Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced net income per share of $2.03 for the second
quarter of 2008, 24 percent above the second quarter of 2007 and a
quarterly record. Sales in the quarter were $4.28 billion, 32
percent above the second quarter of 2007 and also a quarterly
record. Net income was a record $333 million compared to $246
million in 2007, an increase of 35 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 2008 were $2.10 compared to $1.70 per
share in 2007, an increase of 24 percent, and operating earnings
for the second quarter of 2008 were $344 million compared to $255
million in 2007, an increase of 35 percent. Alexander M. Cutler,
Eaton chairman and chief executive officer, said, �Our businesses
performed extremely well in the second quarter, generating strong
sales growth and record profits. We were able to achieve these
results despite the nearly 40 percent rise in oil prices during the
quarter, which caused significant turmoil in our
transportation-related end markets. With 20 percent of our revenue
from emerging countries and with continued strength in many of our
product markets, we believe we are well-positioned to deal with the
reduced growth outlook for the U.S. and European economies caused
by higher fuel prices. �Sales growth in the second quarter of 32
percent consisted of 19 percent from acquisitions, 8 percent from
organic growth, and 5 percent from exchange rates,� said Cutler.
�We outgrew our end markets by 2 percentage points, as our end
markets grew 6 percent in the quarter. �Our segment operating
margin of 13.3 percent, an increase of 0.4 percentage points over
the second quarter of 2007, provides further evidence of the
effectiveness of Eaton�s diversification strategy and of our
demonstrated ability to manage through an environment of rising
commodity prices,� said Cutler. �It is also worth noting that 45
percent of our overall segment operating profits were earned by our
Electrical segment, reflecting the impact of our recent
acquisitions and end markets which are continuing to grow solidly.
�Offsetting our end markets which were adversely impacted by the
rapid increase in oil prices, we were able to begin implementation
in the second quarter of a tax project we had worked on for some
time to consolidate various legal entities,� said Cutler. �As a
result, we were able to achieve a tax rate in the second quarter of
2008 very similar to the tax rate in the second quarter of 2007. In
addition, the tax consolidation project will also benefit earnings
in future years. �We completed three major financings in the second
quarter,� said Cutler. �We sold 18.7 million shares in late April,
raising $1.52 billion; we issued $750 million of five- and ten-year
term debt in mid May; and we replaced an expiring $300 million
backup line of credit with a new $500 million five-year backup
line. These actions allowed us to finish the second quarter with
our debt ratios about the same as those prior to completing the
Phoenixtec and Moeller acquisitions. �Our operating cash flow for
the quarter was $376 million,� said Cutler. �Our growth in sales
from May to June was 9 percent, requiring additional working
capital to fund the receivables created by the increased sales. We
made solid progress during the quarter on working capital
efficiency and expect continued improvements over the balance of
the year. �As we survey our end markets, the year is shaping up to
be slightly weaker than our initial forecast due principally to the
impact of higher oil prices in several of our end markets,� said
Cutler. �We now anticipate our overall end markets to grow at 3
percent, 1 percentage point lower than our prior forecast. We see
growth in our U.S. markets at 1 percent compared to our prior
estimate of 2 percent, while our non-U.S. markets are expected to
grow 5 percent compared to our prior estimate of 6 percent. �We
anticipate net income per share for the third quarter of 2008 to be
between $1.75 and $1.85,� said Cutler. �Operating earnings per
share, which exclude charges to integrate our recent acquisitions,
are anticipated to be between $1.90 and $2.00 in the third quarter
of 2008. �For the full year, due to the reduction in our
expectations for market growth we are reducing the midpoint of our
guidance by $.20 for both net income per share and operating
earnings per share. In addition, since the uncertainty around our
financing of Moeller and Phoenixtec has now been resolved, we are
narrowing our range of guidance. Accordingly, we now anticipate
2008 net income per share of between $7.20 and $7.50, and 2008
operating earnings per share of between $7.70 and $8.00,� said
Cutler. �Based on this guidance, our operating earnings per share
in 2008 are expected to grow between 12 percent and 16 percent over
2007.� Business Segment Results Second quarter sales for the
Electrical segment were a record $1.94 billion, up 67 percent over
2007. Adjusted for acquisitions, sales grew 14 percent, split
between 12 percent organic growth and 2 percent from foreign
exchange. Operating profits in the second quarter were $250
million. Excluding acquisition integration charges of $7 million
during the quarter, operating profits were $257 million, up 82
percent from results in 2007. �End markets for our Electrical
business grew approximately 5 percent during the second quarter,�
said Cutler. �U.S. markets, which make up 40 percent of our
electrical sales, grew just under 5 percent in the quarter, and
non-U.S. markets grew 5 1/2 percent in the quarter. In addition,
our operating margins expanded to a record 13.3 percent, up 1.1
percentage points over the second quarter of 2007. �Our bookings in
the Electrical segment, adjusted for foreign exchange and
acquisitions, grew 11 percent over the second quarter of 2007,�
said Cutler. �June was particularly strong, with orders increasing
15 percent over June of 2007. �We now expect growth in our
Electrical markets for all of 2008 to be 5 percent,� said Cutler.
�We were pleased to close the Moeller acquisition in early April,�
said Cutler. �So far, sales and margins at both Moeller and
Phoenixtec have exceeded our expectations. �We received several
significant orders during the second quarter, reflecting in part
our ability to provide a more comprehensive set of products and
services to customers,� said Cutler. �A good example of this is a
new contract awarded us by the Federal Aviation Administration for
a variety of power quality equipment. The contract is expected to
total $40 million over the next 10 years.� Hydraulics segment sales
were a record $695 million, up 12 percent compared to the second
quarter of 2007. Global hydraulics markets were up 6 percent in the
quarter, with non-U.S. markets up 7 percent while U.S. markets were
up 4 percent. Operating profits in the second quarter were $92
million. Excluding acquisition integration charges of $1 million
during the quarter, operating profits totaled $93 million, an
increase of 31 percent over the second quarter of 2007. �The
hydraulics markets in the second quarter were stronger than
expected due principally to strong demand worldwide for
agricultural, mining and oilfield equipment,� said Cutler. �We
believe these markets will continue to drive strong demand for
hydraulic equipment, and as a result, we now believe the global
hydraulics markets for 2008 will grow 3 percent versus our prior
estimate of 2 percent growth. �In June, we received a commitment
from PACCAR�s Peterbilt Motors to purchase 75 units of our new
Hydraulic Launch Assist hybrid technology for commercial refuse
truck applications later this year and an additional 180 units next
year,� said Cutler. �In testing, the HLA-equipped refuse trucks
have demonstrated a fuel savings of up to 25 percent during a
typical duty cycle and a significant reduction in brake service
costs. Commercial availability of the system is planned for later
this year.� Aerospace segment sales were a record $466 million, 15
percent above the second quarter of 2007. Aerospace markets grew
just under 7 percent compared to the second quarter of 2007.
Operating profits in the second quarter were $69 million. Excluding
acquisition integration charges of $6 million during the quarter,
operating profits were $75 million, an increase of 17 percent
compared to a year earlier. �We anticipate the global aerospace
market will grow 6 percent in 2008, slightly weaker than our
expectations at the end of the first quarter as a result of the
reduction in commercial aftermarket volume due to fleet adjustments
initiated to deal with higher fuel prices,� said Cutler. �Our
aerospace business signed several new contracts during the
quarter,� said Cutler. �Of the $160 million in expected revenue
from new contracts, $100 million is from Eaton�s selection as the
fuel system supplier for the new Cessna Citation Columbus business
jet.� The Truck segment posted sales of $625 million in the second
quarter, up 26 percent compared to 2007. Truck markets in the
second quarter were up 16 percent, with U.S. markets up 13 percent
and non-U.S. markets up 19 percent. �Second quarter production of
NAFTA heavy-duty trucks totaled 57,000 units, an increase of 7,000
units from the first quarter of 2008. We expect production in the
third quarter to be slightly weaker than the second quarter and
then improve in the fourth quarter. As a result, for the full year,
we now expect NAFTA Class 8 production to be 215,000 units,� said
Cutler. Operating profits in the second quarter were $94 million,
an increase of 25 percent over 2007. �Our Truck business continues
to significantly benefit from our strong position in non-U.S.
markets, particularly Brazil,� said Cutler. �Despite the reduced
outlook for NAFTA truck production, our strength in international
markets should allow our Truck business to post a strong second
half.� The Automotive segment posted second quarter sales of $554
million, down 2 percent from the second quarter of 2007. Global
automotive markets were down 3 percent with U.S. markets down 16
percent and non-U.S. markets up 6 percent. Operating profits were
$51 million. Excluding acquisition integration charges of $1
million during the quarter, operating profits were $52 million,
down 25 percent from 2007. �The automotive market in the U.S.
dropped markedly in the second quarter in response to the drastic
increase in fuel prices,� said Cutler. �In addition, the strike at
a major U.S. automotive supplier was not fully resolved until very
late in the quarter, further reducing automotive production in the
U.S. Given all of these headwinds, we are pleased at the strong
performance in the quarter, reflecting our leading positions in
technologies focused on improving fuel economy and reducing
emissions.� Eaton Corporation is a diversified power management
company with 2007 sales of $13 billion. Eaton is a global
technology leader in electrical 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 81,000 employees
and sells products to customers in more than 150 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 2008 and
full year 2008 net income per share and operating earnings per
share, our worldwide markets, our growth in relation to end
markets, and our growth from acquisitions. 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; 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, 2008 are available on the company�s Web
site, www.eaton.com. Eaton Corporation � � � Comparative Financial
Summary � (Millions except for per share data) Three months
endedJune 30 Six months endedJune 30 2008 2007 2008 2007 Continuing
operations Net sales $ 4,279 $ 3,248 $ 7,775 $ 6,361 Income before
income taxes 354 256 640 519 Income after income taxes $ 333 $ 240
$ 577 $ 469 Income from discontinued operations � � � 6 � 3 � 11
Net income $ 333 $ 246 $ 580 $ 480 � Net income per Common Share
assuming dilution Continuing operations $ 2.03 $ 1.60 $ 3.68 $ 3.12
Discontinued operations � � � .04 � .01 � .08 $ 2.03 $ 1.64 $ 3.69
$ 3.20 Average number of Common Shares outstanding assuming
dilution 163.6 150.3 157.1 150.1 � Net income per Common Share
basic Continuing operations $ 2.07 $ 1.63 $ 3.74 $ 3.18
Discontinued operations � � � .04 � .01 � .08 $ 2.07 $ 1.67 $ 3.75
$ 3.26 Average number of Common Shares outstanding basic 161.2
147.4 154.5 147.4 � Cash dividends paid per Common Share $ .50 $
.43 $ 1.00 $ .86 � Reconciliation of net income to operating
earnings Net income $ 333 $ 246 $ 580 $ 480 Excluding acquisition
integration charges (after-tax) � 11 � 9 � 20 � 18 Operating
earnings $ 344 $ 255 $ 600 $ 498 � Net income per Common Share
assuming dilution $ 2.03 $ 1.64 $ 3.69 $ 3.20 Per share impact of
acquisition integration charges (after-tax) � .07 � .06 � .13 � .12
Operating earnings per Common Share $ 2.10 $ 1.70 $ 3.82 $ 3.32 �
See accompanying notes. Eaton Corporation � � � Statements of
Consolidated Income � (Millions except for per share data) Three
months endedJune 30 Six months endedJune 30 2008 2007 2008 2007 Net
sales $ 4,279 $ 3,248 $ 7,775 $ 6,361 � Cost of products sold 3,069
2,346 5,601 4,573 Selling & administrative expense 704 528
1,256 1,035 Research & development expense 111 85 200 165
Interest expense-net 44 41 82 71 Other (income) expense-net � (3 )
� (8 ) � (4 ) � (2 ) Income from continuing operations before
income taxes 354 256 640 519 Income taxes � 21 � � 16 � � 63 � � 50
� Income from continuing operations 333 240 577 469 Income from
discontinued operations � � � 6 � � 3 � � 11 � Net income $ 333 � $
246 � $ 580 � $ 480 � � Net income per Common Share assuming
dilution Continuing operations $ 2.03 $ 1.60 $ 3.68 $ 3.12
Discontinued operations � � � .04 � � .01 � � .08 � $ 2.03 � $ 1.64
� $ 3.69 � $ 3.20 � Average number of Common Shares outstanding
assuming dilution 163.6 150.3 157.1 150.1 � Net income per Common
Share basic Continuing operations $ 2.07 $ 1.63 $ 3.74 $ 3.18
Discontinued operations � � � .04 � � .01 � � .08 � $ 2.07 � $ 1.67
� $ 3.75 � $ 3.26 � Average number of Common Shares outstanding
basic 161.2 147.4 154.5 147.4 � Cash dividends paid per Common
Share $ .50 $ .43 $ 1.00 $ .86 � See accompanying notes. Eaton
Corporation � � � Business Segment Information � Three months ended
Six months ended (Millions) June 30 June 30 2008 2007 2008 2007 Net
sales Electrical $ 1,939 $ 1,158 $ 3,243 $ 2,242 Hydraulics 695 619
1,352 1,193 Aerospace 466 407 896 757 Truck 625 498 1,192 1,074
Automotive � 554 � � 566 � � 1,092 � � 1,095 � $ 4,279 � $ 3,248 �
$ 7,775 � $ 6,361 � � Operating profit Electrical $ 250 $ 139 $ 410
$ 259 Hydraulics 92 68 170 134 Aerospace 69 55 132 100 Truck 94 75
179 182 Automotive 51 69 97 132 � Corporate Amortization of
intangible assets (42 ) (19 ) (67 ) (35 ) Interest expense-net (44
) (41 ) (82 ) (71 ) Minority interest (4 ) (3 ) (7 ) (5 ) Pension
& other postretirement benefit expense (35 ) (43 ) (73 ) (81 )
Stock option expense (8 ) (7 ) (15 ) (14 ) Other corporate
expense�net � (69 ) � (37 ) � (104 ) � (82 ) Income from continuing
operations before income taxes 354 256 640 519 Income taxes � 21 �
� 16 � � 63 � � 50 � Income from continuing operations 333 240 577
469 Income from discontinued operations � � � 6 � � 3 � � 11 � Net
income $ 333 � $ 246 � $ 580 � $ 480 � � See accompanying notes.
Eaton Corporation � Condensed Consolidated Balance Sheets � June
30, � December 31, (Millions) 2008 � 2007 � ASSETS Current assets
Cash $ 219 $ 142 Short-term investments 499 504 Accounts receivable
3,029 2,208 Inventories 1,844 1,483 Deferred income taxes &
other current assets � 472 � 430 6,063 4,767 � Property, plant
& equipment-net 2,699 2,333 Goodwill 6,181 3,982 Other
intangible assets 2,047 1,557 Deferred income taxes & other
assets � 933 � 791 $ 17,923 $ 13,430 � LIABILITIES &
SHAREHOLDERS� EQUITY Current liabilities Short-term debt $ 1,341 $
825 Current portion of long-term debt 148 160 Accounts payable
1,468 1,170 Accrued compensation 378 355 Other current liabilities
� 1,340 � 1,149 4,675 3,659 � Long-term debt 3,155 2,432 Pension
liabilities 946 681 Other postretirement liabilities 767 772 Other
long-term liabilities & deferred income taxes 986 714
Shareholders' equity � 7,394 � 5,172 $ 17,923 $ 13,430 � See
accompanying notes. Eaton Corporation Notes to the Second Quarter
2008 Earnings Release Dollars in millions, except for per share
data (per share data assume dilution) Acquisitions of Businesses In
2008 and 2007, 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 The Moeller Group��A Germany-based supplier �of
electrical components �for commercial and �residential building
�applications, and �industrial controls for �industrial equipment
�applications April 4,2008 Electrical � �1.02 billion for 2007 � �
Balmen Electronic, S.L. ��A Spain-based distributor �and service
provider of �uninterruptible power �supply (UPS) systems March
31,2008 � Electrical $6 for 2007 � Phoenixtec Power CompanyLtd.��A
Taiwan-based �manufacturer of single �and three-phase
�uninterruptible power �supply (UPS) systems February 26,2008 �
Electrical $515 for 2007 � Arrow Hose & Tubing Inc.��A
Canada-based �manufacturer of �thermoplastic hose and �tubing for
the��industrial,�food and��beverage, and �agricultural markets
November 8,2007 � Hydraulics $12 for 2006 � MGE small systems
UPSbusiness from SchneiderElectric��A France-based global �provider
of power quality �solutions including �uninterruptible
power��supply (UPS) systems, �power distribution units, �static
transfer switches �and surge suppressors October 31,2007 �
Electrical $245 for the year ended Sept. 30, 2007 � � Babco
Electric Group��A Canada-based �manufacturer of��specialty low-
and��medium-voltage��switchgear and��electrical�housings��for use
in the �Canadian oil and gas �industry and other harsh
�environments October 19,2007 � Electrical $11 for the year ended
April 30, 2007 � � Pulizzi Engineering ��A U.S. manufacturer of
�alternating current (AC) �power distribution, AC �power
sequencing, �redundant power and �remote-reboot power �management
systems June 19,2007 Electrical $12 for 2006 � Technology and
relatedassets of SMC ElectricalProducts, Inc.�sindustrial
medium-voltageadjustable frequency drivebusiness May 18,2007
Electrical None � Fuel components division ofSaturn Electronics
&Engineering, Inc. ��A U.S. designer and� manufacturer of
fuel��containment and shutoff� valves, emissions control��valves
and specialty ��actuators May 2,2007 Automotive $28 for 2006 �
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 for 2006 � Argo-Tech
Corporation��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 � Aerospace $206 for 2006 � Power
Protection Businessof Power Products Ltd. ��A Czech Republic�
distributor and service� provider of Powerware�� products and
other� uninterruptible power� supply (UPS) systems February 7,2007
� Electrical $3 for 2006 Acquisition Integration Charges In 2008
and 2007, Eaton incurred charges related to the integration of
acquired businesses. These charges, which consisted of plant
consolidations and integration, were recorded as expense as
incurred. A summary of these charges follows: � Three months ended
June 30 Acquisitionintegrationcharges � Operating profitas reported
� Operating profitbefore acquisitionintegration charges 2008 � 2007
2008 � 2007 2008 � 2007 � Electrical $ 7 $ 2 $ 250 $ 139 $ 257 $
141 Hydraulics 1 3 92 68 93 71 Aerospace 6 9 69 55 75 64 Truck 94
75 94 75 Automotive 1 51 69 52 69 Corporate � 2 � � � � � � � � � �
Pretax charges $ 17 $ 14 $ 556 $ 406 $ 571 $ 420 After-tax charges
$ 11 $ 9 Per Common Share $ .07 $ .06 � Six months ended June 30
Acquisitionintegrationcharges Operating profitas reported Operating
profitbefore acquisitionintegration charges 2008 2007 2008 2007
2008 2007 � Electrical $ 10 $ 4 $ 410 $ 259 $ 420 $ 263 Hydraulics
3 7 170 134 173 141 Aerospace 13 16 132 100 145 116 Truck 179 182
179 182 Automotive 2 97 132 99 132 Corporate � 2 � � � � � � � � �
� Pretax charges $ 30 $ 27 $ 988 $ 807 $ 1,016 $ 834 After-tax
charges $ 20 $ 18 Per Common Share $ .13 $ .12 Charges in 2008
related to the integration of primarily the following acquisitions:
in the Electrical segment, Moeller, Phoenixtec, the MGE small
systems UPS business, and Senyuan; in the Hydraulics segment,
Ronningen-Petter, Synflex and Hayward; in the Aerospace segment,
Argo-Tech, PerkinElmer and Cobham; and in the Automotive segment,
Saturn. Charges in 2007 related to the integration of primarily the
following acquisitions: in the Electrical segment, Senyuan and
Powerware; in the Hydraulics segment, Synflex, Hayward and
Walterscheid; and in the Aerospace segment, PerkinElmer and Cobham.
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 the second quarter and the first half of
2008 were 6.1% and 9.8%, respectively, compared to 6.5% and 9.6%
for the same periods in 2007. The income tax rate for the second
quarter of 2008 was affected by actions taken to consolidate
various legal entities, thereby reducing taxes by $33. Financing of
the Acquisitions of Phoenixtec & The Moeller Group In February
2008, Eaton borrowed $250 under a 364-day $3.0 billion revolving
credit agreement to partially finance the acquisition of
Phoenixtec. In April 2008, Eaton borrowed �1.33 billion under the
revolving credit agreement to finance the acquisition of Moeller.
In April and May 2008, Eaton sold 18.678 million of its Common
Shares in a public offering, resulting in net cash proceeds of
$1.52 billion. In May 2008, Eaton issued $300 of 4.9% notes due in
2013 and $450 of 5.6% notes due in 2018. The cash proceeds from the
sale of the Common Shares and from the issuance of the notes were
used to repay borrowings incurred to fund the acquisitions of
Phoenixtec and Moeller, and to repay commercial paper issued under
the backstop provided by the $3.0 billion revolving credit
agreement. Subsequently, in May 2008 Eaton elected to terminate the
$3.0 billion revolving credit agreement. 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 Eaton's financial performance
period to period. Management uses this information in monitoring
and evaluating the on-going performance of Eaton and each business
segment.
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