Eaton Corp.'s (ETN) third-quarter profit plunged 39%, but the company raised its profit outlook for the year as cost reductions help to counter falling sales.

Chairman and Chief Executive Alexander Cutler said the diversified industrial company is seeing modest improvement in several of its hard-hit end markets, which include the automotive and truck-making sectors, construction and agricultural machinery, aerospace and commercial construction. He expects the improvement to continue and gain momentum in the fourth quarter. Cutler predicted global GDP will increase 3.1% next year, up from 2.5% in an earlier forecast. He expects global industrial production to climb 6%.

"Not only do we have the company sized correctly, but the markets are beginning to flatten out, and we're beginning to see some signs of recovery," Cutler said during a conference call with Wall Street analysts. "The business is running now better than we anticipated."

Eaton's stock was recently trading up 7.5% at $64.99 a share.

The Cleveland-based company has cut 15% of its work force since 2008 and moved to reduce its exposure to the slumping auto industry. The head-count reductions and other cost cuts have trimmed tens of millions of dollars from Eaton's overhead expenses in recent quarters, allowing Eaton to fatten its margins. About 20% of Eaton's earnings per share before special charges for the quarter was attributed to improved operating performance.

Cutler declined to discuss what Eaton's costs might be in connection with a jury's ruling earlier this month that Eaton engaged in anticompetitive conduct in its truck-transmission business. A venture involving rival ArvinMeritor Inc. accused Eaton of antitrust activities, but a damage award hasn't been determined.

Cutler said he was "disappointed" in the jury's verdict and maintained the antitrust "allegations in the lawsuit are without merit."

"We believe we have fully complied with the law," he said.

Eaton's third-quarter results handily topped its guidance, prompting the company to raise its full-year profit forecast after two straight quarters in which it slashed its 2009 profits projections. Eaton now sees 2009 earnings, excluding items, of $2.40 to $2.50, up from its July-lowered view of $2 to $2.20. Analysts' latest average estimate, according to Thomson Reuters, was $1.99.

Eaton also projected fourth-quarter earnings of $1.15 a share to $1.25 a share, above analysts' mean view of $1.06.

Eaton's third-quarter profit fell to $193 million, or $1.14 a share, from $315 million, or $1.87 a share, a year earlier. Excluding restructuring and other charges, earnings fell to $1.21 from $1.95 a year ago but were well above analysts' consensus prediction of 90 cents a share. Nevertheless, Eaton's net sales in the quarter dropped 26% to $3.03 billion. That's below analysts' latest forecast of $3.13 billion.

Eaton's electrical business in the Americas, the company's biggest business by revenue, saw a 15% profit decline and 20% decline in sales. The segment has significant exposure to residential and commercial construction.

Automotive-segment sales dropped 27% on sharply lower vehicle production volumes in both the U.S. and global auto markets, but operating profit rose 21%. Eaton's truck-segment sales fell 35%, while profit plunged 74%.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

(Mike Barris contributed to this report.)