Eaton Corporation

1902–1973

Eaton Corporation is a diversified industrial manufacturer whose operations are divided into four main groups: fluid power, electrical, automotive, and trucks. The company is a global leader in fluid power systems and services for industrial, mobile, and aircraft equipment; electrical systems and components for power quality, distribution, and control; automotive engine air management systems and power-train controls for fuel economy; and intelligent drive-train systems for fuel economy and safety in trucks. Among the brands that Eaton uses to market its products and services are Aeroquip, Airflex, Bill, Boston, Char-Lynn, Challenger, Durant, Eaton Electrical, Elek, Fuller, Golf Pride, Heinemann, Holec, Home Automation, Hydro-Line, MEM, Sterer, Tabula, Tedeco, Vickers, VORAD, and Weatherhead. Eaton generates business in more than 100 countries worldwide, with about one-third of revenues originating outside the United States--19 percent in Europe and about 6 percent each in Latin America and the Asia-Pacific region. The company's roots are in low-tech commodity parts for trucks and automobiles, but--particularly since the mid-1990s--Eaton has shifted focus to the manufacture of a variety of electronics-based products.

Pioneering Auto Supplier

In 1911 Joseph Oriel Eaton established a small machine shop in Bloomfield, New Jersey, manufacturing heavy-duty truck axles for the expanding automotive industry. With the help of brother-in-law Henning O. Taube and Viggo V. Torbensen, who had patented an internal-gear rear truck axle in 1902, the Torbensen Gear and Axle Company built seven axles by hand in its first year. Three years later, the company's operations were moved to Cleveland, in order to be closer to the auto manufacturers there and in Detroit. Then in 1917, by which time production had soared to 33,000, the company was sold to Republic Motor Truck Co., the largest truck maker in the country.

In 1922 Eaton reentered the picture, buying back his original company from Republic Motor Truck Co. and renaming it one year later the Eaton Axle and Spring Co. Over the next several years, the company acquired several smaller auto parts manufacturers, including makers of chassis leaf springs, bumpers, engine valves and tappets, and coil springs. Diversification of its product line also included a new line of parts for aircraft engines.

The company weathered the Great Depression, acquiring several companies that were nearing bankruptcy. By the late 1930s industrial growth was stimulated by President Roosevelt's New Deal program, and demand for products from the Eaton Manufacturing Company--a name change registered in May 1932--increased slowly and steadily. When the United States became involved in World War II, Eaton, as a primary manufacturer of vehicle parts, produced a variety of items for the war effort.

In 1946 Eaton purchased the Dynamatic Corporation and one year later established a joint sales and engineering company with two British firms, Rubry Owen and E.N.V. Engineering. These companies soon became suppliers of axles and gears to Ford Motor Company and General Motors Corporation in England. In 1953 Livia, a small Italian manufacturer of engine valves, acquired technological assistance and a production license from Eaton. As a result, Livia become the exclusive supplier of engine valves for Simca of France as well as for all trucks built by Fiat. Livia was purchased by Eaton in 1961.

Diversification Through Acquisition: 1958-73

John C. Virden was named president of Eaton in 1958 and followed the company's diversification policy. A strong believer in "divisional autonomy," Virden ensured that Eaton's subsidiaries and divisions maintained a large degree of managerial independence. Under Virden, Eaton made 23 major acquisitions between 1958 and 1973, including Fuller Manufacturing Co., which produced automotive transmissions (1958); Dole Valve Co. (1963), the deal through which Eaton entered the appliance and automotive controls sectors; and, perhaps more importantly, the Yale & Towne Manufacturing Company. Yale & Towne was founded in the 1870s by the inventor Linus Yale, Jr., who developed a revolutionary pin-tumbler cylinder lock, or padlock, which proved popular and has remained essentially unchanged since its invention. When Yale died in 1913 at the age of 47, Henry Towne took over the company and served as its leader for the next 50 years. Yale & Towne was acquired by Eaton on October 31, 1963, and a full merger occurred on January 1, 1966, under the name of Eaton Yale & Towne Inc.

Eaton also initiated a $470 million diversification program to develop a new line of factory automation products.

1966–1984

During this time, Eaton's auto parts division suffered a temporary setback when General Motors, one of Eaton's primary customers, reduced its orders after model changes and higher wages forced the auto manufacturer to scale down production. Nevertheless, Eaton Yale & Towne remained profitable, as its other divisions supported the company until demand for auto parts recovered. In 1966 Eaton Yale & Towne experienced record growth in sales and profits, largely as a result of an expansion in industrial growth.

Following the merger with Yale & Towne, the company executed a careful integration of managerial personnel; officials at Yale & Towne were given important permanent positions in the new company. Gordon Patterson, formerly president of Yale & Towne, was named vice-chairperson, and John Virden became chairperson, as Elliot Ludvigsen, a former president of Fuller Manufacturing, was named president. When Virden retired in 1969, E. Mandell de Windt, who had joined the company as a production clerk, was elected chairperson. The company's name was changed once again on April 21, 1971, to Eaton Corporation.

Expansion into Factory Automation in the Late 1970s

In the 1970s, decreased demand for American cars severely affected the three largest manufacturers of automobile components: Bendix Corporation, Rockwell International, and Eaton. As a result, all three companies attempted further diversification of their operations. Whereas Bendix acquired new product lines, and Rockwell added electronics products to its line, Eaton began to focus on the less volatile truck components market, as well as on expansion into foreign markets. Eaton also initiated a $470 million diversification program to develop a new line of factory automation products.

In 1978, with the automotive market still sluggish, Eaton made three acquisitions: Samuel Moore & Company, a manufacturer of hydraulic motors and transmissions; Kenway, a company specializing in robotic warehouse storage systems; and, most importantly, the electronics company Cutler-Hammer Inc., whose AIL electronics division had developed the ALQ-161 advanced radar counter-measures system for Rockwell's B-1 bomber and had also been chosen by NASA to build the landing system for the space shuttles. Eaton intended to combine the resources of these three companies in order to develop a new line of factory automation products. During the development stage, however, high capital investments and low profit margins ensued, and Eaton began to struggle financially. Moreover, the Yale & Towne division's ventures in forest equipment and lift-truck manufacturing proved barely profitable (in February 1978 Eaton had sold the Yale lock and security business to Thomas Telling Ltd.); 1980 was a particularly bad year for Eaton.

Restructuring in the 1980s

The following year, Eaton sold or closed down 18 subsidiaries whose profits were marginal or nonexistent. The forestry equipment and lift-truck businesses were written off and sold in 1982 for $200 million. That year, Eaton registered its first loss in 50 years, $189.6 million on sales of $2.4 billion. Determined to reduce the company's exposure to the vagaries of the automotive components business, de Windt declared that Eaton had now dedicated itself to becoming a "high technology company servicing the growth markets of the 1980s."

Ironically, the automotive division generated most of the company's profit the following year. Eaton's major automotive customers, International Harvester (later renamed Navistar International Corp.), Ford, General Motors, and Paccar Inc., had fully recovered from the recession of the mid-1970s and were once again selling a wide range of trucks. Even so, automotive components, which had accounted for 79 percent of Eaton's sales in 1977, were down to 46 percent by 1983. In 1984, 12 of the company's automotive components plants were closed, and the workforce was reduced to 41,000, down from 63,000 in 1979. During this time, sales from the electronic components division rose dramatically from 21 percent of turnover in 1977 to 54 percent in 1983.

1978–1998

Jim Stover, president and chief operating officer of Eaton since 1979, was named chairperson and CEO when de Windt retired on April 23, 1986. Stover maintained de Windt's commitment to the company's substantial foreign markets, remarking that Eaton had learned from the recession that "you compete on a global basis or you don't compete at all." Stover took over after Eaton had reported a 1985 profit of $231 million on sales of $3.7 billion.

At the beginning of 1986, Eaton had $1 billion available for financing acquisitions, and, by July of that year, it had purchased three more companies: Consolidated Controls (precision instruments), Singer Controls (switches and valves), and Pacific-Sierra Research (defense and computer systems). At the end of the year, Stover unexpectedly placed the company's defense electronics business, AIL Systems, Inc., up for sale, noting quality control problems and reduced orders for the division's B-1B bomber systems. This segment of Eaton's business had suffered several other setbacks during this period as well. It was suspended from bidding on new Air Force contracts, and, in March 1988, AIL paid the Department of Defense $9.5 million to settle improper billing charges. Unable to sell the subsidiary, Eaton sustained it as a discontinued operation until mid-1993, when it was "reconsolidated," according to that year's annual report.

Two Huge Acquisitions in the 1990s

From 1984 to 1993, Eaton invested almost $1.7 billion in capital improvements and $2.3 billion in research and development, which enabled it to introduce several new products in the early 1990s. One noteworthy innovation was the AutoSelect automatic transmission, the result of $10 million and six years of planning. Introduced in 1993, AutoSelect promised the trucking industry increased fuel efficiency, safer and easier driving, and drastically lowered training costs. An article in the June 1993 issue of Forbes magazine suggested that AutoSelect might also be intended to attract more female drivers to the shorthanded trucking industry, an allegation that Eaton strongly denied. It was also during this period that William E. Butler took over as CEO, starting in 1991.

Eaton's global expansion resulted in annual sales increases from 13.4 percent in 1985 to nearly 30 percent by 1993. Domestic sales from its automotive division continued, however, to provide the largest share, over 50 percent, of Eaton's revenues. Still susceptible to market fluctuations, the company recorded rather meager profits from 1989 to 1991, and reported a loss in 1992. Nevertheless, profits rebounded the following year, fueled by surging sales in the North American market for sport utility vehicles.

That year, Eaton announced a plan to lessen its dependence on automotive components through the $1.1 billion acquisition of Westinghouse Electric Corporation's distribution and controls business unit--a bold move for a traditionally conservative company. The purchase, completed in February 1994 and at that point the largest in the company's history, advanced Eaton to a top position in industrial control and power distribution markets, providing such products as circuit breakers. The company aimed to pay off the $930 million debt it incurred for the acquisition by 1998. Shortly after completion of the deal, Eaton merged the Westinghouse business into its Cutler-Hammer unit, in the process closing eight plants and warehouses and laying off 1,200 employees. The Westinghouse deal was a significant force behind a 37 percent increase in revenues in 1994, to $6.05 billion.

During 1995 Butler retired after 38 years with the company. Stephen R. Hardis, vice-chairman and CFO since 1986, was named CEO and chairman. Alexander M. Cutler, a strong operations executive who had run the controls group since 1989 and who had joined the company when Cutler-Hammer was acquired in 1978, was named president and chief operating officer. Also that year, Eaton bought the IKU Group, a Dutch maker of automotive mirror controls, and Emwest Products, a manufacturer of electrical switch gear and controls based in Australia. In an example of the company's increasing shift to high-tech business lines--and as a reflection of a 50 percent increase in R&D spending that Hardis enacted--Eaton introduced the VORAD Safety System, a radar unit designed to provide visual and audible warnings to truck drivers if they are too close to a vehicle ahead.

Continuing to seek strategic acquisitions and grow overseas, Eaton spent $135 million in March 1996 for CAPCO Automotive Products, a Brazilian producer of manual transmissions for medium trucks. Brazil was one of five countries the company was targeting for foreign growth, the others being China, India, Mexico, and South Korea. Building its semiconductor business, through which Eaton had a dominant position in the market for ion implanters, used to produce memory chips, the company in July 1997 acquired Fusion Systems Corp., a maker of semiconductor equipment based in Rockville, Maryland, for about $293 million. Eaton also continued to divest operations in which it did hold clear leadership positions. Late in 1997, for example, its appliance controls business was sold to Siebe plc for $310 million. Eaton also finally unloaded the noncore AIL defense electronics business, selling a majority of its stock to AIL's management and an AIL employee stock ownership plan. Then, in a historic move, Eaton engineered a swap of businesses with Dana Corporation in January 1998 that involved Eaton's founding business. Eaton sold its truck axle and brake business to Dana for $287 million, while simultaneously buying Dana's clutch business for $180 million, gaining a business that meshed well with Eaton's truck transmission product line.

1995–2004

In April 1999, in its biggest acquisition yet, Eaton paid $1.7 billion in cash for Aeroquip-Vickers, Inc., a producer of industrial hydraulic equipment based in Maumee, Ohio. Aeroquip-Vickers produced hydraulic pumps, cylinders, motors, and drives as well as fittings and hoses for industrial, aerospace, and automotive markets. Its revenues for 1998 were $2.15 billion. The deal made Eaton the number two player in the hydraulic equipment market, trailing only Parker Hannifin Corporation. To finance the acquisition, Eaton subsequently sold off several operations, some of which had come to the company through Aeroquip-Vickers: Eaton's engineered fasteners business, to TransTechnology Corp.; its fluid power division, producer of engine cooling systems for cars and trucks, to Borg-Warner Automotive, Inc.; its Vickers electronic systems division, to Siemens Energy and Automation, Inc.; and its mobile hydraulic cylinder business, to Hyco International, Inc. Eaton also reorganized its operations into five segments: automotive components, fluid power and other components, industrial and commercial controls, semiconductor equipment, and truck components. Eaton enjoyed its best year ever in 1999, posting net income of $617 million on revenues of $8.4 billion.

Continuing to Evolve in the Early 21st Century

Having thoroughly overhauled both the operations and the management ranks--59 of the top 73 positions at the company were filled by new people, half outsiders, since 1995--Hardis retired in July 2000. Taking over as chairman, president, and CEO was Cutler. The new leader oversaw the separation of the semiconductor equipment business. This unit was taken public as Axcelis Technologies, Inc. in July 2000 through an initial public offering of 18 percent of its stock. Eaton then spun off its remaining 82 percent interest to shareholders in December of that year. Proceeds from the IPO were used to pay down debt, which stood at approximately $3 billion early in 2000.

Over the next few years, with the economic downturn providing a particularly difficult environment for industrial manufacturers, Eaton managed to consistently beat the expectations of Wall Street and remain profitable, culminating in 2003 in net income of $386 million on sales of $8.06 billion. The balance sheet improved significantly as total debt was reduced to less than $2 billion. In addition, the company completed several smaller, "fill-in" acquisitions as well as the divestment of a number of nonproductive businesses.

In March 2001 Eaton purchased Sumitomo Heavy Industries, Ltd.'s 50 percent interest in the two companies' fluid-power joint venture in Japan, which was subsequently renamed Eaton Fluid Power Limited. One month later, Eaton sold its vehicle-switch and electronics division to Delphi Automotive Systems Corp. for $300 million. Eaton next sold its Navy Controls unit, maker of shipboard integrated electrical power distribution and control systems for the Navy, to DRS Technologies, Inc. in July 2002 for $92.2 million. In November 2002 the company bought the Boston Weatherhead division of Dana Corp. for $130 million. This division produced hose, tubing, and fluid connectors for fluid power systems mainly for the industrial distribution, mobile off-highway, and heavy-duty truck markets. In January 2003 Eaton acquired the electrical division of Delta plc for $215 million. Headquartered in the United Kingdom with operations in Europe and the Asia-Pacific region, the acquired division specialized in electrical products, systems, and services used for the control and distribution of medium- and low-voltage electricity to protect life, equipment, and buildings. The division's brands included MEM, Holec, Bill, Home Automation, Elek, and Tabula. Also in 2003 the industrial and commercial control business along with the Cutler-Hammer unit were renamed Eaton Electrical Inc. In June 2004 Eaton acquired Powerware Corporation, the power systems business of Invensys plc, for $560 million. Based in Raleigh, North Carolina, Powerware was a global leader in uninterruptible power systems (UPS) and other devices and services for protecting factories and offices from power surges and power interruptions. With ten plants and more than 100 locations worldwide, Powerware had revenues of $775 million for the fiscal year ending in March 2004. Eaton also bolstered its fluid power business by acquiring Walterscheid Rohrverbindungstechnik GmbH, a German manufacturer of hydraulic tube connectors and fittings, from GKN plc in September 2004 for $48 million.