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 June 30, 2002
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Commission file number 1-1396
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Eaton Corporation
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(Exact name of registrant as specified in its charter)
Ohio 34-0196300
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(State of incorporation) (I.R.S. Employer
Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
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(Address of principal executive offices) (Zip Code)
(216) 523-5000
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(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 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X
There were 70.5 million Common Shares outstanding as of June 30, 2002.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, December 31,
(Millions) 2002 2001
---- ----
ASSETS
Current assets
Cash & short-term investments $ 322 $ 311
Accounts receivable 1,171 1,070
Inventories 669 681
Deferred income taxes & other
current assets 338 325
------ ------
2,500 2,387
Property, plant & equipment-net 1,974 2,050
Goodwill 1,935 1,902
Other intangible assets 509 533
Other assets 737 774
------ ------
$7,655 $7,646
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of
long-term debt $ 344 $ 188
Accounts payable 374 418
Accrued compensation 170 158
Accrued income & other taxes 271 258
Other current liabilities 731 647
------ ------
1,890 1,669
Long-term debt 1,934 2,252
Postretirement benefits other than pensions 666 670
Deferred income taxes & other liabilities 584 580
Shareholders' equity 2,581 2,475
------ ------
$7,655 $7,646
====== ======
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Three Months Ended
June 30
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(Millions except for per share data) 2002 2001
---- ----
Net sales $1,881 $1,871
Costs & expenses
Cost of products sold 1,364 1,400
Selling & administrative 305 303
Research & development 50 53
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1,719 1,756
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Income from operations 162 115
Other income (expense)
Interest expense-net (27) (38)
Other-net (8) (3)
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(35) (41)
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Income before income taxes 127 74
Income taxes 39 25
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Net income $ 88 $ 49
====== ======
Net income per Common Share
assuming dilution $ 1.21 $ .69
Average number of Common Shares
outstanding 72.1 70.7
Net income per Common Share basic $ 1.24 $ .70
Average number of Common Shares
outstanding 70.7 69.5
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
Eaton Corporation
Statements of Consolidated Income
Six Months Ended
June 30
-----------------
(Millions except for per share data) 2002 2001
---- ----
Net sales $3,604 $3,854
Costs & expenses
Cost of products sold 2,650 2,897
Selling & administrative 615 624
Research & development 105 121
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3,370 3,642
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Income from operations 234 212
Other income (expense)
Interest expense-net (54) (80)
Gain on sales of businesses 38
Other-net (5) 8
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(59) (34)
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Income before income taxes 175 178
Income taxes 54 79
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Net income $ 121 $ 99
====== ======
Net income per Common Share
assuming dilution $ 1.68 $ 1.41
Average number of Common Shares
outstanding 71.6 70.4
Net income per Common Share basic $ 1.71 $ 1.43
Average number of Common Shares
outstanding 70.4 69.2
Cash dividends paid per Common Share $ .88 $ .88
See accompanying notes.
Eaton Corporation
Condensed Statements of Consolidated Cash Flows
Six Months Ended
June 30
-----------------
(Millions) 2002 2001
---- ----
Net cash provided by operating activities
Net income $ 121 $ 99
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 176 179
Amortization of goodwill & other intangible assets 11 48
Gain on sales of businesses (38)
Changes in operating assets & liabilities,
excluding acquisitions and sales of
businesses (11) 38
Other-net 18 (25)
------ ------
315 301
Net cash provided by (used in) investing activities
Expenditures for property, plant & equipment (87) (139)
Acquisitions of businesses, less cash acquired (10) (25)
Sales of businesses 313
Net increase in short-term investments (43) (60)
Other-net 5
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(140) 94
Net cash used in financing activities
Borrowings with original maturities of more
than three months
Proceeds 122 1,053
Payments (451) (898)
Borrowings with original maturities of less
than three months - net 127 (488)
Cash dividends paid (61) (60)
Proceeds from exercise of employee stock options 40 25
Purchase of Common Shares (4)
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(223) (372)
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Total (decrease) increase in cash (48) 23
Cash at beginning of period 112 82
------ ------
Cash at end of period $ 64 $ 105
====== ======
See accompanying notes.
The following notes are included in accordance with the requirements of
Regulation S-X and Form 10-Q:
Dollars and shares in millions, except per share data (per share data assume
dilution)
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 2001 Annual
Report on Form 10-K. The interim period results are not necessarily indicative
of the results to be expected for the full year.
Unusual Charges
- ---------------
As the extraordinarily weak economic conditions of 2001 continued into 2002,
Eaton undertook additional restructuring actions in the first half of 2002 to
further reduce fixed operating costs across its business segments and certain
corporate functions as described below.
Three months ended Six months ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Operational restructuring
charges
Fluid Power $ 1 $ 7 $ 18 $ 14
Industrial & Commercial
Controls 2 4 15 4
Automotive 1
Truck 5 14 43
Corporate restructuring charge 4
Other corporate charge 10 10
---- ---- ---- ----
Pretax $ 3 $ 26 $ 52 $ 71
==== ==== ==== ====
After-tax $ 2 $ 17 $ 35 $ 47
Per Common Share .03 .25 .49 .67
The operational restructuring charges are included in the Statements of
Consolidated Income in Income from operations and reduced operating profit of
the related business segment. The corporate restructuring charge is included in
the Statements of Consolidated Income in Income from operations and the Other
corporate charge is included in Other expense-net. All of the corporate
restructuring and other charges are included in Business Segment Information in
Corporate & other-net.
The other corporate charge of $10 in the second quarter of 2001 resulted from an
arbitration award related to a contractual dispute over supply arrangements
initiated in February 1999 against Vickers, Incorporated, a subsidiary of
Aeroquip-Vickers, Inc., which was acquired by Eaton in April 1999.
Restructuring liabilities recorded at December 31, 2001, those recorded in
2002 as described above, and those utilized thus far in 2002, are summarized as
follows:
Workforce reductions Inventory & Plant
-------------------- other asset consolidation
Employees Dollars write-downs & other Total
--------- ------- ----------- ------------- -----
Liabilities remaining
at December 31, 2001 344 $ 21 $ 0 $ 2 $ 23
2002 charges 1,581 38 7 7 52
Utilized in 2002 (1,484) (40) (7) (2) (49)
----- ---- ---- ---- ----
Liabilities remaining
at June 30, 2002 441 $ 19 $ 0 $ 7 $ 26
===== ==== ==== ==== ====
Goodwill and Other Intangible Assets
- ------------------------------------
Effective January 1, 2002, Eaton adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets". Upon adoption,
the Company discontinued the amortization of goodwill and indefinite life
intangible assets recorded in connection with previous business combinations
Second quarter 2002 results were impacted favorably by this reduction in
amortization expense of $19 ($16 after-tax, or $.22 per Common Share). Results
for the first half of 2002 were similarly impacted by this reduction in
amortization expense of $37 ($32 after-tax, or $.44 per share). A
reconciliation of net income and earnings per Common Share for the second
quarter and first half of 2001, as if SFAS No. 142 had been adopted as of the
beginning of that year follows:
Three months ended Six months ended
June 30 June 30
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2002 2001 2002 2001
---- ---- ---- ----
Reported net income $ 88 $ 49 $ 121 $ 99
Add back amortization of goodwill
& indefinite life intangible assets,
net of tax 16 32
----- ----- ----- -----
Adjusted net income $ 88 $ 65 $ 121 $ 131
===== ===== ===== =====
Reported net income per Common Share
Assuming dilution $1.21 $ .69 $1.68 $1.41
Add back amortization of goodwill
& indefinite life intangible assets,
net of tax .22 .44
----- ----- ----- -----
Adjusted net income per Common Share $1.21 $ .91 $1.68 $1.85
===== ===== ===== =====
SFAS No. 142 changes the accounting for goodwill and indefinite life intangible
assets from an amortization approach to a non-amortization approach requiring
periodic testing for impairment of the asset. In the second quarter of 2002,
Eaton completed the initial impairment test for goodwill and indefinite life
intangible assets as of January 1, 2002. This test confirmed that the fair
value of the Company's reporting units exceeds their carrying values, and that
no impairment loss needed to be recognized upon adoption of SFAS No. 142.
A summary of goodwill and other intangible assets follows:
June 30, 2002 December 31, 2001
------------------------- -------------------------
Historical Accumulated Historical Accumulated
cost amortization cost amortization
---------- ------------ ---------- ------------
Goodwill $2,270 $335 $2,218 $316
====== ==== ====== ====
Intangible assets not
subject to amortization
(primarily trademarks) $ 333 $ 24 $ 330 $ 24
====== ==== ====== ====
Intangible assets subject to
amortization
Patents $ 190 $ 70 $ 190 $ 63
Other 142 62 176 76
------ ---- ------ ----
$ 332 $132 $ 366 $139
====== ==== ====== ====
Expense related to intangible assets subject to amortization for the first half
of 2002 was $11. Estimated annual pretax expense for intangible assets subject
to amortization for each of the next five years follows: 2002, $22; 2003, $21;
2004, $16; 2005, $15; and 2006, $15.
Pension and Other Postretirement Benefit Expense
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Pretax income for the second quarter of 2002 was reduced by $14 ($9 after-tax,
or $.13 per Common Share) compared to the same period in 2001 due to the effect
on pension income of the decline in stock market valuations on Eaton's pension
fund assets, coupled with lower discount rates associated with pension and other
postretirement benefit liabilities. Pretax income for the first half of 2002
was similarly reduced by $33 ($21 after-tax, or $.30 per share) compared to the
same period in 2001.
Gain on Sales of Businesses and Other Corporate Assets
- ------------------------------------------------------
During the first quarter of 2001, the Company sold the Vehicle Switch/
Electronics Division (VS/ED) and certain assets of the Truck business.
The sales of these businesses resulted in a pretax gain of $38($7 after-tax, or
$.10 per Common Share). In Business Segment Information the operating results
of VS/ED are included in divested operations for 2001.
Income Taxes
- ------------
The effective income tax rate for the first half of 2002 was 31.0% compared to
44.3% for the same period in 2001. The higher rate in 2001 was primarily the
result of the tax effect of book/tax basis differences related to businesses
sold in the first quarter of 2001, which increased tax expense by $18.
Excluding the negative tax consequences related to the sales of businesses in
2001, the effective tax rate for the first half of 2001 was 34.0% compared to
31.0% in 2002.
Financial Presentation Changes
- ------------------------------
Certain amounts for 2001 have been reclassified to conform to the current
year presentation.
Inventories
- -----------
June 30, December 31,
2002 2001
---- ----
Raw materials $ 205 $ 260
Work-in-process and
finished goods 498 455
----- -----
Gross inventories at FIFO 703 715
Excess of current cost
over LIFO cost (34) (34)
----- -----
Net inventories $ 669 $ 681
===== =====
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share assuming dilution and basic
follows:
Three months ended Six months ended
June 30 June 30
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2002 2001 2002 2001
---- ---- ---- ----
Net income $ 88 $ 49 $ 121 $ 99
===== ===== ===== =====
Average number of Common Shares
outstanding assuming dilution 72.1 70.7 71.6 70.4
Less dilutive effect of stock
options 1.4 1.2 1.2 1.2
----- ----- ----- -----
Average number of Common Shares
outstanding basic 70.7 69.5 70.4 69.2
===== ===== ===== =====
Net income per Common Share
Assuming dilution $1.21 $ .69 $1.68 $1.41
Basic 1.24 .70 1.71 1.43
Comprehensive Income
- --------------------
The principal difference between net income as historically reported in the
Statements of Consolidated Income and comprehensive income is foreign currency
translation adjustments recorded in Shareholders' Equity. Comprehensive income
is as follows:
Three months ended Six months ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 88 $ 49 $121 $ 99
Foreign currency translation
and other adjustments (6) (9) (16) (31)
Deferred gain (loss) on cash
flow hedges 1 3 (2)
---- ---- ---- ----
Comprehensive income $ 82 $ 41 $108 $ 66
==== ==== ==== ====
Business Segment Information
- ----------------------------
Three Months Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
---- ---- ---- ----
Net sales
Fluid Power $ 628 $ 656 $1,225 $1,329
Industrial & Commercial Controls 519 564 1,005 1,123
Automotive 419 391 804 776
Truck 315 260 570 541
------ ------ ------ ------
Total ongoing operations 1,881 1,871 3,604 3,769
Divested operations 85
------ ------ ------ ------
Total net sales $1,881 $1,871 $3,604 $3,854
====== ====== ====== ======
Operating profit (loss)
Fluid Power $ 58 $ 53 $ 101 $ 115
Industrial & Commercial Controls 42 49 60 99
Automotive 64 55 120 109
Truck 30 (5) 20 (43)
------ ------ ------ ------
Total ongoing operations 194 152 301 280
Divested operations 7
Amortization of goodwill & other
intangible assets (5) (24) (11) (48)
Interest expense-net (27) (38) (54) (80)
Gain on sales of businesses 38
Corporate & other-net (35) (16) (61) (19)
------ ------ ------ ------
Income before income taxes 127 74 175 178
Income taxes 39 25 54 79
------ ------ ------ ------
Net income $ 88 $ 49 $ 121 $ 99
====== ====== ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Sales for the second quarter of 2002 were $1,881, 1% above the same period in
2001. Sales for the first half of 2002 of $3,604 were down 6% from the same
period in 2001. The increase in sales for the second quarter was primarily
the result of the continued strong performance by Eaton's Automotive segment
and a partial recovery in the Truck segment. The decline in sales for the
first half of 2002 was primarily in the Fluid Power and Industrial and
Commercial Controls segments, a result of the continued weakness in the
global markets served by these businesses. Excluding the sales of the Vehicle
Switch/ Electronics Division (VS/ED) in the first quarter of 2001 prior to
its divestiture, sales for the first half of 2002 declined 4%.
Net income for the second quarter of 2002 was 80% above the same period in
2001, with income in 2002 of $88 and earnings per Common Share of $1.21,
compared to income of $49 and $.69 per share in 2001. Net income for the
first six months of 2002 of $121 and earnings per share of $1.68, increased
22% and 19%, respectively, over the same period in 2001. These increases
were primarily the result of the benefits of the restructuring actions taken
over the last 18 months to resize the Company. Improved income was also due
to lower restructuring expenses in 2002 compared to 2001 and reduced expense
related to the amortization of goodwill and indefinite life intangible
assets. Income was also affected by reduced pension income and higher expense
for other post retirement benefits, as discussed below. Before restructuring
charges, operating earnings for the second quarter of 2002 were $90, or $1.24
per share, 36% and 32%, respectively, above one year earlier on a similar
basis. Before restructuring and unusual charges and gain on sales of
businesses, operating earnings for the first half of 2002 were $156, or $2.17
per share, compared to $139, or $1.98 per share, for the same period in 2001.
As the extraordinarily weak economic conditions of 2001 continued into 2002,
Eaton undertook additional restructuring actions in the first half of 2002 to
further reduce fixed operating costs across its business segments and certain
corporate functions. During the second quarter of 2002, $3 of operational
restructuring charges were recorded ($2 after-tax, or $.03 per Common Share).
In the second quarter of 2001, $16 of operational restructuring charges were
recorded as well as an unusual corporate charge of $10 related to an arbitration
award in connection with a contractual dispute over supply arrangements with a
subsidiary of Eaton (totaling $17 after-tax, or $.25 per share). During the
first half of 2002, $52 of operational and corporate restructuring charges were
recorded ($35 after-tax, or $.49 per share). In the first half of 2001, $61 of
operational restructuring charges and the unusual corporate charge of $10
described above were recorded ($47 after-tax, or $.67 per share). The
operational and corporate restructuring charges are included in the Statements
of Consolidated Income in Income from operations and reduced operating profit of
the related business segment. The corporate charge of $10 related to the
arbitration award is included in the Statements of Consolidated Income in Other
expense-net and in Business Segment Information in Corporate & other-net.
Results for 2002 were favorably impacted by the adoption of SFAS No. 142, which
eliminated the amortization of goodwill and indefinite life intangible assets
recorded in connection with previous business acquisitions. This accounting
change increased pretax income for the second quarter of 2002 by $19 ($16 after-
tax, or $.22 per Common Share) and for the first half of 2002 by $37 ($32 after-
tax, or $.44 per share).
Pretax income for the second quarter of 2002 was reduced by $14 ($9 after-tax,
or $.13 per Common Share) compared to the same period in 2001 due to the effect
on pension income of the decline in stock market valuations on Eaton's pension
fund assets, coupled with lower discount rates associated with pension and other
postretirement benefit liabilities. Pretax income for the first half of 2002
was similarly reduced by $33 ($21 after-tax, or $.30 per share) compared to the
same period in 2001.
As displayed in the Statements of Consolidated Income, Income from operations of
$162 in the second quarter of 2002 and $234 in the first half of 2002, were 41%
and 10% above the comparable periods in 2001. These increases were primarily
attributable to the benefits of the aggressive restructuring actions described
above, which are expected to produce $130 of savings in 2002. The increases
were also the result of a reduction in restructuring charges recorded in the
second quarter and first half of 2002 compared to 2001, and increased sales in
the second quarter of 2002. Additionally, the increases reflected reduced
expense in 2002 related to amortization of goodwill and indefinite life
intangible assets, offset by reduced pension income and higher expense for other
post retirement benefits in 2002, as described above.
During the first quarter of 2001, the Company sold the Vehicle Switch/
Electronics Division (VS/ED) and certain assets of the Truck business. The
sales of these businesses resulted in a pretax gain of $38($7 after-tax, or $.10
per Common Share). In Business Segment Information the operating results of
VS/ED for the first quarter of 2001, before its divestiture, are included in
divested operations.
The effective income tax rate for the first half of 2002 was 31.0% compared to
44.3% for the same period in 2001. The higher rate in 2001 was primarily the
result of the tax effect of book/tax basis differences related to businesses
sold in the first quarter of 2001, which increased tax expense by $18.
Excluding the negative tax consequences related to the sales of businesses in
2001, the effective tax rate for the first half of 2001 was 34.0% compared to
31.0% in 2002.
Business Segments
- -----------------
Fluid Power
- -----------
Second quarter 2002 sales of Eaton's largest business segment, Fluid Power,
were $628, 4% below one year earlier. This compares to a decline of about 8%
in Fluid Power's markets, with North American fluid power industry shipments
off about 4%, and aerospace markets off about 18%. The decline in aerospace
markets has been slower than had been expected. Sales for the first half of
2002 were $1,225, off 8% from one year ago.
Operating profits in the second quarter of 2002 were $58, 9% above one year
earlier, despite declining sales volume. This improvement was primarily the
result of the benefits of aggressive restructuring actions taken to resize this
business in prior periods. The improvement also reflected lower restructuring
charges in 2002 compared to 2001 with charges of $1 in the second quarter of
2002 and $7 in the same period of 2001. Operating profits for the first half of
2002 were $101, 12% below the same period in 2001, highlighting the extreme
weakness in the markets this business serves, and reflecting restructuring
charges of $18 in the first half of 2002 and $14 in the same period of 2001.
Operating profits before restructuring charges for the second quarter of 2002
were $59 (9.4% of sales) compared to $60 (9.1% of sales) last year, and for the
first half of 2002 were $119 (9.7% of sales) compared to $129 in the same period
of 2001 (9.7% of sales).
Eaton does not anticipate a recovery in the traditional mobile and industrial
hydraulics markets until year-end. The Company also anticipates a 25-30%
decline in commercial aerospace markets in the second half of 2002, offset by a
5% improvement in military markets.
During the second quarter, Eaton purchased the remaining 40% interest in its
hydraulics systems joint venture company, Jining Eaton Hydraulics Company, Ltd.
(JEHYCO), located in Jining, China. JEHYCO is the Company's fourth wholly-owned
business in China.
During the first quarter of 2002, Eaton announced a multi-year contract with
Airbus to provide products for hydraulic fluid conveyance in the new Airbus
380, the world's largest commercial aircraft. The contract has potential revenue
of $70 over the next 20 years. This contract was the second contract awarded to
the Company for the Airbus A380, with the combined contracts expected to
generate revenues of approximately $270 over the next 20 years. BMW also awarded
Eaton a multi-year contract during the first quarter to provide fluid hose
assemblies for two major automobile production models. This contract is expected
to have revenues in excess of $150 over the life of the contract. In addition to
these announcements, several other programs were awarded to the Company in 2001,
which should generate increased revenue in 2002, helping this business grow
faster than its end markets.
In August, Eaton announced a multi-year contract with Lockheed Martin to supply
the wing fluid distribution package on the supersonic multi-role fighter, the F-
35. The award is for the system design and development (SDD) phase of the
program and is estimated to produce revenue of $3 over the next two years. This
award has the potential of generating revenue of $1,000 over the life of the
program.
Industrial & Commercial Controls
- --------------------------------
In the Industrial & Commercial Controls segment, second quarter 2002 sales
were $519, down 8% from last year, as end markets for the Company's
electrical business continued to weaken during the second quarter. North
American markets for this business declined an estimated 13% compared to the
same period last year. The long-cycle, large-project portion of this business
is expected to continue to soften through the balance of this year, with a
recovery not expected until year-end. The residential market is one of the
bright spots for Eaton's electrical business, helping the segment grow faster
than its end markets in the second quarter. Sales for the first half of 2002
of $1,005 were 11% below the same period in 2001.
Operating profits for the second quarter of 2002 were $42, a decrease of 14%
compared to the same period in 2001 and for the first half of 2002 were $60,
a decrease of 39% from the same period in 2001. The declines in operating
profits were primarily the result of weak market conditions in all the
sectors this segment serves, and restructuring charges of $2 in the second
quarter of 2002 and $15 in the first half, compared to similar charges of $4
in the second quarter and first half of 2001. Operating profits before
restructuring charges in the second quarter of 2002 were $44 (8.5% of sales),
down 17% from last year's level of $53 (9.4% of sales) and for the first half
of 2002 were $75 (7.5% of sales) compared to $103 (9.2% of sales) in the same
period of 2001.
During the first quarter of 2002, Eaton announced the formation of its new
Performance Power Solutions organization and a significant new business
relationship with Johnson Controls, Inc. This business expansion is expected to
result in $300 of new business revenue over the next four years. Additionally,
the Company will benefit from a new three-year, $80 agreement with Caterpillar
to be the exclusive supplier of electrical switchgear for the self-contained
mobile generator set systems known as Caterpillar Power Modules. Eaton will
provide Cutler-Hammer power distribution equipment to protect and control the
generator sets contained in the modules.
In July 2002, Eaton completed the sale of its Navy Controls business for $92.
Automotive
- ----------
The Automotive segment posted sales of $419 in the second quarter of 2002, 7%
over the comparable quarter of last year and the highest quarterly sales the
Automotive segment has ever recorded. NAFTA automotive production was up 6%,
while European production declined 1%, compared to the same period last year.
The Automotive segment continued its strong performance with record sales
that considerably outpaced its end markets. The heavy investments this
segment has made in new product development over the last several years are
delivering results as the Company has been able to accelerate the pace of
new product introductions and gain market share. Sales for the first half of
2002 of $804, were 4% above the same period in 2001.
Operating profits in the second quarter of 2002 were $64, up 16% from a year
ago. Operating profits for the first half of 2002 were $120, 10% above the same
period in 2001. This segment produced a return on sales of 15.3% for the second
quarter and 15.0% for the first half of 2002 compared to 14.1% for both periods
in 2001.
During the second quarter, further progress was made in growing the Company's
supercharger business. In Brazil, the smallest supercharger ever produced was
launched for use on the new Ford Fiesta, and delivery began of a high-efficiency
supercharger for use with the new M-271 engine program of Mercedes. Eaton is
providing superchargers, intake and exhaust valves, roller rocker arms and lash
adjusters for the M-271 engine program. Sales of these components are expected
to exceed $375 over this multi-year contract.
In July 2002, Eaton announced the acquisition of technology, trademarks, and
engineering assets representing the GerodiscTM product line from McLaren
Performance Technologies. The addition of this product line to Eaton's existing
products is expected to provide broader application for the light-duty
automotive differential market.
Truck
- -----
The Truck segment posted sales of $315 in the second quarter of 2002, a 21%
increase over the comparable period last year. NAFTA heavy-duty truck
production was up 24% and NAFTA medium-duty truck production was flat.
European truck production was down 6% and South American production decreased
by 15%. Sales for the first half of 2002 were $570, 5% above one year
earlier. The increases in sales were the result of a modest recovery in
North American heavy truck markets, partially in response to accelerated
purchases of trucks before new engine emission standards take effect October
1, 2002.
Operating profits in the second quarter of 2002 were $30 (9.5% of sales)
compared to breakeven performance a year ago, before restructuring charges of
$5. Operating profits for the first half of 2002 were $20 compared to a loss
of $43 in 2001, which reflected restructuring charges of $14 in 2002 and $43
in 2001. Before restructuring charges in both periods, operating profits for
the first half of 2002 were $34 (6.0% of sales) compared to breakeven
performance in the same period of 2001. The positive impact of the extensive
restructuring actions over the last 18 months can be seen in the $30 of
increased profit in the second quarter of 2002 on increased sales of $55,
compared to the same period in 2001.
The Company believes its Truck segment is in a period of recovery as both
NAFTA industry order levels and its own orders climbed rapidly throughout the
second quarter. The Company expects third quarter NAFTA heavy-duty truck
production could increase as much as 15% to 20% from second quarter 2002
levels, and for the full year, expects that NAFTA heavy-duty truck production
will total 170,000 units. NAFTA heavy-duty production is expected to peak in
the third quarter and decline sharply in the fourth quarter as a result of
truck customers accelerating their planned orders in order to increase the
units purchased prior to the new emission standards taking effect October 1,
2002. The Company plans to close the Shelbyville, Tennessee transmission
plant in the fourth quarter of 2002 as previously announced, in an effort to
keep its capacity in line with lower demand.
Non-operating Income (Expense)
- ------------------------------
Results for 2002 were impacted favorably by the adoption of SFAS No. 142, which
eliminated the amortization of goodwill and indefinite life intangible assets
recorded in connection with previous business acquisitions. This accounting
change resulted in a reduction in amortization expense for the second quarter of
2002 of $19 ($16 after-tax, or $.22 per Common Share) and $37 for the first half
($32 after-tax, or $.44 per share).
Net interest expense of $27 in the second quarter of 2002 decreased by
$11 compared to the same period in 2001. Net interest expense of $54 in the
first half of 2002 decreased $26 compared to the same period in 2001. The
decreases were primarily related to the reduction in debt of $371 from the
end of the second quarter of 2001 to June 30, 2002, as well as a reduction of
interest rates throughout 2001.
Corporate and other expense-net increased to $35 in the second quarter of
2002 from $16 in the same period in 2001. This was primarily the result of
reduced pension income of $14 in 2002 compared to 2001 which was due to the
effect of the decline in stock market valuations on Eaton's pension fund
assets, coupled with lower discount rates associated with pension and other
postretirement benefit liabilities. For the first half of 2002, Corporate
and other expense-net increased to $61 compared to $19 for the same period in
2001. This was primarily the result of reduced pension income of $33 for the
first half of 2002 compared to 2001 and $4 of severance and other one-time
costs associated with reductions in the workforce of certain corporate
functions.
Changes in Financial Condition
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The Company's financial position remained strong during the first half of
2002. Net working capital decreased to $610 at June 30, 2002 from $718 at
the end of 2001 (the current ratio was 1.3 and 1.4 at June 30 and December
31, respectively). The primary reason for the change in working capital was a
$156 increase in the current portion of long-term debt during the quarter,
which is the result of certain debt obligations maturing during the next 12
months. Accounts receivable increased $101 from year-end 2001 due to
increased sales during the second quarter of 2002.
Eaton continued to generate significant cash flow from operating activities,
which is the primary source of funds to finance the needs of the Company.
Operating activities generated cash of $315 in the first half of 2002, compared
to $301 for the same period in 2001. Implementation of the Eaton Business
System helped to maintain Eaton's strong financial position through continued
tight control over working capital and capital expenditures. Capital
expenditures for the first half of 2002 were $87, $52 below the same period in
2001.
Total debt of $2,278 at June 30, 2002 decreased $162 from year-end 2001. The
Company made further progress toward its goal of strengthening the balance sheet
and reducing its net debt-to-total capital ratio during the first half of 2002.
The ratio was reduced to 43.1% at June 30, 2002 from 46.2% at December 31, 2001.
The Company has credit facilities of $900, $500 of which expire in 2003 and $400
in 2005.
In July 2002, Eaton issued $300 of 5.75% Notes due 2012. The net proceeds from
the Notes will be used to reduce a portion of the indebtedness incurred in
connection with the acquisition in 1999 of Aeroquip-Vickers, Inc. and to reduce
commercial paper. In July 2002, the Company reached an agreement with the IRS
relating to the treatment of its broad-based company-owned life insurance plans
for the years 1993 through 1998. Pursuant to the agreement, the Company
terminated its remaining broad-based company-owned life insurance plans. The
settlement of this issue resulted in no material effect on Eaton's financial
position, net income or cash flows.
Forward-Looking Statements
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This Form 10-Q contains forward-looking statements concerning our worldwide
markets, volumes from new business awards and relationships (including long-term
contracts) which are not necessarily spread evenly throughout the award period,
and expenses and benefits of our restructuring programs. 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; failure to implement
restructuring plans; unanticipated downturns in business relationships with
customers or their purchases from us, including pursuant to new long-term
contracts where volumes and the timing of sales can vary materially from
expectations and from year to year; competitive pressures on sales and pricing;
increase 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 or dispute resolutions; 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.
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
2001 Annual Report on Form 10-K. Long-term debt decreased to $1,934 at June 30,
2002 from $2,252 at the end of 2001. The decrease is primarily due to the
repayment of commercial paper. This decrease was offset by an increase in the
carrying value of Euro and Yen debt of $25 during the first half of 2002,
primarily the result of a weakening U.S. dollar. There were no other material
changes in long-term debt during the six months ended June 30, 2002.
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 April 15, 2002, the Company filed a Current Report on Form
8-K regarding the first quarter 2002 earnings release.
2. On July 16, 2002, the Company filed a Current Report on Form 8-K regarding
the second quarter 2002 earnings release.
3. On July 19, 2002, the Company filed a Current Report on Form 8-K regarding
a terms agreement and underwriting agreement with several banks for the
issuance of $300 of 5.75% Notes due 2012.
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: August 8, 2002 /s/ Richard H. Fearon
----------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning 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.
12 Ratio of Earnings to Fixed Charges
Eaton Corporation
2002 Quarterly Report on Form 10-Q
Item 6
Exhibit 12
Ratio of Earnings to Fixed Charges
Six months
ended Year ended December 31
June 30, ------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Income from continuing
operations before income taxes
& extraordinary item $ 175 $ 278 $ 552 $ 943 $ 616 $ 730
Adjustments
Minority interests in
consolidated subsidiaries 7 8 8 2 (2) 1
Income of equity investees 0 0 (1) (1) (1) (3)
Interest expensed 56 149 182 159 93 86
Amortization of debt issue
costs 1 1 1 0 0 1
Estimated portion of rent
expense representing
interest 18 38 39 36 28 25
Amortization of capitalized
interest 7 13 10 8 7 8
Distributed income of equity
investees 0 0 1 0 1 2
------ ------ ------ ------ ------ ------
Adjusted income from continuing
operations before income
taxes & extraordinary item $ 264 $ 487 $ 792 $1,147 $ 742 $ 850
====== ====== ====== ====== ====== ======
Fixed charges
Interest expensed $ 56 $ 149 $ 182 $ 159 $ 93 $ 86
Interest capitalized 4 12 22 21 16 12
Amortization of debt issue
costs 1 1 1 0 0 1
Estimated portion of rent
expense representing
interest 18 38 39 36 28 25
------ ------ ------ ------ ------ ------
Total fixed charges $ 79 $ 200 $ 244 $ 216 $ 137 $ 124
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges 3.34 2.44 3.25 5.31 5.42 6.85
Income from continuing operations before income taxes & extraordinary item
for years before 2002 include amortization expense related to goodwill and other
intangible assets. Upon adoption of SFAS No. 142 on January 1, 2002 the Company
ceased amortization of goodwill and indefinite life intangible assets.