-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KkkyhrcNVrcTJk+N381BuQz2uBawO28d5Ecck0kDptbhltsvJ3kvxbBz49esJtRI 7MF4qiv1HWOiWJnJP6CN7g== 0000031277-02-000009.txt : 20020514 0000031277-02-000009.hdr.sgml : 20020514 ACCESSION NUMBER: 0000031277-02-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020509 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 340196300 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-56644 FILM NUMBER: 02647229 BUSINESS ADDRESS: STREET 1: EATON CTR STREET 2: 1111 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114-2584 BUSINESS PHONE: 2165235000 MAIL ADDRESS: STREET 1: 1111 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 FORMER COMPANY: FORMER CONFORMED NAME: EATON YALE & TOWNE INC DATE OF NAME CHANGE: 19710822 10-Q 1 etn1q10q.txt EATON CORPORATION FIRST QUARTER 2002 10-Q United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2002 -------------- Commission file number 1-1396 ------ Eaton Corporation ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0196300 ------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) Eaton Center, Cleveland, Ohio 44114-2584 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 523-5000 ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X --- There were 70.2 million Common Shares outstanding as of March 31, 2002. Page 2 Part I - FINANCIAL INFORMATION Item 1. Financial Statements Eaton Corporation Condensed Consolidated Balance Sheets March 31, December 31, (Millions) 2002 2001 ---- ---- ASSETS Current assets Cash & short-term investments $ 262 $ 311 Accounts receivable 1,096 1,070 Inventories 668 681 Deferred income taxes & other current assets 345 325 ------ ------ 2,371 2,387 Property, plant & equipment 1,999 2,050 Goodwill 1,918 1,902 Other intangible assets 515 533 Other assets 747 774 ------ ------ $7,550 $7,646 ====== ====== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debt & current portion of long-term debt $ 197 $ 188 Accounts payable 356 418 Accrued compensation 148 158 Accrued income & other taxes 254 258 Other current liabilities 714 647 ------ ------ 1,669 1,669 Long-term debt 2,144 2,252 Postretirement benefits other than pensions 669 670 Deferred income taxes & other liabilities 561 580 Shareholders' equity 2,507 2,475 ------ ------ $7,550 $7,646 ====== ====== See accompanying notes. Page 3 Eaton Corporation Statements of Consolidated Income Three Months Ended March 31 ------------------ (Millions except for per share data) 2002 2001 ---- ---- Net sales $1,723 $1,983 Costs & expenses Cost of products sold 1,286 1,497 Selling & administrative 310 321 Research & development 55 68 ------ ------ 1,651 1,886 ------ ------ Income from operations 72 97 Other income (expense) Interest expense-net (27) (42) Gain on sales of businesses 38 Other-net 3 11 ------ ------ (24) 7 ------ ------ Income from continuing operations before income taxes 48 104 Income taxes 15 54 ------ ------ Net income $ 33 $ 50 ====== ====== Net income per Common Share assuming dilution $ .47 $ .72 Average number of Common Shares outstanding 71.2 70.1 Net income per Common Share basic $ .48 $ .73 Average number of Common Shares outstanding 70.1 69.0 Cash dividends paid per Common Share $ .44 $ .44 See accompanying notes. Page 4 Eaton Corporation Condensed Statements of Consolidated Cash Flows Three Months Ended March 31 ------------------ (Millions) 2002 2001 ---- ---- Net cash provided by operating activities Net income $ 33 $ 50 Adjustments to reconcile to net cash provided by operating activities Depreciation & amortization 89 90 Amortization of goodwill & intangible assets 6 25 Gain on sales of businesses (38) Changes in operating assets & liabilities, excluding acquisitions and sales of businesses (46) (7) Other-net 1 (11) ----- ----- 83 109 Net cash used in investing activities Expenditures for property, plant & equipment (40) (63) Acquisitions of businesses, less cash acquired (22) Sales of businesses 277 (Increase) decrease in short-term investments-net 32 (212) Other-net 2 3 ----- ----- (6) (17) Net cash used in financing activities Borrowings with original maturities of more than three months Proceeds 76 702 Payments (382) (511) Borrowings (payments) with original maturities of less than three months-net 217 (222) Cash dividends paid (30) (30) Purchase of Common Shares (4) Other-net 24 11 ----- ----- (95) (54) ----- ----- Total (decrease) increase in cash (18) 38 Cash at beginning of period 112 82 ----- ----- Cash at end of period $ 94 $ 120 ===== ===== See accompanying notes. Page 5 The following notes are included in accordance with the requirements of Regulation S-X and Form 10-Q: Dollars and shares in millions, except per share data (per share data assume dilution) Preparation of Financial Statements - ----------------------------------- The condensed consolidated financial statements of Eaton Corporation (Eaton or the Company) are unaudited. However, in the opinion of management, all adjustments have been made which are necessary for a fair presentation of financial position, results of operations and cash flows for the stated periods. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2001 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Unusual Charges - --------------- As the extraordinarily weak economic conditions of 2001 continued into 2002, Eaton undertook additional restructuring actions in the first quarter to further reduce fixed operating costs across all business segments and certain corporate functions. The operational restructuring charges are included in the Statements of Consolidated Income in Income from operations and reduced operating profit of the related business segment. The corporate charges are included in the Statements of Consolidated Income in Income from operations and in Business Segment Information in Corporate & other-net. A summary of unusual charges recorded in each year follows: Three months ended March 31 ------------------ 2002 2001 ---- ---- Operational restructuring charges Fluid Power $ 17 $ 7 Industrial & Commercial Controls 13 Automotive 1 Truck 14 38 Corporate charges 4 ---- ---- Pretax $ 49 $ 45 ==== ==== After-tax $ 33 $ 30 Per Common Share .46 .43 Page 6 Restructuring liabilities remaining at December 31, 2001, those recorded in 2002 as described above, and those utilized thus far in 2002, are summarized as follows: Workforce reductions Inventory & Plant -------------------- other asset consolidation Employees Dollars write-downs & other Total --------- ------- ----------- ------------- ----- Liabilities remaining at December 31, 2001 344 $ 21 $ 0 $ 2 $ 23 2002 charges 1,485 37 6 6 49 Utilized in 2002 (1,079) (29) (6) (4) (39) ----- ---- ---- ---- ---- Liabilities remaining at March 31, 2002 750 $ 29 $ 0 $ 4 $ 33 ===== ==== ==== ==== ==== New Accounting Pronouncement - Adoption of SFAS No. 142 - ------------------------------------------------------- Effective January 1, 2002, Eaton adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets". Upon adoption, the Company discontinued the amortization of goodwill and indefinite life intangible assets recorded in connection with previous business combinations. First quarter 2002 results were impacted favorably by this reduction in amortization expense of $18 ($16 after-tax, or $.22 per Common Share). A reconciliation of net income and earnings per Common Share for the first quarter of 2001, as if SFAS No. 142 had been adopted as of the beginning of that year follows: Three months ended March 31 ------------------ 2002 2001 ---- ---- Reported net income $ 33 $ 50 Add back amortization of goodwill & indefinite life intangible assets, net of tax 16 ---- ---- Adjusted net income $ 33 $ 66 ==== ==== Reported net income per Common Share assuming dilution $.47 $.72 Add back amortization of goodwill & indefinite life intangible assets, net of tax .22 ---- ---- Adjusted net income per Common Share $.47 $.94 ==== ==== Page 7 SFAS No. 142 changes the accounting for goodwill and indefinite life intangible assets from an amortization approach to a non-amortization approach requiring periodic testing for impairment of the asset. Eaton is in the process of completing the initial impairment test for goodwill as of January 1, 2002, which must be completed by June 30, 2002. Eaton does not expect to recognize an impairment charge as a result of this initial impairment test. A summary of goodwill and other intangible assets follows: March 31, 2002 December 31, 2001 ------------------------- ------------------------- Historical Accumulated Historical Accumulated cost amortization cost amortization ---------- ------------ ---------- ------------ Goodwill $2,253 $335 $2,218 $316 ====== ==== ====== ==== Intangible assets not subject to amortization (primarily trademarks) $ 333 $ 24 $ 330 $ 24 ====== ==== ====== ==== Intangible assets subject to amortization Patents $ 190 $ 67 $ 190 $ 63 Other 142 59 176 76 ------ ---- ------ ---- $ 332 $126 $ 366 $139 ====== ==== ====== ==== Expense related to intangible assets subject to amortization for the first quarter of 2002 was $6. Estimated annual pretax expense for intangible assets subject to amortization for each of the next five years follows: 2002, $22; 2003, $21; 2004, $16; 2005, $15; and 2006, $15. Pension and Other Postretirement Benefit Expense - ------------------------------------------------ Pretax income in 2002 was reduced by $19 ($12 after-tax, or $.17 per Common Share) in comparison to 2001 due to the effect on pension income of the decline in stock market valuations on Eaton's pension fund assets, coupled with lower discount rates associated with pension and other postretirement benefit liabilities. Gain on Sales of Businesses - --------------------------- During the first quarter of 2001, in separate transactions the Company sold the Vehicle Switch/Electronics Division (VS/ED) and certain assets of the Truck business. The sales of these businesses resulted in a pretax gain of $38 ($7 after-tax, or $.10 per Common Share). In Business Segment Information, the operating results of VS/ED are included in divested operations for 2001. Page 8 Income Taxes - ------------ The effective income tax rate for the first quarter of 2002 was 31.0% compared to 51.7% for the same period in 2001. The higher rate in 2001 was primarily the result of the tax effect of book/tax basis differences related to businesses sold in the first quarter of 2001 which increased tax expense by $18. Excluding the negative tax consequences related to the sales of businesses in 2001, the effective tax rate for the first quarter of 2001 was 34.0% compared to 31.0% in 2002. Financial Presentation Changes - ------------------------------ Certain amounts for 2001 have been reclassified to conform to the current year presentation. Inventories - ----------- March 31, December 31, 2002 2001 ---- ---- Raw materials $ 272 $ 260 Work-in-process and finished goods 430 455 ----- ----- Gross inventories at FIFO 702 715 Excess of current cost over LIFO cost (34) (34) ----- ----- Net inventories $ 668 $ 681 ===== ===== Net Income per Common Share - --------------------------- The calculation of net income per Common Share assuming dilution and basic follows: Three Months Ended March 31 ------------------ 2002 2001 ---- ---- Net income $ 33 $ 50 ==== ==== Average number of Common Shares outstanding assuming dilution 71.2 70.1 Less dilutive effect of stock options 1.1 1.1 ---- ---- Average number of Common Shares outstanding basic 70.1 69.0 ==== ==== Net income per Common Share Assuming dilution $.47 $.72 Basic .48 .73 Page 9 Comprehensive Income - -------------------- The principal difference between net income as historically reported in the Statements of Consolidated Income and comprehensive income are foreign currency translation adjustments recorded in Shareholders' equity. Comprehensive income is as follows: Three Months Ended March 31 ------------------- 2002 2001 ---- ---- Net income $ 33 $ 50 Foreign currency translation and other adjustments (10) (22) Deferred cash flow hedge adjustments 3 (3) ---- ---- Comprehensive income $ 26 $ 25 ==== ==== Page 10 Business Segment Information - ---------------------------- Three Months Ended March 31 ------------------ 2002 2001 ---- ---- Net sales Fluid Power $ 597 $ 673 Industrial & Commercial Controls 486 559 Automotive 385 385 Truck 255 281 ------ ------ Total ongoing operations 1,723 1,898 Divested operations 85 ------ ------ Total net sales $1,723 $1,983 ====== ====== Operating profit (loss) Fluid Power $ 43 $ 62 Industrial & Commercial Controls 18 50 Automotive 56 54 Truck (10) (38) ------ ------ Total ongoing operations 107 128 Divested operations 7 Amortization of goodwill & other intangible assets (6) (24) Interest expense-net (27) (42) Gain on sales of businesses 38 Corporate & other-net (26) (3) ------ ------ Income before income taxes 48 104 Income taxes 15 54 ------ ------ Net income $ 33 $ 50 ====== ====== Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions, except per share data (per share data assume dilution) Results of Operations - --------------------- Sales for the first quarter of 2002 were $1,723, 13% below the same period in 2001. The decline in sales was primarily the result of the continued weakness in the global economy which caused difficult operating conditions in most of Eaton's businesses. Sales from ongoing operations, which exclude the results of the Vehicle Switch/Electronics Division (VS/ED) that were divested in the first quarter of 2001, declined 9% from 2001. Net income was $33 in the first quarter of 2002, or $.47 per Common Share, compared to $50 in 2001, or $.72 per share. The decline was the result of the lower level of sales in 2002, and also reflected restructuring charges and reduced pension income recorded in 2002, partially offset by reduced expense related to the amortization of goodwill and indefinite life intangible assets, as discussed below. These results benefited from the aggressive restructuring actions, taken in both years to resize the Company in response to the weaker economic conditions, and tight control over expenditures. Before restructuring charges and gain on sales of businesses, operating earnings in 2002 were $66, or $.93 per share, compared to $73 in the first quarter of 2001, or $1.05 per share. As the extraordinarily weak economic conditions of 2001 continued into 2002, Eaton undertook additional restructuring actions in the first quarter to further reduce fixed operating costs across all four business segments and certain corporate functions. During the first quarter of 2002, the Company recorded $49 of restructuring charges ($33 after-tax, or $.46 per Common Share). In the first quarter of 2001, restructuring charges of $45 were recorded ($30 after- tax, or $.43 per share) related to the Truck and Fluid Power segments. The restructuring charges are included in the Statements of Consolidated Income in Income from operations and reduced operating profit of the related business segment. Results for 2002 were favorably impacted by the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, which eliminated the amortization of goodwill and indefinite life intangible assets recorded in connection with previous business combinations. This accounting change increased pretax income for the first quarter of 2002 by $18 ($16 after-tax, or $.22 per Common Share). Pretax income in 2002 was reduced by $19 ($12 after-tax, or $.17 per Common Share) in comparison to 2001 due to the effect on pension income of the decline in stock market valuations on Eaton's pension fund assets, coupled with lower discount rates associated with pension and other postretirement benefit liabilities. Page 12 As displayed in the Statements of Consolidated Income, Income from operations of $72 in the first quarter of 2002 decreased 26% from the same period in 2001. The decline was primarily the result of the lower level of sales in 2002, coupled with the effect of restructuring charges and reduced pension income recorded in 2002. These negative effects on income from operations were partially offset by reduced expense related to the amortization of goodwill and indefinite life intangible assets. During the first quarter of 2001, in separate transactions the Company sold VS/ED and certain assets of the Truck business. The sales of these businesses resulted in a pretax gain of $38 ($7 after-tax, or $.10 per Common Share). This gain is reported as a separate line in the Statements of Consolidated Income and in Business Segment Information. In Business Segment Information, the operating results of VS/ED are included in divested operations for 2001. The effective income tax rate for the first quarter of 2002 was 31.0% compared to 51.7% for the same period in 2001. The higher rate in 2001 was primarily the result of the tax effect of book/tax basis differences related to businesses sold in the first quarter of 2001 which increased tax expense by $18. Excluding the negative tax consequences related to the sales of businesses in 2001, the effective tax rate for the first quarter of 2001 was 34.0% compared to 31.0% in 2002. Business Segments - ----------------- Fluid Power - ----------- First quarter 2002 sales of Eaton's largest business segment, Fluid Power, were $597, 11% below one year earlier. Excluding sales of the Air Conditioning & Refrigeration business, which was divested in the third quarter of 2001, segment sales were off 8% compared to the first quarter of 2001. This compares to a decline of about 11% in Fluid Power's markets, with North American fluid power industry shipments off about 9%, and Aerospace markets off about 17%. While Eaton is beginning to see the early signs of very modest strengthening in the traditional mobile and industrial hydraulics markets, it does not anticipate a significant recovery in these markets until the middle of the second half of 2002. The Aerospace market has weakened and the Company anticipates that it will weaken further during the balance of this year. The earlier forecast for a 25% to 30% decline in the commercial aerospace markets this year, offset by a 5% improvement in military markets, still is the current expectation. Operating profits for the first quarter of 2002 were $43, down from $62 one year earlier. This reduction was due in large part to lower sales in 2002 and restructuring charges of $17 recorded in the first quarter of 2002, an increase from $7 in the prior year. Despite the weak performance of this segment's end markets, the benefits of the restructuring actions are being realized. Operating profits before restructuring charges were $60 for the first quarter of 2002 (10.0% of sales), down 13% from $69 one year ago (10.2% of sales). Page 13 During the first quarter of 2002, Eaton announced a multi-year contract with Airbus to provide products for hydraulic fluid conveyance in the new Airbus A380, the world's largest commercial aircraft. The contract has potential revenue of $70 over the next 20 years. This contract was the second contract awarded to Eaton for the Airbus A380, with the combined contracts expected to generate revenues of approximately $270 over the next 20 years. BMW also awarded Eaton a multi-year contract during the first quarter to provide fluid hose assemblies for two major automobile production models. This contract is expected to have revenues in excess of $150 over the life of the contract. In addition to these announcements, several other programs were awarded to Eaton in 2001, which should generate increased revenue in 2002, helping this business grow faster than its end markets. Industrial & Commercial Controls - -------------------------------- In the Industrial & Commercial Controls segment, first quarter 2002 sales were $486, down 13% from one year earlier, compared to an estimated 24% decline in the North American markets for this business. End markets for the electrical business remain very soft. Eaton expects that the long-cycle, large-project portion of this business will continue to soften through the balance of this year, with a recovery not expected until year-end. The residential market is one of the bright spots for the Company's electrical business, with United States housing starts holding steady at a 1.7 million rate during the first quarter, which was stronger than anticipated. Eaton's strong performance in the residential segment, fueled by the successful new Fire-GuardTM arc fault circuit interrupter product line, helped the electrical business grow faster than its overall end market demand. The Company also continues to be pleased with the growth and improved profitability of the Cutler-Hammer Engineering Services and Systems (C-H ESS) business. Operating profits for the first quarter of 2002 were $18, down from $50 one year earlier. This reduction was due in large part to lower sales in 2002 and restructuring charges of $13 recorded in the first quarter of 2002. As a result of the continued weak economic conditions, this segment took additional actions in 2002 as part of a cost reduction plan initiated in the second quarter of 2001. Operating profits before restructuring charges were $31 for the first quarter of 2002 (6.5% of sales), down 37% from $50 one year ago (9.0% of sales). The decreased profitability was attributable to prolonged economic weakness, especially in the more profitable distributor flow goods business, and inventory reductions at distributors which commenced nearly one year ago. During the first quarter of 2002, Eaton announced the formation of its new Performance Power Solutions organization and a significant new business relationship with Johnson Controls, Inc. This expansion of the C-H ESS business is expected to result in $300 of new business revenue over the next four years. Page 14 Additionally, the Company will benefit from a new three-year, $80 agreement with Caterpillar to be the exclusive supplier of electrical switchgear for the self-contained mobile generator set systems known as Caterpillar Power Modules. Eaton will provide Cutler-Hammer power distribution equipment to protect and control the generator sets contained in the modules. Automotive - ---------- First quarter 2002 Automotive segment sales of $385 were identical to those a year ago. Sales were 2% above the first quarter of 2001 excluding the results of a product line divested in the third quarter of 2001. NAFTA automotive production was up 1%, while European production declined approximately 4% compared to the same period last year. The Automotive segment recorded a solid quarter. The continued strong record of new product introductions and market share gain is demonstrated by this quarter's strong performance. Operating profits for the first quarter of 2002 were $56 (14.7% of sales) compared to $54 (14.1% of sales) in the same period of 2001. During the first quarter of 2002, Eaton announced that Mercedes-Benz selected the Company to provide key components for the new M-271 engine. Eaton will provide superchargers, intake and exhaust valves, roller rocker arms and lash adjusters. Sales of these components are expected to exceed $375 over the multi-year contract. Production is scheduled to begin later this year. Truck - ----- First quarter 2002 Truck segment sales of $255 were 9% below those in the same period last year. NAFTA heavy-duty truck production was down 8%, NAFTA medium-duty truck production was down 9%, European truck production was down 16% and South American production decreased by approximately 4%. Eaton is increasingly confident that its Truck business has bottomed, as both NAFTA industry order levels and the Company's own orders have started to climb substantially. Eaton expects that second quarter heavy-duty truck production could increase as much as 20% to 25% from current levels. The Company continues to estimate that the full-year forecast for NAFTA heavy-duty truck production will total 150,000 units, but if industry order rates keep growing as rapidly as they have over the last few months, actual production could end up being greater than 150,000 units. Operating losses for the first quarter of 2002 were $10, down from $38 one year earlier. This reduction was due in large part to restructuring charges of $14 recorded in the first quarter of 2002, down from $38 of charges one year earlier. Operating profits before restructuring charges were $4 compared to a breakeven quarter a year ago. The positive impact of Eaton's restructuring actions is very evident in the first quarter results for this segment. The Company expects to realize additional earnings leverage as volumes continue to strengthen. Page 15 During the first quarter of 2002, the Company announced the closure of its Shelbyville, Tennessee facility. The action is the result of Eaton's efforts to reduce fixed costs and rationalize manufacturing capacity. The facility will remain open through the third quarter of 2002 to support an anticipated temporary ramp-up in demand for trucks associated with new engine emission standards, which will become effective October 1, 2002. The Company expects its second and third quarter sales and operating profits to benefit from truck customers accelerating their planned orders in order to increase the units purchased prior to the new emission standards taking effect. This anticipated acceleration is expected to result in lower demand for trucks in the fourth quarter of 2002 and early next year compared to earlier estimates. Non-operating Income (Expense) - ------------------------------ Results for 2002 were favorably impacted by the adoption of SFAS No. 142, which eliminated the amortization of goodwill and indefinite life intangible assets recorded in connection with previous business combinations. This accounting change resulted in an $18 reduction of amortization of goodwill and intangible assets compared to 2001. Net interest expense was $27 for the first quarter of 2002, down $15 from the first quarter of 2001. The decrease was primarily related to the $639 reduction of debt from the end of the first quarter of 2001 to March 31, 2002, as well as a reduction of interest rates in 2001. Corporate and other expense-net increased to $26 in the first quarter of 2002 from $3 in same period in 2001. This was primarily the result of reduced pension income of $19 in 2002 compared to 2001. The reduced income was due to the effect of the decline in stock market valuations on Eaton's pension fund assets, coupled with lower discount rates associated with pension and other postretirement benefit liabilities. Expense in 2002 also increased by $4 due to severance and other one- time costs associated with reductions in the workforce taken to reduce the costs of certain corporate functions. Changes in Financial Condition - ------------------------------ The Company's financial position remained strong at the end of the first quarter of 2002. Net working capital decreased slightly to $702 at March 31, 2002 compared to $718 at the end of 2001 (the current ratio was 1.4 at March 31, 2002 and December 31, 2001). The primary reason for the reduction in working capital was a decrease in cash and short-term investments, which reflected in part the repayment of $99 of debt during the first quarter of 2002. Page 16 Eaton continued to generate cash from operating activities, which is the primary source of funds to finance the needs of the Company. Operating activities generated cash of $83 in the first quarter of 2002, compared to $109 in the first quarter of 2001. Eaton's ability to generate significant cash flow from operations in a period of reduced net income is primarily the result of the broad implementation of the Eaton Business System, with results evident in the continued reduction in working capital and capital expenditure levels that have contributed to a further strengthening of the balance sheet. Capital expenditures were $40, $23 below the first quarter of 2001. Total debt of $2,341 at March 31, 2002 decreased $99 from year-end 2001. The Company has credit facilities of $900, $500 of which expire in 2003 and $400 in 2005. The Company made additional progress toward its goal of further strengthening its balance sheet and reducing its net debt to total capital ratio. During the first quarter 2002, the ratio improved to 45.3% at March 31, 2002 compared to 46.2% at year-end 2001. Forward-Looking Statements - -------------------------- This Form 10-Q contains forward-looking statements concerning Eaton's worldwide markets, benefits from its restructuring programs, cash flow and volumes from new business awards. These statements are subject to various risks and uncertainties, many of which are outside the Company's control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the Company's products, failure to implement restructuring plans, an unanticipated downturn in business relationships with customers or sales to these customers, competitive pressures on sales and pricing, increases in cost of material and other production costs that cannot be recouped in product pricing, the introduction of competing technologies, unexpected technical or marketing difficulties and unanticipated further deterioration of economic and financial conditions in the United States and around the world. Eaton does not assume any obligation to update these forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk A discussion of market risk exposures is included in Part II, Item 7A, "Quantitative and Qualitative Disclosure About Market Risk", of the Company's 2001 Annual Report on Form 10-K. Long-term debt decreased to $2,144 at March 31, 2002 from $2,252 at the end of 2001. This decrease was primarily due to the repayment of $99 of debt during the first quarter of 2002. There were no other material changes in debt and financial instruments during the first quarter of 2002. Page 17 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on April 24, 2002, at which shareholders re-elected four directors, approved the Company's 2002 Stock Plan and ratified the appointment of the accounting firm of Ernst & Young LLP as the Company's independent auditors for 2002. Results of the voting in connection with each issue were as follows: Voting on Directors For Withheld Total - ------------------- --- -------- ----- Ned C. Lautenbach 62,101,490 1,193,012 63,294,502 John R. Miller 62,226,159 1,068,343 63,294,502 Furman C. Moseley 62,164,216 1,130,286 63,294,502 Victor A. Pelson 62,158,887 1,135,615 63,294,502 Approval of 2002 Stock Plan - --------------------------- In Favor 50,602,068 Against 12,025,644 Abstain 666,790 ---------- Total 63,294,502 ========== Ratification of Independent Auditors - ------------------------------------ In Favor 60,649,198 Against 2,204,133 Abstain 441,171 ---------- Total 63,294,502 ========== Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - See Exhibit Index attached. (b) Reports on Form 8-K. 1. On January 22, 2002, the Company filed a Current Report on Form 8-K regarding the fourth quarter 2001 earnings release. 2. On April 15, 2002, the Company filed a Current Report on Form 8-K regarding the first quarter 2002 earnings release. Page 18 Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ----------------------------- Registrant Date: May 13, 2002 /s/ Richard H. Fearon ----------------------------- Richard H. Fearon Executive Vice President and Chief Financial and Planning Officer Page 19 EATON CORPORATION EXHIBIT INDEX Regulation S-K, Item 601 - Exhibit Reference Number Exhibit - ------------------ ------- 4 Pursuant to Regulation S-K Item 601 (b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. 12 Ratio of Earnings to Fixed Charges Page 20 Eaton Corporation 2002 Quarterly Report on Form 10-Q Item 6 Exhibit 12 Ratio of Earnings to Fixed Charges Year ended December 31 March 31, ---------------------------------------- 2002 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- ---- Income from continuing operations before income taxes & extraordinary item $ 48 $ 278 $ 552 $ 943 $ 616 $ 730 Adjustments Minority interests in consolidated subsidiaries 2 8 8 2 (2) 1 Income of equity investees 0 0 (1) (1) (1) (3) Interest expensed 28 149 182 159 93 86 Amortization of debt issue costs 0 1 1 0 0 1 Estimated portion of rent expense representing interest 9 38 39 36 28 25 Amortization of capitalized interest 3 13 10 8 7 8 Distributed income of equity investees 0 0 1 0 1 2 ------ ------ ------ ------ ------ ------ Adjusted income from continuing operations before income taxes & extraordinary item $ 90 $ 487 $ 792 $1,147 $ 742 $ 850 ====== ====== ====== ====== ====== ====== Fixed charges Interest expensed $ 28 $ 149 $ 182 $ 159 $ 93 $ 86 Interest capitalized 3 12 22 21 16 12 Amortization of debt issue costs 0 1 1 0 0 1 Estimated portion of rent expense representing interest 9 38 39 36 28 25 ------ ------ ------ ------ ------ ------ Total fixed charges $ 40 $ 200 $ 244 $ 216 $ 137 $ 124 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.25 2.44 3.25 5.31 5.42 6.85
Income from continuing operations before income taxes & extraordinary item for periods prior to March 31, 2002 includes amortization expense related to goodwill and other intangible assets. Upon adoption of SFAS No. 142 on January 1, 2002 the Company ceased amortization of goodwill and indefinite lived intangible assets. -----END PRIVACY-ENHANCED MESSAGE-----