Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced net income per share of $1.64 for the second
quarter of 2007, the same as in the second quarter of 2006 and
significantly above its guidance of $1.35 to $1.45. Sales in the
quarter were $3.25 billion, 4 percent above the second quarter of
2006. Net income was $246 million compared to $253 million in 2006,
a decrease of 3 percent. 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 2007 were $1.70 compared to $1.68 per share in 2006, an
increase of 1 percent, and operating earnings for the second
quarter of 2007 were $255 million compared to $259 million in 2006,
a decrease of 2 percent. Alexander M. Cutler, Eaton chairman and
chief executive officer, said, �We are very pleased with our second
quarter results, which substantially exceeded our guidance. Sales
growth in the quarter of 4 percent consisted of 3 percent from
acquisitions and 2 percent from exchange rates, offset by a 1
percent decline in organic growth. Our end markets declined by 4
percent, due principally to the anticipated sharp decline in the
quarter in the NAFTA heavy-duty truck market. �Compared to the
$1.45 midpoint of our operating earnings per share guidance for the
quarter, we achieved an additional $.08 per share from
stronger-than-projected performance, as well as a $.17 per share of
benefit from a series of events that resulted in a lower tax rate
in the quarter than we had originally expected,� said Cutler. �Most
importantly, our operating profit performance provides dramatic
evidence of the effectiveness of Eaton�s diversification strategy
and our Excel 07 program. Our second quarter segment operating
margin before acquisition integration charges was 12.9 percent, the
same as our margin in the second quarter of 2006. We are very
pleased with this level of profitability, since it reflects the
continued improvement in our electrical and fluid power segment
margins, which offset the decline in our Truck segment margins,�
said Cutler. �All segments achieved higher than 12 percent
operating margins in the second quarter. The 15 percent margin
recorded in our Truck segment is also noteworthy, given that sales
in the Truck segment declined 23 percent in the quarter. �As we
survey our end markets, the year is shaping up to be in line with
our initial forecast,� said Cutler. �We see slightly stronger
growth in the electrical markets, offset by weaker-than-anticipated
conditions in the North American hydraulics markets. �Our operating
cash flow for the quarter was $352 million, our second highest cash
flow in a second quarter,� said Cutler. �We made solid progress on
working capital and expect continued improvements over the balance
of the year. �We have been very successful on the acquisition front
in 2007,� said Cutler. �So far this year, we have announced or
closed seven acquisitions. The majority of the acquisition spending
has been in two of our highest priority markets, aerospace and
electrical power quality. �We anticipate net income per share for
the third quarter of 2007 to be between $1.50 and $1.60,� said
Cutler. �Operating earnings per share, which exclude charges to
integrate our recent acquisitions, are anticipated to be between
$1.60 and $1.70 in the third quarter of 2007. �For the full year,
we are raising our guidance by $.30 for both net income per share
and operating earnings per share to $6.50 to $6.70 for net income
per share, and $6.75 to $6.95 for operating earnings per share.�
Business Segment Results Second quarter sales for the Electrical
segment were a record $1.16 billion, up 11 percent over 2006.
Operating profits in the second quarter were $139 million.
Excluding acquisition integration charges of $2 million during the
quarter, operating profits were $141 million, up 22 percent from
results in 2006. �End markets for our electrical business grew
approximately 4 percent during the second quarter, with strong
growth in non-residential electrical and power quality markets
offsetting weakness in the residential electrical and industrial
controls markets,� said Cutler. �In addition, our operating margins
expanded to 12.2 percent, 1 percentage point over the 11.2 percent
posted in the second quarter of 2006. �In the Electrical segment,
we completed three acquisitions and announced a fourth acquisition
in the second quarter,� said Cutler. �The acquisitions of Aphel
Technologies and Pulizzi Engineering add valuable power
distribution equipment for power quality applications. The
acquisition of the small systems business of MGE UPS Systems, which
we expect to close in the third quarter, brings important
technology and products to our UPS single-phase business and
greatly expands our presence in Europe. Finally, the acquisition of
the medium-voltage drive business of SMC Electrical Products adds
important technology to our existing medium-voltage motor control
business. �We expect end market growth in the second half to be
modestly stronger than in the second quarter, led by strength in
the non-residential electrical and power quality markets,� said
Cutler. In the Fluid Power segment, second quarter sales were a
record $1.15 billion, 12 percent above the second quarter of 2006.
Excluding the impact of acquisitions, second quarter sales were up
5 percent compared to 2006. Fluid Power markets grew 2 percent
compared to the same period in 2006, with global hydraulics
shipments flat, the commercial and business jet aerospace market up
7 percent, the defense aerospace market up 6 percent, and European
automotive production up 1 percent. Operating profits in the second
quarter were a record $130 million. Excluding acquisition
integration charges of $12 million during the quarter, operating
profits were $142 million, an increase of 26 percent compared to a
year earlier. �In the second quarter, the hydraulics markets
outside the United States and the aerospace markets registered
strong growth. U.S. hydraulics markets declined, largely due to a
decline in construction equipment production and soft industrial
demand,� said Cutler. �We expect these trends to continue through
the balance of 2007, although we may see the U.S. hydraulics market
improve slightly due to an expected pick up during the second half
in the production of agricultural equipment. �We were pleased to
win during the second quarter a contract to design and supply the
hydraulic power generation and fluid conveyance package for the new
CH-53K military lift helicopter,� said Cutler. �Based on the
expected production of 156 helicopters for the U.S. Marine Corps,
as well as anticipated foreign military sales, the revenues from
the contract over the expected fifteen-year life of the program and
associated aftermarket sales are anticipated to exceed $200
million. Additionally, we were awarded during the second quarter a
contract to supply the hydraulic power generation system for the
Phenom 300 light jet program, which is expected to generate $20
million in revenue over the ten-year life of the program.� The
Truck segment posted sales of $498 million in the second quarter,
down 23 percent compared to 2006. NAFTA heavy-duty production was
down 51 percent compared to 2006, NAFTA medium-duty production was
down 27 percent, European truck production was up 5 percent,
Brazilian vehicle production was up 11 percent, and Brazilian
agricultural equipment production was up 30 percent. �Second
quarter production of NAFTA heavy-duty trucks totaled 45,000 units,
a decline of 51 percent from the second quarter of 2006. We expect
production in the third quarter to be similar to the second
quarter,� said Cutler. Operating profits in the second quarter were
$75 million, a decrease of 44 percent over 2006. �We are
particularly pleased that our reconfigured manufacturing footprint,
and our greater diversity of product offerings and operating
geographies, allowed us to achieve an operating margin over 15
percent in the quarter,� said Cutler. The Automotive segment posted
second quarter sales of $442 million, a 7 percent increase over the
second quarter of 2006. Automotive production in NAFTA was down 2
percent and in Europe was up 1 percent, compared to the second
quarter of 2006. Operating profits were $62 million, up 55 percent
from 2006. �The automotive markets were sluggish in the second
quarter and we expect them to remain so during the second half,�
said Cutler. �We are pleased at the strong margins in the quarter,
reflecting the benefits of Excel 07 actions taken last year. �We
announced two automotive transactions in the quarter,� said Cutler.
�The first was the acquisition of the fuel components division of
Saturn Electronics & Engineering. This acquisition further
strengthens our fuel valve business. In addition, we announced the
sale of our mirror controls business. The sale represents one more
step in focusing our automotive business around a core set of
products which benefit from regulatory and consumer trends
promoting fuel economy, reduced emissions, and safety.� 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. For more information,
visit www.eaton.com. 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. This news release contains forward-looking statements
concerning the third quarter 2007 and full year 2007 net income per
share and operating earnings per share, and 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 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; 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. Financial Results The company�s comparative financial
results for the three months and six months ended June 30, 2007 are
available on the company�s Web site, www.eaton.com. Eaton
Corporation Comparative Financial Summary Three monthsended June 30
Six monthsended June 30 (Millions except for per share data) � 2007
� 2006 � 2007 � 2006 � Continuing operations Net sales $ 3,248 $
3,125 $ 6,361 $ 6,081 Income before income taxes 256 269 519 514
Income after income taxes $ 240 $ 248 $ 469 $ 450 Income from
discontinued operations � 6 � 5 � 11 � 11 Net income $ 246 $ 253 $
480 $ 461 � Net income per Common Share assuming dilution
Continuing operations $ 1.60 $ 1.60 $ 3.12 $ 2.92 Discontinued
operations � .04 � .04 � .08 � .08 $ 1.64 $ 1.64 $ 3.20 $ 3.00
Average number of Common Shares outstanding assuming dilution 150.3
154.3 150.1 153.7 � Net income per Common Share basic Continuing
operations $ 1.63 $ 1.63 $ 3.18 $ 2.98 Discontinued operations �
.04 � .04 � .08 � .08 $ 1.67 $ 1.67 $ 3.26 $ 3.06 Average number of
Common Shares outstanding basic 147.4 151.7 147.4 151.0 � Cash
dividends paid per Common Share $ .43 $ .35 $ .86 $ .70 �
Reconciliation of net income to operating earnings Net income $ 246
$ 253 $ 480 $ 461 Excluding acquisition integration charges
(after-tax) � 9 � 6 � 18 � 12 Operating earnings $ 255 $ 259 $ 498
$ 473 � Net income per Common Share assuming dilution $ 1.64 $ 1.64
$ 3.20 $ 3.00 Per share impact of acquisition integration charges
(after-tax) � .06 � .04 � .12 � .08 Operating earnings per Common
Share $ 1.70 $ 1.68 $ 3.32 $ 3.08 � See accompanying notes. Eaton
Corporation Statements of Consolidated Income Three monthsended
June 30 Six monthsended June 30 (Millions except for per share
data) � 2007 � � 2006 � � 2007 � � 2006 � � Net sales $ 3,248 $
3,125 $ 6,361 $ 6,081 � Cost of products sold 2,346 2,262 4,573
4,386 Selling & administrative expense 525 495 1,030 973
Research & development expense 88 80 170 159 Interest
expense-net 41 28 71 56 Other income-net � (8 ) � (9 ) � (2 ) � (7
) Income from continuing operations before income taxes 256 269 519
514 Income taxes � 16 � � 21 � � 50 � � 64 � Income from continuing
operations 240 248 469 450 Income from discontinued operations � 6
� � 5 � � 11 � � 11 � Net income $ 246 � $ 253 � $ 480 � $ 461 � �
Net income per Common Share assuming dilution Continuing operations
$ 1.60 $ 1.60 $ 3.12 $ 2.92 Discontinued operations � .04 � � .04 �
� .08 � � .08 � $ 1.64 � $ 1.64 � $ 3.20 � $ 3.00 � Average number
of Common Shares outstanding assuming dilution 150.3 154.3 150.1
153.7 � Net income per Common Share basic Continuing operations $
1.63 $ 1.63 $ 3.18 $ 2.98 Discontinued operations � .04 � � .04 � �
.08 � � .08 � $ 1.67 � $ 1.67 � $ 3.26 � $ 3.06 � Average number of
Common Shares outstanding basic 147.4 151.7 147.4 151.0 � Cash
dividends paid per Common Share $ .43 $ .35 $ .86 $ .70 � See
accompanying notes. Eaton Corporation Business Segment Information
Three monthsended June 30 Six monthsended June 30 (Millions) � 2007
� � 2006 � � 2007 � � 2006 � � Net sales Electrical $ 1,158 $ 1,040
$ 2,242 $ 2,005 Fluid Power 1,150 1,026 2,191 2,000 Truck 498 646
1,074 1,253 Automotive � 442 � � 413 � � 854 � � 823 � $ 3,248 � $
3,125 � $ 6,361 � $ 6,081 � Operating profit Electrical $ 139 $ 113
$ 259 $ 216 Fluid Power 130 110 247 214 Truck 75 133 182 250
Automotive 62 39 119 89 � Corporate Amortization of intangible
assets (19 ) (11 ) (35 ) (22 ) Interest expense-net (41 ) (28 ) (71
) (56 ) Minority interest (3 ) (2 ) (5 ) (3 ) Pension & other
postretirement benefit expense (43 ) (40 ) (81 ) (80 ) Stock option
expense (7 ) (7 ) (14 ) (13 ) Other corporate expense�net � (37 ) �
(38 ) � (82 ) � (81 ) Income from continuing operations before
income taxes 256 269 519 514 Income taxes � 16 � � 21 � � 50 � � 64
� Income from continuing operations 240 248 469 450 Income from
discontinued operations � 6 � � 5 � � 11 � � 11 � Net income $ 246
� $ 253 � $ 480 � $ 461 � � See accompanying notes. Eaton
Corporation Condensed Consolidated Balance Sheets June 30, Dec. 31,
(Millions) � 2007 � 2006 � ASSETS Current assets Cash $ 112 $ 114
Short-term investments 382 671 Accounts receivable 2,208 1,928
Inventories 1,382 1,293 Deferred income taxes & other current
assets � 451 � 402 4,535 4,408 � Property, plant &
equipment-net 2,270 2,271 Goodwill 3,478 3,034 Other intangible
assets 1,386 969 Deferred income taxes & other assets � 750 �
735 $ 12,419 $ 11,417 � LIABILITIES & SHAREHOLDERS� EQUITY
Current liabilities Short-term debt, primarily commercial paper $
721 $ 490 Current portion of long-term debt 38 322 Accounts payable
1,081 1,050 Accrued compensation 278 305 Other current liabilities
� 1,051 � 1,123 3,169 3,290 � Long-term debt 2,518 1,774 Pension
liabilities 841 942 Other postretirement liabilities 778 766 Other
long-term liabilities 666 539 Shareholders' equity � 4,447 � 4,106
$ 12,419 $ 11,417 � See accompanying notes. Eaton Corporation Notes
to Second Quarter 2007 Earnings Release Dollars in millions, except
for per share data (per share data assume dilution) Discontinued
Automotive Operations On June 22, 2007, Eaton announced an
agreement to sell the Mirror Controls Division of the Automotive
segment for $111 to funds managed by Englefield Capital LLP. The
transaction is expected to close during third quarter 2007. In
third quarter 2006, certain other businesses of the Automotive
segment were sold. The operating results of these businesses are
reported as Discontinued operations in the Statement of
Consolidated Income. Acquisitions of Businesses In 2007 and 2006,
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
these transactions follows: Acquired business Date ofacquisition
Businesssegment Annualsales Pulizzi Engineering A U.S. manufacturer
of AC power distribution, AC power sequencing, redundant power and
remote-reboot power management systems � June 19,2007 Electrical
$12 for2006 � Technology and related assets of SMC Electrical
Products, Inc.�s industrial medium-voltage adjustable frequency
drive business May 18,2007 Electrical None � Fuel components
division of Saturn Electronics & Engineering, Inc. A U.S.
designer and manufacturer of fuel containment/shutoff valves,
emissions control valves and specialty actuators � May 2,2007
Automotive $28 for2006 � Aphel Technologies Limited A U.K.-based
global supplier of high density, fault-tolerant power distribution
solutions for datacenters, technical offices, laboratories and
retail environments � April 5,2007 Electrical $12 for2006 �
Argo-Tech A U.S.-based manufacturer of high performance aerospace
engine fuel pumps and systems, airframe fuel pumps and systems, and
ground fueling systems for commercial and military aerospace
markets � March 16,2007 Fluid Power $206 for2006 � Power Protection
Business of Power Products Ltd. A Czech distributor and service
provider of Powerware and other uninterruptible power systems �
February 7,2007 Electrical $3 for2006 � Schreder-Hazemeyer Eaton
acquired the remaining 50% ownership of the Belgium manufacturer of
low and medium voltage electrical distribution switchgear �
December 1,2006 Electrical $9 for2006 � Diesel fuel processing
technology & associated assets of Catalytica Energy Systems
Inc. A U.S. developer of emission control solutions for Trucks
October 26,2006 Truck None � Senyuan International Holdings Limited
A China-based manufacturer of vacuum circuit breakers and other
electrical switchgear components � September 14,2006 Electrical $47
for2005 � Ronningen-Petter business unit of Dover Resources, Inc. A
U.S.-based manufacturer of industrial fine filters and components
September 5,2006 Fluid Power $30 for2005 � Synflex business unit of
Saint-Gobain Performance Plastics Corp. A U.S.-based manufacturer
of thermoplastic hose and tubing March 31,2006 Fluid Power $121
for2005 � � Marina Power & Lighting A U.S. manufacturer of
marine duty electrical distribution products March 24,2006
Electrical $11 for2005 On June 21, 2007, the Company announced an
agreement to acquire the small systems business of Schneider
Electric�s MGE UPS Systems for �425 ($574). The transaction is
expected to close in third quarter 2007. This business had sales of
�163 ($220) for the 12-month period ending May 31, 2007.
Headquartered in France, the business is a global provider of power
quality solutions including UPS, power distribution units, static
transfer switches and surge suppressors, and will be integrated
into the Electrical segment. Acquisition Integration Charges In
2007 and 2006, Eaton incurred charges related to the integration of
acquired businesses. Charges in 2007 related to the integration of
primarily the following acquisitions: In the Electrical segment,
Powerware and Senyuan; and in the Fluid Power segment, several
acquisitions including the acquired operations of Cobham, Hayward,
PerkinElmer, Synflex, and Walterscheid. Charges in 2006 related to
the integration of primarily the following acquisitions: In the
Electrical segment, Powerware and Pringle; in the Fluid Power
segment, PerkinElmer, Cobham, Hayward, and Winner; in the Truck
segment Pigozzi; and in the Automotive segment, Tractech and
Morestana. A summary of these charges follows: Three months ended
June 30 Acquisitionintegrationcharges Operating profit asreported
Operating profitbefore acquisitionintegration charges � 2007 � 2006
� 2007 � 2006 � 2007 � 2006 Electrical $ 2 $ 3 $ 139 $ 113 $ 141 $
116 Fluid Power 12 3 130 110 142 113 Truck 2 75 133 75 135
Automotive � � 1 � 62 � 39 � 62 � 40 Pretax charges $ 14 $ 9 $ 406
$ 395 $ 420 $ 404 After-tax charges $ 9 $ 6 Per Common Share $ .06
$ .04 Six months ended June 30 Acquisitionintegrationcharges
Operating profit asreported Operating profitbefore
acquisitionintegration charges � 2007 � 2006 � 2007 � 2006 � 2007 �
2006 Electrical $ 4 $ 5 $ 259 $ 216 $ 263 $ 221 Fluid Power 23 6
247 214 270 220 Truck 4 182 250 182 254 Automotive � � 3 � 119 � 89
� 119 � 92 Pretax charges $ 27 $ 18 $ 807 $ 769 $ 834 $ 787
After-tax charges $ 18 $ 12 Per Common Share $ .12 $ .08 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. Income Taxes The effective income tax rates for
continuing operations for second quarter and first half 2007 were
6.5% and 9.6%, respectively, compared to 7.8% and 12.5% for the
same periods in 2006. There were many factors that favorably
affected the effective income tax rate during the first half of
2007. In first quarter, Eaton resolved multiple state income tax
issues as well as benefited from a change in an income tax law in a
foreign jurisdiction that eliminated an uncertainty in the
application of tax law. In second quarter, the Company favorably
resolved income tax litigation in a foreign country, reversed a
valuation allowance due to a change in state tax law, and recorded
a favorable adjustment to its 2006 tax accrual after the
preparation of several tax returns. Excluding the benefits of these
factors, the income tax rate for second quarter and first half 2007
would have been 14.4% and 15.5%, respectively. The rates in 2007
also reflect the impact of higher earnings in international tax
jurisdictions with lower income tax rates and the impact of
acquisitions completed in 2007. Effective January 1, 2007, Eaton
adopted Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 48, �Accounting for Uncertainty in Income Taxes � an
interpretation of FASB Statement No. 109�. The net income tax
assets recognized under FIN No. 48 did not differ from the net
assets recognized before adoption, and, therefore, the Company did
not record a cumulative-effect adjustment related to the adoption
of FIN No. 48. Long-term Debt In February 2007, Eaton entered into
a new $750 short-term 364-day revolving credit agreement. In March,
the Company issued a $281 note at 5.6% under this revolving credit
agreement to partially finance the acquisition of Argo-Tech. In
June, the Company refinanced that borrowing through the issuance of
a $281 note. This note matures in June 2010 and bears interest at a
floating rate based on LIBOR. With the issuance of this note, the
aggregate amount of the commitment under the $750 short-term
364-day revolving credit agreement was reduced to $469. The Company
does not have any borrowings outstanding under this revolving
credit agreement. In March 2007, Eaton issued $250 of 5.3% notes
due 2017 and $250 of 5.8% notes due 2037. The proceeds from the
issuance of the notes were used to repay $263 of 6% notes due in
2007, and to repay commercial paper. Common Shares On January 22,
2007, Eaton announced it had authorized a new 10 million Common
Share repurchase program, replacing the 1.3 million shares
remaining from the 10 million share repurchase authorization
approved in April 2005. The shares are expected to be repurchased
over time, depending on market conditions, the market price of the
Company�s Common Shares, the Company�s capital levels and other
considerations. The number of Common Shares repurchased in the open
market in 2007 and 2006, and the total cost, follow: Shares
repurchased Cost (Shares in millions) 2007 2006 � 2007 � 2006 First
quarter 2.312 $ 178 Second quarter 1.437 0.895 131 $ 63 Third
quarter 1.051 69 Fourth quarter � 3.340 � � 254 3.749 5.286 $ 309 $
386 In second quarter 2007, 0.6 million stock options were
exercised resulting in cash proceeds of $26. In first half 2007,
3.0 million stock options were exercised resulting in cash proceeds
of $111. 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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