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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 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 77.6 million Common Shares outstanding as of
June 30, 1996.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, December 31,
(Millions) 1996 1995
---- ----
ASSETS
Current assets
Cash $ 8 $ 56
Short-term investments 21 28
Accounts receivable 1,093 932
Inventories 735 735
Deferred income taxes and
other current assets 245 216
------ ------
2,102 1,967
Property, plant and equipment 1,686 1,653
Excess of cost over net assets
of businesses acquired 950 895
Deferred income taxes and
other assets 517 538
------ ------
$5,255 $5,053
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current
portion of long-term debt $ 41 $ 50
Accounts payable and other
current liabilities 1,113 1,095
------ ------
1,154 1,145
Long-term debt 1,143 1,084
Postretirement benefits other
than pensions 583 579
Other liabilities 271 270
Shareholders' equity 2,104 1,975
------ ------
$5,255 $5,053
====== ======
See accompanying notes.
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<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Income
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
(Millions except for per share data) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,782 $1,758 $3,518 $3,489
Costs and expenses
Cost of products sold 1,306 1,289 2,584 2,554
Selling and administrative 245 238 484 470
Research and development 68 58 133 115
------ ------ ------ ------
1,619 1,585 3,201 3,139
------ ------ ------ ------
Income from operations 163 173 317 350
Other income (expense)
Interest expense (22) (23) (43) (43)
Interest income 1 2 3 3
Other income--net 7 12 13 17
------ ------ ------ ------
(14) (9) (27) (23)
------ ------ ------ ------
Income before income taxes 149 164 290 327
Income taxes 46 54 92 109
------ ------ ------ ------
Net income $ 103 $ 110 $ 198 $ 218
====== ====== ====== ======
Per Common Share
Net income $ 1.32 $ 1.41 $ 2.55 $ 2.79
Cash dividends paid .40 .40 .80 .70
Average number of Common Shares outstanding 77.7 77.9 77.7 77.9
See accompanying notes.
</TABLE>
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<TABLE>
Eaton Corporation
<CAPTION>
Condensed Statements of Consolidated Cash Flows
Six Months Ended
June 30
--------------------
(Millions) 1996 1995
---- ----
<S> <C> <C>
Operating activities
Net income $ 198 $ 218
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 154 137
Changes in operating assets and liabilities,
excluding acquisitions of businesses (119) (200)
Other--net (1) 26
----- -----
Net cash provided by operating activities 232 181
Investing activities
Acquisitions of businesses, less cash acquired (151) (112)
Expenditures for property, plant and equipment (123) (144)
Net change in short-term investments 5 2
Other--net 23 14
----- -----
Net cash used in investing activities (246) (240)
Financing activities
Borrowings with original maturities of more than
three months
Proceeds 102 299
Payments (59) (64)
Borrowings with original maturities of less than
three months--net (9) (123)
Proceeds from exercise of stock options 10 7
Cash dividends paid (62) (55)
Purchase of Common Shares (16) (14)
----- -----
Net cash (used in) provided by financing activities (34) 50
----- -----
Decrease in cash (48) (9)
Cash at beginning of year 56 18
----- -----
Cash at end of period $ 8 $ 9
===== =====
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
- -----------
June 30, December 31,
(Millions) 1996 1995
---- ----
Raw materials $238 $225
Work-in-process and
finished goods 594 604
---- ----
Gross inventories at FIFO 832 829
Excess of current cost
over LIFO cost (97) (94)
---- ----
Net inventories $735 $735
==== ====
Acquisition of Business
- -----------------------
On April 16, 1996, the Company acquired CAPCO Automotive
Products Corporation (CAPCO) for a purchase price of $135
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. This
operation was subsequently renamed Eaton Truck Components Ltda.
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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):
Six Months Ended
June 30
-----------------
1996 1995
---- ----
Income statement data
Net sales $331 $324
Gross margin 54 60
Net income 14 26
June 30, December 31,
1996 1995
---- ----
Balance sheet data
Current assets $329 $324
Noncurrent assets 150 152
Net intercompany payables 11 15
Current liabilities 87 97
Noncurrent liabilities 115 117
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 second quarter and first half of 1996 were flat
compared to the same periods of 1995. Net income and net
income per Common Share decreased 6% for the second quarter and
9% for the first half of 1996 from the comparable periods 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 half of 1996, activity in the
Company's markets around the world was much more mixed.
Overall, performance in the second quarter and first half of
1996 demonstrates an improvement from previous years in the
balance between the Company's two major business segments:
Vehicle Components and Electrical and Electronic Controls.
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Income from operations decreased 6% and 9% in the second
quarter and first half of 1996, respectively, from the same
periods in 1995. The decrease was primarily attributable to
reduced sales of Truck Components offset by increased sales in
the Electrical and Electronic Controls segment, which
historically have had a lower gross margin. The decrease also
resulted from increased costs associated with various research
and development, and productivity improvement programs. The
Company spent $8.5 million in the second quarter and $15
million in the first half of 1996 on research and development
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.
Results of the Company's Vehicle Components segment are
summarized as follows (in millions):
Three Months Ended
June 30
------------------
1996 1995
---- ----
Net sales
Truck Components $453 $516
Passenger Car Components 191 179
Off-Highway Vehicle
Components 127 118
---- ----
$771 $813
==== ====
Operating profit $ 89 $111
==== ====
Six Months Ended
June 30
------------------
1996 1995
---- ----
Net sales
Truck Components $ 902 $1,046
Passenger Car Components 370 353
Off-Highway Vehicle
Components 249 245
------ ------
$1,521 $1,644
====== ======
Operating profit $ 177 $ 234
====== ======
Performance in this segment continues to remain below Company
expectations despite excellent performance in many business
units.
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Vehicle Components segment sales decreased 5% in the second
quarter and 7% in the first half of 1996 as compared to the
unprecedented levels experienced in the same periods of 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, second quarter 1996
segment sales approximated $748 million, an 8% decrease as
compared to the same period in 1995.
Driven by a 22% decrease in North American factory sales of
heavy-duty trucks, a 30% decrease in activity in Latin American
markets and a 4% decrease in European production, Truck
Components sales decreased 12% in the second quarter of 1996
from the prior year's second 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. While the North American
heavy-duty truck market is slowing, backlog, which is at 72,000
units at June 30, 1996, remains strong by historical standards.
Excluding the effects of CAPCO, Truck Components sales
decreased 15% from the prior year's level.
As a result of a 4% increase in North American passenger car
production and despite a flat market in Europe, Passenger Car
Components sales rose 7% in the second quarter of 1996 as
compared to the same period in 1995. Off-Highway Vehicle
Components sales rose 8% in the second quarter of 1996 from the
year-ago quarter despite generally flat market activity.
Operating profit for the Vehicle Components segment decreased
20% and 24% for the second quarter and first half of 1996,
respectively, from the comparable periods of 1995. The
reduction in operating profits was primarily attributable to
lower sales volumes of Truck Components. Operating profit for
the second quarter and first half of 1996 also was reduced by
expenses of $4 million and $8 million, respectively, which were
incurred for the purpose of bringing the Company's North
American axle/brake business unit to acceptable levels of
profitability. The Company expects to spend an additional $9
million in 1996 and to achieve $15 million in annual savings by
1997. Excluding the effects of CAPCO, second quarter 1996
operating profit approximated $92 million, a 17% decrease as
compared to the same period in 1995. While CAPCO is not
expected to have a material effect on 1996 results, the Company
believes this strategic acquisition will become accretive in
1997.
To allow the Company to have direct access to sub-Saharan
medium- and heavy-duty 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 acquired in the second quarter of 1996.
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Results of the Company's Electrical and Electronic Controls
segment are summarized as follows (in millions):
Three Months Ended
June 30
------------------
1996 1995
---- ----
Net sales
Industrial and Commercial
Controls $518 $496
Automotive and Appliance
Controls 294 266
Specialty Controls 172 153
---- ----
$984 $915
==== ====
Operating profit $ 86 $ 80
==== ====
Six Months Ended
June 30
------------------
1996 1995
---- ----
Net sales
Industrial and Commercial
Controls $1,023 $ 967
Automotive and Appliance
Controls 578 539
Specialty Controls 348 281
------ ------
$1,949 $1,787
====== ======
Operating profit $ 168 $ 150
====== ======
Electrical and Electronic Controls, the Company's largest
segment, continued its trend of increased sales, which rose 8%
in the second quarter and 9% in the first half of 1996 over the
comparable periods of 1995. All of the business units
comprising this segment are continuing to experience record
sales.
Aided by continued strength in nonresidential and residential
construction markets and the beginning of a rebound in
aerospace controls offsetting a sluggish industrial controls
market, Industrial and Commercial Controls sales rose 4% in the
second quarter of 1996 over the comparable period in 1995.
Automotive and Appliance Controls sales were particularly
strong in the second quarter of 1996, rising 11% from the
second quarter of 1995, in an environment where North American
light vehicle production increased 5% and continued flat
activity in European markets. This better-than-market
performance is attributed to new program launches in the North
American automotive switch business and the acquisition of the
IKU Group in May 1995.
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While Specialty Controls sales rose 12% in the second quarter
of 1996 from the comparable period in 1995, they were
essentially flat compared to the first quarter of 1996.
Worldwide demand for semiconductor capital equipment, which is
included in Specialty Controls, has slowed in lagged response
to the downturn in the semiconductor industry's book-to-bill
ratio. As the leading worldwide producer of ion implanters,
the Company is seeing the effects of the slowdown in its
operating results. To complement the Company's ion
implantation equipment business, High Temperature Engineering
Corporation, an 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 acquired in the second quarter of 1996.
Operating profit for the Electrical and Electronic Controls
segment continued to be strong, improving 8% in the second
quarter and 12% for the first half of 1996 over the same
periods in 1995. The improvement in operating profits was
primarily attributable to improved sales volumes, but also to
added contributions from recently acquired businesses,
continued stringent cost containment efforts and the
realization of benefits from earlier resizings.
Results of the Company's Defense Systems segment are summarized
as follows (in millions):
Three Months Ended
June 30
------------------
1996 1995
---- ----
Net sales $27 $30
Operating profit (1)
Six Months Ended
June 30
------------------
1996 1995
---- ----
Net sales $48 $58
Operating profit (1) (1)
Based on the current market outlook, 1996 continues to look
like a challenging year for Eaton. While North American
markets continue to track Eaton's expectations, the
semiconductor capital equipment market will not be a source of
incremental strength for the remainder of the year. European
markets may be softer than Eaton's relatively pessimistic
expectations, and recovery in Latin America is taking longer
than earlier anticipated.
The Company's ability to report improved results for the
remainder of 1996 continues to depend on making sustained
progress in addressing certain operational problems, achieving
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Page 11
the benefits of earlier resizing efforts and success with new
product introductions. Regardless of market conditions, the
Company's goal remains to outperform expectations based on the
cyclical levels of Eaton's traditional markets.
Eaton is continuing efforts to expand outside of North America,
especially 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 and
transaxle components manufacturer, as more fully discussed in
the "Business Acquisition" note, the formation of a 75%-owned
joint venture with Suzhou Electrical Apparatus Group Company
(SEAG) in the People's Republic of China, and the acquisition
of a South African medium- and heavy-duty truck transmission
manufacturer as previously discussed.
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 provides an extraordinary foundation for
profitable growth in Brazil and Latin America.
In April 1996, the Company signed a joint venture agreement
with SEAG in the People's Republic of 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
partners 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 half of 1996. Net working capital increased to $948
million at June 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 levels in May and June 1996 primarily caused the
increase in accounts receivable at June 30, 1996 from the end
of 1995. The CAPCO acquisition was the principal cause of the
$55 million increase in excess of cost over net assets of
businesses acquired and the $50 million increase in total debt
at June 30, 1996 from year-end 1995. Total debt consists of
short-term debt, long-term debt and current portion of long-
term debt.
Cash flow from net income, supplemented by commercial paper
borrowings, was used to fund increased working capital,
primarily the increase in accounts receivable, the purchase
price of business acquisitions, capital expenditures and cash
dividends.
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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 June 30, 1996.
<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: July 31, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 8
<SECURITIES> 21
<RECEIVABLES> 1,107
<ALLOWANCES> 14
<INVENTORY> 735
<CURRENT-ASSETS> 2,102
<PP&E> 3,319
<DEPRECIATION> 1,633
<TOTAL-ASSETS> 5,255
<CURRENT-LIABILITIES> 1,154
<BONDS> 1,143
0
0
<COMMON> 39
<OTHER-SE> 2,065
<TOTAL-LIABILITY-AND-EQUITY> 5,255
<SALES> 3,518
<TOTAL-REVENUES> 3,518
<CGS> 2,584
<TOTAL-COSTS> 3,201
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 290
<INCOME-TAX> 92
<INCOME-CONTINUING> 198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198
<EPS-PRIMARY> 2.55
<EPS-DILUTED> 2.50
</TABLE>
