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Eaton Corp. (39BU)

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Tuesday 22 January, 2002

Eaton Corp.

Final Results

Eaton Corp
22 January 2002

( BW)(OH-EATON)(ETN) Eaton Reports Fourth Quarter Operating Earnings

of 65 Cents Per Share



    Business Editors



    CLEVELAND--(BUSINESS WIRE)--Jan. 22, 2002--Diversified industrial

manufacturer Eaton Corporation (NYSE:ETN) today announced operating

earnings per share of 65 cents for the fourth quarter of 2001, 37

percent below comparable results one year earlier. Sales in the

quarter were $1.69 billion, 13 percent below last year. Net income

before unusual items was $47 million compared to $72 million in 2000.

    During the quarter, the company recognized pre-tax charges of $25

million related to the restructuring of its operations. After all

unusual items in both periods, fourth quarter net income was $30

million with earnings per share of $.42, compared to $58 million and

$.83 last year.

    For the full year 2001, operating earnings per share were $3.30 on

sales of $7.3 billion. Comparable earnings in 2000 were $5.28 per

share, on sales of $8.3 billion. After all unusual items in both

periods, full year net income per share for 2001 was $2.39 on net

income of $169 million, which is comparable to $5.00 per share and net

income of $363 million in 2000 for continuing operations.

    Alexander M. Cutler, Eaton chairman and chief executive officer,

said, 'Eaton's fourth quarter earnings are in line with our

expectations, in spite of weaker end markets than we had anticipated

at the beginning of the quarter. Our credible operating performance in

this continued period of end market weakness is a direct testament to

the effectiveness of our restructuring actions and the continued

focused efforts of Eaton employees around the world.

    '2001 was an exceptionally challenging year, as market conditions

declined all year long. In this difficult operating environment,

Eaton's operating results were bolstered by our early decisions to

resize the corporation. Eaton incurred $119 million of restructuring

charges, which should deliver $100 million of net savings in 2002.

Throughout 2001, another major focus was to strengthen our balance

sheet. We have achieved exceptional results in this respect. Eaton's

net debt leverage is now below 47 percent, having paid off more than

$560 million of debt during 2001.

    'Our forecast for our end markets during 2002 has changed. In

several of our businesses, the markets were not as strong in the

fourth quarter as had been anticipated. We expect that Eaton's end

markets will decline further in the first quarter and will remain

below current levels until the second half of 2002.

    'We remain focused on controlling our expenses, working capital

and capital expenditures in this uncertain economic environment. We

have initiated an additional $55 million of restructuring actions in

our Truck, Fluid Power and Industrial & Commercial Controls segments.

The majority of these costs will be incurred in the first quarter of

this year. We expect that these additional restructuring actions will

produce approximately $30 million of savings in 2002.

    'Our 2002 operating earnings guidance is $4.25 to $4.50 per share,

including the $.87 per share positive impact of the Statement of

Financial Accounting Standards No. 142 related to goodwill and other

intangible assets. We anticipate that first quarter 2002 operating

earnings per share will be in the $.85 to $.95 range. Eaton will be

significantly cash flow positive again in 2002,' said Cutler.



    Business Segment Results

    ------------------------



    Fourth quarter sales of Eaton's largest business segment, Fluid

Power, were $578 million, 8 percent below one year earlier. This

compares to a decline of about 10 percent in Fluid Power's markets,

with North American fluid power industry shipments off about 15

percent, and aerospace markets off about 5 percent. Segment profits

before restructuring costs were $41 million, down 43 percent from a

year ago.

    'The traditional mobile and industrial hydraulics markets have

remained very weak and we still do not anticipate significant recovery

in these markets until the middle of the second half of 2002,' said

Cutler. 'The anticipated weakening of the aerospace market is

materializing. We continue to foresee a 25-30 percent decline in the

commercial aircraft markets this year, offset by a 5 percent

improvement in military markets. As the result of the comprehensive

resizing of our Fluid Power business in 2001, this segment is well

positioned for a solid rebound in 2002.'

    During the quarter, the company announced its new Hydraulic Launch

Assist technology, which has the potential to improve the fuel economy

of commercial vehicles by 25 to 35 percent. The sales potential for

this new technology could approach $500 million by mid-decade.

    In addition, new multi-year order commitments were announced

recently, including approximately $1 billion for the Lockheed Martin

Joint Strike Fighter program and multi-year programs totaling nearly

$250 million with GE, Airbus and BMW.

    Fourth quarter Industrial & Commercial Controls sales were $528

million, down 14 percent from last year. Excluding divestitures, sales

were off about 12 percent, compared to an estimated 27 percent decline

in North American markets. Segment profits were $44 million before

restructuring charges, down 31 percent from one year ago.

    'We are now seeing a significant weakening of the end markets for

this segment,' said Cutler. 'Traditionally a late-cycle business, the

large-project business is weakening and we expect that the market

conditions in this segment will not improve until the end of 2002. We

have outgrown our end markets, despite these poor conditions. We are

particularly pleased with the continued growth and improved

profitability of our Engineering Services and Systems (CHESS)

business. And we expect that the benefits of our restructuring efforts

will drive improved levels of profitability in 2002.'

    Fourth quarter Automotive segment sales of $354 million were

virtually the same as a year ago, compared to a 3 percent decrease in

NAFTA automotive production and a 3 percent decrease in European

automotive production. Segment profits were $44 million, compared to

$46 million a year ago.

    'Our Automotive segment recorded another strong quarter of

performance, during a time of weekly fluctuations in customer demand,'

said Cutler. 'For both the fourth quarter and full year 2001, we have

once again clearly outgrown the end markets, and we expect to continue

this level of performance in 2002.'

    Yesterday the company announced that it received a contract from

General Motors Corporation's Tier One mirror suppliers to provide

memory glass and power-folding mirror actuators for a wide range of

pick-up trucks and sport utility vehicles, beginning in 2002. The full

life of the contract has a revenue value of $160 million. During the

quarter, the company announced that it completed the acquisition of

the European portion of the vehicle mirror actuator business of

Donnelley Corporation, located in Manorhamilton, Ireland.

    Fourth quarter Truck segment sales of $235 million were 14 percent

below those in the same period last year. NAFTA heavy truck production

for the quarter was down 30 percent, NAFTA medium-duty truck

production was up 5 percent, European truck production was down 17

percent and South American production was down by 8 percent. Before

restructuring charges, segment operating losses were $9 million

compared to $12 million a year ago.

    'After three quarters of breakeven operating results, the Truck

segment showed a loss in the fourth quarter of 2001,' said Cutler.

'Compared to fourth quarter 2000, losses were reduced by $3 million on

a $38 million drop in volume. Given the continued decline in our Truck

segment's end markets, it is clear that the benefits of our

restructuring program are being realized. We expect that NAFTA

heavy-duty truck production will reach 150,000 units in 2002, up

marginally from 2001 levels. As the market begins to strengthen later

this year and then more strongly in 2003, we are very confident of the

earnings leverage in this business.'



    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 49,000 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 10:00 a.m. EST on Eaton's Investor Relations

website at http://www.shareholder.com/etn/.



    This news release contains forward-looking statements concerning

    the first quarter 2002 and the year 2002 operating earnings per

    share, our worldwide markets, benefits from our restructuring

    programs, cash flow and volumes from new business awards. These

    statements are subject to various risks and uncertainties, many of

    which are outside of 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 downturn 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, introduction of competing

    technologies, unexpected technical or marketing difficulties, 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.

-0-

*T

Financial Results

-----------------

The company's comparative financial results for the three and twelve

months ended December 31, 2001 and 2000 follow:



Eaton Corporation



Comparative Financial Summary

                                                    Three months ended

                                                        December 31

                                                    ------------------

(Millions except for per share data)                   2001     2000

                                                       ----     ----

Continuing operations

 Net sales                                            $1,695   $1,948

 Income before income taxes                               39       85

 Income after income taxes                                30       58



Income from continuing operations per Common Share

 Assuming dilution                                    $ 0.42   $ 0.83

 Basic                                                  0.42     0.84



Average number of Common Shares outstanding

 Assuming dilution                                      70.6     70.1

 Basic                                                  69.6     69.6



Cash dividends paid per Common Share                  $ 0.44   $ 0.44





Reconciliation of income from continuing operations

 to operating earnings from continuing operations

---------------------------------------------------



Income from continuing operations                     $   30   $   58

Excluding (after-tax)

 Unusual charges                                          17       14

                                                      ------   ------

Operating earnings from continuing operations         $   47   $   72

                                                      ======   ======



Income from continuing operations per Common Share -

 assuming dilution                                    $ 0.42   $ 0.83

Per share impact of unusual items                       0.23     0.20

                                                      ------   ------

Operating earnings from continuing operations

 per Common Share                                     $ 0.65   $ 1.03

                                                      ======   ======

Cash operating earnings from continuing operations

 per Common Share                                     $ 0.91   $ 1.31



This summary includes amounts for continuing operations only. This

summary excludes the semiconductor equipment operations which were

spun-off to Eaton Shareholders on December 29, 2000 and are reported

as a discontinued operation.



See accompanying notes.





Comparative Financial Summary

                                                   Twelve months ended

                                                        December 31

                                                   -------------------

(Millions except for per share data)                   2001     2000

                                                       ----     ----

Continuing operations

 Net sales                                            $7,299   $8,309

 Income before income taxes                              278      552

 Income after income taxes                               169      363



Income from continuing operations per Common Share

 Assuming dilution                                    $ 2.39   $ 5.00

 Basic                                                  2.43     5.06



Average number of Common Shares outstanding

 Assuming dilution                                      70.5     72.6

 Basic                                                  69.4     71.8



Cash dividends paid per Common Share                  $ 1.76   $ 1.76



Reconciliation of income from continuing operations

 to operating earnings from continuing operations

---------------------------------------------------



Income from continuing operations                     $  169   $  363

Excluding (after-tax)

 Unusual charges                                          86       34

 Gain on sales of businesses                             (22)

 Gain on sales of corporate assets                                (14)

                                                      ------   ------

Operating earnings from continuing operations         $  233   $  383

                                                      ======   ======



Income from continuing operations per Common Share -

 assuming dilution                                    $ 2.39   $ 5.00

Per share impact of unusual items                       0.91     0.28

                                                      ------   ------

Operating earnings from continuing operations

 per Common Share                                     $ 3.30   $ 5.28

                                                      ======   ======

Cash operating earnings from continuing operations

 per Common Share                                     $ 4.40   $ 6.37



This summary includes amounts for continuing operations only. This

summary excludes the semiconductor equipment operations which were

spun-off to Eaton Shareholders on December 29, 2000 and are reported

as a discontinued operation.



See accompanying notes.





Statements of Consolidated Income

                                                    Three months ended

                                                        December 31

                                                    ------------------

(Millions except for per share data)                   2001     2000

                                                       ----     ----

Net sales                                             $1,695   $1,948



Costs & expenses

 Cost of products sold                                 1,280    1,455

 Selling & administrative                                296      320

 Research & development                                   51       63

                                                      ------   ------

                                                       1,627    1,838

                                                      ------   ------

Income from operations                                    68      110



Other income (expense)

 Interest expense - net                                  (29)     (46)

 Other - net                                                       21

                                                      ------   ------

                                                         (29)     (25)

                                                      ------   ------

Income from continuing operations before income taxes     39       85

Income taxes                                               9       27

                                                      ------   ------

Income from continuing operations                         30       58

Income from discontinued operations                                26

                                                      ------   ------

Net income                                            $   30   $   84

                                                      ======   ======

Net income per Common Share

 Assuming dilution

  Continuing operations                               $ 0.42   $ 0.83

  Discontinued operations                                        0.37

                                                      ------   ------

                                                      $ 0.42   $ 1.20

                                                      ======   ======

 Basic

  Continuing operations                               $ 0.42   $ 0.84

  Discontinued operations                                        0.37

                                                      ------   ------

                                                      $ 0.42   $ 1.21

                                                      ======   ======

Average number of Common Shares outstanding

 Assuming dilution                                      70.6     70.1

 Basic                                                  69.6     69.6



Cash dividends paid per Common Share                  $ 0.44   $ 0.44



See accompanying notes.





Statements of Consolidated Income

                                                   Twelve months ended

                                                        December 31

                                                   -------------------

(Millions except for per share data)                   2001     2000

                                                       ----     ----

Net sales                                             $7,299   $8,309



Costs & expenses

 Cost of products sold                                 5,503    6,092

 Selling & administrative                              1,220    1,299

 Research & development                                  228      269

                                                      ------   ------

                                                       6,951    7,660

                                                      ------   ------

Income from operations                                   348      649



Other income (expense)

 Interest expense - net                                 (142)    (177)

 Gain on sales of businesses                              61

 Other - net                                              11       80

                                                      ------   ------

                                                         (70)     (97)

                                                      ------   ------

Income from continuing operations before income taxes    278      552

Income taxes                                             109      189

                                                      ------   ------

Income from continuing operations                        169      363

Income from discontinued operations                                90

                                                      ------   ------

Net income                                            $  169   $  453

                                                      ======   ======

Net income per Common Share

 Assuming dilution

  Continuing operations                               $ 2.39   $ 5.00

  Discontinued operations                                        1.24

                                                      ------   ------

                                                      $ 2.39   $ 6.24

                                                      ======   ======

 Basic

  Continuing operations                               $ 2.43   $ 5.06

  Discontinued operations                                        1.25

                                                      ------   ------

                                                      $ 2.43   $ 6.31

                                                      ======   ======

Average number of Common Shares outstanding

 Assuming dilution                                      70.5     72.6

 Basic                                                  69.4     71.8



Cash dividends paid per Common Share                  $ 1.76   $ 1.76



See accompanying notes.





Business Segment Information

                                                    Three months ended

                                                        December 31

                                                    ------------------

(Millions)                                             2001     2000

                                                       ----     ----

Net sales

 Fluid Power                                          $  578   $  631

 Industrial & Commercial Controls                        528      616

 Automotive                                              354      353

 Truck                                                   235      273

                                                      ------   ------

Total ongoing operations                               1,695    1,873

Divested operations                                                75

                                                      ------   ------

Total net sales                                       $1,695   $1,948

                                                      ======   ======

Operating profit (loss)

 Fluid Power                                          $   37   $   55

 Industrial & Commercial Controls                         37       64

 Automotive                                               44       46

 Truck                                                   (15)     (12)

                                                      ------   ------

Total ongoing operations                                 103      153



Divested operations                                       (1)      (2)

Amortization of goodwill & other intangible assets       (22)     (24)

Interest expense - net                                   (29)     (46)

Corporate & other - net                                  (12)       4

                                                      ------   ------

Income from continuing operations before income taxes     39       85

Income taxes                                               9       27

                                                      ------   ------

Income from continuing operations                         30       58

Income from discontinued operations                                26

                                                      ------   ------

Net income                                            $   30   $   84

                                                      ======   ======

See accompanying notes.





Business Segment Information

                                                   Twelve months ended

                                                        December 31

                                                   -------------------

(Millions)                                             2001     2000

                                                       ----     ----

Net sales

 Fluid Power                                          $2,507   $2,607

 Industrial & Commercial Controls                      2,199    2,421

 Automotive                                            1,479    1,502

 Truck                                                 1,029    1,456

                                                      ------   ------

Total ongoing operations                               7,214    7,986

Divested operations                                       85      323

                                                      ------   ------

Total net sales                                       $7,299   $8,309

                                                      ======   ======

Operating profit (loss)

 Fluid Power                                          $  183   $  235

 Industrial & Commercial Controls                        163      251

 Automotive                                              194      214

 Truck                                                   (64)     107

                                                      ------   ------

Total ongoing operations                                 476      807



Divested operations                                        6        8

Amortization of goodwill & other intangible assets       (94)     (95)

Interest expense - net                                  (142)    (177)

Gain on sales of businesses                               61

Corporate & other - net                                  (29)       9

                                                      ------   ------

Income from continuing operations before income taxes    278      552

Income taxes                                             109      189

                                                      ------   ------

Income from continuing operations                        169      363

Income from discontinued operations                                90

                                                      ------   ------

Net income                                            $  169   $  453

                                                      ======   ======

See accompanying notes.





Condensed Consolidated Balance Sheets

                                                        December 31,

                                                      ----------------

(Millions)                                             2001     2000

                                                       ----     ----

ASSETS

Current assets

 Cash & short-term investments                        $  311   $  126

 Accounts receivable                                   1,070    1,219

 Inventories                                             681      872

 Deferred income taxes & other current assets            325      354

                                                      ------   ------

                                                       2,387    2,571

Property, plant & equipment                            2,050    2,274

Goodwill                                               1,902    2,026

Other intangible assets                                  533      556

Other assets                                             774      753

                                                      ------   ------

                                                      $7,646   $8,180

                                                      ======   ======

LIABILITIES & SHAREHOLDERS' EQUITY

Current liabilities

 Short-term debt & current portion of long-term debt  $  188   $  557

 Accounts payable                                        337      396

 Accrued compensation                                    158      199

 Accrued income & other taxes                            258      192

 Other current liabilities                               728      763

                                                      ------   ------

                                                       1,669    2,107

Long-term debt                                         2,252    2,447

Postretirement benefits other than pensions              670      679

Deferred income taxes & other liabilities                580      537

Shareholders' equity                                   2,475    2,410

                                                      ------   ------

                                                      $7,646   $8,180

                                                      ======   ======

See accompanying notes.





Notes to the Fourth Quarter 2001 Earnings Release (All references to

net income per Common Share assume dilution.)



Unusual Charges

---------------

Income was reduced by the following unusual charges (millions except

for per share data):



                              Three months ended   Twelve months ended

                                  December 31          December 31

                              ------------------   -------------------

                                  2001   2000          2001   2000

                                  ----   ----          ----   ----

Operational restructuring

 charges

  Fluid Power                     $  4   $ 17          $ 22   $ 47

  Industrial & Commercial

   Controls                          7                   30

  Truck                              6                   55

Corporate charges                    8      4            22      5

                                  ----   ----          ----   ----

Pretax                            $ 25   $ 21          $129   $ 52

                                  ====   ====          ====   ====

After-tax                         $ 17   $ 14          $ 86   $ 34

Per Common Share                   .23    .20          1.21    .47

*T



    During 2001, the Company undertook restructuring actions that were

needed to maintain a competitive advantage in the current economic

environment. These charges are summarized above as Operational

restructuring charges. The Fluid Power segment incurred charges

throughout the year in association with the ongoing integration of

Aeroquip-Vickers and other recent business acquisitions. The

Industrial and Commercial Controls segment announced a restructuring

program for the year in the second quarter and took charges in each

remaining quarter. The Truck segment announced a plan in the first

quarter and recorded charges, when appropriate, in each quarter of the

year.

    The corporate charges for the full year 2001 were due to a binding

arbitration award settled in the second quarter related to a

contractual dispute over supply arrangements associated with a

subsidiary of Eaton, and the restructuring of certain corporate

functions in the third and fourth quarters. The arbitration award of

$10 million resulted from a legal action initiated in February 1999

against Vickers Inc., part of Aeroquip-Vickers Inc., which was

acquired by Eaton in April 1999. A charge of $8 million was recognized

in the fourth quarter relating primarily to actions to reduce and

restructure corporate staff (a similar charge of $4 million was

recognized in the third quarter).

    The operational restructuring charges for 2001 and 2000 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, except for $11 million

in 2001, which primarily related to the arbitration award discussed

above and is included in Other expense - net. All of the corporate

charges are included in Business Segment Information in Corporate &

other - net.



    Gains on Sales of Businesses and Other Corporate Assets

    -------------------------------------------------------

    For the full year 2001, the Company sold businesses resulting in a

pretax gain of $61 million ($22 million after-tax, or $.30 per Common

Share). The Air Conditioning & Refrigeration business and certain

assets of the Automotive segment were sold in the third quarter. The

Vehicle Switch/Electronics Division (VS/ED) was divested in the first

quarter as well as certain assets of the Truck segment. In Business

Segment Information, the operating results of VS/ED are included in

divested operations for all periods presented.

    Income for full year of 2000 was increased by a net pretax gain on

the sales of corporate assets of $22 million ($14 million after-tax,

or $.19 per Common Share). These gains were included in the Statements

of Consolidated Income in Other income - net and in Business Segment

Information in Corporate and other - net.



    Income Taxes

    ------------

    The effective income tax rate for the fourth quarter of 2001 was

24.9% compared to 41.8% for the nine months ended September 30, 2001

(including the tax consequences related to all sales of businesses

described below) and 31.8% in the fourth quarter of 2000. The lower

rate in the fourth quarter of 2001 was related to adjustments of

worldwide tax liabilities, including claims filed for research credits

in prior years.

    Excluding the tax consequences on all sales of businesses, the

effective tax rate for the full year 2001 was 33.0% compared to 34.2%

in 2000. Including the negative tax consequences of the gain on sales

of businesses, the effective income tax rate for the full year 2001

was 39.4%. 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 million.



    Discontinued Operations

    -----------------------

    The condensed consolidated financial statements present the

semiconductor equipment operations as a discontinued operation. These

operations were spun-off to Eaton shareholders on December 29, 2000.



    Financial Presentation Changes

    ------------------------------

    Certain amounts for prior years have been reclassified to conform

to the current year presentation.



    --30--jsw/clv*



    CONTACT: Eaton Corporation

             Media Relations: Renald M. Romain, 216/523-4736

             Investor Relations: William C. Hartman, 216/523-4501


END


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