By Bob Tita
(Adds details from latest results, including comments from CEO starting in the third paragraph.)
Eaton Corp. ( ETN ) said Friday it expects modest sales growth next year from a combination of strengthening economic
growth and its acquisition of electrical-gear maker Cooper Industries.
The diversified manufacturer reported a 48% increase in third-quarter income largely stemming from the addition of
Cooper last year. But the company's revised its profit forecasts for the fourth quarter and 2013 to levels below
analysts' consensus estimates.
"We now believe our overall markets in 2013 are likely to be flat" with 2012, said Chairman and Chief Executive
Alexander Cutler on Friday. "The markets just aren't behaving quite as we thought they would this year."
Eaton's third-quarter results contrast with other diversified manufacturers, such as Parker Hannifin Corp. ( PH ),
Illinois Tool Works Inc. ( ITW ) and Ingersoll-Rand PLC ( IR ), that reported better-than-anticipated profits and margins
from rejuvenated end-market growth. But Eaton's exposure to difficult markets for construction and mining machinery and
commercial trucks weighed on the company, which expanded its electrical business lines to make Eaton less susceptible to
highly cyclical industrial sectors.
Sales from Eaton's hydraulics business, which supplies systems to Caterpillar Inc. ( CAT ) and other construction
machinery makers, fell 3% in the quarter to $739 million, while operating profit slipped 4% to $89 million. Although
third-quarter bookings for hydraulics were the strongest in two years, Mr. Cutler acknowledged the market remains weak,
especially in China.
"Mining is going to be slower than we saw a couple of years ago, and construction has to go through the bleed-off of
the [unsold] inventory that is still necessary in Asia," Mr. Cutler said during a conference call with analysts.
In the company's vehicle segment, which supplies components for passenger cars and transmissions for commercial
trucks, sales rose 3% to $964 million, as profit gained 12% to $161 million.
The company continued to scale back its production forecast for the heavy-duty truck market in the U.S., Canada and
Mexico. The company now expects 245,000 trucks to be built this year, down from 270,000 vehicles forecast at the
beginning of the year. Mr. Cutler said anemic U.S. gross domestic product growth has kept truckers from expanding their
fleets in recent years.
"We're not seeing historic levels of investment in trucking capacity in the U.S.," he said during an interview.
The Cooper acquisition caused third-quarter sales of Eaton's electrical products, which include light fixtures and
circuit breakers, to nearly double from the prior year to $1.82 billion. Meanwhile, sales from electrical services and
custom-designed electrical systems for buildings climbed 80% to $1.64 billion. Operating profit from electrical products
soared 79% to $310 million, while profit from electrical systems and services rose 115% to $241 million.
Mr. Cutler said the electrical segments have benefited from an improving residential construction industry in the U.S.
and stabilizing economies in Europe after a prolonged recession.
"The economic conditions won't be dramatically better next year, but they will be better," he said. "The U.S. is
getting gradually better. We think Eaton has some fairly bright prospects going into next year."
Eaton, which relocated its headquarters from the U.S. to Ireland after acquiring Cooper, didn't offer specific sales
and profit guidance for 2014, but predicted that its end markets next year will grow by 3% to 4% over 2013.
Nevertheless, Eaton's near-term outlooks reflected the company's continuing cautiousness about its markets. Eaton
forecast fourth-quarter profit of about $1.05 a share, compared with analysts' estimate of $1.12 a share. The company
also ratcheted down the top-end of its 2013 profit range by a dime to $4.05 to $4.15 a share. Analysts have been
expecting $4.18 a share.
"Eaton's third-quarter performance continued the recent trend of low-quality and lower revisions to end-market
growth," said Nick Heymann, an analyst for William Blair & Co., in a note to investors.
Overall for the quarter, Eaton reported a profit of $510 million, or $1.07 a share, up from $345 million, or $1.02 a
share, a year earlier. Excluding special items, per-share operating earnings were $1.12, matching analysts' estimates.
Sales jumped 42% to $5.61 billion on a year-over-year basis. Core sales, which exclude sales from Cooper and the
effects of currency exchange rates, grew 3% from a year ago. Analysts had predicted sales of $5.7 billion.
Eaton's stock recently was up 4.79% at $71.78 a share.
--Nathalie Tadena contributed to this article.
Write to Bob Tita at email@example.com
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