ETN Eaton Corp New

Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced record net income per share of $1.07 for the third quarter of 2011, an increase of 37 percent over the $0.78 earned in the third quarter of 2010. Sales in the third quarter were $4.12 billion, 15 percent above the third quarter of 2010. Net income in the third quarter was $365 million compared to $268 million in 2010.

Net income in both periods included charges for integration of acquisitions. Before these acquisition integration charges, operating earnings per share in the third quarter of 2011 were $1.08 compared to $0.79 per share in 2010, an increase of 37 percent. Operating earnings in the third quarter were $367 million compared to $272 million in 2010.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Our record third quarter results were at the midpoint of our guidance range, which we had increased in our July earnings release. This achievement is despite our incurring $0.06 per share of non cash mark-to-market losses on commodity hedge contracts resulting from the virtually unprecedented declines in metals prices which occurred during the last two weeks of September. We also achieved record operating margins and very strong cash flow in the third quarter, demonstrating that our business is continuing to perform well despite the uncertainty affecting the world economy and a number of our end markets.

“Sales in the third quarter increased 15 percent compared to the third quarter of 2010,” said Cutler.” The 15 percent sales growth was comprised of 11 percent core growth, 2 percent from acquisitions, and 2 percent from foreign exchange. End markets grew 11 percent in the quarter.

“We are very pleased with our 14.6 percent segment operating margin in the third quarter, setting a new segment operating margin record,” said Cutler.

“Our operating cash flow in the third quarter was $642 million, almost equal to the record operating cash flow we recorded in the fourth quarter of 2008,” said Cutler. “We took advantage of our strong cash flow and the depressed price of our shares to buy back 2 percent of our outstanding shares during the third quarter, at an average price of just over $39 per share.

“We anticipate net income per share for the fourth quarter of 2011 to be between $1.04 and $1.14,” said Cutler. “Operating earnings per share for the fourth quarter, which exclude charges to integrate our recent acquisitions, are anticipated to be between $1.06 and $1.16.

“We are affirming the midpoint of our full year earnings guidance as we continue to anticipate record operating earnings per share in 2011, our 100th anniversary year,” said Cutler. “Our guidance for net income per share is between $3.91 and $4.01 and for operating earnings per share is between $3.95 and $4.05. This represents growth in 2011 operating earnings per share of between 41 and 44 percent.”

Business Segment Results

Third quarter sales for the Electrical Americas segment were $1.07 billion, up 11 percent compared to 2010 and a quarterly record sales level for this segment. Operating profits in the third quarter were $156 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $159 million, up 13 percent over results in 2010.

“Our margin in the third quarter was impacted by the dramatic decline in commodity prices during the second half of September, resulting in mark-to-market commodity hedge costs of $11 million during the quarter,” said Cutler. “These costs reduced our operating margin in the quarter by 1.0 percentage points.

“End markets for our Electrical Americas segment grew 11 percent during the third quarter,” said Cutler. “As we had anticipated, the nonresidential construction markets in the U.S. have bottomed and are starting to show modest growth.

“Our bookings in the Electrical Americas segment, adjusted for foreign exchange, increased 21 percent compared to the third quarter of 2010,” said Cutler. “We now expect that our Electrical Americas markets in 2011 will grow by 8 percent, 1 percent higher than we anticipated in July.”

Sales for the Electrical Rest of World segment were $755 million, an increase of 7 percent compared to the third quarter of 2010. The sales increase was comprised of a 7 percent increase from foreign currency and a 2 percent increase from acquisitions, offset by a 2 percent decline in core sales. The segment reported operating profits of $62 million.

“Our margins in the Electrical Rest of World segment were impacted by the large decrease in the residential solar market and the dramatic decline in commodity prices during the last half of September, resulting in mark-to-market commodity hedge costs of $11 million during the quarter,” said Cutler. “The hedge costs reduced our operating margin in the quarter by 1.5 percentage points.

“Our markets in the third quarter grew 1 percent,” said Cutler. “Our bookings for the Electrical Rest of World segment, adjusted for foreign exchange and acquisitions, declined 9 percent in the quarter driven by a drop in the residential solar inverter market. For all of 2011, we now believe that the markets in our Electrical Rest of World segment will grow by 6 percent, down from the 7 percent we expected in July.”

Hydraulics segment sales were $717 million, up 23 percent compared to the third quarter of 2010. Global hydraulics markets were up 14 percent in the quarter, with U.S. markets up 18 percent and non-U.S. markets up 11 percent. Operating profits in the third quarter were $109 million. Excluding acquisition integration costs of $1 million during the quarter, operating profits were $110 million, up 45 percent over the third quarter of 2010.

“Global hydraulics markets in the third quarter continued the strong rebound we saw in the first half, although we did see weakness in the Chinese construction equipment markets,” said Cutler. “Our bookings, adjusted for foreign exchange, increased 20 percent in the third quarter. For all of 2011, we believe global hydraulics markets will grow 17 percent, 1 percent lower than we had expected in July.

“We were pleased to close our acquisition of German filtration company E. Begerow during the third quarter,” said Cutler.

Aerospace segment sales were $420 million, up 8 percent compared to the third quarter of 2010. Aerospace markets were up 7 percent compared to the third quarter of 2010. Operating profits in the third quarter were $71 million, up 16 percent over the third quarter of 2010.

“As we expected, our Aerospace margins rebounded in the third quarter, rising to 16.9 percent,” said Cutler. “We believe the development program issues we encountered in the first half of 2011 are now behind us.

“Aerospace bookings increased 16 percent during the third quarter, adjusted for foreign exchange, reflecting improved bookings in commercial OEM and aftermarket,” said Cutler. “We now believe that our Aerospace markets will grow by 5 percent in 2011, 1 percent higher than we anticipated in July.”

The Truck segment posted sales of $715 million in the third quarter, up 34 percent compared to 2010 and a record quarterly sales level for this segment. Truck production in the third quarter was up 25 percent, with U.S. markets up 51 percent and non-U.S. markets up 7 percent. The segment reported operating profits of $139 million.

“We now expect the NAFTA Class 8 market to total 255,000 units, a small reduction from our forecast in July,” said Cutler. “Outside NAFTA, we are seeing a continuation of modest growth.

“Our Truck segment is performing very well,” said Cutler. “We are at record sales levels despite the NAFTA markets still operating well below the peak levels of 2006. This reflects the substantial growth we have had in our non-NAFTA truck business over the last five years.”

The Automotive segment posted third quarter sales of $442 million, up 13 percent over the third quarter of 2010. Global automotive markets were up 8 percent, with U.S. markets up 13 percent and non-U.S. markets up 6 percent. The segment reported operating profits of $62 million.

“Global automotive production in the third quarter of 2011 was unusually strong, and this strength, along with solid execution across our business, allowed us to earn very attractive margins,” said Cutler.

Eaton Corporation is a diversified power management company with 2010 sales of $13.7 billion. Celebrating its 100th anniversary in 2011, Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 73,000 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 third quarter results is available to all interested parties as a live audio webcast today at 10 a.m. Eastern time via a link on the center of Eaton’s home page. This news release can be accessed under its headline on the home page. Also available on the website prior to the call will be a presentation on third quarter results, which will be discussed during the call.

This news release contains forward-looking statements concerning our fourth quarter 2011 tax rate, our fourth quarter and full year 2011 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; the availability of credit to customers and suppliers; 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 and currency fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.

Financial Results

The company’s comparative financial results for the three months and nine months ended September 30, 2011 are available on the company’s website, www.eaton.com.

                  EATON CORPORATION CONSOLIDATED STATEMENTS OF INCOME  

Three months endedSeptember 30

Nine months endedSeptember 30

(In millions except for per share data) 2011 2010 2011 2010 Net sales $ 4,123 $ 3,571 $ 12,016 $ 10,052   Cost of products sold 2,900 2,480 8,444 7,068 Selling and administrative expense 668 651 2,031 1,842 Research and development expense 104 104 316 308 Interest expense-net 29 33 92 102 Other income-net (10 ) (2 ) (30 ) (11 ) Income before income taxes 432 305 1,163 743 Income tax expense 65   36   172   89   Net income 367 269 991 654 Less net income for noncontrolling interests (2 ) (1 ) (3 ) (5 ) Net income attributable to Eaton common shareholders $ 365   $ 268   $ 988   $ 649     Net income per common share Diluted $ 1.07 $ 0.78 $ 2.86 $ 1.90 Basic 1.07 0.80 2.90 1.93   Weighted-average number of common shares outstanding Diluted 341.9 340.6 344.4 340.1 Basic 338.1 335.2 339.7 334.7   Cash dividends paid per common share $ 0.34 $ 0.29 $ 1.02 $ 0.79   Reconciliation of net income attributable to Eaton common shareholders to operating earnings Net income attributable to Eaton common shareholders $ 365 $ 268 $ 988 $ 649 Excluding acquisition integration charges (after-tax) 2   4   6   16   Operating earnings $ 367   $ 272   $ 994   $ 665     Net income per common share - diluted $ 1.07 $ 0.78 $ 2.86 $ 1.90 Excluding per share impact of acquisition integration charges (after-tax) 0.01   0.01   0.02   0.05   Operating earnings per common share $ 1.08   $ 0.79   $ 2.88   $ 1.95     Net income per common share, weighted-average number of common shares outstanding, cash dividends paid per common share and operating earnings per common share have been restated to give effect to the two-for-one stock split. See the accompanying notes for additional information.  

See accompanying notes.

                    EATON CORPORATION BUSINESS SEGMENT INFORMATION  

Three months endedSeptember 30

Nine months endedSeptember 30 (In millions) 2011 2010 2011 2010 Net sales Electrical Americas $ 1,074 $ 967 $ 3,071 $ 2,663 Electrical Rest of World 755 707 2,285 1,980 Hydraulics 717 583 2,130 1,641 Aerospace 420 390 1,218 1,136 Truck 715 534 1,964 1,479 Automotive 442   390   1,348   1,153   Total net sales $ 4,123   $ 3,571   $ 12,016   $ 10,052     Segment operating profit Electrical Americas $ 156 $ 141 $ 432 $ 366 Electrical Rest of World 62 81 209 183 Hydraulics 109 76 335 207 Aerospace 71 60 166 157 Truck 139 74 349 179 Automotive 62   39   167   120   Total segment operating profit 599 471 1,658 1,212   Corporate Amortization of intangible assets (47 ) (46 ) (143 ) (134 ) Interest expense-net (29 ) (33 ) (92 ) (102 ) Pension and other postretirement benefits expense (35 ) (30 ) (105 ) (91 ) Other corporate expense-net (56 ) (57 ) (155 ) (142 ) Income before income taxes 432 305 1,163 743 Income tax expense 65   36   172   89   Net income 367 269 991 654 Less net income for noncontrolling interests (2 ) (1 ) (3 ) (5 ) Net income attributable to Eaton common shareholders $ 365   $ 268   $ 988   $ 649    

See accompanying notes.

                EATON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS   September 30,2011

December 31,2010

(In millions) Assets Current assets Cash $ 278 $ 333 Short-term investments 536 838 Accounts receivable-net 2,549 2,239 Inventory 1,769 1,564 Other current assets 601   532 Total current assets 5,733 5,506   Property, plant and equipment-net 2,537 2,477   Other noncurrent assets Goodwill 5,571 5,454 Other intangible assets 2,253 2,272 Deferred income taxes 971 1,001 Other assets 562   542 Total assets $ 17,627   $ 17,252   Liabilities and shareholders’ equity Current liabilities Short-term debt $ 86 $ 72 Current portion of long-term debt 321 4 Accounts payable 1,527 1,408 Accrued compensation 401 465 Other current liabilities 1,445   1,284 Total current liabilities 3,780   3,233   Noncurrent liabilities Long-term debt 3,368 3,382 Pension liabilities 1,182 1,429 Other postretirement benefits liabilities 634 743 Deferred income taxes 456 487 Other noncurrent liabilities 461   575 Total noncurrent liabilities 6,101   6,616   Shareholders’ equity Eaton shareholders’ equity 7,723 7,362 Noncontrolling interests 23   41 Total equity 7,746   7,403 Total liabilities and equity $ 17,627   $ 17,252  

See accompanying notes.

 

EATON CORPORATION

NOTES TO THE THIRD QUARTER 2011 EARNINGS RELEASE

Amounts are in millions of dollars unless indicated otherwise (per share data assume dilution).

On January 27, 2011, Eaton's Board of Directors announced a two-for-one stock split of the Company’s common shares effective in the form of a 100% stock dividend. The record date for the stock split was February 7, 2011, and the additional shares were distributed on February 28, 2011. Accordingly, all per share amounts and average shares outstanding presented in this earnings release have been adjusted retroactively to reflect the stock split.

This earnings release includes certain non-GAAP financial measures. These financial measures include 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. 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.

Note 1. ACQUISITIONS OF BUSINESSES

In 2011 and 2010, Eaton acquired businesses and entered into a joint venture in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions are summarized below:

Acquired businesses and joint venture    

Date oftransaction

   

Businesssegment

   

Annualsales

IE Power, Inc. August 31, Electrical $5 for 2010

A Canada-based provider of high power inverters for a variety of mission-critical applications including solar, wind and battery energy storage.

2011 Americas   E. Begerow GmbH & Co. KG August 15, Hydraulics $84 for 2010

A Germany-based system provider of advanced liquid filtration solutions. This business develops and produces technologically innovative filter media and filtration systems for food and beverage, chemical, pharmaceutical and industrial applications.

2011   ACTOM Low Voltage June 30, Electrical $65 for the

A South Africa manufacturer and supplier of motor control components, engineered electrical distribution systems and uninterruptible power supply (UPS) systems.

2011 Rest ofWorld

year endedMay 31,2011

  C.I. ESI de Colombia S.A. June 2, Electrical $8 for 2010

A Colombia-based distributor of industrial electrical equipment and engineering services in the Colombian market, focused on oil and gas, mining, and industrial and commercial construction.

2011 Americas   Internormen Technology Group May 12, Hydraulics $55 for 2010

A Germany-based manufacturer of hydraulic filtration and instrumentation with sales and distribution subsidiaries in China, the United States, India and Brazil.

2011  

Eaton-SAMC (Shanghai) Aircraft Conveyance System Manufacturing Co., Ltd.

March 8, Aerospace New joint

A 49%-owned joint venture in China focusing on the design, development, manufacturing and support of fuel and hydraulic conveyance systems for the global civil aviation market.

2011 venture   Tuthill Coupling Group January 1, Hydraulics $35 for the

A United States and France-based manufacturer of pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications.

2011 year endedNovember 30,2010  

Chloride Phoenixtec Electronics

October 12, Electrical $25 for the

A China manufacturer of UPS systems. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.

2010 Rest ofWorld year endedSeptember 30,2010   CopperLogic, Inc. October 1, Electrical $35 for the

A United States-based manufacturer of electrical and electromechanical systems.

2010 Americas year endedSeptember 30,2010   Wright Line Holding, Inc. August 25, Electrical $101 for the

A United States provider of customized enclosures, rack systems, and air-flow management systems to store, power, and secure mission-critical IT data center electronics.

2010 Americas year endedJune 30,2010   EMC Engineers, Inc. July 15, Electrical $24 for 2009

A United States energy engineering and energy services company that delivers energy efficiency solutions for a wide range of governmental, educational, commercial and industrial facilities.

2010

Americas

 

 

Note 2. ACQUISITION INTEGRATION CHARGES

Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:

        Three months ended September 30

Acquisitionintegration charges

   

Operating profitas reported

   

Operating profitexcluding acquisitionintegration charges

2011   2010 2011   2010 2011   2010

Business segment

Electrical Americas $ 3 $ — $ 156 $ 141 $ 159 $ 141 Electrical Rest of World — 6 62 81 62 87 Hydraulics 1 — 109 76 110 76 Aerospace — 1 71 60 71 61 Truck — — 139 74 139 74 Automotive —   —   62   39   62   39 Total before income taxes $ 4   $ 7  

$

599   $ 471   $ 603   $ 478 After-tax integration charges $ 2 $ 4 Per common share $ 0.01 $ 0.01           Nine months ended September 30

Acquisitionintegration charges

   

Operating profitas reported

   

Operating profitexcluding acquisitionintegration charges

2011   2010 2011   2010 2011   2010

Business segment

Electrical Americas $ 7 $ 2 $ 432 $ 366 $ 439 $ 368 Electrical Rest of World 1 20 209 183 210 203 Hydraulics 1 — 335 207 336 207 Aerospace — 3 166 157 166 160 Truck — — 349 179 349 179 Automotive —   —   167   120   167   120 Total before income taxes $ 9   $ 25   $ 1,658   $ 1,212   $ 1,667   $ 1,237 After-tax integration charges $ 6 $ 16 Per common share $ 0.02 $ 0.05  

Charges in 2011 were related primarily to CopperLogic, Wright Line Holding and EMC Engineers. Charges in 2010 were related primarily to Moeller and Phoenixtec. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

Note 3. RETIREMENT BENEFITS PLANS

The components of retirement benefits expense follow:

        Three months ended September 30

Pensionbenefit expense

   

Other postretirementbenefits expense

2011   2010 2011   2010 Service cost $ 35 $ 30 $ 4 $ 4 Interest cost 52 50 10 11 Expected return on plan assets (58 ) (54 ) — — Amortization 22   15   3   3 51 41 17 18 Curtailment loss 1 — — — Settlement loss 5   4   —   — Total expense $ 57   $ 45   $ 17   $ 18           Nine months ended September 30

Pensionbenefit expense

   

Other postretirementbenefits expense

2011   2010 2011   2010 Service cost $ 106 $ 89 $ 12 $ 12 Interest cost 158 150 30 34 Expected return on plan assets (176 ) (163 ) — — Amortization 66   45   9   8 154 121 51 54 Curtailment loss 1 — — — Settlement loss 15   13   —   — Total expense $ 170   $ 134   $ 51   $ 54    

Note 4. INCOME TAXES

The effective income tax rate for the third quarter of 2011 was 15.2% compared to 11.7% for the third quarter of 2010 and 14.8% for the first nine months of 2011 compared to 12.0% for the first nine months of 2010. Higher effective tax rates in both the third quarter and first nine months of 2011 were primarily attributable to greater levels of income in high tax jurisdictions, particularly in the United States and Brazil, due to improved economic and market conditions. The effective income tax rate for the third quarter of 2011 was also favorably impacted by positive adjustments to the tax provision for 2010 tax returns filed during the third quarter in the United States and international tax jurisdictions.

Note 5. SHARE REPURCHASE

During the third quarter of 2011, 7.0 million common shares were repurchased under Eaton's share repurchase program in the open market at a total cost of $275. During the first nine months of 2011, a total of 8.3 million common shares were repurchased under this program in the open market at a total cost of $343. No common shares were repurchased in the open market in the first nine months of 2010.