Eaton to Buy Back Stock, Sell Defense-Related Units

Eaton Corp. said Wednesday that it will spend $500 million to buy back some of its common shares and will sell its defense electronics businesses, which employ 2,000 in Southern California.

Company Chairman James R. Stover said that the stock market’s recent volatility “has made it imperative that we proceed from strength” and provided another good reason for getting out of defense electronics and repurchasing stock, although neither move was prompted by the market’s collapse.

Eaton’s defense businesses have suffered a number of setbacks in the development of a radar jamming system for the B-1 bomber. In December, the Air Force disclosed that it was withholding $159.3 million from Eaton after it found deficiencies in the company’s management system, quality assurance, contract administration and product integrity.

And earlier this year, the Air Force revealed that the radar jamming system for the B-1 bomber, formally known as the B-1B, had serious problems that would require about two years to fix.

In a prepared statement on Wednesday, Stover said that Eaton was “well along on a solution to the remaining technical problems.” He added, “We are proud of our performance on the B-1B.”

Among the defense-related businesses owned by Eaton in Southern California are Information Management Systems, which employs 1,110 in Westlake Village; Data Systems Services, which employs 600 in Culver City; Pacific Sierra Research, which employs 200 in Santa Monica, and American Nucleonics, which employs 100 in Westlake Village.

Eaton also owns Microwave Products in Sunnyvale, Calif., which employs 428.

A spokesman for Eaton said that the Cleveland-based company expects to sell the businesses next year. The spokesman, Renald Romain, said: “There is no expectation that these businesses will be closed.” He said that Eaton’s investment banker, Morgan Stanley & Co., believes that the businesses “have high value.”

Also Wednesday, the company reported a third-quarter profit of $49.1 million, contrasted with an $11.8-million loss in the same period a year ago.

Third-quarter sales totaled $753.5 million, up from $679.5 million a year earlier.

Eaton entered the defense electronics business when it acquired Cutler-Hammer in 1979. Cutler-Hammer’s airborne instruments laboratories division at that time had annual sales of $100 million, compared to more than $900 million in sales to be generated by Eaton’s defense electronics operations this year, Stover said.

However, Stover said, Eaton came to the conclusion that it must either increase the size of its defense electronics operations or get out.

The decisions to get out of defense electronics and to repurchase $500 million in stock reflect a sharpened focus on Eaton’s vehicle power train and controls businesses, Stover said.