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, 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 77.8 million Common Shares outstanding as of
March 31, 1996.
<PAGE>
<PAGE>
Page 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
Condensed Consolidated Balance Sheets
March 31, December 31,
(Millions) 1996 1995
---- ----
ASSETS
Current assets
Cash $ 3 $ 56
Short-term investments 23 28
Accounts receivable 1,086 932
Inventories 739 735
Deferred income taxes and
other current assets 228 216
------ ------
2,079 1,967
Property, plant and equipment 1,637 1,653
Excess of cost over net assets
of businesses acquired 889 895
Deferred income taxes and
other assets 525 538
------ ------
$5,130 $5,053
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 42 $ 50
Accounts payable and other
current liabilities 1,119 1,095
------ ------
1,161 1,145
Long-term debt 1,071 1,084
Postretirement benefits other
than pensions 581 579
Other liabilities 271 270
Shareholders' equity 2,046 1,975
------ ------
$5,130 $5,053
====== ======
See accompanying notes.
<PAGE>
<PAGE>
Page 3
Eaton Corporation
Statements of Consolidated Income
Three Months Ended
March 31
------------------
(Millions except for per share data) 1996 1995
---- ----
Net sales $ 1,736 $ 1,731
Costs and expenses
Cost of products sold 1,278 1,265
Selling and administrative 239 232
Research and development 65 57
------- -------
1,582 1,554
------- -------
Income from operations 154 177
Other income (expense)
Interest expense (21) (20)
Interest income 2 1
Other income--net 6 5
------- -------
(13) (14)
------- -------
Income before income taxes 141 163
Income taxes 46 55
------- -------
Net income $ 95 $ 108
======= =======
Per Common Share
Net income $ 1.23 $ 1.39
Cash dividends paid $ .40 $ .30
Average number of Common Shares outstanding 77.7 77.9
See accompanying notes.
<PAGE>
<PAGE>
Page 4
<TABLE>
Eaton Corporation
<CAPTION>
Condensed Statements of Consolidated Cash Flows
Three Months Ended
March 31
------------------
(Millions) 1996 1995
---- ----
<S> <C> <C>
Operating activities
Net income $ 95 $ 108
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 75 66
Changes in operating assets and liabilities,
excluding acquisitions of businesses (129) (151)
Other--net (5) 18
------ ------
Net cash provided by operating activities 36 41
Investing activities
Acquisitions of businesses, less cash acquired (16) (5)
Expenditures for property, plant and equipment (55) (57)
Net change in short-term investments 4 (19)
Other--net 18 14
------ ------
Net cash used in investing activities (49) (67)
Financing activities
Borrowings with original maturities of more than
three months
Proceeds 8
Payments (36) (28)
Borrowings with original maturities of less than
three months - net 11 89
Proceeds from exercise of stock options 9 1
Cash dividends paid (31) (23)
Purchase of Common Shares (1) (9)
------ ------
Net cash (used in) provided by financing activities (40) 30
------ ------
(Decrease) increase in cash (53) 4
Cash at beginning of year 56 18
------ ------
Cash at end of period $ 3 $ 22
====== ======
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
Page 5
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
- -----------
March 31, December 31,
(Millions) 1996 1995
---- ----
Raw materials $209 $225
Work-in-process and
finished goods 625 604
---- ----
Gross inventories at FIFO 834 829
Excess of current cost
over LIFO cost (95) (94)
---- ----
Net inventories $739 $735
==== ====
Subsequent Event - Acquisition of Business
- ------------------------------------------
On April 16, 1996, the Company acquired CAPCO Automotive
Products Corporation (CAPCO) for an estimated purchase price of
$138 million. CAPCO, a Brazilian manufacturer of light- and
medium-duty truck transmissions, had sales of $176 million in
1995. This acquisition will be accounted for as a purchase and,
accordingly, the Company's statements of consolidated income
will include the results of CAPCO from the effective date of
acquisition.
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
<PAGE>
<PAGE>
Page 6
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):
Three Months Ended
March 31
------------------
1996 1995
---- ----
Income statement data
Net sales $162 $144
Gross profit 25 28
Net income 7 13
March 31, December 31,
1996 1995
---- ----
Balance sheet data
Current assets $327 $324
Noncurrent assets 150 152
Net intercompany payables 35 15
Current liabilities 71 97
Noncurrent liabilities 116 117
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. Sales
in the first quarter of 1996 were flat compared to the first
quarter of 1995. Net income and net income per Common Share for
the first quarter of 1996 decreased 12% from the comparable
period in 1995. A year ago, all of the Company's markets were
surging, and Eaton took full advantage of the opportunity to
achieve record performance. In the first quarter of 1996,
activity in the Company's markets around the world was much more
mixed. Overall, performance in the first quarter of 1996 met
the Company's expectations based on market conditions and
programs that are underway. Eaton's performance in the first
quarter of 1996 demonstrates the better balance between the
Company's two major business segments: Vehicle Components and
Electrical and Electronic Controls.
Income from operations decreased 13% in the first quarter of
1996 (8.9% return on sales) from the same period in 1995 (10.2%
return on sales). The decrease was primarily attributable to
reduced sales of Truck Components offset by increased sales in
the Electrical and Electronic Controls segment, which have a
lower gross margin. The decrease also resulted from costs
associated with various research and development, and
productivity improvement programs. These programs are part of a
strategy to position the Company to take advantage of growth
opportunities in the global marketplace. Also, the Company
spent an additional $6.5 million in the first quarter of 1996 on
major programs designed to accelerate the Company's sustainable
growth in the years ahead.
<PAGE>
<PAGE>
Page 7
Results of the Company's Vehicle Components segment for the
three months ended March 31 are summarized as follows (in
millions):
1996 1995
---- ----
Net sales
Truck Components $449 $530
Passenger Car Components 179 174
Off-Highway Vehicle
Components 122 127
---- ----
$750 $831
==== ====
Operating profit $ 88 $123
==== ====
Performance in this segment was below Company expectations
despite excellent performance in most business units.
Vehicle Components segment sales decreased 10% in the first
quarter of 1996 as compared to the unprecedented levels
experienced in the first quarter of 1995. Driven by 19% and 10%
decreases in North American factory sales of heavy-duty trucks
and light vehicle production, respectively, and a 37% decrease
in activity in Latin American markets, Truck Components sales
decreased 15% in the first quarter of 1996 from prior year's
first quarter record level. This decrease reflects the
previously anticipated softening of the North American
heavy-duty truck market from the record levels experienced in
the prior two years. In contrast, despite flat markets, Truck
Components sales rose 9% in Europe due to continuing market
penetration of the Company's new heavy-duty synchronized
transmissions. While the North American heavy-duty truck
business is slowing, backlog, which is at 91,600 units at March
31, 1996, remains strong by historical standards.
Despite an 18% decrease in North American passenger car
production and flat activity levels in Europe, Passenger Car
Components sales rose 3% in the first quarter of 1996 as
compared to the same period in 1995. The Company continues to
benefit from the worldwide migration to multivalve engines for
enhanced performance and economy, and increased penetration of
the Company's hydraulic lifters in Europe. Lower demand in the
Latin American agricultural market primarily caused the 3%
decrease in Off-Highway Vehicle Components sales in the first
quarter of 1996 as compared to the same period in 1995.
Operating profit for the Vehicle Components segment decreased
29% for the first quarter of 1996 from the same period of 1995,
reflecting an 11.7% return on sales (14.8% in 1995). The
reduction in operating profit was primarily attributable to
lower sales volumes. Operating profit for the first quarter of
1996 also was reduced by costs of $4 million to begin
rationalization of the Company's North American axle/brake
business unit. The Company expects to spend an additional $13
million in 1996 and to achieve $15 million of annual savings by
1997.
<PAGE>
<PAGE>
Page 8
Results of the Company's Electrical and Electronic Controls
segment for the three months ended March 31 are summarized as
follows (in millions):
1996 1995
---- ----
Net sales
Industrial and Commercial
Controls $505 $471
Automotive and Appliance
Controls 284 273
Specialty Controls 176 128
---- ----
$965 $872
==== ====
Operating profit $ 82 $ 70
==== ====
Electrical and Electronic Controls, the Company's largest
segment, continued its trend of increased sales, which rose 11%
in the first quarter of 1996 over the same period in 1995. The
three product classes comprising this segment reported
improvements in sales ranging from 4% to 37% for the first
quarter of 1996.
Aided by strong nonresidential construction and a modest revival
in the housing market, Industrial and Commercial Controls sales
rose 7% in the first quarter of 1996 over the comparable period
in 1995. Despite 10% and 18% decreases in North American
production of light vehicles and passenger cars, respectively,
Automotive and Appliance Controls sales rose 4% in the first
quarter of 1996 over the comparable period in 1995, primarily
due to the acquisition of the IKU Group in May 1995.
Worldwide demand for the Company's semiconductor capital
equipment continues to be extraordinarily strong. Sales of the
Company's ion implanters are at an all-time high. This demand
was the primary contributor to Specialty Controls' 37% sales
increase in the first quarter of 1996 as compared to the same
period in 1995. Based on industry capital spending plans,
semiconductor capital equipment sales are expected to continue
to rise significantly in 1996 after substantial gains in each of
the last two years.
Operating profit for the Electrical and Electronic Controls
segment continued to be strong, improving 18% in the first
quarter of 1996 over the same period in 1995 and reflecting an
8.6% return on sales (8.1% in 1995). The improvement in profits
was primarily attributable to improved sales volumes, but also
included added contributions from recently acquired businesses,
continued stringent cost containment efforts and the realization
of benefits from earlier resizings. The 8.6% operating margin
is nearly a high for this economic cycle, although not yet at
the Company's targeted level, and indicates that the Company is
beginning to overcome the operational difficulties experienced
in the second half of 1995 at the Cutler-Hammer and Automotive
Controls business units.
<PAGE>
<PAGE>
Page 9
Results of the Company's Defense Systems segment for the three
months ended March 31 are summarized as follows (in millions):
1996 1995
---- ----
Net sales $ 21 $ 28
Operating profit (loss) (1)
Based on the current market outlook, 1996 continues to look like
a challenging year for Eaton. The Company's ability to report
improved results for 1996 depends on continuing progress in
addressing certain operational problems, achieving the benefits
of earlier resizing efforts and success with new product
introductions. The Company's goal remains to outperform
expectations based on the cyclical levels of Eaton's traditional
automotive markets.
Eaton is continuing efforts to expand in Latin America and the
Pacific Rim, regions expected to have the highest growth rates
for the foreseeable future. Recent examples of this expansion
are the acquisition of CAPCO, a Brazilian light- and medium-duty
transmission manufacturer, more fully discussed in the
'Subsequent Event - Acquisition of Business' note, and the
formation of a 75%-owned joint venture in the People's Republic
of China.
CAPCO is an excellent business fit from the standpoint of
product lines, manufacturing capability, geographic coverage and
developments in the worldwide motor vehicle industry. Coupled
with the Company's existing businesses in the region, this
acquisition will provide an extraordinary foundation for
profitable growth in Brazil and Latin America.
In April 1996, the Company signed a joint venture agreement with
Suzhou Electrical Apparatus Group Company (SEAG) in China to
manufacture and sell electrical circuit protection devices for
the Chinese market. The venture will be operated by
Cutler-Hammer, which is the world leader in circuit protection
technology. The agreement allows the Company to leverage the
strengths of both companies as SEAG is a leader in the markets
it serves and molded case circuit breakers are one of
Cutler-Hammer's strongest product lines.
Changes in Financial Condition
- ------------------------------
The Company's financial condition remained strong during the
first three months of 1996. Net working capital increased to
$918 million at March 31, 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 March 1996 primarily caused the
increase in accounts receivable at March 31 from the end of 1995.
Cash flow from net income was primarily used to fund increased
working capital, primarily the increase in accounts receivable.
Net cash provided by operating activities was used to fund the
purchase price of business acquisitions, capital expenditures
and cash dividends.
<PAGE>
<PAGE>
Page 10
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 24,
1996 at which security holders re-elected four directors and
ratified the appointment of the accounting firm of Ernst & Young
LLP as the Company's independent auditors for 1996.
Results of the voting in connection with each issue were as
follows:
Voting on Directors
- -------------------
For Withheld Total
--- -------- -----
C. E. Hugel 68,693,146 440,453 69,133,599
J. R. Miller 68,723,274 410,325 69,133,599
F. C. Moseley 68,712,951 420,648 69,133,599
V. A. Pelson 68,712,515 421,084 69,133,599
Ratification of Independent Auditors
- ------------------------------------
In Favor 68,502,268
Against 281,807
Abstain 349,524
----------
Total 69,133,599
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, 1996.
<PAGE>
<PAGE>
Page 11
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 6, 1996 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Vice President - Chief
Financial and Planning
Officer; Principal Financial
Officer
<PAGE>
<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>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3
<SECURITIES> 23
<RECEIVABLES> 1,100
<ALLOWANCES> 14
<INVENTORY> 739
<CURRENT-ASSETS> 2,079
<PP&E> 3,231
<DEPRECIATION> 1,594
<TOTAL-ASSETS> 5,130
<CURRENT-LIABILITIES> 1,161
<BONDS> 1,071
0
0
<COMMON> 39
<OTHER-SE> 2,007
<TOTAL-LIABILITY-AND-EQUITY> 5,130
<SALES> 1,736
<TOTAL-REVENUES> 1,736
<CGS> 1,278
<TOTAL-COSTS> 1,582
<OTHER-EXPENSES> (8)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 141
<INCOME-TAX> 46
<INCOME-CONTINUING> 95
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.20
</TABLE>
