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 June 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
June 30, 1998.
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
(Millions) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 44 $ 53
Short-term investments 18 37
Accounts receivable 999 958
Inventories 684 734
Deferred income taxes and other
current assets 275 273
------ ------
2,020 2,055
Property, plant and equipment 1,616 1,759
Excess of cost over net assets of
businesses acquired 1,017 966
Deferred income taxes and other assets 649 685
------ ------
$5,302 $5,465
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion of
long-term debt $ 379 $ 104
Accounts payable and other current
liabilities 1,071 1,253
------ ------
1,450 1,357
Long-term debt 1,192 1,272
Postretirement benefits other than pensions 547 553
Other liabilities 161 212
Shareholders' equity 1,952 2,071
------ ------
$5,302 $5,465
====== ======
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Millions except for per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $1,712 $1,909 $3,399 $3,698
Costs and expenses
Cost of products sold 1,200 1,371 2,407 2,678
Selling and administrative 264 272 527 529
Research and development 82 79 164 154
------ ------ ------ ------
1,546 1,722 3,098 3,361
------ ------ ------ ------
Income from operations 166 187 301 337
Other income (expense)
Interest (expense) income - net (23) (19) (44) (37)
Gain on sale of businesses 43
Other--net 18 14 16 27
------ ------ ------ ------
(5) (5) 15 (10)
------ ------ ------ ------
Income before income taxes 161 182 316 327
Income taxes 47 56 97 100
------ ------ ------ ------
Net income $ 114 $ 126 $ 219 $ 227
====== ====== ====== ======
Net income per Common Share
Assuming dilution $ 1.57 $ 1.61 $ 2.98 $ 2.90
Basic 1.60 1.64 3.05 2.94
Average number of Common Shares outstanding
Assuming dilution 72.8 78.3 73.3 78.3
Basic 71.1 77.1 71.6 77.1
Cash dividends paid per Common Share $ .44 $ .44 $ .88 $ .84
</TABLE>
See accompanying notes.
<PAGE>
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Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Six Months Ended
June 30
----------------
(Millions) 1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 219 $ 227
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 163 165
Gain on sale of businesses (43)
Changes in operating assets and liabilities,
excluding acquisitions and sales of businesses (263) (185)
Other--net (4) 13
----- -----
72 220
Net cash provided by (used in) investing activities
Acquisitions of businesses, less cash acquired (79)
Sales of businesses 359
Expenditures for property, plant and equipment (150) (152)
Other--net 4 6
----- -----
134 (146)
Net cash used in by financing activities
Borrowings with original maturities of more than
three months
Proceeds 801 64
Payments (477) (118)
Borrowings with original maturities of less than
three months--net (145) 53
Proceeds from exercise of stock options 16 18
Cash dividends paid (63) (65)
Purchase of Common Shares (347) (25)
----- -----
(215) (73)
----- -----
(Decrease) increase in cash (9) 1
Cash at beginning of year 53 22
----- -----
Cash at end of period $ 44 $ 23
===== =====
</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 prior periods have been reclassified to
conform to the current period 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.
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 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
included in divested operations and prior periods have been
reclassified to conform to the current period presentation.
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
<PAGE>
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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 is foreign currency translation
recorded in shareholders' equity. Comprehensive income (in
millions) is as follows:
Three months ended
June 30
------------------
1998 1997
---- ----
Net income $114 $126
Foreign currency translation
and other adjustments (2) (13)
---- ----
Comprehensive income $112 $113
==== ====
Six months ended
June 30
------------------
1998 1997
---- ----
Net income $219 $227
Foreign currency translation
and other adjustments 13 (53)
---- ----
Comprehensive income $232 $174
==== ====
Inventories
- -----------
June 30, December 31,
(Millions) 1998 1997
---- ----
Raw materials $251 $258
Work-in-process and
finished goods 506 565
--- ----
Gross inventories at FIFO 757 823
Excess of current cost
over LIFO cost (73) (89)
---- ----
Net inventories $684 $734
==== ====
<PAGE>
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Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share - assuming
dilution and basic follows (millions except for per share data):
Three months ended
June 30
------------------
1998 1997
---- ----
Net income-assuming dilution and basic $ 114 $ 126
Average number of Common Shares
outstanding-assuming dilution 72.8 78.3
Less dilutive effect of stock options 1.7 1.2
---- ----
Average number of Common Shares
outstanding-basic 71.1 77.1
==== ====
Net income per Common Share
Assuming dilution $1.57 $1.61
Basic $1.60 $1.64
Six months ended
June 30
------------------
1998 1997
---- ----
Net income-assuming dilution and basic $ 219 $ 227
Average number of Common Shares
outstanding-assuming dilution 73.3 78.3
Less dilutive effect of stock options 1.7 1.2
---- ----
Average number of Common Shares
outstanding-basic 71.6 77.1
==== ====
Net income per Common Share
Assuming dilution $2.98 $2.90
Basic $3.05 $2.94
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
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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.
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):
Six Months Ended
June 30
------------------
1998 1997
---- ----
Income statement data
Net sales $349 $360
Gross profit 83 75
Net income 37 34
June 30, December 31,
1998 1997
---- ----
Balance sheet data
Current assets $373 $375
Noncurrent assets 179 196
Net intercompany payables 114 160
Current liabilities 115 120
Noncurrent liabilities 112 107
<PAGE>
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Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------ ----------------
(Millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Automotive Components $ 488 $ 462 $ 980 $ 919
Hydraulics & Other Components 158 153 320 297
Industrial & Commercial Controls 598 567 1,149 1,102
Semiconductor Equipment 93 107 172 185
Truck Components 375 273 747 527
------ ------ ------ ------
Ongoing operations 1,712 1,562 3,368 3,030
Divested operations 347 31 668
------ ------ ------ ------
Total net sales $1,712 $1,909 $3,399 $3,698
====== ====== ====== ======
Operating profit
Automotive Components $ 58 $ 65 $ 117 $ 127
Hydraulics & Other Components 29 30 59 57
Industrial & Commercial Controls 57 57 88 103
Semiconductor Equipment (8) 4 (22) 4
Truck Components 66 36 123 68
------ ------ ------ ------
Ongoing operations 202 192 365 359
Divested operations 26 (1) 41
Interest (expense) income - net (23) (19) (44) (37)
Amortization of intangible assets and excess
of cost over net assets of businesses acquired (16) (10) (32) (20)
Gain on sale of businesses 43
Other expense - net (2) (7) (15) (16)
------ ------ ------ ------
Income before income taxes $ 161 $ 182 $ 316 $ 327
====== ====== ====== ======
</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 six months ended June 30, 1998
decreased 10% and 8%, respectively, from the comparable periods
in 1997. Excluding the Semiconductor Equipment Business, second
quarter 1998 business segment sales from ongoing operations were
11% ahead of a year ago while operating margins were steady at
13% of sales. The Semiconductor Equipment Business segment
experienced a decline in sales while all other business segments
experienced sales growth in the second quarter of 1998. The
Company's 1997 strategic repositioning program of major
divestitures and important acquisitions further resulted in
reduced second quarter 1998 sales of $300 million and first half
1998 sales of about $500 million on a net basis when compared to
one year ago.
Net income for the three months and six months ended June 30,
1998 decreased 10% and 4%, respectively, from the comparable
periods in 1997. Second quarter 1998 earnings per share was
$1.57, down 2% from last year's $1.61 per fully diluted share.
The Company reached a record earnings per share for the six
months ended June 30, 1998 of $2.98 compared to $2.90 for the
same period in 1997.
Despite the difficult conditions the Company is experiencing in
the semiconductor equipment business, the Company's
consolidated second quarter earnings per share came within four
cents of last year's record performance. The Company would
have reported record earnings per share had the Company not
also been affected by the PACCAR and General Motors strikes,
which together reduced earnings per share by about six cents
per share. The Company remains focused on building an
enterprise that demonstrates both superior operating
performance and higher sustainable growth. However, because of
the severe and prolonged downturn in the semiconductor capital
equipment business, the Company is no longer confident that its
1998 earnings will exceed 1997's record results.
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.
Automotive Components sales in the second quarter of 1998 were
a record, increasing 6% from a year ago, despite a 4% decline
in North American light vehicle production and an 8% drop in
Latin American volume, offset somewhat by a 5% increase in
Europe. Sales rose 7% in the first half of 1998 compared to the
same period in 1997. Operating profit for the second quarter
and first half of 1998 declined 11% and 8%, respectively, in
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comparison to the same periods in 1997 due primarily to
restructuring charges of $8 million in the first half of 1998.
Also, the Company is struggling a bit because of continued
penetration gains and stronger than expected European volumes.
As a result, margins are being affected as production is
adjusted around the world to satisfy varying levels of global
demand.
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 also reported record sales in the
second quarter of 1998, 4% ahead of year earlier results and
consistent with the year-to-year gain in North American
hydraulics shipments. Sales also increased 8% for the first
half of 1998 as compared to the same period in 1997. Operating
profits were down 3% and up 4%, respectively, for the second
quarter and first half of 1998 compared to the same periods in
1997. As expected, orders in the mobile hydraulics industry
have plateaued in recent months as the Asian crisis has hurt
customer exports. Demand for the Company's products, though,
has continued to be strong. The Company has been making
investments in incremental capacity, which should generate
operating efficiencies over the remainder of the year.
Sales of Industrial & Commercial Controls reached a record in
the second quarter of 1998, 5% ahead of one year ago. Sales
increased 4% for the first half of 1998 as compared to the same
period in 1997. Operating profits for the second quarter of
1998 were flat compared to a year ago, and declined 15% or $15
million for the first half of 1998 as compared to the same
period in 1997 due to restructuring charges of $15 million
recorded in the first half of 1998. While residential
construction was up 7% for the quarter from a year ago,
commercial and industrial construction markets were up only
about 2%. Second quarter sales growth represented a slight
acceleration from first quarter comparisons. The renewed pick-
up in orders the Company first identified three months ago has
continued through mid-year.
Semiconductor Equipment sales in the second quarter and first
half of 1998 fell 13% and 7%, respectively, as compared to the
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same periods in 1997. This business segment recorded an operating
loss of $8 million for the second quarter of 1998 and $22
million for the first half of 1998 compared to operating
profits of $4 million in both of the comparable periods in
1997. Industry orders are one third lower than six months ago
with no sign of an imminent upturn in sight. The Company is
addressing the difficult operating conditions in this business
segment by reducing headcount by about 24% from year end 1997
and reducing capital spending by nearly 50% from planned levels.
Sales of Truck Components in the second quarter of 1998 were a
record, 37% above last year's results. Operating profits also
reached a record in the second quarter of 1998, 83% above last
year. Sales and operating profit increased 42% and 81%,
respectively, for the first half of 1998 as compared to the same
period in 1997. The Company's Spicer Clutch acquisition in 1997
continues to make a strong contribution, but even on a continuing
operations basis, Truck Components worldwide sales for the second
quarter of 1998 were up 17% from a year ago. North American net
orders and backlog for Class 8 trucks are at all time records. It
is hard to imagine conditions improving from here; however, there
is nothing in the industry or the economy to suggest that a
marked deterioration is imminent. Continuing market recovery in
Latin America and Europe also seems likely. Operating profit was
reduced by restructuring charges of $10 million in the first half
of 1998.
Construction of a $70 million plant near Sao Paulo, Brazil to
manufacture transaxles for GM's Corsa is on schedule and will
begin production next year. The recently announced agreement
to purchase Fabryka Przekladni Samochodowych (FPS), a truck
transmission manufacturer in Gdansk, Poland, with annual sales
of about $20 million, is an important step in a major
initiative to improve the manufacturing cost structure of our
European Truck operations.
Changes in Financial Condition
- ------------------------------
The Company remains in a strong financial position at June 30,
1998; net working capital decreased from $698 million at the end
of 1997 to $570 million at June 30, 1998 (the current ratio was
1.5 compared to 1.4 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
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million with a five-year term and $500 million with a 364-day
term.
Forward-Looking Statements
- --------------------------
The forward-looking statements in this Form 10-Q 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 the market for semiconductor capital manufacturing
equipment, changes in global economic and market conditions,
and the effect of the labor strike currently underway at
PACCAR and the recent labor strike at General Motors.
<PAGE>
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PART II - OTHER INFORMATION
Item 5. Other Information
The Company's proxies for its 1999 Annual Meeting of Shareholders
will confer discretionary authority to vote on any matter if the
Company does not have written notice of the matter by January 27,
1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On April 2, 1998, the Company filed a Current
Report on Form 8-K regarding the change in its
business segment reporting.
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Signature
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Date: August 6, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 44
<SECURITIES> 18
<RECEIVABLES> 1,015
<ALLOWANCES> 16
<INVENTORY> 684
<CURRENT-ASSETS> 2,020
<PP&E> 3,092
<DEPRECIATION> 1,476
<TOTAL-ASSETS> 5,302
<CURRENT-LIABILITIES> 1,450
<BONDS> 1,192
36
0
<COMMON> 0
<OTHER-SE> 1,916
<TOTAL-LIABILITY-AND-EQUITY> 5,302
<SALES> 3,399
<TOTAL-REVENUES> 3,399
<CGS> 2,407
<TOTAL-COSTS> 3,098
<OTHER-EXPENSES> (59)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 316
<INCOME-TAX> 97
<INCOME-CONTINUING> 219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219
<EPS-PRIMARY> 3.05
<EPS-DILUTED> 2.98
</TABLE>
