Eaton Reports Fourth Quarter Operating Earnings of $.98 Per Share

After all unusual items in both periods, net income in the fourth quarter of 2002 was more than double that in 2001, with 2002 net income of $67 million and earnings per share of $.94, compared to $30 million and $.42 per share in 2001.

For the full year 2002, sales were $7.21 billion, 1 percent lower than in 2001. Net income of $315 million, before unusual items, increased 35 percent over last year, and operating earnings per share of $4.40 rose 33 percent above 2001. After all unusual items in both periods, net income in 2002 increased to $281 million, 66 percent more than in 2001, and earnings per share of $3.92 rose 64 percent compared to last year.

In comparison to 2001, fourth quarter and full year 2002 results were favorably impacted by $.22 and $.88 per share, respectively, due to the adoption of Statement of Financial Accounting Standards No. 142, which discontinued the amortization of goodwill and certain intangible assets, and were unfavorably impacted by $.10 and $.52 per share, respectively, due to additional pension expense.

Restructuring expense for the fourth quarter was $4 million, and for the full year totaled $62 million. Alexander M. Cutler, Eaton chairman and chief executive officer, said, "We are pleased with our fourth quarter and full year results. For the past three quarters, we have experienced revenue growth and significantly higher operating margins compared to the same periods a year ago. The restructuring actions we took in 2001 and 2002 have generated the $130 million in savings we expected, allowing us to post significantly higher earnings despite our end markets showing yet another year of decline in 2002.

"We made further progress implementing the Eaton Business System during the fourth quarter, with results evident in the continued tight control over working capital and capital expenditures. Our capital expenditures for all of 2002 were $228 million, just over 3 percent of sales. As a result, we were able to complete the acquisitions of Boston Weatherhead and the aerospace circuit breaker business of Mechanical Products in November while incurring only $56 million of additional debt during the quarter. For the year as a whole, we reduced our debt

outstanding by $352 million, while increasing our cash and short-term investments by $117 million. At the end of the fourth quarter, shareholders' equity was reduced by a non-cash charge of $386 million, net of deferred income taxes, related to the recognition of a minimum liability for certain pension plans," Cutler said.

"As we survey our end markets, we see only marginal growth in the first half of 2003, with stronger growth likely in the second half. For the year as a whole, we are anticipating growth in our end markets of approximately 1 to 2 percent. As in the past year, we expect to outgrow our end markets by approximately 2 to 3 percent. We will also record additional growth during 2003 from the recently-completed acquisitions of Boston Weatherhead, the aerospace circuit breaker business of Mechanical Products, and the power systems business of Commonwealth Sprague Capacitor, as well as from the pending acquisition of the electrical division of Delta plc. We anticipate these acquisitions could add approximately $500 million to our 2003 revenues.

"Operating earnings per share are estimated to be between $.90 and $1.00 in the first quarter. For the full year, we project operating earnings per share to be between $5.00 and $5.25," said Cutler.

Fourth quarter sales of Eaton's largest business segment, Fluid Power, were $622 million, 8 percent above one year earlier, and excluding the impact of the Boston Weatherhead and Mechanical Products acquisitions, up 2 percent over the fourth quarter of 2001. Fluid Power markets showed no growth compared to the fourth quarter of 2001, with North American fluid power industry shipments up about 3 percent, commercial aerospace markets off about 26 percent, and defense aerospace markets up by 27 percent. Segment profits before restructuring costs were $44 million, $3 million more than last year.

"We do not anticipate a recovery in the traditional mobile and industrial hydraulics markets until the middle of 2003," said Cutler. "The decline in the commercial aerospace market has occurred as we expected. We believe that the commercial markets are near bottom, but may not recover significantly until 2004. Military aerospace markets remain strong and are likely to improve further over the course of 2003.

"As mentioned earlier, we completed two acquisitions in this segment during the fourth quarter. We purchased the Boston Weatherhead hose and fittings business for $130 million and the aerospace circuit breaker business of Mechanical Products for $10 million." Detailed information about the results of other Eaton Corporation segments are to be found at www.eaton.com.

About Eaton

Eaton is a global $7.2 billion diversified industrial manufacturer that is a leader in fluid power systems; electrical power quality, distribution and control; automotive engine air management and fuel economy; and intelligent truck systems for fuel economy and safety. Eaton has 48,000 employees and sells products in more than 50 countries.