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, 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 77.1 million Common Shares outstanding as of
September 30, 1997.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
(Millions) 1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 24 $ 22
Short-term investments 70 38
Accounts receivable 1,144 985
Inventories 785 729
Deferred income taxes and other
current assets 287 243
------- -------
2,310 2,017
Property, plant and equipment 1,837 1,792
Excess of cost over net assets of
businesses acquired 1,150 968
Deferred income taxes and other assets 548 530
------- -------
$ 5,845 $ 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 1,313 1,200
------- -------
1,343 1,230
Long-term debt 1,387 1,062
Postretirement benefits other than pensions 589 585
Other liabilities 291 270
Shareholders' equity 2,235 2,160
------- -------
$ 5,845 $ 5,307
======= =======
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
(Millions except for per share data) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,931 $ 1,719 $ 5,629 $ 5,237
Costs and expenses
Cost of products sold 1,390 1,283 4,068 3,873
Selling and administrative 272 244 801 728
Research and development 81 67 235 200
Purchased in-process research and development 85 0 85 0
------- ------- ------- -------
1,828 1,594 5,189 4,801
------- ------- ------- -------
Income from operations 103 125 440 436
Other income (expense)
Interest expense (22) (21) (62) (64)
Interest income 2 2 5 5
Other--net 12 9 39 28
------- ------- ------- -------
(8) (10) (18) (31)
------- ------- ------- -------
Income before income taxes 95 115 422 405
Income taxes 41 30 141 122
------- ------- ------- -------
Net income $ 54 $ 85 $ 281 $ 283
======= ======= ======= =======
Per Common Share
Net income $ 0.70 $ 1.11 $ 3.65 $ 3.66
Cash dividends paid 0.44 0.40 1.28 1.20
Average number of Common Shares outstanding 77.1 77.3 77.1 77.5
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Nine Months Ended
September 30
--------------------
(Millions) 1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 281 $ 283
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 250 236
Write-off of purchased in-process research
and development 85
Changes in operating assets and liabilities,
excluding acquisitions of businesses (118) (55)
Other--net (1) (36)
------- -------
497 428
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (382) (154)
Expenditures for property, plant and equipment (262) (198)
Net change in short-term investments (34) (5)
Other--net (25) 27
------- -------
(703) (330)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than
three months
Proceeds 394 122
Payments (137) (101)
Borrowings with original maturities of less than
three months--net 82 (20)
Proceeds from exercise of stock options 25 12
Cash dividends paid (99) (93)
Purchase of Common Shares (57) (49)
------- -------
208 (129)
------- -------
Increase (decrease) in cash 2 (31)
Cash at beginning of year 22 56
------- -------
Cash at end of period $ 24 $ 25
======= =======
</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 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.
Inventories
- -----------
September 30, December 31,
(Millions) 1997 1996
---- ----
Raw materials $265 $270
Work-in-process and
finished goods 615 552
---- ----
Gross inventories at FIFO 880 822
Excess of current cost
over LIFO cost (95) (93)
---- ----
Net inventories $785 $729
==== ====
Acquisition of Fusion Systems Corporation and Write-off of Purchased
In-Process Research and Development
- ---------------------------------------------------------------------
On August 4, 1997, the Company purchased Fusion Systems Corporation
for $293 million, before a reduction for cash acquired of $90
million. Fusion, which had sales of $85 million in 1996,
manufactures front-end process equipment for the semiconductor
industry.
The acquisition was accounted for by the purchase method of
accounting, and accordingly, the statements of income and the results
of the Electrical and Electronic Controls segment (Specialty Controls
class of similar products) for the third quarter include the results
of Fusion from the effective date of acquisition. The purchase price
allocation included $85 million for purchased in-process research and
<PAGE>
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development which was determined through an independent valuation.
This amount was expensed at the date of acquisition because
technological feasibility had not been established and no alternative
commercial use had been identified. Therefore, the third quarter
results include the write-off of $85 million for purchased in-process
research and development, with no income tax benefit, or $1.10 per
Common Share. As a result of the non-deductible nature of the write-
off, the estimated effective income tax rate for the year increased
to 33.4% compared to 30.1% in 1996.
Acquisition of Spicer Clutch
- ----------------------------
On September 2, 1997, the Company completed the acquisition of Dana
Corporation's worldwide Spicer clutch business for $180 million.
Spicer is a leader in the development of medium- and heavy-duty
truck clutches and vibration dampers and had 1996 sales of $200
million. This acquisition was accounted for by the purchase method
of accounting.
Future Accounting Pronouncements
- --------------------------------
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 reporting earnings per share. The
Company must adopt SFAS No. 128 at year-end 1997 and believes the
effect of adoption will not be material.
In June 1997, SFAS No. 130, 'Reporting Comprehensive Income', was
issued. SFAS No. 130 establishes new standards for reporting
comprehensive income and its components. The Company must adopt SFAS
No. 130 in the first quarter of 1998. The Company expects that
comprehensive income will not differ materially from net income,
except for foreign currency translation adjustments included in
comprehensive income, the effect of which could be material depending
on future changes in foreign exchange rates.
In June 1997, SFAS No. 131, 'Disclosures about Segments of an
Enterprise and Related Information', was issued. SFAS No. 131
changes the standards for reporting financial results by operating
segments, related products and services, geographic areas, and major
customers. The Company must adopt the new standard no later than
year-end 1998.
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 electrical and
electronic controls, truck transmissions, fasteners, leaf spring
assemblies and engine components. Effective January 1997, majority
<PAGE>
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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):
Nine Months Ended
September 30
----------------
1997 1996
---- ----
Income statement data
Net sales $543 $441
Gross margin 119 72
Net income 52 16
September 30, December 31,
1997 1996
---- ----
Balance sheet data
Current assets $398 $364
Noncurrent assets 196 215
Net intercompany payables 165 54
Current liabilities 113 111
Noncurrent liabilities 82 122
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Sales, and before a one-time charge, earnings and earnings per share
for the third quarter and the first nine months of 1997 were the
highest in the Company's history. During the third quarter of 1997,
the Company recorded a one-time charge of $85 million, with no income
tax benefit, or $1.10 per Common Share, to write-off the purchased
in-process research and development associated with its acquisition
of Fusion Systems Corporation, as discussed in the notes to the
financial statements. Earnings per share for the third quarter 1997,
after the one-time charge, were $.70 compared to $1.11 for the third
quarter 1996.
Most of the Company's markets are enjoying robust activity, and the
results demonstrate the considerable potential of the Company's
product and market strengths. The Company continues to build upon
those strengths through new product development, international
expansion, and acquisition. The Company expects 1997 to be a record
year, and a year notable for the steps taken to implement the
Company's long-term growth strategy.
Sales for the three months and nine months ended September 30, 1997
increased 12% and 7%, respectively, over the comparable periods in
1996. The improvement in sales was broadly based and primarily
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attributable to higher unit volumes in both the Electrical and
Electronic Controls and the Vehicle Components segments. Each
product class, except for Automotive and Appliance Controls,
experienced sales growth in the third quarter. Income from
operations, before the one-time charge, increased 50% and 20% in the
third quarter and first nine months of 1997, respectively over the
comparable periods in 1996. Net income and net income per Common
Share for the third quarter of 1997, before the one-time charge,
increased 64% and 62%, respectively, over the comparable periods in
1996. For the first nine months of 1997, net income and net income
per Common Share, before the one-time charge, increased 29% and 30%,
respectively, over the same periods 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
September 30
------------------
1997 1996
---- ----
Net sales
Industrial and Commercial Controls $ 586 $ 542
Automotive and Appliance Controls 277 281
Specialty Controls 179 139
------ ------
$1,042 $ 962
====== ======
Operating profit
Before write-off of purchased in-
process research & development $ 100 $ 78
Write-off of purchased in-process
research & development (85) 0
------ ------
$ 15 $ 78
====== ======
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Nine Months Ended
September 30
----------------
1997 1996
---- ----
Net sales
Industrial and Commercial Controls $1,688 $1,565
Automotive and Appliance Controls 868 859
Specialty Controls 462 487
------ ------
$3,018 $2,911
====== ======
Operating profit
Before write-off of purchased in-
process research & development $ 258 $ 246
Write-off of purchased in-process
research & development (85) 0
------ ------
$ 173 $ 246
====== ======
Electrical and Electronic Controls, the Company's largest segment,
achieved record sales and, before the $85 million one-time charge,
record operating profit in the third quarter of 1997. Segment sales
rose 8% in the third quarter and 4% in the first nine months of 1997
compared to the same periods in 1996. Operating profit, before the
one-time charge, increased 28% and 5%, respectively, in comparison to
the same periods in 1996. Before the one-time charge, operating
margin in this segment achieved an all-time high, reaching 9.6% of
sales. Sales activity in most markets of this segment continued to
be firm and the semiconductor equipment market began to rebound.
Industrial and Commercial Controls experienced record sales in the
third quarter of 1997, rising 8% over the comparable period in 1996.
This increase was attributable to strong industrial construction
markets, continued gains in Cutler-Hammer's market position, and a
booming commercial aircraft market. Cutler-Hammer is also now
receiving the full benefit of the synergies the Company anticipated
from the 1994 acquisition of Westinghouse's Distribution and Control
Business Unit.
Automotive and Appliance Controls sales were off 2% in the third
quarter of 1997 from last year's third quarter. Volumes were up
about 5%, but the higher exchange value of the U.S. dollar reduced
the year's sales by about $20 million.
Specialty Controls sales, which include the Company's Semiconductor
Equipment Operations, achieved record sales increasing 29% in the
third quarter of 1997 from the same quarter one year ago. The
Company is actively participating in the industry rebound in
semiconductor equipment. The Company anticipates that this business,
after a very difficult past 12 months, will show considerable gains
in the years immediately ahead. Excluding the acquisition of Fusion,
Specialty Controls sales reached $163 million, 17% above one year
ago.
<PAGE>
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During the third quarter, the Company announced the acquisition of
Tycor International, a small manufacturer of power conditioning and
surge suppression devices. Tycor will provide strategic growth
opportunities for Cutler-Hammer in a variety of markets, including
construction, industrial, medical, factory automation,
telecommunications, and residential.
The Company also announced during the third quarter it was building a
new plant in Gdansk, Poland to manufacture automotive controls, and
that it had formed a 51% Company-owned joint venture with JC
Corporation to manufacture automotive controls in Korea. This joint
venture in Korea will permit the Company to efficiently provide the
latest in automotive controls design and technology to important
customers in the Korean automotive industry. It is further evidence
of the Company's commitment to invest in, and grow with, the Korean
economy.
In addition, in the third quarter, the Company announced it had
agreed to sell its Appliance Controls business, which had sales of
$440 million in 1996, to Siebe plc for $310 million. This
announcement does not affect the Company's Automotive Controls
business, which serves the Company's key vehicle components markets.
The agreement is subject to certain conditions, including normal
governmental approvals.
Subsequent to the end of the third quarter, the Company also
announced the formation of Cutler-Hammer de Argentina, a 75% Company-
owned joint venture with Electro Integral Sudamerica, to manufacture
and distribute electrical equipment in the Mercosur countries. This
joint venture is another key step for the Company and supports the
global expansion component of the Company's growth initiative.
Vehicle Components segment results are summarized as follows (in
millions):
Three Months Ended
September 30
------------------
1997 1996
---- ----
Net sales
Truck Components $ 534 $ 439
Passenger Car Components 193 175
Off-Highway Vehicle Components 137 115
------ ------
$ 864 $ 729
====== ======
Operating profit $ 110 $ 62
====== ======
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Nine Months Ended
September 30
------------------
1997 1996
---- ----
Net sales
Truck Components $1,528 $1,341
Passenger Car Components 601 549
Off-Highway Vehicle Components 411 360
------ ------
$2,540 $2,250
====== ======
Operating profit $ 331 $ 239
====== ======
Vehicle Components segment sales and operating profit reached all-
time highs in the third quarter of 1997. Segment sales rose 19% in
the third quarter and 13% in the first nine months of 1997 compared
to the same periods in 1996, while operating profit increased 77% and
38%, respectively, over the same periods in 1996.
All of the Vehicle Components businesses are performing very well.
Particularly noteworthy has been CAPCO, the Brazilian transmission
manufacturer that the Company acquired last year, where the year-to-
year profits improved by more than $16 million. With a corresponding
increase in sales and new business awards, the Company is now
achieving the full strategic benefits of this important acquisition.
Truck Components experienced record sales in the third quarter of
1997, rising 22% over the prior year's third quarter. This compares
with industry volumes that are up about 20% in North and South
America and flat in Europe. Heavy truck orders in North America
continue to climb, consistent with the strength in America's
industrial sector. At this point, the Company expects 1997 North
American factory sales to be about 10% above last year's levels, with
further modest growth anticipated in 1998. After a long decline, the
Company is also seeing tentative signs of an industry upturn in
Europe.
Passenger Car Components also experienced record sales in the third
quarter of 1997, rising 10% over the comparable period in 1996
despite a $12 million, or 7%, reduction in sales due to unfavorable
exchange rates. This 17% increase in volume was well ahead of the
flat output of light vehicles in North America and Europe, reflecting
increasing penetration and greater participation in the burgeoning
Brazilian automotive market.
Off-Highway Vehicle Components sales also reached an all-time high,
rising 19% in the third quarter of 1997 over last year's third
quarter. The strong gains are attributable to very robust activity
in the North American hydraulics market, which was up 12% year-to-
year, and to higher levels of new product introductions for the
Company's worldwide agricultural and construction equipment
customers.
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On September 2, 1997, the Company completed the acquisition of Dana
Corporation's worldwide Spicer clutch business which is a leader in
the development of medium- and heavy-duty truck clutches and
vibration dampers. This acquisition will give the Company the
worldwide capability to meet customers' demands for systems solutions
to their heavy-truck drivetrain needs. Excluding Spicer clutch,
Truck Components sales reached $518 million for the third quarter of
1997, 18% ahead of one year ago.
During the third quarter, the Company announced it had established a
wholly-owned enterprise, Eaton Truck and Bus Components (Shanghai)
Company, Limited, to manufacture heavy truck transmissions for the
Chinese and other Asia/Pacific markets. This is the Company's fourth
operation in China, and the third announced in the past sixteen
months.
During the third quarter, the Company announced it had agreed to sell
its worldwide Axle and Brake business to Dana Corporation for $287
million. The worldwide axle and brake business had sales of $600
million in 1996. The agreement is subject to the due diligence
process and normal governmental approvals.
Results of the Defense Systems segment, comprised of AIL Systems
Inc., are summarized as follows (in millions):
Three Months Ended
September 30
------------------
1997 1996
---- ----
Net sales $ 25 $ 28
Operating (loss) profit (1) 2
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
Net sales $ 71 $ 76
Operating (loss) profit (2) 1
On October 1, 1997, the Company sold a majority of the stock of AIL
Systems Inc. The Company will retain a minority interest in the new
company. AIL had sales of $112 million in 1996.
Changes in Financial Condition
- ------------------------------
The Company remains in a strong financial position at September 30,
1997. Net working capital increased to $967 million at September 30,
1997 from $787 million at the end of 1996 and the current ratio rose
to 1.7 from 1.6 at those dates, respectively. Higher sales in
September 1997 primarily caused the increase in accounts receivable
<PAGE>
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at September 30 from the end of 1996. The acquisition of businesses
in the third quarter of 1997 was the cause of the increase in
goodwill and long-term debt.
During the third quarter, the Company entered into two new 364-day
revolving credit facilities totaling $250 million increasing the
existing facility to $750 million.
During the third quarter, Eaton's Board of Directors authorized the
Company to spend up to an additional $500 million over a five year
period to purchase Common Shares to enhance shareholder value and to
avoid any dilution of earnings per Common Share resulting from
recently announced agreements to divest the Axle/Brake and Appliance
Controls businesses. This authorization is in addition to the five
million share repurchase program authorized by the Board in December
1994.
Cash flow from operating activities, supplemented by commercial paper
borrowings, was used to fund capital expenditures, acquisition of
businesses, 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.
<PAGE>
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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, 1997.
<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: November 12, 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
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 24
<SECURITIES> 70
<RECEIVABLES> 1,160
<ALLOWANCES> 16
<INVENTORY> 785
<CURRENT-ASSETS> 2,310
<PP&E> 3,638
<DEPRECIATION> 1,801
<TOTAL-ASSETS> 5,845
<CURRENT-LIABILITIES> 1,343
<BONDS> 1,387
0
0
<COMMON> 39
<OTHER-SE> 2,196
<TOTAL-LIABILITY-AND-EQUITY> 5,845
<SALES> 5,629
<TOTAL-REVENUES> 5,629
<CGS> 4,068
<TOTAL-COSTS> 5,189
<OTHER-EXPENSES> (44)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 422
<INCOME-TAX> 141
<INCOME-CONTINUING> 281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 281
<EPS-PRIMARY> 3.65
<EPS-DILUTED> 3.54
</TABLE>
