August 2, 2013 / 11:11 AM / 5 years ago

UPDATE 4-Eaton gives downbeat outlook as profit misses forecasts

By Lewis Krauskopf
    Aug 2 (Reuters) - Diversified manufacturer Eaton Corp
 reported a lower-than-expected quarterly profit on
Friday and cut the top end of its full-year earnings outlook,
citing slower market growth.    
    Shares fell more than 5 percent, as the maker of electrical
and hydraulic systems said quarterly sales would have declined 2
percent without the help of acquisitions.
    Eaton Chief Executive Sandy Cutler said the company's
markets were now expected to rise only 1 percent this year
compared to the company's estimate of 2 percent to 3 percent
growth when 2013 began.
    In an interview, Cutler characterized the economic recovery
in the United States as "subpar" and said that while Europe "may
be flattening...we think there is little prospect of a vigorous
recovery in the short-term."
    "We're in a world that is struggling to grow at 2 percent,"
Cutler said. "Those are growth rates that all of us are not used
to dealing with."
    Cutler also said the while gross domestic product data
earlier this week showed that U.S. economic growth unexpectedly
accelerated in the second quarter, manufacturing industrial
production was sluggish.
    Eaton's second-quarter net income rose to $494 million, or
$1.04 per share, from $382 million, or $1.12 per share, a year
earlier, when Eaton had far fewer shares outstanding.
    Excluding charges to integrate recent acquisitions, earnings
were $1.09 per share, 2 cents below the analysts' average
estimate, according to Thomson Reuters I/B/E/S.
    Revenue jumped 37.7 percent to $5.60 billion, driven by the
company's 2012 acquisition of Cooper Industries. Analysts were
looking for $5.77 billion. 
    Excluding a 40 percent boost from acquisitions, sales fell 2
percent, Eaton said.
    Despite weak revenue, Eaton was able to increase its
operating profit margin to 15.6 percent, from 14.7 percent a
year earlier, encouraging analysts.
    The margin improvement stemmed from Eaton's ability to sell
more advanced products with higher prices and productivity
efforts that allow it to bring down costs, Cutler said.
    The choppy demand for Eaton's products was consistent with
what rivals reported for the quarter, including delays on large
capital projects by customers, MKM Partners analyst Joshua
Pokrzywinski said.
    "The underlying story isn't broken here," Pokrzywinski said.
"We've just reset some of the numbers." 
    The company forecast 2013 earnings, excluding special items,
at $4.05 to $4.25 per share, reducing the high end from $4.45.
The $4.15 midpoint of the new outlook represents an increase of
5 percent over 2012. Analysts have been looking for $4.35.
    Eaton now expects only $350 million in core revenue growth,
excluding acquisitions, this year, down from an April outlook of
$900 million. It also expects $6 billion in revenue from
acquisitions this year.
    Eaton said it was achieving cost savings from the $11.8
billion acquisition of Cooper at a faster pace than expected. It
estimated those savings at $115 million this year, $25 million
higher than it previously expected, and $210 million next year,
$30 million more than before.
    The acquisition of Cooper expanded Eaton's range of
electrical products, such as lighting and wiring devices, to
markets ranging from mining to oil and gas and utilities.
    Eaton shares were down 5.1 percent to $66.37 in mid-day
trading on the New York Stock Exchange.
    Through Thursday, Eaton shares had climbed 29 percent this
year, topping a 19.7 percent increase for the Standard & Poor's
500 stock index.
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