Date: July 16, 2007
Eaton reports second quarter net income per share of $1.64; guidance for 2007 net income per share raised by $.30
CLEVELAND … Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.64 for the second quarter of 2007, the same as in the second quarter of 2006 and significantly above its guidance of $1.35 to $1.45. Sales in the quarter were $3.25 billion, 4 percent above the second quarter of 2006. Net income was $246 million compared to $253 million in 2006, a decrease of 3 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 2007 were $1.70 compared to $1.68 per share in 2006, an increase of 1 percent, and operating earnings for the second quarter of 2007 were $255 million compared to $259 million in 2006, a decrease of 2 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, “We are very pleased with our second quarter results, which substantially exceeded our guidance. Sales growth in the quarter of 4 percent consisted of 3 percent from acquisitions and 2 percent from exchange rates, offset by a 1 percent decline in organic growth. Our end markets declined by 4 percent, due principally to the anticipated sharp decline in the quarter in the NAFTA heavy-duty truck market.
“Compared to the $1.45 midpoint of our operating earnings per share guidance for the quarter, we achieved an additional $.08 per share from stronger-than-projected performance, as well as a $.17 per share of benefit from a series of events that resulted in a lower tax rate in the quarter than we had originally expected,” said Cutler.
“Most importantly, our operating profit performance provides dramatic evidence of the effectiveness of Eaton’s diversification strategy and our Excel 07 program. Our second quarter segment operating margin before acquisition integration charges was 12.9 percent, the same as our margin in the second quarter of 2006. We are very pleased with this level of profitability, since it reflects the continued improvement in our electrical and fluid power segment margins, which offset the decline in our Truck segment margins,” said Cutler. “All segments achieved higher than 12 percent operating margins in the second quarter. The 15 percent margin recorded in our Truck segment is also noteworthy, given that sales in the Truck segment declined 23 percent in the quarter.
“As we survey our end markets, the year is shaping up to be in line with our initial forecast,” said Cutler. “We see slightly stronger growth in the electrical markets, offset by weaker-than-anticipated conditions in the North American hydraulics markets.
“Our operating cash flow for the quarter was $352 million, our second highest cash flow in a second quarter,” said Cutler. “We made solid progress on working capital and expect continued improvements over the balance of the year.
“We have been very successful on the acquisition front in 2007,” said Cutler. “So far this year, we have announced or closed seven acquisitions. The majority of the acquisition spending has been in two of our highest priority markets, aerospace and electrical power quality.
“We anticipate net income per share for the third quarter of 2007 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 $1.60 and $1.70 in the third quarter of 2007.
“For the full year, we are raising our guidance by $.30 for both net income per share and operating earnings per share to $6.50 to $6.70 for net income per share, and $6.75 to $6.95 for operating earnings per share.”
Business Segment Results
Second quarter sales for the Electrical segment were a record $1.16 billion, up 11 percent over 2006. Operating profits in the second quarter were $139 million. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $141 million, up 22 percent from results in 2006.
“End markets for our electrical business grew approximately 4 percent during the second quarter, with strong growth in non-residential electrical and power quality markets offsetting weakness in the residential electrical and industrial controls markets,” said Cutler. “In addition, our operating margins expanded to 12.2 percent, 1 percentage point over the 11.2 percent posted in the second quarter of 2006.
“In the Electrical segment, we completed three acquisitions and announced a fourth acquisition in the second quarter,” said Cutler. “The acquisitions of Aphel Technologies and Pulizzi Engineering add valuable power distribution equipment for power quality applications. The acquisition of the small systems business of MGE UPS Systems, which we expect to close in the third quarter, brings important technology and products to our UPS single-phase business and greatly expands our presence in Europe. Finally, the acquisition of the medium-voltage drive business of SMC Electrical Products adds important technology to our existing medium-voltage motor control business.
“We expect end market growth in the second half to be modestly stronger than in the second quarter, led by strength in the non-residential electrical and power quality markets,” said Cutler.
In the Fluid Power segment, second quarter sales were a record $1.15 billion, 12 percent above the second quarter of 2006. Excluding the impact of acquisitions, second quarter sales were up 5 percent compared to 2006. Fluid Power markets grew 2 percent compared to the same period in 2006, with global hydraulics shipments flat, the commercial and business jet aerospace market up 7 percent, the defense aerospace market up 6 percent, and European automotive production up 1 percent.
Operating profits in the second quarter were a record $130 million. Excluding acquisition integration charges of $12 million during the quarter, operating profits were $142 million, an increase of 26 percent compared to a year earlier.
“In the second quarter, the hydraulics markets outside the United States and the aerospace markets registered strong growth. U.S. hydraulics markets declined, largely due to a decline in construction equipment production and soft industrial demand,” said Cutler. “We expect these trends to continue through the balance of 2007, although we may see the U.S. hydraulics market improve slightly due to an expected pick up during the second half in the production of agricultural equipment.
“We were pleased to win during the second quarter a contract to design and supply the hydraulic power generation and fluid conveyance package for the new CH-53K military lift helicopter,” said Cutler. “Based on the expected production of 156 helicopters for the U.S. Marine Corps, as well as anticipated foreign military sales, the revenues from the contract over the expected fifteen-year life of the program and associated aftermarket sales are anticipated to exceed $200 million.
Additionally, we were awarded during the second quarter a contract to supply the hydraulic power generation system for the Phenom 300 light jet program, which is expected to generate $20 million in revenue over the ten-year life of the program.”
The Truck segment posted sales of $498 million in the second quarter, down 23 percent compared to 2006. NAFTA heavy-duty production was down 51 percent compared to 2006, NAFTA medium-duty production was down 27 percent, European truck production was up 5 percent, Brazilian vehicle production was up 11 percent, and Brazilian agricultural equipment production was up 30 percent.
“Second quarter production of NAFTA heavy-duty trucks totaled 45,000 units, a decline of 51 percent from the second quarter of 2006. We expect production in the third quarter to be similar to the second quarter,” said Cutler.
Operating profits in the second quarter were $75 million, a decrease of 44 percent over 2006. “We are particularly pleased that our reconfigured manufacturing footprint, and our greater diversity of product offerings and operating geographies, allowed us to achieve an operating margin over 15 percent in the quarter,” said Cutler.
The Automotive segment posted second quarter sales of $442 million, a 7 percent increase over the second quarter of 2006. Automotive production in NAFTA was down 2 percent and in Europe was up 1 percent, compared to the second quarter of 2006. Operating profits were $62 million, up 55 percent from 2006.
“The automotive markets were sluggish in the second quarter and we expect them to remain so during the second half,” said Cutler. “We are pleased at the strong margins in the quarter, reflecting the benefits of Excel 07 actions taken last year.
“We announced two automotive transactions in the quarter,” said Cutler. “The first was the acquisition of the fuel components division of Saturn Electronics & Engineering. This acquisition further strengthens our fuel valve business. In addition, we announced the sale of our mirror controls business. The sale represents one more step in focusing our automotive business around a core set of products which benefit from regulatory and consumer trends promoting fuel economy, reduced emissions, and safety.”
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 62,000 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 as a live audio webcast today at 10 a.m. Eastern time via the microphone on the right side of Eaton’s home page. This news release can be accessed under its headline on the home page.
This news release contains forward-looking statements concerning the third quarter 2007 and full year 2007 net income per share and operating earnings per share, and our worldwide 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, 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.
Gary Klasen (216) 523-4736 (Media Relations)
William C. Hartman (216) 523-4501 (Investor Relations)