-----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, Oo4rxFlLQuQ8kGkRRxtf8Raqazov7yEZTtCP9OP3LTPMJbuPa3DCQCcXgT9xE01J meKQQZtqiTrdz/siadHvaQ== 0000031277-99-000019.txt : 19990816 0000031277-99-000019.hdr.sgml : 19990816 ACCESSION NUMBER: 0000031277-99-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-12842 FILM NUMBER: 99687433 BUSINESS ADDRESS: STREET 1: EATON CTR STREET 2: 1111 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114-2584 BUSINESS PHONE: 2165235000 MAIL ADDRESS: STREET 1: 1111 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 FORMER COMPANY: FORMER CONFORMED NAME: EATON YALE & TOWNE INC DATE OF NAME CHANGE: 19710822 10-Q 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1999 ------------- Commission file number 1-1396 ------ Eaton Corporation - ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0196300 - ------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) Eaton Center, Cleveland, Ohio 44114-2584 - ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 523-5000 - ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past ninety days. Yes X --- There were 72.2 million Common Shares outstanding as of June 30, 1999. Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Eaton Corporation Condensed Consolidated Balance Sheets
June 30, December 31, (Millions) 1999 1998 ---- ---- ASSETS Cash & short-term investments $ 44 $ 122 Accounts receivable 1,429 885 Inventories 982 707 Deferred income taxes & other current assets 323 268 ------ ------ 2,778 1,982 Property, plant & equipment 2,393 1,837 Excess of cost over net assets of businesses acquired 1,977 1,025 Other intangible assets 486 214 Deferred income taxes & other assets 707 607 ------ ------ $8,341 $5,665 ====== ====== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debt & current portion of long-term debt $1,578 $ 333 Accounts payable & other current liabilities 1,483 1,183 ------ ------ 3,061 1,516 Long-term debt 2,008 1,191 Postretirement benefits other than pensions 665 557 Other liabilities 482 344 Shareholders' equity 2,125 2,057 ------ ------ $8,341 $5,665 ====== ====== See accompanying notes.
Page 3 Eaton Corporation Statements of Consolidated Income
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- (Millions except for per share data) 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $2,300 $1,712 $3,961 $3,399 Costs & expenses Cost of products sold 1,643 1,200 2,815 2,407 Selling & administrative 354 264 629 527 Research & development 77 82 148 164 ------ ------ ------ ------ 2,074 1,546 3,592 3,098 ------ ------ ------ ------ Income from operations 226 166 369 301 Other income (expense) Interest expense - net (44) (23) (65) (44) Gain on sales of businesses 43 Other - net 4 18 5 16 ------ ------ ------ ------ (40) (5) (60) 15 ------ ------ ------ ------ Income before income taxes 186 161 309 316 Income taxes 61 47 100 97 ------ ------ ------ ------ Net income $ 125 $ 114 $ 209 $ 219 ====== ====== ====== ====== Net income per Common Share Assuming dilution $ 1.71 $ 1.57 $ 2.88 $ 2.98 Basic 1.74 1.60 2.92 3.05 Average number of Common Shares outstanding Assuming dilution 72.8 72.8 72.5 73.3 Basic 71.7 71.1 71.5 71.6 Cash dividends paid per Common Share $ .44 $ .44 $ .88 $ .88 See accompanying notes.
Page 4 Eaton Corporation Condensed Statements of Consolidated Cash Flows
Six Months Ended June 30 ---------------- (Millions) 1999 1998 ---- ---- Net cash provided by operating activities Net income $ 209 $ 219 Adjustments to reconcile to net cash provided by operating activities Depreciation & amortization 201 163 Gain on sales of businesses (43) Changes in operating assets & liabilities, excluding acquisitions and sales of businesses (319) (263) Other - net 60 (4) ------ ------ 151 72 Net cash (used in) provided by investing activities Acquisitions of businesses, less cash acquired (1,593) (79) Sales of businesses 359 Expenditures for property, plant & equipment (183) (150) Other - net (8) 4 ------ ------ (1,784) 134 Net cash provided by (used in) financing activities Borrowings with original maturities of more than three months Proceeds 820 801 Payments (670) (477) Borrowings with original maturities of less than three months - net 1,481 (145) Cash dividends paid (63) (63) Purchase of Common Shares (347) Other - net 11 16 ------ ------ 1,579 (215) ------ ------ Decrease in cash (54) (9) Cash at beginning of year 80 53 ------ ------ Cash at end of period $ 26 $ 44 ====== ====== See accompanying notes.
Page 5 The following notes are included in accordance with the requirements of Regulation S-X and Form 10-Q: All references to net income per Common Share assume dilution, unless otherwise indicated. Preparation of Financial Statements - ----------------------------------- The condensed consolidated financial statements of Eaton Corporation (Eaton or the Company) are unaudited. However, in the opinion of management, all adjustments have been made which are necessary for a fair presentation of financial position, results of operations and cash flows for the stated periods. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 1998 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Acquisition of Aeroquip-Vickers, Inc. - ------------------------------------- On April 9, 1999, the Company completed the acquisition of Aeroquip-Vickers, Inc. (A-V) for approximately $1.6 billion in cash. A-V, which had 1998 sales of $2.1 billion, is comprised of two principal subsidiaries: Aeroquip Corporation and Vickers, Incorporated. Aeroquip Corporation is a global leader in the manufacture of products that include all pressure ranges of hose, fittings, adapters, couplings and other fluid connectors, plus precision molded and extruded plastic products. Vickers, Incorporated is a leading worldwide producer of hydraulic pumps, motors and cylinders; electronic and hydraulic controls; electric motors and drives; filtration products; and fluid-evaluation products and services. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the statements of consolidated income include the results of A-V beginning April 9, 1999. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by Eaton's management based on information currently available and on current assumptions as to future operations. The allocation of the purchase price to the assets acquired and liabilities assumed is subject to revision as a result of the final determination of appraised and other fair values. For financial statement purposes, the excess of cost over net assets acquired is amortized by the straight-line method over forty years. A summary of the assets acquired and liabilities assumed in the acquisition follows (in millions): Estimated fair values Assets acquired $1,741 Liabilities assumed (1,094) Excess of cost over net assets acquired 976 ------ Purchase price $1,623 Less cash acquired & liability for outstanding shares (42) ------ Net cash paid $1,581 ====== Page 6 Funds for the purchase were primarily obtained through the issuance of commercial paper. Of the commercial paper issued, $500 million is classified as long-term debt because the Company intends, and has the ability under a five-year credit agreement, to refinance this debt on a long-term basis. Unaudited pro forma results of operations for the six month periods ended June 30, 1999 and 1998, as if Eaton and A-V had been combined as of the beginning of those periods, follow (in millions). The pro forma results include preliminary estimates and assumptions which Eaton's management believes are reasonable. However, the pro forma results do not include any cost savings or other effects of the planned integration of Eaton and A-V, and are not necessarily indicative of the results which would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. Pro forma Six months ended June 30 ---------------- 1999 1998 ---- ---- Net sales $4,499 $4,521 Net income 198 240 Net income per Common Share Assuming dilution $ 2.73 $ 3.27 Basic 2.77 3.35 Business Segment Reporting - -------------------------- As announced on July 15, 1999, due to the recent acquisition of A-V, and the planned divestitures of the Fluid Power, Engineered Fasteners and Vickers Electronics Systems divisions, the Company has realigned its business segment reporting. Principal changes include: Hydraulics and Other Components has been renamed Fluid Power and Other Components and will include the operating results of A-V; Aerospace Controls has been reclassified from Industrial and Commercial Controls to Fluid Power and Other Components; the Trucking Information Systems Division and Eaton VORAD have been reclassified from Automotive Components to Truck Components; and the operating results of the Fluid Power and Engineered Fasteners divisions, included in Automotive Components and Hydraulics and Other Components, respectively, have been reclassified to Divested Operations due to their expected divestiture. Prior periods have been reclassified to conform to the current presentation. Subsequent Events - ----------------- In July 1999, in order to partially refinance the cost of the acquisition of A-V, the Company sold 1.625 million Common Shares for net proceeds of $147 million. On July 13, 1999, Eaton announced it had signed a definitive agreement to sell the Engineered Fasteners business to TransTechnology Corporation for $173 million cash. The sale is expected to be completed by September 1, 1999. On August 3, 1999, Eaton announced it had entered into a definitive agreement to sell the Fluid Power Division to Borg-Warner Automotive, Inc. for $310 million. The sale is expected to be completed in the second half of 1999. Page 7 Unusual Charges - --------------- Income in the first quarter of 1998 was reduced by unusual pretax charges of $43 million ($28 million aftertax, or $.38 per Common Share). The Company recorded $33 million of restructuring charges which reduced operating profit of the Automotive Components segment by $8 million, the Industrial & Commercial Controls segment by $15 million, and the Truck Components segment by $10 million. These charges, which are included in the Statement of Consolidated Income in Income from Operations, related to workforce reductions, asset write-downs and other restructuring actions. The Company also recorded a $10 million contribution to its charitable trust which is included in Other Expense. These charges are more fully discussed in the Company's 1998 Annual Report on Form 10-K in the Unusual Charges footnote and throughout Management's Discussion and Analysis of Financial Condition and Results of Operations. Gain on Sales of Businesses - --------------------------- On January 2, 1998, the Company completed the sale of the Axle and Brake business to Dana Corporation. The sale of this business, and an adjustment related to a business sold in a prior period, resulted in a pretax gain of $43 million ($28 million aftertax, or $.38 per Common Share), which was recorded in the first quarter of 1998. On April 1, 1998, the Company completed the sale of its automotive leaf spring business. The operating results of these businesses are included in Divested Operations. Comprehensive Income - -------------------- The principal difference between net income as historically reported in the statements of consolidated income and comprehensive income are foreign currency translation adjustments recorded in Shareholders' Equity. Comprehensive income is as follows (in millions):
Three months ended Six months ended June 30 June 30 ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income $125 $114 $209 $219 Foreign currency translation and other adjustments (in the first quarter of 1999, primarily relates to operations in Brazil) (9) (2) (108) 13 ---- ---- ---- ---- Comprehensive income $116 $112 $101 $232 ==== ==== ==== ====
Page 8 Inventories - ----------- June 30, December 31, (Millions) 1999 1998 ---- ---- Raw materials $ 355 $ 282 Work-in-process and finished goods 696 494 ------ ------ Gross inventories at FIFO 1,051 776 Excess of current cost over LIFO cost (69) (69) ------ ------ Net inventories $ 982 $ 707 ====== ====== Net Income per Common Share - --------------------------- The calculation of net income per Common Share - assuming dilution and basic follows (millions except for per share data):
Three months ended Six months ended June 30 June 30 ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income $ 125 $ 114 $ 209 $ 219 ==== ==== ==== ==== Average number of Common Shares outstanding-assuming dilution 72.8 72.8 72.5 73.3 Less dilutive effect of stock options 1.1 1.7 1.0 1.7 ---- ---- ---- ---- Average number of Common Shares outstanding-basic 71.7 71.1 71.5 71.6 ==== ==== ==== ==== Net income per Common Share Assuming dilution $1.71 $1.57 $2.88 $2.98 Basic 1.74 1.60 2.92 3.05
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. On April 1, 1998, the division that manufactured leaf spring assemblies was sold. Summary financial information for Eaton Offshore and its consolidated subsidiaries is as follows (in millions): Page 9 Six months ended June 30 ------------------ 1999 1998 ---- ---- Income statement data Net sales $245 $349 Gross profit 70 83 Net income 17 37 June 30, December 31, 1999 1998 ---- ---- Balance sheet data Current assets $347 $336 Noncurrent assets 196 248 Net intercompany payables 117 132 Current liabilities 116 104 Noncurrent liabilities 119 108 Minority interest 21 Page 10 Eaton Corporation Business Segment Information
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- (Millions) 1999 1998 1999 1998 ---- ---- ---- ---- Net sales Automotive Components $ 480 $ 436 $ 958 $ 878 Fluid Power & Other Components 661 180 820 358 Industrial & Commercial Controls 578 553 1,090 1,062 Semiconductor Equipment 98 93 155 172 Truck Components 407 378 789 752 ------ ------ ------ ------ Total ongoing operations 2,224 `1,640 3,812 3,222 Divested operations 76 72 149 177 ------ ------ ------ ------ Total net sales $2,300 $1,712 $3,961 $3,399 ====== ====== ====== ====== Operating profit (loss) Automotive Components $ 65 $ 54 $ 127 $ 106 Fluid Power & Other Components 60 35 82 69 Industrial & Commercial Controls 49 46 76 68 Semiconductor Equipment 10 (8) (2) (22) Truck Components 61 61 121 113 ------ ------ ------ ------ Total ongoing operations 245 188 404 334 Divested operations 16 14 31 30 Amortization of certain intangible assets (24) (16) (41) (32) Interest expense - net (44) (23) (65) (44) Gain on sales of businesses 43 Corporate & other - net (7) (2) (20) (15) ------ ------ ------ ------ Income before income taxes $ 186 $ 161 $ 309 $ 316 ====== ====== ====== ======
Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- On April 9, 1999, the Company completed the acquisition of Aeroquip-Vickers, Inc. (A-V) for approximately $1.6 billion in cash. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the statements of consolidated income include the results of A-V beginning April 9, 1999. This acquisition is more fully discussed under "Acquisition of Aeroquip-Vickers, Inc." on page 5 of this report. The Company reported record sales of $2.30 billion for the second quarter of 1999, 34% above the comparable period in 1998. Sales for the first half of 1999 were $3.96 billion, an increase of 17% from the comparable period in 1998. The increase in sales primarily reflects the acquisition of A-V. Net income for the second quarter of 1999 was $125 million, an increase of 10% from the comparable period in 1998. Earnings per share reached a record $1.71 per fully diluted share, 9% above last year's $1.57. Net income for the first half 1999 was $209 million, a decrease of 5% from the comparable period in 1998. Earnings per share for the six months ended June 30, 1999 were $2.88 compared to $2.98 for the same period in 1998. All businesses performed well given varied market conditions. The Company is particularly pleased by Semiconductor Equipment, which returned to double-digit profitability in the quarter. The Company is also making steady progress integrating A-V into the family of Eaton businesses. Since the acquisition date, A-V added about $.12 to the Company's quarterly earnings per share, prior to restructuring charges of $.03, stemming from the integration. The Company is pleased that earnings are back on track, particularly when the recovery in semiconductor equipment has just begun and the market for hydraulics is still depressed. The Company is beginning to see the benefits of the major company-wide initiatives it undertook in 1998 to reduce costs. During the first quarter of 1998, the Company recorded a net pretax gain of $43 million, related principally to the January 2, 1998 sale of its worldwide Axle and Brake business to Dana Corporation. This gain was entirely offset by charges of $33 million related to restructuring actions and a $10 million contribution to the Company's charitable trust. Automotive Components - --------------------- Sales in the second quarter of 1999 of $480 million were a record, 10% above one year ago. Sales in the first half of 1999 of $958 million increased 9% compared to the same period in 1998. This increase compares to increases of 11% in North American light vehicle production and 2% in European output and a 30% year-to-year decline in South American production. This above-market performance can be attributed to penetration gains across Eaton's product lines. Page 12 Operating profits in the second quarter of 1999 of $65 million were also a record, an increase of 20% compared to the same period in 1998. Operating profits for the first half of 1999 were $127 million, an increase of 20% compared to the same period in 1998. This performance can be attributed to the increased sales and benefits of 1998's restructuring initiatives. Before restructuring charges of $8 million recorded in the first quarter of 1998, operating profits for the first half of 1999 were 11% ahead of the comparable period in 1998. Fluid Power & Other Components - ------------------------------ Fluid Power and Other Components sales in the second quarter of 1999 were $661 million, 267% above year earlier results. Sales in the first half of 1999 of $820 million were 129% ahead of 1998's first half results. The increase was primarily due to the acquisition of A-V. Activity in mobile and stationary fluid power markets remains very depressed, with industry shipments off 11% versus last year. While industry orders are essentially flat versus the first quarter, the Company does not anticipate a meaningful upturn before year-end. Operating profits were $60 million for the second quarter of 1999, 70% ahead of one year earlier. Operating profits for the first half of 1999 were $82 million, 18% ahead of comparable results in 1998. Operating profits increased primarily due to the acquisition of A-V. Restructuring expenses are expected to lower the contribution of A-V to this segment during the remainder of the year. Including A-V in 1998 results on a pro forma basis, sales in the second quarter of 1999 were off 8% from one year ago while profits were off 31%. Assuming markets gradually improve, the Company is increasingly confident that A-V will add at least $.50 per share to the Company's year 2000 earnings per share. Industrial & Commercial Controls - -------------------------------- Industrial and Commercial Controls sales reached a record $578 million in the second quarter of 1999, an increase of 4% from year earlier results compared to about a 1% increase in the North American market for electrical distribution equipment and industrial controls. Sales in the first half of 1999 of $1.1 billion were 3% ahead of 1998's first half results. The above-industry growth can be attributed to strong residential and commercial construction markets, new multi-product "solutions" packaging, and the success of the Company's new Engineering Services business unit. Cutler- Hammer's North American orders in the second quarter were 14% ahead of one year ago. Operating profits for the second quarter of 1999 were $49 million, an increase of 8% compared to the same period in 1998. Operating profits for the first half of 1999 were $76 million, an increase of 13% from comparable results in 1998. This increase can be attributed to increased sales and benefits of 1998's restructuring initiatives partially offset by the costs of building the new Engineering Services business unit. Before restructuring charges of $15 million recorded in the first quarter of 1998, operating profits for the six months in 1999 were 7% below the comparable period in 1998. Page 13 Semiconductor Equipment - ----------------------- Semiconductor Equipment sales in the second quarter of 1999 were $98 million, 6% above last year's comparable results and well above the 10% decline in industry shipments. Sales in the first half of 1999 of $155 million were 10% below sales in the first half of 1998. This segment returned to double-digit profitability in the second quarter of 1999 reaching an operating profit of $10 million compared to an operating loss of $8 million in the comparable period in 1998. This segment suffered an operating loss of $2 million in the first half of 1999 compared to last year's loss of $22 million. These results reflect the early hard-earned benefits of the Company's operational restructuring more than a resurgent market. But the equipment market is rebounding, with the second quarter book-to-bill ratio above 1.20. Second quarter orders were at the highest level since late 1997. Customer reception to the Company's new generation of semiconductor equipment validates the uninterrupted research and development spending over the past two difficult years, and is expected to be reflected in sustained higher sales in the year ahead. Truck Components - ---------------- Truck Components sales in the second quarter of 1999 were a record $407 million, 8% above last year's comparable results. Sales in the first half of 1999 were $789 million, 5% ahead of year earlier results. This sales growth compares with a 24% increase in North American Class 8 production, a 2% drop in European heavy truck production, and a decline of more than 40% in South American commercial vehicle production. The Company is utilizing its worldwide capacity to satisfy NAFTA heavy truck demand, which is now running above a 310,000 annual rate. Operating profits in the second quarter of 1999 were flat compared to a year ago at $61 million. Operating profits in the first half of 1999 were $121 million, an increase of 7% compared to the same period in 1998. These results are primarily due to increased sales offset by operating inefficiencies stemming from unprecedented demand. Before restructuring charges of $10 million recorded in the first quarter of 1998, operating profits were 2% below the comparable period in 1998. In June 1999, the Company announced it would invest more than $100 million to build a new truck transmission manufacturing plant in Mexico to meet unprecedented market demand and support the Company's increasing market share for commercial truck components throughout NAFTA. Trucking continues to gain share in this world of just-in-time production and logistics. With the U.S. manufacturing sector also regaining momentum, the Company expects the heavy truck market will continue near these levels for some time to come. Page 14 Changes in Financial Condition - ------------------------------ Current liabilities exceeded current assets by $283 million at June 30, 1999, primarily due to the $1.2 billion increase in short-term debt and current portion of long-term debt. The increase in short-term debt resulted from the acquisition of A-V for $1.6 billion in cash, which is more fully discussed under "Acquisition of Aeroquip-Vickers, Inc." on page 5 of this report. Likewise, long-term debt increased to $2.0 billion at June 30, 1999 from $1.2 billion at the end of 1998, due to the acquisition of A-V. In anticipation of the acquisition of A-V, on April 5, 1999, the Company issued $200 million of floating rate notes maturing April 2000. The Company also entered into an additional $500 million revolving credit facility with a five-year term and a $1.3 billion credit facility with a 364- day term. This increased the Company's total credit facilities to approximately $3 billion. The purchase of A-V, primarily funded through the issuance of commercial paper, is supported by these credit facilities. During the first quarter of 1999, the Company announced the intention to divest the Engineered Fasteners and Fluid Power divisions. These operations had combined 1998 sales of $283 million. During the second quarter of 1999, the Company announced the planned sale of Vickers Electronics Systems (VES) which had 1998 sales of $130 million. VES is a business that was acquired in the acquisition of A-V. On July 13, 1999, the Company announced it had signed a definitive agreement to sell the Engineered Fasteners business to TransTechnology Corporation for $173 million in cash. The sale is expected to be completed by September 1, 1999. On August 3, 1999, Eaton announced it had entered into a definitive agreement to sell the Fluid Power Division to Borg-Warner Automotive, Inc. for $310 million. The sale is expected to be completed in the second half of 1999. Proceeds from the sales of these businesses will be used to pay down a portion of the debt incurred to finance the acquisition of A-V. In July 1999, the Company completed the sale of 1.625 million Common Shares for net proceeds of $147 million, which will be used to pay down a portion of the debt incurred to finance the A-V acquisition. The Company also expects to refinance a portion of the commercial paper on a long-term basis before the end of the year. During the first half of 1999, the Brazilian real currency devalued by 47%. The effect of this devaluation on the net assets of the Company's operations in Brazil resulted in a $76 million foreign currency translation loss which was recorded directly in Shareholders' Equity, through comprehensive income, in the first half of 1999. 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 15 As is more fully described in the Company's 1998 Annual Report on Form 10-K, the Company's program to address the Year 2000 issue involves a combination of hardware and software modifications, upgrades and replacements. The Company has fully integrated Aeroquip-Vickers' (A-V) Year 2000 program, which was structured in a very similar manner, into Eaton's corporate-wide initiative. The Company has substantially completed the execution phase of the program although certain applications at certain businesses will be completed throughout the second half of 1999. Continuous review and testing have been conducted throughout all phases of the program and will continue during the second half of 1999 as well as monitoring of the program's success. The current estimate of total Year 2000 program costs is approximately $120 million, of which approximately 90% has been incurred. Approximately $90 million of these costs represent replacement costs of certain hardware and software and the remaining $30 million represents costs associated with modifying and upgrading existing systems. The increase in estimated costs from the previously reported $95 million is primarily due to the inclusion of the estimated remediation costs of A-V. 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. Forward-Looking Statements - -------------------------- The forward-looking statements in this Form 10-Q concerning the Aeroquip-Vickers acquisition, the outlook of the semiconductor equipment and truck transmission market, the refinancing of debt on a long-term basis and the Year 2000 issue should be used with caution. They are subject to various risks and uncertainties, many of which are outside the control of the Company. Important factors which could cause actual results to differ materially from those in the forward-looking statements include changes in global economic and financial conditions, the markets for semiconductor equipment, truck transmissions, and fluid power and other components, the Company's ability to successfully implement the integration of Aeroquip-Vickers, the interest rate market and costs and disruptions associated with the Year 2000 issue. The Company assumes no obligation to update these forward- looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk A discussion of market risk exposures is included in Part II, Item 7A, "Quantitative and Qualitative Disclosure about Market Risk", of the Company's 1998 Annual Report on Form 10- K. Long-term debt increased to $2.0 billion at June 30, 1999 from $1.2 billion at the end of 1998. Commercial paper, classified as long-term, represented $500 million of this increase. The average interest rate for commercial paper at June 30, 1999 was 5.0%. The remaining increase in long-term debt primarily represents the debt assumed as part of the Page 16 acquisition of Aeroquip-Vickers. The carrying values of commercial paper and the assumed debt approximated their fair values at June 30, 1999. There were no other material changes during the six months ended June 30, 1999. Page 17 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - See Exhibit Index attached. (b) Reports on Form 8-K. 1. On April 9, 1999, the Company filed a Current Report on Form 8-K regarding the completion of the acquisition of Aeroquip-Vickers, Inc. (A-V). 2. A Current Report on Form 8-K dated April 22, 1999, as amended on May 11, 1999, was filed by the Company which included the audited historical financial statements of A-V for 1998 and unaudited pro forma combined condensed financial statements for 1998 reflecting Eaton's acquisition of A-V. 3. On June 21, 1999, the Company filed a Current Report on Form 8-K which included the unaudited historical financial statements of A-V for the first quarter of 1999 and 1998, and unaudited pro forma condensed financial statements reflecting Eaton's acquisition of A-V as of March 31, 1999 and December 31, 1998. 4. On July 1, 1999, the Company filed a Current Report on Form 8-K regarding the sale of 1.625 million Common Shares. 5. On July 15, 1999, the Company filed a Current Report on Form 8-K regarding revisions to its business segments. Page 18 Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ---------------------------- Registrant Date: August 10, 1999 /s/ Adrian T. Dillon ---------------------------- Adrian T. Dillon Executive Vice President - Chief Financial and Planning Officer; Principal Financial Officer Page 19 EATON CORPORATION EXHIBIT INDEX Regulation S-K, Item 601 - Exhibit Reference Number Exhibit - ------------------ ------- 4 Pursuant to Regulation S-K Item 601 (b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. 27 Financial Data Schedule 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 6-MOS DEC-31-1999 JUN-30-1999 26 18 1,458 29 982 2,778 3,967 1,574 8,341 3,061 2,008 0 0 36 2,089 8,341 3,961 3,961 2,815 3,592 (5) 0 65 309 100 209 0 0 0 209 2.92 2.88
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