Eaton Reports Third Quarter

Sales in the quarter were $2.79 billion, 10 percent above the same period in 2004. Net income was $199 million compared to $170 million in 2004, an increase of 17 percent.

Net income in both periods included charges for restructuring activities related to the integration of acquisitions. Before these restructuring charges, operating earnings per share in the third quarter of 2005 were $1.33 versus $1.13 per share in 2004, an increase of 18 percent, and operating earnings for the third quarter of 2005 were $203 million compared to $177 million in 2004, an increase of 15 percent.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We had a strong third quarter. Sales growth of 10 percent in the quarter consisted of 7 percent from organic growth, 1 percent from acquisitions, and 2 percent from exchange rates. Our organic growth was comprised of 4 percent in our end markets and 3 percent from outgrowing our end markets.

"We expect our end markets to grow about 4 percent in the fourth quarter," said Cutler. "The electrical markets are improving and the truck markets remain very strong, while some segments of the mobile hydraulics and automotive markets are weakening.

"We are pleased with our third quarter segment operating margin, which increased about 1 percentage point over the margin in the third quarter of 2004," said Cutler.

"We closed two acquisitions during the quarter - Tractech Holdings and the filtration business of Hayward Industries - and announced two new acquisitions in our aerospace business," said Cutler. "The annualized sales of all acquisitions closed and announced so far during 2005 total approximately $580 million.

"We anticipate that net income per share for 2005 will be between $5.10 and $5.20, and accordingly we anticipate that net income per share for the fourth quarter of 2005 will be between $1.25 and $1.35. Operating earnings per share, which exclude restructuring charges to integrate our recent acquisitions, are anticipated for 2005 to be between $5.25 and $5.35, with operating earnings per share for the fourth quarter of between $1.30 and $1.40."

Business Segment Results

Third quarter sales for the Electrical segment were $978 million, up 13 percent over 2004 and a quarterly record. Operating profits in the third quarter were $111 million. Operating profits before restructuring charges were $115 million, up 47 percent from results in 2004.

"End markets for our electrical business grew about 7 percent during the third quarter," said Cutler. "We expect end market growth over the balance of the year to continue at these levels.

"We are particularly pleased with the margins posted by our Electrical business in the third quarter," said Cutler. "Our operating margin before restructuring expanded by 2.8 percentage points over the third quarter of 2004, and is a record quarterly operating margin for the Electrical segment."

In the Fluid Power segment, third quarter sales were $774 million, 2 percent above the third quarter of 2004. Fluid Power markets grew 4 percent compared to the same period in 2004, with global hydraulics shipments up an estimated 4 percent, commercial aerospace markets up 18 percent, defense aerospace markets down 1 percent, and European automotive production down 3 percent. Operating profits in the third quarter were $73 million, down 10 percent compared to a year earlier.

"Growth in the mobile and industrial hydraulics markets has slowed from the pace in the first half," said Cutler. "In particular, agricultural equipment sales have been sluggish due to a combination of drought conditions and reductions in farm income in several markets around the world. We anticipate that the growth in mobile and industrial hydraulics is likely to remain modest for the balance of 2005. The commercial aerospace market showed the strongest quarterly growth in the last four years, driven by higher new plane deliveries and strong growth in passenger air miles flown. We now anticipate stronger commercial aerospace growth in 2005 than we had foreseen earlier this year.

"In addition, we announced within the last month two significant aerospace acquisitions - the aerospace fluid and air division of Cobham plc and the aerospace division of PerkinElmer," said Cutler. "These acquisitions expand our aerospace product range and, in combination with our existing aerospace business, will build our total aerospace sales to approximately $1.2 billion per year.

"We also closed the acquisition of the filtration business of Hayward Industries in September," said Cutler. "Hayward represents our first move into industrial filtration, which is a natural extension of our fluid power business."

The Truck segment posted sales of $601 million in the third quarter, up 24 percent compared to 2004, and recorded operating profits of $119 million. Operating profits before restructuring charges were $120 million, up 29 percent from results in 2004. NAFTA heavy-duty production was up 14 percent compared to 2004, NAFTA medium-duty production was down 11 percent, European truck production was up 4 percent, and Brazilian vehicle production was up 6 percent.

"Third quarter production of NAFTA heavy-duty trucks totaled 86,000 units, about the same as in the second quarter," said Cutler. "We expect that for the full-year NAFTA heavy-duty production is likely to be about 325,000 units.

"We were notified during the quarter that Eaton has been selected by the National Highway Transportation Safety Administration to be part of a group of companies to evaluate crash-avoidance technologies for both cars and commercial vehicles. The government has budgeted $31 million for this four-year study."

The Automotive segment posted third quarter sales of $436 million, 1 percent above the comparable quarter of 2004. Automotive production in NAFTA was up by 3 percent while European production was down 3 percent over the third quarter of 2004. Operating profits were $50 million. Operating profits before restructuring charges were $51 million, up 2 percent.

"Our Automotive business recorded solid margins despite sluggish automotive markets," said Cutler. "We are expecting that the markets in NAFTA and Europe will be down slightly over the balance of the year.

"We announced during the quarter we had started production on a new combination supercharger and turbocharger system for Volkswagen," said Cutler. "The combination allows an automaker the option to provide a smaller displacement gasoline engine in place of a turbo diesel while improving performance, and reducing fuel consumption and emissions.

"During the quarter, we also closed the acquisition of specialty differential manufacturer Tractech Holdings," said Cutler. "This acquisition allows Eaton to expand our traction modifier business to off highway vehicles, a diversification beyond our traditional light truck market."

Eaton Corporation is a diversified industrial manufacturer with 2004 sales of $9.8 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 57,000 employees and sells products to customers in more than 125 countries.