Date: October 15, 2007
Eaton Reports Record Quarterly Sales, Net Income Per Share, And Cash Flow
Sales Up 7 Percent
Net Income Per Share Up 6 Percent
Operating Cash Flow of $495 Million
CLEVELAND … Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced record net income per share of $1.71 for the third quarter of 2007, an increase of 6 percent over net income per share of $1.62 in the third quarter of 2006. Sales in the quarter were a record $3.30 billion, 7 percent above the same period in 2006. Net income was $258 million compared to $248 million in 2006, an increase of 4 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 2007 were $1.79 versus $1.65 in 2006, an increase of 8 percent. Included in the third quarter results was a gain from discontinued operations of $0.12 per share, which compares to a gain of $0.24 per share in the third quarter of 2006. Without those gains, operating earnings per share in the third quarter 2007 were $1.67 versus $1.41 in 2006, an increase of 18 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, “We are pleased with our third quarter results. Sales growth of 7 percent in the quarter consisted of 1 percent from organic growth, 3 percent from acquisitions, and 3 percent from exchange rates. We outgrew our end markets by 5 percent this quarter, which was offset in large part by a 4 percent reduction in our end markets, resulting in 1 percent organic growth.
“Eaton’s diversification strategy is working. Our improved geographic and business balance allowed us to post record earnings per share in the third quarter despite a 55 percent decline in the NAFTA heavy-duty truck market,” said Cutler. “For the second quarter in a row, our Electrical and Fluid Power businesses made up almost 70 percent of segment operating profits.
“Our margin performance in the third quarter was also strong, with our segment operating margin before acquisition integration charges of 13.4 percent setting a quarterly record,” said Cutler. “We are particularly pleased with our strong margins in Electrical, at 13.1 percent, and in Truck, at 17.6 percent.
“During the third quarter, we reached agreement with the U.S. Internal Revenue Service on our 2003 and 2004 tax years,” said Cutler. “The agreement results in a modest tax refund, which we expect to receive in the fourth quarter. We believe this result provides further confirmation of the sustainability of our tax rate.
“Our operating cash flow in the third quarter was a record $495 million, exceeding our previous record by nearly $50 million,” said Cutler. “Our free cash flow of $410 million after capital expenditures of $85 million in the quarter was also a record.
“We are very pleased with our overall results and the achievement of our strategic objectives thus far in 2007,” said Cutler.
“Due to the economic uncertainties triggered by the late summer turmoil in global credit markets, we believe that our overall markets in the fourth quarter will not improve as we had earlier anticipated. While the non-residential electrical, power quality, aerospace, and Brazilian vehicle and agricultural equipment markets remain strong, the NAFTA heavy-duty truck market is not rebounding as we had expected and the greater weakness in U.S. housing starts is negatively impacting our residential electrical, hydraulics construction equipment, and NAFTA automotive businesses,” said Cutler. “In light of the conditions in our end markets, we anticipate that our sales in the fourth quarter will be about the same as in the third quarter. Further, while most of our plant and product line moves have gone according to plan, we have had delays in three moves in our hydraulics and aerospace businesses. We anticipate those moves should be back on schedule by the early part of 2008.
“As a result, we are making a slight adjustment to the midpoint of our full-year 2007 guidance, lowering it by $0.05 per share. We now anticipate that net income per share for the fourth quarter of 2007 will be between $1.60 and $1.70, and for full year 2007 we are narrowing our guidance for net income per share to between $6.50 and $6.60. Operating earnings per share, which exclude charges to integrate our recent acquisitions, are anticipated for the fourth quarter of 2007 to be between $1.65 and $1.75, with operating earnings per share for full year 2007 to be between $6.75 and $6.85. It is worth noting that the midpoint of our updated guidance for full-year 2007 operating earnings per share is $0.40 above our expectations at the start of the year.
“As we stated at the beginning of the year, we have viewed 2007 as the year when the power of our increased diversification would become apparent, as we anticipated we would be able to grow earnings despite a sharp slowdown in the NAFTA truck markets,” said Cutler. “Based on the midpoint of our new full-year guidance for 2007, our operating earnings per share will increase 6 percent over operating earnings per share in 2006. We think this provides dramatic evidence of the power and consistency of the earnings of our new business mix.”
Business Segment Results
Third quarter sales for the Electrical segment were $1.22 billion, up 13 percent over 2006 and a quarterly record. Operating profits in the third quarter were $156 million, also a quarterly record. Operating profits before acquisition integration charges were $160 million, up 37 percent from results in 2006.
“End markets for our electrical business grew about 8 percent during the third quarter,” said Cutler. “We expect the non-residential electrical and power quality markets to remain very strong, while the decline in the U. S. residential electrical market will be more prolonged. As a result, we expect end market growth in the Electrical segment over the balance of the year to be similar to the third quarter.
“We are pleased with the 13.1 percent operating margin we achieved in the quarter,” said Cutler. “Our electrical business continues to benefit from a growing order backlog, with orders in the quarter up 12 percent over the third quarter of 2006.
“We anticipate our acquisition of the MGE single phase UPS business will close in the fourth quarter,” said Cutler.
In the Fluid Power segment, third quarter sales were $1.14 billion, 14 percent above the third quarter of 2006. Excluding the impact of acquisitions, the Fluid Power segment grew 7 percent during the quarter. Fluid Power markets in the third quarter grew 1 percent compared to the same period in 2006, with global hydraulics shipments down an estimated 1 percent, commercial aerospace markets up 8 percent, defense aerospace markets up 1 percent, and European automotive production up 3 percent.
Operating profits in the third quarter were $128 million. Operating profits before acquisition integration charges were $141 million, up 28 percent compared to a year earlier.
“The global hydraulics markets declined slightly in the quarter, driven by the decline in construction equipment related to the slowdown in home construction in the U.S. and several other countries,” said Cutler. “We anticipate that global hydraulics markets are likely to remain sluggish over the balance of 2007.
“The commercial aerospace market had another quarter of strong growth, and we anticipate growth to remain strong for the next several years,” said Cutler. “The defense aerospace market grew slightly in the quarter, and we expect growth in the near future to remain relatively modest.
The Truck segment posted sales of $541 million in the third quarter, down 16 percent compared to 2006. Operating profits were $95 million, down 23 percent from results in 2006.
In the third quarter, NAFTA heavy-duty truck production was down 55 percent compared to 2006, NAFTA medium-duty truck production was down 38 percent, European truck production was down 4 percent, Brazilian vehicle production was up 23 percent, and Brazilian agricultural equipment production was up 65 percent.
“Third quarter production of NAFTA heavy-duty trucks totaled 45,000 units, the same as in the second quarter,” said Cutler. “We expect that production in the fourth quarter will rise only modestly and that, as a result, full-year NAFTA heavy-duty truck production will be about 210,000 units. The lower volumes in the NAFTA heavy-duty truck market are being offset somewhat by strong conditions in the Brazilian vehicle and agricultural equipment markets.
“We are very pleased with the 17.6 percent operating margin posted by our truck business in the quarter,” said Cutler. “The margin reflects the diversity of our products and operating geographies, as well as the success of our reconfigured manufacturing footprint.”
The Automotive segment posted third quarter sales of $397 million, up 10 percent over the third quarter of 2006. Automotive production in both North America and Europe was up 3 percent compared to the third quarter of 2006.
Operating profits in the third quarter were $45 million. Operating profits before acquisition integration charges were $46 million versus $3 million in the third quarter of 2006, which was heavily impacted by Excel 07 charges.
“The North American and European automotive markets were stronger in the third quarter than we anticipated,” said Cutler. “For the balance of the year, we anticipate the North American market to weaken.
“We closed the sale of our mirror control business in late August,” said Cutler. “We are pleased the sale progressed on schedule, generating proceeds of $111 million.”
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 third 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 fourth quarter 2007 and full year 2007 net income per share and operating earnings per share, the performance of our worldwide markets, revenues from acquisitions, and sales for the fourth quarter of 2007. 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.
Gary Klasen (216) 523-4736 (Media Relations)
William C. Hartman (216) 523-4501 (Investor Relations)