-----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, QwmtfsyeBVxdsj+ukMDJI8zFZMoiCn7OJ+HYEh2xqnxpGomk/YtqAJQBjQwRjUf5 N4RzrVEVztKumQZZiiTFgQ== 0000031277-99-000003.txt : 19990322 0000031277-99-000003.hdr.sgml : 19990322 ACCESSION NUMBER: 0000031277-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 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-K405 SEC ACT: SEC FILE NUMBER: 001-01396 FILM NUMBER: 99568736 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-K405 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1998 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 New York Stock Exchange The Chicago Stock Exchange The Pacific Stock Exchange The London 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 ninety 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, 1999 was $5.0 billion. As of January 31, 1999, there were 71,724,963 Common Shares outstanding. Page 2 Documents Incorporated By Reference Portions of the Proxy Statement for the 1999 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 that serve industrial, vehicle, construction, commercial and semiconductor markets. Principal products include electrical power distribution and control equipment, truck drivetrain systems, engine components, hydraulic products, ion implanters and a wide variety of controls. Worldwide sales in 1998 reached $6.63 billion. Headquartered in Cleveland, the Company has 49,500 employees and 155 manufacturing sites in 25 countries around the world. The internet address for Eaton is http://www.eaton.com. The Company acquired businesses for a combined net cash purchase price of $117 million in 1998. Each of these acquisitions was accounted for by the purchase method of accounting, and, accordingly, the statement of consolidated income includes the results of the acquired businesses from the effective dates of acquisition. The acquisitions included the purchase of G.T. Products for $77 million, which is reported in the Automotive Components segment. The Company sold businesses for aggregate cash proceeds of $375 million in 1998. The divestitures included the sale of the Axle and Brake business in January and the automotive leaf spring business in April. The sales of these businesses, and adjustments related to businesses sold in prior periods, resulted in a pretax gain of $43 million ($28 million aftertax, or $.38 per Common Share). In 1998, the Company recorded unusual pretax charges of $111 million ($72 million aftertax, or $.99 per Common Share) which include $101 million to restructure certain business segments and $10 million for a contribution to the Company's charitable trust. The restructuring charges include workforce reductions, inventory and other asset write-downs, plant closing and other costs. Details of these charges and the components, by segment, are discussed further in "Unusual Charges" on pages 25 and 26 and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 45 through 52 of this report. Subsequent Events On February 1, 1999, the Company announced it had entered into an agreement to acquire all of the outstanding common stock of Aeroquip-Vickers, Inc., for $58 per share in cash, or approximately $1.7 billion, plus the assumption of debt. For 1998, Aeroquip- Page 3 Vickers reported sales of $2.15 billion, pretax income of $148 million, and net assets of $569 million. Aeroquip-Vickers is a world leader in the design, manufacture and distribution of engineered components and systems to industrial, aerospace and automotive markets. Eaton expects to finance approximately 20% of the acquisition through the sale of Common Shares, with the remainder through the issuance of debt. In conjunction with the acquisition, Eaton anticipates recording an acquisition integration charge which has not yet been determined. The acquisition is expected to be completed in April 1999 and will be accounted for as a purchase. Eaton has important operations in Brazil and recent events have occurred in the Brazilian economy causing the currency to devalue. The real plan, implemented by the Brazilian government in 1995, drastically lowered Brazilian inflation and stabilized the currency. However, on January 15, 1999, in reaction to declining foreign reserves and a loss of confidence in Brazilian fiscal policy, the Brazilian real exchange rate "band" was scrapped, allowing the currency to float freely. Since the currency was allowed to float, it has declined in value. Abandoning the real plan will likely have the effect of weakening the economy in 1999, making the outlook more volatile for inflation and for the currency. The situation will be closely monitored for effects on Eaton's businesses. Information regarding principal products, net sales, operating profit and long-lived assets by segment and geographic region is presented in "Business Segment and Geographic Region Information" on pages 39 through 43 of this report. Additional information regarding Eaton's segments and business in general is presented below. Automotive Components Patents and Trademarks - Eaton owns, controls, or is licensed under many patents related to this segment. While the EATON and EATON (logomark) trademarks are emphasized in marketing many products within this segment, the Company also markets under a number of other trademarks including EATONITE, DILL, INDUCTALLOY, ULV, SUPERCHARGER (& DESIGN), DYNA-TRAXX, INTELLI-TRAXX, VORAD, SmartCruise, LECTRON, L/P (DESIGN), FleetAdvisor, and FleetCom. Seasonal Fluctuations - Sales of automotive 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 segment are price, service and product performance. Eaton occupies a strong competitive position in relation to many competitors in this segment and, with respect to many products, is considered among the market leaders. Page 4 Major Customers - Approximately 56% of this segment's net sales in 1998 were made to divisions and subsidiaries of three large original equipment manufacturers of vehicles, generally concentrated in North America. 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. One of these customers is a major customer and two are minor customers of the Truck Components segment. Hydraulics & Other Components Patents and Trademarks - Eaton owns, controls, or is licensed under many patents related to this segment. The EATON, EATON (logomark), GEROLER, CHAR-LYNN, ORBIT, ORBITROL, AIRFLEX, FAWICK, TINNERMAN, SPEED NUT, and GOLF PRIDE trademarks are used in connection with marketing products included in this segment. Competition - Principal methods of competition in this segment are price, geographic coverage, service and product performance. Eaton occupies a strong competitive position in relation to many competitors in this segment and, with respect to many products, is considered among the market leaders. Major Customers - Approximately 10% of this segment's net sales in 1998 were made to one customer, which is not a major customer of any other segment. Industrial & Commercial Controls Patents and Trademarks - Eaton owns, controls, or is licensed under many patents related to this segment. The EATON, EATON (logomark), CUTLER-HAMMER, CH (EMBLEM), CH CONTROL (IN MONO BORDER), CH (IN MONO BORDER), SERIES C (& DESIGN), DE-ION, QUICKLAG, DURANT, CHALLENGER, FACTORYMATE, PANELMATE, POW-R-WAY, POW-R-LINE, POW-R- QUICK, POW-R-DESIGNER, ADVANTAGE, ADVANTAGE (& DESIGN), ADVANCED POWER CENTER, MAGNUM, MAGNUM DS, DS, OPTIM, TRI-PAC, IMPACC, and HEINEMANN are some of the more significant trademarks used in connection with marketing products included in this segment. In addition, the Company has the right to use the WESTINGHOUSE trademark in marketing certain products until 2004. Competition - Principal methods of competition in this segment are price, geographic coverage, service and product performance. Eaton occupies a strong competitive position in relation to many competitors in this segment and, with respect to many products, is considered among the market leaders. Page 5 Major Customers - Approximately 18% of this segment's net sales in 1998 were made to one customer, which is not a major customer of any other segment. Semiconductor Equipment Patents and Trademarks - Eaton owns, controls, or is licensed under many patents related to this segment. Although the EATON and EATON (logomark) trademarks are emphasized in marketing many products within this segment, the Company also markets under several other trademarks, including RapidTherm, GEMINI, FUSION 200, FUSION 300, PHOTOKINETICS, and FUSION SYSTEMS. Competition - Principal methods of competition in this segment are price, geographic coverage, service and product performance. Eaton occupies a strong competitive position in relation to many competitors in this segment and, with respect to many products, is considered among the market leaders. Major Customers - Approximately 16% of this segment's net sales in 1998 were made to two customers, which are not major customers of any other segment. Truck Components Patents and Trademarks- Eaton owns, controls, or is licensed under many patents related to this segment. The EATON, EATON (logomark), FULLER, ROADRANGER, AutoShift, EASY-PEDAL PLUS, SOLO, ANGLE-RING, CEEMAT, ANGLE SPRING, LIGHTNING, TOP 2, AMT, SAMT, and S-SERIES trademarks are used in connection with marketing products included in this segment. Competition - Principal methods of competition in this segment are price, service and product performance. Eaton occupies a strong competitive position in relation to many competitors in this segment and, with respect to many products, is considered among the market leaders. Major Customers- Approximately 50% of this segment's net sales in 1998 were made to divisions and subsidiaries of three original equipment manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles, generally concentrated in North America. One of these customers is a major customer of the Automotive Components segment. 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. Raw materials, as well as parts and other Page 6 components, are purchased from many suppliers and, under normal circumstances, the Company has no difficulty obtaining them. Order Backlog - Since a significant portion of open orders placed with Eaton by original equipment manufacturers of vehicles and trucks 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 the dates listed. Using this criterion, total backlog at December 31, 1998 and 1997 (in billions) was approximately $1.2 and $1.3, 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 1998, 1997 and 1996 (in millions) were $334, $319 and $267, respectively. Over the past five years, the Company has invested approximately $1.4 billion in research and development. Protection of the Environment - Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. The Company continues to modify, on an ongoing, regular basis, certain processes in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in and wastes generated from operations. Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have a material adverse effect upon earnings or the competitive position of the Company. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for 1999 and 2000. Information regarding the Company's liabilities related to environmental matters is presented in "Protection of the Environment" on page 31 of this report. Item 2. Properties Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 155 locations in 25 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment, none of which are material to the Company's operations. Eaton's principal research facilities are located in Southfield, Michigan, and Milwaukee, Wisconsin. In addition, certain divisions conduct research in their own facilities. Management believes that the manufacturing facilities are adequate for operations, and such facilities are maintained in good condition. Page 7 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 1998 and 1997 is presented in "Quarterly Data" on page 62 of this report. At December 31, 1998, there were 13,195 holders of record of the Company's Common Shares. Additionally, 21,364 current and former employees were shareholders through participation in the Company sponsored Share Purchase and Investment Plan. Item 6. Selected Financial Data Information regarding selected financial data is presented in the "Five-Year Consolidated Financial Summary" on page 63 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 45 through 61 of this report. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Information regarding market risk is included on pages 54 and 55 of this report. Item 8. Financial Statements and Supplementary Data The consolidated financial statements, financial review and the report of independent auditors is presented on pages 17 through 43 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Page 8 Part III Item 10. Directors and Executive Officers of the Registrant Information contained on pages 5 through 7 in the definitive Proxy Statement dated March 19, 1999, with respect to directors, is incorporated by reference. A listing of Eaton's officers, their ages and their current positions and offices, as of January 31, 1999 and updated to reflect the election of Randy W. Carson, follows: Name Age Position (Date elected to position) - ------------------- --- ----------------------------------- Stephen R. Hardis 63 Chairman and Chief Executive Officer (January 1, 1996 and September 1, 1995, respectively); Director Alexander M. Cutler 47 President and Chief Operating Officer (September 1, 1995); Director Gerald L. Gherlein 60 Executive Vice President and General Counsel (September 4, 1991) Adrian T. Dillon 45 Executive Vice President - Chief Financial and Planning Officer (April 23, 1997) Brian R. Bachman 53 Senior Vice President and Group Executive - Hydraulics, Semiconductor Equipment and Specialty Controls (September 9, 1998) Robert J. McCloskey 59 Senior Vice President and Group Executive - Automotive (September 9, 1998) Thomas W. O'Boyle 56 Senior Vice President and Group Executive - Truck Components (September 9, 1998) David M. Wathen 46 Senior Vice President and Group Executive - Cutler-Hammer (September 9, 1998) Randy W. Carson 48 Vice President - Growth Initiatives (February 24, 1999) Susan J. Cook 51 Vice President - Human Resources (January 16, 1995) Patrick X. Donovan 63 Vice President - International (April 27, 1988) Earl R. Franklin 55 Secretary and Associate General Counsel (September 1, 1991) John W. Hushen 63 Vice President - Corporate Affairs (August 1, 1991) Stanley V. Jaskolski 60 Vice President - Technical Management (October 1, 1990) Derek R. Mumford 57 Vice President - Information Technologies (April 1, 1992) Larry M. Oman 57 Vice President - Supplier Resource Management (September 9, 1998) Robert E. Parmenter 46 Vice President and Treasurer (January 1, 1997) Page 9 Billie K. Rawot 47 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 Brian R. Bachman, David M. Wathen, Randy W. Carson, and Susan J. Cook. Prior to joining Eaton, Mr. Bachman was Vice President and General Manager for the Standard Products Business Group of Philips Semiconductor. Earlier in his career, Mr. Bachman was President of the General Semiconductor Industry Unit of Square D Corporation. Prior to joining Eaton, Mr. Wathen was a senior executive with Allied- Signal, Inc. Prior to joining Allied-Signal, Inc., in 1996, Mr. Wathen spent seven years with Emerson Electric Company and twelve years with General Electric. Prior to joining Eaton, Mr. Carson served as senior vice president of Rockwell Automation for six years. Mr. Carson's previous responsibilities with Rockwell included leading the Automation Group of Allen-Bradley, and as executive vice president of the Reliance Electrical Group. Prior to joining Eaton, Ms. Cook was Vice President-Human Resources at Tandem Computers, Inc. 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, 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 10 through 20 in the definitive Proxy Statement dated March 19, 1999, with respect to executive compensation, is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information contained on pages 20 through 23 of the definitive Proxy Statement dated March 19, 1999, with respect to security ownership of certain beneficial owners and management, is incorporated by reference. Item 13. Certain Relationships and Related Transactions None required to be reported. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page 10 (a) (1) (i) The following consolidated financial statements and financial review, included in Item 8, are filed as as a separate section of this report. Report of Independent Auditors - Page 17 Consolidated Balance Sheets - December 31, 1998 and 1997 - Pages 18 and 19 Statements of Consolidated Income - Years ended December 31, 1998, 1997 and 1996 - Page 20 Statements of Consolidated Cash Flows - Years ended December 31, 1998, 1997 and 1996 - Page 21 Statements of Consolidated Shareholders' Equity - Years ended December 31, 1998, 1997 and 1996 - Page 22 Financial Review - Pages 23 through 43 (ii) Summarized financial information for Eaton ETN Offshore Ltd. - Page 44 (2) 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(a) Amended Articles of Incorporation (amended and restated as of April 27, 1994) - Incorporated by reference to the Form 8-K Report dated May 19, 1994 3(b) Amended Regulations (amended and restated as of April 27, 1988) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1994 4(a) Instruments defining rights of security holders, including indentures (Pursuant to Regulation S-K Item 601(b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt) 4(b) Eaton Corporation Rights Agreement dated June 28, 1995 - Incorporated by reference to the Form 8-K Report dated June 28, 1995 10 Material contracts The following are either a management contract or a compensatory plan or arrangement: Page 11 (a) Deferred Incentive Compensation Plan (amended and restated as of September 24, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (b) Executive Strategic Incentive Plan (amended and restated as of June 21, 1994, July 25, 1995 and April 21, 1998) (filed as a separate section of this report) (c) Group Replacement Insurance Plan (GRIP), effective as of June 1, 1992 - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1992 (d) 1991 Stock Option Plan - Incorporated by reference to the definitive Proxy Statement dated March 18, 1991 (e) 1995 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 17, 1995 (f) Incentive Compensation Deferral Plan (amended and restated as of September 24, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (g) Strategic Incentive and Option Plan (amended and restated as of September 24, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (h) Form of "Change of Control" Agreement entered into with officers of Eaton Corporation as of November 1, 1996 - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (i) The following are incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1990: (i) Limited Eaton Service Supplemental Retirement Income Plan (amended and restated as of January 1, 1989) Page 12 (ii) Amendments to the 1980 and 1986 Stock Option Plans (iii) Eaton Corporation Supplemental Benefits Plan (amended and restated as of January 1, 1989) (which provides supplemental retirement benefits) (iv) Eaton Corporation Excess Benefits Plan (amended and restated as of January 1, 1989) (with respect to Section 415 limitations of the Internal Revenue Code) (j) Executive Incentive Compensation Plan, effective January 1, 1995 - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (k) Plan for the Deferred Payment of Directors' Fees (amended and restated as of September 24, 1996 and amended effective as of January 1, 1997) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1997 (l) Plan for the Deferred Payment of Directors' Fees (originally adopted in 1980 and amended effective February 25, 1997) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (m) 1996 Non-Employee Director Fee Deferral Plan (amended effective January 1, 1997 and February 25, 1997) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1997 (n) Eaton Corporation Trust Agreement - Outside Directors (dated December 6, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (o) Eaton Corporation Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 Page 13 (p) Eaton Corporation Retirement Plan for Non- Employee Directors (amended and restated January 1, 1996) - Incorporated by Reference to the Annual Report filed on Form 10-K for the year ended December 31, 1997 (q) 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998 21 Subsidiaries of Eaton Corporation (filed as a separate section of this report) 23 Consent of Independent Auditors (filed as a separate section of this report) 24 Power of Attorney (filed as a separate section of this report) (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1998. (c) Exhibits Certain exhibits required by this portion of Item 14 are filed as a separate section of this report. (d) Financial Statement Schedules None required to be filed. Page 14 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ----------------- Registrant Date: March 19, 1999 /s/ Adrian T. Dillon ---------------------------- Adrian T. Dillon Executive Vice President-- Chief Financial and Planning Officer; Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. DATE: March 19, 1999 Signature Title - ----------------------- --------------------------------------- * - ----------------------- Stephen R. Hardis Chairman and Chief Executive Officer; Principal Executive Officer; Director * - ----------------------- Alexander M. Cutler President and Chief Operating Officer; Director * - ----------------------- Billie K. Rawot Vice President and Controller; Principal Accounting Officer * - ----------------------- Neil A. Armstrong Director Page 15 * - ----------------------- Michael J. Critelli Director - ----------------------- Phyllis B. Davis Director * - ----------------------- Ernie Green Director * - ----------------------- Ned C. Lautenbach Director * - ----------------------- John R. Miller Director * - ----------------------- Furman C. Moseley Director * - ----------------------- Victor A. Pelson Director * - ----------------------- A. William Reynolds Director * - ----------------------- Gary L. Tooker Director *By /s/ Adrian T. Dillon -------------------------------------- Adrian T. Dillon, Attorney-in-Fact for the officers and directors signing in the capacities indicated Page 16 Eaton Corporation 1998 Annual Report on Form 10-K Items 6, 7, 7A, 8 & Item 14(c) 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 Quarterly Data Five-Year Consolidated Financial Summary Exhibits Page 17 REPORT OF INDEPENDENT AUDITORS - ------------------------------ To the Shareholders Eaton Corporation We have audited the accompanying consolidated balance sheets of Eaton Corporation and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 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. /s/ Ernst & Young LLP Cleveland, Ohio January 19, 1999 Page 18 Eaton Corporation
Consolidated Balance Sheets December 31 ----------------- (Millions) 1998 1997 ---- ---- ASSETS Current assets Cash $ 80 $ 53 Short-term investments 42 37 Accounts receivable 885 958 Inventories 707 734 Deferred income taxes 152 163 Other current assets 116 110 ------- ------- 1,982 2,055 Property, plant & equipment Land & buildings 620 622 Machinery & equipment 2,767 2,738 ------- ------- 3,387 3,360 Accumulated depreciation (1,550) (1,601) ------- ------- 1,837 1,759 Excess of cost over net assets of businesses acquired 1,025 966 Other assets 821 826 ------- ------- $ 5,665 $ 5,606 ======= ======= The Financial Review on pages 23 to 43 is an integral part of the consolidated financial statements.
Page 19 Eaton Corporation
Consolidated Balance Sheets December 31 ---------------- (Millions) 1998 1997 ---- ---- LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 225 $ 81 Current portion of long-term debt 108 23 Accounts payable 445 519 Accrued compensation 160 180 Accrued income & other taxes 74 76 Other current liabilities 504 478 ------- ------- 1,516 1,357 Long-term debt 1,191 1,272 Postretirement benefits other than pensions 557 553 Other liabilities 344 353 Shareholders' equity Common Shares (71.7 in 1998 and 74.7 in 1997) 36 37 Capital in excess of par value 853 844 Retained earnings 1,321 1,385 Accumulated other comprehensive income (loss) (110) (148) Shares in trust Employee Stock Ownership Plan (6) (20) Deferred compensation plans (37) (27) ------- ------- 2,057 2,071 ------- ------- $ 5,665 $ 5,606 ======= ======= The Financial Review on pages 23 to 43 is an integral part of the consolidated financial statements.
Page 20 Eaton Corporation
Statements of Consolidated Income Year ended December 31 ------------------------- (Millions except for per share data) 1998 1997 1996 ---- ---- ---- Net sales $ 6,625 $ 7,563 $ 6,961 Costs & expenses Cost of products sold 4,759 5,456 5,171 Selling & administrative 1,050 1,088 995 Research & development 334 319 267 Purchased in-process research & development 85 ------- ------- ------- 6,143 6,948 6,433 ------- ------- ------- Income from operations 482 615 528 Other income (expense) Interest expense - net (88) (79) (79) Gain on sales of businesses 43 91 Other - net 48 41 36 ------- ------- ------- 3 53 (43) ------- ------- ------- Income before income taxes & extraordinary item 485 668 485 Income taxes 136 204 136 ------- ------- ------- Income before extraordinary item 349 464 349 Extraordinary item (54) ------- ------- ------- Net income $ 349 $ 410 $ 349 ======= ======= ======= Per Common Share - assuming dilution Income before extraordinary item $ 4.80 $ 5.93 $ 4.46 Extraordinary item (.69) ------- ------- ------- Net income $ 4.80 $ 5.24 $ 4.46 ======= ======= ======= Average number of Common Shares outstanding 72.7 78.2 78.2 Per Common Share - basic Income before extraordinary item $ 4.89 $ 6.05 $ 4.50 Extraordinary item (.71) ------- ------- ------- Net income $ 4.89 $ 5.34 $ 4.50 ======= ======= ======= Average number of Common Shares outstanding 71.4 76.8 77.4 Cash dividends paid per Common Share $ 1.76 $ 1.72 $ 1.60 The Financial Review on pages 23 to 43 is an integral part of the consolidated financial statements.
Page 21 Eaton Corporation
Statements of Consolidated Cash Flows Year ended December 31 ------------------------- (Millions) 1998 1997 1996 ---- ---- ---- Net cash provided by operating activities Income before extraordinary item $ 349 $ 464 $ 349 Adjustments to reconcile to net cash provided by operating activities Depreciation 259 285 270 Amortization 72 57 50 Deferred income taxes 94 31 (12) Long-term assets and liabilities, & other non-cash items in income (33) (14) 3 Write-off of purchased in-process research & development 85 Gain on sales of businesses (43) (91) Changes in operating assets & liabilities, excluding acquisitions & sales of businesses Accounts receivable (11) (106) (32) Inventories (38) (53) 36 Accounts payable & other accruals (3) 140 42 Other - net (4) (35) ------- ------- ------- 642 763 706 Net cash used in investing activities Acquisitions of businesses, less cash acquired (117) (387) (151) Sales of businesses 375 329 Expenditures for property, plant & equipment (483) (438) (347) Other - net (56) (35) (7) ------- ------- ------- (281) (531) (505) Net cash used in financing activities Borrowings with original maturities of more than three months Proceeds 1,409 425 169 Payments (982) (570) (148) Borrowings with original maturities of less than three months - net (303) 356 (87) Proceeds from exercise of stock options 17 36 18 Cash dividends paid (126) (133) (124) Purchase of Common Shares (349) (315) (63) ------- ------- ------- (334) (201) (235) ------- ------- ------- Total increase (decrease) in cash 27 31 (34) Cash at beginning of year 53 22 56 ------- ------- ------- Cash at end of year $ 80 $ 53 $ 22 ======= ======= ======= The Financial Review on pages 23 to 43 is an integral part of the consolidated financial statements.
Page 22 Eaton Corporation
Statements of Consolidated Shareholders' Equity Shares in trust Accumulated ------------------ Total Common Shares Capital in other Deferred share- ------------- excess of Retained comprehensive compensa- holders' Shares Amount par value earnings income (loss) ESOP tion plans equity ------ ------ --------- -------- ------------- ---- ----------- -------- Balance at January 1, 1996 77.6 $39 $812 $1,227 $(50) $(53) $1,975 Net income 349 349 Other comprehensive income (17) (17) ------ Total comprehensive income 332 Cash dividends paid, net of Employee Stock Ownership Plan (ESOP) tax benefit (123) (123) Issuance of shares under employee benefit plans, including tax benefit .5 23 (1) 22 Purchase of shares (1.1) (12) (51) (63) Shares allocated to employees 17 17 Issuance of shares to trust .1 7 $(7) ---- --- ---- ------ ---- ---- --- ------ Balance at December 31, 1996 77.1 39 830 1,401 (67) (36) (7) 2,160 Net income 410 410 Other comprehensive income (81) (81) ------ Total comprehensive income 329 Cash dividends paid, net of ESOP tax benefit (132) (132) Issuance of shares under employee benefit plans, including tax benefit .9 47 (2) 45 Put option obligation, net (18) (18) Purchase of shares (3.7) (2) (40) (292) (334) Shares allocated to employees 16 16 Issuance of shares to trust .2 20 (20) Other .2 5 5 ---- --- ---- ------ ---- ---- --- ------ Balance at December 31, 1997 74.7 37 844 1,385 (148) (20) (27) 2,071 Net income 349 349 Other comprehensive income 38 38 ------ Total comprehensive income 387 Cash dividends paid, net of ESOP tax benefit (126) (126) Issuance of shares under employee benefit plans, including tax benefit .5 25 (1) 24 Put option obligation, net 16 16 Purchase of shares (3.7) (1) (42) (286) (329) Shares allocated to employees 14 14 Issuance of shares to trust .2 10 (10) ---- --- ---- ------ ---- ---- --- ------ Balance at December 31, 1998 71.7 $36 $853 $1,321 $(110) $(6) $(37) $2,057 ==== === ==== ====== ===== ==== ==== ====== The Financial Review on pages 23 to 43 is an integral part of the consolidated financial statements.
Page 23 FINANCIAL REVIEW - ---------------- All references to net income per Common Share assume dilution, unless otherwise indicated. 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 in associate companies and joint ventures where the Company has a 20% to 50% ownership interest. Foreign Currency Translation - ---------------------------- The functional currency for principally all subsidiaries outside the United States is the local currency. Financial statements for these subsidiaries 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. 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. 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. Cost of buildings is depreciated over forty years and machinery and equipment over principally three to ten years. Intangible assets primarily consist of patents, trademarks, tradenames and software which are amortized over a range of five to forty years. Excess of cost over net assets of businesses acquired is amortized over a range of five to forty years. Excess of cost over net assets of businesses acquired and certain other long-lived assets are reviewed for impairment losses whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Financial Instruments - --------------------- The Company selectively uses straightforward, nonleveraged financial instruments as part of foreign exchange and interest rate risk management programs. Financial instruments are not bought and sold solely for trading purposes, except for nominal amounts authorized under limited, controlled circumstances. Credit loss has never been experienced, and is not anticipated, as the counterparties to various financial instruments are major international financial institutions Page 24 with strong credit ratings and due to control over the limit of positions entered into with any one party. Although financial instruments are an integral part of the Company's risk management programs, their incremental effect on financial condition and results of operations is not material. The Company and its subsidiaries, operating in Canada, Europe, Latin America and the Pacific Region, are exposed to fluctuations in foreign currencies in the normal course of business. Foreign currency forward exchange contracts and options are used to reduce exposure to foreign currency fluctuations. Accrued gains or losses on those financial instruments which hedge net investments in subsidiaries outside the United States are recorded in shareholders' equity. Gains or losses on those financial instruments which hedge specific transactions are deferred and subsequently recognized in net income when the gains or losses on the hedged foreign currency transaction are recognized in net income. Cash premiums and discounts related to these financial instruments are amortized to other income-net over the life of the respective agreement. In the normal course of business, the Company's operations are also exposed to fluctuations in interest rates. Interest rate swaps and caps, and forward interest rate agreements, are used to reduce the cost of, and exposure to, interest rate fluctuations. Accrued gains or losses on interest rate swaps and caps are included in interest expense since they hedge interest on debt. Gains and losses on forward interest rate agreements are deferred and subsequently recognized in net income when interest expense on the hedged debt is recognized in net income. Cash premiums related to interest rate caps are amortized to interest expense over the life of the respective agreement. Options for Common Shares - ------------------------- The Company applies the intrinsic value based method described in Accounting Principles Board Opinion No. 25 to account for stock options granted to employees to purchase Common Shares. Under this method, no compensation expense is recognized on the grant date, since on that date the option price equals the market price of the underlying Common Shares. Revenue Recognition - ------------------- Substantially all revenues are recognized when products are shipped to unaffiliated customers. Estimates - --------- Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates. Page 25 Financial Presentation Changes - ------------------------------ Certain amounts for prior years have been reclassified to conform to the current year presentation. SUBSEQUENT EVENT (Unaudited) - --------------------------- On February 1, 1999, the Company announced it had entered into an agreement to acquire all of the outstanding common stock of Aeroquip- Vickers, Inc., for $58 per share in cash, or approximately $1.7 billion, plus the assumption of debt. For 1998, Aeroquip-Vickers reported sales of $2.15 billion, pretax income of $148 million, and net assets of $569 million. Aeroquip-Vickers is a world leader in the design, manufacture and distribution of engineered components and systems to industrial, aerospace and automotive markets. Eaton expects to finance approximately 20% of the acquisition through the sale of Common Shares, with the remainder through the issuance of debt. In conjunction with the acquisition, Eaton anticipates recording an acquisition integration charge which has not yet been determined. The acquisition is expected to be completed in April 1999 and will be accounted for as a purchase. UNUSUAL CHARGES - --------------- In 1998, the Company recorded unusual pretax charges of $111 million ($72 million aftertax, or $.99 per Common Share) which include $101 million to restructure certain business segments and $10 million for a contribution to the Company's charitable trust. Components of the 1998 restructuring charges, included in income from operations, are as follows (in millions):
Original Balance remaining charges Utilized at December 31, 1998 -------- -------- -------------------- Workforce reductions $ 41 $ (9) $ 32 Inventory & other asset write-downs 46 (46) 0 Plant closing & other 14 (7) 7 ---- ---- ---- $101 $(62) $ 39 ==== ==== ====
The charge for workforce reductions primarily represents severance and other related benefit payments for the expected termination of approximately 3,000 employees, primarily manufacturing personnel. As of December 31, 1998, approximately 900 have been terminated. The balance remaining at the end of 1998 will be substantially utilized in 1999. The principal business affected by the restructuring is the Semiconductor Equipment segment. Due to the collapse of the semiconductor equipment industry, the Company took actions to restructure the segment that amounted to $43 million of the $101 million charge noted above. Approximately $8 million represents workforce reductions and $30 million represents inventory and other asset write-downs. The workforce reductions primarily relate to the closing of the Austin, Texas plant, although workforce reductions Page 26 will also occur at other locations. The charge for asset write-downs primarily relates to inventory, which was written down to estimated market value, and approximately $2 million to write-down the Austin plant to estimated selling price. The write-down of inventory is included in cost of products sold. The remaining $58 million of the $101 million restructuring charge primarily relates to workforce reductions, inventory write-downs, and other costs in the Automotive Components, Industrial and Commercial Controls, and Truck Components segments. Certain plants in these segments will be closed and production is being consolidated into other existing facilities in an effort to reduce costs. In order to restructure certain business segments, the Company also recorded pretax charges of $24 million in 1997 ($15 million aftertax, or $.19 per Common Share) and $50 million in 1996 ($32 million aftertax, or $.41 per Common Share). These charges related to workforce reductions, asset write-downs and other costs. ACQUISITIONS OF BUSINESSES - -------------------------- The Company acquired businesses for a combined net cash purchase price (in millions) of $117, $387, and $151 in 1998, 1997 and 1996, respectively. Each of these acquisitions was accounted for by the purchase method of accounting, and, accordingly, the statements of consolidated income include the results of the acquired businesses from the effective dates of acquisition. In 1998, G.T. Products was acquired for $77 million and is reported in the Automotive Components segment. Acquisitions in 1997 included the purchase of Dana Corporation's Spicer Clutch business for $180 million, which is reported in the Truck Components segment, and Fusion Systems Corporation for $203 million, which is reported in the Semiconductor Equipment segment. In 1996, CAPCO Automotive Products Corporation was acquired for $135 million and is reported in the Truck Components segment. The purchase price allocation for Fusion Systems included $85 million for purchased in-process research and 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, 1997 results include the write-off of $85 million for purchased in-process research and development, with no income tax benefit, or $1.09 per Common Share. DIVESTITURES OF BUSINESSES - -------------------------- The Company sold businesses for aggregate cash proceeds of $375 million in 1998. The divestitures included the sale of the Axle and Brake business in January and the automotive leaf spring business in April. The sales of these businesses, and adjustments related to businesses sold in prior periods, resulted in a pretax gain of $43 million ($28 million aftertax, or $.38 per Common Share). Page 27 The Company also sold businesses for aggregate cash proceeds of $329 million in 1997. The divestitures included the sale of the majority of the stock of AIL Systems in October and the worldwide Appliance Controls business in December. The sales of these businesses resulted in a pretax gain of $91 million ($69 million aftertax, or $.88 per Common Share). The operating results of these businesses are reported in business segment information as divested operations. DEBT AND OTHER FINANCIAL INSTRUMENTS - ------------------------------------ The Company's subsidiaries outside the United States have lines of credit, primarily short-term, aggregating $65 million from various banks worldwide. At December 31, 1998, $42 million was outstanding under these lines of credit. Long-term debt at December 31, excluding the current portion, follows (in millions):
1998 1997 ---- ---- 6-3/8% notes due 1999 (effective interest rate 4.8%) $ 100 9% notes due 2001 $ 100 100 8% debentures due 2006 86 86 8.9% debentures due 2006 100 100 8.1% debentures due 2022 100 100 7-5/8% debentures due 2024 (effective interest rate 7.1%) 100 100 6-1/2% debentures due 2025 (due 2005 at option of debenture holders) 150 150 Commercial paper 500 500 Other (effective interest rate 9.5%) 55 36 ------ ------ $1,191 $1,272 ====== ======
In the second quarter of 1998, the Company terminated existing credit agreements and entered into a $1 billion credit facility with a series of banks; $500 million with a five-year term and $500 million with a 364-day term. These lines of credit provide funds for working capital and general corporate purposes. Commercial paper of $500 million is classified as long-term debt because the Company intends, and has the ability under the five-year credit agreement, to refinance these notes on a long-term basis. The weighted-average interest rate on short-term borrowings, including commercial paper classified in long-term debt, was 6.0% at December 31, 1998 and 1997. Aggregate mandatory sinking fund requirements and annual maturities of long-term debt are as follows (in millions): 1999, $108; 2000, $11; 2001, $103; 2002, $0; and 2003, $500. Interest capitalized as part of the acquisition or construction of major fixed assets (in millions) was $16 in 1998, $12 in 1997 and $8 Page 28 in 1996. Interest paid (in millions) was $116 in 1998, $97 in 1997 and $96 in 1996. The carrying values of cash, short-term investments and short-term debt in the Consolidated Balance Sheet approximate their estimated fair values. The estimated fair values of other financial instruments outstanding at December 31 are as follows (in millions):
1998 1997 -------------------------- ----------------------- Notional Carrying Fair Notional Carrying Fair amount amount value amount amount value -------- ------- ----- -------- -------- ----- Marketable debt securitie $66 $66 $62 $62 Long-term debt, current portion of long-term debt & foreign currency principal swaps (1,299)(1,384) (1,295)(1,373) Foreign currency forward exchange contracts & options $ 11 (3) (3) $112 (27) (27) Interest rate swaps Fixed to floating 36 66 1 Floating to fixed 103 (5) 9 Fixed to fixed 40 90 1 Forward interest rate agreement 200 (9)
The estimated fair values of financial instruments are principally based on quoted market prices. The fair value of foreign currency forward exchange contracts and options, which primarily mature in 1999, and foreign currency principal and interest rate swaps are estimated based on quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences. EXTRAORDINARY ITEM - ------------------ On December 30, 1997, the Company redeemed the $200 million of 7% debentures due 2011. The aftertax extraordinary loss on this redemption, including the write-off of debt issue costs, was $54 million, or $.69 per Common Share ($88 million before income taxes). PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS - ---------------------------------------------- The Company has non-contributory defined benefit pension plans and other postretirement benefit plans, primarily health care and life insurance. 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 of employees and retirees. Page 29 Components of plan obligations and assets, and the recorded asset (liability) at December 31 are as follows (in millions):
Other postretirement Pension benefits benefits ---------------- --------------- 1998 1997 1998 1997 ---- ---- ---- ---- Benefit obligation at beginning of year $(1,567) $(1,627) $ (737) $ (705) Service cost (58) (64) (12) (13) Interest cost (98) (111) (49) (49) Effect of divestitures 99 162 14 56 Actuarial loss (132) (55) (33) (64) Benefits paid 161 144 51 55 Other (7) (16) (3) (17) ------- ------- ------- ------- Benefit obligation at end of year $(1,602) $(1,567) $ (769) $ (737) ------- ------- ------- ------- Fair value of plan assets at beginning of year $ 2,024 $ 1,939 Actual return on plan assets 222 375 Employer contributions 16 17 $ 48 $ 52 Settlement cost (29) (3) Effect of divestitures (62) (171) Benefits paid (161) (144) (51) (55) Other (6) 11 3 3 ------- ------- ------- ------- Fair value of plan assets at end of year $ 2,004 $ 2,024 $ 0 $ 0 ------- ------- ------- ------- Pension plan assets in excess of benefit obligations $ 402 $ 457 Obligations with no plan assets $ (769) $ (737) Unamortized Net (gain) loss (290) (395) 204 184 Prior service cost 34 32 (21) (29) Other (15) (19) ------- ------- ------- ------- Recorded asset (liability) $ 131 $ 75 $ (586) $ (582) ======= ======= ======= =======
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets (in millions) were $230, $206 and $118, respectively, as of December 31, 1998 and $211, $186 and $89, respectively, as of December 31, 1997. Page 30 The components of net periodic benefit income (cost) for the years ended December 31 are as follows (in millions):
Pension benefits ------------------------- 1998 1997 1996 ---- ---- ---- Service cost $ (58) $ (64) $ (58) Interest cost (98) (111) (105) Expected return on plan assets 158 164 147 Other (4) 3 ------ ------ ------ (2) (11) (13) Curtailment gain (loss) 8 (1) Settlement gain 41 68 6 ------ ------ ------ $ 47 $ 56 $ (7) ====== ====== ====== Other postretirement benefits ----------------------------- 1998 1997 1996 ---- ---- ---- Service cost $ (12) $ (13) $ (12) Interest cost (49) (49) (47) Net amortization (2) 3 5 ------ ------ ------ (63) (59) (54) Curtailment gain 1 16 Settlement loss (5) (12) ------ ------ ------ $ (67) $ (55) $ (54) ====== ====== ======
The curtailment and settlement gains and losses relate primarily to the sales of the Axle and Brake and Appliance Controls businesses, and AIL Systems. Actuarial assumptions used in the calculation of the recorded asset (liability) are as follows:
1998 1997 ---- ---- Discount rate 6.50% 7.00% Return on pension plan assets 10.00% 10.00% Rate of compensation increase 3.95% 4.50% Projected health care cost trend rate 7.00% 8.00% Ultimate health care trend rate 4.25% 4.75% Year ultimate health care trend rate is achieved 2003 2002
Page 31 Assumed health care cost trend rates have a significant effect on the amounts reported for other postretirement benefits. A one- percentage-point change in the assumed health care cost trend rate would have the following effects (in millions): 1% Increase 1% Decrease ----------- ----------- 1998 benefit cost $ 3 $ (3) Recorded liability at December 31, 1998 40 (36) PROTECTION OF THE ENVIRONMENT - ----------------------------- The Company has several policies in place to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. For example, each facility has a person responsible for environmental, health and safety (EHS) matters. The Company routinely reviews EHS performance at each of its facilities; and, continuously strives to minimize the generation of hazardous waste at its facilities. As a result of past operations, the Company is involved in remedial response and voluntary environmental cleanup activities at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites. A number of factors affect the cost of environmental remediation, including the number of parties involved at many sites, the determination of the extent of contamination, the length of time that remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, the Company has estimated (without discounting) costs of remediation, which will be incurred over a period of several years. The Company accrues an amount equal to the best estimates of these costs when it is probable that a liability has been incurred. At December 31, 1998 and 1997, the consolidated balance sheet included an accrual for these costs (in millions) of $32 and $33, respectively. The Company has rights of recovery from non-affiliated parties as to a portion of these costs with regard to several of the sites. Based upon the Company's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably likely to exceed the accrual by an amount that would have a material adverse effect on its financial condition or results of operations or liquidity. All of these estimates are forward- looking statements and, given the inherent uncertainties in evaluating environmental exposures, actual results can differ from these estimates. SHAREHOLDERS' EQUITY - -------------------- There are 300 million Common Shares authorized ($.50 par value per share). At December 31, 1998, there were 8.6 million Common Shares held in treasury and 13,195 holders of record of Common Shares. Additionally, 21,364 current and former employees were shareholders Page 32 through participation in the Company sponsored Share Purchase and Investment Plan. Under the Share Purchase and Investment Plan (SPIP) for United States operations, eligible participating employees may choose to contribute up to 17% of their eligible compensation. The Company matches employee contributions up to 6% of a participant's eligible compensation as limited by United States income tax regulations. The matching contribution, which is determined each quarter based on net income per Common Share-basic, ranges from 25% to 100% of a participant's contribution and is invested in the Company's Common Shares. The Company has prefunded, through early 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 which have not yet been allocated to employee accounts are included in shareholders' equity as "Shares in trust-ESOP" and the notes payable of the ESOP, which are guaranteed by the Company, are included in current portion of long-term debt. Unallocated shares in the ESOP are released at historical cost based on the ratio of the annual principal payment on the notes payable compared to the original principal amount of the notes payable and allocated to employee accounts. 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. Unallocated shares in the ESOP, which are considered outstanding for purposes of computing net income per Common Share, at the end of 1998 and 1997 were 170,000 and 800,000, respectively. Compensation expense related to the SPIP match, including the effect of shares released by the ESOP at historical cost, (in millions) was $9 in 1998, $6 in 1997 and $10 in 1996. The Company has plans which permit eligible employees and directors to defer a portion of their compensation. The Company has deposited $77 million of marketable securities and Common Shares into a trust to fund a portion of these liabilities. The marketable securities are included in other assets and the Common Shares are included in shareholders' equity. Stock Options - ------------- Stock 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. Historically, the majority of these options vest ratably during the three-year period following the date of grant and expire ten years from date of grant. During 1998 and 1997, the Company granted .6 million and 1.9 million special performance-vested stock options, respectively, in lieu of the more standard options. These options become exercisable when the Company achieves certain net income and Common Share price targets. If these targets are not achieved, these options become exercisable ten days before the expiration of their ten-year term. Half of the options granted in 1997 became exercisable during 1997 when the initial Common Share price target of $85 was achieved. Page 33 A summary of stock option activity follows (shares in millions):
1998 1997 1996 -------------- -------------- ---------------- Average Average Average price price price per per per share Shares share Shares share Shares ------- ------ ------- ------ ------ ------ Outstanding, January 1 $55.85 6.8 $44.32 5.0 $41.12 4.6 Granted 87.81 1.2 73.07 2.8 53.10 1.1 Exercised 43.40 (.4) 43.49 (.9) 33.57 (.6) Canceled 71.11 (.1) 59.85 (.1) 51.79 (.1) --- --- --- Outstanding, December 31 $61.46 7.5 $55.85 6.8 $44.32 5.0 === === === Exercisable, December 31 $51.91 4.8 $49.71 4.5 $41.42 3.7 Reserved for future grants, December 31 .4 1.5 4.2
The following table summarizes information about stock options outstanding at December 31, 1998 (shares in millions):
Weighted- Weighted- average average remaining exercise Range of exercise Number contractual price per prices per share outstanding life (years) share - --------------------------------------------------------------------- $24.15 - $39.99 1.5 2.8 $33.12 $40.00 - $49.99 .8 6.1 48.56 $50.00 - $69.99 1.6 6.3 55.42 $70.00 - $79.99 2.4 8.1 71.82 $80.00 - $100.91 1.2 9.1 89.54
The following table summarizes information about stock options that are exercisable at December 31, 1998 (shares in millions):
Weighted- average exercise Range of exercise prices Number price per per share exercisable share - ----------------------------------------------------- $24.15 - $39.99 1.5 $33.12 $40.00 - $49.99 .8 48.56 $50.00 - $69.99 1.3 55.38 $70.00 - $79.99 1.1 71.82 $80.00 - $100.91 .1 89.11
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation". If the Company accounted for its stock options under the fair value method of SFAS No. 123, net income (in millions) and net income per Common Share would have been as indicated below:
Page 34 1998 1997 1996 ---- ---- ---- Net income As reported $ 349 $ 410 $ 349 Assuming fair value method 338 390 343 Net income per Common Share-assuming dilution As reported $4.80 $5.24 $4.46 Assuming fair value method 4.65 4.99 4.38 Net income per Common Share-basic As reported $4.89 $5.34 $4.50 Assuming fair value method 4.73 5.08 4.43
The fair value of each option grant was estimated using the Black- Scholes option pricing model with the following assumptions:
1998 1997 1996 ---- ---- ---- Dividend yield 3% 3% 3% Expected volatility 22% 22% 23% Risk-free interest rate 5.5% to 5.7% 6.0% to 6.7% 5.3% to 6.3% Expected option life 4, 5 or 6 years 4, 5 or 6 years 4 years Weighted-average per share fair value of options granted during the year $18.73 $16.84 $10.27
Preferred Share Purchase Rights - ------------------------------- In June 1995, the Company declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding Common Share. The Rights become exercisable only if a person or group acquires, or offers to acquire, 20% or more of the Company's Common Shares. The Company is authorized to reduce the 20% threshold for triggering the Rights to not less than 10%. The Rights expire on July 12, 2005, unless redeemed earlier at one cent per Right. When the Rights become exercisable, the holder of each Right, other than the acquiring person, is entitled (1) to purchase for $250, one one-hundredth of a Series C Preferred Share (Preferred Share), (2) to purchase for $250, that number of the Company's Common Shares or common stock of the acquiring person having a market value of twice that price, or (3) at the option of the Company, to exchange each Right for one Common Share or one one-hundredth of a Preferred Share. Comprehensive Income - -------------------- In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new standards for reporting comprehensive income and its components; the adoption of SFAS No. 130 has no impact on the Company's net income or shareholders' equity. The components of accumulated other Page 35 comprehensive income (loss) as reported in the Statement of Consolidated Shareholders' Equity are as follows (in millions):
Unrealized Foreign gain (loss) currency on available translation for sale adjustments securities Total ----------- ---------- ----- Balance at January 1, 1996 $ (55) $ 5 $ (50) 1996 adjustment, net of income taxes (13) (4) (17) ----- ----- ----- Balance at December 31, 1996 (68) 1 (67) 1997 adjustment, net of income taxes (79) (10) (89) Recognition in income of adjustment related to divested businesses 8 8 ----- ----- ----- Balance at December 31, 1997 (139) (9) (148) 1998 adjustment, net of income taxes (2) 6 4 Recognition in income of adjustment related to divested businesses 34 34 ----- ----- ----- Balance at December 31, 1998 $(107) $ (3) $(110) ===== ===== =====
INCOME TAXES - ------------ For financial statement reporting purposes, income before income taxes (in millions), based on the geographical location of the operation to which such earnings are attributable, is summarized below. Certain foreign operations are branches of Eaton Corporation and are, therefore, subject to United States as well as foreign income tax regulations. As a result, pretax income by location and the components of income tax expense by taxing jurisdiction are not directly related.
Income before income taxes -------------------------- 1998 1997 1996 ---- ---- ---- United States $455 $457 $385 Non-United States 64 219 100 Write-off of foreign currency translation adjustments related to divested businesses (34) (8) ---- ---- ---- $485 $668 $485 ==== ==== ====
Page 36 Income tax expense for the years ended December 31 follows (in millions):
1998 1997 1996 ---- ---- ---- Current United States Federal $(11) $ 99 $ 81 State & local 9 14 21 Non-United States 42 42 34 ---- ---- ---- 40 155 136 Deferred United States Federal 90 20 (5) State & local 5 Non-United States Reduction of valuation allowance for deferred income tax assets (4) Operating loss carryforwards (1) 15 11 Other 7 13 (6) ---- ---- ---- 96 49 0 ---- ---- ---- $136 $204 $136 ==== ==== ====
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):
1998 ------------- 1997 1996 Amount Rate Rate Rate ------ ---- ---- ---- Income taxes at the United States statutory rate $170 35.0% 35.0% 35.0% Write-off of purchased in-process research & development 4.5 State & local income taxes 7 1.5 2.9 2.9 Possessions credit related to Puerto Rican operations (40) (8.2) (5.7) (7.2) Credit for increasing research activities (13) (2.7) (3.3) (.6) Book/tax basis difference related to sales of businesses 11 2.1 (1.9) Foreign source income 1 .3 .2 (2.6) Other--net (1.2) .7 ---- ---- ---- ---- $136 28.0% 30.5% 28.2% ==== ==== ==== ====
Page 37 Significant components of current and long-term deferred income taxes at December 31 follow (in millions):
Current Long-term Long-term assets assets liabilities ------- --------- ----------- 1998 Accruals & other adjustments Employee benefits $ 43 $ 2 $187 Depreciation & amortization (4) (20) (233) Other 99 10 24 Operating loss carryforwards of non-United States subsidiaries 6 50 4 Other items 8 23 2 Valuation allowance (50) ---- ---- ---- $152 $ 15 $(16) ==== ==== ==== 1997 Accruals & other adjustments Employee benefits $ 45 $225 $(11) Depreciation & amortization (6) (189) (13) Other 109 49 4 Operating loss carryforwards of non-United States subsidiaries 4 58 2 Other items 11 15 7 Valuation allowance (52) ---- ---- ---- $163 $106 $(11) ==== ==== ====
At December 31, 1998, certain non-United States subsidiaries had operating loss carryforwards aggregating $158 million. Carryforwards of $133 million have no expiration dates and the balance expires at various dates from 1999 through 2005. The Company has manufacturing facilities in Puerto Rico which operate under United States tax law incentives that will no longer be available after 2005. No provision has been made for income taxes on undistributed earnings of consolidated non-United States subsidiaries of $484 million at December 31, 1998, 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 in 1998, 1997 and 1996 (in millions) were $30, $163 and $154, respectively. Page 38 OTHER INFORMATION - ----------------- Accounts Receivable - ------------------- Accounts receivable are net of an allowance for doubtful accounts (in millions) of $14 at the end of 1998 and $15 at the end of 1997. Inventories - ----------- The components of inventories at December 31 follow (in millions):
1998 1997 ---- ---- Raw materials $282 $258 Work in process 297 330 Finished goods 197 235 ---- ---- Gross inventories at FIFO 776 823 Excess of current cost over LIFO cost (69) (89) ---- ---- Net inventories $707 $734 ==== ====
Gross inventories accounted for using the LIFO method (in millions) were $389 at the end of 1998 and $422 at the end of 1997. Excess of Cost Over Net Assets of Businesses Acquired - ----------------------------------------------------- Accumulated amortization of excess of cost over net assets of businesses acquired (in millions) was $184 at the end of 1998 and $148 at the end of 1997. Investments in Life Insurance - ----------------------------- The Company has 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, 1998 and 1997, the investment in the policies included in other assets (in millions) was $21 and $13, net of policy loans of $345 and $346, respectively. Net life insurance expense (in millions) of $7 in 1998, $8 in 1997 and $9 in 1996, including interest expense of $33 in 1998 and 1997 and $35 in 1996 is included in selling and administrative expense. Lease Commitments - ----------------- Minimum rental commitments for 1999 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, are $75 million and decline substantially thereafter. Rental expense in 1998, 1997 and 1996 (in millions) was $90, $78 and $71, respectively. Page 39 Net Income per Common Share - --------------------------- The calculation of net income per Common Share-assuming dilution and basic follows:
(Millions except for per share data) 1998 1997 1996 ---- ---- ---- Net income $ 349 $ 410 $ 349 ===== ===== ===== Average number of Common Shares outstanding - assuming dilution 72.7 78.2 78.2 Less dilutive effect of stock options 1.3 1.4 .8 ---- ---- ---- Average number of Common Shares outstanding - basic 71.4 76.8 77.4 ==== ==== ==== Net income per Common Share Assuming dilution $4.80 $5.24 $4.46 Basic 4.89 5.34 4.50
Employee stock options to purchase 3.7 million Common Shares were outstanding at the end of 1998 but were not included in the computation of net income per Common Share-assuming dilution, since they would have had an antidilutive effect on earnings per share. Recently Issued Accounting Pronouncements - ----------------------------------------- In June 1998, Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued. The Company must adopt the standard by the first quarter of fiscal year 2000. SFAS No. 133 requires all derivatives to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company expects that the adoption of the standard will have an immaterial effect on earnings and financial position. BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION - --------------------------------------------------- The Company is a global manufacturer of highly engineered products which serve the industrial, vehicle, construction, commercial and semiconductor markets with operations located in 25 countries. The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and restated 1997 and 1996 segment information to conform to the new standard. The Company's new segments are based on the way that management aggregates products and business units for making operating decisions and assessing performance. Major products included in each segment and other information follows. Page 40 Automotive Components - --------------------- Valve train systems, intake and exhaust valves, lash compensation lifters and lash adjusters, cylinder heads, viscous fan drives, plastic cooling fans and shrouds, superchargers, limited slip and locking differentials, transmission dampers, precision gear forgings, air control valves, climate controls, convenience switches (for power windows, door locks, mirrors, lights, etc.), engine sensors, mirror actuators, transmission controls, keyless entry systems, daytime running lamps, speed-sensitive steering systems, on-board vapor recovery valves, check valves, fuel level sensors, pressure control valves, intelligent cruise control systems, collision warning systems, and transportation logistics management systems Hydraulics and Other Components - ------------------------------- Hydraulic pumps, motors, valves, cylinders, power steering units, transaxles and transmissions, fasteners for automotive and other commercial products, clutches and brakes for industrial machines, and golf grips Industrial and Commercial Controls - ---------------------------------- To control and protect electric motors -- drives, contactors, starters, and other motor control products; position sensing -- a wide range of sensors; to control machine logic -- automation personal computers and programmable logic controllers; to permit human interface with machines -- a full range of operator interface hardware and software; to manage distribution of electricity in homes, businesses and industrial facilities -- vacuum interrupters, a wide range of circuit breakers and a variety of power distribution and control assemblies and components; to support customer power and control system requirements -- engineering systems and diagnostic and support services; for aerospace, commercial and military applications - -- actuators, thermal circuit breakers, cockpit controls, illuminated displays, integrated displays and panels, relays and valves, power control and conversion equipment Semiconductor Equipment - ----------------------- High- and medium- current implanters and high-energy implanters; integrated implant products and services that deliver the lowest cost of ownership and contamination-free production of semiconductor devices, including those requiring special capabilities such as wafer repositioning and extreme tilt angles; photostablizers, ozone and plasma ashers, thermal processing systems, flat panel display equipment, regional spare parts depots and innovative parts management programs Truck Components - ---------------- Heavy-, medium-, and light-duty mechanical transmissions, heavy-duty automated transmissions, heavy- and medium-duty clutches, traction control systems, transfer boxes, power take-off units, splitter boxes, gearshift mechanisms, and transmissions for off-highway construction equipment Other Information - ----------------- The principal market for Automotive Components, Truck Components, and Hydraulics and Other Components is original equipment manufacturers of heavy-, medium-, and light-duty trucks, passenger cars and off- Page 41 highway vehicles. These original equipment manufacturers are generally concentrated in North America, however, sales are made on a global basis. Most sales of these products are made directly to such manufacturers. The principal markets for Industrial and Commercial Controls and Semiconductor Equipment are industrial, construction, commercial, automotive, aerospace and government customers concentrated principally in North America, however, sales are made globally. Sales are made directly by the Company and indirectly through distributors and manufacturers' representatives to such customers. No single customer represented more than 10% of the Company's net sales in 1998. Net sales to divisions and subsidiaries of one customer, primarily from the Automotive Components, Truck Components, and Hydraulics and Other Components segments, were (in millions) $766 in 1997 and $739 in 1996 (10% of sales in 1997 and 11% in 1996). Sales from ongoing United States and Canadian operations to customers in foreign countries (in millions) were $812 in 1998 and $590 in 1997 (12% of sales in 1998 and 9% in 1997). The accounting policies of the segments are generally the same as the policies described under "Accounting Policies" in the financial review, except that inventories and related cost of products sold of the segments are accounted for using the FIFO method and the segment results only reflect the service cost component related to pensions and other postretirement benefits. The Company accounts for intersegment sales and transfers at the same prices as if the sales and transfers were made to third parties. Identifiable assets excludes general corporate assets, which principally consist of short-term investments, deferred income taxes, certain accounts receivable, and certain property, plant and equipment and other assets. Page 42 Geographic Region Information
Ongoing operations -------------------------- Long- Net Operating lived (Millions) sales profit assets* ----- --------- ------ 1998 United States $5,364 $ 492 $1,250 Canada 194 20 16 Europe 927 61 290 Latin America 414 19 228 Pacific Region 136 (9) 53 Eliminations (441) ------ ------ ------ $6,594 $ 583 $1,837 ====== ====== ====== 1997 United States $5,114 $ 630 $1,140 Canada 183 18 17 Europe 869 66 263 Latin America 445 29 147 Pacific Region 138 5 27 Eliminations (478) ------ ------ ------ $6,271 $ 748 $1,594 ====== ====== ====== 1996 United States $4,659 $ 550 $1,053 Canada 183 17 16 Europe 858 52 260 Latin America 312 (31) 128 Pacific Region 124 27 21 Eliminations (402) ------ ------ ------ $5,734 $ 615 $1,478 ====== ====== ======
*Long-lived assets consist of property, plant, and equipment-net. Operating profit was reduced by the following restructuring charges (in millions):
1998 1997 1996 ---- ---- ---- United States $85 $ 4 $14 Canada 5 Europe 7 12 8 Latin America 1 1 13 Pacific Region 8 2
Geographic region information (table above) does not include sales of associate companies and joint ventures in which the Company holds a 20%-50% ownership interest and which had total sales as follows (in millions):
1998 1997 1996 ---- ---- ---- United States $ 21 $ 13 Europe $ 15 14 14 Latin America 31 16 Pacific Region 165 258 326 ---- ---- ---- $180 $324 $369 ==== ==== ====
Page 43 Business Segment Information
(Millions) 1998 1997 1996 ---- ---- ---- Net sales Automotive Components $1,943 $1,801 $1,747 Hydraulics & Other Components 599 588 533 Industrial & Commercial Controls 2,320 2,251 2,096 Semiconductor Equipment 267 459 446 Truck Components 1,465 1,172 912 ------ ------ ------ Total ongoing operations 6,594 6,271 5,734 Divested operations 31 1,292 1,227 ------ ------ ------ Total net sales $6,625 $7,563 $6,961 ====== ====== ====== Operating profit Automotive Components $ 212 $ 225 $ 202 Hydraulics & Other Components 94 108 101 Industrial & Commercial Controls 180 216 175 Semiconductor Equipment (123) 29 60 Truck Components 220 170 77 ------ ------ ------ Total ongoing operations 583 748 615 Divested operations (1) 76 6 Amortization of certain intangible assets (67) (48) (41) Purchased in-process research & development (85) Interest expense - net (88) (79) (79) Gain on sales of businesses 43 91 Corporate & other - net 15 (35) (16) ------ ------ ------ Income before income taxes & extraordinary item $ 485 $ 668 $ 485 ====== ====== ====== Segment operating profit was reduced by the following restructuring charges Automotive Components $ 12 $ 12 $ 10 Hydraulics & Other Components 1 1 4 Industrial & Commercial Controls 28 6 3 Semiconductor Equipment 43 1 2 Truck Components 17 4 16
(Millions) 1998 1997 1996 ---- ---- ---- Identifiable assets Automotive Components $1,115 $ 932 $ 901 Hydraulics & Other Components 331 304 280 Industrial & Commercial Controls 1,155 1,028 1,003 Semiconductor Equipment 254 344 252 Truck Components 710 599 525 ------ ------ ------ Total ongoing operations 3,565 3,207 2,961 Divested operations 391 711 Intangible assets 1,239 1,189 1,007 Corporate 861 819 706 ------ ------ ------ Total assets $5,665 $5,606 $5,385 ====== ====== ====== Expenditures for property, plant & equipment Automotive Components $ 127 $ 125 $ 91 Hydraulics & Other Components 42 33 31 Industrial & Commercial Controls 148 113 84 Semiconductor Equipment 14 14 25 Truck Components 124 52 44 ------ ------ ------ Total ongoing operations 455 337 275 Divested operations 1 62 51 Corporate 27 39 21 ------ ------ ------ Total expenditures for property, plant & equipment $ 483 $ 438 $ 347 ====== ====== ====== Depreciation of property, plant & equipment Automotive Components $ 87 $ 82 $ 80 Hydraulics & Other Components 24 21 20 Industrial & Commercial Controls 67 59 52 Semiconductor Equipment 11 7 3 Truck Components 51 47 47 ------ ------ ------ Total ongoing operations 240 216 202 Divested operations 1 50 50 Corporate 18 19 18 ------ ------ ------ Total depreciation of property, plant & equipment $ 259 $ 285 $ 270 ====== ====== ======
Page 44 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 and engine components. Effective January 31, 1994, Eaton Offshore, through its subsidiaries, acquired certain of the Canadian and Brazilian operations of the former Distribution and Control Business Unit (DCBU) of CBS Corporation (formerly named Westinghouse Electric Corporation). On June 30, 1994 and on April 1, 1995, majority ownership of certain other assets of DCBU and another subsidiary were transferred to a subsidiary of Eaton Offshore from Eaton. On April 1, 1998, the division that manufactured leaf spring assemblies was sold. Summary financial information for Eaton Offshore and its consolidated subsidiaries for the years ended December 31 follows (in millions):
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Income statement data Net sales $631 $725 $602 $614 $494 Gross margin 146 149 94 99 87 Net income 41 33 23 28 20 Balance sheet data Current assets $336 $375 $304 $300 $237 Noncurrent assets 248 196 146 152 122 Net intercompany payables 132 160 53 47 4 Current liabilities 104 120 90 98 83 Noncurrent liabilities 108 106 100 102 105 Minority interest 21 1 6 2
Page 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - -------- The healthy earnings momentum the Company enjoyed throughout 1997 faltered in 1998. Overall results for 1998 were deeply affected by the unexpected worldwide collapse of the semiconductor equipment market. Weakness in orders in 1997 developed into a market collapse in the first quarter of 1998 and continued throughout the year. Later in the year, sharp downturns in agricultural equipment production and the uncertain Brazilian economy also adversely impacted 1998 results. Nevertheless, 1998 proved to be a success for some business segments in light of very mixed market conditions and difficult business challenges. In order to reposition businesses to be more in line with their expected future physical volumes, the Company took $125 million in charges beginning in the fourth quarter of 1997 and throughout 1998 to restructure certain operations. Additionally, the Company continued to make the investments necessary to win new business across all segments resulting in increased research and development charges. Together, these restructuring and investment initiatives should better position the Company to take advantage of more focused growth opportunities which will further enable results to outpace the markets served. Continuing the 1997 program of strategic repositioning moves, on January 2, 1998, the Company sold the Axle and Brake business to Dana Corporation. On April 1, 1998, the automotive leaf spring business was sold. These divestitures, combined with the 1997 divestitures of the Appliance Controls business and AIL Systems, resulted in a $1.3 billion reduction of net sales in 1998 and a $77 million reduction in operating profit compared to 1997. SUBSEQUENT EVENTS - ----------------- A significant step toward the goal to achieve $10 billion in sales by the end of the year 2000 was taken with the announcement on February 1, 1999, of the intention to acquire Aeroquip- Vickers, Inc. Eaton has entered into an agreement to acquire all of the outstanding common stock of Aeroquip-Vickers for $58 per share in cash, or a total price of approximately $1.7 billion, plus the assumption of debt. Aeroquip-Vickers, which had sales in 1998 of $2.15 billion, designs, manufactures and distributes engineered components and systems to industrial, aerospace and automotive markets. This significant acquisition builds upon and extends the Company's already strong position in mobile and industrial hydraulics. With Vickers, Eaton acquires a global leader in industrial hydraulics, generating $1.1 billion in annual sales to serve mobile and industrial customers. This complementary acquisition fundamentally repositions Eaton's hydraulics business Page 46 among the world leaders. Eaton expands upon the existing strengths in hydraulics with Aeroquip's $1.1 billion position in hoses and couplings, serving mobile and industrial, aerospace and automotive customers. Together, Eaton and Aeroquip create an aerospace and hydraulics business and a systems capability across all hydraulics applications. Eaton expects the acquisition to be neutral to earnings in 1999, excluding first-year transition costs. Eaton has important operations in Brazil and recent events have occurred in the Brazilian economy causing the currency to devalue. The real plan, implemented by the Brazilian government in 1995, drastically lowered Brazilian inflation and stabilized the currency. However, on January 15, 1999, in reaction to declining foreign reserves and a loss of confidence in Brazilian fiscal policy, the Brazilian real exchange rate "band" was scrapped, allowing the currency to float freely. Since the currency was allowed to float, it has declined in value. Abandoning the real plan will likely have the effect of weakening the economy in 1999, making the outlook more volatile for inflation and for the currency. The situation will be closely monitored for effects on Eaton's businesses. 1998 COMPARED TO 1997 - --------------------- RESULTS OF OPERATIONS - --------------------- Worldwide sales of $6.6 billion in 1998 were 12% below the record results of 1997. Year-to-year comparisons were materially affected by business divestitures, which reduced sales in 1998 by about $1.3 billion. Worldwide sales of ongoing operations in 1998 were 5% ahead of last year's results. Sales in the United States and Canada increased 5% and increased 7% in Europe. In Latin America, sales decreased 7% in 1998 compared to 1997 as a result of economic weaknesses in Mexico, Brazil, and Argentina. Sales in the Pacific Region remained flat in 1998, as a result of the recession in Japan and the economic crisis in Asia. As displayed in the Statement of Consolidated Income, Income from Operations of $482 million in 1998 decreased 22% from 1997. Divested businesses accounted for approximately $77 million of the $133 million decrease. The decrease also reflected the collapse of the semiconductor capital equipment market and the unusual charges described below. Further, as a consequence of continuing efforts to enhance the existing product portfolio, as well as to develop new products to serve expanding markets, a record $334 million was spent in 1998 on research and development, 5% above 1997. Research and development expense as a percentage of net sales increased to 5% in 1998 from 4% in 1997. Over the past five years, approximately $1.4 billion has been spent on research and development. During 1998, the Company recorded unusual pretax charges of $111 million, which included $101 million to restructure business Page 47 segments and $10 million for a contribution to Eaton's charitable trust. The Semiconductor Equipment segment recorded $43 million of the restructuring charge with the balance recorded by various operations in the other business segments. The restructuring charges principally relate to workforce reductions, inventory and other asset write-downs, plant closings and other costs. Workforce reductions involve several Semiconductor Equipment locations as well as certain other plants in the Automotive Components, Industrial and Commercial Controls, and Truck Components segments. Approximately 2,825 operations employees and 175 corporate employees are expected to be terminated, of which 900 have been terminated as of year-end. These reductions will generally be manufacturing personnel, although certain administrative functions will also be affected. Production at certain plants will be consolidated into other existing facilities as the Company continues the process of reducing costs to benefit customers and better accommodate the markets that these plants serve. These actions should also significantly increase cost competitiveness, enabling the Company to better compete. Industrial and Commercial Controls operations in the Pacific Region are also being realigned to better position the Company's businesses in that region. The Company believes the benefits of these restructuring activities will be demonstrated by improved operating results in future periods. In 1998, a pretax gain of $43 million was recognized related to business divestitures, net of adjustments related to businesses sold in prior periods. Results for 1997 included unusual pretax charges of $24 million for business segment restructuring actions and an $85 million write-off of purchased in-process research and development related to the acquisition of Fusion Systems. Also, a pretax gain of $91 million was recognized in 1997 for the sales of businesses. Finally, an aftertax extraordinary loss of $54 million was recognized in 1997 for the redemption of debentures. Before unusual items in both years, net income of $393 million in 1998 decreased 21% from 1997 and full year 1998 earnings per share were $5.41, down 15% from last year. After unusual items, net income of $349 million in 1998 decreased 15% from 1997 and full year earnings per share were $4.80, down 8% from 1997. AUTOMOTIVE COMPONENTS - --------------------- The Automotive Components segment achieved record sales of $1.94 billion in 1998, 8% above 1997. During the first quarter of 1998, G.T. Products, a U.S. manufacturer of fuel system components that regulate fuel flow and vapor emissions in automotive fuel tanks, was acquired. During the third quarter of 1998, the assets of Amtec S.p.A., a privately owned Italian manufacturer of automotive cylinder heads, were acquired. Excluding the acquisitions of G.T. Products and Amtec, sales were still 3% ahead of last year, which is consistent with the increase in light vehicle production in the Americas and Europe. Page 48 Operating profit of $224 million, before restructuring charges of $12 million, declined 6% from comparable 1997 results. This segment struggled with product mix, stronger than expected European volumes, and higher than anticipated costs to expand operations in China, Korea, and Brazil. This segment continues to achieve impressive new product wins across all product lines. Recently, the Company won new contracts for superchargers. As would be expected, increased spending on new programs has reduced margins in the near-term. As these contracts move to production over the next one to three years, sales and profits should outpace overall market trends. The restructuring charges of $12 million relate to management's plan to consolidate production at three manufacturing facilities into other existing locations in order to reduce costs in reaction to ongoing price pressure from customers and increased competition in markets served. These restructuring charges primarily relate to workforce reductions of approximately 850 employees. Asset write-downs and other costs were also recorded for the closing of these facilities. To accommodate the fast growing demand for superchargers, the Athens, Georgia plant is being expanded and production levels are expected to increase in the second quarter of 1999. A new automotive differential plant in Hastings, Nebraska was also opened during 1998 to meet higher customer demand. HYDRAULICS & OTHER COMPONENTS - ----------------------------- The Hydraulics and Other Components segment also achieved record sales of $599 million in 1998. Sales were 2% ahead of last year, an increase that is consistent with the year-to-year change in North American mobile hydraulics shipments. First half sales gains in 1998 dissipated before year end as orders in the mobile hydraulics industry reached a plateau in the second quarter and the Asian crisis started to hurt customer exports. As 1998 progressed, agricultural equipment production, an important market for this segment, fell sharply. Operating profit of $95 million, before restructuring charges of $1 million, decreased 13% from comparable results in 1997. Profits were reduced in the first half of 1998 due to manufacturing inefficiencies stemming from efforts to meet high customer demand. In the second half of 1998, the Company adjusted production and employment radically downward in light of decreased demand, which is expected to continue through the first quarter of 1999. INDUSTRIAL & COMMERCIAL CONTROLS - ---------------------------------- Sales of Industrial and Commercial Controls reached a record of $2.32 billion in 1998. Sales were 3% ahead of 1997 results as the strong market for electrical distribution equipment offset softness in industrial controls markets. This segment's above- market growth was attributable to strong construction and aerospace markets, and to the initial success of Cutler-Hammer's Page 49 new Engineering Services and Systems business. In January 1998, this new business was formed to provide technical and field support for all of Cutler-Hammer's electrical system and industrial control and automation customers. Several minor acquisitions were also made to grow this business during 1998. Before restructuring charges of $28 million, operating profits of $208 million in 1998, fell 6% below comparable results in 1997. Earnings from the solid activity levels in electrical distribution equipment did not fully offset continued softness in industrial controls markets. Cutler-Hammer's new Engineering Services and Systems Division also incurred significant start-up costs during 1998. The restructuring charges of $28 million relate to management's plan to divest a non-strategic product line and the consolidation of three domestic facilities into other existing locations due to increased pressure for cost improvements, brought on in part by increased global competition. The restructuring charges relate to workforce reductions of approximately 550 employees, of which 300 have been terminated as of year-end. These charges also include inventory and other asset write-downs and other costs. Operations in the Pacific Region are also being realigned to better position the businesses in that region. These charges relate to workforce reductions of approximately 600 employees, of which approximately 200 have been terminated as of year-end. These charges also include inventory and other asset write-downs as these businesses are consolidating facilities and operations to be more competitive in the region. SEMICONDUCTOR EQUIPMENT - ----------------------- Semiconductor Equipment sales of $267 million declined 42% in 1998 compared to 1997 as 1998 proved to be a very difficult year for the semiconductor capital equipment industry. The collapse of the semiconductor equipment market was especially difficult for the Company due to new product programs, the acquisition of Fusion Systems in late 1997 and capacity expansion plans. This segment suffered an operating loss of $80 million in 1998, before restructuring charges of $43 million. The unprecedented severity of conditions in the semiconductor equipment industry caused the Company to take drastic steps to ensure capacity is appropriately sized for current market conditions. In the third quarter of 1998, restructuring charges of $42 million were recorded for this business segment. Late in 1998, the semiconductor equipment industry appeared to have hit bottom and the Company continues to target break-even performance in 1999 based on 1998 sales levels. While taking the necessary measures to restructure this business segment, the Company is continuing spending on vital new product development programs that are critical to the future of this dynamic business. Several specific actions comprise the overall restructuring efforts related to the Semiconductor Equipment segment including workforce reductions, asset write-downs, and other restructuring Page 50 actions. The charge for workforce reductions includes the termination of approximately 475 employees, primarily manufacturing personnel. As of year-end, approximately 300 employees have been terminated in this program, in addition to 575 employees released earlier in the year. The charge for asset write-downs primarily related to inventory, which was written down to estimated market value, and is included in cost of products sold. The ion implant equipment manufacturing facility in Austin, Texas will be closed and production will be transferred to Beverly, Massachusetts. The write-down of this plant to estimated selling price represented approximately $2 million of the restructuring charge. The phase-out of this plant is expected to be concluded in the first quarter of 1999. Further, the Thermal Processing Systems business, located in Peabody, Massachusetts, will be merged into the Fusion Systems division located in Rockville, Maryland and the Flat Panel Equipment business will be merged into the Implant Systems operations located in Beverly, Massachusetts. During the third quarter of 1997, Eaton acquired Fusion Systems Corporation (Fusion) for $203 million. The purchase price allocation for Fusion included $85 million for purchased in- process research and development, which was determined through an independent valuation based on the income method using a risk adjusted discount rate of 31% applied to project cash flows. Three groups of projects comprised over 95% of the total value of purchased in-process research and development, and are described in more detail below. All of the purchased in-process research and development was expensed at the date of acquisition because technological feasibility had not been established and no alternative commercial use had been identified. The nature of the efforts required to develop the purchased in-process technology into commercially viable products principally relate to the completion of all planning, designing and testing activities that are necessary to establish that these products can be produced to meet their design requirements, including functions, features and technical performance requirements. Gemini Photostablizer (GPS) - This project involved the development of a 300 mm photostabilizer and was valued at $22.4 million. This product will be scaled for 300 mm wafers and will include functions new to photostabilizing. In order to realize this new technology, product designs will have to be configured and scaled for the larger wafers. At the acquisition date, the greatest risk of potential failure associated with this project was that it could not be accomplished given technical and economic constraints. Product completion was originally expected in late 1998. Development was ultimately completed in the first quarter of 1999, resulting in the sale of the first prototype. This small delay had a nominal impact upon 1998 consolidated results of operations, and will not have a significant impact upon the Company's financial condition or ultimate expected investment return. Gemini Enhanced Strip (GES) - These projects involve the development of the next generation Enhanced Strip products for Page 51 both 200 mm and 300 mm wafers and together were valued at $37.4 million. These new products will incorporate various new functions, including targeting applications for 0.25 micron and 0.18 micron geometries. Areas requiring design are the same as those in the GPS project, with corresponding risks of failure. Product completion was originally planned for mid-1999, and is still scheduled for completion in that time frame. Gemini Microwave Plasma Asher (GPL) - These projects involved the development of the next generation of plasma ashers for 200 mm and 300 mm wafers and together were valued at $22.8 million. These new products will incorporate substantial changes in an attempt to enable targeting applications for 0.25 micron and 0.18 micron geometries. The primary risk related to these projects involved the achievement of tightly controlled process parameters, which is considered difficult due to the smaller linewidths targeted with these projects. Product completion was originally planned for mid-1998, and was completed by the fourth quarter of 1998. This small delay had a nominal impact upon 1998 consolidated results of operations, and no significant impact upon the Company's financial condition or ultimate expected investment return. TRUCK COMPONENTS - ---------------- Truck Components sales in 1998 reached a record of $1.47 billion, increasing 25% compared to 1997. Heavy truck production was at record levels in 1998 in both North America and Europe. The performance of the Clutch division, acquired in the third quarter of 1997, continued to exceed expectations and made a strong contribution to the results of this segment. Excluding the Clutch acquisition, worldwide sales were up 13% from one year ago as the Company took good advantage of sustained robust markets. Operating profits of $237 million in 1998, before restructuring charges of $17 million, were 36% ahead of comparable 1997 results. The full year impact of the Clutch acquisition in 1997 contributed, as expected, to Truck Components' overall performance. The restructuring charges of $17 million relate primarily to the European Truck Components business and worldwide headcount reductions at various other locations. The restructuring includes the expected termination of approximately 350 employees (300 in Europe). The restructuring is the result of European trucking deregulation, de-integration of OEM's and the introduction of the Euro. These conditions will combine and fundamentally transform the competitive landscape in Europe in the years ahead. This restructuring, building upon the third quarter 1998 acquisition of a Polish truck transmission manufacturer, is intended to help achieve world class low costs and productivity at all worldwide operations. Manufacturing operations for the medium-duty product line are being consolidated as part of the restructuring of this segment. The restructuring charges include severance and other related benefit Page 52 costs, asset write-downs, costs associated with the consolidation of manufacturing operations and other costs. GLOBAL EXPANSION - ---------------- Significant steps continue to be taken toward improving market position and helping to assure future growth in the world's rapidly industrializing markets. A key component of this long- term growth strategy involves an expanded presence in China; several transactions in 1998 are making this strategy a reality. In January 1998, a joint venture, Shanghai Eaton Engine Components Company Ltd., was formed, which manufactures and sells automotive and motorcycle engine valves and hydraulic valve lifters for the Chinese market. The formation of Eaton Hydraulics (Shanghai) Ltd. was also completed, which will facilitate the expansion of high quality hydraulic systems and other hydraulic products into China. In June 1998, a joint venture, Eaton Shenglong Co., Ltd., was formed to produce viscous fan drives in China for the domestic truck and automobile market. In other regions of the world, Fabryka Przekladni Samochodowych (FPS), a truck transmission manufacturer based in Gdansk, Poland, was purchased in June 1998. FPS is the largest manufacturer of truck, bus and van transmissions in Poland and gives the Company a low cost, high quality manufacturer with access to the expanding East European market. In August 1998, the assets of Amtec S.p.A., a manufacturer of automotive cylinder heads, near Turin, Italy, were purchased. This acquisition was an important step toward the goal of establishing the Company as a global valvetrain system designer and supplier. In December 1998, TGM Automotive Ltda., a privately-held Sao Paulo, Brazil, manufacturer of automotive controls, was acquired. This acquisition expands product offerings to the Mercosur automotive controls marketplace, and will help provide an enlarged automotive customer base for the future. Finally, construction is nearly complete on the new plant in Brazil to produce light- duty automotive components, and operations are expected to begin in mid-1999. CHANGES IN FINANCIAL CONDITION - ------------------------------ The Company remains in a strong financial position and expects to have resources available in the form of working capital, lines of credit and funds provided by operations for continued reinvestment in existing operations, strategic acquisitions, including the planned 1999 acquisition of Aeroquip-Vickers for approximately $1.7 billion in cash, and managing the capital structure. The Company continues to generate substantial cash from operations, which continues to be the primary source of funds to finance operating needs, including record investments in research and development. Emphasis on asset management generated operating cash flow of $642 million in 1998 compared with the record in Page 53 1997. Cash flow from operations, supplemented by commercial paper borrowings as well as proceeds from the sales of businesses, was used to fund business acquisitions, capital expenditures, repayment of debt, cash dividends and the repurchases of Common Shares. Net working capital was $466 million at year-end 1998 compared to $698 million at year-end 1997 and the current ratio was 1.3 compared to 1.5 at those dates, respectively. Accounts receivable and inventory turnover rates continue to be strong and showed improvement in 1998, while days of inventory on-hand was consistent with 1997. Accounts receivable days sales outstanding at year-end was a strong 50 days. Divested businesses and the increase in short-term debt were the primary causes of the reduction in working capital. The acquisitions of G.T. Products and Amtec partially drove the increase in debt and resulted in the increase in excess of cost over net assets of businesses acquired from the prior year. Total debt increased by 11% to $1.5 billion at year-end 1998. This increase was primarily a result of acquisitions of businesses and the repurchase of Common Shares. As discussed under "Debt and Other Financial Instruments" in the Financial Review, the Company has a $1 billion credit facility with a series of banks; $500 million which matures in 2003 and $500 million which matures in May 1999. This credit facility supports outstanding commercial paper of $686 million at December 31, 1998. The Company expects to finance approximately 20% of the Aeroquip-Vickers acquisition through the sale of Common Shares, with the remainder through the issuance of debt. Cash dividends paid in 1998 were $126 million and represented 36% of net income. Annual per share dividends of $1.76 in 1998 rose 2% from the previous year, following an 8% increase from the year before. Dividends on Common Shares have been paid annually since 1923. In 1994, to avoid the dilution of earnings per share resulting from the exercise of stock options, the Board of Directors authorized the purchase of up to 5 million outstanding Common Shares over a five year period, with a maximum of 1.5 million shares to be purchased in one year. Additionally, in 1997, to avoid earnings dilution resulting from the sales of businesses, the Board of Directors authorized the Company to spend up to an additional $500 million over a period of up to five years to purchase Common Shares. In January 1998, the $500 million program was completed by repurchasing 2.8 million shares for $256 million. Since the initiation of the programs, 9.3 million shares have been repurchased at an average price of $83 per share, including 3.7 million shares repurchased in 1998 for an average price of $90 per share. Emphasis continues to be placed on the ongoing physical capital investment program designed to enhance product quality, manufacturing productivity and business growth, reduce costs and, selectively, to add capacity. Capital expenditures for 1998 Page 54 reached a record $483 million, 10% above 1997. Over the past five years, nearly $1.9 billion has been spent in capital expenditures. Capital spending in 1999 is expected to continue at near record levels. The Company has deferred income tax assets of $167 million as of December 31, 1998 and believes the assets will be realized through the reduction of future taxable income. Significant factors considered by management in the determination of the probability of realization of deferred tax assets include historical operating results, expectations of future earnings and the extended period of time over which the postretirement health care liability will be paid. The Company is subject to various inherent financial risks attributable to operating in a global economy. Derivative financial instruments are utilized to manage exposures in interest and foreign exchange markets. Systems to measure and assure that these exposures are evaluated comprehensively have been developed 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. Monthly, management performs an oversight review of exposures and derivative activities. The counterparties used in these transactions have been diversified in order to minimize the impact of any potential credit loss in the event of nonperformance by the counterparties. Although derivatives are an integral part of risk management programs, their incremental effect on financial condition and results of operations is not material. Derivative activities are described in greater detail under "Debt and Other Financial Instruments" in the Financial Review. Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. On an ongoing, regular basis, certain processes continue to be modified in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in and wastes generated from operations. Liabilities related to environmental matters are further discussed under "Protection of the Environment" in the Financial Review. MARKET RISK DISCLOSURE - ---------------------- The Company is subject to interest rate risk as it relates to long-term debt. The table below presents principal cash flows (in millions) and related weighted-average interest rates by expected maturity dates of long-term debt, excluding foreign currency principal swaps. Page 55
December 31, 1998 Expected maturity date ----------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total Fair value ---- ---- ---- ---- ---- ---------- ----- ---------- Long-term debt, including current portion Fixed rate (US$) $107 $ 11 $100 $584 $802 $895 Average interest rate 6.5% 12.1% 9.0% 7.9% 7.9% Fixed rate (Renmimbi) $ 1 $ 3 4 4 Average interest rate 9.2% 9.4% 9.3% Commercial paper (US$) $500 500 500 Average interest rate 5.3% 5.3% December 31, 1997 Expected maturity date ----------------------------------------------------- 1998 1999 2000 2001 2002 Thereafter Total Fair value ---- ---- ---- ---- ---- ---------- ----- ---------- Long-term debt, including current portion Fixed rate (US$) $ 19 $107 $ 2 $102 $ 2 $587 $819 $899 Average interest rate 7.9% 6.5% 7.8% 9.1% 12.5% 7.8% 7.8% Fixed rate (Won) $ 2 2 2 Average interest rate 18.2% 18.2% Fixed rate (Zloty) $ 2 2 2 Average interest rate 26.3% 26.3% Commercial paper (US$) $500 500 500 Average interest rate 5.8% 5.8%
See "Changes in Financial Condition" in Management's Discussion and Analysis of Financial Condition and Results of Operations for details on the Company's primary market risks, and the objectives and strategies used to manage these risks. Also, see "Financial Instruments" under Accounting Policies in the notes to the consolidated financial statements for additional information on market risks. YEAR 2000 - --------- Like most companies, Eaton is impacted by computer software that relies on two digits in the date fields in order to function properly. Software that uses two digits rather than four to identify the applicable year may be unable to interpret appropriately the calendar Year 2000, and thus could cause disruption of normal business activities. The Company relies on software in various aspects of the business including manufacturing, product development, many administrative functions and certain products. Much of this software may be unable to interpret the calendar Year 2000 appropriately without some form of remediation. Page 56 The Company has approached the Year 2000 issue with the creation of a corporate-wide initiative led by the Company's Vice President-Information Technologies and involving program managers from each business unit. The activities associated with this initiative include reviewing critical information technology (IT) and non-IT systems, as well as those which interface with major customers, suppliers, other third parties, and date-sensitive products. Eaton's Year 2000 compliance efforts encompass the following focus areas: Business Management Systems: This area includes information systems and applications relating to manufacturing, marketing, sales (including EDI-Electronic Data Interchange and an integrated order processing and management system), purchasing, product development and computer aided design systems. These systems have been identified as very important to the support of operations and have been given the highest priority toward becoming Year 2000 compliant. Enterprise Network Infrastructure (including personal computers): One enterprise network is utilized throughout the organization which will be upgraded by the end of the second quarter of 1999 to become Year 2000 compliant. All personal/desktop computers and related software will also be made compliant. Administrative Systems: This area includes systems associated with human resources, cash management and financial accounting and reporting. In North America and Europe, the Company operates a highly centralized systems environment which is expected to be fully compliant by mid-year 1999. To ensure compliance, testing of these systems will continue through the third quarter of 1999. Shop Floor Equipment and Facilities Infrastructure: The Company is auditing the machinery and equipment used both in manufacturing and in support operations at each location. This audit determines Year 2000 readiness, measures the risk of non- compliance and determines the best remediation plan to be followed in avoiding potential disruptions in production. This focus area has been substantially completed. Software in Products: All of the Company's products which are currently marketed, and the vast majority of the products which have been marketed in the past, are either not date-sensitive or do not require remediation. With respect to certain previously marketed products of the Semiconductor Equipment business segment and the Cutler-Hammer business, the Company is offering product upgrades or other remediation programs, including programs covered by product warranties. Supplier Assurance: To determine Year 2000 readiness, the Company undertook a supplier assurance program in 1997, which included surveying suppliers and evaluating their responses. Based on this evaluation and the criticality of the items or services provided by the suppliers, the Company is auditing their Page 57 compliance and working with them toward assuring compliance or, if needed, the development of contingency plans (e.g., the selection of alternative suppliers). Customer Assurance: The Company is working with the Automotive Industry Action Group, various other trade organizations and customers to ensure that a common Year 2000 compliance approach is applied across those respective industries. Continuous interaction with these trade organizations is helping to identify the issues requiring attention and to develop appropriate solutions. The Company's Year 2000 program activities include the identification of affected hardware and software, the development of a plan for remediating those systems in the most effective manner, the execution of that plan, which includes continuous testing, and the monitoring of the program's success. Although various locations are at differing stages of readiness with respect to the various focus areas, the identification and plan development phases of the project are substantially completed. The Company is well underway in the execution phase and anticipates completing the majority of the program by mid-year 1999 although certain applications at certain businesses will be completed throughout the second half of 1999. Continuous review and testing is being conducted throughout all phases of the program to help ensure that compliance is achieved and maintained as the Year 2000 approaches. The program, as it relates to IT, involves a combination of hardware and software modifications, upgrades and replacements. In many instances, the Company will replace or has replaced non- compliant systems with newer systems, which will significantly improve functionality as well as appropriately interpret the calendar year 2000 and beyond. Although the timing of these actions may have been influenced by the Year 2000 issue, in virtually all instances they will involve capital expenditures that would have occurred in the normal course of business. As part of reengineering and other initiatives, the Company is also currently upgrading and replacing other systems to provide significantly enhanced functionality. These upgrades and replacements are unrelated to the Year 2000 remediation. As part of the Year 2000 program, detailed contingency plans are being formalized as the target date for completion approaches. Business disruption scenarios are currently being identified and appropriate strategies and detailed plans are being evaluated and tested in the development of these various plans. The current estimate of total Year 2000 program costs is approximately $95 million. Included in this estimate are compensation and benefit costs of employees who are fully dedicated to the Year 2000 compliance effort. Costs of employees not fully dedicated to that effort are not tracked and are excluded from the estimate. Approximately $70 million of those costs represent replacement costs of certain hardware and software, which will provide significantly enhanced functionality over the systems that are currently being used. The remaining $25 Page 58 million represents costs associated with modifying and upgrading existing systems. To date, nearly 70% of the estimated costs have been incurred. Purchased hardware and newly developed or purchased software is capitalized in accordance with normal Company policy while other remediation costs associated with existing systems are expensed as incurred. Cash flow related to these costs will be satisfied with funds from operations that are normally budgeted for procurement and maintenance of information systems and production and facilities equipment. Regular project status reporting is required, and cost estimates are updated as more refined estimates become available. The Company believes that it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, satisfactory completion of the program may not prevent business disruptions resulting from actions of critical suppliers and customers. Such disruptions would impair the Company's ability to obtain necessary materials for production or sell products to customers. If such a disruption occurred, the Company may experience lost or delayed sales and profits depending on the duration of the disruption. Key aspects of the program are addressing this uncertainty but the Company's ability to be fully confident of conditions related to third parties is limited. Currently, the Company cannot reasonably estimate the amount of potential lost or delayed sales and profits. EURO - ---- On January 1, 1999, eleven of the fifteen member countries of the European Monetary Union (EMU) began a three-year transition phase during which a common currency called the Euro was adopted as their legal currency. The Euro began trading on currency exchanges and is available for non-cash transactions. During the transition period, public and private parties may pay for goods and services using either the Euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis. The conversion rates between the existing legacy currencies and the Euro were fixed on January 1, 1999. The legacy currencies will remain legal tender for cash transactions between January 1, 1999 and January 1, 2002 at which time all legacy currencies will be withdrawn from circulation and the new Euro denominated bills and coins will be used for cash transactions. The Company has several operations within the eleven participating countries that will be utilizing the Euro as their local currency in 1999. Additionally, the Company's operations in other European countries and elsewhere in the world will be conducting business transactions with customers and suppliers that will be denominated in the Euro. Euro denominated bank accounts have been established to accommodate Euro transactions. The Company's exposure to changes in foreign exchange rates may also be reduced as a result of the Euro conversion. The Company has established a steering committee to review strategic and tactical areas arising from the Euro conversion. Page 59 Immediate efforts have been focused on aspects of the Euro conversion that required adjustment or compliance by January 1, 1999 and for conducting Euro-denominated business during 1999. These aspects included transacting business in the Euro, the competitive impact on product pricing and adjustments to billing systems to handle parallel currencies. The Company has determined that these systems have the capability to handle Euro transactions and is currently in a position to transact business in Euro's. Continuing analysis and development efforts by the steering committee and project teams at the business units will help ensure that the implementation of the Euro meets the timetable and regulations established by the EMU. Based on current estimates, the Company does not expect the costs incurred to address the Euro will have a material impact on the financial condition or results of operations. FORWARD-LOOKING STATEMENTS - -------------------------- The Company has included in this Annual Report expectations for 1999, an outlook concerning the Brazilian situation, certain anticipated effects of strategic moves, market expectations, and expectations for capital spending. Actual results could differ materially from these forward-looking statements since they inherently are subject to risks and uncertainties. Important factors which could cause such a difference include completion of the anticipated Aeroquip-Vickers acquisition, 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, costs and disruptions associated with the Year 2000 issue, difficulties in introducing new products as well as global economic and market conditions, and the impact of the conversion to the Euro currency. 1997 COMPARED TO 1996 - --------------------- RESULTS OF OPERATIONS - --------------------- Worldwide sales in 1997 exceeded $7 billion for the first time in the Company's history, 9% above 1996. Sales for North America showed improvement; however, sales in Europe were flat. In Latin America, sales increased 43% in 1997 over 1996, despite economic weakness in Mexico, Brazil and Argentina. The full strategic benefits of the April 1996 acquisition of CAPCO Automotive Products Corporation were achieved, which contributed to the sales increase in Latin America. Despite the continued recession in Japan and the crisis in Asia, sales in the Pacific Region rose 11% in 1997 over 1996. Gross margin of $2.11 billion in 1997 increased to 28% of net sales from 26% in 1996 as a result of increased sales volumes Page 60 across most lines of business, acquisitions and divestitures of businesses, and the benefits realized from recent restructurings. Income from Operations of $700 million, before a one-time charge of $85 million, increased 33% in 1997 from 1996. The one-time charge was recorded against third quarter 1997 earnings to write- off the purchased in-process research and development associated with the acquisition of Fusion Systems Corporation. During the fourth quarter of 1997, an aftertax gain of $69 million was recorded related to the sales of businesses. This gain was offset by a $54 million aftertax charge related to the redemption of the 7% debentures due April 1, 2011, and by a $15 million aftertax charge related to restructuring actions. The fourth quarter 1997 restructuring charges principally related to workforce reductions, asset write-downs and other costs. Before unusual items, both net income of $495 million and earnings per share of $6.33 increased 30% in 1997 from comparable results in 1996. After these items, net income of $410 million and earnings per share of $5.24 increased 17% in 1997 from 1996 results. AUTOMOTIVE COMPONENTS - --------------------- The Automotive Components segment experienced record sales of $1.80 billion in 1997, 3% above 1996. The increase in volume compares favorably with about a 3% year-to-year increase in automotive production in North America and Europe. This trend can be attributed to continued penetration of selected automotive products, and greater participation in Latin American markets. Operating profit for this segment reached $237 million before restructuring charges of $12 million, 12% ahead of 1996 results on a comparable basis. HYDRAULICS AND OTHER COMPONENTS - ------------------------------- Continuing demand from the North American hydraulics market enabled the Hydraulics and Other Components segment to report record sales of $588 million in 1997, rising 10% over 1996. Sales gains in 1997 were double the pace of the hydraulics industry, a result attributable to higher levels of new product introductions for the worldwide agricultural and construction equipment customers. Operating profit for this segment reached a record level of $109 million, before $1 million of restructuring charges, 4% ahead of 1996 results on a comparable basis. INDUSTRIAL AND COMMERCIAL CONTROLS - ---------------------------------- Aided by continued strength in Cutler-Hammer's market position, strong construction markets, and a booming commercial aircraft market, Industrial and Commercial Controls also achieved record sales of $2.25 billion in 1997, increasing 7% over 1996 results. Operating profit for this segment reached a record $222 million, before restructuring charges of $6 million, a 25% increase from 1996 results. Cutler-Hammer enjoyed the full benefit of the Page 61 synergies anticipated from the 1994 acquisition of Westinghouse's Distribution and Control Business Unit. SEMICONDUCTOR EQUIPMENT - ----------------------- The Semiconductor Equipment segment reported record sales of $459 million in 1997, increasing 3% over 1996. During the third quarter of 1997, Fusion Systems Corporation, a leading supplier of front-end process equipment to the semiconductor industry, was acquired. Excluding Fusion, Semiconductor Equipment segment sales trailed 1996 results by 5%. Operating profit for this segment reached $29 million in 1997, a 52% decrease from 1996 results. This decrease was primarily caused by the substantial increase in research and development spending to continue the development of advanced products and enhance the existing product portfolio. TRUCK COMPONENTS - ---------------- The Truck Components segment also reported record sales of $1.17 billion in 1997, increasing 29% over 1996. CAPCO, the Brazilian medium-duty transmission manufacturer acquired in 1996, accounted for $100 million of the $260 million increase in sales in 1997. With CAPCO's increase in sales and the favorable impact of new business awards from automotive manufacturers, the full strategic benefits of this important acquisition were achieved. The Clutch division, which was acquired from Dana Corporation in the third quarter of 1997, also contributed $67 million in sales in 1997. Excluding Clutch, sales increased 21% above 1996. North American factory sales of Class 8 trucks rose about 13% in 1997 to 216,000 units. The European market was also up in 1997, though a more modest 6%. Operating profit for this segment reached a record $174 million before restructuring charges of $4 million, 87% ahead of 1996 results. Operating profit as a percentage of sales increased from 8% in 1996 to 15% in 1997. The increase in operating profit was primarily attributable to the exceptional performance by CAPCO where the year-over-year profits improved by more than $39 million. Record operating results also were accomplished through higher sales volume, the acquisition of the Clutch business in 1997, and benefits realized from restructuring efforts in this business unit. Page 62 QUARTERLY DATA - -------------- (Unaudited)
Quarter ended 1998 Quarter ended 1997 (Millions except for per share data) ----------------------------------- ------------------------------------ Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 ------- -------- ------- ------- ------- -------- ------- ------- Net sales $1,606 $1,620 $1,712 $1,687 $1,934 $1,931 $1,909 $1,789 Gross margin 446 428 512 480 546 541 538 482 Percent of sales 28% 26% 30% 28% 28% 28% 28% 27% Income before extraordinary item $ 72 $ 58 $ 114 $ 105 $ 183 $ 54 $ 126 $ 101 Extraordinary item (54) ------------------------------------ ----------------------------------- Net income $ 72 $ 58 $ 114 $ 105 $ 129 $ 54 $ 126 $ 101 ==================================== =================================== Per Common Share - assuming dilution Income before extraordinary item $ 1.01 $ .80 $ 1.57 $ 1.42 $ 2.35 $ .69 $ 1.61 $ 1.29 Extraordinary item (.69) ------------------------------------ ----------------------------------- Net income $ 1.01 $ .80 $ 1.57 $ 1.42 $ 1.66 $ .69 $ 1.61 $ 1.29 ==================================== =================================== Per Common Share - basic Income before extraordinary item $ 1.02 $ .82 $ 1.60 $ 1.45 $ 2.41 $ .70 $ 1.64 $ 1.31 Extraordinary item (.71) ------------------------------------ ----------------------------------- Net income $ 1.02 $ .82 $ 1.60 $ 1.45 $ 1.70 $ .70 $ 1.64 $ 1.31 ==================================== =================================== Cash dividends paid per Common Share $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .40 Market price per Common Share High $71-7/8 $80 $95-3/8 $99-5/8 $103-3/8 $95-15/16 $89-7/8 $75-1/8 Low $60-1/4 $57-1/2 $76 $85-3/16 $ 85-1/2 $81-7/8 $67-1/2 $67-1/4
The quarterly results of operations include the following unusual items Restructuring charges & other items Pretax $ (29) $ (42) $ 3 $ (43) $ (24) Aftertax (19) (27) 2 (28) (15) Net income (loss) per Common Share (.26) (.38) .03 (.38) (.19) Gain on sales of businesses Pretax 43 91 Aftertax 28 69 Net income per Common Share .38 .88 Write-off of purchased in-process research & development Pretax $ (85) Aftertax (85) Net loss per Common Share (1.08)
In the fourth quarter of 1998, the effective income tax rate for full year 1998 was adjusted to 28% from 30%. This adjustment reduced income tax expense for the fourth quarter by $8 million, which primarily relates to a revision of the research and development tax credit. Page 63 Eaton Corporation
Five-Year Consolidated Financial Summary For the year 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ (Millions except for per share data) Net sales $ 6,625 $ 7,563 $ 6,961 $ 6,822 $ 6,052 Income before income taxes & extraordinary item 485 668 485 592 488 Income before extraordinary item $ 349 $ 464 $ 349 $ 399 $ 333 Percent of net sales 5.3% 6.1% 5.0% 5.8% 5.5% Extraordinary item - redemption of debentures (54) -------------------------------------------------------- Net income $ 349 $ 410 $ 349 $ 399 $ 333 ======================================================== Per Common Share - assuming dilution Income before extraordinary item $ 4.80 $ 5.93 $ 4.46 $ 5.08 $ 4.35 Extraordinary item (.69) -------------------------------------------------------- Net income $ 4.80 $ 5.24 $ 4.46 $ 5.08 $ 4.35 ======================================================== Average number of Common Shares outstanding 72.7 78.2 78.2 78.6 76.4 Per Common Share - basic Income before extraordinary item $ 4.89 $ 6.05 $ 4.50 $ 5.13 $ 4.40 Extraordinary item (.71) -------------------------------------------------------- Net income $ 4.89 $ 5.34 $ 4.50 $ 5.13 $ 4.40 ======================================================== Average number of Common Shares outstanding 71.4 76.8 77.4 77.8 75.6 Cash dividends paid per Common Share $ 1.76 $ 1.72 $ 1.60 $ 1.50 $ 1.20 Market price per Common Share High $ 99-5/8 $103-3/8 $ 70-7/8 $ 62-1/2 $ 62-1/8 Low $ 57-1/2 $ 67-1/4 $ 50-3/8 $ 45-3/8 $ 43-7/8 - ------------------------------------------------------------------------------------------------------------------ Investments during the year (percent of net sales) Property, plant & equipment 7.3% 5.8% 5.0% 5.8% 4.4% Research & development 5.0% 4.2% 3.8% 3.3% 3.5% Information technology 3.1% 2.7% 2.1% 2.1% 2.2% -------------------------------------------------------- 15.4% 12.7% 10.9% 11.2% 10.1% ======================================================== At the year-end - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 5,665 $ 5,606 $ 5,385 $ 5,106 $ 4,731 Working capital 466 698 787 822 744 Long-term debt 1,191 1,272 1,062 1,084 1,053 Shareholders' equity 2,057 2,071 2,160 1,975 1,680 Shareholders' equity per Common Share $ 28.69 $ 27.72 $ 28.00 $ 25.45 $ 21.54 Common Shares outstanding 71.7 74.7 77.1 77.6 78.0 - ------------------------------------------------------------------------------------------------------------------------------
Income includes the following unusual items
1998 1997 1996 ---- ---- ---- Restructuring charges & other items Pretax $ (111) $ (24) $ (50) Aftertax (72) (15) (32) Net loss per Common Share (.99) (.19) (.41) Gain on sales of businesses Pretax $ 43 $ 91 Aftertax 28 69 Net income per Common Share .38 .88 Write-off of purchased in-process research & development Pretax $ (85) Aftertax (85) Net loss per Common Share (1.09)
Page 1 Eaton Corporation 1998 Annual Report on Form 10-K Item 14(c) Listing of Exhibits Filed 3(a) Amended Articles of Incorporation (amended and restated as of April 27, 1994) - Incorporated by reference to the Form 8-K Report dated May 19, 1994 3(b) Amended Regulations (amended and restated as of April 27, 1988) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1994 4(a) Instruments defining rights of security holders, including indentures (Pursuant to Regulation S-K Item 601(b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt) 4(b) Eaton Corporation Rights Agreement dated June 28, 1995 - Incorporated by reference to the Form 8-K Report dated June 28, 1995 10 Material contracts The following are either a management contract or a compensatory plan or arrangement: (a) Deferred Incentive Compensation Plan (amended and restated as of September 24, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (b) Executive Strategic Incentive Plan (amended and restated as of June 21, 1994, July 25, 1995 and April 21, 1998) (files as a separate section of this report) (c) Group Replacement Insurance Plan (GRIP), effective as of June 1, 1992 - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1992 (d) 1991 Stock Option Plan - Incorporated by reference to the definitive Proxy Statement dated March 18, 1991 (e) 1995 Stock Option Plan - Incorporated by reference to the definitive Proxy Statement dated March 17, 1995 (f) Incentive Compensation Deferral Plan (amended and restated as of September 24, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 Page 2 (g) Strategic Incentive and Option Plan (amended and restated as of September 24, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (h) Form of "Change of Control" Agreement entered into with officers of Eaton Corporation as of November 1, 1996 - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (i) The following are incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1990: (i) Limited Eaton Service Supplemental Retirement Income Plan (amended and restated as of January 1, 1989) (ii) Amendments to the 1980 and 1986 Stock Option Plans (iii) Eaton Corporation Supplemental Benefits Plan (amended and restated as of January 1, 1989) (which provides supplemental retirement benefits) (iv) Eaton Corporation Excess Benefits Plan (amended and restated as of January 1, 1989) (with respect to Section 415 limitations of the Internal Revenue Code) (j) Executive Incentive Compensation Plan, effective January 1, 1995 - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (k) Plan for the Deferred Payment of Directors' Fees (amended and restated as of September 24, 1996 and amended effective as of January 1, 1997) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1997 (l) Plan for the Deferred Payment of Directors' Fees (originally adopted in 1980 and amended effective February 25, 1997) - Incorporated by reference to the Annual report on Form 10-K for the year ended December 31, 1996 (m) 1996 Non-Employee Director Fee Deferral Plan (amended effective January 1, 1997 and February 25, 1997) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1997 Page 3 (n) Eaton Corporation Trust Agreement - Outside Directors (dated December 6, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (o) Eaton Corporation Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1996 (p) Eaton Corporation Retirement Plan for Non-Employee Directors (amended and restated January 1, 1996) - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1997 (q) 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998 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) Page 1 Eaton Corporation 1998 Annual Report on Form 10-K Item 14(c) Exhibit 10(b) Executive Strategic Incentive Plan (effective as of January 1, 1991 and amended and restated as of June 21, 1994, July 25, 1995 and April 21, 1998) 1. PURPOSE The purpose of the Executive Strategic Incentive Plan (the "Plan") is to promote the growth and profitability of Eaton Corporation (the "Company") through the granting of incentives intended to motivate executive officers of the Company to achieve demanding long-term corporate objectives and to attract and retain executive officers of outstanding ability. 2. ADMINISTRATION Except as otherwise expressly provided herein, the Plan shall be administered by the Compensation and Organization Committee (the "Committee") of the Company's Board of Directors which shall consist of at least three directors of the Company selected by the Board. Except as otherwise expressly provided herein, the Committee shall have complete authority to: (i) interpret all provisions of the Plan consistent with law; (ii) designate the executives to participate under the Plan; (iii) determine the incentive targets and performance objectives applicable to participants; (iv) adopt, amend and rescind general and special rules and regulations for the Plan's administration; and (v) make all other determinations necessary or advisable for the administration of the Plan. 3. ELIGIBILITY All officers of the Company shall be eligible to participate in the Plan. The Committee shall have sole discretion in determining the other executives who shall participate under the Plan for any Award Period. 4. INCENTIVE TARGETS (A) Establishment of Incentive Amounts Individual Incentive Amounts for each participant with respect to each Plan Award Period (as defined below) shall be determined by multiplying the Incentive Percentages adopted by the Committee which are applicable to such participant, and which may not exceed 120%, by the amount of such participant's actual weighted average Page 2 year-end salary range midpoint for the Award Period. In the event that during any Award Period a participant's salary grade changes to a grade for which a different Incentive Percentage would be applicable, such different Incentive Percentage shall be applicable to such participant with respect to the portion of any Award Period remaining after such salary grade change. With respect to Award Periods beginning on or after January 1, 1998, participant incentive targets will be expressed in the form of Performance Share Units which will be determined by the Committee by: (a) first estimating the Individual Incentive Amount for each participant with respect to each Award Period by multiplying the Incentive Percentage adopted by the Committee which is applicable to such participant, by the amount of such participant's estimated weighted average salary range midpoint for the Award Period and, (b) then dividing such Individual Incentive Amount by the average of the mean prices for the Company's common shares for the first twenty (20) trading days of each Award Period. At the end of each Award Period the estimated Individual Incentive Amount used for each participant (and the resulting number of Performance Share Units) shall be adjusted to reflect the participant's actual weighted average year-end salary range midpoint for such Award Period. In all cases, such amount shall be rounded up to the nearest 50 whole units. For purposes of the Plan, "mean price" shall be the mean of the highest and lowest selling prices for Company common shares quoted on the New York Stock Exchange List of Composite Transactions on the relevant trading day. Notwithstanding the foregoing, the Committee may, in its sole discretion, use a different method for establishing incentive targets for participants under the Plan. (B) Award Periods Each Award Period shall be the four-calendar year period commencing as of the first day of the calendar year in which the performance objectives are established for the Award Period as described in Section 4(C). A new Award Period shall commence as of the first day of each calendar year, unless otherwise specified by the Committee. (C) Establishment of Company Performance Objectives As soon as practicable at the beginning of each Award Period, threshold, target, and maximum Company performance objectives for such Award Period shall be established by the Committee. The performance objectives shall be based upon cash flow return on gross capital ("CFROGC") except that, for Award Periods commencing on or after January 1, 1998, unless otherwise determined by the Committee in its sole discretion, performance objectives will be established using a CFROGC/EPS Growth Page 3 Performance Matrix which shall use the Company's average cash flow return on gross capital for such period along one axis and the Company's cumulative earnings per share for such period along the second axis. Within sixty (60) days after the performance objectives have been established by the Committee, each participant will be provided with written notice of his or her established objectives. In its sole discretion, the Committee may modify previously established performance objectives as a result of any change in conditions, the occurrence of any events or other factors which make such objectives unsuitable. Notwithstanding the foregoing, after a Change in Control (as hereinafter defined), neither the Committee nor the Board shall have the authority to modify performance objectives in any manner which could prove detrimental to the interests of the Plan's participants. (D) Determination of Payments As promptly as practicable after the end of each Award Period, the Committee shall fix the level of attainment of the Company's performance for the Award Period and approve award payments under the Plan which shall not exceed: (i) 50% of the participant's Incentive Amount upon attainment of the threshold performance objective; (ii) 100% of the participant's Incentive Amounts upon attainment of the target performance objective; and (iii) 200% of the participant's Incentive Amount upon attainment of the maximum performance objective; provided, however, that if the Company's performance does not place it within the top 25%, using equivalent measurements of performance, of a group of peer companies selected by the Committee in its sole discretion, an award payment equal to 150% of the participant's Incentive Amount shall instead be paid upon the attainment of maximum performance. Payments ranging from 50% to 200% of the Incentive Amounts will be determined by the Committee in respect of an Award Period for the attainment of performance objectives between either threshold and target or target and maximum. Such amounts, if any, shall be paid to the participant in cash within ninety (90) days after the end of each Award Period, unless the participant made an irrevocable election to defer all or part of the amount of his or her award payment pursuant to any long term incentive compensation deferral plan adopted by the Company and made available for amounts earned hereunder. Notwithstanding the foregoing, for Award Periods beginning on or after January 1, 1998, Final Individual Performance Share Unit Awards shall be determined by the Committee by: (a) determining the CFROGC/EPS Growth Matrix Performance Percentage applicable for the Award Period; (b) multiplying such percentage by the number of Page 4 Performance Share Units credited to the participant and (c) further multiplying the result by an Individual Performance Rating which will be a whole percentage between zero and 150% established by the Committee in its sole discretion after considering the recommendations of Company management. The Final Individual Performance Share Unit Award shall be distributed to participants in the form of whole Company common shares (except that, to the extent necessary to satisfy federal, state or local tax withholding obligations, Performance Share Units may be converted to cash at a market value of Company common shares determined by the Committee), unless the participant has made an irrevocable election to defer all or part of the amount of his or her award pursuant to any long term incentive compensation deferral plan adopted by the Committee or the Company. 5. PRORATA PAYMENTS A participant must be employed by the Company or one of its subsidiaries at the end of an Award Period in order to be entitled to a payment in respect to such Award Period; provided, however, that a payment, prorated for the participant's length of service during the Award Period, may be authorized by the Committee, in its sole discretion, in the event the employment of a participant terminates before the end of an Award Period due to death, permanent disability, normal or early retirement, closure or divestiture of an Eaton facility or any other reason. Notwithstanding the foregoing, upon any termination of the Plan by the Committee during the term of any Award Period, payments to all participants will be made, prorated for each participant's length of service during the Award Period prior to the date of Plan termination. 6. OTHER PROVISIONS (A) Adjustments upon Certain Changes In the event of changes to the structure or corporate organization of the Company's businesses which affect the participants and/or the performance prospects of the Company, the Committee may make appropriate adjustments to individual participant Incentive Targets or to the established performance objectives for incomplete Award Periods. Adjustments under this Section 6 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. Notwithstanding the foregoing, after a Change in Control, neither the Committee nor the Board shall have the authority to change established Performance Objectives in any manner which could prove detrimental to the interests of the participant. Page 5 (B) Change in Control Defined For purposes of the Plan, a Change in Control shall be deemed to have occurred if: (i) a tender offer shall be made and consummated for the ownership of 25% or more of the outstanding voting securities of the Company, (ii) the Company shall be merged or consolidated with another Corporation and as a result of such merger or consolidation less than 75% of the out- standing voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company, (iv) a "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) of the Securities Exchange Act of 1934 (as in effect on the effective date of the Plan) shall acquire 25% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record). For purposes of the Plan, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(I) under the Securities Exchange Act of 1934 (as in effect on the effective date of the Plan), or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (C) Non-Transferability No right to payment under the Plan shall be subject to debts, contract liabilities, engagements or torts of the participant, nor to transfer, anticipation, alienation, sale, assignment, pledge or encumbrance by the participant except by will or the law of descent and distribution or pursuant to a qualified domestic relations order. Page 6 (H) Compliance with Law and Approval of Regulatory Bodies No payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with tax requirements. (H) No Right to Employment Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan, or any part thereof, shall confer upon any participant under the Plan any right to continue in the employ of the Company or any subsidiary, or shall in any way affect the right and power of the Company or any subsidiary to terminate the employment of any participant under the Plan at any time with or without assigning a reason therefore, to the same extent as the Company might have done if the Plan had not been adopted. (H) Interpretation of the Plan Headings are given to the sections of the Plan solely as a convenience to facilitate reference; such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of the Plan or any provisions thereof. The use of the masculine gender shall also include within its meaning the feminine. The use of the singular shall also include within its meaning the plural and vice versa. (H) Amendment and Termination The Committee may at any time suspend, amend or terminate the Plan. Notwithstanding the foregoing, upon the occurrence of a Change in Control, no amendment, suspension or termination of the Plan shall, without the consent of the participant, alter or impair any rights or obligations under the Plan with respect to such participant. (H) Effective Date of the Plan The Plan was adopted by the Board on April 24, 1991 but the effective date of the Plan shall be January 1, 1991. The Plan was amended and restated as of June 21, 1994, July 25, 1995 and April 21, 1998 Page 1 Eaton Corporation 1998 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, 1998 are as follows:
Percentage of voting securities owned (by Where Eaton unless otherwise Consolidated subsidiaries (A) organized indicated) - ------------------------------ ---------- ---------------------- Vorad Safety Systems, Inc. California 100% IVHS Technologies, Inc. CEEC Holdings Incorporated Delaware 100% CEEC Investments Incorporated CEEC Incorporated Delaware 100% Cutler-Hammer Inc. CEEC Investments Incorporated Delaware 100% CEEC Incorporated Cutler-Hammer de Puerto Rico Inc. Delaware 100% Cutler-Hammer Inc. Cutler-Hammer Inc. Delaware 100% Integrated Partial Discharge Diagnostics, Inc. (IPDD) Delaware 100% Cutler-Hammer Inc. Eaton Administration Corporation Delaware 100% Eaton ESC Holding Company Delaware 100% Eaton International Corporation Delaware 100% Eaton Semiconductor Equipment Inc. Delaware 100% Eaton Truck Systems, Inc. Delaware 100% Eaton USEV Holding Company Delaware 100% Eaton VORAD Technologies, L.L.C. (Partnership) Delaware 50% Eaton Truck Systems, Inc. 50% Vorad Safety Systems, Inc. ERC Corporation Delaware 100% Eaton Leasing Corporation ERC II Corporation Delaware 100% Eaton Leasing Corporation Fusion Systems Corporation Delaware 100% Fusion Taiwan, Inc. Delaware 100% Fusion Technology International, Inc. Fusion Technology International, Inc. Delaware 100% Fusion Systems Corporation Page 2 IVHS Technologies, Inc. Delaware 69.8% Modern Molded Products, Inc. Delaware 100% Kelmac Grip, L.P. Delaware 100% Modern Molded Products, Inc. Eaton Asia Investments Corporation Maryland 100% Fusion Semiconductor Systems Corporation Maryland 100% Fusion Systems Corporation Fusion Investments, Inc. Maryland 100% Fusion Systems Corporation CAPCO Automotive Products Corporation Michigan 100% G.T. Products, Inc. Michigan 100% Cutler-Hammer de Puerto Rico Company (Partnership) Ohio 99% Cutler-Hammer de Puerto Rico Inc. 1% Cutler-Hammer Inc. Cutler-Hammer IDT, Inc. Ohio 100% Eaton Consulting Services Corporation Ohio 100% Eaton Leasing Corporation Ohio 100% Eaton MDH Co. Inc. Ohio 100% Eaton MDH Limited Partnership Ohio 1% 99% Eaton MDH Co. Inc. Eaton Properties Corporation Ohio 100% Eaton Leasing Corporation Eaton Utah Corporation Ohio 100% Eaton Leasing Corporation U.S. Engine Valve (Partnership) Ohio 5.607% 70% Eaton USEV Holding Company Cutler-Hammer de Argentina S.A. Argentina 100% Eaton S.A. Argentina 100% Cutler-Hammer Controls Pty. Ltd. Australia 99.99996% Eaton International Corporation .00004% Eaton Pty. Ltd. Eaton Finance Pty. Ltd. Australia 100% Eaton International Corporation Eaton Finance G.P. Australia 99.583% Eaton Finance Pty. Ltd. Eaton Pty. Ltd. Australia 100% Page 3 Eaton Specialty Controls Pty. Ltd. Australia 99.99996% .00004% Eaton International Corporation Eaton Holding G.m.b.H. Austria 100% Eaton International Corporation Eaton Foreign Sales Corporation Barbados 100% Eaton Holding Limited Barbados 100% Eaton Yale Ltd. Eaton Services Limited Barbados 100% Eaton Holding Limited Saturn Insurance Company Ltd. Bermuda Islands 100% Eaton Ltda. Brazil 65.04% Eaton Services Limited 34.96% Eaton International Corporation Eaton Truck Components Ltda. Brazil 21.135% 78.865% CAPCO Automotive Products Corporation TGM Industria Electrometalurgica Ltda. Brazil 100% Eaton Ltda. 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. Electrotechnique GFTL, Inc. Canada 100% Eaton Yale Ltd. Tycor International Corporation Canada 100% Eaton Yale Ltd. Eaton Holding I Limited Cayman Islands 100% Eaton Holding III Limited Eaton Holding II Limited Cayman Islands 100% Eaton Holding III Limited Eaton Holding III Limited Cayman Islands 100% Eaton Holding G.m.b.H. Eaton Hydraulics (Shanghai) Co., Ltd. China 100% Eaton China Investment Co., Ltd. Page 4 Eaton Truck and Bus Components Company (Shanghai) Ltd. China 100% Eaton China Investment Co., Ltd. Eaton China Investments Co., Ltd. China 100% Eaton Asia Investments Corporation Eaton-Shenglong Automobile Components (Ningbo) Co., Ltd. China 70% Eaton China Investment Co., Ltd. Jining Eaton Hydraulics Company Ltd. China 60% Shanghai Eaton Engine Components Company, Ltd. China 55% Eaton China Investment Co., Ltd. Suzhou Cutler-Hammer Electric Co., Ltd. China 100% Eaton Controles Industriales S.A. Costa Rica 97.14% Eaton International Corporation Cutler-Hammer, S.A. Dominican Republic 100% Cutler-Hammer Inc. Eaton Automotive Controls Srl France 100% Eaton Technologies S.A. Eaton S.A. France 100% Eaton Technologies S.A. France 55% 45% Eaton International Corporation Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H. Eaton Controls G.m.b.H. & Co. K.G. (Partnership) Germany 99.33% Eaton Yale Ltd. .67% Eaton G.m.b.H. Eaton G.m.b.H. Germany 100% Eaton Technologies Limited Hong Kong 100% Eaton International Corporation Eaton Automotive Srl Italy 100% Eaton Srl Eaton Srl Italy 100% Eaton B.V. Fusion Italia Srl Italy 95% Fusion Europe Ltd. 5% Fusion Technologies International Eaton Japan Co., Ltd. Japan 100% Page 5 Fusion Semiconductor Japan KK Japan 100% Fusion Technology International, Inc. Japan Fawick Company Limited Japan 50% Sumitomo Eaton Hydraulics Co., Ltd. Japan 50% Sumitomo Eaton Nova Corporation Japan 50% Cutler-Hammer Controls Sdn. Bhd. Malaysia 100% Eaton International Corporation Condura S. de R.L. de C.V. Mexico 99.999556% .000444% Eaton Holding International I B.V. Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton International Corporation Eaton Controls, S. de R.L. de C.V. Mexico 99% 1% Eaton Holding International I B.V. Eaton Molded Products S. de R.L. de C.V. Mexico 99.9999985% .0000015%Eaton Holding International I B.V. Eaton Truck Components, S.A. de C.V. Mexico 99.995% .005% Eaton Holding International I B.V. Operaciones de Maquila de Juarez S de R.L. de C.V. Mexico 99.956% Cutler-Hammer Inc. .044% Eaton Holding International I B.V. Eaton s.a.m. Monaco 100% Eaton Automotive B.V. Netherlands 100% IKU Holding Montfoort B.V. Eaton B.V. Netherlands 100% Eaton Holding International I B.V. Eaton C.V. (Partnership) Netherlands 99.9% Eaton Holding III Limited .1% Eaton International Corporation Eaton Holding B.V. Netherlands 100% Eaton B.V. Eaton Holding International I B.V. Netherlands 100% Page 6 IKU Holding Montfoort B.V. Netherlands 100% Eaton Holding B.V. Eaton Finance B.V. Netherlands 100% Eaton B.V. Technisch Bureau Hoevelaken B.V. Netherlands 100% Eaton Holding B.V. Cutler-Hammer Asia Corporation Philippines 100% Eaton International Corporation Eaton Controls Spolka z o.o. Poland 100% Eaton Holding B.V. Eaton Automotive Spolka z o.o. Poland 100% Eaton Automotive Srl Eaton Truck Components S.A. Poland 83.72% Eaton B.V. Cutler-Hammer Pte. Ltd. Singapore 100% Eaton International Corporation Eaton Services Pte. Ltd. Singapore 100% Eaton Semiconductor Equipment Inc. Eaton Truck Components (Pty) Limited South Africa 100% Eaton Limited Eaton Automotive Controls Limited South Korea 100% Eaton International Corporation Eaton Limited South Korea 100% Eaton Semiconductor Limited South Korea 100% Eaton Semiconductor Equipment Inc. Fusion Pacific, Ltd. South Korea 100% Fusion Technology International, Inc. Eaton Ros S.A. Spain 100% Eaton S.A. Productos Eaton Livia S.A. Spain 100% Eaton S.A. Eaton SA Switzerland 100% Eaton Technologies S.A. Switzerland 100% Eaton SA Eaton Limited Taiwan 19.4% 80.6% Eaton International Corporation Modern Molded Products Limited Taiwan 100% Eaton International Corporation Eaton Technologies Limited Thailand 100% Rubberon Technology Corporation Limited Thailand 100% Page 7 Cutler-Hammer Europa Pension United Trustees Ltd. Kingdom 50% Eaton Limited 50% Eaton Financial Services Limited Eaton Financial Services Limited United Kingdom 100% Eaton Limited Eaton Holding Limited United Kingdom 100% Eaton Limited United Kingdom 100% Eaton Holding Limited Eaton Shared Services Limited United Kingdom 100% Eaton Holding Limited Fusion Europe Ltd. United Kingdom 100% Fusion Technology International, Inc. Cutler-Hammer de Venezuela S.A. Venezuela 100% 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. Page 1 Eaton Corporation 1998 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 19, 1999, with respect to the consolidated financial statements of Eaton Corporation included in this Form 10-K for the year ended December 31, 1998:
Registration number Description Filing date - ------------ ---------------------------------------- ------------------ 333-74355 Eaton Corporation $1,400,000,000 of Debt Securities, Debt Warrants, Common Shares and Preferred Shares - Form S-3 Registration Statement March 12, 1999 333-62375 Eaton Corporation 1998 Stock Plan - Form S-8 Registration Statement August 27, 1998 333-62373 Eaton Holding Limited U.K. Savings- Related Share Option Scheme [1998]- Form S-8 Registration Statement August 27, 1998 333-46861 Eaton Limited U.K. Savings-Related Share Option Scheme [1991] - Form S-8 Registration Statement February 25, 1998 333-40243 Eaton Corporation 172,489 Common Shares - Form S-3 Registration Statement February 20, 1998 333-45575 Eaton Limited U.K. Savings-Related Share Option Scheme [1991] - Form S-8 Registration Statement February 4, 1998 333-35697 Cutler-Hammer de Puerto Rico Company Retirement Savings Plan - Form S-8 Registration Statement September 16, 1997 333-35699 Eaton Savings Plan for Certain Cutler- Hammer Represented Employees - Form S-8 Registration Statement September 16, 1997 333-28869 Eaton 401(K) Savings Plan and Trust - Form S-8 Registration Statement June 10, 1997 333-25693 Eaton Corporation Shareholder Dividend Reinvestment Plan - Form S-3 Registration Statement April 23, 1997 333-23539 Eaton Non-Employee Director Fee Deferral Plan - Form S-8 Registration Statement March 18, 1997 333-22597 Eaton Incentive Compensation Deferral Plan - Form S-8 Registration Statement March 13, 1997 Page 2 333-13873 Eaton Corporation Investment Plan for Hourly Employees of the Hydraulics Division - Hutchinson Plant - Form S-8 Registration Statement October 10, 1996 333-13869 Lincoln Plant Share Purchase and Investment Plan and Trust - Form S-8 Registration Statement October 10, 1996 333-13861 Eaton Corporation 401(k) Savings Plan for the Hourly Rate Employees at Airflex Division - Form S-8 Registration Statement October 10, 1996 333-13857 Eaton Wauwatosa Union Plan and Trust - Form S-8 Registration Statement October 10, 1996 333-13855 Eaton Winamac Hourly Investment Plan and Trust - Form S-8 Registration Statement October 10, 1996 333-03599 Eaton Corporation Share Purchase and Investment Plan - Form S-8 Registration Statement May 13, 1996 333-01365 Eaton Corporation Incentive Compensation Deferral Plan - Form S-3 Registration Statement March 1, 1996 33-64201 Eaton Corporation $120,837,500 of Debt Securities and Debt Warrants - Form S-3 Registration Statement November 14, 1995 33-63357 Lectron Products, Inc. Retirement Savings Plan - Form S-8 Registration Statement October 12, 1995 33-60907 Eaton 1995 Stock Plan - Form S-8 Registration Statement July 7, 1995 33-59459 Eaton Corporation 2,072,400 Common Shares - Form S-3 Registration Statement May 19, 1995 33-53521 Cutler-Hammer Inc. Savings Plan for Certain Hourly Employees - Form S-8 Registration Statement May 6, 1994 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 33-49779 Eaton Limited U.K. Savings-Related Share Option Scheme [1991] - Form S-8 Registration Statement July 16, 1993 Page 3 33-49777 Eaton Corporation Share Purchase and Investment Plan - Form S-8 Registration Statement July 15, 1993 33-49393, Eaton Corporation Stock Option Plans - 33-12842, Form S-8 Registration Statement March 9, 1993 2-76349 & 2-58718 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
/s/ Ernst & Young LLP Cleveland, Ohio March 19, 1999 Page 1 Eaton Corporation 1998 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, Adrian T. Dillon, Billie K. Rawot 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, to the Annual Report on Form 10-K for the year ended December 31, 1998 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, 1999. IN WITNESS WHEREOF, this Power of Attorney has been signed this 24th day of February, 1999. /s/ Stephen R. Hardis /s/ Ernie Green ------------------------------ ---------------------------- Stephen R. Hardis Ernie Green Chairman and Chief Executive Director Officer; Principal Executive Officer; Director /s/ Alexander M. Cutler /s/ Ned C. Lautenbach ------------------------------ ---------------------------- Alexander M. Cutler Ned C. Lautenbach President and Chief Operating Director Officer; Director /s/ Adrian T. Dillon /s/ John R. Miller ------------------------------ ---------------------------- Executive Vice President-- John R. Miller Chief Financial and Planning Director Officer; Principal Financial Officer /s/ Billie K. Rawot /s/ Furman C. Moseley ------------------------------ ---------------------------- Billie K. Rawot Furman C. Moseley Vice President and Controller; Director Principal Accounting Officer Page 2 /s/ Neil A. Armstrong /s/ Victor A. Pelson ------------------------------ ---------------------------- Neil A. Armstrong Victor A. Pelson Director Director /s/ Michael J. Critelli /s/ A. William Reynolds ------------------------------ ---------------------------- Michael J. Critelli A. William Reynolds Director Director /s/ Gary L. Tooker ------------------------------ ---------------------------- Phyllis B. Davis Gary L. Tooker Director Director EX-27 2
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 12-MOS DEC-31-1998 DEC-31-1998 80 42 899 14 707 1,982 3,387 1,550 5,665 1,516 1,191 0 0 36 2,021 5,665 6,625 6,625 4,759 6,143 (91) 0 88 485 136 349 0 0 0 349 4.89 4.80
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