Eaton Reports Q2 2001 Operating Earnings Per Share of 94 Cents
CLEVELAND--July 16, 2001--Diversified industrial manufacturer Eaton Corporation today announced operating earnings per share of 94 cents for the second quarter of 2001, 43 percent below comparable results one year earlier. Sales in the quarter were $1.87 billion, 14 percent below last year. Net income from continuing operations before unusual items was $66 million versus last year's $123 million.During the quarter, the company recognized charges of $16 million related to the restructuring of its Truck, Fluid Power and Industrial & Commercial Controls segments. It also recorded a one-time corporate charge of $10 million related to a previously announced arbitration award. After all unusual items in both periods, second quarter net income from continuing operations was $49 million compared to $123 million one year ago.
For the first six months of 2001, operating earnings per share were $1.98 on sales of $3.85 billion. Comparable first half 2000 earnings were $3.16 per share, on sales of $4.35 billion.
Alexander M. Cutler, chairman and chief executive officer, said, "After lowering expectations three weeks ago, today we are reporting second quarter earnings near the upper end of the indicated range.
"These are tough times for U.S. manufacturing, and for Eaton. While we remain hopeful that, in aggregate, we are seeing a bottoming in activity levels, we do not anticipate that our North American markets will rebound meaningfully before year-end. In addition, European, Asian and, to a lesser extent, South American markets are beginning to decline in lagged response to the North American weakness.
"In this environment, we continue to focus intently on activities we can control. The benefits of the first quarter restructuring of our Truck business were demonstrated by its break-even performance in the second quarter despite the worst industry conditions in more than a decade, and a further ratcheting down from first quarter activity levels. The acceleration of our remaining restructuring and integration activities in Fluid Power is well underway, and improvements in operating performance should be increasingly evident later this year.
"Despite much lower earnings, we generated $110 million more cash through the first half of this year than one year ago because of good control over working and fixed capital. Our mid-year net debt-to-capital ratio stands near 50 percent compared to 55 percent at the beginning of the year.
"We have already begun to invest the expected $30 million third quarter gains from the sale of non-core businesses in a further reduction in structural costs, principally in our Industrial & Commercial Controls segment, where we expect markets to remain weak into next year.
"Automotive continues to do an excellent job juggling a record level of new platform launches while operating in very difficult markets that, in North America, seem to be showing modest signs of improvement.
"Whatever the near-term economic environment, we remain committed to demonstrating that Eaton can be a premier diversified industrial. As our markets return to more normal operating conditions, our owners, employees and customers will see the full benefits of Eaton's focus and actions reflected in the superior operating performance of this changed enterprise."
Business Segment Results
Second quarter sales of Eaton's largest business segment, Fluid Power, were $656 million, 4 percent below one year earlier. Excluding the impact of three acquisitions made over the past year, comparable sales were off about 8 percent compared to a nearly 19 percent drop in North American fluid power industry shipments. Segment profits before restructuring charges were $60 million, down 24 percent from one year ago.
Said Cutler, "Outside of aerospace, where we continue to expect shipments to be up 10 percent to 15 percent this year, market conditions remain very weak. This is particularly true in North America, where the decline in industry shipments has greatly exceeded that of relatively stagnant end markets for mobile and industrial hydraulics. This severe inventory liquidation by dealers and OEMs shows some signs of abating but we anticipate that end markets will remain weak throughout the remainder of 2001.
"The acceleration of our restructuring and integration activities in Fluid Power is progressing rapidly. We are creating one seamless business that is more customer oriented and cost effective. Nearly 400 positions were eliminated by mid-year, with the balance of the program to be completed by the end of this quarter."
Second quarter Industrial & Commercial Controls sales were $564 million, down almost 7 percent from last year. Excluding divestitures, sales were off about 4 percent compared to a 5 percent decline in North American markets. Segment profits were $53 million before charges, off 18 percent from one year ago.
"This segment experienced a considerable market weakening in the second quarter," said Cutler, "particularly in the more profitable distributor channel, where inventories are being sharply reduced, and in industrial controls, where industry shipments were off more than 18 percent from last year. Electrical distribution markets, more closely tied to long-cycle construction projects, have held up better, but are now off 2 percent year to year, and expected to remain weak into 2002.
"As indicated earlier, we are aggressively addressing structural costs in this business. In the second quarter, we recognized $4 million in restructuring costs and we anticipate spending about another $20 million in the current quarter."
Second quarter Automotive segment sales of $391 million were 1 percent below year ago levels excluding sales of the divested Vehicle Switch and Electronics Division, which are now reported in Divested Operations. This compares to a 10 percent decline in NAFTA automotive output, flat European production, and a 20 percent increase in South America. Segment profits of $55 million were down 13 percent from one year ago.
Said Cutler, "The Automotive segment had an excellent quarter considering still very difficult North American operating conditions and gradually weakening European markets. We are significantly outpacing industry sales trends because of penetration and market share gains. We are also managing a record level of new product launches for model years 2002-2004, which are increasing current engineering and R&D costs but also give us confidence that the fine performance of this business will continue in the years ahead."
Truck segment sales of $260 million were 36 percent below last year's second quarter. NAFTA Class 8 truck production during the period was down 47 percent, NAFTA medium duty trucks were off 34 percent, European truck output was off 4 percent and South American commercial vehicle production was down 15 percent. Before restructuring charges, the segment operated at breakeven compared to operating profits of $52 million one year ago.
Said Cutler, "We are clearly seeing the benefits of our restructuring in the operating performance of this business. Market conditions in the NAFTA region remain extraordinarily depressed. Second quarter sales were $21 million lower than depressed first quarter sales, but the business remained at breakeven. We have completed the European medium truck business restructuring and will effectively finish restructuring our European heavy truck unit this quarter.
"A year of severe production declines has eliminated much of the industry-wide glut of new trucks in NAFTA, though stocks of good used trucks remain excessive and will continue to depress production through year-end. The impact of lower diesel fuel prices, easier credit conditions and more stable freight demand should also begin to improve market conditions as we move into 2002.
Our worldwide business is now sized and structured to take full advantage of any upturn."
During the quarter, Eaton acquired the commercial clutch manufacturing assets of Transmisiones TSP, S.A. de C.V., for an undisclosed amount.
The financial results
The company's comparative financial results for the three and six months ended June 30, 2001 and 2000 follows:
Eaton Corporation
Comparative Financial Summary
Three months ended
June 30
--------------------
(Millions except for per share data) 2001 2000
---- ----
Continuing operations
Net sales $1,871 $2,169
Income before income taxes 74 186
Income after income taxes $ 49 $ 123
Income from discontinued operations 22
------ ------
Net income $ 49 $ 145
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.69 $ 1.66
Discontinued operations 0.30
------ ------
$ 0.69 $ 1.96
====== ======
Basic
Continuing operations $ 0.70 $ 1.69
Discontinued operations 0.30
------ ------
$ 0.70 $ 1.99
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.7 74.1
Basic 69.5 73.2
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 $ 49 $ 123
Excluding (after-tax)
Unusual charges 17 7
Gain on sales of businesses
Gain on sales of corporate assets (7)
------ ------
Operating earnings from continuing operations $ 66 $ 123
====== ======
Income from continuing operations per Common Share -
assuming dilution $ 0.69 $ 1.66
Per share impact of unusual items 0.25 (0.01)
------ ------
Operating earnings per Common Share
Continuing operations 0.94 1.65
Discontinued operations 0.30
------ ------
$ 0.94 $ 1.95
====== ======
Cash operating earnings per Common Share
Continuing operations $ 1.22 $ 1.92
Discontinued operations 0.33
------ ------
$ 1.22 $ 2.25
====== ======
Six months ended
June 30
-------------------
(Millions except for per share data) 2001 2000
---- ----
Continuing operations
Net sales $3,854 $4,353
Income before income taxes 178 362
Income after income taxes $ 99 $ 236
Income from discontinued operations 40
------ ------
Net income $ 99 $ 276
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 1.41 $ 3.19
Discontinued operations 0.54
------ ------
$ 1.41 $ 3.73
====== ======
Basic
Continuing operations $ 1.43 $ 3.23
Discontinued operations 0.55
------ ------
$ 1.43 $ 3.78
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.4 74.0
Basic 69.2 73.1
Cash dividends paid per Common Share $ 0.88 $ 0.88
Reconciliation of income from continuing operations
to operating earnings from continuing operations
---------------------------------------------------
Income from continuing operations $ 99 $ 236
Excluding (after-tax)
Unusual charges 47 12
Gain on sales of businesses (7)
Gain on sales of corporate assets (14)
------ ------
Operating earnings from continuing operations $ 139 $ 234
====== ======
Income from continuing operations per Common Share -
assuming dilution $ 1.41 $ 3.19
Per share impact of unusual items 0.57 (0.03)
------ ------
Operating earnings per Common Share
Continuing operations 1.98 3.16
Discontinued operations 0.54
------ ------
$ 1.98 $ 3.70
====== ======
Cash operating earnings per Common Share
Continuing operations $ 2.55 $ 3.69
Discontinued operations 0.60
------ ------
$ 2.55 $ 4.29
====== ======
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
June 30
--------------------
(Millions except for per share data) 2001 2000
---- ----
Net sales $1,871 $2,169
Costs & expenses
Cost of products sold 1,400 1,564
Selling & administrative 303 334
Research & development 53 70
------ ------
1,756 1,968
------ ------
Income from operations 115 201
Other income (expense)
Interest expense - net (38) (45)
Gain on sales of businesses
Other - net (3) 30
------ ------
(41) (15)
------ ------
Income from continuing operations
before income taxes 74 186
Income taxes 25 63
------ ------
Income from continuing operations 49 123
Income from discontinued operations 22
------ ------
Net income $ 49 $ 145
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.69 $ 1.66
Discontinued operations 0.30
------ ------
$ 0.69 $ 1.96
====== ======
Basic
Continuing operations $ 0.70 $ 1.69
Discontinued operations 0.30
------ ------
$ 0.70 $ 1.99
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.7 74.1
Basic 69.5 73.2
Cash dividends paid per Common Share $ 0.44 $ 0.44
Six months ended
June 30
-------------------
(Millions except for per share data) 2001 2000
---- ----
Net sales $3,854 $4,353
Costs & expenses
Cost of products sold 2,897 3,145
Selling & administrative 624 674
Research & development 121 138
------ ------
3,642 3,957
------ ------
Income from operations 212 396
Other income (expense)
Interest expense - net (80) (89)
Gain on sales of businesses 38
Other - net 8 55
------ ------
(34) (34)
------ ------
Income from continuing operations
before income taxes 178 362
Income taxes 79 126
------ ------
Income from continuing operations 99 236
Income from discontinued operations 40
------ ------
Net income $ 99 $ 276
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 1.41 $ 3.19
Discontinued operations 0.54
------ ------
$ 1.41 $ 3.73
====== ======
Basic
Continuing operations $ 1.43 $ 3.23
Discontinued operations 0.55
------ ------
$ 1.43 $ 3.78
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.4 74.0
Basic 69.2 73.1
Cash dividends paid per Common Share $ 0.88 $ 0.88
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, December 31,
(Millions) 2001 2000
---- ----
ASSETS
Current assets
Cash & short-term investments $ 207 $ 126
Accounts receivable 1,215 1,219
Inventories 781 872
Deferred income taxes & other current assets 336 354
------ ------
2,539 2,571
Property, plant & equipment 2,105 2,274
Goodwill 1,922 2,026
Other intangible assets 552 556
Deferred income taxes & other assets 749 753
------ ------
$7,867 $8,180
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 105 $ 557
Accounts payable 332 396
Accrued compensation 165 199
Accrued income & other taxes 280 192
Other current liabilities 786 763
------ ------
1,668 2,107
Long-term debt 2,544 2,447
Postretirement benefits other than pensions 677 679
Deferred income taxes & other liabilities 520 537
Shareholders' equity 2,458 2,410
------ ------
$7,867 $8,180
====== ======
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
June 30
--------------------
(Millions) 2001 2000
---- ----
Net sales
Automotive $ 391 $ 396
Fluid Power 656 681
Industrial & Commercial Controls 564 604
Truck 260 405
------ ------
Total ongoing operations 1,871 2,086
Divested operations 83
------ ------
Total net sales $1,871 $2,169
====== ======
Operating profit
Automotive $ 55 $ 63
Fluid Power 53 69
Industrial & Commercial Controls 49 65
Truck (5) 52
------ ------
Total ongoing operations 152 249
Divested operations 2
Amortization of goodwill & other intangible assets (24) (25)
Interest expense - net (38) (45)
Gain on sales of businesses
Corporate & other - net (16) 5
------ ------
Income from continuing operations
before income taxes 74 186
Income taxes 25 63
------ ------
Income from continuing operations 49 123
Income from discontinued operations 22
------ ------
Net income $ 49 $ 145
====== ======
Six months ended
June 30
--------------------
(Millions) 2001 2000
---- ----
Net sales
Automotive $ 776 $ 803
Fluid Power 1,329 1,346
Industrial & Commercial Controls 1,123 1,183
Truck 541 848
------ ------
Total ongoing operations 3,769 4,180
Divested operations 85 173
------ ------
Total net sales $3,854 $4,353
====== ======
Operating profit
Automotive $ 109 $ 130
Fluid Power 115 136
Industrial & Commercial Controls 99 114
Truck (43) 112
------ ------
Total ongoing operations 280 492
Divested operations 7 8
Amortization of goodwill & other intangible assets (48) (48)
Interest expense - net (80) (89)
Gain on sales of businesses 38
Corporate & other - net (19) (1)
------ ------
Income from continuing operations
before income taxes 178 362
Income taxes 79 126
------ ------
Income from continuing operations 99 236
Income from discontinued operations 40
------ ------
Net income $ 99 $ 276
====== ======
See accompanying notes.
Eaton Corporation
Notes to the Second 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 Six months ended
June 30 June 30
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Operational restructuring charges
Fluid Power $ 7 $ 10 $ 14 $ 18
Industrial & Commercial Controls 4 4
Truck 5 43
Corporate 10 10
---- ---- ---- ----
Pretax $ 26 $ 10 $ 71 $ 18
==== ==== ==== ====
After-tax $ 17 $ 7 $ 47 $ 12
Per Common Share .25 .09 .67 .16
The operational restructuring charges were primarily associated with
the restructuring of the Company's Truck business announced in the
first quarter of 2001 and the ongoing integration of Aeroquip-Vickers.
The corporate charge of $10 million related primarily to a binding
arbitration award in connection with a contractual dispute over supply
arrangements with a subsidiary of Eaton. The court action was
initiated in February 1999 against Vickers Inc., part of
Aeroquip-Vickers Inc., which was acquired by Eaton in April 1999.
The operational restructuring charges for 2001 and 2000 are included
in the Statements of Consolidated Income in Income from operations and
reduced operating profit of the related business segment. The $10
million corporate charge is included in the Statements of Consolidated
Income in Other expense -- net and in Business Segment Information in
Corporate & other -- net.
Gains on Sales of Businesses and Other Corporate Assets
-------------------------------------------------------
During the first quarter of 2001, in separate transactions the Company
sold the Vehicle Switch/Electronics Division (VS/ED) for $300 million
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). In Business Segment Information,
the operating results of VS/ED are included in divested operations for
all periods presented.
Income for the second quarter of 2000 was increased by a net pretax
gain on the sale of a corporate asset of $12 million ($7 million
after-tax, or $.10 per Common Share). Income for the first half of
2000 was increased by a net pretax gain on the sales of corporate
assets of $22 million ($14 million after-tax, or $.19 per Common
Share). The gains in 2000 were 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 half of 2001 was 44.3%.
The higher rate in 2001 compared to the same period in 2000 was
attributable to the tax effect of book/tax basis differences related
to businesses sold in the first quarter of 2001, which increased tax
expense by $18 million. Excluding the negative tax consequences of
these transactions, the effective tax rate for the first half 2001 was
34.0% compared to 34.9% in 2000.
Discontinued Operations
-----------------------
The condensed consolidated financial statements present the
semiconductor equipment operations as a discontinued operation. These
operations were spun-off to Eaton shareholders on December 29, 2000.
Financial Presentation Changes
------------------------------
Certain amounts for prior years have been reclassified to conform to
the current year presentation.