-----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, UCp3DQt+T1Ge8xngXYKSdqiPJj5JLdCDuXDbohPBlm1WH2Lkv+ISBHASK+N3f/Ul MQC3Y39jDv1x/WCDXecgDw== 0000950152-04-007959.txt : 20041105 0000950152-04-007959.hdr.sgml : 20041105 20041105143646 ACCESSION NUMBER: 0000950152-04-007959 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON CORP CENTRAL INDEX KEY: 0000031277 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] 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: 041122341 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 l10333ae10vq.txt EATON CORPORATION 10-Q/QUARTER END 9-30-04 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 quarterly period ended September 30, 2004 ------------------ 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 - Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X - There were 151.9 million Common Shares outstanding as of September 30, 2004. PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ----------------------------- Eaton Corporation Statements of Consolidated Income
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 (Millions except for per share data) ---- ---- ---- ---- Net sales $2,543 $2,026 $7,184 $5,978 Cost of products sold 1,836 1,479 5,183 4,392 Selling & administrative expense 406 327 1,156 995 Research & development expense 72 57 196 168 Interest expense-net 20 20 58 68 Other (income) expense-net (2) 1 4 (8) ------ ------ ------ ------ Income before income taxes 211 142 587 363 Income taxes 41 35 122 91 ------ ------ ------ ------ Net income $ 170 $ 107 $ 465 $ 272 ====== ====== ====== ====== Net income per Common Share assuming dilution $ 1.09 $ 0.69 $ 2.97 $ 1.83 Average number of Common Shares outstanding assuming dilution 156.9 154.5 156.8 148.5 Net income per Common Share basic $ 1.12 $ 0.70 $ 3.05 $ 1.86 Average number of Common Shares outstanding basic 152.8 151.8 152.8 146.3 Cash dividends paid per Common Share $ 0.27 $ 0.24 $ 0.81 $ 0.68
See accompanying notes. 2 Eaton Corporation Condensed Consolidated Balance Sheets
Sept. 30, Dec. 31, 2004 2003 (Millions) ---- ---- ASSETS Current assets - -------------- Cash $ 83 $ 61 Short-term investments 267 804 Accounts receivable 1,649 1,190 Inventories 930 721 Deferred income taxes & other current assets 296 317 ------ ------ 3,225 3,093 Property, plant & equipment-net 2,057 2,076 Goodwill 2,496 2,095 Other intangible assets 568 541 Deferred income taxes & other assets 537 418 ------ ------ $8,883 $8,223 ====== ====== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities - ------------------- Short-term debt & current portion of long-term debt $ 294 $ 302 Accounts payable 761 526 Accrued compensation 257 204 Accrued income & other taxes 295 298 Other current liabilities 917 796 ------ ------ 2,524 2,126 Long-term debt 1,647 1,651 Postretirement benefits other than pensions 623 636 Pensions & other liabilities 719 693 Shareholders' equity 3,370 3,117 ------ ------ $8,883 $8,223 ====== ======
See accompanying notes. 3 Eaton Corporation Condensed Statements of Consolidated Cash Flows
Nine months ended September 30 ----------------- 2004 2003 (Millions) ---- ---- Net cash provided by operating activities - ----------------------------------------- Net income $ 465 $ 272 Adjustments to reconcile to net cash provided by operating activities Depreciation & amortization 298 298 Changes in operating assets & liabilities, excluding acquisitions & sales of businesses (162) (90) Contribution to U.S. qualified pension plans (75) - Other-net 51 37 ----- ----- 577 517 ----- ----- Net cash used in investing activities - ------------------------------------- Expenditures for property, plant & equipment (199) (177) Acquisitions of businesses, less cash acquired (627) (256) Decrease (increase) in short-term investments-net 542 (162) Other-net 13 (7) ----- ----- (271) (602) ----- ----- Net cash (used in) provided by financing activities - --------------------------------------------------- Payments of borrowings with original maturities of more than three months - (153) Borrowings with original maturities of less than three months-net (9) (47) Cash dividends paid (122) (98) Proceeds from exercise of employee stock options 97 84 Purchase of Common Shares (250) - Sale of Common Shares - 296 ----- ----- (284) 82 ----- ----- Total increase (decrease) in cash 22 (3) Cash at beginning of period 61 75 ----- ----- Cash at end of period $ 83 $ 72 ===== =====
See accompanying notes. 4 Notes To Condensed Consolidated Financial Statements - ---------------------------------------------------- Dollars in millions, except for 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 2003 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Acquisitions of Businesses - -------------------------- On September 1, 2004, Eaton acquired the Walterscheid Rohrverbindungstechnik GmbH business (Walterscheid) from GKN plc for $48 of cash. Walterscheid, a German manufacturer of hydraulic tube connectors and fittings primarily for the European market, had 2003 sales of $52 and is located in Lohmar, Germany. Its products are used in mobile and stationary markets such as construction and agricultural equipment and machine tools. Walterscheid's metric tube connectors and fittings expand Eaton's European product range and sales channels while also strengthening the Company's position as a systems provider. Eaton's operating results for 2004 include Walterscheid from the date of acquisition. The allocation of the purchase price for this acquisition is preliminary and will be finalized by the end of third quarter 2005. This business is included in the Fluid Power segment. Also in September 2004, Eaton contributed $28 of cash for its 50% interest in a new medium-duty truck transmission joint venture located in Changchun, China. The partner in this venture is FAW Jiefang Automotive Co., Ltd., which is the commercial vehicle subsidiary of China First Auto Works Group Company (FAW), the largest manufacturer of commercial vehicles in China. Eaton's operating results include this joint venture beginning in September 2004. This business is included in the Truck segment. On June 9, 2004, Eaton acquired Powerware Corporation, the power systems business of Invensys plc, for $560 of cash. Powerware, based in Raleigh, N.C., is a global market leader in Uninterruptible Power Systems (UPS), DC Power products and power quality services. Powerware had revenues of $775 for the year ended March 31, 2004. Powerware has operations in the United States, Canada, Europe, South America and in the Asia/Pacific area that provide products and services utilized by computer manufacturers, industrial companies, governments, telecommunications firms, medical institutions, data centers and other businesses. The acquisition of Powerware will provide new products and solutions, along with strong brand recognition and expanded channels, for Eaton's global electrical business. Eaton's operating results for 2004 include Powerware from the date of acquisition. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by management based on information currently available and on current tentative assumptions as to future operations. The allocation of the purchase price for this acquisition is preliminary and will be finalized by the end of second quarter 2005. This business is included in the Electrical segment. 5 Unaudited pro forma results of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, as if Eaton and Powerware had been combined as of the beginning of those periods, follow. The pro forma results include preliminary estimates and assumptions, which Eaton's management believes are reasonable. However, the pro forma results do not include any cost savings or other effects of the planned integration of Powerware, and, accordingly, are not necessarily indicative of the results which would have occurred if the business combination had been in effect on the dates indicated.
Pro Forma Results of Operations ---------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net sales $2,543 $2,222 $7,520 $6,547 Net income 170 113 453 279 Net income per Common Share Assuming dilution $ 1.09 $ 0.73 $ 2.89 $ 1.88 Basic 1.12 0.74 2.97 1.91
Restructuring Charges - --------------------- In 2004, Eaton incurred restructuring charges related primarily to the integration of: Powerware, acquired in June 2004; the electrical division of Delta plc, acquired in January 2003; and the Boston Weatherhead fluid power business, acquired in November 2002. In 2003, restructuring charges related primarily to the integration of the electrical division of Delta plc and the Boston Weatherhead fluid power business. A summary of these charges follows:
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- Fluid Power $ 3 $ 2 $ 5 $ 11 Electrical 8 5 20 12 ----- ----- ----- ----- 11 7 25 23 Corporate - - - 1 ----- ----- ----- ----- Total pretax charges $ 11 $ 7 $ 25 $ 24 ===== ===== ===== ===== After-tax charges $ 7 $ 5 $ 16 $ 16 Per Common Share $0.04 $0.03 $0.10 $0.11
The restructuring charges were included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment or were included in Other corporate expense-net, as appropriate. 6 Utilization of restructuring liabilities follows:
Plant consolidation & other ------------- Balance remaining at December 31, 2003 $ 10 2004 charges 25 Utilized in 2004 (32) ---- Balance remaining at September 30, 2004 $ 3 ====
Retirement Benefit Plans - ------------------------ Pretax income for third quarter 2004 was reduced by $6 ($4 after-tax, or $0.03 per Common Share) compared to third quarter 2003 due to increased pension and other postretirement benefit expense in 2004. This resulted from the decline over the last several years in the market value of equity investments held by Eaton's pension plans, coupled with the effect of the lowering of discount rates associated with pension and other postretirement benefit liabilities at year-end 2003. These increased costs were partially offset by the effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, as discussed below. Pretax income for the first nine months of 2004 was similarly reduced by $22 ($14 after-tax, or $0.09 per Common Share) compared to the same period in 2003. During January 2004, Eaton made a voluntary contribution of $75 to its United States qualified pension plans. The components of benefit costs follow:
Three months ended September 30 ---------------------------------- Other postretirement Pension benefits benefits ---------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Service cost $ 22 $ 21 $ 5 $ 4 Interest cost 34 30 13 14 Expected return on plan assets (45) (42) - - Other 8 2 3 2 ----- ----- ----- ----- 19 11 21 20 Settlement loss 8 11 - - ----- ----- ----- ----- $ 27 $ 22 $ 21 $ 20 ===== ===== ===== =====
7
Nine months ended September 30 ---------------------------------- Other postretirement Pension benefits benefits ---------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Service cost $ 75 $ 71 $ 13 $ 12 Interest cost 102 101 39 42 Expected return on plan assets (135) (140) - - Other 22 6 7 6 ----- ----- ----- ----- 64 38 59 60 Settlement loss 26 29 - - ----- ----- ----- ----- $ 90 $ 67 $ 59 $ 60 ===== ===== ===== =====
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was passed on December 8, 2003, subsequent to the November 30 measurement of the Company's other postretirement benefit plans. The Act provides for prescription drug benefits under Medicare Part D and contains a subsidy to plan sponsors who provide "actuarially equivalent" prescription plans. In accordance with Financial Accounting Standards Board Staff Positions, Eaton elected not to defer accounting for the effect of the Act and adopted the related accounting guidance in first quarter 2004. As a result, in first quarter 2004 the accumulated postretirement benefit obligation decreased by $51, with an offsetting change in unrecognized net actuarial loss. The reduction in the accumulated postretirement benefit obligation was attributable to the Federal subsidy and an expected reduction in the number of retirees electing coverage under the Company's other postretirement benefit plans. The Act will reduce other postretirement benefit costs by $6 in 2004, comprised of $3 of service and interest cost and $3 of amortization of unrecognized net actuarial loss, which is being recognized ratably during the quarterly periods in 2004. A prescription drug benefit plan must be "actuarially equivalent" in order to qualify for the subsidy. While the United States Department of Health and Human Services has not yet defined the tests for "actuarially equivalent" prescription plans, Eaton has certain plans that are non-contributory and that the Company believes will satisfy the "actuarially equivalent" test and will receive the subsidy. The reduction in the accumulated postretirement benefit obligation and ongoing net periodic other postretirement cost did not require a modification or amendment of the Company's benefit plans. However, if certain plans were amended, the Act could further reduce the accumulated postretirement benefit obligation and ongoing net periodic other postretirement cost. Income Taxes - ------------ The effective income tax rates for the third quarter and the first nine months of 2004 were 19.6% and 20.8%, respectively, compared to 25.0% for the same periods in 2003. The lower rates in 2004 reflect many factors, including higher earnings in international tax jurisdictions with lower income tax rates and increased use of international tax credit carryforwards. Repurchase of Common Shares - --------------------------- In January 2004, Eaton initiated a plan to repurchase 4.2 million of its Common Shares to offset the shares issued during 2003 from the exercise of stock 8 options. During first quarter 2004, the shares were repurchased at a total cost of $250. Two-For-One Stock Split - ----------------------- On January 21, 2004, Eaton announced a two-for-one split of the Company's Common Shares effective in the form of a 100% stock dividend. The record date for the stock split was February 9, 2004, and it was distributed on February 23, 2004. Accordingly, all per share amounts, average shares outstanding, and shares outstanding have been adjusted retroactively to reflect the stock split. Net Income per Common Share - --------------------------- A summary of the calculation of net income per Common Share assuming dilution and basic follows (shares in millions):
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income $ 170 $ 107 $ 465 $ 272 ====== ====== ====== ====== Average number of Common Shares outstanding assuming dilution 156.9 154.5 156.8 148.5 Less dilutive effect of stock options 4.1 2.7 4.0 2.2 ------ ------ ------ ------ Average number of Common Shares outstanding basic 152.8 151.8 152.8 146.3 ====== ====== ====== ====== Net income per Common Share assuming dilution $ 1.09 $ 0.69 $ 2.97 $ 1.83 Net income per Common Share basic 1.12 0.70 3.05 1.86
Stock Options - ------------- Eaton has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based Compensation". If the Company accounted for its stock options under the fair-value-based method of SFAS No. 123, net income and net income per Common Share would have been as follows:
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income - ---------- As reported $ 170 $ 107 $ 465 $ 272 Stock-based compensation expense, net of income taxes (3) (3) (10) (9) ------ ------ ------ ------ Assuming fair-value-method $ 167 $ 104 $ 455 $ 263 ====== ====== ====== ======
9 Net income per Common Share assuming dilution - --------------------------- As reported $ 1.09 $ 0.69 $ 2.97 $ 1.83 Stock-based compensation expense, net of income taxes (0.02) (0.02) (0.06) (0.06) ------ ------ ------ ------ Assuming fair-value-method $ 1.07 $ 0.67 $ 2.91 $ 1.77 ====== ====== ====== ====== Net income per Common Share basic - --------------------------------- As reported $ 1.12 $ 0.70 $ 3.05 $ 1.86 Stock-based compensation expense, net of income taxes (0.02) (0.02) (0.06) (0.06) ------ ------ ------ ------ Assuming fair-value-method $ 1.10 $ 0.68 $ 2.99 $ 1.80 ====== ====== ====== ======
Comprehensive Income - -------------------- Comprehensive income is as follows:
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income $170 $107 $465 $272 Foreign currency translation 34 5 15 56 Other 1 - - 4 ---- ---- ---- ---- Comprehensive income $205 $112 $480 $332 ==== ==== ==== ====
Inventories - ----------- The components of inventories follow:
Sept. 30, Dec. 31, 2004 2003 ---- ---- Raw materials $356 $301 Work-in-process & finished goods 611 452 ---- ---- Inventories at FIFO 967 753 Excess of FIFO over LIFO cost (37) (32) ---- ---- $930 $721 ==== ====
10 Business Segment Information - ----------------------------
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 (Millions) ---- ---- ---- ---- Net sales - --------- Fluid Power $ 759 $ 683 $2,319 $2,083 Electrical 869 612 2,177 1,701 Automotive 430 395 1,386 1,267 Truck 485 336 1,302 927 ------ ------ ------ ------ $2,543 $2,026 $7,184 $5,978 ====== ====== ====== ====== Operating profit - ---------------- Fluid Power $ 81 $ 65 $ 253 $ 186 Electrical 70 49 172 114 Automotive 50 44 184 164 Truck 93 52 232 114 ------ ------ ------ ------ 294 210 841 578 Corporate - --------- Amortization of intangible assets (7) (5) (18) (18) Interest expense-net (20) (20) (58) (68) Minority interest (2) (3) (6) (9) Pension & other postretirement benefit expense (19) (15) (59) (42) Other corporate expense-net (35) (25) (113) (78) ------ ------ ------ ------ Income before income taxes 211 142 587 363 Income taxes 41 35 122 91 ------ ------ ------ ------ Net income $ 170 $ 107 $ 465 $ 272 ====== ====== ====== ======
Identifiable assets of the Electrical segment increased by approximately $350 as a result of the acquisition of Powerware in June 2004. 11 Item 2. Management's Discussion & Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Dollars in millions, except for per share data (per share data assume dilution) Overview of the Company - ----------------------- Eaton is a diversified industrial manufacturer that is a global leader in the design, manufacture and marketing of: 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, powertrain solutions and specialty controls for performance, fuel economy and safety; and intelligent truck drivetrain systems for safety and fuel economy. The principal markets for the Fluid Power, Automotive and Truck segments are original equipment manufacturers and after-market customers of aerospace products and systems, off-highway agricultural and construction vehicles, industrial equipment, passenger cars and heavy-, medium-, and light-duty trucks. The principal markets for the Electrical segment are industrial, construction, commercial, automotive and government customers. The Company had 55,000 employees at the end of third quarter 2004 and sells products to customers in more than 100 countries. Two-For-One Stock Split - ----------------------- On January 21, 2004, Eaton announced a two-for-one split of the Company's Common Shares effective in the form of a 100% stock dividend. The record date for the stock split was February 9, 2004, and it was distributed on February 23, 2004. Accordingly, all per share amounts, average shares outstanding, and shares outstanding have been adjusted retroactively to reflect the stock split. Highlights of Results for 2004 - ------------------------------ The Company's operating results for the three months and nine months ended September 30, 2004 and 2003 are summarized as follows:
Three months ended Nine months ended September 30 September 30 ------------------------- ------------------------- 2004 2003 Increase 2004 2003 Increase ---- ---- -------- ---- ---- -------- Net sales $2,543 $2,026 26% $7,184 $5,978 20% Net income 170 107 59% 465 272 71% Net income per Common Share assuming dilution $ 1.09 $ 0.69 58% $ 2.97 $ 1.83 62%
Net sales in third quarter 2004 were an all-time quarterly record for Eaton, having surpassed the record set in second quarter 2004. Third quarter 2004 was also the fourth consecutive quarter of positive growth in end markets served by the Company. Sales rose 26% in third quarter 2004 compared to the same quarter in 2003. The increase was the result of end market growth of 9% in third quarter 2004, and above market growth of 4% during the quarter. An additional 11% of the sales growth in third quarter reflected sales from recently acquired businesses and the joint venture with Caterpillar formed in August 2003, and 2% was from foreign exchange rates. Sales growth for the first nine months of 2004 was primarily attributable to the same factors as third quarter 2004. The increases in net income during the third quarter and the first nine months of 2004 were primarily due to higher sales and the benefits of restructuring actions taken in recent years. In addition, lower net interest expense and a reduction in the effective income tax rate helped the Company to post 12 significantly higher net income in 2004. These increases in net income in 2004 were partially offset by higher basic metal prices, higher costs for pensions and other postretirement benefits, and increased restructuring charges in 2004. During the first nine months of 2004, net cash provided by operating activities was $577 compared to $517 in the first nine months of 2003. Before a $75 voluntary contribution to the United States qualified pension plans in first quarter 2004, net cash provided by operating activities was $652 in the first nine months of 2004. Management believes net cash provided by operating activities before this pension contribution is a useful performance measure, since this was the first such contribution in over a decade. Any future pension contributions are uncertain in terms of both timing and amount. The net-debt-to-total-capital ratio increased to 32.1% at September 30, 2004 from 25.9% at year-end 2003. This increase was primarily due to the $537 decline in short-term investments, which primarily resulted from the use in 2004 of cash on hand to finance the recent business acquisitions and new joint venture investment discussed below, the $75 contribution to the pension plans, and the repurchase of 4.2 million Common Shares at a total cost of $250. On September 1, 2004, Eaton acquired the Walterscheid Rohrverbindungstechnik GmbH business (Walterscheid) from GKN plc for $48 of cash. Walterscheid, a German manufacturer of hydraulic tube connectors and fittings primarily for the European market, had 2003 sales of $52 and is located in Lohmar, Germany. Its products are used in mobile and stationary markets such as construction and agricultural equipment and machine tools. Eaton's operating results for 2004 include Walterscheid from the date of acquisition. This business is included in the Fluid Power segment. Also in September 2004, Eaton contributed $28 of cash for its 50% interest in a new medium-duty truck transmission joint venture located in Changchun, China. The partner in this venture is FAW Jiefang Automotive Co., Ltd., which is the commercial vehicle subsidiary of China First Auto Works Group Company (FAW), the largest manufacturer of commercial vehicles in China. Eaton's operating results include this joint venture beginning in September 2004. This business is included in the Truck segment. On June 9, 2004, Eaton acquired Powerware Corporation, the power systems business of Invensys plc, for $560 of cash. Powerware, based in Raleigh, N.C., is a global market leader in Uninterruptible Power Systems (UPS), DC Power products, and power quality services. Powerware had revenues of $775 for the year ended March 31, 2004. Powerware has operations in the United States, Canada, Europe, South America and in the Asia/Pacific area that provide products and services utilized by computer manufacturers, industrial companies, governments, telecommunications firms, medical institutions, data centers and other businesses. Eaton's operating results for 2004 include Powerware from the date of acquisition. This business is included in the Electrical segment. Eaton continues to expect its end markets to grow between 7 and 8% for full year 2004. Mobile hydraulics and truck markets have continued their strong performance, while electrical markets have posted modest growth and automotive markets are likely to post a small decline for the year. As a result of stronger than expected end markets, in mid-October Eaton increased its guidance for full year 2004 net income per Common Share to between $3.95 and $4.05, reflecting the continued improvement in the Company's financial results. The Company anticipates net income per share for fourth quarter 2004 to be between $0.98 and $1.08. These per share amounts are net of restructuring charges of $0.15 for full year 2004 and $0.05 for fourth quarter 2004. 13 Results of Operations - 2004 Compared to 2003 - ---------------------------------------------
Three months ended Nine months ended September 30 September 30 -------------------------- -------------------------- 2004 2003 Increase 2004 2003 Increase ---- ---- -------- ---- ---- -------- Net sales $2,543 $2,026 26% $7,184 $5,978 20% Operating profit 294 210 40% 841 578 46% Operating margin 11.6% 10.4% 11.7% 9.7%
Sales for the third quarter and the first nine months of 2004 were up sharply compared to similar periods in 2003. Sales growth in third quarter 2004 consisted of 13% from organic growth, 11% from recently acquired businesses and the joint venture formed with Caterpillar in August 2003, and 2% from foreign exchange rates. Organic growth was comprised of 9% in Eaton's end markets and 4% from outgrowing its end markets. Sales growth for the first nine months of 2004 consisted of 12% from organic growth, 5% from business acquisitions and the joint venture with Caterpillar, and 3% from foreign exchange rates. The operating results of each business segment are further discussed below. Increased operating profit in the third quarter and the first nine months of 2004 was primarily due to higher sales and the benefits of restructuring actions taken in recent years. These increases were partially offset by higher basic metal prices in 2004 and higher restructuring charges in 2004. Operating margins were reduced due to restructuring charges by 0.4% in third quarter 2004 and 0.3% in third quarter 2003. For the first nine months of 2004 and 2003, operating margins were reduced due to restructuring charges by 0.4% in both periods. Third quarter 2004 operating margins increased compared to third quarter 2003 despite normal seasonal weakness in the automotive business, higher basic metal costs, increased restructuring charges, and the addition of the Powerware business, whose margins are currently lower than the rest of the Electrical segment. In 2004, Eaton incurred restructuring charges related primarily to the integration of: Powerware, acquired in June 2004; the electrical division of Delta plc, acquired in January 2003; and the Boston Weatherhead fluid power business, acquired in November 2002. In 2003, restructuring charges related primarily to the integration of the electrical division of Delta plc and the Boston Weatherhead fluid power business. A summary of these charges follows:
Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- Fluid Power $ 3 $ 2 $ 5 $ 11 Electrical 8 5 20 12 ----- ----- ----- ----- 11 7 25 23 Corporate - - - 1 ----- ----- ----- ----- Total pretax charges $ 11 $ 7 $ 25 $ 24 ===== ===== ===== ===== After-tax charges $ 7 $ 5 $ 16 $ 16 Per Common Share $0.04 $0.03 $0.10 $0.11
The restructuring charges were included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related 14 business segment or were included in Other corporate expense-net, as appropriate. Pretax income for third quarter 2004 was reduced by $6 ($4 after-tax, or $0.03 per Common Share) compared to third quarter 2003 due to increased pension and other postretirement benefit expense in 2004. This resulted from the decline over the last several years in the market value of equity investments held by Eaton's pension plans, coupled with the effect of the lowering of discount rates associated with pension and other postretirement benefit liabilities at year-end 2003. These increased costs were partially offset by the effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Pretax income for the first nine months of 2004 was similarly reduced by $22 ($14 after-tax, or $0.09 per Common Share) compared to the same period in 2003. The effective income tax rates for the third quarter and the first nine months of 2004 were 19.6% and 20.8%, respectively, compared to 25.0% for the same periods in 2003. The lower rates in 2004 reflect many factors, including higher earnings in international tax jurisdictions with lower income tax rates and increased use of international tax credit carryforwards. Results by Business Segment - ---------------------------
Three months ended Nine months ended September 30 September 30 ------------------------ ------------------------- Fluid Power 2004 2003 Increase 2004 2003 Increase - ----------- ---- ---- -------- ---- ---- -------- Net sales $759 $683 11% $2,319 $2,083 11% Operating profit 81 65 25% 253 186 36% Operating margin 10.7% 9.5% 10.9% 8.9%
Third quarter 2004 sales of the Fluid Power segment were an all-time record. Eaton's operating results for 2004 include Walterscheid from the date of acquisition, as discussed above. The strong growth in the mobile and industrial hydraulics markets seen in first half 2004 continued into third quarter 2004. The increase in sales compares to growth in Fluid Power's markets of 9% over the same period in 2003, with global hydraulics markets up an estimated 16%, commercial aerospace markets up 7%, defense aerospace markets up 2%, and European automotive production up 1%. Eaton anticipates that the growth in mobile and industrial hydraulics is likely to continue well into 2005, although the rate of growth is likely to moderate from the levels seen in 2004. The Company now anticipates stronger commercial aerospace growth in 2005 than had been foreseen earlier this year. Sales growth for the first nine months of 2004 was primarily attributable to the same factors as third quarter 2004. Operating profit in third quarter 2004 was also an all-time record. Increased operating profit in 2004 was primarily due to higher sales and the benefits of restructuring actions taken in recent years to resize this business and integrate acquired businesses. Increased operating profit in the first nine months of 2004 was primarily due to higher sales, the benefits of restructuring actions taken in recent years, and reduced restructuring charges in 2004. Restructuring charges in third quarter 2004 were $3 compared to $2 in third quarter 2003, reducing operating margins by 0.4% in 2004 and 0.3% in 2003. For the first nine months of 2004, restructuring charges were $5 compared to $11 in the same period in 2003, reducing operating margins by 0.2% in 2004 compared to 0.5% in 2003. The restructuring charges in 2004 and 2003 related primarily to the acquisition of the Boston Weatherhead business in late 2002. 15
Three months ended Nine months ended September 30 September 30 ------------------------ ------------------------- Electrical 2004 2003 Increase 2004 2003 Increase - ---------- ---- ---- -------- ---- ---- -------- Net sales $869 $612 42% $2,177 $1,701 28% Operating profit 70 49 43% 172 114 51% Operating margin 8.1% 8.0% 7.9% 6.7%
Third quarter 2004 sales of the Electrical segment were an all-time record. Sales growth in third quarter 2004 included 35% from the acquisition of Powerware in June 2004, as discussed above, and the joint venture formed with Caterpillar in August 2003. Eaton's operating results for 2004 include Powerware from the date of acquisition. End markets for the electrical business grew about 5% during third quarter 2004. The Company expects modest end market growth over the balance of the year, with more significant growth likely in 2005. Orders for Powerware in third quarter 2004 were 13% higher than third quarter 2003. Sales growth for the first nine months of 2004 included 18% from the acquisition of Powerware, Electrum, and the electrical division of Delta plc acquired in January 2003, and the joint venture formed with Caterpillar. Increased operating profit in the third quarter and the first nine months of 2004 was primarily due to higher sales and the benefits of restructuring actions taken in recent years to resize this business and integrate acquired businesses. These improvements were partially offset by increased restructuring charges in 2004. The operating margin of the Powerware business is currently lower than the rest of the Electrical segment. Restructuring charges recorded in third quarter 2004 were $8 compared to $5 in third quarter 2003, reducing operating margins by 0.9% in 2004 and 0.8% in 2003. For the first nine months of 2004, restructuring charges were $20 compared to $12 in 2003, reducing operating margins by 0.9% in 2004 compared to 0.7% in 2003. The restructuring charges in 2004 related primarily to the acquisition of Powerware and the electrical division of Delta plc acquired in January 2003. Restructuring charges in 2003 related primarily to the acquisition of the electrical division of Delta plc. During second quarter 2004, the Electrical business was awarded a contract from the U.S. Postal Service to test and maintain electrical switchgear, which is anticipated to generate between $12 and $15 of revenue annually over the next four years, and a contract worth $10 to supply distribution and control equipment for a new power plant being constructed by Hitachi. On March 17, 2004, Eaton acquired the Electrum Group Ltd., a New Jersey-based company that provides power management services and web-based software for telecommunications, data center and government applications. Electrum had $3 of sales in 2003. Electrum, while small in size, significantly expands the Company's capabilities to serve the telecommunications, data center and government power markets.
Three months ended Nine months ended September 30 September 30 ----------------------- ------------------------- Automotive 2004 2003 Increase 2004 2003 Increase - ---------- ---- ---- -------- ---- ---- -------- Net sales $430 $395 9% $1,386 $1,267 9% Operating profit 50 44 14% 184 164 12% Operating margin 11.6% 11.1% 13.3% 12.9%
16 The Automotive segment recorded strong revenue growth in third quarter 2004 despite flat markets. Third quarter 2004 automotive production in NAFTA was lower by 2% and in Europe was up 1% compared to third quarter 2003. Traditionally, sales for this segment are lower in the third quarter than in the second quarter as a result of the normal seasonal pattern of European automotive industry production. Eaton expects that the NAFTA and European markets will be slightly down over the balance of the year. Sales growth for the first nine months of 2004 were a reflection of stronger sales in first half 2004. Increased operating profit in the third quarter and the first nine months of 2004 was primarily the result of increased sales in 2004, partially offset by higher prices for basic metals. In first quarter 2004, Eaton won contracts to supply locking differentials to Hyundai and Kia for several new vehicle programs. Revenues from these contracts are expected to total approximately $150 over the next six years.
Three months ended Nine months ended September 30 September 30 ----------------------- ------------------------- Truck 2004 2003 Increase 2004 2003 Increase - ----- ---- ---- -------- ---- ---- -------- Net sales $485 $336 44% $1,302 $927 40% Operating profit 93 52 79% 232 114 104% Operating margin 19.2% 15.5% 17.8% 12.3%
The Truck segment posted record sales in third quarter 2004, with sales that were up sharply compared to third quarter 2003. In third quarter 2004, NAFTA heavy-duty truck production of 69,000 units was 10% above second quarter 2004 and was up 47% compared to third quarter 2003. NAFTA medium-duty truck production was up 9% in third quarter 2004 compared to 2003, European truck production was up 8% and Brazilian vehicle production was up 33%. Monthly orders for new NAFTA heavy-duty trucks during third quarter 2004 averaged 28,000 units. While order levels would support another significant growth in production in fourth quarter 2004, given the capacity constraints faced by other suppliers to the truck assemblers, Eaton estimates that the NAFTA heavy-duty market in 2004 is likely to total 255,000 units. Sales growth for the first nine months of 2004 was primarily attributable to the same factors as third quarter 2004. Third quarter 2004 operating profit and operating margin were all-time records. Increased operating profit in the third quarter and the first nine months of 2004 was primarily due to increased sales in 2004 throughout all geographic regions. Eaton made significant progress during third quarter 2004 on both of its recently announced new truck joint ventures in China. The joint venture with FAW Jiefang Automotive Co., Ltd. formally started production in September 2004 with Eaton contributing $28 of cash for its 50% interest in the venture. This venture was formed in March 2004 in Changchun, China to produce a complete line of medium-duty transmissions for commercial vehicles and buses for the growing Chinese market. FAW Jiefang Automotive Co., Ltd. is the commercial vehicle subsidiary of China First Auto Works Group Company (FAW), the largest manufacturer of commercial vehicles in China. Eaton and FAW Jiefang will have equal ownership of the joint venture, which is named FAW Eaton Transmission Co., Ltd. In addition, the Company is still on target to start production in the Eaton Fast Gear (EFG) heavy-duty transmission joint venture in fourth quarter 2004. The formation of EFG was announced in third quarter 2003. Eaton's partners in EFG are Shaanxi Fast Gear Co., Ltd. and Xiang Torch Investment Co., Ltd. This 17 venture will produce heavy-duty truck transmissions for the growing Chinese market. Eaton has 55% ownership of the venture. Changes in Financial Condition During 2004 - ------------------------------------------ Net working capital of $701 at September 30, 2004 decreased from $967 at year-end 2003. The current ratio was 1.3 at September 30 and 1.4 at the end of 2003. The decrease in net working capital was primarily due to the $537 reduction in short-term investments reflecting the use of cash on hand to finance the acquisitions of Walterscheid in September 2004 for $48 and Powerware in June 2004 for $560, the $28 investment made in September in the FAW Eaton Transmission Co., Ltd. joint venture, and, in first quarter 2004, a $75 contribution to the United States qualified pension plans and the repurchase of 4.2 million Common Shares at a total cost of $250. These uses of working capital were offset by higher accounts receivable resulting from increased sales in 2004 and strong cash flow from operating activities in the first nine months of 2004. During the first nine months of 2004, net cash provided by operating activities was $577 compared to $517 in the first nine months of 2003. Before a $75 voluntary contribution to the United States qualified pension plans in first quarter 2004, net cash provided by operating activities was $652 in the first nine months of 2004. Management believes net cash provided by operating activities before this pension contribution is a useful performance measure, since this was the first such contribution in over a decade. Any future pension contributions are uncertain in terms of both timing and amount. Capital expenditures for the first nine months of 2004 were $199 compared to $177 in the first nine months of 2003. Total debt of $1,941 at September 30, 2004 decreased slightly from $1,953 at the end of 2003. The net-debt-to-capital ratio increased to 32.1% at September 30 from 25.9% at year-end 2003. This increase was primarily due to the $537 reduction of short-term investments, as described above. In March 2004, Eaton entered into a new $50 long-term revolving credit facility which will expire in May 2008. Eaton has long-term revolving credit facilities of $700, of which $400 expire in April 2005 and the remaining $300 in May 2008. On October 21, 2004, Eaton issued $75 of 5.45% senior debentures, which mature in 2034. The Company expects to use the proceeds to repay a portion of the 6.95% notes maturing on November 15, 2004 or for general corporate purposes. Forward-Looking Statements - -------------------------- This Form 10-Q contains forward-looking statements concerning fourth quarter 2004 and full year 2004 net income per share, the performance of Eaton's worldwide markets, and volumes from new business awards. These statements should be used with caution and 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 business segments; unanticipated downturns in business relationships with customers or their purchases from the Company; competitive pressures on sales and pricing; increases in the cost of material, energy and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; the impact of acquisitions, divestitures, and joint ventures; new laws and governmental regulations; interest rate changes; stock market fluctuations; and unanticipated 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. 18 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 Eaton's 2003 Annual Report on Form 10-K. There have been no material changes in reported market risk since the inclusion of this discussion in the Company's 2003 Annual Report on Form 10-K referenced above. Item 4. Controls and Procedures - ------------------------------- Pursuant to SEC Rule 13a-15, an evaluation was performed, under the supervision and with the participation of Eaton's management, including Alexander M. Cutler - - Chairman and Chief Executive Officer and Richard H. Fearon - Executive Vice President - Chief Financial and Planning Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, Eaton's management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2004. Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. During third quarter 2004, there was no change in Eaton's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits - See Exhibit Index attached. (b) Reports on Form 8-K. 1. On July 15, 2004, Eaton filed a Current Report on Form 8-K regarding the second quarter 2004 earnings release. 2. On September 13, 2004, Eaton filed a Current Report on Form 8-K regarding the reaffirmation, without modification, of the Company's previously released 2004 earnings guidance during Morgan Stanley's CEOs Unplugged Industrials Conference. 3. On October 14, 2004, Eaton filed a Current Report on Form 8-K regarding the third quarter 2004 earnings release. 19 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: November 5, 2004 /s/ Richard H. Fearon ---------------------------- Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer 20 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Exhibit Index Exhibit - ------- 4 Instruments defining rights of security holders, including indentures (Pursuant to Regulation to S-K Item 601(b)(4), Eaton agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt) 12 Ratio of Earnings to Fixed Charges 31.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) 31.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) 32.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) 32.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) 99 Global 5.45% Senior Debenture, due 2034 21 EX-12 2 l10333aexv12.txt EXHIBIT 12 . . . Exhibit 12 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Ratio of Earnings to Fixed Charges
Nine months ended Year ended December 31 Sept. 30, --------------------------------- 2004 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- ---- Income from continuing operations before income taxes $ 587 $ 508 $ 399 $ 278 $ 552 $ 943 Adjustments - ----------- Minority interests in consolidated subsidiaries 6 12 14 8 8 2 Income of equity investees (1) (3) (1) - (1) (1) Interest expensed 64 93 110 149 182 159 Amortization of debt issue costs 1 2 2 1 1 - Estimated portion of rent expense representing interest 29 38 34 38 39 36 Amortization of capitalized interest 12 13 13 13 10 8 Distributed income of equity investees 3 - - - 1 - ----- ----- ----- ----- ----- ------ Adjusted income from continuing operations before income taxes $ 701 $ 663 $ 571 $ 487 $ 792 $1,147 ===== ===== ===== ===== ===== ====== Fixed charges - ------------- Interest expensed $ 64 $ 93 $ 110 $ 149 $ 182 $ 159 Interest capitalized 5 7 8 12 22 21 Amortization of debt issue costs 1 2 2 1 1 - Estimated portion of rent expense representing interest 29 38 34 38 39 36 ----- ----- ----- ----- ----- ------ Total fixed charges $ 99 $ 140 $ 154 $ 200 $ 244 $ 216 ===== ===== ===== ===== ===== ====== Ratio of earnings to fixed charges 7.08 4.73 3.71 2.44 3.25 5.31
Income from continuing operations before income taxes for years before 2002 includes amortization expense related to goodwill and other intangible assets. Upon adoption of Statement of Financial Accounting Standard No. 142 on January 1, 2002, Eaton ceased amortization of goodwill and indefinite life intangible assets. 22 EX-31.1 3 l10333aexv31w1.txt EXHIBIT 31.1 Exhibit 31.1 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Certification I, Alexander M. Cutler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Eaton Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ Alexander M. Cutler ------------------------------------ Alexander M. Cutler Chairman and Chief Executive Officer 23 EX-31.2 4 l10333aexv31w2.txt EXHIBIT 31.2 Exhibit 31.2 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Certification I, Richard H. Fearon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Eaton Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ Richard H. Fearon ------------------------------------ Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer 24 EX-32.1 5 l10333aexv32w1.txt EXHIBIT 32.1 Exhibit 32.1 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Certification This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 ("10-Q Report"). I hereby certify that, based on my knowledge, the 10-Q Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries. Date: November 5, 2004 /s/ Alexander M. Cutler ------------------------------------ Alexander M. Cutler Chairman and Chief Executive Officer 25 EX-32.2 6 l10333aexv32w2.txt EXHIBIT 32.2 Exhibit 32.2 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Certification This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 ("10-Q Report"). I hereby certify that, based on my knowledge, the 10-Q Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries. Date: November 5, 2004 /s/ Richard H. Fearon ------------------------------------ Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer 26 EX-99 7 l10333aexv99.txt EXHIBIT 99 Exhibit 99 Eaton Corporation Quarterly Report on Form 10-Q Third Quarter 2004 Global 5.45% Senior Debenture, due 2034 27 EXCEPT AS OTHERWISE PROVIDED IN THIS GLOBAL SECURITY, THIS GLOBAL SECURITY MAY BE TRANSFERRED, IN WHOLE BUT NOT IN PART, ONLY TO ANOTHER NOMINEE OF THE DEPOSITORY, OR TO THE DEPOSITORY, OR TO A SUCCESSOR DEPOSITORY OR TO A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. Unless this Certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. EATON CORPORATION $75,000,000 5.45% Senior Debenture due 2034 R-1 CUSIP 278058 AY 8 EATON CORPORATION, a corporation duly organized and existing under the laws of the State of Ohio (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, as nominee of The Depository Trust Company, the principal sum of SEVENTY-FIVE MILLION DOLLARS ($75,000,000) on October 15, 2034 and to pay interest thereon from October 21, 2004 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on April 15 and October 15 of each year, commencing April 15, 2005, at the rate of 5.45% per annum until the principal hereof is paid or made available for payment (each such date, an "Interest Payment Date"). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Global Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not punctually paid or duly provided for will forthwith cease to be payable to the holder hereof on such Regular Record Date and may either be paid to the Person in whose name this Global Security (or one or more Predecessor Securities) is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to the holder hereof not less than 10 days prior to such special record date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. This Global Security is one of the duly authorized securities of the Company (herein called the "Securities") issued and to be issued in one or more series under an Indenture dated as of April 1, 1994 (the "Indenture"), between the Company and JPMorgan Chase Bank, (formerly known as Chemical Bank) as Trustee, (herein called the "Trustee," which term includes any successor trustee under the Indenture with respect to the series of Securities represented hereby), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is a Global Security representing 28 the Securities of the series designated 5.45% Senior Debentures due 2034, which Securities are limited in aggregate principal amount to $75,000,000. The Company may, without the consent of the holder hereof, create and issue additional Securities ranking pari passu with the Securities of this series in all respects. Payment of the principal of and any interest on this Global Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, the City and State of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts and in immediately available funds; provided, however, that, at the option of the Company, payment of interest may be made by wire transfer of immediately available funds to an account of the Person entitled thereto as such account shall be provided to the Security Registrar at least 15 days prior to the applicable Interest Payment Date and shall appear in the Security Register. Initially the Trustee will act as paying agent (the "Paying Agent") and the security registrar (the "Security Registrar") for the Securities. The Company may change any Paying Agent at any time without notice to holders of the Securities. The Securities are in registered form without coupons in denominations of $1,000 of the principal amount and multiples of $1,000 in excess thereof. A holder of Securities may register the transfer or exchange of Securities in accordance with the terms of this Global Security. The Security Registrar may require a holder of Securities, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted in the Indenture. This Global Security is not subject to redemption prior to Stated Maturity and is not subject to any sinking fund provision. If an Event of Default with respect to this Global Security shall occur and be continuing, the principal hereof may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in stated principal amount of the Securities at the time outstanding of each series to be affected, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Securities of each such series to be affected; provided, however, that, without the consent of the holder of each Security so affected, no such supplemental indenture shall, among other things, (i) change the Stated Maturity of the principal of, or any installment of interest on, any Security of such series, or reduce the principal amount thereof, or any premium payable upon redemption thereof, or reduce the rate of interest thereon, or change the Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (ii) reduce the aforesaid percentage of Outstanding Securities of any series, the holders of which are required to consent to any supplemental indenture, or the consent of whose holders is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults thereunder and their consequences provided for in the Indenture, or reduce the requirements for quorum or voting with respect to the Securities or (iii) modify any of the provisions of Section 902, Section 513 or Section 1011 of the Indenture except to increase any such percentage or to provide that certain other provisions of the Indenture which affect such series cannot be waived or modified without the consent of the holder of each Outstanding Security of such series. The holders of a majority in principal amount of the Securities of any series at the time Outstanding may on behalf of the holders of all the Securities of such series at the time outstanding waive certain past 29 defaults under the Indenture and their consequences, subject to the conditions and as provided in the Indenture. Any such consent or waiver or other action by the holder of this Global Security shall be conclusive and binding upon such holder and upon all future holders of this Global Security and of any Global Security issued upon registration of transfer hereof or in exchange or substitution herefor, irrespective of whether any notation thereof is made upon this Global Security or such other Global Security. No reference herein to the Indenture and no provision of this Global Security or of the Indenture shall affect or impair the right of the holder of this Global Security to receive payment of the principal of and interest on this Global Security at the time and places, at the rate and in the coin or currency herein prescribed. As provided in the Indenture and subject to certain limitations therein and herein set forth, particularly the limitations set forth in the third, fourth, fifth, and sixth succeeding paragraphs, upon surrender of this Global Security for registration of transfer or exchange at the office or agency of the Company in the Borough of Manhattan, the City and State of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the holder hereof or his attorney duly authorized in writing, a new Global Security in authorized denominations, for the same aggregate principal amount, will be issued to the designated transferee or transferees or the holder hereof in exchange herefor, without charge except for any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Global Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Global Security is registered as the owner hereof for all purposes, whether or not this Global Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. For purposes of the Indenture this Global Security constitutes a Security issued in permanent global form. The initial depository therefor shall be The Depository Trust Company (herein referred to, together with any successor thereto provided for herein, as the "Depository"). Subject to the provisions set forth below, this Global Security may be transferred, in whole but not in part and in the manner provided in Section 305 of the Indenture, only to a nominee of the Depository, or to the Depository, or a successor Depository appointed by the Company, or to a nominee of such successor Depository. If at any time the Depository for this Global Security notifies the Company that it is unwilling or unable to continue as Depository for this Global Security or if at any time the Depository for this Global Security shall no longer be eligible or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation, the Company shall appoint a successor Depository for this Global Security. If a successor Depository for this Global Security is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of individual Securities of this series in exchange for this Global Security, will authenticate and deliver individual Securities of this series in definitive form in an aggregate principal amount equal to the principal amount of this Global Security in exchange herefor. 30 The Company may, at any time and in its sole discretion, determine that the Securities of this series shall no longer be represented by a Global Security. In such event, and subject to the procedures of the Depository, the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of individual Securities of this series in exchange in whole or in part for such Global Security, will authenticate and deliver individual Securities of this series in definitive form in an aggregate principal amount equal to the principal amount of this Global Security in exchange herefor. In any exchange provided for in any of the preceding two paragraphs, the Company will execute and the Trustee will authenticate and deliver individual Securities in definitive registered form without coupons, in denominations of $1,000 and any integral multiple thereof. Upon the exchange in whole of this Global Security for individual Securities, this Global Security shall be canceled by the Trustee. Securities issued in exchange for this Global Security pursuant to the preceding two paragraphs shall be registered in such names and in such authorized denominations as the Depository for this Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Securities to the Persons in whose name such Securities are so registered. None of the Company, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in this Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Indenture contains provisions under which the Company may, at its option, at any time either (i) be discharged from its obligations with respect to the Securities of this series (except for the obligations to register the transfer or exchange of such Securities, to replace mutilated, destroyed, lost or stolen Securities of this series, to maintain an office or agency in respect of the Securities of this series and to hold moneys for payment in trust), or (ii) be released from its obligations with respect to the Securities of this series under Sections 1009 (Limitation on Liens) and 1010 (Limitation on Sale and Leaseback Transactions) of the Indenture and related Events of Default, in each case upon compliance by the Company with certain conditions set forth in the Indenture, which provisions apply to the Securities of this series. No recourse under or upon any obligation, covenant or agreement of the Indenture or this Global Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, employee, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released by every holder hereof. All terms used in this Global Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Global Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Eaton Corporation has caused this instrument to be signed by two authorized officers and attested by its Secretary or one of its Assistant Secretaries, manually or in facsimile, and its corporate seal to be affixed hereunto or imprinted hereto. 31 By - -------------------------------------- Billie K. Rawot Vice President and Controller By - -------------------------------------- Robert E. Parmenter Vice President and Treasurer [CORPORATE SEAL] Attest: ------------------------------- Earl R. Franklin Secretary and Associate General Counsel TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within mentioned Indenture JPMORGAN CHASE BANK, as Trustee By: ------------------------ Authorized Officer Dated: October 21, 2004 32 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED, the undersigned registered holder hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------------------------------------------ (Print or Type Name and Address including Zip Code of Assignee) - ------------------------------------------------------------------------------ the within Global Security, and all rights thereunder, hereby irrevocably constituting and appointing - ------------------------------------------------------------------ attorney to transfer said Global Security on the books of the Company, with full power of substitution in the premises. Dated: NOTE: The signature to this assignment must correspond to the name as written upon the face of the within Global Security in every particular without alteration or enlargement or any change whatsoever and must be guaranteed by a commercial bank or trust company having its principal office or correspondent in the City of New York or by a member of the New York Stock Exchange. 33 -----END PRIVACY-ENHANCED MESSAGE-----