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, 1998
------------------
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 71.4 million Common Shares outstanding as of
September 30, 1998.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
Sept. 30, Dec. 31,
(Millions) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 47 $ 53
Short-term investments 44 37
Accounts receivable 1,001 958
Inventories 687 734
Deferred income taxes and other
current assets 282 273
------ ------
2,061 2,055
Property, plant and equipment 1,712 1,759
Excess of cost over net assets of
businesses acquired 1,052 966
Deferred income taxes and other assets 668 685
------ ------
$5,493 $5,465
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of
long-term debt $ 396 $ 104
Accounts payable and other current
liabilities 1,186 1,253
------ ------
1,582 1,357
Long-term debt 1,194 1,272
Postretirement benefits other than pensions 550 553
Other liabilities 159 212
Shareholders' equity 2,008 2,071
------ ------
$5,493 $5,465
====== ======
</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) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,620 $1,931 $5,019 $5,629
Costs and expenses
Cost of products sold 1,192 1,390 3,599 4,068
Selling & administrative 247 272 774 801
Research & development 85 81 249 235
Purchased in-process research & development 85 85
------ ------ ------ ------
1,524 1,828 4,622 5,189
------ ------ ------ ------
Income from operations 96 103 397 440
Other income (expense)
Interest (expense) income - net (23) (20) (67) (57)
Gain on sale of businesses 43
Other--net 6 12 22 39
------ ------ ------ ------
(17) (8) (2) (18)
------ ------ ------ ------
Income before income taxes 79 95 395 422
Income taxes 21 41 118 141
------ ------ ------ ------
Net income $ 58 $ 54 $ 277 $ 281
====== ====== ====== ======
Net income per Common Share
Assuming dilution $ .80 $ .69 $ 3.79 $ 3.58
Basic .82 .70 3.87 3.65
Average number of Common Shares outstanding
Assuming dilution 72.3 78.7 73.0 78.4
Basic 71.1 77.1 71.5 77.1
Common Shares outstanding at end of period 71.4 77.1 71.4 77.1
Cash dividends paid per Common Share $ .44 $ .44 $ 1.32 $ 1.28
</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) 1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 277 $ 281
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 245 250
Write-off of purchased in-process research
and development 85
Gain on sale of businesses (43)
Changes in operating assets and liabilities,
excluding acquisitions and sales of businesses (157) (118)
Other--net (26) (1)
------ ------
296 497
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (107) (382)
Sales of businesses 367
Expenditures for property, plant and equipment (271) (262)
Net change in short-term investments (6) (34)
Other--net (53) (25)
------ ------
(70) (703)
Net cash (used in) provided by financing activities
Borrowings with original maturities of more than
three months
Proceeds 1,174 394
Payments (795) (137)
Borrowings with original maturities of less than
three months--net (185) 82
Proceeds from exercise of stock options 17 25
Cash dividends paid (94) (99)
Purchase of Common Shares (349) (57)
------ ------
(232) 208
------ ------
(Decrease) increase in cash (6) 2
Cash at beginning of year 53 22
------ ------
Cash at end of period $ 47 $ 24
====== ======
</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 1997 Annual Report on Form 10-K. The
interim period results are not necessarily indicative of the
results to be expected for the full year.
Financial Presentation Changes
- ------------------------------
Certain amounts for prior periods have been reclassified to
conform to the current period presentation.
Nonrecurring Charges
- --------------------
Income in the third quarter of 1998 was reduced by pretax
restructuring charges of $42 million ($27 million aftertax, or
$.38 per Common Share-assuming dilution). These charges, which
reduced operating profit of the Semiconductor Equipment
business segment, related to workforce reductions, asset write-
downs and other restructuring actions.
Income in the first quarter of 1998 was reduced by nonrecurring
pretax charges of $43 million ($28 million aftertax, or $.38
per Common Share-assuming dilution). The Company recorded $33
million of restructuring charges which reduced operating profit
of the Automotive Components business segment by $8 million,
the Industrial & Commercial Controls business segment by $15
million, and the Truck Components business segment by $10
million. These charges related to workforce reductions, asset
write-downs and other restructuring actions. The Company also
recorded a $10 million contribution to its charitable trust
which is included in other expense.
Sales of Businesses
- -------------------
On January 2, 1998, the Company completed the sale of the Axle
and Brake business to Dana Corporation. The sale of this
business, and an adjustment related to a business sold in a
prior period, resulted in a pretax gain of $43 million ($28
million aftertax, or $.38 per Common Share-assuming dilution)
which was recorded in the first quarter of 1998. On April 1,
1998, the Company completed the sale of its automotive leaf
spring business. The operating results of these businesses are
reported in business segment information as divested operations
<PAGE>
Page 6
and prior periods have been reclassified to conform to the
current period presentation.
Acquisition of Fusion Systems Corporation and Write-off of
Purchased In-Process Research & Development
- ----------------------------------------------------------
On August 4, 1997, the Company purchased Fusion Systems
Corporation for $293 million, before a reduction for cash
acquired of $90 million. The acquisition was accounted for by
the purchase method of accounting, and accordingly, the
statements of income and the results of the Semiconductor
Equipment business segment 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 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 of 1997 includes the
write-off of $85 million for purchased in-process research and
development, with no income tax benefit ($1.08 per Common
Share-assuming dilution).
Acquisition of Spicer Clutch
- -----------------------------
On September 2, 1997, the Company completed the acquisition of
Dana Corporation's worldwide Spicer Clutch business for $180
million. Clutch 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.
Business Segment Reporting
- --------------------------
As announced on April 2, 1998, the Company changed its business
segment reporting in order to comply with Statement of
Financial Accounting Standard (SFAS) No. 131, 'Disclosure about
Segments of an Enterprise and Related Information'. This new
rule changes the standards for reporting financial results by
operating segments. Business segment information for 1997 has
been reclassified to conform to the current year presentation.
Comprehensive Income
- --------------------
On January 1, 1998, the Company adopted SFAS No. 130,
'Reporting Comprehensive Income'. SFAS No. 130 establishes new
standards for reporting comprehensive income and its
components; however, the adoption of SFAS No. 130 has no impact
on the Company's net income or shareholders' equity. For the
Company, the principal difference between net income as
historically reported in the statements of consolidated income
and comprehensive income are foreign currency translation
adjustments recorded in shareholders' equity. Comprehensive
income (in millions) is as follows:
<PAGE>
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Three Months Ended
September 30
------------------
1998 1997
---- ----
Net income $ 58 $ 54
Foreign currency translation
and other adjustments 23 (16)
---- ----
Comprehensive income $ 81 $ 38
==== ====
Nine Months Ended
September 30
-----------------
1998 1997
---- ----
Net income $277 $281
Foreign currency translation
and other adjustments 37 (69)
---- ----
Comprehensive income $314 $212
==== ====
Inventories
- -----------
Sept. 30, Dec. 31,
(Millions) 1998 1997
---- ----
Raw materials $263 $258
Work-in-process and
finished goods 497 565
---- ----
Gross inventories at FIFO 760 823
Excess of current cost
over LIFO cost (73) (89)
---- ----
Net inventories $687 $734
==== ====
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share - assuming
dilution and basic follows (millions except for per share data):
<PAGE>
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Three Months Ended
September 30
------------------
1998 1997
---- ----
Net income-assuming dilution
and basic $ 58 $ 54
Average number of Common Shares
outstanding-assuming dilution 72.3 78.7
Less dilutive effect of stock
options 1.2 1.6
---- ----
Average number of Common Shares
outstanding-basic 71.1 77.1
==== ====
Net income per Common Share
Assuming dilution $ .80 $ .69
Basic $ .82 $ .70
Nine Months Ended
September 30
-----------------
1998 1997
---- ----
Net income-assuming dilution
and basic $ 277 $ 281
Average number of Common Shares
outstanding-assuming dilution 73.0 78.4
Less dilutive effect of stock
options 1.5 1.3
---- ----
Average number of Common Shares
outstanding-basic 71.5 77.1
==== ====
Net income per Common Share
Assuming dilution $3.79 $3.58
Basic $3.87 $3.65
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1998, SFAS No. 133, 'Accounting for Derivative Instruments
and Hedging Activities', was issued. The Company must adopt the
standard by the beginning of the first quarter of the year 2000.
SFAS No. 133 will require the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized
in earnings. The Company has not yet determined the effect of SFAS
No. 133 on earnings and the financial position of the Company.
<PAGE>
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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 electrical and electronic controls,
truck transmissions, fasteners and engine components. On April
1, 1998, the division that manufactures leaf spring assemblies
was sold. Summary financial information for Eaton Offshore and
its consolidated subsidiaries is as follows (in millions):
Nine Months Ended
September 30
------------------
1998 1997
---- ----
Income statement data
Net sales $499 $543
Gross profit 118 119
Net income 44 52
Sept. 30, Dec. 31,
1998 1997
---- ----
Balance sheet data
Current assets $364 $375
Noncurrent assets 198 196
Net intercompany payables 107 160
Current liabilities 116 120
Noncurrent liabilities 115 107
<PAGE>
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Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Automotive Components $ 458 $ 429 $1,438 $1,348
Hydraulics & Other Components 145 145 465 442
Industrial & Commercial Controls 604 586 1,753 1,688
Semiconductor Equipment 48 131 220 316
Truck Components 365 303 1,112 830
------ ------ ------ ------
Ongoing operations 1,620 1,594 4,988 4,624
Divested operations 337 31 1,005
------ ------ ------ ------
Total net sales $1,620 $1,931 $5,019 $5,629
====== ====== ====== ======
Operating profit
Automotive Components $ 41 $ 48 $ 158 $ 175
Hydraulics & Other Components 19 27 78 84
Industrial & Commercial Controls 55 64 143 167
Semiconductor Equipment (71) 14 (93) 18
Truck Components 54 43 177 111
------ ------ ------ ------
Ongoing operations 98 196 463 555
Divested operations 22 (1) 63
Amortization of intangible assets & excess
of cost over net assets of businesses acquired (16) (13) (48) (33)
Purchased in-process research & development (85) (85)
Interest (expense) income - net (23) (20) (67) (57)
Gain on sales of businesses 43
Other (expense) income - net 20 (5) 5 (21)
------ ------ ------ ------
Income before income taxes $ 79 $ 95 $ 395 $ 422
====== ====== ====== ======
</TABLE>
<PAGE>
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Sales for the three months and nine months ended September 30,
1998 decreased 16% and 11%, respectively, from the comparable
periods in 1997. The Company's 1997 strategic repositioning
program of major divestitures and important acquisitions reduced
year-to-date 1998 sales by about $800 (14%) million compared to one
year ago. The Semiconductor Equipment business segment
experienced a decline in sales while all other business segments
experienced sales growth in the nine months ended September 30,
1998. Excluding the Semiconductor Equipment business segment,
year-to-date 1998 sales from ongoing operations were 11% ahead of
a year ago while operating margins were steady at 12% of sales.
During the third quarter of 1998, the Company recorded a
nonrecurring pretax charge of $42 million to restructure the
Company's Semiconductor Equipment Operations (SEO). In last year's
third quarter, the Company recorded a one-time charge of $85
million to write-off the purchased in-process research and
development associated with the acquisition of Fusion Systems
Corporation.
During the first quarter of 1998, the Company recorded a one-
time net pretax gain of $43 million, related principally to the
January 2, 1998 sale of its worldwide Axle and Brake business
to Dana Corporation. This gain was entirely offset by charges
of $33 million related to restructuring actions and a $10 million
contribution to the Company's charitable trust.
Before nonrecurring charges in both periods, net income reached
$85 million compared to last year's $139 million. Third quarter
1998 earnings per share before these charges were $1.18, down 33%
from last year's $1.77 per fully diluted share. After nonrecurring
charges in both periods, third quarter 1998 net income increased 7%
and third quarter 1998 earnings per share were $.80, up 16% from
last year's $.69 per fully diluted share. Net income for the nine
months ended September 30, 1998 decreased 1% from the comparable
period in 1997. The Company achieved a record earnings per share
for the nine months ended September 30, 1998 of $3.79 compared to
$3.58 for the same period in 1997.
In the fourth quarter of 1998, the Company anticipates taking an
additional $33 million of restructuring charges to bring costs
back into better balance with likely 1999 physical volumes while
still supporting the Company's ongoing growth initiatives. By
the end of 1998, in just over a year, the Company will have
invested more than $130 million in restructuring its businesses
in order to improve its ability to achieve superior performance,
whatever the economic climate may be.
<PAGE>
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Automotive Components
- ---------------------
Automotive Components sales in the third quarter and first nine
months of 1998 were a record, increasing 7% from the comparable
periods a year ago. Excluding the acquisitions of GT Products
and Amtec S.p.A., sales during the quarter were up about 1% from
a year ago compared to a 3% drop in North American light vehicle
production, an 18% decline in South America, and a 5% increase in
European production. Traditionally, sales for this segment in the
third quarter are lower than in the second quarter as a result
of preparations by vehicle manufacturers for the upcoming model
year and their temporary shutdowns for the taking of annual
physical inventories.
Operating profit for the third quarter and first nine months of
1998 declined 15% and 10%, respectively, compared to the same
periods in 1997. Beyond the impact of the General Motors
strike, which reduced operating profits by about $7 million in
the third quarter of 1998, the Company continues to struggle
with product mix and strong European volumes. The Company
recently won significant new contracts for the supercharger and
automotive switch businesses. Increased spending on these
programs has reduced margins near term, but should help ensure
that this business segment continues to profitably outpace
market growth in the years immediately ahead. Operating profit
was also reduced by restructuring charges of $8 million
recorded in the first quarter of 1998.
During the third quarter of 1998, the Company acquired Amtec
S.p.A., a privately owned Italian manufacturer of automotive
cylinder heads.
During the second quarter of 1998, the Company announced the
formation of Shanghai Eaton Engine Components Company Ltd., a
55% owned joint venture with Shanghai Pudong Valve Factory and
Asian Nittan Pte. Ltd. The venture manufactures and sells
automotive and motorcycle engine valves and hydraulic valve
lifters for the Chinese market. The Company also announced it
had formed Eaton Shenglong Company Ltd., a 70% owned joint
venture with Shenglong Group, which is producing viscous fan
drives for the Chinese automotive market.
During the first quarter of 1998, the Company acquired GT
Products, a manufacturer of fuel system components that
regulate fuel flow and vapor emissions in fuel tanks. On April
1, 1998, the Company concluded the previously announced sale of
its automotive leaf spring business.
Hydraulics & Other Components
- -----------------------------
Hydraulics & Other Components sales in the third quarter of
1998 were essentially equal to last year's volume and
consistent with the year-to-year change in North American
mobile hydraulics shipments. Business slowed appreciably in
the third quarter as the Company's customers reacted to the ongoing
Asian crisis. Sales for the first nine months of 1998 increased
<PAGE>
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5% compared to the same period in 1997. Many of the agricultural
equipment customers have scheduled lower fourth quarter production
and the Company will be affected by that slowdown.
Operating profits were down 30% and 7%, respectively, for the
third quarter and first nine months of 1998 compared to the
same periods in 1997. The operating efficiencies anticipated
in the third quarter were not achieved, but investments made
earlier this year are expected to produce better margins over
the balance of 1998 and in 1999.
Industrial & Commercial Controls
- --------------------------------
Sales of Industrial & Commercial Controls reached a record in
the third quarter of 1998, 3% ahead of one year ago compared to
about a 2% increase in North American markets for distribution
equipment and industrial controls markets. Sales increased 4%
for the first nine months of 1998 compared to the same period
in 1997.
Operating profits for the third quarter and first nine months
of 1998 declined 14% compared to the same periods in 1997 with
Hurricane Georges responsible for about $4 million of the
shortfall. Solid activity levels in electrical distribution
equipment offset continued softness in industrial controls
markets, but costs are still too high at present sales levels.
The success of Cutler-Hammer's new Engineering Services and
Systems Division, while incurring significant start-up costs,
should help this segment to outpace market growth in the
periods ahead. Operating profit was also reduced by
restructuring charges of $15 million recorded in the first
quarter of 1998.
During the third quarter of 1998, the Company acquired
Integrated Partial Discharge Diagnostics, Inc., a Minnetonka,
Minnesota-based manufacturer of equipment that measures
insulation deterioration within AC power equipment.
Semiconductor Equipment
- -----------------------
Semiconductor Equipment (SEO) sales in the third quarter and
first nine months of 1998 fell 63% and 30%, respectively,
compared to the same periods in 1997. Before a restructuring
charge of $42 million, this business segment suffered an
operating loss of $29 million for the third quarter of 1998 and
$51 million for the first nine months of 1998 compared to
operating profits of $14 million and $18 million in the
comparable periods in 1997.
During the third quarter of 1998, the Company recorded a
nonrecurring pretax charge of $42 million to restructure this
<PAGE>
Page 14
business segment. The restructuring includes the layoff of an
additional 475 employees from the SEO worldwide workforce,
bringing to 1,050, or 42%, the number of employees laid off as
a result of declining global markets for semiconductor
equipment. The charge includes $10 million related to
workforce reductions, $27 million for asset write-downs, and $5
million related to other restructuring actions. The Company
also expects to record additional restructuring actions in the
fourth quarter 1998 and in the first quarter of 1999 of
approximately $4 million in each quarter.
The Company has lowered 1998 sales and earnings expectations of
the Semiconductor Equipment business segment. Given current
orders and backlog, the Company now expects that sales will
only reach $275 million in 1998, 40% below 1997 and the
business segment will suffer an operating loss of approximately
$80 million before the $42 million restructuring charge
described above. The Company continues to search for the
bottom of this market while pushing ahead with critical
restructuring efforts. Assuming that volumes are no better in
1999 than this year, the Company would expect the restructuring
efforts to produce break-even results next year.
Truck Components
- ----------------
Sales of Truck Components in the third quarter of 1998 were a
record, 21% above last year's results. Operating profits also
reached a record in the third quarter of 1998, 26% above last
year. Sales and operating profit increased 34% and 59%,
respectively, for the first nine months of 1998 compared to the
same period in 1997. Heavy truck production is at record levels
this year in both North America and Europe. The performance of
the Clutch division, acquired from Dana Corporation in 1997,
continues to exceed expectations. In general, the Company is
taking advantage of sustained robust markets.
Operating profit was reduced by restructuring charges of $10
million recorded in the first quarter of 1998. This business
segment anticipates an additional $10 million restructuring
charge in the fourth quarter of 1998, in part to begin restructuring
its European business. European trucking deregulation, de-
integration of OEMs, and the Euro will all transform the
competitive landscape in Europe in the years ahead. This
restructuring, building upon the recent acquisition of a Polish
transmission manufacturer, is intended to ensure the Company
achieves world class costs and productivity in all worldwide
operations.
During the third quarter of 1998, the Company acquired Fabryka
Przekladni Samochodowych (FPS), a truck transmission
manufacturer in Gdansk, Poland, with annual sales of about $20
million. This acquisition is an important step in a major
initiative to improve the manufacturing cost structure of our
European Truck operations. Also, construction of a $70 million
<PAGE>
Page 15
plant near Sao Paulo, Brazil to manufacture transaxles for GM's
Corsa is on schedule and will begin production next year.
Changes in Financial Condition
- ------------------------------
The Company remains in a strong financial position at September 30,
1998; net working capital decreased from $698 million at the end of
1997 to $479 million at September 30, 1998 (the current ratio was
1.5 compared to 1.3 at each of those dates, respectively). Divested
businesses and the increase in short-term debt were the primary
causes of the reduction in working capital.
Cash flow from operating activities, supplemented by proceeds
from commercial paper borrowings and the sale of businesses, was
used to fund capital expenditures, acquisitions of businesses,
repayment of debt, cash dividends and the repurchase of Common
Shares.
During the second quarter of 1998, the Company terminated its
existing credit agreements and entered into a new credit
facility with a series of banks totaling $1 billion; $500
million with a five-year term and $500 million with a 364-day
term.
Year 2000 Readiness Disclosure
- ------------------------------
Computer software that uses two digits rather than four to
identify the applicable year may be unable to interpret
appropriately the calendar Year 2000, and thus could cause
disruption of normal business activities. The Company uses
software in various aspects of the business, including certain
products, manufacturing, product development and many
administrative functions. Much of this software may be unable
to interpret the calendar Year 2000 appropriately unless it is
modified or replaced.
The Company has approached the Year 2000 issue with the
creation of a corporate-wide initiative led by the Company's
Vice President-Information Technologies and involving program
managers from each business unit. The activities associated
with the corporate-wide initiative include reviewing the
Company's date-sensitive products and critical information
technology (IT) and non-IT systems, such as those which
interface with major customers, suppliers, and other third
parties.
The Company's Year 2000 compliance efforts encompass the
following focus areas:
Business Management Systems: This area includes information
systems and applications relating to manufacturing, marketing,
sales, purchasing, product development and design systems.
These systems have been identified as very important to the
support of the Company's operations and have been given the
highest priority toward becoming Year 2000 compliant.
<PAGE>
Page 16
Enterprise Network Infrastructure: The Company utilizes one
enterprise network throughout the organization which will be
upgraded by the end of 1998 to become Year 2000 compliant. All
personal/desktop computers and related software used throughout
the Company will also be made compliant.
Administrative Systems: This area includes systems associated
with human resources, cash management and financial accounting
and reporting. The Company operates a highly centralized
systems environment in North America and throughout much of
Europe and is working towards full compliance of these systems
by mid-year 1999.
Shop Floor Equipment and Facilities Infrastructure: The
Company is auditing the machinery and equipment used both in
manufacturing and in support operations at each location. This
audit will establish Year 2000 readiness and measure the risk
of non-compliance so as to determine the best remediation plan
to be followed in avoiding potential disruptions in production.
Software in Products: All of the Company's products which are
currently marketed, and the vast majority of the products which
have been marketed in the past, are either not date-sensitive
or do not require remediation. With respect to certain
previously-marketed products of the Semiconductor Equipment
business segment and the Cutler-Hammer business, the Company is
pursuing remediation programs that are consistent with its
warranty requirements or is offering product upgrades or
remediations.
Supplier Assurance: To determine Year 2000 readiness, the
Company undertook a supplier assurance program in 1997, which
includes surveying its suppliers and evaluating their
responses. Based on this evaluation and the criticality of the
items or services provided by the suppliers, the Company is
auditing their compliance and working with them towards
assuring compliance or, if needed, the development of
contingency plans.
Customer Assurance: The Company is working with the Automotive
Industry Action Group, various other trade organizations and
customers to ensure that a common Year 2000 compliance approach
is applied across those respective industries. Continuous
interaction with these trade organizations is helping to
identify the issues requiring attention and to develop
appropriate solutions.
The Company's Year 2000 program activities include the
identification of affected hardware and software, the
development of a plan for correcting those systems in the most
effective manner, the execution of that plan and the monitoring
of its success. Although the Company's various locations are
at differing stages of readiness with respect to the various
areas, the Company has substantially completed the
<PAGE>
Page 17
identification and plan development phases of the project. The
Company is well underway in the execution phase and anticipates
completing the majority of the program by mid-year 1999
although certain applications at certain business units may not
be completed until late in 1999. Continuous review and testing
is being conducted throughout all phases of the program
to help ensure that the Company achieves and maintains
compliance as the Year 2000 approaches.
The program, as it relates to IT, involves a combination of
hardware and software modifications, upgrades and replacements.
In many instances, the Company will replace non-compliant
systems with newer systems which will significantly improve
functionality as well as appropriately interpret the calendar
year 2000 and beyond. Although the timing of these actions may
have been influenced by the Year 2000 issue, in virtually all
instances they will involve capital expenditures that would
have occurred in the normal course of business. As part of
reengineering and other initiatives, the Company is also currently
upgrading and replacing other systems to provide significantly
enhanced functionality; however, these upgrades and replacements are
unrelated to the Year 2000 issue.
As part of the Company's Year 2000 program, detailed
contingency plans are being formalized as the target date for
completion approaches. Business disruption scenarios are
currently being identified and appropriate strategies are being
evaluated in the development of these various plans.
The current estimate of total Year 2000 program costs is
approximately $95 million. Approximately $70 million of those
costs represent replacement costs of certain hardware and
software which will provide significantly enhanced
functionality over the systems that are currently being used.
The remaining $25 million represents costs associated with modifying
and upgrading existing systems. To date, approximately two thirds
of the estimated costs have been incurred. Purchased hardware and
software will be capitalized in accordance with normal Company
policy while other remediation costs will be expensed as incurred.
Cash flow related to these costs will be satisfied with funds
from operations that are normally budgeted for procurement and
maintenance of the Company's information systems and production
and facilities equipment as well as operating cash flows. The
Company requires regular project status reporting, and cost
estimates will be revised as more refined estimates become
available.
The Company believes that it has an effective program in place
to resolve the Year 2000 issue in a timely manner. However,
satisfactory completion of the Company's program may not
prevent business disruptions resulting from actions of the
Company's critical suppliers and customers. Such disruptions
would impair the Company's ability to obtain necessary
materials for production or sell products to customers. If
such a disruption occurred, the Company may experience lost or
delayed sales and profits depending on the duration of the
disruption. Key aspects of the Company's program are
<PAGE>
Page 18
addressing this uncertainty but its ability to be fully
confident of conditions related to third parties is limited.
Currently, the Company cannot reasonably estimate the amount of
potential lost or delayed sales and profits.
Euro
- ----
On January 1, 1999, eleven of the fifteen member countries of
the European Monetary Union (EMU) will begin a three-year
transition phase during which a common currency called the Euro
will be adopted as their legal currency. The Euro will then
trade on currency exchanges and be available for non-cash
transactions. During the transition period, public and private
parties may pay for goods and services using either the Euro or
the participating country's legacy currency on a "no
compulsion, no prohibition" basis. The conversion rates
between the existing legacy currencies and the Euro will be
fixed on January 1, 1999. The legacy currencies will remain
legal tender for cash transactions between January 1, 1999 and
January 1, 2002 at which time all legacy currencies will be
withdrawn from circulation and the new Euro denominated bills
and coins will be used for cash transactions.
The Company has several operations within the eleven
participating countries that will be utilizing the Euro as
their local currency in 1999. Additionally, the Company's
operations in other European countries and elsewhere in the
world will be conducting business transactions with customers
and suppliers that will be denominated in the Euro. The Company
has established Euro denominated bank accounts to accommodate
Euro transactions.
The Company's exposure to changes in foreign exchange rates may
be reduced as a result of the Euro conversion. Conversely,
changes in the value of the Euro in US Dollars may have a
greater impact because there will be less diversity in the
Company's exposure to foreign currencies.
The Company has established a steering committee to review
strategic and tactical areas arising from the Euro conversion.
The Company has focused immediate efforts on aspects of the
Euro conversion that require adjustment or compliance by
January 1, 1999. These aspects include transacting business in
the Euro, the competitive impact on product pricing and
adjustments to billing systems to handle parallel currencies.
The Company has determined that these systems have the
capability to handle Euro transactions. Continuing analysis and
development efforts by the steering committee and project teams
at the business units will help ensure that the implementation
of the Euro meets the timetable and regulations established by
the EMU.
Based on current estimates, the Company does not expect the
costs incurred to address the Euro will have a material impact
on the financial condition or results of operations.
<PAGE>
Page 19
Forward-Looking Statements
- --------------------------
The forward-looking statements in this Form 10-Q relating to
fourth quarter restructuring charges, the growth of the
Automotive Components and the Industrial and Commercial
Controls business segments, the slowdown of the Hydraulics and
Other Components business segment, and the operating results of
the Semiconductor Equipment business segment, should be used
with caution. They are subject to various risks and
uncertainties, many of which are outside the control of the
Company. Important factors which could cause actual results to
differ materially from those in the forward-looking statements
include changes in global economic and financial conditions,
labor strikes, the markets for the products to which the
forward-looking statements relate, costs and disruptions
associated with the Year 2000 issue and the impact of the
conversion to the Euro currency. The Company assumes no
obligation to update these forward-looking statements.
<PAGE>
Page 20
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.
1. On October 8, 1998, the Company filed a Current
Report on Form 8-K concerning lowering 1998
expectation for sales and earnings of the
Semiconductor Equipment Operations (SEO) and a $50
million charge to restructure SEO.
<PAGE>
Page 21
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, 1998 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning
Officer; Principal Financial
Officer
<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.
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 47
<SECURITIES> 44
<RECEIVABLES> 1,017
<ALLOWANCES> 16
<INVENTORY> 687
<CURRENT-ASSETS> 2,061
<PP&E> 3,238
<DEPRECIATION> 1,526
<TOTAL-ASSETS> 5,493
<CURRENT-LIABILITIES> 1,582
<BONDS> 1,194
0
0
<COMMON> 36
<OTHER-SE> 1,972
<TOTAL-LIABILITY-AND-EQUITY> 5,493
<SALES> 5,019
<TOTAL-REVENUES> 5,019
<CGS> 3,599
<TOTAL-COSTS> 4,622
<OTHER-EXPENSES> (65)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 395
<INCOME-TAX> 118
<INCOME-CONTINUING> 277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 277
<EPS-PRIMARY> 3.87
<EPS-DILUTED> 3.79
</TABLE>
