Eaton Corporation
Gary Klasen, 216-523-4736 (Media Relations)
William C. Hartman, 216-523-4501 (Investor Relations)
Eaton Reports Third Quarter Net Income of $1.39 Per Share
Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today
announced net income per share of $1.39 for the third quarter of 2003,
an increase of 7 percent from net income per share of $1.30 in the
third quarter of 2002. Sales in the quarter were $2.03 billion, 11
percent above last year. Net income was $107 million compared to $93
million in 2002.
Net income in both periods included charges related to restructuring
activities. Net income in 2002 also included a gain on the sale of a
business, partly offset by a contribution to the Eaton Charitable
Fund. Before these items, 2003 third quarter operating earnings per
share were 15 percent above 2002, with 2003 operating earnings per
share of $1.45 versus $1.26 per share in 2002. Operating earnings for
the third quarter of 2003 were $112 million compared to $90 million in
2002.
For the first nine months of 2003, sales were $5.98 billion, 10
percent higher than in 2002. Net income of $272 million increased 27
percent over last year, and net income per share of $3.67 rose 23
percent above 2002. Operating earnings in the first nine months of
2003 increased to $288 million, 17 percent more than in 2002, and
operating earnings per share of $3.88 rose 13 percent compared to last
year.
Alexander M. Cutler, Eaton chairman and chief executive officer, said,
"We are very pleased with our third quarter results, which exceeded
the guidance we provided at the beginning of the quarter.
"The sales growth in the third quarter of 11 percent above last year
consisted of 8 percent from our recent acquisitions and 3 percent from
higher exchange rates. We continued to outperform our end markets, as
we estimate that our end markets declined 5 percent compared to the
third quarter last year.
"We continue to make good progress on integrating our recent
acquisitions. The profits of the acquired businesses, while still
modest, are beginning to reflect the benefits of our integration
activities. In addition, working capital in these acquisitions has
been significantly reduced and we expect further improvements over the
balance of the year.
"While our end markets remained depressed in the third quarter, we
anticipate modest growth in the fourth quarter compared to last year,
driven principally by a stronger heavy-duty truck market in North
America.
"We now anticipate full-year net income per share of $4.80 to $4.90
and fourth quarter net income per share of $1.15 to $1.25," said
Cutler. "Excluding the restructuring charges to integrate our recent
acquisitions, we are also confirming our full-year operating earnings
guidance at $5.15 to $5.25 per share, the high end of our previous
guidance. We anticipate fourth quarter operating earnings per share
will be in the $1.30 to $1.40 range. We are pleased that in spite of
end markets which are weaker than we expected at the beginning of the
year, and the issuance of an additional 3.7 million shares, we expect
to be able to post earnings at the high end of our original full year
guidance."
Business Segment Results
Third quarter sales of Fluid Power, Eaton's largest business segment,
were $683 million, 12 percent above one year earlier. Excluding the
impact of the Boston Weatherhead and Mechanical Products acquisitions,
sales were up 4 percent over the third quarter of 2002. This compares
to a decline of 3 percent in Fluid Power's markets, with North
American fluid power industry shipments down about 5 percent,
commercial aerospace markets off 10 percent, and defense aerospace
markets up by 12 percent. Operating profits in the third quarter were
$65 million. Operating profits before restructuring charges were $67
million, up 34 percent compared to a year earlier, reflecting
significantly improved results across most of the business.
"Our view of our end markets in this segment remains largely
unchanged. We do not anticipate a recovery in the traditional mobile
and industrial hydraulics markets until next year," said Cutler. "The
decline in the commercial aerospace market has occurred as we
expected. Military aerospace markets have been strong, largely
offsetting the decline in the commercial markets."
In the Electrical segment (formerly the Industrial & Commercial
Controls segment), third quarter sales were $612 million, up 21
percent from last year. Excluding the impact of the Delta and
Commonwealth Sprague Capacitor acquisitions and the new joint venture
formed with Caterpillar, third quarter sales were up 2 percent
compared to 2002. Operating profits in the third quarter were $49
million. Operating profits before restructuring charges were $54
million, up 10 percent from results one year ago.
"End markets for our electrical business remained weak during the
third quarter, with an estimated 3 percent decline in the markets for
this business compared to last year," said Cutler. "We expect that the
overall electrical markets will remain flat for the balance of 2003,
with modest growth expected to resume in the first half of next year.
"The profitability of our base electrical business has improved
significantly, and the integration of the electrical division of
Delta, which we purchased at the end of January, continues on plan,"
said Cutler. "Even so, the Delta acquisition reduced the Electrical
segment's operating margins for the quarter by slightly less than two
percentage points. We are encouraged by the rate of improvement in our
Delta acquisition and expect further improvement in the fourth
quarter.
"During the third quarter, Eaton formed a joint venture with
Caterpillar to provide switchgear products under the Cat brand name.
The joint venture operates under the name Intelligent Switchgear
Organization LLC and is 51 percent owned by Eaton. We expect annual
revenues within the next two to three years to be in excess of $100
million."
Among major contract wins in the Electrical segment in the third
quarter was a contract to supply electrical equipment for Phase I of
the new Terminal 5 at Heathrow Airport. Terminal 5 will proceed in
phases, with the entire project scheduled to be completed by 2006.
The Automotive segment posted third quarter sales of $395 million, 1
percent above the comparable quarter of last year. Both NAFTA and
European automotive production declined 5 percent compared to the same
period last year. Operating profits were $44 million, down 15 percent
from a year ago.
"Automotive segment revenue outpaced its end markets, as it has done
consistently all year," said Cutler. "Our margins during the quarter
continued to be negatively impacted by increased costs related to new
product launches and several facility relocations which are currently
underway. We expect to make further progress on these programs during
the fourth quarter, which should lead to an improvement in margins."
The Truck segment posted sales of $336 million in the third quarter,
up 4 percent compared to last year, and recorded operating profits of
$52 million, a 17 percent increase over 2002. NAFTA heavy-duty truck
production was down 16 percent compared to last year, reflecting the
fact that the third quarter of 2002 was the height of the "pre buy"
that occurred in 2002, and NAFTA medium-duty truck production was down
4 percent. European truck production was down 5 percent and Brazil
vehicle production was down 1%.
"Third quarter production of NAFTA heavy-duty trucks totaled about
47,000 units," said Cutler. "In light of the slightly weaker than
expected industry bookings levels in August and September, we expect
fourth quarter production of heavy-duty trucks in NAFTA to be
approximately 52,000 units, resulting in full year production totaling
180,000 units.
"We are pleased to announce today that Eaton, together with Shaanxi
Fast Gear Works Co., Ltd. and Xiang Torch Investment Co., Ltd., have
signed an agreement to form a joint venture in Xi'an, China to produce
heavy-duty truck transmissions for the growing Chinese market. Eaton
will have 55 percent ownership of the venture, which will be called
Eaton Fast Gear Company. The joint venture will be formally set up
upon obtaining regulatory approval. Production is expected to begin in
the fourth quarter of 2004.
Eaton is a global diversified industrial manufacturer with 2002 sales
of $7.2 billion that is a leader in fluid power systems; electrical
power quality, distribution and control; automotive engine air
management and fuel economy; and intelligent systems for fuel economy
and safety in trucks. Eaton has 51,000 employees and sells products in
more than 50 countries. For more information, visit www.eaton.com.
Notice of Conference Call: Eaton's conference call to discuss its
third quarter results is available to all interested parties via live
audio webcast today at 10 a.m. EDT through the Investor Relations tab
on Eaton's home page at www.eaton.com. This news release can be
accessed under the Corporate News heading on the Eaton home page by
clicking on the news release.
This news release contains forward-looking statements concerning the
fourth quarter 2003 and the full year 2003 net income per share and
operating earnings per share, our worldwide markets, our restructuring
programs, working capital, and joint venture revenues and production.
These statements should be used with caution. They are subject to
various risks and uncertainties, many of which are outside the
company's control. The following factors could cause actual results to
differ materially from those in the forward-looking statements:
unanticipated changes in the markets for the company's business
segments; failure to implement restructuring plans; unanticipated
downturns in business relationships with customers or their purchases
from us; competitive pressures on sales and pricing; increases in the
cost of material and other production costs, or unexpected costs that
cannot be recouped in product pricing; the introduction of competing
technologies; unexpected technical or marketing difficulties;
unexpected claims, charges, litigation or dispute resolutions;
material acquisitions or divestitures; significant costs from new laws
and governmental regulations; and unanticipated further deterioration
of economic and financial conditions in the United States and around
the world. We do not assume any obligation to update these
forward-looking statements.
Financial Results
The company's comparative financial results for the three months and
nine months ended September 30, 2003 and 2002 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
(Millions except for
per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 2,026 $ 1,830 $ 5,978 $ 5,434
Income before income taxes 142 132 363 307
Net income 107 93 272 214
Net income per Common Share
assuming dilution $ 1.39 $ 1.30 $ 3.67 $ 2.98
Average number of
Common Shares outstanding 77.2 71.9 74.2 71.7
Net income per Common Share
basic $ 1.41 $ 1.32 $ 3.73 $ 3.03
Average number of
Common Shares outstanding 75.9 70.8 73.1 70.5
Cash dividends paid per
Common Share $ 0.48 $ 0.44 $ 1.36 $ 1.32
Reconciliation of net income
to operating earnings
------------------------------
Net income $ 107 $ 93 $ 272 $ 214
Excluding reconciling
items (after-tax)
Restructuring charges 5 4 16 39
Contribution to Eaton
Charitable Fund - 6 - 6
Gain on sale of business - (13) - (13)
--------- --------- --------- ---------
Operating earnings $ 112 $ 90 $ 288 $ 246
========= ========= ========= =========
Net income per Common Share
assuming dilution $ 1.39 $ 1.30 $ 3.67 $ 2.98
Per share impact of
reconciling items 0.06 (0.04) 0.21 0.44
--------- --------- --------- ---------
Operating earnings per
Common Share $ 1.45 $ 1.26 $ 3.88 $ 3.42
========= ========= ========= =========
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
(Millions except for
per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 2,026 $ 1,830 $ 5,978 $ 5,434
Costs & expenses
----------------
Costs of products sold 1,479 1,316 4,392 3,966
Selling & administrative 327 302 995 917
Research & development 57 51 168 156
Interest expense-net 20 26 68 80
Gain on sale of business - (18) - (18)
Other (income) expense-net 1 21 (8) 26
--------- --------- --------- ---------
Income before income taxes 142 132 363 307
Income taxes 35 39 91 93
--------- --------- --------- ---------
Net income $ 107 $ 93 $ 272 $ 214
========= ========= ========= =========
Net income per Common Share
assuming dilution $ 1.39 $ 1.30 $ 3.67 $ 2.98
Average number of
Common Shares outstanding 77.2 71.9 74.2 71.7
Net income per Common Share
basic $ 1.41 $ 1.32 $ 3.73 $ 3.03
Average number of
Common Shares outstanding 75.9 70.8 73.1 70.5
Cash dividends paid per
Common Share $ 0.48 $ 0.44 $ 1.36 $ 1.32
See accompanying notes.
Eaton Corporation
Business Segment Information
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
(Millions) 2003 2002 2003 2002
---- ---- ---- ----
Net sales
---------
Fluid Power $ 683 $ 609 $ 2,083 $ 1,834
Electrical 612 506 1,701 1,511
Automotive 395 393 1,267 1,197
Truck 336 322 927 892
--------- --------- --------- ---------
$ 2,026 $ 1,830 $ 5,978 $ 5,434
========= ========= ========= =========
Operating profit
----------------
Fluid Power $ 65 $ 44 $ 186 $ 145
Electrical 49 49 114 109
Automotive 44 52 164 172
Truck 52 45 114 65
--------- --------- --------- ---------
210 190 578 491
Corporate
---------
Amortization of
intangible assets (5) (5) (18) (16)
Interest expense-net (20) (26) (68) (80)
Gain on sale of business - 18 - 18
Corporate expense-net (43) (45) (129) (106)
--------- --------- --------- ---------
Income before income taxes 142 132 363 307
Income taxes 35 39 91 93
--------- --------- --------- ---------
Net income $ 107 $ 93 $ 272 $ 214
========= ========= ========= =========
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
Sept. 30, Dec. 31,
(Millions) 2003 2002
---- ----
ASSETS
Current assets
--------------
Cash $ 72 $ 75
Short-term investments 522 353
Accounts receivable 1,314 1,032
Inventories 735 698
Deferred income taxes & other current assets 306 299
--------- ---------
2,949 2,457
Property, plant & equipment-net 2,059 1,955
Goodwill 1,998 1,910
Other intangible assets 508 510
Other assets 389 306
--------- ---------
$ 7,903 $ 7,138
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
-------------------
Short-term debt & current portion
of long-term debt $ 41 $ 201
Accounts payable 504 488
Accrued compensation 202 199
Accrued income & other taxes 284 225
Other current liabilities 761 621
--------- ---------
1,792 1,734
Long-term debt 1,901 1,887
Postretirement benefits other than pensions 639 652
Deferred income taxes & other liabilities 628 563
Shareholders' equity 2,943 2,302
--------- ---------
$ 7,903 $ 7,138
========= =========
See accompanying notes.
Eaton Corporation
Notes to the Third Quarter 2003 Earnings Release
Dollars in millions, except per share data (per share data
assume dilution)
Acquisition of Business
-----------------------
On January 31, 2003, Eaton acquired the electrical business of Delta
plc for approximately $215. The Delta business has operations in
Europe and in the Asia Pacific area. Sales in 2002 were $360. The
business' major electrical brands include MEM(R), Holec(TM), Bill(TM),
Home Automation(TM), Elek(TM) and Tabula(TM). The Delta business is
included in the Electrical segment.
On August 5, 2003, Eaton formed a joint venture with Caterpillar Inc.
to provide switchgear products under the Cat brand name. The joint
venture operates under the name Intelligent Switchgear Organization
LLC and is 51% owned by Eaton. Eaton's investment in the joint venture
is approximately $30.
Restructuring Charges
---------------------
In 2003, Eaton incurred restructuring charges related primarily to the
integration of the Boston Weatherhead fluid power business acquired in
November 2002 and the electrical business of Delta plc acquired in
January 2003. In 2002, the Company incurred charges to reduce
operating costs across its business segments and certain corporate
functions. The charges in 2002 were primarily a continuation of
restructuring programs initiated in 2001. A summary of these charges
follows:
Three months ended September 30
-------------------------------
Operating profit
Operating before
Restructuring profit restructuring
charges as reported charges
------------- ----------- ----------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Fluid Power $ 2 $ 6 $ 65 $ 44 $ 67 $ 50
Electrical 5 - 49 49 54 49
Automotive - - 44 52 44 52
Truck - - 52 45 52 45
----- ----- ------ ------ ------ ------
Total $ 7 $ 6 $ 210 $ 190 $ 217 $ 196
===== ===== ====== ====== ====== ======
After-tax $ 5 $ 4
Per Common Share $0.06 $0.05
Nine months ended September 30
-------------------------------
Operating profit
Operating before
Restructuring profit restructuring
charges as reported charges
------------- ----------- ----------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Fluid Power $ 11 $ 24 $ 186 $ 145 $ 197 $ 169
Electrical 12 15 114 109 126 124
Automotive - 1 164 172 164 173
Truck - 14 114 65 114 79
----- ----- ------ ------ ------ ------
23 54 $ 578 $ 491 $ 601 $ 545
====== ====== ====== ======
Corporate 1 4
----- -----
Total $ 24 $ 58
===== =====
After-tax $ 16 $ 39
Per Common Share $0.21 $0.53
The restructuring charges were included in the Statements of
Consolidated Income in Costs of products sold or Selling &
administrative expense, as appropriate. In Business Segment
Information, the restructuring charges reduced Operating profit of the
related business segment or were included in Corporate expense-net, as
appropriate.
Contribution to Eaton Charitable Fund
-------------------------------------
In third quarter 2002, a corporate charge of $10 was recorded for a
contribution to the Eaton Charitable Fund ($6 after-tax, or $0.09 per
Common Share). In the Statements of Consolidated Income, the charge
was included in Other (income) expense-net. In Business Segment
Information, the charge was included in Corporate expense-net.
Gain on Sale of Business
------------------------
In July 2002, the Navy Controls business was sold resulting in a
pretax gain of $18 ($13 after-tax, or $0.18 per Common Share).
Other (Income) Expense-Net
--------------------------
The change of $20 in Other (income) expense-net for third quarter 2003
compared to the same period in 2002 was primarily due to a loss of $1
in foreign exchange in 2003 versus a loss of $5 in 2002, reduced legal
expenses of $4 in 2003, and the corporate charge of $10 in third
quarter 2002 for the contribution to the Eaton Charitable Fund. The
change of $34 in Other (income) expense-net for the first nine months
of 2003 compared to the same period in 2002 was primarily due to a
gain of $5 in foreign exchange in 2003 versus a loss of $8 in 2002,
the corporate charge of $10 in third quarter 2002 for the contribution
to the Eaton Charitable Fund, and various other items including
reduced legal expenses and favorable legal settlements in 2003.
Pension and Other Postretirement Benefit Expense
------------------------------------------------
Pretax operating income for third quarter 2003 was reduced by $18 ($12
after-tax, or $0.15 per Common Share) compared to the same period in
2002 due to the effect on pension income of the decline in stock
market valuations on Eaton's pension fund assets, coupled with lower
discount rates associated with pension and other postretirement
benefit liabilities. Pretax operating income for the first nine months
of 2003 was similarly reduced by $50 ($33 after-tax, or $0.44 per
Common Share) compared to the same period in 2002.
Income Taxes
------------
The effective income tax rate for third quarter and the first nine
months of 2003 was 25.0%. The rates in 2003 compared to 29.6% for
third quarter 2002 and 30.4% for the first nine months of 2002. The
lower rates in 2003 reflect many factors, including higher earnings in
tax jurisdictions with lower income tax rates and increased tax
benefits from tax losses.
Sale of Common Shares
---------------------
In June 2003, Eaton sold 3.7 million Common Shares for net proceeds of
$296, which were used to pay down commercial paper and for general
corporate purposes.
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.