Eaton Reports Third Quarter Revenue

Sales in the quarter were a record $2.54 billion, 26 percent above the same period in 2003. Net income was $170 million compared to $107 million in 2003, an increase of 59 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 2004 were $1.13 versus $.72 per share in 2003, an increase of 57 percent, and operating earnings for the third quarter of 2004 were $177 million compared to $112 million in 2003, an increase of 58 percent.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are very pleased with our third quarter. Sales growth of 26 percent in the quarter consisted of 13 percent from organic growth, 11 percent from acquisitions, and 2 percent from exchange rates. Our organic growth was comprised of 9 percent in our end markets and 4 percent from outgrowing our end markets.

"We continue to expect our markets to grow between 7 and 8 percent for full year 2004," said Cutler. "Mobile hydraulics and truck markets have continued their strong performance, while electrical markets have posted modest growth and automotive markets are likely to post a small decline for the year.

"We are pleased with our third quarter margins, which were strong despite the normal seasonal weakness in our automotive business, higher metals costs, and the addition of the Powerware business, whose margins are currently lower than the rest of our electrical business," said Cutler.

"We anticipate that net income per share for 2004 will be between $3.95 and $4.05, and accordingly we anticipate that net income per share for the fourth quarter of 2004 will be between $.98 and $1.08. Operating earnings per share, which exclude restructuring charges to integrate our recent acquisitions, are anticipated for 2004 to be between $4.10 and $4.20, with operating earnings per share for the fourth quarter of between $1.03 and $1.13."

Business Segment Results

Third quarter sales of the Fluid Power segment were $759 million, 11 percent above the third quarter of 2003. Fluid Power markets grew 9 percent compared to the same period in 2003, with global hydraulics shipments up an estimated 16 percent, commercial aerospace markets up 7 percent, defense aerospace markets up 2 percent, and European automotive production up 1 percent. Operating profits in the third quarter were $81 million. Operating profits before restructuring charges were $84 million, up 25 percent compared to a year earlier.

"The strong growth in the mobile and industrial hydraulics markets seen in the first half continued into the third quarter," said Cutler. "We anticipate that the growth in mobile and industrial hydraulics is likely to continue well into 2005, although the rate of growth is likely to moderate from the levels seen in 2004. The commercial aerospace market showed the strongest quarterly growth since 2001, driven by strong growth in passenger air miles flown plus higher new plane deliveries. We now anticipate stronger commercial aerospace growth in 2005 than we had foreseen earlier this year.

"We closed the acquisition of the Walterscheid European connector business of GKN plc in early September," said Cutler. "This acquisition expands our product range and sales channels in Europe while also strengthening our position as a systems provider."

In the Electrical segment, third quarter sales were $869 million, up 42 percent over 2003. Excluding the impact of the Powerware acquisition and the joint venture with Caterpillar formed in August of 2003, third quarter sales were up 7 percent compared to 2003. Operating profits in the third quarter were $70 million. Operating profits before restructuring charges were $78 million, up 44 percent from results in 2003.

"End markets for our electrical business grew about 5 percent during the third quarter," said Cutler. "We expect modest end market growth over the balance of the year, with more significant growth likely in 2005.

"We were particularly pleased with the performance of the Powerware acquisition in its first full quarter as part of Eaton," said Cutler. "Orders for Powerware in the third quarter were 13 percent higher than the third quarter of 2003."

The Automotive segment posted third quarter sales of $430 million, 9 percent above the comparable quarter of 2003. Automotive production in NAFTA was lower by 2 percent and in Europe was up 1 percent over the third quarter of 2003. Operating profits were $50 million, up 14 percent. As expected, the third quarter operating margin was impacted by higher metals prices and third quarter European customer shutdowns.

"The Automotive segment again recorded strong revenue growth despite flat markets," said Cutler. "We are expecting that the markets in NAFTA and Europe will be slightly down over the balance of the year."

The Truck segment posted sales of $485 million in the third quarter, up 44 percent compared to 2003, and recorded operating profits of $93 million, up 79 percent from results in 2003. The operating margin for the third quarter was a record 19.2 percent. NAFTA heavy-duty production was up 47 percent compared to 2003, NAFTA medium-duty production was up 9 percent, European truck production was up 8 percent, and Brazilian vehicle production was up 33 percent.

"Third quarter production of NAFTA heavy-duty trucks totaled 69,000 units, about 10 percent more than in the second quarter of 2004," said Cutler. "Monthly orders for new NAFTA heavy-duty trucks during the third quarter have averaged 28,000 units. While order levels would support another significant growth in production in the fourth quarter, given the capacity constraints faced by other suppliers to the truck assemblers we continue to estimate that the NAFTA heavy-duty market in 2004 is likely to total 255,000 units.

"We made significant progress during the quarter on both our new truck joint ventures in China," said Cutler. "The medium-duty joint venture with FAW formally started in September. We are still on target to start production in our Eaton Fast Gear heavy-duty joint venture in the fourth quarter of this year.

Financial Results

The company's comparative financial results for the three months and nine months ended September 30, 2004 and 2003 are available on the company's Web site.

Eaton Corporation is a diversified industrial manufacturer with 2003 sales of $8.1 billion. Eaton is a global leader in fluid power systems and services for industrial, mobile and aircraft equipment; electrical systems and components for power quality, distribution and control; automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety; and intelligent truck drivetrain systems for safety and fuel economy. Eaton has 55,000 employees and sells products to customers in more than 100 countries.

This news release contains forward-looking statements concerning the fourth quarter 2004 and full year 2004 net income per share and operating earnings per share, the performance of our worldwide markets, and volumes from new business awards. 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; competitive pressures on sales and pricing; increases in the cost of material, energy 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; the impact of acquisitions, divestitures, and joint ventures; new laws and governmental regulations; interest rate changes; stock market 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.