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, 1999
------------------
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 73.6 million Common Shares outstanding as of
September 30, 1999.
<PAGE>
Page 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
(Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash & short-term investments $ 71 $ 122
Accounts receivable 1,400 885
Inventories 950 707
Deferred income taxes & other
current assets 352 268
------ ------
2,773 1,982
Property, plant & equipment 2,405 1,837
Goodwill 1,970 1,025
Other intangible assets 476 214
Deferred income taxes & other assets 745 607
------ ------
$8,369 $5,665
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of
long-term debt $ 1,201 $ 333
Accounts payable & other current
liabilities 1,616 1,183
------ ------
2,817 1,516
Long-term debt 1,946 1,191
Postretirement benefits other than pensions 663 557
Deferred income taxes & other liabilities 493 344
Shareholders' equity 2,450 2,057
------ ------
$8,369 $5,665
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 3
Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------- -----------------
(Millions except for per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $2,227 $1,620 $6,188 $5,019
Costs & expenses
Cost of products sold 1,612 1,192 4,427 3,599
Selling & administrative 349 247 978 774
Research & development 82 85 230 249
------ ------ ------ ------
2,043 1,524 5,635 4,622
------ ------ ------ ------
Income from operations 184 96 553 397
Other income (expense)
Interest expense - net (47) (23) (112) (67)
Gain on sales of businesses 133 133 43
Other - net 16 6 21 22
------ ------ ------ ------
102 (17) 42 (2)
------ ------ ------ ------
Income before income taxes 286 79 595 395
Income taxes 102 21 202 118
------ ------ ------ ------
Net income $ 184 $ 58 $ 393 $ 277
====== ====== ====== ======
Net income per Common Share
Assuming dilution $ 2.46 $ .80 $ 5.35 $ 3.79
Basic 2.52 .82 5.44 3.87
Average number of Common Shares outstanding
Assuming dilution 74.9 72.3 73.4 73.0
Basic 73.2 71.1 72.2 71.5
Cash dividends paid per Common Share$ .44 $ .44 $ 1.32 $ 1.32
See accompanying notes.
</TABLE>
<PAGE>
Page 4
Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Nine months ended
September 30
------------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 393 $ 277
Adjustments to reconcile to net cash
provided by operating activities
Depreciation 237 194
Amortization 86 51
Gain on sales of businesses (133) (43)
Changes in operating assets & liabilities,
excluding acquisitions and sales of
businesses (168) (157)
Other - net 38 (26)
------ ------
453 296
Net cash used in investing activities
Acquisitions of businesses, less cash
acquired (1,601) (107)
Sales of businesses 172 367
Expenditures for property, plant & equipment (313) (271)
Other - net (18) (59)
------ ------
(1,760) (70)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more
than three months
Proceeds 1,285 1,174
Payments (1,196) (795)
Borrowings with original maturities of less
than three months - net 1,100 (185)
Cash dividends paid (96) (94)
Sale of Common Shares 147
Purchase of Common Shares (349)
Other - net 22 17
------ ------
1,262 (232)
------ ------
Decrease in cash (45) (6)
Cash at beginning of year 80 53
------ ------
Cash at end of period $ 35 $ 47
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 5
The following notes are included in accordance with the
requirements of Regulation S-X and Form 10-Q:
All references to net income per Common Share assume
dilution, unless otherwise indicated.
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 1998 Annual Report
on Form 10-K. The interim period results are not
necessarily indicative of the results to be expected for the
full year.
Acquisition of Aeroquip-Vickers, Inc.
- -------------------------------------
On April 9, 1999, the Company completed the acquisition of
Aeroquip-Vickers, Inc. (A-V) for approximately $1.623
billion in cash. A-V, which had 1998 sales of $2.1 billion,
was comprised of two principal subsidiaries: Aeroquip
Corporation and Vickers, Inc. Aeroquip's operations
manufacture products that include all pressure ranges of
hose, fittings, adapters, couplings and other fluid
connectors, plus precision molded and extruded plastic
products. Vickers' operations produce hydraulic pumps,
motors and cylinders; electronic and hydraulic controls;
electric motors and drives; filtration products; and fluid-
evaluation products and services. These worldwide operations
are reported in the Fluid Power and Other Components
business segment. Funds for the purchase were initially
obtained through the issuance of commercial paper. Of the
commercial paper issued, $432 million is classified as long-
term debt because the Company intends, and has the ability
under a five-year credit agreement, to refinance this debt
on a long-term basis.
The acquisition has been accounted for by the purchase
method of accounting, and accordingly, the statements of
consolidated income include the effects of the acquisition
of A-V beginning April 9, 1999. The assets acquired and
liabilities assumed have been recorded at estimated fair
values as determined by Eaton's management based on
information currently available and on current assumptions
as to future operations. The allocation of the purchase
price to the assets acquired and liabilities assumed is
subject to revision as a result of the final determination
of appraised and other fair values. For financial statement
purposes, the excess of cost over net assets acquired is
amortized by the straight-line method over forty years. A
summary of the assets acquired and liabilities assumed in
the acquisition follows (in millions):
<PAGE>
Page 6
Estimated fair values
Assets acquired $1,741
Liabilities assumed (1,094)
Goodwill 976
------
Purchase price 1,623
Less cash acquired & liability for
outstanding shares (35)
------
Net cash paid $1,588
======
Unaudited pro forma results of operations for the nine month
periods ended September 30, 1999 and 1998, as if Eaton and
A-V had been combined as of the beginning of those periods,
follow (in millions). The pro forma results include
preliminary estimates and assumptions which Eaton's
management believes are reasonable. However, the pro forma
results do not include any cost savings or other effects of
the planned integration of Eaton and A-V, and are not
necessarily indicative of the results which would have
occurred if the business combination had been in effect on
the dates indicated, or which may result in the future.
Pro forma
Nine months ended
September 30
----------------
1999 1998
---- ----
Net sales $6,726 $6,649
Net income 382 297
Net income per Common Share
Assuming dilution $ 5.21 $ 4.07
Basic 5.29 4.16
Unusual Charges
- ---------------
Income in the third quarter of 1999 was reduced by
restructuring charges of $8 million ($5 million aftertax, or
$.07 per Common Share). Income in the first nine months of
1999 was reduced by restructuring charges of $11 million ($7
million aftertax, or $.10 per Common Share). These charges
reduced operating profit of the Fluid Power and Other
Components segment and were associated with the integration
of A-V's operations into the Company.
Income in the third quarter of 1998 was reduced by
restructuring charges of $42 million ($27 million aftertax,
or $.38 per Common Share) which reduced operating profit of
the Semiconductor Equipment segment.
Income in the first quarter of 1998 was reduced by unusual
pretax charges of $43 million ($28 million aftertax, or $.38
per Common Share). The Company recorded $33 million of
restructuring charges which reduced operating profit of the
Automotive Components segment by $8 million, the Industrial
and 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.
<PAGE>
Page 7
Restructuring charges recorded in 1999 and 1998, which are
included in Income from Operations in the Statement of
Consolidated Income, relate to workforce reductions, asset
write-downs and other restructuring actions. The 1998
charges are more fully discussed in the Company's 1998
Annual Report on Form 10-K in the Unusual Charges footnote
and throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Gain on Sales of Businesses
- ---------------------------
On August 31, 1999, the Company completed the sale of the
Engineered Fasteners Division for $173 million in cash. The
sale of this business resulted in a pretax gain of $133
million ($81 million aftertax, or $1.08 per Common Share)
which was recorded in the third quarter of 1999. On October
1, 1999, the Company completed the sale of the Fluid Power
Division for $310 million in cash. The gain on the sale of
this business will be reported in the fourth quarter of
1999.
On January 2, 1998, the Company completed the sale of the
Axle and Brake business. 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), 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
Business Segment Information in Divested Operations.
Sale of Common Shares
- ---------------------
In July 1999, in order to partially refinance the cost of
the acquisition of A-V, the Company sold 1.625 million
Common Shares for net proceeds of $147 million.
Comprehensive Income
- --------------------
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 is as follows (in millions):
<PAGE>
Page 8
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $184 $ 58 $393 $277
Foreign currency translation and
other adjustments (in the first
nine months of 1999, primarily
relates to operations in Brazil) 10 23 (98) 37
---- ---- ---- ----
Comprehensive income $194 $ 81 $295 $314
==== ==== ==== ====
</TABLE>
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share - assuming
dilution and basic follows (millions except for per share
data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 184 $ 58 $ 393 $ 277
===== ===== ===== =====
Average number of Common Shares
outstanding-assuming dilution 74.9 72.3 73.4 73.0
Less dilutive effect of stock
options 1.7 1.2 1.2 1.5
----- ----- ----- -----
Average number of Common Shares
outstanding-basic 73.2 71.1 72.2 71.5
===== ===== ===== =====
Net income per Common Share
Assuming dilution $2.46 $ .80 $5.35 $3.79
Basic 2.52 .82 5.44 3.87
</TABLE>
Inventories
- -----------
September 30, December 31,
(Millions) 1999 1998
---- ----
Raw materials $ 337 $ 282
Work-in-process and
finished goods 681 494
------ ------
Gross inventories at FIFO 1,018 776
Excess of current cost
over LIFO cost (68) (69)
------ ------
Net inventories $ 950 $ 707
====== ======
<PAGE>
Page 9
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 and engine components. On
April 1, 1998, the division that manufactured leaf spring
assemblies was sold and on August 31, 1999, the Engineered
Fasteners Division was sold. Summary financial information
for Eaton Offshore and its consolidated subsidiaries is as
follows (in millions):
Nine months ended
September 30
------------------
1999 1998
---- ----
Income statement data
Net sales $377 $499
Gross profit 113 118
Net income 31 44
September 30, December 31,
1999 1998
---- ----
Balance sheet data
Current assets $365 $336
Noncurrent assets 185 248
Net intercompany payables 102 132
Current liabilities 126 104
Noncurrent liabilities 122 108
Minority interest 21
<PAGE>
Page 10
Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
(Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Automotive Components $ 444 $ 412 $1,402 $1,290
Fluid Power & Other Components 614 168 1,434 526
Industrial & Commercial Controls 587 559 1,677 1,621
Semiconductor Equipment 109 48 264 220
Truck Components 414 368 1,203 1,120
------ ------ ------ ------
Total ongoing operations 2,168 1,555 5,980 4,777
Divested operations 59 65 208 242
------ ------ ------ ------
Total net sales $2,227 $1,620 $6,188 $5,019
====== ====== ====== ======
Operating profit (loss)
Automotive Components $ 50 $ 41 $ 177 $ 147
Fluid Power & Other Components 43 26 125 95
Industrial & Commercial Controls 54 44 130 112
Semiconductor Equipment 16 (71) 14 (93)
Truck Components 67 50 188 163
------ ------ ------ ------
Total ongoing operations 230 90 634 424
Divested operations 9 8 40 38
Amortization of goodwill & other
intangible assets (28) (16) (72) (48)
Interest expense - net (47) (23) (112) (67)
Gain on sales of businesses 133 133 43
Corporate & other - net (11) 20 (28) 5
------ ------ ------ ------
Income before income taxes $ 286 $ 79 $ 595 $ 395
====== ====== ====== ======
</TABLE>
As announced on July 15, 1999, due to the recent acquisition
of A-V, and the planned divestitures of the Fluid Power and
Engineered Fasteners Divisions and Vickers Electronic
Systems, the Company realigned its business segment
reporting. Principal changes include: Hydraulics and Other
Components has been renamed Fluid Power and Other Components
and includes the operating results of A-V; Aerospace
Controls has been reclassified from Industrial and
Commercial Controls to Fluid Power and Other Components; the
Trucking Information Systems Division and Eaton VORAD have
been reclassified from Automotive Components to Truck
Components; and the operating results of the Fluid Power and
Engineered Fasteners Divisions, previously included in
Automotive Components and Hydraulics and Other Components,
respectively, have been reclassified to Divested Operations
due to their divestiture. Prior periods have been
reclassified to conform to the current presentation.
<PAGE>
Page 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
All references to net income per Common Share assume
dilution, unless otherwise indicated.
Results of Operations
- ---------------------
On April 9, 1999, the Company completed the acquisition of
Aeroquip-Vickers, Inc. (A-V) for approximately $1.623
billion in cash. The acquisition has been accounted for by
the purchase method of accounting, and accordingly, the
statements of consolidated income include the effects of the
acquisition of A-V beginning April 9, 1999. This acquisition
is more fully discussed under "Acquisition of Aeroquip-
Vickers, Inc." on page 5 of this report.
The Company reported record sales of $2.23 billion for the
third quarter of 1999, 37% above the third quarter of 1998.
Sales for the first nine months of 1999 were a record $6.19
billion, an increase of 23% from the comparable period in
1998. The increase in sales primarily reflects the
acquisition of A-V.
Net income for the third quarter of 1999 was a record $184
million, an increase of 217% from the comparable period in
1998. Earnings per share reached $2.46, 208% above last
year's $.80. Net income for the first nine months of 1999
was a record $393 million, an increase of 42% from the
comparable period in 1998. Earnings per share for the nine
months ended September 30, 1999 were $5.35, an increase of
41% compared to the same period in 1998.
During the third quarter of 1999, the Company recorded a
pretax gain of $133 million ($81 million aftertax, or $1.08
per Common Share), related to the sale of the Engineered
Fasteners Division. The Company also recorded restructuring
charges of $8 million ($5 million aftertax, or $.07 per
Common Share) during the third quarter of 1999.
Restructuring charges for the first nine months of 1999 were
$11 million ($7 million aftertax, or $.10 per Common Share).
These charges were associated with the integration of A-V's
operations into the Company.
During the third quarter of 1998, the Company recorded
restructuring charges of $42 million ($27 million aftertax,
or $.38 per Common Share). During the first quarter of 1998,
the Company recorded a net pretax gain of $43 million
related principally to the January 2, 1998 sale of its
worldwide Axle and Brake business. 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.
Excluding the gain on sale of the Engineered Fasteners
Division and restructuring charges in both years, net income
for the third quarter of 1999 was $108 million, 27% ahead of
the comparable period in 1998 and earnings per share were
$1.45, 23% above the comparable period in 1998. Excluding
non-recurring items in both periods, net income for the
first nine months of 1999 was $319 million, or $4.35 per
share, increases of 5% compared to the same period in 1998.
<PAGE>
Page 12
The Company's improved performance in 1999 can be attributed
to robust conditions in the Truck, Automotive, and
Industrial markets, and the benefits of last year's
restructuring of the Semiconductor Equipment business.
Conditions in the Fluid Power business, however, remain very
weak, but excellent progress is being made integrating the
former A-V into the Company's businesses. During the
quarter, A-V added about $.03 to earnings per share before
restructuring charges. The Company's improved performance
can also be seen in earnings before non-cash amortization of
acquisition-related intangibles. Comparable 'cash' earnings
per share in the third quarter of 1999 were $1.76, an
increase of 30% from last year's $1.35.
Results of Business Segments
- ----------------------------
Automotive Components
- ---------------------
Sales in the third quarter of 1999 were a record $444
million, 8% above one year ago. Sales in the first nine
months of 1999 of $1.40 billion increased 9% compared to the
same period in 1998. This increase compares to increases of
15% in NAFTA light vehicle production and 2% in Europe, with
a 17% decline in South American output. This segment's
improved performance can be attributed to robust conditions
in the Automotive market and penetration gains across
Eaton's product lines. 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 shutdown for the
taking of annual physical inventories.
Operating profits in the third quarter of 1999 of $50
million were also a record, an increase of 32% compared to
the same period in 1998 before restructuring charges.
Operating profits for the first nine months of 1999 were
$177 million, an increase of 17% compared to the same period
in 1998 before restructuring charges. This improved
performance can be attributed to increased sales and the
benefits of 1998's restructuring initiatives.
Fluid Power & Other Components
- ------------------------------
Fluid Power and Other Components sales in the third quarter
of 1999 were $614 million, 265% above year earlier results.
Sales in the first nine months of 1999 of $1.43 billion were
173% ahead of 1998's results. The increase was due to the
acquisition of A-V. Including A-V in 1998 results on a pro
forma basis, sales in the third quarter of 1999 were off 5%
from one year ago.
Conditions in the fluid power markets remain very depressed
with North American industry shipments of both mobile and
industrial hydraulics off about 10% compared to a year ago.
The decline in the Company's shipments has been less
pronounced because of steady activity in Aeroquip's fluid
conveyance business. An improvement in hydraulics markets
before year-end is not anticipated. However, the Company's
progress in integrating A-V's operations and building a
world-leading Fluid Power business remains on track.
<PAGE>
Page 13
Operating profits for the third quarter of 1999 were $51
million before restructuring charges of $8 million, 96%
ahead of one year earlier. Operating profits for the first
nine months of 1999 were $136 million before restructuring
charges of $11 million, 43% ahead of comparable results in
1998. Operating profits increased due to the acquisition of
A-V. Including A-V in 1998 results on a pro forma basis,
profits in the third quarter of 1999 were off 9% from one
year ago before restructuring charges.
Industrial & Commercial Controls
- --------------------------------
Industrial and Commercial Controls sales were a record $587
million in the third quarter of 1999, an increase of 5% from
year earlier results. This compares to about a 2% increase
in the North American market for electrical distribution
equipment and industrial controls. Sales in the first nine
months of 1999 of $1.68 billion were 3% ahead of 1998's
results. The above-industry growth can be attributed to
continued strength in residential and light commercial
construction, to selected market share gains, and to
building momentum in Cutler-Hammer's Engineering Service and
Systems business.
Operating profits for the third quarter of 1999 were $54
million, an increase of 17% compared to the same period in
1998 before restructuring charges. Operating profits for the
first nine months of 1999 were $130 million, an increase of
2% from comparable results in 1998 before restructuring
charges. This increase can be attributed to increased sales
and the benefits of 1998's restructuring initiatives
partially offset by the costs of building the new
Engineering Services business unit.
Semiconductor Equipment
- -----------------------
Semiconductor Equipment sales in the third quarter of 1999
were $109 million, 127% above last year's comparable results
and more than double the pace of the industry rebound. Sales
in the first nine months of 1999 of $264 million were 20%
ahead of sales in the first nine months of 1998. The
semiconductor equipment industry continues to rebound with
third quarter orders up over 100% and a book-to-bill ratio
of about 1.15.
This segment reached an operating profit of $16 million in
the third quarter of 1999 compared to an operating loss of
$29 million before restructuring charges of $42 million in
the comparable period in 1998. Operating profits in the
first nine months of 1999 reached $14 million compared to
last year's loss of $52 million before restructuring charges
of $41 million. Improved profits can be attributed to the
significant increase in sales as well as the benefits of
1998's restructuring initiatives.
<PAGE>
Page 14
Truck Components
- ----------------
Truck Components sales in the third quarter of 1999 were a
record $414 million, 13% above last year's comparable
results. This compares with a 27% increase in NAFTA Class 8
production, a 3% drop in European commercial truck
production, and a 36% decline in South American truck
production. Sales in the first nine months of 1999 were
$1.20 billion, 7% ahead of year earlier results.
Operating profits in the third quarter of 1999 were a record
$67 million, 31% ahead of a year ago before restructuring
charges. Operating profits in the first nine months of 1999
were $188 million, an increase of 11% compared to the same
period in 1998 before restructuring charges. These results
are primarily due to increased sales and the benefits of
1998's restructuring initiatives. The Company is also
becoming increasingly effective utilizing worldwide capacity
to satisfy NAFTA heavy truck demand.
Non-operating Income (Expense)
- ------------------------------
Amortization of goodwill and other intangible assets related
to acquisitions of $28 million in the third quarter of 1999
and $72 million in the first nine months of 1999 increased
by $12 million and $24 million, respectively, compared to
the same periods in 1998. The increases were primarily
attributable to the amortization of goodwill and other
intangible assets related to the acquisition of A-V.
Net interest expense of $47 million in the third quarter of
1999 and $112 million in the first nine months of 1999
increased by $24 million and $45 million, respectively,
compared to the same periods in 1998. The increases were
primarily due to borrowings required to finance the
acquisition of A-V.
Corporate and other expenses of $11 million in the third
quarter of 1999 and $28 million in the first nine months of
1999 increased by $31 million and $33 million, respectively,
compared to the same periods in 1998. The year-to-year
swings were related primarily to incentive compensation
accruals ($11 million for both the third quarter and first
nine months) and deferred compensation accruals ($12 million
for the third quarter and $18 million for the first nine
months). The sharp swings in these items relate to the
disappointing operating results the Company experienced
beginning in the third quarter of 1998 which resulted in an
adjustment to lower the 1998 incentive compensation accrual
in the second half of 1998. The change was also due to the
sharp drop in the Company's stock price in 1998 which
resulted in a reduction in the deferred compensation accrual
during the second half of 1998, compared to an increase in
the stock price during 1999 resulting in an increase in the
deferred compensation accrual.
Changes in Financial Condition
- ------------------------------
Current liabilities exceeded current assets by $44 million
at September 30, 1999, primarily due to the $868 million
increase in short-term debt and current portion of long-term
debt versus year end 1998. The increase in short-term debt
resulted from the financing required for the acquisition of
A-V for $1.623 billion in cash, which is more fully discussed
under "Acquisition of Aeroquip-Vickers, Inc." on page 5 of
this report. Long-term debt increased to $1.95 billion at
September 30,
<PAGE>
Page 15
1999 from $1.19 billion at the end of 1998, also due to the
acquisition of A-V.
In anticipation of the acquisition of A-V, on April 5, 1999,
$200 million of floating rate notes maturing April 2000 were
issued. The Company also entered into an additional $500
million revolving credit facility with a five-year term and
a $1.3 billion credit facility with a 364-day term. This
increased total credit facilities at the acquisition date of
A-V to $2.8 billion. At September 30, 1999, the Company's
credit facilities stood at $2.35 billion, of which $932
million was scheduled to expire beyond the end of 2002.
Outstanding commercial paper, most of which was incurred in
connection with the A-V acquisition, is supported by these
credit facilities.
In July 1999, the Company completed the sale of 1.625
million Common Shares for net proceeds of $147 million,
which was used to pay down a portion of the debt incurred to
finance the acquisition of A-V. The Company also expects to
refinance a portion of the outstanding commercial paper on a
long-term basis during the fourth quarter of 1999 or first
quarter of 2000.
On August 31, 1999, the sale of the Engineered Fasteners
Division for $173 million in cash was completed. On October
1, 1999, the sale of the Fluid Power Division for $310
million in cash was completed. Proceeds from the sales of
these businesses were used to pay down a portion of the debt
incurred to finance the acquisition of A-V. During the
second quarter of 1999, the planned sale of Vickers
Electronics Systems (VES) was announced. VES is a business
acquired in connection with the acquisition of A-V.
During the first nine months of 1999, the Brazilian real
currency devalued significantly. The effect of this
devaluation on the net assets of the Company's operations in
Brazil resulted in an $88 million foreign currency
translation loss in the first nine months of 1999 which is
reported in Shareholders' Equity, through comprehensive
income.
Year 2000
- ---------
Like most companies, Eaton is impacted by computer software
that relies on two digits in the date fields of programs in
order to function properly. 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 relies on software in various
aspects of the business including manufacturing, product
development, many administrative functions and certain
products. Much of this software may be unable to interpret
the calendar Year 2000 appropriately without some form of
remediation.
As is more fully described in the Company's 1998 Annual
Report on Form 10-K, the program to address the Year 2000
issue involves a combination of hardware and software
modifications, upgrades and replacements. The Company has
completed, with some known exceptions, the execution phase
of the program. The exceptions are intended to be completed
in November 1999. Continuous review and testing have been
conducted throughout all
<PAGE>
Page 16
phases of the program and will continue during the balance
of 1999, as will the monitoring of the program's success.
The Company is completing contingency plans to address
potential disruptions that might result from Year 2000
noncompliance. These plans address relationships
with suppliers and customers, as well as relationships with
providers of utilities, telecommunications, transportation
and financial services. The contingency plans include such
measures as alternative sources of power, alternative lines
of communication, manual order-taking, alternative modes of
transportation, alternative means of check preparation and
additional supplies of critical components. These plans
also include the establishment of a Year 2000 communications
center and arrangements to confirm the operability of our
facilities immediately after the beginning of the Year 2000.
The current estimate of total Year 2000 program costs as of
September 30, 1999 is approximately $120 million, of which
approximately 95% are estimated to have been incurred.
Approximately $90 million of these costs represent
replacement costs of certain hardware and software and the
remaining $30 million represents costs associated with
modifying and upgrading existing systems.
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 program may not
prevent business disruptions resulting from actions of
critical suppliers and customers, as well as from actions of
providers of utilities and other services. Such disruptions
would impair the Company's ability to produce or sell
products. 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 program
are addressing this uncertainty through contingency planning
but the Company's 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.
Forward-Looking Statements
- --------------------------
The forward-looking statements in this Form 10-Q concerning
the hydraulics markets, the refinancing of debt on a long-
term basis and the Year 2000 issue 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, market demand for hydraulics, the ability to
implement business plans, the ability to successfully
implement the integration of Aeroquip-Vickers, conditions in
the public debt markets and costs and disruptions associated
with the Year 2000 issue. The Company assumes no obligation
to update these forward-looking statements.
<PAGE>
Page 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
A discussion of market risk exposures is included in Part
II, Item 7A, "Quantitative and Qualitative Disclosure about
Market Risk", of the Company's 1998 Annual Report on Form 10-
K. Long-term debt increased to $1.95 billion at September
30, 1999 from $1.19 billion at the end of 1998. Commercial
paper, classified as long-term, represented $432 million of
this increase. The average interest rate for commercial
paper at September 30, 1999 was 5.42%. The remaining
increase in long-term debt primarily represents the debt
assumed as part of the acquisition of Aeroquip-Vickers. The
carrying values of commercial paper and the assumed debt
approximated their fair values at September 30, 1999. There
were no other material changes during the nine months ended
September 30, 1999.
<PAGE>
Page 18
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 July 1, 1999, the Company filed a Current
Report on Form 8-K regarding the sale of 1.625
million Common Shares.
2. On July 15, 1999, the Company filed a Current
Report on Form 8-K regarding the realignment of
its business segments.
<PAGE>
Page 19
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 5, 1999 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning
Officer; Principal Financial
Officer
<PAGE>
Page 20
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>
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<ARTICLE> 5
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This schedule contains summary financial information extracted from the
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<CURRENT-ASSETS> 2,773
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<DEPRECIATION> 1,601
<TOTAL-ASSETS> 8,369
<CURRENT-LIABILITIES> 2,817
<BONDS> 1,946
0
0
<COMMON> 37
<OTHER-SE> 2,413
<TOTAL-LIABILITY-AND-EQUITY> 8,369
<SALES> 6,188
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<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 595
<INCOME-TAX> 202
<INCOME-CONTINUING> 393
<DISCONTINUED> 0
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<NET-INCOME> 393
<EPS-BASIC> 5.44
<EPS-DILUTED> 5.35
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