2nd UPDATE: Eaton 3Q Net Up 39%; Raises EPS Outlook

Eaton Corp.'s (ETN) third-quarter profit rose 39% as strengthening demand in the markets for trucks, autos and hydraulics drove improved results for the quarter.

The diversified manufacturer topped expectations and raised its outlook for the rest of the year. Eaton predicted demand in all six of its business segments next year will be better than in 2010.

"Our confidence is building and our forward visibility continues to improve," Chairman and Chief Executive Alexander Cutler said Wednesday during a conference call. "There's more to come as far as rebuilding our momentum. All six of our cylinders ought to be firing next year."

Eaton's stock Wednesday rallied on the upbeat outlook. The shares recently were up 3.1% at $86 a share.

Eaton's results in the quarter benefited from a near-record operating profit margin and increased production volumes in construction and farm machinery and the long-suffering commercial truck industry. These markets helped offset lingering weakness in the company's aerospace business and the portions of its electrical equipment business with exposure to the commercial construction industry.

Manufacturing has been one of the strengths of the U.S. economy in recent quarters as industrial customers rebuild inventories depleted during the recession. That restocking may be subsiding. The Federal Reserve reported Monday that U.S. industrial output fell last month for the first time in more than a year.

Nonetheless, Eaton said demand from customers has been stronger than anticipated, especially outside the U.S. In hydraulic systems, the company's third-quarter profit nearly quadrupled as revenue rose 39%. Eaton's truck segment income almost tripled from a year ago as sales rose 33%. Automotive segment profit rose 70% on a 20% increase in sales.

Cutler predicted the electrical products businesses will show significant improvement next year, noting that full-scale inventory restocking by electrical distributors has yet to occur. Sales in the Americas segment of the electrical business rose 15% in the third quarter, but profit slipped 1%. Price-cutting on electrical equipment sales to the still-weak commercial construction industry drained the segment's income.

"We had anticipated that we would see margins come off," Cutler said in an interview with Dow Jones Newswires. The strongest demand in the Americas electrical segment is coming from government-funded programs for energy efficiency and conservation. Last year's federal economic stimulus legislation has accounted for $450 million in sales for Eaton so far this year.

Eaton's electrical business in the rest of the world recorded a record margin in the third quarter as profit rose 53% from a year ago on a 9% increase in sales. Cutler attributed the performance to contributions from businesses Eaton bought in recent years to bolster its market positions in backup power equipment for computer server centers and power management systems.

Cutler anticipates rising sales and income next year in the aerospace business, which reported flat profit in the third quarter on a 1% reduction in sales. The company expects to begin supplying components next year for Boeing's new 787 airliner and Airbus's A350, and anticipates higher volumes of commercial aircraft already in production, particularly Boeing's 737.

"There's a real change in the mood" of the aerospace industry, Cutler said.

The Cleveland company raised its 2010 profit forecast range to $5.45 to $5.55 a share from $4.90 to $5.10 a share. It forecast $1.55 to $1.65 a share profit from the fourth quarter. Analysts had expected earnings of $1.37 a share for the fourth quarter and $5.09 for the year, according to Thomson Reuters.

For the quarter ended Sept. 30, Eaton reported a profit of $268 million, or $1.57 a share, up from $193 million, or $1.14 a share, a year earlier. Excluding acquisition charges, earnings rose to $1.60 from $1.21 as revenue increased 18% to $3.57 billion.

Analysts expected the company to earn $1.38 a share on revenue of $3.40 billion.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

(Yogita Patel and Kevin Kingsbury contributed to this article.)

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