SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amended Form 8-K/A - #1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 22, 1999
EATON CORPORATION
- --------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 1-1396 34-0196300
- ----------------- ------------ -------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
Eaton Center
Cleveland, Ohio 44114
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
-----------------------------
Registrant's telephone number,
including area code
<PAGE>
Page 2
Item 2. Acquisition or Disposition of Assets
------------------------------------
On April 9, 1999, Eaton Corporation (Eaton) completed the
acquisition of all of the outstanding common stock of Aeroquip-
Vickers, Inc., for approximately $1.6 billion. Funds for the
purchase price were primarily obtained through the issuance of
commercial paper. The acquisition will be accounted for by the
purchase method of accounting.
Aeroquip is a global leader in the manufacture of products
that include all pressure ranges of hose, fittings, adapters,
couplings and other fluid connectors, plus precision molded
and extruded plastic products.
Vickers is a leading worldwide producer of hydraulic pumps,
motors and cylinders; electronic and hydraulic controls;
electric motors and drives; filtration products; and fluid-
evaluation products and services. The two companies had
combined sales of $2.1 billion for 1998.
<PAGE>
Page 3
Item 7. Financial Statements and Exhibits
---------------------------------
Included in this report are 1) audited historical financial state-
ments of Aeroquip-Vickers, Inc., 2) unaudited pro forma condensed
financial statements reflecting Eaton's acquisition of Aeroquip-
Vickers and 3) exhibit 23, consent of independent auditors.
1) FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 31, 1998 FOR
AEROQUIP-VICKERS, INC.
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
Aeroquip-Vickers, Inc.
We have audited the accompanying statement of financial position of
Aeroquip-Vickers, Inc. and subsidiaries at December 31, 1998 and 1997
and the related statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedule listed
at Item 14(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Aeroquip-Vickers, Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their
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 financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 1 of Notes to Financial Statements, the Company
changed its method of accounting for start-up activities in 1998.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
January 27, 1999
<PAGE>
Page 4
<TABLE>
<CAPTION>
STATEMENT OF INCOME
Years ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $2,149,474 $2,112,293 $2,032,915
Cost of products sold 1,619,905 1,554,668 1,520,736
---------- ---------- ----------
MANUFACTURING INCOME 529,569 557,625 512,179
Selling and general administrative
expenses 271,718 263,824 260,712
Engineering, research and development
expenses 71,471 72,161 74,892
Special charge -- 30,000 --
---------- ---------- ----------
OPERATING INCOME 186,380 191,640 176,575
Interest expense (27,013) (27,171) (25,813)
Other income (expense) - net (11,830) (16,316) 2,659
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 147,537 148,153 153,421
Income taxes 47,200 47,300 50,700
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 100,337 100,853 102,721
Cumulative effect of accounting change,
net of income tax benefit of $1,549 (3,283) -- --
---------- ---------- ----------
NET INCOME $ 97,054 $ 100,853 $ 102,721
========== ========== ==========
BASIC INCOME PER SHARE
Before cumulative effect of
accounting change $ 3.58 $ 3.60 $ 3.62
Cumulative effect of accounting
change (.12) -- --
---------- ---------- ----------
Basic net income per share $ 3.46 $ 3.60 $ 3.62
========== ========== ==========
DILUTED INCOME PER SHARE
Before cumulative effect of
accounting change $ 3.56 $ 3.51 $ 3.51
Cumulative effect of accounting
change (.12) -- --
---------- ---------- ----------
Diluted net income per share $ 3.44 $ 3.51 $ 3.51
========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Page 5
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL POSITION
December 31, 1998 and 1997
(Dollars in thousands, except per share data)
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 17,310 $ 18,736
Receivables 341,825 348,822
Inventories 302,236 294,767
Other current assets 52,146 49,323
----------- -----------
TOTAL CURRENT ASSETS 713,517 711,648
Plants and properties 1,119,557 993,002
Less accumulated depreciation 571,340 518,860
----------- -----------
548,217 474,142
Other assets 197,067 190,806
----------- -----------
TOTAL ASSETS $ 1,458,801 $ 1,376,596
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 101,829 $ 84,044
Accounts payable 113,698 111,800
Income taxes 27,167 30,496
Other accrued liabilities 197,726 212,800
Current maturities of long-term debt 1,035 1,857
----------- -----------
TOTAL CURRENT LIABILITIES 441,455 440,997
Long-term debt 278,343 256,707
Postretirement benefits other than pensions 121,715 122,272
Other liabilities 48,469 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 27,600,520 and
28,064,981 shares, respectively
(after deducting 6,680,326 and
6,215,865 shares, respectively, in treasury) 138,003 140,325
Additional paid-in capital 47,841 41,288
Retained earnings 419,178 366,676
Accumulated other comprehensive income (loss) -
currency translation adjustments (36,203) (38,090)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 568,819 510,199
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,458,801 $ 1,376,596
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Page 6
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 97,054 $ 100,853 $ 102,721
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of accounting change,
net of income tax benefit 3,283 -- --
Special charge -- 30,000 --
Depreciation 70,661 66,562 68,684
Amortization 8,986 6,639 4,789
Gain on sales of affiliates -- -- (17,300)
Dividends received from affiliates -- -- 9,932
Deferred income taxes 511 (467) 11,997
Changes in certain assets and liabilities,
excluding effects from special charge,
acquisitions and dispositions
--Receivables 14,807 (31,073) (44,783)
--Inventories 4,113 (47,215) 10,656
--Accounts payable (6,806) 19,018 (75)
--Income taxes (4,654) 15,969 (15,929)
--Other assets, payables and accruals (18,438) (9,354) (5,991)
Restructuring payments - net 9,370 (16,666) 810
Other (1,404) 3,418 274
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 177,483 137,684 125,785
INVESTING ACTIVITIES
Capital expenditures (142,243) (139,811) (90,626)
Businesses acquired (30,741) -- (42,540)
Sales of businesses and affiliates -- 43,381 40,261
Other 1,532 1,561 1,483
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (171,452) (94,869) (91,422)
FINANCING ACTIVITIES
Cash dividends (24,673) (22,465) (22,705)
Increase (decrease) in notes payable 12,406 50,866 (1,444)
Long-term borrowings 65,000 100,000 107,145
Repayments of long-term borrowings (44,301) (172,669) (77,465)
Purchases of common stock (23,166) (21,590) (32,213)
Stock issuance under stock plans 7,518 20,133 3,287
Other (773) (924) (2,440)
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (7,989) (46,649) (25,835)
Effect of exchange rate changes on
cash and cash equivalents 532 (1,364) (780)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,426) (5,198) 7,748
Cash and cash equivalents at beginning of year 18,736 23,934 16,186
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,310 $ 18,736 $ 23,934
========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Page 7
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share data)
Accumulated
Other
Comprehensive
Income (Loss) -
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustments Total
--------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 144,125 $ 17,933 $ 254,484 $ (15,670) $ 400,872
Net income 102,721 102,721
Other comprehensive income:
Currency translation adjustments
during the year 841
Reclassification of realized amounts
to net income (6,387) (5,546)
---------
Total comprehensive income 97,175
Cash dividends paid ($.80 share) (22,705) (22,705)
Issuance of 108,990 shares, net of
shares exchanged, under stock plans 545 2,742 3,287
Purchase of 1,022,100 treasury shares (5,111) (27,102) (32,213)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 139,559 20,675 307,398 (21,216) 446,416
Net income 100,853 100,853
Other comprehensive income:
Currency translation adjustments
during the year (19,144)
Reclassification of realized amounts
to net income 2,270 (16,874)
---------
Total comprehensive income 83,979
Cash dividends paid ($.80 a share) (22,465) (22,465)
Issuance of 578,054 shares, net of
shares exchanged, under stock plans 2,891 17,242 20,133
Issuance of 70,950 shares upon
conversion of long-term debt 355 3,371 3,726
Purchase of 496,100 treasury shares (2,480) (19,110) (21,590)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 140,325 41,288 366,676 (38,090) 510,199
Net income 97,054 97,054
Other comprehensive income:
Currency translation adjustments
during the year 2,014
Reclassification of realized amounts
to net income (127) 1,887
---------
Total comprehensive income 98,941
Cash dividends paid ($.88 a share) (24,673) (24,673)
Issuance of 193,039 shares, net of
shares exchanged, under stock plans 965 6,553 7,518
Purchase of 657,500 treasury shares (3,287) (19,879) (23,166)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1998 $ 138,003 $ 47,841 $ 419,178 $ (36,203) $ 568,819
========= ========= ========= ========= =========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE>
Page 8
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Dollars in thousands, except per share data)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries. Affiliated
companies in which the Company's ownership is 20% to 50% are accounted
for by the equity method. All significant intercompany transactions
and accounts are eliminated upon consolidation.
Use of Estimates: The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make certain estimates and exercise judgment affecting
the reported amounts in the statements of income, financial
position and cash flows, including disclosures in the Notes to
Financial Statements. Actual results could differ from those estimates.
Revenue Recognition: Revenue is recognized when products are shipped
to customers.
Cash Equivalents: Marketable securities that are highly liquid and
have original maturities of three months or less are classified as
cash equivalents. The carrying amount approximates fair value.
Inventories: Inventories are stated at the lower of cost or market.
Inventory costs for U.S. operations are determined principally by
the last-in, first-out (LIFO) method. The remaining inventory costs
are determined principally by the first-in, first-out (FIFO) method.
Plants and Properties: Plants and properties are carried at cost.
Depreciation is generally computed by the straight-line method over
the estimated useful lives of the respective assets. In general,
depreciation is provided at annual rates of 2.5% to 3% on buildings
and 8% to 12% on equipment.
Intangibles: Intangible assets are carried at cost less accumulated
amortization and consist principally of goodwill. Goodwill represents
the excess of cost over fair value of assets acquired, which is
amortized over periods from 15 to 40 years using the straight-line
method. Other intangibles include software and patents which are
amortized over periods from five to 15 years using the straight-line
method. The carrying amounts for goodwill and other long-lived assets
are reviewed for impairment whenever events or changes in circumstances
indicate that such carrying amounts may not be recoverable. For any
long-lived assets that are determined to be impaired, a loss would
be recognized for the difference between the carrying value and the
fair value for assets to be held.
Life Insurance: The Company's investment in corporate-owned life
insurance is recorded net of policy loans. Net life insurance
expense, including interest expense of $6,300, $10,800 and $9,150
on policy loans in 1998, 1997 and 1996, respectively, is included
in Other income (expense) - net in the Statement of Income.
Accounting Pronouncements: The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards Nos. 130,
"Reporting Comprehensive Income," and 131, "Disclosures about
Segments of an Enterprise and Related Information," in 1997. In 1998,
the FASB issued Statements Nos. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," and 133, "Accounting
for Derivative Instruments and Hedging Activities." Statement 130
requires that comprehensive income, which includes net income and
other comprehensive income consisting of foreign currency
<PAGE>
Page 9
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
items, minimum pension liability adjustments, and unrealized gains
and losses on certain security investments, be reported as a total
in the financial statements. Historically, the Company's only
component of other comprehensive income has been foreign currency
items. The Company adopted Statement 130 effective January 1, 1998,
and reclassified financial statements for prior periods to reflect
application of this Statement. Statement 131 requires that operating
segment financial information be reported on a basis consistent
with the Company's internal reporting that is used for evaluating
segment performance and allocating resources. Statement 132 revises
and standardizes disclosures about pensions and other postretirement
benefit obligations and requires that information about changes
in benefit obligations and fair values of plan assets be reported.
Among other provisions, Statement 133 requires that all derivatives
be recognized as assets or liabilities in the Statement of Financial
Position and that those instruments be measured at fair value. The
Company adopted Statement Nos. 131 and 132 in 1998, changing its
reportable segments and providing the required disclosures for each
of the statements. Prior-period segment information and pension and
postretirement benefit obligation information were restated in
accordance with the provisions of the statements. The adoption of
Statement Nos. 130, 131 and 132 did not affect the Company's results
of operations or consolidated financial position. Statement 133
will become effective for fiscal years beginning after June 15,
1999. Early application is permitted. The Company is currently
evaluating the effect of the provisions of this Statement on its
accounting and reporting policies, and has not determined when it
will adopt the Statement. The Company does not expect that adoption
of this Statement will have a material adverse effect on its
consolidated financial position or results of operations.
In 1998, The American Institute of Certified Public Accountants
issued Statements of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," and
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-1
requires the capitalization of certain costs incurred after the
date of adoption in connection with acquiring or developing
software for internal use. The Company adopted SOP 98-1 in 1998,
and since the Company's previous capitalization policy was similar
to the requirements of SOP 98-1, the adoption of this standard
did not have a material effect on the Company's consolidated
financial position or results of operations. SOP 98-5 requires that
the costs of start-up activities, including organization costs, be
expensed as incurred and that initial application of this standard
be reported as the cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 in 1998, and recognized
the cumulative effect of an accounting change of $4,832 ($3,283
after tax, or $.12 per share). The effect of this change in
accounting was not material to income before cumulative effect of
accounting change for the year ended December 31, 1998.
Stock Options: The Company follows the intrinsic value method of
accounting for stock options under Accounting Principles Board
Opinion No. 25. When stock options are exercised, common stock is
credited for the par value of shares issued; additional paid-in
capital is credited for the consideration received in excess of par
value and any related income tax benefits.
Derivative Financial Instruments: The Company uses forward exchange
contracts and option contracts to manage certain foreign exchange
exposures. The Company enters into forward exchange contracts to
hedge the effects of changes in exchange rates on certain recorded
receivables and payables that are denominated in currencies other
than the functional currencies of the originating locations.
Forward exchange contracts are marked to market with changes in market
value recorded in income as foreign exchange gains or
<PAGE>
Page 10
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
losses, offsetting the losses or gains on the underlying
transactions. The Company enters into option contracts to hedge
certain anticipated transactions. These option contracts are
designated as hedges of certain forecasted monthly purchases and
sales transactions that are denominated in currencies other than
the functional currencies of the originating locations, that other-
wise would expose the Company to foreign currency exchange rate
risk. Gains on option contracts are included in sales and cost of
products sold when realized. Premiums on option contracts are
deferred and amortized to cost of products sold on a straight-line
basis over the life of the contracts. Forward exchange and option
contracts are entered into with major commercial banks with high
credit ratings. Forward exchange and option contracts are not held
for trading or speculative purposes, and the Company is not a party
to any leveraged derivatives. The terms of these contracts are
generally one year or less.
<PAGE>
Page 11
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - INCOME PER SHARE
Following is a reconciliation of income and average shares for
purposes of calculating basic and diluted income per share:
1998 1997 1996
---- ---- ----
Basic Income per Share
- ---------------------------
<S> <C> <C> <C>
Income before cumulative effect of
accounting change $ 100,337 $ 100,853 $ 102,721
Cumulative effect of accounting
change (3,283) -- --
---------- ---------- ----------
Net Income $ 97,054 $ 100,853 $ 102,721
========== ========== ==========
Average common shares outstanding 28,035,748 28,049,749 28,384,089
========== ========== ==========
Basic Income per Share
Before cumulative effect of
accounting change $ 3.58 $ 3.60 $ 3.62
Cumulative effect of accounting change (.12) -- --
---------- ---------- ----------
Basic net income per share $ 3.46 $ 3.60 $ 3.62
========== ========== ==========
Diluted Income per Share
- -------------------------
Income before cumulative effect
of accounting change $ 100,337 $ 100,853 $102,721
After-tax equivalent of interest
expense on 6% convertible debentures -- 2,192 3,720
---------- ---------- ----------
Income for purpose of computing diluted
income per share before cumulative
effect of accounting change 100,337 103,045 106,441
Cumulative effect of accounting change (3,283) -- --
---------- ---------- ----------
Income for purpose of computing
diluted income per share $ 97,054 $ 103,045 $ 106,441
========== ========== ==========
Average common shares outstanding 28,035,748 28,049,749 28,384,089
Dilutive stock options 156,979 209,927 46,019
Assumed conversion of 6%
convertible debentures -- 1,109,298 1,904,762
---------- ---------- ----------
Average common shares for purpose
of computing diluted income per share 28,192,727 29,368,974 30,334,870
========== ========== ==========
Diluted Income per Share
Before cumulative effect of
accounting change $ 3.56 $ 3.51 $ 3.51
Cumulative effect of accounting change (.12) -- --
---------- ---------- ----------
Diluted net income per share $ 3.44 $ 3.51 $ 3.51
========== ========== ==========
</TABLE>
Options to purchase an average of 160,600 and 771,000 shares of
common stock were outstanding during 1998 and 1996, respectively,
that were not included in the computation of diluted income per
share because the option exercise prices were greater than the
average market price of common shares and, therefore, the
effect would have been anti-dilutive.
<PAGE>
Page 12
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SPECIAL CHARGE
In 1997, the Company's Aeroquip segment exited its automotive
interior plastics business and recorded a special charge of $30,000
($18,500 net, or diluted net income per share of $.63). The special
charge included a provision for severance payments of $6.3 million
to terminate approximately 1,500 salaried and hourly employees,
principally in Germany. The special charge also included lease
termination costs amounting to $6.9 million; asset disposal costs,
including environmental costs, amounting to $9.6 million; litigation
costs amounting to $3 million; and other costs amounting to $4.2
million. The Company sold or closed eight facilities during 1997
that had combined sales of approximately $67,000 and $132,000 in
1997 and 1996, respectively. The planned actions to which this
special charge related were substantially completed during 1997, and
as of December 31, 1998, all costs had been incurred.
NOTE 4 - ACQUISITIONS
During 1998, the Company's Aeroquip segment acquired two companies
and its Vickers segment acquired four companies for an aggregate
purchase price of $30,741, including acquisition costs. In 1996,
the Company's Vickers segment acquired two companies for an
aggregate purchase price of $46,116, including acquisition costs.
All of the above acquisitions were accounted for as purchases,
and their operations were included in the Statement of Income from
their respective acquisition dates. Had these acquisitions occurred
as of the beginning of the respective years, the pro forma results
of operations giving effect to the acquisitions would not be
materially different from the net sales, net income and net income
per share presented in the Statement of Income.
NOTE 5 - GAIN ON SALE OF UNCONSOLIDATED AFFILIATES
In 1996, the Company sold its 35% interest in Yokohama Aeroquip
K.K. and its 49% interest in Aeroquip Mexicana S.A. The two
transactions resulted in a net combined pretax gain of $17,300
($5,000 net, or diluted net income per share of $.16). The combined p
retax gain included a net translation gain of $6,387 previously
deferred in accumulated other comprehensive income.
NOTE 6 - INVENTORIES
Inventory costs determined by the LIFO method accounted for
approximately 58% and 61% of total inventories at December 31, 1998
and 1997, respectively. If all inventories valued by the LIFO method
had been valued at current costs, these inventories would have been
approximately $27,591 and $27,884 higher than reported at
December 31, 1998 and 1997, respectively.
NOTE 7 - DEBT
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
7.875% senior debentures, due June 1, 2026 $100,000 $100,000
Medium term notes - interest rates from 6.40%
to 7.58% - due at various dates from 2002 to 2018 165,000 100,000
9.55% senior sinking fund debentures -- 42,000
Industrial revenue bonds - interest rates from
5.8% to 7.625% - due at various dates to 2013 7,264 7,300
Other 7,114 9,264
-------- --------
279,378 258,564
Less current maturities 1,035 1,857
-------- --------
$278,343 $256,707
======== ========
</TABLE>
<PAGE>
Page 13
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - DEBT (Continued)
In December 1997, the Company called its 9.55% senior sinking fund
debentures for redemption on February 3, 1998. The debentures were
due to mature in February 2018. Proceeds from additional borrowings
under the Company's Medium Term Note program were used to redeem
the debentures. The loss from redemption of the debentures amounting
to approximately $2,500 was recorded in Other income (expense) -
net in 1998. In June 1997, the Company called its 6% convertible
subordinated debentures for redemption and recorded a loss of $1,487
in Other income (expense) - net. The debentures, which were due to
mature in October 2002, were convertible into common shares of the
Company at a conversion price of $52.50 per share. Prior to the
redemption date, debentures in the amount of $3,726 were converted
into 70,950 shares of common stock.
In 1997, the Company established a Medium Term Note program. The
remaining borrowing capacity at December 31, 1998, under provisions
of a shelf registration statement designated for the Medium Term
Note program was $185,000.
Under terms of a revolving credit agreement, expiring August 31,
2001, with a consortium of U.S. and non-U.S. banks, the Company can
borrow up to $175,000. Borrowings under the credit agreement bear
interest at rates agreed to by the Company and lenders. The agreement
is maintained to support the Company's commercial paper borrowings
and, to the extent not so utilized, to provide domestic borrowings.
The remaining borrowing capacity under this agreement at
December 31, 1998, was $120,000. Covenants of the revolving credit
agreement and certain other debt instruments require the Company to
maintain certain financial ratios, including a limitation that the
Company's debt-to-capitalization ratio (exclusive of the effects
of the change in accounting for postretirement benefit obligations)
not exceed a specified amount. At December 31, 1998, retained
earnings of $255,000 were available for the payment of cash dividends
and purchase of common stock.
Maturities of long-term debt in 1999 and in the four succeeding
years are $1,035, $355, $271, $25,188 and $97. Interest paid on
short- and long-term debt during 1998, 1997 and 1996 amounted to
$28,446, $27,664 and $27,392, respectively. The weighted-average
interest rate of outstanding notes payable at December 31, 1998
and 1997, was 6.4% and 6.5%, respectively.
NOTE 8 - CONTINGENCIES
The Company or certain of its subsidiaries have been named parties
to various lawsuits, claims and proceedings, including being named
potentially responsible parties (PRP) for site investigation and
cleanup costs under the Comprehensive Environmental Response,
Compensation, and Liability Act (Superfund) or similar regulations
with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the
ordinary course of the Company's business. While the ultimate
outcome of the various lawsuits, claims and proceedings, including
PRP designations and other environmental matters, cannot now be
predicted, the Company believes that any costs in excess of amounts
provided, or covered by insurance as it relates to litigation,
arising out of these matters will not have a material adverse
effect on the Company's consolidated financial position, results
of operations or cash flows.
<PAGE>
Page 14
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The components of income before income taxes and cumulative effect
of accounting change consist of the following:
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
U.S. $ 64,772 $ 84,300 $ 73,644
Non-U.S. 82,765 63,853 79,777
-------- -------- --------
$147,537 $148,153 $153,421
======== ======== ========
Income tax expense consists of the following:
1998 1997 1996
------ ------ ------
Current:
U.S. federal $ 20,101 $ 23,231 $ 21,920
State and local 2,279 2,070 2,676
Non-U.S. 24,309 22,466 14,107
-------- -------- --------
46,689 47,767 38,703
Deferred:
U.S. federal 952 (136) 4,356
Non-U.S. (441) (331) 7,641
-------- -------- --------
511 (467) 11,997
-------- -------- --------
$ 47,200 $ 47,300 $ 50,700
======== ======== ========
Reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate before cumulative effect of accounting
change follows:
1998 1997 1996
------ ------ -----
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local taxes, net of U.S. federal
tax benefit .9 .9 1.1
Basis differences on affiliates sold -- -- 4.1
Research and development credit (2.9) (1.9) (2.6)
Taxes in excess of (less than) the U.S. tax
rate on non-U.S. earnings, including
utilization of net operating loss carryforwards (1.0) 1.0 (3.2)
Other -- (3.1) (1.4)
---- ---- -----
Effective income tax rate 32.0% 31.9% 33.0%
==== ==== =====
</TABLE>
<PAGE>
Page 15
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
The effects of temporary differences and loss carryforwards giving
rise to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Gross Deferred Tax Assets:
Postretirement benefits other than pensions $ 42,729 $ 42,704
Tax credits and loss carryforwards 14,943 8,668
Employee benefit accruals 15,088 14,289
Other 14,728 9,617
--------- ---------
87,488 75,278
Gross Deferred Tax Liabilities:
Depreciation (38,067) (33,241)
Other (8,741) (7,980)
--------- ---------
(46,808) (41,221)
Valuation allowances (12,969) (6,816)
--------- ---------
Net deferred tax assets $ 27,711 $ 27,241
========= =========
The components of net deferred tax assets are recorded in the
Statement of Financial Position as follows:
1998 1997
------ ------
Current assets $ 10,066 $ 3,679
Non-current assets 27,711 30,958
Non-current liabilities (10,066) (7,396)
--------- ---------
$ 27,711 $ 27,241
========= =========
</TABLE>
Valuation allowances increased $6,153 in 1998 and decreased $5,773
and $3,364 in 1997 and 1996, respectively.
At December 31, 1998, the Company had net non-U.S. operating loss
and foreign tax credit carryforwards of $20,700 and $8,200,
respectively, for income tax purposes. Loss carryforwards of
approximately $13,800 have no expiration dates. The remaining net
operating loss and foreign tax credit carryforwards expire in years
through 2008. Income tax expense for the years 1998, 1997 and 1996
was reduced by $1,190, $1,770 and $3,730, respectively, due to
utilization of operating loss carryforwards. Non-U.S. operating
loss carryforwards in the amount of $4,900 and $5,600 expired in
1998 and 1997, respectively, resulting in the loss of future tax
benefits and a reduction in valuation allowances in the amount
of $1,800 and $2,100, respectively. The Company does not provide
deferred income taxes on undistributed earnings of certain of its
non-U.S. subsidiaries which have been reinvested indefinitely.
Undistributed earnings of non-U.S. subsidiaries for which U.S.
income taxes have not been provided approximated $150,300 at
December 31, 1998. Should these earnings be remitted, certain
countries would impose withholding taxes that would be available
for use as credits against any U.S. federal income tax liability,
subject to certain limitations. It is not practical to estimate
the amount of tax that would be payable should the Company remit
these earnings.
Income taxes paid during 1998, 1997 and 1996 amounted to $51,343,
$31,798 and $54,633, respectively.
<PAGE>
Page 16
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - LEASES
The Company and its subsidiaries lease a variety of real property
and equipment. Rent expense under operating leases amounted to
approximately $22,554, $20,457 and $18,863 for 1998, 1997 and
1996, respectively. Future minimum rental payments required under
operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 19,499
2000 14,752
2001 12,232
2002 7,758
2003 6,893
Thereafter 11,526
--------
$ 72,660
========
</TABLE>
NOTE 11 - FINANCIAL INSTRUMENTS
Fair value for long-term debt, including current maturities, at
December 31, 1998 and 1997, was $292,000 and $269,000, respectively.
Fair value for notes payable at December 31, 1998 and 1997,
approximated the carrying amounts at those dates.
At December 31, 1998, the Company had forward exchange contracts
outstanding with notional amounts equivalent to $14,300. The
carrying amount of these outstanding forward exchange contracts
was $121. Fair value was approximately equal to the carrying amount.
These forward exchange contracts will mature at various dates
through April 1999. At December 31, 1997, the Company had forward
exchange contracts outstanding with notional amounts equivalent to
$12,800. The carrying amount of these outstanding forward exchange
contracts was $227. Fair value was approximately equal to the
carrying amount. These forward exchange contracts matured at various
dates through April 1998.
At December 31, 1998, the Company held option contracts maturing at
various dates through November 1999, with notional amounts equivalent
to $28,000. Fair value of these option contracts was approximately
$204. At December 31, 1997, the Company held option contracts
maturing at various dates through December 1998, with notional
amounts equivalent to $61,600. Fair value of these option contracts
was approximately $600.
NOTE 12 - BENEFIT PLANS
The Company sponsors trusteed defined-contribution pension plans
as its primary source of retirement benefits for U.S. and certain
non-U.S. employees. In addition, the Company sponsors trusteed
defined-benefit pension plans that cover a limited number of U.S.
employees. The Company also provides access to postretirement
benefits under life insurance and health care plans for most retired
U.S. employees. Various pension plans are also in effect for
subsidiaries operating outside the U.S., including trusteed or
insured, government-sponsored and unfunded plans.
<PAGE>
Page 17
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - BENEFIT PLANS (Continued)
Following is a reconciliation of the changes in benefit obligations
and fair values of plan assets for defined-benefit pension and
postretirement benefit plans for the two-year period ended
December 31, 1998, and a summary of funded status as of December 31,
1998 and 1997.
<TABLE>
<CAPTION>
Pension Postretirement
Plans Plans
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning
of year $ 160,600 $ 157,800 $ 102,600 $ 111,100
Service cost 2,400 2,200 1,700 1,700
Interest cost 11,500 11,300 7,400 8,100
Participant contributions 300 200 100 200
Plan amendments 300 1,600 -- --
Actuarial (gains) losses 16,000 1,700 (600) (10,700)
Benefit payments (10,000) (9,500) (8,100) (7,800)
Settlements (2,800) -- -- --
Exchange rate changes 1,700 (4,700) -- --
--------- --------- --------- ---------
Benefit obligations at end of year $ 180,000 $ 160,600 $ 103,100 $ 102,600
========= ========= ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year $ 181,400 $ 154,200 $ -- $ --
Actual return on plan assets 19,400 38,200 -- --
Employer contributions 1,000 900 8,000 7,600
Participant contributions 300 200 100 200
Benefit payments (10,000) (9,500) (8,100) (7,800)
Settlements (1,700) -- -- --
Exchange rate changes 1,000 (2,600) -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 191,400 $ 181,400 $ -- $ --
========= ========= ========= =========
FUNDED STATUS
Funded status at end of year $ 11,400 $ 20,800 $(103,100) $(102,600)
Unrecognized gains (19,500) (33,700) (9,815) (9,172)
Unrecognized transition obligations (1,500) 400 -- --
Unrecognized prior service cost (credit) 4,800 6,200 (8,800) (10,500)
--------- --------- --------- ---------
Accrued benefit cost $ (4,800) $ (6,300) $(121,715) $(122,272)
========= ========= ========= =========
AMOUNTS RECORDED IN THE STATEMENT
OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 24,400 $ 15,500 $ -- $ --
Accrued benefit cost (29,200) (21,800) (121,715) (122,272)
--------- --------- --------- ---------
Net amount recorded $ (4,800) $ (6,300) $(121,715) $(122,272)
========= ========= ========= =========
</TABLE>
<PAGE>
Page 18
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - BENEFIT PLANS (Continued)
The aggregate accumulated benefit obligations and fair value of
pension plan assets at the end of each year for plans that have an
accumulated benefit obligation in excess of plan assets were as
follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Projected benefit obligations $39,593 $35,039
Accumulated benefit obligations 37,456 33,358
Plan assets 15,570 14,228
</TABLE>
Components of net periodic benefit cost for the defined-benefit
pension and postretirement benefit plans, total contributions charged
to pension expense for the defined-contribution plans, and pension
expense for other non-U.S. pension plans are summarized below:
<TABLE>
<CAPTION>
Pension Plans Postretirement Plans
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 2,400 $ 2,200 $ 2,400 $ 1,700 $ 1,700 $ 1,700
Interest cost 11,500 11,300 11,300 7,400 8,100 8,200
Expected return on plan assets (14,800) (13,700) (13,000) -- -- --
Amortization of (gains) losses (600) (200) (200) -- -- --
Amortization of transition
obligation 200 200 300 -- -- --
Amortization of prior service
cost 700 500 400 (1,600) (1,700) (1,700)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost (income)
of defined benefit plans (600) 300 1,200 7,500 8,100 8,200
Defined contribution plans 38,700 42,000 37,000 -- -- --
Other non-U.S. pension plans 1,100 1,000 1,200 -- -- --
-------- -------- -------- -------- -------- --------
Totals $ 39,200 $ 43,300 $ 39,400 $ 7,500 $ 8,100 $ 8,200
======== ======== ======== ======== ======== ========
</TABLE>
The Company's health care plans are contributory. In general,
most participants meeting eligibility requirements and retiring
after January 1, 1995, share in the cost of postretirement health
care benefits by paying, in the form of a premium, the excess, if
any, of the average of the Company's annual per-capita claims cost
in the previous year over the amount of the Company's contribution
as stated in the plans.
Following are the weighted-average assumptions used in determining
the Company's benefit obligations and net periodic benefit cost.
The measurement date for these plans was principally September 30.
<PAGE>
Page 19
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - BENEFIT PLANS (Continued)
Pension Benefits Postretirement Benefits
------------------------------ -------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Discount rate:
<S> <C> <C> <C> <C> <C> <C>
U.S. 7.0% 7.5% 7.5% 7.0% 7.5% 7.5%
Non-U.S. 6.4 7.2 7.5
Expected return on plan assets 9.5 10.0 10.0
Rate of compensation increase 4.0 4.0 4.0
Projected health care cost
trend rates:
Under age 65 7.95 8.6 9.1
Over age 65 5.95 6.4 6.7
Ultimate 5.0 5.25 5.25
Year ultimate health care cost
trend rate is achieved 2008 2008 2008
The projected health care cost trend rates listed above for under
and over age 65 participants represent assumed increases in per
capita cost of covered health care benefits for 1999, 1998 and 1997,
respectively. For future years, the rates are assumed to decrease
gradually and remain at the ultimate trend rate thereafter. Because
the amount of the Company's annual contribution to retiree health
care costs is limited, changes to the assumed health care cost trend
rates do not have a significant effect on the amounts reported for
the health care plans. Following are the effects of a one-percentage-
point change in the assumed health care cost trend rates.
</TABLE>
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
---------------- ---------------
<S> <C> <C>
Effect on total 1998 service and
interest cost components of net periodic
post-retirement health care benefit cost $ 331 $ (308)
Effect on the health care component of
the accumulated postretirement benefit
obligation as of September 30, 1998 4,430 (4,121)
</TABLE>
NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS
The Company has rights outstanding as set forth in a Rights
Agreement, whereby holders of common stock have one right for each
share of common stock outstanding. When exercisable, each right
entitles its holder to buy one one-hundredth of a new preferred
share for $150. The Company has 4,000,000 shares of serial preferred
stock authorized, of which no shares were outstanding at December 31,
1998 or 1997. In the absence of further Board of Directors action,
the rights generally will become exercisable and allow the holder to
acquire the Company's common stock at a discounted price if a person
or group acquires 20% or more of the outstanding shares of the
Company's common stock.
Rights held by persons who exceed the 20% threshold will be void.
Under certain circumstances, the rights will entitle the holder to
buy shares in an acquiring entity at a discounted price. The
Agreement also includes an exchange option that, in general, after
the rights become exercisable, allows the Board of Directors to,
at its option, effect an exchange of part or all of the rights,
other than rights that have become void, for shares of the Company's
common stock. Under this option, the Company would issue one share
of its common stock for each right, subject to adjustment in certain
<PAGE>
Page 20
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
circumstances. The Company may, at its option, redeem all rights
for $.01 per right, generally at any time prior to the rights
becoming exercisable. The rights will expire on February 7, 2009,
unless earlier redeemed, exchanged or amended by the Board of
Directors.
In 1998, the Company's shareholders approved the 1998 Stock
Incentive Plan (the Plan) which permits the issuance of stock
options, stock appreciation rights (SARs), performance awards and
restricted stock awards to selected salaried employees as approved
by the Organization and Compensation Committee of the Board of
Directors. The number of shares of common stock that may be issued
or transferred under the Plan may not exceed 1,772,299 shares
(1,700,000 shares as designated in the Plan, plus 72,299 remaining
shares available for grant under terms of the prior plan).
Among other considerations, options may be granted to selected
employees to purchase common stock at prices not less than 100% of
the fair market value on the date of grant. Options expire 10 years
after date of grant. Options granted under the Plan become
exercisable ratably over a three-year period commencing one year
following date of grant. Options that expire, terminate or are
canceled without exercise are available for the grant of new awards.
Performance awards may be granted to selected employees to receive
future payments contingent on continuous service with the Company
and achievement of pre-established goals. In January 1998 and 1997,
16,925 and 44,314 shares of common stock, respectively, were
distributed to participants as performance awards under provisions
of a plan that was discontinued in 1998. At December 31, 1998,
there were no outstanding SARs, performance awards or restricted s
tock awards.
Also in 1998, the Company's shareholders approved the Non-Employee
Directors' Stock Award Plan (Directors' Plan). The Directors' Plan
provides, among other considerations, that upon election or re-
election to the Board, each eligible director will receive a stock
option covering 1,200 common shares and a stock award covering 200
common shares. Stock options are granted to purchase common stock
at the fair market value of the Company's common stock on the date
of grant. Stock options are exercisable ratably over a three-year
period commencing one year following date of grant and expire 10
years after date of grant. Stock awards vest and become payable on
the first anniversary following date of grant.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25 and related interpretations. As a
result, no compensation expense for stock options has been recognized
in the financial statements because such options were granted at
market value at date of grant. However, pro forma information
regarding net income and net income per share is required by Statement
of Financial Accounting Standards No. 123, and has been determined
for disclosure purposes as if the Company had accounted for stock
options under the fair value method as prescribed by that Statement.
The fair values of the Company's stock options were estimated as of
the dates of grant using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Risk-free interest rates 5.49% 5.8% 6.52%
Expected dividend yields 1.7% 1.9% 2.3%
Expected stock price volatility .330 .323 .319
Weighted-average expected option life 5 years 5 years 6 years
</TABLE>
<PAGE>
Page 21
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
For purposes of pro forma disclosures, the estimated fair values of
stock options are amortized to expense over the options' vesting
periods. The estimated fair value per share of options granted during
1998, 1997 and 1996 was $16.86, $13.43 and $11.36, respectively.
Pro forma income and income per share before cumulative effect of
accounting change are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Income before cumulative
effect of accounting change As reported $100,337 $100,853 $102,721
Pro forma 98,248 99,505 101,293
Diluted income per share before
cumulative effect of accounting
change As reported 3.56 3.51 3.51
Pro forma 3.48 3.46 3.46
</TABLE>
Options outstanding at December 31, 1998, with a range of exercise
prices from $22.50 to $33.75 had a weighted-average remaining
contractual life of approximately 6.4 years and options with a range
of exercise prices from $42.13 to $60.31 had a weighted-average
remaining contractual life of approximately nine years.
At December 31, 1998, the Company had 2,787,331 shares of common
stock reserved for issuance in connection with stock options.
The following table summarizes employee stock option activity:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------------------------ --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,129,911 $ 35.44 1,405,950 $ 31.30 1,164,980 $ 30.67
Granted 353,500 51.73 342,000 42.13 349,000 33.02
Exercised (195,713) 32.57 (592,041) 29.52 (86,030) 29.18
Forfeited (80,158) 42.24 (16,998) 34.77 (4,500) 33.58
Canceled (11,335) 30.96 (9,000) 33.44 (17,500) 33.52
Outstanding at December 31 1,196,205 40.30 1,129,911 35.44 1,405,950 31.30
Exercisable at December 31 587,190 34.31 587,754 32.38 1,059,950 30.74
Available for future awards
at December 31 1,491,126 58,133 391,060
</TABLE>
In addition to the above, 9,800 options and stock awards were granted
to directors in 1998 under the Directors' Plan at a weighted-average
exercise price of $60.31. All options granted were outstanding at
December 31, 1998, and none were exercisable at that date. 90,200
options are available for future awards at December 31, 1998.
<PAGE>
Page 22
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which was
adopted in 1998. Statement 131 requires that segment financial
information be reported on a basis consistent with the Company's
internal reporting used for evaluating segment performance and
allocating resources. Accordingly, in 1998, the Company changed
its business segments, which were previously based on markets
served, from Industrial, Automotive and Aerospace to Aeroquip
and Vickers. These segments reflect the way the Company is organized
and managed and how performance is measured. The Company evaluates
performance and allocates resources based on operating income before
allocation of corporate costs. Corporate costs represent the total
of corporate headquarters costs. Although Aeroquip and Vickers serve
many of the same customers and markets, they are managed separately
because of significantly different product technologies and
manufacturing processes and the differing dynamics required to serve
their customers. Amounts for prior years have been restated to
conform to the current year presentation.
The Aeroquip segment designs, manufactures and distributes fluid
connectors and plastic products. Fluid connectors include all
pressure ranges of hose and hose assemblies; fittings, adapters,
couplings and swivels; automotive air conditioning, power steering,
and oil and transmission cooler components and assemblies; tube
fittings and assemblies; refrigeration/air conditioning connectors;
clamps and V-band couplings; fuel-handling products; noise-reduction
products; chemical containment products; and electronic fluid system
products. Aeroquip plastic products include molded, extruded and
co-extruded plastic products. The Aeroquip segment serves original
equipment and aftermarket customers in industrial markets located
principally in the U.S., Europe, Asia-Pacific and Brazil; original
equipment and aftermarket customers in aerospace and defense markets
located principally in the U.S. and Europe; and automobile, light
truck, sport utility and van manufacturers in automotive markets
located principally in the U.S. and Europe.
The Vickers segment designs, manufactures and distributes power
and motion control products. Vickers products include hydraulic,
electrohydraulic, pneumatic and electronic control devices; piston
and vane pumps and motors; open architecture machine controls;
hydraulic and pneumatic cylinders; hydraulic power packages;
electric motors and drives; fuel pumps; electric motorpumps and
generator packages; electrohydraulic and electromechanical actuators;
sensors and monitoring devices; hydraulic and lubrication filtration;
and fluid-evaluation products and services. The Vickers segment
serves original equipment and aftermarket customers in industrial
markets located principally in the U.S., Europe, Asia-Pacific and
Brazil, and original equipment and aftermarket customers in aerospace
and defense markets located principally in the U.S. and Europe.
The accounting policies for the reportable segments are the same as
those described in Note 1 - Significant Accounting Policies.
Intersegment sales are not significant.
<PAGE>
Page 23
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS (Continued)
The following information relates to business segments:
<TABLE>
<CAPTION>
Reconciling
Amounts-
Corporate
and
Eliminations
Aeroquip Vickers Net Totals
---------- --------- -------------------- ----------
1998
- -----
<S> <C> <C> <C> <C>
Net sales $1,071,608 $1,077,866 $ -- $2,149,474
Depreciation and amortization 35,284 42,017 2,346 79,647
Segment income 124,295 90,407 -- 214,702 (A)
Investments in unconsolidated affiliates 1,585 -- -- 1,585
Segment assets 581,553 795,070 82,178 1,458,801
Capital expenditures 73,554 64,833 3,856 142,243
Expenditures for businesses acquired 11,762 18,979 -- 30,741
========== ========== ========== ==========
1997
- -----
Net sales $1,065,188 $1,047,105 $ -- $2,112,293
Depreciation and amortization 35,139 35,625 2,437 73,201
Segment income 89,458 132,599 -- 222,057 (A)
Investments in unconsolidated affiliates 945 637 -- 1,582
Segment assets 535,701 771,650 69,245 1,376,596
Capital expenditures 66,195 70,315 3,301 139,811
========== ========== ========== ==========
1996
- -----
Net sales $1,099,914 $ 933,001 $ -- $2,032,915
Depreciation and amortization 39,314 31,499 2,660 73,473
Segment income 96,184 110,571 -- 206,755 (A)
Investments in unconsolidated affiliates 1,041 1,152 -- 2,193
Segment assets 570,300 667,381 51,806 1,289,487
Capital expenditures 50,893 38,356 1,377 90,626
Expenditures for businesses acquired -- 42,540 -- 42,540
========== ========== ========== ==========
Note A - See following reconcilement of total segment income to
income before income taxes and cumulative effect of accounting change.
<PAGE>
Page 24
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS (Continued)
Following is a reconciliation of total segment income to income
before income taxes and cumulative effect of accounting change:
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Segment income $ 214,702 $ 222,057 $ 206,755
Less unallocated corporate costs 28,322 30,417 30,180
---------- ---------- ----------
Consolidated operating income 186,380 191,640 176,575
Interest expense (27,013) (27,171) (25,813)
Other income (expense) - net (11,830) (16,316) 2,659
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting change $ 147,537 $ 148,153 $ 153,421
========== ========== ==========
Following are net sales by product groupings:
Power and Motion Control $1,077,866 $1,047,105 $ 933,001
Fluid Connectors 929,022 858,769 824,388
Plastics 142,586 206,419 275,526
---------- ---------- ----------
$2,149,474 $2,112,293 $2,032,915
========== ========== ==========
</TABLE>
<PAGE>
Page 25
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS (Continued)
Following are net sales to external customers and plants and
properties by geographic area. Net sales are reported based on
the geographic location from which the sales originated. Amounts
reported for plants and properties are based on the country where
located.
<TABLE>
<CAPTION>
Plants and
Net Sales Properties
--------- ----------
1998
- -----
<S> <C> <C>
United States $1,394,277 $ 410,699
Europe
United Kingdom 271,660 60,768
Germany 226,786 36,040
Other Europe 140,257 17,977
---------- ----------
Total Europe 638,703 114,785
Other 116,494 22,733
---------- ----------
Totals $2,149,474 $ 548,217
========== ==========
1997
- -----
United States $1,356,334 $ 362,776
Europe
United Kingdom 245,965 52,653
Germany 252,627 26,859
Other Europe 125,548 12,693
---------- ----------
Total Europe 624,140 92,205
Other 131,819 19,161
---------- ----------
Totals $2,112,293 $ 474,142
========== ==========
1996
- -----
United States $1,291,875 $ 330,368
Europe
United Kingdom 238,590 47,754
Germany 270,254 33,063
Other Europe 117,567 10,361
---------- ----------
Total Europe 626,411 91,178
Other 114,629 15,937
---------- ----------
Totals $2,032,915 $ 437,483
========== ==========
</TABLE>
<PAGE>
Page 26
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - OTHER INFORMATION
<TABLE>
<CAPTION>
1998 1997
---------- ----------
RECEIVABLES
<S> <C> <C>
Receivables $ 356,664 $ 363,523
Less allowance for doubtful accounts 14,839 14,701
--------- ---------
$ 341,825 $ 348,822
INVENTORIES ========= =========
In-process and finished products $ 231,842 $ 239,800
Raw materials and manufacturing supplies 70,394 54,967
--------- ---------
$ 302,236 $ 294,767
========= =========
OTHER CURRENT ASSETS
Deferred income taxes $ 10,066 $ 3,679
Prepaid expenses and other current assets 42,080 45,644
--------- ---------
$ 52,146 $ 49,323
========= =========
PLANTS AND PROPERTIES - AT COST
Land and improvements $ 22,634 $ 21,458
Buildings 223,405 198,882
Machinery and equipment 801,692 694,572
Construction in progress 71,826 78,090
--------- ---------
$1,119,557 $ 993,002
========= =========
OTHER ASSETS
Goodwill, net of accumulated amortization of $17,045
and $13,077 in 1998 and 1997, respectively $ 124,890 $ 111,905
Deferred income taxes 27,711 30,958
Receivables, deposits and other assets 44,466 47,943
--------- ---------
$ 197,067 $ 190,806
========= =========
NOTES PAYABLE
Commercial paper $ 55,096 $ 36,177
Short-term notes payable to banks 46,733 47,867
--------- ---------
$ 101,829 $ 84,044
========= =========
OTHER ACCRUED LIABILITIES
Employees' compensation and amounts
withheld therefrom $ 106,502 $ 117,107
Taxes, other than income taxes 7,309 10,177
Other accrued liabilities 83,915 85,516
--------- ---------
$ 197,726 $ 212,800
========= =========
</TABLE>
<PAGE>
Page 27
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENT (Unaudited)
On February 1, 1999, Eaton Corporation and Aeroquip-Vickers, Inc.
announced that the companies had entered into an "Agreement and Plan
of Merger" whereby Eaton Corporation would acquire all of the
outstanding shares of Aeroquip-Vickers, Inc. for $58 per share in
cash. The Boards of Directors of both companies have approved the
transaction, which is subject to normal closing conditions and the
approval of Aeroquip-Vickers shareholders. The transaction is
expected to be completed in April 1999.
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Three Months Ended
----------------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 547,055 $ 574,314 $ 508,974 $ 519,131 $2,149,474
Manufacturing income 144,232 151,575 123,821 109,941 529,569
Income before cumulative
effect of accounting change 31,173 37,841 23,931 7,392 100,337
Cumulative effect of
accounting change (3,283) -- -- -- (3,283)
Net income 27,890 37,841 23,931 7,392 97,054
Basic income per share
before cumulative effect
of accounting change 1.11 1.34 .85 .27 3.58
Cumulative effect of
accounting change (.12) -- -- -- (.12)
Basic net income per share .99 1.34 .85 .27 3.46
Diluted income per share
before cumulative effect of
accounting change 1.10 1.33 .85 .27 3.56
Cumulative effect of
accounting change (.12) -- -- -- (.12)
Diluted net income per share .98 1.33 .85 .27 3.44
Average shares outstanding
Basic 28,119 28,199 28,166 27,669 28,036
Diluted 28,336 28,454 28,302 27,674 28,193
</TABLE>
<PAGE>
Page 28
QUARTERLY RESULTS OF OPERATIONS (Unaudited) (Continued)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Three Months Ended
------------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 538,426 $ 556,278 $ 494,777 $ 522,812 $2,112,293
Manufacturing income 132,475 147,037 134,406 143,707 557,625
Net income 5,694 33,630 30,104 31,425 100,853
Net income per share
Basic .20 1.20 1.07 1.12 3.60
Diluted .20 1.15 1.05 1.11 3.51
Average shares outstanding
Basic 27,974 27,948 28,153 28,150 28,050
Diluted 28,116 30,020 29,036 28,372 29,369
</TABLE>
(a) The 1998 fourth quarter includes non-recurring charges
(principally incurred severance costs) of $5 million, $3.1
million net (diluted net income per share of $.11).
(b) In 1997, the Company redeemed its outstanding 6% convertible
debentures, which were common stock equivalents. For purposes
of computing diluted net income per share in 1997, the assumed
conversion of the convertible debentures was included in average
shares outstanding as follows: 1,904,762 shares in the 1997
second quarter, 627,667 shares in the 1997 third quarter and
1,109,298 shares for the year.
(c) The 1997 first quarter included a special charge of $30 million,
$18.5 million net (diluted net income per share of $.66 [$.63
for the year]) to exit Aeroquip's automotive interior plastics
business.
(d) In the 1997 third quarter, the annual effective income tax rate
was reduced. The cumulative year-to-date adjustment increased
third-quarter net income by $1.3 million (diluted net income
per share of $.05).
(e) The 1997 fourth quarter included income amounting to $4.3 million,
$2.6 million net (diluted net income per share of $.09) from
recovery of previously incurred development and pre-production
costs with a Vickers aerospace customer arising from the
termination of a component design and production supply contract,
reduced by a charge of $2.6 million, $1.6 million net (diluted
net income per share of $.05) to recognize a product liability
claim from an Aeroquip industrial customer for a unique product
that is no longer manufactured.
<PAGE>
Page 29
Item 14(a)(2)
Schedule II - Valuation and Qualifying Accounts
Aeroquip-Vickers, Inc.
[CAPTION]
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- -----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 14,701 $ 4,770 $ - $ 4,632 -A $ 14,839
Deferred tax valuation allowance 6,816 7,927 - (1,810)-B 12,969
36 -C
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 16,032 $ 1,485 $ - $ (2,816)-A $ 14,701
Deferred tax valuation allowance 12,589 (1,767) - (2,064)-B 6,816
(1,942)-C
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 13,241 $ 3,899 $ - $ (1,108)-A $ 16,032
Deferred tax valuation allowance 15,953 (3,853) - 489 -B 12,589
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Currency translation adjustments
<PAGE>
Page 30
2) EATON CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements have been prepared by Eaton's management. These
financial statements reflect Eaton's acquisition of Aeroquip-
Vickers, Inc. (A-V), and combine, for the indicated date
or period, the historical consolidated financial statements of
Eaton and A-V, 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 A-V.
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.
<PAGE>
Page 31
The pro forma financial statements have been prepared using the
following facts and assumptions:
- - Eaton acquires the common stock and common stock equivalents of
A-V in exchange for a total cash payment of $1.623 billion.
- - Eaton borrows $1.623 billion to finance the acquisition.
- - The assets acquired and liabilities assumed of A-V 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 A-V. 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 A-V is subject to revision as a result of
the final determination of appraised and other fair values.
As a result of the acquisition of A-V, Eaton will incur costs to
1) exit and consolidate activities at A-V and Eaton locations,
2) involuntarily terminate and relocate employees of A-V and Eaton
and 3) integrate operating locations and other activities of A-V
and Eaton (integration costs). Generally accepted accounting
principles require that the A-V integration costs be reflected as
assumed liabilities in the allocation of the purchase price of A-V
to the net assets of A-V acquired. These same accounting rules
require that Eaton integration costs be recorded as expense as
incurred subsequent to the acquisition date. As a result, Eaton
integration costs are not reflected in the pro forma financial
statements.
The unaudited pro forma combined condensed balance sheet includes an
adjustment to record 1) a current liability of $19 million for the
estimated transaction costs related to the acquisition of A-V and
2) assumed liabilities of $64 million for estimated A-V integration
costs based on Eaton's preliminary integration plan ($30 million as
a current liability and $34 million as a long-term liability). As
noted in public statements regarding the acquisition of A-V, Eaton
has put in place a series of integration teams who are charged with
formalizing the integration plans and restructuring opportunities for
each of the A-V businesses. As Eaton is approaching this effort with
the intent of minimizing disruption of the ongoing businesses and the
external parties with whom they regularly interface, Eaton is
determined to fully understand the major issues before proceeding
with definitive action. Accordingly, at this juncture, the preliminary
integration plan cannot yet be discussed with a great deal of
specificity. In general terms, Eaton will be focusing on three key
areas of integration: 1) manufacturing process and supply chain
rationalization, including plant closings, 2) elimination of redundant
administrative overhead and support activities, including the
consolidation of administrative functions currently performed at
A-V's world headquarters in Maumee, Ohio, and 3) restructuring and
repositioning of the sales/marketing and research and development
organizations to eliminate redundancies in these activities. Based
on the preliminary integration plan, it is expected that A-V
integration costs will approximate $33 million for employee severance
and relocation, $28 million for manufacturing relocation and plant
closings, and $3 million of other related costs. It is expected that
a large portion of the actions currently being planned will be
implemented within the next one to two years.
All aspects of Eaton's preliminary integration plan will be re-
examined after the acquisition date. As a result, the estimated
assumed liabilities of $64 million for A-V integration costs will
be adjusted accordingly. Major unresolved issues in the evaluation
of the integration plan include capacity of existing and acquired
facilities to accomodate new manufacturing and administrative
processes and also the appropriate positioning of the sales/marketing
and research and development organizations to best serve customer
needs. Adjustments of the $64 million of assumed liabilities related
to estimated A-V integration costs will be included in the allocation
of the aggregate purchase price of A-V, if the adjustment is
determined within the purchase price allocation period (normally
no longer than one year after the date of the acquisition).
Adjustments of these estimated liabilities that are determined after
the end of the purchase price allocation period will be 1) recorded
as a reduction of net income, if the ultimate amount of the liability
exceeds the estimate, or 2) recorded as a reduction of the excess
of the purchase price of A-V over the net assets of A-V acquired,
if the ultimate amount of the liability is below the estimate.
The pro forma results do not reflect the planned sale of Eaton's
Engineered Fasteners and Fluid Power Divisions announced on March 25,
1999. For 1998, Engineered Fasteners and Fluid Power reported net
sales of $94 million and $189 million, respectively, and total assets
at February 28, 1999 of $40 million and $94 million, respectively.
Proceeds from the sales of these businesses will be used to reduce
the number of Common Shares that Eaton plans to sell in the future
to refinance the $1.623 billion cost of the acquisition of A-V.
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. Although Eaton intends to
complete the sales of these businesses in 1999, no buyer has yet been
identified, and, as a result, Eaton will not speculate on the sales
price it might receive for the businesses.
The pro forma results do not reflect a $3 million aftertax expense
recorded by A-V 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, incorporated by reference from its Amended 1998 Form 10-K
filed on May 11, 1999, and of A-V included in this Form 8-K.
<PAGE>
Page 32
<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
968 2n 1,993
Deferred income taxes & other assets 607 72 (5)2f 674
----- ----- ----- -----
$5,665 $1,459 $1,251 $8,375
===== ===== ===== =====
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
115 2l 542
Shareholders' equity
A-V 569 (569)2m 0
Eaton 2,057 2,057
----- ----- ----- -----
$5,665 $1,459 $1,251 $8,375
===== ===== ===== =====
See accompanying notes.
</TABLE>
<PAGE>
Page 33
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The pro forma adjustments to give effect to Eaton's acquisition of
A-V, 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 has issued $200
million of notes payable due in 2000 and intends, and has the ability
under a new $500 million five-year revolving credit agreement 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 A-V, and the
recognition of the excess of the purchase price over the estimated
fair value of net assets of A-V acquired, is a follows (in millions):
Adjustments
-----------
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 A-V's
acquisitions of businesses in prior years (125)
2f Eliminate deferred financing costs of A-V (5)
2g Record estimated current liabilities of $30
million related to post-acquisition integration
of A-V's locations, employees, and other
costs, and $19 million of transaction
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 A-V's locations, employees, and other
costs (34)
2l Record deferred income taxes for the above
adjustments, except for adjustment 2e
which is nontaxable, assuming a 35%
income tax rate (113)
2m Eliminate shareholders' equity of A-V
prior to pro forma adjustments 569
2n Record preliminary estimate of excess of
cost over net assets of A-V acquired 968
-----
Purchase price $1,623
=====
<PAGE>
Page 34
<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
----- -------- ----- --------
<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
(2)1d
(5)1e
12 1f
24 1g 6,449
Selling & administrative 1,050 272 1,322
Research & development 334 72 (32)1a 374
----- ----- ----- -----
6,143 1,964 38 8,145
----- ----- ----- -----
Income from operations 482 186 (38) 630
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
----- ----- ----- -----
3 (39) (98) (134)
----- ----- ----- -----
Income before income taxes 485 147 (136) 496
Income taxes 136 47 (41)1j 142
----- ----- ----- -----
Net income $ 349 $ 100 $ (95) $ 354
===== ===== ===== =====
Net income per Common Share (1k) -
Assuming dilution $ 4.80 $ 4.87
Basic 4.89 4.96
Average number of Common Shares
outstanding (in millions) -
Assuming dilution 72.7 72.7
Basic 71.4 71.4
See accompanying notes.
</TABLE>
<PAGE>
Page 35
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
The pro forma adjustments to give effect to Eaton's acquisition of
A-V, and the estimated purchase price allocation for the year ended
December 31, 1998, are as follows (in millions):
1a Reclassify engineering expenses of A-V 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 of A-V 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, principally start-up
activities, deferred by A-V
1e Eliminate amortization of the excess of cost over net assets
acquired related to A-V's 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 A-V 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.
<PAGE>
Page 36
Exhibit 23
Consent of Independent Auditors
We consent to the use of our report dated January 27, 1999, with
respect to the consolidated financial statements and schedule of
Aeroquip-Vickers, Inc. and subsidiaries included in the Current
Report on Form 8-K/A dated April 22, 1999, as amended, of Eaton
Corporation.
/s/ Ernst & Young, LLP
Toledo, Ohio
May 10, 1999
<PAGE>
Page 37
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
-----------------
/s/ Billie K. Rawot
-----------------------------
Billie K. Rawot
Vice President and Controller
Principal Accounting Officer
Date: May 10, 1999
<PAGE>
