-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GrpvNzmQ67Bs9LrzO7nQfrBm6gUfNN1SNRlr+nBrW7Y4uXM/s3xOfWrRKZL4R/XL l879bm+uysLh6y75XMKeXw== 0000031277-94-000017.txt : 19940331 0000031277-94-000017.hdr.sgml : 19940331 ACCESSION NUMBER: 0000031277-94-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: 3714 IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-01396 FILM NUMBER: 94518144 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-K 1 10K Page 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the year ended December 31, 1993 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) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------------- --------------------------- Common Shares ($.50 par value) The Chicago Stock Exchange The New York Stock Exchange The Pacific Stock Exchange The London Stock Exchange 7% Debentures, due 2011 The New York Stock Exchange 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 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 1994 was $4.1 billion. As of January 31, 1994, there were 72,268,764 Common Shares outstanding. Page 2 Documents Incorporated By Reference Portions of the Proxy Statement for the 1994 annual shareholders' meeting are incorporated by reference into Part III. Part I Item 1. Business Eaton Corporation (herein referred to as Eaton or Company) was incorporated in 1916. Eaton is a global manufacturer of vehicle powertrain components and a broad variety of controls serving transportation, industrial, commercial, aerospace, and military markets. The Company offers thousands of high-quality products worldwide. Principal products include truck transmissions and axles, engine components, electrical equipment and controls. The Company had 1993 net sales of $4.4 billion and 38,000 employees at 120 manufacturing facilities in 17 countries. In May 1993, the Company redeemed its share purchase rights at a redemption price of 3-1/3 cents for each right, for a total payment of $2 million. In June 1993, the Company distributed a two-for-one stock split effected in the form of a 100% stock dividend and increased its quarterly dividend on Common Shares to 30 cents per share from the post-split rate of 27-1/2 cents per share. Also, in June 1993, the Company reconsolidated the net assets and operating results of its remaining discontinued operations. The Company has concluded that, although it would still prefer to divest these operations, due to the ongoing contraction in the defense industry and uncertainty in the defense electronics market at the present time, it would be extremely difficult to implement its divestiture plans on an acceptable basis. Financial information for these operations is presented under Defense Systems in "Business Segment Information" on page 38 of this report. In December 1993, the Company recorded a $55 million acquisition integration charge before income tax credits ($34 million after income tax credits, or $.49 per Common Share) in conjunction with the January 31, 1994 acquisition of the Distribution and Control Business Unit (DCBU) of Westinghouse Electric Corporation. The acquisition, which will be accounted for as a purchase in 1994, was for a purchase price of $1.1 billion, plus the assumption of certain liabilities. The purchase price is subject to adjustment based upon changes in DCBU's adjusted net assets. DCBU will be combined with the Company's Industrial Control and Power Distribution Operations, which market Cutler-Hammer products, to form a Cutler-Hammer business unit with annual sales of $1.6 billion. DCBU had 1993 sales of $1.1 billion and Eaton's consolidated sales are expected to increase 25% as a result of the acquisition. Further information regarding the acquisition and its financing is presented under "Subsequent Event - Acquisition of DCBU and Integration Charge" on pages 20 through 22 of this report. Information regarding principal products, net sales, operating profit and identifiable assets by business segment and geographic region is found under "Business Segment and Geographic Region Information" on pages 35 to 39 of this report. Additional information regarding Eaton's business segments and its business in general is presented below. Page 3 Vehicle Components Patents and Trademarks - Eaton owns, controls or is licensed under many patents related to this business segment. Although Eaton emphasizes its EATON trademark in the marketing of many of its products within this business segment, it also markets under a number of other trademarks, including CHAR-LYNN, DILL, FULLER, ROADRANGER and TOP SPEC. Seasonal Fluctuations - Sales of truck, passenger car and off-highway vehicle components are generally reduced in the third quarter of each year as a result of preparations by vehicle manufacturers for the following model year and their temporary shut-downs for taking physical inventories. Competition - The principal methods of competition in this business segment are price, service and product performance. Eaton occupies a strong competitive position in relation to its many competitors in this business segment and, with respect to many products, is considered among the market leaders. Major Customers - Approximately 18% of net sales in 1993 of the Vehicle Components segment were made to divisions and subsidiaries of Ford Motor Company. Also, approximately 39% of net sales in 1993 of the Vehicle Components segment were made to divisions and subsidiaries of five other large companies. Eaton has been doing business with each of these companies for many years. Sales to these companies include a number of different products and different models or types of the same product, the sales of which are not dependent upon one another. With respect to many of the products sold, the various divisions and subsidiaries of each of the companies are in the nature of separate customers, and sales to one division or subsidiary are not dependent upon sales to other divisions or subsidiaries. Electrical and Electronic Controls Patents and Trademarks - Eaton owns, controls or is licensed under many patents related to this business segment. The EATON, C-H CONTROL, CUTLER-HAMMER, DOLE, DURANT, DYNAMATIC, HEINEMANN, KENWAY, and PANELMATE trademarks are used in connection with the marketing of products included in this business segment. In addition, in conjunction with its January 1994 acquisition of DCBU, the Company has the right to use the CHALLENGER, COMMANDER and WESTINGHOUSE trademarks in the marketing of certain products. The use of the WESTINGHOUSE trademark is limited to a period of ten years. Competition - The principal methods of competition in this business segment are price, geographic coverage, service and product performance. The number of competitors varies with respect to the different products. Eaton occupies a strong competitive position in this business segment and, with respect to many products, is considered among the market leaders. Major Customers - Approximately 8% of net sales in 1993 of the Electrical and Electronic Controls segment were made to the United States Government. All contracts that the Company has with the United States Government are subject to termination at the election of the Government. Approximately 6% of net sales in 1993 of the Electrical and Electronic Controls segment were made to divisions and subsidiaries of Ford Motor Company, which is a major customer of the Company's Vehicle Components segment. Defense Systems Patents and Trademarks - Eaton owns, controls or is licensed under many patents related to this business segment. The AIL, INCHWORM and HYPERMANUAL trademarks are used in connection with the marketing of products included in this business segment. Competition - The principal methods of competition in this business segment are price, technological capability and product performance. The number of competitors is limited and varies with respect to the different technologies. Page 4 Major Customers - Almost all net sales in 1993 of the Defense Systems segment were made to the United States Government. All contracts that the Company has with the United States Government are subject to the termination at the election the Government. Information Concerning Eaton's Business in General Raw Materials - The principal raw materials used by Eaton are iron, steel, copper, aluminum, brass, insulating materials, silver, rubber and plastic. These materials are purchased in various forms, such as pig iron, metal sheets and strips, forging billets, bar stock and plastic pellets. Eaton purchases its raw materials, as well as parts and other components, from many suppliers and under normal circumstances has no difficulty obtaining them. Order Backlog - Since a significant proportion of open orders placed with Eaton by original equipment manufacturers of trucks, passenger cars and off-highway vehicles are historically subject to month-to-month releases by the customers during each model year, such orders are not considered technically firm. In computing its backlog of orders, Eaton includes only the amount of such orders released by such customers as of dates listed. Using this criterion, Eaton's total backlog was approximately $1 billion and $900 million as of December 31, 1993 and 1992, respectively. The backlog should not be relied upon as being indicative of results of operations for future periods. Research and Development - Research and development expenses for new products and the improvement of existing products were $154 million in 1993, $151 million in 1992 and $138 million in 1991. Protection of the Environment - The operations of the Company involve the use, disposal and cleanup of certain substances regulated under environmental protection laws, as further discussed under "Protection of the Environment" on page 26 of this report. Subject to the difficulty in estimating future environmental costs, the Company expects that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed will not have a material adverse effect on its financial condition or results of operations. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for the remainder of 1994 and 1995. Employees - Eaton employed 38,000 individuals as of December 31, 1993. As a result of its January 1994 acquisition of DCBU, the Company added 12,500 employees. Item 2. Properties Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 120 locations in 17 countries. In addition, as a result of its January 1994 acquisition of DCBU, the Company acquired 36 manufacturing facilities in various domestic and international locations, as well as 27 satellite operations and 12 distribution centers. The Company is a lessee under a number of operating leases for certain real properties and equipment. Information regarding the Company's commitments for operating leases is found under "Lease Commitments" on page 28 of this report. Eaton's principal research facilities are located in Southfield, Michigan, in Milwaukee, Wisconsin, and near Cleveland, Ohio. In addition, certain Eaton divisions conduct research in their own facilities. Management believes that the Company's manufacturing facilities are adequate for its operations, and such facilities are maintained in good condition. Item 3. Legal Proceedings None required to be reported. Item 4. Submission of Matters to a Vote of Security Holders None. Page 5 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Common Shares are listed for trading on the New York, Chicago, Pacific and London stock exchanges. Information regarding cash dividends paid and the high and low market price per Common Share for each quarter in 1993 and 1992 is found under "Quarterly Data" on page 34 of this report. At December 31, 1993, there were 15,417 holders of record of the Company's Common Shares. Additionally, 15,508 employees were shareholders through participation in the Company's Share Purchase and Investment Plan. Item 6. Selected Financial Data Information regarding selected financial data of the Company is found in the "Five-Year Consolidated Financial Summary" on page 49 of this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations "Management's Discussion and Analysis of Financial Condition and Results of Operations" is found on pages 41 to 48 of this report. Item 8. Financial Statements and Supplementary Data The consolidated financial statements and financial review of Eaton Corporation and the report of independent auditors are found on pages 13 through 39 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information contained on pages 5 through 8 in the Company's definitive proxy statement dated March 18, 1994, with respect to directors of the Company, is incorporated herein by reference in response to this Item. Page 6 The following is a list of Eaton's officers, their ages and their current positions and offices, as of February 1, 1994. Name Age Position (Date elected to position) - ---------------- --- ------------------------------------------- William E. Butler 62 Chairman and Chief Executive Officer (January 1, 1992); Director John S. Rodewig 60 President; Chief Operating Officer - Vehicle Components (September 22, 1993); Director Stephen R. Hardis 58 Vice Chairman and Chief Financial and Administrative Officer (April 23, 1986); Director Alexander M. Cutler 42 Executive Vice President; Chief Operating Officer - Controls (September 22, 1993); Director Gerald L. Gherlein 55 Executive Vice President and General Counsel (September 4, 1991) John M. Carmont 55 Vice President and Treasurer (December 1, 1981) Adrian T. Dillon 40 Vice President - Planning (March 1, 1991) Patrick X. Donovan 58 Vice President - International (April 27, 1988) John D. Evans 63 Vice President - Human Resources (January 1, 1982) Earl R. Franklin 50 Secretary and Associate General Counsel (September 1, 1991) John W. Hushen 58 Vice President - Corporate Affairs (August 1, 1991) Stanley V. Jaskolski 55 Vice President - Technical Management (October 1, 1990) Ronald L. Leach 59 Vice President - Accounting (December 1, 1981) William T. Muir 51 Vice President - Manufacturing Technologies (April 1, 1989) Derek R. Mumford 52 Vice President - Information Technologies (April 1, 1992) Billie K. Rawot 42 Vice President and Controller (March 1, 1991) All of the officers listed above have served in various capacities with Eaton over the past five years. There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors. Item 11. Executive Compensation The information contained on pages 11 through 25 in Eaton's definitive proxy statement dated March 18, 1994, with respect to executive compensation, is incorporated herein by reference in response to this Item. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained on pages 28 and 29 of the Company's definitive proxy statement dated March 18, 1994, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this Item. Item 13. Certain Relationships and Related Transactions The information contained on page 10 of the Company's definitive proxy statement dated March 18, 1994, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this Item. Page 7 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The following consolidated financial statements and financial review of Eaton Corporation are filed as a separate section of this report: Consolidated Balance Sheets - December 31, 1993 and 1992 - Pages 14 and 15 Statements of Consolidated Income - Years ended December 31, 1993, 1992 and 1991 - Page 16 Statements of Consolidated Cash Flows - Years ended December 31, 1993, 1992 and 1991 - Page 17 Statements of Consolidated Shareholders' Equity - Years ended December 31, 1993, 1992 and 1991 - Page 18 Financial Review - Pages 19 to 39 (2) The summarized financial information for Eaton ETN Offshore Ltd. on page 40 and the following consolidated financial statement schedules for Eaton Corporation are filed as a separate section of this report: Schedule V - Property, Plant and Equipment - Page 50 Schedule VI - Accumulated Depreciation of Property, Plant and Equipment - Page 51 Schedule IX - Short-Term Borrowings - Page 52 Schedule X - Supplementary Income Statement Information - Page 53 All other schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) Exhibits 3 Amended Articles of Incorporation (as amended and restated as of January 24, 1989, filed on Form SE on March 13, 1989) and Amended Regulations (as amended and restated as of April 27, 1988, filed on Form SE on March 13, 1989) 4(a) Instruments defining rights of security holders, including indentures (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) 10 Material contracts (1) DCBU Purchase Agreement dated as of August 10, 1993 between Westinghouse Electric Corporation (Seller) and Eaton Corporation (Buyer) Regarding the Distribution and Control Business Unit of Westinghouse Electric Corporation (Agreement) - Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 Page 8 Including the following Exhibits to the Agreement: (i) Form of Technology Agreement (Ex. 2.1) (ii) Terms of Lease for Shared Facilities (Ex.9.6(a) (1)) (iii) Terms of Sublease for Shared Facilities (Ex. 9.6(a) (2)) (iv) Terms of Lease for Vidalia, Georgia Shared Facility (Ex. 9.6(b) (1) (i)) (v) Terms of Lease by Buyer of Part of Horseheads Facility (Ex. 9.6(b) (1) (ii)) (vi) Terms for Jackson, Mississippi Sublease (Ex. 9.6(b) (2)) (vii) Form of Services Agreement (Ex. 9.8) (viii) Form of WESCO Distributor Agreement (Ex. 9.9) (ix) Form of Interim NEWCO Distributor Agreement (Ex. 7.15.2) (x) Form of NEWCO Distributor Agreement (xi) Form of Supplier and Vendor Agreement (Ex. 9.10) (2) The following are either a management contract or a compensatory plan or arrangement: (a) Deferred Incentive Compensation Plan (as amended and restated May 1, 1990; filed as a separate section of this report) (b) Executive Strategic Incentive Plan, effective as of January 1, 1991 - Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (c) Group Replacement Insurance Plan (GRIP), effective as of June 1, 1992 - Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (d) 1991 Stock Option Plan - Incorporated herein by reference to the Company's definitive proxy statement dated March 18, 1991 (e) The following are incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990: (i) Strategic Incentive and Option Plan (as amended and restated as of January 1, 1989) (ii) Limited Eaton Service Supplemental Retirement Income Plan (as amended and restated as of January 1, 1989) (iii) Amendments to the 1980 and 1986 Stock Option Plans (iv) Form of "Change in Control" Agreement entered into with all officers of Eaton Corporation (v) Eaton Corporation Supplemental Benefits Plan (as amended and restated as of January 1, 1989) (which provides supplemental retirement benefits) (vi) Eaton Corporation Excess Benefits Plan (as amended and restated as of January 1, 1989) (with respect to Section 415 limitations of the Internal Revenue Code) (f) The following are incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (filed on Form SE dated March 28, 1991): (i) Executive Incentive Compensation Plan Page 9 (ii) Plan for the Deferred Payment of Directors' Fees (as amended and restated as of January 1, 1989) (iii) Plan for the Deferred Payment of Directors' Fees (originally adopted in 1980 and amended and restated in 1989) (iv) Eaton Corporation Retirement Plan for Non-Employee Directors (as amended and restated as of January 1, 1989) 11 Statement regarding computations of net income per Common Share (filed as a separate section of this report) 21 Subsidiaries of Eaton Corporation (filed as a separate section of this report) 23 Consent of Independent Auditors (filed as a separate section of this report) 24 Power of Attorney (filed as a separate section of this report) (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1993. (c) & (d) Exhibits and Financial Statement Schedules Certain exhibits and financial statement schedules required by this portion of Item 14 are filed as a separate section of this report. Page 10 Signatures 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: March 28, 1994 /s/ Stephen R. Hardis --------------------- Stephen R. Hardis Vice Chairman and Chief Financial and Administrative Officer; Principal Financial Officer; Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. DATE: March 28, 1994 Signature Title - -------------------- ------------------------------------- * - -------------------- William E. Butler Chairman and Chief Executive Officer; Principal Executive Officer; Director * - -------------------- John S. Rodewig President; Chief Operating Officer - Vehicle Components; Director * - -------------------- Alexander M. Cutler Executive Vice President; Chief Operating Officer - Controls; Director /s/ Ronald L. Leach - -------------------- Ronald L. Leach Vice President - Accounting; Principal Accounting Officer * - -------------------- Billie K. Rawot Vice President and Controller * - -------------------- Neil A. Armstrong Director * - -------------------- Phyllis B. Davis Director * - -------------------- Arthur Dole III Director * - -------------------- Charles E. Hugel Director * - -------------------- John R. Miller Director Page 11 * - -------------------- Furman C. Moseley Director * - -------------------- Hooper G. Pattillo Director * - -------------------- A. William Reynolds Director * - -------------------- Gary L. Tooker Director *By /s/ Stephen R. Hardis -------------------------------------- Stephen R. Hardis, Attorney-in-Fact for the officers and directors signing in the capacities indicated Page 12 Eaton Corporation 1993 Annual Report on Form 10-K Items 6, 7, 8 & Item 14 (c) and (d) Report of Independent Auditors Consolidated Financial Statements and Financial Review Summary Financial Information for Eaton ETN Offshore Ltd. Management's Discussion and Analysis of Financial Condition and Results of Operations Five-Year Consolidated Financial Summary Financial Statement Schedules Exhibits Page 13 REPORT OF INDEPENDENT AUDITORS - ------------------------------ To the Shareholders Eaton Corporation We have audited the accompanying consolidated balance sheets of Eaton Corporation and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the summary financial information and financial statement schedules listed in Item 14(a). These financial statements, schedules and summary financial information are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements, schedules and summary financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eaton Corporation at December 31, 1993 and 1992, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related summary financial information and financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As described under "Accounting Changes" on page 22 of this report, in 1992 the Company changed its methods of accounting for postretirement benefits other than pensions and for income taxes. Ernst & Young Cleveland, Ohio February 1, 1994 Page 14
Eaton Corporation Consolidated Balance Sheets December 31 -------------------- (Millions of dollars) 1993 1992 ---- ---- ASSETS Current assets Cash $ 32 $ 30 Short-term investments 268 186 Accounts receivable 550 628 Inventories 434 455 Deferred income taxes 127 120 Other current assets 55 61 ------- ------- 1,466 1,480 Property, plant and equipment Land 41 41 Buildings 486 482 Machinery and equipment 1,959 1,896 ------- ------- 2,486 2,419 Accumulated depreciation (1,298) (1,238) ------- ------- 1,188 1,181 Excess of cost over net assets of businesses acquired 265 275 Deferred income taxes 112 61 Other assets 237 223 ------- ------- $ 3,268 $ 3,220 ======= ======= The Financial Review on pages 19 to 39 is an integral part of the consolidated financial statements.
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Eaton Corporation Consolidated Balance Sheets December 31 -------------------- (Millions of dollars) 1993 1992 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 14 $ 30 Current portion of long-term debt 110 19 Accounts payable 266 251 Accrued compensation 106 95 Accrued income and other taxes 23 48 Other current liabilities 268 286 ------ ------ 787 729 Long-term debt 649 833 Postretirement benefits other than pensions 509 511 Other long-term liabilities 218 199 Shareholders' equity Common Shares (71.3 million in 1993 and 34.7 million in 1992) 36 17 Capital in excess of par value 535 452 Retained earnings 708 636 Foreign currency translation adjustments (78) (47) Unallocated Employee Stock Ownership Plan shares (96) (110) ------ ------ 1,105 948 ------ ------ $3,268 $3,220 ====== ====== The Financial Review on pages 19 to 39 is an integral part of the consolidated financial statements.
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Eaton Corporation Statements of Consolidated Income Year ended December 31 ------------------------------- (Millions of dollars except for per 1993 1992 1991 share data) ---- ---- ---- Net sales $4,401 $4,101 $3,659 Costs and expenses Cost of products sold 3,284 3,134 2,808 Selling and administrative expense 591 578 520 Research and development expense 154 151 138 Acquisition integration charge 55 Restructuring charge 39 ------ ------ ------ 4,084 3,863 3,505 ------ ------ ------ Income from operations 317 238 154 Other income and (expense) Interest expense (75) (89) (83) Interest income 8 9 12 Other income--net 12 23 18 ------ ------ ------ (55) (57) (53) ------ ------ ------ Income before income taxes 262 181 101 Income taxes 82 41 27 ------ ------ ------ Income before extraordinary item and cumulative effect of accounting changes 180 140 74 Extraordinary item (7) Cumulative effect of accounting changes Postretirement benefits other than pensions (274) Income taxes 6 ------ ------ ------ Net income (loss) $ 173 $ (128) $ 74 ====== ====== ====== Per Common Share Income before extraordinary item and cumulative effect of accounting changes $ 2.57 $ 2.03 $ 1.09 Extraordinary item (.10) Cumulative effect of accounting changes Postretirement benefits other than pensions (3.97) Income taxes 0.09 ------ ------ ------ Net income (loss) $ 2.47 $(1.85) $ 1.09 ====== ====== ====== Cash dividends paid $ 1.15 $ 1.10 $ 1.10 Average number of Common Shares outstanding (in millions) 69.8 68.9 68.0 The Financial Review on pages 19 to 39 is an integral part of the consolidated financial statements.
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Eaton Corporation Statements of Consolidated Cash Flows Year ended December 31 ---------------------------- (Millions of dollars) 1993 1992 1991 ---- ---- ---- Operating activities Income before extraordinary item and cumulative effect of accounting changes $ 180 $ 140 $ 74 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 196 200 185 Acquisition integration charge 55 Long-term liabilities for postretirement benefits other than pensions 21 Deferred income taxes (65) (26) (63) Other long-term liabilities and other non-cash items in income (6) (40) 4 Changes in operating assets and liabilities, excluding purchases of businesses Accounts receivable 40 58 (91) Inventories 12 11 (17) Other current assets 6 (5) (5) Accounts payable and other accruals 29 (8) (26) Accrued income and other taxes (15) (9) (11) Other--net 3 39 (2) ----- ----- ----- Net cash provided by operating activities 435 381 48 Investing activities Expenditures for property, plant and equipment (227) (186) (194) Acquisitions of businesses (14) (22) (17) Purchases of short-term investments (108) (86) (39) Maturities and sales of short-term investments 22 138 Other--net 8 36 5 ----- ----- ----- Net cash used in investing activities (319) (258) (107) Financing activities Long-term borrowings 99 203 Payments of long-term debt (98) (151) (107) Proceeds from sale of Common Shares 62 Proceeds from exercise of stock options by employees 19 29 5 Cash dividends paid (83) (76) (75) Net change in short-term debt (14) (15) 24 ----- ----- ----- Net cash (used in) provided by financing activities (114) (114) 50 ----- ----- ----- Total increase (decrease) in cash 2 9 (9) Cash at beginning of year 30 21 30 ----- ----- ----- Cash at end of year $ 32 $ 30 $ 21 ===== ===== ===== The Financial Review on pages 19 to 39 is an integral part of the consolidated financial statements.
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Eaton Corporation Statements of Consolidated Shareholders' Equity Foreign Total Common Shares Capital in currency Unallocated share- ------------------ excess of Retained translation ESOP holders' (Shares in thousands, dollars in millions) Shares Amount par value earnings adjustments shares equity ------ ------ --------- -------- ----------- -------- -------- Balance at January 1, 1991 33,948 $17 $411 $837 $9 $(134) $1,140 Net income 74 74 Cash dividends paid, net of Employee Stock Ownership Plan (ESOP) tax benefit (72) (72) Issuance of shares under employee benefit plans, including tax benefit 145 7 7 Purchase of shares for treasury (24) (1) (1) Reduction of unallocated ESOP shares 12 12 Foreign currency translation adjustments (7) (7) ------ --- ---- ---- ---- ---- ------ Balance at December 31, 1991 34,069 17 418 838 2 (122) 1,153 Net loss (128) (128) Cash dividends paid, net of ESOP tax benefit (74) (74) Issuance of shares under employee benefit plans, including tax benefit 598 34 34 Reduction of unallocated ESOP shares 12 12 Foreign currency translation adjustments (49) (49) ------ --- ---- ---- ---- ---- ------ Balance at December 31, 1992 34,667 17 452 636 (47) (110) 948 Net income 173 173 Cash dividends paid, net of ESOP tax benefit (83) (83) Issuance of shares under employee benefit plans, including tax benefit 483 22 22 Two-for-one stock split 34,867 18 (18) Sale of shares 1,287 1 61 62 Reduction of unallocated ESOP shares 14 14 Foreign currency translation adjustments (31) (31) ------ --- ---- ---- ---- ---- ------ Balance at December 31, 1993 71,304 $36 $535 $708 $(78) $(96) $1,105 ====== === ==== ==== ==== ==== ====== The Financial Review on pages 19 to 39 is an integral part of the consolidated financial statements.
Page 19 FINANCIAL REVIEW - ---------------- On June 28, 1993, the Company distributed a two-for-one stock split effected in the form of a 100% stock dividend. Accordingly, all per share amounts, average shares outstanding used in the calculation of per share amounts and stock option information have been adjusted retroactively to reflect the stock split. In June 1993, the Company reconsolidated the net assets and operating results of its remaining discontinued operations. Prior years have been restated to include these results. The Company has concluded that, although it would still prefer to divest these operations, due to the ongoing contraction in the defense industry and uncertainty in the defense electronics market at the present time, it would be extremely difficult to implement its divestiture plans on an acceptable basis. Financial information for these operations is presented under Defense Systems in "Business Segment Information" in the Financial Review. 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 where the Company has a 20% to 50% ownership interest. Foreign Currency Translation - ---------------------------- Financial statements for subsidiaries outside the United States, except those in highly inflationary economies, are translated into U.S. 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. Financial statements for subsidiaries in highly inflationary economies are translated into U.S. dollars in the same manner except for inventories and property, plant and equipment-net, and related expenses, which are translated at historical exchange rates. The resulting translation adjustments are included in net income. Short-Term Investments - ---------------------- Short-term investments are carried at cost and are not considered to be cash equivalents for purposes of classification in the statements of consolidated cash flows. Inventories - ----------- Inventories are carried at lower of cost or market. Inventories in the United States, other than those associated with long-term contracts, are accounted for using the last-in, first-out (LIFO) method and all other inventories using the first-in, first-out (FIFO) method. Page 20 Long-Term Contracts - ------------------- Income and costs on long-term contracts, which relate primarily to the Defense Systems business segment, are recognized on the percentage-of-completion method. Provision is made for anticipated losses on uncompleted contracts. Certain government contracts provide for incentive awards or penalties which are reflected in operations at the time amounts can be reasonably determined. Depreciation and Amortization - ----------------------------- Depreciation and amortization are computed by the straight-line method for financial statement purposes. Depreciation of plant and equipment is provided over the useful lives of the various classes of assets. Excess of cost over net assets of businesses acquired is amortized over fifteen to forty years (accumulated amortization was $78 million and $69 million at the end of 1993 and 1992, respectively). Other intangible assets, principally patents, are amortized over their respective lives. Income Taxes - ------------ In 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", as discussed under "Accounting Changes" in the Financial Review. Deferred income taxes are not provided for undistributed earnings of consolidated subsidiaries outside the United States when such earnings are reinvested for an indefinite period of time by the subsidiaries. Financial Instruments - --------------------- Gains or losses on interest rate swap and cap agreements which hedge interest on debt are accrued in interest expense. Gains or losses on foreign currency forward exchange contracts and options which hedge specific transactions are recognized in net income, offsetting the underlying foreign currency transaction gains or losses. Gains or losses on foreign currency forward exchange contracts and options which hedge net investments in consolidated subsidiaries outside the United States are accrued in shareholders' equity. Premiums related to interest rate swap and cap agreements and foreign currency forward exchange contracts and options are amortized to net income over the life of the agreement. Net Income Per Common Share - --------------------------- Net income per Common Share is computed by dividing net income by the average month-end number of shares outstanding during each period. The dilutive effect of common stock equivalents is not material. SUBSEQUENT EVENT - ACQUISITION OF DCBU AND INTEGRATION CHARGE - ------------------------------------------------------------- On January 31, 1994, the Company acquired the Distribution and Control Business Unit (DCBU) of Westinghouse Electric Corporation for a purchase price of $1.1 billion, plus the assumption of certain liabilities. The purchase price is subject to adjustment based upon Page 21 changes in DCBU's adjusted net assets. This acquisition will be accounted for as a purchase in 1994. DCBU had sales of $1.1 billion in 1993 and has estimated net assets of $600 million. DCBU is a leading North American manufacturer of electrical distribution equipment and industrial controls, headquartered in Pittsburgh, Pennsylvania. It has approximately 12,500 employees who are located at 36 plants and facilities in the United States, Puerto Rico, Central and South America, Canada and the United Kingdom, and at 27 satellite operations and 12 distribution centers. The purchase includes Challenger Electrical Equipment Corporation, which was acquired by Westinghouse in 1987. DCBU will be combined with Eaton's Industrial Control and Power Distribution Operations (ICPDO), which market Cutler-Hammer products, to form a Cutler-Hammer business unit with annual sales of $1.6 billion. Eaton's consolidated sales are expected to increase by 25% as a result of the acquisition. In order to finance the acquisition, the Company issued $930 million of short-term commercial paper. The Company plans to reduce these short-term financings by the middle of 1994 through equity and long-term debt financings. The timing and mix of these financings will depend on market conditions. Of these short-term financings, $555 million will be classified as long-term debt because the Company intends, and has the ability under a new five-year $555 million revolving credit agreement entered into in January 1994, to refinance this debt on a long-term basis. Also, in January 1994, the Company entered into a $555 million 364-day revolving credit agreement. In 1993, the Company entered into several interest rate hedge agreements related to the planned financing of the acquisition. In September 1993, the Company entered into four interest rate swaps commencing on January 18, 1994. Two thirty-year swaps will effectively convert $100 million of floating rate debt into fixed rate debt at an average rate of 6.685%, and two ten-year swaps will effectively convert $100 million of floating rate debt into fixed rate debt at an average rate of 5.788%. In October 1993, the Company purchased a one-year interest rate cap commencing on January 1, 1994 that effectively places a 5.5% ceiling on $400 million of floating rate debt, and a ten-month interest rate cap commencing January 1, 1995 that effectively places a 5.5% ceiling on $100 million of floating rate debt. In December 1993, in conjunction with the acquisition, the Company recorded a $55 million acquisition integration charge before income tax credits ($34 million after income tax credits, or $.49 per Common Share). Part of a comprehensive business plan, the charge addresses the costs of the integration of ICPDO product lines and operations with DCBU, related workforce reductions and an $8 million write-down of assets, largely in the United States. Expenditures are expected to occur over approximately the next four years and will be funded through cash flow from the combined operations. The Company anticipates that integration of the businesses will create permanent value by streamlining product lines, manufacturing capacity and Page 22 organization structure and enable the businesses to attain maximum benefit from synergy of complementary product offerings, operations and technical expertise. Positive incremental benefits are anticipated following the first year of integration activities. EXTRAORDINARY ITEM AND RESTRUCTURING CHARGE - ------------------------------------------- In March 1993, the Company called for redemption, in April 1993, the $74 million outstanding balance of its 9% debentures, and in December 1993, the Company called for redemption, in January 1994, the $89 million outstanding balance of its 8.5% debentures. The extraordinary loss on these redemptions, including the write-off of debt issue costs, was $11 million before income tax credits ($7 million after income tax credits, or $.10 per Common Share). In 1991, as a result of the review of operating strategies and in order to improve competitiveness and future profitability, the Company recorded a restructuring charge of $39 million before income tax credits ($25 million after income tax credits, or $.38 per Common Share). The charge included provisions for restructuring, relocation and rationalization of product lines and operations and permanent workforce reductions involving a significant number of operations, primarily in the United States and Europe. ACCOUNTING CHANGES - ------------------ In 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". SFAS No. 106 requires accrual of these benefits, primarily postretirement health care and life insurance for retirees in the United States, over the working lives of employees rather than recognition of expenses as claims are incurred. Included in net income for 1992 is the cumulative effect of this accounting change for prior years of $442 million before income tax credits ($274 million after income tax credits, or $3.97 per Common Share). As a result of this accounting change, 1992 postretirement health care and life insurance costs increased $25 million before income tax credits ($16 million after income tax credits, or $.23 per Common Share). Results for 1991 have not been restated for this accounting change. SFAS No. 106 has no effect on cash flows since claims will continue to be paid as incurred. In 1992, the Company also adopted SFAS No. 109, "Accounting for Income Taxes". The adoption of this standard changed the method of accounting for income taxes to the liability method from the deferred method. The liability method requires recognition of deferred income taxes based on temporary differences between the financial reporting and income tax bases of assets and liabilities, using currently- enacted income tax rates and regulations. Included in net income for 1992 is the cumulative effect of this accounting change for prior years of $6 million, or $.09 per Common Share. Results for 1991 have not been restated for this accounting change. SFAS No. 109 has no effect on cash flows. Page 23 ACCOUNTS RECEIVABLE - ------------------- Included in accounts receivable at December 31, 1993 and 1992 were unbilled amounts of $23 million and $91 million, respectively, primarily related to long-term contracts of the Defense Systems business segment with the United States Government. These receivables will be billed in accordance with applicable contract terms and are expected to be collected within one year. Accounts receivable are net of an allowance for doubtful accounts of $10 million at the end of 1993 and 1992. INVENTORIES - ----------- December 31 --------------- (Millions of dollars) 1993 1992 ---- ---- Raw materials $141 $128 Work in process 238 264 Finished goods 139 146 ---- ---- Gross inventories at FIFO 518 538 Excess of current cost over LIFO cost (84) (83) ---- ---- Net inventories at LIFO $434 $455 ==== ==== Gross inventories accounted for using the LIFO method were $314 million and $294 million at the end of 1993 and 1992, respectively. DEBT AND OTHER FINANCIAL INSTRUMENTS - ------------------------------------ Information related to the 1994 financing of the acquisition of DCBU is contained under "Subsequent Event - Acquisition of DCBU and Integration Charge" in the Financial Review. The Company has lines of credit, primarily short-term, aggregating $119 million from various banks worldwide. Most of these arrangements do not have termination dates, but are reviewed periodically for renewal. At December 31, 1993, the Company had $24 million outstanding under lines of credit with banks. Page 24 A summary of long-term debt, excluding the current portion, follows: December 31 --------------- (Millions of dollars) 1993 1992 ---- ---- 9% notes payable, due 2001 $100 $100 8% debentures, due 2006 (due 1996 at option of debenture holder) 86 86 8.9% debentures, due 2006 100 100 7% debentures, due 2011, net of unamor- tized discount of $95 million in 1993 and $96 million in 1992 (effective interest rate 14.6%) 105 104 8-7/8% debentures, due 2019 (due 2004 at option of debenture holder) 38 38 8.1% debentures, due 2022 100 100 Notes payable of Employee Stock Ownership Plan due through 1999 82 96 8.5% sinking fund debentures 89 9% sinking fund debentures 74 Other 38 46 ---- ---- $649 $833 ==== ==== During 1993, the Company called for redemption the $74 million outstanding balance of its 9% debentures and the $89 million outstanding balance of its 8.5% debentures, resulting in an extraordinary loss of $7 million. Notes payable of the Employee Stock Ownership Plan (ESOP), which are guaranteed by the Company, consist of $65 million at a floating interest rate (3.00% at December 31, 1993) based on LIBOR and $31 million at a fixed interest rate of 7.62%. The Company has entered into a series of interest rate swaps, which expire ratably through 1999, and which change the interest rate on the $31 million of fixed interest rate notes payable to fixed interest rates of 7.07% and 6.85% as to $9 million and $18 million, respectively, and to a floating interest rate (2.075% at December 31, 1993) based on LIBOR as to $4 million. In 1991, an unrelated party exercised its option under a 1990 agreement to enter into an interest rate swap expiring in 2000 with the Company. The agreement effectively converts $100 million of floating rate debt into fixed rate obligations. Payments are received at a floating interest rate (3.375% at December 31, 1993) based on LIBOR and are made at a fixed interest rate of 9%. Aggregate mandatory sinking fund requirements and annual maturities of long-term debt are as follows (in millions): 1994, $110; 1995, $21; 1996, $106; 1997, $21; and 1998, $22. The amount for 1994 includes $89 million of 8.5% debentures called for redemption in January 1994. The amount for 1996 includes $86 million of 8% debentures due in 1996 at the option of the debenture holder. Page 25 Interest cost capitalized as part of acquisition or construction of major assets (in millions) was $12, $8, and $7 in 1993, 1992 and 1991, respectively. Interest paid (in millions) was $90, $94 and $81 in 1993, 1992 and 1991, respectively. At December 31, 1993, the Company held foreign currency forward exchange contracts and options, which primarily mature in 1994, for purchase or sale of largely European and Canadian currencies to hedge foreign currency transactions and net investment positions. Open purchase contracts totaled $63 million and open sales contracts totaled $290 million. Counterparties to various hedging instruments are a number of major international financial institutions. While the Company may be exposed to credit losses in the event of nonperformance by these counterparties, it does not anticipate losses due to its control over the limit of positions entered into with any one party and the strong credit ratings of these institutions. The following table summarizes the carrying amount and fair value of financial instruments:
December 31, 1993 December 31, 1992 ----------------- - ----------------- Carrying Fair Carrying Fair (Millions of dollars) amount value amount value -------- ----- -------- ----- Cash and short-term investments $300 $300 $ 216 $ 216 Equity investments and marketable securities, included in other assets 53 61 54 67 Short-term debt (14) (14) (30) (30) Long-term debt and current portion of long-term debt (759) (941) (852) (954) Foreign currency forward exchange contracts and options 6 7 8 14 Interest rate derivatives (13) (12)
The fair value of equity investments, marketable securities, long-term debt and interest rate derivatives was principally based on quoted market prices. The fair value of foreign currency forward exchange contracts and options was estimated based on quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences. The carrying amount of financial instruments is not affected by the fair value measurement. Page 26 PROTECTION OF THE ENVIRONMENT - ----------------------------- The Company has been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites. Although this law technically imposes joint and several liability upon each PRP at each site, the extent of the Company's required financial contribution to the cleanup of these sites is expected to be limited based on the number and financial strength of the other named PRP's and the volumes of waste involved which might be attributable to the Company. The Company is also involved in remedial response and voluntary environmental cleanup expenditures at a number of other sites which are not the subject of any Superfund law proceeding, including certain of its currently-owned or formerly-owned plants. Although it is difficult to quantify the potential financial impact of compliance with environmental protection laws, management estimates that there is a reasonable possibility that the remediation and other costs associated with all of these sites may range between $10 million and $68 million, and that such costs would be incurred over a period of several years. The Company accrues for these costs when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. At December 31, 1993, the Company's balance sheet included an accrual for the estimated remediation and other environmental costs of approximately $14 million. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Subject to the difficulty in estimating future environmental costs, the Company expects that any sum it may be required to pay in connection with environmental matters in excess of the amounts recorded or disclosed above will not have a material adverse effect on its financial condition or results of operations. With respect to the DCBU operations acquired at January 31, 1994, to date the Company has conducted only a due diligence, pre-acquisition review of the environmental loss contingencies and expenditures at these operations. Although additional investigation and review is in progress, the Company is not yet able to evaluate conclusively the scope of any environmental issues. The Company expects that these operations will have environmental exposure similar to that of other electrical equipment manufacturers. The Company's exposure is limited, however, by the agreement between the Company and Westinghouse Electric Corporation, pursuant to which the Company acquired DCBU. With respect to environmental conditions existing prior to the acquisition, Westinghouse has agreed to retain certain responsibilities, to share the cost of others and to indemnify the Company for its share of those costs to the extent that they exceed $3.5 million annually. For locations in the United States, this obligation to share and to indemnify extends for ten years, and for locations elsewhere it extends for fifteen years. The Company continues to modify, on an ongoing, regular basis, certain of its processes in order to reduce the impact on the environment. Efforts in this regard include the removal of many underground storage tanks and the reduction or elimination of certain chemicals and wastes in its operations. Page 27 OPTIONS FOR COMMON SHARES - ------------------------- Options have been granted to certain employees, under various plans, to purchase the Company's Common Shares at prices equal to fair market value as of date of grant. These options expire ten years from date of grant. A summary of stock option activity follows:
1993 1992 ------------------------ ------------------------- Average Average price price per share Shares per share Shares --------- --------- --------- --------- Outstanding, January 1 $28.81 3,368,670 $26.33 3,836,274 Granted 39.34 831,730 34.10 808,070 Exercised 27.28 (657,353) 24.50 (1,221,610) Canceled 32.52 (109,197) 29.47 (54,064) --------- --------- Outstanding, December 31 $31.53 3,433,850 $28.81 3,368,670 ========= ========= Shares exercisable January 1 2,334,758 2,903,104 December 31 2,401,683 2,334,758 Shares reserved for future grants January 1 2,856,882 3,703,528 December 31 2,133,630 2,856,882
SHAREHOLDERS' EQUITY - -------------------- There are 150 million Common Shares authorized. There were 11 million and 12 million Common Shares held in treasury at the end of 1992 and 1991, respectively, which were reissued in conjunction with the June 1993 two-for-one stock split. At December 31, 1993, 5.8 million Common Shares were reserved principally for exercise and grant of stock options. At December 31, 1993, there were 15,417 holders of record of Common Shares. Additionally, 15,508 employees were shareholders through participation in the Share Purchase and Investment Plan. In private placements the Company sold 1.3 million Common Shares in 1993 for aggregate net proceeds of $62 million, and sold an additional 800,000 Common Shares in January 1994 for aggregate net proceeds of $38 million. In May 1993, the Company redeemed its share purchase rights at a redemption price of 3-1/3 cents for each right, for a total payment of $2 million. The Company's Employee Stock Ownership Plan (ESOP) was established to prefund a portion of the anticipated matching contributions through 1999 to its Share Purchase and Investment Plan (SPIP) for participating United States employees. That portion of SPIP expense related to the ESOP is calculated by first determining the ratio of shares allocated to employee ESOP accounts relative to shares released, and then applying that ratio to the amount contributed to the ESOP. That amount, along with dividends on unallocated Common Shares held by the ESOP, is used to repay the notes, including interest, in level installments. Unallocated ESOP shares are allocated to employee ESOP accounts in aggregate amounts based on loan principal payments made by the ESOP. Page 28 LEASE COMMITMENTS - ----------------- Future minimum rental commitments as of December 31, 1993, under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, are as follows (in millions): 1994, $28; 1995, $23; 1996, $17; 1997, $14; 1998, $12; and after 1998, $91. Rental expense in 1993, 1992 and 1991 (in millions) was $43, $45 and $49, respectively. PENSION PLANS - ------------- The Company has non-contributory defined benefit pension plans covering the majority of employees. Plans covering salaried and certain hourly employees provide benefits that are generally based on years of service and final average compensation. Benefits for other hourly employees are generally based on years of service. Company policy is to fund at least the minimum amount required by applicable regulations. 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 for employees and retirees. The components of pension (expense) income are as follows: Year ended December 31 -------------------------- (Millions of dollars) 1993 1992 1991 ---- ---- ---- Service cost - benefits earned during year $(42) $(39) $(39) Interest cost on projected benefit obligation (97) (96) (92) Actual return on assets 155 203 216 Net amortization and deferral (17) (73) (90) ---- ---- ---- $ (1) $ (5) $ (5) ==== ==== ==== Page 29 The following table sets forth, by funded status, the asset (liability) recognized in the consolidated balance sheets for pension plans:
December 31, 1993 December 31, 1992 - ----------------------- ----------------------- (Millions of dollars) Overfunded Underfunded Overfunded Underfunded ---------- - ----------- ---------- ----------- Accumulated pension benefit obligation Vested $ 979 $ 136 $ 900 $ 101 Nonvested 53 10 57 8 ------ - ----- ----- ----- 1,032 146 957 109 Value of future salary projections 143 10 147 14 ------ - ----- ----- ----- Total projected pension benefit obligation 1,175 156 1,104 123 Fair value of plan assets 1,371 68 1,372 40 ------ - ----- ----- ----- Plan assets in excess of or (less than) projected benefit obligation 196 (88) 268 (83) Unamortized amounts not yet recognized Initial net (asset) obligation (48) 7 (63) 8 Net (gain) loss (116) 3 (198) (2) Prior service cost 27 12 34 11 Adjustment to recognize minimum liability (12) (8) ------ - ----- ----- ----- $ 59 $ (78) $ 41 $ (74) ====== ===== ===== =====
Measurement of the projected benefit obligation was based on a discount rate of 7.25% in 1993 and 8.25% in 1992 and 1991. The expected compensation growth rate was 4.95% in 1993 and 5.95% in 1992 and 1991. The expected long-term rate of return on assets was 10% in all three years; actual returns during each of these three years exceeded the expected 10% rate. Plan assets were invested in equity and fixed income securities and other instruments. Underfunded plans are associated principally with operations outside the United States. The change in the discount rate to 7.25% at the end of 1993 had the effect of increasing the accumulated pension benefit obligation by $103 million with an offsetting decrease in the unamortized net gain. This change will have an immaterial effect on future expense. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS - ------------------------------------------------ Generally, employees become eligible for postretirement benefits other than pensions, primarily health care and life insurance for retirees in the United States, when they retire. These benefits are payable for life, although the Company retains the right to modify or terminate the plans providing these benefits. The plans are primarily contributory, with retiree contributions adjusted annually, and contain other cost-sharing features, including deductibles and co-payments. Effective January 1, 1993, certain plans were amended to limit the annual amount of the Company's future contributions towards employees' postretirement health care benefits. Company policy is to pay claims as they are incurred since, unlike pensions, there is no effective method to obtain a tax deduction for prefunding of these benefits under existing United States income tax regulations. Page 30 Expense for postretirement benefits other than pensions, with amounts for 1993 and 1992 calculated under SFAS No. 106, is as follows: Year ended December 31 ---------------------- (Millions of dollars) 1993 1992 1991 ---- ---- ---- Service cost - benefits earned during year $ (7) $(12) Interest cost on projected benefit obligation (37) (44) Amortization of unrecognized prior service cost 9 Claims incurred and expensed $(27) ---- ---- ---- $(35) $(56) $(27) ==== ==== ==== The liability recognized in the consolidated balance sheets for postretirement benefit plans other than pensions is as follows: December 31 --------------- (Millions of dollars) 1993 1992 ---- ---- Accumulated postretirement benefit obligation Retirees $368 $345 Eligible plan participants 38 45 Noneligible plan participants 120 161 Unamortized amounts not yet recognized Prior service cost 91 Net loss (73) (5) ---- ---- $544 $546 ==== ==== Measurement of the accumulated postretirement benefit obligation at December 31, 1993, was based on a 12% annual rate of increase in per capita cost of covered health care benefits (13% for 1992). For 1993, the rate was assumed to decrease ratably to 5% through 2000 and remain at that level thereafter (6% for 1992). The discount rate was 7.25% in 1993 and 8.5% in 1992. An increase of 1% in assumed health care cost trend rates would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $34 million and the net periodic cost for 1993 by $2 million. The changes in assumed rates had the effect of increasing the accumulated postretirement benefit obligation by $49 million with an offsetting increase in the unamortized net loss. This change will have an immaterial effect on future expense. Page 31 INVESTMENT IN LIFE INSURANCE - ---------------------------- In 1993, the Company purchased company-owned life insurance policies insuring the lives of a portion of its active United States employees. These policies offer an attractive means of accumulating assets to meet future liabilities including the payment of employee benefits such as health care. At December 31, 1993, the investment in this life insurance, included in other assets, was $7 million, net of policy loans of $110 million. Net life insurance expense of $2 million, including interest expense of $4 million in 1993, was included in selling and administrative expense. INCOME TAXES - ------------ Year ended December 31 ---------------------- (Millions of dollars) 1993 1992 1991 ---- ---- ---- Income before income taxes United States $214 $147 $ 85 Outside the United States 48 34 16 ---- ---- ---- $262 $181 $101 ==== ==== ==== Income taxes, with amounts for 1993 and 1992 derived under SFAS No. 109, are summarized below: Year ended December 31 ---------------------- (Millions of dollars) 1993 1992 1991 ---- ---- ---- Current United States Federal $108 $ 42 $ 64 State and local 7 5 10 Outside the United States 30 20 10 ---- ---- ---- 145 67 84 Deferred United States Increase in statutory tax rate (5) Other Federal (50) (14) (47) State and local (2) (1) (8) Outside the United States Operating loss carryforwards (7) (11) Reduction of valuation allowance for deferred tax assets (5) Increase in statutory tax rate (1) Other 7 (2) ---- --- --- (63) (26) (57) ---- --- --- $ 82 $41 $27 ==== === === Page 32 Significant components of net current and net long-term deferred income taxes derived under SFAS No. 109 are as follows: December 31, 1993 ------------------------------- Current Long-term Long-term (Millions of dollars) assets assets liabilities ------- --------- ----------- Accruals and other adjustments Employee benefits $ 44 $209 $ (4) Inventory 15 Long-term contracts 16 Restructuring 15 13 Depreciation and amortization (140) (15) Other 22 5 Operating loss carryforwards 50 2 Valuation allowance (15) Other items 15 (10) 7 ---- ---- ---- $127 $112 $(10) ==== ==== ==== December 31, 1992 ------------------------------- Current Long-term Long-term (Millions of dollars) assets assets liabilities ------- --------- ----------- Accruals and other adjustments Employee benefits $ 28 $209 $ (3) Inventory 26 Long-term contracts 17 (9) Restructuring 14 Depreciation and amortization (137) (19) Other 23 4 Operating loss carryforwards 42 4 Valuation allowance (20) Other items 12 (28) 4 ---- ---- ---- $120 $ 61 $(14) ==== ==== ==== The deferred income tax provision of $57 million for 1991 related primarily to long-term contracts. At December 31, 1993 certain subsidiaries outside the United States had tax loss carryforwards aggregating $115 million. Carryforwards of $68 million have no expiration dates and the balance expire at various dates from 1995 through 2005. Page 33
A reconciliation of income taxes at the United States Federal statutory rate to the effective income tax rate, with amounts for 1993 and 1992 derived under SFAS No. 109, follows: Year ended December 31 - ---------------------------------- 1993 --------------- 1992 1991 (Millions of dollars) Amount Rate Rate Rate ------- ------ - ------ ------ Income taxes at the United States statutory rate $ 92 35.0% 34.0% 34.0% Adjustment of deferred income taxes for change in statutory tax rates (6) (2.3) State and local income taxes 4 1.5 .9 2.1 Adjustment of worldwide tax liabilities 3 1.4 (6.0) (4.1) Effective tax rate differential on earnings of consolidated subsidiaries and associate companies outside the United States (5) (2.0) (3.9) (2.1) Other--net (6) (2.1) (2.2) (3.4) ---- ----- - ----- ----- $ 82 31.5% 22.8% 26.5% ==== ===== ===== =====
The adoption of SFAS No. 109 reduced 1992 income tax expense by $11 million and the effective income tax rate by 6%, in comparison to the prior accounting method. The parent company has not provided income taxes on undistributed earnings of consolidated subsidiaries outside the United States of $332 million at December 31, 1993, 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, including Federal and state income taxes in the United States, in 1993, 1992 and 1991 (in millions) were $156, $71 and $97, respectively. Page 34 QUARTERLY DATA - -------------- (Unaudited) Quarter ended (Millions of dollars except ----------------------------------- for per share data) Dec. 31 Sept. 30 June 30 Mar. 31 ------- -------- ------- ------- 1993 Net sales $1,115 $1,053 $1,147 $1,086 Gross margin 297 266 279 275 Percent of sales 27% 25% 24% 25% Income before extraordinary item 30 44 53 53 Extraordinary item (4) (3) Net income 26 44 53 50 Per Common Share Income before extraordinary item $ .41 $ .63 $ .77 $ .76 Extraordinary item (.05) (.05) Net income .36 .63 .77 .71 Cash dividends paid .30 .30 .275 .275 Market price High 55-3/8 51-3/4 47-1/8 43-3/4 Low 48 43 41-1/2 38-1/4 1992 Net sales $1,030 $1,012 $1,064 $ 995 Gross margin 253 223 256 235 Percent of sales 24% 22% 24% 24% Income before cumulative effect of accounting changes 39 28 41 32 Cumulative effect of accounting changes Postretirement benefits other than pensions (274) Income taxes 6 Net income (loss) 39 28 41 (236) Per Common Share Income before cumulative effect of accounting changes $ .57 $ .40 $ .60 $ .46 Cumulative effect of accounting changes Postretirement benefits other than pensions (4.00) Income taxes .09 Net income (loss) .57 .40 .60 (3.45) Cash dividends paid .275 .275 .275 .275 Market price High 40-7/8 40-3/8 41-5/8 39-3/8 Low 35 35-7/8 35-1/2 30-7/8 Page 35 The fourth quarter of 1993 includes an acquisition integration charge of $55 million before income tax credits ($34 million after income tax credits, or $.49 per Common Share). The redemption of debentures in 1993 resulted in extraordinary losses of $5 million and $6 million before income tax credits in the first and fourth quarters, respectively ($3 million and $4 million after income tax credits, or $.05 per Common Share in each quarter). The previously reported first quarter results were restated to segregate the extraordinary loss. Gross margin for the second quarter of 1993 was reduced by a charge of $9 million for the restructuring of certain vehicle components operations in Europe. The third quarter of 1992 includes an $11 million gain, before income taxes, on the sale of an interest in a limited partnership. The gain was partially offset by the accrual in the third quarter of 1992 of the contribution to the Company's charitable trust of marketable securities with a market value of $8 million. In 1992, the Company adopted the new accounting standards for postretirement benefits other than pensions and income taxes, retroactive to January 1, 1992. Net income in the first quarter of 1992 includes the cumulative effect of the accounting change for postretirement benefits other than pensions for prior years of $442 million before income tax credits ($274 million after income tax credits, or $4.00 per Common Share). Net income in the first quarter of 1992 also includes the cumulative effect of the accounting change for income taxes for prior years of $6 million, or $.09 per Common Share. BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION - -------------------------------------------------- Operations are classified among three business segments: Vehicle Components, Electrical and Electronic Controls and Defense Systems. The major classes of products included in each segment and other information follow. Vehicle Components - ------------------ Truck Components - Heavy and medium duty mechanical transmissions; power take-offs; drive, trailer and steering axles; brakes; locking differentials; engine valves; valve lifters; leaf springs; viscous fan drives; fans and fan shrouds; power steering pumps; tire pressure control systems; tire valves. Passenger Car Components - Engine valves; hydraulic valve lifters; viscous fan drives; fans and fan shrouds; locking differentials; spring fluid dampers; superchargers; tire valves. Off-Highway Vehicle Components - Mechanical and automatic transmissions; drive and steering axles; brakes; engine valves; hydraulic valve lifters; gear and piston pumps and motors; transaxles and steering systems; geroters; control valves and cylinders; forgings; tire valves. Page 36 The principal market for these products is original equipment manufacturers of trucks, passenger cars and off-highway vehicles. Most sales of these products are made directly from the Company's plants to such manufacturers. Electrical and Electronic Controls - ---------------------------------- Industrial and Commercial Controls - Electromechanical and electronic controls: motor starters, contactors, overloads and electric drives; programmable controllers, counters, man/machine interface panels and pushbuttons; photoelectric, proximity, temperature and pressure sensors; circuit breakers; loadcenters; safety switches; panelboards; switchboards; dry type transformers; busway; meter centers; portable tool switches; commercial switches; relays; illuminated panels; annunciator panels; electrically actuated valves and actuators. Automotive and Appliance Controls - Electromechanical and electronic controls: convenience, stalk and concealed switches; knock sensors; climate control components; speed controls; timers; pressure switches; water valves; range controls; thermostats; gas valves; infinite switches; temperature and humidity sensors. Specialty Controls - Automated material handling systems; automated guided vehicles; stacker cranes; ion implanters; engineered fasteners; golf grips; industrial clutches and brakes. The principal markets for these products are industrial, commercial, automotive, appliance, aerospace and government customers. Sales are made directly by the Company or indirectly through distributors and manufacturers' representatives. Defense Systems - --------------- Strategic countermeasures; tactical jamming systems; electronic intelligence; electronic support measures. The principal market for these products is the United States Government. Other Information - ----------------- Operating profit represents net sales less operating expenses for each segment and geographic region and excludes interest expense and income, and general corporate expenses--net. Identifiable assets for each segment and geographic region represent those assets used in operations (including excess of cost over net assets of businesses acquired) and exclude general corporate assets (consisting principally of short-term investments, deferred income taxes, investments carried at equity, property and other assets). Net sales to divisions and subsidiaries of one customer, primarily from the Vehicle Components business segment, were $541 million in 1993, $491 million in 1992 and $394 million in 1991 (12% of sales in 1993, 12% in 1992 and 11% in 1991). Page 37 Geographic Region Information
United Latin Pacific Elimin- (Millions of dollars) States Canada Europe America Region ations Totals ------ ------ ------ ------- ------ ------ ------ 1993 Net sales $3,404 $183 $769 $202 $81 $238 $4,401 Operating profit 275 21 17 9 10 332 Identifiable assets 1,726 101 548 103 48 60 2,466 1992 Net sales $3,002 $175 $861 $184 $66 $187 $4,101 Operating profit 201 20 29 8 6 264 Identifiable assets 1,781 74 630 98 48 59 2,572 1991 Net sales $2,768 $166 $679 $153 $58 $165 $3,659 Operating profit 151 12 6 5 174 Identifiable assets 1,886 84 626 100 48 71 2,673 Operating profit in 1993 was reduced by an acquisition integration charge of $53 million in the United States and $2 million in Canada, and by a restructuring charge of $9 million in Europe. Operating profit for the United States in 1992 was reduced by $25 million of expense related to the accounting change for postretirement benefits other than pensions. Operating profit in 1991 was reduced by a restructuring charge of $24 million in the United States, $2 million in Canada and $13 million in Europe. Geographic region information (table above) does not include results of associate companies and joint ventures in which the Company holds a 20%-50% ownership interest, which are accounted for by the equity method, and which had total sales as follows: United Latin Pacific (Millions of dollars) States Europe America Region Totals ------ ------ ------- ------ ------ 1993 $ 7 $13 $15 $169 $204 1992 6 18 6 136 166 1991 39 40 7 189 275
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Business Segment Information (Millions of dollars) 1993 1992 1991 ---- ---- ---- Net sales by classes of similar products Vehicle Components Truck Components $1,504 $1,244 $1,022 Passenger Car Components 524 542 477 Off-Highway Vehicle Components 329 307 307 ------ ------ ------ 2,357 2,093 1,806 Electrical and Electronic Controls Industrial and Commercial Controls 779 745 730 Automotive and Appliance Controls 735 723 529 Specialty Controls 338 308 316 ------ ------ ------ 1,852 1,776 1,575 Defense Systems 192 232 278 ------ ------ ------ $4,401 $4,101 $3,659 ====== ====== ====== Operating profit Vehicle Components $ 247 $ 170 $ 63 Electrical and Electronic Controls (includes a $55 million acquisition integration charge in 1993) 83 85 88 Defense Systems 2 9 23 ------ ------ ------ 332 264 174 Interest expense (75) (89) (83) Interest income 8 9 12 General corporate expenses--net (3) (3) (2) ------ ------ ------ Income before income taxes $ 262 $ 181 $ 101 ====== ====== ====== Identifiable assets Vehicle Components $1,230 $1,194 $1,244 Electrical and Electronic Controls 1,119 1,128 1,089 Defense Systems 117 250 340 ------ ------ ------ 2,466 2,572 2,673 General corporate assets 802 648 511 ------ ------ ------ Total assets $3,268 $3,220 $3,184 ====== ====== ====== Capital expenditures Vehicle Components $ 124 $ 93 $ 107 Electrical and Electronic Controls 68 67 55 Defense Systems 7 14 24 Corporate 28 12 8 ------ ------ ------ $ 227 $ 186 $ 194 ====== ====== ====== Depreciation Vehicle Components $ 101 $ 103 $ 99 Electrical and Electronic Controls 58 59 48 Defense Systems 13 14 14 Corporate 10 8 8 ------ ------ ------ $ 182 $ 184 $ 169 ====== ====== ====== Page 39 Operating profit of the Electrical and Electronic Controls segment was reduced in 1993 by an acquisition integration charge of $55 million. Operating profit of the Vehicle Components segment was reduced in 1993 by a restructuring charge of $9 million. Operating profit in 1992 was reduced by expense related to the accounting change for postretirement benefits other than pensions of $14 million for the Vehicle Components segment and $11 million for the Electrical and Electronic Controls segment. Operating profit in 1991 was reduced by a restructuring charge of $22 million for the Vehicle Components segment and $17 million for the Electrical and Electronic Controls segment.
Page 40 Summary Financial Information for Eaton ETN Offshore Ltd. - --------------------------------------------------------- Eaton ETN Offshore Ltd. (Eaton Offshore) was incorporated by Eaton 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 and/or one or more of Eaton's direct or indirect subsidiaries. All of the issued and outstanding capital stock of Eaton Offshore is owned directly or indirectly by Eaton. In addition, Eaton Offshore owns all of the issued and outstanding capital stock of Eaton Yale ltd. (Eaton Yale) previously owned by Eaton. Eaton Yale is engaged principally in the manufacture of fasteners, leaf spring assemblies and electrical and electronic controls. In January 1992, Eaton Yale acquired Franz Kirsten KG. In January 1994, Eaton Yale acquired the Canadian operations of the Distribution and Control Business Unit of the Westinghouse Electric Corporation. Summary financial information for Eaton Offshore and its consolidated subsidiaries is as follows: Year ended December 31 ------------------------------------ (Millions of dollars) 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Income statement data Net sales $281 $295 $165 $188 $207 Gross profit 38 42 26 29 29 Net income 13 17 13 12 7 Balance sheet data Current assets $144 $144 $124 $ 91 $ 49 Net intercompany receivables (payables) 22 24 33 17 (11) Noncurrent assets 81 86 42 48 45 Current liabilities 42 51 20 21 12 Noncurrent liabilities 109 115 104 73 12 Page 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - -------- The Company experienced an extraordinary year of achievement in 1993. Income after income taxes for the year increased to $214 million in 1993 before the recognition of a $34 million acquisition integration charge and a $7 million extraordinary loss on the redemption of debentures. This represents a 53% increase compared to income of $140 million in 1992 (before the cumulative effect of 1992 accounting changes). Earnings per Common Share, before the special charges, rose to $3.06 in 1993, a 51% increase over $2.03 (before the impact of accounting changes) in 1992. On January 31, 1994, the Company acquired Westinghouse Electric Corporation's Distribution and Control Business Unit (DCBU), and in December of 1993 recorded a $55 million charge ($34 million after income tax credits, or $.49 per Common Share) for the integration of the Company's Industrial Control and Power Distribution Operations (ICPDO) with DCBU to form the Cutler- Hammer business unit. This acquisition provides greater product depth with world class technology and substantially increases product offering and distribution opportunities. During March and December 1993, the Company called for redemption a total of $163 million of debentures. The loss on the redemptions was accounted for as an extraordinary item in each of those periods. In June, a two-for-one common stock split was distributed, effected in the form of a 100% stock dividend, and the quarterly dividend on Common Shares was increased by 2-1/2 cents (9%) to 30 cents per share, the third dividend increase in seven years. In June, the Company reconsolidated the net assets and operating results of its remaining discontinued operations. Prior years have been restated to include those results. 1993 COMPARED TO 1992 - --------------------- NET SALES - --------- Net sales in 1993 increased by 7% to $4.40 billion, over $4.10 billion in 1992. The increase occurred principally in the United States and was largely due to a strengthened North American market for heavy and light trucks, vans and sport utility vehicles, responding to a U.S. economic recovery. The improvement in North America more than offset the effects of the continued deep European recession. In North America, certain Page 42 markets, which had been sluggish through most of 1993, showed sales improvements in the fourth quarter. The Vehicle Components segment net sales increased to $2.36 billion for 1993, rising 13% over 1992 sales of $2.09 billion. This improvement was largely due to significant growth in sales of truck components, following the best factory sales of heavy trucks in North America since 1979. The passenger car and light truck markets also showed improvement in 1993. Off-highway equipment markets, which had been down for several years, improved considerably. Strong sales growth in North America was partially offset by reduced sales in Europe where vehicle markets remain weak. The Electrical and Electronic Controls segment showed a net sales increase of 4% in 1993 to $1.85 billion compared to $1.78 billion in 1992. This increase was largely due to increased sales in the areas of industrial and commercial controls and specialty controls. Strong North American markets for automotive and appliance controls were largely offset, however, by the continued weakness in the corresponding European markets due to the economic recession and the negative impact of foreign currency exchange rate fluctuations. Rising demand for portable tools, factory equipment and residential housing drove the increase in sales of industrial and commercial controls. Sales of the Company's industrial and power distribution equipment, which tend to lag any North American economic recovery, rose sharply in the fourth quarter. The semiconductor equipment business, included in specialty controls, experienced strong results throughout the year, with a 19% improvement in sales for 1993 over 1992. OPERATING RESULTS - ----------------- Gross margin increased to $1.12 billion (25.4% of sales) in 1993, rising from $967 million (23.6% of sales) in 1992, due to significant sales growth as well as benefits achieved through ongoing cost containment and productivity improvements. This improvement in margin was achieved in spite of a $9 million charge, included in cost of products sold in 1993, for the restructuring of certain vehicle components operations in Europe. Selling and administrative expenses showed an increase of 2% in 1993 compared to 1992, with expense of $591 million in 1993 and $578 million in 1992. This level of increase is a clear indication of the results of cost control and restructuring efforts, which is further evidenced by their relationship to net sales, 13% in 1993 compared to 14% in 1992. Research and development expenses for 1993 were $154 million, rising from $151 million in 1992. This level of expenditure reflects the continued commitment to achieving expressed Page 43 corporate targets in product innovation and enhancements and to maintaining leading-edge technology. The Vehicle Components segment operating profit rose to $247 million (10% of sales) for 1993, a substantial improvement over $170 million (8% of sales) for 1992 despite a $9 million restructuring charge recorded in 1993 for restructuring certain European operations. This improvement was largely a result of the improved market in North America for heavy and light trucks, vans and sport utility vehicles. Other factors contributing to increased profits were continuing stringent cost containment efforts and the economies achieved through restructuring certain businesses, which have better positioned operations to benefit from further growth in vehicle markets. The Electrical and Electronic Controls segment operating profit significantly improved, before the effect of the $55 million acquisition integration charge, rising 62% to $138 million in 1993 (7% of sales) from $85 million (5% of sales) in 1992. This improved segment profit picture is partially due to the sales growth experienced in certain controls markets, but is also a clear reflection of the continuing emphasis placed on containing and controlling costs and the realization of anticipated benefits of earlier restructuring efforts. The depressed European economy negatively impacted the controls businesses, particularly automotive and appliance controls. Profit for this segment was also reduced by a $55 million pretax charge recorded in December 1993 for the integration of ICPDO product lines and operations with DCBU to form the new Cutler-Hammer business unit. The DCBU acquisition will bring a more even balance in sales and earnings between the Electrical and Electronic Controls segment and the historically strong Vehicle Components segment. Interest expense declined to $75 million for 1993, the lowest level since 1986, from $89 million for 1992 largely due to the reduction of higher interest rate debt, lower debt levels during 1993 and increased capitalized interest. Other income--net was $12 million in 1993, down from $23 million in 1992, largely due to the $11 million pretax gain on the sale of the Company's interest in a limited partnership recorded in 1992. An analysis of changes in income taxes and the effective income tax rate is presented under "Income Taxes" in the Financial Review. In 1992, the Company adopted two new accounting standards for postretirement benefits other than pensions and for income taxes, which together reduced net income by $268 million due to the recognition of their cumulative effect for prior years. Page 44 CHANGES IN FINANCIAL CONDITION - ------------------------------ The Company's financial condition remained strong during 1993. The current ratio was 1.9 at December 31, 1993 compared to 2.0 at December 31, 1992. The decline in working capital to $679 million at year-end 1993 from $751 million at year-end 1992 was primarily the result of an increase in the current portion of long-term debt due to the decision to redeem, in early 1994, the $89 million outstanding balance of 8.5% debentures. Cash and short-term investments increased by $84 million to $300 million at December 31, 1993 due to improved cash flow from operations and the sale of 1.3 million Common Shares in 1993 for net proceeds of $62 million. In spite of the increase in sales in 1993 to record levels, heightened emphasis on efficient asset management is reflected in the $21 million decline in inventories to $434 million at December 31, 1993. An increase in accounts receivable resulting from improved 1993 sales was more than offset by a reduction due to the collection of receivables at AIL as a consequence of the definitization of contract modifications as agreed to with the United States Air Force late in 1992; the net impact of the increase and offsetting decrease resulted in a $78 million decline in accounts receivable to $550 million at December 31, 1993. In addition, accounts receivable days sales outstanding at December 31, 1993 was 43, historically one of the lowest levels, in spite of the expanding economy and sales growth. Long-term debt declined to $649 million at year-end 1993 from $833 million at the end of 1992 primarily due to the call for redemption of $74 million of 9% debentures in March 1993 and $89 million of 8.5% debentures in December 1993. In private placements the Company sold 1.3 million Common Shares in 1993 for aggregate net proceeds of $62 million and, in January 1994, an additional 800,000 Common Shares for $38 million. Beginning in April 1995, the holder of these shares has the right to require the Company to register their public sales under the Federal securities law. Capital expenditures were $227 million, one of the Company's highest levels, in 1993 compared with $186 million in 1992, as the Company maintained its emphasis on enhancing manufacturing efficiencies and capabilities. Capital expenditures in 1994 are anticipated to be higher than 1993 for those businesses unrelated to the acquisition of DCBU. Further capital expenditures are planned relative to the combining of DCBU and ICPDO. During 1993, the Company invested $14 million in small businesses, primarily to establish a joint venture, which will round out product lines and open avenues for market expansion. Page 45 Net cash provided by operating activities increased to $435 million for 1993 from $381 million for 1992. This increase resulted primarily from improved net income, reflecting higher sales and rigorous cost controls. Changes in operating assets and liabilities also contributed to the increase in net cash provided by operating activities in 1993. Operating cash flow and proceeds from the sale of Common Shares during 1993 were more than adequate to fund capital expenditures, cash dividends, the investment in certain small businesses and other corporate purposes. On May 25, 1993, the Company redeemed its share purchase rights at a redemption price of 3-1/3 cents for each right for a total payment of $2 million. At the end of 1993, as a result of the trend of declining long-term interest rates, the discount rate used to measure the projected benefit obligation for pensions was reduced to 7.25% from 8.25%. This change had the effect of increasing the accumulated pension benefit obligation by $103 million with an offsetting decrease in the unamortized net gain. In addition, the rates used to measure the projected benefit obligation for postretirement benefits other than pensions were changed. The changes in rates included a reduction in the discount rate to 7.25% from 8.5%, and in the annual rate of increase in per capita cost of covered health care benefits. These rate changes had the effect of increasing the accumulated postretirement benefit obligation by $49 million with an offsetting increase in the unamortized net loss. The effect on future expense for pensions and postretirement benefits other than pensions will be immaterial. At December 31, 1993 and 1992, the Company had net deferred income tax assets included in current and long-term assets. Management believes it is more likely than not that these tax benefits will be realized through the reduction of future taxable income. Significant factors considered by management in its determination of the probability of the realization of the deferred tax assets include the historical operating results of the Company, expectations of future earnings and the extended period of time over which the postretirement health care liability will be paid. On January 31, 1994, the Company acquired DCBU from Westinghouse Electric Corporation and issued $930 million of short-term commercial paper to finance the acquisition. The Company plans to reduce these short-term financings by the middle of 1994 through expanded use of equity and long-term debt financings. The timing and mix of these financings will depend on market conditions. Of these short-term financings, $555 million will be classified as long-term debt because the Company intends, and has Page 46 the ability under a new five-year $555 million revolving credit agreement entered into in January 1994, to refinance this debt on a long-term basis. Also, in January 1994, the Company entered into a $555 million 364-day revolving credit agreement. Strong cash flow, reinforced by the projected results of the newly created Cutler-Hammer business unit, should permit the repayment of the financings within the next five years. The Company is maintaining the strength of its balance sheet, and two major debt-rating agencies, Standard and Poor's and Moody's, have confirmed the "A" rating on its long-term debt. The Company expects that the economic and market growth experienced in North America during 1993 will continue to expand to additional markets in 1994; however, that growth will likely be moderated by lingering weakness in Europe. Long-range plans continue to be focused on enhancements in quality, productivity and growth in all its major markets. The acquisition of DCBU and integration with ICPDO should create permanent value by streamlining product lines, manufacturing capacity and organization structure and will enable the businesses to realize the synergies resulting from complementary product offerings, operations and technical expertise. This acquisition will reinforce the goal of improving the balance in sales and earnings between the historically strong Vehicle Components segment and the Electrical and Electronic Controls segment. Investments in the form of research and development, marketing and manufacturing programs continue in all key product lines, and plans are to continue to make niche acquisitions which will promote the Company's position in worldwide markets. The Company believes capital resources available in the form of working capital on hand, lines of credit and funds provided by operations will more than adequately meet anticipated capital requirements for capital expenditures and business expansion through niche acquisitions. The acquisition of DCBU required the additional capital resources discussed above. The operations of the Company involve the use, disposal and cleanup of certain substances regulated under environmental protection laws, as further discussed under "Protection of the Environment" in the Financial Review. Subject to the difficulty in estimating future environmental costs, the Company expects that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed will not have a material adverse effect on its financial condition or results of operations. Page 47 RESULTS OF OPERATIONS - --------------------- 1992 COMPARED TO 1991 - --------------------- Net Sales - --------- Net sales for 1992 were $4.10 billion, up 12% from $3.66 billion in 1991. Certain markets in North America experienced a modest recovery in 1992. However, economies in Europe, Japan and South America continued to weaken, affecting businesses in those areas, and offsetting some strength in North America. The Vehicle Components segment net sales increased to $2.09 billion for 1992, 16% higher than sales of $1.81 billion recorded for 1991. North American sales of heavy and light trucks, vans and sport utility vehicles were strong throughout the year. A marked increase in heavy truck production in North America during the second half of 1992 had a significant favorable impact on this segment's results. Heavy truck production increased 30% in 1992 over prior year levels. Strategic investments also contributed to sales growth through expansion of business into new products and territories. Sales of passenger car and off-highway vehicle equipment slowed in the last half of the year, after showing increases during the first half. Overseas vehicle markets, primarily in Europe, were depressed, and weakened further in the fourth quarter. The Electrical and Electronic Controls segment had net sales of $1.78 billion for 1992, rising 13% from sales of $1.58 billion in 1991. This increase reflects the acquisition of Kirsten, a European automotive controls manufacturer with 1992 sales of approximately $120 million, and other smaller acquisitions during 1992 and 1991. Existing automotive and appliance controls businesses experienced a strong rebound in their markets, adding to the improved results. Sales from industrial and commercial controls businesses were flat, with the recovery in residential markets offset by continued contraction in military and commercial aircraft industries. Sales from specialty controls businesses declined slightly, reflecting the continued weakening of the North American automated materials handling market, as well as significant softening of the semiconductor equipment markets in the United States and Japan. Operating Results - ----------------- Higher sales levels, benefits of recent restructurings and rigorous inventory controls produced an improved gross margin of $967 million in 1992 (24% of sales), up from $851 million in 1991 (23% of sales). Gross margin in 1992 was reduced by $17 million of increased expense related to the accounting change for postretirement benefits other than pensions. Selling and administrative expenses were held level relative to sales due to stringent cost controls, as well as the benefits of recent restructurings, with $578 million reported in 1992 compared to $520 million in 1991 (14% of sales in both years). Page 48 The Company's continued commitment to improvement of established product lines, and to product innovation and development in markets offering the greatest potential for growth was reflected in the increase in research and development expenses to $151 million in 1992 from $138 million in 1991. The Vehicle Components segment operating profit showed a substantial increase to $170 million for 1992 over profit of $63 million in 1991. Profit for 1992 was reduced by $14 million due to recognition of additional expenses for postretirement benefits other than pensions. The improved profit was largely a result of increased demand for heavy and light trucks, vans and sport utility vehicles previously described and, additionally, benefitted from recent restructurings, for which a $22 million charge was recorded in 1991. Strict cost containment also contributed to growth in profit. Strategic investments in marketing, research and development, and manufacturing improvements should further promote sustainable growth and increases in profit as markets served by this segment strengthen. The Electrical and Electronic Controls segment operating profit was $85 million in 1992 compared to $88 million in 1991. Profit for this segment for 1992 was reduced by $11 million due to recognition of additional expenses related to the accounting change for postretirement benefits other than pensions. Profit for 1991 was reduced by a $17 million restructuring charge recorded in the first quarter. Start-up costs for integration of Kirsten and other acquisitions depressed 1992 profits, but these investments should provide opportunities for growth and profit improvement in the future. The acquisition of Kirsten, a European automotive controls manufacturer with operations in Germany, France and Spain, is a good example of the Company's investment in growth businesses through acquisitions. Restructuring costs due to downsizing of military-related operations reduced profits. In addition, profits for 1992 were affected by depressed sales in certain businesses, as discussed above, the costs of long-range programs in marketing, research and development, and manufacturing improvement, and cost/price pressures. Other income--net rose to $23 million for 1992 from $18 million for 1991, primarily due to an $11 million pretax gain on the sale of the Company's interest in a limited partnership recorded in 1992. An analysis of changes in income taxes and the effective income tax rate is presented under "Income Taxes" in the Financial Review. Page 49
Eaton Corporation Five-Year Consolidated Financial Summary For the year 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------------- (Millions of dollars except for per share data) Net sales $4,401 $4,101 $3,659 $4,083 $4,228 Income before extraordinary item and cumulative effect of accounting changes $ 180 $ 140 $ 74 $ 179 $ 225 Extraordinary item (7) Cumulative effect of accounting changes Postretirement benefits other than pensions (274) Income taxes 6 Net income (loss) 173 (128) 74 179 225 Per Common Share Income before extraordinary item and cumulative effect of accounting changes $ 2.57 $ 2.03 $ 1.09 $ 2.53 $ 3.00 Extraordinary item (.10) Cumulative effect of accounting changes Postretirement benefits other than pensions (3.97) Income taxes 0.09 Net income (loss) 2.47 (1.85) 1.09 2.53 3.00 Cash dividends paid 1.15 1.10 1.10 1.05 1.00 At the year-end - --------------------------------------------------------------------------------------------------- Total assets $3,268 $3,220 $3,184 $3,140 $3,189 Long-term debt 649 833 795 755 861 Total debt 773 882 927 815 923 Shareholders' equity 1,105 948 1,153 1,140 1,145 Information for 1989 through 1992 has been restated to reconsolidate previously discontinued operations and to give effect to the two-for-one stock split effective June 28, 1993. Income in 1993 was reduced by an acquisition integration charge of $55 million before income tax credits ($34 million after income tax credits, or $.49 per Common Share). Income in 1993 was reduced by an extraordinary loss of $11 million before income tax credits for the redemption of debentures ($7 million after income tax credits, or $.10 per Common Share). Income in 1992 and 1993 was reduced by expense related to the accounting change for postretirement benefits other than pensions. Income in 1991 was reduced by a restructuring charge of $39 million before income tax credits ($25 million after income tax credits, or $.38 per Common Share).
Page 50
Eaton Corporation Schedule V - Property, Plant and Equipment (Millions of dollars) Column A Column B Column C Column D Column E Column F - --------------------------------- ----------- ----------- ----------- ------------- ----------- Balance at Other changes Balance at beginning Additions Add (deduct) end of Classification of period at cost Retirements - Describe period - --------------------------------- ----------- ----------- ----------- ------------- ----------- Year ended December 31, 1993 Land $ 41 $ 41 Buildings 482 $ 7 $ 5 $ 11 (A) (9)(B) 486 Machinery and equipment 1,896 220 99 (11)(A) (47)(B) 1,959 ------ ------ ------ ------ ------ $2,419 $ 227 $ 104 $ (56) $2,486 ====== ====== ====== ====== ====== Year ended December 31, 1992 Land $ 40 $ (1)(B) 2 (C) $ 41 Buildings 460 $ 11 $ 2 18 (A) (16)(B) 5 (C) 6 (D) 482 Machinery and equipment 1,808 175 61 (18)(A) (77)(B) 39 (C) 30 (D) 1,896 ------ ------ ------ ------ ------ $2,308 $ 186 $ 63 $ (12) $2,419 ====== ====== ====== ====== ====== Year ended December 31, 1991 Land $ 39 $ 1 (C) $ 40 Buildings 432 $ 20 $ 2 3 (A) 7 (C) 460 Machinery and equipment 1,726 174 94 (3)(A) (5)(B) 10 (C) 1,808 ------ ------ ------ ------ ------ $2,197 $ 194 $ 96 $ 13 $2,308 ====== ====== ====== ====== ====== (A) Represents transfers between classifications. (B) Represents foreign currency translation adjustments. (C) Represents cost of assets of companies acquired. (D) Represents assets acquired related to acquisition of majority interest in former associate company. (E) The annual provisions for depreciation have been computed by the straight-line method principally in accordance with the following ranges of rates. Buildings 2.5% Machinery and equipment 4.5% to 25%
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Schedule VI - Accumulated Depreciation of Property, Plant and Equipment (Millions of dollars) Column A Column B Column C Column D Column E Column F - ----------------------------- ---------- ---------- ---------- ------------- ---------- Additions Balance at charged to Other changes Balance at beginning costs and Add (deduct) end of Description of period expenses Retirements - Describe period - ----------------------------- --------- --------- ----------- ------------- ---------- Year ended December 31, 1993 Buildings $ 201 $ 15 $ 4 $ 1 (A) $ 213 Machinery and equipment 1,037 167 93 (26)(A) 1,085 ------ ----- ----- ----- ------ $1,238 $ 182 $ 97 $ (25) $1,298 ====== ===== ===== ===== ====== Year ended December 31, 1992 Buildings $ 182 $ 21 $ 1 $ (5)(A) 4 (B) $ 201 Machinery and equipment 935 163 55 (38)(A) 32 (B) 1,037 ------ ----- ----- ----- ------ $1,117 $ 184 $ 56 $ (7) $1,238 ====== ===== ===== ===== ====== Year ended December 31, 1991 Buildings $ 167 $ 19 $ 4 $ 182 Machinery and equipment 869 150 81 $ (3)(A) 935 ------ ----- ----- ----- ------ $1,036 $ 169 $ 85 $ (3) $1,117 ====== ===== ===== ===== ====== (A) Represents foreign currency translation adjustments. (B) Represents accumulated depreciation related to acquisition of majority interest in former associate company.
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Eaton Corporation Schedule IX - Short-Term Borrowings (Millions of dollars) Column A Column B Column C Column D Column E Column F - --------------------------- ---------- --------- -------- ---------- -------- Weighted Maximum Average average Weighted amount amount interest Balance at average outstanding outstanding rate Category of aggregate end of interest during the during the during the short-term borrowings (A) period rate period period (B) period (C) - ---------------------------- ---------- -------- ----------- ----------- ----------- Year ended December 31, 1993 High inflation countries $ 2 (D) $ 5 $ 2 (D) Other 12 8.05% 25 14 11.27% --- --- --- $14 $30 $16 === === === Year ended December 31, 1992 High inflation countries $ 5 (D) $ 6 $ 4 (D) Other 25 10.92% 79 37 12.64% --- --- --- $30 $85 $41 === === === Year ended December 31, 1991 High inflation countries $ 6 (D) $ 6 $ 6 (D) Other 47 11.33% 52 39 15.37% --- --- --- $53 $58 $45 === === === (A) Short-term debt is primarily outside the United States and consists of amounts payable to banks for borrowings and commercial paper. Certain short-term borrowings by operations in Argentina and Brazil, which are classified as "high inflation countries", bear interest rates substantially above the interest rates paid by other operations. (B) The average amount outstanding during the period was computed by dividing the total of month-end outstanding principal balances by 13. (C) The weighted average interest rate during the period was computed by dividing actual interest expense by average short-term debt outstanding. (D) Interest rate is not meaningful because it reflects the effect of significant inflation.
Page 53 Eaton Corporation
Schedule X - Supplementary Income Statement Information (Millions of dollars) Column A Column B - -------------------------------------------- ---------------------------------- Charged to costs and expenses Item Year ended December 31 - -------------------------------------------- ---------------------------------- 1993 1992 1991 ---- ---- ---- Maintenance and repairs $125 $127 $104 Amortization of intangible assets (A) (A) (A) Taxes, other than payroll and income taxes (A) (A) (A) Royalties (A) (A) (A) Advertising costs (A) (A) (A) (A) Amounts are not presented as such amounts are less than 1% of net sales.
Page 1 Eaton Corporation 1993 Annual Report on Form 10-K Item 14(c) Listing of Exhibits Filed 3 Amended Articles of Incorporation (as amended and restated as of January 24, 1989, filed on Form SE on March 13, 1989) and Amended Regulations (as amended and restated as of April 27, 1988, filed on Form SE on March 13, 1989) 4(a) Instruments defining rights of security holders, including indentures (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) 10 Material contracts (1) DCBU Purchase Agreement dated as of August 10, 1993 between Westinghouse Electric Corporation (Seller) and Eaton Corporation (Buyer) Regarding the Distribution and Control Business Unit of Westinghouse Electric Corporation (Agreement) - Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 Including the following Exhibits to the Agreement: (i) Form of Technology Agreement (Ex. 2.1) (ii) Terms of Lease for Shared Facilities (Ex.9.6(a) (1)) (iii) Terms of Sublease for Shared Facilities (Ex. 9.6(a) (2)) (iv) Terms of Lease for Vidalia, Georgia Shared Facility (Ex. 9.6(b) (1) (i)) (v) Terms of Lease by Buyer of Part of Horseheads Facility (Ex. 9.6(b) (1) (ii)) (vi) Terms for Jackson, Mississippi Sublease (Ex. 9.6(b) (2)) (vii) Form of Services Agreement (Ex. 9.8) (viii) Form of WESCO Distributor Agreement (Ex. 9.9) (ix) Form of Interim NEWCO Distributor Agreement (Ex. 7.15.2) (x) Form of NEWCO Distributor Agreement (xi) Form of Supplier and Vendor Agreement (Ex. 9.10) (2) The following are either a management contract or a compensatory plan or arrangement: (a) Deferred Incentive Compensation Plan (as amended and restated May 1, 1990; filed as a separate section of this report) (b) Executive Strategic Incentive Plan, effective as of January 1, 1991 - Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (c) Group Replacement Insurance Plan (GRIP), effective as of June 1, 1992 - Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (d) 1991 Stock Option Plan - Incorporated herein by reference to the Company's definitive proxy statement dated March 18, 1991 (e) The following are incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990: Page 2 (i) Strategic Incentive and Option Plan (as amended and restated as of January 1, 1989) (ii) Limited Eaton Service Supplemental Retirement Income Plan (as amended and restated as of January 1, 1989) (iii) Amendments to the 1980 and 1986 Stock Option Plans (iv) Form of "Change in Control" Agreement entered into with all officers of Eaton Corporation (v) Eaton Corporation Supplemental Benefits Plan (as amended and restated as of January 1, 1989) (which provides supplemental retirement benefits) (vi) Eaton Corporation Excess Benefits Plan (as amended and restated as of January 1, 1989) (with respect to Section 415 limitations of the Internal Revenue Code) (f) The following are incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (filed on Form SE dated March 28, 1991): (i) Executive Incentive Compensation Plan (ii) Plan for the Deferred Payment of Directors' Fees (as amended and restated as of January 1, 1989) (iii) Plan for the Deferred Payment of Directors' Fees (originally adopted in 1980 and amended and restated in 1989) (iv) Eaton Corporation Retirement Plan for Non-Employee Directors (as amended and restated as of January 1, 1989) 11 Statement regarding computations of net income per Common Share (filed as a separate section of this report) 21 Subsidiaries of Eaton Corporation (filed as a separate section of this report) 23 Consent of Independent Auditors (filed as a separate section of this report) 24 Power of Attorney (filed as a separate section of this report) EX-10 2 LEGAL CONTRACT Date: EATON CORPORATION By: Title: By: Title: 072590/4876b EATON CORPORATION DEFERRED INCENTIVE COMPENSATION PLAN (as Amended and Restated as of May 1, 1990) I. PURPOSE The purpose of the Deferred Incentive Compensation Plan is to promote the greater success of Eaton Corporation and its subsidiaries by providing a means to defer Incentive Compensation for key employees whose level and nature of position enable them to affect significantly the profitability, competitiveness and growth of Eaton. II. CONCEPT The Plan is based on the concept that the deferral of Incentive Compensation for later payment to a Participant, including the later payment during Retirement, will provide a benefit to each Participant and an incentive to improve the profitability, competitiveness and growth of Eaton. III. DEFINITIONS Unless otherwise required by the context, the terms used herein shall have the meanings as set forth below: (a) ACCOUNT: The account established by Eaton for each Participant to which may be credited his Deferred Incentive Compensation, Dividend Equivalents, Treasury Bill Interest Equivalents and Fixed Rate Interest Equivalents. (b) BENEFICIARY: The person or entity (including a trust or the estate of the Participant) designated in a written document executed by the Participant and delivered to the Committee. If at the time when any unpaid balance of Deferred Incentive Compensation shall be or become due at or after the death of a Participant, there shall not be any living person or any entity in existence so designated, the term "Beneficiary" shall mean the Participant's estate. (c) BOARD: The Board of Directors of Eaton. (d) CAUSE: For the purposes of this Plan, Eaton shall have "Cause" to terminate the Participant's employment hereunder upon (i) the willful and continued failure by the Participant to substantially perform the Participant's duties with Eaton (other than any such failure resulting from the Participant's incapacity due to physical or mental illness), after a demand for substantial performance is delivered to the Participant by the Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in gross misconduct materially and demonstrably injurious to Eaton. For purposes of this definition, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of Eaton. Notwithstanding the foregoing, the Participant's employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of conduct set forth above in clauses (i) or (ii) of this definition and specifying the particulars thereof in detail. (e) CHANGE IN CONTROL OF EATON: For purposes of this Plan, a "Change in Control of Eaton" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of securities of Eaton representing 25% or more of the combined voting power of Eaton's then outstanding voting securities, (ii) Eaton shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of Eaton, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) Eaton shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of Eaton, (iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of Eaton representing 25% or more of the combined voting power of Eaton's then outstanding securities; or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by Eaton's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were Directors at the beginning of the period. For purposes of this Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect). (f) COMMITTEE: The Corporate Compensation Committee of Management of Eaton. (g) COMPENSATION COMMITTEE OF THE BOARD: The Compensation Committee of the Board of Directors of Eaton. (h) CONTINGENT SHARE UNITS: Units credited to a Participant's Account which are equivalent in value to the market value of Eaton Common Shares. (i) DEFERRED INCENTIVE COMPENSATION: That portion of Incentive Compensation which has been deferred pursuant to the Plan and any Dividend Equivalents, Treasury Bill Interest Equivalents, Fixed Rate Interest Equivalents and Contingent Share Units which are attributable thereto. (j) DEFERRED INCENTIVE COMPENSATION AGREEMENT: The written agreement between Eaton and a Participant pursuant to which Incentive Compensation is deferred under the Plan. (k) DISABILITY: If, as a result of the Participant's incapacity due to physical or mental illness, the Participant shall have been absent from the Participant's duties with Eaton on a full-time basis for 180 consecutive business days and within thirty (30) days after written Notice of Termination the Participant shall not have returned to the full-time performance of the Participant's duties, any termination of the Participant's employment by Eaton shall be for "Disability." (l) DIVIDEND EQUIVALENT: An amount equal to the per share dividends paid on Eaton Common Shares. (m) EATON: Eaton Corporation, an Ohio corporation, and its subsidiaries and successors and assigns. (n) EXECUTIVE INCENTIVE COMPENSATION PLAN: An incentive compensation plan approved by the Board of Directors of Eaton the participants in which are designated by the Committee on an annual basis. (o) FIXED RATE INTEREST EQUIVALENT: With respect to any Participant, the rate of interest as specified in the Deferred Incentive Compensation Agreement between such Participant and Eaton. (p) GOOD REASON: For purposes of this Plan, any Termination of Employment by a Participant under the following circumstances shall be for "Good Reason": (i) without the Participant's express written consent, the assignment to the Participant of any duties inconsistent with the Participant's positions, duties, responsibilities and status with Eaton immediately prior to a Change in Control of Eaton, or a change in the Participant's reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control of Eaton, or any removal of the Participant from or any failure to re-elect the Participant to any of such positions, except in connection with the termination of the Participant's employment for Cause, Disability or as a result of the Participant's death; (ii) a reduction by Eaton in the Participant's base salary as in effect immediately prior to the Change in Control of Eaton or as the same may be increased from time to time; or the failure by Eaton to increase such base salary each year after a Change in Control of Eaton by an amount which at least equals, on a percentage basis, the average annual percentage merit increase in the Participant's base salary during the five (5) full calendar years immediately preceding a Change in Control of Eaton; (iii) a failure by Eaton to continue the Participant's participation in Eaton's Executive Incentive Compensation Plan (the "I.C. Plan"), Deferred Incentive Compensation Plan (the "Deferred I.C. Plan"), Limited Eaton Service Supplemental Retirement Income Plan (the "Limited Service Plan"), Strategic Incentive and Option Plan (the "SIOP Plan") and Supplemental Benefit Plan established by the Board as a result of the limitations on pension benefits imposed by Section 415 of the Internal Revenue Code (the "Supplemental Plan"), as each plan may be modified from time to time but substantially in the form presently in effect, on at least the basis as in effect immediately prior to the Change in Control of Eaton or to pay the Participant any amounts earned under such plans in accordance with the terms of such plans. (iv) the relocation of Eaton's principal executive offices to a location outside Cuyahoga County, Ohio or any county adjoining Cuyahoga County, Ohio, or Eaton's requiring the Participant to be based anywhere other than Eaton's principal executive offices or the location where the Participant is based immediately prior to the Change in Control of Eaton except for required travel on Eaton's business to an extent substantially consistent with the Participant's business travel obligations in effect immediately prior to the Change in Control of Eaton, or, in the event the Participant consents to any such relocation of Eaton's principal executive offices, the failure by Eaton to pay (or reimburse the Participant for) all reasonable moving expenses incurred by the Participant relating to a change of the Participant's principal residence in connection with such relocation and to indemnify the Participant against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) the Participant's aggregate investment in such residence or (b) the fair market value of such residence as determined by any real estate appraiser designated by the Participant and reasonably satisfactory to Eaton) realized in the sale of the Participant's principal residence in connection with any such change of residence; (v) the failure by Eaton to continue to effect any benefit or compensation plan (including but not limited to the plans described under paragraph (p)(iii) above), pension plan, life insurance plan, health and accident plan or disability plan in which the Participant is participating at the time of a Change in Control of Eaton (or plans providing the Participant with substantially similar benefits), the taking of any action by Eaton which would adversely affect the Participant's participation in or materially reduce the Participant's benefits under any of such plans or deprive the Participant of any material fringe or personal benefit enjoyed by the Participant at the time of the Change in Control of Eaton, or the failure by Eaton to provide the Participant with the number of paid vacation days to which the Participant is then entitled on the basis of years of service with Eaton in accordance with Eaton's normal vacation policy in effect immediately prior to the Change in Control of Eaton; (vi) the failure of Eaton to obtain the assumption of this Plan by any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the assets of Eaton, by agreement in form and substance satisfactory to the Participant, to expressly assume this Plan and the obligations of Eaton hereunder; or (vii) any purported termination of the Participant's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination as herein defined (and, if applicable, the definition of "Cause" as herein defined); and for purposes of this Plan, no such purported termination shall be effective. (q) INCENTIVE COMPENSATION: The full amount of the annual Incentive Compensation awarded to a Participant under the Executive Incentive Compensation Plan. (r) INCENTIVE YEAR: An incentive year as defined under the provisions of the Executive Incentive Compensation Plan. (s) MEAN PRICE: The mean between the highest and lowest quoted selling price of an Eaton Common Share on the New York Stock Exchange List of Composite Transactions. (t) NORMAL RETIREMENT DATE: The date a Participant attains age sixty-five (65). (u) NOTICE OF TERMINATION: Any termination of the Participant's employment by Eaton for Cause or Disability or by the Participant for Good Reason shall be communicated by written Notice of Termination to the Participant or Eaton, respectively. For purposes of this Plan, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated. (v) PARTICIPANT: An employee of Eaton in a key position receiving benefits under the Executive Incentive Compensation Plan and participating under the Plan. (w) PERIODIC COMPENSATION: That portion of a Participant's Incentive Compensation which is deferred under the Plan for payment over a period of five (5) years. (x) PERIODIC INSTALLMENTS: Equal monthly, quarterly, semiannual or annual payments, over a period not to exceed 15 years, as determined by the Committee in its sole discretion. (y) PLAN: The Deferred Incentive Compensation Plan pursuant to which all or a portion of Incentive Compensation may be deferred for later payment to a participant, as amended and restated as of January 1, 1989. (z) RETIREMENT: The Termination of Employment of a Participant who is age fifty-five (55) or older and who has at least ten (10) years of service with Eaton or who is age sixty-five (65) or older or under circumstances making him eligible to receive pension payments under a pension plan sponsored by Eaton commencing within sixty (60) days of the date of such Termination of Employment. (aa) RETIREMENT COMPENSATION: That portion of Incentive Compensation deferred under the Plan for payment to a Participant upon his Retirement which either shall be Type A Retirement Compensation or Type B Retirement Compensation as selected by the Participant in accordance with Section 4.01. (bb) TERMINATION OF EMPLOYMENT: The time when a Participant shall no longer be employed by Eaton whether by reason of Retirement, death, voluntary resignation (with or without Good Reason), divestiture or closing of a business unit, plant or facility, discharge (with or without Cause), or such disability that, under the then current employment practices of Eaton, the employment of the Participant is deemed to have been terminated. (cc) TREASURY BILL INTEREST EQUIVALENT: A rate of interest equal to the quarterly average yield of 13-week U.S. Government Treasury Bills. (dd) TYPE A RETIREMENT COMPENSATION: As defined in Section 6.01. (ee) TYPE B RETIREMENT COMPENSATION: As defined in Section 6.01. IV. ELECTION TO DEFER Section 4.01. With respect to Incentive Compensation for each Incentive Year commencing in or after 1986, the Participant shall be given the opportunity to elect, by signing and delivering to the Committee a Deferred Incentive Compensation Agreement, the manner and extent to which the Participant's Incentive Compensation awarded in respect to such Incentive Year shall be deferred under the Plan, the allocation between Periodic Compensation and Retirement Compensation and, with respect to the latter, the allocation between Type A Retirement Compensation and Type B Retirement Compensation. Section 4.02. Not less than 10% of Incentive Compensation awarded for any Incentive Year may be deferred under the Plan. Section 4.03. If a Participant elects to allocate a portion of Incentive Compensation to both Periodic Compensation and Retirement Compensation, the amount allocated to each form of Compensation shall be not less than 10% of the Incentive Compensation awarded for any Incentive Year. Section 4.04. To be in effect for an Incentive Year, a Participant's election pursuant to Section 4.01 must be completed on or before June 15 of such Incentive Year; provided, however, that in order to select Type B Retirement Compensation such election must be completed on or before December 2 of the immediately preceding Incentive Year. Only Participants who have elected to allocate Deferred Incentive Compensation to Retirement Compensation for the Incentive Year commencing in 1985 (under the Plan as in effect prior to the October 23, 1985 amendment and restatement thereof) shall be entitled to allocate all or part of such Deferred Incentive Compensation to Type B Retirement Compensation. Section 4.05. Once a Participant has made an effective election under Section 4.01 with respect to the deferral and allocation of his Incentive Compensation, he may not thereafter change that election or change the allocation between Periodic Compensation and Retirement Compensation or between Type A Retirement Compensation and Type B Retirement Compensation. V. PERIODIC COMPENSATION Section 5.01. There shall be computed and credited quarterly to the Participant's Account Treasury Bill Interest Equivalents on all unpaid Periodic Compensation. Section 5.02. Commencing in January of the second year following the Incentive Year for which the Periodic Compensation was credited to the Participant, the Periodic Compensation shall be paid to the Participant in five (5) equal annual installments; and, with each such installment, there shall be paid to the Participant all Treasury Bill Interest Equivalents credited to the Participant and then unpaid. Section 5.03. Upon Termination of Employment, any unpaid Periodic Compensation and any unpaid Treasury Bill Interest Equivalents credited thereon shall be paid to the Participant, or his Beneficiary, as the case may be, pursuant to the schedule for payment described in Section 5.02. VI. RETIREMENT COMPENSATION A. General. Section 6.01. As elected by the Participant pursuant to Section 4.01, the amount of Deferred Incentive Compensation allocated to Retirement Compensation may be allocated between Type A Retirement Compensation and, subject to Sections 6.08 and 6.09, Type B Retirement Compensation. Amounts allocated as Type A Retirement Compensation shall be converted into a number of Contingent Share Units based upon the average of the Mean Prices for Eaton Common Shares for the twenty (20) trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately following the end of the Incentive Year in which the Incentive Compensation so allocated was earned. Amounts allocated as Type B Retirement Compensation shall not be converted into Contingent Share Units but shall instead be credited with Fixed Rate Interest Equivalents, compounded annually, until paid. Retirement Compensation which the Participant elects to have converted into Contingent Share Units is referred to herein as "Type A Retirement Compensation" and Retirement Compensation to be credited with Fixed Rate Interest Equivalents is referred to herein as "Type B Retirement Compensation." B. Provisions Regarding Type A Retirement Compensation. Section 6.02. On each dividend payment date for Eaton Common Shares, Dividend Equivalents shall be credited to the Participant's Account with respect to all Contingent Share Units then credited to such Account and shall be converted into an appropriate number of Contingent Share Units utilizing the procedures set forth in Section 6.01 but at the Mean Price on said dividend payment date. Section 6.03. In determining the number of Contingent Share Units to be credited to a Participant, whether by reason of the conversion of Retirement Compensation to Contingent Share Units or by reason of the conversion of Dividend Equivalents to Contingent Share Units, such number may be expressed in fractions of a Contingent Share Unit computed to the nearest tenth. The number of Contingent Share Units credited to a Participant shall be appropriately adjusted to reflect any change in the capitalization of Eaton resulting from a stock dividend, stock split, reorganization, merger, consolidation, recapitalization, combination, exchange of shares or any other similar events. Section 6.04. Upon Retirement or other Termination of Employment of the Participant or upon any other distribution of Type A Retirement Compensation, all Contingent Share Units standing to his credit shall be converted to an amount equal to the greater of the following: (a) the product of the average of the Mean Prices for an Eaton Common Share for the twenty (20) trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately preceding the date of Retirement or other Termination of Employment or distribution multiplied by the number of Contingent Share Units then credited to the Participant's Account; (b) if a Change in Control of Eaton shall have occurred at any time within the period of thirty-six (36) months immediately preceding the Participant's Retirement or other Termination of Employment, the product of the highest of the following: (i) the highest price paid for an Eaton Common Share in any tender offer in connection with the Change in Control; (ii) the price received for an Eaton Common Share in any merger, consolidation or similar event in connection with the Change in Control; or (iii) the highest price paid for an Eaton Common Share as reported in any Schedule 13D within the sixty (60) day period immediately preceding the Change in Control; multiplied by the number of Contingent Share Units credited to the Participant's Account at the time of his Retirement or other Termination of Employment or distribution; or (c) the total of all Incentive Compensation allocated to Type A Retirement Compensation, as determined prior to conversion to Contingent Share Units pursuant to Section 6.01 hereof, and Treasury Bill Interest Equivalents, compounded quarterly, in respect to such Incentive Compensation for the period from the date of allocation to the date of Retirement or other Termination of Employment or distribution. The amount so determined shall be credited to the Participant's Account and held for later payment as set forth in Section 6.05. Section 6.05. After the Retirement or other Termination of Employment of a Participant or upon any other distribution of Type A Retirement Compensation, and after the calculation of the amount to be credited to the Participant's Account as set forth in Section 6.04, the Committee shall determine in its sole discretion the method of payment of the Type A Retirement Compensation, whether in a lump sum, to be paid within one year after Retirement or other Termination of Employment or upon the date of any of other distribution of such Compensation, or Periodic Installments; provided, however, that in making such determination the Committee may consider the wishes and needs of the Participant or his Beneficiary, as the case may be, with respect to the payment of Type A Retirement Compensation. Section 6.06. There shall be computed on a quarterly basis and credited to the Participant's Account Treasury Bill Interest Equivalents on the unpaid amount of Type A Retirement Compensation determined pursuant to Section 6.04 until such compensation is paid by Eaton. Section 6.07. Commencing at such time as the Committee shall determine, but not later than one (1) year following Retirement or other Termination of Employment, the amount determined in accordance with Section 6.04 shall be paid to the Participant or his Beneficiary, as the case may be, in accordance with the schedule for payment determined under Section 6.05 and, with each Periodic Installment, there shall be paid all Treasury Bill Interest Equivalents credited to the Participant and then unpaid. C. Provisions Regarding Type B Retirement Compensation. Section 6.08. A Participant may defer as Type B Retirement Compensation all or any portion of his future Incentive Compensation which is earned during a period of four (4) consecutive Incentive Years or for the period to his Normal Retirement Date, if earlier; provided, however, that with respect to any Incentive Year, the amount of Incentive Compensation a Participant may defer as Type B Retirement Compensation must be at least $5,000 and no greater than the maximum amount for such Incentive Year specified in such Participant's Deferred Incentive Compensation Agreement; provided, further, that any Incentive Compensation in excess of such annual maximum limitation may be deferred as either Periodic Compensation or Type A Retirement Compensation. Section 6.09. Notwithstanding anything herein to the contrary, Eaton shall be entitled to deny Participants the opportunity to elect to defer future Incentive Compensation as Type B Retirement Compensation for any reason if such Incentive Compensation is not then subject to an effective deferral election; provided, however, that any such denial by Eaton of the opportunity to elect deferrals shall apply to all Participants equally. Section 6.10. (a) Following Retirement, all Type B Retirement Compensation then credited to a Participant's Account, together with Fixed Rate Interest Equivalents earned during the period of deferral, shall be paid to the Participant or his Beneficiary in fifteen (15) equal annual installments commencing on the first day of February following the year in which the Participant attains age 65; provided, however, that after consideration of the wishes and needs of the Participant or his Beneficiary, the Committee may determine in its sole discretion (i) to commence payment of the installments to any Participant at an earlier date following Retirement; (ii) to pay to any Participant the Type B Retirement Compensation in a lump sum within one year following Retirement; or (iii) to pay Type B Retirement Compensation in a lump sum upon any Termination of Employment by reason of divestiture or closing of a business unit, subsidiary, plant or facility or to provide that such Type B Retirement Compensation shall be paid commencing on a date which is subsequent to such Termination of Employment but not later than the Participant's Normal Retirement Date. For purposes of the payments under the foregoing clauses (ii) and (iii), the amount of such lump sum shall be equal to the then present value of the fifteen (15) annual payments which otherwise would have been made as calculated using an interest rate equal to "Moody's Corporate Bond Yield Average - Monthly (Average Corporates)" most recently published by Moody's Investor Services, Inc. (or any successor thereto) at the time of the calculation. (b) The rate of each Participant's Fixed Rate Interest Equivalent, as set forth in his Deferred Incentive Compensation Agreement, is based on the assumption that the Participant will defer a specified amount of Incentive Compensation for four (4) consecutive years or to his Retirement, if earlier. Notwithstanding any provisions hereof to the contrary, upon a Participant's Termination of Employment, other than for Retirement and except as provided below in Section 6.10(c) or upon any payment pursuant to Section 10.02 to a Participant who is not eligible for Retirement, all Type B Retirement Compensation then credited to his Account shall be credited only with Treasury Bill Interest Equivalents, compounded quarterly, for the actual period of deferral until paid in lieu of the Fixed Rate Interest Equivalents otherwise credited to Type B Retirement Compensation; and payment of the amount credited to his Account shall be made in such equal annual installments over a period not to exceed fifteen (15) years following the Participant's Termination of Employment or in a lump sum within one (1) year following such Termination of Employment, as the Committee shall determine in its sole discretion. (c) Notwithstanding anything in Section 6.10(b) to the contrary, (i) if a Participant's Termination of Employment occurs within five (5) years after a Change in Control of Eaton and such Termination of Employment is by Eaton without Cause or by the Participant for Good Reason or for Retirement, all Type B Retirement Compensation then credited to the Participant's Account shall be credited with the Fixed Rate Interest Equivalents and held under the Plan as elected by the Participant in his Deferred Incentive Compensation Agreement; (ii) if within five (5) years after a Change in Control of Eaton a Participant is not permitted to complete the deferral of Incentive Compensation until the Participant's Retirement because of any amendment or termination of the Plan, all Type B Retirement Compensation then credited to the Participant's Account shall be credited with the Fixed Rate Interest Equivalents and held under the Plan as elected by the Participant in his Deferred Incentive Compensation Agreement; or (iii) if a Participant's Termination of Employment is caused by any divestiture or closing of a business unit, subsidiary, plant or facility, the Compensation Committee of the Board may determine in its sole discretion that all Type B Retirement Compensation then credited to the Participant's Account shall be credited with the Fixed Rate Interest Equivalents until paid as provided under Section 6.10(a). VII. AMENDMENT AND TERMINATION Section 7.01. Eaton fully expects to continue the Plan but it reserves the right, except as otherwise provided herein, at any time or from time to time, by action of the Compensation Committee of the Board, to modify or amend the Plan, in whole or in part, or to terminate the Plan, in whole or in part, at any time and for any reason, including, but not limited to, adverse changes in the federal tax laws. Section 7.02. In the event of any termination of the Plan which results in the Participants being unable to have any future Incentive Compensation allocated as Type B Retirement Compensation, the amount of all Type B Retirement Compensation credited to a Participant's Account at the date of such Plan termination shall be converted to Type A Retirement Compensation, effective retroactively to the date such Retirement Compensation was allocated pursuant to Section 6.01, and either shall be paid to the Participant or continue to be held under the Plan as elected by the Participant in his Deferred Incentive Compensation Agreement, except for 1985 Incentive Compensation, if any, deferred as Type B Retirement Compensation which shall continue to be held under the Plan. Notwithstanding the foregoing, in the event of a termination of the Plan within five (5) years after a Change in Control of Eaton, all Type B Retirement Compensation then credited to a Participant's Account together with Fixed Rate Interest Equivalents earned during the period of deferral shall not be converted to Type A Retirement Compensation but shall be held under the Plan as elected by the Participant in his Deferred Incentive Compensation Agreement. No amendment to, or termination of, the Plan after a Change in Control of Eaton shall modify this provision or any provision hereof relating to a Change in Control of Eaton or the rights of a Participant in effect under the Plan immediately prior to such Change in Control of Eaton. VIII. ADMINISTRATION Section 8.01. The Plan shall be administered by the Committee in accordance with rules of general application for the administration of the Plan as the Committee may, from time to time, adopt. The Committee shall interpret the provisions of the Plan where necessary and may adopt procedures for the administration of the Plan which are consistent with the provisions of the Plan and the rules adopted by the Committee. Section 8.02. Each Participant or Beneficiary must claim any benefit to which he may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the specific reasons for the denial. The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty (60) days after the notice of the denial of his claim. The written decision by the Committee with respect to the review must be given within one hundred and twenty (120) days after receipt of the written request. IX. AUTOMATIC LUMP-SUM PAYMENT Section 9.01. Except as provided below in this Article IX, upon the date of a Proposed Change in Control, as defined in Section 9.02 hereof, the Company shall make an immediate Lump Sum Payment, as defined in Section 9.03 hereof, to each Participant or his Beneficiary. At any time prior to a Proposed Change in Control, the Board may decide that the Lump Sum Payment shall not be made, upon a Proposed Change in Control, because any such payment is not then advisable, in the Board's judgment, in order to protect the benefits of the Participants under the Plan. If the Board makes such a decision, it may thereafter (i) take no further action, in which case the Lump Sum Payments will not be made, (ii) reconsider such decision and decide at a later date (which may be subsequent to a Proposed Change In Control) to terminate the Plan and make Lump Sum Payments, (iii) provide funding for the Plan benefits by depositing funds in trust for such purpose or (iii) take no action to protect the Plan benefits. Section 9.02. A Proposed Change in Control shall mean the first to occur of any of the following events (including the expiration of the periods specified therein): (i) twenty days after the commencement of a tender offer shall be made for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities (unless such tender offer shall have been withdrawn); (ii) twenty days after the commencement of solicitation of proxies or consents for a merger or consolidation with another corporation and as a result of such merger or consolidation less than 75%, in the Company's view, of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by the former shareholders of the Company, other than the party and any affiliates (within the meaning of the Securities Exchange Act of l934 (the "Exchange Act")) of any party, to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation; (iii) upon the date that the Company shall have entered into an agreement to sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company; (iv) within twenty days after any "person" (as such term is used in Section 3(a)(9) and l3(d)(3) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing l5% or more of the combined voting power of the Company's then outstanding securities; or (v) upon the date that individuals who, at the beginning of any period of two consecutive years, constitute the Board of the Company, cease for any reason to constitute at least 76% percent thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. For purposes of this Section 9.02, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule l3d-3(d)(l)(i) of the Exchange Act (as then in effect). Section 9.03. Lump Sum Payment means an amount equal to the total of the following amounts calculated as of the date of the Proposed Change in Control: (i) The amount, if any, of the Participant's Periodic Compensation then credited to his Account and accrued and unpaid Treasury Bill Interest Equivalents thereon; plus (ii) The amount, if any, of the Participant's unpaid Type A Retirement Compensation calculated in accordance with Section 6.04 of the Plan and assuming for purposes of the conversion calculation that a Change in Control of Eaton has occurred within the relevant time period so that Section 6.04(b) is applicable; plus (iii) The amount, if any, payable as a lump sum in relation to Type B Retirement Compensation, calculated in accordance with Section 6.10(a)(ii) of the Plan, assuming that the Type B Retirement Compensation would be credited with Fixed Rate Interest Equivalents from the date of the Proposed Change in Control until paid over the fifteen-year period following the date of the Proposed Change in Control. In the event that a Participant or a Participant's Designated Beneficiary has begun to receive benefit installment payments under the Plan prior to the Proposed Change in Control, the amount of such Lump Sum shall be equal to the present value of the remaining annual payments which otherwise would have been made calculated as described in this Section 9.03. X. MISCELLANEOUS Section 10.01. Each Participant shall have the right, by written instruction to the Committee, on a form supplied by the Committee, to designate one or more primary and contingent beneficiaries (and the proportion to be paid to each, if more than one is designated) to receive his Deferred Incentive Compensation upon his death. Any such designation shall be revocable by the Participant. Section 10.02. The Committee may, in its sole discretion, change the amount of the Periodic Installments or the number of years over which the Periodic Installments are to be paid or permit the payment of any Deferred Incentive Compensation at any date or dates which may be earlier than the payment date or dates provided under the Plan. The Committee may consider the needs and desires of the participant or beneficiary in making this decision. The determination of the Committee shall be final and conclusive upon Eaton, the Participant and the Beneficiary. Any Type B Retirement Compensation paid pursuant to this Section 10.02 to a Participant who would then be eligible to terminate his employment for Retirement shall be credited with the Fixed Rate Interest Equivalent on the amount so paid. Any Type B Retirement Compensation paid to a Participant who is not then eligible to terminate his employment for Retirement shall be credited only with the Treasury Bill Interest Equivalent. Section 10.03. All payments under the Plan shall be subject to such taxes (federal, state or local) as may be due thereon and the determination by the Committee as to withholding with respect thereto shall be binding upon the Participant and his Beneficiary. Section 10.04. If any Participant under the Plan is a member of the Committee, he shall not participate as a member of the Committee in any determination under the Plan relating to his Deferred Incentive Compensation. Section 10.05. All action of the Committee hereunder may be taken with or without a meeting. If taken without a meeting, the action shall be in writing and signed by a majority of the members of the Committee and if taken with a meeting, a majority of the Committee shall constitute a quorum for any such action. Section 10.06. Subject to any federal statute to the contrary, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. If the Participant or Beneficiary shall become bankrupt, or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right hereunder, then such right or benefit shall, in the discretion of the Company, cease and terminate, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Participant or his spouse, children, or other dependents, or any of them, in such manner and in such amounts and proportions as the Company may deem proper. Section 10.07. The obligations of Eaton to make payments hereunder shall constitute a liability of Eaton to the Participant. Such payments shall be made from the general funds of the Company, and Eaton shall not be required to establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payments shall be made, and neither a Participant nor Beneficiary shall have any interest in any particular asset of Eaton by reason of its obligations hereunder. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between Eaton and a Participant or any other person. Section 10.08. The Plan shall not be deemed to constitute a contract of employment between Eaton and a Participant. Neither shall the execution of this Plan nor any action taken by Eaton pursuant to this Plan be held or construed to confer on a Participant any legal right to be continued as an employee of Eaton, in an executive position or in any other capacity with Eaton whatsoever. Section 10.09. Obligations incurred by Eaton pursuant to this Plan shall be binding upon and inure to the benefit of Eaton, its successors and assigns, and the Participant or his Beneficiary. Section 10.10. This Plan shall be construed and governed in accordance with the law of the State of Ohio. Section 10.11. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. Section 10.12. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. EX-11 3 EXHIBIT 11 Page 1
Eaton Corporation 1993 Annual Report on Form 10-K Item 14(c) Exhibit 11 Computations of Net Income per Common Share Year ended December 31 ---------------------------------- (Millions of dollars except for per share amounts) 1993 1992 1991 ---- ---- ---- Average number of Common Shares outstanding (in millions) 69.8 68.9 68.0 Income before extraordinary item and cumulative effect of accounting changes $ 180 $ 140 $ 74 Per share amount 2.57 2.03 1.09 ====== ====== ====== Extraordinary item $ (7) Per share amount (.10) ====== Cumulative effect of accounting changes Postretirement benefits other than pensions $ (274) Per share amount (3.97) ====== Income taxes $ 6 Per share amount .09 ====== Net income (loss) $ 173 $ (128) $ 74 Per share amount 2.47 (1.85) 1.09 ====== ====== ======
EX-21 4 EXHIBIT 21
Page 1 Eaton Corporation 1993 Annual Report on Form 10-K Item 14(c) Exhibit 21 Subsidiaries of Eaton Corporation Eaton is publicly held and has no parent corporation. Eaton's subsidiaries, the state or country in which each was organized, and the percentage of voting securities owned by Eaton or another Eaton subsidiary as of December 31, 1993 are as follows: Where Percentage of voting securities owned Consolidated subsidiaries (A) organized (by Eaton unless otherwise indicated) - ------------------------------- ---------- -------------------------------------- American Nucleonics Corporation California 100% AIL Systems Inc. AIL Systems Inc. Delaware 95.389% AIL Systems Holding Company BAC Investments Ltd. Delaware 100% Eaton Administration Corporation Delaware 100% Eaton ESC Holding Company Delaware 100% Eaton International Corporation Delaware 100% Eaton USEV Holding Company Delaware 100% ERC Corporation Delaware 100% Eaton Leasing Corporation ERC II Corporation Delaware 100% Eaton Leasing Corporation AIL Systems Holding Company Nevada 100% Eaton Airflex Division, Inc. Ohio 100% Eaton Consulting Services Corporation Ohio 100% Eaton IDT, Inc. Ohio 100% Eaton-Kenway, Inc. Ohio 100% Eaton Leasing Corporation Ohio 100% Eaton Properties Corporation Ohio 100% Eaton Leasing Corporation Eaton Truck Systems, Inc. Ohio 100% Eaton Utah Corporation Ohio 100% Eaton Leasing Corporation Eaton Westlake Corporation Ohio 100% Eaton Leasing Corporation U. S. Engine Valve (Partnership) Ohio 70% Eaton USEV Holding Company Kenway Handling Systems, Inc. New York 100% Eaton-Kenway, Inc. Eaton I.C.S.A. Argentina 100% Eaton Pty. Ltd. Australia 100% Eaton Controls Pty. Limited Australia 99.99996% Eaton International Corporation .00004% Eaton Pty. Ltd. Eaton Specialty Controls Pty. Ltd. Australia 99.99996% Eaton Corporation .00004% Eaton International Corporation Eaton Holding Limited Barbados 100% Eaton Yale Ltd. Eaton Services Limited Barbados 100% Eaton Holding Limited Saturn Insurance Company Ltd. Bermuda Islands 100% Equipamentos Eaton Ltda. Brazil 98.1% BAC Investments Ltd. 1.9% Eaton Mercantil Exportadora Ltda. Brazil 100% Equipamentos Eaton Ltda. Eaton ETN Offshore Ltd. Canada 100% Common Shares - Eaton Corporation 100% Preferred Shares - Eaton Int'l. Corp. Eaton Yale Ltd. Canada 100% Eaton ETN Offshore Ltd. Eaton Controles Industriales S.A. Costa Rica 97.53% Eaton International Corporation Eaton S.A. France 100% Eaton Technologies S.A. France 55% 45% Eaton International Corporation Eaton Controls S.A. France 100% Eaton Technologies S.A. Kirsten France S.A. France 100% Kirsten Verwaltungs G.m.b.H. Eaton G.m.b.H. Germany 100% Page 2 Where Percentage of voting securities owned Consolidated subsidiaries (A) organized (by Eaton unless otherwise indicated) - ----------------------------------- --------- -------------------------------------- Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H. Eaton Controls Verwaltungs G.m.b.H. Germany 100% Eaton Controls G.m.b.H. & Co. K.G. (Partnership) Germany 99.5% Eaton Yale Ltd. .5% Eaton Controls Verwaltungs G.m.b.H. Kirsten Verwaltungs G.m.b.H. Germany 100% Eaton Controls G.m.b.H. & Co. K.G. Eaton Technologies Limited Hong Kong 100% Eaton International Corporation Eaton S.p.A. Italy 99.9053% .0947% Eaton B.V. Eaton EST S.p.A. Italy 99% 1% Eaton S.p.A. Eaton Automotive S.p.A. Italy 99.999% Eaton S.p.A. .001% Eaton EST S.p.A. Eaton Controls S.p.A. Italy 99.9998% Eaton S.p.A. .0002% Eaton EST S.p.A. Eaton Commerciale S.r.l. Italy 55% Eaton Automotive S.p.A. Eaton Finance S.p.A. Italy 50% Eaton EST S.p.A. 50% Eaton Controls S.p.A. Eaton Japan Co., Ltd. Japan 100% Eaton International Inc. Liberia 100% Condura, S.A. de C.V. Mexico 100% Eaton International Corporation Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton International Corporation Eaton Manufacturera S.A. de C.V. Mexico 53.9471% Eaton s.a.m. Monaco 100% Eaton B.V. Netherlands 100% Eaton Finance N.V. Netherlands Antilles 55% Eaton International Inc. 45% Eaton Electrical Components Limited New Zealand 99.98% .02% Eaton International Inc. Eaton Services Pte., Ltd. Singapore 100% Eaton International Corporation Eaton Limited South Korea 100% Eaton S.A. Spain 50.14% Eaton B.V. 49.29% Eaton Ros S.A. Spain 66.025% Kirsten Verwaltungs G.m.b.H. Productos Eaton Livia S.A. Spain 52% Eaton B.V. 28% Eaton S.A. (Spain) Eaton Limited Taiwan 80.58% Eaton International Corporation 19.42% Eaton Credit Limited United Kingdom 100% Eaton Limited (U.K.) Eaton Limited United Kingdom 100% Foreign Sales Corporation U.S. Virgin Islands 100% (A) Other Eaton subsidiaries, most of which are inactive, are not listed above. They are treated as consolidated subsidiaries and, if considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary.
EX-23 5 EXHIBIT 23 Page 1 Eaton Corporation 1993 Annual Report on Form 10-K Item 14(c) 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 February 1, 1994, with respect to the consolidated financial statements and schedules of Eaton Corporation included in this Form 10-K for the year ended December 31, 1993: Registration number Description Filing date - ------------ ------------------------------------ ------------- 33-49393, Eaton Corporation Stock Option Plans March 9, 1993 33-12842, - Form S-8 Registration Statement 2-76349 and 2-58718 33-49777 Eaton Corporation Share Purchase and Investment Plan - Form S-8 Registration July 15, 1993 Statement 33-49779 Eaton Limited U.K. Savings-Related Share Option Scheme (1191) - Form S-8 July 16, 1993 Registration Statement 33-48851 Eaton Corporation $200,000,000 of Debt Securities, Debt Warrants and Preferred July 30, 1992 Shares - Form S-3 Registration Statement 33-15582 Eaton Limited U.K. Savings-Related Share Option Scheme - Form S-8 Registration July 7, 1987 Statement 33-2688 Eaton Corporation Shareholder Dividend Reinvestment Plan (Including Post Effective Jan. 15, 1986 Amendment No. 1 filed February 19, 1986) 2-77090 Eaton Corporation Strategic Incentive and Option Plan - Form S-8 Registration May 10, 1982 Statement 33-52333 Eaton Corporation $600,000,000 of Debt Securities, Debt Warrants, Common Shares Feb. 18, 1994 and Preferred Shares - Form S-3 Registration Statement Ernst & Young Cleveland, Ohio March 28, 1994 EX-24 6 EXHIBIT 24 Page 1 Eaton Corporation 1993 Annual Report on Form 10-K Item 14(c) Exhibit 24 Power of Attorney KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed below has made, constituted and appointed, and by this instrument does make, constitute and appoint, Stephen R. Hardis, Ronald L. Leach or William J. Nowak his or her true and lawful attorney, for him or her and in his or her name, place and stead to subscribe, as attorney-in-fact, his or her signature as Director or Officer or both, as the case may be, of Eaton Corporation, an Ohio corporation (the "Corporation"), to the Annual Report on Form 10-K for the year ended December 31, 1993 pursuant to the Securities Exchange Act of 1934, and to any and all amendments to that Annual Report on Form 10-K, giving and granting unto each such attorney-in-fact full power and authority to do and perform every act and thing whatsoever necessary to be done in the premises, as fully as he or she might or could do if personally present, hereby ratifying and confirming all that each such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall not apply to any Annual Report on Form 10-K or amendment thereto filed after December 31, 1994. IN WITNESS WHEREOF, this Power of Attorney has been signed this ___ day of March 1994. /s/ William E. Butler ---------------------------- William E. Butler Chairman and Chief Executive Officer; Principal Executive Officer; Director /s/ John S. Rodewig /s/ Charles E. Hugel ---------------------------- -------------------- John S. Rodewig Charles E. Hugel President; Chief Operating Director Officer - Vehicle Components; Director /s/ Alexander M. Cutler /s/ John R. Miller ---------------------------- --------------------- Alexander M. Cutler John R. Miller Executive Vice President; Director Chief Operating Officer - Controls; Director /s/ Billie K. Rawot /s/ Furman C. Moseley ---------------------------- ---------------------- Billie K. Rawot Furman C. Moseley Vice President and Controller Director /s/ Neil A. Armstrong /s/ Hooper G. Pattillo ---------------------------- ------------------------ Neil A. Armstrong Hooper G. Pattilo Director Director /s/ Phyllis B. Davis /s/ A. William Reynolds ---------------------------- ------------------------ Phyllis B. Davis A. William Reynolds Director Director /s/ Arthur Dole II /s/ Gary L. Tooker ---------------------------- ------------------------ Arthur Dole III Gary L. Tooker Director Director -----END PRIVACY-ENHANCED MESSAGE-----