United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1999
--------------
Commission file number 1-1396
------
Eaton Corporation
- -------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
- -------------------------------------------------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
- -------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
- -------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months
and (2) has been subject to such filing requirements for the past
ninety days. Yes X
---
There were 71.8 million Common Shares outstanding as of March 31,
1999.
<PAGE>
Page 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
(Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 20 $ 80
Short-term investments 20 42
Accounts receivable 1,018 885
Inventories 714 707
Deferred income taxes & other
current assets 290 268
------ ------
2,062 1,982
Property, plant & equipment 1,781 1,837
Excess of cost over net assets of
businesses acquired 1,015 1,025
Deferred income taxes & other assets 806 821
------ ------
$5,664 $5,665
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of
long-term debt $ 398 $ 333
Accounts payable & other current
liabilities 1,181 1,183
------ ------
1,579 1,516
Long-term debt 1,188 1,191
Postretirement benefits other than pensions 561 557
Other liabilities 318 344
Shareholders' equity 2,018 2,057
------ ------
$5,664 $5,665
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 3
Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended
March 31
------------------
(Millions except for per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $1,661 $1,687
Costs & expenses
Cost of products sold 1,172 1,207
Selling & administrative 275 263
Research & development 71 82
------ ------
1,518 1,552
------ ------
Income from operations 143 135
Other income (expense)
Interest expense - net (21) (21)
Gain on sales of businesses 43
Other - net 1 (2)
------ ------
(20) 20
------ ------
Income before income taxes 123 155
Income taxes 39 50
------ ------
Net income $ 84 $ 105
====== ======
Net income per Common Share
Assuming dilution $ 1.17 $ 1.42
Basic 1.18 1.45
Average number of Common Shares outstanding
Assuming dilution 72.2 73.7
Basic 71.2 72.0
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
</TABLE>
<PAGE>
Page 4
Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Three Months Ended
March 31
------------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net cash (used in) provided by operating activities
Net income $ 84 $ 105
Adjustments to reconcile to net cash (used in)
provided by operating activities
Depreciation & amortization 86 81
Gain on sales of businesses (43)
Changes in operating assets & liabilities,
excluding acquisitions and sales of
businesses (194) (138)
Other - net 17 (4)
----- -----
(7) 1
Net cash (used in) provided by investing activities
Acquisitions of businesses, less cash acquired (11) (77)
Sales of businesses 295
Expenditures for property, plant & equipment (77) (58)
Other - net 6 2
----- -----
(82) 162
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than
three months
Proceeds 103 461
Payments (284) (129)
Borrowings with original maturities of less than
three months - net 249 (144)
Cash dividends paid (32) (32)
Purchase of Common Shares (338)
Other (7) 12
----- -----
29 (170)
----- -----
Decrease in cash (60) (7)
Cash at beginning of year 80 53
----- -----
Cash at end of period $ 20 $ 46
===== =====
See accompanying notes.
</TABLE>
<PAGE>
Page 5
The following notes are included in accordance with the requirements
of Regulation S-X and Form 10-Q:
All references to net income per Common Share assume dilution, unless
otherwise indicated.
Preparation of Financial Statements
- -----------------------------------
The condensed consolidated financial statements of Eaton Corporation
(Eaton or the Company) are unaudited. However, in the opinion of
management, all adjustments have been made which are necessary for a
fair presentation of financial position, results of operations and
cash flows for the stated periods. These financial statements should
be read in conjunction with the consolidated financial statements and
related notes included in the Company's 1998 Annual Report on Form
10-K. The interim period results are not necessarily indicative of
the results to be expected for the full year.
Subsequent Event
- ----------------
On April 9, 1999, the Company purchased all of the outstanding common
stock of Aeroquip-Vickers, Inc., for approximately $1.6 billion in
cash. For 1998, Aeroquip-Vickers had sales of $2.15 billion, pretax
income of $148 million, net income of $97 million, and net assets of
$569 million. The acquisition will be accounted for by the purchase
method of accounting. Funds for the purchase were primarily obtained
through the issuance of commercial paper. This acquisition is more
fully discussed on pages 12 and 13 of this report.
Unusual Charges
- ---------------
Income in the first quarter of 1998 was reduced by unusual pretax
charges of $43 million ($28 million aftertax, or $.38 per Common
Share). The Company recorded $33 million of restructuring charges
which reduced operating profit of the Automotive Components segment
by $8 million, the Industrial and Commercial Controls segment by $15
million and the Truck Components segment by $10 million. These
charges, which are included in the Statement of Consolidated Income
in Income from Operations, related to workforce reductions, asset
write-downs and other restructuring actions. The Company also
recorded a $10 million contribution to its charitable trust which is
included in Other Expense. These charges are more fully discussed in
the Company's 1998 Annual Report on Form 10-K in the Unusual Charges
footnote and throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Gain on Sales of Businesses
- ---------------------------
On January 2, 1998, the Company completed the sale of the Axle and
Brake business to Dana Corporation. The sale of this business, and
an adjustment related to a business sold in a prior period, resulted
<PAGE>
Page 6
in a pretax gain of $43 million ($28 million aftertax, or $.38 per
Common Share).
Comprehensive Income
- --------------------
The principal difference between net income as historically reported
in the Statements of Consolidated Income and comprehensive income are
foreign currency translation adjustments recorded in Shareholders'
Equity. Comprehensive income (loss) is as follows (in millions):
Three Months Ended
March 31
-------------------
1999 1998
---- ----
Net income $ 84 $105
Foreign currency translation
and other adjustments (in
1999, primarily relates
to operations in Brazil) (99) 15
---- ----
Comprehensive income (loss) $(15) $120
==== ====
Inventories
- -----------
March 31, December 31,
(Millions) 1999 1998
---- ----
Raw materials $281 $282
Work-in-process and
finished goods 502 494
---- ----
Gross inventories at FIFO 783 776
Excess of current cost
over LIFO cost (69) (69)
---- ----
Net inventories $714 $707
==== ====
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share - assuming dilution
and basic follows (millions except for per share data):
Three Months Ended
March 31
------------------
1999 1998
---- ----
Net income $ 84 $ 105
==== ====
<PAGE>
Page 7
Average number of Common Shares
outstanding-assuming dilution 72.2 73.7
Less dilutive effect of stock
options 1.0 1.7
---- ----
Average number of Common Shares
outstanding-basic 71.2 72.0
==== ====
Net income per Common Share
Assuming dilution $1.17 $1.42
Basic 1.18 1.45
Summary Financial Information for Eaton ETN Offshore Ltd.
- ---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned subsidiary
of Eaton, was incorporated by Eaton in 1990 under the laws of
Ontario, Canada, primarily for the purpose of raising funds through
the offering of debt securities in the United States and making these
funds available to Eaton or its subsidiaries. Eaton Offshore owns
the common stock of a number of Eaton's subsidiaries which are engaged
principally in the manufacture and/or sale of electrical and
electronic controls, truck transmissions, fasteners and engine
components. On April 1, 1998, the division that manufactured leaf
spring assemblies was sold. Summary financial information for Eaton
Offshore and its consolidated subsidiaries is as follows (in millions):
Three Months Ended
March 31
------------------
1999 1998
---- ----
Income statement data
Net sales $111 $181
Gross profit 30 41
Net income 2 18
March 31, December 31,
1999 1998
---- ----
Balance sheet data
Current assets $320 $336
Noncurrent assets 198 248
Net intercompany payables 121 132
Current liabilities 114 104
Noncurrent liabilities 110 108
Minority interest (4) 21
<PAGE>
Page 8
Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three Months Ended
March 31
------------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net Sales
Automotive Components $ 532 $ 492
Hydraulics & Other Components 145 162
Industrial & Commercial Controls 551 551
Semiconductor Equipment 57 79
Truck Components 376 372
------ ------
Total ongoing operations 1,661 1,656
Divested operations 31
------ ------
Total net sales $1,661 $1,687
====== ======
Operating profit
Automotive Components $ 68 $ 59
Hydraulics & Other Components 20 30
Industrial & Commercial Controls 34 31
Semiconductor Equipment (12) (14)
Truck Components 64 57
------ ------
Total ongoing operations 174 163
Divested operations (1)
Amortization of certain intangible assets (17) (16)
Interest expense - net (21) (21)
Gain on sales of businesses 43
Corporate & other - net (13) (13)
------ ------
Income before income taxes $ 123 $ 155
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Sales for the first quarter of 1999 were $1.66 billion, a decrease of
2% from the comparable period in 1998. Excluding divested operations,
sales were nearly equal to 1998 results. Net income in the first
quarter of 1999 was $84 million compared to last year's $105 million.
First quarter 1999 fully diluted earnings per share were $1.17, down
18% from last year's first quarter record of $1.42.
During the first quarter of 1998, the Company recorded a net pretax
gain of $43 million, related principally to the January 2, 1998 sale
of its worldwide Axle and Brake business to Dana Corporation. This
gain was entirely offset by charges of $33 million related to
restructuring actions and a $10 million contribution to the Company's
charitable trust.
Automotive Components
- ---------------------
Automotive Components sales in the first quarter of 1999 reached a
record $532 million, increasing 8% from comparable 1998 results.
Excluding the 1998 acquisitions of G.T. Products and Amtec, sales
increased 4%, slightly ahead of the 2% increase in production of
light vehicles in the Americas and Europe.
Operating profit for the first quarter of 1999 was $68 million, an
increase of 15% compared to the same period in 1998. Before
restructuring charges of $8 million recorded in the first quarter of
1998, operating profit in 1999 was 1% ahead of last year's results.
Hydraulics & Other Components
- -----------------------------
Hydraulics and Other Components sales in the first quarter of 1999
were $145 million, 10% below last year's comparable record volume
of $162 million and marginally better than the 13% year-to-year
decline in North American mobile equipment shipments.
<PAGE>
Page 10
Operating profit was $20 million for the first quarter of 1999,
down 33% compared to the same period in 1998. Although operating
margins were well below the boom conditions experienced in early
1998, first quarter 1999 operating margins were above those of last
year's second half. The Company appears to have seen the worst of
the Asian crisis' impact on customers' orders, but does not anticipate a
meaningful upturn before this year's second half.
Industrial & Commercial Controls
- --------------------------------
Industrial and Commercial Controls sales reached $551 million in the
first quarter of 1999, unchanged from first quarter 1998. This was
consistent with the North American market for electrical distribution
equipment and industrial controls which was flat year-to-year. A
modest increase in Cutler-Hammer sales, especially the new Engineering
Services and Systems business, was offset by weakness in the
commercial and aerospace markets.
Operating profit for the first quarter of 1999 was $34 million, an
increase of 10% compared to the same period in 1998. Before
restructuring charges of $15 million recorded in the first quarter of
1998, 1999 operating profit was 26% below last year's results.
Profits were hurt by weakness in the commercial and aerospace markets
as well as the continued costs of building Cutler-Hammer's new
Engineering Services and Systems business.
Semiconductor Equipment
- -----------------------
Semiconductor Equipment sales in the first quarter of 1999 were $57
million, 28% below last year's comparable results. However, higher
industry orders, which have been rising for nearly 9 months, and a
rising backlog for semiconductor capital equipment should help buoy
shipments for the remainder of the year. The Company's first quarter
orders were the best in over a year, increasing confidence that this
segment may achieve at least a break-even performance in 1999 compared
to an operating loss of $80 million in 1998, before $43 million of
restructuring charges.
This segment reported an operating loss of $12 million in the first
quarter of 1999, an improvement of $2 million compared to one year
ago. Despite much lower sales, the better results can be attributed
to the initial impact of last year's third quarter operational
restructuring.
<PAGE>
Page 11
Truck Components
- ----------------
Truck Components sales in the first quarter of 1999 were a record
$376 million, 1% above last year's comparable results. The Brazilian
devaluation in the first quarter of 1999 reduced sales by $14
million, but was offset by a 5% year-to-year increase in volume,
consistent with the rise in medium and heavy truck production in
the Americas and Europe.
Operating profits in the first quarter of 1999 were $64 million, an
increase of 12% compared to the same period in 1998. Before
restructuring charges of $10 million recorded in the first quarter of
1998, operating profit was 4% below last year's results.
Changes in Financial Condition
- ------------------------------
The Company remained in a strong financial position at March 31, 1999;
net working capital increased to $483 million at March 31, 1999 from
$466 million at the end of 1998 (the current ratio was 1.3 at each of
those dates).
Cash flow from operations, supplemented by commercial paper borrowings,
was used to fund changes in working capital accounts, capital
expenditures, acquisitions of businesses, repayment of debt and cash
dividends.
During the first quarter of 1999, the Brazilian real currency devalued
by 43%. The effect of this devaluation on the net assets of the
Company's operations in Brazil resulted in a $74 million foreign
currency translation loss which was recorded directly in Shareholders'
Equity, through comprehensive income, in the first quarter.
During the first quarter of 1999, the Company announced the intention
to divest the Engineered Fasteners and Fluid Power divisions. These
operations had combined 1998 sales of $283 million. The proceeds
from these divestitures will be used to reduce the sale of Common
Shares related to refinancing the $1.6 billion cost of the acquisition
of Aeroquip-Vickers, Inc., which was completed on April 9, 1999.
In anticipation of the acquisition of Aeroquip-Vickers, on April 5,
1999, the Company issued $200 million of floating rate notes maturing
April 2000. The Company also entered into an additional $500
million revolving credit facility with a five-year term and a $1.3
billion credit facility with a 364-day term. This increased the
Company's total credit facilities to approximately $3 billion. The
purchase of Aeroquip-Vickers was primarily funded through the issuance
of commercial paper which is supported by these credit facilities.
<PAGE>
Page 12
Year 2000
- ---------
Like most companies, Eaton is impacted by computer software that
relies on two digits in the date fields in order to function properly.
Software that uses two digits rather than four to identify the
applicable year may be unable to interpret appropriately the calendar
Year 2000, and thus could cause disruption of normal business
activities. The Company relies on software in various aspects of
the business including manufacturing, product development, many
administrative functions and certain products. Much of this software
may be unable to interpret the calendar Year 2000 appropriately
without some form of remediation.
As is more fully described in the Company's 1998 Annual Report on
Form 10-K, the Company's program to address the Year 2000 issue
involves a combination of hardware and software modifications,
upgrades and replacements. The Company is on target to complete
the majority of the program by mid-year 1999. The current estimate
of total Year 2000 program costs is approximately $95 milion, of
which approximately 80% has been incurred.
The Company believes that it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, satisfactory
completion of the program may not prevent business disruptions
resulting from actions of critical suppliers and customers. Such
disruptions would impair the Company's ability to obtain necessary
materials for production or sell products to customers. If such a
disruption occurred, the Company may experience lost or delayed
sales and profits depending on the duration of the disruption.
Key aspects of the program are addressing this uncertainty but the
Company's ability to be fully confident of conditions related to
third parties is limited. Currently, the Company cannot reasonably
estimate the amount of potential lost or delayed sales and profits.
Subsequent Event
- ----------------
On April 9, 1999, the Company purchased all of the outstanding common
stock of Aeroquip-Vickers, Inc., for approximately $1.6 billion in cash.
Aeroquip-Vickers is comprised of two principal subsidiaries:
Aeroquip Corporation and Vickers, Inc. 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
<PAGE>
Page 13
and hydraulic controls; electric motors and drives; filtration products;
and fluid-evaluation products and services. For 1998, Aeroquip-Vickers
had sales of $2.15 billion, pretax income of $148 million, net income
of $97 million, and net assets of $569 million. The acquisition will
be accounted for by the purchase method of accounting. The purchase
of Aeroquip-Vickers was primarily funded through the issuance of
commercial paper.
The results of operations for Aeroquip-Vickers for the three months
ended March 31, 1999 and 1998, which are not included in Eaton's first
quarter results, are summarized below (in millions):
1999 1998
---- ----
Total sales
Aeroquip $287 $266
Vickers 251 281
---- ----
$538 $547
==== ====
Operating income
Aeroquip $ 33 $ 32
Vickers 4 33
Corporate (7) (7)
---- ----
30 58
Interest expense 7 7
Other expense 5 5
---- ----
Pretax income 18 46
Income taxes 6 15
---- ----
Net income $ 12 $ 31
==== ====
First quarter 1999 operating income of $4 million for the Vickers
segment was 88% or $29 million below operating income of $33
million in the first quarter of 1998, on a sales reduction of 11%
or $30 million. Vickers' results were negatively impacted in
comparison to one year ago as the trends and weaknesses noted in
the fourth quarter of 1998 continued. Sales in all major
industrial markets declined from 1998, particularly for agricultural
and electronic machine control products. Profits were resultingly
lower than one year ago due to lower volumes, shift in sales mix,
start-up costs for new operations and charges of $8 million
related to a potential product performance claim and a supplier
dispute.
Forward-Looking Statements
- --------------------------
The forward-looking statements in this Form 10-Q relating to the
slowdown of the Hydraulics and Other Components business segment,
the operating results of the Semiconductor Equipment business segment
and the Year 2000 computer software issue should be used with caution.
They are subject to various risks and uncertainties, many of which
are outside the control of the Company. Important factors which could
cause actual results to differ materially from those in the forward-
looking statements include the Company's ability to successfully
implement the integration of Aeroquip-Vickers, changes in global
economic and financial conditions, the markets for the products to
which the forward-looking statements relate, costs and disruptions
associated with the Year 2000 issue and the impact of the conversion
to the Euro currency. The Company assumes no obligation to update
these forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A discussion of market risk exposures is included in Part II,
Item 7A, "Quantitative and Qualitative Disclosure about Market Risk",
of the Company's 1998 Annual Report on Form 10-K. There were no
material changes during the three months ended March 31, 1999.
<PAGE>
Page 14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 28,
1999, at which shareholders re-elected four directors and ratified
the appointment of the accounting firm of Ernst & Young LLP as the
Company's independent auditors for 1999.
Results of the voting in connection with each issue were as follows:
Voting on Directors For Withheld Total
- ------------------- --- -------- -----
Ned C. Lautenbach 64,013,142 859,139 64,872,281
John R. Miller 64,026,338 845,943 64,872,281
Furman C. Moseley 63,985,579 886,702 64,872,281
Victor A. Pelson 64,026,545 845,736 64,872,281
Ratification of Independent Auditors
- ------------------------------------
In Favor 64,179,190
Against 427,624
Abstain 265,467
----------
Total 64,872,281
==========
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On March 29, 1999, the Company filed a Current Report on
Form 8-K which included unaudited pro forma combined condensed
financial statements for 1998 reflecting Eaton's acquisition
of Aeroquip-Vickers, Inc. and the announcement of Eaton's
intention to sell the Engineered Fasteners and Fluid Power
divisions.
2. On April 9, 1999, the Company filed a Current Report on Form
8-K regarding the completion of the acquisition of Aeroquip-
Vickers, Inc.
3. A Current Report on Form 8-K dated April 22, 1999, as amended
on May 11, 1999, was filed by the Company which included the
audited historical financial statements of Aeroquip-Vickers, Inc.
for 1998 and unaudited pro forma combined condensed financial
statements for 1998 reflecting Eaton's acquisition of Aeroquip-
Vickers.
<PAGE>
Page 15
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Date: May 14, 1999 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning
Officer; Principal Financial
Officer
<PAGE>
Page 16
EATON CORPORATION
EXHIBIT INDEX
Regulation S-K,
Item 601 - Exhibit
Reference Number Exhibit
- ------------------ -------
4 Pursuant to Regulation S-K
Item 601 (b)(4), the Company
agrees to furnish to the
Commission, upon request, a copy
of the instruments defining
the rights of holders of long-term
debt of the Company and its
subsidiaries.
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and the Statements of Consolidated Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 20
<SECURITIES> 20
<RECEIVABLES> 1,034
<ALLOWANCES> 16
<INVENTORY> 714
<CURRENT-ASSETS> 2,062
<PP&E> 3,333
<DEPRECIATION> 1,552
<TOTAL-ASSETS> 5,664
<CURRENT-LIABILITIES> 1,579
<BONDS> 1,188
0
0
<COMMON> 36
<OTHER-SE> 1,982
<TOTAL-LIABILITY-AND-EQUITY> 5,664
<SALES> 1,661
<TOTAL-REVENUES> 1,661
<CGS> 1,172
<TOTAL-COSTS> 1,518
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 123
<INCOME-TAX> 39
<INCOME-CONTINUING> 84
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.17
</TABLE>
