Alexander Cutler - Chairman and Chief Executive Officer Richard Fearon - Vice Chairman, Chief Financial Officer and Planning Officer Donald Bullock - Senior Vice President of Investor Relations

Steven Winoker - Sanford C. Bernstein Joe Ritchie – Goldman Sachs John Inch – Deutsche Bank Ann Duignan – JPMorgan Stephen Volkmann – Jefferies & Co.

David Raso - ISI Group Jeffrey Sprague - Vertical Research Christopher Glynn – Oppenheimer & Co. Nigel Coe – Morgan Stanley Andrew Obin - Bank of America Merrill Lynch

Good morning. I am Don Bullock, Eaton's Senior Vice President of Investor Relations.

I'd like to welcome you all to our second quarter 2013 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO; and Rick Fearon, Vice Chairman and CFO.

We'll begin today's call with comments from Sandy and we'll follow up with questions for the question-and-answer session. Before we step into the presentation I would like to take a moment to draw your attention to the statement on page two of our presentation.

Our presentation today contains certain forward-looking statements. Comments on page two in the presentation will outline the series of factors that could cause those actual results to differ from the statements.

Those factors are also noted in the press release and in the Form 8-K. Additionally, we have a number of non-GAAP measures in the presentation as defined by SEC rules.

A reconciliation of those measures and the most directly comparable GAAP equivalent can be seen on our Investor Relations website at www.eaton.com. At this point, I will turn it over to Sandy.

Thanks, Don, and good morning everybody. Thanks for joining us.

I am going to walk through the packet of information that we posted in terms of our earnings presentation. So I am turning to page three to start.

And just before I comment on this page, I will spend a little longer time this morning talking to our view of end markets because obviously they have had an impact on our guidance for the year, and so I will come to that in a moment. Let's start on page three, titled highlights of the second quarter results.

And I'd just remind everyone that this is a second full quarter of our results reflecting our acquisition of Cooper Industries. Operating earnings per share of $1.09 that compared to our guidance for the quarter of $1.05 to $1.15 and the consensus of $1.11 as of the last night.

Our sales were $5.6 billion, up a very solid 38%, and that's about up 5.5% from the first quarter. And you'll recall that our guidance when we left the first quarter and were giving guidance for the second quarter, was that we expect our sales to move up seasonally about 7.5%.

We had said between 5% and 10%. So we came in slightly short of that.

We are really delighted that in spite of the market weakness that drove that miss in sales, we had all time record quarterly segment operating margins of 15.6%. I think if you've had a chance to look through the pack, you'd see in a really strong performance across our businesses.

Strong operating cash flow, $609 million. And that our Cooper integration remains ahead of schedule.

Really pleased with the progress our teams are making in this regard. So we've increased our 2013 synergies by $25 million to $115 million, and I'll comment a little later on the fact, on our view on 2014 and 2016, both which have moved up as well.

I think what obviously is allowing us to do is these cost savings are helping to offset some of the market weakness that we're dealing with. It really allows us to make some progress by controlling those issues we can control when the markets are a little bit weaker than we anticipated.

If we turn to page four, just a quick reconciliation to our second quarter guidance. You recall the midpoint of our guidance was $1.10.

We had about $125 million lower sales than we had anticipated. That's the difference between the 7.5% and the actual achieved 5.5% growth from the first quarter.

That drove a negative $0.08. Higher incrementals, you saw the very high segment margin is 15.6%, a new quarterly record for us, up about $0.04.

And the tax rate we’d said would be around 10% when we gave our guidance and it came in at 7%. That was about $0.03.

So all in all netted about $0.01 short of where we had thought we would be coming into the quarter. Now if we compare the first quarter to the second quarter, and I think this is where it’s perhaps easiest to get a sense for rate of the progress, because we do have some difficulty comparing year-to-year because of the size of the Cooper acquisition, the first quarter you recall our operating earnings per share, I’m on slide five, was $0.84.

We had higher seasonal volume, about $290 million higher. We were at $5.31 billion in the first quarter, $5.6 billion in the second quarter.

So that's that 5.5% I’ve referred to a couple of times. That drove about $0.19.

We didn't have the inventory charges from the purchase price adjustments that you recall that we had in the first quarter. That was about $33 million you recall in the first quarter.

That did not repeat and it won't repeat going forward. That's a positive $0.06.

Our margins improved from 14% in the first quarter to about 15.6% here in the second quarter. And so that drove about $0.05 and this improvement beyond the normal 33% incremental that we talked about this year and also the additional synergy, which is on the next line that we incurred as we're continuing to ramp up our synergy savings from our acquisitions.

And then the tax rate was little higher here in the second quarter, about 7% versus 5% in the first quarter. And our corporate expenses increased as we had indicated they would up to a total and I’m including pension in this category of about $85 million or negative $0.04.

So that's the reconciliation of how we get from $0.84 to the $1.09. Turning to page six, a quick look as we try to compare ourselves back to last year the second quarter.

If you recall last year we had $1.15. The higher acquisition volume above $1.6 billion drives about $0.66.

Our margins were higher. Last year they were 14.7% of the segment level, this year 15.6%.

Our tax rate was a little lower, 7% this year versus 8.7% last year. And then you get into a couple of the items that are directly related to the acquisition financing.

A higher number of shares were about 476 million shares this year. We were about 339 last year.

Purchase price accounting and amortization, that's about $66 million. That's a negative $0.18.

Higher interest as you can see looking at our income statement of about $41 million. And then slightly lower core volume there of about $90 million lower volume in terms of core as the markets were weaker this year.

That's the reconciliation. And we know it's a difficult one for you to follow with all the puts and takes because of the acquisition and the associated financing and accounting.

Let's move to chart seven, a quick summary. You’ve seen most of these numbers already in our press release.

Sales versus the first quarter were up 5.5%. You see a very substantial increase in the segment operating margins from 14% in the first quarter to 15.6% here in the second quarter.

We think really good sequential progress in the business. Turning to the individual product segments, let's start on page eight with the electrical products segment.

Versus the first quarter when we had sales of $1.66 billion, sales are up approximately 6% from the first quarter. You see the very substantial margin progress, up to 16.2% from 14.7% in the first quarter.

Large contribution here obviously from the acquisition and this is all Cooper in this particular segment. And then you recall, if you try to compare the second quarter '13 to the second quarter '12 numbers, you recall of course that the Cooper numbers are not in the second quarter '12.

What I would tell you when you look within both the Eaton legacy and the Cooper legacy businesses, is we made solid progress in terms of margin improvement in both streams of revenues. So, really, very pleased with the revenue performance here, bookings up 2%.

Markets, not probably a surprise to you, stronger in the U.S., Middle East and Latin America, weaker in Asia Pacific and Europe, and I will come back and comment about that when we talk about our forward look. As a result of this very strong performance here in the quarter, we are raising our segment margin to 16.5% for the full year versus our original 16%.

So really strong margin performance, integration performance here within the segment. Turning to page nine, our electrical systems and services segment, compared to the first quarter of this year, first quarter of 2013, we had sales of $1.521 billion.

And so as you see, our sales are up about 7% compared to the first quarter, margins are up 14.7% versus 14.1% in the first quarter. When you compare, again, back to the second quarter of '12, we have the same issue here that the Cooper products were not included in 2012, they are in 2013.

Again, very solid margin progress in both streams here. The acquisitions that you see contributing 78% to the sales, that is the Cooper, Rolec and Gycom acquisitions.

Once again very strong margin performance and as result we are raising our segment margin guidance from 14% to 14.5% for the full year. If we turn to hydraulics, compared to the first quarter of 2013 when our sales were $756 million, sales are up 2% sequentially.

Margins up very strongly, 14.5% compared to 11.9% in the first quarter of this year. The acquisition numbers you see in terms of contributing 10 points to the sales, that is both the Jeil and SEL Polimer acquisitions.

And I think perhaps the most important in terms of trying to understand the pace of this business, let's look at the bookings and drill down just a little bit in this area. Bookings were down 12% versus the very strong second quarter of last year.

And when you look within that, I think probably not a surprise in terms of the complexion. Distributor sales were down for us on the order of about 9%, OEMs down on the order of about 16%.

And when you drill down within that, no surprise, the larger weakness continues to be on the mobile side of the market where it was down about 18%, whereas the stationary side was only down about 8%. Looking around the world, probably not a lot of surprises in this regard too, is that we have not seen a snapback in Asia Pacific at this point.

Europe continues to be weak and the U.S. is weak at this point, really led by the weakness on the construction and mining side.

Turning to page 11, aerospace. First quarter sales were $434 million.

So our second quarter sales of $446 million were up about 3%, again very solid margin performance here, 15% in the quarter compared to 14.3% in the first quarter. Bookings up about 5%, not a surprise again.

I think here really driven by the strength of the commercial OEM market. Aftermarket remains weak, and you'll recall that we've said that we thought the first half of this year would be choppy in the aftermarket.

Our expectation is it'd begin to stabilize in the second half of this year. Very solid quarter in terms of margin performance and top line performance.

Turning to page 12, the vehicle segment. First quarter 2013 sales were $939 million.

So $1.2 billion here in the second quarter of '13, up 7%. Operating profit, again a familiar story by now, a very solid quarter.

Really an exceptional 17.2% operating margin compared to 14.1% in the first quarter. Of the big change here, and you saw it in our commentary and our press release, is that we have reduced our NAFTA heavy duty truck production estimate for 2013 down from 270,000 units to 260,000 units.

And just to anticipate a question, yes, we do still think the second half is stronger than the first half in terms of that layout with the first quarter this year having been about 55,000 units. The second quarter about 66,000 units.

The third quarter, 68,000, is our forecast, fourth quarter 71,000. Those are all NAFTA production numbers adding up to 260,000 full year forecast, down 10,000 units from our earlier forecast.

If you turn to page 13, I think this really becomes the heart of our discussion with you today. And to anticipate questions, let's spend a little bit more time on this particular chart than we might ordinarily do so.

And before I get into the specific numbers, let me give you the backdrop to our thinking about what's happening globally in terms of economic. We know there’s been a rush of data in the last couple of days that has seemed quite positive.

We'd like to put it in a little bit broader perspective and maybe a setting that is I think anchored by if you simply look at U.S GDP in the second quarter which you saw reported this week at a 1.7%. I think that many have not concentrated upon is that the manufacturing industrial production number was 0.1.

So virtually no growth. And so as we look around the world, I give you a quick rundown how we think about it.

We've obviously changed our full year market growth guidance to 1% from the guidance we gave you at the end of the first quarter which you recall was a 2% to 3% range headed towards the bottom of that range. We think the global economy is trending up slowly, but it is a real mix of positives and negatives.

And we don't think we’re being dower. We think we are being realistic in this regard.

U.S. is plodding.

Europe may be at a bottom, but we see a little prospect for a lot of vigor in a prospective recovery at this point. And the emerging nations continue to be a mixed bag with China, India and Brazil probably being good examples of halting progress.

We do not see a major catalyst for a change in the second half of this year. If you think about just a couple end markets, construction is mixed in the U.S.

That's flat, perhaps declining in Europe. Capital equipment is rising moderately in NAFTA and elsewhere.

Most global vehicle markets are improving. And the EU decline and the slope is beginning to flatten.

But U.S. Defense and government spending are clearly hamstrung by the sequester and fiscal challenges.

As we look here in the U.S, in Canada we see strong residential construction, a weaker non-residential construction than expected earlier in the year. Weak construction equipment, we've seen indications of that over the last couple of weeks.

Weaker general industrial demand. I think you've seen that from a number of companies who have announced here.

The utility demand is weaker than it was a year ago, particularly in the distribution segment. We see flat to weak heavy duty truck demand.

I spoke about the government issue. And then we do see data center demand strengthening, both at the high-end and mid-end, particularly in terms of prospects for the second half of this year.

If we go to Europe, I think many of us were surprised with the high side PMI surprise that we saw on the Eurozone. And we are hopeful, that means that we're seeing the economy flatten.

But that's one month. That's not yet a quarter or two quarters.

And in Asia Pac, I think most people were shaken by the China PMI's downside surprise after a number of people have felt they saw that market significantly increasing. Demand continues to flow in Australia.

In India I think we see it’s a story of reduced growth from what we were used to several years ago. So as we look at all of this, we think it's a fairly realistic appraisal at this point in terms of a 1% growth rate in terms of our end markets this year.

And GDP here in the U.S, for many of you who follow that in close order, being below 2% this year. And so not a huge change from where we've been in our forecast, but I know it stands in some stark contrast to the very bullish numbers that have come out in a number of areas until people saw jobs today.

And I think as people start to concentrate on the industrial production, we see the growth here in the U.S is primarily on the consumer side, not the industrial side. And let me bring us back here to page 13, which is our attempt to provide you some insights into our end markets as we see them by each of the segments as we report them.

So if you take the two electrical markets together, we had been talking about the electrical products index growing at 3% in total and the electrical systems and services index growing at 4%. And so as you can see these have come down a couple of points.

And let me talk to you just about a couple of the places and let me do this by end markets. And so if we talk about for both electrical products and electrical systems, our view of the European markets is that they are going to be down on the order of about 2% this year, and that Asia Pacific will be up about 3%.

That is a little weaker in both areas than we have thought earlier this year. Here in U.S., our view is the utility markets will be down on the order of 4%.

Non-residential construction will be up 2% to 3%, now that's weaker than we thought earlier in the year when we said 4% to 5%. Residential, I think we are all following, we think continues to be a strong number up about 12%.

General and industrial about 2% and power quality down too after a very, very weak first half and then strengthening into the second half. That's our view on the electrical business at this time.

The hydraulics business, not a big change from our earlier forecast. We had been forecasting the hydraulics index in the U.S.

will be down 5%. We weakened the index outside of the U.S.

from a negative 3% at the end of the first quarter down to a negative 5%, anticipating that Europe is down about 4%, Asia is down about 7%, and Latin America down about 3%. In the aerospace side after we've taken up our view here, really because the commercial story here in the U.S.

continues to get stronger. The only real change we've made here is that we're talking about aerospace kind of a 9% up instead of an 8% up in that market.

And outside of the U.S. we went up from 4% to 5%.

So overall aerospace increased from 2% to 3%. In the vehicle area, really two I think salient changes here.

In the U.S., growth number where we had been at 1% positive growth were at negative 3%. And really the main issue here is our reduction of the NAFTA heavy duty truck business.

If you go outside of the U.S., a little stronger. We had thought it would be about 3%, now we think it will be about 4%.

And the real issue there is that we have seen Latin America growing less than 10%. We now think it may grow as much as potentially 18% as we are seeing quite a recovery in the Latin American markets.

So when you step back from all of this instead of seeing our markets in the U.S. grow at a 2% to 3% number, we think they will be about flat.

Instead of our feeling that non-U.S. markets will grow at about 2% to 3%, we think that they will be at about 1%.

Putting that altogether you get to about 1% growth for our end markets. Now the bright side of this entire picture.

When you turn to the next page which is where we talk about margin expectations, is that we take our largest business, our electrical business, and move the margins up by 0.5 point. I think you have seen the demonstration of those margins in the first quarter and you have seen very strong margin performance in our hydraulics, aerospace and vehicle businesses, which I think give great credibility to those numbers we have -- I refer our guidance in terms of segment margins for the balance of the year.

So, overall, our margins will go up from the 15% earlier guidance to 15.25% for the full year. Second part of the strength of this story is it's not simply the productivity in the business nor the 33% incrementals that we're exceeding that we've provided as our guidance this year, but we're also off to an even faster start in terms of our Cooper integration savings.

You may recall, we have originally increased -- we started this year with our synergies at $75 million for operational synergies, at the end of February we moved that to $90 million, we are now moving that to $115 million. So up $25 million from our most recent guidance, up $30 million in 2014.

And when you go out to 2016, up $35 million now a total of $440 million. And we have increased those acquisition and integration costs you see at the bottom by $40 million in 2013 and $30 million in 2014 as we're pulling some of these actions in more quickly.

Obviously the question is, where is it going better than we thought. It's primarily in SG&A savings and some facility consolidation, additional work that we gave you a little bit of an indication.

We thought there was some more potential of when we had our early March analyst meeting. So I think very solid performance here.

If we turn to chart 16, our operating earnings per share and net income forecast for this year. If you look at the top number there are $4.05 to $4.25 in terms of our operating EPS full year guidance.

There is no change to the bottom-end of that range. That was the $4.05 that we have provided this year.

We did reduce the top end by $0.20 as we are seeing these markets to be weaker. We are able to hold the lower end because of all the productivity, cost savings, good incremental work and better synergy savings that were occurring this year.

Our third quarter, $1.05 to $1.15 in terms of our guidance from midpoint of $1.10. Then on page 17.

If I could take you through this somewhat busy chart in terms of our operating EPS guidance for this year. I think I can simplify this with you for a couple of comments.

And so let me do that. On the acquisition line, the $2.66 is up $0.18 from our last guidance to you.

And that's the addition of $25 million of integration savings this year that's moving from the 90 to the 115. And it is higher base productivity in the Cooper, Jeil and SCL businesses.

The businesses are running even better than we thought they would, so up $0.18 there. The organic growth at 33% incremental margin.

No change in the incremental margin. But the volume is down of what we provided you earlier of some $900 million was our earlier estimate.

We brought that down to 350 and that is the impact of reducing these overall markets. That's down $0.45 from what we provided you at the end of the first quarter.

In addition to expense control, this is additional productivity and cost saving work beyond the integration savings and beyond the 33% incremental, about a positive $0.15. It’s about $55 million and I think that those are the actions that we've been able to take and our teams have been able to achieve across the company to maintain profitability during a period of reduced market demand, really good work there.

So the total of that top group is a negative $0.12. The higher number of shares, the $1.47 is $0.02 better than our previous estimate.

So when you net the negative 12 up top and the $0.02 there, that's how you get the $0.10 reduction from $4.25 to our guidance now at the midpoint of $4.15. If we turn to chart 18, this is a comparison of the second quarter of this year to the third quarter of this year.

It supports our guidance of $1.10 the midpoint. We start with $1.09 that we’ve reported for our second quarter of this year.

We're anticipating higher seasonal volume but it's pretty nominal. It's about $75 million, again reflecting the fact that we don't see an accelerating economy.

That's taking again another 33% incremental gives us about $0.05. Additional acquisition synergy as it continues to ramp up quarter-to-quarter through this year of another $0.01.

We're anticipating a slightly higher tax rate in the third quarter of approximately 9%, versus 7% during the second quarter. That's negative $0.02 and higher corporate expense of about $15 million.

So, it will be a total of about 100 million and I’m including in here our corporate expense pension and amortization. So that total is about $0.03 and that gets us to the overall $1.10.

So if we move to chart 19, chart 19 is simply a summary of our outlook. You'll recall that the $350 million of core revenue growth compares to the $900 million in our last guidance we provided you.

No change to the $6 billion of net acquisition revenue. No change to the incremental margin of 33%.

No change to the tax rate of 7% to 9%. The change to the operating EPS full year forecast is simply at the high end of the range.

It came down from 4.45 to 4.25, our first guidance for the third quarter. And operating cash flow in light of the weaker overall volumes coming from the lower market this year, both the operating cash flow, both at the lower end and the higher end have been reduced by $100 million.

You notice the free cash flow has only been reduced by $50 million at both ends of that range. That's due to fact that we've reduced our CapEx this year from $700 million to $650 million.

And then finally, if we move to chart 20, the final chart in this packet. Just a quick summary of I think the themes that you've heard me refer to as we went through this.

The markets started off weaker if you recall. We were down with organic growth about 4% in the first quarter, 2% in the second quarter.

And they remain weaker than we originally anticipated. I went through in some length those markets to try to give you a granular feel as to how it supports our thinking.

Secondly, we’re really very pleased that we’re delivering higher operating margins, higher than expected in terms of our segments by 0.25 point. You saw specifically we took them up in our two electrical segments and continue to have very strong performance across our industrial businesses.

And then we're also very pleased with the terrific work that our integration teams are doing and specifically here. We’ve increased both the full year 2013 and each of the future years 2014, '15 and '16 forecasts for increased savings.

And so as we think about the quarter, it's a quarter all about controlling what you can control. And we can't control our end markets but we can certainly control our segments in terms of our operating margins and the productivity work and the integration work.

And I hope you see in the results that we have chosen to pull forward a number of these integration activities as markets have been weaker. That's allowing us to get at these synergies more quickly and the $55 million of additional savings this year that are not related to the acquisitions and they are not related to the 33% incremental, I think are an indication of the effectiveness of all that productivity and cost control work in a period of weaker demand.

So I hope we have given you a little bit more of a granular understanding for our thinking around markets because we anticipate that's where a lot of your questions may be this morning. And with that, Don, I'll turn things back to you.

If you would, operator, will give you some instructions regarding the question-and-answer session.

Our first question this morning comes from Steven Winoker with Sanford Bernstein.

A lot to cover here, but just maybe first on the outgrowth versus the markets. You've talked obviously a lot about the market weakness that you experienced.

But traditionally you've given us a very good flavor on how you think Eaton has done relative to those markets. Could you maybe provide some color across the portfolio about how you think you did on a relative basis and why?

Yeah, Steve, we indicated in our first quarter of this year that we would not be providing quarterly breakouts on that during this year, we will do so at year-end. And really the reason why, so we have got a number of new businesses and a very large number of data streams, that I can tell you with what's just been issued this week in terms of the rebasing of so many of our traditional data streams.

It's very difficult for us to do that on a quarterly basis. So our sense is, I can tell you across our businesses, that we're doing well on these businesses but we don't have an ability to quantify it this year.

Okay, all right. Maybe talk a little bit about what you are seeing in non-res specifically.

I mean you talked about it being weaker than your prior expectations, what do you think is driving that? What are you anticipating?

Are you seeing seen any inflection points there?

I would say not an inflection point but I would say, certainly on the government side, on those projects that are government financed, you are seeing a negative number in that segment. And so the private put in place, if you will, is stronger than this 2% to 3%.

But you are seeing a government side which is in the order of sort of a negative 5% to 6%. And that is providing, I guess I would say some downward pressure on that.

We see a lot of projects being talked about, a lot of projects being bid. But there are some caution, I guess I would say in the marketplace, that I think is very much what we are seeing broadly across our businesses here in the U.S., where people aren't quite sure how they really continue to invest in a GDP that's clearly not going to reach 2% this year.

And so I think that degree of caution while you find individual segments where people are very bullish, you will see other areas where people are really kind of biting their time. And so I'd say it's not a lack of projects on the drawing board or projects that are being bid, it's really more kind of getting them released to moving them forward.

Okay. And before I hand it off, could you maybe give us a view sequentially in the third quarter by business unit, sales and margin.

We don't go into the specifics in terms of our guidance, in terms of -- but I could tell you from a historical point of view, generally you have seen vehicle markets have a third quarter because of some of the shutdown period that's a little weaker than the second quarter. Generally, the second and third quarter are your stronger electrical segments of the year with the fourth quarter then being a little weaker and the first quarter being the weakest.

Aerospace tends to be fairly consistent through the year and hydraulics generally is a little weaker in the second half than it is in the first half. Those are sort of the patterns of how it normally lays out.

And that's why you have assumed more or less...?

Yeah. We have not -- the one business that I think you have got a little difference in this is, and we talked about at the end of the first quarter and it is still true with our 260,000 units forecast, is the North American heavy duty truck market from those numbers I have provided, we do expect ramps up during the third and the fourth quarter.

And as we have talked with many of you over time, the critical element there is really seeing the orders come in and we did see some weaker order patterns here at the back end of the second quarter in that business. That's the reason we had dropped our forecast by 10,000 units.

Our next question comes from Joe Ritchie with Goldman Sachs

So as I think about the cadence for the rest of the year and what your guidance implies, it looks like second half versus first half you’re looking about a $0.20 increase in EPS at the midpoint of your guidance. And I think some of it is going to be seasonality.

But clearly the cost outs are also increasing in the back half of the year. So perhaps maybe you can provide some color on how much of that increase is expected to come from the cost outs versus seasonality versus volume improvement.

As you can tell by our guidance, Joe for the second quarter of only up $75 million on a $5.6 million base, we're not counting on a lot of volume here in the second half. And we just think in this marketplace we’re better to manage our business assuming that the markets aren’t going to get a lot stronger.

We do get obviously higher integration savings are one of the largest drivers here in the second half. And that's very much within our control.

I did mention that in the third quarter we're going to see higher taxes. We're also going to see higher corporate expense and that will play out in our own guidance we think in the fourth quarter as well.

So I’d say that the two issues that are tugging at another is not a lot of help from higher volumes in the second half. We will drive our own additional higher profits from our integrations and productivity work and that will be offset to some extent by the higher taxes and the higher corporate expense.

And prior to that higher corporate expense, for those of you who have gone to the balance sheet already, is that our intangible expense coming from these acquisitions is going to be a little higher than we originally anticipated, being offset in some other areas. But that's going to flow through here in the second half.

So I'd say those are the elements that tend to push one on other.

That's helpful. And as it relates specifically to the cost synergies, it seems like you have $0.01 incremental benefit this quarter.

You're expecting $0.01 next quarter. Is the fourth quarter supposed to be a big quarter?

As I was tracking I thought you guys for this year had about $35 million that you’ve achieved thus far and I think the target for this year is 115. So I just want to make sure my numbers are right.

No, I’d say we’re in the order of $35 million to $40 million here in the first half and then the balance out in the second half. And that's why I say we do get a positive from the integration benefits and it's the largest portion of what drives higher profits from the second half

And one last question. I think it may be too early to start talking about '14, but perhaps maybe you can talk about some puts and takes.

It seems like the cost outs alone a lot about $0.18. Clearly at this point there would be a pension tailwind.

But any puts and takes as you see it today as we head into '14?

Yeah, I'd say the only that we’d be really comfortable talking about yeah because it's a little early to get to '14 is that clearly we're going to get the integration savings that we talked about and that is a positive. You saw that we did increase it for next year as well.

So that is a positive for us. And I think as you stay back and think about the economic situation, for those of you who think Europe has already turned up, we're not yet in that mode.

But at some point out of this very still situation that’s been there for a couple of years, we're going to turn from a negative to something being more stable. And for those who are most optimistic, maybe very slightly positive.

China has been going through a real digestion period. We think that continues, but at some point that begins to stabilize as well.

And we think we're in a period of time where until you solve the fiscal issues here in the U.S, you've got relatively low growth similar to what we’ve been facing the last couple of years. So we think most likely we're in a period of time here for global economies that you don't get the propulsion that we got used to many years ago a lot of emerging nations because they've got some issues as well.

So it means you've really got to find a way to create your own sources of profit growth. And that's why we're really pleased that all the work that's going on in terms of increasing margins, whether that be from higher productivity or from the integration of these acquisitions that we've completed last year is really providing that opportunity.

Our next question comes from John Inch with Deutsche Bank.

So the magnitude of the end market revision, one, it’s not really that surprising and it's not a big number. But it does come only three months later and it's not if there seems to be a lot that's really changed.

And I’m thinking, Sandy, you were relatively more optimistic at EPG towards the end of May with respect to lighting, new products etcetera. Can you just help us with kind of put this in to a context in terms of perhaps did the month of June get a lot worse versus what your trajectory had been expecting?

It just seems like Hubbell and some other companies maybe are a little bit more constructive, maybe more realistic. I am just trying to put all of this together.

Yeah, glad to, John. I think if you remember our guidance, at the end of the first quarter, and I repeated it down at EPG, was that we started the year thinking our markets would be up 2% to 3%.

At the end of the first quarter we said, after what we have seen in the first quarter we think pretty clearly it's going be towards the lower end of that range, it's going to be more like 2%. And we are now saying we think it's like 1%.

So I think the difference we're talking about is really that difference of that lower end of the 2% to 3% range down to the 1%. Having said that, if you kind of go around the world and say what's a little different than we might have expected back at that time period.

I would say here in the U.S., I think that we haven't seen the truck orders come in that we thought were going to come in and so that dropped from that. And remember we said that we thought you'd have to start to see monthly truck orders of 20,000 to 25,000, that has not materialized.

Secondly, after a very strong quarter of quarter-to-quarter booking progress in the hydraulics business, we've seen a quarter now where it was down 12%. And then I'd say not much of a change in aerospace.

And then I'd say, third, in the electrical business, that we saw growth come in through the quarter about a point lower than we had thought. And as you look to the pieces of that in terms of how it materializes, I'd say the non-res issue, that the outlook has slowed a little bit from where we were.

Resi is fine. Utility market, I think people, and you've heard most of the people comment on utility that it's softer than people thought and we have seen that as well.

And then I'd say the last piece in that regard has to do with how we think about Europe and Asia Pacific, is that they have not what I call stabilized quite yet, and so we still saw more negative numbers in those regions than we have thought would come in. I wouldn't say the quarter decelerated greatly.

Our individual months were fairly similar. I'd say what we lacked was an acceleration during the quarter.

That kinds of make sense. How did lighting, Sandy, do because...?

Very well. I mean that was one of those areas in our electrical business that was really smokin' in the quarter.

And so very healthy double-digit increases and really delighted with some of the new products. I have spoken to a number of you about it.

When you think about that whole WaveStream LED recessed commercial lighting area, really doing well and winning large tenders.

And then a lot of your products obviously run through distribution, and I realize a little bit of it, there are subtleties between hydraulics versus electrical. But did distribution play a role in some of this?

I mean was there some incremental de-stocking that you could tell and kind of the corollary to that question is, you guys are doing much better or at least better on Cooper perhaps. And I am just wondering like in all this these situations sometimes there are distraction costs that are created, I am just wondering if maybe you lost a little bit of share.

It may be hard to quantify just around the edges and it maybe not that material but it may be happening because you're just focused on Copper?

John, we don't think so. It's something that we monitor pretty closely.

And I would say that I think distribution had a good quarter not an outstanding quarter, and I think that's again reflected by some concern. If you are a resi guy, life is just spectacular.

If you're someone who is a [balance] of dealing with resi and non-resi and industrial MRO, and maybe some utility work, you got some elements in there where there are some areas they have gone a little softer on you. And if you are a person that's really oriented at single phase power quality, you have had a really rugged first half.

And so I'd say it's a little different by the type of distributor. But, no, we do not see and we get pretty good market share data out of organizations like, [NIMA] for example, we don't see any evidence of that.

Maybe just finally here. I know there will be these OECD tax meetings, and I hate to kind of bring this up, but I don't know if Rich's there.

I mean is there something that's percolating behind the scenes that would in any way cause you to think perhaps somewhat differently in any context positively or negatively about obviously your tax rates which are much lower than everybody else because of your high risk status?

The report you refer to is one that came out a week ago Friday in which the OECD published 15 principals and they put together work groups to look at these streams of areas, but no. We said before we’re Irish incorporated.

We have no special deals in Ireland. And so we don't think the issues are pertaining to Eaton.

Our next question comes from Ann Duignan with JP Morgan.

Sandy, on the public construction data, we published it this morning also, we have seen a significant deceleration in public spending since sequestration. And given that we face another potential 40 billion incremental cut from sequestration going into next year, how confident are you that that public construction segment won't deteriorate further before it gets better?

I don't know that we can give you assurance on that, Ann. Those numbers look to us, like in both the first quarter and second quarter this year they were down about roughly 6% from a year ago.

Those are some pretty big numbers when you think about usually peak to trough in these markets is on the 30% to 35% side. So you are seeing some pullback there.

I think perhaps the bigger question is whether the private put in place which has been running more in this year, more in this 3% to 4% area. Does that begin to pick up as you continue to see job hiring go up?

Unemployment comes down very nominally, but it has been coming down by a tenth or two. And that's the balance we are looking at.

We are seeing a fair amount of activity in the commercial area, which is usually in one of those areas that's more interest sensitive. So you expect to see that.

So that's our eye, but we can't give you a guarantee because none of us really know exactly where sequestration is going to fall out. I think the same question pertains so the aerospace market where we've been forecasting a 6% contraction.

And you’re seeing a lot of people now beginning to talk about the individual services, talk about how they're meeting those. And in many cases there what we would consider employment and forces reductions as much as they are capital equipment though which is more where we tend to get involved.

That's a good color. Thank you.

And then from a more strategic standpoint, this is probably another question you’re not going to answer directly, but I'll throw it out there anyway. Part of the reason for the negative earnings revisions this morning was hydraulics and trucks.

Just highlights and reminds investors that Eaton still has machinery exposure. I guess my question Sandy is why wouldn't you look at the strategic rationale having those businesses in your portfolio going forward?

Yeah, I'll come back to your question in a minute, but just if I could maybe correct one piece. When you look at the overall markets, actually the electrical markets which are markets we're quite bullish on as well as the others, came down and had as bigger influence as the other markets did.

So I think just to correct that base period. We actually -- then let me come back to the other comment about hydraulics for a minute.

Hydraulics obviously we think has gone through a big adjustment as construction equipment was over built around the world. The prospect we think is the growth is really quite good in that segment going forward.

We’ve come to two years of fairly difficult adjustment here. And so we think there is a real opportunity to create shareholder value there.

And in the vehicle market, actually the growth rate is not bad. It's really -- if you look at the light vehicle side of the marketplace I think is where you’re seeing a number of people report some fairly exciting sales and earnings opportunities and you see the 17.2% margin, the highest margin we have within Eaton in that individual segment I think are indications.

So we think we can continue to create real value there. So it’s a power management business.

We continue to think like fit.

Our next question comes from Stephen Volkmann with Jefferies.

Sandy, I am wondering if we can just talk about these changes in the Cooper synergies a little bit. Obviously you raised those numbers, but you also raised the cost associated with that.

We should be sort of looking at that net, I assume, right?

No, I think the cost to achieve is obviously, they are incurred once. So we get the repeat in terms of what happens over multiple years in terms of the savings.

And what we basically, there are two reasons that that cost is going up and the savings are going up. Number one, we are finding even more SG&A savings than we had originally estimated.

They are happening more quickly. And and those will run in to the future and I think that speaks well to the future margin character of the businesses.

And then secondly, as we had talked about, as Tom Gross had shared with you in the March New York meeting, we think there is more potential on the side of the plant consolidation as well. Generally, the plant consolidation is a little bit more expensive than SG&A and we've announced a number of facility consolidations.

I am not going to get ahead of the process of our other announcements at this point. So we think there are some very attractive opportunities there for productivity and efficiency, and improved service to our customers.

So, yeah, we're up that 40 and 30 on the integration side and then through the time period being up $25 million savings this year, 30 and 35 and 35. We think we will pay for that increase and more.

Okay, that's good color. But really for 2013 then that is a bit of headwind here.

Yeah. In terms of the fully diluted, that is correct.

Great, okay. So, that was one thing.

And then I was just curious, I think John started to ask this question, but with respect to distribution, and I guess I am thinking more specifically in hydraulics. Are you able to see anything kind of specifically going on with sort of destocking at the distributor level and any color on where that process may be.

No, I think, Steve, if I could take us back to our comments in the first quarter, we saw more of that distributor destocking towards the end of last year into the first quarter. We don't believe there is a lot of active destocking going on at this point, although the distributor demand is weaker.

We think that simply reflects their end markets, not so much that they are spending their inventories. They are pretty thin right now.

But what we have not seen is a really active restocking there, but I think, again, put yourself in the position of any one of these business partners who are looking at end markets that aren't positive right now. And so we don't sense that it's a really active destocking.

It's just that they aren't feeling they are having to put a lot of inventory in in anticipation of an immediate snapback in the market.

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

I know I brought this issue up last call as well, but the concern around the core volumes and implied growth. The first half of the year, the core volume on a pro forma basis was down like 3.5%.

So this is a full year number, the second half has got to be up, 6.8%. And I think the sector is sort of facing this right now.

If you look at your comps from a year ago, the comps fit easier. First half of the year standalone company core growth was positive three to four in the first half, negative four in the back half.

So, comps alone, I can see why the core business in the second half should be positive. But this 6.8% seems like a strong enough number.

And just when you hear your description of your end markets, this doesn't sound like it's a 6.8% type back half of the year. So it was asked a bit earlier, but are there some markets on an outperformance basis or am I doing my math wrong?

It just doesn't feel like a back half of 6.8% from everything we're hearing on the call and obviously the other work that we do.

I'd say that we've been through that exact same analysis by products or by segment, by quarter. And we do think it all fits together.

Let me just take a couple to give you a sense for probably the one that's easiest, will actually get your head around this, is the vehicle issue where you're continuing to see a strong retail demand here in the U.S. for light vehicle.

You're seeing Europe is not declining like it was. You're seeing South America strengthening and you're seeing Asia Pacific strengthening.

That was all light vehicle. On the heavy duty side, I think we can quickly get our heads around the fact that there is a ramp in the second half.

So I think we can sort of take vehicle and put that one on the side. If we take aerospace, aerospace, I think if you have looked at our bookings, quite strong during the first half of this year.

I think they support what we have in terms of the shipments. Our bookings have been going faster than our shipments during the first half.

In hydraulics, where you had quite a severe contraction still in the first quarter, but very strong bookings if you recall them, less of the contraction here now in the second quarter. So anticipation that that business, again as you said weak comps starts to compare better in the second half because you recall it was running off in the second half of last year.

Then in the electrical business, it’s seasonally a strong quarter in the third quarter. Resi tends to be a big quarter in the third quarter I mentioned earlier in my comments, perhaps it was very early in the call, that we see quite a difference in the power quality markets in the second half to the first half because particularly the three phase area has strengthened very substantially on the bookings side.

And we've got good visibility now in terms of what we're shipping in the second half. That's really -- those are the major pieces in the -- excuse me, Europe we think is more stable in the second half than it was in the first half.

And we think actually Asia is a little bit better in the second half than it was in the first half. So those are the elements as we have gone through this by each of the businesses and each of the regions to support our view of the second half versus the first half.

Let's say last quarter we find out that the core volume guidance was a little bit aggressive for the latter part of the year. Are there some levers to pull on the cost side?

Obviously I’m not sure how much people are willing to pay for it, but the tax rate always seems to save you a couple of pennies every quarter. But versus what we have as a core growth story for the back half, I would still argue like last quarter looks a little optimistic.

Are there some levers to pull on the cost side to feel comfortable at the back half of the year, even if core volume did disappoint? Are there things that were maybe another incremental boost to the synergies?

I’m just trying to understand the downside risk if the core volume isn't 6.8, it's 4. How do we offset that?

And then the thought is of course what’s that run rate mean going into next year?

I think clearly what you heard us talk about here in the second quarter, David, is exactly the thesis you’re postulating there is that in a slow growth marketplace, you've got to find ways to create sources of profitability. And I think we’ve been pretty successful in doing so.

So I can't tell you I know exactly what that individual lever is at this point. But that's exactly what our teams have been working all through this year.

And that's why you see us with $55 million of higher savings than the 33% incremental would suggest and that's a very high incremental by the way and above the increase of $25 million in the integration savings. So those are exactly the issues we're continuing to work because I would tend to agree with you is that it's hard to predict in this kind of an environment exactly what the global economy is going to be, because it's full of pluses and minuses, which by the way is characteristic of when you have slow growth because there is just not as much of a variable to work with.

And so obviously the reason that we're sharing with every one of you our view of the markets that is a little bit more calibrated than I think what people were hearing in the last two to three days is it’s our belief that just like the last three years where people got too enthused with economic growth early in the year and then we're facing dramatic slowdowns this year when on. We're trying to manage within that envelope.

And that's the reason we're putting a real premium on cost reduction margin improvement and asset management.

And I guess last question you can answer as much detail as you wish, hopefully good detail. If next year, another muddle through economy, so you can move the geographies around, but another modest, modest core growth year, how does that impact how we think about the synergy opportunities and ideally if somebody wants to quantify would be great.

If I gave you that 1% core growth to the year, what can the company do next year? It could be out growth.

It could be obviously some synergy savings, however you want to use the balance sheet. I’m just trying to think about how much can this be of self-help versus we can self-help for the first year.

So with Cooper and some synergies, but at some point I need 3%, 4%, 5% core growth again. I’m just trying to get a feel how you feel about, how you plan for next year modest growth -- change how you act and what you can do self-help wise.

I think the chart, Dave that was in the packet, I’m just paging for the right page number here, but it's the one that's got the integration savings on it. I think it's a good place to start, it's page 15.

Because obviously you see a jump there in the operational synergies between $115 million and $210 million, I think a very important source of additional profitability to the company. But that would assume if you had nothing else, I mean that occurs, now I do think there will be something else.

I would say though, however, to be consistent with what we have said with our economic forecast, we think the U.S. will, improve so there will be growth but we are not forecasting a breakout in the economy.

We are thinking that Europe gets a whole lot closer to stability or potentially positive. I think China will be a more stable story by next year than it is now.

We did see good progress in China between the first quarter and the second quarter of this year. Our sales were up 20%.

Now having said that, we don't think the economy is jumping and you normally see some sequential increase between second and third. But we were up most solidly in our vehicle businesses in China, as you'd expect, the automotive market has been quite strong.

We were up high single-digits in our electrical business. We were still down in our hydraulics business, mobile oriented there as well.

I do think you're going to continue to see these emerging nations get better but they're not going to be quite the propulsion that we saw a number of years ago. So, we haven’t put a number on what we think end markets are next year but it feels that it would be better than it would be this year, but we haven't really tuned it up at this point.

And the incremental synergies at 4% EPS growth here, top of base right there, so from (inaudible) that aspect, at least the synergies give you 4% growth from a baseline perspective?

No. And that's obviously why we're pulling these synergies ahead is that we recognize in a slower growth marketplace, those sources of profitability become even more important.

Now we are not taking our hands off the growth issue, we have got a whole string of new products and we can manage up quite well. We just think the danger in these types of markets is that people plan for too much growth but their expenses get out of control and their working capital out of control and then you end up with a period of time where people are trying to pull back expenses.

That's not an error we want to make and we are quite confident we can scramble upwards if we see the volume occur.

Our next question comes from Jeff Sprague with Vertical Research.

Just a couple of things. First, just to the balance sheet.

Can you explain a little bit what is going on with the big bump in intangibles. I see goodwill actually came down but the movement in tangibles is much larger.

And how do we think about that actually amortizing through the P&L and what kind of timeline did this additional increase?

Yeah, Jeff let me address that. As you know, when you go through a purchase price accounting, it involves a series of detailed analysis of the various categories of intangibles.

Just having bought Cooper at year end and at March 30, we had not, or our outside appraisers have not gone through all of the details that you need to go through. We have now been through much more of that.

We're not 100% done but we're certainly well beyond 50%. And the conclusion is that the intangibles, particularly the trade names, were more valuable.

But also as we refined our plans around how we're going to use the trade names, how they're going to be used over time in particular, we concluded that the amortization period would be a bit longer as well. So the net of it all is that amortization costs go up by between $10 million and $15 million a year as a result of the change in the intangible valuation.

All right, thank you. Sandy, a lot of questions, I think people trying to get round out growth and things like that.

And your answer is kind of understood. One thing I am trying to just understand and that was what's going on in Asia with your business, in the electrical business in particular.

A lot of mixed results from folks. Schneider had a good performance in Asia, Lockwell was up in China, but down elsewhere.

Mixed bag at ABB but slightly positive. Can you just give kind of the state of the world and kind of the electrical franchises in Asia as you see it and where you might be gaining or loosing grounds?

Yeah, our electrical business as I mentioned was up high single-digits second quarter versus first quarter this year. And I'd say the biggest portion of -- and I’m speaking specifically to China right now, and I think their -- while the mining market has been weaker in China then it's been before, we are seeing the market get a little bit better in that regard.

And just to complete the picture, I had mentioned that hydraulics in China was down and vehicle was up. So like you've heard from a number of companies, second quarter was substantially better than the first quarter.

In that regard there are two we've seen that with the pressure on liquidity, particularly for smaller customers. There are certain segments of the market that have not been as strong.

And I would take just single phase power quality as an example of that which tends to go through smaller distributors. The liquidity pressure is really being felt by some of those smaller firms.

I'd say that's the only maybe unique element that we’ve seen in that regard.

And then just finally, what is the prospect for some share repurchase this year? Obviously as you look into next year, you've got very strong cash flow.

You’re bringing your debt balances down already, but at what point do we maybe get a mix of share reduction and debt reduction in this post Cooper period?

Really no change in game plan there, Jeff that we’ve indicated. Really our number one issue obviously we start off is financing, our R&D and our capital expenditures, our dividend which we had increased this year.

And then we’ve said really that with the free cash flow after that the working -- first priority really to reduce this debt. And we scheduled out for everyone a couple of different times it was about $2.1 billion of that 4.9 billion that we were going to get repaid.

We’ve done just over 300 million of that. We’ve got a larger tranche to the order of about $550 million that comes due to next year.

And so we have not anticipated beyond simply neutralizing dilution that occurs as a result of option exercise. We’re not anticipating or forecasting any share repurchase.

Next question comes from Christopher Glynn with Oppenheimer.

A question going back to Joe's, looking for some complexion on 2014 puts and takes. I see trucks coming through little slower here, but FTR has forecasting very high utilization rates in the back half, so seemingly at odds.

I’m wondering if you any thoughts from customer discussion or otherwise to see how that could trend?

I think the real critical issue in terms of trying to understand that market demand is going to be to watch orders here during this third quarter, because to support for fourth quarter ramp up that we outlined in terms of our guidance, we’ve still got to see those orders start to come in above 20,000 to 25,000. And so a little difficult to call '14 at this point.

We do see fleets making money, plenty of freight at this point. All those drivers seem to be positive.

But in spite of that orders were a little weaker here at the end of the second quarter. And that was our bringing it down.

We see all the indications for why it ought to be stronger, but it's not.

Our next question comes from Nigel Coe with Morgan Stanley.

You've cut a lot of ground and I really appreciate all the amount of color. Just a couple of quick ones for me.

So I think the big theme for the quarter was obviously excellent cost control and execution on Cooper. The $0.15 from the additional cost control in the bridge, Sandy, just want to clarify, is that structural cost savings or somewhat discretionary that might come back in '14?

I don't know I can give you a precise characterization on that. But I think that level of productivity and focus is something that I would hope we can continue to repeat.

At this point I think it’s just a reflection of around the world everybody recognizing that markets are little slower. And so we have to find ways to continue to it.

There was not a big restructuring cost we took to do it. And so it's more a series of hundreds and hundreds of projects and programs people are working on.

So I tend to think about that more as something we all expect as a base line for us and not something we end up giving back.

Okay. And then switching to aerospace.

Again you referenced the better trends in markets in the back half of the year which still is reasonable to me. But in spite of the weak spread mix, your margins were north of 14%.

So, I am wondering if we get a richer spread mix in the back half of the year why wouldn't aerospace margins expand from here?

Well, what we would really like to see is to see, as you mentioned that driver of the booking start to materialize on the aftermarket, because it really did not here in the second quarter. There was lots of talk at Paris Air Show this year.

Almost everyone was talking about the expectation of the higher aftermarket bookings. We'd like to see them.

And I think as they come in at the volumes, people are talking about that is beneficial, but we'd like to have them on the books first.

Okay. That's fair.

And then finally looking to tax rates, and Rick I've gone through the last ten years and your 4Q tax rate is usually your lowest tax rate of the year. So I am just wondering that 7% range, is 7% more realistic than 9%?

No, we continue, Nigel, to believe that 7% to 9% is where the full year will come in. There isn't really a seasonality in tax rate, it's based upon the precise mix in the given quarter.

It's also based upon a variety of items that get resolved around the world. And it's also now as we are continuing to complete all of the projects related to the movement to Ireland.

It's the impact of those projects being completed. And it's a very complex thing to forecast but we continue to believe that the tax rate in the second half of the year will be a bit higher than the rate in the first half.

We're going to be able to take one additional call since we've run past our normal scheduling time. Our next call would be Andrew Obin with Bank of America.

Just a question on the vehicle margins. Very impressive margin, Europe auto seems to be getting better.

Brazil which is a very good business for you, is doing quite well. So specifically you highlighted increase in forecast there.

So why we're leaving the vehicle outlook unchanged because I would imagine Brazil would have offset North America margin wise. And can you talk a little bit about the intersegment dynamic?

Yeah, Andrew, I think your characterization of the regions is correct from our view, and I think the good news is that the rate of decline in Europe has begun to get less. And that clearly the new news in this quarter in terms of our guidance was the strength in Brazil.

Having said that, normally the third quarter is a weaker quarter from a margin perspective than the second quarter is. And that's a result of some of the shutdowns we are seeing as we mentioned.

Good demand on the retail side, that's also true -- excuse me, light vehicle side, that's true in China as well. Well, that market is quite strong and that is the reason that our vehicle market is up so strongly and our vehicle business is up so strongly in China.

So, I'd say in terms of the margins, it's just the expectations that you see this down in the third quarter and the second quarter is often the strongest quarter in terms of margins in that business.

And can you just comment what are you seeing in terms of pricing and sort of cost going to the second half and how is it versus your expectations?

Yeah, the way we tend to think about it, and you've heard us talk about it before, is really trying to have pricing and commodity pressures to be relatively neutral, and that's to the main very much our experience this year.

Thank you all for joining us today. As always, we will be available to take calls and questions throughout the day and next week.

I look forward to speaking with each of you. And, again, thank you very much for joining us on the call today.