ETN Eaton Corp New

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.