Eaton reports third quarter operating earnings of $1.26 per share

CLEVELAND, OHIO ... 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.

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.

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.



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William Hartman, vice president, Investor Relations


Gary Klasen, director, Media Relations