Eaton reports third quarter net income of $1.39 per share


CLEVELAND…Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced net income per share of $1.39 for the third quarter of 2003, an increase of 7 percent from net income per share of $1.30 in the third quarter of 2002. Sales in the quarter were $2.03 billion, 11 percent above last year. Net income was $107 million compared to $93 million in 2002.

Net income in both periods included charges related to restructuring activities. Net income in 2002 also included a gain on the sale of a business, partly offset by a contribution to the Eaton Charitable Fund. Before these items, 2003 third quarter operating earnings per share were 15 percent above 2002, with 2003 operating earnings per share of $1.45 versus $1.26 per share in 2002. Operating earnings for the third quarter of 2003 were $112 million compared to $90 million in 2002.

For the first nine months of 2003, sales were $5.98 billion, 10 percent higher than in 2002. Net income of $272 million increased 27 percent over last year, and net income per share of $3.67 rose 23 percent above 2002. Operating earnings in the first nine months of 2003 increased to $288 million, 17 percent more than in 2002, and operating earnings per share of $3.88 rose 13 percent compared to last year.

Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are very pleased with our third quarter results, which exceeded the guidance we provided at the beginning of the quarter.

"The sales growth in the third quarter of 11 percent above last year consisted of 8 percent from our recent acquisitions and 3 percent from higher exchange rates. We continued to outperform our end markets, as we estimate that our end markets declined 5 percent compared to the third quarter last year.

"We continue to make good progress on integrating our recent acquisitions. The profits of the acquired businesses, while still modest, are beginning to reflect the benefits of our integration activities. In addition, working capital in these acquisitions has been significantly reduced and we expect further improvements over the balance of the year.

"While our end markets remained depressed in the third quarter, we anticipate modest growth in the fourth quarter compared to last year, driven principally by a stronger heavy-duty truck market in North America.

"We now anticipate full-year net income per share of $4.80 to $4.90 and fourth quarter net income per share of $1.15 to $1.25," said Cutler. "Excluding the restructuring charges to integrate our recent acquisitions, we are also confirming our full-year operating earnings guidance at $5.15 to $5.25 per share, the high end of our previous guidance. We anticipate fourth quarter operating earnings per share will be in the $1.30 to $1.40 range. We are pleased that in spite of end markets which are weaker than we expected at the beginning of the year, and the issuance of an additional 3.7 million shares, we expect to be able to post earnings at the high end of our original full year guidance."

Business Segment Results

Third quarter sales of Fluid Power, Eaton's largest business segment, were $683 million, 12 percent above one year earlier. Excluding the impact of the Boston Weatherhead and Mechanical Products acquisitions, sales were up 4 percent over the third quarter of 2002. This compares to a decline of 3 percent in Fluid Power's markets, with North American fluid power industry shipments down about 5 percent, commercial aerospace markets off 10 percent, and defense aerospace markets up by 12 percent. Operating profits in the third quarter were $65 million. Operating profits before restructuring charges were $67 million, up 34 percent compared to a year earlier, reflecting significantly improved results across most of the business.

"Our view of our end markets in this segment remains largely unchanged. 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 strong, largely offsetting the decline in the commercial markets."

In the Electrical segment (formerly the Industrial & Commercial Controls segment), third quarter sales were $612 million, up 21 percent from last year. Excluding the impact of the Delta and Commonwealth Sprague Capacitor acquisitions and the new joint venture formed with Caterpillar, third quarter sales were up 2 percent compared to 2002. Operating profits in the third quarter were $49 million. Operating profits before restructuring charges were $54 million, up 10 percent from results one year ago.

"End markets for our electrical business remained weak during the third quarter, with an estimated 3 percent decline in the markets for this business compared to last year," said Cutler. "We expect that the overall electrical markets will remain flat for the balance of 2003, with modest growth expected to resume in the first half of next year.

"The profitability of our base electrical business has improved significantly, and the integration of the electrical division of Delta, which we purchased at the end of January, continues on plan," said Cutler. "Even so, the Delta acquisition reduced the Electrical segment's operating margins for the quarter by slightly less than two percentage points. We are encouraged by the rate of improvement in our Delta acquisition and expect further improvement in the fourth quarter.

"During the third quarter, Eaton formed a joint venture with Caterpillar to provide switchgear products under the Cat brand name. The joint venture operates under the name Intelligent Switchgear Organization LLC and is 51 percent owned by Eaton. We expect annual revenues within the next two to three years to be in excess of $100 million."

Among major contract wins in the Electrical segment in the third quarter was a contract to supply electrical equipment for Phase I of the new Terminal 5 at Heathrow Airport. Terminal 5 will proceed in phases, with the entire project scheduled to be completed by 2006.

The Automotive segment posted third quarter sales of $395 million, 1 percent above the comparable quarter of last year. Both NAFTA and European automotive production declined 5 percent compared to the same period last year. Operating profits were $44 million, down 15 percent from a year ago.

"Automotive segment revenue outpaced its end markets, as it has done consistently all year," said Cutler. "Our margins during the quarter continued to be negatively impacted by increased costs related to new product launches and several facility relocations which are currently underway. We expect to make further progress on these programs during the fourth quarter, which should lead to an improvement in margins."

The Truck segment posted sales of $336 million in the third quarter, up 4 percent compared to last year, and recorded operating profits of $52 million, a 17 percent increase over 2002. NAFTA heavy-duty truck production was down 16 percent compared to last year, reflecting the fact that the third quarter of 2002 was the height of the "pre buy" that occurred in 2002, and NAFTA medium-duty truck production was down 4 percent. European truck production was down 5 percent and Brazil vehicle production was down 1%.

"Third quarter production of NAFTA heavy-duty trucks totaled about 47,000 units," said Cutler. "In light of the slightly weaker than expected industry bookings levels in August and September, we expect fourth quarter production of heavy-duty trucks in NAFTA to be approximately 52,000 units, resulting in full year production totaling 180,000 units.

"We are pleased to announce today that Eaton, together with Shaanxi Fast Gear Works Co., Ltd. and Xiang Torch Investment Co., Ltd., have signed an agreement to form a joint venture in Xi'an, China to produce heavy-duty truck transmissions for the growing Chinese market. Eaton will have 55 percent ownership of the venture, which will be called Eaton Fast Gear Company. The joint venture will be formally set up upon obtaining regulatory approval. Production is expected to begin in the fourth quarter of 2004.

Eaton is a global diversified industrial manufacturer with 2002 sales of $7.2 billion that is a leader in fluid power systems; electrical power quality, distribution and control; automotive engine air management and fuel economy; and intelligent systems for fuel economy and safety in trucks. Eaton has 51,000 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 through the Investor Relations tab on Eaton's home page. This news release can be accessed under the Corporate News heading on the Eaton home page by clicking on the news release.

This news release contains forward-looking statements concerning the fourth quarter 2003 and the full year 2003 net income per share and operating earnings per share, our worldwide markets, our restructuring programs, working capital, and joint venture revenues and production. These statements should be used with caution. They 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, litigation or dispute resolutions; material acquisitions or divestitures; significant costs from new laws and governmental regulations; 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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