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Press release from Business Wire

Eaton Second Quarter Earnings Per Share Increase 47 Percent

<p> <b>Revenues Grow 21 Percent</b><br/><b>Record Quarterly Segment Margins</b><br/><b>Midpoint of Full Year Earnings Per Share Guidance Raised by $0.15</b> </p>

Monday, July 25, 2011

Eaton Second Quarter Earnings Per Share Increase 47 Percent06:34 EDT Monday, July 25, 2011 CLEVELAND (Business Wire) -- Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $0.97 for the second quarter of 2011, an increase of 47 percent over the $0.66 earned in the second quarter of 2010. Sales in the second quarter were $4.09 billion, 21 percent above the second quarter of 2010. Net income in the second quarter was $336 million compared to $226 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 second quarter of 2011 were $0.97 compared to $0.68 per share in 2010, an increase of 43 percent. Operating earnings in the second quarter were $338 million compared to $232 million in 2010. Alexander M. Cutler, Eaton chairman and chief executive officer, said, “We are pleased with our second quarter results, which exceeded the high end of our guidance for the quarter. Our sales in the second quarter were 8 percent higher than in the first quarter of 2011, reflecting the continued expansion of our markets around the world. “Sales in the second quarter increased 21 percent compared to the second quarter of 2010,” said Cutler. “Sales growth was comprised of 14 percent core growth, 6 percent from foreign exchange, and 1 percent from acquisitions. End markets grew 12 percent in the quarter. “We are very pleased with our 13.9 percent segment operating margin in the second quarter, setting a new segment operating margin record,” said Cutler. “The year is shaping up to be better than we forecasted in April,” said Cutler. “We now anticipate our overall end markets will grow by 11 percent versus our earlier forecast of 10 percent. “We anticipate net income per share for the third quarter of 2011 to be between $1.01 and $1.11,” said Cutler. “Operating earnings per share for the third quarter, which exclude charges to integrate our recent acquisitions, are anticipated to be between $1.03 and $1.13. Our outlook anticipates higher sales and margins in the third quarter over the second quarter, offset partially by a higher tax rate. “We are raising our guidance for the full year. As a result of our strong second quarter and our slightly stronger market outlook for the year, we are raising our full-year per share guidance at the midpoint by $0.15, resulting in net income per share of between $3.86 and $4.06 and operating earnings per share of between $3.90 and $4.10. “We expect 2011 to be a year of record sales and record profits,” said Cutler. “Our sales are projected to be 19 percent above 2010 and 6 percent above our previous annual sales record, which we achieved in 2008. Our operating earnings per share at the midpoint of our guidance is 42 percent above 2010 and 16 percent above our previous operating earnings per share record. We are particularly encouraged by the outlook for our 2011 results, given that many of our significant businesses are just beginning to recover from the economic downturn of 2008 and 2009.” Business Segment Results Second quarter sales for the Electrical Americas segment were $1.03 billion, up 16 percent compared to 2010. The sales increase was comprised of 11 percent core growth, 4 percent from acquisitions, and 1 percent from foreign exchange. Operating profits in the second quarter were $144 million. Excluding acquisition integration charges of $1 million during the quarter, operating profits were $145 million, up 20 percent over results in 2010. “End markets for our Electrical Americas segment grew 10 percent during the second quarter,” said Cutler. “The industrial markets were the strongest sector of the business in the quarter. “Our bookings in the Electrical Americas segment, adjusted for foreign exchange, increased 9 percent compared to the second quarter of 2010 resulting in a record backlog for the segment,” said Cutler. “We expect that Electrical Americas markets will grow 7 percent during 2011 and believe the momentum in our Electrical Americas markets so far this year will lead to stronger market conditions next year. “During the quarter, we completed the acquisition of C.I. ESI de Colombia S.A.,” said Cutler. “This acquisition will help grow Eaton's presence in Colombia and serve as a platform for future growth in the region.” Sales for the Electrical Rest of World segment were $787 million, an increase of 18 percent compared to the second quarter of 2010. The sales increase was comprised of a 5 percent increase in core sales and a 13 percent increase from foreign currency. The segment reported operating profits of $77 million. Excluding acquisition integration charges of $1 million during the quarter, operating profits totaled $78 million, an increase of 16 percent over the second quarter of 2010. “Our markets in the second quarter grew 6 percent, with both European and Asian electrical markets increasing 6 percent,” said Cutler. “Our bookings for the Electrical Rest of World segment, adjusted for foreign exchange and acquisitions, declined 4 percent in the quarter driven by a sharp drop in orders for solar inverters. For all of 2011, we are maintaining our forecast that markets in our Electrical Rest of World segment will grow 7 percent. “During the quarter, we completed the acquisition of ACTOM (Pty) Limited's low-voltage electrical business in South Africa,” said Cutler. “This acquisition provides us with a solid position in the South African electrical market, as well as a platform for growth in southern Africa.” Hydraulics segment sales were $728 million, up 28 percent compared to the second quarter of 2010. Global hydraulics markets were up 18 percent in the quarter, with U.S. markets up 21 percent and non-U.S. markets up 16 percent. Operating profits in the second quarter were $120 million, up 56 percent compared to the second quarter of 2010. “The global hydraulics markets in the second quarter continued the strong rebound we saw in the first quarter,” said Cutler. “Our bookings, adjusted for foreign exchange, increased 20 percent in the second quarter. For all of 2011, we continue to believe global hydraulics markets will grow 18 percent. “Our Hydraulics segment had an outstanding quarter, achieving record sales, operating profits, and margins,” said Cutler. “We were particularly pleased with the record quarterly margin of 16.5 percent. “We made further progress during the quarter in our strategy of building a significant filtration business, completing the acquisition of Internormen Technology Group and announcing an agreement to acquire E. Begerow GmbH,” said Cutler. “These acquisitions double the size of our filtration business and add important new products and end markets to our business.” Aerospace segment sales were $409 million, up 11 percent compared to the second quarter of 2010. Aerospace markets were up 4 percent compared to the second quarter of 2010. Operating profits in the second quarter were $50 million compared to $48 million in the second quarter of 2010. “Aerospace bookings declined 1 percent during the second quarter, adjusted for foreign exchange, reflecting lower military bookings,” said Cutler. “During the second half of 2011, we believe the planned expansion in commercial aircraft production will offset the sluggish conditions in military markets and so we are maintaining our forecast that the global aerospace market will grow 4 percent in 2011. “Similar to our first quarter, our margins in the second quarter were impacted by increased expenses from changes in scope, program delays, and execution of new customer programs,” said Cutler. “We believe that our margins in the second half of 2011 will improve over first half levels.” The Truck segment posted record quarterly sales of $673 million in the second quarter, up 37 percent compared to 2010. Truck production in the second quarter was up 27 percent, with U.S. markets up 53 percent and non-U.S. markets up 5 percent. The segment reported operating profits of $120 million. “We continue to expect the NAFTA Class 8 market to total 265,000 units in 2011,” said Cutler. “Outside NAFTA, we expect markets to register more modest growth. “We were pleased with our 17.8 percent margin in the quarter and are increasing our full year margin guidance for the segment,” said Cutler. “As volumes continue to ramp up through this business cycle, we expect our margins will improve further.” The Automotive segment posted second quarter sales of $460 million, up 18 percent from the second quarter of 2010. Global automotive markets were up 9 percent, with U.S. markets up 15 percent and non-U.S. markets up 7 percent. The segment reported operating profits of $55 million, an increase of 41 percent over the second quarter of 2010. “We are pleased with the Automotive segment margin of 12.0 percent and as a result, we are raising our full year margin guidance,” said Cutler. “While there was very little impact on us, global automotive production was impacted in the second quarter by Japanese supply issues,” said Cutler. “Fortunately, there was less disruption than many industry experts had forecasted. We believe that third quarter global auto production will rebound from second quarter levels, as the supply situation returns to normal.” 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 second 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 second quarter results, which will be covered during the call. This news release contains forward-looking statements concerning our third quarter and full year 2011 sales, our third quarter 2011 tax rate, our third quarter and full year 2011 net income per share and operating earnings per share, and the performance of 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 six months ended June 30, 2011 are available on the company's website, www.eaton.com.                   EATON CORPORATIONCONSOLIDATED STATEMENTS OF INCOME   Three months ended June 30 Six months ended June 30 (In millions except for per share data) 2011 2010 2011 2010 Net sales $ 4,090 $ 3,378 $ 7,893 $ 6,481   Cost of products sold 2,862 2,387 5,544 4,588 Selling and administrative expense 698 604 1,363 1,191 Research and development expense 107 103 212 204 Interest expense-net 31 34 63 69 Other income-net (4 ) (1 ) (20 ) (9 ) Income before income taxes 396 251 731 438 Income tax expense 58   22   107   53   Net income 338 229 624 385 Less net income for noncontrolling interests (2 ) (3 ) (1 ) (4 ) Net income attributable to Eaton common shareholders $ 336   $ 226   $ 623   $ 381     Net income per common share Diluted $ 0.97 $ 0.66 $ 1.80 $ 1.12 Basic 0.99 0.67 1.83 1.14   Weighted-average number of common shares outstanding Diluted 345.7 340.4 345.7 339.8 Basic 340.9 334.7 340.5 334.5   Cash dividends paid per common share $ 0.34 $ 0.25 $ 0.68 $ 0.50   Reconciliation of net income attributable to Eaton common shareholders to operating earnings Net income attributable to Eaton common shareholders $ 336 $ 226 $ 623 $ 381 Excluding acquisition integration charges (after-tax) 2   6   4   12   Operating earnings $ 338   $ 232   $ 627   $ 393     Net income per common share - diluted $ 0.97 $ 0.66 $ 1.80 $ 1.12 Excluding per share impact of acquisition integration charges (after-tax) —   0.02   0.01   0.03   Operating earnings per common share $ 0.97   $ 0.68   $ 1.81   $ 1.15     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 CORPORATIONBUSINESS SEGMENT INFORMATION   Three months ended June 30 Six months ended June 30 (In millions) 2011 2010 2011 2010 Net sales Electrical Americas $ 1,033 $ 894 $ 1,997 $ 1,696 Electrical Rest of World 787 665 1,530 1,273 Hydraulics 728 568 1,413 1,058 Aerospace 409 370 798 746 Truck 673 492 1,249 945 Automotive 460   389   906   763   Total net sales $ 4,090   $ 3,378   $ 7,893   $ 6,481     Segment operating profit Electrical Americas $ 144 $ 120 $ 276 $ 225 Electrical Rest of World 77 60 147 102 Hydraulics 120 77 226 131 Aerospace 50 48 95 97 Truck 120 59 210 105 Automotive 55   39   105   81   Total segment operating profit 566 403 1,059 741   Corporate Amortization of intangible assets (48 ) (43 ) (96 ) (88 ) Interest expense-net (31 ) (34 ) (63 ) (69 ) Pension and other postretirement benefits expense (37 ) (29 ) (70 ) (61 ) Other corporate expense-net (54 ) (46 ) (99 ) (85 ) Income before income taxes 396 251 731 438 Income tax expense 58   22   107   53   Net income 338 229 624 385 Less net income for noncontrolling interests (2 ) (3 ) (1 ) (4 ) Net income attributable to Eaton common shareholders $ 336   $ 226   $ 623   $ 381     See accompanying notes.               EATON CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS   June 30,2011 December 31,2010 (In millions) Assets Current assets Cash $ 282 $ 333 Short-term investments 601 838 Accounts receivable-net 2,625 2,239 Inventory 1,766 1,564 Other current assets 643   532 Total current assets 5,917 5,506   Property, plant and equipment-net 2,589 2,477   Other noncurrent assets Goodwill 5,723 5,454 Other intangible assets 2,360 2,272 Deferred income taxes 961 1,001 Other assets 571   542 Total assets $ 18,121   $ 17,252   Liabilities and shareholders' equity Current liabilities Short-term debt $ 101 $ 72 Current portion of long-term debt 16 4 Accounts payable 1,534 1,408 Accrued compensation 367 465 Other current liabilities 1,385   1,284 Total current liabilities 3,403   3,233   Noncurrent liabilities Long-term debt 3,650 3,382 Pension liabilities 1,222 1,429 Other postretirement benefits liabilities 639 743 Deferred income taxes 499 487 Other noncurrent liabilities 521   575 Total noncurrent liabilities 6,531   6,616   Shareholders' equity Eaton shareholders' equity 8,152 7,362 Noncontrolling interests 35   41 Total equity 8,187   7,403 Total liabilities and equity $ 18,121   $ 17,252   See accompanying notes. EATON CORPORATIONNOTES TO THE SECOND 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:       Date of   Business   Annual Acquired business transaction segment sales 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 India, China, Brazil and the United States. 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   On June 30, 2011, Eaton reached an agreement to acquire E. Begerow GmbH & Co. KG, 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 and had sales of $84 in 2010. The terms of the agreement are subject to customary closing conditions. The acquisition is expected to close during the third quarter of 2011. This business will be included in the Hydraulics segment. Note 2. ACQUISITION INTEGRATION CHARGES Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:         Three months ended June 30 Acquisitionintegration charges     Operating profitas reported     Operating profitexcluding acquisitionintegration charges 2011   2010 2011   2010 2011   2010 Business segment Electrical Americas $ 1 $ 1 $ 144 $ 120 $ 145 $ 121 Electrical Rest of World 1 7 77 60 78 67 Hydraulics — — 120 77 120 77 Aerospace — 1 50 48 50 49 Truck — — 120 59 120 59 Automotive —   —   55   39   55   39 Total before income taxes $ 2   $ 9   $ 566   $ 403   $ 568   $ 412 After-tax integration charges $ 2 $ 6 Per common share $ — $ 0.02           Six months ended June 30 Acquisitionintegration charges     Operating profitas reported     Operating profitexcluding acquisitionintegration charges 2011   2010 2011   2010 2011   2010 Business segment Electrical Americas $ 4 $ 2 $ 276 $ 225 $ 280 $ 227 Electrical Rest of World 1 14 147 102 148 116 Hydraulics — — 226 131 226 131 Aerospace — 2 95 97 95 99 Truck — — 210 105 210 105 Automotive —   —   105   81   105   81 Total before income taxes $ 5   $ 18   $ 1,059   $ 741   $ 1,064   $ 759 After-tax integration charges $ 4 $ 12 Per common share $ 0.01 $ 0.03   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 June 30 Pensionbenefit expense     Other postretirementbenefits expense 2011   2010 2011   2010 Service cost $ 35 $ 30 $ 4 $ 4 Interest cost 53 50 10 12 Expected return on plan assets (59 ) (55 ) — — Amortization 22   15   3   2 51 40 17 18 Settlement loss 7   4   —   — Total expense $ 58   $ 44   $ 17   $ 18           Six months ended June 30 Pensionbenefit expense     Other postretirementbenefits expense 2011   2010 2011   2010 Service cost $ 71 $ 59 $ 8 $ 8 Interest cost 106 100 20 23 Expected return on plan assets (118 ) (109 ) — — Amortization 44   30   6   5 103 80 34 36 Settlement loss 10   9   —   — Total expense $ 113   $ 89   $ 34   $ 36   During the second quarter, Eaton contributed $100 into a Voluntary Employee Benefit Association trust for the pre-funding of postretirement Medicare Part D prescription drug benefits for the Company's eligible United States employees and retirees. Note 4. INCOME TAXES The effective income tax rate for the second quarter of 2011 was 14.7% compared to 9.0% for the second quarter of 2010 and 14.6% for the first six months of 2011 compared to 12.2% for the first six months of 2010. Higher effective tax rates in both the three and six month periods of 2011 were primarily attributable to greater levels of income in high tax jurisdictions, particularly the United States, due to improved economic conditions. Eaton CorporationScott R. Schroeder, 216-523-5150scottrschroeder@eaton.comorDon Bullock, 216-523-5127