Eaton earns $85 million before restructuring charge, on sales of $1.62 billion

Tue Oct 13, 1998 -

CLEVELAND, OH.... Eaton Corporation (NYSE:ETN) today announced that, before special charges in both periods, third quarter 1998 earnings per share were $1.18, down 33% from last year’s $1.77 per fully diluted share. Income before charges reached $85 million compared to last year’s $139 million. Sales were $1.62 billion compared to $1.93 billion in the third quarter of 1997.

The company's comparative financial results: Comparative Financial Summary Condensed Consolidated Balance Sheets Business Segment Information Statements of Consolidated Income As previously announced, Eaton took a nonrecurring, pretax charge of $42 million, or 38 cents per share, to restructure its Semiconductor Equipment Operations. In last year’s third quarter, Eaton took a one-time non-cash charge of $85 million, or $1.08 per share, to write off the purchased in-process research and development associated with its acquisition of Fusion Systems Corporation. After charges in both periods, Eaton earned $58 million, or $0.80 per share in 1998, compared to $54 million, or $0.69 per share in 1997.

Income for the first nine months of 1998 reached $304 million before all special items, or $4.16 per share, on sales of $5.02 billion. Comparable 1997 earnings were $366 million, or $4.66 per share, on sales of $5.63 billion. After charges in both periods, nine month earnings per share were $3.79 this year and $3.58 in 1997.

Stephen R. Hardis, Chairman and Chief Executive Officer, said, "Our third quarter operating results were mixed and, in aggregate, disappointing. We are responding by making the investments and taking the decisive actions necessary to get earnings back on track in 1999. In the fourth quarter of this year, we anticipate taking an additional $33 million of restructuring charges to bring costs back into better balance with likely 1999 physical volumes while still supporting our ongoing growth initiatives. By the end of 1998, the company will have invested more than $130 million in restructuring Eaton’s businesses in just over a year so that, whatever the economic climate, Eaton’s performance will prove superior.

"It is also important to note the successes the company is achieving across its operations: the new business we’re winning and products we’re developing that will enable Eaton to continue to outpace the growth of our markets. The biggest mistake we could make at this point would be to interrupt the progress we’re making toward an enterprise capable of higher sustainable growth."

Turning to Eaton’s business segments, Hardis noted that Automotive Components sales reached a third quarter record $458 million, up 7 percent from a year ago. Excluding the acquisitions of GT Products and Amtec S.p.A., sales were up about 1 percent from a year ago compared to a 3 percent drop in North American production of light vehicles, an 18 percent decline in South America, and a 5 percent increase in European production. Operating profit was $41 million compared to $48 million one year ago. Said Hardis, "Beyond the impact of the General Motors strike, which hurt operating profits by about $7 million, Eaton continues to struggle with product mix and strong European volumes. In the fourth quarter, we anticipate restructuring charges of about $10 million to improve the operating performance of this segment."

"We have recently won significant and attractive new contracts for our supercharger and automotive switch businesses. Increased spending on these programs has reduced margins near term, but will ensure that this segment continues to profitably outpace market growth in the years immediately ahead."

During the quarter, Eaton announced it acquired the assets of Amtec S.p.A., a privately owned Italian manufacturer of automotive cylinder heads with 1997 sales of $27 million.

Third quarter sales of Hydraulics & Other Components were $145 million, essentially equal to last year’s volume and consistent with the year-to-year change in North American mobile hydraulics shipments. Operating profits in the quarter were $19 million compared to $27 million in 1997. Said Hardis, "Business slowed appreciably in the third quarter as our customers reacted to the ongoing Asian crisis. Many of our agricultural equipment customers have scheduled lower fourth quarter production, and we will be affected by that slowdown. We did not achieve the operating efficiencies we anticipated in the third quarter, but we still expect the investments we made earlier this year to produce better margins over the balance of 1998 and in 1999."

Sales of Industrial & Commercial Controls reached a record $604 million, 3 percent ahead of year-earlier results compared to about a 2 percent increase in North American markets for distribution equipment and industrial controls. Operating profits in the third quarter were $55 million compared to $64 million a year ago, with Hurricane Georges responsible for about $4 million of the shortfall. Noted Hardis, "Solid activity levels in electrical distribution equipment are offsetting continued softness in industrial controls markets, but costs are still too high at present sales levels. During the fourth quarter, we will take a $10 million restructuring charge to improve the operating performance of this business.

"The success of Cutler-Hammer’s new Engineering Services and Systems Division, while incurring significant start-up costs, will help this segment to outpace market growth in the periods ahead."

During the quarter, the company announced the acquisition of Integrated Partial Discharge Diagnostics, Inc., a Minnetonka, Minnesota-based manufacturer of equipment that measures insulation deterioration within AC power equipment.

Semiconductor Equipment sales in the third quarter fell to $48 million, 63 percent below year-earlier levels. Before a restructuring charge of $42 million, SEO suffered an operating loss of $29 million compared to an operating profit of $14 million one year earlier. Said Hardis, "We continue to search for the bottom of this market while we push ahead with critical restructuring efforts. Assuming that volumes are no better in 1999 than this year, we would expect the $50 million in charges, as previously announced, to produce break-even results next year compared to an expected $80 million operating loss in 1998."

Truck Components sales reached a third quarter record $365 million, 21 percent ahead of last year’s results. Operating profits were up 26 percent to a third quarter record $54 million. Said Hardis, "Heavy truck production will be at record levels this year in both North America and Europe. The performance of the Clutch Division, acquired from Dana Corporation last year, continues to exceed our expectations and, in general, we are taking good advantage of sustained robust markets."

Hardis also noted that Truck Components will take a charge of about $10 million in the fourth quarter, in part to begin restructuring its European business. Said Hardis, "European trucking deregulation, de-integration of OEMs, and the Euro will all transform the competitive landscape in Europe in the years ahead. This restructuring, building upon our recent acquisition of a Polish transmission manufacturer, is intended to ensure we achieve world class costs and productivity in all of our worldwide operations."

Summing up, Hardis said, "Global economic problems, which first affected demand for semiconductor capital equipment, are now reaching some of our other markets. We are striving to strike the right balance between the imperative for better operational performance and maintaining those growth programs that are beginning to bear fruit. That is the challenge of management. We will continue to fine tune our efforts as needed to produce the best long term results for our owners."

Eaton Corporation is a global manufacturer of highly engineered products that serve industrial, vehicle, construction, commercial and semiconductor markets. Principal products include electrical power distribution and control equipment, truck drivetrain systems, engine components, hydraulic products, ion implanters and a wide variety of controls. Headquartered in Cleveland, the company has 51,000 employees and 155 manufacturing sites in 25 countries around the world. Sales for 1997 were $7.6 billion.

The forward-looking statements in this news release should be used with caution. They are subject to various risks and uncertainties, many of which are outside the control of the company. Important factors which could cause actual results to differ materially from those in the forward-looking statements include changes in global economic and financial conditions, labor strikes, the markets for semiconductor capital equipment, commercial trucks and hydraulics around the world.



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