eaton corporation ubs industrial leadership …pub/@eaton/@corp/documents/...eaton corporation ubs...

© 2011 Eaton Corporation. All rights reserved.

Eaton Corporation

UBS Industrial Leadership Conference

Richard Fearon, Vice Chairman and Chief Financial and Planning OfficerMay 6, 2011

2 2© 2011 Eaton Corporation. All rights reserved.

Forward-looking statements and Non-GAAP financial information

This presentation contains forward-looking statements concerning the second quarter 2011, and full year 2011 net income per share and operating earnings per share, full year 2011 revenues, our worldwide markets, our growth in relation to end markets and our growth from acquisitions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; competitive pressures on sales and pricing; increases in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; changes in currency exchange rates; stock market or currency fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.

This presentation includes certain non-GAAP measures as defined by SEC rules. Areconciliation of those measures to the most directly comparable GAAP equivalent isprovided in the investor relations section of our website at www.eaton.com.


Eaton Corporation – A Premier Diversified Power Management Company

• A balanced power management company

• Progress over a decade

• Continued growth and improved profitability

• 2011 outlook


Eaton is a leader across the power management spectrum

Cities & Buildings

TransportationIndustrial & Machinery

Information Technology

Energy & Utilities

Infrastructure

We provide reliable, efficient and safe power management for:


$7.3 B$6.4 B

Our organization is aligned to effectively serve our markets

Industrial Sector

Vehicle

Aerospace

Hydraulics

Electrical Sector

Electrical Americas

Electrical Rest of World

2010 Sales by Sector


The Electrical Sector delivers a broad array of power solutions through a regionally focused organization

$3.7B Americas business$2.7B Rest of World business

Power Distribution Power Quality Control and

AutomationServices and Aftermarket

Circuit breakersSwitchgearPanelboards and switchboardsTransformersAssemblies

Uninterruptible power supplies

Single phase3 phase

Power distribution unitsMeters and software

Engineering and consulting servicesTurnkey design, build and managementMaintenance and aftermarketPower audits and studies

DrivesSensorsHuman machine interfaceControl components

2010 Sales


Electrical Americas Sales2010 $3.7 B

• Continued strong growth in industrial machinery leveraging Moeller andMicro Innovation products

• Recovery of mission critical business

• Stabilization of residential business

• Continued growth in some specialty construction markets, including government and institutions

• Flattening of nonresidential market by mid year, followed by modest growth

Growth Drivers

The Electrical Americas business is well positioned to take advantage of recovering markets

Residential Government

Utility

Commercial

Industrial Machinery

Institutional

Industrial Facilities

Infrastructure

Data Center, IT & Related

Sales by Market Segment


Electrical ROW Sales2010 $2.7B M • Continued rapid expansion in China

• Deeper penetration into mission critical applications in APAC and EMEA

• Double digit growth for machinery OEM’s, particularly in Europe

• Entry into residential solar inverter market

• Increased access to the Middle East and Africa through acquisition of Actom and joint ventures

Growth Drivers


Residential

Government

Utility

Commercial

IndustrialFacilities

Infrastructure


Institutional

Data Center, IT & Related

The Electrical ROW business is broadly diversified across markets and channels


$7.3B portfolio of Industry leading businesses

Aerospace Hydraulics AutomotiveTruck

Hydraulic SystemsConveyance SystemsElectrical, Sensing and ControlsFuel Systems

ControlsFluid ConveyancePowerFiltration

ValvetrainSuperchargerTorque ControlFluid ConnectorsFuel and Powertrain

TransmissionsHeavy DutyLight / Medium Duty

ClutchHybrid

Eaton's Industrial Sector is a leader in the management of mechanical and fluid power

2010 Sales


Sales Mix• Commercial: 60%

Military: 40%Market Mix• Original Equipment: 65%

Aftermarket: 35%

Eaton Aerospace Today

Our Aerospace business brings both component expertise and system capabilities to a wide range of markets

• Emerging economies• Acquisitions and alliances• Energy efficient solutions• Positions on growth platforms

Growth DriversAerospace Sales2010 $1.5B

Rotorcraft

Military Fighters

Large Transport

Regional Transport

Business Jet

General Aviation

Military Transport

Other

Military Rotorcraft



Our Hydraulics business offers product breadth and serves diverse end markets

Hydraulics Sales2010 $2.3B

End Market Mix• Mobile: 75%

Stationary: 25% Channel Mix• Direct: 55%

Distribution: 45%

Eaton Hydraulics Today

• Emerging markets • Leading technologies• Acquisitions and alliances• Energy efficiency

Growth Drivers

Construction

Agriculture

Material Handling

Truck, Bus, Engine


Processing

OtherMobile

OtherStationary

Energy

Filtration

Recreation



Our Truck business serves global markets with leading technology

Truck Sales2010 $2.0B

Global Presence• NAFTA: 50%

Rest of World: 50%Market Mix• OEM: 75%

Aftermarket: 25%

Eaton Truck Today

• Continued global expansion • New products and programs• Industry leadership in hybrids

Growth Drivers

HeavyDutyTransmissions

Medium/LightDuty

Transmissions

Clutch

AgricultureTransmissions



Our Automotive business is positioned to win in emissions and fuel economy

• > 75% of business is outside of Detroit 3 / NAFTA

• Nittan partnership: 10%• Asian OEM brands: 20%

Eaton Automotive Today

• Energy efficiency and emissions• New products• Emerging economies• Relationship with Nittan

Growth DriversAutomotive Sales2010 $1.5B

Asia / Asian Brands

Alternative Markets

EuropeBrands

Detroit 3 (NAFTA)

Other







• 2011 outlook


EBS underlies our recent and long-term success

Rapid deployment of best practices

Prescriptive processes

Continuous assessmentEaton University

Growth & Operating Excellence

• Growth• Robust strategic planning

process for growth and profitability

• Outgrowing end markets through innovation

• Identifying higher growth markets

• Established acquisition strategy and processes

• Profitability• Operational excellence• Global scale• Efficient functional support

• Capital Efficiency• Effective working capital

management• Capital expenditures targeted

to support growth• Culture and Values

• Doing business right• Employee development• Customer focus• Supplier partnerships

A powerful combination of proven foundation elements, tools and processes, EBS is at the heart of our strategy for becoming a premier diversified industrial


Over the last decade, we have markedly changed our mix towards higher growth/margin segments…

31%47%

9%

11%19%

16%19%

15%23%

11%

0%

20%

40%

60%

80%

100%

2000 2010Electrical Aerospace Hydraulics Truck Automotive

$13.7 B$7.8 B

Eaton Sales by Segment


…and have greatly expanded our international and emerging market footprint

U.S45%

Global Sales by Region Global Sales by Type of Market

80%

45%

20%

55%

2000 2010U.S. International

92%75%

8%25%

2000 2010Developed Economies Emerging Economies


Our businesses are well balanced across the economic cycle

32%

31%

22%

15%

0%

20%

40%

60%

80%

100%

2010

$2.1 B in RevenuesElectrical Service, Defense,

Filtration, Aerospace Aftermarket

$3.0 B in RevenuesCommercial Aerospace,

Nonresidential Construction, Large Data Centers

$4.2 B in RevenuesHydraulics, Industrial Controls,

Medium Duty Truck,Mid-sized Data Centers

$4.4 B in RevenuesResidential Electric,

Single Phase Power Quality,Heavy Duty Truck, Automotive

Early

Mid

Late

No

Cyc

le

2010 Global Sales by Cycle


Core market growth, profitability and cash generation have improved significantly

Segment Operating Margin

10.4%12.7%

2000 2010

Cash Conversion Cycle Free Cash Flow

83

62

2000 2010

$0.9 B

$0.4 B

2000 2010

FCF Pension Cont. FCF Pension

Cont.

$1.3 B

$0.2 B

Notes: Segment Operating Margin excludes acquisition integration charges Free Cash Flow is operating cash flow less capital expendituresCash Conversion Cycle is DSO + DOH – DPO

5%4%

2000 2010

Core Growth Rate Through the Cycle


0%

5%

10%

15%

20%

25%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0%

5%

10%

15%

20%

25%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Median = 10.5%

Return on Equity Return on Invested Capital

Median = 14.2%

Our businesses have generated attractive returns over the past decade


Our dividend yield and share price appreciation have greatly exceeded our peers…

0%

1%

2%

3%

4%

5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

180%

65%

0%

50%

100%

150%

200%

Eaton DI Median

Eaton DI Median

Dividend YieldCumulative Price Appreciation

2000 - 2010

Median = 2.1%

Note: DI dividend yield and cumulative price appreciation based on data from Capital IQ and Eaton analysis


…delivering strong results to our shareholders

Cumulative Shareholder Returns

50100150200250300350400450500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Apr15

2011Eaton S&P 500 S&P 1500 MachDI Group PDI Group ODI Group

2000 - 2011 CAGR*

Return Index

15.4%

11.0%

9.7%

1.9%

9.4%

8.2%

Note – DI Group represents an equal weighted index of ABB, DHR, DOV, EMR, GE, HON, IR, ITT, ITW, MMM, PH, SI, SPW, TXT, TYC, UTX; *CAGR = Calculated using the End Point MethodologySource Data: Capital IQ






• 2011 outlook


Our 2015 goals reflect higher growth and performance targets as we build upon 2010 results

ReturnsPerformance

Growth

16%segmentmargin

12-14% sales

growth20%

earnings growth

9% free cash flow

margin

30% of sales from emerging markets

15% ROIC

2015 Goals

Note: Segment Margin excludes acquisition integration charges


Penetration ofEmergingMarkets

1.5%

MarketGrowth

7%

Acquisitions2-4%

Innovation &New Markets

1.5%

Eaton Growth

12-14% Eaton Sales Growth

2010-2015Growth Strategy

Expected Market Growth Rate During Recovery

2010-2015

5%

2%

Long-Term Core

Growth

Recovery Outgrowth

7%

From 2010-2015, we expect annual revenue growth between 12% and 14%


We maintained our investments in technology in the downturn and are realizing the benefits…

$0

$100

$200

$300

$400

$500

2005 2006 2007 2008 2009 2010

($ in

mill

ions

)

0%

1%

2%

3%

4%

5%

(% o

f Sal

es)

R&D Expense % of Sales

Global Economic Recession

Annual Research and Development Expense


…from new products and services in the Electrical sector…

New markets Extending our value-enhancing capabilities

Electric Vehicle

Charging

Alternative Energy

Energy Efficiency Services Cooling

Solutions

Global Electrical Platforms

• Entering the airflow management cooling business with new, innovative products

• Developing cost efficient and easily scalable heat containment systems

• Launching new IEC low voltage and medium voltage switchgear designs

• Serving customers around the globe with modular design that can be assembled in Eaton facilities or by OEM partners

• Expanding our power distribution and power quality service footprint outside North America

• Rapidly growing our metering, software and monitoring business

• Introducing level 2 and level 3 charging stations with complete balance of system electrical infrastructure

• Collaborating with vehicle OEMs, fleets, governments, utilities and integrators

• Launching UL version of residential photovoltaic inverters

• Introducing new line of commercial photovoltaic inverters

• Performing turnkey system installation

• Building an efficiency focused consulting, commissioning, retro-commissioning and performance contracting capability

http://www.wrightline.com/products/independent_containment.html?category=23


…and from new products in the Industrial SectorNew products, programs and applications

COMAC 919High PressurePiston Pumps

Medium Duty Hybrid Vehicles

FuelEfficiency

• Supplying critical fuel and hydraulic conveyance systems, cockpit panel assemblies and dimming control system

• Expanding high pressure piston pump offerings for industrial and mobile markets

• New products offer open circuit and closed circuit options for global stationary and mobile applications

• >4,500 Hybrid Electric Systems (HEV) trucks globally

• Expect 200+ Plug-in Hybrid Electric Systems (PHEV) to >50 utility and municipal fleets in 2011-2012

• Launched Hydraulic Launch Assist (HLA) product for refuse trucks

• Introduced new Superchargers that offer up to 25% fuel economy improvement without sacrificing performance

• Superchargers are the best boosting option for engine downsizing and downspeeding


We have resumed growing our portfolio through acquisitions and joint ventures…

• Sales: $24 million• Energy engineering and

energy services company• Announced: July 2010

• Sales: $101 million• Manufacturer of enclosures,

rack systems, and cooling systems

• Announced: August 2010

• Sales: $35 million• Manufacturer of electrical

and electromechanical systems

• Announced: September 2010

• Sales: $58 million• South African manufacturer

of motor controls and electrical components

• Announced: January 2011

•

•

• Sales: $35 million• Manufacturer of hydraulic

quick coupling solutions• Announced: December 2010

JV with Commercial Aircraft Corporation of China (COMAC) to develop and manufacture fuel and hydraulic conveyance systems for the C919 aircraftAnnounced: July 2010

Electrical Hydraulics Aerospace

• Sales: $55 million• Manufacturer of advanced

filtration technologies• Announced: March 2011

COMAC JV


…while maintaining our disciplined approach for future acquisitions

Acq

uisi

tion

Crit

eria

• We continue to create value through our acquisitions

• We are geared for growth through acquisitions

• We have a robust pipeline of potential acquisition opportunities

• Expect activity to return to pre-recession levels in 2011

• Ample free cash flow available for acquisitions

Leadership in a key strategic marketor region

Target minimum returns of at least 3% pts above Weighted Average Cost of Capital

Proprietary content in productsand services

Strong underlying industry fundamentals

Attractive opportunities for growthand profitability


We are targeting sales from emerging markets to reach 30% by 2015

Global Sales by Region

45% 45% 40%

33% 30%30%

22% 25% 30%

2009 2010 2015e

U.S. International Developed Emerging Markets

Sales to emerging markets increased 30% from 2009 to 2010


We expect profitability and cash flow to improve markedly by 2015

2010Results

2015Goal

12.7%

16%

Segment Operating Margin

2010Results

2015Goal

6260

2010Results

2015Goal

6%

9%

$0.9B

$2.3B

Cash Conversion Cycle Free Cash Flow% of Sales

Notes: Segment Operating Margin excludes acquisition integration chargesFree Cash Flow is operating cash flow less capital expenditures; Operating cash flow is after pension contributions2010 Guidance as of February 26, 2010






• 2011 outlook


2011E2010

0

7

29

(1)

23

24

11%

20092011ETotal U.S. Non

U.S.

Electrical Americas Index (20) 7

7

18

4

22

6

10%

7

Electrical ROW Index (18)

7

n/a

22

4

45

7

7

Hydraulics Index (35) 15

Aerospace Index (4) 4

Truck Index (23) 7

Automotive Index (20) 5

Eaton Consolidated Index (20%) 13% 8%

We project growth of 10% in our markets in 2011…


…and higher margins in all segments, leading to record segment margins

12%

17%

11%

14%15.5%

14%15%

0%

5%

10%

15%

20%

ElectricalAmericas

ElectricalRoW

Hydraulics Aerospace Truck Automotive EatonConsolidated

2010 2011E

2011E Segment Operating Margins

Note: Segment operating margin excludes acquisition integration charges


2011 EPS Guidance Bridge2010 Operating EPS $2.81Several Pluses:• Market improvement of 10% at 33% margin $1.19• Market outgrowth at 33% margin 0.39• FOREX 0.05• Non-recurring 2010 lawsuit provision 0.08• Acquisitions 0.04

$1.75Several Negatives:• Higher tax rate $(0.29)• Unrecovered commodity costs (0.13)

• Increase in number of shares outstanding (0.06)• Increase in pension expense (0.11)

• Increase in other (Healthcare, LIFO) (0.12)($0.71)

2011 Operating EPS $3.85

Updated April 20, 2011


JanuaryGuidance

FebruaryGuidance

AprilGuidance

9% 10%

$1,400M

$450M

Acquisition Revenue $160M $160M $160M

Full Year

Q2 $0.90 - $0.96

Full Year $3.46 – $3.76 $3.51 – $3.81 $3.66 – $3.96

Q2

Growth from Forex $0M $0M $200M

Tax Rate 15% – 17% 15% – 17% 16% – 18%

$3.70 – $4.00

$0.89 - $0.95

$1.6B – $1.7B

$1.05M – $1.15M

$1,200M

$450M

$3.55 – $3.85

$1.6B – $1.7B

$1.05M – $1.15M

Market Growth Forecast 8%

Market Growth $1,100M

Outgrowth of Market $450M

Fully Diluted EPS

$3.50 – $3.80Operating EPS

Operating Cash Flow $1.6B – $1.7B

Free Cash Flow $1.05M – $1.15M

Summary of 2011 guidance

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