-----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, Ln7wZlJKsv5aM+FzabYDZrUi/uAXwR5GQQSrw+8vxFLD4jtFjShIKPvtbGrV4evW 20YTXVx7U7tqTPgQyt4xow== 0000031277-96-000022.txt : 19961107 0000031277-96-000022.hdr.sgml : 19961107 ACCESSION NUMBER: 0000031277-96-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961106 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: 96654913 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 SEPTEMBER 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 September 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 77.1 million Common Shares outstanding as of September 30, 1996. Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Eaton Corporation Condensed Consolidated Balance Sheets September 30, December 31, (Millions) 1996 1995 ---- ---- ASSETS Current assets Cash $ 25 $ 56 Short-term investments 31 28 Accounts receivable 1,056 932 Inventories 736 735 Deferred income taxes and other current assets 240 216 ------ ------ 2,088 1,967 Property, plant and equipment 1,708 1,653 Excess of cost over net assets of businesses acquired 953 895 Deferred income taxes and other assets 528 538 ------ ------ $5,277 $5,053 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt and current portion of long-term debt $ 31 $ 50 Accounts payable and other current liabilities 1,131 1,095 ------ ------ 1,162 1,145 Long-term debt 1,125 1,084 Postretirement benefits other than pensions 584 579 Other liabilities 275 270 Shareholders' equity 2,131 1,975 ------ ------ $5,277 $5,053 ====== ====== See accompanying notes. Page 3 Eaton Corporation
Statements of Consolidated Income Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------- (Millions except for per share data) 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $1,719 $1,672 $5,237 $5,161 Costs and expenses Cost of products sold 1,281 1,243 3,865 3,797 Selling and administrative 244 226 728 696 Research and development 67 53 200 168 ------ ------ ------ ------ 1,592 1,522 4,793 4,661 ------ ------ ------ ------ Income from operations 127 150 444 500 Other income (expense) Interest expense (21) (22) (64) (65) Interest income 2 1 5 4 Other income--net 7 9 20 26 ------ ------ ------ ------ (12) (12) (39) (35) ------ ------ ------ ------ Income before income taxes 115 138 405 465 Income taxes 30 47 122 156 ------ ------ ------ ------ Net income $ 85 $ 91 $ 283 $ 309 ====== ====== ====== ====== Per Common Share Net income $ 1.11 $ 1.18 $ 3.66 $ 3.97 Cash dividends paid .40 .40 1.20 1.10 Average number of Common 77.3 77.7 77.5 77.8 Shares outstanding See accompanying notes.
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Condensed Statements of Consolidated Cash Flows Nine Months Ended September 30 ----------------- (Millions) 1996 1995 ---- ---- Operating activities Net income $283 $309 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 236 207 Changes in operating assets and liabilities, excluding acquisitions of businesses (55) (193) Other--net (36) 24 ---- ---- Net cash provided by operating activities 428 347 Investing activities Acquisitions of businesses, less cash acquired (154) (114) Expenditures for property, plant and equipment (198) (234) Net change in short-term investments (5) (5) Other--net 27 22 ---- ---- Net cash used in investing activities (330) (331) Financing activities Borrowings with original maturities of more than three months Proceeds 122 363 Payments (101) (191) Borrowings with original maturities of less than three months--net (20) (76) Proceeds from exercise of stock options 12 9 Cash dividends paid (93) (86) Purchase of Common Shares (49) (39) ---- ---- Net cash used in financing activities (129) (20) ---- ---- Decrease in cash (31) (4) Cash at beginning of year 56 18 ---- ---- Cash at end of period $ 25 $ 14 ==== ==== 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 - ----------- September 30, December 31, (Millions) 1996 1995 ---- ---- Raw materials $248 $225 Work-in-process and finished goods 585 604 ---- ---- Gross inventories at FIFO 833 829 Excess of current cost over LIFO cost (97) (94) ---- ---- Net inventories $736 $735 ==== ==== Income Taxes - ------------ In the third quarter of 1996, the estimated effective income tax rate for full year 1996 was adjusted to 29.9% from 31.6%. This adjustment reduced income tax expense for the third quarter by $5 million, which relates to the first half of 1996. Business Acquisition - -------------------- On April 16, 1996, the Company purchased CAPCO Automotive Products Corporation (CAPCO) for $137 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. 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): Nine Months Ended September 30 ----------------- 1996 1995 ---- ---- Income statement data Net sales $478 $464 Gross margin 76 79 Net income 16 30 September 30, December 31, 1996 1995 ---- ---- Balance sheet data Current assets $326 $324 Noncurrent assets 149 152 Net intercompany payables 22 15 Current liabilities 82 97 Noncurrent liabilities 112 117 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. The Company was disappointed with its overall financial results in the third quarter of 1996, given the very good performance of most operations, and the continued progress in turning around those operations that have been a drag on operating results in prior years. However, persistent operating issues at a few operations are having a disproportionate effect on results during the second half of 1996. Sales in the third quarter of 1996 increased 3% over 1995 while sales for the first nine months of 1996 were flat compared to the same period in 1995. Overall, performance in the third quarter and first nine months of 1996 demonstrated the better balance between the Company's two major business segments: Vehicle Components and Electrical and Electronic Controls. Page 7 Two of the Company's bellwether markets, North American heavy- duty trucks and worldwide semiconductor equipment, are showing indications of stabilizing, and prospects for sustained worldwide expansion over the next few years look increasingly bright. Income from operations decreased 15% and 11% in the third quarter and first nine months of 1996, respectively, from the same periods in 1995. The decreases were primarily attributable to reduced sales of Truck Components offset by increased sales of Electrical and Electronic Controls, which historically have had a lower gross margin. The decreases also resulted from increased costs associated with various major growth 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. The Company spent $11 million in the third quarter and $26 million in the first nine months of 1996 on these major growth programs. The Company's major cost improvement initiatives, namely finance reengineering and a supplier resource management program, are well underway. In the third quarter of 1996, the estimated effective income tax rate for full year 1996 was adjusted to 29.9% from 31.6%. This adjustment reduced income tax expense for the third quarter by $5 million, which relates to the first half of 1996. Net income and net income per Common Share decreased 7% and 6% for the third quarter of 1996, respectively, and 8% for both performance measures for the first nine months of 1996 from the comparable periods in 1995. Results of the Vehicle Components segment are summarized as follows (in millions): Three Months Ended September 30 ------------------ 1996 1995 ---- ---- Net sales Truck Components $439 $476 Passenger Car Components 175 151 Off-Highway Vehicle Components 115 103 ---- ---- $729 $730 ==== ==== Operating profit $ 62 $ 91 ==== ==== Page 8 Nine Months Ended September 30 ------------------ 1996 1995 ---- ---- Net sales Truck Components $1,341 $1,522 Passenger Car Components 549 504 Off-Highway Vehicle Components 360 348 ------ ------ $2,250 $2,374 ====== ====== Operating profit $ 239 $ 325 ====== ====== Vehicle Components segment sales were flat in the third quarter and decreased 5% in the first nine months of 1996 as compared to the same periods in 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, third quarter 1996 segment sales approximated $692 million, a 5% decrease as compared to the same period in 1995. Truck Components sales decreased 8% in the third quarter of 1996 from the same period in 1995. This decrease was primarily the result of the softening of the North American heavy-duty truck market from the record levels experienced in the prior two years. However, North American heavy-duty truck backlog, which was at 62,000 units at September 30, 1996, remains high by historical standards. Excluding the effects of CAPCO, Truck Components sales decreased 16% from the prior year's level. While activity appears to be gradually improving, the Latin American markets for heavy-duty trucks and agricultural equipment were much weaker than the Company had anticipated earlier in 1996 (38% decline as compared to prior year). Passenger Car Components experienced record sales in the third quarter of 1996, rising 16% over the same period in 1995 despite an increase of less than 9% in passenger car production in North America and Europe. This better-than-market performance was attributed to selected market share penetration and the continued trend to multivalve engines. Traditionally, Passenger Car Components sales in the third quarter are lower than in the second quarter as a result of preparations by vehicle manufacturers for the following model year and their temporary shutdowns for the taking of annual physical inventories. Off-Highway Vehicle Components also experienced record sales in the third quarter of 1996, rising 12% over the year-ago quarter despite generally flat market activity. Page 9 Operating profit for the Vehicle Components segment decreased 32% and 26% for the third quarter and first nine months of 1996, respectively, from the comparable periods of 1995. Performance in this segment continues to remain below expectations despite excellent performance in the business units serving the always demanding light and off-highway vehicle markets. The reductions in operating profit were primarily attributable to lower sales volumes of Truck Components. This segment's operating results are well below the Company's expectation given its earlier projection for a 20% to 25% downturn in the North American heavy-duty truck market. Overall operating results have been affected both by disappointing market conditions outside North America and by unexpected operating problems around the world. Excluding the effects of CAPCO, third quarter 1996 operating profit approximated $66 million, a 28% decrease compared to the same period in 1995. Vehicle Components operating profit for the third quarter and first nine months of 1996 also was reduced by expenses of $4 million and $12 million, respectively, which were incurred for the purpose of bringing the North American axle/brake business unit to acceptable levels of profitability. The Company expects to spend an additional $3 million in 1996 to complete the reorganization of this business unit and to achieve $15 million in annual savings by 1997. In addition, operating profit for the third quarter of 1996 included a $1 million charge to integrate an existing Brazilian manufacturing operation with CAPCO. Vehicle Components operating profit was also being affected by a significant and unanticipated level of warranty expense, which increased $4 million in the third quarter of 1996 from the comparable period in 1995. For full year 1996, the Company expects these costs to be approximately $10 million more than 1995 levels. These increases are related primarily to models which have recently been replaced, and to policy practices which have since been tightened. The Company expects warranty costs to decline during 1997. To allow the Company to have direct access to sub-Saharan 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 purchased in the second quarter of 1996. Page 10 Results of the Electrical and Electronic Controls segment are summarized as follows (in millions): Three Months Ended September 30 ------------------ 1996 1995 ---- ---- Net sales Industrial and Commercial Controls $542 $519 Automotive and Appliance Controls 281 252 Specialty Controls 139 145 ---- ---- $962 $916 ==== ==== Operating profit $ 78 $ 73 ==== ==== Nine Months Ended September 30 ------------------ 1996 1995 ---- ---- Net sales Industrial and Commercial Controls $1,565 $1,486 Automotive and Appliance Controls 859 791 Specialty Controls 487 426 ------ ------ $2,911 $2,703 ====== ====== Operating profit $ 246 $ 223 ====== ====== Electrical and Electronic Controls, the Company's largest segment, continued its trend of increased sales, which rose 5% in the third quarter and 8% in the first nine months of 1996 over the comparable periods of 1995. Activity in these markets was more mixed than earlier in the year. Aided by continued strength in Cutler-Hammer's nonresidential and residential construction markets, Industrial and Commercial Controls sales rose 4% in the third quarter of 1996 over the comparable period in 1995. Automotive and Appliance Controls sales continued to be particularly strong in the third quarter of 1996, rising 12% from third quarter of 1995, in an environment where North American and European vehicle production increased 7% and appliance production increased approximately 6%. This better-than-market performance was attributed to new program launches in the North American automotive switch business and the acquisition of the IKU Group in May 1995. Traditionally, Automotive and Appliance Controls sales in the third quarter are lower than in the second quarter as a result of preparations by vehicle manufacturers for the Page 11 following model year and their temporary shutdowns for the taking of annual physical inventories. Specialty Controls sales decreased 4% in the third quarter of 1996 from the comparable period in 1995 primarily due to a sharp downturn in worldwide demand for semiconductor capital equipment. As the leading worldwide producer of ion implanters, the Company saw the effects of this slowdown in third quarter 1996 sales of ion implanters, which decreased approximately 25% from the previous two quarters. The Company is encouraged by the past two months' stability in orders and by the recently reported increases in the semiconductor industry's book-to-bill ratio. However, the Company does not anticipate year-to-year sales improvement prior to mid-1997. Operating profit for the Electrical and Electronic Controls segment continued to be strong, improving 8% in the third quarter and 10% for the first nine months of 1996 over the same periods in 1995. The improvement in operating profits was primarily attributable to improved sales volumes, added contributions from recently acquired businesses and reduced program launch costs. Although most of the Industrial Controls business unit transitional plant integration difficulties have now been overcome, the Company remains disappointed by the profit levels of that business unit. Specific actions are now underway to return this key business unit to traditional levels of operating performance. During the third quarter of 1996, approximately $1 million was incurred in connection with these efforts. To complement the Company's ion implantation equipment business, High Temperature Engineering Corporation, a 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 purchased in the second quarter of 1996. Results of the Defense Systems segment are summarized as follows (in millions): Three Months Ended September 30 ------------------ 1996 1995 ---- ---- Net sales $28 $26 Operating profit 2 Nine Months Ended September 30 ------------------ 1996 1995 ---- ---- Net sales $76 $84 Operating profit 1 (1) Page 12 The Company had set very ambitious goals for 1996. However, given third quarter results and an anticipated fourth quarter reorganization charge, as discussed below, Eaton will not achieve the expected level of performance this year. Sustaining superior financial performance while pursuing opportunities for higher sustainable growth, the necessary ingredients for genuinely superior long-term performance, has been challenging. However, the Company is making progress in both dimensions of performance and is making the difficult but necessary adjustments to ensure long-term success. The Company is determined to get its financial results back on track in 1997. The Company will not take the short-term expedient of mortgaging Eaton's future by reducing spending on major growth programs designed to increase the Company's sustainable growth rate in the years ahead. The Company is excited by the progress being made in developing major new products for new and existing markets, and by opportunities to manufacture and sell products around the world. The Company's commitment remains to outperform expectations based on the cyclical levels of Eaton's traditional markets. Specifically, excluding the costs of the major growth programs and based on similar activity levels, the Company expects to produce about a $1.00 per share improvement in earnings between 1995 and 1997, which is measurably above current operating performance. The Company has identified additional reorganizations which are expected to generate an incremental $20 million of annual savings beginning in 1997. The cost of these reorganizations is anticipated to approximate $25 million to $30 million, the bulk of which is expected to be charged against fourth quarter 1996 results. In total, the Company expects to expense $40 million to $45 million on reorganizations in 1996. The benefits of these actions should bring 1997 performance back to targeted levels. Changes in Financial Condition - ------------------------------ The Company's financial condition remained strong during the first nine months of 1996. Net working capital increased to $926 million at September 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 in September 1996 were the primary cause of the increase in accounts receivable at September 30, 1996 from the end of 1995. The CAPCO acquisition was the principal cause of the increases in excess of cost over net assets of businesses acquired and long-term debt at September 30, 1996 from year-end 1995. Cash flow from net income, supplemented by commercial paper borrowings, was used to fund business acquisitions, capital expenditures, repayment of debt, cash dividends, repurchase of Common Shares, as well as increased working capital, primarily the increase in accounts receivable. Page 13 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 September 30, 1996. Page 14 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: November 6, 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 9-MOS DEC-31-1996 SEP-30-1996 25 31 1,070 14 736 2,088 3,398 1,690 5,277 1,162 1,125 0 0 39 2,092 5,277 5,237 5,237 3,865 4,793 (25) 0 64 405 122 283 0 0 0 283 3.66 3.58
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