Eaton Reports Second Quarter Operating Earnings Up 32% To $1.24 Per Share
CLEVELAND--July 15, 2002--Diversified industrial manufacturer Eaton Corporation today announced operating earnings per share of $1.24 for the second quarter of 2002, 32 percent above comparable results one year earlier. Sales in the quarter were $1.88 billion, 1 percent above last year. Net income before unusual items was $90 million compared to $66 million in 2001.After all unusual items in both periods, net income in the second quarter of 2002 was 80 percent above 2001, with 2002 net income of $88 million and earnings per share of $1.21, compared to $49 million and $.69 per share in 2001.
For the first six months of 2002, operating earnings per share were $2.17 on sales of $3.60 billion. Comparable first half 2001 operating earnings were $1.98 per share on sales of $3.85 billion. Net income for the first six months of 2002 was $1.68 per share compared to $1.41 per share in 2001. In comparison to 2001, first half 2002 results were favorably impacted by $.44 per share by the adoption of Statement of Financial Accounting Standards No. 142, which discontinued the amortization of goodwill and certain intangible assets, and were unfavorably impacted by $.30 per share due to lower pension income.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are pleased with our second quarter results -- they are at the high end of our own expectations and represent the first year-over-year improvement in our quarterly results since 2000. We are clearly realizing the benefit of the aggressive actions we have taken over the last 18 months to resize our corporation, even though the majority of our end markets remain depressed. We remain on track to realize $130 million of savings in 2002 from these restructuring actions.
"We made further progress implementing the Eaton Business System during the second quarter, with results evident in the continued tight control over working capital and capital expenditures. These improvements helped us to pay down an additional $63 million of debt during the second quarter, bringing the total reduction in debt for the first six months of 2002 to $162 million.
"While our forecast for our overall end markets has improved slightly compared to our view at the end of the first quarter, we still do not expect to see any material recovery until the end of the third quarter.
"We continue to exercise tight control of all expenditures and are fully implementing the additional restructuring activities that we announced at the beginning of this year. Restructuring expense in the second quarter was $3 million, bringing restructuring expenses for the first half to $52 million. We still expect our full-year restructuring expenses to be $59 million.
"We are maintaining full-year operating earnings guidance of $4.25 to $4.50 per share, despite the divestiture of our Navy Controls business, which is expected to close shortly. We anticipate third quarter operating earnings per share will be in the $1.20 to $1.30 range," said Cutler.
Business Segment Results
------------------------
Second quarter sales of Eaton's largest business segment, Fluid Power, were $628 million, 4 percent below one year earlier. This compares to a decline of about 8 percent in Fluid Power's markets, with North American fluid power industry shipments off about 4 percent, and aerospace markets off about 18 percent. Segment profits before restructuring costs were $59 million, $1 million less than last year.
"We do not anticipate a recovery in the traditional mobile and industrial hydraulics markets until year end," said Cutler. "The decline in the aerospace market has been slower than we expected. We now anticipate a 25 to 30 percent decline in commercial aerospace markets in the second half of 2002, offset by a 5 percent improvement in military markets.
"During the second quarter, we purchased the remaining 40 percent interest in our hydraulics systems joint venture company, Jining Eaton Hydraulics Company, Ltd. (JEHYCO), located in Jining, China. JEHYCO is our fourth wholly-owned business in China."
In the Industrial & Commercial Controls segment, second quarter sales were $519 million, down 8 percent from last year, and profits were $44 million before restructuring charges, down 17 percent from one year ago.
"End markets for our electrical business continued to weaken during the second quarter, with an estimated 13 percent decline in the North American markets for this business compared to last year," said Cutler. "We expect that the long-cycle, large-project portion of this business will continue to soften through the balance of this year, with a recovery not expected until year end. The residential market is one of the real bright spots for our electrical business, helping us to significantly outgrow our end markets in the second quarter."
The Automotive segment posted sales of $419 million in the second quarter, 7 percent over the comparable quarter of last year and the highest quarterly sales the Automotive segment has ever recorded. NAFTA automotive production was up 6 percent, while European production declined 1 percent, compared to the same period last year. Segment profits were $64 million, up 16 percent from a year ago.
"Our Automotive segment continued its strong performance with record sales that considerably outpaced its end markets," said Cutler. "The heavy investments we have made in new product development over the last several years are delivering real results as we have been able to accelerate the pace of new product introductions and gain market share.
"During the second quarter, further progress was made in growing our supercharger business. In Brazil we launched the smallest supercharger ever produced, for use on the new Ford Fiesta, and we began delivery of a high-efficiency supercharger for use with the new M-271 engine program of Mercedes."
The Truck segment posted sales of $315 million in the second quarter, a 21 percent increase over the comparable period last year, and recorded profits of $30 million, compared to a breakeven performance before unusual items a year ago. NAFTA heavy-duty truck production was up 24 percent and NAFTA medium-duty truck production was flat. European truck production was down 6 percent and South American production decreased by 15 percent.
"It is clear that our Truck business is in a solid period of recovery, as both NAFTA industry order levels and our own orders climbed rapidly throughout the quarter," said Cutler. "We expect third quarter NAFTA heavy-duty truck production could increase as much as 15 to 20 percent from second quarter levels, and for the full year, we now expect production of heavy-duty trucks in NAFTA to total 170,000 units. The positive impact of our extensive restructuring actions over the last two years can be seen in the $30 million of increased profit in the second quarter of 2002 on increased sales of $55 million, compared to the same period in 2001.
"NAFTA heavy-duty production will peak in the third quarter and decline in the fourth quarter. We will be closing our Shelbyville, Tennessee transmission plant in the fourth quarter as previously announced, which will keep our capacity in line with lower demand."
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 48,000 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 second quarter results is available to all interested parties via live audio webcast today at 10 a.m. EDT on www.eaton.com.
This news release contains forward-looking statements concerning the third quarter 2002 and the full year 2002 operating earnings per share, our worldwide markets, and expenses and benefits of our restructuring programs. 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 restructuring plans; unanticipated downturns in business relationships with customers or their purchases from us; competitive pressures on sales and pricing; increase in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges or dispute resolutions; 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 months and six months ended June 30, 2002 and 2001 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended
June 30
-------------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $1,881 $1,871
Income before income taxes 127 74
Net income 88 49
Net income per Common Share assuming dilution $ 1.21 $ 0.69
Average number of Common Shares outstanding 72.1 70.7
Net income per Common Share basic $ 1.24 $ 0.70
Average number of Common Shares outstanding 70.7 69.5
Cash dividends paid per Common Share $ 0.44 $ 0.44
Reconciliation of net income to operating earnings
--------------------------------------------------
Net income $ 88 $ 49
Excluding (after-tax)
Unusual charges 2 17
------ ------
Operating earnings $ 90 $ 66
====== ======
Net income per Common Share assuming dilution $ 1.21 $ 0.69
Per share impact of unusual items 0.03 0.25
------ ------
Operating earnings per Common Share $ 1.24 $ 0.94
====== ======
See accompanying notes.
Eaton Corporation
Comparative Financial Summary
Six months ended
June 30
-----------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $3,604 $3,854
Income before income taxes 175 178
Net income 121 99
Net income per Common Share assuming dilution $ 1.68 $ 1.41
Average number of Common Shares outstanding 71.6 70.4
Net income per Common Share basic $ 1.71 $ 1.43
Average number of Common Shares outstanding 70.4 69.2
Cash dividends paid per Common Share $ 0.88 $ 0.88
Reconciliation of net income to operating earnings
--------------------------------------------------
Net income $ 121 $ 99
Excluding (after-tax)
Unusual charges 35 47
Gain on sales of businesses (7)
------ ------
Operating earnings $ 156 $ 139
====== ======
Net income per Common Share assuming dilution $ 1.68 $ 1.41
Per share impact of unusual items 0.49 0.57
------ ------
Operating earnings per Common Share $ 2.17 $ 1.98
====== ======
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
June 30
------------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $1,881 $1,871
Costs & expenses
Cost of products sold 1,364 1,400
Selling & administrative 305 303
Research & development 50 53
------ ------
1,719 1,756
------ ------
Income from operations 162 115
Other income (expense)
Interest expense-net (27) (38)
Other-net (8) (3)
------ ------
(35) (41)
------ ------
Income before income taxes 127 74
Income taxes 39 25
------ ------
Net income $ 88 $ 49
====== ======
Net income per Common Share assuming dilution $ 1.21 $ 0.69
Average number of Common Shares outstanding 72.1 70.7
Net income per Common Share basic $ 1.24 $ 0.70
Average number of Common Shares outstanding 70.7 69.5
Cash dividends paid per Common Share $ 0.44 $ 0.44
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Six months ended
June 30
-----------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $3,604 $3,854
Costs & expenses
Cost of products sold 2,650 2,897
Selling & administrative 615 624
Research & development 105 121
------ ------
3,370 3,642
------ ------
Income from operations 234 212
Other income (expense)
Interest expense - net (54) (80)
Gain on sales of businesses 38
Other-net (5) 8
------ ------
(59) (34)
------ ------
Income before income taxes 175 178
Income taxes 54 79
------ ------
Net income $ 121 $ 99
====== ======
Net income per Common Share assuming dilution $ 1.68 $ 1.41
Average number of Common Shares outstanding 71.6 70.4
Net income per Common Share basic $ 1.71 $ 1.43
Average number of Common Shares outstanding 70.4 69.2
Cash dividends paid per Common Share $ 0.88 $ 0.88
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
June 30
------------------
(Millions) 2002 2001
---- ----
Net sales
Fluid Power $ 628 $ 656
Industrial & Commercial Controls 519 564
Automotive 419 391
Truck 315 260
------ ------
Total net sales $1,881 $1,871
====== ======
Operating profit (loss)
Fluid Power $ 58 $ 53
Industrial & Commercial Controls 42 49
Automotive 64 55
Truck 30 (5)
------ ------
Total ongoing operations 194 152
Amortization of goodwill & other intangible assets (5) (24)
Interest expense-net (27) (38)
Corporate & other-net (35) (16)
------ ------
Income before income taxes 127 74
Income taxes 39 25
------ ------
Net income $ 88 $ 49
====== ======
See accompanying notes.
Eaton Corporation
Business Segment Information
Six months ended
June 30
----------------
(Millions) 2002 2001
---- ----
Net sales
Fluid Power $1,225 $1,329
Industrial & Commercial Controls 1,005 1,123
Automotive 804 776
Truck 570 541
------ ------
Total ongoing operations 3,604 3,769
Divested operations 85
------ ------
Total net sales $3,604 $3,854
====== ======
Operating profit (loss)
Fluid Power $ 101 $ 115
Industrial & Commercial Controls 60 99
Automotive 120 109
Truck 20 (43)
------ ------
Total ongoing operations 301 280
Divested operations 7
Amortization of goodwill & other intangible assets (11) (48)
Interest expense-net (54) (80)
Gain on sales of businesses 38
Corporate & other-net (61) (19)
------ ------
Income before income taxes 175 178
Income taxes 54 79
------ ------
Net income $ 121 $ 99
====== ======
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, December 31,
(Millions) 2002 2001
---- ----
ASSETS
Current assets
Cash & short-term investments $ 322 $ 311
Accounts receivable 1,171 1,070
Inventories 669 681
Deferred income taxes & other current assets 338 325
------ ------
2,500 2,387
Property, plant & equipment-net 1,974 2,050
Goodwill & other intangible assets 2,444 2,435
Other assets 737 774
------ ------
$7,655 $7,646
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 344 $ 188
Accounts payable 374 418
Accrued compensation 170 158
Accrued income & other taxes 271 258
Other current liabilities 731 647
------ ------
1,890 1,669
Long-term debt 1,934 2,252
Postretirement benefits other than pensions 666 670
Deferred income taxes & other liabilities 584 580
Shareholders' equity 2,581 2,475
------ ------
$7,655 $7,646
====== ======
See accompanying notes.
Eaton Corporation
Notes to the Second Quarter 2002 Earnings Release
Dollars in millions, except per share data (per share data assume
dilution)
Unusual Charges
---------------
As the extraordinarily weak economic conditions of 2001 continued into
2002, Eaton undertook additional restructuring actions in the first
half of 2002 to further reduce fixed operating costs across all
business segments and certain corporate functions as described below.
Three months ended Six months ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Operational restructuring charges
Fluid Power $ 1 $ 7 $ 18 $ 14
Industrial & Commercial Controls 2 4 15 4
Automotive 1
Truck 5 14 43
Corporate restructuring charge 4
Other corporate charge 10 10
---- ---- ---- ----
Pretax $ 3 $ 26 $ 52 $ 71
==== ==== ==== ====
After-tax $ 2 $ 17 $ 35 $ 47
Per Common Share .03 .25 .49 .67
The operational restructuring charges are included in the Statements
of Consolidated Income in Income from operations and reduced operating
profit of the related business segment. The corporate restructuring
charge is included in the Statements of Consolidated Income in Income
from operations and the Other corporate charge is included in Other
expense-net. All of the corporate restructuring and other charges are
included in Business Segment Information in Corporate & other-net.
The other corporate charge of $10 in the second quarter of 2001
resulted from an arbitration award related to a contractual dispute
over supply arrangements initiated in February 1999 against Vickers,
Incorporated, a subsidiary of Aeroquip-Vickers, Inc., which was
acquired by Eaton in April 1999.
Goodwill and Other Intangible Assets
------------------------------------
Effective January 1, 2002, Eaton adopted Statement of Financial
Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets." Upon adoption, the Company discontinued the amortization of
goodwill and indefinite life intangible assets recorded in connection
with previous business combinations. Second quarter 2002 results were
impacted favorably by this reduction in amortization expense of $19
($16 after-tax, or $.22 per Common Share). Results for the first half
of 2002 were similarly impacted by this reduction in amortization
expense of $37 ($32 after-tax, or $.44 per Share).
Pension and Other Postretirement Benefit Expense
------------------------------------------------
Pretax income for the second quarter of 2002 was reduced by $14 ($9
after-tax, or $.13 per Common Share) compared to the same period in
2001 due to the effect on pension income of the decline in stock
market valuations on Eaton's pension fund assets, coupled with lower
discount rates associated with pension and other postretirement
benefit liabilities. Pretax income for the first half of 2002 was
similarly reduced by $33 ($21 after-tax, or $.30 per Share) compared
to the same period in 2001.
Gain on Sales of Businesses
---------------------------
During the first quarter of 2001, the Company sold the Vehicle
Switch/Electronics Division (VS/ED) and certain assets of the Truck
business. The sales of these businesses resulted in a pretax gain of
$38 ($7 after-tax, or $.10 per Common Share). In Business Segment
Information, the operating results of VS/ED are included in divested
operations for 2001.
Income Taxes
------------
The effective income tax rate for the first half of 2002 was 31.0%
compared to 44.3% for the same period in 2001. 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. Excluding the negative tax
consequences related to the sales of businesses in 2001, the effective
tax rate for the first half 2001 was 34.0% compared to 31.0% in 2002.
Financial Presentation Changes
------------------------------
Certain amounts for 2001 have been reclassified to conform to the
current year presentation.