where government tends to have an influence.

I'm talking the federal government here, primarily, but there is some state government there as well.

And that is an area where, you're right, there have been some very significant energy efficiency mandates.

And honestly enough, those mandates have not changed.

So the question is, how are they going to be funded?

And those mandates apply both to government buildings, plus there are incentives available for people, if they are building more effective buildings in terms of the private marketplace as well.

We've not seen an enormous change there yet, but our expectation has been that that will slow down.

It's going to get crimped in this budget issue and that's why we say we think about a non-res market's maybe 3% to 4% with that included at this point.

But frankly those pressures have been being felt, we believe in the federal government, really since the second quarter of last year.

So we don't see that as a big game changer at this point.

And would Electrical Products be the business that would be more impacted by that?

Or would it be Services?

No, I would say that it's probably more the Systems and Services.

More of that would tend to flow in there, but there are businesses that are over in the Products business that would have product that would go in there as well.

So a business such as Lighting, for example, which is in our Products segment, clearly part of the big push is to try to get far more energy efficiency and one of the best plays anybody can have is to think about re-lighting these buildings.

So I'd say that's probably the one in there that's got a bigger play.

Okay.

Yes, that's kind of what I was thinking on the Lighting side.

And then on Hydraulics, on your outlook, Sandy, you noticed that agriculture OEM orders was up significantly.

But you didn't change your outlook for the end market.

Can you talk about, is there a bigger drag elsewhere?

Or is this just being conservative in case things slow again as we go through the year?

I'd say there would be two areas in there, Ann.

I'd say that we haven't changed our view so much of the US nor Asia on the end market, but we are in Europe consistent with our view of what's happened with car sales there, what's happened with distributor stocking in our Electrical business.

And also we look at the hydraulics market in Europe of being influenced by that.

So that's a little bit of a drag.

I'd say the Construction Equipment business, it has been a drag and it's continuing to be.

I'm talking about the US and Asia in that regard.

Mining is clearly a little bit worse than it's been, and I think we've all read about that.

And I think it is related to the commodity question that was raised earlier.

And then I'd say the big plus has been as you noted, has been the ag market, a big turnaround from what it appeared to us, many OEMs were trying to reduce inventory still last year.

It appears to us now that they've flipped that switch and we're seeing, we saw very strong orders plays.

And some of them were for future capacity, but frankly some of them were right for the springtime build.

Okay.

I'll leave it there and get back in line.

Thanks.

Josh Pokrzywinski, MKM partners.

Hi, good morning, guys.

Morning.

Just on following up on the comment about sequential growth in bookings in Hydraulics, that 30% jump in the fourth quarter.

What is that normally, seasonally?

It's not odd to have a jump from the fourth quarter to the first quarter.

It's been very hard the last couple years to give you a normal, because we've been going through these very dramatic changes.

But I think if you assume between fourth quarter and first quarter that you're going to get 10% or 15% jump, that's not a terrible number.

But I would tell you that it's been hard to give you a normal number the last couple of years.

Any way you look at it after these four quarters of quarter-to-quarter decline, it's a big jump and we think directionally it gives us a view that we're starting to make the turn here.

And one of your competitors said last week that some of the weakness they saw on the bookings side was more for long-term delivery schedules, trimming the out quarters rather than anything you would call near-time weakness.

Is that your characterization as well?

Maybe a little bit of near-term and a little bit of out?

Some color there would be helpful.

Last year we saw quite a bit of long-term cut-back.

That's consistent with what we saw in the 2008-2009 time period where, when people weren't clear of what their visibility was going forward, they were just trying to get everything off the books.

I would say we saw most of that hitting us last year.

Now we're seeing a little bit more of, it's not only that -- quick, hurry, I need something next week.

It's also trying to get a call on capacity as we go out a little further.

Got you.

And one last one for me on the data center side.

Any change in momentum on small data centers versus large ones?

Any update you can give us there on the momentum there?

Yes, I would say not much.

You recall when we give our guidance for this year, after a very weak year last year, we thought that market would be growing between 1% and 2% this year.

We don't see anything that's really changing that at this point.

A couple pieces that if you've all listened to the various tech companies report, there's not a big new generation of servers coming out.

There's not many of the technology nodes that tends to get people to flip at this point.

And there's still a fair amount of work going on as people are trying to think about do they build their own versus do they continue their own work on virtualization, or do they kick things to the cloud?

So we think this year is going to be a relatively slow side on the power quality side.

And that's consistent with what we said earlier this year.

Great.

Thanks a lot, guys.

Eli Lustgarten, Longbow.

Good morning, everyone.

Morning, Eli.

A lot's been asked.

Can we talk a little bit about the European exposure in the Electrical business plus Electrical Products and Electrical Systems Services?

Electrical Products, weaker bookings in the quarter.

Margins, where we're expecting 60%, what's going on in European countries?

I don't think it's that big in that business, but can we talk about how you're thinking of it and get some color on that?

And same thing for Electrical Systems and Services?

Yes, I think again, and you'll recall from Tom Gross's presentations, that our business in Systems and Services in the traditional Eaton business was bigger in the US than it was outside the US, because we hadn't had the traditional IEC Assemblies business and our Services business, which tends to work on that installed base, had not fully developed yet.

So Europe's not a real big issue there, so more of a Products orientation for the traditional business.

You'd find that overall, Eaton, we talk about Europe being on order of about 18% of our sales.

So that when we acquired Cooper, Europe became an even smaller portion of Eaton's overall sales.

In terms of the geographic exposure, the Products business has got a bigger exposure to Europe than does the Assemblies.

It's about two to one.

And when we give guidance at year end, we were talking about in terms of geographic guidance, that the Systems business, Systems and Services had a 14% or 15% end market European, and that's EMEA so that includes the Middle East content, and the Products was closer to 27%, 28%.

Thanks.

I'm trying to get some idea as we look at you look at your Electrical Products' 14.7% margin, first quarter bookings down 3% as you got to get to 16% with a bigger European exposure.

So trying to get some color on that and how we get there.

So more important Eaton Electrical Systems Services, you beat the 14% guidance for the quarter.

Yet you're telling us it's that it's going to get weaker over the rest of the year.

So I'm just trying to get some idea of --

Yes, I think what we're really telling you, Eli, is we've got two new segments here that we have one month of experience, or one quarter of experience, with.

And it's just too early to be changing the guidance.

And I think as we have a little bit more experience working with the new businesses we acquired, we will have a little better handle on how they go through the year, if you will.

But say, both to us feel very reasonable as we look at the guidance for the remainder of this year.

And the Products business, even in a weakened Europe still has the seasonality, because the weather patterns happen the same kind of way they do here.

So it will be off a lower base.

Follow-up on that ESS business, is the weakness of the Utility business the reason why you're so cautious on operating profitability?

No.

I would say I just noted, because I think you've heard from a number of other participants in the electrical industry that utility was weaker in the first quarter than perhaps they thought it was going to be.

It's still a really nice business for us, but it's not going to be -- people who've anticipated the utilities were going to be in a un-bettered ability to spend cash, if you've watched what's gone on, and the continuation of what went on last year with the difficulty utilities have gotten to be able to get rate increases.

They need to get those rate increases to have some of the money to spend.

And that's gotten quite tight in this environment.

Great.

Thank you.

Chris Glynn, Oppenheimer.

Good morning.

Morning.

Question about the Electrical strength in the US called out for both segments.

It seems like some of the distribution commentary has been that it's been weaker, so just wondering if you could comment on the contrast between channels, whether that's direct distribution, OEM, MRO, any flavor in that regard?

No.

I would say that we tend to think of the markets as covering the whole residential, non-residential, the industrial OEM and end-user side.

We think about verticals like oil and gas, for example, that are continuing to spend quite a bit.

Pharma's quite active continuous at this point.

And we think about the utility market that we mentioned.

And then big drivers that are going on in the industry such as LED replacement, the use of vacuum interruption, a variety of different technologies.

And so our characterization of where we think the market's going to grow, I think we were pulled back in the first quarter in terms of being able to achieve those full-year numbers, by the distributor de-stock.

Generally what gets de-stocked has to be re-stocked, so we think those things tend to work out over a couple quarters.

So no, I wouldn't say we're backed off in terms of -- I would say, like all of the markets that were out there, we think the growth's going to be a little bit toward the lower side versus the higher side, but we still think it's going to be a good year of growth.

Okay.

And then for the Electrical segments, you did refer to just having a few months with the full segmentation, but is the $7 billion for EP and the $6.9 billion for ESS still a good way for us to think about the year?

Yes.

It's our best thinking at this point.

Whether they are going to end up exactly in those two segments, I'd say that's the best way to think about modeling.

And at this point we still feel pretty good, obviously, about the $13.9 billion in total, and I think that's going to be the balancing item.

And the total will be the balance and we'll see how well we did in getting these split up into the two segments.

Got it.

Thanks.

Andy Casey, Wells Fargo.

Thanks.

Good morning, everybody.

Good morning, Andy.

Just wanted to look at the growth you're forecasting a little bit differently.

In a lot of different company conference calls there's been discussion about increased quoting activity that's just not translating into orders right now.

Is it your view that we're in a CapEx air pocket?

And then within that, are you seeing more customers focus on operating expense in place of capital investment outside of Europe?

I'd say it's quite different, Andy, for us by individual segment.

I'd say that, let me take an area like oil and gas for example, we continue to see people moving forward on very major projects as well as their MRO.

I would say in mining, clearly people have gotten very cautious, and are looking for ways to pull back.

In residential I would say, it's still very much rebuilding of the industry and trying to get everyone to come.

I heard an analogy this morning, that said they'd try to get all the players back at the party.

It's been quite different being at 1 million or 800,000 starts, versus what Europe did, 2.1 million.

I'd say on this construction equipment side, I'd say I think people are still cautious.

On ag, it's starting to feel like people are interested in running on more cylinders again.

So fairly inconsistent if you would, and I think those are often the attributes of slow growth overall GDP.

And that still is our predominant view on, again Aerospace commercial, quite busy, great news, the 787 is flying again.

The industry seems to be opening up.

On the defense side, obviously, it's lower.

So I think that's where this execution is so important as a Company, and that our opportunity having these five acquisitions to integrate, is we've got an opportunity to create synergies and create earnings per share even without a big strong top market growth going on.

And I think that's one of the issues that really makes Eaton attractive through here.

Okay.

Thanks for that, Sandy.

And then one detailed question related to pension expense.

I think you're looking for increases in the 2013 guidance but Q1 seemed to show a year-to-year decline.

Is there something special about Q1 or is it just a timing thing?

No, pension expense does vary by quarter, Andy, based upon just the timing of retirements, which we can't exactly plan on.

But our expectation is you'll see a modest increase in pension expense this year.

And we believe that accordingly, you'll see some higher levels of pension costs as you look at the balance of the quarters.

Okay.

Thank you very much.

Our final question today comes from Nigel Coe with Morgan Stanley.

Yes, thanks, guys.

Last question is unquestionable a good one.

(laughter) Sandy, just wanted to clarify the comments you made about inventory reductions.

You seemed to indicate that in Products it was particularly heavy in January and February.

And I'm assuming that Hydraulics is the same way.

So did we see an unusually weak start to the year or for the quarter and we're showing up better into March?

Slightly better.

Of course March is always the month of the quarter, in the first quarter.

In some senses you can almost take off the first month.

I would say slightly better, but I think again it wasn't the rate of acceleration that we've seen in some other years.

I think that's reflective, again, of this slower-growth environment.

And I do think there's some caution in the air, in terms of whether distributors want to put a lot of inventory on their shelves not knowing exactly how this next round of the fiscal discussions go on in the US.

So we think there's plenty of room for some additional recovery here.

Okay.

And then switching to Aero margins.

For me this is a big bright spot in the quarter.

You've referenced aftermarket is still under pressure.

Yet you showed a big sequential improvement from the second-half run rate into 1Q.

So I'm wondering if there's anything that you should call out there in terms of the strength?

I think, remember in the fourth quarter, we took $4 million of restructuring expense, and we did that because, as we looking at the size of the business and this forecast that we mentioned, growth on commercial, negative growth on defense, we needed to resize the organization, and we also closed one small plant.

And so getting that in place is a piece of helping us manage more successfully in this a little bit changed environment.

We feel pretty solid about this 14% range.

And as you say it's great to start off well in this regard.

It doesn't hurt to have this backlog piece turning up a little bit for us as well.

Just a quick follow on that, so as the aftermarket starts to improve for the year, would you expect to build off that 14% through the year?

I think at this point our best estimate is that that's why we haven't changed guidance at this point, that we think it's 14% for the full year but I'd say it's early still, and so I'll have a better feel after we maybe get through two quarters.

Okay.

Thanks, Sandy.

Thank you all for participating in today's call.

As always we will be available for follow-up questions following the call.

Thank you very much.

That does conclude our conference for today.

Thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.