Eaton Corp. Q1 2010 Earnings Call Transcript

123jump.com Staff
05 May, 2010
New York City

Sales up 10.7% to $3.1 billion and net income was $155 million or 91 cents a per share. Operating income of $0.95, excluding the non-cash Medicare Part D charge of $0.14 it would have been $1.09. operating cash flow was a negative $162 million, but that

Eaton Corporation ((ETN))
Q1 2010 Earnings Call Transcript
April 20, 2010 10:00 a.m. ET

Executives

William Hartman - Investor Relations
Sandy Cutler – Executive Chairman, President and Chief Executive Officer
Richard H. Fearon - Vice Chairman and Chief Financial and Planning Officer

Analysts

Steve Roakman - Analyst
David Raso - ISI Group
Eli Lustgarten - Longbow Research
Ann Duignan - J.P. Morgan
Timothy Thein - Citigroup
Jamie Cook - Credit Suisse
Robert McCarthy - Robert W. Baird & Co., Inc.
Jeffrey Hammond - KeyBanc Capital Markets
Andrew Casey - Wells Fargo Securities, Llc
Mark Koznarek - Cleevland Research Company
Robert McCarthy - Robert W. Baird & Co., Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Eaton Corporation first quarter earnings conference call. At this time, all participant lines are in a listen-only mode and later there will be an opportunity for your questions. If you would like to ask a question you may be press star then one on your touchtone phone. To withdraw your quest from this queue you may be press the pound key.

And as a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Mr. Bill Hartman. Please go ahead, sir.

William Hartman

Thank you, very much. Good morning, everyone. And welcome to Eaton’s First Quarter earnings conference call for the year 2010.

Joining me this morning are Sandy Cutler, Chairman and CEO; and Richard H. Fearon, Vice Chairman and CFO. As been our practice in the past, we will start today’s call with some comments from Sandy, followed by a question and answer session.

As a reminder, the information that we’re providing in our conference call today will include some forward-looking statements concerning the second quarter of 2010, the full year of 2010 on net income and operating earnings per share and second quarter and full year 2010 revenues. Comments on our worldwide markets, our growth in relation to these end markets and our growth from acquisitions.

These comments all need to be views with caution and are subject to the various risks and uncertainties, many of which are outside the Company’s control. Factors that could cause actual results to differ materially from those in these forward-looking statements are set forward in today’s press release and related Form 8-K filing.

As a reminder, we’ve included a presentation on first quarter results which can be accessed on the Investor Relations page. Additional financial information is available in today’s press release, which is located on an Eaton’s home page at www.eaton.com.

And with those preliminary comments, it’s my pleasure to turn the meeting over to Sandy Cutler. Sandy?

Sandy Cutler

Thanks, Bill. Good morning and thanks everyone for joining us. I’m going to work off of the presentation that I hope you all have been able to access at this point and Bill, covered the forward-looking statement. So I’m going to move right to page three in your packet, highlights of the first quarter. We had a very strong first quarter. We’re very pleased with it and certainly a very different quarter than we experienced a year ago at this time.

Operating income per share of $0.95, excluding the non-cash Medicare Part D charge of $0.14 it would have been $1.09. Net income per share of $0.91 and again excluding that non-cash charge it would have been $1.05.

Sales were $3.1 billion, up 10%, roughly flat with the fourth quarter, which you’ll remember was $3.131 billion. Our end markets were up 4% for the quarter, some 24% of our sales coming from the developing countries, where we continue to see the recovery outpacing what’s going on in the developed nations.

And our operating cash flow was a negative $162 million, but that’s after pension contributions of $326 million. So a fairly typical first quarter for us and those of you who follow us know that our cash flow tends to accelerate in the second, third and fourth quarters.

Moving to page four, a quick reconciliation of our first quarter guidance or performance versus guidance. Here you recall the midpoint of our guidance was $0.85 that’s the mid-point that we set for operating earnings per share in our February New York analyst meeting; it had been $0.80 prior to that.

We obviously reported operating earnings per share $0.95. I mentioned the impact of the Medicare Part D of $0.14. Our tax rate, not including the Medicare Part D adjustment, was at about 4% versus the 12% that we had mentioned that was embedded in our guidance for the first quarter. So that was about a $0.09 positive and we’ve taken it out of this reconciliation. So without the tax impact on those two items, our operating performance was about $1 -- was $1 versus the $0.85, so an 18% improvement over our guidance and actually 25% higher than the guidance we provided in January when we started the quarter.

When you get inside the $0.15 of improved performance, about $0.13 of that really came right out of the operating performance of the businesses and about $0.02 came out of some lower spending in a variety of different corporate line items on the income statement.

A year ago, some of you may have noted that our other income and expense category was significantly different than we had this year. That was not the basis for our guidance in 2010. You recall a year ago we were experience a period of quite a bit of currency fluctuation.

We actually had a large loss associated with that in the first quarter of this year. We had not anticipated that this year and that obviously was reflected when we gave our guidance early this year and talked about a year which we did not anticipate anywhere near the currency volatility that we saw a year ago.

Moving to page five, total financial summary, I think you’ve seen all of these numbers; I won’t [trawl] through each of them. I will simply point out that the $347 million of segment operating profit that you see in the first quarter 2010 column on the second line, that does include one quarter of the $225 million of other costs that we talked about that would come back into our operations this year. So we’re really very pleased that, in spite of having stopped many of what we recall the special or other cost actions we took last year that were temporary in nature.

We were able to report these strong operating results for the first quarter. As you saw in our press release, our market growth was 4%; we did out grow our end markets by a percent and our FOREX impact was about 5% in adding up to our overall 10% of sales.

Moving into the individual segments, if you will turn to page Six, our Electrical America segment, I’m very pleased that while sales were down by 7% that we were able to achieve a 13.2% return on sales; yes, that’s down from the 15.2% that we had in the fourth quarter, but it’s certainly in line with our full year guidance that we provided of 13% and frankly we’re quite pleased it was this strong in what is normally the weakest quarter of the year for us in our Electrical businesses.

Bookings were down some 4% versus the decline that we saw for bookings in the fourth quarter of 18%. We’re seeing some of these early and mid-cycle segment end markets starting to come back, residential up about 3% and non-residential was down 21%.

Industrial segments were up about 3% and our stimulus orders now total about $250 million and those do not that number does not include the over $500 million contract of that another supplier and ourselves will split over the next couple years that we released last week. So in short, on the stimulus piece, it really was very helpful in terms of us not having our bookings decline further. We’re continued to do well in that arena and will be glad to answer questions on that later.

Turning the page to page Seven, Electrical segment for the rest of the world, 12% increase in our sales, obviously very pleased also with the 8.1% operating margin. You recall in this segment we provided guidance to this year of 9% return on sales and we had said that we had expected the early part of the year would start weekly and that we would see double-digit profitability in the second half for the year. So we’re very pleased with 8.1% right out of the barrel this year.

Now, bookings up a very strong 18% and the greatest strength here has been in Asia, with a little less strength in Europe, but both positive numbers. And you can see that in these numbers in the 12% increase of sales was about an 8% impact from FOREX.

On the Hydraulics market on page Eight, $490 million in sales, up from $419 million in the fourth quarter; profits really coming back quite strongly, 11% return on sales versus 3% in the fourth quarter. This 11% shipment growth, excluding FOREX and acquisitions, we think is a real reflection of the bookings increase that we’ve been talking about that’s happening in this business and we’re delighted that our global bookings were up by 88% excluding FOREX and acquisitions; a real breakout quarter and really seeing that strength in every region of the world.

Now, one has to note that the first quarter of last year was extremely low and perhaps artificially depressed, as we saw not only low orders of bookings coming in, but we also saw cancellations in the OEM markets when many large OEMs were really trying to pull in their forward commitments. What is leading that’s very strong surge and increase at this point is the Mobile OEM side.

We do believe that they are not only responding to increased demand, but they are also rebuilding their own inventories. And toward the end of the quarter we began to see distributor demand picking up as well, not yet for what we would call details stocking orders, but responding to line outs, line shortages that are out there, quick shipment recovery and so not yet what we would call inventory rebuilding on the distributor side. So once again, this recovery is being led on the Mobile side, with the large OEMs being most active.

Moving to page nine, $376 million of shipments here in the Aerospace segment, basically flat with the fourth quarter when we were $381 million. A 13.3% margin, flat with what we saw in the fourth quarter when it was 13.1%.

Bookings down about 7%, compared to the 25% down we saw in the fourth quarter. And the real change that we’re seeing in the Aerospace market is that we now think that OEM production is likely to be a little stronger than when we started the year, but the weakness is continuing in the commercial aftermarket; and every time we see interruptions such as what’s been going on in Europe after the volcanic eruption, it just puts further pressure into the commercial airlines and so we think we’re going to continue to see a weak year in terms of commercial aftermarket activity this year.

Turning to page ten, the Truck segment, sales of $453 million, up about $10 million from what we achieved in the fourth quarter of ‘09. Overall markets up some 19%, really led by the agricultural market and we’re very pleased to be holding a 10% operating margin on this business at these very low levels of activity and that’s just a little bit weaker than what we saw in the fourth quarter, when it was 11.5%.

Looking forward for the year, we have reduced our 2010 outlook for the NAFTA Class 8 build from 150,000, levels down to 135,000 unit levels and I think that’s pretty much a consensus number that you find across the industry at this point. So it means that we would see a very flat year in terms of NAFTA heavy duty truck demand.

Turning to page 11, the Automotive segment, $374 million of volume, up just about $12 million or $11 million from the fourth quarter. Our profitability of 11.2%; really very, very pleased with the profitability in this business, reflecting all the restructuring work we did last year.

Enormous change in market; what a difference a year makes in this regard and that very strong growth is in the U.S., then Asia-Pacific, then Europe. And we’re predicting that full year U.S. production forecast being up about 31% and outside of the U.S. being up about 6%; so quite a year of recovery.

If you move to page 12, just a quick synopsis of our view of the end markets. You recall in January we had provided guidance that we thought our end markets would be up on a weighted average by about 5%. In our February conference in New York, we moved that up to 5.5% and as you read in our release this morning we now think markets will be up by about 6%. No real change to our outlook in Electrical Americas; a slight increase in our Electrical rest of world up to 6%; Hydraulics, as you can see, up another point.

Aerospace up slightly; the Truck index down as a result of the change I mentioned in the NAFTA heavy duty market. Automotive up slightly; and that brings us all up from the 5.5% to 6%. So I would describe these as more fine tuning than any major changes in the market outlook.

On 13, with obviously chart 13, with the very strong performance of the first quarter and in particular the real strength we see in the number of our operating segments in terms of margin production, we’re increasing our overall segment margins. And if you look at this chart, you can see that we’re taking Hydraulics up from 9% to 11% full year and you recall when we started the year in January we had felt it was 8%. So clearly we were seeing volumes improve, bookings improve and our margin capture rate has improved substantially.

In the Aerospace market, we’re taking our margin expectation for the year down from 15.5% to 14.5%. That’s both as a result of the mix change that we see, with more OEM shipments and less aftermarket and then I will detail the situation on one of the following slides that affects a particular situation we’ve at one of our facilities.

Our truck, holding the 10% margin forecast we had for this year; and then Automotive, increasing our full year guidance from 7% up to 9%. You recall when we started the year, our original guidance for automotive was 5%. So, really seeing, the tremendous improvements in our cost structure paying off in this segment. So overall, from our last guidance taking margin up by one point from 10% to 11% on a consolidated segment basis.

And when you step back and reflect upon the incrementals, in January when we began the year we said we thought we would have 35% incremental. In February we increased that to 38% after we had seen a very strong month of performance in January; and underpinning our reconciliation, I will review with you in a minute, at this point is that we believe our incrementals across the segments this year will be on the order of 40%, obviously very strong numbers.

Chart 14, our revised guidance. Let me just speak to the mid-points on these for the second quarter, in terms of operating earnings per share, $1.15; in terms of net income, $1.10; in terms of full year, operating earnings per share of $4.45; net income, $4.30. And the $4.45 operating earnings per share is 11% increase from our last guidance; if you did not include the Medicare Part D, it would be 15%.

Similarly on the net income column, the increase of $4.30 is a 13% increase in terms of our guidance; without Medicare Part D, it would be 17%.

Turning to chart 15, a quick reconciliation of our first quarter operating earnings per share of $0.95 to our second quarter operating earnings per share guidance of $1.15, we obviously will not have the repeat of the Medicare Part D, that’s $0.14. I think we will get about another $0.21 from incremental volume. Our tax rate will move up from the 4% that we had in the first quarter.

And then we’ve a situation at a facility on the East Coast which was flooded during the terrible rains of the end of March and early April. We’re recovering from a total plant shutdown at that site in early April, but it is unlikely that we will have this plant come fully back online in the second quarter. As a result, we think it will impact for about a negative $0.04 in the second quarter. All that leads us to $1.15 in terms of our forecast for second quarter operating earnings per share.

If we move to chart 16, a reconciliation of the full year, I just would pick out a few items here really, in terms that are different from what we shared with you twice earlier this year. The first line item, we’ve obviously moved the market up to 6% from 5.5% and we’re using an incremental rate of 40% instead of the 38% you saw the last time.

On the FOREX line, we’re decreasing our guidance for increased sales from FOREX this year from the [225] we provided at the end of February to [150] now and then on the top line under the Several Negatives section in the yellow box, the tax rate change comes down now; instead of it being 15% full year, we think it will be approximately 13%.

And then moving to the final chart in the packet is just a summary of many of the subjects that I just talked about for your reference. I would refer just to the bottom two numbers on this chart, we’ve not talked about them yet, that we’ve increased our operating cash flow and our free cash flow projections for the year by $100 million each.

With that, Bill, why don’t we open things up for questions?

William Hartman

Thank you, Sandy. [Lea], could you issue the instructions for the Q&A please?

Question-and-Answer Session

Operator

Ladies and gentlemen once again if you would like to ask a question please press star one on your touchtone phone you will hear phone indicating you have been place in queue. You may withdraw yourself from this queue by the pressing the pound key. One moment please.

William Hartman

All right, names are popping up. The first one on the screen is [Steve Roakman]. Are you there, Steve?

Steve Roakman - Analyst

I’m here, good morning.

William Hartman

Good morning.

Steve Roakman - Analyst

We’re starting to get some fairly volatile performance versus market by segment, either outgrowth or undergrowth, I guess. Is there anything we should be pulling out of there? Is it kind of timing issues, or anything you can add?

Sandy Cutler

I think in terms of if you go through the pieces, Steve, where we had commented last fall that we felt there were some situations where we were dealing with difficulty getting good information about individual markets, I would say that I think you always have some timing issues.

I would say that the biggest issue that I think is one that we feel is a little bit more material is actually in the automotive arena, where there have been there obviously are some changes in sizes of equipment and what I mean there is SUVs versus CUVs, versus small cars, that have not played to our advantage in that regard. Outside of that, not too concerned and we think we’re pretty much on pace our full year projections this year of market outgrowth.

Steve Roakman - Analyst

Okay, great. And a quick follow-up, in Hydraulics you mentioned led by Mobile OEM strength, I think you guys have sort of specific exposure in the ag side, but is there sort of a little end market onion you could peel back for us there?

Sandy Cutler

Yes, I’d say it’s actually been stronger on the construction side than it’s been on the ag side, so I would put construction as the strongest in the Mobile area and then ag secondarily.

Steve Roakman - Analyst

And that’s inventory rebuilding, I guess?

Sandy Cutler

Yes, I think what we’re seeing is -- I think like many sectors of the economy, many of our customers in those two areas really worked hard to get their inventories down last year and now as they are preparing to obviously ship to end users in their own areas they are having to do own rebuilding of their own inventories in their own factories and distribution centers before they are in a position really to be then getting it out to dealers and distributors.

Steve Roakman - Analyst

And that’s in both construction and ag, but more construction?

Sandy Cutler

Correct.

Steve Roakman - Analyst

Super. Thanks.

William Hartman

Next, we have David Raso. Good morning, David.

David Raso - ISI Group

Hi. Good morning. I wanted to compare the first quarter margins you just reported with the full year and I know you’ve raised the automotive margins a couple times. But I’m just trying to think through, why do we see the automotive margins in the first quarter above 11%, but full year at 9%? And does that decline offset some of the improvement you are looking for in Electrical rest of the world and also even in Aerospace from the first quarter to the full year guidance? Could you just take me through the Automotive margin degradation?

Sandy Cutler

Yes, I think there are two things in Automotive, Dave. Normally what you find is that the first half is stronger than the second half in Automotive in terms of days worked and remember that in the industry you have very significant close downs in the third quarter and that’s when a lot of the model changeover is.

And so that if you look at just a pure play on Automotive, normally the first and second are your strong quarters and then you have a weaker quarter in third and then in fourth quarter that comes back but generally not at the level of the first and the second. So that’s the first issue, which is the normal kind of sequential quarterly progression.

The second is that there has been, in our opinion, quite a bit of inventory rebuild going on in terms of manufacturers quickly gearing up manufacturing in the first quarter. For us, it’s not as clear at this point in terms of the second half as to what demand is going to look like, not only here but also in Europe.

So in terms of the visibility issues, do we’ve great visibility in the second half demand levels in automotive industry? No, at this point and so much depends upon the strength of the consumer recovery and we just think there still are some questions about that. So our own anticipation is that demand will be slightly weaker in the second half than it was in the first half.

David Raso - ISI Group

And on Truck and I appreciate how much Brazilian-added transmissions are helping and even outside the North American Truck market broadly, for 130,000 builds for the year in North America and we just had 35,000 the first quarter, can you just help us out with how do you see the quarterly builds play out for the rest of the year and just trying to think through why the margin for the full year should only be equal to what you just did in the first quarter?

Sandy Cutler

Basically, the easiest way to think about that build rate for the year is that it’s basically flat, that you just don’t get much of an increase. You come out of this first quarter at a 33,000 to 34,000 and then you go at 33,000, a 34,000 or a 35,000, so it just is this is an absolute flat line for the year.

David Raso - ISI Group

So, no dip second, third quarter, then back up in the fourth, you are just assuming a flat line. One last quickie, on the EPS bridge and I apologize if I missed it, but from what you reported in February at the analyst meeting, you’ve essentially raised your guidance roughly, depends how you back things out, $0.55 to $0.60 and $0.30 is from improved market growth, also some market outgrowth improvement. You also have $0.17 benefit from the last guidance from lower drag from higher amortization of intangibles. And that’s almost a third of the guidance increase from something going out with amortization of intangibles. Can you help us out on that?

Richard H. Fearon

Dave, it’s Rick. It’s intangibles and variety of other corporate items and intangibles at this point look to be a little bit lower and we think that there are likely to be some other savings in some of the corporate line items, so it’s a whole variety of things.

David Raso - ISI Group

Okay. I was just thinking, since February I think the business improve might be even more incentive comp pressure on the upside not the downside; I was just surprised that you put your big part of the EPS increase from kind of a random other kind of category. Is there anything material one item in there, or is just?

Richard H. Fearon
No, I would say really it’s a whole variety of topics and they all add up to that.

David Raso - ISI Group

Okay. All right, I appreciate it, thank you.

William Hartman

All right, next is Eli Lustgarten. Hello, Eli.

Eli Lustgarten - Longbow Research

Good morning, everyone. Nice quarter, actually. One quick clarification; your $4.30 to $4.60 to $4.45 excluded the Medicare charge, correct?

Sandy Cutler

No, no.

Richard H. Fearon

That’s after the Medicare charge.

Eli Lustgarten - Longbow Research

So, the $4.45 would be like $4.60 on a pure operating basis?

Richard H. Fearon

$4.59, right.

Eli Lustgarten - Longbow Research

$4.59, okay. I sort of missed that. Probably the same real as David was talking about, the Hydraulics business, 11%, I know we keep raising the margin, but you were there in the first quarter and volume is going to strengthen a bit for the rest of the year from where we’re in the first quarter; is that mix or seasonality, or the end of inventory building? What’s causing the margins really to really go nowhere in the first -- the rest of the year from where you are now?

Sandy Cutler

I think again, Eli, what we’re a little cautious about at this point is that we’ve seen a quarter of what we think is quite a lot of inventory rebuild on the OEM side. And we’re -- always trying to ferret out how much of that is rebuild versus how much of it is demand is more of an art form than it is a science, I’m afraid and that’s what we were trying to keep our eye on.

I think as we get through another quarter and get a better view as to what the run rate is on a continuing basis, we’re going to have better visibility on this. But we’re coming out of a period where we’ve had such poor forward visibility to a period where we’re just starting to get some forward visibility and that’s our best look at this point.

But I would say if there is some potential, it is probably going to be on the upside there, but it’s maybe a little early to call.

Eli Lustgarten - Longbow Research

And a tax rate at 13% this year, does that say it won’t go up as quickly next year? I mean, are we sort of you know, we’ve it in multiple years, will it start initially at 15% and are we going to 17% to 19% next year, or what happens as we look out?
Richard H. Fearon

It’s, as you know, a hazardous activity forecasting the tax rate. I do think that for four months that we’re going to have this year suggests that perhaps we could do a little bit better than we had suggested at our last conference call and so I do think that a number in the 16% to 18% range is probably a reasonable number to pencil in at this early juncture.

Eli Lustgarten - Longbow Research

For next year. Now, one final question, Electrical America, it’s 250 million in stimulus in it, so you expect that 500 million is a very real number and you expect profitability to sort of hold through the rest of the year in Electrical, as opposed to any dip; is that what we’re - that’s what the guidance says.

Sandy Cutler

Two items in terms on the stimulus, yes, we still are very comfortable with our projection in that regard and the rate of bookings has picked up and I think you are generally starting to hear people that are around the subject in any detail, that they are seeing dollars flowing, whereas there was more a conversation earlier. On the margin, we’ve maintained the 13% guidance for the full year.

We’ve always said that the most difficult thing in calling that number has been, as you continue to have non-residential go down with some the large assemblies business that goes with that and then you have the lift going on of the short and mid-cycle businesses, will they perfectly match in every quarter. The 13% probably over simplifies that. We can’t be sure that will be true in every quarter this year, but we’re pretty confident for the full year we’re going to get that 13%.

Eli Lustgarten - Longbow Research

I thought there was also involvement in the project bid business, the competition in there, is that going on?

Sandy Cutler

And that’s where the volume has been coming off and obviously with 21% drop that we talked about there for non-res, that side of the business coming down, but we were seeing good strength in power quality, we’re seeing an increase in the residential, we’re seeing an increase in the industrial and so I can’t tell you that every quarter is going to match exactly, but we do think that the 13% for the full year is the right range.

Eli Lustgarten - Longbow Research

Thank you, very much, I will get back in line.

William Hartman

Okay, next is Ann Duignan. Ann?

Ann Duignan - J.P. Morgan

Hi. Good morning, guys. Maybe you could provide us a little bit of color on the Electrical rest of world market. You know, it’s always surprising to us that you continue to see strength in construction in Europe and maybe you could just give us a bit more color on what you’re seeing around the world than the electrical side?

Sandy Cutler

The big plus year-to-year in terms of bookings and volumes is actually occurring in Asia and there it has continued to strengthen and we’re seeing it pretty broadly across each of our product lines and arenas, most strongly led obviously in China.

So that’s continuing to be quite strong and we’re very pleased and an enormous snap back from where it was a year ago. But it is a continuation out of what we talked about all last year, that fourth quarter of 2008 and the first quarter 2009 were kind of the low periods and since then Asia has been coming on every quarter.

In Europe, we’re actually pleased that we seen stability and we’ve started to see some growth and that business participates not only in construction markets but industrial markets as well and obviously power quality in both these two regions is a bigger percentage of our business than it actually is here in the Americas and power quality is quite strong. So we’re feeling quite good about where we’re. We started the year a little bit better than we had expected we might in the margins for that sector.

Ann Duignan - J.P. Morgan

Okay. And Sandy, you’ve seen such a back half at least your margin outlook across many businesses is a little bit conservative. Is that driven by lack of visibility on the revenue side, or is it driven more by the concerns you might have on input costs versus price? And maybe you could address which you are more concerned about, or which you have less visibility into?

Sandy Cutler

I think it’s far more on the former end. I think as we -- as I mentioned I think to Eli’s question, our visibility is so much better than it was a year ago, but it’s still shorter than it was several years ago. And so Aerospace is probably the market where we’ve got the longest visibility, but you start to get down underneath that and we’re still dealing with looking out just a couple of months and not really being able to see detailed customer patterns looking out Six, Nine, 12 months.

And so that’s where we’re perhaps a little cautious about the second half, because we do think in some of these markets, as I mentioned, you’ve seen some OEM rebuilding of inventories and at some point that will come in line with actual production.

Having said that, I think what’s particularly intriguing about the markets that Eaton serves is that we’ve got a couple big markets that basically have not kicked in yet and I would expect that we would see them kicking in, in 2011.

And in response to Dave’s earlier question, certainly the heavy duty Truck market is going to be substantially stronger in 2011 than it is in 2010 and that will provide some additional fuel obviously for our earnings. We do anticipate this non-residential construction market, which you recall is almost 40% of the Electrical Americas segment, will have a far better year in 2011 than it has in 2010.

So while we’re pleased that we were seeing a number of our businesses come back, we don’t have them all kicked in yet at this point and that’s why perhaps we’re a little conservative in the second half, but we think there is a very reasoned forecast that says these markets get stronger in 2011 than they are in 2010.

Ann Duignan - J.P. Morgan

Okay. And just one final tiny follow-up. Your incremental profits by the way you calculate them, what were they in Q1 versus your outlook for 40% incrementals for the year?

Richard H. Fearon

They were up toward the 70% number in the first quarter and that’s obviously what’s caused us to say, hey, as they’ve got to move up.

Ann Duignan - J.P. Morgan

Okay, so somewhere around 70% in Q1?

Sandy Cutler

Yes, but recognize, Ann, when you start to do quarter to quarter and years to years, the biggest increase should have been Q1. So I know some will want to extrapolate 70% for the year.

Ann Duignan - J.P. Morgan

And clearly that’s not where you are guiding to. Okay, thanks. I’ve taken up enough time.

William Hartman

Thank you, Ann. Next is Tim Thein. Are you there Tim?

Timothy Thein - Citigroup

Good morning, guys.

Sandy Cutler

Good morning.

Timothy Thein - Citigroup

Can we discuss a little bit more about the North American Truck market relative to Europe. Are you seeing either market particularly out performing the other? And is your exposure in Europe medium duty versus heavy?

Sandy Cutler

Yes. We’ve a very small exposure in Europe and what exposure we’ve is medium. Our primary exposure in the area, as we mentioned earlier, is North America. And here there is reason to be encouraged by some of the freight numbers that have available, particularly within the last week.

But having said that, there has been an overcapacity that’s taking awhile for the industry to work its way through it and that’s why we reduced our guidance from 150,000 units down to 135,000 for this year.

Timothy Thein - Citigroup

And just jumping to Electrical rest of world, is there any seasonality in that margin? Does that strengthen through the year as Americas?

Sandy Cutler

Typically, the weakest quarter is the first quarter. And when we gave our guidance in January, we said to expect that the first half would be more in the 7% to 8% range and the second half would be double-digit and that’s how we would get to the average of the 9% return on sales guidance for the segment.

Timothy Thein - Citigroup

Thanks. And just one more, can you give a first quarter CapEx number?

Sandy Cutler

Yes, we were under $40 million for the first quarter.

Richard H. Fearon

And as you know, for the full year we’re saying the number will be around $400 million and we had said we would start out quite cautiously and we did.

Timothy Thein - Citigroup

Okay, great. Thanks very much.

William Hartman

Next we have Jamie Cook. Good morning, Jamie.

Jamie Cook - Credit Suisse

Hi. Good morning. A couple of quick follow-up questions. Again on the Mobile equipment side, Sandy, I’m just trying to get a feel for how much of the improvement is you not really believing the OE’s orders, versus them taking production up again? And then on the construction equipment side, how much is U.S -- or is it all emerging markets, or are we seeing any improvement in the U.S.? And what you guys are hearing for any pre-buy on off highway tier -- with Tier 4 coming ahead in 2011, if you assume any potential pre-buying in your forecast?

Sandy Cutler

Jamie, in terms of the regional differences, almost nothing in terms of regional differences. That 88% increase in our bookings is pretty much the same in each of the regions of the world. We’ve seen a very strong rebound and as I mentioned earlier, very much led on the Mobile side and within Mobile much stronger on the construction side.

So there is not a lot of color to add, because there is really not too much difference between the regions at this point. What we’re pleased about is that that’s different than what we saw at the end of the year, where most of the strength was being seen in Asia/Pacific. It’s not really filled in elsewhere.

And in terms of comments on pre-buying, no, we’ve really not heard much at this point and it’s -- I think what’s driving things more than anything else right now is this expectation that worldwide economy is getting stronger, that you are starting to see shortages, you are starting to see some lead times move out and as a result many of our customers are starting to now put inventory and then start to produce again.

Jamie Cook - Credit Suisse

Okay. And then just a follow-up question again, some the comments have been made that your margin assumptions at least in the back half of the year seem a little bit conservative. Can you just help me, what are you assuming for material cost price in the back half of the year versus first half, or any headwind in the back half that we’re not appreciating?

Sandy Cutler

No, what we’ve said is that we would expect to match price and cost and if you look across the industry there are some price increases out in the Electrical industry already, there are some that are out in the Hydraulics industry at this point and so I think what you are seeing is kind of creeping commodity prices and then people’s pricing is starting to creep to take care of that.

Jamie Cook - Credit Suisse

Okay, but no headwind in the second half relative to first, just to be clear.

Sandy Cutler

No.

Jamie Cook - Credit Suisse

Thanks. I will get back in queue.

William Hartman

Okay, thanks. Next up is Rob McCarthy.

Robert McCarthy - Robert W. Baird & Co., Inc.

Good morning. My first question is on Aerospace aftermarket. I know that in some cases, aftermarket sales have even dipped further than flight hours and wonder if there could be a snap back. So I wanted to ask on the typical order cycle lead times, how does that process work? How much visibility do you have and do you see any prospect for recovery in the later half of the year, just based on timing of orders and delivery? If it were to get stronger, in other words?

Sandy Cutler

It really very much, Rob, depends upon the type of equipment, because much of this is not the kind of stuff that is stocked in a warehouse somewhere, it has to be built to an order and so there is some portion that is. So you have a couple months in there, but I would say that I think the conditions are such that you are likely to see an enormous change. Profitability is not on an upward trend yet for the airlines. You just had a major interruption in terms of what’s happened in Europe that is going to put financial pressure on more of the airlines at this point.

So these things don’t tend to change in two or three-month buckets. It tends to be more than that, sort of kind of a six to 12-month time and you can hear a fair number of people in the industry now saying that they think the commercial after market improvement doesn’t really occur until you get into 2011.

So that’s more of our thinking. There will be spot differences in that I’m sure and it’s always different for individual companies based upon the type of book that they make. But I think the base issue you have to think about is that while flight hours have increased, profitability is still pretty poor and there is a lot of pressure on this kind of discretionary spending.

Robert McCarthy - Robert W. Baird & Co., Inc.

Did you change what your revenue forecast would have been, based on the flood and the volcano, or was it kind of locked in anyway?

Sandy Cutler

Two different issues. No, we’ve not substantially changed our forecast. Remember, what we said as we think OEM production is a little stronger now, the outlooks are, than we had anticipated. But the aftermarket is weaker, so it’s more of a mix change than it’s a top line change.

Robert McCarthy - Robert W. Baird & Co., Inc.

I guess I not sure it’s a fair question, but I was trying to ask would it have been higher absent the flood and the volcano?

Sandy Cutler

I think on the -- more specifically, we’ve a very hard time knowing what will come out of the volcano, except more ash. But I would say on the flood issue, there what we’ve done, as you saw, we’ve taken our earnings down in the second quarter and that is related to having less volume.

Robert McCarthy - Robert W. Baird & Co., Inc.

Perfect. Thanks, guys.

William Hartman

Next is Jeff Hammond. Good morning, Jeff.

Jeffrey Hammond - KeyBanc Capital Markets

Hi. Good morning, guys. Rick, can you just go through the moving pieces in free cash flow? You bumped it up by $100 million. It looks like net income is certainly higher. What was the pension contribution thought before versus actual? How are you thinking about working capital?

Richard H. Fearon

You know, Jeff, as we commented on our January call, we made a $300 million U.S. pension contribution in mid-January. We’re done for the year on the U.S. side. And we typically make about $100 million into the foreign plans per year and we’re very much on track to do that this year. So, no change on the pension side.

And really, the increases due to the higher income that we’re forecasting are on not very much change on sales volumes, so you don’t have a lot of extra funding required for that sales volume but you do have higher margins and that’s what led to the improvement in both operating and derivatively, free cash flow.

Jeffrey Hammond - KeyBanc Capital Markets

Okay. Thanks, guys.

William Hartman

Next is Andy Casey.

Andrew Casey - Wells Fargo Securities, Llc

Good morning, everybody.

Sandy Cutler

Good morning.

Andrew Casey - Wells Fargo Securities, Llc

Couple of quick questions. A lot of them have been asked already. But on the demand increase, you are likely seeing tightening capacity utilization; are you seeing any supply chain constraints show up and if so, where?

Sandy Cutler

We’ve not yet andy, although I would say the thing that we keep watching right now is something we’ve talked about on each of these the last several quarterly calls, which is that for small businesses and small suppliers at this point, as things ramp up, they will have working capital challenges and that’s why so much you are hearing about is the need to get more credit available to small business. But to date, it hasn’t caused us a problem.

Andrew Casey - Wells Fargo Securities, Llc

Okay, thanks. And just a follow-up on that one, Sandy, with the discussion about the natural disasters recently, should we be concerned about the duration of no-fly zone over Europe at this point?

Sandy Cutler

I don’t know that we can give you a lot of insight on that. They are starting to fly and we don’t know anything more than everyone does watching the news right now. They are starting to fly. I’m not sure I want to be on one of the first flights, but it looks like the situation is starting to modify at this point.

Andrew Casey - Wells Fargo Securities, Llc

Okay, thanks. Then within the truck outlook, can you help us on what you are expecting for Brazilian agricultural production in the second half on the equipment side?

Sandy Cutler

Yes, our -- and I was just in Brazil here a couple of weeks ago and had a chance to meet with a number of our large customers there. Obviously, this first half looks like a [bull], March, first quarter, certainly was there. Crop prices are holding up fine. I think there is a sense that the Brazilian domestic economy is operating quite well, which also leads to a sense of confidence.

There is, however, a fair amount of discussion that this will slow slightly in the second half. And then as some of the incentives that have been put in place by the Brazilian government start to end, that the big pop that has occurred will return to what I would call kind of more normal levels.

Having said that, we’re quite confident that long-term, Brazil becomes one of the real agricultural food baskets for the world and you will continue to see more land and then a bigger push on higher productivity for that land. So I think the continuing longer-term trend it, will be above trend compared to the rest of the world for ag equipment.

Andrew Casey - Wells Fargo Securities, Llc

Thank you very much.

William Hartman

Okay. Next is Mark Koznarek. Good morning Mark.

Mark Koznarek - Cleevland Research Company

Hi. Good morning.

William Hartman

Good morning.

Mark Koznarek - Cleevland Research Company

A question about, first of all, the little detail here about the currency. It looks like basically this first quarter you’re getting all that you are expecting for the year and the earnings contribution is the $0.10 that is in the year-over-year walk, that was the contribution from currency in the first quarter?

Sandy Cutler

The -- actually, Mark, the impact on currency in the first quarter from a profit standpoint was negligible and we did have, you’re right, about $130 million of revenues. So we expect a little bit of additional revenue for the balance of the year, but not substantial and of course it’s anybody’s guess as who how exactly what happens to the Euro, which is the one that’s been the hardest to forecast.

Our $150 million essentially assumes the Euro and the Real are about at the rate they are today. But given all the moving parts, that could obviously change.

Mark Koznarek - Cleevland Research Company

Okay, maybe I will take that offline. Then the other question I had had to do with the Electrical business for Americas, no change here down 3%, but there has been a lot of reporting recently about how strong the server market has been. Some of the market pundits have recently increased their shipment outlook to around 15%, previously it was up 6%. Sounds like a real boom year for products that are co-used with your power quality equipment. So that if that is getting better, it suggests the power distribution is worse to get your outlook unchanged. Can you comment about those two pieces?

Sandy Cutler

Yes, I’d say Mark, you’re exactly right that the power quality side of the market, whether one looks at either these are large data center market, which has returned with quite a bit of strength, or whether you are looking at the single phase or the flow products that are sort of in the middle of the two, the market is stronger than we thought when the year started and very pleased by that.

I think what we’ve seen on the array of other markets that go under the power distribution side is that I think people are -- have a more tepid view of the residential recovery kind of as each month goes on, we were setting new lengths of time that we go without building homes and so that has been a little weaker.

And I think some of the thoughts about utility spending, where people I think were very much influenced by their thought that smart would be built in a month, some of the realities about how long it takes to get things done, those segments are a little slower. And then non-res, it depends which index you want to look at, but I would say your net conclusion is right, that a little stronger on the power quality business and a little weaker on the power distribution and they kind of net.

Mark Koznarek - Cleevland Research Company

Okay. And then when we take a look at the Electrical Americas margin, it down shifted quite a bit here in the first quarter relative to the fourth quarter. It almost was like an 80% incremental margin, if you look at it sequentially. What changed so much in this current quarter versus fourth? Is there anything unusual that -- one-time that will reverse out over the course of the year?

Sandy Cutler

Yes, I would say you have two things here, Mark. One is the normal fact that your third and fourth quarters tend to be strong quarters seasonally in this business and the weakest quarter is always the first quarter. A lot of that has to do with how it relates to construction.

The construction tends to be slower in the first quarter of each year. And you also find that some of the power quality activity starts a little slower in the year as well, as some of the IT channels tend to fill fairly heavily in the fourth quarter. So I would say the great majority of that is that the normal seasonal pattern, if you would.

We had commented in our guidance for this year, for 2010, that we expect to see about one point of margin deterioration, due primarily to the declining volume in the non-residential project or assembly business and the pricing deterioration that we had associated -- or had planned to come with that. So I’d say this is playing out about as we thought.

I would have expected that our margins would have actually been less than 13% in the first quarter. So when I made my comments earlier, our full year guidance of 13%, when we started with 13%, is really good news.

Mark Koznarek - Cleevland Research Company

Okay, Great. Thank you.

William Hartman

Next is Rob McCarthy. Good morning, Rob.

Robert McCarthy - Robert W. Baird & Co., Inc.

Good morning, everybody. Sandy, I would like to ask you about the heavy duty Truck market in a different way. Are you surprised to find yourself and how do you reconcile, lowering your outlook for heavy duty Truck in North America for this year. At the same time that you are raising expectations pretty much across the board? I mean, varying degrees, but a little bit stronger market outlook everywhere else. And there seems to be broader confirming macro data that would support a little bit stronger macro outlook.

Sandy Cutler

I would say maybe two aspects on that Rob, one which I don’t think is the question you are asking but I will take this case and answer it anyways, which is that yes, I think it’s impressive with the balance that Eaton now has that we can be lowering the guidance in what has always been one of Eaton’s most important end markets and we still can increase our guidance, not including Medicare Part D, by 15%.

Having said that, now let me come back to your question on the heavy duty market, which is we came in this year thinking we would see, with all of the recovery in the markets, a 5% weighted average increase in markets and that we would see the Truck market be about 150,000 units. In saying that, we said that we thought by the March/April time period we would start to have to see orders returning to this high teens or low 20s levels and that clearly has not happened.

So what’s going on? What we think is going on is there is still this kind of overcapacity of trucks that are out there that are still very viable to use, that aren’t being utilized at high levels. We’re seeing the front end of freight picking up, which is one of the things that has to happen first to start to absorb that. But it hasn’t moved people off the sidelines yet, when they are looking at new vehicles that cost more money than the vehicles did last year.

So this period of digestion of the higher prices for the new vehicles, plus the inventory that needs to be absorbed that’s out there, is happening less quickly than we anticipated. That’s why we taken the 15,000 out. And yes, we’re surprised. We thought this would come back more quickly but we think the prudent thing to do at this point is to plan on the 15,000 lower.

Having said that, having been through this four or five times in my career, about the time that you think that things won’t increase is about the time things take off. So at some point this market will come back and when it comes back it tends to come back quite quickly. That’s why we think a 2011 plan or forecast that is over 200,000 units makes a lot of sense.

Robert McCarthy - Robert W. Baird & Co., Inc.

In terms of increase, sure. But you’re basically -- if I understand you correctly, we’re postponing the inflection in the order cycle until 2011?

Sandy Cutler

Yes, I would say we’re postponing the shipment until 2011, that’s right and it would mean that that order cycle has got to start to come up sometime in the second half of this year.

Robert McCarthy - Robert W. Baird & Co., Inc.

Yes, but late, okay. The other question I wanted to ask you, I realize that some of this is requires a reasonable range around estimation, but, when you say non-residential 40% of North American Electrical, first thing that comes to my mind is, exactly when? Because we had a differential growth rate last year, will again this year, so that we sort of size our foundation correctly going forward. What are we talking about this business bottoming out at? Like 30% of the segment? 25%?

Sandy Cutler

We’ve not re-sized that at this point, Rob. What we did was we provided -- in our February New York analyst meeting, we provided sort of a pie chart, if you recall, on each of these and that was based off of our volumes in 2009. We’ve not re-cut it at this point. We will as we get out to the end of this year.

Robert McCarthy - Robert W. Baird & Co., Inc.

Okay, very good. Thanks, Sandy.

William Hartman

Thank you, everybody, that completes the Q&A session and we appreciate your interest and as always we will be available for the rest of the day to continue to answer your questions. Thanks again.

Operator

Ladies and gentlemen, that does conclude your conference. Thank you for using AT&T executive teleconference service. You may now disconnect.