Eaton Reports Record Sales and Earnings Per Share
19 July 1999
Eaton Reports Record Sales and Earnings Per Share
CLEVELAND--July 19, 1999--Eaton Corporation today announced record sales and earnings per share for the second quarter of 1999. Sales in the quarter were $2.30 billion, 34 percent above the second quarter of 1998. Earnings per share of $1.71 were 9 percent above last year's $1.57 per fully diluted share. Net income was $125 million compared to last year's $114 million.Net income for the first six months of 1999 reached $209 million, or $2.88 per share, on sales of $3.96 billion. Comparable first half 1998 earnings were $219 million, or $2.98 per share, on sales of $3.40 billion.
Stephen R. Hardis, Chairman and Chief Executive Officer, said, "Our results speak to the evolving nature of Eaton Corporation. Indeed, we believe the quarter marks an important milestone in the recognition of Eaton as a diversified industrial manufacturer capable of superior operational performance, balanced earning and higher sustainable growth."
"All of our businesses performed well given varied market conditions. We were particularly pleased by Semiconductor Equipment, which returned to double-digit profitability in the quarter. We are also making steady progress integrating Aeroquip-Vickers into the family of Eaton businesses. In our first quarter together, Aeroquip- Vickers added about $0.12 to Eaton's quarterly earnings per share prior to restructuring charges of $0.03."
Hardis noted that earlier this month the company completed the sale of 1.625 million common shares. Last week, Eaton announced it had signed a definitive agreement to sell the Engineered Fasteners business unit to TransTechnology Corporation for $173 million in cash. The combined proceeds of $320 million will be used to pay down a portion of the debt incurred to finance the Aeroquip- Vickers acquisition.
Said Hardis, "It's great to have earnings back on track, particularly when the recovery in semiconductor equipment has just begun and the market for hydraulics is still depressed. It means that we're beginning to see the benefits of the major initiatives we undertook throughout Eaton to reduce costs.
"Our challenge continues to be to meet our year 2000 earnings commitments while laying the foundation for sustainable earnings growth thereafter. In that respect, it is heartening to have Aeroquip-Vickers make an immediate contribution to earnings. Other areas of intense focus include: our new product and international growth initiatives; our $150 million cost-out program; and implementation of the Eaton Business System, which emphasizes achieving best practices consistently in every Eaton business.
"Eaton is now a very different company, and we're increasingly excited about our prospects."
Last week, Eaton announced selected revisions to its business segments to reflect the Aeroquip-Vickers acquisition, the anticipated divestitures of its Engineered Fasteners and Fluid Power business units, and to better align segments with markets served and reporting relationships.
Sales and profits in the Automotive Components segment were at record levels. Second quarter sales of $480 million were 10 percent above one year ago. This compares to an 11 percent increase in North American light vehicle production, a 2 percent increase in European output and a 30 percent year-to-year decline in South American production. Segment profits during the quarter were up 20 percent to $65 million. Hardis attributed the above-market performance to penetration gains across Eaton's product line.
Second quarter sales of Fluid Power & Other Components were $661 million, 267 percent above year earlier results. Segment profits, at $60 million, were 70 percent ahead of one year earlier. Including Aeroquip-Vickers in 1998 results on a pro forma basis, sales were off 8 percent from one year ago while profits were off 31 percent. Said Hardis, "Activity in mobile and stationary fluid power markets remains very depressed, with industry shipments off 11 percent versus last year. Given those conditions, we are encouraged by the positive contribution of Aeroquip-Vickers to Eaton earnings, and we are very pleased with the dedicated and productive efforts of the combined 'integration' and 'run' teams to build a world- leading Fluid Power business.
"While industry orders are essentially flat versus the first quarter, we don't anticipate a meaningful upturn before year-end. Restructuring expenses and a higher equity base will lower the net contribution of Aeroquip- Vickers during the remainder of the year. But, assuming markets do gradually improve, we are increasingly confident that this acquisition will add at least $0.50 per share to Eaton's year 2000 earnings per share."
Sales of Industrial & Commercial Controls were a record $578 million, up 4 percent from year-earlier results, compared to about a 1 percent increase in the North American market for electrical distribution equipment and industrial controls. Segment profits were 8 percent ahead of last year at $49 million. Hardis noted that Cutler- Hammer's North American orders in the second quarter were 14 percent ahead of one year ago. He attributed above- industry growth to strong residential and commercial construction markets, new multi-product "solutions" packaging, and the success of the new Engineering Service business unit.
Second quarter Semiconductor Equipment sales were $98 million, 6 percent above last year and well above the 10 percent decline in industry shipments. Operating profits were $10 million compared to an operating loss of $8 million. Said Hardis, "Our results reflect the early hard-earned benefits of our operational restructuring more than a resurgent market. But the equipment market is rebounding, with the second quarter book-to-bill ratio above 1.20. Our second quarter orders were 47 percent ahead of last year, and are at the highest level since late 1997. Customer reception to Eaton's new generation of semiconductor equipment validates our uninterrupted R&D spending over the past two difficult years, and should be reflected in sustained higher sales in the year ahead."
Truck Components sales were a record $407 million, 8 percent above one year ago. This compares with a 24 percent increase in North American Class 8 production, a 2 percent drop in European heavy truck production, and a decline of more than 40 percent in South American commercial vehicle production. Segment profits were flat compared to a year ago at $61 million. Said Hardis, "We are operating well beyond our production 'sweet spot,' utilizing Eaton's worldwide capacity to satisfy NAFTA heavy truck demand, which is now running above a 310,000 annual rate."
Last month the company announced it would invest more than $100 million to build a new truck transmission manufacturing plant in Mexico to meet unprecedented market demand and support Eaton's increasing market share for commercial truck components throughout NAFTA. Said Hardis, "Trucking continues to gain share in this world of just-in-time production and logistics. With the U.S. manufacturing sector also regaining momentum, we think the heavy truck market will continue near these levels for some time yet to come."
Eaton Corporation is a global manufacturer of highly engineered products that serve industrial, vehicle, construction, commercial, aerospace and semiconductor markets. Principal products include hydraulic products and fluid connectors, electrical power distribution and control equipment, truck drivetrain systems, ion implanters and a wide variety of controls. Headquartered in Cleveland, the company has 64,500 employees and 215 manufacturing sites in 25 countries around the world. Sales for 1998 were $6.6 billion. On April 9, 1999 Eaton acquired Aeroquip-Vickers, Inc., which had sales of $2.1 billion in 1998. The Internet address for Eaton is: http://www.eaton.com/
The forward-looking statements in this news release concerning the Aeroquip-Vickers acquisition 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, the markets for fluid power and other components and Eaton's ability to successfully implement the integration of Aeroquip-Vickers. We do not assume any obligation to update these forward-looking statements.
The financial results:
The company's comparative financial results for the three and six months ended June 30, 1999 and 1998 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended
June 30
------------------
(Millions except for per share data) 1999 1998
---- ----
Net sales $2,300 $1,712
Income before income taxes 186 161
Net income 125 114
Net income per Common Share
Assuming dilution $ 1.71 $ 1.57
Basic 1.74 1.60
Average number of Common Shares outstanding
Assuming dilution 72.8 72.8
Basic 71.7 71.1
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Comparative Financial Summary
Six months ended
June 30
-----------------
(Millions except for per share data) 1999 1998
---- ----
Net sales $3,961 $3,399
Income before income taxes 309 316
Net income 209 219
Net income per Common Share
Assuming dilution $ 2.88 $ 2.98
Basic 2.92 3.05
Average number of Common Shares outstanding
Assuming dilution 72.5 73.3
Basic 71.5 71.6
Cash dividends paid per Common Share $ .88 $ .88
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
June 30
------------------
(Millions except for per share data) 1999 1998
---- ----
Net sales $2,300 $1,712
Costs & expenses
Cost of products sold 1,643 1,200
Selling & administrative 354 264
Research & development 77 82
------ ------
2,074 1,546
------ ------
Income from operations 226 166
Other income (expense)
Interest expense - net (44) (23)
Other - net 4 18
------ ------
(40) (5)
------ ------
Income before income taxes 186 161
Income taxes 61 47
------ ------
Net income $ 125 $ 114
------ ------
------ ------
Net income per Common Share
Assuming dilution $ 1.71 $ 1.57
Basic 1.74 1.60
Average number of Common Shares outstanding
Assuming dilution 72.8 72.8
Basic 71.7 71.1
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Six months ended
June 30
-----------------
(Millions except for per share data) 1999 1998
---- ----
Net sales $3,961 $3,399
Costs & expenses
Cost of products sold 2,815 2,407
Selling & administrative 629 527
Research & development 148 164
------ ------
3,592 3,098
------ ------
Income from operations 369 301
Other income (expense)
Interest expense - net (65) (44)
Gain on sales of businesses 43
Other - net 5 16
------ ------
(60) 15
------ ------
Income before income taxes 309 316
Income taxes 100 97
------ ------
Net income $ 209 $ 219
------ ------
------ ------
Net income per Common Share
Assuming dilution $ 2.88 $ 2.98
Basic 2.92 3.05
Average number of Common Shares outstanding
Assuming dilution 72.5 73.3
Basic 71.5 71.6
Cash dividends paid per Common Share $ .88 $ .88
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
June 30
------------------
(Millions) 1999 1998
---- ----
Net sales
Automotive Components $ 480 $ 436
Fluid Power & Other Components 661 180
Industrial & Commercial Controls 578 553
Semiconductor Equipment 98 93
Truck Components 407 378
------ ------
Total ongoing operations 2,224 1,640
Divested operations 76 72
------ ------
Total net sales $2,300 $1,712
------ ------
------ ------
Operating profit
Automotive Components $ 65 $ 54
Fluid Power & Other Components 60 35
Industrial & Commercial Controls 49 46
Semiconductor Equipment 10 (8)
Truck Components 61 61
------ ------
Total ongoing operations 245 188
Divested operations 16 14
Amortization of certain intangible assets (24) (16)
Interest expense - net (44) (23)
Corporate & other - net (7) (2)
------ ------
Income before income taxes $ 186 $ 161
------ ------
------ ------
See accompanying notes.
Eaton Corporation
Business Segment Information
Six months ended
June 30
------------------
(Millions) 1999 1998
---- ----
Net sales
Automotive Components $ 958 $ 878
Fluid Power & Other Components 820 358
Industrial & Commercial Controls 1,090 1,062
Semiconductor Equipment 155 172
Truck Components 789 752
------ ------
Total ongoing operations 3,812 3,222
Divested operations 149 177
------ ------
Total net sales $3,961 $3,399
------ ------
------ ------
Operating profit
Automotive Components $ 127 $ 106
Fluid Power & Other Components 82 69
Industrial & Commercial Controls 76 68
Semiconductor Equipment (2) (22)
Truck Components 121 113
------ ------
Total ongoing operations 404 334
Divested operations 31 30
Amortization of certain intangible assets (41) (32)
Interest expense - net (65) (44)
Gain on sales of businesses 43
Corporate & other - net (20) (15)
------ ------
Income before income taxes $ 309 $ 316
------ ------
------ ------
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, December 31,
(Millions) 1999 1998
---- ----
ASSETS
Current assets
Cash & short-term investments $ 44 $ 122
Accounts receivable 1,429 885
Inventories 982 707
Deferred income taxes & other current
assets 323 268
------ ------
2,778 1,982
Property, plant & equipment 2,393 1,837
Excess of cost over net assets
of businesses acquired 1,977 1,025
Deferred income taxes & other assets 1,193 821
------ ------
$8,341 $5,665
------ ------
------ ------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $1,578 $ 333
Accounts payable & other current
liabilities 1,483 1,183
------ ------
3,061 1,516
Long-term debt 2,008 1,191
Postretirement benefits other than pensions 665 557
Other liabilities 482 344
Shareholders' equity 2,125 2,057
------ ------
$8,341 $5,665
------ ------
------ ------
See accompanying notes.
Eaton Corporation
Notes to the Second Quarter 1999 Earnings Release
Acquisition of Aeroquip-Vickers, Inc.
-------------------------------------
On April 9, 1999, the Company completed the acquisition of Aeroquip-Vickers, Inc. (A-V) for approximately $1.6 billion in cash. A-V, which had 1998 sales of $2.1 billion, is comprised of two principal subsidiaries: Aeroquip Corporation and Vickers, Inc. Aeroquip Corporation is a global leader in the manufacture of products that include all pressure ranges of hose, fittings, adapters, couplings and other fluid connectors, plus precision molded and extruded plastic products. Vickers, Inc. is a leading worldwide producer of hydraulic pumps, motors and cylinders; electronic and hydraulic controls; electric motors and drives; filtration products; and fluid-evaluation products and services. Funds for the purchase were primarily obtained through the issuance of commercial paper.
The acquisition has been accounted for by the purchase method of accounting, and accordingly, the statements of consolidated income include the results of A-V beginning April 9, 1999. The acquired assets and liabilities were recorded at estimated fair values as determined by Eaton's management based on information currently available and on current assumptions as to future operations. The allocation of the purchase price to the acquired assets and liabilities is subject to revision as a result of the final determination of appraised and other fair values.
Business Segment Reporting
--------------------------
As announced on July 15, 1999, due to the recent acquisition of A-V, and the planned divestitures of the Fluid Power, Engineered Fasteners and Vickers Electronics Systems divisions, the Company has realigned its business segment reporting. Principal changes include: Hydraulics and Other Components has been renamed Fluid Power and Other Components and will include the operating results of A-V; Aerospace Controls has been reclassified from Industrial and Commercial Controls to Fluid Power and Other Components; the Trucking Information Systems Division and Eaton VORAD have been reclassified from Automotive Components to Truck Components; and the operating results of the Fluid Power and Engineered Fasteners divisions, included in Automotive Components and Hydraulics and Other Components, respectively, have been reclassified to divested operations due to their expected divestiture. Prior periods have been reclassified to conform to the current presentation.
Subsequent Events
-----------------
In July 1999, in order to partially refinance the cost of the acquisition of A-V, the Company sold 1.625 million Common Shares for net proceeds of $147 million.
On July 13, 1999, Eaton announced it had signed a definitive agreement to sell the Engineered Fasteners business to TransTechnology Corporation for $173 million cash. The sale is expected to be completed by September 1, 1999.
Unusual Charges
---------------
Income in the first quarter of 1998 was reduced by unusual pretax charges of $43 million ($28 million aftertax, or $.38 per Common Share). The Company recorded $33 million of restructuring charges which reduced operating profit of the Automotive Components segment by $8 million, the Industrial & Commercial Controls segment by $15 million, and the Truck Components segment by $10 million. The Company also recorded a $10 million contribution to its charitable trust which is included in other expense.
Gain on 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, or $.38 per Common Share), which was recorded in the first quarter of 1998. On April 1, 1998, the Company completed the sale of its automotive leaf spring business. The operating results of these businesses are included in divested operations