Document 6dG7LemNOkdMBm3NORNGoG8m

HIGHLIGHTS V: mIm K-f.t !\'i C'MiV:, vii'U- .''.i,!:. - i: /W <<, 1 It :;y....i /, j<:< I. .M / .'Ills 11 ' :a::: < "v V ,-iO \? i/m t: r/ W'i'; I.N'.l . T, Ml iMl'! si.,, i'.I' .> V;: :.(! i!..' i|\. J K. nit- I-.1 ^ , i ;iv LJ.-M:!H |e. v,- >..hi;- . .1 rtiici ........:i.ii. i... I'm the CONTENTS 1 /.( I,'.`I' S ll it I'l'lli i ! ifc 1 V 4 (ftini'Jl (fli.ltrill M/'t' HI I I i 'll ; I [. \ : //, >; ft 8 Gil >''// I,:n n:.,l m, <:! 12 (fnnnfi ihi:r:h (ih'iuil 16 (rV.iiii/'i iliioiivli .1 Ci/hi wiiiMM 20 (i'll >.'/i.7t,',v,/ rinuiii i.il S i: r me n; - 30 (J n,! t~t <'t'/ y l iii l a 32 fiitsiucss .SC'.'i/it /// ! n l<>riii a t ion TO OUR SHAREHOLDERS By nearly all measures. Eaton has attained the qualities of a stellar performer - market leadership, superior returns, a solid balance sheet and enviable cash generation. We are now leveraging those strengths to realize our remaining goal: sustained, above-average growth in earnings. Progress made in 1994 provides credible indicators that such growth can become reality. Achieving the highest earnings and sales in our 83-year history is but one sign of Eaton's gathering strength. Another is the extension of market leader ship. Fifteen years of building and pruning have brought Eaton to the point where every major line of business is a leader in the market it serves. More than 80 percent of the company's sales, in fact, come from products that are number one or number two in their markets. This has been largely responsible for a total return on your invest ment of 15.2 percent annually over the past five years. 91 9? 93 94 NET SALES . ,n IMI I JO u 91 92 93 94 INCOME BEFORE ACCOUNTING CHANGES m: .V A 91 92 93 94 RETURN ON SHAREHOLDERS' EQUITY rtotn, The 1994 acquisition of the Westinghouse Distribution and Control Business Unit (DCBU) tripled the size of our CutlerHammer industrial control and power distribution business, put us on an equal footing with our primary competitors in North America and gave Eaton 51 billion of additional sales. This business, which had been our last major operating unit with out substantial leadership across its industry, now represents our largest concentration of sales. Its growth, coupled with that of our other businesses, pushed Eaton's sales above S6 billion for the first time. We believe the future will continue to reward companies with leadership in industrial markets. Production in this sector has outperformed the general economy in the United States by 50 percent throughout the current expansion, and we see several reasons for continued opti mism. On the immediate horizon: t Order backlogs for heavy-duty trucks in North America at the end of 1994 were a record 212.000 units, more than twice the level of a year ago. t Contracts representing current and future non-residential building construction in the U.S. increased 27 percent in 1994, strong evidence that these markets are recovering from the prolonged slump. < Europe and Japan are emerging from their recessions, and exports of capital goods to Latin America and Pacific Rim countries are rising significantly. We are. however, aware that orders are not shipments and favorable economic winds can die. It is there fore encouraging to see evidence that the industrial economy is benefiting from underlying trends which add force to the current cycle but will not disappear with rising interest rates. Fundamental improve ments in productivity and quality have given U.S. manufacturers a competitive advantage in world T Eaton s Senior Management Cmmctf mWutfes. from fvfi. William E. Butler, chairman tuuf chiefexecutive officer. Stephen R. Hardis, vice chairman and chieffinancial and administrative officer: Gerald L Gher/eiit. executive cu e pix'sident and general counsel: John S. Rotlwig. president, chief operating officer - Vehicle Components, and Alexander M. Culler, executive vice president, chief opemting officer - Controls. T <:? markets. These changes have affected the strategies of global companies and their decisions about where to source products. Eaton is participating in this trend and is a beneficiary of it. There are three basic ways in which Eaton is expanding its sales and earnings: through internal develop ment of new products, by expand ing into global markets and by acquiring other companies or product lines. The prerequisite for all three, however, is what we call operational excellence - market leadership based on continuous improvement in quality and pro ductivity. In 1994. for the third year running, productivity improvement exceeded 4 percent. This has allowed us to maintain our margins while pricing our products competi tively in value-driven world markets. Market leadership also helps Eaton generate superior rates of return on equity. In 1994. that return was 22.8 percent, which placed us among the top quurtile of the S&P 400. Superior returns also produced the discretionary cash necessary to maintain existing market leadership and help finance additional growth. Capital investment in 1994 totaled nearly S270 million, much of it devoted to improving the efficiency of our 150 factories around the world by providing better tools, equipment and working environ ment for our 51,000 employees. Capital spending in 1995 is projected to be $350 million, the highest in the company's history. Some of these funds will be used to expand capacity in areas where current customer demand requires certain plants to operate at rates well beyond optimum efficiency, which penalizes earnings. With operational excellence as a foundation, we continue to implement a three-pronged strategy for growth: Internal Development In 1994. investments in internal development - R & D and engi neering - exceeded S250 million. Increasingly, these funds are being used to make mechanical products "smart" by applying electronics, and to develop assemblies and sub systems instead of components. Electronic technology is becoming increasingly sophisticated and durable, and we are applying it in ways which add value for our cus tomers hy enabling them to differ entiate from their competitors. Likewise, as major customers seek io simplify their manufacturing and reduce suppliers, we are finding opportunities to provide full assem blies rather than components alone. These strategies - simple to describe - are complex to execute. Increasingly, we are relying on multidisciplinary teams, including customers, to bring innovative products to market which will have noticeable impact on our sales. The process helps quicken the pace of product development, improves the efficiency of manufacturing and insures greater market acceptance. Global Expansion We are redoubling efforts to expand in Latin America and the Pacific Rim, regions expected to have the highest growth rates for the foresee able future. We intend to leverage the success we have enjoyed in North America and Europe to these less developed regions which require so many of the products we produce. Eaton's reputation as a market leader is essential for this strategy - since business and government decision-makers in these developing economies look for (rusted names with whom to forge partnerships. These regions already account for significant Eaton business, some of it not readily apparent. If exports from our U.S. plants and sales from joint ventures are added to consolidated sales in Latin America and the Pacific Rim. total revenue from these regions in 1994 was SI.2 billion, up 76 percent in the pasi three years. T Acquisitions Over the past 10 years, we have acquired 26 companies or product lines to strengthen our businesses and assure their world-class competitiveness. We have made solid progress in integrating the Westinghouse DCBU with our Cutler-Hammer business. During 1994, we closed 23 manufacturing, warehousing and distribution operations in order to eliminate excess capacity. We are consoli dating product offerings and increasingly capitalizing on the product synergies we had antici pated. The projected dilution in 1994 earnings per share, originally forecast when we acquired the Westinghouse business, became, instead, a positive contribution to earnings. Successfully integrating such a large acquisition is strong evidence of the capability of our operating managers to undertake similar projects, if the value and strategic fit are right. Two smaller acquisitions made in 1994 illustrate another facet of our acquisition strategy. In No\ember. Eaton added Lectron Products. Inc., a manufacturer of automotive controls, and in December, we acquired a majority interest in a leading Brazilian appliance controls company, reinforcing our position in the growing Latin American market. Both illustrate the building of our automotive and appliance , controls business. In I9NU. it had less than SI7? million in -ales. mostly in the U.S. and Canada. Today, it is a global business with 33 manufacturing plants in 12 countries. Sates in 1995 are expected to be a billion dollars, more than 45 percent of which are outside North America. Eaton's entire management is pledged to continue the profitable growth of the company, and the strategy to achieve it which is out lined in this report. That commit ment is. I hope, as reassuring to you as it is to me. for l am retiring at the end of the year. Long after that date, however, my interest in Eaton's progress will continue, as will my pride in the accomplish ments of our Eaton team. We have no doubt that attaining the goal of high, sustainable earnings will translate directly into increased shareholder value. Our intent is to eliminate the discount at which Eaton shares trade below the average of the S&P 400. That change will proceed as the market perceives and then acknowledges that Eaton has. in fact, become a different and better company. We very much appreciate your continued support as we seek to enhance your investment. VOtfiStAAM "5"- William E. Builer Chuintmii <imi Chief Executive Officer Eehrmirv 2fi. /W5 Pun Minin v. /eft. ftiul \t> 'iioitfertii. ir>\cmh/c ' n fHMmi pmuf>y t /.',/,mi \ ftftitu in Hutchinson. Kansas. The pumps un critical components in hufmstatie tntnstni!tsiim,\ that /impel such pnnhu/.s as sku/ steer holders, industrial sweepers and \t nthhers. eommen ud lawn moisers and other et/mjjtUCnt requiring fmm 11HO horsepower. MARKET LEADERSHIP Operational excellence in today's fiercely competitive global arena demands market leadership that permits the economies of scale, product breadth and command of strategic imperatives to compete effectively, Eaton's return on common equity in 1994 was 22.8 percent, only the third time since 1950 that this By 1993. all but one of Eaton's businesses had achieved market leadership. The one exception the industrial control and power distribution business marketed under the Cutler-Hammer name overcame that hurdle in 1994 figure has risen above 20 percent. Over the past two years, net cash provided by Eaton's operating activities approached $1 billion. These funds are funneled into activities that sustain and build market leadership. I with the $1 billion acquisition of Westinghouse product lines (dis cussed more fully under "Growth through Acquisitions" on pages 16 through 19). Today. Cutler-Hammer, with nearly $1.5 billion in sales, has the size and product offerings to compete on a global basis. Market leadership means that certain costs, such as product and market development, can be spread over larger sales to improve profit margins. It means better prices from suppliers through larger vol ume purchases. It means having a greater ability to build strategi cally for the future despite the Boosting Factory Efficiency Over the past 10 years, Eaton has invested more than $1.8 billion in capital improvements, including nearly $270 million in 1994. Much of this amount has been devoted to increasing operating efficiency at the company's 150 factories around the world. As demand for our prod ucts has surged since 1991, invest ments in modernization have paid off handsomely. By the end of 1994, Eaton plants had earned more than 800 customer quality citations and certifications. Nearly 40 percent of Eaton's plants H. vagaries of the marketplace Each of Eaton's businesses now enjoys these substantial advantages. have already qualified for the inter national quality standard. ISO 9000. and many others will do so in 1995. In 1994. Eaton's plant in Salisbury. Maryland, winch manufactures /.ah'ii n>i,l Mm k hydraulic-magnetic circuit breaker' was cited for us crucial support Pet kti i tu'i , fn\ef\ fit the ilt-s<-s*m h),/ MiH'i/ij,;. ;/nc "! in il, ii,-' , /i/' I.tilxi! "ti/nuhii lares on-, than .'ft nut il. /.. w hen a division of AT&T won both the Malcolm Baldrige Award, the U S national quality award, and the Demmg Prt/e. Japan's national quality award. T QROWTH THROUGH OPERATIONAL EXCELLENCE I l I I__________________ ROLANDO CRUZ TESTS SERIES C. TYPE PS. MOLDED CASE CIRCUIT BREAKERS AT THE CUTLER-HAMMER PLANT IN TOA BAJA. PUERTO RlCO THESE MICROPROCESSOR CONTROLLED BREAKERS MEET INTERNATIONAL ELECTRICAL STANDARDS AND ARE USED PRIMARILY FOR MOTOR PROTECTION SERIES MOLOEC CASE CIRCUIT BREAKERS ARE A LARGE FAMILY OF BREAKERS WITH RATINGS FROM 10 AMPS TO 2500 AMPS T growth through operational excellence DYNAMOMETER TECHNICIAN BRIAN CARPENTER TESTS EATON VALVES IN A M LITER CHRYSLER PROTOTYPE ENGINE. AS A PREFERRED SUPPLIER FOR VALVES AND ROLLER LIFTERS UNSET). EATON CONTRIBUTES SIGNIFICANT TECHNOLOGICAL EXPERInCE sTO CHRYSLER NEW ENGINE DESIGN ANO DEVELOPMENT PROGRAMS T Improving Productivity For three years running. Eaton has achieved its corporate goal of at least 4 percent improved produc tivity annually. Inventory manage ment, judged by annual turnover, has improved 25 percent in the last five years. The spotlight on numbers does not obscure our clear and continuous focus on the customers who deter mine our success. Our goal is total customer support. We seek to antic ipate their needs so completely that they are delighted by their associa tion with Eaton. Here are a few of the ways Eaton's service translates into customer delight. i Strategic alliances between Eaton and its customers are nourishing. Eaton and Cummins, the leading manufacturer of engines for heavyduty trucks, now work jointly on valve train designs. This alliance gives Cummins access to Eaton's extensive technical expertise and gives Eaton the inside track on new business. Engineers at Black & Decker, a company renowned for its power tools, routinely form cross-functional teams with their Eaton counterparts to design better, more versatile power tool switches. Total service is an everyday goal. Cutler-Hammer recently worked closely with Ford Motor Company and Lamb Technicon. an equipment manufacturer, to design a multi plexed, microprocessor-based sys tem to control a transfer machine that processes engine parts at Ford's plant in Windsor, Ontario. Canada. Cutler-Hammer also worked hand-in-glove with Moore Electric Supply. Inc., its distributor in Charlotte. North Carolina, to win the multi-million dollar electrical contract for the new stadium where the National Football League's Carolina Panthers will play. Generating New Business * High quality and timely delivery often mean more orders. Since 1991. Eaton's business with Chrysler has grown four-fold and today Eaton Is Chrysler's preferred supplier of valves and hydraulic roller lifierv Eaton is also a major supplier to Chrysler of automotive controls, including switches, cruise controls, air conditioning expansion valves and drier receivers. . knhvn [-. Sllwifliiwili. tell- ifiwif/nmliu l ih-iftn/nilfin tvn/inffi: will lllnmin \1. Hull, m,will,,, timii^ fitttrncfi. funiwif ii In^lhfHm cr rift nii nl hitnl ih ili ihiiiiiin ninilntf l< n Ihf .\/>ti, Itf iii-lti n/ili-i Ilif mill\ imu nlf , ii.r. ,, <7`.'/l/ anil n/f nn ,iif\ inut iin- fincnifli i fhnlilf will fllh icm in niwutxitif /nni in- nhimfil mn ` lift (Tackling tough problems builds goodwill. Boeing and Pratt & Whitney were delighted when Eaton designed problem-free hydraulic and differential pressure switches that resolved problems and enabled jet engines to perform at optimum efficiency. The focus on customers is at the heart of operational excellence and the essence of good business - and of growing market leadership. But having market leadership - as Eaton does - is not enough. The challenge is to sustain and build on that lead ership to steadily improve financial performance. The hard-won finan cial rewards of our success are being carefully reinvested to achieve this goal. T oil's iirw nmtrffi/cuHi; .WAfrni ini'! an cfectronn vontnd module linked in a wnxtc twisted pan of w n t's fill bottom in phidot. which * nolmi numcO'tis ftnu lioox (tod replaces the ciiinherstnne spaghetti like cable laved w ith individual w i>x"( (rijiht in photo i Ji>r co* h function. Robert C Net) wake* /ici<//m/> adjusters at Eaton \ new plant tn Bivns\> m A, Ohio The adjusters fasien ihr haullamp to the \ chicle ami permit \ ertn ai aml/m hp>i :<ual aii/nsimem J.afon manalai lines milht t hctullainp adptsteii iounmlls fni hiidnn; MORE NEW PRODUCTS At Eaton, internal development is focused on two things: (I) more new products, (2) in less time. The company has a carefully crafted strategy driving this vision. The long-term objective is 10 per cent sustainable eamings growth annually. As part of its strategic plan ning, Eaton prioritizes many opportunities for growth: new products, new technologies, new uses for old technology, and. to a thriving extent, the application of electronics to Eaton's traditional mechanical and electrical products. We are placing special emphasis on opportunities that will generate substantial sales and eamings within five years. We recognize that some of today's promising projects will fail; others, however, will generate growth far in excess of expectations. A team of carefully selected business and technical experts shepherds each project. These Simultaneous Product and Process Development (SPPD) teams often have 25 to 30 members. They include many disciplines: product design, engineering, manufactur ing. marketing and sales, as well as customer representatives with various areas of expertise. The teams address both product and process workflows, simplifying them to develop and introduce new products in less time. The SPPD team devotes its time exclusively to the new project, employing the best practices and technology. Rigorous analysis by the company's senior managers gauges progress along the way. Funding is a critical issue, and Eaton dedicates funds to permit projects to succeed long-term. Substantial Rewards Ahead This strategy has already generated new sales, but the substantial rewards lie ahead as the strategy spreads throughout the company. Eaton SPPD teams have already had notable successes. tin 1995. Eaton will begin deliver ing multiplexing components to Chrysler that substantially reduce the wiring required in 1996 Jeep Grand Cherokees. Multiplexing permits electronic controls attached to vehicle components to communi cate with one another via a single twisted pair of wires. This system reduces weight and lowers costs h> eliminating the spaghetti-like wiring harness in vehicle doors and dash boards required to run individual wires 10 each switch. The sales potential is extraordinary if other automakers adopt the technology, and Eaton's leading-edge position provides outstanding growth opportunities. growth through internal oevelopment____ , ------------------ .. VERONICA ROSAS PEREZ ASSEM&lES ELECTRONIC MODULES AT EATON'S PLANT IN MATAMOROS. MEXICO THE MODULES ARE PART OF EATON'S NEW MULTIPLEXING SYSTEM FOR CHRYSLERS 1996 JEER GRANO CHEROKEES MULTIPLEXED FUNCTIONS INCLUDE REMOTE KEYLESS ENTRY. SINGLE/ALL-DOOR LOCK. AUTO DOOR LOCK AT 15 MILES PER HOUR. HEATED MIRRORS ANO DRIVER S SIDE WINDOW EXPRESS-DOWN ...................... 1~ 'I T -i i ...........................- i I growth through internal development of the benefits of automatic transmissions at reouceo costs .* Eaton's EC Timer - designed especially for European appliance makers - is modular, and customers can select their level of sophistica tion. Refinements to the timer's components have helped the compa ny maintain its edge in an increas ingly competitive European appli ance controls market. I Responding to the needs of vehicle manufacturers. Eaton designed an aluminum drier receiver that filters and dries air. thus greatly improving the efficiency of automotive air conditioning systems. Enlarged Circuit Breaker Line I Computer modeling resulted in ' the rapid development of a new cir cuit breaker that extends the com pany's leading medium voltage circuit breaker line to 38 kilovolts. The new circuit breaker, which is typically used in electrical substa tions. offers long life and troublefree service. * Eaton has also developed a new heavy-duty hydrostatic pump that incorporates an electronic circuit board, sensors and multiplexing to allow pump parameters to be mom tored and adjusted to optimize per formance. The pumps are smaller and quieter than earlier models and are designed for use on combines, wheel loaders, lift trucks and simi lar agricultural and construction equipment. Eaton's share of the S500 million worldwide market for heavy-duty hydrostatics is growing. The company intends to market the new electronic hydrostatic pump aggressively during 1995 in both North America and in Europe. I In 1994. Eaton introduced the AutoShift. a semi-automated heavy-duty transmission primarily for buses and coaches. Based on the Eaton Fuller 10-speed mechanical transmission, the AutoShift has an electronic module that selects ideal shift points and shifts automatically. Among other advantages. AutoShift trims weight and cost and reduces complexity. A partially automated version, the AutoSelect. is being offered for heavy-duty trucks in North America. HttUunu'. u\`ht. titiioti\icr iff ttl*intniix amf ru./(r/my. and Jim Pick, mammci fH'tHftn l\ yron/*. my kys nu-mha s nf a ica>n that i/f'it'iin/ti ont ,'<' Min_vr '4 sll-itl far Willi anti kilim: '</*> \tcm.s. ui ..tkiinan lo nuliudual i timnii aituu Inc ynm f/f ofif)orna;:iic\ * Other truck projects include a lightweight, heavy-duty D404 tandem axle, now the benchmark of the industry; an extremely robust and reliable steer axle: extended service ("ES") brakes; a tire pres sure control system that permits drivers to deflate and reinflate tires while the vehicle is moving. The tire pressure control system proved itself in Operation Desert Storm and in field testing with forestry customers such as Weyerhaeuser. Through internal development. Eaton is meeting the challenge ol extending the lite ol current prod ucts and developing new families upon which to build a future ol growth and prosperity. Eaton makes both /iwi* ami vixenus fan times at its plant m .WtaUaif. Cit'fimmv. fat < iistmuefs n 20 unwinr* in Etaa/ie. Smith Atnenea atut Southeast Amu Y QY Renuie Dammel mvoleetl in final assembly of i i.H Ou.s fans anil fan shnnats at Eaton \ phut! in Mai'kihnf, Ceonunv. i\heir enifilouTs eamaianit ate m 10 lanxuuycs. T WORLDWIDE OPPORTUNITIES Eaion has 63 manufacturing plants outside the United States, including 26 in Europe and 21 in Latin America. Within the next few years, the number of facilities is expected to grow steadily as Eaton moves into developing markets, where global market leadership makes Eaton the partner of choice. In 1994. a task force identified 10 countries with exceptional growth prospects as prime markets for Eaton products. Most are in the Far East and Latin America. In many of these developing markets, automakers and appliance manufacturers are vying to be the supplier of choice. As a component supplier to most of the world's passenger car and truck manufacturers and to every major U.S. and European appliance maker. Eaton is well-positioned to participate as growth opportunities develop. Cutler-Hammer is growing its elec trical equipment business globally through wholly-owned subsidiaries in Canada, the United Kingdom. Venezuela. Mexico. Costa Rica. Brazil and Australia, and through export sales. Cutler-Hammer's broad product lines, including molded-case circuit breakers and vacuum breakers, meet all international electrical I hi team W\/n > mi hit- (or \t inn^ up tin ih ttui-m t>l\ line { > \ St < n v ima> mi\\imi\ nl \l t itiih e. an hub's hum hit. leant t,ni,l, f .niUnui /.i/ Utttmutti t^mn ni ( < 'i haul Iemi f t,tm i \ standards. These products, along with photoelectric and proximity sensors. Freedom Series motor starters and contactors, and PanelMate video control panels, provide a substantial platform from which to grow the business interna tionally. (Cutler-Hammer is dis cussed more fully under "Growth through Acquisitions." on pages 16 through 19.) Groundwork For Growth In China, Eaton has had a licens ing agreement for its 9-speed Roadranger transmissions since 1986. In 1993. Eaton formed Jining Eaton Hydraulics Company, a joint venture in China manufacturing hydraulic components, such as hydrostatic steering units and orbit motors. Eaton's chairman and other senior officers visited China last fall to lay the groundwork for other business ventures. Perhaps the most successful of Eaton's international joint ventures is Sumitomo Eaton Nova (SEN), which manufactures ion implantcrs in Japan for worldwide markets. Eaton and SEN engineers work closely on the development of new products. The most recent result ol orowth through gloom, expansion I i. '------------------------------LAURENT LANUEL UNDERTAKES FINAL ASSEMBLY OF AN SSERIES TRANSMISSION AT EATON'S MANUFACTURING PLANT IN ST. NAZAIRE. FRANCE. THE FULLY SYNCHRONIZED S-SERIES WAS OEVELOPEO BY TEAMS IN EUROPE AND THE UNITED STATES AND DELIVERED TO MARKET IN JUST OVER TWO YEARS FROM CONCEPT TO MANUFACTURED PROOUCT O T growth through global EXPANSION SON CHAU. ELECTHICAL/MECHANICAL assembler, helps prepare ONE of EATON'S leaoing eoge nv-gsd/he ion implanters. which are designed, manufactured ano . ASSEMBLED in BEVERLY. MASSACHUSETTS. EATON WILL DELIVER CUSTOMERS MORE THAN 30 OF THE NEW UNITS IN 1995 INSET THE FRONT OF THE NV-GSO/HE SHOWS THE IMPLANTER S SOPHISTICATED WAFER-HANDLING SYSTEM. their collaboration is Eaton's new high-energy ion implanter. intro duced in 1994 to overwhelming market demand. Eaton and Sumitomo Electric each own 50 percent of the SEN joint venture. Eaton's high-current and mediumcurrent implanters are in demand worldwide. Successful Joint Ventures Other joint ventures include Sumitomo Eaton Hydraulics Company (SEHYCO), a partner ship with Sumitomo Heavy Industries of Japan that manufac tures hydraulic components; Modem Molded Products Ltd., which manufactures Golf Pride golf grips in Taiwan; Nittan Valve of Japan, which has a major position as an Asian automotive valve sup plier; and Japan Fawick. which manufactures Airflex clutches and brakes and markets Golf Pride golf grips. Eaton has one wholly-owned manufacturing plant in Asia, an assembly facility in Taiwan that manufactures commercial switches for Asian customers. Total Eatonrelated sales in the Asia-Pacific region in 1994 were approximately S750 million. Among other areas identified for their exceptional growth prospects are Latin America and India. Eaton manufactures axles and assembles a variety of controls in Mexico, and is pursuing other investment oppor tunities. In Brazil, Eaton manufac tures truck components, engine components, industrial control and power distribution equipment, and appliance controls. In India, the company participates in a joint ven ture that builds truck axles. Eaton is also continuing to develop its extensive manufacturing and marketing base in Europte. where it has excellent market positions in automotive and appliance controls, engine components and truck com ponents. and has growing positions in electrical equipment, commercial controls and hydraulics T Engineers mi uieeil m niunufaetnnny umlded < ti.se eireutr breakers ui Tint Safa. Puerto Hit n. iitclmir Hainan Oieda prodm/ mill pitH tpial itv iinprm enieiii 1`Uyitit't'i \furidell\ Hieeru, iiiuitu lot luring r'.v'"uvr Hem Hey. nuiindiH luring sitpei vi.sor. and Lorn Hopple*, nunputerinteyeuted man nfucturiiig enyateei Kuiiui'y Chadnunt Ui//nmi E. Hutler. eennx Purulent John S. Hode^iy. nyhl and Esenuiee V'n Ptvudcn1 Ale.\undei M Cudcr visiled China die lull </ /WV /ft t(tihinti hn silu-s > nppm tnmlie\ y.uti'ii has seien fan *</ line businesses in Thi\ vacuum circuit breaker ruled i 5.00() iydts and weifihinji J50 pounds, is on imcjind pun of Cul!cC'H(Winu`r'\ mcdiinn-volmfie sn itchycut: u hu h n marketed mlobali\ T EXPANDING OUR REACH Over the Iasi 10 years. Eaton has speni SI.7 billion on acquisitions that sustain and build market lead ership. As a result, more than 80 percent of Eaton's sales come from products that are number one or number two in the markets they serve. The acquisition of the Westinghouse Distribution and Controls Business Unit (DCBU) in 1994 merged two heavyweights - CutlerHammer, a major player in industrial controls, and DCBU. a leader in electrical distribution equipment - into one world-class franchise marketed as "The New Cutler-Hammer." The combination created one of the broadest selec tions of electrical components available from a single supplier. Cutler-Hammer sales in 1994 approached $1.5 billion. These sales come from two broad cate gories of products:* * Industrial controls include contac tors and motor starters, variable speed drives, photoelectric and proximity sensors. PanelMate video control panels, microprocessorbased control and protection devices, as well as pushbuttons and switches, all designed to enhance factory performance. * Power distribution equipment includes the most complete Iannis of circuit breakers in the industry, ranging from miniature breakers rated 12(1 volts up to world class vacuum breakers rated up to 38 kilovolts. These products are used wherever there is a demand for electrical power - in residences, high-rise apartment and office buildings, commercial sites, hospi tals and factories. The company's Series C molded case circuit break ers provide increased performance in less space than standard breakers and, like the vacuum breakers, meet all major international electrical standards. As a result, the company has high expectations of substantial ly improving export sales and sales at seven international subsidiaries. Leading-Edge Products - Microprocessors are changing the electrical equipment industry, and Cutler-Hammer's leading-edge products provide substantial competitive advantages. The new Digitrip OPTIM programmable electronic trip unit uses micro processors to monitor and adjust sellings on installed circuit breakers, reducing downtime, increasing pro ductivity and trimming costs. This technology, previously feasible only on large breakers, is now available on smaller molded case breakers. The OPTIM trip units perform opti mally with the company's Series C molded case circuit breakers and 4 t 1 CBOWTM THRQUQH ACQUISITIONS---------------- I ^------------------------------BILLY CANN, DRAFTER/TESTER. CHECKS MEDIUM-VOLTAGE SWITCHGEAR AT THE COMPANY'S PLANT IN GREENWOOD, SOUTH CAROLINA INSET: AN ASSEMBLY TEAM AT THE PLANT INCLUDES. FROM LEFT. DIANE CAFFNEY. OSCAR E LATIMER. LINOA K COBB AND CEORGE M BALCHIN 17 GROWTH THROUGH ACQUISITIONS -------------- SHERRI FRANKLIN PLACES A PRINTED CIRCUIT BOARD ONTO AN AUTOF' > TRANSMISSION SOLENOID MANIFOLD AT EATON S PLANT IN ROCHESTER HILLS, MICHIGAN. ACQUIRED AS PART OF lECTRON PROOUCTS IN 1994. SOLENOIDS (INSET) ASSURE SMOOTH GEAR SHlfTI LECTRON W^LL AOO MORE THAN $140 MILLION TO EATON S ANNUAL SALES T low-voltage power circuit breakers to provide superior protection, diagnostics, monitoring and com munications capability to protective applications. Technological Innovation Another new product is the [Q Analyzer, an outgrowth of the industry-leading family of IQ Electronic Meters. The IQ Analyzer monitors a full range of system parameters, including current, volt age, power and energy demand, among others. It also monitors the quality of power, noting voltage sags and harmonics, which can be harmful to electrical distribution systems. The IQ Analyzer, which features a user-friendly operator panel, makes system data easy to retrieve and available in a form that operators can readily interpret and use. As with all of the IQ family of products, it can also communicate information back to a personal computer over the Cutler-Hammer IMPACC system. The IQ Analyzer is ideally suited to locations such as computer facilities, commercial sites and industrial plants, where power quality iserueial. More typical for Eaton than the Westinghouse DC8U purchase are niche acquisitions, smaller fran chises that complement and bolster product lines. Eaton continued that trend in 1994 by acquiring Lectron Products. Inc., of Rochester Hills. Michigan. Lectron. Eaton's 26th niche acquisition since 1984. manu factures electro-mechanical and electronic controls for the automo tive industry, including shift valves for electronically controlled auto matic transmissions, speed-sensi tive power steering control valves, keyless vehicle entry systems, day time running lamps, chime warning modules and releases for trunk lids and fuel doors. Strength in New Markets During 1994, Eaton also acquired a 51 percent interest in Mallory Controles Ltda. of Sao Paulo. Brazil, with an option to acquire the remaining 49 percent. Mallory is the leading supplier of controls for major appliances in Brazil, and the acquisition reinforces Eaton's position with its global customers Ciitter-Hnimiier H'! ' breaker* arc reoihed far shipment at llw i a imny 's plant in Heim Pennsvlvonin. Onleis with nne la five birak. are slapped nest Jo\. orders of six or more . shipped within five da in the growing Latin American market. The factory in Sao Paulo makes program timers, pressure switches and water valves for major appliances. These products comple ment others offered by Eaton's automotive and appliance controls business. In 1980. Eaton's automotive and appliance controls business had less than $175 million in sales, mostly in the U.S. and Canada. Today, it is a global business with 33 manufac turing plants in 12 countries. Sales in 1995 are expected to be $ 1 billion, and more than 45 percent are in foreign markets. As part of a long-range plan for building its businesses, Eaton remains alert for opportunities to reinforce basic business strengths, build product breadth and improve market leadership. 19 EATON CORPORATION CONSOLIDATED BALANCE SHEETS December 31 {Millions) Assets Current assets - Cash Short-term investments Accounts receivable Inventories Deferred income taxes Other current assets Property, plant and equipment Land Buildings Machinery and equipment Accumulated depreciation Excess of cost over net assets of businesses acquired Deferred income taxes Other assets Liabilities and Shareholders'Equity Current liabilities Short-term debt Current portion of long-term debt Accounts payable Accrued compensation Accrued income and other taxes Other current liabilities Long-term debt Postretiremen! benefits other than pensions Other long-term liabilities Shareholders' equity Common Shares (78.0 in 1994 and 71.3 in 1993) Capital in excess of par value Retained earnings Foreign currency translation adjustments Unallocated Employee Stock Ownership Plan shares The Financial Review on pages 24 io 32 is an integral part of the consolidated financial statements /w 1993 S 18 23 889 698 151 67 1.846 $ 32 268 550 434 127 55 1.466 50 539 2.321 2.910 (1.441) 1.469 850 158 359 $4,682 41 486 1.959 2.486 (1,298) 1,188 265 112 237 $3,268 S 14 22 449 163 . 60 394 1.102 1.053 573 274 39 806 988 (7I| (821 1.680 $4,682 $ 14 110 266 106 23 268 787 649 509 218 36 535 708 (78) (96) 1.105 $3,268 EATON CORPORATION STATEMENTS OF CONSOLIDATES INCOME Year ended December 31 (Millions esccpt (or per share 4iu) Met sales 199-1 S6.052 Costs and expenses Cost of products sold Selling and administrative expense Research and development expense Acquisition integration charge ' Income from operations 4.397 882 213 5.492 560 Other income and (expense) Interest expense Interest income Other income - net Income before income taxes Income taxes Income before extraordinary item and cumulative effect ofaccounting changes Extraordinary item Cumulative effect of accounting changes Postretirement benefits other than pensions Income taxes Met income (loss) (91) 7 12 (72) 488 155 333 $ 333 Per Common Share Income before extraordinary item and cumulative effect of accounting changes Extraordinary item Cumulative effect of accounting changes Postretirement benefits other than pensions Income taxes Net income (loss) S 4.40 $ 4.40 Cash dividends paid S 1.20 Average number of Common Shares outstanding 75.6 The Financial Review on pages 24 to 32 is an integral pan of the consolidated financial statements. 1993 $4,401 3.284 591 154 55 4.084 317 (75) 8 12 (55) 262 82 180 (7) $ 173 $ 2.57 (.10) $ 2.47 $ 1.15 69.8 1992 $4,101 3.134 578 151 3,863 238 (89) 9 23 (57) 181 41 140 (274) 6 $ (128) $ 2.03 (3.97) .09 $(1.85) $ 1.10 68.9 EATON CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS Year endedDecember 31 (Millions) Operating activities Income before extraordinary item and cumulative effect of accounting changes Adjustments to reconcile to net cash provided by operating activities Depreciation Amortization Acquisition integration charge Deferred income taxes Long-term liabilities Other non-cash items in income Changes in operating assets and liabilities. excluding acquisitions and divestitures of businesses Accounts receivable Inventories Other current assets Accounts payable and other accruals Accrued income and other taxes Other - net Net cash provided by operating activities Investing activities Acquisitions of businesses, less cash acquired Divestitures of businesses Expenditures for property, plant and equipment Purchases of short-term investments Maturities and sales of short-term investments Other-net Net cash used in investing activities Financing activities Borrowings with original maturities of more than three months Proceeds Payments Borrowings with original maturities of less than three months - net Proceeds from sale of Common Shares Proceeds from exercise of stock options Cash dividends paid Net cash provided by (used in) financing activities Total increase (decrease) in cash Cash at beginning of year Cash at end ofyear The Financial Review on pages 24 to 32 is an integral pan of ihe consolidated financial statements. W4 199i 1992 S 333 :i(> 35 4(1 .17 $ 180 182 14 55 (65) (6) S 140 184 16 (26) 20 (39) itwi (115) ti:> 121 10 4 522 40 12 6 29 (15) 3 435 58 11 (5) (8) (9) 39 381 U.05X) 61 (267) (7) 252 9 (1.010) (14) (227) (108) 22 8 (319) (22) 18 (186) (86) 18 (258) 731 (609) 173 252 IX (91) 474 (14) 32 5 IX (98) (14) 62 19 (83) (114) 2 30 $ 32 99 (151) (15) 29 (76) (114) 9 21 S 30 EATON CORPORATION STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY -- 1 Shut* 'ft thousand*, dollars m millions) . Balance at January I, 1992 Net loss Cash dividends paid, net of Employee Stock Ownership Plan (ESOP) tax benefit Issuance of shares under employee benefit plans, including tax benefit Reduction of unallocated ESOP shares Foreign currency translation adjustments Balance at December 31, 1992 Net income Cash dividends paid, net of ESOP tax benefit Issuance of shares under employee benefit plans, including tax benefit Two-for-one stock split Sale of shares Reduction of unallocated ESOP shares Foreign currency translation adjustments Balance at December 31, 1993 Net income Cash dividends paid, net of ESOP tax benefit Issuance of shares under employee benefit plans, including tax benefit Sale of shares iling-of-interests with Lectron Products, Inc. unrealized net gain on available-for-sale securities. net of income taxes Reduction of unallocated ESOP shares Foreign currency translation adjustments Balance at December 31, 1994 Common Shares Shares Amount Capital in excess of par value Retained earnings Foreign currency translation adjustments Unallocated ESOP shares Total share- equity 34,069 $17 598 $418 34 $838 (128) (74) 34,667 17 452 636 173 (83) 483 34,867 1,287 18 I 22 (18) 61 . 71,304 36 503 4,560 1,600 2 1 535 708 333 (89) 21 250 25 11 77,967 $39 S806 S988 $2 (49) (47) (31) (78) 7 S(7I) $022) $1,153 (128) (74) 12 (HO) 34 12 (49) 948 173 (83) 22 62 14 14 (31) (96) 1.105 333 (89) 21 252 26 14 S (82) 11 14 7 SI.680 The Financial Review on pages 2410 32 is an integral part of (he consolidated financial statements. 23 T EATON CORPORATION --jH.'uriW:U'in accounting policies Consolidation The consolidated financial statements include accounts of the Company and all majority-owned subsidiaries. The equity method of accounting is used for investments where the Company has a 20% to 50% ownership interest. Foreign Currency Translation Financial statements for subsidiaries outside the United States, except those in highly inflationary economies, are translated into United States dollars at year-end exchange rates as to assets and liabilities and weighted average exchange rates as to revenues and expenses. The resulting translation adjustments are recorded in shareholders' equity. Financial statements for subsidiaries in highly inflationary economies are translated into United States dollars in the same man ner except for inventories and property, plant and equipment-net, and related expenses, which are translated at historical exchange rates. The resulting translation adjustments are included in net income. Short-Term Investments Short-term investments are not considered to be cash equivalents for purposes of classification in the statements of consolidated cash flows. Inventories Inventories are carried at lower of cost or market. Inventories in the United States are generally accounted for using the last-in, first-out (LIFO) method. The remaining United States and all other inventories are accounted for using the first-in, first-out (FIFO) method. Depreciation and Amortization Depreciation and amortization are computed by the straight-line method for financial statement purposes. The cost of plant and equip ment is depreciated over the useful lives of the various classes of assets. Identified intangible assets, principally patents, trademarks and tradenames are amortized over the useful life of the respective asset. Excess of cost over net assets of businesses acquired is amor tized principally over forty years (accumulated amortization in mil lions was $102 and $78 at the end of 1994 and 1993, respectively). Excess of cost over net assets of businesses acquired is assessed for impairment when operating profit from the related business indicates that the carrying amount may not be recoverable. Financial Instruments The Company uses various financial instruments, including foreign exchange contracts and options, and interest rate swaps and caps, as pan of foreign exchange and interest rate risk management programs. The Company does not buy and sell financial instruments solely for the purpose of earning a profit due to changes in the market price of the instruments, except for nominal amounts authorized under limit ed, controlled circumstances. The Company has subsidiaries operating in Canada. Europe. Latin America and the Pacific region. In the normal course of business, these operations are exposed to fluctuations in related foreign curren cies, The Company seeks to reduce exposure to foreign currency fluc tuations. primarily the European and Canadian currencies, through the use of foreign currency forward exchange contracts and options. Gains or losses on foreign currency forward exchange contracts and options which hedge net investments in consolidated subsidiaries out side the United States are accrued in shareholders' equity. Gains or losses on foreign currency forward exchange contracts and options which hedge specific transactions are recognized in net income, off setting the underlying foreign currency transaction gains or losses. Premiums and discounts related to foreign currency forward exchange contracts and options are amortized to other income - net over the lives of the agreements. In the normal course of business, the Company's operations are also exposed to fluctuations in interest rates. The Company seeks to reduce the cost of and exposure to interest rate fluctuations through the use of interest rate swaps and caps. Gains or losses on interest rate swaps and caps are included in interest expense since (hey hedge interest on debt. Premiums related to interest rate caps are amortized to interest expense over the lives of the agreements. Counterparties to various hedging instruments arc many major inter national financial institutions. While the Company may be exposed to credit losses in the event of nonperformance by these counterparties, no losses are anticipated due to control over the limit of positions entered into with any one party and the strong credit ratings of these institutions. Net Income Per Common Share Net income per Common Share is computed by dividing net income by the average month-end number of shares outstanding during each period. The dilutive effect of common stock equivalents, comprised solely of employee options for Common Shares, is not material. ACQUISITIONS AND DIVESTITURES OF BUSINESSES On January 31,1994, the Company acquired the Distribution and Control Business Unit (DCBU) of Westinghouse Electric Corporation for an adjusted purchase price of $1,050 billion. DCBU, a leading North American manufacturer of electrical distribution equipment and industrial controls, was combined with Eaton's Industrial Control and Power Distribution Operations (ICPDO) to form the new CutlerHammer business unit. The acquisition has been accounted for as a purchase and, accordingly, the statements of consolidated income include the results of DCBU beginning February 1,1994. The acquired assets and liabilities assumed in the acquisition follow (in millions): Fair value of assets acquired Liabilities assumed Excess of cost over nei assets acquired606 Purchase price, net of cash acquired S 742 1298) $1-050 The excess of cost over net asseis acquired is being amortized over forty years. Identified intangible asseis of $95 million are being amortized over an average life of sixteen years. On an unaudited pro forma basis, assuming Eaton and DCBU had been combined as of the beginning of 1993, net sales would have increased $1 billion whereas net income and net income per Common Share would noi have been significantly different from reported amounts. On the same basis, results for 1994 would not have been significantly different from reported amounts. T In December 1993. in conjunction with the acquisition of DCBU, the Company recorded a $55 million acquisition integration charge ($34 million after income tax credits, or $.49 per Common Share). Part of a comprehensive business plan, the charge addressed the costs of inte grating the ICPDO product lines and manufacturing operations with DCBU, related workforce reductions and a $9 million write-down of assets, largely in the United States. To date, expenditures and charges total $20 million with the remaining $35 million expected to occur primarily over the next three years. The remaining expenditures will be funded through cash flow from the combined operations. On November 16,1994, the Company acquired the common stock of Lectron Products, Inc. (Lectron) through the issuance of 1.6 million Common Shares. Lectron, a privately-held manufacturer of electronic and precision electromechanical controls for automotive manufactur ers, had annual sales of $128 million for the most recent fiscal year. This acquisition was accounted for as a pooling-of-interests. Financial statements for periods prior to the acquisition were not restated for the acquisition since the effect would not be material. During 1994, in conjunction with the acquisition of DCBU, the Company sold certain DCBU operations to Thomas & Betts Corporation (T&B) in exchange for cash aggregating $61 million and $14 million of T&B common stock. These divestitures resulted in no gain or loss. During 1994,1993 and 1992, the Company acquired and divested other smaller operations. EXTRAORDINARY ITEM During 1993, the Company called for redemption $74 million of 9% debentures and $89 million of 8.5% debentures. The extraordinary loss on these redemptions, including the write-off of unamortized debt issuance costs, was $11 million ($7 million after income tax credits, or $.10 per Common Share). ACCOUNTING CHANGES In 1992, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 106, "Employers'Accounting for Postretire ment Benefits Other Than Pensions" and SFAS No. 109, "Accounting for Income Taxes." SFAS No. 106 requires accrual of postretirement benefits other than pensions, primarily postretirement health care and life insurance for retirees in the United States, over the working lives of employees rather than recognition of expenses as claims are incurred. Net income for 1992 was reduced by the cumulative effect of this accounting change for prior years of $442 million ($274 million after income tax credits, or $3.97 per Common Share). SFAS No. 106 has no effect on cash flows since claims will continue to be paid as incurred. The adoption of SFAS No. 109 changed the method of accounting for income taxes to the liability method from the' deferred method. The liability method requires recognition of deferred income taxes based on temporary differences between the financial reporting and income ---tax bases of assets and liabilities, using currently-enacted income tax ties and regulations. Net income for 1992 was increased by the cumu lative effect of this accounting change for prior years of $6 million, or $.09 per Common Share. SFAS No. 109 has no effect on cash flows. ACCOUNTS RECEIVABLE AND INVENTORIES Accounts receivable are net of an allowance for doubtful accounts (in millions) of $14 and $10 at the end of 1994 and 1993, respectively. The components of inventories at December 31 follow (in millions): 1994 1993 Raw materials Work in process Finished goods Gross inventories at RFO Excess of current cost over LIFO cost Net inventories at LIFO $213 358 216 787 (89) $698 $141 238 139 518 (84) $434 Gross inventories accounted for using the LIFO method (in millions) were $367 and $314 at the end of 1994 and 1993, respectively. INVESTMENT IN LIFE INSURANCE In 1993, the Company purchased company-owned life insurance poli cies insuring the lives of a portion of active United States employees. The policies accumulate asset values to meet future liabilities includ ing the payment of employee benefits such as health care. At December 31,1994 and 1993, the investment in the policies included in other assets (in millions) was $10 and $7. net of policy loans of $226 and SI 10, respectively. Net life insurance expense (in millions) of $5 and S2, including interest expense of $15 and $4 in 1994 and 1993, respectively, was included in selling and administrative expense. DEBT AND OTHER FINANCIAL INSTRUMENTS The Company's subsidiaries outside the United States have lines of credit, primarily short-term, aggregating $115 million from various banks worldwide. Most of these arrangements are reviewed periodi cally for renewal. At December 31, 1994, the Company had $19 mil lion outstanding under these lines of credit with banks. The weighted average interest rate on short-term debt, excluding immaterial amounts for highly inflationary countries, at December 31, 1994 and 1993 was 6.8% and 8.1%, respectively. Long-term debt at December 31, excluding the current portion, follows (in millions): 1994 1993 Notes of Employee Slock Ownership Plan due through 1999 6- 3/8% notes due 1999 9% notes due 2001 8% debentures due 2006 (due 1996 at option of debenture holders l 8.9% debentures due 2006 7% debentures due 2011. net of unamortized discount of S93 million in 1994 and 595 million in 1993 (effective interest rate 14.6%) 8-7/8% debentures due 2019 (due 2004 at option of debenture holders) S. 1% debentures due 2022 7- 5/8% debentures due 2024 Unsecured notes (6% io 6.4%) Other S 66 S 82 100 100 100 86 86 100 100 107 105 38 100 100 210 46 $71)53 38 100 38 $"649 i T EATON CORPORATION FINANCIAL REVIEW To refinance a portion of the cost of the acquisition of DCBU, in April 1994, the Company sold $100 million of 6-3/8% notes due 1999 and $100 million of 7-5/8% debentures due 2024. Concurrent with the sale of the 6-3/8% notes and the 7-5/8% debentures, the Company terminated, and settled for cash, interest rate swap agree ments with notional amounts totaling $200 million which hedged the sale of the notes and debentures. The gain on the termination of the interest rate swap agreements is being amortized to interest expense over the life of the notes and debentures and effectively reduces the annual rate of the notes to 4.8% and the debentures to 7.1%. In January 1994, in order to finance the acquisition of DCBU, the Company entered into a $555 million 364-day revolving credit agree ment and a $555 million five-year revolving credit agreement. During 1994, as a result of the sale of $200 million of notes and debentures, the sale of $214 million of Common Shares and cash flow from oper ations, the Company canceled the 364-day revolving credit agreement and reduced the $555 million five-year revolving credit agreement to $300 million. The $210 million of unsecured notes at December 31, 1994 relate to the acquisition of DCBU. These unsecured notes are classified as long-term debt because the Company intends, and has the ability under the five-year $300 million revolving credit agree ment, to refinance this debt on a long-term basis. Notes of the Employee Stock Ownership Plan, which are guaranteed by the Company, consist of $55 million at a floating interest rate (5.5% at December 31, 1994) based on LIBOR and $26 million at a fixed interest rate of 7.6% ($15 million of these notes are included in current portion of long-term debt). The Company has entered into a series of interest rate swaps, which expire ratably through 1999, and which change the interest rate on the $26 million of fixed interest rate notes to fixed interest rates of 7.1% and 6.9% as to $7 million and $16 million, respectively, and to a floating interest rate (5.2% at December 31, 1994) based on LIBOR as to $3 million. In April 1994, the Company sold a five-year interest rate cap in exchange for a premium (cash) of $1.5 million. This agreement effec tively converts the $100 million of 6-3/8% notes into floating rate debt at LIBOR minus 2.6% when LIBOR exceeds 9%. At December 31,1994, the Company had entered into interest rate caps commencing in January 1995 which effectively place a 5.5% ceiling on $100 million of floating rate debt through November 1, 1995. In 1994, the Company entered into two interest rate swaps aggregat ing $50 million that expire in 2000. which partially offset the effect of a $100 million 9% interest rate swap also expiring in 2000. The net effect of these swaps at December 31,1994 was to convert $50 mil lion of floating rate debt to fixed rate debt at 9% and another $50 mil lion of floating rate debt to LIBOR plus 3.1%. Aggregate mandatory sinking fund requirements and annual maturi ties of long-term debt are as follows (in millions): 1995, $22; 1996, $120: 1997, $22; 1998, $22; and 1999.5323. The amount for 1996 includes $86 million of 8% debentures due in 1996 at the option of the debenture holders. The amount for 1999 includes $210 million of unsecured notes due to the expiration of the five-year revolving credit agreement in 1999. Interest capitalized as part of acquisition or construction of major assets (in millions) was $10, $12. and $8 in 1994,1993 and 1992. respectively. Interest paid (in millions) was $101, $90 and $94 in 1994.1993 and 1992, respectively. Effective January I, 1994, the Company adopted SFAS No. 115. "Accounting for Certain Investments in Debt and Equity Securities." As a result of the adoption of SFAS No. 115, the Company accrued the unrealized gain related to several available-for-sale securities. The cumulative effect of the accounting change for prior years was an $8 million increase in the carrying value of the securities with an offset ting increase, after income taxes, of $5 million in retained earnings in shareholders' equity. The notional amounts, carrying amounts and fair values of financial instruments outstanding at December 31 follow (in millions): 1994 Notional Carrying amount amount 1993 Fair Notional Carrying value amount amount Fair value Cash and short-term investments Marketable equity investments Marketable debt securities Short-term debt Long-term debt and current portion of long-term debt Foreign currency forward exchange contracts and options Interest rale swaps Fixed to floating Floating to fixed Interest rate caps Purchased Sold S 41 S 41 51 51 26 26 114) (14) (1.075) (1.114) $300 $300 27 34 26 (14) 27 (141 (759) (941) SI89 76 12} too (100) 1 (1) $227 (5) 31 (4) 327 2 500 (1) (2) 67 3 (16) The fair value of short-term investments, marketable equity invest ments and debt securities, short-term and long-term debt, and interest rate swaps and caps was principally based on quoted market prices. The fair value of foreign currency forward exchange contracts and options, which primarily mature in 1995. was estimated based on quoted market prices of comparable contracts, adjusted through inter polation where necessary for maturity differences. PENSION PLANS The Company has non-contributory defined benefit pension plans _ covering the majority of employees. Plans covering salaried and certain hourly employees provide benefits that are generally based on years of service and final average compensation. Benefits for other hourly employees are generally based on years of service. Company policy is to fund at least the minimum amount required by applicable regula tions. In the event of a change in eontrol of the Company, excess pen sion plan assets of North American operations may be dedicated to funding of health and welfare benefits for employees and retirees. 26 I The components of pension (expense) income for the years ended December 31 follow (in millions): _ __ __________ - 199-1 1993 1992 Service cost benefits earned during year Interest cost on projected benefit obligation Actual return on assets Net amortization and deferral K55) (94) 36 99 KM) $(42) (97) 153 (17) S (1) 39) (96) 203 (73) $ (S) As a result of the DCBU acquisition, pension expense increased by $7 million in 1994. The pension asset (liability), by funded status, recognized in the bal ance sheet at December 31 follows (in millions): 1994 1993 Over Under- Over- Under funded funded funded funded Accumulated pension benefit obligation Vested Nonvested Value of future salary projections Total projected pension benefit obligation Fair value of plan assets Plan assets in excess of or (less than) projected benefit obligation Unamortized Initial net (asset) obligation ' Net (gain) loss Prior service cost Adjustment to recognize minimum liability $ 950 62 1,012 135 1,147 1.370 $ 147 8 155 10 165 70 $ 979 53 1.032 143 1.175 1.371 $ 136 10 146 10 156 68 223 (95) 196 (88) (40) (125) 10 7 (3) 15 (12) (48) (M6) 27 7 3 12 (12) $ 68 $ (88) $ 59 $ (78) Measurement of the projected benefit obligation was based on a discount rate of 8.50%, 7.25%. and 8.25% in-1994, 1993 and 1992, respectively. The expected compensation growth rate was 5.95%, 4.95%, and 5.95% in 1994,1993 and 1992, respectively. The expected long-term rate-of return on assets was 10% in all three years. Plan assets are invested in equity and fixed income securities and other instruments. Underfunded plans are associated principally with oper ations outside the United States. The change in the discount rate to 8.50% at the end of 1994 had the effect of decreasing the accumulated pension benefit obligation by $140 million with an offsetting increase in the unamortized net gain. This change will have an immaterial effect on future expense. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS Generally, employees become eligible for postretirement benefits other than pensions, primarily health care and life insurance for retirees in the United States, when they retire. These benefits are payable for life, although the Company retains the right to modify or terminate the plans providing the benefits. The plans are contributory, with retiree contributions adjusted annually, and contain other cost sharing features, including deductibles and co-payments. During 1993, cenain plans were amended to limit the annual amount of the Company's future contributions towards employees' postretirement health care benefits. Company policy is to pay claims as they are incurred since, unlike pensions, there is no effective method to obtain a tax deduction for prefunding of these benefits under existing United States income tax regulations. Expense for postretirement benefits other than pensions for the years ended December 31 follows (in millions): 1994 2993 2992 Service cost - benefits earned during year Interest cost on projected benefit obligation Net amortization and deferral $(13) (43) 5 $<5I) i (7) (37) 9 ${35) $< 12) (44) $(56) The liability for postretiremen! benefit plans other than pensions rec ognized in the balance sheets at December 31 follows (in millions): 2994 2993 Accumulated postretirement benefit obligation Retirees Eligible plan participants Non-eligible plan participants Unamortized Prior service cost Net loss $382 44 177 $368 38 120 67 (62) $608 91 (73) $544 As a result of the DCBU acquisition, the expense and the liability for postretiremen! benefits other than pensions increased by $6 million and $51 million, respectively. Measurement of the accumulated postretirement benefit obligation at December 31,1994, was based on an 11% annual rate of increase in the per capita cost of covered health care benefits (12% for 1993). For 1994. the rate was assumed to decrease ratably to 7% through 1999 and decrease to 6.25% in 2000 and remain at that level there after (5% for 1993). The discount rate was 8.50% in 1994 and 7.25% for 1993. The changes in assumed rates had the effect of decreasing the accumulated postretiremen! benefit obligation (APBO) which off set increases in the APBO due to changes in plan provisions. These changes will have an immaterial effect on future expense. An increase of 1% in assumed health care cost trend rates would increase the accumulated postretirement benefit obligation as of December 31. 1994 by $39 million and the net periodic cost for 1994 by $3 million. v EATON CORPORATION financial review PROTECTION OF THE ENVIRONMENT The Company has been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites. Although this law technically imposes joint and several liability upon each PRP at each site, the extent of the Company's required financial contribution to the cleanup of these sites is expected to be limited based on the number and financial strength of the other named PRP's and the volumes of waste involved which might be attributable to the Company. The Company is also involved in remedial response and voluntary environmental cleanup expenditures at a number of other sites which are not the subject of any Superfund law proceeding, including certain currently-owned or formerly-owned plants. Environmental exposures associated with the DCBU acquisition are limited by the purchase agreement with Weslinghouse Electric Corporation. With respect to environmental conditions existing prior to the acquisition, Westinghouse agreed to retain certain responsibili ties, to share the cost of others and to indemnify the Company for costs to the extent they exceed S3.S million annually. The obligation to share costs extends for ten years. Although difficult to quantify, management estimates that there is a reasonable possibility that the remediation and other costs associated with all of these sites may range up to $74 million, and that such costs would be incurred over a period of several years. The Company accrues for these costs when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. At December 31,1994 and 1993, the balance sheet included an accrual for estimated remediation and other environmental costs (in millions) of approximately $48 and $ 18, respectively. The accrual for environ mental costs at year-end 1994 includes $13 million for environmental exposures associated with DCBU which was recorded as part of the allocation of the purchase price of DCBU. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Subject to the difficulty in estimating future environmental costs, the Company expects that any sum it may be required to pay in connec tion with environmental matters in excess of the amounts recorded or disclosed above will not have a material adverse effect on financial condition or results of operations. The Company continues to modify, on an ongoing, regular basis, certain processes in order to reduce the impact on the environment. Efforts in this regard include the removal of many underground stor age tanks and the reduction or elimination of certain chemicals and wastes in operations. LEASE COMMITMENTS Future minimum rental commitments as of December 31, 1994. under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, are as follows (in millions): 1995. $42; 1996. $31; 1997. $24; 1998. $15; 1999, $12; and after 1999. $97. Rental expense in 1994. 1993 and 1992 (in millions) was $65. $43 and $45. respectively. . SHAREHOLDERS' EQUITY At the 1994 Annual Meeting, shareholders adopted amended Articles of Incorporation which increased the number of authorized Common Shares from 150 million to 300 million. At December 31, 1994, 5.4 million Common Shares were reserved for exercise and grant of stock options. At the end of 1994. there were 14,834 holders of record of Common Shares. Additionally, 21,286 employees were shareholders through participation in the Share Purchase and Investment Plan. In private placements, the Company sold 1.3 million Common Shares in December 1993 for aggregate net proceeds of $62 million, and sold an additional 800,000 Common Shares in January 1994 for aggregate net proceeds of $38 million. The proceeds from these pri vate placements were used primarily to fund the redemption in January 1994 of $89 million of 8.5% debentures. In March 1994, in order to partially refinance the acquisition of DCBU. the Company sold 3.8 million Common Shares to the public for aggregate net proceeds of $214 million. In November 1994. the Company issued 1.6 million Common Shares in a pooling-of-interests with Leciron Products, Inc. In May 1993, the Company's share purchase rights were redeemed at a price of 3-1/3 cents for each right, for a total payment of $2 million. The Company sponsors a Share Purchase and Investment Plan (SPIP) for United Slates 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 regu lations. The matching contribution ranges from 25% to 100% of a participant's contribution and is invested in the Company's Common Shares. The matching contribution percentage is determined each quarter, based on net income per Common Share. In 1989, the Company prefunded, through 1999, a portion of antici pated matching contributions to the SPIP by creating an Employee Stock Ownership Plan (ESOP) under the SPIP and selling 5 million Common Shares for $150 million to the ESOP. The shares held by the ESOP have not yet been allocated to employee accounts and are included in shareholders' equity as "Unallocated ESOP Shares" and the notes payable of the ESOP are included in long-term debt. Shares in the ESOP are released at historical cost and allocated to the employee accounts based on the ratio of the annual principal payment on the notes payable compared to the original principal amount of the notes payable. Cash dividends paid on shares in the ESOP are charged against retained earnings and. along with Company contributions, are used to repay the principal and interest due on the notes payable. ESOP shares are considered as outstanding for purposes of computing net income per Common Share. Shares in the ESOP at the end of 1994 and 1993 (in millions) were 2.7 and 3.4, respectively. Compensation expense related to the SPIP match, including the effect of shares released by the ESOP at historical cost, (in millions) was $15 in 1994. $11 in 1993 and $7 in 1992. as T I I OPTIONS FOR COMMON SHARES Options have been granted to certain employees, under various plans, to purchase the Company's Common Shares at prices equal to fair market value as of date of grant. These options expire ten years from date of grant. A summary of stock option activity follows: 1994 1993 Average price per share Shares Average price per share Shares Outstanding, January 1 Granted Exercised Canceled Outstanding, December 31 S31.53 57.71 78.12 46.42 $37.94 3.433,850 959,390 (348,720) (45,361) 3.999.159 $28.81 39.34 27.28 32.52 S31.53 3.368.670 831.730 (657.353) (109.197) 3.433,850 Shares exercisable January 1 December 31 Shares reserved for future grams January 1 December 31 2.401,683 2,839,095 2,133,630 1.218,477 2.334.758 2.401,683 2,856.882 2.133.630 INCOME TAXES Income before income taxes for the years ended December 31 follows (in millions): United States Outside (he United Suites 1994 $396 . 92 $488 1993 $214 48 $262 1992 $147 34 $181 Income taxes for the years ended December 31 follows (in millions): Current United Slates Federal ' State and local Outside the United States Deferred United States Increase in statutory tax rate Other Federal State and local Outside the United Slates Operating loss carryforwards Reduction of valuation allowance for deferred tax assets Increase in statutory tax rate Other 1994 1993 1992 $ 81 15 - 44 140 $108 7 30 145 $ 42 5 20 67 (5) 24 (50) (14) 1 (2) (1) (8) (7) (III (3) (2) 3 15 $155 <5) (1) 7 (63) $ 82 (26) S 41 Significant components of current and long-term deferred income taxes at December 31 follow (in millions): Accruals and other adjustments Employee benefits Inventory Restructuring Depreciation and amortization Other Operating loss carryforwards Valuation allowance Other ilems Current assets 1994 Long-term assets Long-term liabilities $ 54 15 20 46 16 $151 $228 13 (142) 7 78 (29) 3 $158 $ (4) (17) l 9 $<U) Accruals and other adjustments Employee benefits Inventory Restructuring Depreciation and amortization Other Operating loss carryforwards Valuation allowance Other items Current assets 1993 Long-term assets Long-term liabilities $ 44 15 15 38 15 $127 $209 13 (140) 5 50 (15) (10) $112 $ (4) (15) 2 7 $(10) At December 31,1994, certain subsidiaries outside the United States had tax loss carryforwards and tax credit carryovers (in millions) aggregating S162 and $15, respectively. Carryforwards of $92 million have no expiration dates and the balance expire at various dates from 1995 through 2005. The tax credit carryovers expire at various dates from 1995 through 1999. 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): Income taxes at the United States statutory rate State and local income (axes Adjustment of worldwide tar liabilities Possessions credit related to Puerto Rican operations Reduction of valuation allowance for deferred tax assets Adjustment of deferred income taxes for change in statutory rates Effective tax rate differential on earnings of consolidated subsidiaries and associate companies outside the United States Other - net 1994 Amount Rate 1993 Rate 1992 Rate $171 14 35.0% 2.8 35.0% 1.5 34.0% .9 7 1.6 1.4 (6.0) (26) (5.2) (3) (.6) (2.1) (2) (.41 (2.3) (6) $155 (1.3) 31.9% .1 (2.1) 31.5% (3.9) (2.2) 22.8% 29 EATON CORPORATION FINANCIAL REVIEW The Company has facilities in Puerto Rico that manufacture products for both domestic and foreign markets. These facilities operate under tax relief and other incentives that expire at various dates beginning in 2004 through 2013. The parent company has not provided income taxes on undistributed earnings of consolidated subsidiaries outside the United States of S353 million at December 31,1994, since the earnings retained have been reinvested by the subsidiaries. If distributed, such remitted earnings would be subject to withholding taxes but substantially free of United States income taxes. Worldwide income tax payments, including Federal and state income taxes in the United States, in 1994, 1993 and 1992 (in millions) were $109, $156 and $71, respectively. QUARTERLY DATA (Unaudited) __________________________ (Millions except tot pet there diu) 1994 Net sales Gross margin Percent of sales Net income Per Common Share Net income Cash dividends paid Market price High Low 1993 Net sales Gross margin Percent of sales Income before extraordinary item Extraordinary item Net income Per Common Share Income before extraordinary item Extraordinary item Net income Cash dividends paid Market price High Low - Quarter ended Dec. 31 Sept. 30 June JO Mar. 31 $1,605 $1,531 $1545 $1,371 442 411 429 373 28* 27* 28* 27* 89 84 86 74 $ 1.15 $ 1.10 $ 1.13 $ 1.01 .30 .30 .30 .30 54k 54k 58k 62k 43X 45k 49k 50k $1,115 $1,053 $1,147 SI.086 297 27* 266 25* 279 24% 275 25* 30 44 53 53 (4) (3) 26 44 53 50 $ .41 (.05) .36 .30 $ .63 .63 .30 $ .77 .77 275 S .76 (.05) .71 .275 55k 51k 47k 43k 48 43 41k 38k Results for 1994 reflect the acquisition of DCBU on January 31. 1994. Results for the fourth quarter of 1993 were reduced by a $55 million acquisition integration charge related to the purchase of DCBU (S34 million after income tax credits, or $.49 per Common Share). The redemption of debentures in 1993 resulted in extraordinary losses of $5 million and $6 million in the first and fourth quarters, respectively ($3 million and $4 million after income tax credits, or $.05 per Common Share in each quarter). Gross margin for the second quarter of 1993 was reduced by a $9 million charge for streamlining certain Vehicle Components operations in Europe. BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION Operations are classified among three business segments: Vehicle Components. Electrical and Electronic Controls and Defense Systems. The major classes of products included in each segment and other information follows. Vehicle Components Truck Components - Heavy and medium duty mechanical and auto matic transmissions; power take-offs; drive, trailer and steering axles; brakes: anti-lock brake systems: locking differentials; engine valves; valve lifters; leaf springs; viscous fan drives; fans and fan shrouds; power steering pumps; tire pressure control systems; tire valves. Passenger Car Components - Engine valves; hydraulic valve lifters; viscous fan drives; fans and fan shrouds; locking differentials: spring fluid dampers; superchargers: tire valves. Off-Highway Vehicle Components - Mechanical and automatic trans missions: drive and steering axles; specialty axle products; brakes; engine valves; hydraulic valve lifters; gear and piston pumps and motors; transaxles and steering systems; geroters; control valves and cylinders: forgings; central tire inflation systems: tire valves. The principal market for these products is original equipment manufac turers of trucks, passenger cars and off-highway vehicles. Most sales of these products are made directly from the Company's plants to such manufacturers. Electrical and Electronic Controls Industrial and Commercial Controls - Electromechanical and electronic controls including motor starters, contactors, overloads and electric drives; programmable controllers, counters, man/machine interface panels and pushbuttons; photoelectric, proximity, temperature and pressure sensors; residential, molded case, air and medium voltage circuit breakers; loadcemers; safety switches; panelboards; switch boards; switchgear components: switchgear dry type transformers: busway; meter centers; portable tool switches; commercial switches; relays; vacuum interrupters; illuminated pushbuttons and panels; annunciator panels; electrically actuated valves and actuators; pressure transducers and switches. Automotive and Appliance Controls - Electromechanical and electronic controls including convenience, stalk and concealed switches: knock sensors: climate control components; speed controls; timers; pressure switches: water valves; range controls; thermostats; gas valves: infinite switches: temperature and humidity sensors: transmission valves: speed sensitive steering systems; tone generators and chimes; lighting con trols; emission control valves; remote keyless entry systems and remote actuated solenoids. Specialty Controls - Ion implanters; engineered fasteners; golf grips: industrial clutches and brakes: automated material handling systems, automated guided vehicles and stacker cranes. The principal markets for these products are industrial, construction, commercial, automotive, appliance, aerospace and government cus tomers. Sales are made directly by the Company or indirectly through distributors and manufacturers' representatives. T --- Defense Systems " Strategic countermeasures; tactical jamming systems; electronic intelli gence; electronic support measures and radar surveillance. The principal market for these products is the United Slates Government. Other Information Operating profit represents net sales less operating expenses for each segment and geographic region and excludes interest expense and income, and general corporate expenses - net. Identifiable assets for each segment and geographic region represent those assets used in operations, including excess of cost over net assets of businesses acquired, and exclude general corporate assets, which consist principally of short-term investments, deferred income taxes, investments carried at equity, property and other assets. Net sales to divisions and subsidiaries of one customer, primarily from the Vehicle Components business segment (in millions), were $623 in 1994, $541 in 1993 and $491 in 1992 (10% of sales in 1994, 12% in 1993 and 1992). GEOGRAPHIC REGION INFORMATION United States (Millions) 1994 Net sales Operating profit icntifiable assets 34,807 491 3,098 Canada 5292 30 119 Europe $912 50 636 1993 Net sales Operating profit Identifiable assets 33.404 275 1,726 - 3183 21 lOt $769 17 548 1992 Net sales Operating profit Identifiable assets 33,002 201 1,781 3175 20 74 $861 29 630 Results for 1994 reflect the acquisition of DCBU on January 31. 1994. Operating profit in 1993 was reduced 333 million in the United States and S2 million in Canada by an acquisition integration charge related to the purchase of DCBU. and by a 39 million charge for streamlining operations in Europe Geographic region information (table above) does not include results of associate companies and joint ventures in which the Company holds a 20%-50% ownership interest, which are accounted for by the equity method, and which had total sales as follows: (Milliont) 1994 1991 - I9<P United Latin Pacific States Europe America Region Totals $8 S15 $10 $240 S273 7 13 15 169 204 6 18 6 136 166 Latin America $298 9 156 $202 9 103 $184 8 98 t/t CO Pacific Region $103 14 57 10 48 $ 66 6 48 Elimin ations S360 86 $238 60 $187 59 Totals S6.052 594 3.980 $4,401 332 2.466 $4,101 264 *> 572 at EATON CORPORATION FINANCIAL REVIEW BUSINESS SEGMENT INFORMATION {Millions) Net sales by classes ofsimilar products Vehicle Components Truck Components Passenger Car Components Off-Highway Vehicle Components Electrical and Electronic Controls Industrial and Commercial Controls Automotive and Appliance Controls Specialty Controls Defense Systems Operating profit Vehicle Components Electrical and Electronic Controls (1993 reduced by the $55 million acquisition integration charge) Defense Systems . Interest expense Interest income General corporate expenses - net Income before income taxes Identifiable assets Vehicle Components Electrical and Electronic Controls Defense Systems General corporate assets Total assets Capital expenditures Vehicle Components Electrical and Electronic Controls Defense Systems Corporate Depreciation and amortization Vehicle Components Electrical and Electronic Controls Defense Systems Corporate ' 199* 1993 7992 $1,798 616 414 2.828 1.812 839 437 3.088 136 $6,052 $ 354 $1,504 524. 329 2.357 779 735 338 1.852 192 $4,401 $ 247 SI.244 542 307 2.093 745 723 308 1.776 232 $4,101 S 170 239 1 594 (91) 7 (22) $ 488 83 2 332 (75) 8 (3) $ 262 85 9 264 (89) 9 (3) S 181 $1,359 2.506 115 3.980 702 $4,682 $1,230 1,119 117 2.466 802 $3,268 SI. 194 1.128 250 2.572 648 S3.220 $ 149 98 5 15 S 267 S 110 114 14 13 S 251 $ 124 68 7 28 $ 227 S 101 69 15 11 S 196 S 93 67 14 12 S 186 S 104 71 16 9 S 200 Results for 1994 reflect the acquisition of DCBU on January ^1. 199* . Operating profit of the Electrical and Electronic Controls segment in 1993 was reduced by a S55 million acquisition integration charge related to the purchase of DCBU. Operating profit of the Vehicle Components segment in 1993 was reduced by a $9 million charge for streamlining certain vehicle component.-, opera tions in Europe. EATON CORPORATION management's discussion and analysis of financial condition and results of operations OVERVIEW Strong sales in 1994 resulted in the Company reporting the highest net sales, net income and net income per Common Share in its his tory. The strength of the year was underscored by the results of each quarter in 1994 which represented the best in the Company's history. On January 31,1994, the Company purchased the Distribution and Control Business Unit (DCBU) from Westinghouse Electric Corporation, the largest acquisition in the Company's history. This acquisition, as discussed under "Acquisitions and Divestitures of Businesses" in the Financial Review, substantially bolstered the prospects for the Electrical and Electronic Controls segment by providing greater product depth with world class technology and by increasing product offering and distribution opportunities. This acquisition improves the balance of sales and earnings between the Electrical and Electronic Controls segment and the historically strong Vehicle Components segment. The strong sales increase was broadly based with record sales achieved in both the Vehicle Components and the Electrical and Electronic Controls segments. Each product class of these segments experienced double-digit growth in 1994 as compared to 1993. Net income for the year rose to $333 million in 1994. This represents a 92% increase com pared to net income of $173 million in 1993 which was reduced by a $34 million after tax acquisition integration charge related to the pur chase of DCBU and a $7 million extraordinary loss on the redemption of debentures. Net income per Common Share increased to $4.40 in ^J994, a 78% increase over $2.47 (after the charges noted above) in 993. Net income per Common Share increased by a lesser percentage than net income due to an additional 6.7 million Common Shares out standing at year-end 1994. 1994 COMPAREO TO 1993 Net Sales Net sales for 1994 increased 38% to $6.1 billion from $4.4 billion in 1993. The increase in sales was a reflection of the contributions of acquired businesses, as well as the improvement in North American transportation and capital goods markets. The Company expects that in 1995 the North American economy will continue to favor transportation and capital goods markets. Sales improvements were also recorded by virtually all of the Company's operations outside the United States due in part to export of products to meet North American market demands. The economic recovery that began in the United Kingdom in the past year spread to the European continent as additional market strength was evident in Germany, France, Italy and other continental countries as indicated by the 19% sales increase in Europe over 1993. Expectations are that the Company's European businesses will continue to benefit as the recovery continues. The purchase of DCBU also expanded the Company's presence in Latin America. The combination of this acquisition and the growth in existing operations resulted in a 48% sales increase in Latin America over 1993. The Vehicle Components segment continued to experience significant growth as net sales increased to $2.8 billion for 1994, rising 20% over I993's net sales of $2.4 billion. Although the increase in sales was dri ven by unprecedented levels of production of heavy trucks in North America, each product class in this segment reported an increase in excess of 17% in 1994 as compared to 1993. The heavy truck market set industry records, with North American factory sales of 226,000 units, a 7% increase over the previous record levels of 1979 and a 21% increase over 1993. Order backlogs for heavy trucks reached an all time high of 212,000 units at year-end 1994. Vehicle Components segment sales also reflect higher sales of compo nents for sport utility vehicles, minivans and light trucks which markets showed a 20% increase in North American factory sales in 1994 over 1993. These vehicles, where the Company's component sales arc par ticularly strong, now account for nearly half of the domestic vehicle unit sales of United States based automobile manufacturers. Passenger Car Components sales in 1994 increased substantially over 1993 as the Company benefited from the 5% increase in factory sales of passenger cars in North America and also from improved market penetration. Additionally, sales of Off-Highway Vehicle Components showed marked improvement throughout the year as a result of strong demand for hydraulic components from agricultural, construction and industrial markets worldwide. The positive outlook for the continued growth of the Vehicle Component product lines is based on increased use of heavy trucks in support of domestic manufacturing, consumer preference for minivans, light trucks and sport utility vehicles, increased production of multi valve automobile engines, and strength of the construction and agricul tural markets. The Electrical and Electronic Controls segment's net sales in 1994 rose to $3.1 billion, a 67% increase over 1993 net sales of $ 1.9 billion. This segment now represents more than one-half of total sales. The DCBU acquisition was the principal cause for the increase in the Industrial and Commercial Controls product class, where sales more than doubled compared to 1993. Each of the remaining product classes in this seg ment reported an increase in excess of 14% in 1994 as compared to 1993. These increases were a reflection of strong growth experienced in the industrial, residential and commercial markets served by this segment. Automotive and Appliance Controls sales in 1994 increased signifi cantly over 1993 due to improved conditions in the passenger car and light truck markets served by the Company. The current strength of the North American household appliances market in comparison to previ ous years and positioning with appliance manufacturers also benefited the Company. Robust sales of semiconductor equipment, included in Specialty Controls, also contributed significantly to the 1994 sales increase for this segment. Sales have risen sharply over the past two years due to increased market penetration and worldwide demand for semiconductor equipment. Markei leadership permitted the Companv to benefit substantially from the industry's growth to the extent that order backlogs for ion implanters are at record levels. To meet this con tinuing demand, a new medium current ion implanter manufacturing 33 EATON CORPORATION MANAGEMENT'S DISCUSSION AMD ANALYSIS OF FINANCIAL CONDITION AMP RESULTS Of OPERATIONS facility will be built in Austin, Texas in 1995. A new high energy ion implantation system was introduced in mid-year 1994, and market response, particularly in the Far East, exceeded expectations. Several factors raise expectations for continuing growth in the Electrical and Electronic Controls product lines, including broad demand for technologically advanced controls for industrial and com mercial markets, ongoing strength of the United States economy, high level of capacity utilization across many industries, recovering markets in Europe and new market initiatives in the Far East. Operating Results Income from operations increased 77% to $560 million in 1994 over $317 million in 1993, which was reduced by a $55 million acquisi tion integration charge before income tax credits related to the pur chase of DCBU. This increase reflects the higher level of sales described above, including the contributions of acquired businesses, results of continuous improvement initiatives and inventory controls, efforts to maintain and improve efficiency and productivity in the face of greatly increased marketplace demand, and benefits of recent capacity and workforce rationalizations. Operating profit for the Vehicle Components segment was strong, rising 43% to $354 million (13% of sales) in 1994 over $247 million (10% of sales) in 1993. Increased profits were attributable largely to improved sales levels and also were a reflection of continuing stringent cost containment efforts as well as economies achieved through organi zational rationalizations of certain businesses which better positioned operations to benefit from further growth and market opportunities in global vehicle markets. In 1993, operating profit was reduced by $9 million as a result of streamlining certain Vehicle Components opera tions in Europe. Operating profit for the Electrical and Electronic Controls segment significantly improved, rising 73% to $239 million (8% of sales) from $138 million (7% of sales) in 1993, before the effect of the $55 million acquisition integration charge. The improvement in profits resulted from higher sales volumes, including contributions from acquired busi nesses, emphasis placed on containing and controlling costs and real ization of benefits of earlier resizings. Interest expense of $91 million in 1994 increased from $75 million in 1993. This increase was primarily caused by a higher average borrow ing level due to the issuance of $716 million of debt in 1994 to partial ly finance the acquisition of DCBU. An analysis of changes in income taxes and the effective income tax rate is presented under "Income Taxes" in the Financial Review. changes in financial condition The Company's financial condition remained strong during 1994. Net working capital increased to $744 million at year-end 1994 from $679 million at year-end 1993, with a slight decrement in the current ratio to 1.7 from 1.9 at those dates, respectively. The reduction of $245 million in short-term investments at December 31,1994 from the end of 1993 was primarily the result of the liquida tion of $170 million to partially fund the acquisition of DCBU. Additionally, the Company redeemed $89 million of 8.5% debentures through the issuance of 1.3 million Common Shares in December 1993 for aggregate net proceeds of $62 million and 800,000 Common Shares in January 1994 for aggregate net proceeds of $38 million. Accounts receivable increased by $339 million at December 31. 1994 from the end of 1993 largely due to the acquisition of DCBU and increased sales levels. The acquisition of DCBU was also the principal cause of the substantial increases in inventories, deferred income taxes, property, plant and equipment, excess of cost over net assets of busi nesses acquired, other assets, and current and long-term liabilities ai December 31,1994 compared to the end of 1993. Total debt, consisting of short-term, long-term and current portion of long-term debt, increased to $1.1 billion at December 31,1994 from the end of 1993, primarily due to debt issued to finance the acquisition of DCBU. The increase in total debt in 1994 was net of the redemption in January 1994 of $89 million of 8.5% debentures. Throughout the year, cash provided by operating activities was partially used to repay debt related to business acquisitions. As previously discussed, through a private placement, the Company sold 800,000 Common Shares in January 1994 for $38 million. Beginning in April 1995, the holder of these shares has the right to require the Company to register the shares for public sale under the Federal securities law. The Company sold 3.8 million Common Shares to the public in March 1994 for aggregate net proceeds of $214 million. In November 1994, the Company issued 1.6 million Common Shares, which are being registered under the Federal securities laws, in the pooling-of-interests with Lectron Products, Inc. Capital expenditures for 1994 were a record $267 million compared with $227 million in 1993, reflecting the Company's ongoing invest ment program under long-range goals to achieve improvements in product quality, manufacturing productivity and business growth. Capital spending in 1995 is anticipated to be another all-time record in order to enable the Company to enhance product quality through technology improvements, to keep pace with the strength of orders in virtually ail product lines, and to achieve long-term growth prospects. Net cash provided by operating activities reached a record $522 million in 1994compared with $435 million in 1993 and S38I million in 1992. The improvement in cash flow from increased net income and other items exceeded cash requirements to satisfy increased working capiial demands, primarily the substantial increase in accounts receivable. Net cash provided by operating activities, supplemented by liquidation of short-term investments, funding from unsecured notes and other borrowings, proceeds from the sale of businesses and the issuance of Common Shares were used to fund business acquisitions, capital expenditures, cash dividends and repayment of debt. As a result of the sale of the Common Shares, notes and debentures, as well as cash flow from operations, (he Company canceled a SS5S mil lion 364-day revolving credit agreement and $255 million of a $555 million five-year revolving credit agreement which had been entered into in January 1994 to provide interim financing for the acquisition of DCBU. The Company is maintaining the strength of the balance sheet and has now restored it to pre-acquisition standards in less than a year with the debt to capital ratio again below 40%. The Company believes capital resources available in the form of working capital on-hand, lines of credit and funds provided by operations will more than ade quately meet anticipated requirements for capital expenditures and business expansion through niche acquisitions. The combination of DCBU with the Company's Industrial Controls and Power Distribution Operations (ICPDO) strengthened the competitive position in the Electrical and Electronic Controls segment and will pro vide the opportunity for significant cost savings resulting from the complementary fit of the two businesses. Substantial efficiencies are beginning to be experienced due to the combination of the two opera tions. The Company has a comprehensive integration plan which is focused on rationalization of product lines and manufacturing opera tions, integration of sales and distribution functions and reduction of Iministrative expenses. The plan includes plant closures over the next few years to eliminate over-capacity. To date, the Company has closed and/or announced the closure of twenty-three facilities. The Company has also sold four facilities as a result of divestiture activities. It has also begun the relocation of several product lines as a result of the rationalization plan. The cost of the consolidation program for ICPDO locations was included in the 1993 $55 million acquisition integration charge. To date, expenditures and charges total $20 million with (he remaining $35 million expected to occur primarily over the next three years. Remaining expenditures will be funded through cash flow from combined operations. For actions related to the acquired locations, such costs have been considered in the allocation of the purchase price. In the normal course of business, the Company is exposed to various financial risks including interest and foreign exchange rates. The Company has developed systems to continuously measure exposures to assure that exposures are evaluated comprehensively so (hat appropri ate and timely action can be taken to reduce risk, if necessary. Monitoring of exposures and the evaluation of risks includes approval of derivative activities on a discrete basis by senior management. Oversight and review is performed monthly by senior management. In order to minimize the impact of potential defaults, the Company specif ically limits counterparty credit exposure to prudent dollar limits. The Company's derivative activities are described in greater detail under "Debt and Other Financial Instruments" in the Financial Review To reflect current market conditions, the discount rate used to measure the projected benefit obligations for pensions and postretirement bene fits other than pensions was increased to 8.50% from 7.25%. This change had the effect of decreasing the accumulated pension benefit obligation by $140 million with an offsetting increase in the unamor tized net gain. The changes in assumed rates for postretirement benefits other than pensions had the effect of decreasing the accumulated postretirement benefit obligation which offset changes in other plan provisions. The effect of the change in the discount rates on future expense for pensions and postretirement benefits other than pensions will not be material. At December 31,1994 and 1993, the Company had net deferred income lax assets included in current and long-term assets. Management believes it is more likely than not (hat these tax benefits will be realized through the reduction of future taxable income. Significant factors considered by management in determination of the probability of realization of deferred tax assets include historical operating results of the Company, expectations of future earnings and the extended period of time over which the postreiirement health care liability will be paid. The Company has manufacturing operations in Mexico, none of which are significant to overall operations. The recent devaluation of the Peso in Mexico had an immaterial adverse effect on the Company's financial position and results of operations. The Company will continue to moni tor the economic situation in Mexico. Operations of the Company involve the use, disposal and clean-up of certain substances regulated under environmental protection laws, as further discussed under "Protection of the Environment" in the Financial Review. Subject to the difficulty in estimating future environ mental costs, the Company expects that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed will not have a material adverse effect on finan cial condition. To enhance shareholder value and to avoid dilution of earnings per share resulting from the exercise of stock options by employees, the Company's Board of Directors authorized the purchase of up to five million Common Shares. Under the Board's authorization, the Company may purchase the shares over a five year period; however, only a maxi mum of 1.5 million shares can be purchased in any one year. as EATON CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1993 COMPARED TO 1992 Net Sales Net sales for 1993 increased by 7% to S4.4 billion from $4.1 billion in 1992. The increase occurred principally in the United States and was largely due to a strengthened North American market for heavy and light trucks, vans and sport utility vehicles, responding to a United States economic recovery. The improvement in North America more than offset effects of the continued deep European recession. In North America, certain markets, which had been sluggish through most of 1993, showed sales improvements in the fourth quarter Vehicle Components segment net sales increased to $2.4 billion for 1993, rising 13% over 1992 sales of $2.1 billion. The improvement was largely due to significant growth in sales of truck components, follow ing the best year for factory sales of heavy trucks in North America since 1979. Passenger car and light truck markets also showed improvement in 1993. Off-highway equipment markets, which had been down for several years, improved considerably. Strong sales growth in North America was partially offset by reduced sales in Europe where vehicle markets remain weak. The Electrical and Electronic Controls segment showed a net sales increase of 4% in 1993 to $1.9 billion compared to $1.8 billion in 1992. The improvement was largely due to increased sales of industrial and commercial controls and specialty controls. Strong North American markets for automotive and appliance controls were largely offset, however, by continued weakness in corresponding European markets due to economic recession and the negative impact of foreign currency exchange rate fluctuations. Rising demand for portable tools, factory equipment and residential housing drove the increase in sales of industrial and commercial controls. Sales of industrial and power dis tribution equipment, which tend to lag any North American economic recovery, rose sharply in the fourth quarter. The semiconductor equip ment business, included in specialty controls, experienced strong results throughout the year, with a 19% improvement in sales for 1993 over 1992> Operating Results Income from operations increased 33% to $317 million in 1993 over $238 million in 1992. This increase was due to significant sales growth as well as benefits achieved through ongoing cost containment and pro ductivity improvements. This improvement was achieved in spite of a $55 million acquisition integration charge related to the purchase of DC8U and a $9 million charge, included in cost of products sold in 1993. for streamlining certain vehicle components operations in Europe. The Vehicle Components segment operating profit rose to $247 million (10% of sales) for 1993, a substantial improvement over $170 million (8% of sales) for 1992 despite a $9 million charge recorded in 1993 for streamlining certain European operations. The improvement was large ly a result of improved markets in North America for heavy and light trucks, vans and sport utility vehicles. Other factors contributing to increased profits were continuing stringent cost containment efforts and economies achieved through capacity and workforce rationalizations of certain businesses, which better positioned operations to benefit from further growth in vehicle markets. The Electrical and Electronic Controls segment operating profit signifi cantly improved, before the effect of the $55 million acquisition inte gration charge, rising 62% to $138 million in 1993 (7% of sales) from $85 million (5% of sales) in 1992. The improved segment profit picture was partially due to sales growth experienced in certain controls mar kets, but was also a clear reflection of continuing emphasis placed on containing and controlling costs and realization of anticipated benefits of earlier capacity and workforce rationalization efforts. The depressed European economy negatively impacted controls businesses, particular ly automotive and appliance controls. Profit for this segment was reduced by a $55 million pretax charge recorded in December 1993 for integration of ICPDO product lines and operations with DCBU to form the new Cutler-Hammer business unit. Interest expense declined to $75 million for 1993, the lowest level since 1986, from $89 million for 1992 largely due to the reduction of higher interest rate debt, lower debt levels during 1993 and increased capitalized interest. Other income - net was $12 million in 1993, down from $23 million in 1992, largely due to the $11 million pretax gain on the sale of an inter est in a limited partnership in 1992. An analysis of changes in income taxes and the effective income tax rate is presented under "Income Taxes" in the Financial Review. In 1992, new accounting standards for postretirement benefits other than pensions and for income taxes were adopted, which together reduced net income by $268 million due to the recognition of the cumulative effect for prior years. 36 T EATON CORPORATION REPORT OF MANAGEMENT REPORT OF INDEPENDENT AUDITORS We have prepared the accompanying consolidated Financial statements and related information included herein for each of the three years in the period ended December 31, 1994. The primary responsibility for the integrity of the financial information included in this annual report rests with management. Such information was prepared in accordance with generally accepted accounting principles appropriate in the cir cumstances, based on our best estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, the Company's independent auditors, on those Financial statements is included herein. Eaton maintains internal accounting control systems which provide reasonable assurance that assets are safeguarded from loss or unautho rized use and which produce reliable accounting records for prepara tion of financial information. There are limits inherent in all systems of internal accounting control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe the Company's systems provide this appropriate balance. The systems and controls and compliance (herewith are reviewed by an extensive program of internal audits and by our independent audi tors. Their activities are coordinated to obtain maximum audit cover age with a minimum of duplicate effort and cost. The independent auditors receive copies of all reports issued by the internal auditors at the same time they are released to management and have access to all internal audit work papers. The Company maintains high standards when selecting, training and developing personnel, to ensure that management's objectives of main lining strong, effective internal accounting controls and unbiased, uniform reporting standards are attained. We believe our policies and procedures provide reasonable assurance that operations are conducted in conformity with law and with our Company's commitment to a high standard of business conduct. The Board of Directors pursues its responsibility for the quality of the Company's financial reporting primarily through its Audit Committee which is composed of four outside directors. The Audit Committee meets regularly with management, the internal auditors and indepen dent auditors to ensure that they are meeting their responsibilities and to discuss matters concerning internal accounting control systems, accounting and financial reporting. The internal auditors and indepen dent auditors have full and free access to senior management and the Audit Committee. To the Shareholders Eaton Corporation We have audited the consolidated balance sheets of Eaton Corporation as of December 31. 1994 and 1993. and the related statements of con solidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994, appearing on pages 20 to 32. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted audit ing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state ments 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 (he 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 financial statements referred to above present fair ly, in all material respects, the consolidated financial position of Eaton Corporation at December 31,1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31. 1994 in conformity with generally accepted accounting principles. As described under "Accounting Changes" on page 25 in the Financial Review, in 1992 the Company changed its methods of accounting for postretirement benefits other than pensions and for income taxes. Cleveland. Ohio January 27, i995 UP William E. Butler Chairman and Chief Executive Officer `uurv27. 1995 Stephen R. Hardis Vice Chairman and Chief Financial ami Administrative Officer Ronald L. Leach Vice President Accotmtiny 37 EATON CORPORATION FIVE'VEAR CONSOLIDATED FINANCIAL SUMMARY For (he year (Millions except for per share dxu) Net sales Income before extraordinary item and cumulative effect of accounting changes Extraordinary item Cumulative effect of accounting changes Postretirement benefits other than pensions Income taxes Net income (loss) Per Common Share Income before extraordinary item and cumulative effect of accounting changes Extraordinary item Cumulative effect of accounting changes Postretirement benefits other than pensions Income taxes Net income (loss) Cash dividends paid At the year-end Total assets . Long-term debt Total debt Shareholders' equity S6.0'2 1993 $4,401 180 (7) 173 1992 $4,101 140 (274) 6 (128) 1991 $3,659 74 74 1990 $4,083 179 179 S 4,4(1 4.4() 1 20 $ 2.57 (.10) 2.47 1.15 $ 2.03 (3.97) .09 (1.85) 1.10 $ 1.09 1.09 1.10 $ 2.53 2.53 1.05 S4.682 1.053 1.089 1.680 $3,268 649 773 1,105 $3,220 833 882 948 $3,184 795 927 1,153 $3,140 755 815 1.140 Results for 1994 reflect the icquisition of DCBU on January 31, 1994. Income in 1993 was reduced by a $55 million acquisition integration charge related to the purchase of DCBU ($34 million after income tax credits, or $.49 per Common Share). Income in 1993 was reduced by an extraordinary loss of $11 million for the redemption of debentures ($7 million after income tax credits, or $ 10 per Common Share). Income in 1991 was reduced by a restructuring charge of $39 million ($25 million after income tax credits, or $.38 per Common Share). as CORPORATE OFFICERS SENIOR MANAGEMENT COUNCIL William E. Butler Chairman and Chief Executive Officer John S. Rooewig President Chief Operating Officer Vehicle Components Stephen R. Hardis Vice Chairman and Chief Financial and Administrative Officer Alexander M. Cutler Executive Vice President Chief Operating Officer - Controls Geralo L. Gherlein Executive Vice President and General Counsel STAFF OFFICERS John M. Carmont Vice President and Treasurer Susan J. Cook Vice President - Human Resources Adrian T. Dillon Vice President - Planning Patrick X. Donovan Vice President - International John D. Evans Vice President Earl R. Franklin Secretary and Associate General Counsel John W. Hushen Vice President - Corporate Affairs Stanley V. Jaskolski Vice President Technical Management Ronald L. Leach Vice President - Accounting William T. Muir Vice President Manufacturing Technologies Derek R. Mumford Vice President Information Technologies Billie K. Rawot Vice President and Controller John M. Carmont Susan J. Cook Adrian T. Dillon Patrick X. Donovan John D. Evans Earl R. Franklin John W Hushen Stanley V. Jaskolski Ronald L Leach APPOINTED VICE PRESIDENTS Joseph L. Becherer Vice President Operations/Cutler-Hammer Alan E. Best Vice President - Truck Components Operations/North America Thomas W. Chisholm Vice President Automotive Marketing ante Luiic Vice President Automotive & Appliance Controls Operations/Europe T Robert J. McCloskey Vice President - Hydraulics & General Products Operations Thomas W. O'Boyle Vice President - Truck Components Operations/Worldwide Larry M. Oman Vice President - Engine Components Operations/World wide Randall R. Phillips Vice President Automotive &. Appliance Controls Operations/Worldwide William T. Muir Derek R. Mumford Billie K. Ro*ot Samuel K. Scovil Vice President Commercial & Military Controls Opera! ions/Worldwide Jerald J. Theder Vice President Integration/Culler-Hammer Joaquin J. Zuza Vice President Truck Components Operations/Europe 39 DIRECTORS from fxrw. from left John S. Rodewig President, Chief Operating Officer Vehicle Components. Eaton Corporation William E. Butler Chairman and Chief Executive Officer. Eaton Corporation Alexander M. Cutler Executive Vice President, Chief Operating Officer - Controls, Eaton Corporation Stephen R. Hardis Vice Chairman and Chief Financial and Administrative Officer, Eaton Corporation Back row. from left John R. Miller ' President and Chief Executive Officer, TBN Holdings Inc., Cleveland, Ohio, an environmental company engaged primarily in the resource recovery and recycling business A. William Reynolds Chairman. GenCorp Inc., Fairlawn. Ohio, a technology-based company with positions in aerospace, automo tive and polymer products Gary L. Tooker Vice Chairman and Chief Executive Officer. Motorola. Inc., a manufacturer of electronics equipment Victor a. Pelson Executive Vice President and Chairman of the Global Operations Team. AT&T, providers of telecommunications Furman C. Moseley President, Simpson Investment Company, holding company for Simpson Paper Company and Simpson Timber Company, all of Seattle, Washington Charles E. Hugel Former Chairman and Chief Executive Officer, Combustion Engineering. Inc., Stamford. Connecticut, providers of products and services for the power, process, automation, environmental control and other markets Hooper G. Pattillc Chairman of the Board and President. Pauillo Construction Company. Inc . Decatur, Georgia, an industrial con struction and development company Neil A. Armstrong Former Chairman of Computing Technologies for Aviation. Inc.. Charlottesville. Virginia, a computer systems company Phyllis B Davis Former Senior Vice President. Corporate Affairs. Avon Products. Inc.. New York, a manufacturer and marketer of cosmetics, toiletries and jewelry COMMITTEES OF THE BOARD Executive Committee Mr. Butler, as Chairman of the Board's Executive Committee, serves for the full 12-month term. Each of the non-employee directors serves a four-month term Audit Committee Hooper G. Patcillo - Chairman Phyllis B. Davis Charles E. Hugel A. William Reynolds Compensation Committee Neil A, Armstrong - Chairman Charles E. Hugel John R. Miller Furman C. Moseley Victor A. Pelson Finance Committee Furman C. Moseley - Chairman Neil A. Armstrong Stephen R. Hardis John R. Miller Gary L. Tooker Organization and Nominating Committee Neil A. Armstrong - Chairman William E. Butler Charles E. Hugel John R. Miller Furman C. Moseley Victor A. Pelson Pension Review Committee A. William Reynolds - Chairman Phyllis B. Davis Charles E. Hugel Hooper G. Pauillo Gary L. Tooker SHARCHOIOFR INFORMATION ADDRESS Eaton Corporation. Futon Cutter Cleveland. Ohio 44/f4-25S4 2 l6-52.'-5l!0it A N t J U A L M i: E TI A1 G The company\ Ianimal mectrtie of sharehc'ld-eir- twl! he It-ekl ut Ideit ;i m.. local nine, on \\'cdtiC'day, April 26. Ix-OS. at The la-rum Coi'fcicnrc end Education Center Jo.-yieJ wiiliin One Cleveland Center. CCS Faei Ninth Snoot. Cleveland. Oilier 441 14. FAtiuil nonce of the ittCeMiuy. a prow sluieii'ent and proxy form will he rttmled to c-tcli shaieholdcr on or about March IT. PTES. FORM 1C-K REFO.RT Any eltaicliolvlei may. upon u l inen iv.pic-t io rhe Ollteo of the Se.ietan. obtain vv itf'onit chaise a copy of Eaton A Form |(l-K Report for IW4 ae llled vvith the Sccuriliee and Evch.-.nec Coinnii-eion. The report vv ill he available after M.nelr L l'S'15. COMMON SPARES l .ieictl tor trading: Now York. Chicago. I'acitic and London Mock cxchaiieec tTicker Sy ttihol: El N) 1 PAMSFER AGENT. REGISTRAR. DtVtDcNO CSEUFSING AGEt AND DIVIDEND REINVESTMENT AGENT: Key Cor;'' Shareholder Sen ices. Inc. I'.O. Box 6477 Cleveland. Ohio 44101-1477 I -STli 1-542-770C. DIVIDEND REINVESTMENT PLAN A dsvidertd rcinvcetmcnt plan is axailahle at r;o charec r<> n-ci.-rd holders of Fat on common shaic.v Thnuieli the plan, rccotel holders may buy nddit ie-nal eharee In icim eMine their ca-h di\ idcixU or investing additional cash up to StiO.dtlti per ycar. ImetcMcd eharoholdcts of icemd 'hon'd n.nttiei KeyCorp Shatehokler Sen ice-. Inc., shove. DIRECT DEPOSIT OF DIVIDENDS Shareholder' of iccord may have their dividend-. diicel depi-cited to their hank aeeountc. IntcieMcd shaielu'ldcis ol teex'id 'hould contact KeyCorp Shaiel'.older Service'. Inc., above. CHARITABLE CONTRIBUTIONS A lepovt of Eaton'' eliaritahle contribution-, E available upon written rctjiteM to the Ol lice of Comnuinily Affair' at the Eaton Corporation addiC" shown ahox e. T:\nL tn.il ks >{ |-;ili >n Ccrp'Mjiton tnculn'iu'il in 'I'is .mmi.,1 k p- :i tin !..in -i'. A if He \. Au:*'Sc!cci. Aui*'SPiiti. OiMt'iitci CuHv.: Huimjii.t. DrjitM'i. j-.S. I luTimii Sci'Cv Cj.'lt KiiJc. IMPACV. in \iv.l>.cr. I.'VII'UI. \V r.rM) HI . P.tr.jiV.jf. i. S Sci:^ :* r.i;, it f* .rpiT.ii:- >;i 1'0