Eaton Q3 Profit Up 4%; Guides Q4, Narrows FY07 EPS Outlook - Update

(RTTNews) - Monday morning, diversified industrial manufacturer Eaton Corp. (ETN | charts | news | PowerRating) reported a 4% increase in net income for the third quarter and 6% increase in earnings per share, aided by strong performance at its Electrical and Fluid power business and higher margins. Excluding charges, operating earnings for the quarter increased 8%, while sales for the quarter increased 7%. Looking ahead to the fourth quarter, the company provided outlook for earnings per share and said it expects sales for the quarter to be about the same as in the third quarter due to adverse market conditions. In addition, the company narrowed its earnings outlook for the full year, citing weakness in the NAFTA heavy-duty truck market as well as U.S. housing starts.

Third Quarter Results

Cleveland, Ohio-based Eaton's net income for the third quarter increased 4% to $258 million from $248 million in the year-ago quarter. Earnings per share for the quarter increased 6% to $1.71 per share from $1.62 per share in the year-ago quarter.

Net income for the third quarter includes a gain from discontinued operations of $0.12 per share compared to gain of $0.24 per share in the prior-year quarter. Results for both the periods include charges related to the integration of acquisitions.

Operating earnings before integration charges increased 8% to $1.79 per share from $1.65 per share in the similar period of last year. Excluding gains, operating earnings per share increased to $1.67 from $1.41 in the year-ago quarter.

On average, sixteen analysts polled by first call/ Thomson Financial expected the company to report earnings of $1.67 per share for the quarter.

Net sales for the quarter increased 7% to $3.30 billion from $3.08 billion in the previous-year period. Wall Street analysts expected revenues of $3.24 billion for the quarter.

Sales growth of 7% in the quarter consisted of 1% from organic growth, 3% from acquisitions and 3% from exchange rates. The company noted that for the second quarter in a row, its Electrical and Fluid Power business made up almost 70% of segment operating profits.

Commenting on the results, Alexander Cutler said, "Eaton's diversification strategy is working. Our improved geographic and business balance allowed us to post record earnings per share in the third quarter despite a 55% decline in the NAFTA heavy-duty truck market."

Cutler added, "Our margin performance in the third quarter was also strong, with our segment operating margin before acquisition integration charges of 13.4 percent setting a quarterly record. We are particularly pleased with our strong margins in Electrical, at 13.1 percent, and in Truck, at 17.6 percent."

Cost of products sold for the quarter were $2.38 billion compared to $2.29 billion in the prior-year quarter. Selling, general and administrative expense for the quarter increased to $528 million from $467 million a year ago. Research and development expense increased to $88 million from $84 million in the year-ago quarter.

Income from continuing operations increased to $238 million or $1.59 per share from $210 million or $1.38 per share in the similar period of last year. Income from discontinued operations was $20 million or $0.12 per share in the quarter, compared to income from discontinued operations of $38 million or $0.24 per share in the prior-year period.

The company, which produces power quality products and fluid power systems, said that during the third quarter, it reached agreement with the U.S. Internal Revenue Service on its 2003 and 2004 tax years, which would result in a modest tax refund. The company expects to receive the tax refund in the fourth quarter.

Business Segment Results

Net sales for the Electrical Segment climbed 13% to $1.22 billion from $1.08 billion last year. Operating profit for the quarter increased to $156 million from $116 million in the prior-year period. Operating profits before acquisition charges surged 37% to $160 million. Orders for the segment during the quarter increased 12% from a year ago.

Sales for Eaton's Fluid Power Segment climbed 14% to $1.14 billion from $998 million in the year-ago period. Excluding the impact of acquisitions, the segment grew 7% in the quarter. Operating profit for the segment was $128 million compared to operating profit of $105 million in the year-ago period. Fluid Power markets in the quarter grew 1% from last year, with global hydraulics shipments down an estimated 1%, while commercial aerospace markets grew 8%, defense aerospace markets increased 1% and European automotive production improved 3%.

The company's Truck Segment reported a 16% decline in sales to $541 million from $647 million in the previous-year quarter. Operating profit for the quarter dropped 23% to $95 million from $122 million in the prior-year period. The company said that during the quarter, NAFTA heavy-duty truck production dropped 55% compared to the year-ago period, while NAFTA medium-duty truck production declined 38%, European truck production decreased 4%. However, Brazilian vehicle production climbed 23% and Brazilian agricultural equipment production surged 65%.

Eaton's Automotive segment reported a 10% increase in sales for the quarter to $397 million from $362 million in the similar period of last year. Operating profit in the third quarter were $45 million compared to operating profit of $3 million in the prior-year quarter. Before acquisition integration charges, operating profits rose to $46 million from $3 million in the previous-year quarter, which was heavily impacted by Excel 07 charges. Automotive production in North America and Europe increased 3% from last year.

Nine-Month results

Eaton's net income for the nine months increased to $738 million or $4.91 per share from $709 million or $4.62 per share in the year-ago period. Net sales for the period rose to $9.66 billion from $9.16 billion in the prior-year period.

Outlook

Looking ahead to the fourth quarter, Eaton forecast net income in a range of $1.60-$1.70 per share and operating earnings, excluding charges, in a range of $1.65-$1.75 per share. The company also forecast sales for the quarter to be about the same as in the third quarter, citing adverse market conditions. Analysts expect the company to report earnings of $1.84 per share on revenues of $3.30 billion for the quarter.

The company anticipates the acquisition of the MGE single phase UPS business to close in the fourth quarter.

Cutler said, "While the non-residential electrical, power quality, aerospace, and Brazilian vehicle and agricultural equipment markets remain strong, the NAFTA heavy-duty truck market is not rebounding as we had expected and the greater weakness in U.S. housing starts is negatively impacting our residential electrical, hydraulics construction equipment, and NAFTA automotive businesses."

Cutler added, "We are making a slight adjustment to the midpoint of our full-year 2007 guidance, lowering it by $0.05 per share."

Accordingly, for fiscal year 2007, the company narrowed its earnings outlook to a range of $6.50-$6.60 per share from the prior range of $6.50-$6.70 per share. The company also provided outlook for operating earnings, which excludes charges, in a range of $6.75-$6.85 per share compared to the prior forecast in a range of $6.75-$6.95 per share. Analysts expect the company to earn $6.83 per share on revenues of $12.93 billion for the year.

Other Developments

In August, Eaton said that it completed the $111 million sale of its Mirror Control Division to funds managed by private equity firm Englefield LLP. The division is part of the company's Automotive Group, which employs about 630 people and has four manufacturing operations.

Prior Quarter results

In July, Eaton reported a 3% decline in its net income for the second quarter to $246 million from $253 million a year ago, as it incurred charges for integration of acquisitions. On a per share basis, the company's earnings remained flat with prior year at $1.64 per share. Before the acquisition integration charges, operating earnings per share for the second increased 1% to $1.70 from $1.68 in the year-ago period. Fuelled by acquisitions and benefit from exchange rates, revenues for the quarter grew 4% to $3.25 billion from $3.13 billion in the year-ago period.

Peer Performance

Among the company's peers, White Plains, New York-based ITT Corp. (ITT | charts | news | PowerRating) is slated to report its financial results for the third quarter on October 26, 2007. Analysts expect the company to earn $0.90 per share on revenues of $2.16 billion for the quarter.

Milwaukee, Wisconsin-based Johnson Controls Inc. (JCI | charts | news | PowerRating) is scheduled to report its financial results for the third quarter on October 23, 2007. Wall Street analysts expect the company to report earnings per share of $0.78 per share on revenues of $8.90 billion for the quarter.

Stock Movements

In Monday's regular trading session, ETN is currently trading at $92.00, down $4.40 or 4.56% from Friday's close. In the 52-week period, the stock has been trading in a range of $70.27-$104.12.

For comments and feedback: contact editorial@rttnews.com Copyright(c) 2007 RealTimeTraders.com, Inc. All Rights Reserved

Morning Coffee with TradingMarkets -- Free Newsletter

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index