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, 1996
------------------
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 77.1 million Common Shares outstanding as of
September 30, 1996.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
Condensed Consolidated Balance Sheets
September 30, December 31,
(Millions) 1996 1995
---- ----
ASSETS
Current assets
Cash $ 25 $ 56
Short-term investments 31 28
Accounts receivable 1,056 932
Inventories 736 735
Deferred income taxes and
other current assets 240 216
------ ------
2,088 1,967
Property, plant and equipment 1,708 1,653
Excess of cost over net assets
of businesses acquired 953 895
Deferred income taxes and
other assets 528 538
------ ------
$5,277 $5,053
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 31 $ 50
Accounts payable and other
current liabilities 1,131 1,095
------ ------
1,162 1,145
Long-term debt 1,125 1,084
Postretirement benefits other
than pensions 584 579
Other liabilities 275 270
Shareholders' equity 2,131 1,975
------ ------
$5,277 $5,053
====== ======
See accompanying notes.
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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) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,719 $1,672 $5,237 $5,161
Costs and expenses
Cost of products sold 1,281 1,243 3,865 3,797
Selling and administrative 244 226 728 696
Research and development 67 53 200 168
------ ------ ------ ------
1,592 1,522 4,793 4,661
------ ------ ------ ------
Income from operations 127 150 444 500
Other income (expense)
Interest expense (21) (22) (64) (65)
Interest income 2 1 5 4
Other income--net 7 9 20 26
------ ------ ------ ------
(12) (12) (39) (35)
------ ------ ------ ------
Income before income taxes 115 138 405 465
Income taxes 30 47 122 156
------ ------ ------ ------
Net income $ 85 $ 91 $ 283 $ 309
====== ====== ====== ======
Per Common Share
Net income $ 1.11 $ 1.18 $ 3.66 $ 3.97
Cash dividends paid .40 .40 1.20 1.10
Average number of Common 77.3 77.7 77.5 77.8
Shares outstanding
See accompanying notes.
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
Condensed Statements of Consolidated Cash Flows
Nine Months Ended
September 30
-----------------
(Millions) 1996 1995
---- ----
<S> <C> <C>
Operating activities
Net income $283 $309
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 236 207
Changes in operating assets and liabilities,
excluding acquisitions of businesses (55) (193)
Other--net (36) 24
---- ----
Net cash provided by operating activities 428 347
Investing activities
Acquisitions of businesses, less cash acquired (154) (114)
Expenditures for property, plant and equipment (198) (234)
Net change in short-term investments (5) (5)
Other--net 27 22
---- ----
Net cash used in investing activities (330) (331)
Financing activities
Borrowings with original maturities of more than
three months
Proceeds 122 363
Payments (101) (191)
Borrowings with original maturities of less than
three months--net (20) (76)
Proceeds from exercise of stock options 12 9
Cash dividends paid (93) (86)
Purchase of Common Shares (49) (39)
---- ----
Net cash used in financing activities (129) (20)
---- ----
Decrease in cash (31) (4)
Cash at beginning of year 56 18
---- ----
Cash at end of period $ 25 $ 14
==== ====
See accompanying notes.
</TABLE>
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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 1995 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) 1996 1995
---- ----
Raw materials $248 $225
Work-in-process and
finished goods 585 604
---- ----
Gross inventories at FIFO 833 829
Excess of current cost
over LIFO cost (97) (94)
---- ----
Net inventories $736 $735
==== ====
Income Taxes
- ------------
In the third quarter of 1996, the estimated effective income
tax rate for full year 1996 was adjusted to 29.9% from 31.6%.
This adjustment reduced income tax expense for the third
quarter by $5 million, which relates to the first half of 1996.
Business Acquisition
- --------------------
On April 16, 1996, the Company purchased CAPCO Automotive
Products Corporation (CAPCO) for $137 million. CAPCO, a
Brazilian manufacturer of transmissions for light- and medium-
duty trucks and transaxle components for passenger cars, had
sales of $176 million in 1995. This acquisition was accounted
for as a purchase and, accordingly, the Company's statements of
consolidated income include the results of CAPCO from the
effective date of acquisition.
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Summary Financial Information for Eaton ETN Offshore Ltd.
- ---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned
subsidiary of Eaton, 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. Eaton Offshore owns the common stock of a number
of Eaton's subsidiaries which are engaged principally in the
manufacture and/or sale of truck transmissions, fasteners, leaf
spring assemblies, engine components, and electrical and
electronic controls. Summary financial information for Eaton
Offshore and its consolidated subsidiaries is as follows (in
millions):
Nine Months Ended
September 30
-----------------
1996 1995
---- ----
Income statement data
Net sales $478 $464
Gross margin 76 79
Net income 16 30
September 30, December 31,
1996 1995
---- ----
Balance sheet data
Current assets $326 $324
Noncurrent assets 149 152
Net intercompany payables 22 15
Current liabilities 82 97
Noncurrent liabilities 112 117
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
As anticipated, 1996 is proving to be a challenging year. The
Company was disappointed with its overall financial results in
the third quarter of 1996, given the very good performance of
most operations, and the continued progress in turning around
those operations that have been a drag on operating results in
prior years. However, persistent operating issues at a few
operations are having a disproportionate effect on results
during the second half of 1996.
Sales in the third quarter of 1996 increased 3% over 1995 while
sales for the first nine months of 1996 were flat compared to
the same period in 1995. Overall, performance in the third
quarter and first nine months of 1996 demonstrated the better
balance between the Company's two major business segments:
Vehicle Components and Electrical and Electronic Controls.
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Two of the Company's bellwether markets, North American heavy-
duty trucks and worldwide semiconductor equipment, are showing
indications of stabilizing, and prospects for sustained
worldwide expansion over the next few years look increasingly
bright.
Income from operations decreased 15% and 11% in the third
quarter and first nine months of 1996, respectively, from the
same periods in 1995. The decreases were primarily
attributable to reduced sales of Truck Components offset by
increased sales of Electrical and Electronic Controls, which
historically have had a lower gross margin. The decreases also
resulted from increased costs associated with various major
growth programs designed to accelerate the Company's
sustainable growth in the years ahead. These programs are key
components of a strategy to position the Company to take
advantage of growth opportunities in the global marketplace.
The Company spent $11 million in the third quarter and $26
million in the first nine months of 1996 on these major growth
programs. The Company's major cost improvement initiatives,
namely finance reengineering and a supplier resource management
program, are well underway.
In the third quarter of 1996, the estimated effective income
tax rate for full year 1996 was adjusted to 29.9% from 31.6%.
This adjustment reduced income tax expense for the third
quarter by $5 million, which relates to the first half of 1996.
Net income and net income per Common Share decreased 7% and 6%
for the third quarter of 1996, respectively, and 8% for both
performance measures for the first nine months of 1996 from the
comparable periods in 1995.
Results of the Vehicle Components segment are summarized as
follows (in millions):
Three Months Ended
September 30
------------------
1996 1995
---- ----
Net sales
Truck Components $439 $476
Passenger Car Components 175 151
Off-Highway Vehicle
Components 115 103
---- ----
$729 $730
==== ====
Operating profit $ 62 $ 91
==== ====
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Nine Months Ended
September 30
------------------
1996 1995
---- ----
Net sales
Truck Components $1,341 $1,522
Passenger Car Components 549 504
Off-Highway Vehicle
Components 360 348
------ ------
$2,250 $2,374
====== ======
Operating profit $ 239 $ 325
====== ======
Vehicle Components segment sales were flat in the third quarter
and decreased 5% in the first nine months of 1996 as compared
to the same periods in 1995. Comparisons with prior year
results were affected by the April 1996 acquisition of CAPCO
Automotive Products Corporation (CAPCO), as more fully
discussed in the "Business Acquisition" note. Excluding the
effects of CAPCO, third quarter 1996 segment sales approximated
$692 million, a 5% decrease as compared to the same period in
1995.
Truck Components sales decreased 8% in the third quarter of
1996 from the same period in 1995. This decrease was primarily
the result of the softening of the North American heavy-duty
truck market from the record levels experienced in the prior
two years. However, North American heavy-duty truck backlog,
which was at 62,000 units at September 30, 1996, remains high
by historical standards. Excluding the effects of CAPCO, Truck
Components sales decreased 16% from the prior year's level.
While activity appears to be gradually improving, the Latin
American markets for heavy-duty trucks and agricultural
equipment were much weaker than the Company had anticipated
earlier in 1996 (38% decline as compared to prior year).
Passenger Car Components experienced record sales in the third
quarter of 1996, rising 16% over the same period in 1995
despite an increase of less than 9% in passenger car production
in North America and Europe. This better-than-market
performance was attributed to selected market share penetration
and the continued trend to multivalve engines. Traditionally,
Passenger Car Components sales in the third quarter are lower
than in 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. Off-Highway Vehicle Components also experienced
record sales in the third quarter of 1996, rising 12% over the
year-ago quarter despite generally flat market activity.
<PAGE>
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Operating profit for the Vehicle Components segment decreased
32% and 26% for the third quarter and first nine months of
1996, respectively, from the comparable periods of 1995.
Performance in this segment continues to remain below
expectations despite excellent performance in the business
units serving the always demanding light and off-highway
vehicle markets. The reductions in operating profit were
primarily attributable to lower sales volumes of Truck
Components. This segment's operating results are well below
the Company's expectation given its earlier projection for a
20% to 25% downturn in the North American heavy-duty truck
market. Overall operating results have been affected both by
disappointing market conditions outside North America and by
unexpected operating problems around the world. Excluding the
effects of CAPCO, third quarter 1996 operating profit
approximated $66 million, a 28% decrease compared to the same
period in 1995.
Vehicle Components operating profit for the third quarter and
first nine months of 1996 also was reduced by expenses of $4
million and $12 million, respectively, which were incurred for
the purpose of bringing the North American axle/brake business
unit to acceptable levels of profitability. The Company
expects to spend an additional $3 million in 1996 to complete
the reorganization of this business unit and to achieve $15
million in annual savings by 1997. In addition, operating
profit for the third quarter of 1996 included a $1 million
charge to integrate an existing Brazilian manufacturing
operation with CAPCO.
Vehicle Components operating profit was also being affected by
a significant and unanticipated level of warranty expense,
which increased $4 million in the third quarter of 1996 from
the comparable period in 1995. For full year 1996, the Company
expects these costs to be approximately $10 million more than
1995 levels. These increases are related primarily to models
which have recently been replaced, and to policy practices
which have since been tightened. The Company expects warranty
costs to decline during 1997.
To allow the Company to have direct access to sub-Saharan truck
markets, the assets of Drivetrain (Pty.) Ltd, a medium- and
heavy-duty truck transmission manufacturer in South Africa,
with 1995 sales of approximately $6 million, were purchased in
the second quarter of 1996.
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Results of the Electrical and Electronic Controls segment are
summarized as follows (in millions):
Three Months Ended
September 30
------------------
1996 1995
---- ----
Net sales
Industrial and Commercial
Controls $542 $519
Automotive and Appliance
Controls 281 252
Specialty Controls 139 145
---- ----
$962 $916
==== ====
Operating profit $ 78 $ 73
==== ====
Nine Months Ended
September 30
------------------
1996 1995
---- ----
Net sales
Industrial and Commercial
Controls $1,565 $1,486
Automotive and Appliance
Controls 859 791
Specialty Controls 487 426
------ ------
$2,911 $2,703
====== ======
Operating profit $ 246 $ 223
====== ======
Electrical and Electronic Controls, the Company's largest
segment, continued its trend of increased sales, which rose 5%
in the third quarter and 8% in the first nine months of 1996
over the comparable periods of 1995. Activity in these markets
was more mixed than earlier in the year.
Aided by continued strength in Cutler-Hammer's nonresidential
and residential construction markets, Industrial and Commercial
Controls sales rose 4% in the third quarter of 1996 over the
comparable period in 1995. Automotive and Appliance Controls
sales continued to be particularly strong in the third quarter
of 1996, rising 12% from third quarter of 1995, in an
environment where North American and European vehicle
production increased 7% and appliance production increased
approximately 6%. This better-than-market performance was
attributed to new program launches in the North American
automotive switch business and the acquisition of the IKU Group
in May 1995. Traditionally, Automotive and Appliance Controls
sales in the third quarter are lower than in the second quarter
as a result of preparations by vehicle manufacturers for the
<PAGE>
Page 11
following model year and their temporary shutdowns for the
taking of annual physical inventories.
Specialty Controls sales decreased 4% in the third quarter of
1996 from the comparable period in 1995 primarily due to a
sharp downturn in worldwide demand for semiconductor capital
equipment. As the leading worldwide producer of ion
implanters, the Company saw the effects of this slowdown in
third quarter 1996 sales of ion implanters, which decreased
approximately 25% from the previous two quarters. The Company
is encouraged by the past two months' stability in orders and
by the recently reported increases in the semiconductor
industry's book-to-bill ratio. However, the Company does not
anticipate year-to-year sales improvement prior to mid-1997.
Operating profit for the Electrical and Electronic Controls
segment continued to be strong, improving 8% in the third
quarter and 10% for the first nine months of 1996 over the same
periods in 1995. The improvement in operating profits was
primarily attributable to improved sales volumes, added
contributions from recently acquired businesses and reduced
program launch costs.
Although most of the Industrial Controls business unit
transitional plant integration difficulties have now been
overcome, the Company remains disappointed by the profit levels
of that business unit. Specific actions are now underway to
return this key business unit to traditional levels of
operating performance. During the third quarter of 1996,
approximately $1 million was incurred in connection with these
efforts.
To complement the Company's ion implantation equipment
business, High Temperature Engineering Corporation, a United
States manufacturer of rapid thermal processor furnaces and
small batch vertical furnaces for use in semiconductor
fabrication, with 1995 sales of less than $10 million, was
purchased in the second quarter of 1996.
Results of the Defense Systems segment are summarized as
follows (in millions):
Three Months Ended
September 30
------------------
1996 1995
---- ----
Net sales $28 $26
Operating profit 2
Nine Months Ended
September 30
------------------
1996 1995
---- ----
Net sales $76 $84
Operating profit 1 (1)
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The Company had set very ambitious goals for 1996. However,
given third quarter results and an anticipated fourth quarter
reorganization charge, as discussed below, Eaton will not
achieve the expected level of performance this year. Sustaining
superior financial performance while pursuing opportunities for
higher sustainable growth, the necessary ingredients for
genuinely superior long-term performance, has been challenging.
However, the Company is making progress in both dimensions of
performance and is making the difficult but necessary
adjustments to ensure long-term success.
The Company is determined to get its financial results back on
track in 1997. The Company will not take the short-term
expedient of mortgaging Eaton's future by reducing spending on
major growth programs designed to increase the Company's
sustainable growth rate in the years ahead. The Company is
excited by the progress being made in developing major new
products for new and existing markets, and by opportunities to
manufacture and sell products around the world.
The Company's commitment remains to outperform expectations
based on the cyclical levels of Eaton's traditional markets.
Specifically, excluding the costs of the major growth programs
and based on similar activity levels, the Company expects to
produce about a $1.00 per share improvement in earnings between
1995 and 1997, which is measurably above current operating
performance. The Company has identified additional
reorganizations which are expected to generate an incremental
$20 million of annual savings beginning in 1997. The cost of
these reorganizations is anticipated to approximate $25 million
to $30 million, the bulk of which is expected to be charged
against fourth quarter 1996 results. In total, the Company
expects to expense $40 million to $45 million on
reorganizations in 1996. The benefits of these actions should
bring 1997 performance back to targeted levels.
Changes in Financial Condition
- ------------------------------
The Company's financial condition remained strong during the
first nine months of 1996. Net working capital increased to
$926 million at September 30, 1996 from $822 million at the end
of 1995 and the current ratio rose to 1.8 from 1.7 at those
dates, respectively.
Higher sales in September 1996 were the primary cause of the
increase in accounts receivable at September 30, 1996 from the
end of 1995. The CAPCO acquisition was the principal cause of
the increases in excess of cost over net assets of businesses
acquired and long-term debt at September 30, 1996 from year-end
1995.
Cash flow from net income, supplemented by commercial paper
borrowings, was used to fund business acquisitions, capital
expenditures, repayment of debt, cash dividends, repurchase of
Common Shares, as well as increased working capital, primarily
the increase in accounts receivable.
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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, 1996.
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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 6, 1996 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Vice President - Chief
Financial and Planning
Officer; Principal Financial
Officer
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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
<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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 25
<SECURITIES> 31
<RECEIVABLES> 1,070
<ALLOWANCES> 14
<INVENTORY> 736
<CURRENT-ASSETS> 2,088
<PP&E> 3,398
<DEPRECIATION> 1,690
<TOTAL-ASSETS> 5,277
<CURRENT-LIABILITIES> 1,162
<BONDS> 1,125
0
0
<COMMON> 39
<OTHER-SE> 2,092
<TOTAL-LIABILITY-AND-EQUITY> 5,277
<SALES> 5,237
<TOTAL-REVENUES> 5,237
<CGS> 3,865
<TOTAL-COSTS> 4,793
<OTHER-EXPENSES> (25)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 405
<INCOME-TAX> 122
<INCOME-CONTINUING> 283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283
<EPS-PRIMARY> 3.66
<EPS-DILUTED> 3.58
</TABLE>
