First Quarter Results

The company’s first quarter net income totaled $247 million, up from $234 million reported in the same quarter of last year. On a per share basis, earnings were up 5% to $1.67 from $1.59 in the prior year quarter.

Net income from continuing operations for the quarter was $244 million or $1.65 per share, compared to $229 million or $1.56 per share in the corresponding quarter of the previous year.

Net income in both periods included charges for integration of acquisitions. Before acquisition integration charges, operating earnings per share in the current quarter were up 5% to $1.70 from $1.62 per share in 2007. Adjusted operating earnings per share, excluding the impact of discontinued operations, totaled $1.72, compared to $1.65 in the first quarter of 2007. Operating earnings for the quarter were $256 million, compared to $243 million in the previous year.

On average, 19 analysts polled by First Call/Thomson Financial expected the company to earn $1.66 per share for the quarter.

Quarterly net sales amounted to $3.496 billion, up 12% from previous year’s net sales of $3.113 billion, and surpassed Wall Street analysts’ consensus revenue estimate of $3.43 billion.

The company noted that the sales growth in the latest quarter of 12% included 2% from organic growth, 6% from acquisitions, and 4% from higher foreign exchange rates. Eaton’s end markets grew 2% in the quarter. Additionally, Eaton said that its end markets performed well in the first quarter, buoyed by the strength in international markets.

Alexander Cutler, chairman and chief executive officer of Eaton, commented, “The strike at an automotive supplier which impacted production at several U.S. vehicle manufacturers reduced our revenues and margins for the quarter. We anticipate the labor situation will be resolved during the second quarter and, as a result, U.S. production should recover in the second quarter.�

Other Metrics

Cost of products sold during the latest quarter was $2.53 billion, higher than $2.23 billion recorded in the year-earlier quarter. First quarter selling & administrative expenses rose to $552 million from $507 million last year, while research & development expenses increased to $89 million from $80 million in the year-ago quarter. Net interest income ascended to $38 million from $30 million in the comparable quarter of the previous year.

Segment Analysis

The company’s Electrical segment generated first quarter sales of $1.3 billion, up 20% from $1.1 billion in the previous year quarter. Operating profit for this segment advanced to $160 million from $120 million in the three months ended March 31, 2007. Excluding acquisition integration charges of $3 million during the quarter, operating profits were $163 million, an increase of 34% over the first quarter of 2007. For the full year, the company still expects global electrical markets to grow by 5% - 6%.

Hydraulics segment witnessed quarterly sales growth of 14% that amounted to $657 million, compared to $574 million last year. Segment operating profit grew to $78 million from $66 million in the first quarter of 2007. Excluding acquisition integration charges of $2 million, operating profits totaled $80 million, up 14% from 2007. Eaton now believes the global hydraulics markets for 2008 will grow 2%, compared to its prior estimate of 1% growth.

First quarter sales at Aerospace segment were up 23% to $430 million from $350 million a year ago, while operating profit ascended to $63 million from $45 million in the same quarter of last year. Excluding acquisition integration charges of $7 million during the quarter, operating profits were up 35% to $70 million from last year. The company currently estimates the global aerospace market to grow 7% in 2008.

The Truck segment sales dropped 2% to $567 million from $576 million in the previous year’s first quarter. Operating profit for this segment fell 21% to $85 million from $107 million reported in the year-earlier quarter.

Automotive segmented posted first quarter sales of $538 million, up 2% from prior year’s sales of $529 million. Operating profit decreased to $46 million from $63 million in the comparable quarter of the previous year. Excluding acquisition integration charges of $1 million, operating profits were $47 million, down 25% from 2007.

Q2 & FY08 Forecast

Looking ahead, Eaton expects second quarter earnings to be in the range of $1.80 - $1.90 per share. Operating earnings, which exclude charges to integrate the company’s recent acquisitions, are projected to range between $1.90 and $2.00 per share.

Based on the strong first quarter performance, the company lifted its full year earnings forecast by $0.05 per share to $7.30 - $7.80 per share, from the previously communicated outlook range of $7.25 - $7.75 per share. Annual operating earnings are now estimated to be between $7.80 and $8.30 per share. Analysts polled by First Call/Thomson Financial expect the company to earn $1.92 per share for the second quarter and $7.78 per share for the full year 2008.

In addition, Cutler said, “We continue to anticipate growth of 4 percent in our end markets in 2008, with international markets modestly stronger than our expectations in January and U.S. markets slightly weaker.�

Peer Performance

Among Eaton’s rivals, White Plains, New York-based ITT Corp. (ITT) is due to release its quarter financial results on April 25. Analysts expect the company to report earnings of $0.81 per share on revenues of $2.66 billion for the quarter.

Another competitor, Milwaukee, Wisconsin-based Johnson Controls Inc. (JCI) would announce its quarterly results on April 16. Analysts surveyed by First Call/Thomson Financial expect the company to post earnings of $0.47 per share on revenues of $9.33 billion.

Parker Hannifin Corp. (PH), yet another peer in the industry, is slated to report its quarterly results on April 22. Analysts estimate the company to earn $1.38 per share on revenues of $2.99 billion for the quarter.

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