Eaton Reports Record Sales and Earnings
19 October 1999
Eaton Reports Record Sales and Earnings
CLEVELAND--Oct. 19, 1999--Eaton Corporation today announced record sales and earnings for the third quarter of 1999. Sales in the quarter were $2.23 billion, 37 percent above the third quarter of 1998. Earnings per share of $2.46 were well above last year's $0.80 per share. Net income was $184 million compared to last year's $58 million.Excluding a gain from the sale of the company's Engineered Fasteners Division and restructuring charges in both periods, Eaton earned $1.45 per share, 23 percent above one year earlier. Comparable net income was $108 million versus $85 million.
Net income for the first nine months of 1999 reached a record $393 million, or $5.35 per share, on record sales of $6.19 billion. Comparable year earlier earnings were $277 million or $3.79 per share, on sales of $5.02 billion. Excluding non-recurring items in both periods, net income was $319 million, or $4.35 per share, in the first nine months of 1999 compared to $304 million, or $4.16 per share, in 1998.
Stephen R. Hardis, Chairman and Chief Executive Officer, said, "Eaton continues to gain momentum toward our year 2000 earnings commitments. Compared to a year ago, operating profits before charges are up 80 percent to $238 million. We are taking far better advantage of generally robust conditions in Truck, Automotive, and Industrial markets, and the benefits of last year's restructuring of Semiconductor Equipment are showing up in sharply improved performance this year.
"Conditions in the Fluid Power business, in contrast, remain very weak, but we are making excellent progress integrating the former Aeroquip-Vickers, Inc. into the family of Eaton businesses. During the quarter, Aeroquip-Vickers added about $0.03 to Eaton's earnings per share before restructuring charges. The quality of Eaton's performance can also be seen in our earnings before non-cash amortization charges. Our comparable 'cash' earnings per share were up 30 percent in the third quarter to $1.76 per share."
Looking at segment results, Hardis noted that sales and profits in Automotive Components were at record third quarter levels. Sales of $444 million were 8 percent above one year ago. This compares to a 15 percent increase in NAFTA light vehicle production, a 2 percent rise in Europe, and a 17 percent decline in South American output. Segment profits during the quarter were up 32 percent to $50 million.
Third quarter sales of Fluid Power & Other Components were $614 million, 265 percent above year earlier results. Segment profits, at $51 million before restructuring charges, were 96 percent ahead of one year earlier. Including Aeroquip-Vickers in 1998 results on a pro forma basis, sales were off 5 percent from one year ago while profits were off 9 percent. Said Hardis, "As recent announcements from our major customers suggest, conditions in fluid power markets remain very depressed, with North American industry shipments of both mobile and industrial hydraulics off about 10 percent compared to a year ago. The decline in Eaton shipments has been somewhat less pronounced because of steady activity in Aeroquip's fluid conveyance business.
"Given industry conditions, we're encouraged that Aeroquip-Vickers was accretive to Eaton's earnings again this quarter. While we don't anticipate an improvement in hydraulics markets before year-end, our progress in integrating these operations and building a world-leading Fluid Power business remains on track. To finance the Aeroquip-Vickers acquisition, we raised $147 million in equity at mid-year, and recently completed the sale of the Engineered Fasteners and Fluid Power divisions at very attractive prices, to pay down debt."
Sales of Industrial & Commercial Controls were a record $587 million, up 5 percent from year-earlier results. This compares to about a 2 percent increase in the North American market for electrical distribution equipment and industrial controls. Segment profits were 17 percent ahead of last year at $54 million. Hardis attributed above-industry growth to continued strength in residential and light commercial construction, to selected market share gains, and to building momentum in Cutler-Hammer's Engineering Service and Systems business.
Third quarter sales of Semiconductor Equipment were $109 million, 127 percent above last year and more than double the pace of the industry rebound. Segment profits were $16 million compared to an operating loss of $29 million before charges in the prior year. Said Hardis, "After nearly three years of unprecedented volatility and the extraordinarily difficult conditions we faced last year, it is perhaps most noteworthy that this business is beginning to feel 'normal' again. The semiconductor equipment industry continues its rebound, with third quarter orders up over 100 percent and a book-to-bill ratio of about 1.15. We are realizing the benefits of last year's restructuring, and expect to take full advantage of sustained industry recovery in the years immediately ahead."
Truck Components sales and profits were also at record levels in the third quarter. Sales of $414 million were 13 percent above last year. This compares with a 27 percent increase in NAFTA Class 8 production, a 3 percent drop in European commercial truck production, and a 36 percent decline in South American truck production. Segment profits were up 31 percent to $67 million. Said Hardis, "Although we are still operating well beyond our production 'sweet spot', we are becoming increasingly effective utilizing Eaton's worldwide capacity to satisfy NAFTA heavy truck demand. As the NAFTA Class 8 market begins to stabilize at around 310 - 320 thousand units, and especially when our new Mexican plant comes on line, we expect to see continued improvements in operating performance."
Summing up, Hardis said, "We feel very good about these operational results. A year ago, at a time when we were hurt badly by the unexpected collapse in the global semiconductor equipment markets, we committed to a sharp improvement in company-wide performance. Tough restructuring measures were taken throughout Eaton in a concerted effort to regain a sharper focus on our earnings targets. These actions have paid off.
"We are now gaining further momentum from the continuing benefits of restructuring, the implementation of the Eaton Business System, the Aeroquip-Vickers acquisition consolidation savings and the payoff from our substantial new product commercialization programs. In short, we are making good progress toward sustained superior performance in the years ahead."
Eaton 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, engine components, ion implanters and a wide variety of controls. Headquartered in Cleveland, the company has 64,000 employees and 205 manufacturing sites in 25 countries around the world. Eaton's 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 hydraulics markets, recovery in the semiconductor industry, improvements in the Truck Components segment and sustained superior performance in the years ahead, 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, market demand for hydraulics and semiconductor equipment, the ability to implement business plans and the 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 months and nine months ended September 30, 1999 and 1998 follows:
Eaton Corporation
Comparative Financial Summary
Three months ended
September 30
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(Millions except for per share data) 1999 1998
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Net sales $2,227 $1,620
Income before income taxes 286 79
Net income 184 58
Net income per Common Share
Assuming dilution $ 2.46 $ .80
Basic 2.52 .82
Average number of Common Shares outstanding
Assuming dilution 74.9 72.3
Basic 73.2 71.1
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Comparative Financial Summary
Nine months ended
September 30
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(Millions except for per share data) 1999 1998
---- ----
Net sales $6,188 $5,019
Income before income taxes 595 395
Net income 393 277
Net income per Common Share
Assuming dilution $ 5.35 $ 3.79
Basic 5.44 3.87
Average number of Common Shares outstanding
Assuming dilution 73.4 73.0
Basic 72.2 71.5
Cash dividends paid per Common Share $ 1.32 $ 1.32
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended
September 30
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(Millions except for per share data) 1999 1998
---- ----
Net sales $2,227 $1,620
Costs & expenses
Cost of products sold 1,612 1,192
Selling & administrative 349 247
Research & development 82 85
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2,043 1,524
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Income from operations 184 96
Other income (expense)
Interest expense - net (47) (23)
Gain on sales of businesses 133
Other - net 16 6
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102 (17)
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Income before income taxes 286 79
Income taxes 102 21
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Net income $ 184 $ 58
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------ ------
Net income per Common Share
Assuming dilution $ 2.46 $ .80
Basic 2.52 .82
Average number of Common Shares outstanding
Assuming dilution 74.9 72.3
Basic 73.2 71.1
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Nine months ended
September 30
-----------------
(Millions except for per share data) 1999 1998
---- ----
Net sales $6,188 $5,019
Costs & expenses
Cost of products sold 4,427 3,599
Selling & administrative 978 774
Research & development 230 249
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5,635 4,622
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Income from operations 553 397
Other income (expense)
Interest expense - net (112) (67)
Gain on sales of businesses 133 43
Other - net 21 22
------ ------
42 (2)
------ ------
Income before income taxes 595 395
Income taxes 202 118
------ ------
Net income $ 393 $ 277
------ ------
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Net income per Common Share
Assuming dilution $ 5.35 $ 3.79
Basic 5.44 3.87
Average number of Common Shares outstanding
Assuming dilution 73.4 73.0
Basic 72.2 71.5
Cash dividends paid per Common Share $ 1.32 $ 1.32
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended
September 30
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(Millions) 1999 1998
---- ----
Net sales
Automotive Components $ 444 $ 412
Fluid Power & Other Components 614 168
Industrial & Commercial Controls 587 559
Semiconductor Equipment 109 48
Truck Components 414 368
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Total ongoing operations 2,168 1,555
Divested operations 59 65
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Total net sales $2,227 $1,620
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Operating profit
Automotive Components $ 50 $ 41
Fluid Power & Other Components 43 26
Industrial & Commercial Controls 54 44
Semiconductor Equipment 16 (71)
Truck Components 67 50
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Total ongoing operations 230 90
Divested operations 9 8
Amortization of goodwill &
other intangible assets (28) (16)
Interest expense - net (47) (23)
Gain on sales of businesses 133
Corporate & other - net (11) 20
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Income before income taxes $ 286 $ 79
------ ------
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See accompanying notes.
Eaton Corporation
Business Segment Information
Nine months ended
September 30
-----------------
(Millions) 1999 1998
---- ----
Net sales
Automotive Components $1,402 $1,290
Fluid Power & Other Components 1,434 526
Industrial & Commercial Controls 1,677 1,621
Semiconductor Equipment 264 220
Truck Components 1,203 1,120
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Total ongoing operations 5,980 4,777
Divested operations 208 242
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Total net sales $6,188 $5,019
------ ------
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Operating profit
Automotive Components $ 177 $ 147
Fluid Power & Other Components 125 95
Industrial & Commercial Controls 130 112
Semiconductor Equipment 14 (93)
Truck Components 188 163
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Total ongoing operations 634 424
Divested operations 40 38
Amortization of goodwill &
other intangible assets (72) (48)
Interest expense - net (112) (67)
Gain on sales of businesses 133 43
Corporate & other - net (28) 5
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Income before income taxes $ 595 $ 395
------ ------
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See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
September 30, December 31,
(Millions) 1999 1998
---- ----
ASSETS
Current assets
Cash & short-term investments $ 71 $ 122
Accounts receivable 1,400 885
Inventories 950 707
Deferred income taxes & other current
assets 352 268
------ ------
2,773 1,982
Property, plant & equipment 2,405 1,837
Goodwill 1,970 1,025
Deferred income taxes & other assets 1,221 821
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$8,369 $5,665
------ ------
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $1,201 $ 333
Accounts payable & other current
liabilities 1,616 1,183
------ ------
2,817 1,516
Long-term debt 1,946 1,191
Postretirement benefits other than pensions 663 557
Deferred income taxes & other liabilities 493 344
Shareholders' equity 2,450 2,057
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$8,369 $5,665
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See accompanying notes.
Eaton Corporation
Notes to the Third Quarter 1999 Earnings Release (All references to net income per Common Share assume dilution.)
Acquisition of Aeroquip-Vickers, Inc.
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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, was comprised of two principal subsidiaries: Aeroquip Corporation and Vickers, Inc.. Aeroquip's operations manufacture products that include all pressure ranges of hose, fittings, adapters, couplings and other fluid connectors, plus precision molded and extruded plastic products. Vickers' operations produce hydraulic pumps, motors and cylinders; electronic and hydraulic controls; electric motors and drives; filtration products; and fluid-evaluation products and services. These worldwide operations are part of the Fluid Power and Other Components business segment. Funds for the purchase were initially 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 effects of the acquisition of A-V beginning April 9, 1999. The acquired assets and liabilities were recorded at estimated fair values as determined by the Company'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.
Unusual Charges
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Income in the third quarter of 1999 was reduced by restructuring charges of $8 million ($5 million aftertax, or $.07 per Common Share). Income in the first nine months of 1999 was reduced by restructuring charges of $11 million ($7 million aftertax, or $.10 per Common Share). These charges reduced operating profit of the Fluid Power and Other Components segment and are associated with the integration of A-V into the Company.
Income in the third quarter of 1998 was reduced by restructuring charges of $42 million ($27 million aftertax, or $.38 per Common Share) which reduced operating profit of the Semiconductor Equipment segment.
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 and 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.
Restructuring charges recorded in 1999 and 1998 relate to workforce reductions, asset write-downs and other restructuring actions.
Gain on Sales of Businesses
---------------------------
On August 31, 1999, the Company completed the sale of the Engineered Fasteners Division for $173 million in cash. The sale of this business resulted in a pretax gain of $133 million ($81 million aftertax, or $1.08 per Common Share) which was recorded in the third quarter of 1999. On October 1, 1999, the Company completed the sale of the Fluid Power Division for $310 million in cash. The gain on the sale of this business will be reported in the fourth quarter of 1999.
On January 2, 1998, the Company completed the sale of the Axle and Brake business. 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.
Sale of Common Shares
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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.