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): January 24, 2000
EATON CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 1-1396 34-0196300
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
Eaton Center
Cleveland, Ohio 44114
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(Address of principal executive offices) (Zip Code)
(216) 523-5000
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Registrant's telephone number,
including area code
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Item 5. Other Events
------------
Included in this report is the discussion of the fourth quarter 1999
earnings as released on January 24, 2000.
Eaton announced record sales and earnings for the fourth quarter
and the full year 1999. Sales in the quarter were $2.21 billion, 38
percent above the fourth quarter of 1998. Excluding a gain from the
sale of the company's Fluid Power Division and restructuring charges
in both periods, Eaton earned $1.59 per share in the fourth quarter,
25 percent above one year earlier. Comparable net income was $119
million versus last year's $91 million. After non-recurring items in
both periods, fourth quarter earnings per share were $2.98, nearly
triple last year's $1.01 per share. Net income was $224 million
compared to last year's $72 million.
Income for the full year reached $439 million before all unusual items,
or $5.95 per share, on sales of $8.40 billion. Comparable 1998 earnings
were $393 million, or $5.41 per share, on sales of $6.63 billion. After
non-recurring items in both periods, earnings reached $8.36 per share
in 1999 compared to $4.80 in 1998.
Stephen R. Hardis, Chairman and Chief Executive Officer, said, "Eaton had a
strong finish to a very eventful 1999. While the big jump in fourth quarter
sales was largely due to the addition of Aeroquip-Vickers, operating profits
before charges were up a much larger 76 percent from last year, with
contributions from all of our businesses. We took good advantage of
boom conditions in North American truck markets, and gathering strength
in Industrial & Commercial Controls markets, while Semiconductor
Equipment began an extraordinary worldwide rebound.
"If anything, the Truck Components market was too strong, and we were
challenged to meet surging North American demand. In contrast, the
Fluid Power business was very weak. But we continued to make excellent
progress integrating Aeroquip-Vickers into the family of Eaton
businesses. During the quarter, Aeroquip-Vickers added about $0.11 to
Eaton's earnings per share before restructuring charges, bringing the
full year contribution before charges to $0.27 per share. Our successful
execution of a multi-faceted financing strategy, and continued excellent
control over working capital, reduced debt leverage from a peak of 64%
early in the year to about 50% by year end.
"With the strength of the balance sheet restored and operating momentum
building in our businesses, we look forward to the challenge of beating
market expectations for performance in 2000."
Looking at Eaton's business segment results, Hardis noted that sales
and profits for Automotive Components were at fourth quarter record
levels. Sales of $455 million were about 1 percent above one year ago.
Adjusting for the foreign exchange impact of a stronger dollar, sales
volume was up about 5 percent. This compares to a 3 percent increase in
NAFTA light vehicle production, a 1 percent rise in Europe, and a 20
percent increase in South American output. Segment profits during the
quarter, at $59 million, were 5 percent higher than comparable profits
in 1998.
Fourth quarter sales of Fluid Power & Other Components were $602 million,
nearly 300 percent above year earlier results. Segment profits before
restructuring charges were $62 million, 170 percent ahead of last year.
Including Aeroquip-Vickers in 1998 results on a pro forma basis, sales
were off 6 percent while profits were about 59 percent above one year
earlier. Said Hardis, "We are pleased with the progress of our integration
efforts, which continue to exceed our acquisition plan despite very weak
hydraulics markets. Aeroquip's fluid conveyance business also finished
a record year on a strong note.
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"We may be seeing the first tentative signs since mid-1998 of an
improvement in industry conditions. In the fourth quarter, our orders
for mobile and industrial hydraulics were up about 17 percent compared
to last year. While we are not counting on an early or brisk rebound
this year, we are confident we will achieve the $0.50 per share of
synergies originally anticipated from the combination of Eaton and
Aeroquip-Vickers."
Sales and profits of the Industrial & Commercial Controls segment were
also at fourth quarter record levels. Sales of $597 million were 14
percent above last year while comparable operating profits of $51 million
were up 24 percent. Hardis noted that the surge in Eaton's sales far
exceeded the 6 percent rise in the North American market for electrical
distribution equipment and industrial controls. Said Hardis, "We
enjoyed an increase in shipments of our Navy Controls business that we
think will be sustained this year. Our Cutler-Hammer business also
showed good year-to-year growth of 8 percent, boosted by the 85 percent
rise in sales of its Engineered Service and Systems business."
Semiconductor Equipment sales surged $86 million, or 183 percent, from
the fourth quarter of last year while comparable operating profits
improved by $45 million to $17 million. Said Hardis, "We're extremely
pleased with the turnaround of this business. During 1999, sales jumped
nearly 50 percent to almost $400 million while operating profits improved
by $111 million. Current industry forecasts suggest that worldwide
semiconductor equipment purchases should rise about 30 percent this year,
and that the industry is just beginning at least a three-year up cycle.
With the business restructuring completed and our operation healthy
again, we believe Eaton is very well positioned to take full advantage of
this multi-year growth trend."
Fourth quarter sales of Truck Components jumped 19 percent to a record
$427 million. This compares with a 19 percent rise in NAFTA Class 8
factory sales, a 3 percent rise in European commercial truck production,
and a 3 percent drop in South American truck output. Before restructuring
charges in both periods, segment profits rose 17 percent to $54 million.
Said Hardis, "In the face of remarkable fourth quarter strength in the
NAFTA heavy truck market, we went to extraordinary lengths to meet urgent
customer needs. Inevitably, those actions to keep our customers' plants
running were very costly, and affected fourth quarter margins. As the
market returns to a more stable annual rate of about 300 thousand units,
we certainly expect those outsized costs to dissipate." Hardis also
noted that the $7 million restructuring charge in this year's fourth
quarter was related to the announced closure of the Aycliffe, United
Kingdom medium-duty transmission plant that was part of the corporation's
original 1998 $150 million cost-out program.
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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. The internet address for Eaton is http://www.eaton.com/
This news release contains forward-looking statements concerning
synergies anticipated from the combination of Eaton and Aeroquip-
Vickers, the recovery of the worldwide semiconductor market for this
year and the next three-year period and the dissipation of costs in
the Truck Components segment. 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 changes in global economic and
financial conditions, market demand for hydraulics equipment, our ability
to implement successfully the integration of Aeroquip-Vickers and our
ability to manage costs in the Truck Components segment. We do not
assume any obligation to update these forward-looking statements.
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Eaton Corporation
<TABLE>
Comparative Financial Summary
<CAPTION>
Three months ended
December 31
------------------
(Millions except for per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $2,214 $1,606
Income before income taxes 368 90
Net income 224 72
Net income per Common Share
Assuming dilution $ 2.98 $ 1.01
Basic 3.04 1.02
Average number of Common Shares outstanding
Assuming dilution 75.1 71.9
Basic 73.7 71.2
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
<TABLE>
Comparative Financial Summary
<CAPTION>
Year ended
December 31
------------------
(Millions except for per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $8,402 $6,625
Income before income taxes 963 485
Net income 617 349
Net income per Common Share
Assuming dilution $ 8.36 $ 4.80
Basic 8.51 4.89
Average number of Common Shares outstanding
Assuming dilution 73.7 72.7
Basic 72.5 71.4
Cash dividends paid per Common Share $ 1.76 $ 1.76
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Three months ended
December 31
------------------
(Millions except for per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $2,214 $1,606
Costs & expenses
Cost of products sold 1,614 1,160
Selling & administrative 340 276
Research & development 84 85
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2,038 1,521
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Income from operations 176 85
Other income (expense)
Interest expense - net (40) (21)
Gain on sales of businesses 207
Other - net 25 26
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192 5
------ ------
Income before income taxes 368 90
Income taxes 144 18
------ ------
Net income $ 224 $ 72
====== ======
Net income per Common Share
Assuming dilution $ 2.98 $ 1.01
Basic 3.04 1.02
Average number of Common Shares outstanding
Assuming dilution 75.1 71.9
Basic 73.7 71.2
Cash dividends paid per Common Share $ .44 $ .44
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
<TABLE>
Statements of Consolidated Income
<CAPTION>
Year ended
December 31
------------------
(Millions except for per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $8,402 $6,625
Costs & expenses
Cost of products sold 6,041 4,759
Selling & administrative 1,318 1,050
Research & development 314 334
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7,673 6,143
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Income from operations 729 482
Other income (expense)
Interest expense - net (152) (88)
Gain on sales of businesses 340 43
Other - net 46 48
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234 3
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Income before income taxes 963 485
Income taxes 346 136
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Net income $ 617 $ 349
====== ======
Net income per Common Share
Assuming dilution $ 8.36 $ 4.80
Basic 8.51 4.89
Average number of Common Shares outstanding
Assuming dilution 73.7 72.7
Basic 72.5 71.4
Cash dividends paid per Common Share $ 1.76 $ 1.76
See accompanying notes.
</TABLE>
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Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Three months ended
December 31
------------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net sales
Automotive Components $ 455 $ 451
Fluid Power & Other Components 602 155
Industrial & Commercial Controls 597 524
Semiconductor Equipment 133 47
Truck Components 427 358
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Total ongoing operations 2,214 1,535
Divested operations 71
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Total net sales $2,214 $1,606
====== ======
Operating profit (loss)
Automotive Components $ 59 $ 51
Fluid Power & Other Components 52 22
Industrial & Commercial Controls 51 28
Semiconductor Equipment 17 (30)
Truck Components 47 38
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Total ongoing operations 226 109
Divested operations 3 11
Amortization of goodwill & other
intangible assets (27) (19)
Interest expense - net (40) (21)
Gain on sales of businesses 207
Corporate & other - net (1) 10
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Income before income taxes $ 368 $ 90
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
<TABLE>
Business Segment Information
<CAPTION>
Year ended
December 31
------------------
(Millions) 1999 1998
---- ----
<S> <C> <C>
Net sales
Automotive Components $1,857 $1,741
Fluid Power & Other Components 2,036 681
Industrial & Commercial Controls 2,274 2,145
Semiconductor Equipment 397 267
Truck Components 1,630 1,478
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Total ongoing operations 8,194 6,312
Divested operations 208 313
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Total net sales $8,402 $6,625
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Operating profit (loss)
Automotive Components $ 236 $ 198
Fluid Power & Other Components 177 117
Industrial & Commercial Controls 181 140
Semiconductor Equipment 31 (123)
Truck Components 235 201
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Total ongoing operations 860 533
Divested operations 44 49
Amortization of goodwill & other
intangible assets (99) (67)
Interest expense - net (152) (88)
Gain on sales of businesses 340 43
Corporate & other - net (30) 15
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Income before income taxes $ 963 $ 485
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
December 31
(Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash & short-term investments $ 165 $ 122
Accounts receivable 1,267 885
Inventories 965 707
Deferred income taxes & other current
assets 385 268
------ ------
2,782 1,982
Property, plant & equipment 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
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 970 $ 333
Accounts payable & other current
liabilities 1,679 1,183
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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 2,624 2,057
------ ------
$8,437 $5,665
====== ======
See accompanying notes.
</TABLE>
<PAGE>
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Eaton Corporation
Notes to the Fourth Quarter 1999 Earnings Release
(All references to net income per Common Share assume dilution.)
Acquisition of Aeroquip-Vickers, Inc.
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On April 9, 1999, the Company completed the acquisition of
Aeroquip-Vickers, Inc. for approximately $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 in November 1999 and
the sale of 1.625 million Common Shares for $147 million in July
1999.
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.
Unusual Charges
- ---------------
Income for the fourth quarter of 1999 was reduced by
restructuring charges of $18 million ($12 million aftertax, or
$.16 per Common Share). 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 as announced in the fourth quarter of 1999.
These charges reduced operating profit of the Fluid Power and
Other Components segment by $10 million, the Truck Components
segment by $7 million and General Corporate by $1 million.
Income for the full year of 1999 was reduced by similar charges
of $30 million ($20 million aftertax, or $.27 per Common Share).
These charges reduced operating profit of the Fluid Power and
Other Components segment by $21 million, the Truck Components
segment by $7 million and General Corporate by $2 million.
Income for the fourth quarter of 1998 was reduced by
restructuring charges of $29 million ($19 million aftertax, or
$.26 per Common Share). These charges reduced operating profit
of the Automotive Components segment by $5 million, the Fluid
Power and Other Components segment by $1 million, the Industrial
and Commercial Controls segment by $13 million, the
Semiconductor Equipment segment by $2 million and the Truck
Components segment by $8 million.
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Income for the full year of 1998 was reduced by unusual pretax
charges of $111 million ($72 million aftertax, or $.99 per
Common Share). The Company recorded $101 million of
restructuring charges which reduced operating profit of the
Automotive Components segment by $12 million, the Fluid Power
and Other Components segment by $1 million, the Industrial and
Commercial Controls segment by $28 million, the Semiconductor
Equipment segment by $43 million and the Truck Components
segment by $17 million. The Company also recorded a $10 million
contribution to its charitable trust which is included in General
Corporate expense.
Restructuring charges recorded in 1999 and 1998 relate to
workforce reductions, asset write-downs and other restructuring
actions.
Gain on Sales of Businesses
- ---------------------------
On October 1, 1999, the Company completed the sale of the Fluid
Power Division. The sale of this business, and adjustments
related to businesses sold in prior periods, resulted in a
pretax gain of $207 million ($117 million aftertax, or $1.55 per
Common Share) which was recorded in the fourth quarter of 1999.
On December 30, 1999, the Company sold substantially all of
Vickers Electronics Systems, which was acquired in the
acquisition of Aeroquip-Vickers, resulting in no gain or loss.
On August 31, 1999, the Company completed the sale of the
Engineered Fasteners Division. 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 January 2, 1998, the Company sold the Axle and Brake business
and on April 1, 1998, the automotive leaf spring business. The
sale of these businesses, and an adjustment related to a
business sold in a prior period, resulted in a pretax gain of
$43 million ($28 million aftertax, or $.38 per Common Share),
which was recorded in the first quarter of 1998.
The operating results of these businesses are included in
divested operations.
Income Taxes
- ------------
The higher effective income tax rates for the fourth quarter
and full year 1999 compared to the same periods in 1998 are
primarily the result of the reduced significance of income tax
credits in 1999 relative to pretax income and income taxes related
to the gain on the sales of the Engineered Fasteners and Fluid
Power Divisions. 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.
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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
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/s/ Adrian T. Dillon
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Adrian T. Dillon
Executive Vice President
Chief Financial and Planning Officer
Date: February 1, 2000
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