Eaton Reports Third Quarter Operating Earnings of 66 Cents Per Share Down 38%
CLEVELAND--Oct. 15, 2001--Diversified industrial manufacturer Eaton Corporation today announced operating earnings per share of 66 cents for the third quarter of 2001, 38 percent below comparable results one year earlier. Sales in the quarter were $1.75 billion, 13 percent below last year. Net income before unusual items was $47 million versus last year's $77 million.During the quarter, the company recognized pre-tax charges of $33 million related to the restructuring of its operations. It also realized a gain of $23 million from the sale of non-core businesses. After all unusual items in both periods, third quarter net income was $40 million compared to $69 million one year ago.
For the first nine months of 2001, operating earnings per share were $2.64 on sales of $5.60 billion. Comparable earnings last year were $4.23 per share, on sales of $6.36 billion.
Alexander M. Cutler, chairman and chief executive officer, said, "Eaton's third quarter earnings came in about where we expected in the wake of the September 11, 2001 terrorist attack on our nation. While it is still early to accurately assess the full impact of that tragedy on the U.S. and world economy, we remain comfortable with the guidance we provided earlier for Eaton's fourth quarter 2001 and full year 2002 prospects.
"The rough parallel to the current situation that we have found helpful is the Gulf War of 1990 -- 1991. If the analogy holds, the overall U.S. economy will decline again in the fourth quarter and then should begin to regain its bearings sometime next spring, with a recovery that is aided by the full impact of a year's monetary easing, low inflation, tax cuts and additional fiscal stimulus," Cutler said. "International markets are trailing the U.S. economy with the normal 6-month lag, and are expected to continue weakening throughout the next year.
"We expect Eaton's markets will be down again this quarter and remain below year-ago levels until the second half of 2002. The eventual market rebound will be first reflected in our Truck and Automotive segments, with the turnaround in our Fluid Power and Industrial & Commercial Controls segments not anticipated before year-end.
"Because of our aggressive actions earlier in the year, Eaton is in good shape to weather these extended, difficult operating conditions. The $110 million we will have invested in restructuring Eaton this year should deliver $75 million in net savings to the bottom line in 2002. Eaton's net debt leverage is now below 50 percent, and we will have paid off over $500 million of debt by year-end. While the economic environment remains highly uncertain, we anticipate fourth quarter 2001 operating earnings will be in the range of 60-70 cents per share. Our 2002 operating earnings guidance of $3.75-$4.25 per share is also unchanged, but will be boosted by 87 cents per share after taking into account the impact of SFAS 142. The company should be significantly cash flow positive again in 2002," said Cutler.
"While the global business environment remains highly uncertain, we are determined to remain focused on that which we can control, and actions we can take, to ensure that Eaton delivers superior performance to our owners over the near- and long-term horizon."
Business Segment Results
Third quarter sales of Eaton's largest business segment, Fluid Power, were $600 million, 5 percent below one year earlier. Excluding the impact of acquisitions and divestitures made over the past year, comparable sales were off about 10 percent. This compares with about an 11 percent decline in Fluid Power's markets, with North American fluid power industry shipments off about 18 percent and aerospace markets up about 3 percent. Segment profits before restructuring charges were $35 million, off 38 percent from one year ago.
Said Cutler, "Traditional mobile and industrial hydraulics markets remain very weak and aren't anticipated to recover before mid-2002. Aerospace, which has been strong, is now quickly softening. The 25 percent decline we expect in commercial aircraft markets next year will be only partially offset by a 5 percent rise in military markets. We expect to outperform on both the top and bottom lines next year, driven by recent program wins and the cumulative benefits of current restructuring actions."
During the quarter, the company announced it had won new customer awards with potential sales of more than $500 million over several years. It also announced it had sold its Air Conditioning and Refrigeration business for an undisclosed amount.
Third quarter Industrial & Commercial Controls sales were $548 million, down 12 percent from last year. Excluding divestitures, sales were off about 9 percent compared to an estimated 16 percent decline in North American markets. Segment profits were $46 million before restructuring charges, off 37 percent from one year ago.
Said Cutler, "This segment, which normally lags the overall economy, is now fully reflecting the prior weakness in industrial activity. We have outgrown our markets because of share gains, the continued growth of our Engineering Services & Systems (C-H ESS) business, and our participation in power quality markets. Operating margins are being affected by particularly weak distributor business. We anticipate that segment sales will be modestly lower again in 2002 while operating margins should reflect the benefits of this year's planned $28 million investment to reduce structural costs."
Third quarter Automotive segment sales of $349 million were 1 percent above last year. This compares to a 10 percent decline in NAFTA auto production and flat European automotive output. Segment profits of $41 million were 8 percent above one year ago.
"The Automotive segment had another excellent quarter under very difficult market conditions, extending its record as Eaton's most consistent performer over the past 5-10 years. We are measurably outgrowing our end markets because of penetration gains and a record level of new product launches in areas of engine air management, powertrain, and specialty controls," Cutler said.
Truck segment sales of $253 million were 24 percent below last year's third quarter. NAFTA heavy truck production during the period was down 34 percent, NAFTA medium duty trucks were off 22 percent, European truck output was down 9 percent, and South American commercial truck production was down 24 percent. Before restructuring charges, the segment operated at breakeven compared to profits of $7 million one year ago.
Said Cutler, "Considering the extraordinarily depressed industry conditions, the performance of Truck this quarter was excellent, fully reflecting the benefits of this year's earlier restructuring. The segment has operated at breakeven all this year despite a further $30 million decline in volume since the first quarter. Compared to last year's third quarter, profits are off only $7 million despite an $82 million drop in volume. This performance gives us great confidence in the upside potential of the business when the industry finally returns to more normal operating conditions."
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 has 51,000 employees and sells products in more than 50 countries. For more information, visit www.eaton.com.
Notice of Conference Call: Eaton's conference call to discuss its third quarter results is available to all interested parties via live audio webcast at 10 a.m. EST, on Eaton's Investor Relations website at http://www.shareholder.com/etn/.
This news release contains forward-looking statements concerning fourth quarter 2001 and year 2002 operating earnings per share, our worldwide markets, debt leverage and cash flow. 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, failure to implement integration and restructuring plans, 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 unanticipated further deterioration of economic and financial conditions in the United States and around the world resulting from the terrorist attack on September 11 and related matters. We do not assume any obligation to update these forward-looking statements.
The financial results
The company's comparative financial results for the three and nine months ended September 30, 2001 and 2000 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended
September 30
--------------------
(Millions except for per share data)
2001 2000
---- ----
Continuing operations
Net sales $ 1,750 $ 2,008
Income before income taxes 61 105
Income after income taxes $ 40 $ 69
Income from discontinued operations 24
------- -------
Net income $ 40 $ 93
======= =======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.57 $ 0.95
Discontinued operations 0.33
------- -------
$ 0.57 $ 1.28
======= =======
Basic
Continuing operations $ 0.58 $ 0.96
Discontinued operations 0.33
------- -------
$ 0.58 $ 1.29
======= =======
Average number of Common
Shares outstanding
Assuming dilution 70.9 72.8
Basic 69.6 72.0
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 $ 40 $ 69
Excluding (after-tax)
Unusual charges 22 8
Gain on sales of businesses (15)
------- -------
Operating earnings from
continuing operations $ 47 $ 77
======= =======
Income from continuing operations
per Common Share --
assuming dilution $ 0.57 $ 0.95
Per share impact of unusual items 0.09 0.12
------- -------
Operating earnings per Common Share
Continuing operations 0.66 1.07
Discontinued operations 0.33
------- -------
$ 0.66 $ 1.40
======= =======
Cash operating earnings
per Common Share
Continuing operations $ 0.93 $ 1.34
Discontinued operations 0.35
------- -------
$ 0.93 $ 1.69
======= =======
See accompanying notes
Comparative Financial Summary
Nine months ended
September 30
--------------------
(Millions except for per share data)
2001 2000
---- ----
Continuing operations
Net sales $ 5,604 $ 6,361
Income before income taxes 239 467
Income after income taxes $ 139 $ 305
Income from discontinued operations 64
------- -------
Net income $ 139 $ 369
======= =======
Net income per Common Share
Assuming dilution
Continuing operations $ 1.97 $ 4.15
Discontinued operations 0.87
------- -------
$ 1.97 $ 5.02
======= =======
Basic
Continuing operations $ 2.01 $ 4.20
Discontinued operations 0.88
------- -------
$ 2.01 $ 5.08
======= =======
Average number of Common
Shares outstanding
Assuming dilution 70.5 73.5
Basic 69.3 72.6
Cash dividends paid per Common Share $ 1.32 $ 1.32
Reconciliation of income from continuing operations
to operating earnings from continuing operations
------------------------------------------------------
Income from continuing operations $ 139 $ 305
Excluding (after-tax)
Unusual charges 69 20
Gain on sales of businesses (22)
Gain on sales of corporate assets (14)
------- -------
Operating earnings from
continuing operations $ 186 $ 311
======= =======
Income from continuing operations
per Common Share --
assuming dilution $ 1.97 $ 4.15
Per share impact of unusual items 0.67 0.08
------- -------
Operating earnings per Common Share
Continuing operations 2.64 4.23
Discontinued operations 0.87
------- -------
$ 2.64 $ 5.10
======= =======
Cash operating earnings
per Common Share
Continuing operations $ 3.48 $ 5.05
Discontinued operations 0.95
------- -------
$ 3.48 $ 6.00
======= =======
See accompanying notes
Statements of Consolidated Income
Three months ended
September 30
--------------------
(Millions except for per share data)
2001 2000
---- ----
Net sales $ 1,750 $ 2,008
Costs & expenses
Cost of products sold 1,326 1,492
Selling & administrative 300 305
Research & development 56 68
------- -------
1,682 1,865
------- -------
Income from operations 68 143
Other income (expense)
Interest expense -- net (33) (42)
Gain on sales of businesses 23
Other -- net 3 4
------- -------
(7) (38)
------- -------
Income from continuing
operations before income taxes 61 105
Income taxes 21 36
------- -------
Income from continuing operations 40 69
Income from discontinued operations 24
------- -------
Net income $ 40 $ 93
======= =======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.57 $ 0.95
Discontinued operations 0.33
------- -------
$ 0.57 $ 1.28
======= =======
Basic
Continuing operations $ 0.58 $ 0.96
Discontinued operations 0.33
------- -------
$ 0.58 $ 1.29
======= =======
Average number of Common
Shares outstanding
Assuming dilution 70.9 72.8
Basic 69.6 72.0
Cash dividends paid per Common Share $ 0.44 $ 0.44
See accompanying notes.
Statements of Consolidated Income
Nine months ended
September 30
--------------------
(Millions except for per share data)
2001 2000
---- ----
Net sales $ 5,604 $ 6,361
Costs & expenses
Cost of products sold 4,223 4,637
Selling & administrative 924 979
Research & development 177 206
------- -------
5,324 5,822
------- -------
Income from operations 280 539
Other income (expense)
Interest expense -- net (113) (131)
Gain on sales of businesses 61
Other -- net 11 59
------- -------
(41) (72)
------- -------
Income from continuing
operations before income taxes 239 467
Income taxes 100 162
------- -------
Income from continuing operations 139 305
Income from discontinued operations 64
------- -------
Net income $ 139 $ 369
======= =======
Net income per Common Share
Assuming dilution
Continuing operations $ 1.97 $ 4.15
Discontinued operations 0.87
------- -------
$ 1.97 $ 5.02
======= =======
Basic
Continuing operations $ 2.01 $ 4.20
Discontinued operations 0.88
------- -------
$ 2.01 $ 5.08
======= =======
Average number of Common
Shares outstanding
Assuming dilution 70.5 73.5
Basic 69.3 72.6
Cash dividends paid per Common Share $ 1.32 $ 1.32
See accompanying notes.
Business Segment Information
Three months ended
September 30
--------------------
(Millions)
2001 2000
---- ----
Net sales
Fluid Power $ 600 $ 630
Industrial & Commercial Controls 548 622
Automotive 349 346
Truck 253 335
------- -------
Total ongoing operations 1,750 1,933
Divested operations 75
------- -------
Total net sales $ 1,750 $ 2,008
======= =======
Operating profit (loss)
Fluid Power $ 31 $ 44
Industrial & Commercial Controls 27 73
Automotive 41 38
Truck (6) 7
------- -------
Total ongoing operations 93 162
Divested operations 2
Amortization of goodwill
& other intangible assets (24) (23)
Interest expense -- net (33) (42)
Gain on sales of businesses 23
Corporate & other -- net 2 6
------- -------
Income from continuing
operations before income taxes 61 105
Income taxes 21 36
------- -------
Income from continuing operations 40 69
Income from discontinued operations 24
------- -------
Net income $ 40 $ 93
======= =======
See accompanying notes.
Business Segment Information
Nine months ended
September 30
--------------------
(Millions)
2001 2000
---- ----
Net sales
Fluid Power $ 1,929 $ 1,976
Industrial & Commercial Controls 1,671 1,805
Automotive 1,125 1,149
Truck 794 1,183
------- -------
Total ongoing operations 5,519 6,113
Divested operations 85 248
------- -------
Total net sales $ 5,604 $ 6,361
======= =======
Operating profit (loss)
Fluid Power $ 146 $ 180
Industrial & Commercial Controls 126 187
Automotive 150 168
Truck (49) 119
------- -------
Total ongoing operations 373 654
Divested operations 7 10
Amortization of goodwill
& other intangible assets (72) (71)
Interest expense -- net (113) (131)
Gain on sales of businesses 61
Corporate & other -- net (17) 5
------- -------
Income from continuing
operations before income taxes 239 467
Income taxes 100 162
------- -------
Income from continuing operations 139 305
Income from discontinued operations 64
------- -------
Net income $ 139 $ 369
======= =======
See accompanying notes.
Condensed Consolidated Balance Sheets
(Millions)
September 30, December 31,
2001 2000
---- ----
ASSETS
Current assets
Cash & short-term investments $ 211 $ 126
Accounts receivable 1,171 1,219
Inventories 739 872
Deferred income taxes & other current
assets 466 354
------ ------
2,587 2,571
Property, plant & equipment 2,055 2,274
Goodwill 1,902 2,026
Other intangible assets 544 556
Deferred income taxes & other assets 805 753
------ ------
$7,893 $8,180
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 189 $ 557
Accounts payable 329 396
Accrued compensation 174 199
Accrued income & other taxes 374 192
Other current liabilities 814 763
------ ------
1,880 2,107
Long-term debt 2,327 2,447
Postretirement benefits other than pensions 674 679
Deferred income taxes & other liabilities 558 537
Shareholders' equity 2,454 2,410
------ ------
$7,893 $8,180
====== ======
See accompanying notes.
Eaton Corporation
Notes to the Third 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 Nine months ended
September 30 September 30
---------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
Operational restructuring charges
Fluid Power $ 4 $ 13 $ 18 $ 31
Industrial & Commercial Controls 19 23
Truck 6 49
Corporate 4 14
---- ---- ---- ----
Pretax $ 33 $ 13 $104 $ 31
==== ==== ==== ====
After-tax $ 22 $ 8 $ 69 $ 20
Per Common Share .30 .12 .98 .28
The operational restructuring charges were associated with the
restructuring of the Company's Truck business announced in the first
quarter of 2001 and the restructuring of the Industrial & Commercial
Controls segment announced in the second quarter, as well as the
ongoing integration of Aeroquip-Vickers within Fluid Power. The
corporate charge for the first nine months of 2001 related primarily
to a binding arbitration award settled in the second quarter of 2001
in connection with a contractual dispute over supply arrangements
associated with a subsidiary of Eaton. The arbitration award of $10
million resulted from a legal action initiated in February 1999
against Vickers Inc., part of Aeroquip-Vickers Inc., which was
acquired by Eaton in April 1999. A corporate charge of $4 million was
recognized in the third quarter of 2001 relating to actions to
restructure certain corporate functions.
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
corporate charges are included in the Statements of Consolidated
Income in Other expense -- net and in Business Segment Information in
Corporate & other -- net.
Gain on Sales of Businesses and Other Corporate Assets
------------------------------------------------------
During the third quarter of 2001, the Company sold its Air
Conditioning & Refrigeration business and certain assets of the
Automotive business. The sales of these businesses resulted in a net
pretax gain of $23 million ($15 million after-tax, or $.21 per Common
Share).
During the first nine months of 2001, the Company sold businesses
resulting in a pretax gain of $61 million ($22 million after-tax, or
$.31 per Common Share). In addition to the businesses sold in the
third quarter of 2001 noted above, Vehicle Switch/Electronics Division
(VS/ED) was divested in the first quarter of 2001 for $300 million,
and certain assets of the Truck business were also sold in the first
quarter. In Business Segment Information, the operating results of
VS/ED are included in divested operations for all periods presented.
Income for the first nine months of 2000 was increased by a net pretax
gain on the sales of a corporate assets of $22 million ($14 million
after-tax, or $.19 per Common Share). These gains 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 nine months ended September 30,
2001 was 41.8%. The higher rate in 2001 compared to the same period in
2000 was principally 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 tax
consequences on all sales of businesses, the effective tax rate for
the first nine months of 2001 was 34.0% compared to 34.7% 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.