Industrial manufacturer Eaton Corporation ( ETN - Analyst Report ) released its second quarter results with earnings per share of $1.15 beating the year-ago quarter figure of 97 cents per share. Earnings were ahead of the Zacks Consensus Estimate of $1.09 per share.

Eaton’s GAAP earnings during the second quarter were $1.12 per share versus 97 cents per share reported in the year-ago quarter. The difference between GAAP and operating earnings of 3 cents during the reported quarter was due to acquisition integration charges.

Revenue

In the second quarter, Eaton earned net quarterly revenue of $4.07 billion, which was marginally lower than the year-ago performance of $4.09 billion. The year-over-year results were impacted by lower-than-expected end market growth and an unfavorable foreign exchange rate, which were marginally offset by growth in core sales and positive contribution from the acquired assets.

Quarterly revenue was also lower than the Zacks Consensus Estimate of $4.2 billion.

Segment Analysis

Electrical Americas: Within its Electrical unit, Electrical Americas’ revenues improved 10% from the year-ago quarter to $1.1 billion, while operating profit (excluding acquisition integration charges) spiked 32% to $192 million. The upside reflected end market growth of 8% and 4% in order bookings, compared to the prior-year quarter.

Electrical Rest of the World: The Electrical Rest of the World segment’s sales were down 13% year over year to $683 million. Operating income of $55 million (excluding acquisition integration charges) was down 29% from the year-ago level. Segment bookings for the quarter saw a 4% dip due to a sharp drop in orders for solar inverters.

Hydraulics: At $769 million, Hydraulics segment’s sales rose 6% over the prior year, while operating profits came in at $126 million, up 5% from the corresponding quarter last year. Global Hydraulics markets grew 2% and the U.S. market was up by 7% in the quarter.

Aerospace: Segmental sales in the second quarter grew 7% to $436 million and operating profits grew 18.0% to $59 million. Aerospace booking in the second quarter was up by 2%, attributable to higher commercial aircraft production offset by soft sales in military markets.

Truck: The Truck segment posted a decline of 7% resulting in sales of $625 million. It brought in operating income of $120 million during the quarter, flat with the year-ago quarter.

Automotive: The segment’s second quarter sales declined 8% year over year to $422 million. It posted an operating profit of $48 million, reflecting a decline of 13% from the comparable quarter last year.

Operating Results

The cost of product sold in the second quarter 2012 were $2,815 million, declining marginally from $2,862 million in the year-ago quarter.

Selling and administrative expenses also followed a similar trend, declining to $690 million from $698 million in the prior year.

The decline in expenses benefited the segment operating income of the company. The segment operating profit grew by 4.6% year over year to $592 million from $566 million in the year-ago quarter.

Financial Health

Cash and short-term investments of the company as of June 30, 2012 were $1.17 billion versus $1.08 billion as of December 31, 2011.

Long-term debt was $3.67 billion as of June 30, 2012 compared with $3.37 billion as of December 31, 2011.

Guidance

Eaton expects its 2012 pro forma and GAAP earnings to be in the range of $4.20 – $4.50 per share and $4.09 –$4.39 per share, respectively. Pro forma earnings estimates exclude acquisition integration charges.

After registering a strong performance in the first half of the year, the company expects the Electrical Americas market to improve 8% in 2012, up from the earlier projection of 6%.

Electrical Rest of the World registered soft results in the first half of 2012 and the company expects a 3% year-over-year decline in the business in the fiscal.

The company expects that the global hydraulics business will grow at a 3% rate in 2012, lower than the previous expectation due to delay in recovery in the Chinese markets.

Peer Update

The company competes with Parker-Hannifin Corporation ( PH - Analyst Report ) . Parker-Hannifin is expected to release its fiscal 2012 results on August 2, 2012. The company expects 2012 earnings per share to be in the range of $7.30 to $7.50. The Zacks Consensus expectation is presently pegged at $7.39 per share, which is within the guided range.

Our View

The top-line results of the company were impacted by currency fluctuation and lower-than-expected growth in the end markets, stemming from slower economic growth rates in China, India and Brazil.

The decline in cost and a lower tax rate will likely benefit the company in the second half of 2012. Electrical Americas is also expected to register a strong performance in the second half 2012.

However, we prefer to remain on the sidelines as the acquisition of Cooper Industries will substantially increase the debt burden of the company. We maintain our long-term Neutral recommendation on the company.

Cleveland, Ohio-based diversified power management company Eaton Corporation is a leading supplier of power accessories in the aerospace industry and has customers spanning 150 countries. Eaton Corporation currently retains a Zacks #3 Rank (short-term Hold rating).