CLEVELAND ... Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced record quarterly sales, net income, and cash flow for the second quarter of 2006. Net income per share was $1.64 for the second quarter of 2006, an increase of 20 percent over net income per share of $1.37 in the second quarter of 2005. Sales in the quarter were $3.19 billion, 12 percent above the same period in 2005. Net income was $253 million compared to $209 million in 2005, an increase of 21 percent.
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 2006 were $1.68 versus $1.40 per share in 2005, an increase of 20 percent, and operating earnings for the second quarter of 2006 were $259 million compared to $214 million in 2005, an increase of 21 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "Our second quarter results exceeded our guidance. Sales growth in the quarter of 12 percent consisted of 5 percent from organic growth, 6 percent from acquisitions, and 1 percent from exchange rates. Our end markets grew by approximately 4 percent.
"In the second quarter, our segment operating margin before acquisition integration charges was 12.9 percent, after a reduction of 0.7 percent due to net costs associated with our Excel 07 program. Our Excel 07 program is on schedule and meeting our original expectations," said Cutler.
Excel 07 is the program Eaton initiated in the first quarter 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 in 2007. As disclosed previously, the Excel 07 program includes the costs of the actions as well as funding sources such as savings generated from the actions, sales of non-strategic product lines, and benefits from corporate actions such as resolution of tax audits.
"The net impact of our Excel 07 program in the second quarter totaled a $.09 per share benefit to earnings, slightly ahead of the $.05 per share benefit we had expected at the start of the quarter. Included in the program were benefits from the resolution of tax audits in the second quarter of $29 million," said Cutler. "For the first half of 2006, our Excel 07 program has had a positive impact of $.02 per share and in the third quarter the impact of the Excel 07 program is expected to be neutral.
"As we survey our end markets, the year is shaping up about as we forecasted at the start of the year," said Cutler. "We expect the strong growth we experienced in many of our markets in the first half to slow somewhat over the balance of the year as markets respond to the impact of the continuing rise in interest rates in the United States and many other countries. Overall, we anticipate our markets in 2006 to grow between 4 and 5 percent.
"Our operating cash flow for the quarter was a quarterly record of $441 million," said Cutler. "That compares to operating cash flow in the second quarter of 2005 of $322 million.
"In light of our strong performance, and our outlook for the rest of this year and 2007, we are raising our quarterly dividend by 11 percent, from $.35 per share to $.39 per share," said Cutler. "Additionally, we took advantage of the weakness in the stock market in early June to repurchase $63 million of stock.
"We anticipate net income per share for the third quarter of 2006 to be between $1.50 and $1.60," said Cutler. "Operating earnings per share, which exclude charges to integrate our recent acquisitions, are anticipated to be between $1.55 and $1.65 in the third quarter of 2006.
"For the full year, we are maintaining our guidance of between $5.90 and $6.20 for net income per share and between $6.10 and $6.40 for operating earnings per share."
Business Segment Results
Second quarter sales for the Electrical segment were $1.04 billion, up 13 percent over 2005. Operating profits in the second quarter were $113 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $116 million, up 23 percent from results in 2005. The Excel 07 program had a positive impact of $4 million in the quarter due to the sale of a small power generation control product line.
"End markets for our electrical business grew about 8 percent during the second quarter, with strong growth in non-residential construction markets offsetting weakness in the residential market. Our growth in power quality applications continues to be impressive," said Cutler. "In addition, our operating margins expanded to 11.2 percent, compared to 10.2 percent in the second quarter of 2005. We are particularly pleased that we were able to increase our margins despite absorbing $14 million of additional costs in the second quarter from the rise in copper prices over the past year.
"We expect end market growth in the second half to be between 5 and 6 percent, led by strength in the non-residential construction and power quality markets."
In the Fluid Power segment, second quarter sales were $1.03 billion, 22 percent above the second quarter of 2005. Excluding the impact of acquisitions, second quarter sales were up 4 percent compared to 2005. Fluid Power markets grew 4 percent compared to the same period in 2005, with global fluid power industry shipments up an estimated 7 percent, the commercial and business jet aerospace market up 5 percent, the defense aerospace market up 2 percent, and European automotive production down 4 percent.
Operating profits in the second quarter were $110 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $113 million, an increase of 19 percent compared to a year earlier. There were $7 million of Excel 07 net costs in the quarter.
"In the second quarter, the global hydraulics markets maintained the strong growth experienced in the first quarter," said Cutler. "The commercial aerospace market grew slightly less than expected, due principally to slower than expected growth in the aftermarket.
"We announced during the quarter a joint initiative with the Environmental Protection Agency, International Truck and Bus, and United Parcel Service to test a new hydraulic hybrid diesel truck," said Cutler. "This technology offers the potential to significantly improve fuel economy and reduce carbon dioxide emissions."
The Truck segment posted sales of $646 million in the second quarter, up 8 percent compared to 2005. NAFTA heavy-duty production was up 7 percent compared to 2005, NAFTA medium-duty production was down 1 percent, and both European truck and Brazilian vehicle production were up 2 percent.
Operating profits in the second quarter were $133 million. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $135 million, an increase of 13 percent over 2005. Excel 07 net costs were $7 million during the quarter.
"Second quarter production of NAFTA heavy-duty trucks totaled 97,000 units, about 6 percent more than in the first quarter of 2006," said Cutler. "Orders during the second quarter averaged 28,000 units per month, higher than we had expected at the start of the quarter. The backlog at the end of June was estimated to be about 205,000 units.
The Automotive segment posted second quarter sales of $474 million, a slight increase over the second quarter of 2005. Automotive production in NAFTA was down 1 percent and in Europe was down 4 percent, compared to the second quarter of 2005.
Operating profits were $47 million. Excluding acquisition integration charges of $1 million, operating profits were $48 million, down 28 percent from 2005. Excel 07 net costs were $12 million during the quarter.
"The automotive markets were sluggish in the second quarter," said Cutler. "We are expecting that for 2006 as a whole the markets in NAFTA and Europe will be slightly weaker than in 2005. In light of this, we took several significant Excel 07 actions to better position our business for the future."
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 second 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 third quarter 2006 and full year 2006 net income per share and operating earnings per share, our worldwide markets, and the 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 that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; acquisitions and divestitures; 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.