Date: October 16, 2006
Eaton reports third quarter net income per share up 25 percent to $1.62
CLEVELAND … Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.62 for the third quarter of 2006, an increase of 25 percent over net income per share of $1.30 in the third quarter of 2005. Sales in the quarter were $3.12 billion, 13 percent above the same period in 2005. Net income was $248 million compared to $199 million in 2005, an increase of 25 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 2006 were $1.65 versus $1.33 per share in 2005, an increase of 24 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "Results in the third quarter were strong, with operating earnings per share coming in at the very top of our guidance. Sales growth of 13 percent in the quarter consisted of 5 percent from organic growth, 6 percent from acquisitions, and 2 percent from exchange rates. Our organic growth was comprised of 4 percent growth in our end markets and 1 percent from outgrowing our end markets.
"We expect the growth rate in our overall end markets to weaken slightly in the fourth quarter," said Cutler. "While the non-residential electrical and hydraulics markets remain strong, and the heavy-duty truck market should post a strong finish to the year, markets likely to weaken during the quarter are the residential construction market for our electrical products, North American and Brazilian automotive production, and Brazilian agricultural equipment production.
"We were able to make significant progress on our Excel 07 program during the third quarter," said Cutler. "The net impact of our Excel 07 program in the third quarter was a $.03 per share benefit to earnings, taking into account the costs to implement Excel 07 actions, the savings generated from past Excel 07 actions, a net gain on the sale of non-strategic product lines, and benefits from the resolution of tax audits. The Excel 07 announcements during the quarter were in total the largest set of quarterly actions this year, and with these actions behind us, we anticipate a smaller number of new Excel 07 actions during the fourth quarter."
Excel 07 is the program Eaton initiated in the first quarter of 2006 to address resource levels and operating performance in businesses which underperformed in 2005 and businesses in which markets are expected to soften during the second half of 2006 and 2007.
"We are very pleased with our overall results and the achievement of our strategic objectives thus far in 2006," said Cutler. "The overall economic picture during 2006 has evolved very much along the lines we had anticipated at the start of the year, our acquisition integration activities are meeting our expectations, and our Excel 07 program is on plan.
"We closed two acquisitions during the quarter, the acquisitions of the Senyuan International Chinese medium-voltage electrical business and the Ronningen-Petter filtration business," said Cutler. "The annualized sales of all acquisitions closed so far during 2006 total approximately $210 million.
"Our operating cash flow in the third quarter was $448 million, a record for quarterly cash flow," said Cutler. "That compares to operating cash flow in the third quarter of 2005 of $296 million.
"We repurchased $69 million of stock during the third quarter, and a total of $132 million so far in 2006. We ended the third quarter with $701 million of cash and short-term investments on our balance sheet and a ratio of net debt to capital of 29 percent," said Cutler. "This gives us substantial capacity for further acquisitions or share repurchases.
"In light of the slowing growth rate in our overall end markets, we anticipate that net income per share for the fourth quarter of 2006 will be between $1.45 and $1.55, and as a result, we are narrowing our guidance for net income per share for full year 2006 to between $6.07 and $6.17. Operating earnings per share, which exclude charges to integrate our recent acquisitions, are anticipated for the fourth quarter of 2006 to be between $1.50 and $1.60, with operating earnings per share for full year 2006 to be between $6.23 and $6.33."
Business Segment Results
Third quarter sales for the Electrical segment were $1.08 billion, up 10 percent over 2005 and a quarterly record. Operating profits in the third quarter were $116 million. Operating profits before acquisition integration charges were $117 million, up 2 percent from results in 2005. Excel 07 net costs incurred in the Electrical segment in the third quarter totaled $6 million.
"End markets for our electrical business grew about 6 percent during the third quarter," said Cutler. "While we expect the non-residential construction markets to remain very strong, the decline in the residential construction market is continuing. As a result, we expect end market growth in the Electrical segment over the balance of the year to be slightly lower, at about 5 percent.
"Our margins were impacted during the quarter by the high level of copper prices," said Cutler. "The higher prices reduced third quarter operating profit in the Electrical segment by $9 million compared to our plan at the start of the year.
"We are particularly pleased we were able to complete the acquisition of Senyuan International during the quarter," said Cutler. "Senyuan International, the second largest participant in the Chinese medium-voltage electrical component market, will significantly accelerate our strategy of building a substantial electrical business in China."
In the Fluid Power segment, third quarter sales were $998 million, 29 percent above the third quarter of 2005. Excluding the impact of acquisitions, the Fluid Power segment grew 9 percent during the quarter. Fluid Power markets in the third quarter grew 5 percent compared to the same period in 2005, with global hydraulics shipments up an estimated 7 percent, commercial aerospace markets up 13 percent, defense aerospace markets flat, and European automotive production down 4 percent.
Operating profits in the third quarter were $105 million. Operating profits before acquisition integration charges were $110 million, up 51 percent compared to a year earlier. Excel 07 net costs incurred in the third quarter in the Fluid Power segment totaled $11 million.
"The global hydraulics markets posted another quarter of strong growth, driven by continued investment in industrial and construction equipment worldwide," said Cutler. "We anticipate that the global hydraulics markets are likely to continue to grow over the balance of 2006 at the pace seen in the third quarter. The commercial aerospace market showed very strong growth in the quarter, while defense aerospace remained flat.
"We closed the acquisition of the Ronningen-Petter filtration business in September," said Cutler. "Ronningen-Petter will prove to be a valuable addition to our filtration strategy."
The Truck segment posted sales of $647 million in the third quarter, up 8 percent compared to 2005, and recorded operating profits of $122 million. Operating profits before acquisition integration charges were $123 million, up 3 percent from results in 2005. The Truck segment incurred $24 million of net Excel 07 costs during the third quarter.
In the third quarter, NAFTA heavy-duty truck production was up 11 percent compared to 2005, NAFTA medium-duty production was up 13 percent, European truck production was up 11 percent, Brazilian vehicle production was up 1 percent, and Brazilian agricultural equipment production was down 18 percent.
"Third quarter production of NAFTA heavy-duty trucks totaled 98,000 units, the highest quarterly production of the year," said Cutler. "We expect that for the full-year NAFTA heavy-duty production is likely to be between 355,000 units and 365,000 units, slightly higher than we previously had forecast. The increase in the heavy-duty market is being offset by the slowdown we expect during the fourth quarter in the Brazilian vehicle and agricultural equipment markets."
The Automotive segment posted third quarter sales of $394 million, 5 percent less than the comparable quarter of 2005. Automotive production in NAFTA was down 9 percent while European production was down 4 percent compared to the third quarter of 2005.
Operating profits in the third quarter were $6 million, down 88 percent from the third quarter of 2005 as a result of the $34 million in net Excel 07 charges incurred during the quarter. Although shown as discontinued operations, there was a net gain of $35 million after-tax during the third quarter from the sale of two automotive businesses, consisting of a $38 million after-tax gain from the sale of a European transmission and engine controls business and a $3 million after-tax loss from the sale of a small plant that manufactured specialized vehicle controls.
"We were very pleased with our ability to undertake the large number of Automotive Excel 07 actions in the third quarter. In total, the cost of the plant closure actions was entirely offset from the two small sales we concluded during the quarter," said Cutler. "We believe the significant restructuring we have undertaken in our automotive business during 2006 will position us well to compete effectively and profitably in the changing automotive industry."
Eaton Corporation is a diversified industrial manufacturer with 2005 sales of $11.1 billion. Eaton is a global leader in electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. Eaton has 60,000 employees and sells products to customers in more than 125 countries.
Notice of Conference Call: Eaton's conference call to discuss its third quarter results is available to all interested parties via live audio webcast today at 10 a.m. Eastern Time through the Investor Relations tab on Eaton's home page. This news release can be accessed under the Corporate News heading on the Eaton home page by clicking on the news release.
This news release contains forward-looking statements concerning the fourth quarter 2006 and full year 2006 net income per share and operating earnings per share, the performance of our worldwide markets, revenues from acquisitions, and our Excel 07 program. 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; unexpected difficulties in implementing the Excel 07 program; 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.
William Hartman, vice president, Investor Relations
Gary Klasen, director, Media Relations