SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): January 31, 1994
EATON CORPORATION
- --------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 1-1396 34-0196300
---------------- ------------ -------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
Eaton Center
Cleveland, Ohio 44114
--------------------- ------
(Address of Principal (Zip Code)
Executive Offices)
216-523-5000
----------------------------
(Registrant's Telephone
Number, Including Area Code)
Item 7. Financial Statements and Exhibits
- ------------------------------------------
The undersigned Registrant hereby amends its Current Report on Form 8-K dated
February 14, 1994 to add financial statements of the business acquired with
respect to Westinghouse Electric Corporation's Distribution and Control
Business Unit (DCBU).
SIGNATURE
Pursuant to the requirements 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
BY: /s/ Ronald L. Leach
-------------------
Ronald L. Leach
Vice President - Accounting
Date: February 18, 1994
Westinghouse Electric Corporation
Distribution and Control Business Unit
Consolidated Financial Statements
September 30, 1993 and 1992 (unaudited)
December 31, 1992 and 1991
Report of Management
The enclosed financial statements have been prepared by the management of
Westinghouse Electric Corporation in support of the January 31, 1994, purchase
by Eaton Corporation of certain assets and assumption of certain liabilities
of the Distribution and Control Business Unit of Westinghouse Electric
Corporation. Management has the primary responsibility for the financial
statements and other financial information and for ascertaining that the data
fairly reflect the financial position, results of operations and cash flows of
the Distribution and Control Business Unit.
The financial statements present the financial results of those operating
units of the Distribution and Control Business Unit that were included in the
January 31, 1994, sale to Eaton Corporation. Operations that were historically
part of the Distribution and Control Business Unit but were not included in
the sale, principally EMAIL-Westinghouse Pty. Ltd., an Australian operation,
and Westinghouse Asia Controls Corporation, a Philippean operation, are not
included in these financial statements.
The financial statements were prepared in accordance with generally accepted
accounting principles appropriate in the circumstances, and necessarily
include amounts that are based on best estimates and judgements with
appropriate consideration given to materiality. Historically, Westinghouse
Electric Corporation has not prepared general purpose financial statements for
operating units. The preparation of these general purpose financial statements
included the use of "carve-out" accounting procedures wherein certain
expenses, and associated accrued liabilities, historically incurred at the
parent company level of Westinghouse Electric Corporation on behalf of its
operating units, have been identified and pushed-down or allocated as
appropriate to fairly reflect the financial results of the Distribution and
Control Business Unit for the periods shown.
Report of Independent Accountants
To the Board of Directors and Shareholders
of Westinghouse Electric Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and cash flows present fairly, in all
material respects, the financial position of the Distribution and Control
Business Unit (DCBU), an organizational unit of Westinghouse Electric
Corporation (Westinghouse), at December 31, 1992 and 1991, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Westinghouse's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of the statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to these financial statements, DCBU adopted Statement
of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS No. 109, "Accounting
for Income Taxes," in 1992. DCBU is an organizational unit of Westinghouse
and, as disclosed in Note 3 to the accompanying financial statements, has
engaged in various transactions and relationships with other Westinghouse
entities.
Price Waterhouse
600 Grant Street
Pittsburgh, Pennsylvania 15219-9954
January 31, 1994
<TABLE>
Westinghouse Electric Corporation
Distribution and Control Business Unit
Consolidated Balance Sheet
<CAPTION>
(in millions) Unaudited
At December 31, At September 30,
---------------- ----------------
1992 1991 1993 1992
------ ------ ------ ------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents (note 3) $ 0.8 $ 0.6 $ 2.0 $ 2.7
Customer accounts receivable, net (note 8) 124.1 123.5 134.5 137.8
Accounts receivable from related
parties (note 3) 11.4 10.4 19.0 15.5
Inventories (note 9) 189.8 178.8 187.3 183.1
Prepaid and other current assets (note 10) 29.6 26.7 38.8 32.8
------- ------- ------- -------
Total current assets 355.7 340.0 381.6 371.9
Plant and equipment, net (note 11) 250.0 257.8 239.8 243.7
Intangible and other noncurrent
assets (note 12) 146.3 155.0 144.3 150.5
------- ------- ------- -------
Total assets $ 752.0 $ 752.8 $ 765.7 $ 766.1
======= ======= ======= =======
LIABILITIES AND INVESTMENT
Short-term debt (note 13) $ 2.0 $ 0.5 $ 6.1 $ 2.9
Trade accounts payable 75.2 69.3 66.4 66.1
Accounts payable to related parties (note 3) 3.8 5.0 3.8 4.2
Other current liabilities (note 14) 48.0 48.3 48.2 64.2
------- ------- ------- -------
Total current liabilities 129.0 123.1 124.5 137.4
Other noncurrent liabilities (note 15) 65.5 71.4 57.5 69.2
------- ------- ------- -------
Total liabilities 194.5 194.5 182.0 206.6
------- ------- ------- -------
Contingent liabilities and
commitments (note 17)
Minority interest in equity of
consolidated subsidiaries 0.3 0.4 0.3 0.3
Deferred foreign currency translation
adjustments (14.6) (3.0) (16.2) (5.5)
Parent company investment (note 16) 571.8 560.9 599.6 564.7
------- ------- ------- -------
Total investment 557.5 558.3 583.7 559.5
------- ------- ------- -------
Total liabilities and investment $ 752.0 $ 752.8 $ 765.7 $ 766.1
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
Westinghouse Electric Corporation
Distribution and Control Business Unit
Consolidated Statement of Income
<CAPTION>
(in millions) Unaudited
For the year ended For the nine months
December 31, ended September 30,
---------------------- ---------------------
1992 1991 1993 1992
------- ------- ------- -------
<S> <C> <C> <C> <C>
Customer sales $ 734.2 $ 731.4 $ 564.3 $ 547.1
Sales to related parties 352.7 353.0 231.1 261.7
--------- --------- ------- -------
Total sales 1,086.9 1,084.4 795.4 808.8
--------- --------- ------- -------
Cost of goods sold to customers (453.2) (435.8) (338.9) (332.8)
Cost of goods sold to related parties (206.4) (221.5) (139.1) (158.9)
--------- --------- ------- -------
Cost of goods sold (659.6) (657.3) (478.0) (491.7)
Selling, general and administrative
expenses (288.7) (302.3) (214.0) (228.5)
Research and development expenses (38.8) (44.3) (28.0) (26.2)
Depreciation and amortization (38.3) (37.7) (29.5) (28.9)
--------- --------- ------- -------
Total costs and expenses (1,025.4) (1,041.6) (749.5) (775.3)
--------- --------- ------- -------
Income from operations 61.5 42.8 45.9 33.5
Other income and expenses, net (note 6) (5.5) 27.1 (0.2) (3.4)
Interest expense (note 3) (27.7) (31.7) (20.5) (20.6)
--------- --------- ------- -------
Income before taxes 28.3 38.2 25.2 9.5
Income taxes (note 7) (7.9) (4.4) (4.4) (2.7)
--------- --------- ------- -------
Net income $ 20.4 $ 33.8 $ 20.8 $ 6.8
========= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
Westinghouse Electric Corporation
Distribution and Control Business Unit
Consolidated Statement of Cash Flows
<CAPTION>
(in millions) Unaudited
For the year ended For the nine months
December 31, ended September 30,
------------------ --------------------
1992 1991 1993 1992
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 20.4 $ 33.8 $ 20.8 $ 6.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38.3 37.7 29.5 28.9
Deferred taxes (5.8) (1.3) (2.5) (4.2)
Loss (gain) on sale of assets 0.1 (29.0) (0.8) (0.5)
Changes in assets and liabilities
excluding sales of assets:
Accounts receivable (1.6) 14.8 (18.0) (19.4)
Inventories (11.0) 17.0 2.5 (4.3)
Prepaid and other current assets 0.9 (0.5) (6.3) (3.3)
Accounts payable and other
current liabilities 4.4 (4.4) (8.6) 11.9
Other noncurrent assets
and liabilities (4.1) 5.8 (11.3) (1.7)
------- ------- ------- -------
Net cash provided by operating activities 41.6 73.9 5.3 14.2
------- ------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (32.7) (26.5) (15.0) (15.8)
Proceeds from sales of assets 10.9 54.6 1.4 6.8
------- ------- ------- -------
Net cash provided by (used in) investing
activities (21.8) 28.1 (13.6) (9.0)
------- ------- ------- -------
FINANCING ACTIVITIES
Net changes in debt 1.5 (14.8) 4.1 2.4
Net payments to (receipts from)
parent company (9.5) (92.9) 7.0 (3.0)
------- ------- ------- -------
Net cash provided by (used in)
financing activities (8.0) (107.7) 11.1 (0.6)
Effect of exchange rate changes on cash (11.6) 1.1 (1.6) (2.5)
------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents 0.2 (4.6) 1.2 2.1
Cash and cash equivalents at beginning of year 0.6 5.2 0.8 0.6
------- ------- ------- -------
Cash and cash equivalents at end of year $ 0.8 $ 0.6 $ 2.0 $ 2.7
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Westinghouse Electric Corporation
Distribution and Control Business Unit
Notes to the Financial Statements
Note 1: Basis of Presentation
Effective January 31, 1994, Eaton Corporation (Eaton) acquired certain assets
and assumed certain liabilities of the Distribution and Control Business Unit
(DCBU) of Westinghouse Electric Corporation under a Purchase Agreement dated
August 10, 1993 (the Agreement). Operations that were historically part of
DCBU but were not included in the Agreement are not included in these
financial statements. For purposes of these financial statements, DCBU relates
only to those operations which are included as part of the Agreement.
DCBU was an organizational unit of Westinghouse Electric Corporation and its
majority owned and controlled subsidiaries and affiliates (collectively
Westinghouse). Westinghouse Electric Corporation (WELCO or the parent company)
is incorporated in the Commonwealth of Pennsylvania. Its subsidiaries and
affiliates are incorporated or registered in other jurisdictions in the U.S.
and a number of other countries. DCBU is not a distinct legal entity.
DCBU manufactures, distributes and sells a broad range of industrial and
commercial electrical equipment to markets worldwide. Organizationally, DCBU
includes divisions of WELCO; divisions of Westinghouse de Puerto Rico;
divisions of Westinghouse Canada, Inc.; Challenger Electrical Equipment
Corporation (Challenger); Ottermill, Ltd.; Westinghouse de Venezuela S.A.;
Westinghouse do Brazil S.A.; Equipos Westinghouse S.A. de C.V.; and other
subsidiaries and affiliates.
The Securities and Exchange Commission, in Staff Accounting Bulletin Number 55
(SAB 55), requires that historical financial statements of a subsidiary,
division, or lesser business component of another entity include certain
expenses incurred by the parent on its behalf. These expenses include officer
and employee salaries, rent or depreciation, advertising, accounting and legal
services, other selling, general and administrative expenses and other such
expenses. These financial statements include such adjustments.
Historically, DCBU's results of domestic operations have been included in the
consolidated U.S. federal income tax return of Westinghouse. DCBU's results
of operations in Puerto Rico and certain operations in Canada were also
included with other Westinghouse operations in tax returns in those
jurisdictions. For operations that do not pay their own income tax,
Westinghouse internally allocates income tax expense at the statutory rate
after adjustment for state income taxes, Puerto Rican tax exemptions, and
several other items. The income tax expense and other tax related information
in these statements has been calculated as if DCBU had not been eligible to be
included in the consolidated tax returns of Westinghouse. The calculation of
tax provisions and deferred taxes necessarily required certain assumptions,
allocations and estimates which management believes are reasonable to
accurately reflect the tax reporting for DCBU as a stand-alone taxpayer.
These consolidated financial statements include the historical financial
position, results of operations, and cash flows of DCBU previously included in
the Westinghouse consolidated financial statements. These consolidated
financial statements have been prepared by Westinghouse management in
accordance with generally accepted accounting principles and include such
estimates and adjustments as deemed necessary to present fairly the
consolidated financial position, results of operations, and cash flows of DCBU
for the years ended December 31, 1992 and 1991.
In the opinion of the management of Westinghouse, the unaudited consolidated
financial statements for the nine month periods ended September 30, 1993 and
1992, include all material adjustments necessary to present fairly DCBU's
financial position, results of operations and cash flows for those periods.
Such adjustments are of a normal recurring nature. The results of the nine
month periods are not necessarily indicative of results for the entire years.
DCBU receives certain services and participates in certain centralized
Westinghouse activities, the allocated costs of which are included in these
financial statements. See note 3.
Note 2: Summary of Significant
Accounting Policies
CONSOLIDATION
The consolidated financial statements include the accounts of DCBU after
elimination of intercompany accounts and transactions other than those with
other units of Westinghouse as described in note 3.
REVENUE RECOGNITION
Sales are recorded primarily as products are shipped and services are
rendered.
AMORTIZATION OF INTANGIBLE ASSETS
Goodwill and other acquired intangible assets are amortized under the
straight-line method over their useful lives, which are estimated to
approximate 40 years.
CASH AND CASH EQUIVALENTS
DCBU considers all investment securities with a maturity of three months or
less when acquired to be cash equivalents. See note 3.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out (FIFO) basis, or market. Inventoried
costs include direct material, direct labor, and certain overheads. See note
9.
PLANT AND EQUIPMENT
Plant and equipment assets are recorded at cost and depreciated generally
under the straight-line method over their estimated useful lives. Expenditures
for additions and improvements are capitalized, and costs for repairs and
maintenance are charged to operations as incurred. DCBU limits capitalization
of newly acquired assets to those assets with cost in excess of $500. See note
11.
PRODUCT WARRANTY
Estimated warranty costs are provided at the time of sale of the warranted
product. The warranty costs are estimated and accrued based on historical
warranty costs incurred on the revenue earned on the sale of the product.
ENVIRONMENTAL COSTS
It is the policy of DCBU to expense or capitalize, as appropriate,
environmental expenditures that relate to current operations. Expenditures
that relate to an existing condition caused by past operations and which do
not contribute to current or future revenue generation are expensed. DCBU
accrues reserves when environmental assessments or remedial efforts are
probable and the costs can be reasonably estimated. Such reserves are adjusted
if necessary based upon the completion of a formal study and the information
obtained thereby. See note 17.
FOREIGN CURRENCY TRANSLATION
Results of foreign operations, other than those located in countries with
highly inflationary economies, are translated into U.S. dollars using average
exchange rates during the period, while assets and liabilities are translated
into U.S. dollars using current rates. The resulting translation adjustments
are recorded as deferred foreign currency translation adjustments in total
investment. Currency gains and losses resulting from translation of operations
in highly inflationary economies and all gains and losses resulting from
foreign currency transactions are determined using a combination of current
and historical rates and are reported as foreign currency transactions in
other income. DCBU operations in Venezuela, Brazil and Mexico are translated
under the highly inflationary approach.
NEW ACCOUNTING PRINCIPLES
Effective January 1, 1992, DCBU adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," on the immediate recognition basis. This statement
requires that the cost of certain medical, dental and life insurance benefits
for eligible retirees and dependents be recognized in the financial statements
during the employees' service with DCBU. DCBU's previous practice was to
expense these costs as incurred. See note 5.
In 1992, DCBU adopted SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." This statement is an extension of SFAS No. 105, "Disclosures of
Information about Financial Instruments with Concentrations of Credit Risks,"
adopted in a prior year, and requires the disclosure of the fair value of
certain financial instruments. See note 19.
In 1992, DCBU adopted SFAS No. 109, "Accounting for Income Taxes,"
retroactively to 1990. See note 7.
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112, "Employers' Accounting for Postemployment Benefits" which requires
employers to adopt accrual accounting for workers' compensation, salary
continuation, medical and life insurance continuation, severance benefits and
disability benefits provided former or inactive employees after employment but
before retirement. The statement is effective beginning in 1994 and requires
immediate recognition as a cumulative effect adjustment for the change in
accounting for postemployment benefits. DCBU plans to adopt SFAS No. 112 in
1994. DCBU is in the process of evaluating the impact of adoption of SFAS No.
112 and estimates its pre-tax effect to be between $9.0 million and $11.0
million.
Note 3: Related-Party Transactions
DCBU purchases products from and sells products to other Westinghouse
operations. DCBU also purchases certain services from Westinghouse, including
liability, property and workers' compensation insurance. These transactions
are discussed in further detail below.
CASH AND CASH EQUIVALENTS
DCBU utilizes the Westinghouse centralized cash management services in North
America and several foreign countries. Under such service arrangements,
accounts receivable are collected and cash is invested centrally.
Additionally, disbursing operations are funded centrally on demand. As a
result, DCBU carries little cash but receives charges and credits against
parent company investment for cash used and collected through a central
clearinghouse arrangement.
INTERCOMPANY PURCHASES
DCBU purchases products and services from other Westinghouse operations. For
intercompany purchases in the U.S., DCBU uses the central clearinghouse
arrangement through which intercompany transactions are settled at the
transfer date.
Accounts payable to related parties represents payable balances for purchases
from units of Westinghouse that do not participate in the central
clearinghouse arrangement.
INTERCOMPANY SALES AND RECEIVABLES
DCBU sells products to Westinghouse Electric Supply Company (WESCO) and
various other Westinghouse operations on a commercial basis. DCBU receives
credit through the central clearinghouse for sales to WESCO when products are
shipped. Therefore, there are no intercompany receivables for domestic WESCO
sales in these financial statements because such transactions are accounted
for on an immediate settlement basis.
In 1992 and 1991, intercompany sales included $336.5 million and $347.0
million to WESCO.
DCBU sales to WESCO have historically been governed on a commercial basis by
internal Westinghouse interunit arrangements. Westinghouse has entered into a
distributor agreement with Eaton which allows for the purchase and resale of
certain DCBU products by WESCO. The terms and conditions of the distributor
agreement permit DCBU products to be sold to WESCO on a commercial basis for
an initial five year period, subject to specified termination provisions.
Westinghouse has announced its intention to sell WESCO. Westinghouse intends
that any buyer of WESCO would assume the obligations of Westinghouse under the
terms and conditions of the distributor agreement.
Accounts receivable from related parties represents the accounts receivable
from sales to units of Westinghouse that do not participate in the central
clearinghouse arrangement. None of the allowance for doubtful accounts balance
relates to these receivables.
CORPORATE SERVICES
DCBU uses, and is charged directly for, certain services that Westinghouse
provides to its business units. These services include telephone services,
information systems support, certain accounting functions, legal services,
environmental affairs and benefit administration. DCBU also purchases other
Westinghouse internally-provided services as required. These services include
printing, freight forwarding, warranty and repair services, productivity and
quality consulting, recruiting and administrative support for Caribbean
activities.
Westinghouse centrally develops, negotiates and administers DCBU's insurance
programs. The insurance includes a broad all-risk coverage for real and
personal property and third-party liability coverage, and employer's liability
coverage, automobile liability, general product liability and other standard
liability coverage. Westinghouse also maintains a program of self-insurance
for workers' compensation in the U.S. A portion of the cost of this program is
charged to DCBU based on claims history.
The Westinghouse Science and Technology Center (STC) provides support to DCBU
relating to new product development. STC is the Westinghouse corporate central
research and development organization. DCBU is charged for all such research
and development costs as they are incurred as immediate settlement
transactions through the Westinghouse central clearinghouse.
All of the charges described above are included as costs of DCBU's operations
in these financial statements. Such charges by Westinghouse to DCBU are based
on either a direct cost pass through or a percentage allocation of total costs
for the service provided. Where percentage allocations are used, such
allocations are based on DCBU's percent utilization compared to that of all
Westinghouse organizations. These costs have been allocated to DCBU on a basis
that management believes is reasonable. However, management believes that it
is possible that the terms of these transactions may differ from those that
would result from transactions among unrelated parties. The charges to DCBU
for the above services were $39.5 million and $37.7 million in 1992 and 1991
respectively.
In addition, Westinghouse also allocates a certain portion of its corporate
expenses to each business unit. These allocated costs include Westinghouse
executive management and corporate overhead; benefit costs associated with
retired and divested business employees; corporate-related pension charges;
audit, tax and treasury services; and other support and executive functions.
DCBU's domestic credit and collection activities are administered centrally by
the Westinghouse treasury group, and the cost of this service is included in
the corporate-allocated cost.
Corporate expenses are allocated to DCBU based primarily on payroll dollars.
Such allocations are not necessarily indicative of actual results and it is
not practical for management to estimate the level of expenses that might have
been incurred had DCBU operated as a separate stand-alone entity. The
following table presents the costs charged to DCBU for such expenses.
CORPORATE EXPENSES
(in millions)
Allocated
Costs
-------------
For the year ended December 31, 1992 1991
---- ----
Credit and collection $ 2.5 $ 2.5
All other allocated
services and costs $13.4 $14.2
OTHER SERVICES
DCBU's sales forces sell the products of certain other Westinghouse divisions,
including Westinghouse Motor Co., Engineering & Repair Services, Specialty
Products and WESCO. For performing such services, DCBU receives a commission
that is offset against selling expenses. For the years ended December 31, 1992
and 1991, these commissions totalled $6.7 million and $6.0 million,
respectively.
INTEREST
DCBU receives a charge from Westinghouse for the carrying cost of parent
company investment in the form of interest expense. The charge is based on
DCBU's average total investment and is adjusted annually. DCBU's allocated
interest expense was $23.1 million and $20.1 million in 1992 and 1991. The
effective annual percentage rate for interest expense was approximately 10
percent in both years. For purposes of these financial statements, interest
paid is assumed to equal interest expense.
Note 4: Pensions
Westinghouse sponsors various pension arrangements covering substantially all
domestic and foreign DCBU employees. Most plan benefits are based on either
years of service and compensation levels at the time of retirement, a formula
based on career earnings or a final average compensation amount. Pension
benefits are paid from trusts funded by contributions from employees and
Westinghouse. The pension funding policy is consistent with the funding
requirements of U.S. federal and other government laws and regulations. Plan
assets consist primarily of listed stocks, fixed income securities and real
estate investments.
DCBU's pension arrangements include both single-employer and multiemployer
plans as defined in SFAS 87, "Employers' Accounting for Pensions." DCBU's
single-employer plans consist of the pension plans of Challenger (Challenger
plans) and are discussed below. For purposes of these financial statements,
DCBU's multiemployer plans include the Westinghouse Pension Plan, Westinghouse
Executive Pension Plan, Westinghouse Canada Inc. Pension Plan for Hourly
Employees, Westinghouse Canada Inc. Consolidated Pension Plan for Salaried
Employees, and Westinghouse Pension Plan for Operations in Puerto Rico
(multiemployer plans). All of these plans are defined benefit plans and are
sponsored by Westinghouse. They include various domestic and foreign employees
of DCBU as well as other domestic and foreign employees of Westinghouse. For
multiemployer plans, employers are required to recognize as net pension
expense total contributions for the period. For 1992 and 1991, DCBU's pension
expense for multiemployer plans was $10.1 million and $9.8 million,
respectively. There were no contributions due and unpaid at December 31, 1992
and 1991.
Net periodic pension cost for 1992 and 1991, and the funding status at
December 31, 1992 and 1991, for the Challenger plans are as follows:
NET PERIODIC PENSION COSTS - CHALLENGER PLANS
(in millions)
For the year ended December 31, 1992 1991
---- ----
Service cost $ 1.2 $ 1.3
Interest cost on projected benefit
obligation 2.1 2.0
Amortization of unrecognized prior
service cost .1 .1
---- ----
3.4 3.4
---- ----
Return on plan assets:
Actual return on plan assets (1.8) (3.6)
Unrecognized return on plan assets (1.1) 1.1
---- ----
Recognized return on plan assets (2.9) (2.5)
---- ----
Net periodic pension cost $ .5 $ .9
==== ====
For the Challenger plans in both periods, an 8.5 percent discount rate and a 7
percent rate of increase in future compensation levels, for the plans to which
such increase applies, were used in determining the actuarial present value of
the projected benefit obligation. The expected long-term rate of return on
plan assets was 9.5 percent.
For financial reporting purposes, a pension plan is considered underfunded
when the fair value of the plan assets is less than the accumulated benefit
obligation. In accordance with SFAS No. 87, a minimum pension liability must
be recognized for the sum of the underfunded amount plus any prepaid
contributions. In recognizing such a liability, an intangible asset, limited
to the sum of the prior service cost not yet recognized and the unrecognized
transition obligation, is usually recorded. Any liability amount to be
recognized in excess of the intangible asset limit should be charged to
equity. At December 31, 1992 and 1991, for the underfunded Challenger plans,
additional minimum pension liabilities of $.5 million and $.3 million,
respectively, were recognized for the difference between the underfunded
accumulated benefit obligations of $.6 million and $.4 million, respectively,
and the accrued pension costs of $.1 million. An intangible asset of $.5
million at December 31, 1992, and $.3 million at December 31, 1991, offset the
additional minimum pension liability.
<TABLE>
FUNDING STATUS - CHALLENGER PLANS
<CAPTION>
(in millions)
At December 31 1992 1991
---------------------- ----------------------
Overfunded Underfunded Overfunded Underfunded
plans plans plans plans
------- ------- ------- ------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Vested $(21.1) $ (2.0) $(19.9) $ (1.5)
Nonvested (.8) (.1) (.7) (.1)
------ ----- ----- -----
Accumulated benefit obligation (21.9) (2.1) (20.6) (1.6)
Effect of projected future
compensation levels (4.1) - (3.6) (.2)
------ ----- ----- -----
Projected benefit obligation for
service rendered to date (26.0) (2.1) (24.2) (1.8)
Plan assets at fair value 32.7 1.5 29.9 1.2
------ ----- ----- -----
Plan assets in excess (deficit) of
projected benefit obligation 6.7 (.6) 5.7 (.6)
Unrecognized net gain (.9) - (1.5) -
Prior service cost not yet recognized
in net periodic pension cost .8 .5 .8 .5
------ ----- ----- -----
Prepaid (accrued) pension
contribution $ 6.6 $ (.1) $ 5.0 $ (.1)
- --------------------------------------------------------------------------------
</TABLE>
In June 1993, Westinghouse changed the actuarial assumptions regarding future
events for the multiemployer plans. Those changes included lowering the
discount, wage escalation, and return on plan asset rates. As a result of
those changes it is estimated that DCBU's 1993 full year pension expense for
multiemployer plans will be approximately 40 percent higher than the 1992
level. Additionally, effective December 31, 1993, Westinghouse made further
changes in its pension actuarial assumptions. It is estimated that DCBU's full
year 1994 pension expense for multiemployer plans will be approximately 20
percent higher than the 1993 estimated level. The actuarial assumptions in use
by Westinghouse for 1994 are a discount rate of 7.25 percent, a wage increase
rate of 4.0 percent, and a return on plan asset rate of 9.75 percent.
As discussed above, the Challenger plans use actuarial assumptions different
from those in the multiemployer plans. While an actuarial study to determine
the effect of such rate changes on the Challenger plans has not been prepared,
it could reasonably be expected that the resulting rate of change in
Challenger pension expense would be less than that experienced in the
multiemployer plans.
Note 5: Postretirement Benefits Other Than Pensions
Westinghouse sponsors defined benefit postretirement plans that provide
medical, dental and life insurance benefits for eligible retirees and
dependents, including DCBU's eligible retirees located in the U.S., Puerto
Rico and Canada. During 1992, Westinghouse adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," on the immediate
recognition basis. This statement requires employers that sponsor single-
employer defined benefit postretirement plans to recognize net periodic
postretirement benefit costs during an employee's service to the employer and,
when adopted on the immediate recognition basis, a transition obligation for
postretirement benefits accumulated by employees in earlier periods. However,
for the purposes of these financial statements, DCBU is considered to have
participated in a multiemployer postretirement benefit plan as defined in SFAS
106. Therefore, no provision has been made in these financial statements to
recognize an obligation for accumulated postretirement benefits.
For multiemployer plans, employers are required to recognize as net post-
retirement benefit costs, total contributions for the period. For 1992, DCBU's
net postretirement benefit cost for multiemployer plans was $10.5 million
which represents DCBU's contribution to Westinghouse for eligible retiree and
dependent benefits.
Certain of DCBU's non-U.S. subsidiaries have private and government-sponsored
plans for retirees. The cost of these plans is not material to DCBU.
Note 6: Other Income and Expenses, net
OTHER INCOME AND EXPENSES
(in millions)
Unaudited
For the 9 months
For the year ended ended
December 31, September 30,
1992 1991 1993 1992
Interest income $ 1.7 $ 0.8 $ 1.0 $ 1.3
Gain on sale of
Bryant 0.0 30.5 0.0 0.0
Net gain (loss) on sale
of assets (0.1) (1.5) 0.8 0.5
Foreign currency transaction
and highly inflationary
translation gains and (losses) (5.6) (1.5) (0.2) (3.4)
Other expenses, net (1.5) (1.2) (1.8) (1.8)
----- ----- ----- -----
Other income and
expenses, net $(5.5) $27.1 $(0.2) $(3.4)
===== ===== ===== =====
Interest income primarily includes income from notes issued by various
Westinghouse foreign subsidiaries in support of regional cash management
operations. In 1991 DCBU sold its Bryant Division for $52.1 million in cash.
Note 7: Income Taxes
Income taxes are calculated under the bases described in note 1. For purposes
of these financial statements, taxes paid are assumed to equal income taxes
currently payable.
CONSOLIDATED INCOME TAXES
(in millions)
Unaudited
For the 9
For the year ended months ended
December 31, September 30,
1992 1991 1993
Current:
Federal $ 6.2 $ 4.3 $ 1.9
State 1.4 0.2 0.1
Foreign 6.1 1.2 4.9
- -------------------------------------------------------------------
Total income taxes - current 13.7 5.7 6.9
- -------------------------------------------------------------------
Deferred:
Federal $ (4.1) $ (1.0) (0.3)
State (1.0) 0.3 0.3
Foreign (0.7) (0.6) (2.5)
- -------------------------------------------------------------------
Total income taxes - deferred (5.8) (1.3) (2.5)
- -------------------------------------------------------------------
Income taxes $ 7.9 $ 4.4 $ 4.4
- -------------------------------------------------------------------
Deferred federal income taxes for 1993 include a benefit of $0.4 million
resulting from the enactment of an increase in the statutory federal income
tax rate from 34% to 35%.
In 1992, DCBU adopted SFAS No. 109 retroactive to 1990.
The foreign portion of income or loss before income taxes in the consolidated
statement of income was a loss of $0.4 million for nine months of 1993, income
of $1.2 million in 1992, and a loss of $5.1 million in 1991.
Deferred federal income taxes have not been provided on cumulative
undistributed earnings from foreign subsidiaries, totaling $7.1 million at
December 31, 1992, in which the earnings have been reinvested for an
indefinite time. It is not practicable to determine the income tax liability
that would result had such earnings been repatriated. The amount of
withholding taxes that would be payable upon such repatriation is estimated to
be $0.5 million.
Net income includes income of certain manufacturing operations in Puerto Rico
which are exempt from U.S. income tax and partially exempt from Puerto Rican
income tax under grants of industrial tax exemptions. These tax exemptions
provided net tax benefits of $5.1 million for nine months of 1993, $5.2
million in 1992, and $8.4 million in 1991. The exemptions will expire at
various dates from 1997 through 2007. The 1993 Revenue Reconciliation Act
places limits on the amount of tax benefits available to U.S. corporations in
Puerto Rico beginning in 1994. These limitations are not expected to have a
material effect on DCBU's results of operations as an historical stand-alone
taxpayer.
Deferred income taxes result from temporary differences in the financial bases
and tax bases of assets and liabilities. The type of differences that give
rise to significant portions of deferred income tax liabilities or assets are
shown in the accompanying table.
CONSOLIDATED DEFERRED INCOME TAX SOURCES
(in millions)
Unaudited
At At
December 31, September 30,
1992 1991 1993
Provisions for expenses and losses $ 18.4 $ 19.5 $ 17.8
Accumulated depreciation (22.6) (26.2) (22.1)
Minimum pension liabilities (2.6) (2.7) (2.6)
Inventories 12.8 9.4 12.8
Operating loss carryforwards 2.3 0.0 4.2
Alternative minimum tax credit 1.2 2.4 2.6
Other deferred tax assets 4.3 3.3 4.0
Other deferred tax liabilities (4.1) (4.1) (2.7)
Valuation allowance (2.3) 0.0 (4.2)
- ---------------------------------------------------------------------
Deferred income taxes, net asset $ 7.4 $ 1.6 $ 9.8
- ---------------------------------------------------------------------
At December 31, 1992, and September 30, 1993, there were alternative minimum
tax credit carryforwards of $1.2 million and $2.7 million, respectively, which
have no expiration date.
At September 30, 1993 there were $14.3 million of net operating loss
carryforwards attributable to foreign subsidiaries. Of this total,
approximately $6.5 million will expire in 1997 and the balance has no
expiration date. A valuation allowance of $4.2 million related to those losses
has been established since it is considered more likely than not that the
benefit will not be realized.
EFFECTIVE TAX RATE
Unaudited
For the 9
For the year ended months ended
December 31, September 30,
1992 1991 1993
Federal statutory income tax rate 34.0 % 34.0 % 35.0 %
Increase (decrease) in the tax rate
resulting from:
State income tax, net of federal effect 0.8 0.9 0.8
Lower tax rate on income of foreign
sales corporations (2.5) (1.7) (2.1)
Lower tax rate on net income of Puerto
Rican operations (18.4) (22.1) (20.3)
Different tax rate on
foreign subsidiaries 2.7 (2.2) (4.8)
Goodwill amortization 3.2 2.5 2.8
Valuation allowance 8.0 0.0 7.5
Adjustment of deferred tax asset
for increase in federal income
tax rate 0.0 0.0 (1.5)
Other 0.1 0.1 0.1
- -------------------------------------------------------------------------
Effective tax rate 27.9 % 11.5 % 17.5 %
- -------------------------------------------------------------------------
The federal income tax returns of Westinghouse are settled through the year
ended December 31, 1986. Management believes that adjustments to Westinghouse
federal tax returns of all years through December 31, 1992 will have no
material effect on DCBU for purposes of these financial statements.
Note 8: Customer Accounts Receivable, net
Allowances for doubtful accounts of $4.8 million and $4.9 million at December
31, 1992 and 1991, respectively, were deducted from customer receivables. As
of December 31, 1992 and 1991, DCBU had no significant concentrations of
credit risk due to the large number of customers comprising the DCBU customer
base and their dispersion across many different industries and geographic
areas. DCBU performs ongoing credit evaluations of its customers and generally
does not require collateral.
Note 9: Inventories
INVENTORIES
(in millions)
Unaudited
At December 31, At September 30,
1992 1991 1993 1992
Raw materials $ 23.5 $ 25.7 $ 22.6 $ 24.7
Work in process 69.8 62.7 72.3 64.1
Finished goods 96.5 90.4 92.4 94.3
- ----------------------------------------------------------------------------
Inventories $189.8 $178.8 $187.3 $183.1
- ----------------------------------------------------------------------------
Inventories do not exceed net realizable values and, other than those related
to replacement parts, are generally realized within one year.
Note 10: Prepaid and Other Current Assets
PREPAID AND OTHER
CURRENT ASSETS
(in millions)
At December 31, 1992 1991
Deferred income taxes $ 26.4 $ 22.6
Other 3.2 4.1
- ----------------------------------------------------------------------------
Prepaid and other current assets $ 29.6 $ 26.7
- ----------------------------------------------------------------------------
Note 11: Plant and Equipment
PLANT AND EQUIPMENT
(in millions)
At December 31, 1992 1991
Land and buildings $ 108.2 $ 110.0
Machinery and equipment 381.0 367.2
Construction in progress 21.8 22.7
- ----------------------------------------------------------------------------
Plant and equipment, at cost 511.0 499.9
Accumulated depreciation (261.0) (242.1)
- ----------------------------------------------------------------------------
Plant and equipment, net $ 250.0 $ 257.8
- ----------------------------------------------------------------------------
Note 12: Intangible and Other
Noncurrent Assets
INTANGIBLE AND OTHER NONCURRENT ASSETS
(in millions)
At December 31, 1992 1991
Goodwill and other acquired intangible
assets $ 136.7 $ 145.9
Prepaid pension contributions 8.1 8.0
Other 1.5 1.1
- -----------------------------------------------------------------------------
Intangible and other noncurrent assets $ 146.3 $ 155.0
- -----------------------------------------------------------------------------
Goodwill and other acquired intangible assets consists primarily of goodwill
of $147.9 million recorded in the acquisition of Challenger on December 31,
1987. Accumulated amortization of Challenger goodwill totalled $17.5 million
and $14.3 million, at December 31, 1992 and 1991, respectively.
Note 13: Short-term Debt
Short-term debt consists of bank loans of subsidiaries in Venezuela and
Brazil.
Note 14: Other Current Liabilities
OTHER CURRENT LIABILITIES
(in millions)
At December 31, 1992 1991
Accrued employee compensation $ 28.4 $ 27.4
Accrued product warranty 7.0 6.9
Accrued volume discounts 4.1 3.5
Progress and advanced billings 3.2 3.7
Other 5.3 6.8
- -----------------------------------------------------------------------------
Other current liabilities $ 48.0 $ 48.3
- -----------------------------------------------------------------------------
Note 15: Other Noncurrent Liabilities
OTHER NONCURRENT LIABILITIES
(in millions)
At December 31, 1992 1991
Deferred income taxes $ 19.0 $ 21.0
Accrued product liability 25.3 26.0
Accrued environmental costs 16.4 17.6
Pension liabilities 3.0 3.2
Other 1.8 3.6
- -----------------------------------------------------------------------------
Other noncurrent liabilities $ 65.5 $ 71.4
- -----------------------------------------------------------------------------
Accrued environmental costs includes $13.6 million as of December 31, 1992,
relating to DCBU properties which are not included in the list of assets to be
sold by Westinghouse to Eaton but which will be leased by DCBU as productive
facilities. The gross and net book values of these properties at December 31,
1992, are $12.9 million and $4.2 million, respectively. See note 17.
Note 16: Parent Company Investment
Since DCBU is an operating unit and not a distinct legal entity (see note 1)
there are no customary equity and capital accounts. Instead, parent company
investment is maintained by DCBU and Westinghouse to account for all interunit
transactions as described in note 3. Parent company investment is comprised of
net income, capital expenditures, and other transactions with Westinghouse as
shown below.
PARENT COMPANY INVESTMENT
(in millions)
Unaudited
For the
For the year ended 9 months ended
December 31, September 30,
1992 1991 1993
Balance, beginning of year $ 560.9 $ 620.0 $ 571.8
Net income 20.4 33.8 20.8
Capital expenditures 32.7 26.5 15.0
Proceeds from sale of assets (10.9) (54.6) (1.4)
Net interunit transactions (31.3) (64.8) (6.6)
----- ----- -----
Balance, end of year $ 571.8 $ 560.9 $ 599.6
===== ===== =====
Note 17: Contingent Liabilities and Commitments
DCBU is a party to personal injury and property damage litigation arising out
of incidents involving the use of its products. Annually, Westinghouse
administers DCBU's product liability insurance program based on DCBU's current
and historical claims experience and the availability and cost of insurance.
The combination of these annual programs constitutes DCBU's aggregate product
liability insurance coverage. DCBU's program for 1992 was comprised of a self-
insurance retention and catastrophic coverage in excess of the retention.
Cumulative amounts estimated to be payable by DCBU with respect to pending and
potential claims for all years in which DCBU is liable under its self-
insurance retention are $24.8 million at September 30, 1993, $25.3 million at
December 31, 1992, and $26.0 million at December 31, 1991. These amounts have
been accrued for in these financial statements. See note 15.
Environmental:
It is the policy of Westinghouse to operate and maintain its facilities in
compliance with all applicable laws and regulations to protect the environment
and the health and safety of its employees. Compliance with federal, state and
local regulations relating to the discharge of substances into the
environment, the disposal of hazardous wastes and other related activities
affecting the environment have had and will continue to have an impact on the
operations of DCBU. Thus far, compliance with environmental requirements and
resolution of environmental claims has been accomplished without material
adverse effect on DCBU's liquidity, competitive status, financial condition or
results of operations.
While it is difficult to estimate the timing and ultimate costs to be incurred
in the future due to uncertainties about the status of laws, regulations,
technology and information available for individual sites, management has
estimated the reasonably possible remediation costs that could be incurred by
DCBU based on the facts and circumstances known currently. Such estimates
include the professional judgment of Westinghouse's environmental experts,
outside environmental specialists and other experts and, when necessary, legal
counsel. In addition, the likelihood that other parties which also have been
named as potential responsible parties (PRP's) will have the financial
resources to fulfill their obligations at superfund sites where they are also
liable has been considered.
In accordance with the above policy, there are several ongoing environmental
evaluations and remediation programs under federal and state superfund laws
for which Westinghouse has responsibility on behalf of DCBU. These programs
involve investigations and remediation actions at DCBU's Beaver, Pennsylvania,
and Horseheads, New York, facilities, and related investigations and
remediation resulting from alleged off-site contamination and waste disposal
from the facilities.
In addition, five sites acquired as part of the Challenger acquisition in
1987, four of which have been sold, are subject to ongoing soil, ground water
and underground tank remediation. The remediation is the responsibility of and
is being borne by Challenger's predecessors in interest. Virtually all of the
remedial work addressing these environmental concerns has been completed.
Westinghouse has full indemnities for these identified environmental
liabilities at the five Challenger sites, and therefore, management believes
it has no obligation for funding the completion of the remedial work.
Management has estimated the total probable costs which could be incurred for
remediation of the above mentioned environmental sites to be approximately
$10.0 million at September 30, 1993, $16.4 million at December 31, 1992 and
$17.6 million at December 31, 1991. These amounts have been accrued for in
these financial statements. Management believes that the total remaining
reasonably possible costs which could be incurred for remediation of the above
mentioned environmental sites, none of which have been accrued, will not have
a material adverse effect on DCBU's liquidity, competitive status, financial
condition or results of operations. See note 15.
Note 18: Leases
DCBU has commitments under operating leases for certain machinery and
equipment and facilities used in various operations. Rental expense in 1992
and 1991 was $19.1 million and $22.1 million, respectively. These amounts
include immaterial amounts for contingent rentals and sublease income.
MINIMUM RENTAL PAYMENTS
(in millions)
At December 31 1992
1993 $ 16.3
1994 13.7
1995 10.6
1996 6.9
1997 4.0
Subsequent years 4.5
------
Minimum rental payments $ 56.0
======
Note 19: Financial Instruments
The estimated fair value of financial instruments has been determined by DCBU
using the best available market information and appropriate valuation
methodologies. Accordingly, the estimates presented are not necessarily
indicative of the amounts that DCBU could realize in a current market exchange
or the value that ultimately will be realized by DCBU upon maturity or
disposition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
(in millions)
At December 31 1992
---------------------------
Estimated
Carrying Fair
Amount Value
-------- ---------
Assets:
- -------
Cash and cash equivalents $ 0.8 $ 0.8
Liabilities:
- ------------
Short-term debt 2.0 2.0
Off-balance-sheet financial instruments:
- ----------------------------------------
Foreign currency forward
exchange contracts 0.0 0.2
The carrying amount for cash and cash equivalents approximates fair value. See
note 3.
The carrying amount of short-term debt approximates fair value.
At December 31, 1992, DCBU held foreign currency forward exchange contracts
maturing in 1993 for the purchase or sale of European and Canadian currencies
to hedge foreign currency transactions. Open sales contracts totalled $9.7
million. Gains and losses on foreign currency forward exchange contracts which
hedge specific transactions are recognized in net income, offsetting the
underlying foreign currency transaction gains or losses.
Note 20: Business Segment and Geographical Region Information
DCBU operates solely in the industrial and commercial electrical equipment
market segment. DCBU's products include electromechanical and electronic
controls, motor starters, programmable controllers, sensors, circuit breakers,
load centers, safety switches, panelboards, busway, commercial switches,
relays and various other related products.
The largest single customer of DCBU is WESCO, an operating unit of
Westinghouse. Intercompany sales to WESCO accounted for 31% of sales in 1992
and 32% in 1991. See note 3.
DCBU sells products to customers throughout the world using domestic
operations and foreign subsidiaries. Generally, products manufactured outside
the United States are sold outside the United States.
Geographic Region Information
(in millions)
United Latin Elimin-
States Canada America Europe ations Totals
1992
- ----
Net sales $1,356.6 $150.7 $ 71.4 $16.8 $(508.6) $1,086.9
Operating
profit 64.2 9.3 5.0 1.1 (18.1) 61.5
Identifiable
assets 685.0 152.9 73.5 8.8 (168.2) 752.0
1991
- ----
Net sales $1,298.2 $169.7 $ 71.0 $17.9 $(472.4) $1,084.4
Operating
profit 29.4 7.0 (1.4) 1.0 6.8 42.8
Identifiable
assets 672.5 178.1 78.7 8.7 (185.2) 752.8
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
prospectuses constituting part of the Registration Statements of
Eaton Corporation listed below of our report dated January 31, 1994
which appears on page 3 of this Form 8-K Current Report:
Registration
Number Description Filing Date
33-49393, Eaton Corporation Stock Option Plans- March 9, 1993
33-12842, Form S-8 Registration Statement
2-76349 and
2-58718
33-49777 Eaton Corporation Share Purchase and
Investment Plan- July 16, 1993
Form S-8 Registration Statement
33-49779 Eaton Limited U.K. Savings-Relate
Share Option Scheme (1991) - Form
S-8 Registration Statement July 16, 1993
33-48851 Eaton Corporation $200,000,000 of
Debt Securities, Debt Warrants and
Preferred Shares - July 30, 1992
Form S-3 Registration Statement
33-15582 Eaton Limited U.K. Savings-Related
Share Option Scheme- July 7, 1987
Form S-8 Registration Statement
33-2688 Eaton Corporation Shareholder
Dividend Reinvestment Plan Jan. 15, 1986
(Including Post Effective
Amendment No. 1 Filed Feb. 19, 1986)
2-77090 Eaton Corporation Strategic
Incentive and Option Plan- May 10, 1982
Form S-8 Registration Statement
Price Waterhouse
600 Grant Street
Pittsburgh, Pennsylvania 15219
February 18, 1994
