United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 2000
------------------
Commission file number 1-1396
------
Eaton Corporation
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
-------------------------------------------------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
-------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months and (2) has been subject
to such filing requirements for the past ninety days. Yes X
---
There were 70.0 million Common Shares outstanding as of September 30,
2000.
<PAGE>
Page 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
(Millions) 2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash & short-term investments $ 201 $ 165
Accounts receivable 1,356 1,267
Inventories 981 965
Deferred income taxes & other
current assets 438 385
------ ------
2,976 2,782
Property, plant & equipment 2,276 2,369
Goodwill 2,044 1,905
Other intangible assets 587 625
Deferred income taxes & other assets 801 756
------ ------
$8,684 $8,437
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion of
long-term debt $ 371 $ 970
Accounts payable 452 511
Accrued compensation 239 286
Accrued income & other taxes 206 257
Other current liabilities 780 625
------ ------
2,048 2,649
Long-term debt 2,447 1,915
Postretirement benefits other than pensions 675 667
Deferred income taxes & other liabilities 642 582
Shareholders' equity 2,872 2,624
------ ------
$8,684 $8,437
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 3
Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
(Millions except for per share data) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $2,191 $2,227 $6,851 $6,188
Costs & expenses
Cost of products sold 1,596 1,612 4,920 4,427
Selling & administrative 337 349 1,055 978
Research & development 86 82 257 230
------ ------ ------ ------
2,019 2,043 6,232 5,635
------ ------ ------ ------
Income from operations 172 184 619 553
Other income (expense)
Interest - net (40) (47) (129) (112)
Gain on sales of businesses 133 133
Other - net 8 16 69 21
------ ------ ------ ------
(32) 102 (60) 42
------ ------ ------ ------
Income before income taxes 140 286 559 595
Income taxes 47 102 190 202
------ ------ ------ ------
Net income $ 93 $ 184 $ 369 $ 393
====== ====== ====== ======
Net income per Common Share
Assuming dilution $ 1.28 $ 2.46 $ 5.02 $5.35
Basic 1.29 2.52 5.08 5.44
Average number of Common Shares
outstanding
Assuming dilution 72.8 74.9 73.5 73.4
Basic 72.0 73.2 72.6 72.2
Cash dividends paid per Common Share $ .44 $ .44 $ 1.32 $ 1.32
See accompanying notes.
</TABLE>
<PAGE>
Page 4
Eaton Corporation
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Nine Months Ended
September 30
-----------------
<S> <C> <C>
(Millions) 2000 1999
---- ----
Net cash provided by operating activities
Net income $ 369 $ 393
Adjustments to reconcile to net cash provided
by operating activities
Depreciation 250 237
Amortization 104 86
Gain on sales of businesses & corporate assets (23) (133)
Changes in operating assets & liabilities,
excluding acquisitions and sales of
businesses (336) (168)
Other - net 7 38
------ ------
371 453
------ ------
Net cash used in investing activities
Expenditures for property, plant & equipment (237) (313)
Acquisitions of businesses, less cash acquired (110) (1,601)
Sale of minority interest in Axcelis
Technologies, Inc. 349
Sales of businesses and corporate assets 73 172
Net change in short-term investments (89) 15
Other - net (11) (33)
------ ------
(25) (1,760)
------ ------
Net cash (used in) provided by financing activities
Borrowings with original maturities of more
than three months
Proceeds 1,275 1,285
Payments (1,172) (1,196)
Borrowings with original maturities of less
than three months - net (121) 1,100
Cash dividends paid (96) (96)
Sale of Common Shares 147
Purchase of Common Shares (289)
Other - net 8 22
------ ------
(395) 1,262
------ ------
Decrease in cash (49) (45)
Cash at beginning of year 81 80
------ ------
Cash at end of period $ 32 $ 35
====== ======
See accompanying notes.
</TABLE>
<PAGE>
Page 5
The following notes are included in accordance with the requirements of
Regulation S-X and Form 10-Q.
Preparation of Financial Statements
-----------------------------------
The condensed consolidated financial statements of Eaton Corporation
(Eaton or the Company) are unaudited. However, in the opinion of
management, all adjustments have been made which are necessary for a
fair presentation of financial position, results of operations and cash
flows for the stated periods. These financial statements should be read
in conjunction with the consolidated financial statements and related
notes included in Eaton's 1999 Annual Report on Form 10-K. The interim
period results are not necessarily indicative of the results to be
expected for the full year.
All references to net income per Common Share assume dilution, unless
otherwise indicated.
Unusual Charges
---------------
Income in the third quarter of 2000 was reduced by restructuring
charges of $13 million ($8 million aftertax, or $.12 per Common Share).
Income in the first nine months of 2000 was reduced by restructuring
charges of $31 million ($20 million aftertax, or $.28 per Common
Share). These charges were associated with the integration of Aeroquip-
Vickers into the Company as discussed in the "Acquisition of Aeroquip-
Vickers, Inc." footnote. These charges primarily related to plant
consolidation and other expenses, including fees paid to outside
consultants, travel expenses, and relocation of inventory and
equipment.
Income in the third quarter of 1999 was reduced by restructuring
charges of $9 million ($6 million aftertax, or $.07 per Common Share).
Income in the first nine months of 1999 was reduced by restructuring
charges of $12 million ($8 million aftertax, or $.10 per Common Share).
These charges were also associated with the integration of Aeroquip-
Vickers into the Company.
The restructuring charges in 2000 and 1999 reduced operating profit of
the Fluid Power and Other Components segment and were included in the
Statements of Consolidated Income in Income from Operations.
Other Income (Expense)
---------------------
Income in the first nine months of 2000 was increased by a net pretax
gain on the sale of corporate assets of $22 million ($14 million
aftertax, or $.19 per Common Share). These gains were included in the
Statements of Consolidated Income in Other income-net and in Business
Segment Information in Corporate and other-net.
<PAGE>
Page 6
Initial Public Offering of Axcelis Technologies, Inc.
-----------------------------------------------------
In April 2000, Eaton announced a plan to reorganize its semiconductor
equipment operations into an independent, publicly held company. On
June 30, 2000, Eaton substantially completed the transfer of these
operations to Axcelis Technologies, Inc. (Axcelis), a wholly-owned
subsidiary. In July 2000, Axcelis completed an initial public offering
(IPO) for the sale of 17,050,000 shares of common stock at $22 per
share, which increased the number of outstanding shares of Axcelis
common stock to 97,050,000. The proceeds from the IPO, net of
underwriting discounts and commissions, were $352.6 million before the
payment of other offering expenses. The proceeds, together with cash
from other sources available to Axcelis, were used to pay a previously
declared $300 million dividend to Eaton. These funds were used by Eaton
to pay down outstanding commercial paper. Prior to the IPO, Eaton owned
100% of the 80 million shares of outstanding Axcelis common stock. As a
result of the IPO, Eaton owns approximately 82.4% of the outstanding
shares of Axcelis common stock.
Eaton currently plans to complete the divestiture of the Axcelis common
stock by year-end 2000 through a dividend of the Axcelis stock to Eaton
shareholders in a tax-free spin-off. Eaton has received confirmation
from the Internal Revenue Service that the divestiture will be tax-free
to Eaton and its shareholders. The final divestiture is subject to
approval by Eaton's board of directors which requires that 1) there be
no legal restraint preventing the divestiture and 2) the divestiture
not have a material adverse effect on Eaton or its shareholders.
Gain on Sales of Businesses
---------------------------
On August 31, 1999, the Company completed the sale of the Engineered
Fasteners Division for $173 million in cash. The sale of this business
resulted in a pretax gain of $133 million ($81 million aftertax, or
$1.08 per Common Share) which was recorded in the third quarter of
1999. On October 1, 1999, Eaton completed the sale of the Fluid Power
Division for $310 million in cash. The gain on the sale of this
business was reported in the fourth quarter of 1999. The operating
results of these businesses are included in Business Segment
Information in Divested Operations.
Acquisition of Aeroquip-Vickers, Inc.
-------------------------------------
On April 9, 1999, Eaton completed the acquisition of Aeroquip-
Vickers, Inc. for $1.623 billion in cash. The acquisition was accounted
for by the purchase method of accounting and, accordingly, the
Statement of Consolidated Income for the first quarter of 1999 does not
include the results of Aeroquip-Vickers. Beginning with the second
quarter of 1999, the operating results of Aeroquip-Vickers are reported
in Business Segment Information in Fluid Power and Other Components.
The assets acquired and liabilities assumed were recorded at estimated
fair values as determined by Eaton's management based on information
available and on assumptions as to future operations. The Company has
obtained independent appraisals of the fair values of the acquired
property, plant and equipment, and identified intangible
<PAGE>
Page 7
assets, and their remaining useful lives, and has completed the review
and determination of the fair values of the other assets acquired and
liabilities assumed. A summary of the assets acquired and liabilities
assumed in the acquisition follows (in millions):
Estimated fair values
Assets acquired $1,766
Liabilities assumed (1,217)
Goodwill (amortized by the straight-line
method over forty years) 1,074
------
Purchase price 1,623
Less cash acquired & liability for
outstanding shares (30)
------
Net cash paid $1,593
======
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
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
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. The components of the acquisition integration liabilities
included in the purchase price allocation for Aeroquip-Vickers are as
follows (dollars in millions):
<TABLE>
<CAPTION>
Workforce reductions Plant
-------------------- consolidation
Employees Dollars & other Total
--------- ------- -------------- -----
<S> <C> <C> <C> <C>
Balance at
December 31, 1999 10 $ 3 $ 0 $ 3
2000 1,760 67 8 75
Utilized in the first
nine months of 2000 (630) (21) (1) (22)
----- --- --- ---
Balance remaining
at September 30, 2000 1,140 $49 $ 7 $56
===== === === ===
</TABLE>
The acquisition integration liabilities are based on Eaton's
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
<PAGE>
Page 8
support activities, and 3) restructuring and repositioning of the
sales/marketing and research and development organizations to eliminate
redundancies in these activities. Amounts provided in 2000 for
workforce reductions primarily relate to plant closings and
consolidations, for which decisions were finalized in the first quarter
of 2000. Adjustments to these liabilities in the future will be 1)
recorded as a reduction of net income, if the ultimate 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 nine month period
ended September 30, 1999 as if Eaton and Aeroquip-Vickers had been
combined as of the beginning of that period, follow (in millions except
per share data). The pro forma results do not include any cost savings
or other effects of the planned integration of Eaton and 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.
Pro forma
Nine months ended
September 30, 1999
------------------
Net sales $6,726
Net income 381
Net income per Common Share
Assuming dilution $ 5.19
Basic 5.28
Inventories
-----------
September 30, December 31,
(Millions) 2000 1999
---- ----
Raw materials $ 432 $ 341
Work-in-process and
finished goods 591 661
------ ------
Gross inventories at FIFO 1,023 1,002
Excess of current cost
over LIFO cost (42) (37)
------ ------
Net inventories $ 981 $ 965
====== ======
Refinancing of Debt
-------------------
In March 2000, the Company sold Euro 200 million of 6% notes due 2007
and in August 2000, it issued $100 million of 7.05% medium-term notes
due 2002. Net proceeds from the sale of the notes were used to reduce
outstanding commercial paper and short-term notes issued in connection
with the 1999 acquisition of Aeroquip-Vickers. On April 3, 2000, the
Company entered into an additional $400 million credit facility with a
five-year term which supports outstanding commercial paper.
<PAGE>
Page 9
Comprehensive Income
--------------------
The principal difference between net income as historically reported in
the Statements of Consolidated Income and Comprehensive Income are
foreign currency translation adjustments recorded in Shareholders'
Equity. Comprehensive income is as follows (in millions):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 93 $184 $369 $393
Foreign currency translation
and other adjustments (37) 10 (66) (98)
---- ---- ---- ----
Comprehensive income $ 56 $194 $303 $295
==== ==== ==== ====
</TABLE>
Net Income per Common Share
---------------------------
The calculation of net income per Common Share - assuming dilution and
basic follows (millions except for per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 93 $ 184 $ 369 $ 393
==== ==== ==== ====
Average number of Common Shares
outstanding-assuming dilution 72.8 74.9 73.5 73.4
Less dilutive effect of stock
options .8 1.7 .9 1.2
---- ---- ---- ----
Average number of Common Shares
outstanding-basic 72.0 73.2 72.6 72.2
==== ==== ==== ====
Net income per Common Share
Assuming dilution $1.28 $2.46 $5.02 $5.35
Basic 1.29 2.52 5.08 5.44
</TABLE>
New Accounting Pronouncement
----------------------------
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be recognized on the balance sheet at fair value. The
required implementation date of the standard was delayed by the
issuance of Statement of Financial Accounting Standard No. 137 and
<PAGE>
Page 10
amended by Statement of Financial Accounting Standard No. 138. The
Company is required to adopt the standards in the first quarter of
2001, and does not expect adoption to have a significant effect on its
consolidated results of operations or financial position.
Summary Financial Information for Eaton ETN Offshore Ltd.
---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned subsidiary of
Eaton, was incorporated by Eaton in 1990 under the laws of Ontario,
Canada, primarily for the purpose of raising funds through the offering
of debt securities in the United States and making these funds
available to Eaton or its subsidiaries. Eaton Offshore owns the common
stock of a number of Eaton's subsidiaries which are engaged principally
in the manufacture and/or sale of electrical and electronic controls,
truck transmissions and engine components. On August 31, 1999, the
Engineered Fasteners division was sold. Summary financial information
for Eaton Offshore and its consolidated subsidiaries is as follows (in
millions):
Nine months ended
September 30
-------------------
2000 1999
---- ----
Income statement data
Net sales $362 $377
Gross profit 110 113
Net income 48 31
September 30, December 31,
2000 1999
---- ----
Balance sheet data
Current assets $381 $354
Noncurrent assets 188 184
Net intercompany payables 56 93
Current liabilities 200 92
Noncurrent liabilities 36 115
Minority interest 11 3
<page
Page 11
Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
(Millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales
Automotive Components $ 421 $ 444 $1,397 $1,402
Fluid Power & Other Components 630 614 1,976 1,434
Industrial & Commercial Controls 622 587 1,805 1,677
Semiconductor Equipment 183 109 490 264
Truck Components 335 414 1,183 1,203
------ ----- ------ ------
Total ongoing operations 2,191 2,168 6,851 5,980
Divested operations 59 208
------ ------ ------- ------
Total net sales $2,191 $2,227 $6,851 $6,188
====== ====== ====== ======
Operating profit
Automotive Components $ 41 $ 50 $ 180 $ 177
Fluid Power & Other Components 44 43 180 125
Industrial & Commercial Controls 73 54 187 130
Semiconductor Equipment 42 16 102 14
Truck Components 7 67 119 188
------ ------ ------ ------
Total ongoing operations 207 230 768 634
Divested operations 9 40
Amortization of goodwill & other
intangible assets (26) (28) (80) (72)
Interest expense - net (40) (47) (129) (112)
Gain on sales of businesses 133 133
Corporate & other - net (1) (11) (0) (28)
------ ------ ------ ------
Income before income taxes $ 140 $ 286 $ 559 $ 595
====== ====== ====== ======
</TABLE>
<PAGE>
Page 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
---------------------
Eaton reported operating earnings per share (earnings per share before
restructuring charges and a gain on the sale of a business in 1999) of
$1.40 during the third quarter of 2000, 3% below results one year
earlier. Comparable net income was $101 million versus last year's $108
million. Sales in the quarter were $2.19 billion, 2% below last year.
Net income, including restructuring charges in both years and a gain on
the sale of a business in 1999, was $93 million, or $1.28 per share,
for the third quarter of 2000 compared to $184 million, or $2.46 per
share, for the comparable quarter of 1999.
Sales and operating earnings per share during the first nine months of
2000 were at record levels. Net income, before restructuring charges
and gains on the sales of a business and corporate assets, reached $375
million, or $5.10 per share, on sales of $6.85 billion. Comparable year
earlier earnings were $319 million, or $4.35 per share, on sales of
$6.19 billion.
Including restructuring charges in both years and gains on the sales of
a business and corporate assets in 2000 and 1999, net income for the
first nine months of 2000 was $369 million, or $5.02 per share,
compared to $393 million, or $5.35 per share, for the comparable period
of 1999.
The record performance of Industrial & Commercial Controls during the
quarter was particularly notable. Axcelis Technologies, Inc., Eaton's
82.4%-owned semiconductor equipment subsidiary, also turned in an
outstanding performance. The results of these two businesses, in
combination with the sustained progress in the Fluid Power segment,
which reflects the acquisition of Aeroquip-Vickers beginning in the
second quarter of 1999, nearly offset the impact of very difficult
operating conditions experienced in Automotive and, especially, Truck
Components. During the third quarter of 2000, Aeroquip-Vickers added
about $.12 per share to Eaton's earnings before restructuring charges.
As displayed in the Statement of Consolidated Income, Income from
Operations was $172 million in the third quarter of 2000 (7.9% of net
sales), down from $184 million in the comparable period in 1999 (8.3%
of net sales). For the first nine months of 2000, Income from
Operations was $619 million (9.0% of net sales), up from $553 million
in the same period in 1999 (8.9% of net sales). The changes in these
amounts and as a percent of net sales in 2000 from 1999, were
consistent with the change in net sales.
Income from Operations in the third quarter of 2000 was reduced by
restructuring charges of $13 million ($8 million aftertax, or $.12 per
Common Share). Income in the first nine months of 2000 was reduced by
restructuring charges of $31 million ($20 million aftertax, or $.28 per
Common Share).
<PAGE>
Page 13
Income from Operations in the third quarter of 1999 was reduced by
restructuring charges of $9 million ($6 million aftertax, or $.07 per
Common Share). Income in the first nine months of 1999 was reduced by
restructuring charges of $12 million ($8 million aftertax, or $.10 per
Common Share).
The restructuring charges in 2000 and 1999 were associated with the
integration of Aeroquip-Vickers into the Company and reduced operating
profit of the Fluid Power and Other Components segment.
In the first nine months of 2000, income was increased by a net pretax
gain on the sale of corporate assets of $22 million ($14 million
aftertax, or $.19 per Common Share). This gain was included in the
Statements of Consolidated Income in Other income-net and in Business
Segment Information in Corporate and other-net.
On August 31, 1999, the Company completed the sale of the Engineered
Fasteners Division for $173 million in cash. The sale of this business
resulted in a pretax gain of $133 million ($81 million aftertax, or
$1.08 per Common Share) which was recorded in the third quarter of
1999. On October 1, 1999, Eaton completed the sale of the Fluid Power
Division for $310 million in cash. The gain on the sale of this
business was reported in the fourth quarter of 1999. The operating
results of these businesses are included in divested operations.
A discussion of the Company's operating earnings per share has been
included above because it is commonly used by financial analysts as one
measure of operating performance.
Automotive Components
---------------------
Third quarter Automotive Component segment sales were 5% below last
year at $421 million primarily because of the weak euro exchange rate.
Volumes were essentially at last year's levels compared to 1% drops in
NAFTA and European production of light vehicles and a 12% rise in South
American output. Sales in the first nine months of 2000 were $1.4
billion, almost even with the same period in 1999.
Segment profits were $41 million, down $9 million from year earlier
results. In addition to the euro, profits in the third quarter were
affected by the 7% reduction in North American light truck production,
where Eaton enjoys a richer product mix. Operating profits for the
first nine months of 2000 were $180 million, 2% above the same period
in 1999.
During the quarter, Eaton announced it would be divesting its $330
million Vehicle Switch/Electronics Division because the business no
longer fit its longer-term strategic objectives.
Traditionally, sales for this segment in the third quarter are lower
than in the second quarter as a result of preparations by vehicle
manufacturers for the upcoming model year and their temporary shutdown
for the taking of annual physical inventories.
<PAGE>
Page 14
Fluid Power & Other Components
------------------------------
Sales of Fluid Power & Other Components were a third quarter record
$630 million, 3% above year earlier results. The weaker euro reduced
reported sales by about 3%. The resulting 6% increase in volume
compares favorably to the 2% rise in North American fluid power markets
and a 3% decline in aerospace markets. Sales of $1.98 billion in the
first nine months of 2000 were 38% ahead of 1999's results, reflecting
the acquisition of Aeroquip-Vickers in the second quarter of 1999.
Segment profits before restructuring charges were $57 million, up 12%
from one year ago. The Fluid Power business achieved a fine year-to-
year profit improvement despite somewhat softer industry conditions and
an acceleration of manufacturing integration activities related to last
year's acquisition of Aeroquip-Vickers. Overall, that acquisition
contributed about 12 cents to third quarter earnings per share before
restructuring charges. The acceleration of restructuring activities,
along with two new important acquisitions, are designed to ensure Eaton
continues to build a world leading franchise and meets its earnings
commitment for this business in 2001. Operating profits for the first
nine months of 2000 were $180 million, 44% above 1999, primarily a
result of the acquisition of Aeroquip-Vickers in the second quarter of
1999.
During the quarter, Eaton announced it had acquired the industrial
cylinder business of International Motion Control Incorporated. In
early October, Eaton announced it had also acquired Frederick Duffield
PTY Ltd., an Australian-based manufacturer of metal hydraulic fittings
and adapters.
Industrial & Commercial Controls
--------------------------------
Industrial & Commercial Controls segment sales and profits were at
record levels in the third quarter. Sales of $622 million were 6% above
last year and in line with the trend of North American markets for
distribution equipment and industrial controls. Sales of $1.8 billion
in the first nine months of 2000 were 8% ahead of 1999's results.
Segment profits of $73 million were 35% higher than last year and a
record 11.7% of sales. Orders continue strong, up 10% from last year,
driven in part by demand for back-up power generation, and by the
continued strength in telecommunications infrastructure building.
Operating profits for the first nine months of 2000 were $187 million,
an increase of 44% from comparable results in 1999.
Semiconductor Equipment
-----------------------
Axcelis Technologies, Inc., Eaton's 82.4%-owned Semiconductor Equipment
business, achieved record results in the third quarter. Sales by
Axcelis were $183 million, 68% above one year ago. Sales in the first
nine months of 2000 of $490 million were 86% above sales in the
comparable period in 1999. The sharp increase in sales was
attributable to continued high levels of capital spending by
semiconductor manufacturing customers, resulting in increased demand
for the Company's semiconductor equipment products and services.
<PAGE>
Page 15
Segment profits of $42 million in the third quarter of 2000 were more
than 2 1/2 times last year. Profits of $102 million for the first nine
months of 2000 were more than 7 times last year's profits. The sharply
improved profitability resulted from the significantly higher levels of
sales in 2000 and also reflected the benefits from the restructuring of
this business undertaken in the second half of 1998 and early 1999.
Eaton has announced that it intends to divest its ownership of Axcelis
via a dividend to Eaton shareholders, and that its board of directors
has authorized the necessary preparations for the spin-off.
Confirmation has been received from the Internal Revenue Service that
Eaton's divestiture of its Axcelis common stock will be tax-free to
Eaton and its shareholders. Eaton anticipates that its board of
directors will formally authorize a year-end spin-off of Axcelis shares
later this month.
Truck Components
----------------
Third quarter Truck Components sales were 19% below one year earlier at
$335 million. This compares to a 36% decline in NAFTA production of
Class 8 trucks, a 22% decline in NAFTA medium duty truck production, a
6% rise in European truck output and a 24% increase in South American
commercial vehicle production. Sales in the first nine months of 2000
were $1.18 billion, 2% below 1999.
Third quarter segment profits of $7 million were $60 million below year earlier
results. Operating profits in the first nine months of 2000 were $119
million, down 37% from the same period in 1999. NAFTA heavy truck
production has fallen an unprecedented 40% in the past six months.
During that time, the Company has reduced employment by over 900 and in
the last quarter incurred about $10 million of downsizing expenses.
But, it has been unable to reduce costs and resources to match the pace
of the decline in orders. Compounding the pressure is that primarily
all current buyers are only fleet buyers, resulting in a marked shift
to basic fleet transmissions from higher-valued automated products.
During the fourth quarter, Eaton will continue resizing the business
for the roughly 200,000 unit annual rate of production it anticipates
for the next six to nine months and the roughly 230,000 total build
rate it sees for the year 2001.
Non-operating Income (Expense)
------------------------------
Net interest expense of $40 million in the third quarter of 2000 fell
by $7 million compared to the same period in 1999. The reduction was a
result of lower debt levels during the third quarter of 2000 as
compared to the prior year. Interest expense of $129 million in the
first nine months of 2000 increased $17 million compared to the same
period in 1999, primarily due to additional borrowings required to
primarily finance the acquisition of Aeroquip-Vickers.
Corporate and other expenses for the first nine months of 2000 was
lower due to a net pretax gain on the sale of corporate assets of $22
million ($14 million aftertax, or $.19 per Common Share).
<PAGE>
Page 16
Changes in Financial Condition
------------------------------
Eaton remained in a strong financial position at September 30, 2000.
Net working capital increased to $928 million at September 30, 2000
from $133 million at the end of 1999 (the current ratio was 1.45 and
1.1 at those dates, respectively). The increase in accounts receivable
due to higher sales in 2000 and the reduction in short-term debt due to
the long-term refinancing of commercial paper were the major causes of
the increase in working capital. In July 2000, the Company also used
$300 million from a dividend paid by Axcelis Technologies Inc. to pay
down outstanding commercial paper.
Total debt of $2.8 billion at September 30, 2000 was down $67 million
from year-end 1999. In March 2000, the Company sold Euro 200 million of
6% notes due 2007 and in August 2000, Eaton issued $100 million of
7.05% medium-term notes due 2002. Net proceeds from the sale of the
notes were used to refinance outstanding commercial paper and short-
term notes that were issued in connection with the 1999 acquisition of
Aeroquip-Vickers.
The Company currently has a multi-year credit facility of $900 million,
$500 million expiring in 2003 and $400 million expiring in 2005. Eaton
also entered into a $900 million credit facility with a 364-day term to
replace the expired 364-day facility, which was subsequently reduced by
$300 million in the second quarter of 2000. The Company's credit
facilities total $1.5 billion and support outstanding commercial paper
of $1.1 billion at September 30, 2000 of which $900 million is
classified as long-term debt, compared to $500 million at year-end 1999.
On July 26, 2000, the Board of Directors authorized the Company to
spend up to $500 million to purchase its Common Shares. This program is
in addition to the $500 million, five-year purchase program authorized
in January 2000. In the first nine months of 2000, 4.3 million shares
were purchased at a cost of $297 million under these programs.
Forward-Looking Statements
--------------------------
This Form 10-Q contains forward-looking statements concerning the
earnings commitment of the Fluid Power & Other Components segment for
2001, the planned spin-off of Axcelis Technologies Inc. by year-end
2000, and NAFTA heavy truck production for the next six to nine months
and in 2001. Those statements should be used with caution. They are
subject to various risks and uncertainties, many of which are outside
the control of the Company. Important factors which could cause actual
results to differ materially from those in the forward-looking
statements include our ability to integrate of Aeroquip-Vickers Inc.
successfully, our board's deciding not to proceed with the Axcelis
spin-off, an unanticipated change in the NAFTA heavy- and medium-duty
truck markets, continuity of business relationships with and purchases
by major customers, competitive pressure on sales and pricing,
increases in material and other production costs that cannot be
recouped in product pricing and global economic and financial
conditions. We do not assume any obligation to update these forward-
looking statements.
<PAGE>
Page 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A discussion of market risk exposures is included in Part II, Item 7A,
"Quantitative and Qualitative Disclosure about Market Risk", of the
Eaton's 1999 Annual Report on Form 10-K. Long-term debt increased to
$2.45 billion at September 30, 2000 from $1.92 billion at the end of
1999. This increase is primarily due to the offering in March of Euro
200 million of 6% notes due 2007, the issuance in August of $100
million of 7.05% medium-term notes due 2002, and the $400 million
increase in commercial paper classified as long-term debt. The carrying
value of the Euro debt and the medium-term notes approximated their
fair value at September 30, 2000. There were no other material changes
during the three months ended September 30, 2000.
<PAGE>
Page 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On July 31, 2000, the Company filed a Current Report on Form
8-K which included information concerning the initial public
offering of Axcelis Technologies, Inc., Eaton's second
quarter 2000 earnings release dated July 17, 2000, and a
press release dated July 26, 2000 announcing the
authorization of a $500 million Common Share repurchase
program.
<PAGE>
Page 19
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Adrian T. Dillon
Date: October 23, 2000 /s/-------------------------
Adrian T. Dillon
Executive Vice President -
Chief Financial and Planning
Officer; Principal Financial
Officer
<page
Page 20
EATON CORPORATION
EXHIBIT INDEX
Regulation S-K,
Item 601 - Exhibit
Reference Number Exhibit
------------------ -------
27 Financial Data Schedule
<page
