U.S. News

Eaton Profit Improves 15%, But Company Sees Flat 2007 Sales


Eaton Corp. posted an increase in quarterly profit on strong demand in its electrical business, but the results disappointed investors and the diversified manufacturer forecast flat 2007 sales, sending its shares lower.

Eaton said it expects the markets it serves to shrink about 3.5% in 2007, mostly due to the expected "dramatic decrease" in the North American heavy-duty truck market.

"This is roughly 1.5% lower growth in our markets than we expected a year ago, as we now see the slowdown in the overall manufacturing sector experienced in the second half of 2006 extending into the early portion of 2007," Eaton Chief Executive Alexander Cutler said in a statement.

Eaton forecast sales this year would be flat compared with last year -- slightly weaker than analysts were expecting. However, it said the earnings benefit from a restructuring program launched in January 2006 should be double the initial target and offset much of the market decline it sees.

Net income in the fourth quarter rose 14.8% to $241 million, or $1.59 a share, compared with $210 million, or $1.38 a share, in the year-earlier quarter.

Excluding one-time items, Eaton, which makes products ranging from electrical power distribution and control equipment to engine parts and hydraulic and fluid power systems, earned $1.66 a share. That was above the $1.59 a share analysts polled by Reuters Estimates had expected.

Results Disappoint Some

However, Merrill Lynch analyst Andrew Obin said in a research note that the analysts' consensus figure was "somewhat meaningless" as some had not updated their estimates after Eaton announced some tax benefits recently.

"We view the quarter as an operating 'miss,"' he said, adding that the reported fourth-quarter profit margin of 7.4% was below his expectation for 8.6%.

Sales rose 10% from a year before to $3.1 billion, short of the $3.16 billion analysts had expected.

Four percentage points of the growth came from an increase within the ongoing businesses, four points from acquisitions and two points from higher exchange rates. The company's end markets grew 4% in the quarter.

Earlier this month, Eaton had raised its fourth-quarter profit outlook by 5 cents a share to reflect lower tax expenses. On January 10, it said it expected to report a net profit in the range of $1.50 to $1.60 a share, and a profit before one-time items of $1.55 to $1.65 a share.

In October, Eaton, based in Cleveland, Ohio, had said it expected some of its markets to weaken in the fourth quarter due in part to the softening U.S. residential housing market. However, it had said the heavy-duty truck market it serves would remain strong.

Eaton forecast 2007's sales would be flat with the 2006 total of $12.37 billion, below the $12.59 billion analysts were expecting.

The company forecast a 2007 net profit in the range of $6.05 a share to $6.25 a share, and earnings before one-time items in the range of $6.30 a share to $6.50 a share. Analysts have been expecting $6.26 before one-time items.

However, Eaton sees a first-quarter net profit of $1.30 to $1.40 a share, and earnings before one-time items of $1.35 to $1.45 a share. Analysts have been expecting $1.61 a share before one-time items.

Eaton also increased its quarterly dividend by 10% to 43 cents a share and contributed $150 million to its U.S. pension plan. It also announced a new 10 million share buyback program, replacing an existing program that had 1.3 million shares remaining to repurchase.