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Eaton Corp. (NYSE:ETN)

Q1 FY08 Earnings Call

April 14, 2008, 10:00 AM ET

Executives

William C. Hartman - VP of IR

Alexander M. Cutler - Chairman and CEO; President

Richard H. Fearon - EVP - Chief Financial and Planning Officer

Analysts

Stephen E. Volkmann - J.P. Morgan

David Raso - Citigroup

Ann Duignan - Bear Stearns

Jamie Cook - Credit Suisse

Jeffrey Hammond - Keybanc Capital Markets

Andrew Casey - Wachovia Capital Markets

Terry Darling - Goldman Sachs

Andrew Obin - Merrill Lynch

Eli Lustgarten - Longbow Research

Mark Koznarek - Cleveland Research Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions]. We do remind you today's call is been recorded. And your host and speaker, Bill Hartman. Please go ahead, sir.

William C. Hartman - Vice President of Investor Relations

Thank you, Kevin. Good morning everyone, welcome to Eaton's first quarter 2008 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO; Rick Fearon, Executive Vice President and CFO. As it has been our practice; we will begin today's call with comments from Sandy followed by a regular question-and-answer session.

The information provided in our conference call today will include some forward-looking statements concerning the second quarter of 2008 and full year 2008, net income per share and operating earnings per share, statements on our worldwide markets, our growth in relationship with those markets, and our growth from acquisitions. These statements should be used with caution and are subject to the various risks and uncertainties, many of which are outside of the Company's control.

Factors that can cause these actual results to differ materially from those in the forward-looking statements are set forth in today's press release and related Form 8-K filing. Additional information is available in today's press release which is located in the corporate news heading on Eaton's homepage at www.eaton.com.

That out of the way, I'd like to introduce Sandy Cutler. Sandy.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Great thanks Bill and welcome everybody, thanks for joining us this morning. I'd like to provide some amplification around three primary subjects this morning, and one as Bill mentioned we will be glad to take some questions.

First, our solid first quarter operating results and increased guidance for the full year really both reflect of our balanced diversification strategy both in terms of geography and business segments are really working well and what is I think termed by most as a challenging operating environment.

Secondly, two new reporting conventions are... we are for the first time reporting actuals for the quarter of our new hydraulics and aerospace segments, I am sure you seen that in the statements today. And as a part of that you've also I hope noticed in our press release that we changed our reporting conventions in terms of talking about end markets and it really try to provide you with visibility around U.S. versus non-U.S. markets. Obviously a lot of new data there, lot of new data streams we are working with and we would share with you that we don't feel that all of that data is as refined yet as historically you would have found our models because we are working in a lot of new international markets at this point.

And then third, an update on our 2008 outlook for the economy, our end markets and our own earnings outlook. And I think especially important in context of the fairly widely divergent views of what's going on in the world of economy and I would imagine we'll spend some time talking about that together.

Let me turn first to our operating results. This morning, we obviously recorded strong earnings with net income and operating income per share of both the high end of our own guidance. Sales of $3.5 billion of some 12%, you saw the net earnings per share of $1.64 of some 5%, and particularly significantly down at the time that the NAFTA heavy-duty market is down by over 30%. So we've not yet seen that market come back to the levels that we saw in the first quarter of last year.

Operating earnings excluding acquisition integration charges of $1.70, up some 5%, and then some $13 million of acquisition restructuring costs related to the many acquisitions that we completed last year. And then we were pleased, as you saw, to not only have closed Phoenixtec, during the first quarter, but having closed Moeller now in the very early days of the second quarter.

If we look at our bookings, to give you a sense for kind of ongoing activity, our Electrical segment bookings were up by some 3%, and as we've been telling you, we've been operating at very high levels in this business, so we see that continue to be confirmation of strong end markets there I'll talk more about that.

Hydraulics orders up by some 6%, and the real answer there is fairly flat conditions here in the U.S., but much stronger conditions outside of the U.S., and rest of the world. And then Aerospace orders up a very strong some 25% in the quarter, again confirmation of the many new programs and activities and the building production levels in that arena.

We're pleased that we achieved operating earnings progress in several of our segments, you saw a fairly substantial improvement in Electrical margins, in Aerospace margins, flat margins in Hydraulics and then slightly down margins in both our Truck and Automotive businesses, our two smaller businesses now, and so I'll come back and talk a little bit more about that.

Capital spending pretty much in line with our own thinking, and overall, cash flow for the first quarter neutral as, as usual for our first quarter, I think you all know our seasonal pattern there, where our strong cash flow really occurs in the second, third and fourth quarters.

Turning to our Electrical segment. Very big quarter; sales up some 20%, 11 points of that coming from acquisitions, small contribution from ForEx the majority was then coming from end market growth as we mentioned of some 7%. Operating profits up 12.5%, compared to 11.3% last year. You'll recall our full year guidance of 13% to 14% for this segment. We still feel that's the appropriate guidance for this year and for those of you who have not followed our Electrical business as carefully. Remember there are two critical elements to think about in that full year guidance; one, is the normal seasonal where this business gets much stronger in the second, third and fourth quarter; and then the other is, the larger impact of the acquisitions which you will see on a full quarter basis now starting in the second quarter, and I am referring to the Phoenixtec plus the Moeller Group acquisitions there.

Talking a little about market conditions, we know that the subject is very much in all of your minds as it is on our own. Let me start abroad for a moment that markets outside the U.S. are continuing to be quite strong and Middle East demand is very strong. We are continuing to see Petrochemical almost anywhere its located being very strong. Our European demand although that businesses is going to get lot bigger for us now once we've closed Moeller has held up well to this time period.

Then I think the business that many of you had the question about or the market segment the non-residential markets are operating actually better than I think many of you feel they are and if I could just provide you with a couple insights on that. If you look through the first several months of reported data January and February of this year here in North America, you'd see that the private sector non-residential put in place market and those are the numbers we've reviewed with you in our February New York Analyst Meeting are up in the order of 5% to 6%. Now if we... I'm not taking you to the details but you recall that our guidance for this year was middle single digit growth.

Many of you are appropriately concerned about lodging, office and commercial, well those make up about 35% of the private sector non-residential put in place market, and that's using 2007 percentage of the actual market. Interestingly, if you look at the mining exploration, petroleum natural gas, manufacturing, power, which is power generating, healthcare, you come up to a total of just over 55% of the market, and each of those segments are growing at double-digit numbers and we see quite strong demand for the remainder of this year.

So I think, perhaps the missing piece of insight on this subject is that even if one's forecast is that lodging, office and commercial weakens as we go up to this year and we think that's an appropriate forecast to find what you really don't see growth in those segments by the time you get to the end of this year. The power side, the medical side, the petrochemical side, we see having a longer opportunities for growth and a stronger double-digit and that's what gets us to this overall forecast of middle single-digit growth in the non-residential North American market.

So I'm turning for Hydraulics business, first quarter that we've reported, our actual results we gave you some history at our February meeting but a very good quarter of some 14%. And the markets are pretty much as we had told you they would be weaker in the U.S., stronger abroad, that's the way they've laid out so far this year. We are very pleased with the operating profits of 12.2% that is flat with the year ago. We did announce a plant closing in the first quarter that depressed earnings by just about 1 point, return-on-sales, but we expect we'll get that savings back during this year. And so our original guidance for this segment this year up 12.5% to 13.5% return-on-sales, still feels appropriate for the year.

As I mentioned, bookings were quite strong, and I think that again is consistent with our outlook and you saw us take our own forecast of growth for this business, market growth, up by about a point from our earlier forecast of 1% global to now 2%. And that's basically saying stronger international growth not much for change here domestically.

Moving to our Aerospace business, up 23% in terms of revenues from a year ago. First quarter operating profits of 16.3%, you remember our guidance for the full year here is 17% to 18%, again still feels realistic for the full year in that range. Very strong bookings, I would say the two market issues that are going on here that will probably end up spending some time chatting about today is that whereas the U.S. airline is running at 80% to 85% capacity when they're dealing with fuel prices.

There obviously has pressured on retiring less efficient older aircraft and that does have a negative impact on after market and in the near term. We also are watching closely obviously the combinations... proposed combinations of a number of domestic airlines and our own view on that is where most of the synergies will take places and the non-operating expenses i.e. its hard to combine a lot more airplanes at a time when you are running at 85% capacity utilization already, but we can come back and chat some more about that.

Our Truck business, sales down just about 2% from a year ago, that really is being driven by these large decreases in the North American or the NAFTA market both on the heavy-duty side, where it start on the order of 34% in the first quarter. Medium-duty side down about 15%, and so we have the pressure here in North America being offset by very strong South American agricultural equipment market strong Brazilian vehicle markets, some pluses in Europe. But very pleased with the 15% return on sales and... in the quarter, and you recall that's versus our guidance for 17.5% to 18% this year. And the real difference if you think about the remainder of the year is our forecast for what is going to happen in the NAFTA market.

But you saw in our press release that our original guidance for this year for the, NAFTA heavy-duty market was about 240,000 units. We've taken that down by about 10,000 units to the 230 range and again I would remind you that when we've made this forecast for the NAFTA heavy-duty markets they've always been plus or minus 10,000 units.

We do think we will see a slight improvement in the second quarter from the first quarter's rate of production, you recall you had one of the major OEMs here in North America on strike for a period of the first quarter. We think that volume comes back and we've now seen if you think about order rates, a number of months in terms of this 20,000 rate in the last two months cracked below the 20,000 rate and we actually think these lateness for the Mid-America Show may have contributed to part of that, that weakness here in March.

Moving to Automotive, sales up 2% from a year ago, margin up 8.7% and that is below the 10% guidance that we provided for this year. The major contributor there is the significant strike by another supplier, the depressed production at a couple of manufacturers. That impacted us for about 1 point in terms of the sales in profits that we gave up during that bad strike we expect to recover them. For those vehicles now need to be built to really replenish some of the fast movers, and so our 10% guidance so remains in place for this business for the balance of the year and we would expect the second quarter margin to strengthen significantly.

Couple of broad comments on the subject of markets, if you go back to our guidance for this year, the real change in our guidance for this year on markets is you recall we had said that U.S. markets will grow on average 2% to 3%, and that our non-U.S. markets will grow on average 5% to 6% and that would give us the 4% end market growth that is still in place in terms of our forecast.

What we have tweaked slightly within all of that is that our Aerospace markets are slightly stronger, our Hydraulics markets primarily because of the international site are slightly stronger, and as I mentioned we took 10,000 units out of the NAFTA heavy-duty forecast, and those basically offset one another. And then if you look between the U.S. and non-U.S., we are towards the lower end of our 2% to 3% forecast for the U.S. we are towards the higher end of our 5% to 6% for international and I think that probably feels of our right to all you... in light of all you've been seeing develop in multiple companies.

In terms of our guidance for the year, we took our guidance up by a $0.05, and we obviously were stronger in the first quarter. We have not seen anything that causes us to feel that the remainder of the year should change from what our forecast was. And if we think about the progression of the quarters, in the second quarter what are the big items that we would expect to change from the first quarter, we'd expect to see some improved stability in the overall U.S. economy and we think there are some reasons to believe that that will happen and I will talk about that, but most specifically a slight strengthening in the NAFTA heavy-duty truck market.

In the second half, what we're basing our forecast on is the gradual improvement in the U.S. economy nothing sharp, a recovery in the NAFTA heavy-duty market. Seasonal demand which comes on strongly in the Electrical business, and then the non-dilutive impacts of Moeller and Phoenixtec, and those are the major elements that they would lay out across the balance of the year.

So if we step back, we're very pleased with our first quarter performance. We think the diversification strategy in terms of balance of markets and businesses is working well. We're pleased that both Phoenixtec and Moeller have been closed, and we can now begin the integration of those businesses, and the markets in the main have been performing about as we'd expected.

I can address one last subject that being the issue of commodity or input cost. You will recall that we have been a company over the last couple of years that has been consistent in saying... in planning that we did not think you'd see any abatement in terms of commodity costs, and we think that it's been a result of high level capacity and simultaneous strong economic demand around the world. And so on our own planning this year, we had planned for input cost to increase; they have. They're not out of line with what our expectations were for this year. And so as we provide you guidance for the balance of the year, it is with the entire input costs in mind and we've planned on them for this year.

So with that we'd be delighted to open things up for questions Bill.

William C. Hartman - Vice President of Investor Relations

Thank you, Sandy. Kelvin, could we get the instructions on for the Q&A portion?

Question And Answer

Operator

[Operator Instructions].

William C. Hartman - Vice President of Investor Relations

Okay, first up is Steve Volkmann. Good morning Steve.

Stephen E. Volkmann - J.P. Morgan

All right there, can you hear me?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes.

William C. Hartman - Vice President of Investor Relations

Yes, we can.

Stephen E. Volkmann - J.P. Morgan

Great, sorry. So, now that Ptec and Moeller have closed, Sandy, I'm just wondering if there's been any update to your thinking about potential synergies either in amount or in timing, or whether you've had any evolution in your thinking about funding these acquisitions as well?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Steve, both of them are relatively recent occurrences, but I'll give you what updates we have at this point. I think the very good news is the business prospects, and I'm talking about revenues and profitabilities in the base businesses look very good. So, no initial surprises if you will on that basis, and we're pleased in that respect.

We're in the process of beginning our integration activity so no we don't have any reason to believe they are any different at this point than we had laid out. And on the financing subject, we'd mentioned that we obviously would be going out with financing, but we've not been specific about the timing and we are not prepared at this point to be any more specific on that. But it will occur during... we believe during 2008 but that's about as specific as we feel we can be.

Stephen E. Volkmann - J.P. Morgan

Okay, fair enough. And then just a quick follow up on your comments on Electrical. The bookings growth of 3% obviously is a bit of a down shift from where we've been in the last few quarters and we'd seem to be somewhat below what we are expecting for the rest of the year. So, just sort of how should we think about that?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Well I think as we've talked through the various segments in the marketplace, we've talked about the non-res market being one that we thought we would... are talking U.S. here first, the non-res market being one all we see middle digit growth, and then we'll move around a little bit on the quarter-by-quarter in terms of bookings, in terms of what big projects book in. Non-residential pretty much in line with what we had thought being down in this kind of 16% to 18% type range and that's planned out pretty much as we've thought. Power Quality up in that kind of 10% type number, and then industrial control being a pretty flat number that's how you get up to those kind of 4% numbers for this year.

So, I would say that I think the first quarter we had a huge first quarter last year in terms of booking that our shipments couldn't keep up with it, and so what I think we are seeing is that the market is gone from a double-digit growth in the U.S. to more of a single digit growth. So I am not concerned with that. I think this is pretty much in line with what we would expect at this point. Faster growth abroad at this point, but I think the big issue we've been trying to keep an eye on because we see continued strong drivers on the Power Quality side whether that be new construction or whether that be replacement.

What we've been trying to keep a close eye, and I know that you and your peers have been as well as what's really happening in the non-residential construction market and will the slowdown on the retail, the lodging and office side will that have a material impact on taking the whole market negative; our own view as I mentioned before is while those are important segments, but remember there are segments that do not represent the entire market. There are about 35% of the private sector, non-residential put in place number, that they are being more than offset by this very strong growth in, what I am going to call long cycle non-res activity and we continue to think that will be ongoing.

Now, I would tell you that when you are booking in the petrochemical arena, those tend to come in big pieces so that they can vary quarter-to-quarter and that causes some of the lumpiness on the booking side for us.

Stephen E. Volkmann - J.P. Morgan

Okay, that's helpful. And then may be you can just discuss how much actual visibility you think you have in that business? And I will hand it up.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I would say very similar to I think what we shared before, is that we've probably got a pretty good lookout about nine months just because of how quotations are done, how financing occurs, how street pricing and final booking happens, and so our expectation is that particularly on the retail side and on portions of kind of the commercial side that that should be in a weakening mode by the end of this year.

Now, we have not seen a lot of that yet, but we still believe that will happen. What is replacing that if you will or more than offsetting it is this strength in the areas that I mentioned which are continuing to be areas of big investment and they tend to be long cycle, it have to be planned for sometime. So pretty good visibility on those. So, I think our visibility is still pretty good out there through year-end and I would say in the big power project so whether that will be power generation, or whether that be oil and gas. We see those projects well out in the 2009 at this point because they take that long to get them assembled and quoted.

Stephen E. Volkmann - J.P. Morgan

Thanks very much.

William C. Hartman - Vice President of Investor Relations

Next, we have Dave Raso. You there, David?

David Raso - Citigroup

Yes, I am, good morning.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Hey David.

David Raso - Citigroup

Question is on the Hydraulic business. The revenue was a pretty strong number, can you break it up for us between mobile and industrial on the filtration pieces is this small? Can you help us between those two mobile?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

I think if we think about the market at this point, you are saying about market or our shipments?

David Raso - Citigroup

Pardon me. I guess your shipments been taken obviously to the implications and other names we cover when it comes in, is it industrial CapEx, stronger than people think? Is it's truly the mobile market? May be mobile pull was bigger here than industrial. So, I think it's mobile, but if you can just give some color around it?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Sure David, yes, I think here in the U.S., it's much more mobile at this point. I'd say that whether we're in our Electrical business or in our Industrial business, our Electrical or Hydraulics business, we see that conditions on the industrial side being fairly similar. They're fairly flat, if you will. Others obviously been a big push in Ag here and elsewhere, I mean all you have to do is look at any kind of food pricing numbers around and the numbers are hard to conceive in terms of how much grain pricing is often, that is driving a lot of reinvestment in terms of capital equipments.

So, strongest number here in North America that we see right now is on the Ag side. You're seeing some discordant numbers on the construction side, you're seeing retail sales numbers in January and February that in some categories was really quite strong. It hasn't been as bigger driver yet in terms of our activity, as I mentioned, industrial fairly flat.

Outside of the U.S, it's a little different story. Outside of the U.S., there is more industrial activity, and that as you're seeing, some of these regions of the world where I would say, it's kind of a more of an equal, equal balance of what's happening in terms of the industrial growth and the construction and the Ag.

David Raso - Citigroup

Obviously construction and Ag are material for you, but when I see up 14%, is there a way to just give us a breakout, was mobile up 17% and the industrial up 12%? I'm just trying to get a feel how much is it mobile-driven and given your two-thirds OEM, one-third MRO, I'm just trying to get a feel for the mix, trying to get a feel for your margin.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, we do it regionally for you, David. And I'd say that here in North America, again we are talking about markets being flat and so there really we were really looking at what's strong as agriculture, what's weak is, is more the construction equipment and the industrial side, whereas you go abroad, we are talking about Ag numbers that are up above 8% in construction equipment its more of between the 8% and 0% and then industrial is more of a 3% to 4% number.

David Raso - Citigroup

But again you reported revenue is up 14%.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I think that's... the raw markets are up by 4%, we had acquisitions up by 1% and then you had a fairly big contribution of ForEx in this quarter which was 5% and then our market outgrowth was 4%.

David Raso - Citigroup

And last on Hydraulics, there is a $2 million add-back on restructuring, but you mentioned a plant closure which seems like that was actually in the number, even if you pull out the $2 million. That's --

Alexander M. Cutler - Chairman and Chief Executive Officer; President

That's correct, that's just a normal operating issue that we do in every business every year. So, we only mentioned that because of the fact that the margins in the quarter, but we are below our guidance for the year and we expect to get the savings back this year. So, that really is just a quarterly timing issue and we would expect to get the margin contribution back during this year, it will come later in the year.

David Raso - Citigroup

So, that was a $0.03 to $0.04 hit from a plant closure that's been the number, plus $7 million, $6 million, to be exact?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, see in that order of magnitude. That's right.

David Raso - Citigroup

And one last quick one, pension expense was close to be a help for the year, first quarter its flat, how shall I think about the pension expense for the full year?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Well, we don't bounce around quite a bit quarter-by-quarter and that has to do with lump sum settlements that are not predictable. We continue to believe that we will have production for the full year in the order of magnitudes that we laid out for you.

David Raso - Citigroup

It's a big number, I remember it was $0.25 for the guidance.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, that is correct.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Yes.

David Raso - Citigroup

But it's still that in that ballpark $0.25 health year-over-year from pension?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Yes, that are correct.

David Raso - Citigroup

Okay thank you very much.

William C. Hartman - Vice President of Investor Relations

Next, we have Ann Duignan. Good morning, Ann.

Ann Duignan - Bear Stearns

Hi, good morning everybody.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Hello.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Good morning, Ann.

Ann Duignan - Bear Stearns

Sandy, can you talk a little about the fact that your total organic growth was up 2% and our end market growth was up 2%. Can you walk us through where which businesses underperformed in the end markets and whether there is any risk to your out-performance this year?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

No Ann, it goes back to my introductory comments about our... the new data streams, we're trying to work with in terms of U.S. and international markets. And so I would tell you we are little less certain of, let me call the decimal plant accuracy of our all these new market cuts that we just try to put together. My hope is that by the second quarter, we're going to have these little bit more stabilized. And here where the biggest change has occurred in that regard are actually in our Electrical business because while we're acquiring Phoenixtec and Moeller, we've been trying to ensure that we've now got the same kind of access to data and whole bunch of reasons in the world that we've not typically had that kind of granularity on.

And so, if we walk through the businesses, really I think there'll be not much of a surprise. Our numbers would say that we under-grew in Electrical by 2 points but we're having a hard time understanding that because the market share reports that we get out of regions that report market share are showing that we increased shares. So, I would just put a question mark there saying that we've got some question about our data there as well.

And the Hydraulics business, we're really pleased for the market, our growth looks to be on the levels of about 4 points. On the Aerospace business, very pleased again with a very good quarter there and market our growth that we think is least a point, there are five points, excuse me there. On the Truck business, we had... also we think a solid quarter, and of course you got some pretty strong mix issues going on here as I mentioned between downs in the U.S. but, we think we had a point of outgrowth there.

And then, in the Truck business... our Automotive business, excuse me, we believe we under-grew on the order of about 4 points there, and the drivers are similar to what we have seen in quarters where we have not outgrown in that market before. And that's really around two items, you saw quite a change of mix in the first quarter of 2008. We've all been monitoring this passenger car versus light truck and I think as you saw in the month of March crisis, it somewhat affected by the strike and that industry saw passenger cars actually be a higher percentage than trucks, SUVs and those vehicles, and that is quite a change.

And then the second is you are continuing to see quite a bit of share gain by the agent OEMs, we're not producing that engines here. And so I'd say that trades is right to those two. My hope, again as I mentioned Ann, as that we'll have a little tighter data for... as we get into the second quarter, we've had a chance to work with some of these new data streams to a greater degree but no, I would say that there is nothing here that we look at that we sense is a real shift in kind of competitive position.

Ann Duignan - Bear Stearns

Okay, that's helpful Sandy, thanks. And, just to follow up on the truck-build, I mean how comfortable are you now with your revised 230,000 units outlook, given more... everything we heard that the Mid-America Truck Show, 230 still seems like a bit of a stretch. How comfortable are you Sandy, that we can actually get to that level this year or that we won't be at something like a 230 run rate by the end of the year as opposed to full-year build of 230?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Obviously, there... I think there are divergent views around this forecast that's are [ph] around a number just a usual normal forecast, and I'd say it starts with our feeling that you will see the United States economy... U.S. economy gradually strengthen through this year. It is also founded on the premise that you'll continue to see exports from the U.S. with a very competitively priced to a value dollar be strong, and as you know when we're exporting, that's a very heavy activity for trucks.

Third, the low value of the dollar means that we are actually exporting more trucks than we have historically, and that has been a fairly significant underpinning for the Truck market last year; we believe that will be again this year. And then, we think too and that the lateness of the Mid-America Show this year and that that some of the orders that would have typically dropped into the March month are more likely to drop into April.

Having said that, we need to start to see some 25 months in terms of 25,000 unit months in terms of bookings, but we think the 230 is still got a very reasoned likelihood of occurrence that's what we are basing our own forecast on. I think that the follow-up question beyond that, then is that what happens to 2009, and I think you are hearing some people in the industry say it won't be as big a blow-off year as 2006 was, just because people might know the big three by the last time and then the economy weakened up and it ended up holding new trucks for a longer period of time and that's a relatively recent memory for people.

So, we think that we will see higher production in the second quarter than we did in the first quarter, not by a big number, but it will be slightly higher and remember we had one of the OEMs out on strike for about 6 weeks so that first quarter we think that's an element that contributes to us as well.

Ann Duignan - Bear Stearns

Okay, Sandy thanks for the color. I will get back in line and follow-up offline.

William C. Hartman - Vice President of Investor Relations

Next, we have Jamie Cook. Good morning, Jamie.

Jamie Cook - Credit Suisse

Hi. Good morning.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Good morning.

Jamie Cook - Credit Suisse

Sandy, just a follow-up on question on your guidance, I mean we still have $0.50 range with the first quarter underneath our belt and a first quarter that was better I guess then most of us had anticipated. I understand the uncertain macro environment, but can you just give a little more color, specifically on which end markets or business segments where you sort of see the most risk and at what point you felt comfortable sort of narrowing the EPS range?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I think as you recall, let me go back to what we said of our guidance Jamie, because it is a little broader guidance in terms of cents, but remember it is only a 6% range for us. And, so the denominators got bigger than the numerators.... numerator actually hasn't kept pace with where we have been historically.

The biggest issue really around our element is the acquisition closings. We now know when they did close. The integration results were still very early in those. And, so my hope would be in another quarter, we'll have a little bit more insight on that. The acquisition financing plans and as we enter the year, we obviously noticed two of the first the uncertainty in the financial markets and so the timing of when our financing occurs and how it manifests itself is still a lot of ahead of us.

That's why we have felt that the $0.50 range is probably the appropriate thing to do at this point. And then all said within this context of uncertain economic markets, now you are absolutely correct, we are very pleased we came through our first quarter stronger than we had forecast, stronger than many of you and your peers would tell our results would be.

As Dave correctly pointed out, there were some elements that occurred in the first quarter which were negatives than we hadn't anticipated. We hadn't seen the strike in the automotive industry. We closed the facility that we don't have the savings to offset and our operating results were still stronger. And so we do feel this is encouraged by our strength during the first quarter and the diversification strategy is working very well in terms of the international versus U.S. balance.

But coming back to your base question, we still think $0.50 was about the right place to be with about $0.06... 6% range at this point. As we get through the year a little... another quarter will narrow it up, but one quarter does not get a year made.

Jamie Cook - Credit Suisse

And then just checking, can you just comment on your thoughts about the Western European economy in general? I'm hearing more weakness in Spain and other leaders, a couple of smaller banks in Germany that went under... just sort of how you're thinking about Western Europe and whether short of the credit issue spread to that area, and how it impacts your business?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I think the credit issue is one that I think is we've all watched the situation develop over the last four or five months, that we had to have our ear shut not feel that the credit markets are somewhat interlinked around the world. I think what we would say that there is a fundamental overestimation of that impact upon global growth is if a country's growth rate is specifically tied to simply exports to the retail side of the U.S. economy, we have a very high conviction that that will be impacted negatively.

However, it's a big part of the economy is tied to the, what I am going to call historically repress infrastructure investment, which now must be accelerated than a finite number of years, that is somewhat insulated, not fully insulated, but somewhat insulated from the credit market impact that's kind of rolled out from here. So, as we think about important areas in Asia or important areas in Europe, specifically Eastern Europe and Russia, those markets aren't backing off very much, and we're seeing tremendous investment going on. I would agree with you that that Italy and Spain, and that's not areas where we have very large operations in terms of end markets, they've been some of the markets that have been slower over the last several years, and they are continuing to be.

Jamie Cook - Credit Suisse

And then, just my last question, and not to nitpick on the orders on the orders but you are nice enough to give us January orders at the Analyst Day and Electrical equipment was up 6, now we are 3 for the quarter which means February-March dropped off. And, the same on the Hydraulics side, I think you were up 10 in January, now we are up 6 for the quarter. So, is it tough comps, am I being a little too granular here? Any trends in April you want to share?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I would say Jamie that I think we've always had a challenge kind of looking at months-to-months versus quarter versus half year. I think it's perhaps too granular. We don't... I would tell you we don't sense kind of on the firing line that we are seeing and we monitor this not just on a monthly basis but very frequently. We don't sense a fee change at this point and really in any of these businesses, and you get some lumpiness in some of these businesses. So, we are always very careful of months as well as quarters. But no, my own encouragement or counsel would be I think that's probably too granular to cut it.

Jamie Cook - Credit Suisse

All right, thanks I will get back in queue.

William C. Hartman - Vice President of Investor Relations

Next, we have Jeff Hammond. Hello, Jeff.

Jeffrey Hammond - Keybanc Capital Markets

Hi, good morning.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Good morning Jeff.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Hello.

Jeffrey Hammond - Keybanc Capital Markets

Hey Sandy, just to re-ask the financing question, in your February packet, you'd indicated an issuance of equity or equity linked instruments around... some time in the first-half for the year. It sounds like your earlier commentary maybe gave a little bit more flexibility and the timing, can you just provide a little more color there and maybe just remind us of what level of flexibility actually have relative to the rating agencies and time and et cetera.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

It's Rick, let me jump in here. As I think is obvious, when we talked in January, we expected those Ptec and Moeller to close a bit earlier than they ended up closing. And so, the whole program has been pushed back a bit. At the same time, the equity markets have remained pretty volatile. Our... and we also have a bridge that in place that takes us into the first quarter of next year. And so, there is no urgency to this.

Having said that, we're also mindful that over the course of 2008, we want to get our ratios back in line, and so that's why we've indicated that our intention is to get this permanent financing in place during the balance of 2008, but it's very hard to say are we going to do that, in any given month or quarter just because of the volatility right now in the markets.

Jeffrey Hammond - Keybanc Capital Markets

Okay, that's good color. And then, just a follow-on on the raw material issue, back in '04-'05, when we saw spike in steel costs, lot of the steel companies were kind of ripping up contracts, implementing surcharges. Have you seen any of that near term that... similar to that or standpoint or it just seems like that spike was much bigger than anyone would have anticipated?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

No, I think your insight there, Jeff, is correct at least with our experience. What we've seen really through the last 3 or 4 years is a continual discussion of pressure around commodity prices. So, it hasn't backed out. We saw a lot of things written a couple of years ago, that several genome [ph], this is going to be a period of time when commodity prices are going to fall out and fall down, and I think you recall us being thorough agnostics on that subject. We felt that as long as you've seen worldwide demand strength, you're going to continue to see high commodity prices and suppliers have been talking about that pressure. So, no I would say this has been much more of a continual conversation, not a one-time spike.

Jeffrey Hammond - Keybanc Capital Markets

Okay. Thanks, guys.

William C. Hartman - Vice President of Investor Relations

All right. Next, we have Andy Casey. Hello, Andy.

Andrew Casey - Wachovia Capital Markets

Good morning everybody.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Hi Andy.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Hi.

Andrew Casey - Wachovia Capital Markets

I was stunned to see some news out of Navistar, about Mr. Ivy, sorry. They... first on financing of the general market, we talked about it after the fourth quarter, can you give us an update what you are seeing in terms of your smaller distributors ability to fund working capital?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes the people that might have the chance to talk to and what I hear through our team is that that has not been as tight as we had feared it might be, and I have just been on a couple of different conferences in that regard. And that we are not seeing that as the big pressure for them. Now if you look at the various different loan information that's available, you know it will lead you to believe the creditors is tighter in that regard, but I have been actually pleasantly surprised. And as discussions I have had with distributors and dealers that it's not feeling as tight on their end as if I would have anticipated that would have.

Now I think that that's good news and I would couple that with I think the good news that came out today on retail sales, that I think surprised people positively. And I think we have to recall in that regard that the rebate checks have not yet arrived for the consumer either. Now you don't want to overreact to any one these pieces that are positive but at the same time we want to be sure that people don't overreact to each piece of negative data and there sure seems to be a little bit of that flavor today.

Andrew Casey - Wachovia Capital Markets

Thanks. And then lastly on auto, just kind of a thematic question here the Asian OEM engine capacity location issues, it's being going on for a while. Some time ago, we expected it to shift here to the U.S. When are you being told that will happen and start to reverse some of the negative comps you are seeing?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Andy we really aren't being told that it's going to change at this point. And I think you actually saw last year announcement sort of a major Japanese OEM at mid-year as they created some political milestone here in the U.S. that actually expansion plans were being cutback in U.S. So I think the likelihood that you will see that change substantially in the next year or two are fairly low because this takes some time to bring capacity up.

Andrew Casey - Wachovia Capital Markets

Okay. Thank you very much.

William C. Hartman - Vice President of Investor Relations

Next is Terry Darling. Good morning Terry.

Terry Darling - Goldman Sachs

Good morning. Sandy I wanted to coming back to your point about the percentage of the market coming from the office, retail and commercial pieces, can you tell us where Eaton's exposure to those three markets which stand relative to the market overall? Do you think that's representative of your exposure or you are above or below that?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I would say generally that because we are such a large player across the whole non-res area that we are pretty well represented. We are a good surrogate for the market if you will in that regard.

Terry Darling - Goldman Sachs

Okay. And then the comment in the press release about Phoenixtec and Moeller running ahead of original expectations, you just clarify is that you'd really focus on the international growth numbers there for your earlier discussion?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yeah, they are basically both operating and internet what we call non-U.S. markets and yes and what we were pleased about is we've had the chance to talk with their teams as we can closing the deals that their revenues and profits looked just a little bit better than we had planned on. And so that now we are pleased that we were stepping in at advantageous time in terms of operation.

Terry Darling - Goldman Sachs

Okay. So that does not relate to cost savings expectations?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

No. Because we have not really begun and I think someone asked the question earlier too that we haven't update on our synergies. No, we don't. We still think that projections that we provide at the time of acquisition are the right ones to be using at this time and after we have a chance to get in for a couple of quarters I think we will have a more detailed update on that.

Terry Darling - Goldman Sachs

Okay. And in terms of acquisition integration cost going forward, wonder if can you calibrate us with an update there?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, not a big change from what we had planed this year in terms of our guidance. We had talked about acquisition integration numbers. I don't remember them off hand, I am going to have to find them.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Yes, they carried for the year. They are going to clearly step up as you get into Q3 and Q4 because that's given that the light closing of Ptec and Moeller in total we are in the range of $100 million $120 million for the full year. But of course in the second quarter as we indicated it's going to be closer to $20 million $25 million.

Terry Darling - Goldman Sachs

Okay. And then Rick maybe you can help on this one as well. The other corporate fees was a bunch lower than we thought this quarter. Can you update us on where we should be for the second quarter or where your guidance is implicit for the second quarter where there's been a change there in the full year?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Yes. I think you are right they were lower, but nothing kind of sell in two pieces. One piece had to do with a very definitive plan we undertook in the first quarter was the fact that we were aware that markets were a little uncertain and so we started off this year was a real cost control project was in need to keep our cost down. The second has to do with these acquisitions that closed a little later and so the resources were putting in place for them are coming later. But we still think the full year forecast we have given you roughly $220 million is the right number for full year. So they will step up as we go through this year.

Terry Darling - Goldman Sachs

Okay, great. Thanks very much.

William C. Hartman - Vice President of Investor Relations

Okay, next is Andrew Obin. Good morning Andrew.

Andrew Obin - Merrill Lynch

Yes, good morning. Just a question on auto, did I hear you right that you said that the impact from the strike at American Axle was roughly 1 percentage point?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Correct.

Andrew Obin - Merrill Lynch

And also anything else in the quarter because the margins sort of came in a little bit below my forecast?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

No, we had provided guidance for the year that the segment would be 10% return on sales. It came in at 8.7 and have impact of about a point. So that's 9.7. So now it's pretty much right inline with what we had thought.

Andrew Obin - Merrill Lynch

And the second question regarding your outlook, are you incorporating any sort of tax returns in the second half of the year or the tax rate remains constant?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Andrew, as we said in January we thought the rate for the year would be between 15 and 16 and we thought Q1 would be between 14 and 15. Well Q1 turned out exactly in the middle of that range. Now we continue to think that the full year rate would be 15 to 16. So our anticipation for Q2 right now is the rate will be between 15.5 and 16, and it's likely to be roughly in that same area for the second half of the year as well.

Andrew Obin - Merrill Lynch

So, no additional rebates in your current guidance?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

No. No, we are not building in any rebate. The other thing I might point out that the reason the rate is going to be higher in Q2 and the second half of the year is principally because of the acquisitions which have come in to the Eaton fold with higher tax rates than we pay on the balance of our businesses.

Andrew Obin - Merrill Lynch

Thank you very much.

William C. Hartman - Vice President of Investor Relations

Next we have Eli Lustgarten. Good morning Eli.

Eli Lustgarten - Longbow Research

Good morning. How are you?

William C. Hartman - Vice President of Investor Relations

Good.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Good morning.

Eli Lustgarten - Longbow Research

Nice quarter.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Thank you.

Eli Lustgarten - Longbow Research

Couple of clarifications. One, you gave us currency of 3% in the first quarter in Electrical, and 5% in Hydraulics. With currency of that magnitude and new point of sales and how much of currency contributed to the profitability?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Well, the total FX impact in revenues Eli was about 145 and there was about $13 million of profit on that.

Eli Lustgarten - Longbow Research

Okay.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

And as you would imagine with the movements in the euro and reais you did have currency impacting several of the segments. Hydraulics was impacted to the tune of 5% of Sandy had indicated truck with the reais being as strong as it was those impacted about 6%. And so it's the businesses that have their large European or Brazil exposure that were most impacted. And auto was also 6% and the reason was principally because of that European automotive exposure, some of which was the automotive Fluid connective business, we moved into that segment.

Eli Lustgarten - Longbow Research

And Hydraulic was 5 and Electrical 3, Truck 6, what is 6?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Electrical was 4 and the Aerospace was just 1.

Eli Lustgarten - Longbow Research

Okay. Secondly in the acquisitions that you have closed, so talking about a bit later, have you changed your view that their basically neutral earnings for the year? Do you expect them to add over the business at this point to 2008, given the strength in the markets you are seeing?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Eli, it's just too hard to make a definitive statement beyond neutral at this point because it is so dependent upon how the financing ultimately comes together. It is obviously a positive that the businesses are performing better than we had originally anticipated but it's just... I am sure we have the financing plan more firmly better down. And it's hard to really.

Eli Lustgarten - Longbow Research

Well there is nothing in the guidance as far as that at this point. My final question, if your second quarter guidance is reasonable if it's accurate you are implying that the second half of the year quarterly earnings are in the $2.20 range as opposed to the $1.70 and then $1.90 to $2 range. That's a big step up from current level particularly with the negative taxes. And in the acquisition to being neutral, is the Truck really the win-pin of getting to that number for the second half of the year and if that's we cut at the bottom of the range because that's a pretty big step up as we look through the rest of the year in the guidance?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

I think there are couple of drivers and truck is one, but remember truck is now 20% of the company. So it's not the big driver and the NAFTA is roughly half of that sort of 10%. But you got our view that you are seeing a gradual improvement in the U.S. economy. You do have the recovery the NAFTA, heavy-duty and medium-duty. But you've got the big seasonal demand in the Electrical business and remember that really steps up in the second half in the business. And those are your drivers, but remembering again the respective sizes of the business that the NAFTA assumptions an important one but it's not the big driver it historically was for the company.

Eli Lustgarten - Longbow Research

That's a retro viewing [ph]. One final question, the big thing more people have is Electrical or non-res not the 2008 but 2009 that you are feeling or just point at this point that these 55% of the markets that you talked about versus a 35% is sufficient to keep a non-res construction positive field in 2009?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Yes.

Eli Lustgarten - Longbow Research

That's okay. Thank you.

William C. Hartman - Vice President of Investor Relations

Next up is Brian Jacoby [ph]. You are there Brian?

Unidentified Analyst

Yes. Thanks guys. I know you guys have been asked this on the financing side, but maybe I will just try to ask it a different way. With respect to the rating agencies, one of the rating agencies you mentioned back when they affirmed you with a negative outlook that they expect significant portions of financing to be equity. And I know you can't say exactly how much between debt and equity but I mean is it still your intention to try to work in the significant portion of the financing for this piece of acquisitions with equity?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Well with equity, our equity linked instruments, because we clearly are wanting to get our capital structure back to our typical target range of around 35%, net debt to total capital, and the way to do that is obviously to increase the equity and reduce the debt, and that will come about both from earnings but also from an equity or equity linked issuance.

Unidentified Analyst

Right. And then with respect to the debt component, is it fair to say that possibly that could consist of combination of say term debt, and maybe commercial paper that would give you flexibility to get down in order the cash flow is coming better, you can pay down some of the CP, or is it going to be more term debt and less CP?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

It will be a balance of CP and term debt. That's typically how we finance ourselves, and you're right, by so doing, you give yourself a lot of flexibility to pay down debt as cash flow is coming.

Unidentified Analyst

Right. And then lastly, just I assume you talked to the rating agencies recently just that give them an update on just about the timing on the funding might not occur in 2Q, because they... one of them specifically mentioned in the recent press release that they expect it to that happen very close to the closing of those transactions. So I assume you talked to them.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

We are in contact with them quite frequently, as you would imagine. And so the dialogue is an ongoing one.

Unidentified Analyst

Okay. Thank you very much.

William C. Hartman - Vice President of Investor Relations

Next is William Dan [ph]. Good morning Dan.

Unidentified Analyst

Good morning guys.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Hi.

Unidentified Analyst

I recognized there is a great deal in uncertainty about the state of the macro economy particularly U.S., but let's just imagine that we are actually in a U.S. recession in Q1 and Q2, and as you guys are suggesting Q3 and Q4 is really starting to recover. Can you help me understand when you would expect each one of your business unit to start to show weakness from a U.S. recession? Would it be contemporaneous, would it be one quarter lag two quarter; just try to give us a sense of when if we are in a recession now we should expect to see some of the pain of that?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Well Dan, I guess I was started off and say again I remember about 55% of the company is being driven by the international markets. So the question really addresses the 45% of the company. As we think within that let me start from the bottom up in terms of the way that we are listening our segments. The automotive business I think you are seeing this winter and I think you are seeing at most people's forecast that auto, appliance and residential housing tend to be early indictors of economic downturn in the U.S. And so I'd say you are seeing those conditions in that segment already. And I think the important drivers there really are going to be and we have I think a fairly consensus forecast to what you are going to see in U.S. build there. So I think that one is there and our general feeling is it doesn't strengthen a lot through this year just as we don't think residential housing does.

And so that's kind of where we are there. On the Truck side I think it's not simply an issue of recession. I think the other issue there is the overhang that came from the pre-build or pre-buy of the precious year and they are best analysis is that that pre-buying or overhang is being burnt off and you have been seeing 88 tonnage increase since last August. And so you are seeing a time period now a positive months-to-months growth there and we are actually encouraged by that and we have been encouraged by some of the activity that's happening in the export market for production as well. So there is a piece buried within that.

In the Hydraulics business, I think you got a very different issue going on because food prices has been escalating and so I would say that you are not seeing Ag being driven by perception or recession, its really being driven by worldwide food prices and that's an important element for us. And a big part of the U.S. construction market is not being driven, I am talking about production of equipment by the U.S. Its equipment has been exported. And we already talked a little about Aerospace and I think what you are seeing happen there is that tremendous pressure on fuel prices and you are seeing lower year-to-year growth in terms of passenger miles here in the U.S. about half the rate you are seeing internationally.

But we don't see that you have got into a negative there. So we don't see that really being impacted much and in the electrical business we spent quite a bit of time talking about here is that the real pressure there from so called recessionary type of time period would be upon retail and we've seen that coming down beyond commercial as what we talked about you have to add that together with logic and you get to about 35%. So that would be the area that we would manifested itself and we are planning on those weakening as we go through this year, although we have not seen material indication of it so far.

Unidentified Analyst

So, would you agree with the idea that in effect for your purposes of your business, a U.S. recession that's relatively brief and mild, is effectively being fully offset by high commodity prices and a very weak dollar. Is that statement true?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Well, I don't know that it go all the way to there, but I would say I think the fact that Eaton is now a balanced business with 55% of our revenues being driven offshore gives us the opportunity to have a much more of a hedge if you will on this U.S. economy potential shallow recession. And I think the fact that once you look inside the U.S. businesses a large percentage of our businesses are now becoming longer cycle businesses.

So that's allowing us two to be involving segments here in the U.S. that aren't hit as hard by a shallow recession. And that if we... that's been our view and I think you remember Jim Mill's comments in New York, commenting that we thought we would come very close to but might have the opportunity to avoid a recession, but it would be a very narrow call. So, I think that banned whether it's shallow recession, or it's just above water with the nose is still one that's going to very hard to make, we'll get a view on that looking backwards when see the statistics.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Dan, one thing I might add is that it clearly is a case that exports are continuing to grow broadly, exports in February, you may have seen the improvement report on Friday, we're up 2%, month-over-month, which is pretty robust growth. So, I do think that the growth and exports, most of which are manufactured goods, will tend to put the manufacturing sector in better state than some other parts of the U.S. economy, should the U.S. go into a recession. And so, this is a little bit the opposite of what happened in 2000 and 2001, where the economy went into a slight recession, manufacturing went into a severe recession. This time around, it's probably not going to play out that way, instead manufacturing will do better than the overall economy.

Unidentified Analyst

Okay, thank you.

William C. Hartman - Vice President of Investor Relations

Next is Mark Koznarek. Good morning, Mark.

Mark Koznarek - Cleveland Research Company

Hi, good morning.

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Hi, Mark.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Hello.

Mark Koznarek - Cleveland Research Company

On the acquisitions, Moeller and Ptec, could you give us a sense of actually what they are growing at right now, because the last real update we had was back when you announced the acquisitions in December, and at that point you talked about current growth rates of 10 to 12 for Moeller and 15 to 20 for Ptec, but what is it working out to be so far in '08?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes, I don't have that right here with me, we'd be in a better position, I think, Mark that we've actually owned Moeller for more than 10 days to probably give you a good insight on that, but I think by the time we hit the end of the second quarter, we can give you a good update. What we can tell you is what we try to provide in the earnings release is that they look to be in terms of revenue and profitability point of view to be in good shape, vis-à-vis what we had thought their plans would be this year. So we don't have a more specific update from that at this point.

Mark Koznarek - Cleveland Research Company

So you... well you must be basing that comment that they're looking a little better based on something?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Well yeah as I mentioned it is based upon what our estimates had been for how they would do this year versus how they are reporting their forecast so far for this year. But I think its early days Mark, I'd say that it's just our view is that it looks good at this point and so that we don't have a surprise if you well in terms of that there is something that we're finding after the first few days of ownership here it looks to be greatly different than what we had estimated.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

And I think we can also say that the trends underlying growth trends in the business do not appear to be changing. They are continuing on the course that we had anticipated they would be on.

Mark Koznarek - Cleveland Research Company

So it's reasonable to expect they would be built in the double-digit category and I would assume then with the weaker dollar on a reported revenue growth basis in dollars that would be even further a tailwind for them. Would that be correct?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

I don't think I jumped to all of those conclusions. In that... to defend his earlier point we've only on Moeller for ten days now and Phoenixtec for something like 50 days. We continue to believe they have very good growth prospects both based upon their market positions as well as on the fundamentals of the markets that they're in, but you'll have to really wait until our report on the second quarter for us to give you a little more granularity around that.

Mark Koznarek - Cleveland Research Company

Okay then the next question I had was on Aerospace margins being very good at an adjusted 16.3%, but still quite a bit lower than 4Q. And I wasn't aware that there was that much seasonality in Aerospace we are really just seeing your business broken apart for the first time, but I am wondering if you can talk about that whether there actually is seasonality or whether there is something unusual and does it call into question the outlook of 17% to 18% margin for the full year there?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Now we are... as I mentioned Mark we are comfortable with the 17% to 18%. I still feel that's the right guidance for the year. You are right it tends not to be as much seasonality but it can bounce from months-to-months depending upon which program you are working on, what's heavier in terms of shipments but its... we are still very comfortable with the 17% to 18% projection for this year.

The one issue I did mention is that what you are seeing and I think and what many people are close to Aerospace industry are witnessing right now is that with the airlines under such fuel pressure right now they are looking for every means to be able to offset that and one of the ways to offset it is to be sure you got very high utilization. And so you are saying both here and internationally very, very high levels that we have not seen in the industry in terms of 85% and 80% utilization levels that does have an impact on after market. And actually I think in light of the... that slight pressure plus the particular mix of business we were working on the first quarter we are really quite pleased with the 16.3% return on sales.

Mark Koznarek - Cleveland Research Company

And any adjustment to the revenue outlook at all based on the latest Boeing announcement?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

No it's a good question because obviously the 787 is one that's been very much on everyone's mind and you have terrific, terrific program when you look at the number of the aircraft now booked. We've not been given any official reschedule yet that would probably happen over the next month or two. You have seen some companies like Forecast International who have put out there own estimate of what will happen to the program, but our best estimate is that this is something that would impact us probably less than 1%.

Mark Koznarek - Cleveland Research Company

Okay, thanks very much.

William C. Hartman - Vice President of Investor Relations

Next is Steve Saroll [ph]. You are there Steve?

Unidentified Analyst

Yes, good morning. I am curious given the strength to the euro all through the quarter how much in dollars Moeller ultimately cost you, by the time it closed?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

It's a complicated reconciliation because the way that transaction was structured, there was a certain amount paid to the owners in cash we assume pension liabilities, we assumed relatively modest amount of debt but also acquired some cash and... but then subtle was to think about it is that when we announce the transaction in December the euro was in the mid 140's and when we closed it, it was in the mid 150's and so roughly speaking you can look at our prior disclosures and utilize those ratios to give you a good sense of that.

Unidentified Analyst

Okay, and did you actually... did you funded through borrowings under the bank plans or did you do it in the CP markets?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Well, again a mixed answer that the bank lines can't be used either for direct bank financing or for back up for CP and so we did a little of both.

Unidentified Analyst

I was just curious given the term loan in the markets how receptive they were for?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

We had... we see no real disturbances in the commercial paper markets for our paper and so the financing happened quite smoothly.

Unidentified Analyst

Okay, and given the much increased European flavor at the company now would you consider doing some financing in the European markets rather than just domestically once you'll differently [ph].

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

It's certainly something that we have considered and we will continue to consider obviously balancing out one debt profile through the use of different currencies can make a lot of sense. Obviously there are a lot of factors including rate differentials, outlooks on currency that one have to think through but it's certainly a subject of consideration.

Unidentified Analyst

Okay, thank you.

William C. Hartman - Vice President of Investor Relations

Okay next up we have Ted Wheeler and others are up there a couple of with repeat questions. So we are going to call on Ted and call that the end of the Q&A session. So, Ted you are there.

Unidentified Analyst

Yes I'm. Good morning, thanks. Just two questions on the Aerospace spare part numbers you have a kind of a ballpark of what the revenues were in the quarter?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Yes we don't break out OEM versus after market so that I think you recall we've generally said that what you tend to see at a time when you have high OEM production which you have now it tends to be on the order of 60% and the after market is more like a 40% at a time when the OEM market is low where it tends to go to more of a 50-50.

Unidentified Analyst

And the delta on spares you just indicated it probably wasn't that weaker just from comment is that a fair?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

I think you have seen two things happen in terms of the activity one you'll recall last year we talked a little bit in the fourth quarter that after market orders had been slow on the defense side and you are actually starting to see a little bit of improvement on that but that's being offset by a commercial after market than there is probably going to be a little skinnier here for a period of time. So we just think it's a trend worth noting at this point because we don't think the financial pressures in a period of time when fuel prices are going to continue as high as they are, are likely to go away for the airlines.

Unidentified Analyst

You think the airline industry... sorry inventory levels on spares are they normal, or are they drawing those down, do you think?

Alexander M. Cutler - Chairman and Chief Executive Officer; President

Well, this would be speculation, I guess on all of our part, I think there's just pressure on it, so that... I would guess you're going to get narrowing up of expenses wherever you can get them at this point, that's very understandable with fuel prices like where they are.

Unidentified Analyst

And just one other one on the acquisitions and the synergies. Would I be correct in thinking very initially the acquisitions might be slightly dilutive, and that during the year, you would have some improvement and to get to that sort of non-dilutive full year, is that the way to think about it, or will it be non-dilutive in all quarters?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

It just depends on when the financing occurs, and how it occurs, and then the other element you have to add in is the purchase price accounting specifically the inventory.

Unidentified Analyst

Right.

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Write up and so, it's hard to be very definitive right now, given the uncertainties in terms of the timing of the financing.

Unidentified Analyst

Well the inventory will work through in the June quarter, I would think, right?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

It will certainly work through a large part of it in the June quarter and as you know you write it up, and both of these businesses do have significant levels of inventory. And so the Phoenixtec and Moeller and so those will be sold in over the next several months, but you're right, that's more predictable. What's less predictable is the financing.

Unidentified Analyst

I guess. Well do you have a ballpark with that right up in zero gross margin impact would be?

Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer

Not... Ted not at this point because we have to go in and value the inventory and so we just haven't completed that process yet. But we will certainly have that done within the next several months.

Unidentified Analyst

Understood. Well good quarter, thanks again.

William C. Hartman - Vice President of Investor Relations

Thank you all and as I said we'll have to cut if off at this point. We appreciate everyone's participation. And as always I will be available all afternoon to answer questions. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference. We do thank you for joining, while using AT&T Executive Teleconference. You may now disconnect. Have a good day.

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