Eaton Reports Fourth Quarter Net Income

Net income in both periods included charges related to restructuring activities. Before restructuring charges, operating earnings per share in the fourth quarter of 2005 were $1.43 versus $1.23 per share in 2004, an increase of 16 percent. Operating earnings for the fourth quarter of 2005 were $219 million compared to $194 million in 2004, an increase of 13 percent.

Sales growth in the fourth quarter of 8 percent consisted of 5 percent organic growth and 4 percent from acquisitions, offset by a 1 percent decline from lower exchange rates. The 5 percent organic growth was made up of 3 percent growth in end markets and 2 percent growth from outgrowing end markets.

For the full year 2005, sales were $11.1 billion, 13 percent above 2004. Net income of $805 million increased 24 percent over 2004, and net income per share of $5.23 rose 27 percent. Operating earnings per share for 2005 of $5.38 rose 25 percent above 2004. Operating earnings in 2005 totaled $829 million versus $675 million in 2004, an increase of 23 percent.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We had another quarter of strong performance, marking this as the fifteenth quarter in a row where we have recorded a year-over-year increase in operating earnings per share of more than 10 percent.

"Looking at 2005 as a whole, we had an outstanding year," said Cutler. "Our sales grew 13 percent, operating earnings per share grew 25 percent, and our return on equity was 22 percent. In addition, we generated a record amount of cash, with operating cash flow in 2005 rising 35 percent, to just over $1.1 billion.

"In 2000, we set several challenging goals for Eaton over the 2000-2005 time period, " said Cutler. "I am pleased to report that we exceeded most of the goals. In particular, our compound annual growth in operating earnings per share of 15 percent exceeded our 10 percent goal. In addition, our annual total return to shareholders over the last five years has averaged 18 percent."

In light of its strong results and future prospects, Eaton is taking the following actions:

-- Increasing its quarterly dividend by 13 percent, from $.31 per share to $.35 per share

-- Making a voluntary contribution of $100 million to its qualified pension plan in the United States.

"As we survey our end markets in 2006, we anticipate growth of approximately 3 percent," said Cutler. "We expect to outgrow our end markets by well over 50 percent, and we expect to also record approximately $475 million of growth from the full-year impact of the eight acquisitions and one joint venture we concluded in 2005. As a result, we anticipate overall growth in our sales in 2006 of approximately 10 percent.

"We anticipate net income per share for the first quarter of 2006 to be $1.20 to $1.30, and for the full year to be $5.75 to $6.05. Operating earnings per share, which exclude restructuring charges to integrate our recent acquisitions and joint ventures, are anticipated to be $1.25 to $1.35 for the first quarter of 2006, and $5.95 to $6.25 for the full year."

Business Segment Results

Fourth quarter sales of the Electrical segment, Eaton's largest business group, were $1.01 billion, up 13 percent over 2004. Operating profits in the fourth quarter were $106 million. Operating profits before restructuring charges were $111 million, up 32 percent from results in 2004.

"End markets for our electrical business grew about 4 percent during the fourth quarter, the same rate of growth for the year as a whole," said Cutler. "In 2006, we expect our markets to grow at between 4 and 5 percent, but the nonresidential electric markets will become a more important source of growth than in 2005. Most importantly, we are continuing to realize significantly stronger operating margins."

In the Fluid Power segment, fourth quarter sales were $839 million, 8 percent above the fourth quarter of 2004. Operating profits in the fourth quarter were $96 million. Operating profits before restructuring charges were $98 million, up 11 percent compared to a year earlier.

Fluid Power markets grew 4 percent compared to the same period in 2004, with global hydraulics shipments up 5 percent, commercial aerospace markets up 11 percent, defense aerospace markets up 4 percent, and European automotive production down 1 percent.

"Growth in the mobile and industrial hydraulics markets moderated in the fourth quarter from the rates seen earlier in the year, " said Cutler. "We are particularly pleased with our margins in the fourth quarter, which rebounded significantly from those in the third quarter.

"For 2006, we anticipate that growth in both the agricultural and construction equipment markets will be lower than in 2005, while industrial markets should enjoy growth similar to 2005," said Cutler. "The commercial aerospace market is expected to post significantly higher growth in 2006, while defense aerospace markets are expected to be flat.

"We closed two aerospace acquisitions in the fourth quarter," said Cutler. "The timing of these two acquisitions could not be better. These acquisitions expand our product and system capabilities and, in combination with our existing aerospace businesses, our annualized sales to the aerospace market now total more than $1.2 billion."

The Truck segment posted sales of $549 million in the fourth quarter, up 10 percent compared to 2004. Operating profits in the quarter were $105 million. Operating profits before restructuring charges were $108 million, up 11 percent compared to the fourth quarter of 2004.

NAFTA heavy-duty production was up 5 percent compared to 2004, NAFTA medium-duty production was down 1 percent, European truck production was up 5 percent, and Brazilian vehicle production was up 1 percent.

"Production of NAFTA heavy-duty trucks in 2005 totaled 341,000 units, " said Cutler. "We believe that production in 2006 will likely stay at about the same level."

The Automotive segment posted fourth quarter sales of $442 million, 4 percent lower than the comparable quarter of 2004. Operating profits were $46 million. Operating profits before restructuring charges were $49 million, 17 percent lower than fourth quarter 2004.

Automotive production in NAFTA increased 3 percent compared to the fourth quarter of 2004, while European production declined 1 percent.

"Our Automotive segment revenue in the fourth quarter was reduced by 3 percent due to foreign exchange," said Cutler. "Our margins were impacted in the quarter by costs incurred to start up new facilities in Eastern Europe and costs to exit a product line. For 2006, we anticipate slightly weaker production in NAFTA and a slight increase in production in Europe."