-----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, ngED7pK0tHYj9KDB6B5LVYlh9lBQpkS7cnvChcqfke6vDZwV0ktJoQPAm+wcCef+ ScqeNmn4w6/tgJmUemccsA== 0000031277-95-000003.txt : 19950414 0000031277-95-000003.hdr.sgml : 19950411 ACCESSION NUMBER: 0000031277-95-000003 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950404 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-01396 FILM NUMBER: 95526890 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/A 1 1994 10-K AMENDMENT United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K/A Amendment #1 - To include Financial Data Schedule inadvertently not included in the original submission dated March 21, 1995. Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the year ended December 31, 1994 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 twelve 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 voting stock held by non-affiliates of the registrant as of January 31, 1995 was $3.6 billion. As of January 31, 1995, there were 77,966,602 Common Shares outstanding. Page 2 Documents Incorporated By Reference Portions of the Proxy Statement for the 1995 annual shareholders' meeting are incorporated by reference into Part III. Part I Item 1. Business Eaton Corporation (Eaton or Company), incorporated in 1916, is a global manufacturer of highly engineered products which serve the automotive, industrial, construction, commercial, aerospace and marine markets. Principal products include truck transmissions and axles, engine components, hydraulic products, electrical power distribution and control equipment, ion implanters and a wide variety of controls. The Company had 1994 net sales of $6.1 billion and 51,000 employees and 150 manufacturing sites in 18 countries around the world. On January 31, 1994, the Company acquired the Distribution and Control Business Unit (DCBU) of Westinghouse Electric Corporation for an adjusted purchase price of $1.050 billion. DCBU, a leading North American manufacturer of electrical distribution equipment and industrial controls with 1993 net sales of $1.1 billion, was combined with Eaton's Industrial Control and Power Distribution Operations to form the new Cutler-Hammer business unit. The acquisition has been accounted for as a purchase and, accordingly, the statements of consolidated income include the results of DCBU beginning February 1, 1994. This acquisition, the largest in Company history, substantially bolstered prospects for the Electrical and Electronic Controls segment by providing greater product depth with world class technology and by increasing product offering and distribution opportunities. This acquisition improves the balance of sales and earnings between the Electrical and Electronic Controls segment and the historically strong Vehicle Components segment. On November 16, 1994, the Company acquired the common stock of Lectron Products, Inc. (Lectron) through the issuance of 1.6 million Common Shares. Lectron, a privately-held manufacturer of electronic and precision electromechanical controls for automotive manufacturers, had annual sales of $128 million. This acquisition was accounted for as a pooling-of-interests. Financial statements for periods prior to the acquisition were not restated for the acquisition since the effect would not be material. Information regarding principal products, net sales, operating profit and identifiable assets by business segment and geographic region is presented in "Business Segment and Geographic Region Information" on pages 38 to 42 of this report. Additional information regarding Eaton's business segments and 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 the EATON trademark in marketing many 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 upcoming model year and temporary shut-downs for taking physical inventories. Competition - Principal methods of competition in this business segment are price, service and product performance. Eaton occupies a strong competitive position in relation to many competitors in this business segment and, with respect to many products, is considered among the market leaders. Major Customers - Approximately 17% of net sales in 1994 of the Vehicle Components segment were made to divisions and subsidiaries of Ford Motor Company. Approximately 38% of net sales in 1994 of the Vehicle Components segment were made to divisions and subsidiaries of five other large companies. Eaton has been conducting 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, sales of which are not dependent upon one another. With respect to many of the products sold, 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, CHALLENGER, COMMANDER, CUTLER-HAMMER, DOLE, DURANT, DYNAMATIC, GOLF PRIDE, HEINEMANN, LECTRON, L/P (and design), PANELMATE and TINNERMAN trademarks are used in connection with marketing products included in this business segment. In addition, in conjunction with the acquisition of DCBU, the Company has the right to use the WESTINGHOUSE trademark in marketing certain products. Use of the WESTINGHOUSE trademark is limited to a period of ten years. Competition - 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. Page 4 Major Customers - Approximately 5% of net sales in 1994 of the Electrical and Electronic Controls segment were made to the United States Government which is the major customer of the Defense Systems segment. All contracts that the Company has with the United States Government are subject to termination at the election of the Government. Approximately 5% of net sales in 1994 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 and HYPERMANUAL trademarks are used in connection with marketing products included in this business segment. Competition - 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. Major Customers - Substantially all net sales in 1994 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 of the Government. Information Concerning Eaton's Business in General Raw Materials - Principal raw materials used are iron, steel, copper, aluminum, brass, insulating materials, silver, rubber and plastic. Materials are purchased in various forms, such as pig iron, metal sheets and strips, forging billets, bar stock and plastic pellets. Eaton purchases 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 portion 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 customers during each model year, such orders are not considered technically firm. In measuring backlog of orders, the Company includes only the amount of such orders released by such customers as of dates listed. Using this criterion, Eaton's total backlog at December 31, 1994 and 1993 (in billions) was approximately $1.5 and $1.1, respectively. 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 improvement of existing products in 1994, 1993 and 1992 (in millions) were $213, $154 and $151, respectively. Page 5 Protection of the Environment - The Company's operations involve the use, disposal and cleanup of certain substances regulated under environmental protection laws, as further discussed in "Protection of the Environment" on pages 30 to 31 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 financial condition or results of operations. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for 1995 and 1996. Item 2. Properties Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 150 locations in 18 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment. Information regarding commitments for operating leases is included under "Lease Commitments" on page 32 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 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. 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 high and low market price per Common Share for each quarter in 1994 and 1993 is included in "Quarterly Data" on page 36 of this report. At December 31, 1994, there were 14,834 holders of record of the Company's Common Shares. Additionally, 21,286 employees were shareholders through participation in the Company's Share Purchase and Investment Plan. Page 6 Item 6. Selected Financial Data Information regarding selected financial data is presented in the "Five-Year Consolidated Financial Summary" on page 53 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 included on pages 44 through 52 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 is presented on pages 15 through 42 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 Information contained on pages 5 through 8 in the Company's definitive proxy statement dated March 17, 1995, with respect to directors, is incorporated by reference. Page 7 A listing of Eaton's officers, their ages and their current positions and offices, as of February 1, 1995 follows:
Name Age Position (Date elected to position) - -------------------- --- ---------------------------------------- William E. Butler 63 Chairman and Chief Executive Officer (January 1, 1992); Director John S. Rodewig 61 President and Chief Operating Officer - Vehicle Components (September 22, 1993); Director Stephen R. Hardis 59 Vice Chairman and Chief Financial and Administrative Officer (April 23, 1986); Director Alexander M. Cutler 43 Executive Vice President and Chief Operating Officer - Controls (September 22, 1993); Director Gerald L. Gherlein 56 Executive Vice President and General Counsel (September 4, 1991) John M. Carmont 56 Vice President and Treasurer (December 1, 1981) Susan J. Cook 47 Vice President - Human Resources (January 16, 1995) Adrian T. Dillon 41 Vice President - Planning (March 1, 1991) Patrick X. Donovan 59 Vice President - International (April 27, 1988) John D. Evans 64 Vice President (January 16, 1995) Earl R. Franklin 51 Secretary and Associate General Counsel (September 1, 1991) John W. Hushen 59 Vice President - Corporate Affairs (August 1, 1991) Stanley V. Jaskolski 56 Vice President - Technical Management (October 1, 1990) Ronald L. Leach 60 Vice President - Accounting (December 1, 1981) William T. Muir 52 Vice President - Manufacturing Technologies (April 1, 1989) Derek R. Mumford 53 Vice President - Information Technologies (April 1, 1992) Billie K. Rawot 43 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, except for Susan J. Cook. Susan J. Cook joined Eaton as Vice President-Human Resources on January 16, 1995, succeeding John D. Evans, who will retire on June 30, 1995. Prior to joining Eaton, she was Vice President-Human Resources at Tandem Computers, Inc., a company with sales of $2 billion and operations in 20 countries. Prior to joining Tandem Computers, Inc. in 1988, Ms. Cook had a seventeen-year career in human resources at IBM Corporation. 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, Page 8 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 Information contained on pages 11 through 25 in Eaton's definitive proxy statement dated March 17, 1995, with respect to executive compensation, is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information contained on pages 32 to 33 of the Company's definitive proxy statement dated March 17, 1995, with respect to security ownership of certain beneficial owners and management, is incorporated by reference. Item 13. Certain Relationships and Related Transactions Information contained on page 10 of the Company's definitive proxy statement dated March 17, 1995, with respect to certain relationships and related transactions, is incorporated by reference. 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, 1994 and 1993 - Pages 16 and 17 Statements of Consolidated Income - Years ended December 31, 1994, 1993 and 1992 - Page 18 Statements of Consolidated Cash Flows - Years ended December 31, 1994, 1993 and 1992 - Page 19 Statements of Consolidated Shareholders' Equity - Years ended December 31, 1994, 1993 and 1992 - Page 20 Financial Review - Pages 21 through 42 (2) Summarized financial information for Eaton ETN Offshore Ltd. on page 43 is filed as a separate section Page 9 of this report. All 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 adopted on April 27, 1994 - Incorporated by reference to the Company's Form 8-K Report dated May 19, 1994 and Amended Regulations (as amended and restated as of April 27, 1988, filed as a separate section of this report) 4 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) 10 Material contracts 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) - Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (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 by reference to the Company's definitive proxy statement dated March 18, 1991 (e) The following are incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990: Page 10 (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 by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990: (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) Page 11 24 Power of Attorney (filed as a separate section of this report) 27 Financial Data Schedule (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 1994. (c) & (d) Exhibits and Financial Statement Schedules Certain exhibits required by this portion of Item 14 are filed as a separate section of this report. Page 12 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: April 4, 1995 /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: April 4, 1995 Signature Title - ----------------------- ----------------------------------------- * - ----------------------- William E. Butler Chairman and Chief Executive Officer; Principal Executive Officer; 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 * - ----------------------- John S. Rodewig President; Chief Operating Officer - Vehicle Components; Director Page 13 * - ----------------------- Neil A. Armstrong Director * - ----------------------- Phyllis B. Davis Director * - ----------------------- Charles E. Hugel Director * - ----------------------- John R. Miller Director * - ----------------------- Furman C. Moseley Director * - ----------------------- Hooper G. Pattillo Director * - ----------------------- Victor A. Pelson 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 14 Eaton Corporation 1994 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 Exhibits Page 15 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, 1994. Our audits also included the summary financial information of Eaton ETN Offshore Ltd. listed in Item 14 (a). These financial statements and summary financial information are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1994 and 1993, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related summary financial information, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As described under "Accounting Changes" on page 24 of this report, in 1992 the Company changed its methods of accounting for postretirement benefits other than pensions and for income taxes. Ernst & Young LLP Cleveland, Ohio January 27, 1995 Page 16 Eaton Corporation Consolidated Balance Sheets December 31 --------------------- (Millions) 1994 1993 ---- ---- ASSETS Current assets Cash $ 18 $ 32 Short-term investments 23 268 Accounts receivable 889 550 Inventories 698 434 Deferred income taxes 151 127 Other current assets 67 55 ------- ------- 1,846 1,466 Property, plant and equipment Land 50 41 Buildings 539 486 Machinery and equipment 2,321 1,959 ------- ------- 2,910 2,486 Accumulated depreciation (1,441) (1,298) ------- ------- 1,469 1,188 Excess of cost over net assets of businesses acquired 850 265 Deferred income taxes 158 112 Other assets 359 237 ------- ------- $ 4,682 $ 3,268 ======= ======= The Financial Review on pages 21 to 42 is an integral part of the consolidated financial statements. Page 17 Eaton Corporation Consolidated Balance Sheets December 31 --------------------- (Millions) 1994 1993 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 14 $ 14 Current portion of long-term debt 22 110 Accounts payable 449 266 Accrued compensation 163 106 Accrued income and other taxes 60 23 Other current liabilities 394 268 ------- ------- 1,102 787 Long-term debt 1,053 649 Postretirement benefits other than pensions 573 509 Other long-term liabilities 274 218 Shareholders' equity Common Shares (78.0 in 1994 and 71.3 in 1993) 39 36 Capital in excess of par value 806 535 Retained earnings 988 708 Foreign currency translation adjustments (71) (78) Unallocated Employee Stock Ownership Plan shares (82) (96) ------- ------- 1,680 1,105 ------- ------- $ 4,682 $ 3,268 ======= ======= The Financial Review on pages 21 to 42 is an integral part of the consolidated financial statements. Page 18 Eaton Corporation Statements of Consolidated Income Year ended December 31 ----------------------------- (Millions except for per share data) 1994 1993 1992 ---- ---- ---- Net sales $6,052 $4,401 $4,101 Costs and expenses Cost of products sold 4,397 3,284 3,134 Selling and administrative expense 882 591 578 Research and development expense 213 154 151 Acquisition integration charge 55 ------ ------ ------ 5,492 4,084 3,863 ------ ------ ------ Income from operations 560 317 238 Other income and (expense) Interest expense (91) (75) (89) Interest income 7 8 9 Other income--net 12 12 23 ------ ------ ------ (72) (55) (57) ------ ------ ------ Income before income taxes 488 262 181 Income taxes 155 82 41 ------ ------ ------ Income before extraordinary item and cumulative effect of accounting changes 333 180 140 Extraordinary item (7) Cumulative effect of accounting changes Postretirement benefits other than pensions (274) Income taxes 6 ------ ------ ------ Net income (loss) $ 333 $ 173 $ (128) ====== ====== ====== Per Common Share Income before extraordinary item and cumulative effect of accounting changes $ 4.40 $ 2.57 $ 2.03 Extraordinary item (.10) Cumulative effect of accounting changes Postretirement benefits other than pensions (3.97) Income taxes .09 ------ ------ ------ Net income (loss) $ 4.40 $ 2.47 $(1.85) ====== ====== ====== Cash dividends paid $ 1.20 $ 1.15 $ 1.10 Average number of Common Shares outstanding 75.6 69.8 68.9 The Financial Review on pages 21 to 42 is an integral part of the consolidated financial statements. Page 19 Eaton Corporation
Statements of Consolidated Cash Flows Year ended December 31 -------------------------------- (Millions) 1994 1993 1992 ---- ---- ---- Operating activities Income before extraordinary item and cumulative effect of accounting changes $ 333 $ 180 $ 140 Adjustments to reconcile to net cash provided by operating activities Depreciation 216 182 184 Amortization 35 14 16 Acquisition integration charge 55 Deferred income taxes 35 (65) (26) Long-term liabilities 40 (6) 20 Other non-cash items in income 37 (39) Changes in operating assets and liabilities, excluding acquisitions and divestitures of businesses Accounts receivable (190) 40 58 Inventories (115) 12 11 Other current assets (12) 6 (5) Accounts payable and other accruals 129 29 (8) Accrued income and other taxes 10 (15) (9) Other--net 4 3 39 -------- -------- -------- Net cash provided by operating activities 522 435 381 Investing activities Acquisitions of businesses, less cash acquired (1,058) (14) (22) Divestitures of businesses 61 18 Expenditures for property, plant and equipment (267) (227) (186) Purchases of short-term investments (7) (108) (86) Maturities and sales of short-term investments 252 22 Other--net 9 8 18 -------- -------- -------- Net cash used in investing activities (1,010) (319) (258) Financing activities Borrowings with original maturities of more than three months Proceeds 731 99 Payments (609) (98) (151) Borrowings with original maturities of less than three months--net 173 (14) (15) Proceeds from sale of Common Shares 252 62 Proceeds from exercise of stock options 18 19 29 Cash dividends paid (91) (83) (76) -------- -------- -------- Net cash provided by (used in) financing activities 474 (114) (114) -------- -------- -------- Total increase (decrease) in cash (14) 2 9 Cash at beginning of year 32 30 21 -------- -------- -------- Cash at end of year $ 18 $ 32 $ 30 ======== ======== ======== The Financial Review on pages 21 to 42 is an integral part of the consolidated financial statements.
Page 20 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, 1992 34,069 $17 $418 $838 $ 2 $(122) $1,153 Net loss (128) (128) Cash dividends paid, net of Employee Stock Ownership Plan (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 Net income 333 333 Cash dividends paid, net of ESOP tax benefit (89) (89) Issuance of shares under employee benefit plans, including tax benefit 503 21 21 Sale of shares 4,560 2 250 252 Pooling-of-interests with Lectron Products, Inc. 1,600 1 25 26 Unrealized net gain on available-for-sale securities, net of income taxes 11 11 Reduction of unallocated ESOP shares 14 14 Foreign currency translation adjustments 7 7 ------ --- ---- ---- ---- ----- ------ Balance at December 31, 1994 77,967 $39 $806 $988 $(71) $ (82) $1,680 ====== === ==== ==== ==== ===== ====== The Financial Review on pages 21 to 42 is an integral part of the consolidated financial statements.
Page 21 Eaton Corporation 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 United States dollars at year-end exchange rates as to assets and liabilities and weighted average exchange rates as to revenues and expenses. The resulting translation adjustments are recorded in shareholders' equity. Financial statements for subsidiaries in highly inflationary economies are translated into United States 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 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 are generally accounted for using the last-in, first-out (LIFO) method. The remaining United States and all other inventories are accounted for using the first-in, first-out (FIFO) method. Depreciation and Amortization - ----------------------------- Depreciation and amortization are computed by the straight-line method for financial statement purposes. The cost of plant and equipment is depreciated over the useful lives of the various classes of assets. Identified intangible assets, principally patents, trademarks and tradenames are amortized over the useful life of the respective asset. Excess of cost over net assets of businesses acquired is amortized principally over forty years (accumulated amortization in millions was $102 and $78 at the end of 1994 and 1993, respectively). Excess of cost over net assets of businesses acquired is assessed for impairment when operating profit from the related business indicates that the carrying amount may not be recoverable. Page 22 Financial Instruments - --------------------- The Company uses various financial instruments, including foreign exchange contracts and options, and interest rate swaps and caps, as part of foreign exchange and interest rate risk management programs. The Company does not buy and sell financial instruments solely for the purpose of earning a profit due to changes in the market price of the instruments, except for nominal amounts authorized under limited, controlled circumstances. The Company has subsidiaries operating in Canada, Europe, Latin America and the Pacific region. In the normal course of business, these operations are exposed to fluctuations in related foreign currencies. The Company seeks to reduce exposure to foreign currency fluctuations, primarily the European and Canadian currencies, through the use of foreign currency forward exchange contracts and options. 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. 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. Premiums and discounts related to foreign currency forward exchange contracts and options are amortized to other income--net over the lives of the agreements. In the normal course of business, the Company's operations are also exposed to fluctuations in interest rates. The Company seeks to reduce the cost of and exposure to interest rate fluctuations through the use of interest rate swaps and caps. Gains or losses on interest rate swaps and caps are included in interest expense since they hedge interest on debt. Premiums related to interest rate caps are amortized to interest expense over the lives of the agreements. Counterparties to various hedging instruments are many major international financial institutions. While the Company may be exposed to credit losses in the event of nonperformance by these counterparties, no losses are anticipated due to control over the limit of positions entered into with any one party and the strong credit ratings of these institutions. 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, comprised solely of employee options for Common Shares, is not material. ACQUISITIONS AND DIVESTITURES OF BUSINESSES - ------------------------------------------- On January 31, 1994, the Company acquired the Distribution and Control Business Unit (DCBU) of Westinghouse Electric Corporation for an adjusted purchase price of $1.050 billion. DCBU, a leading North American manufacturer of electrical distribution equipment and industrial controls, was combined with Eaton's Industrial Control and Page 23 Power Distribution Operations (ICPDO) to form the new Cutler-Hammer business unit. The acquisition has been accounted for as a purchase and, accordingly, the statements of consolidated income include the results of DCBU beginning February 1, 1994. The acquired assets and liabilities assumed in the acquisition follow (in millions): Fair value of assets acquired $ 742 Liabilities assumed (298) Excess of cost over net assets acquired 606 ------ Purchase price, net of cash acquired $1,050 ====== The excess of cost over net assets acquired is being amortized over forty years. Identified intangible assets of $95 million are being amortized over an average life of sixteen years. On an unaudited pro forma basis, assuming Eaton and DCBU had been combined as of the beginning of 1993, net sales would have increased $1 billion whereas net income and net income per Common Share would not have been significantly different from reported amounts. On the same basis, results for 1994 would not have been significantly different from reported amounts. In December 1993, in conjunction with the acquisition of DCBU, the Company recorded a $55 million acquisition integration charge ($34 million after income tax credits, or $.49 per Common Share). Part of a comprehensive business plan, the charge addressed the costs of integrating the ICPDO product lines and manufacturing operations with DCBU, related workforce reductions and a $9 million write-down of assets, largely in the United States. To date, expenditures and charges total $20 million with the remaining $35 million expected to occur primarily over the next three years. The remaining expenditures will be funded through cash flow from the combined operations. On November 16, 1994, the Company acquired the common stock of Lectron Products, Inc. (Lectron) through the issuance of 1.6 million Common Shares. Lectron, a privately-held manufacturer of electronic and precision electromechanical controls for automotive manufacturers, had annual sales of $128 million for the most recent fiscal year. This acquisition was accounted for as a pooling-of-interests. Financial statements for periods prior to the acquisition were not restated for the acquisition since the effect would not be material. During 1994, in conjunction with the acquisition of DCBU, the Company sold certain DCBU operations to Thomas & Betts Corporation (T&B) in exchange for cash aggregating $61 million and $14 million of T&B common stock. These divestitures resulted in no gain or loss. During 1994, 1993 and 1992, the Company acquired and divested other smaller operations. Page 24 EXTRAORDINARY ITEM - ------------------ During 1993, the Company called for redemption $74 million of 9% debentures and $89 million of 8.5% debentures. The extraordinary loss on these redemptions, including the write-off of unamortized debt issuance costs, was $11 million ($7 million after income tax credits, or $.10 per Common Share). ACCOUNTING CHANGES - ------------------ In 1992, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109, "Accounting for Income Taxes." SFAS No. 106 requires accrual of postretirement benefits other than pensions, 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. Net income for 1992 was reduced by the cumulative effect of this accounting change for prior years of $442 million ($274 million after income tax credits, or $3.97 per Common Share). SFAS No. 106 has no effect on cash flows since claims will continue to be paid as incurred. The adoption of SFAS No. 109 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. Net income for 1992 was increased by the cumulative effect of this accounting change for prior years of $6 million, or $.09 per Common Share. SFAS No. 109 has no effect on cash flows. ACCOUNTS RECEIVABLE AND INVENTORIES - ----------------------------------- Accounts receivable are net of an allowance for doubtful accounts (in millions) of $14 and $10 at the end of 1994 and 1993, respectively. The components of inventories at December 31 follow (in millions): 1994 1993 ---- ---- Raw materials $213 $141 Work in process 358 238 Finished goods 216 139 ---- ---- Gross inventories at FIFO 787 518 Excess of current cost over LIFO cost (89) (84) ---- ---- Net inventories at LIFO $698 $434 ==== ==== Gross inventories accounted for using the LIFO method (in millions) were $367 and $314 at the end of 1994 and 1993, respectively. Page 25 INVESTMENT IN LIFE INSURANCE - ---------------------------- In 1993, the Company purchased company-owned life insurance policies insuring the lives of a portion of active United States employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as health care. At December 31, 1994 and 1993, the investment in the policies included in other assets (in millions) was $10 and $7, net of policy loans of $226 and $110, respectively. Net life insurance expense (in millions) of $5 and $2, including interest expense of $15 and $4 in 1994 and 1993, respectively, was included in selling and administrative expense. DEBT AND OTHER FINANCIAL INSTRUMENTS - ------------------------------------ The Company's subsidiaries outside the United States have lines of credit, primarily short-term, aggregating $115 million from various banks worldwide. Most of these arrangements are reviewed periodically for renewal. At December 31, 1994, the Company had $19 million outstanding under these lines of credit with banks. The weighted average interest rate on short-term debt, excluding immaterial amounts for highly inflationary countries, at December 31, 1994 and 1993 was 6.8% and 8.1%, respectively. Long-term debt at December 31, excluding the current portion, follows (in millions): 1994 1993 ---- ---- Notes of Employee Stock Ownership Plan due through 1999 $ 66 $ 82 6-3/8% notes due 1999 100 9% notes due 2001 100 100 8% debentures due 2006 (due 1996 at option of debenture holders) 86 86 8.9% debentures due 2006 100 100 7% debentures due 2011, net of unamor- tized discount of $93 million in 1994 and $95 million in 1993 (effective interest rate 14.6%) 107 105 8-7/8% debentures due 2019 (due 2004 at option of debenture holders) 38 38 8.1% debentures due 2022 100 100 7-5/8% debentures due 2024 100 Unsecured notes (6% to 6.4%) 210 Other 46 38 ------ ------ $1,053 $ 649 ====== ====== To refinance a portion of the cost of the acquisition of DCBU, in April 1994, the Company sold $100 million of 6-3/8% notes due 1999 and $100 million of 7-5/8% debentures due 2024. Concurrent with the sale of the 6-3/8% notes and the 7-5/8% debentures, the Company terminated, and settled for cash, interest rate swap agreements with notional amounts totaling $200 million which hedged the sale of the Page 26 notes and debentures. The gain on the termination of the interest rate swap agreements is being amortized to interest expense over the life of the notes and debentures and effectively reduces the annual rate of the notes to 4.8% and the debentures to 7.1%. In January 1994, in order to finance the acquisition of DCBU, the Company entered into a $555 million 364-day revolving credit agreement and a $555 million five-year revolving credit agreement. During 1994, as a result of the sale of $200 million of notes and debentures, the sale of $214 million of Common Shares and cash flow from operations, the Company canceled the 364-day revolving credit agreement and reduced the $555 million five-year revolving credit agreement to $300 million. The $210 million of unsecured notes at December 31, 1994 relate to the acquisition of DCBU. These unsecured notes are classified as long-term debt because the Company intends, and has the ability under the five-year $300 million revolving credit agreement, to refinance this debt on a long-term basis. Notes of the Employee Stock Ownership Plan, which are guaranteed by the Company, consist of $55 million at a floating interest rate (5.5% at December 31, 1994) based on LIBOR and $26 million at a fixed interest rate of 7.6% ($15 million of these notes are included in current portion of long-term debt). The Company has entered into a series of interest rate swaps, which expire ratably through 1999, and which change the interest rate on the $26 million of fixed interest rate notes to fixed interest rates of 7.1% and 6.9% as to $7 million and $16 million, respectively, and to a floating interest rate (5.2% at December 31, 1994) based on LIBOR as to $3 million. In April 1994, the Company sold a five-year interest rate cap in exchange for a premium (cash) of $1.5 million. This agreement effectively converts the $100 million of 6-3/8% notes into floating rate debt at LIBOR minus 2.6% when LIBOR exceeds 9%. At December 31, 1994, the Company had entered into interest rate caps commencing in January 1995 which effectively place a 5.5% ceiling on $100 million of floating rate debt through November 1, 1995. In 1994, the Company entered into two interest rate swaps aggregating $50 million that expire in 2000, which partially offset the effect of a $100 million 9% interest rate swap also expiring in 2000. The net effect of these swaps at December 31, 1994 was to convert $50 million of floating rate debt to fixed rate debt at 9% and another $50 million of floating rate debt to LIBOR plus 3.1%. Aggregate mandatory sinking fund requirements and annual maturities of long-term debt are as follows (in millions): 1995, $22; 1996, $120; 1997, $22; 1998, $22; and 1999, $323. The amount for 1996 includes $86 million of 8% debentures due in 1996 at the option of the debenture holders. The amount for 1999 includes $210 million of unsecured notes due to the expiration of the five-year revolving credit agreement in 1999. Interest capitalized as part of acquisition or construction of major assets (in millions) was $10, $12, and $8 in 1994, 1993 and 1992, respectively. Interest paid (in millions) was $101, $90 and $94 in 1994, 1993 and 1992, respectively. Page 27 Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result of the adoption of SFAS No. 115, the Company accrued the unrealized gain related to several available-for-sale securities. The cumulative effect of the accounting change for prior years was an $8 million increase in the carrying value of the securities with an offsetting increase, after income taxes, of $5 million in retained earnings in shareholders' equity. The notional amounts, carrying amounts and fair values of financial instruments outstanding at December 31 follow (in millions):
1994 1993 -------------------------- ----------------------------- Notional Carrying Fair Notitional Carrying Fair amount amount value amount amount value -------- -------- ----- ---------- -------- ----- Cash and short-term investments $ 41 $ 41 $300 $300 Marketable equity investments 51 51 27 34 Marketable debt securities 26 26 26 27 Short-term debt (14) (14) (14) (14) Long-term debt and current portion of long-term debt (1,075) (1,114) (759) (941) Foreign currency forward exchange contracts and options $189 1 (1) $227 6 7 Interest rate swaps Fixed to floating 76 (5) 31 3 Floating to fixed 123 (4) 327 (16) Interest rate caps Purchased 100 2 500 Sold (100) (1) (2)
The fair value of short-term investments, marketable equity investments and debt securities, short-term and long-term debt, and interest rate swaps and caps was principally based on quoted market prices. The fair value of foreign currency forward exchange contracts and options, which primarily mature in 1995, was estimated based on quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences. 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. Page 28 The components of pension (expense) income for the years ended December 31 follow (in millions): 1994 1993 1992 ---- ---- ---- Service cost - benefits earned during year $(55) $(42) $(39) Interest cost on projected benefit obligation (94) (97) (96) Actual return on assets 36 155 203 Net amortization and deferral 99 (17) (73) ---- ---- ---- $(14) $ (1) $ (5) ==== ==== ==== As a result of the DCBU acquisition, pension expense increased by $7 million in 1994. The pension asset (liability), by funded status, recognized in the balance sheet at December 31 follows (in millions): 1994 1993 --------------- --------------- Over- Under- Over- Under- funded funded funded funded ------ ------ ------ ------ Accumulated pension benefit obligation Vested $ 950 $ 147 $ 979 $ 136 Nonvested 62 8 53 10 ------ ------ ------ ------ 1,012 155 1,032 146 Value of future salary projections 135 10 143 10 ------ ------ ------ ------ Total projected pension benefit obligation 1,147 165 1,175 156 Fair value of plan assets 1,370 70 1,371 68 ------ ------ ------ ------ Plan assets in excess of or (less than) projected benefit obligation 223 (95) 196 (88) Unamortized Initial net (asset) obligation (40) 7 (48) 7 Net (gain) loss (125) (3) (116) 3 Prior service cost 10 15 27 12 Adjustment to recognize minimum liability (12) (12) ------ ------ ------ ------ $ 68 $ (88) $ 59 $ (78) ====== ====== ====== ====== Measurement of the projected benefit obligation was based on a discount rate of 8.50%, 7.25%, and 8.25% in 1994, 1993 and 1992, respectively. The expected compensation growth rate was 5.95%, 4.95%, and 5.95% in 1994, 1993 and 1992, respectively. The expected long-term rate of return on assets was 10% in all three years. Plan Page 29 assets are 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 8.50% at the end of 1994 had the effect of decreasing the accumulated pension benefit obligation by $140 million with an offsetting increase 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 the benefits. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features, including deductibles and co-payments. During 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. Expense for postretirement benefits other than pensions for the years ended December 31 follows (in millions): 1994 1993 1992 ---- ---- ---- Service cost - benefits earned during year $(13) $ (7) $(12) Interest cost on projected benefit obligation (43) (37) (44) Net amortization and deferral 5 9 ---- ---- ---- $(51) $(35) $(56) ==== ==== ==== The liability for postretirement benefit plans other than pensions recognized in the balance sheets at December 31 follows (in millions): 1994 1993 ---- ---- Accumulated postretirement benefit obligation Retirees $382 $368 Eligible plan participants 44 38 Non-eligible plan participants 177 120 Unamortized Prior service cost 67 91 Net loss (62) (73) ---- ---- $608 $544 ==== ==== Page 30 As a result of the DCBU acquisition, the expense and the liability for postretirement benefits other than pensions increased by $6 million and $51 million, respectively. Measurement of the accumulated postretirement benefit obligation at December 31, 1994, was based on an 11% annual rate of increase in the per capita cost of covered health care benefits (12% for 1993). For 1994, the rate was assumed to decrease ratably to 7% through 1999 and decrease to 6.25% in 2000 and remain at that level thereafter (5% for 1993). The discount rate was 8.50% in 1994 and 7.25% for 1993. The changes in assumed rates had the effect of decreasing the accumulated postretirement benefit obligation (APBO) which offset increases in the APBO due to changes in plan provisions. These changes will have an immaterial effect on future expense. An increase of 1% in assumed health care cost trend rates would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $39 million and the net periodic cost for 1994 by $3 million. 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 currently-owned or formerly-owned plants. Environmental exposures associated with the DCBU acquisition are limited by the purchase agreement with Westinghouse Electric Corporation. With respect to environmental conditions existing prior to the acquisition, Westinghouse agreed to retain certain responsibilities, to share the cost of others and to indemnify the Company for costs to the extent they exceed $3.5 million annually. The obligation to share costs extends for ten years. Although difficult to quantify, management estimates that there is a reasonable possibility that the remediation and other costs associated with all of these sites may range up to $74 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, 1994 and 1993, the balance sheet included an accrual for estimated remediation and other environmental costs (in millions) of approximately $48 and $18, respectively. The accrual for environmental costs at year-end 1994 includes $13 million for environmental exposures associated with DCBU which was recorded as part of the allocation of the purchase price of DCBU. 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 Page 31 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 financial condition or results of operations. The Company continues to modify, on an ongoing, regular basis, certain 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 operations. SHAREHOLDERS' EQUITY - -------------------- At the 1994 Annual Meeting, shareholders adopted amended Articles of Incorporation which increased the number of authorized Common Shares from 150 million to 300 million. At December 31, 1994, 5.4 million Common Shares were reserved for exercise and grant of stock options. At the end of 1994, there were 14,834 holders of record of Common Shares. Additionally, 21,286 employees were shareholders through participation in the Share Purchase and Investment Plan. In private placements, the Company sold 1.3 million Common Shares in December 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. The proceeds from these private placements were used primarily to fund the redemption in January 1994 of $89 million of 8.5% debentures. In March 1994, in order to partially refinance the acquisition of DCBU, the Company sold 3.8 million Common Shares to the public for aggregate net proceeds of $214 million. In November 1994, the Company issued 1.6 million Common Shares in a pooling-of-interests with Lectron Products, Inc. In May 1993, the Company's share purchase rights were redeemed at a price of 3-1/3 cents for each right, for a total payment of $2 million. The Company sponsors a Share Purchase and Investment Plan (SPIP) for United States operations under which eligible participating employees may choose to contribute up to 15% of their base pay to the SPIP. The Company matches employee contributions up to 6% of a participant's base pay as limited by United States income tax regulations. The matching contribution ranges from 25% to 100% of a participant's contribution and is invested in the Company's Common Shares. The matching contribution percentage is determined each quarter, based on net income per Common Share. In 1989, the Company prefunded, through 1999, a portion of anticipated matching contributions to the SPIP by creating an Employee Stock Ownership Plan (ESOP) under the SPIP and selling 5 million Common Shares for $150 million to the ESOP. The shares held by the ESOP have not yet been allocated to employee accounts and are included in shareholders' equity as "Unallocated ESOP Shares" and the Page 32 notes payable of the ESOP are included in long-term debt. Shares in the ESOP are released at historical cost and allocated to the employee accounts based on the ratio of the annual principal payment on the notes payable compared to the original principal amount of the notes payable. Cash dividends paid on shares in the ESOP are charged against retained earnings and, along with Company contributions, are used to repay the principal and interest due on the notes payable. ESOP shares are considered as outstanding for purposes of computing net income per Common Share. Shares in the ESOP at the end of 1994 and 1993 (in millions) were 2.7 and 3.4, respectively. Compensation expense related to the SPIP match, including the effect of shares released by the ESOP at historical cost, (in millions) was $15 in 1994, $11 in 1993 and $7 in 1992. 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: 1994 1993 ------------------- ------------------- Average Average price price per per share Shares share Shares ------- --------- ------- --------- Outstanding, January 1 $31.53 3,433,850 $28.81 3,368,670 Granted 57.71 959,390 39.34 831,730 Exercised 28.12 (348,720) 27.28 (657,353) Canceled 46.42 ( 45,361) 32.52 (109,197) --------- --------- Outstanding, December 31 $37.94 3,999,159 $31.53 3,433,850 ========= ========= Shares exercisable January 1 2,401,683 2,334,758 December 31 2,839,095 2,401,683 Shares reserved for future grants January 1 2,133,630 2,856,882 December 31 1,218,477 2,133,630 LEASE COMMITMENTS - ----------------- Future minimum rental commitments as of December 31, 1994, under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, are as follows (in millions): 1995, $42; 1996, $31; 1997, $24; 1998, $15; 1999, $12; and after 1999, $97. Rental expense in 1994, 1993 and 1992 (in millions) was $65, $43 and $45, respectively. Page 33 INCOME TAXES - ------------ Income before income taxes for the years ended December 31 follows (in millions): 1994 1993 1992 ---- ---- ---- United States $396 $214 $147 Outside the United States 92 48 34 ---- ---- ---- $488 $262 $181 ==== ==== ==== Income taxes for the years ended December 31 follows (in millions): 1994 1993 1992 ---- ---- ---- Current United States Federal $ 81 $108 $ 42 State and local 15 7 5 Outside the United States 44 30 20 ---- ---- ---- 140 145 67 Deferred United States Increase in statutory tax rate (5) Other Federal 24 (50) (14) State and local 1 (2) (1) Outside the United States Operating loss carryforwards (8) (7) (11) Reduction of valuation allowance for deferred tax assets (3) (5) Increase in statutory tax rate (2) (1) Other 3 7 ---- ---- ---- 15 (63) (26) ---- ---- ---- $155 $ 82 $ 41 ==== ==== ==== Page 34 Significant components of current and long-term deferred income taxes at December 31 follow (in millions): 1994 ------------------------------- Current Long-term Long-term assets assets liabilities ------- --------- ----------- Accruals and other adjustments Employee benefits $ 54 $228 $ (4) Inventory 15 Restructuring 20 13 Depreciation and amortization (142) (17) Other 46 7 Operating loss carryforwards 78 1 Valuation allowance (29) Other items 16 3 9 ---- ---- ---- $151 $158 $(11) ==== ==== ==== 1993 ------------------------------- Current Long-term Long-term assets assets liabilities ------- --------- ----------- Accruals and other adjustments Employee benefits $ 44 $209 $ (4) Inventory 15 Restructuring 15 13 Depreciation and amortization (140) (15) Other 38 5 Operating loss carryforwards 50 2 Valuation allowance (15) Other items 15 (10) 7 ---- ---- ---- $127 $112 $(10) ==== ==== ==== At December 31, 1994, certain subsidiaries outside the United States had tax loss carryforwards and tax credit carryovers (in millions) aggregating $162 and $15, respectively. Carryforwards of $92 million have no expiration dates and the balance expire at various dates from 1995 through 2005. The tax credit carryovers expire at various dates from 1995 through 1999. Page 35 Reconciliations of income taxes at the United States Federal statutory rate to the effective income tax rate for the years ended December 31 follow (in millions): 1994 ------------- 1993 1992 Amount Rate Rate Rate ------ ---- ---- ---- Income taxes at the United States statutory rate $171 35.0% 35.0% 34.0% State and local income taxes 14 2.8 1.5 .9 Adjustment of worldwide tax liabilities 7 1.6 1.4 (6.0) Possessions credit related to Puerto Rican operations (26) (5.2) Reduction of valuation allowance for deferred tax assets (3) (.6) (2.1) Adjustment of deferred income taxes for change in statutory rates (2) (.4) (2.3) Effective tax rate differential on earnings of consolidated subsidiaries and associate companies outside the United States (6) (1.3) .1 (3.9) Other--net (2.1) (2.2) ---- ----- ----- ----- $155 31.9% 31.5% 22.8% ==== ===== ===== ===== The Company has facilities in Puerto Rico that manufacture products for both domestic and foreign markets. These facilities operate under tax relief and other incentives that expire at various dates beginning in 2004 through 2013. The parent company has not provided income taxes on undistributed earnings of consolidated subsidiaries outside the United States of $353 million at December 31, 1994, 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 1994, 1993 and 1992 (in millions) were $109, $156 and $71, respectively. Page 36 QUARTERLY DATA - -------------- (Unaudited) Quarter ended (Millions except for ----------------------------------- per share data) Dec. 31 Sept. 30 June 30 Mar. 31 ------- -------- ------- ------- 1994 Net sales $1,605 $1,531 $1,545 $1,371 Gross margin 442 411 429 373 Percent of sales 28% 27% 28% 27% Net income 89 84 86 74 Per Common Share Net income $ 1.15 $ 1.10 $ 1.13 $ 1.01 Cash dividends paid .30 .30 .30 .30 Market price High 54-1/4 54-5/8 58-3/4 62-1/8 Low 43-7/8 45-3/4 49-7/8 50-3/8 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 Page 37 Results for 1994 reflect the acquisition of DCBU on January 31, 1994. Results for the fourth quarter of 1993 were reduced by a $55 million acquisition integration charge related to the purchase of DCBU ($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 in the first and fourth quarters, respectively ($3 million and $4 million after income tax credits, or $.05 per Common Share in each quarter). Gross margin for the second quarter of 1993 was reduced by a $9 million charge for streamlining certain Vehicle Components operations in Europe. Page 38 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 follows. Vehicle Components - ------------------ Truck Components - Heavy and medium duty mechanical and automatic transmissions; power take-offs; drive, trailer and steering axles; brakes; anti-lock brake systems; 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; specialty axle products; brakes; engine valves; hydraulic valve lifters; gear and piston pumps and motors; transaxles and steering systems; geroters; control valves and cylinders; forgings; central tire inflation systems; tire valves. 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 including motor starters, contactors, overloads and electric drives; programmable controllers, counters, man/machine interface panels and pushbuttons; photoelectric, proximity, temperature and pressure sensors; residential, molded case, air and medium voltage circuit breakers; loadcenters; safety switches; panelboards; switchboards; switchgear components; switchgear dry type transformers; busway; meter centers; portable tool switches; commercial switches; relays; vacuum interrupters; illuminated pushbuttons and panels; annunciator panels; electrically actuated valves and actuators; pressure transducers and switches. Automotive and Appliance Controls - Electromechanical and electronic controls including 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; transmission valves; speed sensitive steering systems; tone generators and chimes; lighting controls; emission control valves; remote keyless entry systems and remote actuated solenoids. Page 39 Specialty Controls - Ion implanters; engineered fasteners; golf grips; industrial clutches and brakes; automated material handling systems; automated guided vehicles and stacker cranes. The principal markets for these products are industrial, construction, 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 and radar surveillance. 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, which consist 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 (in millions), were $623 in 1994, $541 in 1993 and $491 in 1992 (10% of sales in 1994, 12% in 1993 and 1992). Page 40 Geographic Region Information
United Latin Pacific Elimin- (Millions) States Canada Europe America Region ations Totals ------ ------ ------ ------- ------ ------ ------ 1994 Net sales $4,807 $292 $912 $298 $103 $360 $6,052 Operating profit 491 30 50 9 14 594 Identifiable assets 3,098 119 636 156 57 86 3,980 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 Results for 1994 reflect the acquisition of DCBU on January 31, 1994. Operating profit in 1993 was reduced $53 million in the United States and $2 million in Canada by an acquisition integration charge related to the purchase of DCBU, and by a $9 million charge for streamlining operations 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) States Europe America Region Totals ------ ------ ------- ------ ------ 1994 $8 $15 $10 $240 $273 1993 7 13 15 169 204 1992 6 18 6 136 166 Page 41 Business Segment Information (Millions) 1994 1993 1992 ---- ---- ---- Net sales by classes of similar products Vehicle Components Truck Components $1,798 $1,504 $1,244 Passenger Car Components 616 524 542 Off-Highway Vehicle Components 414 329 307 ------ ------ ------ 2,828 2,357 2,093 Electrical and Electronic Controls Industrial and Commercial Controls 1,812 779 745 Automotive and Appliance Controls 839 735 723 Specialty Controls 437 338 308 ------ ------ ------ 3,088 1,852 1,776 Defense Systems 136 192 232 ------ ------ ------ $6,052 $4,401 $4,101 ====== ====== ====== Operating profit Vehicle Components $ 354 $ 247 $ 170 Electrical and Electronic Controls (1993 reduced by the $55 million acquisition integration charge) 239 83 85 Defense Systems 1 2 9 ------ ------ ------ 594 332 264 Interest expense (91) (75) (89) Interest income 7 8 9 General corporate expenses--net (22) (3) (3) ------ ------ ------ Income before income taxes $ 488 $ 262 $ 181 ====== ====== ====== Identifiable assets Vehicle Components $1,359 $1,230 $1,194 Electrical and Electronic Controls 2,506 1,119 1,128 Defense Systems 115 117 250 ------ ------ ------ 3,980 2,466 2,572 General corporate assets 702 802 648 ------ ------ ------ Total assets $4,682 $3,268 $3,220 ====== ====== ====== Capital expenditures Vehicle Components $ 149 $ 124 $ 93 Electrical and Electronic Controls 98 68 67 Defense Systems 5 7 14 Corporate 15 28 12 ------ ------ ------ $ 267 $ 227 $ 186 ====== ====== ====== Depreciation and amortization Vehicle Components $ 110 $ 101 $ 104 Electrical and Electronic Controls 114 69 71 Defense Systems 14 15 16 Corporate 13 11 9 ------ ------ ------ $ 251 $ 196 $ 200 ====== ====== ====== Page 42 Results for 1994 reflect the acquisition of DCBU on January 31, 1994. Operating profit of the Electrical and Electronic Controls segment in 1993 was reduced by a $55 million acquisition integration charge related to the purchase of DCBU. Operating profit of the Vehicle Components segment in 1993 was reduced by a $9 million charge for streamlining certain vehicle components operations in Europe. Page 43 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 the Company or its subsidiaries. All of the issued and outstanding capital stock of Eaton Offshore is owned directly or indirectly by Eaton. Eaton Offshore owns all of the issued and outstanding capital stock of a number of subsidiaries. These subsidiaries are engaged principally in the manufacture of fasteners, leaf spring assemblies, engine components, and electrical and electronic controls. Effective January 31, 1994, Eaton Offshore, through its subsidiaries, acquired certain of the Canadian and Brazilian operations of DCBU. On June 30, 1994, ownership of certain other assets of DCBU was transferred to a subsidiary of Eaton Offshore from a subsidiary of Eaton. Summary financial information for Eaton Offshore and its consolidated subsidiaries for the years ended December 31 follow (in millions): 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Income statement data Net sales $494 $295 $295 $165 $188 Gross profit 87 42 42 26 29 Net income 20 13 17 13 12 Balance sheet data Current assets $237 $160 $144 $124 $ 91 Net intercompany receivables (payables) (4) (15) 24 33 17 Noncurrent assets 122 109 86 42 48 Current liabilities 83 50 51 20 21 Noncurrent liabilities 107 114 115 104 73 Page 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - -------- Strong sales in 1994 resulted in the Company reporting the highest net sales, net income and net income per Common Share in its history. The strength of the year was underscored by the results of each quarter in 1994 which represented the best in the Company's history. On January 31, 1994, the Company purchased the Distribution and Control Business Unit (DCBU) from Westinghouse Electric Corporation, the largest acquisition in the Company's history. This acquisition, as discussed under "Acquisitions and Divestitures of Businesses" in the Financial Review, substantially bolstered the prospects for the Electrical and Electronic Controls segment by providing greater product depth with world class technology and by increasing product offering and distribution opportunities. This acquisition improves the balance of sales and earnings between the Electrical and Electronic Controls segment and the historically strong Vehicle Components segment. The strong sales increase was broadly based with record sales achieved in both the Vehicle Components and the Electrical and Electronic Controls segments. Each product class of these segments experienced double-digit growth in 1994 as compared to 1993. Net income for the year rose to $333 million in 1994. This represents a 92% increase compared to net income of $173 million in 1993 which was reduced by a $34 million after tax acquisition integration charge related to the purchase of DCBU and a $7 million extraordinary loss on the redemption of debentures. Net income per Common Share increased to $4.40 in 1994, a 78% increase over $2.47 (after the charges noted above) in 1993. Net income per Common Share increased by a lesser percentage than net income due to an additional 6.7 million Common Shares outstanding at year-end 1994. 1994 COMPARED TO 1993 - --------------------- NET SALES - --------- Net sales for 1994 increased 38% to $6.1 billion from $4.4 billion in 1993. The increase in sales was a reflection of the contributions of acquired businesses, as well as the improvement in North American transportation and capital goods markets. The Company expects that in 1995 the North American economy will continue to favor transportation and capital goods markets. Sales improvements were also recorded by virtually all of the Company's operations outside the United States due in part to Page 45 export of products to meet North American market demands. The economic recovery that began in the United Kingdom in the past year spread to the European continent as additional market strength was evident in Germany, France, Italy and other continental countries as indicated by the 19% sales increase in Europe over 1993. Expectations are that the Company's European businesses will continue to benefit as the recovery continues. The purchase of DCBU also expanded the Company's presence in Latin America. The combination of this acquisition and the growth in existing operations resulted in a 48% sales increase in Latin America over 1993. The Vehicle Components segment continued to experience significant growth as net sales increased to $2.8 billion for 1994, rising 20% over 1993's net sales of $2.4 billion. Although the increase in sales was driven by unprecedented levels of production of heavy trucks in North America, each product class in this segment reported an increase in excess of 17% in 1994 as compared to 1993. The heavy truck market set industry records, with North American factory sales of 226,000 units, a 7% increase over the previous record levels of 1979 and a 21% increase over 1993. Order backlogs for heavy trucks reached an all time high of 212,000 units at year-end 1994. Vehicle Components segment sales also reflect higher sales of components for sport utility vehicles, minivans and light trucks which markets showed a 20% increase in North American factory sales in 1994 over 1993. These vehicles, where the Company's component sales are particularly strong, now account for nearly half of the domestic vehicle unit sales of United States based automobile manufacturers. Passenger Car Components sales in 1994 increased substantially over 1993 as the Company benefited from the 5% increase in factory sales of passenger cars in North America and also from improved market penetration. Additionally, sales of Off-Highway Vehicle Components showed marked improvement throughout the year as a result of strong demand for hydraulic components from agricultural, construction and industrial markets worldwide. The positive outlook for the continued growth of the Vehicle Component product lines is based on increased use of heavy trucks in support of domestic manufacturing, consumer preference for minivans, light trucks and sport utility vehicles, increased production of multi-valve automobile engines, and strength of the construction and agricultural markets. The Electrical and Electronic Controls segment's net sales in 1994 rose to $3.1 billion, a 67% increase over 1993 net sales of $1.9 billion. This segment now represents more than one-half of total sales. The DCBU acquisition was the principal cause for the increase in the Industrial and Commercial Controls product class, where sales more than doubled compared to 1993. Each of the remaining product classes in this segment reported an increase in excess of 14% in 1994 as compared to 1993. These increases were a reflection of strong growth experienced in the Page 46 industrial, residential and commercial markets served by this segment. Automotive and Appliance Controls sales in 1994 increased significantly over 1993 due to improved conditions in the passenger car and light truck markets served by the Company. The current strength of the North American household appliances market in comparison to previous years and positioning with appliance manufacturers also benefited the Company. Robust sales of semiconductor equipment, included in Specialty Controls, also contributed significantly to the 1994 sales increase for this segment. Sales have risen sharply over the past two years due to increased market penetration and worldwide demand for semiconductor equipment. Market leadership permitted the Company to benefit substantially from the industry's growth to the extent that order backlogs for ion implanters are at record levels. To meet this continuing demand, a new medium current ion implanter manufacturing facility will be built in Austin, Texas in 1995. A new high energy ion implantation system was introduced in mid-year 1994, and market response, particularly in the Far East, exceeded expectations. Several factors raise expectations for continuing growth in the Electrical and Electronic Controls product lines, including broad demand for technologically advanced controls for industrial and commercial markets, ongoing strength of the United States economy, high level of capacity utilization across many industries, recovering markets in Europe and new market initiatives in the Far East. OPERATING RESULTS - ----------------- Income from operations increased 77% to $560 million in 1994 over $317 million in 1993, which was reduced by a $55 million acquisition integration charge before income tax credits related to the purchase of DCBU. This increase reflects the higher level of sales described above, including the contributions of acquired businesses, results of continuous improvement initiatives and inventory controls, efforts to maintain and improve efficiency and productivity in the face of greatly increased marketplace demand, and benefits of recent capacity and workforce rationalizations. Operating profit for the Vehicle Components segment was strong, rising 43% to $354 million (13% of sales) in 1994 over $247 million (10% of sales) in 1993. Increased profits were attributable largely to improved sales levels and also were a reflection of continuing stringent cost containment efforts as well as economies achieved through organizational rationalizations of certain businesses which better positioned operations to benefit from further growth and market opportunities in global vehicle markets. In 1993, operating profit was reduced by $9 million as a result of streamlining certain Vehicle Components operations in Europe. Page 47 Operating profit for the Electrical and Electronic Controls segment significantly improved, rising 73% to $239 million (8% of sales) from $138 million (7% of sales) in 1993, before the effect of the $55 million acquisition integration charge. The improvement in profits resulted from higher sales volumes, including contributions from acquired businesses, emphasis placed on containing and controlling costs and realization of benefits of earlier resizings. Interest expense of $91 million in 1994 increased from $75 million in 1993. This increase was primarily caused by a higher average borrowing level due to the issuance of $716 million of debt in 1994 to partially finance the acquisition of DCBU. An analysis of changes in income taxes and the effective income tax rate is presented under "Income Taxes" in the Financial Review. CHANGES IN FINANCIAL CONDITION - ------------------------------ The Company's financial condition remained strong during 1994. Net working capital increased to $744 million at year-end 1994 from $679 million at year-end 1993, with a slight decrement in the current ratio to 1.7 from 1.9 at those dates, respectively. The reduction of $245 million in short-term investments at December 31, 1994 from the end of 1993 was primarily the result of the liquidation of $170 million to partially fund the acquisition of DCBU. Additionally, the Company redeemed $89 million of 8.5% debentures through the issuance of 1.3 million Common Shares in December 1993 for aggregate net proceeds of $62 million and 800,000 Common Shares in January 1994 for aggregate net proceeds of $38 million. Accounts receivable increased by $339 million at December 31, 1994 from the end of 1993 largely due to the acquisition of DCBU and increased sales levels. The acquisition of DCBU was also the principal cause of the substantial increases in inventories, deferred income taxes, property, plant and equipment, excess of cost over net assets of businesses acquired, other assets, and current and long-term liabilities at December 31, 1994 compared to the end of 1993. Total debt, consisting of short-term, long-term and current portion of long-term debt, increased to $1.1 billion at December 31, 1994 from the end of 1993, primarily due to debt issued to finance the acquisition of DCBU. The increase in total debt in 1994 was net of the redemption in January 1994 of $89 million of 8.5% debentures. Throughout the year, cash provided by operating activities was partially used to repay debt related to business acquisitions. As previously discussed, through a private placement, the Company sold 800,000 Common Shares in January 1994 for $38 million. Page 48 Beginning in April 1995, the holder of these shares has the right to require the Company to register the shares for public sale under the Federal securities law. The Company sold 3.8 million Common Shares to the public in March 1994 for aggregate net proceeds of $214 million. In November 1994, the Company issued 1.6 million Common Shares, which are being registered under the Federal securities laws, in the pooling-of-interests with Lectron Products, Inc. Capital expenditures for 1994 were a record $267 million compared with $227 million in 1993, reflecting the Company's ongoing investment program under long-range goals to achieve improvements in product quality, manufacturing productivity and business growth. Capital spending in 1995 is anticipated to be another all-time record in order to enable the Company to enhance product quality through technology improvements, to keep pace with the strength of orders in virtually all product lines, and to achieve long-term growth prospects. Net cash provided by operating activities reached a record $522 million in 1994 compared with $435 million in 1993 and $381 million in 1992. The improvement in cash flow from increased net income and other items exceeded cash requirements to satisfy increased working capital demands, primarily the substantial increase in accounts receivable. Net cash provided by operating activities, supplemented by liquidation of short-term investments, funding from unsecured notes and other borrowings, proceeds from the sale of businesses and the issuance of Common Shares were used to fund business acquisitions, capital expenditures, cash dividends and repayment of debt. As a result of the sale of the Common Shares, notes and debentures, as well as cash flow from operations, the Company canceled a $555 million 364-day revolving credit agreement and $255 million of a $555 million five-year revolving credit agreement which had been entered into in January 1994 to provide interim financing for the acquisition of DCBU. The Company is maintaining the strength of the balance sheet and has now restored it to pre-acquisition standards in less than a year with the debt to capital ratio again below 40%. 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 requirements for capital expenditures and business expansion through niche acquisitions. The combination of DCBU with the Company's Industrial Controls and Power Distribution Operations (ICPDO) strengthened the competitive position in the Electrical and Electronic Controls segment and will provide the opportunity for significant cost savings resulting from the complementary fit of the two businesses. Substantial efficiencies are beginning to be experienced due to the combination of the two operations. The Company has a comprehensive integration plan which is focused on rationalization of product lines and manufacturing operations, integration of sales and distribution functions and reduction of Page 49 administrative expenses. The plan includes plant closures over the next few years to eliminate over-capacity. To date, the Company has closed and/or announced the closure of twenty-three facilities. The Company has also sold four facilities as a result of divestiture activities. It has also begun the relocation of several product lines as a result of the rationalization plan. The cost of the consolidation program for ICPDO locations was included in the 1993 $55 million acquisition integration charge. To date, expenditures and charges total $20 million with the remaining $35 million expected to occur primarily over the next three years. Remaining expenditures will be funded through cash flow from combined operations. For actions related to the acquired locations, such costs have been considered in the allocation of the purchase price. In the normal course of business, the Company is exposed to various financial risks including interest and foreign exchange rates. The Company has developed systems to continuously measure exposures to assure that exposures are evaluated comprehensively so that appropriate and timely action can be taken to reduce risk, if necessary. Monitoring of exposures and the evaluation of risks includes approval of derivative activities on a discrete basis by senior management. Oversight and review is performed monthly by senior management. In order to minimize the impact of potential defaults, the Company specifically limits counterparty credit exposure to prudent dollar limits. The Company's derivative activities are described in greater detail under "Debt and Other Financial Instruments" in the Financial Review. To reflect current market conditions, the discount rate used to measure the projected benefit obligations for pensions and postretirement benefits other than pensions was increased to 8.50% from 7.25%. This change had the effect of decreasing the accumulated pension benefit obligation by $140 million with an offsetting increase in the unamortized net gain. The changes in assumed rates for postretirement benefits other than pensions had the effect of decreasing the accumulated postretirement benefit obligation which offset changes in other plan provisions. The effect of the change in the discount rates on future expense for pensions and postretirement benefits other than pensions will not be material. At December 31, 1994 and 1993, 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 determination of the probability of realization of deferred tax assets include 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. The Company has manufacturing operations in Mexico, none of which are significant to overall operations. The recent devaluation of the Peso in Mexico had an immaterial adverse effect on the Page 50 Company's financial position and results of operations. The Company will continue to monitor the economic situation in Mexico. Operations of the Company involve the use, disposal and clean-up 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 financial condition. To enhance shareholder value and to avoid dilution of earnings per share resulting from the exercise of stock options by employees, the Company's Board of Directors authorized the purchase of up to five million Common Shares. Under the Board's authorization, the Company may purchase the shares over a five year period; however, only a maximum of 1.5 million shares can be purchased in any one year. 1993 COMPARED TO 1992 - --------------------- NET SALES - --------- Net sales for 1993 increased by 7% to $4.4 billion from $4.1 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 United States economic recovery. The improvement in North America more than offset effects of the continued deep European recession. In North America, certain markets, which had been sluggish through most of 1993, showed sales improvements in the fourth quarter. Vehicle Components segment net sales increased to $2.4 billion for 1993, rising 13% over 1992 sales of $2.1 billion. The improvement was largely due to significant growth in sales of truck components, following the best year for factory sales of heavy trucks in North America since 1979. 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 $1.9 billion compared to $1.8 billion in 1992. The improvement was largely due to increased sales of industrial and commercial controls and specialty controls. Strong North American markets for automotive and appliance controls were largely offset, however, by continued weakness in corresponding European markets due to economic recession and the negative impact of foreign currency exchange rate fluctuations. Page 51 Rising demand for portable tools, factory equipment and residential housing drove the increase in sales of industrial and commercial controls. Sales of 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 - ----------------- Income from operations increased 33% to $317 million in 1993 over $238 million in 1992. This increase was due to significant sales growth as well as benefits achieved through ongoing cost containment and productivity improvements. This improvement was achieved in spite of a $55 million acquisition integration charge related to the purchase of DCBU and a $9 million charge, included in cost of products sold in 1993, for streamlining certain vehicle components operations in Europe. 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 charge recorded in 1993 for streamlining certain European operations. The improvement was largely a result of improved markets 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 economies achieved through capacity and workforce rationalizations of certain businesses, which 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. The improved segment profit picture was partially due to sales growth experienced in certain controls markets, but was also a clear reflection of continuing emphasis placed on containing and controlling costs and realization of anticipated benefits of earlier capacity and workforce rationalization efforts. The depressed European economy negatively impacted controls businesses, particularly automotive and appliance controls. Profit for this segment was reduced by a $55 million pretax charge recorded in December 1993 for integration of ICPDO product lines and operations with DCBU to form the new Cutler-Hammer business unit. 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. Page 52 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 an interest in a limited partnership 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, new accounting standards for postretirement benefits other than pensions and for income taxes were adopted, which together reduced net income by $268 million due to the recognition of the cumulative effect for prior years. Page 53 Eaton Corporation Five-Year Consolidated Financial Summary
For the year 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------- (Millions except for per share data) Net sales $6,052 $4,401 $4,101 $3,659 $4,083 Income before extraordinary item and cumulative effect of accounting changes 333 180 140 74 179 Extraordinary item (7) Cumulative effect of accounting changes Postretirement benefits other than pensions (274) Income taxes 6 Net income (loss) 333 173 (128) 74 179 Per Common Share Income before extraordinary item and cumulative effect of accounting changes $ 4.40 $ 2.57 $ 2.03 $ 1.09 $ 2.53 Extraordinary item (.10) Cumulative effect of accounting changes Postretirement benefits other than pensions (3.97) Income taxes .09 Net income (loss) 4.40 2.47 (1.85) 1.09 2.53 Cash dividends paid 1.20 1.15 1.10 1.10 1.05 At the year-end - --------------------------------------------------------------------------------------------------- Total assets $4,682 $3,268 $3,220 $3,184 $3,140 Long-term debt 1,053 649 833 795 755 Total debt 1,089 773 882 927 815 Shareholders' equity 1,680 1,105 948 1,153 1,140 Results for 1994 reflect the acquisition of DCBU on January 31, 1994. Income in 1993 was reduced by a $55 million acquisition integration charge related to the purchase of DCBU ($34 million after income tax credits, or $.49 per Common Share). Income in 1993 was reduced by an extraordinary loss of $11 million for the redemption of debentures ($7 million after income tax credits, or $.10 per Common Share). Income in 1991 was reduced by a restructuring charge of $39 million ($25 million after income tax credits, or $.38 per Common Share). Page 1 Eaton Corporation 1994 Annual report on Form 10-K Item 14 (c) Listing of Exhibits Filed 3 Amended Articles of Incorporation adopted on April 27, 1994 - Incorporated by reference to the Company's Form 8-K Report dated May 19, 1994 and Amended Regulations (as amended and restated as of April 27, 1988, filed as a separate section of this report) 4 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) 10 Material contracts 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) - Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (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 by reference to the Company's definitive proxy statement dated March 18, 1991 (e) The following are incorporated 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 by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1990: (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) Page 3 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) 27 Financial Data Schedule (filed as a separate section of this report)
EX-3 2 ARTICLES OF INCORPORATION Page 1 Eaton Corporation 1994 Annual Report on Form 10-K Item 14 (c) Exhibit 3 Amended Regulations (as Amended and Restated as of April 27, 1988) ARTICLE I SHAREHOLDERS Section 1. Annual Meeting. The annual meeting of the shareholders shall be held on the fourth Wednesday in April in each year, if not a legal holiday, and if a legal holiday, then on the next Wednesday not a legal holiday, for the purpose of electing directors and of considering reports to be laid before said meeting. The annual meeting shall be held at such hour and place as the Board of Directors may designate and cause to be stated in the notice of such meeting given to shareholders. Upon due notice there may also be considered and acted upon at an annual meeting any matter which could properly be considered and acted upon at a special meeting, in which case and for which purpose the annual meeting shall also be considered as, and shall be, a special meeting. In the event the annual meeting is not held or if directors are not elected thereat, a special meeting may be called and held for that purpose. Section 2. Special Meetings. Special meetings of the shareholders may be called by the Chairman, President or a Vice President, or by a majority of the members of the Board of Directors acting with or without a meeting, or by the persons who hold not less than fifty per cent of all the shares outstanding and entitled to be voted on the proposal to be submitted at said meeting. Upon request in writing delivered either in person or by registered or certified mail, return receipt requested, to the President or Secretary by any persons entitled to call a meeting of shareholders, it shall be the duty of such President or Secretary forthwith to cause to be given to the shareholders entitled thereto notice of such meeting to be held on a date not less than seven nor more than sixty days after the receipt of such request, as such officer may fix. If such notice is not given within fifteen days after the delivery or mailing of such request, the persons calling the meeting may fix the time of meeting and give notice thereof as in the manner hereinafter provided, or cause such notice to be given by any designated representative. Section 3. Place of Meetings. Any meeting of the shareholders of the Corporation may be held either within or without the State of Ohio. Page 2 Section 4. Notice of Meetings. Written notice stating the time, place, and purposes of a meeting of the shareholders shall be given either by personal delivery or by mail not less than seven nor more than sixty days before the date of the meeting to each shareholder of record entitled to notice of the meeting by or at the direction of the President or the Secretary or any other person required or permitted by these Regulations to give such notice. If mailed, such notice shall be addressed to the shareholder at his address as it appears on the records of the Corporation. Notice of adjournment of a meeting need not be given if the time and place to which it is adjourned are fixed and announced at such meeting. Section 5. Waiver of Notice. Notice of the time, place, and purposes of any meeting of shareholders may be waived in writing, either before or after the holding of such meeting, by any shareholder, which writing shall be filed with or entered upon the records of the meeting. The attendance of any shareholder at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting. Section 6. Shareholders Entitled to Notice and to Vote. The Board of Directors may fix a future time not exceeding sixty days preceding any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of and to vote at any such meeting or any adjournments thereof, and, in such case, only shareholders of record at the time so fixed shall be entitled to notice of and to vote at such meeting or any adjournments thereof. The Board of Directors may close the books of the Corporation against transfer of shares during the whole or any part of such period, including the date of the meeting of the shareholders and the period ending with the date, if any, to which adjourned. If the Board of Directors shall not fix a record date or close the books against transfer of shares as aforesaid, the shareholders of record at the date next preceding the day of the giving of notice of the meeting shall be entitled to notice thereof and the shareholders of record at the date next preceding the day of the meeting shall be entitled to vote thereat. A shareholder of record on the record date or date of closing the books of the Corporation against transfers of shares fixed as aforesaid, shall not lose his right to vote at such meeting by reason of not being a shareholder at the date of such meeting. At any meeting of shareholders a list of shareholders entitled to vote, alphabetically arranged, showing the addresses of, and the number and classes of shares held by, each shareholder on the date fixed for closing the books Page 3 against transfers, or on the record date fixed as hereinbefore provided (or if no such date has been fixed, then on the date next preceding the day of the meeting), shall be produced on the request of any shareholder and such list shall be prima facie evidence of the ownership of shares and of the right of the shareholders to vote when certified by the Secretary or by the agent of the Corporation having charge of the transfers of the shares. Section 7. Voting. Except when votes are cumulated in the election of directors as hereinafter provided and except as otherwise provided in the Articles, every shareholder of record at the time fixed as provided in these Regulations for the determination of the shareholders entitled to vote at such meeting shall be entitled to one vote on each proposal submitted to the meeting for each share standing in said shareholder's name at the time so fixed on which no installment is overdue and unpaid. At a meeting of shareholders at which directors are to be elected, only persons nominated as candidates shall be eligible for election as directors. At all elections of directors the candidates receiving the greatest number of votes shall be elected. If notice in writing is given by any shareholder to the President, a Vice President, or the Secretary, not less than forty-eight hours before the time fixed for holding a meeting of the shareholders for the purpose of electing directors if notice of such meeting shall have been given at least ten days prior thereto, and otherwise not less than twenty-four hours before such time, that he desires that the voting at such election shall be cumulative, and if an announcement of the giving of such notice is made upon the convening of the meeting by the Chairman or Secretary or by or on behalf of the shareholder giving such notice, each shareholder shall have the right to cumulate such voting power as he possesses and to give one candidate as many votes as the number of directors to be elected multiplied by the number of his votes equals, or to distribute his votes on the same principle among two or more candidates, as he sees fit. Section 8. Proxies. A. A person who is entitled to attend a shareholders' meeting, to vote thereat, or to execute consents, waivers, or releases, may be represented at such meeting or vote thereat, and execute consents, waivers, and releases, and exercise any of his other rights, by proxy or proxies appointed by a writing signed by such person. B. A telegram or cablegram appearing to have been transmitted by such person, or a photographic, Page 4 photostatic, or equivalent reproduction of a writing, appointing a proxy shall be a sufficient writing. C. No appointment of a proxy shall be valid after the expiration of eleven months after it is made unless the writing specifies the date on which it is to expire or the length of time it is to continue in force. D. Unless the writing appointing a proxy otherwise provides: (1) Each proxy shall have the power of substitution and, when three or more proxies are appointed, a majority of them or of their substitutes may appoint one or more substitutes to act for all; (2) If more than one proxy is appointed, then (a) with respect to voting or executing consents, waivers, or releases, or objections to consents at a shareholders' meeting, a majority of such proxies as attend the meeting, or if only one attends then that one, may exercise all the voting and consenting authority thereat; and if one or more attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such authority with respect to an equal number of shares; (b) with respect to exercising any other authority, a majority may act for all. (3) A revocable proxy shall not be revoked by the death or incompetency of the maker unless, before the vote is taken or the authority granted is otherwise exercised, written notice of such death or incompetency is received by the Corporation from the executor or administrator of the estate of such maker or from the fiduciary having control of the shares in respect of which the proxy was appointed; (4) The presence at a meeting of the person appointing a proxy shall not revoke the appointment. Without affecting any vote previously taken, the person appointing a proxy may revoke a revocable appointment by a later appointment received by the Corporation or by giving notice of revocation to the Corporation in writing or in open meeting. Any signature on such instrument approved by the inspectors hereinafter provided for as genuine, shall be deemed to be the signature of the shareholder whose name is signed thereon, and the falsity of such signature shall in no manner impair the validity of such instrument or of any vote or action taken at such meeting, provided that such shareholder shall not have previously filed with the Secretary of the Corporation his authorized signature guaranteed by a reputable bank or trust company. Page 5 Section 9. Organization of Meeting. The Board of Directors in advance of any meeting of shareholders may appoint inspectors to act at such meeting or any adjournment thereof. If inspectors of elections are not so appointed, the officer or person acting as chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment. In case any person appointed as inspector shall fail or refuse to appear or to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting, or at the meeting by the officer or person acting as chairman. If there are three or more inspectors, the decision, act, or certificate of a majority of them shall be effective in all respects as the decision, act, or certificate of all. The inspectors of election shall determine the number of shares outstanding, the voting rights with respect to each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies. They shall also receive votes, ballots, assents, consents, waivers and releases, hear and determine all challenges and questions in any way arising in connection with the vote, count and tabulate all votes, assents, consents, waivers and releases, determine and announce the result, and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. No inspector whether appointed by the Board of Directors or by the officer or person acting as chairman need be a shareholder. On request, the inspectors shall make a report in writing of any challenge, question, or matter determined by them and execute a certificate of any fact found by them. The certificate of the inspectors shall be prima facie evidence of the facts stated therein and of the vote as certified by them. Section 10. Quorum. The shareholders present in person or by proxy at any meeting of shareholders shall constitute a quorum for such meeting, but no action required by law, the Articles, or these Regulations to be authorized or taken by the holders of a designated proportion of the shares of any particular class or of each class, may be authorized or taken by a lesser proportion. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time. Section 11. Action Without Meeting. Any action which may be authorized or taken at a meeting of shareholders may be authorized or taken without a meeting in a writing or writings signed by all of the shareholders who would be entitled to notice of a meeting of the shareholders held Page 6 for such purpose, which writing or writings shall be filed with or entered upon the records of the Corporation. Section 12. Accounts and Reports to Shareholders. The Board of Directors shall cause to be kept and maintained adequate, correct and complete books and records of account, together with minutes of the proceedings of the incorporators, shareholders, directors, and committees of the directors, and records of the shareholders showing their names and address and the number and class of shares issued or transferred of record to or by them from time to time. Any shareholder of the Corporation, upon written demand stating the specific purpose thereof, shall have the right to examine in person or by agent or attorney at any reasonable time and for any reasonable and proper purpose, the Articles of the Corporation, its Regulations, its books and records of account, minutes, the aforesaid records of shareholders, and voting trust agreements, if any, on file with the Corporation, and to make copies or extracts thereof. At the annual meeting of shareholders, or the meeting held in lieu thereof, the officers of the Corporation shall lay before the shareholders a financial statement consisting of: A. A balance sheet containing a summary of the assets, liabilities, stated capital, and surplus (showing separately any capital surplus arising from unrealized appreciation of assets, other capital surplus, and earned surplus) of the Corporation as of the date not more than four months before such meeting; if such meeting is an adjourned meeting, said balance sheet may be as of a date not more than four months before the date of the meeting as originally convened; B. A statement of profit and loss and surplus, including a summary of profits, dividends paid, and other changes in the surplus accounts of the Corporation for the period commencing with the date marking the end of the period for which the last preceding statement of profit and loss required under this section was made and ending with the date of said balance sheet. The financial statement shall have appended thereto a certificate signed by the President or a Vice President or the Treasurer or an Assistant Treasurer of the Corporation or by a public accountant or firm of public accountants to the effect that the financial statement presents fairly the position of the Corporation and the results of its operations in conformity with generally accepted accounting principles applied on a basis consistent for the period Page 7 covered thereby, or such other certificate as is in accordance with sound accounting practice. Upon the written request of any shareholder made within sixty days after notice of any such meeting has been given, the Corporation, not later than the fifth day after receiving such request or the fifth day before such meeting, whichever is the later date, shall mail to such shareholder a copy of such financial statement. ARTICLE II BOARD OF DIRECTORS Section 1. Powers, Qualification. All the capacity of the Corporation shall be vested in and all its authority except as otherwise provided by law or by the Articles in regard to action required to be taken, authorized or approved by the shareholders, shall be exercised by the Board of Directors, which shall manage and conduct the business of the Corporation. In discharging his duties, a director may, when acting in good faith, rely upon the books and records of the Corporation, upon reports made to the Corporation by an officer or employee or by any other person selected for the purpose with reasonable care by the Corporation, and upon financial statements or written reports prepared by an officer or employee of the Corporation in charge of its accounts or certified by a public accountant or firm of public accountants. Each person elected a director of the Corporation shall within 60 days from the date of his election qualify as such by either (a) accepting in writing his election as a director, or (b) being present and acting as a director in a duly called meeting of the Board of Directors. Section 2. Election, Number and Term of Office. Directors shall be elected at the annual meeting of shareholders or, if not so elected, at a special meeting of the shareholders called for that purpose. The Board of Directors shall be composed of fourteen members and shall be divided into three classes. The first and second classes shall consist of five members each, and the third class shall consist of four members. Directors elected at the first election for the first class shall hold office for a term of one year from the date of their election; directors elected at the first election for the second class shall hold office for a term of two years from the date of their election; and directors elected at the first election for the third class shall hold office for a term of three years from the date of their election. In each instance such directors shall hold office until their Page 8 successors are chosen and qualified. At each annual election, the successors to the directors of each class whose term shall expire in that year shall be elected to hold office for a term of three years from the date of their election and until their successors are chosen and qualified. All directors, for whatever terms elected, shall hold office subject to provisions of law, the Amended Articles and the Amended Regulations as to removals and the creation of vacancies. The number of directors of any such class may be fixed or changed by resolution adopted by the vote of the shareholders entitled to exercise 66-2/3% of the voting power of the shares represented at a meeting called to elect directors in person or by proxy at such meeting and entitled to vote at such election, but in no event shall the number of directors of any class be less than three. No reduction in the number of directors shall have the effect of removing any director prior to the expiration of his term of office. In the event of any increase in the number of directors of any class, any additional directors elected to such class shall hold office for a term coincident with the term of such class. The number of directors may also be changed by the directors by resolution adopted by the vote of a majority of the directors present at a meeting at which a quorum is present. Section 3. Removal of Directors and Filling Vacancies. The office of a director shall become vacant if he dies or resigns. The Board of Directors may remove any director and thereby create a vacancy in the Board: 1. If he be declared of unsound mind by an order of court, or if he is adjudicated a bankrupt; 2. If he does not qualify within sixty days as provided by these Regulations. Any vacancy in the Board of Directors may be filled for the unexpired term by the remaining director or directors, though less than a majority of the whole Board, by a vote of a majority of their number. Within the meaning of this section a vacancy or vacancies shall be deemed to exist in case the shareholders shall increase the authorized number of directors but shall fail at the meeting at which such increase is authorized, or an adjournment thereof, to elect the additional directors so provided for, or in case the shareholders fail at any time to elect the whole authorized number of directors. A vacancy or vacancies shall also be Page 9 deemed to exist within the meaning of this section in case the directors shall increase the authorized number of directors. All the directors, or all the directors of a particular class, or any individual director, may be removed from office by the vote of the holders of 66-2/3% of the voting power entitling them to elect directors in place of those to be removed, provided that unless all the directors, or all the directors of a particular class, are removed, no individual director shall be removed in case the votes of a sufficient number of shares are cast against his removal which, if cumulatively voted at an election of all the directors, or all the directors of a particular class, as the case may be, would be sufficient to elect at least one director. In case of any such removal, a new director may be elected at the same meeting for the unexpired term of each director removed. Failure to elect a director to fill the unexpired term of any director removed shall be deemed to create a vacancy in the board. Section 4. Meetings. Meetings of the Board of Directors may be held at any time within or without the State of Ohio. Such meetings may be held through any communications equipment if all persons participating can hear each other and participation in a meeting pursuant to this paragraph shall constitute presence at such meeting. Regular meetings of the Board of Directors shall be held immediately after the annual meetings of the shareholders and at such other stated times as may be fixed by the Board of Directors, and such regular meetings may be held without further notice. Special meetings of the Board of Directors may be called by the Chairman of the Board or by the President of the Corporation, or by not less than one-third of the directors. Notice of the time and place of such meetings shall be served upon or telephoned to each director at least twenty-four hours, or given by mail, telegram or cablegram to each director at his address as shown by the books of the Corporation at least forty-eight hours prior to the time of the meeting. Such notice may be waived in writing by any director, either before or after the meeting. Attendance at the meeting by a director without protesting, prior to or at the commencement of the meeting, the lack of proper notice, shall constitute waiver of such notice by such director. Section 5. Quorum. A majority of the whole authorized number of directors is necessary to constitute a quorum for a meeting of the directors, except that a majority of the directors in office constitutes a quorum for filling a vacancy in the Board. The act of a majority of the directors present at a meeting at which a quorum is present Page 10 is the act of the Board, unless the act of a greater number is required by the Articles or these Regulations. Section 6. Action Without Meeting. Any action which may be authorized or taken at a meeting of the Board of Directors may be authorized or taken without a meeting with the affirmative vote or approval of, and in a writing or writings signed by all of the directors, which writing or writings shall be filed with or entered upon the records of the Corporation. Section 7. Fixing of Record Date. A. For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to: (1) receive notice of or to vote at a meeting of shareholders; (2) receive payment of any dividend or distribution; (3) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to contract rights with respect thereto; or (4) participate in the execution of written consents, waivers or releases, the directors may fix a record date which shall not be a date earlier than the date on which the record date is fixed and, in the cases provided for in clauses (1), (2), and (3) above, shall not be more than sixty days preceding the date of the meeting of the shareholders, or the date fixed for the payment of any dividend or distribution, or the date fixed for the receipt or the exercise of rights, as the case may be. B. If a meeting of the shareholders is called by persons entitled to call the same, or action is taken by shareholders without a meeting, and if the directors fail or refuse, within such time as the persons calling such meeting or initiating such other action may request, to fix a record date for the purpose of clause (1) or (4) of division A of this section, then the persons calling such meeting or initiating such other action may fix a record date for such purpose, subject to the limitations set forth in division A of this section. C. The record date for the purpose of clause (1) of division A of this section shall continue to be the record date for all adjournments of such meeting, unless the directors or the persons who shall have fixed the original record date shall, subject to the limitations set forth in division A of this section, fix another date, and in case a new record date is so fixed, notice thereof and of the date Page 11 to which the meeting shall have been adjourned shall be given to shareholders of record as of said date in accordance with the same requirements as those applying to a meeting newly called. D. The directors may close the share transfer books against transfers of shares during the whole or any part of the period provided for in division A above, including the date of the meeting of the shareholders and the period ending with the date, if any, to which adjourned. E. If no record date is fixed therefor, the record date for determining the shareholders who are entitled to receive notice of, or who are entitled to vote at, a meeting of shareholders, shall be the date next preceding the day on which notice is given, or the date next preceding the day on which the meeting is held, as the case may be. F. The record date for a change of shares shall be the time when the certificate of amendment or of amended Articles effecting such change is filed in the office of the Secretary of State. Section 8. Committees. The Board of Directors may from time to time create an Executive Committee, a Finance Committee and such other committees as it may deem to be advisable and may delegate to any such committee any of the powers of the Board of Directors, other than that of filling vacancies among the directors or in any committee of the directors. Any such committee shall be composed of not less than three members of the Board of Directors to serve until otherwise ordered by the Board of Directors and shall act only in the interval between meetings of the Board of Directors and shall be subject at all times to the control and direction of the Board of Directors. The Board of Directors may appoint one or more directors as alternate members of any such committee, who may take the place of any absent member or members at any meeting of such committee. Any such committee may act by a writing or writings signed by all its members or by a majority of any such committee present at a meeting at which a quorum is present. Meetings of any committee may be held at any time within or without Ohio and through any communications equipment if all persons participating can hear each other. Participation through use of communications equipment shall constitute presence at the meeting. A majority of the whole authorized number of members of any such committee is necessary to constitute a quorum for a meeting of that committee. Any act or authorization of an act by any such committee within the authority delegated to it shall be as effective for all purposes as the act or authorization of the Board of Directors. Page 12 ARTICLE III OFFICERS Section 1. Officers. The Corporation shall have a Chairman of the Board of Directors and a President (both of whom shall be members of the Board of Directors), a Secretary, a Treasurer and a Controller, all of whom shall be elected by the Board of Directors. The Corporation may also have one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers as the Board may deem advisable, all of whom shall be elected by the Board of Directors. All officers shall 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 shall be subject to removal, with or without cause, at any time by the vote of a majority of the Board of Directors. The election of an officer for a given term, or a general provision in the Articles or these Regulations with respect to term of office, shall not be deemed to create contract rights. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law or by the Articles or these Regulations to be executed, acknowledged or verified by two or more officers. Section 2. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors, shall supervise and direct the Corporation's affairs and the administration thereof by the other executive officers of the Corporation and shall have such other powers and duties as may be assigned to or vested in him by the Board of Directors. Section 3. The President. The President, in the absence of the Chairman of the Board, shall preside at all meetings of the shareholders and of the Board of Directors. Subject to the direction of the Board of Directors, the Executive Committee and the Chairman of the Board, he shall have general charge and authority over the business of the Corporation. He shall from time to time make such reports of the business of the Corporation as the Board of Directors may require. The President shall perform such other duties and have such powers as are assigned to or vested in him by the Board of Directors. Section 4. The Vice President. The Vice President, or, if there be more than one, the Vice Presidents, in order of their seniority by designation (or if not designated, in order of their seniority of election), shall perform the duties of the President in his absence or during his disability to act. The Vice Presidents shall have such Page 13 other duties and powers as may be assigned to or vested in them by the Board of Directors or the Executive Committee. Section 5. The Secretary. The Secretary shall issue notices of all meetings for which notice is required to be given, shall keep the minutes of all meetings, shall have charge of the corporate seal and corporate record books, shall cause to be prepared for each meeting of shareholders the list of shareholders referred to in Section 6 of Article I hereof, and shall have such other powers and perform such other duties as are assigned to or vested in him by the Board of Directors or the Executive Committee. Section 6. The Treasurer and the Controller. (a) The Treasurer shall be the financial officer of the Corporation. He shall have the custody of all moneys and securities of the Corporation and shall keep adequate and correct accounts of the Corporation's receipts and disbursements, including records of customers' credits and collections. The funds of the Corporation shall be deposited in the name of the Corporation by the Treasurer in such depositories as the Board of Directors may from time to time designate. He shall have such other powers and perform such other duties as are assigned to or vested in him by the Board of Directors or the Executive Committee. (b) The Controller shall be the accounting officer of the Corporation. He shall keep adequate and correct accounts of the Corporation's business transactions (except those kept by the Treasurer as herein provided), including accounts of its assets, liabilities, gains, losses, stated capital and shares. He shall prepare and lay before the shareholders' meetings the data referred to in Section 12 of Article I hereof, and shall mail copies of such data as required in said section to any shareholder requesting same. He shall have such other powers and perform such other duties as are assigned to or vested in him by the Board of Directors or the Executive Committee. Section 7. Other Officers. Other officers of the Corporation shall have such powers and duties as may be assigned to or vested in them by the Board of Directors or the Executive Committee. Section 8. Authority to Sign. Share certificates shall be signed as hereinafter in Article V provided. Except as otherwise specifically provided by the Board of Directors or the Executive Committee of the Corporation, checks, notes, drafts, contracts or other instruments authorized by the Board of Directors or the Executive Committee may be executed and delivered on behalf of the Corporation by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Page 14 Section 9. Duties of Officers may be Delegated. In case of the absence or disability of an officer of the Corporation, or for any other reason that may seem sufficient to the Board, the Board of Directors may, for the time being, delegate his powers and duties to any other officer or to any director. ARTICLE IV SALARIES, COMPENSATION AND INDEMNIFICATION Section 1. Salaries and Compensation. The Board of Directors may fix the pay of all officers. The Board may also allow compensation to members of any committee. The Board may vote compensation to any director for attendance at meetings or for any special services. Section 2. Indemnification. (a) The Corporation shall indemnify any director, officer or employee and any former director, officer or employee of the Corporation and any such director, officer or employee who is or has served at the request of the Corporation as a director, officer or trustee of another corporation, partnership, joint venture, trust or other enterprise (and his heirs, executors and administrators) against expenses, including attorney's fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such director, officer, employee or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to the full extent permitted by applicable law. The indemnification provided for herein shall not be deemed to restrict the right of the Corporation to indemnify agents and others to the extent not prohibited by law. The Corporation may purchase and maintain insurance or furnish similar protection on behalf of or for any person who is or was a director, officer, employee or agent of the Corporation, or any person who is or was serving at the request of the Corporation as a director, officer, trustee, employee or agent of another corporation, joint venture, partnership, trust or other enterprise against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such. (b) The Corporation is expressly authorized to enter into any indemnification or insurance agreements with or on the behalf of any person who is or was a director, officer, employee or designated agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or designated agent of another corporation, partnership, joint venture, trust or other enterprise, in accordance with the terms of this Article IV or the laws of the State of Ohio. Such agreements may include, but are not limited to, agreements providing for Page 15 indemnification or the advancement of expenses, agreements providing for insurance, indemnification or the advancement of expenses by way of self-insurance, whether or not funded through the use of a trust, escrow agreement, letter of credit, or other arrangement, in accordance with subsection (a) of this Section 2, and agreements providing for insurance of indemnification through the commercial insurance market. ARTICLE V CERTIFICATES Section 1. Certificates. Each shareholder of the Corporation shall be entitled to a certificate signed by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, evidencing the number and class of paid-up shares held by him in the Corporation, but no certificate for shares shall be executed or delivered until such shares are fully paid, provided, however, that when any such certificate is countersigned by an incorporated transfer agent or registrar, the signature of any such officer upon such certificate may be facsimile, engraved, stamped or printed. In case any officer or officers, who shall have signed, or whose facsimile signature shall have been engraved, stamped or printed on any certificate or certificates for shares, shall cease to be such officer or officers of the Corporation, because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates, if authenticated by the endorsement thereon of the signature of an incorporated transfer agent or registrar, shall nevertheless be conclusively deemed to have been adopted by the Corporation by the use and delivery thereof and shall be effective in all respects when delivered. Such certificate shall be in such form as shall be approved by the Board of Directors and shall contain such statements as are required by the Ohio General Corporation Law. Section 2. Transfer and Registration. The Board of Directors shall have authority to make such rules and regulations, not inconsistent with law, the Articles or these Regulations, as it deems expedient concerning the execution, delivery, transfer and registration of share certificates and may appoint incorporated transfer agents and registrars thereof. Transfer books may be kept in any state of the United States or in any foreign country for the purpose of transferring shares issued by the Corporation; but if no Page 16 transfer agent is appointed to act in this State, the Corporation shall keep an office in this State at which shares shall be transferable, and at which it shall keep books in which shall be recorded the names and addresses of all shareholders, and all transfers of shares. Section 3. Substituted Certificates. Any person claiming a share certificate to have been lost, destroyed or stolen, shall make an affidavit or affirmation of that fact, and if required by the Board of Directors shall advertise the same in such manner as the Board of Directors may require, and shall give the Corporation, its transfer agents and its registrars a bond of indemnity, in form and with one or more sureties satisfactory to the Board or any one designated by the Board with authority to act thereon, whereupon a new certificate may be executed and delivered of the same tenor and for the same number of shares as the one alleged to have been lost, destroyed or stolen. ARTICLE VI VOTING UPON STOCKS Section 1. Voting Upon Stocks. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President, a Vice President, the Secretary or the Treasurer of the Corporation, or a proxy appointed by any such officer, shall have full power and authority on behalf of the Corporation to attend, to act and to vote at any meeting of shareholders and to execute consents, waivers and releases relating to the affairs of any other corporation, domestic or foreign, for profit or non-profit, in which the Corporation may hold stock or membership, and at any such meeting shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock and which as the owner thereof the Corporation would have possessed and might have exercised if present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. ARTICLE VII CORPORATE SEAL Section 1. Corporate Seal. The seal of the Corporation shall be circular in form with the name of the Corporation followed by the words "Cleveland, Ohio" stamped around the margin, and the words "Corporate Seal" stamped across the center. Page 17 ARTICLE VIII AMENDMENTS Section 1. Amendments. The Regulations of the Corporation may be amended or added to by the affirmative vote of the shareholders of record entitled to exercise a majority of the voting power on such proposal or, without a meeting, by the written consent of the shareholders of record entitled to exercise 66-2/3% of the voting power on such proposal. Notwithstanding anything to the contrary contained herein, to amend, repeal or add to Article I -- Section 2, Article II -- Section 2, the last paragraph of Article II --Section 3 or this paragraph of Article VIII -- Section 1, shall require the affirmative vote at a meeting of the shareholders of record entitled to exercise 66-2/3% of the voting power on such proposal, unless such action is recommended by two-thirds of the members of the Board of Directors. If an amendment is adopted by written consent without a meeting of the shareholders, it shall be the duty of the Secretary to enter the amendment in the records of the Corporation and to mail a copy of such amendment to each shareholder of record who would be entitled to vote thereon and did not participate in the adoption thereof. CERTIFICATE The undersigned, the duly elected, qualified and acting Secretary of Eaton Corporation, an Ohio corporation having its principal office in Cleveland, Ohio, hereby certifies that the foregoing is a true and correct copy of the Amended Regulations of said corporation which were duly adopted by the affirmative vote of the shareholders of record of said corporation entitled to exercise a majority of the voting power on such proposal, to supersede and take the place of the theretofore existing Amended Regulations, at the Annual Meeting of said shareholders on April 27, 1988, and that the foregoing Amended Regulations are in full force and effect, without amendment or modification, on the date of this certificate. Dated: April 27, 1988 ------------------------------- Secretary of Eaton Corporation EX-11 3 EARNINGS PER SHARE Page 1 Eaton Corporation 1994 Annual Report on Form 10-K Item 14(c) Exhibit 11 Computations of Net Income per Common Share Year ended December 31 ---------------------------- (Millions except for per share amounts) 1994 1993 1992 ------ ------ ------ Average number of Common Shares outstanding 75.6 69.8 68.9 Income before extraordinary item and cumulative effect of accounting changes $ 333 $ 180 $ 140 Per share amount 4.40 2.57 2.03 ======= ======= ======= 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) $ 333 $ 173 $ (128) Per share amount 4.40 2.47 (1.85) ======= ======= ======= EX-21 4 SUBSIDIARIES Page 1 Eaton Corporation 1994 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, 1994 are as follows: Percentage of voting securities owned (by Where Eaton unless otherwise Consolidated subsidiaries (A) organized indicated) - ------------------------------- ----------- ------------------------ American Nucleonics Corporation California 100% AIL Systems Inc. AIL Systems Inc. Delaware 94.993% AIL Systems Holding Company BAC Investments Ltd. Delaware 100% CEEC Incorporated Delaware 100% Cutler-Hammer Inc. CEEC Investments Incorporated Delaware 100% CEEC Incorporated CEEC Holdings Incorporated Delaware 100% CEEC Investments Incorporated Challenger Electrical Equipment Corp. Delaware 100% CEEC Holdings Incorporated Challenger Pageland Inc. Delaware 100% Challenger Electrical Equipment Corp. Challenger Electrical Materials, Inc. Delaware 100% Challenger Electrical Equipment Corp. Cutler-Hammer de Puerto Rico Inc. Delaware 100% Cutler-Hammer (Partnership) Cutler-Hammer Inc. 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 Eaton Truck Systems, Inc. Delaware 100% Lectron Products, Inc. Indiana 100% Lectron Products, Inc. Michigan 100% AIL Systems Holding Company Nevada 100% Page 2 Kenway Handling Systems, Inc. New York 100% Eaton-Kenway, Inc. Cutler-Hammer (Partnership) Ohio 99% 1% Cutler-Hammer Inc. Cutler-Hammer de Puerto Rico Company (Partnership) Ohio 99% Cutler-Hammer de Puerto Rico Inc. 1% Cutler-Hammer Inc. Cutler-Hammer Products (Partnership) Ohio 99% 1% Cutler-Hammer Inc. Eaton Airflex Division, Inc. Ohio 100% Eaton Consulting Services Corporation Ohio 100% Eaton IDT, Inc. Ohio 100% Cutler-Hammer Products Eaton-Kenway, Inc. Ohio 100% Eaton Leasing Corporation Ohio 100% Eaton Properties Corporation Ohio 100% Eaton Leasing Corporation 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 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% .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% Page 3 Cutler-Hammer do Brasil Ltda. Brazil 99.924% Eaton Services Limited .0715% Cutler-Hammer Inc. .0007% Cutler-Hammer do Brasil Servicos Ltda. Cutler-Hammer do Brasil Servicos Ltda. Brazil 99.99% Eaton Services Limited .01% Cutler-Hammer Inc. Eaton Controles Ltda. Brazil 51% Equipamentos Eaton Ltda. Brazil 98.1% BAC Investments Ltd. 1.9% Eaton Mercantil Exportadora Ltda. Brazil 100% Equipamentos Eaton Ltda. Eaton Technologies Ltda. Brazil 99.99991% .00009% Eaton International Corporation Eaton ETN Offshore Ltd. Canada 100% Common Shares - Eaton Corporation 100% Preferred Shares - Eaton International Corporation 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% Eaton Beteiligungs G.m.b.H. Eaton G.m.b.H. Germany 100% Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H. Eaton Controls Verwaltungs G.m.b.H. Germany 100% Page 4 Eaton Controls G.m.b.H. & Co. K.G. (Partnership) Germany 99.5% Eaton Yale Ltd. .5% Eaton Controls Verwaltungs G.m.b.H. Eaton Beteiligungs 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 Automotive S.p.A. Italy 33% .3333% Eaton S.p.A. 66.6667% Eaton EST S.p.A. Eaton EST S.p.A. Italy 99.999% Eaton S.p.A. .001% Eaton Automotive S.p.A. Eaton Controls S.p.A. Italy 99.9998% Eaton S.p.A. .0002% Eaton Automotive S.p.A. Eaton Commerciale S.r.l. Italy 100% Eaton Automotive S.p.A. Eaton Finance S.p.A. Italy 50% Eaton Automotive 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 Controles Latinoamericanos, 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% Equipos Cutler-Hammer S.A. de C.V. Mexico 99.99999% Eaton International Corporation .00001% Cutler-Hammer Inc. Page 5 Operaciones de Maquila de Juarez, S.A. de C.V. Mexico 99.99999% Eaton International Corporation .00001% Cutler-Hammer Inc. Eaton s.a.m. Monaco 100% Eaton B.V. Netherlands 100% Eaton Finance N.V. Netherlands Antilles 55% Eaton International Inc. 45% 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% Eaton Beteiligungs G.m.b.H. 33.975% Eaton 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 Technologies Limited Thailand 99.99% Eaton Credit Limited United Kingdom 100% Eaton Limited (U.K.) Eaton Limited United Kingdom 100% Eaton Foreign Sales Corporation U.S. Virgin Islands 100% Lectron International, Inc. U.S. Virgin Islands 100% Lectron Products, Inc. Cutler-Hammer de Venezuela, S.A. Venezuela 74% Eaton International Corporation (A) Other Eaton subsidiaries, most of which are inactive, are not listed above. If considered in the aggregate, they would not be material. EX-23 5 CONSENT OF EXPERTS Page 1 Eaton Corporation 1994 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 January 27, 1995, with respect to the consolidated financial statements of Eaton Corporation included in this Form 10-K for the year ended December 31, 1994: Registration number Description Filing date - ------------ ------------------------------------------ ----------------- 33-52333 Eaton Corporation $600,000,000 of Debt Securities, Debt Warrants, Common Shares and Preferred Shares - Form S-3 Registration Statement February 18, 1994 33-53521 Cutler-Hammer Inc. Savings Plan for Certain Hourly Employees - Form S-8 Registration Statement May 6, 1994 33-49393, Eaton Corporation Stock Option Plans - 33-12842, Form S-8 Registration Statement March 9, 1993 2-76349 & 2-58718 33-49777 Eaton Corporation Share Purchase and Investment Plan - Form S-8 Registration Statement July 15, 1993 33-49779 Eaton Limited U.K. Savings-Related Share Option Scheme (1191) - Form S-8 Registration Statement July 16, 1993 33-15582 Eaton Limited U.K. Savings-Related Share Option Scheme - Form S-8 Registration Statement July 7, 1987 33-2688 Eaton Corporation Shareholder Dividend Reinvestment Plan (Including Post Effective Amendment No. 1 filed February 19, 1986) January 15, 1986 2-77090 Eaton Corporation Strategic Incentive and Option Plan - Form S-8 Registration Statement May 10, 1982 Ernst & Young LLP Cleveland, Ohio March 21, 1995 EX-24 6 POWER OF ATTORNEY Page 1 Eaton Corporation 1994 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, 1994 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, 1995. IN WITNESS WHEREOF, this Power of Attorney has been signed this 22nd day of February, 1995. /s/ WILLIAM E. BUTLER ---------------------------- William E. Butler Chairman and Chief Executive Officer; Principal Executive Officer; 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/ John S. Rodewig /s/ Hooper G. Pattillo ---------------------------- ---------------------------- John S. Rodewig Hooper G. Pattillo President; Chief Operating Director Officer - Vehicle Components; Director Page 2 /s/ Neil A. Armstrong /s/ Victor A. Pelson ---------------------------- ---------------------------- Neil A. Armstrong Victor A. Pelson Director Director /s/ Phyllis B. Davis /s/ A. William Reynolds ---------------------------- ---------------------------- Phyllis B. Davis A. William Reynolds Director Director /s/ Charles E. Hugel ---------------------------- ---------------------------- Charles E. Hugel Gary L. Tooker Director Director -----END PRIVACY-ENHANCED MESSAGE-----