Eaton Reports Second Quarter Earnings Per Share of $.17

Date: July 20, 2009

Strong Operating Cash Flow of $361 Million

Increased Savings from Cost-Reduction Program

CLEVELAND ... Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $.17 for the second quarter of 2009, 92 percent below the second quarter of 2008. Sales in the quarter were $2.90 billion, 32 percent below the second quarter of 2008. Net income was $29 million compared to $333 million in 2008.

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 2009 were $.23 compared to $2.10 per share in 2008, a decrease of 89 percent, and operating earnings were $39 million compared to $344 million in 2008.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our sales in the second quarter were only slightly higher than in the first quarter of 2009, reflecting little improvement in the challenging global economic conditions. Despite the sluggish revenues, which came in $100 million lower than projected in our initial quarterly guidance, we were successful in substantially lowering our cost structure, which allowed us to generate earnings about equal to our guidance for the quarter.

“Sales in the second quarter declined 32 percent compared to the second quarter of 2008, with a decline of 6 percent from exchange rates and a decline of 26 percent in core sales,” said Cutler. “Our end markets declined 26 percent in the quarter. It is clear that significant destocking and inventory liquidation continued in virtually all of our segments during the quarter.

“Despite the challenging market conditions, our operating cash flow for the quarter was $361 million, just slightly lower than last year, and our free cash flow was $313 million, $68 million higher than last year,” said Cutler. “In the last three quarters, our operating cash flow has totaled $1.1 billion. We are maintaining our dividend for the second quarter at $0.50 per share, to be distributed in mid August.

“As we survey our end markets, the year is shaping up to be considerably weaker than we had forecast in April,” said Cutler. “We now anticipate our overall end markets will decline by between 21 and 22 percent versus our earlier forecast of a decline between 15 and 16 percent. We see our U.S. markets declining by 25 percent, while our non-U.S. markets are expected to decline by 19 percent.

“We anticipate net income per share for the third quarter of 2009 to be between $0.80 and $0.90,” said Cutler. “Operating earnings per share, which exclude charges to integrate our recent acquisitions, are anticipated to be between $0.90 and $1.00 in the third quarter of 2009.

“We are lowering our guidance for the full year due to the further reduction in our expectations for market growth, which we expect to be partially offset by an additional $120 million of savings from our cost-reduction initiatives. Accordingly, we now anticipate 2009 net income per share of between $1.65 and $1.85, and 2009 operating earnings per share of between $2.00 and $2.20,” said Cutler.

Business Segment Results

Second quarter sales for the Electrical Americas segment were $881 million, down 14 percent compared to 2008. Operating profits in the second quarter were $144 million. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $146 million, down 8 percent from results in 2008.

“End markets for our Electrical Americas segment declined approximately 22 percent during the second quarter,” said Cutler. “Both non-residential electrical and power quality markets declined in the high teens, while residential electrical and industrial controls markets declined about 30 percent.

“Our bookings in the Electrical Americas segment, adjusted for foreign exchange and acquisitions, declined 33 percent compared to the second quarter of 2008,” said Cutler. “We now anticipate markets in our Electrical Americas segment will decline by 20 percent for the full year.”

Sales for the Electrical Rest of the World segment were $595 million, a decline of 35 percent compared to the second quarter of 2008. The sales decline was comprised of an 11 percent decline due to foreign currency and a 24 percent decline in core sales.

The segment reported operating profits of $16 million. Excluding acquisition integration charges of $10 million during the quarter, operating profits totaled $26 million, down 73 percent compared to the second quarter of 2008.

“The European electrical markets declined steeply in the quarter, down 24 percent,” said Cutler. “Asian markets fared a bit better, declining by 15 percent. We now anticipate markets in our Electrical Rest of the World segment will decline by 17 percent for the full year.”

Hydraulics segment sales were $425 million, down 39 percent compared to the second quarter of 2008. Global hydraulics markets were down 39 percent in the quarter, with non-U.S. markets down 33 percent and U.S. markets down 45 percent. Operating profits in the second quarter were $14 million, down 85 percent compared to the second quarter of 2008.

“The global hydraulics markets in the second quarter were very weak,” said Cutler. “We believe these markets will remain weak, with only slightly improved conditions in the second half of the year. As a result, we now believe global hydraulics markets for all of 2009 will decline by 33 percent.”

Aerospace segment sales were $409 million, 12 percent below the second quarter of 2008. Aerospace markets declined 8 percent compared to the second quarter of 2008.

Operating profits in the second quarter were $70 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $73 million, a decline of 3 percent compared to a year earlier.

“Aerospace markets in the second quarter were impacted by declines in the commercial aftermarket and inventory reductions at commercial OEMs,” said Cutler. “We anticipate the global aerospace market will decline 5 percent in 2009. Commercial aftermarket demand, in particular, has weakened as both passenger traffic and freight volumes have declined worldwide.”

The Truck segment posted sales of $321 million in the second quarter, down 49 percent compared to 2008. Truck production in the second quarter was down 33 percent, with U.S. markets down 43 percent and non-U.S. markets down 22 percent. The segment reported an operating loss of $3 million.

“We expect production in the second half to be broadly similar to the first half,” said Cutler. “The key factors inhibiting demand for trucks appear to be weak freight volumes and limitations on financing. It is unclear when these conditions will improve. At this point, for all of 2009, we anticipate our Truck markets will decline by 27 percent.”

The Automotive segment posted second quarter sales of $270 million, down 51 percent from the second quarter of 2008. Global automotive markets were down 33 percent with U.S. markets down 48 percent and non-U.S. markets down 25 percent. The segment reported an operating loss of $19 million.

“The automotive market in the U.S. was markedly impacted in the second quarter by the shutdowns at General Motors and Chrysler,” said Cutler. “Outside the U.S., several markets benefited from incentive programs designed to boost auto purchases. We now anticipate global automotive markets will decline by 25 percent in 2009.”

Eaton Corporation is a diversified power management company with 2008 sales of $15.4 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees and sells products to customers in more than 150 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. Also available on the Web site prior to the call will be a presentation on second quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning the third quarter 2009 and full year 2009 net income per share and operating earnings per share, our worldwide markets, and our growth in relation to end 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; the availability of credit to customers; 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; strikes or other labor unrest; the impact of acquisitions and divestitures; 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.

Financial Results

The company's comparative financial results for the three months and six months ended June 30, 2009.



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