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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
For the year ended December 31, 1997
Commission file number 1-1396
Eaton Corporation
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
- ----------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(216) 523-5000
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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 New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve
months and (2) has been subject to such filing requirements for
the past ninety days. Yes X
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of voting stock held by non-affiliates
of the registrant as of January 31, 1998 was $6.4 billion. As of
January 31, 1998, there were 71,807,322 Common Shares outstand-
ing.
Page 2
Documents Incorporated By Reference
Portions of the Proxy Statement for the 1998 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
industrial, vehicle, construction, commercial and semiconductor
markets. Principal products include electrical power
distribution and control equipment, truck drivetrain systems,
engine components, hydraulic products, ion implanters and a wide
variety of controls. Worldwide sales in 1997 reached $7.6
billion. At December 31, 1997, the Company had 49,000 employees.
On August 4, 1997, the Company purchased Fusion Systems
Corporation (Fusion) for $293 million, before a reduction for
cash acquired of $90 million. Fusion, which had sales of $85
million in 1996, manufactures front-end process equipment for
the semiconductor industry.
On September 2, 1997, the Company purchased Dana Corporation's
Spicer Clutch business for $180 million. Spicer Clutch, which
had sales of $200 million in 1996, is a leader in the development
of medium- and heavy-duty truck clutches and vibration dampers.
The acquisitions of Fusion and Spicer Clutch were accounted for
by the purchase method of accounting, and accordingly, the
statements of consolidated income include the results of the
acquired businesses from the effective dates of acquisition.
The purchase price allocation for Fusion included $85 million
for purchased in-process research and development which was
determined through an independent valuation. This amount was
expensed at the date of acquisition because technological
feasibility had not been established and no alternative
commercial use had been identified. Therefore, 1997 includes
the write-off of $85 million for purchased in-process research
and development, with no income tax benefit, or $1.11 per
Common Share.
On October 1, 1997, the Company sold the majority of the stock of
AIL Systems Inc. which represented the Company's Defense Systems
business segment (the Company continues to hold a minor interest
in AIL). On December 1, 1997, the Company sold its worldwide
Appliance Controls business for $310 million. The sale of these
businesses resulted in pretax gains of $91 million ($69 million
aftertax, or $.90 per Common Share). On January 2, 1998, the
Company also completed the sale of the Axle and Brake business.
The proceeds from these divestitures were used to repurchase
Common Shares under the Company's share repurchase program, which
reduced the number of Common Shares outstanding to approximately
72 million at the end of January 1998.
Information regarding principal products, net sales, operating
profit and identifiable assets by business segment and geographic
region, presented in "Business Segment and Geographic Region
Information" on pages 40 to 44 of this report. Additional
Page 3
information regarding Eaton's business segments and business in
general is presented below.
Electrical and Electronic Controls
Patents and Trademarks - Eaton owns, controls or is licensed
under many patents related to this business segment. The EATON,
EATON (logomark), CH CONTROL, CHALLENGER, COMMANDER, CUTLER-
HAMMER, GEMINI, DURANT, HEINEMANN, IKU (and design), LECTRON,
L/P (and design) and PANELMATE trademarks are used in connection
with marketing products included in this business segment. In
addition, the Company has the right to use the WESTINGHOUSE
trademark in marketing certain products until 2004.
Competition - Principal methods of competition in this 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.
Major Customers - Approximately 10% of net sales in 1997 of the
Electrical and Electronic Controls segment were made to WESCO
Distribution, Inc. Also, approximately 6% of net sales in 1997
of this segment were made to divisions and subsidiaries of Ford
Motor Company, which is a major customer of the Vehicle
Components segment.
Vehicle Components
Patents and Trademarks - Eaton owns, controls or is licensed
under many patents related to this business segment. Although
the Company emphasizes the EATON and EATON (logomark) 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 SOLO.
Seasonal Fluctuations - Sales of truck, passenger car and light
duty components, 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 15% of net sales in 1997 of the
Vehicle Components segment were made to divisions and
subsidiaries of Ford Motor Company. Also, approximately 43% of
net sales in 1997 of this segment were made to divisions and
subsidiaries of six other large original equipment manufacturers
of trucks, passenger cars, and light-duty and off-highway
vehicles generally concentrated in North America. Eaton has been
conducting business with each of these companies for many years.
Sales to these companies include a number of different products
and different models or types of the same product, sales of which
Page 4
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.
Information Concerning Eaton's Business in General
Raw Materials - Principal raw materials used are iron, steel,
copper, aluminum, brass, insulating materials, silver, rubber and
plastic. Materials are purchased in various forms, such as pig
iron, metal sheets and strips, forging billets, bar stock and
plastic pellets. Raw materials, as well as parts and other
components, are purchased from many suppliers and, under normal
circumstances, the Company has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed
with Eaton by original equipment manufacturers of 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, total backlog at December 31, 1997 and 1996
(in billions) was approximately $1.3 and $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 1997, 1996
and 1995 (in millions) were $319, $267 and $227, respectively.
Over the past five years, the Company has invested approximately
$1.2 billion in research and development with significant
increases in the past three years.
Protection of the Environment - Operations of the Company involve
the use and disposal of certain substances regulated under
environmental protection laws. The Company continues to modify,
on an ongoing, regular basis, certain processes in order to
reduce the impact on the environment, including the reduction
or elimination of certain chemicals used in and wastes generated
from operations. Compliance with Federal, State and local
provisions which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise
relating to the protection of the environment, is not expected
to have a material adverse effect upon earnings or competitive
position of the Company. Eaton's estimated capital expenditures
for environmental control facilities are not expected to be
material for 1998 and 1999. Information regarding the Company's
liabilities related to environmental matters, is presented in
"Protection of the Environment" on pages 29 and 30 of this
report.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The
Company maintains manufacturing facilities at 145 locations in 28
countries. The Company is a lessee under a number of operating
leases for certain real properties and equipment, none of which
Page 5
are material to the Company's operations. Eaton's principal
research facilities are located in Southfield, Michigan,
Milwaukee, Wisconsin, and Willoughby Hills, Ohio. In addition,
certain divisions conduct research in their own facilities.
Management believes that the manufacturing facilities are
adequate for operations, and such facilities are maintained
in good condition.
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 1997 and 1996, is presented in
"Quarterly Data" on page 38 and 39 of this report. At December
31, 1997, there were 13,669 holders of record of the Company's
Common Shares. Additionally, 22,448 employees were shareholders
through participation in the Company's Share Purchase and
Investment Plan.
Item 6. Selected Financial Data
Information regarding selected financial data is presented in the
"Five-Year Consolidated Financial Summary" on page 56 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 46 through 55 of this
report.
Item 7A. Disclosure of Qualitative and Quantitative Information
about Market Risk
Information regarding market risk is included on pages 51 and 52
of this report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, financial review and the
report of independent auditors is presented on pages 15 through
44 of this report.
Page 6
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 7 in the definitive
Proxy Statement dated March 13, 1998, with respect to
directors, is incorporated by reference.
A listing of Eaton's officers, their ages and their current
positions and offices, as of January 31, 1998 follows:
Name Age Position (Date elected to position)
- ------------------- ---- -----------------------------------
Stephen R. Hardis 62 Chairman and Chief Executive Officer
(January 1, 1996 and September 1,
1995, respectively); Director
Alexander M. Cutler 46 President and Chief Operating Officer
(September 1, 1995); Director
Adrian T. Dillon 44 Executive Vice President - Chief
Financial and Planning Officer
(September 1, 1995)
Gerald L. Gherlein 59 Executive Vice President and General
Counsel (September 4, 1991)
Brian R. Bachman 52 Senior Vice President - Semiconductor
and Specialty Systems (January 1,
1996)
Robert J. McCloskey 58 Senior Vice President - Controls and
Hydraulics (September 1, 1995)
Thomas W. O'Boyle 55 Senior Vice President - Truck
Components (September 1, 1995)
Larry M. Oman 56 Senior Vice President - Automotive
Components (September 1, 1995)
David M. Wathen 45 Senior Vice President - Cutler-Hammer
(October 9, 1997)
Susan J. Cook 50 Vice President - Human Resources
(January 16, 1995)
Patrick X. Donovan 62 Vice President - International (April
27, 1988)
Earl R. Franklin 54 Secretary and Associate General
Counsel (September 1, 1991)
John W. Hushen 62 Vice President - Corporate Affairs
(August 1, 1991)
Stanley V. Jaskolski 59 Vice President - Technical Management
(October 1, 1990)
Joseph J. Mikelonis 47 Vice President - Taxes (May 1, 1996)
William T. Muir 55 Vice President - Manufacturing
Technologies (April 1, 1989)
Derek R. Mumford 56 Vice President - Information
Technologies (April 1, 1992)
Robert E. Parmenter 45 Vice President and Treasurer
(January 1, 1997)
Billie K. Rawot 46 Vice President and Controller
(March 1, 1991)
Page 7
All of the officers listed above have served in various
capacities with Eaton over the past five years, except for
Susan J. Cook, Brian R. Bachman, and David M. Wathen. For the
two years prior to joining Eaton, Ms. Cook was Vice President-
Human Resources at Tandem Computers, Inc. Prior to joining
Tandem Computers, Inc. in 1988, Ms. Cook had a seventeen-year
career in human resources at IBM Corporation. For the three
years prior to joining Eaton, Mr. Bachman was Vice President and
General Manager for the Standard Products Business Group of
Philips Semiconductor. Earlier in his career, he was President
of the General Semiconductor Industry Unit of Square D
Corporation. Prior to joining Eaton, Mr. Wathen was a senior
executive with Allied Signal, Inc. Prior to joining Allied
Signal, Inc. in 1996, Mr. Wathen spent seven years with Emerson
Electric Company and twelve years with General Electric.
There are no family relationships among the officers listed, and
there are no arrangements or understandings pursuant to which any
of them were elected as officers. All officers hold office for
one year and until their successors are elected and qualified,
unless otherwise specified by the Board of Directors; provided,
however, that any officer is subject to removal with or without
cause, at any time, by a vote of a majority of the Board of
Directors.
Item 11. Executive Compensation
Information contained on pages 10 through 19 in the definitive
Proxy Statement dated March 13, 1998, with respect to executive
compensation, is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information contained on pages 22 through 24 of the definitive
Proxy Statement dated March 13, 1998, with respect to security
ownership of certain beneficial owners and management, is
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None required to be reported.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) The following consolidated financial statements and
financial review, included in Item 8, are filed as
a separate section of this report:
Consolidated Balance Sheets - December 31, 1997 and
1996 - Page 16 and 17
Statements of Consolidated Income - Years ended
December 31, 1997, 1996 and 1995 - Page 18
Page 8
Statements of Consolidated Cash Flows - Years ended
December 31, 1997, 1996 and 1995 - Page 19
Statements of Consolidated Shareholders' Equity -
Years ended December 31, 1997, 1996 and 1995 -
Page 20
Financial Review - Pages 21 through 44
Summarized financial information for Eaton ETN
Offshore Ltd. - Page 45
(2) All schedules for which provision is made in
Regulation S-X of the Securities and Exchange
Commission, are not required under the related
instructions or are inapplicable and, therefore,
have been omitted.
(3) Exhibits
3(a) Amended Articles of Incorporation (amended
and restated as of May 19, 1994) -
Incorporated by reference to the Form 8-K
Report dated May 19, 1994
3(b) Amended Regulations (amended and restated
as of April 27, 1988) - Incorporated by
reference to the Annual Report on Form 10-K
for the year ended December 31, 1994
4(a) Instruments defining rights of security
holders, including indentures (Pursuant to
Regulation S-K Item 601(b)(4), the Company
agrees to furnish to the Commission, upon
request, a copy of the instruments defining
the rights of holders of long-term debt)
4(b) Eaton Corporation Rights Agreement dated June
28, 1995 - Incorporated by reference to the
Form 8-K Report dated June 28, 1995
10 Material contracts
The following are either a management
contract or a compensatory plan or
arrangement:
(a) Deferred Incentive Compensation Plan
(amended and restated as of September
24, 1996) - Incorporated by reference
to the Annual Report on Form 10-K for
the year ended December 31, 1996
Page 9
(b) Executive Strategic Incentive Plan
(amended and restated as of June 21,
1994 and July 25, 1995) - Incorporated
by reference to the Annual Report on
Form 10-K for the year ended December
31, 1996
(c) Group Replacement Insurance Plan
(GRIP), effective as of June 1, 1992 -
Incorporated by reference to the
Annual Report on Form 10-K for the
year ended December 31, 1992
(d) 1991 Stock Option Plan - Incorporated
by reference to the definitive Proxy
Statement dated March 18, 1991
(e) 1995 Stock Option Plan - Incorporated
by reference to the definitive Proxy
Statement dated March 17, 1995
(f) Incentive Compensation Deferral Plan
(amended and restated as of September
24, 1996) - Incorporated by reference
to the Annual Report on Form 10-K for
the year ended December 31, 1996
(g) Strategic Incentive and Option Plan
(amended and restated as of September
24, 1996) - Incorporated by reference
to the Annual Report on Form 10-K for
the year ended December 31, 1996
(h) Form of "Change in Control" Agreement
entered into with officers of Eaton
Corporation as of November 1, 1996 -
Incorporated by reference to the
Annual Report on Form 10-K for the
year ended December 31, 1996
(i) The following are incorporated by
reference to the Quarterly Report on
Form 10-Q for the quarter ended June
30, 1990:
(i) Limited Eaton Service
Supplemental Retirement Income
Plan (amended and restated
as of January 1, 1989)
(ii) Amendments to the 1980 and 1986
Stock Option Plans
(iii) Eaton Corporation Supplemental
Benefits Plan (amended and
restated as of January 1, 1989)
(which provides supplemental
retirement benefits)
Page 10
(iv) Eaton Corporation Excess
Benefits Plan (amended and
restated as of January 1, 1989)
(with respect to Section 415
limitations of the Internal
Revenue Code)
(j) Executive Incentive Compensation Plan,
effective January 1, 1995 -
Incorporated by reference to the
Annual Report on Form 10-K for the
year ended December 31, 1996
(k) Plan for the Deferred Payment of
Directors' Fees (amended and restated
as of September 24, 1996 and amended
effective as of January 1, 1997)
(filed as a separate section of this
report)
(l) Plan for the Deferred Payment of
Directors' Fees (originally adopted in
1980 and amended effective February
25, 1997) - Incorporated by reference
to the Annual Report on Form 10-K for
the year ended December 31, 1996
(m) 1996 Non-Employee Director Fee
Deferral Plan (amended effective as of
January 1, 1997 and February 25, 1997)
(filed as a separate section of this
report)
(n) Eaton Corporation Trust Agreement -
Outside Directors (dated December 6,
1996) - Incorporated by reference to
the Annual Report on Form 10-K for the
year ended December 31, 1996
(o) Eaton Corporation Trust Agreement -
Officers and Employees (dated December
6, 1996) - Incorporated by reference
to the Annual Report on Form 10-K for
the year ended December 31, 1996
(p) Eaton Corporation Retirement Plan for
Non-Employee Directors (amended and
restated January 1, 1996) (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)
Page 11
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 1997.
(c) Exhibits
Certain exhibits required by this portion of
Item 14 are filed as a separate section of
this report.
(d) Financial Statement Schedules
None required to be filed
Page 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 20, 1998 /s/ Adrian T. Dillon
---------------------
Adrian T. Dillon
Executive Vice President
and Chief Financial and
Planning Officer; Principal
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
DATE: March 20, 1998
Signature Title
- ----------------------- ----------------------------------------
*
- -----------------------
Stephen R. Hardis Chairman and Chief Executive Officer;
Principal Executive Officer;
Director
*
- -----------------------
Alexander M. Cutler President and Chief Operating Officer;
Director
*
- -----------------------
Billie K. Rawot Vice President and Controller;
Principal Accounting Officer
*
- -----------------------
Neil A. Armstrong Director
*
- -----------------------
Phyllis B. Davis Director
Page 13
*
- -----------------------
Ernie Green Director
*
- -----------------------
Ned C. Lautenbach Director
*
- -----------------------
John R. Miller Director
*
- -----------------------
Furman C. Moseley Director
*
- -----------------------
Victor A. Pelson Director
*
- -----------------------
A. William Reynolds Director
*
- -----------------------
Gary L. Tooker Director
*By /s/ Adrian T. Dillon
--------------------------------------
Adrian T. Dillon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
Page 14
Eaton Corporation
1997 Annual Report on Form 10-K
Items 6, 7, 8 & Item 14(c)
Report of Independent Auditors
Consolidated Financial Statements and Financial Review
Summary Financial Information for Eaton ETN Offshore Ltd.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Five-Year Consolidated Financial Summary
Certain 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, 1997. 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, 1997 and
1996, and the consolidated results of its operations and cash
flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related summary financial
information, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 19, 1998
Page 16
Eaton Corporation
Consolidated Balance Sheets December 31
---------------
(Millions) 1997 1996
---- ----
ASSETS
Current assets
Cash $ 53 $ 22
Short-term investments 37 38
Accounts receivable 958 985
Inventories 734 729
Deferred income taxes 163 165
Other current assets 110 78
------ ------
2,055 2,017
Property, plant and equipment
Land and buildings 622 700
Machinery and equipment 2,738 2,796
------ ------
3,360 3,496
Accumulated depreciation (1,601) (1,704)
------ ------
1,759 1,792
Excess of cost over net assets of businesses
acquired 966 968
Other assets 685 530
------ ------
$5,465 $5,307
====== ======
The Financial Review on pages 21 to 44 is an integral part of the
consolidated financial statements.
Page 17
Eaton Corporation
Consolidated Balance Sheets December 31
-------------
(Millions) 1997 1996
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 81 $ 10
Current portion of long-term debt 23 20
Accounts payable 519 512
Accrued compensation 180 181
Accrued income and other taxes 76 97
Other current liabilities 478 410
------ ------
1,357 1,230
Long-term debt 1,272 1,062
Postretirement benefits other than pensions 553 585
Other liabilities 212 270
Shareholders' equity
Common Shares (74.7 in 1997 and 77.1 in 1996) 37 39
Capital in excess of par value 844 830
Retained earnings 1,376 1,402
Foreign currency translation adjustments (139) (68)
Shares in trust
Employee Stock Ownership Plan (20) (36)
Deferred compensation plans (27) (7)
------ ------
2,071 2,160
------ ------
$5,465 $5,307
====== ======
The Financial Review on pages 21 to 44 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) 1997 1996 1995
---- ---- ----
Net sales $7,563 $6,961 $6,822
Costs and expenses
Cost of products sold 5,456 5,171 5,028
Selling and administrative 1,088 995 927
Research and development 319 267 227
Purchased in-process research and development 85
------ ----- -----
6,948 6,433 6,182
------ ----- -----
Income from operations 615 528 640
Other income (expense)
Interest expense (86) (85) (86)
Interest income 7 6 6
Gain on sales of businesses 91
Other income--net 41 36 32
------ ----- -----
53 (43) (48)
------ ----- -----
Income before income taxes and extraordinary item 668 485 592
Income taxes 204 136 193
------ ----- -----
Income before extraordinary item 464 349 399
Extraordinary item (54)
------ ----- -----
Net income $ 410 $ 349 $ 399
====== ===== ======
Per Common Share
Income before extraordinary item $ 6.05 $ 4.50 $ 5.13
Extraordinary item (.71)
------ ----- -----
Net income $ 5.34 $ 4.50 $ 5.13
====== ===== =====
Per Common Share-assuming dilution
Income before extraordinary item $ 5.93 $ 4.46 $ 5.08
Extraordinary item (.69)
------ ----- -----
Net income $ 5.24 $ 4.46 $ 5.08
====== ===== =====
Cash dividends paid per Common Share $ 1.72 $ 1.60 $ 1.50
The Financial Review on pages 21 to 44 is an integral part of the
consolidated financial statements.
Page 19
Eaton Corporation
Statements of Consolidated Cash Flows
Year Ended December 31
----------------------
(Millions) 1997 1996 1995
---- ---- ----
Net cash provided by operating activities
Income before extraordinary item $464 $349 $399
Adjustments to reconcile to net cash provided by
operating activities
Depreciation 285 270 238
Amortization 57 50 43
Deferred income taxes, long-term liabilities,
and other non-cash items in income 17 (9) 42
Write-off of purchased in-process research and
development 85
Gain on sales of businesses (91)
Changes in operating assets and liabilities,
excluding acquisitions and sales of
businesses
Accounts receivable (106) (32) (20)
Inventories (53) 36 (30)
Accounts payable and other accruals 140 42 (10)
Other--net (35) (15)
---- ---- ----
763 706 647
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (387) (151) (143)
Sales of businesses 329 11
Expenditures for property, plant and equipment (438) (347) (399)
Other--net (35) (7) 24
---- ---- ----
(531) (505) (507)
Net cash used in financing activities
Borrowings with original maturities of more than
three months
Proceeds 425 169 368
Payments (570) (148) (251)
Borrowings with original maturities of less than
three months--net 356 (87) (73)
Proceeds from exercise of stock options 36 18 11
Cash dividends paid (133) (124) (117)
Purchase of Common Shares (315) (63) (40)
---- ---- ----
(201) (235) (102)
---- ---- ----
Total increase (decrease) in cash 31 (34) 38
Cash at beginning of year 22 56 18
---- ---- ----
Cash at end of year $ 53 $ 22 $ 56
==== ==== ====
The Financial Review on pages 21 to 44 is an integral part of the
consolidated financial statements.
Page 20
Eaton Corporation
Statements of Consolidated Shareholders' Equity
Shares in trust
Foreign ------------------ Total
Common Shares Capital in currency Deferred share-
------------- excess of Retained translation compensa- holders'
Shares Amount par value earnings adjustments ESOP tion plans equity
------ ------ --------- -------- ----------- ---- ----------- --------
(Millions)
Balance at January 1, 1995 78.0 $39 $806 $ 988 ($ 71) ($82) $1,680
Net income 399 399
Cash dividends paid, net of
Employee Stock Ownership
Plan (ESOP) tax benefit (116) (116)
Issuance of shares under
employee benefit plans,
including tax benefit .4 14 (1) 13
Net unrealized loss on
available-for-sale
securities (6) (6)
Purchase of shares (.8) (8) (32) (40)
Shares allocated to employees 29 29
Net translation adjustments 16 16
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1995 77.6 39 812 1,232 (55) (53) 1,975
Net income 349 349
Cash dividends paid, net of
ESOP tax benefit (123) (123)
Issuance of shares under
employee benefit plans,
including tax benefit .5 23 (1) 22
Net unrealized loss on
available-for-sale
securities (4) (4)
Purchase of shares (1.1) (12) (51) (63)
Shares allocated to employees 17 17
Issuance of shares to trust .1 7 ($ 7)
Net translation adjustments (13) (13)
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1996 77.1 39 830 1,402 (68) (36) (7) 2,160
Net income 410 410
Cash dividends paid, net of
ESOP tax benefit (132) (132)
Issuance of shares under
employee benefit plans,
including tax benefit .9 47 (2) 45
Put option obligation, net (18) (18)
Net unrealized loss on
available-for-sale
securities (10) (10)
Purchase of shares (3.7) (2) (40) (292) (334)
Shares allocated to employees 16 16
Issuance of shares to trust .2 20 (20)
Net translation adjustments (71) (71)
Other .2 5 5
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1997 74.7 $37 $844 $1,376 ($139) ($20) ($27) $2,071
==== === ==== ====== ==== ==== === ======
The Financial Review on pages 21 to 44 is an integral part of the
consolidated financial statements.
Page 21
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 in associate companies and
joint ventures where the Company has a 20% to 50% ownership
interest.
Foreign Currency Translation
- ----------------------------
The functional currency for principally all subsidiaries outside
the United States is the local currency. Financial statements
for these subsidiaries are translated into United States dollars
at year-end exchange rates as to assets and liabilities and
weighted-average exchange rates as to revenues and expenses.
The resulting translation adjustments are recorded in
shareholders' equity.
Inventories
- -----------
Inventories are carried at lower of cost or market. Inventories
in the United States are generally accounted for using the
last-in, first-out (LIFO) method. Remaining United States and
all other inventories are accounted for using the first-in,
first-out (FIFO) method.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization are computed by the straight-line
method for financial statement purposes. Cost of buildings is
depreciated over forty years and machinery and equipment over
principally three to ten years. Identified intangible assets
primarily consist of patents, trademarks and tradenames, which
are amortized over a range of five to forty years. Excess of
cost over net assets of businesses acquired is amortized over
a range of ten to forty years. Excess of cost over net assets
of businesses acquired and certain other long-lived assets are
reviewed for impairment losses whenever events or changes in
circumstances indicate the carrying amount may not be recovered
through future net cash flows generated by the assets.
Financial Instruments
- ---------------------
The Company selectively uses straightforward, nonleveraged
financial instruments as part of foreign exchange and interest
rate risk management programs. The Company does not buy and sell
financial instruments solely for trading purposes, except for
nominal amounts authorized under limited, controlled
circumstances. Credit loss has never been experienced, and is not
anticipated, as the counterparties to various financial
instruments are major international financial institutions with
strong credit ratings and due to control over the limit of
positions entered into with any one party. Although financial
instruments are an integral part of the Company's risk management
Page 22
programs, their incremental effect on financial condition and
results of operations is not material.
The Company and its subsidiaries, operating in Canada, Europe,
Latin America and the Pacific Region, are exposed to fluctuations
in foreign currencies in the normal course of business. The
Company seeks to reduce exposure to foreign currency fluctuations
through the use of foreign currency forward exchange contracts
and options. Gains or losses on those financial instruments
which hedge net investments in subsidiaries outside the United
States are recorded in shareholders' equity. Gains or losses
on those financial instruments which hedge specific transactions
are recognized in net income, offsetting the underlying foreign
currency transaction gains or losses. Cash premiums and
discounts related to these financial instruments are amortized
to other income--net over the life of the respective agreement.
In the normal course of business, the Company's operations are
also exposed to fluctuations in interest rates. 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 are included in interest
expense since they hedge interest on debt. Cash premiums
related to interest rate caps are amortized to interest expense
over the life of the respective agreement.
Options for Common Shares
- -------------------------
The Company applies the intrinsic value based method to account
for stock options granted to employees to purchase Common Shares.
Under this method, no compensation expense is recognized on the
grant date since on that date the option price equals the market
price of the underlying Common Shares.
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are
shipped to unaffiliated customers.
Estimates
- ---------
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions in certain circumstances that affect
amounts reported in the accompanying consolidated financial
statements and notes. Actual results could differ from these
estimates.
Financial Presentation Changes
- ------------------------------
Certain amounts for prior years have been reclassified to conform
to the current year presentation.
Page 23
SALES AND ACQUISITIONS OF BUSINESSES AND WRITE-OFF OF PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT
- ----------------------------------------------------------------
On August 4, 1997, the Company purchased Fusion Systems
Corporation (Fusion) for $293 million, before a reduction for
cash acquired of $90 million. Fusion, which had sales of $85
million in 1996, manufactures front-end process equipment for
the semiconductor industry.
On September 2, 1997, the Company purchased Dana Corporation's
Spicer Clutch business for $180 million. Spicer Clutch, which
had sales of $200 million in 1996, is a leader in the development
of medium- and heavy-duty truck clutches and vibration dampers.
On April 16, 1996, the Company purchased CAPCO Automotive
Products Corporation for $135 million. CAPCO, a Brazilian
manufacturer of transmissions for light- and medium-duty trucks
and transaxle components for passenger cars, had sales of $176
million in 1995.
The acquisitions of Fusion, Spicer Clutch, and CAPCO were
accounted for by the purchase method of accounting; and
accordingly, the statements of consolidated income include the
results of the acquired businesses from the effective dates of
acquisition. The purchase price allocation for Fusion included
$85 million for purchased in-process research and development
which was determined through an independent valuation. This
amount was expensed at the date of acquisition because
technological feasibility had not been established and no
alternative commercial use had been identified. Therefore, the
third quarter of 1997 includes the write-off of $85 million for
purchased in-process research and development, with no income tax
benefit, or $1.11 per Common Share.
On October 1, 1997, the Company sold the majority of the stock of
AIL Systems Inc. which represented the Company's Defense Systems
business segment (the Company continues to hold a minor interest
in AIL). On December 1, 1997, the Company sold its worldwide
Appliance Controls business for $310 million. The sale of these
businesses resulted in pretax gains of $91 million ($69 million
aftertax, or $.90 per Common Share).
During 1997, 1996 and 1995, the Company also acquired and sold
other smaller operations.
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
The Company's subsidiaries outside the United States have lines
of credit, primarily short-term, aggregating $138 million from
various banks worldwide. At December 31, 1997, the Company had
$81 million outstanding under these lines of credit. The
weighted average interest rate on short-term debt, excluding
immaterial amounts for highly inflationary countries, at
December 31, 1997 and 1996 was 7.1% and 7.2%, respectively.
Page 24
Long-term debt at December 31, excluding the current portion,
follows (in millions):
1997 1996
---- ----
6-3/8% notes due 1999
(effective interest rate 4.8%) $ 100 $ 100
9% notes due 2001 100 100
8% debentures due 2006 86 86
8.9% debentures due 2006 100 100
7% debentures due 2011, net of unamor-
tized discount of $90 million in 1996
(effective interest rate 14.6%) 110
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024
(effective interest rate 7.1%) 100 100
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 150 150
Unsecured notes (5.6% to 6.6%) 500 150
Other (effective interest rate 9.5%) 36 66
------ ------
$1,272 $1,062
====== ======
The Company has a $250 million revolving line of credit, which
expires in 1998, and a $500 million revolving credit agreement,
which expires in 2000. These lines of credit provide funds for
working capital and general corporate purposes. The unsecured
notes are classified as long-term debt because the Company
intends, and has the ability under the $500 million revolving
credit agreement, to refinance these notes on a long-term basis.
In 1997, the Company completed the termination of, and settled
for cash, a $100 million 9% interest rate swap expiring in 2000.
The combined $6.8 million pretax loss on the termination of the
swap ($3.1 million related to 1996) is being amortized to
interest expense through 2000 when the swap was originally
scheduled to mature.
The Company has interest rate swap agreements that effectively
convert interest expense on $115 million of United States dollar
fixed-rate debt to a fixed rate of 3.2% as to $50 million, and to
floating rates at December 31, 1997 of 2.5% (based on the swap
agreement) as to $25 million and 5.8% (based on the Amsterdam
Interbank Offered Rate plus 1.89%) as to the remaining $40
million.
In 1995, the Company entered into an agreement that expires in
1999 which effectively converts $40 million of United States
dollar debt into Dutch Guilder denominated debt. This agreement
was designated as a hedge of the Company's net investment in a
Netherlands subsidiary.
Aggregate mandatory sinking fund requirements and annual
maturities of long-term debt are as follows (in millions):
1998, $23; 1999, $107; 2000, $502; 2001, $102; and 2002, $2.
Page 25
Interest capitalized as part of acquisition or construction of
major fixed assets (in millions) was $12 in 1997, $8 in 1996 and
$10 in 1995. Interest paid (in millions) was $97 in 1997, and
$96 in 1996 and 1995.
Financial instruments outstanding at December 31 are as follows
(in millions):
1997 1996
-------------------------- -------------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------- -------- ----- -------- -------- -----
Cash and short-term
investments $ 90 $ 90 $ 60 $ 60
Marketable equity
investments 5 5 22 22
Marketable debt securities 62 62 44 44
Short-term debt (81) (81) (10) (10)
Long-term debt, current
portion of long-term
debt and foreign
currency principal swaps (1,295)(1,373) (1,082)(1,206)
Put options (1)
Foreign currency forward
exchange contracts and
options $112 (27) (27) $ 23 (10) (8)
Interest rate swaps
Fixed to floating 66 1 127 1
Floating to fixed 9 64 (5)
Fixed to fixed 90 1 90 2 (2)
Interest rate caps sold (50) (1) (1)
The fair values of short-term investments, marketable equity
investments and debt securities, short-term and long-term debt,
put options, and interest rate swaps and caps are principally
based on quoted market prices. The fair value of foreign
currency forward exchange contracts and options, which primarily
mature in 1998, and foreign currency principal and interest rate
swaps are estimated based on quoted market prices of comparable
contracts, adjusted through interpolation where necessary for
maturity differences.
EXTRAORDINARY ITEM
- ------------------
On December 30, 1997, the Company redeemed the $200 million of 7%
debentures due 2011. The aftertax extraordinary loss on this
redemption, including the write-off of debt issue costs, was $54
million, or $.71 per Common Share ($88 million before income
taxes).
Page 26
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.
The components of pension expense for the years ended December 31
follow (in millions):
1997 1996 1995
---- ---- ----
Service cost - benefits earned during
year $ (64) $ (58) $ (51)
Interest cost on projected benefit
obligation (111) (105) (104)
Actual return on assets 375 350 347
Net amortization and deferral (211) (200) (214)
----- ----- -----
$ (11) $ (13) $ (22)
Curtailment loss (1)
Settlement gain 68 6 6
----- ----- -----
$ 56 $ (7) $ (16)
===== ===== =====
In 1997, the curtailment loss and settlement gain relate
primarily to the sales of AIL Systems Inc. and the Appliance
Controls business.
Page 27
The pension asset (liability), by funded status of the plan, at
December 31 follows (in millions):
1997 1996
--------------- ---------------
Over- Under- Over- Under-
funded funded funded funded
------ ------ ------ ------
Accumulated pension benefit
obligation
Vested $1,127 $ 178 $1,186 $ 177
Nonvested 91 8 94 7
------ ------ ------ ------
1,218 186 1,280 184
Value of future salary
projections 134 25 152 14
------ ------ ------ ------
Total projected pension benefit
obligation 1,352 211 1,432 198
Fair value of plan assets 1,931 89 1,852 92
------ ------ ------ ------
Plan assets in excess of (less
than) projected benefit
obligation 579 (122) 420 (106)
Unamortized
Initial net asset (7) (4) (14) (5)
Net (gain) loss (431) 36 (326) 12
Prior service cost 18 14 15 16
Adjustment to recognize minimum
liability (8) (11)
------ ------ ------ ------
$ 159 $ (84) $ 95 $ (94)
====== ====== ====== ======
Actuarial assumptions used in the calculation of the pension
asset (liability) are as follows:
1997 1996 1995
---- ---- ----
Discount rate 7.00% 7.25% 7.25%
Compensation growth rate 4.50% 4.70% 4.70%
Long-term rate of return on plan assets 10% 10% 9.50%
Plan assets are invested in equity and fixed income securities
and other instruments. Underfunded plans are associated
principally with operations outside the United States. The
changes in assumed rates at the end of 1997 had the effect of
increasing the accumulated pension benefit obligation by $29
million with an offsetting increase in the unamortized net loss.
This change will not have a material effect on future expense.
Page 28
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS
- ------------------------------------------------
Generally, United States employees become eligible for
postretirement benefits other than pensions, primarily health
care and life insurance, upon retirement. These benefits are
payable for life, although the Company retains the right to
modify or terminate the plans providing these benefits. The
plans are contributory, with retiree contributions adjusted
annually, and contain other cost-sharing features, including
deductibles and co-payments. Certain plans 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):
1997 1996 1995
---- ---- ----
Service cost - benefits earned during year $(13) $(12) $(12)
Interest cost on projected benefit obligation (49) (47) (49)
Amortization 3 5 8
---- ---- ----
$(59) $(54) $(53)
Curtailment gain 16
Settlement loss (12)
---- ---- ----
$(55) $(54) $(53)
==== ==== ====
The curtailment gain and settlement loss relate primarily to the
sales of AIL Systems Inc. and the Appliance Controls business.
The liability for postretirement benefit plans other than
pensions at December 31 follows (in millions):
1997 1996
---- ----
Accumulated postretirement benefit obligation
Retirees $470 $465
Eligible plan participants 90 58
Non-eligible plan participants 177 182
Unamortized
Prior service cost 29 53
Net loss (184) (138)
---- ----
$582 $620
==== ====
Actuarial assumptions used in the calculation of the liability
for postretirement benefits other than pensions are as follows:
Page 29
1997 1996 1995
---- ---- ----
Discount rate 7.00% 7.25% 7.25%
Projected health care cost trend rate 8% 9% 10%
Ultimate trend rate 4.75% 5% 5%
Year ultimate trend rate is achieved 2002 2001 2001
The changes in assumed rates had the effect of increasing the
accumulated postretirement benefit obligation (APBO) by $13
million with an offsetting increase in the unamortized net loss.
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, 1997 by $37 million and the net periodic cost for
1997 by $3 million.
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has several policies in place to ensure that its
operations are conducted in keeping with good corporate
citizenship and with a positive commitment to the protection of
the natural and workplace environments. For example, the Company
has, at each of its facilities, a person responsible for
environmental, health and safety (EHS) matters. The Company
routinely reviews EHS performance at each of its facilities; and,
the Company continuously strives to minimize the generation of
hazardous waste at its facilities.
As a result of past operations, the Company is involved in
remedial response and voluntary environmental cleanup activities
at a number of sites, including certain of its currently-owned
or formerly-owned plants. The Company has also been named a
potentially responsible party (PRP) under the Federal Superfund
law at a number of waste disposal sites.
A number of factors affect the cost of environmental remediation,
including the number of parties involved at many sites, the
determination of the extent of contamination, the length of time
that remediation may require, the complexity of environmental
regulations, and the continuing advancement of remediation
technology. Taking these factors into account, the Company has
estimated (without discounting) costs of remediation, which will
be incurred over a period of several years.
The Company accrues an amount equal to the best estimates of
these costs when it is probable that a liability has been
incurred. At December 31, 1997 and 1996, the balance sheet
included an accrual for these costs (in millions) of $33 and
$35, respectively. The Company has rights of recovery from
non-affiliated parties as to a portion of these costs with regard
to several of the sites. The accrual for 1997 was reduced due
to the settlement of liability at certain sites, new cost-sharing
agreements, and regulatory guidance and activity affecting
estimated remediation costs.
Page 30
Based upon the Company's analysis and subject to the difficulty
in estimating these future costs, the Company expects that any
sum it may be required to pay in connection with environmental
matters is not reasonably likely to exceed the accrual by an
amount that would have a material adverse effect on its financial
condition or results of operations or liquidity. All of these
estimates are forward-looking statements and, given the inherent
uncertainties in evaluating environmental exposures, actual
results can differ from these estimates.
SHAREHOLDERS' EQUITY
- --------------------
There are 300 million Common Shares authorized ($.50 par value
per share). At December 31, 1997, there were 5.1 million Common
Shares held in treasury and 13,669 holders of record of Common
Shares. Additionally, 22,448 employees were shareholders through
participation in the Share Purchase and Investment Plan.
In the second half of 1997, the Company sold written put options
on 400,000 Common Shares. Options on 150,000 Common Shares
expired unexercised in 1997. In December 1997, the Company
purchased 50,000 shares at $90 per Common Share as a result of an
option exercise. The remaining 200,000 options expire in the
first half of 1998 at strike prices of $90.00 and $94.66 per
Common Share.
Stock options have been granted to certain employees, under
various plans, to purchase the Company's Common Shares at prices
equal to fair market value as of date of grant. Historically,
the majority of these options vest ratably during the three-year
period following the date of grant and expire ten years from date
of grant. In January 1997, 1.9 million special performance-
vested stock options were granted at an option price of $71.81.
These options become fully exercisable ten days before the
expiration of their ten-year term. Accelerated vesting of these
options is linked to the Company's success in achieving net
income and Common Share price targets. Half of the options became
exercisable during 1997 when the Company achieved the initial
share price target of $85 per Common Share. The remaining
options become exercisable if the Company earns $8 per Common
Share during any twelve month period prior to the end of the year
2000. If the earnings target is not met by the end of 2000, the
unmet target for each subsequent year will increase at a compound
annual rate of 10%.
Page 31
A summary of stock option activity follows (shares in millions):
1997 1996 1995
-------------- -------------- --------------
Average Average Average
price price price
per per per
share Shares share Shares share Shares
------- ------ ------- ------ ----- ------
Outstanding, January 1 $44.32 5.0 $41.12 4.6 $37.94 4.0
Granted 73.07 2.8 53.10 1.1 48.60 1.1
Exercised 43.49 (.9) 33.57 (.6) 28.94 (.4)
Canceled 59.85 (.1) 51.79 (.1) 50.58 (.1)
--- --- ---
Outstanding, December 31 $55.85 6.8 $44.32 5.0 $41.12 4.6
=== === ===
Exercisable, December 31 4.5 3.7 3.3
Reserved for future
grants, December 31 1.5 4.2 5.2
The following table summarizes information about stock options
outstanding at December 31, 1997:
Weighted-
average Weighted-
remaining average
Number contractual exercise
Range of exercise prices outstanding life price
- ------------------------ ----------- ----------- -------
$24.15 - $39.99 1.7 3.6 $32.86
$40.00 - $49.99 .8 7.1 48.56
$50.00 - $69.99 1.6 7.3 55.09
$70.00 - $100.91 2.7 9.1 73.12
The following table summarizes information about stock options
that are exercisable at December 31, 1997:
Weighted-
average
Number exercise
Range of exercise prices exercisable price
- ------------------------ ----------- ---------
$24.15 - $39.99 1.7 $32.86
$40.00 - $49.99 .6 48.56
$50.00 - $69.99 1.2 55.75
$70.00 - $100.91 1.0 71.98
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standard (SFAS) No. 123,
'Accounting for Stock-Based Compensation.' If the Company
accounted for its stock options under the fair value method of
SFAS No. 123, the Company's net income (in millions) and net
income per Common Share would have been as indicated below:
Page 32
1997 1996 1995
---- ---- ----
Net income $ 390 $ 343 $ 395
Net income per Common
Share $5.08 $4.43 $5.07
Net income per Common
Share-assuming dilution $4.99 $4.38 $5.02
The fair value of each option grant in 1997, 1996, and 1995 was
estimated using the Black-Scholes option pricing model with the
following assumptions:
1997 1996 1995
---- ---- ----
Dividend yield 3% 3% 3%
Expected volatility 22% 23% 24%
Risk-free interest rate 6.0% to 6.7% 5.3% to 6.3% 6.7% to 7.8%
Expected option life 4 to 6 years 4 years 4 years
Weighted-average fair
value of options
granted during the
year $16.84 $10.27 $11.50
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, which is determined each
quarter based on net income per Common Share, ranges from 25% to
100% of a participant's contribution and is invested in the
Company's Common Shares.
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 which have not yet been allocated to employee
accounts are included in shareholders' equity as "Shares in
Trust-ESOP" and the notes payable of the ESOP, which are
guaranteed by the Company, are included in long-term debt.
Unallocated shares in the ESOP are released at historical cost
based on the ratio of the annual principal payment on the notes
payable compared to the original principal amount of the notes
payable and allocated to employee accounts. Cash dividends paid
on shares in the ESOP are charged against retained earnings and,
along with Company contributions, are used to repay the principal
and interest due on the notes payable. Unallocated shares in the
ESOP, which are considered outstanding for purposes of computing
net income per Common Share, at the end of 1997 and 1996 (in
millions) were .8 and 1.2, respectively. Compensation expense
related to the SPIP match, including the effect of shares
released by the ESOP at historical cost, (in millions) was $6 in
1997, $10 in 1996 and $17 in 1995.
Page 33
The Company has plans which permit eligible employees and
directors to defer a portion of their compensation. The Company
has deposited $65 million of marketable securities and Common
Shares into a trust to fund a portion of these liabilities. The
marketable securities are included in other assets and the
shares, with a fair value of $27 million, are included in
shareholders' equity.
PREFERRED SHARE PURCHASE RIGHTS
- -------------------------------
In June 1995, the Company declared a dividend of one Preferred
Share Purchase Right (Right) for each outstanding Common Share.
The Rights become exercisable only if a person or group acquires,
or offers to acquire, 20% or more of the Company's Common Shares.
The Company is authorized to reduce the 20% threshold for
triggering the Rights to not less than 10%. The Rights expire on
July 12, 2005, unless redeemed earlier at one cent per Right.
When the Rights become exercisable, the holder of each Right,
other than the acquiring person, is entitled (1) to purchase for
$250, one one-hundredth of a Series C Preferred Share (Preferred
Share), (2) to purchase for $250, that number of the Company's
Common Shares or common stock of the acquiring person having a
market value of twice that price, or (3) at the option of the
Company, to exchange each Right for one Common Share or one one-
hundredth of a Preferred Share.
INCOME TAXES
- ------------
Income before income taxes for the years ended December 31
follows (in millions):
1997 1996 1995
---- ---- ----
United States $457 $385 $471
Non-United States 211 100 121
---- ---- ----
$668 $485 $592
==== ==== ====
Page 34
Income taxes for the years ended December 31 follows (in
millions):
1997 1996 1995
---- ---- ----
Current
United States
Federal $ 99 $ 81 $109
State and local 14 21 24
Non-United States 42 34 59
---- ---- ----
155 136 192
Deferred
United States
Reduction of valuation allowance
for deferred income tax assets (11)
Other Federal 20 (5) 26
State and local 5 1
Non-United States
Reduction of valuation allowance
for deferred income tax assets (4)
Operating loss carryforwards 15 11 (4)
Other 13 (6) (11)
---- ---- ----
49 0 1
---- ---- ----
$204 $136 $193
==== ==== ====
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):
1997
------------- 1996 1995
Amount Rate Rate Rate
------ ---- ---- ----
Income taxes at the United
States statutory rate $234 35.0% 35.0% 35.0%
Write-off of purchased in-process
research and development 30 4.5
State and local income taxes 20 2.9 2.9 3.1
Possessions credit related to
Puerto Rican operations (38) (5.7) (7.2) (5.4)
Current and prior years' credit for
increasing research activities (22) (3.3) (.6)
Book/tax basis difference related
to sales of businesses (13) (1.9)
Reduction of valuation allowance
for deferred income tax assets (4) (.6) (1.8)
Adjustment of worldwide tax
liabilities (1) (.2) .9 2.0
Foreign source income 1 .2 (2.6) 1.5
Other--net (3) (.4) (.2) (1.8)
---- ----- ----- -----
$204 30.5% 28.2% 32.6%
==== ===== ===== =====
Page 35
Significant components of current and long-term deferred income
taxes at December 31 follow (in millions):
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
1997
Accruals and other adjustments
Employee benefits $ 45 $225 $(11)
Depreciation and amortization (189) (12)
Other 109 49
Operating loss carryforwards of
non-United States subsidiaries 58
Other items 9 15 12
Valuation allowance (52)
---- ---- ----
$163 $106 $(11)
==== ==== ====
1996
Accruals and other adjustments
Employee benefits $ 57 $241 $ (5)
Depreciation and amortization (190) (10)
Other 102 43
Operating loss carryforwards of
non-United States subsidiaries 79
Other items 6 32 4
Valuation allowance (56)
---- ---- ----
$165 $149 $(11)
==== ==== ====
At December 31, 1997, certain non-United States subsidiaries
had operating loss carryforwards aggregating $165 million.
Carryforwards of $134 million have no expiration dates and the
balance expires at various dates from 1998 through 2005.
The Company has manufacturing facilities in Puerto Rico which
operate under tax relief and other incentives that will no longer
be available after 2005.
No provision has been made for income taxes on undistributed
earnings of consolidated non-United States subsidiaries of $521
million at December 31, 1997, since the earnings retained have
been reinvested by the subsidiaries. If distributed, such
remitted earnings would be subject to withholding taxes but
substantially free of United States income taxes.
Worldwide income tax payments in 1997, 1996 and 1995 (in
millions) were $163, $154 and $166, respectively.
Page 36
OTHER INFORMATION
- -----------------
Accounts Receivable
- -------------------
Accounts receivable are net of an allowance for doubtful accounts
(in millions) of $15 at the end of 1997 and 1996, respectively.
Inventories
- -----------
The components of inventories at December 31 follow (in
millions):
1997 1996
---- ----
Raw materials $258 $270
Work in process 330 312
Finished goods 235 240
---- ----
Gross inventories at FIFO 823 822
Excess of current cost over LIFO cost (89) (93)
---- ----
Net inventories $734 $729
==== ====
Gross inventories accounted for using the LIFO method (in
millions) were $422 and $431 at the end of 1997 and 1996,
respectively.
Excess of Cost Over Net Assets of Businesses Acquired
- -----------------------------------------------------
Accumulated amortization of excess of cost over net assets of
businesses acquired (in millions) was $148 and $162 at the end of
1997 and 1996, respectively.
Investments in Life Insurance
- -----------------------------
The Company has company-owned life insurance policies insuring
the lives of a portion of active United States employees. The
policies accumulate asset values to meet future liabilities
including the payment of employee benefits such as health care.
At December 31, 1997 and 1996, the investment in the policies
included in other assets (in millions) was $13 and $11, net of
policy loans of $346 and $347, respectively. Net life insurance
expense (in millions) of $8 in 1997, $9 in 1996 and $7 in 1995,
including interest expense of $33, $35 and $27 in 1997, 1996 and
1995, respectively, is included in selling and administrative
expense.
Lease Commitments
- -----------------
Minimum rental commitments for 1998 under noncancelable operating
leases, which expire at various dates and in most cases contain
renewal options, are $59 million and decline substantially
thereafter.
Rental expense in 1997, 1996 and 1995 (in millions) was $78, $71
and $67, respectively.
Page 37
Net Income per Common Share
- ---------------------------
The Company adopted SFAS No. 128, 'Earnings Per Share', at the
end of 1997. The calculation of net income per Common Share and
net income per Common Share-assuming dilution follows:
(millions except per share data) 1997 1996 1995
---- ---- ----
Net income per Common Share
Net income $ 410 $ 349 $ 399
Average number of Common Shares
outstanding 76.8 77.4 77.8
Net income per Common Share $5.34 $4.50 $5.13
===== ===== =====
Net income per Common Share-
assuming dilution
Net income $ 410 $ 349 $ 399
Average number of Common Shares
outstanding 76.8 77.4 77.8
Dilutive effect of stock options 1.4 .8 .8
----- ----- -----
Total average number of Common
Shares outstanding 78.2 78.2 78.6
----- ----- -----
Net income per Common Share-
assuming dilution $5.24 $4.46 $5.08
===== ===== =====
Options to purchase 920,000 shares of Common Shares were
outstanding at the end of 1995 but were not included in the
computation of net income per Common Share--assuming dilution
since they would have had an antidilutive effect on earnings per
share.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1997, SFAS No. 130, 'Reporting Comprehensive Income', was
issued. SFAS No. 130 establishes new standards for reporting
comprehensive income and its components; however, the adoption of
SFAS No. 130 will have no effect on net income or shareholders'
equity. The Company must adopt SFAS No. 130 in the first quarter
of fiscal year 1998. The Company expects that comprehensive
income will not differ materially from net income, except for
foreign currency translation adjustments included in
comprehensive income, the effect of which could be material
depending on future changes in foreign exchange rates.
In June 1997, SFAS No. 131, 'Disclosures about Segments of an
Enterprise and Related Information', was issued. SFAS No. 131
changes the standards for reporting financial results by
operating segments and related products and services, geographic
areas, and major customers. The Company must adopt the standard
no later than year-end 1998.
Page 38
QUARTERLY DATA
- --------------
(Unaudited)
Quarter ended
(Millions except for ----------------------------------
per share data) Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- -------
1997
Net sales $1,934 $1,931 $1,909 $1,789
Gross margin 546 541 538 482
Percent of sales 28% 28% 28% 27%
Income before extraordinary item $ 183 $ 54 $ 126 $ 101
Extraordinary item (54)
----------------------------------
Net income $ 129 $ 54 $ 126 $ 101
==================================
Per Common Share
Income before extraordinary item $ 2.41 $ .70 $ 1.64 $ 1.31
Extraordinary item (.71)
----------------------------------
Net income $ 1.70 $ .70 $ 1.64 $ 1.31
==================================
Cash dividends paid $ .44 $ .44 $ .44 $ .40
Market price
High 103-3/8 95-15/16 89-7/8 75-1/8
Low 85-1/2 81-7/8 67-1/2 67-1/4
Per Common Share-assuming dilution
Income before extraordinary item $ 2.35 $ .69 $ 1.61 $ 1.29
Extraordinary item (.69)
----------------------------------
Net income $ 1.66 $ .69 $ 1.61 $ 1.29
==================================
1996
Net sales $1,724 $1,719 $1,782 $1,736
Gross margin 426 436 472 456
Percent of sales 25% 25% 26% 26%
Net income 66 85 103 95
Per Common Share
Net income $ .85 $ 1.11 $ 1.32 $ 1.23
Cash dividends paid .40 .40 .40 .40
Market price
High 70-7/8 61-1/4 62-3/8 61-7/8
Low 57-3/4 53 56-7/8 50-3/8
Per Common Share-assuming dilution
Net income $ .84 $ 1.09 $ 1.31 $ 1.22
Page 39
Income in the fourth quarter of 1997 was increased by pretax
gains of $91 million related to the sales of AIL Systems Inc.
and the Appliance Controls business ($69 million aftertax, or
$.90 per Common Share).
Income in the fourth quarter of 1997 was reduced by pretax
restructuring charges of $24 million ($15 million aftertax, or
$.19 per Common Share).
Net income in the fourth quarter of 1997 was reduced by a $54
million aftertax extraordinary loss for the redemption of
debentures, or $.71 per Common Share.
Net income in the third quarter of 1997 was reduced by an $85
million write-off of purchased in-process research and
development, with no income tax benefit, or $1.11 per Common
Share.
Income in 1996 was reduced by pretax restructuring charges of
$50 million ($32 million aftertax, or $.41 per Common Share).
Of these restructuring charges, $29 million was recorded in the
fourth quarter of 1996 and the remaining $21 million was recorded
evenly throughout the first nine months of 1996.
In the fourth quarter of 1996, the effective income tax rate for
full year 1996 was adjusted to 28.2% from 29.9%. This adjustment
reduced income tax expense for the fourth quarter by $7 million,
which relates to the first nine months of 1996.
In the third quarter of 1996, the estimated effective income tax
rate for full year 1996 was adjusted to 29.9% from 31.6%. This
adjustment reduced income tax expense for the third quarter by
$5 million, which relates to the first half of 1996.
Page 40
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- --------------------------------------------------
Eaton is a global manufacturer of highly engineered products
which serve the industrial, vehicle, construction, commercial and
semiconductor markets with operations located in 28 countries.
The major classes of products included in each business segment
and other information follows.
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, hydraulic, air and vacuum circuit
breakers; loadcenters; safety switches; lighting control systems;
panelboards; switchboards; switchgear components; switchgear; dry
type transformers; protective relays and metering; surge
suppressors; busway; meter centers; crane controls; portable tool
switches; commercial switches; relays; vacuum interrupters;
illuminated pushbuttons and panels; annunciator panels;
electrically actuated valves and actuators; pressure transducers
and switches; and Navy motor control and power conversion
systems.
Automotive and Appliance Controls - Electromechanical and
electronic controls including convenience, stalk and concealed
switches; knock sensors; climate control components; speed
controls; water valves; thermostats; temperature and humidity
sensors; transmission valves; speed sensitive steering systems;
tone generators and chimes; lighting controls; emission control
valves; collision warning systems; remote keyless entry systems
and remote actuated solenoids.
On December 1, 1997, the Company sold the Appliance Controls
business which had sales of $418 million and $432 million in
1997 and 1996, respectively. The following products represent
those included in the Appliance Controls business: timers,
pressure switches, range controls, gas valves, and infinite
switches.
Specialty Controls - Ion implanters; photostabilizers; ozone and
plasma ashers; thermal processing systems; flat panel display
equipment; plastic and steel spring fasteners; retainer rings;
clamps; golf grips; industrial rubber products; industrial
clutches and brakes.
The markets for these products are industrial, construction,
commercial, automotive, appliance, aerospace and government
customers concentrated principally in North America, however,
sales are made globally. Sales are made directly by the Company
and indirectly through distributors and manufacturers'
representatives to such customers.
Page 41
Vehicle Components
- ------------------
Truck Components - Heavy-, medium- and light-duty mechanical and
automatic transmissions; power take-offs; engine valves; valve
lifters; leaf springs; viscous fan drives; fans and fan shrouds;
power steering pumps; fleet management systems and advanced
drivetrain controls.
On January 2, 1998, the Company completed the sale of the Axle
and Brake business, which had sales of $659 million and $542
million in 1997 and 1996, respectively. This business
manufactured components for commercial trucks, primarily heavy-
and medium-duty, and construction of off-highway equipment.
Products manufactured by this business include heavy- and medium-
duty clutches; drive, trailer, and steering axles; brakes; anti-
lock brake systems; locking differentials; tire pressure control
systems and tire valves.
Passenger Car and Light Duty Components - Engine valves;
hydraulic valve lifters; viscous fan drives; fans and fan
shrouds; locking differentials; limited slip differentials;
viscous converter clutches; transaxle components; superchargers;
tire valves; refrigeration charge and relief 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 and tire valves.
The principal market for these products is original equipment
manufacturers of heavy-, medium- and light-duty trucks, passenger
cars and off-highway vehicles. These original equipment
manufacturers are generally concentrated in North America,
however, sales are made on a global basis. Most sales of these
products are made directly to such manufacturers.
Defense Systems
- ---------------
Strategic countermeasures; tactical jamming systems; electronic
intelligence; electronic support measures and radar surveillance.
On October 1, 1997, the Company sold the majority of AIL Systems
Inc., which represented the Defense Systems business segment (the
Company continues to hold a minor interest in AIL).
Other Information
- -----------------
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 in associate
companies and joint ventures, property and other assets.
Page 42
Net sales to divisions and subsidiaries of one customer,
primarily from the Vehicle Components business segment (in
millions), were $766 in 1997, $739 in 1996 and $740 in 1995
(10% of sales in 1997 and 11% of sales in 1996 and 1995). Sales
from the Company's United States operations to customers in
foreign countries, primarily Canada, (in millions) were $791 in
1997, $743 in 1996 and $709 in 1995 (10% of sales in 1997, 11%
in 1996, and 10% in 1995).
Page 43
Geographic Region Information
Identi-
Operating fiable
(Millions) Net sales profit assets
--------- --------- -------
1997
United States $5,946 $ 516 $3,631
Canada 293 28 106
Europe 1,112 104 662
Latin America 532 34 435
Pacific Region 158 1 122
Eliminations (478) (104)
------ ------ ------
$7,563 $ 683 $4,852
====== ====== ======
1996
United States $5,440 $ 505 $3,399
Canada 297 23 108
Europe 1,113 84 752
Latin America 366 (31) 368
Pacific Region 148 18 136
Eliminations (403) (94)
------ ------ ------
$6,961 $ 599 $4,669
====== ====== ======
1995
United States $5,390 $ 571 $3,369
Canada 282 24 109
Europe 1,153 79 807
Latin America 266 4 151
Pacific Region 136 23 90
Eliminations (405) (99)
------ ------ ------
$6,822 $ 701 $4,427
====== ====== ======
Operating profit in 1997 was reduced by restructuring charges
(in millions) of $4 in the United States, $12 in Europe, $5 in
Canada, $1 in Latin America, and $2 in the Pacific Rim.
Operating profit for the United States in 1997 was reduced by
an $85 million write-off of purchased in-process research and
development.
Operating profit in 1996 was reduced by restructuring charges
(in millions) of $28 in the United States, $9 in Europe and $13
in Latin America.
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 and which had total
sales as follows (in millions):
1997 1996 1995
---- ---- ----
United States $ 21 $ 13 $ 21
Europe 14 14 13
Latin America 31 16 20
Pacific Region 258 326 347
---- ---- ----
$324 $369 $401
==== ==== ====
Page 44
Business Segment Information
(Millions) 1997 1996 1995
---- ---- ----
Net sales by classes of similar products
Electrical and Electronic Controls
Industrial and Commercial Controls $2,251 $2,096 $1,975
Automotive and Appliance Controls 1,125 1,144 1,062
Specialty Controls 656 634 574
------ ------ -----
4,032 3,874 3,611
Vehicle Components
Truck Components 2,104 1,766 1,965
Passenger Car and Light Duty Components 808 734 669
Off-Highway Vehicle Components 548 475 458
------ ------ -----
3,460 2,975 3,092
Defense Systems 71 112 119
------ ------ -----
$7,563 $6,961 $6,822
====== ====== ======
Operating profit
Electrical and Electronic Controls
Before write-off of purchased in-process
research and development $ 321 $ 309 $ 285
Write-off of purchased in-process research
and development (85)
Vehicle Components 449 286 414
Defense Systems (2) 4 2
------ ------ ------
683 599 701
Interest expense (86) (85) (86)
Interest income 7 6 6
Gain on sales of businesses 91
General corporate expenses--net (27) (35) (29)
------ ------ ------
Income before income taxes and extraordinary
item $ 668 $ 485 $ 592
====== ====== ======
Identifiable assets
Electrical and Electronic Controls $2,813 $2,888 $2,869
Vehicle Components 2,039 1,677 1,463
Defense Systems 104 95
------ ------ ------
4,852 4,669 4,427
General corporate assets 613 638 626
------ ------ ------
Total assets $5,465 $5,307 $5,053
====== ====== ======
Capital expenditures
Electrical and Electronic Controls $ 217 $ 183 $ 174
Vehicle Components 203 145 203
Defense Systems 3 6 4
Corporate 15 13 18
------ ------ ------
$ 438 $ 347 $ 399
====== ====== ======
Depreciation and amortization
Electrical and Electronic Controls $ 167 $ 153 $ 134
Vehicle Components 152 141 118
Defense Systems 7 10 13
Corporate 16 16 16
------ ------ ------
$ 342 $ 320 $ 281
====== ====== ======
Operating profit in 1997 was reduced by restructuring charges (in
millions) of $18 for the Electrical and Electronic Controls
segment and $6 for the Vehicle Components segment.
Operating profit in 1996 was reduced by restructuring charges (in
millions) of $16 for the Electrical and Electronic Controls
segment and $34 for the Vehicle Components segment.
Page 45
Summary Financial Information for Eaton ETN Offshore Ltd.
- ---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned
subsidiary of Eaton, was incorporated by Eaton in 1990 under the
laws of Ontario, Canada, primarily for the purpose of raising
funds through the offering of debt securities in the United
States and making these funds available to Eaton or its
subsidiaries. Eaton Offshore owns the common stock of a number
of Eaton's subsidiaries which are engaged principally in the
manufacture and/or sale of electrical and electronic controls,
truck transmissions, fasteners, leaf spring assemblies and engine
components. Effective January 31, 1994, Eaton Offshore, through
its subsidiaries, acquired certain of the Canadian and Brazilian
operations of the former Distribution and Control Business Unit
(DCBU) of Westinghouse Electric Corporation. On June 30, 1994
and on April 1, 1995, majority ownership of certain other assets
of DCBU and another subsidiary were transferred to a subsidiary
of Eaton Offshore from Eaton. Effective January 1, 1996, majority
ownership of certain German subsidiaries was transferred to other
subsidiaries of Eaton. Summary financial information for
Eaton Offshore and its consolidated subsidiaries for the years
ended December 31 follows (in millions):
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Income statement data
Net sales $725 $602 $614 $494 $295
Gross margin 149 94 99 87 42
Net income 33 23 28 20 13
Balance sheet data
Current assets $375 $304 $300 $237 $160
Noncurrent assets 196 146 152 122 109
Net intercompany
receivables/(payables) (160) (53) (47) (4) (15)
Current liabilities 120 90 98 83 50
Noncurrent liabilities 80 100 108 107 114
Page 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
- --------
For Eaton Corporation, 1997 proved to be a watershed year. The
Company reported all-time record sales, earnings and earnings per
share. Favorable market conditions, the benefits of
restructuring actions taken in prior years, and the extraordinary
efforts of the Company's employees worldwide all contributed to
these outstanding results. During 1997, the Company's businesses
performed well virtually across the board and notable progress
was made to build an enterprise capable of higher sustainable
earnings growth in the years ahead. This performance was
achieved while spending at an accelerated pace on new product
development and international expansion.
To help achieve growth in future years, the Company completed a
number of strategic repositioning moves. In the second half of
the year, the Company completed acquisitions of Fusion Systems
Corporation and Dana Corporation's worldwide Spicer Clutch
business, which will build upon and extend the considerable
strengths of the Semiconductor Equipment and Truck Components
businesses, respectively. Also in the second half of the year,
the Company sold AIL Systems Inc., which represented the
Company's Defense Systems business segment, and the Appliance
Controls business. On January 2, 1998, the Company completed the
sale of the worldwide Axle and Brake business to Dana
Corporation. Looking forward, the combination of these strategic
moves is believed by management to have increased the Company's
inherent earnings growth rate by about 10 percent.
In the latter part of 1997, the economic climate in Asia worsened
considerably. Poor regulation and currency management skills by
certain governments in the region contributed to local currency
devaluations and bank failures. This crisis was the primary
cause of the decrease in operating profit for the Company's
Pacific Region. However, as of December 31, 1997, these effects
were not material to operations or financial results for the
Company as a whole.
1997 COMPARED TO 1996
- ---------------------
NET SALES
- ---------
Worldwide sales in 1997 exceeded $7 billion for the first time
in the Company's history, 9% above 1996. Sales for North America
showed improvement; however, sales in Europe were flat. In Latin
America, sales increased 45% in 1997 over 1996 despite economic
weakness in Mexico, Brazil and Argentina. The Company is now
achieving the full strategic benefits of the April 1996
acquisition of CAPCO Automotive Products Corporation, which
contributed to the sales increase in Latin America. Despite the
continued recession in Japan and the crisis in Asia, sales in the
Pacific Region rose 7% in 1997 over 1996.
Page 47
Electrical and Electronic Controls, the Company's largest
business segment, continued its growth trend by achieving record
sales in 1997, increasing 4% in 1997 over 1996. This segment
represents 53% of total sales. Activity in most markets remained
firm, and the semiconductor equipment market began to rebound in
the second half of 1997 after a difficult 1996.
Aided by continued strength in Cutler-Hammer's market position,
strong construction markets, and a booming commercial aircraft
market, Industrial and Commercial Controls also achieved record
sales in 1997, increasing 7% over 1996 results. Cutler-Hammer is
now enjoying the full benefit of the synergies anticipated from
the 1994 acquisition of Westinghouse's Distribution and Control
Business Unit.
Sales of the Company's Automotive and Appliance Controls
businesses were off 2% from one year ago. Sales volumes were up
while the strength of the U.S. dollar versus major European
currencies reduced sales by 5%. Sales were lowered an additional
3% compared to 1996 as a result of the sale of the Company's
Appliance Controls business on December 1, 1997 to Siebe plc.
The net increase in volume compares favorably with about a 3%
year-to-year increase in automotive production in North America
and Europe.
Specialty Controls, which includes the Company's Semiconductor
Equipment Operations, reported record sales, increasing 3% in
1997 over 1996. During the third quarter of 1997, the Company
acquired Fusion Systems Corporation, a leading supplier of front-
end process equipment to the semiconductor industry. Excluding
Fusion, Specialty Controls sales trailed 1996 results by 2%.
While second half 1997 industry orders were somewhat stronger
than anticipated, it is too early to determine the impact of the
Asian economic crisis on our customers' demand for front-end
processing equipment.
Vehicle Components segment sales reached a record level,
increasing 16% in 1997 over 1996. Truck Components, Passenger
Car and Light Duty Components, and Off-Highway Vehicle Components
all experienced record sales in 1997. After a difficult 1996,
the 1997 success of this segment demonstrates that the Company's
managers met the full challenge to achieve performance
excellence.
Truck Components achieved record sales, increasing 19% in 1997
over 1996. CAPCO, the Brazilian medium-duty transmission
manufacturer acquired in 1996, accounted for $54 million of the
$338 million increase in sales in 1997. With CAPCO's increase in
sales and the favorable impact of new business awards from
automotive manufacturers, the Company is now achieving the full
strategic benefits of this important acquisition. The Company's
Spicer Clutch unit, which was acquired from Dana Corporation in
the third quarter of 1997, also contributed $68 million in sales
in 1997. Excluding Spicer Clutch, sales were also at record
levels, increasing 15% above one year ago. North American
factory sales of Class 8 trucks rose about 13% in 1997 to 216,000
Page 48
and, based on current backlogs and the pace of orders, 1998
production is expected to rise another 5% to 10%. The European
market was also up last year, though a more modest 6%, and the
Company expects the pace of improvement to continue in 1998. The
effects of the current austerity plan in Brazil make that market
more problematic after a 30% market rise in 1997.
Passenger Car and Light Duty Components experienced record sales
in 1997, rising 10% over 1996. CAPCO contributed approximately
$26 million of the $74 million increase in sales in 1997. The
increase in volume was ahead of the increase in automotive
production in North America, Europe, and Latin America. This
trend can be attributed to continued penetration of selected
automotive products, and greater participation in Latin American
markets.
Continuing demand from the North American hydraulics market
enabled Off-Highway Vehicle Components also to report record
sales in 1997, rising 15% over 1996. CAPCO contributed $20
million of the $73 million increase in sales. Higher levels of
new product introductions for the Company's worldwide
agricultural and construction equipment customers also
contributed to the increase in sales. The Company's sales gains
in 1997 were double the pace of the hydraulics industry, a result
attributable to a faster pace of new product introductions for
the Company's worldwide agricultural and construction equipment
customers.
OPERATING RESULTS
- -----------------
Gross margin increased to 28% of net sales in 1997 from 26% in
1996 as a result of increased sales volumes across most lines of
business, acquisitions and divestitures of businesses, and the
benefits realized from recent restructurings.
Income from operations, before a one-time charge, increased 33%
in 1997 from 1996. The Company took a one-time charge of $85
million against third quarter, 1997 after-tax earnings to write-
off the purchased in-process research and development associated
with the recent acquisition of Fusion Systems Corporation.
Operating profit for the Electrical and Electronic Controls
segment continued to be strong, reaching $339 million before
restructuring charges of $18 million and the write-off of
purchased in-process research and development of $85 million, 4%
ahead of 1996 results on a comparable basis. The Company is now
achieving the performance expected from the 1994 acquisition of
Westinghouse's Distribution and Control Business Unit.
Operating profit for the Vehicle Components segment reached a
record level of $455 million before $6 million of restructuring
charges, 42% ahead of 1996 results on a comparable basis. All of
the business units included in this segment demonstrated
excellent performance throughout 1997. The increase in operating
profit was primarily attributable to the exceptional performance
by CAPCO where the year-over-year profits improved by more than
$39 million. Operating profit as a percentage of sales also
Page 49
increased from 10% in 1996 to 13% in 1997. This was accomplished
through higher sales volume, the acquisition of the Spicer
Clutch business in 1997, and benefits realized from restructuring
efforts in the Truck Components business unit.
During the fourth quarter of 1997, the Company reported one-time
pretax gains of $91 million ($69 million aftertax) related to the
December 1, 1997 sale of the Appliance Controls business and the
October 1, 1997 sale of AIL Systems Inc. These gains were
offset by a $54 million aftertax charge related to the redemption
of the 7% debentures due April 1, 2011, and by a $15 million
aftertax charge related to restructuring actions recorded in the
fourth quarter of 1997. The 1997 restructuring charges
principally relate to work force reductions composed of salaries
and benefits and realignment among several businesses. These
restructuring charges are intended to help the Company to
continue the trend of earnings growth in future years.
An analysis of changes in income taxes and the effective income
tax rate is presented under 'Income Taxes' in the Financial
Review.
The Company's goal is to build an enterprise capable of higher
sustainable earnings growth, emphasizing the development of new
products, increased expansion into global markets, and
acquisition of businesses and product lines to complement the
Company's existing operations. To enhance the existing product
portfolio as well as develop the products of tomorrow, the
Company spent a record $319 million in 1997 on research and
development, 19% above 1996. Over the past five years, the
Company has spent approximately $1.2 billion on research and
development.
The Company continues to be active in pursuing growth in the
world's developing markets. Recent examples of this expansion
are the formation of Cutler-Hammer de Argentina, a 75% owned
joint venture with Electro Integral de Sudamerica to manufacture
and distribute electrical equipment in the Mercosur countries,
the formation of a 51% owned joint venture with JC Corporation to
manufacture automotive controls in Korea, and the establishment
of a wholly-owned enterprise, Eaton Truck and Bus Components
(Shanghai) Company, Limited, to manufacture heavy truck
transmissions for Chinese and other Asia/Pacific markets. The
Company also plans to build a new $70 million plant in Brazil to
expand production of light-duty transmissions for a major
automotive customer.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
The Company remains in a strong financial position and has
resources available in the form of working capital, lines of
credit and funds provided by operations for continued
reinvestment in existing operations, strategic acquisitions and
managing the capital structure. Net working capital was $698
million at year-end 1997 compared to $787 million at year-end
1996 and the current ratio was 1.5 compared to 1.6 at those
dates, respectively.
Page 50
Accounts receivable days sales outstanding improved by 6 days in
December 1997 which was the Company's third best December in the
past fifteen years. The inventory turnover rate and days of
inventory on-hand in 1997 showed improvement over 1996. The
Fusion Systems and Spicer Clutch acquisitions resulted in an
increase in excess of cost over net assets of businesses acquired
from the prior year. However, this increase was offset by the
write-off of the amounts related to the sale of AIL Systems Inc.
and the Appliance Controls business.
The Company's total debt increased by 26% to $1.4 billion in
1997. This increase in debt was primarily a result of
acquisitions of businesses and the repurchase of Common Shares.
As discussed under 'Debt and Other Financial Instruments' in the
Financial Review, the Company has a $250 million one-year
revolving line of credit and a $500 million long-term revolving
credit agreement, which supports the Company's outstanding
commercial paper.
Reflecting the Company's ongoing investment program under long-
range goals to achieve improvements in product quality,
manufacturing productivity and business growth, capital
expenditures for 1997 reached a record $438 million, 26% above
1996. Over the past five years, the Company has spent nearly
$1.7 billion in capital expenditures intended to increase
productivity, reduce costs and, selectively, to add capacity. In
order to enhance product quality through technology improvements
and to help achieve long-term growth prospects, capital spending
in 1998 is anticipated to increase above the 1997 level.
Management believes it is more likely than not that deferred
income tax assets of $269 million as of December 31, 1997 will be
realized through the reduction of future taxable income.
Significant factors considered by management in the determination
of the probability of realization of deferred tax assets include
historical operating results, expectations of future earnings and
the extended period of time over which the postretirement health
care liability will be paid.
The Company is subject to various inherent financial risks
attributable to operating in a global economy. Derivative
financial instruments are utilized to manage exposures in
interest and foreign exchange markets. The Company has developed
systems to measure and assure that these 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. Monthly,
senior management performs an oversight and review of exposures
and derivative activities. The Company diversifies the
counterparties used in these transactions in order to minimize
the impact of any potential credit loss in the event of
nonperformance by the counterparties. Although derivatives are
an integral part of the Company's risk management programs, their
incremental effect on financial condition and results of
operations is not material. Derivative activities are described
Page 51
in greater detail under 'Debt and Other Financial Instruments' in
the Financial Review.
Operations of the Company involve the use and disposal of certain
substances regulated under environmental protection laws. The
Company continues to modify, on an ongoing, regular basis,
certain processes in order to reduce the impact on the
environment, including the reduction or elimination of certain
chemicals used in and wastes generated from operations. The
Company's liabilities related to environmental matters are
further discussed under 'Protection of the Environment' in the
Financial Review.
Cash dividends paid in 1997 were a record $133 million and
represented 32% of net income. Per share dividends in 1997 rose
8% from the previous year, following a 7% increase from the year
before. The Company has paid dividends on Common Shares annually
since 1923.
In 1995, to avoid the dilution of earnings per share resulting
from the exercise of stock options, the Board of Directors
authorized the purchase of up to five million outstanding Common
Shares over a five year period with a maximum of 1.5 million
shares to be purchased in one year. Additionally, in September
1997, to avoid further dilution resulting from the sales of AIL
Systems Inc. and the Appliance Controls and Axle and Brake
businesses, the Board of Directors authorized the Company
to spend up to an additional $500 million over a period of up to
five years to purchase Common Shares. In January 1998, the
Company completed the $500 million program by repurchasing 2.8
million shares for $256 million. This reduced the number of
shares outstanding to approximately 72 million at the end of
January 1998. During 1997, the Company returned $334 million to
shareholders through share repurchases as 3.7 million shares were
repurchased for an average price of $90 per share. Since the
initiation of the programs, 8.4 million shares have been
repurchased at an average price of $83 per share.
The Company continues to generate substantial cash from
operations which continues to be the primary source of funds to
finance operating needs including record investments in research
and development. The Company's emphasis on asset management
generated record operating cash flow of $763 million in 1997,
compared with the previous record in 1996. Cash flow from
operations, supplemented by commercial paper borrowings, was used
to fund business acquisitions, capital expenditures, repayment of
debt, the record level of cash dividends and the repurchases of
Common Shares.
MARKET RISK DISCLOSURE
- ----------------------
The Company is subject to interest rate risk as it relates to
long-term debt. The following table presents principal cash flows
and related weighted-average interest rates by expected maturity
dates of the Company's long term-debt excluding foreign currency
principal swaps.
Page 52
December 31, 1997
($ in millions)
Expected Maturity Date
-----------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term debt, including
current portion
Fixed rate (US$) $ 19 $107 $ 2 $102 $ 2 $587 $819 $899
Average interest rate 7.9% 6.5% 7.8% 9.1% 12.5% 7.8%
Fixed rate (Won) $ 2 2 2
Average interest rate 18.2%
Fixed rate (Zloty) $ 2 2 2
Average interest rate 26.3%
Commercial Paper (US$) $500 500 500
Average interest rate 5.8%
See 'Changes in Financial Condition' in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations for details on the Company's primary market risks, and
the objectives and strategies used to manage these risks. Also,
see 'Financial Instruments' under Accounting Policies in the
notes to the consolidated financial statements for additional
information on market risks.
YEAR 2000
- ---------
Computer software that uses two digits rather than four to
identify the applicable year may be unable to interpret
appropriately the calendar Year 2000, and thus could cause
disruption of normal business activities. The Company uses
software in various aspects of its business, including
manufacturing, product development and many administrative
functions, and much of this software will be unable to interpret
the calendar Year 2000 appropriately unless it is modified or
replaced.
The Company is addressing this Year 2000 issue with a corporate-
wide initiative led by the Company's Vice President-Information
Technologies and involving coordinators for each Company
location. The initiative includes the identification of affected
software, the development of a plan for correcting that software
in the most effective manner, the implementation of that plan and
the monitoring of its implementation. The program also includes
communications with the Company's significant suppliers and
customers to determine the extent to which the Company's systems
are vulnerable to any failures by them to address the Year 2000
issue. In most instances, the Company will replace older
software with new programs and systems, which will significantly
upgrade the existing software as well as appropriately interpret
the calendar Year 2000 and beyond. Although the timing of these
replacements is influenced by the Year 2000 issue, in most
instances they will involve capital expenditures that would have
occurred in the normal course of business in any event. The
Page 53
Company expects that most of the modifications and replacements
will be in place before the end of 1998.
Given the information available at this time, management
currently anticipates that the amount that the Company will spend
to modify or replace software in order to remediate the Year 2000
issue should not have a material adverse effect on the Company's
liquidity or results of operations, and that those costs should
not cause reported financial information not to be indicative of
future operating results or future financial condition. Specific
factors which might cause a material difference include the
availability and cost of trained personnel and the ability to
locate all computer codes requiring correction.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company has included in this Annual Report expectations for
1998, an outlook concerning the Asian situation, certain
anticipated effects of strategic moves, market expectations, and
expectations for capital spending. Actual results could differ
materially from these forward-looking statements since they
inherently are subject to risks and uncertainties. Important
factors which could cause such a difference include: continuity
of business relationships with and purchases by major customers,
product mix, competitive pressure on sales and pricing, increases
in material and other production costs which cannot be recouped
in product pricing, costs associated with correcting the Year
2000 issue, difficulties in introducing new products as well as
global economic and market conditions.
1996 COMPARED TO 1995
- ---------------------
NET SALES
- ---------
Worldwide sales in 1996 reached nearly $7 billion for the first
time in the Company's history, slightly above 1995. During 1996,
the Company benefited from the diversity of its product lines as
well as from its global markets as the highest sales growth
occurred in international markets.
In 1996, sales for North America, which includes the United
States and Canada, and Europe were flat compared to 1995.
Despite the continued recession in Japan, sales in the Pacific
Region rose 9% in 1996 over 1995, due in part to the acquisition
of the Emwest electrical switchgear and controls business in May
1995. In Latin America, sales increased 38% in 1996 over 1995
despite economic weakness in Mexico, Brazil and Argentina. The
increase in Latin America was attributable to the acquisition of
CAPCO Automotive Products Corporation. On April 16, 1996, the
Company purchased CAPCO, a Brazilian manufacturer of
transmissions for light- and medium-duty trucks and transaxle
components for passenger cars, for $135 million.
Electrical and Electronic Controls, the Company's largest
segment, continued to experience growth in sales in 1996 as sales
Page 54
increased 7% in 1996 over 1995, which more than doubled from just
three years ago. Activity in the markets served by this segment
was more mixed in the second half of 1996 than earlier in the
year.
Aided by continued strength in Cutler-Hammer's electrical power
distribution equipment business, Industrial and Commercial
Controls sales rose 6% in 1996 over 1995. New program launches
in the North American automotive controls business and the
acquisition of the IKU Group in May 1995 contributed to the
Automotive and Appliance Controls' 8% sales increase in 1996 over
1995.
Specialty Controls sales increased 10% in 1996 over 1995 in spite
of the sharp downturn in the worldwide market for semiconductor
capital equipment in the second half of 1996. Sales of
semiconductor equipment stabilized in the second half of 1996 at
23% below first half levels.
Vehicle Components segment sales decreased 4% in 1996 from 1995.
The acquisition of CAPCO affected prior year results comparisons.
Excluding the effects of CAPCO, 1996 sales for this segment were
$2.88 billion, 7% below 1995.
Truck Components sales decreased 10% in 1996 from 1995.
Excluding the effects of CAPCO, Truck Components sales declined
13% from the prior year's level. This reduction was primarily
the result of the softening of the North American heavy-duty
truck market from the record levels experienced in the prior two
years.
Passenger Car and Light Duty Components experienced record sales
in 1996, rising 10% over 1995, despite flat passenger car
production in North America and Europe. This better-than-market
performance was attributed to selected market share penetration
and the continued trend towards multivalve engines. Continued
demand for hydraulic components from the agricultural,
construction and industrial markets enabled Off-Highway Vehicle
Components to report record sales in 1996, rising 4% over 1995,
despite generally flat market activity.
OPERATING RESULTS
- -----------------
Income from operations declined 17% in 1996 from 1995. This
reduction was primarily attributable to lower sales of Truck
Components, offset by increased sales of Electrical and
Electronic Controls, which historically have had a lower gross
margin. The decrease also resulted from increased costs
associated with various major growth programs designed to
accelerate the Company's sustainable growth rate in the years
ahead. During 1996, the Company spent $37 million more than in
1995 on these major growth programs.
Income from operations in 1996 was also markedly affected by $50
million of restructuring charges. These restructuring charges
principally related to workforce reductions. Several business
Page 55
units took these charges in order to bring the Company's
performance back to targeted levels.
Operating profit for the Electrical and Electronic Controls
segment continued to be strong and improved 8% in 1996 over 1995.
Restructuring charges of $16 million reduced operating profit.
The improvement in operating profit was primarily attributable to
improved sales volumes and added contributions from acquired
businesses.
Operating profit for the Vehicle Components segment decreased 31%
in 1996 from 1995. Excluding the effects of the April 1996
acquisition of CAPCO, 1996 operating profit was $302 million, a
decrease of 27% from 1995. Operating results in this segment
varied sharply by business unit and geographic region. Despite
the disappointing results, most of the business units included in
the segment demonstrated excellent performance throughout 1996.
The reduction in operating profit was primarily attributable to
lower sales volumes of Truck Components. The segment's operating
results were below the Company's expectations given its earlier
projection for a 22% downturn in the North American heavy-duty
truck market in 1996 from 1995.
Vehicle Components operating profit for 1996 also was reduced by
$34 million of restructuring charges, which included $15 million
to continue the restructuring of the North American axle/brake
business unit for the purpose of bringing these business units to
acceptable levels of profitability. Of these restructuring
charges, $19 million was recorded in the fourth quarter of 1996,
principally related to the segment's Latin American and European
operations.
Page 56
Eaton Corporation
Five-Year Consolidated Financial Summary
For the year 1997 1996 1995 1994 1993
(Millions except for per share data) --------------------------------------------
Net sales $7,563 $6,961 $6,822 $6,052 $4,401
Income before income taxes and extraordinary item 668 485 592 488 262
Income before extraordinary item $ 464 $ 349 $ 399 $ 333 $ 180
Extraordinary item (54) (7)
--------------------------------------------
Net income $ 410 $ 349 $ 399 $ 333 $ 173
============================================
Per Common Share
Income before extraordinary item $ 6.05 $ 4.50 $ 5.13 $ 4.40 $ 2.57
Extraordinary item (.71) (.10)
--------------------------------------------
Net income $ 5.34 $ 4.50 $ 5.13 $ 4.40 $ 2.47
============================================
Per Common Share-assuming dilution
Income before extraordinary item $ 5.93 $ 4.46 $ 5.08 $ 4.35 $ 2.55
Extraordinary item (.69) (.10)
--------------------------------------------
Net income $ 5.24 $ 4.46 $ 5.08 $ 4.35 $ 2.45
============================================
Cash dividends paid per Common Share $ 1.72 $ 1.60 $ 1.50 $ 1.20 $ 1.15
Capital expenditures $ 438 $ 347 $ 399 $ 267 $ 227
Research and development expense 319 267 227 213 154
At the year-end
Total assets $5,465 $5,307 $5,053 $4,682 $3,268
Working capital 698 787 822 744 679
Long-term debt 1,272 1,062 1,084 1,053 649
Shareholders' equity 2,071 2,160 1,975 1,680 1,105
Shareholders' equity per Common Share $27.72 $28.00 $25.45 $21.54 $15.50
Income in 1997 was increased by pretax gains of $91 million
related to the sales of AIL Systems Inc., and the Appliance
Controls business ($69 million aftertax, or $.90 per Common
Share).
Income in 1997 and 1996 was reduced by pretax restructuring
charges of $24 million ($15 million aftertax, or $.19 per Common
Share) and $50 million ($32 million aftertax, or $.41 per Common
Share), respectively.
Net income in 1997 was reduced by an $85 million write-off of
purchased in-process research and development, with no income tax
benefit, or $1.11 per Common Share.
Net income in 1997 was reduced by a $54 million aftertax extra-
ordinary loss for the redemption of debentures, or $.71 per
Common Share.
Results reflect the acquisition of Distribution and Control
Business Unit (DCBU) of Westinghouse Electric Corporation on
January 31, 1994.
Income in 1993 was reduced by a $55 million acquisition
integration charge related to the purchase of DCBU ($34 million
aftertax, or $.49 per Common Share).
Net income in 1993 was reduced by a $7 million aftertax extra-
ordinary loss for the redemption of debentures, or $.10 per
Common Share.
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14 (c)
Listing of Exhibits Filed
3(a) Amended Articles of Incorporation (amended and restated
as of May 19, 1994) - Incorporated by reference to the
Form 8-K Report dated May 19, 1994
3(b) Amended Regulations (amended and restated as of April 27,
1988) - Incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1994
4(a) Instruments defining rights of security holders,
including indentures (Pursuant to Regulation S-K Item
601(b)(4), the Company agrees to furnish to the
Commission, upon request, a copy of the instruments
defining the rights of holders of long-term debt)
4(b) Eaton Corporation Rights Agreement dated June 28, 1995 -
Incorporated by reference to the Form 8-K Report dated
June 28, 1995
10 Material contracts
The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(b) Executive Strategic Incentive Plan (amended and
restated as of June 21, 1994 and July 25, 1995) -
Incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1996
(c) Group Replacement Insurance Plan (GRIP), effective
as of June 1, 1992 - Incorporated by reference to
the Annual Report on Form 10-K for the year ended
December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 18,
1991
(e) 1995 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 17,
1995
(f) Incentive Compensation Deferral Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(g) Strategic Incentive and Option Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(h) Form of "Change in Control" Agreement entered into
with officers of Eaton Corporation as of November 1,
1996 - Incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31,
1996
Page 2
(i) The following are incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990:
(i) Limited Eaton Service Supplemental
Retirement Income Plan (amended and
restated as of January 1, 1989)
(ii) Amendments to the 1980 and 1986 Stock Option
Plans
(iii) Eaton Corporation Supplemental Benefits
Plan (amended and restated as of January 1,
1989) (which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess Benefits Plan
(amended and restated as of January 1,
1989) (with respect to Section 415
limitations of the Internal Revenue Code)
(j) Executive Incentive Compensation Plan, effective
January 1, 1995 - Incorporated by reference to the
Annual Report on Form 10-K for the year ended
December 31, 1996
(k) Plan for the Deferred Payment of Directors' Fees
(filed as a separate section of this report)
(l) Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and amended effective
February 25, 1997) - Incorporated by reference to
the Annual Report on Form 10-K for the year ended
December 31, 1996
(m) 1996 Non-Employee Director Fee Deferral Plan
(filed as a separate section of this report)
(n) Eaton Corporation Trust Agreement - Outside
Directors (dated December 6, 1996) - Incorporated
by reference to the Annual Report on Form 10-K
for the year ended December 31, 1996
(o) Eaton Corporation Trust Agreement - Officers and
Employees (dated December 6, 1996) - Incorporated
by reference to the Annual Report on Form 10-K
for the year ended December 31, 1996
(p) Eaton Corporation Retirement Plan for Non-Employee
Directors (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)
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (k)
Plan for Deferred Payment of Directors' Fees
(amended and restated as of September 24, 1996 and amended
effective as of January 1, 1997
ARTICLE I
ESTABLISHMENT OF PLAN
1.01 "Establishment of Plan and Effective Date": Eaton
Corporation (the "Company") has established this Plan
for the Deferred Payment of Directors' Fees (the
"Plan") effective as of October 23, 1985. This
Amendment and Restatement of the Plan shall be
effective as of September 24, 1996.
1.02 "Statement of Purpose": It is the purpose of the Plan
to attract and retain qualified persons to serve as
Directors of the Company by enabling such Directors to
defer some or all fees which may be payable to them for
future services as a member of the Board of Directors
of the Company or as chairman or a member of any
committee of the Board.
Page 2
ARTICLE II
DEFINITIONS
When used herein the following terms shall have the
meanings indicated unless a different meaning is clearly
required by the context:
2.01 "Board": The Board of Directors of Eaton Corporation.
2.02 "Change in Control of the Company": For purposes of
the Plan, a "Change in Control of the Company" shall be
deemed to have occurred if (i) a tender offer shall be
made and consummated for the ownership of securities of
the Company representing 25% or more of the combined
voting power of the Company's then outstanding voting
securities, (ii) the Company shall be merged or
consolidated with another corporation and as a result
of such merger or consolidation less than 75% of the
outstanding voting securities of the surviving or
resulting corporation shall be owned in the aggregate
by the former shareholders of the Company, other than
affiliates (within the meaning of the Securities
Exchange Act of 1934 (the "Exchange Act")) of any party
to such merger or consolidation, as the same shall have
existed immediately prior to such merger or
consolidation, (iii) the Company shall sell
substantially all of its assets to another corporation
which is not a wholly-owned subsidiary of the Company,
(iv) any "person" (as such term is used in Sections
3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes
the beneficial owner, directly or indirectly, of
securities of the Company representing 25% or more of
the combined voting power of the Company's then
outstanding securities, or (v) during any period of two
consecutive years, individuals who at the beginning of
such period constitute the Board cease for any reason
to constitute at least a majority thereof unless the
election, or the nomination for election by the
Company's shareholders, of each new Director was
approved by a vote of at least two-thirds of the
Directors then still in office who were Directors at
the beginning of the period. For purposes of the Plan,
ownership of voting securities shall take into account
and include ownership as determined by applying the
provisions of Rule 13d-3(d)(1)(i) of the Exchange Act
(as then in effect).
2.03 "Committee": The Corporate Compensation Committee of
the Company which shall have full power and authority
to administer and interpret, in its sole discretion,
the provisions of the Plan.
Page 3
2.04 "Company": Eaton Corporation and its corporate
successors.
2.05 "Compensation": The total annual fees paid to a
Participant for services as a Director of the Company
including the annual retainer fee, Board meeting
attendance fees, additional annual retainer fees paid
to Board Committee chairmen and any other fees paid by
the Company for services as a Director of the Company.
2.06 "Deferral Plans": The Company's plan of the same name
as this Plan and this Plan.
2.07 "Deferred Account Balance": At any particular date,
the total of all Compensation deferred under the Plan
and earnings credited thereto less the amount of any
deferred Compensation previously paid to the
Participant.
2.08 "Deferred Compensation Agreement": The written
agreement between the Company and a Participant
substantially in the form attached hereto as Exhibit A
and made a part hereof.
2.09 "Designated Beneficiary": One or more beneficiaries,
as designated by a Participant in a written form filed
with the Vice President and Secretary of the Company
and approved by the Committee, to whom payments
otherwise due to or for the benefit of the Participant
hereunder shall be made in the event of his death prior
to the commencement of benefit payments hereunder or
the complete payment of such benefit. In the event no
such written designation is made by a Participant or if
such Designated Beneficiary shall not be in existence
at the time of the Participant's death or if such
Designated Beneficiary predeceases the Participant, the
Participant shall be deemed to have designated his
estate as the Designated Beneficiary.
2.10 "Failure to Pay": The circumstances described in either
(i) or (ii) have occurred:
(i) Any Participant shall have notified the Company and
the Trustee in writing that the Company shall have
failed to pay to the Participant, when due, either
directly or by direction to the trustee of any
trust holding assets for the payment of benefits
pursuant to the Plan, at least 75% of any and all
amounts which the Participant was entitled to
receive at any time in accordance with the terms of
the Plan, and that such amounts remain unpaid.
Such notice must set forth the amount, if any,
which was paid to the Participant, and the amount
Page 4
which the Participant believes he or she was
entitled to receive under the Plan. The failure to
make such payment shall have continued for a period
of 30 days after receipt of such notice by the
Company, and during such 30-day period the Company
shall have failed to prove, by clear and convincing
evidence as determined by the Trustee in its sole
and absolute discretion, that such amount was in
fact paid or was not due and payable; or
(ii) More than two Participants shall have notified the
Company and the Trustee in writing that they have
not been paid when due, either directly or by
direction to the Trustee, amounts to which they are
entitled under the Plan and that such amounts
remain unpaid. Each such notice must set forth the
amount, if any, which was paid to the Participant,
and the amount which the Participant believes he or
she was entitled to receive under the Plan. Within
15 days after receipt of each such notice, the
Trustee shall determine, on a preliminary basis,
whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or
by direction, at least 75% of the aggregate amount
due to all Participants under all the Deferral
Plans in any two-year period, and that such amounts
remain unpaid. If the Trustee determines that such
a failure has occurred, then it shall so notify the
Company and the Participants in writing within the
same 15 day period. Within a period of 20 days
after receipt of such notice from the Trustee, the
Company shall have failed to prove by clear and
convincing evidence, in the sole and absolute
discretion of the Trustee, that such amount was
paid or was not due and payable.
2.11 "Funded Amount": With respect to the account of any
Participant, the value of any assets which have been
placed in a grantor trust established by the Company to
pay benefits with respect to that account, as
determined at the time initial payments are to be made
pursuant to the selections made by the Participants in
accordance with Section 6.03 .
2.12 "Lump Sum Payment": The lump sum amount which is equal
to the then present value of the payment, in fifteen
annual payments commencing on the date of the lump sum
payment, of the Participant's Deferred Account Balance
plus a rate of return thereon equal to the rate or
rates of interest specified in the Participant's
Deferred Compensation Agreement throughout that fifteen
year period, discounted with a rate of interest equal
to "Moody's Corporate Bond Yield Average - Monthly
Page 5
(Average Corporates)" most recently published by
Moody's Investor Services, Inc., or any successor
thereto, at the time of the calculation.
2.13 "Normal Retirement": Retirement as a Director of the
Company at the Normal Retirement Date.
2.14 "Normal Retirement Date": The date a Participant
retires from the Board of Directors after attaining the
age of sixty-eight (68).
2.15 "Participant": A Director who is or hereafter becomes
eligible to participate in the Plan and does
participate by electing, in the manner specified
herein, to defer Compensation pursuant to the Plan.
2.16 "Plan": This Plan for the Deferred Payment of
Directors' Fees as contained herein which was
originally effective as of October 23, 1985, and which
has been amended from time to time thereafter.
2.17 "Regular Annuity Starting Date": The April 1st
immediately following a Participant's Normal
Retirement Date.
2.18 "Termination and Change in Control": The termination of
the service as a Director of a Participant for any
reason whatsoever prior to a Change in Control, upon a
Change in Control or during the three-year period
immediately following a Change in Control.
2.19 "Trustee": Shall mean the trustee of any trust which
holds assets for the payment of the benefits provided
by the Plan
Page 6
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01 "Eligibility": Any Director of the Company who is
separately compensated for his services on the Board
and who is first elected to the Board prior to 1996
shall be eligible to participate under the Plan.
Directors who serve as either an officer or an employee
of the Company, or who are first elected after 1995,
shall not be eligible to participate under the Plan.
3.02 "Manner of Election":
(a) Any person wishing to commence participation in
the Plan must file a signed copy of the Deferred
Compensation Agreement in the form attached as
Exhibit A with the Vice President and Secretary
of the Company at Eaton Center, Cleveland, Ohio
44114. If the Company accepts the Election, an
eligible Director shall become a Participant in
the Plan as of December 1, 1985 for an Election
filed in 1985 and as of the January 1st
immediately following the date an Election is
filed in any year after 1985 if such Election is
filed prior to December 1 of such year. Upon
the request of a Participant, the Committee may
in its sole discretion approve the termination
of future deferrals by such Participant.
(b) The Board shall be vested with the authority to
deny Participants the opportunity to defer
future Compensation pursuant to the Plan for any
reason if such denial is applied equitably to
all Participants; provided, however, that the
foregoing authority does not apply to any
Participant's right to continue to defer the
amount constituting his then existing Deferred
Account Balance and any past and future earnings
thereon, which amounts shall continue to be
deferred and/or paid in accordance with the
other terms and conditions of this Plan.
3.03 "Limits on Deferred Compensation":
(a) Subject to required minimum and maximum annual
limitations on the amount of Compensation which
may be deferred equal to $5,000 and $30,000,
respectively, a Participant may defer all or any
portion of his future Compensation which is
earned during a period of at least four (4)
years (16 full calendar quarters) or for the
Page 7
period to his Normal Retirement Date, if
earlier, or for any period of time longer than
four years which ends prior to his Normal
Retirement Date. Future Compensation in excess
of the $30,000 annual limitation may be deferred
pursuant to the Company's Plan for Deferred
Payment of Directors' Fees adopted as of June 1,
1980 (the "1980 Plan"), which plan continues to
be effective.
(b) Notwithstanding the annual limitations imposed
under Section 3.03(a), an eligible Participant
under the Plan may elect, in the manner
specified in Section 3.02, prior to December 1,
1985, to have all or part of his Compensation
which was deferred under the 1980 Plan to be
held and distributed in accordance with the
terms and conditions of the Plan.
Page 8
ARTICLE IV
RETIREMENT BENEFITS
4.01 "Normal Retirement Benefit":
(a) The Normal Retirement Benefit is a level fifteen
(15) year annuity payable to a Participant who
has attained Normal Retirement in fifteen (15)
equal annual installments commencing on the
Participant's Regular Annuity Starting Date and
continuing on the anniversary of that date each
year thereafter until fifteen (15) annual
payments have been made;
(b) The Normal Retirement Benefit shall be
calculated by reference to the Participant's
total Compensation deferred under the Plan and
the rate or rates of interest specified in his
Deferred Compensation Agreement; provided,
however, that the Committee may determine, in
its sole discretion, to pay the Normal
Retirement Benefit in a Lump Sum Payment.
4.02 "Early Termination Benefit": The Normal Retirement
Benefit provided under the Plan is based on the
assumption that each Participant will defer a specified
amount of Compensation for a specified period of time
of not less than (4) years or to his Normal Retirement
Date, if earlier. In the event a Participant has not
deferred Compensation in accordance with the terms and
conditions of the Plan for at least four (4) years,
resigns as a Director of the Company on a date which is
before i) the end of the deferral period he elected or
ii) his Normal Retirement Date, and iii) any Proposed
Change in Control of the Company, then in lieu of the
Normal Retirement Benefit described in Section 4.01(a)
hereof, the Participant shall be entitled to receive an
Early Termination Benefit either at age 68 or at the
date of his termination as a Director, as determined by
the Committee in its sole discretion. The Early
Termination Benefit shall be equal to his Deferred
Account Balance at the time of his termination as
Director and shall be payable in a lump sum or in up to
fifteen (15) equal annual installments, as determined
by the Committee in its sole discretion. To the Early
Termination Benefit payable to a Participant under this
Section 4.02 shall be added interest at the rate
specified in his Deferred Compensation Agreement,
compounded annually, and credited on the unpaid
deferred Compensation from the date of termination
until the date paid by the Company.
Page 9
4.03 "Entitlement to Normal Retirement Benefit After
a Change in Control of the Company": Notwithstanding
anything to the contrary herein, if within three years
after a Change in Control of the Company any
Participant who, before his Normal Retirement Date, is
removed as a Director of the Company by a vote of the
shareholders, resigns as a Director of the Company,
completes his term of office as a Director of the
Company and is not re-elected for the next successive
term or is otherwise unable to defer additional
Compensation for a full (4) years or until his Normal
Retirement Date, whichever is earlier, because of any
amendment, suspension or termination of the Plan, shall
be entitled to receive the Normal Retirement Benefit
payable as provided in Section 4.01(a) based upon his
then existing Deferred Account Balance.
Page 10
ARTICLE V
SURVIVOR BENEFIT
5.01 "Survivor Benefit": Upon the occurrence of any of the
following events, the Company shall pay to a
Participant's Designated Beneficiary a benefit as
defined in this ARTICLE V (herein referred to as a
"Survivor Benefit"):
(a) The death of a Participant while serving as a
Director of the Company; or
(b) The death of a Participant after becoming
entitled to a Normal Retirement Benefit or an
Early Termination Benefit but prior to
commencement of payment of either such benefit.
5.02 "Amount of Survivor Benefit": The Survivor Benefit
shall be an amount equal to the Participant's Deferred
Account Balance at the date of his death together with
interest thereon, compounded annually, from the date
Compensation was deferred until the date it is
completely paid by the Company (a "Deferral Period") at
a rate equal to the prime rate announced by AmeriTrust
Company National Association in Cleveland, Ohio (or any
successor thereto) (hereinafter referred to as the
"Prime Rate") from time to time during the Deferral
Period. The Survivor Benefit shall be paid either in a
lump sum or in up to fifteen (15) annual installments,
as determined by the Committee in its sole discretion.
5.03 "Survivor Benefit After Commencement of Benefit
Payments to the Participant": In the event a
Participant who has begun to receive benefit
installment payments under the Plan dies prior to full
payment of his Normal Retirement Benefit or Early
Termination Benefit, all remaining payments due
hereunder shall be made to such Participant's
Designated Beneficiary, either in a lump sum or in
installments, in such amounts and over such periods,
not exceeding the remaining period from the date of the
Participant's death, as the Committee may direct in its
sole discretion.
Page 11
ARTICLE VI
CERTAIN PAYMENTS TO PARTICIPANTS
6.01 "Termination and Change in Control": Notwithstanding
anything herein to the contrary, upon the occurrence of
a Termination and Change in Control, the Participants
shall be entitled to receive from the Company the
payments as provided in Section 6.03 .
6.02 "Failure to Pay": Notwithstanding anything herein to
the contrary, upon the occurrence of a Failure to Pay,
each Participant covered by the situation described in
clause (i) of the definition of Failure to Pay, or each
of the Participants in the event of a situation
described in clause (ii) of that definition, as the
case may be, shall be entitled to receive from the
Company the payments as provided in Section 6.03.
6.03 "Payment Requirement": No later than the first to
occur of (i) six months following the date hereof for
any current Participant, (ii) a Termination and Change
in Control or a Failure to Pay for any current
Participant or (iii) the date upon which any person who
is not a current Participant upon the date hereof
becomes a Participant, each Participant shall select
one of the payment alternatives set forth below with
respect to that portion of the Participant's account
equal to the full amount of the account minus the
Funded Amount, and with respect to that portion of the
account equal to the Funded Amount. The payment
alternatives selected with respect to the two portions
of the account need not be the same. The payment
alternatives are as follows:
(a) a Lump Sum Payment within 30 days following the
Termination and Change in Control or Failure to
Pay, as the case may be;
(b) payment in monthly, quarterly, semiannual or
annual payments, over a period not to exceed
fifteen years, as selected by the Participant at
the time provided in the first paragraph of this
Section 6.03, commencing within 30 days
following the Termination and Change in Control
or Failure to Pay, as the case may be, which are
substantially equal in amount, except that
earnings attributable to periods following
Termination and Change in Control or Failure to
Pay at the rate or rates of interest specified
in the Participant's Deferred Compensation
Agreement shall be included with each payment.
Page 12
Payment shall be made to each such Participant in
accordance with his or her selected alternative as
provided in Sections 6.01 and 6.02.
Page 13
ARTICLE VII
AMENDMENT AND TERMINATION
7.01 "Right to Amend and Terminate the Plan": The Company
fully expects to continue the Plan but it reserves the
right, at any time or from time to time, by action of
the Board, to modify or amend the Plan, in whole or in
part. In addition, the Company reserves the right by
action of the Board to terminate the Plan, in whole or
in part, at any time and for any reason, including, but
not limited to, adverse changes in the federal tax
laws. Notwithstanding anything herein to the contrary,
no amendment, modification or termination of the Plan
shall, without the consent of the Participant, alter
this provision or impair any of the Participant's
rights under the Plan with respect to benefits accrued
prior to such amendment, modification or termination.
7.02 "Plan Termination Benefit":
(a) In the event of the complete termination of the
Plan, each Participant shall be entitled to
receive an amount equal to his then Deferred
Account Balance (other than amounts initially
deferred under the l980 Plan which will continue
to be held in accordance with the terms of the
Plan) together with interest thereon at the
Prime Rate in effect from time to time during
such Deferral Period, compounded annually, and
credited from the date of deferral until the
date paid by the Company (hereinafter referred
to as a "Plan Termination Benefit"). As
determined by the Committee in its sole
discretion, the Plan Termination Benefit shall
be payable either in a lump sum or in up to
fifteen (15) annual installments commencing at
the time elected by the Participant in his
Deferred Compensation Agreement prior to the
Deferral Period.
(b) In the event of a Participant's death prior to
the complete payment of the benefits provided
under this Section 8.02, all remaining payments
due hereunder shall be made to the Participant's
Designated Beneficiary in the same amount as was
being received by the Participant.
7.03 "Right to Amend or Terminate the Plan After a Change in
Control of the Company": Notwithstanding anything to
the contrary herein, no amendment shall be made to the
Plan after a Change in Control of the Company which
would alter or impair this Section 7.03 or any rights
Page 14
or obligations under the Plan in relation to any
Participant without the prior written consent of the
Participant; and in the event of complete termination
of the Plan after a Change in Control of the Company,
each Participant shall be entitled to receive his
Normal Retirement Benefit, if greater than the Plan
Termination Benefit, payable as provided in Section
4.01(a) based upon his then existing Deferred Account
Balance.
Page 15
ARTICLE VIII
MISCELLANEOUS
8.01 "Non-Alienation of Benefits": Subject to any federal
statute to the contrary, no right or benefit under the
Plan shall be subject to anticipation, alienation,
sale, assignment, pledge, encumbrance, or charge, and
any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge any right or benefit under
the Plan shall be void. No right or benefit hereunder
shall in any manner be liable for or subject to the
debts, contracts, liabilities, or torts of the person
entitled to such benefits. If a Participant or his
Designated Beneficiary (if entitled to benefits under
the Plan) shall become bankrupt, or attempt to
anticipate, alienate, sell, assign, pledge, encumber,
or charge any right hereunder, then such right or
benefit shall, in the discretion of the Committee,
cease and terminate, and in such event, the Company may
hold or apply the same or any part thereof for the
benefit of the Participant or his spouse, children, or
other dependents, or any of them, in such manner and in
such amounts and proportions as the Committee may deem
proper.
8.02 "No Trust Created": The obligations of the Company to
make payments hereunder shall constitute a liability of
the Company to the Participant. Such payments shall be
made from the general funds of the Company, and the
Company shall not be required to establish or maintain
any special or separate fund, or purchase or acquire
life insurance on a Participant's life, or otherwise to
segregate assets to assure that such payments shall be
made, and neither a Participant nor Designated
Beneficiary shall have any interest in any particular
asset of the Company by reason of its obligations
hereunder. Nothing contained in the Plan shall create
or be construed as creating a trust of any kind or any
other fiduciary relationship between the Company and a
Participant or any other person.
8.03 "No Employment Agreement": The Plan shall not be
deemed to constitute a contract of employment between
the Company and a Participant. Neither shall the
execution of the Plan nor any action taken by the
Company pursuant to the Plan be held or construed to
confer on a Participant any legal right to be continued
as Director of the Company, in an executive position or
in any other capacity with the Company whatsoever; nor
shall any provision herein restrict the right of any
Participant to resign as a Director.
Page 16
8.04 "Binding Effect": Obligations incurred by the Company
pursuant to the Plan shall be binding upon and inure to
the benefit of the Company, its successors and assigns,
and the Participant or his Designated Beneficiary.
8.05 "Claims for Benefits": Each Participant or Designated
Beneficiary must claim any benefit to which he may be
entitled under this Plan by filing a written
notification with the Vice President and Secretary of
the Company. The Committee shall make all
determinations with respect to such claims for
benefits. If a claim is denied by the Committee, it
must be denied within a reasonable period of time in a
written notice stating the following:
(a) The specific reason for the denial.
(b) The specific reference to the Plan
provision on which the denial is based.
(c) A description of additional information
necessary for the claimant to present his
claim, if any, and an explanation of why
such information is necessary.
(d) An explanation of the Plan's claims review
procedure.
The claimant may have a review of the denial by the
Committee by filing a written notice with the Vice
President and Secretary of the Company within sixty
(60) days after the notice of the denial of his claim.
The written decision by the Committee with respect to
the review must be given within one hundred and twenty
(120) days after receipt of the written request.
8.06 "Entire Plan": This document and any amendments hereto
contain all the terms and provisions of the Plan and
shall constitute the entire Plan, any other alleged
terms or provisions being of no effect.
Page 17
ARTICLE IX
CONSTRUCTION
9.01 "Governing Law": The Plan shall be construed and
governed in accordance with the law of the State of
Ohio.
9.02 "Gender": The masculine gender, where appearing in the
Plan, shall be deemed to include the feminine gender,
and the singular may include the plural, unless the
context clearly indicates to the contrary.
9.03 "Headings, etc.": The cover page of the Plan, the
Table of Contents and all headings used in this Plan
are for convenience of reference only and are not part
of the substance of the Plan.
Page 18
Exhibit A
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made this day of
, 199_ , between EATON CORPORATION (hereinafter the
"Company"), an Ohio corporation, and
, a non-employee Director of the Company (hereinafter
called "Participant").
WHEREAS, the Board of Directors of the Company has
approved a Plan for the Deferred Payment of Directors' Fees
(the "Plan") for the purpose of attracting and retaining
qualified persons to serve as Directors of the Company;
WHEREAS, the Plan provides that a Director becomes a
participant under the Plan upon the execution and delivery by
him of a Deferred Compensation Agreement, in the form of this
Agreement, to the Administrative Committee under the Plan, and
the acceptance of such agreement by the Company;
NOW, THEREFORE, in consideration of the mutual
agreements herein contained, the Company and the Participant
hereby agree as follows:
1. Participation. This Agreement is made to evidence
the Participant's participation in the Plan, to set
forth the amount of the Participant's Compensation to
be deferred thereunder and to establish the interest
rates to be used to calculate the Participant's Normal
Retirement Benefit and his Early Termination Benefit
under the Plan.
2. The Plan Controls. The Plan (and all its
provisions), as it now exists and as it may be amended
hereafter, is incorporated herein and made a part of
this Agreement, and the provisions of the Plan, as it
may be amended from time to time, shall control the
terms and conditions of this Agreement and anything
contained herein which is inconsistent with the Plan,
as so amended, shall be of no force or effect.
3. Definitions. When used herein, the terms which are
defined in the Plan shall have the meanings given them
in the Plan.
4. No Interest Created. Neither the Participant nor
his Designated Beneficiary shall have any interest in
any specific asset of the Company, including policies
of insurance. The Participant and his Designated
Beneficiary shall have only the right to receive the
benefits provided under the Plan.
Page 19
5. Deferrals. Pursuant to ARTICLE III of the Plan,
the Participant hereby elects to defer the receipt of,
and the Company hereby elects to defer the payment of,
future Compensation in the amount of_________________
Dollars ($_______________________ ) for each calendar
year during the period of________________________ to
____________________.
6. Normal Retirement Benefit Interest Rate. The
Participant's Normal Retirement Benefit shall be
determined by crediting interest to the Participant's
total Compensation deferred under the Plan (including
amounts transferred from the Company's Plan for the
Deferred Payment of Directors' Fees established as of
June 1, 1980) at the rate of ____ % compounded annually
from the date of deferral until paid by the Company.
7. Early Termination Benefit Interest Rate. In
accordance with ARTICLE IV of the Plan, interest shall
be credited to the Early Termination Benefit at a rate
equal to ____%, compounded annually.
8. Disposition In the Event of Plan Termination. In
the event the Company determines to terminate the Plan,
the Participant hereby elects to have his Plan
Termination Benefit (other than amounts transferred
from the 1980 Plan) distributed as indicated by the
Participant below: (The Participant should check only
one of the boxes below and sign his initials in the
opposite blank).
_________________________ I hereby elect to have payment of
the Plan Termination
initials________________ Benefit commence within a reasonable
period of time after the Plan
termination date; or
_________________________ I hereby elect to have the Plan
Termination Benefit be
initials ________________ retained by the Company, credited
with interest during
the Deferral Period, compounded
annually, at the Prime Rate and paid
commencing upon the earlier to occur
of my Normal Retirement or my
resignation from the Board of
Directors of the Company.
The Company shall determine in its sole discretion
whether the Plan Termination Benefit shall be paid in a
lump sum or in up to fifteen (15) annual installments.
9. Entire Agreement. This Agreement contains the
Page 20
entire agreement and understanding by and between the
Company and the Participant, and no representations,
promises, agreements, or understandings, written or
oral, not contained herein shall be of any force or
effect.
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (m)
1996 Non-Employee Director Fee Deferral Plan
(amended effective as of January 1, 1997 and February 25, 1997)
I. Purpose
The 1996 Non-Employee Director Fee Deferral Plan (the
"Plan") enables each Director of Eaton Corporation ("Eaton" or
the "Company") who is not employed by the Company to defer
receipt of fees that may be payable to him or her for future
services as a member of the Board of Directors of the Company
(the "Board") or as chairman or as a member of any committee of
the Board. The purpose of the Plan is to help attract and retain
highly qualified individuals to serve as members of the Company's
Board of Directors and as members of committees thereof.
II. Eligibility
All members of the Board who are not employed by the
Company are eligible to participate in the Plan with respect to
amounts earned as fees for services as a member of the Board or
as chairman or a member of any committee of the Board.
III. Definitions
The terms used herein shall have the following meanings:
Account - A bookkeeping account established by Eaton for a
Participant to which may be credited Deferred Fees and earnings
or losses thereon.
Agreement - A written agreement between Eaton and a
Participant deferring the receipt of Fees and indicating the term
of the deferral.
Beneficiary - The person or entity designated in writing
executed and delivered by the Participant to the Committee. If
that person or entity is not living or in existence at the time
any unpaid balance of Deferred Fees becomes due after the death
of a Participant, the term "Beneficiary" shall mean the
Participant's estate or legal representative or any person, trust
or organization designated in such Participant's will.
Board - The Board of Directors of Eaton Corporation.
Change in Control of Eaton - Shall be deemed to occur if
Page 2
(i) a tender offer shall be consummated for 25% or more of the
combined voting power of Eaton's then outstanding voting
securities, (ii) Eaton shall be merged or consolidated with
another corporation and as a result less than 75% of the
outstanding voting securities of the resulting corporation shall
be owned by the former shareholders of Eaton, other than
affiliates (within the meaning of the Securities Exchange Act of
1934 (the "Exchange Act")) of any party to such merger or
consolidation, as the same shall have existed immediately prior
to such merger or consolidation, (iii) Eaton shall sell
substantially all of its assets to another corporation that is
not a wholly owned subsidiary of Eaton, (iv) any "person" (as
such term is used in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of 25% or more of the combined voting power of
Eaton's then outstanding securities; or (v) during any period of
two consecutive years, individuals who at the beginning of that
period constitute the Board cease to constitute at least a
majority thereof unless the election, or the nomination for
election by Eaton's shareholders, of each new director was
approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the
period. For purposes of this Plan, ownership of voting
securities shall take into account and include ownership as
determined by applying the provisions of Rule 13d-3(d)(l)(i) of
the Exchange Act (as then in effect).
Committee - The Compensation and Organization Committee of
the Board or such other committee as the Board may from time to
time designate
for purposes of administration of the Plan.
Common Share Retirement Deferred Fees - Retirement
Deferred Fees that are converted into share units in accordance
with Article VI.
Deferral Plans - This Plan and any other prior plan
sponsored by the Company pursuant to which Fees may be deferred.
Deferred Fees - That portion of Fees deferred pursuant to
the Plan.
Eaton - Eaton Corporation, an Ohio corporation, and its
subsidiaries and successors and assigns.
Eaton Common Shares - The common shares of Eaton
Corporation with a par value of 504 each.
Failure to Pay - The circumstances described in either (i)
or (ii) have occurred:
Page 3
(i) Any Participant shall have notified the Company
and the Trustee in writing that the Company shall have
failed to pay to the Participant, when due, either
directly or by direction to the trustee of any trust
holding assets for the payment of benefits pursuant to the
Plan, at least 75% of any and all amounts which the
Participant was entitled to receive at any time in
accordance with the terms of the Plan, and that such
amounts remain unpaid. Such notice must set forth the
amount, if any, which was paid to the Participant by the
Company, and the amount which the Participant believes he
or she was entitled to receive under the Plan. The
failure to make such payment shall have continued for a
period of 30 days after receipt of such notice by the
Company, and during such 30-day period the Company shall
have failed to prove, by clear and convincing evidence as
determined by the Trustee in its sole and absolute
discretion, that such amount was in fact paid or was not
due and payable; or
(ii) More than two Participants shall have notified
the Company and the Trustee in writing that they have not
been paid when due, either directly or by direction to the
Trustee, amounts to which they are entitled under the Plan
and that such amounts remain unpaid. Each such notice
must set forth the amount, if any, which was paid to the
Participant, and the amount which the Participant believes
he or she was entitled to receive under the Plan. Within
15 days after receipt of each such notice, the Trustee
shall determine, on a preliminary basis, whether any
failure to pay such Participants has resulted in a failure
to pay when due, directly or by direction, at least 75% of
the aggregate amount due to all Participants under all the
Deferral Plans in any two-year period, and that such
amounts remain unpaid. If the Trustee determines that
such a failure has occurred, then it shall so notify the
Company and the Participants in writing within the same 15
day period. Within a period of 20 days after receipt of
such notice from the Trustee, the Company shall have
failed to prove by clear and convincing evidence, in the
sole and absolute discretion of the Trustee, that such
amounts were paid or were not due and payable.
Fees - Any amount payable to a Participant for services as
a member of the Board or as chairman or a member of any committee
of the Board.
Funded Amount - With respect to the Account of any
Participant, the value of any assets which have been placed in a
grantor trust established by the Company to pay benefits with
respect to that Account, as determined at the time initial
payments are to be made pursuant to the selections made by the
Page 4
Participants in accordance with Section 10.03.
Interest Rate Retirement Deferred Fees - Retirement
Deferred Fees that are credited with Treasury Note Based Interest
in accordance with Article VII.
Participant - A member of the Board who is not an employee
of Eaton and who elects to defer receipt of Fees.
Periodic Installments - Monthly, quarterly, semiannual or
annual payments, over a period not to exceed fifteen years, as
determined by the Committee in its sole discretion, which are
substantially equal in amount, or, in the case of Common Share
Retirement Deferred Fees, substantially equal in the number of
share units being valued and paid or the number of Eaton Common
Shares being distributed, except that earnings attributable to
periods following Retirement or Termination of Service as a
Director shall be included with each payment.
Plan - This 1996 Non-Employee Director Fee Deferral Plan
pursuant to which Fees may be deferred for later payment.
Retirement - The Termination of Service as a Director of a
Participant who is age 55 or older and who has at least ten years
of service as a member of the Board, who is age 68 or older, or
who is approved by the Committee to qualify as a retirement.
Retirement Deferred Fees - That portion of Fees deferred
for payment at Retirement, at one year following Retirement, or
in Periodic Installments commencing after Retirement.
Short-Term Deferred Fees - That portion of Fees deferred
for payment as determined by the Committee in accordance with
Article V.
Termination and Change in Control - The Termination of
Service as a Director of a Participant for any reason whatsoever
prior to a Change in Control if there is a subsequent Change in
Control or the Termination of Service as a Director of a
Participant for any reason whatsoever during the three-year
period immediately following a Change in Control.
Termination of Service as a Director - The time when a
Participant shall no longer be a member of the Board, whether by
reason of retirement, death, voluntary resignation, divestiture,
removal (with or without cause), or disability.
Treasury Bill Interest Equivalent - A rate of interest
equal to the quarterly average yield of 13-week U.S. Government
Treasury Bills.
Page 5
Treasury Note Based Interest - A rate of interest equal to
the average yield of 10-year U.S. Government Treasury Notes plus
300 basis points.
Trustee - The trustee of any trust which holds assets for
the payment of the benefits provided by the Plan.
Page 6
IV. Election to Defer
Section 4.01 Deferral Options. For each calendar year
commencing with 1997, a Participant may elect to defer the
receipt of all or part of his or her Fees as Short-Term Deferred
Fees or Retirement Deferred Fees. Once a Participant has made an
effective election, he or she may not thereafter change that
election or change any allocation between Short-Term Deferred
Fees or Retirement Deferred Fees.
Section 4.02 Amount Deferred. Not less than 10% of Fees
payable for any calendar year may be deferred under the Plan. If
a Participant elects to allocate a portion of Fees to both Short-
Term Deferred Fees and Retirement Deferred Fees, the amount
allocated to each shall be not less than 10% of the Fees payable
for any calendar year.
Section 4.03 Election Deadline. To be in effect, a
Participant's election must be completed, signed and filed with
the Committee on or before such date as is necessary to defer
inclusion of the Fees in the Director's gross income for Federal
income tax purposes.
Section 4.04 Transfers. Notwithstanding anything herein
to the contrary, a Participant may elect to have held and
distributed in accordance with the terms and conditions of the
Plan all or part of his or her compensation which was deferred
under the 1980 Plan for Deferred Payment of Directors? Fees, and
any such election with respect to amounts to be held and
distributed as Retirement Deferred Fees for any Participant in
payment status upon the effective date of such election may be
held only as Interest Rate Deferred Fees if to do otherwise would
be administratively impractical.
V. Short-Term Deferred Fees
If elected by a Participant, payment of the amount of Fees
allocated to Short-Term Deferred Fees will be deferred. Short-
Term Deferred Fees shall be credited to the Participant on the
date such amount would have been distributed to him or her if
there had been no valid deferral election by establishing an
Account in the Participant?s name. Treasury Bill Interest
Equivalents shall be credited quarterly to the Participant's
Short-Term Deferred Fees Account until such compensation is paid
to the Participant. Short-Term Deferred Fees, together with
credited Treasury Bill Interest Equivalents, shall be paid to the
Participant in a lump sum or in not more than five annual
installments as determined by the Committee.
Page 7
VI. Retirement Deferred Fees
Section 6.01 Duration. If elected by a Participant, payment of
the amount of Fees allocated to Retirement Deferred Fees will be
deferred to Retirement or to one year after Retirement, but
subject to Committee discretion as to date of payment as provided
herein. Retirement Deferred Fees shall be credited to the
Participant on the date such amount would have been
distributed to him or her if there had been no valid deferral
election by establishing an Account in the Participant's name.
Section 6.02 Common Share Retirement Deferred Fees.
Between 50% and 100%, as elected by the Participant, of the
amount allocated to Retirement Deferred Fees shall be credited to
Common Share Retirement Deferred Fees, and the balance shall be
credited to Interest Rate Retirement Deferred Fees.
Common Share Retirement Deferred Fees shall be converted
into a number of share units based upon the average of the mean
prices for Eaton Common Shares for the twenty trading days of the
New York Stock Exchange during which Eaton Common Shares were
traded immediately preceding the end of the calendar quarter in
which the Fees to be deferred were earned. For purposes of the
Plan, "mean price" shall be the mean of the highest and lowest
selling prices for Eaton Common Shares quoted on the New York
Stock Exchange List of Composite Transactions on the relevant
trading day. On each Eaton Common Share dividend payment date,
dividend equivalents equal to the actual Eaton Common Share
dividends paid shall be credited to the share units in the
Participant's Account, and shall in turn be converted into share
units utilizing the mean price for Eaton Common Shares on the
dividend payment date.
Upon payment of Common Share Retirement Deferred Fees in
Eaton Common Shares, the share units standing to the
Participant's credit shall be converted to the same number of
Eaton Common Shares for distribution to the Participant.
Upon payment of Common Share Retirement Deferred Fees in
cash, including any installment thereof in the case of Periodic
Installments, the share units required to make the cash payment
shall be converted to an amount equal to the greater of: (a) the
product of the average of the mean prices for an Eaton Common
Share for the last twenty trading days of the New York Stock
Exchange during which Eaton Common Shares were traded in the
month immediately preceding the month in which the date of
payment occurs, multiplied by the number of share units then
credited to the Participant's Account, or (b) if a Change in
Control of Eaton shall have occurred at any time within thirty-
six months immediately preceding the payment, the product of the
number of share units credited to the Participant's Account at
the time of payment multiplied by the highest of (i) the highest
Page 8
price paid for an Eaton Common Share in any tender offer in
connection with the Change in Control of Eaton; (ii) the price
received for an Eaton Common Share in any merger, consolidation
or similar event in connection with the Change in Control of
Eaton; or (iii) the highest price paid for an Eaton Common Share
as reported in any Schedule 13D within the sixty-day period
immediately preceding the Change in Control of Eaton.
Section 6.03 Interest Rate Retirement Deferred Fees.
Retirement Deferred Fees not credited to Common Share Retirement
Deferred Fees shall be credited to Interest Rate Retirement
Deferred Fees. Interest Rate Retirement Deferred Fees shall be
credited to the Interest Rate Retirement Deferred Fees Account,
which shall earn Treasury Note Based Interest, compounded
quarterly, until paid.
Section 6.04 Periodic Installments. Upon the death of a
Participant who has commenced receiving Periodic Installments,
the entire remaining amount of his or her Retirement Deferred
Fees shall be distributed to the Participant's Beneficiary. Such
distributions may be made either in a lump sum or in installments
in such amounts and over such periods, not exceeding the
remaining number of annual installments from the date of death of
the Participant, as the Committee may direct in its sole
discretion.
Section 6.05 Termination of Service as a Director. The
Retirement Deferred Fees Account of a Participant whose
Termination of Service as a Director occurs for reasons other
than Retirement shall be distributed in a lump sum or in Periodic
Installments, as the Committee may determine in its sole
discretion. The lump sum payment shall be made, or the Periodic
Installments shall commence, when the Committee may determine in
its sole discretion, no later than February 1 of the calendar
year immediately after the calendar year that includes the
earliest of: (i) the Participant's death, (ii) the Participant's
attainment of age 55 if he or she was credited with at least 10
years of service for Eaton (or an affiliate of Eaton), (iii) the
Participant's attainment of age 68, or (iv) the fifth anniversary
of the Participant's Termination of Service as a Director.
Earnings shall be credited on undistributed Retirement
Deferred Fees Accounts, and annual installment payments shall be
adjusted to reflect such additional earnings, based on the
remaining number of installment payments to be distributed and
based on Treasury Note Based Interest, computed quarterly.
Page 9
VII. Amendment and Termination
Eaton fully expects to continue the Plan but it reserves
the right, except as otherwise provided herein, at any time by
action of the Board, to modify, amend or terminate the Plan for
any reason, including adverse changes in the federal tax laws.
Notwithstanding the foregoing, upon the occurrence of a Change in
Control of Eaton, no amendment, modification or termination of
the Plan shall, without the consent of any particular
Participant, alter or impair any rights or obligations under the
Plan with respect to that Participant.
VIII. Administration
The Plan shall be administered by the Committee. The
Committee shall interpret the provisions of the Plan where
necessary and may adopt procedures for the administration of the
Plan which are consistent with the provisions of the Plan and any
rules adopted by the Committee.
After Retirement or other Termination of Service as a
Director, the Committee shall determine in its sole discretion
(i) whether Retirement Deferred Fees shall be paid in a lump sum
or in Periodic Installments, (ii) the date on which a lump sum
payment will be made or Periodic Installments will commence,
which in the case of Retirement shall be not later than one year
following the date to which the deferral was made, and in the
case of Termination of Service as a Director for reasons other
than Retirement shall be in accordance with Section 6.05,
(iii) whether to change the Periodic Installments or the number
of years over which they are to be paid, and (iv) whether Common
Share Retirement Deferred Fees will be paid in cash or in Eaton
Common Shares. In making these determinations, the Committee may
consider the wishes and needs of the Participant or his or her
Beneficiary.
Each Participant or Beneficiary must claim any benefit to
which such Beneficiary may be entitled under the Plan by a
written notification to the Committee. If a claim is denied, it
must be denied within a reasonable period of time in a written
notice stating the specific reasons for the denial. The claimant
may have a review of the denial by the Committee by filing a
written notice with the Committee within sixty days after the
notice of the denial of his or her claim. The written decision
by the Committee with respect to the review must be given within
120 days after receipt of the written request.
The determinations of the Committee shall be final and
conclusive.
Page 10
IX. Termination and Change in Control - Failure to Pay
Section 9.01 Termination and Change in Control.
Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Company the
payments as provided in Section 9.03.
Section 9.02 Failure to Pay. Notwithstanding anything
herein to the contrary, upon the occurrence of a Failure to Pay,
each Participant covered by the situation described in clause (i)
of the definition of Failure to Pay, or each of the Participants
in the event of a situation described in clause (ii) of that
definition, as the case may be, shall be entitled to receive from
the Company the payments as provided in Section 9.03.
Section 9.03 Payment Requirement. No later than (i) the
first to occur of six months following the date hereof, a
Termination and Change in Control or a Failure to Pay for any
person who is a Participant upon such event or (ii) the date upon
which any person who is not subject to clause (i) becomes a
Participant, each Participant shall select one of the payment
alternatives set forth below with respect to that portion of the
Participant's Account equal to the full amount of the Account
minus the Funded Amount, and with respect to that portion of the
Account equal to the Funded Amount. The payment alternatives
selected with respect to the two portions of the Account need not
be the same. The payment alternatives are as follows:
(a) a Lump Sum Payment within 30 days following
the Termination and Change in Control or Failure to Pay, as
the case may be;
(b) payment in monthly, quarterly, semiannual or
annual payments, over a period not to exceed fifteen years,
as selected by the Participant at the time provided in the
first paragraph of this Section 9.03, commencing within 30
days following the Termination and Change in Control or
Failure to Pay, as the case may be, which are substantially
equal in amount or in the number of share units being valued
and paid or in the number of Eaton Common Shares being
distributed, except that earnings attributable to periods
following Termination and Change in Control or Failure to
Pay shall be included with each payment.
Payment of such amounts shall be made to each such Participant in
accordance with his or her selected alternative as provided in
Section 9.01 and 9.02.
Page 11
X. Miscellaneous
Section 10.01 Adjustments. In the event of a
reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split,
stock dividend, rights offering or similar event affecting shares
of the Company, the Committee shall equitably adjust the number
of share units previously allocated to the Accounts of
Participants as Common Share Retirement Deferred Fees.
Section 10.02 Designation of Beneficiaries. Each
Participant shall have the right, by written instruction to the
Committee, on a form supplied by the Committee, to designate one
or more primary and contingent Beneficiaries (and the proportion
to be paid to each, if more than one is designated) to receive
his or her Account balance upon his or her death. Any such
designation shall be revocable by the Participant.
Section 10.03 Committee Actions. All actions of the
Committee hereunder may be taken with or without a meeting. If
taken without a meeting, the action shall be in writing and
signed by a majority of the members of the Committee and if taken
with a meeting, a majority of the Committee shall constitute a
quorum for any such action.
Section 10.04 Assignment. No benefit under the Plan shall
be subject to anticipation, alienation, sale, transfer or
encumbrance, and any attempt to do so shall be void. No benefit
hereunder shall in any manner be liable for the debts, contracts,
or liabilities of the person entitled to such benefits. If a
Participant or Beneficiary shall become bankrupt, or attempt to
anticipate, alienate, sell, transfer or encumber any benefit
hereunder, then such benefit shall, in the discretion of the
Committee, cease and terminate, and the Committee may hold or
apply the same for the benefit of the Participant or his or her
spouse, children, or other dependents, or any of them, in such
manner and in such amounts and proportions as the Committee may
deem proper. During a Participant's lifetime, rights hereunder
are exercisable only by the Participant or the Participant's
guardian or legal representative. Notwithstanding the foregoing,
nothing in this Section shall prohibit the transfer of any
benefit by will or by the laws of descent and distribution or (if
permitted by applicable regulations under Section 16(b) of the
Securities Exchange Act) pursuant to a qualified domestic
relations order, as defined under the Internal Revenue Code and
the Employee Retirement Income Security Act.
Page 12
Section 10.05 No Funding Required. The obligations of
Eaton to make payments shall be a liability of Eaton to the
Participant. Eaton shall not be required to maintain any
separate fund or reserve, or purchase or acquire life insurance
on a Participant's life, or otherwise segregate assets to assure
that any particular asset of Eaton is available to make such
payments by reason of Eaton's obligations hereunder. Nothing
contained in the Plan shall be construed as creating a trust or
other fiduciary relationship between Eaton and a Participant or
any other person.
Section 10.06 No Contract for Services. The Plan shall not
be deemed to constitute a contract for services between Eaton and
a Participant. Neither the execution of the Plan nor any action
taken by Eaton or the Committee pursuant to the Plan shall confer
on a Participant any legal right to be continued as a member of
the Board or in any other capacity with Eaton whatsoever.
Section 10.07 Governing Law. The Plan shall be construed
and governed in accordance with the law of the State of Ohio to
the extent not covered by Federal law.
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (p)
Eaton Corporation Retirement Plan for Non-Employee Directors
(amended and restated as of January 1, 1996)
Eaton Corporation (the "Company") hereby amends and
restates, effective as of January 1, 1996, the Eaton Corporation
Retirement Plan for Non-Employee Directors ("the Plan"), which
was originally adopted May 1, 1984.
SECTION 1.
Purpose of the Plan. The purpose of the Plan is to provide a
retirement benefit to eligible non-employee Directors of the
Company.
SECTION 2.
Effective Dates. The original effective date of the Plan was May
1, 1984. The effective date ("Effective Date") of this amendment
and restatement of the Plan is January 1, 1996.
SECTION 3.
Eligibility. Any non-employee Director of the Company first
elected to the Board of Directors of the Company ("the Board")
prior to the Effective Date shall be eligible to receive a
retirement benefit under the Plan if he or she ceases to be a
Director for any reason after serving a minimum of one (1) year
as a Director (a "Participant"). Any non-employee Director of
the Company first elected to the Board on or after the Effective
Date shall not be eligible to receive any benefit under the Plan.
SECTION 4.
(a) Amount of Retirement Income. The amount of annual
retirement income payable pursuant to the Plan ("retirement
income") to a Participant shall be equal to (i) the annual
retainer payable to non-employee Directors for membership on the
full Board in effect at the time a Participant ceases to be a
Director multiplied by (ii) a fraction the numerator of which is
the number of full years (which need not be consecutive) during
which a Participant served as a Director up to five (5) and the
denominator of which is the number five (5).
(b) Payment Dates. The retirement income provided under this
Section 4 shall commence on the first day of the month following
the date a Participant ceases to be a Director and shall be
payable annually on each anniversary of such date for the lesser
of ten (10) years or the life of a Participant. Upon the death
Page 2
of a Participant, all rights to receive any future payments of
retirement income which would have been due under the Plan after
the date of death shall immediately terminate and no amounts
shall be due or payable to the deceased Participant, his or her
estate, legal representatives, heirs or beneficiaries after the
date of death.
SECTION 5.
Amendment to the Plan. Except as provided in Section 6 hereof,
the Board reserves the right to interpret the terms and
conditions of the Plan, to amend or modify the Plan, in whole or
in part, or to terminate the Plan at any time.
SECTION 6.
Change in Control of the Company. No amendment to the Plan made
after a Change in Control of the Company (as hereinafter defined)
shall change this Section 6 or adversely affect the right of a
Participant to receive the retirement income provided under
Section 4 hereof in accordance with the terms and conditions of
the Plan as then in effect.
For purposes of the Plan, a "Change in Control of the Company"
shall be deemed to have occurred if (i) a tender offer shall be
made and consummated for the ownership of securities of the
Company representing 25% or more of the combined voting power of
the Company's then outstanding voting securities, (ii) the
Company shall be merged or consolidated with another corporation
and as a result of such merger or consolidation less than 75% of
the outstanding voting securities of the surviving or resulting
corporation shall be owned in the aggregate by the former
shareholders of the Company, other than affiliates (within the
meaning of the Securities Exchange Act of 1934 (the "Exchange
Act")) of any party to such merger or consolidation, as the same
shall have existed immediately prior to such merger or
consolidation, (iii) the Company shall sell substantially all of
its assets to another corporation which is not a wholly-owned
subsidiary of the Company, (iv) any "person" (as such term is
used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or
becomes the beneficial owner, directly of indirectly, of
securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding
securities, or (v) during any period of two consecutive years,
individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority
thereof unless the election, or the nomination for election by
the Company's shareholders, of each new Director was approved by
a vote of at least two-thirds of the Directors then still in
office who were Directors at the beginning of the period. For
purposes of the Plan, ownership of voting securities shall take
into account and include ownership as determined by applying the
Page 3
provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in
effect).
SECTION 7.
Assignment. Subject to any federal statute to the contrary, no
right or benefit under the Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance or charge, and
any attempt to anticipate, alienate, sell, assign, pledge,
encumber or charge any right or benefit under the Plan shall be
void. No right or benefit hereunder shall in any manner be
subject to the debts, contracts, liabilities or torts of the
person entitled to such right or benefit.
SECTION 8.
General Creditor. A Participant has only the unsecured promise
of the Company to pay the annual retirement income provided under
the Plan. The right of a Participant to the assets of the
Company are no greater than the rights of any other unsecured
creditor of the Company.
SECTION 9.
No Employment Rights. Nothing contained in the Plan shall be
construed as a right of a Participant to be continued as a
Director, or as a contract of employment between the Company and
a Participant.
SECTION 10.
Governing Law. The validity, interpretation and enforcement of
the Plan shall be governed by the laws of the State of Ohio.
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14(c)
Exhibit 21
Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's
subsidiaries, the state or country in which each was organized,
and the percentage of voting securities owned by Eaton or another
Eaton subsidiary as of December 31, 1997 are as follows:
Percentage of voting
securities owned (by
Where Eaton unless otherwise
Consolidated subsidiaries (A) organized indicated)
- ------------------------------ ------------ ----------------------
Vorad Safety Systems, Inc. California 100% IVHS
Technologies,
Inc.
CEEC Holdings Incorporated Delaware 100% CEEC
Investments
Incorporated
CEEC Incorporated Delaware 100% Cutler-Hammer
Inc.
CEEC Investments Incorporated Delaware 100% CEEC
Incorporated
Challenger Electrical Equipment
Corporation Delaware 100% CEEC Holdings
Incorporated
Challenger Pageland Inc. Delaware 100% Challenger
Electrical
Equipment
Corporation
Cutler-Hammer de Puerto
Rico Inc. Delaware 100% Cutler-Hammer
Inc.
Cutler-Hammer Inc. Delaware 100%
Eaton Administration
Corporation Delaware 100%
Eaton ESC Holding Company Delaware 100%
Eaton International Corporation Delaware 100%
Eaton Semiconductor Equipment
Inc. Delaware 100%
Eaton Truck Systems, Inc. Delaware 100%
Eaton USEV Holding Company Delaware 100%
Eaton VORAD Technologies,
L.L.C. (Partnership) Delaware 50% Eaton Truck
Systems, Inc.
50% Vorad Safety
Systems, Inc.
ERC Corporation Delaware 100% Eaton Leasing
Corporation
ERC II Corporation Delaware 100% Eaton Leasing
Corporation
Fusion Systems Corporation Delaware 100%
Page 2
High Temperature Engineering
Corporation Delaware 100%
IVHS Technologies, Inc. Delaware 70%
Eaton Asia Investments
Corporation Maryland 100%
CAPCO Automotive Products
Corporation Michigan 100%
AIL Systems Holding Company Nevada 100%
Cutler-Hammer de Puerto Rico
Company (Partnership) Ohio 99% Cutler-Hammer
de Puerto
Rico Inc.
1% Cutler-Hammer
Inc.
Cutler-Hammer IDT, Inc. Ohio 100%
Eaton Consulting Services
Corporation Ohio 100%
Eaton Leasing Corporation Ohio 100%
Eaton Properties Corporation Ohio 100% Eaton Leasing
Corporation
Eaton Utah Corporation Ohio 100% Eaton Leasing
Corporation
Eaton Westlake Corporation Ohio 100% Eaton Leasing
Corporation
U.S. Engine Valve (Partnership) Ohio 5.607%
70% Eaton USEV
Holding
Company
Cutler-Hammer de Argentina S.A. Argentina 75% Eaton Holding
S.A.
Eaton Holding S.A. Argentina 100%
Eaton Controls Pty. Ltd. Australia 99.99996% Eaton
International
Corporation
.00004% Eaton Pty.
Ltd.
Eaton Pty. Ltd. Australia 100%
Eaton Foreign Sales Corporation Barbados 100%
Page 3
Eaton Holding Limited Barbados 100% Eaton Yale
Ltd.
Eaton Services Limited Barbados 100% Eaton Holding
Limited
Saturn Insurance Company Ltd. Bermuda
Islands 100%
Eaton Ltda. Brazil 65.12% Eaton
Services
Limited
34.88% Eaton
International
Corporation
Eaton Truck Components Ltda. Brazil 21.135%
78.865%CAPCO
Automotive
Products
Corporation
Eaton Valvetrain Systems Ltda. Brazil 80%
Eaton ETN Offshore Ltd. Canada 100% Common Shares
- Eaton
Corporation
100% Preferred
Shares -
Eaton
International
Corporation
Eaton Yale Ltd. Canada 100% Eaton ETN
Offshore Ltd.
Tycor International Corporation Canada 100% Eaton
Yale Ltd.
Eaton Truck and Bus Components
Company (Shanghai) Ltd. China 100%
Eaton (China) Investments Co.,
Ltd. China 100% Eaton Asia
Investments
Corporation
Jining Eaton Hydraulics
Company Ltd. China 60%
Suzhou Cutler-Hammer Electric
Co., Ltd. China 75%
Eaton Controles Industriales
S.A. Costa Rica 97.53% Eaton
International
Corporation
Eaton Controls d.o.o. Croatia 100% Eaton
Technologies
S.A.
Cutler-Hammer, S.A. Dominican
Republic 100% Cutler-Hammer
Inc.
Page 4
Coupatan Immobiliere S.A. France 100% Eaton
Technologies
S.A.
Eaton Automotive Controls Srl France 100% Eaton
Technologies
S.A.
Eaton S.A. France 100%
Eaton Technologies S.A. France 55%
45% Eaton
International
Corporation
Eaton Automotive G.m.b.H. Germany 100% Eaton
G.m.b.H.
Eaton Controls G.m.b.H. & Co.
K.G. (Partnership) Germany 99.5% Eaton Yale
Ltd.
.5% Eaton
G.m.b.H.
Eaton G.m.b.H. Germany 100%
Eaton Technologies Limited Hong Kong 100% Eaton
International
Corporation
Eaton Automotive Srl Italy 33%
67% Eaton Srl
Eaton Engine Lifters Italy 100% Eaton Holding
Limited
Eaton Srl Italy 100% Eaton Holding
International
II B.V.
Fusion Italia Srl Italy 100% Fusion Europe
Ltd.
Eaton Japan Co., Ltd. Japan 100%
Fusion Semiconductor Japan KK Japan 100% Fusion
Technology
International
Inc.
Japan Fawick Company Limited Japan 50%
Sumitomo Eaton Hydraulics Co.,
Ltd. Japan 50%
Sumitomo Eaton Nova Corporation Japan 50%
Cutler-Hammer Controls Sdn. Bhd.Malaysia 100% Eaton
International
Corporation
Condura S. de R.L. de C.V. Mexico 99.999556%
.000444% Eaton Holding
International
I B.V.
Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton
International
Corporation
Eaton Controls, S. de R.L.
de C.V. Mexico 99%
1% Eaton Holding
International
I B.V.
Eaton Manufacturera S.A.
de C.V. Mexico 90.603%
Page 5
Eaton Molded Products S.
de R.L. de C.V. Mexico 99.9999985%
.0000015% Eaton Holding
International
I B.V.
Eaton Truck Components,
S.A. de C.V. Mexico 99.995%
.005%Eaton Holding
International
I B.V.
Operaciones de Maquila de
Juarez S de R.L. de C.V. Mexico 99.956%Cutler-Hammer
Inc.
.044%Eaton Holding
International
I B.V.
Eaton s.a.m. Monaco 100%
Eaton Automotive B.V. Netherlands 100% IKU Holding
Montfoort
B.V.
Eaton B.V. Netherlands 100%
Eaton C.V. (Partnership) Netherlands 99.9% Eaton Holding
III Limited
.1% Eaton
International
Corporation
Eaton Holding International I
B.V. Netherlands 100%
Eaton Holding International II
B.V. Netherlands 100% Eaton Holding
International
I B.V.
IKU Holding Montfoort B.V. Netherlands 100% Eaton Holding
B.V.
Technisch Bureau Hoevelaken B.V.Netherlands 100% Eaton Holding
B.V.
Cutler-Hammer Asia Corporation Philippines 100% Eaton
International
Corporation
Eaton Controls Spolka z o.o. Poland 100% Eaton Holding
B.V.
Eaton Automotive Spolka z o.o. Poland 100% Eaton
Automotive
Srl
Cutler-Hammer Pte. Ltd. Singapore 100% Eaton
International
Corporation
Eaton Services Pte. Ltd. Singapore 100% Eaton
Semiconductor
Equipment
Inc.
Page 6
Eaton Truck Components (Pty)
Limited South Africa 100% Eaton Limited
(U.K.)
Eaton J.C. Controls South Korea 51% Eaton
International
Corporation
Eaton Limited South Korea 100%
Eaton Semiconductor Limited South Korea 100% Eaton
Semiconductor
Equipment
Inc.
Fusion Pacific, Ltd. South Korea 100% Fusion
Technology
International
Inc.
Eaton Ros S.A. Spain 100% Eaton S.A.
Eaton S.A. Spain 49.86%
50.14% Eaton B.V.
Productos Eaton Livia S.A. Spain 100% Eaton S.A.
Rheodata S.A. Switzerland 100%
Rheodata Technologies S.A. Switzerland 100% Rheodata S.A.
Eaton Limited Taiwan 19.42%
80.58% Eaton
International
Corporation
Fusion Taiwan Inc. Taiwan 100% Fusion
Technology
International
Inc.
Modern Molded Products Limited Taiwan 50% Eaton
International
Corporation
Eaton Technologies Limited Thailand 100%
Rubberon Technology Corporation
Limited Thailand 100%
Eaton Financial Services
Limited United
Kingdom 100% Eaton Limited
(U.K.)
Eaton Holding Limited United
Kingdom 100%
Eaton Limited United
Kingdom 100% Eaton Holding
Limited
Eaton Shared Services Limited United
Kingdom 100% Eaton Holding
Limited
Fusion Europe Ltd. United
Kingdom 100% Fusion
Technology
International
Inc.
Page 7
Cutler-Hammer de Venezuela S.A. Venezuela 100% Eaton
International
Corporation
Cutler-Hammer Electro
Metalurgica C.A. Venezuela 100% Cutler-Hammer
de Venezuela
S.A.
(A) Other Eaton subsidiaries, most of which are inactive, are not
listed above. If considered in the aggregate, they would not be
material.
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14(c)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following
Registration Statements and related Prospectuses of our report
dated January 19, 1998, with respect to the consolidated financial
statements of Eaton Corporation included in this Form 10-K for the
year ended December 31, 1997:
Registration
number Description Filing Date
- ------------ ------------------------------------------ -----------------
333-46861 Eaton Limited U.K. Savings-Related
Share Option Scheme [1991] - Form S-8
Registration Statement February 25, 1998
333-40243 Eaton Corporation 172,489 Common
Shares - Form S-3 Registration
Statement February 20, 1998
333-45575 Eaton Limited U.K. Savings-Related Share
Option Scheme [1991] - Form S-8
Registration Statement February 4, 1998
333-35697 Cutler-Hammer de Puerto Rico Company
Retirement Savings Plan - Form S-8
Registration Statement September 16, 1997
333-35699 Eaton Savings Plan for Certain Cutler-
Hammer Represented Employees - Form S-8
Registration Statement September 16, 1997
333-28869 Eaton 401(K) Savings Plan and Trust -
Form S-8 Registration Statement June 10, 1997
333-28867 AIL Systems Inc. Employee Investment
Plan - Form S-8 Registration Statement June 10, 1997
333-25693 Eaton Corporation Shareholder Dividend
Reinvestment Plan - Form S-3
Registration Statement April 23, 1997
333-23539 Eaton Non-Employee Director Fee Deferral
Plan - Form S-8 Registration Statement March 18, 1997
333-22597 Eaton Incentive Compensation Deferral
Plan - Form S-8 Registration Statement March 13, 1997
333-13873 Eaton Corporation Investment Plan for
Hourly Employees of the Hydraulics
Division - Hutchinson Plant - Form S-8
Registration Statement October 10, 1996
Page 2
333-13869 Lincoln Plant Share Purchase and
Investment Plan and Trust - Form S-8
Registration Statement October 10, 1996
333-13861 Eaton Corporation 401(k) Savings Plan for
the Hourly Rate Employees at Airflex
Division - Form S-8 Registration
Statement October 10, 1996
333-13857 Eaton Wauwatosa Union Plan and Trust -
Form S-8 Registration Statement October 10, 1996
333-13855 Eaton Winamac Hourly Investment Plan and
Trust - Form S-8 Registration Statement October 10, 1996
333-03599 Eaton Corporation Share Purchase and
Investment Plan - Form S-8 Registration
Statement May 13, 1996
333-01365 Eaton Corporation Incentive Compensation
Deferral Plan - Form S-3 Registration
Statement March 1, 1996
33-64201 Eaton Corporation $120,837,500 of Debt
Securities and Debt Warrants - Form S-3
Registration Statement November 14, 1995
33-63357 Lectron Products, Inc. Retirement Savings
Plan - Form S-8 Registration Statement October 12, 1995
33-60907 Eaton 1995 Stock Plan - Form S-8
Registration Statement July 7, 1995
33-59459 Eaton Corporation 2,072,400 Common
Shares - Form S-3 Registration Statement May 19, 1995
33-53521 Cutler-Hammer Inc. Savings Plan for
Certain Hourly Employees - Form S-8
Registration Statement May 6, 1994
33-52333 Eaton Corporation $600,000,000 of Debt
Securities, Debt Warrants, Common Shares
and Preferred Shares - Form S-3
Registration Statement February 18, 1994
33-49779 Eaton Limited U.K. Savings-Related Share
Option Scheme [1991] - Form S-8
Registation Statement July 16, 1993
33-49777 Eaton Corporation Share Purchase and
Investment Plan - Form S-8
Registration Statement July 15, 1993
33-49393, Eaton Corporation Stock Option Plans -
33-12842, Form S-8 Registration Statement March 9, 1993
2-76349 &
2-58718
Page 3
33-15582 Eaton Limited U.K. Savings-Related Share
Option Scheme - Form S-8 Registration
Statement July 7, 1987
33-2688 Eaton Corporation Shareholder Dividend
Reinvestment Plan (Including Post
Effective Amendment No. 1 filed
February 19, 1986) January 15, 1986
2-77090 Eaton Corporation Strategic Incentive and
Option Plan - Form S-8 Registration
Statement May 10, 1982
/s/ Ernst & Young LLP
Cleveland, Ohio
March 20, 1998
Page 1
Eaton Corporation
1997 Annual Report on Form 10-K
Item 14(c)
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is
signed below has made, constituted and appointed, and by this
instrument does make, constitute and appoint, Adrian T. Dillon,
Billie K. Rawot or William J. Nowak his or her true and lawful
attorney, for him or her and in his or her name, place and stead
to subscribe, as attorney-in-fact, his or her signature as
Director or Officer or both, as the case may be, of Eaton
Corporation, an Ohio corporation, to the Annual Report on Form
10-K for the year ended December 31, 1997 pursuant to the
Securities Exchange Act of 1934, and to any and all amendments
to that Annual Report on Form 10-K, giving and granting unto each
such attorney-in-fact full power and authority to do and perform
every act and thing whatsoever necessary to be done in the
premises, as fully as he or she might or could do if personally
present, hereby ratifying and confirming all that each such
attorney-in-fact shall lawfully do or cause to be done by virtue
hereof.
This Power of Attorney shall not apply to any Annual Report on
Form 10-K or amendment thereto filed after December 31, 1998.
IN WITNESS WHEREOF, this Power of Attorney has been signed this
25th day of February, 1998.
/s/ Stephen R. Hardis /s/ Ned C. Lautenbach
- ------------------------------ ---------------------------
Stephen R. Hardis Ned C. Lautenbach
Chairman and Chief Executive Director
Officer; Principal
Executive Officer; Director
/s/ Alexander M. Cutler /s/ John R. Miller
- ------------------------------ ---------------------------
Alexander M. Cutler John R. Miller
President and Chief Operating Director
Officer; Director
/s/ Adrian T. Dillon /s/ Furman C. Moseley
- ------------------------------ ---------------------------
Adrian T. Dillon Furman C. Moseley
Executive Vice President; Director
Chief Financial and Planning
Officer; Principal Financial
Officer
/s/ Billie K. Rawot /s/ Victor A. Pelson
- ------------------------------ ---------------------------
Billie K. Rawot Victor A. Pelson
Vice President and Controller; Director
Principal Accounting Officer
Page 2
/s/ Neil A. Armstrong /s/ A. William Reynolds
- ------------------------------ ---------------------------
Neil A. Armstrong A. William Reynolds
Director Director
/s/ Phyllis B. Davis /s/ Gary L. Tooker
- ------------------------------ ---------------------------
Phyllis B. Davis Gary L. Tooker
Director Director
/s/ Ernie Green
- -----------------------------
Ernie Green
Director