Page 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee required)
For the year ended December 31, 1993
Commission file number 1-1396
- ----------------------------------------------------------------
Eaton Corporation
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
- ----------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(216) 523-5000
- ---------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------------- ---------------------------
Common Shares ($.50 par value) The Chicago Stock Exchange
The New York Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
7% Debentures, due 2011 The New York Stock Exchange
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
---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of January 31, 1994 was $4.1
billion. As of January 31, 1994, there were 72,268,764 Common
Shares outstanding.
Page 2
Documents Incorporated By Reference
Portions of the Proxy Statement for the 1994 annual shareholders'
meeting are incorporated by reference into Part III.
Part I
Item 1. Business
Eaton Corporation (herein referred to as Eaton or Company) was
incorporated in 1916. Eaton is a global manufacturer of vehicle
powertrain components and a broad variety of controls serving
transportation, industrial, commercial, aerospace, and military
markets. The Company offers thousands of high-quality products
worldwide. Principal products include truck transmissions and
axles, engine components, electrical equipment and controls. The
Company had 1993 net sales of $4.4 billion and 38,000 employees at
120 manufacturing facilities in 17 countries.
In May 1993, the Company redeemed its share purchase rights at a
redemption price of 3-1/3 cents for each right, for a total
payment of $2 million.
In June 1993, the Company distributed a two-for-one stock split
effected in the form of a 100% stock dividend and increased its
quarterly dividend on Common Shares to 30 cents per share from the
post-split rate of 27-1/2 cents per share. Also, in June 1993,
the Company reconsolidated the net assets and operating results of
its remaining discontinued operations. The Company has concluded
that, although it would still prefer to divest these operations,
due to the ongoing contraction in the defense industry and
uncertainty in the defense electronics market at the present time,
it would be extremely difficult to implement its divestiture plans
on an acceptable basis. Financial information for these
operations is presented under Defense Systems in "Business Segment
Information" on page 38 of this report.
In December 1993, the Company recorded a $55 million acquisition
integration charge before income tax credits ($34 million after
income tax credits, or $.49 per Common Share) in conjunction with
the January 31, 1994 acquisition of the Distribution and Control
Business Unit (DCBU) of Westinghouse Electric Corporation. The
acquisition, which will be accounted for as a purchase in 1994,
was for a purchase price of $1.1 billion, plus the assumption of
certain liabilities. The purchase price is subject to adjustment
based upon changes in DCBU's adjusted net assets. DCBU will be
combined with the Company's Industrial Control and Power
Distribution Operations, which market Cutler-Hammer products, to
form a Cutler-Hammer business unit with annual sales of $1.6
billion. DCBU had 1993 sales of $1.1 billion and Eaton's
consolidated sales are expected to increase 25% as a result of the
acquisition. Further information regarding the acquisition and
its financing is presented under "Subsequent Event - Acquisition
of DCBU and Integration Charge" on pages 20 through 22 of this
report.
Information regarding principal products, net sales, operating
profit and identifiable assets by business segment and geographic
region is found under "Business Segment and Geographic Region
Information" on pages 35 to 39 of this report. Additional
information regarding Eaton's business segments and its business
in general is presented below.
Page 3
Vehicle Components
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. Although Eaton
emphasizes its EATON trademark in the marketing of many of its
products within this business segment, it also markets under a
number of other trademarks, including CHAR-LYNN, DILL, FULLER,
ROADRANGER and TOP SPEC.
Seasonal Fluctuations - Sales of truck, passenger car and
off-highway vehicle components are generally reduced in the third
quarter of each year as a result of preparations by vehicle
manufacturers for the following model year and their temporary
shut-downs for taking physical inventories.
Competition - The principal methods of competition in this
business segment are price, service and product performance.
Eaton occupies a strong competitive position in relation to its
many competitors in this business segment and, with respect to
many products, is considered among the market leaders.
Major Customers - Approximately 18% of net sales in 1993 of the
Vehicle Components segment were made to divisions and subsidiaries
of Ford Motor Company. Also, approximately 39% of net sales in
1993 of the Vehicle Components segment were made to divisions and
subsidiaries of five other large companies. Eaton has been doing
business with each of these companies for many years. Sales to
these companies include a number of different products and
different models or types of the same product, the sales of which
are not dependent upon one another. With respect to many of the
products sold, the various divisions and subsidiaries of each of
the companies are in the nature of separate customers, and sales
to one division or subsidiary are not dependent upon sales to
other divisions or subsidiaries.
Electrical and Electronic Controls
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. The EATON, C-H
CONTROL, CUTLER-HAMMER, DOLE, DURANT, DYNAMATIC, HEINEMANN, KENWAY, and
PANELMATE trademarks are used in connection with the marketing of
products included in this business segment. In addition, in
conjunction with its January 1994 acquisition of DCBU, the Company
has the right to use the CHALLENGER, COMMANDER and WESTINGHOUSE
trademarks in the marketing of certain products. The use of the
WESTINGHOUSE trademark is limited to a period of ten years.
Competition - The principal methods of competition in this
business segment are price, geographic coverage, service and product
performance. The number of competitors varies with respect to the
different products. Eaton occupies a strong competitive position in
this business segment and, with respect to many products, is considered
among the market leaders.
Major Customers - Approximately 8% of net sales in 1993 of the
Electrical and Electronic Controls segment were made to the United
States Government. All contracts that the Company has with the
United States Government are subject to termination at the
election of the Government. Approximately 6% of net sales in 1993
of the Electrical and Electronic Controls segment were made to
divisions and subsidiaries of Ford Motor Company, which is a major
customer of the Company's Vehicle Components segment.
Defense Systems
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. The AIL, INCHWORM
and HYPERMANUAL trademarks are used in connection with the
marketing of products included in this business segment.
Competition - The principal methods of competition in this
business segment are price, technological capability and product
performance. The number of competitors is limited and varies with
respect to the different technologies.
Page 4
Major Customers - Almost all net sales in 1993 of the Defense
Systems segment were made to the United States Government. All
contracts that the Company has with the United States Government
are subject to the termination at the election the Government.
Information Concerning Eaton's Business in General
Raw Materials - The principal raw materials used by Eaton are
iron, steel, copper, aluminum, brass, insulating materials,
silver, rubber and plastic. These materials are purchased in
various forms, such as pig iron, metal sheets and strips, forging
billets, bar stock and plastic pellets. Eaton purchases its raw
materials, as well as parts and other components, from many
suppliers and under normal circumstances has no difficulty
obtaining them.
Order Backlog - Since a significant proportion of open orders
placed with Eaton by original equipment manufacturers of trucks,
passenger cars and off-highway vehicles are historically subject
to month-to-month releases by the customers during each model year, such
orders are not considered technically firm. In computing its
backlog of orders, Eaton includes only the amount of such orders
released by such customers as of dates listed. Using this
criterion, Eaton's total backlog was approximately $1 billion and
$900 million as of December 31, 1993 and 1992, respectively. The
backlog should not be relied upon as being indicative of results
of operations for future periods.
Research and Development - Research and development expenses for
new products and the improvement of existing products were $154
million in 1993, $151 million in 1992 and $138 million in 1991.
Protection of the Environment - The operations of the Company
involve the use, disposal and cleanup of certain substances
regulated under environmental protection laws, as further
discussed under "Protection of the Environment" on page 26 of
this report. Subject to the difficulty in estimating future
environmental costs, the Company expects that any sum it may have
to pay in connection with environmental matters in excess of the
amounts recorded or disclosed will not have a material adverse
effect on its financial condition or results of operations.
Eaton's estimated capital expenditures for environmental control
facilities are not expected to be material for the remainder of
1994 and 1995.
Employees - Eaton employed 38,000 individuals as of December 31,
1993. As a result of its January 1994 acquisition of DCBU, the
Company added 12,500 employees.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The
Company maintains manufacturing facilities at 120 locations in 17
countries. In addition, as a result of its January 1994
acquisition of DCBU, the Company acquired 36 manufacturing
facilities in various domestic and international locations, as
well as 27 satellite operations and 12 distribution centers. The
Company is a lessee under a number of operating leases for certain
real properties and equipment. Information regarding the
Company's commitments for operating leases is found under "Lease
Commitments" on page 28 of this report.
Eaton's principal research facilities are located in Southfield,
Michigan, in Milwaukee, Wisconsin, and near Cleveland, Ohio. In
addition, certain Eaton divisions conduct research in their own
facilities.
Management believes that the Company's manufacturing facilities
are adequate for its operations, and such facilities are
maintained in good condition.
Item 3. Legal Proceedings
None required to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 5
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Shares are listed for trading on the New
York, Chicago, Pacific and London stock exchanges. Information
regarding cash dividends paid and the high and low market price
per Common Share for each quarter in 1993 and 1992 is found under
"Quarterly Data" on page 34 of this report. At December 31, 1993,
there were 15,417 holders of record of the Company's Common
Shares. Additionally, 15,508 employees were shareholders through
participation in the Company's Share Purchase and Investment Plan.
Item 6. Selected Financial Data
Information regarding selected financial data of the Company is
found in the "Five-Year Consolidated Financial Summary" on page 49
of this report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" is found on pages 41 to 48 of this report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and financial review of
Eaton Corporation and the report of independent auditors are found
on pages 13 through 39 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained on pages 5 through 8 in the Company's
definitive proxy statement dated March 18, 1994, with respect to
directors of the Company, is incorporated herein by reference in
response to this Item.
Page 6
The following is a list of Eaton's officers, their ages and their
current positions and offices, as of
February 1, 1994.
Name Age Position (Date elected to position)
- ---------------- --- -------------------------------------------
William E. Butler 62 Chairman and Chief Executive Officer
(January 1, 1992); Director
John S. Rodewig 60 President; Chief Operating Officer -
Vehicle Components (September 22, 1993);
Director
Stephen R. Hardis 58 Vice Chairman and Chief Financial and
Administrative Officer (April 23, 1986);
Director
Alexander M. Cutler 42 Executive Vice President; Chief Operating
Officer - Controls (September 22, 1993);
Director
Gerald L. Gherlein 55 Executive Vice President and General Counsel
(September 4, 1991)
John M. Carmont 55 Vice President and Treasurer (December 1, 1981)
Adrian T. Dillon 40 Vice President - Planning (March 1, 1991)
Patrick X. Donovan 58 Vice President - International (April 27, 1988)
John D. Evans 63 Vice President - Human Resources (January 1, 1982)
Earl R. Franklin 50 Secretary and Associate General Counsel
(September 1, 1991)
John W. Hushen 58 Vice President - Corporate Affairs
(August 1, 1991)
Stanley V. Jaskolski 55 Vice President - Technical Management
(October 1, 1990)
Ronald L. Leach 59 Vice President - Accounting (December 1, 1981)
William T. Muir 51 Vice President - Manufacturing Technologies
(April 1, 1989)
Derek R. Mumford 52 Vice President - Information Technologies
(April 1, 1992)
Billie K. Rawot 42 Vice President and Controller (March 1, 1991)
All of the officers listed above have served in various capacities
with Eaton over the past five years. There are no family
relationships among the officers listed, and there are no
arrangements or understandings pursuant to which any of them were
elected as officers. All officers hold office for one year and
until their successors are elected and qualified, unless otherwise
specified by the Board of Directors; provided, however, that any
officer is subject to removal with or without cause, at any time,
by a vote of a majority of the Board of Directors.
Item 11. Executive Compensation
The information contained on pages 11 through 25 in Eaton's
definitive proxy statement dated March 18, 1994, with respect to
executive compensation, is incorporated herein by reference in
response to this Item.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information contained on pages 28 and 29 of the Company's
definitive proxy statement dated March 18, 1994, with respect to
security ownership of certain beneficial owners and management, is
incorporated herein by reference in response to this Item.
Item 13. Certain Relationships and Related Transactions
The information contained on page 10 of the Company's definitive
proxy statement dated March 18, 1994, with respect to certain
relationships and related transactions, is incorporated herein by
reference in response to this Item.
Page 7
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) The following consolidated financial statements and
financial review of Eaton Corporation are filed as a
separate section of this report:
Consolidated Balance Sheets - December 31, 1993 and 1992 -
Pages 14 and 15
Statements of Consolidated Income - Years ended December 31,
1993, 1992 and 1991 - Page 16
Statements of Consolidated Cash Flows - Years ended December
31, 1993, 1992 and 1991 - Page 17
Statements of Consolidated Shareholders' Equity - Years ended
December 31, 1993, 1992 and 1991 - Page 18
Financial Review - Pages 19 to 39
(2) The summarized financial information for Eaton ETN Offshore
Ltd. on page 40 and the following consolidated financial
statement schedules for Eaton Corporation are filed as a
separate section of this report:
Schedule V - Property, Plant and Equipment - Page 50
Schedule VI - Accumulated Depreciation of Property, Plant and
Equipment - Page 51
Schedule IX - Short-Term Borrowings - Page 52
Schedule X - Supplementary Income Statement Information -
Page 53
All other schedules for which provision is made in Regulation
S-X of the Securities and Exchange Commission, are not required
under the related instructions or are inapplicable and,
therefore, have been omitted.
(3) Exhibits
3 Amended Articles of Incorporation (as amended and restated
as of January 24, 1989, filed on Form SE on March 13,
1989) and Amended Regulations (as amended and restated as
of April 27, 1988, filed on Form SE on March 13, 1989)
4(a) Instruments defining rights of security holders, including
indentures (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)
10 Material contracts
(1) DCBU Purchase Agreement dated as of August 10,
1993 between Westinghouse Electric Corporation
(Seller) and Eaton Corporation (Buyer) Regarding the
Distribution and Control Business Unit of
Westinghouse Electric Corporation (Agreement) -
Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1993
Page 8
Including the following Exhibits to the Agreement:
(i) Form of Technology Agreement (Ex. 2.1)
(ii) Terms of Lease for Shared Facilities
(Ex.9.6(a) (1))
(iii) Terms of Sublease for Shared Facilities
(Ex. 9.6(a) (2))
(iv) Terms of Lease for Vidalia, Georgia Shared
Facility (Ex. 9.6(b) (1) (i))
(v) Terms of Lease by Buyer of Part of Horseheads
Facility (Ex. 9.6(b) (1) (ii))
(vi) Terms for Jackson, Mississippi Sublease
(Ex. 9.6(b) (2))
(vii) Form of Services Agreement (Ex. 9.8)
(viii) Form of WESCO Distributor Agreement (Ex. 9.9)
(ix) Form of Interim NEWCO Distributor Agreement
(Ex. 7.15.2)
(x) Form of NEWCO Distributor Agreement
(xi) Form of Supplier and Vendor Agreement
(Ex. 9.10)
(2) The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (as amended
and restated May 1, 1990; filed as a separate
section of this report)
(b) Executive Strategic Incentive Plan, effective
as of January 1, 1991 - Incorporated by reference
to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992
(c) Group Replacement Insurance Plan (GRIP),
effective as of June 1, 1992 - Incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992
(d) 1991 Stock Option Plan - Incorporated herein by
reference to the Company's definitive proxy
statement dated March 18, 1991
(e) The following are incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990:
(i) Strategic Incentive and Option Plan
(as amended and restated as of January 1, 1989)
(ii) Limited Eaton Service Supplemental Retirement
Income Plan (as amended and restated as of
January 1, 1989)
(iii) Amendments to the 1980 and 1986 Stock Option
Plans
(iv) Form of "Change in Control" Agreement entered
into with all officers of Eaton Corporation
(v) Eaton Corporation Supplemental Benefits Plan
(as amended and restated as of January 1, 1989)
(which provides supplemental retirement benefits)
(vi) Eaton Corporation Excess Benefits Plan (as
amended and restated as of January 1, 1989)
(with respect to Section 415 limitations of the
Internal Revenue Code)
(f) The following are incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990 (filed on Form SE dated March
28, 1991):
(i) Executive Incentive Compensation Plan
Page 9
(ii) Plan for the Deferred Payment of Directors' Fees
(as amended and restated as of January 1, 1989)
(iii) Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and amended and
restated in 1989)
(iv) Eaton Corporation Retirement Plan for
Non-Employee Directors (as amended and restated
as of January 1, 1989)
11 Statement regarding computations of net income per Common
Share (filed as a separate section of this report)
21 Subsidiaries of Eaton Corporation (filed as a separate
section of this report)
23 Consent of Independent Auditors (filed as a separate section
of this report)
24 Power of Attorney (filed as a separate section of this report)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1993.
(c) & (d) Exhibits and Financial Statement Schedules
Certain exhibits and financial statement schedules required by
this portion of Item 14 are filed as a separate section of this report.
Page 10
Signatures
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: March 28, 1994 /s/ Stephen R. Hardis
---------------------
Stephen R. Hardis
Vice Chairman and Chief
Financial and
Administrative Officer;
Principal Financial
Officer; Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
DATE: March 28, 1994
Signature Title
- -------------------- -------------------------------------
*
- --------------------
William E. Butler Chairman and Chief Executive Officer;
Principal Executive Officer;
Director
*
- --------------------
John S. Rodewig President; Chief Operating Officer -
Vehicle Components; Director
*
- --------------------
Alexander M. Cutler Executive Vice President; Chief Operating
Officer - Controls; Director
/s/ Ronald L. Leach
- --------------------
Ronald L. Leach Vice President - Accounting; Principal
Accounting Officer
*
- --------------------
Billie K. Rawot Vice President and Controller
*
- --------------------
Neil A. Armstrong Director
*
- --------------------
Phyllis B. Davis Director
*
- --------------------
Arthur Dole III Director
*
- --------------------
Charles E. Hugel Director
*
- --------------------
John R. Miller Director
Page 11
*
- --------------------
Furman C. Moseley Director
*
- --------------------
Hooper G. Pattillo Director
*
- --------------------
A. William Reynolds Director
*
- --------------------
Gary L. Tooker Director
*By /s/ Stephen R. Hardis
--------------------------------------
Stephen R. Hardis, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
Page 12
Eaton Corporation
1993 Annual Report on Form 10-K
Items 6, 7, 8 & Item 14 (c) and (d)
Report of Independent Auditors
Consolidated Financial Statements and Financial Review
Summary Financial Information for Eaton ETN Offshore Ltd.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Five-Year Consolidated Financial Summary
Financial Statement Schedules
Exhibits
Page 13
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
To the Shareholders
Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton
Corporation and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1993. Our audits also included the
summary financial information and financial statement schedules
listed in Item 14(a). These financial statements, schedules and
summary financial information are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements, schedules and summary financial information
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Eaton Corporation at December 31, 1993 and
1992, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also, in
our opinion, the related summary financial information and financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As described under "Accounting Changes" on page 22 of this report, in
1992 the Company changed its methods of accounting for postretirement
benefits other than pensions and for income taxes.
Ernst & Young
Cleveland, Ohio
February 1, 1994
Page 14
<TABLE>
<CAPTION>
Eaton Corporation
Consolidated Balance Sheets December 31
--------------------
(Millions of dollars) 1993 1992
<S> ---- ----
ASSETS
Current assets <C> <C>
Cash $ 32 $ 30
Short-term investments 268 186
Accounts receivable 550 628
Inventories 434 455
Deferred income taxes 127 120
Other current assets 55 61
------- -------
1,466 1,480
Property, plant and equipment
Land 41 41
Buildings 486 482
Machinery and equipment 1,959 1,896
------- -------
2,486 2,419
Accumulated depreciation (1,298) (1,238)
------- -------
1,188 1,181
Excess of cost over net assets of businesses
acquired 265 275
Deferred income taxes 112 61
Other assets 237 223
------- -------
$ 3,268 $ 3,220
======= =======
<FN>
The Financial Review on pages 19 to 39 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 15
<TABLE>
<CAPTION>
Eaton Corporation
Consolidated Balance Sheets December 31
--------------------
(Millions of dollars) 1993 1992
<S> ---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities <C> <C>
Short-term debt $ 14 $ 30
Current portion of long-term debt 110 19
Accounts payable 266 251
Accrued compensation 106 95
Accrued income and other taxes 23 48
Other current liabilities 268 286
------ ------
787 729
Long-term debt 649 833
Postretirement benefits other than pensions 509 511
Other long-term liabilities 218 199
Shareholders' equity
Common Shares (71.3 million in 1993 and
34.7 million in 1992) 36 17
Capital in excess of par value 535 452
Retained earnings 708 636
Foreign currency translation adjustments (78) (47)
Unallocated Employee Stock Ownership Plan
shares (96) (110)
------ ------
1,105 948
------ ------
$3,268 $3,220
====== ======
<FN>
The Financial Review on pages 19 to 39 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 16
<TABLE>
<CAPTION>
Eaton Corporation
Statements of Consolidated Income Year ended December 31
-------------------------------
(Millions of dollars except for per 1993 1992 1991
share data) ---- ---- ----
<S> <C> <C> <C>
Net sales $4,401 $4,101 $3,659
Costs and expenses
Cost of products sold 3,284 3,134 2,808
Selling and administrative expense 591 578 520
Research and development expense 154 151 138
Acquisition integration charge 55
Restructuring charge 39
------ ------ ------
4,084 3,863 3,505
------ ------ ------
Income from operations 317 238 154
Other income and (expense)
Interest expense (75) (89) (83)
Interest income 8 9 12
Other income--net 12 23 18
------ ------ ------
(55) (57) (53)
------ ------ ------
Income before income taxes 262 181 101
Income taxes 82 41 27
------ ------ ------
Income before extraordinary item and
cumulative effect of accounting changes 180 140 74
Extraordinary item (7)
Cumulative effect of accounting changes
Postretirement benefits other than
pensions (274)
Income taxes 6
------ ------ ------
Net income (loss) $ 173 $ (128) $ 74
====== ====== ======
Per Common Share
Income before extraordinary item and
cumulative effect of accounting changes $ 2.57 $ 2.03 $ 1.09
Extraordinary item (.10)
Cumulative effect of accounting changes
Postretirement benefits other than
pensions (3.97)
Income taxes 0.09
------ ------ ------
Net income (loss) $ 2.47 $(1.85) $ 1.09
====== ====== ======
Cash dividends paid $ 1.15 $ 1.10 $ 1.10
Average number of Common Shares outstanding
(in millions) 69.8 68.9 68.0
The Financial Review on pages 19 to 39 is an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
Page 17
<TABLE>
<CAPTION>
Eaton Corporation
Statements of Consolidated Cash Flows Year ended December 31
----------------------------
(Millions of dollars) 1993 1992 1991
<S> ---- ---- ----
Operating activities
Income before extraordinary item and <C> <C> <C>
cumulative effect of accounting changes $ 180 $ 140 $ 74
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 196 200 185
Acquisition integration charge 55
Long-term liabilities for postretirement
benefits other than pensions 21
Deferred income taxes (65) (26) (63)
Other long-term liabilities and other
non-cash items in income (6) (40) 4
Changes in operating assets and liabilities,
excluding purchases of businesses
Accounts receivable 40 58 (91)
Inventories 12 11 (17)
Other current assets 6 (5) (5)
Accounts payable and other accruals 29 (8) (26)
Accrued income and other taxes (15) (9) (11)
Other--net 3 39 (2)
----- ----- -----
Net cash provided by operating activities 435 381 48
Investing activities
Expenditures for property, plant and
equipment (227) (186) (194)
Acquisitions of businesses (14) (22) (17)
Purchases of short-term investments (108) (86) (39)
Maturities and sales of short-term
investments 22 138
Other--net 8 36 5
----- ----- -----
Net cash used in investing activities (319) (258) (107)
Financing activities
Long-term borrowings 99 203
Payments of long-term debt (98) (151) (107)
Proceeds from sale of Common Shares 62
Proceeds from exercise of stock options by
employees 19 29 5
Cash dividends paid (83) (76) (75)
Net change in short-term debt (14) (15) 24
----- ----- -----
Net cash (used in) provided by financing
activities (114) (114) 50
----- ----- -----
Total increase (decrease) in cash 2 9 (9)
Cash at beginning of year 30 21 30
----- ----- -----
Cash at end of year $ 32 $ 30 $ 21
===== ===== =====
<FN>
The Financial Review on pages 19 to 39 is an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
Page 18
<TABLE>
<CAPTION>
Eaton Corporation
Statements of Consolidated Shareholders' Equity
Foreign Total
Common Shares Capital in currency Unallocated share-
<S> ------------------ excess of Retained translation ESOP holders'
(Shares in thousands, dollars in millions) Shares Amount par value earnings adjustments shares equity
------ ------ --------- -------- ----------- -------- --------
<C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991 33,948 $17 $411 $837 $9 $(134) $1,140
Net income 74 74
Cash dividends paid, net of Employee
Stock Ownership Plan (ESOP) tax
benefit (72) (72)
Issuance of shares under employee
benefit plans, including tax benefit 145 7 7
Purchase of shares for treasury (24) (1) (1)
Reduction of unallocated ESOP shares 12 12
Foreign currency translation adjustments (7) (7)
------ --- ---- ---- ---- ---- ------
Balance at December 31, 1991 34,069 17 418 838 2 (122) 1,153
Net loss (128) (128)
Cash dividends paid, net of ESOP tax
benefit (74) (74)
Issuance of shares under employee
benefit plans, including tax benefit 598 34 34
Reduction of unallocated ESOP shares 12 12
Foreign currency translation adjustments (49) (49)
------ --- ---- ---- ---- ---- ------
Balance at December 31, 1992 34,667 17 452 636 (47) (110) 948
Net income 173 173
Cash dividends paid, net of ESOP tax
benefit (83) (83)
Issuance of shares under employee
benefit plans, including tax benefit 483 22 22
Two-for-one stock split 34,867 18 (18)
Sale of shares 1,287 1 61 62
Reduction of unallocated ESOP shares 14 14
Foreign currency translation adjustments (31) (31)
------ --- ---- ---- ---- ---- ------
Balance at December 31, 1993 71,304 $36 $535 $708 $(78) $(96) $1,105
====== === ==== ==== ==== ==== ======
<FN>
The Financial Review on pages 19 to 39 is an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
Page 19
FINANCIAL REVIEW
- ----------------
On June 28, 1993, the Company distributed a two-for-one stock split
effected in the form of a 100% stock dividend. Accordingly, all per
share amounts, average shares outstanding used in the calculation of
per share amounts and stock option information have been adjusted
retroactively to reflect the stock split.
In June 1993, the Company reconsolidated the net assets and operating
results of its remaining discontinued operations. Prior years have
been restated to include these results. The Company has concluded
that, although it would still prefer to divest these operations, due
to the ongoing contraction in the defense industry and uncertainty in
the defense electronics market at the present time, it would be
extremely difficult to implement its divestiture plans on an
acceptable basis. Financial information for these operations is
presented under Defense Systems in "Business Segment Information" in
the Financial Review.
ACCOUNTING POLICIES
- -------------------
Consolidation
- -------------
The consolidated financial statements include accounts of the Company
and all majority-owned subsidiaries. The equity method of accounting
is used for investments where the Company has a 20% to 50% ownership
interest.
Foreign Currency Translation
- ----------------------------
Financial statements for subsidiaries outside the United States,
except those in highly inflationary economies, are translated into
U.S. dollars at year-end exchange rates as to assets and liabilities
and weighted average exchange rates as to revenues and expenses. The
resulting translation adjustments are recorded in shareholders'
equity. Financial statements for subsidiaries in highly inflationary
economies are translated into U.S. dollars in the same manner except
for inventories and property, plant and equipment-net, and related
expenses, which are translated at historical exchange rates. The
resulting translation adjustments are included in net income.
Short-Term Investments
- ----------------------
Short-term investments are carried at cost and are not considered to
be cash equivalents for purposes of classification in the statements
of consolidated cash flows.
Inventories
- -----------
Inventories are carried at lower of cost or market. Inventories in
the United States, other than those associated with long-term
contracts, are accounted for using the last-in, first-out (LIFO)
method and all other inventories using the first-in, first-out (FIFO)
method.
Page 20
Long-Term Contracts
- -------------------
Income and costs on long-term contracts, which relate primarily to
the Defense Systems business segment, are recognized on the
percentage-of-completion method. Provision is made for anticipated
losses on uncompleted contracts. Certain government contracts
provide for incentive awards or penalties which are reflected in
operations at the time amounts can be reasonably determined.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization are computed by the straight-line
method for financial statement purposes. Depreciation of plant and
equipment is provided over the useful lives of the various classes of
assets. Excess of cost over net assets of businesses acquired is
amortized over fifteen to forty years (accumulated amortization was
$78 million and $69 million at the end of 1993 and 1992,
respectively). Other intangible assets, principally patents, are
amortized over their respective lives.
Income Taxes
- ------------
In 1992, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", as discussed
under "Accounting Changes" in the Financial Review. Deferred income
taxes are not provided for undistributed earnings of consolidated
subsidiaries outside the United States when such earnings are
reinvested for an indefinite period of time by the subsidiaries.
Financial Instruments
- ---------------------
Gains or losses on interest rate swap and cap agreements which hedge
interest on debt are accrued in interest expense. Gains or losses on
foreign currency forward exchange contracts and options which hedge
specific transactions are recognized in net income, offsetting the
underlying foreign currency transaction gains or losses. Gains or
losses on foreign currency forward exchange contracts and options
which hedge net investments in consolidated subsidiaries outside the
United States are accrued in shareholders' equity. Premiums related
to interest rate swap and cap agreements and foreign currency forward
exchange contracts and options are amortized to net income over the
life of the agreement.
Net Income Per Common Share
- ---------------------------
Net income per Common Share is computed by dividing net income by the
average month-end number of shares outstanding during each period.
The dilutive effect of common stock equivalents is not material.
SUBSEQUENT EVENT - ACQUISITION OF DCBU AND INTEGRATION CHARGE
- -------------------------------------------------------------
On January 31, 1994, the Company acquired the Distribution and
Control Business Unit (DCBU) of Westinghouse Electric Corporation for
a purchase price of $1.1 billion, plus the assumption of certain
liabilities. The purchase price is subject to adjustment based upon
Page 21
changes in DCBU's adjusted net assets. This acquisition will be
accounted for as a purchase in 1994. DCBU had sales of $1.1 billion
in 1993 and has estimated net assets of $600 million. DCBU is a
leading North American manufacturer of electrical distribution
equipment and industrial controls, headquartered in Pittsburgh,
Pennsylvania. It has approximately 12,500 employees who are located
at 36 plants and facilities in the United States, Puerto Rico,
Central and South America, Canada and the United Kingdom, and at 27
satellite operations and 12 distribution centers. The purchase
includes Challenger Electrical Equipment Corporation, which was
acquired by Westinghouse in 1987.
DCBU will be combined with Eaton's Industrial Control and Power
Distribution Operations (ICPDO), which market Cutler-Hammer products,
to form a Cutler-Hammer business unit with annual sales of $1.6
billion. Eaton's consolidated sales are expected to increase by 25%
as a result of the acquisition.
In order to finance the acquisition, the Company issued $930 million
of short-term commercial paper. The Company plans to reduce these
short-term financings by the middle of 1994 through equity and
long-term debt financings. The timing and mix of these financings
will depend on market conditions. Of these short-term financings,
$555 million will be classified as long-term debt because the Company
intends, and has the ability under a new five-year $555 million
revolving credit agreement entered into in January 1994, to refinance
this debt on a long-term basis. Also, in January 1994, the Company
entered into a $555 million 364-day revolving credit agreement.
In 1993, the Company entered into several interest rate hedge
agreements related to the planned financing of the acquisition. In
September 1993, the Company entered into four interest rate swaps
commencing on January 18, 1994. Two thirty-year swaps will
effectively convert $100 million of floating rate debt into fixed
rate debt at an average rate of 6.685%, and two ten-year swaps will
effectively convert $100 million of floating rate debt into fixed
rate debt at an average rate of 5.788%. In October 1993, the Company
purchased a one-year interest rate cap commencing on January 1, 1994
that effectively places a 5.5% ceiling on $400 million of floating
rate debt, and a ten-month interest rate cap commencing January 1,
1995 that effectively places a 5.5% ceiling on $100 million of
floating rate debt.
In December 1993, in conjunction with the acquisition, the Company
recorded a $55 million acquisition integration charge before income
tax credits ($34 million after income tax credits, or $.49 per Common
Share). Part of a comprehensive business plan, the charge addresses
the costs of the integration of ICPDO product lines and operations
with DCBU, related workforce reductions and an $8 million write-down
of assets, largely in the United States. Expenditures are expected
to occur over approximately the next four years and will be funded
through cash flow from the combined operations. The Company
anticipates that integration of the businesses will create permanent
value by streamlining product lines, manufacturing capacity and
Page 22
organization structure and enable the businesses to attain maximum
benefit from synergy of complementary product offerings, operations
and technical expertise. Positive incremental benefits are
anticipated following the first year of integration activities.
EXTRAORDINARY ITEM AND RESTRUCTURING CHARGE
- -------------------------------------------
In March 1993, the Company called for redemption, in April 1993, the
$74 million outstanding balance of its 9% debentures, and in December
1993, the Company called for redemption, in January 1994, the $89
million outstanding balance of its 8.5% debentures. The
extraordinary loss on these redemptions, including the write-off of
debt issue costs, was $11 million before income tax credits ($7
million after income tax credits, or $.10 per Common Share).
In 1991, as a result of the review of operating strategies and in
order to improve competitiveness and future profitability, the
Company recorded a restructuring charge of $39 million before income
tax credits ($25 million after income tax credits, or $.38 per Common
Share). The charge included provisions for restructuring, relocation
and rationalization of product lines and operations and permanent
workforce reductions involving a significant number of operations,
primarily in the United States and Europe.
ACCOUNTING CHANGES
- ------------------
In 1992, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". SFAS No. 106 requires
accrual of these benefits, primarily postretirement health care and
life insurance for retirees in the United States, over the working
lives of employees rather than recognition of expenses as claims are
incurred. Included in net income for 1992 is the cumulative effect
of this accounting change for prior years of $442 million before
income tax credits ($274 million after income tax credits, or $3.97
per Common Share). As a result of this accounting change, 1992
postretirement health care and life insurance costs increased $25
million before income tax credits ($16 million after income tax
credits, or $.23 per Common Share). Results for 1991 have not been
restated for this accounting change. SFAS No. 106 has no effect on
cash flows since claims will continue to be paid as incurred.
In 1992, the Company also adopted SFAS No. 109, "Accounting for
Income Taxes". The adoption of this standard changed the method of
accounting for income taxes to the liability method from the deferred
method. The liability method requires recognition of deferred income
taxes based on temporary differences between the financial reporting
and income tax bases of assets and liabilities, using currently-
enacted income tax rates and regulations. Included in net income for
1992 is the cumulative effect of this accounting change for prior
years of $6 million, or $.09 per Common Share. Results for 1991 have
not been restated for this accounting change. SFAS No. 109 has no
effect on cash flows.
Page 23
ACCOUNTS RECEIVABLE
- -------------------
Included in accounts receivable at December 31, 1993 and 1992 were
unbilled amounts of $23 million and $91 million, respectively,
primarily related to long-term contracts of the Defense Systems
business segment with the United States Government. These
receivables will be billed in accordance with applicable contract
terms and are expected to be collected within one year.
Accounts receivable are net of an allowance for doubtful accounts of
$10 million at the end of 1993 and 1992.
INVENTORIES
- -----------
December 31
---------------
(Millions of dollars) 1993 1992
---- ----
Raw materials $141 $128
Work in process 238 264
Finished goods 139 146
---- ----
Gross inventories at FIFO 518 538
Excess of current cost over LIFO cost (84) (83)
---- ----
Net inventories at LIFO $434 $455
==== ====
Gross inventories accounted for using the LIFO method were $314
million and $294 million at the end of 1993 and 1992, respectively.
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
Information related to the 1994 financing of the acquisition of DCBU
is contained under "Subsequent Event - Acquisition of DCBU and
Integration Charge" in the Financial Review.
The Company has lines of credit, primarily short-term, aggregating
$119 million from various banks worldwide. Most of these
arrangements do not have termination dates, but are reviewed
periodically for renewal. At December 31, 1993, the Company had $24
million outstanding under lines of credit with banks.
Page 24
A summary of long-term debt, excluding the current portion, follows:
December 31
---------------
(Millions of dollars) 1993 1992
---- ----
9% notes payable, due 2001 $100 $100
8% debentures, due 2006 (due 1996 at
option of debenture holder) 86 86
8.9% debentures, due 2006 100 100
7% debentures, due 2011, net of unamor-
tized discount of $95 million in 1993
and $96 million in 1992 (effective
interest rate 14.6%) 105 104
8-7/8% debentures, due 2019 (due 2004 at
option of debenture holder) 38 38
8.1% debentures, due 2022 100 100
Notes payable of Employee Stock
Ownership Plan due through 1999 82 96
8.5% sinking fund debentures 89
9% sinking fund debentures 74
Other 38 46
---- ----
$649 $833
==== ====
During 1993, the Company called for redemption the $74 million
outstanding balance of its 9% debentures and the $89 million
outstanding balance of its 8.5% debentures, resulting in an
extraordinary loss of $7 million.
Notes payable of the Employee Stock Ownership Plan (ESOP), which are
guaranteed by the Company, consist of $65 million at a floating
interest rate (3.00% at December 31, 1993) based on LIBOR and $31
million at a fixed interest rate of 7.62%. The Company has entered
into a series of interest rate swaps, which expire ratably through
1999, and which change the interest rate on the $31 million of fixed
interest rate notes payable to fixed interest rates of 7.07% and
6.85% as to $9 million and $18 million, respectively, and to a
floating interest rate (2.075% at December 31, 1993) based on LIBOR
as to $4 million.
In 1991, an unrelated party exercised its option under a 1990
agreement to enter into an interest rate swap expiring in 2000 with
the Company. The agreement effectively converts $100 million of
floating rate debt into fixed rate obligations. Payments are
received at a floating interest rate (3.375% at December 31, 1993)
based on LIBOR and are made at a fixed interest rate of 9%.
Aggregate mandatory sinking fund requirements and annual maturities
of long-term debt are as follows (in millions): 1994, $110; 1995,
$21; 1996, $106; 1997, $21; and 1998, $22. The amount for 1994
includes $89 million of 8.5% debentures called for redemption in
January 1994. The amount for 1996 includes $86 million of 8%
debentures due in 1996 at the option of the debenture holder.
Page 25
Interest cost capitalized as part of acquisition or construction of
major assets (in millions) was $12, $8, and $7 in 1993, 1992 and
1991, respectively. Interest paid (in millions) was $90, $94 and $81
in 1993, 1992 and 1991, respectively.
At December 31, 1993, the Company held foreign currency forward
exchange contracts and options, which primarily mature in 1994, for
purchase or sale of largely European and Canadian currencies to hedge
foreign currency transactions and net investment positions. Open
purchase contracts totaled $63 million and open sales contracts
totaled $290 million.
Counterparties to various hedging instruments are a number of major
international financial institutions. While the Company may be
exposed to credit losses in the event of nonperformance by these
counterparties, it does not anticipate losses due to its control over
the limit of positions entered into with any one party and the strong
credit ratings of these institutions.
The following table summarizes the carrying amount and fair value of
financial instruments:
<TABLE>
<CAPTION> December 31, 1993 December
31, 1992
-----------------
- -----------------
Carrying Fair Carrying
Fair
(Millions of dollars) amount value amount
value
-------- ----- --------
-----
<S> <C> <C> <C>
<C>
Cash and short-term investments $300 $300 $ 216
$ 216
Equity investments and marketable
securities, included in other
assets 53 61 54
67
Short-term debt (14) (14)
(30) (30)
Long-term debt and current portion of
long-term debt (759) (941)
(852) (954)
Foreign currency forward exchange
contracts and options 6 7 8
14
Interest rate derivatives (13)
(12)
</TABLE>
The fair value of equity investments, marketable securities,
long-term debt and interest rate derivatives was principally based on
quoted market prices. The fair value of foreign currency forward
exchange contracts and options was estimated based on quoted market
prices of comparable contracts, adjusted through interpolation where
necessary for maturity differences. The carrying amount of financial
instruments is not affected by the fair value measurement.
Page 26
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has been named a potentially responsible party (PRP)
under the Federal Superfund law at a number of waste disposal sites.
Although this law technically imposes joint and several liability
upon each PRP at each site, the extent of the Company's required
financial contribution to the cleanup of these sites is expected to
be limited based on the number and financial strength of the other
named PRP's and the volumes of waste involved which might be
attributable to the Company. The Company is also involved in
remedial response and voluntary environmental cleanup expenditures at
a number of other sites which are not the subject of any Superfund
law proceeding, including certain of its currently-owned or
formerly-owned plants. Although it is difficult to quantify the
potential financial impact of compliance with environmental
protection laws, management estimates that there is a reasonable
possibility that the remediation and other costs associated with all
of these sites may range between $10 million and $68 million, and
that such costs would be incurred over a period of several years.
The Company accrues for these costs when it is probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. At December 31, 1993, the Company's balance
sheet included an accrual for the estimated remediation and other
environmental costs of approximately $14 million. Actual costs to be
incurred at identified sites in future periods may vary from the
estimates, given inherent uncertainties in evaluating environmental
exposures. Subject to the difficulty in estimating future
environmental costs, the Company expects that any sum it may be
required to pay in connection with environmental matters in excess of
the amounts recorded or disclosed above will not have a material
adverse effect on its financial condition or results of operations.
With respect to the DCBU operations acquired at January 31, 1994, to
date the Company has conducted only a due diligence, pre-acquisition
review of the environmental loss contingencies and expenditures at
these operations. Although additional investigation and review is in
progress, the Company is not yet able to evaluate conclusively the
scope of any environmental issues. The Company expects that these
operations will have environmental exposure similar to that of other
electrical equipment manufacturers. The Company's exposure is
limited, however, by the agreement between the Company and
Westinghouse Electric Corporation, pursuant to which the Company
acquired DCBU. With respect to environmental conditions existing
prior to the acquisition, Westinghouse has agreed to retain certain
responsibilities, to share the cost of others and to indemnify the
Company for its share of those costs to the extent that they exceed
$3.5 million annually. For locations in the United States, this
obligation to share and to indemnify extends for ten years, and for
locations elsewhere it extends for fifteen years.
The Company continues to modify, on an ongoing, regular basis,
certain of its processes in order to reduce the impact on the
environment. Efforts in this regard include the removal of many
underground storage tanks and the reduction or elimination of certain
chemicals and wastes in its operations.
Page 27
OPTIONS FOR COMMON SHARES
- -------------------------
Options have been granted to certain employees, under various plans,
to purchase the Company's Common Shares at prices equal to fair
market value as of date of grant. These options expire ten years
from date of grant. A summary of stock option activity follows:
<TABLE>
<CAPTION>
1993
1992
------------------------
-------------------------
Average
Average
price
price
per share Shares
per share Shares
--------- ---------
--------- ---------
<S> <C> <C>
<C> <C>
Outstanding, January 1 $28.81 3,368,670
$26.33 3,836,274
Granted 39.34 831,730
34.10 808,070
Exercised 27.28 (657,353)
24.50 (1,221,610)
Canceled 32.52 (109,197)
29.47 (54,064)
---------
---------
Outstanding, December 31 $31.53 3,433,850
$28.81 3,368,670
=========
=========
Shares exercisable
January 1 2,334,758
2,903,104
December 31 2,401,683
2,334,758
Shares reserved for future grants
January 1 2,856,882
3,703,528
December 31 2,133,630
2,856,882
</TABLE>
SHAREHOLDERS' EQUITY
- --------------------
There are 150 million Common Shares authorized. There were 11
million and 12 million Common Shares held in treasury at the end of
1992 and 1991, respectively, which were reissued in conjunction with
the June 1993 two-for-one stock split. At December 31, 1993, 5.8
million Common Shares were reserved principally for exercise and
grant of stock options. At December 31, 1993, there were 15,417
holders of record of Common Shares. Additionally, 15,508 employees
were shareholders through participation in the Share Purchase and
Investment Plan.
In private placements the Company sold 1.3 million Common Shares in
1993 for aggregate net proceeds of $62 million, and sold an
additional 800,000 Common Shares in January 1994 for aggregate net
proceeds of $38 million. In May 1993, the Company redeemed its share
purchase rights at a redemption price of 3-1/3 cents for each right,
for a total payment of $2 million.
The Company's Employee Stock Ownership Plan (ESOP) was established to
prefund a portion of the anticipated matching contributions through
1999 to its Share Purchase and Investment Plan (SPIP) for
participating United States employees. That portion of SPIP expense
related to the ESOP is calculated by first determining the ratio of
shares allocated to employee ESOP accounts relative to shares
released, and then applying that ratio to the amount contributed to
the ESOP. That amount, along with dividends on unallocated Common
Shares held by the ESOP, is used to repay the notes, including
interest, in level installments. Unallocated ESOP shares are
allocated to employee ESOP accounts in aggregate amounts based on
loan principal payments made by the ESOP.
Page 28
LEASE COMMITMENTS
- -----------------
Future minimum rental commitments as of December 31, 1993, under
noncancelable operating leases, which expire at various dates and in
most cases contain renewal options, are as follows (in millions):
1994, $28; 1995, $23; 1996, $17; 1997, $14; 1998, $12; and after
1998, $91.
Rental expense in 1993, 1992 and 1991 (in millions) was $43, $45 and
$49, respectively.
PENSION PLANS
- -------------
The Company has non-contributory defined benefit pension plans
covering the majority of employees. Plans covering salaried and
certain hourly employees provide benefits that are generally based on
years of service and final average compensation. Benefits for other
hourly employees are generally based on years of service. Company
policy is to fund at least the minimum amount required by applicable
regulations. In the event of a change in control of the Company,
excess pension plan assets of North American operations may be
dedicated to funding of health and welfare benefits for employees and
retirees.
The components of pension (expense) income are as follows:
Year ended December 31
--------------------------
(Millions of dollars) 1993 1992 1991
---- ---- ----
Service cost - benefits earned
during year $(42) $(39) $(39)
Interest cost on projected
benefit obligation (97) (96) (92)
Actual return on assets 155 203 216
Net amortization and deferral (17) (73) (90)
---- ---- ----
$ (1) $ (5) $ (5)
==== ==== ====
Page 29
The following table sets forth, by funded status, the asset
(liability) recognized in the consolidated balance sheets for pension
plans:
<TABLE>
<CAPTION>
December 31,
1993 December 31, 1992
- ----------------------- -----------------------
(Millions of dollars) Overfunded
Underfunded Overfunded Underfunded
----------
- ----------- ---------- -----------
<S> <C> <C>
<C> <C>
Accumulated pension benefit obligation
Vested $ 979
$ 136 $ 900 $ 101
Nonvested 53
10 57 8
------
- ----- ----- -----
1,032
146 957 109
Value of future salary projections 143
10 147 14
------
- ----- ----- -----
Total projected pension benefit obligation 1,175
156 1,104 123
Fair value of plan assets 1,371
68 1,372 40
------
- ----- ----- -----
Plan assets in excess of or (less than) projected
benefit obligation
196 (88) 268 (83)
Unamortized amounts not yet recognized
Initial net (asset) obligation (48)
7 (63) 8
Net (gain) loss (116)
3 (198) (2)
Prior service cost 27
12 34 11
Adjustment to recognize minimum liability
(12) (8)
------
- ----- ----- -----
$ 59
$ (78) $ 41 $ (74)
======
===== ===== =====
</TABLE>
Measurement of the projected benefit obligation was based on a
discount rate of 7.25% in 1993 and 8.25% in 1992 and 1991. The
expected compensation growth rate was 4.95% in 1993 and 5.95% in 1992
and 1991. The expected long-term rate of return on assets was 10% in
all three years; actual returns during each of these three years
exceeded the expected 10% rate. Plan assets were invested in equity
and fixed income securities and other instruments. Underfunded plans
are associated principally with operations outside the United States.
The change in the discount rate to 7.25% at the end of 1993 had the
effect of increasing the accumulated pension benefit obligation by
$103 million with an offsetting decrease in the unamortized net gain.
This change will have an immaterial effect on future expense.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS
- ------------------------------------------------
Generally, employees become eligible for postretirement benefits
other than pensions, primarily health care and life insurance for
retirees in the United States, when they retire. These benefits are
payable for life, although the Company retains the right to modify or
terminate the plans providing these benefits. The plans are
primarily contributory, with retiree contributions adjusted annually,
and contain other cost-sharing features, including deductibles and
co-payments. Effective January 1, 1993, certain plans were amended
to limit the annual amount of the Company's future contributions
towards employees' postretirement health care benefits. Company
policy is to pay claims as they are incurred since, unlike pensions,
there is no effective method to obtain a tax deduction for prefunding
of these benefits under existing United States income tax
regulations.
Page 30
Expense for postretirement benefits other than pensions, with amounts
for 1993 and 1992 calculated under SFAS No. 106, is as follows:
Year ended December 31
----------------------
(Millions of dollars) 1993 1992 1991
---- ---- ----
Service cost - benefits earned during year $ (7) $(12)
Interest cost on projected benefit
obligation (37) (44)
Amortization of unrecognized prior service
cost 9
Claims incurred and expensed $(27)
---- ---- ----
$(35) $(56) $(27)
==== ==== ====
The liability recognized in the consolidated balance sheets for
postretirement benefit plans other than pensions is as follows:
December 31
---------------
(Millions of dollars) 1993 1992
---- ----
Accumulated postretirement benefit
obligation
Retirees $368 $345
Eligible plan participants 38 45
Noneligible plan participants 120 161
Unamortized amounts not yet recognized
Prior service cost 91
Net loss (73) (5)
---- ----
$544 $546
==== ====
Measurement of the accumulated postretirement benefit obligation at
December 31, 1993, was based on a 12% annual rate of increase in per
capita cost of covered health care benefits (13% for 1992). For
1993, the rate was assumed to decrease ratably to 5% through 2000 and
remain at that level thereafter (6% for 1992). The discount rate was
7.25% in 1993 and 8.5% in 1992. An increase of 1% in assumed health
care cost trend rates would increase the accumulated postretirement
benefit obligation as of December 31, 1993 by $34 million and the net
periodic cost for 1993 by $2 million. The changes in assumed rates
had the effect of increasing the accumulated postretirement benefit
obligation by $49 million with an offsetting increase in the
unamortized net loss. This change will have an immaterial effect on
future expense.
Page 31
INVESTMENT IN LIFE INSURANCE
- ----------------------------
In 1993, the Company purchased company-owned life insurance policies
insuring the lives of a portion of its active United States
employees. These policies offer an attractive means of accumulating
assets to meet future liabilities including the payment of employee
benefits such as health care. At December 31, 1993, the investment
in this life insurance, included in other assets, was $7 million, net
of policy loans of $110 million. Net life insurance expense of $2
million, including interest expense of $4 million in 1993, was
included in selling and administrative expense.
INCOME TAXES
- ------------
Year ended December 31
----------------------
(Millions of dollars) 1993 1992 1991
---- ---- ----
Income before income taxes
United States $214 $147 $ 85
Outside the United States 48 34 16
---- ---- ----
$262 $181 $101
==== ==== ====
Income taxes, with amounts for 1993 and 1992 derived under SFAS No.
109, are summarized below:
Year ended December 31
----------------------
(Millions of dollars) 1993 1992 1991
---- ---- ----
Current
United States
Federal $108 $ 42 $ 64
State and local 7 5 10
Outside the United States 30 20 10
---- ---- ----
145 67 84
Deferred
United States
Increase in statutory tax rate (5)
Other Federal (50) (14) (47)
State and local (2) (1) (8)
Outside the United States
Operating loss carryforwards (7) (11)
Reduction of valuation allowance
for deferred tax assets (5)
Increase in statutory tax rate (1)
Other 7 (2)
---- --- ---
(63) (26) (57)
---- --- ---
$ 82 $41 $27
==== === ===
Page 32
Significant components of net current and net long-term deferred
income taxes derived under SFAS No. 109 are as follows:
December 31, 1993
-------------------------------
Current Long-term Long-term
(Millions of dollars) assets assets liabilities
------- --------- -----------
Accruals and other adjustments
Employee benefits $ 44 $209 $ (4)
Inventory 15
Long-term contracts 16
Restructuring 15 13
Depreciation and amortization (140) (15)
Other 22 5
Operating loss carryforwards 50 2
Valuation allowance (15)
Other items 15 (10) 7
---- ---- ----
$127 $112 $(10)
==== ==== ====
December 31, 1992
-------------------------------
Current Long-term Long-term
(Millions of dollars) assets assets liabilities
------- --------- -----------
Accruals and other adjustments
Employee benefits $ 28 $209 $ (3)
Inventory 26
Long-term contracts 17 (9)
Restructuring 14
Depreciation and amortization (137) (19)
Other 23 4
Operating loss carryforwards 42 4
Valuation allowance (20)
Other items 12 (28) 4
---- ---- ----
$120 $ 61 $(14)
==== ==== ====
The deferred income tax provision of $57 million for 1991 related
primarily to long-term contracts.
At December 31, 1993 certain subsidiaries outside the United States
had tax loss carryforwards aggregating $115 million. Carryforwards
of $68 million have no expiration dates and the balance expire at
various dates from 1995 through 2005.
Page 33
<TABLE>
<CAPTION>
A reconciliation of income taxes at the United States Federal
statutory rate to the effective income tax rate, with amounts for
1993 and 1992 derived under SFAS No. 109, follows:
Year ended
December 31
- ----------------------------------
1993
---------------
1992 1991
(Millions of dollars) Amount Rate
Rate Rate
<S> ------- ------
- ------ ------
Income taxes at the United States <C> <C> <C>
<C>
statutory rate $ 92 35.0%
34.0% 34.0%
Adjustment of deferred income taxes for
change in statutory tax rates (6) (2.3)
State and local income taxes 4 1.5 .9
2.1
Adjustment of worldwide tax
liabilities 3 1.4
(6.0) (4.1)
Effective tax rate differential on
earnings of consolidated
subsidiaries and associate
companies outside the United
States (5) (2.0)
(3.9) (2.1)
Other--net (6) (2.1)
(2.2) (3.4)
---- -----
- ----- -----
$ 82 31.5%
22.8% 26.5%
==== =====
===== =====
</TABLE>
The adoption of SFAS No. 109 reduced 1992 income tax expense by $11
million and the effective income tax rate by 6%, in comparison to the
prior accounting method.
The parent company has not provided income taxes on undistributed
earnings of consolidated subsidiaries outside the United States of
$332 million at December 31, 1993, since the earnings retained have
been reinvested by the subsidiaries. If distributed, such remitted
earnings would be subject to withholding taxes but substantially free
of United States income taxes.
Worldwide income tax payments, including Federal and state income
taxes in the United States, in 1993, 1992 and 1991 (in millions) were
$156, $71 and $97, respectively.
Page 34
QUARTERLY DATA
- --------------
(Unaudited)
Quarter ended
(Millions of dollars except -----------------------------------
for per share data) Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- -------
1993
Net sales $1,115 $1,053 $1,147 $1,086
Gross margin 297 266 279 275
Percent of sales 27% 25% 24% 25%
Income before extraordinary item 30 44 53 53
Extraordinary item (4) (3)
Net income 26 44 53 50
Per Common Share
Income before extraordinary item $ .41 $ .63 $ .77 $ .76
Extraordinary item (.05) (.05)
Net income .36 .63 .77 .71
Cash dividends paid .30 .30 .275 .275
Market price
High 55-3/8 51-3/4 47-1/8 43-3/4
Low 48 43 41-1/2 38-1/4
1992
Net sales $1,030 $1,012 $1,064 $ 995
Gross margin 253 223 256 235
Percent of sales 24% 22% 24% 24%
Income before cumulative effect
of accounting changes 39 28 41 32
Cumulative effect of accounting
changes
Postretirement benefits
other than pensions (274)
Income taxes 6
Net income (loss) 39 28 41 (236)
Per Common Share
Income before cumulative effect
of accounting changes $ .57 $ .40 $ .60 $ .46
Cumulative effect of
accounting changes
Postretirement benefits
other than pensions (4.00)
Income taxes .09
Net income (loss) .57 .40 .60 (3.45)
Cash dividends paid .275 .275 .275 .275
Market price
High 40-7/8 40-3/8 41-5/8 39-3/8
Low 35 35-7/8 35-1/2 30-7/8
<PAGE>
Page 35
The fourth quarter of 1993 includes an acquisition integration charge
of $55 million before income tax credits ($34 million after income
tax credits, or $.49 per Common Share).
The redemption of debentures in 1993 resulted in extraordinary losses
of $5 million and $6 million before income tax credits in the first
and fourth quarters, respectively ($3 million and $4 million after
income tax credits, or $.05 per Common Share in each quarter). The
previously reported first quarter results were restated to segregate
the extraordinary loss.
Gross margin for the second quarter of 1993 was reduced by a charge
of $9 million for the restructuring of certain vehicle components
operations in Europe.
The third quarter of 1992 includes an $11 million gain, before income
taxes, on the sale of an interest in a limited partnership. The gain
was partially offset by the accrual in the third quarter of 1992 of
the contribution to the Company's charitable trust of marketable
securities with a market value of $8 million.
In 1992, the Company adopted the new accounting standards for
postretirement benefits other than pensions and income taxes,
retroactive to January 1, 1992. Net income in the first quarter of
1992 includes the cumulative effect of the accounting change for
postretirement benefits other than pensions for prior years of $442
million before income tax credits ($274 million after income tax
credits, or $4.00 per Common Share). Net income in the first quarter
of 1992 also includes the cumulative effect of the accounting change
for income taxes for prior years of $6 million, or $.09 per Common
Share.
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- --------------------------------------------------
Operations are classified among three business segments: Vehicle
Components, Electrical and Electronic Controls and Defense Systems.
The major classes of products included in each segment and other
information follow.
Vehicle Components
- ------------------
Truck Components - Heavy and medium duty mechanical transmissions;
power take-offs; drive, trailer and steering axles; brakes; locking
differentials; engine valves; valve lifters; leaf springs; viscous
fan drives; fans and fan shrouds; power steering pumps; tire pressure
control systems; tire valves.
Passenger Car Components - Engine valves; hydraulic valve lifters;
viscous fan drives; fans and fan shrouds; locking differentials;
spring fluid dampers; superchargers; tire valves.
Off-Highway Vehicle Components - Mechanical and automatic
transmissions; drive and steering axles; brakes; engine valves;
hydraulic valve lifters; gear and piston pumps and motors; transaxles
and steering systems; geroters; control valves and cylinders;
forgings; tire valves.
Page 36
The principal market for these products is original equipment
manufacturers of trucks, passenger cars and off-highway vehicles.
Most sales of these products are made directly from the Company's
plants to such manufacturers.
Electrical and Electronic Controls
- ----------------------------------
Industrial and Commercial Controls - Electromechanical and electronic
controls: motor starters, contactors, overloads and electric drives;
programmable controllers, counters, man/machine interface panels and
pushbuttons; photoelectric, proximity, temperature and pressure
sensors; circuit breakers; loadcenters; safety switches; panelboards;
switchboards; dry type transformers; busway; meter centers; portable
tool switches; commercial switches; relays; illuminated panels;
annunciator panels; electrically actuated valves and actuators.
Automotive and Appliance Controls - Electromechanical and electronic
controls: convenience, stalk and concealed switches; knock sensors;
climate control components; speed controls; timers; pressure
switches; water valves; range controls; thermostats; gas valves;
infinite switches; temperature and humidity sensors.
Specialty Controls - Automated material handling systems; automated
guided vehicles; stacker cranes; ion implanters; engineered
fasteners; golf grips; industrial clutches and brakes.
The principal markets for these products are industrial, commercial,
automotive, appliance, aerospace and government customers. Sales are
made directly by the Company or indirectly through distributors and
manufacturers' representatives.
Defense Systems
- ---------------
Strategic countermeasures; tactical jamming systems; electronic
intelligence; electronic support measures.
The principal market for these products is the United States
Government.
Other Information
- -----------------
Operating profit represents net sales less operating expenses for
each segment and geographic region and excludes interest expense and
income, and general corporate expenses--net.
Identifiable assets for each segment and geographic region represent
those assets used in operations (including excess of cost over net
assets of businesses acquired) and exclude general corporate assets
(consisting principally of short-term investments, deferred income
taxes, investments carried at equity, property and other assets).
Net sales to divisions and subsidiaries of one customer, primarily
from the Vehicle Components business segment, were $541 million in
1993, $491 million in 1992 and $394 million in 1991 (12% of sales in
1993, 12% in 1992 and 11% in 1991).
Page 37
Geographic Region Information
<TABLE>
<CAPTION>
United Latin Pacific Elimin-
(Millions of dollars) States Canada Europe America Region ations Totals
<S> ------ ------ ------ ------- ------ ------ ------
1993 <C> <C> <C> <C> <C> <C> <C>
Net sales $3,404 $183 $769 $202 $81 $238 $4,401
Operating profit 275 21 17 9 10 332
Identifiable assets 1,726 101 548 103 48 60 2,466
1992
Net sales $3,002 $175 $861 $184 $66 $187 $4,101
Operating profit 201 20 29 8 6 264
Identifiable assets 1,781 74 630 98 48 59 2,572
1991
Net sales $2,768 $166 $679 $153 $58 $165 $3,659
Operating profit 151 12 6 5 174
Identifiable assets 1,886 84 626 100 48 71 2,673
<FN>
Operating profit in 1993 was reduced by an acquisition integration charge of $53
million in the United States and $2 million in Canada, and by a restructuring
charge of $9 million in Europe.
Operating profit for the United States in 1992 was reduced by $25 million of
expense related to the accounting change for postretirement benefits other
than pensions.
Operating profit in 1991 was reduced by a restructuring charge of $24 million
in the United States, $2 million in Canada and $13 million in Europe.
Geographic region information (table above) does not include results of associate
companies and joint ventures in which the Company holds a 20%-50% ownership interest,
which are accounted for by the equity method, and which had total sales as follows:
United Latin Pacific
(Millions of dollars) States Europe America Region Totals
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
1993 $ 7 $13 $15 $169 $204
1992 6 18 6 136 166
1991 39 40 7 189 275
</TABLE>
<PAGE>
Page 38
<TABLE>
<CAPTION>
Business Segment Information
(Millions of dollars) 1993 1992 1991
<S> ---- ---- ----
Net sales by classes of similar products
Vehicle Components <C> <C> <C>
Truck Components $1,504 $1,244 $1,022
Passenger Car Components 524 542 477
Off-Highway Vehicle Components 329 307 307
------ ------ ------
2,357 2,093 1,806
Electrical and Electronic Controls
Industrial and Commercial Controls 779 745 730
Automotive and Appliance Controls 735 723 529
Specialty Controls 338 308 316
------ ------ ------
1,852 1,776 1,575
Defense Systems 192 232 278
------ ------ ------
$4,401 $4,101 $3,659
====== ====== ======
Operating profit
Vehicle Components $ 247 $ 170 $ 63
Electrical and Electronic Controls
(includes a $55 million acquisition
integration charge in 1993) 83 85 88
Defense Systems 2 9 23
------ ------ ------
332 264 174
Interest expense (75) (89) (83)
Interest income 8 9 12
General corporate expenses--net (3) (3) (2)
------ ------ ------
Income before income taxes $ 262 $ 181 $ 101
====== ====== ======
Identifiable assets
Vehicle Components $1,230 $1,194 $1,244
Electrical and Electronic Controls 1,119 1,128 1,089
Defense Systems 117 250 340
------ ------ ------
2,466 2,572 2,673
General corporate assets 802 648 511
------ ------ ------
Total assets $3,268 $3,220 $3,184
====== ====== ======
Capital expenditures
Vehicle Components $ 124 $ 93 $ 107
Electrical and Electronic Controls 68 67 55
Defense Systems 7 14 24
Corporate 28 12 8
------ ------ ------
$ 227 $ 186 $ 194
====== ====== ======
Depreciation
Vehicle Components $ 101 $ 103 $ 99
Electrical and Electronic Controls 58 59 48
Defense Systems 13 14 14
Corporate 10 8 8
------ ------ ------
$ 182 $ 184 $ 169
====== ====== ======
<PAGE>
Page 39
<FN>
Operating profit of the Electrical and Electronic Controls segment
was reduced in 1993 by an acquisition integration charge of $55
million. Operating profit of the Vehicle Components segment was
reduced in 1993 by a restructuring charge of $9 million.
Operating profit in 1992 was reduced by expense related to the
accounting change for postretirement benefits other than pensions of
$14 million for the Vehicle Components segment and $11 million for
the Electrical and Electronic Controls segment.
Operating profit in 1991 was reduced by a restructuring charge of $22
million for the Vehicle Components segment and $17 million for the
Electrical and Electronic Controls segment.
</TABLE>
Page 40
Summary Financial Information for Eaton ETN Offshore Ltd.
- ---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore) was incorporated by Eaton
under the laws of Ontario, Canada, primarily for the purpose of
raising funds through the offering of debt securities in the United
States and making these funds available to Eaton and/or one or more
of Eaton's direct or indirect subsidiaries. All of the issued and
outstanding capital stock of Eaton Offshore is owned directly or
indirectly by Eaton. In addition, Eaton Offshore owns all of the
issued and outstanding capital stock of Eaton Yale ltd. (Eaton Yale)
previously owned by Eaton. Eaton Yale is engaged principally in the
manufacture of fasteners, leaf spring assemblies and electrical and
electronic controls. In January 1992, Eaton Yale acquired Franz
Kirsten KG. In January 1994, Eaton Yale acquired the Canadian operations
of the Distribution and Control Business Unit of the Westinghouse
Electric Corporation. Summary financial information for Eaton Offshore
and its consolidated subsidiaries is as follows:
Year ended December 31
------------------------------------
(Millions of dollars) 1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Income statement data
Net sales $281 $295 $165 $188 $207
Gross profit 38 42 26 29 29
Net income 13 17 13 12 7
Balance sheet data
Current assets $144 $144 $124 $ 91 $ 49
Net intercompany
receivables (payables) 22 24 33 17 (11)
Noncurrent assets 81 86 42 48 45
Current liabilities 42 51 20 21 12
Noncurrent liabilities 109 115 104 73 12
Page 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company experienced an extraordinary year of achievement in
1993.
Income after income taxes for the year increased to $214 million
in 1993 before the recognition of a $34 million acquisition
integration charge and a $7 million extraordinary loss on the
redemption of debentures. This represents a 53% increase
compared to income of $140 million in 1992 (before the cumulative
effect of 1992 accounting changes). Earnings per Common Share,
before the special charges, rose to $3.06 in 1993, a 51% increase
over $2.03 (before the impact of accounting changes) in 1992.
On January 31, 1994, the Company acquired Westinghouse Electric
Corporation's Distribution and Control Business Unit (DCBU), and
in December of 1993 recorded a $55 million charge ($34 million
after income tax credits, or $.49 per Common Share) for the
integration of the Company's Industrial Control and Power
Distribution Operations (ICPDO) with DCBU to form the Cutler-
Hammer business unit. This acquisition provides greater product
depth with world class technology and substantially increases
product offering and distribution opportunities.
During March and December 1993, the Company called for redemption
a total of $163 million of debentures. The loss on the
redemptions was accounted for as an extraordinary item in each of
those periods. In June, a two-for-one common stock split was
distributed, effected in the form of a 100% stock dividend, and
the quarterly dividend on Common Shares was increased by 2-1/2
cents (9%) to 30 cents per share, the third dividend increase in
seven years.
In June, the Company reconsolidated the net assets and operating
results of its remaining discontinued operations. Prior years
have been restated to include those results.
1993 COMPARED TO 1992
- ---------------------
NET SALES
- ---------
Net sales in 1993 increased by 7% to $4.40 billion, over $4.10
billion in 1992. The increase occurred principally in the United
States and was largely due to a strengthened North American
market for heavy and light trucks, vans and sport utility
vehicles, responding to a U.S. economic recovery. The
improvement in North America more than offset the effects of the
continued deep European recession. In North America, certain
Page 42
markets, which had been sluggish through most of 1993, showed
sales improvements in the fourth quarter.
The Vehicle Components segment net sales increased to $2.36
billion for 1993, rising 13% over 1992 sales of $2.09 billion.
This improvement was largely due to significant growth in sales
of truck components, following the best factory sales of heavy
trucks in North America since 1979. The passenger car and light
truck markets also showed improvement in 1993. Off-highway
equipment markets, which had been down for several years,
improved considerably. Strong sales growth in North America was
partially offset by reduced sales in Europe where vehicle markets
remain weak.
The Electrical and Electronic Controls segment showed a net sales
increase of 4% in 1993 to $1.85 billion compared to $1.78 billion
in 1992. This increase was largely due to increased sales in the
areas of industrial and commercial controls and specialty
controls. Strong North American markets for automotive and
appliance controls were largely offset, however, by the continued
weakness in the corresponding European markets due to the
economic recession and the negative impact of foreign currency
exchange rate fluctuations. Rising demand for portable tools,
factory equipment and residential housing drove the increase in
sales of industrial and commercial controls. Sales of the
Company's industrial and power distribution equipment, which tend
to lag any North American economic recovery, rose sharply in the
fourth quarter. The semiconductor equipment business, included
in specialty controls, experienced strong results throughout the
year, with a 19% improvement in sales for 1993 over 1992.
OPERATING RESULTS
- -----------------
Gross margin increased to $1.12 billion (25.4% of sales) in 1993,
rising from $967 million (23.6% of sales) in 1992, due to
significant sales growth as well as benefits achieved through
ongoing cost containment and productivity improvements. This
improvement in margin was achieved in spite of a $9 million
charge, included in cost of products sold in 1993, for the
restructuring of certain vehicle components operations in Europe.
Selling and administrative expenses showed an increase of 2% in
1993 compared to 1992, with expense of $591 million in 1993 and
$578 million in 1992. This level of increase is a clear
indication of the results of cost control and restructuring
efforts, which is further evidenced by their relationship to net
sales, 13% in 1993 compared to 14% in 1992.
Research and development expenses for 1993 were $154 million,
rising from $151 million in 1992. This level of expenditure
reflects the continued commitment to achieving expressed
Page 43
corporate targets in product innovation and enhancements and to
maintaining leading-edge technology.
The Vehicle Components segment operating profit rose to $247
million (10% of sales) for 1993, a substantial improvement over
$170 million (8% of sales) for 1992 despite a $9 million
restructuring charge recorded in 1993 for restructuring certain
European operations. This improvement was largely a result of
the improved market in North America for heavy and light trucks,
vans and sport utility vehicles. Other factors contributing to
increased profits were continuing stringent cost containment
efforts and the economies achieved through restructuring certain
businesses, which have better positioned operations to benefit
from further growth in vehicle markets.
The Electrical and Electronic Controls segment operating profit
significantly improved, before the effect of the $55 million
acquisition integration charge, rising 62% to $138 million in
1993 (7% of sales) from $85 million (5% of sales) in 1992. This
improved segment profit picture is partially due to the sales
growth experienced in certain controls markets, but is also a
clear reflection of the continuing emphasis placed on containing
and controlling costs and the realization of anticipated benefits
of earlier restructuring efforts. The depressed European economy
negatively impacted the controls businesses, particularly
automotive and appliance controls. Profit for this segment was
also reduced by a $55 million pretax charge recorded in December
1993 for the integration of ICPDO product lines and operations
with DCBU to form the new Cutler-Hammer business unit. The DCBU
acquisition will bring a more even balance in sales and earnings
between the Electrical and Electronic Controls segment and the
historically strong Vehicle Components segment.
Interest expense declined to $75 million for 1993, the lowest
level since 1986, from $89 million for 1992 largely due to the
reduction of higher interest rate debt, lower debt levels during
1993 and increased capitalized interest.
Other income--net was $12 million in 1993, down from $23 million
in 1992, largely due to the $11 million pretax gain on the sale
of the Company's interest in a limited partnership recorded in
1992.
An analysis of changes in income taxes and the effective income
tax rate is presented under "Income Taxes" in the Financial
Review.
In 1992, the Company adopted two new accounting standards for
postretirement benefits other than pensions and for income taxes,
which together reduced net income by $268 million due to the
recognition of their cumulative effect for prior years.
Page 44
CHANGES IN FINANCIAL CONDITION
- ------------------------------
The Company's financial condition remained strong during 1993.
The current ratio was 1.9 at December 31, 1993 compared to 2.0 at
December 31, 1992. The decline in working capital to $679
million at year-end 1993 from $751 million at year-end 1992 was
primarily the result of an increase in the current portion of
long-term debt due to the decision to redeem, in early 1994, the
$89 million outstanding balance of 8.5% debentures. Cash and
short-term investments increased by $84 million to $300 million
at December 31, 1993 due to improved cash flow from operations
and the sale of 1.3 million Common Shares in 1993 for net
proceeds of $62 million. In spite of the increase in sales in
1993 to record levels, heightened emphasis on efficient asset
management is reflected in the $21 million decline in inventories
to $434 million at December 31, 1993. An increase in accounts
receivable resulting from improved 1993 sales was more than
offset by a reduction due to the collection of receivables at AIL
as a consequence of the definitization of contract modifications
as agreed to with the United States Air Force late in 1992; the
net impact of the increase and offsetting decrease resulted in a
$78 million decline in accounts receivable to $550 million at
December 31, 1993. In addition, accounts receivable days sales
outstanding at December 31, 1993 was 43, historically one of the
lowest levels, in spite of the expanding economy and sales
growth.
Long-term debt declined to $649 million at year-end 1993 from
$833 million at the end of 1992 primarily due to the call for
redemption of $74 million of 9% debentures in March 1993 and $89
million of 8.5% debentures in December 1993.
In private placements the Company sold 1.3 million Common Shares
in 1993 for aggregate net proceeds of $62 million and, in January
1994, an additional 800,000 Common Shares for $38 million.
Beginning in April 1995, the holder of these shares has the right
to require the Company to register their public sales under the
Federal securities law.
Capital expenditures were $227 million, one of the Company's
highest levels, in 1993 compared with $186 million in 1992, as
the Company maintained its emphasis on enhancing manufacturing
efficiencies and capabilities. Capital expenditures in 1994 are
anticipated to be higher than 1993 for those businesses unrelated
to the acquisition of DCBU. Further capital expenditures are
planned relative to the combining of DCBU and ICPDO. During
1993, the Company invested $14 million in small businesses,
primarily to establish a joint venture, which will round out
product lines and open avenues for market expansion.
Page 45
Net cash provided by operating activities increased to $435
million for 1993 from $381 million for 1992. This increase
resulted primarily from improved net income, reflecting higher
sales and rigorous cost controls. Changes in operating assets
and liabilities also contributed to the increase in net cash
provided by operating activities in 1993. Operating cash flow
and proceeds from the sale of Common Shares during 1993 were more
than adequate to fund capital expenditures, cash dividends, the
investment in certain small businesses and other corporate
purposes.
On May 25, 1993, the Company redeemed its share purchase rights
at a redemption price of 3-1/3 cents for each right for a total
payment of $2 million.
At the end of 1993, as a result of the trend of declining
long-term interest rates, the discount rate used to measure the
projected benefit obligation for pensions was reduced to 7.25%
from 8.25%. This change had the effect of increasing the
accumulated pension benefit obligation by $103 million with an
offsetting decrease in the unamortized net gain. In addition,
the rates used to measure the projected benefit obligation for
postretirement benefits other than pensions were changed. The
changes in rates included a reduction in the discount rate to
7.25% from 8.5%, and in the annual rate of increase in per capita
cost of covered health care benefits. These rate changes had the
effect of increasing the accumulated postretirement benefit
obligation by $49 million with an offsetting increase in the
unamortized net loss. The effect on future expense for pensions
and postretirement benefits other than pensions will be
immaterial.
At December 31, 1993 and 1992, the Company had net deferred
income tax assets included in current and long-term assets.
Management believes it is more likely than not that these tax
benefits will be realized through the reduction of future taxable
income. Significant factors considered by management in its
determination of the probability of the realization of the
deferred tax assets include the historical operating results of
the Company, expectations of future earnings and the extended
period of time over which the postretirement health care
liability will be paid.
On January 31, 1994, the Company acquired DCBU from Westinghouse
Electric Corporation and issued $930 million of short-term
commercial paper to finance the acquisition. The Company plans
to reduce these short-term financings by the middle of 1994
through expanded use of equity and long-term debt financings.
The timing and mix of these financings will depend on market
conditions. Of these short-term financings, $555 million will be
classified as long-term debt because the Company intends, and has
Page 46
the ability under a new five-year $555 million revolving credit
agreement entered into in January 1994, to refinance this debt on
a long-term basis. Also, in January 1994, the Company entered
into a $555 million 364-day revolving credit agreement. Strong
cash flow, reinforced by the projected results of the newly
created Cutler-Hammer business unit, should permit the repayment
of the financings within the next five years. The Company is
maintaining the strength of its balance sheet, and two major
debt-rating agencies, Standard and Poor's and Moody's, have
confirmed the "A" rating on its long-term debt.
The Company expects that the economic and market growth
experienced in North America during 1993 will continue to expand
to additional markets in 1994; however, that growth will likely
be moderated by lingering weakness in Europe. Long-range plans
continue to be focused on enhancements in quality, productivity
and growth in all its major markets. The acquisition of DCBU and
integration with ICPDO should create permanent value by
streamlining product lines, manufacturing capacity and
organization structure and will enable the businesses to realize
the synergies resulting from complementary product offerings,
operations and technical expertise. This acquisition will
reinforce the goal of improving the balance in sales and earnings
between the historically strong Vehicle Components segment and
the Electrical and Electronic Controls segment. Investments in
the form of research and development, marketing and manufacturing
programs continue in all key product lines, and plans are to
continue to make niche acquisitions which will promote the
Company's position in worldwide markets. The Company believes
capital resources available in the form of working capital on
hand, lines of credit and funds provided by operations will more
than adequately meet anticipated capital requirements for capital
expenditures and business expansion through niche acquisitions.
The acquisition of DCBU required the additional capital resources
discussed above.
The operations of the Company involve the use, disposal and
cleanup of certain substances regulated under environmental
protection laws, as further discussed under "Protection of the
Environment" in the Financial Review. Subject to the difficulty
in estimating future environmental costs, the Company expects
that any sum it may have to pay in connection with environmental
matters in excess of the amounts recorded or disclosed will not
have a material adverse effect on its financial condition or
results of operations.
Page 47
RESULTS OF OPERATIONS
- ---------------------
1992 COMPARED TO 1991
- ---------------------
Net Sales
- ---------
Net sales for 1992 were $4.10 billion, up 12% from $3.66 billion in
1991. Certain markets in North America experienced a modest recovery
in 1992. However, economies in Europe, Japan and South America
continued to weaken, affecting businesses in those areas, and
offsetting some strength in North America.
The Vehicle Components segment net sales increased to $2.09 billion
for 1992, 16% higher than sales of $1.81 billion recorded for
1991. North American sales of heavy and light trucks, vans and sport
utility vehicles were strong throughout the year. A marked increase
in heavy truck production in North America during the second half of
1992 had a significant favorable impact on this segment's results.
Heavy truck production increased 30% in 1992 over prior year levels.
Strategic investments also contributed to sales growth through
expansion of business into new products and territories. Sales of
passenger car and off-highway vehicle equipment slowed in the last
half of the year, after showing increases during the first half.
Overseas vehicle markets, primarily in Europe, were depressed, and
weakened further in the fourth quarter.
The Electrical and Electronic Controls segment had net sales of $1.78
billion for 1992, rising 13% from sales of $1.58 billion in 1991.
This increase reflects the acquisition of Kirsten, a European
automotive controls manufacturer with 1992 sales of approximately
$120 million, and other smaller acquisitions during 1992 and 1991.
Existing automotive and appliance controls businesses experienced a
strong rebound in their markets, adding to the improved results.
Sales from industrial and commercial controls businesses were flat,
with the recovery in residential markets offset by continued
contraction in military and commercial aircraft industries. Sales
from specialty controls businesses declined slightly, reflecting the
continued weakening of the North American automated materials
handling market, as well as significant softening of the
semiconductor equipment markets in the United States and Japan.
Operating Results
- -----------------
Higher sales levels, benefits of recent restructurings and rigorous
inventory controls produced an improved gross margin of $967 million
in 1992 (24% of sales), up from $851 million in 1991 (23% of sales).
Gross margin in 1992 was reduced by $17 million of increased expense
related to the accounting change for postretirement benefits other
than pensions.
Selling and administrative expenses were held level relative to sales
due to stringent cost controls, as well as the benefits of recent
restructurings, with $578 million reported in 1992 compared to $520
million in 1991 (14% of sales in both years).
Page 48
The Company's continued commitment to improvement of established
product lines, and to product innovation and development in markets
offering the greatest potential for growth was reflected in the
increase in research and development expenses to $151 million in 1992
from $138 million in 1991.
The Vehicle Components segment operating profit showed a substantial
increase to $170 million for 1992 over profit of $63 million in 1991.
Profit for 1992 was reduced by $14 million due to recognition of
additional expenses for postretirement benefits other than pensions.
The improved profit was largely a result of increased demand for
heavy and light trucks, vans and sport utility vehicles previously
described and, additionally, benefitted from recent restructurings,
for which a $22 million charge was recorded in 1991. Strict cost
containment also contributed to growth in profit. Strategic
investments in marketing, research and development, and manufacturing
improvements should further promote sustainable growth and increases
in profit as markets served by this segment strengthen.
The Electrical and Electronic Controls segment operating profit was
$85 million in 1992 compared to $88 million in 1991. Profit for this
segment for 1992 was reduced by $11 million due to recognition of
additional expenses related to the accounting change for
postretirement benefits other than pensions. Profit for 1991 was
reduced by a $17 million restructuring charge recorded in the first
quarter. Start-up costs for integration of Kirsten and other
acquisitions depressed 1992 profits, but these investments should
provide opportunities for growth and profit improvement in the
future. The acquisition of Kirsten, a European automotive controls
manufacturer with operations in Germany, France and Spain, is a good
example of the Company's investment in growth businesses through
acquisitions. Restructuring costs due to downsizing of
military-related operations reduced profits. In addition, profits
for 1992 were affected by depressed sales in certain businesses, as
discussed above, the costs of long-range programs in marketing,
research and development, and manufacturing improvement, and
cost/price pressures.
Other income--net rose to $23 million for 1992 from $18 million for
1991, primarily due to an $11 million pretax gain on the sale of the
Company's interest in a limited partnership recorded in 1992.
An analysis of changes in income taxes and the effective income tax
rate is presented under "Income Taxes" in the Financial Review.
Page 49
<TABLE>
<CAPTION>
Eaton Corporation
Five-Year Consolidated Financial Summary
<S>
For the year 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------
(Millions of dollars except for per share data)
<C> <C> <C> <C> <C>
Net sales $4,401 $4,101 $3,659 $4,083 $4,228
Income before extraordinary item and cumulative
effect of accounting changes $ 180 $ 140 $ 74 $ 179 $ 225
Extraordinary item (7)
Cumulative effect of accounting changes
Postretirement benefits other than pensions (274)
Income taxes 6
Net income (loss) 173 (128) 74 179 225
Per Common Share
Income before extraordinary item and
cumulative effect of accounting changes $ 2.57 $ 2.03 $ 1.09 $ 2.53 $ 3.00
Extraordinary item (.10)
Cumulative effect of accounting
changes
Postretirement benefits other
than pensions (3.97)
Income taxes 0.09
Net income (loss) 2.47 (1.85) 1.09 2.53 3.00
Cash dividends paid 1.15 1.10 1.10 1.05 1.00
At the year-end
- ---------------------------------------------------------------------------------------------------
Total assets $3,268 $3,220 $3,184 $3,140 $3,189
Long-term debt 649 833 795 755 861
Total debt 773 882 927 815 923
Shareholders' equity 1,105 948 1,153 1,140 1,145
Information for 1989 through 1992 has been restated to reconsolidate previously discontinued
operations and to give effect to the two-for-one stock split effective June 28, 1993.
Income in 1993 was reduced by an acquisition integration charge of $55 million before income tax
credits ($34 million after income tax credits, or $.49 per Common Share).
Income in 1993 was reduced by an extraordinary loss of $11 million before income tax credits for
the redemption of debentures ($7 million after income tax credits, or $.10 per Common Share).
Income in 1992 and 1993 was reduced by expense related to the accounting change for
postretirement benefits other than pensions.
Income in 1991 was reduced by a restructuring charge of $39 million before income tax credits
($25 million after income tax credits, or $.38 per Common Share).
</TABLE>
<PAGE>
Page 50
<TABLE>
<CAPTION> Eaton Corporation
Schedule V - Property, Plant and Equipment
(Millions of dollars)
Column A Column B Column C Column D Column E Column F
- --------------------------------- ----------- ----------- ----------- ------------- -----------
Balance at Other changes Balance at
beginning Additions Add (deduct) end of
Classification of period at cost Retirements - Describe period
- --------------------------------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Land $ 41 $ 41
Buildings 482 $ 7 $ 5 $ 11 (A)
(9)(B) 486
Machinery and equipment 1,896 220 99 (11)(A)
(47)(B) 1,959
------ ------ ------ ------ ------
$2,419 $ 227 $ 104 $ (56) $2,486
====== ====== ====== ====== ======
Year ended December 31, 1992
Land $ 40 $ (1)(B)
2 (C) $ 41
Buildings 460 $ 11 $ 2 18 (A)
(16)(B)
5 (C)
6 (D) 482
Machinery and equipment 1,808 175 61 (18)(A)
(77)(B)
39 (C)
30 (D) 1,896
------ ------ ------ ------ ------
$2,308 $ 186 $ 63 $ (12) $2,419
====== ====== ====== ====== ======
Year ended December 31, 1991
Land $ 39 $ 1 (C) $ 40
Buildings 432 $ 20 $ 2 3 (A)
7 (C) 460
Machinery and equipment 1,726 174 94 (3)(A)
(5)(B)
10 (C) 1,808
------ ------ ------ ------ ------
$2,197 $ 194 $ 96 $ 13 $2,308
====== ====== ====== ====== ======
(A) Represents transfers between classifications.
(B) Represents foreign currency translation adjustments.
(C) Represents cost of assets of companies acquired.
(D) Represents assets acquired related to acquisition of majority interest in former associate company.
(E) The annual provisions for depreciation have been computed by the straight-line method principally
in accordance with the following ranges of rates.
Buildings 2.5%
Machinery and equipment 4.5% to 25%
</TABLE>
<PAGE>
Page 51
<TABLE>
Eaton Corporation
<CAPTION> Schedule VI - Accumulated Depreciation of Property, Plant and Equipment
(Millions of dollars)
Column A Column B Column C Column D Column E Column F
- ----------------------------- ---------- ---------- ---------- ------------- ----------
Additions
Balance at charged to Other changes Balance at
beginning costs and Add (deduct) end of
Description of period expenses Retirements - Describe period
- ----------------------------- --------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Buildings $ 201 $ 15 $ 4 $ 1 (A) $ 213
Machinery and equipment 1,037 167 93 (26)(A) 1,085
------ ----- ----- ----- ------
$1,238 $ 182 $ 97 $ (25) $1,298
====== ===== ===== ===== ======
Year ended December 31, 1992
Buildings $ 182 $ 21 $ 1 $ (5)(A)
4 (B) $ 201
Machinery and equipment 935 163 55 (38)(A)
32 (B) 1,037
------ ----- ----- ----- ------
$1,117 $ 184 $ 56 $ (7) $1,238
====== ===== ===== ===== ======
Year ended December 31, 1991
Buildings $ 167 $ 19 $ 4 $ 182
Machinery and equipment 869 150 81 $ (3)(A) 935
------ ----- ----- ----- ------
$1,036 $ 169 $ 85 $ (3) $1,117
====== ===== ===== ===== ======
(A) Represents foreign currency translation adjustments.
(B) Represents accumulated depreciation related to acquisition of majority interest in former
associate company.
</TABLE>
Page 52
<TABLE>
<CAPTION> Eaton Corporation
Schedule IX - Short-Term Borrowings
(Millions of dollars)
Column A Column B Column C Column D Column E Column F
- --------------------------- ---------- --------- -------- ---------- --------
Weighted
Maximum Average average
Weighted amount amount interest
Balance at average outstanding outstanding rate
Category of aggregate end of interest during the during the during the
short-term borrowings (A) period rate period period (B) period (C)
- ---------------------------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
High inflation countries $ 2 (D) $ 5 $ 2 (D)
Other 12 8.05% 25 14 11.27%
--- --- ---
$14 $30 $16
=== === ===
Year ended December 31, 1992
High inflation countries $ 5 (D) $ 6 $ 4 (D)
Other 25 10.92% 79 37 12.64%
--- --- ---
$30 $85 $41
=== === ===
Year ended December 31, 1991
High inflation countries $ 6 (D) $ 6 $ 6 (D)
Other 47 11.33% 52 39 15.37%
--- --- ---
$53 $58 $45
=== === ===
(A) Short-term debt is primarily outside the United States and consists of amounts payable
to banks for borrowings and commercial paper. Certain short-term borrowings by
operations in Argentina and Brazil, which are classified as "high inflation countries",
bear interest rates substantially above the interest rates paid by other operations.
(B) The average amount outstanding during the period was computed by dividing the total of
month-end outstanding principal balances by 13.
(C) The weighted average interest rate during the period was computed by dividing actual
interest expense by average short-term debt outstanding.
(D) Interest rate is not meaningful because it reflects the effect of significant inflation.
</TABLE>
<PAGE>
Page 53
<TABLE> Eaton Corporation
<CAPTION> Schedule X - Supplementary Income Statement Information
(Millions of dollars)
Column A Column B
- -------------------------------------------- ----------------------------------
Charged to costs and expenses
Item Year ended December 31
- -------------------------------------------- ----------------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs $125 $127 $104
Amortization of intangible assets (A) (A) (A)
Taxes, other than payroll and income taxes (A) (A) (A)
Royalties (A) (A) (A)
Advertising costs (A) (A) (A)
(A) Amounts are not presented as such amounts are less than 1% of net sales.
</TABLE>
Page 1
Eaton Corporation
1993 Annual Report on Form 10-K
Item 14(c)
Listing of Exhibits Filed
3 Amended Articles of Incorporation (as amended and restated
as of January 24, 1989, filed on Form SE on March 13,
1989) and Amended Regulations (as amended and restated as
of April 27, 1988, filed on Form SE on March 13, 1989)
4(a) Instruments defining rights of security holders, including
indentures (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)
10 Material contracts
(1) DCBU Purchase Agreement dated as of August 10,
1993 between Westinghouse Electric Corporation
(Seller) and Eaton Corporation (Buyer) Regarding the
Distribution and Control Business Unit of
Westinghouse Electric Corporation (Agreement) -
Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1993
Including the following Exhibits to the Agreement:
(i) Form of Technology Agreement (Ex. 2.1)
(ii) Terms of Lease for Shared Facilities
(Ex.9.6(a) (1))
(iii) Terms of Sublease for Shared Facilities
(Ex. 9.6(a) (2))
(iv) Terms of Lease for Vidalia, Georgia Shared
Facility (Ex. 9.6(b) (1) (i))
(v) Terms of Lease by Buyer of Part of Horseheads
Facility (Ex. 9.6(b) (1) (ii))
(vi) Terms for Jackson, Mississippi Sublease
(Ex. 9.6(b) (2))
(vii) Form of Services Agreement (Ex. 9.8)
(viii) Form of WESCO Distributor Agreement (Ex. 9.9)
(ix) Form of Interim NEWCO Distributor Agreement
(Ex. 7.15.2)
(x) Form of NEWCO Distributor Agreement
(xi) Form of Supplier and Vendor Agreement
(Ex. 9.10)
(2) The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (as amended
and restated May 1, 1990; filed as a separate
section of this report)
(b) Executive Strategic Incentive Plan, effective
as of January 1, 1991 - Incorporated by reference
to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992
(c) Group Replacement Insurance Plan (GRIP),
effective as of June 1, 1992 - Incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992
(d) 1991 Stock Option Plan - Incorporated herein by
reference to the Company's definitive proxy
statement dated March 18, 1991
(e) The following are incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990:
Page 2
(i) Strategic Incentive and Option Plan
(as amended and restated as of January 1, 1989)
(ii) Limited Eaton Service Supplemental Retirement
Income Plan (as amended and restated as of
January 1, 1989)
(iii) Amendments to the 1980 and 1986 Stock Option
Plans
(iv) Form of "Change in Control" Agreement entered
into with all officers of Eaton Corporation
(v) Eaton Corporation Supplemental Benefits Plan
(as amended and restated as of January 1, 1989)
(which provides supplemental retirement benefits)
(vi) Eaton Corporation Excess Benefits Plan (as
amended and restated as of January 1, 1989)
(with respect to Section 415 limitations of the
Internal Revenue Code)
(f) The following are incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1990 (filed on Form SE dated March
28, 1991):
(i) Executive Incentive Compensation Plan
(ii) Plan for the Deferred Payment of Directors' Fees
(as amended and restated as of January 1, 1989)
(iii) Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and amended and
restated in 1989)
(iv) Eaton Corporation Retirement Plan for
Non-Employee Directors (as amended and restated
as of January 1, 1989)
11 Statement regarding computations of net income per Common
Share (filed as a separate section of this report)
21 Subsidiaries of Eaton Corporation (filed as a separate section
of this report)
23 Consent of Independent Auditors (filed as a separate section of
this report)
24 Power of Attorney (filed as a separate section of this report)
Date: EATON CORPORATION
By:
Title:
By:
Title:<PAGE>
072590/4876b
EATON CORPORATION
DEFERRED INCENTIVE COMPENSATION PLAN
(as Amended and Restated as of May 1, 1990)
I. PURPOSE
The purpose of the Deferred Incentive Compensation Plan is
to promote the greater success of Eaton Corporation and
its subsidiaries by providing a means to defer Incentive
Compensation for key employees whose level and nature of
position enable them to affect significantly the
profitability, competitiveness and growth of Eaton.
II. CONCEPT
The Plan is based on the concept that the deferral of
Incentive Compensation for later payment to a Participant,
including the later payment during Retirement, will
provide a benefit to each Participant and an incentive to
improve the profitability, competitiveness and growth of
Eaton.
III. DEFINITIONS
Unless otherwise required by the context, the terms used
herein shall have the meanings as set forth below:
(a) ACCOUNT: The account established by Eaton for each
Participant to which may be credited his Deferred
Incentive Compensation, Dividend Equivalents,
Treasury Bill Interest Equivalents and Fixed Rate
Interest Equivalents.
<PAGE>
(b) BENEFICIARY: The person or entity (including a
trust or the estate of the Participant) designated
in a written document executed by the Participant
and delivered to the Committee. If at the time when
any unpaid balance of Deferred Incentive
Compensation shall be or become due at or after the
death of a Participant, there shall not be any
living person or any entity in existence so
designated, the term "Beneficiary" shall mean the
Participant's estate.
(c) BOARD: The Board of Directors of Eaton.
(d) CAUSE: For the purposes of this Plan, Eaton shall
have "Cause" to terminate the Participant's
employment hereunder upon (i) the willful and
continued failure by the Participant to
substantially perform the Participant's duties with
Eaton (other than any such failure resulting from
the Participant's incapacity due to physical or
mental illness), after a demand for substantial
performance is delivered to the Participant by the
Board which specifically identifies the manner in
which the Board believes that the Participant has
not substantially performed the Participant's
duties, or (ii) the willful engaging by the
Participant in gross misconduct materially and
demonstrably injurious to Eaton. For purposes of
this definition, no act, or failure to act, on the
Participant's part shall be considered "willful"
unless done, or omitted to be done, by the
Participant not in good faith and without reasonable
belief that the Participant's action or omission was
in the best interest of Eaton. <PAGE>
Notwithstanding the foregoing, the Participant's
employment shall not be deemed to have been
terminated for Cause unless and until there shall
have been delivered to the Participant a copy of a
resolution duly adopted by the affirmative vote of
not less than three-quarters of the entire
membership of the Board at a meeting of the Board
called and held for such purpose (after reasonable
notice to the Participant and an opportunity for the
Participant, together with the Participant's
counsel, to be heard before the Board), finding that
in the good faith opinion of the Board the
Participant was guilty of conduct set forth above in
clauses (i) or (ii) of this definition and
specifying the particulars thereof in detail.
(e) CHANGE IN CONTROL OF EATON: For purposes of this
Plan, a "Change in Control of Eaton" shall be deemed
to have occurred if (i) a tender offer shall be made
and consummated for the ownership of securities of
Eaton representing 25% or more of the combined
voting power of Eaton's then outstanding voting
securities, (ii) Eaton shall be merged or
consolidated with another corporation and as a
result of such merger or consolidation less than 75%
of the outstanding voting securities of the
surviving or resulting corporation shall be owned in
the aggregate by the former shareholders of Eaton,
other than affiliates (within the meaning of the
Securities Exchange Act of 1934 (the "Exchange
Act")) of any party to such merger or consolidation,
as the same shall have existed immediately prior to
such merger or consolidation, (iii) Eaton shall sell
substantially all of its<PAGE>
assets to another corporation which is not a wholly
owned subsidiary of Eaton, (iv) any "person" (as
such term is used in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act) is or becomes the beneficial
owner, directly or indirectly, of securities of
Eaton representing 25% or more of the combined
voting power of Eaton's then outstanding securities;
or (v) during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason to
constitute at least a majority thereof unless the
election, or the nomination for election by Eaton's
shareholders, of each new director was approved by a
vote of at least two-thirds of the directors then
still in office who were Directors at the beginning
of the period. For purposes of this Plan, ownership
of voting securities shall take into account and
include ownership as determined by applying the
provisions of Rule 13d-3(d)(1)(i) of the Exchange
Act (as then in effect).
(f) COMMITTEE: The Corporate Compensation Committee of
Management of Eaton.
(g) COMPENSATION COMMITTEE OF THE BOARD: The
Compensation Committee of the Board of Directors of
Eaton.
(h) CONTINGENT SHARE UNITS: Units credited to a
Participant's Account which are equivalent in value
to the market value of Eaton Common Shares.
<PAGE>
(i) DEFERRED INCENTIVE COMPENSATION: That portion of
Incentive Compensation which has been deferred
pursuant to the Plan and any Dividend Equivalents,
Treasury Bill Interest Equivalents, Fixed Rate
Interest Equivalents and Contingent Share Units
which are attributable thereto.
(j) DEFERRED INCENTIVE COMPENSATION AGREEMENT: The
written agreement between Eaton and a Participant
pursuant to which Incentive Compensation is deferred
under the Plan.
(k) DISABILITY: If, as a result of the Participant's
incapacity due to physical or mental illness, the
Participant shall have been absent from the
Participant's duties with Eaton on a full-time basis
for 180 consecutive business days and within thirty
(30) days after written Notice of Termination the
Participant shall not have returned to the full-time
performance of the Participant's duties, any
termination of the Participant's employment by Eaton
shall be for "Disability."
(l) DIVIDEND EQUIVALENT: An amount equal to the per
share dividends paid on Eaton Common Shares.
(m) EATON: Eaton Corporation, an Ohio corporation, and
its subsidiaries and successors and assigns.
(n) EXECUTIVE INCENTIVE COMPENSATION PLAN: An incentive
compensation plan approved by the Board of Directors
of Eaton the participants in which are designated by
the Committee on an annual basis.
<PAGE>
(o) FIXED RATE INTEREST EQUIVALENT: With respect to any
Participant, the rate of interest as specified in
the Deferred Incentive Compensation Agreement
between such Participant and Eaton.
(p) GOOD REASON: For purposes of this Plan, any
Termination of Employment by a Participant under the
following circumstances shall be for "Good Reason":
(i) without the Participant's express written
consent, the assignment to the Participant of
any duties inconsistent with the Participant's
positions, duties, responsibilities and status
with Eaton immediately prior to a Change in
Control of Eaton, or a change in the
Participant's reporting responsibilities,
titles or offices as in effect immediately
prior to a Change in Control of Eaton, or any
removal of the Participant from or any failure
to re-elect the Participant to any of such
positions, except in connection with the
termination of the Participant's employment for
Cause, Disability or as a result of the
Participant's death;
(ii) a reduction by Eaton in the Participant's
base salary as in effect immediately prior to
the Change in Control of Eaton or as the same
may be increased from time to time; or the
failure by Eaton to increase such base salary
each year after a Change in Control of Eaton by
an amount which at least equals, on a
percentage basis, the<PAGE>
average annual percentage merit increase in the
Participant's base salary during the five (5)
full calendar years immediately preceding a
Change in Control of Eaton;
(iii) a failure by Eaton to continue the
Participant's participation in Eaton's
Executive Incentive Compensation Plan (the
"I.C. Plan"), Deferred Incentive Compensation
Plan (the "Deferred I.C. Plan"), Limited Eaton
Service Supplemental Retirement Income Plan
(the "Limited Service Plan"), Strategic
Incentive and Option Plan (the "SIOP Plan") and
Supplemental Benefit Plan established by the
Board as a result of the limitations on pension
benefits imposed by Section 415 of the Internal
Revenue Code (the "Supplemental Plan"), as each
plan may be modified from time to time but
substantially in the form presently in effect,
on at least the basis as in effect immediately
prior to the Change in Control of Eaton or to
pay the Participant any amounts earned under
such plans in accordance with the terms of such
plans.
(iv) the relocation of Eaton's principal
executive offices to a location outside
Cuyahoga County, Ohio or any county adjoining
Cuyahoga County, Ohio, or Eaton's requiring the
Participant to be based anywhere other than
Eaton's principal executive offices or the
location where the Participant is based
immediately prior to the Change in Control of
Eaton except for required travel on Eaton's<PAGE>
business to an extent substantially consistent
with the Participant's business travel
obligations in effect immediately prior to the
Change in Control of Eaton, or, in the event
the Participant consents to any such relocation
of Eaton's principal executive offices, the
failure by Eaton to pay (or reimburse the
Participant for) all reasonable moving expenses
incurred by the Participant relating to a
change of the Participant's principal residence
in connection with such relocation and to
indemnify the Participant against any loss
(defined as the difference between the actual
sale price of such residence and the higher of
(a) the Participant's aggregate investment in
such residence or (b) the fair market value of
such residence as determined by any real estate
appraiser designated by the Participant and
reasonably satisfactory to Eaton) realized in
the sale of the Participant's principal
residence in connection with any such change of
residence;
(v) the failure by Eaton to continue to effect
any benefit or compensation plan (including but
not limited to the plans described under
paragraph (p)(iii) above), pension plan, life
insurance plan, health and accident plan or
disability plan in which the Participant is
participating at the time of a Change in
Control of Eaton (or plans providing the
Participant with substantially similar
benefits), the taking of any action by<PAGE>
Eaton which would adversely affect the
Participant's participation in or materially
reduce the Participant's benefits under any of
such plans or deprive the Participant of any
material fringe or personal benefit enjoyed by
the Participant at the time of the Change in
Control of Eaton, or the failure by Eaton to
provide the Participant with the number of paid
vacation days to which the Participant is then
entitled on the basis of years of service with
Eaton in accordance with Eaton's normal
vacation policy in effect immediately prior to
the Change in Control of Eaton;
(vi) the failure of Eaton to obtain the
assumption of this Plan by any successor
(whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or
substantially all of the assets of Eaton, by
agreement in form and substance satisfactory to
the Participant, to expressly assume this Plan
and the obligations of Eaton hereunder; or
(vii) any purported termination of the
Participant's employment which is not effected
pursuant to a Notice of Termination satisfying
the requirements of a Notice of Termination as
herein defined (and, if applicable, the
definition of "Cause" as herein defined); and
for purposes of this Plan, no such purported
termination shall be effective.
(q) INCENTIVE COMPENSATION: The full amount of the
annual Incentive Compensation awarded to a<PAGE>
Participant under the Executive Incentive
Compensation Plan.
(r) INCENTIVE YEAR: An incentive year as defined under
the provisions of the Executive Incentive
Compensation Plan.
(s) MEAN PRICE: The mean between the highest and lowest
quoted selling price of an Eaton Common Share on the
New York Stock Exchange List of Composite
Transactions.
(t) NORMAL RETIREMENT DATE: The date a Participant
attains age sixty-five (65).
(u) NOTICE OF TERMINATION: Any termination of the
Participant's employment by Eaton for Cause or
Disability or by the Participant for Good Reason
shall be communicated by written Notice of
Termination to the Participant or Eaton,
respectively. For purposes of this Plan, a "Notice
of Termination" shall mean a notice which shall
indicate the specific termination provision in this
Plan relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to
provide a basis for termination of the Participant's
employment under the provision so indicated.
(v) PARTICIPANT: An employee of Eaton in a key position
receiving benefits under the Executive Incentive
Compensation Plan and participating under the Plan.
<PAGE>
(w) PERIODIC COMPENSATION: That portion of a
Participant's Incentive Compensation which is
deferred under the Plan for payment over a period of
five (5) years.
(x) PERIODIC INSTALLMENTS: Equal monthly, quarterly,
semiannual or annual payments, over a period not to
exceed 15 years, as determined by the Committee in
its sole discretion.
(y) PLAN: The Deferred Incentive Compensation Plan
pursuant to which all or a portion of Incentive
Compensation may be deferred for later payment to a
participant, as amended and restated as of
January 1, 1989.
(z) RETIREMENT: The Termination of Employment of a
Participant who is age fifty-five (55) or older and
who has at least ten (10) years of service with
Eaton or who is age sixty-five (65) or older or
under circumstances making him eligible to receive
pension payments under a pension plan sponsored by
Eaton commencing within sixty (60) days of the date
of such Termination of Employment.
(aa) RETIREMENT COMPENSATION: That portion of Incentive
Compensation deferred under the Plan for payment to
a Participant upon his Retirement which either shall
be Type A Retirement Compensation or Type B
Retirement Compensation as selected by the
Participant in accordance with Section 4.01.
(bb) TERMINATION OF EMPLOYMENT: The time when a
Participant shall no longer be employed by Eaton<PAGE>
whether by reason of Retirement, death, voluntary
resignation (with or without Good Reason),
divestiture or closing of a business unit, plant or
facility, discharge (with or without Cause), or such
disability that, under the then current employment
practices of Eaton, the employment of the
Participant is deemed to have been terminated.
(cc) TREASURY BILL INTEREST EQUIVALENT: A rate of
interest equal to the quarterly average yield of
13-week U.S. Government Treasury Bills.
(dd) TYPE A RETIREMENT COMPENSATION: As defined in
Section 6.01.
(ee) TYPE B RETIREMENT COMPENSATION: As defined in
Section 6.01.
IV. ELECTION TO DEFER
Section 4.01. With respect to Incentive Compensation for
each Incentive Year commencing in or after 1986, the
Participant shall be given the opportunity to elect, by
signing and delivering to the Committee a Deferred
Incentive Compensation Agreement, the manner and extent
to which the Participant's Incentive Compensation awarded
in respect to such Incentive Year shall be deferred under
the Plan, the allocation between Periodic Compensation and
Retirement Compensation and, with respect to the
latter, the allocation between Type A Retirement
Compensation and Type B Retirement Compensation.
<PAGE>
Section 4.02. Not less than 10% of Incentive Compensation
awarded for any Incentive Year may be deferred under the
Plan.
Section 4.03. If a Participant elects to allocate a
portion of Incentive Compensation to both Periodic
Compensation and Retirement Compensation, the amount
allocated to each form of Compensation shall be not less
than 10% of the Incentive Compensation awarded for any
Incentive Year.
Section 4.04. To be in effect for an Incentive Year, a
Participant's election pursuant to Section 4.01 must be
completed on or before June 15 of such Incentive Year;
provided, however, that in order to select Type B
Retirement Compensation such election must be completed on
or before December 2 of the immediately preceding
Incentive Year. Only Participants who have elected to
allocate Deferred Incentive Compensation to Retirement
Compensation for the Incentive Year commencing in 1985
(under the Plan as in effect prior to the October 23, 1985
amendment and restatement thereof) shall be entitled to
allocate all or part of such Deferred Incentive
Compensation to Type B Retirement Compensation.
Section 4.05. Once a Participant has made an effective
election under Section 4.01 with respect to the deferral
and allocation of his Incentive Compensation, he may not
thereafter change that election or change the allocation
between Periodic Compensation and Retirement Compensation
or between Type A Retirement Compensation and Type B
Retirement Compensation.
<PAGE>
V. PERIODIC COMPENSATION
Section 5.01. There shall be computed and credited
quarterly to the Participant's Account Treasury Bill
Interest Equivalents on all unpaid Periodic Compensation.
Section 5.02. Commencing in January of the second year
following the Incentive Year for which the Periodic
Compensation was credited to the Participant, the Periodic
Compensation shall be paid to the Participant in five (5)
equal annual installments; and, with each such
installment, there shall be paid to the Participant all
Treasury Bill Interest Equivalents credited to the
Participant and then unpaid.
Section 5.03. Upon Termination of Employment, any unpaid
Periodic Compensation and any unpaid Treasury Bill
Interest Equivalents credited thereon shall be paid to the
Participant, or his Beneficiary, as the case may be,
pursuant to the schedule for payment described in Section
5.02.
VI. RETIREMENT COMPENSATION
A. General.
Section 6.01. As elected by the Participant pursuant to
Section 4.01, the amount of Deferred Incentive
Compensation allocated to Retirement Compensation may be
allocated between Type A Retirement Compensation and,
subject to Sections 6.08 and 6.09, Type B Retirement
Compensation. Amounts allocated as Type A Retirement
Compensation shall be converted into a number of
<PAGE>
Contingent Share Units based upon the average of the Mean
Prices for Eaton Common Shares for the twenty (20) trading
days of the New York Stock Exchange during which Eaton
Common Shares were traded immediately following the end of
the Incentive Year in which the Incentive Compensation so
allocated was earned. Amounts allocated as Type B
Retirement Compensation shall not be converted into
Contingent Share Units but shall instead be credited
with Fixed Rate Interest Equivalents, compounded annually,
until paid.
Retirement Compensation which the Participant elects to
have converted into Contingent Share Units is referred to
herein as "Type A Retirement Compensation" and Retirement
Compensation to be credited with Fixed Rate Interest
Equivalents is referred to herein as "Type B Retirement
Compensation."
B. Provisions Regarding Type A Retirement Compensation.
Section 6.02. On each dividend payment date for Eaton
Common Shares, Dividend Equivalents shall be credited to
the Participant's Account with respect to all Contingent
Share Units then credited to such Account and shall be
converted into an appropriate number of Contingent Share
Units utilizing the procedures set forth in Section 6.01
but at the Mean Price on said dividend payment date.
Section 6.03. In determining the number of Contingent
Share Units to be credited to a Participant, whether by
reason of the conversion of Retirement Compensation to
Contingent Share Units or by reason of the conversion of
Dividend Equivalents to Contingent Share Units, such
number may be expressed in fractions of a Contingent<PAGE>
Share Unit computed to the nearest tenth. The number of
Contingent Share Units credited to a Participant shall be
appropriately adjusted to reflect any change in the
capitalization of Eaton resulting from a stock dividend,
stock split, reorganization, merger, consolidation,
recapitalization, combination, exchange of shares or any
other similar events.
Section 6.04. Upon Retirement or other Termination of
Employment of the Participant or upon any other
distribution of Type A Retirement Compensation, all
Contingent Share Units standing to his credit shall be
converted to an amount equal to the greater of the
following: (a) the product of the average of the Mean
Prices for an Eaton Common Share for the twenty (20)
trading days of the New York Stock Exchange during which
Eaton Common Shares were traded immediately preceding the
date of Retirement or other Termination of Employment or
distribution multiplied by the number of Contingent Share
Units then credited to the Participant's Account; (b) if a
Change in Control of Eaton shall have occurred at any time
within the period of thirty-six (36) months immediately
preceding the Participant's Retirement or
other Termination of Employment, the product of the
highest of the following:
(i) the highest price paid for an Eaton Common
Share in any tender offer in connection with the
Change in Control;
(ii) the price received for an Eaton Common Share
in any merger, consolidation or similar event in
connection with the Change in Control; or
<PAGE>
(iii) the highest price paid for an Eaton Common
Share as reported in any Schedule 13D within the
sixty (60) day period immediately preceding the
Change in Control;
multiplied by the number of Contingent Share Units
credited to the Participant's Account at the time of his
Retirement or other Termination of Employment or
distribution; or (c) the total of all Incentive
Compensation allocated to Type A Retirement Compensation,
as determined prior to conversion to Contingent Share
Units pursuant to Section 6.01 hereof, and Treasury Bill
Interest Equivalents, compounded quarterly, in respect to
such Incentive Compensation for the period from the date
of allocation to the date of Retirement or other
Termination of Employment or distribution. The amount so
determined shall be credited to the Participant's Account
and held for later payment as set forth in Section 6.05.
Section 6.05. After the Retirement or other Termination
of Employment of a Participant or upon any other
distribution of Type A Retirement Compensation, and after
the calculation of the amount to be credited to the
Participant's Account as set forth in Section 6.04, the
Committee shall determine in its sole discretion the
method of payment of the Type A Retirement Compensation,
whether in a lump sum, to be paid within one year after
Retirement or other Termination of Employment or upon the
date of any of other distribution of such Compensation, or
Periodic Installments; provided, however, that in making
such determination the Committee may consider the wishes
and needs of the Participant or his Beneficiary, as the
case may be, with respect to the payment of Type A
Retirement Compensation.
<PAGE>
Section 6.06. There shall be computed on a quarterly
basis and credited to the Participant's Account Treasury
Bill Interest Equivalents on the unpaid amount of Type A
Retirement Compensation determined pursuant to Section
6.04 until such compensation is paid by Eaton.
Section 6.07. Commencing at such time as the Committee
shall determine, but not later than one (1) year following
Retirement or other Termination of Employment, the amount
determined in accordance with Section 6.04 shall be paid
to the Participant or his Beneficiary, as the case may be,
in accordance with the schedule for payment determined
under Section 6.05 and, with each Periodic Installment,
there shall be paid all Treasury Bill Interest Equivalents
credited to the Participant and then unpaid.
C. Provisions Regarding Type B Retirement Compensation.
Section 6.08. A Participant may defer as Type B
Retirement Compensation all or any portion of his future
Incentive Compensation which is earned during a period of
four (4) consecutive Incentive Years or for the period to
his Normal Retirement Date, if earlier; provided, however,
that with respect to any Incentive Year, the amount of
Incentive Compensation a Participant may defer as Type B
Retirement Compensation must be at least $5,000 and no
greater than the maximum amount for such Incentive
Year specified in such Participant's Deferred Incentive
Compensation Agreement; provided, further, that any
Incentive Compensation in excess of such annual maximum
limitation may be deferred as either Periodic Compensation
or Type A Retirement Compensation.
<PAGE>
Section 6.09. Notwithstanding anything herein to the
contrary, Eaton shall be entitled to deny Participants the
opportunity to elect to defer future Incentive
Compensation as Type B Retirement Compensation for any
reason if such Incentive Compensation is not then subject
to an effective deferral election; provided, however, that
any such denial by Eaton of the opportunity to elect
deferrals shall apply to all Participants equally.
Section 6.10.
(a) Following Retirement, all Type B Retirement
Compensation then credited to a Participant's
Account, together with Fixed Rate Interest
Equivalents earned during the period of deferral,
shall be paid to the Participant or his Beneficiary
in fifteen (15) equal annual installments commencing
on the first day of February following the year in
which the Participant attains age 65; provided,
however, that after consideration of the wishes and
needs of the Participant or his Beneficiary, the
Committee may determine in its sole discretion (i)
to commence payment of the installments to any
Participant at an earlier date following Retirement;
(ii) to pay to any Participant the Type B Retirement
Compensation in a lump sum within one year following
Retirement; or (iii) to pay Type B Retirement
Compensation in a lump sum upon any Termination of
Employment by reason of divestiture or closing of a
business unit, subsidiary, plant or facility or to
provide that such Type B Retirement Compensation
shall be paid commencing on a date which is
subsequent to such Termination of Employment but not
later than<PAGE>
the Participant's Normal Retirement Date. For
purposes of the payments under the foregoing clauses
(ii) and (iii), the amount of such lump sum shall be
equal to the then present value of the fifteen (15)
annual payments which otherwise would have been made
as calculated using an interest rate equal to
"Moody's Corporate Bond Yield Average - Monthly
(Average Corporates)" most recently published by
Moody's Investor Services, Inc. (or any successor
thereto) at the time of the calculation.
(b) The rate of each Participant's Fixed Rate Interest
Equivalent, as set forth in his Deferred Incentive
Compensation Agreement, is based on the assumption
that the Participant will defer a specified amount
of Incentive Compensation for four (4) consecutive
years or to his Retirement, if earlier.
Notwithstanding any provisions hereof to the
contrary, upon a Participant's Termination of
Employment, other than for Retirement and except as
provided below in Section 6.10(c) or upon any
payment pursuant to Section 10.02 to a Participant
who is not eligible for Retirement, all Type B
Retirement Compensation then credited to his Account
shall be credited only with Treasury Bill Interest
Equivalents, compounded quarterly, for the actual
period of deferral until paid in lieu of the Fixed
Rate Interest Equivalents otherwise credited to
Type B Retirement Compensation; and payment of the
amount credited to his Account shall be made in
such equal annual installments over a period not to
exceed fifteen (15) years following the
Participant's Termination of Employment or in a<PAGE>
lump sum within one (1) year following such
Termination of Employment, as the Committee shall
determine in its sole discretion.
(c) Notwithstanding anything in Section 6.10(b) to the
contrary, (i) if a Participant's Termination of
Employment occurs within five (5) years after a
Change in Control of Eaton and such Termination of
Employment is by Eaton without Cause or by the
Participant for Good Reason or for Retirement, all
Type B Retirement Compensation then credited to the
Participant's Account shall be credited with the
Fixed Rate Interest Equivalents and held under the
Plan as elected by the Participant in his Deferred
Incentive Compensation Agreement; (ii) if within
five (5) years after a Change in Control of Eaton a
Participant is not permitted to complete the
deferral of Incentive Compensation until the
Participant's Retirement because of any amendment or
termination of the Plan, all Type B Retirement
Compensation then credited to the Participant's
Account shall be credited with the Fixed Rate
Interest Equivalents and held under the Plan as
elected by the Participant in his Deferred Incentive
Compensation Agreement; or (iii) if a Participant's
Termination of Employment is caused by any
divestiture or closing of a business unit,
subsidiary, plant or facility, the Compensation
Committee of the Board may determine in its sole
discretion that all Type B Retirement Compensation
then credited to the Participant's Account shall be
credited with the Fixed Rate Interest Equivalents
until paid as provided under Section 6.10(a).
<PAGE>
VII. AMENDMENT AND TERMINATION
Section 7.01. Eaton fully expects to continue the Plan
but it reserves the right, except as otherwise provided
herein, at any time or from time to time, by action of the
Compensation Committee of the Board, to modify or
amend the Plan, in whole or in part, or to terminate the
Plan, in whole or in part, at any time and for any reason,
including, but not limited to, adverse changes in the
federal tax laws.
Section 7.02. In the event of any termination of the Plan
which results in the Participants being unable to have any
future Incentive Compensation allocated as Type B
Retirement Compensation, the amount of all Type B
Retirement Compensation credited to a Participant's
Account at the date of such Plan termination shall be
converted to Type A Retirement Compensation, effective
retroactively to the date such Retirement Compensation was
allocated pursuant to Section 6.01, and either shall be
paid to the Participant or continue to be held under the
Plan as elected by the Participant in his Deferred
Incentive Compensation Agreement, except for 1985
Incentive Compensation, if any, deferred as Type B
Retirement Compensation which shall continue to be held
under the Plan. Notwithstanding the foregoing, in the
event of a termination of the Plan within five (5) years
after a Change in Control of Eaton, all Type B Retirement
Compensation then credited to a Participant's Account
together with Fixed Rate Interest Equivalents earned
during the period of deferral shall not be converted to
Type A Retirement Compensation but shall be held under the
Plan as elected by the Participant in his Deferred
Incentive Compensation Agreement. No amendment to, or
<PAGE>
termination of, the Plan after a Change in Control of
Eaton shall modify this provision or any provision hereof
relating to a Change in Control of Eaton or the rights of
a Participant in effect under the Plan immediately prior
to such Change in Control of Eaton.
VIII. ADMINISTRATION
Section 8.01. The Plan shall be administered by the
Committee in accordance with rules of general application
for the administration of the Plan as the Committee may,
from time to time, adopt. The Committee shall interpret
the provisions of the Plan where necessary and may adopt
procedures for the administration of the Plan which are
consistent with the provisions of the Plan and the rules
adopted by the Committee.
Section 8.02. Each Participant or Beneficiary must claim
any benefit to which he may be entitled under the Plan by
a written notification to the Committee. If a claim is
denied, it must be denied within a reasonable period of
time in a written notice stating the specific reasons for
the denial.
The claimant may have a review of the denial by the
Committee by filing a written notice with the Committee
within sixty (60) days after the notice of the denial of
his claim.
The written decision by the Committee with respect to the
review must be given within one hundred and twenty (120)
days after receipt of the written request.
<PAGE>
IX. AUTOMATIC LUMP-SUM PAYMENT
Section 9.01. Except as provided below in this Article
IX, upon the date of a Proposed Change in Control, as
defined in Section 9.02 hereof, the Company shall make an
immediate Lump Sum Payment, as defined in Section 9.03
hereof, to each Participant or his Beneficiary. At any
time prior to a Proposed Change in Control, the Board may
decide that the Lump Sum Payment shall not be made, upon a
Proposed Change in Control, because any such payment is
not then advisable, in the Board's judgment, in order to
protect the benefits of the Participants under the Plan.
If the Board makes such a decision, it may thereafter (i)
take no further action, in which case the Lump Sum
Payments will not be made, (ii) reconsider such decision
and decide at a later date (which may be subsequent to a
Proposed Change In Control) to terminate the Plan and make
Lump Sum Payments, (iii) provide funding for the Plan
benefits by depositing funds in trust for such purpose or
(iii) take no action to protect the Plan benefits.
Section 9.02. A Proposed Change in Control shall mean the
first to occur of any of the following events (including
the expiration of the periods specified therein):
(i) twenty days after the commencement of a
tender offer shall be made for the ownership of
securities of the Company representing 25% or more
of the combined voting power of the Company's then
outstanding voting securities (unless such tender
offer shall have been withdrawn);
<PAGE>
(ii) twenty days after the commencement of
solicitation of proxies or consents for a merger or
consolidation with another corporation and as a
result of such merger or consolidation less than
75%, in the Company's view, of the outstanding
voting securities of the surviving or resulting
corporation would be owned in the aggregate by the
former shareholders of the Company, other than the
party and any affiliates (within the meaning of the
Securities Exchange Act of l934 (the "Exchange
Act")) of any party, to such merger or
consolidation, as the same shall have existed
immediately prior to such merger or consolidation;
(iii) upon the date that the Company shall have
entered into an agreement to sell substantially all
of its assets to another corporation which is not a
wholly owned subsidiary of the Company;
(iv) within twenty days after any "person" (as
such term is used in Section 3(a)(9) and l3(d)(3) of
the Exchange Act) becomes the beneficial owner,
directly or indirectly, of securities of the Company
representing l5% or more of the combined voting
power of the Company's then outstanding securities;
or
(v) upon the date that individuals who, at the
beginning of any period of two consecutive years,
constitute the Board of the Company, cease for any
reason to constitute at least 76% percent thereof,
unless the election, or the nomination for election
by the Company's shareholders, of each new director
was approved by a vote of at least two-thirds of
<PAGE>
the directors then still in office who were
directors at the beginning of the period.
For purposes of this Section 9.02, ownership of voting
securities shall take into account and include ownership
as determined by applying the provisions of Rule
l3d-3(d)(l)(i) of the Exchange Act (as then in effect).
Section 9.03. Lump Sum Payment means an amount equal to
the total of the following amounts calculated as of the
date of the Proposed Change in Control:
(i) The amount, if any, of the Participant's
Periodic Compensation then credited to his Account
and accrued and unpaid Treasury Bill Interest
Equivalents thereon; plus
(ii) The amount, if any, of the Participant's
unpaid Type A Retirement Compensation calculated in
accordance with Section 6.04 of the Plan and
assuming for purposes of the conversion calculation
that a Change in Control of Eaton has occurred
within the relevant time period so that Section
6.04(b) is applicable; plus
(iii) The amount, if any, payable as a lump sum in
relation to Type B Retirement Compensation,
calculated in accordance with Section 6.10(a)(ii) of
the Plan, assuming that the Type B Retirement
Compensation would be credited with Fixed Rate
Interest Equivalents from the date of the Proposed
Change in Control until paid over the fifteen-year
period following the date of the Proposed Change in
Control.
<PAGE>
In the event that a Participant or a Participant's
Designated Beneficiary has begun to receive benefit
installment payments under the Plan prior to the Proposed
Change in Control, the amount of such Lump Sum shall be
equal to the present value of the remaining annual
payments which otherwise would have been made calculated
as described in this Section 9.03.
X. MISCELLANEOUS
Section 10.01. Each Participant shall have the right, by
written instruction to the Committee, on a form supplied
by the Committee, to designate one or more primary and
contingent beneficiaries (and the proportion to be paid to
each, if more than one is designated) to receive his
Deferred Incentive Compensation upon his death. Any such
designation shall be revocable by the Participant.
Section 10.02. The Committee may, in its sole discretion,
change the amount of the Periodic Installments or the
number of years over which the Periodic Installments are
to be paid or permit the payment of any Deferred Incentive
Compensation at any date or dates which may be earlier
than the payment date or dates provided under the Plan.
The Committee may consider the needs and desires of the
participant or beneficiary in making this decision. The
determination of the Committee shall be final and
conclusive upon Eaton, the Participant and the
Beneficiary. Any Type B Retirement Compensation paid
pursuant to this Section 10.02 to a Participant who would
then be eligible to terminate his employment for
Retirement shall be credited with the Fixed Rate Interest
Equivalent on the amount so
<PAGE>
paid. Any Type B Retirement Compensation paid to a
Participant who is not then eligible to terminate his
employment for Retirement shall be credited only with the
Treasury Bill Interest Equivalent.
Section 10.03. All payments under the Plan shall be
subject to such taxes (federal, state or local) as may be
due thereon and the determination by the Committee as to
withholding with respect thereto shall be binding upon the
Participant and his Beneficiary.
Section 10.04. If any Participant under the Plan is a
member of the Committee, he shall not participate as a
member of the Committee in any determination under the
Plan relating to his Deferred Incentive Compensation.
Section 10.05. All action of the Committee hereunder may
be taken with or without a meeting. If taken without a
meeting, the action shall be in writing and signed by a
majority of the members of the Committee and if taken with
a meeting, a majority of the Committee shall constitute a
quorum for any such action.
Section 10.06. Subject to any federal statute to the
contrary, no right or benefit under the Plan shall be
subject to anticipation, alienation, sale, assignment,
pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber, or
charge any right or benefit under the Plan shall be void.
No right or benefit hereunder shall in any manner be
liable for or subject to the debts, contracts,
liabilities, or torts of the person entitled to such
benefits. If the Participant or Beneficiary shall become
bankrupt, or attempt to anticipate, alienate, sell,
<PAGE>
assign, pledge, encumber, or charge any right hereunder,
then such right or benefit shall, in the discretion of the
Company, cease and terminate, and in such event, the
Company may hold or apply the same or any part thereof for
the benefit of the Participant or his spouse,
children, or other dependents, or any of them, in such
manner and in such amounts and proportions as the Company
may deem proper.
Section 10.07. The obligations of Eaton to make payments
hereunder shall constitute a liability of Eaton to the
Participant. Such payments shall be made from the general
funds of the Company, and Eaton shall not be required to
establish or maintain any special or separate fund, or
purchase or acquire life insurance on a Participant's
life, or otherwise to segregate assets to assure that such
payments shall be made, and neither a Participant nor
Beneficiary shall have any interest in any particular
asset of Eaton by reason of its obligations hereunder.
Nothing contained in the Plan shall create or be construed
as creating a trust of any kind or any other fiduciary
relationship between Eaton and a Participant or any other
person.
Section 10.08. The Plan shall not be deemed to constitute
a contract of employment between Eaton and a Participant.
Neither shall the execution of this Plan nor any action
taken by Eaton pursuant to this Plan be held or construed
to confer on a Participant any legal right to be continued
as an employee of Eaton, in an executive position or in
any other capacity with Eaton whatsoever.
<PAGE>
Section 10.09. Obligations incurred by Eaton pursuant to
this Plan shall be binding upon and inure to the benefit
of Eaton, its successors and assigns, and the Participant
or his Beneficiary.
Section 10.10. This Plan shall be construed and governed
in accordance with the law of the State of Ohio.
Section 10.11. The masculine gender, where appearing in
the Plan, shall be deemed to include the feminine gender,
and the singular may include the plural, unless the
context clearly indicates to the contrary.
Section 10.12. All headings used in the Plan are for
convenience of reference only and are not part of the
substance of the Plan.
Page 1
<TABLE>
<CAPTION> Eaton Corporation
1993 Annual Report on Form 10-K
Item 14(c)
Exhibit 11
Computations of Net Income per Common Share
Year ended December 31
----------------------------------
(Millions of dollars except for per share amounts) 1993 1992 1991
<S> ---- ---- ----
Average number of Common Shares outstanding <C> <C> <C>
(in millions) 69.8 68.9 68.0
Income before extraordinary item and cumulative effect of
accounting changes $ 180 $ 140 $ 74
Per share amount 2.57 2.03 1.09
====== ====== ======
Extraordinary item $ (7)
Per share amount (.10)
======
Cumulative effect of accounting changes
Postretirement benefits other than pensions $ (274)
Per share amount (3.97)
======
Income taxes $ 6
Per share amount .09
======
Net income (loss) $ 173 $ (128) $ 74
Per share amount 2.47 (1.85) 1.09
====== ====== ======
</TABLE>
<TABLE>
<CAPTION> Page 1
Eaton Corporation
1993 Annual Report on Form 10-K
Item 14(c)
Exhibit 21
Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's subsidiaries,
the state or country in which each was organized, and the percentage of voting
securities owned by Eaton or another Eaton subsidiary as of December 31, 1993
are as follows:
<S> Where Percentage of voting securities owned
Consolidated subsidiaries (A) organized (by Eaton unless otherwise indicated)
- ------------------------------- ---------- --------------------------------------
<C> <C>
American Nucleonics Corporation California 100% AIL Systems Inc.
AIL Systems Inc. Delaware 95.389% AIL Systems Holding Company
BAC Investments Ltd. Delaware 100%
Eaton Administration Corporation Delaware 100%
Eaton ESC Holding Company Delaware 100%
Eaton International Corporation Delaware 100%
Eaton USEV Holding Company Delaware 100%
ERC Corporation Delaware 100% Eaton Leasing Corporation
ERC II Corporation Delaware 100% Eaton Leasing Corporation
AIL Systems Holding Company Nevada 100%
Eaton Airflex Division, Inc. Ohio 100%
Eaton Consulting Services Corporation Ohio 100%
Eaton IDT, Inc. Ohio 100%
Eaton-Kenway, Inc. Ohio 100%
Eaton Leasing Corporation Ohio 100%
Eaton Properties Corporation Ohio 100% Eaton Leasing Corporation
Eaton Truck Systems, Inc. Ohio 100%
Eaton Utah Corporation Ohio 100% Eaton Leasing Corporation
Eaton Westlake Corporation Ohio 100% Eaton Leasing Corporation
U. S. Engine Valve (Partnership) Ohio 70% Eaton USEV Holding Company
Kenway Handling Systems, Inc. New York 100% Eaton-Kenway, Inc.
Eaton I.C.S.A. Argentina 100%
Eaton Pty. Ltd. Australia 100%
Eaton Controls Pty. Limited Australia 99.99996% Eaton International Corporation
.00004% Eaton Pty. Ltd.
Eaton Specialty Controls Pty. Ltd. Australia 99.99996% Eaton Corporation
.00004% Eaton International Corporation
Eaton Holding Limited Barbados 100% Eaton Yale Ltd.
Eaton Services Limited Barbados 100% Eaton Holding Limited
Saturn Insurance Company Ltd. Bermuda
Islands 100%
Equipamentos Eaton Ltda. Brazil 98.1% BAC Investments Ltd.
1.9%
Eaton Mercantil Exportadora Ltda. Brazil 100% Equipamentos Eaton Ltda.
Eaton ETN Offshore Ltd. Canada 100% Common Shares - Eaton Corporation
100% Preferred Shares - Eaton Int'l. Corp.
Eaton Yale Ltd. Canada 100% Eaton ETN Offshore Ltd.
Eaton Controles Industriales S.A. Costa Rica 97.53% Eaton International Corporation
Eaton S.A. France 100%
Eaton Technologies S.A. France 55%
45% Eaton International Corporation
Eaton Controls S.A. France 100% Eaton Technologies S.A.
Kirsten France S.A. France 100% Kirsten Verwaltungs G.m.b.H.
Eaton G.m.b.H. Germany 100%
Page 2
Where Percentage of voting securities owned
Consolidated subsidiaries (A) organized (by Eaton unless otherwise indicated)
- ----------------------------------- --------- --------------------------------------
Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H.
Eaton Controls Verwaltungs G.m.b.H. Germany 100%
Eaton Controls G.m.b.H. & Co. K.G.
(Partnership) Germany 99.5% Eaton Yale Ltd.
.5% Eaton Controls Verwaltungs G.m.b.H.
Kirsten Verwaltungs G.m.b.H. Germany 100% Eaton Controls G.m.b.H. & Co. K.G.
Eaton Technologies Limited Hong Kong 100% Eaton International Corporation
Eaton S.p.A. Italy 99.9053%
.0947% Eaton B.V.
Eaton EST S.p.A. Italy 99%
1% Eaton S.p.A.
Eaton Automotive S.p.A. Italy 99.999% Eaton S.p.A.
.001% Eaton EST S.p.A.
Eaton Controls S.p.A. Italy 99.9998% Eaton S.p.A.
.0002% Eaton EST S.p.A.
Eaton Commerciale S.r.l. Italy 55% Eaton Automotive S.p.A.
Eaton Finance S.p.A. Italy 50% Eaton EST S.p.A.
50% Eaton Controls S.p.A.
Eaton Japan Co., Ltd. Japan 100%
Eaton International Inc. Liberia 100%
Condura, S.A. de C.V. Mexico 100% Eaton International Corporation
Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton International Corporation
Eaton Manufacturera S.A. de C.V. Mexico 53.9471%
Eaton s.a.m. Monaco 100%
Eaton B.V. Netherlands 100%
Eaton Finance N.V. Netherlands
Antilles 55% Eaton International Inc.
45%
Eaton Electrical Components Limited New Zealand 99.98%
.02% Eaton International Inc.
Eaton Services Pte., Ltd. Singapore 100% Eaton International Corporation
Eaton Limited South Korea 100%
Eaton S.A. Spain 50.14% Eaton B.V.
49.29%
Eaton Ros S.A. Spain 66.025% Kirsten Verwaltungs G.m.b.H.
Productos Eaton Livia S.A. Spain 52% Eaton B.V.
28% Eaton S.A. (Spain)
Eaton Limited Taiwan 80.58% Eaton International Corporation
19.42%
Eaton Credit Limited United Kingdom 100% Eaton Limited (U.K.)
Eaton Limited United Kingdom 100%
Foreign Sales Corporation U.S. Virgin
Islands 100%
(A) Other Eaton subsidiaries, most of which are inactive, are not listed above. They are treated as consolidated
subsidiaries and, if considered in the aggregate as a single subsidiary, they would not constitute a significant
subsidiary.
</TABLE>
Page 1
Eaton Corporation
1993 Annual Report on Form 10-K
Item 14(c)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated February 1, 1994,
with respect to the consolidated financial statements and schedules of
Eaton Corporation included in this Form 10-K for the year ended December
31, 1993:
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 - Form S-8 Registration July 15, 1993
Statement
33-49779 Eaton Limited U.K. Savings-Related Share
Option Scheme (1191) - Form S-8 July 16, 1993
Registration Statement
33-48851 Eaton Corporation $200,000,000 of Debt
Securities, Debt Warrants and Preferred July 30, 1992
Shares - Form S-3 Registration Statement
33-15582 Eaton Limited U.K. Savings-Related Share
Option Scheme - Form S-8 Registration July 7, 1987
Statement
33-2688 Eaton Corporation Shareholder Dividend
Reinvestment Plan (Including Post Effective Jan. 15, 1986
Amendment No. 1 filed February 19, 1986)
2-77090 Eaton Corporation Strategic Incentive and
Option Plan - Form S-8 Registration May 10, 1982
Statement
33-52333 Eaton Corporation $600,000,000 of Debt
Securities, Debt Warrants, Common Shares Feb. 18, 1994
and Preferred Shares - Form S-3 Registration
Statement
Ernst & Young
Cleveland, Ohio
March 28, 1994
Page 1
Eaton Corporation
1993 Annual Report on Form 10-K
Item 14(c)
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed
below has made, constituted and appointed, and by this instrument does
make, constitute and appoint, Stephen R. Hardis, Ronald L. Leach or
William J. Nowak his or her true and lawful attorney, for him or her and
in his or her name, place and stead to subscribe, as attorney-in-fact, his
or her signature as Director or Officer or both, as the case may be, of
Eaton Corporation, an Ohio corporation (the "Corporation"), to the Annual
Report on Form 10-K for the year ended December 31, 1993 pursuant to the
Securities Exchange Act of 1934, and to any and all amendments to that
Annual Report on Form 10-K, giving and granting unto each such
attorney-in-fact full power and authority to do and perform every act and
thing whatsoever necessary to be done in the premises, as fully as he or
she might or could do if personally present, hereby ratifying and
confirming all that each such attorney-in-fact shall lawfully do or cause
to be done by virtue hereof.
This Power of Attorney shall not apply to any Annual Report on Form
10-K or amendment thereto filed after December 31, 1994.
IN WITNESS WHEREOF, this Power of Attorney has been signed this ___ day
of March 1994.
/s/ William E. Butler
----------------------------
William E. Butler
Chairman and Chief Executive
Officer; Principal
Executive Officer; Director
/s/ John S. Rodewig /s/ Charles E. Hugel
---------------------------- --------------------
John S. Rodewig Charles E. Hugel
President; Chief Operating Director
Officer - Vehicle Components;
Director
/s/ Alexander M. Cutler /s/ John R. Miller
---------------------------- ---------------------
Alexander M. Cutler John R. Miller
Executive Vice President; Director
Chief Operating Officer -
Controls; Director
/s/ Billie K. Rawot /s/ Furman C. Moseley
---------------------------- ----------------------
Billie K. Rawot Furman C. Moseley
Vice President and Controller Director
/s/ Neil A. Armstrong /s/ Hooper G. Pattillo
---------------------------- ------------------------
Neil A. Armstrong Hooper G. Pattilo
Director Director
/s/ Phyllis B. Davis /s/ A. William Reynolds
---------------------------- ------------------------
Phyllis B. Davis A. William Reynolds
Director Director
/s/ Arthur Dole II /s/ Gary L. Tooker
---------------------------- ------------------------
Arthur Dole III Gary L. Tooker
Director Director
