Page 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1995
-------------
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)
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 twelve
months and (2) has been subject to such filing requirements for
the past 90 days. Yes X
---
There were 77.9 million Common Shares outstanding as of
June 30, 1995.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Eaton Corporation
<CAPTION>
Condensed Consolidated Balance Sheets
June 30, December 31,
(Millions) 1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 9 $ 18
Short-term investments 18 23
Accounts receivable 1,053 889
Inventories 773 698
Deferred income taxes and
other current assets 237 218
------ ------
2,090 1,846
Property, plant and equipment 1,542 1,469
Excess of cost over net assets
of businesses acquired 923 850
Deferred income taxes and
other assets 526 517
------ ------
$5,081 $4,682
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 40 $ 36
Accounts payable and other
current liabilities 1,109 1,066
------ ------
1,149 1,102
Long-term debt 1,181 1,053
Postretirement benefits other
than pensions 575 573
Other long-term liabilities 318 274
Shareholders' equity 1,858 1,680
------ ------
$5,081 $4,682
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Income
Three Months Ended Six Months Ended
June 30 June 30
------------------- -----------------
(Millions except for per share data) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,758 $ 1,545 $ 3,489 $ 2,916
Costs and expenses
Cost of products sold 1,289 1,116 2,554 2,114
Selling and administrative expense 238 229 470 429
Research and development expense 58 55 115 105
------- ------- ------- -------
1,585 1,400 3,139 2,648
------- ------- ------- -------
Income from operations 173 145 350 268
Other income and (expense)
Interest expense (23) (21) (43) (41)
Interest income 2 1 3 3
Other income--net 12 17 2
------- ------- ------- -------
(9) (20) (23) (36)
------- ------- ------- -------
Income before income taxes 164 125 327 232
Income taxes 54 39 109 72
------- ------- ------- -------
Net income $ 110 $ 86 $ 218 $ 160
======= ======= ======= =======
Per Common Share
Net income $ 1.41 $ 1.13 $ 2.79 $ 2.15
Cash dividends paid $ .40 $ .30 $ .70 $ .60
Average number of Common Shares outstanding 77.9 76.3 77.9 74.5
See accompanying notes.
</TABLE>
<PAGE>
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<TABLE>
Eaton Corporation
<CAPTION>
Condensed Statements of Consolidated Cash Flows
Six Months Ended
June 30
------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Operating activities
Net income $ 218 $ 160
Adjustments to reconcile to net cash provided by
operating activities
Depreciation and amortization 137 125
Changes in operating assets and liabilities,
excluding acquisitions of businesses (200) (112)
Other--net 33 56
------ ------
Net cash provided by operating activities 188 229
Investing activities
Acquisitions of businesses, less cash acquired (112) (1,097)
Expenditures for property, plant and equipment (144) (90)
Net change in short-term investments 2 246
Other--net 14 9
------ ------
Net cash used in investing activities (240) (932)
Financing activities
Borrowings with original maturities of more than
three months
Proceeds 292 581
Payments (64) (263)
Borrowings with original maturities of less than
three months - net (123) 142
Proceeds from sale of Common Shares 252
Proceeds from exercise of stock options 7 17
Cash dividends paid (55) (45)
Purchase of Common Shares (14)
------ ------
Net cash provided by financing activities 43 684
------ ------
Decrease in cash (9) (19)
Cash at beginning of year 18 32
------ ------
Cash at end of period $ 9 $ 13
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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The following notes are included in accordance with the requirements
of Regulation S-X and Form 10-Q:
Preparation of Financial Statements
-----------------------------------
The condensed consolidated financial statements of Eaton Corporation
(Eaton or the Company) are unaudited. However, in the opinion of
management, all adjustments have been made which are necessary for a
fair presentation of financial position, results of operations and
cash flows for the stated periods. These adjustments are of a normal
recurring nature. These financial statements should be read in
conjunction with the consolidated financial statements and related
notes included in the Company's 1994 Annual Report on Form 10-K.
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, comprised solely of
options for Common Shares, is not material.
Inventories
-----------
June 30, December 31,
(Millions) 1995 1994
---- ----
Raw materials and supplies $284 $213
Work in process and
finished goods 584 574
---- ----
Gross inventories at FIFO 868 787
Excess of current cost
over LIFO cost (95) (89)
---- ----
Net inventories at LIFO $773 $698
==== ====
Debt
----
In April 1995, the Company entered into a $200 million 364-day
revolving credit agreement to provide funds for working capital and
general corporate purposes.
In June 1995, the Company issued $150 million of 6-1/2% debentures
due 2025. The holder of each debenture may elect to have such
debenture repaid on June 1, 2005. The net proceeds from the sale of
the debentures were used to refinance outstanding commercial paper.
Acquisitions of Businesses
--------------------------
Effective May 1, 1995, in two separate transactions, the Company
acquired the IKU Group of The Netherlands and the Emwest electrical
switchgear and controls business from Email Ltd. of Australia. These
two acquisitions had combined sales of approximately $110 million in
1994. The purchase price for these and other smaller investments
made in 1995 was $112 million.
The IKU Group is a leading supplier of electric mirror actuators for
automotive manufacturers. IKU's patented designs are used by every
<PAGE>
Page 6
major mirror manufacturer in the United States, Europe and Korea.
The acquisition complements Eaton's automotive controls operations,
provides expanded capabilities in the high-growth actuator/sensor
product line, and strengthens the Company's position as a worldwide
automotive controls supplier.
Emwest manufactures and distributes a wide range of electrical
equipment including circuit breakers, panelboards, contactors and
switchgear in the Pacific Region. This acquisition is an important
part of the international growth strategy of the Company's
Cutler-Hammer business. In addition to providing the Company with an
additional presence in the emerging Pacific Region markets, the
acquisition provides the Company with a platform from which the full
range of Cutler-Hammer products can be sold to original equipment
manufacturers and distributors in that region.
Preferred Share Purchase Rights
-------------------------------
In June 1995, the Company declared a dividend of one Preferred Share
Purchase Right (Right) for each outstanding Common Share. The
dividend was paid on July 12, 1995 to shareholders of record on that
date. Each Right entitles shareholders to purchase one one-hundredth
of a share of a new series of preferred stock at an exercise price of
$250. The Rights become exercisable only if a person or group
acquires, or announces a tender offer to acquire, 20% or more of the
Company's Common Shares. Prior to the acquisition of 20% or more of
its Common Shares, the Company has an option to redeem each Right for
one cent. The Company is also authorized to reduce the 20% threshold
for triggering the Rights to not less than 10%. The Rights expire on
July 12, 2005.
If a person or group acquires 20% or more of the Company's
outstanding Common Shares, each Right entitles its holder to
purchase, at the then-current exercise price, a number of the
Company's Common Shares having a market value of twice that price.
In addition, if the Company is acquired in a merger or other business
combination after an acquiring company has acquired 20% or more of
the Company's Common Shares, each Right entitles its holder to
purchase, at the Right's then-current exercise price, a number of the
acquiring company's common shares having a market value of twice the
exercise price. The acquiring person is not entitled to exercise
these Rights.
Following the acquisition of 20% or more of the Company's Common
Shares and prior to acquisition of 50% or more of the Common Shares,
the Company may exchange the Rights at an exchange ratio of one
Common Share (or one one-hundredth of a share of the new series of
participating preferred stock) per Right. The acquiring person is
not entitled to receive any shares in this exchange.
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
<PAGE>
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States and making these funds available to Eaton or its subsidiaries.
All of the issued and outstanding Common Shares of Eaton Offshore are
owned directly or indirectly by Eaton. Eaton Offshore owns all of
the issued and outstanding common stock of a number of subsidiaries.
These subsidiaries are engaged principally in the manufacture of
truck transmissions, fasteners, leaf spring assemblies, engine
components, and electrical and electronic controls. Effective April
1, 1995, majority ownership of net assets of certain Brazilian
subsidiaries was transferred to a subsidiary of Eaton Offshore from
Eaton. Summary financial information for Eaton Offshore and its
consolidated subsidiaries is summarized as follows (in millions):
Six Months Ended
June 30
-----------------
1995 1994
---- ----
Income statement data
Net sales $324 $227
Gross margin 60 42
Net income 26 8
June 30, December 31,
1995 1994
---- ----
Balance sheet data
Current assets $337 $237
Noncurrent assets 141 122
Net intercompany payables 75 4
Current liabilities 96 83
Noncurrent liabilities 114 107
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
---------------------
Despite the flattening growth rate of the United States economy in
the second quarter of 1995, strong sales growth continued and net
sales, net income and net income per Common Share for the second
quarter and first half of 1995 set all-time records. These results
extend the positive trend of record results and double digit growth
to six consecutive quarters. The results reflect strong business
performance and continuous improvements in quality and productivity.
Net sales of $1.8 billion in the second quarter and $3.5 billion in
the first half of 1995 reflect increases of 14% and 20%,
respectively, over the same periods in 1994. The improvement in
sales was broadly based with the increase primarily attributable to
higher unit volumes in both the Vehicle Components and Electrical and
Electronic Controls segments. Each product class and geographic
region in these segments experienced sales growth in comparison to
the same periods in 1994. The stronger sales reflect positive
contributions from the Company's existing operations, geographic
expansion, 1994 and 1995 business acquisitions, as well as improving
economic conditions worldwide.
<PAGE>
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Income from operations increased to $173 million and $350 million in
the second quarter and first half of 1995, respectively, (10% return
on sales for both periods) from $145 million and $268 million in the
comparable periods in 1994 (9% return on sales for both periods).
This improvement was primarily a result of the higher sales volume
described above, as well as benefits from ongoing cost reduction
efforts and productivity improvement programs. These improvements
have enabled the Company to maintain its margins while pricing
products competitively in value-driven world markets. Although
profits do not meet expectations in Europe, the Company's European
businesses should benefit substantially from ongoing cost reduction
efforts and productivity improvement programs, and a significant
turnaround in the economic environment.
Other income--net of $12 million for the second quarter and $17
million for the first half of 1995 increased $12 million and $15
million, respectively, from the comparable periods in 1994 primarily
due to reduced foreign currency exchange losses and a payment
received related to a dividend from a foreign subsidiary.
Net income of $110 million, or $1.41 per Common Share, for the second
quarter of 1995 increased 28% and 25%, respectively, over the
comparable period in 1994. For the first half of 1995, net income
was $218 million, or $2.79 per Common Share, reflecting increases of
36% and 30% when compared to the same period in 1994. These
increases are largely due to increased sales as well as other
improvements in operating results previously discussed. The smaller
percentage increases for net income per Common Share compared to net
income resulted from additional shares outstanding.
Results of the Company's Vehicle Components segment are summarized as
follows (in millions):
Three Months Ended
June 30
------------------
1995 1994
---- ----
Net sales
Truck Components $516 $445
Passenger Car Components 179 162
Off-Highway Vehicle
Components 118 103
---- ----
$813 $710
==== ====
Operating profit $111 $ 88
==== ====
<PAGE>
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Six Months Ended
June 30
------------------
1995 1994
---- ----
Net sales
Truck Components $1,046 $ 875
Passenger Car Components 353 310
Off-Highway Vehicle
Components 245 203
------ ------
$1,644 $1,388
====== ======
Operating profit $ 234 $ 177
====== ======
The Vehicle Components segment continued to experience significant
growth in sales, which rose 15% in the second quarter and 18% in the
first half of 1995 over the same periods of 1994. Although the
increase in sales was driven by unprecedented levels of production of
heavy trucks in North America, each of the three product classes in
this segment reported sales increases ranging from 10% to 16% for the
second quarter and 14% to 21% for the first half of 1995.
Although orders for heavy trucks in North America declined in the
second quarter of 1995 compared to the first quarter of 1995,
backlog, which is at 207,000 units at the end of the second quarter
1995, remains very high. This recent decline in orders represents an
order correction with no significant market softening expected to be
seen until 1996. The Company anticipates that production levels for
1995 will equal or exceed the record 225,000 units in 1994; however,
there are indications of modest declines in production levels
expected towards the end of the second half of 1995. Sales of the
Company's Passenger Car Components rose in the second quarter 1995
from the year-ago quarter despite a 4% decrease in North American
production of passenger cars. Additionally, sales of Off-Highway
Vehicle Components continue to remain strong as a result of the
demand for hydraulic components from the agricultural, construction
and industrial markets.
Operating profit for the Vehicle Components segment was strong,
rising 26% and 32% for the second quarter and first half of 1995,
respectively, over the comparable periods of 1994. These profits
reflect a 14% return on sales for both periods (12% and 13% in 1994,
respectively). The improvement in profits was primarily attributable
to improved sales volume, ongoing cost reduction efforts and
productivity improvement programs. Profit margins in the Truck
Components product class are improving as the Company's manufacturing
facilities adjust to higher demand levels.
<PAGE>
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Results of the Company's Electrical and Electronic Controls segment
are summarized as follows (in millions):
Three Months Ended
June 30
------------------
1995 1994
---- ----
Net sales
Industrial and Commercial
Controls $496 $477
Automotive and Appliance
Controls 266 210
Specialty Controls 153 116
---- ----
$915 $803
==== ====
Operating profit $ 80 $ 64
==== ====
Six Months Ended
June 30
------------------
1995 1994
---- ----
Net sales
Industrial and Commercial
Controls $ 967 $ 841
Automotive and Appliance
Controls 539 410
Specialty Controls 281 217
------ ------
$1,787 $1,468
====== ======
Operating profit $ 150 $ 106
====== ======
The Electrical and Electronic Controls segment continued to
experience significant growth in sales, which rose 14% in the second
quarter and 22% in the first half of 1995 over the same periods in
1994. Each of the three product classes in this segment reported
sales increases ranging from 4% to 32% for the second quarter and 15%
to 31% for the first half of 1995. Sales of the Industrial and
Commercial Controls product class for the first half of 1995 reflects
six months of sales from the former Westinghouse Distribution and
Controls Business Unit operations (DCBU); the same period in 1994
only reflects five months of sales as this business was acquired on
January 31, 1994.
Sales of the Company's Cutler-Hammer products, included in the
Industrial and Commercial Controls product class, were moderated by a
slowdown in United States residential construction from the levels of
the prior year. However, the Company is anticipating increased
residential construction as the effect of lower long-term interest
rates takes hold. Sales in the industrial control and
non-residential construction markets remain strong and this trend is
expected to continue. Sales from businesses acquired in niche
acquisitions in 1994 and 1995 that complemented existing operations
<PAGE>
Page 11
in the Automotive and Appliance Controls product class offset the
effect the slowdown of residential construction has had on appliance
controls. The market for the Company's semiconductor equipment is
strong, nearly doubling on a year-to-year basis, and contributed to
the sales increase in the Specialty Controls product class. The
market for ion implanters has surged as semiconductor manufacturers
have geared up to meet increased demand. The Company's new
high-energy semiconductor equipment product line, introduced last
year, has already captured more than half of the available market.
The Company's worldwide semiconductor equipment sales, including its
joint venture in Japan, now exceed half a billion dollars annually.
Operating profit for the Electrical and Electronic Controls segment
was up 25% in the second quarter and 42% for the first half of 1995
over the same periods in 1994. This increase reflects a 9% and 8%
return on sales for the second quarter and first half of 1995,
respectively, in comparison to 8% and 7% for the same periods in
1994. The improvement in profits resulted from higher sales volume,
including the contributions from acquired businesses, and benefits
from ongoing cost reduction efforts and productivity improvement
programs.
Results of the Company's Defense Systems segment are summarized as
follows (in millions):
Three Months Ended
June 30
------------------
1995 1994
---- ----
Net sales $ 30 $ 32
Operating loss (2)
Six Months Ended
June 30
------------------
1995 1994
---- ----
Net sales $ 58 $ 60
Operating loss (1) (2)
Eaton's long-term goal of building sustainable earnings growth
throughout the economic cycle is being accomplished through the
development of new products, expansion into global markets and
acquisition of businesses and product lines.
The Company's investments in internal product development are being
used to make mechanical products "smart" by applying electronics, and
to develop assemblies and subsystems instead of components. In 1995,
research and development spending is expected to increase to $230
million, representing a 50% increase over the levels of two years
ago. In addition, the Company's ongoing investment program under
long-range goals to achieve improvements in product quality,
manufacturing productivity and business growth has led Eaton to plan
record capital spending in 1995, nearly $350 million. In the past
five years, the Company has spent more than $1 billion on capital
<PAGE>
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expenditures, with the vast majority (70%) towards projects related
to growth, cost reduction and tooling.
The Company continues to be active in pursuing growth through
acquisitions. Last year's acquisition of DCBU tripled the size of
Eaton's Cutler-Hammer business. Over the past ten years, the Company
has acquired 29 companies or product lines to strengthen its
businesses and assure their world-class competitiveness. Each of the
Company's major business lines is now a leader in the market it
serves. The Company is redoubling its efforts to expand in Latin
America and the Pacific Region, areas expected to have the highest
growth rates for the foreseeable future. Eaton intends to leverage
its strong established presence in North America and Europe to these
less developed regions. Recent examples of this expansion are the
acquisitions of Mallory Controles Ltda. in Brazil in the fourth
quarter of 1994 and Emwest in the second quarter of 1995.
Changes in Financial Condition
------------------------------
The Company's financial condition remained strong during the first
half of 1995. Net working capital increased to $941 million at June
30 from $744 million at the end of 1994 and the current ratio rose to
1.8 from 1.7 at those dates, respectively.
Improved sales primarily caused the $164 million increase in accounts
receivable at June 30, 1995 from the end of 1994. The acquisitions
of the IKU Group and the electrical switchgear and controls business
of Emwest were the principal cause of the increase in excess of cost
over net assets of businesses acquired. These acquisitions were also
the principal cause for the $132 million increase of total debt,
consisting of short-term, long-term and current portion of long-term
debt, at June 30, 1995 from year-end 1994.
As a result of the Company's strong balance sheet and cash flow from
operations and the strength of its markets, the quarterly dividend
was raised from 30 cents to 40 cents, effective with the second
quarter dividend. This represents a 33% increase and is the second
increase in less than two years. The Company has paid dividends on
Common Shares annually since 1923. In addition, a dividend of one
Preferred Share Purchase Right on each outstanding Common Share was
declared as discussed under "Preferred Share Purchase Rights" in this
report.
Net cash provided by operating activities was $181 million for the
first half of 1995 compared to $229 million for the first half of
1994. The improvement in cash flow resulting from increased net
income was more than offset by cash requirements to fund increased
working capital, primarily the substantial increase in accounts
receivable caused by the record level of sales reported in the first
half of 1995. Net cash provided by operating activities in the first
half of 1995, supplemented by commercial paper and other borrowings,
was used to fund the purchase price of business acquisitions, capital
expenditures, cash dividends and the repayment of debt.
Recent actions by the Company to maximize shareholder value include
the share repurchase program, which began in the first quarter of
1995 and continued during the second quarter of 1995, the 33%
quarterly dividend increase and the new Preferred Share Purchase
Rights Plan.
<PAGE>
Page 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
During the three months ended June 30, 1995, the following
reports on Form 8-K were filed by the Company:
Date of Report Items Reported Description
-------------- -------------- -----------
June 7, 1995 5 and 7 Underwriting Agreement
dated June 5, 1995 for
the issuance of $150
million of 6-1/2%
Debentures due June 1,
2025 and the computation
of the ratios of earnings
to fixed charges.
June 28, 1995 5 and 7 Rights Agreement dated
June 28, 1995 setting
forth the terms of the
Series C Participating
Preferred Stock, form of
Rights Certificate and
summary of Rights to
Purchase Preferred
Shares.
<PAGE>
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Signature
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Date: August 7, 1995 /s/ Stephen R. Hardis
----------------------------
Stephen R. Hardis
Vice Chairman and Chief
Financial and Administrative
Officer; Principal Financial
Officer
<PAGE>
Page 1
EATON CORPORATION
EXHIBIT INDEX
Regulation S-K,
Item 601 - Exhibit
Reference Number Exhibit
---------------- -------
4 Pursuant to Regulation S-K
Item 601 (b)(4), the Company
agrees to furnish to the
Commission, upon request, a copy
of the instruments defining
the rights of holders of long-term
debt of the Company and its
subsidiaries.
10 Eaton 1995 Stock Plan filed as Exhibit A
to the Company's 1995 Proxy Statement is
hereby incorporated by reference.
10 Eaton Incentive Compensation Deferral
Plan filed as Exhibit B to the Company's
1995 Proxy Statement is hereby
incorporated herein by reference.
11 Computations of net income per
Common Share can be determined from
the Statements of Consolidated Income
on page 3 and the footnote "Net Income
per Common Share" on page 5.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and the Statements of Consolidated Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 9
<SECURITIES> 18
<RECEIVABLES> 1,069
<ALLOWANCES> 16
<INVENTORY> 773
<CURRENT-ASSETS> 2,090
<PP&E> 3,049
<DEPRECIATION> 1,507
<TOTAL-ASSETS> 5,081
<CURRENT-LIABILITIES> 1,149
<BONDS> 1,181
<COMMON> 39
0
0
<OTHER-SE> 1,819
<TOTAL-LIABILITY-AND-EQUITY> 5,081
<SALES> 3,489
<TOTAL-REVENUES> 3,489
<CGS> 2,554
<TOTAL-COSTS> 3,139
<OTHER-EXPENSES> (20)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 327
<INCOME-TAX> 109
<INCOME-CONTINUING> 218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218
<EPS-PRIMARY> 2.79
<EPS-DILUTED> 2.74
</TABLE>
