Eaton Reports Fourth Quarter Net Income of $1.25 Per Share and Full Year Net Income of $2.27 Per Share

Date: January 25, 2010

2009 Free Cash Flow a Record $1.2 Billion

Earnings Expected to Rebound in 2010


CLEVELAND ... Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.25 for the fourth quarter of 2009, an increase of 28 percent over net income per share of $0.98 in the fourth quarter of 2008. Sales in the quarter were $3.1 billion, 10 percent below the same period in 2008. Net income was $211 million compared to $163 million in 2008, an increase of 29 percent.

Net income in both periods included charges related to acquisition integration. Before acquisition integration charges, operating earnings per share in the fourth quarter of 2009 were $1.35 compared to $1.08 per share in the fourth quarter of 2008, an increase of 25 percent. Operating earnings for the fourth quarter of 2009 were $229 million compared to $180 million in 2008, an increase of 27 percent.

The sales decline in the fourth quarter of 10 percent consisted of a 15 percent decline in core sales offset by 5 percent growth due to foreign exchange. End markets in the fourth quarter declined by 15 percent.

For the full year 2009, sales were $11.9 billion, 23 percent less than 2008. Net income was $383 million, a decrease of 64 percent over 2008, and net income per share of $2.27 was 65 percent less than in 2008. Operating earnings in 2009 totaled $437 million versus $1.109 billion in 2008, a decrease of 61 percent. Operating earnings per share for 2009 of $2.59 were 62 percent lower than in 2008.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We had a strong fourth quarter, with earnings considerably higher than our guidance at the start of the quarter due principally to improved operating performance. As we anticipated, our markets improved very modestly in the fourth quarter, reflecting a continuation of the slow global economic recovery.

"Looking at 2009 as a whole, our earnings were significantly affected by the decline in our revenues due to the market downturn," said Cutler. "We believe the steps we took to deal with the downturn effectively adjusted our cost structure to ensure we can operate profitably at these lower volumes and realize attractive incremental profits on revenue gains. Our 2009 free cash flow of $1.2 billion was an outstanding accomplishment in this economic environment. We used our robust cash flow in 2009 to markedly reduce our long-term liabilities, with over $750 million of debt paid off during the year, $270 million contributed to our global pension plans in 2009, and an additional $300 million contributed to our U.S. pension plan in January 2010. As a result of these actions, our liquidity position is exceptionally strong, with little commercial paper outstanding, no term debt maturities until the middle of 2012, and no additional contributions to the U.S. pension plan required until 2011.

"We estimate our markets for all of 2010 will grow 5 percent, and we expect to outgrow our end markets in 2010 by approximately $300 million," said Cutler. "We also expect approximately $450 million of growth from foreign exchange. In total, we anticipate our revenues in 2010 will likely grow by 11 percent compared to 2009.

"As we concluded our planning for 2010 late last year, we initiated additional workforce reductions in several of our mid- and late-cycle business units to further align capacity with expected 2010 demand," said Cutler. "These actions resulted in severance costs of $26 million in the fourth quarter, $24 million more than we had planned for at the start of the fourth quarter. About half the higher severance costs were offset by a higher tax benefit than we had forecast.

"Our forward visibility is improving as the global market conditions have stabilized and are beginning to improve," said Cutler. "In addition to the normal seasonal first quarter weakness in several of our businesses, our overall business will be impacted by two additional factors this year: first, our 2010 earnings will be impacted by a significant swing in our tax rate from a credit rate of 27 percent in 2009 to a tax expense of an estimated 15 percent in 2010, and secondly, compared to our fourth quarter results, we have removed in the first quarter the extraordinary short-term cost containment actions we put in place last year. As a result, we estimate that first quarter operating earnings per share, which exclude an estimated $0.05 of charges to integrate our recent acquisitions, will be between $0.75 and $0.85 per share. For the full year 2010, we estimate that operating earnings per share, which exclude an estimated $0.20 of charges to integrate our recent acquisitions, will be between $3.70 and $4.00.

"Our guidance underlines the considerable earnings leverage we expect to capture as volumes improve. Operating earnings per share in 2010 will double on only 11 percent growth in sales, after adjusting 2009 earnings to reflect the same tax rate we expect in 2010," said Cutler. "We anticipate that 2010 will prove to be a transitional year of growth between the depressed market conditions of 2009 and even better market conditions in 2011."

Business Segment Results

Fourth quarter sales for the Electrical Americas segment were $827 million, down 20 percent from the fourth quarter of 2008. Operating profits in the fourth quarter were $126 million. Adjusting for acquisition integration charges in the fourth quarter of 2008, operating profits in the fourth quarter of 2009 were down 24 percent.

"End markets for our Electrical Americas segment declined 22 percent during the fourth quarter, about the same as in the third quarter, and our orders in the fourth quarter declined by 18 percent," said Cutler. "We were pleased with the margins in our Electrical Americas segment in the fourth quarter. Our operating margin was 15.2 percent, and excluding severance costs incurred in the fourth quarter, the margin was 16.1 percent.

"Private nonresidential construction spending in the United States declined by 25 percent in the fourth quarter of 2009, but we expect the rate of decline to lessen over the course of 2010," said Cutler. "In total for 2010, we expect our markets to decline by approximately 3 percent."

Sales for the Electrical Rest of World segment were $698 million, down 1 percent from the fourth quarter of 2008. Operating profits were $52 million. Excluding acquisition integration charges of $22 million during the quarter, operating profits totaled $74 million, up 42 percent compared to the fourth quarter of 2008.

"The European markets posted a decline of 15 percent and the Asia-Pacific markets posted a decline of 7 percent, both significantly lower rates of decline than in the third quarter," said Cutler. "We were pleased that our operating margin in the quarter, at 10.6 percent, is back in double digits.

"For 2010, our Electrical Rest of World markets are expected to grow about 5 percent," said Cutler.

In the Hydraulics segment, fourth quarter sales were $419 million, 21 percent lower than the fourth quarter of 2008. Hydraulics markets in the fourth quarter declined 30 percent compared to the same period in 2008, with U.S. markets down 39 percent and non-U.S. markets down 21 percent.

Operating profits in the fourth quarter were $13 million. Adjusting for acquisition integration charges in the fourth quarter of 2008, operating profits in the fourth quarter of 2009 were down 72 percent.

"The global hydraulics market improved marginally in the fourth quarter compared to the third quarter. Our bookings improved in the fourth quarter, growing 11 percent over the fourth quarter of 2008 and 8 percent over the third quarter of 2009," said Cutler. "Our operating margin in the fourth quarter was impacted by severance charges. Without these charges, the operating margin was 5.3 percent.

"For 2010, we anticipate global hydraulics markets will be up on the order of 11 percent," said Cutler. "Markets in the U.S. are expected to grow 12 percent and non-U.S. markets are expected to grow by 10 percent."

The Aerospace segment posted fourth quarter sales of $381 million, a decrease of 15 percent from the fourth quarter of 2008. Aerospace markets in the fourth quarter declined by 10 percent, with U.S. markets declining by 5 percent and non-U.S. markets declining by 20 percent.

Operating profits in the fourth quarter were $47 million. Excluding acquisition integration charges of $3 million, operating profits were $50 million, down 37 percent from the fourth quarter of 2008.

"The aerospace market was impacted during the quarter by soft conditions in the commercial aftermarket," said Cutler. "We incurred severance charges in the quarter to adjust staffing levels. Without these charges, our operating margin was 14.2 percent.

"For 2010, aerospace markets are expected to decline about 3 percent," said Cutler. "U.S. markets are expected to be down by 1 percent, while non-U.S. markets are expected to decline by 8 percent."

The Truck segment posted sales of $443 million in the fourth quarter, up 1 percent compared to 2008. Truck markets in the fourth quarter declined 8 percent, with U.S. markets down 22 percent and non-U.S. markets up 10 percent. Operating profits were $51 million, an increase of 24 percent compared to the fourth quarter of 2008.

"We were pleased with the 11.5 percent Truck segment operating margin in the fourth quarter," said Cutler. "Our business is operating at good margins despite low activity levels. As evidence of just how low activity levels have been, the truck market during 2009 declined by 27 percent, with the NAFTA Class 8 market at levels not seen since 1991.

"For 2010, we expect good market growth, although volumes are likely to still be at depressed levels," said Cutler. "We anticipate our overall truck markets will grow at 19 percent, with U.S. markets growing at 26 percent and non-U.S. markets growing at 10 percent."

The Automotive segment posted fourth quarter sales of $363 million, up 9 percent from the fourth quarter of 2008. Automotive unit production for our served markets in the fourth quarter grew by 10 percent, with U.S. markets down 5 percent and non-U.S. markets up 17 percent. Operating profits in the fourth quarter were $32 million.

"Automotive markets began to recover in the fourth quarter, particularly outside the U.S.," said Cutler. "We were pleased with our 8.8 percent operating margin, despite the low production levels.

"Looking at 2010, we anticipate auto production in our served markets will grow 9 percent," said Cutler. "We expect growth in U.S. production of about 17 percent and growth in non-U.S. production of about 5 percent."

Eaton Corporation is a diversified power management company with 2009 sales of $11.9 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 fourth 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 fourth quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning the first quarter 2010 and full year 2010 net income per share and operating earnings per share, the growth in full year 2010 revenues, the performance of 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; 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; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; changes in currency exchange rates; 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

View the company's comparative financial results for the three months and year ended December 31, 2009 and 2008.



Contact
Kelly Jasko, (216) 523-5304
William Hartman, (216) 523-4501