Eaton Reports First Quarter

... a record $3.01 billion, 14 percent above the same period in 2005. Net income was $208 million compared to $187 million in the first quarter of 2005.

Net income in both periods included charges for integration of acquisitions. Before acquisition integration charges, operating earnings per share in the first quarter of 2006 were $1.40 versus $1.23 per share in 2005, an increase of 14 percent. Operating earnings for the first quarter of 2006 were $214 million compared to $193 million in 2005.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We had a strong first quarter, with earnings per share above the top of our guidance. Sales growth in the first quarter of 14 percent consisted of 9 percent from organic growth and 6 percent from acquisitions, offset by a 1 percent decline from lower exchange rates. Our end markets grew 7 percent.

"In the first quarter, our segment operating margin before acquisition integration charges was 12.9 percent, after a reduction of 0.6 percent due to net costs associated with our Excel 07 program, compared to the 12.6 percent segment operating margin we recorded a year ago," 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.

"We now anticipate 4 percent growth in our end markets in 2006, slightly higher than we originally anticipated," said Cutler. "In the first quarter, the worldwide electrical and hydraulics markets were stronger than we had expected. In addition, the NAFTA heavy-duty truck market started the year with considerably stronger growth in both production and orders than we had anticipated.

"The net costs of our Excel 07 program totaled $.07 per share in the first quarter," said Cutler. "We announced an additional group of Excel 07 actions last week. We expect to be able to offset the expenses associated with these and other potential second quarter actions through savings from the Excel 07 actions, sales of non-strategic business lines, and potential gains on settlements from several tax audits we believe will be finalized during the second quarter. For the full year, we continue to believe that we will be able to offset the impact of the Excel 07 program through actions such as those above. Our quarterly and full year guidance includes our Excel 07 program.

"Our cash flow during the first quarter was very strong," said Cutler. "Cash flow from operations in the first quarter totaled $127 million, net of a $100 million contribution we made to our U.S. qualified pension plan in January. This compares to cash flow from operations of $93 million in the first quarter of 2005.

"We anticipate net income per share for the second quarter of 2006 to be between $1.50 and $1.60. Operating earnings per share, which excludes charges to integrate our recent acquisitions, are expected to be between $1.55 and $1.65 in the second quarter of 2006. We are raising our full-year guidance for both net income per share and operating earnings per share by 15 cents, to $5.90 to $6.20, and $6.10 to $6.40, respectively."

Business Segment Results

First quarter sales for the Electrical segment were $965 million, up 14 percent over 2005. Operating profits in the first quarter were $103 million. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $105 million, up 38 percent from 2005. There were $3 million of Excel 07 net costs in the first quarter.

"End markets for our electrical business grew nearly 9 percent during the first quarter, the highest quarterly growth rate in the last five years," said Cutler. "The U.S. nonresidential construction market and the markets for uninterruptible power supply products registered solid growth, and the residential markets held up well during the quarter.

"Our bookings in the Electrical segment, adjusted for foreign exchange and acquisitions, were up 16 percent from the first quarter a year ago, continuing the build up of momentum in our Electrical segment," said Cutler. "March was an all-time monthly bookings record for the segment.

"We announced during the quarter that we received a $65 million order from IdleAire Technologies Corporation to provide electrical equipment for truck stop electrification," said Cutler. "We expect this equipment to be delivered over the next 18 months.

"We also completed the acquisition of Marina Power and Lighting at the end of March," said Cutler. "This acquisition expands our presence in the rapidly growing marina electrical market."

Fluid Power segment first quarter sales were $974 million, 24 percent above the first quarter of 2005. Excluding the impact of acquisitions, first quarter sales were up 8 percent compared to 2005. Fluid Power markets grew 6 percent compared to the same period in 2005, with global hydraulics shipments up 8 percent, the commercial and business jet aerospace market up 13 percent, defense aerospace down 3 percent, and European automotive up 4 percent.

Operating profits in the first quarter were $104 million. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $107 million, an increase of 34 percent compared to a year earlier. There were $6 million of Excel 07 net costs in the quarter.

"The hydraulics markets globally were strong in the first quarter, and we expect continued growth throughout 2006," said Cutler. "Activity in the commercial and business jet aerospace market was at the strongest level in the last five years, while defense aerospace was relatively weak, as we had expected. Our improved mix of businesses within the Fluid Power segment helped drive the higher margin in the segment compared to last year.

"We completed the acquisition of Synflex at the end of March," said Cutler. "Synflex provides Eaton with an expanded range of thermoplastic hose and tubing products for customers in a broad range of fluid conveyance applications."

The Truck segment posted sales of $607 million in the first quarter, up 12 percent compared to 2005. NAFTA heavy-duty truck production in the first quarter was up 13 percent compared to 2005, NAFTA medium-duty truck production was down 4 percent, European truck production was up 1 percent, and Brazilian vehicle production was up 8 percent.

Operating profits in the first quarter were $117 million. Excluding acquisition integration charges of $2 million during the quarter, operating profits were $119 million, an increase of 9 percent over 2005. Excel 07 net costs were $2 million during the quarter.

"First quarter production of NAFTA heavy-duty trucks totaled 91,500 units, compared to 81,000 in the first quarter of 2005," said Cutler. "Orders for NAFTA heavy-duty trucks during the first quarter averaged 46,000 units per month and the backlog at the end of March is estimated to be more than 220,000 units. We now estimate the NAFTA heavy-duty truck market in 2006 is likely to total between 345,000 to 355,000 units.

"We announced several new initiatives during the quarter, including a marketing agreement with @Road for the sale of diagnostics, safety and telematics solutions to the commercial vehicle market; an initiative with PACCAR on medium-duty hybrid trucks; and an expansion of our hybrid program with United Parcel Service," said Cutler.

The Automotive segment posted first quarter sales of $467 million, 3 percent lower than the comparable quarter of 2005. Automotive production in both NAFTA and European markets increased 4 percent compared to the first quarter of 2005.

Operating profits in the first quarter were $55 million. Excluding acquisition integration costs of $2 million, operating profits were $57 million, down 17 percent from 2005. Excel 07 net costs were $6 million during the quarter.

"We continue to expect that, for 2006 as a whole, the combined NAFTA and European automotive markets will be slightly weaker than 2005," said Cutler. "While our profits were lower in the first quarter of 2006 than in 2005, our operating margin excluding acquisition integration charges remained a solid 12.2 percent."