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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, 1997
-------------
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 ninety days. Yes X
---
There were 77.3 million Common Shares outstanding as of
June 30, 1997.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
(Millions) 1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 23 $ 22
Short-term investments 29 38
Accounts receivable 1,120 985
Inventories 744 729
Deferred income taxes and other
current assets 249 243
------ ------
2,165 2,017
Property, plant and equipment 1,762 1,792
Excess of cost over net assets of
businesses acquired 949 968
Deferred income taxes and other assets 524 530
------ ------
$5,400 $5,307
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of
long-term debt $ 30 $ 30
Accounts payable and other current
liabilities 1,198 1,200
------ ------
1,228 1,230
Long-term debt 1,055 1,062
Postretirement benefits other than pensions 588 585
Other liabilities 255 270
Shareholders' equity 2,274 2,160
------ ------
$5,400 $5,307
====== ======
See accompanying notes.
</TABLE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Millions except for per share data) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,909 $1,782 $3,698 $3,518
Costs and expenses
Cost of products sold 1,371 1,310 2,678 2,590
Selling and administrative 272 246 529 484
Research and development 79 68 154 133
------ ------ ------ ------
1,722 1,624 3,361 3,207
------ ------ ------ ------
Income from operations 187 158 337 311
Other income (expense)
Interest expense (20) (22) (40) (43)
Interest income 1 1 3 3
Other--net 14 12 27 19
------ ------ ------ ------
(5) (9) (10) (21)
------ ------ ------ ------
Income before income taxes 182 149 327 290
Income taxes 56 46 100 92
------ ------ ------ ------
Net income $ 126 $ 103 $ 227 $ 198
====== ====== ====== ======
Per Common Share
Net income $ 1.64 $ 1.32 $ 2.94 $ 2.55
Cash dividends paid .44 .40 .84 .80
Average number of Common Shares outstanding 77.1 77.7 77.1 77.7
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Six Months Ended
June 30
----------------
(Millions) 1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $227 $198
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 165 154
Changes in operating assets and liabilities,
excluding acquisitions of businesses (185) (119)
Other--net (6) (1)
---- ----
201 232
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (151)
Expenditures for property, plant and equipment (152) (123)
Other--net 25 28
---- ----
(127) (246)
Net cash used in financing activities
Borrowings with original maturities of more than
three months
Proceeds 64 102
Payments (118) (59)
Borrowings with original maturities of less than
three months--net 53 (9)
Proceeds from exercise of stock options 18 10
Cash dividends paid (65) (62)
Purchase of Common Shares (25) (16)
---- ----
(73) (34)
---- ----
Increase (decrease) in cash 1 (48)
Cash at beginning of year 22 56
---- ----
Cash at end of period $ 23 $ 8
==== ====
</TABLE>
See accompanying notes.
<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 1996 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.
In February 1997, Statement of Financial Accounting Standards (SFAS)
No. 128, 'Earnings per Share', was issued. SFAS No. 128 establishes
new standards for computing and presenting earnings per share. The
Company must adopt SFAS No. 128 for the year ending 1997 and believes
the effect of adoption will not be material.
Inventories
- -----------
June 30, December 31,
(Millions) 1997 1996
---- ----
Raw materials $255 $270
Work-in-process and
finished goods 584 552
---- ----
Gross inventories at FIFO 839 822
Excess of current cost
over LIFO cost (95) (93)
---- ----
Net inventories $744 $729
==== ====
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
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engaged principally in the manufacture and/or sale of electrical and
electronic controls, truck transmissions, fasteners, leaf spring
assemblies and engine components. Effective January 1997, majority
ownership of a subsidiary was transferred to a subsidiary of Eaton
Offshore from Eaton. Summary financial information for Eaton
Offshore and its consolidated subsidiaries is as follows (in
millions):
Six Months Ended
June 30
----------------
1997 1996
---- ----
Income statement data
Net sales $360 $330
Gross margin 75 52
Net income 34 7
June 30, December 31,
1997 1996
---- ----
Balance sheet data
Current assets $392 $364
Noncurrent assets 189 215
Net intercompany payables 175 54
Current liabilities 109 111
Noncurrent liabilities 80 122
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Sales, earnings and earnings per share for the second quarter and the
first six months of 1997 were the highest in the Company's history.
Eaton's 1997 year-to-date performance clearly indicates that
operating results are, again, consistent with the Company's
objectives and that the Company has taken some meaningful steps to
start the implementation of its long-term growth strategy. The
Company continues to build upon existing strengths via new product
introductions, increased international expansion and strategic
acquisitions. The Company remains committed to taking those actions
needed to achieve superior performance in 1997 and beyond.
Sales for the three months and six months ended June 30, 1997
increased 7% and 5%, respectively, over the comparable periods in
1996. The improvement in sales was broadly based and primarily
attributable to higher unit volumes in both the Electrical and
Electronic Controls and the Vehicle Components segments. Each
product class, except for Specialty Controls, and geographic region
in these segments experienced sales growth.
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Income from operations increased 18% and 8% in the second quarter and
first half of 1997, respectively. Net income and net income per
Common Share for the second quarter of 1997 increased 22% and 24%,
respectively, over the comparable period in 1996. For the first half
of 1997, both net income and net income per Common Share increased
15% over the same period in 1996. These improvements were primarily
a result of the higher sales volumes previously discussed, as well as
benefits from the restructuring investments made during 1996.
Electrical and Electronic Controls segment results are summarized as
follows (in millions):
Three Months Ended
June 30
------------------
1997 1996
---- ----
Net sales
Industrial and Commercial Controls $ 568 $ 518
Automotive and Appliance Controls 296 294
Specialty Controls 158 172
------ ------
$1,022 $ 984
====== ======
Operating profit $ 88 $ 86
====== ======
Six Months Ended
June 30
----------------
1997 1996
---- ----
Net sales
Industrial and Commercial Controls $1,102 $1,023
Automotive and Appliance Controls 591 578
Specialty Controls 283 348
------ ------
$1,976 $1,949
====== ======
Operating profit $ 158 $ 168
====== ======
Electrical and Electronic Controls, the Company's largest segment,
achieved record sales and operating profit in the second quarter of
1997. Electrical and Electronic Controls segment sales rose 4% in
the second quarter and 1% in the first half of 1997 compared to the
same periods in 1996, while operating profit increased 2% and
decreased 6%, respectively, in comparison to the same periods in
1996. Sales activity in this segment continued to be firm except for
the depressed semiconductor capital equipment market.
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Industrial and Commercial Controls experienced record sales in the
second quarter of 1997, rising 10% over the comparable period in
1996. This strong performance is attributable to continued gains in
Cutler-Hammer's market position, strong nonresidential construction
markets that more than offset modestly lower residential
construction, and a sharp rise in the demand for commercial and
aerospace controls.
Automotive and Appliance Controls sales also reached an all-time
high, rising 1% in the second quarter of 1997 over last year's second
quarter, despite a $13 million reduction in sales due to unfavorable
exchange rates. Adjusting for these unfavorable exchange rates,
sales rose 5% compared to a 1% increase in the North American and
European production of these products.
Specialty Controls sales, which include the Company's Semiconductor
Equipment Operations, decreased 8% in the second quarter of 1997 from
the year ago quarter, while operating profit decreased $13 million
due to lower sales and higher research and development spending.
Although sales were still below last year's levels, the Company has
seen a steady rise in semiconductor equipment orders from last fall's
trough. Second quarter 1997 shipments rose from the first quarter
and, based on backlog, the Company continues to expect that sales
will exceed year ago levels beginning in the third quarter of 1997.
During the quarter, the Company signed a joint venture agreement with
Weihai Measuring Tools Factory to manufacture washing machine
controls for the Chinese domestic market. The Company expects the
agreement to provide the basis for development of additional
appliance controls business in the future. By establishing the joint
venture, Eaton became the first Western manufacturer of appliance
program timers in China.
The Company also entered into a definitive merger agreement to
acquire Fusion Systems Corporation, a leading supplier of front-end
process equipment to the semiconductor industry with strong market
positions in photoresist ash, post-ash residue removal and
photostabilization. In 1996, Fusion Systems had sales of $85
million, more than half of which were in Europe and Pacific Rim
countries. This acquisition is expected to be a significant factor
in Eaton's semiconductor equipment business growth plans, with a goal
of reaching $1.5 billion in annual sales in five years. This is one
of the major drivers for the Company's overall corporate target of
reaching $10 billion in sales by the year 2000. The merger of
Fusion Systems' photostabilization and asher technologies with
Eaton's ion implantation and thermal processing systems will enhance
the product portfolio that the Company brings to semiconductor
manufacturing customers.
<PAGE>
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Vehicle Components segment results are summarized as follows (in
millions):
Three Months Ended
June 30
------------------
1997 1996
---- ----
Net sales
Truck Components $ 512 $ 453
Passenger Car Components 210 194
Off-Highway Vehicle Components 139 124
------ ------
$ 861 $ 771
====== ======
Operating profit $ 120 $ 89
====== ======
Six Months Ended
June 30
----------------
1997 1996
---- ----
Net sales
Truck Components $ 994 $ 902
Passenger Car Components 408 374
Off-Highway Vehicle Components 274 245
------ ------
$1,676 $1,521
====== ======
Operating profit $ 221 $ 177
====== ======
Vehicle Components segment sales and operating profit reached all-
time highs in the second quarter of 1997. Vehicle Components segment
sales rose 12% in the second quarter and 10% in the first half of
1997 compared to the same periods in 1996, while operating profit
increased 35% and 25%, respectively, over the same periods in 1996.
The improvement in operating profit was primarily attributable to
improved sales volumes. The Company is also continuing to reap the
benefit of the restructuring actions taken over the past two years.
The operating results of CAPCO, the Brazilian transmission
manufacturer acquired in April 1996, have continued to improve
markedly, and also were a significant factor in the year-over-year
operating profit improvement.
Truck Components sales increased 13% in the second quarter of 1997
over the prior year's second quarter compared to a 4% increase in
North American factory sales of heavy-duty trucks, a 20% increase in
activity in Latin American markets and a 10% decrease in European
production. Because heavy-duty truck orders in North America
continue to climb commensurate with the robust growth of U.S.
manufacturing, the Company expects Class 8 North American factory
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sales in 1997 to be 5% above 1996's level of 192,000 units. North
American heavy-duty truck backlog, which was at 98,000 units at June
30, 1997, remains high by historical standards.
Passenger Car Components experienced record sales in the second
quarter of 1997, rising 8% over the comparable period in 1996 despite
an $8 million, or 4%, reduction in sales due to unfavorable exchange
rates. This compares with a flat level of passenger car production
in North America and Europe and a 20% rise in Latin American
activity.
Off-Highway Vehicle Components sales also reached an all-time high,
rising 12% in the second quarter of 1997 over last year's second
quarter. Hydraulics industry shipments in the second quarter of 1997
were 9% above year earlier levels. This better-than-market
performance was attributed to the success of new hydraulics products
introduced over the past year which enabled the Company to better
serve worldwide agricultural and construction equipment customers.
During the quarter, the Company established a manufacturing facility
in Poland to begin supplying engine valves to Fiat and other
customers who are locating in Eastern Europe. The decision to
produce engine valves in Poland was based, in part, on the growing
importance of Eastern European automotive manufacturing. The Company
also announced that by October 1997, a facility in South Korea will
be opened to build limited slip differentials for Korean automakers
Hyundai and Kia. This facility will enable the Company to be more
responsive to customers' needs and is expected to provide a good
opportunity for the Company to grow because Korean light vehicle
manufacturers are increasing their use of traction modifiers. These
business ventures continue the Company's expansion into global
markets.
In July 1997, the Company announced the signing of agreements whereby
Eaton will purchase Dana Corporation's $200 million worldwide clutch
business for $180 million, and Dana will purchase Eaton's $600
million worldwide axle and brake business for $287 million. In
addition to the sale of the two businesses, a long-term agreement was
also signed with Dana whereby Eaton will exclusively represent, on a
global basis, a complete range of Dana heavy-duty drivetrain products to
North American original equipment manufacturers. These agreements
are subject to the due diligence process and normal governmental
approvals. The Company views this transaction as one of the most
strategic repositioning moves made by Eaton in its recent history,
and a reflection of the Company's commitment to the trucking
industry. Increasingly, customers are demanding system solutions
from their suppliers, and these agreements give the Company the
ability to meet these demands. The addition of the clutch business
to the Company's market-leading medium- and heavy-duty transmissions,
and the marketing rights for axles, brakes and driveshafts, should
permit Eaton to better respond to the demand for enhanced drivetrain
solutions by customers. The efficiencies resulting from these
agreements, combined with global clutch opportunities, are expected
to provide Eaton with a solid presence in the marketplace from which
to grow.
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Defense Systems segment results are summarized as follows (in
millions):
Three Months Ended
June 30
------------------
1997 1996
---- ----
Net sales $ 26 $ 27
Operating loss (3) (1)
Six Months Ended
June 30
----------------
1997 1996
---- ----
Net sales $ 46 $ 48
Operating loss (1) (1)
Changes in Financial Condition
- ------------------------------
The Company remains in a strong financial position at June 30, 1997.
Net working capital increased to $937 million at June 30, 1997 from
$787 million at the end of 1996 and the current ratio rose to 1.8
from 1.6 at those dates, respectively. Higher sales in June 1997
primarily caused the increase in accounts receivable at June 30 from
the end of 1996.
Cash flow from operating activities, supplemented by commercial paper
borrowings, was used to fund capital expenditures, repayment of debt,
cash dividends and the repurchase of Common Shares.
Forward-Looking Statements
- --------------------------
The Company has included in this Form 10-Q, expectations of the
outlook for 1997. Actual results could differ materially from these
expectations, since they are forward-looking statements which
inherently are subject to risks and uncertainties. Important factors
which could cause actual results to differ from the 1997 expectations
include: continuity of business relationships with and purchases by
major customers, product mix, competitive pressure on sales and
pricing, increases in material and other production costs which
cannot be recouped in product pricing, failure to complete announced
acquisitions and divestitures, difficulties in introducing new
products as well as global economic and market conditions.
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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, 1997.
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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: August 11, 1997 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive 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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 23
<SECURITIES> 29
<RECEIVABLES> 1,135
<ALLOWANCES> 15
<INVENTORY> 744
<CURRENT-ASSETS> 2,165
<PP&E> 3,517
<DEPRECIATION> 1,755
<TOTAL-ASSETS> 5,400
<CURRENT-LIABILITIES> 1,228
<BONDS> 1,055
0
0
<COMMON> 39
<OTHER-SE> 2,235
<TOTAL-LIABILITY-AND-EQUITY> 5,400
<SALES> 3,698
<TOTAL-REVENUES> 3,698
<CGS> 2,678
<TOTAL-COSTS> 3,361
<OTHER-EXPENSES> (30)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 327
<INCOME-TAX> 100
<INCOME-CONTINUING> 227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.86
</TABLE>
