-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TIubU98nHHubnxiA7BSATj8hEjln9KVNJqQdzEk/AfMiO2UmX7QS5pqTbju6IsFM ly3PX5AHOrSTlR5UlG060g== 0000031277-98-000007.txt : 19980817 0000031277-98-000007.hdr.sgml : 19980817 ACCESSION NUMBER: 0000031277-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01396 FILM NUMBER: 98688340 BUSINESS ADDRESS: STREET 1: EATON CTR STREET 2: 1111 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114-2584 BUSINESS PHONE: 2165235000 FORMER COMPANY: FORMER CONFORMED NAME: EATON YALE & TOWNE INC DATE OF NAME CHANGE: 19710822 10-Q 1 JUNE 30, 1998 FORM 10-Q Page 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1998 ------------- 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 71.4 million Common Shares outstanding as of June 30, 1998. Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Eaton Corporation Condensed Consolidated Balance Sheets
June 30, December 31, (Millions) 1998 1997 ---- ---- ASSETS Current assets Cash $ 44 $ 53 Short-term investments 18 37 Accounts receivable 999 958 Inventories 684 734 Deferred income taxes and other current assets 275 273 ------ ------ 2,020 2,055 Property, plant and equipment 1,616 1,759 Excess of cost over net assets of businesses acquired 1,017 966 Deferred income taxes and other assets 649 685 ------ ------ $5,302 $5,465 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt and current portion of long-term debt $ 379 $ 104 Accounts payable and other current liabilities 1,071 1,253 ------ ------ 1,450 1,357 Long-term debt 1,192 1,272 Postretirement benefits other than pensions 547 553 Other liabilities 161 212 Shareholders' equity 1,952 2,071 ------ ------ $5,302 $5,465 ====== ======
See accompanying notes. Page 3 Eaton Corporation Statements of Consolidated Income
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- (Millions except for per share data) 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $1,712 $1,909 $3,399 $3,698 Costs and expenses Cost of products sold 1,200 1,371 2,407 2,678 Selling and administrative 264 272 527 529 Research and development 82 79 164 154 ------ ------ ------ ------ 1,546 1,722 3,098 3,361 ------ ------ ------ ------ Income from operations 166 187 301 337 Other income (expense) Interest (expense) income - net (23) (19) (44) (37) Gain on sale of businesses 43 Other--net 18 14 16 27 ------ ------ ------ ------ (5) (5) 15 (10) ------ ------ ------ ------ Income before income taxes 161 182 316 327 Income taxes 47 56 97 100 ------ ------ ------ ------ Net income $ 114 $ 126 $ 219 $ 227 ====== ====== ====== ====== Net income per Common Share Assuming dilution $ 1.57 $ 1.61 $ 2.98 $ 2.90 Basic 1.60 1.64 3.05 2.94 Average number of Common Shares outstanding Assuming dilution 72.8 78.3 73.3 78.3 Basic 71.1 77.1 71.6 77.1 Cash dividends paid per Common Share $ .44 $ .44 $ .88 $ .84
See accompanying notes. Page 4 Eaton Corporation Condensed Statements of Consolidated Cash Flows
Six Months Ended June 30 ---------------- (Millions) 1998 1997 ---- ---- Net cash provided by operating activities Net income $ 219 $ 227 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 163 165 Gain on sale of businesses (43) Changes in operating assets and liabilities, excluding acquisitions and sales of businesses (263) (185) Other--net (4) 13 ----- ----- 72 220 Net cash provided by (used in) investing activities Acquisitions of businesses, less cash acquired (79) Sales of businesses 359 Expenditures for property, plant and equipment (150) (152) Other--net 4 6 ----- ----- 134 (146) Net cash used in by financing activities Borrowings with original maturities of more than three months Proceeds 801 64 Payments (477) (118) Borrowings with original maturities of less than three months--net (145) 53 Proceeds from exercise of stock options 16 18 Cash dividends paid (63) (65) Purchase of Common Shares (347) (25) ----- ----- (215) (73) ----- ----- (Decrease) increase in cash (9) 1 Cash at beginning of year 53 22 ----- ----- Cash at end of period $ 44 $ 23 ===== =====
See accompanying notes. 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 the Company's 1997 Annual Report on Form 10-K. Financial Presentation Changes - ------------------------------ Certain amounts for prior periods have been reclassified to conform to the current period presentation. Nonrecurring Charges - -------------------- Income in the first quarter of 1998 was reduced by nonrecurring pretax charges of $43 million. The Company recorded $33 million of restructuring charges which reduced operating profit of the Automotive Components segment by $8 million, the Industrial & Commercial Controls segment by $15 million, and the Truck Components segment by $10 million. The Company also recorded a $10 million contribution to its charitable trust which is included in other expense. Sales of Businesses - ------------------- On January 2, 1998, the Company completed the sale of the Axle and Brake business to Dana Corporation. The sale of this business, and an adjustment related to a business sold in a prior period, resulted in a pretax gain of $43 million which was recorded in the first quarter of 1998. On April 1, 1998, the Company completed the sale of its automotive leaf spring business. The operating results of these businesses are included in divested operations and prior periods have been reclassified to conform to the current period presentation. Segment Reporting - ----------------- As announced on April 2, 1998, the Company changed its business segment reporting in order to comply with Statement of Financial Accounting Standard (SFAS) No. 131, 'Disclosure about Segments of an Enterprise and Related Information'. This new rule changes the standards for reporting financial results by Page 6 operating segments. Business segment information for 1997 has been reclassified to conform to the current year presentation. Comprehensive Income - -------------------- On January 1, 1998, the Company adopted SFAS No. 130, 'Reporting Comprehensive Income'. SFAS No. 130 establishes new standards for reporting comprehensive income and its components; however, the adoption of SFAS No. 130 has no impact on the Company's net income or shareholders' equity. For the Company, the principal difference between net income as historically reported in the statements of consolidated income and comprehensive income is foreign currency translation recorded in shareholders' equity. Comprehensive income (in millions) is as follows: Three months ended June 30 ------------------ 1998 1997 ---- ---- Net income $114 $126 Foreign currency translation and other adjustments (2) (13) ---- ---- Comprehensive income $112 $113 ==== ==== Six months ended June 30 ------------------ 1998 1997 ---- ---- Net income $219 $227 Foreign currency translation and other adjustments 13 (53) ---- ---- Comprehensive income $232 $174 ==== ==== Inventories - ----------- June 30, December 31, (Millions) 1998 1997 ---- ---- Raw materials $251 $258 Work-in-process and finished goods 506 565 --- ---- Gross inventories at FIFO 757 823 Excess of current cost over LIFO cost (73) (89) ---- ---- Net inventories $684 $734 ==== ==== Page 7 Net Income per Common Share - --------------------------- The calculation of net income per Common Share - assuming dilution and basic follows (millions except for per share data): Three months ended June 30 ------------------ 1998 1997 ---- ---- Net income-assuming dilution and basic $ 114 $ 126 Average number of Common Shares outstanding-assuming dilution 72.8 78.3 Less dilutive effect of stock options 1.7 1.2 ---- ---- Average number of Common Shares outstanding-basic 71.1 77.1 ==== ==== Net income per Common Share Assuming dilution $1.57 $1.61 Basic $1.60 $1.64 Six months ended June 30 ------------------ 1998 1997 ---- ---- Net income-assuming dilution and basic $ 219 $ 227 Average number of Common Shares outstanding-assuming dilution 73.3 78.3 Less dilutive effect of stock options 1.7 1.2 ---- ---- Average number of Common Shares outstanding-basic 71.6 77.1 ==== ==== Net income per Common Share Assuming dilution $2.98 $2.90 Basic $3.05 $2.94 Recently Issued Accounting Pronouncements - ----------------------------------------- In June 1998, SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities', was issued. The Company must adopt the standard by the beginning of the first quarter of the year 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion Page 8 of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined the effect of SFAS No. 133 on earnings and the financial position of the Company. Summary Financial Information for Eaton ETN Offshore Ltd. - --------------------------------------------------------- Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned subsidiary of Eaton, was incorporated by Eaton in 1990 under the laws of Ontario, Canada, primarily for the purpose of raising funds through the offering of debt securities in the United States and making these funds available to Eaton or its subsidiaries. Eaton Offshore owns the common stock of a number of Eaton's subsidiaries which are engaged principally in the manufacture and/or sale of electrical and electronic controls, truck transmissions, fasteners and engine components. On April 1, 1998, the division that manufactures leaf spring assemblies was sold. Summary financial information for Eaton Offshore and its consolidated subsidiaries is as follows (in millions): Six Months Ended June 30 ------------------ 1998 1997 ---- ---- Income statement data Net sales $349 $360 Gross profit 83 75 Net income 37 34 June 30, December 31, 1998 1997 ---- ---- Balance sheet data Current assets $373 $375 Noncurrent assets 179 196 Net intercompany payables 114 160 Current liabilities 115 120 Noncurrent liabilities 112 107 Page 9 Eaton Corporation Business Segment Information
Three months ended Six months ended June 30 June 30 ------------------ ---------------- (Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Net sales Automotive Components $ 488 $ 462 $ 980 $ 919 Hydraulics & Other Components 158 153 320 297 Industrial & Commercial Controls 598 567 1,149 1,102 Semiconductor Equipment 93 107 172 185 Truck Components 375 273 747 527 ------ ------ ------ ------ Ongoing operations 1,712 1,562 3,368 3,030 Divested operations 347 31 668 ------ ------ ------ ------ Total net sales $1,712 $1,909 $3,399 $3,698 ====== ====== ====== ====== Operating profit Automotive Components $ 58 $ 65 $ 117 $ 127 Hydraulics & Other Components 29 30 59 57 Industrial & Commercial Controls 57 57 88 103 Semiconductor Equipment (8) 4 (22) 4 Truck Components 66 36 123 68 ------ ------ ------ ------ Ongoing operations 202 192 365 359 Divested operations 26 (1) 41 Interest (expense) income - net (23) (19) (44) (37) Amortization of intangible assets and excess of cost over net assets of businesses acquired (16) (10) (32) (20) Gain on sale of businesses 43 Other expense - net (2) (7) (15) (16) ------ ------ ------ ------ Income before income taxes $ 161 $ 182 $ 316 $ 327 ====== ====== ====== ======
Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- Sales for the three months and six months ended June 30, 1998 decreased 10% and 8%, respectively, from the comparable periods in 1997. Excluding the Semiconductor Equipment Business, second quarter 1998 business segment sales from ongoing operations were 11% ahead of a year ago while operating margins were steady at 13% of sales. The Semiconductor Equipment Business segment experienced a decline in sales while all other business segments experienced sales growth in the second quarter of 1998. The Company's 1997 strategic repositioning program of major divestitures and important acquisitions further resulted in reduced second quarter 1998 sales of $300 million and first half 1998 sales of about $500 million on a net basis when compared to one year ago. Net income for the three months and six months ended June 30, 1998 decreased 10% and 4%, respectively, from the comparable periods in 1997. Second quarter 1998 earnings per share was $1.57, down 2% from last year's $1.61 per fully diluted share. The Company reached a record earnings per share for the six months ended June 30, 1998 of $2.98 compared to $2.90 for the same period in 1997. Despite the difficult conditions the Company is experiencing in the semiconductor equipment business, the Company's consolidated second quarter earnings per share came within four cents of last year's record performance. The Company would have reported record earnings per share had the Company not also been affected by the PACCAR and General Motors strikes, which together reduced earnings per share by about six cents per share. The Company remains focused on building an enterprise that demonstrates both superior operating performance and higher sustainable growth. However, because of the severe and prolonged downturn in the semiconductor capital equipment business, the Company is no longer confident that its 1998 earnings will exceed 1997's record results. During the first quarter of 1998, the Company had a one-time net pretax gain of $43 million, related principally to the January 2, 1998 sale of its worldwide axle and brake business to Dana Corporation. This gain was entirely offset by charges of $33 million related to restructuring actions and a $10 million contribution to the Company's Charitable Trust. Automotive Components sales in the second quarter of 1998 were a record, increasing 6% from a year ago, despite a 4% decline in North American light vehicle production and an 8% drop in Latin American volume, offset somewhat by a 5% increase in Europe. Sales rose 7% in the first half of 1998 compared to the same period in 1997. Operating profit for the second quarter and first half of 1998 declined 11% and 8%, respectively, in Page 11 comparison to the same periods in 1997 due primarily to restructuring charges of $8 million in the first half of 1998. Also, the Company is struggling a bit because of continued penetration gains and stronger than expected European volumes. As a result, margins are being affected as production is adjusted around the world to satisfy varying levels of global demand. During the second quarter of 1998, the Company announced the formation of Shanghai Eaton Engine Components Company Ltd., a 55% owned joint venture with Shanghai Pudong Valve Factory and Asian Nittan Pte. Ltd. The venture manufactures and sells automotive and motorcycle engine valves and hydraulic valve lifters for the Chinese market. The Company also announced it had formed Eaton Shenglong Company Ltd., a 70% owned joint venture with Shenglong Group, which is producing viscous fan drives for the Chinese automotive market. During the first quarter of 1998, the Company acquired GT Products, a manufacturer of fuel system components that regulate fuel flow and vapor emissions in fuel tanks. On April 1, 1998, the Company concluded the previously announced sale of its automotive leaf spring business. Hydraulics & Other Components also reported record sales in the second quarter of 1998, 4% ahead of year earlier results and consistent with the year-to-year gain in North American hydraulics shipments. Sales also increased 8% for the first half of 1998 as compared to the same period in 1997. Operating profits were down 3% and up 4%, respectively, for the second quarter and first half of 1998 compared to the same periods in 1997. As expected, orders in the mobile hydraulics industry have plateaued in recent months as the Asian crisis has hurt customer exports. Demand for the Company's products, though, has continued to be strong. The Company has been making investments in incremental capacity, which should generate operating efficiencies over the remainder of the year. Sales of Industrial & Commercial Controls reached a record in the second quarter of 1998, 5% ahead of one year ago. Sales increased 4% for the first half of 1998 as compared to the same period in 1997. Operating profits for the second quarter of 1998 were flat compared to a year ago, and declined 15% or $15 million for the first half of 1998 as compared to the same period in 1997 due to restructuring charges of $15 million recorded in the first half of 1998. While residential construction was up 7% for the quarter from a year ago, commercial and industrial construction markets were up only about 2%. Second quarter sales growth represented a slight acceleration from first quarter comparisons. The renewed pick- up in orders the Company first identified three months ago has continued through mid-year. Semiconductor Equipment sales in the second quarter and first half of 1998 fell 13% and 7%, respectively, as compared to the Page 12 same periods in 1997. This business segment recorded an operating loss of $8 million for the second quarter of 1998 and $22 million for the first half of 1998 compared to operating profits of $4 million in both of the comparable periods in 1997. Industry orders are one third lower than six months ago with no sign of an imminent upturn in sight. The Company is addressing the difficult operating conditions in this business segment by reducing headcount by about 24% from year end 1997 and reducing capital spending by nearly 50% from planned levels. Sales of Truck Components in the second quarter of 1998 were a record, 37% above last year's results. Operating profits also reached a record in the second quarter of 1998, 83% above last year. Sales and operating profit increased 42% and 81%, respectively, for the first half of 1998 as compared to the same period in 1997. The Company's Spicer Clutch acquisition in 1997 continues to make a strong contribution, but even on a continuing operations basis, Truck Components worldwide sales for the second quarter of 1998 were up 17% from a year ago. North American net orders and backlog for Class 8 trucks are at all time records. It is hard to imagine conditions improving from here; however, there is nothing in the industry or the economy to suggest that a marked deterioration is imminent. Continuing market recovery in Latin America and Europe also seems likely. Operating profit was reduced by restructuring charges of $10 million in the first half of 1998. Construction of a $70 million plant near Sao Paulo, Brazil to manufacture transaxles for GM's Corsa is on schedule and will begin production next year. The recently announced agreement to purchase Fabryka Przekladni Samochodowych (FPS), a truck transmission manufacturer in Gdansk, Poland, with annual sales of about $20 million, is an important step in a major initiative to improve the manufacturing cost structure of our European Truck operations. Changes in Financial Condition - ------------------------------ The Company remains in a strong financial position at June 30, 1998; net working capital decreased from $698 million at the end of 1997 to $570 million at June 30, 1998 (the current ratio was 1.5 compared to 1.4 at each of those dates, respectively). Divested businesses and the increase in short-term debt were the primary causes of the reduction in working capital. Cash flow from operating activities, supplemented by proceeds from commercial paper borrowings and the sale of businesses, was used to fund capital expenditures, acquisitions of businesses, repayment of debt, cash dividends and the repurchase of Common Shares. During the second quarter of 1998, the Company terminated its existing credit agreements and entered into a new credit facility with a series of banks totaling $1 billion, $500 Page 13 million with a five-year term and $500 million with a 364-day term. Forward-Looking Statements - -------------------------- The forward-looking statements in this Form 10-Q 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 the market for semiconductor capital manufacturing equipment, changes in global economic and market conditions, and the effect of the labor strike currently underway at PACCAR and the recent labor strike at General Motors. Page 14 PART II - OTHER INFORMATION Item 5. Other Information The Company's proxies for its 1999 Annual Meeting of Shareholders will confer discretionary authority to vote on any matter if the Company does not have written notice of the matter by January 27, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - See Exhibit Index attached. (b) Reports on Form 8-K. 1. On April 2, 1998, the Company filed a Current Report on Form 8-K regarding the change in its business segment reporting. Page 15 Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ---------------------------- Registrant Date: August 6, 1998 /s/ Adrian T. Dillon ---------------------------- Adrian T. Dillon Executive Vice President - Chief Financial and Planning Officer; Principal Financial Officer Page 1 EATON CORPORATION EXHIBIT INDEX Regulation S-K, Item 601 - Exhibit Reference Number Exhibit - ------------------ ------- 4 Pursuant to Regulation S-K Item 601 (b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. 27 Financial Data Schedule EX-27 2
5 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. 1,000,000 6-MOS DEC-31-1998 JUN-30-1998 44 18 1,015 16 684 2,020 3,092 1,476 5,302 1,450 1,192 36 0 0 1,916 5,302 3,399 3,399 2,407 3,098 (59) 0 44 316 97 219 0 0 0 219 3.05 2.98
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