United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1998
Commission file number 1-1396
Eaton Corporation
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(Exact name of registrant as specified in its charter)
Ohio 34-0196300
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(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
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(Address of principal executive offices) (Zip code)
(216) 523-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------ ----------------------------
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
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
---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. X
---
The aggregate market value of voting stock held by non-affiliates
of the registrant as of January 31, 1999 was $5.0 billion. As of
January 31, 1999, there were 71,724,963 Common Shares outstanding.
<PAGE>
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Documents Incorporated By Reference
Portions of the Proxy Statement for the 1999 annual shareholders'
meeting are incorporated by reference into Part III.
Part I
Item 1. Business
Eaton Corporation (Eaton or Company), incorporated in 1916, is a
global manufacturer of highly engineered products that serve
industrial, vehicle, construction, commercial and semiconductor
markets. Principal products include electrical power distribution
and control equipment, truck drivetrain systems, engine components,
hydraulic products, ion implanters and a wide variety of controls.
Worldwide sales in 1998 reached $6.63 billion. Headquartered in
Cleveland, the Company has 49,500 employees and 155 manufacturing
sites in 25 countries around the world. The internet address for
Eaton is http://www.eaton.com.
The Company acquired businesses for a combined net cash purchase
price of $117 million in 1998. Each of these acquisitions was
accounted for by the purchase method of accounting, and,
accordingly, the statement of consolidated income includes the
results of the acquired businesses from the effective dates of
acquisition. The acquisitions included the purchase of G.T.
Products for $77 million, which is reported in the Automotive
Components segment.
The Company sold businesses for aggregate cash proceeds of $375
million in 1998. The divestitures included the sale of the Axle
and Brake business in January and the automotive leaf spring
business in April. The sales of these businesses, and adjustments
related to businesses sold in prior periods, resulted in a pretax
gain of $43 million ($28 million aftertax, or $.38 per Common
Share).
In 1998, the Company recorded unusual pretax charges of $111
million ($72 million aftertax, or $.99 per Common Share) which
include $101 million to restructure certain business segments and
$10 million for a contribution to the Company's charitable trust.
The restructuring charges include workforce reductions, inventory
and other asset write-downs, plant closing and other costs. Details
of these charges and the components, by segment, are discussed
further in "Unusual Charges" on pages 25 and 26 and in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 45 through 52 of this report.
Subsequent Events
On February 1, 1999, the Company announced it had entered into an
agreement to acquire all of the outstanding common stock of
Aeroquip-Vickers, Inc., for $58 per share in cash, or approximately
$1.7 billion, plus the assumption of debt. For 1998, Aeroquip-
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Vickers reported sales of $2.15 billion, pretax income of $148
million, and net assets of $569 million. Aeroquip-Vickers is a
world leader in the design, manufacture and distribution of
engineered components and systems to industrial, aerospace and
automotive markets.
Eaton expects to finance approximately 20% of the acquisition
through the sale of Common Shares, with the remainder through the
issuance of debt. In conjunction with the acquisition, Eaton
anticipates recording an acquisition integration charge which has
not yet been determined. The acquisition is expected to be
completed in April 1999 and will be accounted for as a purchase.
Eaton has important operations in Brazil and recent events have
occurred in the Brazilian economy causing the currency to devalue.
The real plan, implemented by the Brazilian government in 1995,
drastically lowered Brazilian inflation and stabilized the
currency. However, on January 15, 1999, in reaction to declining
foreign reserves and a loss of confidence in Brazilian fiscal
policy, the Brazilian real exchange rate "band" was scrapped,
allowing the currency to float freely. Since the currency was
allowed to float, it has declined in value. Abandoning the real
plan will likely have the effect of weakening the economy in 1999,
making the outlook more volatile for inflation and for the
currency. The situation will be closely monitored for effects on
Eaton's businesses.
Information regarding principal products, net sales, operating
profit and long-lived assets by segment and geographic region
is presented in "Business Segment and Geographic Region Information"
on pages 39 through 43 of this report. Additional information
regarding Eaton's segments and business in general is presented
below.
Automotive Components
Patents and Trademarks - Eaton owns, controls, or is licensed under
many patents related to this segment. While the EATON and EATON
(logomark) trademarks are emphasized in marketing many products
within this segment, the Company also markets under a number of
other trademarks including EATONITE, DILL, INDUCTALLOY, ULV,
SUPERCHARGER (& DESIGN), DYNA-TRAXX, INTELLI-TRAXX, VORAD,
SmartCruise, LECTRON, L/P (DESIGN), FleetAdvisor, and FleetCom.
Seasonal Fluctuations - Sales of automotive components are
generally reduced in the third quarter of each year as a result of
preparations by vehicle manufacturers for the upcoming model year
and temporary shut-downs for taking physical inventories.
Competition - Principal methods of competition in this segment are
price, service and product performance. Eaton occupies a strong
competitive position in relation to many competitors in this
segment and, with respect to many products, is considered among the
market leaders.
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Page 4
Major Customers - Approximately 56% of this segment's net sales in
1998 were made to divisions and subsidiaries of three large
original equipment manufacturers of vehicles, generally
concentrated in North America. Eaton has been conducting business
with each of these companies for many years. Sales to these
companies include a number of different products and different
models or types of the same product, sales of which are not
dependent upon one another. With respect to many of the products
sold, various divisions and subsidiaries of each of the companies
are in the nature of separate customers, and sales to one division
or subsidiary are not dependent upon sales to other divisions or
subsidiaries. One of these customers is a major customer and two
are minor customers of the Truck Components segment.
Hydraulics & Other Components
Patents and Trademarks - Eaton owns, controls, or is licensed under
many patents related to this segment. The EATON, EATON (logomark),
GEROLER, CHAR-LYNN, ORBIT, ORBITROL, AIRFLEX, FAWICK, TINNERMAN,
SPEED NUT, and GOLF PRIDE trademarks are used in connection with
marketing products included in this segment.
Competition - Principal methods of competition in this segment are
price, geographic coverage, service and product performance. Eaton
occupies a strong competitive position in relation to many
competitors in this segment and, with respect to many products, is
considered among the market leaders.
Major Customers - Approximately 10% of this segment's net sales in
1998 were made to one customer, which is not a major customer of
any other segment.
Industrial & Commercial Controls
Patents and Trademarks - Eaton owns, controls, or is licensed under
many patents related to this segment. The EATON, EATON (logomark),
CUTLER-HAMMER, CH (EMBLEM), CH CONTROL (IN MONO BORDER), CH (IN
MONO BORDER), SERIES C (& DESIGN), DE-ION, QUICKLAG, DURANT,
CHALLENGER, FACTORYMATE, PANELMATE, POW-R-WAY, POW-R-LINE, POW-R-
QUICK, POW-R-DESIGNER, ADVANTAGE, ADVANTAGE (& DESIGN), ADVANCED
POWER CENTER, MAGNUM, MAGNUM DS, DS, OPTIM, TRI-PAC, IMPACC, and
HEINEMANN are some of the more significant trademarks used in
connection with marketing products included in this segment. In
addition, the Company has the right to use the WESTINGHOUSE
trademark in marketing certain products until 2004.
Competition - Principal methods of competition in this segment are
price, geographic coverage, service and product performance. Eaton
occupies a strong competitive position in relation to many
competitors in this segment and, with respect to many products, is
considered among the market leaders.
<PAGE>
Page 5
Major Customers - Approximately 18% of this segment's net sales in
1998 were made to one customer, which is not a major customer of
any other segment.
Semiconductor Equipment
Patents and Trademarks - Eaton owns, controls, or is licensed under
many patents related to this segment. Although the EATON and EATON
(logomark) trademarks are emphasized in marketing many products
within this segment, the Company also markets under several other
trademarks, including RapidTherm, GEMINI, FUSION 200, FUSION 300,
PHOTOKINETICS, and FUSION SYSTEMS.
Competition - Principal methods of competition in this segment are
price, geographic coverage, service and product performance. Eaton
occupies a strong competitive position in relation to many
competitors in this segment and, with respect to many products, is
considered among the market leaders.
Major Customers - Approximately 16% of this segment's net sales in
1998 were made to two customers, which are not major customers of
any other segment.
Truck Components
Patents and Trademarks- Eaton owns, controls, or is licensed under
many patents related to this segment. The EATON, EATON (logomark),
FULLER, ROADRANGER, AutoShift, EASY-PEDAL PLUS, SOLO, ANGLE-RING,
CEEMAT, ANGLE SPRING, LIGHTNING, TOP 2, AMT, SAMT, and S-SERIES
trademarks are used in connection with marketing products included
in this segment.
Competition - Principal methods of competition in this segment are
price, service and product performance. Eaton occupies a strong
competitive position in relation to many competitors in this
segment and, with respect to many products, is considered among the
market leaders.
Major Customers- Approximately 50% of this segment's net sales in
1998 were made to divisions and subsidiaries of three original
equipment manufacturers of heavy-, medium-, and light-duty trucks
and off-highway vehicles, generally concentrated in North America.
One of these customers is a major customer of the Automotive
Components segment.
Information Concerning Eaton's Business in General
Raw Materials - Principal raw materials used are iron, steel,
copper, aluminum, brass, insulating materials, silver, rubber and
plastic. Materials are purchased in various forms, such as pig
iron, metal sheets and strips, forging billets, bar stock and
plastic pellets. Raw materials, as well as parts and other
<PAGE>
Page 6
components, are purchased from many suppliers and, under normal
circumstances, the Company has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed
with Eaton by original equipment manufacturers of vehicles and
trucks are historically subject to month-to-month releases by
customers during each model year, such orders are not considered
technically firm. In measuring backlog of orders, the Company
includes only the amount of such orders released by such
customers as of the dates listed. Using this criterion, total
backlog at December 31, 1998 and 1997 (in billions) was
approximately $1.2 and $1.3, respectively. Backlog should not be
relied upon as being indicative of results of operations for future
periods.
Research and Development - Research and development expenses for
new products and improvement of existing products in 1998, 1997 and
1996 (in millions) were $334, $319 and $267, respectively. Over
the past five years, the Company has invested approximately $1.4
billion in research and development.
Protection of the Environment - Operations of the Company involve
the use and disposal of certain substances regulated under
environmental protection laws. The Company continues to modify, on
an ongoing, regular basis, certain processes in order to reduce the
impact on the environment, including the reduction or elimination
of certain chemicals used in and wastes generated from operations.
Compliance with Federal, State and local provisions which have been
enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, is not expected to have a material adverse effect upon
earnings or the competitive position of the Company. Eaton's
estimated capital expenditures for environmental control facilities
are not expected to be material for 1999 and 2000. Information
regarding the Company's liabilities related to environmental
matters is presented in "Protection of the Environment" on page 31
of this report.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The
Company maintains manufacturing facilities at 155 locations in 25
countries. The Company is a lessee under a number of operating
leases for certain real properties and equipment, none of which are
material to the Company's operations. Eaton's principal research
facilities are located in Southfield, Michigan, and Milwaukee,
Wisconsin. In addition, certain divisions conduct research in
their own facilities.
Management believes that the manufacturing facilities are adequate
for operations, and such facilities are maintained in good
condition.
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Page 7
Item 3. Legal Proceedings
None required to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Shares are listed for trading on the New York,
Chicago, Pacific and London stock exchanges. Information regarding
cash dividends paid and high and low market price per Common Share
for each quarter in 1998 and 1997 is presented in "Quarterly Data"
on page 62 of this report. At December 31, 1998, there were 13,195
holders of record of the Company's Common Shares. Additionally,
21,364 current and former employees were shareholders through
participation in the Company sponsored Share Purchase and
Investment Plan.
Item 6. Selected Financial Data
Information regarding selected financial data is presented in the
"Five-Year Consolidated Financial Summary" on page 63 of this
report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" is included on pages 45 through 61 of this
report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Information regarding market risk is included on pages 54 and 55 of
this report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, financial review and the
report of independent auditors is presented on pages 17 through 43
of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
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Page 8
Part III
Item 10. Directors and Executive Officers of the Registrant
Information contained on pages 5 through 7 in the definitive Proxy
Statement dated March 19, 1999, with respect to directors, is
incorporated by reference.
A listing of Eaton's officers, their ages and their current
positions and offices, as of January 31, 1999 and updated to
reflect the election of Randy W. Carson, follows:
Name Age Position (Date elected to position)
- ------------------- --- -----------------------------------
Stephen R. Hardis 63 Chairman and Chief Executive Officer
(January 1, 1996 and September 1, 1995,
respectively); Director
Alexander M. Cutler 47 President and Chief Operating Officer
(September 1, 1995); Director
Gerald L. Gherlein 60 Executive Vice President and General
Counsel (September 4, 1991)
Adrian T. Dillon 45 Executive Vice President - Chief
Financial and Planning Officer
(April 23, 1997)
Brian R. Bachman 53 Senior Vice President and Group
Executive - Hydraulics, Semiconductor
Equipment and Specialty Controls
(September 9, 1998)
Robert J. McCloskey 59 Senior Vice President and Group
Executive - Automotive
(September 9, 1998)
Thomas W. O'Boyle 56 Senior Vice President and Group
Executive - Truck Components
(September 9, 1998)
David M. Wathen 46 Senior Vice President and Group
Executive - Cutler-Hammer
(September 9, 1998)
Randy W. Carson 48 Vice President - Growth Initiatives
(February 24, 1999)
Susan J. Cook 51 Vice President - Human Resources
(January 16, 1995)
Patrick X. Donovan 63 Vice President - International (April
27, 1988)
Earl R. Franklin 55 Secretary and Associate General Counsel
(September 1, 1991)
John W. Hushen 63 Vice President - Corporate Affairs
(August 1, 1991)
Stanley V. Jaskolski 60 Vice President - Technical Management
(October 1, 1990)
Derek R. Mumford 57 Vice President - Information
Technologies (April 1, 1992)
Larry M. Oman 57 Vice President - Supplier Resource
Management (September 9, 1998)
Robert E. Parmenter 46 Vice President and Treasurer (January 1,
1997)
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Page 9
Billie K. Rawot 47 Vice President and Controller (March 1,
1991)
All of the officers listed above have served in various capacities
with Eaton over the past five years, except for Brian R. Bachman,
David M. Wathen, Randy W. Carson, and Susan J. Cook. Prior to
joining Eaton, Mr. Bachman was Vice President and General Manager
for the Standard Products Business Group of Philips Semiconductor.
Earlier in his career, Mr. Bachman was President of the General
Semiconductor Industry Unit of Square D Corporation. Prior to
joining Eaton, Mr. Wathen was a senior executive with Allied-
Signal, Inc. Prior to joining Allied-Signal, Inc., in 1996, Mr.
Wathen spent seven years with Emerson Electric Company and twelve
years with General Electric. Prior to joining Eaton, Mr. Carson
served as senior vice president of Rockwell Automation for six
years. Mr. Carson's previous responsibilities with Rockwell
included leading the Automation Group of Allen-Bradley, and as
executive vice president of the Reliance Electrical Group. Prior
to joining Eaton, Ms. Cook was Vice President-Human Resources at
Tandem Computers, Inc. Prior to joining Tandem Computers, Inc., in
1988, Ms. Cook had a seventeen-year career in human resources at
IBM Corporation.
There are no family relationships among the officers listed, and
there are no arrangements or understandings pursuant to which any
of them were elected as officers. All officers hold office for one
year and until their successors are elected and qualified, unless
otherwise specified by the Board of Directors; provided, however,
that any officer is subject to removal with or without cause, at
any time, by a vote of a majority of the Board of Directors.
Item 11. Executive Compensation
Information contained on pages 10 through 20 in the definitive
Proxy Statement dated March 19, 1999, with respect to executive
compensation, is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information contained on pages 20 through 23 of the definitive
Proxy Statement dated March 19, 1999, with respect to security
ownership of certain beneficial owners and management, is
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None required to be reported.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
<PAGE>
Page 10
(a) (1) (i) The following consolidated financial statements and
financial review, included in Item 8, are filed as
as a separate section of this report.
Report of Independent Auditors - Page 17
Consolidated Balance Sheets - December 31, 1998 and
1997 - Pages 18 and 19
Statements of Consolidated Income - Years ended
December 31, 1998, 1997 and 1996 - Page 20
Statements of Consolidated Cash Flows - Years ended
December 31, 1998, 1997 and 1996 - Page 21
Statements of Consolidated Shareholders' Equity -
Years ended December 31, 1998, 1997 and 1996 -
Page 22
Financial Review - Pages 23 through 43
(ii) Summarized financial information for Eaton ETN
Offshore Ltd. - Page 44
(2) All schedules for which provision is made in
Regulation S-X of the Securities and Exchange
Commission, are not required under the related
instructions or are inapplicable and, therefore,
have been omitted.
(3) Exhibits
3(a) Amended Articles of Incorporation (amended
and restated as of April 27, 1994) -
Incorporated by reference to the Form 8-K
Report dated May 19, 1994
3(b) Amended Regulations (amended and restated
as of April 27, 1988) - Incorporated by
reference to the Annual Report on Form 10-K
for the year ended December 31, 1994
4(a) Instruments defining rights of security
holders, including indentures (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)
4(b) Eaton Corporation Rights Agreement dated June
28, 1995 - Incorporated by reference to the
Form 8-K Report dated June 28, 1995
10 Material contracts
The following are either a management
contract or a compensatory plan or
arrangement:
<PAGE>
Page 11
(a) Deferred Incentive Compensation Plan
(amended and restated as of September
24, 1996) - Incorporated by reference to
the Annual Report on Form 10-K for the
year ended December 31, 1996
(b) Executive Strategic Incentive Plan
(amended and restated as of June 21,
1994, July 25, 1995 and April 21, 1998)
(filed as a separate section of this
report)
(c) Group Replacement Insurance Plan (GRIP),
effective as of June 1, 1992 -
Incorporated by reference to the Annual
Report on Form 10-K for the year ended
December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by
reference to the definitive Proxy
Statement dated March 18, 1991
(e) 1995 Stock Plan - Incorporated by
reference to the definitive Proxy
Statement dated March 17, 1995
(f) Incentive Compensation Deferral Plan
(amended and restated as of September
24, 1996) - Incorporated by reference to
the Annual Report on Form 10-K for the
year ended December 31, 1996
(g) Strategic Incentive and Option Plan
(amended and restated as of September
24, 1996) - Incorporated by reference to
the Annual Report on Form 10-K for the
year ended December 31, 1996
(h) Form of "Change of Control" Agreement
entered into with officers of Eaton
Corporation as of November 1, 1996 -
Incorporated by reference to the Annual
Report on Form 10-K for the year ended
December 31, 1996
(i) The following are incorporated by
reference to the Quarterly Report on
Form 10-Q for the quarter ended June 30,
1990:
(i) Limited Eaton Service
Supplemental Retirement Income
Plan (amended and restated
as of January 1, 1989)
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Page 12
(ii) Amendments to the 1980 and 1986
Stock Option Plans
(iii) Eaton Corporation Supplemental
Benefits Plan (amended and
restated as of January 1, 1989)
(which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess
Benefits Plan (amended and
restated as of January 1, 1989)
(with respect to Section 415
limitations of the Internal
Revenue Code)
(j) Executive Incentive Compensation Plan,
effective January 1, 1995 - Incorporated
by reference to the Annual Report on
Form 10-K for the year ended December
31, 1996
(k) Plan for the Deferred Payment of
Directors' Fees (amended and restated as
of September 24, 1996 and amended
effective as of January 1, 1997) -
Incorporated by reference to the Annual
Report on Form 10-K for the year ended
December 31, 1997
(l) Plan for the Deferred Payment of
Directors' Fees (originally adopted in
1980 and amended effective February 25,
1997) - Incorporated by reference to the
Annual Report on Form 10-K for the year
ended December 31, 1996
(m) 1996 Non-Employee Director Fee Deferral
Plan (amended effective January 1, 1997
and February 25, 1997) - Incorporated by
reference to the Annual Report on Form
10-K for the year ended December 31, 1997
(n) Eaton Corporation Trust Agreement -
Outside Directors (dated December 6,
1996) - Incorporated by reference to the
Annual Report on Form 10-K for the year
ended December 31, 1996
(o) Eaton Corporation Trust Agreement -
Officers and Employees (dated December
6, 1996) - Incorporated by reference to
the Annual Report on Form 10-K for the
year ended December 31, 1996
<PAGE>
Page 13
(p) Eaton Corporation Retirement Plan for Non-
Employee Directors (amended and restated
January 1, 1996) - Incorporated by
Reference to the Annual Report filed on
Form 10-K for the year ended December 31,
1997
(q) 1998 Stock Plan - Incorporated by
reference to the definitive Proxy
Statement dated March 13, 1998
21 Subsidiaries of Eaton Corporation (filed as a
separate section of this report)
23 Consent of Independent Auditors (filed as a
separate section of this report)
24 Power of Attorney (filed as a separate section
of this report)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
fourth quarter of 1998.
(c) Exhibits
Certain exhibits required by this portion of Item 14
are filed as a separate section of this report.
(d) Financial Statement Schedules
None required to be filed.
<PAGE>
Page 14
Signatures
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: March 19, 1999 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President--
Chief Financial and Planning
Officer; Principal Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
DATE: March 19, 1999
Signature Title
- ----------------------- ---------------------------------------
*
- -----------------------
Stephen R. Hardis Chairman and Chief Executive Officer;
Principal Executive Officer;
Director
*
- -----------------------
Alexander M. Cutler President and Chief Operating Officer;
Director
*
- -----------------------
Billie K. Rawot Vice President and Controller;
Principal Accounting Officer
*
- -----------------------
Neil A. Armstrong Director
<PAGE>
Page 15
*
- -----------------------
Michael J. Critelli Director
- -----------------------
Phyllis B. Davis Director
*
- -----------------------
Ernie Green Director
*
- -----------------------
Ned C. Lautenbach Director
*
- -----------------------
John R. Miller Director
*
- -----------------------
Furman C. Moseley Director
*
- -----------------------
Victor A. Pelson Director
*
- -----------------------
A. William Reynolds Director
*
- -----------------------
Gary L. Tooker Director
*By /s/ Adrian T. Dillon
--------------------------------------
Adrian T. Dillon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
<PAGE>
Page 16
Eaton Corporation
1998 Annual Report on Form 10-K
Items 6, 7, 7A, 8 & Item 14(c)
Report of Independent Auditors
Consolidated Financial Statements and Financial Review
Summary Financial Information for Eaton ETN Offshore Ltd.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Quarterly Data
Five-Year Consolidated Financial Summary
Exhibits
<PAGE>
Page 17
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
To the Shareholders
Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton
Corporation and the related statements of consolidated income,
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the
summary financial information of Eaton ETN Offshore Ltd. listed in
Item 14(a). These financial statements and summary financial
information are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and summary financial information based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Eaton Corporation at December 31, 1998 and
1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related summary financial information,
when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 19, 1999
<PAGE>
Page 18
<TABLE>
Eaton Corporation
<CAPTION>
Consolidated Balance Sheets December 31
-----------------
(Millions) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 80 $ 53
Short-term investments 42 37
Accounts receivable 885 958
Inventories 707 734
Deferred income taxes 152 163
Other current assets 116 110
------- -------
1,982 2,055
Property, plant & equipment
Land & buildings 620 622
Machinery & equipment 2,767 2,738
------- -------
3,387 3,360
Accumulated depreciation (1,550) (1,601)
------- -------
1,837 1,759
Excess of cost over net assets of businesses
acquired 1,025 966
Other assets 821 826
------- -------
$ 5,665 $ 5,606
======= =======
The Financial Review on pages 23 to 43 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 19
<TABLE>
Eaton Corporation
<CAPTION>
Consolidated Balance Sheets December 31
----------------
(Millions) 1998 1997
---- ----
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 225 $ 81
Current portion of long-term debt 108 23
Accounts payable 445 519
Accrued compensation 160 180
Accrued income & other taxes 74 76
Other current liabilities 504 478
------- -------
1,516 1,357
Long-term debt 1,191 1,272
Postretirement benefits other than pensions 557 553
Other liabilities 344 353
Shareholders' equity
Common Shares (71.7 in 1998 and 74.7 in 1997) 36 37
Capital in excess of par value 853 844
Retained earnings 1,321 1,385
Accumulated other comprehensive income (loss) (110) (148)
Shares in trust
Employee Stock Ownership Plan (6) (20)
Deferred compensation plans (37) (27)
------- -------
2,057 2,071
------- -------
$ 5,665 $ 5,606
======= =======
The Financial Review on pages 23 to 43 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 20
<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Income Year ended December 31
-------------------------
(Millions except for per share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 6,625 $ 7,563 $ 6,961
Costs & expenses
Cost of products sold 4,759 5,456 5,171
Selling & administrative 1,050 1,088 995
Research & development 334 319 267
Purchased in-process research & development 85
------- ------- -------
6,143 6,948 6,433
------- ------- -------
Income from operations 482 615 528
Other income (expense)
Interest expense - net (88) (79) (79)
Gain on sales of businesses 43 91
Other - net 48 41 36
------- ------- -------
3 53 (43)
------- ------- -------
Income before income taxes & extraordinary item 485 668 485
Income taxes 136 204 136
------- ------- -------
Income before extraordinary item 349 464 349
Extraordinary item (54)
------- ------- -------
Net income $ 349 $ 410 $ 349
======= ======= =======
Per Common Share - assuming dilution
Income before extraordinary item $ 4.80 $ 5.93 $ 4.46
Extraordinary item (.69)
------- ------- -------
Net income $ 4.80 $ 5.24 $ 4.46
======= ======= =======
Average number of Common Shares outstanding 72.7 78.2 78.2
Per Common Share - basic
Income before extraordinary item $ 4.89 $ 6.05 $ 4.50
Extraordinary item (.71)
------- ------- -------
Net income $ 4.89 $ 5.34 $ 4.50
======= ======= =======
Average number of Common Shares outstanding 71.4 76.8 77.4
Cash dividends paid per Common Share $ 1.76 $ 1.72 $ 1.60
The Financial Review on pages 23 to 43 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 21
<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Cash Flows Year ended December 31
-------------------------
(Millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating activities
Income before extraordinary item $ 349 $ 464 $ 349
Adjustments to reconcile to net cash provided by
operating activities
Depreciation 259 285 270
Amortization 72 57 50
Deferred income taxes 94 31 (12)
Long-term assets and liabilities, & other
non-cash items in income (33) (14) 3
Write-off of purchased in-process research &
development 85
Gain on sales of businesses (43) (91)
Changes in operating assets & liabilities,
excluding acquisitions & sales of businesses
Accounts receivable (11) (106) (32)
Inventories (38) (53) 36
Accounts payable & other accruals (3) 140 42
Other - net (4) (35)
------- ------- -------
642 763 706
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (117) (387) (151)
Sales of businesses 375 329
Expenditures for property, plant & equipment (483) (438) (347)
Other - net (56) (35) (7)
------- ------- -------
(281) (531) (505)
Net cash used in financing activities
Borrowings with original maturities of more than
three months
Proceeds 1,409 425 169
Payments (982) (570) (148)
Borrowings with original maturities of less than
three months - net (303) 356 (87)
Proceeds from exercise of stock options 17 36 18
Cash dividends paid (126) (133) (124)
Purchase of Common Shares (349) (315) (63)
------- ------- -------
(334) (201) (235)
------- ------- -------
Total increase (decrease) in cash 27 31 (34)
Cash at beginning of year 53 22 56
------- ------- -------
Cash at end of year $ 80 $ 53 $ 22
======= ======= =======
The Financial Review on pages 23 to 43 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 22
<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Shareholders' Equity
Shares in trust
Accumulated ------------------ Total
Common Shares Capital in other Deferred share-
------------- excess of Retained comprehensive compensa- holders'
Shares Amount par value earnings income (loss) ESOP tion plans equity
------ ------ --------- -------- ------------- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 77.6 $39 $812 $1,227 $(50) $(53) $1,975
Net income 349 349
Other comprehensive income (17) (17)
------
Total comprehensive income 332
Cash dividends paid, net of
Employee Stock Ownership
Plan (ESOP) tax benefit (123) (123)
Issuance of shares under
employee benefit plans,
including tax benefit .5 23 (1) 22
Purchase of shares (1.1) (12) (51) (63)
Shares allocated to employees 17 17
Issuance of shares to trust .1 7 $(7)
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1996 77.1 39 830 1,401 (67) (36) (7) 2,160
Net income 410 410
Other comprehensive income (81) (81)
------
Total comprehensive income 329
Cash dividends paid, net of
ESOP tax benefit (132) (132)
Issuance of shares under
employee benefit plans,
including tax benefit .9 47 (2) 45
Put option obligation, net (18) (18)
Purchase of shares (3.7) (2) (40) (292) (334)
Shares allocated to employees 16 16
Issuance of shares to trust .2 20 (20)
Other .2 5 5
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1997 74.7 37 844 1,385 (148) (20) (27) 2,071
Net income 349 349
Other comprehensive income 38 38
------
Total comprehensive income 387
Cash dividends paid, net of
ESOP tax benefit (126) (126)
Issuance of shares under
employee benefit plans,
including tax benefit .5 25 (1) 24
Put option obligation, net 16 16
Purchase of shares (3.7) (1) (42) (286) (329)
Shares allocated to employees 14 14
Issuance of shares to trust .2 10 (10)
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1998 71.7 $36 $853 $1,321 $(110) $(6) $(37) $2,057
==== === ==== ====== ===== ==== ==== ======
The Financial Review on pages 23 to 43 is an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
Page 23
FINANCIAL REVIEW
- ----------------
All references to net income per Common Share assume dilution, unless
otherwise indicated.
ACCOUNTING POLICIES
- -------------------
Consolidation
- -------------
The consolidated financial statements include accounts of the Company
and all majority-owned subsidiaries. The equity method of accounting
is used for investments in associate companies and joint ventures
where the Company has a 20% to 50% ownership interest.
Foreign Currency Translation
- ----------------------------
The functional currency for principally all subsidiaries outside the
United States is the local currency. Financial statements for these
subsidiaries are translated into United States dollars at year-end
exchange rates as to assets and liabilities and weighted-average
exchange rates as to revenues and expenses. The resulting
translation adjustments are recorded in shareholders' equity.
Inventories
- -----------
Inventories are carried at lower of cost or market. Inventories in
the United States are generally accounted for using the last-in,
first-out (LIFO) method. Remaining United States and all other
inventories are accounted for using the first-in, first-out (FIFO)
method.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization are computed by the straight-line
method for financial statement purposes. Cost of buildings is
depreciated over forty years and machinery and equipment over
principally three to ten years. Intangible assets primarily consist
of patents, trademarks, tradenames and software which are amortized
over a range of five to forty years. Excess of cost over net assets
of businesses acquired is amortized over a range of five to forty
years. Excess of cost over net assets of businesses acquired and
certain other long-lived assets are reviewed for impairment losses
whenever events or changes in circumstances indicate the carrying
amount may not be recovered through future net cash flows generated
by the assets.
Financial Instruments
- ---------------------
The Company selectively uses straightforward, nonleveraged financial
instruments as part of foreign exchange and interest rate risk
management programs. Financial instruments are not bought and sold
solely for trading purposes, except for nominal amounts authorized
under limited, controlled circumstances. Credit loss has never been
experienced, and is not anticipated, as the counterparties to various
financial instruments are major international financial institutions
<PAGE>
Page 24
with strong credit ratings and due to control over the limit of
positions entered into with any one party. Although financial
instruments are an integral part of the Company's risk management
programs, their incremental effect on financial condition and results
of operations is not material.
The Company and its subsidiaries, operating in Canada, Europe, Latin
America and the Pacific Region, are exposed to fluctuations in
foreign currencies in the normal course of business. Foreign
currency forward exchange contracts and options are used to reduce
exposure to foreign currency fluctuations. Accrued gains or losses
on those financial instruments which hedge net investments in
subsidiaries outside the United States are recorded in shareholders'
equity. Gains or losses on those financial instruments which hedge
specific transactions are deferred and subsequently recognized in net
income when the gains or losses on the hedged foreign currency
transaction are recognized in net income. Cash premiums and
discounts related to these financial instruments are amortized to
other income-net over the life of the respective agreement.
In the normal course of business, the Company's operations are also
exposed to fluctuations in interest rates. Interest rate swaps and
caps, and forward interest rate agreements, are used to reduce the
cost of, and exposure to, interest rate fluctuations. Accrued gains
or losses on interest rate swaps and caps are included in interest
expense since they hedge interest on debt. Gains and losses on
forward interest rate agreements are deferred and subsequently
recognized in net income when interest expense on the hedged debt is
recognized in net income. Cash premiums related to interest rate
caps are amortized to interest expense over the life of the
respective agreement.
Options for Common Shares
- -------------------------
The Company applies the intrinsic value based method described in
Accounting Principles Board Opinion No. 25 to account for stock
options granted to employees to purchase Common Shares. Under this
method, no compensation expense is recognized on the grant date,
since on that date the option price equals the market price of the
underlying Common Shares.
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are shipped
to unaffiliated customers.
Estimates
- ---------
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and notes.
Actual results could differ from these estimates.
<PAGE>
Page 25
Financial Presentation Changes
- ------------------------------
Certain amounts for prior years have been reclassified to conform to
the current year presentation.
SUBSEQUENT EVENT (Unaudited)
- ---------------------------
On February 1, 1999, the Company announced it had entered into an
agreement to acquire all of the outstanding common stock of Aeroquip-
Vickers, Inc., for $58 per share in cash, or approximately $1.7
billion, plus the assumption of debt. For 1998, Aeroquip-Vickers
reported sales of $2.15 billion, pretax income of $148 million, and
net assets of $569 million. Aeroquip-Vickers is a world leader in
the design, manufacture and distribution of engineered components and
systems to industrial, aerospace and automotive markets.
Eaton expects to finance approximately 20% of the acquisition through
the sale of Common Shares, with the remainder through the issuance of
debt. In conjunction with the acquisition, Eaton anticipates
recording an acquisition integration charge which has not yet been
determined. The acquisition is expected to be completed in April
1999 and will be accounted for as a purchase.
UNUSUAL CHARGES
- ---------------
In 1998, the Company recorded unusual pretax charges of $111 million
($72 million aftertax, or $.99 per Common Share) which include $101
million to restructure certain business segments and $10 million for
a contribution to the Company's charitable trust. Components of the
1998 restructuring charges, included in income from operations, are
as follows (in millions):
<TABLE>
<CAPTION>
Original Balance remaining
charges Utilized at December 31, 1998
-------- -------- --------------------
<S> <C> <C> <C>
Workforce reductions $ 41 $ (9) $ 32
Inventory & other
asset write-downs 46 (46) 0
Plant closing & other 14 (7) 7
---- ---- ----
$101 $(62) $ 39
==== ==== ====
</TABLE>
The charge for workforce reductions primarily represents severance
and other related benefit payments for the expected termination of
approximately 3,000 employees, primarily manufacturing personnel.
As of December 31, 1998, approximately 900 have been terminated.
The balance remaining at the end of 1998 will be substantially
utilized in 1999.
The principal business affected by the restructuring is the
Semiconductor Equipment segment. Due to the collapse of the
semiconductor equipment industry, the Company took actions to
restructure the segment that amounted to $43 million of the $101
million charge noted above. Approximately $8 million represents
workforce reductions and $30 million represents inventory and other
asset write-downs. The workforce reductions primarily relate to the
closing of the Austin, Texas plant, although workforce reductions
<PAGE>
Page 26
will also occur at other locations. The charge for asset write-downs
primarily relates to inventory, which was written down to estimated
market value, and approximately $2 million to write-down the Austin
plant to estimated selling price. The write-down of inventory is
included in cost of products sold.
The remaining $58 million of the $101 million restructuring charge
primarily relates to workforce reductions, inventory write-downs, and
other costs in the Automotive Components, Industrial and Commercial
Controls, and Truck Components segments. Certain plants in these
segments will be closed and production is being consolidated into
other existing facilities in an effort to reduce costs.
In order to restructure certain business segments, the Company also
recorded pretax charges of $24 million in 1997 ($15 million aftertax,
or $.19 per Common Share) and $50 million in 1996 ($32 million
aftertax, or $.41 per Common Share). These charges related to
workforce reductions, asset write-downs and other costs.
ACQUISITIONS OF BUSINESSES
- --------------------------
The Company acquired businesses for a combined net cash purchase
price (in millions) of $117, $387, and $151 in 1998, 1997 and 1996,
respectively. Each of these acquisitions was accounted for by the
purchase method of accounting, and, accordingly, the statements of
consolidated income include the results of the acquired businesses
from the effective dates of acquisition.
In 1998, G.T. Products was acquired for $77 million and is reported
in the Automotive Components segment. Acquisitions in 1997 included
the purchase of Dana Corporation's Spicer Clutch business for $180
million, which is reported in the Truck Components segment, and
Fusion Systems Corporation for $203 million, which is reported in the
Semiconductor Equipment segment. In 1996, CAPCO Automotive Products
Corporation was acquired for $135 million and is reported in the
Truck Components segment.
The purchase price allocation for Fusion Systems 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, 1997 results include the write-off of $85
million for purchased in-process research and development, with no
income tax benefit, or $1.09 per Common Share.
DIVESTITURES OF BUSINESSES
- --------------------------
The Company sold businesses for aggregate cash proceeds of $375
million in 1998. The divestitures included the sale of the Axle and
Brake business in January and the automotive leaf spring business in
April. The sales of these businesses, and adjustments related to
businesses sold in prior periods, resulted in a pretax gain of $43
million ($28 million aftertax, or $.38 per Common Share).
<PAGE>
Page 27
The Company also sold businesses for aggregate cash proceeds of $329
million in 1997. The divestitures included the sale of the majority
of the stock of AIL Systems in October and the worldwide Appliance
Controls business in December. The sales of these businesses
resulted in a pretax gain of $91 million ($69 million aftertax, or
$.88 per Common Share).
The operating results of these businesses are reported in business
segment information as divested operations.
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
The Company's subsidiaries outside the United States have lines of
credit, primarily short-term, aggregating $65 million from various
banks worldwide. At December 31, 1998, $42 million was outstanding
under these lines of credit.
<TABLE>
Long-term debt at December 31, excluding the current portion, follows
(in millions):
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
6-3/8% notes due 1999
(effective interest rate 4.8%) $ 100
9% notes due 2001 $ 100 100
8% debentures due 2006 86 86
8.9% debentures due 2006 100 100
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024
(effective interest rate 7.1%) 100 100
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 150 150
Commercial paper 500 500
Other (effective interest rate 9.5%) 55 36
------ ------
$1,191 $1,272
====== ======
</TABLE>
In the second quarter of 1998, the Company terminated existing credit
agreements and entered into a $1 billion credit facility with a
series of banks; $500 million with a five-year term and $500 million
with a 364-day term. These lines of credit provide funds for working
capital and general corporate purposes. Commercial paper of $500
million is classified as long-term debt because the Company intends,
and has the ability under the five-year credit agreement, to
refinance these notes on a long-term basis.
The weighted-average interest rate on short-term borrowings,
including commercial paper classified in long-term debt, was 6.0% at
December 31, 1998 and 1997.
Aggregate mandatory sinking fund requirements and annual maturities
of long-term debt are as follows (in millions): 1999, $108; 2000,
$11; 2001, $103; 2002, $0; and 2003, $500.
Interest capitalized as part of the acquisition or construction of
major fixed assets (in millions) was $16 in 1998, $12 in 1997 and $8
<PAGE>
Page 28
in 1996. Interest paid (in millions) was $116 in 1998, $97 in 1997
and $96 in 1996.
The carrying values of cash, short-term investments and short-term
debt in the Consolidated Balance Sheet approximate their estimated
fair values. The estimated fair values of other financial
instruments outstanding at December 31 are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
-------------------------- -----------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------- ------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Marketable debt securitie $66 $66 $62 $62
Long-term debt, current
portion of long-term
debt & foreign
currency principal swaps (1,299)(1,384) (1,295)(1,373)
Foreign currency forward
exchange contracts &
options $ 11 (3) (3) $112 (27) (27)
Interest rate swaps
Fixed to floating 36 66 1
Floating to fixed 103 (5) 9
Fixed to fixed 40 90 1
Forward interest rate
agreement 200 (9)
</TABLE>
The estimated fair values of financial instruments are principally
based on quoted market prices. The fair value of foreign currency
forward exchange contracts and options, which primarily mature in
1999, and foreign currency principal and interest rate swaps are
estimated based on quoted market prices of comparable contracts,
adjusted through interpolation where necessary for maturity
differences.
EXTRAORDINARY ITEM
- ------------------
On December 30, 1997, the Company redeemed the $200 million of 7%
debentures due 2011. The aftertax extraordinary loss on this
redemption, including the write-off of debt issue costs, was $54
million, or $.69 per Common Share ($88 million before income taxes).
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
- ----------------------------------------------
The Company has non-contributory defined benefit pension plans and
other postretirement benefit plans, primarily health care and life
insurance. In the event of a change in control of the Company, excess
pension plan assets of North American operations may be dedicated to
funding of health and welfare benefits of employees and retirees.
<PAGE>
Page 29
<TABLE>
Components of plan obligations and assets, and the recorded asset
(liability) at December 31 are as follows (in millions):
<CAPTION>
Other
postretirement
Pension benefits benefits
---------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation at beginning
of year $(1,567) $(1,627) $ (737) $ (705)
Service cost (58) (64) (12) (13)
Interest cost (98) (111) (49) (49)
Effect of divestitures 99 162 14 56
Actuarial loss (132) (55) (33) (64)
Benefits paid 161 144 51 55
Other (7) (16) (3) (17)
------- ------- ------- -------
Benefit obligation at end
of year $(1,602) $(1,567) $ (769) $ (737)
------- ------- ------- -------
Fair value of plan assets at
beginning of year $ 2,024 $ 1,939
Actual return on plan assets 222 375
Employer contributions 16 17 $ 48 $ 52
Settlement cost (29) (3)
Effect of divestitures (62) (171)
Benefits paid (161) (144) (51) (55)
Other (6) 11 3 3
------- ------- ------- -------
Fair value of plan assets at
end of year $ 2,004 $ 2,024 $ 0 $ 0
------- ------- ------- -------
Pension plan assets in excess of
benefit obligations $ 402 $ 457
Obligations with no plan assets $ (769) $ (737)
Unamortized
Net (gain) loss (290) (395) 204 184
Prior service cost 34 32 (21) (29)
Other (15) (19)
------- ------- ------- -------
Recorded asset (liability) $ 131 $ 75 $ (586) $ (582)
======= ======= ======= =======
</TABLE>
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets (in millions) were $230, $206
and $118, respectively, as of December 31, 1998 and $211, $186 and
$89, respectively, as of December 31, 1997.
<PAGE>
Page 30
<TABLE>
The components of net periodic benefit income (cost) for the years
ended December 31 are as follows (in millions):
<CAPTION>
Pension benefits
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ (58) $ (64) $ (58)
Interest cost (98) (111) (105)
Expected return on plan assets 158 164 147
Other (4) 3
------ ------ ------
(2) (11) (13)
Curtailment gain (loss) 8 (1)
Settlement gain 41 68 6
------ ------ ------
$ 47 $ 56 $ (7)
====== ====== ======
Other postretirement benefits
-----------------------------
1998 1997 1996
---- ---- ----
Service cost $ (12) $ (13) $ (12)
Interest cost (49) (49) (47)
Net amortization (2) 3 5
------ ------ ------
(63) (59) (54)
Curtailment gain 1 16
Settlement loss (5) (12)
------ ------ ------
$ (67) $ (55) $ (54)
====== ====== ======
</TABLE>
The curtailment and settlement gains and losses relate primarily to
the sales of the Axle and Brake and Appliance Controls businesses,
and AIL Systems.
<TABLE>
Actuarial assumptions used in the calculation of the recorded asset
(liability) are as follows:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rate 6.50% 7.00%
Return on pension plan assets 10.00% 10.00%
Rate of compensation increase 3.95% 4.50%
Projected health care cost trend rate 7.00% 8.00%
Ultimate health care trend rate 4.25% 4.75%
Year ultimate health care trend rate
is achieved 2003 2002
</TABLE>
<PAGE>
Page 31
Assumed health care cost trend rates have a significant effect on the
amounts reported for other postretirement benefits. A one-
percentage-point change in the assumed health care cost trend rate
would have the following effects (in millions):
1% Increase 1% Decrease
----------- -----------
1998 benefit cost $ 3 $ (3)
Recorded liability
at December 31, 1998 40 (36)
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has several policies in place to ensure that its
operations are conducted in keeping with good corporate citizenship
and with a positive commitment to the protection of the natural and
workplace environments. For example, each facility has a person
responsible for environmental, health and safety (EHS) matters. The
Company routinely reviews EHS performance at each of its facilities;
and, continuously strives to minimize the generation of hazardous
waste at its facilities.
As a result of past operations, the Company is involved in remedial
response and voluntary environmental cleanup activities at a number
of sites, including certain of its currently-owned or formerly-owned
plants. The Company has also been named a potentially responsible
party (PRP) under the Federal Superfund law at a number of waste
disposal sites.
A number of factors affect the cost of environmental remediation,
including the number of parties involved at many sites, the
determination of the extent of contamination, the length of time that
remediation may require, the complexity of environmental regulations,
and the continuing advancement of remediation technology. Taking
these factors into account, the Company has estimated (without
discounting) costs of remediation, which will be incurred over a
period of several years. The Company accrues an amount equal to the
best estimates of these costs when it is probable that a liability
has been incurred. At December 31, 1998 and 1997, the consolidated
balance sheet included an accrual for these costs (in millions) of
$32 and $33, respectively. The Company has rights of recovery from
non-affiliated parties as to a portion of these costs with regard to
several of the sites.
Based upon the Company's analysis and subject to the difficulty in
estimating these future costs, the Company expects that any sum it
may be required to pay in connection with environmental matters is
not reasonably likely to exceed the accrual by an amount that would
have a material adverse effect on its financial condition or results
of operations or liquidity. All of these estimates are forward-
looking statements and, given the inherent uncertainties in
evaluating environmental exposures, actual results can differ from
these estimates.
SHAREHOLDERS' EQUITY
- --------------------
There are 300 million Common Shares authorized ($.50 par value per
share). At December 31, 1998, there were 8.6 million Common Shares
held in treasury and 13,195 holders of record of Common Shares.
Additionally, 21,364 current and former employees were shareholders
<PAGE>
Page 32
through participation in the Company sponsored Share Purchase and
Investment Plan.
Under the Share Purchase and Investment Plan (SPIP) for United States
operations, eligible participating employees may choose to contribute
up to 17% of their eligible compensation. The Company matches
employee contributions up to 6% of a participant's eligible
compensation as limited by United States income tax regulations. The
matching contribution, which is determined each quarter based on net
income per Common Share-basic, ranges from 25% to 100% of a
participant's contribution and is invested in the Company's Common
Shares.
The Company has prefunded, through early 1999, a portion of
anticipated matching contributions to the SPIP by creating an
Employee Stock Ownership Plan (ESOP) under the SPIP and selling 5
million Common Shares for $150 million to the ESOP. The shares held
by the ESOP which have not yet been allocated to employee accounts
are included in shareholders' equity as "Shares in trust-ESOP" and
the notes payable of the ESOP, which are guaranteed by the Company,
are included in current portion of long-term debt. Unallocated
shares in the ESOP are released at historical cost based on the ratio
of the annual principal payment on the notes payable compared to the
original principal amount of the notes payable and allocated to
employee accounts. Cash dividends paid on shares in the ESOP are
charged against retained earnings and, along with Company
contributions, are used to repay the principal and interest due on
the notes payable. Unallocated shares in the ESOP, which are
considered outstanding for purposes of computing net income per
Common Share, at the end of 1998 and 1997 were 170,000 and 800,000,
respectively. Compensation expense related to the SPIP match,
including the effect of shares released by the ESOP at historical
cost, (in millions) was $9 in 1998, $6 in 1997 and $10 in 1996.
The Company has plans which permit eligible employees and directors
to defer a portion of their compensation. The Company has deposited
$77 million of marketable securities and Common Shares into a trust
to fund a portion of these liabilities. The marketable securities
are included in other assets and the Common Shares are included in
shareholders' equity.
Stock Options
- -------------
Stock options have been granted to certain employees, under various
plans, to purchase the Company's Common Shares at prices equal to
fair market value as of date of grant. Historically, the majority of
these options vest ratably during the three-year period following the
date of grant and expire ten years from date of grant.
During 1998 and 1997, the Company granted .6 million and 1.9 million
special performance-vested stock options, respectively, in lieu of
the more standard options. These options become exercisable when the
Company achieves certain net income and Common Share price targets.
If these targets are not achieved, these options become exercisable
ten days before the expiration of their ten-year term. Half of the
options granted in 1997 became exercisable during 1997 when the
initial Common Share price target of $85 was achieved.
<PAGE>
Page 33
<TABLE>
A summary of stock option activity follows (shares in millions):
<CAPTION>
1998 1997 1996
-------------- -------------- ----------------
Average Average Average
price price price
per per per
share Shares share Shares share Shares
------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 $55.85 6.8 $44.32 5.0 $41.12 4.6
Granted 87.81 1.2 73.07 2.8 53.10 1.1
Exercised 43.40 (.4) 43.49 (.9) 33.57 (.6)
Canceled 71.11 (.1) 59.85 (.1) 51.79 (.1)
--- --- ---
Outstanding, December 31 $61.46 7.5 $55.85 6.8 $44.32 5.0
=== === ===
Exercisable, December 31 $51.91 4.8 $49.71 4.5 $41.42 3.7
Reserved for future
grants, December 31 .4 1.5 4.2
</TABLE>
<TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998 (shares in millions):
<CAPTION>
Weighted- Weighted-
average average
remaining exercise
Range of exercise Number contractual price per
prices per share outstanding life (years) share
- ---------------------------------------------------------------------
<S> <C> <C> <C>
$24.15 - $39.99 1.5 2.8 $33.12
$40.00 - $49.99 .8 6.1 48.56
$50.00 - $69.99 1.6 6.3 55.42
$70.00 - $79.99 2.4 8.1 71.82
$80.00 - $100.91 1.2 9.1 89.54
</TABLE>
<TABLE>
The following table summarizes information about stock options that
are exercisable at December 31, 1998 (shares in millions):
<CAPTION>
Weighted-
average
exercise
Range of exercise prices Number price per
per share exercisable share
- -----------------------------------------------------
<S> <C> <C>
$24.15 - $39.99 1.5 $33.12
$40.00 - $49.99 .8 48.56
$50.00 - $69.99 1.3 55.38
$70.00 - $79.99 1.1 71.82
$80.00 - $100.91 .1 89.11
</TABLE>
<TABLE>
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation". If the Company accounted for its stock
options under the fair value method of SFAS No. 123, net income (in
millions) and net income per Common Share would have been as
indicated below:
<CAPTION>
<PAGE>
Page 34
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $ 349 $ 410 $ 349
Assuming fair value method 338 390 343
Net income per Common Share-assuming
dilution
As reported $4.80 $5.24 $4.46
Assuming fair value method 4.65 4.99 4.38
Net income per Common Share-basic
As reported $4.89 $5.34 $4.50
Assuming fair value method 4.73 5.08 4.43
</TABLE>
<TABLE>
The fair value of each option grant was estimated using the Black-
Scholes option pricing model with the following assumptions:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 3% 3% 3%
Expected volatility 22% 22% 23%
Risk-free interest rate 5.5% to 5.7% 6.0% to 6.7% 5.3% to 6.3%
Expected option life 4, 5 or 6 years 4, 5 or 6 years 4 years
Weighted-average per
share fair value of
options granted
during the year $18.73 $16.84 $10.27
</TABLE>
Preferred Share Purchase Rights
- -------------------------------
In June 1995, the Company declared a dividend of one Preferred Share
Purchase Right (Right) for each outstanding Common Share. The Rights
become exercisable only if a person or group acquires, or offers to
acquire, 20% or more of the Company's Common Shares. The Company is
authorized to reduce the 20% threshold for triggering the Rights to
not less than 10%. The Rights expire on July 12, 2005, unless
redeemed earlier at one cent per Right.
When the Rights become exercisable, the holder of each Right, other
than the acquiring person, is entitled (1) to purchase for $250, one
one-hundredth of a Series C Preferred Share (Preferred Share), (2) to
purchase for $250, that number of the Company's Common Shares or
common stock of the acquiring person having a market value of twice
that price, or (3) at the option of the Company, to exchange each
Right for one Common Share or one one-hundredth of a Preferred Share.
Comprehensive Income
- --------------------
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new standards for
reporting comprehensive income and its components; the adoption of
SFAS No. 130 has no impact on the Company's net income or
shareholders' equity. The components of accumulated other
<PAGE>
Page 35
comprehensive income (loss) as reported in the Statement of
Consolidated Shareholders' Equity are as follows (in millions):
<TABLE>
<CAPTION>
Unrealized
Foreign gain (loss)
currency on available
translation for sale
adjustments securities Total
----------- ---------- -----
<S> <C> <C> <C>
Balance at January 1, 1996 $ (55) $ 5 $ (50)
1996 adjustment, net of income taxes (13) (4) (17)
----- ----- -----
Balance at December 31, 1996 (68) 1 (67)
1997 adjustment, net of income taxes (79) (10) (89)
Recognition in income of adjustment
related to divested businesses 8 8
----- ----- -----
Balance at December 31, 1997 (139) (9) (148)
1998 adjustment, net of income taxes (2) 6 4
Recognition in income of adjustment
related to divested businesses 34 34
----- ----- -----
Balance at December 31, 1998 $(107) $ (3) $(110)
===== ===== =====
</TABLE>
INCOME TAXES
- ------------
For financial statement reporting purposes, income before income
taxes (in millions), based on the geographical location of the
operation to which such earnings are attributable, is summarized
below. Certain foreign operations are branches of Eaton Corporation
and are, therefore, subject to United States as well as foreign
income tax regulations. As a result, pretax income by location and
the components of income tax expense by taxing jurisdiction are not
directly related.
<TABLE>
<CAPTION>
Income before income taxes
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $455 $457 $385
Non-United States 64 219 100
Write-off of foreign currency
translation adjustments related
to divested businesses (34) (8)
---- ---- ----
$485 $668 $485
==== ==== ====
</TABLE>
<PAGE>
Page 36
<TABLE>
Income tax expense for the years ended December 31 follows (in
millions):
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
United States
Federal $(11) $ 99 $ 81
State & local 9 14 21
Non-United States 42 42 34
---- ---- ----
40 155 136
Deferred
United States
Federal 90 20 (5)
State & local 5
Non-United States
Reduction of valuation allowance
for deferred income tax assets (4)
Operating loss carryforwards (1) 15 11
Other 7 13 (6)
---- ---- ----
96 49 0
---- ---- ----
$136 $204 $136
==== ==== ====
</TABLE>
<TABLE>
Reconciliations of income taxes at the United States Federal
statutory rate to the effective income tax rate for the years ended
December 31 follow (in millions):
<CAPTION>
1998
------------- 1997 1996
Amount Rate Rate Rate
------ ---- ---- ----
<S> <C> <C> <C> <C>
Income taxes at the United States
statutory rate $170 35.0% 35.0% 35.0%
Write-off of purchased in-process
research & development 4.5
State & local income taxes 7 1.5 2.9 2.9
Possessions credit related to Puerto
Rican operations (40) (8.2) (5.7) (7.2)
Credit for increasing research activities (13) (2.7) (3.3) (.6)
Book/tax basis difference related to
sales of businesses 11 2.1 (1.9)
Foreign source income 1 .3 .2 (2.6)
Other--net (1.2) .7
---- ---- ---- ----
$136 28.0% 30.5% 28.2%
==== ==== ==== ====
</TABLE>
<PAGE>
Page 37
<TABLE>
Significant components of current and long-term deferred income taxes
at December 31 follow (in millions):
<CAPTION>
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
<S> <C> <C> <C>
1998
Accruals & other adjustments
Employee benefits $ 43 $ 2 $187
Depreciation & amortization (4) (20) (233)
Other 99 10 24
Operating loss carryforwards of
non-United States subsidiaries 6 50 4
Other items 8 23 2
Valuation allowance (50)
---- ---- ----
$152 $ 15 $(16)
==== ==== ====
1997
Accruals & other adjustments
Employee benefits $ 45 $225 $(11)
Depreciation & amortization (6) (189) (13)
Other 109 49 4
Operating loss carryforwards of
non-United States subsidiaries 4 58 2
Other items 11 15 7
Valuation allowance (52)
---- ---- ----
$163 $106 $(11)
==== ==== ====
</TABLE>
At December 31, 1998, certain non-United States subsidiaries
had operating loss carryforwards aggregating $158 million.
Carryforwards of $133 million have no expiration dates and the
balance expires at various dates from 1999 through 2005.
The Company has manufacturing facilities in Puerto Rico which operate
under United States tax law incentives that will no longer be
available after 2005.
No provision has been made for income taxes on undistributed earnings
of consolidated non-United States subsidiaries of $484 million at
December 31, 1998, since the earnings retained have been reinvested
by the subsidiaries. If distributed, such remitted earnings would be
subject to withholding taxes but substantially free of United States
income taxes.
Worldwide income tax payments in 1998, 1997 and 1996 (in millions)
were $30, $163 and $154, respectively.
<PAGE>
Page 38
OTHER INFORMATION
- -----------------
Accounts Receivable
- -------------------
Accounts receivable are net of an allowance for doubtful accounts (in
millions) of $14 at the end of 1998 and $15 at the end of 1997.
Inventories
- -----------
<TABLE>
The components of inventories at December 31 follow (in millions):
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $282 $258
Work in process 297 330
Finished goods 197 235
---- ----
Gross inventories at FIFO 776 823
Excess of current cost over LIFO cost (69) (89)
---- ----
Net inventories $707 $734
==== ====
</TABLE>
Gross inventories accounted for using the LIFO method (in millions)
were $389 at the end of 1998 and $422 at the end of 1997.
Excess of Cost Over Net Assets of Businesses Acquired
- -----------------------------------------------------
Accumulated amortization of excess of cost over net assets of
businesses acquired (in millions) was $184 at the end of 1998 and
$148 at the end of 1997.
Investments in Life Insurance
- -----------------------------
The Company has company-owned life insurance policies insuring the
lives of a portion of active United States employees. The policies
accumulate asset values to meet future liabilities including the
payment of employee benefits such as health care. At December 31,
1998 and 1997, the investment in the policies included in other
assets (in millions) was $21 and $13, net of policy loans of $345 and
$346, respectively. Net life insurance expense (in millions) of $7
in 1998, $8 in 1997 and $9 in 1996, including interest expense of $33
in 1998 and 1997 and $35 in 1996 is included in selling and
administrative expense.
Lease Commitments
- -----------------
Minimum rental commitments for 1999 under noncancelable operating
leases, which expire at various dates and in most cases contain
renewal options, are $75 million and decline substantially
thereafter.
Rental expense in 1998, 1997 and 1996 (in millions) was $90, $78 and
$71, respectively.
<PAGE>
Page 39
Net Income per Common Share
- ---------------------------
<TABLE>
The calculation of net income per Common Share-assuming dilution
and basic follows:
<CAPTION>
(Millions except for per share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 349 $ 410 $ 349
===== ===== =====
Average number of Common Shares
outstanding - assuming dilution 72.7 78.2 78.2
Less dilutive effect of stock options 1.3 1.4 .8
---- ---- ----
Average number of Common Shares
outstanding - basic 71.4 76.8 77.4
==== ==== ====
Net income per Common Share
Assuming dilution $4.80 $5.24 $4.46
Basic 4.89 5.34 4.50
</TABLE>
Employee stock options to purchase 3.7 million Common Shares were
outstanding at the end of 1998 but were not included in the
computation of net income per Common Share-assuming dilution, since
they would have had an antidilutive effect on earnings per share.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1998, Statement of Financial Accounting Standard (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. The Company must adopt the standard by
the first quarter of fiscal year 2000. SFAS No. 133 requires all
derivatives to be recognized 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 expects that the adoption of the standard will have an
immaterial effect on earnings and financial position.
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- ---------------------------------------------------
The Company is a global manufacturer of highly engineered products
which serve the industrial, vehicle, construction, commercial and
semiconductor markets with operations located in 25 countries.
The Company has adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" and restated 1997 and 1996
segment information to conform to the new standard. The Company's
new segments are based on the way that management aggregates products
and business units for making operating decisions and assessing
performance. Major products included in each segment and other
information follows.
<PAGE>
Page 40
Automotive Components
- ---------------------
Valve train systems, intake and exhaust valves, lash compensation
lifters and lash adjusters, cylinder heads, viscous fan drives,
plastic cooling fans and shrouds, superchargers, limited slip and
locking differentials, transmission dampers, precision gear forgings,
air control valves, climate controls, convenience switches (for power
windows, door locks, mirrors, lights, etc.), engine sensors, mirror
actuators, transmission controls, keyless entry systems, daytime
running lamps, speed-sensitive steering systems, on-board vapor
recovery valves, check valves, fuel level sensors, pressure control
valves, intelligent cruise control systems, collision warning
systems, and transportation logistics management systems
Hydraulics and Other Components
- -------------------------------
Hydraulic pumps, motors, valves, cylinders, power steering units,
transaxles and transmissions, fasteners for automotive and other
commercial products, clutches and brakes for industrial machines, and
golf grips
Industrial and Commercial Controls
- ----------------------------------
To control and protect electric motors -- drives, contactors,
starters, and other motor control products; position sensing -- a
wide range of sensors; to control machine logic -- automation
personal computers and programmable logic controllers; to permit
human interface with machines -- a full range of operator interface
hardware and software; to manage distribution of electricity in
homes, businesses and industrial facilities -- vacuum interrupters, a
wide range of circuit breakers and a variety of power distribution
and control assemblies and components; to support customer power and
control system requirements -- engineering systems and diagnostic and
support services; for aerospace, commercial and military applications
- -- actuators, thermal circuit breakers, cockpit controls, illuminated
displays, integrated displays and panels, relays and valves, power
control and conversion equipment
Semiconductor Equipment
- -----------------------
High- and medium- current implanters and high-energy implanters;
integrated implant products and services that deliver the lowest
cost of ownership and contamination-free production of semiconductor
devices, including those requiring special capabilities such as wafer
repositioning and extreme tilt angles; photostablizers, ozone and
plasma ashers, thermal processing systems, flat panel display
equipment, regional spare parts depots and innovative parts
management programs
Truck Components
- ----------------
Heavy-, medium-, and light-duty mechanical transmissions, heavy-duty
automated transmissions, heavy- and medium-duty clutches, traction
control systems, transfer boxes, power take-off units, splitter
boxes, gearshift mechanisms, and transmissions for off-highway
construction equipment
Other Information
- -----------------
The principal market for Automotive Components, Truck Components, and
Hydraulics and Other Components is original equipment manufacturers
of heavy-, medium-, and light-duty trucks, passenger cars and off-
<PAGE>
Page 41
highway vehicles. These original equipment manufacturers are
generally concentrated in North America, however, sales are made on a
global basis. Most sales of these products are made directly to such
manufacturers.
The principal markets for Industrial and Commercial Controls and
Semiconductor Equipment are industrial, construction, commercial,
automotive, aerospace and government customers concentrated
principally in North America, however, sales are made globally.
Sales are made directly by the Company and indirectly through
distributors and manufacturers' representatives to such customers.
No single customer represented more than 10% of the Company's net
sales in 1998. Net sales to divisions and subsidiaries of one
customer, primarily from the Automotive Components, Truck Components,
and Hydraulics and Other Components segments, were (in millions) $766
in 1997 and $739 in 1996 (10% of sales in 1997 and 11% in 1996).
Sales from ongoing United States and Canadian operations to customers
in foreign countries (in millions) were $812 in 1998 and $590 in 1997
(12% of sales in 1998 and 9% in 1997).
The accounting policies of the segments are generally the same as the
policies described under "Accounting Policies" in the financial
review, except that inventories and related cost of products sold of
the segments are accounted for using the FIFO method and the segment
results only reflect the service cost component related to pensions
and other postretirement benefits.
The Company accounts for intersegment sales and transfers at the same
prices as if the sales and transfers were made to third parties.
Identifiable assets excludes general corporate assets, which
principally consist of short-term investments, deferred income taxes,
certain accounts receivable, and certain property, plant and
equipment and other assets.
<PAGE>
Page 42
<TABLE>
Geographic Region Information
<CAPTION>
Ongoing operations
--------------------------
Long-
Net Operating lived
(Millions) sales profit assets*
----- --------- ------
<S> <C> <C> <C>
1998
United States $5,364 $ 492 $1,250
Canada 194 20 16
Europe 927 61 290
Latin America 414 19 228
Pacific Region 136 (9) 53
Eliminations (441)
------ ------ ------
$6,594 $ 583 $1,837
====== ====== ======
1997
United States $5,114 $ 630 $1,140
Canada 183 18 17
Europe 869 66 263
Latin America 445 29 147
Pacific Region 138 5 27
Eliminations (478)
------ ------ ------
$6,271 $ 748 $1,594
====== ====== ======
1996
United States $4,659 $ 550 $1,053
Canada 183 17 16
Europe 858 52 260
Latin America 312 (31) 128
Pacific Region 124 27 21
Eliminations (402)
------ ------ ------
$5,734 $ 615 $1,478
====== ====== ======
</TABLE>
*Long-lived assets consist of property, plant, and equipment-net.
<TABLE>
Operating profit was reduced by the following restructuring
charges (in millions):
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $85 $ 4 $14
Canada 5
Europe 7 12 8
Latin America 1 1 13
Pacific Region 8 2
</TABLE>
<TABLE>
Geographic region information (table above) does not include
sales of associate companies and joint ventures in which the
Company holds a 20%-50% ownership interest and which had total
sales as follows (in millions):
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $ 21 $ 13
Europe $ 15 14 14
Latin America 31 16
Pacific Region 165 258 326
---- ---- ----
$180 $324 $369
==== ==== ====
</TABLE>
<PAGE>
Page 43
<TABLE>
Business Segment Information
<CAPTION>
(Millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales
Automotive Components $1,943 $1,801 $1,747
Hydraulics & Other Components 599 588 533
Industrial & Commercial Controls 2,320 2,251 2,096
Semiconductor Equipment 267 459 446
Truck Components 1,465 1,172 912
------ ------ ------
Total ongoing operations 6,594 6,271 5,734
Divested operations 31 1,292 1,227
------ ------ ------
Total net sales $6,625 $7,563 $6,961
====== ====== ======
Operating profit
Automotive Components $ 212 $ 225 $ 202
Hydraulics & Other Components 94 108 101
Industrial & Commercial Controls 180 216 175
Semiconductor Equipment (123) 29 60
Truck Components 220 170 77
------ ------ ------
Total ongoing operations 583 748 615
Divested operations (1) 76 6
Amortization of certain intangible assets (67) (48) (41)
Purchased in-process research & development (85)
Interest expense - net (88) (79) (79)
Gain on sales of businesses 43 91
Corporate & other - net 15 (35) (16)
------ ------ ------
Income before income taxes & extraordinary item $ 485 $ 668 $ 485
====== ====== ======
Segment operating profit was reduced by the following restructuring charges
Automotive Components $ 12 $ 12 $ 10
Hydraulics & Other Components 1 1 4
Industrial & Commercial Controls 28 6 3
Semiconductor Equipment 43 1 2
Truck Components 17 4 16
</TABLE>
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Identifiable assets
Automotive Components $1,115 $ 932 $ 901
Hydraulics & Other Components 331 304 280
Industrial & Commercial Controls 1,155 1,028 1,003
Semiconductor Equipment 254 344 252
Truck Components 710 599 525
------ ------ ------
Total ongoing operations 3,565 3,207 2,961
Divested operations 391 711
Intangible assets 1,239 1,189 1,007
Corporate 861 819 706
------ ------ ------
Total assets $5,665 $5,606 $5,385
====== ====== ======
Expenditures for property, plant & equipment
Automotive Components $ 127 $ 125 $ 91
Hydraulics & Other Components 42 33 31
Industrial & Commercial Controls 148 113 84
Semiconductor Equipment 14 14 25
Truck Components 124 52 44
------ ------ ------
Total ongoing operations 455 337 275
Divested operations 1 62 51
Corporate 27 39 21
------ ------ ------
Total expenditures for property, plant &
equipment $ 483 $ 438 $ 347
====== ====== ======
Depreciation of property, plant & equipment
Automotive Components $ 87 $ 82 $ 80
Hydraulics & Other Components 24 21 20
Industrial & Commercial Controls 67 59 52
Semiconductor Equipment 11 7 3
Truck Components 51 47 47
------ ------ ------
Total ongoing operations 240 216 202
Divested operations 1 50 50
Corporate 18 19 18
------ ------ ------
Total depreciation of property, plant &
equipment $ 259 $ 285 $ 270
====== ====== ======
</TABLE>
<PAGE>
Page 44
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. Effective January 31, 1994, Eaton Offshore, through
its subsidiaries, acquired certain of the Canadian and Brazilian
operations of the former Distribution and Control Business Unit
(DCBU) of CBS Corporation (formerly named Westinghouse Electric
Corporation). On June 30, 1994 and on April 1, 1995, majority
ownership of certain other assets of DCBU and another subsidiary
were transferred to a subsidiary of Eaton Offshore from Eaton. On
April 1, 1998, the division that manufactured leaf spring
assemblies was sold. Summary financial information for Eaton
Offshore and its consolidated subsidiaries for the years ended
December 31 follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income statement data
Net sales $631 $725 $602 $614 $494
Gross margin 146 149 94 99 87
Net income 41 33 23 28 20
Balance sheet data
Current assets $336 $375 $304 $300 $237
Noncurrent assets 248 196 146 152 122
Net intercompany
payables 132 160 53 47 4
Current liabilities 104 120 90 98 83
Noncurrent liabilities 108 106 100 102 105
Minority interest 21 1 6 2
</TABLE>
<PAGE>
Page 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
- --------
The healthy earnings momentum the Company enjoyed throughout 1997
faltered in 1998. Overall results for 1998 were deeply affected
by the unexpected worldwide collapse of the semiconductor
equipment market. Weakness in orders in 1997 developed into a
market collapse in the first quarter of 1998 and continued
throughout the year. Later in the year, sharp downturns in
agricultural equipment production and the uncertain Brazilian
economy also adversely impacted 1998 results. Nevertheless, 1998
proved to be a success for some business segments in light of
very mixed market conditions and difficult business challenges.
In order to reposition businesses to be more in line with their
expected future physical volumes, the Company took $125 million
in charges beginning in the fourth quarter of 1997 and throughout
1998 to restructure certain operations. Additionally, the
Company continued to make the investments necessary to win new
business across all segments resulting in increased research and
development charges. Together, these restructuring and
investment initiatives should better position the Company to take
advantage of more focused growth opportunities which will further
enable results to outpace the markets served.
Continuing the 1997 program of strategic repositioning moves, on
January 2, 1998, the Company sold the Axle and Brake business to
Dana Corporation. On April 1, 1998, the automotive leaf spring
business was sold. These divestitures, combined with the 1997
divestitures of the Appliance Controls business and AIL Systems,
resulted in a $1.3 billion reduction of net sales in 1998 and a
$77 million reduction in operating profit compared to 1997.
SUBSEQUENT EVENTS
- -----------------
A significant step toward the goal to achieve $10 billion in
sales by the end of the year 2000 was taken with the announcement
on February 1, 1999, of the intention to acquire Aeroquip-
Vickers, Inc. Eaton has entered into an agreement to acquire all
of the outstanding common stock of Aeroquip-Vickers for $58 per
share in cash, or a total price of approximately $1.7 billion,
plus the assumption of debt. Aeroquip-Vickers, which had sales
in 1998 of $2.15 billion, designs, manufactures and distributes
engineered components and systems to industrial, aerospace and
automotive markets.
This significant acquisition builds upon and extends the
Company's already strong position in mobile and industrial
hydraulics. With Vickers, Eaton acquires a global leader in
industrial hydraulics, generating $1.1 billion in annual sales to
serve mobile and industrial customers. This complementary
acquisition fundamentally repositions Eaton's hydraulics business
<PAGE>
Page 46
among the world leaders. Eaton expands upon the existing
strengths in hydraulics with Aeroquip's $1.1 billion position in
hoses and couplings, serving mobile and industrial, aerospace and
automotive customers. Together, Eaton and Aeroquip create an
aerospace and hydraulics business and a systems capability across
all hydraulics applications. Eaton expects the acquisition to be
neutral to earnings in 1999, excluding first-year transition
costs.
Eaton has important operations in Brazil and recent events have
occurred in the Brazilian economy causing the currency to
devalue. The real plan, implemented by the Brazilian government
in 1995, drastically lowered Brazilian inflation and stabilized
the currency. However, on January 15, 1999, in reaction to
declining foreign reserves and a loss of confidence in Brazilian
fiscal policy, the Brazilian real exchange rate "band" was
scrapped, allowing the currency to float freely. Since the
currency was allowed to float, it has declined in value.
Abandoning the real plan will likely have the effect of weakening
the economy in 1999, making the outlook more volatile for
inflation and for the currency. The situation will be closely
monitored for effects on Eaton's businesses.
1998 COMPARED TO 1997
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Worldwide sales of $6.6 billion in 1998 were 12% below the record
results of 1997. Year-to-year comparisons were materially
affected by business divestitures, which reduced sales in 1998 by
about $1.3 billion. Worldwide sales of ongoing operations in
1998 were 5% ahead of last year's results. Sales in the United
States and Canada increased 5% and increased 7% in Europe. In
Latin America, sales decreased 7% in 1998 compared to 1997 as a
result of economic weaknesses in Mexico, Brazil, and Argentina.
Sales in the Pacific Region remained flat in 1998, as a result of
the recession in Japan and the economic crisis in Asia.
As displayed in the Statement of Consolidated Income, Income from
Operations of $482 million in 1998 decreased 22% from 1997.
Divested businesses accounted for approximately $77 million of
the $133 million decrease. The decrease also reflected the
collapse of the semiconductor capital equipment market and the
unusual charges described below. Further, as a consequence of
continuing efforts to enhance the existing product portfolio, as
well as to develop new products to serve expanding markets, a
record $334 million was spent in 1998 on research and
development, 5% above 1997. Research and development expense as
a percentage of net sales increased to 5% in 1998 from 4% in
1997. Over the past five years, approximately $1.4 billion has
been spent on research and development.
During 1998, the Company recorded unusual pretax charges of $111
million, which included $101 million to restructure business
<PAGE>
Page 47
segments and $10 million for a contribution to Eaton's charitable
trust. The Semiconductor Equipment segment recorded $43 million
of the restructuring charge with the balance recorded by various
operations in the other business segments. The restructuring
charges principally relate to workforce reductions, inventory and
other asset write-downs, plant closings and other costs.
Workforce reductions involve several Semiconductor Equipment
locations as well as certain other plants in the Automotive
Components, Industrial and Commercial Controls, and Truck
Components segments. Approximately 2,825 operations employees and
175 corporate employees are expected to be terminated, of which
900 have been terminated as of year-end. These reductions will
generally be manufacturing personnel, although certain
administrative functions will also be affected. Production at
certain plants will be consolidated into other existing
facilities as the Company continues the process of reducing costs
to benefit customers and better accommodate the markets that
these plants serve. These actions should also significantly
increase cost competitiveness, enabling the Company to better
compete. Industrial and Commercial Controls operations in the
Pacific Region are also being realigned to better position the
Company's businesses in that region. The Company believes the
benefits of these restructuring activities will be demonstrated
by improved operating results in future periods.
In 1998, a pretax gain of $43 million was recognized related to
business divestitures, net of adjustments related to businesses
sold in prior periods.
Results for 1997 included unusual pretax charges of $24 million
for business segment restructuring actions and an $85 million
write-off of purchased in-process research and development
related to the acquisition of Fusion Systems. Also, a pretax
gain of $91 million was recognized in 1997 for the sales of
businesses. Finally, an aftertax extraordinary loss of $54
million was recognized in 1997 for the redemption of debentures.
Before unusual items in both years, net income of $393 million in
1998 decreased 21% from 1997 and full year 1998 earnings per
share were $5.41, down 15% from last year. After unusual items,
net income of $349 million in 1998 decreased 15% from 1997 and
full year earnings per share were $4.80, down 8% from 1997.
AUTOMOTIVE COMPONENTS
- ---------------------
The Automotive Components segment achieved record sales of $1.94
billion in 1998, 8% above 1997. During the first quarter of
1998, G.T. Products, a U.S. manufacturer of fuel system
components that regulate fuel flow and vapor emissions in
automotive fuel tanks, was acquired. During the third quarter of
1998, the assets of Amtec S.p.A., a privately owned Italian
manufacturer of automotive cylinder heads, were acquired.
Excluding the acquisitions of G.T. Products and Amtec, sales were
still 3% ahead of last year, which is consistent with the
increase in light vehicle production in the Americas and Europe.
<PAGE>
Page 48
Operating profit of $224 million, before restructuring charges of
$12 million, declined 6% from comparable 1997 results. This
segment struggled with product mix, stronger than expected
European volumes, and higher than anticipated costs to expand
operations in China, Korea, and Brazil. This segment continues
to achieve impressive new product wins across all product lines.
Recently, the Company won new contracts for superchargers. As
would be expected, increased spending on new programs has reduced
margins in the near-term. As these contracts move to production
over the next one to three years, sales and profits should
outpace overall market trends.
The restructuring charges of $12 million relate to management's
plan to consolidate production at three manufacturing facilities
into other existing locations in order to reduce costs in
reaction to ongoing price pressure from customers and increased
competition in markets served. These restructuring charges
primarily relate to workforce reductions of approximately 850
employees. Asset write-downs and other costs were also recorded
for the closing of these facilities.
To accommodate the fast growing demand for superchargers, the
Athens, Georgia plant is being expanded and production levels are
expected to increase in the second quarter of 1999. A new
automotive differential plant in Hastings, Nebraska was also
opened during 1998 to meet higher customer demand.
HYDRAULICS & OTHER COMPONENTS
- -----------------------------
The Hydraulics and Other Components segment also achieved record
sales of $599 million in 1998. Sales were 2% ahead of last year,
an increase that is consistent with the year-to-year change in
North American mobile hydraulics shipments. First half sales
gains in 1998 dissipated before year end as orders in the mobile
hydraulics industry reached a plateau in the second quarter and
the Asian crisis started to hurt customer exports. As 1998
progressed, agricultural equipment production, an important
market for this segment, fell sharply.
Operating profit of $95 million, before restructuring charges of
$1 million, decreased 13% from comparable results in 1997.
Profits were reduced in the first half of 1998 due to
manufacturing inefficiencies stemming from efforts to meet high
customer demand. In the second half of 1998, the Company adjusted
production and employment radically downward in light of
decreased demand, which is expected to continue through the first
quarter of 1999.
INDUSTRIAL & COMMERCIAL CONTROLS
- ----------------------------------
Sales of Industrial and Commercial Controls reached a record of
$2.32 billion in 1998. Sales were 3% ahead of 1997 results as
the strong market for electrical distribution equipment offset
softness in industrial controls markets. This segment's above-
market growth was attributable to strong construction and
aerospace markets, and to the initial success of Cutler-Hammer's
<PAGE>
Page 49
new Engineering Services and Systems business. In January 1998,
this new business was formed to provide technical and field
support for all of Cutler-Hammer's electrical system and
industrial control and automation customers. Several minor
acquisitions were also made to grow this business during 1998.
Before restructuring charges of $28 million, operating profits of
$208 million in 1998, fell 6% below comparable results in 1997.
Earnings from the solid activity levels in electrical
distribution equipment did not fully offset continued softness in
industrial controls markets. Cutler-Hammer's new Engineering
Services and Systems Division also incurred significant start-up
costs during 1998.
The restructuring charges of $28 million relate to management's
plan to divest a non-strategic product line and the consolidation
of three domestic facilities into other existing locations due to
increased pressure for cost improvements, brought on in part by
increased global competition. The restructuring charges relate
to workforce reductions of approximately 550 employees, of which
300 have been terminated as of year-end. These charges also
include inventory and other asset write-downs and other costs.
Operations in the Pacific Region are also being realigned to
better position the businesses in that region. These charges
relate to workforce reductions of approximately 600 employees, of
which approximately 200 have been terminated as of year-end.
These charges also include inventory and other asset write-downs
as these businesses are consolidating facilities and operations
to be more competitive in the region.
SEMICONDUCTOR EQUIPMENT
- -----------------------
Semiconductor Equipment sales of $267 million declined 42% in
1998 compared to 1997 as 1998 proved to be a very difficult year
for the semiconductor capital equipment industry. The collapse
of the semiconductor equipment market was especially difficult
for the Company due to new product programs, the acquisition of
Fusion Systems in late 1997 and capacity expansion plans.
This segment suffered an operating loss of $80 million in 1998,
before restructuring charges of $43 million. The unprecedented
severity of conditions in the semiconductor equipment industry
caused the Company to take drastic steps to ensure capacity is
appropriately sized for current market conditions. In the third
quarter of 1998, restructuring charges of $42 million were
recorded for this business segment. Late in 1998, the
semiconductor equipment industry appeared to have hit bottom and
the Company continues to target break-even performance in 1999
based on 1998 sales levels. While taking the necessary measures
to restructure this business segment, the Company is continuing
spending on vital new product development programs that are
critical to the future of this dynamic business.
Several specific actions comprise the overall restructuring
efforts related to the Semiconductor Equipment segment including
workforce reductions, asset write-downs, and other restructuring
<PAGE>
Page 50
actions. The charge for workforce reductions includes the
termination of approximately 475 employees, primarily
manufacturing personnel. As of year-end, approximately 300
employees have been terminated in this program, in addition to
575 employees released earlier in the year. The charge for asset
write-downs primarily related to inventory, which was written
down to estimated market value, and is included in cost of
products sold. The ion implant equipment manufacturing facility
in Austin, Texas will be closed and production will be
transferred to Beverly, Massachusetts. The write-down of this
plant to estimated selling price represented approximately $2
million of the restructuring charge. The phase-out of this plant
is expected to be concluded in the first quarter of 1999.
Further, the Thermal Processing Systems business, located in
Peabody, Massachusetts, will be merged into the Fusion Systems
division located in Rockville, Maryland and the Flat Panel
Equipment business will be merged into the Implant Systems
operations located in Beverly, Massachusetts.
During the third quarter of 1997, Eaton acquired Fusion Systems
Corporation (Fusion) for $203 million. The purchase price
allocation for Fusion included $85 million for purchased in-
process research and development, which was determined through an
independent valuation based on the income method using a risk
adjusted discount rate of 31% applied to project cash flows.
Three groups of projects comprised over 95% of the total value of
purchased in-process research and development, and are described
in more detail below. All of the purchased in-process research
and development was expensed at the date of acquisition because
technological feasibility had not been established and no
alternative commercial use had been identified. The nature of
the efforts required to develop the purchased in-process
technology into commercially viable products principally relate
to the completion of all planning, designing and testing
activities that are necessary to establish that these products
can be produced to meet their design requirements, including
functions, features and technical performance requirements.
Gemini Photostablizer (GPS) - This project involved the
development of a 300 mm photostabilizer and was valued at $22.4
million. This product will be scaled for 300 mm wafers and will
include functions new to photostabilizing. In order to realize
this new technology, product designs will have to be configured
and scaled for the larger wafers. At the acquisition date, the
greatest risk of potential failure associated with this project
was that it could not be accomplished given technical and
economic constraints. Product completion was originally expected
in late 1998. Development was ultimately completed in the first
quarter of 1999, resulting in the sale of the first prototype.
This small delay had a nominal impact upon 1998 consolidated
results of operations, and will not have a significant impact
upon the Company's financial condition or ultimate expected
investment return.
Gemini Enhanced Strip (GES) - These projects involve the
development of the next generation Enhanced Strip products for
<PAGE>
Page 51
both 200 mm and 300 mm wafers and together were valued at $37.4
million. These new products will incorporate various new
functions, including targeting applications for 0.25 micron and
0.18 micron geometries. Areas requiring design are the same as
those in the GPS project, with corresponding risks of failure.
Product completion was originally planned for mid-1999, and is
still scheduled for completion in that time frame.
Gemini Microwave Plasma Asher (GPL) - These projects involved the
development of the next generation of plasma ashers for 200 mm
and 300 mm wafers and together were valued at $22.8 million.
These new products will incorporate substantial changes in an
attempt to enable targeting applications for 0.25 micron and 0.18
micron geometries. The primary risk related to these projects
involved the achievement of tightly controlled process
parameters, which is considered difficult due to the smaller
linewidths targeted with these projects. Product completion was
originally planned for mid-1998, and was completed by the fourth
quarter of 1998. This small delay had a nominal impact upon 1998
consolidated results of operations, and no significant impact
upon the Company's financial condition or ultimate expected
investment return.
TRUCK COMPONENTS
- ----------------
Truck Components sales in 1998 reached a record of $1.47 billion,
increasing 25% compared to 1997. Heavy truck production was at
record levels in 1998 in both North America and Europe. The
performance of the Clutch division, acquired in the third quarter
of 1997, continued to exceed expectations and made a strong
contribution to the results of this segment. Excluding the
Clutch acquisition, worldwide sales were up 13% from one year ago
as the Company took good advantage of sustained robust markets.
Operating profits of $237 million in 1998, before restructuring
charges of $17 million, were 36% ahead of comparable 1997
results. The full year impact of the Clutch acquisition in 1997
contributed, as expected, to Truck Components' overall
performance.
The restructuring charges of $17 million relate primarily to the
European Truck Components business and worldwide headcount
reductions at various other locations. The restructuring
includes the expected termination of approximately 350 employees
(300 in Europe). The restructuring is the result of European
trucking deregulation, de-integration of OEM's and the
introduction of the Euro. These conditions will combine and
fundamentally transform the competitive landscape in Europe in
the years ahead. This restructuring, building upon the third
quarter 1998 acquisition of a Polish truck transmission
manufacturer, is intended to help achieve world class low costs
and productivity at all worldwide operations. Manufacturing
operations for the medium-duty product line are being
consolidated as part of the restructuring of this segment. The
restructuring charges include severance and other related benefit
<PAGE>
Page 52
costs, asset write-downs, costs associated with the consolidation
of manufacturing operations and other costs.
GLOBAL EXPANSION
- ----------------
Significant steps continue to be taken toward improving market
position and helping to assure future growth in the world's
rapidly industrializing markets. A key component of this long-
term growth strategy involves an expanded presence in China;
several transactions in 1998 are making this strategy a reality.
In January 1998, a joint venture, Shanghai Eaton Engine
Components Company Ltd., was formed, which manufactures and sells
automotive and motorcycle engine valves and hydraulic valve
lifters for the Chinese market. The formation of Eaton Hydraulics
(Shanghai) Ltd. was also completed, which will facilitate the
expansion of high quality hydraulic systems and other hydraulic
products into China. In June 1998, a joint venture, Eaton
Shenglong Co., Ltd., was formed to produce viscous fan drives in
China for the domestic truck and automobile market.
In other regions of the world, Fabryka Przekladni Samochodowych
(FPS), a truck transmission manufacturer based in Gdansk, Poland,
was purchased in June 1998. FPS is the largest manufacturer of
truck, bus and van transmissions in Poland and gives the Company
a low cost, high quality manufacturer with access to the
expanding East European market. In August 1998, the assets of
Amtec S.p.A., a manufacturer of automotive cylinder heads, near
Turin, Italy, were purchased. This acquisition was an important
step toward the goal of establishing the Company as a global
valvetrain system designer and supplier. In December 1998, TGM
Automotive Ltda., a privately-held Sao Paulo, Brazil,
manufacturer of automotive controls, was acquired. This
acquisition expands product offerings to the Mercosur automotive
controls marketplace, and will help provide an enlarged
automotive customer base for the future. Finally, construction
is nearly complete on the new plant in Brazil to produce light-
duty automotive components, and operations are expected to begin
in mid-1999.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
The Company remains in a strong financial position and expects to
have resources available in the form of working capital, lines of
credit and funds provided by operations for continued
reinvestment in existing operations, strategic acquisitions,
including the planned 1999 acquisition of Aeroquip-Vickers for
approximately $1.7 billion in cash, and managing the capital
structure.
The Company continues to generate substantial cash from
operations, which continues to be the primary source of funds to
finance operating needs, including record investments in research
and development. Emphasis on asset management generated operating
cash flow of $642 million in 1998 compared with the record in
<PAGE>
Page 53
1997. Cash flow from operations, supplemented by commercial
paper borrowings as well as proceeds from the sales of
businesses, was used to fund business acquisitions, capital
expenditures, repayment of debt, cash dividends and the
repurchases of Common Shares.
Net working capital was $466 million at year-end 1998 compared to
$698 million at year-end 1997 and the current ratio was 1.3
compared to 1.5 at those dates, respectively. Accounts
receivable and inventory turnover rates continue to be strong and
showed improvement in 1998, while days of inventory on-hand was
consistent with 1997. Accounts receivable days sales outstanding
at year-end was a strong 50 days. Divested businesses and the
increase in short-term debt were the primary causes of the
reduction in working capital. The acquisitions of G.T. Products
and Amtec partially drove the increase in debt and resulted in
the increase in excess of cost over net assets of businesses
acquired from the prior year.
Total debt increased by 11% to $1.5 billion at year-end 1998.
This increase was primarily a result of acquisitions of
businesses and the repurchase of Common Shares. As discussed
under "Debt and Other Financial Instruments" in the Financial
Review, the Company has a $1 billion credit facility with a
series of banks; $500 million which matures in 2003 and $500
million which matures in May 1999. This credit facility supports
outstanding commercial paper of $686 million at December 31,
1998. The Company expects to finance approximately 20% of the
Aeroquip-Vickers acquisition through the sale of Common Shares,
with the remainder through the issuance of debt.
Cash dividends paid in 1998 were $126 million and represented 36%
of net income. Annual per share dividends of $1.76 in 1998 rose
2% from the previous year, following an 8% increase from the year
before. Dividends on Common Shares have been paid annually since
1923.
In 1994, to avoid the dilution of earnings per share resulting
from the exercise of stock options, the Board of Directors
authorized the purchase of up to 5 million outstanding Common
Shares over a five year period, with a maximum of 1.5 million
shares to be purchased in one year. Additionally, in 1997, to
avoid earnings dilution resulting from the sales of businesses,
the Board of Directors authorized the Company to spend up to an
additional $500 million over a period of up to five years to
purchase Common Shares. In January 1998, the $500 million
program was completed by repurchasing 2.8 million shares for $256
million. Since the initiation of the programs, 9.3 million shares
have been repurchased at an average price of $83 per share,
including 3.7 million shares repurchased in 1998 for an average
price of $90 per share.
Emphasis continues to be placed on the ongoing physical capital
investment program designed to enhance product quality,
manufacturing productivity and business growth, reduce costs and,
selectively, to add capacity. Capital expenditures for 1998
<PAGE>
Page 54
reached a record $483 million, 10% above 1997. Over the past
five years, nearly $1.9 billion has been spent in capital
expenditures. Capital spending in 1999 is expected to continue
at near record levels.
The Company has deferred income tax assets of $167 million as of
December 31, 1998 and believes the assets will be realized
through the reduction of future taxable income. Significant
factors considered by management in the determination of the
probability of realization of deferred tax assets include
historical operating results, expectations of future earnings and
the extended period of time over which the postretirement health
care liability will be paid.
The Company is subject to various inherent financial risks
attributable to operating in a global economy. Derivative
financial instruments are utilized to manage exposures in
interest and foreign exchange markets. Systems to measure and
assure that these exposures are evaluated comprehensively have
been developed so that appropriate and timely action can be taken
to reduce risk, if necessary. Monitoring of exposures and the
evaluation of risks includes approval of derivative activities on
a discrete basis by senior management. Monthly, management
performs an oversight review of exposures and derivative
activities. The counterparties used in these transactions have
been diversified in order to minimize the impact of any potential
credit loss in the event of nonperformance by the counterparties.
Although derivatives are an integral part of risk management
programs, their incremental effect on financial condition and
results of operations is not material. Derivative activities are
described in greater detail under "Debt and Other Financial
Instruments" in the Financial Review.
Operations of the Company involve the use and disposal of certain
substances regulated under environmental protection laws. On an
ongoing, regular basis, certain processes continue to be modified
in order to reduce the impact on the environment, including the
reduction or elimination of certain chemicals used in and wastes
generated from operations. Liabilities related to environmental
matters are further discussed under "Protection of the
Environment" in the Financial Review.
MARKET RISK DISCLOSURE
- ----------------------
The Company is subject to interest rate risk as it relates to
long-term debt. The table below presents principal cash flows
(in millions) and related weighted-average interest rates by
expected maturity dates of long-term debt, excluding foreign
currency principal swaps.
<PAGE>
Page 55
<TABLE>
<CAPTION>
December 31, 1998 Expected maturity date
-----------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current portion
Fixed rate (US$) $107 $ 11 $100 $584 $802 $895
Average interest rate 6.5% 12.1% 9.0% 7.9% 7.9%
Fixed rate (Renmimbi) $ 1 $ 3 4 4
Average interest rate 9.2% 9.4% 9.3%
Commercial paper (US$) $500 500 500
Average interest rate 5.3% 5.3%
December 31, 1997 Expected maturity date
-----------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term debt, including
current portion
Fixed rate (US$) $ 19 $107 $ 2 $102 $ 2 $587 $819 $899
Average interest rate 7.9% 6.5% 7.8% 9.1% 12.5% 7.8% 7.8%
Fixed rate (Won) $ 2 2 2
Average interest rate 18.2% 18.2%
Fixed rate (Zloty) $ 2 2 2
Average interest rate 26.3% 26.3%
Commercial paper (US$) $500 500 500
Average interest rate 5.8% 5.8%
</TABLE>
See "Changes in Financial Condition" in Management's Discussion
and Analysis of Financial Condition and Results of Operations for
details on the Company's primary market risks, and the objectives
and strategies used to manage these risks. Also, see "Financial
Instruments" under Accounting Policies in the notes to the
consolidated financial statements for additional information on
market risks.
YEAR 2000
- ---------
Like most companies, Eaton is impacted by computer software that
relies on two digits in the date fields 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.
<PAGE>
Page 56
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 this
initiative include reviewing critical information technology (IT)
and non-IT systems, as well as those which interface with major
customers, suppliers, other third parties, and date-sensitive
products.
Eaton'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 (including EDI-Electronic Data Interchange and an
integrated order processing and management system), purchasing,
product development and computer aided design systems. These
systems have been identified as very important to the support of
operations and have been given the highest priority toward
becoming Year 2000 compliant.
Enterprise Network Infrastructure (including personal computers):
One enterprise network is utilized throughout the organization
which will be upgraded by the end of the second quarter of 1999
to become Year 2000 compliant. All personal/desktop computers
and related software will also be made compliant.
Administrative Systems: This area includes systems associated
with human resources, cash management and financial accounting
and reporting. In North America and Europe, the Company operates
a highly centralized systems environment which is expected to
be fully compliant by mid-year 1999. To ensure compliance,
testing of these systems will continue through the third quarter
of 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 determines Year 2000 readiness, measures the risk of non-
compliance and determines the best remediation plan to be
followed in avoiding potential disruptions in production. This
focus area has been substantially completed.
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 offering product
upgrades or other remediation programs, including programs
covered by product warranties.
Supplier Assurance: To determine Year 2000 readiness, the
Company undertook a supplier assurance program in 1997, which
included surveying 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
<PAGE>
Page 57
compliance and working with them toward assuring compliance or,
if needed, the development of contingency plans (e.g., the
selection of alternative suppliers).
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 remediating those systems in the most effective
manner, the execution of that plan, which includes continuous
testing, and the monitoring of the program's success. Although
various locations are at differing stages of readiness with
respect to the various focus areas, the identification and plan
development phases of the project are substantially completed.
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 businesses will be
completed throughout the second half of 1999. Continuous review
and testing is being conducted throughout all phases of the
program to help ensure that compliance is achieved and maintained
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 or has replaced 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. These upgrades and
replacements are unrelated to the Year 2000 remediation.
As part of the 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 and detailed plans are being evaluated and
tested in the development of these various plans.
The current estimate of total Year 2000 program costs is
approximately $95 million. Included in this estimate are
compensation and benefit costs of employees who are fully
dedicated to the Year 2000 compliance effort. Costs of employees
not fully dedicated to that effort are not tracked and are
excluded from the estimate. 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
<PAGE>
Page 58
million represents costs associated with modifying and upgrading
existing systems. To date, nearly 70% of the estimated costs
have been incurred. Purchased hardware and newly developed or
purchased software is capitalized in accordance with normal
Company policy while other remediation costs associated with
existing systems are 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 information
systems and production and facilities equipment. Regular project
status reporting is required, and cost estimates are updated 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 program may not prevent business
disruptions resulting from actions of 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 program are
addressing this uncertainty 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.
EURO
- ----
On January 1, 1999, eleven of the fifteen member countries of the
European Monetary Union (EMU) began a three-year transition phase
during which a common currency called the Euro was adopted as
their legal currency. The Euro began trading on currency
exchanges and is 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 were 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. Euro denominated bank
accounts have been established to accommodate Euro transactions.
The Company's exposure to changes in foreign exchange rates may
also be reduced as a result of the Euro conversion.
The Company has established a steering committee to review
strategic and tactical areas arising from the Euro conversion.
<PAGE>
Page 59
Immediate efforts have been focused on aspects of the Euro
conversion that required adjustment or compliance by January 1,
1999 and for conducting Euro-denominated business during 1999.
These aspects included 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 and is currently in a position to transact business
in Euro's. 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.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company has included in this Annual Report expectations for
1999, an outlook concerning the Brazilian situation, certain
anticipated effects of strategic moves, market expectations, and
expectations for capital spending. Actual results could differ
materially from these forward-looking statements since they
inherently are subject to risks and uncertainties. Important
factors which could cause such a difference include completion of
the anticipated Aeroquip-Vickers acquisition, continuity of
business relationships with and purchases by major customers,
product mix, competitive pressure on sales and pricing, increases
in material and other production costs which cannot be recouped
in product pricing, costs and disruptions associated with the
Year 2000 issue, difficulties in introducing new products as well
as global economic and market conditions, and the impact of the
conversion to the Euro currency.
1997 COMPARED TO 1996
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Worldwide sales in 1997 exceeded $7 billion for the first time in
the Company's history, 9% above 1996. Sales for North America
showed improvement; however, sales in Europe were flat. In Latin
America, sales increased 43% in 1997 over 1996, despite economic
weakness in Mexico, Brazil and Argentina. The full strategic
benefits of the April 1996 acquisition of CAPCO Automotive
Products Corporation were achieved, which contributed to the
sales increase in Latin America. Despite the continued recession
in Japan and the crisis in Asia, sales in the Pacific Region rose
11% in 1997 over 1996.
Gross margin of $2.11 billion in 1997 increased to 28% of net
sales from 26% in 1996 as a result of increased sales volumes
<PAGE>
Page 60
across most lines of business, acquisitions and divestitures of
businesses, and the benefits realized from recent restructurings.
Income from Operations of $700 million, before a one-time charge
of $85 million, increased 33% in 1997 from 1996. The one-time
charge was recorded against third quarter 1997 earnings to write-
off the purchased in-process research and development associated
with the acquisition of Fusion Systems Corporation.
During the fourth quarter of 1997, an aftertax gain of $69
million was recorded related to the sales of businesses. This
gain was offset by a $54 million aftertax charge related to the
redemption of the 7% debentures due April 1, 2011, and by a $15
million aftertax charge related to restructuring actions. The
fourth quarter 1997 restructuring charges principally related to
workforce reductions, asset write-downs and other costs.
Before unusual items, both net income of $495 million and
earnings per share of $6.33 increased 30% in 1997 from comparable
results in 1996. After these items, net income of $410 million
and earnings per share of $5.24 increased 17% in 1997 from 1996
results.
AUTOMOTIVE COMPONENTS
- ---------------------
The Automotive Components segment experienced record sales of
$1.80 billion in 1997, 3% above 1996. The increase in volume
compares favorably with about a 3% year-to-year increase in
automotive production in North America and Europe. This trend can
be attributed to continued penetration of selected automotive
products, and greater participation in Latin American markets.
Operating profit for this segment reached $237 million before
restructuring charges of $12 million, 12% ahead of 1996 results
on a comparable basis.
HYDRAULICS AND OTHER COMPONENTS
- -------------------------------
Continuing demand from the North American hydraulics market
enabled the Hydraulics and Other Components segment to report
record sales of $588 million in 1997, rising 10% over 1996.
Sales gains in 1997 were double the pace of the hydraulics
industry, a result attributable to higher levels of new product
introductions for the worldwide agricultural and construction
equipment customers. Operating profit for this segment reached a
record level of $109 million, before $1 million of restructuring
charges, 4% ahead of 1996 results on a comparable basis.
INDUSTRIAL AND COMMERCIAL CONTROLS
- ----------------------------------
Aided by continued strength in Cutler-Hammer's market position,
strong construction markets, and a booming commercial aircraft
market, Industrial and Commercial Controls also achieved record
sales of $2.25 billion in 1997, increasing 7% over 1996 results.
Operating profit for this segment reached a record $222 million,
before restructuring charges of $6 million, a 25% increase from
1996 results. Cutler-Hammer enjoyed the full benefit of the
<PAGE>
Page 61
synergies anticipated from the 1994 acquisition of Westinghouse's
Distribution and Control Business Unit.
SEMICONDUCTOR EQUIPMENT
- -----------------------
The Semiconductor Equipment segment reported record sales of $459
million in 1997, increasing 3% over 1996. During the third
quarter of 1997, Fusion Systems Corporation, a leading supplier
of front-end process equipment to the semiconductor industry, was
acquired. Excluding Fusion, Semiconductor Equipment segment
sales trailed 1996 results by 5%. Operating profit for this
segment reached $29 million in 1997, a 52% decrease from 1996
results. This decrease was primarily caused by the substantial
increase in research and development spending to continue the
development of advanced products and enhance the existing product
portfolio.
TRUCK COMPONENTS
- ----------------
The Truck Components segment also reported record sales of $1.17
billion in 1997, increasing 29% over 1996. CAPCO, the Brazilian
medium-duty transmission manufacturer acquired in 1996, accounted
for $100 million of the $260 million increase in sales in 1997.
With CAPCO's increase in sales and the favorable impact of new
business awards from automotive manufacturers, the full strategic
benefits of this important acquisition were achieved. The Clutch
division, which was acquired from Dana Corporation in the third
quarter of 1997, also contributed $67 million in sales in 1997.
Excluding Clutch, sales increased 21% above 1996. North American
factory sales of Class 8 trucks rose about 13% in 1997 to 216,000
units. The European market was also up in 1997, though a more
modest 6%.
Operating profit for this segment reached a record $174 million
before restructuring charges of $4 million, 87% ahead of 1996
results. Operating profit as a percentage of sales increased
from 8% in 1996 to 15% in 1997. The increase in operating profit
was primarily attributable to the exceptional performance by
CAPCO where the year-over-year profits improved by more than $39
million. Record operating results also were accomplished through
higher sales volume, the acquisition of the Clutch business in
1997, and benefits realized from restructuring efforts in this
business unit.
<PAGE>
Page 62
<TABLE>
QUARTERLY DATA
- --------------
(Unaudited)
<CAPTION>
Quarter ended 1998 Quarter ended 1997
(Millions except for per share data) ----------------------------------- ------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $1,606 $1,620 $1,712 $1,687 $1,934 $1,931 $1,909 $1,789
Gross margin 446 428 512 480 546 541 538 482
Percent of sales 28% 26% 30% 28% 28% 28% 28% 27%
Income before extraordinary item $ 72 $ 58 $ 114 $ 105 $ 183 $ 54 $ 126 $ 101
Extraordinary item (54)
------------------------------------ -----------------------------------
Net income $ 72 $ 58 $ 114 $ 105 $ 129 $ 54 $ 126 $ 101
==================================== ===================================
Per Common Share - assuming dilution
Income before extraordinary item $ 1.01 $ .80 $ 1.57 $ 1.42 $ 2.35 $ .69 $ 1.61 $ 1.29
Extraordinary item (.69)
------------------------------------ -----------------------------------
Net income $ 1.01 $ .80 $ 1.57 $ 1.42 $ 1.66 $ .69 $ 1.61 $ 1.29
==================================== ===================================
Per Common Share - basic
Income before extraordinary item $ 1.02 $ .82 $ 1.60 $ 1.45 $ 2.41 $ .70 $ 1.64 $ 1.31
Extraordinary item (.71)
------------------------------------ -----------------------------------
Net income $ 1.02 $ .82 $ 1.60 $ 1.45 $ 1.70 $ .70 $ 1.64 $ 1.31
==================================== ===================================
Cash dividends paid per Common Share $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .40
Market price per Common Share
High $71-7/8 $80 $95-3/8 $99-5/8 $103-3/8 $95-15/16 $89-7/8 $75-1/8
Low $60-1/4 $57-1/2 $76 $85-3/16 $ 85-1/2 $81-7/8 $67-1/2 $67-1/4
</TABLE>
<TABLE>
<CAPTION>
The quarterly results of operations include the following unusual items
<S> <C> <C> <C> <C> <C> <C>
Restructuring charges & other items
Pretax $ (29) $ (42) $ 3 $ (43) $ (24)
Aftertax (19) (27) 2 (28) (15)
Net income (loss) per Common Share (.26) (.38) .03 (.38) (.19)
Gain on sales of businesses
Pretax 43 91
Aftertax 28 69
Net income per Common Share .38 .88
Write-off of purchased in-process
research & development
Pretax $ (85)
Aftertax (85)
Net loss per Common Share (1.08)
</TABLE>
In the fourth quarter of 1998, the effective income tax rate for
full year 1998 was adjusted to 28% from 30%. This adjustment
reduced income tax expense for the fourth quarter by $8 million,
which primarily relates to a revision of the research and
development tax credit.
<PAGE>
Page 63
<TABLE>
Eaton Corporation
<CAPTION>
Five-Year Consolidated Financial Summary
For the year 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(Millions except for per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 6,625 $ 7,563 $ 6,961 $ 6,822 $ 6,052
Income before income taxes & extraordinary item 485 668 485 592 488
Income before extraordinary item $ 349 $ 464 $ 349 $ 399 $ 333
Percent of net sales 5.3% 6.1% 5.0% 5.8% 5.5%
Extraordinary item - redemption of debentures (54)
--------------------------------------------------------
Net income $ 349 $ 410 $ 349 $ 399 $ 333
========================================================
Per Common Share - assuming dilution
Income before extraordinary item $ 4.80 $ 5.93 $ 4.46 $ 5.08 $ 4.35
Extraordinary item (.69)
--------------------------------------------------------
Net income $ 4.80 $ 5.24 $ 4.46 $ 5.08 $ 4.35
========================================================
Average number of Common Shares outstanding 72.7 78.2 78.2 78.6 76.4
Per Common Share - basic
Income before extraordinary item $ 4.89 $ 6.05 $ 4.50 $ 5.13 $ 4.40
Extraordinary item (.71)
--------------------------------------------------------
Net income $ 4.89 $ 5.34 $ 4.50 $ 5.13 $ 4.40
========================================================
Average number of Common Shares outstanding 71.4 76.8 77.4 77.8 75.6
Cash dividends paid per Common Share $ 1.76 $ 1.72 $ 1.60 $ 1.50 $ 1.20
Market price per Common Share
High $ 99-5/8 $103-3/8 $ 70-7/8 $ 62-1/2 $ 62-1/8
Low $ 57-1/2 $ 67-1/4 $ 50-3/8 $ 45-3/8 $ 43-7/8
- ------------------------------------------------------------------------------------------------------------------
Investments during the year (percent of net sales)
Property, plant & equipment 7.3% 5.8% 5.0% 5.8% 4.4%
Research & development 5.0% 4.2% 3.8% 3.3% 3.5%
Information technology 3.1% 2.7% 2.1% 2.1% 2.2%
--------------------------------------------------------
15.4% 12.7% 10.9% 11.2% 10.1%
========================================================
At the year-end
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,665 $ 5,606 $ 5,385 $ 5,106 $ 4,731
Working capital 466 698 787 822 744
Long-term debt 1,191 1,272 1,062 1,084 1,053
Shareholders' equity 2,057 2,071 2,160 1,975 1,680
Shareholders' equity per Common Share $ 28.69 $ 27.72 $ 28.00 $ 25.45 $ 21.54
Common Shares outstanding 71.7 74.7 77.1 77.6 78.0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Income includes the following unusual items
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Restructuring charges & other items
Pretax $ (111) $ (24) $ (50)
Aftertax (72) (15) (32)
Net loss per Common Share (.99) (.19) (.41)
Gain on sales of businesses
Pretax $ 43 $ 91
Aftertax 28 69
Net income per Common Share .38 .88
Write-off of purchased in-process research & development
Pretax $ (85)
Aftertax (85)
Net loss per Common Share (1.09)
</TABLE>
<PAGE>
Page 1
Eaton Corporation
1998 Annual Report on Form 10-K
Item 14(c)
Listing of Exhibits Filed
3(a) Amended Articles of Incorporation (amended and restated
as of April 27, 1994) - Incorporated by reference to the
Form 8-K Report dated May 19, 1994
3(b) Amended Regulations (amended and restated as of April 27,
1988) - Incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1994
4(a) Instruments defining rights of security holders,
including indentures (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)
4(b) Eaton Corporation Rights Agreement dated June 28, 1995 -
Incorporated by reference to the Form 8-K Report dated
June 28, 1995
10 Material contracts
The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K
for the year ended December 31, 1996
(b) Executive Strategic Incentive Plan (amended and
restated as of June 21, 1994, July 25, 1995 and
April 21, 1998) (files as a separate section of
this report)
(c) Group Replacement Insurance Plan (GRIP), effective
as of June 1, 1992 - Incorporated by reference to
the Annual Report on Form 10-K for the year ended
December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 18,
1991
(e) 1995 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 17,
1995
(f) Incentive Compensation Deferral Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K
for the year ended December 31, 1996
<PAGE>
Page 2
(g) Strategic Incentive and Option Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K
for the year ended December 31, 1996
(h) Form of "Change of Control" Agreement entered into
with officers of Eaton Corporation as of November 1,
1996 - Incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31,
1996
(i) The following are incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990:
(i) Limited Eaton Service Supplemental
Retirement Income Plan (amended and
restated as of January 1, 1989)
(ii) Amendments to the 1980 and 1986 Stock Option
Plans
(iii) Eaton Corporation Supplemental Benefits
Plan (amended and restated as of January 1,
1989) (which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess Benefits Plan
(amended and restated as of January 1,
1989) (with respect to Section 415
limitations of the Internal Revenue Code)
(j) Executive Incentive Compensation Plan, effective
January 1, 1995 - Incorporated by reference to the
Annual Report on Form 10-K for the year ended
December 31, 1996
(k) Plan for the Deferred Payment of Directors' Fees
(amended and restated as of September 24, 1996 and
amended effective as of January 1, 1997) -
Incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1997
(l) Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and amended effective
February 25, 1997) - Incorporated by reference to
the Annual report on Form 10-K for the year ended
December 31, 1996
(m) 1996 Non-Employee Director Fee Deferral Plan
(amended effective January 1, 1997 and February 25,
1997) - Incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31,
1997
<PAGE>
Page 3
(n) Eaton Corporation Trust Agreement - Outside
Directors (dated December 6, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(o) Eaton Corporation Trust Agreement - Officers and
Employees (dated December 6, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(p) Eaton Corporation Retirement Plan for Non-Employee
Directors (amended and restated January 1, 1996) -
Incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1997
(q) 1998 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 13, 1998
21 Subsidiaries of Eaton Corporation (filed as a separate
section of this report)
23 Consent of Independent Auditors (filed as a separate
section of this report)
24 Power of Attorney (filed as a separate section of this
report)
27 Financial Data Schedule (filed as a separate section of
this report)
<PAGE>
Page 1
Eaton Corporation
1998 Annual Report on Form 10-K
Item 14(c)
Exhibit 10(b)
Executive Strategic Incentive Plan
(effective as of January 1, 1991 and
amended and restated as of June 21, 1994,
July 25, 1995 and April 21, 1998)
1. PURPOSE
The purpose of the Executive Strategic Incentive Plan (the
"Plan") is to promote the growth and profitability of Eaton
Corporation (the "Company") through the granting of incentives
intended to motivate executive officers of the Company to
achieve demanding long-term corporate objectives and to
attract and retain executive officers of outstanding ability.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan shall
be administered by the Compensation and Organization Committee
(the "Committee") of the Company's Board of Directors which
shall consist of at least three directors of the Company
selected by the Board.
Except as otherwise expressly provided herein, the Committee
shall have complete authority to: (i) interpret all provisions
of the Plan consistent with law; (ii) designate the executives
to participate under the Plan; (iii) determine the incentive
targets and performance objectives applicable to participants;
(iv) adopt, amend and rescind general and special rules and
regulations for the Plan's administration; and (v) make all
other determinations necessary or advisable for the
administration of the Plan.
3. ELIGIBILITY
All officers of the Company shall be eligible to participate
in the Plan. The Committee shall have sole discretion in
determining the other executives who shall participate under
the Plan for any Award Period.
4. INCENTIVE TARGETS
(A) Establishment of Incentive Amounts
Individual Incentive Amounts for each participant with
respect to each Plan Award Period (as defined below)
shall be determined by multiplying the Incentive
Percentages adopted by the Committee which are applicable
to such participant, and which may not exceed 120%, by
the amount of such participant's actual weighted average
<PAGE>
Page 2
year-end salary range midpoint for the Award Period. In
the event that during any Award Period a participant's
salary grade changes to a grade for which a different
Incentive Percentage would be applicable, such different
Incentive Percentage shall be applicable to such
participant with respect to the portion of any Award
Period remaining after such salary grade change. With
respect to Award Periods beginning on or after January 1,
1998, participant incentive targets will be expressed in
the form of Performance Share Units which will be
determined by the Committee by: (a) first estimating the
Individual Incentive Amount for each participant with
respect to each Award Period by multiplying the Incentive
Percentage adopted by the Committee which is applicable
to such participant, by the amount of such participant's
estimated weighted average salary range midpoint for the
Award Period and, (b) then dividing such Individual
Incentive Amount by the average of the mean prices for
the Company's common shares for the first twenty (20)
trading days of each Award Period. At the end of each
Award Period the estimated Individual Incentive Amount
used for each participant (and the resulting number of
Performance Share Units) shall be adjusted to reflect the
participant's actual weighted average year-end salary
range midpoint for such Award Period. In all cases, such
amount shall be rounded up to the nearest 50 whole units.
For purposes of the Plan, "mean price" shall be the mean
of the highest and lowest selling prices for Company
common shares quoted on the New York Stock Exchange List
of Composite Transactions on the relevant trading day.
Notwithstanding the foregoing, the Committee may, in its
sole discretion, use a different method for establishing
incentive targets for participants under the Plan.
(B) Award Periods
Each Award Period shall be the four-calendar year period
commencing as of the first day of the calendar year in
which the performance objectives are established for the
Award Period as described in Section 4(C). A new Award
Period shall commence as of the first day of each
calendar year, unless otherwise specified by the
Committee.
(C) Establishment of Company Performance Objectives
As soon as practicable at the beginning of each Award
Period, threshold, target, and maximum Company
performance objectives for such Award Period shall be
established by the Committee. The performance objectives
shall be based upon cash flow return on gross capital
("CFROGC") except that, for Award Periods commencing on
or after January 1, 1998, unless otherwise determined by
the Committee in its sole discretion, performance
objectives will be established using a CFROGC/EPS Growth
<PAGE>
Page 3
Performance Matrix which shall use the Company's average
cash flow return on gross capital for such period along
one axis and the Company's cumulative earnings per share
for such period along the second axis. Within sixty (60)
days after the performance objectives have been
established by the Committee, each participant will be
provided with written notice of his or her established
objectives. In its sole discretion, the Committee may
modify previously established performance objectives as a
result of any change in conditions, the occurrence of any
events or other factors which make such objectives
unsuitable. Notwithstanding the foregoing, after a
Change in Control (as hereinafter defined), neither the
Committee nor the Board shall have the authority to
modify performance objectives in any manner which could
prove detrimental to the interests of the Plan's
participants.
(D) Determination of Payments
As promptly as practicable after the end of each Award
Period, the Committee shall fix the level of attainment
of the Company's performance for the Award Period and
approve award payments under the Plan which shall not
exceed: (i) 50% of the participant's Incentive Amount
upon attainment of the threshold performance objective;
(ii) 100% of the participant's Incentive Amounts upon
attainment of the target performance objective; and (iii)
200% of the participant's Incentive Amount upon
attainment of the maximum performance objective;
provided, however, that if the Company's performance does
not place it within the top 25%, using equivalent
measurements of performance, of a group of peer companies
selected by the Committee in its sole discretion, an
award payment equal to 150% of the participant's
Incentive Amount shall instead be paid upon the
attainment of maximum performance. Payments ranging from
50% to 200% of the Incentive Amounts will be determined
by the Committee in respect of an Award Period for the
attainment of performance objectives between either
threshold and target or target and maximum. Such
amounts, if any, shall be paid to the participant in cash
within ninety (90) days after the end of each Award
Period, unless the participant made an irrevocable
election to defer all or part of the amount of his or her
award payment pursuant to any long term incentive
compensation deferral plan adopted by the Company and
made available for amounts earned hereunder.
Notwithstanding the foregoing, for Award Periods
beginning on or after January 1, 1998, Final Individual
Performance Share Unit Awards shall be determined by the
Committee by: (a) determining the CFROGC/EPS Growth
Matrix Performance Percentage applicable for the Award
Period; (b) multiplying such percentage by the number of
<PAGE>
Page 4
Performance Share Units credited to the participant and
(c) further multiplying the result by an Individual
Performance Rating which will be a whole percentage
between zero and 150% established by the Committee in its
sole discretion after considering the recommendations of
Company management. The Final Individual Performance
Share Unit Award shall be distributed to participants in
the form of whole Company common shares (except that, to
the extent necessary to satisfy federal, state or local
tax withholding obligations, Performance Share Units may
be converted to cash at a market value of Company common
shares determined by the Committee), unless the
participant has made an irrevocable election to defer all
or part of the amount of his or her award pursuant to any
long term incentive compensation deferral plan adopted by
the Committee or the Company.
5. PRORATA PAYMENTS
A participant must be employed by the Company or one of its
subsidiaries at the end of an Award Period in order to be
entitled to a payment in respect to such Award Period;
provided, however, that a payment, prorated for the
participant's length of service during the Award Period, may
be authorized by the Committee, in its sole discretion, in the
event the employment of a participant terminates before the
end of an Award Period due to death, permanent disability,
normal or early retirement, closure or divestiture of an Eaton
facility or any other reason. Notwithstanding the foregoing,
upon any termination of the Plan by the Committee during the
term of any Award Period, payments to all participants will be
made, prorated for each participant's length of service during
the Award Period prior to the date of Plan termination.
6. OTHER PROVISIONS
(A) Adjustments upon Certain Changes
In the event of changes to the structure or corporate
organization of the Company's businesses which affect the
participants and/or the performance prospects of the
Company, the Committee may make appropriate adjustments
to individual participant Incentive Targets or to the
established performance objectives for incomplete Award
Periods. Adjustments under this Section 6 shall be made
by the Committee, whose determination as to what
adjustments shall be made, and the extent thereof, shall
be final, binding and conclusive. Notwithstanding the
foregoing, after a Change in Control, neither the
Committee nor the Board shall have the authority to
change established Performance Objectives in any manner
which could prove detrimental to the interests of the
participant.
<PAGE>
Page 5
(B) Change in Control Defined
For purposes of the Plan, a Change in Control shall be
deemed to have occurred if:
(i) a tender offer shall be made and consummated
for the ownership of 25% or more of the outstanding
voting securities of the Company,
(ii) the Company shall be merged or consolidated
with another Corporation and as a result of such
merger or consolidation less than 75% of the out-
standing voting securities of the surviving or
resulting corporation shall be owned in the
aggregate by the former shareholders of the Company
as the same shall have existed immediately prior to
such merger or consolidation,
(iii) the Company shall sell substantially all of
its assets to another corporation which is not a
wholly-owned subsidiary of the Company,
(iv) a "person" within the meaning of Section
3(a)(9) or of Section 13(d)(3) of the Securities
Exchange Act of 1934 (as in effect on the effective
date of the Plan) shall acquire 25% or more of the
outstanding voting securities of the Company (whether
directly, indirectly, beneficially or of record). For
purposes of the Plan, ownership of voting securities
shall take into account and shall include ownership
as determined by applying the provisions of Rule
13d-3(d)(1)(I) under the Securities Exchange Act of
1934 (as in effect on the effective date of the
Plan), or
(v) during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason to
constitute at least a majority thereof unless the
election, or nomination for election by the
Company's shareholders, of each new director was
approved by a vote of at least two-thirds of the
directors then still in office who were directors at
the beginning of the period.
(C) Non-Transferability
No right to payment under the Plan shall be subject to
debts, contract liabilities, engagements or torts of the
participant, nor to transfer, anticipation, alienation,
sale, assignment, pledge or encumbrance by the
participant except by will or the law of descent and
distribution or pursuant to a qualified domestic
relations order.
<PAGE>
Page 6
(H) Compliance with Law and Approval of Regulatory Bodies
No payment shall be made under the Plan except in
compliance with all applicable federal and state laws and
regulations including, without limitation, compliance
with tax requirements.
(H) No Right to Employment
Neither the adoption of the Plan nor its operation, nor
any document describing or referring to the Plan, or any
part thereof, shall confer upon any participant under the
Plan any right to continue in the employ of the Company
or any subsidiary, or shall in any way affect the right
and power of the Company or any subsidiary to terminate
the employment of any participant under the Plan at any
time with or without assigning a reason therefore, to the
same extent as the Company might have done if the Plan
had not been adopted.
(H) Interpretation of the Plan
Headings are given to the sections of the Plan solely as
a convenience to facilitate reference; such headings,
numbering and paragraphing shall not in any case be
deemed in any way material or relevant to the
construction of the Plan or any provisions thereof. The
use of the masculine gender shall also include within its
meaning the feminine. The use of the singular shall also
include within its meaning the plural and vice versa.
(H) Amendment and Termination
The Committee may at any time suspend, amend or terminate
the Plan. Notwithstanding the foregoing, upon the
occurrence of a Change in Control, no amendment,
suspension or termination of the Plan shall, without the
consent of the participant, alter or impair any rights or
obligations under the Plan with respect to such
participant.
(H) Effective Date of the Plan
The Plan was adopted by the Board on April 24, 1991 but the
effective date of the Plan shall be January 1, 1991. The Plan was
amended and restated as of June 21, 1994, July 25, 1995 and April
21, 1998
<PAGE>
Page 1
Eaton Corporation
1998 Annual Report on Form 10-K
Item 14(c)
Exhibit 21
Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's
subsidiaries, the state or country in which each was organized, and
the percentage of voting securities owned by Eaton or another Eaton
subsidiary as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Percentage of voting
securities owned (by
Where Eaton unless otherwise
Consolidated subsidiaries (A) organized indicated)
- ------------------------------ ---------- ----------------------
<S> <C> <C> <C>
Vorad Safety Systems, Inc. California 100% IVHS
Technologies,
Inc.
CEEC Holdings Incorporated Delaware 100% CEEC
Investments
Incorporated
CEEC Incorporated Delaware 100% Cutler-Hammer
Inc.
CEEC Investments Incorporated Delaware 100% CEEC
Incorporated
Cutler-Hammer de Puerto Rico Inc. Delaware 100% Cutler-Hammer
Inc.
Cutler-Hammer Inc. Delaware 100%
Integrated Partial Discharge
Diagnostics, Inc. (IPDD) Delaware 100% Cutler-Hammer
Inc.
Eaton Administration Corporation Delaware 100%
Eaton ESC Holding Company Delaware 100%
Eaton International Corporation Delaware 100%
Eaton Semiconductor Equipment Inc. Delaware 100%
Eaton Truck Systems, Inc. Delaware 100%
Eaton USEV Holding Company Delaware 100%
Eaton VORAD Technologies, L.L.C.
(Partnership) Delaware 50% Eaton Truck
Systems, Inc.
50% Vorad Safety
Systems, Inc.
ERC Corporation Delaware 100% Eaton Leasing
Corporation
ERC II Corporation Delaware 100% Eaton Leasing
Corporation
Fusion Systems Corporation Delaware 100%
Fusion Taiwan, Inc. Delaware 100% Fusion
Technology
International,
Inc.
Fusion Technology
International, Inc. Delaware 100% Fusion
Systems
Corporation
<PAGE>
Page 2
IVHS Technologies, Inc. Delaware 69.8%
Modern Molded Products, Inc. Delaware 100%
Kelmac Grip, L.P. Delaware 100% Modern
Molded
Products,
Inc.
Eaton Asia Investments
Corporation Maryland 100%
Fusion Semiconductor Systems
Corporation Maryland 100% Fusion
Systems
Corporation
Fusion Investments, Inc. Maryland 100% Fusion
Systems
Corporation
CAPCO Automotive Products
Corporation Michigan 100%
G.T. Products, Inc. Michigan 100%
Cutler-Hammer de Puerto Rico
Company (Partnership) Ohio 99% Cutler-Hammer
de Puerto
Rico Inc.
1% Cutler-Hammer
Inc.
Cutler-Hammer IDT, Inc. Ohio 100%
Eaton Consulting Services
Corporation Ohio 100%
Eaton Leasing Corporation Ohio 100%
Eaton MDH Co. Inc. Ohio 100%
Eaton MDH Limited Partnership Ohio 1%
99% Eaton MDH Co.
Inc.
Eaton Properties Corporation Ohio 100% Eaton Leasing
Corporation
Eaton Utah Corporation Ohio 100% Eaton Leasing
Corporation
U.S. Engine Valve (Partnership) Ohio 5.607%
70% Eaton USEV
Holding
Company
Cutler-Hammer de Argentina S.A. Argentina 100%
Eaton S.A. Argentina 100%
Cutler-Hammer Controls Pty. Ltd. Australia 99.99996% Eaton
International
Corporation
.00004% Eaton Pty.
Ltd.
Eaton Finance Pty. Ltd. Australia 100% Eaton
International
Corporation
Eaton Finance G.P. Australia 99.583% Eaton
Finance Pty.
Ltd.
Eaton Pty. Ltd. Australia 100%
<PAGE>
Page 3
Eaton Specialty Controls
Pty. Ltd. Australia 99.99996%
.00004% Eaton
International
Corporation
Eaton Holding G.m.b.H. Austria 100% Eaton
International
Corporation
Eaton Foreign Sales Corporation Barbados 100%
Eaton Holding Limited Barbados 100% Eaton Yale
Ltd.
Eaton Services Limited Barbados 100% Eaton Holding
Limited
Saturn Insurance Company Ltd. Bermuda
Islands 100%
Eaton Ltda. Brazil 65.04% Eaton
Services
Limited
34.96% Eaton
International
Corporation
Eaton Truck Components Ltda. Brazil 21.135%
78.865% CAPCO
Automotive
Products
Corporation
TGM Industria Electrometalurgica
Ltda. Brazil 100% Eaton Ltda.
Eaton ETN Offshore Ltd. Canada 100% Common Shares
- Eaton
Corporation
100% Preferred
Shares -
Eaton
International
Corporation
Eaton Yale Ltd. Canada 100% Eaton ETN
Offshore Ltd.
Electrotechnique GFTL, Inc. Canada 100% Eaton Yale
Ltd.
Tycor International Corporation Canada 100% Eaton
Yale Ltd.
Eaton Holding I Limited Cayman Islands 100% Eaton Holding
III Limited
Eaton Holding II Limited Cayman Islands 100% Eaton Holding
III Limited
Eaton Holding III Limited Cayman Islands 100% Eaton
Holding
G.m.b.H.
Eaton Hydraulics (Shanghai)
Co., Ltd. China 100% Eaton China
Investment
Co., Ltd.
<PAGE>
Page 4
Eaton Truck and Bus Components
Company (Shanghai) Ltd. China 100% Eaton China
Investment
Co., Ltd.
Eaton China Investments Co.,
Ltd. China 100% Eaton Asia
Investments
Corporation
Eaton-Shenglong Automobile
Components (Ningbo) Co., Ltd. China 70% Eaton China
Investment
Co., Ltd.
Jining Eaton Hydraulics
Company Ltd. China 60%
Shanghai Eaton Engine Components
Company, Ltd. China 55% Eaton China
Investment
Co., Ltd.
Suzhou Cutler-Hammer Electric
Co., Ltd. China 100%
Eaton Controles Industriales S.A. Costa Rica 97.14% Eaton
International
Corporation
Cutler-Hammer, S.A. Dominican
Republic 100% Cutler-Hammer
Inc.
Eaton Automotive Controls Srl France 100% Eaton
Technologies
S.A.
Eaton S.A. France 100%
Eaton Technologies S.A. France 55%
45% Eaton
International
Corporation
Eaton Automotive G.m.b.H. Germany 100% Eaton
G.m.b.H.
Eaton Controls G.m.b.H. & Co.
K.G. (Partnership) Germany 99.33% Eaton Yale
Ltd.
.67% Eaton
G.m.b.H.
Eaton G.m.b.H. Germany 100%
Eaton Technologies Limited Hong Kong 100% Eaton
International
Corporation
Eaton Automotive Srl Italy 100% Eaton Srl
Eaton Srl Italy 100% Eaton B.V.
Fusion Italia Srl Italy 95% Fusion Europe
Ltd.
5% Fusion
Technologies
International
Eaton Japan Co., Ltd. Japan 100%
<PAGE>
Page 5
Fusion Semiconductor Japan KK Japan 100% Fusion
Technology
International,
Inc.
Japan Fawick Company Limited Japan 50%
Sumitomo Eaton Hydraulics Co.,
Ltd. Japan 50%
Sumitomo Eaton Nova Corporation Japan 50%
Cutler-Hammer Controls Sdn. Bhd. Malaysia 100% Eaton
International
Corporation
Condura S. de R.L. de C.V. Mexico 99.999556%
.000444% Eaton Holding
International
I B.V.
Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton
International
Corporation
Eaton Controls, S. de R.L.
de C.V. Mexico 99%
1% Eaton Holding
International
I B.V.
Eaton Molded Products S.
de R.L. de C.V. Mexico 99.9999985%
.0000015%Eaton Holding
International
I B.V.
Eaton Truck Components,
S.A. de C.V. Mexico 99.995%
.005% Eaton Holding
International
I B.V.
Operaciones de Maquila de
Juarez S de R.L. de C.V. Mexico 99.956% Cutler-Hammer
Inc.
.044% Eaton Holding
International
I B.V.
Eaton s.a.m. Monaco 100%
Eaton Automotive B.V. Netherlands 100% IKU Holding
Montfoort
B.V.
Eaton B.V. Netherlands 100% Eaton Holding
International
I B.V.
Eaton C.V. (Partnership) Netherlands 99.9% Eaton Holding
III Limited
.1% Eaton
International
Corporation
Eaton Holding B.V. Netherlands 100% Eaton B.V.
Eaton Holding International I
B.V. Netherlands 100%
<PAGE>
Page 6
IKU Holding Montfoort B.V. Netherlands 100% Eaton Holding
B.V.
Eaton Finance B.V. Netherlands 100% Eaton B.V.
Technisch Bureau Hoevelaken B.V. Netherlands 100% Eaton Holding
B.V.
Cutler-Hammer Asia Corporation Philippines 100% Eaton
International
Corporation
Eaton Controls Spolka z o.o. Poland 100% Eaton Holding
B.V.
Eaton Automotive Spolka z o.o. Poland 100% Eaton
Automotive
Srl
Eaton Truck Components S.A. Poland 83.72% Eaton B.V.
Cutler-Hammer Pte. Ltd. Singapore 100% Eaton
International
Corporation
Eaton Services Pte. Ltd. Singapore 100% Eaton
Semiconductor
Equipment
Inc.
Eaton Truck Components (Pty)
Limited South Africa 100% Eaton Limited
Eaton Automotive Controls
Limited South Korea 100% Eaton
International
Corporation
Eaton Limited South Korea 100%
Eaton Semiconductor Limited South Korea 100% Eaton
Semiconductor
Equipment
Inc.
Fusion Pacific, Ltd. South Korea 100% Fusion
Technology
International,
Inc.
Eaton Ros S.A. Spain 100% Eaton S.A.
Productos Eaton Livia S.A. Spain 100% Eaton S.A.
Eaton SA Switzerland 100%
Eaton Technologies S.A. Switzerland 100% Eaton SA
Eaton Limited Taiwan 19.4%
80.6% Eaton
International
Corporation
Modern Molded Products Limited Taiwan 100% Eaton
International
Corporation
Eaton Technologies Limited Thailand 100%
Rubberon Technology Corporation
Limited Thailand 100%
<PAGE>
Page 7
Cutler-Hammer Europa Pension United
Trustees Ltd. Kingdom 50% Eaton Limited
50% Eaton
Financial
Services
Limited
Eaton Financial Services Limited United
Kingdom 100% Eaton Limited
Eaton Holding Limited United
Kingdom 100%
Eaton Limited United
Kingdom 100% Eaton Holding
Limited
Eaton Shared Services Limited United
Kingdom 100% Eaton Holding
Limited
Fusion Europe Ltd. United
Kingdom 100% Fusion
Technology
International,
Inc.
Cutler-Hammer de Venezuela S.A. Venezuela 100% Eaton
International
Corporation
</TABLE>
(A) Other Eaton subsidiaries, most of which are inactive, are not
listed above. If considered in the aggregate, they would not be
material.
<PAGE>
Page 1
Eaton Corporation
1998 Annual Report on Form 10-K
Item 14(c)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following
Registration Statements and related Prospectuses of our report
dated January 19, 1999, with respect to the consolidated financial
statements of Eaton Corporation included in this Form 10-K for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
Registration
number Description Filing date
- ------------ ---------------------------------------- ------------------
<S> <C> <C>
333-74355 Eaton Corporation $1,400,000,000 of
Debt Securities, Debt Warrants,
Common Shares and Preferred Shares -
Form S-3 Registration Statement March 12, 1999
333-62375 Eaton Corporation 1998 Stock Plan - Form
S-8 Registration Statement August 27, 1998
333-62373 Eaton Holding Limited U.K. Savings-
Related Share Option Scheme [1998]-
Form S-8 Registration Statement August 27, 1998
333-46861 Eaton Limited U.K. Savings-Related Share
Option Scheme [1991] - Form S-8
Registration Statement February 25, 1998
333-40243 Eaton Corporation 172,489 Common
Shares - Form S-3 Registration Statement February 20, 1998
333-45575 Eaton Limited U.K. Savings-Related Share
Option Scheme [1991] - Form S-8
Registration Statement February 4, 1998
333-35697 Cutler-Hammer de Puerto Rico Company
Retirement Savings Plan - Form S-8
Registration Statement September 16, 1997
333-35699 Eaton Savings Plan for Certain Cutler-
Hammer Represented Employees - Form S-8
Registration Statement September 16, 1997
333-28869 Eaton 401(K) Savings Plan and Trust -
Form S-8 Registration Statement June 10, 1997
333-25693 Eaton Corporation Shareholder Dividend
Reinvestment Plan - Form S-3
Registration Statement April 23, 1997
333-23539 Eaton Non-Employee Director Fee Deferral
Plan - Form S-8 Registration Statement March 18, 1997
333-22597 Eaton Incentive Compensation Deferral
Plan - Form S-8 Registration Statement March 13, 1997
<PAGE>
Page 2
333-13873 Eaton Corporation Investment Plan for
Hourly Employees of the Hydraulics
Division - Hutchinson Plant - Form S-8
Registration Statement October 10, 1996
333-13869 Lincoln Plant Share Purchase and
Investment Plan and Trust - Form S-8
Registration Statement October 10, 1996
333-13861 Eaton Corporation 401(k) Savings Plan for
the Hourly Rate Employees at Airflex
Division - Form S-8 Registration
Statement October 10, 1996
333-13857 Eaton Wauwatosa Union Plan and Trust -
Form S-8 Registration Statement October 10, 1996
333-13855 Eaton Winamac Hourly Investment Plan and
Trust - Form S-8 Registration Statement October 10, 1996
333-03599 Eaton Corporation Share Purchase and
Investment Plan - Form S-8 Registration
Statement May 13, 1996
333-01365 Eaton Corporation Incentive Compensation
Deferral Plan - Form S-3 Registration
Statement March 1, 1996
33-64201 Eaton Corporation $120,837,500 of Debt
Securities and Debt Warrants - Form S-3
Registration Statement November 14, 1995
33-63357 Lectron Products, Inc. Retirement Savings
Plan - Form S-8 Registration Statement October 12, 1995
33-60907 Eaton 1995 Stock Plan - Form S-8
Registration Statement July 7, 1995
33-59459 Eaton Corporation 2,072,400 Common
Shares - Form S-3 Registration Statement May 19, 1995
33-53521 Cutler-Hammer Inc. Savings Plan for
Certain Hourly Employees - Form S-8
Registration Statement May 6, 1994
33-52333 Eaton Corporation $600,000,000 of Debt
Securities, Debt Warrants, Common Shares
and Preferred Shares - Form S-3
Registration Statement February 18, 1994
33-49779 Eaton Limited U.K. Savings-Related Share
Option Scheme [1991] - Form S-8
Registration Statement July 16, 1993
<PAGE>
Page 3
33-49777 Eaton Corporation Share Purchase and
Investment Plan - Form S-8
Registration Statement July 15, 1993
33-49393, Eaton Corporation Stock Option Plans -
33-12842, Form S-8 Registration Statement March 9, 1993
2-76349 &
2-58718
33-15582 Eaton Limited U.K. Savings-Related Share
Option Scheme - Form S-8 Registration
Statement July 7, 1987
33-2688 Eaton Corporation Shareholder Dividend
Reinvestment Plan (Including Post
Effective Amendment No. 1 filed
February 19, 1986) January 15, 1986
</TABLE>
/s/ Ernst & Young LLP
Cleveland, Ohio
March 19, 1999
<PAGE>
Page 1
Eaton Corporation
1998 Annual Report on Form 10-K
Item 14(c)
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is
signed below has made, constituted and appointed, and by this
instrument does make, constitute and appoint, Adrian T. Dillon, Billie
K. Rawot or William J. Nowak his or her true and lawful attorney, for
him or her and in his or her name, place and stead to subscribe, as
attorney-in-fact, his or her signature as Director or Officer or both,
as the case may be, of Eaton Corporation, an Ohio corporation, to the
Annual Report on Form 10-K for the year ended December 31, 1998
pursuant to the Securities Exchange Act of 1934, and to any and all
amendments to that Annual Report on Form 10-K, giving and granting unto
each such attorney-in-fact full power and authority to do and perform
every act and thing whatsoever necessary to be done in the premises, as
fully as he or she might or could do if personally present, hereby
ratifying and confirming all that each such attorney-in-fact shall
lawfully do or cause to be done by virtue hereof.
This Power of Attorney shall not apply to any Annual Report
on Form 10-K or amendment thereto filed after December 31, 1999.
IN WITNESS WHEREOF, this Power of Attorney has been signed
this 24th day of February, 1999.
/s/ Stephen R. Hardis /s/ Ernie Green
------------------------------ ----------------------------
Stephen R. Hardis Ernie Green
Chairman and Chief Executive Director
Officer; Principal
Executive Officer; Director
/s/ Alexander M. Cutler /s/ Ned C. Lautenbach
------------------------------ ----------------------------
Alexander M. Cutler Ned C. Lautenbach
President and Chief Operating Director
Officer; Director
/s/ Adrian T. Dillon /s/ John R. Miller
------------------------------ ----------------------------
Executive Vice President-- John R. Miller
Chief Financial and Planning Director
Officer; Principal Financial
Officer
/s/ Billie K. Rawot /s/ Furman C. Moseley
------------------------------ ----------------------------
Billie K. Rawot Furman C. Moseley
Vice President and Controller; Director
Principal Accounting Officer
<PAGE>
Page 2
/s/ Neil A. Armstrong /s/ Victor A. Pelson
------------------------------ ----------------------------
Neil A. Armstrong Victor A. Pelson
Director Director
/s/ Michael J. Critelli /s/ A. William Reynolds
------------------------------ ----------------------------
Michael J. Critelli A. William Reynolds
Director Director
/s/ Gary L. Tooker
------------------------------ ----------------------------
Phyllis B. Davis Gary L. Tooker
Director Director
<PAGE>
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 80
<SECURITIES> 42
<RECEIVABLES> 899
<ALLOWANCES> 14
<INVENTORY> 707
<CURRENT-ASSETS> 1,982
<PP&E> 3,387
<DEPRECIATION> 1,550
<TOTAL-ASSETS> 5,665
<CURRENT-LIABILITIES> 1,516
<BONDS> 1,191
0
0
<COMMON> 36
<OTHER-SE> 2,021
<TOTAL-LIABILITY-AND-EQUITY> 5,665
<SALES> 6,625
<TOTAL-REVENUES> 6,625
<CGS> 4,759
<TOTAL-COSTS> 6,143
<OTHER-EXPENSES> (91)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> 485
<INCOME-TAX> 136
<INCOME-CONTINUING> 349
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 349
<EPS-PRIMARY> 4.89
<EPS-DILUTED> 4.80
</TABLE>
