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): January 21, 2003
EATON CORPORATION
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 1-1396 34-0196300
----------------- ------------ -------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
Eaton Center
Cleveland, Ohio 44114
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
-----------------------------
Registrant's telephone number,
including area code
Item 5. Other Events
------------
Press Release dated January 21, 2003
EATON REPORTS FOURTH QUARTER OPERATING EARNINGS OF $.98 PER SHARE
CLEVELAND . . . Diversified industrial manufacturer Eaton Corporation
NYSE:ETN) today announced operating earnings per share of $.98 for the
fourth quarter of 2002, 51 percent above results one year earlier of
$.65 per share. Sales in the quarter were $1.78 billion, 5 percent
above last year. Net income before unusual items was $69 million
compared to $47 million in 2001.
After all unusual items in both periods, net income in the fourth
quarter of 2002 was more than double that in 2001, with 2002 net income
of $67 million and earnings per share of $.94, compared to $30 million
and $.42 per share in 2001.
For the full year 2002, sales were $7.21 billion, 1 percent lower than
in 2001. Net income of $315 million, before unusual items, increased
35 percent over last year, and operating earnings per share of $4.40
rose 33 percent above 2001. After all unusual items in both periods,
net income in 2002 increased to $281 million, 66 percent more than in
2001, and earnings per share of $3.92 rose 64 percent compared to last
year.
In comparison to 2001, fourth quarter and full year 2002 results were
favorably impacted by $.22 and $.88 per share, respectively, 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 $.10 and $.52 per share,
respectively, due to additional pension expense. Restructuring expense
for the fourth quarter was $4 million, and for the full year totaled
$62 million.
Alexander M. Cutler, Eaton chairman and chief executive officer, said,
"We are pleased with our fourth quarter and full year results. For the
past three quarters, we have experienced revenue growth and
significantly higher operating margins compared to the same periods a
year ago. The restructuring actions we took in 2001 and 2002 have
generated the $130 million in savings we expected, allowing us to post
significantly higher earnings despite our end markets showing yet
another year of decline in 2002.
"We made further progress implementing the Eaton Business System during
the fourth quarter, with results evident in the continued tight control
over working capital and capital expenditures. Our capital
expenditures for all of 2002 were $228 million, just over 3 percent of
sales. As a result, we were able to complete the acquisitions of
Boston Weatherhead and the aerospace circuit breaker business of
Mechanical Products in November while incurring only $56 million of
additional debt during the quarter. For the year as a whole, we
reduced our debt outstanding by $352 million, while increasing our cash
and short-term investments by $117 million. At the end of the fourth
quarter, shareholders' equity was reduced by a non-cash charge of $386
million, net of deferred income taxes, related to the recognition of a
minimum liability for certain pension plans," Cutler said.
"As we survey our end markets, we see only marginal growth in the first
half of 2003, with stronger growth likely in the second half. For the
year as a whole, we are anticipating growth in our end markets of
approximately 1 to 2 percent. As in the past year, we expect to
outgrow our end markets by approximately 2 to 3 percent. We will also
record additional growth during 2003 from the recently-completed
acquisitions of Boston Weatherhead, the aerospace circuit breaker
business of Mechanical Products, and the power systems business of
Commonwealth Sprague Capacitor, as well as from the pending acquisition
of the electrical division of Delta plc. We anticipate these
acquisitions could add approximately $500 million to our 2003 revenues.
"Operating earnings per share are estimated to be between $.90 and
$1.00 in the first quarter. For the full year, we project operating
earnings per share to be between $5.00 and $5.25," said Cutler.
Business Segment Results
------------------------
Fourth quarter sales of Eaton's largest business segment, Fluid Power,
were $622 million, 8 percent above one year earlier, and excluding the
impact of the Boston Weatherhead and Mechanical Products acquisitions,
up 2 percent over the fourth quarter of 2001. Fluid Power markets
showed no growth compared to the fourth quarter of 2001, with North
American fluid power industry shipments up about 3 percent, commercial
aerospace markets off about 26 percent, and defense aerospace markets
up by 27 percent. Segment profits before restructuring costs were $44
million, $3 million more than last year.
"We do not anticipate a recovery in the traditional mobile and
industrial hydraulics markets until the middle of 2003," said Cutler.
"The decline in the commercial aerospace market has occurred as we
expected. We believe that the commercial markets are near bottom, but
may not recover significantly until 2004. Military aerospace markets
remain strong and are likely to improve further over the course of
2003.
"As mentioned earlier, we completed two acquisitions in this segment
during the fourth quarter. We purchased the Boston Weatherhead hose
and fittings business for $130 million and the aerospace circuit
breaker business of Mechanical Products for $10 million."
In the Industrial & Commercial Controls segment, fourth quarter sales
were $482 million, down 9 percent from last year, but were the same as
last year after adjusting for the impact of selling the Navy Controls
business at the start of the third quarter. Operating profits before
restructuring charges were $41 million, down 7 percent from results one
year ago, but up 11 percent after excluding the sale of Navy Controls.
"End markets for our electrical business weakened slightly during the
fourth quarter, with an estimated 1 percent decline in the North
American markets for this business compared to last year," said Cutler.
"We expect that the electrical distribution equipment market will begin
to recover in 2003, with growth accelerating as we go through the year.
The residential market was strong in 2002, but is expected to weaken
slightly during 2003.
"In December we announced an agreement to purchase the electrical
division of Delta plc for 130 million pounds sterling ($210 million
at the current exchange rate)," said Cutler. "With sales in 2001 of
229 million pounds sterling ($370 million at the current exchange rate),
the Delta business represents a significant addition to the capabilities
and geographic footprint of our Industrial and Commercial Controls
business. We expect the transaction to close early in the first quarter
of 2003.
"Additionally, in early January 2003 we completed the acquisition of
the power systems business of Commonwealth Sprague Capacitor. This
business will add to our offerings in the areas of power quality and
energy management," said Cutler.
The Automotive segment posted sales of $397 million in the fourth
quarter, 12 percent above the same quarter of last year. NAFTA
automotive production was up 2 percent, and European production
increased 1 percent, compared to the same period last year. Segment
profits were $53 million, up 20 percent from a year ago.
"Our Automotive segment continued its strong performance with sales
growth 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."
Among significant product wins during the quarter was a contract to
provide electronic differentials for the front and rear axles of a
future Chrysler Group vehicle platform.
The Truck segment posted sales of $274 million in the fourth quarter, a
17 percent increase over the fourth quarter of 2001, and recorded
profits of $27 million before restructuring charges, compared to a loss
of $9 million a year ago. NAFTA heavy-duty truck production was up 12
percent, NAFTA medium-duty truck production was up 6 percent, European
truck production was down 6 percent, and South American production
increased by 5 percent.
"Heavy-duty truck production in NAFTA totaled 181,000 units in 2002.
We expect that production during 2003 could approach 190,000 units,
with volumes lower in the first quarter and strengthening during the
balance of the year," said Cutler. "The positive impact of our
extensive restructuring actions in this segment over the last two years
can be seen in the $36 million of increased profit before restructuring
costs in the fourth quarter of 2002 on increased sales of $39 million,
compared to the same period in 2001."
Among developments in the Truck segment was the official dedication in
November of the new heavy-duty transmission plant located in San Luis
Potosi, Mexico, which is now fully operational.
Eaton is a global $7.2 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 48,000 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
fourth-quarter results is available to all interested parties via live
audio webcast today at 10 a.m. EST on www.eaton.com.
This news release contains forward-looking statements concerning the
first quarter 2003 and the full year 2003 operating earnings per share,
our worldwide markets, our growth in relation to end markets, results
from business acquisitions, and the completion of the acquisition of
the electrical division of Delta plc. 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; 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; unexpected withholding of governmental approvals for
business acquisitions; 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
year ended December 31, 2002 and 2001 follow:
Eaton Corporation
Comparative Financial Summary
Three months ended
December 31
------------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $1,775 $1,695
Income before income taxes 92 39
Net income 67 30
Net income per Common Share assuming dilution $ 0.94 $ 0.42
Average number of Common Shares outstanding 71.6 70.6
Net income per Common Share basic $ 0.95 $ 0.42
Average number of Common Shares outstanding 70.9 69.6
Cash dividends paid per Common Share $ 0.44 $ 0.44
Reconciliation of net income to operating earnings
--------------------------------------------------
Net income $ 67 $ 30
Excluding (after-tax)
Unusual charges 2 17
------ ------
Operating earnings $ 69 $ 47
====== ======
Net income per Common Share assuming dilution $ 0.94 $ 0.42
Per share impact of unusual items 0.04 0.23
------ ------
Operating earnings per Common Share $ 0.98 $ 0.65
====== ======
Twelve months ended
December 31
-------------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $7,209 $7,299
Income before income taxes 399 278
Net income 281 169
Net income per Common Share assuming dilution $ 3.92 $ 2.39
Average number of Common Shares outstanding 71.7 70.5
Net income per Common Share basic $ 3.98 $ 2.43
Average number of Common Shares outstanding 70.6 69.4
Cash dividends paid per Common Share $ 1.76 $ 1.76
Reconciliation of net income to operating earnings
--------------------------------------------------
Net income $ 281 $ 169
Excluding (after-tax)
Unusual charges 47 86
Gains on sales of businesses (13) (22)
------ ------
Operating earnings $ 315 $ 233
====== ======
Net income per Common Share assuming dilution $ 3.92 $ 2.39
Per share impact of unusual items 0.48 0.91
------ ------
Operating earnings per Common Share $ 4.40 $ 3.30
====== ======
See accompanying notes.
Statements of Consolidated Income
Three months ended
December 31
------------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $1,775 $1,695
Costs & expenses
Cost of products sold 1,306 1,280
Selling & administrative 300 296
Research & development 47 51
------ ------
1,653 1,627
------ ------
Income from operations 122 68
Other income (expense)
Interest expense-net (24) (29)
Other-net (6)
------ ------
(30) (29)
------ ------
Income before income taxes 92 39
Income taxes 25 9
------ ------
Net income $ 67 $ 30
====== ======
Net income per Common Share assuming dilution $ 0.94 $ 0.42
Average number of Common Shares outstanding 71.6 70.6
Net income per Common Share basic $ 0.95 $ 0.42
Average number of Common Shares outstanding 70.9 69.6
Cash dividends paid per Common Share $ 0.44 $ 0.44
Twelve months ended
December 31
-------------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $7,209 $7,299
Costs & expenses
Cost of products sold 5,272 5,503
Selling & administrative 1,217 1,220
Research & development 203 228
------ ------
6,692 6,951
------ ------
Income from operations 517 348
Other income (expense)
Interest expense-net (104) (142)
Gains on sales of businesses 18 61
Other-net (32) 11
------ ------
(118) (70)
------ ------
Income before income taxes 399 278
Income taxes 118 109
------ ------
Net income $ 281 $ 169
====== ======
Net income per Common Share assuming dilution $ 3.92 $ 2.39
Average number of Common Shares outstanding 71.7 70.5
Net income per Common Share basic $ 3.98 $ 2.43
Average number of Common Shares outstanding 70.6 69.4
Cash dividends paid per Common Share $ 1.76 $ 1.76
See accompanying notes.
Business Segment Information
Three months ended
December 31
------------------
(Millions) 2002 2001
---- ----
Net sales
Fluid Power $ 622 $ 578
Industrial & Commercial Controls 482 528
Automotive 397 354
Truck 274 235
------ ------
Total net sales $1,775 $1,695
====== ======
Operating profit (loss)
Fluid Power $ 42 $ 37
Industrial & Commercial Controls 40 37
Automotive 53 44
Truck 25 (15)
------ ------
Total ongoing operations 160 103
Divested operations (1)
Amortization of goodwill & other
intangible assets (7) (22)
Interest expense-net (24) (29)
Corporate & other-net (37) (12)
------ ------
Income before income taxes 92 39
Income taxes 25 9
------ ------
Net income $ 67 $ 30
====== ======
Twelve months ended
December 31
-------------------
(Millions) 2002 2001
---- ----
Net sales
Fluid Power $2,456 $2,507
Industrial & Commercial Controls 1,993 2,199
Automotive 1,594 1,479
Truck 1,166 1,029
------ ------
Total ongoing operations 7,209 7,214
Divested operations 85
------ ------
Total net sales $7,209 $7,299
====== ======
Operating profit (loss)
Fluid Power $ 187 $ 183
Industrial & Commercial Controls 149 163
Automotive 225 194
Truck 90 (64)
------ ------
Total ongoing operations 651 476
Divested operations 6
Amortization of goodwill & other
intangible assets (23) (94)
Interest expense-net (104) (142)
Gains on sales of businesses 18 61
Corporate & other-net (143) (29)
------ ------
Income before income taxes 399 278
Income taxes 118 109
------ ------
Net income $ 281 $ 169
====== ======
See accompanying notes.
Condensed Consolidated Balance Sheets
December 31, December 31,
(Millions) 2002 2001
---- ----
ASSETS
Current assets
Cash & short-term investments $ 428 $ 311
Accounts receivable 1,032 1,070
Inventories 698 681
Deferred income taxes & other current
assets 299 325
------ ------
2,457 2,387
Property, plant & equipment-net 1,955 2,050
Goodwill 1,910 1,902
Other intangible assets 510 533
Other assets 306 774
------ ------
$7,138 $7,646
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 201 $ 188
Accounts payable 488 418
Accrued compensation 199 158
Accrued income & other taxes 225 258
Other current liabilities 621 647
------ ------
1,734 1,669
Long-term debt 1,887 2,252
Postretirement benefits other than pensions 652 670
Deferred income taxes & other liabilities 563 580
Shareholders' equity 2,302 2,475
------ ------
$7,138 $7,646
====== ======
See accompanying notes.
Notes to the Fourth Quarter 2002 Earnings Release
Dollars in millions, except per share data (per share data assume
dilution)
Acquisition of Businesses
-------------------------
In November 2002, Eaton purchased the Boston Weatherhead business of Dana
Corporation for $130. This business, which had 2001 sales of $207,
manufactures hose, tubing, and fluid connectors for fluid power systems
primarily for the industrial distribution, mobile off-highway and heavy-duty
truck markets. The Boston Weatherhead business will be integrated into the
Fluid Power segment. In December 2002, Eaton announced its intention to acquire
the electrical business of Delta plc for 130 pounds sterling ($210 at the
current exchange rate). This business, which had 2001 sales of 229 pounds
sterling ($370 at the current exchange rate), includes major electrical brands
such as MEM, Holec, Bill, Home Automation, Elek and Tabula. The Delta business
will be integrated into the Industrial and Commercial Controls segment. This
transaction is expected to close early in the first quarter of 2003.
Unusual Charges
---------------
In 2002, Eaton undertook additional restructuring actions to further reduce
fixed operating costs across its business segments and certain corporate
functions, and incurred other unusual charges. A summary of these charges
follows:
Three months ended Twelve months ended
December 31 December 31
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
Operational restructuring
charges
Fluid Power $ 2 $ 4 $ 26 $ 22
Industrial & Commercial
Controls 1 7 16 30
Automotive 1
Truck 2 6 16 55
Corporate restructuring
charges (1) 8 3 12
----- ----- ----- -----
4 25 62 119
Other corporate charges 10 10
----- ----- ----- -----
Total unusual charges $ 4 $ 25 $ 72 $ 129
===== ===== ===== =====
After-tax $ 2 $ 17 $ 47 $ 86
Per Common Share 0.04 0.23 0.66 1.21
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 2002 represents a contribution to the Eaton
Charitable Fund. The other corporate charge of $10 in 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
----------------------------
In July 2002, Eaton sold the Navy Controls business, resulting in a pretax gain
of $18 ($13 after-tax, or $.18 per Common Share).
In 2001, the Company sold businesses resulting in a pretax gain of $61 ($22
after-tax, or $.30 per Share). The Air Conditioning & Refrigeration business
and certain assets of the Automotive segment were sold in the third quarter
of 2001. The Vehicle Switch/Electronics Division (VS/ED) and certain assets
of the Truck segment 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.
Fourth quarter 2002 results were impacted favorably by this reduction in
amortization expense of $17 ($15 after-tax, or $.22 per Common Share). Results
for the full year 2002 were similarly impacted by this reduction in amortization
expense of $73 ($63 after-tax, or $.88 per Share).
Pension and Other Postretirement Benefits
-----------------------------------------
Pretax income for the fourth quarter of 2002 was reduced by $11 ($7 after-tax,
or $.10 per Common Share) compared to the same period in 2001 due to the effect
on pension income of the decline in the market value of stocks in Eaton's
pension fund, coupled with lower discount rates associated with pension and
other postretirement benefit liabilities. Pretax income for the full year of
2002 was similarly reduced by $57 ($37 after-tax, or $.52 per Share) compared to
the same period in 2001.
In the fourth quarter of 2002, Shareholders' Equity was reduced by a charge
of $386 after recognition of deferred income taxes, related to the recognition
of a minimum liability for certain pension plans. This non-cash charge did not
affect net income and will be reversible should the pension plans become
overfunded at the end of 2003.
Income Taxes
------------
The effective income tax rate for the full year 2002 was 29.5% compared to 39.4%
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 full year 2001 was 32.8% compared to 29.5% in 2002,
primarily the result of the discontinuance of amortization of non-deductible
goodwill in 2002 compared to 2001.
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
-----------------------------
R. H. Fearon
Executive Vice President and
Chief Financial & Planning Officer
Date: January 21, 2003