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Eaton Corp. (39BU)

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Monday 15 April, 2002

Eaton Corp.

1st Quarter Results

1st Quarter Results 

    LONDON-(BUSINESS WIRE)-April 15, 2002-

    Eaton Reports First Quarter Operating Earnings of 93 Cents Per
                                 Share


Diversified industrial manufacturer Eaton Corporation (NYSE:ETN)
today announced operating earnings per share of 93 cents for the first
quarter of 2002, 11 percent below comparable results one year earlier.
Sales in the quarter were $1.72 billion, 13 percent below last year.
Net income before unusual items was $66 million compared to $73
million in 2001.

During the quarter, the company recognized pre-tax charges of 
$49 million related to the restructuring of its operations. After all
unusual items in both periods, first quarter net income was 
$33 million with earnings per share of $.47, compared to $50 million
and $.72 per share last year.

Alexander M. Cutler, Eaton chairman and chief executive officer,
said, 'Eaton's first quarter earnings are in line with our
expectations. Our end markets remain depressed, much as we had
anticipated. In this period of weak end market demand, our improving
results demonstrate the effectiveness of our aggressive actions to
resize the corporation.

'We remain convinced that the restructuring actions taken during
2001 and in the first quarter of this year will deliver $130 million
of savings in 2002. We also continue to benefit from the broad
implementation of the Eaton Business System, with results evident in
the continued reduction in working capital and capital expenditure
levels that have contributed to a further strengthening of our balance
sheet.

'Our overall forecast for our end markets has not changed. We had
expected our markets to bottom out in the first quarter, and not to
recover materially until the end of the third quarter. We are
beginning to see limited signs of strengthening at this time, which
appear to validate our earlier forecast.

'We continue to maintain tight control of all expenditures and are
fully implementing the additional restructuring activities that we
announced at the beginning of this year. We also continue to believe
that our full year restructuring expenses will be in the range of 
$59 million, $49 million of which was incurred in the first quarter.

'We are maintaining our full-year operating earnings guidance of
$4.25 to $4.50 per share. We anticipate that second quarter operating
earnings per share will be in the $1.15 to $1.25 range. Eaton will
remain significantly cash flow positive in 2002,' said Cutler.

Results for 2002 will be favorably impacted by $.87 per share
related to adoption of Statement of Financial Accounting Standards 
No. 142, which discontinues amortization of goodwill and certain
intangible assets; $.22 per share of that impact relates to the first
quarter. Results for 2002 will be reduced by $.56 per share due to
lower pension income; the first quarter effect amounts to $.17 per
share compared to 2001.

Business Segment Results

First quarter sales of Eaton's largest business segment, Fluid
Power, were $597 million, 11 percent below one year earlier. This
compares to a decline of about 11 percent in Fluid Power's markets,
with North American fluid power industry shipments off about 
9 percent, and aerospace markets off about 17 percent. Segment profits
before restructuring costs were $60 million, down 13 percent from a
year ago.

'While we are beginning to see the early signs of very modest
strengthening in the traditional mobile and industrial hydraulics
markets, we do not anticipate a significant recovery in these markets
until the middle of the second half of 2002,' said Cutler. 'The
Aerospace market has weakened and we anticipate that it will weaken
further during the balance of this year. Our earlier forecast for a 
25 to 30 percent decline in the commercial markets this year, offset
by a 5 percent improvement in military markets, still seems about
right. In spite of the overall weakness in these end markets, we are
seeing the benefits of our comprehensive restructuring activities. And
the Fluid Power segment has won more new business, in addition to the
Lockheed Martin, GE, Airbus and BMW programs announced previously, for
a total of $1.3 billion in multi-year program wins in the first
quarter.'

In the Industrial & Commercial Controls segment, first quarter
sales were $486 million, down 13 percent from last year, compared to
an estimated 24 percent decline in the North American markets for this
business. Segment profits were $31 million before restructuring
charges, down 37 percent from one year ago.

End markets for our electrical business remain very soft,' said
Cutler. 'We expect that the long-cycle, large-project portion of this
business will continue to soften through the balance of this year,
with a recovery not expected until year-end. The residential market is
one of the real bright spots for our electrical business, with United
States housing starts holding steady at a 1.7 million rate during the
first quarter, which was stronger than we had anticipated. Eaton's
strong performance in the residential segment, fueled by our
successful new Fire-Guard(TM) arc fault circuit interrupter product
line, helped our electrical business outgrow its overall end market
demand. We also continue to be pleased with the growth and improved
profitability of our Cutler-Hammer Engineering Services and Systems
(C-H ESS) business.'

During the quarter, the company announced the formation of its new
Performance Power Solutions organization and a significant new
business relationship with Johnson Controls, Inc. This expansion of
the C-H ESS business is expected to result in $300 million of new
business revenue over the next four years.

Additionally, the company will benefit from a new three-year, 
$80 million agreement with Caterpillar to be the exclusive supplier of
electrical switchgear for the self-contained mobile generator set
systems known as Caterpillar Power Modules. Eaton will provide
Cutler-Hammer power distribution equipment to protect and control the
generator sets contained in the modules.

First quarter Automotive segment sales of $385 million were
identical to those a year ago. NAFTA automotive production was up 
1 percent, while European production declined approximately 4 percent
compared to the same period last year. Segment profits before unusual
items were $57 million, up 6 percent from a year ago.

'Our Automotive segment recorded an exceptional quarter,' said
Cutler. 'The continued strong record of new product introductions and
market share gain is demonstrated by this quarter's strong
performance.'

During the quarter, the company announced that Mercedes-Benz
selected Eaton to provide key components for the new M-271 engine.
Eaton will provide superchargers, intake and exhaust valves, roller
rocker arms and lash adjusters. Sales of these components are expected
to exceed $375 million over the multi-year contract. Production is
scheduled to begin later this year.

First quarter Truck segment sales of $255 million were 9 percent
below those in the same period last year. Before restructuring
expenses, segment operating profits were $4 million compared to a
breakeven quarter a year ago. NAFTA heavy-duty truck production was
down 8 percent, NAFTA medium-duty truck production was down 9 percent,
European truck production was down 16 percent and South American
production decreased by approximately 4 percent.

'We are increasingly confident that our Truck business has
bottomed, as both NAFTA industry order levels and our own orders have
started to climb substantially,' said Cutler. 'We expect that second
quarter heavy-duty truck production could increase as much as 20 to 
25 percent from current levels, giving us further confidence in our
full-year forecast for 150,000 units of heavy-duty truck production in
2002. The positive impact of our restructuring actions is very evident
in the first quarter results for this segment. We will realize
additional earnings leverage as volumes continue to strengthen.'

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 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
first quarter results is available to all interested parties via live
audio webcast today at 10 a.m. EDT on Eaton's Investor Relations
website at www.eaton.com.

This news release contains forward-looking statements concerning
the second quarter 2002 and the full year 2002 operating earnings per
share, our worldwide markets, expenses and benefits of our
restructuring programs, cash flow and volumes from new business awards
and relationships. 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 or
charges; 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
ended March 31, 2002 follow:

Eaton Corporation

Comparative Financial Summary
                                                 Three months ended
                                                       March 31
                                                 ---------
(Millions except for per share data)               2002       2001
                                                   --       --

Net sales                                        $1,723     $1,983
Income before income taxes                           48        104
Net income                                           33         50

Net income per Common Share assuming dilution    $ 0.47     $ 0.72
Average number of Common Shares outstanding        71.2       70.1

Net income per Common Share basic                $ 0.48     $ 0.73
Average number of Common Shares outstanding        70.1       69.0

Cash dividends paid per Common Share             $ 0.44     $ 0.44

Reconciliation of net income to operating earnings
-------------------------
Net income                                       $   33     $   50
Excluding (after-tax)
  Unusual charges                                    33         30
  Gain on sales of businesses                                   (7)
                                                 ---     ---
Operating earnings                               $   66     $   73
                                                 ======     ======

Net income per Common Share assuming dilution    $ 0.47     $ 0.72
Per share impact of unusual items                  0.46       0.33
                                                 ---     ---
Operating earnings per Common Share              $ 0.93     $ 1.05
                                                 ======     ======

See accompanying notes.


Eaton Corporation

Statements of Consolidated Income
                                                  Three months ended
                                                       March 31
                                                  ---------
(Millions except for per share data)                2002       2001
                                                    --       --

Net sales                                         $1,723     $1,983

Costs & expenses
  Cost of products sold                            1,286      1,497
  Selling & administrative                           310        321
  Research & development                              55         68
                                                  ---     ---
                                                   1,651      1,886
                                                  ---     ---
Income from operations                                72         97

Other income (expense)
  Interest expense-net                               (27)       (42)
  Gain on sales of businesses                                    38
  Other-net                                            3         11
                                                  ---     ---
                                                     (24)         7
                                                  ---     ---
Income before income taxes                            48        104
Income taxes                                          15         54
                                                  ---     ---
Net income                                        $   33     $   50
                                                  ======     ======

Net income per Common Share assuming dilution     $ 0.47     $ 0.72
Average number of Common Shares outstanding         71.2       70.1

Net income per Common Share basic                 $ 0.48     $ 0.73
Average number of Common Shares outstanding         70.1       69.0

Cash dividends paid per Common Share              $ 0.44     $ 0.44

See accompanying notes.


Eaton Corporation

Business Segment Information
                                                  Three months ended
                                                       March 31
                                                  ---------
(Millions)                                         2002        2001
                                                   --        --
Net sales
  Fluid Power                                     $ 597      $  673
  Industrial & Commercial Controls                  486         559
  Automotive                                        385         385
  Truck                                             255         281
                                                 ---      ---
Total ongoing operations                          1,723       1,898
Divested operations                                              85
                                                 ---      ---
Total net sales                                  $1,723      $1,983
                                                 ======      ======

Operating profit (loss)
  Fluid Power                                    $   43      $   62
  Industrial & Commercial Controls                   18          50
  Automotive                                         56          54
  Truck                                             (10)        (38)
                                                 ---      ---
Total ongoing operations                            107         128

Divested operations                                               7
Amortization of goodwill & other intangible assets   (6)        (24)
Interest expense-net                                (27)        (42)
Gain on sales of businesses                                      38
Corporate & other-net                               (26)         (3)
                                                 ---      ---
Income before income taxes                           48         104
Income taxes                                         15          54
                                                 ---      ---
Net income                                       $   33      $   50
                                                 ======      ======

See accompanying notes.


Eaton Corporation

Condensed Consolidated Balance Sheets
                                                March 31, December 31,
                                                  2002        2001
                                                  --        --  
(Millions)

Assets
Current assets
 Cash & short-term investments                  $  262      $  311
 Accounts receivable                             1,096       1,070
 Inventories                                       668         681
 Deferred income taxes & other current assets      345         325
                                                ---      ---
                                                 2,371       2,387
Property, plant & equipment                      1,999       2,050
Goodwill & other intangible assets               2,433       2,435
Other assets                                       747         774
                                                ---      ---
                                                $7,550      $7,646
                                                ======      ======

Liabilities & Shareholders' Equity
Current liabilities
 Short-term debt & current portion of 
  long-term debt                                $  197      $  188
 Accounts payable                                  356         418
 Accrued compensation                              148         158
 Accrued income & other taxes                      254         258
 Other current liabilities                         714         647
                                                ---      ---
                                                 1,669       1,669
Long-term debt                                   2,144       2,252
Postretirement benefits other than pensions        669         670
Deferred income taxes & other liabilities          561         580
Shareholders' equity                             2,507       2,475
                                                ---      ---
                                                $7,550      $7,646
                                                ======      ======

See accompanying notes.


Eaton Corporation
Notes to the First Quarter 2002 Earnings Release
Dollars in millions, except per share data (per share data assume
dilution)

Unusual Charges
--------
As the extraordinarily weak economic conditions of 2001 continued into
2002, Eaton undertook additional restructuring actions in the first
quarter to further reduce fixed operating costs across all business
segments, as well as certain corporate functions. 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 charges are included in the
Statements of Consolidated Income in Income from operations and in
Business Segment Information in Corporate & other-net.

A summary of unusual charges recorded in each year follows:

                                                  Three months ended
                                                       March  31
                                                  ---------
                                                  2002          2001
                                                  --          --
Operational restructuring charges
  Fluid Power                                     $ 17          $  7 
  Industrial & Commercial Controls                  13 
  Automotive                                         1 
  Truck                                             14            38 
Corporate  charges                                   4 
                                                  --          -- 
Pretax                                            $ 49          $ 45 
                                                  ====          ==== 
After-tax                                         $ 33          $ 30
Per Common Share                                   .46           .43

New Accounting Pronouncement - Adoption of SFAS Statement No. 142
---------------------------------
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. First quarter 2002 results were
impacted favorably by the reduction in amortization expense for
goodwill and indefinite life intangible assets of $18 ($16 after-tax,
or $.22 per Common Share).
                                             
Pension and Other Postretirement Benefit Expense
------------------------
Pretax income in 2002 was reduced by $19 ($12 after-tax, or $.17 per
Common Share) in comparison to 2001 due to the effect on pension
income of the recent dramatic decline in stock market valuations on
Eaton's pension fund, coupled with lower discount rates associated
with pension and other postretirement benefit liabilities.

Gains on Sales of Businesses
--------------
During the first quarter of 2001, in separate transactions the Company
sold the Vehicle Switch/Electronics Division (VS/ED) and certain
assets of the Truck business. The sales of these businesses resulted
in a pretax gain of $38 ($7 after-tax, or $.10 per Common Share). In
Business Segment Information, the operating results of VS/ED are
included in divested operations for all periods presented.

Income Taxes
------
The effective income tax rate for the first quarter of 2002 was 31.0%
compared to 51.7% 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 quarter of 2001 was 34.0% compared to 31.0% in
2002.
 
Financial Presentation Changes
---------------
Certain amounts for 2001 have been reclassified to conform to the
current year presentation.
*T

www.eaton.com

    Short Name: Eaton Corp.
    Category Code: QRT
    Sequence Number: 00000001
    Time of Receipt (in Greenwich Mean Time): 15-APR-2002 01:34 PM GMT

                                                                                                                     

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