Eaton Corporation (Eaton) has reported net sales of $15.4 billion for the year 2008, up 18%, compared with the net sales of $13 billion in the previous year-end. It has also reported a net income of $1.06 billion, or $6.52 per diluted share, for the year 2008, compared with the net income of $994 million, or $6.62 per diluted share, in the previous year-end.
The company has announced net income per share of $.98 for the fourth quarter of 2008, a decrease of 43% from net income per share of $1.71 in the fourth quarter of 2007. Sales in the quarter were $3.5 billion, 3% above the same period in 2007. Net income was $163 million compared to $256 million in 2007, a reduction of 36%.
Net income in both periods included charges related to acquisition integration. Before acquisition integration charges, operating earnings per share in the fourth quarter of 2008 were $1.08 compared to $1.79 per share in the fourth quarter of 2007, a decrease of 40%. Operating earnings for the fourth quarter of 2008 were $180 million compared to $269 million in 2007, a reduction of 33%.
Sales growth in the fourth quarter of 3% consisted of 13% growth from acquisitions, offset by a 6% decline from lower exchange rates and a 4% decline in organic growth. End markets in the fourth quarter declined by 6%.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, “Despite weaker-than-expected conditions in our end markets, we were able to generate earnings per share in the fourth quarter at the high end of our most recent guidance. Our markets turned down sharply in the fourth quarter, dropping 6% from the fourth quarter of 2007 versus our expectations in mid-December of a decline of between 3 and 4%.
“Looking at 2008 as a whole, our operating earnings grew to a new record, while our operating earnings per share were about the same as in 2007,” said Cutler. “We achieved a fundamental repositioning of the company in 2008, as seen by the fact that in the second half of 2008 our Electrical, Hydraulics and Aerospace businesses earned almost 90% of our segment profits. Our operating cash flow of $624 million in the fourth quarter was a quarterly record, further demonstrating the strength of our mix of businesses. With our strong cash flow, we were able to reduce our commercial paper outstanding at year end to $767 million and end the quarter with $530 million of cash and short-term investments.
“So far in 2009, our markets have continued to decline,” said Cutler. “We anticipate that our markets will decline through at least the second, and possibly the third, quarter. We estimate our markets for all of 2009 will decline by between 7 and 8%. We expect to outgrow our end markets in 2009 by around $300 million, and we also expect to record around $400 million of growth from the full-year impact of the six acquisitions we completed in 2008. These increases are expected to be offset by a decline in foreign currencies of 6%. As a result, we anticipate our revenues in 2009 will likely decline by 8% compared to 2008.
“We took significant employee reduction actions in 2008 in anticipation of the severe downturn, and in January we have taken further actions,” said Cutler. “The continued decline in our end markets in early 2009 unfortunately necessitated that we reduce our workforce even further than we originally anticipated. The employee reductions in 2008 and 2009 total about 10% of our full-time workforce. Net of $110 million of severance costs to be incurred in the first quarter of 2009, we anticipate a year-over-year pretax earnings increase in 2009 of $165 million from the actions. In 2010, we expect an additional year-over-year pretax earnings increase of $125 million.
“In addition, there will be further savings from ongoing acquisition integration activities in 2009,” said Cutler. “We anticipate the savings from the two largest acquisitions, Moeller and Phoenixtec, to add $0.30 per share to our 2009 after-tax earnings.
“We will be changing our reporting in 2009, dividing our Electrical business into two segments,” said Cutler. “The segments will be based on geography with one segment focused on the Americas and the other on the rest of the world.
“Forecasting earnings in 2009 is particularly complicated in light of the uncertain global economic environment,” said Cutler. “Looking at the first quarter of 2009, our revenues will be impacted by plant shutdowns implemented by many of our hydraulics, truck, and automotive customers late in the fourth quarter of 2008, which in many cases are extending into the middle of the first quarter of 2009. These shutdowns will lower revenues in the first quarter of 2009 compared to the fourth quarter of 2008. As a result of these shutdowns, combined with the impact of the $110 million of severance costs associated with the employee reductions we have taken in January, we anticipate earnings in the first quarter will be the weakest quarter by far of 2009. We now estimate that first quarter operating earnings per share, which exclude an estimated $0.15 of charges to integrate our recent acquisitions, will likely be about breakeven. For the full year 2009, we estimate that operating earnings per share, which exclude an estimated $0.40 of charges to integrate our recent acquisitions, will be between $4.20 and $5.20.”
Business Segment Results
Fourth quarter sales for the Electrical segment were $1.7 billion, up 34% over 2007. Operating profits in the fourth quarter were $194 million. Operating profits before acquisition integration charges were $217 million, up 29% over results in 2007.
“End markets for our electrical business grew about 1% during the fourth quarter, a slowdown from the 4% growth in the third quarter, and our orders in the fourth quarter declined by 5%,” said Cutler. “Nonresidential construction spending in the United States held up well in the fourth quarter of 2008, but we expect it to begin to decline by the second quarter of 2009. Overall for 2009, we expect our markets to decline by around 5%, with the U.S. market declining by 7% and non-U.S. markets declining by 4%.
In the Hydraulics segment, fourth quarter sales were $533 million, 11% lower than the fourth quarter of 2007. Hydraulics markets in the fourth quarter declined 8% compared to the same period in 2007, with U.S. markets down 9% and non-U.S. markets down just under 8%.
Operating profits in the fourth quarter were $44 million. Operating profits before acquisition integration charges were $46 million, down 37% compared to a year earlier.
“The global hydraulics market declined markedly in the fourth quarter led by steep production cutbacks from customers around the world,” said Cutler. “For 2009, we anticipate a sharp contraction, with our global markets down on the order of 16%. Markets in the U.S. are expected to be down nearly 20% and non-U.S. markets are expected to decline by 11%.
“We were pleased to be selected by United Parcel Service to supply series hydraulic hybrid vehicles for use in package delivery applications,” said Cutler. “As is the case with our hybrid electric applications in our Truck business, the series hydraulic hybrid vehicle offers significant improvement in fuel economy and emissions.”
The Aerospace segment posted fourth quarter sales of $446 million, an increase of 6% over the fourth quarter of 2007. Aerospace markets in the fourth quarter declined by 4%. U.S. markets declined by 9%, driven by the reduction in new plane deliveries at Boeing as a result of the strike, while non-U.S. markets grew 7%.
Operating profits in the fourth quarter were $76 million. Excluding acquisition integration charges, operating profits were $79 million, a 6% decline from the fourth quarter of 2007.
“We were very pleased with the performance of our Aerospace business in the fourth quarter,” said Cutler. “Despite the inefficiencies we incurred as a result of the Boeing strike, we earned a 17.7% operating margin, the highest quarterly margin of 2008.
“For 2009, growth in our aerospace markets is expected to be about 2%,” said Cutler. “U.S. markets are expected to grow by 4%, while non-U.S. markets are expected to decline by 3%.