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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 March 31, 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 77.2 million Common Shares outstanding as of
March 31, 1997.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
(Millions) 1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 25 $ 22
Short-term investments 43 38
Accounts receivable 1,081 985
Inventories 723 729
Deferred income taxes and other
current assets 261 243
------ ------
2,133 2,017
Property, plant and equipment 1,743 1,792
Excess of cost over net assets of
businesses acquired 957 968
Deferred income taxes and other assets 526 530
------ ------
$5,359 $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 1,178 1,200
------ ------
1,208 1,230
Long-term debt 1,121 1,062
Postretirement benefits other than pensions 579 585
Other liabilities 261 270
Shareholders' equity 2,190 2,160
------ ------
$5,359 $5,307
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended
March 31
------------------
(Millions except for per share data) 1997 1996
---- ----
<S> <C> <C>
Net sales $1,789 $1,736
Costs and expenses
Cost of products sold 1,307 1,280
Selling and administrative 257 238
Research and development 75 65
------ ------
1,639 1,583
------ ------
Income from operations 150 153
Other income (expense)
Interest expense (20) (21)
Interest income 2 2
Other--net 13 7
------ ------
(5) (12)
------ ------
Income before income taxes 145 141
Income taxes 44 46
------ ------
Net income $ 101 $ 95
====== ======
Per Common Share
Net income $ 1.31 $ 1.23
Cash dividends paid .40 .40
Average number of Common Shares outstanding 77.1 77.7
</TABLE>
See accompanying notes.
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Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Three Months Ended
March 31
------------------
(Millions) 1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $101 $ 95
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 82 75
Changes in operating assets and liabilities,
excluding acquisitions of businesses (154) (129)
Other--net (2) (5)
---- ----
27 36
Net cash used in investing activities
Expenditures for property, plant and equipment (47) (55)
Other--net (6) 6
---- ----
(53) (49)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than
three months
Proceeds 64 8
Payments (82) (36)
Borrowings with original maturities of less than
three months--net 84 11
Proceeds from exercise of stock options 11 9
Cash dividends paid (31) (31)
Purchase of Common Shares (17) (1)
---- ----
29 (40)
---- ----
Increase (decrease) in cash 3 (53)
Cash at beginning of year 22 56
---- ----
Cash at end of period $ 25 $ 3
==== ====
</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
- -----------
March 31, December 31,
(Millions) 1997 1996
---- ----
Raw materials $243 $270
Work-in-process and
finished goods 574 552
---- ----
Gross inventories at FIFO 817 822
Excess of current cost
over LIFO cost (94) (93)
---- ----
Net inventories $723 $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 and transaxle components. As a result of the
Company's acquisition of CAPCO, as further discussed in Management's
Discussion and Analysis of Financial Condition and Results of
Operations, the majority ownership of CAPCO's Brazilian operations
was acquired by Eaton Offshore through its subsidiaries. Summary
financial information for Eaton Offshore and its consolidated
subsidiaries is as follows (in millions):
Three Months Ended
March 31
------------------
1997 1996
---- ----
Income statement data
Net sales $192 $154
Gross profit 34 24
Net income 14 7
March 31, December 31,
1997 1996
---- ----
Balance sheet data
Current assets $361 $364
Noncurrent assets 183 215
Net intercompany payables 139 54
Current liabilities 98 111
Noncurrent liabilities 102 122
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
The Company achieved record sales in the first quarter of 1997,
rising 3% over 1996. Net income and net income per Common Share were
the second best first quarter results, increasing 6% over 1996. The
Company is pleased with its overall financial performance in the
first quarter of 1997. These results reinforce the Company's
confidence that Eaton is on track to achieving the aggressive
performance goals set for 1997.
Income from operations decreased 2% in the first quarter of 1997 from
1996. The Company's first quarter 1997 performance was not achieved
by compromising investments in the future, as the reduction in income
from operations partially resulted from increased costs associated
with various major growth programs designed to accelerate 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. First quarter 1997 results
included $7 million of additional expense for these major growth
programs.
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Electrical and Electronic Controls segment results for the first
quarter are summarized as follows (in millions):
1997 1996
---- ----
Net sales
Industrial and Commercial Controls $534 $505
Automotive and Appliance Controls 295 284
Specialty Controls 125 176
---- ----
$954 $965
==== ====
Operating profit $ 70 $ 82
==== ====
Sales for Electrical and Electronic Controls, the Company's largest
segment, in the first quarter of 1997 were slightly below 1996, while
operating profit decreased 15% from 1996. Activity in this segment
continued firm outside of the slumping semiconductor capital
equipment market and operating performance was generally improved.
These results are encouraging considering the fact that last year the
Company's Semiconductor Equipment business was surging. A year ago,
that business had consolidated first quarter sales of $130 million
and, including the sales of the Company's 50% joint venture Sumitomo
Eaton Nova, total sales of $178 million. This year, consolidated
sales and operating profit relating to this business decreased more
than $50 million and $25 million, respectively. Without the steep
year-to-year decrease in Semiconductor Equipment, the Electrical and
Electronic Controls segment would have achieved another all-time
record for both sales and operating profit.
The sharp downturn in worldwide demand for semiconductor capital
equipment as discussed previously caused Specialty Controls' 29%
sales decrease in the first quarter of 1997 from 1996. However, like
other industry participants, the Company's new orders rose 25% over
the past six months. Assuming this new order trend continues, the
Company's sales should begin to show year-to-year improvement during
the second half of 1997. Over time, this business demonstrates
excellent growth and, because of the Company's worldwide leading
position in ion implantation, it is an attractive business for Eaton.
However, this extraordinarily dynamic market requires a sustained
commitment to research and new product development. The Company
spent an additional $3 million in research and new product
development for Semiconductor Equipment in the first quarter of 1997
over 1996. Although that investment hurts today's operating results,
it will help to ensure that the Company takes full advantage of
Eaton's leadership position in the years ahead.
Aided by continued strong nonresidential construction markets and
modest gains in Cutler-Hammer's market position, Industrial and
Commercial Controls experienced record sales in the first quarter of
1997, rising 6% over 1996, in an environment where the markets served
increased only 3% on a year-to-year basis. Automotive and Appliance
Controls sales rose 4% in the first quarter of 1997 over 1996 even
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though there was only a 2% increase in the North American and
European production of these products.
Vehicle Components segment results for the first quarter are
summarized as follows (in millions):
1997 1996
---- ----
Net sales
Truck Components $483 $449
Passenger Car Components 197 180
Off-Highway Vehicle Components 135 121
---- ----
$815 $750
==== ====
Operating profit $101 $ 88
==== ====
Vehicle Components segment operating results in the first quarter of
1997 were sharply improved from recent quarters. Segment sales rose
9% in the first quarter of 1997 compared to 1996, while operating
profit increased 15% over 1996. The improvement in operating profit
was primarily attributable to improved sales volumes and added
contributions resulting from the CAPCO acquisition described below.
The Company is also beginning to benefit from the restructuring
actions taken during 1996 and earlier.
Comparisons with prior year results were affected by the April 1996
acquisition of CAPCO Automotive Products Corporation (CAPCO), a
Brazilian manufacturer of transmissions for light- and medium-duty
trucks and transaxle components for passenger cars. Excluding the
effects of CAPCO, first quarter 1997 segment sales approximated $783
million, a 4% increase compared to 1996, with corresponding operating
profit approximating $99 million, a 13% increase over 1996. The
Company is pleased that CAPCO was in the black during the first
quarter of 1997. The Truck Components team is performing an
excellent job under difficult economic conditions. The Company can
now begin to realize the full strategic potential of this key
acquisition.
Truck Components sales increased 8% in the first quarter of 1997 over
1996. Excluding the effects of CAPCO, Truck Components sales
increased 4% over 1996 despite an 8% decrease in North American
heavy-duty truck production. Based on the strong industry orders
trend, the Company's 1997 forecast for essentially flat North
American factory sales of heavy-duty trucks appears achievable.
North American heavy-duty truck backlog, which was at 81,500 units at
March 31, 1997, remains high by historical standards.
Passenger Car Components experienced record sales in the first
quarter of 1997, rising 9% over 1996 despite only a 2% increase in
passenger car production in North America and Europe. This better-
than-market performance was attributed to new product launches and
participation in the growing Latin American markets. Aided by a 6%
year-to-year growth in hydraulics industry shipments, Off-Highway
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Vehicle Components also experienced record sales in the first quarter
of 1997, rising 12% over 1996.
Defense Systems segment results for the first quarter are summarized
as follows (in millions):
1997 1996
---- ----
Net sales $ 20 $ 21
Operating profit 2
Changes in Financial Condition
- ------------------------------
The Company remains in a strong financial position at March 31, 1997.
Net working capital increased to $925 million at March 31, 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 March 1997
primarily caused the increase in accounts receivable at March 31 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, difficulties in introducing
new products as well as global economic and market conditions.
<PAGE>
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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
23, 1997 at which shareholders re-elected four directors and
elected one new director, and ratified the appointment of the
accounting firm of Ernst & Young LLP as the Company's
independent auditors for 1997.
Results of the voting in connection with each issue were as
follows:
Voting on Directors
- -------------------
For Withheld Total
--- -------- -----
A. M. Cutler 68,012,413 773,100 68,785,513
P. B. Davis 67,979,724 805,789 68,785,513
S. R. Hardis 67,986,473 799,040 68,785,513
N. C. Lautenbach 68,010,731 774,782 68,785,513
G. L. Tooker 68,023,773 761,740 68,785,513
Ratification of Independent Auditors
- ------------------------------------
In Favor 68,208,587
Against 317,167
Abstain 259,759
----------
Total 68,785,513
Item 5. Other Information
Reflecting the Company's confidence that its growth strategy is
on track, the Board of Directors raised the quarterly cash
dividend from 40 cents to 44 cents. This 10% dividend increase
raises the annualized dividend payout to $1.76, and is the
second increase made by the Company in two years. Eaton has
paid dividends on Common Shares annually since 1923.
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, 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: May 6, 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
<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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 25
<SECURITIES> 43
<RECEIVABLES> 1,095
<ALLOWANCES> 14
<INVENTORY> 723
<CURRENT-ASSETS> 2,133
<PP&E> 3,475
<DEPRECIATION> 1,732
<TOTAL-ASSETS> 5,359
<CURRENT-LIABILITIES> 1,208
<BONDS> 1,121
0
0
<COMMON> 39
<OTHER-SE> 2,151
<TOTAL-LIABILITY-AND-EQUITY> 5,359
<SALES> 1,789
<TOTAL-REVENUES> 1,789
<CGS> 1,307
<TOTAL-COSTS> 1,639
<OTHER-EXPENSES> (15)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 145
<INCOME-TAX> 44
<INCOME-CONTINUING> 101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.28
</TABLE>
