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 September 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 77.6 million Common Shares outstanding as of
September 30, 1995.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Eaton Corporation
<CAPTION>
Condensed Consolidated Balance Sheets
September 30, December 31,
(Millions) 1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 14 $ 18
Short-term investments 25 23
Accounts receivable 1,032 889
Inventories 756 698
Deferred income taxes and
other current assets 240 218
------ ------
2,067 1,846
Property, plant and equipment 1,561 1,469
Excess of cost over net assets
of businesses acquired 905 850
Deferred income taxes and
other assets 532 517
------ ------
$5,065 $4,682
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 39 $ 36
Accounts payable and other
current liabilities 1,072 1,066
------ ------
1,111 1,102
Long-term debt 1,147 1,053
Postretirement benefits other
than pensions 578 573
Other liabilities 318 274
Shareholders' equity 1,911 1,680
------ ------
$5,065 $4,682
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Income
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
(Millions except for per share data) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,672 $1,531 $5,161 $4,447
Costs and expenses
Cost of products sold 1,243 1,120 3,797 3,234
Selling and administrative expense 226 223 696 652
Research and development expense 53 52 168 157
------ ------ ------ ------
1,522 1,395 4,661 4,043
------ ------ ------ ------
Income from operations 150 136 500 404
Other income and (expense)
Interest expense (22) (23) (65) (64)
Interest income 1 2 4 5
Other income--net 9 11 26 13
------ ------ ------ ------
(12) (10) (35) (46)
------ ------ ------ ------
Income before income taxes 138 126 465 358
Income taxes 47 42 156 114
------ ------ ------ ------
Net income $ 91 $ 84 $ 309 $ 244
====== ====== ====== ======
Per Common Share
Net income $ 1.18 $ 1.10 $ 3.97 $ 3.25
Cash dividends paid $ .40 $ .30 $ 1.10 $ .90
Average number of Common Shares
outstanding 77.7 76.3 77.8 75.0
See accompanying notes.
</TABLE>
<PAGE>
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<TABLE>
Eaton Corporation
<CAPTION>
Condensed Statements of Consolidated Cash Flows
Nine Months Ended
September 30
-------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Operating activities
Net income $ 309 $ 244
Adjustments to reconcile to net cash provided by
operating activities
Depreciation and amortization 207 187
Changes in operating assets and liabilities,
excluding acquisitions and divestitures of
businesses (193) (145)
Other--net 24 56
------ ------
Net cash provided by operating activities 347 342
Investing activities
Acquisitions of businesses, less cash acquired (114) (1,052)
Divestitures of businesses 8 54
Expenditures for property, plant and equipment (234) (143)
Net change in short-term investments (5) 218
Other--net 14 14
------ ------
Net cash used in investing activities (331) (909)
Financing activities
Borrowings with original maturities of more than
three months
Proceeds 363 706
Payments (191) (452)
Borrowings with original maturities of less than
three months - net (76) 95
Proceeds from sale of Common Shares 252
Proceeds from exercise of stock options 9 18
Cash dividends paid (86) (68)
Purchase of Common Shares (39)
------ ------
Net cash (used in) provided by financing activities (20) 551
------ ------
Decrease in cash (4) (16)
Cash at beginning of year 18 32
------ ------
Cash at end of period $ 14 $ 16
====== ======
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
- -----------
September 30, December 31,
(Millions) 1995 1994
---- ----
Raw materials and supplies $264 $213
Work in process and
finished goods 585 574
---- ----
Gross inventories at FIFO 849 787
Excess of current cost
over LIFO cost (93) (89)
---- ----
Net inventories at LIFO $756 $698
==== ====
Debt
- ----
In September 1995, the Company entered into a $500 million
five-year revolving credit agreement to provide funds for
working capital and general corporate purposes. This agreement
replaced the $200 million 364-day and $300 million five-year
revolving credit agreements which were due to expire in April
1996 and January 1999, respectively.
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.
Acquisition 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 $114 million.
<PAGE>
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The IKU Group is a leading supplier of electric mirror actuators
for automotive manufacturers. The IKU patented designs are used
by every 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. The Rights become exercisable only if a person or
group acquires, or offers 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
the Rights at one cent per Right. 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.
When the Rights become exercisable, the holder of a Right, other
than the acquiring person, can purchase for $250, one
one-hundredth of a Series C Preferred Share (Preferred Share)
which is expected to have a market value approximating one
Common Share due to its dividend and liquidation rights.
Alternatively, the holder of the Right can elect to purchase for
$250, that number of Common Shares having a market value of
twice that price.
If the Company is acquired in a merger or other business
combination, or 50% or more of its consolidated assets or
earning power are sold after a person has acquired 20% or more
of the Company's Common Shares, the holder of the Right, other
than the acquiring person, can purchase for $250, that number of
the acquiring company's common stock having a market value of
twice that price.
Following the acquisition by a person 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
Preferred Share, 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 in 1990 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 or its subsidiaries. All of the issued and outstanding
common stock of Eaton Offshore is owned directly or indirectly
<PAGE>
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by Eaton. Eaton Offshore owns the common stock of a number of
the Company's 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):
Nine Months Ended
September 30
-----------------
1995 1994
---- ----
Income statement data
Net sales $464 $361
Gross margin 79 61
Net income 30 13
September 30, December 31,
1995 1994
---- ----
Balance sheet data
Current assets $330 $237
Noncurrent assets 145 122
Net intercompany payables 57 4
Current liabilities 55 83
Noncurrent liabilities 122 107
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Eaton's momentum continued through September 1995 as the Company
extended the positive trend to seven consecutive quarters of
record results for net sales, net income and net income per
Common Share. Each of these seven quarters had results
surpassing the same period of preceding years. The results
reflect strong business performance and continuous improvements
in quality and productivity. Based on the performance of the
Company in the first nine months of 1995 and the current
industrial economic market outlook, 1995 should be the second
consecutive year of record results.
Net sales of $1.7 billion in the third quarter and $5.2 billion
in the first nine months of 1995 reflect increases of 9% and
16%, respectively, over the same periods in 1994. The
improvement in sales was broadly based and primarily
attributable to higher unit volumes in both the Vehicle
Components and Electrical and Electronic Controls segments.
Virtually all product classes and geographic regions 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
improved industrial economic market conditions worldwide.
Despite the continued recession in Japan, sales in the Pacific
Region increased 43% in the third quarter of 1995 compared to
the same period in 1994, due in part to the acquisition of
Emwest. In Latin America, economic weakenss in Mexico and
<PAGE>
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Brazil caused an approximate 15% sales decrease for the third
quarter of 1995 compared to the same period in 1994. The
weakness in Mexico and Brazil was partially offset by sales
from the recently acquired majority interest in Mallory
Controles Ltda.
Income from operations of $150 million in the third quarter and
$500 million in the first nine months of 1995, an improvement of
10% and 24%, respectively, compared to the same periods last
year, reflect a 9% and 10% return on sales (9% for comparable
periods in 1994). These improvements were primarily a result of
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 the European economic
recovery continues, operating profit is below the Company's
longer-term expectations. Improvement in European operating
profits is expected as the Company begins to realize the
benefits from productivity improvement programs instituted in
1994 and 1995.
Other income--net of $26 million for the first nine months of
1995 increased $13 million over the same period 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 $91 million, or $1.18 per Common Share, for the
third quarter of 1995 increased 9% and 7%, respectively, over
the comparable period in 1994. For the first nine months of
1995, net income was $309 million, or $3.97 per Common Share,
reflecting increases of 27% and 22% 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
September 30
------------------
1995 1994
---- ----
Net sales
Truck Components $476 $450
Passenger Car Components 151 146
Off-Highway Vehicle
Components 103 105
---- ----
$730 $701
==== ====
Operating profit $ 91 $ 87
==== ====
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Nine Months Ended
September 30
------------------
1995 1994
---- ----
Net sales
Truck Components $1,522 $1,325
Passenger Car Components 504 456
Off-Highway Vehicle
Components 348 308
------ ------
$2,374 $2,089
====== ======
Operating profit $ 325 $ 264
====== ======
The Vehicle Components segment continued to experience growth in
sales, with increases of 4% and 14% in the third quarter and the
first nine months of 1995, respectively, over the results for
the same periods last year. Performance in this segment was
mixed, as each product class reported sales fluctuations ranging
from (1%) to 6% for the third quarter of 1995; however, each
product class reported a sales increase in excess of 10% for the
first nine months of 1995.
Despite the 2% decrease in North American truck production in
the third quarter 1995, Truck Components sales increased in the
third quarter 1995 as compared to the same period of 1994.
Although orders for heavy trucks in North America continue to
decline since the first quarter 1995, backlog, which is at
144,000 units at September 30, 1995, remains very high by
historical standards. The decline in orders represents an order
correction with no significant softening of retail sales
expected to be seen until 1996. The Company anticipates that
industry production levels for 1995 will equal or exceed the
record 225,000 units in 1994; however, there are indications of
declines in production levels expected in the fourth quarter of
1995. Sales of Passenger Car Components rose in the third
quarter 1995 from the year-ago quarter despite a 4% decrease in
North American production of passenger cars. Traditionally,
Passenger Car Components sales in the third quarter are lower
than the second quarter as a result of preparations by vehicle
manufacturers for the following model year and their temporary
shutdowns for the taking of annual physical inventories.
Additionally, sales of Off-Highway Vehicle Components decreased
in the third quarter 1995 from a year-ago primarily due to lower
demand in the Latin American agricultural market.
Operating profit for the Vehicle Components segment improved
5% and 23% for the third quarter and first nine months of 1995,
respectively, over the comparable periods of 1994. These
profits reflect a 12% and 14% return on sales, respectively (12%
and 13% for comparable periods in 1994). The improvement in
profits was primarily attributable to improved sales volumes,
ongoing cost reduction efforts and productivity improvement
programs. Demand in Europe for the Company's new heavy-duty
synchronized transmission has exceeded expectations, but the
costs of bringing this new product to market decreased Vehicle
Components segment margins in the third quarter 1995.
<PAGE>
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Results of the Company's Electrical and Electronic Controls
segment are summarized as follows (in millions):
Three Months Ended
September 30
------------------
1995 1994
---- ----
Net sales
Industrial and Commercial
Controls $519 $489
Automotive and Appliance
Controls 252 201
Specialty Controls 145 105
---- ----
$916 $795
==== ====
Operating profit $ 73 $ 66
==== ====
Nine Months Ended
September 30
------------------
1995 1994
---- ----
Net sales
Industrial and Commercial
Controls $1,486 $1,330
Automotive and Appliance
Controls 791 611
Specialty Controls 426 322
------ ------
$2,703 $2,263
====== ======
Operating profit $ 223 $ 172
====== ======
The Electrical and Electronic Controls segment continued to
experience significant growth in sales, which rose 15% in the
third quarter and 19% in the first nine months of 1995 over the
same periods in 1994. Each product class in this segment
reported sales increases ranging from 6% to 38% for the third
quarter; however, each product class reported a sales increase
in excess of 11% for the first nine months of 1995.
Year-to-date 1995 sales reflect nine months from the former
Westinghouse Electric Corporation Distribution and Control
Business Unit operations (DCBU); the same period in 1994
only reflects eight months as the results of this acquisition
were included beginning February 1, 1994.
Despite lower residential construction from levels of the prior
year, Industrial and Commercial Controls sales increased in the
third quarter 1995 as compared to the same period of 1994.
Sales of Automotive and Appliance Controls increased 26% in the
third quarter and 30% in the first nine months of 1995 from the
year-ago periods due in part to recent business acquisitions in
1994 and 1995 that complemented existing operations and
increased penetration on several new automotive platforms.
Worldwide demand for the Company's semiconductor capital
equipment continues to be extraordinarily strong, with an order
backlog continuing through mid-1996. This demand contributed to
Specialty Controls' 38% sales increase in the third quarter and
32% sales increase in the first nine months of 1995 over
comparable periods a year ago. The Company is experiencing
<PAGE>
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surging markets as well as market share gains in the entire ion
implanters product line. Based on industry capital spending
plans, semiconductor capital equipment sales are expected to
rise significantly in 1996. A new facility in Austin, Texas,
currently under construction, will significantly expand the
Company's capacity to serve this growing market.
Operating profit for the Electrical and Electronic Controls
segment improved 11% and 29% for the third quarter and first
nine months of 1995, respectively, over the comparable periods
of 1994. These profits reflect an 8% return on sales for both
periods in 1995 and 1994. The improvement in profits was
primarily attributable to improved sales volumes, including
contributions from acquired businesses, and benefits from
ongoing cost reduction efforts and productivity improvement
programs. Transitional plant integration difficulties and the
effects of two September 1995 hurricanes in Puerto Rico reduced
profits by approximately $7 million. Unanticipated program
launch costs on several new automotive platforms also reduced
profits in the third quarter 1995 by approximately $5 million.
Results of the Company's Defense Systems segment are summarized
as follows (in millions):
Three Months Ended
September 30
------------------
1995 1994
---- ----
Net sales $ 26 $ 35
Operating profit 4
Nine Months Ended
September 30
-----------------
1995 1994
---- ----
Net sales $ 84 $ 95
Operating profit (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 developing assemblies and subsystems instead of
components. 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. In the past five years,
the Company has spent more than $1 billion on capital
expenditures, with the vast majority (70%) being expended in
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, included in the Industrial
and Commercial Controls product class. Over the past ten years,
<PAGE>
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the Company has acquired 29 companies or product lines to
strengthen existing 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 a majority interest in Mallory Controles Ltda.
in Brazil in the fourth quarter of 1994 and Emwest in the
Pacific Region in the second quarter of 1995.
Changes in Financial Condition
- ------------------------------
The Company's financial condition remained strong during the
first nine months of 1995. Net working capital increased to
$956 million at September 30, 1995 from $744 million at the end
of 1994 and the current ratio rose to 1.9 from 1.7 at those
dates, respectively.
Improved sales primarily caused the $143 million increase in
accounts receivable at September 30, 1995 from the end of 1994.
The acquisitions of the IKU Group and Emwest were the principal
cause of the $55 million increase in excess of cost over net
assets of businesses acquired and the $97 million increase of
total debt at September 30, 1995 from year-end 1994. Total debt
consists of short-term debt, long-term debt and current portion
of long-term debt. In 1995, the Company entered into a $500
million five-year revolving credit agreement as discussed under
"Debt" in this report.
A dividend of one Preferred Share Purchase Right on each
outstanding Common Share was paid in 1995 as discussed under
"Preferred Share Purchase Rights" in this report.
Net cash provided by operating activities was $347 million for
the first nine months of 1995 compared to $342 million for the
comparable period in 1994. The improvement in cash flow
resulting from increased net income and other items exceeded the
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 nine months of 1995.
Net cash provided by operating activities in the first nine
months of 1995, supplemented by commercial paper and other
borrowings, was used to fund the purchase price of business
acquisitions, capital expenditures, repayment of debt, cash
dividends and repurchase of Common Shares.
<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.
There were no reports on Form 8-K filed during the three months
ended September 30, 1995.
<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: November 3, 1995 Adrian T. Dillon
----------------------------
Vice President - Chief
Financial and Planning
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.
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
<PAGE>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 14
<SECURITIES> 25
<RECEIVABLES> 1,047
<ALLOWANCES> 15
<INVENTORY> 756
<CURRENT-ASSETS> 2,067
<PP&E> 3,092
<DEPRECIATION> 1,531
<TOTAL-ASSETS> 5,065
<CURRENT-LIABILITIES> 1,111
<BONDS> 1,147
<COMMON> 39
0
0
<OTHER-SE> 1,872
<TOTAL-LIABILITY-AND-EQUITY> 5,065
<SALES> 5,161
<TOTAL-REVENUES> 5,161
<CGS> 3,797
<TOTAL-COSTS> 4,661
<OTHER-EXPENSES> (30)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 465
<INCOME-TAX> 156
<INCOME-CONTINUING> 309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309
<EPS-PRIMARY> 3.97
<EPS-DILUTED> 3.90
</TABLE>
