Eaton earns $85 million on sales of $1.72 billion

CLEVELAND, OH.... Eaton Corporation today announced third quarter 1996 sales of $1.72 billion compared to sales of $1.67 billion in the third quarter of 1995. Net income for the third quarter was $85 million, down 7 percent from last year's record $91 million. Earnings per share for the third quarter were $1.11, compared to $1.18 in 1995.

Net income for the first nine months of 1996 reached $283 million, or $3.66 per share, on sales of $5.24 billion. Comparable 1995 earnings were $309 million, or $3.97 per share, on sales of $5.16 billion.

The financial results: The company's comparative financial results for the three months and nine months ended September 30, 1996 and 1995:

Comparative Financial Summary Condensed Consolidated Balance Sheets Business Segment Information Statements of Consolidated Income Stephen R. Hardis, Chairman and Chief Executive Officer, said, "We are disappointed with Eaton's overall financial results during the past quarter. Most of our businesses have shown very good performance given market conditions in the year to date. On balance, we have also continued to make progress turning around those operations which have been a drag on operating results in prior years. However, persistent operating issues at a few of our operations are having a disproportionate effect on our results during the second half of this year."

In Eaton's largest business segment, Electrical and Electronic Controls, Hardis said that activity levels were more mixed than earlier in the year. Segment sales increased 5 percent above year ago levels to a record $962 million, while segment profits rose 8 percent to a record $78 million. Hardis pointed out that sales of Industrial and Commercial Controls continued about 4 percent ahead of year ago levels, with particular strength in Cutler-Hammer's nonresidential and residential construction markets. Said Hardis, "We have now overcome most of the transitional plant integration difficulties which have hurt performance over the past year, but we remain disappointed by activity and profit levels of our Industrial Controls business." Hardis pointed out that specific actions are now underway to return this key business to traditional levels of operating performance. During the third quarter, about $1 million was incurred in connection with these efforts.

Hardis also noted that Automotive and Appliance Controls was particularly strong again in the third quarter, with sales at record levels, up 12 percent from a year ago. This compares with automotive production increases of 7 percent in North America and Europe, and appliance production gains of about 6 percent versus a year earlier. Said Hardis, "We continue to enjoy the benefits of new program launches in the North American switch business and we have largely overcome the program launch costs which hurt our results in this business over the past year."

In Specialty Controls, sales were off 4 percent from last year's record levels due in large part to the sharp downturn in worldwide demand for semiconductor capital equipment. Said Hardis, "As the leading worldwide producer of ion implanters, we are clearly feeling the effects of the slowdown in our sales, which are off about 25 percent from the first two quarters. Looking ahead, we are encouraged by the stability we have seen in orders over the past two months, and by the recently reported increases in the semiconductor industry's book-to-bill ratio. However, at this point, we would not anticipate year-to-year improvement in sales before about mid-1997."

In the Vehicle Components Segment, Hardis said that operating results were well below expectations. Segment sales were $729 million, essentially equal to year ago levels, while operating profits were $62 million, 32 percent below one year ago. Hardis pointed out that comparisons with year-earlier performance were affected by the second quarter 1996 acquisition of CAPCO, a Brazilian light- and medium-duty transmission manufacturer. Excluding the operating results of CAPCO, segment sales in this year's third quarter were about $692 million, 5 percent below one year ago, while profits were about $66 million, 28 percent below last year.

Hardis emphasized that the disappointing Vehicle Components Segment results occurred despite excellent performance in business units serving the always demanding light vehicle and off-highway vehicle markets. "Sales of Passenger Car Components were at record levels, up nearly 16 percent versus a year ago, while industry production in North America and Europe was up less than 9 percent. We continue to enjoy selected share gains and to benefit from the gradual migration to multivalve engines." Sales of Off-Highway Vehicle Components were also at record levels, up 12 percent year-to-year, despite generally flat markets.

Turning to Truck Components, Hardis said that sales were off 8 percent from one year ago, and were down 16 percent excluding CAPCO sales. "Operating results are well below what we had expected given our projection for a 20 to 25 percent downturn in the North American heavy truck market. Overall results have been affected both by disappointing market conditions outside North America and by unexpected operating problems around the world." Hardis noted that activity levels in our Latin American markets were off 38 percent compared to last year. Said Hardis, "While activity appears to be gradually improving, the Latin American markets for heavy trucks and agricultural equipment are much weaker than we anticipated earlier this year." Included in this quarter's Vehicle Components Segment results is a $1 million charge to begin the closure and consolidation into CAPCO of Truck Components' Santo Andre, Brazil transmission facility.

Hardis pointed out that the company incurred an additional $4 million expense during the third quarter to continue the restructuring of the North American axle/brake business. "We now expect to spend an additional $3 million this year to complete the restructuring of this business unit, and we continue to expect this $15 million cumulative expenditure to achieve $15 million in annual savings by 1997."

However, Hardis stated that Truck Components Operations are also being affected by a significant and unanticipated level of warranty expense. Said Hardis, "Warranty expense in the third quarter is up $4 million from a year ago. For the full year, we now expect warranty costs to be nearly $10 million above 1995 levels. These costs are related primarily to on-highway models which have recently been replaced, and to policy practices which have since been tightened. We expect these costs to decline during 1997."

Looking ahead, Hardis said, "We are clearly disappointed in the company's overall results in the third quarter, especially given the excellent performance of most of our operations, and the sustained progress we have been making in addressing most of our previous operational problems. Our major cost improvement initiatives, namely a reengineering of our finance function and a supplier resource management program, are well underway. Two of our bellwether markets, North American heavy trucks and worldwide semiconductor equipment, are showing early signs of stabilizing, and prospects for sustained worldwide expansion over the next few years look increasingly bright.

"We are determined to get the company's financial results back on track in 1997. We will not take the short term expedient of mortgaging our future by cutting spending on major growth programs designed to increase Eaton's sustainable growth rate in the years ahead. We are excited by the progress we are making in developing major new products for new and existing markets, and by the opportunities we are seeing to manufacture and sell Eaton products around the world." Hardis noted that the company spent about $11 million more than in last year's third quarter to fund these major growth programs.

Said Hardis, "Our commitment as a company has been to outperform expectations based on the cyclical levels of our traditional markets. Specifically, excluding the costs of the major growth programs and based on similar activity levels, we expect to produce about a $1.00 per share improvement in earnings between 1995 and 1997. That is measurably above Eaton's current operating performance, but our senior managers across the company have accepted this challenge. They have identified additional restructuring moves which will generate an incremental $20 million of annual savings beginning next year. The cost of these restructuring moves is anticipated to be about $25 million to $30 million, the bulk of which the company expects to charge against fourth quarter 1996 results. In total, we expect to spend $40 million to $45 million on restructuring moves this year. The benefits of these actions should bring the company's 1997 performance back to targeted levels."

Concluded Hardis, "We set very ambitious goals for 1996 and, given third quarter results and the anticipated fourth quarter charge, Eaton will not achieve the level of performance expected this year. Sustaining superior financial performance while pursuing opportunities for higher sustainable growth -- the necessary ingredients for genuinely superior long term performance -- has clearly been challenging, both financially and in human terms. But, on balance, we are making progress in both dimensions of performance, and we are making the difficult but necessary adjustments to ensure our long term success."

Eaton Corporation is a global manufacturer of highly engineered products which serve vehicle, industrial, construction, commercial and aerospace markets. Principal products include truck transmissions and axles, engine components, hydraulic products, electrical power distribution and control equipment, ion implanters and a wide variety of controls. Headquartered in Cleveland, the company has 54,000 employees and 155 manufacturing sites in 26 countries around the world. Sales for 1995 were $6.8 billion.



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Renald Romain