Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Corporation’s first quarter earnings conference call. [Operator instructions.] I'd now like to turn the conference over to your host, Mr. Don Bullock. Please go ahead.

Good morning. I’m Don Bullock, senior vice president of investor relations. Welcome to Eaton’s first quarter 2013 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. Before turning it over to Sandy, I’d like to cover a couple of items. First, I’d take a moment to draw your attention to page 2 of the presentation for today’s call. Our presentation today contains certain forward-looking statements. Comments included on page two of the presentation outline factors that could cause the actual results to differ from those statements. These factors are also noted in today’s press release and the related Form 8-K. In addition, this presentation also includes certain non-GAAP measures as defined by the SEC. A reconciliation of those measures to the most directly comparable GAAP equivalent is provided in the Investor Relations section of our website at www.eaton.com. With that, I’ll turn it over to Sandy.

Great. Thanks, Don, and thank you all for joining us this morning. Delighted to have this chance to cover with you our achievements related to the first quarter. Maybe just a couple of comments to proceed talking through the presentation, which I hope you have all had a chance to download this morning. I’ll be working off of those slides. If you’ll turning to slide three, this is labeled highlights of our first quarter results, a couple of comments. First, this is the first full quarter of results reflecting our acquisition of Cooper Industries, and as such you’ll note that we’re reporting in our new segments that we had outlined to you in our last earnings call. You’ll also note, for those of you are used to following our earnings calls that we’re not providing any quarter market growth or out growth information on a quarter basis. The process of both the acquisition and then pulling together all this information has just made that very difficult for us to do at this time. So with that, let me start off with a couple of points on this first chart, and I’m on chart number three, operating earnings per share of $0.84. Obviously compares very favorably, above the top end of the guidance that we provided for the first quarter and against the consensus of $0.79. Sales were $5.3 billion, obviously a record, benefitting quite a bit from the acquisition of Cooper and the other acquisitions we concluded last year. About 40 points from acquisition, a negative one, from forex, and a negative 5 from organic growth. Operating cash flow was $100 million, and for those of you who’ve followed us for some time, you know the first quarter is always our weakest quarter in that regard. We make our largest…

I’ll turn it to the operator, who will give us instructions, and then we’ll open it to questions.

[Operator instructions.]

Our first quarter today is from Joe Ritchie with Goldman Sachs.

Sandy, you just mentioned 2013 is much more highly dependent on your execution than global growth. Could you just set some light on where you see the greatest execution risk as you progress through the year?

I wouldn’t characterize them as risk, because I think we’ve got teams [well around them], but certainly the integration of an acquisition the size of Cooper Industries is one that is obviously on all of our target lists. We also acquired four other companies last year. And so each of those five have to be successfully integrated. I think the first quarter is a good indication of how well we’re doing on that. We’re very much on track. And you may recall that we actually increased our guidance, if we go back into the February, early March, time period for what we expected to get from the Cooper acquisition this year. I’d say second, there are a number of restructuring programs that we kicked off with the roughly $50 million of restructuring costs that we booked in the fourth quarter. Those are also going quite well. And then the area that I’m particularly excited about, the vast array of new products that we are launching this year, included in part of that is how we expect to be able to drive higher bookings activities. And if I just had to pick a couple out of our electrical business, this whole suite of [unintelligible] automation and control solutions that are targeting machine builders, off and running well, and for those of you who went over to Hannover Fair, you really saw that reception there. Our new [series of] modular [SF63] medium voltage switch gear, another big plus. For those of you who were at Lightfair just this last week, you saw us kick off another LED platform with something we call Wave Stream, that’s the brand name, for our new [edge-lit] LED lighting products. Really offered at a very attractive price range, and really taking that technology into recessed lighting, where it has not yet really penetrated. And then I would just end with just one other big one to be thinking about here, and that’s you’ve heard us talk about this really premiere energy efficiency we have in three phase. Large, high power apps. We’ve now moved that down into a product line that’s much more sort of the midsize. So it really brings that efficiency to the smaller data centers, where there’s a fair amount of activity. So those are the kind of issues we’ve got our eyes on in terms of execution. I’d say they’re off to a great start this year, and I think our team well understands the market’s not going to make the difference this year. It’s really creating our own growth and creating sources of profits. And that’s where this large acquisition really gives us an additional leg up relative to many others, because we’ve got a lot to work on, where we create additional profitability.

And in your prepared comments, one end market question, you did talk a little bit about distributor [EBITDA] in U.S. and Europe. And just trying to square that away with your commentary that the fourth quarter you expect non-res and specifically U.S. non-res markets to be up 4-5% this year. So help me understand those dynamics and what then what’s the [unintelligible] in the marketplace today?

If you think about our electrical business having kind of two types of activity, I’m going to talk about how they throw through channels, not the kind of products. Those products that are stocked on distributor shelves, a very healthy part of our business, and one that we were really very pleased that the Cooper acquisition bought us an even bigger percentage of those kind of standard products, if you will, that’s where we saw, in January and February in particular, fairly active destocking by distributors, both here and in the U.S. Now, we think that partially was people readjusting to the fact that maybe the year wasn’t going to be the kind of year that some of our distributors thought it was going to be originally. Frankly, I think they’ve come back a little bit more to where we thought the growth rates were going to be this year. But I think, too, it’s so hard, when you watch all of the issues of sequestration or other government challenges going on here and in Europe, that doesn’t give distributors a lot of confidence about putting more inventory on their shelves. So unlike many quarters, in the first quarter, when you see a rapid acceleration of sales quarter to quarter, we didn’t see as much of that this year. I would say on the non-residential side, that tends to be product that is not stocked as much. That tends to be the assemblies business, if I could characterize it. It’s bid to a particular job or transaction. There, pretty good bid activity, and so that distributor stocking issue doesn’t tend to hit it as much. You’re exactly right, we did come into the year with a non-res forecast of roughly 4-5%. And that has always been private put in place that we’ve talked about. I think the piece that everyone’s got their eye on right now is what’s the government kind of stream of activity. And obviously with sequestration in place, we think that that’s a bit of a negative. So when you look at the total non-res, which would be government and private put in place, probably a number that’s more like 3-4% versus a number that’s like 4-5%. But I would say frankly that’s tuning that sometimes that tight a tuning doesn’t really change things that much for us.

Our next question comes from David Raso with ISI.

[Just trying to see into] the implied second half growth, and also a question on the modeling for amortization of intangibles. Just trying to think through the growth in the second half of the year. It seems to be implying maybe high single-digits, low double-digit. And I backed into that based off of what you just said first quarter to second quarter on core volume. So can you help us understand if I’m doing that properly? I can completely appreciate the vehicle business, truck being up a lot year over year in the second half, and maybe hydraulic to some degree as well. But can you help us walk through that second half acceleration of growth? Maybe try to nail down a little bit more what are you expecting from the electrical businesses in the second half, maybe aerospace?

Sure. And I think the way to think about this, David, if you take our first half, the $0.84 and the midpoint of $1.10, that’s $1.94. And then if you subtract that $1.94 from the $4.25, you get $2.31 in the second half. So roughly 46% of the earnings in the first half, 54% in the second half. I think you’d find that’s within about 2% of what we’ve generally run most years, if you go back. Of that $0.37 increase in the second half, roughly $0.17 of it comes from the Cooper synergies. And that’s the difference between the first half and the second half. I told you it would be slightly. When I say Cooper synergies, it’s that entire balance of $0.15 for the year. So that’s got amortization, it’s got increased shares, it’s got the interest costs. It’s got all that in it. So you get a little bit of a negative on that in the first half. You get roughly $0.17 in the second half, so now you’re dealing with a $0.20 difference, half to half, if you will. And the largest portion of that $0.20 difference then comes from the acceleration specifically on the North American heavy duty side, because our forecast of $15 million retail sales for light vehicles here in North America hasn’t changed much. We came into the year thinking that the European automotive market would be only down maybe 2%. We think that’s likely to be more like a 6 and a 7. So that’s kind of taking away any plus you find on the automotive side of that marketplace. So you come back to the heavy duty truck, and then you come back to the seasonality here where you tend to get that electrical business, as I mentioned, that tends to kind of come up. That 7.5% is not a bad number for that business. It kind of comes to that second quarter and third quarter being relatively similar, and then it comes off just slightly in the fourth quarter. And then lastly I would say the hydraulics business, which we believe, but we can’t certify, obviously, that we’re seeing the bottoming of this bookings activity. And if we’re right in that regard, we’re going to start to see some volume pickup there. Aerospace we’ve assumed not a lot of volume change. It’s pretty, I think, dropped through to the bottom line. It’s not a substantial difference. So I think you’re really looking at vehicle, hydraulics and electrical as being those three drivers.

And I do appreciate that, but maybe Rick, just help me make sure I have these numbers right. The core volume was down $190 million in the first quarter, correct?

Roughly, yeah.

And if I grow that $125 million in Q2, that means Q2 will give me about a positive $130 million year over year on core. So I go into the second half of the year in the hole about $60 million to try to get to the full year core revenue growth guidance of $900 million. So based on the older core growth in the second half to get to $900 million? And I understand some of the businesses year over year, they are going to grow a lot more in the second half than we’re seeing in the first half. I’m just making sure I understand the core growth dynamics in the second half of the year.

And I think, David, maybe we ought to go offline to kind of work through all the specific numbers. I tried to give you the kind of overall where we are. We’d be glad to do that subsequently.

And then last, the amortization question. The $107 million in the first quarter, which is just a little higher than I would have thought. Can you help us think that through, the full year number?

David, we continue to think the number is in the neighborhood of $420 for the full year, so it will be at this level or maybe just a little bit under this level in some of the later quarters.

And that’s not any different than we indicated in our earnings conference call.

Our next question comes from Julian Mitchell with Credit Suisse.

I guess just firstly on China, I remember you mentioned on the earnings call in January that you’d seen some encouraging order intake activity. Looking around other companies that have reported, it feels like sort of domestic focus, stuff like construction’s a bit better, but stuff that’s tied more to exports, like factory investment, industrial output, is still very weak. I just wondered what your update was on China.

Yeah, your memory of our comments is exactly right. We had talked about specifically on our hydraulics business in January, which is one of our insights into the construction equipment business there in China, that things have ticked up in China. I’d say unfortunately they ticked up and kind of stalled in China, and so we, like others, would, I think, characterize China as not recovering on the pace that it looked like it might have starting off beginning of the year. It is beginning to recover, and 7.7% GDP growth is nothing to sneeze at, but it’s not the 10-12% everyone would love to see. Our own business in China, if you look at our actual shipments for China in the first quarter, were about flat with a year ago. But when you go within it, I think more instructive is the vehicle businesses are up pretty nicely. And so you saw a pretty good quarter of activity there. I would say that most of the infrastructure oriented businesses, be that our electrical or our hydraulics businesses, were off just slightly in terms of the shipment, and all that brings together to be roughly flat. So I think our assumption for this year on China of roughly an 8% GDP increase feels about right to us, but it’s not accelerating really really quickly.

And then just within the electrical systems and services segment, you obviously had a very, very nice margin jump in Q1, and the margin in that segment in Q1 was sort of already slightly above your full year target. I just wondered if there was anything in terms of seasonality that we need to be aware of or if you could give any sense of what the base full year margin in 2012 for the systems and services [unintelligible].

Our challenge in 2012 is giving it to you with both Cooper and with Eaton, and that’s what we can’t at this point. But what I could tell you, because obviously it is a noticeable change between the 9.2% we reported last year, which was the traditional Eaton businesses, and the 14.1% now, is that it was just the Eaton products, and that’s where we’ve got consistent data. We saw a several point increase in margins. And some of the work we’ve been doing in terms of continuing to work on productivity and introduce new products, and so this isn’t simply a mix change of having added in the Crouse Hinds and the power systems business into that segment. And so we’re really pleased and we think that is quite sustainable. So when we look at that full year number, obviously, of a 14% margin, we started off the first quarter, which typically is a little weaker, with a very strong quarter. Now, it’s also a reflection of the fact that you’ll recall the really outstanding bookings versus market demand that we had in the second, third, and fourth quarter. And you’re seeing us come right out of the block with obviously being able to ship from this very strong backlog.

And then just lastly, electrical products. The bookings were down about 3% in Q1. Core sales were down about 4%. For Q2, is your guidance sort of embedding that that gets about flattish year on year for revenue?

Our thinking, again, is that at this volume, if you take our two businesses and put them together, there’s roughly 7.5% increase. That’s not a bad surrogate for the electrical business as well. And obviously as the construction market comes up in terms of just the bad weather issue is always an issue in this business, is that you get a bigger quarter there in the second quarter. So our conversations with distributors, and we’ve had many, is that we think the inventory correction that went on this winter is maybe a little overdone. And there’s an opportunity in that regard as we enter the bigger building program. You know, we haven’t talked about one particular market here, because I think there is understandable focus on non-res. I think we’ve all got to keep focus on the fact that residential is, while not back at the levels we experienced in the 2006 and 2007 heydays, is coming back to more respectable levels. And these are kind of 20% increases year-to-year, and that residential really starts to move more quickly as you get into the second and third quarter from a construction point of view.

Our next question comes from Jeff Hammond with KeyBanc.

The better incrementals, is that in one or two segments? Or is that pretty broad-based? And how do you think about the sustainability?

We still think the right number, Jeff, full year, is to think about roughly this 33% incremental. And you’ll recall in our guidance at the end of the fourth quarter the reason we used the 33% this year and the previous year had been 28% was that we expensed $50 million of restructuring, which we don’t anticipate doing this year, and we get the savings from that. So we still think the 33% is the right number in that regard for this year.

And then the order resiliency and some of the strength you talked about last year in electrical systems and services, what’s really driving that? And where do you think you’re seeing the outperformance?

If you think about our fourth quarter, our fourth quarter where we were talking about the market having - I’m talking to electrical right now and I’m putting the two segments together. We talked about growth had slowed in the second half of last year, and we think that it has carried over into the first half of this year. It’s consistent with kind of our overall forecast, talking about growth slowing toward the back half of last year and then being fairly low this year globally. Our bookings continue to be better than market conditions, and we think there are a number of reasons to think that will continue. But you may recall in the fourth quarter last year we had overall bookings up like 7.5% at a time where the market was barely growing. Now, most of that got driven by some of what I’d call the systems businesses, and large projects that we were successful in booking. We didn’t see quite as much of that in terms of that outgrowth in the first quarter, but we don’t see anything fundamentally that changes that competitive positioning. And based upon a number of the products that I mentioned earlier to Joe’s question, we are launching an unprecedented array of new products in our electrical business between the base Eaton business and the legacy Cooper business, a number of which are right in the dead center of these big energy issues. And we’ve talked a lot about LED in lighting. We were well up over 20%in terms of the LED content, in terms of LED product content, in our first quarter. This whole new edge lighting for recess application we think opens up the biggest segment of the lighting area, and we’re right out front if you’ve had a chance to read anything about out what went on at Lightfair. So we’re really quite bullish in terms of the new products and what that’s going to drive for us here.

Our next question comes from Steve Volkmann with Jefferies.

I might be getting a little bit ahead of myself here, but I wonder, Sandy, as you’ve had another quarter under your belt to look at Cooper, whether you see any evolution in your thinking about potential synergies in, say, ’14 or ’15 and maybe even comment on the sales side as well.

Then we’ve maintained $160 million on the tax side. So all that feels really good. It’s a little early, still. We’ve got elements of our team that are very heavily involved, I guess I would say, in all of the blocking and tackling to make this happen. But the customer reception, the channel reception, what we see in the cost reduction, we’ll get everything that we’ve talked about. And I think so importantly that the broader array of capabilities we’ve got right now has done nothing but strengthen us in that regard. So I’d say a little early in terms of taking that next look at the ’14, ’15, ’16. We’ll revisit that as we get out toward the end of the year and get a couple of quarters under our belt.

And then it sounds like you’re saying the destocking in the electrical side has sort of run its course, and maybe even got a little overdone. Similar comments on hydraulics? I don’t want to put words in your mouth.

No, I think all these issues, whenever you have channel destocking, there is a point where you get down to a minimum that you have to have to be able to satisfy kind of daily sales. And obviously hydraulics went through four quarters of negative bookings, and over a year, I think you get that pretty well shaken out. I’d say the market that’s been hardest for us to call in hydraulics, in terms of not only the distributor channel but also the OEM channel, how much product they’ve got, finished product, at their dealers, has been China. And I would say our insight is not perfect in that regard, because I think we’ve been fooled a couple of times over the last year or two, trying to be sure we had our hands on that. It feels like that’s starting to turn, but that one always takes a little longer than we think. I would say here in the electrical business, we’ve got a pretty good handle here in the U.S. and Europe through our major distributor partners as to where they are in that regard. You can’t get down much under a 30-day stocking. You just can’t handle the kind of volumes. So our best thinking on this at this point is we saw it in the first quarter. We think we’ve understood it. We spent a lot of time with our channel partners, and we don’t expect to see another quarter of it in the second quarter.

And then April, has that kind of unfolded the same way?

Yeah, it’s a little unfortunate for us right now, with bringing all our systems together between our traditional electrical business and Cooper. We’re not quite as fully integrated as we will be in a couple of months. So I don’t have quite as much up to date data for you there. But I think the tone is reasonable here in the second quarter, and it feels like the season. I would say the one business we’ve not talked about here on the call, which has been one of the points of weakness in the electrical industry in the U.S. has been the utility market. And I think versus some of the forecasts that were out from the industry associations that forecast utility demand, the first quarter was a weaker quarter in terms of utility demand. And our own thinking for this year is that while it will be a good year, it’s probably not going to be a record year. And that’s all reflected in our guidance at this point.

Our next question comes from Nathan Jones with Stifel Nicolaus.

Can you comment, we’ve seen declines in copper prices and declines in steel prices the last couple of months at least. Can you talk about how that flows through pricing in both of your electrical segments and in general? I would assume it’s easy to pass through pricing on electrical products. Am I thinking about that the right way?

You’re right in terms of clearly versus a couple of years ago. The drumbeat doesn’t seem to be a move up on commodities. So clearly I think you’re seeing pricing in the markets obviously be a little bit more conservative on that as well. We tend to buy, as we’ve pointed out, more on the spot markets than we do on the commodity markets. Now, the spot markets have come down, but not quite to the degree that the future markets have in that regard. But we are in a little easier commodity market at the present time than we were a couple of years ago when they were rocketing quarter to quarter and it was very difficult to stay up with them. That’s obviously helpful in a time period where growth is as slow as it is on a global basis. And so yeah, I’d say when you look at this overall environment, I’d say slow growth, more stable commodities. And that really puts the load on us in terms of executing well. And that’s exactly what we think we were able to do in the first quarter.

If I could just jump over to aerospace, you commented that you had had a strong order quarter from out of the military side of aerospace. I think everybody’s expecting strength on the commercial side, but maybe not on the military side. If you could give some more color around that and whether or not you think it’s sustainable?

Well, our own forecast, again, is that we’ll see the military markets come down by about 6% this year. We have not changed that view of where things are going to be. You just can’t have every supplier having increases in the military market and come up to a negative 6%. That’s not going to work out. We do believe that a number of the platforms we’re on are the platforms that are going to be consolidated around, such as the Joint Strike Fighter or the new tanker. A number of the heavy lift rotorcraft. And it’s on those platforms that we secured additional long term commitments, and that’s really what helped with this very strong 7% quarter. So whether it was commercial transport, business jets, military fighters, military transports, we had a very good quarter in that regard. Now, just recall, remember again in the aerospace business you often get orders and they may ship over some period of time. So it’s almost never in one month and out of the next.

And it looks to me like you paid off the only debt maturity you had for this year. You’re likely to generate $1 billion plus in cash, even after the dividend, for the remainder of the year. Can you talk about the priorities for that cash?

Yeah, we have just one more slug of debt, term debt, that we can pay off this year. Rick, do you want to comment on that?

That would be in May. We’ve got $300 million in May, and another $7 million in October. So another $307 million. But your point is correct. We have quite substantial cash flow even considering that, and our priority, as we’ve said, both for financial and managerial reasons, is that our priority is to use the cash flow to pay down as much debt as we can, including, to the extent that it makes sense, and we can get to it execution, perhaps even paying some debt down by buying it off-market. We did a very small amount of that in the first quarter, but we will continue to look at that as the year progresses.

And that’s the agenda, obviously, what you’ve seen us do already this year. A 10.5% increase in our dividend we announced in the first quarter. We said that as we went through this period of time where we’d be largely out of the M&A market, to the points Rick made, that we maintain our overall commitment in terms of our capital expenditures. That’s roughly $700 million this year. Our commitment in terms of increasing our dividend in line with our future expectation of our earnings, that was the 10.5% increase we made in the dividend this year, pay down the debt to get us back to a solid A. It means we stay out of the M&A market for any appreciable activity here for a couple of years until we get there. So that’s very consistent with what we laid out going back to last May, as what would be our game plan in terms of the balance sheet.

Our next question comes from Ann Duignan with JP Morgan.

When you were giving your comments, you said over here. Are you guys in Ireland? Or are you in Cleveland?

We seem to be in the air all the time. No, we’re in the States right now.

I wanted to ask you, Sandy, if you’d give us a little bit more color on the two electrical businesses and their exposures to government spending. I know that Eaton’s core business did well over the last couple of years on a lot of retrofitting of government buildings. Can you just give us a little color now on both businesses and their exposure?

Yeah, I wouldn’t say it’s a major business there. I’d say the major business really is aerospace you’ve got a fairly significant piece that relates to military spending. I would say that when you try to think about the non-residential market in the U.S., and of course this gets a little complex in terms of whether you include road building and other things. But the type of stuff that uses electrical equipment, to our best estimate, and believe me this is an estimate, so please don’t take this to a decimal point, there’s 25-30% of the total market that sort of relates to where government tends to have an influence. I’m talking about federal government here, primarily. But there is some state government in there as well. And that is an area where you’re right, there has been some very significant energy efficiency mandates. And honestly, those mandates have not changed. So the question is how are they going to be funded. And those mandates apply both to government buildings plus there are incentives available for people if they’re building more effective buildings in terms of the private marketplace as well. We’ve not seen an enormous change there yet, but our expectation has been that that will slow down. It’s going to get crimped in this budget issue, and that’s why we say we think about our non-res markets maybe 3-4% with that included at this point. But frankly, those pressures have been being felt, we believe, in the federal government, really since the second quarter of last year. So I don’t see that as a big game-changer at this point.

And would electrical products be the business that will be more impacted by that? Or would it be services?

I would say that it’s probably more the systems and services, more of that would tend to flow in that. But there are businesses that are over in the product business that would have product that would go in there as well. So a business such as lighting, for example, which is in our product segment, clearly part of the big push is to try to get far more energy efficiency. And one of the best plays anybody can have is to think about relighting these buildings. So I’d say that’s probably the one in there that’s got a bigger play.

Yeah, that’s kind of what I was thinking on the lighting side. And then just on hydraulics, on your outlook. I mean, you know that the agribusiness OEM order book was up significantly. But you didn’t change your outlook for end market. Can you talk about is there a bigger drag elsewhere, or is this just being conservative in case things slow again as it goes through the year?

I think there would be two areas in there. I would say that we haven’t changed our view so much of the U.S. or Asia on the end market, but we are in Europe consistent with our view of what’s happened there with car sales there, with what’s happened with distributor stocking in the electrical business. Also, we look at the hydraulics market in Europe of being influenced by that. So that’s a little bit of a drag. I’d say the construction equipment business, it has been a drag, and it’s continuing to be. I’m talking about the U.S. and Asia in that regard. Mining is clearly a little bit worse than it’s been. I think we’ve all read about that, and I think it’s related to the commodity question that was raised earlier. And then I’d say the big plus has been just, as you noted, the ag market. A big turnaround from what has appeared to us many OEMs were trying to reduce inventories still last year. It appears to us now that they’ve flipped that switch, and we saw very strong orders placed. And some of them were for future capacity, but frankly some of them were right for the springtime build.

The next question comes from Joshua Pokrzywinski with MKM Partners.

Following up on the comment about sequential growth in bookings and hydraulics, that 30% jump fourth quarter. What is that normally, seasonally?

It’s not odd to have a jump from the fourth quarter to the fourth quarter to the first quarter. It’s been very hard the last couple of years to give you a normal, because we’ve been going through these very dramatic changes. But I think if you assume between fourth quarter and first quarter that you’re going to get a 10% or 15% jump, that’s not a terrible number. But I would tell you that it’s been hard to give you a normal number the last couple of years. Any way you look at it, after these four quarters of quarter to quarter declines, it’s a big jump, and we think directionally it gives us a view that we’re starting to make the turn here.

One of your competitors said last week that some of the weakness they saw on the bookings side was more for long term delivery schedule, kind of trimming the out quarters rather than anything that you would call near term weakness. Is that your characterization as well? Maybe a little bit of near term and a little bit of out? I guess just some color there would be helpful.

Last year we saw quite a bit of long term cutbacks. That consistent with what we saw in the 2008/2009 time period, where, when people weren’t clear what their visibility was going forward, they were just trying to get everything off the books. I would say we saw most of that hitting us last year. Now, we’re seeing a little bit more of the, it’s not only the quick, hurry, I need something next week, it’s also trying to get a call on capacity as we go out a little further.

And then just one last one from me on the data center side. Any change in momentum on small data centers versus large ones? Any update you can give us there on the momentum there?

I would say not much. You’ll recall when we gave our guidance for this year, after a very weak year last year, we thought that market would be growing kind of between 1% and 2% this year. And we don’t see anything that’s really changing that at this point. A couple of pieces, as you’ve all listened to the various different tech companies report, there’s not a big new generation of servers coming out. There’s not, you know, many of the kind of technology nodes that tend to get people to flip at this point. And there’s still a fair amount of work going on as people are trying to think about, do they build their own versus do they continue their own work on virtualization, or do they kick things to the cloud. So we think this year is going to be a relatively slow side on the power quality side, and that’s consistent with what we said earlier this year.

Our next question comes from Eli Lustgarten with Longbow.

Can we just talk a little bit about the European exposure in the electrical business, electrical products and electrical system services. Electrical products, weaker bookings in the quarter. Margins [unintelligible]. What’s going on in the European [unintelligible]? I don’t think it’s that big in that business, but can you talk about how you’re thinking of it and get some color on that? And same thing for electrical system services.

I think, again, in Europe, you’ll recall from Tom Gross’s presentation, that our business in systems and services and the traditional Eaton business was bigger in the U.S. than it was outside the U.S., because we hadn’t had the traditional IEC assemblies business, and our services business, which tends to work on that installed base has not fully developed yet. So Europe’s not a real big issue there. So more of a products orientation for the traditional business. You’d find that overall, Eaton, we talk about Europe being on the order of about 18% of our sales. So when we acquired Cooper, Europe became an even smaller portion of Eaton’s overall sales. In terms of the geographic exposure, the product business has got a bigger exposure to Europe than does the assemblies. It’s about two to one. And when we gave guidance at year-end, we were talking about, in terms of geographic guidance, that the systems business, systems and services, had a 14% or 15% end market European, and that’s EMEA, so that includes the Middle East content. And the products was closer to 27-28%.

I’m trying to get some idea, as you look at your electrical products, 14.7% margin in the first quarter, bookings down 3%, and you’ve got to get to 16%, with a bigger European exposure. So trying to get some color on that and how easy to get there. At one point, even the electrical system services, you beat the 14% guidance for the quarter. You’re telling us that it’s going to get weaker over the rest of the year. So I’m trying to get some idea…

I think what we’re really telling you is that we’ve got two new segments here that we have one quarter of experience with. And it’s just too early to be changing the guidance. And I think as we have a little bit more experience working with the new businesses we acquired, we’ll have a little better handle on how they kind of go through the year, if you will. Both, to us, feel very reasonable as we look at the guidance for the remainder of the year this year. And the products business, even in a weakened Europe, still has the seasonality, because the weather patterns happen the same kind of way that they do hear. So they’ll be off a lower base.

And with a follow up on the ESS business, is the weakness of the utility business the reason why you’re so cautious on operating profitability?

No, I just note it because I think you’ve heard from a number of other participants in the electrical industry that utility was weaker in the first quarter than perhaps they thought it was going to be. Still a really nice business for us, but people who have anticipated the utilities were going to be in an unfettered ability to spend cash, if you’ve watched what’s going on and the continuation of what went on last year with the difficulty utilities have got, and to be able to get rate increases, they need to get those rate increases to have some of the money to spend. And that’s gotten quite tight in this environment.

Our next question comes from Chris Glynn with Oppenheimer.

Question about the electrical strength in the U.S. called out for both segments. It seems like some of the distribution commentary has been that it’s been weaker. Just wondering if you could comment on the contrast between channels, whether that’s direct distribution, OEM, MRO. Any flavor in that regard?

No, I would say that we tend to think of the markets as covering the whole residential, non-residential, the industrial OEM, and user side. We think about verticals like oil and gas, for example, that are continuing to spend quite a bit. Pharma’s quite active, continues at this point. And we think about the utility markets that we mentioned. And then big drivers that are going on in the industry such as led replacement, the use of vacuum interruption, a variety of different technologies. And so our characterization of where we think our market’s going to grow, I think we were pulled back in the first quarter in terms of being able to achieve those full year numbers by the distributor destock. Generally what gets destocked has to be restocked, so we think those things tend to work out over a couple of quarters. So no, I wouldn’t say we’re backed off in terms of—I would say, like all of the markets that were out there, we think the growth is going to be a little bit toward the lower side versus the higher side. But we still think it’s going to be a good year of growth.

And then for the electrical segment, you did refer to just having a few months with the full segmentation, but is the $7 billion for EP in the 69 for ESS still a good way for us to think about the year?

It’s our best thinking at this point. Whether they’re going to end up exactly in those two segments, I’d say that’s the best way to think about modeling it at this point. We still feel pretty good, obviously, about the 13.9 in total, and I think that’s going to be the balancing item. And the total will be the balance, and we’ll see how well we did in getting these split up into the two segments.

Our next question comes from Andy Casey with Wells Fargo.

Just wanted to look at the growth. You’re forecasting a little bit differently. In a lot of different company conference calls there’s been discussion about increased quoting activity that’s just not translating into orders right now. Is it your view that we’re kind of in a capex air pocket? And then within that, are you seeing more customers focus on operating expense in place of capital investment outside of Europe?

I’d say it’s quite different, Andy, for us by individual segment. Let me take an area like oil and gas for example. We continue to see people moving forward on very major projects as well as their MRO. I would say in mining, clearly people have gotten very cautious, and are looking for ways to kind of pull back. In residential, I would say it’s still very much rebuilding of the industry, and trying to get everyone to… I heard an analogy this morning that said you try to get all the players back at the party. You know, it’s been quite different being at a million or 800,000 starts versus when you were up at 2.1. I’d say on this construction equipment side, I think people are still cautious. On ag, it’s starting to feel like people are interested in running on more cylinders again. So fairly inconsistent if you would, and I think those are often the attributes of slow growth, overall GDP. And that still is our kind of predominant view. Again, aerospace commercial, quite busy. Great news. The 787 flying again. The industry seems to be opening up. On the defense side, obviously it’s lower. And so I think that’s where this execution is so important as a company, in that our opportunity, having these 5 acquisitions to integrate, is we’ve got an opportunity to create synergies and create earnings per share even without big, strong, top market growth going on. And I think that’s one of the issues that really makes Eaton attractive through here.

And then one detailed question related to pension expense. I think you’re looking for increases in the 2013 guidance, but Q1 seemed to show a year-to-year decline. Is there something special about Q1? Or is it just a timing thing?

Pension expense does vary by quarter, based upon the timing of retirements, which we can’t exactly plan on. But our expectation is you’ll see a modest increase in pension expense this year. And we believe that accordingly, you’ll see some higher levels of pension costs as you look at the balance of the quarters.

Our final question today comes from Nigel Coe of Morgan Stanley.

Just wanted to clarify the comment you made about industry reductions. You seemed to indicate that in products it was particularly heavy in January/February. And [unintelligible] is the same way. So did we see an unusually weak start to the year, to the quarter, which then got better into March?

And then switching to aero margins, for me this is a big bright spot in the quarter. You’ve referenced that after market’s still under pressure, yet you showed a big sequential improvement from the second half run rates into Q1. So just wondering if there’s anything that you should call out there in terms of the strength?

I think remember in the fourth quarter we took $4 million restructuring expense, and we did that because as we were looking at the size of the business, and as forecasted we mentioned growth on commercial, negative growth on defense, we needed to resize the organization. We also closed one small plant. And so getting that in place is a piece of helping us manage more successfully in this changed environment. We feel pretty solid about this 14% range, and as you say, it’s great to start off well in this regard. And I’d say it doesn’t hurt to have this backlog piece turning up a little bit for us as well.

Then just as a quick follow up on that, as the after-market starts to improve for the year, would you expect to build off that 14% through the year?

I think at this point our best estimate is, that’s why we haven’t changed guidance at this point, because we think it’s 14 for the full year, but I’d say it’s early still. And so I’ll have a better feel maybe after we get through two quarters.

Thank you all for participating in today’s call. As always, we will be available for follow up questions following this call. Thank you very much.