Eaton Corporation plc (ETN) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. Welcome to the Eaton Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions] And as a remainder, the conference is being recorded. And I’d now like to turn the conference over to our host Eaton’s Senior Vice President, Investor Relations, Mr. Don Bullock. Please go ahead.

Good morning. I’m Don Bullock. Welcome to Eaton’s third quarter 2014 earnings conference call. Joining me this morning are Sandy Cutler, our Chairman and CEO; and Rick Fearon, our Vice Chairman and CFO. As has been our practice, we will begin today’s call with comments from Sandy, followed by the question-and-answer as the host alluded to you earlier. Before we move into the call, I’ll take a moment to draw your attention to the statement on page 2 of the presentation. It contains certain; our presentation today contains certain forward-looking statements. The comments on page 2 outline those factors that could cause actual results to differ from what’s outlined in the presentation. These factors are noted in today’s release and also the 8-K. In addition, the presentation contains certain non-GAAP measures as defined by the SEC. A reconciliation of all of those measures and the most directly comparable GAAP equivalent is provided on the Investor Relations page of eaton.com. With those opening comments, I’ll turn it over to Sandy.

Great, thanks Don. And thanks everyone for joining us this morning. I’m going to work off of the earnings presentation which was posted earlier, and hopefully you’ve all got that in front of you, I’m going to start on page 3 that’s titled highlights of the Q3 results. Just a couple of comments here, we had a – we think a very strong and balanced quarter in the third quarter as you’ve already read our operating EPS it was above the midpoint of our guidance it came under the $1.29 versus the $1.25 that had been the midpoint. Significantly that operating EPS is up 15% from a year ago in markets that are I would describe as in overall as a less than robust. Our sales were up some 2%; core revenue was up 3% and then obviously reflects the impact of ForEx of the negative about 1 point. As you’ll hear us talk as we go through each of our businesses and the total corporate results, revenues really as for the tail of two cities strong conditions here in the U.S. as the U.S. continues to strengthen and then weaker conditions as we get outside the U.S. and just as one indication of that when you look within our core revenue being up 3%. The U.S. was up almost 7%, so we’re doing quite well in our businesses here in the U.S. Our record segment profits which were really pleased to see here we call the first quarter segment profits were 14.5%, second quarter they were 14.6%, but I think you remember that we had taken some restructuring expenses on our industrial businesses during that quarter, without those restructuring expense the margins would have been about 15.2%, now obviously the all-time record 16%. All of that drove a record operating cash flow of $943 million that excludes the legal settlements that were settled in the second quarter and we paid out as we’ve mentioned to you in numerous forms paid out that cash early in July. On the free cash flow was that a very robust 14% of sales, really pleased with that performance. Strong bookings in electrical again 4% overall, aerospace some 12% and we’re really pleased that all the work we’re doing to integrate the Cooper acquisition remains very much on track. If we turn to page 4, just a very quick and pretty simple reconciliation to our guidance you recall as I mentioned our guidance the midpoint was $1.25. Our record margins which came in about $0.04 stronger than we thought that was really in the electrical systems and services segment. I’ll speak more about that. But very pleased with the very full recovery we made in the third quarter frankly a little faster, we had said that we thought we would get an average of about 14% margins in the third and fourth quarter. We obviously came in above that in the third quarter, then aerospace came in slightly higher powered by some of the strength of our aftermarket shipments sales. I’ll speak more about that in a moment. With volumes coming in just a tad lighter than we had indicated, when we were looking for about a $150 million of incremental revenue when we gave our guidance for the third quarter. We worked very hard on productivity and expense control across the company. Our corporate expense came in as you saw it about $64 million versus the mid 80s guidance that we had provided. Taxes were about 2 points lower and that offset the lower than expected volume compared to our guidance and that was just about a $120 million lower expected physical volume and then a negative 65 impact, $65 million impact from ForEx. Again compared to consensus our volume was about $14 million difference in consensus out there. So, overall up some from $0.04, we think a very solid quarter of execution. If we move to page 5, just the corporate numbers that you’ve already seen with the overall sales 2%, 3% core growth that adds back to 1.4 for ForEx. I think the recent number speak very much for the prelim itself no impact of acquisitions or divestitures at the total corporate level. So, topic right into the business segment, if we turn to page 6, another very strong quarter performance in electrical product segment, our biggest segment in the company. As you can see sales up some 3% from last year, core growth up 4%. We think really solid when we look, whether we look against peers or look against market here. Margins expanded to 18%, bookings raised significantly up 5%. And when you look within those bookings, once again the story is very much the same as I’ve already mentioned twice about strength in the U.S. bookings over 8% in the U.S, really strong numbers here again. And Asia-Pacific was stronger, as you might expect Europe being the area of still looking for stabilization in those markets and that’s the area of weakness. As we look within those bookings lighting continues to be an area of continued strength, volume up from 19% our LED participation or percentage of – percent of our total lighting revenue at 45% really leading the industry. I’m very pleased with that. If we look around the world, we’re pleased on the U.S. our demand for industrial products, our industrial control products up some 15% in the quarter as well. Strength in the Middle East, and we’re pleased that they were seeing some pretty strong activity, compounded activity in Asia now well not as true on the system and services side, but I’ll come to that in just a moment. So, we think a really solid quarter, very much hitting our targets for performance here in terms of volume and margins. If we move to electrical systems and services segment, perhaps I think the highlights of the quarter in terms of really converting upon our improvement plans here, come back and talk about those three areas that work particularly on here in the quarter. But obviously volumes up 1%, 2% of course, so again a negative 1 point from ForEx, up 2% from the second quarter as well. Probably the big highlight is the margin of 14.6% up from the 12.7% disappointing performance in the second quarter. Bookings up 3% again over 5% here in the Americas region, so very much that same outlook and a number of you would recall when we talked about volume increases in the second half of 2014 that one of the portions of the systems and services businesses where we are counting on with strong services increase. Our bookings were up over 20% in the quarter, and services it was very much converting and we had thought, we’re seeing a little better tone on utilities where we actually we’re up about plus 6 in that particular area and doing well on the power distribution gear side. The weakness continues in the large UPS markets, whether it’s here or in Asia, and as we spoke to you we thought that it would be the condition that we continue for this year. Just a quick comment, following the second quarter and during our second quarter call we talked about initiatives to get our margins back in line with our own expectations that were around freight and logistics that are around capacity rightsizing and prior quality business and about continuing strong bookings momentum and getting a better price tone. If you recall the time I told you that, there we needed improvement in all three of those areas that they were about equally weighted, frankly we had hopefully we would get to as I mentioned second half margins of 14%, which would have had us a slower in the third quarter than 14%, a little above 14% in the fourth quarter clearly. We got back to 14.6% for one quarter really good progress on all three of these, there was not a significant change in material cost. So that’s not what drove these increased margins, increased margins came for getting the progress we targeted in those three areas. And we expect that to continue in the fourth quarter as well. If we move to hydraulics, another challenging quarter in hydraulics and I think we gave you some indication of what our thoughts were in terms of what was happening in the market, at the end of the second quarter, we’ve talked about it all through the third quarter that, while we’ve talked about China construction equipment weakness over the last year or two, the big change in this market has been what’s been happening in the global ag market and particularly in the U.S. and in Europe. You’ve all seen the announcements from the major OEMs, a very significant turn in their outlook in terms of what they are doing with anticipated sales and production announced the production as an impact on us. Let me turn first to the issue of bookings which are down 6%, very significantly our distributor orders were flat; they are actually up in the U.S. But the real story to understand what’s happening in the bookings level here is that, our OEM bookings were down 19% and if you took the ag market out of that total of OEM bookings. All our other OEMs are up some 6% and that includes the global construction market. The real weakness is in ag due to significant cancellations in the Americas, in EMEA, I don’t think that’s probably a surprise and if you are following the ag market just going through preparation for quite a down cycle. We’ve tried to be quite transparent that we think that next year will be a down year in ag equipment as well. And so, this quarter where our sales were down from last year 1% and again when you get under the 1% down in volume of shipments, and now switching shipments. Distributor settlement is quite good up 7% OEM down 6% really driven by the ag side again. So our large exposure to ag is obviously showing up in this quarter, the 11.7% margins are influenced by the lower margin and the fact that we’ve taken our inventories down in responses as well. We think that this is a condition that’s likely to carry into the fourth quarter; we’ll see some small improvement in margins, but this kind of level in volume in the typical fourth quarter being slightly less than the third quarter in terms of volume as I think how this will play out in the fourth quarter as well. I’m going to switch to aerospace, really a terrific quarter in aerospace. If you move this is page 9, if you move to the slightly green colored box in the left hand lower side of this chart, you’ll see the core growth was 6%, you see right the divestiture is 6%. These are the two smaller units that we divested in the second quarter that we now have a full quarter of the lack of those sales. So, the actual organic growth in the business was really quite good, in fact very good, 6% we’re very pleased with the bookings up some 12% and had both positive bookings on both the commercial and the military side of the business. Significantly, we call out on the yellow box that aftermarket shipments accelerated during the third quarter that obviously is a help on the margins and I think you saw the very strong margins of 15.9%, you recall we’ve had a number of quarters now, these past several quarters, we’ve had significant acceleration on the aftermarket spares and repairs activity. And we’re starting to see that come through in the shipments here as well. We move to the Vehicle business, another strong quarter of performance, volume up 5% again core growth up 6% margins up 17.4%. We obviously raised our guidance for the NAFTA heavy-duty Class 8 build to 295,000 units for the year. We can see that finish line pretty clearly here as we said at the end of the third quarter really fourth quarter in terms of what this year looks like. And I think in addition, to the strong September NAFTA heavy-duty orders of almost 25,000 units that we’ve seen in the marketplace. We’re hearing pretty good news about what October is going to look like as well. So, I think continued good news. The weakness in this particular market is the same as we spoken to you about and it has not turned around from production point of view, South America, Brazil in particular continues to be very weak in its vehicle markets. And so we’ve got again a little bit of a story of two different worlds here, the very strong North American activity, the very weak Brazilian operation and remember that Brazil is a pretty big percentage of our business that’s outside – of the U.S. in this particular segment. So, if we turn to 11 sort of wrapping up 2014. Full year segment margins, we still think to be above 15.2%, I’m sure there will be individual differences by decimal point in these five different segments as we get to the close of the year and wait all the quarters. But overall we’re pretty comfortable with 15.2% that’s we shared in the – in our earnings announcement. We think the full year market growth is, likely to be around 2% where the U.S. market is growing at an attractive 3% level and the rest of the world growing at more like 1%. ForEx obviously has been a big change vis-à-vis what we first saw at the middle of the year, and you saw we had about $65 million year-to-year of negative ForEx in the third quarter. We think the full year is now likely to be on the order of some $220 million, for those of you who are doing the quick detection of that means more in the fourth quarter that was in the third quarter that is correct, because most of that currency change occurred in September. So, if they stay at these levels, we would get three months so that impact in the fourth quarter instead of largely one month of impact in the third quarter. And we’re really pleased that with all the complexity of all the different programs that our teams are working, they are doing a great job and the Cooper synergies remain on track for this $210 million in 2014, which to remind is about $95 million of incremental synergies and profits in 2014 compared to 2013. We turn to page 12, operating earnings per share same numbers that we showed you full year at the end of last quarter, so we’re holding that guidance that’s up 11% from the previous year. The fourth quarter midpoint in terms of operating earnings per share were $1.20 that’s also up 11% from last year. So, in markets that, we think are growing on the order of roughly 2%, we think very attractive leverage in terms of the profits dropping through. If we move to chart 13, its titled comparison of Q3 to Q4 for 2014, that was the starts for the $29 which we reported for the third quarter. We will again get about another penny I think from Cooper synergies. Margins in our fourth quarter for those of you who following our company for sometime, normally are about half a point lower in the fourth and they are in the third quarter, a portion that has to do with their regions of the world of our large parts of December are not business days. And that would account for about $0.06 drop from the third quarter to the fourth quarter that is inline well with our expectations were for the fourth quarter when we put our second half guidance together at the middle of the year as well. ForEx we think, as I mentioned it will be on the order of about negative $100 million comparing the third quarter to the fourth quarter that can drive about $0.02 and then the normal lower core volume that we see with the fourth quarter being slightly less than the seasonal peaks in the second and third quarter. That will be in the order of about $50 million, and so that’s how we get to our $1.20 obviously putting that together with our first three quarters, puts us at our full year midpoint that I covered on the previous stage. Chart 14, is provided just for quick summary of the key elements that we try to provide in our guidance and discussion about results. A couple of changes that I have already mentioned, but I would just highlight them for your record keeping ease on this chart. Market growth it was at 3%, we’ve lowered at the 2% as I mentioned before that changes all the occurring outside of the U.S. ForEx you may recall, we started the year thinking it would be about a negative 200, we got to the middle of the year and it didn’t look like it was going to be at that level 1 to 0. We now think it’s a negative 220, I think further confirmation that we know-how particular does a great job of forecasting ForEx. And then if you drop down to free cash flow, it’s up $50 million, so it was $1.8 billion to $2.0 billion, as we’ve gotten through the year this year and I’ve looked kind of the pace of all of the programs and the programs we prioritize, we think we’ll be spending about $50 million less than we thought when we enter the year. I would call that tuning, it’s not a reflection of any programs being behind, it’s really just our ability to get it spent this year. If we turn to page 15, a summary of the quarter and the year, as I mentioned, we think it’s a very solid quarter of performance clearly ForEx surprises a little bit, but I think it probably surprised almost everyone. Record margins really reflect all the work on productivity and effective cost control. Record free cash flow, we think really good look into 2015, I’ll talk a little bit more about that in the next chart, running at 14% of sales. We think the market conditions in the fourth quarter likely to be similar to Q3, the only modification of that I would say is just as a seasonal difference in the first quarter. And that we think a very solid attractive year this year with 11% operating EPS growth coming off the year with relatively modest worldwide market growth in terms of our markets. I know very much on your mind at this point is, what is 2015 start to look like, its – we’re in the midst of our operating planning. So, we can provide you only with a couple of kind of broad-based indications and obviously we’ll address this in far more detail in January in our call at that time. But maybe a couple of comments to reflect, we think market growth is likely to be similar to 2014, I think the big trends there are continuing growth in the U.S. and lower growth outside of the U.S. As you break that down kind of into our individual businesses, I think this our general feeling is that aerospace is likely to be a little higher growth than the average, hydraulics is going to be a little lower growth than the average. And the other franchises are going fall sort of somewhere in between. As we’ve mentioned in our last call and I would reemphasize again today, we’ve got two very big drivers and sort of self-help here in terms of another incremental $50 million of Cooper synergies, another incremental $35 million of benefits that come from the restructuring we did in the second quarter of this year in our industrial sector. And then the negatives that we spoke to you about earlier that we do expect that our tax rate will move from this roughly 6% this year to something and that 9% to 11% range next year. And then finally an issue that many of you have asked us about and we’ve discussed in quite some detail over the last year and a half. It has been our expectation ever since we announced the acquisition of Cooper by the middle of 2015; we would have the vast majority of our acquisition integration activities completed. We would have been paying off the major portion of the debt that we had indicated, we will repay back that we took on this part of the acquisition. And that the company will have the opportunity at that point to really be thinking through what is as around the very significant cash flow that we are driving at this point. And that’s likely to include either getting back into the M&A markets and/or share repurchases. We’ve not taken our finger off that chest piece at this point, you saw that we did purchase about $225 million of stock that was roughly 3.4 million shares in the third quarter. We’ve had the capacity we believe that, if we decide it makes sense to continue us purchases in the fourth quarter, but that’s frankly a decision we’ve not reached yet. And as we get into 2015, I think it’s just to open without some very attractive alternatives for us as we get back to the point where our balance sheet is considerably strengthened and we would have completed most of this integration, which really gives us the confidence than to think about new initiatives, as I said that either around the M&A side or on the side of purchasing back shares. So once again, we think a very strong quarter one that we really hit on upon the key elements that we felt that we need to improve upon it, if we came on a second quarter I think it sets up the fourth quarter entering next year on a strong basis. So with that, Don, I’ll turn things back to you and look forward to people’s questions.

Very good. Our moderator will give you some instructions for the question-and-answer session.

[Operator Instructions] Our first question is from the line of Nigel Coe with Morgan Stanley. Please go ahead. Nigel Coe – Morgan Stanley: Thanks, good morning. Sandy, I just want to pick up on your comments, your last comment on the share repurchase and/or M&A. And I think most of the thing of 2016 is as really when, the balance optionality opens up. So, mid 2015 is a bit earlier, so I’m just wondering if anything is changed with the competition of the agencies et cetera. And in terms of, the pan limit REPOs this is M&A, I’ve got to think that the common share price REPOs would be where you are thinking more so? So just any comments on that would be helpful.

Thanks Nigel. And you’re right, we do feel that we have the mature year of our synergies in 2016, but we have been pretty clear that most of the actions and decisions will have been completed by the middle of 2015. And what we’ve been indicating over the last six months is that, we think that it opens some opportunities, we continue to kind of hit the cash flow numbers that we are that we can begin planning those activities in the middle 2015. Obviously, if it was M&A it’s likely to be something that we would think might not close to later in 2015, but that doesn’t mean that you don’t get the work done earlier in the lab. I – we tend to agree with you at the kind of share levels that we’ve seen more recently, it has to be a pretty special acquisition to be one that would outpace the REPO. Nigel Coe – Morgan Stanley: Okay that’s helpful. And then just switching to ESS margins, you indicated that your plan was for 14% margins in 3Q, you came in at full obviously ahead of that 14.6%. So, what was, what drove that outside of this year plan and should we then think about 4Q being sequentially higher than the 3Q, given your initial setup?

And you stated what I said correctly is that, we did think that the second half would average 14% with the language that had used and really proud of the job our team did in terms of really addressing all three of the improvement areas that we said we had to work upon. So it’s not our expectation, we would give that back. So that it’s our expectation we ought to be operating at petty similar levels as we go into the fourth quarter. This is a business unlike some of the other sectors where seasonally the volume goes down on a number, normally in the systems and services business the volume stays a little more constant going into the fourth quarter, because there is an awful lot of large installation to do repair and service work over the various different holidays that are sprinkled to the fourth quarter. So, our expectation is that, that would stay at these types of levels in terms of profitability. Nigel Coe – Morgan Stanley: Okay. And then just quickly, the ESS orders today reflect therefore pricing discipline on some of the larger project opportunities?

I would say that the biggest issue there is still Nigel is the weakness in the very large power quality markets. And I think you’ve seen that from a couple of our peers who have announced this well. That’s the piece that is not as robust, the power distribution side is, I recall fairly robust as we go forward this time. Nigel Coe – Morgan Stanley: Great. Thanks Sandy.

Our next question comes from Scott Davis with Barclays. Scott Davis – Barclays: Good morning guys. I just want to follow up a little bit on Nigel’s question on UPS, I mean, I think some of us are trying to figure out how much of this weakness is cyclical and how much of it’s circular, I mean did you see changes there and power quality eligibly that this is something it’s probably going to stay weaker or longer than what you, usual cycle would be?

I think what we’ve been trying to share with people Scott and then first good morning. Yes, we do think there are some important changes going on from the point of view that there has been a period of over build and then under build and we think will come back to a period of time when people will be building in more, but the topology of the technologies are changing as well. And that so the total electrical package that is sold in many of these large datacenters that isn’t changing much, but the mix between the power quality of UPS and the power distribution side is changing. And that’s not in all of the datacenters, but it is in what we call some of the web 2.0 or hyperscale type of datacenters. And we spoke to that at several conferences this year. So, I do think part of what we’re going through right now, is that we got some areas where people have pulled back on spending all of these drivers of capacity continue to happen. So, I think we’ll step back into that, but it does mean that companies got to have these new topology to really be able to deal with the change in the mix of product. We do, we sell obviously both the power distribution and the power quality. So, on a net-net basis that doesn’t make us softer, but it does made us a little slower on the product quality side. Scott Davis – Barclays: Fair enough. And I just want to get a sense of where your thought process is Sandy on, your stock price has been a little disappointing, I think it had a tough year and you’ve lost that, for a while you’re trading more like a multi-industry company now you’re back to trading more like a machinery company. And does it make you start to wonder whether you’re ever going to get credit for moving towards being an electrical equipment peer play that maybe some of the more cyclical businesses are always going to have an outsized influenced on where you trade?

I think for us Scott, it’s really all-around performance. And, I think that we’ve built a company that has balance, it has balanced from a geographic point of view. It’s got balance from how it participates to the cycle that is balanced in terms of its different businesses. And I think what we’re trying to deliver for its shareholders and owners is a stream of income and revenues that continues to grow right through the cycle regardless of what’s happening around the world. There will be individual quarters where an individual business or region in the world won’t be a strong as others that’s part of being a global company as part of being a diversified company. So, we still think we can deliver on that strategy and that promise. But we have to deliver it each quarter and that’s what we’re really focused on. Scott Davis – Barclays: Okay, fair enough, excellent. Thank you.

Our next question comes from Steve Winoker with Bernstein Research. Steve Winoker – Bernstein Research: Thanks and good morning guys.

Good morning.

Hi. Steve Winoker – Bernstein Research: Maybe just start off with that 2015 guidance, any preliminary thoughts and how you was thinking about the corporate line items in pension and some of those other, can be large swing factors?

Yes, maybe just on the pension issue, you may recall at the end of the second quarter, we had opined that, if rates had stated similar rates that we might see a tailwind, a positive tailwind in terms of pension cost. I think about as quickly as we said that, we saw interest rates and discount rates continue to move in confounding directions. And so, I think our guidance at this point is that, we just don’t know and we’ll see when we get those rates at the end of the year. So, that’s why you don’t see that on our summary list at this point. I think in terms of the corporate expenses, I mean obviously you see that we have really worked hard on productivity and cost, all through the company as markets have grown a little less quickly than we all might have hoped at the beginning of the year. I think you got to assume that’s going to continue as we go forward. We think this worldwide economic outlook that we have is one that basically says that U.S. is going to continue to be the strongest part of the neighborhood. But you’re going to see Europe struggle through challenging times on a continuing basis and that what’s going on in the emerging nations will be quite inconsistent from country-to-country. And that’s what sets our belief that, you have to be ready to run your company successfully with this growth rate of that what we’re experiencing around 2%. Steve Winoker – Bernstein Research: Okay, well on the – maybe on the segment margin commentary, ex-cost synergies in that implied in that guidance as well. So, and if you get the $185 million between cost synergies and restructuring benefit, but normally even if you didn’t have that and you’re steering at 3% plus core growth in the business, you should see some positive fall through on the margin side. Maybe how are you thinking about that?

I think what we’ve indicated there Steve, as we think for this 20% to 25% is probably the right way to be thinking about that going into 2015. And obviously as we get to our operating planning, we’ll share far more detail on that and kind of margin targets for each of our businesses as we start the year next year in January. Steve Winoker – Bernstein Research: Okay, all right. Maybe I’ll be have a little more luck here, on the Cooper synergy discussion then. How is the, last time you gave us the, I think with slide 16 in Q2 and look through the annual pretax synergies, I assume there is no change to that thinking. But are you really seeing these revenue synergies come through, because you’ve got slower market growth, you’ve got the even the outgrowth that you’ve talked about it’s a little hard for me to tell whether you’re really getting some of these sales synergies?

No definitely, we’re really quite excited about it, and I think you see that and the comparison when you go to our electrical product segment, you look back over bookings just as your first quarter 6%, second quarter 6%, third quarter 5%, good on the peer numbers, the electrical industry and we obviously look at those pretty hard in terms of the core numbers. And you clearly see what we’re gaining, I think for those who are out there in the channel and have been at the major customer conferences. It’s pretty clear for those who are closely and they know we’re gaining and these synergies are coming through. There is no question about it. Steve Winoker – Bernstein Research: Okay, I’ll pass it on. Thanks Sandy.

Our next question comes from Ann Duignan with JPMorgan. Ann Duignan – JPMorgan: Hi good morning guys.

Good morning.

Good morning. Ann Duignan – JPMorgan: Sandy, can you just talk about as you look across your different businesses and you talk to your new chief economist, what does lower in oil prices do to each of your businesses, obviously there may be some upside to vehicles perhaps and maybe downside just some other business, just conceptually how are you thinking about that?

Ann, obviously there have been some forecast put out this last week and 10 days, which obviously people I think spending a little bit, we personally are not bought into the $75 oil forecast. But, having said that, with lower prices there are obviously oil prices there are couple of businesses that again, it takes some time for these changes to come through. But, obviously the vehicle markets that are enhanced by that lower cost, obviously will help the aerospace industry as well, because it’s lower cost there as well. We think it helps residential construction, because the consumer has more money. It helps utilities, because the utility cost go down, their cost of operation go down as well. I think within oil and gas, because the – I think the question in everyone’s mind is, how severely does this push back investment in oil and gas and awful lot of the activity is going on in oil and gas is actually downstream not upstream and the type of work that has to be done there and we’re really quite excited about our revenue potential in 2015 and 2016 in that particular area. And when you do go upstream you’ve probably seen some of those stuff that’s been published recently in terms of the number of rigs that have to be extensively we work as over 30 years old. I don’t think a relatively short-term change is going to have, and a short-term six to nine month is going to have a significant impact. So, I deal to your question, I think there are number of businesses that get a plus out of lower prices and we’re not a big consumer industry, we’re reading the same thing everyone else is reading. That people anticipating on lower Eaton costs that the consumer may do well both at the pump well there would be a close lower Eaton cost. That would be our general thinking. Ann Duignan – JPMorgan: Okay, on net-net more of a positive than the negative is that, if you’re going to 50…

I think for many of our businesses and I think on the issue as you know how long does it stay down, because obviously if it stays down for a couple of years. I think then you’re likely to have an impact on spending patterns by the major oil and gas and service companies. Ann Duignan – JPMorgan: Okay and then, thank you that’s good color. And then following up, your lighting strength, just a point of clarification, you said volumes was up 19% was that unit volume or is that revenues?

That’s revenues. Ann Duignan – JPMorgan: Okay, thank you. I appreciate it. I’ll get back in line.

Yes.

Our next question comes from Jeff Hammond with KeyBanc. Jeff Hammond – KeyBanc: Hey good morning guys.

Good morning Jeff. Jeff Hammond – KeyBanc: Just one last one on 2015, and I think maybe Rick touched on this at a conference, but how are you thinking about restructuring cost the $40 million you spent this year kind of going away versus, finding other restructuring to do?

I think we’ve been consistent on this Jeff, since we spoke last spring and announced our attempt to do that is, the $39 million that we’ve expanded, we said it was going to be 40 it turned out to be 39 in the second quarter, was a pull forward as some activities that we had not anticipated doing during 2015 when we started 2014, when we started our plan. Having said that, we’re doing restructuring all the time in our company and we would expect that we would continue to be doing that in 2014 and 2015, I think is just a normal part of doing business. We encourage people to think about the $35 million of benefit, but that the 39 would not go away i.e. that is part of the overall restructuring we do year-to-year. The only reason we call that out this year that was the change to our plan and once we had started the plan and we saw markets start to weaken. So, you should not take 39 plus 35 and assume that a source of profits next year. It would be the 35 on top of this year’s profits. Jeff Hammond – KeyBanc: Okay perfect. And then just on free cash momentum, can you talk about how you’re thinking about pension contribution, cash restructuring and working capital in 2015 versus kind of how it played out in 2014?

Yes, I think in terms of the pension Jeff, it’s a little early for us to be able to say per se, because the interest rates are, and discount rates are proving to be a little bit more volatile than we might have thought they would be. It would be less than we did this last year, but we’re not yet comfortable we know how much less. Rick, you want to add anything to that.

Well the other factor Jeff that you will know is Congress passed a bill that reduced the minimum required contributions for 2015. So it gives a little more lead way, but nonetheless still heavily impacted by the discount rate.

On the question of cash restructuring, our restructuring tends to be pretty close cash and profit impact and I think you may recall that we didn’t include the chart simply, because it haven’t changed. But that the anticipated acquisition integration cost in 2015 were 35 million and that’s our best thinking still at this point. So, no change in that regard, then you had a third element Jeff. Jeff Hammond – KeyBanc: Just working capital?

Working capital. Working capital as generally run above 16%, 17% of sales and so I think whatever your assumption would be of incremental volume next year that’s a pretty good number to assume in that regard. Jeff Hammond – KeyBanc: Thank you.

And our next question comes from Andrew Aylwin with BofA Merrill Lynch. Andrew Aylwin – BofA Merrill Lynch: Yes, hi guys how are you?

Good morning. Andrew Aylwin – BofA Merrill Lynch: Just a question Sandy, you sort of described the world where U.S. is out growing to rest of the world and it doesn’t seem like that’s going to change in 2015. And as you guys put your business plan, I would guess long-term business plan several years ago, where the world looked very differently and it was the international growth emerging markets on the industrial side that drove the growth. Are you guys giving any thought to long-term changes in your capital allocation i.e. shifting investment more to the U.S. changes to M&A strategy? What are your thinking about that?

And I think Andrew, you’re right whether your memory in terms of our view, and that was sort of pre-2008 and that once we came out of the recession, our view was that Europe was going to come back more slowly, because we really thought the amount of restructuring that have been undertaken, in the countries wasn’t sufficient to really put them on a growth rate. We thought that the growth in the emerging countries, because you recall that inflation took off so quickly they had to reintroduce much higher interest rates would be inconsistent. So, I would say on the run, we’ve been making that adjustment all during this time period. I think China will continue to be attractive it’s not going to grow the rates we saw before, but if it does grow it, it’s a 6% over this time period. That’s still going to be attractive, clearly geopolitical it has made Russia a whole lot less attractive. Middle East continues to be attractive to us, particular the oil and gas driven portions of it. Frankly, we had hoped India would be better, we think it will become better under Mr. Modi’s leadership at this point. I think there is some early indications that will begin to change at this point. And then I think the one that has been perhaps the bigger surprise in terms of how long it’s going on as Brazil and you’ve heard us speak about our own caution about Brazil in terms of what’s been happening in the economy and obviously with election not having resulted in a change. I think one have to assume that economy stays a slower grower than it had been pre-2008. But I would say, we’ve made those changes on the run, so I would say it’s not so much conclusion where reaching you at the end of 2014 and yes it does, it does impact both where we can grow, where we will grow and where we’ll put incremental capital. Andrew Aylwin – BofA Merrill Lynch: And just a follow up question on ag. It seems like the order book is being built right now for the spring selling season that doesn’t seem to be very strong. How long do you think until we hit the bottom, do we need to go through the full combined order season to really see where it ends up or do you think the spring selling season could be the bottom?

I think, we can’t give you a decimal point on this, but our best estimate is this takes more than one growing cycle to work its way through. When we spoke to this at the end of the second quarter, we thought it could take two or three growing cycles that’s not two or three years that can be 18 to 20 months. But and we don’t have any indication that of any newer data than that, I think what we’re seeing is that, as people become have gotten closer to their actual built schedule, we’ve seen them just not only here but, also in Europe. This is primarily a U.S. and European and to a lesser extent South America kind of impact, but big ag is cut back fairly significantly and coming off the peaks. We got to start to see those crop prices move back and you all know the crop price numbers they are a long way of the peak at this point. That’s going to take some time to get them back. Andrew Aylwin – BofA Merrill Lynch: Thank you.

Our next question comes from John Inch with Deutsche Bank. John Inch – Deutsche Bank: Thank you, good morning everyone.

Good morning John.

Good morning. John Inch – Deutsche Bank: Hey guys, hi Sandy just to trying make sure I’m understanding exactly what you are saying with respect to restructuring in the second quarter you took a sense of restructuring understand the context of pull forward. Just as we’re sort of building out models right I mean, are you planning to also take another 39 million in the second quarter, or is it kind of TBD in terms of spreading it around. So, it’s a question of is it still another 39 million, I think that’s kind of what you said and what we expect in the second quarter or spread sort of throughout the year?

I would say it’s a TBD, because just as if we were sitting in the fall of 2013, we would have been working through our planning of when we were going to do different actions. So, I can’t give you a specific quarter, but I think the way to – the way I would encourage you to think about it as we like I think most other large organizations are always working on areas and trying to improve the productivity and address issues that either on growing quickly or producing the kind of profit potential what we think are necessary. That’s all I would think about that number, and it will be during the year, next year, it don’t have a good enough feel right now we’ll be able to share with you, what quarter. John Inch – Deutsche Bank: Based on the strength of the U.S. would it be fair to say that if you were to pursue these actions, you probably are looking at your international operations or is it again that’s sort of too soon to tell us well?

I think a little too soon John, just because there is, we’re going to $22 billion plus company there are always areas we can work to get better. And so it could be, it will be outside the U.S. there could be some things we do in the U.S. as well. I just don’t have a good handle on our final prioritization yet. John Inch – Deutsche Bank: And just to this is a clarification, you mentioned Russia, the Russian economy looks like it’s falling apart, your exposure there is pretty de minimis is that correct even with the oil and gas side?

We don’t have, we have a exposure there in both our electrical business. So, that’s probably our biggest exposure there, but it’s not a big one, no. John Inch – Deutsche Bank: And then, the thing on the tax rate, I guess I realized there is a little bit of a black box element to this, but Rick you’ve alluded to and you guys reiterated this morning a 10% sort of tax rate placeholder into next year. I thought tax rates, number one, were going to be little higher this quarter. So, I’m just curious why they weren’t and secondly, just to understand why the tax rates, why would they hockey stick, why would they go from 6% to say 5 points higher in 2011 to get to the high end of your range?

Well you have a couple of things going on John and I mentioned this on an earlier call. In any given year you do have some one-off times that that enter into the tax picture and we have to expect it some of those this year and indeed they largely have occurred. Secondly, you have higher U.S. income and because, the U.S. is the fastest growing part of the world it does have the highest tax rate of virtually any country in the world. And so, it’s the lack of those one-time discrete items plus the higher U.S. income that is really pushing the rate up. Now mind you 9 to 11 is an overly high rate compared to most others. John Inch – Deutsche Bank: Okay, so but the so you’re saying Rick all of this is really just the impact of higher U.S. or is there?

That’s a big part of it. John Inch – Deutsche Bank: Okay. And then just the U.S. is up 7%, what got better in the quarter versus your expectations, obviously the performance was commendable, it’s consistent with what other companies are saying, I mean what kind of got better and do you think it’s sustainable as we roll into the next year?

To think from a geographic perspective it’s not that anything really got better or worse from, how we saw thought the world markets were, kind of it always felt like Asia, excuse me like outside of the United States was weaker than the U.S. I would say that the thing that is continued to be weaker that really reinforced our lowering the full year market growth from 3 to 2 is that South America has continued to be weak, no question. Europe I think we’ve all read the indication of – is it teetering on the edge of something a little worse than it’s been over the last couple of years. And clearly, it’s taken kind of a step back from one. I think the first quarter many people felt that maybe we are starting to trying to go up. I’d say those are the big two that had changed. China, the situation hasn’t changed much our sales have increased there, but you hear a lot discussion around whether it’s real 7% or 7.5% as well. I would say those are the two geographic areas. And I would say from what improved for us as I mentioned earlier was margins came in ahead of our expectations both in the electrical systems and services and in aerospace. And I think we have very attractive margins obviously in our vehicle market and our electrical product sector. John Inch – Deutsche Bank: Thank you.

Okay. Our next question comes from Julian Mitchell with Credit Suisse. Julian Mitchell – Credit Suisse: Hi. Thanks. You’ve mentioned many times that the U.S is better than all the rest of it. But, I guess it sounds like electrical globally, the market grows at a similar rate in 2015 as in 2014, and the U.S. or North America is over half of that business. And presumably in that region you are seeing better trends and utility you talked about, you have been pretty vocal about non-res getting slightly better. So I wonder, you factoring in that for an electrical that you get a steeper downturn in LatAm next year or a bigger slump in China or Europe?

I would say at this point Julian; we’ve not tuned next year’s forecast down into micro segments, the work that we have started doing right now. We just try to approach this kind of early view in the next year as I said. We don’t see drivers of significant change at this point from the way markets are behaving this year. And, so I don’t have detail, I can’t really provide you to tell – this one is sub-elements is going to move to another. Frankly, we were a little bit positively surprised that the utility business had a better tone to it here in the U.S. in the third quarter than we have thought. But I say, the rest of it has been pretty much as we had expected. And we have more obviously, as we get our operating plans; we are right in the middle of going through all those reviews with our teams right now. Julian Mitchell – Credit Suisse: Thanks. And then on the outgrowth is something you used to talk about more – the sort of 150 bps of outgrowth you have delved in for this year. Any reason that changes much or any reason why you might change the way you kind of present the outgrowth?

No, no that would be our expectation next year as well. Julian Mitchell – Credit Suisse: Thanks. And then hydraulics, as you said EBIT was down more than revenue I think year-on-year in Q3 because of destocking measures sounds like that drags them into Q4. I guess how far through that destocking are you now and you sort of – are you taking measures to ensure that really in the second half of this year the destocking is ring fenced?

Yes. And again it’s just – no one wants to interpret to your question, it’s not distributor destocking, which – this is our getting our own Eaton inventories down because we have seen the ag demand drop off. I think it really does depend upon how much more we see in terms of drop in the market. It’s a drop of that demand. They have obviously cancelled very significant portions of the forward orders that we have in our backlog. But, our hope is that we have seen the worst at this point. We will have to see as we work through the fourth quarter. As I mentioned our anticipation is seasonally, we anticipate slightly less volume in the fourth quarter than we had in the third quarter in our hydraulics business. This year we’ve had pretty modest growth in the overall market that’s our assumption for next year. So my hope is Julian that we have got a lot of that inventory correction done in the third quarter. I would guess, we would do a little more here in the fourth quarter. Julian Mitchell – Credit Suisse: Great. Thank you.

Our next question comes from David Raso with ISI. David Raso – ISI: Hi. Good morning. I’m trying to size your comment significant cash to deploy. I can calculate by the middle of next year, your net debt to trailing EBITDA is probably back at 2 maybe a little bit below 2. So to help it size them, just trying to think through your comfort level with leverage. So it’s the end of June next year, your leverage is down at 2 or less. What kind of capacity are we talking about, what kind of leverage are you comfortable running the company at?

As we said, Dave by consistently we believe the long-term positioning of the company should be straight A, but we realized, we first got to get A minus before you get there. And so the reality if to get to straight A, if you really ultimately think about that target you’d have to be about 1.5. But we aren’t saying we’re going to – we’re not going to do anything until we get to that 1.5 it’s a balance of course of rebuilding the balance sheet, paying down the debt, we’ve already committed to. And just to remind, the last installment of that $2.1 billion that we committed to the agency to pay down occurs in January 2016. And so if you think about the cash on the balance sheet at September 30th, we’re very close to $1 billion of cash and you think about cash generation in Q4 and then the cash generation next year is to relatively easy to see that and you also consider the pay down schedule that we’ve committed to is relatively easy to see that cash does accumulate and that’s what creates the optionality once you get to the middle of next. David Raso – ISI: Well, just to be clear, I’m just trying to make sure you all manage expectations on a significant comment. Again, the net debt to cap – the EBITDA being down 1.5 by mid next year, it doesn’t look likely just given the seasonality of the cash flow. So just to be clear, are we saying we can be down near that 1.5 by the middle of next year?

No, no we also have to factor in the pay down schedule of the debt which is about $400 million in the first half $600 million in the second half of next year. What we are saying though is that even factoring in the pay down schedule we will begin to accumulate more and more cash on the balance sheet and that gives the comment about optionality. And of course, we generate the largest part of our cash flow each year on the second half. And so we’ll start to accumulate as you get to the end of the first half and then we’ll accumulate much more during the second half of next year and so absent taking any actions acquisitions through purchases you would expect to see at the end of next year with the relatively better cash balance. David Raso – ISI: Okay. Just to quantify…

I would just add to comment Dave that and I recognize that how you’re trying to calibrate this and I’ll go back to what I said earlier is that by the middle of next year, we will be in the position to make decisions about deployment, it doesn’t necessarily mean what we do it at the middle of the next year. But, I think we’ll be in a position them having seen what the cash flow is and what the rate of improvement is that we can start to make decisions whether it’s M&A and/or are simply share buyback. You see now is that we have been in the market in the second quarter we were in the market in the third quarter. I think that reflects the fact that we do have some optionality around the edge, it gets bigger as we go forward. David Raso – ISI: Again, just trying to manage your expectations here. I’m just running these numbers. It sounds like it’s more of – we generate roughly $2 billion of free a $1 billion goes to dividends that extra billion now we’re thinking being a little more aggressive with it then necessarily leveraging the company up so just unclear on that.

That is correct. David Raso – ISI: That’s all I just wanted to clarify. All right. Thank you very much.

Yes, certainly.

Our question comes from Josh Pokrzywinski with Buckingham Research. Josh Pokrzywinski – Buckingham Research: Hi, good morning guys.

Good morning. Josh Pokrzywinski – Buckingham Research: Rick, just go back on your comment, I understand you might be new on the 20% to 25% kind of base incremental as we think about the framework for next year before we came to discussions about restructuring or throughput synergies. It seems like with the easy comp that you have on the ESS side and I think you’re signaling that you largely fixed the issues there. It seems like there might be another $40 million to $60 million of just easy comp there on margins, should we think of that as not being a component or being something outside of it or is that 20% to 25% really more like 20% because five points to that is just easy comp. Sorry, a lot of questions there, I think you see where I’m getting at.

Again, I would say that we will be in a fair better position to tune this guidance as we get into early next year. But I think for this purpose, I will go back to the markets similar to this year, the outgrowth that was asked earlier, yes we do expect that to happen and I would just – 20% to 25% plus there is two sources of additional profitability and we talked about being the additional cooper synergies and then the additional profitability that comes from the restructuring action we took this year in industrial. That’s about us as far as we can go at this point until we have our operating plans put together. Josh Pokrzywinski – Buckingham Research: Okay, that’s fair. And I guess just to follow-up on that, now thinking about 2015, but with the assessing the quarter and the progress you made, could you rank order kind of the things that went your way between pricing, productivity, synergies, raw mats, just kind of the rank order of that then, how that necessarily shakes out, kind of one our 4Q, what’s sustainable, what’s little bit more one-off?

Yes I think you recall there were three items that we had indicated that had led to the short fall in our targeted margins in the second quarter in our electrical systems and services segment. Those were freight and logistics there were some capacity resizing that we needed to do in the 3Q business, and there was bookings momentum, because we have had several quarters of weak momentum before that and price. They were about equal, we’ve said at that time, they are about a third, third, third in terms of how they contributed to the challenges that we have in the second quarter. And I’m really pleased, we made progress on all of them. So, we essentially got our fixed programs initiatives in place faster than we thought with greater effective, I wouldn’t say it’s any one of the three that is outsized versus the other. And as I mentioned earlier, we think they are absolutely sustainable going into the fourth quarter here at this point. Josh Pokrzywinski – Buckingham Research: Got you, all right. Thank you.

Our next question comes from Mig Dobre with Robert Baird. Mig Dobre – Robert Baird: Hey thanks for squeezing me in, sticking with ESS Sandy, I recall you saying that the bookings on the services side of the business were up something like 20%. Can you please confirm that and maybe talk a little bit about the drivers here, because I recall services sort of being core to the revenue synergy that you are talking about on a Cooper deal?

The – you are right on both elections. So let me do with the Cooper deal first, one of the four sources of revenue synergies in the Cooper transaction was that we felt that particularly for the power systems that was the business that we’re serving primarily utilities with, Cooper had not had an internal service organization. So, we’ve been in the process of beginning to service those customers with the existing Eaton service group that we have obviously in large to handle more demand. And we’re very pleased that momentum is becoming to pick up. I would emphasize again that was one of the sources of synergy, wasn’t the biggest one on the sales synergy, but that’s beginning to go quite well and you may recall that Tom Gross spoke to that little bit at the New York Meeting, this past February, early March. And things haven’t picked up as quickly than they have picked up now. So, thanks for bringing that point up. Secondly, on when we provided our guidance for the second half this year at the end of the second quarter, we had talked about that, one of the reasons we were pretty bullish on the opportunity to have a significant increase in second half over first half, electrical business was that in the last two years, we’ve had some budget in our option happened on our Washington, which is tend to shut down federal spending. It was our anticipation that would not happen this year, because of the mid-year election and then indeed it has not and as a result we’re seeing more of this business like services, significant federal installations continuing through this fall. So, that’s indeed laid out pretty much as we thought and we’re seeing the bookings and the orders for doing that. Mig Dobre – Robert Baird: That was great. And I guess my last question would be on aerospace, aftermarket starting to pick up a little bit is this a one-off or may be the start of a trend here?

And thanks for the question, it is we think the start of a trend, but what we cautioned at the end of the second quarter, I would say now as well as that it took three years for the percentage of aftermarket as a percentage of the total business to decline 5 to 8 points. I think it will take a couple of years for to go up a couple of points. We did have a very nice quarter in terms of shipments of aftermarket accelerating. But I don’t think that talks us right back for the kind of 17% margins that we experienced when the overall aftermarket was at higher level in within a year or so. I think this takes a couple of years to come back, but I think it is the start of a more positive trend in that regard. Mig Dobre – Robert Baird: Wish you provide you with some tailwind hopefully into 2015.

Well I think probably, even bigger as you get into 2016, because it takes sometime for this, the kind of work that’s way through. Mig Dobre – Robert Baird: Great, thank you.

Our next question comes from Andy Casey with Wells Fargo. Andy Casey – Wells Fargo: Thanks a lot, good morning everybody.

Good morning Andy.

Good morning. Andy Casey – Wells Fargo: A lot of question has been asked, so I wanted to bring it back up to 30,000 feet type thing for you Sandy and ask a fairly broad question about the U.S. economy. Your first look suggest growth is going to be better in that region than the rest of the world, but really not to expect, the signal is not to expect I think growth acceleration in 2015 despite some of the early cycle U.S. markets acting pretty well, but overall growth really not gaining momentum. So, I wanted really to get your view on why we are likely going to continue to be in relatively steady growth environment as it, is it a function of capital restrict, because of lingering lesson learned during 2009, do you think it’s related to export market driven business uncertainty dragging on the overall growth or is there some other factor we should consider?

I think you said on a number them, and clearly one was roughly a quarter the economy tied to export the, our biggest trading partners are doing particularly well right now. And so I would say that, that is one element. I think the second element is that, obviously the countries has not yet come to grids with its deficit, well we’re laying it on in terms of the debt at a lower rate than we were, we’re still running a significant deficit. And that tends to anchor economic growth to a certain degree, so that each time we start to run all faster we start to running those budget issues if you will. A number of the markets that had done quite well over the last couple of years and certainly a number of the retail oriented places, it’s hard to see them grow quite as quickly as they had. And so, I think that’s part of the reason when you put it all together and we’ve not done the final tune up on this. We think it’s more likely it grows at the current level or slightly better here in the U.S. that we’re not back at kind of 4% to 5% growth in the U.S, where we’re more of a 3% number. Each of the last four years the fed is had to revise down their growth rate and we’re aware that there is, there is sort of, as I mentioned this anchor on the economy. Hopefully we’re wrong with that Andy and we can scramble up, but that’s our best thinking at this point. Andy Casey – Wells Fargo: Okay, thanks. And then just really two quick questions, within ESS, you mentioned pricing improved sequentially from Q2 does that imply the price pressure that you saw in Q2 is gone or is it just lesser factor?

I would say, the pricing and the bookings backlog were coupled in my comment, you may recall that the second half of 2013 and the first quarter of 2013 were very weak quarters of booking for us and that the booking, the quarter before as a big influence on the next quarter in this business, because it is a backlog business. So the fact that we had weak loads which meant, that we didn’t have as much utilization in our factories coupled with competitive pricing that really led into that second quarter challenges we had. We now had a couple of very good quarters of booking, I think the pricing tone feels a little better than it did in last winter and early part of the spring time, so the two together are what we are hoping to have really happened and we got that put in place. Andy Casey – Wells Fargo: Okay thanks. And then lastly on Europe outside of farm equipment and auto, can you discuss any view about incoming orders related to European industrial demand, is it flat, down or up?

Little different by country, and I would say that the disappointment I think in this early fall into late fall has been Germany where early in the year things look a little better and they clearly flattened France there has never been start on this regard. Some people are speaking about Italy being a little stronger, we’ve not seen too much of that not much of a change in order in the UK at this point. Andy Casey – Wells Fargo: Thanks a lot.

Our next question comes from Eli Lustgarten with Longbow. Eli Lustgarten – Longbow: Good morning, thanks for letting me in. One quick clarification there were drop in corporate expense we saw in the third quarter, is that a new ongoing rate or one-time?

So I think for this year, we’re assuming, because we didn’t show an increase in that fourth quarter that it’s the rate for the remainder of the year. Eli Lustgarten – Longbow: Okay, and your outlook you said it would be plus minus you put electrical basically in not much difference. The U.S. market people had to product you up 8% we feel a lot of strengthening in North America and then in the U.S. in particularly in electrical products going forward in the non-res spending component, your reason that nothing much changes and that’s where to be a lot weaker or is there a chance that we can get a lot better results in electrical next year, than you sort of indicating?

Well, I think it’s really going to depend upon as we tune up our economy view what these other regions of the world look like, because Europe obviously is weaker and that’s not contributing the growth at this point. But, we do expect, we continue to get the strong out growth as we’ve indicated and but, I think that base kind of you for the U.S. is kind of a 3% growth rate. Eli Lustgarten – Longbow: And hydraulics with the big drop in ag is going on, we continue to see the pressure out to next year. Is it 12% operating margin sort of stabilization point we’re looking for in hydraulics as we go forward, this point you indicated fourth quarter be little better, so it seems to be at that point that we can manage with ag that weak?

Yes. In ag and those of you who follow their business for sometime, it should be hydraulics know that profits are always stronger in the first half or in the second half it’s a bit of a seasonal in that business for us. And this year, we’re saying we think profits coming around 13% this year. And we think that likely that we can get to margins that are kind of in that range next year or little bit stronger, but it’s, we’ll have a better feel for once we complete our profit planning work. Eli Lustgarten – Longbow: All right. Thank you very much.

Then our last question today comes from Joe Ritchie with Goldman Sachs. Joe Ritchie – Goldman Sachs: Thanks for squeezing me in guys. And I only have one question. I may have missed this earlier Sandy, but have you talked a little bit about your October trends and kind of the cadence as you went through Q2, Q3 and into this quarter? And then I know that you’ve said that truck seems like pretty good news today, I’d be just curious to hear it across your different businesses.

We don’t have October numbers yet and Joe, so it’s more of what I would call anecdotal discussions under these facts, but and that’s how I would treat the truck information as well too. There is a lot of buzz out in the marketplace that October is going to be a very strong month of order bookings. Generally, what we’re hearing in our electrical businesses is a very much continuation of the strength we saw in September as well, not much has changed on the side of the ag side as it’s still pretty much working through this, there are lower anticipated shipments next year which means lower production for us right now. So and aerospace tends to be, recall a longer cycle business so not much change there. So, I would say we feel pretty about the overall feel as to where we are in our electrical business. We work our way through hydraulics which again remember that’s about 12% or 13% of the company. And the vehicle sides whether you’re about the truck or retail sales of cars and I think people respond to the lower gas prices there really quite good so, strongest again in the U.S., weaker outside the U.S. Joe Ritchie – Goldman Sachs: Okay, great. See you guys in a couple of weeks.

Thank you very much for joining us today on our call. As always, we’ll be available for follow up questions for the remainder of the week. Thank you.