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 March 31, 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 77.8 million Common Shares outstanding as of
March 31, 1995.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Eaton Corporation
<CAPTION>
Condensed Consolidated Balance Sheets
March 31, December 31,
(Millions) 1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 22 $ 18
Short-term investments 39 23
Accounts receivable 1,052 889
Inventories 735 698
Deferred income taxes and
other current assets 229 218
------ ------
2,077 1,846
Property, plant and equipment 1,475 1,469
Excess of cost over net assets
of businesses acquired 844 850
Deferred income taxes and
other assets 530 517
------ ------
$4,926 $4,682
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 53 $ 36
Accounts payable and other
current liabilities 1,133 1,066
------ ------
1,186 1,102
Long-term debt 1,102 1,053
Postretirement benefits other
than pensions 573 573
Other long-term liabilities 299 274
Shareholders' equity 1,766 1,680
------ ------
$4,926 $4,682
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Income
Three Months Ended
March 31
------------------
(Millions except for per share data) 1995 1994
---- ----
<S> <C> <C>
Net sales $1,731 $1,371
Costs and expenses
Cost of products sold 1,265 998
Selling and administrative expense 229 197
Research and development expense 57 50
------ ------
1,551 1,245
------ ------
Income from operations 180 126
Other income and (expense)
Interest expense (23) (23)
Interest income 1 2
Other income--net 5 2
------ ------
(17) (19)
------ ------
Income before income taxes 163 107
Income taxes 55 33
------ ------
Net income $ 108 $ 74
====== ======
Per Common Share
Net income $ 1.39 $ 1.01
Cash dividends paid $ .30 $ .30
Average number of Common Shares outstanding 77.9 73.1
See accompanying notes.
</TABLE>
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<TABLE>
Eaton Corporation
<CAPTION>
Condensed Statements of Consolidated Cash Flows
Three Months Ended
March 31
------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Operating activities
Net income $ 108 $ 74
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 66 62
Changes in operating assets and liabilities,
excluding acquisitions of businesses (151) (115)
Other--net 18 38
------ ------
Net cash provided by operating activities 41 59
Investing activities
Acquisitions of businesses, less cash acquired (5) (1,096)
Expenditures for property, plant and equipment (57) (39)
Net change in short-term investments (19) 246
Other--net 14 3
------ ------
Net cash used in investing activities (67) (886)
Financing activities
Borrowings with original maturities of more than
three months
Proceeds 200
Payments (28) (98)
Borrowings with original maturities of less than
three months - net 89 469
Proceeds from sale of Common Shares 252
Proceeds from exercise of stock options 1 16
Cash dividends paid (23) (22)
Purchase of Common Shares (9)
------ ------
Net cash provided by financing activities 30 817
------ ------
Increase (decrease) in cash 4 (10)
Cash at beginning of year 18 32
------ ------
Cash at end of period $ 22 $ 22
====== ======
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
employee options for Common Shares, is not material.
Inventories
- -----------
March 31, December 31,
(Millions) 1995 1994
---- ----
Raw materials and supplies $247 $213
Work in process and
finished goods 580 574
---- ----
Gross inventories at FIFO 827 787
Excess of current cost
over LIFO cost (92) (89)
---- ----
Net inventories at LIFO $735 $698
==== ====
Subsequent Event - Debt
- -----------------------
In April 1995, the Company entered into a $200 million 364-day
revolving credit agreement to provide funds for general corporate
purposes, including acquisitions.
Subsequent Event - Acquisitions of Businesses
- ---------------------------------------------
On May 1, 1995, in two separate transactions, the Company acquired
the IKU Group of The Netherlands and the electrical switchgear and
controls business from Email Ltd. of Australia. These two
acquisitions had combined sales of approximately $110 million in
1994.
The IKU Group, a privately-owned company, is a leading supplier of
electric mirror actuators for automotive manufacturers. The patented
designs are used by every major mirror manufacturer in the United
States, Europe and Korea. The IKU Group acquisition complements
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Eaton's automotive controls operations, provides a unique opportunity
for the Company to expand capabilities in the high-growth
actuator/sensor product line, and strengthens the Company's position
as a worldwide automotive controls supplier.
Email Ltd.'s switchgear and controls business manufactures and
distributes a wide range of electrical equipment including circuit
breakers, panelboards, contactors and switchgear. 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 immediate presence in the emerging Southeast Asian
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.
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 the Company or it's
subsidiaries. All of the issued and outstanding capital stock of
Eaton Offshore is owned directly or indirectly by Eaton. Eaton
Offshore owns all of the issued and outstanding capital stock of a
number of subsidiaries. These subsidiaries are engaged principally
in the manufacture of fasteners, leaf spring assemblies, engine
components, and electrical and electronic controls. Summary
financial information for Eaton Offshore and its consolidated
subsidiaries are summarized as follows (in millions):
Three Months Ended
March 31
------------------
1995 1994
---- ----
Income statement data
Net sales $144 $106
Gross margin 28 17
Net income 13 1
March 31, December 31,
1995 1994
---- ----
Balance sheet data
Current assets $315 $237
Noncurrent assets 124 122
Net intercompany payables 63 4
Current liabilities 87 83
Noncurrent liabilities 105 107
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Strong sales growth continued in the first quarter of 1995, resulting
in the Company reporting its fifth consecutive quarter of record
sales, net income and net income per Common Share. The improvement
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in sales was broadly based with the increase primarily attributable
to higher unit volumes in both the Vehicle Components and the
Electrical and Electronic Controls segments. Each product class in
these segments experienced double-digit sales growth in the first
quarter of 1995 compared to the same period in 1994. Based on the
performance of the Company in the first quarter and the current
market outlook, 1995 should be the second consecutive year of record
results.
Net sales for the first quarter of 1995 increased 26% to $1.7 billion
over the comparable period in 1994. The sales increase reflects
substantially improved sales of the Truck Components product class
due to the continued strong pace of North American factory sales of
heavy trucks. The improvement was also aided by the inclusion in
1995 of three full months of sales from the former Westinghouse
Distribution and Controls Business Unit (DCBU). In the prior year
period, only two months of sales were recorded for this acquisition
due to its effective date of January 31, 1994. Improved sales also
resulted from other acquisitions made during the fourth quarter of
1994 including Lectron Products, Inc. and Eaton Controles Ltda. In
addition, the Company is experiencing sales increases from the
European economic recovery.
Income from operations increased to $180 million in the first quarter
of 1995 (10% return on sales) from $126 million for the same period
in 1994 (9% return on sales). This improvement was primarily a
result of the higher sales volume described above, as well as from
ongoing cost reduction efforts and productivity improvement programs.
For the past three years, the Company has experienced productivity
improvements exceeding 4%. These improvements have enabled the
Company to maintain its margins while pricing products competitively
in value-driven world markets.
Net income rose 46% to $108 million for the first quarter of 1995
over the comparable period in 1994 largely due to increased sales and
other improvements in operating performance discussed above.
However, net income per Common Share for the first quarter of 1995
increased by a lesser percentage (38%) than net income due to the
effect of additional shares outstanding.
Results of the Company's Vehicle Components segment for the three
months ended March 31 are summarized as follows (in millions):
1995 1994
---- ----
Net sales
Truck Components $530 $430
Passenger Car Components 174 148
Off-Highway Vehicle
Components 127 100
---- ----
$831 $678
==== ====
Operating profit $123 $ 89
==== ====
The Vehicle Components segment continued to experience significant
growth in sales, which rose 23% in the first quarter of 1995 over the
same period of 1994. Although the increase in sales was driven by
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unprecedented levels of production of heavy trucks in North America,
each of the three product classes in this segment reported sales
increases in excess of 17% for the first quarter of 1995 compared to
the same period in 1994.
North American factory sales of heavy trucks, which set records in
1994, were 22% higher in the first quarter of 1995 on a year-to-year
basis. Order backlogs for heavy trucks have reached an all-time high
of 234,000 units. Segment sales also reflect higher sales of
components for sport utility vehicles, minivans and light trucks.
Although North American sales of passenger cars and light trucks have
leveled off, production remains strong. Additionally, sales of
Off-Highway Vehicle Components have shown marked improvement as a
result of strong demand for hydraulic components from the
agricultural, construction and industrial markets.
Operating profit for the Vehicle Components segment was strong,
rising 38% for the first quarter of 1995 over the same period of
1994. This represents a 15% return on sales for the first quarter of
1995 (13% in 1994). 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.
The Company's expectations for continued growth in the Vehicle
Components product lines are based on increased use of heavy trucks
in support of domestic manufacturing, consumer preference for
minivans, light trucks and sport utility vehicles, increased
production of multi-valve automobile engines, and strength of the
construction and agricultural markets.
Results of the Company's Electrical and Electronic Controls segment
for the three months ended March 31 are summarized as follows (in
millions):
1995 1994
---- ----
Net sales
Industrial and Commercial
Controls $471 $364
Automotive and Appliance
Controls 273 200
Specialty Controls 128 101
---- ----
$872 $665
==== ====
Operating profit $ 70 $ 42
==== ====
The Electrical and Electronic Controls segment continued to
experience significant growth in sales, which rose 31% in the first
quarter of 1995 compared to the same period in 1994. This segment
now represents more than one-half of total Company sales. Although
first quarter 1995 sales for this segment were aided by the inclusion
of three months of sales from DCBU compared to only two months of
sales following its acquisition on January 31, 1994, each of the
three product classes in the Electrical and Electronic Controls
segment reported sales increases in excess of 26%.
<PAGE>
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The Industrial and Commercial Controls product line has been effected
by higher interest rates which have slowed residential construction
from the levels of the prior year; however, the recovery now underway
in non-residential construction is expected to bring substantial
benefit to this product line. This product line is also benefiting
from the current boom in capital spending, which is expected to show
double-digit growth in 1995 for the second consecutive year. The
Automotive and Appliance Controls sales increase was partly due to
fourth quarter 1994 niche acquisitions that complement existing
operations. Robust sales of semiconductor equipment, included in
Specialty Controls, also contributed to the sales increase for this
segment. Semiconductor equipment sales have risen sharply over the
past two years due to increased market penetration and worldwide
demand. Sales of the Company's ion implanters are at an all-time
high.
Operating profit for the Electrical and Electronic Controls segment
was up 67% in the first quarter of 1995 over the same period in 1994.
This represents an 8% return on sales for the first quarter of 1995
compared to 6% for the comparable period 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. The
integration of the DCBU acquisition continues to be ahead of
schedule.
Several factors raise expectations for continuing growth in the
Electrical and Electronic Controls segment including ongoing strength
in the United States economy and the recovering markets in Europe, a
capital spending boom based on the ongoing reindustrialization of the
United States economy, the drive for productivity gains in the
manufacturing sector, and favorable developments in non-residential
construction signaled by an increase in contracts signed for
commercial and industrial space.
Results of the Company's Defense Systems segment for the three months
ended March 31 are summarized as follows (in millions):
1995 1994
---- ----
Net sales $ 28 $ 28
Operating profit (1)
The Company is benefiting from fundamental improvements in
productivity and quality that have given United States manufacturers
a competitive advantage in world markets.
There are three ways in which the Company is expanding sales and
earnings: through internal development of new products, by expanding
into global markets and by acquiring companies or product lines.
The Company's investments in internal development are being used to
make mechanical products "smart" by applying electronics, and to
develop assemblies and subsystems instead of components. Electronic
technology is becoming increasingly sophisticated and durable, and
the Company is applying this technology in ways which adds value for
customers by enabling them to differentiate themselves from their
competitors. Likewise, as major customers seek to simplify their
manufacturing and reduce suppliers, the Company is finding
opportunities to provide full assemblies rather than components
alone.
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The Company is redoubling efforts to expand in Latin America and the
Pacific Rim, regions 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 which require many of the Company's products.
Steady progress toward the Company's long-term goal of building
sustainable earnings growth throughout the economic cycle is being
accomplished in part through niche acquisitions that complement
existing operations and continued resizing of existing operations.
Over the past ten years, Eaton has acquired 29 companies or product
lines to strengthen its businesses and assure their world-class
competitiveness.
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 prior five years, the Company
spent more than $1 billion on capital expenditures, with the vast
majority (70%) towards projects related to growth, cost reduction and
tooling.
Changes in Financial Condition
- ------------------------------
The Company's financial condition improved during the first three
months of 1995. Net working capital increased to $891 million at
March 31, 1995 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 caused the $163 million increase in accounts
receivable at March 31, 1995 from the end of 1994. Total debt,
consisting of short-term, long-term and current portion of long-term,
increased by $66 million at March 31, 1995 from year-end 1994
primarily due to the funding of the substantial increase in accounts
receivable. In April 1995, the Company entered into a $200 million
364-day revolving credit agreement to provide funds for general
corporate purposes, including acquisitions.
Net cash provided by operating activities was $41 million for the
first three months of 1995 compared to $59 million for the comparable
period in 1994. The improvement in cash flow resulting from
increased net income was offset by the cash requirements to fund
increased working capital, primarily the substantial increase in
accounts receivable caused by the higher level of sales reported in
the first quarter of 1995. Net cash provided by operating activities
in the first three months of 1995, supplemented by the funding from
commercial paper and other borrowings were used to fund capital
expenditures, cash dividends and the repayment of debt.
<PAGE>
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April
26, 1995 at which security holders: (a) re-elected four
directors and elected one new director, (b) approved an Eaton
Stock Plan to provide stock options to non-employee directors
and salaried employees, (c) approved an Incentive Compensation
Deferral Plan that allows for long-term incentive awards and
for participants to defer receipt of the amounts earned, and
(d) ratified the appointment of the accounting firm of Ernst &
Young LLP as the Company's independent auditors for 1995.
Results of the voting in connection with each issue were as
follows:
Voting on Directors
- -------------------
For Withheld Total
--- -------- -----
N. A. Armstrong 67,812,555 556,243 68,368,798
W. E. Butler 67,859,525 509,273 68,368,798
E. Green 67,781,874 586,924 68,368,798
A. W. Reynolds 67,842,186 526,612 68,368,798
J. S. Rodewig 67,851,522 517,276 68,368,798
Eaton Stock Plan
- ----------------
In Favor - 48,705,090
Against - 14,846,923
Abstain - 1,236,985
Broker Non-
Votes - 3,579,800
----------
Total 68,368,798
Incentive Compensation Deferral Plan
- ------------------------------------
In Favor - 61,800,311
Against - 2,213,792
Abstain - 826,169
Broker Non-
Votes - 3,528,526
----------
Total 68,368,798
Ratification of Independent Auditors
- ------------------------------------
In Favor - 67,410,977
Against - 718,862
Abstain - 238,959
----------
Total 68,368,798
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Item 5. Other Information
As announced at the 1995 Annual Meeting of Shareholders, the
Company's Board of Directors elected Stephen R. Hardis to
become Chairman and Chief Executive Officer, and Alexander M.
Cutler to become President and Chief Operating Officer. Mr.
Hardis' promotion to Chief Executive Officer and Mr. Cutler's
promotion are effective September 1, 1995. Mr. Hardis will
assume the additional responsibility of board chairman when
current Chairman and Chief Executive Officer William E. Butler
retires on December 31, 1995.
As announced at the 1995 Annual Meeting of Shareholders, as a
result of the Company's strong balance sheet and cash flow from
operations and the strength of its markets, the Board of
Directors raised the quarterly cash dividend from 30 cents to
40 cents, payable on May 25, 1995 to shareholders of record as
of May 8, 1995. This represents a 33% increase and is the
second increase in less than two years. Eaton has paid
dividends on Common Shares annually since 1923.
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 March 31, 1995.
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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: May 4, 1995 /s/ Stephen R. Hardis
----------------------------
Stephen R. Hardis
Vice Chairman and Chief
Financial and Administrative
Officer; Principal Financial
Officer
<PAGE>
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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
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 22
<SECURITIES> 39
<RECEIVABLES> 1,066
<ALLOWANCES> 14
<INVENTORY> 735
<CURRENT-ASSETS> 2,077
<PP&E> 2,931
<DEPRECIATION> 1,456
<TOTAL-ASSETS> 4,926
<CURRENT-LIABILITIES> 1,186
<BONDS> 1,102
<COMMON> 39
0
0
<OTHER-SE> 1,727
<TOTAL-LIABILITY-AND-EQUITY> 4,926
<SALES> 1,731
<TOTAL-REVENUES> 1,731
<CGS> 1,265
<TOTAL-COSTS> 1,551
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 163
<INCOME-TAX> 55
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.37
</TABLE>
