-----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, SYww9nVc7OXS8Eo4dd8uQUKLw/LbQGXeZ1sLpqav0xnZkHO47UKN6J33oRGhPcRe JxxiRKK1j5gLZePm/kkujg== 0000031277-97-000014.txt : 19971113 0000031277-97-000014.hdr.sgml : 19971113 ACCESSION NUMBER: 0000031277-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01396 FILM NUMBER: 97716041 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 SEPT 30, 1997 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, 1997 ------------------ Commission file number 1-1396 ------ Eaton Corporation - ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0196300 - ------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) Eaton Center, Cleveland, Ohio 44114-2584 - ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 523-5000 - ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past ninety days. Yes X --- There were 77.1 million Common Shares outstanding as of September 30, 1997. Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Eaton Corporation Condensed Consolidated Balance Sheets
September 30, December 31, (Millions) 1997 1996 ---- ---- ASSETS Current assets Cash $ 24 $ 22 Short-term investments 70 38 Accounts receivable 1,144 985 Inventories 785 729 Deferred income taxes and other current assets 287 243 ------- ------- 2,310 2,017 Property, plant and equipment 1,837 1,792 Excess of cost over net assets of businesses acquired 1,150 968 Deferred income taxes and other assets 548 530 ------- ------- $ 5,845 $ 5,307 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt and current portion of long-term debt $ 30 $ 30 Accounts payable and other current liabilities 1,313 1,200 ------- ------- 1,343 1,230 Long-term debt 1,387 1,062 Postretirement benefits other than pensions 589 585 Other liabilities 291 270 Shareholders' equity 2,235 2,160 ------- ------- $ 5,845 $ 5,307 ======= =======
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) 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $ 1,931 $ 1,719 $ 5,629 $ 5,237 Costs and expenses Cost of products sold 1,390 1,283 4,068 3,873 Selling and administrative 272 244 801 728 Research and development 81 67 235 200 Purchased in-process research and development 85 0 85 0 ------- ------- ------- ------- 1,828 1,594 5,189 4,801 ------- ------- ------- ------- Income from operations 103 125 440 436 Other income (expense) Interest expense (22) (21) (62) (64) Interest income 2 2 5 5 Other--net 12 9 39 28 ------- ------- ------- ------- (8) (10) (18) (31) ------- ------- ------- ------- Income before income taxes 95 115 422 405 Income taxes 41 30 141 122 ------- ------- ------- ------- Net income $ 54 $ 85 $ 281 $ 283 ======= ======= ======= ======= Per Common Share Net income $ 0.70 $ 1.11 $ 3.65 $ 3.66 Cash dividends paid 0.44 0.40 1.28 1.20 Average number of Common Shares outstanding 77.1 77.3 77.1 77.5
See accompanying notes. Page 4 Eaton Corporation Condensed Statements of Consolidated Cash Flows
Nine Months Ended September 30 -------------------- (Millions) 1997 1996 ---- ---- Net cash provided by operating activities Net income $ 281 $ 283 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 250 236 Write-off of purchased in-process research and development 85 Changes in operating assets and liabilities, excluding acquisitions of businesses (118) (55) Other--net (1) (36) ------- ------- 497 428 Net cash used in investing activities Acquisitions of businesses, less cash acquired (382) (154) Expenditures for property, plant and equipment (262) (198) Net change in short-term investments (34) (5) Other--net (25) 27 ------- ------- (703) (330) Net cash provided by (used in) financing activities Borrowings with original maturities of more than three months Proceeds 394 122 Payments (137) (101) Borrowings with original maturities of less than three months--net 82 (20) Proceeds from exercise of stock options 25 12 Cash dividends paid (99) (93) Purchase of Common Shares (57) (49) ------- ------- 208 (129) ------- ------- Increase (decrease) in cash 2 (31) Cash at beginning of year 22 56 ------- ------- Cash at end of period $ 24 $ 25 ======= =======
See accompanying notes. Page 5 The following notes are included in accordance with the requirements of Regulation S-X and Form 10-Q: Preparation of Financial Statements - ----------------------------------- The condensed consolidated financial statements of Eaton Corporation (Eaton or the Company) are unaudited. However, in the opinion of management, all adjustments have been made which are necessary for a fair presentation of financial position, results of operations and cash flows for the stated periods. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 1996 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) 1997 1996 ---- ---- Raw materials $265 $270 Work-in-process and finished goods 615 552 ---- ---- Gross inventories at FIFO 880 822 Excess of current cost over LIFO cost (95) (93) ---- ---- Net inventories $785 $729 ==== ==== Acquisition of Fusion Systems Corporation and Write-off of Purchased In-Process Research and Development - --------------------------------------------------------------------- On August 4, 1997, the Company purchased Fusion Systems Corporation for $293 million, before a reduction for cash acquired of $90 million. Fusion, which had sales of $85 million in 1996, manufactures front-end process equipment for the semiconductor industry. The acquisition was accounted for by the purchase method of accounting, and accordingly, the statements of income and the results of the Electrical and Electronic Controls segment (Specialty Controls class of similar products) for the third quarter include the results of Fusion from the effective date of acquisition. The purchase price allocation included $85 million for purchased in-process research and Page 6 development which was determined through an independent valuation. This amount was expensed at the date of acquisition because technological feasibility had not been established and no alternative commercial use had been identified. Therefore, the third quarter results include the write-off of $85 million for purchased in-process research and development, with no income tax benefit, or $1.10 per Common Share. As a result of the non-deductible nature of the write- off, the estimated effective income tax rate for the year increased to 33.4% compared to 30.1% in 1996. Acquisition of Spicer Clutch - ---------------------------- On September 2, 1997, the Company completed the acquisition of Dana Corporation's worldwide Spicer clutch business for $180 million. Spicer is a leader in the development of medium- and heavy-duty truck clutches and vibration dampers and had 1996 sales of $200 million. This acquisition was accounted for by the purchase method of accounting. Future Accounting Pronouncements - -------------------------------- In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128, 'Earnings per Share', was issued. SFAS No. 128 establishes new standards for computing and reporting earnings per share. The Company must adopt SFAS No. 128 at year-end 1997 and believes the effect of adoption will not be material. In June 1997, SFAS No. 130, 'Reporting Comprehensive Income', was issued. SFAS No. 130 establishes new standards for reporting comprehensive income and its components. The Company must adopt SFAS No. 130 in the first quarter of 1998. The Company expects that comprehensive income will not differ materially from net income, except for foreign currency translation adjustments included in comprehensive income, the effect of which could be material depending on future changes in foreign exchange rates. In June 1997, SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related Information', was issued. SFAS No. 131 changes the standards for reporting financial results by operating segments, related products and services, geographic areas, and major customers. The Company must adopt the new standard no later than year-end 1998. Summary Financial Information for Eaton ETN Offshore Ltd. - --------------------------------------------------------- Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned subsidiary of Eaton, was incorporated by Eaton in 1990 under the laws of Ontario, Canada, primarily for the purpose of raising funds through the offering of debt securities in the United States and making these funds available to Eaton or its subsidiaries. Eaton Offshore owns the common stock of a number of Eaton's subsidiaries which are engaged principally in the manufacture and/or sale of electrical and electronic controls, truck transmissions, fasteners, leaf spring assemblies and engine components. Effective January 1997, majority Page 7 ownership of a subsidiary was transferred to a subsidiary of Eaton Offshore from Eaton. Summary financial information for Eaton Offshore and its consolidated subsidiaries is as follows (in millions): Nine Months Ended September 30 ---------------- 1997 1996 ---- ---- Income statement data Net sales $543 $441 Gross margin 119 72 Net income 52 16 September 30, December 31, 1997 1996 ---- ---- Balance sheet data Current assets $398 $364 Noncurrent assets 196 215 Net intercompany payables 165 54 Current liabilities 113 111 Noncurrent liabilities 82 122 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- Sales, and before a one-time charge, earnings and earnings per share for the third quarter and the first nine months of 1997 were the highest in the Company's history. During the third quarter of 1997, the Company recorded a one-time charge of $85 million, with no income tax benefit, or $1.10 per Common Share, to write-off the purchased in-process research and development associated with its acquisition of Fusion Systems Corporation, as discussed in the notes to the financial statements. Earnings per share for the third quarter 1997, after the one-time charge, were $.70 compared to $1.11 for the third quarter 1996. Most of the Company's markets are enjoying robust activity, and the results demonstrate the considerable potential of the Company's product and market strengths. The Company continues to build upon those strengths through new product development, international expansion, and acquisition. The Company expects 1997 to be a record year, and a year notable for the steps taken to implement the Company's long-term growth strategy. Sales for the three months and nine months ended September 30, 1997 increased 12% and 7%, respectively, over the comparable periods in 1996. The improvement in sales was broadly based and primarily Page 8 attributable to higher unit volumes in both the Electrical and Electronic Controls and the Vehicle Components segments. Each product class, except for Automotive and Appliance Controls, experienced sales growth in the third quarter. Income from operations, before the one-time charge, increased 50% and 20% in the third quarter and first nine months of 1997, respectively over the comparable periods in 1996. Net income and net income per Common Share for the third quarter of 1997, before the one-time charge, increased 64% and 62%, respectively, over the comparable periods in 1996. For the first nine months of 1997, net income and net income per Common Share, before the one-time charge, increased 29% and 30%, respectively, over the same periods in 1996. These improvements were primarily a result of the higher sales volumes previously discussed, as well as benefits from the restructuring investments made during 1996. Electrical and Electronic Controls segment results are summarized as follows (in millions): Three Months Ended September 30 ------------------ 1997 1996 ---- ---- Net sales Industrial and Commercial Controls $ 586 $ 542 Automotive and Appliance Controls 277 281 Specialty Controls 179 139 ------ ------ $1,042 $ 962 ====== ====== Operating profit Before write-off of purchased in- process research & development $ 100 $ 78 Write-off of purchased in-process research & development (85) 0 ------ ------ $ 15 $ 78 ====== ====== Page 9 Nine Months Ended September 30 ---------------- 1997 1996 ---- ---- Net sales Industrial and Commercial Controls $1,688 $1,565 Automotive and Appliance Controls 868 859 Specialty Controls 462 487 ------ ------ $3,018 $2,911 ====== ====== Operating profit Before write-off of purchased in- process research & development $ 258 $ 246 Write-off of purchased in-process research & development (85) 0 ------ ------ $ 173 $ 246 ====== ====== Electrical and Electronic Controls, the Company's largest segment, achieved record sales and, before the $85 million one-time charge, record operating profit in the third quarter of 1997. Segment sales rose 8% in the third quarter and 4% in the first nine months of 1997 compared to the same periods in 1996. Operating profit, before the one-time charge, increased 28% and 5%, respectively, in comparison to the same periods in 1996. Before the one-time charge, operating margin in this segment achieved an all-time high, reaching 9.6% of sales. Sales activity in most markets of this segment continued to be firm and the semiconductor equipment market began to rebound. Industrial and Commercial Controls experienced record sales in the third quarter of 1997, rising 8% over the comparable period in 1996. This increase was attributable to strong industrial construction markets, continued gains in Cutler-Hammer's market position, and a booming commercial aircraft market. Cutler-Hammer is also now receiving the full benefit of the synergies the Company anticipated from the 1994 acquisition of Westinghouse's Distribution and Control Business Unit. Automotive and Appliance Controls sales were off 2% in the third quarter of 1997 from last year's third quarter. Volumes were up about 5%, but the higher exchange value of the U.S. dollar reduced the year's sales by about $20 million. Specialty Controls sales, which include the Company's Semiconductor Equipment Operations, achieved record sales increasing 29% in the third quarter of 1997 from the same quarter one year ago. The Company is actively participating in the industry rebound in semiconductor equipment. The Company anticipates that this business, after a very difficult past 12 months, will show considerable gains in the years immediately ahead. Excluding the acquisition of Fusion, Specialty Controls sales reached $163 million, 17% above one year ago. Page 10 During the third quarter, the Company announced the acquisition of Tycor International, a small manufacturer of power conditioning and surge suppression devices. Tycor will provide strategic growth opportunities for Cutler-Hammer in a variety of markets, including construction, industrial, medical, factory automation, telecommunications, and residential. The Company also announced during the third quarter it was building a new plant in Gdansk, Poland to manufacture automotive controls, and that it had formed a 51% Company-owned joint venture with JC Corporation to manufacture automotive controls in Korea. This joint venture in Korea will permit the Company to efficiently provide the latest in automotive controls design and technology to important customers in the Korean automotive industry. It is further evidence of the Company's commitment to invest in, and grow with, the Korean economy. In addition, in the third quarter, the Company announced it had agreed to sell its Appliance Controls business, which had sales of $440 million in 1996, to Siebe plc for $310 million. This announcement does not affect the Company's Automotive Controls business, which serves the Company's key vehicle components markets. The agreement is subject to certain conditions, including normal governmental approvals. Subsequent to the end of the third quarter, the Company also announced the formation of Cutler-Hammer de Argentina, a 75% Company- owned joint venture with Electro Integral Sudamerica, to manufacture and distribute electrical equipment in the Mercosur countries. This joint venture is another key step for the Company and supports the global expansion component of the Company's growth initiative. Vehicle Components segment results are summarized as follows (in millions): Three Months Ended September 30 ------------------ 1997 1996 ---- ---- Net sales Truck Components $ 534 $ 439 Passenger Car Components 193 175 Off-Highway Vehicle Components 137 115 ------ ------ $ 864 $ 729 ====== ====== Operating profit $ 110 $ 62 ====== ====== Page 11 Nine Months Ended September 30 ------------------ 1997 1996 ---- ---- Net sales Truck Components $1,528 $1,341 Passenger Car Components 601 549 Off-Highway Vehicle Components 411 360 ------ ------ $2,540 $2,250 ====== ====== Operating profit $ 331 $ 239 ====== ====== Vehicle Components segment sales and operating profit reached all- time highs in the third quarter of 1997. Segment sales rose 19% in the third quarter and 13% in the first nine months of 1997 compared to the same periods in 1996, while operating profit increased 77% and 38%, respectively, over the same periods in 1996. All of the Vehicle Components businesses are performing very well. Particularly noteworthy has been CAPCO, the Brazilian transmission manufacturer that the Company acquired last year, where the year-to- year profits improved by more than $16 million. With a corresponding increase in sales and new business awards, the Company is now achieving the full strategic benefits of this important acquisition. Truck Components experienced record sales in the third quarter of 1997, rising 22% over the prior year's third quarter. This compares with industry volumes that are up about 20% in North and South America and flat in Europe. Heavy truck orders in North America continue to climb, consistent with the strength in America's industrial sector. At this point, the Company expects 1997 North American factory sales to be about 10% above last year's levels, with further modest growth anticipated in 1998. After a long decline, the Company is also seeing tentative signs of an industry upturn in Europe. Passenger Car Components also experienced record sales in the third quarter of 1997, rising 10% over the comparable period in 1996 despite a $12 million, or 7%, reduction in sales due to unfavorable exchange rates. This 17% increase in volume was well ahead of the flat output of light vehicles in North America and Europe, reflecting increasing penetration and greater participation in the burgeoning Brazilian automotive market. Off-Highway Vehicle Components sales also reached an all-time high, rising 19% in the third quarter of 1997 over last year's third quarter. The strong gains are attributable to very robust activity in the North American hydraulics market, which was up 12% year-to- year, and to higher levels of new product introductions for the Company's worldwide agricultural and construction equipment customers. Page 12 On September 2, 1997, the Company completed the acquisition of Dana Corporation's worldwide Spicer clutch business which is a leader in the development of medium- and heavy-duty truck clutches and vibration dampers. This acquisition will give the Company the worldwide capability to meet customers' demands for systems solutions to their heavy-truck drivetrain needs. Excluding Spicer clutch, Truck Components sales reached $518 million for the third quarter of 1997, 18% ahead of one year ago. During the third quarter, the Company announced it had established a wholly-owned enterprise, Eaton Truck and Bus Components (Shanghai) Company, Limited, to manufacture heavy truck transmissions for the Chinese and other Asia/Pacific markets. This is the Company's fourth operation in China, and the third announced in the past sixteen months. During the third quarter, the Company announced it had agreed to sell its worldwide Axle and Brake business to Dana Corporation for $287 million. The worldwide axle and brake business had sales of $600 million in 1996. The agreement is subject to the due diligence process and normal governmental approvals. Results of the Defense Systems segment, comprised of AIL Systems Inc., are summarized as follows (in millions): Three Months Ended September 30 ------------------ 1997 1996 ---- ---- Net sales $ 25 $ 28 Operating (loss) profit (1) 2 Nine Months Ended September 30 ----------------- 1997 1996 ---- ---- Net sales $ 71 $ 76 Operating (loss) profit (2) 1 On October 1, 1997, the Company sold a majority of the stock of AIL Systems Inc. The Company will retain a minority interest in the new company. AIL had sales of $112 million in 1996. Changes in Financial Condition - ------------------------------ The Company remains in a strong financial position at September 30, 1997. Net working capital increased to $967 million at September 30, 1997 from $787 million at the end of 1996 and the current ratio rose to 1.7 from 1.6 at those dates, respectively. Higher sales in September 1997 primarily caused the increase in accounts receivable Page 13 at September 30 from the end of 1996. The acquisition of businesses in the third quarter of 1997 was the cause of the increase in goodwill and long-term debt. During the third quarter, the Company entered into two new 364-day revolving credit facilities totaling $250 million increasing the existing facility to $750 million. During the third quarter, Eaton's Board of Directors authorized the Company to spend up to an additional $500 million over a five year period to purchase Common Shares to enhance shareholder value and to avoid any dilution of earnings per Common Share resulting from recently announced agreements to divest the Axle/Brake and Appliance Controls businesses. This authorization is in addition to the five million share repurchase program authorized by the Board in December 1994. Cash flow from operating activities, supplemented by commercial paper borrowings, was used to fund capital expenditures, acquisition of businesses, repayment of debt, cash dividends and the repurchase of Common Shares. Forward-Looking Statements - -------------------------- The Company has included in this Form 10-Q, expectations of the outlook for 1997. Actual results could differ materially from these expectations, since they are forward-looking statements which inherently are subject to risks and uncertainties. Important factors which could cause actual results to differ from the 1997 expectations include: continuity of business relationships with and purchases by major customers, product mix, competitive pressure on sales and pricing, increases in material and other production costs which cannot be recouped in product pricing, failure to complete announced acquisitions and divestitures, difficulties in introducing new products as well as global economic and market conditions. Page 14 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, 1997. Page 15 Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ---------------------------- Registrant Date: November 12, 1997 /s/ Adrian T. Dillon ---------------------------- Adrian T. Dillon Executive Vice President - Chief Financial and Planning Officer; Principal Financial Officer Page 1 EATON CORPORATION EXHIBIT INDEX Regulation S-K, Item 601 - Exhibit Reference Number Exhibit - ------------------ ------- 4 Pursuant to Regulation S-K Item 601 (b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. 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 1,000,000 9-MOS DEC-31-1997 SEP-30-1997 24 70 1,160 16 785 2,310 3,638 1,801 5,845 1,343 1,387 0 0 39 2,196 5,845 5,629 5,629 4,068 5,189 (44) 0 62 422 141 281 0 0 0 281 3.65 3.54
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