CLEVELAND, OHIO… Diversified industrial manufacturer Eaton Corporation (NYSE:ETN) today announced operating earnings per share of $1.05 for the first quarter of 2001, 30 percent below comparable results one year earlier. Sales in the quarter were $1.98 billion, 9 percent below last year. Net income before unusual items was $73 million versus last year?s $111 million.
During the quarter, the company realized a pre-tax gain of $38 million from the sales of businesses, notably its Vehicle Switch/Electronics Division (VS/ED) to Delphi Automotive Systems. The company also recognized a $38 million charge related to the previously announced restructuring of its truck components business, and had a restructuring charge of $7 million related to the continuing integration of Aeroquip-Vickers, Inc. (ANV) into Eaton. After all unusual items in both periods, first quarter net income from continuing operations was $50 million compared to $113 million one year ago.
Alexander M. Cutler, chairman and chief executive officer, said, "We are very pleased to have met our performance expectations, and to have modestly exceeded consensus analyst estimates, despite very difficult operating conditions in several of our businesses. While specific segment results were mixed, we once again realized the benefits of Eaton?s diversification and stronger business mix. With VS/ED divestiture proceeds and tight control over capital, Eaton?s balance sheet also improved, bringing net debt-to-capital down below 52 percent.
"Looking ahead, we expect current market conditions to continue through mid-year, and we will continue our initiatives to size the business to these activity levels. It is difficult to have confidence in any projections given the current economic environment. But, we remain comfortable with the consensus projections for Eaton?s full year results on the assumption that a modest U.S. recovery will begin during this year?s second half. Our current expectation is that second quarter results will come in closer to the lower end of current analyst forecasts.
"We have been pleased by the relative performance of Eaton?s stock over the past 6 months or so. We believe it reflects growing recognition of Eaton as a stronger, more diversified enterprise committed to delivering superior shareholder value. Whatever the near-term economic environment, we remain committed to demonstrating that Eaton deserves to be considered a premier diversified industrial."
Fluid Power, Eaton?s largest business segment, experienced very mixed markets during the quarter. Sales of $673 million were 1 percent above one year earlier. Excluding net acquisitions over the year, sales were off 1 percent, which compares to a 15 percent decline in North American hydraulics industry shipments and a 12 percent increase in aerospace markets. Segment profits before restructuring charges were $69 million, down 8 percent from one year ago.
Said Cutler, "Conditions in the North American hydraulics markets deteriorated markedly during the first quarter, with industry orders off 18 percent from one year earlier. This had a disproportionate impact on segment profits during the period and prevented us from making sustained progress towards our 15 percent operating margin target. In order to address this deterioration, which we expect to continue at least through mid-year, we are increasing the pace of restructuring we originally planned for this business as a result of the 1999 acquisition of Aeroquip-Vickers, Inc. Approximately 600 positions will be eliminated across Fluid Power over the next three months as we accelerate the creation of one seamless business that is more customer oriented and cost effective.
"In contrast to hydraulics, aerospace markets are showing sustained strength; our first quarter sales to this market were 16 percent ahead of last year. We also completed the purchase of 100 percent of SEHYCO, our former hydraulics joint venture with Sumitomo Heavy Industries, adding $100 million of annual sales in the Asian region. With the acceleration of our ANV integration activities, sustained strength in aerospace, and the eventual recovery of hydraulics markets, we remain confident that Fluid Power will achieve its full synergy and operating margin commitments."
First quarter Industrial & Commercial Controls sales were $559 million, down 3 percent from last year. Excluding sales of the divested portable tool switch product line, sales were off about 1 percent. A 2 percent increase in Cutler-Hammer sales was more than offset by a sharp decline in our project-oriented Navy Controls unit. Segment profits were up 2 percent despite lower sales.
"This segment is benefiting from its focus on power distribution, power quality, and providing engineering services," said Cutler. "The North American industrial control market was down nearly 10 percent in the first quarter but distribution equipment is still modestly above last year. Within our business, sales to distributors are down due to aggressive inventory reductions, while project construction remains strong. The half point improvement in operating margins, despite the overall flat market, is also impressive. We expect that profile ? flat sales and improved margins ? to also characterize full year results."
During the quarter, the company formed a joint venture with Hager Electro SA, creating Eletromar LTD., to manufacture IEC residential circuit breakers in Brazil.
The Automotive segment had an excellent quarter considering the severe adjustment taking place in the North American automotive industry. Segment sales of $470 million were 5 percent below one year ago compared to a 16 percent drop in NAFTA production, flat European auto production and a 14 percent increase in South American output. Segment profits of $62 million were off 17 percent from one year ago.
Said Cutler, "Last year, we indicated that Eaton had taken full advantage of a nearly ideal market environment. A year later, given current industry conditions, our performance is in some ways even more impressive. We continue to outperform our markets because of the rising penetration of multi-valve engines and market share gains. The recent $500 million multi-year contract award by General Motors to provide advanced powertrain technology illustrates the value we add in new product development."
"We are also pleased to have completed the divestiture of VS/ED to Delphi Automotive Systems for $300 million. With Delphi?s scale and presence in the automotive electronics market, the combination is ideally situated to capitalize on industry trends and provide VS/ED with an attractive platform for future growth."
First quarter Truck segment sales of $281 million were 37 percent below one year ago. NAFTA Class 8 truck production during the period was down 54 percent, NAFTA medium duty trucks were off 30 percent, European Truck output was up 3 percent and South American commercial vehicle production rose 22 percent. Before restructuring charges, the segment operated at breakeven during the quarter compared to operating profits of $60 million one year ago.
Said Cutler, "Activity in North American markets remains extraordinarily depressed, with heavy truck production currently at its lowest levels since 1992. In that context, we are pleased that our business reached breakeven this quarter compared to a $12 million loss in the fourth quarter of last year. NAFTA order activity shows no signs of improving in the near term, and the $55 million restructuring of this worldwide business we announced earlier this year is now well underway. Our commitment is to emerge from this industry depression with a more flexible, less capital intensive, and more profitable organization that is less affected by the inevitable ups and downs of this market, and can better serve the needs of our customers, suppliers, employees and owners."
Eaton Corporation is a global $8 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?s 55,000 employees work in 29 countries on six continents.
Notice of Conference Call: Eaton's conference call to discuss its first quarter results is available to all interested parties via live audio webcast at 10 a.m. EST, on Eaton's Investor Relations site at http://www.shareholder.com/etn/.
This news release contains forward-looking statements concerning full year and second quarter results, restructuring, synergy and operating margin commitments for Fluid Power, sales and margins for Industrial & Commercial Controls and NAFTA order activity. 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, our ability to implement our integration and restructuring plans, an 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 that cannot be recouped in product pricing and 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.