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 March 31, 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
March 31, 1998.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
December 31,
(Millions) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 46 $ 53
Short-term investments 29 37
Accounts receivable 991 958
Inventories 693 734
Deferred income taxes and other
current assets 275 273
------ ------
2,034 2,055
Property, plant and equipment 1,612 1,759
Excess of cost over net assets of
businesses acquired 1,030 966
Deferred income taxes and other assets 647 685
------ ------
$5,323 $5,465
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of
long-term debt $ 288 $ 104
Accounts payable and other current
liabilities 1,162 1,253
------ ------
1,450 1,357
Long-term debt 1,291 1,272
Postretirement benefits other than pensions 545 553
Other liabilities 161 212
Shareholders' equity 1,876 2,071
------ ------
$5,323 $5,465
====== ======
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended
March 31
------------------
(Millions except for per share data) 1998 1997
---- ----
<S> <C> <C>
Net sales $1,687 $1,789
Costs and expenses
Cost of products sold 1,214 1,307
Selling and administrative 263 257
Research and development 82 75
------ ------
1,559 1,639
------ ------
Income from operations 128 150
Other income (expense)
Interest expense (22) (20)
Interest income 1 2
Gain on sale of businesses 43
Other--net 5 13
------ ------
27 (5)
------ ------
Income before income taxes 155 145
Income taxes 50 44
------ ------
Net income $ 105 $ 101
====== ======
Net income per Common Share
Assuming dilution $ 1.42 $ 1.29
Basic 1.45 1.31
Average number of Common Shares outstanding
Assuming dilution 73.7 78.2
Basic 72.0 77.1
Cash dividends paid per Common Share $ 0.44 $ 0.40
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Three Months Ended
March 31
------------------
(Millions) 1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 105 $ 101
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 81 82
Gain on sale of businesses (43)
Changes in operating assets and liabilities,
excluding acquisitions and sales of businesses (138) (154)
Other--net (4) 5
----- -----
1 34
Net cash provided by (used in) investing activities
Acquisitions of businesses, less cash acquired (77)
Sales of businesses 295
Expenditures for property, plant and equipment (58) (47)
Other--net 2 (13)
----- -----
162 (60)
Net cash (used in) provided by financing activities
Borrowings with original maturities of more than
three months
Proceeds 461 64
Payments (129) (82)
Borrowings with original maturities of less than
three months--net (144) 84
Proceeds from exercise of stock options 12 11
Cash dividends paid (32) (31)
Purchase of Common Shares (338) (17)
------ -----
(170) 29
----- -----
Decrease (increase) in cash (7) 3
Cash at beginning of year 53 22
----- -----
Cash at end of period $ 46 $ 25
===== =====
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three months ended
March 31
------------------
(Millions) 1998 1997
---- ----
<S> <C> <C>
Net Sales
Automotive Components $ 523 $ 490
Hydraulics & Other Components 162 144
Industrial & Commercial Controls 551 535
Semiconductor Equipment 79 78
Truck Components 372 254
------ ------
Ongoing operations 1,687 1,501
Divested operations 288
------ ------
Total operations $1,687 $1,789
====== ======
Operating profit
Automotive Components $ 58 $ 63
Hydraulics & Other Components 30 27
Industrial & Commercial Controls 31 46
Semiconductor Equipment (14) 0
Truck Components 57 32
------ ------
Ongoing operations 162 168
Divested operations 14
Interest expense - net (21) (18)
Amortization of intangible assets and excess
of cost over net assets of businesses acquired (16) (10)
Gain on sale of businesses 43
Other expense - net (13) (9)
------ ------
Income before income taxes $ 155 $ 145
====== ======
</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.
Financial Presentation Changes
- ------------------------------
Certain amounts for 1997 have been reclassified to conform to
the current year presentation.
Nonrecurring Charges
- --------------------
Income in the first quarter of 1998 was reduced by nonrecurring
pretax charges of $43 million. The Company recorded $33 million
of restructuring charges which reduced operating profit of the
Automotive Components segment by $8 million, the Industrial &
Commercial Controls segment by $15 million, and the Truck
Components segment by $10 million. The Company also recorded a
$10 million contribution to its charitable trust which is
included in other expense.
Gain on Sale 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.
Segment Reporting
- -----------------
As announced on April 2, 1998, the Company changed its business
segment reporting in order to comply with 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
<PAGE>
Page 7
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 is foreign currency translation
recorded in shareholders' equity. Comprehensive income (in
millions) is as follows:
Three months ended
March 31
------------------
1998 1997
---- ----
Net income $105 $101
Foreign currency translation and
other adjustments 15 (40)
---- ----
Comprehensive income $120 $ 61
==== ====
Inventories
- -----------
March 31, December 31,
(Millions) 1998 1997
---- ----
Raw materials $247 $258
Work-in-process and
finished goods 520 565
---- ----
Gross inventories at FIFO 767 823
Excess of current cost
over LIFO cost (74) (89)
---- ----
Net inventories $693 $734
==== ====
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share - assuming
dilution and basic follows:
Three months ended
March 31
------------------
(Millions except for per share data) 1998 1997
---- ----
Net income-assuming dilution and basic $ 105 $ 101
Average number of Common Shares
outstanding-assuming dilution 73.7 78.2
Less dilutive effect of stock options 1.7 1.1
----- -----
Average number of Common Shares
outstanding-basic 72.0 77.1
===== =====
<PAGE>
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Net income per Common Share
Assuming dilution $1.42 $1.29
Basic $1.45 $1.31
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, certain subsidiaries that manufacture leaf spring
assemblies were sold. Summary financial information for Eaton
Offshore and its consolidated subsidiaries is as follows (in
millions):
Three Months Ended
March 31
------------------
1998 1997
---- ----
Income statement data
Net sales $181 $192
Gross profit 41 34
Net income 18 14
March 31, December 31,
1998 1997
---- ----
Balance sheet data
Current assets $381 $375
Noncurrent assets 195 196
Net intercompany payables 144 160
Current liabilities 129 120
Noncurrent liabilities 108 107
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
First quarter 1998 sales were $1.69 billion, a 6% decline from
first quarter 1997. Net income for the first quarter of 1998
was $105 million, up 4% from last year's $101 million. Net
income per Common Share-assuming dilution was $1.42, a first
quarter record, and 10% above the $1.29 reported in the first
quarter of 1997.
<PAGE>
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The Company's 1997 strategic repositioning program reduced
first quarter 1998 sales by about $200 million, and pretax
profits by $13 million, compared to one year ago. The Company
has also seen a relapse in the worlwide semiconductor equipment
market that affected the Company's first quarter sales and
profits.
During the first quarter of 1998, the Company had 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.
In comparison to 1997 results, and allowing for restructuring
charges, operating margins in the first quarter of 1998 are a
percentage point higher, despite an increase in research and
development expense as a percent of sales to 4.9% in 1998 from
4.2% in 1997.
Automotive Components sales in the first quarter of 1998 were a
record, up 7% from a year ago, despite a stronger U.S. dollar
that reduced sales by $14 million. The 10% volume increase
compares to a 2% rise in North American automotive production,
nearly a 25% drop in South America, and a 6% rise in Europe.
Operating profit reached $66 million before restructuring
charges of $8 million, 4% ahead of one year ago. This segment
is enjoying the benefits of above-market growth even though the
Company struggled a bit to keep up with unexpectedly strong
demand from its European customers.
During the first quarter of 1998, the Company announced the
purchase of 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.
Sales of Hydraulics & Other Components reached a record in the
first quarter of 1998, 12% ahead of one year ago and well above
the 8% increase in the North American hydraulics market.
Operating profits were 12% ahead of last year's results. The
impact of the Asian crisis on this market has been modest, and
new product introductions continue to drive the Company's
above-market sales gains.
Industrial and Commercial Controls also reported record sales
in the first quarter of 1998, 3% ahead of year earlier results.
Operating profits, before restructuring costs of $15 million,
were flat compared to a year ago. While U.S. residential
construction remains robust, industrial and other non-
residential construction in the first quarter was virtually
flat with year ago levels. U.S. capital spending plans remain
strong and, after a six month pause, the Company is beginning
to see a renewed pick-up in orders for electrical distribution
and industrial control products.
<PAGE>
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Semiconductor sales in the first quarter of 1998 remained level
with last year's results. This business segment recorded an
operating loss compared to break-even results one year earlier.
The renewed collapse of the semiconductor equipment market
could not have come at a worse time in view of the Company's
increased investment in major new product development, the
third quarter 1997 Fusion Systems acquisition, and its capacity
expansion plans. The Company has made necessary operating
adjustments, including a 13% reduction in headcount and a 42%
reduction in budgeted 1998 capital spending.
Sales of Truck Components in the first quarter were a record,
47% above last year's results. Operating profits before $10
million of restructuring expenses reached $67 million, 111%
above last year's levels. Boom conditions continue to
charaterize the North American heavy truck industry. The
Company's third quarter 1997 Spicer Clutch acquisition
continues to perform above expectations, but even on a
continuing operations basis Truck Components sales are up 24%.
This compares to heavy truck market increases of about 25% in
North America and 15% in Europe, and a 25% decline in South
America. North American net orders for Class 8 trucks continue
at all-time record levels. Production in 1998 may eclipse the
1995 record of 245,000 units.
Changes in Financial Condition
- ------------------------------
The Company remains in a strong financial position at March 31,
1998 although net working capital decreased from $698 million at
the end of 1997 to $584 million at March 31, 1998 (the current
ratio was 1.5 compared to 1.4 at each of those dates, respectively).
The increase in short-term debt was the primary cause of the
reduction in working capital.
Cash flow from operating activities, supplemented by proceeds from
commercial paper borrowings and the sale of the Axle and Brake
business, was used to fund capital expenditures, acquisitions of
businesses, repayment of debt, cash dividends and the repurchase
of Common Shares.
During the first quarter, the Company entered into an additional
364-day revolving credit facility for $250 million increasing the
total facility to $1 billion.
The Company returned over $300 million in cash to the owners
over the past three months via share repurchases.
<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
22, 1998 at which shareholders re-elected three directors,
approved the Company's 1998 Stock Plan, and ratified the
appointment of the accounting firm of Ernst & Young LLP as the
Company's independent auditors for 1998.
Results of the voting in connection with each issue were as
follows:
Voting on Directors For Withheld Total
- ------------------- --- -------- -----
Neil A. Armstrong 63,540,938 1,109,215 64,650,153
Ernie Green 63,553,717 1,096,436 64,650,153
A. William Reynolds 63,547,101 1,103,052 64,650,153
Approval of the Company's 1998 Stock Plan
- -----------------------------------------
In Favor 52,221,622
Against 7,578,374
Abstain 633,237
Non-vote 4,216,920
----------
Total 64,650,153
Ratification of Independent Auditors
- ------------------------------------
In Favor 64,078,836
Against 360,712
Abstain 210,605
----------
Total 64,650,153
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On February 3, 1998, the Company filed a Current Report on
Form 8-K regarding fourth quarter 1997 results of operations,
the completion of the $500 million stock repurchase program, the
declaration of a quarterly dividend, the completion of the sale
of the Axle and Brake and Appliance Controls businesses and the
redemption of the outstanding 7% debentures.
2. On April 2, 1998, the Company filed a Current Report on Form
8-K regarding the change in its business segment reporting.
<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: May 13, 1998 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning
Officer; Principal Financial
Officer
<PAGE>
Page 13
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheetsand the Statementsof 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 46
<SECURITIES> 29
<RECEIVABLES> 1,009
<ALLOWANCES> 18
<INVENTORY> 693
<CURRENT-ASSETS> 2,034
<PP&E> 3,076
<DEPRECIATION> 1,464
<TOTAL-ASSETS> 5,323
<CURRENT-LIABILITIES> 1,450
<BONDS> 1,291
0
0
<COMMON> 36
<OTHER-SE> 1,840
<TOTAL-LIABILITY-AND-EQUITY> 5,323
<SALES> 1,687
<TOTAL-REVENUES> 1,687
<CGS> 1,214
<TOTAL-COSTS> 1,559
<OTHER-EXPENSES> (49)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 155
<INCOME-TAX> 50
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.42
</TABLE>
