Date: April 16, 2007

Eaton Reports First Quarter Net Income Per Share Up 15 Percent To $1.56 And Raises Guidance For The Year

CLEVELAND … Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.56 for the first quarter of 2007, an increase of 15 percent over net income per share of $1.36 in the first quarter of 2006. Sales in the quarter were $3.2 billion, 5 percent above the same period in 2006 and a record for the first quarter. Net income was $234 million, also a record for the first quarter.

Net income in both periods included charges for integration of acquisitions. Before acquisition integration charges, operating earnings per share in the first quarter of 2007 were $1.62 versus $1.40 per share in 2006, an increase of 16 percent. Operating earnings for the first quarter of 2007 were $243 million compared to $214 million in 2006.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “We had a strong first quarter, with earnings per share well above the top end of our guidance. The 16 percent growth in operating earnings per share in the first quarter represents our twentieth quarter in a row with year-over-year operating earnings per share growth of more than 10 percent. Our strong performance in the quarter is further demonstration of our improved business diversification and geographic balance. Sales growth in the first quarter of 5 percent consisted of 1 percent from organic growth, 2 percent from acquisitions, and 2 percent from higher foreign exchange rates. Our end markets declined slightly more than 1 percent in the quarter, driven by the decline in the NAFTA heavy-duty truck market.

“Compared to the midpoint of our operating earnings per share guidance for the quarter, we achieved an additional $.15 per share from stronger than expected performance across all segments, as well as a gain of $.07 per share from state tax settlements and a tax law change affecting certain foreign operations,” said Cutler. “Our segment operating margin before acquisition integration charges was 13.3 percent in the first quarter compared to the 12.9 percent segment operating margin we recorded a year ago. Our margins are benefiting from the actions we undertook last year in our Excel 07 program.

“We continue to anticipate a decline of 3 to 4 percent in our end markets in 2007, primarily due to the decline in the NAFTA heavy-duty truck market,” said Cutler. “Overall, the weighted average of our end markets in the first quarter performed as we had expected, buoyed by stronger conditions in the markets for NAFTA heavy-duty trucks and Brazilian agricultural equipment, offset by weaker conditions in the North American markets for residential electrical equipment and hydraulics. It is worth noting that we now expect the quarterly progression of the NAFTA heavy-duty truck market to be slightly different from our expectations at the start of the year, with the stronger start to the year leading to the balance of the year being slightly weaker.

“We anticipate net income per share for the second quarter of 2007 to be between $1.35 and $1.45. Operating earnings per share, which excludes charges to integrate our recent acquisitions, are expected to be between $1.40 and $1.50 in the second quarter of 2007. We are raising our full-year guidance for both net income per share and operating earnings per share by $.15, to $6.20 to $6.40, and $6.45 to $6.65, respectively. The increase in our full-year guidance is less than the $.22 per share by which our operating earnings per share in the first quarter exceeded the midpoint of our guidance due to our expectation that the NAFTA heavy-duty truck market over the balance of the year will be slightly weaker than our original expectations.”

Business Segment Results

Sales for the Electrical segment were $1.1 billion, up 12 percent over 2006. Operating profits were $120 million, a new record for the first quarter. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $122 million, up 16 percent from 2006.

“End markets for our electrical business grew 1 percent during the first quarter,” said Cutler. “The U.S. nonresidential electrical market and the markets for uninterruptible power supply products registered solid growth, while the residential electrical and industrial equipment markets declined during the quarter.

“Our bookings in the Electrical segment, adjusted for foreign exchange and acquisitions, were up 10 percent from the first quarter a year ago, continuing the buildup of momentum in our Electrical segment,” said Cutler. “Our orders in the first quarter were a new quarterly bookings record for the segment.

“We completed the acquisition of Aphel Technologies Limited in early April,” said Cutler. “This acquisition expands our capabilities to provide power distribution equipment uniquely configured for power quality applications.”

Fluid Power segment sales were $1.0 billion, 7 percent above the first quarter of 2006. Fluid Power markets grew 6 percent compared to the first quarter of 2006, with global hydraulics shipments up 7 percent, the commercial and business jet aerospace market up 9 percent, defense aerospace up 5 percent, and European automotive up 2 percent.

Operating profits in the first quarter were $117 million, a new quarterly record. Excluding acquisition integration charges of $11 million during the quarter, operating profits were $128 million, an increase of 20 percent compared to a year earlier.

“We anticipate that growth in the U.S. hydraulics market should rebound as we go through 2007,” said Cutler. “Growth in the commercial and business jet aerospace market remained strong, while defense aerospace was stronger than we had expected. Our improved mix of businesses and overall improvement in operating efficiencies within the Fluid Power segment helped drive the higher margin in the segment compared to last year.

“We completed the acquisition of Argo-Tech in mid-March,” said Cutler. “Argo-Tech adds an important component to Eaton’s aerospace fuel system strategy, allowing us to provide a total fuel system solution.

“The aerospace business signed several new business contracts during the quarter,” said Cutler. “The expected lifetime revenues from the new business, based on the production schedules of the associated platforms, total approximately $275 million.”

The Truck segment posted sales of $576 million, down 5 percent compared to the first quarter of 2006. NAFTA heavy-duty truck production in the first quarter was down 23 percent compared to 2006, NAFTA medium-duty truck production was down 18 percent, European truck production was down 7 percent, Brazilian vehicle production was up 4 percent, and Brazilian agricultural equipment production was up 8 percent.

Operating profits in the first quarter were $107 million, a decline of 9 percent from 2006.

“First quarter production of NAFTA heavy-duty trucks was better than expected and should approximate 75,000 units, compared to 92,000 in the first quarter of 2006,” said Cutler. “We continue to expect a significant falloff in production in the second quarter, to about 45,000 units. We now estimate the NAFTA heavy-duty truck market in 2007 will total between 215,000 to 220,000 units.

The Automotive segment posted first quarter sales of $452 million, 2 percent higher than the comparable quarter of 2006. Automotive production in NAFTA declined 8 percent compared to the first quarter of 2006 while in Europe the market grew by 2 percent.

Operating profits in the first quarter were $63 million, up 19 percent over 2006.

“We expect that, for 2007 as a whole, the combined NAFTA and European automotive markets will decline slightly compared to 2006,” said Cutler. “The impact of our Excel 07 actions can be seen in the strong recovery of margins in the business.

“We announced in early April the acquisition of the fuel components division of Saturn Electronics & Engineering,” said Cutler. “This acquisition adds important new technology to our fuel emissions and safety controls business.”

Eaton Corporation is a diversified industrial manufacturer with 2006 sales of $12.4 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 61,000 employees and sells products to customers in more than 125 countries.

Notice of Conference Call: Eaton’s conference call to discuss its first quarter results is available to all interested parties via live audio webcast today at 10 a.m. Eastern time by clicking on the microphone on the right side of Eaton’s home page. This news release can also be accessed on the home page by clicking “view article” under the news release headline.

This news release contains forward-looking statements concerning the second quarter 2007 and full year 2007 net income per share and operating earnings per share, our worldwide markets, and business awards. 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; 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.

Financial Results


Gary Klasen (216) 523-4736 (Media Relations)

William C. Hartman (216) 523-4501 (Investor Relations)