Eaton Reports Second Quarter Net Income Per Share up 61 Percent to $1.03 on Record Quarterly Revenue
CLEVELAND--July 15, 2004--Diversified industrial manufacturer Eaton Corporation today announced net income per share of $1.03 for the second quarter of 2004, an increase of 61 percent over net income per share of $.64 in the second quarter of 2003. Sales in the quarter were a record $2.40 billion, 19 percent above the same period in 2003. Net income was $161 million compared to $93 million in 2003, an increase of 73 percent.Net income in both periods included charges for restructuring activities related to the integration of acquisitions. Before these restructuring charges, operating earnings per share in the second quarter of 2004 were $1.06 versus $.68 per share in 2003, an increase of 56 percent, and operating earnings for the second quarter of 2004 were $166 million compared to $99 million in 2003, an increase of 68 percent.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are very pleased with our second quarter, which came in above the high end of our guidance. Sales growth in the quarter of 19 percent consisted of 3 percent from acquisitions, 2 percent from exchange rates, and 14 percent from organic growth. Our organic growth was made up of 9 percent growth in our end markets and 5 percent growth from outgrowing our end markets.
"In the second quarter, our segment operating margin before restructuring charges was 12.4 percent, a significant step up from the 11.7 percent margin in the first quarter," said Cutler. "Our operating cash flow for the quarter, at $330 million, was a record performance for the second quarter."
"As we survey our end markets in 2004, we now anticipate growth of between 7 to 8 percent," said Cutler. "The mobile hydraulics and truck markets, in particular, are stronger than we had anticipated, as are the residential electrical markets. There are still several important end markets in which we have had very little upturn, notably nonresidential construction and the European markets, and we are not expecting significant growth in these sectors until next year."
"We anticipate net income per share for the third quarter of 2004 to be $1.00 to $1.10. We are increasing our full-year guidance for net income per share by 15 cents, to between $3.85 and $4.00. Operating earnings per share, which exclude restructuring charges to integrate our recent acquisitions, are anticipated to be between $1.05 and $1.15 in the third quarter of 2004, and we are increasing our full-year guidance for operating earnings by 15 cents, to between $4.00 and $4.15."
Business Segment Results
Second quarter sales of Eaton's largest business segment, Fluid Power, were $792 million, 13 percent above the second quarter of 2003. Both sales and operating profits for Fluid Power were all-time quarterly records. Fluid Power markets grew 12 percent compared to the same period in 2003, with North American fluid power industry shipments up 21 percent, commercial aerospace markets up 7 percent, defense aerospace markets up 11 percent, and European automotive production up 1 percent. Operating profits in the second quarter were $91 million. Operating profits before restructuring charges were $92 million, up 37 percent compared to a year earlier.
"The strong growth in the mobile and industrial hydraulics markets seen in the first quarter continued into the second quarter," said Cutler. "We anticipate that the growth in mobile and industrial hydraulics is likely to continue well into 2005. The commercial aerospace market showed the strongest quarterly growth since 2001, while defense aerospace posted another quarter of double-digit growth.
"We announced in early June the acquisition of the Walterscheid European connector business of GKN plc," said Cutler. "This acquisition, which is expected to close by the end of the third quarter, expands our product range and sales channels in Europe while also strengthening our position as a systems provider."
In the Electrical segment, second quarter sales were $697 million, up 21 percent over 2003. Excluding the impact of the Powerware and Electrum acquisitions, and the new joint venture formed with Caterpillar, second quarter sales were up 10 percent compared to 2003. Operating profits in the second quarter were $57 million. Operating profits before restructuring charges were $64 million, up 64 percent from results in 2003.
"End markets for our electrical business grew about 5 percent during the second quarter, the fastest quarterly growth since the first quarter of 2000. In addition, our operating margins expanded to 9.2 percent, compared to 8.2 percent in the first quarter," said Cutler. "We expect steady end market growth over the balance of the year, with more significant growth likely in 2005.
"We completed the acquisition of Powerware in early June," said Cutler. "We remain very excited about the new capabilities this acquisition provides and we are already finding that the combination of Powerware with our other products represents a powerful offering in the marketplace."
Reflecting progress in generating additional service and power generation revenue, the Electrical business was awarded during the second quarter with a contract from the U.S. Postal Service to test and maintain electrical switchgear, which is anticipated to total between $12 and $15 million annually over the next four years, and a contract worth $10 million to supply distribution and control equipment for a new power plant being constructed by Hitachi.
The Automotive segment posted second quarter sales of $478 million, 11 percent above the comparable quarter of 2003. Automotive production in NAFTA was flat and in Europe was up 1 percent over the second quarter of 2003. Operating profits were $65 million, up 12 percent. The second quarter operating margin was lower than that in the first quarter primarily due to higher metals prices, as expected.
"The Automotive segment again posted strong revenue growth despite flat markets," said Cutler. "We are expecting that the markets in NAFTA and Europe will be flat to slightly down over the balance of the year."
The Truck segment posted sales of $436 million in the second quarter, up 38 percent compared to 2003, and recorded operating profits of $78 million, nearly twice the profit earned in the second quarter of 2003. NAFTA heavy-duty production was up 41 percent compared to 2003, NAFTA medium-duty production was up 15 percent, European truck production was up 9 percent, and Brazilian vehicle production was up 17 percent.
"Second quarter production of NAFTA heavy-duty trucks totaled 63,000 units, about 17 percent more than in the first quarter of 2004," said Cutler. "Monthly orders for new NAFTA heavy-duty trucks during the second quarter have averaged 33,000 units. As a result, we are now estimating that the NAFTA heavy-duty market in 2004 is likely to total at least 255,000 units.
"We made progress during the quarter on both our new truck joint ventures in China," said Cutler. "We expect the medium-duty joint venture with FAW to formally start in late July. We are still on target to start production in our Eaton Fast Gear heavy-duty joint venture in the fourth quarter of this year."
Eaton Corporation is a diversified industrial manufacturer with 2003 sales of $8.1 billion. Eaton is a global leader in fluid power systems and services for industrial, mobile and aircraft equipment; electrical systems and components for power quality, distribution and control; automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety; and intelligent truck drivetrain systems for safety and fuel economy. Eaton has 55,000 employees and sells products to customers in more than 100 countries. For more information, visit www.eaton.com.
Financial Results
The company's comparative financial results for the three months and six months ended June 30, 2004 and 2003 are available on the company's Web site, www.eaton.com.
Eaton Corporation
Comparative Financial Summary
Three months ended Six months ended
June 30 June 30
(Millions except for per ------------------ -----------------
share data) 2004 2003 2004 2003
--------- -------- -------- --------
Net sales $2,403 $2,027 $4,641 $3,952
Income before income taxes 203 122 376 221
Net income 161 93 295 165
Net income per Common Share
assuming dilution $1.03 $0.64 $1.88 $1.14
Average number of Common Shares
outstanding 156.2 147.0 156.8 145.8
Net income per Common Share basic $1.06 $0.64 $1.93 $1.15
Average number of Common Shares
outstanding 152.1 145.0 152.7 143.8
Cash dividends paid per Common Share $0.27 $0.22 $0.54 $0.44
Reconciliation of net income to
operating earnings
--------------------------------
Net income $161 $93 $295 $165
Excluding restructuring charges
(after-tax) 5 6 9 11
--------- -------- -------- --------
Operating earnings $166 $99 $304 $176
========= ======== ======== ========
Net income per Common Share
assuming dilution $1.03 $0.64 $1.88 $1.14
Per share impact of restructuring
charges (after-tax) 0.03 0.04 0.06 0.07
--------- -------- -------- --------
Operating earnings per Common
Share $1.06 $0.68 $1.94 $1.21
========= ======== ======== ========
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended Six months ended
June 30 June 30
(Millions except for per ------------------ -----------------
share data) 2004 2003 2004 2003
--------- -------- -------- --------
Net sales $2,403 $2,027 $4,641 $3,952
Cost of products sold 1,726 1,498 3,347 2,913
Selling & administrative expense 389 339 750 668
Research & development expense 64 56 124 111
Interest expense-net 19 24 38 48
Other (income) expense-net 2 (12) 6 (9)
--------- -------- -------- --------
Income before income taxes 203 122 376 221
Income taxes 42 29 81 56
--------- -------- -------- --------
Net income $161 $93 $295 $165
========= ======== ======== ========
Net income per Common Share
assuming dilution $1.03 $0.64 $1.88 $1.14
Average number of Common Shares
outstanding 156.2 147.0 156.8 145.8
Net income per Common Share basic $1.06 $0.64 $1.93 $1.15
Average number of Common Shares
outstanding 152.1 145.0 152.7 143.8
Cash dividends paid per Common Share $0.27 $0.22 $0.54 $0.44
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended Six months ended
June 30 June 30
------------------ -----------------
(Millions) 2004 2003 2004 2003
--------- -------- -------- --------
Net sales
---------
Fluid Power $792 $703 $1,560 $1,400
Electrical 697 575 1,308 1,089
Automotive 478 432 956 872
Truck 436 317 817 591
--------- -------- -------- --------
$2,403 $2,027 $4,641 $3,952
========= ======== ======== ========
Operating profit
----------------
Fluid Power $91 $63 $172 $121
Electrical 57 33 102 65
Automotive 65 58 134 120
Truck 78 40 139 62
--------- -------- -------- --------
291 194 547 368
Corporate
---------
Amortization of intangible assets (5) (7) (11) (13)
Interest expense-net (19) (24) (38) (48)
Minority interest (1) (3) (4) (6)
Pension & other postretirement
benefit expense (22) (13) (40) (27)
Other corporate expense-net (41) (25) (78) (53)
--------- -------- -------- --------
Income before income taxes 203 122 376 221
Income taxes 42 29 81 56
--------- -------- -------- --------
Net income $161 $93 $295 $165
========= ======== ======== ========
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, Dec. 31,
(Millions) 2004 2003
-------- --------
Assets
Current assets
--------------
Cash $86 $61
Short-term investments 203 804
Accounts receivable 1,579 1,190
Inventories 877 721
Deferred income taxes & other current assets 328 317
-------- --------
3,073 3,093
Property, plant & equipment-net 2,059 2,076
Goodwill 2,461 2,095
Other intangible assets 574 541
Deferred income taxes & other assets 388 418
-------- --------
$8,555 $8,223
======== ========
Liabilities & Shareholders' Equity
Current liabilities
-------------------
Short-term debt & current portion of long-term debt $293 $302
Accounts payable 821 526
Accrued compensation 225 204
Accrued income & other taxes 268 298
Other current liabilities 849 796
-------- --------
2,456 2,126
Long-term debt 1,614 1,651
Postretirement benefits other than pensions 626 636
Pensions & other liabilities 675 693
Shareholders' equity 3,184 3,117
-------- --------
$8,555 $8,223
======== ========
See accompanying notes.
Eaton Corporation
Notes to Second Quarter 2004 Earnings Release
---------------------------------------------
Dollars in millions, except for per share data (per share data assume
dilution)
Acquisition of Business
-----------------------
On June 9, 2004, Eaton acquired Powerware Corporation, the power
systems business of Invensys plc, for $560. Powerware, based in
Raleigh, N.C., is a global market leader in Uninterruptible Power
Systems (UPS), DC Power products, and power quality services.
Powerware had revenues of $775 for the year ended March 31, 2004 and
has operations in the United States, Europe and in the Asia/Pacific
area that provide products and services that are utilized by computer
manufacturers, industrial companies, governments, telecommunications
firms, medical institutions, data centers and other businesses.
Eaton's operating results for 2004 include Powerware from the date of
acquisition. This business is included in the Electrical segment.
Restructuring Charges
---------------------
In 2004 and 2003, Eaton incurred restructuring charges related
primarily to the integration of the electrical division of Delta plc
acquired in January 2003 and the Boston Weatherhead fluid power
business acquired in November 2002. A summary of these charges
follows:
Three months ended June 30
------------------------------------------------
Operating profit
before
Restructuring Operating profit restructuring
charges as reported charges
------------- ---------------- -----------------
2004 2003 2004 2003 2004 2003
------ ------ -------- ------- -------- --------
Fluid Power $1 $4 $91 $63 $92 $67
Electrical 7 6 57 33 64 39
Automotive - - 65 58 65 58
Truck - - 78 40 78 40
------ ------ -------- ------- -------- --------
Total pretax
charges $8 $10 $291 $194 $299 $204
====== ====== ======== ======= ======== ========
After-tax charges $5 $6
Per Common Share $0.03 $0.04
Operating margin 12.1% 9.6% 12.4% 10.1%
Six months ended June 30
-------------------------------------------------
Operating profit
before
Restructuring Operating profit restructuring
charges as reported charges
------------- ----------------- -----------------
2004 2003 2004 2003 2004 2003
------ ------ -------- -------- -------- --------
Fluid Power $2 $9 $172 $121 $174 $130
Electrical 12 7 102 65 114 72
Automotive - - 134 120 134 120
Truck - - 139 62 139 62
------ ------ -------- -------- -------- --------
14 16 $547 $368 $561 $384
======== ======== ======== ========
Corporate - 1
------ ------
Total pretax
charges $14 $17
====== ======
After-tax charges $9 $11
Per Common Share $0.06 $0.07
Operating margin 11.8% 9.3% 12.1% 9.7%
The restructuring charges were included in the Statements of
Consolidated Income in Cost of products sold or Selling &
administrative expense, as appropriate. In Business Segment
Information, the charges reduced Operating profit of the related
business segment or were included in Other corporate expense-net, as
appropriate.
Pension & Other Postretirement Benefit Expense
----------------------------------------------
Pretax income for second quarter 2004 was reduced by $12
($7 after-tax, or $0.05 per Common Share) compared to second quarter
2003 due to increased pension and other postretirement benefit costs
in 2004 resulting from the decline over the last several years in the
market value of equity investments held by Eaton's pension plans,
coupled with the effect of the lowering of discount rates associated
with pension and other postretirement benefit liabilities at year-end
2003. Pretax income for first half 2004 was similarly reduced by $16
($10 after-tax, or $0.06 per Common Share) compared to first half
2003. Also, during January 2004, Eaton made a voluntary contribution
of $75 to its United States qualified pension plans.
Income Taxes
------------
The effective income tax rates for second quarter and first half 2004
were 20.6% and 21.5%, respectively, compared to 23.4% and 25.0% for
the same periods in 2003. The lower rates in 2004 reflect many
factors, including higher earnings in international tax jurisdictions
with lower income tax rates and increased use of international tax
credit carryforwards.
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.