Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced net income per share of $1.59 for the fourth
quarter of 2006, an increase of 15 percent over net income per
share of $1.38 in the fourth quarter of 2005. Sales in the quarter
were $3.1 billion, 10 percent above the same period in 2005. Net
income was $241 million compared to $210 million in 2005, an
increase of 15 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 2006
were $1.66 compared to $1.43 per share in 2005, an increase of 16
percent. Operating earnings for the fourth quarter of 2006 were
$251 million compared to $219 million in 2005, an increase of 15
percent. Excel 07 had no impact upon earnings in the fourth
quarter. Sales growth in the fourth quarter of 10 percent consisted
of 4 percent from organic growth, 4 percent from acquisitions, and
2 percent from higher exchange rates. End markets in the fourth
quarter grew by 4 percent. Income tax for the fourth quarter was a
credit of $2 million. Included in fourth quarter taxes was an
income tax benefit of $32 million, which was part of the Excel 07
program, resulting from the resolution in the fourth quarter of
international income tax items, as well as a tax benefit from the
reenactment of the Research and Experimentation tax credit in
December. For the full year 2006, sales were $12.4 billion, 12
percent above 2005. Net income of $950 million increased 18 percent
over 2005, and net income per share of $6.22 rose 19 percent.
Operating earnings per share for 2006 of $6.39 rose 19 percent
above 2005. Operating earnings in 2006 totaled $977 million versus
$829 million in 2005, an increase of 18 percent. Alexander M.
Cutler, Eaton chairman and chief executive officer, said, �We had a
strong fourth quarter, posting our nineteenth quarter in a row with
year-over-year operating earnings per share growth of more than 10
percent. Equally significant is the balance of earnings in the
quarter, with our Electrical and Fluid Power businesses
representing 70 percent of our overall segment operating earnings.
�Looking at 2006 as a whole, we had a very solid year and are off
to a good start on the goals we set for Eaton for the 2006 � 2010
time period,� said Cutler. �Our sales in 2006 grew 12 percent,
operating earnings per share grew 19 percent, and our return on
equity was 23 percent. In addition, we generated a record amount of
cash, with operating cash flow in 2006 rising 25 percent, to more
than $1.4 billion. �As we survey our end markets in 2007, we
anticipate our markets will decline by approximately 3 1/2 percent,
primarily as a result of the expected dramatic decrease in the
NAFTA heavy-duty truck market. This is roughly 1 1/2 percent lower
growth in our markets than we expected a year ago, as we now see
the slowdown in the overall manufacturing sector experienced in the
second half of 2006 extending into the early portion of 2007,� said
Cutler. �The significant restructuring undertaken in our Excel 07
program will offset much of the market decline. Our Excel 07
program incurred net costs of $154 million prior to tax settlements
and divestiture gains. The earnings benefit in 2007 we now expect
from the Excel 07 program is double the target we announced when we
started the program in January of 2006. With our Excel 07 program
behind us, we believe our operations are well positioned for the
balance of the decade. �We expect to outgrow our end markets in
2007 by approximately $200 million, and we also expect to record
approximately $300 million of growth from the full-year impact of
the six acquisitions we completed in 2006, and the two acquisitions
we have signed but not yet completed,� said Cutler. �As a result,
we anticipate our revenues in 2007 will be flat compared to 2006.�
In light of its strong results and future prospects, Eaton is
taking the following actions: Increasing its quarterly dividend by
10 percent, from $.39 per share to $.43 per share Making a
voluntary contribution of $150 million to its qualified pension
plan in the United States Authorizing a new 10 million repurchase
of common shares, replacing the 1.3 million shares remaining from
the 10 million share repurchase authorization approved in April of
2005. �We anticipate net income per share for the first quarter of
2007 to be $1.30 to $1.40, and for the full year to be $6.05 to
$6.25. Operating earnings per share, which exclude charges to
integrate our recent acquisitions and joint ventures, are
anticipated to be $1.35 to $1.45 for the first quarter of 2007, and
$6.30 to $6.50 for the full year.� Business Segment Results Fourth
quarter sales for the Electrical segment were $1.1 billion, up 9
percent over 2005. Operating profits in the fourth quarter were
$142 million. Operating profits before acquisition integration
charges were $143 million, up 29 percent from results in 2005. Net
Excel 07 costs in the fourth quarter were $12 million. In addition,
fourth quarter operating margins were positively impacted by the
sale of the Brazilian battery business acquired in the 2004
Powerware acquisition. �End markets for our electrical business
grew about 2 1/2 percent during the fourth quarter, reflecting a
slowdown from the growth rate earlier in 2006,� said Cutler. �In
2007, we expect our markets to grow approximately 4 percent, with
growth in the nonresidential markets offsetting a decline in the
residential market. We expect operating margins to improve as a
result of the additional volume, a reduced impact from commodity
costs, and the benefits from the Excel 07 actions taken in 2006.
�We announced two small European acquisitions, the acquisitions of
Schreder-Hazemeyer and the power protection business of Power
Products, in the fourth quarter,� said Cutler. �These acquisitions
expand our sales in new geographic areas.� In the Fluid Power
segment, fourth quarter sales were $985 million, 17 percent above
the fourth quarter of 2005. Adjusted for acquisitions completed
within the last year, sales grew 7 percent. Operating profits in
the fourth quarter were $103 million. Operating profits before
acquisition integration charges were $115 million, up 17 percent
compared to a year earlier. Excel 07 resulted in a net savings of
$1 million in the fourth quarter. Fluid Power markets grew 6
percent compared to the same period in 2005, with global hydraulics
shipments up 7 percent, commercial aerospace markets up 14 percent,
defense aerospace markets up 2 percent, and European automotive
production flat. �Growth in the mobile and industrial hydraulics
markets moderated slightly in the fourth quarter from the rates
seen earlier in the year,� said Cutler. �For 2007, we anticipate
that growth in the construction equipment markets will be lower
than in 2006, while agricultural equipment markets are expected to
grow for the first time in three years. Industrial markets are
likely to post lower growth than in 2006. Growth in the commercial
aerospace market is expected to be solid, while defense aerospace
markets are expected to post modest growth. In total, we believe
the Fluid Power markets will grow approximately 4 percent. �We
anticipate Fluid Power operating margins will improve in 2007 as a
result of the additional volume, the increasing mix of aerospace
revenues, and the benefits from the Excel 07 actions taken in
2006,� said Cutler. �We reached agreement in December to acquire
Argo-Tech,� said Cutler. �This acquisition will round out our
aerospace fuel system capabilities and further strengthens the
overall breadth of our rapidly-growing Aerospace business.� The
Truck segment posted sales of $620 million in the fourth quarter,
up 13 percent compared to 2005. Operating profits in the quarter
were $76 million, down 30 percent compared to the fourth quarter of
2005. Adjusting for the $27 million of net Excel 07 costs incurred
in the fourth quarter, operating profits declined by 5 percent.
Also contributing to the margin decline in the quarter was an
adjustment to Brazilian inventories. The Excel 07 net costs and
Brazilian inventory adjustment comprised the entire decline in
year-to-year Truck segment operating margins. NAFTA heavy-duty
production was up 16 percent compared to 2005, NAFTA medium-duty
production was up 20 percent, European truck production was flat,
and Brazilian vehicle production was up 1 percent. �Production of
NAFTA heavy-duty trucks in 2006 totaled 378,000 units,� said
Cutler. �We are maintaining our forecast that production in 2007
will be between 205,000 and 210,000 units. �Our hybrid truck
program made further progress during the quarter, with the receipt
of the 2006 Environmental Innovation Award from the Ohio
Environmental Council,� said Cutler. The Automotive segment posted
fourth quarter sales of $394 million, 6 percent lower than the
comparable quarter of 2005. Operating profits were $34 million.
Operating profits before acquisition integration charges were $36
million, 27 percent lower than the fourth quarter of 2005. Excel 07
net costs in the fourth quarter were neutral. Automotive production
in NAFTA declined by 8 percent compared to the fourth quarter of
2005, while European production was flat. �Our Automotive segment
margins in the fourth quarter were impacted by the reductions in
production volumes in North America and the continued importation
of engines by Asian producers,� said Cutler. �For 2007, we
anticipate weaker production in NAFTA, with another year of flat
production in Europe. However, we expect our margins to improve as
a result of the substantial benefits from Excel 07.� 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 60,000 employees and sells products
to customers in more than 125 countries. For more information,
visit www.eaton.com Notice of Conference Call: Eaton�s conference
call to discuss its fourth quarter results is available to all
interested parties via live audio webcast today at 10 a.m. Eastern
Time through the Investor Relations link on Eaton�s home page. This
news release can be accessed on the Eaton home page. This news
release contains forward-looking statements concerning the first
quarter 2007 and full year 2007 net income per share and operating
earnings per share, our worldwide markets, our growth in relation
to end markets, our growth from acquisitions and joint ventures,
and the benefits from Excel 07. 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; 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 year ended December 31, 2006 and 2005 are available on
the company�s Web site, www.eaton.com. Eaton Corporation
Comparative Financial Summary � Three months ended December 31 Year
ended December 31 (Millions except for per share data) 2006 2005
2006 2005 � Continuing operations Net sales $ 3,102� $ 2,817�
$12,370� $11,019� Income before income taxes 239� 246� 989� 988�
Income after income taxes $ 241� $ 211� $ 912� $ 799� Income (loss)
from discontinued operations, net of income taxes -� (1) 38� 6� Net
income $ 241� $ 210� $ 950� $ 805� � Net income per Common Share
assuming dilution Continuing operations $ 1.59� $ 1.39� $ 5.97� $
5.19� Discontinued operations -� (.01) .25� .04� $ 1.59� $ 1.38� $
6.22� $ 5.23� Average number of Common Shares outstanding assuming
dilution 151.5� 152.7� 152.9� 154.0� � Net income per Common Share
basic Continuing operations $ 1.62� $ 1.42� $ 6.07� $ 5.32�
Discontinued operations -� (.01) .25� .04� $ 1.62� $ 1.41� $ 6.32�
$ 5.36� Average number of Common Shares outstanding basic 149.0�
149.3� 150.2� 150.2� � Cash dividends paid per Common Share $ .39�
$ .31� $ 1.48� $ 1.24� � � Reconciliation of net income to
operating earnings Net income $ 241� $ 210� $ 950� $ 805� Excluding
acquisition integration charges (after-tax) 10� 9� 27� 24�
Operating earnings $ 251� $ 219� $ 977� $ 829� � Net income per
Common Share assuming dilution $ 1.59� $ 1.38� $ 6.22� $ 5.23� Per
share impact of acquisition integration charges (after-tax) .07�
.05� .17� .15� Operating earnings per Common Share $ 1.66� $ 1.43�
$ 6.39� $ 5.38� � � See accompanying notes. Eaton Corporation
Statements of Consolidated Income � Three months ended December 31
Year ended December 31 (Millions except for per share data) 2006
2005 2006 2005 � Net sales $ 3,102� $ 2,817� $12,370� $11,019� �
Cost of products sold 2,300� 2,042� 9,050� 7,936� Selling &
administrative expense 501� 452� 1,946� 1,753� Research &
development expense 73� 74� 321� 285� Interest expense-net 23� 22�
104� 90� Other (income) expense-net (34) (19) (40) (33) Income from
continuing operations before income taxes 239� 246� 989� 988�
Income taxes (credit) (2) 35� 77� 189� Income from continuing
operations 241� 211� 912� 799� Income (loss) from discontinued
operations, net of income taxes -� (1) 38� 6� Net income $ 241� $
210� $ 950� $ 805� � Net income per Common Share assuming dilution
Continuing operations $ 1.59� $ 1.39� $ 5.97� $ 5.19� Discontinued
operations -� (.01) .25� .04� $ 1.59� $ 1.38� $ 6.22� $ 5.23�
Average number of Common Shares outstanding assuming dilution
151.5� 152.7� 152.9� 154.0� � Net income per Common Share basic
Continuing operations $ 1.62� $ 1.42� $ 6.07� $ 5.32� Discontinued
operations -� (.01) .25� .04� $ 1.62� $ 1.41� $ 6.32� $ 5.36�
Average number of Common Shares outstanding basic 149.0� 149.3�
150.2� 150.2� � Cash dividends paid per Common Share $ .39� $ .31�
$ 1.48� $ 1.24� � � See accompanying notes. Eaton Corporation
Business Segment Information � Three months ended December 31 Year
ended December 31 (Millions) 2006 2005 2006 2005 � Net sales
Electrical $ 1,103� $ 1,008� $ 4,184� $ 3,758� Fluid Power 985�
839� 3,983� 3,240� Truck 620� 549� 2,520� 2,288� Automotive 394�
421� 1,683� 1,733� $ 3,102� $ 2,817� $12,370� $11,019� � Operating
profit Electrical $ 142� $ 106� $ 474� $ 375� Fluid Power 103� 96�
422� 339� Truck 76� 105� 448� 453� Automotive 34� 46� 137� 225� �
Corporate Amortization of intangible assets (16) (9) (51) (30)
Interest expense-net (23) (22) (104) (90) Minority interest (4) (1)
(10) (5) Pension & other postretirement benefit expense (32)
(31) (152) (120) Stock option expense (7) -� (27) -� Other
corporate expense-net (34) (44) (148) (159) Income from continuing
operations before income taxes 239� 246� 989� 988� Income taxes
(credit) (2) 35� 77� 189� Income from continuing operations 241�
211� 912� 799� Income (loss) from discontinued operations, net of
income taxes -� (1) 38� 6� Net income $ 241� $ 210� $ 950� $ 805� �
� See accompanying notes. Eaton Corporation Condensed Consolidated
Balance Sheets � December 31 (Millions) 2006 2005 � Assets Current
assets Cash $ 114� $ 110� Short-term investments 671� 226� Accounts
receivable 1,928� 1,785� Inventories 1,293� 1,099� Deferred income
taxes & other current assets 402� 358� 4,408� 3,578� �
Property, plant & equipment-net 2,271� 2,175� Goodwill 3,034�
3,139� Other intangible assets 969� 626� Deferred income taxes
& other assets 701� 700� $11,383� $10,218� � Liabilities &
Shareholders' Equity Current liabilities Short-term debt, primarily
commercial paper $ 490� $ 394� Current portion of long-term debt
322� 240� Accounts payable 1,050� 810� Accrued compensation 305�
277� Accrued income & other taxes 149� 305� Other current
liabilities 1,091� 942� 3,407� 2,968� � Long-term debt 1,774�
1,830� Pensions 942� 632� Other postretirement benefits 766� 537�
Other long-term liabilities 422� 473� Shareholders' equity 4,072�
3,778� $11,383� $10,218� � � See accompanying notes. Eaton
Corporation Notes to Fourth Quarter 2006 Earnings Release Dollars
in millions, except for per share data (per share data assume
dilution) Acquisitions of Businesses In 2006 and 2005, Eaton
acquired certain businesses in separate transactions. The
Statements of Consolidated Income include the results of these
businesses from the effective dates of acquisition. A summary of
the larger transactions follows: Date of acquisition Business
segment Annual sales � 2006 Acquisitions Schreder-Hazemeyer
December 1, 2006 Electrical $9 for 2006 ��Eaton acquired
remaining��50% ownership of the��Belgium manufacturer of��low and
medium voltage��electrical distribution��switchgear � � � � � � �
Diesel fuel processingtechnology & associatedassets of
Catalytica EnergySystems Inc. October 26, 2006 Truck N/A� � � ��A
U.S. developer of��emissions control��solutions for Trucks � � � �
� Senyuan InternationalHoldings Limited September 14,2006
Electrical $47 for 2005 ��A China-based��manufacturer of
vacuum��circuit breakers and��other electrical��switchgear
components � � � Ronningen-Petter businessunit of Dover
Resources,Inc. September 5, 2006 Fluid Power $30 for 2005 ��A
U.S.-based manufacturer��of industrial fine��filters and components
� � � Synflex business unit ofSaint-Gobain PerformancePlastics
Corporation March 31, 2006 Fluid Power $121 for 2005 � ��A
U.S.-based manufacturer��of�thermoplastic hoses��and Tubing � �
Marina Power and Lighting March 24, 2006 Electrical $11 for 2005
��A U.S. manufacturer of��marine duty electrical��distribution
products � � 2005 Acquisitions Aerospace division of PerkinElmer,
Inc. December 6, 2005 Fluid Power $150 for theyear endedJune
30,2005 � Aerospace fluid and air division of Cobham plc November
1, 2005 Fluid Power $210 for2004 � Assets of Pringle Electrical
Manufacturing Company October 11, 2005 Electrical $6 for
2004,one-third ofwhich wereto Eaton � Industrial filtration
business of Hayward Industries, Inc. September 6, 2005 Fluid Power
$100 for theyear endedJune 30,2005 � Tractech Holdings, Inc. August
17, 2005 Automotive $43 for 2004 � Morestana S.A. de C.V. June 30,
2005 Automotive $13 for 2004 � Winner Group Holdings Ltd. March 31,
2005 Fluid Power $26 for 2004 � Pigozzi S.A. Engrenagens e
Transmissoes March 1, 2005 Truck $42 for 2004 On December 28, 2006,
Eaton announced it had reached an agreement to purchase AT Holdings
Corporation, the parent of Argo-Tech Corporation, for $695. This
transaction is expected to close in the first quarter of 2007.
Argo-Tech�s U.S.-based aerospace business, which had sales for the
fiscal year ended October 28, 2006 of $206, is a leader in high
performance aerospace engine fuel pumps and systems, airframe fuel
pumps and systems, and ground fueling systems for commercial and
military aerospace markets. The Argo-Tech business will be
integrated into the Fluid Power segment. On January 5, 2007, the
Company announced it had reached an agreement to purchase the Power
Protection Business of Power Products Ltd., a Czech-based
distributor and service provider of Powerware and other
uninterruptible power systems, for $2. The transaction is expected
to close in the first quarter of 2007. This business, which had
2006 sales of $3, will be integrated into the Electrical segment.
Acquisition Integration Charges In 2006 and 2005, Eaton incurred
charges related to the integration of acquired businesses. Charges
in 2006 related to primarily the following acquisitions: Powerware,
the electrical power systems business acquired in 2004 and the
Pringle electrical switch business; several acquisitions in Fluid
Power including the acquired operations of Synflex, PerkinElmer,
Cobham, Hayward, Winner, and Walterscheid (acquired in 2004); and
the Pigozzi, Tractech, and Morestana businesses. Charges in 2005
related to primarily the following acquisitions: Powerware and the
electrical division of Delta plc acquired in 2003; several
acquisitions in Fluid Power, including Winner, Walterscheid, and
Boston Weatherhead (acquired in 2002); and the Pigozzi and
Morestana businesses. A summary of these charges follows:
Acquisitionintegrationcharges Operating profitas reported Operating
profitbefore acquisitionintegration charges � Three months ended
December 31 2006 2005 2006 2005 2006 2005 Electrical $ 1� $ 5�
$142� $106� $143� $111� Fluid Power 12� 2� 103� 96� 115� 98� Truck
-� 3� 76� 105� 76� 108� Automotive 2� 3� 34� 46� 36� 49� Pretax
charges $ 15� $ 13� After-tax charges $ 10� $ 9� Per Common Share $
.07� $ .05� Acquisitionintegrationcharges Operating profitas
reported Operating profitbefore acquisitionintegration charges �
Year ended December 31 2006 2005 2006 2005 2006 2005 Electrical $
7� $ 21� $474� $375� $481� $396� Fluid Power 23� 7� 422� 339� 445�
346� Truck 5� 4� 448� 453� 453� 457� Automotive 5� 4� 137� 225�
142� 229� Pretax charges $ 40� $ 36� After-tax charges $ 27� $ 24�
Per Common Share $ .17� $ .15� The acquisition integration charges
were included in the Statements of Consolidated Income in Cost of
products sold or Selling & administrative expense, as
appropriate. In Business Segment Information, the charges reduced
Operating profit of the related business segment. Excel 07 Plant
Closing Charges In first quarter 2006, Eaton announced, and began
to implement, its Excel 07 program. This program was a series of
actions in 2006 intended to address resource levels and operating
performance in businesses that underperformed in 2005, and
businesses that were expected to soften during second half 2006 and
in 2007. As part of the Excel 07 program, charges were incurred
related to the closings of plants in all four business segments. A
summary of charges incurred by each segment in fourth quarter 2006
and full year 2006 related to all Excel 07 plant closings,
including severance, plant integration and other charges, follows:
Three months endedDecember 31, 2006 Year endedDecember 31, 2006
Electrical $ 7� $ 12� Fluid Power -� 19� Truck 5� 30� Automotive 4�
51� Pretax charges $ 16� $ 112� The costs associated with Excel 07
plant closings were included in the Statements of Consolidated
Income primarily in Cost of products sold. In Business Segment
Information, the charges reduced Operating profit of the related
business segment. Discontinued Automotive Operations In third
quarter 2006, certain product lines of the Automotive segment were
sold, resulting in a $35 after-tax gain, or $.23 per Common Share.
As a result of these sales, the consolidated financial statements
present these operations as discontinued operations. Retirement
Benefit Plans Expense Net income in fourth quarter 2006 was reduced
by $3, or $.02 per Common Share, compared to fourth quarter 2005
due to increased pension benefit expense in 2006. This primarily
resulted from the lowering of discount rates associated with
pension liabilities at year-end 2005, and the effect of the
increased settlement costs in 2006. Net income for full year 2006
was similarly reduced by $42, or $.28 per share, compared to full
year 2005. In January 2007, Eaton made voluntary contributions of
$150 to its United States qualified pension plan and in January
2006, a similar contribution of $100 was also made. In fourth
quarter 2006, Eaton adopted Statement of Financial Accounting
Standards (SFAS) No. 158, �Employers� Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R)�. SFAS No. 158 requires
employers to recognize on their balance sheets the net amount by
which pension and other postretirement benefit plan liabilities are
overfunded or underfunded. This new requirement replaces SFAS No.
87�s requirement to report a minimum pension liability measured as
the excess of the accumulated benefit obligations over the fair
value of plan assets. Under SFAS No. 158, employers are required to
recognize all actuarial gains and losses, prior service costs, and
any remaining transition amounts from the initial application of
SFAS Nos. 87 and 106 when recognizing the plans� funded status,
with an increase in accumulated other comprehensive loss in
shareholders� equity. Effective for fiscal years ending after
December 15, 2008, SFAS No. 158 will also require year-end
measurements of plan assets and benefit obligations, eliminating
the use of earlier measurement dates currently permissible. SFAS
No. 158 does not change the amounts recognized in the income
statement as net periodic benefit cost. The effect on Eaton of
applying SFAS No. 158 on the consolidated balance sheet at December
31, 2006 was an increase in the liability for pensions of $248
($163 after-tax) and an increase in the liability for
postretirement benefits other than pensions of $238 ($153
after-tax). These adjustments increased Accumulated other
comprehensive loss in Shareholders� equity by a combined amount of
$316, reducing total Shareholders� equity by a like amount. Stock
Options Effective January 1, 2006, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123(R), �Share-Based
Payment�, Eaton began to record compensation expense under the
�fair-value-based� method of accounting for stock options granted
to employees and directors. Expense for stock options in fourth
quarter 2006 was $7 pretax ($5 after-tax, or $.04 both per Common
Share both assuming dilution and basic). For full year 2006,
expense for stock options was $27 ($20 after-tax, or $.13 per share
both assuming dilution and basic). The Company adopted SFAS No.
123(R) using the �modified prospective application� method and, as
a result, financial results for periods prior to 2006 were not
restated for this accounting change. Income Taxes The effective
income tax rates for continuing operations for the fourth quarter
and full year 2006 were (1.1%) and 7.8%, respectively, compared to
13.8% and 19.1% for the same periods in 2005. The lower rates in
2006 were primarily due to income tax benefits of $32 in fourth
quarter 2006, and $90 for full year 2006, resulting from the
favorable resolution of multiple international and U.S. income tax
items. Excluding the income tax benefits resulting from the
favorable resolution of income tax items, the effective income tax
rates for continuing operations for fourth quarter 2006 was 12.4%
and for full year 2006 was 17.0%. The lower rates in the fourth
quarter and full year 2006 also reflect the reenactment of the
Research and Experimentation tax credit into U.S. law in December
2006. Since the reenactment is retroactive to the prior expiration
date of December 31, 2005, a full year benefit was accrued in
fourth quarter 2006. Repurchase of Common Shares In fourth quarter
2006, Eaton repurchased 3.340 million Common Shares in the open
market at a total cost of $254. For full year 2006, 5.286 million
shares were repurchased at a total cost of $386. In full year 2005,
7.015 million Common Shares were repurchased in the open market at
a total cost of $450. Reconciliation of Financial Measures This
earnings release discloses operating earnings, operating earnings
per Common Share and operating profit before acquisition
integration charges for each business segment, each of which
excludes amounts that differ from the most directly comparable
measure calculated in accordance with generally accepted accounting
principles (GAAP). A reconciliation of each of these financial
measures to the most directly comparable GAAP measure is included
in this earnings release in the Comparative Financial Summary or in
the notes to the earnings release. Management believes that these
financial measures are useful to investors because they exclude
transactions of an unusual nature, allowing investors to more
easily compare the Company's financial performance period to
period. Management uses this information in monitoring and
evaluating the on-going performance of the Company and each
business segment.
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