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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 (Fee required)
For the year ended December 31, 1994
Commission file number 1-1396
Eaton Corporation
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
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(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
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(Address of principal executive offices) (Zip code)
(216) 523-5000
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(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 Chicago Stock Exchange
The New York Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
7% Debentures, due 2011 The New York 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
90 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, 1995 was $3.6 billion. As of
January 31, 1995, there were 77,966,602 Common Shares outstanding.
Page 2
Documents Incorporated By Reference
Portions of the Proxy Statement for the 1995 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 which serve the
automotive, industrial, construction, commercial, aerospace and
marine markets. Principal products include truck transmissions
and axles, engine components, hydraulic products, electrical power
distribution and control equipment, ion implanters and a wide
variety of controls. The Company had 1994 net sales of $6.1
billion and 51,000 employees and 150 manufacturing sites in 18
countries around the world.
On January 31, 1994, the Company acquired the Distribution and
Control Business Unit (DCBU) of Westinghouse Electric Corporation
for an adjusted purchase price of $1.050 billion. DCBU, a leading
North American manufacturer of electrical distribution equipment
and industrial controls with 1993 net sales of $1.1 billion, was
combined with Eaton's Industrial Control and Power Distribution
Operations to form the new Cutler-Hammer business unit. The
acquisition has been accounted for as a purchase and, accordingly,
the statements of consolidated income include the results of DCBU
beginning February 1, 1994. This acquisition, the largest in
Company history, substantially bolstered prospects for the
Electrical and Electronic Controls segment by providing greater
product depth with world class technology and by increasing
product offering and distribution opportunities. This acquisition
improves the balance of sales and earnings between the Electrical
and Electronic Controls segment and the historically strong
Vehicle Components segment.
On November 16, 1994, the Company acquired the common stock of
Lectron Products, Inc. (Lectron) through the issuance of 1.6
million Common Shares. Lectron, a privately-held manufacturer of
electronic and precision electromechanical controls for automotive
manufacturers, had annual sales of $128 million. This acquisition
was accounted for as a pooling-of-interests. Financial statements
for periods prior to the acquisition were not restated for the
acquisition since the effect would not be material.
Information regarding principal products, net sales, operating
profit and identifiable assets by business segment and geographic
region is presented in "Business Segment and Geographic Region
Information" on pages 38 to 42 of this report. Additional
information regarding Eaton's business segments and business in
general is presented below.
Page 3
Vehicle Components
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. Although Eaton
emphasizes the EATON trademark in marketing many products within
this business segment, it also markets under a number of other
trademarks, including CHAR-LYNN, DILL, FULLER, ROADRANGER and TOP
SPEC.
Seasonal Fluctuations - Sales of truck, passenger car and
off-highway vehicle 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 business
segment are price, service and product performance. Eaton
occupies a strong competitive position in relation to many
competitors in this business segment and, with respect to many
products, is considered among the market leaders.
Major Customers - Approximately 17% of net sales in 1994 of the
Vehicle Components segment were made to divisions and subsidiaries
of Ford Motor Company. Approximately 38% of net sales in 1994 of
the Vehicle Components segment were made to divisions and
subsidiaries of five other large companies. 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.
Electrical and Electronic Controls
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. The EATON, C-H
CONTROL, CHALLENGER, COMMANDER, CUTLER-HAMMER, DOLE, DURANT,
DYNAMATIC, GOLF PRIDE, HEINEMANN, LECTRON, L/P (and design),
PANELMATE and TINNERMAN trademarks are used in connection with
marketing products included in this business segment. In
addition, in conjunction with the acquisition of DCBU, the Company
has the right to use the WESTINGHOUSE trademark in marketing
certain products. Use of the WESTINGHOUSE trademark is limited to
a period of ten years.
Competition - Principal methods of competition in this business
segment are price, geographic coverage, service and product
performance. The number of competitors varies with respect to the
different products. Eaton occupies a strong competitive position
in this business segment and, with respect to many products, is
considered among the market leaders.
Page 4
Major Customers - Approximately 5% of net sales in 1994 of the
Electrical and Electronic Controls segment were made to the United
States Government which is the major customer of the Defense
Systems segment. All contracts that the Company has with the
United States Government are subject to termination at the
election of the Government. Approximately 5% of net sales in 1994
of the Electrical and Electronic Controls segment were made to
divisions and subsidiaries of Ford Motor Company which is a major
customer of the Company's Vehicle Components segment.
Defense Systems
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. The AIL and
HYPERMANUAL trademarks are used in connection with marketing
products included in this business segment.
Competition - Principal methods of competition in this business
segment are price, technological capability and product
performance. The number of competitors is limited and varies with
respect to the different technologies.
Major Customers - Substantially all net sales in 1994 of the
Defense Systems segment were made to the United States Government.
All contracts that the Company has with the United States
Government are subject to the termination at the election of the
Government.
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. Eaton purchases raw materials, as well as parts
and other components, from many suppliers and under normal
circumstances has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed
with Eaton by original equipment manufacturers of trucks,
passenger cars and off-highway vehicles 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 dates listed. Using this
criterion, Eaton's total backlog at December 31, 1994 and 1993 (in
billions) was approximately $1.5 and $1.1, 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 1994, 1993
and 1992 (in millions) were $213, $154 and $151, respectively.
Page 5
Protection of the Environment - The Company's operations involve
the use, disposal and cleanup of certain substances regulated
under environmental protection laws, as further discussed in
"Protection of the Environment" on pages 30 to 31 of this report.
Subject to the difficulty in estimating future environmental
costs, the Company expects that any sum it may have to pay in
connection with environmental matters in excess of the amounts
recorded or disclosed will not have a material adverse effect on
financial condition or results of operations. Eaton's estimated
capital expenditures for environmental control facilities are not
expected to be material for 1995 and 1996.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The
Company maintains manufacturing facilities at 150 locations in 18
countries. The Company is a lessee under a number of operating
leases for certain real properties and equipment. Information
regarding commitments for operating leases is included under
"Lease Commitments" on page 32 of this report.
Eaton's principal research facilities are located in Southfield,
Michigan, in Milwaukee, Wisconsin, and near Cleveland, Ohio. In
addition, certain Eaton divisions conduct research in their own
facilities.
Management believes that the Company's manufacturing facilities
are adequate for operations, and such facilities are maintained in
good condition.
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 1994 and 1993 is included in
"Quarterly Data" on page 36 of this report. At December 31, 1994,
there were 14,834 holders of record of the Company's Common
Shares. Additionally, 21,286 employees were shareholders through
participation in the Company's Share Purchase and Investment Plan.
Page 6
Item 6. Selected Financial Data
Information regarding selected financial data is presented in the
"Five-Year Consolidated Financial Summary" on page 53 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 44 through 52 of this
report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and financial review of
Eaton Corporation and the report of independent auditors is
presented on pages 15 through 42 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information contained on pages 5 through 8 in the Company's
definitive proxy statement dated March 17, 1995, with respect to
directors, is incorporated by reference.
Page 7
A listing of Eaton's officers, their ages and their current
positions and offices, as of February 1, 1995 follows:
Name Age Position (Date elected to position)
- -------------------- --- ----------------------------------------
William E. Butler 63 Chairman and Chief Executive Officer
(January 1, 1992); Director
John S. Rodewig 61 President and Chief Operating Officer -
Vehicle Components (September 22,
1993); Director
Stephen R. Hardis 59 Vice Chairman and Chief Financial and
Administrative Officer (April 23,
1986); Director
Alexander M. Cutler 43 Executive Vice President and Chief
Operating Officer - Controls (September
22, 1993); Director
Gerald L. Gherlein 56 Executive Vice President and General
Counsel (September 4, 1991)
John M. Carmont 56 Vice President and Treasurer (December
1, 1981)
Susan J. Cook 47 Vice President - Human Resources
(January 16, 1995)
Adrian T. Dillon 41 Vice President - Planning (March 1,
1991)
Patrick X. Donovan 59 Vice President - International (April
27, 1988)
John D. Evans 64 Vice President (January 16, 1995)
Earl R. Franklin 51 Secretary and Associate General Counsel
(September 1, 1991)
John W. Hushen 59 Vice President - Corporate Affairs
(August 1, 1991)
Stanley V. Jaskolski 56 Vice President - Technical Management
(October 1, 1990)
Ronald L. Leach 60 Vice President - Accounting (December 1,
1981)
William T. Muir 52 Vice President - Manufacturing
Technologies (April 1, 1989)
Derek R. Mumford 53 Vice President - Information
Technologies (April 1, 1992)
Billie K. Rawot 43 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 Susan J. Cook.
Susan J. Cook joined Eaton as Vice President-Human Resources on
January 16, 1995, succeeding John D. Evans, who will retire on
June 30, 1995. Prior to joining Eaton, she was Vice
President-Human Resources at Tandem Computers, Inc., a company
with sales of $2 billion and operations in 20 countries. 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,
Page 8
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 11 through 25 in Eaton's definitive
proxy statement dated March 17, 1995, with respect to executive
compensation, is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information contained on pages 32 to 33 of the Company's
definitive proxy statement dated March 17, 1995, with respect to
security ownership of certain beneficial owners and management, is
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information contained on page 10 of the Company's definitive proxy
statement dated March 17, 1995, with respect to certain
relationships and related transactions, is incorporated by
reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) The following consolidated financial statements and
financial review of Eaton Corporation are filed as a
separate section of this report:
Consolidated Balance Sheets - December 31, 1994 and 1993
- Pages 16 and 17
Statements of Consolidated Income - Years ended December
31, 1994, 1993 and 1992 - Page 18
Statements of Consolidated Cash Flows - Years ended
December 31, 1994, 1993 and 1992 - Page 19
Statements of Consolidated Shareholders' Equity - Years
ended December 31, 1994, 1993 and 1992 - Page 20
Financial Review - Pages 21 through 42
(2) Summarized financial information for Eaton ETN
Offshore Ltd. on page 43 is filed as a separate section
Page 9
of this report. 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 Amended Articles of Incorporation adopted on April
27, 1994 - Incorporated by reference to the
Company's Form 8-K Report dated May 19, 1994 and
Amended Regulations (as amended and restated as of
April 27, 1988, filed as a separate section of
this report)
4 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)
10 Material contracts
The following are either a management contract
or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (as
amended and restated May 1, 1990) -
Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1993
(b) Executive Strategic Incentive Plan, effective
as of January 1, 1991 - Incorporated by
reference to the Company's Annual Report on
Form 10-K for the year ended December 31,
1992
(c) Group Replacement Insurance Plan (GRIP),
effective as of June 1, 1992 - Incorporated
by reference to the Company's Annual Report
on Form 10-K for the year ended December 31,
1992
(d) 1991 Stock Option Plan - Incorporated by
reference to the Company's definitive proxy
statement dated March 18, 1991
(e) The following are incorporated by reference
to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1990:
Page 10
(i) Strategic Incentive and Option Plan
(as amended and restated as of
January 1, 1989)
(ii) Limited Eaton Service Supplemental
Retirement Income Plan (as amended
and restated as of January 1, 1989)
(iii) Amendments to the 1980 and 1986
Stock Option Plans
(iv) Form of "Change in Control" Agreement
entered into with all officers of
Eaton Corporation
(v) Eaton Corporation Supplemental
Benefits Plan (as amended and
restated as of January 1, 1989)
(which provides supplemental
retirement benefits)
(vi) Eaton Corporation Excess Benefits
Plan (as amended and restated as of
January 1, 1989) (with respect to
Section 415 limitations of the
Internal Revenue Code)
(f) The following are incorporated by reference
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990:
(i) Executive Incentive Compensation Plan
(ii) Plan for the Deferred Payment of
Directors' Fees (as amended and
restated as of January 1, 1989)
(iii) Plan for the Deferred Payment of
Directors' Fees (originally adopted
in 1980 and amended and restated in
1989)
(iv) Eaton Corporation Retirement Plan for
Non-Employee Directors (as amended
and restated as of January 1, 1989)
11 Statement regarding computations of net income per
Common Share (filed as a separate section of
this report)
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)
Page 11
24 Power of Attorney (filed as a separate section
of this report)
27 Financial Data Schedule (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 1994.
(c) & (d) Exhibits and Financial Statement Schedules
Certain exhibits required by this portion of Item 14 are
filed as a separate section of this report.
Page 12
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 21, 1995 /s/ Stephen R. Hardis
------------------------------
Stephen R. Hardis
Vice Chairman and Chief
Financial and Administrative
Officer; Principal Financial
Officer; Director
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 21, 1995
Signature Title
- ----------------------- -----------------------------------------
*
- -----------------------
William E. Butler Chairman and Chief Executive Officer;
Principal Executive Officer;
Director
*
- -----------------------
Alexander M. Cutler Executive Vice President; Chief Operating
Officer - Controls; Director
/s/ Ronald L. Leach
- -----------------------
Ronald L. Leach Vice President - Accounting; Principal
Accounting Officer
*
- -----------------------
Billie K. Rawot Vice President and Controller
*
- -----------------------
John S. Rodewig President; Chief Operating Officer -
Vehicle Components; Director
Page 13
*
- -----------------------
Neil A. Armstrong Director
*
- -----------------------
Phyllis B. Davis Director
*
- -----------------------
Charles E. Hugel Director
*
- -----------------------
John R. Miller Director
*
- -----------------------
Furman C. Moseley Director
*
- -----------------------
Hooper G. Pattillo Director
*
- -----------------------
Victor A. Pelson Director
*
- -----------------------
A. William Reynolds Director
- -----------------------
Gary L. Tooker Director
*By /s/ Stephen R. Hardis
--------------------------------------
Stephen R. Hardis, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
Page 14
Eaton Corporation
1994 Annual Report on Form 10-K
Items 6, 7, 8 & Item 14 (c) and (d)
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
Five-Year Consolidated Financial Summary
Exhibits
Page 15
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
To the Shareholders
Eaton Corporation
We have audited the accompanying consolidated balance sheets of
Eaton corporation and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. 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, 1994 and
1993, and the consolidated results of its operations and cash
flows for each of the three years in the period ended December
31, 1994, 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.
As described under "Accounting Changes" on page 24 of this
report, in 1992 the Company changed its methods of accounting for
postretirement benefits other than pensions and for income taxes.
Ernst & Young LLP
Cleveland, Ohio
January 27, 1995
Page 16
Eaton Corporation
Consolidated Balance Sheets December 31
---------------------
(Millions) 1994 1993
---- ----
ASSETS
Current assets
Cash $ 18 $ 32
Short-term investments 23 268
Accounts receivable 889 550
Inventories 698 434
Deferred income taxes 151 127
Other current assets 67 55
------- -------
1,846 1,466
Property, plant and equipment
Land 50 41
Buildings 539 486
Machinery and equipment 2,321 1,959
------- -------
2,910 2,486
Accumulated depreciation (1,441) (1,298)
------- -------
1,469 1,188
Excess of cost over net assets of businesses
acquired 850 265
Deferred income taxes 158 112
Other assets 359 237
------- -------
$ 4,682 $ 3,268
======= =======
The Financial Review on pages 21 to 42 is an integral part of the
consolidated financial statements.
Page 17
Eaton Corporation
Consolidated Balance Sheets December 31
---------------------
(Millions) 1994 1993
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 14 $ 14
Current portion of long-term debt 22 110
Accounts payable 449 266
Accrued compensation 163 106
Accrued income and other taxes 60 23
Other current liabilities 394 268
------- -------
1,102 787
Long-term debt 1,053 649
Postretirement benefits other than pensions 573 509
Other long-term liabilities 274 218
Shareholders' equity
Common Shares (78.0 in 1994 and 71.3 in 1993) 39 36
Capital in excess of par value 806 535
Retained earnings 988 708
Foreign currency translation adjustments (71) (78)
Unallocated Employee Stock Ownership Plan
shares (82) (96)
------- -------
1,680 1,105
------- -------
$ 4,682 $ 3,268
======= =======
The Financial Review on pages 21 to 42 is an integral part of the
consolidated financial statements.
Page 18
Eaton Corporation
Statements of Consolidated Income Year ended December 31
-----------------------------
(Millions except for per share data) 1994 1993 1992
---- ---- ----
Net sales $6,052 $4,401 $4,101
Costs and expenses
Cost of products sold 4,397 3,284 3,134
Selling and administrative expense 882 591 578
Research and development expense 213 154 151
Acquisition integration charge 55
------ ------ ------
5,492 4,084 3,863
------ ------ ------
Income from operations 560 317 238
Other income and (expense)
Interest expense (91) (75) (89)
Interest income 7 8 9
Other income--net 12 12 23
------ ------ ------
(72) (55) (57)
------ ------ ------
Income before income taxes 488 262 181
Income taxes 155 82 41
------ ------ ------
Income before extraordinary item and
cumulative effect of accounting changes 333 180 140
Extraordinary item (7)
Cumulative effect of accounting changes
Postretirement benefits other than
pensions (274)
Income taxes 6
------ ------ ------
Net income (loss) $ 333 $ 173 $ (128)
====== ====== ======
Per Common Share
Income before extraordinary item and
cumulative effect of accounting changes $ 4.40 $ 2.57 $ 2.03
Extraordinary item (.10)
Cumulative effect of accounting changes
Postretirement benefits other than
pensions (3.97)
Income taxes .09
------ ------ ------
Net income (loss) $ 4.40 $ 2.47 $(1.85)
====== ====== ======
Cash dividends paid $ 1.20 $ 1.15 $ 1.10
Average number of Common Shares outstanding 75.6 69.8 68.9
The Financial Review on pages 21 to 42 is an integral part of the consolidated
financial statements.
Page 19
Eaton Corporation
Statements of Consolidated Cash Flows Year ended December 31
--------------------------------
(Millions) 1994 1993 1992
---- ---- ----
Operating activities
Income before extraordinary item and
cumulative effect of accounting changes $ 333 $ 180 $ 140
Adjustments to reconcile to net cash
provided by operating activities
Depreciation 216 182 184
Amortization 35 14 16
Acquisition integration charge 55
Deferred income taxes 35 (65) (26)
Long-term liabilities 40 (6) 20
Other non-cash items in income 37 (39)
Changes in operating assets and liabilities,
excluding acquisitions and divestitures
of businesses
Accounts receivable (190) 40 58
Inventories (115) 12 11
Other current assets (12) 6 (5)
Accounts payable and other accruals 129 29 (8)
Accrued income and other taxes 10 (15) (9)
Other--net 4 3 39
-------- -------- --------
Net cash provided by operating activities 522 435 381
Investing activities
Acquisitions of businesses, less cash acquired (1,058) (14) (22)
Divestitures of businesses 61 18
Expenditures for property, plant and
equipment (267) (227) (186)
Purchases of short-term investments (7) (108) (86)
Maturities and sales of short-term
investments 252 22
Other--net 9 8 18
-------- -------- --------
Net cash used in investing activities (1,010) (319) (258)
Financing activities
Borrowings with original maturities of more
than three months
Proceeds 731 99
Payments (609) (98) (151)
Borrowings with original maturities of less
than three months--net 173 (14) (15)
Proceeds from sale of Common Shares 252 62
Proceeds from exercise of stock options 18 19 29
Cash dividends paid (91) (83) (76)
-------- -------- --------
Net cash provided by (used in) financing activities 474 (114) (114)
-------- -------- --------
Total increase (decrease) in cash (14) 2 9
Cash at beginning of year 32 30 21
-------- -------- --------
Cash at end of year $ 18 $ 32 $ 30
======== ======== ========
The Financial Review on pages 21 to 42 is an integral part of the consolidated
financial statements.
Page 20
Eaton Corporation
Statements of Consolidated Shareholders' Equity
Foreign Total
Common Shares Capital in currency Unallocated share-
------------------ excess of Retained translation ESOP holders'
(Shares in thousands, dollars in millions) Shares Amount par value earnings adjustments shares equity
------ ------ --------- -------- ----------- -------- --------
Balance at January 1, 1992 34,069 $17 $418 $838 $ 2 $(122) $1,153
Net loss (128) (128)
Cash dividends paid, net of Employee
Stock Ownership Plan (ESOP) tax benefit (74) (74)
Issuance of shares under employee
benefit plans, including tax benefit 598 34 34
Reduction of unallocated ESOP shares 12 12
Foreign currency translation adjustments (49) (49)
------ --- ---- ---- ---- ----- ------
Balance at December 31, 1992 34,667 17 452 636 (47) (110) 948
Net income 173 173
Cash dividends paid, net of ESOP tax
benefit (83) (83)
Issuance of shares under employee
benefit plans, including tax benefit 483 22 22
Two-for-one stock split 34,867 18 (18)
Sale of shares 1,287 1 61 62
Reduction of unallocated ESOP shares 14 14
Foreign currency translation adjustments (31) (31)
------ --- ---- ---- ---- ----- ------
Balance at December 31, 1993 71,304 36 535 708 (78) (96) 1,105
Net income 333 333
Cash dividends paid, net of ESOP tax
benefit (89) (89)
Issuance of shares under employee
benefit plans, including tax benefit 503 21 21
Sale of shares 4,560 2 250 252
Pooling-of-interests with Lectron
Products, Inc. 1,600 1 25 26
Unrealized net gain on available-for-sale
securities, net of income taxes 11 11
Reduction of unallocated ESOP shares 14 14
Foreign currency translation adjustments 7 7
------ --- ---- ---- ---- ----- ------
Balance at December 31, 1994 77,967 $39 $806 $988 $(71) $ (82) $1,680
====== === ==== ==== ==== ===== ======
The Financial Review on pages 21 to 42 is an integral part of the consolidated financial statements.
Page 21
Eaton Corporation
FINANCIAL REVIEW
- ----------------
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 where the Company has a 20% to 50% ownership
interest.
Foreign Currency Translation
- ----------------------------
Financial statements for subsidiaries outside the United States,
except those in highly inflationary economies, 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. Financial statements for subsidiaries in
highly inflationary economies are translated into United States
dollars in the same manner except for inventories and property, plant
and equipment-net, and related expenses, which are translated at
historical exchange rates. The resulting translation adjustments are
included in net income.
Short-Term Investments
- ----------------------
Short-term investments are not considered to be cash equivalents for
purposes of classification in the statements of consolidated cash
flows.
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. The 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. The cost of plant and
equipment is depreciated over the useful lives of the various classes
of assets. Identified intangible assets, principally patents,
trademarks and tradenames are amortized over the useful life of the
respective asset. Excess of cost over net assets of businesses
acquired is amortized principally over forty years (accumulated
amortization in millions was $102 and $78 at the end of 1994 and
1993, respectively). Excess of cost over net assets of businesses
acquired is assessed for impairment when operating profit from the
related business indicates that the carrying amount may not be
recoverable.
Page 22
Financial Instruments
- ---------------------
The Company uses various financial instruments, including foreign
exchange contracts and options, and interest rate swaps and caps, as
part of foreign exchange and interest rate risk management programs.
The Company does not buy and sell financial instruments solely for
the purpose of earning a profit due to changes in the market price of
the instruments, except for nominal amounts authorized under limited,
controlled circumstances.
The Company has subsidiaries operating in Canada, Europe, Latin
America and the Pacific region. In the normal course of business,
these operations are exposed to fluctuations in related foreign
currencies. The Company seeks to reduce exposure to foreign currency
fluctuations, primarily the European and Canadian currencies, through
the use of foreign currency forward exchange contracts and options.
Gains or losses on foreign currency forward exchange contracts and
options which hedge net investments in consolidated subsidiaries
outside the United States are accrued in shareholders' equity. Gains
or losses on foreign currency forward exchange contracts and options
which hedge specific transactions are recognized in net income,
offsetting the underlying foreign currency transaction gains or
losses. Premiums and discounts related to foreign currency forward
exchange contracts and options are amortized to other income--net
over the lives of the agreements.
In the normal course of business, the Company's operations are also
exposed to fluctuations in interest rates. The Company seeks to
reduce the cost of and exposure to interest rate fluctuations through
the use of interest rate swaps and caps. Gains or losses on interest
rate swaps and caps are included in interest expense since they hedge
interest on debt. Premiums related to interest rate caps are
amortized to interest expense over the lives of the agreements.
Counterparties to various hedging instruments are many major
international financial institutions. While the Company may be
exposed to credit losses in the event of nonperformance by these
counterparties, no losses are anticipated due to control over the
limit of positions entered into with any one party and the strong
credit ratings of these institutions.
Net Income Per Common Share
- ---------------------------
Net income per Common Share is computed by dividing net income by the
average month-end number of shares outstanding during each period.
The dilutive effect of common stock equivalents, comprised solely of
employee options for Common Shares, is not material.
ACQUISITIONS AND DIVESTITURES OF BUSINESSES
- -------------------------------------------
On January 31, 1994, the Company acquired the Distribution and
Control Business Unit (DCBU) of Westinghouse Electric Corporation for
an adjusted purchase price of $1.050 billion. DCBU, a leading North
American manufacturer of electrical distribution equipment and
industrial controls, was combined with Eaton's Industrial Control and
Page 23
Power Distribution Operations (ICPDO) to form the new Cutler-Hammer
business unit. The acquisition has been accounted for as a purchase
and, accordingly, the statements of consolidated income include the
results of DCBU beginning February 1, 1994. The acquired assets and
liabilities assumed in the acquisition follow (in millions):
Fair value of assets acquired $ 742
Liabilities assumed (298)
Excess of cost over net assets acquired 606
------
Purchase price, net of cash acquired $1,050
======
The excess of cost over net assets acquired is being amortized over
forty years. Identified intangible assets of $95 million are being
amortized over an average life of sixteen years.
On an unaudited pro forma basis, assuming Eaton and DCBU had been
combined as of the beginning of 1993, net sales would have increased
$1 billion whereas net income and net income per Common Share would
not have been significantly different from reported amounts. On the
same basis, results for 1994 would not have been significantly
different from reported amounts.
In December 1993, in conjunction with the acquisition of DCBU, the
Company recorded a $55 million acquisition integration charge ($34
million after income tax credits, or $.49 per Common Share). Part of
a comprehensive business plan, the charge addressed the costs of
integrating the ICPDO product lines and manufacturing operations with
DCBU, related workforce reductions and a $9 million write-down of
assets, largely in the United States. To date, expenditures and
charges total $20 million with the remaining $35 million expected to
occur primarily over the next three years. The remaining
expenditures will be funded through cash flow from the combined
operations.
On November 16, 1994, the Company acquired the common stock of
Lectron Products, Inc. (Lectron) through the issuance of 1.6 million
Common Shares. Lectron, a privately-held manufacturer of electronic
and precision electromechanical controls for automotive
manufacturers, had annual sales of $128 million for the most recent
fiscal year. This acquisition was accounted for as a
pooling-of-interests. Financial statements for periods prior to the
acquisition were not restated for the acquisition since the effect
would not be material.
During 1994, in conjunction with the acquisition of DCBU, the Company
sold certain DCBU operations to Thomas & Betts Corporation (T&B) in
exchange for cash aggregating $61 million and $14 million of T&B
common stock. These divestitures resulted in no gain or loss.
During 1994, 1993 and 1992, the Company acquired and divested other
smaller operations.
Page 24
EXTRAORDINARY ITEM
- ------------------
During 1993, the Company called for redemption $74 million of 9%
debentures and $89 million of 8.5% debentures. The extraordinary
loss on these redemptions, including the write-off of unamortized
debt issuance costs, was $11 million ($7 million after income tax
credits, or $.10 per Common Share).
ACCOUNTING CHANGES
- ------------------
In 1992, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and SFAS No. 109, "Accounting for
Income Taxes."
SFAS No. 106 requires accrual of postretirement benefits other than
pensions, primarily postretirement health care and life insurance for
retirees in the United States, over the working lives of employees
rather than recognition of expenses as claims are incurred. Net
income for 1992 was reduced by the cumulative effect of this
accounting change for prior years of $442 million ($274 million after
income tax credits, or $3.97 per Common Share). SFAS No. 106 has no
effect on cash flows since claims will continue to be paid as
incurred.
The adoption of SFAS No. 109 changed the method of accounting for
income taxes to the liability method from the deferred method. The
liability method requires recognition of deferred income taxes based
on temporary differences between the financial reporting and income
tax bases of assets and liabilities, using currently-enacted income
tax rates and regulations. Net income for 1992 was increased by the
cumulative effect of this accounting change for prior years of $6
million, or $.09 per Common Share. SFAS No. 109 has no effect on
cash flows.
ACCOUNTS RECEIVABLE AND INVENTORIES
- -----------------------------------
Accounts receivable are net of an allowance for doubtful accounts (in
millions) of $14 and $10 at the end of 1994 and 1993, respectively.
The components of inventories at December 31 follow (in millions):
1994 1993
---- ----
Raw materials $213 $141
Work in process 358 238
Finished goods 216 139
---- ----
Gross inventories at FIFO 787 518
Excess of current cost over LIFO cost (89) (84)
---- ----
Net inventories at LIFO $698 $434
==== ====
Gross inventories accounted for using the LIFO method (in millions)
were $367 and $314 at the end of 1994 and 1993, respectively.
Page 25
INVESTMENT IN LIFE INSURANCE
- ----------------------------
In 1993, the Company purchased 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, 1994 and 1993, the investment in the policies included
in other assets (in millions) was $10 and $7, net of policy loans of
$226 and $110, respectively. Net life insurance expense (in
millions) of $5 and $2, including interest expense of $15 and $4 in
1994 and 1993, respectively, was included in selling and
administrative expense.
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
The Company's subsidiaries outside the United States have lines of
credit, primarily short-term, aggregating $115 million from various
banks worldwide. Most of these arrangements are reviewed
periodically for renewal. At December 31, 1994, the Company had $19
million outstanding under these lines of credit with banks. The
weighted average interest rate on short-term debt, excluding
immaterial amounts for highly inflationary countries, at December 31,
1994 and 1993 was 6.8% and 8.1%, respectively.
Long-term debt at December 31, excluding the current portion, follows
(in millions):
1994 1993
---- ----
Notes of Employee Stock Ownership
Plan due through 1999 $ 66 $ 82
6-3/8% notes due 1999 100
9% notes due 2001 100 100
8% debentures due 2006 (due 1996 at
option of debenture holders) 86 86
8.9% debentures due 2006 100 100
7% debentures due 2011, net of unamor-
tized discount of $93 million in 1994
and $95 million in 1993 (effective
interest rate 14.6%) 107 105
8-7/8% debentures due 2019 (due 2004 at
option of debenture holders) 38 38
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024 100
Unsecured notes (6% to 6.4%) 210
Other 46 38
------ ------
$1,053 $ 649
====== ======
To refinance a portion of the cost of the acquisition of DCBU, in
April 1994, the Company sold $100 million of 6-3/8% notes due 1999
and $100 million of 7-5/8% debentures due 2024. Concurrent with the
sale of the 6-3/8% notes and the 7-5/8% debentures, the Company
terminated, and settled for cash, interest rate swap agreements with
notional amounts totaling $200 million which hedged the sale of the
Page 26
notes and debentures. The gain on the termination of the interest
rate swap agreements is being amortized to interest expense over the
life of the notes and debentures and effectively reduces the annual
rate of the notes to 4.8% and the debentures to 7.1%.
In January 1994, in order to finance the acquisition of DCBU, the
Company entered into a $555 million 364-day revolving credit
agreement and a $555 million five-year revolving credit agreement.
During 1994, as a result of the sale of $200 million of notes and
debentures, the sale of $214 million of Common Shares and cash flow
from operations, the Company canceled the 364-day revolving credit
agreement and reduced the $555 million five-year revolving credit
agreement to $300 million. The $210 million of unsecured notes at
December 31, 1994 relate to the acquisition of DCBU. These unsecured
notes are classified as long-term debt because the Company intends,
and has the ability under the five-year $300 million revolving credit
agreement, to refinance this debt on a long-term basis.
Notes of the Employee Stock Ownership Plan, which are guaranteed by
the Company, consist of $55 million at a floating interest rate (5.5%
at December 31, 1994) based on LIBOR and $26 million at a fixed
interest rate of 7.6% ($15 million of these notes are included in
current portion of long-term debt). The Company has entered into a
series of interest rate swaps, which expire ratably through 1999, and
which change the interest rate on the $26 million of fixed interest
rate notes to fixed interest rates of 7.1% and 6.9% as to $7 million
and $16 million, respectively, and to a floating interest rate (5.2%
at December 31, 1994) based on LIBOR as to $3 million.
In April 1994, the Company sold a five-year interest rate cap in
exchange for a premium (cash) of $1.5 million. This agreement
effectively converts the $100 million of 6-3/8% notes into floating
rate debt at LIBOR minus 2.6% when LIBOR exceeds 9%.
At December 31, 1994, the Company had entered into interest rate caps
commencing in January 1995 which effectively place a 5.5% ceiling on
$100 million of floating rate debt through November 1, 1995.
In 1994, the Company entered into two interest rate swaps aggregating
$50 million that expire in 2000, which partially offset the effect of
a $100 million 9% interest rate swap also expiring in 2000. The net
effect of these swaps at December 31, 1994 was to convert $50 million
of floating rate debt to fixed rate debt at 9% and another $50
million of floating rate debt to LIBOR plus 3.1%.
Aggregate mandatory sinking fund requirements and annual maturities
of long-term debt are as follows (in millions): 1995, $22; 1996,
$120; 1997, $22; 1998, $22; and 1999, $323. The amount for 1996
includes $86 million of 8% debentures due in 1996 at the option of
the debenture holders. The amount for 1999 includes $210 million of
unsecured notes due to the expiration of the five-year revolving
credit agreement in 1999.
Interest capitalized as part of acquisition or construction of major
assets (in millions) was $10, $12, and $8 in 1994, 1993 and 1992,
respectively. Interest paid (in millions) was $101, $90 and $94 in
1994, 1993 and 1992, respectively.
Page 27
Effective January 1, 1994, the Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
As a result of the adoption of SFAS No. 115, the Company accrued the
unrealized gain related to several available-for-sale securities.
The cumulative effect of the accounting change for prior years was an
$8 million increase in the carrying value of the securities with an
offsetting increase, after income taxes, of $5 million in retained
earnings in shareholders' equity.
The notional amounts, carrying amounts and fair values of financial
instruments outstanding at December 31 follow (in millions):
1994 1993
-------------------------- -----------------------------
Notional Carrying Fair Notitional Carrying Fair
amount amount value amount amount value
-------- -------- ----- ---------- -------- -----
Cash and short-term
investments $ 41 $ 41 $300 $300
Marketable equity
investments 51 51 27 34
Marketable debt securities 26 26 26 27
Short-term debt (14) (14) (14) (14)
Long-term debt and current
portion of long-term debt (1,075) (1,114) (759) (941)
Foreign currency forward
exchange contracts and
options $189 1 (1) $227 6 7
Interest rate swaps
Fixed to floating 76 (5) 31 3
Floating to fixed 123 (4) 327 (16)
Interest rate caps
Purchased 100 2 500
Sold (100) (1) (2)
The fair value of short-term investments, marketable equity
investments and debt securities, short-term and long-term debt, and
interest rate swaps and caps was principally based on quoted market
prices. The fair value of foreign currency forward exchange
contracts and options, which primarily mature in 1995, was estimated
based on quoted market prices of comparable contracts, adjusted
through interpolation where necessary for maturity differences.
PENSION PLANS
- -------------
The Company has non-contributory defined benefit pension plans
covering the majority of employees. Plans covering salaried and
certain hourly employees provide benefits that are generally based on
years of service and final average compensation. Benefits for other
hourly employees are generally based on years of service. Company
policy is to fund at least the minimum amount required by applicable
regulations. 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 for employees and
retirees.
Page 28
The components of pension (expense) income for the years ended
December 31 follow (in millions):
1994 1993 1992
---- ---- ----
Service cost - benefits earned
during year $(55) $(42) $(39)
Interest cost on projected
benefit obligation (94) (97) (96)
Actual return on assets 36 155 203
Net amortization and deferral 99 (17) (73)
---- ---- ----
$(14) $ (1) $ (5)
==== ==== ====
As a result of the DCBU acquisition, pension expense increased by $7
million in 1994.
The pension asset (liability), by funded status, recognized in the
balance sheet at December 31 follows (in millions):
1994 1993
--------------- ---------------
Over- Under- Over- Under-
funded funded funded funded
------ ------ ------ ------
Accumulated pension benefit
obligation
Vested $ 950 $ 147 $ 979 $ 136
Nonvested 62 8 53 10
------ ------ ------ ------
1,012 155 1,032 146
Value of future salary
projections 135 10 143 10
------ ------ ------ ------
Total projected pension benefit
obligation 1,147 165 1,175 156
Fair value of plan assets 1,370 70 1,371 68
------ ------ ------ ------
Plan assets in excess of or
(less than) projected benefit
obligation 223 (95) 196 (88)
Unamortized
Initial net (asset) obligation (40) 7 (48) 7
Net (gain) loss (125) (3) (116) 3
Prior service cost 10 15 27 12
Adjustment to recognize minimum
liability (12) (12)
------ ------ ------ ------
$ 68 $ (88) $ 59 $ (78)
====== ====== ====== ======
Measurement of the projected benefit obligation was based on a
discount rate of 8.50%, 7.25%, and 8.25% in 1994, 1993 and 1992,
respectively. The expected compensation growth rate was 5.95%,
4.95%, and 5.95% in 1994, 1993 and 1992, respectively. The expected
long-term rate of return on assets was 10% in all three years. Plan
Page 29
assets are invested in equity and fixed income securities and other
instruments. Underfunded plans are associated principally with
operations outside the United States. The change in the discount
rate to 8.50% at the end of 1994 had the effect of decreasing the
accumulated pension benefit obligation by $140 million with an
offsetting increase in the unamortized net gain. This change will
have an immaterial effect on future expense.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS
- ------------------------------------------------
Generally, employees become eligible for postretirement benefits
other than pensions, primarily health care and life insurance for
retirees in the United States, when they retire. These benefits are
payable for life, although the Company retains the right to modify or
terminate the plans providing the benefits. The plans are
contributory, with retiree contributions adjusted annually, and
contain other cost-sharing features, including deductibles and
co-payments. During 1993, certain plans were amended to limit the
annual amount of the Company's future contributions towards
employees' postretirement health care benefits. Company policy is to
pay claims as they are incurred since, unlike pensions, there is no
effective method to obtain a tax deduction for prefunding of these
benefits under existing United States income tax regulations.
Expense for postretirement benefits other than pensions for the years
ended December 31 follows (in millions):
1994 1993 1992
---- ---- ----
Service cost - benefits earned during year $(13) $ (7) $(12)
Interest cost on projected benefit
obligation (43) (37) (44)
Net amortization and deferral 5 9
---- ---- ----
$(51) $(35) $(56)
==== ==== ====
The liability for postretirement benefit plans other than pensions
recognized in the balance sheets at December 31 follows (in
millions):
1994 1993
---- ----
Accumulated postretirement benefit
obligation
Retirees $382 $368
Eligible plan participants 44 38
Non-eligible plan participants 177 120
Unamortized
Prior service cost 67 91
Net loss (62) (73)
---- ----
$608 $544
==== ====
Page 30
As a result of the DCBU acquisition, the expense and the liability
for postretirement benefits other than pensions increased by $6
million and $51 million, respectively.
Measurement of the accumulated postretirement benefit obligation at
December 31, 1994, was based on an 11% annual rate of increase in the
per capita cost of covered health care benefits (12% for 1993). For
1994, the rate was assumed to decrease ratably to 7% through 1999 and
decrease to 6.25% in 2000 and remain at that level thereafter (5% for
1993). The discount rate was 8.50% in 1994 and 7.25% for 1993. The
changes in assumed rates had the effect of decreasing the accumulated
postretirement benefit obligation (APBO) which offset increases in
the APBO due to changes in plan provisions. These changes will have
an immaterial effect on future expense. An increase of 1% in assumed
health care cost trend rates would increase the accumulated
postretirement benefit obligation as of December 31, 1994 by $39
million and the net periodic cost for 1994 by $3 million.
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has been named a potentially responsible party (PRP)
under the Federal Superfund law at a number of waste disposal sites.
Although this law technically imposes joint and several liability
upon each PRP at each site, the extent of the Company's required
financial contribution to the cleanup of these sites is expected to
be limited based on the number and financial strength of the other
named PRP's and the volumes of waste involved which might be
attributable to the Company. The Company is also involved in
remedial response and voluntary environmental cleanup expenditures at
a number of other sites which are not the subject of any Superfund
law proceeding, including certain currently-owned or formerly-owned
plants.
Environmental exposures associated with the DCBU acquisition are
limited by the purchase agreement with Westinghouse Electric
Corporation. With respect to environmental conditions existing prior
to the acquisition, Westinghouse agreed to retain certain
responsibilities, to share the cost of others and to indemnify the
Company for costs to the extent they exceed $3.5 million annually.
The obligation to share costs extends for ten years.
Although difficult to quantify, management estimates that there is a
reasonable possibility that the remediation and other costs
associated with all of these sites may range up to $74 million, and
that such costs would be incurred over a period of several years.
The Company accrues for these costs when it is probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. At December 31, 1994 and 1993, the balance
sheet included an accrual for estimated remediation and other
environmental costs (in millions) of approximately $48 and $18,
respectively. The accrual for environmental costs at year-end 1994
includes $13 million for environmental exposures associated with DCBU
which was recorded as part of the allocation of the purchase price of
DCBU. Actual costs to be incurred at identified sites in future
periods may vary from the estimates, given inherent uncertainties in
evaluating environmental exposures. Subject to the difficulty in
Page 31
estimating future environmental costs, the Company expects that any
sum it may be required to pay in connection with environmental
matters in excess of the amounts recorded or disclosed above will not
have a material adverse effect on financial condition or results of
operations.
The Company continues to modify, on an ongoing, regular basis,
certain processes in order to reduce the impact on the environment.
Efforts in this regard include the removal of many underground
storage tanks and the reduction or elimination of certain chemicals
and wastes in operations.
SHAREHOLDERS' EQUITY
- --------------------
At the 1994 Annual Meeting, shareholders adopted amended Articles of
Incorporation which increased the number of authorized Common Shares
from 150 million to 300 million. At December 31, 1994, 5.4 million
Common Shares were reserved for exercise and grant of stock options.
At the end of 1994, there were 14,834 holders of record of Common
Shares. Additionally, 21,286 employees were shareholders through
participation in the Share Purchase and Investment Plan.
In private placements, the Company sold 1.3 million Common Shares in
December 1993 for aggregate net proceeds of $62 million, and sold an
additional 800,000 Common Shares in January 1994 for aggregate net
proceeds of $38 million. The proceeds from these private placements
were used primarily to fund the redemption in January 1994 of $89
million of 8.5% debentures.
In March 1994, in order to partially refinance the acquisition of
DCBU, the Company sold 3.8 million Common Shares to the public for
aggregate net proceeds of $214 million.
In November 1994, the Company issued 1.6 million Common Shares in a
pooling-of-interests with Lectron Products, Inc.
In May 1993, the Company's share purchase rights were redeemed at a
price of 3-1/3 cents for each right, for a total payment of $2
million.
The Company sponsors a Share Purchase and Investment Plan (SPIP) for
United States operations under which eligible participating employees
may choose to contribute up to 15% of their base pay to the SPIP.
The Company matches employee contributions up to 6% of a
participant's base pay as limited by United States income tax
regulations. The matching contribution ranges from 25% to 100% of a
participant's contribution and is invested in the Company's Common
Shares. The matching contribution percentage is determined each
quarter, based on net income per Common Share.
In 1989, the Company prefunded, through 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 have not yet been allocated to employee accounts and are
included in shareholders' equity as "Unallocated ESOP Shares" and the
Page 32
notes payable of the ESOP are included in long-term debt. Shares in
the ESOP are released at historical cost and allocated to the
employee accounts based on the ratio of the annual principal payment
on the notes payable compared to the original principal amount of the
notes payable. 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.
ESOP shares are considered as outstanding for purposes of computing
net income per Common Share. Shares in the ESOP at the end of 1994
and 1993 (in millions) were 2.7 and 3.4, respectively. Compensation
expense related to the SPIP match, including the effect of shares
released by the ESOP at historical cost, (in millions) was $15 in
1994, $11 in 1993 and $7 in 1992.
OPTIONS FOR COMMON SHARES
- -------------------------
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. These options expire ten years
from date of grant. A summary of stock option activity follows:
1994 1993
------------------- -------------------
Average Average
price price
per per
share Shares share Shares
------- --------- ------- ---------
Outstanding, January 1 $31.53 3,433,850 $28.81 3,368,670
Granted 57.71 959,390 39.34 831,730
Exercised 28.12 (348,720) 27.28 (657,353)
Canceled 46.42 ( 45,361) 32.52 (109,197)
--------- ---------
Outstanding, December 31 $37.94 3,999,159 $31.53 3,433,850
========= =========
Shares exercisable
January 1 2,401,683 2,334,758
December 31 2,839,095 2,401,683
Shares reserved for future grants
January 1 2,133,630 2,856,882
December 31 1,218,477 2,133,630
LEASE COMMITMENTS
- -----------------
Future minimum rental commitments as of December 31, 1994, under
noncancelable operating leases, which expire at various dates and in
most cases contain renewal options, are as follows (in millions):
1995, $42; 1996, $31; 1997, $24; 1998, $15; 1999, $12; and after
1999, $97.
Rental expense in 1994, 1993 and 1992 (in millions) was $65, $43 and
$45, respectively.
Page 33
INCOME TAXES
- ------------
Income before income taxes for the years ended December 31 follows
(in millions):
1994 1993 1992
---- ---- ----
United States $396 $214 $147
Outside the United States 92 48 34
---- ---- ----
$488 $262 $181
==== ==== ====
Income taxes for the years ended December 31 follows (in millions):
1994 1993 1992
---- ---- ----
Current
United States
Federal $ 81 $108 $ 42
State and local 15 7 5
Outside the United States 44 30 20
---- ---- ----
140 145 67
Deferred
United States
Increase in statutory tax rate (5)
Other Federal 24 (50) (14)
State and local 1 (2) (1)
Outside the United States
Operating loss carryforwards (8) (7) (11)
Reduction of valuation allowance
for deferred tax assets (3) (5)
Increase in statutory tax rate (2) (1)
Other 3 7
---- ---- ----
15 (63) (26)
---- ---- ----
$155 $ 82 $ 41
==== ==== ====
Page 34
Significant components of current and long-term deferred income taxes
at December 31 follow (in millions):
1994
-------------------------------
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
Accruals and other adjustments
Employee benefits $ 54 $228 $ (4)
Inventory 15
Restructuring 20 13
Depreciation and amortization (142) (17)
Other 46 7
Operating loss carryforwards 78 1
Valuation allowance (29)
Other items 16 3 9
---- ---- ----
$151 $158 $(11)
==== ==== ====
1993
-------------------------------
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
Accruals and other adjustments
Employee benefits $ 44 $209 $ (4)
Inventory 15
Restructuring 15 13
Depreciation and amortization (140) (15)
Other 38 5
Operating loss carryforwards 50 2
Valuation allowance (15)
Other items 15 (10) 7
---- ---- ----
$127 $112 $(10)
==== ==== ====
At December 31, 1994, certain subsidiaries outside the United States
had tax loss carryforwards and tax credit carryovers (in millions)
aggregating $162 and $15, respectively. Carryforwards of $92 million
have no expiration dates and the balance expire at various dates from
1995 through 2005. The tax credit carryovers expire at various dates
from 1995 through 1999.
Page 35
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):
1994
------------- 1993 1992
Amount Rate Rate Rate
------ ---- ---- ----
Income taxes at the United
States statutory rate $171 35.0% 35.0% 34.0%
State and local income taxes 14 2.8 1.5 .9
Adjustment of worldwide tax
liabilities 7 1.6 1.4 (6.0)
Possessions credit related to
Puerto Rican operations (26) (5.2)
Reduction of valuation allowance
for deferred tax assets (3) (.6) (2.1)
Adjustment of deferred income taxes
for change in statutory rates (2) (.4) (2.3)
Effective tax rate differential
on earnings of consolidated
subsidiaries and associate
companies outside the United
States (6) (1.3) .1 (3.9)
Other--net (2.1) (2.2)
---- ----- ----- -----
$155 31.9% 31.5% 22.8%
==== ===== ===== =====
The Company has facilities in Puerto Rico that manufacture products
for both domestic and foreign markets. These facilities operate
under tax relief and other incentives that expire at various dates
beginning in 2004 through 2013.
The parent company has not provided income taxes on undistributed
earnings of consolidated subsidiaries outside the United States of
$353 million at December 31, 1994, 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, including Federal and state income
taxes in the United States, in 1994, 1993 and 1992 (in millions) were
$109, $156 and $71, respectively.
Page 36
QUARTERLY DATA
- --------------
(Unaudited)
Quarter ended
(Millions except for -----------------------------------
per share data) Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- -------
1994
Net sales $1,605 $1,531 $1,545 $1,371
Gross margin 442 411 429 373
Percent of sales 28% 27% 28% 27%
Net income 89 84 86 74
Per Common Share
Net income $ 1.15 $ 1.10 $ 1.13 $ 1.01
Cash dividends paid .30 .30 .30 .30
Market price
High 54-1/4 54-5/8 58-3/4 62-1/8
Low 43-7/8 45-3/4 49-7/8 50-3/8
1993
Net sales $1,115 $1,053 $1,147 $1,086
Gross margin 297 266 279 275
Percent of sales 27% 25% 24% 25%
Income before extraordinary item 30 44 53 53
Extraordinary item (4) (3)
Net income 26 44 53 50
Per Common Share
Income before extraordinary item $ .41 $ .63 $ .77 $ .76
Extraordinary item (.05) (.05)
Net income .36 .63 .77 .71
Cash dividends paid .30 .30 .275 .275
Market price
High 55-3/8 51-3/4 47-1/8 43-3/4
Low 48 43 41-1/2 38-1/4
Page 37
Results for 1994 reflect the acquisition of DCBU on January 31, 1994.
Results for the fourth quarter of 1993 were reduced by a $55 million
acquisition integration charge related to the purchase of DCBU ($34
million after income tax credits, or $.49 per Common Share).
The redemption of debentures in 1993 resulted in extraordinary losses
of $5 million and $6 million in the first and fourth quarters,
respectively ($3 million and $4 million after income tax credits, or
$.05 per Common Share in each quarter).
Gross margin for the second quarter of 1993 was reduced by a $9
million charge for streamlining certain Vehicle Components operations
in Europe.
Page 38
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- --------------------------------------------------
Operations are classified among three business segments: Vehicle
Components, Electrical and Electronic Controls and Defense Systems.
The major classes of products included in each segment and other
information follows.
Vehicle Components
- ------------------
Truck Components - Heavy and medium duty mechanical and automatic
transmissions; power take-offs; drive, trailer and steering axles;
brakes; anti-lock brake systems; locking differentials; engine
valves; valve lifters; leaf springs; viscous fan drives; fans and fan
shrouds; power steering pumps; tire pressure control systems; tire
valves.
Passenger Car Components - Engine valves; hydraulic valve lifters;
viscous fan drives; fans and fan shrouds; locking differentials;
spring fluid dampers; superchargers; tire valves.
Off-Highway Vehicle Components - Mechanical and automatic
transmissions; drive and steering axles; specialty axle products;
brakes; engine valves; hydraulic valve lifters; gear and piston pumps
and motors; transaxles and steering systems; geroters; control valves
and cylinders; forgings; central tire inflation systems; tire valves.
The principal market for these products is original equipment
manufacturers of trucks, passenger cars and off-highway vehicles.
Most sales of these products are made directly from the Company's
plants to such manufacturers.
Electrical and Electronic Controls
- ----------------------------------
Industrial and Commercial Controls - Electromechanical and electronic
controls including motor starters, contactors, overloads and electric
drives; programmable controllers, counters, man/machine interface
panels and pushbuttons; photoelectric, proximity, temperature and
pressure sensors; residential, molded case, air and medium voltage
circuit breakers; loadcenters; safety switches; panelboards;
switchboards; switchgear components; switchgear dry type
transformers; busway; meter centers; portable tool switches;
commercial switches; relays; vacuum interrupters; illuminated
pushbuttons and panels; annunciator panels; electrically actuated
valves and actuators; pressure transducers and switches.
Automotive and Appliance Controls - Electromechanical and electronic
controls including convenience, stalk and concealed switches; knock
sensors; climate control components; speed controls; timers; pressure
switches; water valves; range controls; thermostats; gas valves;
infinite switches; temperature and humidity sensors; transmission
valves; speed sensitive steering systems; tone generators and chimes;
lighting controls; emission control valves; remote keyless entry
systems and remote actuated solenoids.
Page 39
Specialty Controls - Ion implanters; engineered fasteners; golf
grips; industrial clutches and brakes; automated material handling
systems; automated guided vehicles and stacker cranes.
The principal markets for these products are industrial,
construction, commercial, automotive, appliance, aerospace and
government customers. Sales are made directly by the Company or
indirectly through distributors and manufacturers' representatives.
Defense Systems
- ---------------
Strategic countermeasures; tactical jamming systems; electronic
intelligence; electronic support measures and radar surveillance.
The principal market for these products is the United States
Government.
Other Information
- -----------------
Operating profit represents net sales less operating expenses for
each segment and geographic region and excludes interest expense and
income, and general corporate expenses--net.
Identifiable assets for each segment and geographic region represent
those assets used in operations, including excess of cost over net
assets of businesses acquired, and exclude general corporate assets,
which consist principally of short-term investments, deferred income
taxes, investments carried at equity, property and other assets.
Net sales to divisions and subsidiaries of one customer, primarily
from the Vehicle Components business segment (in millions), were $623
in 1994, $541 in 1993 and $491 in 1992 (10% of sales in 1994, 12% in
1993 and 1992).
Page 40
Geographic Region Information
United Latin Pacific Elimin-
(Millions) States Canada Europe America Region ations Totals
------ ------ ------ ------- ------ ------ ------
1994
Net sales $4,807 $292 $912 $298 $103 $360 $6,052
Operating profit 491 30 50 9 14 594
Identifiable assets 3,098 119 636 156 57 86 3,980
1993
Net sales $3,404 $183 $769 $202 $ 81 $238 $4,401
Operating profit 275 21 17 9 10 332
Identifiable assets 1,726 101 548 103 48 60 2,466
1992
Net sales $3,002 $175 $861 $184 $ 66 $187 $4,101
Operating profit 201 20 29 8 6 264
Identifiable assets 1,781 74 630 98 48 59 2,572
Results for 1994 reflect the acquisition of DCBU on January 31, 1994.
Operating profit in 1993 was reduced $53 million in the United States and $2 million
in Canada by an acquisition integration charge related to the purchase of DCBU, and
by a $9 million charge for streamlining operations in Europe.
Geographic region information (table above) does not include results of associate
companies and joint ventures in which the Company holds a 20%-50% ownership interest,
which are accounted for by the equity method, and which had total sales as follows:
United Latin Pacific
(Millions) States Europe America Region Totals
------ ------ ------- ------ ------
1994 $8 $15 $10 $240 $273
1993 7 13 15 169 204
1992 6 18 6 136 166
Page 41
Business Segment Information
(Millions) 1994 1993 1992
---- ---- ----
Net sales by classes of similar products
Vehicle Components
Truck Components $1,798 $1,504 $1,244
Passenger Car Components 616 524 542
Off-Highway Vehicle Components 414 329 307
------ ------ ------
2,828 2,357 2,093
Electrical and Electronic Controls
Industrial and Commercial Controls 1,812 779 745
Automotive and Appliance Controls 839 735 723
Specialty Controls 437 338 308
------ ------ ------
3,088 1,852 1,776
Defense Systems 136 192 232
------ ------ ------
$6,052 $4,401 $4,101
====== ====== ======
Operating profit
Vehicle Components $ 354 $ 247 $ 170
Electrical and Electronic Controls
(1993 reduced by the $55 million
acquisition integration charge) 239 83 85
Defense Systems 1 2 9
------ ------ ------
594 332 264
Interest expense (91) (75) (89)
Interest income 7 8 9
General corporate expenses--net (22) (3) (3)
------ ------ ------
Income before income taxes $ 488 $ 262 $ 181
====== ====== ======
Identifiable assets
Vehicle Components $1,359 $1,230 $1,194
Electrical and Electronic Controls 2,506 1,119 1,128
Defense Systems 115 117 250
------ ------ ------
3,980 2,466 2,572
General corporate assets 702 802 648
------ ------ ------
Total assets $4,682 $3,268 $3,220
====== ====== ======
Capital expenditures
Vehicle Components $ 149 $ 124 $ 93
Electrical and Electronic Controls 98 68 67
Defense Systems 5 7 14
Corporate 15 28 12
------ ------ ------
$ 267 $ 227 $ 186
====== ====== ======
Depreciation and amortization
Vehicle Components $ 110 $ 101 $ 104
Electrical and Electronic Controls 114 69 71
Defense Systems 14 15 16
Corporate 13 11 9
------ ------ ------
$ 251 $ 196 $ 200
====== ====== ======
Page 42
Results for 1994 reflect the acquisition of DCBU on January 31, 1994.
Operating profit of the Electrical and Electronic Controls segment in
1993 was reduced by a $55 million acquisition integration charge
related to the purchase of DCBU. Operating profit of the Vehicle
Components segment in 1993 was reduced by a $9 million charge for
streamlining certain vehicle components operations in Europe.
Page 43
Summary Financial Information for Eaton ETN Offshore Ltd.
- ---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore) was incorporated by Eaton
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 the Company or its
subsidiaries. All of the issued and outstanding capital stock of
Eaton Offshore is owned directly or indirectly by Eaton. Eaton
Offshore owns all of the issued and outstanding capital stock of a
number of subsidiaries. These subsidiaries are engaged principally
in the manufacture of fasteners, leaf spring assemblies, engine
components, and electrical and electronic controls. Effective
January 31, 1994, Eaton Offshore, through its subsidiaries, acquired
certain of the Canadian and Brazilian operations of DCBU. On June
30, 1994, ownership of certain other assets of DCBU was transferred
to a subsidiary of Eaton Offshore from a subsidiary of Eaton.
Summary financial information for Eaton Offshore and its consolidated
subsidiaries for the years ended December 31 follow (in millions):
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Income statement data
Net sales $494 $295 $295 $165 $188
Gross profit 87 42 42 26 29
Net income 20 13 17 13 12
Balance sheet data
Current assets $237 $160 $144 $124 $ 91
Net intercompany
receivables (payables) (4) (15) 24 33 17
Noncurrent assets 122 109 86 42 48
Current liabilities 83 50 51 20 21
Noncurrent liabilities 107 114 115 104 73
Page 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
- --------
Strong sales in 1994 resulted in the Company reporting the
highest net sales, net income and net income per Common Share in
its history. The strength of the year was underscored by the
results of each quarter in 1994 which represented the best in the
Company's history.
On January 31, 1994, the Company purchased the Distribution and
Control Business Unit (DCBU) from Westinghouse Electric
Corporation, the largest acquisition in the Company's history.
This acquisition, as discussed under "Acquisitions and
Divestitures of Businesses" in the Financial Review,
substantially bolstered the prospects for the Electrical and
Electronic Controls segment by providing greater product depth
with world class technology and by increasing product offering
and distribution opportunities. This acquisition improves the
balance of sales and earnings between the Electrical and
Electronic Controls segment and the historically strong Vehicle
Components segment.
The strong sales increase was broadly based with record sales
achieved in both the Vehicle Components and the Electrical and
Electronic Controls segments. Each product class of these
segments experienced double-digit growth in 1994 as compared to
1993. Net income for the year rose to $333 million in 1994.
This represents a 92% increase compared to net income of $173
million in 1993 which was reduced by a $34 million after tax
acquisition integration charge related to the purchase of DCBU
and a $7 million extraordinary loss on the redemption of
debentures. Net income per Common Share increased to $4.40 in
1994, a 78% increase over $2.47 (after the charges noted above)
in 1993. Net income per Common Share increased by a lesser
percentage than net income due to an additional 6.7 million
Common Shares outstanding at year-end 1994.
1994 COMPARED TO 1993
- ---------------------
NET SALES
- ---------
Net sales for 1994 increased 38% to $6.1 billion from $4.4
billion in 1993. The increase in sales was a reflection of the
contributions of acquired businesses, as well as the improvement
in North American transportation and capital goods markets. The
Company expects that in 1995 the North American economy will
continue to favor transportation and capital goods markets.
Sales improvements were also recorded by virtually all of the
Company's operations outside the United States due in part to
Page 45
export of products to meet North American market demands. The
economic recovery that began in the United Kingdom in the past
year spread to the European continent as additional market
strength was evident in Germany, France, Italy and other
continental countries as indicated by the 19% sales increase in
Europe over 1993. Expectations are that the Company's European
businesses will continue to benefit as the recovery continues.
The purchase of DCBU also expanded the Company's presence in
Latin America. The combination of this acquisition and the
growth in existing operations resulted in a 48% sales increase in
Latin America over 1993.
The Vehicle Components segment continued to experience
significant growth as net sales increased to $2.8 billion for
1994, rising 20% over 1993's net sales of $2.4 billion. Although
the increase in sales was driven by unprecedented levels of
production of heavy trucks in North America, each product class
in this segment reported an increase in excess of 17% in 1994 as
compared to 1993. The heavy truck market set industry records,
with North American factory sales of 226,000 units, a 7% increase
over the previous record levels of 1979 and a 21% increase over
1993. Order backlogs for heavy trucks reached an all time high
of 212,000 units at year-end 1994.
Vehicle Components segment sales also reflect higher sales of
components for sport utility vehicles, minivans and light trucks
which markets showed a 20% increase in North American factory
sales in 1994 over 1993. These vehicles, where the Company's
component sales are particularly strong, now account for nearly
half of the domestic vehicle unit sales of United States based
automobile manufacturers. Passenger Car Components sales in 1994
increased substantially over 1993 as the Company benefited from
the 5% increase in factory sales of passenger cars in North
America and also from improved market penetration. Additionally,
sales of Off-Highway Vehicle Components showed marked improvement
throughout the year as a result of strong demand for hydraulic
components from agricultural, construction and industrial markets
worldwide.
The positive outlook for the continued growth of the Vehicle
Component product lines is based on increased use of heavy trucks
in support of domestic manufacturing, consumer preference for
minivans, light trucks and sport utility vehicles, increased
production of multi-valve automobile engines, and strength of the
construction and agricultural markets.
The Electrical and Electronic Controls segment's net sales in
1994 rose to $3.1 billion, a 67% increase over 1993 net sales of
$1.9 billion. This segment now represents more than one-half of
total sales. The DCBU acquisition was the principal cause for
the increase in the Industrial and Commercial Controls product
class, where sales more than doubled compared to 1993. Each of
the remaining product classes in this segment reported an
increase in excess of 14% in 1994 as compared to 1993. These
increases were a reflection of strong growth experienced in the
Page 46
industrial, residential and commercial markets served by this
segment.
Automotive and Appliance Controls sales in 1994 increased
significantly over 1993 due to improved conditions in the
passenger car and light truck markets served by the Company. The
current strength of the North American household appliances
market in comparison to previous years and positioning with
appliance manufacturers also benefited the Company. Robust sales
of semiconductor equipment, included in Specialty Controls, also
contributed significantly to the 1994 sales increase for this
segment. Sales have risen sharply over the past two years due to
increased market penetration and worldwide demand for
semiconductor equipment. Market leadership permitted the Company
to benefit substantially from the industry's growth to the extent
that order backlogs for ion implanters are at record levels. To
meet this continuing demand, a new medium current ion implanter
manufacturing facility will be built in Austin, Texas in 1995. A
new high energy ion implantation system was introduced in
mid-year 1994, and market response, particularly in the Far East,
exceeded expectations.
Several factors raise expectations for continuing growth in the
Electrical and Electronic Controls product lines, including broad
demand for technologically advanced controls for industrial and
commercial markets, ongoing strength of the United States
economy, high level of capacity utilization across many
industries, recovering markets in Europe and new market
initiatives in the Far East.
OPERATING RESULTS
- -----------------
Income from operations increased 77% to $560 million in 1994 over
$317 million in 1993, which was reduced by a $55 million
acquisition integration charge before income tax credits related
to the purchase of DCBU. This increase reflects the higher level
of sales described above, including the contributions of acquired
businesses, results of continuous improvement initiatives and
inventory controls, efforts to maintain and improve efficiency
and productivity in the face of greatly increased marketplace
demand, and benefits of recent capacity and workforce
rationalizations.
Operating profit for the Vehicle Components segment was strong,
rising 43% to $354 million (13% of sales) in 1994 over $247
million (10% of sales) in 1993. Increased profits were
attributable largely to improved sales levels and also were a
reflection of continuing stringent cost containment efforts as
well as economies achieved through organizational
rationalizations of certain businesses which better positioned
operations to benefit from further growth and market
opportunities in global vehicle markets. In 1993, operating
profit was reduced by $9 million as a result of streamlining
certain Vehicle Components operations in Europe.
Page 47
Operating profit for the Electrical and Electronic Controls
segment significantly improved, rising 73% to $239 million (8% of
sales) from $138 million (7% of sales) in 1993, before the effect
of the $55 million acquisition integration charge. The
improvement in profits resulted from higher sales volumes,
including contributions from acquired businesses, emphasis placed
on containing and controlling costs and realization of benefits
of earlier resizings.
Interest expense of $91 million in 1994 increased from $75
million in 1993. This increase was primarily caused by a higher
average borrowing level due to the issuance of $716 million of
debt in 1994 to partially finance the acquisition of DCBU.
An analysis of changes in income taxes and the effective income
tax rate is presented under "Income Taxes" in the Financial
Review.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
The Company's financial condition remained strong during 1994.
Net working capital increased to $744 million at year-end 1994
from $679 million at year-end 1993, with a slight decrement in
the current ratio to 1.7 from 1.9 at those dates, respectively.
The reduction of $245 million in short-term investments at
December 31, 1994 from the end of 1993 was primarily the result
of the liquidation of $170 million to partially fund the
acquisition of DCBU. Additionally, the Company redeemed $89
million of 8.5% debentures through the issuance of 1.3 million
Common Shares in December 1993 for aggregate net proceeds of $62
million and 800,000 Common Shares in January 1994 for aggregate
net proceeds of $38 million.
Accounts receivable increased by $339 million at December 31,
1994 from the end of 1993 largely due to the acquisition of DCBU
and increased sales levels. The acquisition of DCBU was also the
principal cause of the substantial increases in inventories,
deferred income taxes, property, plant and equipment, excess of
cost over net assets of businesses acquired, other assets, and
current and long-term liabilities at December 31, 1994 compared
to the end of 1993.
Total debt, consisting of short-term, long-term and current
portion of long-term debt, increased to $1.1 billion at December
31, 1994 from the end of 1993, primarily due to debt issued to
finance the acquisition of DCBU. The increase in total debt in
1994 was net of the redemption in January 1994 of $89 million of
8.5% debentures. Throughout the year, cash provided by operating
activities was partially used to repay debt related to business
acquisitions.
As previously discussed, through a private placement, the Company
sold 800,000 Common Shares in January 1994 for $38 million.
Page 48
Beginning in April 1995, the holder of these shares has the right
to require the Company to register the shares for public sale
under the Federal securities law. The Company sold 3.8 million
Common Shares to the public in March 1994 for aggregate net
proceeds of $214 million. In November 1994, the Company issued
1.6 million Common Shares, which are being registered under the
Federal securities laws, in the pooling-of-interests with Lectron
Products, Inc.
Capital expenditures for 1994 were a record $267 million compared
with $227 million in 1993, reflecting the Company's ongoing
investment program under long-range goals to achieve improvements
in product quality, manufacturing productivity and business
growth. Capital spending in 1995 is anticipated to be another
all-time record in order to enable the Company to enhance product
quality through technology improvements, to keep pace with the
strength of orders in virtually all product lines, and to achieve
long-term growth prospects.
Net cash provided by operating activities reached a record $522
million in 1994 compared with $435 million in 1993 and $381
million in 1992. The improvement in cash flow from increased net
income and other items exceeded cash requirements to satisfy
increased working capital demands, primarily the substantial
increase in accounts receivable. Net cash provided by operating
activities, supplemented by liquidation of short-term
investments, funding from unsecured notes and other borrowings,
proceeds from the sale of businesses and the issuance of Common
Shares were used to fund business acquisitions, capital
expenditures, cash dividends and repayment of debt.
As a result of the sale of the Common Shares, notes and
debentures, as well as cash flow from operations, the Company
canceled a $555 million 364-day revolving credit agreement and
$255 million of a $555 million five-year revolving credit
agreement which had been entered into in January 1994 to provide
interim financing for the acquisition of DCBU. The Company is
maintaining the strength of the balance sheet and has now
restored it to pre-acquisition standards in less than a year with
the debt to capital ratio again below 40%. The Company believes
capital resources available in the form of working capital
on-hand, lines of credit and funds provided by operations will
more than adequately meet anticipated requirements for capital
expenditures and business expansion through niche acquisitions.
The combination of DCBU with the Company's Industrial Controls
and Power Distribution Operations (ICPDO) strengthened the
competitive position in the Electrical and Electronic Controls
segment and will provide the opportunity for significant cost
savings resulting from the complementary fit of the two
businesses. Substantial efficiencies are beginning to be
experienced due to the combination of the two operations. The
Company has a comprehensive integration plan which is focused on
rationalization of product lines and manufacturing operations,
integration of sales and distribution functions and reduction of
Page 49
administrative expenses. The plan includes plant closures over
the next few years to eliminate over-capacity. To date, the
Company has closed and/or announced the closure of twenty-three
facilities. The Company has also sold four facilities as a
result of divestiture activities. It has also begun the
relocation of several product lines as a result of the
rationalization plan. The cost of the consolidation program for
ICPDO locations was included in the 1993 $55 million acquisition
integration charge. To date, expenditures and charges total $20
million with the remaining $35 million expected to occur
primarily over the next three years. Remaining expenditures will
be funded through cash flow from combined operations. For
actions related to the acquired locations, such costs have been
considered in the allocation of the purchase price.
In the normal course of business, the Company is exposed to
various financial risks including interest and foreign exchange
rates. The Company has developed systems to continuously measure
exposures to assure that exposures are evaluated comprehensively
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. Oversight and review is performed
monthly by senior management. In order to minimize the impact of
potential defaults, the Company specifically limits counterparty
credit exposure to prudent dollar limits. The Company's
derivative activities are described in greater detail under "Debt
and Other Financial Instruments" in the Financial Review.
To reflect current market conditions, the discount rate used to
measure the projected benefit obligations for pensions and
postretirement benefits other than pensions was increased to
8.50% from 7.25%. This change had the effect of decreasing the
accumulated pension benefit obligation by $140 million with an
offsetting increase in the unamortized net gain. The changes in
assumed rates for postretirement benefits other than pensions had
the effect of decreasing the accumulated postretirement benefit
obligation which offset changes in other plan provisions. The
effect of the change in the discount rates on future expense for
pensions and postretirement benefits other than pensions will not
be material.
At December 31, 1994 and 1993, the Company had net deferred
income tax assets included in current and long-term assets.
Management believes it is more likely than not that these tax
benefits will be realized through the reduction of future taxable
income. Significant factors considered by management in
determination of the probability of realization of deferred tax
assets include historical operating results of the Company,
expectations of future earnings and the extended period of time
over which the postretirement health care liability will be paid.
The Company has manufacturing operations in Mexico, none of which
are significant to overall operations. The recent devaluation of
the Peso in Mexico had an immaterial adverse effect on the
Page 50
Company's financial position and results of operations. The
Company will continue to monitor the economic situation in
Mexico.
Operations of the Company involve the use, disposal and clean-up
of certain substances regulated under environmental protection
laws, as further discussed under "Protection of the Environment"
in the Financial Review. Subject to the difficulty in estimating
future environmental costs, the Company expects that any sum it
may have to pay in connection with environmental matters in
excess of the amounts recorded or disclosed will not have a
material adverse effect on financial condition.
To enhance shareholder value and to avoid dilution of earnings
per share resulting from the exercise of stock options by
employees, the Company's Board of Directors authorized the
purchase of up to five million Common Shares. Under the Board's
authorization, the Company may purchase the shares over a five
year period; however, only a maximum of 1.5 million shares can be
purchased in any one year.
1993 COMPARED TO 1992
- ---------------------
NET SALES
- ---------
Net sales for 1993 increased by 7% to $4.4 billion from $4.1
billion in 1992. The increase occurred principally in the United
States and was largely due to a strengthened North American
market for heavy and light trucks, vans and sport utility
vehicles, responding to a United States economic recovery. The
improvement in North America more than offset effects of the
continued deep European recession. In North America, certain
markets, which had been sluggish through most of 1993, showed
sales improvements in the fourth quarter.
Vehicle Components segment net sales increased to $2.4 billion
for 1993, rising 13% over 1992 sales of $2.1 billion. The
improvement was largely due to significant growth in sales of
truck components, following the best year for factory sales of
heavy trucks in North America since 1979. Passenger car and
light truck markets also showed improvement in 1993. Off-highway
equipment markets, which had been down for several years,
improved considerably. Strong sales growth in North America was
partially offset by reduced sales in Europe where vehicle markets
remain weak.
The Electrical and Electronic Controls segment showed a net sales
increase of 4% in 1993 to $1.9 billion compared to $1.8 billion
in 1992. The improvement was largely due to increased sales of
industrial and commercial controls and specialty controls.
Strong North American markets for automotive and appliance
controls were largely offset, however, by continued weakness in
corresponding European markets due to economic recession and the
negative impact of foreign currency exchange rate fluctuations.
Page 51
Rising demand for portable tools, factory equipment and
residential housing drove the increase in sales of industrial and
commercial controls. Sales of industrial and power distribution
equipment, which tend to lag any North American economic
recovery, rose sharply in the fourth quarter. The semiconductor
equipment business, included in specialty controls, experienced
strong results throughout the year, with a 19% improvement in
sales for 1993 over 1992.
OPERATING RESULTS
- -----------------
Income from operations increased 33% to $317 million in 1993 over
$238 million in 1992. This increase was due to significant sales
growth as well as benefits achieved through ongoing cost
containment and productivity improvements. This improvement was
achieved in spite of a $55 million acquisition integration charge
related to the purchase of DCBU and a $9 million charge, included
in cost of products sold in 1993, for streamlining certain
vehicle components operations in Europe.
The Vehicle Components segment operating profit rose to $247
million (10% of sales) for 1993, a substantial improvement over
$170 million (8% of sales) for 1992 despite a $9 million charge
recorded in 1993 for streamlining certain European operations.
The improvement was largely a result of improved markets in North
America for heavy and light trucks, vans and sport utility
vehicles. Other factors contributing to increased profits were
continuing stringent cost containment efforts and economies
achieved through capacity and workforce rationalizations of
certain businesses, which better positioned operations to benefit
from further growth in vehicle markets.
The Electrical and Electronic Controls segment operating profit
significantly improved, before the effect of the $55 million
acquisition integration charge, rising 62% to $138 million in
1993 (7% of sales) from $85 million (5% of sales) in 1992. The
improved segment profit picture was partially due to sales growth
experienced in certain controls markets, but was also a clear
reflection of continuing emphasis placed on containing and
controlling costs and realization of anticipated benefits of
earlier capacity and workforce rationalization efforts. The
depressed European economy negatively impacted controls
businesses, particularly automotive and appliance controls.
Profit for this segment was reduced by a $55 million pretax
charge recorded in December 1993 for integration of ICPDO product
lines and operations with DCBU to form the new Cutler-Hammer
business unit.
Interest expense declined to $75 million for 1993, the lowest
level since 1986, from $89 million for 1992 largely due to the
reduction of higher interest rate debt, lower debt levels during
1993 and increased capitalized interest.
Page 52
Other income--net was $12 million in 1993, down from $23 million
in 1992, largely due to the $11 million pretax gain on the sale
of an interest in a limited partnership in 1992.
An analysis of changes in income taxes and the effective income
tax rate is presented under "Income Taxes" in the Financial
Review.
In 1992, new accounting standards for postretirement benefits
other than pensions and for income taxes were adopted, which
together reduced net income by $268 million due to the
recognition of the cumulative effect for prior years.
Page 53
Eaton Corporation
Five-Year Consolidated Financial Summary
For the year 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------
(Millions except for per share data)
Net sales $6,052 $4,401 $4,101 $3,659 $4,083
Income before extraordinary item and cumulative
effect of accounting changes 333 180 140 74 179
Extraordinary item (7)
Cumulative effect of accounting changes
Postretirement benefits other than pensions (274)
Income taxes 6
Net income (loss) 333 173 (128) 74 179
Per Common Share
Income before extraordinary item and
cumulative effect of accounting changes $ 4.40 $ 2.57 $ 2.03 $ 1.09 $ 2.53
Extraordinary item (.10)
Cumulative effect of accounting
changes
Postretirement benefits other
than pensions (3.97)
Income taxes .09
Net income (loss) 4.40 2.47 (1.85) 1.09 2.53
Cash dividends paid 1.20 1.15 1.10 1.10 1.05
At the year-end
- ---------------------------------------------------------------------------------------------------
Total assets $4,682 $3,268 $3,220 $3,184 $3,140
Long-term debt 1,053 649 833 795 755
Total debt 1,089 773 882 927 815
Shareholders' equity 1,680 1,105 948 1,153 1,140
Results for 1994 reflect the acquisition of DCBU on January 31, 1994.
Income in 1993 was reduced by a $55 million acquisition integration charge related to the
purchase of DCBU ($34 million after income tax credits, or $.49 per Common Share).
Income in 1993 was reduced by an extraordinary loss of $11 million for the redemption of
debentures ($7 million after income tax credits, or $.10 per Common Share).
Income in 1991 was reduced by a restructuring charge of $39 million ($25 million after
income tax credits, or $.38 per Common Share).
Page 1
Eaton Corporation
1994 Annual report on Form 10-K
Item 14 (c)
Listing of Exhibits Filed
3 Amended Articles of Incorporation adopted on
April 27, 1994 - Incorporated by reference to the
Company's Form 8-K Report dated May 19, 1994 and
Amended Regulations (as amended and restated as
of April 27, 1988, filed as a separate section of
this report)
4 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)
10 Material contracts
The following are either a management contract
or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (as
amended and restated May 1, 1990) -
Incorporated by reference to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1993
(b) Executive Strategic Incentive Plan,
effective as of January 1, 1991 -
Incorporated by reference to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1992
(c) Group Replacement Insurance Plan (GRIP),
effective as of June 1, 1992 - Incorporated
by reference to the Company's Annual Report
on Form 10-K for the year ended December 31,
1992
(d) 1991 Stock Option Plan - Incorporated by
reference to the Company's definitive proxy
statement dated March 18, 1991
(e) The following are incorporated by reference
to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1990:
Page 2
(i) Strategic Incentive and Option Plan
(as amended and restated as of
January 1, 1989)
(ii) Limited Eaton Service Supplemental
Retirement Income Plan (as amended
and restated as of January 1, 1989)
(iii) Amendments to the 1980 and 1986
Stock Option Plans
(iv) Form of "Change in Control"
Agreement entered into with all
officers of Eaton Corporation
(v) Eaton Corporation Supplemental
Benefits Plan (as amended and
restated as of January 1, 1989)
(which provides supplemental
retirement benefits)
(vi) Eaton Corporation Excess Benefits
Plan (as amended and restated as of
January 1, 1989) (with respect to
Section 415 limitations of the
Internal Revenue Code)
(f) The following are incorporated by reference
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990:
(i) Executive Incentive Compensation
Plan
(ii) Plan for the Deferred Payment of
Directors' Fees (as amended and
restated as of January 1, 1989)
(iii) Plan for the Deferred Payment of
Directors' Fees (originally adopted
in 1980 and amended and restated in
1989)
(iv) Eaton Corporation Retirement Plan
for Non-Employee Directors (as
amended and restated as of January
1, 1989)
Page 3
11 Statement regarding computations of net income
per Common Share (filed as a separate section of
this report)
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)