Eaton Reports Fourth Quarter Net Income of $1.44 Per Share, up 53 Percent on Record Fourth Quarter Revenue
CLEVELAND--Jan. 2, 20041, 2004--| Eaton Increases Dividend by 12.5 Percent and Announces 2-for-1 Stock Split |
Diversified industrial manufacturer Eaton Corporation today announced net income per share of $1.44 for the fourth quarter of 2003, an increase of 53 percent over net income per share of $.94 in the fourth quarter of 2002. Sales in the quarter were $2.08 billion, 17 percent above the same period in 2002 and a record for the fourth quarter. Net income was $114 million compared to $67 million in 2002, an increase of 70 percent.
Net income in both periods included charges related to restructuring activities. Before restructuring charges, operating earnings per share in the fourth quarter of 2003 were $1.55 versus $.98 per share in 2002, an increase of 58 percent. Operating earnings for the fourth quarter of 2003 were $122 million compared to $69 million in 2002, an increase of 77 percent.
For the full year 2003, sales were $8.06 billion, 12 percent above 2002, and the highest sales since 2000. Net income of $386 million increased 37 percent over 2002, and net income per share of $5.13 rose 31 percent. Operating earnings per share for 2003 of $5.45 rose 24 percent above 2002. Operating earnings in 2003 totaled $410 million versus $315 million in 2002, an increase of 30 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We had a very good year. We are very pleased with our fourth quarter, which exceeded our previous guidance. Sales growth in the fourth quarter of 17 percent consisted of 7 percent from acquisitions, 4 percent from higher exchange rates, and 6 percent from organic growth. Our organic growth was made up of 4 percent growth in our end markets and 2 percent growth from outgrowing our end markets.
"Our cash flow from operations in the fourth quarter was $357 million and totaled $874 million for all of 2003. We are particularly pleased with our continued strong cash flow, which is a function of our earnings growth and our success in keeping tight control over working capital."
In light of strong full-year results and growing momentum in many of its markets, Eaton is taking the following actions:
-- Splitting its stock 2-for-1
-- Increasing its quarterly dividend by 12.5 percent, from $.48 per share to $.54 per share on a pre-split basis
-- Contributing $75 million to its qualified pension plans in the United States
-- Initiating a plan to repurchase 2.1 million shares on a pre-split basis to offset the shares issued during 2003 from the exercise of stock options.
Further information concerning the timing of the stock split and payment of the quarterly dividend are included in a separate press release issued simultaneously with this release.
"As we survey our end markets in 2004, we anticipate growth of approximately 4 percent," said Cutler. "As in 2003, we expect to outgrow our end markets by 2 to 3 percent. We will also record additional growth from the full year impact of the Delta acquisition, and from the new joint ventures we established during the year with Caterpillar, and with Shaanxi Fast Gear and Senstar in China.
"We anticipate net income per share on a pre-split basis for the first quarter of 2004 to be $1.45 to $1.55, and for the full year to be $6.30 to $6.60. Operating earnings per share, which exclude restructuring charges to integrate our recent acquisitions and joint ventures, are anticipated to be $1.50 to $1.60 on a pre-split basis for the first quarter of 2004, and $6.50 to $6.80 for the full year."
Business Segment Results
Fourth quarter sales of Eaton's largest business segment, Fluid Power, were $703 million, 13 percent above the fourth quarter of 2002. Both sales and operating profits for Fluid Power were fourth quarter records. Fluid Power markets grew 6 percent compared to the same period in 2002, with North American fluid power industry shipments up 4 percent, commercial aerospace markets up 1 percent, and defense aerospace markets up 22 percent. Operating profits in the fourth quarter were $61 million. Operating profits before restructuring charges were $64 million, up 45 percent compared to a year earlier, reflecting significantly improved results across most of the business.
"The traditional mobile and industrial markets began to recover in the fourth quarter, reflecting the pickup in capital goods expenditures," said Cutler. "We anticipate that this recovery will gather steam during 2004, resulting in the first year of growth in these markets since 2000.
"The commercial and defense aerospace markets grew as we expected in the fourth quarter," said Cutler. "We foresee no growth in commercial aerospace during 2004, with modest growth in defense aerospace."
In the Electrical segment, fourth quarter sales were $612 million, up 27 percent over 2002. Excluding the impact of the Delta and Commonwealth Sprague Capacitor acquisitions and the new joint venture formed with Caterpillar, fourth quarter sales were up 6 percent compared to 2002. Operating profits in the fourth quarter were $44 million. Operating profits before restructuring charges were $54 million, up 32 percent from results in 2002.
"End markets for our electrical business grew about 1 percent during the fourth quarter," said Cutler. "We anticipate that growth will begin to accelerate over the course of 2004."
"We are pleased that the profit margin of our electrical business, excluding recent acquisitions and joint ventures, was 10 percent for the second quarter in a row, and that the Delta acquisition posted modest profits in the fourth quarter," said Cutler.
The Automotive segment posted fourth quarter sales of $423 million, 7 percent above the comparable quarter of 2002. Automotive production in NAFTA and Europe was flat compared to the fourth quarter of 2002. Operating profits were $60 million, up 13 percent.
"Automotive segment revenue considerably outpaced its end markets in the fourth quarter, consistent with its performance all year," said Cutler. "As we expected, our margins rebounded to 14 percent in the quarter, reflecting improved performance on several new program launches that had reduced margins in the second and third quarters.
"For 2004, we anticipate flat markets for both NAFTA and European automotive production. Based on new product wins already awarded, we believe we will outgrow these end markets as we did during 2003," said Cutler.
The Truck segment posted sales of $345 million in the fourth quarter, up 26 percent compared to 2002, and recorded operating profits of $54 million, more than double the profit earned in the fourth quarter of 2002. NAFTA heavy-duty production was up 19 percent compared to 2002, NAFTA medium-duty production was up 13 percent, European truck production was down 4 percent, and Brazilian vehicle production was down 4 percent.
"Fourth quarter production of NAFTA heavy-duty trucks totaled 50,000 units, slightly more than in the third quarter," said Cutler. "Orders for new NAFTA heavy-duty trucks in December were 26,000 units. As a result, we believe that production in the first quarter of 2004 will be about 55,000 units, with growth accelerating as the year progresses. For all of 2004, we believe that the NAFTA heavy-duty market is likely to total 240,000 units."
Eaton is a global diversified industrial manufacturer with 2003 sales of $8.1 billion that is a leader in fluid power systems; electrical power quality, distribution and control; automotive engine air management and fuel economy; and intelligent systems for fuel economy and safety in trucks. Eaton has 51,000 employees and sells products to customers in more than 100 countries.
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 a.m. EDT through the Investor Relations tab on Eaton's home page. This news release can be accessed under the Corporate News heading on the Eaton home page by clicking on the news release.
Financial Results
The company's comparative financial results for the three months and year ended December 31, 2003 and 2002 are available on the company's Web site, www.eaton.com.
Eaton Corporation
Comparative Financial Summary
Three months ended Twelve months ended
December 31 December 31
(Millions except for ------------------- -------------------
per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 2,083 $ 1,775 $ 8,061 $ 7,209
Income before income taxes 145 92 508 399
Net income 114 67 386 281
Net income per Common Share
assuming dilution $ 1.44 $ 0.94 $ 5.13 $ 3.92
Average number of
Common Shares outstanding 78.4 71.6 75.2 71.7
Net income per
Common Share basic $ 1.48 $ 0.95 $ 5.21 $ 3.98
Average number of
Common Shares outstanding 76.7 70.9 74.0 70.6
Cash dividends paid
per Common Share $ 0.48 $ 0.44 $ 1.84 $ 1.76
Reconciliation of net income
to operating earnings
----------------------------
Net income $ 114 $ 67 $ 386 $ 281
Excluding reconciling
items (after-tax)
Restructuring charges 8 2 24 41
Contribution to Eaton
Charitable Fund - - - 6
Gain on sale of business - - - (13)
-------- -------- -------- --------
Operating earnings $ 122 $ 69 $ 410 $ 315
======== ======== ======== ========
Net income per Common Share
assuming dilution $ 1.44 $ 0.94 $ 5.13 $ 3.92
Per share impact of
reconciling items 0.11 0.04 0.32 0.48
-------- -------- -------- --------
Operating earnings
per Common Share $ 1.55 $ 0.98 $ 5.45 $ 4.40
======== ======== ======== ========
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended Twelve months ended
December 31 December 31
(Millions except for ------------------- -------------------
per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 2,083 $ 1,775 $ 8,061 $ 7,209
Costs of products sold 1,505 1,306 5,897 5,272
Selling & administrative
expense 356 300 1,351 1,217
Research & development expense 55 47 223 203
Interest expense-net 19 24 87 104
Gain on sale of business - - - (18)
Other (income) expense-net 3 6 (5) 32
-------- -------- -------- --------
Income before income taxes 145 92 508 399
Income taxes 31 25 122 118
-------- -------- -------- --------
Net income $ 114 $ 67 $ 386 $ 281
======== ======== ======== ========
Net income per Common Share
assuming dilution $ 1.44 $ 0.94 $ 5.13 $ 3.92
Average number of
Common Shares outstanding 78.4 71.6 75.2 71.7
Net income per
Common Share basic $ 1.48 $ 0.95 $ 5.21 $ 3.98
Average number of
Common Shares outstanding 76.7 70.9 74.0 70.6
Cash dividends paid
per Common Share $ 0.48 $ 0.44 $ 1.84 $ 1.76
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended Twelve months ended
December 31 December 31
------------------- -------------------
(Millions) 2003 2002 2003 2002
--------- --------- --------- ---------
Net sales
---------
Fluid Power $ 703 $ 622 $ 2,786 $ 2,456
Electrical 612 482 2,313 1,993
Automotive 423 397 1,690 1,594
Truck 345 274 1,272 1,166
-------- -------- -------- --------
$ 2,083 $ 1,775 $ 8,061 $ 7,209
======== ======== ======== ========
Operating profit
----------------
Fluid Power $ 61 $ 42 $ 247 $ 187
Electrical 44 40 158 149
Automotive 60 53 224 225
Truck 54 25 168 90
-------- -------- -------- --------
219 160 797 651
Corporate
---------
Amortization of
intangible assets (3) (7) (21) (23)
Interest expense-net (19) (24) (87) (104)
Gain on sale of business - - - 18
Corporate expense-net (52) (37) (181) (143)
--------- -------- -------- --------
Income before income taxes 145 92 508 399
Income taxes 31 25 122 118
-------- -------- -------- --------
Net income $ 114 $ 67 $ 386 $ 281
======== ======== ======== ========
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
December 31,
------------------
(Millions) 2003 2002
------- -------
Assets
Current assets
--------------
Cash $ 61 $ 75
Short-term investments 804 353
Accounts receivable 1,190 1,032
Inventories 721 698
Deferred income taxes & other current assets 317 299
------- -------
3,093 2,457
Property, plant & equipment-net 2,076 1,955
Goodwill 2,095 1,910
Other intangible assets 541 510
Deferred income taxes & other assets 418 306
------- -------
$ 8,223 $ 7,138
======= =======
Liabilities & Shareholders' Equity
Current liabilities
-------------------
Short-term debt & current portion of long-term debt $ 302 $ 201
Accounts payable 526 488
Accrued compensation 204 199
Accrued income & other taxes 298 225
Other current liabilities 796 621
------- -------
2,126 1,734
Long-term debt 1,651 1,887
Postretirement benefits other than pensions 636 652
Deferred income taxes & other liabilities 693 563
Shareholders' equity 3,117 2,302
------- -------
$ 8,223 $ 7,138
======= =======
See accompanying notes.
Eaton Corporation
Notes to the Fourth Quarter 2003 Earnings Release
Dollars in millions, except per share data (per share data assume
dilution)
Acquisitions of Businesses
--------------------------
On January 31, 2003, Eaton acquired the electrical business of Delta
plc for approximately $215. The Delta business has operations in
Europe and in the Asia Pacific area. The business' major electrical
brands include MEM(R), Holec(TM), Bill(TM), Home Automation(TM),
Elek(TM) and Tabula(TM).
On August 5, 2003, Eaton formed a joint venture with Caterpillar Inc.
to provide switchgear products under the Cat brand name. The joint
venture operates under the name Intelligent Switchgear Organization
LLC and is 51% owned by Eaton. Eaton's investment in the joint venture
is approximately $30.
Both of these businesses are included in the Electrical segment.
Restructuring Charges
---------------------
In 2003, Eaton incurred restructuring charges related primarily to the
integration of the Boston Weatherhead fluid power business acquired in
November 2002 and the electrical business of Delta plc acquired in
January 2003. In 2002, the Company incurred charges to reduce
operating costs across its business segments and certain corporate
functions. The charges in 2002 were primarily a continuation of
restructuring programs initiated in 2001. A summary of these charges
follows:
Three months ended December 31
--------------------------------------------
Operating
Operating profit before
Restructuring profit as restructuring
charges reported charges
-------------- -------------- --------------
2003 2002 2003 2002 2003 2002
------ ------ ------ ------ ------ ------
Fluid Power $ 3 $ 2 $ 61 $ 42 $ 64 $ 44
Electrical 10 1 44 40 54 41
Automotive - - 60 53 60 53
Truck - 2 54 25 54 27
----- ----- ----- ----- ----- -----
13 5 $ 219 $ 160 $ 232 $ 165
===== ===== ===== =====
Corporate - (1)
----- -----
Total $ 13 $ 4
===== =====
After-tax $ 8 $ 2
Per Common Share $0.11 $0.04
Twelve months ended December 31
--------------------------------------------
Operating
Operating profit before
Restructuring profit as restructuring
charges reported charges
-------------- -------------- --------------
2003 2002 2003 2002 2003 2002
------ ------ ------ ------ ------ ------
Fluid Power $ 14 $ 26 $ 247 $ 187 $ 261 $ 213
Electrical 22 16 158 149 180 165
Automotive - 1 224 225 224 226
Truck - 16 168 90 168 106
----- ----- ----- ----- ----- -----
36 59 $ 797 $ 651 $ 833 $ 710
===== ===== ===== =====
Corporate 1 3
----- -----
Total $ 37 $ 62
===== =====
After-tax $ 24 $ 41
Per Common Share $0.32 $0.57
The restructuring charges were included in the Statements of
Consolidated Income in Costs of products sold or Selling &
administrative expense, as appropriate. In Business Segment
Information, the restructuring charges reduced Operating profit of the
related business segment or were included in Corporate expense-net, as
appropriate.
Pension and Other Postretirement Benefit Expense
------------------------------------------------
Pretax operating income for fourth quarter 2003 was reduced by $16
($10 after-tax, or $0.13 per Common Share) compared to fourth quarter
2002 due to increased expense in 2003 resulting from the effect of the
decline in stock market valuations on Eaton's pension fund assets,
coupled with the effect of the lowering of discount rates associated
with pension and other postretirement benefit liabilities at year-end
2002. Pretax operating income for full year 2003 was similarly reduced
by $66 ($43 after-tax, or $0.57 per Common Share) compared to full
year 2002.
Gain on Sale of Business
------------------------
In July 2002, the Navy Controls business was sold resulting in a
pretax gain of $18 ($13 after-tax, or $0.18 per Common Share).
Other (Income) Expense-Net
--------------------------
The change of $37 in Other (income) expense-net for full year 2003
compared to full year 2002 was primarily due to a gain of $3 in
foreign exchange in 2003 versus a loss of $8 in 2002, a charge of $10
in 2002 for the contribution to the Eaton Charitable Fund, and various
other items including $11 of reduced legal expenses and favorable
legal settlements in 2003. The charge of $10 for the contribution to
the Eaton Charitable Fund ($6 after-tax, or $0.09 per Common Share)
was recorded in the third quarter of 2002. In Business Segment
Information, this charge was included in Corporate expense-net.
Income Taxes
------------
The effective income tax rate for fourth quarter 2003 was 21.5% and
24.0% for full year 2003. The comparable rates in 2002 were 26.5% for
the fourth quarter and 29.5% for the full year. The lower rates in
2003 reflect many factors, including higher operating earnings in
international tax jurisdictions with lower income tax rates and
increased use of international tax credit carryforwards.
Sale of Common Shares
---------------------
In June 2003, Eaton sold 3.7 million Common Shares for net proceeds of
$296, which were used to pay down commercial paper and for general
corporate purposes.
Reconciliation of Operating Earnings
------------------------------------
This earnings release discloses operating earnings, operating earnings
per Common Share and operating profit before restructuring charges for
each business segment, each of which excludes amounts that make it
different from the most directly comparable measure calculated in
accordance with generally accepted accounting principles (GAAP). A
reconciliation of each of these financial measures to the most
directly comparable GAAP measure is included in this earnings release
in the Comparative Financial Summary or in the notes to the earnings
release. Management believes that each of these financial measures is
useful to investors because it excludes transactions that are unusual
due to their nature, size, infrequency, or limited duration and
therefore allows investors to more easily compare the Company's
financial performance period to period. Management uses this
information in monitoring and evaluating the on-going performance of
the Company and each business segment.