Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced net income per share of $1.63 for the fourth
quarter of 2010, a 30 percent increase over net income per share of
$1.25 in the fourth quarter of 2009. Net income in both periods
included charges related to acquisition integration. Before
acquisition integration charges, operating earnings per share in
the fourth quarter of 2010 were $1.69 compared to $1.35 per share
in the fourth quarter of 2009, an increase of 25 percent.
“Our fourth quarter results were very strong, substantially
exceeding the high end of our guidance despite recording a pretax
provision of $36 million, or 15 cents per share after tax, during
the quarter for a Brazilian legal judgment,” said Alexander M.
Cutler, Eaton chairman and chief executive officer.
Sales in the quarter were $3.7 billion, 17 percent higher than
the same period in 2009. Net income was $280 million compared to
$211 million in 2009, an increase of 33 percent. Operating
earnings, which exclude acquisition integration charges, for the
fourth quarter of 2010 were $291 million compared to $229 million
in 2009, an increase of 27 percent.
“Sales growth in the fourth quarter of 17 percent consisted of
16 percent growth in core sales and 2 percent growth from
acquisitions, offset slightly by a 1 percent decline due to foreign
exchange. End markets in the fourth quarter grew by 13 percent,”
said Cutler. “Our segment operating margin in the fourth quarter
was 13.7 percent, an all-time record and a notable improvement over
our segment operating margin of 13.4 percent in the third
quarter.”
For the full year 2010, sales were $13.7 billion, 16 percent
higher than 2009. Net income was $929 million, an increase of 143
percent over 2009, and net income per share of $5.46 was 141
percent more than in 2009. Operating earnings in 2010 totaled $956
million versus $437 million in 2009, an increase of 119 percent.
Operating earnings per share for 2010 of $5.61 were 117 percent
higher than in 2009.
“Our full year 2010 sales growth of 16 percent reflects a
rebound from the depressed market levels of 2009 and our 30 percent
growth in revenues from developing countries,” said Cutler. “We are
pleased with the momentum we see in our businesses and with the
strong incremental earnings we have been able to generate from the
additional sales volume.
“We had excellent cash flow in the fourth quarter, with
operating cash flow totaling $555 million,” said Cutler. “Full year
operating cash flow totaled $1.3 billion, including $400 million in
contributions made to our pension plans during 2010. We also
acquired businesses with revenues in the year prior to the
acquisition of $220 million.
“We estimate our markets for all of 2011 will grow 8 percent,
with the markets in all six segments registering growth, the first
year since 2006 in which the markets for all of our segments have
grown. We expect to outgrow our end markets in 2011 by
approximately $450 million,” said Cutler. “The incremental revenues
in 2011 from our recent acquisitions are expected to total $160
million. In total, we anticipate our revenues in 2011 will grow by
12 percent compared to 2010.
“We expect that 2011 operating earnings per share will set a new
record,” said Cutler. “We estimate that first quarter operating
earnings per share, which exclude an estimated $0.02 of charges to
integrate our recent acquisitions, will be between $1.50 and $1.60
per share. For the full year 2011, we estimate that operating
earnings per share, which exclude an estimated $0.08 of charges to
integrate our recent acquisitions, will be between $7.00 and
$7.60.
“In light of our strong 2010 results and our outlook for 2011,
we are increasing our quarterly dividend by 17 percent,” said
Cutler. “In addition, due to the handsome growth in our stock
price, which has risen by more than 60 percent since the start of
2010, we are announcing a two-for-one stock split. Note that the
per share guidance for 2011 in the preceding paragraph is stated on
a pre-split basis.”
Business Segment Results
Fourth quarter sales for the Electrical Americas segment were
$1.0 billion, up 22 percent from the fourth quarter of 2009.
Operating profits in the fourth quarter were $163 million, up 29
percent over the fourth quarter of 2009.
“End markets for our Electrical Americas segment grew 9 percent
during the fourth quarter, slightly faster than in the third
quarter, and our orders in the fourth quarter grew by 14 percent,”
said Cutler. “We were pleased with the margins in our Electrical
Americas segment in the fourth quarter. Our operating margin was
16.1 percent, a significant improvement over the 14.6 percent
margin in the third quarter.
“Our industrial controls and power quality markets showed robust
growth during the quarter,” said Cutler. “For 2011, we expect our
markets to increase by approximately 6 percent.”
Fourth quarter sales for the Electrical Rest of World segment
were $768 million, up 10 percent over the fourth quarter of 2009.
Operating profits were $81 million. Excluding acquisition
integration charges of $13 million during the quarter, operating
profits totaled a quarterly record of $94 million, up 27 percent
compared to the fourth quarter of 2009.
“During the fourth quarter, our Rest of World electrical markets
grew 10 percent,” said Cutler. “We were pleased with our 12.2
percent operating margin in the quarter.
“Orders in the fourth quarter grew 10 percent,” said Cutler.
“For 2011, our Electrical Rest of World markets are expected to
grow by 7 percent, with Asian growth outpacing growth in
Europe.
“We announced last week we reached agreement to acquire ACTOM
(Pty) Limited’s low-voltage electrical business in South Africa,”
said Cutler. “In addition to greatly expanding our electrical
business in South Africa, this acquisition provides a strong
platform to pursue growth in other southern African countries.”
In the Hydraulics segment, fourth quarter sales were $571
million, 36 percent higher than the fourth quarter of 2009.
Hydraulics markets in the fourth quarter grew 38 percent compared
to the same period in 2009, with U.S. markets up 46 percent and
non-U.S. markets up 32 percent.
Operating profits in the fourth quarter were $72 million, and
adjusting for acquisition integration charges of $1 million in the
fourth quarter of 2010, were $73 million. This compares to
operating profits in the fourth quarter of 2009 of $13 million.
“The global hydraulics market had another quarter of strong
growth, capping a year in which our global hydraulics markets grew
by 34 percent. Our bookings grew 41 percent over the fourth quarter
of 2009,” said Cutler. “For 2011, we anticipate global hydraulics
markets will be up 12 percent.
“We were pleased to complete the acquisition of the Tuthill
Coupling Group on January 1,” said Cutler. “This acquisition
further expands our offerings of hydraulic and pneumatic quick
connect coupling solutions.”
The Aerospace segment posted fourth quarter sales of $400
million, an increase of 5 percent from the fourth quarter of 2009.
Aerospace markets in the fourth quarter grew by 1 percent.
Operating profits in the fourth quarter were $63 million.
Excluding acquisition integration charges of $1 million, operating
profits were $64 million, up 28 percent from the fourth quarter of
2009.
“Our bookings were up 36 percent in the quarter,” said Cutler.
“For 2011, aerospace markets are expected to grow by 4
percent.”
The Truck segment posted sales of $518 million in the fourth
quarter, up 17 percent compared to 2009. Truck markets in the
fourth quarter grew 16 percent, with U.S. markets up 20 percent and
non-U.S. markets up 14 percent. Operating profits were $66 million,
an increase of 29 percent compared to the fourth quarter of
2009.
“For 2011, we expect good market growth, driven by a sharp
rebound in NAFTA Class 8 truck production” said Cutler. “We
anticipate our overall truck markets will grow 20 percent, with
U.S. markets growing 40 percent and non-U.S. markets growing 7
percent.”
The Automotive segment posted fourth quarter sales of $394
million, up 9 percent from the fourth quarter of 2009. Automotive
unit production in the fourth quarter grew by 9 percent, with U.S.
markets up 10 percent and non-U.S. markets up 9 percent. Operating
profits in the fourth quarter were $43 million, an increase of 34
percent over the fourth quarter of 2009.
“Looking at 2011, we anticipate auto production will grow 6
percent,” said Cutler. “We expect growth in U.S. production of 7
percent and growth in non-U.S. production of about 5 percent.”
The presentation to be discussed on today’s earnings
conference call at 10 a.m. Eastern time is currently available
on www.eaton.com.
Eaton Corporation is a diversified power management company with
2010 sales of $13.7 billion. Celebrating its 100th anniversary in
2011, 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 fourth quarter results is available to all interested parties
as a live audio webcast today at 10 a.m. Eastern time via a link on
the center 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 fourth quarter results,
which will be covered during the call.
This news release contains forward-looking statements concerning
the first quarter 2011 and full year 2011 net income per share and
operating earnings per share, the growth in full year 2011
revenues, the performance of 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;
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; the impact of acquisitions and divestitures;
unanticipated difficulties integrating acquisitions; new laws and
governmental regulations; interest rate changes; changes in
currency exchange rates; 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 year ended December 31, 2010 and 2009 are available on the
company’s Web site, www.eaton.com.
EATON CORPORATION
COMPARATIVE FINANCIAL SUMMARY
Three months ended Year ended December 31 December 31 (In
millions except for per share data) 2010 2009 2010 2009
Net sales $ 3,663 $ 3,131 $ 13,715 $ 11,873
Income before
income taxes 293 170 1,036 303
Net income $ 283 $ 212 $
937 $ 385 Less net income for noncontrolling interests (3 )
(1 ) (8 ) (2 )
Net income attributable to
Eaton common shareholders $ 280 $ 211 $ 929
$ 383
Net income per common share
Diluted $ 1.63 $ 1.25 $ 5.46 $ 2.27 Basic 1.66 1.27 5.52 2.31
Weighted-average number of common shares outstanding
Diluted 171.4 168.8 169.8 167.9 Basic 168.9 166.7 167.7 166.4
Cash dividends paid per common share $ .58 $ .50 $
2.16 $ 2.00
Reconciliation of net income attributable to
Eaton common shareholders to operating earnings Net
income attributable to Eaton common shareholders $ 280 $ 211 $ 929
$ 383 Excluding acquisition integration charges (after-tax)
11 18 27 54
Operating earnings $ 291 $ 229 $ 956 $
437 Net income per common share - diluted $ 1.63 $
1.25 $ 5.46 $ 2.27 Excluding per share impact of acquisition
integration charges (after-tax) .06 .10
.15 .32
Operating earnings per
common share $ 1.69 $ 1.35 $ 5.61 $ 2.59
See accompanying notes.
EATON
CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Three months ended Year ended December 31
December 31 (In millions except for per share data) 2010 2009 2010
2009
Net sales $ 3,663 $ 3,131 $ 13,715 $ 11,873
Cost of products sold 2,565 2,241 9,633 8,782 Selling and
administrative expense 644 587 2,486 2,252 Research and development
expense 117 103 425 395 Interest expense-net 34 34 136 150 Other
(income) expense-net 10 (4 ) (1 )
(9 )
Income before income taxes 293 170 1,036 303
Income tax expense (benefit) 10 (42 )
99 (82 )
Net income 283 212 937 385 Less net
income for noncontrolling interests (3 ) (1 )
(8 ) (2 )
Net income attributable to Eaton common
shareholders $ 280 $ 211 $ 929 $ 383
Net income per common share Diluted $ 1.63 $
1.25 $ 5.46 $ 2.27 Basic 1.66 1.27 5.52 2.31
Weighted-average number of common shares outstanding Diluted
171.4 168.8 169.8 167.9 Basic 168.9 166.7 167.7 166.4
Cash dividends paid per common share $ 0.58 $ 0.50 $ 2.16 $
2.00 See accompanying notes.
EATON CORPORATION
BUSINESS SEGMENT INFORMATION
Three months ended Year ended December 31 December 31 (In millions)
2010 2009 2010 2009
Net sales Electrical Americas $ 1,012 $
827 $ 3,675 $ 3,410 Electrical Rest of World 768 698 2,748 2,483
Hydraulics 571 419 2,212 1,692 Aerospace 400 381 1,536 1,602 Truck
518 443 1,997 1,457 Automotive 394 363
1,547 1,229
Total net sales $
3,663 $ 3,131 $ 13,715 $ 11,873
Segment operating profit (loss) Electrical Americas $ 163 $
126 $ 529 $ 518 Electrical Rest of World 81 52 264 107 Hydraulics
72 13 279 51 Aerospace 63 47 220 245 Truck 66 51 245 39 Automotive
43 32 163 (10 )
Total segment operating
profit 488 321 1,700 950
Corporate Amortization
of intangible assets (47 ) (44 ) (181 ) (170 ) Interest expense-net
(34 ) (34 ) (136 ) (150 ) Pension and other postretirement benefits
expense (29 ) (37 ) (120 ) (212 ) Stock option expense (2 ) (8 )
(11 ) (28 ) Other corporate expense-net (83 ) (28 )
(216 ) (87 )
Income before income taxes 293
170 1,036 303 Income tax expense (benefit) 10
(42 ) 99 (82 )
Net income 283 212 937
385 Less net income for noncontrolling interests (3 )
(1 ) (8 ) (2 )
Net income attributable to Eaton
common shareholders $ 280 $ 211 $ 929 $
383 See accompanying notes.
EATON
CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
December 31 (In millions) 2010 2009
Assets
Current assets Cash $ 333 $ 340 Short-term investments 838 433
Accounts receivable-net 2,239 1,899 Inventory 1,564 1,326 Deferred
income taxes and other current assets 532 526
Total current assets 5,506 4,524 Property, plant and
equipment-net 2,477 2,445 Goodwill 5,454 5,435 Other intangible
assets 2,272 2,441 Deferred income taxes and other noncurrent
assets 1,543 1,437
Total assets $ 17,252 $
16,282
Liabilities and shareholders' equity Current
liabilities Short-term debt $ 72 $ 113 Current portion of long-term
debt 4 5 Accounts payable 1,408 1,057 Accrued compensation 465 256
Other current liabilities 1,284 1,258
Total
current liabilities 3,233 2,689 Noncurrent
liabilities Long-term debt 3,382 3,349 Pension liabilities 1,429
1,586 Other postretirement benefits liabilities 743 754 Deferred
income taxes and other noncurrent liabilities 1,062
1,086
Total noncurrent liabilities 6,616 6,775
Shareholders' equity Eaton shareholders' equity 7,362 6,777
Noncontrolling interests 41 41
Total equity
7,403 6,818
Total liabilities and equity $
17,252 $ 16,282 See accompanying notes.
EATON CORPORATION
NOTES TO THE FOURTH QUARTER 2010 EARNINGS RELEASE
Amounts are in millions unless indicated otherwise (per share
data assume dilution)
This earnings release discloses operating earnings, operating
earnings per common share, and operating profit 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 this 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.
Note 1. ACQUISITIONS OF BUSINESSES
The Consolidated Statements of Income include the results of
these businesses from the dates of the transactions or formation.
These transactions are summarized below:
Acquired business
Date oftransaction
Businesssegment
Annual sales Chloride Phoenixtec Electronics October 12,
Electrical $25 for the
A China-based manufacturer of
uninterruptiblepower supply (UPS) systems. Eaton acquired
theremaining shares to increase its ownership from50% to 100%.
2010
Rest ofWorld
year endedSeptember 30,2010
CopperLogic, Inc. October 1, Electrical $35 for the
A United States-based manufacturer
ofelectrical and electromechanical systems.
2010 Americas
year endedSeptember 30,2010
Wright Line Holding, Inc. August 25, Electrical $101 for the
A United States provider of
customizedenclosures, rack systems, and air-flow management systems
to store, power, and secure mission-critical IT data center
electronics.
2010 Americas
year endedJune 30, 2010
EMC Engineers, Inc. July 15, 2010 Electrical $24 for 2009
A United States energy engineering and
energy services company that delivers energy efficiency solutions
for a wide range of governmental, educational, commercial and
industrial facilities.
Americas Micro Innovation Holding AG September 1, Electrical
$33 for 2008
A Switzerland-based manufacturer of
humanmachine interfaces, programmable logic controllers and
input/output devices. Eaton acquired the remaining shares to
increase its ownership from 50% to 100%.
2009
Rest ofWorld
SEG Middle East Power Solutions &
SwitchboardManufacture LLC
July 2,
2009
ElectricalRest of
$10 for 2008
A 49%-owned joint venture in Abu Dhabi
that manufactures low-voltage switchboards and control panel
assemblies for use in the Middle East power generation and
industrial markets.
World
On January 1, 2011, Eaton closed the acquisition of the Tuthill
Coupling Group, a division of the Tuthill Corporation. This
business, located in the United States and France, manufactures
pneumatic and hydraulic quick coupling solutions and leak-free
connectors used in industrial, construction, mining, defense,
energy and power applications. This business had sales of $35 for
the year ended November 30, 2010 and will be included in the
Hydraulics business segment.
On January 20, 2011, Eaton reached an agreement to acquire ACTOM
(Pty) Limited’s low-voltage electrical business in South
Africa. This business is a manufacturer and supplier of motor
control components, engineered electrical distribution systems, and
uninterruptible power supply systems and had sales of $58 for the
year ended December 31, 2010. The terms of the agreement are
subject to regulatory approvals and other customary closing
conditions. The acquisition is expected to close during the first
half of 2011.
Note 2. 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 December 31
Acquisitionintegrationcharges
Operating profitas reported
Operating profitexcluding
acquisitionintegration charges
2010 2009 2010 2009 2010 2009
Business
segment
Electrical
Americas $ - $ - $ 163 $ 126 $ 163 $ 126 Electrical Rest of World
13 22 81 52 94 74 Hydraulics 1 - 72 13 73 13 Aerospace 1 3 63 47 64
50 Truck - - 66 51 66 51 Automotive
- - 43 32
43 32 15 25 488 321 503 346 Corporate
-
2 - - - -
Total integration charges before income
taxes
$ 15 $ 27 $
488 $ 321 $ 503 $ 346 After-tax integration charges $
11 $ 18 Per common share $ .06 $ .10 Year ended December 31
Acquisitionintegrationcharges
Operating profit (loss)as reported
Operating profit (loss)excluding
acquisitionintegration charges
2010 2009 2010 2009 2010 2009
Business
segment
Electrical Americas $ 2 $ 4 $ 529 $ 518 $ 531 $ 522 Electrical Rest
of World 33 60 264 107 297 167 Hydraulics 1 3 279 51 280 54
Aerospace 4 12 220 245 224 257 Truck - - 245 39 245 39 Automotive
-
1 163 (10 ) 163 (9 ) 40 80 1,700
950 1,740 1,030 Corporate -
2 - -
- -
Total integration charges before income
taxes
$ 40 $ 82 $
1,700 $ 950 $ 1,740 $ 1,030 After-tax integration
charges $ 27 $ 54 Per common share $ .15 $ .32
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 Consolidated Statements of Income in
Cost of products sold or Selling and administrative expense, as
appropriate. In Business Segment Information, the charges reduced
Operating profit of the related business segment.
Note 3. WORKFORCE REDUCTION CHARGES
In 2009, Eaton took significant actions to reduce its full-time
workforce by 17% in response to the severe economic downturn. These
actions resulted in the recognition of severance and pension and
other postretirement benefits expense of $26 in the fourth quarter
of 2009 and $182 for the full year of 2009. These charges were
primarily included in Cost of products sold or Selling and
administrative expense, as appropriate. In Business Segment
Information, the charges reduced Operating profit of the related
business segment.
Note 4. PENSION AND OTHER POSTRETIREMENT BENEFITS
EXPENSE
In 2009, due to limitations imposed by the Pension Protection
Act on pension lump-sum distributions, Eaton’s United States
Qualified Pension Plan (the Plan) became restricted from making
100% lump-sum payments. As a result, the Plan experienced a
significant increase in lump-sum payments in 2009 prior to the
limitation going into effect. Pension settlement expense was $86
for the full year of 2009, of which $83 was attributable to the
U.S. pension plans. A portion of the increase in lump-sum payments
was attributable to the workforce reduction in 2009. Additionally,
as a result of the workforce reduction in 2009, Eaton incurred
curtailment expense related to pension plans. 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. Curtailment expense was $22 for the full year
of 2009. These charges were primarily included in Cost of products
sold or Selling and administrative expense, as appropriate. In
Business Segment Information, the charges were included in Pension
and other postretirement benefits expense.
Note 5. COMMITMENTS AND CONTINGENCIES
In December 2010, a Brazilian court held that a judgment against
a Brazilian company sold by Eaton in 2006 could be enforced against
Eaton. The Company recorded a provision of 60 Brazilian Reais ($36
based on current exchange rates) related to this legal matter as a
corporate charge classified in Other (income) expense-net. Eaton is
appealing this decision in the Brazilian court system.
Note 6. INCOME TAXES
The effective tax rate for the fourth quarter of 2010 was 3.3%
compared to a tax benefit rate of 24.6% for the fourth quarter of
2009. The fourth quarter 2010 tax rate was favorably impacted by
the tax effect of a Brazil legal judgment for which a provision of
$36 was recorded and the renewal of the U.S. Research and
Experimentation tax credit. Without these two items, the tax rate
in the fourth quarter 2010 would have been 10.4%. The
effective tax rate for the full year 2010 was 9.5% compared to a
tax benefit rate of 27.2% for 2009. The increased tax rate in 2010
is primarily attributable to higher U.S. income at the higher
relative U.S. tax rate, a one-time, non-cash charge of $23 to
reflect the impact of the Health Care Reform and Education
Reconciliation Act on taxation associated with Medicare Part D, and
adjustments of $22 related to an income tax audit of transfer
prices for 2005 to 2009, partially offset by the successful
resolution of international tax audit issues, the recognition of
state and local income tax benefits involving tax loss
carry-forwards and the recognition of additional international
deferred tax assets.
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