Eaton Reports Record Sales, Net Income, and Cash Flow
CLEVELAND--July 17, 2006--Diversified industrial manufacturer Eaton Corporation today announced record quarterly sales, net income, and cash flow for the second quarter of 2006. Net income per share was $1.64 for the second quarter of 2006, an increase of 20 percent over net income per share of $1.37 in the second quarter of 2005. Sales in the quarter were $3.19 billion, 12 percent above the same period in 2005. Net income was $253 million compared to $209 million in 2005, an increase of 21 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 2006 were $1.68 versus $1.40 per share in 2005, an increase of 20 percent, and operating earnings for the second quarter of 2006 were $259 million compared to $214 million in 2005, an increase of 21 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "Our second quarter results exceeded our guidance. Sales growth in the quarter of 12 percent consisted of 5 percent from organic growth, 6 percent from acquisitions, and 1 percent from exchange rates. Our end markets grew by approximately 4 percent.
"In the second quarter, our segment operating margin before acquisition integration charges was 12.9 percent, after a reduction of 0.7 percent due to net costs associated with our Excel 07 program. Our Excel 07 program is on schedule and meeting our original expectations," said Cutler.
Excel 07 is the program Eaton initiated in the first quarter to address resource levels and operating performance in businesses which underperformed in 2005 and businesses in which markets are expected to soften during the second half of 2006 and in 2007. As disclosed previously, the Excel 07 program includes the costs of the actions as well as funding sources such as savings generated from the actions, sales of non-strategic product lines, and benefits from corporate actions such as resolution of tax audits.
"The net impact of our Excel 07 program in the second quarter totaled a $.09 per share benefit to earnings, slightly ahead of the $.05 per share benefit we had expected at the start of the quarter. Included in the program were benefits from the resolution of tax audits in the second quarter of $29 million," said Cutler. "For the first half of 2006, our Excel 07 program has had a positive impact of $.02 per share and in the third quarter the impact of the Excel 07 program is expected to be neutral.
"As we survey our end markets, the year is shaping up about as we forecasted at the start of the year," said Cutler. "We expect the strong growth we experienced in many of our markets in the first half to slow somewhat over the balance of the year as markets respond to the impact of the continuing rise in interest rates in the United States and many other countries. Overall, we anticipate our markets in 2006 to grow between 4 and 5 percent.
"Our operating cash flow for the quarter was a quarterly record of $441 million," said Cutler. "That compares to operating cash flow in the second quarter of 2005 of $322 million.
"In light of our strong performance, and our outlook for the rest of this year and 2007, we are raising our quarterly dividend by 11 percent, from $.35 per share to $.39 per share," said Cutler. "Additionally, we took advantage of the weakness in the stock market in early June to repurchase $63 million of stock.
"We anticipate net income per share for the third quarter of 2006 to be between $1.50 and $1.60," said Cutler. "Operating earnings per share, which exclude charges to integrate our recent acquisitions, are anticipated to be between $1.55 and $1.65 in the third quarter of 2006.
"For the full year, we are maintaining our guidance of between $5.90 and $6.20 for net income per share and between $6.10 and $6.40 for operating earnings per share."
Business Segment Results
Second quarter sales for the Electrical segment were $1.04 billion, up 13 percent over 2005. Operating profits in the second quarter were $113 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $116 million, up 23 percent from results in 2005. The Excel 07 program had a positive impact of $4 million in the quarter due to the sale of a small power generation control product line.
"End markets for our electrical business grew about 8 percent during the second quarter, with strong growth in non-residential construction markets offsetting weakness in the residential market. Our growth in power quality applications continues to be impressive," said Cutler. "In addition, our operating margins expanded to 11.2 percent, compared to 10.2 percent in the second quarter of 2005. We are particularly pleased that we were able to increase our margins despite absorbing $14 million of additional costs in the second quarter from the rise in copper prices over the past year.
"We expect end market growth in the second half to be between 5 and 6 percent, led by strength in the non-residential construction and power quality markets."
In the Fluid Power segment, second quarter sales were $1.03 billion, 22 percent above the second quarter of 2005. Excluding the impact of acquisitions, second quarter sales were up 4 percent compared to 2005. Fluid Power markets grew 4 percent compared to the same period in 2005, with global fluid power industry shipments up an estimated 7 percent, the commercial and business jet aerospace market up 5 percent, the defense aerospace market up 2 percent, and European automotive production down 4 percent.
Operating profits in the second quarter were $110 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $113 million, an increase of 19 percent compared to a year earlier. There were $7 million of Excel 07 net costs in the quarter.
"In the second quarter, the global hydraulics markets maintained the strong growth experienced in the first quarter," said Cutler. "The commercial aerospace market grew slightly less than expected, due principally to slower than expected growth in the aftermarket.
"We announced during the quarter a joint initiative with the Environmental Protection Agency, International Truck and Bus, and United Parcel Service to test a new hydraulic hybrid diesel truck," said Cutler. "This technology offers the potential to significantly improve fuel economy and reduce carbon dioxide emissions."
The Truck segment posted sales of $646 million in the second quarter, up 8 percent compared to 2005. NAFTA heavy-duty production was up 7 percent compared to 2005, NAFTA medium-duty production was down 1 percent, and both European truck and Brazilian vehicle production were up 2 percent.
Operating profits in the second quarter were $133 million. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $135 million, an increase of 13 percent over 2005. Excel 07 net costs were $7 million during the quarter.
"Second quarter production of NAFTA heavy-duty trucks totaled 97,000 units, about 6 percent more than in the first quarter of 2006," said Cutler. "Orders during the second quarter averaged 28,000 units per month, higher than we had expected at the start of the quarter. The backlog at the end of June was estimated to be about 205,000 units.
The Automotive segment posted second quarter sales of $474 million, a slight increase over the second quarter of 2005. Automotive production in NAFTA was down 1 percent and in Europe was down 4 percent, compared to the second quarter of 2005.
Operating profits were $47 million. Excluding acquisition integration charges of $1 million, operating profits were $48 million, down 28 percent from 2005. Excel 07 net costs were $12 million during the quarter.
"The automotive markets were sluggish in the second quarter," said Cutler. "We are expecting that for 2006 as a whole the markets in NAFTA and Europe will be slightly weaker than in 2005. In light of this, we took several significant Excel 07 actions to better position our business for the future."
Eaton Corporation is a diversified industrial manufacturer with 2005 sales of $11.1 billion. Eaton is a global leader in electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. Eaton has 60,000 employees and sells products to customers in more than 125 countries. For more information, visit www.eaton.com
Financial Results
The company's comparative financial results for the three months and six months ended June 30, 2006 are available on the company's Web site, www.eaton.com.
Eaton Corporation
Comparative Financial Summary
Three months ended Six months ended
June 30 June 30
------------------ ----------------
(Millions except for per share
data) 2006 2005 2006 2005
--------- -------- ------- --------
Net sales $3,186 $2,834 $6,199 $5,488
Income before income taxes 278 267 531 503
Net income 253 209 461 396
Net income per Common Share
assuming dilution $1.64 $1.37 $3.00 $2.55
Average number of Common Shares
outstanding assuming dilution 154.3 153.4 153.7 155.2
Net income per Common Share basic $1.67 $1.40 $3.06 $2.62
Average number of Common Shares
outstanding basic 151.7 149.8 151.0 151.4
Cash dividends paid per Common
Share $.35 $.31 $.70 $.62
Reconciliation of net income to
operating earnings
-----------------------------------
Net income $253 $209 $461 $396
Excluding acquisition integration
charges (after-tax) 6 5 12 11
--------- -------- ------- --------
Operating earnings $259 $214 $473 $407
========= ======== ======= ========
Net income per Common Share
assuming dilution $1.64 $1.37 $3.00 $2.55
Per share impact of acquisition
integration charges (after-tax) .04 .03 .08 .07
--------- -------- ------- --------
Operating earnings per Common Share $1.68 $1.40 $3.08 $2.62
========= ======== ======= ========
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended Six months ended
June 30 June 30
------------------ ----------------
(Millions except for per share
data) 2006 2005 2006 2005
--------- -------- -------- -------
Net sales $3,186 $2,834 $6,199 $5,488
Cost of products sold 2,307 2,039 4,474 3,952
Selling & administrative expense 499 446 979 865
Research & development expense 82 69 163 138
Interest expense-net 28 22 56 44
Other (income) expense-net (8) (9) (4) (14)
--------- -------- -------- -------
Income before income taxes 278 267 531 503
Income taxes 25 58 70 107
--------- -------- -------- -------
Net income $253 $209 $461 $396
========= ======== ======== =======
Net income per Common Share
assuming dilution $1.64 $1.37 $3.00 $2.55
Average number of Common Shares
outstanding assuming dilution 154.3 153.4 153.7 155.2
Net income per Common Share basic $1.67 $1.40 $3.06 $2.62
Average number of Common Shares
outstanding basic 151.7 149.8 151.0 151.4
Cash dividends paid per Common
Share $.35 $.31 $.70 $.62
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended Six months ended
June 30 June 30
------------------ ----------------
(Millions) 2006 2005 2006 2005
--------- -------- -------- -------
Net sales
Electrical $1,040 $924 $2,005 $1,772
Fluid Power 1,026 842 2,000 1,627
Truck 646 596 1,253 1,138
Automotive 474 472 941 951
--------- -------- -------- -------
$3,186 $2,834 $6,199 $5,488
========= ======== ======== =======
Operating profit
Electrical $113 $87 $216 $158
Fluid Power 110 94 214 170
Truck 133 120 250 229
Automotive 47 67 102 136
Corporate
Amortization of intangible assets (11) (7) (22) (14)
Interest expense-net (28) (22) (56) (44)
Minority interest (2) (1) (3) (2)
Pension & other postretirement
benefit expense (40) (32) (80) (60)
Stock option expense (7) - (13) -
Other corporate expense-net (37) (39) (77) (70)
--------- -------- -------- -------
Income before income taxes 278 267 531 503
Income taxes 25 58 70 107
--------- -------- -------- -------
Net income $253 $209 $461 $396
========= ======== ======== =======
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, Dec. 31,
(Millions) 2006 2005
-------- --------
Assets
Current assets
--------------
Cash $125 $110
Short-term investments 354 226
Accounts receivable 2,035 1,785
Inventories 1,186 1,099
Deferred income taxes & other current assets 419 358
-------- --------
4,119 3,578
Property, plant & equipment-net 2,220 2,175
Goodwill 3,152 3,139
Other intangible assets 764 626
Deferred income taxes & other assets 630 700
-------- --------
$10,885 $10,218
======== ========
Liabilities & Shareholders' Equity
Current liabilities
-------------------
Short-term debt, primarily commercial paper $431 $394
Current portion of long-term debt 477 240
Accounts payable 1,012 810
Accrued compensation 256 277
Accrued income & other taxes 293 305
Other current liabilities 1,010 942
-------- --------
3,479 2,968
Long-term debt 1,514 1,830
Postretirement benefits other than pensions 528 537
Pensions & other liabilities 1,115 1,105
Shareholders' equity 4,249 3,778
-------- --------
$10,885 $10,218
======== ========
See accompanying notes.
Eaton Corporation
Notes to Second Quarter 2006 Earnings Release
Dollars in millions, except for per share data (per share data assume
dilution)
Acquisitions of Businesses
--------------------------
In 2006 and 2005, 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 the larger transactions follows:
Date of Business
acquisition segment Annual sales
------------ ---------- -------------
2006 Acquisitions
--------------------------------
Synflex business unit of Saint- March 31, Fluid $120 for 2005
Gobain Performance Plastics 2006 Power
Corporation
A U.S. based manufacturer of
thermoplastic hoses and
tubing
Marina Power and Lighting March 24, Electrical $11 for 2005
A U.S. manufacturer of 2006
marine duty electrical
distribution products
2005 Acquisitions
--------------------------------
Aerospace division of December 6, Fluid $150 for the
PerkinElmer, Inc. 2005 Power year ended
June 30,
2005
Aerospace fluid and air division November 1, Fluid $210 for 2004
of Cobham plc 2005 Power
Assets of Pringle Electrical October 11, Electrical $6 for 2004,
Manufacturing Company 2005 one-third of
A U.S. manufacturer of bolted which were to
contact switches and other Eaton
specialty switches
Industrial filtration business September 6, Fluid $100 for the
of Hayward Industries, Inc. 2005 Power year ended
June 30, 2005
Tractech Holdings, Inc. August 17, Automotive $43 for 2004
2005
Morestana S.A. de C.V. June 30, Automotive $13 for 2004
2005
Winner Group Holdings Ltd. March 31, Fluid $26 for 2004
2005 Power
Pigozzi S.A. Engrenagens e March 1, Truck $42 for 2004
Transmissoes 2005
Acquisition Integration Charges
-------------------------------
In 2006 and 2005, Eaton incurred charges related to the integration of
acquired businesses. Charges in 2006 related to primarily the
following acquisitions: Powerware, the electrical power systems
business acquired in June 2004 and the Pringle electrical switch
business acquired in October 2005; several acquisitions in Fluid
Power, including the acquired operations of PerkinElmer, Inc., Cobham
plc, Hayward, and Winner; and the Pigozzi, Tractech and Morestana
businesses. Charges in 2005 related to primarily the following
acquisitions: Powerware, the electrical division of Delta plc acquired
in January 2003, and the Boston Weatherhead fluid power business
acquired in November 2002. A summary of these charges follows:
Acquisition Operating Operating profit
integration profit as before acquisition
charges reported integration charges
------------ ------------ --------------------
Three months ended June 30
----------------------------------------------
2006 2005 2006 2005 2006 2005
------ ----- ------ ----- --------- ----------
Electrical $3 $7 $113 $87 $116 $94
Fluid Power 3 1 110 94 113 95
Truck 2 - 133 120 135 120
Automotive 1 - 47 67 48 67
------ -----
Pretax charges $9 $8
====== =====
After-tax charges $6 $5
Per Common Share $.04 $.03
Acquisition Operating Operating profit
integration profit as before acquisition
charges reported integration charges
------------ ------------ --------------------
Six months ended June 30
----------------------------------------------
2006 2005 2006 2005 2006 2005
------ ----- ------ ----- --------- ----------
Electrical $5 $12 $216 $158 $221 $170
Fluid Power 6 5 214 170 220 175
Truck 4 - 250 229 254 229
Automotive 3 - 102 136 105 136
------ -----
Pretax charges $18 $17
====== =====
After-tax charges $12 $11
Per Common Share $.08 $.07
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.
Retirement Benefit Plans Expense
--------------------------------
Pretax income for second quarter 2006 was reduced by $15 ($10
after-tax, or $.07 per Common Share) compared to second quarter 2005
due to increased pension and other postretirement benefit expense in
2006. This primarily resulted from the declines during 2000 through
2002 in the market related value of equity investments held by Eaton's
pension plans, increased settlement costs in 2006, and the effect of
the lowering of discount rates associated with pension liabilities at
year-end 2005. Pretax income for first half 2006 was similarly reduced
by $34 ($22 after-tax, or $.15 per Common Share) compared to first
half 2005. In January 2006, Eaton made a voluntary contribution of
$100 to its United States qualified pension plan.
Stock Options
-------------
Effective January 1, 2006, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123(R), "Share-Based Payment", Eaton
began to record compensation expense under the "fair-value-based"
method of accounting for stock options granted to employees and
directors. Expense for stock options in second quarter 2006 was $7
pretax ($5 after-tax, or $.03 both per Common Share assuming dilution
and basic). For the first half of 2006, expense was $13 pretax ($9
after-tax, or $.06 per Common Share). The Company adopted SFAS No.
123(R) using the "modified prospective application" method and, as a
result, financial results for periods prior to 2006 were not restated
for this accounting change.
Income Taxes
------------
The effective income tax rates for second quarter and first half 2006
were 8.7% and 13.1%, respectively, compared to 21.5% and 21.3% for the
same periods in 2005. The lower rates in 2006 were primarily due to an
income tax benefit of $29 resulting from the favorable resolution in
second quarter 2006 of multiple international and U.S. income tax
items. Prior to the income tax benefit of $29 resulting from the
favorable resolution of income tax items, the effective income tax
rate for second quarter 2006 was 19.1%.
Repurchase of Common Shares
---------------------------
In June 2006, Eaton repurchased .895 million Common Shares in the open
market at a total cost of $63.
During first quarter 2005, Eaton repurchased 3.635 million Common
Shares in the open market at a total cost of $250. In second quarter
2005, 3.380 million shares were repurchased in the open market at a
total cost of $200.
Reconciliation of Financial Measures
------------------------------------
This earnings release discloses operating earnings, operating earnings
per Common Share and operating profit before acquisition integration
charges for each business segment, each of which excludes amounts that
differ from the most directly comparable measure calculated in
accordance with generally accepted accounting principles (GAAP). A
reconciliation of each of these financial measures to the most
directly comparable GAAP measure is included in this earnings release
in the Comparative Financial Summary or in the notes to the earnings
release. Management believes that these financial measures are useful
to investors because they exclude transactions of an unusual nature,
allowing investors to more easily compare the Company's financial
performance period to period. Management uses this information in
monitoring and evaluating the on-going performance of the Company and
each business segment.