Eaton Earns $91M Before Restructuring Charge On Sales of $1.61B
20 January 1999
Eaton Earns $91 Million Before Restructuring Charge, On Sales of $1.61 Billion
CLEVELAND--Jan. 20, 1999--Eaton Corporation today announced that, before special charges, fourth quarter 1998 earnings per share were $1.27, down 23 percent from last year's $1.66 per fully diluted share. Income before charges reached $91 million compared to last year's $129 million. Sales were $1.61 billion compared to $1.93 billion.As previously announced, Eaton took a fourth quarter, pretax charge of $29 million, or 26 cents per share. After this restructuring charge, Eaton earned $72 million, or $1.01 per share.
Income for the full year reached $393 million before all unusual items, or $5.41 per share, on sales of $6.63 billion. Comparable 1997 earnings were $495 million, or $6.33 per share, on sales of $7.56 billion. Year-to-year comparisons were materially affected by 1997's business divestitures, which had annual sales totaling about $1.3 billion. After unusual items in both years, earnings reached $4.80 per share in 1998 compared to $5.24 in 1997.
Stephen R. Hardis, Chairman and Chief Executive Officer, said, "After our stellar performance in 1997, 1998 was a disappointment. Overall results were deeply affected all year by the worldwide collapse in the semiconductor equipment industry. More recently, sharp downturns in agricultural equipment and the Brazilian economy have hurt our results.
"But, we are unwilling to wait for better markets to deliver superior results. Our resolve to improve operating performance is best demonstrated by the $125 million we have invested to restructure Eaton's businesses in just over a year. We are also winning new business that is enabling the company to outpace its markets. In 1999, we are determined to prove that 1998 was the aberration and that Eaton is evolving toward an enterprise that demonstrates superior performance and higher sustainable growth."
Looking at Eaton's business segments, Hardis noted that Automotive Components fourth quarter sales reached a record $505 million, up 12 percent from one year ago. Excluding the acquisitions of GT Products and Amtec, sales were up 5 percent during a period when production of light vehicles was flat in the Americas and Europe. For the year, sales reached a record $1.94 billion, 8% above 1997 results.
Fourth quarter profits for the segment reached $59 million before restructuring charges of $5 million, 4 percent below last year's $62 million before charges of $12 million. For the year, profits reached $224 million before charges, down 6 percent from comparable 1997 results.
Said Hardis, "We continue to achieve impressive new product wins across our product line, and this is driving higher programmatic spending in the near term. As these new products come to market over the next 1 to 3 years, we will see sales and profits outpace overall market trends." Hardis also noted that the company had recently opened a new automotive differential plant in Hastings, Nebraska, and had a major expansion of its supercharger plant underway in Athens, Georgia
-- both to meet sharply higher demand for those products.
During the quarter, Eaton announced it had acquired TGM Automotiva Ltda, a Brazilian manufacturer of automotive controls with 1997 sales of $9 million. The company also said its Eaton VORAD subsidiary had signed an agreement with Hitachi, Ltd., of Tokyo to speed development of electronics technology and increase the geographic marketing of vehicle collision warning systems.
Fourth quarter sales of Hydraulics & Other Components were $134 million, down 9 percent from last year's volume and consistent with the year-to-year change in North American mobile hydraulics shipments. Full year 1998 sales were a record $599 million, 2 percent ahead of last year.
Before restructuring charges of about $1 million in both periods, operating profits reached $17 million in the fourth quarter compared to $25 million one year earlier. For the year, profits before charges reached $95 million, off 13 percent from comparable 1997 results. Said Hardis, "We are adjusting production and employment consistent with the sharp fourth quarter reduction in agricultural equipment, which looks to continue at current levels through at least the first quarter of 1999."
Sales of Industrial & Commercial Controls reached a fourth quarter record $567 million, 1 percent ahead of year-earlier results. For the year, sales were up 3 percent to a record $2.32 billion, compared to about a 1 percent decline in the North American markets for distribution equipment and industrial controls. Hardis noted that the segment's above-market growth was attributable to strong construction and aerospace markets, and to the initial success of Cutler-Hammer's new Engineering Services and Systems business.
Fourth quarter segment profits reached $50 million before restructuring charges of $13 million compared to $55 million before charges of $6 million in 1997. For 1998, profits reached $208 million before charges of $28 million, 6 percent below comparable profits in 1997.
Semiconductor Equipment sales in the fourth quarter fell to $47 million, 68 percent below 1997. The segment suffered an operating loss of $28 million before restructuring charges of $2 million, $40 million below comparable 1997 results. For the year, Semiconductor Equipment sales were $267 million compared to 1997's $459 million; operating losses during the year totaled $80 million before restructuring charges of $43 million.
Said Hardis, "1998 has truly proved to be a very difficult year for the semiconductor equipment industry. Eaton can take some comfort from the fact that we have profoundly restructured this business while sustaining spending on programs critical to the future of this dynamic business. The industry appears to have hit bottom and we continue to target break-even performance based on 1999 sales essentially equal to 1998."
Truck Components sales reached a fourth quarter record $353 million, 3 percent ahead of 1997. Profits before restructuring charges of $8 million reached $51 million compared to $63 million one year earlier. Said Hardis, "While the fourth quarter performance of Truck Components didn't reach the blow-out proportions of 1997, margins remained at third quarter levels, completing an excellent year for this business." For the year, sales were a record $1.47 billion, 25 percent above 1997. Before $17 million of restructuring costs, profits were a record $237 million, 36 percent ahead of 1997.
Hardis also noted that the company began the previously announced restructuring of its European Truck Components business. "The Euro, deregulation, and de-integration of OEMs will combine to fundamentally change the European competitive landscape. With leading-edge products and world class costs, we intend to participate fully in the competitive transformation of European trucking."
Concluded Hardis, "We understand that 1999 is a critical year for Eaton. This year, we must demonstrate superior performance in the context of a relatively flat and excruciatingly competitive economic environment. We are taking the required steps to meet the challenge. This team is firmly committed, and confident of success."
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 49,500 employees and 155 manufacturing sites in 25 countries around the world. 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, automotive components and hydraulics around the world.
Eaton Corporation
Comparative Financial Summary
Three months ended
December 31
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(Millions except for per share data) 1998 1997
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Net sales $1,606 $1,934
Income before income taxes and extraordinary item 90 246
Income before extraordinary item 72 183
Extraordinary item (54)
Net income 72 129
Per Common Share-assuming dilution
Income before extraordinary item $ 1.01 $ 2.35
Extraordinary item (.69)
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Net income $ 1.01 $ 1.66
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Average number of Common Shares outstanding 71.9 77.9
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Comparative Financial Summary
Year ended
December 31
-----------------
(Millions except for per share data) 1998 1997
---- ----
Net sales $6,625 $7,563
Income before income taxes and extraordinary item 485 668
Income before extraordinary item 349 464
Extraordinary item (54)
Net income 349 410
Per Common Share-assuming dilution
Income before extraordinary item $ 4.80 $ 5.93
Extraordinary item (.69)
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Net income $ 4.80 $ 5.24
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Average number of Common Shares outstanding 72.7 78.2
Cash dividends paid per Common Share $ 1.76 $ 1.72
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
December 31
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(Millions except for per share data) 1998 1997
---- ----
Net sales $1,606 $1,934
Costs and expenses
Cost of products sold 1,160 1,388
Selling & administrative 276 287
Research & development 85 84
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1,521 1,759
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Income from operations 85 175
Other income (expense)
Interest expense - net (21) (22)
Gain on sales of businesses 91
Other--net 26 2
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5 71
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Income before income taxes and extraordinary item 90 246
Income taxes 18 63
------ ------
Income before extraordinary item 72 183
Extraordinary item (54)
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Net income $ 72 $ 129
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Per Common Share-assuming dilution
Income before extraordinary item $ 1.01 $ 2.35
Extraordinary item (.69)
------ ------
Net income $ 1.01 $ 1.66
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Average number of Common Shares outstanding 71.9 77.9
Per Common Share-basic
Income before extraordinary item $ 1.02 $ 2.41
Extraordinary item (.71)
------ ------
Net income $ 1.02 $ 1.70
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Average number of Common Shares outstanding 71.2 76.0
Common Shares outstanding at end of period 71.7 74.7
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Year ended
December 31
----------------
(Millions except for per share data) 1998 1997
---- ----
Net sales $6,625 $7,563
Costs and expenses
Cost of products sold 4,759 5,456
Selling & administrative 1,050 1,088
Research & development 334 319
Purchased in-process research & development 85
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6,143 6,948
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Income from operations 482 615
Other income (expense)
Interest expense - net (88) (79)
Gain on sales of businesses 43 91
Other--net 48 41
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3 53
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Income before income taxes and extraordinary item 485 668
Income taxes 136 204
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Income before extraordinary item 349 464
Extraordinary item (54)
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Net income $ 349 $ 410
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Per Common Share-assuming dilution
Income before extraordinary item $ 4.80 $ 5.93
Extraordinary item (.69)
------ ------
Net income $ 4.80 $ 5.24
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Average number of Common Shares outstanding 72.7 78.2
Per Common Share-basic
Income before extraordinary item $ 4.89 $ 6.05
Extraordinary item (.71)
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Net income $ 4.89 $ 5.34
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Average number of Common Shares outstanding 71.4 76.8
Common Shares outstanding at end of period 71.7 74.7
Cash dividends paid per Common Share $ 1.76 $ 1.72
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
December 31
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(Millions) 1998 1997
---- ----
Net sales
Automotive Components $ 505 $ 453
Hydraulics & Other Components 134 146
Industrial & Commercial Controls 567 563
Semiconductor Equipment 47 143
Truck Components 353 342
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Ongoing operations 1,606 1,647
Divested operations 287
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Total net sales $1,606 $1,934
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Operating profit
Automotive Components $ 54 $ 50
Hydraulics & Other Components 16 24
Industrial & Commercial Controls 37 49
Semiconductor Equipment (30) 11
Truck Components 43 59
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Ongoing operations 120 193
Divested operations 13
Amortization of intangible assets related to
businesses acquired (19) (15)
Interest expense - net (21) (22)
Gain on sales of businesses 91
Corporate and other - net 10 (14)
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Income before income taxes and
extraordinary item $ 90 $ 246
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See accompanying notes.
Eaton Corporation
Business Segment Information
Year ended
December 31
------------------
(Millions) 1998 1997
---- ----
Net sales
Automotive Components $1,943 $1,801
Hydraulics & Other Components 599 588
Industrial & Commercial Controls 2,320 2,251
Semiconductor Equipment 267 459
Truck Components 1,465 1,172
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Ongoing operations 6,594 6,271
Divested operations 31 1,292
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Total net sales $6,625 $7,563
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Operating profit
Automotive Components $ 212 $ 225
Hydraulics & Other Components 94 108
Industrial & Commercial Controls 180 216
Semiconductor Equipment (123) 29
Truck Components 220 170
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Ongoing operations 583 748
Divested operations (1) 76
Amortization of intangible assets related to
businesses acquired (67) (48)
Purchased in-process research & development (85)
Interest expense - net (88) (79)
Gain on sales of businesses 43 91
Corporate and other - net 15 (35)
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Income before income taxes and
extraordinary item $ 485 $ 668
------ ------
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See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
Dec. 31, Dec. 31,
(Millions) 1998 1997
---- ----
ASSETS
Current assets
Cash $ 80 $ 53
Short-term investments 42 37
Accounts receivable 885 958
Inventories 707 734
Deferred income taxes and
other current assets 268 273
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1,982 2,055
Property, plant and equipment 1,837 1,759
Excess of cost over net assets
of businesses acquired 1,025 966
Deferred income taxes and
other assets 821 826
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$5,665 $5,606
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 333 $ 104
Accounts payable and other
current liabilities 1,183 1,253
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1,516 1,357
Long-term debt 1,191 1,272
Postretirement benefits other than pensions 557 553
Other liabilities 344 353
Shareholders' equity 2,057 2,071
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$5,665 $5,606
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See accompanying notes.
Eaton Corporation
Notes to the Fourth Quarter 1998 Earnings Release
(All references to net income per Common Share assume dilution, unless otherwise indicated.)
Unusual Charges
Income in the fourth quarter of 1998 was reduced by restructuring charges of $29 million ($19 million aftertax, or $.26 per Common Share) which reduced operating profit of the Automotive Components segment by $5 million, the Hydraulics and Other Components segment by $1 million, the Industrial and Commercial Controls segment by $13 million, the Semiconductor Equipment segment by $2 million and the Truck Components segment by $8 million. These charges relate to workforce reductions, asset write-downs and other restructuring actions.
Income for the full year 1998 was reduced by unusual pretax charges of $111 million ($72 million aftertax, or $.99 per Common Share). The Company recorded $101 million of restructuring charges which reduced operating profit of the Automotive Components segment by $12 million, the Hydraulics and Other Components segment by $1 million, the Industrial and Commercial Controls segment by $28 million, the Semiconductor Equipment segment by $43 million, and the Truck Components segment by $17 million. These charges relate to workforce reductions, asset write-downs and other restructuring actions. The Company also recorded a $10 million contribution to its charitable trust which is included in other expense.
Income in the fourth quarter of 1997 was reduced by restructuring charges of $24 million ($15 million aftertax, or $.19 per Common Share) which reduced operating profit of the Automotive Components segment by $12 million, the Hydraulics and Other Components segment by $1 million, the Industrial and Commercial Controls segment by $6 million, the Semiconductor Equipment segment by $1 million and the Truck Components segment by $4 million. These charges also related to workforce reductions, asset write-downs and other items.
Sales of Businesses
On January 2, 1998, the Company sold the Axle and Brake business and on April 1, 1998, the automotive leaf spring business. The sale of these businesses, 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) which was recorded in the first quarter of 1998.
On October 1, 1997, the Company sold the majority of the stock of AIL Systems and on December 1, 1997, the worldwide Appliance Controls business. The sale of these businesses resulted in pretax gains of $91 million ($69 million aftertax, or $.88 per Common Share) which were recorded in the fourth quarter of 1997.
The operating results of these businesses are reported in business segment information as divested operations.
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 $203 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 segment 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, 1997 includes the write-off of $85 million ($1.09 per Common Share) for purchased in-process research and development, with no income tax benefit.
Income Taxes
In the fourth quarter of 1998, the effective income tax rate for full year 1998 was adjusted to 28% from 30%. This adjustment reduced income tax expense for the fourth quarter by $8 million, which primarily relates to a revision of the research and development tax credit.
Extraordinary Item
On December 30, 1997, the Company redeemed $200 million of 7% debentures due 2011. The aftertax extraordinary loss on this redemption, including the write-off of debt issue costs, was $54 million, or $.69 per Common Share ($88 million before income taxes) which was recorded in the fourth quarter 1997.
Financial Statement Changes
Certain amounts for prior periods have been reclassified to conform to the current period presentation.