Eaton Earns $85 Million Before Restructuring Charge
13 October 1998
Eaton Earns $85 Million Before Restructuring Charge, On Sales of $1.62 Billion
CLEVELAND--Oct. 13, 1998--Eaton Corporation today announced that, before special charges in both periods, third quarter 1998 earnings per share were $1.18, down 33% from last year's $1.77 per fully diluted share. Income before charges reached $85 million compared to last year's $139 million. Sales were $1.62 billion compared to $1.93 billion in the third quarter of 1997.As previously announced, Eaton took a nonrecurring, pretax charge of $42 million, or 38 cents per share, to restructure its Semiconductor Equipment Operations. In last year's third quarter, Eaton took a one-time non-cash charge of $85 million, or $1.08 per share, to write off the purchased in-process research and development associated with its acquisition of Fusion Systems Corporation. After charges in both periods, Eaton earned $58 million, or $0.80 per share in 1998 compared to $54 million, or $0.69 per share in 1997.
Income for the first nine months of 1998 reached $304 million before all special items, or $4.16 per share, on sales of $5.02 billion. Comparable 1997 earnings were $366 million, or $4.66 per share, on sales of $5.63 billion. After charges in both periods, nine month earnings per share were $3.79 this year and $3.58 in 1997.
Stephen R. Hardis, Chairman and Chief Executive Officer, said, "Our third quarter operating results were mixed and, in aggregate, disappointing. We are responding by making the investments and taking the decisive actions necessary to get earnings back on track in 1999. In the fourth quarter of this year, we anticipate taking an additional $33 million of restructuring charges to bring costs back into better balance with likely 1999 physical volumes while still supporting our ongoing growth initiatives. By the end of 1998, the company will have invested more than $130 million in restructuring Eaton's businesses in just over a year so that, whatever the economic climate, Eaton's performance will prove superior.
"It is also important to note the successes the company is achieving across its operations: the new business we're winning and products we're developing that will enable Eaton to continue to outpace the growth of our markets. The biggest mistake we could make at this point would be to interrupt the progress we're making toward an enterprise capable of higher sustainable growth."
Turning to Eaton's business segments, Hardis noted that Automotive Components sales reached a third quarter record $458 million, up 7 percent from a year ago. Excluding the acquisitions of GT Products and Amtec S.p.A., sales were up about 1 percent from a year ago compared to a 3 percent drop in North American production of light vehicles, an 18 percent decline in South America, and a 5 percent increase in European production. Operating profit was $41 million compared to $48 million one year ago. Said Hardis, "Beyond the impact of the General Motors strike, which hurt operating profits by about $7 million, Eaton continues to struggle with product mix and strong European volumes. In the fourth quarter, we anticipate restructuring charges of about $10 million to improve the operating performance of this segment."
"We have recently won significant and attractive new contracts for our supercharger and automotive switch businesses. Increased spending on these programs has reduced margins near term, but will ensure that this segment continues to profitably outpace market growth in the years immediately ahead."
During the quarter, Eaton announced it acquired the assets of Amtec S.p.A., a privately owned Italian manufacturer of automotive cylinder heads with 1997 sales of $27 million.
Third quarter sales of Hydraulics & Other Components were $145 million, essentially equal to last year's volume and consistent with the year-to-year change in North American mobile hydraulics shipments. Operating profits in the quarter were $19 million compared to $27 million in 1997. Said Hardis, "Business slowed appreciably in the third quarter as our customers reacted to the ongoing Asian crisis. Many of our agricultural equipment customers have scheduled lower fourth quarter production, and we will be affected by that slowdown. We did not achieve the operating efficiencies we anticipated in the third quarter, but we still expect the investments we made earlier this year to produce better margins over the balance of 1998 and in 1999."
Sales of Industrial & Commercial Controls reached a record $604 million, 3 percent ahead of year-earlier results compared to about a 2 percent increase in North American markets for distribution equipment and industrial controls. Operating profits in the third quarter were $55 million compared to $64 million a year ago, with Hurricane Georges responsible for about $4 million of the shortfall. Noted Hardis, "Solid activity levels in electrical distribution equipment are offsetting continued softness in Industrial Controls markets, but costs are still too high at present sales levels. During the fourth quarter, we will take a $10 million restructuring charge to improve the operating performance of this business.
"The success of Cutler-Hammer's new Engineering Services and Systems Division, while incurring significant start-up costs, will help this segment to outpace market growth in the periods ahead."
During the quarter, the company announced the acquisition of Integrated Partial Discharge Diagnostics, Inc., a Minnetonka, Minnesota-based manufacturer of equipment that measures insulation deterioration within AC power equipment.
Semiconductor Equipment sales in the third quarter fell to $48 million, 63 percent below year-earlier levels. Before a restructuring charge of $42 million, SEO suffered an operating loss of $29 million compared to an operating profit of $14 million one year earlier. Said Hardis, "We continue to search for the bottom of this market while we push ahead with critical restructuring efforts. Assuming that volumes are no better in 1999 than this year, we would expect the $50 million in charges, as previously announced, to produce break-even results next year compared to an expected $80 million operating loss in 1998."
Truck Components sales reached a third quarter record $365 million, 21 percent ahead of last year's results. Operating profits were up 26 percent to a third quarter record $54 million. Said Hardis, "Heavy truck production will be at record levels this year in both North America and Europe. The performance of the Clutch Division, acquired from Dana Corporation last year, continues to exceed our expectations and, in general, we are taking good advantage of sustained robust markets."
Hardis also noted that Truck Components will take a charge of about $10 million in the fourth quarter, in part to begin restructuring its European business. Said Hardis, "European trucking deregulation, de-integration of OEMs, and the Euro will all transform the competitive landscape in Europe in the years ahead. This restructuring, building upon our recent acquisition of a Polish transmission manufacturer, is intended to ensure we achieve world class costs and productivity in all of our worldwide operations."
Summing up, Hardis said, "Global economic problems, which first affected demand for semiconductor capital equipment, are now reaching some of our other markets. We are striving to strike the right balance between the imperative for better operational performance and maintaining those growth programs that are beginning to bear fruit. That is the challenge of management. We will continue to fine tune our efforts as needed to produce the best long term results for our owners."
Eaton Corporation is a global manufacturer of highly engineered products that serve industrial, vehicle, construction, commercial and semiconductor markets. Principal products include electrical power distribution and control equipment, truck drivetrain systems, engine components, hydraulic products, ion implanters and a wide variety of controls. Headquartered in Cleveland, the company has 51,000 employees and 155 manufacturing sites in 25 countries around the world. Sales for 1997 were $7.6 billion. The Internet address for Eaton is: http://www.eaton.com/
The forward-looking statements in this news release should be used with caution. They are subject to various risks and uncertainties, many of which are outside the control of the company. Important factors which could cause actual results to differ materially from those in the forward-looking statements include changes in global economic and financial conditions, labor strikes, the markets for semiconductor capital equipment, commercial trucks and hydraulics around the world.
Financial Results _________________
The company's comparative financial results for the three months and nine months ended Sept. 30, 1998 and 1997 follows:
Eaton Corporation
Comparative Financial Summary
Three months ended
September 30
__________________
(Millions except for per share data) 1998 1997
____ ____
Net sales $1,620 $1,931
Income before income taxes 79 95
Net income 58 54
Net income per Common Share
Assuming dilution $ .80 $ .69
Basic .82 .70
Average number of Common Shares outstanding
Assuming dilution 72.3 78.7
Basic 71.1 77.1
Common Shares outstanding at end of period 71.4 77.1
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Comparative Financial Summary
Nine months ended
September 30
_________________
(Millions except for per share data) 1998 1997
____ ____
Net sales $5,019 $5,629
Income before income taxes 395 422
Net income 277 281
Net income per Common Share
Assuming dilution $ 3.79 $ 3.58
Basic 3.87 3.65
Average number of Common Shares outstanding
Assuming dilution 73.0 78.4
Basic 71.5 77.1
Common Shares outstanding at end of period 71.4 77.1
Cash dividends paid per Common Share $ 1.32 $ 1.28
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
September 30
__________________
(Millions except for per share data) 1998 1997
____ ____
Net sales $1,620 $1,931
Costs and expenses
Cost of products sold 1,192 1,390
Selling & administrative 247 272
Research & development 85 81
Purchased in-process research & development 85
______ ______
1,524 1,828
______ ______
Income from operations 96 103
Other income (expense)
Interest (expense) income - net (23) (20)
Other--net 6 12
______ ______
(17) (8)
______ ______
Income before income taxes 79 95
Income taxes 21 41
______ ______
Net income $ 58 $ 54
______ ______
______ ______
Net income per Common Share
Assuming dilution $ .80 $ .69
Basic .82 .70
Average number of Common Shares outstanding
Assuming dilution 72.3 78.7
Basic 71.1 77.1
Common Shares outstanding at end of period 71.4 77.1
Cash dividends paid per Common Share $ .44 $ .44
Income was reduced by nonrecurring, pretax charges of $42 million
in the third quarter 1998 and $85 million for the year-to-date
1998. See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Nine months ended
September 30
_________________
(Millions except for per share data) 1998 1997
____ ____
Net sales $5,019 $5,629
Costs and expenses
Cost of products sold 3,599 4,068
Selling & administrative 774 801
Research & development 249 235
Purchased in-process research & development 85
______ ______
4,622 5,189
______ ______
Income from operations 397 440
Other income (expense)
Interest (expense) income - net (67) (57)
Gain on sale of businesses 43
Other--net 22 39
______ ______
(2) (18)
______ ______
Income before income taxes 395 422
Income taxes 118 141
______ ______
Net income $ 277 $ 281
______ ______
______ ______
Net income per Common Share
Assuming dilution $ 3.79 $ 3.58
Basic 3.87 3.65
Average number of Common Shares outstanding
Assuming dilution 73.0 78.4
Basic 71.5 77.1
Common Shares outstanding at end of period 71.4 77.1
Cash dividends paid per Common Share $ 1.32 $ 1.28
Income was reduced by nonrecurring, pretax charges of $42 million
in the third quarter 1998 and $85 million for the year-to-date
1998. See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
September 30
__________________
(Millions) 1998 1997
____ ____
Net sales
Automotive Components $ 458 $ 429
Hydraulics & Other Components 145 145
Industrial & Commercial Controls 604 586
Semiconductor Equipment 48 131
Truck Components 365 303
______ ______
Ongoing operations 1,620 1,594
Divested operations 337
______ ______
Total net sales $1,620 $1,931
______ ______
______ ______
Operating profit
Automotive Components $ 41 $ 48
Hydraulics & Other Components 19 27
Industrial & Commercial Controls 55 64
Semiconductor Equipment (71) 14
Truck Components 54 43
______ ______
Ongoing operations 98 196
Divested operations 22
Amortization of intangible assets & excess
of cost over net assets of businesses acquired (16) (13)
Purchased in-process research & development (85)
Interest (expense) income - net (23) (20)
Other (expense) income - net 20 (5)
______ ______
Income before income taxes $ 79 $ 95
______ ______
______ ______
Income was reduced by nonrecurring, pretax charges of $42 million
in the third quarter 1998 and $85 million for the year-to-date
1998. See accompanying notes.
Eaton Corporation
Business Segment Information
Nine months ended
September 30
_________________
(Millions) 1998 1997
____ ____
Net sales
Automotive Components $1,438 $1,348
Hydraulics & Other Components 465 442
Industrial & Commercial Controls 1,753 1,688
Semiconductor Equipment 220 316
Truck Components 1,112 830
______ ______
Ongoing operations 4,988 4,624
Divested operations 31 1,005
______ ______
Total net sales $5,019 $5,629
______ ______
______ ______
Operating profit
Automotive Components $ 158 $ 175
Hydraulics & Other Components 78 84
Industrial & Commercial Controls 143 167
Semiconductor Equipment (93) 18
Truck Components 177 111
______ ______
Ongoing operations 463 555
Divested operations (1) 63
Amortization of intangible assets & excess
of cost over net assets of businesses acquired (48) (33)
Purchased in-process research & development (85)
Interest (expense) income - net (67) (57)
Gain on sales of businesses 43
Other (expense) income - net 5 (21)
______ ______
Income before income taxes $ 395 $ 422
______ ______
______ ______
Income was reduced by nonrecurring, pretax charges of $42 million
in the third quarter 1998 and $85 million for the year-to-date
1998. See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
Sept. 30, Dec. 31,
(Millions) 1998 1997
____ ____
ASSETS
Current assets
Cash $ 47 $ 53
Short-term investments 44 37
Accounts receivable 1,001 958
Inventories 687 734
Deferred income taxes and
other current assets 282 273
______ ______
2,061 2,055
Property, plant and equipment 1,712 1,759
Excess of cost over net assets
of businesses acquired 1,052 966
Deferred income taxes and
other assets 668 685
______ ______
$5,493 $5,465
______ ______
______ ______
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 396 $ 104
Accounts payable and other
current liabilities 1,186 1,253
______ ______
1,582 1,357
Long-term debt 1,194 1,272
Postretirement benefits other than pensions 550 553
Other liabilities 159 212
Shareholders' equity 2,008 2,071
______ ______
$5,493 $5,465
______ ______
______ ______
See accompanying notes.
Eaton CorporationNotes to the Third Quarter 1998 Earnings Release
Nonrecurring Charges ____________________ Income in the third quarter of 1998 was reduced by nonrecurring pretax charges of $42 million ($27 million aftertax, or $.38 per Common Share-assuming dilution) which reduced operating profit of the Semiconductor Equipment business segment. These charges relate to workforce reductions, asset write-downs and other restructuring charges.
Income in the first quarter of 1998 was reduced by nonrecurring pretax charges of $43 million ($28 million aftertax, or $.38 per Common Share-assuming dilution). The Company recorded $33 million of restructuring charges which reduced operating profit of the Automotive Components business segment by $8 million, the Industrial & Commercial Controls business segment by $15 million, and the Truck Components business segment by $10 million. The Company also recorded a $10 million contribution to its charitable trust which is included in other expense.
Sales of Businesses ___________________ On January 2, 1998, the Company completed the sale of the Axle and Brake business to Dana Corporation. The sale of this business, and an adjustment related to a business sold in a prior period, resulted in a pretax gain of $43 million ($28 million aftertax, $.38 per Common Share-assuming dilution) which was recorded in the first quarter 1998. On April 1, 1998, the Company completed the sale of its automotive leaf spring business. The operating results of these businesses are reported in business segment information as divested operations and prior periods have been reclassified to conform to the current period presentation.
Acquisition of Fusion Systems Corporation and Write-off of Purchased In-Process Research & Development ____________________________________________________________________ On August 4, 1997, the Company purchased Fusion Systems Corporation for $293 million, before a reduction for cash acquired of $90 million. The acquisition was accounted for by the purchase method of accounting, and accordingly, the statements of income and the results of the Semiconductor Equipment business segment for the third quarter include the results of Fusion from the effective date of acquisition. The purchase price allocation included $85 million for purchased in-process research and development which was determined through an independent valuation. This amount was expensed at the date of acquisition because technological feasibility had not been established and no alternative commercial use had been identified. Therefore, the third quarter of 1997 includes the write-off of $85 million for purchased in-process research and development, with no income tax benefit ($1.08 per Common Share-assuming dilution).
Financial Statement Changes ___________________________ Certain amounts for prior periods have been reclassified to conform to the current period presentation.