SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 14, 2002
EATON CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 1-1396 34-0196300
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
Eaton Center
Cleveland, Ohio 44114
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(Address of principal executive offices) (Zip Code)
(216) 523-5000
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Registrant's telephone number,
including area code
Item 5. Other Events
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Press Release dated October 14, 2002
EATON REPORTS SECOND QUARTER OPERATING EARNINGS OF
$1.26 PER SHARE
CLEVELAND . . . Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced operating earnings per share of $1.26 for the third quarter of
2002, 91 percent above results one year earlier of $.66 per share. Sales in the
quarter were $1.83 billion, 5 percent above last year. Net income before
unusual items was $90 million compared to $47 million in 2001.
After all unusual items in both periods, net income in the third quarter of 2002
was more than double that in 2001, with 2002 net income of $93 million and
earnings per share of $1.30, compared to $40 million and $.57 per share in 2001.
In comparison to 2001, third quarter 2002 results were favorably impacted by
$.22 per share due to the adoption of Statement of Financial Accounting
Standards No. 142, which discontinued the amortization of goodwill and certain
intangible assets, and were unfavorably impacted by $.12 per share due to lower
pension income. Net income in the third quarter benefited from a gain of $.18
per share on the sale of the Navy Controls business, partly offset by an expense
of $.09 per share for a contribution to the Eaton Charitable Fund.
Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are
pleased with our third quarter results. For the past two quarters, we have
experienced growth in revenue compared to the same period a year ago and have
achieved operating margins over 10 percent. It is clear we are realizing the
benefit of the aggressive actions we have taken to resize our corporation, even
though most of our end markets remain depressed. We remain on track to realize
$130 million of savings in 2002 from these restructuring actions.
"We made further progress implementing the Eaton Business System during the
third quarter, with results evident in the continued tight control over working
capital and capital expenditures. These improvements, along with proceeds from
the sale of our Navy Controls business, helped us to pay down an additional $246
million of debt during the third quarter, bringing the total reduction in debt
for the first nine months of 2002 to $408 million. During the third quarter we
also issued $300 million of 10-year term debt, which was used to reduce our
outstanding commercial paper.
"The modest recovery we had anticipated in our end markets beginning in the
fourth quarter appears to be delayed somewhat due to the slow and uneven pace of
the economic recovery. Our current forecast projects very little growth in our
end markets in the first half of next year, with stronger growth likely in the
second half. As a result of the continuing soft market conditions, we are
continuing to exercise tight control over all expenditures.
"Restructuring expense in the third quarter was $6 million, bringing
restructuring expenses year-to-date to $58 million. We expect our full-year
restructuring expenses to be $60 million.
"We are narrowing our full-year operating earnings guidance to $4.30 to $4.40
per share. We anticipate fourth quarter operating earnings per share will be
in the $.90 to $1.00 range," said Cutler.
Business Segment Results
------------------------
Third quarter sales of Eaton's largest business segment, Fluid Power, were $609
million, 2 percent above one year earlier. This compares to a decline of 3
percent in Fluid Power's markets, with North American fluid power industry
shipments up about 1 percent, commercial aerospace markets off about 23 percent,
and defense aerospace markets up by 13 percent. Segment profits before
restructuring costs were $50 million, $15 million more than last year.
"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 stronger than expected and are likely to remain strong into
next year.
"As previously announced, major product wins during the quarter included the
wing fluid distribution package for the F-35, the second major contract we have
won on the Joint Strike Fighter, and additional business from the U.S. Air
Force's decision to purchase an additional 60 C-17 cargo aircraft.
"At quarter end, we announced that we had signed a contract to purchase
substantially all of the assets of the Boston Weatherhead hose and fittings
business owned by Dana Corporation, " said Cutler. "The Boston Weatherhead
business had sales of $207 million in 2001. We anticipate the transaction to
close in November."
In the Industrial & Commercial Controls segment, third quarter sales were $506
million, down 8 percent from last year, but down only 3 percent after adjusting
for the impact of selling the Navy Controls business at the start of the third
quarter. Operating profits were $49 million, up 7 percent from results one
year ago.
"End markets for our electrical business continued to weaken during the third
quarter, with an estimated 6 percent decline in the North American markets for
this business compared to last year," said Cutler. "We expect that the long-
cycle, large-project portion of this business will continue to soften for the
remainder of this year, with a recovery not expected until the middle of next
year. The residential market has remained strong, helping us to substantially
outgrow our end markets in the third quarter."
The Automotive segment posted sales of $393 million in the third quarter, 13
percent above the comparable quarter of last year. NAFTA automotive production
was up 12 percent, while European production declined 5 percent, compared to the
same period last year. Segment profits were $52 million, up 27 percent from a
year ago.
"Our Automotive segment continued its strong performance with sales that
considerably outpaced its end markets," said Cutler. "The heavy investments we
have made in new product development over the last several years are continuing
to deliver real results as we have been able to accelerate the pace of new
product introductions and gain market share."
The Truck segment posted sales of $322 million in the third quarter, a 27
percent increase over the comparable period last year, and recorded profits of
$45 million, compared to a breakeven performance before unusual items a year
ago. NAFTA heavy-duty truck production was up 67 percent and NAFTA medium-duty
truck production was up 11 percent. European truck production was down 7
percent and South American production decreased by 4 percent.
"For the full year, we now expect production of heavy-duty trucks in NAFTA to
total 174,000 units," said Cutler. "The positive impact of our extensive
restructuring actions over the last two years can be seen in the $45 million of
increased profit in the third quarter of 2002 on increased sales of $69 million,
compared to the same period in 2001.
"Among the significant product wins achieved in the third quarter were two new
contracts that we announced last week with Volvo and AGCO to supply
transmissions for the Brazilian market," said Cutler.
Eaton is a global $7.3 billion diversified industrial manufacturer that is a
leader in fluid power systems; electrical power quality, distribution and
control; automotive engine air management and fuel economy; and intelligent
truck systems for fuel economy and safety. Eaton has 47,000 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 on www.eaton.com.
This news release contains forward-looking statements concerning the fourth
quarter 2002 and the full year 2002 operating earnings per share, our worldwide
markets, expenses and benefits of our restructuring programs, and expected
volumes from business awards. These statements 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 or
dispute resolutions; 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
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The company's comparative financial results for the three months and nine months
ended September 30, 2002 and 2001 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended
September 30
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(Millions except for per share data) 2002 2001
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Net sales $1,830 $1,750
Income before income taxes 132 61
Net income 93 40
Net income per Common Share assuming dilution $ 1.30 $ 0.57
Average number of Common Shares outstanding 71.9 70.9
Net income per Common Share basic $ 1.32 $ 0.58
Average number of Common Shares outstanding 70.8 69.6
Cash dividends paid per Common Share $ 0.44 $ 0.44
Reconciliation of net income to operating earnings
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Net income $ 93 $ 40
Excluding (after-tax)
Unusual charges 10 22
Gains on sales of businesses (13) (15)
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Operating earnings $ 90 $ 47
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Net income per Common Share assuming dilution $ 1.30 $ 0.57
Per share impact of unusual items (0.04) 0.09
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Operating earnings per Common Share $ 1.26 $ 0.66
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See accompanying notes.
Comparative Financial Summary
Nine months ended
September 30
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(Millions except for per share data) 2002 2001
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Net sales $5,434 $5,604
Income before income taxes 307 239
Net income 214 139
Net income per Common Share assuming dilution $ 2.98 $ 1.97
Average number of Common Shares outstanding 71.7 70.5
Net income per Common Share basic $ 3.03 $ 2.01
Average number of Common Shares outstanding 70.5 69.3
Cash dividends paid per Common Share $ 1.32 $ 1.32
Reconciliation of net income to operating earnings
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Net income $ 214 $ 139
Excluding (after-tax)
Unusual charges 45 69
Gains on sales of businesses (13) (22)
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Operating earnings $ 246 $ 186
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Net income per Common Share assuming dilution $ 2.98 $ 1.97
Per share impact of unusual items 0.44 0.67
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Operating earnings per Common Share $ 3.42 $ 2.64
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See accompanying notes.
Statements of Consolidated Income
Three months ended
September 30
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(Millions except for per share data) 2002 2001
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Net sales $1,830 $1,750
Costs & expenses
Cost of products sold 1,316 1,326
Selling & administrative 302 300
Research & development 51 56
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1,669 1,682
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Income from operations 161 68
Other income (expense)
Interest expense-net (26) (33)
Gains on sales of businesses 18 23
Other-net (21) 3
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(29) (7)
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Income before income taxes 132 61
Income taxes 39 21
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Net income $ 93 $ 40
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Net income per Common Share assuming dilution $ 1.30 $ 0.57
Average number of Common Shares outstanding 71.9 70.9
Net income per Common Share basic $ 1.32 $ 0.58
Average number of Common Shares outstanding 70.8 69.6
Cash dividends paid per Common Share $ 0.44 $ 0.44
See accompanying notes.
Statements of Consolidated Income
Nine months ended
September 30
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(Millions except for per share data) 2002 2001
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Net sales $5,434 $5,604
Costs & expenses
Cost of products sold 3,966 4,223
Selling & administrative 917 924
Research & development 156 177
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5,039 5,324
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Income from operations 395 280
Other income (expense)
Interest expense-net (80) (113)
Gains on sales of businesses 18 61
Other-net (26) 11
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(88) (41)
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Income before income taxes 307 239
Income taxes 93 100
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Net income $ 214 $ 139
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Net income per Common Share assuming dilution $ 2.98 $ 1.97
Average number of Common Shares outstanding 71.7 70.5
Net income per Common Share basic $ 3.03 $ 2.01
Average number of Common Shares outstanding 70.5 69.3
Cash dividends paid per Common Share $ 1.32 $ 1.32
See accompanying notes.
Business Segment Information
Three months ended
September 30
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(Millions) 2002 2001
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Net sales
Fluid Power $ 609 $ 600
Industrial & Commercial Controls 506 548
Automotive 393 349
Truck 322 253
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Total net sales $1,830 $1,750
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Operating profit (loss)
Fluid Power $ 44 $ 31
Industrial & Commercial Controls 49 27
Automotive 52 41
Truck 45 (6)
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Total ongoing operations 190 93
Amortization of goodwill & other intangible assets (5) (24)
Interest expense-net (26) (33)
Gains on sales of businesses 18 23
Corporate & other-net (45) 2
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Income before income taxes 132 61
Income taxes 39 21
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Net income $ 93 $ 40
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See accompanying notes.
Business Segment Information
Nine months ended
September 30
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(Millions) 2002 2001
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Net sales
Fluid Power $1,834 $1,929
Industrial & Commercial Controls 1,511 1,671
Automotive 1,197 1,125
Truck 892 794
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Total ongoing operations 5,434 5,519
Divested operations 85
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Total net sales $5,434 $5,604
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Operating profit (loss)
Fluid Power $ 145 $ 146
Industrial & Commercial Controls 109 126
Automotive 172 150
Truck 65 (49)
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Total ongoing operations 491 373
Divested operations 7
Amortization of goodwill & other intangible assets (16) (72)
Interest expense-net (80) (113)
Gains on sales of businesses 18 61
Corporate & other-net (106) (17)
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Income before income taxes 307 239
Income taxes 93 100
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Net income $ 214 $ 139
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See accompanying notes.
Condensed Consolidated Balance Sheets
September 30 December 31
(Millions) 2002 2001
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ASSETS
Current assets
Cash & short-term investments $ 379 $ 311
Accounts receivable 1,139 1,070
Inventories 634 681
Deferred income taxes & other current
assets 311 325
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2,463 2,387
Property, plant & equipment-net 1,898 2,050
Goodwill 1,893 1,902
Other intangible assets 505 533
Other assets 711 774
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$7,470 $7,646
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 199 $ 188
Accounts payable 368 418
Accrued compensation 189 158
Accrued income & other taxes 304 258
Other current liabilities 764 647
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1,824 1,669
Long-term debt 1,833 2,252
Postretirement benefits other than pensions 657 670
Deferred income taxes & other liabilities 551 580
Shareholders' equity 2,605 2,475
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$7,470 $7,646
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See accompanying notes.
Notes to the Third Quarter 2002 Earnings Release
Dollars in millions, except per share data (per share data assume dilution)
Unusual Charges
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As the extraordinarily weak economic conditions of 2001 continued into 2002,
Eaton undertook additional restructuring actions in the first nine months of
2002 to further reduce fixed operating costs across its business segments and
certain corporate functions as described below.
Three months ended Nine months ended
September 30 September 30
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2002 2001 2002 2001
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Operational restructuring charges
Fluid Power $ 6 $ 4 $ 24 $ 18
Industrial & Commercial Controls 19 15 23
Automotive 1
Truck 6 14 49
Corporate restructuring charges 4 4 4
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6 33 58 94
Other corporate charges 10 10 10
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Total unusual charges $ 16 $ 33 $ 68 $104
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After-tax $ 10 $ 22 $ 45 $ 69
Per Common Share .14 .30 .62 .98
The operational restructuring charges are included in the Statements of
Consolidated Income in Income from operations and reduced operating profit of
the related business segment. The corporate restructuring charges are
included in the Statements of Consolidated Income in Income from operations and
the Other corporate charges are included in Other expense-net. All of the
corporate restructuring and other corporate charges are included in Business
Segment Information in Corporate & other-net.
The other corporate charge of $10 in the third quarter of 2002 represents a
contribution to the Eaton Charitable Fund. The other corporate charge of $10 in
the second quarter of 2001 resulted from an arbitration award related to a
contractual dispute over supply arrangements initiated in February 1999 against
Vickers, Incorporated, a subsidiary of Aeroquip-Vickers Inc., which was acquired
by Eaton in April 1999.
Gains on Sales of Businesses
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During the third quarter of 2002, the Company sold its Navy Controls business.
The sale of this business resulted in a pretax gain of $18 ($13 after-tax, or
$.18 per Common Share).
During the third quarter of 2001, the Company sold its Air Conditioning &
Refrigeration business and certain assets of the Automotive business. The sales
of these businesses resulted in a net pretax gain of $23 ($15 after-tax, or $.21
per Share). During the first nine months of 2001, Eaton sold businesses
resulting in a net pretax gain of $61 ($22 after-tax, or $.31 per Share). In
addition to the businesses sold in the third quarter of 2001 as discussed above,
the Vehicle Switch / Electronics Division (VS/ED) business and certain assets of
the truck business were sold in the first quarter of 2001. In Business Segment
Information, the operating results of VS/ED are included in divested operations
for 2001.
Goodwill and Other Intangible Assets
------------------------------------
Effective January 1, 2002, Eaton adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets". Upon adoption,
the Company discontinued the amortization of goodwill and indefinite life
intangible assets recorded in connection with previous business combinations.
Third quarter 2002 results were impacted favorably by this reduction in
amortization expense of $19 ($16 after-tax, or $.22 per Common Share). Results
for the first nine months of 2002 were similarly impacted by this reduction in
amortization expense of $56 ($48 after-tax, or $.67 per Share).
Pension and Other Postretirement Benefit Expense
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Pretax income for the third quarter of 2002 was reduced by $13 ($9 after-tax, or
$.12 per Common Share) compared to the same period in 2001 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 income for the first nine months of
2002 was similarly reduced by $46 ($30 after-tax, or $.42 per Share) compared to
the same period in 2001.
Income Taxes
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The effective income tax rate for the first nine months of 2002 was 30.4%
compared to 41.8% for the same period in 2001. The higher rate in 2001 was
primarily the result of the tax effect of book/tax basis differences related to
businesses sold in the first quarter of 2001, which increased tax expense by
$18. Excluding the negative tax consequences related to the sales of businesses
in 2001, the effective tax rate for the first nine months of 2001 was 34.0%
compared to 30.4% in 2002.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Eaton Corporation
/s/ R. H. Fearon
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R. H. Fearon
Chief Financial Officer
Date: October 14, 2002