SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): 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. Aeroquip-Vickers,
which had 1998 sales of $2.1 billion, includes two principal
subsidiaires: Aeroquip Corporation and Vickers, Inc. Funds for the
purchase were primarily obtained through the issuance of commercial
paper. The acquisition was 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.
Item 7. Financial Statements and Exhibits
---------------------------------
Included in this report are 1) unaudited historical financial state-
ments of Aeroquip-Vickers, Inc. for the three month periods ended
March 31, 1999 and 1998 and 2) unaudited pro forma condensed financial
statements reflecting Eaton's acquisition of Aeroquip-Vickers as of
March 31, 1999 and December 31, 1998.
<PAGE>
Page 3
1) FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED MARCH 31,
1999 AND 1998 FOR AEROQUIP-VICKERS, INC.
Aeroquip-Vickers, Inc.
<TABLE>
Statement of Financial Position
<CAPTION>
March 31, December 31,
(Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash & cash equivalents $ 25 $ 18
Receivables 347 342
Inventories
In-process & finished products 222 232
Raw materials & manufacturing supplies 72 70
------ ------
294 302
Other current assets 51 52
------ ------
717 714
Plants & properties 1,112 1,119
Less accumulated depreciation 569 571
------ ------
543 548
Goodwill 122 125
Other assets 73 72
------ ------
$1,455 $1,459
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Notes payable & current maturities
of long-term debt $ 134 $ 103
Accounts payable 101 113
Income taxes 30 27
Other current liabilities 185 198
------ ------
450 441
Long-term debt 278 278
Postretirement benefits other than pensions 122 122
Other liabilities 47 49
Shareholders' Equity
Common stock 138 138
Additional paid-in capital 49 48
Retained earnings 425 419
Accumulated other comprehensive income
(loss)-currency translation adjustments (54) (36)
------ ------
558 569
------ ------
$1,455 $1,459
====== ======
The Notes to Financial Statements are an integral part of this statement.
</TABLE>
<PAGE>
Page 4
Aeroquip-Vickers, Inc.
<TABLE>
Condensed Statement of Income
<CAPTION>
Three Months Ended
March 31
-------------------
(Millions except for per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $ 538 $ 547
Cost of products sold 418 403
------ ------
Manufacturing income 120 144
Selling & general administrative expenses 72 68
Engineering, research & development expenses 18 18
------ ------
Operating income 30 58
Interest expense (7) (7)
Other expenses - net (5) (5)
------ ------
Income before income taxes and
cumulative effect of accounting change 18 46
Income taxes 6 15
------ ------
Income before cumulative effect of
accounting change 12 31
Cumulative effect of accounting change,
net of income tax benefit of $1.5 - (3)
------ ------
Net income $ 12 $ 28
====== ======
Basic income per share
Before cumulative effect of accounting
change $ .43 $ 1.11
Cumulative effect of accounting change - (.12)
------ ------
$ .43 $ .99
====== ======
Dilutive income per share
Before cumulative effect of accounting
change $ .43 $ 1.10
Cumulative effect of accounting change - (.12)
------ ------
$ .43 $ .98
====== ======
The Notes to Financial Statements are an integral part of this statement.
</TABLE>
<PAGE>
Page 5
Aeroquip-Vickers, Inc.
<TABLE>
Condensed Statement of Cash Flows
<CAPTION>
Three Months Ended
March 31
------------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities
Net income $ 12 $ 28
Adjustments to reconcile to net cash
provided by operating activities
Cumulative effect of accounting change,
net of income tax benefit 3
Depreciation 20 16
Amortization 2 2
Changes in certain components of working
capital other than debt (27) (39)
Other (3)
------ ------
4 10
Net cash used in investing activities
Capital expenditures (26) (32)
Businesses acquired (13)
Other 1
------ ------
(25) (45)
Net cash provided by financing activities
Net increase in short- and long-term debt 33 47
Cash dividends (6) (6)
Stock issuance under stock plans 2 3
------ ------
29 44
Effect of exchange rate changes on cash (1)
------ ------
Increase in cash & cash equivalents 7 9
Cash & cash equivalents at beginning
of year 18 19
------ ------
Cash & cash equivalents at end of period $ 25 $ 28
====== ======
The Notes to Financial Statements are an integral part of this Statement.
</TABLE>
<PAGE>
Page 6
Aeroquip-Vickers, Inc.
Notes to Financial Statements
Basis of Presentation
- ---------------------
The accompanying financial statements for the interim periods are
unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of the results for the interim periods
included herein have been made. Operating results for the three
months ended March 31, 1999, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
It is suggested that these financial statements be read in conjunction
with the audited 1998 financial statements and notes thereto included
in Aeroquip-Vickers, Inc.'s (A-V) most recent annual report on Form
10-K.
Change in Control
- -----------------
On April 8, 1999, shareholders of A-V approved the sale of A-V to
Eaton Corporation for $58 per share in cash, pursuant to an Agreement
and Plan of Merger announced on February 1, 1999. The transaction
was completed on April 9, 1999.
Cumulative Effect of Change in Accounting
- -----------------------------------------
In the fourth quarter of 1998, A-V adopted SOP 98-5, "Reporting on
the Costs of Start-Up Activities," issued by the American Institute
of Certified Public Accountants, and recognized the cumulative
effect of an accounting change amounting to $5 million ($3 million
aftertax, or $.12 per share), retroactive to the first quarter of
1998.
Comprehensive Income
- --------------------
Following are details of comprehensive income for the three-month
periods ended March 31, 1999 and 1998 (in millions):
Three Months Ended
March 31
------------------
1999 1998
---- ----
Net income $12 $28
Other comprehensive income
(loss) - currency translation
adjustments during the period (18) 1
--- ---
Comprehensive income (loss) $(6) $29
=== ===
<PAGE>
Page 7
Business Segments
- -----------------
The following information (in millions) relates to business segments.
Total assets are not materially different from amounts reported at
December 31, 1998, and there were no changes in the basis of
segmentation or in the basis for measurement of segment profit or
loss since December 31, 1998.
Three Months Ended
March 31
------------------
1999 1998
---- ----
Net sales
Aeroquip $287 $266
Vickers 251 281
---- ----
$538 $547
==== ====
Segment income
Aeroquip $ 33 $ 32
Vickers 4 33
Corporate (7) (7)
---- ----
30 58
Interest expense 7 7
Other expenses - net 5 5
---- ----
Income before income taxes and
cumulative effect of accounting
change $ 18 $ 46
==== ====
Redemption of Debt
- ------------------
In December 1997, A-V called its 9.55% senior sinking fund debentures
in the principal amount of $42 million for redemption on February 3,
1998. The pretax loss from redemption of the 9.55% senior sinking
fund debentures, amounting to approximately $2.5 million, was recognized
in Other expenses-net in the first quarter of 1998.
<PAGE>
Page 8
Income per Share
- ----------------
Following is a reconciliation of income and average shares for
purposes of calculating basic and diluted income per share (in
millions except for per share data):
Three Months Ended
March 31
------------------
1999 1998
---- ----
Income before cumulative effect
of accounting change $ 12 $ 31
Cumulative effect of accounting
change - (3)
--- ---
Net income $ 12 $ 28
==== ====
Average common shares outstanding
for purposes of computing basic
income per share 27.6 28.1
Dilutive stock options .1 .2
---- ----
Average common shares outstanding
for purposes of computing diluted
income per share 27.7 28.3
==== ====
Basic Income per Share
- ----------------------
Before cumulative effect of
accounting change $ .43 $1.11
Cumulative effect of accounting
change - (.12)
---- ----
$ .43 $ .99
==== ====
Diluted Income per Share
- ------------------------
Before cumulative effect of
accounting change $ .43 $1.10
Cumulative effect of accounting
change - (.12)
---- ----
$ .43 $ .98
==== ====
<PAGE>
Page 9
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 dates
or periods, 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 March 31, 1999.
The unaudited pro forma combined statements of income reflect
adjustments as if the acquisition had occurred at the beginning of
the period presented.
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.
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 integration
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. 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. Eaton integration costs are 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.
<PAGE>
Page 10
The unaudited pro forma combined condensed balance sheet includes
adjustments 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 is 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-
assessed as plans are finalized. 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 accommodate 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.
<PAGE>
Page 11
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.
The pro forma results also do not reflect the planned sale of
Vickers Electronic Systems (VES) announced on May 20, 1999. VES,
which had 1998 sales of $130 million, is a business that was acquired
in the acquisition of A-V. 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 for 1998 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 1998 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 for the first quarter of 1999 incorporated
by reference from its Form 10-Q filed on May 17, 1999. The pro forma
financial statements should also be read in conjunction with the 1998
historical consolidated financial statements and schedule, and related
notes, of A-V, incorporated by reference from Eaton's Amended Form 8-K
filed on May 11, 1999, and for the first quarter of 1999 included in
this Form 8-K.
<PAGE>
Page 12
Unaudited Pro Forma Combined Condensed Balance Sheet
<TABLE>
March 31, 1999
<CAPTION>
(Millions of dollars) Historical Pro
---------------- forma Pro
Aeroquip adjust- forma
Eaton -Vickers ments combined
----- -------- ------ --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 20 $ 25 $ 45
Short-term investments 20 20
Accounts receivable 1,018 347 1,365
Inventories 714 294 $ 28 2a 1,036
Deferred income taxes & other
current assets 290 51 12 2b
2 2l 355
----- ----- ----- -----
2,062 717 42 2,821
Property, plant & equipment 1,781 543 82 2c 2,406
Identified intangible assets 205 289 2d 494
Excess of cost over net assets of
businesses acquired 1,015 122 (122)2e
976 2n 1,991
Deferred income taxes & other assets 601 73 (5)2f 669
----- ----- ----- -----
$5,664 $1,455 $1,262 $8,381
===== ===== ===== =====
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 398 $ 134 $ 923 (1) $1,455
Accounts payable & other current
liabilities 1,181 316 49 2g
(4)2h 1,542
----- ----- ----- -----
1,579 450 968 2,997
Long-term debt 1,188 278 700 (1)
22 2i 2,188
Postretirement benefits other than
pensions 561 122 (19)2j 664
Deferred income taxes & other
liabilities 318 47 34 2k
115 2l 514
Shareholders' equity
A-V 558 (558)2m 0
Eaton 2,018 2,018
----- ----- ----- -----
$5,664 $1,455 $1,262 $8,381
===== ===== ===== =====
See accompanying notes.
</TABLE>
<PAGE>
Page 13
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 March 31, 1999,
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 as 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 (122)
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 558
2n Record preliminary estimate of excess of
cost over net assets of A-V acquired 976
-----
Purchase price $1,623
=====
<PAGE>
Page 14
Unaudited Pro Forma Combined Statement of Income
<TABLE>
Three Months Ended March 31, 1999
<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 $1,661 $ 538 $2,199
Costs & expenses
Cost of products sold 1,172 418 $ 8 1a
2 1c
(2)1e
3 1f
6 1g 1,607
Selling & administrative 275 72 347
Research & development 71 18 (8)1a 81
----- ----- ----- -----
1,518 508 9 2,035
----- ----- ----- -----
Income from operations 143 30 (9) 164
Other income (expense)
Interest expense - net (21) (7) (25)1h (53)
Other - net 1 (5) (4)
----- ----- ----- -----
(20) (12) (25) (57)
----- ----- ----- -----
Income before income taxes 123 18 (34) 107
Income taxes 39 6 (11)1j 34
----- ----- ----- -----
Net income $ 84 $ 12 $ (23) $ 73
===== ===== ===== =====
Net income per Common Share (1k) -
Assuming dilution $ 1.17 $ 1.01
Basic 1.18 1.03
Average number of Common Shares
outstanding (in millions) -
Assuming dilution 72.2 72.2
Basic 71.2 71.2
See accompanying notes.
</TABLE>
<PAGE>
Page 15
Unaudited Pro Forma Combined Statement of Income
<TABLE>
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 16
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 three month
period ended March 31, 1999 and the year ended December 31, 1998,
are as follows:
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 17
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: June 18, 1999
<PAGE>
