ETN Eaton Corp New

Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.57 for the third quarter of 2010, an increase of 38 percent from net income per share of $1.14 in the third quarter of 2009. Sales in the quarter were $3.6 billion, 18 percent above the same period in 2009. Net income was $268 million compared to $193 million in 2009, an increase of 39 percent.

Net income in both periods included charges related to the integration of acquisitions. Before these acquisition integration charges, operating earnings per share in the third quarter of 2010 was $1.60 versus $1.21 in 2009, an increase of 32 percent.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our third quarter results significantly exceeded our guidance. The results reflect the outstanding achievements of our employees around the world, who have capitalized on the continued rebound in our end markets while realizing the benefits of the substantial changes in our cost structure implemented over the past two years.

“Our 18 percent sales increase in the quarter was due entirely to an increase in core sales, with a 1 percent increase from acquisitions offset by a 1 percent decline from exchange rates,” said Cutler. “Our end markets increased 14 percent in the quarter.

“Our segment operating margin in the third quarter was 13.4 percent, just slightly below our record quarterly margin of 13.5 percent posted in the fourth quarter of 2007. Our third quarter margins increased significantly from the second quarter in Electrical Americas, Electrical Rest of World, Aerospace and Truck,” said Cutler. “Our strong margin performance is particularly notable given that our revenues are still 17 percent below where they were in our peak quarter in 2008.

“Our operating cash flow in the third quarter was $420 million and free cash flow was $314 million,” said Cutler.

“As we look at our end markets, we believe the growth patterns we have experienced so far this year will continue,” said Cutler. “For the full year, we now believe our end markets will increase 10 percent, 2 points higher than our expectations at the end of the second quarter, driven by higher growth in non-U.S. markets.

“We anticipate fourth quarter net income per share will be between $1.50 and $1.60 and operating earnings per share, which excludes charges to integrate our recent acquisitions, will be between $1.55 and $1.65,” said Cutler. “Accordingly, for the full year, we are raising our earnings guidance by 10 percent. We now anticipate that net income per share will be between $5.30 and $5.40, and operating earnings per share will be between $5.45 and $5.55. This full-year guidance includes the recognition of $0.14 per share of tax expense in the first quarter associated with Medicare Part D.”

Business Segment Results

Third quarter sales for the Electrical Americas segment were $967 million, up 15 percent compared to 2009. Operating profits in the third quarter were $141 million, down 1 percent from results in 2009.

“End markets for our Electrical Americas segment grew 3 percent during the third quarter,” said Cutler. “We saw good growth during the quarter in our early- and mid-cycle markets, particularly in power quality and industrial markets. That growth was largely offset by the weakness in our non-residential markets.

“We were pleased with our 14.6 percent margin in the Electrical Americas segment,” said Cutler. “Despite the downturn in our non-residential markets, our margins have improved sequentially in each quarter of 2010.

“Bookings for the Electrical Americas segment, adjusted for acquisitions and foreign exchange, increased 8 percent in the third quarter,” said Cutler. “We are maintaining our view that markets for our Electrical Americas segment will decline by 1 percent in 2010.

“We closed two acquisitions, EMC Engineers and Wright Line, in the third quarter and we closed a third, CopperLogic, in early October,” said Cutler. “These acquisitions add additional high-value products and engineering services to our capabilities.”

Sales for the Electrical Rest of World segment were $707 million, an increase of 9 percent compared to the third quarter of 2009. The sales increase was comprised of a 12 percent increase in core sales and a 1 percent increase from acquisitions offset by a 4 percent decline due to foreign currency.

The segment reported operating profits of $81 million. Excluding acquisition integration charges of $6 million during the quarter, operating profits totaled $87 million, up 53 percent compared to the third quarter of 2009.

“European electrical markets grew 9 percent during the third quarter,” said Cutler, “while Asian markets grew 10 percent. Our margin of 12.3 percent in the third quarter is an all-time high for this segment and represents a significant improvement over the second quarter. This strong operating margin is confirmation of the powerful competitive position of the franchise we have created through our acquisitions in 2007 of the MGE Small Systems business and in 2008 of Moeller and Phoenixtec.

“Our bookings in Electrical Rest of World, adjusted for acquisitions and foreign exchange, grew 19 percent during the third quarter, reflecting both strong growth in developing country markets and accelerating growth in European markets,” said Cutler. “We now believe that our Electrical Rest of World markets will grow 7 percent in 2010, 1 percent stronger than our previous estimate.”

In the Hydraulics segment, third quarter sales were $583 million, up 40 percent from the third quarter of 2009. Hydraulics markets in the third quarter grew 44 percent compared to the same period in 2009, with U.S. markets up 58 percent and non-U.S. markets up 34 percent. Operating profits in the third quarter were $76 million. In the third quarter of 2009, operating profits were $20 million, excluding acquisition integration charges of $2 million.

“Global hydraulics markets continued their sharp rebound during the third quarter,” said Cutler. “Our bookings, adjusted for foreign exchange, increased 43 percent in the third quarter. We expect hydraulics markets will show further growth in the fourth quarter, although the rate of growth is likely to be somewhat lower than in the third quarter. For all of 2010, we now expect our markets to grow 31 percent versus our expectation at the end of the second quarter of 26 percent.”

The Aerospace segment posted third quarter sales of $390 million, a decrease of 1 percent from the third quarter of 2009. Aerospace markets in the third quarter increased 3 percent, with U.S. markets increasing 4 percent and non-U.S. markets increasing 1 percent.

Operating profits in the third quarter were $60 million. Excluding acquisition integration charges of $1 million, operating profits were $61 million, the same as in the third quarter of 2009.

“Our bookings, adjusted for foreign exchange, increased 12 percent in the third quarter,” said Cutler. “The commercial aerospace aftermarket has started to rebound, with both U.S. and non-U.S. markets showing modest growth. We expect commercial aftermarket growth to continue at a modest pace over the balance of 2010. We are maintaining our forecast that aerospace markets for all of 2010 will decline by 1 percent.”

“We are pleased with our 15.6 percent margin in Aerospace, a significant improvement over our second quarter margin,” said Cutler.

The Truck segment posted sales of $534 million in the third quarter, up 33 percent compared to 2009. Truck markets in the third quarter were up 28 percent, with U.S. markets up 24 percent and non-U.S. markets up 31 percent. Operating profits were $74 million compared to $25 million in the third quarter of 2009.

“We are pleased with our 13.9 percent margin in the Truck segment during the third quarter,” said Cutler. “This margin performance is particularly noteworthy given the currently depressed production levels in the NAFTA Class 8 truck market.

“We believe truck markets in the fourth quarter will continue to improve, although at a slower rate than in the third quarter,” said Cutler. “We now estimate our Truck markets in 2010 to grow 26 percent versus our expectation of 23 percent at the end of the second quarter.”

The Automotive segment posted third quarter sales of $390 million, up 20 percent from the third quarter of 2009. Automotive unit production in the third quarter grew 14 percent, with U.S. auto production up 27 percent and production outside the U.S. up 8 percent compared to the third quarter of 2009.

Operating profits in the third quarter were $39 million, an increase of 70 percent compared to the third quarter of 2009.

“Global automotive production declined slightly from the second to the third quarter, principally due to lower production in Europe and Asia,” said Cutler. ”We expect stronger growth in the fourth quarter. For all of 2010, we now estimate our markets to grow 24 percent versus our expectation at the end of the second quarter of 17 percent growth.”

Eaton Corporation is a diversified power management company with 2009 sales of $11.9 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 third 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 website prior to the call will be a presentation on third quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning the fourth quarter 2010 and full year 2010 net income per share and operating earnings per share, and the performance of our worldwide 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; competitive pressures on sales and pricing; increases in the cost of material, energy 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; the impact of acquisitions, divestitures, and joint ventures; 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 nine months ended September 30, 2010 and 2009 are available on the company’s website, www.eaton.com.

 

EATON CORPORATION

COMPARATIVE FINANCIAL SUMMARY         Three months ended Nine months ended September 30 September 30 (Millions except for per share data) 2010 2009 2010 2009   Net sales $ 3,571 $ 3,028 $ 10,052 $ 8,742 Income before income taxes 305 166 743 133 Net income $ 269 $ 194 $ 654 $ 173 Adjustment of net income for noncontrolling interests   (1 )   (1 )   (5 )   (1 ) Net income attributable to common shareholders $ 268   $ 193   $ 649   $ 172     Net income per common share - diluted $ 1.57 $ 1.14 $ 3.80 $ 1.02 Average number of common shares outstanding - diluted 170.3 169.2 170.0 168.2   Net income per common share - basic $ 1.59 $ 1.16 $ 3.86 $ 1.03 Average number of common shares outstanding - basic 167.6 167.0 167.4 166.9   Cash dividends paid per common share $ .58 $ .50 $ 1.58 $ 1.50   Reconciliation of net income attributable to common shareholders to operating earnings Net income attributable to common shareholders $ 268 $ 193 $ 649 $ 172 Excluding acquisition integration charges (after-tax)   4     12     16     36   Operating earnings $ 272   $ 205   $ 665   $ 208     Net income per common share - diluted $ 1.57 $ 1.14 $ 3.80 $ 1.02 Per share impact of acquisition integration charges (after-tax)   .03     .07     .10     .21   Operating earnings per common share $ 1.60   $ 1.21   $ 3.90   $ 1.23     See accompanying notes.   EATON CORPORATION STATEMENTS OF CONSOLIDATED INCOME         Three months ended Nine months ended September 30 September 30 (Millions except for per share data) 2010 2009 2010 2009   Net sales $ 3,571 $ 3,028 $ 10,052 $ 8,742   Cost of products sold 2,480 2,178 7,068 6,541 Selling & administrative expense 651 553 1,842 1,665 Research & development expense 104 99 308 292 Interest expense-net 33 38 102 116 Other (income) expense-net   (2 )   (6 )   (11 )   (5 ) Income before income taxes 305 166 743 133 Income tax expense (benefit)   36     (28 )   89     (40 ) Net income 269 194 654 173 Adjustment of net income for noncontrolling interests   (1 )   (1 )   (5 )   (1 ) Net income attributable to common shareholders $ 268   $ 193   $ 649   $ 172     Net income per common share - diluted $ 1.57 $ 1.14 $ 3.80 $ 1.02 Average number of common shares outstanding - diluted 170.3 169.2 170.0 168.2   Net income per common share - basic $ 1.59 $ 1.16 $ 3.86 $ 1.03 Average number of common shares outstanding - basic 167.6 167.0 167.4 166.9   Cash dividends paid per common share $ .58 $ .50 $ 1.58 $ 1.50   See accompanying notes.   EATON CORPORATION BUSINESS SEGMENT INFORMATION               Three months ended Nine months ended September 30 September 30 (Millions) 2010 2009 2010 2009 Net sales Electrical Americas $ 967 $ 843 $ 2,663 $ 2,583 Electrical Rest of World 707 646 1,980 1,785 Hydraulics 583 418 1,641 1,273 Aerospace 390 394 1,136 1,221 Truck 534 401 1,479 1,014 Automotive   390   326   1,153   866 Total net sales $ 3,571 $ 3,028 $ 10,052 $ 8,742   Segment operating profit (loss) Electrical Americas $ 141 $ 142 $ 366 $ 392 Electrical Rest of World 81 45 183 55 Hydraulics 76 18 207 38 Aerospace 60 57 157 198 Truck 74 25 179 (12) Automotive 39 23 120 (42) Total segment operating profit 471 310 1,212 629   Corporate Amortization of intangible assets (46) (42) (134) (126) Interest expense-net (33) (38) (102) (116) Pension & other postretirement benefits expense (30) (36) (91) (175) Stock option expense (2) (7) (9) (20) Other corporate expense-net   (55)   (21)   (133)   (59) Income before income taxes 305 166 743 133 Income tax expense (benefit)   36   (28)   89   (40) Net income 269 194 654 173 Adjustment of net income for noncontrolling interests   (1)   (1)   (5)   (1) Net income attributable to common shareholders $ 268 $ 193 $ 649 $ 172   See accompanying notes.   EATON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS                         September 30, December 31, (Millions) 2010 2009   Current assets Cash $ 395 $ 340 Short-term investments 493 433 Accounts receivable 2,332 1,899 Inventories 1,533 1,326 Deferred income taxes & other current assets   600   526 Total current assets 5,353 4,524   Property, plant & equipment-net 2,381 2,445 Goodwill 5,440 5,435 Other intangible assets 2,360 2,441 Deferred income taxes & other long-term assets   1,481   1,437 Total assets $ 17,015 $ 16,282   Current liabilities Short-term debt $ 93 $ 113 Current portion of long-term debt 5 5 Accounts payable 1,353 1,057 Accrued compensation 437 256 Other current liabilities   1,425   1,258 Total current liabilities 3,313 2,689   Long-term debt 3,406 3,349 Pension liabilities 1,263 1,586 Other postretirement benefits liabilities 748 754 Deferred income taxes & other long-term liabilities 1,036 1,086   Equity Eaton shareholders' equity 7,207 6,777 Noncontrolling interests   42   41 Total equity   7,249   6,818 Total liabilities & equity $ 17,015 $ 16,282   See accompanying notes.  

EATON CORPORATION

NOTES TO THE THIRD QUARTER 2010 EARNINGS RELEASE

  Millions of dollars unless indicated otherwise (per share data assume dilution)  

Acquisitions of Businesses

  In 2010 and 2009, Eaton acquired certain businesses and entered into joint ventures. The Statements of Consolidated Income include the results of these businesses from the dates of the transactions. These transactions are summarized below: Acquired business   Date of transaction   Business segment   Annual sales   Wright Line Holding, Inc. August 25, Electrical $101 for year

A U.S. provider of customized enclosures, rack systems, and air flow management systems to store, power, and secure mission-critical ITdata center electronics.

2010 Americas ended

June 30, 2010

  EMC Engineers, Inc. July 15, 2010 Electrical $24 for 2009

A U.S. energy engineering and energyservices company that delivers energy efficiencysolutions for a wide range of governmental,educational, commercial and industrial facilities.

Americas   Joint venture agreement to support the COMAC C919 July 12, 2010 Aerospace New joint single-aisle commercial aircraft program venture

A 49%-owned joint venture in China focusing

on the design, development, manufacturing andsupport of fuel and hydraulic conveyance systemsfor the global civil aviation market.

  Micro Innovation Holding AG September 1, Electrical $33 for 2008

A Switzerland-based manufacturer of humanmachine interfaces, programmable logic controllersand input/output devices. Eaton acquired theremaining shares to increase its ownership from50% to 100%.

2009

Rest ofWorld

 

SEG Middle East Power Solutions & SwitchboardManufacture LLC

July 2,

2009

Electrical

Rest of

$10 for 2008

A 49%-owned joint venture in Abu Dhabithat manufactures low voltage switchboardsand control panels assemblies for use in theMiddle East power generation and industrialmarkets.

World  

Subsequent Event – Acquisition of Business

  On October 1, 2010, Eaton acquired CopperLogic, Inc., a U.S.-based manufacturer of electrical and electromechanical systems. This business had sales of approximately $35 for the year ended August 31, 2010.  

Acquisition Integration Charges

  In 2010 and 2009, Eaton incurred charges related to the integration of acquired businesses. These charges were recognized as expense as incurred. A summary of these charges follows:   Three months ended September 30 Acquisition

integration

charges

  Operating profit

as reported

  Operating profit

excluding acquisition

integration charges

2010   2009 2010   2009 2010  

2009

Electrical Americas

 

    $     1 $ 141 $   142 $ 141 $   143 Electrical Rest of World

$

6 12 81 45 87 57 Hydraulics 2 76 18 76 20 Aerospace 1 4 60 57 61 61 Truck 74 25 74 25 Automotive                   39     23     39     23   $     7 $     19 $ 471 $   310   $ 478 $   329   After-tax charges $ 4 $ 12 Per common share $ .03 $ .07   Nine months ended September 30 Acquisition

integration

charges

Operating profit (loss)

as reported

Operating profit (loss)

excluding acquisition

integration charges

2010 2009 2010 2009 2010 2009 Electrical Americas $ 2 $ 4 $ 366 $ 392 $ 368 $ 396 Electrical Rest of World 20 38 183 55 203 93 Hydraulics 3 207 38 207 41 Aerospace 3 9 157 198 160 207 Truck 179 (12 ) 179 (12 ) Automotive               1   120     (42 )   120     (41 ) $     25 $     55 $ 1,212 $   629   $ 1,237 $   684   After-tax charges $ 16 $ 36 Per common share $ .10 $ .21

Charges in 2010 were related primarily to Moeller and Phoenixtec. Charges in 2009 were related primarily to Integrated Hydraulics, Kirloskar, Moeller, Phoenixtec and Argo-Tech. These 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 2009 to reduce its workforce in response to the severe economic downturn. The reductions totaled approximately 17% of the full-time workforce. These actions resulted in the recognition of severance and pension and other postretirement benefits expense of $22 in the third quarter of 2009 and $156 in the first nine months of 2009. These charges were primarily 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.

Pension and Other Postretirement Benefits Expense

Due to limitations imposed by the Pension Protection Act on pension lump sum distributions, Eaton’s U.S. Qualified Pension Plan became restricted in 2009 from making 100% lump sum payments. As a result, the plan experienced a significant increase in lump sum payments in 2009 before the limitation went into effect. Pension settlement expense was $51 in the second quarter of 2009 and $77 in the first nine months of 2009, most of which was attributable to the U.S. pension plans. A portion of the increase was attributable to the workforce reduction in 2009.

As a result of the workforce reduction in 2009, curtailment expense related to pension plans of $14 was recognized in the second quarter of 2009 and $21 in the first nine months of 2009. The curtailment expense included recognition of the change in the projected benefit obligation, as well as recognition of a portion of the unrecognized prior service cost.

These charges were primarily included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges were included in Pension & other postretirement benefits expense.

Income Taxes

During the third quarter of 2010 and the first nine months of 2010, income tax expense of $36 and $89, respectively, was recognized (an effective tax rate of 11.7% in the third quarter and 12.0% in the first nine months of 2010) compared to income tax benefits of $28 and $40 in the third quarter of 2009 and the first nine months of 2009, respectively (a tax benefit rate of 17.0% in the third quarter and 30.5% for the first nine months of 2009). Income tax expense for the first nine months of 2010 included a non-cash, one-time charge of $23 ($0.14 per common share) that was recorded in the first quarter of 2010 to reflect the impact of the Health Care Reform and Education Reconciliation Act on taxation associated with Medicare Part D. Without this one-time charge, income tax expense of $66 (an effective tax rate of 8.9%) would have been recognized in the first nine months 2010. Income tax expense for the first nine months of 2010 also reflected a benefit associated with the successful resolution of international tax audit issues; the recognition of state and local income tax attributes involving tax loss carryforwards, tax credits and other temporary differences; the recognition of international tax incentives; and the recognition of other international tax benefits.

Reconciliation of Non-GAAP 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.