-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FallFEOBEch5T6Ddy9C0z5K9EeT00Nx3NgeEMlcGEDVfF222bznYP3ogMaXFWCo4 52xLpxA8tILWTvrlvnbuSQ== 0000031277-96-000017.txt : 19960807 0000031277-96-000017.hdr.sgml : 19960807 ACCESSION NUMBER: 0000031277-96-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960806 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01396 FILM NUMBER: 96604138 BUSINESS ADDRESS: STREET 1: EATON CTR STREET 2: 1111 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114-2584 BUSINESS PHONE: 2165235000 FORMER COMPANY: FORMER CONFORMED NAME: EATON YALE & TOWNE INC DATE OF NAME CHANGE: 19710822 10-Q 1 JUNE 30, 1996 FORM 10-Q Page 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1996 ------------- Commission file number 1-1396 ------ Eaton Corporation - ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0196300 - ------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) Eaton Center, Cleveland, Ohio 44114-2584 - ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 523-5000 - ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. Yes X --- There were 77.6 million Common Shares outstanding as of June 30, 1996. Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Eaton Corporation Condensed Consolidated Balance Sheets June 30, December 31, (Millions) 1996 1995 ---- ---- ASSETS Current assets Cash $ 8 $ 56 Short-term investments 21 28 Accounts receivable 1,093 932 Inventories 735 735 Deferred income taxes and other current assets 245 216 ------ ------ 2,102 1,967 Property, plant and equipment 1,686 1,653 Excess of cost over net assets of businesses acquired 950 895 Deferred income taxes and other assets 517 538 ------ ------ $5,255 $5,053 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt and current portion of long-term debt $ 41 $ 50 Accounts payable and other current liabilities 1,113 1,095 ------ ------ 1,154 1,145 Long-term debt 1,143 1,084 Postretirement benefits other than pensions 583 579 Other liabilities 271 270 Shareholders' equity 2,104 1,975 ------ ------ $5,255 $5,053 ====== ====== See accompanying notes. Page 3 Eaton Corporation
Statements of Consolidated Income Three Months Ended Six Months Ended June 30 June 30 ---------------------- ---------------------- (Millions except for per share data) 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $1,782 $1,758 $3,518 $3,489 Costs and expenses Cost of products sold 1,306 1,289 2,584 2,554 Selling and administrative 245 238 484 470 Research and development 68 58 133 115 ------ ------ ------ ------ 1,619 1,585 3,201 3,139 ------ ------ ------ ------ Income from operations 163 173 317 350 Other income (expense) Interest expense (22) (23) (43) (43) Interest income 1 2 3 3 Other income--net 7 12 13 17 ------ ------ ------ ------ (14) (9) (27) (23) ------ ------ ------ ------ Income before income taxes 149 164 290 327 Income taxes 46 54 92 109 ------ ------ ------ ------ Net income $ 103 $ 110 $ 198 $ 218 ====== ====== ====== ====== Per Common Share Net income $ 1.32 $ 1.41 $ 2.55 $ 2.79 Cash dividends paid .40 .40 .80 .70 Average number of Common Shares outstanding 77.7 77.9 77.7 77.9 See accompanying notes.
Page 4 Eaton Corporation
Condensed Statements of Consolidated Cash Flows Six Months Ended June 30 -------------------- (Millions) 1996 1995 ---- ---- Operating activities Net income $ 198 $ 218 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 154 137 Changes in operating assets and liabilities, excluding acquisitions of businesses (119) (200) Other--net (1) 26 ----- ----- Net cash provided by operating activities 232 181 Investing activities Acquisitions of businesses, less cash acquired (151) (112) Expenditures for property, plant and equipment (123) (144) Net change in short-term investments 5 2 Other--net 23 14 ----- ----- Net cash used in investing activities (246) (240) Financing activities Borrowings with original maturities of more than three months Proceeds 102 299 Payments (59) (64) Borrowings with original maturities of less than three months--net (9) (123) Proceeds from exercise of stock options 10 7 Cash dividends paid (62) (55) Purchase of Common Shares (16) (14) ----- ----- Net cash (used in) provided by financing activities (34) 50 ----- ----- Decrease in cash (48) (9) Cash at beginning of year 56 18 ----- ----- Cash at end of period $ 8 $ 9 ===== ===== See accompanying notes.
Page 5 The following notes are included in accordance with the requirements of Regulation S-X and Form 10-Q: Preparation of Financial Statements - ----------------------------------- The condensed consolidated financial statements of Eaton Corporation (Eaton or the Company) are unaudited. However, in the opinion of management, all adjustments have been made which are necessary for a fair presentation of financial position, results of operations and cash flows for the stated periods. These adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 1995 Annual Report on Form 10-K. 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 options for Common Shares, is not material. Inventories - ----------- June 30, December 31, (Millions) 1996 1995 ---- ---- Raw materials $238 $225 Work-in-process and finished goods 594 604 ---- ---- Gross inventories at FIFO 832 829 Excess of current cost over LIFO cost (97) (94) ---- ---- Net inventories $735 $735 ==== ==== Acquisition of Business - ----------------------- On April 16, 1996, the Company acquired CAPCO Automotive Products Corporation (CAPCO) for a purchase price of $135 million. CAPCO, a Brazilian manufacturer of transmissions for light- and medium-duty trucks and transaxle components for passenger cars, had sales of $176 million in 1995. This acquisition was accounted for as a purchase and, accordingly, the Company's statements of consolidated income include the results of CAPCO from the effective date of acquisition. This operation was subsequently renamed Eaton Truck Components Ltda. Page 6 Summary Financial Information for Eaton ETN Offshore Ltd. - --------------------------------------------------------- Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned subsidiary of Eaton, was incorporated by Eaton in 1990 under the laws of Ontario, Canada, primarily for the purpose of raising funds through the offering of debt securities in the United States and making these funds available to Eaton or its subsidiaries. Eaton Offshore owns the common stock of a number of Eaton's subsidiaries which are engaged principally in the manufacture and/or sale of truck transmissions, fasteners, leaf spring assemblies, engine components, and electrical and electronic controls. Summary financial information for Eaton Offshore and its consolidated subsidiaries is as follows (in millions): Six Months Ended June 30 ----------------- 1996 1995 ---- ---- Income statement data Net sales $331 $324 Gross margin 54 60 Net income 14 26 June 30, December 31, 1996 1995 ---- ---- Balance sheet data Current assets $329 $324 Noncurrent assets 150 152 Net intercompany payables 11 15 Current liabilities 87 97 Noncurrent liabilities 115 117 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- As anticipated, 1996 is proving to be a challenging year. Sales in the second quarter and first half of 1996 were flat compared to the same periods of 1995. Net income and net income per Common Share decreased 6% for the second quarter and 9% for the first half of 1996 from the comparable periods in 1995. A year ago, all of the Company's markets were surging, and Eaton took full advantage of the opportunity to achieve record performance. In the first half of 1996, activity in the Company's markets around the world was much more mixed. Overall, performance in the second quarter and first half of 1996 demonstrates an improvement from previous years in the balance between the Company's two major business segments: Vehicle Components and Electrical and Electronic Controls. Page 7 Income from operations decreased 6% and 9% in the second quarter and first half of 1996, respectively, from the same periods in 1995. The decrease was primarily attributable to reduced sales of Truck Components offset by increased sales in the Electrical and Electronic Controls segment, which historically have had a lower gross margin. The decrease also resulted from increased costs associated with various research and development, and productivity improvement programs. The Company spent $8.5 million in the second quarter and $15 million in the first half of 1996 on research and development programs designed to accelerate the Company's sustainable growth in the years ahead. These programs are key components of a strategy to position the Company to take advantage of growth opportunities in the global marketplace. Results of the Company's Vehicle Components segment are summarized as follows (in millions): Three Months Ended June 30 ------------------ 1996 1995 ---- ---- Net sales Truck Components $453 $516 Passenger Car Components 191 179 Off-Highway Vehicle Components 127 118 ---- ---- $771 $813 ==== ==== Operating profit $ 89 $111 ==== ==== Six Months Ended June 30 ------------------ 1996 1995 ---- ---- Net sales Truck Components $ 902 $1,046 Passenger Car Components 370 353 Off-Highway Vehicle Components 249 245 ------ ------ $1,521 $1,644 ====== ====== Operating profit $ 177 $ 234 ====== ====== Performance in this segment continues to remain below Company expectations despite excellent performance in many business units. Page 8 Vehicle Components segment sales decreased 5% in the second quarter and 7% in the first half of 1996 as compared to the unprecedented levels experienced in the same periods of 1995. Comparisons with prior year results were affected by the April 1996 acquisition of CAPCO Automotive Products Corporation (CAPCO), as more fully discussed in the "Business Acquisition" note. Excluding the effects of CAPCO, second quarter 1996 segment sales approximated $748 million, an 8% decrease as compared to the same period in 1995. Driven by a 22% decrease in North American factory sales of heavy-duty trucks, a 30% decrease in activity in Latin American markets and a 4% decrease in European production, Truck Components sales decreased 12% in the second quarter of 1996 from the prior year's second quarter record level. This decrease reflects the previously anticipated softening of the North American heavy-duty truck market from the record levels experienced in the prior two years. While the North American heavy-duty truck market is slowing, backlog, which is at 72,000 units at June 30, 1996, remains strong by historical standards. Excluding the effects of CAPCO, Truck Components sales decreased 15% from the prior year's level. As a result of a 4% increase in North American passenger car production and despite a flat market in Europe, Passenger Car Components sales rose 7% in the second quarter of 1996 as compared to the same period in 1995. Off-Highway Vehicle Components sales rose 8% in the second quarter of 1996 from the year-ago quarter despite generally flat market activity. Operating profit for the Vehicle Components segment decreased 20% and 24% for the second quarter and first half of 1996, respectively, from the comparable periods of 1995. The reduction in operating profits was primarily attributable to lower sales volumes of Truck Components. Operating profit for the second quarter and first half of 1996 also was reduced by expenses of $4 million and $8 million, respectively, which were incurred for the purpose of bringing the Company's North American axle/brake business unit to acceptable levels of profitability. The Company expects to spend an additional $9 million in 1996 and to achieve $15 million in annual savings by 1997. Excluding the effects of CAPCO, second quarter 1996 operating profit approximated $92 million, a 17% decrease as compared to the same period in 1995. While CAPCO is not expected to have a material effect on 1996 results, the Company believes this strategic acquisition will become accretive in 1997. To allow the Company to have direct access to sub-Saharan medium- and heavy-duty truck markets, the assets of Drivetrain (Pty.) Ltd, a medium- and heavy-duty truck transmission manufacturer in South Africa with 1995 sales of approximately $6 million, were acquired in the second quarter of 1996. Page 9 Results of the Company's Electrical and Electronic Controls segment are summarized as follows (in millions): Three Months Ended June 30 ------------------ 1996 1995 ---- ---- Net sales Industrial and Commercial Controls $518 $496 Automotive and Appliance Controls 294 266 Specialty Controls 172 153 ---- ---- $984 $915 ==== ==== Operating profit $ 86 $ 80 ==== ==== Six Months Ended June 30 ------------------ 1996 1995 ---- ---- Net sales Industrial and Commercial Controls $1,023 $ 967 Automotive and Appliance Controls 578 539 Specialty Controls 348 281 ------ ------ $1,949 $1,787 ====== ====== Operating profit $ 168 $ 150 ====== ====== Electrical and Electronic Controls, the Company's largest segment, continued its trend of increased sales, which rose 8% in the second quarter and 9% in the first half of 1996 over the comparable periods of 1995. All of the business units comprising this segment are continuing to experience record sales. Aided by continued strength in nonresidential and residential construction markets and the beginning of a rebound in aerospace controls offsetting a sluggish industrial controls market, Industrial and Commercial Controls sales rose 4% in the second quarter of 1996 over the comparable period in 1995. Automotive and Appliance Controls sales were particularly strong in the second quarter of 1996, rising 11% from the second quarter of 1995, in an environment where North American light vehicle production increased 5% and continued flat activity in European markets. This better-than-market performance is attributed to new program launches in the North American automotive switch business and the acquisition of the IKU Group in May 1995. Page 10 While Specialty Controls sales rose 12% in the second quarter of 1996 from the comparable period in 1995, they were essentially flat compared to the first quarter of 1996. Worldwide demand for semiconductor capital equipment, which is included in Specialty Controls, has slowed in lagged response to the downturn in the semiconductor industry's book-to-bill ratio. As the leading worldwide producer of ion implanters, the Company is seeing the effects of the slowdown in its operating results. To complement the Company's ion implantation equipment business, High Temperature Engineering Corporation, an United States manufacturer of rapid thermal processor furnaces and small batch vertical furnaces for use in semiconductor fabrication with 1995 sales of less than $10 million, was acquired in the second quarter of 1996. Operating profit for the Electrical and Electronic Controls segment continued to be strong, improving 8% in the second quarter and 12% for the first half of 1996 over the same periods in 1995. The improvement in operating profits was primarily attributable to improved sales volumes, but also to added contributions from recently acquired businesses, continued stringent cost containment efforts and the realization of benefits from earlier resizings. Results of the Company's Defense Systems segment are summarized as follows (in millions): Three Months Ended June 30 ------------------ 1996 1995 ---- ---- Net sales $27 $30 Operating profit (1) Six Months Ended June 30 ------------------ 1996 1995 ---- ---- Net sales $48 $58 Operating profit (1) (1) Based on the current market outlook, 1996 continues to look like a challenging year for Eaton. While North American markets continue to track Eaton's expectations, the semiconductor capital equipment market will not be a source of incremental strength for the remainder of the year. European markets may be softer than Eaton's relatively pessimistic expectations, and recovery in Latin America is taking longer than earlier anticipated. The Company's ability to report improved results for the remainder of 1996 continues to depend on making sustained progress in addressing certain operational problems, achieving Page 11 the benefits of earlier resizing efforts and success with new product introductions. Regardless of market conditions, the Company's goal remains to outperform expectations based on the cyclical levels of Eaton's traditional markets. Eaton is continuing efforts to expand outside of North America, especially in Latin America and the Pacific Rim, regions expected to have the highest growth rates for the foreseeable future. Recent examples of this expansion are the acquisition of CAPCO, a Brazilian light- and medium-duty transmission and transaxle components manufacturer, as more fully discussed in the "Business Acquisition" note, the formation of a 75%-owned joint venture with Suzhou Electrical Apparatus Group Company (SEAG) in the People's Republic of China, and the acquisition of a South African medium- and heavy-duty truck transmission manufacturer as previously discussed. CAPCO is an excellent business fit from the standpoint of product lines, manufacturing capability, geographic coverage and developments in the worldwide motor vehicle industry. Coupled with the Company's existing businesses in the region, this acquisition provides an extraordinary foundation for profitable growth in Brazil and Latin America. In April 1996, the Company signed a joint venture agreement with SEAG in the People's Republic of China to manufacture and sell electrical circuit protection devices for the Chinese market. The venture will be operated by Cutler-Hammer, which is the world leader in circuit protection technology. The agreement allows the Company to leverage the strengths of both partners as SEAG is a leader in the markets it serves and molded case circuit breakers are one of Cutler-Hammer's strongest product lines. Changes in Financial Condition - ------------------------------ The Company's financial condition remained strong during the first half of 1996. Net working capital increased to $948 million at June 30, 1996 from $822 million at the end of 1995 and the current ratio rose to 1.8 from 1.7 at those dates, respectively. Higher sales levels in May and June 1996 primarily caused the increase in accounts receivable at June 30, 1996 from the end of 1995. The CAPCO acquisition was the principal cause of the $55 million increase in excess of cost over net assets of businesses acquired and the $50 million increase in total debt at June 30, 1996 from year-end 1995. Total debt consists of short-term debt, long-term debt and current portion of long- term debt. Cash flow from net income, supplemented by commercial paper borrowings, was used to fund increased working capital, primarily the increase in accounts receivable, the purchase price of business acquisitions, capital expenditures and cash dividends. Page 12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - See Exhibit Index attached. (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the three months ended June 30, 1996. Page 13 Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ---------------------------- Registrant Date: July 31, 1996 /s/ Adrian T. Dillon ---------------------------- Adrian T. Dillon Vice President - Chief Financial and Planning Officer; Principal Financial Officer Page 1 EATON CORPORATION EXHIBIT INDEX Regulation S-K, Item 601 - Exhibit Reference Number Exhibit - ---------------- ------- 4 Pursuant to Regulation S-K Item 601 (b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. 11 Computations of net income per Common Share can be determined from the Statements of Consolidated Income on page 3 and the footnote "Net Income per Common Share" on page 5. 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and the Statements of Consolidated Income and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1996 JUN-30-1996 8 21 1,107 14 735 2,102 3,319 1,633 5,255 1,154 1,143 0 0 39 2,065 5,255 3,518 3,518 2,584 3,201 (16) 0 43 290 92 198 0 0 0 198 2.55 2.50
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