Eaton Reports First Quarter 2001 Operating Earnings Per Share of $1.05
CLEVELAND--April 16, 2001--Diversified industrial manufacturer Eaton Corporation today announced operating earnings per share of $1.05 for the first quarter of 2001, 30 percent below comparable results one year earlier.Sales in the quarter were $1.98 billion, 9 percent below last year. Net income before unusual items was $73 million versus last year's $111 million.
During the quarter, the company realized a pre-tax gain of $38 million from the sales of businesses, notably its Vehicle Switch/Electronics Division (VS/ED) to Delphi Automotive Systems. The company also recognized a $38 million charge related to the previously announced restructuring of its truck components business, and had a restructuring charge of $7 million related to the continuing integration of Aeroquip-Vickers, Inc. (ANV) into Eaton. After all unusual items in both periods, first quarter net income from continuing operations was $50 million compared to $113 million one year ago.
Alexander M. Cutler, chairman and chief executive officer, said, "We are very pleased to have met our performance expectations, and to have modestly exceeded consensus analyst estimates, despite very difficult operating conditions in several of our businesses. While specific segment results were mixed, we once again realized the benefits of Eaton's diversification and stronger business mix. With VS/ED divestiture proceeds and tight control over capital, Eaton's balance sheet also improved, bringing net debt-to-capital down below 52 percent.
"Looking ahead, we expect current market conditions to continue through mid-year, and we will continue our initiatives to size the business to these activity levels. It is difficult to have confidence in any projections given the current economic environment. But, we remain comfortable with the consensus projections for Eaton's full year results on the assumption that a modest U.S. recovery will begin during this year's second half. Our current expectation is that second quarter results will come in closer to the lower end of current analyst forecasts.
"We have been pleased by the relative performance of Eaton's stock over the past 6 months or so. We believe it reflects growing recognition of Eaton as a stronger, more diversified enterprise committed to delivering superior shareholder value. Whatever the near-term economic environment, we remain committed to demonstrating that Eaton deserves to be considered a premier diversified industrial."
Business Segment Results
Fluid Power, Eaton's largest business segment, experienced very mixed markets during the quarter. Sales of $673 million were 1 percent above one year earlier. Excluding net acquisitions over the year, sales were off 1 percent, which compares to a 15 percent decline in North American hydraulics industry shipments and a 12 percent increase in aerospace markets. Segment profits before restructuring charges were $69 million, down 8 percent from one year ago.
Said Cutler, "Conditions in the North American hydraulics markets deteriorated markedly during the first quarter, with industry orders off 18 percent from one year earlier. This had a disproportionate impact on segment profits during the period and prevented us from making sustained progress towards our 15 percent operating margin target. In order to address this deterioration, which we expect to continue at least through mid-year, we are increasing the pace of restructuring we originally planned for this business as a result of the 1999 acquisition of Aeroquip-Vickers, Inc. Approximately 600 positions will be eliminated across Fluid Power over the next three months as we accelerate the creation of one seamless business that is more customer oriented and cost effective.
"In contrast to hydraulics, aerospace markets are showing sustained strength; our first quarter sales to this market were 16 percent ahead of last year. We also completed the purchase of 100 percent of SEHYCO, our former hydraulics joint venture with Sumitomo Heavy Industries, adding $100 million of annual sales in the Asian region. With the acceleration of our ANV integration activities, sustained strength in aerospace, and the eventual recovery of hydraulics markets, we remain confident that Fluid Power will achieve its full synergy and operating margin commitments."
First quarter Industrial & Commercial Controls sales were $559 million, down 3 percent from last year. Excluding sales of the divested portable tool switch product line, sales were off about 1 percent. A 2 percent increase in Cutler-Hammer sales was more than offset by a sharp decline in our project-oriented Navy Controls unit. Segment profits were up 2 percent despite lower sales.
"This segment is benefiting from its focus on power distribution, power quality, and providing engineering services," said Cutler. "The North American industrial control market was down nearly 10 percent in the first quarter but distribution equipment is still modestly above last year. Within our business, sales to distributors are down due to aggressive inventory reductions, while project construction remains strong. The half point improvement in operating margins, despite the overall flat market, is also impressive. We expect that profile -- flat sales and improved margins -- to also characterize full year results."
During the quarter, the company formed a joint venture with Hager Electro SA, creating Eletromar LTD., to manufacture IEC residential circuit breakers in Brazil.
The Automotive segment had an excellent quarter considering the severe adjustment taking place in the North American automotive industry. Segment sales of $470 million were 5 percent below one year ago compared to a 16 percent drop in NAFTA production, flat European auto production and a 14 percent increase in South American output. Segment profits of $62 million were off 17 percent from one year ago.
Said Cutler, "Last year, we indicated that Eaton had taken full advantage of a nearly ideal market environment. A year later, given current industry conditions, our performance is in some ways even more impressive. We continue to outperform our markets because of the rising penetration of multi-valve engines and market share gains. The recent $500 million multi-year contract award by General Motors to provide advanced powertrain technology illustrates the value we add in new product development."
"We are also pleased to have completed the divestiture of VS/ED to Delphi Automotive Systems for $300 million. With Delphi's scale and presence in the automotive electronics market, the combination is ideally situated to capitalize on industry trends and provide VS/ED with an attractive platform for future growth."
First quarter Truck segment sales of $281 million were 37 percent below one year ago. NAFTA Class 8 truck production during the period was down 54 percent, NAFTA medium duty trucks were off 30 percent, European Truck output was up 3 percent and South American commercial vehicle production rose 22 percent. Before restructuring charges, the segment operated at breakeven during the quarter compared to operating profits of $60 million one year ago.
Said Cutler, "Activity in North American markets remains extraordinarily depressed, with heavy truck production currently at its lowest levels since 1992. In that context, we are pleased that our business reached breakeven this quarter compared to a $12 million loss in the fourth quarter of last year. NAFTA order activity shows no signs of improving in the near term, and the $55 million restructuring of this worldwide business we announced earlier this year is now well underway. Our commitment is to emerge from this industry depression with a more flexible, less capital intensive, and more profitable organization that is less affected by the inevitable ups and downs of this market, and can better serve the needs of our customers, suppliers, employees and owners."
Eaton Corporation is a global $8 billion diversified industrial manufacturer that is a leader in fluid power systems; electrical power quality, distribution and control; automotive engine air management and fuel economy; and intelligent truck systems for fuel economy and safety. Eaton's 55,000 employees work in 29 countries on six continents. For more information, visit www.eaton.com.
Notice of Conference Call: Eaton's conference call to discuss its first quarter results is available to all interested parties via live audio webcast at 10 a.m. EST, on Eaton's Investor Relations site at http://www.shareholder.com/etn/.
This news release contains forward-looking statements concerning full year and second quarter results, restructuring, synergy and operating margin commitments for Fluid Power, sales and margins for Industrial & Commercial Controls and NAFTA order activity. These statements are subject to various risks and uncertainties, many of which are outside the company's control. The following factors could cause actual results to differ materially from those in the forward- looking statements: unanticipated changes in the markets for the Company's business segments, our ability to implement our integration and restructuring plans, an unanticipated downturn in business relationships with customers or their purchases from us, competitive pressures on sales and pricing, increases in the cost of material and other production costs that cannot be recouped in product pricing and further deterioration of economic and financial conditions in the United States and around the world. We do not assume any obligation to update these forward-looking statements.
The financial results
The company's comparative financial results for the three months ended March 31, 2001 and 2000 follows:
Eaton Corporation
Comparative Financial Summary
Three months ended
March 31
------------------
(Millions except for per share data) 2001 2000
---- ----
Continuing operations
Net sales $1,983 $2,184
Income before income taxes 104 176
Income after income taxes $ 50 $ 113
Income from discontinued operations 18
------ ------
Net income $ 50 $ 131
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.72 $ 1.52
Discontinued operations 0.25
------ ------
$ 0.72 $ 1.77
====== ======
Basic
Continuing operations $ 0.73 $ 1.55
Discontinued operations 0.25
------ ------
$ 0.73 $ 1.80
======= ======
Average number of Common Shares outstanding
Assuming dilution 70.1 73.8
Basic 69.0 72.9
Cash dividends paid per Common Share $ 0.44 $ 0.44
Reconciliation of income from continuing operations
to operating earnings from continuing operations
Income from continuing operations $ 50 $ 113
Excluding (after-tax)
Unusual charges 30 5
Gain on sales of businesses (7)
Gain on sales of corporate assets (7)
------ ------
Operating earnings from continuing operations $ 73 $ 111
====== ======
Income from continuing operations per Common
Share - assuming dilution $ 0.72 $ 1.52
Per share impact of unusual items 0.33 (0.02)
------ ------
Operating earnings per Common Share
Continuing operations 1.05 1.50
Discontinued operations 0.25
------ ------
$ 1.05 $ 1.75
====== ======
Cash operating earnings per Common Share
Continuing operations $ 1.34 $ 1.77
Discontinued operations 0.28
------ ------
$ 1.34 $ 2.05
====== ======
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
March 31
------------------
(Millions except for per share data) 2001 2000
---- ----
Net sales $1,983 $2,184
Costs & expenses
Cost of products sold 1,497 1,581
Selling & administrative 321 340
Research & development 68 68
------ ------
1,886 1,989
------ ------
Income from operations 97 195
Other income (expense)
Interest expense - net (42) (44)
Gain on sales of businesses 38
Other - net 11 25
------ ------
7 (19)
------ ------
Income from continuing operations before
income taxes 104 176
Income taxes 54 63
------ ------
Income from continuing operations 50 113
Income from discontinued operations 18
------ ------
Net income $ 50 $ 131
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.72 $ 1.52
Discontinued operations 0.25
------ ------
$ 0.72 $ 1.77
====== ======
Basic
Continuing operations $ 0.73 $ 1.55
Discontinued operations 0.25
------ ------
$ 0.73 $ 1.80
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.1 73.8
Basic 69.0 72.9
Cash dividends paid per Common Share $ 0.44 $ 0.44
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
March 31
------------------
(Millions) 2001 2000
---- ----
Net sales
Automotive $ 470 $ 497
Fluid Power 673 665
Industrial & Commercial Controls 559 579
Truck 281 443
------ ------
Total net sales $1,983 $2,184
====== ======
Operating profit
Automotive Components $ 62 $ 74
Fluid Power 62 67
Industrial & Commercial Controls 50 49
Truck Components (38) 60
------ ------
Total operating profit 136 250
Amortization of goodwill & other intangible
assets (25) (24)
Interest expense - net (42) (44)
Gain on sales of businesses 38
Corporate & other - net (3) (6)
------ ------
Income from continuing operations before
income taxes 104 176
Income taxes 54 63
------ ------
Income from continuing operations 50 113
Income from discontinued operations 18
------ ------
Net income $ 50 $ 131
====== ======
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
March 31, December 31,
(Millions) 2001 2000
---- ----
ASSETS
Current assets
Cash & short-term investments $ 377 $ 126
Accounts receivable 1,272 1,219
Inventories 840 872
Deferred income taxes & other current
assets 339 354
------ ------
2,828 2,571
Property, plant & equipment 2,130 2,274
Goodwill 1,952 2,026
Other intangible assets 543 556
Deferred income taxes & other assets 740 753
------ ------
$8,193 $8,180
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 482 $ 557
Accounts payable 460 485
Accrued compensation 161 199
Accrued income & other taxes 275 191
Other current liabilities 696 675
------ ------
2,074 2,107
Long-term debt 2,498 2,447
Postretirement benefits other than pensions 679 679
Deferred income taxes & other liabilities 515 537
Shareholders' equity 2,427 2,410
------ ------
$8,193 $8,180
====== ======
See accompanying notes.
Eaton Corporation
Notes to the First Quarter 2001 Earnings Release
(All references to net income per Common Share assume dilution.)
Unusual Charges
---------------
Income was reduced by the following unusual charges (millions except
for per share data):
Three months ended
March 31
------------------
2001 2000
---- ----
Pretax $ 45 $ 8
After-tax 30 5
Per Common Share .43 .07
The charges in 2001 were primarily associated with the restructuring
of the worldwide Truck business, which was announced earlier in the
quarter, and reduced operating profit of the Truck segment by $38
million. The remaining charges, related to the ongoing integration of
Aeroquip-Vickers, reduced operating profit of the Fluid Power segment
by $7 million in 2001 and $8 million in 2000. The restructuring
charges were included in the Statements of Consolidated Income in
Income from operations.
Gain on Sales of Businesses
---------------------------
During the first quarter of 2001, in separate transactions the Company
sold the Vehicle Switch/Electronics Division (VSED) and certain assets
of the Truck business. The sales of these businesses resulted in a
pretax gain of $38 million ($7 million after-tax, or $.10 per Common
Share).
Other Income (Expense)
----------------------
Income for the first quarter of 2000 was increased by a net pretax
gain on the sale of corporate assets of $10 million ($7 million
after-tax, or $.09 per Common Share). This gain was included in the
Statements of Consolidated Income in Other income - net and in
Business Segment Information in Corporate and other - net.
Income Taxes
------------
The effective income tax rate for the first quarter of 2001 was 51.7%.
The higher rate in 2001 compared to 2000 was attributed to the tax
effect of book/tax basis differences related to businesses sold in
2001, which increased tax expense for the first quarter by $18
million. Excluding the negative tax consequences of these
transactions, the effective tax rate for the first quarter 2001 was
34.0% compared to 36.1% in the first quarter of 2000.
Discontinued Operations
-----------------------
The consolidated financial statements present the semiconductor
equipment operations, which were spun-off to Eaton shareholders on
December 29, 2000, as a discontinued operation.