Eaton Third Quarter Earnings Per Share Increases 38 Percent to $1.57

Date: October 20, 2010

Due to Stronger Markets and Improved Operating Performance
Raises Earnings Guidance for 2010 by 10 Percent

CLEVELAND ... Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.57 for the third quarter of 2010, an increase of 38 percent from net income per share of $1.14 in the third quarter of 2009. Sales in the quarter were $3.6 billion, 18 percent above the same period in 2009. Net income was $268 million compared to $193 million in 2009, an increase of 39 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 2010 was $1.60 versus $1.21 in 2009, an increase of 32 percent.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our third quarter results significantly exceeded our guidance. The results reflect the outstanding achievements of our employees around the world, who have capitalized on the continued rebound in our end markets while realizing the benefits of the substantial changes in our cost structure implemented over the past two years.

“Our 18 percent sales increase in the quarter was due entirely to an increase in core sales, with a 1 percent increase from acquisitions offset by a 1 percent decline from exchange rates,” said Cutler. “Our end markets increased 14 percent in the quarter.

“Our segment operating margin in the third quarter was 13.4 percent, just slightly below our record quarterly margin of 13.5 percent posted in the fourth quarter of 2007. Our third quarter margins increased significantly from the second quarter in Electrical Americas, Electrical Rest of World, Aerospace and Truck,” said Cutler. “Our strong margin performance is particularly notable given that our revenues are still 17 percent below where they were in our peak quarter in 2008.

“Our operating cash flow in the third quarter was $420 million and free cash flow was $314 million,” said Cutler.

“As we look at our end markets, we believe the growth patterns we have experienced so far this year will continue,” said Cutler. “For the full year, we now believe our end markets will increase 10 percent, 2 points higher than our expectations at the end of the second quarter, driven by higher growth in non-U.S. markets.

“We anticipate fourth quarter net income per share will be between $1.50 and $1.60 and operating earnings per share, which excludes charges to integrate our recent acquisitions, will be between $1.55 and $1.65,” said Cutler. “Accordingly, for the full year, we are raising our earnings guidance by 10 percent. We now anticipate that net income per share will be between $5.30 and $5.40, and operating earnings per share will be between $5.45 and $5.55. This full-year guidance includes the recognition of $0.14 per share of tax expense in the first quarter associated with Medicare Part D.”

Business Segment Results

Third quarter sales for the Electrical Americas segment were $967 million, up 15 percent compared to 2009. Operating profits in the third quarter were $141 million, down 1 percent from results in 2009.

“End markets for our Electrical Americas segment grew 3 percent during the third quarter,” said Cutler. “We saw good growth during the quarter in our early- and mid-cycle markets, particularly in power quality and industrial markets. That growth was largely offset by the weakness in our non-residential markets.

“We were pleased with our 14.6 percent margin in the Electrical Americas segment,” said Cutler. “Despite the downturn in our non-residential markets, our margins have improved sequentially in each quarter of 2010.

“Bookings for the Electrical Americas segment, adjusted for acquisitions and foreign exchange, increased 8 percent in the third quarter,” said Cutler. “We are maintaining our view that markets for our Electrical Americas segment will decline by 1 percent in 2010.

“We closed two acquisitions, EMC Engineers and Wright Line, in the third quarter and we closed a third, CopperLogic, in early October,” said Cutler. “These acquisitions add additional high-value products and engineering services to our capabilities.”

Sales for the Electrical Rest of World segment were $707 million, an increase of 9 percent compared to the third quarter of 2009. The sales increase was comprised of a 12 percent increase in core sales and a 1 percent increase from acquisitions offset by a 4 percent decline due to foreign currency.

The segment reported operating profits of $81 million. Excluding acquisition integration charges of $6 million during the quarter, operating profits totaled $87 million, up 53 percent compared to the third quarter of 2009.

“European electrical markets grew 9 percent during the third quarter,” said Cutler, “while Asian markets grew 10 percent. Our margin of 12.3 percent in the third quarter is an all-time high for this segment and represents a significant improvement over the second quarter. This strong operating margin is confirmation of the powerful competitive position of the franchise we have created through our acquisitions in 2007 of the MGE Small Systems business and in 2008 of Moeller and Phoenixtec.

“Our bookings in Electrical Rest of World, adjusted for acquisitions and foreign exchange, grew 19 percent during the third quarter, reflecting both strong growth in developing country markets and accelerating growth in European markets,” said Cutler. “We now believe that our Electrical Rest of World markets will grow 7 percent in 2010, 1 percent stronger than our previous estimate.”

In the Hydraulics segment, third quarter sales were $583 million, up 40 percent from the third quarter of 2009. Hydraulics markets in the third quarter grew 44 percent compared to the same period in 2009, with U.S. markets up 58 percent and non-U.S. markets up 34 percent. Operating profits in the third quarter were $76 million. In the third quarter of 2009, operating profits were $20 million, excluding acquisition integration charges of $2 million.

“Global hydraulics markets continued their sharp rebound during the third quarter,” said Cutler. “Our bookings, adjusted for foreign exchange, increased 43 percent in the third quarter. We expect hydraulics markets will show further growth in the fourth quarter, although the rate of growth is likely to be somewhat lower than in the third quarter. For all of 2010, we now expect our markets to grow 31 percent versus our expectation at the end of the second quarter of 26 percent.”

The Aerospace segment posted third quarter sales of $390 million, a decrease of 1 percent from the third quarter of 2009. Aerospace markets in the third quarter increased 3 percent, with U.S. markets increasing 4 percent and non-U.S. markets increasing 1 percent. Operating profits in the third quarter were $60 million. Excluding acquisition integration charges of $1 million, operating profits were $61 million, the same as in the third quarter of 2009.

“Our bookings, adjusted for foreign exchange, increased 12 percent in the third quarter,” said Cutler. “The commercial aerospace aftermarket has started to rebound, with both U.S. and non-U.S. markets showing modest growth. We expect commercial aftermarket growth to continue at a modest pace over the balance of 2010. We are maintaining our forecast that aerospace markets for all of 2010 will decline by 1 percent.”

“We are pleased with our 15.6 percent margin in Aerospace, a significant improvement over our second quarter margin,” said Cutler.

The Truck segment posted sales of $534 million in the third quarter, up 33 percent compared to 2009. Truck markets in the third quarter were up 28 percent, with U.S. markets up 24 percent and non-U.S. markets up 31 percent. Operating profits were $74 million compared to $25 million in the third quarter of 2009.

“We are pleased with our 13.9 percent margin in the Truck segment during the third quarter,” said Cutler. “This margin performance is particularly noteworthy given the currently depressed production levels in the NAFTA Class 8 truck market.

“We believe truck markets in the fourth quarter will continue to improve, although at a slower rate than in the third quarter,” said Cutler. “We now estimate our Truck markets in 2010 to grow 26 percent versus our expectation of 23 percent at the end of the second quarter.”

The Automotive segment posted third quarter sales of $390 million, up 20 percent from the third quarter of 2009. Automotive unit production in the third quarter grew 14 percent, with U.S. auto production up 27 percent and production outside the U.S. up 8 percent compared to the third quarter of 2009. Operating profits in the third quarter were $39 million, an increase of 70 percent compared to the third quarter of 2009.

“Global automotive production declined slightly from the second to the third quarter, principally due to lower production in Europe and Asia,” said Cutler. ”We expect stronger growth in the fourth quarter. For all of 2010, we now estimate our markets to grow 24 percent versus our expectation at the end of the second quarter of 17 percent growth.”

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 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. Also available on the website prior to the call will be a presentation on third quarter results, which will be covered during the call.

This news release contains forward-looking statements concerning the fourth quarter 2010 and full year 2010 net income per share and operating earnings per share, and the performance of 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, 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; 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 nine months ended September 30, 2010 and 2009.
 



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