Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced net income per share of $.17 for the second quarter
of 2009, 92 percent below the second quarter of 2008. Sales in the
quarter were $2.90 billion, 32 percent below the second quarter of
2008. Net income was $29 million compared to $333 million in
2008.
Net income in both periods included charges for integration of
acquisitions. Before these acquisition integration charges,
operating earnings per share in the second quarter of 2009 were
$.23 compared to $2.10 per share in 2008, a decrease of 89 percent,
and operating earnings were $39 million compared to $344 million in
2008.
Alexander M. Cutler, Eaton chairman and chief executive officer,
said, �Our sales in the second quarter were only slightly higher
than in the first quarter of 2009, reflecting little improvement in
the challenging global economic conditions. Despite the sluggish
revenues, which came in $100 million lower than projected in our
initial quarterly guidance, we were successful in substantially
lowering our cost structure, which allowed us to generate earnings
about equal to our guidance for the quarter.
�Sales in the second quarter declined 32 percent compared to the
second quarter of 2008, with a decline of 6 percent from exchange
rates and a decline of 26 percent in core sales,� said Cutler. �Our
end markets declined 26 percent in the quarter. It is clear that
significant destocking and inventory liquidation continued in
virtually all of our segments during the quarter.
�Despite the challenging market conditions, our operating cash
flow for the quarter was $361 million, just slightly lower than
last year, and our free cash flow was $313 million, $68 million
higher than last year,� said Cutler. �In the last three quarters,
our operating cash flow has totaled $1.1 billion. We are
maintaining our dividend for the second quarter at $0.50 per share,
to be distributed in mid August.
�As we survey our end markets, the year is shaping up to be
considerably weaker than we had forecast in April,� said Cutler.
�We now anticipate our overall end markets will decline by between
21 and 22 percent versus our earlier forecast of a decline between
15 and 16 percent. We see our U.S. markets declining by 25 percent,
while our non-U.S. markets are expected to decline by 19
percent.
�We anticipate net income per share for the third quarter of
2009 to be between $0.80 and $0.90,� said Cutler. �Operating
earnings per share, which exclude charges to integrate our recent
acquisitions, are anticipated to be between $0.90 and $1.00 in the
third quarter of 2009.
�We are lowering our guidance for the full year due to the
further reduction in our expectations for market growth, which we
expect to be partially offset by an additional $120 million of
savings from our cost-reduction initiatives. Accordingly, we now
anticipate 2009 net income per share of between $1.65 and $1.85,
and 2009 operating earnings per share of between $2.00 and $2.20,�
said Cutler.
Business Segment Results
Second quarter sales for the Electrical Americas segment were
$881 million, down 14 percent compared to 2008. Operating profits
in the second quarter were $144 million. Excluding acquisition
integration charges of $2 million during the quarter, operating
profits were $146 million, down 8 percent from results in 2008.
�End markets for our Electrical Americas segment declined
approximately 22 percent during the second quarter,� said Cutler.
�Both non-residential electrical and power quality markets declined
in the high teens, while residential electrical and industrial
controls markets declined about 30 percent.
�Our bookings in the Electrical Americas segment, adjusted for
foreign exchange and acquisitions, declined 33 percent compared to
the second quarter of 2008,� said Cutler. �We now anticipate
markets in our Electrical Americas segment will decline by 20
percent for the full year.�
Sales for the Electrical Rest of the World segment were $595
million, a decline of 35 percent compared to the second quarter of
2008. The sales decline was comprised of an 11 percent decline due
to foreign currency and a 24 percent decline in core sales.
The segment reported operating profits of $16 million. Excluding
acquisition integration charges of $10 million during the quarter,
operating profits totaled $26 million, down 73 percent compared to
the second quarter of 2008.
�The European electrical markets declined steeply in the
quarter, down 24 percent,� said Cutler. �Asian markets fared a bit
better, declining by 15 percent. We now anticipate markets in our
Electrical Rest of the World segment will decline by 17 percent for
the full year.�
Hydraulics segment sales were $425 million, down 39 percent
compared to the second quarter of 2008. Global hydraulics markets
were down 39 percent in the quarter, with non-U.S. markets down 33
percent and U.S. markets down 45 percent. Operating profits in the
second quarter were $14 million, down 85 percent compared to the
second quarter of 2008.
�The global hydraulics markets in the second quarter were very
weak,� said Cutler. �We believe these markets will remain weak,
with only slightly improved conditions in the second half of the
year. As a result, we now believe global hydraulics markets for all
of 2009 will decline by 33 percent.�
Aerospace segment sales were $409 million, 12 percent below the
second quarter of 2008. Aerospace markets declined 8 percent
compared to the second quarter of 2008.
Operating profits in the second quarter were $70 million.
Excluding acquisition integration charges of $3 million during the
quarter, operating profits were $73 million, a decline of 3 percent
compared to a year earlier.
�Aerospace markets in the second quarter were impacted by
declines in the commercial aftermarket and inventory reductions at
commercial OEMs,� said Cutler. �We anticipate the global aerospace
market will decline 5 percent in 2009. Commercial aftermarket
demand, in particular, has weakened as both passenger traffic and
freight volumes have declined worldwide.�
The Truck segment posted sales of $321 million in the second
quarter, down 49 percent compared to 2008. Truck production in the
second quarter was down 33 percent, with U.S. markets down 43
percent and non-U.S. markets down 22 percent. The segment reported
an operating loss of $3 million.
�We expect production in the second half to be broadly similar
to the first half,� said Cutler. �The key factors inhibiting demand
for trucks appear to be weak freight volumes and limitations on
financing. It is unclear when these conditions will improve. At
this point, for all of 2009, we anticipate our Truck markets will
decline by 27 percent.�
The Automotive segment posted second quarter sales of $270
million, down 51 percent from the second quarter of 2008. Global
automotive markets were down 33 percent with U.S. markets down 48
percent and non-U.S. markets down 25 percent. The segment reported
an operating loss of $19 million.
�The automotive market in the U.S. was markedly impacted in the
second quarter by the shutdowns at General Motors and Chrysler,�
said Cutler. �Outside the U.S., several markets benefited from
incentive programs designed to boost auto purchases. We now
anticipate global automotive markets will decline by 25 percent in
2009.�
Eaton Corporation is a diversified power management company with
2008 sales of $15.4 billion. Eaton is a global technology leader in
electrical components and systems for power quality, distribution
and control; hydraulics components, systems and services for
industrial and mobile equipment; aerospace fuel, hydraulics and
pneumatic systems for commercial and military use; and truck and
automotive drivetrain and powertrain systems for performance, fuel
economy and safety. Eaton has approximately 70,000 employees and
sells products to customers in more than 150 countries. For more
information, visit www.eaton.com.
Notice of conference call: Eaton�s conference call to discuss
its second quarter results is available to all interested parties
as a live audio webcast today at 10 a.m. Eastern time via the
microphone on the right side of Eaton�s home page. This news
release can be accessed under its headline on the home page. Also
available on the Web site prior to the call will be a presentation
on second quarter results, which will be covered during the
call.
This news release contains forward-looking statements concerning
the third quarter 2009 and full year 2009 net income per share and
operating earnings per share, our worldwide markets, and our growth
in relation to end markets. These statements should be used with
caution and are subject to various risks and uncertainties, many of
which are outside the company�s control. The following factors
could cause actual results to differ materially from those in the
forward-looking statements: unanticipated changes in the markets
for the company�s business segments; unanticipated downturns in
business relationships with customers or their purchases from us;
the availability of credit to customers; competitive pressures on
sales and pricing; increases in the cost of material and other
production costs, or unexpected costs that cannot be recouped in
product pricing; the introduction of competing technologies;
unexpected technical or marketing difficulties; unexpected claims,
charges, litigation or dispute resolutions; strikes or other labor
unrest; the impact of acquisitions and divestitures; unanticipated
difficulties integrating acquisitions; new laws and governmental
regulations; interest rate changes; stock market fluctuations; and
unanticipated deterioration of economic and financial conditions in
the United States and around the world. We do not assume any
obligation to update these forward-looking statements.
Financial Results
The company�s comparative financial results for the three months
and six months ended June 30, 2009 are available on the company�s
Web site, www.eaton.com.
� � � � � � � � �
EATON CORPORATION COMPARATIVE FINANCIAL
SUMMARY � Three months ended Six months ended (Millions except
for per share data) June 30 June 30 2009 2008 2009 2008
Continuing operations Net sales $ 2,901 $ 4,279 $ 5,714 $
7,775 Income (loss) before income taxes 30 358 (33 ) 647 Income
(loss) after income taxes $ 31 $ 337 $ (21 ) $ 584 Income from
discontinued operations � � � � � � � 3 � Net income (loss) 31 337
(21 ) 587 Adjustment of net income (loss) for noncontrolling
interests � (2 ) � (4 ) � � � (7 )
Net income (loss)
attributable to Eaton $ 29 � $ 333 � $ (21 ) $ 580 � �
Net
income (loss) per Common Share attributable to Eaton Common
Shareholders Assuming dilution Continuing operations $
.17 $ 2.03 $ (.13 ) $ 3.68 Discontinued operations � � � � � � �
.01 � $ .17 � $ 2.03 � $ (.13 ) $ 3.69 � Average number of Common
Shares outstanding - assuming dilution 167.6 163.6 166.2 157.1 �
Basic
Continuing operations $ .17 $ 2.07 $ (.13 ) $ 3.74 Discontinued
operations � � � � � � � .01 � $ .17 � $ 2.07 � $ (.13 ) $ 3.75 �
Average number of Common Shares outstanding - basic 166.9 161.2
166.2 154.5 �
Cash dividends paid per Common Share $ .50 $
.50 $ 1.00 $ 1.00 �
Reconciliation of net income (loss)
attributable to Eaton to operating earnings (loss) Net
income (loss) attributable to Eaton $ 29 $ 333 $ (21 ) $ 580
Excluding acquisition integration charges (after-tax) � 10 � � 11 �
� 24 � � 20 � Operating earnings $ 39 � $ 344 � $ 3 � $ 600 � � Net
income (loss) per Common Share attributable to Eaton Common
Shareholders - assuming dilution $ .17 $ 2.03 $ (.13 ) $ 3.69 Per
share impact of acquisition integration charges (after-tax) � .06 �
� .07 � � .14 � � .13 � Operating earnings per Common Share $ .23 �
$ 2.10 � $ .01 � $ 3.82 � � See accompanying notes. � � � � � � � �
� � �
EATON CORPORATION STATEMENTS OF CONSOLIDATED
INCOME � Three months ended Six months ended (Millions except
for per share data) June 30 June 30 2009 2008 2009 2008
Net
sales $ 2,901 $ 4,279 $ 5,714 $ 7,775 � Cost of products sold
2,189 3,069 4,363 5,601 Selling & administrative expense 554
704 1,112 1,256 Research & development expense 95 111 193 200
Interest expense-net 41 44 78 82 Other (income) expense-net � (8 )
� (7 ) � 1 � � (11 )
Income (loss) from continuing
operations before income taxes
30 358 (33 ) 647 Income taxes (benefits) � (1 ) � 21 � � (12 ) � 63
�
Income (loss) from continuing operations 31 337 (21 ) 584
Income from discontinued operations � � � � � � � 3 �
Net income
(loss) 31 337 (21 ) 587 Adjustment of net income (loss) for
noncontrolling interests � (2 ) � (4 ) � � � (7 )
Net income
(loss) attributable to Eaton $ 29 � $ 333 � $ (21 ) $ 580 � �
Net income (loss) per Common Share attributable to Eaton
Common Shareholders Assuming dilution Continuing
operations $ .17 $ 2.03 $ (.13 ) $ 3.68 Discontinued operations � �
� � � � � .01 � $ .17 � $ 2.03 � $ (.13 ) $ 3.69 � Average number
of Common Shares outstanding - assuming dilution 167.6 163.6 166.2
157.1 �
Basic Continuing operations $ .17 $ 2.07 $ (.13 ) $
3.74 Discontinued operations � � � � � � � .01 � $ .17 � $ 2.07 � $
(.13 ) $ 3.75 � Average number of Common Shares outstanding - basic
166.9 161.2 166.2 154.5 �
Cash dividends paid per Common
Share $ .50 $ .50 $ 1.00 $ 1.00 � See accompanying notes. � � �
� � � � � � �
EATON CORPORATION BUSINESS SEGMENT
INFORMATION � Three months ended Six months ended (Millions)
June 30 June 30 2009 2008 2009 2008
Net sales Electrical
Americas $ 881 $ 1,028 $ 1,740 $ 1,939 Electrical Rest of World 595
911 1,139 1,304 Hydraulics 425 695 855 1,352 Aerospace 409 466 827
896 Truck 321 625 613 1,192 Automotive � 270 � � 554 � � 540 � �
1,092 � $ 2,901 � $ 4,279 � $ 5,714 � $ 7,775 � �
Operating
profit (loss) Electrical Americas $ 144 $ 158 $ 250 $ 300
Electrical Rest of World 16 92 10 110 Hydraulics 14 92 20 170
Aerospace 70 69 141 132 Truck (3 ) 94 (37 ) 179 Automotive (19 ) 51
(65 ) 97 �
Corporate Amortization of intangible assets (42 )
(42 ) (84 ) (67 ) Interest expense-net (41 ) (44 ) (78 ) (82 )
Pension & other postretirement benefits expense (92 ) (35 )
(139 ) (73 ) Stock option expense (6 ) (8 ) (13 ) (15 ) Other
corporate expense-net � (11 ) � (69 ) � (38 ) � (104 )
Income
(loss) from continuing operations before income taxes 30 358
(33 ) 647 Income taxes (benefits) � (1 ) � 21 � � (12 ) � 63 �
Income (loss) from continuing operations 31 337 (21 ) 584
Income from discontinued operations � � � � � � � 3 �
Net income
(loss) 31 337 (21 ) 587 Adjustment of net income (loss) for
noncontrolling interests � (2 ) � (4 ) � � � (7 )
Net income
(loss) attributable to Eaton $ 29 � $ 333 � $ (21 ) $ 580 � �
See accompanying notes. � � � � � � � �
EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS � June 30, December
31, (Millions) 2009 2008 �
ASSETS Current assets Cash
$
�
148 $ 188 Short-term investments 433 342 Accounts receivable 2,015
2,295 Inventories 1,373 1,554 Deferred income taxes & other
current assets 508 � 416 4,477 4,795 � Property, plant &
equipment-net 2,542 2,639 Goodwill 5,376 5,232 Other intangible
assets 2,481 2,518 Deferred income taxes & other assets 1,315 �
1,471 �
$
�
�
16,191 $ 16,655 �
LIABILITIES & EQUITY Current
liabilities Short-term debt
$
�
109 $ 812 Current portion of long-term debt 534 269 Accounts
payable 923 1,121 Accrued compensation 263 297 Other current
liabilities 1,230 � 1,246 3,059 3,745 � Long-term debt 3,399 3,190
Pension liabilities 1,411 1,650 Other postretirement liabilities
620 703 Other long-term liabilities & deferred income taxes
1,011 1,002 � Eaton shareholders' equity 6,647 6,317 Noncontrolling
interests 44 � 48 Total equity 6,691 � 6,365 �
$
�
�
16,191 $ 16,655 � See accompanying notes. �
EATON CORPORATIONNOTES TO THE SECOND QUARTER 2009
EARNINGS RELEASE
Millions of dollars unless indicated otherwise (per share data
assume dilution)
Business Segment Reporting
In the first quarter of 2009, Eaton changed its business segment
financial reporting structure. The Electrical segment was divided
into Electrical Americas and Electrical Rest of World. The
Hydraulics, Aerospace, Truck and Automotive segments continue as
individual reporting segments. Accordingly, business segment
information for prior years has been restated to conform to the
current year�s presentation. The change to the business segments
did not affect net income for any of the periods presented.
Adoption of New Accounting Standard - Noncontrolling
Interests in Consolidated Financial Statements
In the first quarter of 2009, Eaton adopted Statement of
Financial Accounting Standards (SFAS) No. 160, �Noncontrolling
Interests in Consolidated Financial Statements - an amendment of
ARB No. 51�. This Standard clarifies accounting and reporting for
noncontrolling interests, sometimes called a minority interest,
which is the portion of equity in a subsidiary not owned, directly
or indirectly, by Eaton. As result of the adoption of this
Standard, the Statements of Consolidated Income and the
Consolidated Balance Sheets were reclassified to report separately
noncontrolling interests. The adoption of this Standard did not
have a material effect on Eaton�s results of operations or
consolidated financial position.
Acquisitions of Businesses
In 2009 and 2008, Eaton acquired certain businesses and entered
into joint ventures in separate transactions. The Statements of
Consolidated Income include the results of these businesses from
the effective dates of acquisition. A summary of these transactions
follows:
Acquired business � � � �
Date ofacquisition
� Business
segment
�
Annual sales
SEG Middle East Power Solutions & Switchboard
Manufacture LLC
� � � � July 6,
2009
� Electrical
Rest of
� $10 for 2008 A joint venture to manufacture low voltage World
�
switchboards and control panel assemblies for use in the Middle
East power generation and industrial markets � Integ Holding
Limited October 2, Hydraulics $52 for 2007 The parent company of
Integrated Hydraulics 2008 Ltd., a U.K.-based manufacturer of
screw-in cartridge valves, custom-engineered hydraulic valves and
manifold systems � Nittan Global Tech Co. Ltd. Operational
Automotive New joint A joint venture to manage the global design,
October 1, venture manufacture and supply of engine valves and 2008
valve actuation products to Japanese and Korean automobile and
engine manufacturers. In addition, during the second half of 2008,
several related manufacturing joint ventures were established. �
Engine Valves business of Kirloskar Oil Engines Ltd. July 31, 2008
Automotive $5 for 2007 An India-based designer, manufacturer and
distributor of intake and exhaust valves for diesel and gasoline
engines � PK Electronics July 31, 2008 Electrical $9 for 2007 A
Belgium-based distributor and service provider Rest of of single
and three-phase uninterruptible World power supply (UPS) systems �
The Moeller Group April 4, 2008 Electrical �1.02 billion for A
Germany-based supplier of electrical Rest of 2007 components for
commercial and residential World building applications and
industrial controls for industrial equipment applications � Balmen
Electronic, S.L. March 31, Electrical $6 for 2007 A Spain-based
distributor and service provider 2008 Rest of of uninterruptible
power supply (UPS) systems World � Phoenixtec Power Company Ltd.
February 26, Electrical $515 for 2007 A Taiwan-based manufacturer
of single and 2008 Rest of three-phase uninterruptible power supply
(UPS) World systems �
Acquisition Integration Charges
In 2009 and 2008, Eaton incurred charges related to the
integration of acquired businesses. These charges, which consisted
of plant consolidations and integration, were recognized as expense
as incurred. A summary of these charges follows:
� � � � Three months ended June 30
Acquisitionintegrationcharges
� � � � � � � �
Operating profit (loss)excluding
acquisitionintegration charges
Operating profit (loss)as
reported
2009 � 2008 2009 � 2008 2009 � 2008 Electrical Americas $ 2 $ 1 $
144 $ 158 $ 146 $ 159 Electrical Rest of World 10 6 16 92 26 98
Hydraulics 1 14 92 14 93 Aerospace 3 6 70 69 73 75 Truck (3 ) 94 (3
) 94 Automotive 1 (19 ) 51 (19 ) 52 Corporate � � � 2 � � � � � � �
� $ 15 $ 17 $ 222 � $ 556 $ 237 � $ 571 After-tax charges $ 10 $ 11
Per Common Share $ .06 $ .07 � � � � Six months ended June 30
Acquisitionintegrationcharges
� � � �
Operating profit (loss)as
reported
� � � �
Operating profit (loss)excluding
acquisitionintegration charges
2009 � 2008 2009 � 2008 2009 � 2008 Electrical Americas $ 3 $ 1 $
250 $ 300 $ 253 $ 301 Electrical Rest of World 26 9 10 110 36 119
Hydraulics 1 3 20 170 21 173 Aerospace 5 13 141 132 146 145 Truck
(37 ) 179 (37 ) 179 Automotive 1 2 (65 ) 97 (64 ) 99 Corporate � �
� 2 � � � � � � � � $ 36 $ 30 $ 319 � $ 988 $ 355 � $ 1,016
After-tax charges $ 24 $ 20 Per Common Share $ .14 $ .13 �
Charges in 2009 were related primarily to the integration of the
following acquisitions: Integrated Hydraulics, Kirloskar, Moeller,
Phoenixtec and Argo-Tech. Charges in 2008 were related primarily to
the integration of the following acquisitions: Moeller, Phoenixtec,
the MGE small systems UPS business, Argo-Tech, Synflex, PerkinElmer
and Cobham. The acquisition integration charges were included in
the Statements of Consolidated Income in Cost of products sold or
Selling & administrative expense, as appropriate. In Business
Segment Information, the charges reduced Operating profit of the
related business segment.
Workforce Reduction Charges
Eaton took significant actions in 2008 to reduce the workforce
in anticipation of the severe economic downturn, and in the first
half of 2009 took further action. The reductions in 2008 and 2009
total approximately 15% of the full-time workforce. These actions
resulted in the recognition of pretax charges for severance and
pension and other postretirement benefits expense of $69 in the
second quarter of 2009 and $134 in the first half of 2009. The
workforce reduction charges were included in the Statements of
Consolidated Income in Cost of products sold or Selling &
administrative expense, as appropriate.
Pension and Other Postretirement Benefits
Due to new limitations imposed by the Pension Protection Act on
pension lump sum distributions effective in 2009, Eaton�s U.S.
Pension Plan became restricted in the second quarter of 2009 from
making 100% lump sum payments. The Plan experienced a significant
increase in lump sum payments in the second quarter before the
limitation went into effect, resulting in pension settlement
expense of $51 in the second quarter. This expense was included in
Pension & other postretirement benefits expense in Business
Segment Information.
Also, as a result of the workforce reduction in 2009,
curtailment expense of $14 related to pension and other
postretirement benefits liabilities was recorded in the second
quarter of 2009. This expense was included in Pension & other
postretirement benefits expense in Business segment Information.
Liabilities related to the U.S. pension and other postretirement
benefits plans were remeasured in the second quarter of 2009
resulting in a $283 reduction of liabilities with a corresponding
reduction of Accumulated other comprehensive losses in
Shareholder�s equity ($182 after-tax).
Of the total increases in pension and other postretirement
benefits expenses attributable to the settlements and curtailments
noted above, $31 was a result of the workforce reduction.
Business Segment Reporting - Other Corporate
Expense-net
Other corporate expense-net of $11 for the second quarter of
2009 and $38 for the first half of 2009 decreased from $69 and $104
for the same periods in 2008 primarily due to the amortization of
purchase price accounting adjustments related to the fair value of
inventories of businesses acquired in 2008, principally Moeller,
and lower corporate expenses.
Income Taxes
During the second quarter of 2009 and the first half of 2009,
income tax benefits of $1 and $12 were recorded (a tax benefit rate
of 4.8% in the second quarter and 36.6% for the first half of 2009)
compared to income tax expense of $21 and $63 in the second quarter
of 2008 and the first half of 2008, respectively (6.0% and 9.7%
effective tax rates).
Reconciliation of Financial Measures
This earnings release discloses operating earnings, operating
earnings per Common Share, and operating profit (loss) before
acquisition integration charges for each business segment, each of
which excludes amounts that differ from the most directly
comparable measure calculated in accordance with generally accepted
accounting principles (GAAP). A reconciliation of each of these
financial measures to the most directly comparable GAAP measure is
included in this earnings release in the Comparative Financial
Summary or in the notes to the earnings release. Management
believes that these financial measures are useful to investors
because they exclude transactions of an unusual nature, allowing
investors to more easily compare Eaton's financial performance
period to period. Management uses this information in monitoring
and evaluating the on-going performance of Eaton and each business
segment.
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