SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 29, 1999
EATON CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 1-1396 34-0196300
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
Eaton Center
Cleveland, Ohio 44114
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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
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Page 2
Item 5. Other Events
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EATON CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On February 1, 1999, Eaton Corporation 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.
The following unaudited pro forma combined condensed financial
statements have been prepared by Eaton's management. These
financial statements reflect Eaton's planned acquisition of Aeroquip-
Vickers, Inc., and combine, for the indicated date or period, the
historical consolidated financial statements of Eaton and
Aeroquip-Vickers, using the purchase method of accounting.
The unaudited pro forma combined condensed balance sheet reflects
adjustments as if the acquisition had occurred on December 31,
1998. The unaudited pro forma combined statement of income
reflects adjustments as if the acquisition had occurred at the
beginning of 1998.
The pro forma financial statements include preliminary estimates
and assumptions which Eaton's management believes are reasonable.
However, the pro forma results do not include any anticipated
cost savings or other effects of the planned integration of Eaton
and Aeroquip-Vickers. Also, the pro forma results do not reflect
an acquisition integration charge, which has not yet been
determined, but will be recorded by Eaton in 1999, related to the
integration of Eaton's product lines and operations with
Aeroquip-Vickers. Therefore, the pro forma results are not
necessarily indicative of the results which would have occurred
if the business combination had been in effect on the dates
indicated, or which may result in the future.
The pro forma financial statements have been prepared using the
following facts and assumptions:
- - Eaton acquires the common stock and common stock equivalents of
Aeroquip-Vickers in exchange for a total cash payment of $1.623
billion.
- - Eaton borrows $1.623 billion to finance the acquisition.
Although Eaton intends to refinance a portion of the
borrowings with the proceeds from the sale of Common Shares and
business divestitures (see "Eaton to Sell Engineered Fasteners
and Fluid Power Divisions" appearing in this report), that
refinancing is not included in the pro forma assumptions.
- - The assets acquired and liabilities assumed of Aeroquip-Vickers
are recorded at estimated fair values as determined by Eaton's
management based on information currently available and on
current tentative assumptions as to the future operations of
Aeroquip-Vickers. Eaton will be obtaining independent appraisals
of the fair values of the acquired property, plant and equipment,
and identified intangible assets, and their remaining useful
lives. Eaton will also be reviewing and determining the fair
values of the other assets acquired and liabilities assumed.
Accordingly, the allocation of the purchase price to the acquired
assets and liabilities of Aeroquip-Vickers is subject to revision
as a result of the final determination of appraised and other
fair values.
The pro forma results do not reflect a $3 million aftertax
expense recorded by Aeroquip-Vickers in 1998 for the cumulative
effect of an accounting change to charge to income previously
deferred start-up costs for new facilities.
The pro forma financial statements should be read in conjunction
with the historical consolidated financial statements, and
related notes, of Eaton and Aeroquip-Vickers.
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Page 3
<TABLE>
Unaudited Pro Forma Combined Condensed Balance Sheet
December 31, 1998
<CAPTION>
(Millions of dollars) Historical Pro
---------------- forma Pro
Aeroquip adjust- forma
Eaton -Vickers ments combined
----- -------- ------ --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 80 $ 18 $ 98
Short-term investments 42 42
Accounts receivable 885 342 1,227
Inventories 707 302 $ 28 2a 1,037
Deferred income taxes & other
current assets 268 52 12 2b
2 2l 334
----- ----- ----- -----
1,982 714 42 2,738
Property, plant & equipment 1,837 548 82 2c 2,467
Identified intangible assets 214 289 2d 503
Excess of cost over net assets of
businesses acquired 1,025 125 (125)2e
976 2n 2,001
Deferred income taxes & other assets 607 72 (16)2f 663 679
----- ----- ----- -----
$5,665 $1,459 $1,248 $8,372
===== ===== ===== =====
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 333 $ 103 $ 923 (1) $1,359
Accounts payable & other current
liabilities 1,183 338 49 2g
(4)2h 1,566
----- ----- ----- -----
1,516 441 968 2,925
Long-term debt 1,191 278 700 (1)
22 2i 2,191
Postretirement benefits other than
pensions 557 122 (19)2j 660
Deferred income taxes & other
liabilities 344 49 34 2k
112 2l 539
Shareholders' equity
Aeroquip-Vickers 569 (569)2m 0
Eaton 2,057 2,057
----- ----- ----- -----
$5,665 $1,459 $1,248 $8,372
===== ===== ===== =====
See accompanying notes.
</TABLE>
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Page 4
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet
The pro forma adjustments to give effect to Eaton's planned
acquisition of Aeroquip-Vickers, and the estimated purchase
price allocation at December 31, 1998, are as follows:
1) The borrowing by Eaton of $1.623 billion to finance the
acquisition price. Of these borrowings, $700 million are
classified on the balance sheet as long-term debt because Eaton
expects to issue $200 million of notes payable due in 2000 and
intends, and expects to have the ability under a new $500 million
five-year revolving credit agreement to be entered into during
April 1999, to refinance this amount of debt on a long-term
basis.
2) The allocation of the aggregate purchase price of Aeroquip-
Vickers, and the recognition of the excess of the purchase
price over the estimated fair value of net assets of Aeroquip-
Vickers acquired, is as follows (in millions):
Adjustments
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2a Adjust acquired inventories to estimated
fair value $ 28
2b Adjust acquired pension assets for certain
overfunded pension plans to estimated
fair value 12
2c Adjust acquired property, plant and
equipment to estimated fair value 82
2d Record acquired identified intangible
assets at estimated fair value 289
2e Eliminate the excess of cost over net
assets acquired related to Aeroquip-
Vickers' acquisitions of businesses
in prior years (125)
2f Eliminate certain costs deferred by
Aeroquip-Vickers (16)
2g Record estimated current liabilities
related to post-acquisition integration
of Aeroquip-Vickers' product lines and
operations with Eaton, and costs related
to the acquisition (49)
2h Adjust acquired pension liability for
certain underfunded pension plans to
estimated fair value 4
2i Adjust acquired long-term debt to reflect
Eaton's current interest rates (22)
2j Adjust acquired liability for post-
retirement benefits other than pensions
to estimated fair value 19
2k Record estimated long-term liabilities
related to post-acquisition integration
of Aeroquip-Vickers' product lines and
operations with Eaton (34)
2l Record deferred income taxes for the above
adjustments, except for adjustment 2e
which is nontaxable, assuming a 35%
income tax rate (110)
2m Eliminate shareholders' equity of Aeroquip-
Vickers, prior to pro forma adjustments 569
2n Record preliminary estimate of excess of
cost over net assets of Aeroquip-Vickers
acquired 976
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Purchase price $1,623
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Page 5
<TABLE>
Unaudited Pro Forma Combined Statement of Income
Year Ended December 31, 1998
<CAPTION>
(Millions of dollars except for per share amounts)
Historical Pro
---------------- forma Pro
Aeroquip adjust- forma
Eaton -Vickers ments combined
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<S> <C> <C> <C> <C>
Net sales $6,625 $2,150 $8,775
Costs & expenses
Cost of products sold 4,759 1,620 $ 32 1a
1 1b
8 1c
(4)1d
(5)1e
12 1f
24 1g 6,447
Selling & administrative 1,050 272 1,322
Research & development 334 72 (32)1a 374
----- ----- ----- -----
6,143 1,964 36 8,143
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Income from operations 482 186 (36) 632
Other income (expense)
Interest expense-net (88) (27) (99)1h
1 1i (213)
Gain on sale of businesses 43 43
Other-net 48 (12) 36
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3 (39) (98) (134)
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Income before income taxes 485 147 (134) 498
Income taxes 136 47 (41)1j 142
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Net income $ 349 $ 100 $ (93) $ 356
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Net income per Common Share (1k) -
Assuming dilution $ 4.80 $ 4.90
Basic 4.89 4.99
Average number of Common Shares
outstanding (in millions) -
Assuming dilution 72.7 72.7
Basic 71.4 71.4
See accompanying notes.
</TABLE>
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Page 6
Notes to Unaudited Pro Forma Combined Statement of Income
The pro forma adjustments to give effect to Eaton's planned
acquisition of Aeroquip-Vickers, and the estimated purchase
price allocation for the year ended December 31, 1998, are as
follows:
1a Reclassify engineering expenses of Aeroquip-Vickers to cost
of products sold to be consistent with Eaton's accounting
policy
1b Adjust expense for acquired pensions and postretirement
benefits other than pensions to reflect Eaton's current
actuarial assumptions
1c Depreciate the write-up of acquired property, plant and
equipment to estimated fair value over 10 years
1d Eliminate amortization of certain costs deferred by Aeroquip-
Vickers
1e Eliminate amortization of the excess of cost over net assets
acquired related to Aeroquip-Vickers' acquisitions of businesses
in prior years
1f Amortize the estimated fair value of acquired identified
intangible assets over 25 years
1g Amortize the excess of the purchase price of Aeroquip-Vickers
over the estimated fair value of net assets acquired over 40
years
1h Record additional interest expense related to $1.623 billion
increase in debt to fund the acquisition (assumed interest
rate 6.1%)
1i Amortize adjustment of acquired long-term debt to reflect
Eaton's current interest rates
1j Record the income tax effect of the above adjustments, except
for adjustments 1e and 1g which are nontaxable, assuming a 35%
income tax rate
1k Pro forma net income per Common Share is computed by dividing
net income by the average number of Common Shares outstanding.
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Page 7
EATON TO SELL ENGINEERED FASTENERS AND FLUID POWER DIVISIONS
On March 25, 1999, Eaton said it will sell the Company's Engineered
Fasteners and Fluid Power Divisions to offset, in part, the cost
of the impending acquisition of Aeroquip-Vickers, Inc.
Engineered Fasteners, which is based in Brunswick, Ohio, and has
approximately 650 employees, had 1998 sales of $94 million, while the
Marshall, Michigan-based Fluid Power Division has approximately 1,050
employees and had 1998 sales of $189 million.
"With the impending acquisition of Aeroquip-Vickers for $1.7 billion,
Eaton has a number of options available to it in order to finance the
transaction," said Chairman Stephen R. Hardis. "We are issuing debt,
and we can, of course, finance the balance by issuing more Eaton
shares. We may do that, too, but for some time we have felt that
Eaton's stock has been undervalued, and equity financing is therefore
very expensive. By selling the fasteners and fluid power businesses
and applying the proceeds to the Aeroquip-Vickers purchase, we can
minimize the number of Common Shares that we issue, and thereby limit
earnings per share dilution. The decision to divest these strong
businesses reflects our confidence in Eaton's future earnings.
"Increasingly, the automotive industry is consolidating its supplier
base, and expecting those suppliers to apply a more modular approach
to the products they bring to the marketplace," Hardis continued.
"As currently structured, neither our fastener nor our fluid power
business have this capability, and it would require significant
investments or additional acquisitions to grow these operations to
that level.
"Both the fastener and fluid power businesses have excellent work
forces and leadership teams, which makes this decision particularly
difficult, but in the final analysis, we believe this course of
action is in the best interest of our owners."
Sale of the Engineered Fasteners business will be handled by the
investment banking firm of Bowles Hollowell Conner, a division of
First Union Capital Markets Corp., while the Fluid Power transaction
will be handled by Goldman, Sachs & Co. Eaton said it would not
speculate on the sale price it might receive for the two businesses.
Eaton's Engineered Fastener Division has manufacturing facilities in
Brunswick and Massillon, Ohio, and in Hamilton, Ontario, Canada.
The Fluid Power Division has manufacturing facilities in Fletcher,
North Carolina, Markdorf, Germany, and San Jose dos Campos, Brazil,
as well as a joint venture business in Ningbo, China.
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Page 8
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Eaton Corporation
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/s/ Billie K. Rawot
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Vice President and Controller
Chief Accounting Officer
Date: March 29, 1999
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