0000031277-01-500027.txt : 20011106
0000031277-01-500027.hdr.sgml : 20011106
ACCESSION NUMBER: 0000031277-01-500027
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011101
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EATON CORP
CENTRAL INDEX KEY: 0000031277
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600]
IRS NUMBER: 340196300
STATE OF INCORPORATION: OH
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 333-56644
FILM NUMBER: 1772878
BUSINESS ADDRESS:
STREET 1: EATON CTR
STREET 2: 1111 SUPERIOR AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44114-2584
BUSINESS PHONE: 2165235000
MAIL ADDRESS:
STREET 1: 1111 SUPERIOR AVENUE
CITY: CLEVELAND
STATE: OH
ZIP: 44114
FORMER COMPANY:
FORMER CONFORMED NAME: EATON YALE & TOWNE INC
DATE OF NAME CHANGE: 19710822
10-Q
1
eaton3q10q.txt
EATON CORPORATION THIRD QUARTER 2001 10-Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 2001
------------------
Commission file number 1-1396
------
Eaton Corporation
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
-------------------------------------------------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
-------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
twelve months and (2) has been subject to such filing
requirements for the past ninety days. YES X
There were 69.3 million Common Shares outstanding as of September 30,
2001.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
Condensed Consolidated Balance Sheets
September 30, December 31,
(Millions) 2001 2000
---- ----
ASSETS
Current assets
Cash & short-term investments $ 211 $ 126
Accounts receivable 1,171 1,219
Inventories 739 872
Deferred income taxes & other
current assets 466 354
------ ------
2,587 2,571
Property, plant & equipment 2,055 2,274
Goodwill 1,902 2,026
Other intangible assets 544 556
Deferred income taxes & other assets 805 753
------ ------
$7,893 $8,180
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of
long-term debt $ 189 $ 557
Accounts payable 329 396
Accrued compensation 174 199
Accrued income & other taxes 374 192
Other current liabilities 814 763
------ ------
1,880 2,107
Long-term debt 2,327 2,447
Postretirement benefits other than pensions 674 679
Deferred income taxes & other liabilities 558 537
Shareholders' equity 2,454 2,410
------ ------
$7,893 $8,180
====== ======
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Millions except for per share data) 2001 2000 2001 2000
---- ---- ---- ----
Net sales $1,750 $2,008 $5,604 $6,361
Costs & expenses
Cost of products sold 1,326 1,492 4,223 4,637
Selling & administrative 300 305 924 979
Research & development 56 68 177 206
------ ------ ------ ------
1,682 1,865 5,324 5,822
------ ------ ------ ------
Income from operations 68 143 280 539
Other income (expense)
Interest expense - net (33) (42) (113) (131)
Gain on sales of businesses 23 61
Other - net 3 4 11 59
------ ------ ------ ------
(7) (38) (41) (72)
------ ------ ------ ------
Income from continuing operations
before income taxes 61 105 239 467
Income taxes 21 36 100 162
------ ------ ------ ------
Income from continuing operations 40 69 139 305
Income from discontinued operations 24 64
------ ------ ------ ------
Net income $ 40 $ 93 $ 139 $ 369
====== ====== ====== ======
Net income per Common Share
Assuming dilution
Continuing operations $ .57 $ .95 $ 1.97 $ 4.15
Discontinued operations .33 .87
------ ------ ------ ------
$ .57 $ 1.28 $ 1.97 $ 5.02
====== ====== ====== ======
Basic
Continuing operations $ .58 $ .96 $ 2.01 $ 4.20
Discontinued operations .33 .88
------ ------ ------ ------
$ .58 $ 1.29 $ 2.01 $ 5.08
====== ====== ====== ======
Average number of Common Shares
outstanding
Assuming dilution 70.9 72.8 70.5 73.5
Basic 69.6 72.0 69.3 72.6
Cash dividends paid per Common Share $ .44 $ .44 $ 1.32 $ 1.32
See accompanying notes.
Eaton Corporation
Condensed Statements of Consolidated Cash Flows
Nine Months Ended
September 30
-----------------
(Millions) 2001 2000
---- ----
Net cash provided by operating activities
of continuing operations
Income from continuing operations $ 139 $ 305
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 267 268
Amortization of goodwill & intangible assets 72 71
Gain on sales of businesses & corporate assets (61) (22)
Changes in operating assets & liabilities,
excluding acquisitions and sales of
businesses 146 (244)
Other - net (68) (34)
------ ------
495 344
Net cash provided by investing activities
of continuing operations
Expenditures for property, plant & equipment (203) (229)
Sales of businesses & corporate assets 403 73
Acquisitions of businesses, less cash acquired (33) (110)
Proceeds from initial public offering of subsidiary 349
Net (increase) decrease in short-term investments (70) 31
Other - net 13 (22)
------ ------
110 92
Net cash used in financing activities
of continuing operations
Borrowings with original maturities of more
than three months
Proceeds 1,182 1,275
Payments (1,334) (1,172)
Borrowings with original maturities of less
than three months - net (359) (121)
Cash dividends paid (90) (96)
Purchase of Common Shares (13) (289)
Proceeds from the exercise of employee stock
options 27 8
------ ------
(587) (395)
------ ------
Cash provided by continuing operations 18 41
Net cash used in discontinued operations (96)
------ ------
Total increase (decrease) in cash 18 (55)
Cash at beginning of period 82 79
------ ------
Cash at end of period $ 100 $ 24
====== ======
See accompanying notes.
The following notes are included in accordance with the requirements
of Regulation S-X and Form 10-Q:
All references to net income per Common Share assume dilution, unless
otherwise indicated.
Preparation of Financial Statements
-----------------------------------
The condensed consolidated financial statements of Eaton Corporation
(Eaton or the Company) are unaudited. However, in the opinion of
management, all adjustments have been made which are necessary for a
fair presentation of financial position, results of operations and
cash flows for the stated periods. These financial statements should
be read in conjunction with the consolidated financial statements and
related notes included in the Company's 2000 Annual Report on Form
10-K. The interim period results are not necessarily indicative of
the results to be expected for the full year.
Discontinued Operations
-----------------------
The condensed consolidated financial statements present the
semiconductor equipment operations as a discontinued operation. These
operations were spun-off to Eaton shareholders on December 29, 2000.
Financial Presentation Changes
------------------------------
Certain amounts for prior years have been reclassified to conform to the
current year presentation.
Unusual Charges
---------------
Income was reduced by the following unusual charges (millions except for
per share data):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Operational restructuring
charges
Fluid Power $ 4 $ 13 $ 18 $ 31
Industrial & Commercial
Controls 19 23
Truck 6 49
Corporate 4 14
---- ---- ---- ----
Pretax $ 33 $ 13 $104 $ 31
==== ==== ==== ====
After-tax $ 22 $ 8 $ 69 $ 20
Per Common Share .30 .12 .98 .28
The operational restructuring charges were associated with the
restructuring of the Company's Truck business announced in the first
quarter of 2001 and the restructuring of the Industrial & Commercial
Controls segment announced in the second quarter, as well as the ongoing
integration of the former Aeroquip-Vickers operations within Fluid
Power. The corporate charge for the first nine months of 2001 included
$10 million related to an arbitration settled in the second quarter of
2001. The arbitration related to a contractual dispute over supply
arrangements and was initiated in February 1999 against Vickers,
Incorporated, a subsidiary of Aeroquip-Vickers, Inc., which was acquired
by Eaton in April 1999. A corporate charge of $4 million was recognized
in the third quarter of 2001 relating to actions to restructure certain
corporate functions.
The operational restructuring charges for 2001 and 2000 are included in
the Statements of Consolidated Income in Income from operations and
reduced operating profit of the related business segment. The corporate
charges are included in the Statements of Consolidated Income in Other
expense - net, except for the third quarter corporate charge of $4 million
which is included in the Statements of Consolidated Income in Income from
operations. All of the corporate charges are included in Business Segment
Information in Corporate & other - net.
Restructuring liabilities recorded at December 31, 2000, and restructuring
charges recorded in 2001 as described above, are summarized as follows
(millions of dollars):
Workforce reductions Inventory & Plant
-------------------- other asset consolidation
Employees Dollars write-downs & other Total
--------- ------- ----------- ------------- -----
Balance at
December 31, 2000 180 $ 8 $ 0 $ 0 $ 8
2001 charges 1,845 57 12 25 94
Utilized in 2001 (1,375) (39) (12) (20) (71)
------ ---- ---- ---- ----
Balance remaining
at September 30, 2001 650 $ 26 $ 0 $ 5 $ 31
====== ==== ==== ==== ====
Gain on Sales of Businesses and Other Corporate Assets
------------------------------------------------------
During the third quarter of 2001, the Company sold its Air Conditioning &
Refrigeration business and certain assets of the Automotive business. The
sales of these businesses resulted in a net pretax gain of $23 million ($15
million after-tax, or $.21 per Common Share).
During the first nine months of 2001, the Company sold businesses resulting in
a net pretax gain of $61 million ($22 million after-tax, or $.31 per Common
Share). In addition to the businesses sold in the third quarter of 2001 noted
above, Vehicle Switch/Electronics Division (VS/ED) was divested in the first
quarter of 2001 for $300 million, and certain assets of the Truck business
were also sold in the first quarter. In Business Segment Information the
operating results of VS/ED are included in divested operations for all periods
presented.
Income for the first nine months of 2000 was increased by a net pretax gain on
the sales of corporate assets of $22 million ($14 million after-tax, or $.19 per
Common Share). These gains were included in the Statements of Consolidated
Income in Other income-net and in Business Segment Information in Corporate
and other-net.
Income Taxes
------------
The effective income tax rate for the nine months ended September 30, 2001 was
41.8%. The higher rate in 2001 compared to the same period in 2000 was
principally attributable to the tax effect of book/tax basis differences related
to businesses sold in the first quarter of 2001, which increased tax expense by
$18 million. Excluding the tax consequences on all sales of businesses, the
effective tax rate for the first nine months of 2001 was 34.0% compared to 34.7%
in 2000.
Inventories
-----------
September 30, December 31,
(Millions) 2001 2000
---- ----
Raw materials $ 376 $ 310
Work-in-process and
finished goods 400 601
----- -----
Gross inventories at FIFO 776 911
Excess of current cost
over LIFO cost (37) (39)
----- -----
Net inventories $ 739 $ 872
===== =====
Purchase Accounting Liabilities
-------------------------------
The remaining acquisition integration liabilities included in the purchase price
allocation for the acquisition of Aeroquip-Vickers are summarized as follows
(million of dollars):
Workforce reductions Plant
-------------------- consolidation
Employees Dollars & other Total
--------- ------- -------------- -----
Balance at
December 31, 2000 1,025 $ 42 $ 7 $ 49
Utilized in 2001 (595) (32) (3) (35)
----- ---- ---- ----
Balance remaining at
September 30, 2001 430 $ 10 $ 4 $ 14
===== ==== ==== ====
Net Income per Common Share
---------------------------
The calculation of net income per Common Share - assuming dilution and
basic follows (millions except for per share data):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Income from continuing operations $ 40 $ 69 $ 139 $ 305
Income from discontinued operations 24 64
----- ----- ----- -----
Net income $ 40 $ 93 $ 139 $ 369
===== ===== ===== =====
Average number of Common Shares
outstanding-assuming dilution 70.9 72.8 70.5 73.5
Less dilutive effect of stock
options 1.3 .8 1.2 .9
----- ----- ----- -----
Average number of Common Shares
outstanding-basic 69.6 72.0 69.3 72.6
===== ===== ===== =====
Net income per Common Share
Assuming dilution
Continuing operations $ .57 $ .95 $1.97 $4.15
Discontinued operations .33 .87
----- ----- ----- -----
$ .57 $1.28 $1.97 $5.02
===== ===== ===== =====
Basic
Continuing operations $ .58 $ .96 $2.01 $4.20
Discontinued operations .33 .88
----- ----- ----- -----
$ .58 $1.29 $2.01 $5.08
===== ===== ===== =====
Financial Instruments
---------------------
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Financial Instruments and
Hedging Activities", as amended. The adoption of SFAS 133 did not have a
material effect on the Company's financial position, results of operations or
cash flows.
Comprehensive Income
--------------------
The principal difference between net income as reported in the Statements of
Consolidated Income and comprehensive income is foreign currency translation
adjustments recorded in Shareholders' Equity. Comprehensive income is as
follows (in millions):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 40 $ 93 $139 $369
Foreign currency translation
and other adjustments (7) (37) (38) (66)
Deferred loss on cash
flow hedges (1) (3)
---- ---- ---- ----
Comprehensive income $ 32 $ 56 $ 98 $303
==== ==== ==== ====
Other comprehensive income includes deferred losses of approximately $1 million
for the quarter and $3 million for the nine months ended September 30, 2001
related to cash flow hedges accounted for in accordance with SFAS 133.
New Accounting Pronouncements
-----------------------------
Statements of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets" were issued
by the Financial Accounting Standards Board (FASB) in the third quarter of
2001. SFAS No. 141 eliminates the pooling-of-interests method for business
combinations and requires use of the purchase method. SFAS No. 142 changes
the accounting for goodwill and indefinite life intangibles from an
amortization approach to a non-amortization approach requiring periodic
tests for impairment of the asset. Upon adoption of the Statement on
January 1, 2002, the provisions of SFAS No. 142 require discontinuance of
amortization of goodwill and indefinite life intangibles which had been
recorded in connection with previous business combinations. The adoption
of SFAS No. 142 is expected to add $.87 per share to the Company's 2002 earnings
per share compared to 2001. At this time, the Company does not expect to
recognize an impairment charge upon adoption of this Statement. However, a
final analysis of the Statement has not been completed.
In the third quarter of 2001, the FASB also issued SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets". This Statement
addresses the conditions under which an impairment charge should be recorded
related to long-lived assets to be held and used, except for goodwill, and
those to be disposed of by sale or otherwise. The provisions of this Statement
are effective on January 1, 2002. At this time, the Company does not expect
this Statement to have a material impact on its financial position, results of
operations or cash flows.
Business Segment Information
----------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Millions) 2001 2000 2001 2000
---- ---- ---- ----
Net sales
Fluid Power $ 600 $ 630 $1,929 $1,976
Industrial & Commercial Controls 548 622 1,671 1,805
Automotive 349 346 1,125 1,149
Truck 253 335 794 1,183
------ ------ ------ ------
Total ongoing operations 1,750 1,933 5,519 6,113
Divested operations 75 85 248
------ ------ ------ ------
Total net sales $1,750 $2,008 $5,604 $6,361
====== ====== ====== ======
Operating profit (loss)
Fluid Power $ 31 $ 44 $ 146 $ 180
Industrial & Commercial Controls 27 73 126 187
Automotive 41 38 150 168
Truck (6) 7 (49) 119
------ ------ ------ ------
Total ongoing operations 93 162 373 654
Divested operations 2 7 10
Amortization of goodwill & other
intangible assets (24) (23) (72) (71)
Interest expense - net (33) (42) (113) (131)
Gain on sales of businesses 23 61
Corporate & other - net 2 6 (17) 5
------ ------ ------ ------
Income from continuing operations
before income taxes 61 105 239 467
Income taxes 21 36 100 162
------ ------ ------ ------
Income from continuing operations 40 69 139 305
Income from discontinued operations 24 64
------ ------ ------ ------
Net income $ 40 $ 93 $ 139 $ 369
====== ====== ====== ======
As a result of the sale of the Vehicle Switch/Electronics Division
during the first quarter 2001, total identifiable assets for the
Automotive Segment were $832 million at September 30, 2001 compared to
$1.056 billion at December 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
---------------------
Sales for the third quarter of 2001 were $1.75 billion, 13% below the
same period in 2000. Sales for the first nine months of 2001 of $5.60
billion were down 12% from the same period in 2000. Excluding the
impact of sales of the divested Vehicle Switch/Electronics Division,
sales from ongoing operations declined about 10% for both the third
quarter and the year-to-date periods. The decline in sales, primarily
a result of the prolonged weakness in the global economy, exacerbated
by the September 11, 2001 terrorist attack on the United States, has
caused difficult operating conditions in most of Eaton's businesses.
During the third quarter, sales in international markets were also
increasingly impacted by current weak economic conditions, which have
trailed the U.S. economy with the normal six-month lag.
As displayed in the Statements of Consolidated Income, Income from
operations of $68 million in the third quarter of 2001 and $280 million
in the first nine months of 2001, decreased 52% and 48% from the same
periods in 2000, respectively. The decline was primarily the result of
the reduced sales levels coupled with restructuring charges recorded in
2001, as described below.
Including the effect of unusual items, income from continuing operations
was $40 million in the third quarter of 2001, or $.57 per Common Share,
compared to $69 million in the same period in 2000, or $.95 per share.
Income from continuing operations for the first nine months of 2001 was
$139 million, or $1.97 per share, compared to $305 million in the same
period in 2000, or $4.15 per share. Unusual items include operational
restructuring charges, a one-time corporate charge related to an
arbitration award and gains on sales of businesses and corporate assets
reported in both years.
Income from continuing operations before unusual items (operating earnings)
in the third quarter of 2001 was $47 million, or $.66 per Common Share,
compared to $77 million in the same period in 2000, or $1.07 per share. During
the first nine months of 2001, operating earnings were $186 million, or $2.64
per share compared to $311 million or $4.23 per share in the same period in
2000.
In response to the weak global business environment, and the anticipated
delay in recovery of the economy and the Company's end markets until the
second half of 2002, the Company has taken actions, and will search for
additional opportunities, to reduce structural costs across its businesses.
The Company anticipates restructuring charges to total $110 million during
2001 in connection with its actions in the Truck business announced in the
first quarter of 2001, the Industrial & Commercial Controls business
announced in the second quarter of 2001 and actions to accelerate the
integration of the former Aeroquip-Vickers operations within Fluid Power.
These charges are discussed further below.
For the third quarter of 2001, income was reduced by unusual charges of
$33 million ($22 million after-tax, or $.30 per Common Share). These
charges included operational restructuring charges of $29 million
related to the business segments discussed above, as well as a $4
million charge relating to actions to restructure certain corporate
functions. During the first nine months of 2001, income was reduced by
similar charges of $104 million ($69 million after-tax, or $.98 per
share). The charges for the first nine months of 2001 included
operational restructuring charges of $90 million. The balance is
comprised of the third quarter action to restructure certain corporate
functions and a one-time charge of $10 million related to an arbitration
award in connection with a contractual dispute over supply arrangements
associated with a subsidiary of Eaton awarded in the second quarter of
2001.
During the third quarter of 2000, income was reduced by restructuring
charges of $13 million ($8 million after-tax, or $.12 per Common Share).
For the first nine months of 2000, income was reduced by restructuring
charges of $31 million ($20 million after-tax, or $.28 per share). The
restructuring charges in 2000 were associated with the ongoing
integration of Aeroquip-Vickers.
The operational restructuring charges in 2001 and 2000 are included in
the Statements of Consolidated Income in Income from operations and
reduced operating profit of the related business segment. The corporate
charges are included in the Statements of Consolidated Income in Other
expense - net, except for the third quarter charge of $4 million which is
included in the Statements of Consolidated Income in Income from operations.
All of the corporate charges are included in Business Segment Information in
Corporate & other - net.
During the third quarter of 2001, the Company sold its Air Conditioning
& Refrigeration business, which had annual sales of $75 million, and
certain assets of the Automotive business. The net pretax gain on the sales
of these businesses was $23 million ($15 million after-tax, or $.21 per
Common Share). For the first nine months of 2001, the Company sold
businesses resulting in a net pretax gain of $61 million ($22 million after-
tax, or $.31 per share). In addition to the businesses sold in the
third quarter of 2001 as noted above, Vehicle Switch/Electronics
Division (VS/ED) was divested in the first quarter for $300 million, and
certain assets of the Truck business were also sold in the first
quarter. These gains are included as a separate line item in the
Statements of Consolidated Income and Business Segment Information. In
Business Segment Information, the operating results of VS/ED are
included in divested operations for all periods presented.
In the first nine months of 2000, income was increased by a net pretax
gain on the sales of corporate assets of $22 million ($14 million after-
tax, or $.19 per share). These gains were included in the Statements of
Consolidated Income in Other income-net and in Business Segment
Information in Corporate and other-net.
Excluding the income tax rate effect related to the sales of businesses in
2001, the effective tax rate for the first nine months of 2001 was 34.0%
compared to 34.7% in 2000. Including these transactions, the effective
tax rate for the first nine months of 2001 was 41.8%. The higher
rate in 2001 compared to 2000 was attributable to the tax effect of
book/tax basis differences related to businesses sold in 2001, which
increased tax expense for the first nine months of the year by $18
million.
The Company reported cash operating earnings per share from continuing
operations of $.93 in the third quarter of 2001 compared to $1.34 in the same
period in 2000. Cash earnings per share from continuing operations for the
first nine months of 2001 were $3.48 compared to $5.05 in 2000. Cash operating
earnings per share are before non-cash amortization of acquisition-related
goodwill and other intangible assets and unusual items. Cash earnings per share
are commonly used by financial analysts as one measure of operating performance.
Cash earnings per share are not determined using generally accepted accounting
principles and, therefore, are not necessarily comparable to other companies.
Cash earnings per share should not be considered in isolation or as a substitute
for, or more meaningful than, measures of performance determined in accordance
with generally accepted accounting principles.
Business Segments
-----------------
Fluid Power
-----------
Fluid Power, Eaton's largest business segment, continued to operate in
extremely weak economic conditions across all markets. Segment sales of
$600 million in the third quarter of 2001 were 5% below one year
earlier. Excluding the effect of acquisitions and divestitures made in
2001 and 2000, comparable sales declined 10%, which compared favorably
to an overall decline in Fluid Power markets of 11% and an 18% decline
in North American fluid power industry shipments. Aerospace markets
increased 3% during the third quarter, however in light of the tragic
events of September 11, 2001 this market is now expected to be flat or
decline for 2001 compared to growth of 15% anticipated only a few weeks
prior. The Company will be impacted by the rapid decline in aerospace
after-market demand, which represents a substantial portion of this
sector's business. Sales in the first nine months of 2001 of $1.93
billion were off 2% from one year ago.
After restructuring charges, operating profits in the third quarter of
2001 were $31 million, 30% below one year earlier. Operating profits for
the first nine months of 2001 were $146 million, 19% below comparable
results in 2000. Before restructuring charges of $4 million and $13
million in the third quarter of 2001 and 2000, respectively, operating
profits were $35 million (5.9% of sales) compared to $57 million (9.0%
of sales). Before restructuring charges of $18 million for the first
nine months of 2001, operating profits were $164 million, 22% below
comparable profits in 2000. The decrease in operating profits was
primarily attributable to weak market conditions, which resulted in a
significant decrease in sales volumes during 2001.
As a result of weak market conditions, the Company announced the
acceleration of activities originally planned in connection with the
integration of Aeroquip-Vickers. The elimination of 600 salary positions
announced in April 2001 was expanded to 1,000 salary positions in the third
quarter and is on schedule to be completed before year-end. The benefits of
this action should be increasingly evident in the operating performance of
the business in 2002, as these restructuring actions are expected to
generate recurring benefits of $20 million per year.
During the quarter, the Company announced multi-year agreements with
several customers to supply fluid power components and hydraulic systems
for aerospace applications with potential revenue of $500 million over
many years. These recent program wins, coupled with several mobile and
industrial programs to be launched next year, should enable the Fluid
Power segment to outperform its end markets, despite the divestiture of
the Air Conditioning & Refrigeration business and its $75 million in
annual sales.
In the first quarter of 2001, Eaton completed the purchase of the
remaining 50% interest in Sumitomo Eaton Hydraulics Company (SEHYCO),
the former joint venture with Sumitomo Heavy Industries. The
acquisition should generate sales of $100 million in the Asian region,
but will be initially dilutive to earnings while the business is
integrated with Eaton's operations.
Industrial & Commercial Controls
--------------------------------
Industrial and Commercial Controls sales were $548 million in the third
quarter of 2001, a decrease of 12% from year earlier results. Excluding
the effect of divestitures, sales were off 9% from the same period in
2000, which compared favorably to a 16% decline in North American
markets. The Company outperformed its markets due to share growth, the
continued growth of the Engineering Services and Systems (C-H ESS) business
and participation in power quality markets. The decrease in sales was
attributable to the prolonged weakness in the industrial segment of the
economy. The Company has not experienced a recovery of the short-cycle
distributor flow goods business as anticipated, which typically are higher
margin products. Despite the sharp inventory adjustments by distributors in
the first half of 2001, this business has further deteriorated. The
business is off 15-18%, affected by lower activity levels further exacerbated
by the terrorist attacks on our nation, which caused the business to be off an
additional 5%. Project-oriented business tied to long-cycle construction
projects continued to perform well through the majority of the third quarter;
however, this market is showing signs of weakening early in the fourth quarter.
Sales in the first nine months of 2001 of $1.67 billion were 7% below the same
period in 2000.
After restructuring charges, operating profits for the second quarter of
2001 were $27 million, a decrease of 63% compared to the same period in
2000. Operating profits for the first nine months of 2001 were $126
million, a decrease of 33% from the same period in 2000. Before
restructuring charges of $19 million in the third quarter of 2001,
operating profits were $46 million (8.3% of sales), compared to $73
million (11.7% of sales) in the third quarter of 2000. Operating
profits for the first nine months of 2001, before the $23 million of
restructuring charges, were $149 million, a 20% decline year-over-year.
Weak markets in the industrial and commercial sectors and distributor
businesses, as well as the effects of product mix, were responsible for
the decreased profits in 2001 per year.
As a result of weakening market conditions in this business, the Company
recognized restructuring charges of $19 million and $23 million in the
third quarter and first nine months of 2001, respectively, as discussed
above. The actions taken eliminated 500 positions within the
organization, and are expected to generate $15 million in recurring
benefits per year.
In the first quarter of 2001, the Company announced that it formed a
joint venture with Hager Electro SA, creating Eletromar LTD. This
operation manufactures IEC residential circuit breakers in Brazil
for the South American marketplace.
Automotive
----------
Automotive segment sales of $349 million in the third quarter of 2001
were 1% above third quarter of 2000, excluding the sales of the Vehicle
Switch/Electronics Division, which are reported in divested operations.
This compares to a 10% decrease in NAFTA automotive output and flat
European production. Despite difficult North American markets and
gradual weakening in Europe, automotive segment sales realized the
benefit of product penetration and market share gains. A record number
of new product launches have also occurred in the areas of engine air
management, powertrain, and specialty controls. Sales in the first nine
months of 2001 of $1.13 billion decreased 2% compared to the same period
in 2000.
Traditionally sales for this segment are lower in the third quarter than
in the second quarter as a result of vehicle manufacturers preparation
for the upcoming model year and their temporary shutdown for the taking
of annual physical inventories.
Operating profits in the third quarter of 2001 were $41 million, an
increase of 5% compared to $38 million in the same period in 2000.
Operating profits for the first nine months of 2001 were $150 million, a
decrease of 11% compared to the same period in 2000. The segment
produced a return on sales of approximately 11.6% and 13.3% for the
third quarter and first nine months of 2001 compared to 11.1% and 14.6%,
respectively, for the same periods in 2000. These results for 2001 were
achieved despite current market conditions and increased engineering and
research and development costs associated with new product launches for
model years 2002-2004.
The expectation is for full year 2001 North American automotive retail
demand to be in the range of 16.0-16.1 million units. Retail demand has
been stronger than expected based upon the consumer response to dealer
incentives, such as 0.0% financing, in an attempt to stimulate weak
sales.
Early in the fourth quarter of 2001, the Company announced the
acquisition of the assets of the European portion of a mirror actuator
business of Donnelley Corporation located in Manorhamilton, Ireland. A
portion of Eaton's existing mirror actuator business will be relocated
to the new facility in Ireland and that operation is expected to reach
sales levels of $50 million over the next two to three years.
In the first quarter of 2001, the Company announced a multi-year
agreement with General Motors to supply advanced powertrain technology
for an undisclosed future platform. The application will provide
increased fuel economy without sacrificing power and performance. This
agreement has potential sales of $500 million over many years.
Truck
-----
Due to extraordinarily depressed industry conditions, Truck segment sales
in the third quarter of 2001 were $253 million, 24% below the same
period in 2000. This compares to declines of 34% in NAFTA production of
Class 8 trucks, 22% in NAFTA medium-duty truck production, a 9% decrease
in European output and a 24% decrease in South American truck output.
Sales in the first nine months of 2001 were $794 million, 33% below one-
year earlier results.
Before restructuring charges of $6 million in the third quarter of 2001
and $49 million for the first nine months of 2001, the segment operated
at breakeven for both periods compared to operating profits of $7
million and $119 million for the comparable periods in 2000. The
benefits of recent restructuring actions can be seen as the segment
operated at this level despite third quarter 2001 sales lagging $82
million behind sluggish results for the same period of 2000. Weak
conditions continued in the NAFTA region and European and South American
markets further deteriorated in the third quarter of 2001. The Company
has completed restructuring actions related to the European medium-duty
and European heavy-duty truck businesses. In 2002, this business should
realize $30 million of incremental benefits related to restructuring
actions taken this year.
During 2001, Eaton acquired the commercial clutch manufacturing assets
of Transmisiones TSP, S.A. de C.V. The business, which had sales of $10
million in 2000, will be relocated to the new Truck facility in San Luis
Potosi, Mexico, as that plant becomes operational over the next several
months.
Non-operating Income (Expense)
------------------------------
Net interest expense of $33 million in the third quarter of 2001
decreased by $9 million compared to the same period in 2000. Net
interest expense of $113 million in the first nine months of 2001
decreased $18 million compared to the same period in 2000. The decrease
was primarily related to the reduction of short-term debt from cash flow
from operations and proceeds from the sale of the Vehicle
Switch/Electronics Division, as well as several reductions in U.S.
interest rates during the first nine months of 2001.
Changes in Financial Condition
------------------------------
The Company improved its strong financial position during the first nine
months of 2001. Net working capital increased to $707 million at
September 30, 2001 from $464 million at the end of 2000 (the current
ratio was 1.4 and 1.2 at September 30, 2001 and December 31, 2000,
respectively). The increase in working capital was primarily a result of
the reduction in short-term debt. This reduction of short-term debt
from year-end was accomplished by the refinancing of commercial paper
through the issuance of $150 million of floating rate medium-term notes
in April 2001, the issuance $41 million of Yen 1.62% notes in the first
quarter of 2001 and the repayment of short-term commercial paper from
cash flow from operations and proceeds from the sale of the Vehicle
Switch/Electronics Division.
Eaton continued to generate substantial cash flow from operating
activities, which is the primary source of funds to finance the needs of
the Company. Operating activities generated cash of $495 million in the
first nine months of 2001 compared to $344 million for the same period
in 2000. Despite lower earnings during the first nine months of 2001
compared to the same period in 2000, $151 million more cash was
generated from operations due to tight control over working and fixed
capital.
The Eaton Business System (EBS) has provided improvements in the areas
of working capital and cash management. The tight control over spending
has yielded a decrease in capital expenditures of $26 million for the nine
months ended 2001 compared to the same period in 2000, an 11% reduction.
Capital expenditures are expected to be below $300 million for the year ending
December 31, 2001.
Total debt of $2.5 billion at September 30, 2001 was down from $3.0
billion at year-end 2000. The Company's credit facilities totaled $1.1
billion at September 30, 2001, supporting outstanding commercial paper
of $691 million, which is classified as long-term debt. The Company
made progress toward its goal of strengthening the balance sheet and
reducing its net debt-to-total capital ratio during the first nine
months of 2001. The proceeds from the sale of the Vehicle
Switch/Electronics Division and tight control over working and fixed
capital enabled the net debt-to-total capital ratio to be reduced to 48%
at September 30, 2001 from 55% at December 31, 2000.
Forward-Looking Statements
--------------------------
This Form 10-Q contains forward-looking statements concerning our
markets, our business segments and overall operating performance. These
statements are subject to various risks and uncertainties, many of which
are outside the control of the Company. 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, successful completion or failure to implement integration
and restructuring plans, unanticipated downturn in business relationships
with customers or their purchases from us, competitive pressures on sales
and pricing, increases in costs 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A discussion of market risk exposures is included in Part II, Item 7A,
"Quantitative and Qualitative Disclosure about Market Risk", of the
Company's 2000 Annual Report on Form 10-K. Long-term debt decreased to
$2.3 billion at September 30, 2001 from $2.4 billion at the end of 2000.
There were no material changes in long-term debt during the nine months
ended September 30, 2001.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On July 16, 2001, the Company filed a Current Report on Form
8-K regarding the second quarter 2001 earnings release.
2. On July 16, 2001, the Company filed a Current Report on Form
8-K, which included restated financial information, presenting
the Company's Vehicle Switch/Electronics Division as a
divested operation.
3. On September 28, 2001, the Company filed a Current Report on
Form 8-K, which included information concerning revised
Earnings estimates for the third quarter and full-year 2001
and 2002 outlook due to current economic conditions.
4. On October 15, 2001, the Company filed a Current Report on Form
8-K regarding the third quarter 2001 earnings release.
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Date: October 31, 2001 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning Officer;
Principal Accounting Officer
EATON CORPORATION
EXHIBIT INDEX
Regulation S-K,
Item 601 - Exhibit
Reference Number Exhibit
------------------ -------
4 Pursuant to Regulation S-K
Item 601 (b)(4), the Company
agrees to furnish to the
Commission, upon request, a copy
of the instruments defining
the rights of holders of long-term
debt of the Company and its
subsidiaries.