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Eaton Corp. plc (NYSE:ETN)

Q4 2012 Earnings Conference Call

February 5, 2013, 10:00 AM ET

Executives

Alexander M. Cutler : Chairman and CEO

Richard H. Fearon : Vice Chairman, CFO and Planning Officer

Donald H. Bullock Jr. : SVP, IR

Analysts

Jeffrey Sprague - Vertical Research Partners

Ann Duignan - JP Morgan Chase & Co, Research Division

Vlad Bystricky - Barclays Capital, Research Division

David Raso - ISI Group

Eli Lustgarten - Longbow Research LLC

Jeffrey Hammond - KeyBanc Capital Markets

Andrew Casey - Wells Fargo Securities

Brian Grzelakowski - Goldman Sachs Group Inc., Research Division

Joshua Pokrzywinski - MKM Partners LLC, Research Division

Edward Wheeler - Buckingham Research Group, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Don Bullock. Please go ahead sir.

Donald H. Bullock Jr.

Good morning. I’m Don Bullock, Senior Vice President of Investor Relations. Welcome to Eaton’s fourth quarter 2012 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO; and Rick Fearon, Vice Chairman and CFO. As it has been our practice, we will begin today’s call with comments from Sandy, followed by a question-and-answer session.

This presentation we will cover today contains certain forward-looking statements. Many factors could cause actual results to differ from those in the statements, including those set forth in our Form 10-K filed with the SEC on February 24, 2012. This presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of those measures to the most direct comparable GAAP equivalent is provided in the Investor Relations section of our website at www.eaton.com. Sandy?

Alexander M. Cutler

Great. Thanks, Don, and thank you all for joining us this morning. I’m going to work from the information that is contained in the earnings presentation that was posted on our web page. So I hope you each have that in front of you. I would like to take a little bit more time than we normally do to introduce this call to really address three different subjects.

So first the fourth quarter, attempt to try to unravel some of the complexity for you that’s associated with the closing of Cooper and the many cause which impacted the month of December. Secondly, to talk about our 2013 economic outlook and our earnings update, and it really is, many of you recall that our first guidance update since July, since we’ve been in a relative quiet period, since we last updated in July.

And then third, to update you on the Cooper acquisition and the integration and I will tell you just a summary that deals with everything we hope it would be in more and we will give you a little bit of update of that as we go this morning and then more details when we get together in New York at the very beginning of March.

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

So if you can step back a couple of summary comments and I will take you through a couple of charts today. I hope you will find helpful in trying to reconcile some of the large pieces. We reported operating earnings per share of $0.82 and net income of $0.46. That’s obviously a $0.36 difference between the two. And out of that $0.36 difference, $0.32 are the transaction cost, that’s a $152 million of transaction cost that you also would have found in our mid-year filings, so that’s the same number that we’ve been talking about since that time period and a $0.04 of acquisition integration cost.

Sales for the quarter, for the fourth quarter were $4.3 billion, up 7%. Again, a little bit of a complicated construct within that, 14 points or 14 points of the 7% came from acquisitions, a negative five from market, so obviously markets came off versus the second – the third quarter when we reported markets down 2%. ForEx about a negative one and undergrowth about a negative one.

Very strong cash flow in the fourth quarter of $687 million and I will talk a little bit about the beneficial impact it had upon our ability to pay back our bridge loan in just a couple of minutes and then obviously all of this is underlying the fact that we completed the Cooper acquisition on November 30th. Further recently mentioned that here is that – so many of you who saw presentations from us, starting in May and then during the balance of the year know that our pro forma’s for 2013 that we showed for the Cooper acquisition anticipated the deal we closed because we simply didn’t know whether it would actually close on January 1st. The fact that we closed it a month earlier than those pro forma’s were constructed is why we’ve been able to hold some of these costs in December that we will be talking about.

If we go to Chart 4, a quick reconciliation of our fourth quarter EPS numbers. Again, we will start with the net income per share on the top line of $0.46. The transaction related costs of $152 million, and again both the same number that was included in our mid-year filings. $0.04 about $24 million of acquisition integration charges and of that, about $11 million of that $24 million related to the Cooper deal. That gets you to operating earnings per share of $0.82.

We elected in the fourth quarter to take restructuring costs of about $50 million and I'll take you through those as we go through each of the segments, but really the rationale for why we felt that was important is, is the markets decreased further than we had initially thought they would in the fourth quarter and our own view is that this slowdown we saw happening as the world economy and the U.S. economy downshifted during the third and fourth quarter is likely to continue in its early part of 2013. And we felt it was prudent to get these costs out to operate well in little lower markets than we might have anticipated, say, a year-ago.

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

If we turn to chart 5, now a little comparison versus last year because we know many of you are trying to really understand the year-on-year performance. And so last year's fourth quarter 2011, our operating EPS was $1.08. The net Cooper impact by the time we take all the items that pertained to this transaction so that the one month of operating results in December, it's the very significant international tax benefits that we referenced in our notes, it's the financing costs, it's the additional shares and it's the purchase price accounting, obviously a very complex and lengthy group of items that's a positive $0.03 in terms of the impact on the quarter.

The lower tax rate for Eaton and this is Eaton alone, so you can think of it as Eaton classic if you want, was about $0.04 benefit. And as you saw in the note attached to our statements, that $0.04 really came from foreign tax credit utilization, little lower international provisions and favorable mix; and what does favorable mix mean? It means that in the countries that had the higher tax rate, we had less income in those than we had estimated.

Lower end market growth; I think one of the big highlights in terms of really trying to understand what's happening at our end markets, about $0.18 impact. This is that difference as I mentioned between 2% down as we were in anticipation of coming in, we were five points lower versus a year ago that we had anticipated here than a year ago in terms of our markets, and that throws off somewhat in the order of $120 million, $125 million of less volume. Most of that lower market was in hydraulics, it was in our vehicles segment. So I'll talk a little bit more about that.

Our restructuring costs of the $50 million, that's a $0.14 negative. And then ForEx, a fairly small impact. And so that's how you get to the $0.82. Now remember the $0.82 does not include the $152 million of the significant items, transaction costs from the Cooper deal.

If we turn now to the segments, I want to take you through those, let's go to page 6, overall results for the company. Just -- where I think most of these numbers on this page speak for themselves. Sales of 7%. Obviously net income is down, but from 51% for all the reasons I just itemized in terms of the significant impact of the Cooper transaction plus the $50 million of restructuring costs that we took.

The acquisition is on the left-hand side in the greenish box, that 14% positive, that's about $580 million of sales in the quarter that came from acquisitions. And then if you're trying to kind of track our progress since the third quarter of 2012, our sales then were 3.95 billion obviously in this quarter helped by acquisition revenue of some $580 million, we were at $4.33 billion.

Jumping into the individual segments, if you turn to Electrical Americas segment, again another terrific quarter from this business. Our overall volume is up 3%, operating profit up 11%, margins at 16.7%. We think very significantly in the look-forward dimension here, orders were really strong up 11% and a little bit surprising. We had equal strength in the power distribution side of the business and the power quality business.

Now that's not to say the markets were equally strong, but we had a number of very large wins in the power quality area that we think boosted our results a little bit higher than you’ll find in the end markets because as we look at the strength, the strength in the markets themselves has been U.S. residential and nonresidential, the power quality market has still been slow as we've been talking. And what we’re really particularly excited about is, continuing strong tone in January as we’re seeing booking activity here in this last month.

And now that you’ve asked questions about Hurricane Sandy in terms of how it impacted us, as you can appreciate it's hard to estimate because some of these orders come through our distribution partners and some of them we have orders come direct. But our best estimate is in the fourth quarter was somewhere in the order of about $25 million of orders and we think that’s likely to repeat again in the first quarter because not all of the repairs and services were able to be completed in the fourth quarter. Just one last comment on this chart, what I think as overall very good news is that, the Rolec acquisition, you remember that the acquisition of the Chilean based electrical business we bought is what you’re seeing and causing the 3% positive growth from acquisitions and that’s about $26 million of revenue in the quarter.

If we move to the next chart, Chart 8, this is the Electrical Rest of World segment. I think good news here again, that you recall the third quarter our volume was $686 million, so volume is up about 4% from the third quarter, 2% from the year-ago as you can see. We were able to hold a 10% margin in spite of the fact that these markets are not back to where they’ve been historically. It is the first quarter of sales and booking growth in over a year. So the way I would characterize this is we’ve seen that the combination of the European and Asian markets stabilized. Europe I would call a little bit more stable, we’re beginning to see growth again in Asia. We did take some restructuring cost in this segment that reduced our margins by about 40 basis points, about $2.5 million of cost. Again, that really was to continue to realign employment levels most especially in Europe, but to some smaller degree in Asia Pacific. These markets you recall in the third quarter we had reported to you were down about 6%. We think they’re down about 5% in the fourth quarter. But I would say the tone feels a little better in this area in terms of us finding bottom and now being able to record a quarter of some improvement in terms of both sales and bookings.

Chart 9, the next chart is the Cooper segment, really not much annotation on this particular chart. This represents one month again, this is the month of December. We think very strong performance and the comments about the end market that I made in both our Electrical Americas and Rest of World that they’re very applicable here. Cooper obviously with its strong strength in addition to residential and nonresidential; remember has this very strong participation in industrial end markets and utility end markets.

If we move to the Hydraulics segment, complex set of items here within Hydraulics. Overall you recall in the second quarter we felt the markets were up about 2%. Third quarter they were down 4%. Fourth quarter down 11%. And what's happening from an end market point of view here? What's really happening here is that we’re continuing to see the construction markets, which you recall are fairly big exposure for us. They were made slightly larger by our acquisition of the Jeil acquisition that we made with the Korean hydraulics manufacture, are continuing to be down hard from an order perspective.

You recall our own view on this has been that we had a number of large customers who overbuilt inventory early in the year and they’ve been aggressively trimming inventory, since then I think you’ve seen many of those announcements out in the marketplace, so that where the market is down 11%, we felt it was very appropriate that we needed to restructure. And so we took restructuring cost as you see impacted our margins by about 250 basis points, about $17 million of cost. Our general global employment resizing, two plant closings and downsizing at two other plants. We believe that, that sizes us for how we think the year will begin, which is obviously slower than it began last year.

And as we try to get a feel for where the strengths or weakness is going to come from a booking side, I would tip-up by the saying while there has been some weakness on the distributor side, the big weakness has been on the OEM side, most particularly in the construction area then followed by agriculture. The one good piece of news here is that, China, which you recall we have a fairly large exposure to and has been quite weak here for a couple of years. We are beginning to see better tone in January. I would not yet announce this as a breakout, but it's been the first indication of better tone that we have seen in that better part of the year in some months.

If we move to the Aerospace segment, shipment is up about 4% from our third quarter of $419 million, up about 1% from a year-ago. And as I say the market action is very similar to that, which we've described in before with the strengthening and the commercial side, the weakness being on the defense side. Bookings down 4% and that really is the interplay of particular orders that came in during the quarter, but again I would say stronger on commercial, weaker on defense, aftermarket up about 3%.

We elected to take some restructuring costs in this business as well, about $4 million across one small plant closing and some reorganization of our workforce as we think again that it sizes us well going into 2013.

Chart 12, the truck segment, again you'll recall that we've been watching this market decelerate on a global basis through this year in the second quarter. We reported to you that we felt that the market grew about 3%; in the third quarter, down about 8%; fourth quarter down about 13%. And within that 13%, because I know a number of you follow elements in here, the big news here is Europe is down over 30% and Brazil down in the mid-30%, U.S. down about 14%.

So, as a result again of the view that we've seen that these markets particularly in Brazil had not come back as we had hoped they had and we think are likely to start out slower this year although we do think it will be a year of growth in Brazil, we elected to take about $7.5 million of restructuring costs to reduce our employment primarily in South America. That impacted these margins but we still think they’re very healthy margins on volume is down some 8% from the third quarter and 26% from a year ago.

Moving to chart 13, the automotive segment, again as we talked to you in the third quarter that we saw the European markets for automotive really begin to crack in the third quarter and that decelerated even further in the fourth quarter. Second quarter we had said that the worldwide markets were up 1%, third quarter they were flat with Europe beginning to decline, fourth quarter down 7% with Europe down 23% from a year ago.

So pretty good growth in the U.S. and we've all been reading those notes and you'll hear we think that this year 2013 will be a year of about 15 million in terms of retail sales in the U.S. But the real weakness is Europe and Europe was down, as I mentioned 5% in the third quarter from a year ago, down 23% in the fourth quarter. And so we undertook actions to really reduce employment in Europe that impacted our margins by 270 basis points, about $9 million and that's the primary reason that these margins are down as they are here in this particular quarter.

That's a quick overview of the fourth quarter segment results. If I could ask everyone to move to chart 14, we've got a number of pieces of information that I think will be helpful to you in terms of understanding both our reporting and then how we're thinking about 2013. Let me start with new segment reporting for 2013. There is no change to our reporting for hydraulics or aerospace, but there are some new reporting segments that I wanted to cover with you and then give you a little bit of background as you think about what is within these individual segments.

We will be reporting on our Electrical results in two segments, the first called Electrical Products; the second called Electrical Systems and Services. We've listed to the right-hand side – middle and right-hand side of this chart the traditional products that will fit into both of those, and so I hope that's helpful to you in trying to understand how you kind of map our different products and the Cooper products to these segments.

They do have slightly different geographic representation within them, and I want to give you a quick rundown on that. The Electrical Products segment is about 50% in the U.S., about 10% in the other Americas, about 28% in EMEA and remember EMEA includes Middle East and Africa not just Europe, and about 12% in Asia-Pac. For the Electrical Systems and Services, it's about 58% in U.S., 17% in other Americas, 14% EMEA and about 11% in Asia-Pac. Hopefully that gives you a feel for this slightly different geographic representations and we'll talk more about that when we get down to our meeting in New York beginning of March.

Similarly, if you ask end market drivers for those businesses, the Electrical Products segment, about a third is nonresidential and about a third is industrial. And then you've got about 15% to 16% that's residential, 15% to 16% that's power quality and about 3% utility. Similarly, if you go to the Electrical Systems and Services segment, about 28% nonresidential, 29% industrial, almost no residential in this, it’s about a point and then 22% Utility and 20% Power Quality. Again, I hope that gives you kind of an orientation of the thinking about these two new segments. And then the Vehicle segment, which will encompass our truck and automotive Drivetrain and Powertrain systems. That business is now about 50%, driven by Truck and Bus, about 48% by light vehicle and then Ag making up the remainder just a couple of points. And then if you think about from a geographic point of view, its just over 40% in the U.S., about 30% the other Americas, about 19% in EMEA and about 10% in Asia Pacific. So I know a lot of data there, but I don’t – I know you will be interested in trying to how to think about these particular segments, we thought that might be helpful to you.

If we turn to chart 15, our 2013 end market growth forecast. I would guess, some of you’re looking at these numbers and think do you they feel a little conservative? Our own view is having watch how different fiscal policy debates have impacted growth in the fourth quarter. The prospects we think have some churns still in Europe as Europe is trying to settle. The recovery coming in Asia Pacific more so as we go through the year and a year where we just saw ourselves come off of one-tenth growth rate of the fourth quarter here in the U.S. We think this set of economics is prudent, not having us get out kind of our [skis], so early in the year and that’s certainly as we watch the last three years, we’ve all seen that people’s economic forecast have started strong in the beginning of the year and that have waned as we gone through the year. So hopefully that gives you some feel for our thinking on these numbers.

I think the numbers on the chart speak for themselves. I thought I just give you a little color behind them. In the electrical two segments here. We’re assuming that the nonresidential market here, in the U.S., is up 4% to 5%. The residential is up on the order of a 11% that corresponds about a million housing starts. Industrial is up about 2%, power quality remains low at 2%. And when you get outside the U.S., we’re basically assuming that Europe is flat and that Asia Pacific improves about 5% to 6%.

Within Hydraulics, I think the U.S. number speaks for itself. When we get outside the U.S., we think Europe will be down on the order of about another 4%. Asia Pacific is still not fully stabilized, down 2%, Latin America down 4%. In the Aerospace side that 1% in the U.S. is that mix that you heard us talk about in the last couple of years, about an 8% positive on commercial, about a negative 6% on defense.

And then in the vehicle index here, which map the heavy duty of about 270 in terms of the truck market, U.S. light vehicle retail sales about 15 million and when you get outside of the U.S., EMEA down 1%, Asia Pacific up 9% and Latin America about 8%.

And so, when you roll all of this together and then I know one of the themes everybody has been trying to understand is people’s geographic balance and we think Eaton’s geographic balance is working for it, and I’ll come back and talk about that. We’ll be about 50% in the U.S, about 50% outside of the U.S, that’s a little different than Eaton was prior to acquiring Cooper. Cooper was a little bit more U.S. oriented or less international, that put the counting for that change from that 45%, 55% now to the 50%, 50%. Now when you look inside the 50% for non-U.S. that’s about 18% of our revenues will be in Europe, about 3% Middle-East and Africa, about 14% in Latin America and Canada and about 15% in Asia Pacific.

Now if you’re pencils are still burning, why don’t we turn to page 16 here. Our margin expectations for this year obviously you can see we think that our electrical products and electrical systems and services are strong margins and those do incorporate the synergies as well as the base operations for the businesses. Hydraulics at about 13.5%, Aerospace 14%, Vehicle 16%; so overall even consolidated our margins 15% which will be a new high for us in terms of guidance we've provided for an individual year for overall segments.

We recognized that in the electrical products, electrical system and services it maybe a little difficult to try to figure out exactly what the revenues will be for these, so I will help you a little bit on that one. Our estimate is at this point is, electrical products will have revenues on the order of about $7 billion in 2013. Electrical Systems and Services will be about $6.9 billion. So they’re offly close to one another in terms of total volume.

Turning to Chart 17; this is our 2013 operating EPS guidance. As you can see the mid-point of our guidance is $4.25 with a $0.40 or roughly 10% range and you can see that our first quarter midpoint is $0.75 with about $0.10 range. Both numbers include a $0.06 charge, if you will, for Cooper inventory purchase price adjustment to finish that purchase price adjustment. So said another way, without that, the midpoint of the first quarter would have been about $0.81.

On chart 18, I think the start of some of the good news in terms of the Cooper acquisition is that you'll recall on the way we've tried to show this to you is the two columns that are labeled original projections both for operating EPS and for cash operating EPS go back to the presentations we made at May when we announced this transaction. And so you'll recall at that time that we thought that we would close the deal on January where we were projecting for the performance purposes that we would close the deal on January 1.

You can see obviously that now with the benefit of having closed and taking many of those costs in the fourth quarter that our operating EPS accretion will be about $0.15, $0.25 better than we estimated. Then you can see a nickel benefit every year going forward. Similarly, you see a fairly similar benefit in terms of the cash operating EPS accretion. At the back of our presentation, we have included, on page 24, labeled Appendix 1, the detail that gives you the insight as to why those change.

We don't propose to spend a lot of time on it here on the call today. We'll talk more about it in New York. But suffice it to say the business is operating at a little higher revenue and very attractive margins. We are realizing our synergies a little faster here in 2013 with about two-thirds of that benefit coming from faster integration of corporate SG&A and about a third from faster realization of supply chain benefits.

You saw the financing information earlier this year that was beneficial in terms of the lower interest rate and that's helping us to tune about a nickel. And then there are a number of purchase price accounting items that the timing and magnitude are slightly different than we had anticipated and obviously those are tough things to estimate before you actually get in and work all the details. So I think the good news here in terms of, we're off and running and ahead of schedule in this regard.

Chart 19 deals with our debt financing, again I think good news here. I'll let you read through the page but I think the really good news here is that as a result of the stronger cash flow of the business and the fact that the Apex Tools joint venture which was the joint venture between Cooper and Danaher has been sold and the deal concluded and the cash having been received by Eaton, we were able to totally repay the bridge loan on the 1st of February. And so as a result of that, we're a little ahead of where we planned on being from a financing point of view.

Our Board will address our first quarter dividend later this month. We mentioned that in our press release. The other thing I wanted to note is that unlike the Moeller and Phoenixtec acquisitions where we had announced our plan to include equity as part of the financing, we have no such plans and had no such plans as it relates to this particular one. So I think the way you simply read this chart is we're ahead of plan in terms of the cash flow and our ability to repay debt and that's good news and we were able to finance at a lower costs.

Chart 20, the 2013 EPS bridge, our traditional bridge, just a couple points of annotation on this. Obviously our 2012 actual operating EPS of $3.94; the acquisition and that is Cooper, that's Jeil, that's SEL, that's Gycom and that's Rolec. If you put all those together, it'd be about $2.48 that includes the synergies for those as well. The organic growth got about a 33% margin and some of you may look at the 33% and say, geez, that's stronger than you guided last year. That is right because we have included in that the lack of the $50 million charge we just took at the end of fourth quarter plus the 2013 benefits. And so we really thought it was appropriate to use the higher margin.

On the negative, a higher number of shares. Our shares this year we anticipate will be about 474 million shares. So you see that impact there. Other corporate expense items primarily intangibles and the interest and much of these first two but not all of this second one pertained to the Cooper acquisition. Higher tax rate and then increase in pension expense of all that leading to about a negative of $2.94, and that's how we get to the midpoint of our guidance of $4.25.

Chart 21, the next chart, it gives you kind of a recap of some of the key elements that support our guidance. Overall revenue growth of about $900 million, so that’s about 5%. Acquisition revenue of $6 billion, that’s about 37%. So overall growth of 42% in terms of our revenues. Of that $6 billion, about $5.8 billion are the three acquisitions in the electrical business, Gycom, Rolec, and Cooper. And about $200,000 are the two acquisitions in hydraulics, that being SEL and Jeil.

Incremental margin, I mentioned 33%. Tax rate of 7% to 9% in line with our expectations when we announced the Cooper deal last spring and reflects the issue. Remember, the $160 million of synergies that we will get on the tax line. I already mentioned the operating EPS guidance and we think very strong cash flow for this next year, operating cash flow of $2.6 billion to $2.7 billion. Free cash flow of $1.9 billion to $2.0 billion, obviously the difference being $700 million as our anticipated CapEx expenditure level.

So all of that and we appreciate your patience on listening to all the detail, brings us to our summary on page 22, is that we think 2013 is a year of modest global GDP growth. And as a result of modest market growth through our end markets and its likely to start slower and strengthen as we get through the year. I would describe it as cautious optimism. Some of you may describe it as conservative, we think it’s the appropriate place to be at this point.

In response to the slower market growth in the fourth quarter in Hydraulics and vehicle in particular, we did undertake these restructuring activities that we think position ourselves to deal with what we think is going to be a little slower start this year economically. The Cooper acquisition as I said before, it’s everything we expect it to be on more. We’re delighted to have it completed to be done with so many of the issues necessary to after close this transaction, that we’re now in the process of running it and really pleased that we’re ahead of schedule in terms of our synergy activity and our financing plans. And we will provide some more color on those synergy plans when we’re together at – in New York.

And then the last two points I would say is that, really pleased obviously we’re now expecting the accretion from Cooper this year. And it’s not only this year, because we raise that accretion by a nickel going forward – in the forward years as well. And we believe that Eaton’s business and geographic balance is really working. So, even in a year where we saw hydraulics be quite weak last year and we think likely to be a weaker year this year. I think you’ve seen the strength of this overall franchise and its earnings capability and certainly the cash flow capability.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Donald H. Bullock Jr.

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

Jeffrey Sprague - Vertical Research Partners

Thank you everyone. Good morning.

Alexander M. Cutler

Good morning, Jeff.

Jeffrey Sprague - Vertical Research Partners

Sandy, could you just address big picture of how to think about the portfolio going forward, obviously the combination of the vehicle assets has some of us kind of speculating on what the future might hold. Anything you could share there about what's next with the Eaton portfolio?

Alexander M. Cutler

And nothing different, Jeff and than I have said in numerous forms really since we announced a Cooper transaction is that, we’ve changed our segment reporting to respond to kind of the changes in the Company at this point, but it doesn’t presage any other moves at this point. So, we like the portfolio we’re with; we like the products that we’ve got and the capabilities and we’re really quite enthused about some of the new products and earnings capability in a number of the features that – in a number of the products where we don’t simply have as great market support right now in terms of end markets, that will come back again.

Jeffrey Sprague - Vertical Research Partners

Great. And I was also just wondering, I believe [Curt Hutchins] was going to move over and help with the integration for a while. Is he still there and kind of what's he up to in the integration process?

Alexander M. Cutler

Yeah, Curt is working with us in the integration activity and on a number of individual projects. I won't go into all those projects, but we’re really a grateful that he’s part of our team in that regard. So, that’s working out just as we anticipated.

Jeffrey Sprague - Vertical Research Partners

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

Alexander M. Cutler

Yeah, I think the big issue Jeff, there is not so much power channel inventory, if you will. But I think it's the inventory of our customers, because there’s where you're seeing in a lot of the mobile markets, you're seeing dealer inventories that are quite strong and they've been that way for some time. And that's why you're tending to see order levels or production levels down below end market demand at this point. And we've commented a couple times during the second half of last year, we think many people felt that the second half of 2012 was going to be a growth time. And so as they were building inventories during the first and second quarters, they build inventories on increased demand and actually demand fell away. And so that's why you're seeing so much written about the orders being overpopulated with inventory. That was particularly true in Asia but it's true in Europe and it's true in the U.S. as well. We think that takes some time to burn off.

Jeffrey Sprague - Vertical Research Partners

Thanks. Congrats on the deal.

Alexander M. Cutler

Thank you.

Donald H. Bullock Jr.

Thank you. Our next question comes from Ann Duignan with JP Morgan.

Ann Duignan - JP Morgan Chase & Co, Research Division

Hi, good morning.

Alexander M. Cutler

Good morning, Ann.

Ann Duignan - JP Morgan Chase & Co, Research Division

Morning. Alexander, could you talk a little bit more about where you are seeing the upside surprise from the Cooper deal? You talked about it being all you expected it to be and more. Can you just give us some more color on that?

Alexander M. Cutler

Yeah, I would say just from the energy point of view as I mentioned, we're off to a faster start in 2013. And so we've not increased future year guidance at this point, but the fact that we're getting it in the SG&A savings and some of the procurement or supply chain savings is I think a reflection of how well the teams have come together. As we've gotten the chance to spend time with the teams in the businesses and with channel partners and end customers, the reaction is just really very, very good.

So we'll spend some more time chatting up on it when we're in New York, but I think you can recall one of the areas that we had talked about that many people had raised questions about were, geez, how are you really going to get sales synergies in this transaction? And I would tell you that it feels really good at this point.

And about half of the sales synergies we had been anticipating came from increasing our scope of our solutions and the key verticals such as oil and gas or mining or broad construction segments and data centers and that feels really good. And the other half was going to come from what we could do together in developing economies where one company was significantly stronger than the other and we think that one can pull the other ahead.

And the other is increased relevancy to our global channel partners and our ability to really take our service business and have it provide support to traditional Cooper businesses, because as you recall, Cooper did not have its own service entity. All of that is, I would tell you is planning out really well. And without getting out ahead of Tom's presentation that he'll share with you in early March, I'd say we're really quite encouraged.

Ann Duignan - JP Morgan Chase & Co, Research Division

Okay, that's helpful. Thank you. And then you noted during the call that you're beginning to hear better tone out of Asia again if you could give us a little bit more color where exactly, what exactly are you hearing out there and is it just a wish and a prayer at this point or is flotation activity, order activity actually picking up? Thanks.

Alexander M. Cutler

No, great question Ann and I would say that I no longer abide the whispers because we've been listening to the whispers for two years and they haven't panned out. So we're really looking at the orders. And our January order tone was better and I'm speaking specifically to China because that's the big one that's really going to move this. And so from the mobile, okay and this is basically construction, we have actually seen a level of activity that is quite different.

And I'm going to tell you this is the heartbeat, this is not yet the patient jumping off the bed and running around the room. But it feels better than it has in some time now. Of course, everyone's trying to speculate not just on hydraulics but in other markets how quickly will the Chinese economy come back? Our own view is that we may get back to a legitimate 7% to 8% GDP in 2013 versus what we feel is a GDP that may have been overvalued by as much as 50% versus the official numbers that have been reported for 2012. So we are encouraged but I would -- probably we're not widely ebullient about what's happening yet in China.

Ann Duignan - JP Morgan Chase & Co, Research Division

Just a real quick clarification, Alexander, you said orders were better in January or order tone?

Alexander M. Cutler

Orders.

Ann Duignan - JP Morgan Chase & Co, Research Division

Okay. I'll get back in line. I appreciate it. Thanks, guys.

Donald H. Bullock Jr.

The next question comes from Andy Kaplowitz with Barclays.

Vlad Bystricky - Barclays Capital, Research Division

Good morning, guys. This is Vlad Bystricky on for Andy. How are you?

Alexander M. Cutler

Good.

Vlad Bystricky - Barclays Capital, Research Division

Can you talk about in Electrical Americas, you talked about strength in nonresidential markets. Can you give us some color on where you’re seeing the strength and what’s driving that?

Alexander M. Cutler

Yeah, we – we got a pretty big front-end as we talked about in this business and we’ve done very well with a number of major projects be they for industrial building, be they for datacenters, be they for large municipal applications and so I think one of the key here is that as we’ve continued to strengthen our franchise, we’ve continued to grow our market share. And so we’ve seen really pretty much across the board strength. I know that got a number of reports from other firms that have talked about weakness in nonresidential, that is not been our experience here during the fourth quarter and its not what we’re seeing in the first quarter.

When you look at the U.S. private [put in] place data, you see a pretty balance due with the market again with and that’s the government data showing growth in the great majority of the end markets. I think there are 12 segments, if I remember there and I think all of the two, if I remember off hand, were positive in the quarter. So, we read the same comments about people talking about weakness in nonresi, and that’s is not our experience.

Vlad Bystricky - Barclays Capital, Research Division

Okay. That’s great. That’s very helpful. And then just a quick follow-up in aerospace, you noted continuing our ongoing decline in defense markets and you also talked about the budget noise that we’ve had here. I’m wondering with some form of sequestration seemingly increasingly likely, are you able to quantify that the impact of potential budget cuts here in aerospace business and do you have any of that assumed in your forecast?

Alexander M. Cutler

Yeah, our – let me just – we got our best assumptions, but having said that and tell you actually see which programs are impacted. But as I’ve said, we won’t know, but in our – commented a number of forms that it seems to us pretty clear that Joint Strike Fighter that the new tanker, that a number of the heavy lift helicopters, a number of the unmanned vehicles are going to continue to be funded and those are areas where Eaton has very good participation. So, we’re pretty comfortable that this marketplace assumption of a negative 6% takes into impact – or takes into a consideration perspective impact that, that we’ll see. So, we think we’re well positioned in a pie that got smaller.

Vlad Bystricky - Barclays Capital, Research Division

Okay, that’s great. Thanks very much guys.

Donald H. Bullock Jr.

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

David Raso - ISI Group

Hi, good morning.

Alexander M. Cutler

Good morning, David.

David Raso - ISI Group

Just unclear about the synergies; you previously spoke of total operating synergies of $375 million, $260 million being cost out and $115 million sales synergies. Are we not increasing those targets today? Is this just simply a function of timing?

Alexander M. Cutler

Yeah, we have not increased the synergies. And what I’ve said is that we’re getting at synergies more quickly in year one, that being 2013, so that’s what you saw as take up. We’re obviously into this transaction now for two months and so we’re not comfortable taking up the overall projections at this point. We’ll describe you in a little bit more detail when we get together in early March what some of the specific activities are and why we’re feeling pretty good about them at this point, but I would just describe it is a little too early there.

David Raso - ISI Group

And related to the comment you said the $160 million of cash management and tax benefits. Just trying to think through then if that’s, what were the original target and still the target. How that relates to the tax rate for the combined entity. The 7% to 9% for ’13 was a little lower than I was expecting. Should I take the $160 million comment holding still as that’s what you’re always thinking about the tax rate for ’13 and going forward that is an 8% type tax rate?

Alexander M. Cutler

Yeah, the $160 million amount is specifically the question, we’ve not changed it. The $160 million and the 7% to 9% are right in line with – 7% and 9% is right in line with what we anticipated or what we never quoted a tax rate. We gave the guidance that you recall take Cooper’s results, take our results add on a the pre-tax synergies and take off the $160 million and that’s what puts us in the 7% to 9%. In terms of – will it always be 7% to 9%; we can’t tell you it’ll be always 7% to 9%. I suspect it may drift up by a point or two, but it's over multiple years, but that’s our best estimate at this point and not different than we anticipated.

David Raso - ISI Group

And regarding your outlook for the U.S. for construction. It seems like you’ve bumped up your thoughts on resi, industrial and power quality. But despite the positive commentary you have on nonresi you’re still in that mid-single digit type forecast? Is there any reason you bumped up the others but aren't comfortable to bump up the nonresi?

Alexander M. Cutler

Well, I'd say nonresi has come back and so we're operating off of bigger numbers. And I'd say the residential issue is that we were perhaps a little conservative on resi and I would say maybe a little bit more on the middle of the pack. With the power quality market, actually 2% did well below the secular growth rate for power quality and we saw really during 2012 a pretty slow year in power quality. There was actually a little less than that 2%. And so we think still it's likely to carry into early next year, it's going to be a little slower.

Our own bookings and that may have been a little bit confusing were really quite good in power quality in the fourth quarter, but that was more the result of us being very successful on a number of large projects not only in the U.S. but around the world. So, no, I wouldn't say -- we're still quite bullish on the overall nonresi, but we think 4% to 5% at a time where you're going to see U.S. GDP growth be somewhere around 2% is a pretty good number.

David Raso - ISI Group

And lastly, looking at it in the, call it classic Eaton way, the Electrical Americas stand-alone, for 2012 the margins, ex-restructuring were about – just a shade below 17%, 16.7%. Could you even give us 2013 Electrical Americas margin guidance stand-alone? I know you're going to morph them together, but how are you thinking about that stand-alone business '13 versus '12?

Alexander M. Cutler

Yeah, we don't have a stand-alone business anymore. We've integrated the businesses and so we can't give you a bridge, Dave that kind of takes you from one organizational structure to another organizational structure. All we can do is provide the guidance on the two new segments.

David Raso - ISI Group

Okay, I appreciate it. Thank you.

Alexander M. Cutler

Thanks.

Donald H. Bullock Jr.

Our next question comes from Eli Lustgarten with Longbow Securities.

Eli Lustgarten - Longbow Research LLC

Good morning, everyone.

Alexander M. Cutler

Good morning, Eli.

Eli Lustgarten - Longbow Research LLC

Just one clarification, the $4.25 midpoint includes the $0.06 purchase price accounting inventory on Cooper, it would b $4.31 if we ex that out?

Alexander M. Cutler

That is correct. Just as the first quarter $0.75 [inclusive], so it would $0.81 if you ex that out.

Eli Lustgarten - Longbow Research LLC

And that's the only charge you expect to see -- you expect the sense to finish it?

Alexander M. Cutler

Yes, that finishes the purchase price inventory on adjustment.

Eli Lustgarten - Longbow Research LLC

And you gave us a tax rate will be similar to the (indiscernible), is there any pension and things like that impact from the ones you put to come together for greater cash use, it’d have to be contributed to plans or anything like that from the combinations?

Richard H. Fearon

Eli, its Rick. No, Cooper's plan is essentially fully funded. It's in the high 90% funding. And so there really isn't any drag from Cooper's pension plans.

Eli Lustgarten - Longbow Research LLC

I see. So that means there's no change for you guys either in '13?

Richard H. Fearon

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

Alexander M. Cutler

Which is largely a function of a lower discount rate. So in terms of pension funding, Eli, as we have mentioned, due to the Transportation Act, the required funding has gone down in the States. So we made our pension contribution for 2013 in January. Its $176 million and that should be our entire contribution for the qualified plan in '13.

Eli Lustgarten - Longbow Research LLC

And can we talk a little bit about cost in pricing across the company at this point. Cost has gone up a little bit at this point, the combination of businesses and with the weakness in hydraulics, there's some pull effect to some pricing pressures across the company. Can you give us an idea what's going on cost wise which I assume would probably be sort of a tailwind for you guys this year and particularly in pricing?

Alexander M. Cutler

Got it. Obviously it’s early in the year to know, but our assumption and our plans here is that we have not assumed either accretion or dilution from the impact of commodity prices versus pricing. And so we think it's likely to be a fairly stable year.

Eli Lustgarten - Longbow Research LLC

So everything's awash as a marketplace. And one final question, your hydraulics numbers which showed a lot of weakness, is this a tail with two heads where you expect hydraulics to be quite weak for the next – first half of '13 with positive compressions in second half. Would you give some color in the spread of the year?

Alexander M. Cutler

Yeah, I think our view is very much as you articulated, Eli, is that it's going to take time to burn off these inventories. And as you've listened to some of the big construction companies' talk, they've all talked about stronger second half than first half. And we think certainly in China where you don't tend to get the OEMs talking about their forecasts, that's exactly what they've been indicating in terms of their burn off. I think the key thing to watch here though is going to be does end market demand burn off these retail inventories quickly enough to allow that to happen. I think that’s really going to be the key issue and fortunately there is a fair amount of public data out there on retail inventory, so that I think that’s an issue we can all kind of keep an eye on.

Eli Lustgarten - Longbow Research LLC

Right. Thank you very much.

Donald H. Bullock Jr.

Our next question comes from Jeff Hammond with KeyBanc.

Jeffrey Hammond - KeyBanc Capital Markets

Hey guys. Just on this ’13 bridge, I see 248 from acquisitions and then if you take the shares corporate intangibles interest 273 for kind of $0.25 net dilution. Can you bridge that versus the $0.15 accretion?

Alexander M. Cutler

Yeah. Jeff, you’re right that it can be a little confusing moving from one to another and because they’re constructed slightly differently. We really can’t give you an easy bridge to it. Some of the information that’s built into other corporate expense for example relates to Eaton and some relates to classic Eaton and some to Cooper, and the transaction and the tax rate similarly you have to pull it apart and it obviously it doesn’t service the purpose going forward and so that’s our best representation we can give you.

Jeffrey Hammond - KeyBanc Capital Markets

Okay. So, there is moving pieces within shares and corporate expense and legacy Eaton where that’s not a [claim], okay.

Alexander M. Cutler

Yeah, absolutely. Yes.

Jeffrey Hammond - KeyBanc Capital Markets

Okay. And then just – can you a rationale and maybe just one or two lines about how you’re splitting the electrical businesses?

Alexander M. Cutler

Let me kind of step back for people who has been around electrical industry for some time. Generally there and you’ve heard us talk about this when we talked about what creates a lower and higher data in terms of earnings trends for electrical businesses is that, there are kind of two different parts of the business and that is how we run the business, now today as the products business. And if you can see both Eaton and Cooper had products businesses, those businesses tend to flow through distribution channels to a little larger degree and have historically tended to have a little less beta through the economic cycle. The projects business or some people call an assembly, some people call systems tends to be a business, its got little longer lead times that tends to operate off of backlog and it tends to had a little bit more of a beta through the cycle because it relates a little bit more than new construction, if you would in that regard. Yes, it’s the fact and so the industry generally will think about products and we’ll talk about the systems and services; that’s why we’ve organized our business. We run it that way, and that’s why we’re going to report it that way.

Jeffrey Hammond - KeyBanc Capital Markets

Okay, that’s great. Thanks guys.

Donald H. Bullock Jr.

Our next question comes from Andy Casey with Wells Fargo.

Andrew Casey - Wells Fargo Securities

Thanks. Good morning everybody.

Alexander M. Cutler

Hi, Andy.

Donald H. Bullock Jr.

Hi.

Andrew Casey - Wells Fargo Securities

First a clarification, it’s small, but in Q4 was there any contribution for Mapex tools?

Alexander M. Cutler

I don’t have the number, Andy. It's a very, very modest contribution.

Andrew Casey - Wells Fargo Securities

Okay. And then within the guidance for European electrical exposure than NAFTA Class 8 truck. Are you implicitly expecting back-half improvement to get full-year flat after a week of first half?

Alexander M. Cutler

Yeah, let me deal with the first one. In terms of NAFTA heavy duty, you obviously saw the orders that came out for January just over 20, so those are kind of annualizing on a seasonal basis, so about 246, our plan is 270. So, yeah we would anticipate that things will get marginally stronger as we go through the year. In Europe we’re fairly flat. We don’t talk about a big recovery in Europe. We think that’s kind of malaise that we’re dealing with is what we’re likely to see pretty much through ’13. So, we’re not calling for a big recovery in Europe.

Andrew Casey - Wells Fargo Securities

Okay. And then – thank you for that. And the post quarter activity in terms of the cash inflow for Mapex and the bridge loan. How much of that $1.67 billion bridge loan is represented on the balance sheet at the end of ’12?

Alexander M. Cutler

We have paid down by the end of the quarter. We have paid off $1 billion, so we had about a little over – little less than $700 million was on the balance sheet at the end of the year.

Andrew Casey - Wells Fargo Securities

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

Alexander M. Cutler

I mentioned before that about $700 million, so it's pretty close to that general 3% guideline that we used as CapEx as a percent of overall sale. We will – obviously our Board will be addressing the dividend as we have our next meeting here, as we mentioned, just to allay any fears of this. We announced this back in May that we did not plan on changing our dividend policy which you know has been to increase our dividend in line with our view of future earnings. And so our Board will obviously make that decision at their meeting and they'll be able to then fix the date as well as add the amount. But no such considerations of us reducing our dividend. And I think you'll see us act in concert with our policy that I stated, but I just can't comment on a number there yet until after our Board meets. We really don't have big lumps in terms of our debt financing until we start to get out a year or two. I think Rick, the first big ones in '14.

Richard H. Fearon

Yeah, we have term debt maturing about 307 million in '13 and they are term debt that is maturing in '14 of about 550 million, but those are still relatively modest numbers given the size of the cash flow.

Alexander M. Cutler

And then I would just complete the last piece as we've stated, I think, consistently since we announced the deal in May is that our primary use of cash will be to reduce debt. And so we'll take advantage obviously those term opportunities to do so. But as you correctly noted, the cash flows that we've gotten into today are pretty fulsome and it's one of the things that has us very excited about this transaction and combining with the base power of Eaton is that our cash flow moves up very substantially.

And as a result, let me just complete that thought, the acquisition issue, many people have asked us about our acquisition policy or activities going forward, we said that we thought we would be largely out of the M&A market for a couple of years and that's indeed still our plan.

Andrew Casey - Wells Fargo Securities

Okay, thank you very much.

Donald H. Bullock Jr.

Our next question comes from Brian Grzelakowski with Goldman Sachs.

Brian Grzelakowski - Goldman Sachs Group Inc., Research Division

Thanks, guys. You got most (indiscernible) on the last one, but just on the free cash flow, so I mean if you have about a little north of 800 million in debt to be able to pay down over the next couple of years, it sounds like then obviously you have other things like the dividend and share buybacks and so forth. Is the pension completely off the table where you would not put additional discretionary contributions into that or is that a possibility that that could be on the docket as well?

Alexander M. Cutler

I wouldn't rule out any possible action, but I would say at this state, we don't contemplate putting additional money into the pension. Now next year, obviously, it depends on the discount rate, it depends on the returns that we get on the plans assets and there probably is a contribution next year that's a little bit more than the 176 we put in this year. But I wouldn't imagine the pension to kind of be a big user of cash relative to the size of the cash flow.

Brian Grzelakowski - Goldman Sachs Group Inc., Research Division

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

Alexander M. Cutler

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

Brian Grzelakowski - Goldman Sachs Group Inc., Research Division

Okay, great. Thank you.

Donald H. Bullock Jr.

Our next question comes from Josh Pokrzywinski with MKM Partners.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

Hi. Good morning, guys. Thanks for putting me on.

Alexander M. Cutler

Good morning, Josh.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

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

Alexander M. Cutler

No, this is an accounting convention that purchase price accounting requires. Essentially, Josh, what you have to do is you have to take existing Cooper inventory and you have to then market the fair market value, so that's looking at the realizable value less distribution costs and it's simply convention of purchase price accounting. So it effectively erases some of the normal profit that Cooper would have earned.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

Okay. I guess what I meant by that is the fact that it's an add-back suggests that there was less inventory to markup?

Alexander M. Cutler

No, it turned out that you also have to take it through LIFO layer, so it turns out to be a much more complicated calculation. We didn't have that information prior to the transaction on when we took it through all of the calculations that turned out to be a lesser number, but it's not really a function of market change in the Cooper levels of inventory.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

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

Alexander M. Cutler

Yeah. But when we put the pro forma’s together and shared them with investors in May, we had for that pro-forma had assumed that the deal we close in January 1, so would only affect 2013. The fact we closed earlier is why many of these costs that were incurred in December and we had mentioned in our third quarter conference call that our expectation was that we would be closing in 2012 and that we would have a lot of these individual items we detailed today would impact the fourth quarter.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

Got you. So is there an easy way to just parsed out with that 25%, I’m sorry, with the 15% versus the 10% of dilution would have looked like assuming January 1, or is that the bulk in the adjustment here?

Alexander M. Cutler

No, that’s the bulk of the adjustment really, but if you look back on your appendix number one, that’s what we’ve tried to give you that – it's the very last chart in the page 24, that’s what we’ve tried to give you that reconciliation of how 2013 has been changed as a result of going ahead and then what the impacts were. So, that’s how you get your $0.25 change, it's pretty well detailed back there.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

Got you. And then, I guess, just one last one before I would go is; when would you guys kind of judge the initial integration kind of grade yourselves on that. Should we expect kind of an update by quarter or maybe a couple of quarters from now; just getting a sense of when – if there’s upside on the synergy front when we might start to see that or get a read on that?

Alexander M. Cutler

Yeah. We have an opportunity obviously to speak to that on a quarterly basis. We do have a meeting coming up in New York in early March, and I would say that’s probably the next chance we’ve really got to talk about that, but I guess, I would just reiterate again this is a $13.2 billion acquisition with over 30,000 employees and we’ve owned it for two months. So, while we’re very enthused about it as well, we want to be sure any numbers we share with you has the benefit of some vetting and so hopefully would have something a little more to share with you at early March.

Joshua Pokrzywinski - MKM Partners LLC, Research Division

I’m clear. I appreciate it.

Donald H. Bullock Jr.

Your last question today comes from Ted Wheeler with Buckingham Research.

Edward Wheeler - Buckingham Research Group, Inc.

Hi, guys. Thank you very much.

Alexander M. Cutler

Hey, Ted.

Edward Wheeler - Buckingham Research Group, Inc.

I have lot of details new, if I could just kind of hit a couple of other ones. What does the future corporate expense – what should we expect for that?

Alexander M. Cutler

If you look at a corporate expense per quarter, we think it's going to be in the $83 million, that’s kind of range.

Edward Wheeler - Buckingham Research Group, Inc.

Okay. And then the OPEB and pension that should pretty much stay the way, well it might go up. What would that look like?

Alexander M. Cutler

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

Edward Wheeler - Buckingham Research Group, Inc.

Yeah, okay. And then the, I guess, the interest expense we can calculate that’s going to move around, but that should come down from the fourth quarter rate, I guess. Is that correct?

Alexander M. Cutler

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

Edward Wheeler - Buckingham Research Group, Inc.

Right.

Alexander M. Cutler

Essentially you take a bridge loan; you put it on your balance sheet when you end up closing a transaction you end up writing-off the bridge costs, so there are some of the $152 million of transaction fees …

Edward Wheeler - Buckingham Research Group, Inc.

Are in that line?

Alexander M. Cutler

Yeah, yeah.

Edward Wheeler - Buckingham Research Group, Inc.

Okay.

Alexander M. Cutler

So you’re probably going to have a number that’s around $300 million.

Edward Wheeler - Buckingham Research Group, Inc.

Okay, okay. And then, just if I could back on the margins; could you maybe indicate what's the new electrical pieces margins – I know it's hard because Cooper’s only in there for months, but maybe if you could just give us the 12 margins for those two new units, and either include or exclude the restructuring or however you want to lay that out for us, that would be helpful.

Alexander M. Cutler

We can’t give you that information yet. If you can imagine we’re in the process of bringing a lot of different things together at the time that we start to publish the actual results for those segments then we’ll provide historical information for them.

Edward Wheeler - Buckingham Research Group, Inc.

I guess the total Company 13.6 for ’12 includes those segments of course. I mean it's the Company?

Alexander M. Cutler

It is the Company. Yeah, it's correct.

Edward Wheeler - Buckingham Research Group, Inc.

And those – that margin includes the restructuring costs. When do you say  the 20 -- my guess is $24 million of restructuring items?

Alexander M. Cutler

Yeah, that was in the fourth quarter, that $24 million.

Edward Wheeler - Buckingham Research Group, Inc.

Right.

Alexander M. Cutler

You’re talking about the acquisition integration charges, the $24 million.

Edward Wheeler - Buckingham Research Group, Inc.

No, I was talking about the – I think well, maybe I am – you delineated restructuring charges for each segment and then there's 11 million in corporate I guess?

Alexander M. Cutler

Yes, and that is a separate 15 million of restructuring charges that – the great majority is in the segments and then you got a small amount in corporate.

Edward Wheeler - Buckingham Research Group, Inc.

Right. I guess I was just trying to reference the total company in your bridge. 13.8% is your actual margin?

Alexander M. Cutler

Right, yeah.

Edward Wheeler - Buckingham Research Group, Inc.

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

Alexander M. Cutler

Correct.

Edward Wheeler - Buckingham Research Group, Inc.

Okay, great. Thank you.

Operator

Thank you.

Alexander M. Cutler

With that, we will be available to answer questions – I'll be able to answer questions and follow-up questions for the remainder of the day. So, I thank you again for participating in our call today.

Operator

Thank you. And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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