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 June 30, 1999
-------------
Commission file number 1-1396
------
Eaton Corporation
- -------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
- -------------------------------------------------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
- -------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
- -------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
twelve months and (2) has been subject to such filing
requirements for the past ninety days.
Yes X
---
There were 72.2 million Common Shares outstanding as of June 30, 1999.
<PAGE>
Page 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
(Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash & short-term investments $ 44 $ 122
Accounts receivable 1,429 885
Inventories 982 707
Deferred income taxes & other
current assets 323 268
------ ------
2,778 1,982
Property, plant & equipment 2,393 1,837
Excess of cost over net assets of
businesses acquired 1,977 1,025
Other intangible assets 486 214
Deferred income taxes & other assets 707 607
------ ------
$8,341 $5,665
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of
long-term debt $1,578 $ 333
Accounts payable & other current
liabilities 1,483 1,183
------ ------
3,061 1,516
Long-term debt 2,008 1,191
Postretirement benefits other than pensions 665 557
Other liabilities 482 344
Shareholders' equity 2,125 2,057
------ ------
$8,341 $5,665
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 3
Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Millions except for per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $2,300 $1,712 $3,961 $3,399
Costs & expenses
Cost of products sold 1,643 1,200 2,815 2,407
Selling & administrative 354 264 629 527
Research & development 77 82 148 164
------ ------ ------ ------
2,074 1,546 3,592 3,098
------ ------ ------ ------
Income from operations 226 166 369 301
Other income (expense)
Interest expense - net (44) (23) (65) (44)
Gain on sales of businesses 43
Other - net 4 18 5 16
------ ------ ------ ------
(40) (5) (60) 15
------ ------ ------ ------
Income before income taxes 186 161 309 316
Income taxes 61 47 100 97
------ ------ ------ ------
Net income $ 125 $ 114 $ 209 $ 219
====== ====== ====== ======
Net income per Common Share
Assuming dilution $ 1.71 $ 1.57 $ 2.88 $ 2.98
Basic 1.74 1.60 2.92 3.05
Average number of Common Shares outstanding
Assuming dilution 72.8 72.8 72.5 73.3
Basic 71.7 71.1 71.5 71.6
Cash dividends paid per Common Share $ .44 $ .44 $ .88 $ .88
See accompanying notes.
</TABLE>
<PAGE>
Page 4
Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Six Months Ended
June 30
----------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 209 $ 219
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 201 163
Gain on sales of businesses (43)
Changes in operating assets & liabilities,
excluding acquisitions and sales of
businesses (319) (263)
Other - net 60 (4)
------ ------
151 72
Net cash (used in) provided by investing activities
Acquisitions of businesses, less cash acquired (1,593) (79)
Sales of businesses 359
Expenditures for property, plant & equipment (183) (150)
Other - net (8) 4
------ ------
(1,784) 134
Net cash provided by (used in) financing activities
Borrowings with original maturities of more
than three months
Proceeds 820 801
Payments (670) (477)
Borrowings with original maturities of less
than three months - net 1,481 (145)
Cash dividends paid (63) (63)
Purchase of Common Shares (347)
Other - net 11 16
------ ------
1,579 (215)
------ ------
Decrease in cash (54) (9)
Cash at beginning of year 80 53
------ ------
Cash at end of period $ 26 $ 44
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 5
The following notes are included in accordance with the
requirements of Regulation S-X and Form 10-Q:
All references to net income per Common Share assume
dilution, unless otherwise indicated.
Preparation of Financial Statements
- -----------------------------------
The condensed consolidated financial statements of Eaton
Corporation (Eaton or the Company) are unaudited. However,
in the opinion of management, all adjustments have been made
which are necessary for a fair presentation of financial
position, results of operations and cash flows for the
stated periods. These financial statements should be read in
conjunction with the consolidated financial statements and
related notes included in the Company's 1998 Annual Report
on Form 10-K. The interim period results are not necessarily
indicative of the results to be expected for the full year.
Acquisition of Aeroquip-Vickers, Inc.
- -------------------------------------
On April 9, 1999, the Company completed the acquisition of
Aeroquip-Vickers, Inc. (A-V) for approximately $1.6 billion
in cash. A-V, which had 1998 sales of $2.1 billion, is
comprised of two principal subsidiaries: Aeroquip
Corporation and Vickers, Incorporated. Aeroquip Corporation
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, Incorporated 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 acquisition has been accounted for by the purchase
method of accounting, and accordingly, the statements of
consolidated income include the results of A-V beginning
April 9, 1999. The assets acquired and liabilities assumed
were recorded at estimated fair values as determined by
Eaton's management based on information currently available
and on current assumptions as to future operations. The
allocation of the purchase price to the assets acquired and
liabilities assumed is subject to revision as a result of
the final determination of appraised and other fair values.
For financial statement purposes, the excess of cost over
net assets acquired is amortized by the straight-line method
over forty years. A summary of the assets acquired and
liabilities assumed in the acquisition follows (in
millions):
Estimated fair values
Assets acquired $1,741
Liabilities assumed (1,094)
Excess of cost over net assets acquired 976
------
Purchase price $1,623
Less cash acquired & liability for
outstanding shares (42)
------
Net cash paid $1,581
======
<PAGE>
Page 6
Funds for the purchase were primarily obtained through the
issuance of commercial paper. Of the commercial paper
issued, $500 million is classified as long-term debt because
the Company intends, and has the ability under a five-year
credit agreement, to refinance this debt on a long-term
basis.
Unaudited pro forma results of operations for the six month
periods ended June 30, 1999 and 1998, as if Eaton and A-V
had been combined as of the beginning of those periods,
follow (in millions). The pro forma results include
preliminary estimates and assumptions which Eaton's
management believes are reasonable. However, the pro forma
results do not include any cost savings or other effects of
the planned integration of Eaton and A-V, and are not
necessarily indicative of the results which would have
occurred if the business combination had been in effect on
the dates indicated, or which may result in the future.
Pro forma
Six months ended
June 30
----------------
1999 1998
---- ----
Net sales $4,499 $4,521
Net income 198 240
Net income per Common Share
Assuming dilution $ 2.73 $ 3.27
Basic 2.77 3.35
Business Segment Reporting
- --------------------------
As announced on July 15, 1999, due to the recent acquisition
of A-V, and the planned divestitures of the Fluid Power,
Engineered Fasteners and Vickers Electronics Systems
divisions, the Company has realigned its business segment
reporting. Principal changes include: Hydraulics and Other
Components has been renamed Fluid Power and Other Components
and will include the operating results of A-V; Aerospace
Controls has been reclassified from Industrial and
Commercial Controls to Fluid Power and Other Components; the
Trucking Information Systems Division and Eaton VORAD have
been reclassified from Automotive Components to Truck
Components; and the operating results of the Fluid Power and
Engineered Fasteners divisions, included in Automotive
Components and Hydraulics and Other Components,
respectively, have been reclassified to Divested Operations
due to their expected divestiture. Prior periods have been
reclassified to conform to the current presentation.
Subsequent Events
- -----------------
In July 1999, in order to partially refinance the cost of
the acquisition of A-V, the Company sold 1.625 million
Common Shares for net proceeds of $147 million.
On July 13, 1999, Eaton announced it had signed a definitive
agreement to sell the Engineered Fasteners business to
TransTechnology Corporation for $173 million cash. The sale
is expected to be completed by September 1, 1999. On August
3, 1999, Eaton announced it had entered into a definitive
agreement to sell the Fluid Power Division to Borg-Warner
Automotive, Inc. for $310 million. The sale is expected to
be completed in the second half of 1999.
<PAGE>
Page 7
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
& 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 in a pretax gain of $43 million
($28 million aftertax, or $.38 per Common Share), which was
recorded in the first quarter of 1998. On April 1, 1998,
the Company completed the sale of its automotive leaf spring
business. The operating results of these businesses are
included in Divested Operations.
Comprehensive Income
- --------------------
The principal difference between net income as historically
reported in the statements of consolidated income and
comprehensive income are foreign currency translation
adjustments recorded in Shareholders' Equity. Comprehensive
income is as follows (in millions):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $125 $114 $209 $219
Foreign currency translation
and other adjustments (in
the first quarter of 1999,
primarily relates to
operations in Brazil) (9) (2) (108) 13
---- ---- ---- ----
Comprehensive income $116 $112 $101 $232
==== ==== ==== ====
</TABLE>
<PAGE>
Page 8
Inventories
- -----------
June 30, December 31,
(Millions) 1999 1998
---- ----
Raw materials $ 355 $ 282
Work-in-process and
finished goods 696 494
------ ------
Gross inventories at FIFO 1,051 776
Excess of current cost
over LIFO cost (69) (69)
------ ------
Net inventories $ 982 $ 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):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 125 $ 114 $ 209 $ 219
==== ==== ==== ====
Average number of Common Shares
outstanding-assuming dilution 72.8 72.8 72.5 73.3
Less dilutive effect of stock
options 1.1 1.7 1.0 1.7
---- ---- ---- ----
Average number of Common Shares
outstanding-basic 71.7 71.1 71.5 71.6
==== ==== ==== ====
Net income per Common Share
Assuming dilution $1.71 $1.57 $2.88 $2.98
Basic 1.74 1.60 2.92 3.05
</TABLE>
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):
<PAGE>
Page 9
Six months ended
June 30
------------------
1999 1998
---- ----
Income statement data
Net sales $245 $349
Gross profit 70 83
Net income 17 37
June 30, December 31,
1999 1998
---- ----
Balance sheet data
Current assets $347 $336
Noncurrent assets 196 248
Net intercompany payables 117 132
Current liabilities 116 104
Noncurrent liabilities 119 108
Minority interest 21
<PAGE>
Page 10
Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Automotive Components $ 480 $ 436 $ 958 $ 878
Fluid Power & Other Components 661 180 820 358
Industrial & Commercial Controls 578 553 1,090 1,062
Semiconductor Equipment 98 93 155 172
Truck Components 407 378 789 752
------ ------ ------ ------
Total ongoing operations 2,224 `1,640 3,812 3,222
Divested operations 76 72 149 177
------ ------ ------ ------
Total net sales $2,300 $1,712 $3,961 $3,399
====== ====== ====== ======
Operating profit (loss)
Automotive Components $ 65 $ 54 $ 127 $ 106
Fluid Power & Other Components 60 35 82 69
Industrial & Commercial Controls 49 46 76 68
Semiconductor Equipment 10 (8) (2) (22)
Truck Components 61 61 121 113
------ ------ ------ ------
Total ongoing operations 245 188 404 334
Divested operations 16 14 31 30
Amortization of certain intangible
assets (24) (16) (41) (32)
Interest expense - net (44) (23) (65) (44)
Gain on sales of businesses 43
Corporate & other - net (7) (2) (20) (15)
------ ------ ------ ------
Income before income taxes $ 186 $ 161 $ 309 $ 316
====== ====== ====== ======
</TABLE>
<PAGE>
Page 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
On April 9, 1999, the Company completed the acquisition of
Aeroquip-Vickers, Inc. (A-V) for approximately $1.6 billion
in cash. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, the
statements of consolidated income include the results of A-V
beginning April 9, 1999. This acquisition is more fully
discussed under "Acquisition of Aeroquip-Vickers, Inc." on
page 5 of this report.
The Company reported record sales of $2.30 billion for the
second quarter of 1999, 34% above the comparable period in
1998. Sales for the first half of 1999 were $3.96 billion,
an increase of 17% from the comparable period in 1998. The
increase in sales primarily reflects the acquisition of A-V.
Net income for the second quarter of 1999 was $125 million,
an increase of 10% from the comparable period in 1998.
Earnings per share reached a record $1.71 per fully diluted
share, 9% above last year's $1.57. Net income for the first
half 1999 was $209 million, a decrease of 5% from the
comparable period in 1998. Earnings per share for the six
months ended June 30, 1999 were $2.88 compared to $2.98 for
the same period in 1998.
All businesses performed well given varied market
conditions. The Company is particularly pleased by
Semiconductor Equipment, which returned to double-digit
profitability in the quarter. The Company is also making
steady progress integrating A-V into the family of Eaton
businesses. Since the acquisition date, A-V added about $.12
to the Company's quarterly earnings per share, prior to
restructuring charges of $.03, stemming from the integration.
The Company is pleased that earnings are back on track,
particularly when the recovery in semiconductor equipment has
just begun and the market for hydraulics is still depressed.
The Company is beginning to see the benefits of the major
company-wide initiatives it undertook in 1998 to reduce costs.
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
- ---------------------
Sales in the second quarter of 1999 of $480 million were a
record, 10% above one year ago. Sales in the first half of
1999 of $958 million increased 9% compared to the same
period in 1998. This increase compares to increases of 11%
in North American light vehicle production and 2% in
European output and a 30% year-to-year decline in South
American production. This above-market performance can be
attributed to penetration gains across Eaton's product
lines.
<PAGE>
Page 12
Operating profits in the second quarter of 1999 of $65
million were also a record, an increase of 20% compared to
the same period in 1998. Operating profits for the first
half of 1999 were $127 million, an increase of 20% compared
to the same period in 1998. This performance can be attributed
to the increased sales and benefits of 1998's restructuring
initiatives. Before restructuring charges of $8 million
recorded in the first quarter of 1998, operating profits for
the first half of 1999 were 11% ahead of the comparable
period in 1998.
Fluid Power & Other Components
- ------------------------------
Fluid Power and Other Components sales in the second quarter
of 1999 were $661 million, 267% above year earlier results.
Sales in the first half of 1999 of $820 million were 129%
ahead of 1998's first half results. The increase was
primarily due to the acquisition of A-V. Activity in mobile
and stationary fluid power markets remains very depressed,
with industry shipments off 11% versus last year. While
industry orders are essentially flat versus the first
quarter, the Company does not anticipate a meaningful upturn
before year-end.
Operating profits were $60 million for the second quarter of
1999, 70% ahead of one year earlier. Operating profits for
the first half of 1999 were $82 million, 18% ahead of
comparable results in 1998. Operating profits increased
primarily due to the acquisition of A-V. Restructuring
expenses are expected to lower the contribution of A-V to
this segment during the remainder of the year.
Including A-V in 1998 results on a pro forma basis, sales in
the second quarter of 1999 were off 8% from one year ago
while profits were off 31%. Assuming markets gradually improve,
the Company is increasingly confident that A-V will add at
least $.50 per share to the Company's year 2000 earnings per
share.
Industrial & Commercial Controls
- --------------------------------
Industrial and Commercial Controls sales reached a record
$578 million in the second quarter of 1999, an increase of
4% from year earlier results compared to about a 1% increase
in the North American market for electrical distribution
equipment and industrial controls. Sales in the first half
of 1999 of $1.1 billion were 3% ahead of 1998's first half
results. The above-industry growth can be attributed to
strong residential and commercial construction markets, new
multi-product "solutions" packaging, and the success of the
Company's new Engineering Services business unit. Cutler-
Hammer's North American orders in the second quarter were
14% ahead of one year ago.
Operating profits for the second quarter of 1999 were $49
million, an increase of 8% compared to the same period in
1998. Operating profits for the first half of 1999 were $76
million, an increase of 13% from comparable results in 1998.
This increase can be attributed to increased sales and
benefits of 1998's restructuring initiatives partially
offset by the costs of building the new Engineering Services
business unit. Before restructuring charges of $15 million
recorded in the first quarter of 1998, operating profits for
the six months in 1999 were 7% below the comparable period
in 1998.
<PAGE>
Page 13
Semiconductor Equipment
- -----------------------
Semiconductor Equipment sales in the second quarter of 1999
were $98 million, 6% above last year's comparable results
and well above the 10% decline in industry shipments. Sales
in the first half of 1999 of $155 million were 10% below
sales in the first half of 1998.
This segment returned to double-digit profitability in the
second quarter of 1999 reaching an operating profit of $10
million compared to an operating loss of $8 million in the
comparable period in 1998. This segment suffered an
operating loss of $2 million in the first half of 1999
compared to last year's loss of $22 million.
These results reflect the early hard-earned benefits of the
Company's operational restructuring more than a resurgent
market. But the equipment market is rebounding, with the
second quarter book-to-bill ratio above 1.20. Second
quarter orders were at the highest level since late 1997.
Customer reception to the Company's new generation of
semiconductor equipment validates the uninterrupted research
and development spending over the past two difficult years,
and is expected to be reflected in sustained higher sales in
the year ahead.
Truck Components
- ----------------
Truck Components sales in the second quarter of 1999 were a
record $407 million, 8% above last year's comparable
results. Sales in the first half of 1999 were $789 million,
5% ahead of year earlier results. This sales growth compares
with a 24% increase in North American Class 8 production, a
2% drop in European heavy truck production, and a decline of
more than 40% in South American commercial vehicle
production. The Company is utilizing its worldwide capacity
to satisfy NAFTA heavy truck demand, which is now running
above a 310,000 annual rate.
Operating profits in the second quarter of 1999 were flat
compared to a year ago at $61 million. Operating profits in
the first half of 1999 were $121 million, an increase of 7%
compared to the same period in 1998. These results are
primarily due to increased sales offset by operating
inefficiencies stemming from unprecedented demand. Before
restructuring charges of $10 million recorded in the first
quarter of 1998, operating profits were 2% below the
comparable period in 1998.
In June 1999, the Company announced it would invest more
than $100 million to build a new truck transmission
manufacturing plant in Mexico to meet unprecedented market
demand and support the Company's increasing market share for
commercial truck components throughout NAFTA. Trucking
continues to gain share in this world of just-in-time
production and logistics. With the U.S. manufacturing
sector also regaining momentum, the Company expects the
heavy truck market will continue near these levels for some
time to come.
<PAGE>
Page 14
Changes in Financial Condition
- ------------------------------
Current liabilities exceeded current assets by $283 million
at June 30, 1999, primarily due to the $1.2 billion increase
in short-term debt and current portion of long-term debt.
The increase in short-term debt resulted from the
acquisition of A-V for $1.6 billion in cash, which is more
fully discussed under "Acquisition of Aeroquip-Vickers,
Inc." on page 5 of this report. Likewise, long-term debt
increased to $2.0 billion at June 30, 1999 from $1.2 billion
at the end of 1998, due to the acquisition of A-V.
In anticipation of the acquisition of A-V, 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 A-V,
primarily funded through the issuance of commercial paper,
is supported by these credit facilities.
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. During the second quarter of 1999, the Company
announced the planned sale of Vickers Electronics Systems
(VES) which had 1998 sales of $130 million. VES is a
business that was acquired in the acquisition of A-V. On
July 13, 1999, the Company announced it had signed a
definitive agreement to sell the Engineered Fasteners
business to TransTechnology Corporation for $173 million in
cash. The sale is expected to be completed by September 1,
1999. On August 3, 1999, Eaton announced it had entered into
a definitive agreement to sell the Fluid Power Division to
Borg-Warner Automotive, Inc. for $310 million. The sale is
expected to be completed in the second half of 1999.
Proceeds from the sales of these businesses will be used to
pay down a portion of the debt incurred to finance the
acquisition of A-V.
In July 1999, the Company completed the sale of 1.625
million Common Shares for net proceeds of $147 million,
which will be used to pay down a portion of the debt
incurred to finance the A-V acquisition. The Company also
expects to refinance a portion of the commercial paper on a
long-term basis before the end of the year.
During the first half of 1999, the Brazilian real currency
devalued by 47%. The effect of this devaluation on the net
assets of the Company's operations in Brazil resulted in a
$76 million foreign currency translation loss which was
recorded directly in Shareholders' Equity, through
comprehensive income, in the first half of 1999.
Year 2000
- ---------
Like most companies, Eaton is impacted by computer software
that relies on two digits in the date fields in order to
function properly. Software that uses two digits rather
than four to identify the applicable year may be unable to
interpret appropriately the calendar Year 2000, and thus
could cause disruption of normal business activities. The
Company relies on software in various aspects of the
business including manufacturing, product development, many
administrative functions and certain products. Much of this
software may be unable to interpret the calendar Year 2000
appropriately without some form of remediation.
<PAGE>
Page 15
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 has fully integrated Aeroquip-Vickers' (A-V) Year
2000 program, which was structured in a very similar manner,
into Eaton's corporate-wide initiative. The Company has
substantially completed the execution phase of the program
although certain applications at certain businesses will be
completed throughout the second half of 1999. Continuous
review and testing have been conducted throughout all phases
of the program and will continue during the second half of
1999 as well as monitoring of the program's success. The
current estimate of total Year 2000 program costs is
approximately $120 million, of which approximately 90% has
been incurred. Approximately $90 million of these costs
represent replacement costs of certain hardware and software
and the remaining $30 million represents costs associated
with modifying and upgrading existing systems. The increase
in estimated costs from the previously reported $95 million
is primarily due to the inclusion of the estimated
remediation costs of A-V.
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.
Forward-Looking Statements
- --------------------------
The forward-looking statements in this Form 10-Q concerning
the Aeroquip-Vickers acquisition, the outlook of the
semiconductor equipment and truck transmission market, the
refinancing of debt on a long-term basis and the Year 2000
issue should be used with caution. They are subject to
various risks and uncertainties, many of which are outside
the control of the Company. Important factors which could
cause actual results to differ materially from those in the
forward-looking statements include changes in global economic
and financial conditions, the markets for semiconductor
equipment, truck transmissions, and fluid power and other
components, the Company's ability to successfully implement
the integration of Aeroquip-Vickers, the interest rate market
and costs and disruptions associated with the Year 2000 issue.
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. Long-term debt increased to $2.0 billion at June 30, 1999
from $1.2 billion at the end of 1998. Commercial paper,
classified as long-term, represented $500 million of this
increase. The average interest rate for commercial paper at
June 30, 1999 was 5.0%. The remaining increase in long-term
debt primarily represents the debt assumed as part of the
<PAGE>
Page 16
acquisition of Aeroquip-Vickers. The carrying values of
commercial paper and the assumed debt approximated their
fair values at June 30, 1999. There were no other material
changes during the six months ended June 30, 1999.
<PAGE>
Page 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On April 9, 1999, the Company filed a Current
Report on Form 8-K regarding the completion of the
acquisition of Aeroquip-Vickers, Inc. (A-V).
2. 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
A-V for 1998 and unaudited pro forma combined condensed
financial statements for 1998 reflecting Eaton's acquisition
of A-V.
3. On June 21, 1999, the Company filed a Current Report on
Form 8-K which included the unaudited historical financial
statements of A-V for the first quarter of 1999 and 1998,
and unaudited pro forma condensed financial statements reflecting
Eaton's acquisition of A-V as of March 31, 1999 and December 31,
1998.
4. On July 1, 1999, the Company filed a Current Report on
Form 8-K regarding the sale of 1.625 million Common Shares.
5. On July 15, 1999, the Company filed a Current Report on
Form 8-K regarding revisions to its business segments.
<PAGE>
Page 18
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: August 10, 1999 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning
Officer; Principal Financial
Officer
<PAGE>
Page 19
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 26
<SECURITIES> 18
<RECEIVABLES> 1,458
<ALLOWANCES> 29
<INVENTORY> 982
<CURRENT-ASSETS> 2,778
<PP&E> 3,967
<DEPRECIATION> 1,574
<TOTAL-ASSETS> 8,341
<CURRENT-LIABILITIES> 3,061
<BONDS> 2,008
0
0
<COMMON> 36
<OTHER-SE> 2,089
<TOTAL-LIABILITY-AND-EQUITY> 8,341
<SALES> 3,961
<TOTAL-REVENUES> 3,961
<CGS> 2,815
<TOTAL-COSTS> 3,592
<OTHER-EXPENSES> (5)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 309
<INCOME-TAX> 100
<INCOME-CONTINUING> 209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209
<EPS-BASIC> 2.92
<EPS-DILUTED> 2.88
</TABLE>
