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): February 25, 2000
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 5. Other Events
------------
(1) Financial Statements and Exhibits
Report of Independent Auditors - Page 2
Consolidated Balance Sheets - December 31, 1999 and 1998 -
Pages 3 and 4
Statements of Consolidated Income - Years ended December 31, 1999,
1998, and 1997 - Page 5
Statements of Consolidated Cash Flows - Years ended December 31, 1999,
998, and 1997 - Page 6
Statements of Consolidated Shareholders' Equity - Years ended
December 31, 1999, 1998, and 1997 - Page 7
Financial Review - Pages 8 through 37
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Page 38 through 53
Exhibit 23 - Consent of Independent Auditors - Page 54
(2) Press Release dated February 24, 2000
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
To the Shareholders
Eaton Corporation
We have audited the consolidated balance sheets of Eaton Corporation as
of December 31, 1999 and 1998, and the related statements of
consolidated income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Eaton Corporation at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 21, 2000
<PAGE>
Page 3
Eaton Corporation
<TABLE>
Consolidated Balance Sheets
<CAPTION>
December 31
-----------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 81 $ 80
Short-term investments 84 42
Accounts receivable 1,267 885
Inventories 965 707
Deferred income taxes 194 152
Other current assets 191 116
------ ------
2,782 1,982
Property, plant & equipment
Land & buildings 788 620
Machinery & equipment 3,174 2,767
------ ------
3,962 3,387
Accumulated depreciation (1,593) (1,550)
------ ------
2,369 1,837
Goodwill 1,905 1,025
Other intangible assets 625 214
Deferred income taxes & other assets 756 607
------ ------
$8,437 $5,665
====== ======
</TABLE>
The Financial Review on pages 8 to 37 is an integral part of the
consolidated financial statements.
<PAGE>
Page 4
Eaton Corporation
<TABLE>
Consolidated Balance Sheets
<CAPTION>
December 31
-----------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 958 $ 225
Current portion of long-term debt 12 108
Accounts payable 511 445
Accrued compensation 286 160
Accrued income & other taxes 257 74
Other current liabilities 625 504
------ ------
2,649 1,516
Long-term debt 1,915 1,191
Postretirement benefits other than pensions 667 557
Deferred income taxes & other liabilities 582 344
Shareholders' equity
Common Shares (74.0 in 1999 and 71.7 in 1998) 37 36
Capital in excess of par value 1,041 853
Retained earnings 1,804 1,321
Accumulated other comprehensive income (loss) (220) (110)
Shares in trust
Employee Stock Ownership Plan (6)
Deferred compensation plans (38) (37)
------ ------
2,624 2,057
------ ------
$8,437 $5,665
====== ======
</TABLE>
The Financial Review on pages 8 to 37 is an integral part of the
consolidated financial statements.
<PAGE>
Page 5
Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Year ended December 31
-------------------------
(Millions except for per share data) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $8,402 $6,625 $7,563
Costs & expenses
Cost of products sold 6,041 4,759 5,456
Selling & administrative 1,318 1,050 1,088
Research & development 314 334 319
Purchased in-process research & development 85
------ ------ ------
7,673 6,143 6,948
------ ------ ------
Income from operations 729 482 615
Other income (expense)
Interest expense - net (152) (88) (79)
Gain on sales of businesses 340 43 91
Other - net 46 48 41
------ ------ ------
234 3 53
------ ------ ------
Income before income taxes & extraordinary item 963 485 668
Income taxes 346 136 204
------ ------ ------
Income before extraordinary item 617 349 464
Extraordinary item (54)
------ ------ ------
Net income $ 617 $ 349 $ 410
====== ====== ======
Per Common Share - assuming dilution
Income before extraordinary item $ 8.36 $ 4.80 $ 5.93
Extraordinary item (.69)
------ ------ ------
Net income $ 8.36 $ 4.80 $ 5.24
====== ====== ======
Average number of Common Shares outstanding 73.7 72.7 78.2
Per Common Share - basic
Income before extraordinary item $ 8.51 $ 4.89 $ 6.05
Extraordinary item (.71)
------ ------ ------
Net income $ 8.51 $ 4.89 $ 5.34
====== ====== ======
Average number of Common Shares outstanding 72.5 71.4 76.8
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.72
</TABLE>
The Financial Review on pages 8 to 37 is an integral part of the
consolidated financial statements.
<PAGE>
Page 6
Eaton Corporation
<TABLE>
Statements of Consolidated Cash Flows
<CAPTION>
Year ended December 31
-------------------------
(Millions) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating activities
Income before extraordinary item $ 617 $ 349 $ 464
Adjustments to reconcile to net cash provided by
operating activities
Depreciation 326 259 285
Amortization 115 72 57
Deferred income taxes 49 94 31
Long-term assets and liabilities, & other
non-cash items in income (33) (14)
Gain on sales of businesses (340) (43) (91)
Write-off of purchased in-process research &
development 85
Changes in operating assets & liabilities,
excluding acquisitions & sales of businesses
Accounts receivable (117) (11) (106)
Inventories 7 (38) (53)
Accounts payable & other accruals (33) (3) 140
Accrued income & other taxes 68 3 1
Other - net (10) (7) (36)
------ ------ ------
682 642 763
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (1,602) (117) (387)
Sales of businesses 544 375 329
Expenditures for property, plant & equipment (496) (483) (438)
Other - net (84) (56) (35)
------ ------ ------
(1,638) (281) (531)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than
three months
Proceeds 1,917 1,409 425
Payments (1,517) (982) (570)
Borrowings with original maturities of less than
three months - net 519 (303) 356
Cash dividends paid (128) (126) (133)
Sale of Common Shares 147
Purchase of Common Shares (5) (349) (315)
Other - net 24 17 36
------ ------ ------
957 (334) (201)
------ ------ ------
Total increase in cash 1 27 31
Cash at beginning of year 80 53 22
------ ------ ------
Cash at end of year $ 81 $ 80 $ 53
====== ====== ======
</TABLE>
The Financial Review on pages 8 to 37 is an integral part of the
consolidated financial statements.
<PAGE>
Page 7
Eaton Corporation
<TABLE>
Statements of Consolidated Shareholders' Equity
<CAPTION>
Shares in trust
Accumulated ------------------ Total
Common Shares Capital in other Deferred share-
------------- excess of Retained comprehensive compensa- holders'
(Millions) Shares Amount par value earnings income (loss) ESOP tion plans equity
------ ------ ----------- -------- ------------- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 77.1 $39 $ 830 $1,401 $ (67) $(36) $ (7) $2,160
Net income 410 410
Other comprehensive income (81) (81)
------
Total comprehensive income 329
Cash dividends paid, net of
Employee Stock Ownership
Plan (ESOP) tax benefit (132) (132)
Issuance of shares under
employee benefit plans,
including tax benefit .9 47 (2) 45
Put option obligation, net (18) (18)
Purchase of shares (3.7) (2) (40) (292) (334)
Shares allocated to employees 16 16
Issuance of shares to trust .2 20 (20) 0
Other .2 5 5
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 1997 74.7 37 844 1,385 (148) (20) (27) 2,071
Net income 349 349
Other comprehensive income 38 38
------
Total comprehensive income 387
Cash dividends paid, net of
ESOP tax benefit (126) (126)
Issuance of shares under
employee benefit plans,
including tax benefit .5 25 (1) 24
Put option obligation, net 16 16
Purchase of shares (3.7) (1) (42) (286) (329)
Shares allocated to employees 14 14
Issuance of shares to trust .2 10 (10) 0
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 1998 71.7 36 853 1,321 (110) (6) (37) 2,057
Net income 617 617
Other comprehensive income (110) (110)
------
Total comprehensive income 507
Cash dividends paid, net of
ESOP tax benefit (128) (128)
Issuance of shares under
employee benefit plans,
including tax benefit .8 49 (1) 48
Put option obligation, net (7) (7)
Sale of shares 1.6 1 146 147
Purchase of shares (.1) (5) (5)
Shares allocated to employees 6 6
Issuance of shares to trust (1) (1)
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 1999 74.0 $37 $1,041 $1,804 $(220) $ 0 $(38) $2,624
==== === ====== ====== ===== ==== ==== ======
</TABLE>
The Financial Review on pages 8 to 37 is an integral part of the
consolidated financial statements.
<PAGE>
Page 8
FINANCIAL REVIEW
- ----------------
All references to net income per Common Share assume dilution, unless
otherwise indicated.
ACCOUNTING POLICIES
- -------------------
Consolidation
- -------------
The consolidated financial statements include accounts of the Company
and all majority-owned subsidiaries. The equity method of accounting
is used for investments in associate companies and joint ventures where
the Company has a 20% to 50% ownership interest.
Foreign Currency Translation
- ----------------------------
The functional currency for principally all subsidiaries outside the
United States is the local currency. Financial statements for these
subsidiaries are translated into United States dollars at year-end
exchange rates as to assets and liabilities and weighted-average
exchange rates as to revenues and expenses. The resulting translation
adjustments are recorded in shareholders' equity in accumulated other
comprehensive income (loss).
Inventories
- -----------
Inventories are carried at lower of cost or market. Inventories in the
United States are generally accounted for using the last-in, first-out
(LIFO) method. Remaining United States and all other inventories are
accounted for using the first-in, first-out (FIFO) method.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization are computed by the straight-line method
for financial statement purposes. Cost of buildings is depreciated
over forty years and machinery and equipment over principally three to
ten years. Goodwill and intangible assets, primarily consisting of
patents, trademarks, tradenames and software, are amortized over a
range of five to forty years.
Goodwill and other long-lived assets are reviewed for impairment losses
whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. Events or circumstances that would
result in an impairment review primarily include operations reporting
losses or a significant change in the use of an asset. The asset would
be considered impaired when the future net undiscounted cash flows
generated by the asset are less than its carrying value. An impairment
loss would be recognized based on the amount by which the carrying
value of the asset exceeds its fair value.
Financial Instruments
- ---------------------
The Company selectively uses straightforward, nonleveraged financial
instruments as part of foreign exchange and interest rate risk
management programs. Financial instruments are not bought and sold
<PAGE>
Page 9
solely for trading purposes, except for nominal amounts authorized
under limited, controlled circumstances. Credit loss has never been
experienced, and is not anticipated, as the counterparties to various
financial instruments are major international financial institutions
with strong credit ratings and due to control over the limit of
positions entered into with any one party. Although financial
instruments are an integral part of the Company's risk management
programs, their incremental effect on financial condition and results
of operations is not material.
The Company and its subsidiaries are exposed to fluctuations in foreign
currencies in the normal course of business. Foreign currency forward
exchange contracts and options are used to reduce exposure to foreign
currency fluctuations. Accrued gains or losses on those financial
instruments which hedge net investments in subsidiaries outside the
United States are recorded in shareholders' equity. Gains or losses on
those financial instruments which hedge specific transactions are
deferred and subsequently recognized in net income when the gains or
losses on the hedged foreign currency transaction are recognized in net
income. Cash premiums and discounts related to these financial
instruments are amortized to other income-net over the life of the
respective agreement.
In the normal course of business, the Company's operations are also
exposed to fluctuations in interest rates. Interest rate swaps and
caps, and forward interest rate agreements, are used to reduce the cost
of, and exposure to, interest rate fluctuations. Accrued gains or
losses on interest rate swaps and caps are included in interest expense
since they hedge interest on debt. Gains and losses on forward
interest rate agreements are deferred and subsequently recognized in
net income when interest expense on the hedged debt is recognized in
net income. Cash premiums related to interest rate caps are amortized
to interest expense over the life of the respective agreement.
In 1998, Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was
issued which requires all derivatives to be recognized on the balance
sheet at fair value. The Company must adopt the standard by the first
quarter of 2001. The Company expects that the adoption of the standard
will have an immaterial effect on earnings and financial position.
Options for Common Shares
- -------------------------
The Company applies the intrinsic value based method described in
Accounting Principles Board Opinion No. 25 to account for stock options
granted to employees to purchase Common Shares. Under this method, no
compensation expense is recognized on the grant date, since on that
date the option price equals the market price of the underlying Common
Shares.
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are shipped to
unaffiliated customers.
<PAGE>
Page 10
Estimates
- ---------
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and notes.
Actual results could differ from these estimates.
Financial Presentation Changes
- ------------------------------
Certain amounts for prior years have been reclassified to conform to
the current year presentation.
<PAGE>
Page 11
ACQUISITIONS OF BUSINESSES
- --------------------------
On April 9, 1999, the Company completed the acquisition of Aeroquip-
Vickers, Inc. for $1.623 billion in cash. Aeroquip-Vickers, which had
1998 sales of $2.1 billion, manufactures the following products: all
pressure ranges of hose, fittings, adapters, couplings and other fluid
power connectors; hydraulic pumps, motors and cylinders; electronic and
hydraulic controls; electric motors and drives; filtration products;
fluid-evaluation products and services; and precision molded and
extruded plastic products. The operating results of Aeroquip-Vickers
are reported in Business Segment Information in Fluid Power and Other
Components. Funds for the purchase were initially obtained through the
issuance of commercial paper, which was partially refinanced through
the issuance of $450 million of long-term notes and debentures and the
sale of 1.625 million Common Shares for $147 million.
The acquisition was accounted for by the purchase method of accounting
and, accordingly, the statements of consolidated income include the
results of Aeroquip-Vickers beginning April 9, 1999. The assets
acquired and liabilities assumed were recorded at estimated fair values
as determined by the Company's management based on information
currently available and on current assumptions as to future operations.
The Company has obtained preliminary independent appraisals of the fair
values of the acquired property, plant and equipment, and identified
intangible assets, and their remaining useful lives. The Company is
also completing the review and determination of the fair values of the
other assets acquired and liabilities assumed. Accordingly, the
allocation of the purchase price is subject to revision, which is not
expected to be material, based on the final determination of appraised
and other fair values. A summary of the assets acquired and liabilities
assumed in the acquisition follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Estimated fair values
Assets acquired $1,765
Liabilities assumed (1,078)
Goodwill (amortized by the straight-line
method over forty years) 936
------
Purchase price 1,623
Less cash acquired & liability for
outstanding shares (34)
------
Net cash paid $1,589
======
</TABLE>
As a result of the acquisition of Aeroquip-Vickers, Eaton incurred
acquisition integration expenses for the incremental costs to exit and
consolidate activities at Aeroquip-Vickers locations, to involuntarily
terminate Aeroquip-Vickers employees, and for other costs to integrate
operating locations and other activities of Aeroquip-Vickers with
Eaton. Generally accepted accounting principles require that these
acquisition integration expenses, which are not associated with the
generation of future revenues and have no future economic benefit, be
reflected as assumed liabilities in the allocation of the purchase
<PAGE>
Page 12
price to the net assets acquired. On the other hand, these same
principles require that acquisition integration expenses which are
associated with the generation of future revenues and have future
economic benefit, and those associated with integrating Eaton
operations into Aeroquip-Vickers locations, must be recorded as
expense. These expenses are discussed in the "Unusual Charges" footnote
in the Financial Review. The components of the acquisition integration
liabilities included in the purchase price allocation for Aeroquip-
Vickers are as follows (in millions):
<TABLE>
<CAPTION>
Balance
Original remaining at
costs Utilized December 31, 1999
-------- -------- -----------------
<S> <C> <C> <C>
Workforce reductions $ 31 $(28) $ 3
Other 1 (1) 0
---- ---- ----
$ 32 $(29) $ 3
==== ==== ====
</TABLE>
The acquisition integration liabilities are based on the Company's
current integration plan which focuses 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, and 3) restructuring and repositioning
of the sales/marketing and research and development organizations to
eliminate redundancies in these activities.
The workforce reductions represent the expected termination of 470
Aeroquip-Vickers employees, primarily administrative personnel. As of
December 31, 1999, 460 have been terminated. The balance remaining at
December 31, 1999 is expected to be utilized in the first quarter of
2000 and will be funded through cash flows from the combined
operations.
Certain aspects of the integration plan will be refined as additional
studies are completed, including the evaluation of capacity of existing
and acquired facilities to accommodate new manufacturing and
administrative processes and the appropriate positioning of the
sales/marketing and research development organizations to best serve
customer needs. Adjustments to the estimated acquisition integration
liabilities based on these refinements will be included in the
allocation of the purchase price of Aeroquip-Vickers, if the adjustment
is determined within the purchase price allocation period. Adjustments
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 goodwill, if the ultimate amount of the liability is
below the estimate.
Unaudited pro forma results of operations for the year ended December
31, 1999 and 1998, as if Eaton and Aeroquip-Vickers had been combined
as of the beginning of the year, follow (in millions). The pro forma
results include estimates and assumptions which management believes are
reasonable. However, pro forma results do not include any anticipated
cost savings or other effects of the planned integration of Eaton and
<PAGE>
Page 13
Aeroquip-Vickers, 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.
<TABLE>
<CAPTION>
Pro forma
Year ended
December 31
----------------
1999 1998
---- ----
<S> <C> <C>
Net sales $8,940 $8,775
Net income 605 352
Net income per Common Share
Assuming dilution $ 8.20 $ 4.84
Basic 8.34 4.93
</TABLE>
In addition to the acquisition of Aeroquip-Vickers described above, the
Company also acquired other businesses for a combined net cash purchase
price (in millions) of $13 in 1999, $117 in 1998 and $387 in 1997. In
1998, G.T. Products was acquired for $77 million and is reported in the
Automotive Components segment. Acquisitions in 1997 included the
purchase of Dana Corporation's Spicer Clutch business for $180 million,
which is reported in the Truck Components segment, and Fusion Systems
Corporation for $203 million, which is reported in the Semiconductor
Equipment segment. Each of these acquisitions was accounted for by the
purchase method of accounting and, accordingly, the statements of
consolidated income include the results of the acquired businesses from
the effective dates of acquisition.
The purchase price allocation for Fusion Systems included $85 million
for purchased in-process research and development. This amount was
expensed at the date of acquisition because technological feasibility
had not been established and no alternative commercial use had been
identified. Therefore, 1997 results include the write-off of $85
million for purchased in-process research and development, with no
income tax benefit, or $1.09 per Common Share.
The purchased in-process research and development was determined based
on the income method using a risk adjusted discount rate of 31% applied
to project cash flows. Three groups of projects comprised over 95% of
the total value of purchased in-process research and development. These
projects were valued at $82.6 million and were completed in 1998 and
mid-1999 at an undiscounted cost of $30.1 million, which approximated
the original cost estimate.
<PAGE>
Page 14
DIVESTITURES OF BUSINESSES
- --------------------------
The Company sold businesses for aggregate cash proceeds (in millions)
of $544 in 1999, $375 in 1998 and $329 in 1997.
Divestitures in 1999 included the sale of the Engineered Fasteners
division in August and the Fluid Power division in October. The sales
of these businesses, and adjustments related to businesses sold in
prior periods, resulted in a pretax gain of $340 million ($198 million
aftertax, or $2.68 per Common Share). In December, the Company also
sold substantially all of Vickers Electronic Systems, which was
acquired in the acquisition of Aeroquip-Vickers, resulting in no gain
or loss.
Divestitures in 1998 included the sale of the Axle and Brake business
in January and the automotive leaf spring business in April. The sales
of these businesses, and adjustments related to businesses sold in
prior periods, resulted in a pretax gain of $43 million ($28 million
aftertax, or $.38 per Common Share).
Divestitures in 1997 included the sale of the majority of the stock of
AIL Systems in October and the worldwide Appliance Controls business in
December. The sales of these businesses resulted in a pretax gain of
$91 million ($69 million aftertax, or $.88 per Common Share).
The operating results of these businesses are reported in Business
Segment Information as Divested Operations.
<PAGE>
Page 15
UNUSUAL CHARGES
- ---------------
1999 Charges
- ------------
The Company recorded charges of $30 million ($20 million aftertax, or
$.27 per Common Share), which included $23 million of integration
expenses, as discussed in the "Acquisitions of Businesses" footnote in the
Financial Review, and $7 million of restructuring charges related to
the Truck Components segment. These charges are included in the
Consolidated Statement of Income in Income from Operations.
Charges of $21 million for the integration of Eaton and Aeroquip-
Vickers primarily relate to plant consolidation and other expenses,
including fees paid to outside consultants, travel expenses, and
relocation of inventory and equipment. In addition, a $2 million
restructuring liability for workforce reductions, severance and other
related employee benefits, was recorded and included the expected
termination of 70 employees, primarily manufacturing personnel.
As part of the ongoing effort to restructure European operations in the
Truck Components segment, the Company recorded a restructuring
liability of $7 million. The Company will be closing a manufacturing
facility in Aycliffe, United Kingdom and consolidating production into
an existing facility in Poland. This charge relates to workforce
reductions, severance and other related employee benefits, for the
expected termination of 190 employees, primarily manufacturing
personnel.
Although appropriate notification has been made, none of the employees
related to the restructuring have been terminated as of December 31,
1999. These employees are expected to be terminated in 2000.
1998 Charges
- ------------
The Company recorded charges of $111 million ($72 million aftertax, or
$.99 per Common Share) which included $101 million for liabilities to
restructure certain business segments and $10 million for a
contribution to the Company's charitable trust. The restructuring
charges are included in the Consolidated Statement of Income in Income
from Operations.
The charges included $41 million for workforce reductions, primarily
severance and other related employee benefits, for the expected
termination of approximately 3,000 employees, mainly manufacturing
personnel.
The principal business affected by the restructuring was the
Semiconductor Equipment segment. Due to the collapse of the
semiconductor equipment industry in 1998, the Company took actions to
restructure the segment that amounted to $43 million of the $101
million charge noted above. Approximately $8 million represented
workforce reductions and $30 million represented inventory and other
asset write-downs. The workforce reductions primarily related to the
closing of the Austin, Texas plant, although workforce reductions
occurred at other locations. The charge for asset write-downs
primarily related to inventory, which was written down to estimated
market value, and approximately $2 million to write-down the Austin
plant to estimated selling price. The write-down of inventory is
<PAGE>
Page 16
included in cost of products sold.
The remaining $58 million of the $101 million restructuring charge
primarily related to workforce reductions, inventory write-downs, and
other costs in the Automotive Components, Industrial and Commercial
Controls, and Truck Components segments. Certain plants in these
segments were closed and production was consolidated into other
existing facilities in an effort to reduce costs.
1997 Charges
- ------------
In order to restructure certain businesses within each segment, the
Company recorded pretax charges of $24 million ($15 million aftertax,
or $.19 per Common Share). These charges related to workforce
reductions, asset write-downs and other costs.
The Company also redeemed the $200 million of 7% debentures due 2011.
The aftertax extraordinary loss on this redemption, including the
write-off of debt issue costs, was $54 million, or $.69 per Common
Share ($88 million before income taxes).
Restructuring Liabilities
- -------------------------
<TABLE>
Movement of the various components of restructuring liabilities follows
(in millions of dollars):
<CAPTION>
Inventory & Plant
Workforce other asset consolidation
Employees reductions write-downs & other Total
--------- ---------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
1998 3,000 $ 41 $ 46 $ 14 $101
Utilized in 1998 (900) (9) (46) (7) (62)
----- ---- ---- ---- ----
Balance remaining
at December 31, 1998 2,100 32 0 7 39
1999 260 9 0 0 9
Utilized in 1999 (2,000) (26) 0 (5) (31)
----- ---- ---- ---- ----
Balance remaining
at December 31, 1999 360 $ 15 $ 0 $ 2 $ 17
===== ==== ==== ==== ====
</TABLE>
<PAGE>
Page 17
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
At December 31, 1999, short-term debt was $958 million, of which $899
million related to United States operations and primarily resulted from
the financing of the acquisition of Aeroquip-Vickers. The Company has
credit facilities totaling $1.1 billion, which mature April 2000, to
support this short-term debt. The Company's subsidiaries outside the
United States have lines of credit, primarily short-term, aggregating
$65 million from various banks worldwide. At December 31, 1999, $59
million was outstanding under these lines of credit.
Long-term debt at December 31, excluding the current portion, follows (in
millions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
9% notes due 2001 $ 100 $ 100
6.95% notes due 2004 250
8% debentures due 2006 86 86
8.9% debentures due 2006 100 100
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024
(effective interest rate 7.1%) 94 100
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 150 150
7.875% debentures due 2026 (assumed in the
acquisition of Aeroquip-Vickers) 82
7.65% debentures due 2029 200
6.4% to 7.6% medium-term notes due at
various dates ranging from 2002 to
2018 (assumed in the acquisition of
Aeroquip-Vickers) 167
Commercial paper 500 500
Other (effective interest rate 10.2%) 86 55
------ ------
$1,915 $1,191
====== ======
</TABLE>
In 1998, the Company entered into a $500 million credit facility with a
series of banks expiring in May 2003. Commercial paper of $500 million
is classified as long-term debt because the Company intends, and has
the ability under this agreement, to refinance these notes on a long-
term basis.
In 1999, the Company entered into a five-year $100 million interest
rate swap and a thirty-year $150 million interest rate swap. These
swaps effectively convert a portion of the 6.95% notes and the 7.65%
debentures to floating rates based on the six-month London Interbank
Offered Rate (6.1% at December 31, 1999).
In 1999, the Company entered into agreements, expiring in 2002, which
effectively convert $75 million of United States dollar fixed-rate debt
into Japanese Yen denominated debt with interest payable at a fixed-
rate of .295% as to $50 million and .6% as to $25 million. In 1999, the
Company also entered into an agreement, expiring in October 2001, which
effectively converts $50 million of United States dollar floating-rate
debt into Euro denominated debt based on the three-month Euro Interbank
<PAGE>
Page 18
Offered Rate (3.3% at December 31, 1999).
The weighted-average interest rate on short-term borrowings, including
commercial paper classified in long-term debt, was 6.2% and 6.0% at
December 31, 1999 and 1998, respectively.
Aggregate mandatory sinking fund requirements and annual maturities of
long-term debt are as follows (in millions): 2000, $12; 2001, $105;
2002, $28; 2003, $500; and 2004, $266.
Interest capitalized as part of the acquisition or construction of
major fixed assets (in millions) was $21 in 1999, $16 in 1998 and $12
in 1997. Interest paid (in millions) was $196 in 1999, $116 in 1998
and $97 in 1997.
The carrying values of cash, short-term investments and short-term debt
in the Consolidated Balance Sheet approximate their estimated fair
values. The estimated fair values of other financial instruments
outstanding at December 31 are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------- ------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Marketable debt securities $ 63 $ 63 $ 66 $ 66
Long-term debt, current
portion of long-term
debt & foreign
currency principal swaps (1,927) (1,963) (1,299) (1,384)
Foreign currency forward
exchange contracts &
options $ 20 $ 11 (3) (3)
Interest rate swaps
Fixed to floating 250 (7) 36
Floating to fixed 103 (5)
Fixed to fixed 75 1 (1) 40
Floating to floating 50 (1)
Forward interest rate
agreement 200 (9)
</TABLE>
The estimated fair values of financial instruments are principally
based on quoted market prices. The fair value of foreign currency
forward exchange contracts and options, which primarily mature in 2000,
and foreign currency principal and interest rate swaps are estimated
based on quoted market prices of comparable contracts, adjusted through
interpolation where necessary for maturity differences.
<PAGE>
Page 19
RETIREMENT BENEFIT PLANS
- ------------------------
The Company has defined benefit pension plans and other postretirement
benefit plans, primarily health care and life insurance. In the event
of a change in control of the Company, excess pension plan assets of
North American operations may be dedicated to funding of health and
welfare benefits of employees and retirees.
Components of plan obligations and assets, and the recorded asset
(liability) at December 31 are as follows (in millions):
<TABLE>
<CAPTION>
Other
postretirement
Pension benefits benefits
---------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation at beginning
of year $(1,602) $(1,567) $ (769) $ (737)
Service cost (67) (58) (15) (12)
Interest cost (108) (98) (54) (49)
Effect of divestitures 25 99 13 14
Effect of acquisitions (179) 1 (106)
Actuarial gain (loss) 40 (132) 36 (33)
Benefits paid 146 161 60 51
Other (10) (8) (2) (3)
------- ------- ------- -------
Benefit obligation at end
of year $(1,755) $(1,602) $ (837) $ (769)
------- ------- ------- -------
Fair value of plan assets at
beginning of year $ 2,004 $ 2,024
Actual return on plan assets 341 222
Employer contributions 21 16 $ 58 $ 48
Settlement cost (29)
Effect of divestitures (26) (62)
Effect of acquisitions 192
Benefits paid (146) (161) (60) (51)
Other 1 (6) 2 3
------- ------- ------- -------
Fair value of plan assets at
end of year $ 2,387 $ 2,004 $ 0 $ 0
------- ------- ------- -------
Pension plan assets in excess of
benefit obligations $ 632 $ 402
Obligations with no plan assets $ (837) $ (769)
Unamortized
Net (gain) loss (469) (290) 156 204
Prior service cost 36 34 (15) (21)
Other (14) (15)
------- ------- ------- -------
Recorded asset (liability) $ 185 $ 131 $ (696) $ (586)
======= ======= ======= =======
</TABLE>
<PAGE>
Page 20
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets (in millions) were $146, $136
and $23, respectively, as of December 31, 1999 and $230, $206 and
$118, respectively, as of December 31, 1998.
The components of net periodic benefit income (cost) for the years
ended December 31 are as follows (in millions):
<TABLE>
<CAPTION>
Pension benefits
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ (67) $ (58) $ (64)
Interest cost (108) (98) (111)
Expected return on plan assets 179 158 164
Other (4) (4)
------ ------ ------
0 (2) (11)
Curtailment gain (loss) (5) 8 (1)
Settlement gain 18 41 68
------ ------ ------
$ 13 $ 47 $ 56
====== ====== ======
Other postretirement benefits
-----------------------------
1999 1998 1997
---- ---- ----
Service cost $ (15) $ (12) $ (13)
Interest cost (54) (49) (49)
Net amortization (3) (2) 3
------ ------ ------
(72) (63) (59)
Curtailment gain 1 1 16
Settlement loss (4) (5) (12)
------ ------ ------
$ (75) $ (67) $ (55)
====== ====== ======
</TABLE>
The curtailment and settlement gains and losses reflect the sales of
the Engineered Fasteners and Fluid Power divisions in 1999, the Axle
and Brake business in 1998, and the Appliance Controls business and AIL
Systems in 1997.
<PAGE>
Page 21
Actuarial assumptions used in the calculation of the recorded asset
(liability) are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Discount rate 7.50% 6.50%
Return on pension plan assets 10.00% 10.00%
Rate of compensation increase 4.50% 3.95%
Projected health care cost trend rate 6.00% 7.00%
Ultimate health care trend rate 5.25% 4.25%
Year ultimate health care trend rate
is achieved 2001 2003
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for other postretirement benefits. A one-percentage-
point change in the assumed health care cost trend rate would have the
following effects (in millions):
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
1999 benefit cost $ 4 $ (3)
Recorded liability
at December 31, 1999 44 (39)
</TABLE>
The Company also has various defined-contribution benefit plans,
primarily consisting of the Eaton Share Purchase and Investment Plan
and the Aeroquip-Vickers Savings and Profit-Sharing Plan. Total
contributions related to these plans charged to expense were (in
millions) $34 in 1999, $9 in 1998, and $6 in 1997.
<PAGE>
Page 22
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has established policies to ensure that its operations are
conducted in keeping with good corporate citizenship and with a
positive commitment to the protection of the natural and workplace
environments. For example, each manufacturing facility has a person
responsible for environmental, health and safety (EHS) matters. The
Company has determined that all of its manufacturing facilities will be
certified under ISO 14001, an international standard for environmental
management systems. The Company routinely reviews EHS performance at
each of its facilities and continuously strives to improve pollution
prevention at its facilities.
As a result of past operations, the Company is involved in remedial
response and voluntary environmental remediation at a number of sites,
including certain of its currently-owned or formerly-owned plants. The
Company has also been named a potentially responsible party (PRP) under
the Federal Superfund law at a number of waste disposal sites.
A number of factors affect the cost of environmental remediation,
including the number of parties involved at a particular site, the
determination of the extent of contamination, the length of time that
remediation may require, the complexity of environmental regulations,
and the continuing advancement of remediation technology. Taking these
factors into account, the Company has estimated (without discounting)
costs of remediation, which will be incurred over a period of several
years. The Company accrues an amount equal to the best estimates of
these costs when it is probable that a liability has been incurred. At
December 31, 1999 and 1998, the Consolidated Balance Sheet included a
liability for these costs (in millions) of $52 and $32, respectively.
The increase in the liability in 1999 was primarily due to the
assumption of amounts associated with the acquisition of Aeroquip-
Vickers. With regard to some of the matters included in the liability,
the Company has rights of recovery from non-affiliated parties for a
portion of these estimated costs.
Based upon the Company's analysis and subject to the difficulty in
estimating these future costs, the Company expects that any sum it may
be required to pay in connection with environmental matters is not
reasonably likely to exceed the liability by an amount that would have
a material adverse effect on its financial condition, results of
operations, or liquidity. All of these estimates are forward-looking
statements and, given the inherent uncertainties in evaluating
environmental exposures, actual results can differ from these
estimates.
<PAGE>
Page 23
SHAREHOLDERS' EQUITY
- --------------------
There are 300 million Common Shares authorized ($.50 par value per
share). At December 31, 1999, there were 7 million Common Shares held
in treasury and 12,552 holders of record of Common Shares.
Additionally, approximately 21,000 current and former employees were
shareholders through participation in the Eaton Share Purchase and
Investment Plan (SPIP).
In 1999, the Company concluded a ten-year program that prefunded a
portion of anticipated matching contributions to the SPIP through
an Employee Stock Ownership Plan (ESOP). The shares held by the ESOP,
which had not yet been allocated to employee accounts, were included in
shareholders' equity as "Shares in trust-ESOP". Unallocated shares in
the ESOP were released at historical cost based on the ratio of the
annual principal payment on the notes payable compared to the original
principal amount of the notes payable and allocated to employee
accounts. Unallocated shares in the ESOP, which were considered
outstanding for purposes of computing net income per Common Share, were
170,000 at the end of 1998 and 800,000 at the end of 1997. In 1999, all
remaining unallocated shares in the ESOP were allocated to employee
accounts. Cash dividends paid on shares in the ESOP were charged
against retained earnings and, along with Company contributions, were
used to repay the principal and interest due on the notes payable.
The Company has plans which permit eligible employees and directors to
defer a portion of their compensation. The Company has deposited $77
million of marketable securities and Common Shares into a trust to fund
a portion of these liabilities. The marketable securities are included
in other assets and the Common Shares are included in shareholders'
equity.
In July 1999, the Company publicly sold 1.625 million Common Shares for
net proceeds of $147 million.
In October 1999, the Company sold written put options on 100,000 Common
Shares. The options expire in April 2000 with a strike price of $71.77
per Common Share.
Stock Options
- -------------
Stock options have been granted to certain employees, under various
plans, to purchase Common Shares at prices equal to fair market value
as of date of grant. Historically, the majority of these options vest
ratably during the three-year period following the date of grant and
expire ten years from the date of grant.
During 1998 and 1997, the Company granted .6 million and 1.9 million
special performance-vested stock options, respectively, in lieu of the
more standard options. These options become exercisable when the
Company achieves certain net income and Common Share price targets. If
these targets are not achieved, these options become exercisable ten
days before the expiration of their ten-year term. Half of the options
granted in 1997 became exercisable during 1997 when the initial Common
Share price target of $85 was achieved.
<PAGE>
Page 24
A summary of stock option activity follows (shares in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ----------------
Average Average Average
price price price
per per per
share Shares share Shares share Shares
------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 $61.46 7.5 $55.85 6.8 $44.32 5.0
Granted 74.53 2.2 87.81 1.2 73.07 2.8
Exercised 44.95 (.8) 43.40 (.4) 43.49 (.9)
Canceled 75.12 (.2) 71.11 (.1) 59.85 (.1)
--- --- ---
Outstanding, December 31 $65.89 8.7 $61.46 7.5 $55.85 6.8
=== === ===
Exercisable, December 31 $55.39 4.6 $51.91 4.8 $49.71 4.5
Reserved for future
grants, December 31 .3 .4 1.5
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999 (shares in millions):
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
remaining exercise
Range of exercise Number contractual price per
prices per share outstanding life (years) share
- ---------------------------------------------------------------------
<S> <C> <C> <C>
$24.15 - $39.99 1.1 2.1 $33.65
$40.00 - $49.99 .7 5.1 48.56
$50.00 - $69.99 1.4 5.4 55.74
$70.00 - $79.99 4.1 8.0 71.72
$80.00 - $102.19 1.4 7.0 91.44
</TABLE>
The following table summarizes information about stock options that are
exercisable at December 31, 1999 (shares in millions):
<TABLE>
<CAPTION>
Weighted-
average
exercise
Range of exercise prices Number price per
per share exercisable share
- -----------------------------------------------------
<S> <C> <C>
$24.15 - $39.99 1.1 $33.65
$40.00 - $49.99 .7 48.56
$50.00 - $69.99 1.3 55.24
$70.00 - $79.99 1.3 72.02
$80.00 - $102.19 .2 88.69
</TABLE>
<PAGE>
Page 25
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-
Based Compensation". If the Company accounted for its stock options
under the fair value method of SFAS No. 123, net income (in millions)
and net income per Common Share would have been as indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $ 617 $ 349 $ 410
Assuming fair value method 602 338 390
Net income per Common Share-assuming
dilution
As reported $8.36 $4.80 $5.24
Assuming fair value method 8.16 4.65 4.99
Net income per Common Share-basic
As reported $8.51 $4.89 $5.34
Assuming fair value method 8.30 4.73 5.08
</TABLE>
The fair value of each option grant was estimated using the Black-
Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield 3% 3% 3%
Expected volatility 21% 22% 22%
Risk-free interest rate 4.7% to 6.1% 5.5% to 5.7% 6.0% to 6.7%
Expected option life in years 4 or 5 4, 5 or 6 4, 5 or 6
Weighted-average per
share fair value of
options granted
during the year $12.99 $18.73 $16.84
</TABLE>
Preferred Share Purchase Rights
- -------------------------------
In June 1995, the Company declared a dividend of one Preferred Share
Purchase Right for each outstanding Common Share. The Rights become
exercisable only if a person or group acquires, or offers to acquire,
20% or more of the Company's Common Shares. The Company is authorized
to reduce the 20% threshold for triggering the Rights to not less than
10%. The Rights expire on July 12, 2005, unless redeemed earlier at
one cent per Right.
When the Rights become exercisable, the holder of each Right, other
than the acquiring person, is entitled (1) to purchase for $250, one
one-hundredth of a Series C Preferred Share, (2) to purchase for $250,
that number of the Company's Common Shares or common stock of the
acquiring person having a market value of twice that price, or (3) at
the option of the Company, to exchange each Right for one Common Share
or one one-hundredth of a Preferred Share.
<PAGE>
Page 26
Comprehensive Income
- --------------------
The components of accumulated other comprehensive income (loss) as
reported in the Statement of Consolidated Shareholders' Equity are as
follows (in millions):
<TABLE>
<CAPTION>
Unrealized
Foreign gain (loss)
currency on available
translation for sale
adjustments securities Total
----------- ---------- -----
<S> <C> <C> <C>
Balance at January 1, 1997 $ (68) $ 1 $ (67)
1997 adjustment, net of income taxes (79) (10) (89)
Recognition in income of adjustment
related to divested businesses 8 8
----- ----- -----
Balance at December 31, 1997 (139) (9) (148)
1998 adjustment, net of income taxes (2) 6 4
Recognition in income of adjustment
related to divested businesses 34 34
----- ----- -----
Balance at December 31, 1998 (107) (3) (110)
1999 adjustment, net of income taxes (116) 3 (113)
Recognition in income of adjustment
related to divested businesses 3 3
----- ----- -----
Balance at December 31, 1999 $(220) $ 0 $(220)
===== ===== =====
</TABLE>
<PAGE>
Page 27
INCOME TAXES
- ------------
For financial statement reporting purposes, income before income taxes
(in millions), based on the geographical location of the operation to
which such earnings are attributable, is summarized below. Certain
foreign operations are branches of Eaton Corporation and are, therefore,
subject to United States as well as foreign income tax regulations. As
a result, pretax income by location and the components of income tax
expense by taxing jurisdiction are not directly related.
<TABLE>
<CAPTION>
Income before income taxes
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States $788 $455 $457
Non-United States 178 64 219
Write-off of foreign currency
translation adjustments related
to divested businesses (3) (34) (8)
---- ---- ----
$963 $485 $668
==== ==== ====
</TABLE>
Income tax expense for the years ended December 31 follows (in
millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current
United States
Federal $233 $(11) $ 99
State & local 10 9 14
Non-United States 52 42 42
---- ---- ----
295 40 155
Deferred
United States
Federal 28 90 20
State & local 5
Non-United States
Reduction of valuation allowance
for deferred income tax assets (4)
Operating loss carryforwards 17 (1) 15
Other 6 7 13
---- ---- ----
51 96 49
---- ---- ----
$346 $136 $204
==== ==== ====
</TABLE>
<PAGE>
Page 28
Reconciliations of income taxes at the United States Federal statutory
rate to the effective income tax rate for the years ended December 31
follow (in millions):
<TABLE>
<CAPTION>
1999
------------- 1998 1997
Amount Rate Rate Rate
------ ---- ---- ----
<S> <C> <C> <C> <C>
Income taxes at the United States
statutory rate $337 35.0% 35.0% 35.0%
Write-off of purchased in-process
research & development 4.5
State & local income taxes 7 .7 1.5 2.9
Amortization of goodwill & intangible
assets 13 1.4 1.6 1.0
Possessions credit related to Puerto
Rican operations (30) (3.2) (8.2) (5.7)
Credit for increasing research activities (11) (1.2) (2.7) (3.3)
Effective income tax rate differential
related to:
Sales of businesses 23 2.5 2.1 (1.9)
Foreign source income 14 1.5 .3 .2
Earnings of consolidated subsidiaries
and associate companies outside the
United States (22) (2.3) (1.0)
Other--net 15 1.5 (1.6) (1.2)
---- ---- ---- ----
$346 35.9% 28.0% 30.5%
==== ==== ==== ====
</TABLE>
Significant components of current and long-term deferred income taxes
at December 31 follow (in millions):
<TABLE>
<CAPTION>
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
<S> <C> <C> <C>
1999
Accruals & other adjustments
Employee benefits $ 52 $ 2 $ 205
Depreciation & amortization (4) (12) (443)
Other 133 10 30
Operating loss carryforwards of
non-United States subsidiaries 57 3
Other items 13 27 (4)
Valuation allowance (70)
----- ----- -----
$ 194 $ 14 $(209)
===== ===== =====
1998
Accruals & other adjustments
Employee benefits $ 43 $ 2 $ 187
Depreciation & amortization (4) (20) (233)
Other 99 10 24
Operating loss carryforwards of
non-United States subsidiaries 6 50 4
Other items 8 23 2
Valuation allowance (50)
----- ----- -----
$ 152 $ 15 $ (16)
===== ===== =====
</TABLE>
<PAGE>
Page 29
At December 31, 1999, certain non-United States subsidiaries had
operating loss carryforwards aggregating $173 million. Carryforwards
of $108 million have no expiration dates and the balance expires at
various dates from 2000 through 2009.
The Company has manufacturing facilities in Puerto Rico which operate
under United States tax law incentives that will no longer be available
after 2005.
No provision has been made for income taxes on undistributed earnings
of consolidated non-United States subsidiaries of $573 million at
December 31, 1999, since the earnings retained have been reinvested by
the subsidiaries. If distributed, such remitted earnings would be
subject to withholding taxes but substantially free of United States
income taxes.
Worldwide income tax payments in 1999, 1998 and 1997 (in millions) were
$169, $30 and $163, respectively.
The Internal Revenue Service (IRS) has asserted the Company owes
additional taxes and interest for 1993 relating to the treatment of
transactions involving company-owned life insurance. A similar issue
exists for 1994-1998. The Company strongly disagrees with the IRS and
is vigorously contesting the matter. Management believes resolution of
this matter will not have a material adverse effect on the Company's
results of operations, financial condition and cash flows.
<PAGE>
Page 30
OTHER INFORMATION
- -----------------
Assets
- ------
Accounts receivable are net of an allowance for doubtful accounts
of $14 million at the end of 1999 and 1998.
The components of inventories at December 31 follow (in millions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 341 $ 282
Work in process 348 297
Finished goods 313 197
------ ------
Gross inventories at FIFO 1,002 776
Excess of current cost over LIFO cost (37) (69)
------ ------
Net inventories $ 965 $ 707
====== ======
</TABLE>
Gross inventories accounted for using the LIFO method (in millions)
were $555 at the end of 1999 and $389 at the end of 1998.
Accumulated amortization of goodwill and intangible assets (in
millions) was $240 and $140 at the end of 1999 and $184 and $102 at the
end of 1998, respectively.
The Company has company-owned life insurance policies insuring the
lives of a portion of active United States employees. The policies
accumulate asset values to meet future liabilities including the
payment of employee benefits such as health care. At December 31, 1999
and 1998, the investment in the policies included in other assets (in
millions) was $53 and $21, net of policy loans of $397 and $345,
respectively. Net life insurance expense (in millions) of $8 in 1999,
$7 in 1998 and $8 in 1997, including interest expense of $32 in 1999,
and $33 in 1998 and 1997, is included in selling and administrative
expense.
Lease Commitments
- -----------------
Minimum rental commitments for 2000 under noncancelable operating
leases, which expire at various dates and in most cases contain renewal
options, are $90 million and decline substantially thereafter.
Rental expense in 1999, 1998 and 1997 (in millions) was $113, $90 and
$78, respectively.
<PAGE>
Page 31
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share-assuming dilution and
basic follows:
<TABLE>
<CAPTION>
(Millions except for per share data) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 617 $ 349 $ 410
===== ===== =====
Average number of Common Shares
outstanding - assuming dilution 73.7 72.7 78.2
Less dilutive effect of stock options 1.2 1.3 1.4
----- ----- -----
Average number of Common Shares
outstanding - basic 72.5 71.4 76.8
===== ===== =====
Net income per Common Share
Assuming dilution $8.36 $4.80 $5.24
Basic 8.51 4.89 5.34
</TABLE>
Employee stock options to purchase 1.5 million and 3.7 million Common
Shares were outstanding at the end of 1999 and 1998, respectively, but
were not included in the computation of net income per Common Share-
assuming dilution, since they would have had an antidilutive effect on
earnings per share.
<PAGE>
Page 32
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- ---------------------------------------------------
The Company is a global manufacturer of highly engineered products,
which serve the industrial, vehicle, construction, commercial,
aerospace and semiconductor markets with 195 manufacturing sites in 23
countries around the world.
As a result of the acquisition of Aeroquip-Vickers, and the
divestitures of the Fluid Power and Engineered Fasteners divisions and
Vickers Electronic Systems, the Company realigned its business segment
reporting in 1999. Principal changes include: Hydraulics and Other
Components was renamed Fluid Power and Other Components and includes
the operating results of Aeroquip-Vickers; Aerospace Controls was
reclassified from Industrial and Commercial Controls to Fluid Power and
Other Components; the Trucking Information Systems Division and Eaton
VORAD were reclassified from Automotive Components to Truck Components;
and the operating results of the Fluid Power and Engineered Fasteners
divisions, previously included in Automotive Components and Hydraulics
and Other Components, respectively, were reclassified to Divested
Operations due to their divestiture. Prior periods have been
reclassified to conform to the current presentation.
The Company's segments are based on the way that management aggregates
products and business units for making operating decisions and
assessing performance. Major products included in each segment and
other information follows.
Automotive Components
- ---------------------
Valve train systems, intake and exhaust valves, lash compensation
lifters and lash adjusters, cylinder heads, superchargers, limited slip
and locking differentials, transmission dampers, precision gear
forgings, air control valves, climate controls, convenience switches
(for power windows, door locks, mirrors, lights, etc.), engine sensors,
mirror actuators, transmission controls, keyless entry systems, daytime
running lamps, speed-sensitive steering systems, on-board vapor
recovery valves, check valves, fuel level sensors and pressure control
valves
Fluid Power and Other Components
- --------------------------------
All pressure ranges of hose, fittings, adapters, couplings and other
fluid power connectors; hydraulic pumps, motors, valves, cylinders,
power steering units, transaxles and transmissions; electronic and
hydraulic controls; electric motors and drives; filtration products and
fluid-evaluation products and services; aerospace products and systems
- - hydraulic and electrohydraulic pumps, motors, electric motor pumps,
hydraulic motor driven generators and integrated system packages,
hydraulic and electromechanical actuators, flap and slat systems, nose
wheel steering systems, cockpit controls, power and load management
systems, sensors, fluid debris monitoring products, illuminated
displays, integrated displays and panels, relays and valves; clutches
and brakes for industrial machines; golf grips and precision molded and
extruded plastic products
<PAGE>
Page 33
Industrial and Commercial Controls
- ----------------------------------
To control and protect electric motors -- drives, contactors, starters,
and other motor control products; for position sensing -- a wide range
of sensors; to control machine logic -- automation personal computers
and programmable logic controllers; to permit human interface with
machines -- a full range of operator interface hardware and software;
to manage distribution of electricity in homes, businesses and
industrial facilities -- vacuum interrupters, a wide range of circuit
breakers and a variety of power distribution and control assemblies and
components; to support customer power and control system requirements -
- - engineering systems and diagnostic and support services; for
commercial and military applications -- thermal circuit breakers and
power control and conversion equipment
Semiconductor Equipment
- -----------------------
High- and medium- current implanters and high-energy implanters;
integrated implant products and services and other products including
photostablizers, ozone and plasma ashers, thermal processing systems
and flat panel display equipment
Truck Components
- ----------------
Heavy-, medium-, and light-duty mechanical transmissions, heavy-duty
automated transmissions, heavy- and medium-duty clutches, traction
control systems, transfer boxes, power take-off units, splitter boxes,
gearshift mechanisms, transmissions for off-highway construction
equipment, intelligent cruise control systems, collision warning
systems and transportation logistics management systems
Other Information
- -----------------
The principal markets for Automotive Components, Truck Components, and
Fluid Power and Other Components are original equipment manufacturers
and after-market customers of heavy-, medium-, and light-duty trucks,
passenger cars, off-highway vehicles, industrial equipment and
aerospace products and systems. The original equipment manufacturers
are generally concentrated in North America and Europe; however, sales
are made globally. Most sales of these products are made directly to
such manufacturers.
The principal markets for Industrial and Commercial Controls are
industrial, construction, commercial, automotive and government
customers. The principal market for Semiconductor Equipment is
integrated circuit manufacturers. These customers are generally
concentrated in North America; however, sales are made globally. Sales
are made directly by the Company and indirectly through distributors
and manufacturers' representatives to such customers.
No single customer represented more than 10% of the Company's net sales
in 1999 or 1998. Net sales to divisions and subsidiaries of one
customer, primarily from the Automotive Components, Truck Components,
and Fluid Power and Other Components segments, were $766 million in
1997 (10% of sales). Sales from ongoing United States and
<PAGE>
Page 34
Canadian operations to customers in foreign countries (in millions)
were $782 in 1999, $812 in 1998 and $590 in 1997 (10% of sales in 1999,
12% in 1998 and 9% in 1997).
The accounting policies of the segments are generally the same as the
policies described under "Accounting Policies" in the Financial Review,
except that inventories and related cost of products sold of the
segments are accounted for using the FIFO method and the segment
results only reflect the service cost component related to pensions and
other postretirement benefits.
The Company accounts for intersegment sales and transfers at the same
prices as if the sales and transfers were made to third parties.
Identifiable assets exclude general corporate assets, which
principally consist of short-term investments, deferred income taxes,
certain accounts receivable, certain property, plant and equipment, and
certain other assets.
<PAGE>
Page 35
Business Segment Information
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales
Automotive Components $1,857 $1,741 $1,601
Fluid Power & Other Components 2,036 681 657
Industrial & Commercial Controls 2,274 2,145 2,091
Semiconductor Equipment 397 267 459
Truck Components 1,630 1,478 1,177
------ ------ ------
Total ongoing operations 8,194 6,312 5,985
Divested operations 208 313 1,578
------ ------ ------
Total net sales $8,402 $6,625 $7,563
====== ====== ======
Operating profit (loss)
Automotive Components $ 236 $ 198 $ 191
Fluid Power & Other Components 177 117 123
Industrial & Commercial Controls 181 140 182
Semiconductor Equipment 31 (123) 29
Truck Components 235 201 149
------ ------ ------
Total ongoing operations 860 533 674
Divested operations 44 49 150
Amortization of goodwill & other
intangible assets (99) (67) (48)
Purchased in-process research & development (85)
Interest expense - net (152) (88) (79)
Gain on sales of businesses 340 43 91
Corporate & other - net (30) 15 (35)
------ ------ ------
Income before income taxes & extraordinary item $ 963 $ 485 $ 668
====== ====== ======
Income before income taxes & extraordinary item was reduced by the following
unusual items (in millions):
Automotive Components $ 12 $ 12
Fluid Power & Other Components $ 21 1 1
Industrial & Commercial Controls 28 6
Semiconductor Equipment 43 1
Truck Components 7 17 4
Corporate 2 10
</TABLE>
<PAGE>
Page 36
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Identifiable assets
Automotive Components $1,020 $1,012 $ 851
Fluid Power & Other Components 1,504 359 331
Industrial & Commercial Controls 1,109 1,090 968
Semiconductor Equipment 316 254 344
Truck Components 767 725 607
------ ------ ------
Total ongoing operations 4,716 3,440 3,101
Divested operations 125 495
Goodwill 1,905 1,025 966
Intangible assets 625 214 224
Corporate 1,191 861 820
------ ------ ------
Total assets $8,437 $5,665 $5,606
====== ====== ======
Expenditures for property, plant & equipment
Automotive Components $ 123 $ 115 $ 100
Fluid Power & Other Components 118 43 32
Industrial & Commercial Controls 76 144 111
Semiconductor Equipment 16 14 14
Truck Components 120 126 53
------ ------ ------
Total ongoing operations 453 442 310
Divested operations 9 14 89
Corporate 34 27 39
------ ------ ------
Total expenditures for property, plant &
equipment $ 496 $ 483 $ 438
====== ====== ======
Depreciation of property, plant & equipment
Automotive Components $ 81 $ 80 $ 77
Fluid Power & Other Components 78 24 22
Industrial & Commercial Controls 73 64 56
Semiconductor Equipment 10 11 7
Truck Components 51 52 47
------ ------ ------
Total ongoing operations 293 231 209
Divested operations 7 10 56
Corporate 26 18 20
------ ------ ------
Total depreciation of property, plant &
equipment $ 326 $ 259 $ 285
====== ====== ======
</TABLE>
<PAGE>
Page 37
Geographic Region Information
<TABLE>
<CAPTION>
Ongoing operations
--------------------------
Long-
Net Operating lived
(Millions) sales profit assets*
----- --------- ------
<S> <C> <C> <C>
1999
United States $6,689 $ 746 $1,691
Canada 172 12 11
Europe 1,333 67 390
Latin America 365 29 196
Pacific Region 232 6 81
Eliminations (597)
------ ------ ------
$8,194 $ 860 $2,369
====== ====== ======
1998
United States $5,156 $ 450 $1,214
Canada 160 10 9
Europe 888 58 276
Latin America 413 23 223
Pacific Region 136 (8) 51
Eliminations (441)
------ ------ ------
$6,312 $ 533 $1,773
====== ====== ======
1997
United States $4,931 $ 576 $1,102
Canada 149 7 10
Europe 779 55 253
Latin America 406 30 143
Pacific Region 138 6 27
Eliminations (418)
------ ------ ------
$5,985 $ 674 $1,535
====== ====== ======
</TABLE>
*Long-lived assets consist of property, plant, and equipment - net.
Operating profit was reduced by the following unusual items (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States $21 $85 $ 4
Canada 5
Europe 7 7 12
Latin America 1 1
Pacific Region 8 2
</TABLE>
<PAGE>
Page 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All references to net income per Common Share assume dilution, unless
otherwise indicated.
OVERVIEW
- --------
1999 proved to be a very eventful and significant year with the Company
reporting record sales, net income and net income per Common Share.
While the most significant contribution to the increase in sales was
the addition of Aeroquip-Vickers, Inc., increases were registered by
all businesses. Four of the Company's five segments, Automotive
Components, Fluid Power and Other Components, Industrial and Commercial
Controls, and Truck Components, all reported record sales in 1999. The
semiconductor capital equipment market, which is served by the fifth
segment, began an extraordinary worldwide rebound in 1999, resulting in
a sales increase of almost 50%.
On April 9, 1999, Eaton acquired Aeroquip-Vickers, Inc., the largest
acquisition in the Company's history. Aeroquip-Vickers had 1998 sales
of $2.1 billion. This significant acquisition, as discussed under
"Acquisitions of Businesses" in the Financial Review, builds upon and
extends the Company's already strong position in mobile and industrial
hydraulics. With the Vickers portion of this acquisition, Eaton
acquired a global leader in industrial hydraulics, generating $1.1
billion in annual sales to serve mobile and industrial customers. This
complementary acquisition fundamentally positions Eaton's hydraulics
business among the world leaders. Eaton expands upon the existing
strengths in hydraulics with the Aeroquip portion of the acquisition
holding a $1.0 billion position in hoses and couplings, serving mobile
and industrial, aerospace and automotive customers. Together, Eaton
and Aeroquip-Vickers create an aerospace and hydraulics business and a
systems capability across all hydraulics applications. The operating
results of the Aeroquip and Vickers businesses are reported in the
Fluid Power and Other Components business segment.
1999 COMPARED TO 1998
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Worldwide sales reached a record $8.4 billion in 1999, 27% ahead of
1998 results. The increase in sales in 1999 was primarily attributable
to the acquisition of Aeroquip-Vickers. Sales in the United States and
Canada increased 29% and rose 50% in Europe. In Latin America, sales
decreased 12% as this region continues to struggle with economic
weaknesses in Mexico, Brazil, and Argentina. Sales in the Pacific
Region increased 71% in 1999, reflecting a partial recovery from the
economic crisis that occurred in Asia in 1998.
As displayed in the Statement of Consolidated Income, Income from
Operations of $729 million in 1999 increased 51% from 1998. Excluding
the gain on sales of businesses and unusual charges in both years, net
income of $439 million in 1999 increased 12% from 1998 and full year
1999 earnings per share were $5.95, 10% above last year.
<PAGE>
Page 39
The Company's improved performance in 1999 can be attributed to the
acquisition of Aeroquip-Vickers, robust conditions in the Truck,
Automotive, and Industrial and Commercial Controls markets, the rebound
of the Semiconductor Equipment market and the benefits of last year's
restructuring actions. Conditions in the Fluid Power business, however,
remain very weak, but excellent progress is being made integrating
Aeroquip-Vickers into the Company's businesses. During 1999, the
Aeroquip and Vickers businesses added about $.27 to earnings per share
before unusual charges.
In 1999, the divestitures of the Engineered Fasteners and Fluid Power
divisions resulted in the Company recording a pretax gain of $340
million ($198 million aftertax, or $2.68 per Common Share). The
Engineered Fasteners and Fluid Power divisions had 1998 sales of $94
million and $189 million, respectively. The Company also recorded
unusual charges of $30 million ($20 million aftertax, or $.27 per
Common Share) during 1999. These charges were associated with the
integration of Aeroquip-Vickers into the Company and the restructuring
of certain European operations in the Truck Components segment.
In 1998, a pretax gain of $43 million ($28 million aftertax, or $.38
per Common Share) was recognized related to business divestitures, net
of adjustments related to businesses sold in prior periods. During
1998, the Company recorded unusual pretax charges of $111 million ($72
million aftertax, or $.99 per Common Share), which included $101
million to restructure operations within certain business segments and
$10 million for a contribution to Eaton's charitable trust. The
restructuring charges principally related to workforce reductions,
inventory and other asset write-downs, plant closing and other costs.
Net income reached a record $617 million in 1999, increasing 77% from
1998 and full year earnings per share were a record $8.36, up 74% from
1998.
The Company's improved performance during the year is also reflected in
cash earnings per share before non-cash amortization of acquisition-
related goodwill and other intangibles. Cash earnings per share in 1999
were $9.45, an increase of 72% from last year's $5.51. Excluding
unusual items in both years, cash earnings per share in 1999 were
$7.04, an increase of 15% from last year's $6.12. Cash earnings per
share has been included because it is commonly used by financial
analysts as one measure of a company's operating performance. Cash
earnings per share are not determined using generally accepted
accounting principles and, therefore, are not necessarily comparable to
other companies. Cash earnings per share should not be considered in
isolation or as a substitute for, or more meaningful than, measures of
performance determined in accordance with generally accepted accounting
principles.
<PAGE>
Page 40
BUSINESS SEGMENTS
- -----------------
AUTOMOTIVE COMPONENTS
- ---------------------
The Automotive Components segment achieved record sales of $1.86
billion in 1999, 7% above 1998. This increase compares to increases of
9% in North American light vehicle production and 2% in European output
and a 20% decrease in South American output. This above-market
performance can be attributed to penetration gains across the Company's
product lines.
Operating profits reached a record $236 million, an increase of 19%
compared to 1998 results. This record performance can be attributed to
the increased sales and benefits of 1998's restructuring initiatives.
Operating profit in 1999 was 12% ahead of last year's results before
restructuring charges of $12 million in 1998.
FLUID POWER & OTHER COMPONENTS
- ------------------------------
The Fluid Power and Other Components segment achieved record sales of
$2.04 billion in 1999, well above 1998 sales of $681 million. The
increase in sales was primarily due to the acquisition of Aeroquip-
Vickers. Despite the very weak hydraulics markets, the first tentative
signs of an improvement in industry conditions since mid-1998 were seen
with fourth quarter 1999 orders for mobile and industrial hydraulics up
about 17% compared to last year. Aeroquip's fluid conveyance business
also finished 1999 on a strong note.
Operating profits reached a record $177 million in 1999, an increase of
51% from 1998 results. Before unusual charges in both years, operating
profits were 68% ahead of last year. While neither an early or brisk
rebound in 2000 is anticipated, the Company is confident that the
synergies originally anticipated from the consolidation of Aeroquip-
Vickers operations with Eaton will be achieved.
During 1999, operating profits were reduced by charges of $21 million
related to the integration of Aeroquip-Vickers, as discussed under
"Unusual Charges" in the Financial Review.
INDUSTRIAL & COMMERCIAL CONTROLS
- --------------------------------
Sales of Industrial and Commercial Controls reached a record $2.27
billion in 1999, 6% ahead of last year's results and exceeding the 3%
rise in the North American market for electrical distribution equipment
and industrial controls. This year's sales growth can be attributed to
strong residential and commercial construction markets, new multi-
product "solutions" packaging, and a sharp increase in shipments in the
Navy Controls business that the Company believes will be sustained in
2000. The Cutler-Hammer business was boosted by the Company's new
Engineering Services business unit whose sales nearly tripled from the
previous year.
Operating profits of $181 million in 1999 were also a record, 29% above
1998 results. 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. Operating
profits were 8% ahead of last year before 1998 restructuring charges of
$28 million.
<PAGE>
Page 41
SEMICONDUCTOR EQUIPMENT
- -----------------------
Semiconductor Equipment sales of $397 million in 1999 were nearly 50%
above last year's comparable results. Current industry forecasts
suggest that worldwide semiconductor equipment purchases should rise
about 30% in 2000, and that the industry is just beginning at least a
three-year up cycle.
This segment returned to double-digit profitability in 1999 reaching an
operating profit of $31 million compared to an operating loss of $123
million in the comparable period in 1998, which included a 1998 charge
of $43 million to restructure the business. The 1999 results reflect
the hard-earned benefits of 1998's operational restructuring actions as
well as a resurgent market.
On February 24, 2000, the Company announced that it
had engaged Goldman, Sachs & Co. to study the feasibility of
selling a minority equity interest in its Semiconductor
Equipment segment through an initial public offering. A possible
sale of equity would involve less than a 20 percent equity
interest in the Company's Semiconductor Equipment business.
TRUCK COMPONENTS
- ----------------
Truck Components sales in 1999 reached a record $1.63 billion,
increasing 10% compared to 1998. This sales growth compares with a 20%
rise in NAFTA Class 8 factory sales, flat European commercial truck
production, and a decline of 25% in South American truck output. The
Company took good advantage of boom conditions in North American truck
markets and worked hard to meet the challenge of surging demand.
Operating profits reached a record of $235 million in 1999, 17% ahead
of one year ago. Before restructuring charges in both years, operating
profits were 11% ahead of last year. These results are primarily due to
increased sales offset by operating inefficiencies stemming from
unprecedented demand. As the market returns to a more stable annual
rate of about 300 thousand units, the Company expects those incremental
costs to dissipate.
In 1999, the Company recorded restructuring charges of $7 million
related to the announced closure of the Aycliffe, United Kingdom
medium-duty transmission plant. This closure is a part of the
Company's original 1998 $150 million cost-out program. These charges
are discussed under "Unusual Charges" in the Financial Review.
NON-OPERATING INCOME (EXPENSE)
- -----------------------------
Amortization of goodwill and other intangible assets of $99 million in
1999 increased by $32 million compared to the same period in 1998.
This increase was largely attributable to the acquisition of Aeroquip-
Vickers.
Net interest expense of $152 million in 1999 increased by $64 million
compared to the same period in 1998. The increase was primarily due to
borrowings required to finance the acquisition of Aeroquip-Vickers.
As previously discussed, the Company recorded a gain on the sales of
businesses of $340 million in 1999 compared to $43 million in 1998.
Corporate and other expenses of $30 million in 1999 increased by $45
million compared to the same period in 1998. The year-to-year change
was related primarily to incentive compensation and deferred
compensation accruals. A $24 million increase in incentive compensation
accruals related to the record performance in 1999 compared to the
<PAGE>
Page 42
disappointing operating results the Company experienced in 1998,
resulting in higher compensation expense. A $19 million increase in
deferred compensation accruals was due to an increase in the stock
price during 1999 from the year-end level of 1998, which drove an
increase in the accrual in 1999. In order to substantially eliminate
the effect of changes in the market price of Eaton Common Shares on the
deferred compensation liability, in 2000, the Company entered into a
financial instrument, maturing in January 2001, which is indexed to the
price of Common Shares.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
The Company continues to generate substantial cash from operations,
which continues to be the primary source of funds to finance operating
needs. When combined with emphasis on asset management, operations
generated operating cash flow of $682 million in 1998 compared to $642
million in 1998.
Total debt increased to $2.9 billion at year-end 1999 primarily due to
the financing required for the acquisition of Aeroquip-Vickers for
$1.623 billion in cash, which is more fully discussed under
"Acquisitions of Businesses" in the Financial Review. Funds for this
acquisition were initially obtained through the issuance of commercial
paper.
In July 1999, the Company completed the sale of 1.625 million Common
Shares for net proceeds of $147 million and in November 1999, the
Company sold $450 million of notes and debentures. The Company sold the
Engineered Fasteners division on August 31, 1999, the Fluid Power
division on October 1, 1999 and substantially all of Vickers Electronic
Systems on December 30, 1999. Proceeds from the sales of these
businesses amounted to $544 million. The proceeds from these
transactions were used to refinance a portion of outstanding commercial
paper.
As discussed under "Debt and Other Financial Instruments" in the
Financial Review, the Company's credit facilities stood at $1.6 billion
at December 31, 1999, of which $1.1 billion matures in April 2000 and
$500 million matures in May 2003. These credit facilities support
outstanding commercial paper of $1.2 billion at December 31, 1999 of
which $500 million is classified as long-term debt.
Net working capital was $133 million at year-end 1999 compared to $466
million at year-end 1998 and the current ratio was 1.1 compared to 1.3
at those dates, respectively. The increase in short-term debt resulting
from the acquisition of Aeroquip-Vickers was the primary cause of the
reduction in working capital. Accounts receivable and inventory
turnover rates continue to be strong and showed continued improvement
in 1999.
Cash dividends paid in 1999 were $128 million and represented 21% of
net income. Annual per share dividends of $1.76 in 1999 were
consistent with 1998. The Company has paid dividends on Common Shares
annually since 1923.
<PAGE>
Page 43
In January 2000, to avoid the dilution of earnings per share resulting
from the exercise of stock options, the Board of Directors authorized
the purchase of up to $500 million of Common Shares over a five-year
period. This authorization replaces the expiring five million share
repurchase program authorized in 1994. Approximately 4.9 million
shares were purchased under the expired program.
Emphasis continues to be placed on the ongoing physical capital
investment program designed to enhance product quality, manufacturing
productivity and business growth, reduce costs and, selectively, to add
capacity. Capital expenditures for 1999 reached a record $496 million,
3% above 1998. Over the past five years, nearly $2.2 billion has been
spent in capital expenditures. Capital spending in 2000 is expected to
continue at the level reached in 1999.
Goodwill and other intangible assets represented 23% and 7% of total
assets and 73% and 24% of shareholders' equity at December 31, 1999,
respectively. The increase in goodwill and other intangible assets was
primarily the result of the acquisition of Aeroquip-Vickers. The
amortization period for goodwill of forty years and the useful lives of
identified intangible assets acquired with Aeroquip-Vickers were based
on the fact that Aeroquip-Vickers was an established company with a
long history of success and the Aeroquip and Vickers businesses should
continue to operate profitably for many years to come. Each business
holds a number one or two market position in the majority of its
product lines and its products are well accepted by customers, which
should continue in the future. The Aeroquip and Vickers products are
not subject to rapid technological or functional obsolescence which
will result in continuous strong demand for products for many years.
The integration of the Aeroquip and Vickers businesses and product
lines into Eaton is expected to create permanent value well into the
future through the streamlining of product lines, manufacturing
capacity and organization structure. This will enable the combined
businesses to obtain the maximum synergy of complementary product
offerings, operations and technical expertise for many years to come.
The Company has deferred income tax assets of $208 million as of
December 31, 1999 and believes these assets will be realized through
the reduction of future taxable income. Significant factors considered
by management in the determination of the probability of realization of
deferred tax assets include historical operating results, expectations
of future earnings and the extended period of time over which the
postretirement health care liability will be paid.
During the first quarter of 1999, the Brazilian real currency devalued
significantly. The effect of this devaluation on the net assets of the
Company's operations in Brazil resulted in a $75 million foreign
currency translation loss for full year 1999 which is reported in
shareholders' equity, in other comprehensive income (loss).
The Company is subject to various inherent financial risks attributable
to operating in a global economy. Derivative financial instruments are
utilized to manage exposures in both the interest and foreign exchange
markets. Systems to measure and assure that these exposures are
evaluated comprehensively have been developed so that appropriate and
<PAGE>
Page 44
timely action can be taken to reduce risk, if necessary. Monitoring of
exposures and the evaluation of risks includes approval of derivative
activities on a discrete basis by senior management. Monthly,
management performs an oversight review of exposures and derivative
activities. The counterparties used in these transactions have been
diversified in order to minimize the impact of any potential credit
loss in the event of nonperformance by the counterparties. Although
derivatives are an integral part of risk management programs, their
incremental effect on financial condition and results of operations is
not material. Derivative activities are described in greater detail
under "Debt and Other Financial Instruments" in the Financial Review.
Operations of the Company involve the use and disposal of certain
substances regulated under environmental protection laws. On an
ongoing, regular basis, certain processes continue to be modified in
order to reduce the impact on the environment, including the reduction
or elimination of certain chemicals used in and wastes generated from
operations. Liabilities related to environmental matters are further
discussed under "Protection of the Environment" in the Financial
Review.
MARKET RISK DISCLOSURE
- ----------------------
The Company is subject to interest rate risk as it relates to long-term
debt. The table below presents principal cash flows (in millions) and
related weighted-average interest rates by expected maturity dates of
long-term debt, excluding foreign currency principal swaps.
<TABLE>
<CAPTION>
December 31, 1999 Expected maturity date
-----------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current portion
Fixed rate (US$) $ 10 $102 $ 27 $254 $1,008 $1,401 $1,443
Average interest rate 12.5% 9.0% 6.6% 6.9% 7.6% 7.5%
Commercial paper (US$) $500 500 500
Average interest rate 6.1% 6.1%
Fixed rate (Renminbi) 3 3 3
Average interest rate 7.8% 7.8%
Fixed rate (Real) 2 1 12 15 15
Average interest rate 17.2% 16.7% 17.2% 17.2%
December 31, 1998 Expected maturity date
-----------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term debt, including
current portion
Fixed rate (US$) $107 $ 11 $100 $584 $802 $895
Average interest rate 6.5% 12.1% 9.0% 7.9% 7.9%
Commercial paper (US$) $500 500 500
Average interest rate 5.3% 5.3%
Fixed rate (Renmimbi) 1 3 4 4
Average interest rate 9.2% 9.4% 9.3%
</TABLE>
<PAGE>
Page 45
See "Changes in Financial Condition" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for details
on the Company's primary market risks, and the objectives and
strategies used to manage these risks. Also, see "Financial
Instruments" under Accounting Policies in the Financial Review for
additional information on market risks.
YEAR 2000
- ---------
Based on operations since January 1, 2000, the Company has not
experienced any significant business disruptions related to the Year
2000 issue. The Company incurred total Year 2000 program costs of $120
million between 1995 and 1999. These costs included compensation and
benefit costs of employees who were fully dedicated to the Year 2000
compliance effort, replacement costs of certain hardware and software
and costs associated with modifying and upgrading existing systems.
EURO
- ----
On January 1, 1999, eleven of the fifteen member countries of the
European Union (EU) began a three-year transition phase during which
the Euro was adopted as their common legal currency. The Euro is
traded on currency exchanges and is available for non-cash
transactions. During the transition period, public and private parties
may pay for goods and services using either the Euro or the
participating country's legacy currency on a "no compulsion, no
prohibition" basis. The conversion rates between the existing legacy
currencies and the Euro were fixed on January 1, 1999. The legacy
currencies will remain legal tender for cash transactions between
January 1, 1999 and June 30, 2002 by which date all legacy currencies
will have been withdrawn from circulation and the new Euro denominated
bills and coins will be used for cash transactions.
The Company has several operations within the eleven participating
countries that have adopted the Euro as the legal currency of the
country. These operations and the Company's operations in other
European countries and elsewhere in the world are conducting business
transactions with customers and suppliers denominated in the Euro. Euro
denominated bank accounts have been established to accommodate Euro
transactions. The Company's exposure to changes in European foreign
exchange rates has reduced as a result of the Euro conversion.
The Company has established a steering committee to review strategic
and tactical areas arising from the Euro conversion. Their efforts
focused on those aspects of the Euro conversion required to conduct
Euro-denominated business transactions during 1999. Those aspects
included transacting business in the Euro, the competitive impact on
<PAGE>
Page 46
product pricing and adjustments to billing systems to handle parallel
currencies. The Company has the systems to handle Euro transactions
and is capable of transacting business in Euro's during the
transitional period until December 31, 2001. Continuing analysis and
development efforts by the steering committee and project teams at the
business units continues to ensure that the full implementation,
systems upgrades, policy and procedural changes for Euro functionality
are adopted in line with the timetable and regulations established by
the EU by January 1, 2002.
Based on current estimates, the Company does not expect the costs
incurred to address the Euro will have a material impact on the
financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company has included in this Annual Report certain anticipated
effects of strategic moves, expectations of the semiconductor capital
equipment market and the Navy Controls business, synergies anticipated
from the combination of Eaton and Aeroquip-Vickers, the dissipation of
costs in the Truck Components segment and expectations for capital
spending. Actual results could differ materially from these forward-
looking statements since they inherently are subject to risks and
uncertainties. Important factors which could cause such a difference
include global economic and financial conditions, market demand, the
ability to successfully integrate Aeroquip-Vickers operations into
Eaton, the ability to manage costs in the Truck Components segment,
continuity of business relationships with and purchases by major
customers, competitive pressure on sales and pricing, increases in
material and other production costs which cannot be recouped in product
pricing, global economic and market conditions, and the impact of the
conversion to the Euro currency.
1998 COMPARED TO 1997
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Worldwide sales of $6.6 billion in 1998 were 12% below the results of
1997. Year-to-year comparisons were materially affected by business
divestitures, which reduced sales in 1998 by about $1.3 billion.
Worldwide sales of ongoing operations in 1998 were 5% ahead of last
year's results. Sales in the United States and Canada increased 5% and
increased 14% in Europe. In Latin America, sales increased only 2% in
1998 compared to 1997 as a result of economic weaknesses in Mexico,
Brazil, and Argentina. Sales in the Pacific Region remained flat in
1998, as a result of the recession in Japan and the economic crisis in
Asia.
As displayed in the Statement of Consolidated Income, Income from
Operations of $482 million in 1998 decreased 22% from 1997. The
decrease reflected divested businesses, the collapse of the
semiconductor capital equipment market and the unusual charges
described below. Further, as a consequence of continuing efforts to
enhance the existing product portfolio, as well as to develop new
products to serve expanding markets, $334 million was spent in 1998 on
<PAGE>
Page 47
research and development, 5% above 1997. Research and development
expense as a percentage of net sales increased to 5% in 1998 from 4% in
1997.
During 1998, the Company recorded unusual pretax charges of $111
million, which included $101 million to restructure business segments
and $10 million for a contribution to Eaton's charitable trust. The
restructuring charges principally related to noncash inventory and
other asset write-downs of $46 million, workforce reductions of $41
million, and plant closings and other costs of $14 million. The
workforce reductions, plant closings and other costs involved cash
expenditures of $16 million which were made in 1998 and the remaining
balance of $39 million was substantially utilized in 1999. These
expenditures were funded with cash provided by operations.
The Semiconductor Equipment segment recorded $43 million of the
restructuring charge with the balance recorded by various operations in
the other business segments. Workforce reductions included in these
restructuring charges involved several Semiconductor Equipment
locations as well as certain other plants in the Automotive Components,
Industrial and Commercial Controls, and Truck Components segments.
Approximately 2,825 operations employees and 175 corporate employees
were expected to be terminated. Approximately 900 were terminated in
1998 and approximately 100 have yet to be terminated as of year-end
1999, primarily from the Industrial and Commercial Controls segment.
These reductions were generally manufacturing personnel, although
certain administrative functions were also affected. Production at
certain plants was consolidated into other existing facilities as the
Company continued the process of reducing costs to benefit customers
and better accommodate the markets that these plants serve. Industrial
and Commercial Controls operations in the Pacific Region were also
realigned to better position the Company's businesses in that region.
In 1998, a pretax gain of $43 million was recognized related to
business divestitures, net of adjustments related to businesses sold in
prior periods.
A pretax gain of $91 million was recognized in 1997 for the sales of
businesses. Results for 1997 also included unusual pretax charges of
$24 million for business segment restructuring actions and an $85
million write-off of purchased in-process research and development
related to the acquisition of Fusion Systems. Details of the write-off
of purchased in-process research and development is described under
"Acquisitions of Businesses" in the Financial Review. Finally, an
aftertax extraordinary loss of $54 million was recognized in 1997 for
the redemption of debentures.
Before unusual items in both years, net income of $393 million in 1998
decreased 21% from 1997 and full year 1998 earnings per share were
$5.41, down 15% from last year. After unusual items, net income of
$349 million in 1998 decreased 15% from 1997 and full year earnings per
share were $4.80, down 8% from 1997.
<PAGE>
Page 48
BUSINESS SEGMENTS
- -----------------
AUTOMOTIVE COMPONENTS
- ---------------------
The Automotive Components segment achieved sales of $1.74 billion in
1998, 9% above 1997. During the first quarter of 1998, G.T. Products,
a U.S. manufacturer of fuel system components that regulate fuel flow
and vapor emissions in automotive fuel tanks, was acquired. During the
third quarter of 1998, the assets of Amtec S.p.A., a privately owned
Italian manufacturer of automotive cylinder heads, were acquired.
Excluding the acquisitions of G.T. Products and Amtec, sales were still
4% ahead of last year, which was consistent with the increase in light
vehicle production in the Americas and Europe.
Operating profit of $210 million, before restructuring charges of $12
million, increased 3% from comparable 1997 results. This segment
struggled with product mix and higher than anticipated costs to expand
operations in China, Korea, and Brazil which was offset by stronger
than expected European volumes and continued impressive new product
wins across all product lines.
The restructuring charges of $12 million related to management's plan
to consolidate production at three manufacturing facilities into other
existing locations in order to reduce costs in reaction to ongoing
price pressure from customers and increased competition in markets
served. These restructuring charges primarily related to workforce
reductions of approximately 850 employees. Asset write-downs and other
costs were also recorded for the closing of these facilities.
Production was phased out at the Actuator and Sensor Division in
Hamilton, Indiana, and was completed in the third quarter of 1999.
Production was phased out at the Vehicle Switch/Electronics Division in
Winamac, Indiana, and was completed in the third quarter of 1999. The
automotive electronics manufacturing and engineering done at the
Actuator and Sensor Division in Rochester Hills, Michigan, was
transferred to another facility and completed in the fourth quarter of
1999.
To accommodate the fast growing demand for superchargers, the Athens,
Georgia plant started expansion plans in 1998. A new automotive
differential plant in Hastings, Nebraska was also opened during 1998 to
meet higher customer demand.
FLUID POWER & OTHER COMPONENTS
- ------------------------------
The Fluid Power and Other Components segment achieved sales of $681
million in 1998. Sales were 4% ahead of last year, an increase that
was consistent with the year-to-year change in North American mobile
hydraulics shipments. First half sales gains in 1998 dissipated before
year-end as orders in the mobile hydraulics industry reached a plateau
in the second quarter and the Asian crisis started to hurt customer
exports. As 1998 progressed, agricultural equipment production, an
important market for this segment, fell sharply.
Operating profit of $118 million, before restructuring charges of $1
million, decreased 5% from comparable results in 1997. Profits were
reduced in the first half of 1998 due to manufacturing inefficiencies
stemming from efforts to meet high customer demand. In the second half
<PAGE>
Page 49
of 1998, the Company adjusted production and employment radically
downward in light of decreased demand.
INDUSTRIAL & COMMERCIAL CONTROLS
- ----------------------------------
Sales of Industrial and Commercial Controls reached $2.15 billion in
1998. Sales were 3% ahead of 1997 results as the strong market for
electrical distribution equipment offset softness in industrial
controls markets. This segment's above-market growth was attributable
to strong construction and aerospace markets, and to the initial
success of Cutler-Hammer's new Engineering Services and Systems
business. In January 1998, this new business was formed to provide
technical and field support for all of Cutler-Hammer's electrical
system and industrial control and automation customers. Several minor
acquisitions were also made to grow this business during 1998.
Before restructuring charges of $28 million, operating profits of $168
million in 1998 fell 11% below comparable results in 1997. Earnings
from the solid activity levels in electrical distribution equipment did
not fully offset continued softness in industrial controls markets.
Cutler-Hammer's new Engineering Services and Systems Division also
incurred significant start-up costs during 1998.
The restructuring charges of $28 million related to management's plan
to divest a non-strategic product line and the consolidation of three
domestic facilities into other existing locations due to increased
pressure for cost improvements, brought on in part by increased global
competition. The restructuring charges related to workforce reductions
of approximately 550 employees, of which 300 have been terminated as of
December 31, 1998. These charges also included inventory and other
asset write-downs and other costs. The Company divested its porcelain
lighting fixture product line in Pageland, South Carolina.
Manufacturing at the Salisbury, Maryland, plant was transferred to
another facility and was substantially completed by the end of 1998.
Production at the Oldsmar, Florida facility was transferred and
completed in the fourth quarter of 1999. Certain production was
transferred from the Grand Prairie, Texas, location and was completed
by the end of the second quarter of 1999. Operations in the Pacific
Region were also realigned to better position the businesses in that
region. These charges related to workforce reductions of approximately
600 employees, of which approximately 200 have been terminated as of
December 31, 1998. These charges also included inventory and other
asset write-downs as these businesses were consolidating facilities and
operations to be more competitive in the region.
SEMICONDUCTOR EQUIPMENT
- -----------------------
Semiconductor Equipment sales of $267 million declined 42% in 1998
compared to 1997 as 1998 proved to be a very difficult year for the
semiconductor capital equipment industry. The collapse of the
semiconductor equipment market was especially difficult for the Company
due to new product programs, the acquisition of Fusion Systems in late
1997 and capacity expansion plans.
<PAGE>
Page 50
This segment suffered an operating loss of $80 million in 1998, before
restructuring charges of $43 million. The unprecedented severity of
conditions in the semiconductor equipment industry caused the Company
to take drastic steps to ensure capacity was appropriately sized for
current market conditions. In the third quarter of 1998, restructuring
charges of $42 million were recorded for this business segment. Late
in 1998, the semiconductor equipment industry appeared to have hit
bottom.
Several specific actions comprised the overall restructuring efforts
related to the Semiconductor Equipment segment including workforce
reductions, asset write-downs, and other restructuring actions. The
charge for workforce reductions included the termination of
approximately 475 employees, primarily manufacturing personnel. As of
December 31, 1998, approximately 300 employees had been terminated in
this program, in addition to 575 employees released earlier in the
year. The charge for asset write-downs primarily related to inventory,
which was written down to estimated market value, and was included in
cost of products sold. The ion implant equipment manufacturing
facility in Austin, Texas was closed and production was transferred to
Beverly, Massachusetts. The write-down of this plant to estimated
selling price represented approximately $2 million of the restructuring
charge. The phase-out of this plant was concluded in the first quarter
of 1999. Further, the Thermal Processing Systems business, located in
Peabody, Massachusetts, was merged into the Fusion Systems division
located in Rockville, Maryland and the Flat Panel Equipment business
was merged into the Implant Systems operations located in Beverly,
Massachusetts.
TRUCK COMPONENTS
- ----------------
Truck Components sales in 1998 reached $1.48 billion, increasing 26%
compared to 1997. Heavy truck production was at record levels in 1998
in both North America and Europe. The performance of the Clutch
division, acquired in the third quarter of 1997, continued to exceed
expectations and made a strong contribution to the results of this
segment. Excluding the Clutch acquisition, worldwide sales were up 7%
from one year ago as the Company took good advantage of sustained
robust markets.
Operating profits of $218 million in 1998, before restructuring charges
of $17 million, were 42% ahead of comparable 1997 results. The full
year impact of the Clutch acquisition in 1997 contributed, as expected,
to Truck Components' overall performance.
The restructuring charges of $17 million related primarily to the
European Truck Components business and worldwide headcount reductions
at various other locations. The restructuring included the expected
termination of approximately 350 employees (300 in Europe). The
restructuring was the result of European trucking deregulation, de-
integration of OEM's and the introduction of the Euro. This
restructuring, building upon the third quarter 1998 acquisition of a
Polish truck transmission manufacturer, was intended to help achieve
world class low costs and productivity at all worldwide operations.
Manufacturing operations for the medium-duty product line were being
<PAGE>
Page 51
consolidated as part of the restructuring of this segment. The
restructuring charges included severance and other related benefit
costs, asset write-downs, costs associated with the consolidation of
manufacturing operations and other costs.
<page
Page 52
QUARTERLY DATA
- --------------
<TABLE>
<CAPTION>
(Unaudited)
Quarter ended 1999 Quarter ended 1998
(Millions except for per share data) -------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 2,214 $ 2,227 $ 2,300 $ 1,661 $ 1,606 $ 1,620 $ 1,712 $ 1,687
Gross margin 600 615 657 489 446 428 512 480
Percent of sales 27% 28% 29% 29% 28% 26% 30% 28%
Net income $ 224 $ 184 $ 125 $ 84 $ 72 $ 58 $ 114 $ 105
Net income per Common Share -
Assuming dilution 2.98 2.46 1.71 1.17 1.01 .80 1.57 1.42
Basic 3.04 2.52 1.74 1.18 1.02 .82 1.60 1.45
Cash dividends paid per Common Share .44 .44 .44 .44 .44 .44 .44 .44
Market price per Common Share
High 89-1/8 103-1/2 94-11/16 74 71-7/8 80 95-3/8 99-5/8
Low 67-1/2 85-3/8 71-11/16 62 60-1/4 57-1/2 76 85-3/16
The quarterly results of operations include the following unusual items:
Acquisition integration, restructuring actions & other items
Pretax $ (18) $ (9) $ (3) $ (29) $ (42) $ 3 $ (43)
Aftertax (12) (6) (2) (19) (27) 2 (28)
Net income (loss) per Common Share (.16) (.07) (.03) (.26) (.38) .03 (.38)
Gain on sales of businesses
Pretax 207 133 43
Aftertax 117 81 28
Net income per Common Share 1.55 1.08 .38
</TABLE>
In the fourth quarter of 1998, the effective income tax rate for full
year 1998 was adjusted to 28% from 30%. This adjustment reduced income
tax expense for the fourth quarter by $8 million, which primarily relates
to a revision of the research and development tax credit.
<page
Page 53
Eaton Corporation
<TABLE>
Five-Year Consolidated Financial Summary
<CAPTION>
For the year 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Millions except for per share data)
Net sales $8,402 $6,625 $7,563 $6,961 $6,822
Income before income taxes & extraordinary item 963 485 668 485 592
Income before extraordinary item $ 617 $ 349 $ 464 $ 349 $ 399
Percent of net sales 7.3% 5.3% 6.1% 5.0% 5.8%
Extraordinary item - redemption of debentures (54)
------ ------ ------ ------ ------
Net income $ 617 $ 349 $ 410 $ 349 $ 399
====== ====== ====== ====== ======
Per Common Share - assuming dilution
Income before extraordinary item $ 8.36 $ 4.80 $ 5.93 $ 4.46 5.08
Extraordinary item (.69)
------ ------ ------ ------ ------
Net income $ 8.36 $ 4.80 $ 5.24 $ 4.46 $ 5.08
====== ====== ====== ====== ======
Average number of Common Shares outstanding 73.7 72.7 78.2 78.2 78.6
Per Common Share - basic
Income before extraordinary item $ 8.51 $ 4.89 $ 6.05 $ 4.50 $ 5.13
Extraordinary item (.71)
------ ------ ------ ------ ------
Net income $ 8.51 $ 4.89 $ 5.34 $ 4.50 $ 5.13
====== ====== ====== ====== ======
Average number of Common Shares outstanding 72.5 71.4 76.8 77.4 77.8
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.72 $ 1.60 $ 1.50
Market price per Common Share
High $103-1/2 $ 99-5/8 $103-3/8 $ 70-7/8 $ 62-1/2
Low 62 $ 57-1/2 $ 67-1/4 $ 50-3/8 $ 45-3/8
At the year-end
- --------------------------------------------------------------------------------------------------------
Total assets $8,437 $5,665 $5,606 $5,385 $5,106
Working capital 133 466 698 787 822
Long-term debt 1,915 1,191 1,272 1,062 1,084
Shareholders' equity 2,624 2,057 2,071 2,160 1,975
Shareholders' equity per Common Share $35.44 $28.69 $27.72 $28.00 $25.45
Common Shares outstanding 74.0 71.7 74.7 77.1 77.6
- --------------------------------------------------------------------------------------------------------
For the year
- --------------------------------------------------------------------------------------------------------
Cash earnings per Common Share - excluding unusual items
Assuming dilution $ 7.04 $ 6.12 $ 6.86 $ 5.35 $ 5.47
Investments during the year (percent of net sales)
Property, plant & equipment 5.9% 7.3% 5.8% 5.0% 5.8%
Research & development 3.7% 5.0% 4.2% 3.8% 3.3%
Information technology 2.8% 3.1% 2.7% 2.1% 2.1%
------ ------ ------ ------ ------
12.4% 15.4% 12.7% 10.9% 11.2%
====== ====== ====== ====== ======
</TABLE>
Income includes the following unusual items:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Acquisition integration, restructuring actions & other items
Pretax $ (30) $ (111) $ (24) $ (50)
Aftertax (20) (72) (15) (32)
Net loss per Common Share (.27) (.99) (.19) (.41)
Gain on sales of businesses
Pretax 340 43 91
Aftertax 198 28 69
Net income per Common Share 2.68 .38 .88
Write-off of purchased in-process research & development
Pretax (85)
Aftertax (85)
Net loss per Common Share (1.09)
</TABLE>
Cash earnings per Common Share represents income per Common Share
excluding unusual items, before amortization expense of goodwill
and other intangible assets.
<PAGE>
Page 54
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following
Registration Statements and related Prospectuses of our report dated
January 21, 2000, with respect to the consolidated financial statements
of Eaton Corporation included in this Form 8-K.
Registration
Number Description Filing Date
- ------------ ----------- -----------
333-86391 Aeroquip-Vickers Savings
and Profit Sharing Plan -
Form S-8 Registration
Statement September 2, 1999
333-86389 Eaton Corporation Executive
Strategic Incentive Plan -
Form S-8 Registration
Statement September 2, 1999
333-77245 Eaton Corporation 401(k)
Savings Plan - Form S-8
Registration Statement April 28, 1999
333-77243 Eaton Corporation Share
Purchase and Investment
Plan - Form S-8 Registration
Statement April 28, 1999
333-74355 Eaton Corporation
$1,400,000,000 of Debt
Securities, Debt Warrants,
Common Shares and Preferred
Shares - Form S-3 Registration
Statement (Incuding Post
Effective Amendment No. 1 filed
on April 23, 1999 and Amendment
No. 2 filed on May 11, 1999) March 12, 1999
333-62375 Eaton Corporation 1998
Stock Plan - Form S-8
Registration Statement August 27, 1998
333-62373 Eaton Holding Limited U.K.
Savings-Related Share Option
Scheme [1998] - Form S-8
Registration Statement August 27, 1998
333-46861 Eaton Limited U.K. Savings-
Related Share Option Scheme
[1991] - Form S-8 Registration
Statement February 25, 1998
333-40243 Eaton Corporation 172,489
Common Shares - Form S-3
Registration Statement February 20, 1998
333-45575 Eaton Limited U.K. Savings-
Related Share Option Scheme
[1991] - Form S-8 Registration
Statement February 4, 1998
333-35697 Cutler-Hammer de Puerto Rico
Company Retirement Savings
Plan - Form S-8 Registration
Statement September 16, 1997
<PAGE>
Page 55
333-28869 Eaton 401(k) Savings Plan
and Trust - Form S-8
Registration Statement June 10, 1997
333-25693 Eaton Corporation Shareholder
Dividend Reinvestment Plan -
Form S-3 Registration
Statement April 23, 1997
333-23539 Eaton Non-Employee Director
Fee Deferral Plan - Form S-8
Registration Statement March 18, 1997
333-22597 Eaton Incentive Compensation
Deferral Plan - Form S-8
Registration Statement March 13, 1997
333-13873 Eaton Corporation Investment
Plan for Hourly Employees of
the Hydraulics Division -
Hutchinson Plant - Form S-8
Registration Statement October 10, 1996
333-13869 Lincoln Plant Share Purchase
and Investment Plan and
Trust - Form S-8 Registration
Statement October 10, 1996
333-13861 Eaton Corporation 401(k)
Savings Plan for the Hourly
Rate Employees at Airflex
Division - Form S-8
Registration Statement October 10, 1996
333-13857 Eaton Wauwatosa Union Plan
and Trust - Form S-8
Registration Statement October 10, 1996
333-13855 Eaton Winamac Hourly
Investment Plan and Trust -
Form S-8 Registration
Statement October 10, 1996
<PAGE>
Page 56
333-03599 Eaton Corporation Share
Purchase and Investment Plan -
Form S-8 Registration
Statement May 13, 1996
333-01365 Eaton Corporation Incentive
Compensation Deferral Plan -
Form S-3 Registration
Statement March 1, 1996
33-64201 Eaton Corporation
$120,837,500 of Debt
Securities and Debt
Warrants - Form S-3
Registration Statement November 14, 1995
33-60907 Eaton 1995 Stock Plan -
Form S-8 Registration
Statement July 7, 1995
33-52333 Eaton Corporation $600,000,000
of Debt Securities, Debt
Warrants, Common Shares and
Preferred Shares - Form S-3
Registration Statement February 18, 1994
33-49779 Eaton Limited U.K. Savings-
Related Share Option Scheme
[1991] - Form S-8
Registration Statement July 16, 1993
33-49393 &
33-12842 Eaton Corporation Stock
Option Plans - Form S-8
Registration Statement March 9, 1993
33-15582 Eaton Limited U.K. Savings-
Related Share Option Scheme -
Form S-8 Registration
Statement July 7, 1987
/s/ Ernst & Young LLP
Cleveland, Ohio
February 25, 2000
<PAGE>
Page 57
Press Release dated February 24, 2000
- -------------------------------------
Eaton Corporation announced on February 24, 2000 that it
has engaged Goldman, Sachs & Co. to study the feasibility of
Eaton selling a minority equity interest in its Semiconductor
Equipment segment through an initial public offering. A possible
sale of equity would involve less than a 20 percent equity
interest in Eaton's Semiconductor Equipment business.
Semiconductor Equipment sales were $397 million in 1999, an
increase of nearly 50 percent from 1998. Operating profits
improved by $111 million during the same period.
Eaton is a global manufacturer of highly engineered
products that serve industrial, vehicle, construction,
commercial, aerospace and semiconductor markets. Principal
products include hydraulic products and fluid connectors,
electrical power distribution and control equipment, truck
drivetrain systems, engine components, ion implanters and a
wide variety of controls. Headquartered in Cleveland, Ohio,
the Company has 63,000 employees and 195 manufacturing
sites in 23 countries. Eaton's sales for 1999 were $8.4
billion.
<PAGE>
Page 58
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: February 25, 2000
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 81
<SECURITIES> 84
<RECEIVABLES> 1,281
<ALLOWANCES> 14
<INVENTORY> 965
<CURRENT-ASSETS> 2,782
<PP&E> 3,962
<DEPRECIATION> 1,593
<TOTAL-ASSETS> 8,437
<CURRENT-LIABILITIES> 2,649
<BONDS> 1,915
0
0
<COMMON> 37
<OTHER-SE> 2,587
<TOTAL-LIABILITY-AND-EQUITY> 8,437
<SALES> 8,402
<TOTAL-REVENUES> 8,402
<CGS> 6,041
<TOTAL-COSTS> 7,673
<OTHER-EXPENSES> 386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152
<INCOME-PRETAX> 963
<INCOME-TAX> 346
<INCOME-CONTINUING> 617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617
<EPS-BASIC> 8.51
<EPS-DILUTED> 8.36
</TABLE>
