fluid power group - eaton

© 2007 Eaton Corporation. All rights reserved.

Analyst Day

May 1, 2007Eden Prairie, MN

2

Forward-Looking StatementsEden Prairie

The information discussed at today’s meeting includes forward-looking statements relating to future sales, revenue from new business awards and potential new business awards and other estimates and goals for future years. Those statements can be identified by the indication that they are for future periods and should be used with caution. They 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, energy and other production 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; acquisitions and divestitures; new laws and governmental regulations; interest rate changes; stock market 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.


Introduction to Eaton’sHydraulics Operations

Craig ArnoldMay 1, 2007

4

1.1. Fluid Power Group OverviewFluid Power Group Overview

2.2. Plenary Session Presentation Plenary Session Presentation • Overview of Industry & Eaton

Hydraulics Operations

3.3. Transport to Building #4Transport to Building #4• Via Hydraulic Hybrid Shuttle Bus

4.4. Breakout Session PresentationsBreakout Session Presentations• Broad Portfolio• Ease of Doing Business• Leading Technologies

5.5. Final Q&AFinal Q&A

Craig Arnold Craig Arnold –– President Fluid President Fluid Power GroupPower Group

William VanArsdale William VanArsdale ––President HydraulicsPresident Hydraulics

Astrid Mozes Astrid Mozes -- GM Hydraulics GM Hydraulics ControlsControls

Jeff Finch Jeff Finch –– GM Hydraulics GM Hydraulics Fluid ConveyanceFluid Conveyance

Scott Krueger Scott Krueger –– VP/GM VP/GM AmericasAmericas

Scott Deakin Scott Deakin –– GM Hydraulics GM Hydraulics Power Power

Today’s Agenda

5

Fluid Power organized around major industries

Fluid Connectors Filtration

Craig ArnoldSr. VP & Group President

Fluid Power, and Asia Pacific

Alexander Cutler Chairman and CEOEaton Corporation

HydraulicsWilliam VanArsdale

President

Aerospace

6

We have improved our business mix

Aerospace• On key growth platforms• Systems capability, hydraulics, fuel, air• High tech aftermarket components

Hydraulics• Balanced end market exposure• Global network of distributor partners• Broad product offering in served markets

Fluid Connectors• Global A/C and PS connectors• Worldwide air-conditioning leader

Filtration• Industrial filtration systems• #1 in bag filtration

52%

27%

21%2003 Business Mix

2007E Business Mix

49%

37%

10% 4%

Hydraulics AerospaceFluid Connectors Filtration

Note: 2007E includes Argo-Tech

7

Fluid Power serving many and diverseend markets

Military

Agriculture

Performance

MilitaryMilitary

AgricultureAgriculture

PerformancePerformance

Commercial

Construction

Automotive

CommercialCommercial

ConstructionConstruction

AutomotiveAutomotive

RegionalRegional

Machine ToolsMachine Tools

Marine

Primary Metals

Industrial Process

MarineMarine

Primary MetalsPrimary Metals

Industrial ProcessIndustrial ProcessCivilCivil

8

• Cylinders• Motors

• Hoses• Tubes

• Filters• Sensors

• Pumps

• Valves• Steering

Fluid Power delivering system solutions andcomponent leadership

Systems

9

Fluid Power building strategic leadership

Cost LeadershipCost Leadership

System Solutions/Component Leadership

System Solutions/Component Leadership

Customer / Channel Leverage

Customer / Channel Leverage

GlobalizationGlobalization

Technology OptimizationTechnology Optimization Product Expansion

10

Why we like the hydraulics industry

• Unique and sustainable technology platform• A global, profitable, and growth industry• Diverse customers and channels• Industry undergoing change and consolidation• Technology differentiation opportunities• Our commitment to Power Management


Hydraulics Overview

Financial Analyst ReviewMay 1, 2007

Show a Wind PowerApplication

Show a Wind PowerApplication

13

IntroductionsIntroductions

14

Overview

VisionTo be the most admired company in our

markets

MissionTo be our customers’ first choice of supply

IndustryPerspective

1Eaton’s

HydraulicsOperationsPerspective

1 22

15

Our Distinctive Capabilities•• Broad PortfolioBroad Portfolio

• Distinctive presence and breadth of capabilities in an otherwise highly-fragmented marketplace

•• Ease of Doing BusinessEase of Doing Business• Operating through an increasingly responsive and more

efficient, customer-oriented delivery model

•• Leading TechnologiesLeading Technologies• Bringing to the market leading-edge innovation for industry

renewal

16

Industry Perspective


markets


IIIIII

IIIIII

IVIV

VV

VIVI

Market Definition

Hydraulics Value Proposition

Market Segmentation

Customer Base

Business Models

Components of a Hydraulic System

17

Market DefinitionII

Stationary On/Off HighwayFactory Automation & Machine Controls

Man MachineInterface

ProgrammableLogic Controller

Hydraulic & Electro-Hydraulic

Components & Solutions

ElectricsMechanicsPneumatics

Vehicle ManagementPower, Control, Actuation & Conveyance

PLC’sPushbuttons

Panels &Displays

Current Field of PlayHydraulics $21B

Man MachineInterface

PushbuttonsDisplays

Joysticks …$9.4B $11.6B

Serving $21B On/Off Highway and Stationary Hydraulics Market

18

Hydraulic Value Proposition

Weight of 10 draft horses

= 16,000 lbs (8 tons!)

Weight of 10 hp electric motor= 200-500 lbs

Historical Power Electric Power

IIII

Why Hydraulics? … Tons of Power Density, Smarts & Reliability.

Weight of Eaton 10 hp orbit motor

= 20-25 lbs

Hydraulic Power

Hydraulics is a Compact, Versatile and Smart Package

19

Components of a Hydraulic System

PumpsPumps

ValvesValves

Motors & CylindersMotors & Cylinders

Connectors, Hose,

Filtration

Connectors, Hose,

Filtration

Power

Controls

Actuation

Fluid Conveyance

IIIIII

Types of Products Purpose

Generate flow

Direct and transmit pressure/flow

Execute commands and work load

Connect, convey, and filter fluid

Breadth and Scale Opens Endless Opportunities

20

IIIIII Basic Circuit

21

IIIIII Basic Circuit Cylinder

22

IIIIII Basic Circuit Cylinder

Prime MoverPump

Reservoir

23


Pump

Cylinder

Reservoir

Prime Mover

24


Pump

Cylinder

Prime Mover

Reservoir

25


Pump

Cylinder

Prime Mover

Reservoir

26


Pump

Cylinder

Prime Mover

Reservoir

27


Pump

Cylinder

Prime Mover

Reservoir

28


Pump

Cylinder

Prime Mover

Reservoir

29


Pump

Cylinder

Prime Mover

Reservoir

30


Pump

Cylinder

PressureControl Valve

DirectionalControl Valve

Prime Mover

Reservoir

31


Pump

Cylinder

PressureControl Valve Prime Mover

Reservoir


32


Pump

Cylinder

PressureControl Valve Prime Mover

Reservoir

Flow/SpeedControl Valve Directional

Control Valve

33


Pump

Cylinder

Filter


Prime Mover

Reservoir

PressureControl Valve

EH Value PropositionExpands Field of Play

Flow/SpeedControl Valve

EH Value PropositionExpands Field of Play

34

Market Segmentation

StationaryOn/Off

Highway

Agriculture• Tractors• Combines• Harvesters• Implements

MaterialHandling• Lift Trucks• Tele-Handlers• Cranes

Truck & Bus• Class 6-8• Medium Duty• Vocational

Utility Vehicles• Snow Blowers• Lawn & Garden• Scissors/Boom Lifts• Rough Terrain Vehicles

Construction• Wheel Loaders• Backhoe Loaders• Mixers• Excavators• Skid Steer Loaders

Processing• Primary Metals• Pulp & Paper• Food & Beverage

MarineOff Shore• Oil Platforms• Ships• Port Equipment

Civil Engineering• Dams• Bridges• Locks

Renewable Energy

Machine Tools• Cutting & Forming• Injection Molding

IVIV

• Wind Power• Ocean Power• Solar Power

Significant Application and Market Diversity

35

Hydraulics IndustryUSD Billions

2006 2011

AP EU Americas

$26B

$21B

VV

5 year GlobalCAGR4.2%


Source: Eaton economics and Fluid Power PMI

Emerging Markets Driving Industry Growth

Key Drivers

North America• Large mobile OEMs have very strong global

influence

• Value added services becoming key differentiator; End-users require custom specs solutions

Europe • Growth in earthmoving & construction

machinery sector• Growth in industrial sector due to

petrochemical, oil & gas industries

Asia Pacific• Fastest growth in China & India (13% CAGR)

due to infrastructure investments in construction, mining and exploration, and port upgrades

• Region growing as a global manufacturing & sourcing base

36

$10.9B$9.4B

Stationary

OtherMtrl. Handling

Construction

Machine Tool

Primary MetalsPlastics

$0.6B

On Road

Other

Agriculture

Marine/Offshore

Market SegmentationIVIV



Growth Rates above Industry Averages

Key Sub-segment Growth Outpacing Industry

On/ Off Highway

Key Drivers

• Industry renewal with Electro Hydraulics & Embedded Controls

• Demand for technological advancement to meet environmental challenges

• Systems solutions gain in importance: synergies between sub-systems increase

• Value added services becoming key differentiator; End-users require custom specs solutions

37

Sub Segment GrowthAG Equipment Construction Equipment

Renewable Energy Marine/Off-shore Primary Metals

• Large construction equipment is expected to increase driven by mining, exploration and infrastructure investments in China and India.

• India’s natural resource development projects drive demand for coal for thermal power generation.

• Increasing demand in AG equipment driven by ethanol production - corn and sugar cane harvesting (7% expected growth rates).

• Brazil produces 17.3bn L of biofuels from sugar cane nearly as much as the US produces from corn.

• Renewable energy is playing an important role in today’s energy crises – wind, solar, hydropower, …

• Global markets continue to grow at 20%+ rates.

• Expansion continues in oil & gas exploration sector – particularly in Russia, Middle East and Africa.

• Both shipbuilding and off-shore equipment are flourishing.

Faster than Industry Average Growth in Many Sub-Segments

• Continued explosion continues in primary metals - driven by world economic growth and industry globalization. Steel production increasing 8.9% globally.

38

Global Customer BaseOEM Margin Characteristics – FY2005

VV

Sourcing Process

Two Distinct Markets with Diverse Requirements Drive Balance through Economic Cycle

~1 - 3 yrs

3-4 months

6 moto 1 yr

10 – 20 yrs

Effo

rt L

evel

Stat

iona

ryO

n/O

ff H

ighw

ay

7+ yrs

Key to success:Broad Portfolio

Ease of doing business

NA.

Specs Sale

Post- SalePre-Sale

Effo

rt L

evel

Buying Characteristics

• Component technology

• Global reach

• Scale

• Applications knowledge

Buying Characteristics

• Portfolio breadth

• Channel reach

• Applications knowledge

• Ease of doing business

On/

Off

Hig

hway

Stat

iona

ry


Ease of doing business


Leading technologies


Leading technologies

10+ yrs

39

Business ModelsVIVI

Component ModelComponent Model Solutions ModelSolutions Model

Components SolutionsCustomer requirements

Niche focused

Types of competitors

Broad based

Most Successful Companies have Capability to Serve Industry's

Diverse Needs

Large OEM’sLarge OEM’s

Small & Medium Size OEM’sTechnical Distribution

Small & Medium Size OEM’sTechnical Distribution

Aftermarket, Retail & MRO Distribution

Aftermarket, Retail & MRO Distribution

40

Eaton’s Hydraulics Operations Perspective


markets


11

22

33

44

Hydraulics Global Footprint

Hydraulics Key Initiatives

Growth Profile and Summary

Hydraulics Organization

41

Eaton’s Hydraulics Operations Global Presence

11

Channel

PlantsPlants

Global customers need broad global suppliers with local reach

Markets13%31%

11%10% 5%

30%

Ag ConstructionMaterial Handling OtherTruck, Bus, Engine Stationary

End Markets

Well-balanced business through economic cycle

Eaton Hydraulics: Around the corner, around the world

Customers

Broad & diverse customer base increases opportunities

Top 25 Customers 42%

2000+ Distributors and 12,000+ Distributor LocationsExtends the reach to broad market and customer base

Other Customers*48%

*5400 Customersplus 1000s of Distributor Customers

42

Eaton’s Hydraulics Operations Organization

22

PresidentGlobal Hydraulics OperationPresident

Global Hydraulics Operation

Enabling Functions:

Finance, HR, IT, Technology, Supply Chain Enabling Functions:

Finance, HR, IT, Technology, Supply Chain

Americas GM“Regional P&L”

OperationsSales

Americas GM“Regional P&L”

OperationsSales

E.M.E.A. GM“Regional P&L”

OperationsSales

E.M.E.A. GM“Regional P&L”

OperationsSales

AP GM“Regional P&L”

OperationsSales

AP GM“Regional P&L”

OperationsSales

GM – PowerProducts Division

”Product P&L”GM – Power

Products Division”Product P&L”

GM – ControlsProducts Division

”Product P&L”GM – Controls

Products Division”Product P&L”

GM –Fluid ConveyanceProducts Division

”Product P&L”

GM –Fluid ConveyanceProducts Division

”Product P&L”

•St

rate

gy &

Glo

bal F

ootp

rint

•M

erge

rs &

Acq

uisi

tions

•Pr

oduc

t Dev

elop

men

t•

Prod

uct M

arke

ting

Global Product Team with Regional Execution

43

Hydraulics Key Initiatives33

• Well-balanced business• Restructuring for global competitiveness• Stationary focus paying off

To ensure further success we are… • Realizing Excel 07 cost savings• Developing new products and services• Further improving the mix

• Acquisitions• Distribution / Aftermarket

Operating MarginSales

2003 2004 2005 2006 2010

13%31%

11%10% 5%

30%

Ag ConstructionMaterial Handling OtherTruck, Bus, Engine Stationary

44

Excel 07 Update

Reynosa, Mexico Expansion:Reynosa, Mexico Expansion:• 3 new mfg. plants – 500,000 sq. ft.• Product relocation completion within 12

months

JiningJining, China Expansion:, China Expansion:• 186,000 sq. ft. facility completed in May 2006

• Phase I construction complete• Equipment moves: by July ‘07

33

Strategy: Reposition manufacturing base to improve global growth and competitiveness

Current Status: On target (Most plant moves will finish in the first half of 2007)

Expanding Global Growth and Competitiveness

45

Developing New ProductsPower Controls Fluid Conveyance

Actions

33

Eclipse Air Brake Tubing (Synflex®)

WalRing

Food & Beverage• Expanding into adjacencies

GH 466-32• 6 Wire Spiral Hose, 420 bar• 2M Flex Impulse

• Improved Performance

Sectional Valve• Open Center

Hitch Control Valve• Tractor applications

Mobile DirectionalControl Valve

DG 70 Design• Separating Power & Control

Versasteer• Multi-mode steering

Delta Motor• New market expansion

HP 30 Motor• Expansion into mid-range construction

machinery

X20 Pump Series• Next generation program

Next Generation Vane• Performance and Noise enhancements

Global Gear Pump• New market entry

New Product Development Drives Organic Growth

46

Improving the Mix3

Acquisitions that broaden Market & Product Portfolio• 2002 – Boston®, Weatherhead®, Hydraulic/Industrial hose• 2002 – Hydro-Line®, Industrial Cylinders• 2004 – Walterscheid™, Metric fittings• 2004 – Ultronics™, Mobile EH Valves• 2005 – Winner, Asia hose/fittings• 2006 – Synflex®, Thermoplastic hose

Grow aftermarket business• Expanded products for distribution

• Stationary and On/Off Highway

• Leverage retail presence • NAPA, Fastenal

• Broader network of distributors • Better market coverage

3

Ensures Sustainable and Profitable Growth

47

Growth Profile

2010 Growth Profile

Year

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Hyd

raul

ics

Rev

enue

s ($

Ms)

2010

Market Outgrowth

Acquisitions

End Market Growth

2006

• Goal is 10% CAGR through the cycle; $18B Eaton

• Corporate model calls for the following growth:

• End Market growth: 4%• Outperforming mkt: 2%• Acquisitions: 4%• Total growth: 10%

GrowthGrowth

Base

A $3B Global Business by 2010

48

SummaryWhy Eaton is Unique

• Broad Portfolio• Wide product & service offering

satisfies diverse customer requirements

• Global network of channel partners provides reach

• Ease of Doing Business• Efficient and customer-oriented

delivery model leverages a broad portfolio

• Leading Technologies• Provides the tipping point for

industry growth

Why We Like the Industry• Unique and sustainable

technology platform

• A global, profitable, and growth industry

• Diverse customers and channels

• Industry undergoing change and consolidation

• Technology differentiation opportunities

Eaton offers a unique value proposition in an attractive space

fluid power group - eaton

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