Eaton Reports Fourth Quarter Operating Earnings Drop 37%
CLEVELAND--Jan. 22, 2002--Diversified industrial manufacturer Eaton Corporation today announced operating earnings per share of 65 cents for the fourth quarter of 2001, 37 percent below comparable results one year earlier. Sales in the quarter were $1.69 billion, 13 percent below last year. Net income before unusual items was $47 million compared to $72 million in 2000.During the quarter, the company recognized pre-tax charges of $25 million related to the restructuring of its operations. After all unusual items in both periods, fourth quarter net income was $30 million with earnings per share of $.42, compared to $58 million and $.83 last year.
For the full year 2001, operating earnings per share were $3.30 on sales of $7.3 billion. Comparable earnings in 2000 were $5.28 per share, on sales of $8.3 billion. After all unusual items in both periods, full year net income per share for 2001 was $2.39 on net income of $169 million, which is comparable to $5.00 per share and net income of $363 million in 2000 for continuing operations.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "Eaton's fourth quarter earnings are in line with our expectations, in spite of weaker end markets than we had anticipated at the beginning of the quarter. Our credible operating performance in this continued period of end market weakness is a direct testament to the effectiveness of our restructuring actions and the continued focused efforts of Eaton employees around the world.
"2001 was an exceptionally challenging year, as market conditions declined all year long. In this difficult operating environment, Eaton's operating results were bolstered by our early decisions to resize the corporation. Eaton incurred $119 million of restructuring charges, which should deliver $100 million of net savings in 2002. Throughout 2001, another major focus was to strengthen our balance sheet. We have achieved exceptional results in this respect. Eaton's net debt leverage is now below 47 percent, having paid off more than $560 million of debt during 2001.
"Our forecast for our end markets during 2002 has changed. In several of our businesses, the markets were not as strong in the fourth quarter as had been anticipated. We expect that Eaton's end markets will decline further in the first quarter and will remain below current levels until the second half of 2002.
"We remain focused on controlling our expenses, working capital and capital expenditures in this uncertain economic environment. We have initiated an additional $55 million of restructuring actions in our Truck, Fluid Power and Industrial & Commercial Controls segments. The majority of these costs will be incurred in the first quarter of this year. We expect that these additional restructuring actions will produce approximately $30 million of savings in 2002.
"Our 2002 operating earnings guidance is $4.25 to $4.50 per share, including the $.87 per share positive impact of the Statement of Financial Accounting Standards No. 142 related to goodwill and other intangible assets. We anticipate that first quarter 2002 operating earnings per share will be in the $.85 to $.95 range. Eaton will be significantly cash flow positive again in 2002," said Cutler.
Business Segment Results
------------------------
Fourth quarter sales of Eaton's largest business segment, Fluid Power, were $578 million, 8 percent below one year earlier. This compares to a decline of about 10 percent in Fluid Power's markets, with North American fluid power industry shipments off about 15 percent, and aerospace markets off about 5 percent. Segment profits before restructuring costs were $41 million, down 43 percent from a year ago.
"The traditional mobile and industrial hydraulics markets have remained very weak and we still do not anticipate significant recovery in these markets until the middle of the second half of 2002," said Cutler. "The anticipated weakening of the aerospace market is materializing. We continue to foresee a 25-30 percent decline in the commercial aircraft markets this year, offset by a 5 percent improvement in military markets. As the result of the comprehensive resizing of our Fluid Power business in 2001, this segment is well positioned for a solid rebound in 2002."
During the quarter, the company announced its new Hydraulic Launch Assist technology, which has the potential to improve the fuel economy of commercial vehicles by 25 to 35 percent. The sales potential for this new technology could approach $500 million by mid-decade.
In addition, new multi-year order commitments were announced recently, including approximately $1 billion for the Lockheed Martin Joint Strike Fighter program and multi-year programs totaling nearly $250 million with GE, Airbus and BMW.
Fourth quarter Industrial & Commercial Controls sales were $528 million, down 14 percent from last year. Excluding divestitures, sales were off about 12 percent, compared to an estimated 27 percent decline in North American markets. Segment profits were $44 million before restructuring charges, down 31 percent from one year ago.
"We are now seeing a significant weakening of the end markets for this segment," said Cutler. "Traditionally a late-cycle business, the large-project business is weakening and we expect that the market conditions in this segment will not improve until the end of 2002. We have outgrown our end markets, despite these poor conditions. We are particularly pleased with the continued growth and improved profitability of our Engineering Services and Systems (CHESS) business. And we expect that the benefits of our restructuring efforts will drive improved levels of profitability in 2002."
Fourth quarter Automotive segment sales of $354 million were virtually the same as a year ago, compared to a 3 percent decrease in NAFTA automotive production and a 3 percent decrease in European automotive production. Segment profits were $44 million, compared to $46 million a year ago.
"Our Automotive segment recorded another strong quarter of performance, during a time of weekly fluctuations in customer demand," said Cutler. "For both the fourth quarter and full year 2001, we have once again clearly outgrown the end markets, and we expect to continue this level of performance in 2002."
Yesterday the company announced that it received a contract from General Motors Corporation's Tier One mirror suppliers to provide memory glass and power-folding mirror actuators for a wide range of pick-up trucks and sport utility vehicles, beginning in 2002. The full life of the contract has a revenue value of $160 million. During the quarter, the company announced that it completed the acquisition of the European portion of the vehicle mirror actuator business of Donnelley Corporation, located in Manorhamilton, Ireland.
Fourth quarter Truck segment sales of $235 million were 14 percent below those in the same period last year. NAFTA heavy truck production for the quarter was down 30 percent, NAFTA medium-duty truck production was up 5 percent, European truck production was down 17 percent and South American production was down by 8 percent. Before restructuring charges, segment operating losses were $9 million compared to $12 million a year ago.
"After three quarters of breakeven operating results, the Truck segment showed a loss in the fourth quarter of 2001," said Cutler. "Compared to fourth quarter 2000, losses were reduced by $3 million on a $38 million drop in volume. Given the continued decline in our Truck segment's end markets, it is clear that the benefits of our restructuring program are being realized. We expect that NAFTA heavy-duty truck production will reach 150,000 units in 2002, up marginally from 2001 levels. As the market begins to strengthen later this year and then more strongly in 2003, we are very confident of the earnings leverage in this business."
Eaton is a global $7.3 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 49,000 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 fourth quarter results is available to all interested parties via live audio webcast today at 10:00 a.m. EST on Eaton's Investor Relations website at http://www.shareholder.com/etn/.
This news release contains forward-looking statements concerning
the first quarter 2002 and the year 2002 operating earnings per
share, our worldwide markets, benefits from our restructuring
programs, cash flow and volumes from new business awards. These
statements are subject to various risks and uncertainties, many of
which are outside of 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
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 or unexpected costs that
cannot be recouped in product pricing, introduction of competing
technologies, unexpected technical or marketing difficulties, and
unanticipated 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.
Financial Results
-----------------
The company's comparative financial results for the three and twelve
months ended December 31, 2001 and 2000 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended
December 31
------------------
(Millions except for per share data) 2001 2000
---- ----
Continuing operations
Net sales $1,695 $1,948
Income before income taxes 39 85
Income after income taxes 30 58
Income from continuing operations per Common Share
Assuming dilution $ 0.42 $ 0.83
Basic 0.42 0.84
Average number of Common Shares outstanding
Assuming dilution 70.6 70.1
Basic 69.6 69.6
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 $ 30 $ 58
Excluding (after-tax)
Unusual charges 17 14
------ ------
Operating earnings from continuing operations $ 47 $ 72
====== ======
Income from continuing operations per Common Share -
assuming dilution $ 0.42 $ 0.83
Per share impact of unusual items 0.23 0.20
------ ------
Operating earnings from continuing operations
per Common Share $ 0.65 $ 1.03
====== ======
Cash operating earnings from continuing operations
per Common Share $ 0.91 $ 1.31
This summary includes amounts for continuing operations only. This
summary excludes the semiconductor equipment operations which were
spun-off to Eaton Shareholders on December 29, 2000 and are reported
as a discontinued operation.
See accompanying notes.
Comparative Financial Summary
Twelve months ended
December 31
-------------------
(Millions except for per share data) 2001 2000
---- ----
Continuing operations
Net sales $7,299 $8,309
Income before income taxes 278 552
Income after income taxes 169 363
Income from continuing operations per Common Share
Assuming dilution $ 2.39 $ 5.00
Basic 2.43 5.06
Average number of Common Shares outstanding
Assuming dilution 70.5 72.6
Basic 69.4 71.8
Cash dividends paid per Common Share $ 1.76 $ 1.76
Reconciliation of income from continuing operations
to operating earnings from continuing operations
---------------------------------------------------
Income from continuing operations $ 169 $ 363
Excluding (after-tax)
Unusual charges 86 34
Gain on sales of businesses (22)
Gain on sales of corporate assets (14)
------ ------
Operating earnings from continuing operations $ 233 $ 383
====== ======
Income from continuing operations per Common Share -
assuming dilution $ 2.39 $ 5.00
Per share impact of unusual items 0.91 0.28
------ ------
Operating earnings from continuing operations
per Common Share $ 3.30 $ 5.28
====== ======
Cash operating earnings from continuing operations
per Common Share $ 4.40 $ 6.37
This summary includes amounts for continuing operations only. This
summary excludes the semiconductor equipment operations which were
spun-off to Eaton Shareholders on December 29, 2000 and are reported
as a discontinued operation.
See accompanying notes.
Statements of Consolidated Income
Three months ended
December 31
------------------
(Millions except for per share data) 2001 2000
---- ----
Net sales $1,695 $1,948
Costs & expenses
Cost of products sold 1,280 1,455
Selling & administrative 296 320
Research & development 51 63
------ ------
1,627 1,838
------ ------
Income from operations 68 110
Other income (expense)
Interest expense - net (29) (46)
Other - net 21
------ ------
(29) (25)
------ ------
Income from continuing operations before income taxes 39 85
Income taxes 9 27
------ ------
Income from continuing operations 30 58
Income from discontinued operations 26
------ ------
Net income $ 30 $ 84
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 0.42 $ 0.83
Discontinued operations 0.37
------ ------
$ 0.42 $ 1.20
====== ======
Basic
Continuing operations $ 0.42 $ 0.84
Discontinued operations 0.37
------ ------
$ 0.42 $ 1.21
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.6 70.1
Basic 69.6 69.6
Cash dividends paid per Common Share $ 0.44 $ 0.44
See accompanying notes.
Statements of Consolidated Income
Twelve months ended
December 31
-------------------
(Millions except for per share data) 2001 2000
---- ----
Net sales $7,299 $8,309
Costs & expenses
Cost of products sold 5,503 6,092
Selling & administrative 1,220 1,299
Research & development 228 269
------ ------
6,951 7,660
------ ------
Income from operations 348 649
Other income (expense)
Interest expense - net (142) (177)
Gain on sales of businesses 61
Other - net 11 80
------ ------
(70) (97)
------ ------
Income from continuing operations before income taxes 278 552
Income taxes 109 189
------ ------
Income from continuing operations 169 363
Income from discontinued operations 90
------ ------
Net income $ 169 $ 453
====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ 2.39 $ 5.00
Discontinued operations 1.24
------ ------
$ 2.39 $ 6.24
====== ======
Basic
Continuing operations $ 2.43 $ 5.06
Discontinued operations 1.25
------ ------
$ 2.43 $ 6.31
====== ======
Average number of Common Shares outstanding
Assuming dilution 70.5 72.6
Basic 69.4 71.8
Cash dividends paid per Common Share $ 1.76 $ 1.76
See accompanying notes.
Business Segment Information
Three months ended
December 31
------------------
(Millions) 2001 2000
---- ----
Net sales
Fluid Power $ 578 $ 631
Industrial & Commercial Controls 528 616
Automotive 354 353
Truck 235 273
------ ------
Total ongoing operations 1,695 1,873
Divested operations 75
------ ------
Total net sales $1,695 $1,948
====== ======
Operating profit (loss)
Fluid Power $ 37 $ 55
Industrial & Commercial Controls 37 64
Automotive 44 46
Truck (15) (12)
------ ------
Total ongoing operations 103 153
Divested operations (1) (2)
Amortization of goodwill & other intangible assets (22) (24)
Interest expense - net (29) (46)
Corporate & other - net (12) 4
------ ------
Income from continuing operations before income taxes 39 85
Income taxes 9 27
------ ------
Income from continuing operations 30 58
Income from discontinued operations 26
------ ------
Net income $ 30 $ 84
====== ======
See accompanying notes.
Business Segment Information
Twelve months ended
December 31
-------------------
(Millions) 2001 2000
---- ----
Net sales
Fluid Power $2,507 $2,607
Industrial & Commercial Controls 2,199 2,421
Automotive 1,479 1,502
Truck 1,029 1,456
------ ------
Total ongoing operations 7,214 7,986
Divested operations 85 323
------ ------
Total net sales $7,299 $8,309
====== ======
Operating profit (loss)
Fluid Power $ 183 $ 235
Industrial & Commercial Controls 163 251
Automotive 194 214
Truck (64) 107
------ ------
Total ongoing operations 476 807
Divested operations 6 8
Amortization of goodwill & other intangible assets (94) (95)
Interest expense - net (142) (177)
Gain on sales of businesses 61
Corporate & other - net (29) 9
------ ------
Income from continuing operations before income taxes 278 552
Income taxes 109 189
------ ------
Income from continuing operations 169 363
Income from discontinued operations 90
------ ------
Net income $ 169 $ 453
====== ======
See accompanying notes.
Condensed Consolidated Balance Sheets
December 31,
----------------
(Millions) 2001 2000
---- ----
ASSETS
Current assets
Cash & short-term investments $ 311 $ 126
Accounts receivable 1,070 1,219
Inventories 681 872
Deferred income taxes & other current assets 325 354
------ ------
2,387 2,571
Property, plant & equipment 2,050 2,274
Goodwill 1,902 2,026
Other intangible assets 533 556
Other assets 774 753
------ ------
$7,646 $8,180
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of long-term debt $ 188 $ 557
Accounts payable 337 396
Accrued compensation 158 199
Accrued income & other taxes 258 192
Other current liabilities 728 763
------ ------
1,669 2,107
Long-term debt 2,252 2,447
Postretirement benefits other than pensions 670 679
Deferred income taxes & other liabilities 580 537
Shareholders' equity 2,475 2,410
------ ------
$7,646 $8,180
====== ======
See accompanying notes.
Notes to the Fourth 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 Twelve months ended
December 31 December 31
------------------ -------------------
2001 2000 2001 2000
---- ---- ---- ----
Operational restructuring
charges
Fluid Power $ 4 $ 17 $ 22 $ 47
Industrial & Commercial
Controls 7 30
Truck 6 55
Corporate charges 8 4 22 5
---- ---- ---- ----
Pretax $ 25 $ 21 $129 $ 52
==== ==== ==== ====
After-tax $ 17 $ 14 $ 86 $ 34
Per Common Share .23 .20 1.21 .47
During 2001, the Company undertook restructuring actions that were needed to maintain a competitive advantage in the current economic environment. These charges are summarized above as Operational restructuring charges. The Fluid Power segment incurred charges throughout the year in association with the ongoing integration of Aeroquip-Vickers and other recent business acquisitions. The Industrial and Commercial Controls segment announced a restructuring program for the year in the second quarter and took charges in each remaining quarter. The Truck segment announced a plan in the first quarter and recorded charges, when appropriate, in each quarter of the year.
The corporate charges for the full year 2001 were due to a binding arbitration award settled in the second quarter related to a contractual dispute over supply arrangements associated with a subsidiary of Eaton, and the restructuring of certain corporate functions in the third and fourth quarters. 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 charge of $8 million was recognized in the fourth quarter relating primarily to actions to reduce and restructure corporate staff (a similar charge of $4 million was recognized in the third quarter).
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 Income from operations, except for $11 million in 2001, which primarily related to the arbitration award discussed above and is included in Other expense - net. All of the corporate charges are included in Business Segment Information in Corporate & other - net.
Gains on Sales of Businesses and Other Corporate Assets
-------------------------------------------------------
For the full year 2001, the Company sold businesses resulting in a pretax gain of $61 million ($22 million after-tax, or $.30 per Common Share). The Air Conditioning & Refrigeration business and certain assets of the Automotive segment were sold in the third quarter. The Vehicle Switch/Electronics Division (VS/ED) was divested in the first quarter as well as certain assets of the Truck segment. In Business Segment Information, the operating results of VS/ED are included in divested operations for all periods presented.
Income for full year 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). 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 fourth quarter of 2001 was 24.9% compared to 41.8% for the nine months ended September 30, 2001 (including the tax consequences related to all sales of businesses described below) and 31.8% in the fourth quarter of 2000. The lower rate in the fourth quarter of 2001 was related to adjustments of worldwide tax liabilities, including claims filed for research credits in prior years.
Excluding the tax consequences on all sales of businesses, the effective tax rate for the full year 2001 was 33.0% compared to 34.2% in 2000. Including the negative tax consequences of the gain on sales of businesses, the effective income tax rate for the full year 2001 was 39.4%. The higher rate in 2001 was primarily the result of 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.
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.