Eaton reports fourth quarter net income of $1.16 per share, up 61 percent

Eaton increases dividend by 15 percent and announces $250 million share buyback



CLEVELAND ... Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.16 for the fourth quarter of 2004, an increase of 61 percent over net income per share of $.72 in the fourth quarter of 2003. Sales in the quarter were $2.63 billion, 26 percent above the same period in 2003 and a quarterly record. Net income was $183 million compared to $114 million in 2003, an increase of 61 percent.

Net income in both periods included charges related to restructuring activities. Before restructuring charges, operating earnings per share in the fourth quarter of 2004 were $1.23 versus $.77 per share in 2003, an increase of 60 percent. Operating earnings for the fourth quarter of 2004 were $194 million compared to $122 million in 2003, an increase of 59 percent.

Net income and operating earnings in the fourth quarter were impacted by a $30 million after-tax gain from resolution of tax issues, a $10 million after-tax charge to exit a legacy tire and refrigeration valve manufacturing business that does not fit Eaton’s long-term strategy, and an $8 million after-tax contribution to Eaton’s charitable fund. These items increased net income and operating earnings in the quarter by 8 cents per share.

For the full year 2004, sales were $9.82 billion, 22 percent above 2003. Net income of $648 million increased 68 percent over 2003, and net income per share of $4.13 rose 61 percent. Operating earnings per share for 2004 of $4.30 rose 58 percent above 2003. Operating earnings in 2004 totaled $675 million versus $410 million in 2003, an increase of 65 percent.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are very pleased with our performance in the fourth quarter. Sales growth in the fourth quarter of 26 percent consisted of 12 percent organic growth, 12 percent from acquisitions, and 2 percent from higher exchange rates. Our organic growth was made up of 8 percent growth in our end markets and 4 percent growth from outgrowing our end markets.

"Looking at 2004 as a whole, we had an outstanding year," said Cutler. "Our sales grew 22 percent, net income grew 68 percent, and our return on equity was 20 percent."

In light of the strong full-year results and continuing strong momentum in most of its markets, Eaton is taking the following actions:

Increasing its quarterly dividend by 15 percent, from $.27 per share to $.31 per share

Initiating a plan to repurchase $250 million of shares to offset dilution from the shares issued during 2004 from the exercise of stock options

Contributing $50 million to its qualified pension plans in the United States

"As we survey our end markets in 2005, we anticipate growth of approximately 5 percent," said Cutler. "We expect to outgrow our end markets by about 50 percent, as we did in 2004, and we expect to also record additional growth from the full-year impact of the Powerware and Walterscheid acquisitions, the ramp up of our Eaton Fast Gear heavy-duty truck transmission joint venture in China, and the acquisition of Winner Hydraulics, which is expected to close later in the first quarter. As a result, we anticipate overall growth in our sales in the range of 12 to 14 percent in 2005.

"We anticipate net income per share for the first quarter of 2005 to be $1.10 to $1.20, and for the full year to be $4.90 to $5.10. Operating earnings per share, which exclude restructuring charges to integrate our recent acquisitions and joint ventures, are anticipated to be $1.15 to $1.25 for the first quarter of 2005, and $5.10 to $5.30 for the full year."

Business Segment Results
Fourth quarter sales of the Fluid Power segment were $779 million, 11 percent above the fourth quarter of 2003. Fluid Power markets grew 8 percent compared to the same period in 2003, with global hydraulics shipments up 13 percent, commercial aerospace markets up 7 percent, defense aerospace markets up 2 percent, and European automotive production down 1 percent. Operating profits in the fourth quarter were $85 million. Operating profits before restructuring charges were $88 million, up 38 percent compared to a year earlier.

"The mobile and industrial hydraulics markets continued their strong growth in the fourth quarter,” said Cutler. "We anticipate that growth in the mobile equipment markets will continue in 2005, although at more modest levels, while growth in the industrial markets will accelerate. The commercial aerospace market grew in the fourth quarter at its fastest rate in over two years. We believe growth in commercial aerospace is likely to improve further in 2005.

"We announced during the quarter that we signed an agreement to purchase Winner Hydraulics, the largest manufacturer of hydraulic hose fittings in China,” said Cutler. "The acquisition is expected to play an important part in our fluid power growth plans in China. We expect the transaction to close late in the first quarter.

"During the fourth quarter, we announced an increase in our scope of work for the wing fluid delivery system on the F-35 Joint Strike Fighter,” said Cutler. "We anticipate the expanded scope will increase revenues over the 20-year life of the program by $1 billion, to a total of almost $3 billion in revenues.”

In the Electrical segment, fourth quarter sales were $895 million, up 46 percent over 2003. Excluding the impact of recent acquisitions, fourth quarter sales were up 8 percent compared to 2003. Operating profits in the fourth quarter were $71 million. Operating profits before restructuring charges were $84 million, up 56 percent from results in 2003.

"End markets for our electrical business grew about 3 percent during the fourth quarter,” said Cutler. "For all of 2004, our electrical markets grew at 4 percent, and in 2005, we expect our markets to grow at about the same rate.”

The Automotive segment posted fourth quarter sales of $461 million, 9 percent above the comparable quarter of 2003. Automotive production in NAFTA decreased 3 percent and in Europe declined 1 percent compared to the fourth quarter of 2003. Operating profits were $59 million, down 2 percent.

"Automotive segment revenue considerably outpaced its end markets in the fourth quarter, consistent with its performance all year,” said Cutler. "As we expected, our margins were impacted in the quarter by higher material costs.

"For 2005, we anticipate slightly weaker markets for both NAFTA and European automotive production. Based on new product wins already awarded, we believe we will outgrow these end markets, as we did during 2004,” said Cutler.

The Truck segment posted sales of $498 million in the fourth quarter, up 44 percent compared to 2003, and recorded operating profits of $97 million, up 80 percent compared to the fourth quarter of 2003. NAFTA heavy-duty production was up 53 percent compared to 2003, NAFTA medium-duty production was up 20 percent, European truck production was up 10 percent, and Brazilian vehicle production was up 16 percent.

"Fourth quarter production of NAFTA heavy-duty trucks totaled 76,000 units, ” said Cutler. "Orders for new NAFTA heavy-duty trucks in the fourth quarter averaged 34,000 units per month, and we believe demand will remain strong throughout 2005 and 2006. For all of 2005, we believe that the NAFTA heavy-duty market is likely to total 310,000 units.”

Eaton Corporation is a diversified industrial manufacturer with 2004 sales of $9.8 billion. Eaton is a global leader in fluid power systems and services for industrial, mobile and aircraft equipment; electrical systems and components for power quality, distribution and control; automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety; and intelligent truck drivetrain systems for safety and fuel economy. Eaton has 55,000 employees and sells products to customers in more than 125 countries.

Notice of Conference Call: Eaton's conference call to discuss its fourth quarter results is available to all interested parties via live audio webcast today at 10 a.m. EST 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 first quarter 2005 and full year 2005 net income per share and operating earnings per share, our worldwide markets, our growth in relation to end markets, our growth from acquisitions and joint ventures, and the repurchase of shares. 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; acquisitions and divestitures; failure to close, or delay in the closing of, acquisitions; unanticipated difficulties integrating acquisitions; 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.


Contact Information

William Hartman, vice president, Investor Relations

Gary Klasen, director, Media Relations