-----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, TK1qhzFUy9F/vjKY+CcXtPorhK6lcQM5LqTkc65o8ogSc/+rrYxTak4xsElqSV2I uAjOLmV9Axy7PTXc2a7KYw== 0000950152-08-001530.txt : 20080229 0000950152-08-001530.hdr.sgml : 20080229 20080228181340 ACCESSION NUMBER: 0000950152-08-001530 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 26 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080229 DATE AS OF CHANGE: 20080228 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01396 FILM NUMBER: 08652197 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-K 1 l30233ae10vk.txt EATON CORPORATION 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE YEAR ENDED DECEMBER 31, 2007 ------------------------------------ Commission file number 1-1396 ----------------------------- EATON CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 34-0196300 ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization)
Eaton Center Cleveland, Ohio 44114-2584 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip code)
(216) 523-5000 --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ----------------------------- --------------------------- Common Share ($.50 par value) The New York Stock Exchange The Chicago Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X ----- Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. No X ----- 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 ninety days. Yes X ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer X Accelerated filer ----- ----- Non-accelerated filer Smaller reporting company ----- ----- (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). No X ----- The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2007 was $13.6 billion. As of January 31, 2008, there were 146.5 million Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2008 annual shareholders meeting are incorporated by reference into Part III. Page 2 PART I ITEM 1. BUSINESS Eaton Corporation (Eaton or Company) is a diversified industrial manufacturer having 2007 sales of $13.0 billion. Eaton was incorporated in Ohio in 1916, as a successor to a New Jersey company incorporated in 1911. The Company is a global leader in electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. Headquartered in Cleveland, Ohio, Eaton had 64,000 employees at year-end 2007 and sells products to customers in more than 150 countries. More information regarding the Company is available at http://www.eaton.com. Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the Company's Internet web site at http://www.eaton.com. These filings are also accessible on the SEC's Internet web site at http://www.sec.gov. RECENT DEVELOPMENTS In 2007, Eaton acquired certain businesses in separate transactions for a combined net cash purchase price of $1.433 billion. The Statements of Consolidated Income include the results of these businesses from the effective dates of acquisition. A summary of these transactions follows (in millions):
Date of Business Acquired business acquisition segment Annual sales - ----------------- ------------------ ----------- -------------- Arrow Hose & Tubing Inc. November 8, 2007 Fluid Power $12 for 2006 A Canada-based manufacturer of specialty thermoplastic hose and tubing for the industrial, food and beverage, and agricultural markets MGE small systems UPS business from October 31, 2007 Electrical $245 for the Schneider Electric year ended A France-based global provider of power quality Sept. 30, 2007 solutions including uninterruptible power supply (UPS) systems, power distribution units, static transfer switches and surge suppressors Babco Electric Group October 19, 2007 Electrical $11 for the A Canada-based manufacturer of specialty low- year ended and medium-voltage switchgear and electrical April 30, 2007 housings for use in the Canadian oil and gas industry and other harsh environments Pulizzi Engineering June 19, 2007 Electrical $12 for 2006 A U.S. manufacturer of alternating current (AC) power distribution, AC power sequencing, redundant power and remote-reboot power management systems Technology and related assets of SMC Electrical May 18, 2007 Electrical None Products, Inc.'s industrial medium-voltage adjustable frequency drive business Fuel components division of Saturn Electronics & May 2, 2007 Automotive $28 for 2006 Engineering, Inc. A U.S. designer and manufacturer of fuel containment and shutoff valves, emissions control valves and specialty actuators
Page 3
Date of Business Acquired business acquisition segment Annual sales - ----------------- ------------------ ----------- -------------- Aphel Technologies Limited April 5, 2007 Electrical $12 for 2006 A U.K.-based global supplier of high density, fault-tolerant power distribution solutions for datacenters, technical offices, laboratories and retail environments Argo-Tech Corporation March 16, 2007 Fluid Power $206 for 2006 A U.S.-based manufacturer of high performance aerospace engine fuel pumps and systems, airframe fuel pumps and systems, and ground fueling systems for commercial and military aerospace markets Power Protection Business of Power Products Ltd. February 7, 2007 Electrical $3 for 2006 A Czech Republic distributor and service provider of Powerware(R) products and other uninterruptible power supply (UPS) systems
On December 20, 2007, Eaton announced it had reached an agreement to purchase The Moeller Group, a Germany-based business, for EURO 1.55 billion (U.S. $2.3 billion). This transaction is expected to close at the beginning of the second quarter of 2008. This business, which had sales of EURO 1.02 billion (U.S. $1.5 billion) for 2007, is a leading supplier of electrical components for commercial and residential building applications, and industrial controls for industrial equipment applications. The business will be integrated into the Electrical segment. On December 20, 2007, Eaton announced a tender offer for all shares of Phoenixtec Power Company Ltd., a company listed on the Taiwan Stock Exchange. The tender offer closed on February 22, 2008, with 91% of Phoenixtec's shares having been tendered into the offer. Eaton acquired the tendered shares on February 26, 2008 and intends to take further steps to acquire all remaining shares. Once that has been accomplished, the Company expects to have paid a total purchase price, net of estimated cash and debt acquired, of $568 for Phoenixtec. This business, with sales of approximately $515 in 2007, manufactures single and three-phase uninterruptible power supply (UPS) systems. The business will be integrated into the Electrical segment. In order to initially finance the acquisitions of The Moeller Group and Phoenixtec, on January 25, 2008, Eaton entered into a revolving credit agreement, in the amount of $3.0 billion, which may be used either to fund direct loans or to backstop commercial paper borrowings. The proceeds must be used to finance certain acquisitions including, but not limited to The Moeller Group and Phoenixtec. All amounts borrowed under the credit agreement, including commercial paper backstopped by this agreement, must be repaid by January 23, 2009, but may be repaid earlier at the Company's option or may be required to be repaid earlier in the event of a default. The commitment amount of the revolving credit agreement will be reduced by the net amount of any proceeds raised through certain future capital market transactions which may include, but are not limited to, debt or equity issuances. The credit agreement also includes covenants customary for transactions of this type with borrowers having capital structures similar to Eaton. In light of its strong results and future prospects, on January 22, 2008 Eaton announced that it was increasing the quarterly dividend on its Common Shares by 16%, from $.43 per share to $.50 per share, effective for the February 2008 dividend. This is the fourth dividend increase within the last three years, reflecting Eaton's philosophy of growing its dividend in line with its long-term growth in earnings. BUSINESS SEGMENT INFORMATION Information by business segment and geographic region regarding principal products, principal markets, methods of distribution, net sales, operating profit and assets is presented in "Business Segment & Geographic Region Information" on pages 51 through 55. Additional information regarding Eaton's segments and business is presented below. Page 4 ELECTRICAL Seasonal Fluctuations - Sales of this segment are historically lower in the first quarter and higher in the third and fourth quarters of a year. Competition - Principal methods of competition in this segment are performance of products and systems, technology, customer service and support, and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders. FLUID POWER Seasonal Fluctuations - Sales of this segment are not affected by seasonal fluctuations. Competition - Principal methods of competition in this segment are product performance, geographic coverage, service, and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders. TRUCK Seasonal Fluctuations - Sales of this segment are not affected by seasonal fluctuations. Significant Customers - Approximately 67% of this segment's sales in 2007 were made to five large manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles. Competition - Principal methods of competition in this segment are product performance, service, and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders. AUTOMOTIVE Seasonal Fluctuations - Sales of this segment historically are lower in the third quarter than in other quarters during the year as a result of the normal seasonal pattern of automotive industry production. Significant Customers - Approximately 59% of this segment's sales in 2007 were made to six large manufacturers of vehicles and components. Competition - Principal methods of competition in this segment are product performance, service, and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders. INFORMATION CONCERNING EATON'S BUSINESS IN GENERAL RAW MATERIALS - Eaton's major requirements for raw materials include iron, steel, copper, nickel, aluminum, brass, silver, molybdenum, titanium, vanadium, rubber, plastic and insulating materials. Materials are purchased in various forms, such as extrusions, castings, powder metal, metal sheets and strips, forging billets, bar stock and plastic pellets. Raw materials, as well as parts and other components, are purchased from many suppliers and, under normal circumstances, the Company has no difficulty obtaining them. In 2007, prices increased for some basic metals purchased by Eaton, in some cases dramatically, due to raw materials supply shortages resulting from higher global demand. The Company maintained appropriate levels of inventory to guard against basic metals shortages, and did not experience any general availability constraints in 2007. PATENTS AND TRADEMARKS - Eaton views its name and mark as significant to its business as a whole. Eaton's products are marketed with a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. Eaton develops and acquires new intellectual property on an ongoing basis and considers all of its intellectual property to be valuable. Based on the broad scope of Eaton's product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments. Eaton's policy is to file applications and obtain patents for its new products including product modifications and improvements. Page 5 ORDER BACKLOG - Since a significant portion of open orders placed with Eaton by original equipment manufacturers of trucks, off-highway vehicles and passenger cars are historically subject to month-to-month releases by customers during each model year, these orders are not considered firm. In measuring backlog of orders, the Company includes only the amount of these orders released by customers as of the dates listed. Using this criterion, total backlog at December 31, 2007 and 2006 was approximately $3.2 billion and $2.2 billion, respectively. Backlog should not be relied upon as being indicative of results of operations for future periods. RESEARCH AND DEVELOPMENT - Research and development expenses (in millions) for new products and improvement of existing products in 2007, 2006 and 2005 were $335, $315 and $279, respectively. Over the past five years, the Company has invested approximately $1.4 billion in research and development. PROTECTION OF THE ENVIRONMENT - Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. Eaton continues to modify certain processes on an ongoing, regular basis in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in, and wastes generated from, operations. Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, are not expected to have a material adverse effect upon earnings or the competitive position of the Company. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for 2008 and 2009. Information regarding the Company's liabilities related to environmental matters is presented in "Protection of the Environment" on page 43 and 44. FOREIGN OPERATIONS - Financial information related to Eaton's foreign operations is presented in "Business Segment & Geographic Information" on page 53. Information regarding risks that may affect Eaton's foreign operations is presented in Item 1A of this Form 10-K Report. ITEM 1A. RISK FACTORS Among the risks that could materially adversely affect Eaton's businesses, financial condition or results of operations are the following: DOWNTURNS IN THE END MARKETS THAT EATON SERVES MAY NEGATIVELY IMPACT EATON'S SEGMENT REVENUES AND PROFITABILITY. Eaton's segment revenues, operating results and profitability have varied in the past and may vary from quarter to quarter in the future. Profitability can be negatively impacted by volatility in the end markets that Eaton serves. The Company has undertaken measures to reduce the impact of this volatility through diversification of markets it serves and expansion of geographic regions in which it operates. Future downturns in any of the markets that Eaton serves could adversely affect the Company's revenues, operating results and profitability. EATON'S OPERATING RESULTS DEPEND IN PART ON CONTINUED SUCCESSFUL RESEARCH, DEVELOPMENT AND MARKETING OF NEW AND/OR IMPROVED PRODUCTS AND SERVICES, AND THERE CAN BE NO ASSURANCE THAT EATON WILL CONTINUE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND SERVICES. The success of new and improved products and services depends on their initial and continued acceptance by Eaton's customers. The Company's businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience difficulties or delays in the research, development, production and/or marketing of new products and services which may prevent Eaton from recouping or realizing a return on the investments required to bring new products and services to market. The end result could be a negative impact on the Company's operating results. EATON'S OPERATIONS DEPEND ON PRODUCTION FACILITIES THROUGHOUT THE WORLD, MANY OF WHICH ARE LOCATED OUTSIDE THE UNITED STATES AND ARE SUBJECT TO GREATER RISKS OF DISRUPTED PRODUCTION. Page 6 Eaton manages businesses with manufacturing facilities worldwide. In recent years, the Company's operations outside the United States have increased significantly in relative size in comparison to its total operations. The Company's manufacturing facilities and operations could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity or public health concerns. Some of Eaton's non-United States manufacturing facilities also may be more susceptible to economic and political upheaval than Eaton's United States facilities. Any such disruption could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately compensate the Company for such losses. EATON'S SUBSTANTIAL FOREIGN SALES SUBJECT IT TO ECONOMIC RISK AS EATON'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY CHANGES IN LOCAL GOVERNMENT REGULATIONS AND POLICIES AND FOREIGN CURRENCY FLUCTUATIONS. As noted above in Item 1 "Foreign Operations", a significant portion of Eaton's sales are outside the United States, and the Company expects sales in foreign markets to continue to represent a significant portion of its total sales. Foreign sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, exchange controls, and repatriation of earnings. Changes in the relative values of currencies occur from time to time and could affect Eaton's operating results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through hedging activities, these risks could adversely affect the Company's operating results. EATON USES A VARIETY OF RAW MATERIALS AND COMPONENTS IN ITS BUSINESSES, AND SIGNIFICANT SHORTAGES OR PRICE INCREASES COULD INCREASE OPERATING COSTS AND ADVERSELY IMPACT THE COMPETITIVE POSITIONS OF EATON'S PRODUCTS. Eaton's major requirements for raw materials are described above in Item 1 "Raw Materials". In 2007, prices increased for some basic metals purchased by Eaton, and in some cases, dramatically, due to raw materials supply shortages resulting from higher global demand. The Company maintained appropriate levels of inventory to guard against basic metals shortages, and did not experience any general availability constraints in 2007. Significant shortages in excess of those experienced in 2007 could affect the prices Eaton's affected businesses are charged and the competitive position of their products and services, all of which could adversely affect Eaton's results of operations. EATON ENGAGES IN ACQUISITIONS AND JOINT VENTURES, AND MAY ENCOUNTER UNEXPECTED DIFFICULTIES IDENTIFYING, PRICING OR INTEGRATING THOSE BUSINESSES. Eaton seeks to grow, in part, through strategic acquisitions and joint ventures, which are intended to complement or expand the Company's businesses, and will continue to do so in the future. The success of this strategy will depend on Eaton's ability to identify, price, finance and complete these transactions or arrangements. Success will also depend on the Company's ability to integrate the businesses acquired in these transactions and to develop satisfactory working arrangements with the Company's strategic partners in the joint ventures. Eaton may encounter unexpected difficulties in completing and integrating acquisitions with Eaton's existing operations, and in managing strategic investments. Furthermore, the Company may not realize the degree, or timing, of benefits Eaton anticipated when it first entered into a transaction. Any of the foregoing could adversely affect the Company's business and results of operations. EATON MAY BE UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, WHICH COULD AFFECT THE COMPANY'S ABILITY TO COMPETE. Page 7 Protecting Eaton's intellectual property rights is critical to its ability to compete and succeed. The Company owns a large number of United States and foreign patents and patent applications, as well as trademark and copyright registrations that are necessary, and contribute significantly, to the preservation of Eaton's competitive position in various markets. Although management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments, there can be no assurance that any one, or more, of these patents and other intellectual property will not be challenged, invalidated or circumvented by third parties. Eaton enters into confidentiality and invention assignment agreements with the Company's employees, and into non-disclosure agreements with Eaton's suppliers and appropriate customers so as to limit access to and disclosure of the Company's proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies. Moreover, the protection provided to Eaton's intellectual property by the laws and courts of foreign nations may not be as advantageous to Eaton as the remedies available under United States law. EATON IS SUBJECT TO LITIGATION AND ENVIRONMENTAL REGULATIONS THAT COULD ADVERSELY IMPACT EATON'S BUSINESSES. At any given time, Eaton may be subject to litigation, the disposition of which may have a material adverse effect on the Company's businesses, financial condition or results of operations. Information regarding the Company's current legal proceedings is presented in "Protection of the Environment" and "Contingencies" on page 43 and 44. EATON PARTICIPATES IN MARKETS THAT ARE COMPETITIVE AND EATON'S RESULTS COULD BE ADVERSELY IMPACTED BY COMPETITORS' ACTIONS. Eaton's businesses operate in competitive markets. The Company competes against other global manufacturers on the basis of product performance, quality and price, in addition to other factors. While Eaton's product development and quality initiatives have been competitive strengths in the past, actions by Eaton's competitors could lead to downward pressure on prices and/or a decline in the Company's market share, either of which could adversely affect Eaton's results. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 203 locations in 30 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment, none of which is material to its operations. Management believes that the existing manufacturing facilities are adequate for operations, and these facilities are maintained in good condition. ITEM 3. LEGAL PROCEEDINGS Information regarding the Company's current legal proceedings is presented in "Protection of the Environment" and "Contingencies" on page 43 and 44. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding executive officers of the Company is presented in Item 10 of this Form 10-K Report. Page 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's Common Shares are listed for trading on the New York and Chicago stock exchanges. Information regarding cash dividends paid and the high and low market price per Common Share for each quarter in 2007 and 2006 is presented in "Quarterly Data" on page 79. At December 31, 2007, there were 8,501 holders of record of the Company's Common Shares. Additionally, 20,763 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP), and the Eaton Electrical de Puerto Rico Inc. Retirement Savings Plan. Information regarding equity compensation plans required by Regulation S-K Item 201(d) is provided in Item 12 of this Form 10-K Report. ITEM 6. SELECTED FINANCIAL DATA Information regarding selected financial data is presented in the "Ten-Year Consolidated Financial Summary" on page 80. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion & Analysis of Financial Condition & Results of Operations" is presented on pages 56 through 78. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding market risk is presented in "Market Risk Disclosure" on page 70. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of the independent registered public accounting firm, consolidated financial statements, and notes to consolidated financial statements are presented on pages 17 through 55. Information regarding selected quarterly financial information for 2007 and 2006 is presented in "Quarterly Data" on page 79. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure 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; President, 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 December 31, 2007. Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC'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. "Management's Report on Internal Control Over Financial Reporting" is presented on page 20. "Report of Independent Registered Public Accounting Firm" relating to internal control over financial reporting is presented on page 19. Page 9 Changes in Internal Control Over Financial Reporting - During fourth quarter 2007, 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. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information required with respect to the directors of the Company is set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. A listing of the Company's executive officers, their ages, positions and offices held over the past five years, as of January 31, 2008, follows:
Name Age Position (Date elected to position) - ---- --- ----------------------------------- Alexander M. Cutler 56 Chairman and Chief Executive Officer; President (August 1, 2000 - present) Director (September 22, 1993 - present) Richard H. Fearon 51 Executive Vice President - Chief Financial and Planning Officer (April 24, 2002 - present) Craig Arnold 47 Senior Vice President and President - Fluid Power Group (October 25, 2000 - present) Scott L. King 47 Senior Vice President and President - Automotive Group (July 1, 2007 - present) Vice President and President - Powertrain and Specialty Controls (May 16, 2005 - June 30, 2007) Vice President - Automotive Sales and Marketing (August 1, 2001 - May 15, 2005) Randy W. Carson 57 Senior Vice President and President - Electrical Group (January 1, 2000 - present) James E. Sweetnam 55 Senior Vice President and President - Truck Group (July 1, 2001 - present) Susan J. Cook 60 Vice President - Human Resources (January 16, 1995 - present) Earl R. Franklin 64 Vice President and Secretary (April 24, 2002 - present) Mark M. McGuire 50 Vice President and General Counsel (December 1, 2005 - present) Vice President and Deputy General Counsel, International Paper Company (2003 - 2005) Associate General Counsel, International Paper Company (March 2001 - 2003) Billie K. Rawot 56 Vice President and Controller (March 1, 1991 - present)
Page 10 Ken D. Semelsberger 46 Vice President - Corporate Development and Treasury (February 22, 2006 - present) Vice President - Strategic Planning (April 28, 1999 - February 21, 2006)
There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors. Information required with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. The Company has adopted a Code of Ethics, which applies to the Directors, officers (including its Chairman and Chief Executive Officer, President, Executive Vice President-Chief Financial and Planning Officer, and Vice President and Controller) and employees worldwide. This document is available on the Company's website at http://www.eaton.com. There were no changes during fourth quarter 2007 to the procedures by which security holders may recommend nominees to the Company's Board of Directors. Information related to the Company's Audit Committee, and members of the Committee that are financial experts, is set forth under the caption "Board Committees - Audit Committee" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information required with respect to executive compensation is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required with respect to securities authorized for issuance under equity compensation plans is set forth under the caption "Equity Compensation Plans" on page 53 of the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. Information required with respect to security ownership of certain beneficial owners, is set forth under the caption "Share Ownership Tables" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required with respect to certain relationships and related transactions is set forth under the caption "Review of Related Person Transactions" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. Information required with respect to director independence is set forth under the caption "Director Independence" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required with respect to principal accountant fees and services is set forth under the caption "Audit Committee Report" in the Company's definitive Proxy Statement to be filed on or about March 14, 2008, and is incorporated by reference. Page 11 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) The report of the independent registered public accounting firm, consolidated financial statements and notes to consolidated financial statements, are included in Item 8 above: Report of Independent Registered Public Accounting Firm - Page 17 Statements of Consolidated Income - Years ended December 31, 2007, 2006 and 2005 - Page 21 Consolidated Balance Sheets - December 31, 2007 and 2006 - Page 22 Statements of Consolidated Cash Flows - Years ended December 31, 2007, 2006 and 2005 - Page 23 Statements of Consolidated Shareholders' Equity - Years ended December 31, 2007, 2006 and 2005 - Page 24 and 25 Notes to Consolidated Financial Statements - Pages 26 through 55 (2) Schedule I - Condensed Financial Information of the Registrant - Pages 81 through 86 All other schedules for which provision is made in Regulation S-X of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) Exhibits 3 (i) Amended Articles of Incorporation (amended and restated April 27, 1994) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 3 (ii) Amended Regulations (amended and restated April 26, 2000) - Incorporated by reference to the Form 10-Q Report for the six months ended June 30, 2000 4 (a) Revolving Credit Agreement, dated as of January 25, 2008 among Eaton Corporation; the banks listed therein; Morgan Stanley Senior Funding, Inc. ("MSSF"), as Administrative Agent; MSSF; Citigroup Global Markets Inc., and J.P. Morgan Securities Inc., as Joint Lead Arrangers and Joint Book Managers and Citibank N.A. and JPMorgan Chase Bank, N.A. as Co-Syndication Agent - Incorporated by reference to the Form 8-K Report filed January 31, 2008 (Pursuant to Regulation S-K Item 601(b) (4), the Company agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt) 10 Material contracts (a) Purchase Agreement between V.G.A.T. Investors, LLC and Eaton Corporation dated as of December 24, 2006 - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (b) Tender Offer for all of the shares of Phoenixtec Power Company Ltd. announced on December 20, 2007 - Filed in conjunction with this Form 10-K Report (c) Share Purchase Agreement between Green Beta S.a.r.l. and Eaton Corporation dated December 20, 2007 - Filed in conjunction with this Form 10-K Report Page 12 (d) Executive Incentive Compensation Plan (effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2005 (e) 2005 Non-Employee Director Fee Deferral Plan (2008 restatement) - Filed in conjunction with this Form 10-K Report (f) Deferred Incentive Compensation Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (g) Excess Benefits Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (h) Incentive Compensation Deferral Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (i) Limited Eaton Service Supplemental Retirement Income Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (j) Supplemental Benefits Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (k) Form of Restricted Share Unit Agreement (2 year vesting) - Filed in conjunction with this Form 10-K Report (l) Form of Restricted Share Unit Agreement (4 year vesting) - Filed in conjunction with this Form 10-K Report (m) Form of Restricted Share Agreement (2 year vesting) - Filed in conjunction with this Form 10-K Report (n) Form of Restricted Share Agreement (4 year vesting) - Filed in conjunction with this Form 10-K Report (o) Form of Stock Option Agreement for Executives (2008) - Filed in conjunction with this Form 10-K Report (p) Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (q) Form of Stock Option Agreement for Non-Employee Directors (2008) - Filed in conjunction with this Form 10-K Report (r) 2004 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 19, 2004 (s) Plan for the Deferred Payment of Directors' Fees (originally adopted in 1985 and amended effective September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004 and, in certain respects, January 1, 2005) - Filed in conjunction with this Form 10-K Report (t) Limited Eaton Service Supplemental Retirement Income Plan (amended and restated January 1, 2003) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (u) Vehicle Allowance Program (effective January 1, 2003) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2003 Page 13 (v) 2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002 (w) 1996 Non-Employee Director Fee Deferral Plan (amended and restated effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (x) Form of Change of Control Agreement entered into with officers of Eaton Corporation - Filed in conjunction with this Form 10-K Report (y) Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (z) Form of Indemnification Agreement entered into with directors of Eaton Corporation - Incorporated by reference to the Form 8-K Report filed January 26, 2007 (aa) Executive Strategic Incentive Plan I (amended and restated January 1, 2007) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (bb) Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (cc) Deferred Incentive Compensation Plan (amended and restated March 31, 2000) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000 (dd) 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998 (ee) Incentive Compensation Deferral Plan (amended and restated October 1, 1997) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000 (ff) Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (gg) Trust Agreement - Non-employee Directors (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (hh) 1995 Stock Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (ii) Group Replacement Insurance Plan (GRIP) (effective June 1, 1992) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 1992 (jj) 1991 Stock Option Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (kk) Excess Benefits Plan (amended and restated effective January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 Page 14 (ll) Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (mm) Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other Equity Grants upon the Restatement of Financial Results - Filed in conjunction with this Form 10-K Report 12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report 14 Code of Ethics - Incorporated by reference to the definitive Proxy Statement to be filed on or about March 14, 2008 21 Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K Report 23 Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report 24 Power of Attorney - Filed in conjunction with this Form 10-K Report 31.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report 31.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report 32.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report 32.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report (b) Exhibits Certain exhibits required by this portion of Item 15 are filed as a separate section of this Form 10-K Report. (c) Financial Statement Schedules Schedule I - Condensed Financial Information of the Registrant Page 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ----------------- Registrant Date: February 26, 2008 /s/ Richard H. Fearon ---------------------------------------- Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date: February 26, 2008 Signature Title - --------- ----- * - --------------------- Alexander M. Cutler Chairman and Chief Executive Officer; President; Director * - --------------------- Billie K. Rawot Vice President and Controller; Principal Accounting Officer * * - --------------------- --------------------- Christopher M. Connor Director Michael J. Critelli Director * * - --------------------- --------------------- Charles E. Golden Director Ernie Green Director * - --------------------- --------------------- Ned C. Lautenbach Director Deborah L. McCoy Director * * - --------------------- --------------------- John R. Miller Director Gregory R. Page Director * - --------------------- --------------------- Victor A. Pelson Director Gary L. Tooker Director *By /s/ Richard H. Fearon -------------------------------------- Richard H. Fearon, Attorney-in-Fact for the officers and directors signing in the capacities indicated Page 16 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Eaton Corporation We have audited the accompanying consolidated balance sheets of Eaton Corporation as of December 31, 2007 and 2006, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eaton Corporation at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in "Retirement Benefit Plans" in the Notes to the Consolidated Financial Statements, effective December 31, 2006, Eaton Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 158,"Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)". As discussed in "Stock Options" in the Notes to the Consolidated Financial Statements, effective January 1, 2006, Eaton Corporation adopted SFAS No. 123(R), "Share-Based Payment". We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eaton Corporation's internal control over financial reporting as of December 31, 2007, based on criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2008 expressed an unqualified opinion thereon. ERNST & YOUNG LLP Cleveland, Ohio February 26, 2008 Page 17 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS We have prepared the accompanying consolidated financial statements and related information of Eaton Corporation included herein for the three years ended December 31, 2007. The primary responsibility for the integrity of the financial information included in this annual report rests with management. The financial information included in this annual report has been prepared in accordance with accounting principles generally accepted in the United States based on our best estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, Eaton's independent registered public accounting firm, on those financial statements is included herein. Eaton has high standards of ethical business practices supported by the Eaton Code of Ethics and corporate policies. Careful attention is given to selecting, training and developing personnel, to ensure that management's objectives of establishing and maintaining adequate internal controls and unbiased, uniform reporting standards are attained. Our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with the Company's commitment to a high standard of business conduct. The Board of Directors pursues its responsibility for the quality of Eaton's financial reporting primarily through its Audit Committee, which is composed of five independent directors. The Audit Committee meets regularly with management, the internal auditors and the independent registered public accounting firm to ensure that they are meeting their responsibilities and to discuss matters concerning accounting, control, audits and financial reporting. The internal auditors and independent registered public accounting firm have full and free access to senior management and the Audit Committee. ALEXANDER M. CUTLER RICHARD H. FEARON BILLIE K. RAWOT Chairman and Chief Executive Vice President - Vice President and Executive Officer; Chief Financial and Planning Controller President Officer February 26, 2008 Page 18 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Eaton Corporation We have audited Eaton Corporation's internal control over financial reporting as of December 31, 2007, based on criteria established in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Eaton Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Eaton Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Eaton Corporation as of December 31, 2007 and 2006, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 26, 2008 expressed an unqualified opinion thereon. ERNST & YOUNG LLP Cleveland, Ohio February 26, 2008 Page 19 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Eaton Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act rules 13a-15(f)). Under the supervision and with the participation of Eaton's management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In conducting this evaluation, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in "Internal Control - Integrated Framework". Based on this evaluation under the framework referred to above, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2007. The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. This report is included herein. ALEXANDER M. CUTLER RICHARD H. FEARON BILLIE K. RAWOT Chairman and Chief Executive Vice President - Vice President and Executive Officer; Chief Financial and Planning Controller President Officer February 26, 2008 Page 20 EATON CORPORATION STATEMENTS OF CONSOLIDATED INCOME
Year ended December 31 ------------------------------ (Millions except for per share data) 2007 2006 2005 -------- -------- -------- NET SALES $ 13,033 $ 12,232 $ 10,874 Cost of products sold 9,382 8,949 7,830 Selling & administrative expense 2,139 1,939 1,746 Research & development expense 335 315 279 Interest expense-net 147 105 90 Other income-net (11) (45) (35) -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,041 969 964 Income taxes 82 72 181 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 959 897 783 Income from discontinued operations 35 53 22 -------- -------- -------- NET INCOME $ 994 $ 950 $ 805 ======== ======== ======== NET INCOME PER COMMON SHARE ASSUMING DILUTION Continuing operations $ 6.38 $ 5.87 $ 5.08 Discontinued operations .24 .35 .15 -------- -------- -------- $ 6.62 $ 6.22 $ 5.23 ======== ======== ======== Average number of Common Shares outstanding assuming dilution 150.3 152.9 154.0 NET INCOME PER COMMON SHARE BASIC Continuing operations $ 6.51 $ 5.97 $ 5.21 Discontinued operations .24 .35 .15 -------- -------- -------- $ 6.75 $ 6.32 $ 5.36 ======== ======== ======== Average number of Common Shares outstanding basic 147.3 150.2 150.2 CASH DIVIDENDS PAID PER COMMON SHARE $ 1.72 $ 1.48 $ 1.24
The notes on pages 26 to 55 are an integral part of the consolidated financial statements. Page 21 EATON CORPORATION CONSOLIDATED BALANCE SHEETS
December 31 ------------------------- (Millions of dollars) 2007 2006 ----------- ----------- ASSETS Current assets Cash $ 142 $ 114 Short-term investments 504 671 Accounts receivable 2,208 1,928 Inventories 1,483 1,293 Deferred income taxes 291 267 Other current assets 139 135 -------- -------- 4,767 4,408 -------- -------- Property, plant & equipment Land & buildings 1,175 1,083 Machinery & equipment 4,067 3,863 -------- -------- 5,242 4,946 Accumulated depreciation (2,909) (2,675) -------- -------- 2,333 2,271 Goodwill 3,982 3,034 Other intangible assets 1,557 969 Deferred income taxes & other assets 791 735 -------- -------- $ 13,430 $ 11,417 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 825 $ 490 Current portion of long-term debt 160 322 Accounts payable 1,170 1,050 Accrued compensation 355 305 Other current liabilities 1,149 1,123 -------- -------- 3,659 3,290 -------- -------- Long-term debt 2,432 1,774 Pension liabilities 681 942 Other postretirement liabilities 772 766 Other long-term liabilities 714 539 Shareholders' equity Common Shares (146.0 million outstanding in 2007 and 146.3 million in 2006) 73 73 Capital in excess of par value 2,290 2,114 Retained earnings 3,257 2,796 Accumulated other comprehensive loss (423) (849) Deferred compensation plans (25) (28) -------- -------- 5,172 4,106 -------- -------- $ 13,430 $ 11,417 ======== ========
The notes on pages 26 to 55 are an integral part of the consolidated financial statements. Page 22 EATON CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS
Year ended December 31 --------------------------- (Millions) 2007 2006 2005 ------- ------- ------- Net cash provided by (used in) operating activities Net income $ 994 $ 950 $ 805 Adjustments to reconcile to net cash provided by operating activities Depreciation & amortization 469 434 409 Deferred income taxes (51) 37 (20) Pension liabilities 206 198 145 Gains on sales of businesses (46) (56) Other long-term liabilities (25) (45) 4 Other non-cash items in income 38 33 (1) Changes in working capital, excluding acquisitions & sales of businesses Accounts receivable (72) (40) (104) Inventories (79) (129) (28) Accounts payable (7) 185 25 Accrued income & other taxes (41) (149) 27 Other current liabilities (36) 72 (29) Other working capital accounts 27 77 (37) Voluntary contributions to United States & United Kingdom qualified pension plans (180) (119) (64) Other-net (36) (17) 3 ------- ------- ------- 1,161 1,431 1,135 ------- ------- ------- Net cash provided by (used in) investing activities Expenditures for property, plant & equipment (354) (360) (363) Cash paid for acquisitions of businesses (1,433) (256) (911) Proceeds from sales of businesses 119 65 Sales (purchases) of short-term investments-net 247 (418) (4) Other-net (39) (42) 10 ------- ------- ------- (1,460) (1,011) (1,268) ------- ------- ------- Net cash provided by (used in) financing activities Borrowings with original maturities of more than three months Proceeds 1,652 706 393 Payments (979) (617) (63) Borrowings with original maturities of less than three months-net, primarily commercial paper 62 (35) 392 Cash dividends paid (251) (220) (184) Proceeds from exercise of employee stock options 141 108 68 Income tax benefit from exercise of employee stock options 42 28 Purchase of Common Shares (340) (386) (450) Other 2 ------- ------- ------- 327 (416) 158 ------- ------- ------- Total increase in cash 28 4 25 Cash at beginning of year 114 110 85 ------- ------- ------- Cash at end of year $ 142 $ 114 $ 110 ======= ======= =======
The notes on pages 26 to 55 are an integral part of the consolidated financial statements. Page 23 EATON CORPORATION STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Accumulated Common Shares Capital in other Deferred Total -------------- excess of Retained comprehensive compensation Shareholders' (Millions) Shares Dollars par value earnings loss plans equity ------ ------- ---------- -------- ------------- ------------ ------------- Balance at January 1, 2005 153.3 $77 $1,993 $2,112 $(538) $(38) $3,606 Net income 805 805 Foreign currency translation and related hedging instruments (including income taxes of $33) (53) (53) Deferred gain on cash flow hedges (net of income taxes of $2) 6 6 Minimum pension liability (net of income tax benefits of $36) (64) (64) ------ Other comprehensive loss (111) ------ Total comprehensive income 694 Cash dividends paid (184) (184) Issuance of shares under employee benefit plans, including income tax benefit 2.1 1 104 (2) 10 113 Issuance of shares to trust .1 8 (8) 0 Purchase of shares (7.0) (4) (92) (354) (450) Other-net (1) (1) ----- --- ------ ------ ----- ---- ------ Balance at December 31, 2005 148.5 74 2,013 2,376 (649) (36) 3,778 Net income 950 950 Foreign currency translation and related hedging instruments (including income tax benefits of $16) 95 95 Deferred loss on cash flow hedges (net of income tax benefits of $3) (5) (5) Minimum pension liability (net of income tax benefits of $1) (8) (8) ------ Other comprehensive income 82 ------ Total comprehensive income 1,032 Adjustment to initially apply SFAS No. 158 Pensions (net of income tax benefits of $85) (163) (163) Other postretirement benefits (net of income tax benefits of $119) (119) (119) Cash dividends paid (220) (220) Issuance of shares under employee benefit plans, including income tax benefit 3.1 2 176 (2) 13 189 Purchase of shares by trust (5) (5) Purchase of shares (5.3) (3) (75) (308) (386) ----- --- ------ ------ ----- ---- ------
Page 24 Balance at December 31, 2006 146.3 73 2,114 2,796 (849) (28) 4,106 Net income 994 994 Foreign currency translation and related hedging instruments (including income taxes of $14) 212 212 Deferred loss on cash flow hedges (net of income tax benefits of $3) (5) (5) Pensions (net of income taxes of $101) 214 214 Other postretirement benefits (net of income taxes of $8) 5 5 ------ Other comprehensive income 426 ------ Total comprehensive income 1,420 Cash dividends paid (251) (251) Issuance of shares under employee benefit plans, including income tax benefit 3.7 2 237 (5) 8 242 Purchase of shares by trust (5) (5) Purchase of shares (4.0) (2) (61) (277) (340) ----- --- ------ ------ ----- ---- ------ Balance at December 31, 2007 146.0 $73 $2,290 $3,257 $(423) $(25) $5,172 ===== === ====== ====== ===== ==== ======
The notes on pages 26 to 55 are an integral part of the consolidated financial statements. Page 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in millions, except per share data (per share data assume dilution) ACCOUNTING POLICIES CONSOLIDATION & BASIS OF PRESENTATION The consolidated financial statements include accounts of Eaton and all subsidiaries and other controlled entities. The equity method of accounting is used for investments in associate companies where the Company has a 20% to 50% ownership interest. These associate companies are not material either individually, or in the aggregate, to Eaton's financial position, results of operations or cash flows. Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties and equipment, as described in "Lease Commitments" in the Notes below. Transactions with related parties are in the ordinary course of business, are conducted on an arm's-length basis, and are not material to Eaton's financial position, results of operations or cash flows. FOREIGN CURRENCY TRANSLATION The functional currency for substantially all subsidiaries outside the United States is the local currency. Financial statements for these subsidiaries are translated into United States dollars at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recorded in Accumulated other comprehensive income (loss) in Shareholders' equity. Gains and losses related to foreign currency transactions are recorded in Other income-net in the Statements of Consolidated Income. INVENTORIES Inventories are carried at lower of cost or market. Inventories in the United States are generally accounted for using the last-in, first-out (LIFO) method. Remaining United States and all other inventories are accounted for using the first-in, first-out (FIFO) method. Cost components include raw materials, purchased components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and costs of the distribution network. DEPRECIATION & AMORTIZATION Depreciation and amortization are computed by the straight-line method for financial statement purposes. Cost of buildings is depreciated over 40 years and machinery and equipment over principally 3 to 10 years. At December 31, 2007, the weighted-average amortization periods for intangible assets subject to amortization were 14 years for patents, 19 years for manufacturing technology and 21 years for customer relationships. Software is amortized over a range of 3 to 7 years. Long-lived assets, except goodwill and indefinite life intangible assets as described in the Notes below, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value. GOODWILL & INDEFINITE LIFE INTANGIBLE ASSETS In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", Eaton does not amortize goodwill and indefinite life intangible assets recorded in connection with business acquisitions. Indefinite life intangible assets primarily consist of trademarks. The Company completed the annual impairment tests for goodwill and indefinite life intangible assets required by SFAS No. 142. These tests confirmed that the fair value of the Company's reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment loss was required to be recognized. page 26 FINANCIAL INSTRUMENTS In the normal course of business, Eaton is exposed to fluctuations in interest rates, foreign currency exchange rates, and commodity prices. The Company uses various financial instruments, primarily interest rate swaps, foreign currency forward exchange contracts, foreign currency swaps and, to a minor extent, commodity futures contracts, to manage exposure to price fluctuations. Financial instruments used by Eaton are straightforward, non-leveraged instruments for which quoted market prices are readily available from a number of independent sources. The risk of credit loss is deemed to be remote, because the counterparties to these instruments are major international financial institutions with strong credit ratings and because of the Company's control over the size of positions entered into with any one counterparty. Such financial instruments are not bought and sold solely for trading purposes, except for nominal amounts authorized under limited, controlled circumstances. No such financial instruments were purchased or sold for trading purposes in 2007, 2006 and 2005. All derivative financial instruments are recognized as either assets or liabilities on the Consolidated balance sheet and are measured at fair value. Accounting for the gain or loss resulting from the change in the financial instrument's fair value depends on whether it has been designated, and is effective, as a hedge and, if so, on the nature of the hedging activity. Financial instruments can be designated as hedges of changes in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability; as hedges of variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability; or as hedges of foreign currency exposure from a net investment in one of the Company's foreign operations. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of Accumulated other comprehensive income (loss) in Shareholders' equity and subsequently recognized in net income when the hedged item affects net income. The ineffective portion of the change in fair value of a financial instrument is recognized in income immediately. The gain or loss related to financial instruments that are not designated as hedges are recognized immediately in net income. WARRANTY EXPENSES Estimated product warranty expenses are accrued in Cost of products sold at the time the related sale is recognized. Estimates of warranty expenses are based primarily on historical warranty claim experience and specific customer contracts. Warranty expenses include accruals for basic warranties for products sold, as well as accruals for product recalls and other related events when they are known and estimable. ASSET RETIREMENT OBLIGATIONS A conditional asset retirement obligation is recognized at fair value when incurred, if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be factored into the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability's fair value. Page 27 STOCK OPTIONS GRANTED TO EMPLOYEES & DIRECTORS As described in "Stock Options" in the Notes below, effective January 1, 2006, in accordance with SFAS No. 123(R), "Share-Based Payment", Eaton began to record compensation expense under the "fair-value-based" method of accounting for stock options granted to employees and directors. The Company adopted SFAS No. 123(R) using the "modified prospective application" method and, consequently, financial results for periods prior to 2006 were not restated for this accounting change. Under the modified prospective method, compensation expense for stock options includes expense for all options granted prior to, but not yet vested as of the end of 2005, and expense for options granted beginning in 2006, based on the grant date fair value of the options. Expense is recognized on a straight-line basis over the period the employee or director is required to provide service in exchange for the award. Prior to 2006, as allowed by SFAS No. 123, "Accounting for Stock-Based Compensation", stock options were accounted for using the intrinsic-value-based method in Accounting Principles Board (APB) Opinion No. 25. Under that method, no compensation expense was recognized on the grant date, since on that date the exercise price of the option equaled the market price of the underlying Common Shares. REVENUE RECOGNITION Sales are recognized when products are shipped to unaffiliated customers, all significant risks of ownership have been transferred to the customer, title has transferred in accordance with shipping terms (FOB shipping point, FOB destination or equivalent International Commercial (INCO) Terms), the selling price is fixed and determinable, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Other revenues for service contracts are recognized as the services are provided. ESTIMATES Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates. FINANCIAL PRESENTATION CHANGES Certain amounts for prior years have been reclassified to conform to the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This Statement clarifies accounting and reporting for a noncontrolling interest, sometimes called a minority interest, which is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent company. This Statement will be effective for Eaton in 2009. The Company expects that this Statement will have an immaterial effect on its consolidated financial condition and results of operations. BUSINESS COMBINATIONS In December 2007, the FASB issued SFAS No. 141 (R), "Business Combinations". This Statement establishes principles and requires the buyer to: - - Recognize, with certain exceptions, 100% of the fair values of assets acquired, liabilities assumed, and non-controlling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity. - - Measure shares issued in consideration for a business combination at fair value on the acquisition date. - - Recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings. - - With certain exceptions, recognize pre-acquisition loss and gain contingencies at their acquisition date fair values. - - Capitalize in-process research and development assets acquired. - - Expense, as incurred, acquisition-related transaction costs. Page 28 - - Capitalize acquisition-related restructuring costs only if the criteria in SFAS No. 146 are met as of the acquisition date. - - Recognize changes that result from a business combination transaction in an acquirer's existing income tax valuation allowances and tax uncertainty accruals as adjustments to income tax expense. This Statement will be effective for Eaton for businesses acquired in 2009, and the Company is evaluating the impact of the Statement. FAIR VALUE OPTION FOR FINANCIAL ASSETS & FINANCIAL LIABILITIES In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment to FASB Statement No. 115." This Statement gives companies the option to measure many financial and nonfinancial instruments at fair value. This Statement is effective for Eaton in 2008. The Company does not intend to exercise its option to measure any additional financial and nonfinancial assets and liabilities at fair value. FAIR VALUE MEASUREMENTS In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This Statement defines fair value for financial and nonfinancial assets and liabilities, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance applies to other accounting pronouncements that require or permit fair value measurements. On February 12, 2008, the FASB finalized FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157". This Staff Position delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). For Eaton, the Staff Position defers the effective date of SFAS No. 157 as it relates to nonfinancial assets and liabilities to 2009. SFAS No. 157 was effective for Eaton in 2008 for financial assets and liabilities. The Company expects that this Statement will have an immaterial effect on its consolidated financial condition and results of operations. ACQUISITIONS OF BUSINESSES In 2007, 2006, and 2005, Eaton acquired certain businesses and formed joint ventures in separate transactions for a combined net cash purchase price of $1,433 in 2007, $256 in 2006 and $911 in 2005. The Statements of Consolidated Income include the results of these businesses from the effective dates of acquisition or formation. A summary of these transactions follows:
Date of Business Acquired business acquisition segment Annual sales - ----------------- ----------- ----------- -------------- Arrow Hose & Tubing Inc. November 8, Fluid Power $12 for 2006 A Canada-based manufacturer of thermoplastic 2007 hose and tubing for the industrial, food and beverage, and agricultural markets MGE small systems UPS business from October 31, Electrical $245 for the Schneider Electric 2007 year ended A France-based global provider of power quality Sept. 30, 2007 solutions including uninterruptible power supply (UPS) systems, power distribution units, static transfer switches and surge suppressors Babco Electric Group October 19, Electrical $11 for the A Canada-based manufacturer of specialty low- 2007 year ended and medium-voltage switchgear and electrical April 30, 2007 housings for use in the Canadian oil and gas industry and other harsh environments
Page 29
Date of Business Acquired business acquisition segment Annual sales - ----------------- ----------- ----------- -------------- Pulizzi Engineering June 19, 2007 Electrical $12 for 2006 A U.S. manufacturer of alternating current (AC) power distribution, AC power sequencing, redundant power and remote-reboot power management systems Technology and related assets of SMC Electrical May 18, 2007 Electrical None Products, Inc.'s industrial medium-voltage adjustable frequency drive business Fuel components division of Saturn Electronics & May 2, 2007 Automotive $28 for 2006 Engineering, Inc. A U.S. designer and manufacturer of fuel containment/shutoff valves, emissions control valves and specialty actuators Aphel Technologies Limited April 5, 2007 Electrical $12 for 2006 A U.K.-based global supplier of high density, fault-tolerant power distribution solutions for datacenters, technical offices, laboratories and retail environments Argo-Tech Corporation March 16, Fluid Power $206 for 2006 A U.S.-based manufacturer of high performance 2007 aerospace engine fuel pumps and systems airframe fuel pumps and systems, and ground fueling systems for commercial and military aerospace markets Power Protection Business of Power Products Ltd. February 7, Electrical $3 for 2006 A Czech Republic distributor and service provider 2007 of Powerware(R) products and other uninterruptible power supply (UPS) systems Schreder-Hazemeyer December 1, Electrical $9 for 2006 Eaton acquired the remaining 50% ownership of 2006 the Belgium manufacturer of low and medium voltage electrical distribution switchgear Diesel fuel processing technology & associated October 26, Truck None assets of Catalytica Energy Systems Inc. 2006 A U.S. developer of emission control solutions for Trucks Senyuan International Holdings Limited September 14, Electrical $47 for 2005 A China-based manufacturer of vacuum circuit 2006 breakers and other electrical switchgear components Ronningen-Petter business unit of Dover Resources, September 5, Fluid Power $31 for 2005 Inc. 2006 A U.S.-based manufacturer of industrial fine filters and components
Page 30
Date of Business Acquired business acquisition segment Annual sales - ----------------- ----------- ----------- -------------- Synflex business unit of Saint-Gobain Performance March 31, Fluid Power $121 for 2005 Plastics Corp. 2006 A U.S.-based manufacturer of thermoplastic hose and tubing Marina Power & Lighting March 24, Electrical $11 for 2005 A U.S. manufacturer of marine duty electrical 2006 distribution products Aerospace division of PerkinElmer, Inc. December 6, Fluid Power $150 for the A U.S.-based provider of sealing and pneumatic 2005 year ended systems for large commercial aircraft and regional June 30, 2005 jets Aerospace fluid and air division of Cobham plc November 1, Fluid Power $210 for 2004 A U.K.-based company that provides low- 2005 pressure airframe fuel systems, electro- mechanical actuation, air ducting, hydraulic and power generation, and fluid distribution systems for fuel, hydraulics and air Assets of Pringle Electrical Manufacturing Company October 11, Electrical $6 for 2004, A U.S. manufacturer of bolted contact switches 2005 one-third of and other specialty switches which were to Eaton Industrial filtration business of Hayward Industries, September 6, Fluid Power $100 for the Inc. 2005 year ended A U.S.-based producer of filtration systems for June 30, 2005 industrial and commercial customers Tractech Holdings, Inc. August 17, Automotive $43 for 2004 A U.S.-based manufacturer of specialized 2005 differentials and clutch components for the commercial and specialty vehicle markets Morestana S.A. de C.V. June 30, 2005 Automotive $13 for 2004 A Mexican producer of hydraulic lifters for automotive engine manufacturers and the automotive aftermarket Eaton Electrical (Zhongshan) Co., Ltd. (a 51%- June 17, 2005 Electrical None owned joint venture) A China-based manufacturer of medium-voltage switchgear components, including circuit breakers, meters and relays Winner Group Holdings Ltd. March 31, Fluid Power $26 for 2004 A China-based producer of hydraulic hose fittings 2005 and adapters Pigozzi S.A. Engrenagens e Transmissoes March 1, 2005 Truck $42 for 2004 A Brazilian agricultural powertrain business that produces transmissions, rotors and other drivetrain components
Page 31 The allocation of the purchase price for certain acquisitions in 2007 is not final, and may be subsequently adjusted. As described above, in 2007 Eaton acquired the Argo-Tech aerospace business for cash of $731 and the MGE small systems UPS business for cash of $614. Assets and liabilities for these businesses were recorded at estimated fair values as determined by Eaton's management based on information currently available and on current assumptions as to future operations. The Company is in the process of completing the allocations of the purchase prices, including the finalization of valuations of certain tangible and intangible assets. The preliminary allocations of the purchase prices are summarized below: Current assets $ 201 Property, plant & equipment 20 Goodwill 889 Other intangible assets 552 Other assets 5 ------ Total assets acquired 1,667 Total liabilities assumed 322 ------ Net assets acquired $1,345 ======
Other intangible assets of $552 included $42 related to trademarks not subject to amortization, and $291 of customer relationships and $80 of technology, both having a useful life of 25 years. Goodwill of $406 for Argo-Tech relates to the Fluid Power segment and goodwill of $483 for the MGE small systems UPS business relates to the Electrical segment, both of which are non-deductible for income tax purposes. PRO FORMA RESULTS OF CONTINUING OPERATIONS Unaudited pro forma results of continuing operations for 2007 and 2006, as if Eaton, Argo-Tech and the MGE small systems UPS business had been consolidated as of the beginning of those periods, follow. The pro forma results include 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 integrations of these businesses, and, accordingly, are not necessarily indicative of the results which would have occurred if the business combinations had been in effect on the date indicated. These pro forma results do not include businesses acquired in 2007 that were immaterial.
2007 2006 ------- ------- Net sales $13,268 $12,637 Income from continuing operations 948 899 Income from continuing operations per Common Share Assuming dilution $ 6.31 $ 5.88 Basic $ 6.44 $ 5.98
SUBSEQUENT EVENTS On December 20, 2007, Eaton announced it had reached an agreement to purchase The Moeller Group, a Germany-based business, for EURO 1.55 billion (U.S. $2.3 billion). This transaction is expected to close at the beginning of the second quarter of 2008. This business, which had sales of EURO 1.02 billion (U.S. $1.5 billion) for 2007, is a leading supplier of electrical components for commercial and residential building applications, and industrial controls for industrial equipment applications. The business will be integrated into the Electrical segment. On December 20, 2007, Eaton announced a tender offer for all shares of Phoenixtec Power Company Ltd., a company listed on the Taiwan Stock Exchange. The tender offer closed on February 22, 2008, with 91% of Phoenixtec's shares having been tendered into the offer. Eaton acquired the tendered shares on February 26, 2008 and intends to take further steps to acquire all remaining shares. Once that has been accomplished, the Company expects to have paid a total purchase price, net of estimated cash and debt acquired, of $568 for Phoenixtec. This business, with sales of approximately $515 in 2007, manufactures single and three-phase uninterruptible power supply (UPS) systems. The business will be integrated into the Electrical segment. Page 32 RESTRUCTURING LIABILITIES Eaton has undertaken restructuring activities at acquired businesses, including workforce reductions, plant consolidations and facility closures. In accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," liabilities for these restructuring activities were recorded in the allocation of the purchase price related to the acquired business. A summary of these liabilities, and utilization of the various components, follows:
Workforce reductions Plant -------------------- closing Employees Dollars & other Total --------- -------- ------- ------ Balance at January 1, 2005 383 $ 13 $ 50 $ 63 Liabilities recorded in 2005 789 25 27 52 Utilized in 2005 (228) (14) (40) (54) ----- ---- ---- ---- Balance at December 31, 2005 944 24 37 61 Liabilities recorded in 2006 417 17 28 45 Utilized in 2006 (285) (8) (43) (51) ----- ---- ---- ---- Balance at December 31, 2006 1,076 33 22 55 Liabilities recorded in 2007 282 7 2 9 Utilized in 2007 (699) (17) (8) (25) ----- ---- ---- ---- Balance at December 31, 2007 659 $ 23 $ 16 $ 39 ===== ==== ==== ====
ACQUISITION INTEGRATION & PLANT CLOSING CHARGES ACQUISITION INTEGRATION CHARGES In 2007, 2006 and 2005, Eaton incurred charges related to the integration of acquired businesses. These charges were recorded as expense as incurred. The charges consisted of plant consolidations and integration. A summary of these charges follows:
Total ------------------ 2007 2006 2005 ---- ---- ---- Electrical $ 12 $ 7 $ 21 Fluid Power 51 23 7 Truck 5 4 Automotive 1 5 4 ---- ---- ---- Pretax charges $ 64 $ 40 $ 36 ==== ==== ==== After-tax charges $ 42 $ 27 $ 24 Per Common Share $.28 $.17 $.15
Charges in 2007 related to the integration of primarily the following acquisitions: in the Electrical segment, the MGE small systems UPS business, Schreder-Hazemeyer, Senyuan and Powerware; in the Fluid Power segment, Argo-Tech, Synflex, PerkinElmer, Cobham and Hayward; and in the Automotive segment, Saturn and Tractech. Charges in 2006 related to the integration of primarily the following acquisitions: in the Electrical segment, Pringle and Powerware; in the Fluid Power segment, Synflex, PerkinElmer, Cobham, Hayward, Winner and Walterscheid; in the Truck segment, Pigozzi; and in the Automotive segment, Tractech and Morestana. Charges in 2005 related to the integration of primarily the following acquisitions: in the Electrical segment, Powerware and Delta; in the Fluid Power segment, Winner, Walterscheid and Boston Weatherhead; in the Truck segment, Pigozzi; and in the Automotive segment, Morestana. Page 33 PLANT CLOSING CHARGES In first quarter 2006, Eaton announced, and began to implement, its Excel 07 program. This program was a series of actions concluded in 2006 intended to address resource levels and operating performance in businesses that under-performed in 2005, and businesses that were expected to weaken during second half 2006 and in 2007. As part of this program, charges were incurred related to plant closings in all four business segments. A summary of charges incurred by each segment related to these plant closings, including workforce reductions, plant integration and other charges follows:
2006 ---- Electrical $ 12 Fluid Power 15 Truck 29 Automotive 50 ---- Pretax charges $106 ====
SUMMARY OF ACQUISITION INTEGRATION & PLANT CLOSING CHARGES & LIABILITIES A summary of acquisition integration and Excel 07 plant closing charges, and utilization of the various components follows:
Workforce reductions Plant -------------------- closing Employees Dollars & other Total --------- -------- ------- ------ Balance at January 1, 2005 $ 3 $ 3 Liabilities recorded in 2005 173 $ 4 32 36 Utilized in 2005 (7) (1) (34) (35) ------- ---- ---- ----- Balance at December 31, 2005 166 3 1 4 Liabilities recorded in 2006 2,339 85 61 146 Utilized in 2006 (902) (39) (56) (95) ------- ---- ---- ----- Balance at December 31, 2006 1,603 49 6 55 Liabilities recorded in 2007 4 2 64 66 Utilized in 2007 (1,044) (37) (69) (106) ------- ---- ---- ----- Balance at December 31, 2007 563 $ 14 $ 1 $ 15 ======= ==== ==== =====
The acquisition integration and plant closing 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. DISCONTINUED AUTOMOTIVE OPERATIONS In third quarter 2007, Eaton sold the Mirror Controls Division of the Automotive segment for $111, resulting in a $20 after-tax gain, or $.12 per Common Share. In third quarter 2006, certain other businesses of the Automotive segment were sold for $64, resulting in a $35 after-tax gain, or $.23 per share. The gains on sale of the Mirror Controls Division and the businesses sold in 2006, and other results of these businesses, are reported as Discontinued operations in the Statement of Consolidated Income. SHORT-TERM INVESTMENTS Eaton invests excess cash generated from operations in short-term marketable investments and classifies these investments as "available-for-sale" under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with SFAS No. 115, available-for-sale investments are recorded at fair market values, with the unrealized gain or loss recorded in Accumulated other comprehensive income (loss) in Shareholders' equity. A summary of the carrying value of short-term investments follows: Page 34
2007 2006 ---- ---- Time deposits & certificate of deposits with banks $198 $323 Bonds issued by foreign governments 121 149 Money market investments 174 138 Corporate & agency bonds 60 Other 11 1 ---- ---- $504 $671 ==== ====
The fair market value of short-term investments approximates the cost of these investments. GOODWILL & OTHER INTANGIBLE ASSETS A summary of goodwill follows:
2007 2006 ------ ------ Electrical $1,570 $1,039 Fluid Power 2,099 1,689 Truck 148 144 Automotive 165 162 ------ ------ $3,982 $3,034 ====== ======
The net increase in goodwill in 2007 was due to goodwill for businesses acquired during 2007, partially offset by the final allocation of purchase price for businesses acquired prior to 2007. These transactions are described in the "Acquisitions of Businesses" Note above. A summary of other intangible assets follows:
2007 2006 ------------------------ ------------------------ Historical Accumulated Historical Accumulated cost amortization cost amortization ---------- ------------ ---------- ------------ Intangible assets not subject to amortization (primarily trademarks) $ 530 $ 430 ====== ====== Intangible assets subject to amortization Customer relationships $ 570 $ 65 $ 214 $ 37 Patents 210 120 208 107 Manufacturing technology 222 20 123 20 Other, including estimates for certain businesses acquired in 2007 279 49 204 46 ------ ---- ------ ------ $1,281 $254 $ 749 $ 210 ====== ==== ====== ======
Expense related to intangible assets subject to amortization for 2007 was $79. Estimated annual pretax expense for intangible assets subject to amortization for each of the next five years is $89 in 2008, $88 in 2009, $86 in 2010, $82 in 2011 and $80 in 2012. The projected amortization expense does not include estimates for The Moeller Group or Phoenixtec to be acquired in the first half of 2008. DEBT & OTHER FINANCIAL INSTRUMENTS Short-term debt of $825 at December 31, 2007 included $821 of short-term commercial paper for operations in the United States and $4 for operations outside the United States. Borrowings for operations outside the United States were largely denominated in local currencies. The weighted-average interest rate on the $821 of short-term commercial paper for operations in the United States was 4.6% at December 31, 2007. Operations outside the United States have available short-term lines of credit aggregating $436 from various banks worldwide. Page 35 A summary of long-term debt, including the current portion, follows:
2007 2006 ------ ------ 6% EURO 200 million notes due 2007 $ 263 7.37% notes due 2007 20 7.14% notes due 2007 3 6.75% notes due 2007 25 EURO 100 million floating rate notes due 2008 (4.91% at December 31, 2007 - EURIBOR+.375%) $ 147 132 7.40% notes due 2009 (converted to floating rate by interest rate swap) 15 15 Floating rate senior notes due 2009 (4.88% at December 31, 2007 - LIBOR+.08%) 250 250 Floating rate senior note due 2010 (5.14% at December 31, 2007 - LIBOR+.26%) 281 5.75% notes due 2012 ($225 converted to floating rate by interest rate swap) 300 300 7.58% notes due 2012 (converted to floating rate by interest rate swap) 12 12 5.80% notes due 2013 7 7 12.5% British Pound debentures due 2014 12 11 4.65% notes due 2015 (converted to floating rate by interest rate swap) 100 100 5.3% notes due 2017 250 7.09% notes due 2018 (converted to floating rate by interest rate swap) 25 25 6.89% notes due 2018 6 6 7.07% notes due 2018 2 2 6.875% notes due 2018 3 3 8-7/8% debentures due 2019 ($25 converted to floating rate by interest rate swap) 38 38 8.10% debentures due 2022 100 100 7.625% debentures due 2024 ($25 converted to floating rate by interest rate swap) 66 66 6-1/2% debentures due 2025 145 145 7.875% debentures due 2026 72 72 7.65% debentures due 2029 ($75 converted to floating rate by interest rate swap) 200 200 5.45% debentures due 2034 ($100 converted to floating rate by interest rate swap) 150 150 5.25% notes due 2035 ($50 converted to floating rate by interest rate swap) 72 90 5.8% notes due 2037 240 Other 99 61 ------ ------ Total long-term debt 2,592 2,096 Less current portion of long-term debt (160) (322) ------ ------ Long-term debt less current portion $2,432 $1,774 ====== ======
In order to initially finance the acquisitions of The Moeller Group and Phoenixtec, on January 25, 2008, Eaton entered into a revolving credit agreement, in the amount of $3.0 billion, which may be used either to fund direct loans or to backstop commercial paper borrowings. The proceeds must be used to finance certain acquisitions including, but not limited to, the acquisition of The Moeller Group and Phoenixtec. All amounts borrowed under the credit agreement, including commercial paper backstopped by this agreement, must be repaid by January 23, 2009, but may be repaid earlier at the Company's option or may be required to be repaid earlier in the event of a default. The commitment amount of the revolving credit agreement will be reduced by the net amount of any proceeds raised through certain future capital market transactions which may include, but are not limited to, debt or equity issuances. The credit agreement also includes covenants customary for transactions of this type with borrowers having capital structures similar to Eaton. Page 36 Eaton's United States operations have long-term revolving credit facilities of $1.5 billion, of which $300 expires in May 2008, $700 in March 2010 and the remaining $500 in August 2011. One of the Company's international subsidiaries has a long-term line of credit of Euro 100 million. The EURO 100 million floating rate notes due 2008, which have a U.S. dollar equivalent of $147 at December 31, 2007, were borrowed under this line of credit. The $281 Floating Rate Senior Note due 2010 was issued by a subsidiary of Eaton in order to refinance short-term borrowings related to the acquisition of the Argo-Tech aerospace business in 2007. This subsidiary owns equity interests in several of the Company's subsidiaries and a portion of the assets of those subsidiaries are pledged as collateral for the note. At December 31, 2007, under the terms of the Note, this subsidiary had net assets of $3.7 billion that were not available to be transferred to the parent company of Eaton Corporation in the form of loans, advances, or cash dividends without the consent of the lender. In the event of an unremedied default, claims of the lender against this subsidiary's net assets are limited to the $281 principal amount of the Note, accrued interest, and any associated damages. Aggregate mandatory annual maturities of long-term debt for each of the next five years are $160 in 2008, $267 in 2009, $285 in 2010, $1 in 2011 and $313 in 2012. Interest paid was $204 in 2007, $151 in 2006 and $112 in 2005. Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk. These interest rate swaps are accounted for as fair value hedges of certain of the Company's long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt above. A summary of interest rate swaps outstanding at December 31, 2007, follows (currency in millions):
Interest rates at December 31, 2007 ------------------------------------------------- Fixed Floating interest interest Notional rate rate Basis for contracted amount received paid floating interest rate paid - -------- -------- -------- --------------------------- $ 15 7.40% 6.77% 6 month LIBOR+1.95% $225 5.75% 6.16% 6 month LIBOR+0.78% $ 12 7.58% 6.58% 6 month LIBOR+1.76% $100 4.65% 4.95% 6 month LIBOR+0.12% $ 25 7.09% 7.22% 6 month LIBOR+2.40% $ 25 8.88% 8.67% 6 month LIBOR+3.84% $ 25 7.63% 7.62% 6 month LIBOR+2.48% $ 75 7.65% 7.32% 6 month LIBOR+2.58% $100 5.45% 5.63% 6 month LIBOR+0.43% $ 50 5.25% 4.99% 6 month LIBOR+0.17%
The carrying values of cash, short-term investments and short-term debt in the balance sheet approximate their estimated fair values. The estimated fair values of other financial instruments outstanding follow: Page 37
2007 2006 -------------------------------- ----------------------------- Notional Carrying Fair Notional Carrying Fair amount value value amount value value ---------- -------- -------- -------- -------- ------ Long-term debt & current portion of long-term debt (a) $(2,592) $(2,661) $(2,096) $(2,213) Foreign currency principal swaps $ 25 $192 (5) (5) Foreign currency forward exchange contracts 57 (44) (43) (23) (6) (7) Fixed to floating interest rate swaps 652 12 11 829 (15) (14)
(a) Includes foreign currency denominated debt. The estimated fair values of financial instruments were principally based on quoted market prices where such prices were available and, where unavailable, fair values were estimated based on quoted market prices for comparable contracts. The fair value of foreign currency principal swaps, which related to the Japanese Yen, and foreign currency forward exchange contracts, which primarily related to the U.S. Dollar, Euro and Pound Sterling were estimated based on quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences. These contracts mature during 2008. RETIREMENT BENEFIT PLANS ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 158 On December 31, 2006, Eaton adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)". SFAS No. 158 required employers to recognize on their balance sheets the net amount by which pension and other postretirement benefit plan liabilities are overfunded or underfunded. SFAS No. 158 replaced SFAS No. 87's requirement to report at least a minimum pension liability measured as the excess of the accumulated benefit obligations over the fair value of plan assets. Under SFAS No. 158, all actuarial gains and losses and prior service costs are recognized, with an offsetting increase in Accumulated other comprehensive loss in Shareholders' equity, net of income tax benefits. As a result of the adoption of SFAS No. 158, at December 31, 2006, Eaton recorded a non-cash charge in Accumulated other comprehensive loss in Shareholders' equity of $248 ($163 after-tax) for pension benefits and $238 ($119 after-tax) for other postretirement benefits as a one-time adjustment to initially apply the new Standard. Retirement benefit plan funding requirements are not affected by the recording of these charges. The adoption of SFAS No. 158 did not change the amounts recognized in the income statement as net periodic benefit cost. Page 38 RETIREMENT BENEFIT PLAN LIABILITIES AND ASSETS Eaton has defined benefit pension plans and other postretirement benefit plans. Components of plan obligations and assets, and recorded liabilities and assets, follow:
Other Pension postretirement liabilities liabilities ----------------- -------------- 2007 2006 2007 2006 ------- ------- ------ ----- Changes in benefit obligation Benefit obligation at beginning of year $(3,125) $(2,782) $(854) $(873) Service cost (147) (142) (15) (17) Interest cost (163) (147) (47) (45) Actuarial (loss) gain 175 (165) 3 (9) Benefits paid 247 224 90 97 Prescription drug subsidy received (7) (5) Foreign currency translation (57) (97) (3) Business acquisitions (29) (4) (26) Other 7 (12) (2) ------- ------- ----- ----- Benefit obligation at end of year (3,092) (3,125) (859) (854) ------- ------- ----- ----- Change in plan assets Fair value of plan assets at beginning of year 2,173 1,916 Actual return on plan assets 194 246 Employer contributions 216 161 90 97 Benefits paid (247) (224) (90) (97) Foreign currency translation 33 66 Business acquisitions 26 Other 8 8 ------- ------- ----- ----- Fair value of plan assets at end of year 2,403 2,173 0 0 ------- ------- ----- ----- Funded status (689) (952) (859) (854) Contributions after measurement date 7 3 5 7 ------- ------- ----- ----- Amount recognized in Consolidated Balance Sheet $ (682) $ (949) $(854) $(847) ======= ======= ===== =====
Amounts recognized in the Consolidated Balance Sheet, follow:
Other Pension postretirement liabilities liabilities -------------- -------------- 2007 2006 2007 2006 ------ ----- ----- ------ Non-current assets $ 10 $ 3 Current liabilities (11) (10) $ (82) $ (81) Non-current liabilities (681) (942) (772) (766) ----- ----- ----- ----- Amount recognized in Consolidated Balance Sheet $(682) $(949) $(854) $(847) ===== ===== ===== =====
Amounts recognized in Accumulated other comprehensive loss, before income tax benefits, follow:
Other Pension postretirement liabilities liabilities ------------- -------------- 2007 2006 2007 2006 ---- ------ ---- ---- Net actuarial loss $764 $1,051 $232 $245 Prior service cost (credit) 3 23 (6) (7) ---- ------ ---- ---- Total before income tax benefits $767 $1,074 $226 $238 ==== ====== ==== ====
Page 39 Changes in pension plan assets and benefit liabilities recognized in Accumulated other comprehensive loss in Shareholders' equity, follow:
After Before income income tax tax credits credits --------------- ------------ 2007 2006 2007 2006 ------ ------ ----- ---- Accumulated other comprehensive loss at beginning of year $1,074 $ 817 $ 707 $536 Change prior to adoption of SFAS No. 158 9 8 Change due to adoption of SFAS No. 158 248 163 Change post adoption of SFAS No. 158 Prior service cost arising during the year (15) (10) Net loss (gain) arising during the year (190) (134) Foreign currency translation 13 9 Less amounts included in costs during the year (115) (76) Other (3) ------ ------ ----- ---- Net change for the year (307) 257 (214) 171 ------ ------ ----- ---- Accumulated other comprehensive loss at end of year $ 767 $1,074 $ 493 $707 ====== ====== ===== ====
Changes in other postretirement benefit liabilities recognized in Accumulated other comprehensive loss in Shareholders' equity, follow:
Before After income income tax credits tax credits ----------- ----------- 2007 2006 2007 2006 ---- ---- ---- ---- Accumulated other comprehensive loss at beginning of year $238 $119 Change prior to adoption of SFAS No. 158 Change due to adoption of SFAS No. 158 $238 $119 Change post adoption of SFAS No. 158 Net loss (gain) arising during the year (3) (2) Foreign currency translation 2 1 Less amounts included in costs during the year (11) (6) Other 2 ---- ---- ---- ---- Net change for the year (12) 238 (5) 119 ---- ---- ---- ---- Accumulated other comprehensive loss at end of year $226 $238 $114 $119 ==== ==== ==== ====
PENSION PLANS The measurement date for all pension obligations is November 30. Effective for fiscal years ending after December 15, 2008, SFAS No. 158 requires year-end measurements of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible. Assumptions used to determine pension benefit obligations and costs follow: Page 40
United States & Non-United States plans United States plans (weighted-average) --------------------- --------------------- 2007 2006 2005 2007 2006 2005 ----- ----- ----- ----- ----- ----- Assumptions used to determine benefit obligation at year-end Discount rate 6.00% 5.60% 5.75% 5.96% 5.39% 5.51% Rate of compensation increase 3.50% 3.50% 3.50% 3.68% 3.67% 3.67% Assumptions used to determine cost Discount rate 5.60% 5.75% 6.00% 5.39% 5.51% 5.81% Expected long-term return on plan assets 8.75% 8.75% 8.75% 8.31% 8.35% 8.41% Rate of compensation increase 3.50% 3.50% 3.50% 3.67% 3.67% 3.60%
The expected long-term rate of return on pension assets was determined separately for each country and reflects long-term historical data, with greater weight given to recent years, and takes into account each plan's target asset allocation. The components of pension benefit cost for continuing operations recorded in the Statements of Consolidated Income follow:
2007 2006 2005 ------ ------ ------ Service cost $(147) $(142) $(117) Interest cost (163) (147) (141) Expected return on plan assets 179 166 166 Amortization (74) (67) (49) ----- ----- ----- (205) (190) (141) Curtailment loss (1) (10) (1) Settlement loss (41) (41) (34) ----- ----- ----- Costs recorded in Statements of Consolidated Income $(247) $(241) $(176) ===== ===== =====
The estimated net loss and prior service cost for the defined benefit pension plans that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2008 are $80 and $1, respectively. The total accumulated benefit obligation for all pension plans at December 31, 2007 was $2,874 and at year-end 2006 was $2,899. The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:
2007 2006 ------ ------ Projected benefit obligation $2,309 $3,101 Accumulated benefit obligation 2,182 2,876 Fair value of plan assets 1,642 2,150
United States pension plans represent 68% and 67% of benefit obligations in 2007 and 2006, respectively. Page 41 The weighted-average pension plan asset allocations by asset category at December 31, 2007 and 2006 are as follows:
2007 2006 ---- ---- Equity securities 80% 80% Debt securities 18% 17% Other 2% 3% --- --- 100% 100% === ===
Investment policies and strategies are developed on a country specific basis. The United States plan represents 67% of worldwide pension assets and its target allocation is 85% diversified equity, 12% United States Treasury Inflation-Protected Securities, and 3% cash equivalents. The United Kingdom plan represents 26% of worldwide pension assets and its target allocation is 70% diversified equity securities and 30% United Kingdom Government Bonds. Contributions to pension plans that Eaton expects to make in 2008, and made in 2007, 2006 and 2005, follow:
2008 2007 2006 2005 ---- ---- ---- ---- Voluntary United States $150 $100 $50 United Kingdom $ 28 30 19 14 Mandatory United States 131 Other 41 40 43 33 ---- ---- ---- --- $200 $220 $162 $97 ==== ==== ==== ===
At December 31, 2007, expected pension benefit payments for each of the next five years and the five years thereafter in the aggregate are, $201 in 2008, $204 in 2009, $214 in 2010, $228 in 2011, $250 in 2012 and $1,443 in 2013-2017. The Company also has various defined-contribution benefit plans, primarily consisting of the Eaton Savings Plan in the United States. Total contributions related to these plans charged to expense were $59 in 2007, $55 in 2006, and $48 in 2005. OTHER POSTRETIREMENT BENEFIT PLANS The measurement date for all other postretirement benefit plan obligations is November 30. Effective for fiscal years ending after December 15, 2008, SFAS No. 158 requires year-end measurements of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible. Assumptions used to determine other postretirement benefit obligations and cost follow:
2007 2006 2005 ---- ---- ----- Assumptions used to determine benefit obligation at year-end Discount rate 6.00% 5.60% 5.75% Health care cost trend rate assumed for next year 8.30% 8.80% 9.60% Ultimate health care cost trend rate 4.75% 4.75% 4.75% Year ultimate health care cost trend rate is achieved 2015 2014 2014 Assumptions used to determine cost Discount rate 5.60% 5.75% 6.00% Initial health care cost trend rate 8.80% 9.60% 10.00% Ultimate health care cost trend rate 4.75% 4.75% 4.75% Year ultimate health care cost trend rate is achieved 2014 2014 2014
Page 42 The components of other postretirement benefits cost for continuing operations recorded in the Statements of Consolidated Income follow:
2007 2006 2005 ---- ---- ---- Service cost $(15) $(17) $(16) Interest cost (47) (45) (48) Amortization (11) (11) (10) ---- ---- ---- (73) (73) (74) Curtailment loss (2) ---- ---- ---- Costs recorded in Statements of Consolidated Income $(73) $(75) $(74) ==== ==== ====
Estimated net loss and prior service cost (credit) for other postretirement benefit plans that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2008 are $11 and $(1), respectively. Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A 1-percentage point change in the assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- Effect on total service and interest cost $ 2 $ (2) Effect on other postretirement liabilities 25 (23)
At December 31, 2007, expected other postretirement benefit payments for each of the next five years and the five years thereafter in the aggregate are $93 in 2008, $92 in 2009, $91 in 2010, $95 in 2011, $93 in 2012 and $426 in 2013-2017. The expected subsidy receipts related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 that are included in the other postretirement benefit payments listed above for each of the next five years and the five years thereafter in the aggregate are, $9 in 2008 and 2009, $10 in 2010, 2011 and 2012 and $52 in 2013-2017. PROTECTION OF THE ENVIRONMENT Eaton has established policies to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. For example, each manufacturing facility has a person responsible for environmental, health and safety (EHS) matters. All of the Company's manufacturing facilities are required to be certified to ISO 14001, an international standard for environmental management systems. The Company routinely reviews EHS performance at each of its facilities and continuously strives to improve pollution prevention at its facilities. As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites. A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be incurred over a period of several years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs when it is probable that a liability has been incurred. The balance sheet included a liability for these costs of $64 at December 31, 2007 and 2006. Page 43 Based upon Eaton's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably likely to exceed the liability by an amount that would have a material adverse effect on its financial position, results of operations or cash flows. All of these estimates are forward-looking statements and, given the inherent uncertainties in evaluating environmental exposures, actual results can differ from these estimates. CONTINGENCIES Eaton is subject to a broad range of claims, administrative proceedings, and legal proceedings, such as lawsuits that relate to contractual allegations, patent infringement, personal injuries (including asbes- tos claims) and employment-related matters. Although it is not pos- sible to predict with certainty the outcome or cost of these matters, the Company believes that these matters will not have a material ad- verse effect on its financial position, results of operations or cash flows. SHAREHOLDERS' EQUITY There are 300 million Common Shares authorized ($.50 par value per share), 146.0 million of which were issued and outstanding at year-end 2007. At December 31, 2007, there were 8,501 holders of record of Common Shares. Additionally, 20,763 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP) and Eaton Electrical de Puerto Rico Inc. Retirement Savings Plan. On January 22, 2007, Eaton announced that it had authorized a new 10 million Common Shares repurchase program, replacing the 1.3 million shares remaining from the 10 million shares repurchase authorization approved in April 2005. The shares are expected to be repurchased over time, depending on market conditions, the market price of the Company's Common Shares, the Company's capital levels and other considerations. The number of Common Shares repurchased in the open market and total cost, follows:
Shares (Shares in millions) repurchased Cost ----------- ----- 2007 4.092 $340 2006 5.286 386 2005 7.015 450
The number of stock options exercised and the resulting cash proceeds follows:
Stock options Cash (Shares in millions) exercised proceeds ------------- -------- 2007 3.713 $141 2006 3.083 108 2005 2.174 68
Eaton has plans that permit certain employees and directors to defer a portion of their compensation. The Company has deposited $26 of Common Shares and marketable securities into a trust at December 31, 2007 to fund a portion of these liabilities. The marketable securities were included in Other assets and the Common Shares were included in Shareholders' equity at historical cost. Page 44 STOCK OPTIONS Under various plans, stock options have been granted to certain employees and directors to purchase Common Shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. During 1998, stock options were granted that have a provision for accelerated vesting if the Company achieves certain earnings per Common Share targets or certain Common Share market price targets. One-half of these options vest based on the achievement of earnings per share targets and the other half vest based on the achievement of Common Share market price targets. If the targets are not achieved, these options vest 10 days before the expiration of their 10-year term. Subsequent to the issuance of these options, the Common Share price target was achieved and the related options vested. As of December 31, 2007, 0.4 million stock options with accelerated vesting provisions associated with earnings per share targets were outstanding and had not vested, because the earnings per share targets had not been achieved. These options were exercised during the second and third weeks of January 2008. Effective January 1, 2006, in accordance with SFAS No. 123(R), "Share-Based Payment", Eaton began to record compensation expense under the "fair-value-based" method of accounting for stock options granted to employees and directors. In 2007 and 2006 expense for stock options was $30 and $27 pretax, respectively, ($21 and $20 after-tax, respectively, or $.14 and $.13 per Common Share both assuming dilution and basic, respectively). Additionally, the adoption of SFAS No. 123(R) reduced cash provided by operating activities by $42 in 2007 and $28 in 2006, and increased cash provided by financing activities by the same amounts, because the new Statement requires, for the first time, certain income tax benefits resulting from exercises of stock options to be included in cash provided by financing activities. The Company adopted SFAS No. 123(R) using the "modified prospective application" method and, consequently, financial results for periods prior to 2006 were not restated for this accounting change. Under the modified prospective method, compensation expense for stock options includes expense for all options granted prior to but not yet vested as of the end of 2005, and expense for options granted beginning in 2006, based on the grant date fair value of the options. Expense is recognized on a straight-line basis over the period the employee or director is required to provide service in exchange for the award. Prior to 2006, as allowed by SFAS No. 123, "Accounting for Stock-Based Compensation", stock options were accounted for using the intrinsic-value-based method in Accounting Principles Board (APB) Opinion No. 25. Under that method, no compensation expense was recognized on the grant date, since on that date the option exercise price equaled the market price of the underlying Common Shares. The fair value of stock options granted was estimated using the Black-Scholes option pricing model. A summary of the assumptions used in determining the fair value of options follows:
2007 2006 2005 ------------ ------------ ------------ Expected volatility 22% 25% 27% Expected option life in years 5 5 5 Expected dividend yield 2.0% 2.0% 2.0% Risk-free interest rate 4.0% to 4.9% 4.3% to 5.0% 3.7% to 4.4%
Application of the Black-Scholes option pricing model involves assumptions that are judgmental and affect compensation expense. Historical information was the primary basis for the selection of expected volatility, expected option life, and expected dividend yield. Expected volatility was based on the most recent historical period equal to the expected life of the option. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term equal to the expected life of the option, on the date the stock options were granted. The weighted-average fair value of stock options granted per option was $17.79 in 2007, $16.80 in 2006, and $16.73 in 2005. The total fair value of stock options vesting was $31 in 2007, $29 in 2006 and $24 in 2005. As of December 31, 2007, the total compensation expense not yet recognized related to nonvested stock options was $41, and the weighted-average period in which the expense is expected to be recognized is 1.5 years. Page 45 A summary of stock option activity for 2007 follows (shares in millions):
Weighted- Weighted- average average remaining Aggregate price per contractual intrinsic option Options life in years value --------- ------- ------------- --------- Outstanding January 1 $48.01 13.0 Granted 80.86 2.1 Exercised 38.89 (3.7) Canceled 71.94 (.2) ---- Outstanding December 31 $56.83 11.2 6.0 $448 ==== Exercisable December 31 $48.00 6.9 4.9 $338 Reserved for future grants December 31 3.3
The aggregate intrinsic value in the table above represents the total pretax difference between the $96.95 closing price of Eaton Common Shares on the last trading day of 2007 over the exercise price of the stock option, multiplied by the number of options outstanding and exercisable. Under SFAS No. 123(R), the aggregate intrinsic value is not recorded for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's Common Shares. Information related to stock options exercised follows:
2007 2006 2005 ---- ---- ---- Proceeds from stock options exercised $141 $108 $68 Income tax benefits related to stock options exercised Reported in operating activities in statement of cash flows 11 8 21 Reported in financing activities in statement of cash flows 42 28 Intrinsic value of stock options exercised 163 102 74
Prior to 2006, Eaton applied the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". If the Company had 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:
2005 ----- Net income As reported $ 805 Stock-based compensation expense, net of income taxes (18) ----- Assuming fair-value-based method $ 787 ===== Net income per Common Share assuming dilution As reported $5.23 Stock-based compensation expense, net of income taxes (.12) ----- Assuming fair-value-based method $5.11 ===== Net income per Common Share basic As reported $5.36 Stock-based compensation expense, net of income taxes (.12) ----- Assuming fair-value-based method $5.24 =====
Page 46 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The components of Accumulated other comprehensive income (loss) as reported in the Consolidated Balance Sheet follow:
2007 2006 ----- ------ Foreign currency translation and related hedging instruments (net of income tax benefits of $8 in 2007 and $22 in 2006) $ 190 $ (22) Deferred (loss) gain on cash flow hedges (net of income tax benefits of $4 in 2007 and $1 in 2006) (6) (1) Pensions (net of income tax benefits of $266 in 2007 and $367 in 2006) (493) (707) Other postretirement benefits (net of income tax benefits of $111 in 2007 and $119 in 2006) (114) (119) ----- ------ $(423) $(849) ===== ======
A discussion of the adjustments related to pensions and other postretirement benefit liabilities is included in the "Retirement Benefit Plans" Note above. INCOME TAXES For financial statement reporting purposes, income from continuing operations before income taxes is summarized below based on the geographic location of the operation to which such earnings are attributable. Certain foreign operations are branches of Eaton and are, therefore, subject to United States as well as foreign income tax regulations. As a result, pretax income by location and the components of income tax expense by taxing jurisdiction are not directly related. For purposes of this note to the consolidated financial statements, non-United States operations include Puerto Rico.
Income from continuing operations before income taxes ------------------------------ 2007 2006 2005 ------ ---- ---- United States $ 52 $150 $198 Non-United States 989 819 766 ------ ---- ---- $1,041 $969 $964 ====== ==== ====
Income tax expense for continuing operations ------------------------------ 2007 2006 2005 ----- ---- ------ Current United States Federal $ 7 $13 $ 68 State & local 9 (9) 3 Non-United States 140 9 134 ----- --- --- 156 13 205 ----- --- --- Deferred United States Federal (15) 25 (9) State & local (20) 24 Non-United States (39) 10 (15) ----- --- ---- (74) 59 (24) ----- --- ---- $ 82 $72 $181 ===== === ====
Page 47 Reconciliations of income taxes from the United States Federal statutory rate to the effective income tax rate for continuing operations follow:
2007 2006 2005 ----- ----- ----- Income taxes at the United States statutory rate 35.0% 35.0% 35.0% United States state & local income taxes 0.2% 1.6% 0.5% Other United States-net (1.5%) (1.0%) (3.8%) Non-United States operations (earnings taxed at other than United States tax rate) (20.3%) (18.9%) (12.8%) Adjustment of worldwide tax liabilities (5.5%) (9.3%) ----- ----- ----- 7.9% 7.4% 18.9% ===== ===== =====
In 2007 and 2006, Eaton recorded income tax benefits of $57 and $90, respectively, which represented an adjustment of worldwide tax liabilities. The 2007 income tax benefits reduced the effective income tax rate for full year 2007 from 13.4% to 7.9%. The 2007 income tax benefits resulted from multiple income tax items. Included in the tax benefits were a $14 benefit from changes to state tax laws and a favorable revaluation of worldwide deferred tax assets. The income tax benefits for 2006 reduced the effective income tax rate for full year 2006 from 16.7% to 7.4%. Significant components of current and long-term deferred income taxes follow:
2007 2006 ------------------- ------------------- Current Long-term Current Long-term assets assets assets assets ------- --------- ------- --------- Accruals & other adjustments Employee benefits $ 85 $ 588 $ 74 $ 725 Depreciation & amortization (461) (329) Other accruals & adjustments 224 100 213 55 Other items (9) 1 United States Federal income tax credit carryforwards 75 51 United States state & local tax loss carryforwards and tax credit carryforwards 96 92 Non-United States tax loss carryforwards 82 96 Non-United States income tax credit carryforwards 55 Valuation allowance (18) (251) (20) (201) ----- ----- ----- ----- $ 291 $ 275 $ 267 $ 490 ===== ===== ===== =====
At the end of 2007, United States Federal income tax credit carryforwards of $75 were available to reduce future Federal income tax liabilities. These credits include $22 that expire in 2025 through 2027, and $53 of which are not subject to expiration. A valuation allowance of $4 has been recorded for these income tax credit carryforwards. United States state and local tax loss carryforwards with a future tax benefit of $56 are also available at the end of 2007. Their expiration dates are $8 in 2008 through 2012, $10 in 2013 through 2017, $25 in 2018 through 2022, and $13 in 2023 through 2027. A full valuation allowance has been recorded for these state and local tax loss carryforwards. There are also United States state and local tax credit carryforwards with a future tax benefit of $40 available at the end of 2007. Their expiration dates are $9 in 2008 through 2012, $15 in 2013 through 2017, $9 in 2018 through 2022, and $7 in 2023 through 2027. A valuation allowance of $35 has been recorded for these state and local tax credit carryforwards. A valuation allowance of $41 has also been recorded for certain other state and local deferred income tax assets. Page 48 At December 31, 2007, certain non-United States subsidiaries had tax loss carryforwards aggregating $322 that are available to offset future taxable income. Carryforwards of $193 expire at various dates from 2008 through 2022 and the balance has no expiration date. A deferred tax asset of $82 has been recorded for these tax loss carryforwards and a valuation allowance of $79 has also been recorded for these tax loss carryforwards. Any future recognition of tax benefits related to $22 of this tax loss carryforward valuation allowance will first be allocated to reduce goodwill. Tax credits at non-United States subsidiaries of $55 were available to reduce future income tax liabilities. These credits include $49 that will expire in 2016 and $6 that are not subject to limitation. A valuation allowance of $54 has been recorded for these income tax credits. No provision has been made for income taxes on undistributed earnings of consolidated non-United States subsidiaries of $3,655 at December 31, 2007, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the additional income taxes and applicable foreign withholding taxes that would be payable on the remittance of such undistributed earnings. Worldwide income tax payments were $141 in 2007, $129 in 2006 and $171 in 2005. UNRECOGNIZED INCOME TAX BENEFITS Effective January 1, 2007, Eaton adopted FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109". FIN No. 48 clarifies the accounting for uncertainty in income taxes by establishing minimum standards for the recognition and measurement of income tax positions taken, or expected to be taken, in an income tax return. FIN No. 48 also changes the disclosure standards for income taxes. Eaton's historical policy has been to enter into tax planning strategies only if it is more likely than not that the benefit would be sustained upon audit. For example, the Company does not enter into any of the Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4. The net income tax assets recognized under FIN No. 48 at January 1, 2007 did not differ from the net assets recognized before adoption, and, therefore, the Company did not record a cumulative-effect adjustment related to the adoption of FIN No. 48. A summary of gross unrecognized income tax benefits follows: Unrecognized income tax benefits at January 1, 2007 $ 93 Increases and decreases as a result of positions taken during prior years: Transfers from valuation allowances 10 Other increases 4 Other decreases (26) Increases as a result of positions taken during the current year 33 Decreases relating to settlements with tax authorities (18) ---- Unrecognized income tax benefits at December 31, 2007 $ 96 ====
If all of the gross unrecognized tax benefits were recorded, the net impact on the effective income tax rate would be $78. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The Company has accrued penalties in jurisdictions where they are automatically applied to any deficiency, regardless of the merit of the position. As of the adoption of FIN No. 48, the Company had accrued approximately $23 for the payment of interest and penalties. As of December 31, 2007, the Company had accrued approximately $20 for the payment of interest and penalties. The resolution of the majority of the Company's unrecognized income tax benefits is dependent on uncontrollable factors such as law changes; new case law; the willingness of the income tax authority to settle the issue, including the timing thereof; and other factors. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change. Page 49 The Company or its subsidiaries file income tax returns in the United States and foreign jurisdictions. The U.S. Internal Revenue Service (IRS) completed their audit of tax years 2003 and 2004 during third quarter 2007, and is currently in the process of conducting an examination of the Company's U.S. income tax returns for 2005 and 2006. With only a few exceptions, the Company is no longer subject to state and local income tax examinations for years before 2004, or foreign examinations for years before 2002. The Company is also under examination for the income tax filings in various state and foreign jurisdictions. The Company does not anticipate any adjustments that would result in a material change in financial position. OTHER INFORMATION ACCOUNTS RECEIVABLE Accounts receivable were net of an allowance for doubtful accounts of $23 at December 31, 2007 and 2006. INVENTORIES The components of inventories follow:
2007 2006 ------ ------ Raw materials $ 674 $ 570 Work-in-process 384 321 Finished goods 533 504 ------ ------ Inventories at FIFO 1,591 1,395 Excess of FIFO over LIFO cost (108) (102) ------ ------ $1,483 $1,293 ====== ======
Inventories at FIFO accounted for using the LIFO method were 42% and 52% at the end of 2007 and 2006, respectively. WARRANTY LIABILITIES A summary of the current and long-term liabilities for warranties follows:
2007 2006 2005 ----- ---- ---- Balance at the beginning of the year $176 $157 $152 Current year provision 57 91 93 Business acquisitions 7 1 3 Claims paid/satisfied (73) (83) (87) Other 10 (4) ---- ---- ---- Balance at the end of the year $167 $176 $157 ==== ==== ====
LEASE COMMITMENTS Eaton leases certain real properties and equipment. Minimum rental commitments at December 31 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the next five years and thereafter in the aggregate were, $102 in 2008, $77 in 2009, $55 in 2010, $38 in 2011, $26 in 2012 and $34 thereafter. Rental expense of continuing operations was $133 in 2007, $123 in 2006, and $115 in 2005. Page 50 NET INCOME PER COMMON SHARE A summary of the calculation of net income per Common Share assuming dilution and basic follows (shares in millions):
2007 2006 2005 ------ ------ ------ Income from continuing operations $ 959 $ 897 $ 783 Income from discontinued operations 35 53 22 ------ ------ ------ Net income $ 994 $ 950 $ 805 ====== ====== ====== Average number of Common Shares outstanding assuming dilution 150.3 152.9 154.0 Less dilutive effect of stock options 3.0 2.7 3.8 ------ ------ ------ Average number of Common Shares outstanding basic 147.3 150.2 150.2 ====== ====== ====== Net income per Common Share assuming dilution Continuing operations $ 6.38 $ 5.87 $ 5.08 Discontinued operations .24 .35 .15 ------ ------ ------ $ 6.62 $ 6.22 $ 5.23 ====== ====== ====== Net income per Common Share basic Continuing operations $ 6.51 $ 5.97 $ 5.21 Discontinued operations .24 .35 .15 ------ ------ ------ $ 6.75 $ 6.32 $ 5.36 ====== ====== ======
BUSINESS SEGMENT & GEOGRAPHIC REGION INFORMATION Eaton is a diversified industrial manufacturer with 2007 sales of $13.0 billion. The Company is a global leader in the design, manufacture, marketing and servicing of electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. The Company had 64,000 employees at the end of 2007 and had sales to customers in more than 150 countries. Major products included in each business segment and other information follows. ELECTRICAL Low- and medium-voltage power distribution and control products that meet ANSI/NEMA and IEC standards; a wide range of circuit breakers, and a variety of assemblies and components used in managing distribution of electricity to industrial, utility, light commercial, residential and OEM markets; drives, contactors, starters, power factor and harmonic correction; a wide range of sensors used for position sensing; a full range of operator interface hardware and software for interfacing with machines, and other motor control products used in the control and protection of electrical power distribution systems; a full range of AC and DC uninterruptible power supply (UPS) systems; power management software, remote monitoring, turnkey integration services and site support engineering services for electrical power and control systems Page 51 FLUID POWER Hydraulic power generation systems for industrial, mobile, automotive, and aerospace applications, including pumps, motors, hydraulic power units, hose and fittings, transaxles, transmissions, electro-hydraulic pumps, power and load management systems; a wide range of controls and sensing products including, valves, cylinders, electronic controls, cockpit controls, electromechanical actuators, sensors, illuminated and integrated displays and panels, health and unit monitoring systems (HUMS), aircraft flap and slat systems, and nose wheel steering systems; a full range of fluid conveyance products, including hose, thermoplastic tubing, fittings, adapters, couplings, sealing, and ducting for large commercial aircraft and regional jets; aerospace fuel systems, including fuel pumps, sensors, valves, adapters, and regulators used in high technology commercial and military aircraft; filtration systems solutions including filter bags, canisters, and vessels with a focus on oil & gas, fine chemicals, and food and beverage applications; heavy-duty drum and disc brakes, clutches and controllers for offshore oil and gas exploration, mining and metal forming markets; and golf grips, and precision molded and extruded plastic products TRUCK Heavy-, medium-, light-duty and agricultural mechanical transmissions; heavy- and medium-duty automated transmissions; heavy- and medium-duty clutches; a variety of other products including gears and shafts, transfer boxes, gearshift mechanisms, rotors; electronic diagnostic equipment for commercial vehicles; collision warning systems; and diesel-electric hybrid power systems for commercial vehicles and buses AUTOMOTIVE Engine valves; valve actuation components, engine displacement control components, advanced valvetrain and fuel management systems to enhance fuel economy and emissions; cylinder heads; superchargers and superturbo charging; advanced air and hydrogen management devices for fuel cells; limited slip and locking differentials, electronically controlled traction modification devices, and off road performance and racing differentials; precision gear forgings; compressor control clutches for mobile refrigeration; transmission controls; on-board vapor recovery systems; fuel level senders; exhaust gas recirculation valves for heavy-duty engines; turbocharger waste gate controls; and intake manifold control valves OTHER INFORMATION The principal markets for the Electrical segment are industrial, non-residential and residential construction, commercial, government, institutional, and telecommunications customers. These customers are generally concentrated in North America, Europe and Asia/Pacific; however, sales are made globally. Sales are made directly by Eaton and indirectly through distributors and manufacturers representatives to such customers. The principal markets for the Fluid Power segment are original equipment manufacturers and after-market customers of off-highway, aircraft and industrial equipment. These manufacturers are located globally and products are sold and serviced through a variety of channels. The principal markets for the Truck and Automotive segments are original equipment manufacturers and after-market customers of heavy-, medium-, and light-duty trucks and passenger cars. These manufacturers are located globally and most sales of these products are made directly to such manufacturers. No single customer represented more than 10% of net sales in 2007, 2006 or 2005. Sales from United States operations to customers in foreign countries were $986 in 2007, $988 in 2006 and $938 in 2005 (8% of sales in 2007, 2006 and 2005). The accounting policies of the business segments are generally the same as the policies described under "Accounting Policies" above, except that inventories and related cost of products sold of the segments are accounted for using the FIFO method and operating profit only reflects the service cost component related to pensions and other postretirement benefits. Intersegment sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties. Page 52 In accordance with SFAS No. 131, for purposes of business segment performance measurement, the Company does not allocate to the business segments items that are of a non-operating nature or corporate organizational and functional expenses of a governance nature. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs. Identifiable assets of the business segments exclude goodwill, other intangible assets, and general corporate assets, which principally consist of cash, short-term investments, deferred income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets. GEOGRAPHIC REGION INFORMATION Net sales and segment operating profit are measured based on the geographic location of the selling plant. Long-lived assets consist of property, plant and equipment-net.
Segment operating Long-lived Net sales profit assets --------- --------- ---------- 2007 United States $ 8,556 $1,177 $1,161 Canada 371 54 20 Europe 2,624 166 592 Latin America 1,246 150 345 Asia/Pacific 1,144 121 215 Eliminations (908) ------- ------ $13,033 $2,333 ======= ====== 2006 United States $ 8,530 $1,146 $1,188 Canada 337 44 16 Europe 2,313 65 579 Latin America 1,090 120 318 Asia/Pacific 888 93 170 Eliminations (926) ------- ------ $12,232 $2,271 ======= ====== 2005 United States $ 7,645 $1,015 $1,191 Canada 315 48 16 Europe 1,964 95 533 Latin America 1,036 136 298 Asia/Pacific 786 80 137 Eliminations (872) ------- ------ $10,874 $2,175 ======= ======
Business segment operating profit was reduced by acquisition integration charges, as follows:
2007 2006 2005 ---- ---- ---- United States $27 $23 $17 Europe 20 7 7 Latin America 12 6 4 Asia/Pacific 5 4 8 --- --- --- $64 $40 $36 === === ===
Page 53 BUSINESS SEGMENT INFORMATION
2007 2006 2005 ------- ------- ------- Net sales Electrical $ 4,759 $ 4,184 $ 3,758 Fluid Power 4,480 3,983 3,240 Truck 2,147 2,520 2,288 Automotive 1,647 1,545 1,588 ------- ------- ------- $13,033 $12,232 $10,874 ======= ======= ======= Operating profit Electrical $ 579 $ 474 $ 375 Fluid Power 518 422 339 Truck 357 448 453 Automotive 214 124 207 Corporate Amortization of intangible assets (79) (51) (30) Interest expense-net (147) (105) (90) Minority interest (14) (10) (5) Pension & other postretirement benefit expense (164) (152) (120) Stock option expense (30) (27) Contribution to Eaton Charitable Fund (16) Other corporate expense-net (177) (154) (165) ------- ------- ------- Income from continuing operations before income taxes 1,041 969 964 Income taxes 82 72 181 ------- ------- ------- Income from continuing operations 959 897 783 Income from discontinued operations 35 53 22 ------- ------- ------- Net income $ 994 $ 950 $ 805 ======= ======= ======= Business segment operating profit was reduced by acquisition integration charges, as follows: Electrical $ 12 $ 7 $ 21 Fluid Power 51 23 7 Truck 5 4 Automotive 1 5 4 ------- ------- ------- $ 64 $ 40 $ 36 ======= ======= =======
Page 54 BUSINESS SEGMENT INFORMATION
2007 2006 2005 ------- ------- ------- Identifiable assets Electrical $ 1,960 $ 1,669 $ 1,454 Fluid Power 2,279 2,007 1,787 Truck 996 1,015 1,064 Automotive 910 890 960 ------- ------- ------- 6,145 5,581 5,265 Goodwill 3,982 3,034 3,139 Other intangible assets 1,557 969 626 Corporate 1,746 1,833 1,188 ------- ------- ------- Total assets $13,430 $11,417 $10,218 ======= ======= ======= Expenditures for property, plant & equipment Electrical $ 82 $ 74 $ 59 Fluid Power 105 121 76 Truck 62 66 99 Automotive 69 79 108 ------- ------- ------- 318 340 342 Corporate 36 20 21 ------- ------- ------- $ 354 $ 360 $ 363 ======= ======= ======= Depreciation of property, plant & equipment Electrical $ 79 $ 79 $ 84 Fluid Power 107 105 94 Truck 84 77 70 Automotive 75 69 76 ------- ------- ------- 345 330 324 Corporate 23 22 19 ------- ------- ------- $ 368 $ 352 $ 343 ======= ======= =======
Page 55 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & 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 with 2007 sales of $13.0 billion. The Company is a global leader in the design, manufacture, marketing and servicing of electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. The principal markets for the Electrical segment are industrial, non-residential and residential construction, commercial, government, institutional, and telecommunications customers. These customers are generally concentrated in North America, Europe and Asia/Pacific; however, sales are made globally, directly by Eaton and indirectly through distributors and manufacturers representatives to such customers. The principal markets for the Fluid Power segment are original equipment manufacturers and after-market customers of off-highway, aircraft and industrial equipment. These manufacturers are located globally and products are sold and serviced through a variety of channels. The principal markets for the Truck and Automotive segments are original equipment manufacturers and after-market customers of heavy-, medium-, and light-duty trucks and passenger cars. These manufacturers are located globally and most sales of these products are made directly to such manufacturers. The Company had 64,000 employees at the end of 2007 and sells products to customers in more than 150 countries. HIGHLIGHTS OF RESULTS FOR 2007 Eaton reported improved earnings per share in 2007 despite a sharp decline in the North American commercial truck market, and was successful in further expanding the proportion of its sales outside the United States. During 2007, the Company posted new records for sales, net income and earnings per Common Share. Sales, operating profit and operating margin for the Electrical and Fluid Power business segments improved in 2007 compared to 2006, setting new records. Sales and operating profit of the Automotive segment were also new records and operating margin was a near record. Sales of the Truck segment in 2007 were lower than 2006 due to a 44% decline in the North American heavy-duty truck market and a 28% decline in the North American medium-duty truck market. The following are highlights of 2007:
2007 2006 Increase ------- ------- -------- Continuing operations Net sales $13,033 $12,232 7% Gross profit 3,651 3,283 11% Percent of net sales 28.0% 26.8% Income before income taxes 1,041 969 7% Income after income taxes $ 959 $ 897 7% Income from discontinued operations 35 53 ------- ------- Net income $ 994 $ 950 5% ======= ======= Net income per Common Share assuming dilution Continuing operations $ 6.38 $ 5.87 9% Discontinued operations .24 .35 ------- ------- $ 6.62 $ 6.22 6% ======= ======= Return on Shareholders' equity 22.2% 23.0%
Page 56 Net sales in 2007 were a new record for Eaton, surpassing the record set in 2006. Sales growth of 7% in 2007 over 2006 consisted of 3% from acquisitions of businesses, 3% from foreign exchange, and 1% from organic growth. Organic growth included 2% from outgrowing end markets, offset by a 1 1/2% decline in end markets, principally due to the anticipated sharp reduction in North American commercial truck production. Gross profit increased 11% in 2007 compared to 2006 and improved to 28.0% of net sales, up from 26.8% of net sales in 2006. These increases were primarily due to sales growth of 7%; benefits from the Excel 07 program; benefits of integrating acquired businesses; continued productivity improvements driven by the Eaton Business System (EBS); and net pretax costs in 2006 related to the Excel 07 program. The Excel 07 program was a series of actions taken in 2006 intended to address resource levels and operating performance in businesses that underperformed in 2005 and businesses that were expected to weaken during second half 2006 and 2007. The improvements in gross profit in 2007 were partially offset by higher prices paid for certain raw materials, supplies and basic metals and higher acquisition integration charges in 2007 compared to 2006. Overall business segment operating margin in 2007 was a record 12.8%, with the Electrical and Fluid Power businesses representing over 65% of overall segment operating profit. Net income and net income per Common Share assuming dilution for 2007 were new records for the Company, increasing 5% and 6%, respectively, compared to 2006. The improvements in 2007 were primarily due to higher sales and the other factors that affected gross profit as discussed above, partially offset by increases in selling, administrative, and research and development expenses; higher interest expense; a contribution to the Eaton Charitable Fund; and a lower after-tax gain on the sale of certain businesses of the Automotive segment in 2007 compared to a similar gain in 2006, which were reported as Discontinued operations in the Statements of Consolidated Income. Earnings per share in 2007 also benefited from a lower number of shares outstanding due to the repurchase of Common Shares in 2007 and 2006 exceeding shares issued from exercises of stock options. Return on Shareholders' equity was 22.2%. In 2007, Eaton acquired nine businesses in separate transactions for a combined net cash purchase price of $1,433. The majority of the acquisition spending has been in two of the Company's highest priority markets, aerospace and electrical power quality. The Statements of Consolidated Income include the results of these businesses from the effective dates of acquisition. These acquisitions are summarized below: - - On November 8, 2007, Eaton acquired Arrow Hose & Tubing Inc., a Canada-based manufacturer of specialty thermoplastic hose and tubing for the industrial, food and beverage, and agricultural markets. This business had sales of $12 in 2006 and is included in the Fluid Power segment. - - On October 31, 2007, the Company acquired the MGE small systems UPS business from Schneider Electric. This business is a France-based global provider of power quality solutions including uninterruptible power supply (UPS) systems, power distribution units, static transfer switches and surge suppressors, and had sales of $245 for the year ended September 30, 2007. This business is included in the Electrical segment. - - On October 19, 2007, Eaton acquired the assets of Babco Electric Group, an Alberta, Canada-based manufacturer of specialty low- and medium-voltage switchgear and electrical housings for use in the Canadian oil and gas industry and other harsh environments. This business had sales of $11 in the year ended April 30, 2007 and will be included in the Electrical segment. - - On June 19, 2007, Eaton acquired Pulizzi Engineering, a U.S. manufacturer of AC power distribution, AC power sequencing, redundant power and remote-reboot power management systems. This business had sales of $12 in 2006 and is included in the Electrical segment. - - On May 18, 2007, the Company acquired technology and related assets of SMC Electrical Products, Inc.'s industrial medium-voltage adjustable frequency drive business. This business is included in the Electrical segment. Page 57 - - On May 2, 2007, Eaton acquired the fuel components division of Saturn Electronics & Engineering, Inc., a U.S. designer and manufacturer of fuel containment and shutoff valves, emissions control valves and specialty actuators. This business had sales of $28 in 2006 and is included in the Automotive segment. - - On April 5, 2007, Eaton acquired Aphel Technologies Limited, a U.K.-based global supplier of high density, fault-tolerant power distribution solutions for datacenters, technical offices, laboratories and retail environments. This business had sales of $12 in 2006 and is included in the Electrical segment. - - On March 16, 2007, Eaton acquired Argo-Tech Corporation, a U.S.-based aerospace business, which had sales of $206 in 2006. Argo-Tech is a leader in high performance aerospace engine fuel pumps and systems, airframe fuel pumps and systems, and ground fueling systems for commercial and military aerospace markets. This business is included in the Fluid Power segment. - - On February 7, 2007, the Company acquired the Power Protection Business of Power Products Ltd., a Czech Republic distributor and service provider of Powerware(R) products and other uninterruptible power supply (UPS) systems. This business had sales of $3 in 2006 and is included in the Electrical segment. On December 20, 2007, Eaton announced it had reached an agreement to purchase The Moeller Group, a Germany-based business, for EURO 1.55 billion (U.S. $2.3 billion). This transaction is expected to close at the beginning of the second quarter of 2008. This business, which had sales of EURO 1.02 billion (U.S. $1.5 billion) for 2007, is a leading supplier of electrical components for commercial and residential building applications, and controls for industrial equipment applications. The business will be integrated into the Electrical segment. On December 20, 2007, Eaton announced a tender offer for all shares of Phoenixtec Power Company Ltd., a company listed on the Taiwan Stock Exchange. The tender offer closed on February 22, 2008, with 91% of Phoenixtec's shares having been tendered into the offer. Eaton acquired the tendered shares on February 26, 2008 and intends to take further steps to acquire all remaining shares. Once that has been accomplished, the Company will have paid a total purchase price, net of estimated cash and debt acquired, of $568 for Phoenixtec. This business, with sales of approximately $515 in 2007, manufactures single and three-phase uninterruptible power supply (UPS) systems. The business will be integrated into the Electrical segment. In order to initially finance the acquisitions of The Moeller Group and Phoenixtec, on January 25, 2008, Eaton entered into a revolving credit agreement, in the amount of $3.0 billion, which may be used either to fund direct loans or to backstop commercial paper borrowings. The proceeds must be used to finance certain acquisitions including, but not limited to, the acquisition of The Moeller Group and Phoenixtec. All amounts borrowed under the credit agreement, including commercial paper backstopped by this agreement, must be repaid by January 23, 2009, but may be repaid earlier at the Company's option or may be required to be repaid earlier in the event of a default. The commitment amount of the revolving credit agreement will be reduced by the net amount of any proceeds raised through certain future capital market transactions which may include, but are not limited to, debt or equity issuances. The credit agreement also includes covenants customary for transactions of this type with borrowers having capital structures similar to Eaton. In the third quarter of 2007, Eaton sold the Mirror Controls Division of the Automotive segment for $111, resulting in a $20 after-tax gain, or $.12 per Common Share. In the third quarter of 2006, certain other businesses of the Automotive segment were sold for $64, resulting in a $35 after-tax gain, or $.23 per share. The gains on sale of the Mirror Controls Division and the businesses sold in 2006, and other results of these businesses, are reported as Discontinued operations in the Statement of Consolidated Income. Page 58 Net cash provided by operating activities was $1,161 in 2007 compared to $1,431 in 2006. The decrease was primarily due to a net increase of $224 in working capital funding, and an increase of $61 in voluntary contributions made to the qualified pension plans in the United States and the United Kingdom, partially offset by higher net income of $44 and other adjustments. Cash and short-term investments totaled $646 at year-end 2007, down $139 from $785 at year-end 2006, reflecting the use of these assets to partially fund operating, investing and financing activities. Total debt of $3,417 at the end of 2007 increased $831 from $2,586 at year-end 2006. Changes in debt during 2007 included the issuance of $781 of long-term notes, and commercial paper and other borrowings of $933, partially offset by the repayment of $979 of notes, commercial paper and other debt. The increase in total debt during 2007 largely resulted from funding acquisitions of businesses in 2007 of $1,433; capital expenditures of $354; the repurchase of 4.1 million Common Shares for $340 and cash dividends paid of $251; partially offset by net cash provided by operating activities of $1,161 and other items. The net-debt-to-capital ratio was 34.9% at the end of 2007 compared to 30.5% at year-end 2006, reflecting the combined effect of the $831 increase in total debt in 2007, and the $139 decline in cash and short-term investments in 2007. Net working capital of $1,108 at the end of 2007 decreased by $10 from $1,118 at year-end 2006. The decrease was largely due to the $139 decrease in cash and short-term investments, which reflected the use of these assets to partially fund operating, investing and financing activities; an increase of $335 in short-term debt due to higher commercial paper borrowings to fund operations; and a net decrease of $168 in other working capital items. These decreases were partially offset by the $280 increase in accounts receivable, resulting from increased sales and the acquisitions of Argo-Tech and the MGE small systems UPS business; the $190 increase in inventories to support higher levels of sales and from these acquisitions; and the decrease of $162 in current portion of long-term debt due to the repayment of notes that matured. The current ratio was 1.3 at year-end 2007 and 2006. On January 22, 2007, Eaton announced it had authorized a 10 million Common Shares repurchase program, replacing the 1.3 million shares remaining from the 10 million shares repurchase authorization approved in April 2005. The shares are expected to be repurchased over time, depending on market conditions, the market price of the Company's Common Shares, the Company's capital levels and other considerations. Under the share repurchase program, 4.1 million shares were repurchased in the open market in 2007 at a total cost of $340. In light of its strong results and future prospects, on January 22, 2008 Eaton announced that it was increasing the quarterly dividend on its Common Shares by 16%, from $.43 per share to $.50 per share, effective for the February 2008 dividend. This is the fourth dividend increase within the last three years, reflecting Eaton's philosophy of growing its dividend in line with its long-term growth in earnings. RESULTS OF OPERATIONS - 2007 COMPARED TO 2006
2007 2006 Increase ------- ------- -------- Continuing operations Net sales $13,033 $12,232 7% Gross profit 3,651 3,283 11% Percent of net sales 28.0% 26.8% Income before income taxes 1,041 969 7% Income after income taxes $ 959 $ 897 7% Income from discontinued operations 35 53 ------- ------- Net income $ 994 $ 950 5% ======= ======= Net income per Common Share assuming dilution Continuing operations $ 6.38 $ 5.87 9% Discontinued operations .24 .35 ------- ------- $ 6.62 $ 6.22 6% ======= ======= Return on Shareholders' equity 22.2% 23.0%
Page 59 Net sales in 2007 were a new record for Eaton, surpassing the record set in 2006. Sales growth of 7% in 2007 over 2006 consisted of 3% from acquisitions of businesses, 3% from foreign exchange, and 1% from organic growth. Organic growth included 2% from outgrowing end markets, offset by a 1 1/2% decline in end markets, principally due to the anticipated sharp reduction in North American commercial truck production. Gross profit increased 11% in 2007 compared to 2006 and improved to 28.0% of net sales, up from 26.8% of net sales in 2006. These increases were primarily due to sales growth of 7%; benefits from the Excel 07 program; benefits of integrating acquired businesses; continued productivity improvements driven by the Eaton Business System (EBS); and net pretax costs of $154 in 2006 related to the Excel 07 program. The Excel 07 program was a series of actions taken in 2006 intended to address resource levels and operating performance in businesses that underperformed in 2005 and businesses that were expected to weaken during second half 2006 and 2007. The improvements in gross profit in 2007 were partially offset by higher prices paid for certain raw materials, supplies and basic metals; and higher acquisition integration charges of $64 in 2007 compared to $40 in 2006. Overall business segment operating margin in 2007 was a record 12.8%, with the Electrical and Fluid Power businesses representing over 65% of overall segment operating profit. RESULTS BY GEOGRAPHIC REGION Net sales and segment operating profit are measured based on the geographic location of the selling plant.
Operating Net sales Segment operating profit margin ---------------------------- -------------------------- ----------- 2007 2006 Increase 2007 2006 Increase 2007 2006 ------- ------- -------- ------ ------ -------- ---- ---- United States $ 8,556 $ 8,530 -- $1,177 $1,146 3% 13.8% 13.4% Canada 371 337 10% 54 44 23% 14.6% 13.1% Europe 2,624 2,313 13% 166 65 155% 6.3% 2.8% Latin America 1,246 1,090 14% 150 120 25% 12.0% 11.0% Asia/Pacific 1,144 888 29% 121 93 30% 10.6% 10.5% Eliminations (908) (926) ------- ------- $13,033 $12,232 7% ======= =======
In the United States, sales in 2007 were flat compared to 2006, while operating profit increased 3% over 2006. Sales increases in the Electrical and Fluid Power segments due to the acquisitions of Argo-Tech and other businesses, as well as growth in end markets, were offset by reduced sales in the Truck segment due to a decline in the North American commercial truck market. The increase in operating profit reflected improved sales and performance in all business segments, except Truck; benefits of the Excel 07 program; benefits of integrating acquired businesses; and $69 of net pretax costs in 2006 related to the Excel 07 program. Acquisition integration charges were $27 in 2007 compared to $23 in 2006 in the United States. Growth in Canada of 10% in sales and 23% in operating profit was primarily due to higher sales in Electrical, resulting from growth in end markets and sales from acquired businesses. Sales growth in Europe of 13% was primarily due to higher sales in Electrical, which reflected the acquisitions of the MGE small systems UPS business and other businesses, as well as increased sales in Fluid Power and Automotive, largely due to growth in their end markets. The sharp increase in operating profit in Europe reflected increased operating profit in Automotive and Truck, largely due to $77 of net pretax costs in 2006 related to the Excel 07 program; sales growth; benefits from the Excel 07 program; and benefits of integrating acquired businesses. These increases were partially offset by higher acquisition integration charges of $20 in 2007 compared to $7 in 2006. In Latin America, growth of 14% in sales was largely due to higher sales in Truck, Fluid Power, and Electrical. The 25% increase in operating profit in Latin America was attributable to higher sales; benefits of the Excel 07 program; an adjustment in 2006 related to Brazilian inventories in the Truck business; the benefits of integrating acquired businesses; and Excel 07 program expenses of $5 in 2006. These increases were partially offset by higher acquisition integration charges of $12 in 2007 compared to $6 in 2006, and a gain on the sale of the Brazilian battery business in 2006. Page 60 Growth in Asia/Pacific of 29% in sales and 30% in operating profit was primarily due to higher sales in Fluid Power, Electrical and Truck, mainly resulting from growth in end markets. OTHER RESULTS OF OPERATIONS In 2007 and 2006, Eaton incurred charges related to the integration of acquired businesses. Charges in 2007 related to the integration of primarily the following acquisitions: in the Electrical segment, the MGE small systems UPS business, Schreder-Hazemeyer, Senyuan and Powerware; in the Fluid Power segment, Argo-Tech, Synflex, PerkinElmer, Cobham and Hayward; and in the Automotive segment, Saturn and Tractech. Charges in 2006 related to the integration of primarily the following acquisitions: in the Electrical segment, Pringle and Powerware; in the Fluid Power segment, Synflex, PerkinElmer, Cobham, Hayward, Winner and Walterscheid; in the Truck segment, Pigozzi; and in the Automotive segment, Tractech and Morestana. A summary of these charges follows:
2007 2006 ---- ---- Electrical $ 12 $ 7 Fluid Power 51 23 Truck 5 Automotive 1 5 ---- ---- Pretax charges $ 64 $ 40 ==== ==== After-tax charges $ 42 $ 27 Per Common Share $.28 $.17
Acquisition integration charges in 2007 included $27 for the United States, $20 for Europe, $12 for Latin America and $5 for Asia/Pacific. Charges in 2006 included $23 for the United States, $7 for Europe, $6 for Latin America and $4 for Asia/Pacific. These 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. In the first quarter of 2006, Eaton announced, and began to implement, its Excel 07 program. This program was a series of actions concluded in 2006 intended to address resource levels and operating performance in businesses that under-performed in 2005, and businesses that were expected to weaken during second half 2006 and in 2007. As part of this program, charges were incurred related to plant closings in all four business segments. The net costs of this program included plant closings, as well as costs of relocating product lines and other employee reductions, partially offset by savings generated from these actions. A summary of the net costs incurred by each business segment related to this program follows:
2006 ---- Electrical $ 17 Fluid Power 23 Truck 60 Automotive 52 Corporate 2 ---- Pretax charges $154 ====
Excel 07 net costs incurred in 2006 included $69 for the United States, $77 for Europe, $5 for Latin America, $2 for Asia/Pacific, and $1 for Canada. The net costs associated with the Excel 07 program were included in the Statements of Consolidated Income primarily in Cost of products sold. In Business Segment Information, the charges reduced Operating profit of the related business segment. In 2007 and 2006, Eaton recorded income tax benefits of $57 and $90, respectively, which represented an adjustment of worldwide tax liabilities. The 2007 income tax benefits reduced the effective income tax rate for full year 2007 from 13.4% to 7.9%. The 2007 income tax benefits resulted from multiple income tax items. Included in the tax benefits were a $14 benefit from changes to state tax laws and a favorable revaluation of worldwide deferred tax assets. The income tax benefits for 2006 reduced the effective income tax rate for full year 2006 from 16.7% to 7.4%. Further analysis regarding the change in the effective income tax rate in 2007 compared to 2006 is found in "Income Taxes" in the Notes to the Consolidated Financial Statements. Page 61 Effective January 1, 2007, Eaton adopted FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109". The net income tax assets recognized under FIN No. 48 at January 1, 2007 did not differ from the net assets recognized before adoption, and, therefore, the Company did not record a cumulative-effect adjustment related to the adoption of FIN No. 48. The adoption of FIN No. 48 is further discussed in "Income Taxes" in the Notes to the Consolidated Financial Statements. In the third quarter of 2007, Eaton sold the Mirror Controls Division of the Automotive segment for $111, resulting in a $20 after-tax gain, or $.12 per Common Share. In the third quarter of 2006, certain other businesses of the Automotive segment were sold for $64, resulting in a $35 after-tax gain, or $.23 per share. The gains on sale of the Mirror Controls Division and the businesses sold in 2006, and other results of these businesses, are reported as Discontinued operations in the Statement of Consolidated Income. Net income and net income per Common Share assuming dilution for 2007 were new records for the Company, increasing 5% and 6%, respectively, compared to 2006. The improvements in 2007 were primarily due to higher sales and the other factors that affected gross profit as discussed above, partially offset by increases in selling, administrative, and research and development expenses; higher interest expense; a contribution to the Eaton Charitable Fund ; and a lower after-tax gain on the sale of certain businesses of the Automotive segment in 2007 compared to a similar gain in 2006, which were reported as Discontinued operations in the Statements of Consolidated Income. Earnings per share in 2007 also benefited from a lower number of shares outstanding due to the repurchase of Common Shares in 2007 and 2006 exceeding shares issued from exercises of stock options. Return on Shareholders' equity was 22.2%. RESULTS BY BUSINESS SEGMENT ELECTRICAL
2007 2006 Increase ------ ------ -------- Net sales $4,759 $4,184 14% Operating profit 579 474 22% Operating margin 12.2% 11.3%
Sales of the Electrical segment reached record levels in 2007. Of the 14% sales increase in 2007 over 2006, 8% was due to organic growth; 3% was from acquisitions of businesses, primarily the MGE small systems UPS business; and 3% from foreign exchange. End markets for the Electrical segment grew about 9% during 2007. The non-residential electrical and power quality markets recorded strong growth, offset by the decline in the U.S. residential electrical market, which was negatively impacted by weakness in U.S. housing starts. Operating profit rose 22% in 2007 over 2006, and was also a new record for this segment. The operating margin of 12.2% was a significant improvement over 11.3% in 2006. The increase in operating profit was largely due to growth in sales; benefits from the Excel 07 program; benefits of integrating acquired businesses; continued productivity improvements; and net pretax costs in 2006 related to the Excel 07 program; partially offset by a gain in 2006 on the sale of the Brazilian battery business. Operating profit reflected acquisition integration charges of $12 in 2007 compared to charges of $7 in 2006, which reduced the operating margin by 0.3% in 2007 and 0.2% in 2006. Acquisition integration charges in 2007 primarily related to the integration of the MGE small systems UPS business, Schreder-Hazemeyer, Senyuan and Powerware, while charges in 2006 related to the integration of Pringle and Powerware. Net pretax costs of $17 related to the Excel 07 program in 2006 reduced the operating margin by 0.4%. The incremental operating margin for 2007 (the increase in operating profit compared to the increase in sales) was 18%. The operating margin for acquired businesses was 13%. Page 62 New businesses acquired during 2007 in the Electrical segment and those planned to be acquired in early 2008 include the following: - - On October 31, 2007, the Company acquired the MGE small systems UPS business from Schneider Electric. This business is a France-based global provider of power quality solutions including uninterruptible power supply (UPS) systems, power distribution units, static transfer switches and surge suppressors, and had sales of $245 for the year ended September 30, 2007. - - On October 19, 2007, Eaton acquired the assets of Babco Electric Group, an Alberta, Canada-based manufacturer of specialty low- and medium-voltage switchgear and electrical housings for use in the Canadian oil and gas industry and other harsh environments. This business had sales of $11 in the year ended April 30, 2007. - - On June 19, 2007, Eaton acquired Pulizzi Engineering, a U.S. manufacturer of AC power distribution, AC power sequencing, redundant power and remote-reboot power management systems. This business had sales of $12 in 2006. - - On May 18, 2007, the Company acquired technology and related assets of SMC Electrical Products, Inc.'s industrial medium-voltage adjustable frequency drive business. - - On April 5, 2007, Eaton acquired Aphel Technologies Limited, a U.K.-based global supplier of high density, fault-tolerant power distribution solutions for datacenters, technical offices, laboratories and retail environments. This business had sales of $12 in 2006. - - On February 7, 2007, the Company acquired the Power Protection Business of Power Products Ltd., a Czech Republic distributor and service provider of Powerware(R) products and other uninterruptible power supply (UPS) systems. This business had sales of $3 in 2006. - - On December 20, 2007, Eaton announced it had reached an agreement to purchase The Moeller Group, a Germany-based business, for EURO 1.55 billion (U.S. $2.3 billion). This transaction is expected to close at the beginning of the second quarter of 2008. This business, which had sales of EURO 1.02 billion (U.S. $1.5 billion) for 2007, is a leading supplier of electrical components for commercial and residential building applications, and controls for industrial equipment applications. - - On December 20, 2007, Eaton announced a tender offer for all shares of Phoenixtec Power Company Ltd., a company listed on the Taiwan Stock Exchange. The tender offer closed on February 22, 2008, with 91% of Phoenixtec's shares having been tendered into the offer. Eaton acquired the tendered shares on February 26, 2008 and intends to take further steps to acquire all remaining shares. Once that has been accomplished, the Company will have paid a total purchase price, net of estimated cash and debt acquired, of $568 for Phoenixtec. This business, with sales of approximately $515 in 2007, manufactures single and three-phase uninterruptible power supply (UPS) systems. FLUID POWER
2007 2006 Increase ------ ------ -------- Net sales $4,480 $3,983 12% Operating profit 518 422 23% Operating margin 11.6% 10.6%
Sales of the Fluid Power segment reached record levels in 2007. The 12% increase in sales in 2007 over 2006 consisted of 6% from acquisitions of businesses, primarily the Argo-Tech aerospace business; 3% from organic growth; and 3% from foreign exchange. Fluid Power markets grew 3% in 2007 compared to 2006, with global hydraulics shipments up 1%, commercial aerospace markets up 8%, defense aerospace markets flat, and European automotive production up 6%. Page 63 Operating profit rose 23% in 2007 over 2006, and was a new record for this segment. The operating margin of 11.6% was also a new record for this segment. The increase in operating profit was due to growth in sales, including a more profitable mix of businesses; benefits from the Excel 07 program; benefits of integrating acquired businesses; overall improvement in operating efficiencies; and net pretax costs in 2006 related to the Excel 07 program. Operating profit reflected acquisition integration charges of $51 in 2007 compared to charges of $23 in 2006, which reduced the operating margin by 1.1% in 2007 and 0.6% in 2006. The acquisition integration charges in 2007 primarily related to the acquired operations of Argo-Tech, Synflex, PerkinElmer, Cobham, and Hayward. Charges in 2006 largely related to the acquired operations of Synflex, PerkinElmer, Cobham, Hayward, Winner and Walterscheid. Net pretax costs of $23 in 2006 related to the Excel 07 program reduced the operating margin by 0.6%. The incremental operating margin for 2007 was 19%. The operating margin for acquired businesses was 26% in 2007. New businesses acquired during 2007 for the Fluid Power segment include the following: - - On November 8, 2007, Eaton acquired Arrow Hose & Tubing Inc. this business is a Canada-based manufacturer of specialty thermoplastic hose and tubing for the industrial, food and beverage, and agricultural markets. This business had sales of $12 in 2006. - - On March 16, 2007, Eaton acquired Argo-Tech Corporation, a U.S.-based aerospace business, which had sales of $206 in 2006. Argo-Tech is a leader in high performance aerospace engine fuel pumps and systems, airframe fuel pumps and systems, and ground fueling systems for commercial and military aerospace markets. TRUCK
2007 2006 (Decrease) ------ ------ ---------- Net sales $2,147 $2,520 (15%) Operating profit 357 448 (20%) Operating margin 16.6% 17.8%
Sales of the Truck segment decreased 15% in 2007 from 2006. The reduction in sales reflected an 18% decline in sales volume, offset by a 3% increase from foreign exchange. The decline in sales was due to a reduction in North American commercial truck production in 2007 from 2006, with North American heavy-duty truck production down 44%, and North American medium-duty production down 28%. Brazilian vehicle production was up 17%, Brazilian agricultural equipment production was up 41%, and European medium-duty truck production was flat compared to 2006. Operating profit decreased 20% in 2007 from 2006, primarily due to the reduction in sales, partially offset by the benefits from the Excel 07 program, net pretax costs in 2006 related to the Excel 07 program, and an adjustment in 2006 to Brazilian inventories. The operating margin was 16.6% in 2007, down 1.2 percentage points from 17.8% in 2006. Operating profit in 2006 was reduced by acquisition integration charges of $5 related to Pigozzi, which reduced the operating margin by 0.2% in 2006; and net pretax costs of $60 related to the Excel 07 program in 2006, which reduced the operating margin by 2.4%. AUTOMOTIVE
2007 2006 Increase ------ ------ -------- Net sales $1,647 $1,545 7% Operating profit 214 124 73% Operating margin 13.0% 8.0%
The 7% increase in sales of the Automotive segment in 2007 over 2006 reflected a 3% increase from organic growth, 3% from foreign exchange, and 1% from acquisitions of businesses. In 2007, North American automotive production declined by 2%, while European production grew 6%. Page 64 Operating profit in 2007 increased $90 over 2006, largely due to $52 of net pretax costs in 2006 related to the Excel 07 program, benefits from the Excel 07 program in 2007, and sales growth in 2007. Operating profit reflected acquisition integration charges of $1 in 2007 compared to charges of $5 in 2006, which reduced the operating margin by 0.1% in 2007 and 0.3% in 2006. Acquisition integration charges in 2007 primarily related to the integration of Saturn and Tractech, while charges in 2006 related to the integration of Tractech and Morestana. Net pretax costs of $52 related to the Excel 07 program in 2006 reduced the operating margin by 3.4%. On May 2, 2007, Eaton acquired the fuel components division of Saturn Electronics & Engineering, Inc., a U.S. designer and manufacturer of fuel containment and shutoff valves, emissions control valves and specialty actuators. This business had sales of $28 in 2006. In the third quarter of 2007, Eaton sold the Mirror Controls Division of the Automotive segment for $111, resulting in a $20 after-tax gain, or $.12 per Common Share. In the third quarter of 2006, certain other businesses of the Automotive segment were sold for $64, resulting in a $35 after-tax gain, or $.23 per share. The gains on sale of the Mirror Controls Division and the businesses sold in 2006, and other results of these businesses, are reported as Discontinued operations in the Statement of Consolidated Income. CORPORATE Amortization of intangible assets of $79 in 2007 increased from $51 in 2006 due to amortization of intangible assets associated with recently acquired businesses. Interest expense of $147 in 2007 increased from $105 in 2006, primarily due to borrowings to finance cash paid of $1,433 for acquisitions of businesses in 2007. In 2007, corporate expense of $16 was recorded for a contribution to the Eaton Charitable Fund. CHANGES IN FINANCIAL CONDITION DURING 2007 Net working capital of $1,108 at the end of 2007 decreased by $10 from $1,118 at year-end 2006. The decrease was largely due to the $139 decrease in cash and short-term investments, which reflected the use of these assets to partially fund operating, investing and financing activities; an increase of $335 in short-term debt due to higher commercial paper borrowings to fund operations; and a net decrease of $168 in other working capital items. These decreases were partially offset by the $280 increase in accounts receivable, resulting from increased sales and the acquisitions of Argo-Tech and the MGE small systems UPS business; the $190 increase in inventories to support higher levels of sales and from these acquisitions; and the decrease of $162 in current portion of long-term debt due to the repayment of notes that matured. The current ratio was 1.3 at year-end 2007 and 2006. Net cash provided by operating activities was $1,161 in 2007 compared to $1,431 in 2006. The decrease was primarily due to a net increase of $224 in working capital funding, and an increase of $61 in voluntary contributions made to the qualified pension plans in the United States and the United Kingdom, partially offset by higher net income of $44 and other adjustments. Cash and short-term investments totaled $646 at year-end 2007, down $139 from $785 at year-end 2006, reflecting the use of these assets to partially fund operating, investing and financing activities. Total debt of $3,417 at the end of 2007 increased $831 from $2,586 at year-end 2006. Changes in debt during 2007 included the issuance of $781 of long-term notes, and commercial paper and other borrowings of $933, partially offset by the repayment of $979 of notes, commercial paper and other debt. The increase in total debt during 2007 largely resulted from funding acquisitions of businesses in 2007 of $1,433; capital expenditures of $354; the repurchase of 4.1 million Common Shares for $340 and cash dividends paid of $251; partially offset by net cash provided by operating activities of $1,161 and other items. The net-debt-to-capital ratio was 34.9% at the end of 2007 compared to 30.5% at year-end 2006, reflecting the combined effect of the $831 increase in total debt in 2007, and the $139 decline in cash and short-term investments in 2007. Page 65 In order to initially finance the acquisitions of The Moeller Group and Phoenixtec, on January 25, 2008, Eaton entered into a revolving credit agreement, in the amount of $3.0 billion, which may be used either to fund direct loans or to backstop commercial paper borrowings. The proceeds must be used to finance certain acquisitions including, but not limited to, the acquisition of The Moeller Group and Phoenixtec. All amounts borrowed under the credit agreement, including commercial paper backstopped by this agreement, must be repaid by January 23, 2009, but may be repaid earlier at the Company's option or may be required to be repaid earlier in the event of a default. The commitment amount of the revolving credit agreement will be reduced by the net amount of any proceeds raised through certain future capital market transactions which may include, but are not limited to, debt or equity issuances. The credit agreement also includes covenants customary for transactions of this type with borrowers having capital structures similar to Eaton. Eaton's United States operations have long-term revolving credit facilities of $1.5 billion, of which $300 expires in May 2008, $700 in March 2010 and the remaining $500 in August 2011. One of the Company's international subsidiaries has a long-term line of credit of EURO 100 million. In order to refinance short-term borrowings related to the acquisition of the Argo-Tech aerospace business in 2007, a subsidiary of Eaton issued a $281 Floating Rate Senior Note due 2010. This subsidiary owns equity interests in several of the Company's subsidiaries and a portion of the assets of those subsidiaries are pledged as collateral for the note. At December 31, 2007, under the terms of the Note, this subsidiary had net assets of $3.7 billion that were not available to be transferred to the parent company of Eaton Corporation in the form of loans, advances, or cash dividends without the consent of the lender. In the event of an unremedied default, claims of the lender against this subsidiary's net assets are limited to the $281 principal amount of the Note, accrued interest, and any associated damages. On January 22, 2007, Eaton announced it had authorized a 10 million Common Shares repurchase program, replacing the 1.3 million shares remaining from the 10 million shares repurchase authorization approved in April 2005. The shares are expected to be repurchased over time, depending on market conditions, the market price of the Company's Common Shares, the Company's capital levels and other considerations. Under the share repurchase program, 4.1 million shares were repurchased in the open market in 2007 at a total cost of $340. In light of its strong results and future prospects, on January 22, 2008 Eaton announced that it was increasing the quarterly dividend on its Common Shares by 16%, from $.43 per share to $.50 per share, effective for the February 2008 dividend. This is the fourth dividend increase within the last three years, reflecting Eaton's philosophy of growing its dividend in line with its long-term growth in earnings. OUTLOOK FOR 2008 As Eaton surveyed its end markets for its business segments in mid-January 2008, it anticipated an overall growth of approximately 4% for full year 2008. U.S. markets are likely to grow by 2 to 3% in 2008, while international markets are likely to grow by 5 to 6%. Eaton expects to outgrow end markets in 2008 by approximately $275, and to record approximately $2.2 billion of growth from the full year impact of the nine acquisitions completed in 2007, and the acquisitions of The Moeller Group and Phoenixtec. As a result, revenues in 2008 are anticipated to grow by approximately 25% compared to 2007. Upon completion of the acquisitions of The Moeller Group and Phoenixtec, sales in 2008 to markets outside the United States, based on an estimate of the geographic location of the ultimate customer for Eaton's products, will grow to approximately 55% of total sales. For 2008, for the Electrical segment, Eaton expects markets to grow approximately 5 to 6%, with growth in the global nonresidential electrical and power quality markets offsetting a decline in the residential electrical market in the United States and several European countries. The Company expects the acquisitions of The Moeller Group and Phoenixtec to add approximately $1.9 billion of sales in 2008. Page 66 For Fluid Power, in 2008 Eaton anticipates a slight decline in construction equipment production in the United States and an increase in production outside the United States. Global agricultural equipment production is expected to post solid growth. Industrial hydraulics markets are likely to post modest growth. In total, global hydraulics markets are expected to grow 1% in 2008. Growth in the commercial aerospace market is expected to be in high single digits, while defense aerospace markets are expected to post modest growth. Overall, aerospace markets are expected to grow about 6%. It is anticipated that full year operating margins in both hydraulics and aerospace will improve in 2008. In the Truck segment, Eaton expects production of North American heavy-duty trucks in 2008 to be 240,000 units. However, it is expected that production in the first quarter of 2008 will be relatively flat with the fourth quarter of 2007, which will lead to a steep growth in production rates later in the year. For the Automotive segment, Eaton anticipates weaker North American production in 2008, modest growth in European production, and strong growth in South American and Asian production. Eaton's guidance for net income per Common Share for full year 2008 is $7.25 to $7.75, after charges to integrate recent acquisitions of $.50 per share. For the first quarter of 2008, the Company anticipates net income per Common Share of $1.50 to $1.60, after acquisition integration charges of $.10 per share. FORWARD-LOOKING STATEMENTS This Annual Report to Shareholders contains forward-looking statements concerning Eaton's first quarter 2008 and full year 2008 net income per Common Share, worldwide markets, growth in relation to end markets, growth from acquisitions and events and trends that may affect the Company's future operating results and financial position. These statements or disclosures may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to the Company, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "guidance," "intend," "may," "possible," "potential," "predict," "project" or other similar words, phrases or expressions. 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 or tax 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. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Eaton's management to make estimates and use assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. For any estimate or assumption there may be other reasonable estimates or assumptions that could have been used. However, the Company believes that given the current facts and circumstances, it is unlikely that applying such other estimates and assumptions would have caused materially different amounts to have been reported. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from estimates used. Page 67 REVENUE RECOGNITION Sales are recognized when products are shipped to unaffiliated customers, all significant risks of ownership have been transferred to the customer, title has transferred in accordance with shipping terms (FOB shipping point, FOB destination, or equivalent International Commercial (INCO) Terms), the selling price is fixed and determinable, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Other revenues for service contracts are recognized as the services are provided. IMPAIRMENT OF GOODWILL & OTHER LONG-LIVED ASSETS SFAS No. 142 "Goodwill and Other Intangible Assets" provides that goodwill and indefinite life intangible assets must be reviewed for impairment, in accordance with the specified methodology. Further, goodwill and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. During 2007, Eaton completed the annual impairment tests for goodwill and indefinite life intangible assets as required by SFAS No. 142. These tests confirmed that the fair value of the Company's reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment loss was required to be recognized. Goodwill and other intangible assets totaled $5.5 billion at the end of 2007 and represented 41% of total assets. These assets resulted primarily from the $1.6 billion acquisition of Aeroquip-Vickers, Inc., a mobile and industrial hydraulics business, in 1999; the $1.1 billion acquisition of the electrical distribution and controls business unit of Westinghouse in 1994; the $731 acquisition of Argo-Tech, a manufacturer of aerospace, airframe, and ground fueling pumps and systems for commercial and military aerospace markets in 2007; the $614 acquisition of the MGE small systems UPS business in 2007; and the $573 acquisition of Powerware Corporation, the electrical UPS business, in 2004. These businesses, as well as many of the Company's other recent business acquisitions, have a long history of operating successfully and profitably and hold significant market positions in the majority of their product lines. Their products are not subject to rapid technological or functional obsolescence. These factors, coupled with continuous strong product demand, support the recorded values of the goodwill and intangible assets related to acquired businesses. Long-lived assets, other than goodwill and indefinite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value. INCOME TAX ASSETS & LIABILITIES Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities, and for certain United States income tax credit carryforwards. Recorded deferred income tax assets and liabilities are described in detail in "Income Taxes" in the Notes to the Consolidated Financial Statements. Significant factors considered by management in the determination of the probability of the realization of deferred tax assets include historical operating results, expectations of future earnings and taxable income, and the extended period of time over which certain temporary differences will reverse. A valuation allowance of $269 has been recognized for certain deferred income tax assets, because management believes there is a low probability of the realization of deferred income tax assets related to certain United States Federal income tax credit carryforwards, certain non-United States income tax credit carryforwards, most United States state and local income tax loss carryforwards and tax credit carryforwards, and most tax loss carryforwards at international operations. As described in "Income Taxes" in the Notes to the Consolidated Financial Statements, effective January 1, 2007, Eaton adopted FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109". The net income tax assets recognized under FIN No. 48 at January 1, 2007 did not differ from the net assets recognized before adoption, and, therefore, the Company did not record a cumulative-effect adjustment related to the adoption of FIN No. 48. Page 68 PENSION & OTHER POSTRETIREMENT BENEFIT PLANS The measurement of liabilities related to pension plans and other postretirement benefit plans is based on management's assumptions related to future events including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trend rates. Actual pension plan asset performance will either reduce or increase pension losses included in accumulated other comprehensive loss, which ultimately affects net income. The discount rate for United States plans was determined by constructing a zero-coupon yield curve derived from a universe of high-quality bonds as of the measurement date, which was designed to match the discounted expected benefit payments. The bond data (rated Aa3 or better by Moody's Investor Services) was obtained from Bloomberg. Callable bonds with explicit call schedules were excluded and bonds with "make-whole" call provisions were included. In addition, a portion of the bonds were deemed outliers and excluded from consideration. Finally, a subset of bonds was selected by grouping the universe of bonds by duration and retaining 50% of the bonds that had the highest yields. The discount rates for non-United States plans are appropriate for each region and are based on high quality long-term corporate and government bonds. Consideration has been given to the duration of the liabilities in each plan for selecting the bonds to be used in determining the discount rate. At the end of 2007, certain key assumptions used to calculate pension and other postretirement benefit expense were adjusted, including the raising of the assumed return on pension plan assets from 8.31% to 8.44% and the discount rate from 5.39% to 5.96%. At the end of 2006, the assumed return on pension plan assets was lowered from 8.35% to 8.31%, and the discount rate from 5.51% to 5.39%. At the end of 2005, the assumed return on pension plan assets was lowered from 8.41% to 8.35% and the discount rate from 5.81% to 5.51%. The changes in these assumptions, offset by decreased curtailment costs in 2007, resulted in increased pretax pension and postretirement expense of $4 in 2007 compared to 2006. These changes, as well as increased curtailment and settlement costs in 2006, increased pretax pension and other postretirement benefit expense $66 in 2006 compared to 2005. Pretax pension and other postretirement benefit expense is expected to decrease by approximately $44 in 2008 compared to 2007 due mainly to an increase in the discount rate and the assumed return on pension plan assets at the end of 2007. A 1-percentage point change in the assumed rate of return on pension plan assets is estimated to have approximately a $23 effect on pension expense. Likewise, a 1-percentage point change in the discount rate is estimated to have approximately a $43 effect on pension expense. A 1-percentage point change in the discount rate is estimated to have approximately a $3 effect on expense for other postretirement benefit plans. Additional information related to changes in key assumptions used to recognize expense for other postretirement benefit plans is found in "Retirement Benefit Plans" in the Notes to the Consolidated Financial Statements. PROTECTION OF THE ENVIRONMENT As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites. A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be incurred over a period of several years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. At December 31, 2007, the balance sheet included a liability for these costs of $64. All of these estimates are forward-looking statements and, given the inherent uncertainties in evaluating environmental exposures, actual results can differ from these estimates. Page 69 CONTINGENCIES Eaton is subject to a broad range of claims, administrative proceedings, and legal proceedings, such as lawsuits that relate to contractual allegations, patent infringement, personal injuries (including asbes- tos claims) and employment-related matters. Although it is not pos- sible to predict with certainty the outcome or cost of these matters, the Company believes that these matters will not have a material ad- verse effect on its financial position, results of operations or cash flows. STOCK OPTIONS GRANTED TO EMPLOYEES & DIRECTORS Effective January 1, 2006, in accordance with SFAS No. 123(R), "Share-Based Payment", Eaton began to record compensation expense under the "fair-value-based" method of accounting for stock options granted to employees and directors. The Company adopted SFAS No. 123(R) using the "modified prospective application" method and, consequently, financial results for periods prior to 2006 were not restated for this accounting change. This change in accounting is further explained in "Stock Options" in the Notes to the Consolidated Financial Statements. OFF-BALANCE SHEET ARRANGEMENTS Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties and equipment, as described in "Lease Commitments" in the Notes to the Consolidated Financial Statements. Transactions with related parties are in the ordinary course of business, are conducted on an arm's-length basis, and are not material to Eaton's financial position, results of operations or cash flows. MARKET RISK DISCLOSURE The Company is exposed to various changes in financial market conditions, including fluctuations in interest rates, foreign currency exchange rates, and commodity prices. Eaton manages exposure to such risks through normal operating and financing activities. To manage exposure to fluctuations in interest rates, foreign currencies and commodity prices, Eaton uses straightforward, non-leveraged, financial instruments for which quoted market prices are readily available from a number of independent services. Interest rate risk can be measured by calculating the near-term earnings impact that would result from adverse changes in interest rates. This exposure results from short-term debt, which includes commercial paper at a floating interest rate, long-term debt that has been swapped to floating rates, and money market investments that have not been swapped to fixed rates. A 100 basis point increase in short-term interest rates would increase the Company's net, pretax interest expense by approximately $15. Eaton also measures interest rate risk by estimating the net amount by which the fair value of the Company's financial liabilities would change as a result of movements in interest rates. Based on a hypothetical, immediate 100 basis point decrease in interest rates at December 31, 2007, the market value of the Company's debt and interest rate swap portfolio, in aggregate, would increase by $125. Foreign currency risk is the risk that Eaton will incur economic losses due to adverse changes in foreign currency exchange rates. The Company mitigates foreign currency risk by funding some investments in foreign markets through local currency financings. Such non-U.S. Dollar debt was $176 at December 31, 2007. To augment Eaton's non-U.S. Dollar debt portfolio, the Company also enters into forward foreign exchange contracts and foreign currency swaps from time to time to mitigate the risk of economic loss in its foreign investments due to adverse changes in exchange rates. At December 31, 2007, the aggregate balance of such contracts was $82. Eaton also monitors exposure to transactions denominated in currencies other than the functional currency of each country in which the Company operates, and periodically enters into forward contracts to mitigate that exposure. In the aggregate, Eaton's portfolio of forward contracts related to such transactions was not material to its financial position, results of operations or cash flows during 2007. Other than the above noted debt and financial derivative arrangements, there were no material derivative instrument transactions in place or undertaken during 2007. Page 70 CONTRACTUAL OBLIGATIONS A summary of contractual obligations as of December 31, 2007 follows:
2009 2011 to to After 2008 2010 2012 2012 Total ------ ------ ---- ------ ------ Long-term debt $ 160 $ 552 $314 $1,566 $2,592 Interest expense related to long-term debt 137 247 217 1,286 1,887 Reduction of interest expense from interest rate swap agreements related to long-term debt (7) (19) (10) (45) (81) Operating leases 102 132 64 34 332 Purchase obligations 461 177 209 5 852 Other long-term liabilities 220 31 30 39 320 ------ ------ ---- ------ ------ $1,073 $1,120 $824 $2,885 $5,902 ====== ====== ==== ====== ======
Long-term debt includes obligations under capital leases, which are not material. Interest expense related to long-term debt is based on the fixed interest rate, or other applicable interest rate related to the debt instrument, at December 31, 2007. The reduction of interest expense due to interest rate swap agreements related to long-term debt is based on the difference in the fixed interest rate the Company receives from the swap, compared to the floating interest rate the Company pays on the swap, at December 31, 2007. Purchase obligations are entered into with various vendors in the normal course of business. These amounts include commitments for purchases of raw materials, outstanding non-cancelable purchase orders, releases under blanket purchase orders and commitments under ongoing service arrangements. Other long-term liabilities include $200 of contributions to pension plans in 2008 and $106 of deferred compensation earned under various plans for which the participants have elected to receive disbursement at a later date. The table above does not include future expected pension benefit payments or expected other postretirement benefit payments for each of the next five years and the five years thereafter. Information related to the amounts of these future payments is described in "Retirement Benefit Plans" in the Notes to the Consolidated Financial Statements. The table above also excludes the liability for unrecognized income tax benefits, since the Company cannot predict with reasonable reliability the timing of cash settlements with the respective taxing authorities. At December 31, 2007, the gross liability for unrecognized income tax benefits totaled $116, including interest and penalties of $20. RESULTS OF OPERATIONS - 2006 COMPARED TO 2005
2006 2005 Increase ------- ------- -------- Continuing operations Net sales $12,232 $10,874 12% Gross profit 3,283 3,044 8% Percent of net sales 26.8% 28.0% Income before income taxes 969 964 1% Income after income taxes $ 897 $ 783 15% Income from discontinued operations 53 22 ------- ------- Net income $ 950 $ 805 18% ======= ======= Net income per Common Share assuming dilution Continuing operations $ 5.87 $ 5.08 16% Discontinued operations .35 .15 ------- ------- $ 6.22 $ 5.23 19% ======= ======= Return on Shareholders' equity 23.0% 22.2%
Page 71 Sales growth of 12% in 2006 consisted of 6% from organic growth, 5% from acquisitions of businesses, and 1% from foreign exchange. Organic growth included 5% from end-market growth and 1% from outgrowing end markets. In the first quarter of 2006, Eaton announced, and began to implement, its Excel 07 program. This program was a series of actions in 2006 intended to address resource levels and operating performance in businesses that underperformed in 2005 and businesses in which markets were expected to weaken during the second half of 2006 and 2007. This program included plant closings, as well as costs of relocating product lines and other employee reductions. The net impact of this program also includes savings generated from the actions noted above, gains from sales of non-strategic product lines, and other corporate actions, including the favorable resolution of multiple income tax items. The total net positive impact of the Excel 07 program in 2006 was after-tax income of $8, or $.05 per Common Share. Pretax costs of this program for plant closings, relocating product lines and other employee reductions, offset by savings generated from these actions, were $154. These costs were offset by gains on the sale of businesses that totaled $35 after-tax, which were reported in the Statement of Consolidated Income as Discontinued operations, and by $90 of income tax benefits resulting from the favorable resolution of multiple income tax items during the year. Net pretax costs of plant closings and other actions associated with the Excel 07 program were included in the Statements of Consolidated Income primarily in Cost of products sold, with additional amounts in Selling & administrative expense or Other (income) expense-net, as appropriate. In Business Segment Information, the net pretax impact of the Excel 07 program was included in Operating profit of the related business segment, as separately discussed in the results of each business segment below. Gross profit increased 8% in 2006 primarily due to sales growth, the benefits of integrating acquired businesses and continued productivity improvements driven by the Eaton Business System (EBS). These improvements in gross profit were partially offset by costs of plant closings and other expenses associated with the Company's Excel 07 program, higher acquisition integration charges, increased pension expense, and higher prices paid for raw materials, supplies and basic metals. RESULTS BY GEOGRAPHIC REGION Net sales and segment operating profit are measured based on the geographic location of the selling plant.
Operating Net sales Segment operating profit margin ---------------------------- ---------------------------- ----------- Increase 2006 2005 Increase 2006 2005 (Decrease) 2006 2005 ------- ------- -------- ------ ------ ---------- ---- ---- United States $ 8,530 $ 7,645 12% $1,146 $1,015 13% 13.4% 13.3% Canada 337 315 7% 44 48 (8%) 13.1% 15.2% Europe 2,313 1,964 18% 65 95 (32%) 2.8% 4.8% Latin America 1,090 1,036 5% 120 136 (12%) 11.0% 13.1% Asia/Pacific 888 786 13% 93 80 16% 10.5% 10.2% Eliminations (926) (872) ------- ------- $12,232 $10,874 12% ======= =======
Page 72 Growth in sales in the United States of 12% was primarily due to higher sales in Fluid Power, which resulted from growth in end markets; sales from businesses acquired in 2006, primarily the thermoplastic hose and tubing business of Synflex and the industrial filtration business of Ronningen-Petter; and the full year effect on sales of businesses acquired in 2005, including the aerospace division of PerkinElmer Inc., the aerospace fluid and air division of Cobham plc, and the industrial filtration business of Hayward Industries, Inc. Higher sales in the United States in 2006 were also due to increased sales in Electrical, largely resulting from growth in end markets, and higher sales in Truck, as a result of strong end market demand for heavy-duty trucks. These increases in sales were partially offset by a sales reduction in Automotive, primarily resulting from the decline in the North American automotive market. The 13% increase in operating profit in the United States was mainly due to strong operating profit in Truck; higher operating profit in Fluid Power, which included profit from businesses acquired in 2006 and the full year effect of businesses acquired in 2005; increased operating profit in Electrical; and the benefits of integrating acquired businesses. These increases in operating profit were partially offset by costs of plant closings and other expenses associated with the Excel 07 program, as described above, and reduced operating profit of the Automotive segment. In Canada, sales growth of 7% in sales was primarily due to improved results in the Electrical businesses. The 8% reduction in operating profit was mainly due to the costs of relocation of certain businesses in the Electrical segment. Sales growth in Europe of 18% was primarily due to higher sales in Fluid Power, which reflected growth in end markets and the full year effect on sales of the businesses acquired in 2005, including the aerospace fluid and air division of Cobham plc, the aerospace division of PerkinElmer Inc., and the industrial filtration business of Hayward Industries, Inc. Higher sales in Europe in 2006 also reflected increased sales in Electrical, largely due to growth in end markets. The 32% decrease in operating profit in Europe reflected reduced operating profit in Automotive and Truck, which primarily resulted from plant closings associated with the Excel 07 program, partially offset by improved results in Electrical and Fluid Power, due to the full-year effect of the Fluid Power acquisitions completed in 2005 and the benefits of integrating acquired businesses. In Latin America, growth of 5% in sales was largely due to higher sales in Truck, Automotive and Fluid Power. The 12% reduction in operating profit in Latin America was attributable to Excel 07 program expenses and an adjustment to Brazilian inventories in the Truck business, partially offset by improved results in Electrical, which included a gain on the sale of the Brazilian battery business. Growth in Asia/Pacific of 13% in sales and 16% in operating profit was primarily due to higher sales in Fluid Power and Electrical, which were the result of growth in end markets and sales from businesses acquired in 2006 and 2005. Acquisitions of businesses included the Senyuan China-based medium-voltage electrical business acquired in September 2006 and the Winner hydraulics business acquired in 2005. OTHER RESULTS OF OPERATIONS In 2006 and 2005, Eaton incurred charges related to the integration of acquired businesses. Charges in 2006 related to the integration of primarily the following acquisitions: in the Electrical segment, Pringle and Powerware; in the Fluid Power segment, Synflex, PerkinElmer, Cobham, Hayward, Winner and Walterscheid; in the Truck segment, Pigozzi; and in the Automotive segment, Tractech and Morestana. Charges in 2005 related to primarily the following acquisitions: in the Electrical segment, Powerware and Delta; in the Fluid Power segment, Winner, Walterscheid, and Boston Weatherhead; in the Truck segment, Pigozzi; and in the Automotive segment, Morestana. A summary of these charges follows:
2006 2005 ---- ---- Electrical $ 7 $ 21 Fluid Power 23 7 Truck 5 4 Automotive 5 4 ---- ---- Pretax charges $ 40 $ 36 ==== ==== After-tax charges $ 27 $ 24 Per Common Share $.17 $.15
Page 73 Acquisition integration charges in 2006 included $23 for the United States, $7 for Europe, $6 for Latin America and $4 for Asia/Pacific. Charges in 2005 included $17 for the United States, $7 for Europe, $4 for Latin America and $8 for Asia/Pacific. These 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. In the first quarter of 2006, Eaton announced, and began to implement, its Excel 07 program. This program was a series of actions concluded in 2006 intended to address resource levels and operating performance in businesses that under-performed in 2005, and businesses that were expected to weaken during second half 2006 and in 2007. As part of this program, charges were incurred related to plant closings in all four business segments, including three significant plant closings announced in the third quarter of 2006 for the heavy-duty truck transmission manufacturing plant in Manchester, United Kingdom; the engine valve actuation manufacturing plant in Saginaw, Michigan; and the engine valve manufacturing plant in Montornes del Valles, Spain. A summary of charges incurred by each segment related to these plant closings, including workforce reductions, plant integration and other charges follow:
2006 ---- Electrical $ 17 Fluid Power 23 Truck 60 Automotive 52 Corporate 2 ---- Pretax charges $154 ====
Excel 07 net costs incurred in 2006 included $69 for the United States, $77 for Europe, $5 for Latin America, $2 for Asia/Pacific, and $1 for Canada. The net costs associated with the Excel 07 program were included in the Statements of Consolidated Income primarily in Cost of products sold. In Business Segment Information, the charges reduced Operating profit of the related business segment. Pretax income for 2006 was reduced by $65 ($42 after-tax, or $.28 per Common Share) compared to 2005 due to increased pension expense in 2006. This reduction primarily resulted from the lowering of discount rates associated with pension liabilities at year-end 2005 and the effect of increased settlement costs in 2006. Effective January 1, 2006, in accordance with SFAS No. 123(R), "Share-Based Payment", Eaton began to record compensation expense under the "fair-value-based" method of accounting for stock options granted to employees and directors. Expense for stock options in 2006 was $27 ($20 after-tax, or $.13 per share both assuming dilution and basic). The Company adopted SFAS No. 123(R) using the "modified prospective application" method and, as a result, financial results for periods prior to 2006 were not restated for this accounting change. This change in accounting is further explained in "Stock Options" in the Notes to the Consolidated Financial Statements. In 2006, Eaton recorded income tax benefits of $90 which represented an adjustment of worldwide tax liabilities. The income tax benefits for 2006 reduced the effective income tax rate for full year 2006 from 16.7% to 7.4%. Further analysis regarding the change in the effective income tax rate in 2006 compared to 2005 is found in "Income Taxes" in the Notes to the Consolidated Financial Statements. As part of the Excel 07 program, in the third quarter of 2006, certain businesses of the Automotive segment were sold for $64, resulting in a $35 after-tax gain, or $.23 per share. The gain on sale of these businesses, and other operating results of these businesses, were reported as Discontinued operations in the Statement of Consolidated Income. Page 74 Net income and net income per Common Share assuming dilution for 2006 increased 18% and 19%, respectively, over 2005. These improvements were primarily due to sales growth; the benefits of integrating acquired businesses; continued productivity improvements driven by EBS; and a lower effective income tax rate. These factors were partially offset by increased pension expense; higher prices paid for raw materials, supplies and basic metals; and expense for stock options being recorded for the first time in 2006. Earnings per share also benefited from lower average shares outstanding in 2006 compared to 2005, due to the repurchase of 5.286 million shares in 2006, at a total cost of $386. The total net positive impact on net income and net income per share of the Excel 07 program in 2006 was $8 and $.05 per Common Share, respectively, as described above. RESULTS BY BUSINESS SEGMENT ELECTRICAL
2006 2005 Increase ------ ------ -------- Net sales $4,184 $3,758 11% Operating profit 474 375 26% Operating margin 11.3% 10.0%
Sales of the Electrical segment grew 11% of which 9% was due to organic growth, 1% was from acquisitions of businesses, and 1% from foreign exchange. End markets for the Electrical segment grew approximately 5% in 2006 with strong growth in non-residential construction markets offsetting weakness in the residential market. Operating profit rose 26% in 2006. The increase was largely due to growth in sales, the benefits of integrating acquired businesses, continued productivity improvements, a gain on the sale of the Brazilian battery business, and lower acquisition integration charges. These improvements in operating profit were partially offset by net costs of the Excel 07 program, and higher prices paid for raw materials, supplies and basic metals. Operating profit in 2006 was reduced by net costs of $17 related to the Excel 07 program, which reduced the operating margin by 0.4%. Operating profit was also reduced by acquisition integration charges of $7 in 2006 compared to $21 in 2005, which reduced the operating margin by 0.2% in 2006 and by 0.6% in 2005. Acquisition integration charges in 2006 primarily related to the integration of Powerware acquired in June 2004 and the Pringle electrical switch business acquired in 2005. Acquisition integration charges in 2005 largely related to the integration of Powerware and the electrical division of Delta plc acquired in 2003. The incremental operating margin in 2006 was 23%. Net costs of the Excel 07 program and acquisition integration charges lowered the incremental operating margin by 1 percentage point. On December 1, 2006, Eaton acquired the remaining 50% ownership in Schreder-Hazemeyer, a Belgium manufacturer of low and medium voltage electrical distribution switchgear. This business had sales of $9 in 2006. On September 14, 2006, the Company acquired Senyuan International Holdings Limited, a China-based manufacturer of vacuum circuit breakers and other electrical switchgear components. This business had sales of $47 in 2005. On March 24, 2006, Eaton acquired Marina Power Lighting, a U.S. manufacturer of marine duty electrical distribution products. This business had sales of $11 in 2005. FLUID POWER
2006 2005 Increase ------ ------ -------- Net sales $3,983 $3,240 23% Operating profit 422 339 24% Operating margin 10.6% 10.5%
Page 75 Sales of the Fluid Power segment grew 23% in 2006 of which 16% was from acquisitions of businesses, 6% from organic growth and 1% from foreign exchange. Acquisitions of businesses in 2006 included the Ronningen-Petter filtration business acquired in September and the Synflex thermoplastic hose and tubing business acquired in March, as described below. Acquisitions of businesses in 2005 included the aerospace operations of PerkinElmer, Inc., the aerospace fluid and air division of Cobham plc, the Hayward industrial filtration business, and the Winner hydraulic hose fittings and adapters business. Growth in the global hydraulics markets in 2006 was driven by continued investment in industrial and construction equipment worldwide. Fluid Power markets grew 6% compared to 2005, with global hydraulics shipments up 6%, commercial aerospace markets up 13%, defense aerospace markets up 1%, and European automotive production up 2%. Operating profit rose 24% in 2006. The increase in operating profit was due to growth in sales, continued productivity improvements, price increases, the benefits of integrating acquired businesses, and favorable business mix. These improvements in operating profit were partially offset by net costs of the Excel 07 program, higher acquisition integration charges, and higher prices paid for raw materials, supplies and basic metals. Operating profit in 2006 was reduced by net costs of $23 related to the Excel 07 program, which reduced the operating margin by 0.6%. Operating profit in 2006 was also reduced by acquisition charges of $23 compared to charges of $7 in 2005, reducing operating margin by 0.6% in 2006 and 0.2% in 2005. The charges in 2006 primarily related to the acquired operations of Synflex, PerkinElmer, Cobham, Hayward, Winner, and Walterscheid. The charges in 2005 largely related to the Boston Weatherhead fluid power business. The incremental operating margin in 2006 was 11%. Net costs of the Excel 07 program and acquisition integration charges lowered the incremental operating margin on overall sales growth by 5 percentage points. The operating margin for acquired businesses was 14%. On September 5, 2006, the Company acquired the Ronningen-Petter business unit of Dover Resources, Inc., a producer of industrial fine filtration systems. This business had sales of $31 in 2005. On March 31, 2006, Eaton acquired the Synflex business unit of Saint-Gobain Performance Plastics Corporation. This business manufactures thermoplastic hose and tubing. This business had sales of $121 in 2005. TRUCK
Increase 2006 2005 (Decrease) ------ ------ --------- Net sales $2,520 $2,288 10% Operating profit 448 453 (1%) Operating margin 17.8% 19.8%
The Truck segment posted increased sales in 2006 of 10% compared to 2005. Of the sales increase in 2006, 8% was due to organic growth and 2% from foreign exchange. Organic growth was attributable to strong end-market demand, primarily in North American heavy-duty truck production, which rose 11% in 2006 to 378,000 units. North American medium-duty production was up 8% compared to 2005, European truck production was up 5%, and Brazilian vehicle production was up 2%. Operating profit decreased 1% in 2006 primarily due to net costs of the Excel 07 program, partially offset by operating profit generated by growth in sales. Operating profit in 2006 was reduced by net costs of $60 related to the Excel 07 program, which reduced the operating margin by 2.4%, and by an adjustment to Brazilian inventories in 2006. The Excel 07 costs included costs related to the closing of the heavy-duty truck transmission plant in Manchester, United Kingdom. Operating profit in 2006 and 2005 was also reduced by acquisition integration charges of $5 and $4, respectively, related to the Pigozzi agricultural powertrain business, which reduced the operating margin by 0.2% in 2006 and 2005. Net costs of the Excel 07 program and acquisition integration charges lowered the incremental operating margin in 2006 by 26 percentage points. Page 76 On October 26, 2006, the Company acquired the diesel fuel processing technology, research and development facility and associated business assets of Catalytica Energy Systems Inc. Catalytica, which had no sales at the time of the acquisition, is engaged in the design and development of emission control solutions for Trucks. On September 29, 2006, Eaton announced the closure in 2006 of its heavy-duty truck transmission manufacturing plant in Manchester, United Kingdom. Aggregate estimated pretax charges associated with this closure were $25. Total costs consisted of cash charges of $16 for severance costs, charges of $3 related to pension costs, and $6 for other costs. This facility had 299 employees. AUTOMOTIVE
2006 2005 (Decrease) ------ ------ ---------- Net sales $1,545 $1,588 (3%) Operating profit 124 207 (40%) Operating margin 8.0% 13.0%
Sales of the Automotive segment decreased 3% in 2006. The reduction in sales reflected a 6% drop in sales volume, offset by a 2% increase from acquisitions of businesses and a 1% increase due to foreign exchange. The decline in sales was primarily due to North American automotive production declining by 3% in 2006 compared to 2005, while European production was up 2%. Sales were also affected by the continued loss in market share of domestic automobile manufacturers. The decrease in sales reflected the full year effect of acquisitions of businesses in 2005, which included the Tractech traction control business and the Morestana engine lifters business. The 40% decrease in operating profit in 2006 was largely due to net costs of $52 related to the Excel 07 program, which reduced the operating margin by 3.4%. The decline in operating profit also reflected lower automotive production volumes in North America and Europe. Operating profit in 2006 was also affected by acquisition integration charges of $5 compared to charges of $4 in 2005, which reduced the operating margin by 0.3% in 2006 and 2005. These charges related to the acquired operations of Tractech and Morestana. On September 29, 2006, Eaton announced its engine valve actuation manufacturing plant in Saginaw, Michigan would close by second half 2008. Aggregate estimated pretax charges associated with this closure were expected to be approximately $21. Total costs consist of cash charges of $3 for severance costs, charges of $4 related to pension costs, $4 for the write-down of fixed capital, and $10 for other costs. This facility had 277 employees. On September 25, 2006, the Company announced the closure in 2006 of its engine valve manufacturing plant in Montornes del Valles, Spain. Aggregate pretax charges associated with this closure were $21. Total costs consisted of cash charges of $15 for severance costs, $2 for the write-down of fixed capital, and $4 for other costs. This facility had 154 employees. As part of the Excel 07 program, in the third quarter of 2006, certain businesses of the Automotive segment were sold for $64, resulting in a $35 after-tax gain. The gain on sale of these businesses, and other operating results of these businesses, were reported as Discontinued operations in the Statement of Consolidated Income. CORPORATE Amortization of intangible assets of $51 in 2006 increased from $30 in 2005 due to amortization of intangible assets associated with recently acquired businesses. Pension and other postretirement benefit expense included in Corporate increased to $152 in 2006 from $120 in 2005. This increase primarily resulted from the lowering of the discount rate associated with pension and other postretirement benefit liabilities at year-end 2005, and the impact of increased settlement costs in 2006. Page 77 Effective January 1, 2006, in accordance with SFAS No. 123(R), "Share-Based Payment", Eaton began to record compensation expense under the "fair-value-based" method of accounting for stock options granted to employees and directors. Pretax expense for stock options was $27 in 2006. This change in accounting is further explained in "Stock Options" in the Notes to the Consolidated Financial Statements. Page 78 QUARTERLY DATA
Quarter ended in 2007 Quarter ended in 2006 --------------------------------------- --------------------------------------- (Millions except for per share data) Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 ------- -------- ------- -------- ------- -------- ------- -------- Continuing operations Net sales $ 3,374 $ 3,298 $3,248 $3,113 $3,068 $3,083 $3,125 $2,956 Gross profit 946 917 902 886 794 794 863 832 Percent of net sales 28.0% 27.8% 27.8% 28.5% 25.9% 25.8% 27.6% 28.2% Income before income taxes 259 263 256 263 234 221 269 245 Income after income taxes $ 252 $ 238 $ 240 $ 229 $ 237 $ 210 $ 248 $ 202 Income (loss) from discontinued operations 4 20 6 5 4 38 5 6 ------- ------- ------ ------ ------ ------ ------ ------ Net income $ 256 $ 258 $ 246 $ 234 $ 241 $ 248 $ 253 $ 208 ======= ======= ====== ====== ====== ====== ====== ====== Net income per Common Share outstanding assuming dilution Continuing operations $ 1.67 $ 1.59 $ 1.60 $ 1.53 $ 1.56 $ 1.38 $ 1.60 $ 1.32 Discontinued operations .04 .12 .04 .03 .03 .24 .04 .04 ------- ------- ------ ------ ------ ------ ------ ------ $ 1.71 $ 1.71 $ 1.64 $ 1.56 $ 1.59 $ 1.62 $ 1.64 $ 1.36 ======= ======= ====== ====== ====== ====== ====== ====== Net income per Common Share basic Continuing operations $ 1.71 $ 1.62 $ 1.63 $ 1.56 $ 1.59 $ 1.40 $ 1.63 $ 1.35 Discontinued operations .03 .13 .04 .03 .03 .25 .04 .03 ------- ------- ------ ------ ------ ------ ------ ------ $ 1.74 $ 1.75 $ 1.67 $ 1.59 $ 1.62 $ 1.65 $ 1.67 $ 1.38 ======= ======= ====== ====== ====== ====== ====== ====== Cash dividends paid per Common Share $ .43 $ .43 $ .43 $ .43 $ .39 $ .39 $ .35 $ .35 Market price per Common Share High $101.26 $102.55 $94.15 $85.53 $78.38 $74.86 $78.89 $73.29 Low 85.29 85.12 83.85 73.80 69.53 63.00 69.80 64.48
Earnings per Common Share for the four quarters in a year may not equal full year earnings per share. Page 79 TEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
(Millions except for per share data) 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ Continuing operations Net sales $13,033 $12,232 $10,874 $9,547 $7,796 $6,983 $7,092 $8,103 $7,789 $6,162 Income before income taxes 1,041 969 964 749 463 364 249 520 911 580 Income after income taxes $ 959 $ 897 $ 783 $ 626 $ 356 $ 258 $ 150 $ 342 $ 582 $ 406 Percent of net sales 7.4% 7.3% 7.2% 6.6% 4.6% 3.7% 2.1% 4.2% 7.5% 6.6% Income (loss) from discontinued operations 35 53 22 22 30 23 19 111 35 (57) ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ Net income $ 994 $ 950 $ 805 $ 648 $ 386 $ 281 $ 169 $ 453 $ 617 $ 349 ======= ======= ======= ====== ====== ====== ====== ====== ====== ====== Net income per Common Share assuming dilution Continuing operations $ 6.38 $ 5.87 $ 5.08 $ 3.99 $ 2.36 $ 1.80 $ 1.07 $ 2.36 $ 3.94 $ 2.79 Discontinued operations .24 .35 .15 .14 .20 .16 .13 .76 .24 (.39) ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ $ 6.62 $ 6.22 $ 5.23 $ 4.13 $ 2.56 $ 1.96 $ 1.20 $ 3.12 $ 4.18 $ 2.40 ======= ======= ======= ====== ====== ====== ====== ====== ====== ====== Average number of Common Shares outstanding assuming dilution 150.3 152.9 154.0 157.1 150.5 143.4 141.0 145.2 147.4 145.4 Net income per Common Share basic Continuing operations $ 6.51 $ 5.97 $ 5.21 $ 4.10 $ 2.40 $ 1.82 $ 1.08 $ 2.39 $ 4.02 $ 2.85 Discontinued operations .24 .35 .15 .14 .21 .17 .14 .77 .24 (.40) ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ $ 6.75 $ 6.32 $ 5.36 $ 4.24 $ 2.61 $ 1.99 $ 1.22 $ 3.16 $ 4.26 $ 2.45 ======= ======= ======= ====== ====== ====== ====== ====== ====== ====== Average number of Common Shares outstanding basic 147.3 150.2 150.2 153.1 147.9 141.2 138.8 143.6 145.0 142.8 Cash dividends paid per Common Share $ 1.72 $ 1.48 $ 1.24 $ 1.08 $ .92 $ .88 $ .88 $ .88 $ .88 $ .88 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ Total assets $13,430 $11,417 $10,218 $9,075 $8,223 $7,138 $7,646 $8,180 $8,342 $5,570 Long-term debt 2,432 1,774 1,830 1,734 1,651 1,887 2,252 2,447 1,915 1,191 Total debt 3,417 2,586 2,464 1,773 1,953 2,088 2,440 3,004 2,885 1,524 Shareholders' equity 5,172 4,106 3,778 3,606 3,117 2,302 2,475 2,410 2,624 2,057 Shareholders' equity per Common Share $ 35.42 $ 28.07 $ 25.44 $23.52 $20.37 $16.30 $17.80 $17.64 $17.72 $14.34 Common Shares outstanding 146.0 146.3 148.5 153.3 153.0 141.2 139.0 136.6 148.0 143.4 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Page 80 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(C) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT STATEMENTS OF INCOME
Year ended December 31 ------------------------ (Millions) 2007 2006 2005 ------ ------ ------ Net sales $2,514 $3,119 $2,740 Cost of products sold 1,909 2,319 1,995 Selling & administrative expense 451 462 394 Research & development expense 132 148 122 Interest expense-net 208 169 128 Dividends from consolidated subsidiaries (60) (343) (178) Other expense (income)-net 36 (191) (144) ------ ------ ------ Income (loss) from continuing operations before income taxes (162) 555 423 Income taxes (benefit) (89) 10 45 Equity in undistributed earnings of subsidiaries 1,069 417 424 ------ ------ ------ Income from continuing operations 996 962 802 Income (loss) from discontinued operations (2) (12) 3 ------ ------ ------ Net income $ 994 $ 950 $ 805 ====== ====== ======
The accompanying condensed notes are an integral part of these condensed financial statements. Page 81 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(C) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEETS
December 31 --------------- (Millions) 2007 2006 ------ ------ ASSETS Current assets Cash $ 51 $ 55 Short-term investments 1 50 Accounts receivable 168 218 Inventories 104 125 Deferred income taxes & other current assets 176 153 ------ ------ 500 601 Investment in subsidiaries 7,929 6,540 Property, plant & equipment-net 355 397 Goodwill 254 291 Other intangible assets 212 172 Deferred income taxes & other assets 741 690 ------ ------ $9,991 $8,691 ====== ====== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 822 $ 472 Current portion of long-term debt 264 Accounts payable 212 230 Accrued compensation 137 112 Pension and other postretirement liabilities 85 87 Other current liabilities 100 343 ------ ------ 1,356 1,508 Long-term debt 1,975 1,464 Pension liabilities 478 619 Other postretirement liabilities 726 754 Other long-term liabilities 284 240 Shareholders' equity 5,172 4,106 ------ ------ $9,991 $8,691 ====== ======
The accompanying condensed notes are an integral part of these condensed financial statements. Page 82 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(C) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31 ---------------------- (Millions) 2007 2006 2005 ------ ----- ----- Net cash provided by (used in) operating activities $ 133 $ 760 $ 615 Net cash provided by (used in) investing activities Expenditures for property, plant & equipment (50) (59) (80) Cash paid for acquisitions of businesses (26) (136) (300) Proceeds from sales of businesses 13 Sales (purchases) of short-term investments-net 50 21 Investments in subsidiaries (231) (214) (277) Other-net (35) 32 (21) ------ ----- ----- (279) (377) (657) ------ ----- ----- Net cash provided by (used in) financing activities Borrowings with original maturities of more than three months Proceeds 1,370 706 393 Payments (924) (633) (130) Borrowings with original maturities of less than three months-net, primarily commercial paper 104 23 365 Cash dividends paid (251) (220) (184) Proceeds from exercise of employee stock options 141 108 68 Income tax benefit from exercise of employee stock options 42 28 Purchase of Common Shares (340) (386) (450) ------ ----- ----- 142 (374) 62 ------ ----- ----- Total increase in cash (4) 9 20 Cash at beginning of year 55 46 26 ------ ----- ----- Cash at end of year $ 51 $ 55 $ 46 ====== ===== =====
The accompanying condensed notes are an integral part of these condensed financial statements. Page 83 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(C) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION (DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED) BASIS OF PRESENTATION These condensed financial statements of the registrant (the Company) are required by Schedule I of SEC Regulation S-X 5-04, which requires parent-company-only financial statements if restricted net assets of consolidated subsidiaries exceeds 25% of consolidated net assets of Eaton Corporation at December 31, 2007. At that date, a subsidiary of Eaton had net assets of $3.7 billion that were not available to be transferred to the parent company of Eaton Corporation in the form of loans, advances, or cash dividends without the consent of the lender. In the parent-company-only financial statements, the investment in subsidiaries is stated at cost plus the Company's equity in undistributed earnings of subsidiaries since the date of acquisition. The Company's share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method. These condensed financial statements should be read in conjunction with the Company's consolidated financial statements for the years ended December 31, 2007, 2006, and 2005. DEBT & OTHER FINANCIAL INSTRUMENTS A summary of long-term debt, including the current portion, follows:
2007 2006 ------ ------ 6% Euro 7 year notes, Due 2007 $ 263 Floating rate senior notes due 2009 (4.88% at December 31, 2007 - LIBOR+.08%) $ 250 250 5.75% notes due 2012 ($225 converted to floating rate by interest rate swap) 300 300 4.65% notes due 2015 (converted to floating rate by interest rate swap) 100 100 5.3% notes due 2017 250 8-7/8% debentures due 2019 ($25 converted to floating rate by interest rate swap) 38 38 8.10% debentures due 2022 100 100 7.625% debentures due 2024 ($25 converted to floating rate by interest rate swap) 66 66 6-1/2% debentures due 2025 145 145 7.65% debentures due 2029 ($75 converted to floating rate by interest rate swap) 200 200 5.45% debentures due 2034 ($100 converted to floating rate by interest rate swap) 150 150 5.25% notes due 2035 ($50 converted to floating rate by interest rate swap) 72 90 5.8% notes due 2037 240 Other 64 26 ------ ------ Total long-term debt 1,975 1,728 Less current portion of long-term debt 0 264 ------ ------ Long-term debt less current portion $1,975 $1,464 ====== ======
Page 84 In order to initially finance the acquisitions of The Moeller Group and Phoenixtec, on January 25, 2008, Eaton entered into a revolving credit agreement, in the amount of $3.0 billion, which may be used either to fund direct loans or to backstop commercial paper borrowings. The proceeds must be used to finance certain acquisitions including, but not limited to, the acquisition of The Moeller Group and Phoenixtec. All amounts borrowed under the credit agreement, including commercial paper backstopped by this agreement, must be repaid by January 23, 2009, but may be repaid earlier at the Company's option or may be required to be repaid earlier in the event of a default. The commitment amount of the revolving credit agreement will be reduced by the net amount of any proceeds raised through certain future capital market transactions which may include, but are not limited to, debt or equity issuances. The credit agreement also includes covenants customary for transactions of this type with borrowers having capital structures similar to Eaton. Eaton's United States operations have long-term revolving credit facilities of $1.5 billion, of which $300 expires in May 2008, $700 in March 2010 and the remaining $500 in August 2011. The $281 Floating Rate Senior Note due 2010 was issued by a subsidiary of Eaton in order to refinance short-term borrowings related to the acquisition of the Argo-Tech aerospace business in 2007. This subsidiary owns equity interests in several of the Company's subsidiaries and a portion of the assets of those subsidiaries are pledged as collateral for the note. At December 31, 2007, under the terms of the Note, this subsidiary had net assets of $3.7 billion that were not available to be transferred to the parent company of Eaton Corporation in the form of loans, advances, or cash dividends without the consent of the lender. In the event of an unremedied default, claims of the lender against the subsidiary's net assets are limited to the $281 principal amount of the Note, accrued interest, and associated damages. Aggregate mandatory annual maturities of long-term debt for each of the next five years are $250 in 2009 and $300 in 2012. Interest paid was $164 in 2007, $126 in 2006 and $85 in 2005. Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk. These interest rate swaps are accounted for as fair value hedges of certain of the Company's long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt above. A summary of interest rate swaps outstanding at December 31, 2007, follows (currency in millions):
Interest rates at December 31, 2007 ------------------------------------------------- Fixed Floating Interest Interest Notional Rate Rate Basis for contracted amount received paid floating interest rate paid - -------- -------- ------- --------------------------- $225 5.75% 6.16% 6 month LIBOR+0.78% $100 4.65% 4.95% 6 month LIBOR+0.12% $ 25 8.88% 8.67% 6 month LIBOR+3.84% $ 25 7.63% 7.62% 6 month LIBOR+2.48% $ 75 7.65% 7.32% 6 month LIBOR+2.58% $100 5.45% 5.63% 6 month LIBOR+0.43% $ 50 5.25% 4.99% 6 month LIBOR+0.17%
DIVIDENDS FROM SUBSIDIARIES AND INVESTEES Cash dividends paid to Eaton Corporation from the Company's consolidated subsidiaries and investees accounted for by the equity method were $60, $343, and $178 in 2007, 2006, and 2005, respectively. INTERCOMPANY TRANSACTIONS The condensed parent company financial statements include intercompany activity with other Eaton subsidiaries and affiliates as follows:
2007 2006 2005 ---- ---- ---- Sales $251 $216 $201 Interest (expense)-net (45) (45) (38) Other income-net Royalty income (expense) (37) 190 137
Page 85 PENSION & OTHER POSTRETIREMENT BENEFITS Eaton Corporation is the sponsor of defined benefit pension plans and other postretirement benefit plans that many subsidiaries in the United States participate in. Eaton Corporation's policy is to record the liabilities and related accumulated other comprehensive loss for these benefit plans for all operations in the United States on the balance sheet of the parent company. These liabilities include amounts related to the U.S. operations that are not included in these parent company financial statements. Expense for pensions and other postretirement employee benefits included in net income of the parent company's financial statements represent only the expense for the parent's operations. CONTINGENCIES Eaton is subject to a broad range of claims, administrative proceedings, and legal proceedings, such as lawsuits that relate to contractual allegations, patent infringement, personal injuries (including asbes- tos claims) and employment-related matters. Although it is not pos- sible to predict with certainty the outcome or cost of these matters, the Company believes that these matters will not have a material ad- verse effect on its financial position, results of operations or cash flows. Page 86 Eaton Corporation 2007 Annual Report of Form 10-K Exhibit Index Exhibits 3(i) Amended Articles of Incorporation (amended and restated April 27, 1994) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 3(ii) Amended Regulations (amended and restated April 26, 2000) - Incorporated by reference to the Form 10-Q Report for the six months ended June 30, 2000 4(a) Revolving Credit Agreement, dated as of January 25, 2008 among Eaton Corporation; the banks listed therein; Morgan Stanley Senior Funding, Inc. ("MSSF"), as Administrative Agent; MSSF; Citigroup Global Markets Inc., and J.P. Morgan Securities Inc., as Joint Lead Arrangers and Joint Book Managers and Citibank N.A. and JPMorgan Chase Bank, N.A. as Co-Syndication Agent - Incorporated by reference to the Form 8-K Report filed January 31, 2008 (Pursuant to Regulation S-K Item 601(b) (4), the Company agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt) 10 Material contracts (a) Purchase Agreement between V.G.A.T. Investors, LLC and Eaton Corporation dated as of December 24, 2006 --Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (b) Tender Offer for all of the shares of Phoenixtec Power Company Ltd. announced on December 20, 2007 - Filed in conjunction with this Form 10-K Report (c) Share Purchase Agreement between Green Beta S.a.r.l. and Eaton Corporation dated December 20, 2007 - Filed in conjunction with this Form 10-K Report (d) Executive Incentive Compensation Plan (effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2005 (e) 2005 Non-Employee Director Fee Deferral Plan (2008 restatement) - Filed in conjunction with this Form 10-K Report (f) Deferred Incentive Compensation Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (g) Excess Benefits Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (h) Incentive Compensation Deferral Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (i) Limited Eaton Service Supplemental Retirement Income Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (j) Supplemental Benefits Plan II (2008 restatement) - Filed in conjunction with this Form 10-K Report (k) Form of Restricted Share Unit Agreement (2 year vesting) - Filed in conjunction with this Form 10-K Report (l) Form of Restricted Share Unit Agreement (4 year vesting) - Filed in conjunction with this Form 10-K Report (m) Form of Restricted Share Agreement (2 year vesting) - Filed in conjunction with this Form 10-K Report (n) Form of Restricted Share Agreement (4 year vesting) - Filed in conjunction with this Form 10-K Report (o) Form of Stock Option Agreement for Executives (2008) - Filed in conjunction with this Form 10-K Report (p) Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (q) Form of Stock Option Agreement for Non-Employee Directors (2008) - Filed in conjunction with this Form 10-K Report (r) 2004 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 19, 2004 (s) Plan for the Deferred Payment of Directors' Fees (originally adopted in 1985 and amended effective September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004 and, in certain respects, January 1, 2005) - Filed in conjunction with this Form 10-K Report (t) Limited Eaton Service Supplemental Retirement Income Plan (amended and restated January 1, 2003) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (u) Vehicle Allowance Program (effective January 1, 2003) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2003 (v) 2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002 (w) 1996 Non-Employee Director Fee Deferral Plan (amended and restated effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (x) Form of Change of Control Agreement entered into with officers of Eaton Corporation - Filed in conjunction with this Form 10-K Report (y) Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (z) Form of Indemnification Agreement entered into with directors of Eaton Corporation - Incorporated by reference to the Form 8-K Report filed January 26, 2007 (aa) Executive Strategic Incentive Plan I (amended and restated January 1, 2007) - - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 (bb) Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (cc) Deferred Incentive Compensation Plan (amended and restated March 31, 2000) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000 (dd) 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998 (ee) Incentive Compensation Deferral Plan (amended and restated October 1, 1997) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000 (ff) Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (gg) Trust Agreement - Non-employee Directors (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (hh) 1995 Stock Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (ii) Group Replacement Insurance Plan (GRIP) (effective June 1, 1992) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 1992 (jj) 1991 Stock Option Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (kk Excess Benefits Plan (amended and restated effective January 1, 1989) -Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (ll) Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 (mm) Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other Equity Grants upon the Restatement of Financial Results -Filed in conjunction with this Form 10-K Report 12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report 14 Code of Ethics - Incorporated by reference to the definitive Proxy Statement to be filed on or about March 14, 2008 21 Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K Report 23 Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report 24 Power of Attorney - Filed in conjunction with this Form 10-K Report 31.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report 31.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report 32.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report 32.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report EX-10.B 2 l30233aexv10wb.txt EX-10(B) EXHIBIT 10 (B) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) TENDER OFFER PROSPECTUS (Unofficial Translation, Official version available at http://www.yuanta.com) 1. OFFEROR: Modern Molded Products Ltd. ("OFFEROR") RESPONSIBLE PERSON: JEFFREY FIORINI 2. TARGET COMPANY: Phoenixtec Power Co., Ltd. ("TARGET COMPANY") 3. TYPE OF SECURITIES ACQUIRED: the common shares of the Target Company. Tender of less than three shares will not be accepted. The Offerees shall deposit the shares into their central depository account before tendering their shares for sale. Any shares that are not deposited into the central depository account will not be accepted. The shares tendered for sale shall not be pledged or subject to any other encumbrances which may affect the transferability of the shares. Any shares that were purchased on margin shall be settled in cash before they can be tendered. 4. NUMBER OF SECURITIES TO BE ACQUIRED: Total of 425,255,291 shares, representing 100% of the total issued and outstanding common shares of the Target Company ("TARGET SHARES", the number of 425,255,291 shares is calculated by deducting the 27,000,000 treasury shares, as of July 25, 2007, from the 452,255,291 total issued shares of the Target Company as shown in the public corporate registration information on the website of the Department of Commerce of the Ministry of Economic Affairs ("MOEA"), last amended on July 9, 2007.) In the event that number of tendered shares falls short of the Target Shares, but reaches 216,880,000 shares ("MINIMUM SHARES"), that is the round-up to the nearest multiple of one thousand of the number arrived after multiplying by 51% the 425,255,291 shares, calculated by deducting the 27,000,000 treasury shares, as of July 25, 2007, from the 452,255,291 total issued and shares of the Target Company as shown in the public corporate registration information displayed on the website of the Department of Commerce of the MOEA as last amended on July 9, 2007, the quantity condition of this Tender Offer shall be deemed to be fulfilled and the Offeror shall still acquire the tendered shares after all the other Tender Offer conditions are fulfilled. 5. CONSIDERATION OF TENDER OFFER: The consideration shall be in cash at NT$ 50 per share. The Offerees shall bear all securities transaction tax, bank charges, postage fees for sending checks by registered mail, and other necessary and reasonable fees related to the payment of consideration. If there are any such other costs or expenses, the Offeror will make a public announcement in accordance with the laws. When making payment for the Tender Offer consideration, the Offeror will round up the payment to the nearest dollar after deducting the above costs and expenses from the total amount of consideration payable. 6. TENDER OFFER PERIOD: From 9 am (local time in Taipei) December 21, 2007 ("COMMENCEMENT DATE") to 3.30 pm, January 25, 2008 ("COMPLETION DATE"). Applications for tendering will be accepted between 9 a.m. to 3:30 p.m. (local time in Taipei) on any business day during the Tender Offer Period. 7. THE OFFEROR OR ANY OTHER PERSONS WHO HAVE SIGNED OR AFFIXED THEIR SEALS ON THIS PROSPECTUS SHALL BE LEGALLY LIABLE FOR ANY MISREPRESENTATION OR NONDISCLOSURE IN THIS PROSPECTUS. 8. THE OFFEREES SHALL READ THE PROSPECTUS CAREFULLY AND SHALL PAY SPECIAL ATTENTION TO THE RISK(s) ASSOCIATED WITH THE TENDER. (For risks please see page 9) 9. This Tender Offer Prospectus is available at http://www.yuanta.com (i.e. the website of Yuanta Securities Co., Ltd.) Date: December 21, 2007 NOTICE TO SHAREHOLDERS OF THE TARGET COMPANY 1. Tender Offer Period: From (local time in Taipei) 9 am, December 21, 2007 to 3.30 pm, January 25, 2008. Applications to tender will be accepted between 9 a.m. and 3:30 p.m. (local time in Taipei) on any business day during the Tender Offer Period. 2. Tender Offer Consideration: The consideration shall be in cash at NT$ 50 per share. 3. Tender Offer Agent: Yuanta Securities Co., Ltd. ("AGENT") 4. Acquisition Unit and Acquisition Restrictions: the common shares of the Target Company. Tender of less than three shares will not be accepted. The Offerees shall deposit the shares into their central depository account before tendering their shares for sale. Any shares that are not deposited into the central depository account will not be accepted. The shares tendered for sale shall not be pledged or subject to any other encumbrances which may affect the transferability of the shares. Any shares that were purchased on margin shall be settled in cash before they can be tendered. 5. Location for Tender Offer: For those Offeree shareholders who have deposited the shares into their central depositary accounts, they may tender their shares by presenting their securities deposit book and authorized signature specimen to the securities firms. 6. Tender Offer Inquiry Hotline: (02) 2712-5566 I. BASIC INFORMATION OF TENDER OFFER 1. Basic Information of the Offeror --------------------------------------------------------------------------- Name: MODERN MOLDED PRODUCTS LTD. Responsible Person: Jeffrey Fiorini --------------------------------------------------------------------------- Web site: None --------------------------------------------------------------------------- Main Business: Manufacturing "rubber molded golf clubs and putters and grips" and other goods F109030 Wholesale of Sports Goods F209020 Retail Sale of Sports Goods F401010 International Trade I201010 Credit Bureau Service MODERN MOLDED PRODUCTS LTD. is a wholly owned subsidiary of Eaton Holding IV B.V. Eaton Holding IV B.V. is an indirect wholly owned subsidiary of Eaton Corporation ("EATON"). Eaton is a premier diversified industrial manufacturer with global leadership in electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment; intelligent truck drivetrain systems for safety and fuel economy; and automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety. Eaton's sales for the fiscal year ended 2006 were USD$12.4 billion. More information can be found at www.Eaton.com. --------------------------------------------------------------------------- Shareholding of Directors, Supervisors and Major Shareholders ---------------------------------------------------------------------------
Title Name/Acting as the Number of Shares Held Shareholding Representative of Percentage --------------------------------------------------------------------------- Chairman Jeffrey Fiorini/Eaton 36,000,000 100% Holding IV B.V. ---------------------------------------------------------------------------
-1- --------------------------------------------------------------------------- Director David Schwieteman/Eaton 36,000,000 100% Holding IV B.V. --------------------------------------------------------------------------- Director Donald Bullock/Eaton 36,000,000 100% Holding IV B.V. --------------------------------------------------------------------------- Supervisor Steven Chen/Eaton 36,000,000 100% Holding IV B.V. --------------------------------------------------------------------------- Supervisor Terri Sun/Eaton 36,000,000 100% Holding IV B.V. --------------------------------------------------------------------------- Shareholder holding over 10% of the Eaton Holding IV B.V. 36,000,000 100% Target Company ---------------------------------------------------------------------------
2. Name, address, telephone number of the Agent and the scope of its mandate: --------------------------------------------------------------------------- Name Yuanta Securities Co., Ltd. --------------------------------------------------------------------------- Address 14F 225 Nanjing East Road, Section 3, Zhong Shan District, Taipei --------------------------------------------------------------------------- Phone Number (02) 2717-5566 --------------------------------------------------------------------------- The Agent is appointed to: 1. Accept the delivery, deposit, and return of the securities of this Tender Offer; 2. Deliver the Tender Offer Prospectus; Scope of 3. Receive and deliver the shares of the Target Mandate Company and the consideration for such shares; 4. Issue securities transaction tax statement and pay the securities transaction tax for this Tender Offer on behalf of the Offerees; 5. Handle the closing and payment of the shares; and --------------------------------------------------------------------------- -2- --------------------------------------------------------------------------- 6. Handle any and all other matters related to the items above. --------------------------------------------------------------------------- II. TERMS AND CONDITIONS OF THE TENDER OFFER: --------------------------------------------------------------------------- 1. TENDER OFFER PERIOD: From (local time in Taipei) 9 am, December 21, 2007 ("COMMENCEMENT DATE") to 3:30 pm, January 25, 2008 ("COMPLETION DATE"). Applications for tendering will be accepted between 9 a.m. and 3:30 p.m. (local time in Taipei) on any business day during the Tender Offer Period. --------------------------------------------------------------------------- 2. THE HIGHEST AND LOWEST ESTIMATED NUMBER OF SECURITIES TO BE ACQUIRED: The maximum shares to be acquired by Tender Offer are 425,255,291 shares (being the Target Shares). If the shares being tendered do not equal to the Target Shares, but reach the minimum shares (being 216,880,000 shares), the quantity condition of this Tender Offer shall be deemed to be fulfilled. Then subject to all other conditions being met, the Offeror shall acquire the tendered shares. --------------------------------------------------------------------------- 3. CONSIDERATION OF THE TENDER OFFER: In cash at NT$ 50 per share. The Offerees shall bear all securities transaction tax, bank charges, postage fees for sending checks by registered mail, and other necessary and reasonable fees related to the payment of consideration. If there are any such other costs or expenses, the Offeror will make a public announcement in accordance with the laws. When making payment for the Tender Offer consideration, the Offeror will round up the payment to the nearest dollar after deducting the above costs and expenses from the total amount of consideration payable. Yuanta Securities will pay the securities transaction tax on behalf of the Offerees. --------------------------------------------------------------------------- 4. UNLESS THE LAW OTHERWISE PROVIDES, AN OFFEREE MAY NOT REVOKE OR CANCEL ITS TENDER AFTER THE OFFEROR MAKES A PUBLIC ANNOUNCEMENT ON THE SATISFACTION OF THE CONDITIONS TO THIS TENDER OFFER. --------------------------------------------------------------------------- -3- --------------------------------------------------------------------------- 5. OTHER IMPORTANT MATTERS: (1) During the Tender Offer Period, the Offerees may tender their shares by presenting their securities deposit book and original authorized signature specimen to the original securities firms. Please refer to the explanations on the website http://www.yuanta.com.tw/ for relevant details. (2) When the Offerees tender their shares for sale, they are deemed to have authorized TDCC and the Offeror to disclose to Yuanta Securities their names, addresses, ID number or company registration number for the Agent to process the matters related to the Tender Offer. (3) The Offerees shall own the shares to be tendered. The shares tendered for sale shall not be pledged or subject to any other encumbrances which may affect the transferability of the shares. Any shares that were purchased on margin shall be settled in cash before they can be tendered. (4) Shares in physical form will not be accepted in this Tender Offer. Those who hold the shares of the Target Company in physical form must deposit their shares into their central depository account with TDCC before tendering. Tender of less than three shares will not be accepted either. (5) Before the completion of this Tender Offer, if the Offeror finds it necessary to extend the Tender Offer Period, it may do so pursuant to the relevant law and regulations. (6) If there are any material changes to the Target Company's financial situation, business operation, the Offeror's bankruptcy or reorganization as ordered by an authority or occurrence of the situations prescribed by the competent authority, the Offeror may suspend or terminate the Tender Offer after obtaining approval from the competent authority. (7) Offerees understand and acknowledge that the success of the Tender Offer is subject to a number of factors, including, but not limited to, the number of shares actually tendered and other circumstances not attributable to the Offeror. If the Tender Offer is subject to consent, approval, order, authorization or permit (the "APPROVAL") of the competent authorities of the ROC (including Investment Commission, MOEA; Financial Supervisory Commission, Executive Yuan; and Fair Trade Commission, Executive Yuan) and the other countries or territories with jurisdiction over the Tender Offer (including the PRC, Germany and the US) or declaration thereof to the above --------------------------------------------------------------------------- -4- --------------------------------------------------------------------------- competent authorities is required, and the Approval is not obtained or the Tender Offer is not completed during the Tender Offer Period, the Offerees will bear the risk of delayed receipt of the subscription price, price fluctuation and failure of the Tender Offer. (8) At the end of the Tender Offer Period, if the number of shares actually tendered is less than the Minimum Shares, there may be a risk of failure of the Tender Offer. (9) For shares offered for sale by the Offerees that are tax-deferred, in accordance with the Ministry of Finance 890726 Tai-Cai-Shui No. 890454416 letter, if the tax-deferred shares are deposited at Taiwan Depositary & Clearance Corporation, these shares will not be treated as tax-deferred, and will be consolidated into the shareholder's income in the current year and subject to annual consolidated income tax. The Offerees understand after they have deposited their tax-deferred shares at Taiwan Depositary & Clearance Corporation, they will be liable to report tax return and pay income tax on the tax-deferred shares even if the Tender Offer is not consummated. (10) Please peruse this Tender Offer Prospectus for any other important terms and conditions. --------------------------------------------------------------------------- -5- III. TYPE AND SOURCE OF PAYMENT AND SOURCE FUNDING FOR THE TENDER OFFER --------------------------------------------------------------------------- Itemized Statement of The Offeror will pay part of the consideration the Offeror's Funds with its own funds. For such purpose, the Offeror passed a board resolution on December 17, 2007 to increase its capital of NT$ 6,460,000,000 through issuance of 646,000 new shares at NT$10,000 each for subscription by its shareholder Eaton Holding IV B.V. --------------------------------------------------------------------------- Source of Capital: The Offeror's shareholder. The Offeror's shareholder will provide a shareholder loan not exceeding NT$ 15,553,000,000 for payment of the consideration of the Tender Offer with the Offeror's own funds. ------------------------------------------------- 2. Primary Borrower: Eaton Holding IV B.V. Details of the ------------------------------------------------- Financing Plan : 3. Whether the assets of the Target Company will be used as collateral in the Offeror's repayment plan: [ ] Yes, the details of the repayment [X] No, the assets of the Target Company will not be used as collateral in the Offeror's repayment plan. --------------------------------------------------------------------------- -6- IV. RISKS OF PARTICIPATION OR NON-PARTICIPATION IN TENDER OFFER RISKS ASSOCIATED WITH PARTICIPATION IN THE TENDER OFFER 1. ANY MATERIAL CHANGES TO THE TARGET COMPANY'S FINANCIAL SITUATION, BUSINESS OPERATION, THE OFFEROR'S BANKRUPTCY OR REORGANIZATION AS ORDERED BY AUTHORITY OR OCCURRENCE OF THE SITUATIONS PRESCRIBED BY THE COMPETENT AUTHORITY: IF, AFTER THE COMMENCEMENT OF THIS TENDER OFFER, ANY MATTER PRESCRIBED UNDER SUBPARAGRAPHS 1 TO 3, PARAGRAPH 1, ARTICLE 43-5 OF THE SECURITIES AND EXCHANGE ACT ("SEA") OCCURS, INCLUDING ANY MATERIAL CHANGES TO THE TARGET COMPANY'S FINANCIAL SITUATION AND BUSINESS OPERATION (INCLUDING WITHOUT LIMITATION ANY MATERIAL FALSE STATEMENT OR CONCEALMENT IN THE FINANCIAL STATEMENT OR OTHER BUSINESS-RELATED DOCUMENTS OF THE TARGET COMPANY THAT HAVE BEEN DECLARED OR DISCLOSED), THE OFFEROR'S BANKRUPTCY OR REORGANIZATION AS ORDERED BY AUTHORITY OR OCCURRENCE OF THE SITUATIONS PRESCRIBED BY THE COMPETENT AUTHORITY, AND THE OFFEROR MAY DISCONTINUE THIS TENDER OFFER UPON APPROVAL OF THE COMPETENT AUTHORITIES, THE OFFEREE WILL BEAR THE RISK OF PRICE FLUCTUATION AND FAILURE OF THE TENDER OFFER. 2. APPROVAL OF THE INVESTMENT COMMISSION OF THE MOEA: THE OFFEROR IS A COMPANY INVESTED BY A FOREIGNER AND ALL OF THE FUNDING SOURCES OF THIS TENDER OFFER ARE THE SUBSCRIPTION PRICE PAID BY THE SHAREHOLDER OF THE OFFEROR IN CASH FOR THE NEW SHARES ISSUED FOR THE INCREASE OF THE OFFEROR'S CAPITAL AND THE LOAN PROVIDED BY THE SHAREHOLDER OF THE OFFEROR. THEREFORE, THE APPROVAL OF THE INVESTMENT COMMISSION ("IC") OF THE MINISTRY OF ECONOMIC AFFAIRS ("MOEA") MUST BE OBTAINED BEFORE THE SHAREHOLDERS OF THE OFFEROR INCREASE THEIR INVESTMENT IN THE OFFEROR AND REMIT THE SUBSCRIPTION PRICE. THE OFFEREE SHALL UNDERSTAND THAT HE/SHE WILL HAVE TO ASSUME THE RISKS OF DELAY IN PAYMENT OF CONSIDERATION, FAILURE OF THIS TENDER OFFER, AND CHANGE OF MARKET PRICE IF THE IC DOES NOT APPROVE THIS TENDER OFFER OR ORDERS A SUSPENSION OF THE EFFECTIVENESS OF OR REVOCATION OF THE APPROVAL. 3. RE-DECLARATION AND PUBLIC DISCLOSURE: THE FSC MIGHT ORDER THE OFFEROR TO REVISE THE REPORTING PARTICULARS OF THE TENDER OFFER AND RE-SUBMIT THE FILING AND PUBLIC ANNOUNCEMENT OF THIS TENDER OFFER IN ACCORDANCE WITH PARAGRAPH 2, ARTICLE 43-5 OF THE SEA. IN LIGHT OF THE FOREGOING, THERE MAY BE RISKS ASSOCIATED WITH RE-SUBMISSION AND RE-ANNOUNCEMENT. -7- 4. SECURITIES AS CONSIDERATION: THE SOLE CONSIDERATION OF THIS TENDER OFFER IS CASH INSTEAD OF SECURITIES. AS A RESULT, THERE ARE NO FAILURE OR DELAY RISKS ASSOCIATED WITH THE DELAY IN THE ISSUANCE OF SECURITIES AS THE TENDER OFFER CONSIDERATION. 5. TENDERS SHALL NOT BE CANCELLED AFTER THE CONDITIONS TO THE TENDER OFFER ARE FULFILLED AND PUBLIC ANNOUNCEMENT THEREOF IS MADE BY THE OFFEROR. ONCE THE CONDITIONS TO THE TENDER OFFER ARE FULFILLED AND PUBLIC ANNOUNCEMENT THEREOF IS MADE BY THE OFFEROR, THE OFFEREES WILL NOT BE ABLE TO CANCEL THEIR TENDERS AND WILL HAVE TO ASSUME THE RISKS ASSOCIATED THEREWITH, REGARDLESS OF WHETHER ANOTHER OFFEROR MAKES A TENDER OFFER AT A HIGHER PRICE OR THE MARKET PRICE OF THE SHARES OF THE TARGET COMPANY IS HIGHER THAN THE CONSIDERATION PROVIDED HEREIN. 6. NUMBER OF SHARES TENDERED DOES NOT REACH THE MINIMUM SHARES THERE IS A RISK THAT THIS TENDER OFFER WILL FAIL IF THE NUMBER OF SHARES TENDERED DOES NOT REACH THE MINIMUM SHARES BY THE END OF THE TENDER OFFER PERIOD. 7. EXTENSION OF THE TENDER OFFER PERIOD: THE TENDER OFFER PERIOD MAY BE EXTENDED FOR LEGITIMATE CAUSES AND THE OFFEREES MIGHT FACE RISKS ASSOCIATED WITH THE DELAY IN CLOSING AND THE FLUCTUATIONS IN MARKET PRICE. 8. TOTAL NUMBER OF TENDERED SHARES EXCEEDS TARGET SHARES: THE OFFEROR PROPOSES TO ACQUIRE 100% OF THE TOTAL ISSUED AND OUTSTANDING SHARES OF THE TARGET COMPANY. AS A RESULT, THERE ARE NO RISKS ASSOCIATED WITH THE SITUATION WHERE THE TOTAL NUMBER OF TENDERED SHARES EXCEEDS THE TARGET SHARES AND THAT THE OFFEROR HAS TO ACQUIRE THE TENDERED SHARES FROM ALL THE OFFEREES ON A PRO-RATA BASIS. 9. THE OFFEREES UNDERSTAND AND ACKNOWLEDGE THAT THE SUCCESS OF THE TENDER OFFER IS SUBJECT TO A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE NUMBER OF SHARES ACTUALLY TENDERED AND OTHER CIRCUMSTANCES NOT ATTRIBUTABLE TO THE OFFEROR. IF THE TENDER OFFER IS SUBJECT TO THE CONSENT, APPROVAL, ORDER, AUTHORIZATION OR PERMIT BY THE TAIWANESE COMPETENT AUTHORITIES, INCLUDING INVESTMENT COMMISSION, MOEA; FINANCIAL SUPERVISORY COMMISSION, EXECUTIVE YUAN; AND FAIR TRADE COMMISSION, EXECUTIVE YUAN, AND OTHER COUNTRIES WITH JURISDICTION OVER THE TENDER OFFER, INCLUDING THE PRC, GERMANY AND THE US ("COMPETENT AUTHORITIES"), OR MUST BE REPORTED TO THE COMPETENT AUTHORITIES, AND THE ABOVE REQUIREMENT IS NOT MET OR SATISFIED BEFORE THE END OF THE TENDER OFFER PERIOD, THE OFFEREES SHALL BEAR THE RISK OF DELAYED RECEIPT OF THE -8- CONSIDERATION OF THE SHARE PURCHASE, OR FAILURE TO COMPLETE THE TENDER OFFER, AND CHANGE OF MARKET PRICE. 10. THE OFFEREES MUST OWN THE SHARES TO BE TENDERED AND THE SHARES TO BE TENDERED MUST NOT BE PLEDGED OR SUBJECT TO ANY ENCUMBRANCES THAT WOULD AFFECT THE TRANSFERABILITY OF THE SHARES. ANY SHARES THAT WERE PURCHASED ON MARGIN MUST BE SETTLED IN CASH BEFORE THEY CAN BE TENDERED. SHARES IN PHYSICAL FORM WILL NOT BE ACCEPTED IN THIS TENDER OFFER. THOSE WHO HOLD THE SHARES OF THE TARGET COMPANY IN PHYSICAL FORM MUST DEPOSIT THEIR SHARES INTO THEIR CENTRAL DEPOSITORY ACCOUNT WITH TDCC BEFORE TENDERING. IF AN OFFEREE DOES NOT DO SO, THERE IS A RISK THAT THEIR SHARES CANNOT BE TENDERED. 11. TAX-DEFERRED STOCKS: FOR SHARES OFFERED FOR SALE BY THE OFFEREES THAT ARE TAX-DEFERRED, IN ACCORDANCE WITH THE MINISTRY OF FINANCE 890726 TAI-CAI-SHUI NO. 890454416 LETTER, IF THE TAX-DEFERRED SHARES ARE DEPOSITED AT TAIWAN DEPOSITARY & CLEARANCE CORPORATION, THESE SHARES WILL NOT BE TREATED AS TAX-DEFERRED, AND WILL BE CONSOLIDATED INTO THE SHAREHOLDER'S INCOME IN THE CURRENT YEAR AND SUBJECT TO ANNUAL CONSOLIDATED INCOME TAX. THE OFFEREES UNDERSTAND AFTER THEY HAVE DEPOSITED THEIR TAX-DEFERRED SHARES AT TAIWAN DEPOSITARY & CLEARANCE CORPORATION, THEY WILL BE LIABLE TO REPORT TAX RETURN AND PAY INCOME TAX ON THE TAX-DEFERRED SHARES EVEN IF THE TENDER OFFER IS NOT CONSUMMATED. 12. OTHER MATERIAL RISKS THAT THE TENDER OFFEROR KNOWS COULD AFFECT THE TENDER OFFER: NONE. RISKS ASSOCIATED WITH NON-PARTICIPATION IN THE TENDER OFFER 1. IT IS CONTEMPLATED THAT AFTER THE COMPLETION OF THIS TENDER OFFER, THE TARGET COMPANY AND ITS 100% OWNED SUBSIDIARY, FU-RUIE INVESTMENT CO., LTD, WILL EACH HOLD A BOARD OR SHAREHOLDERS MEETING TO REVIEW AND APPROVE THE MERGER PROPOSAL. THE TARGET COMPANY WILL BECOME THE SURVIVING COMPANY, AND FU-RUIE INVESTMENT CO., LTD WILL BECOME THE DISSOLVED COMPANY. THE OFFEROR MAY, AS AN ALTERNATIVE, HAVE THE SHARES OF THE TARGET COMPANY HELD BY FU-RUIE INVESTMENT CO., LTD CANCELLED BY USING OTHER MEANS PERMITTED BY THE LAW AND RELEVANT REGULATIONS. THEN THE OFFEROR AND THE TARGET COMPANY WILL EACH HOLD A BOARD OR SHAREHOLDERS MEETING (DEPENDING ON THE TOTAL NUMBER OF SHARES ACQUIRED IN THE TENDER OFFER), TO REVIEW AND APPROVE THE CASH MERGER PROPOSAL WITH THE OFFEROR ("MERGER"). THE OFFEROR WILL BECOME THE SURVIVING COMPANY, AND SHALL OFFER AS MERGER CONSIDERATION TO PURCHASE THE SHARES OF THE TARGET COMPANY AT NT$ 50 PER SHARE, WHICH IS THE SAME AS THE CONSIDERATION OFFERED IN THIS TENDER OFFER. THE EFFECTIVE DATE OF THE MERGER WILL BE DETERMINED BY THE BOARDS OF THE TWO COMPANIES AFTER THE TERMS AND CONDITIONS SET FORTH IN THE MERGER AGREEMENT HAVE -9- BEEN FULFILLED. SHAREHOLDER PLEASE NOTE THAT, UPON THE COMPLETION OF THIS TENDER OFFER, THE OFFEROR WILL HOLD AT LEAST 51% OF THE TARGET COMPANY'S ISSUED SHARES. PURSUANT TO THE COMPANY LAW AND OTHER RELEVANT REGULATIONS, THE OFFEROR'S SHAREHOLDING ALONE WILL BE SUFFICIENT TO PASS THE RESOLUTION AT THE SHAREHOLDERS MEETING OF THE TARGET COMPANY TO APPROVE THE MERGER WITH THE OFFEROR, WITH THE TARGET COMPANY BEING THE DISSOLVING COMPANY. AFTER THE TARGET COMPANY MERGES INTO THE OFFEROR, ITS SHARES CAN NO LONGER BE TRADED ON THE TAIWANESE STOCK EXCHANGE ("TSE") AND THOSE SHARES WILL BE DELISTED AFTER OBTAINING APPROVAL FROM THE SECURITIES AND FUTURES BUREAU ("SFB") OF THE FSC AND THE TSE. IF THE SHAREHOLDERS OF THE TARGET COMPANY DO NOT TENDER THE SHARES IN THIS TENDER OFFER, SUCH SHARES CANNOT BE TRADED ON THE MARKET ONCE THEY ARE DELISTED, AND THESE SHAREHOLDERS MAY NOT RECEIVE THE MERGER CONSIDERATION OR OTHER MARKET PRICE AS CONFIRMED BY THE COURT PURSUANT TO A LEGITIMATE REQUEST IN ACCORDANCE WITH APPLICABLE LAWS AND REGULATIONS UNTIL AFTER THE MERGER EFFECTIVE DATE. 2. SET FORTH BELOW IS THE COMPARISON ON THE DIFFERENT TAX TREATMENT FOR THE SHAREHOLDERS WHO CHOOSE TO PARTICIPATE IN THIS TENDER OFFER AND THOSE WHO CHOOSE TO PARTICIPATE IN THE MERGER: (1) PARTICIPATION IN THIS TENDER OFFER: THE SALE PROCEEDS WILL BE SUBJECT TO 0.3% SECURITIES TRANSACTION TAX. IF THE SHAREHOLDERS ARE DOMESTIC PROFIT-SEEKING ENTERPRISES, ACCORDING TO THE MINIMUM ALTERNATIVE TAX ACT, CAPITAL GAINS REALIZED FROM SALE OF SECURITIES SHOULD BE CONSOLIDATED INTO THEIR MINIMUM INCOME FOR CALCULATING THE ALTERNATIVE MINIMUM TAX. (2) PARTICIPATION IN THE MERGER: ACCORDING TO A RULING (TAI-TSAI-HSUEI-TZI- 9304538300) ISSUED BY THE MINISTRY OF FINANCE ON SEPTEMBER 21, 2004: "IN CASE OF A MERGER BETWEEN COMPANIES WHEREBY THE TOTAL MERGER CONSIDERATION RECEIVED BY THE DISSOLVING COMPANY IS IN EXCESS OF THE CAPITAL CONTRIBUTION OF ALL OF ITS SHAREHOLDERS (INCLUDING CAPITAL, CAPITAL PREMIUM IN THE LEGAL RESERVE AND MERGER PREMIUM), AND THE EXCESSIVE AMOUNT IS FULLY REALIZED IN CASH, ANY AMOUNT OF THE EXCESSIVE AMOUNT DISTRIBUTED TO THE SHAREHOLDERS OF THE DISSOLVING COMPANY SHALL BE DEEMED DIVIDEND INCOME (INVESTMENT INCOME) WHICH IS SUBJECT TO INCOME TAX." THE CASH MERGER CONSIDERATION PAID BY THE OFFEROR TO THE LOCAL INDIVIDUAL SHAREHOLDERS (NT$ 50 EACH SHARE) IN EXCESS OF THE TOTAL CAPITAL CONTRIBUTION OF ALL THE SHAREHOLDERS (CAPITAL, CAPITAL PREMIUM IN THE LEGAL RESERVE, AND MERGER PREMIUM) SHALL BE DEEMED AS DIVIDEND INCOME TO THE RECIPIENTS, WHICH SHALL BE CONSOLIDATED INTO THEIR GROSS INCOME FOR CALCULATING INCOME TAX. IN CASE THE SHAREHOLDERS OF THE DISSOLVING COMPANY ARE PROFIT-SEEKING ENTERPRISES THAT ARE COMPANIES, THE NET DIVIDENDS OR THE NET RETAINED EARNINGS THUS DISTRIBUTED NEED NOT BE CONSOLIDATED INTO THEIR INCOME FOR CALCULATION OF CORPORATE INCOME TAX IN -10- ACCORDANCE WITH ARTICLE 42 OF THE INCOME TAX ACT. THE AMOUNT OF DEDUCTIBLE TAX SHALL BE CONSOLIDATED INTO THE BALANCE OF ITS SHAREHOLDER DEDUCTIBLE TAX ACCOUNT IN ACCORDANCE WITH ARTICLE 66-13 OF THE INCOME TAX ACT. IF THE SHAREHOLDERS ARE FOREIGN INDIVIDUALS OR BUSINESSES, THE DIVIDENDS THUS RECEIVED ARE SUBJECT TO 20% WITHHOLDING TAX (OR OTHER WITHHOLDING TAX RATE IN ACCORDANCE WITH APPLICABLE TAX TREATIES). (3) PLEASE NOTE THAT THE ABOVE IS FOR REFERENCE ONLY AND SHOULD NOT BE TREATED AS TAX ADVICE OR OPINION. SHAREHOLDERS OF THE TARGET COMPANY SHOULD SEEK FROM THEIR OWN TAX CONSULTANTS ADVICE ON TAX LIABILITIES ON PARTICIPATION IN THIS TENDER OFFER OR THE MERGER. -11- V. POST-TENDER OFFER MATTERS 1. Method of Payment of Consideration --------------------------------------------------------------------------- Time Within 6 business days, including the 6th day, after the end of the Tender Offer Period and all the Tender Offer conditions being satisfied. --------------------------------------------------------------------------- Method 1. Method of Payment of Consideration The consideration for tendered shares will be paid by Agent Yuanta Securities Co., Ltd. by means of wire transfer to the bank account of the Offeree registered with the TDCC. Or the consideration will be paid with a check marked with parallel lines and restricted from being endorsed, sent via registered mail by the Agent to the address of the Offeree registered with the TDCC. 2. Calculation of Consideration The total amount payable by the Offeror to each Offeree shall be the net price of the number of the acquired shares multiplied by the Tender Offer unit consideration, after deducting the securities transaction tax payable, bank charges for wire-transfer or postage fees for sending checks by registered mail, and other necessary and reasonable fees, each of which should be rounded to the nearest dollar. --------------------------------------------------------------------------- Location The Agent Yuanta Securities Co., Ltd. will wire the consideration to the Offeree's bank account registered with TDCC or deliver the check, by registered mail, to the address registered at the TDCC. --------------------------------------------------------------------------- 2. Settlement, Transfer and Delivery of Shares Acquired --------------------------------------------------------------------------- Time Within 6 business days, including the 6th day, after the end of the Tender Offer Period and all the Tender Offer conditions being satisfied. --------------------------------------------------------------------------- -12- --------------------------------------------------------------------------- Method For shares tendered for sale have been delivered to Yuanta Securities Co., Ltd.'s Designated Account for Tender Offer, the securities will be delivered from Yuanta Securities' "Yuanta Securities Co., Ltd. Fuxing Branch Designated Account for Tender Offer" (Account No.: 980B0664141) to Offeror's central deposit account. --------------------------------------------------------------------------- Location Yuanta Securities Co., Ltd. Business Office Address: 14F 225 Nanjing East Road, Section 3, Taipei --------------------------------------------------------------------------- 3. Method to Return of the Tendered but Unacquired Securities --------------------------------------------------------------------------- Time ------------------------------------------------------- Within 6 business days, including the 6th day, after the end of the Tender Offer Period. ------------------------------------------------------- Method ------------------------------------------------------- The For shares tendered for sale have been delivered to handling Yuanta Securities Co., Ltd.'s Designated Account for method if Tender Offer, the securities will be delivered from the number Yuanta Securities' "Yuanta Securities Co., Ltd. Fuxing of the Branch Designated Account for Tender Offer" (Account shares No.: 980B0664141) to the Offeree's central depository tendered account. does not reach the Minimum Shares ------------------------------------------------------- Location ------------------------------------------------------- Yuanta Securities Co., Ltd. Business Office Address: 14F 225 Nanjing East Road, Section 3, Taipei --------------------------------------------------------------------------- -13- --------------------------------------------------------------------------- The handling This is not applicable since the Offeror has offered to method for acquire 100% of the total issued and outstanding shares of returning the Target Company. the securities if the number of the securities tendered exceeds the number of securities to be acquired by the Offeror --------------------------------------------------------------------------- -14- VI. THE OFFEROR'S SHAREHOLDING IN THE TARGET COMPANY 1. The Offeror's Shareholding (including those of its related persons, its directors and supervisors) in the Target Company: (1) Offeror (including its related persons)
-------------------------------------------------------------------------------- Shareholding in the Target Company (as of the Declaration Date of Tender Offer) -------------------------------------------------------------------------------- Name Types of Securities Volume Acquisition Price -------------------------------------------------------------------------------- The Offeror ---------------- Related persons This is not applicable. Neither the Offeror nor its related persons holds any shares of the Target Company. ---------------- Total --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- Trading History (purchase and sale) for a period of 6 months prior to the filing date of this Tender Offer -------------------------------------------------------------------------------- Name Date of Type of Number of Acquisition Transaction Transaction Securities Price -------------------------------------------------------------------------------- 1. The Offeror ---------------- 2. Related This is not applicable. Neither the Offeror nor its related Persons persons traded in the shares of the Target Company in the 6 months prior to filing the Tender Offer. ---------------- Total --------------------------------------------------------------------------------
-15- (2) Directors and Supervisors of the Offeror
-------------------------------------------------------------------------------- Shareholding in the Target Company (as of the Declaration Date of Tender Offer) -------------------------------------------------------------------------------- Title Types of Securities Volume Purchase Price -------------------------------------------------------------------------------- 1. Director ---------------- 2. Supervisor Not applicable. The directors and supervisors of the Offeror do not hold any securities of the Target Company. ---------------- Total --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- Trading History (purchase and sale) for a period of 6 months prior to the filing date of this Tender Offer -------------------------------------------------------------------------------- Title Date of Type of Volume Purchase Transaction Transaction Price -------------------------------------------------------------------------------- 1. Director ---------------- 2. Supervisor Not applicable. The directors and supervisors of the Offeror did not trade in the shares of the Target Company in the 6 months prior to filing the Tender Offer. ---------------- Total --------------------------------------------------------------------------------
2. Shareholding of those shareholders of the Offeror, who are also the directors or supervisors of the Target Company, or who hold more than 10% of shares issued by the Target Company: Not applicable. None of the shareholders of the Offeror are also the director or supervisor of the Target Company nor do they hold more than 10% of the shares issued by the Target Company. -16- VII. OTHER TRADING HISTORY OF THE SHARES OF THE TARGET COMPANY BY THE OFFEROR 1. The Offeror's trading of Target Company shares with the following people in the 6 months prior to filing the Tender Offer
- -------------------------------------------------------------------------------- Title Transaction Transaction Price Volume Date Method - -------------------------------------------------------------------------------- Specific 1. Director Persons ---------------- of the 2. Supervisor Target ---------------- Company 3. Manager ---------------- 4. Shareholder This is not applicable. The Offeror did not holding over trade in the shares of the Target Company in the 10% shareholding 6 months prior to filing the Tender Offer. of the Target Company ---------------- 5. Related Persons - --------------------------------------------------------------------------------
2. The material terms and conditions of any agreement between the Offeror and any of the persons described above
- -------------------------------------------------------------------------------- Status Content of important agreements or arrangements - -------------------------------------------------------------------------------- Specific 1. Director I. To make the completion of this Tender Offer Persons of successful, the foreign parent company of the the Target Offeror, Eaton Corporation ("EATON"), has Company executed a share purchase agreement with two shareholders, i.e., the Target Company's chairman and president Mr. Zhen Shui-zhu ((CHINESE CHARACTERS)) and his spouse ("MAJOR SHAREHOLDERS"), on December 20, 2007. The Major Shareholders have agreed to participate in this Tender Offer and offer to sell the 87,212,671 shares of the - --------------------------------------------------------------------------------
-17-
- -------------------------------------------------------------------------------- Target Company they hold ("OFFERED SHARES"), accounting for approximately 20.5% of the issued and outstanding shares of the Target Company. Certain material terms and conditions of the abovementioned share purchase agreement are provided below (the Chinese translation may not fully represent the original version of the SPA and the original version SPA shall prevail in case of any discrepancy between Chinese and the original text): 1. Tender Offer Eaton shall appoint its affiliate in the ROC as the Offeror to launch on the Launch Date a public Tender Offer in accordance with Paragraph 3, Article 43-1 of the ROC Securities and Exchange Law, to acquire a minimum of 51% and up to 100% of the shares of the Target Company. 2. Participation in the Tender Offer The Major Shareholders agree to participate in the Tender Offer by offering all their Offered Shares for sale. 3. Exclusivity Period Starting from the date of the SPA until the later of (i) the Closing Date of the Tender Offer and (ii) if any competing tender offer is launched during the Tender Offer period, until the day after the final day and closure of the competing tender offer period, neither of the Major Shareholders shall: (i) other than the sale and transfer pursuant to this Tender Offer, sell, transfer, assign, pledge or grant any other right, interest or security in any of the Shares, (ii) acquire any additional shares in the Target Company; (iii) accept or support any other tender offer or purchase proposal for any shares of the Target Company; (iv) allow the Target Company to issue any additional shares or other Equity Interests; or (v) agree to take any of the foregoing - --------------------------------------------------------------------------------
-18-
- -------------------------------------------------------------------------------- actions. II. Director of the Target Company, Mr. Shi-huan Wei signed an undertaking on December 20, 2007 to the Offeror agreeing to participate in the Tender Offer by selling the shares of the Offeree he holds. Director Mr. Xian-rong Wei and Mr. Zhuo-ming Xie also signed such an undertaking. ---------------------------------------------------------------- 2. Supervisor Supervisor of the Target Company Mr. Gen-song Tsai signed an undertaking on December 20, 2007 to the Offeror agreeing to participate in the Tender Offer by selling the shares of the Target Company he holds. ---------------------------------------------------------------- 3. Manager Same as no. 1 ---------------------------------------------------------------- 4. 10% or Same as no. 1 more shareholders ---------------------------------------------------------------- 5. Related None. parties - --------------------------------------------------------------------------------
-19- VIII. THE OPERATION PLAN OF THE OFFEROR FOR THE TARGET COMPANY 1. Purpose and plan to acquire the shares of the Target Company - -------------------------------------------------------------------------------- |X| There is an intention to continue to operate the Acquired Company after acquisition. The plans for future operations are: 1. Upon the completion of this Tender Offer, the Target Company and its 100% owned subsidiary, Fu-Ruie Investment Co., Ltd, will each hold a board or shareholders meeting to review and approve the merger proposal. The Target Company will become the surviving company, and Fu-Ruie Investment Co., Ltd will become the dissolved company. The Offeror may, as an alternative, have the shares of the Target Company held by Fu-Ruie Investment Co., Ltd cancelled by using other means permitted by the law and relevant regulations. Then the Offeror and the Target Company will each hold a board meeting or shareholder meeting (depending on the number of shares acquired), to review and approve the cash merger proposal with the Offeror ("Merger"). The Offeror will become the surviving company, and shall offer as merger consideration to purchase the shares of the Target Company at NT$ 50 per share, which is the same as the consideration offered in this Tender Offer. The effective date of the Merger will be determined by the boards of the two companies after the terms and conditions set forth in the Merger Agreement have been fulfilled. Shareholder please note that, upon the completion of this Tender Offer, the Offeror will hold at least 51% of the Target Company's issued shares. Pursuant to the Company Law and other relevant regulations, the Offeror's shareholding alone will be sufficient to pass the resolution at the shareholders meeting of the Target Company to approve the Merger with the Offeror, with the Target Company being the dissolving company. After the Target Company merges into the Offeror, its shares can no longer be traded on the TSE and those shares will be delisted after obtaining approval from the SFB of the FSC and the TSE. 2. The main business of the Target Company is to manufacture, provide services and sell facilities that support uninterruptable power supply system and relating equipment. The total sales of the Target Company in 2007 are NT$16,100,000,000 and the EBITDA is NT$1,700,000,000. After the acquisition, the Offeror will continue to manage and maintain the performance of business of the Target Company. The Offeror and the Target Company will complement and create synergy with each other in uninterruptible power supply system and services and global distribution channels. The Offeror will endeavor to operate the business to make the synergy work and provide further opportunity to the employees of the Target Company. - -------------------------------------------------------------------------------- -20- - -------------------------------------------------------------------------------- [ ] Plans on transferring or assigning the securities of the Target Company within a year after the Tender Offer. After the completion of this Tender Offer, the Offeror intends to conduct the Merger with the Offeror with the Offeror being the surviving company and the Target Company being the dissolving company. Currently, the Offeror does not plan to transfer the shares of the Target Company so acquired within 1 year. - -------------------------------------------------------------------------------- 2. Plans for the Target Company after the completion of the Tender Offer: - -------------------------------------------------------------------------------- Dissolution [ ] No [X] Yes-The details of the plan are as below: The Offeror intends to conduct the merger with the Target Company afterwards, with the Offeror being the surviving company. If the Offeror conducts a merger with the Target Company, the Target Company will be merged into the Offeror and accordingly will cease to exist. - -------------------------------------------------------------------------------- Delisting [ ] No [X] Yes - The details of the plan are as the same as above. - -------------------------------------------------------------------------------- Corporate [ ] No Changes [X] Yes --The details of the plan are as the same as above. - -------------------------------------------------------------------------------- Capital [ ] No Changes [X] Yes --The details of the plan are as the same as above. - -------------------------------------------------------------------------------- Changes in [X] No the Business Plan [ ] Yes If the Offeror merges with the Target Company as described above, it may need to adjust the original business plan if necessary. However, no such plans have been confirmed. - -------------------------------------------------------------------------------- -21- - -------------------------------------------------------------------------------- Changes in [X] No Financial Conditions [ ] Yes If the Offeror merges with the Target Company as described above, it may need to adjust the financial conditions if necessary. However, no such plans have been confirmed. - -------------------------------------------------------------------------------- Manufacturing [X] No Changes [ ] Yes If the Offeror merges with the Target Company as described above, it may need to adjust the production if necessary. However, no such plans have been confirmed. - -------------------------------------------------------------------------------- Other [ ] No Material Events That [X] Yes Affect the Shareholders' Other than the potential merger between the Target Company Interests in and Fu-Ruie Investment Co., Ltd, and the Offeror's merger the Target with the Target Company, there is no other material matter Company that could affect the interests of the shareholders of the Target Company. - -------------------------------------------------------------------------------- 3. Plans to Replace Any of the Following Persons of the Target Company - -------------------------------------------------------------------------------- Director Position change: |X| Yes [ ] No Plan content: Through this Tender Offer, the Offeror proposes to obtain 100% of the shares in the Target Company and plans to merge with the Target Company. Upon the completion of this Tender Offer, the Target Company will call a special shareholders' meeting for re-election of directors. - -------------------------------------------------------------------------------- -22- - -------------------------------------------------------------------------------- Supervisor Position change: |X| Yes [ ] No Plan content: The Offeror proposes to obtain 100% of the shares in the Target Company and plans to merge with the Target Company. Upon the completion of this Tender Offer, the Target Company will call a special shareholders meeting for re-election of the supervisor. - -------------------------------------------------------------------------------- Manager [ ] retirement, layoff with compensation [ ] change of position |X| others: The Offeror proposes to obtain 100% of the shares in the Target Company and plans to merge with the Target Company. The Offeror will make a decision after considering the post-merger structural adjustment needs and human resource strategies. - -------------------------------------------------------------------------------- Other Employees [ ] retirement, layoff with compensation [ ] change of position |X| others: The Offeror proposes to obtain 100% of the shares in the Target Company and plans to merge with the Target Company. The Offeror will make a decision after considering the post-merger structural adjustment needs and human resource strategies. - -------------------------------------------------------------------------------- 4. Details of any merger or acquisition plan or disposal plan in respect of the securities or major assets of the Target Company within one year from the completion of the Tender Offer - -------------------------------------------------------------------------------- [ ] No |X| Yes Contents of plans--Upon the completion of this Tender Offer, the Target Company and its 100% owned subsidiary, Fu-Ruie Investment Co., Ltd, will each hold a board or shareholders meeting to review and approve the merger proposal. The Target Company will become the surviving company, and Fu-Ruie Investment Co., Ltd will become the dissolved company. The Offeror may, as an alternative, have the shares of the Target Company held by Fu-Ruie Investment Co., Ltd cancelled by using other means permitted by the law and relevant regulations. Then the Offeror and the Target Company will each hold a board meeting or shareholder meeting (depending on the number of shares acquired), to pass a resolution on the Cash Merger. The Offeror will become the surviving company, and shall offer as merger consideration to purchase the shares of the Target Company at NT$ 50 per share, which is the same as the consideration offered in this Tender Offer. The effective date of the Merger will be determined by the Boards of the two - -------------------------------------------------------------------------------- -23- - -------------------------------------------------------------------------------- companies after the conditions under the Merger Agreement are satisfied. Shareholders please note that, upon the completion of this Tender Offer, the Offeror will hold at least 51% of the Target Company's issued shares. Pursuant to the Company Law and other relevant regulations, the Offeror's shareholding alone will be sufficient to pass the resolution at the shareholders meeting of the Target Company to approve the Merger with the Offeror, with the Target Company being the dissolving company. After the Target Company merges into the Offeror, its shares can no longer be traded on the TSE and those shares will be delisted after obtaining approval from the SFB of the FSC and the TSE. - -------------------------------------------------------------------------------- IX. RESOLUTION AND FAIRNESS OPINION - -------------------------------------------------------------------------------- 1. The board/shareholders meetings minutes of the Offeror approving this Tender Offer (Please see Appendix 1) - -------------------------------------------------------------------------------- 2. Fairness opinion issued by an independent expert on the consideration for this Tender Offer (Please see Appendix 2) - -------------------------------------------------------------------------------- X. OTHER MATERIAL INFORMATION AND EXPLANATION None -24- EX-10.C 3 l30233aexv10wc.txt EX-10(C) EXHIBIT 10 (C) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) SHARE PURCHASE AGREEMENT between Green Beta S.a.r.l. and Blitz F07-einhundert-achtzig-sechs GmbH and Eaton Corporation dated December 20, 2007 regarding the sale and purchase of all shares in Moeller Holding GmbH and all Shareholder Loans given to Moeller Group 2 TABLE OF CONTENTS
PAGE ---- RECITALS.................................................................................................... 7 SECTION 1 SALE AND PURCHASE OF THE SOLD SHARES AND THE SHAREHOLDER LOANS.................................... 8 1.1 AGREEMENT TO SELL AND PURCHASE THE SOLD SHARES....................................................... 8 1.2 AGREEMENT TO SELL AND PURCHASE THE SHAREHOLDER LOANS................................................. 8 1.3 TRANSFER OF SOLD SHARES AND SHAREHOLDER LOANS........................................................ 8 1.4 EFFECTIVE DATE; DIVIDEND RIGHTS...................................................................... 8 SECTION 2 PURCHASE PRICE; RELATED PARTY DEBT................................................................ 9 2.1 PURCHASE PRICE....................................................................................... 9 2.2 SHAREHOLDER LOAN PURCHASE PRICE...................................................................... 9 2.3 PAYMENTS AT CLOSING.................................................................................. 9 2.4 MODE OF PAYMENT; DEFAULT; SET-OFF.................................................................... 9 2.5 SHAREHOLDER LOAN PURCHASE PRICE, EXISTING BANK DEBT AMOUNT AND SECURITY RELEASE...................... 10 SECTION 3 CLOSING........................................................................................... 12 3.1 PLACE AND TIME OF CLOSING............................................................................ 12 3.2 CONDITIONS TO CLOSING................................................................................ 12 3.3 MERGER CONTROL PROCEEDINGS; OTHER REGULATORY REQUIREMENTS; RIGHTS TO WITHDRAW........................ 14 3.4 ACTIONS ON THE CLOSING DATE.......................................................................... 15 SECTION 4 REPRESENTATIONS OF SELLER......................................................................... 17 4.1 SOLD SHARES.......................................................................................... 17 4.2 AUTHORIZATION OF SELLER.............................................................................. 18 4.3 NO OTHER REPRESENTATIONS OR WARRANTIES............................................................... 18
3 SECTION 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND GUARANTOR......................................... 19 5.1 AUTHORIZATION OF PURCHASER AND GUARANTOR............................................................. 19 5.2 FINANCIAL CAPABILITY................................................................................. 20 SECTION 6 COVENANTS......................................................................................... 20 6.1 CONDUCT OF BUSINESS PRIOR TO CLOSING................................................................. 20 6.2 ACCESS TO INFORMATION BEFORE CLOSING................................................................. 24 6.3 NO SHOP.............................................................................................. 24 6.4 DISCONTINUATION OF RELATED PARTY AGREEMENTS AND HEDGE AGREEMENTS..................................... 25 6.5 NO ALTERATION OF 2005 SPA CLAIMS..................................................................... 25 6.6 USE OF FUNDS ON HOLDING ACCOUNT...................................................................... 25 6.7 FURTHER ASSURANCES; COOPERATION...................................................................... 26 SECTION 7 NO LEAKAGE........................................................................................ 27 7.1 UNDERTAKING.......................................................................................... 27 7.2 DEFINITIONS.......................................................................................... 28 SECTION 8 REMEDIES.......................................................................................... 30 8.1 REMEDIES FOR INCORRECTNESS OF REPRESENTATIONS AND BREACHES OF COVENANTS AND OTHER AGREEMENTS BY SELLER............................................................................................ 30 8.2 DISCLOSED OR KNOWN MATTERS........................................................................... 31 8.3 THRESHOLDS AND AGGREGATE AMOUNTS OF SELLER'S LIABILITY............................................... 32 8.4 LIMITATION PERIOD.................................................................................... 32 8.5 INDEMNIFICATION PROCEDURES........................................................................... 33 8.6 EXCESS RECOVERY...................................................................................... 34 8.7 NO ADDITIONAL RIGHTS OR REMEDIES OF PURCHASER........................................................ 35 8.8 NO DOUBLE INDEMNIFICATION............................................................................ 35 8.9 PURCHASER AND SELLER RELEASE......................................................................... 36 SECTION 9 GUARANTEE......................................................................................... 37 SECTION 10 MISCELLANEOUS.................................................................................... 37 10.1 NOTICES.............................................................................................. 37
4 10.2 PUBLIC DISCLOSURE; CONFIDENTIALITY................................................................... 39 10.3 COSTS AND EXPENSES................................................................................... 39 10.4 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS............................................................. 39 10.5 ASSIGNMENTS; THIRD PARTY BENEFICIARIES............................................................... 40 10.6 GOVERNING LAW; JURISDICTION; SERVICE OF PROCESS...................................................... 40 10.7 INTERPRETATION....................................................................................... 41 10.8 DEFINITIONS.......................................................................................... 42 10.9 SEVERABILITY......................................................................................... 42
5 LIST OF EXHIBITS EXHIBIT R.2 Shareholder Loans EXHIBIT R.3 Entities of the Group EXHIBIT 2.5(A) Letters of Facility Agents EXHIBIT 3.2(A) Required Merger Control Approvals EXHIBIT 3.2(B) Iranian Assets EXHIBIT 3.4(E)(I) Form of Share Transfer Agreement EXHIBIT 3.4(E)(II) Form of Shareholder Loan Transfer Agreement EXHIBIT 3.4(F)(II) List of Resigning Persons EXHIBIT 3.4(F)(III) Leakage Certificate EXHIBIT 4.3 Engagement Letters, Due Diligence Reports, Reliance Letters etc. providing for rights of Purchaser EXHIBIT 6.1(C)(VI) Permitted Actions until Closing EXHIBIT 6.4 Related-Party Agreements EXHIBIT 6.5 Changes to SPA Claims EXHIBIT 7.1(B) Related Partner Undertaking EXHIBIT 7.2(B)(I) Permitted Leakage Agreements EXHIBIT 7.2(B)(II) Names of Employees EXHIBIT 10.8 List of Definitions 6 This share purchase agreement (this "AGREEMENT") is entered into on this 20th day of December 2007 by and between (1) Green Beta S.a r.l., a company with limited liability (societe a responsabilite limitee) under Luxembourg law, with its registered office at 5 rue Guillaume Kroll, L-1882 Luxembourg and registered at the commercial register under number B 109.245 -"SELLER"- -on the one hand- and (2) Blitz F07-einhundert-achtzig-sechs GmbH (to be renamed into Eaton Green Holding GmbH), Frankfurt am Main, a company with limited liability, registered with the commercial register Frankfurt am Main, HRB 81181, -"PURCHASER"- and (3) Eaton Corporation, a corporation under the laws of Ohio, with its chief executive office at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114, USA, -"GUARANTOR"- -on the other hand- - - The parties listed under nos. (1) through (3) hereinafter jointly also referred to as the "PARTIES" and individually as a "PARTY" - 7 RECITALS 1. Moeller Holding GmbH, a German limited liability company, is registered with the commercial register of the local court of Bonn under HRB 13984 (the "TARGET"). Seller owns 100% of the Target's registered share capital of EUR 1,000,000, which comprises one share in the nominal amount of EUR 24,000, one share in the nominal amount of EUR 1,000 and one share in the nominal amount of EUR 975,000 (the three shares are together hereinafter referred to as the "SOLD SHARES"). 2. Prior to the date hereof Seller has granted loans under which Target is the borrower. The parties to these loans, the date of the relevant loan agreements, the principal and the accrued interest outstanding under the shareholder loans as at the Effective Date as well as the interest rate are set forth under EXHIBIT R.2 (the "SHAREHOLDER LOANS"). 3. The Target is a holding company of a group which is one of the leading, globally active suppliers of systems and components concerned with power distribution and automation in industrial, infrastructure and residential building applications. The Target, directly or indirectly, owns the shares/interests in the entities set out in EXHIBIT R.3. The Target and the subsidiaries set out in Exhibit R.3 are collectively referred to herein as the "GROUP". The business of the Group, taken as a whole, is hereinafter referred to as the "BUSINESS". 4. Seller and its affiliates with the exception of any member of the Group, are referred to herein as the "SELLER GROUP". 5. Seller wishes to divest the Group and Purchaser wishes to acquire Seller's interests in the Group, by purchasing and acquiring, with effect from the Effective Date (as defined below), 100% of the Target's share capital and all the Shareholder Loans, and to consummate the other transactions contemplated in this Agreement in connection therewith. NOW, THEREFORE, the Parties agree as follows: 8 SECTION 1 SALE AND PURCHASE OF THE SOLD SHARES AND THE SHAREHOLDER LOANS 1.1 AGREEMENT TO SELL AND PURCHASE THE SOLD SHARES Subject to the terms and conditions set forth herein, Seller hereby sells (verkauft) to Purchaser, and Purchaser hereby purchases (kauft) from Seller, the Group through a sale and purchase of the Sold Shares. 1.2 AGREEMENT TO SELL AND PURCHASE THE SHAREHOLDER LOANS Subject to the terms and conditions set forth herein, Seller hereby sells (verkauft) to Purchaser, and Purchaser hereby purchases (kauft) from Seller, the Shareholder Loans including all rights thereunder. 1.3 TRANSFER OF SOLD SHARES AND SHAREHOLDER LOANS At the Closing, Seller shall transfer to Purchaser and Purchaser shall accept the transfer of the Sold Shares and Shareholder Loans in accordance with Section 3.4(e)(i) and (ii). 1.4 EFFECTIVE DATE; DIVIDEND RIGHTS The Sold Shares and the Shareholder Loans shall be sold and transferred to Purchaser with economic effect as of 31 October 2007, 24:00 hours (the "EFFECTIVE DATE"), with all rights and obligations pertaining thereto, including with respect to the Sold Shares the right to receive all dividends after the Effective Date and together with all rights to dividends for all fiscal years ended before the Effective Date and for the time period between the end of the last fiscal year ended on 30 April 2007 and the Effective Date to the extent such dividends have not been distributed prior to the Effective Date, and with respect to the Shareholder Loans to receive any accrued but unpaid interest as of the Closing Date. 9 SECTION 2 PURCHASE PRICE; RELATED PARTY DEBT 2.1 PURCHASE PRICE The purchase price for the Sold Shares (the "PURCHASE PRICE") shall be the sum of EUR 685,712,888.00 (in words: Euro six hundred eighty five million seven hundred twelve thousand eight hundred eighty eight) plus interest thereon at the rate of 5 per cent per annum, from (but excluding) the Effective Date to (but including) the Closing Date. 2.2 SHAREHOLDER LOAN PURCHASE PRICE The aggregate purchase price for the Shareholder Loans (the "SHAREHOLDER LOAN PURCHASE PRICE") shall amount to EUR 65,459,895.00 (in words: Euro sixty five million four hundred fifty nine thousand eight hundred ninety five), which amount includes the aggregate unpaid interest accrued up to (and including) the Effective Date, plus any unpaid interest thereon at the rate agreed in the Shareholder Loans from (but excluding) the Effective Date to (but including) the Closing Date. 2.3 PAYMENTS AT CLOSING At Closing Purchaser shall pay to Seller (i) the Purchase Price, and (ii) the Shareholder Loan Purchase Price. 2.4 MODE OF PAYMENT; DEFAULT; SET-OFF (a) Any payment to be made under this Section 2 shall be made in Euro by irrevocable wire transfer of immediately available funds to a bank account as designated by Seller at least five Business Days prior to the Closing Date. (b) The payment shall be deemed to have been duly made only upon the unconditional and irrevocable crediting of the amounts payable (without any deduction for taxes, costs or charges) to the relevant bank account on, and as of a value date no later than, the relevant due date. (c) Any failure by Purchaser to make any payment pursuant to this Section 2 when it falls due shall result in Purchaser's immediate default (Verzug), without any notice (Mahnung) by the other Party being required. Without prejudice to (unbeschadet) any other rights Seller may have in a case of a default in accordance with this Agreement or statutory law, any amount unpaid pursuant 10 to this Section 2 shall carry interest at the statutory rate pursuant to section 288 subsection 2 of the German Civil Code (Burgerliches Gesetzbuch), as from and including the date of default until the date when the overdue amount is paid (calculated daily on the basis of a year of 360 days and payable at the same time as the payment to which it relates). (d) Purchaser shall not be entitled to exercise any right of set-off (Aufrechnung) or retention right (Zuruckbehaltungsrecht) with respect to its payment obligations pursuant to this Section 2. 2.5 SHAREHOLDER LOAN PURCHASE PRICE, EXISTING BANK DEBT AMOUNT AND SECURITY RELEASE (a) Attached hereto as EXHIBIT 2.5(A) are letters (i) from the facility agent under the Senior Facilities Agreement specifying the aggregate of all amounts repayable under the Senior Facilities Agreement and (ii) from the facility agent under the Mezzanine Facilities Agreement, specifying the aggregate of all amounts repayable under the Mezzanine Facilities Agreement, including in each case principal, accrued interest, but excluding commissions, fees, costs, prepayment penalties and expenses, all as at the Effective Date and as of December 18, 2007, whether due or not due; (b) No later than the fourth Business Day prior to the Closing Date, Seller shall (i) notify Purchaser of the Existing Bank Debt Amount. (c) On or before the Closing Date, Seller shall (i) provide the Purchaser with the following executed documents in form and substance reasonably satisfactory to the Purchaser: (x) a security release document, signed by the security trustee under the Senior Facilities Agreement by which this security trustee releases, waives or retransfers, as appropriate, any and all security and collateral taken by it or on behalf of the lenders under the Senior Facilities Agreement, subject only to the condition precedent of the payment of the Existing Senior Bank Debt Amount (to be specified in EUR or other denominations of the Existing Senior Bank Debt Amount) into an account of the facility agent under the Senior Facilities Agreement to be specified in the security release document, and payment of the 11 Purchase Price and the Shareholder Loan Purchase Price, if so requested by the security trustee; and (y) a security release document, signed by the security trustee under the Mezzanine Facilities Agreement, by which this security trustee under the Mezzanine Facilities Agreement releases, waives or retransfers, as appropriate, any and all security and collateral taken by it or on behalf of the lenders under the Mezzanine Facilities Agreement, subject only to the condition precedent of the payment of the Existing Mezzanine Bank Debt Amount (to be specified in EUR or other denominations of the Existing Senior Bank Debt Amount) into an account of the facility agent under the Mezzanine Facilities Agreement to be specified in the security release document, and payment of the Purchase Price and the Shareholder Loan Purchase Price, if so requested by the security trustee; (z) a confirmation from the banks and agents being parties to the inter-creditor agreement to the effect that upon payment of the amounts referred to in (x) and (y) the inter-creditor agreement will terminate or the Target and the Group shall be released from all obligations thereunder. (d) Definitions: (i) "CONDITIONAL RELEASE AGREEMENTS" means, collectively, the security release documents to be executed in accordance with Section 2.5 (c) above; (ii) "EXISTING BANK DEBT AMOUNT" means the aggregate of the Existing Senior Bank Debt Amount and the Existing Mezzanine Bank Debt Amount; (iii) "EXISTING MEZZANINE BANK DEBT AMOUNT" means the aggregate of all amounts repayable under the Mezzanine Facilities Agreement, including principal, accrued interest, commissions fees, costs, prepayment penalties and expenses, as at the scheduled Closing Date; (iv) "EXISTING SENIOR BANK DEBT AMOUNT" " means the aggregate of all amounts repayable under the Senior Facilities Agreement, including principal, accrued interest, commissions fees, costs, prepayment penalties and expenses, as at the scheduled Closing Date; 12 (v) "MEZZANINE FACILITIES AGREEMENT" means the Mezzanine Facility Agreement dated 9 September 2005 (as amended on 7 June 2006 and 27 November 2006) between Moeller Holding GmbH (previously known as Ganymed 347 VV GmbH) as Borrower and Guarantor, Lehman Brothers International (Europe) as Facility Agent and Security Trustee and the Mezzanine Lenders (as defined therein); (vi) "SENIOR FACILITIES AGREEMENT" means the Senior Facilities Agreement dated 20 July 2005 (as amended on 9 September 2005, 7 June 2006 and 29 November 2006) between Moeller Holding GmbH (previously known as Ganymed 347 VV GmbH) as Borrower and Guarantor, Mizuho Corporate Bank, Ltd. as Facility Agent, Issuing Bank and Security Trustee and the Senior Lenders (as defined therein). (e) If Seller's obligations pursuant to Section 2.5 (b) have not been fulfilled on the seventh Business Day from the date of the fulfillment of the conditions to Closing pursuant to Section 3.2 of this Agreement, Purchaser shall be entitled to withdraw (zurucktreten) from this Agreement by giving written notice to Seller. The provisions of Section 3.3(d), last sentence, shall apply. SECTION 3 CLOSING 3.1 PLACE AND TIME OF CLOSING The consummation of the transactions contemplated by this Agreement as set forth in Section 3.4 (the "CLOSING") shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, An der Welle 5, 60322 Frankfurt am Main, at 10:00 a.m. local time on the tenth Business Day after the day on which the conditions set forth in Section 3.2 (Conditions to Closing) are met or at such other time or place as Seller and Purchaser may agree. The date on which the Closing shall take place is referred to herein as the "CLOSING DATE", provided that Seller must have fulfilled all of its pre-closing obligations under Section 2.5 (b). 3.2 CONDITIONS TO CLOSING The obligations of Purchaser and Seller to consummate the Closing are subject to the satisfaction of the following conditions precedent: 13 (a) The merger control authorities specified in EXHIBIT 3.2(A) have cleared the transactions contemplated by this Agreement or the relevant waiting periods have elapsed without these transactions having been prohibited. (b) With respect to the assets, liabilities or contractual relationships specified in EXHIBIT 3.2(B) (collectively the "IRANIAN ASSETS") either: (i) Purchaser has received authorization from the U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC") to sell or otherwise dispose of the Iranian Assets; or (ii) the Iranian Assets have been disposed of by the Group in accordance with terms and conditions Seller believes to be commercially reasonable, and Seller has provided Purchaser with documentation evidencing such disposal. Purchaser shall promptly after the signing of this Agreement seek authorization from OFAC to sell or otherwise dispose of the Iranian Assets after the Closing Date by filing a respective license request. Purchaser shall give the Seller and its counsel a reasonable opportunity to review and comment on the License Request (including any amendment or supplement thereto) prior to the filing thereof with OFAC. Purchaser shall promptly provide the Seller and its counsel with a copy (or if oral, a description) of any comments received by Purchaser (or by counsel to Purchaser) from OFAC or its staff with respect to the License Request. Purchaser shall give Seller and its counsel a reasonable opportunity to review and comment on any response to such comments proposed to be provided to OFAC or its staff. Purchaser shall not cause any delay in obtaining from OFAC the necessary authorization to sell or otherwise dispose of the Iranian Assets. Purchaser shall promptly respond to (i) any comments of OFAC or its staff with respect to the License Request and (ii) any requests of OFAC or its staff for additional information or documentation. Seller shall procure that the Purchaser receives the information and/or documentation required to be included in the License Request and/or otherwise necessary for Purchaser to obtain from OFAC the authorization to sell or otherwise dispose of the Iranian Assets after the Closing Date. (c) No enforceable judgment, injunction, order or decree by any court or governmental authority in the European Union, the United States or any other jurisdiction shall prohibit the consummation of the Closing in accordance with this Agreement and no application for the granting of any judgment, injunction, order or decree of the aforementioned kind is pending before any court or governmental authority. 14 3.3 MERGER CONTROL PROCEEDINGS; OTHER REGULATORY REQUIREMENTS; RIGHTS TO WITHDRAW (a) Purchaser (and, to the extent any filing also has to be made by Seller under applicable law, Seller) shall ensure that any filings necessary in connection with any merger control clearance referred to in Section 3.2(a) and any other filings with, or notifications to, any governmental authority required in connection with this Agreement will be made without undue delay, but no later than January 31, 2008, except that with respect to the European Commission a draft filing for discussions with the European Commission shall have been submitted by such date and provided that the actual filing will be made as soon as possible after the pre-filing discussions with the European Commission have been completed. (b) In order to obtain all requisite approvals for the transactions contemplated by this Agreement under merger control laws, Purchaser and Seller shall, and Seller shall procure that each member of the Group shall, (i) reasonably cooperate in all respects in the preparation of any filing or notification and in connection with any submission, investigation or inquiry, (ii) supply to any competent authority as promptly as practicable any additional information requested pursuant to any applicable laws and take all other procedural actions required in order to obtain any necessary clearance or to cause any applicable waiting periods to commence and expire, (iii) promptly provide each other with copies of any written communication received or sent (or written summaries of any non-written communication) in connection with any proceeding and (iv) absent objection from the relevant authority give each other and their respective advisors the opportunity to participate in all meetings and conferences with any competent authority. In addition, Purchaser undertakes to (i) provide the Seller (or advisers nominated by the Seller) with draft copies of all submissions and communications to governmental or regulatory bodies in relation to satisfaction of the conditions in Section 3.2. The Purchaser shall provide such copies at such time as will allow the Seller (or their nominated advisers) a reasonable opportunity to provide comments on such submissions and communications before they are submitted or sent and provide the Seller (or their nominated advisers) with copies of all such submissions and communications in the form submitted or sent; 15 (ii) disclose in writing to Seller immediately upon becoming aware of anything which may prevent any of the conditions in Section 3.2 from being satisfied; (iii) immediately, but not later than within one Business Day of any of the conditions in Section 3.2 being satisfied, notify the Seller. (c) Purchaser shall comply with any obligations or conditions (Auflagen und Bedingungen) or other agreements, including such disposals of assets, offer or give such undertakings, as required by any competent merger control authority at any time during their review as a condition to the clearance of the transactions contemplated hereby at such time and shall take any other steps or actions as may be necessary to obtain each consent, approval or waiver or eliminate each and every impediment to the contemplated transaction under any antitrust, competition or trade regulation law. For the avoidance of doubt, the acceptance of any such obligations or conditions by the Purchaser shall not in any way affect the Purchase Price or the Shareholder Loan Purchase Price or any obligations of the Purchaser hereunder. (d) If the conditions to Closing pursuant to Section 3.2 have not been fulfilled on 31 May 2008, Seller, and if the conditions to Closing pursuant to Section 3.2 have not been fulfilled on 31 July 2008, Purchaser shall be entitled to withdraw (zurucktreten) from this Agreement by giving written notice to the other Party, however the right to terminate under this Section shall not be available to a Party if such Party's failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such day. Upon termination of the Agreement, all rights and obligations of all Parties hereunder shall terminate without any liability of any Party to the other Party (other than for breach of this Section 3 prior to such termination), provided, however, that the confidentiality agreement dated 1 November 2007 (the "CONFIDENTIALITY AGREEMENT") shall remain in full force and effect as if this Agreement had not been entered into and further provided that Section 10 shall remain in force in accordance with its terms. 3.4 ACTIONS ON THE CLOSING DATE On the Closing Date, Seller and Purchaser shall take the following actions, or cause those actions to be taken: (a) Purchaser shall make the payments required in accordance with Sections 2.3. 16 (b) Purchaser shall transfer, for the account of the Target, the Existing Bank Debt Amount by wire transfer into the agency accounts specified in the Conditional Release Agreements. (c) Sellers shall provide the duly executed Conditional Release Agreements. (d) Seller shall provide Purchaser and the Target with written receipts from the facility agents under the Senior Facilities Agreement and the Mezzanine Facilities Agreement, respectively, of the receipt of the Existing Senior Bank Debt Amount and the Existing Mezzanine Bank Debt Amount and confirmations from the security trustees under the Senior Facilities Agreement and the Mezzanine Facilities Agreement, respectively, that any and all conditions for the effectiveness under the Conditional Release Agreements, of the releases, waivers and retransfers of security have been satisfied. (e) Seller and Purchaser shall (i) execute a share transfer agreement regarding the Sold Shares substantially in the form as attached hereto as EXHIBIT 3.4(E) (I); and (ii) execute a transfer agreement regarding the Shareholder Loans substantially in the form as attached hereto as EXHIBIT 3.4(E) (II), provided that Purchaser may request that any of its Affiliates may enter into this transfer agreement as transferee. (f) Seller shall deliver (i) a copy of the minutes of the general meeting of shareholders of the Target approving the transfer of the Shares in accordance with German company law; (ii) the resignation letters (effective at or prior to the Closing Date) of the persons listed in EXHIBIT 3.4(F)(II) including an unconditional and unlimited waiver by such persons of any and all claims against the members of the Group. (iii) a written certificate in the form attached hereto as EXHIBIT 3.4(F)(III) signed by Seller and all shareholders of Green Alpha S.a.r.l., Luxembourg, confirming (i) that neither Seller nor the relevant shareholders nor any other Related Persons has received any Leakage and (ii) that Seller or the relevant shareholders or any other Related Persons have received Permitted Leakage, if any, only in amounts limited to the amounts specified in Exhibit 3.4(f) (iii); the Parties are in agreement that the certificate set forth herein shall not be the basis for 17 any legal consequences but that any legal consequences shall solely be governed by Section 7 and Section 8. The actions referred to under Section 3.4(a) through (f) shall be taken simultaneously (Zug um Zug). (g) If Seller or Purchaser does not fulfil its respective obligations within ten (10) Business Days from the date scheduled as the Closing Date as set out under Section 3.4(a) to (f) Purchaser or Seller, respectively, shall have the right to withdraw (zurucktreten) from this Agreement by giving written notice to the relevant other Party. The provisions of Section 3.3(d), last sentence, shall apply. SECTION 4 REPRESENTATIONS OF SELLER Seller hereby represents (erklart) to Purchaser in the form of an independent guarantee (selbstandiges Garantieversprechen, section 311 of the German Civil Code) that, without prejudice to the covenants in Section 6, the statements set forth in this Section 4 are true and correct on the date hereof and that the statements set forth in this Section 4 will also be true and correct as of the Closing Date. The scope and content of each representation of Seller contained in this Section 4 as well as Seller's liability arising therefrom shall be conclusively (abschlie(beta)end) defined by the provisions of this Agreement (including the limitations on Purchaser's rights and remedies set forth in Section 8 below), which shall be an integral part of the representations of Seller, and no representation of Seller shall be construed as a guarantee for the condition of the sold object (Garantie fur die Beschaffenheit der Sache) of any Seller within the meaning of sections 443 and 444 of the German Civil Code. 4.1 SOLD SHARES (a) The statements set forth under no. 1 and 2 of the Recitals are true and correct. Seller is the sole and unrestricted legal and beneficial owner of the Sold Shares. Seller is the sole and unrestricted legal and beneficial owner of the Shareholder Loans as set out in Exhibit R.2. All contributions on the Sold Shares have been made and not been repaid. (b) Except for rights under this Agreement and except for any security interests which will be released at Closing, there are no security interests, options (whether exercisable now or in the future and whether contingent or not), sub-participations (Unterbeteiligungen) or rights to call for the conversion, issue, registration, sale or transfer, redemption or repayment under any law 18 (collectively, "ENCUMBRANCES") in relation to the Sold Shares, or the Shareholder Loans, and to the best of Seller's knowledge (nach bestem Wissen) no claim has been made by any person to be entitled to any Encumbrance in relation to the Sold Shares or the Shareholder Loans, and there is no agreement, arrangement or obligation (whether actual or contingent) to create any such Encumbrance or to sell or otherwise dispose of the Sold Shares or the Shareholder Loans to any person. As of the Closing Date only, there are no shareholder agreements, trust agreements or similar other agreements with respect to the Sold Shares or the Shareholder Loans. 4.2 AUTHORIZATION OF SELLER (a) Seller is a corporation duly incorporated and validly existing under the laws of Luxembourg and has all corporate powers required to carry on its business as presently conducted. (b) The execution and performance by Seller of this Agreement and the consummation of the transactions contemplated thereby, do not violate the articles of association or by-laws of Seller and have been duly authorized by all necessary corporate action on the part of Seller. (c) Assuming compliance with any applicable requirements under merger control laws as set forth in Section 3.2(a), the execution and performance of this Agreement by Seller requires no approval or consent by any governmental authority and do not violate any applicable law or decision by any court or governmental authority binding on Seller. 4.3 NO OTHER REPRESENTATIONS OR WARRANTIES Subject to the representations expressly contained in Section 4, Purchaser agrees to accept the Sold Shares, the Shareholder Loans and the Group in the condition they are in on the Closing Date, based upon its own inspection, examination and determination with respect thereto (including the due diligence investigation it has conducted), without relying upon any express or implied representations or warranties of any nature including any representations or warranties by Seller, any member of the Seller Group, any member of the Group or any of their respective directors, managing directors, officers, employees, advisers or other representatives (collectively, "SELLER ASSOCIATED PERSONS"). Purchaser acknowledges that Seller and the Seller Associated Persons make no representations, warranties or guarantees, and assumes no disclosure or similar obligation except where a non-disclosure would be fraudulent, in connection with this Agreement and the transactions contemplated hereby, or except as expressly set forth in this Agreement. Nothing in this Agreement shall limit or affect any rights or remedies Purchaser, any member of the Group or any other person may have 19 pursuant to the engagement letters, due diligence reports, reliance letters or similar documents which are listed in EXHIBIT 4.3 under which any Seller Associated Person undertakes or has undertaken a duty or obligation to Purchaser. SECTION 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND GUARANTOR Each of Purchaser and Guarantor hereby represents and warrants to Seller that the following statements are true and correct on the date hereof and will be true and correct on the Closing Date, in each case with respect to the Party making the relevant representation or warranty: 5.1 AUTHORIZATION OF PURCHASER AND GUARANTOR (a) Purchaser is a corporation incorporated and validly existing under the laws of Germany. Guarantor is a corporation incorporated and validly existing under the laws of Ohio. (b) The execution and performance by Purchaser and Guarantor of this Agreement and the consummation of the transactions contemplated thereby are within Purchaser's and Guarantor's corporate powers, do not violate the articles of association or by-laws of Purchaser and Guarantor and have been duly authorized by all necessary corporate action on the part of Purchaser and Guarantor. (c) Assuming compliance with any applicable requirements under merger control laws as set forth in Section 3.2(a) and the fulfilment of the condition in Section 3.2(b), the execution and performance of this Agreement by Purchaser and Guarantor requires no approval or consent by any governmental authority and do not violate any applicable law or decision by any court or governmental authority binding on Purchaser and/or Guarantor. (d) Except as required by applicable law and rules, regulations and orders of any stock exchange where the shares of the Guarantor are listed, no announcements, consultations, notices, reports or filings are required to be made in connection with the transactions contemplated by the Share Purchase Documents and no consents, approvals, registrations, authorisations or permits are required to be obtained by the Purchaser or the Guarantor in connection with the execution and performance of the Share Purchase Documents. 20 5.2 FINANCIAL CAPABILITY Purchaser will have access to sufficient funds on the Closing Date to enable it to make all payments required to be made by it under this Agreement on the Closing Date, and Guarantor will have access to sufficient funds on the Closing Date to enable it to make all payments required to be made by it under this Agreement on the Closing Date, if required under the guarantee under this Agreement. SECTION 6 COVENANTS 6.1 CONDUCT OF BUSINESS PRIOR TO CLOSING From the date hereof to the Closing Date, except as expressly contemplated by this Agreement, (a) Seller has used and shall use its shareholder rights in the Target (so far as is permitted under applicable law) to instruct, by way of a shareholder resolution, the managing directors of the Target, to conduct the Business only in the Ordinary Course of Business, except with Purchaser's prior approval (it being agreed that such approval may not be unreasonably withheld, conditioned or delayed by Purchaser); and (b) Seller has used and shall use its shareholder rights in the Target (so far as is permitted under applicable law), and instruct the managing directors of the Target, not to take, or commit to take, any of the following actions without Purchaser's prior approval (it being agreed that such approval may not be unreasonably withheld, conditioned or delayed by Purchaser), except as contemplated in connection with the Projects (provided that cash expenditures under the Projects for the period between the date hereof and the Closing Date shall in the aggregate not, without the prior approval of Purchaser, which shall not be unreasonably withheld, exceed EUR 5,000,000): (i) any change to the articles of association, entering into any domination agreement, profit and loss transfer agreement or other enterprise agreements (andere Unternehmensvertrage) within the meaning of Sections 291, 292 AktG or comparable law, any issuance, or entering into an obligation to issue, profit-sharing rights (Genussrechte or equivalent instruments under any law) or other equity or equity-like rights or entering into, or incurring any obligation to establish any silent partnership (stille Gesellschaft); 21 (ii) any increase or other change of the stated capital of any member of the Group, or the issue, purchase, redemption or repurchase of, any share of any member of the Group; (iii) any granting of subscription rights or issuance of any convertible bonds or other equity linked securities (including options) by any member of the Group; (iv) any creation of any Encumbrance over any share or partnership interest in any member of the Group or over any asset that is material for the conduct of the business of the Group; (v) any dissolution or liquidation of any member of the Group; (vi) any merger or similar business combination between any member of the Group and any third party (other than another member of the Group) or any other reorganization that would change the corporate structure of the Group; (vii) any acquisition or divestiture by any member of the Group of (x) any material assets or properties (other than in the Ordinary Course of Business consistent with past practice), (y) any businesses, business units or shareholdings or (z) other securities (other than routine treasury management activities); (viii) entering into, changing or withdrawing from any joint venture material for the Business; (ix) any equity investment by any member of the Group in, or making of a loan to, any other company or entity (other than any member of the Group) exceeding in each case EUR 1 million; (x) any creation of any Encumbrance over any piece of real estate in excess of a secured amount of EUR 1,000,000 in the individual case or EUR 5,000,000 in the aggregate; (xi) any lay-off with respect to a significant part of the workforce of the Business or any material part of the Business; (xii) any incurrence, guarantee or assumption of any indebtedness for borrowed money, other than (x) under facility or credit agreements existing on the date hereof in amounts not exceeding EUR 5,000,000 in the aggregate and (y) in the case of guarantees, for guarantees issued for indebtedness of other members of the Group consistent with past practice; 22 (xiii) any material change of the accounting procedures, accounting policies or accounting principles used by the Group, or any change in the implementation thereof by the relevant member of the Group, unless required under applicable law or regulation; (xiv) (A) appoint, employ or elect (or cause to be elected) any Key Employee (as defined below) or terminate the employment or relationship of any such Key Employee (other than for cause, including operational or personal reasons or bad performance, or due to resignation, retirement, death or disability), or change the compensation (including deferred compensation) or other benefits payable to or the obligation or rights of (i) any Key Employee or (ii) a significant part of the work force of the Group or (B) establish, adopt, enter into, amend or terminate any employee benefit plan, except, in the case of clause (A) (ii) or (B) in the Ordinary Course of Business in accordance with past practice ("KEY EMPLOYEE" shall mean the chief executive officer, the chief financial officer, the heads of the business units Power Distribution and Motor Applications as well as the heads of Sales Area Management, Sales Key Account management and Treasury); (xv) adopt or participate in any pension scheme (other than its existing pension schemes) or amend any of its existing pension schemes or materially change or cease contributions to be made to any such scheme, unless required by applicable law or employment agreements existing as at the date of this Agreement; (xvi) reduce or change the existing insurance coverage, except for normal changes within the Ordinary Course of Business which do not materially adversely affect the insurance coverage under the respective policy; (xvii) make any capital expenditures or commit to make any capital expenditures, by additions or improvements to property, plant and equipment (including with respect to IT hardware and software) individually exceeding EUR 1,000,000 on capital account or in the aggregate exceeding EUR 5,000,000 on capital account; (xviii) enter into any agreements with a term of more than two years or which provide for a notice period of more than one year; (xix) enter into any currency exchange, interest rate or commodity swap agreement, currency exchange or interest rate or commodity cap, floor or ceiling agreements or currency exchange rate, interest rate or commodity collar agreements or other agreements or arrangements 23 designed to manage or protect against fluctuations in currency exchange rates, interest rates or commodity prices other than in the Ordinary Course of Business consistent with past practice; (xx) other than referred to in EXHIBIT 6.5 of this Agreement, settle or propose any settlement of any tax liabilities or amend or seek to amend any tax claims and/or elections other than in the Ordinary Course of Business consistent with past practice; (xxi) initiate, settle or abandon any litigation, arbitration or other proceedings with a value in dispute of EUR 1,000,000 or more except, in any case, in relation to debt collection in the Ordinary Course of Business; (xxii) in relation to any claim, forgive amounts exceeding, in the aggregate, EUR 500,000 other than in the Ordinary Course of Business; (xxiii) any transaction entered into by a member of the Group outside the Ordinary Course of Business which has or would reasonably be expected to have a Material Adverse Effect (as defined below), or (xxiv) any commitment to take any of the actions set out in clauses (i) to (xxiii) above. (c) Section 6.1 shall not restrict or prevent Seller or any company of the Group from carrying out: (i) any act required in order to comply with or expressly permitted under the provisions of this Agreement; (ii) any act required in order to comply with any law, applicable regulatory requirements, or the terms of any valid licence, agreement, financial obligation or permit; (iii) any matter undertaken in an emergency or disaster situation minimising the adverse effect thereof; (iv) the completion or performance of any obligations undertaken pursuant to any contract or arrangement entered into by any Group company prior to the date of this Agreement; (v) the payment of any principal, interest and other amounts due and payable by any Group company in accordance with the terms of or as 24 required by any contractual loan or financing arrangement to which any Group company is a party; (vi) any transaction listed in EXHIBIT 6.1(C) (VI); or (vii) any matter undertaken at the request of the Purchaser. "MATERIAL ADVERSE EFFECT" means any change or effect that is materially adverse to the financial condition, results of operations or business operations of the Group, taken as a whole, other than any change or effect arising out of (i) general economic conditions (including general developments of capital markets) or conditions affecting companies generally in the industries in which the Group operates, (ii) disruptions to any business of the Group attributable to the announcement of this Agreement or the transactions contemplated hereby or (iii) changes in laws or interpretations thereof. "ORDINARY COURSE OF BUSINESS" means any action or transaction within the course of trading and activities previously carried out and the continuation and implementation of existing, commenced and/or approved projects, and consistent with applicable law. "PROJECTS" means the projects IDOP and MEK 40 as approved by the advisory board (Beirat) of the Target prior to the Effective Date. 6.2 ACCESS TO INFORMATION BEFORE CLOSING Seller shall cause the Group companies (so far as is permitted under applicable law) to provide Purchaser and its advisors and financing banks with all information reasonably requested by Purchaser in connection with any financing of the transactions contemplated herein or for the purpose of allowing for a smooth transition of ownership from Seller to Purchaser. 6.3 NO SHOP From the date of this agreement until Closing, Seller agrees and undertakes to Purchaser that it and the other members of the Seller Group and its and their directors, employees, advisers and agents will not directly or indirectly (whether or not in conjunction with a third party) facilitate, solicit or encourage negotiations or discussions with any party relating to the sale or other disposal of any member of the Group (or any of their material assets) (an "ALTERNATIVE PROPOSAL") or, unless permitted pursuant to Section 6.1 (c)(vi), enter into any agreement or arrangement with any other party in relation to such matters. 25 6.4 DISCONTINUATION OF RELATED PARTY AGREEMENTS AND HEDGE AGREEMENTS The members of the Group are parties to certain agreements with members of the Seller Group as further set out in EXHIBIT 6.4 (the "RELATED-PARTY AGREEMENTS"). In addition certain members of the Group are parties to hedge agreements including hedge agreements relating to interest and foreign exchange (the "HEDGE AGREEMENTS"). It is understood and agreed between the Parties, and Seller undertakes to ensure, that the Related Party Agreements and the Hedge Agreements will be terminated, latest as of the Closing Date (for the Hedge Agreements one Business Day prior to the Closing Date) provided that until five Business Days prior to the Closing Date Purchaser shall have the right to instruct Seller that certain Hedge Agreements shall not be terminated upon which instruction Seller shall procure that the respective Hedge Agreements are not terminated. 6.5 NO ALTERATION OF 2005 SPA CLAIMS Seller shall not, and shall procure that the other members of its Seller Group will not, enforce, accept payment, waive, sell, transfer, assign or otherwise dispose of, offset, pledge, settle, or otherwise alter or amend any of the claims (whether known or unknown, and whether or not due) the respective member of the Seller Group may have against any person as a result of a breach of any agreement relating to the indirect acquisition by the Target of the shares relating to the Group in the year 2005 other than set out in EXHIBIT 6.5. Exhibit 6.5 also shows (i) the name of the respective escrow agent, (ii) the amounts still available on the respective escrow account as of the date stated therein, and (iii) the type of claims of the Target, for which the amounts on the escrow account can be used. As shown in Exhibit 6.5, an amount of Euro 11.5 million has been paid from the respective escrow account to the Target on December 17, 2007. 6.6 USE OF FUNDS ON HOLDING ACCOUNT (a) Target is the holder of a bank account maintained with Mizuho Bank PLC (the "HOLDING ACCOUNT"). As of 18 December 2007 the amounts available on the Holding Account amounted to E34,923,753.63 (the "HOLDING ACCOUNT AMOUNT"). Target is permitted under the Senior Facilities Agreement and the Mezzanine Facilities Agreement to use the amounts available on the Holding Account solely for certain purposes including for the purpose of funding a pension scheme of the Group in the United Kingdom (the "UK PENSION SCHEME"). (b) Seller shall procure that (i) an amount of EUR 20.7 million in the Holding Account shall not prior to Closing be used for any purpose other than a payment into the UK Pension Scheme; 26 (ii) if any demand is received for tax liabilities in respect of which amounts can be drawn down from the Holding Account Target shall notify Seller and such amounts will be drawn down and used to settle such liabilities; (iii) at the Closing Date (subject to repayment of the Existing Bank Debt) an amount of not less than EUR 12.3 million of the Holding Account Amount shall be available to be freely used by the Target without any restriction and can be used by the Target for any purpose in accordance with the instructions of Purchaser including payment of part of the Existing Bank Debt Amount on the Closing Date, and to the extent that the EUR 20.7 million referred to in (i) has not already been paid into the UK Pension Scheme by the Closing Date such amount shall be freely available to be paid into the UK Pension Scheme for one month following the Closing Date; (iv) Purchaser shall be provided with evidence as reasonably requested by Purchaser that Seller has complied with the aforementioned covenants. (c) Following execution of this Agreement, Seller shall consult with Purchaser prior to sending any communication to the trustee who administers the UK Pension Scheme and shall inform Purchaser promptly of any communication received by it or the Group from the trustee or in relation to the UK Pension Scheme. 6.7 FURTHER ASSURANCES; COOPERATION (a) Subject to the terms and conditions of this Agreement, Seller and Purchaser will use reasonable efforts to execute, or cause to be executed, all agreements and documents and to take, or cause to be taken, all other actions necessary under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. (b) Purchaser agrees and shall ensure that neither Purchaser nor any of its Affiliates will, prior to the Closing, enter into any transaction, which would prevent, delay or interfere with the consummation of the transactions contemplated by this Agreement. (c) Seller shall procure that, from the date hereof until the Closing Date or, respectively, the Date as of which the Agreement terminates, under the Mezzanine Facilities Agreement and the Senior Facilities Agreement, the Target shall, whenever an interest period commences after the date hereof and has not been fixed yet, liaise with the Purchaser on the next appropriate fixed interest period. In case the transaction contemplated by this Agreement is not closed and this Agreement terminates, the Purchaser shall, for the time period 27 between the Effective Date and the date as of which this Agreement terminates, compensate the Target for the difference between (i) the aggregate amount of the interest paid and (ii) the aggregate amount of the interest which would have been payable, had the Target chosen fixed interest periods of six months. SECTION 7 NO LEAKAGE 7.1 UNDERTAKING (a) Seller undertakes to the Purchaser that if during the period from the Effective Date through the Closing Date (i) Seller or any of their respective Related Persons (as defined below) has received or will receive from any member of the Group any Leakage other than Permitted Leakage (each as defined below); or (ii) Seller or any of its Related Persons has or will have, directly or indirectly, whether in its capacity as shareholder, through the exercise of any powers or rights it has or otherwise, authorized, consented to, instructed the payment of or voted in favour of, any Leakage, other than Permitted Leakage, then, subject to Section 7.1(b), Seller shall pay to Purchaser or, if so requested by Purchaser, to a member of the Group an amount in cash (in the same currency as the Leakage) equal to (x) the amount of the Leakage received by Seller or its respective Related Person or (y) in case of Subsection (ii) above, to the amount of the Leakage authorized or consented to by Seller, together with interest on such amount from and including the date such Leakage occurred to and including the date of payment, calculated at a rate equal to 4 % p.a., and, if applicable to such Leakage, shall terminate, cancel and rescind any and all agreements or commitments that constitute Leakage (other than Permitted Leakage or otherwise expressly permitted in this Agreement). (b) With respect to any obligation of Seller under Section 7.1(a) to make any payment with respect to a Related Person who is an individual and a limited partner of Green Managementbeteiligungs GmbH & Co. KG as at the date of this Agreement or any of their Related Persons defined in Section 7.2(c)(iv) (the "RELATED PARTNER") the following provisions shall apply in addition to the provisions set forth in Section 7.1(a) provided that the relevant Leakage has not 28 been authorized, consented to, instructed or voted in favour of, by Seller or by any Related Person which is not a Related Partner: (i) Seller's aggregate liability shall be limited to EUR 7 million; and (ii) Seller shall be released partially, as described in the following sentence, from its liability if the relevant Related Partner enters into a written undertaking in the form attached hereto as EXHIBIT 7.1(B) with Purchaser which provides that such Related Partner shall be - solely with respect to any Leakage received or to be received, authorized by, consented to, instructed by or voted in favour of by such Related Partner - the subject of the obligations to make payment under and subject to the provisions of, Section 7.1(a) and Section 8.4(ii) as if he had been a party to this Agreement. In the event of any reduction of Seller's liability in accordance with Section 7.1(b)(ii), the amount by which Seller's liability in accordance with 7.1(b)(i) is reduced shall be determined in accordance with the relative ownership percentage of the relevant Related Partner in Green Managementbeteiligungs GmbH & Co. KG compared to the ownership percentage of all Related Partners, each as at the date of this Agreement. This percentage shall be notified by Seller to Purchaser upon Purchaser's request. 7.2 DEFINITIONS (a) For purposes of this Agreement, the term "LEAKAGE" means: (i) any interest payment, dividend, or distribution declared, paid, made or agreed or obligated to be made by any member of the Group to Seller or any of its Related Persons, or the issue or sale of any securities of any member of the Group to Seller or any of its Related Persons (except for other members of the Group); (ii) any other payments made (including management fees, professional advisers' fees, consulting fees, monitoring fees, service fees, directors' fees or any other amounts under any agreement or arrangement), or any payments agreed or obligated to be made by any member of the Group, to (or assets transferred to or liabilities assumed, indemnified, or incurred for the benefit of, or any agreement or obligation to take such action) or for the benefit of Seller or any of its Related Persons by any member of the Group; 29 (iii) any fees, bonuses or expenses related to the transactions contemplated by this Agreement to the extent paid, payable, assumed, indemnified or incurred by any member of the Group; (iv) any payments made, or agreed or obligated to be made by any member of the Group to Seller or any of its Related Persons for the purchase, redemption, repurchase, repayment or acquisition of any share capital or other securities of any member of the Group, or any other return of capital to Seller or any of its Related Persons; (v) the waiver or agreement to waive by any member of the Group of (i) any amount owed to that member of the Group by Seller or by any of its Related Persons or (ii) any claims by a member of the Group in respect of any agreement or arrangement with Seller or any of its Related Persons; (vi) any loan by any member of the Group to Seller or any of its Related Persons; (vii) any other agreement or arrangement (other than transactions contemplated by this Agreement) being entered into by a member of the Group with or for the benefit of Seller or any of its Related Persons; and (viii) the payment by any member of the Group or agreement to pay by any member of the Group of any fees, costs or taxes or other amounts as a result of those matters set out in clauses (i) to (vii) above. (b) For purposes of this Agreement, the term "PERMITTED LEAKAGE" means: (i) any payment to any member of the Seller Group pursuant to any of the agreements which are listed in EXHIBIT 7.2(B)(I) and have been entered into prior to the Effective Date up to an amount specified in this Exhibit for each of these agreements; and (ii) any payment or bonus paid to any of the directors, officers or employees of any member of the Seller Group or a Related Person under the employment agreements of the individuals listed in EXHIBIT 7.2(B)(II) which have been entered into in the Ordinary Course of Business and are existing at the date of this Agreement, and with the exception of any fees, bonuses or expenses related to the transactions contemplated by this Agreement to the extent paid, payable, assumed, indemnified or incurred by any member of the Group. (iii) disposal of the Iranian Assets; 30 (iv) the accrual of interest under the Shareholder Loans. (c) For purposes of this Agreement, the term "RELATED PERSONS" means, with respect to Seller: (i) the other members of the Seller Group; (ii) any director, officer or employee, member of any supervisory, advisory or similar board of any member of the Seller Group; (iii) any advisor of any member of the Seller Group, acting in such capacity; (iv) in the case of a Related Partner or a person referred to above which is an individual, any spouse and/or lineal descendants by blood or adoption, any person living in his/her household, or any person or persons acting in its or their capacity as trustee or trustees of a trust of which such individual is the settler; (v) in the case of a person referred to in subsection (c)(i) above in this definition which is a legal entity, the shareholders, partners or holders of any other interest of the person or their nominees or a nominee or trustee for the person which hold shares or interests, directly or indirectly, in the legal entity, provided in each case that the relevant shareholder, partner, holder of any other interest, nominee or trustee acts in this capacity; provided, however, that investors in any fund which holds shares or interest in any such legal entity shall be excluded and therefore not be deemed a Related Person. SECTION 8 REMEDIES 8.1 REMEDIES FOR INCORRECTNESS OF REPRESENTATIONS AND BREACHES OF COVENANTS AND OTHER AGREEMENTS BY SELLER (a) If any of the representations pursuant to Section 4 of the Seller are incorrect or if the Seller breaches any of the covenants pursuant to Section 6 or other agreements in this Agreement or any Share Purchase Documents (as defined below) (any such incorrectness or breach a "BREACH"), Seller, subject to the provisions contained in this Section 8, shall pay to Purchaser or, at the election of Purchaser, to its relevant Affiliate or relevant member of the Group, respectively, compensation for any Losses (as defined below) asserted against, incurred or suffered by, Purchaser, any of its Affiliates, or any member of the Group, respectively, as a result of a Breach of the representation, covenant or 31 other agreement, as the case may be, unless Seller has remedied the Breach and has put Purchaser in the same position Purchaser would have been in had no Breach occurred within 30 days after Seller has been notified of such Breach pursuant to Section 8.5(a). Any indemnity payments made by Seller pursuant to this Agreement shall be treated by the Parties as adjustments of the Purchase Price due to Seller. (b) For the purpose of this Agreement, "LOSSES" shall mean all liabilities, obligations, reasonable costs and expenses and other damages within the meaning of sections 249 et seq. of the German Civil Code on a Euro for Euro basis, but excluding any consequential damages (Folgeschaden) or loss of profits (entgangener Gewinn), internal administration and overhead costs. Any Loss shall be computed net of any amounts which are recovered under insurance or otherwise from any third party. Any Losses incurred, including Losses in any member of the Group not wholly-owned (directly or indirectly) by Target, shall be taken into account only on a pro rata basis in proportion to the respective direct or indirect shareholding of Target (durchgerechnete Beteiligung). (c) Neither Party shall be liable under this Agreement for any Loss to the extent that such Loss is attributable to a failure by the other Party to mitigate the Loss (section 254 of the German Civil Code). In particular, but without limitation, to calculate the damages, there shall be taken into account the net present value of the amount by which any taxation, which the Purchaser or any of the Group Companies would be obliged to pay, is reduced or extinguished as a result of the matter giving rise to such liability, such taxation to be calculated on the basis of rates of taxation prevailing at the time of the Breach. (d) No liability shall attach to the Seller in respect of any Breach to the extent that the same Loss has been recovered by the Purchaser under any other representation or warranty or term of this Agreement or any other Share Purchase Document and accordingly the Purchaser may only recover once in respect of the same Loss. 8.2 DISCLOSED OR KNOWN MATTERS (a) Seller shall not be liable for a Breach of a representation pursuant to Section 4, if the underlying facts of the Breach have been duly and fairly disclosed to Purchaser prior to the date hereof as part of any documents which were in the data room established by the Target (the "DATA ROOM") as such data room 32 existed at 18.00 hours on December 18, 2007 (the "CUT-OFF TIME"); all documents made available in the Data Room at the Cut-Off Time are stored on a CD-ROM, copies of which will be delivered by Seller to Purchaser or Purchaser's legal counsel and the Notary notarizing the signing of this Agreement by December 21, 2007, 18.00 hours; the Notary is hereby instructed to retain his copy of the CD-ROM together with this Agreement and to provide each party upon request and at its expense with print-outs of the documents stored on the CD-ROM, or if such matter was actually known to the Purchaser on the date hereof. (b) Except as provided otherwise in Section 8.2(a) the legal principle expressed in Section 442 of the German Civil Code (BGB) shall not apply. 8.3 THRESHOLDS AND AGGREGATE AMOUNTS OF SELLER'S LIABILITY (a) Seller's aggregate liability for all Breaches of this Agreement including, but not limited to breaches of any representation in Sections 4.1 and 4.2 and of any covenant in Section 6 and the undertaking in Section 7 shall be limited to the sum of all payments to be made by Purchaser to Seller at Closing in accordance with Section 2.3. (b) The limitations in this Section 8.3 shall not apply to any claims of Purchaser which are based on fraud or willful misconduct (Vorsatz) of Seller. 8.4 LIMITATION PERIOD (i) All claims of Purchaser for a breach of a representation contained in Sections 4.1 and 4.2 shall be time-barred (verjahren) upon expiration of a period of five (5) years after the Closing Date, (ii) claims of Purchaser for a Breach of any covenant contained in Section 7 shall be time-barred (verjahren) upon expiration of a period of nine (9) months after the Closing Date; and (iii) claims of Purchaser for a Breach of a covenant contained in Section 6 or otherwise under or in connection with this Agreement shall be time-barred (verjahren) upon expiration of a period of six (6) months after the Closing Date. Section 203 of the German Civil Code shall not apply. 33 8.5 INDEMNIFICATION PROCEDURES (a) In the event of a breach of any representation or covenant, Purchaser shall promptly, but in any event no later than twenty (20) Business Days after becoming aware of that Breach, notify Seller of that Breach, describe its claim in reasonable detail and, to the extent then feasible, set forth the calculation of the Loss alleged by Purchaser with such claim. (b) In the event that any action, claim, demand or proceeding with respect to which Seller may be liable under this Agreement (the "THIRD PARTY CLAIM") is asserted or announced by any third party (including any governmental authority) against Purchaser, any of its Affiliates or the Group (the "CLAIM ADDRESSEE"), subject to Seller indemnifying and holding harmless Purchaser, its Affiliates and the Group from and against all Losses in connection such Third Party Claim, Purchaser shall without undue delay give notice to Seller and shall enable Seller to defend the Claim Addressee against the Third Party Claim. Seller shall have the right to defend the Claim Addressee by all appropriate actions and shall have, at any time during the proceedings, the sole power to direct and control such defence, taking into account the reasonable requests and requirements of Purchaser and the Group. In particular, Seller may participate in and direct all negotiations and correspondence with the third party, appoint and instruct counsel and request that the Third Party Claim be litigated or settled in accordance with Seller's instructions. If Seller elects to defend such Third Party Claim, then Purchaser shall be entitled to the same rights as Seller has under Section 7.5(c), which will apply mutatis mutandis. (c) Purchaser agrees, and shall cause each Claim Addressee, (i) to cooperate with, and assist Seller in the defence of any Third Party Claim, (ii) to diligently conduct the defence (to the extent that Seller is not in control of the defence), (iii) not to acknowledge or settle the Third Party Claim without Seller's prior written consent, (iv) to provide Seller access, upon reasonable advance notice and during normal business hours, to all relevant books and records, other information, premises (regardless of owned or leased) and personnel of the Group, (v) to allow Seller and its representatives to copy or photograph any assets, accounts, documents and records for the purpose of avoiding, disputing, defending, appealing, compromising or contesting any Third Party Claim or liability as Seller may reasonably request, (vi) to deliver to Seller without undue delay copies of all relevant orders (Bescheide), decisions, filings, motions and other documents of any court, authority or party to the conflict, and (vii) to give Seller reasonable opportunity to comment on and discuss with Purchaser and the Group any measures which are necessary or appropriate to take or to omit in connection with a Third Party Claim, and to comment on and review any reports and documents and to participate in all relevant court 34 hearings and any other meetings (it being understood that subsections (ii) - (vii) above shall apply, irrespective of whether or not Seller has elected to defend the Third Party Claim). Purchaser shall bear any costs and expenses it incurs in connection with the cooperation or defence in accordance with this Section 8.5(c), unless it can claim indemnification in accordance with this Agreement. (d) The failure of any Claim Addressee to materially comply with its obligations under this Section 8.5 shall release the Seller from its respective indemnification obligation hereunder, but only to the extent that Seller has been prejudiced (benachteiligt) by such failure and provided that Seller has stated conclusively (schlussig darlegen) and in reasonable detail such failure of the respective Claim Addressee and the harm suffered in a written statement signed by Seller. 8.6 EXCESS RECOVERY If: (a) the Seller makes a payment (excluding any interest on a late payment) in respect of a Breach (the "DAMAGES PAYMENT"); (b) any Group company or the Purchaser receives finally and unconditionally any sum other than from the Seller which would not have been received but for the circumstance which resulted in that Breach (the "THIRD PARTY SUM"); (c) the receipt of the Third Party Sum was not taken into account in calculating the Damages Payment; and (d) the aggregate of (i) the Third Party Sum, diminished by the reasonable costs properly incurred by the Purchaser and the Group companies in order to obtain such Third Party Sum, and (ii) the Damages Payment exceeds the amount required to compensate the Purchaser in full for the Loss resulting from the Breach in question, such excess being the "EXCESS RECOVERY", the Purchaser shall promptly on receipt of the Third Party Sum by it or the relevant Group company, repay to the Seller an amount equal to the lower of (i) the Excess Recovery and (ii) the aggregate of all Damages Payments made, in either case multiplied by the quotient of the amount of the Damages Payment made by the Seller divided by an amount equal to the aggregate of all Damages Payments made. 35 8.7 NO ADDITIONAL RIGHTS OR REMEDIES OF PURCHASER The Parties agree that the rights and remedies which Purchaser or entities of the Group may have with respect to the breach of a representation, covenant or agreement by Seller contained in this Agreement or in any other agreement entered into in connection with this Agreement are limited to the rights and remedies explicitly contained herein and that, in particular, any and all further damage claims based on any such Breach by Seller are excluded. (a) Any and all rights and remedies of any legal nature which Purchaser or entities of the Group may otherwise have (in addition to the claims for specific performance (primare Erfullungspflichten) in accordance with this Agreement, claims resulting from Seller's non-compliance with such claims for specific performance and termination rights, in each case explicitly set forth herein) against Seller in connection with Seller's shareholding in the Target and Seller's indirect shareholding in the Group, this Agreement or the transactions contemplated by this Agreement shall be excluded. Without limiting the generality of the foregoing, Purchaser hereby waives any claims under statutory remedies for defects of the object of purchase (sections 434 et seq. of the German Civil Code including any claim for a reduction of the purchase price in accordance with section 441 of the German Civil Code), statutory contractual or pre-contractual obligations (sections 280 through 282, 311 of the German Civil Code) or vicarious liability for representatives (section 278 of the German Civil Code) or frustration of contract (section 313 of the German Civil Code) or tort (sections 823 et seq. of the German Civil Code). Purchaser shall have no right to rescind, cancel or otherwise terminate this Agreement or to exercise any right or remedy which would have a similar effect, except for the termination rights set forth in Section 3.3(d). (b) The provisions of this Section 8.7 shall not affect any mandatory rights and remedies of Purchaser for fraud or willful misconduct (Vorsatz) of Seller, e.g., section 826 of the German Civil Code or section 823 subsection 2 of the German Civil Code in connection with criminal offences committed with intent (vorsatzlich). 8.8 NO DOUBLE INDEMNIFICATION In the event that a fact or circumstance results in the breach of more than one of the statements made in Section 4 above, Purchaser can claim the damage caused by such breaches only once. 36 8.9 PURCHASER AND SELLER RELEASE (a) The Purchaser and the Purchaser's Guarantor undertake that, in the absence of willful deceit (Arglist), it has no rights against and may not make any claim against any employee, director, agent, officer or adviser of any member of the Group on whom it may have relied before agreeing to any term of, or entering into, this Agreement or other document referred to herein other than as expressly set out herein. Any employee, director, agent, officer or adviser of any member of the Group may enjoy the benefits and enforce the terms of this Section 8.9(a) (echter Vertrag zugunsten Dritter). (b) Except as set forth in this Agreement and in the Share Purchase Documents, the Parties are in agreement that upon the Closing, none of the Group entities shall have any claims, whether known or unknown, against the Seller, any member of the Seller Group or any of their respective Related Persons, except if such person has intentionally (or in a criminal manner) breached a respective agreement with such Group company prior to and including the Closing Date or has any outstanding primary performance obligation under such agreement or if the Group companies have claims against such person based on tort (unerlaubte Handlung) committed intentionally (the "EXCEPTED CLAIMS"), and, unless prohibited by applicable law, the Purchaser shall cause the Group companies to act accordingly and, if necessary, waive any claims which they may still have other than Excepted Claims. In addition, Purchaser shall hold harmless and indemnify Seller, all members of the Seller Group, all of their respective Related Persons, all members of any supervisory, advisory or similar board of any Group company and all of Seller's advisors, as the case may be, from and against any and all damages, costs and expenses arising out of any claims, which any Group company may raise against any such person after the Closing Date other than Excepted Claims. (c) The Parties are in agreement that upon the Closing and except for any amounts specified or referred to in Exhibit 7.2(b)(i) and Exhibit 7.2(b)(ii), neither Seller nor any member of Seller's Group nor any of their respective employees, directors, agents, officers, members of a supervisory, advisory or similar board shall have any claims, whether known or unknown, against any member of the Group, nor against any of their respective employees, directors, agents, officers, members of a supervisory, advisory or similar board, except to the extent that such person is also a Related Person of the Seller's Group or if such person has damaged the Seller intentionally or in a criminal manner, and Seller shall cause the members of Seller's Group and the aforementioned other persons to act accordingly and, if necessary, waive any claims which they may still have. In addition, Seller shall hold harmless and indemnify the members of the Group, all of their respective employees, directors, agents, officers, 37 members of a supervisory, advisory or similar board and any of their advisors, as the case may be, except as stated above, from and against any and all damages, costs and expenses arising out of any claims, which any member of Seller's Group or any of the aforementioned potential claimants may raise against any such person after the Closing Date. SECTION 9 GUARANTEE Guarantor hereby unconditionally and irrevocably guarantees as primary obligor (selbstschuldnerisch) the fulfilment of all obligations of the Purchaser under this Agreement as and when they fall due including payment of the Purchase Price and of the Shareholder Loan Purchase Price. SECTION 10 MISCELLANEOUS 10.1 NOTICES All notices, requests and other communications hereunder shall be made in writing in the English language and delivered by hand, by courier or by fax to the person at the address set forth below, or such other address as may be designated by the respective Party to the other Parties in the same manner: 38 To Seller: care of: Moeller S.a r.l 28 Boulevard Royal L-2449 Luxembourg Fax: +352 26 27 56 21 Marked for the attention of: Graeme Stening with a copy to: Skadden, Arps, Slate, Meagher & Flom (UK) LLP 40 Bank Street London E14 5DS Fax: +44 20 072 7013 Marked for the attention of: Julie Bradshaw and to Skadden, Arps, Slate, Meagher & Flom LLP An der Welle 5 60322 Frankfurt am Main Fax: +49 69 74 22 0-300 Marked for the attention of: Dr. Matthias Jaletzke To Purchaser or Guarantor: Eaton Corporation Eaton Center Attn: Office of the Secretary 1111 Superior Avenue Cleveland, Ohio 44114 USA Fax: +1-216 479-7103 with a copy to: Hengeler Mueller Attn: Dr. Joachim Rosengarten and Dr. Peter Weyland Bockenheimer Landstrasse 24 60323 Frankfurt am Main Germany Fax: +49 (0)69 72 57 73 39 10.2 PUBLIC DISCLOSURE; CONFIDENTIALITY No Party shall make any press release or similar public announcement with respect to this Agreement, and each Party shall keep confidential and not disclose to any third party the contents of this Agreement and any confidential information regarding any other Party disclosed to it in connection with this Agreement or its implementation, except (i) as expressly agreed upon with the other Parties, (ii) as may be required in order to comply with the requirements of any applicable laws or the rules and regulations of any stock exchange upon which any securities of the relevant Party or any of its parent companies are listed or any request of any regulatory authority or (iii) for disclosure by the Seller or its affiliates to any partners of any limited partnerships directly or indirectly invested in such affiliate. 10.3 COSTS AND EXPENSES (a) Purchaser shall bear any and all transfer taxes (including real estate transfer taxes), stamp duties, fees (including notary's fees), registration duties or other charges in connection with any regulatory requirements (including merger control proceedings) and other charges and costs payable in connection with the execution of this Agreement and the implementation of the transactions contemplated hereby. (b) Each Party shall pay its own expenses, including the costs of its advisors, incurred in connection with this Agreement. (c) The costs and expenses of PricewaterhouseCoopers in relation to their investigation of the Group (including answering to questions raised by the Purchaser) and preparation of their vendor due diligence report shall be borne by Seller. 10.4 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS (a) This Agreement (including all Exhibits hereto) and all documents to be entered into pursuant to this Agreement (together the "SHARE PURCHASE DOCUMENTS") contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect thereto, except for the Confidentiality Agreement, which will remain in full force and effect until the Closing Date and, if this Agreement is terminated in accordance with its terms, beyond the date of such termination. (b) Any provision of this Agreement (including this Section 10.4(b)) may be amended or waived only if such amendment or waiver is (i) by written 40 instrument executed by all Parties which explicitly refers to this Agreement or (ii) by notarized deed, if required by law. 10.5 ASSIGNMENTS; THIRD PARTY BENEFICIARIES (a) Except as provided under Section 10.5(b) or as otherwise expressly set forth in this Agreement, no Party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other Party, provided that the assignment or transfer of any rights under this Agreement by Purchaser to any bank or financial institution involved in the financing of the transactions contemplated herein is hereby permitted. In case of a liquidation of Seller, its obligations may be assumed by any of its affiliates. (b) Purchaser shall be entitled to have any directly or indirectly wholly owned subsidiary of the Guarantor (the "ACCEDING PARTY") accede to this Agreement on the side of the Purchaser (Vertragsbeitritt) on or before the Closing Date. Upon any such accession taking effect in accordance with the following sentence, the Acceding Party shall become entitled to state jointly and severally together with Purchaser (als Gesamtglaubiger) any claims which Purchaser has in accordance with this Agreement and shall become jointly and severally (gesamtschuldnerisch) liable together with Purchaser for the performance of all obligations of Purchaser under this Agreement. Alternatively Purchaser may have the Acceding Party accede to this Agreement for the purpose of purchasing the Shareholder Loans only. In such case the Acceding Party shall be obliged to pay the Shareholder Loan Purchase Price and Purchaser as well as Guarantor shall be jointly and severally liable for the fulfillment of this obligation. Any accession to this Agreement shall take effect upon notification of Seller by Purchaser of the name, address and fax no. of the Acceding Party and submission to the Seller of a certified original (Ausfertigung) of a notarial accession deed but shall not require the consent of Seller. (c) Except as provided in Section 8.9 neither this Agreement nor any provision contained in this Agreement is intended to confer any rights or remedies upon any person or entity other than the Parties. 10.6 GOVERNING LAW; JURISDICTION; SERVICE OF PROCESS (a) This Agreement shall be governed by, and construed in accordance with, the laws of Germany (excluding conflict of laws rules). (b) Any dispute arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, shall be finally settled, under exclusion of any 41 state court's competence, by arbitration in accordance with the Arbitration Rules of Deutsche Institution fur Schiedsgerichtsbarkeit e.V. (DIS). The arbitral tribunal shall consist of three arbitrators. Each arbitrator shall be eligible for the office of a judge in Germany. The place of arbitration shall be Frankfurt am Main, Germany. The language to be used in the arbitral proceedings shall be English, provided that no Party shall be under an obligation to provide to the arbitral tribunal English translations of any contracts and agreements in the German language. The right to obtain injunctive relief before state courts shall not be excluded hereby. 10.7 INTERPRETATION (a) The headings of the sections and subsections in this Agreement are for convenience purposes only and shall not affect the interpretation of any of the provisions hereof. (b) Terms to which a German translation has been added shall be interpreted as having the meaning assigned to them by the German translation. (c) The term "AFFILIATED COMPANY", "AFFILIATE" or "AFFILIATE" shall have the meaning assigned to it in section 15 of the German Stock Corporation Act (verbundenes Unternehmen). (d) For the purpose of any disclosure thresholds or other amounts referred to in any representations and warranties contained in this Agreement, any reference to Euro (EUR) shall include the equivalent in any foreign currency at the official Euro foreign exchange rates of the European Central Bank on the date hereof. (e) Words such as "hereof", "herein" or "hereunder" refer (unless otherwise required by the context) to this Agreement as a whole and not to a specific provision of this Agreement. The term "including" shall mean "including, without limitation". (f) For the purpose of this Agreement, a "BUSINESS DAY" shall be any day other than a Saturday, Sunday or days on which banks in Frankfurt am Main, Germany, London, England, Luxembourg, Grand Duchy of Luxembourg, or New York, New York, United States of America are generally closed. (g) The Exhibits to this Agreement are an integral part of this Agreement and any reference to this Agreement shall be a reference to this Agreement and the Exhibits as a whole. The disclosure of any matter in this Agreement (including any Exhibit thereto) shall be deemed to be a disclosure for all purposes of this Agreement. The fact that a matter has been disclosed in an Exhibit shall not be used to construe the extent of the required disclosure (including any standard of 42 materiality) pursuant to the relevant representation or other provision of this Agreement. 10.8 DEFINITIONS EXHIBIT 10.8 sets forth a list of the capitalized terms used in this Agreement, indicating the sections where such terms are defined. Terms defined in the singular have a comparable meaning when used in the plural, and vice versa. 10.9 SEVERABILITY Should any provision of this Agreement, or any provision incorporated into this Agreement in the future, be or become invalid or unenforceable, the validity or enforceability of the other provisions of this Agreement shall not be affected thereby. Instead of the invalid or unenforceable provision, the Parties shall agree upon a suitable and equitable provision that, so far as is lawfully possible, comes as close as possible to the intent and purpose of the invalid or unenforceable provision. The same shall apply: (i) if the Parties have, unintentionally, failed to address a certain matter in this Agreement (Regelungslucke), in which case a suitable and equitable provision shall be agreed upon between the Parties which comes as close as possible to what the Parties, in the light of the intent and purpose of this Agreement, would have agreed upon if they had considered the matter; or (ii) if any provision of this Agreement is invalid because of the scope of any time period or performance stipulated herein, in which case a time period or performance permitted by law shall be agreed upon between the Parties which comes as close as possible to the stipulated time period or performance. 43 EXHIBIT 10.8 LIST OF DEFINITIONS The capitalized terms used in the Agreement are defined in the following clauses: Acceding Party Section 10.5 (b) affiliate Section 10.7 (c) Affiliate Section 10.7 (c) affiliated company Section 10.7 (c) Agreement Introduction Alternative Proposal Section 6.3 Breach Section 8.1 (a) Business Recitals 3. Business Day Section 10.7 (f) Claim Addressee Section 8.5 (b) Closing Section 3.1 Closing Date Section 3.1 Conditional Release Agreement Section 2.5(c) (i) Confidentiality Agreement Section 3.3 (d) Cut-Off Time Section 8.2 Damages Payment Section 8.6 (a) Data Room Section 8.2 Effective Date Section 1.4 Encumbrances Section 4.1 (b) Excepted Claims Section 8.9 (b) Excess Recovery Section 8.6 (d) Existing Bank Debt Amount Section 2.5 (c) (ii) Existing Mezzanine Bank Debt Amount Section 2.5 (c) (iii) Existing Senior Bank Debt Amount Section 2.5 (c) (iv) Group Recitals 3. Group Shares Section 4.1 (a) Guarantor Introduction Hedge Agreements Section 6.4 Holding Account Section 6.6 (a) Holding Account Amount Section 6.6 (a) Iranian Assets Section 3.2 (b) Key Employee Section 6.1 (b) (xiv) Leakage Section 7.2(a) Losses Section 8.1 (b)
44 Material Adverse Effect Section 6.1 (c) Mezzanine Facilities Agreement Section 2.5 (d) (v) Ordinary Course of Business Section 6.1 (c) Parties Introduction Party Introduction Permitted Leakage Section 7.2(b) Projects Section 6.1(c) Purchase Price Section 2.1 Purchaser Introduction Related-Party Agreements Section 6.4 Related Partners Section 7.1(b) Related Persons Section 7.2(c) Seller Introduction Seller Group Recitals 4. Seller Associated Persons Section 4.3 Senior Facilities Agreement Section 2.5 (d) (vi) Share Purchase Documents Section 10.4 (a) Shareholder Loans Recitals 2. Shareholder Loan Purchase Price Section 2.2 Sold Shares Recitals 1. Target Recitals 1. Third Party Claim Section 8.5 (b) Third Party Sum Section 8.6 (b) UK Pension Scheme Section 6.6 (a)
EX-10.E 4 l30233aexv10we.txt EX-10(E) EXHIBIT 10 (E) EATON CORPORTATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) 2005 NON-EMPLOYEE DIRECTOR FEE DEFERRAL PLAN (2008 RESTATEMENT) I. PURPOSE The 2005 Non-Employee Director Fee Deferral Plan (the "Plan") enables each Director of Eaton Corporation ("Eaton" or the "Company") who is not employed by the Company to defer receipt of fees that may be payable to him or her for future services as a member of the Board of Directors of the Company (the "Board") or as Chair or as a member of any committee of the Board. The purpose of the Plan is to help attract and retain highly qualified individuals to serve as members of the Company's Board of Directors and as members of committees thereof. II. ELIGIBILITY All members of the Board who are not employed by the Company are eligible to participate in the Plan with respect to amounts earned as fees for services as a member of the Board or as Chair or a member of any committee of the Board. III. DEFINITIONS The terms used herein shall have the following meanings: Account - A bookkeeping account established by Eaton for a Participant to which may be credited Deferred Fees and earnings or losses thereon. Agreement - A written agreement between Eaton and a Participant deferring the receipt of Fees and indicating the term of the deferral. Beneficiary - The person or entity designated in writing executed and delivered by the Participant to the Committee. If that person or entity is not living or in existence at the time any unpaid balance of Deferred Fees becomes due after the death of a Participant, the term "Beneficiary" shall mean the Participant's estate or legal representative or any person, trust or organization designated in such Participant's will. Board - The Board of Directors of Eaton. Change in Control - Shall be deemed to have occurred upon the occurrence of (i) a change in the ownership of Eaton, (ii) a change in effective control of Eaton, or (iii) a change in the ownership of a substantial portion of the assets of Eaton. For purposes of this definition, except as provided below, a change in the ownership of a Eaton occurs on the date that any one (1) person, or more than one (1) person acting as a group (as defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), acquires ownership of shares of Eaton that, together with shares held by such person or group, constitutes more than fifty (50) percent of the total fair market value or total voting power of the shares of Eaton. However, if any one (1) person, or more than one (1) person acting as a group, is considered to own more than fifty (50) percent of the total fair market value or total voting power of the shares of Eaton, the acquisition of additional shares by the same person or persons is not considered to cause a change in the ownership of Eaton (or to cause a change in the effective control of Eaton). An increase in the percentage of shares owned by any one (1) person, or persons acting as a group, as a result of a transaction in which Eaton acquires its shares in exchange for property will be treated as an acquisition of shares for purposes hereof. This shall apply only when there is a transfer of shares of Eaton (or issuance of shares of Eaton) and shares in Eaton remain outstanding after the transaction. A change in the effective control of Eaton occurs only on either of the following dates: (1) the date any one (1) person, or more than one (1) person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of shares of Eaton possessing thirty (30) percent or more of the total voting power of the shares of Eaton; or (2) the date a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the individuals who had comprised the Board before the date of the appointment or election. A change in the ownership of a substantial portion of Eaton assets occurs on the date any one (1) person, or more than one (1) person acting as a group, acquired (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from Eaton that have a total gross fair market value equal to or more than forty (40) percent of the total gross fair market value of all of the assets of Eaton immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of Eaton, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. Application of this definition shall be further subject to rules set forth in Treasury Regulation Section 1.409A-3(i) relating to persons acting as a group, transfers to related persons, and certain back-to-back arrangements. Code - Internal Revenue Code of 1986, as it may be amended from time to time. Committee - The Governance Committee of the Board or such other committee as the Board may from time to time designate for purposes of administration of the Plan. Common Share Retirement Deferred Fees - Retirement Deferred Fees that are converted into share units in accordance with Article VI. Deferred Fees - That portion of Fees deferred pursuant to the Plan. Eaton - Eaton Corporation, an Ohio corporation, and its corporate successors. Eaton Common Shares - The common shares of Eaton. Fees - Any amount payable to a Participant for services as a member of the Board or as Chair or a member of any committee of the Board. Interest Rate Retirement Deferred Fees - Retirement Deferred Fees that are credited with Treasury Note Based Interest in accordance with Article VI. 2 Participant - A member of the Board who is not an employee of Eaton and who elects to defer receipt of Fees under the Plan. Periodic Installments - Annual payments, over a period not to exceed 15 years, as elected by the Participant in accordance with the terms of the Plan, which are substantially equal in amount, or, in the case of Common Share Retirement Deferred Fees, substantially equal in the number of share units being valued and paid or the number of Eaton Common Shares being distributed, except that earnings attributable to periods following Retirement or Termination of Service as a Director shall be included with each payment. Plan - This 2005 Non-Employee Director Fee Deferral Plan pursuant to which Fees may be deferred for later payment, adopted December 8, 2004 and effective January 1, 2005, as set forth herein. Retirement - The Termination of Service as a Director of a Participant who has five (5) years of service as a member of the Board. Retirement Deferred Fees - That portion of Fees deferred for payment at Retirement or in Periodic Installments commencing at Retirement, as elected by the Participant in accordance with Article IV. Short-Term Deferred Fees - That portion of Fees deferred for payment as elected by the Participant in accordance with Article V. Termination and Change in Control - The Termination of Service as a Director of a Participant for any reason whatsoever prior to a Change in Control if there is a subsequent Change in Control or the Termination of Service as a Director of a Participant for any reason whatsoever during the two (2)-year period immediately following a Change in Control. Termination of Service as a Director - The time when a Participant shall no longer be a member of the Board, whether by reason of retirement, death, voluntary resignation, divestiture, removal (with or without cause), or disability. Treasury Bill Interest Equivalent - A rate of interest equal to the quarterly average yield of 13-week U.S. Government Treasury Bills. Treasury Note Based Interest - A rate of interest equal to the average yield of 10-year U.S. Government Treasury Notes plus 300 basis points. 3 IV. ELECTION TO DEFER Section 4.01 Deferral Options. For each calendar year commencing with 2005, a Participant may elect to defer the receipt of all or part of his or her Fees as Short-Term Deferred Fees or Retirement Deferred Fees. Once a Participant has made an effective election, he or she may not thereafter change that election or change any allocation between Short-Term Deferred Fees or Retirement Deferred Fees. Section 4.02 Amount Deferred. Not less than ten (10) percent of Fees payable for any calendar year may be deferred under the Plan. If a Participant elects to allocate a portion of Fees to both Short-Term Deferred Fees and Retirement Deferred Fees, the amount allocated to each shall be not less than ten (10) percent of the Fees payable for any calendar year. Section 4.03 Election Deadline. To be in effect for a calendar year, a Participant's election must be completed, signed and filed with the Committee on or before December 31 of the immediately preceding calendar year, except that in the case of the first year in which a Participant becomes eligible to participate in the Plan, such election may be made with respect to services performed subsequent to the election within thirty (30) days after the date the Participant becomes eligible to participate in the Plan. Section 4.04 Additional Terms. At the time the Participant elects to defer all or part of his or her Fees for a calendar year as Short-Term Deferred Compensation, the Participant shall also specify the year in which payment of such amount shall commence (which shall not be prior to the second year following the calendar year for which the Fees were deferred) and the method of payment selected from those permitted under Article V, provided that payment shall commence on or about March 15 of the specified year. At the time the Participant elects to defer all or part of his or her Fees for a calendar year as Retirement Deferred Fees, the Participant shall also specify that payment of such amounts be made in a lump sum or in Periodic Installments, including the term of such Periodic Installments, upon Retirement, provided that the date of payment or commencement shall be on or about March 15 of the year following the date of such Retirement, subject to the provisions of Section 6.06. V. SHORT-TERM DEFERRED FEES If elected by a Participant, payment of the amount of Fees allocated to Short-Term Deferred Fees will be deferred. Short-Term Deferred Fees shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant's name. Treasury Bill Interest Equivalents shall be credited quarterly to the Participant's Short-Term Deferred Fees Account until such compensation is paid to the Participant. Short-Term Deferred Fees, together with credited Treasury Bill Interest Equivalents, shall be paid to the Participant in a lump sum or in not more than five annual installments, as elected by the Participant. Upon the death of a Participant prior to payment of such amounts, payment shall be made to his or her Beneficiary in a lump sum within ninety (90) days of the date of such death. 4 VI. RETIREMENT DEFERRED FEES Section 6.01 Duration. If elected by a Participant, payment of the amount of Fees allocated to Retirement Deferred Fees will be deferred to Retirement. Retirement Deferred Fees shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant's name. Section 6.02 Common Share Retirement Deferred Fees. Between fifty (50) percent and one hundred (100) percent, as elected by the Participant, of the amount allocated to Retirement Deferred Fees shall be credited to Common Share Retirement Deferred Fees, and the balance shall be credited to Interest Rate Retirement Deferred Fees. Common Share Retirement Deferred Fees shall be converted into a number of share units based upon the average of the mean prices for Eaton Common Shares for the twenty trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately preceding the end of the calendar quarter in which the Fees to be deferred were earned. For purposes of the Plan, "mean price" shall be the mean of the highest and lowest selling prices for Eaton Common Shares quoted on the New York Stock Exchange on the relevant trading day. On each Eaton Common Share dividend payment date, dividend equivalents equal to the actual Eaton Common Share dividends paid shall be credited to the share units in the Participant's Account, and shall in turn be converted into share units utilizing the mean price for Eaton Common Shares on the dividend payment date. Upon payment of Common Share Retirement Deferred Fees in Eaton Common Shares, the share units standing to the Participant's credit shall be converted to the same number of Eaton Common Shares for distribution to the Participant. Section 6.03 Interest Rate Retirement Deferred Fees. Retirement Deferred Fees not credited to Common Share Retirement Deferred Fees shall be credited to Interest Rate Retirement Deferred Fees. Interest Rate Retirement Deferred Fees shall be credited to the Interest Rate Retirement Deferred Fees Account, which shall earn Treasury Note Based Interest, compounded quarterly, until paid. Section 6.04 Periodic Installments. In the event of the death of a Participant who has commenced receiving Periodic Installments, the entire remaining amount of his or her Retirement Deferred Fees shall be distributed to the Participant's Beneficiary. Such distribution shall be made in a lump sum within ninety (90) days of the date of such death. Section 6.05 Termination of Service as a Director. The Retirement Deferred Fees Account of a Participant whose Termination of Service as a Director occurs for reasons other than Retirement shall be distributed in a lump sum within sixty (60) days following the Participant's Termination of Service as a Director for reasons other than Retirement; subject, however, to the limitations set forth in Section 6.06. 5 Earnings shall be credited on undistributed Retirement Deferred Fees Accounts, and annual installment payments shall be adjusted to reflect such additional earnings, based on the remaining number of installment payments to be distributed and based on Treasury Note Based Interest, computed quarterly. Section 6.06 Limitations on Distribution. Notwithstanding any provision of the Plan to the contrary, Fees deferred under the Plan shall not be distributed earlier than the first to occur of the following: (a) separation from service as determined by the Secretary of the Treasury; (b) the date the Participant becomes disabled (within the meaning of Section 409A(a)(2)(C) of the Code); (c) death of the Participant; (d) a specified time (or pursuant to a fixed schedule) specified under the Plan at the date of the deferral of such Fees; (e) to the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of Eaton, or in the ownership of a substantial portion of the assets of Eaton; or (f) the occurrence of an unforeseeable emergency as defined in Section 409A(a)(2)(B)(ii) of the Code. VII. AMENDMENT AND TERMINATION Section 7.01 Right to Amend or Terminate. Eaton fully expects to continue the Plan but it reserves the right, except as otherwise provided herein, at any time by action of the Committee, to modify, amend or terminate the Plan for any reason, including adverse changes in the federal tax laws. Notwithstanding the foregoing, upon the occurrence of a Change in Control, no amendment, modification or termination of the Plan shall, without the consent of any particular Participant, alter or impair any rights or obligations under the Plan with respect to that Participant. 6 Section 7.02 American Jobs Creation Act of 2004 and Transition Rules. The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by Eaton to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on and after January 1, 2005, including as contemplated by Section 885(f) of the American Jobs Creation Act of 2004. Moreover, after January 1, 2007, and on or before December 31, 2007, and to the extent permitted by the Committee in accordance with terms set forth on an election form provided by the Committee, a Participant may make a change in a payment election as described in IRS Notice 2006-79, provided that with respect to an election to change a time and form of payment made after January 1, 2007 and on or before December 31, 2007, the election may apply only to amounts that would not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that would not otherwise be payable in 2007. Section 7.03 Plan Termination in Connection with Change in Control. The Board shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire Account to the Participant or, if applicable, his or her Beneficiary, pursuant to an irrevocable action taken by the Board within the thirty (30) days preceding a Change in Control. This Section 7.03 will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored by the "service recipient" (as defined under Treasury Regulation Section 1.409A-1(g)) immediately after the time of the Change in Control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c) (2) are terminated and liquidated with respect to each Participant who experienced the Change in Control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 7.03, where the Change in Control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. VIII. ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall interpret the provisions of the Plan where necessary and may adopt procedures for the administration of the Plan which are consistent with the provisions of the Plan and any rules adopted by the Committee. Each Participant or Beneficiary must claim any benefit to which such Participant or Beneficiary may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the 7 specific reasons for the denial. The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty (60) days after the notice of the denial of his or her claim. The written decision by the Committee with respect to the review must be given within one hundred and twenty (120) days after receipt of the written request. The determinations of the Committee shall be final and conclusive. IX. TERMINATION AND CHANGE IN CONTROL Section 9.01 Termination and Change in Control. Notwithstanding anything herein to the contrary other than Section 6.06, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Company the payments as provided in Section 9.02. Section 9.02 Payment Requirement. No later than the date a Participant makes an initial election under the Plan, the Participant shall select one of the payment alternatives set forth below with respect to the Participant's Account. The payment alternatives are as follows: (a) a Lump Sum Payment within thirty (30) days following the Termination and Change in Control; (b) payment in semiannual or annual payments, over a period not to exceed 15 years, as selected by the Participant at the time provided in the first paragraph of this Section 9.02, commencing within thirty (30) days following the Termination and Change in Control which are substantially equal in amount or in the number of share units being valued and paid or in the number of Eaton Common Shares being distributed, except that earnings attributable to periods following Termination and Change in Control shall be included with each payment. Payment of such amounts shall be made to each such Participant in accordance with his or her selected alternative as provided in Section 9.02. X. MISCELLANEOUS Section 10.01 Adjustments. In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or similar event affecting shares of the Company, the Committee shall equitably adjust the number of share units previously allocated to the Accounts of Participants as Common Share Retirement Deferred Fees. Section 10.02 Designation of Beneficiaries. Each Participant shall have the right, by written instruction to the Committee, on a form supplied by the Committee, to designate one or more primary and contingent Beneficiaries (and the proportion to be paid to each, if more than one is designated) to receive his or her Account balance upon his or her death. Any such designation shall be revocable by the Participant. 8 Section 10.03 Committee Actions. All actions of the Committee hereunder may be taken with or without a meeting, as permitted by law and by the Company's Amended Regulations. Section 10.04 Assignment. No benefit under the Plan shall be subject to anticipation, alienation, sale, transfer or encumbrance, and any attempt to do so shall be void. No benefit hereunder shall in any manner be liable for the debts, contracts, or liabilities of the person entitled to such benefits. During a Participant's lifetime, rights hereunder are exercisable only by the Participant or the Participant's guardian or legal representative. Notwithstanding the foregoing, nothing in this Section shall prohibit the transfer of any benefit by will or by the laws of descent and distribution or (if permitted by applicable regulations under Section 16(b) of the Securities Exchange Act) pursuant to a qualified domestic relations order, as defined under the Code and the Employee Retirement Income Security Act of 1974, as amended. Section 10.05 No Funding Required. The obligations of Eaton to make payments shall be a liability of Eaton to the Participant. Eaton shall not be required to maintain any separate fund or reserve, or purchase or acquire life insurance on a Participant's life, or otherwise segregate assets to assure that any particular asset of Eaton is available to make such payments by reason of Eaton's obligations hereunder. Nothing contained in the Plan shall be construed as creating a trust or other fiduciary relationship between Eaton and a Participant or any other person. Section 10.06 No Contract for Services. The Plan shall not be deemed to constitute a contract for services between Eaton and a Participant. Neither the execution of the Plan nor any action taken by Eaton, the Board or the Committee pursuant to the Plan shall confer on a Participant any legal right to be continued as a member of the Board or in any other capacity with Eaton whatsoever. Section 10.07 Governing Law. The Plan shall be construed and governed in accordance with the law of the State of Ohio to the extent not covered by Federal law. Section 10.08 Effective Date. The Plan was adopted by the Board on December 8, 2004, effective January 1, 2005, and is amended and restated effective January 1, 2008, as set forth herein. APPROVAL AND ADOPTION The 2005 Non-Employee Director Fee Deferral Plan, as amended and restated in the form attached hereto, is hereby approved and adopted. - ------------------------------------- Date: October 27, 2007 Name - ------------------------------------- Title - ------------------------------------- Name - ------------------------------------- Title EX-10.F 5 l30233aexv10wf.txt EX-10(F) EXHIBIT 10 (F) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON CORPORATION DEFERRED INCENTIVE COMPENSATION PLAN II EFFECTIVE JANUARY 1, 2005 2008 RESTATEMENT EATON CORPORATION DEFERRED INCENTIVE COMPENSATION PLAN II I. PURPOSE The purpose of the Deferred Incentive Compensation Plan II is to promote the greater success of Eaton Corporation and its subsidiaries by providing a means to defer Incentive Compensation for key employees whose level and nature of position enable them to affect significantly the profitability, competitiveness and growth of Eaton. II. CONCEPT The Plan is based on the concept that the deferral of Incentive Compensation for later payment to a Participant, including the later payment during Retirement, will provide a benefit to each Participant and an incentive to improve the profitability, competitiveness and growth of Eaton. III. DEFINITIONS Unless otherwise required by the context, the terms used herein shall have the meanings as set forth below: ACCOUNT: The account established by Eaton for each Participant to which may be credited his or her Deferred Incentive Compensation, Dividend Equivalents, Treasury Bill Interest Equivalents, and Treasury Note Based Interest. BENEFICIARY: The person or entity (including a trust or the estate of the Participant) designated in a written document executed by the Participant and delivered to the Committee. If at the time when any unpaid balance of Deferred Incentive Compensation shall be or become due at or after the death of a Participant, there shall not be any living person or any entity in existence so designated, the term "Beneficiary" shall mean the Participant's estate. BOARD: The Board of Directors of Eaton. BOARD COMMITTEE: The Compensation and Organization Committee of the Board. CHANGE IN CONTROL: For purposes of the Plan, a "Change in Control" shall be deemed to have occurred upon the occurrence of (i) a change in the ownership of Eaton, (ii) a change in effective control of Eaton, or (iii) a change in the ownership of a substantial portion of the assets of Eaton. For purposes of this definition, except as provided below, a change in the ownership of a Eaton occurs on the date that any one (1) person, or more than one (1) person acting as a group (as defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), acquires ownership of shares of Eaton that, together with shares held by such person or group, constitutes more than fifty (50) percent of the total fair market value or total voting power of the shares of Eaton. However, if any one (1) person, or more than one (1) person acting as a group, is considered to own more than fifty (50) percent of the total fair market value or total voting power of the shares of 2 Eaton, the acquisition of additional shares by the same person or persons is not considered to cause a change in the ownership of Eaton (or to cause a change in the effective control of Eaton). An increase in the percentage of shares owned by any one (1) person, or persons acting as a group, as a result of a transaction in which Eaton acquires its shares in exchange for property will be treated as an acquisition of shares for purposes hereof. This shall apply only when there is a transfer of shares of Eaton (or issuance of shares of Eaton) and shares in Eaton remain outstanding after the transaction. A change in the effective control of Eaton occurs only on either of the following dates: (1) the date any one (1) person, or more than one (1) person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of shares of Eaton possessing thirty (30) percent or more of the total voting power of the shares of the corporation; or (2) the date a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election. A change in the ownership of a substantial portion of the assets of Eaton occurs on the date any one (1) person, or more than one (1) person acting as a group, acquired (or has acquired during the 12- month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty (40) percent of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. Application of this definition shall be further subject to rules set forth in Treasury Regulation Section 1.409A-3(i) relating to persons acting as a group, transfers to related persons, and certain back-to-back arrangements. CODE: Internal Revenue Code of 1986, as it may be amended from time to time. COMMITTEE: The Management Compensation Committee of Eaton. COMMON SHARE RETIREMENT COMPENSATION: Retirement Compensation which is converted into Contingent Share Units in accordance with Article VI. CONTINGENT SHARE UNITS: Units credited to a Participant's Account which are equivalent in value to the market value of Eaton Common Shares. DEFERRED INCENTIVE COMPENSATION: That portion of Incentive Compensation which has been deferred pursuant to the Plan and any Dividend Equivalents, Treasury Bill Interest Equivalents, Contingent Share Units, and Treasury Note Based Interest which are attributable thereto. DEFERRED INCENTIVE COMPENSATION AGREEMENT: The written agreement between Eaton and a Participant pursuant to which Incentive Compensation is deferred under the Plan. DIVIDEND EQUIVALENT: An amount equal to the per share dividends paid on Eaton Common Shares. EATON: Eaton Corporation, an Ohio corporation, and its corporate successors. EATON COMMON SHARES: The common shares of Eaton. 3 EXECUTIVE INCENTIVE COMPENSATION PLAN: Any incentive compensation plan approved (a) by the Board for participation in the Plan and whose participants are designated by the Board Committee or (b) by the Committee. INCENTIVE COMPENSATION: The full amount of the annual Incentive Compensation awarded to a Participant under any Executive Incentive Compensation Plan. INCENTIVE YEAR: An incentive year as defined under the provisions of the applicable Executive Incentive Compensation Plan. INTEREST RATE RETIREMENT COMPENSATION: Retirement Compensation which is credited with Treasury Note Based Interest in accordance with Article VI. MEAN PRICE: The mean between the highest and lowest quoted selling price of an Eaton Common Share on the New York Stock Exchange. PARTICIPANT: An employee of Eaton in a key position receiving benefits under the Executive Incentive Compensation Plan and participating under the Plan. PERIODIC COMPENSATION: That portion of a Participant's Incentive Compensation which is deferred under the Plan for payment over a period not in excess of five (5) years. PERIODIC INSTALLMENTS: Equal annual payments over a period not to exceed fifteen (15) years, as elected by the Participant in accordance with the terms of the Plan. Periodic Installments are paid on or about March 15 of each year, except as otherwise provided herein. PLAN: The Deferred Incentive Compensation Plan pursuant to which all or a portion of Incentive Compensation may be deferred for later payment to a Participant effective January 1, 2005, and adopted December 8, 2004. RETIREMENT: The Termination of Employment of a Participant who is age fifty (50) or older and has at least ten (10) years of service with Eaton. For this purpose, service shall be measured in the same manner as Service under the Pension Plan for Eaton Corporation Employees. RETIREMENT COMPENSATION: That portion of Incentive Compensation deferred under the Plan for payment to a Participant upon his or her Retirement. TERMINATION AND CHANGE IN CONTROL: Shall mean the termination of the employment of a Participant for any reason whatsoever prior to a Change in Control, upon a subsequent Change in Control or termination of the employment of a Participant for any reason whatsoever during the two (2)-year period immediately following a Change in Control. TERMINATION OF EMPLOYMENT: The time when a Participant shall no longer be employed by Eaton whether by reason of Retirement, death, voluntary resignation (with or without good reason), divestiture or closing of a business unit, plant or facility, discharge (with or without cause), or such disability that, under the then current employment practices of Eaton, the employment of the Participant is terminated. 4 Termination of Employment shall include "separation from service" within the meaning of Section 409A of the Code, meaning that a Participant whose level of bona fide services is permanently decreased to no more than twenty (20) percent of the average level of bona fide services performed over the preceding 36-month period shall incur a separation from service for purposes of the Plan. Notwithstanding the foregoing, upon a sale or other disposition of assets of Eaton or any of its subsidiaries to an unrelated purchaser, Eaton reserves the right, to the extent permitted by Section 409A of the Code, to determine whether Participants providing services to the purchaser after and in connection with the purchase transaction have experienced a separation from service. TREASURY BILL INTEREST EQUIVALENT: A rate of interest equal to the quarterly average yield of 13-week U.S. Government Treasury Bills. TREASURY NOTE BASED INTEREST: A rate of interest equal to the average yield of 10-year U.S. Government Treasury Notes plus 300 basis points. IV. ELECTION TO DEFER Section 4.01. With respect to Incentive Compensation for each Incentive Year commencing in or after 2005, the Participant shall be given the opportunity to elect, by signing and delivering to the Committee a Deferred Incentive Compensation Agreement, the manner and extent to which the Participant's Incentive Compensation awarded in respect to such Incentive Year shall be deferred under the Plan and the allocation between Periodic Compensation and Retirement Compensation. At the time such election is made the Participant shall specify with respect to the deferral for such Incentive Year the time and form of payment for such amount as follows: (a) With respect to any amount allocated to Periodic Compensation, the Participant shall specify the year (subject to the provisions of Section 5.02) in which payment of such amount shall be made or commence in the form of Periodic Installments and the number of years, not to exceed five (5) over which payment shall be made. (b) With respect to any amount allocated to Retirement Compensation, the Participant shall specify whether such amount is to be distributed as a lump sum or in the form of Periodic Installments over a period of five (5), ten (10), or fifteen (15) years, subject, however, to the provisions of Section 4.06. Section 4.02. Not less than ten (10) percent of Incentive Compensation awarded for any Incentive Year may be deferred under the Plan. Section 4.03. If a Participant elects to allocate a portion of Incentive Compensation to both Periodic Compensation and Retirement Compensation, the amount allocated to each form of Compensation shall be not less than ten (10) percent of the Incentive Compensation awarded for any Incentive Year. Section 4.04. To be in effect for an Incentive Year, a Participant's election pursuant to Section 4.01 must be completed on or before December 31 of the year immediately preceding the Incentive Year. Moreover, in the case of the first year in which a Participant becomes eligible to participate in the Plan, such election shall be made with respect to services performed subsequent to the election within thirty (30) days after the 5 date the Participant becomes eligible to participate in the Plan. In the event that an election is made hereunder in the Participant's first year of eligibility with respect to compensation that is earned based on a specific performance period and after the beginning of that performance period, the election shall apply only to the compensation paid for services performed after the election. An election will be deemed to apply to compensation paid for services performed after the election if the election applies to no more than an amount equal to the total amount of the compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election over the total number of dates in the performance period. Section 4.05. Once a Participant has made an effective election under Section 4.01 with respect to the deferral and allocation of his or her Incentive Compensation, he or she may not thereafter change that election other than as provided in Section 4.06 or change the allocation between Periodic Compensation and Retirement Compensation. Section 4.06. A Participant who has made an effective election under Section 4.01 with respect to deferral of Retirement Compensation for payment in a lump sum following Retirement may make a subsequent election to delay payment or commencement of payment of such amount for a period of five (5) years from the date such payment would otherwise have been made, which election may include a change in the form of payment in accordance with the following provisions, subject to such administrative rules and procedures as may be established by the Committee: (a) the subsequent election shall not take effect until 12 months after the date on which it is made; and (b) payment in the form of Periodic Installments over a period of five (5) years may be elected. Any such subsequent election shall become irrevocable on the later of the date when made or the date which is 12 months before the date the Participant could first be eligible for Retirement. Notwithstanding the foregoing provisions of this Section 4.06, no such subsequent election shall be given effect unless the Participant has a Termination of Employment by reason of Retirement. V. PERIODIC COMPENSATION Section 5.01. There shall be computed and credited quarterly to the Participant's Account Treasury Bill Interest Equivalents on all unpaid Periodic Compensation. Section 5.02. Commencing on or about March 15 of the year elected by the Participant (but not earlier than the second year following the Incentive Year for which the Periodic Compensation was credited to the Participant), the Periodic Compensation shall be paid to the Participant in not more than five (5) equal annual installments, as earlier elected by the Participant; and, with each such installment, there shall be paid to the Participant all Treasury Bill Interest Equivalents credited to the Participant and then unpaid. Section 5.03. Upon Termination of Employment, any unpaid Periodic Compensation and any unpaid Treasury Bill Interest Equivalents credited thereon shall be paid to the 6 Participant, or his or her Beneficiary, as the case may be, in a lump sum payment within sixty (60) days following such Termination of Employment, subject to the provisions of Section 9.03. VI. RETIREMENT COMPENSATION Section 6.01. The amount of Deferred Incentive Compensation allocated to Retirement Compensation shall correspond with the portion of the Incentive Compensation award elected by the Participant pursuant to Section 4.01. Retirement Compensation shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant's name. For each award period ending after December 31, 2007, the Participant may elect in ten (10) percent increments, the amount, if any, of Retirement Compensation to be credited to Common Share Retirement Compensation, and the balance shall be credited to Interest Rate Retirement Compensation. Section 6.02. Common Share Retirement Compensation shall be converted into a number of Contingent Share Units based upon the average of the Mean Prices for Eaton Common Shares for the twenty (20) trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately following the end of the incentive period in which the Incentive Compensation to be deferred was earned. On each Eaton Common Share dividend payment date, Dividend Equivalents equal to the actual Eaton Common Share dividends paid shall be credited with respect to the Contingent Share Units in the Participant's Account, and shall in turn be converted into Contingent Share Units utilizing the Mean Price for Eaton Common Shares on the dividend payment date. In determining the number of Contingent Share Units to be credited to a Participant, whether by reason of the conversion of Retirement Compensation to Contingent Share Units or by reason of the conversion of Dividend Equivalents to Contingent Share Units, such number may be expressed in fractions of a Contingent Share Unit computed to the nearest tenth. The number of Contingent Share Units credited to a Participant shall be appropriately adjusted to reflect any change in the capitalization of Eaton resulting from a stock dividend, stock split, reorganization, merger, consolidation, recapitalization, combination, exchange of shares or any other similar events. Upon any distribution of Common Share Retirement Compensation, all Contingent Share Units standing to his or her credit which are to be distributed shall be converted to an equal number of Eaton Common Shares for distribution to the Participant in the form of Eaton Common Shares. Section 6.03. Upon Retirement or other Termination of Employment of a Participant or upon any other distribution of Common Share Retirement Compensation, and after the conversion of Contingent Share Units to Eaton Common Shares as set forth in Section 6.02, distribution of such Eaton Common Shares for each Incentive Year shall be made or commence. Upon Retirement distribution shall be made in accordance with the election made by the Participant under the terms of the Plan with respect to method of payment, with distribution made or commencing on or about March 15 of the year following the date of such Retirement, subject to the provisions of Sections 4.06 and 9.03 to the extent applicable, provided that in the event the Participant has made no election for an Incentive Year, such amount relating to such Incentive Year shall be payable in a 7 single sum payment, and provided, further, that in the event of the Participant's death prior to distribution of his or her entire Account, the remaining amount shall be distributed to the Participant's beneficiary in a single sum payment within ninety (90) days following the date of death. In the event of a Participant's Termination of Employment other than Retirement, such amount shall be paid in a single sum payment within sixty (60) days following the date of such Termination of Employment, subject to the provisions of Section 9.03. There shall be computed on a quarterly basis and credited to the Participant's Account Dividend Equivalents on the unpaid amount of Common Share Retirement Compensation until such Common Share Retirement Compensation is paid by Eaton. All credited Dividend Equivalents shall be converted to Eaton Common Shares using the method set forth in Section 6.02. The Eaton Common Shares credited to the Participant's Account in accordance with Section 6.02 shall be distributed to the Participant or his Beneficiary, as the case may be, in accordance with the schedule for distribution determined under this Section 6.03, and with each Periodic Installment, if any, there shall be paid all Dividend Equivalents credited to the Participant and then unpaid. Section 6.04. Retirement Compensation not credited to Common Share Retirement Compensation shall be credited to Interest Rate Retirement Compensation. Interest Rate Retirement Compensation shall be credited to the Interest Rate Retirement Compensation Account, which shall earn Treasury Note Based Interest, compounded quarterly, until paid. Section 6.05. Upon Retirement or other Termination of Employment of a Participant or upon any other distribution of Interest Rate Retirement Compensation, distribution for each Incentive Year shall be made or commence. Upon Retirement distribution shall be made in accordance with the election made by the Participant under the terms of the Plan with respect to method of payment, with distribution made or commencing on or about March 15 of the year following the date of such Retirement, subject to the provisions of Sections 4.06 and 9.03 to the extent applicable, provided that in the event the Participant has made no election for an Incentive Year, such amount relating to such Incentive Year shall be payable in a single sum payment, and provided, further, that in the event of the Participant's death prior to distribution of his or her entire Account, the remaining amount shall be distributed to the Participant's beneficiary in a single sum payment within ninety (90) days following the date of death. In the event of a Participant's Termination of Employment other than Retirement, such amount shall be paid in a single sum payment within sixty (60) days following the date of such Termination of Employment, subject to the provisions of Section 9.03. Interest Rate Retirement Compensation credited to the Participant's Account in accordance with Section 6.04 shall be distributed to the Participant or his Beneficiary, as the case may be, in accordance with the schedule for distribution determined under this Section 6.05, and with each Periodic Installment, if applicable, there shall be paid to the Participant all Treasury Note Based Interest credited to the Participant and then unpaid. VII. AMENDMENT AND TERMINATION 8 Section 7.01. Eaton fully expects to continue the Plan but it reserves the right, at any time or from time to time, by action of the Board Committee, to modify or amend the Plan, in whole or in part, or to terminate the Plan, in whole or in part, at any time and for any reason, including, but not limited to, adverse changes in the federal tax laws. Section 7.02. The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by Eaton to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on and after January 1, 2005, including as contemplated by Section 855(f) of the American Jobs Creation Act of 2004. Moreover, after January 1, 2007, and on or before December 31, 2007, and to the extent permitted by the Committee in accordance with terms set forth on an election form provided by Eaton, a Participant may make a change in a payment election as described in IRS Notice 2006-79, provided that with respect to an election to change a time and form of payment made after January 1, 2007 and on or before December 31, 2007, the election may apply only to amounts that would not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that would not otherwise be payable in 2007. VIII. ADMINISTRATION Section 8.01. The Plan shall be administered by the Committee in accordance with rules of general application for the administration of the Plan as the Committee may, from time to time, adopt. The Committee shall interpret the provisions of the Plan where necessary and may adopt procedures for the administration of the Plan which are consistent with the provisions of the Plan and the rules adopted by the Committee. Section 8.02. Each Participant or Beneficiary must claim any benefit to which he or she may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the specific reasons for the denial. The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty (60) days after the notice of the denial of his or her claim. The written decision by the Committee with respect to the review must be given within one hundred and twenty (120) days after receipt of the written request. IX. PAYMENTS TO PARTICIPANTS Section 9.01. The Board shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire benefit to the Participant or, if applicable, his Beneficiary, pursuant to an irrevocable action taken by the Board within the thirty (30) days preceding or the 12 months following a Change in Control, provided that this Section 9.01 will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored by the service recipient immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c)(2) are terminated and liquidated with respect to each 9 Participant that experienced the change in control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 9.01, where the change in control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. Section 9.02. Notwithstanding any provision of the Plan to the contrary, Compensation deferred under the Plan shall not be distributed earlier than: (a) separation from service as determined by the Secretary of the Treasury (except as provided below with respect to a "specified employee" of Eaton); (b) the date the Participant becomes disabled (within the meaning of Section 409A(a)(2)(C) of the Code); (c) death of the Participant; (d) a specified time (or pursuant to a fixed schedule) specified under the Plan at the date of the deferral of such compensation; (e) to the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of Eaton, or in the ownership of a substantial portion of the assets of Eaton; (f) the occurrence of an unforeseeable emergency as defined in Section 409A(a)(2)(B)(ii) of the Code; or (g) termination of the Plan as described in Section 7.01 or 9.01. In the case of any Participant who is determined by Eaton to be a "specified employee" within the meaning of Section 409A of the Code and applicable Treasury regulations, distributions shall not in any event be made or begin until the first business day of the month which is six (6) months after the date of his separation from service (or, if earlier, the date of death of the Participant) (the "permitted payment date"). In the event any payment to a specified employee is delayed by reason of this provision, such payment (including interest or earnings otherwise credited through the permitted payment date) shall be made on such permitted payment date. 10 X. MISCELLANEOUS Section 10.01. Each Participant shall have the right, by written instruction to the Committee, on a form supplied by the Committee, to designate one (1) or more primary and contingent beneficiaries (and the proportion to be paid to each, if more than one is designated) to receive his or her Deferred Incentive Compensation upon his or her death. Any such designation shall be revocable by the Participant. Section 10.02. All payments under the Plan shall be subject to such taxes (federal, state or local) as may be due thereon and the determination by the Committee as to withholding with respect thereto shall be binding upon the Participant and his or her Beneficiary. Section 10.03. If any Participant under the Plan is a member of the Committee, he or she shall not participate as a member of the Committee in any determination under the Plan relating to his or her Deferred Incentive Compensation. Section 10.04. All action of the Committee hereunder may be taken with or without a meeting. If taken without a meeting, the action shall be in writing and signed by a majority of the members of the Committee and if taken with a meeting, a majority of the Committee shall constitute a quorum for any such action. Section 10.05. Subject to any federal statute to the contrary, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. Section 10.06. The obligations of Eaton to make payments hereunder shall constitute a liability of Eaton to the Participant. Eaton may, but shall not be required to, establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payments shall be made. Section 10.07. In the event that it shall be determined in accordance with any policy, program or standard adopted by Eaton that any Incentive Compensation payable to a Participant which has been deferred under the terms of the Plan is to be restored to Eaton, the Account of such Participant shall be appropriately adjusted to eliminate such deferral, and no substitution shall be provided. Section 10.08. The Plan shall not be deemed to constitute a contract of employment between Eaton and a Participant. Neither shall the execution of the Plan nor any action taken by Eaton pursuant to this Plan be held or construed to confer on a Participant any legal right to be continued as an employee of Eaton, in an executive position or in any other capacity with Eaton whatsoever. 11 Section 10.09. Obligations incurred by Eaton pursuant to the Plan shall be binding upon and inure to the benefit of Eaton, its successors and assigns, and the Participant or his or her Beneficiary. Section 10.10. The Plan shall be construed and governed in accordance with the law of the State of Ohio. Section 10.11. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. Section 10.12. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. Section 10.13. The Plan was adopted by the Board on December 8, 2004, effective January 1, 2005, and is amended and restated effective January 1, 2008, as set forth herein. APPROVAL AND ADOPTION The Eaton Corporation Deferred Incentive Compensation Plan II, as amended and restated in the form attached hereto, is hereby approved and adopted. - ------------------------------------- Date: October 27, 2007 Name - ------------------------------------- Title - ------------------------------------- Name - ------------------------------------- Title EX-10.G 6 l30233aexv10wg.txt EX-10(G) EXHIBIT 10 (G) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON CORPORATION EXCESS BENEFITS PLAN II The Eaton Corporation Excess Benefits Plan II, an unfunded, nonqualified deferred compensation plan adopted December 8, 2004, is set forth below, as amended and restated effective January 1, 2008 and such other dates as may be provided herein. 1. Purpose. The purpose of the Excess Benefits Plan is to provide benefits in excess of the limitations under Section 415 of the Code for employees who participate as salaried participants under a Pension Plan sponsored by the Corporation or one of its operating subsidiaries. 2. Definitions. The following definitions are used throughout the Plan. (a) "Benefits Committee" means the Pension Administration Committee comprised of corporate officers. (b) "Board of Directors" means the Board of Directors of the Corporation. (c) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time. (d) "Committee" means the Compensation and Organization Committee of the Board of Directors. (e) "Corporation" means Eaton Corporation, an Ohio corporation. (f) "Participant" means a participant in the Pension Plan who is eligible to receive benefits under the Plan. The term "Participant" shall include the beneficiary of a deceased Participant. (g) "Pension Plan" means the Pension Plan for Eaton Corporation Employees sponsored by the Corporation, which is a defined benefit plan intended to qualify under Section 401(a) of the Code, and each other defined benefit plan sponsored by a subsidiary of the Corporation that is intended to qualify under section 401(a) of the Code. (h) "Plan" or "Excess Benefits Plan II" means the Eaton Corporation Excess Benefits Plan II as amended from time to time. 3. Eligibility. A Participant who is eligible to receive a benefit under the Pension Plan shall also be eligible to receive a benefit in an amount determined under Section 4. 4. Excess Benefits. A Participant who is eligible to receive a benefit under the Pension Plan shall be entitled to receive a benefit under the Plan in an amount equal to the difference between (i) and (ii), where: (i) equals the aggregate amount of monthly income payable to the Participant under the Pension Plan on the normal benefit commencement date specified in the Pension Plan as determined under the normal retirement benefit formula of the Pension Plan before applying any provision reducing pension benefits because of the provisions of the Code limiting the maximum amount of an employee's compensation which may be taken into account for purposes of calculating benefits under the Pension Plan and before applying the maximum benefit limitations under Section 415 of the Code; and (ii) equals the aggregate amount of monthly income determined in paragraph (i) after applying the maximum benefit limitations of Section 415 of the Code. Notwithstanding the foregoing, a Participant's benefit under the Plan shall be reduced by the present value of the amount to which the Participant would have been entitled under the Eaton Corporation Excess Benefits Plan ("Plan I") if the Participant had voluntarily terminated services without cause on December 31, 2004, and received a payment of the benefits in the form with the -2- maximum value available from Plan I on the earliest possible date allowed under Plan I to receive a payment of benefits following a termination of services (such amount being hereinafter referred to as the "Grandfathered Amount"). Notwithstanding the foregoing, the Grandfathered Amount may increase to equal the present value of the benefit the Participant actually becomes entitled to, in the form and at the time actually paid, determined under the terms of Plan I (including applicable limits under the Code), as in effect on October 3, 2004, without regard to any further services rendered by the Participant after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than a participant election with respect to the time or form of an available benefit). For purposes of calculating the present value of a benefit under this paragraph, reasonable actuarial assumptions and methods must be used. 5. Vesting. Subject to the rights of general creditors as set forth in Section 8 and the right of the Corporation to discontinue the Plan as provided in Section 10(c), a Participant shall have a vested and nonforfeitable interest in the benefit payable under Section 4 to the same extent and in the same manner as the Participant's benefit is vested under the Pension Plan. 6. Benefit Payment Date. The amount of the benefit payable to a Participant under Section 4 shall be calculated as of his "calculation date" which is the first day of the month next following (i) the date of his separation from service (within the meaning of Section 409A of the Code, meaning that a Participant whose level of bona fide services is permanently decreased to no more than twenty (20) percent of the average level of bona fide services performed over the preceding 36-month period shall incur a separation from service for purposes of the Plan) or (ii) if later in the case of a Participant who was accruing a benefit under Appendix A or Appendix B of the Pension Plan on January 1, 2003, the date he attains age 55. Such amount shall be credited with interest based on the "applicable interest rate" determined under Section 417(e) of the Code (in the manner used under the Pension Plan) until his benefit payment date determined under this Section -3- 6. A Participant's benefit shall be paid on or about the first day of the third month next following (i) the date of his separation from service (within the meaning of Section 409A of the Code, as further described above) or (ii) if later in the case of a Participant who was accruing a benefit under Appendix A or Appendix B of the Pension Plan on January 1, 2003, the date he attains age 55. Notwithstanding the foregoing, in the case of a Participant who is determined by the Corporation to be a "specified employee" within the meaning of Section 409A of the Code and applicable Treasury regulations, payment shall not in any event be made until the first business day of the month which is six (6) months after the date of his separation from service hereunder (or, if earlier, the date of death of the Participant). If the Participant receives payment of the benefit hereunder before the normal benefit commencement date under the Pension Plan, the benefit payable under Section 4 shall also be reduced by applying the same factors that would be applied for such purpose under the Pension Plan. In the event a Participant becomes entitled to an additional benefit under the Plan after his calculation date (by reason of the additional accrual of benefits under the Pension Plan while on long term disability, for example), the amount of any such additional benefit shall be calculated as of December 31 of each calendar year beginning with the year following the year in which his initial calculation date falls and shall be paid to him within the ninety (90) day period following. 7. Form of Benefit. (a) The benefit payable under Section 4 shall be paid to the Participant in a single sum payment. The benefit payable under Section 4 shall be actuarially adjusted by using the same actuarial factors as are applied under the Pension Plan for converting the normal form of benefit to an actuarially equivalent optional benefit. (b) If the Participant has a vested interest under the Plan and dies prior to commencement of any benefit under the Plan, the Company will pay a benefit to the Participant's -4- surviving spouse in the form of a single sum within ninety (90) days following the Participant's date of death. This benefit shall be calculated in the same manner provided under the Pension Plan. Notwithstanding the foregoing, a Participant may designate a beneficiary other than his or her spouse (as permitted under the Pension Plan except that no spousal consent shall be required), with the benefit amount being determined in the same manner as provided under the Pension Plan and payable in a lump sum form of payment only. 8. Funding of Benefits. (a) The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Corporation's general assets, and nothing contained in the Plan shall require the Corporation to set aside or hold in trust any funds for the benefit of a Participant, who shall have the status of a general unsecured creditor with respect to the Corporation's obligation to make payments under the Plan. Any funds of the Corporation available to pay benefits under the Plan shall be subject to the claims of general creditors of the Corporation and may be used for any purpose by the Corporation. (b) Notwithstanding the provisions of subsection (a), the Corporation may, at the direction, and in the absolute discretion, of the Benefits Committee, transfer to the trustee of one or more irrevocable domestic trusts established in the United States for the benefit of one or more Participants assets from which all or a portion of the benefits provided under the Plan will be satisfied, provided that such assets held in trust shall at all times be subject to the claims of general unsecured creditors of the Corporation and no Participant shall at any time have a prior claim to such assets. 9. Administration of the Plan. The Benefits Committee shall administer the Plan and shall keep a written record of this action and proceedings regarding the Plan and all dates, records and documents relating to its administration of the Plan. The Benefits Committee is authorized to -5- interpret the Plan, to make, amend and rescind such rules as it deems necessary for the proper administration of the Plan, to make all other determinations necessary or advisable for the administration of the Plan and to correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent that the Benefits Committee deems desirable to carry the Plan into effect. The powers and duties of the Benefits Committee shall include, without limitation, the following: (a) Determining the amount of benefits payable to Participants and authorizing and directing the Corporation with respect to the payment of benefits under the Plan; (b) Construing and interpreting the Plan whenever necessary to carry out its intention and purpose and making and publishing such rules for the regulation of the Plan as are not inconsistent with the terms of the Plan; and (c) Compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan. No member of the Benefits Committee shall vote on any matter relating specifically to such member. In the event that a majority of the members of the Benefits Committee will be specifically affected by any action proposed to be taken (as opposed to being affected in the same manner as each other Participant in the Plan), such action shall be taken by the Compensation Committee. 10. Miscellaneous. (a) Nothing in the Plan shall confer upon a Participant the right to continue in the employ of the Corporation or an affiliate of the Corporation or shall limit or restrict the right of the Corporation or any affiliate to terminate the employment of a Participant at any time or without cause. -6- (b) Neither the Corporation nor any Participant hereunder shall assign, transfer or delegate this Plan or any rights or obligations hereunder except as expressly provided herein. Without limiting the generality of the foregoing, no right or interest under this Plan of a Participant shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant. (c) The Plan may be amended at any time by the Benefits Committee provided such amendment does not have the effect of increasing, directly or indirectly, the benefit of any Participant. The Plan may also be amended or terminated by the Board of Directors at any time, and any amendment adopted by the Board of Directors shall supersede any prior or later amendment adopted by the Benefits Committee that is inconsistent with the action of the Board of Directors. Subject to the provisions of Section 10(d) and Section 10(e), no amendment shall have the effect of decreasing or impairing a Participant's accrued benefit. No amendment may amend or modify the preceding sentence. (d) The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by the Corporation to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on or after January 1, 2005, including as contemplated by Section 885(f) of the American Jobs Creation Act of 2004. (e) The Board of Directors shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire benefit to the Participant or, if applicable, his Beneficiary, pursuant to an irrevocable action taken by the Board of Directors within the thirty -7- (30) days preceding or the 12 months following a change in control of the Corporation (within the meaning of Section 409A of the Code), provided that this Section 10(e) will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored by the service recipient immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c) (2) are terminated and liquidated with respect to each Participant that experienced the change in control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 10(e), where the change in control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. (f) The Plan is intended to be an "excess benefit plan" as defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and exempt from the provisions of Title I of ERISA pursuant to ERISA Section 4(b)(5). In the event the Plan does not qualify for the exemption under ERISA Section 4(b)(5) and it is also determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not exempt from the provisions of Sections 201, 301 and 401 of ERISA as a plan that provides benefits for "management or highly compensated" employees within the meaning of such Sections, the Plan shall terminate, and -8- except for accrued benefits and benefits in pay status, no further benefits shall accrue or be paid hereunder. (g) If any provision in the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue to full force and effect without being impaired or invalidated in any way. (h) The Plan shall be construed and governed in all respects in accordance with applicable federal law and, to the extent not preempted by such federal law, in accordance with the law of the State of Ohio. APPROVAL AND ADOPTION The Eaton Corporation Excess Benefits Plan II, as amended and restated in the form attached hereto, is hereby approved and adopted. - ------------------------------------- Date: October 27, 2007 Name - ------------------------------------- Title - ------------------------------------- Name - ------------------------------------- -9- EX-10.H 7 l30233aexv10wh.txt EX-10(H) EXHIBIT 10 (H) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON INCENTIVE COMPENSATION DEFERRAL PLAN II EFFECTIVE JANUARY 1, 2005 2008 RESTATEMENT EATON INCENTIVE COMPENSATION DEFERRAL PLAN II I. PURPOSE The Incentive Compensation Deferral Plan II (the "Plan") enables employees who contribute significantly to the success of Eaton Corporation ("Eaton" or the "Company") to defer receipt of awards earned under incentive compensation plans and certain other compensation. The purpose of the Plan is to help attract and retain highly qualified individuals, to provide an incentive to those individuals to improve the profitability, competitiveness and growth of the Company, and to help align their interests with those of the shareholders. II. ELIGIBILITY All elected officers of the Company are eligible to participate in the Plan with respect to amounts earned under the Executive Strategic Incentive Plan or any other Eaton incentive plan made available for deferral hereunder by the Committee. Such other executives as determined by the Committee shall also be eligible to participate in the Plan with respect to any amounts earned under any Eaton incentive compensation plan made available for deferral hereunder by the Committee. III. DEFINITIONS The terms used herein shall have the following meanings: Account--A bookkeeping account established by Eaton for a Participant to which may be credited Deferred Incentive Compensation and earnings or losses thereon. Agreement--A written agreement between Eaton and a Participant deferring the receipt of Incentive Compensation and indicating the term of the deferral. Beneficiary--The person or entity designated in writing by the Participant and delivered to the Committee. If that person or entity is not living or in existence at the time any unpaid balance of Deferred Incentive Compensation becomes due after the death of a Participant, the term "Beneficiary" shall mean the Participant's estate or legal representative or any person, trust or organization designated in such Participant's will. Board--The Board of Directors of Eaton. Change in Control--Shall be deemed to occur upon the occurrence of (i) a change in the ownership of Eaton, (ii) a change in effective control of Eaton, or (iii) a change in the ownership of a substantial portion of the assets of Eaton. For purposes of this definition, except as provided below, a change in the ownership of a Eaton occurs on the date that any one (1) person, or more than one (1) person acting as a group (as defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), acquires ownership of stock of Eaton that, together with stock held by such person or group, constitutes more than fifty (50) percent of the total fair market value or total voting power of the shares of Eaton. However, if any one (1) person, or more than one (1) person acting as a group, is considered to own more than fifty (50) percent of the total fair market value or total voting power of the shares of Eaton, the acquisition of additional shares by the same person or persons is not considered to cause a change in the ownership of Eaton (or to cause a change in the effective control of Eaton). An increase in the percentage of stock owned by any one (1) person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock for purposes hereof. This shall apply only when there is a transfer of shares of Eaton (or issuance of shares of Eaton) and shares in Eaton remain outstanding after the transaction. A change in the effective control of Eaton occurs only on either of the following dates: (1) The date any one (1) person, or more than one (1) person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of shares of Eaton possessing thirty (30) percent or more of the total voting power of the shares of the corporation; or (2) the date a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election. A change in the ownership of a substantial portion of the assets of Eaton occurs on the date any one (1) person, or more than one (1) person acting as a group, acquires (or has acquired during the 12- month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty (40) percent of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. Application of this definition shall be further subject to rules set forth in Treasury Regulation Section 1.409A-3(i) relating to persons acting as a group, transfers to related persons, and certain back-to-back arrangements. Code--Internal Revenue Code of 1986, as it may be amended from time to time. Committee--The Compensation and Organization Committee of the Board. Common Share Retirement Compensation--Retirement Compensation which is converted into share units in accordance with Article VI. Deferred Incentive Compensation--That portion of Incentive Compensation deferred pursuant to the Plan. Eaton--Eaton Corporation, an Ohio corporation, and its corporate successors. Eaton Common Shares--The common shares of Eaton. Incentive Compensation--Any payment awarded to a Participant under any Incentive Compensation Plan. Incentive Compensation Plan--Any incentive compensation plan approved by either the Board or its Compensation and Organization Committee. -2- Interest Rate Retirement Compensation--Retirement Compensation which is credited with Treasury Note Based Interest in accordance with Article VI. Participant--An employee of Eaton who elects to defer receiving benefits under an Incentive Compensation Plan designated by the Committee as eligible for deferral hereunder. Periodic Installments--Annual payments, over a period not to exceed fifteen (15) years, as elected by the Participant in accordance with the terms of the Plan, which are substantially equal in amount, or, in the case of Common Share Retirement Compensation, substantially equal in the number of share units being valued and paid or the number of Eaton Common Shares being distributed, except that earnings attributable to periods following Retirement or Termination of Employment shall be included with each payment. Periodic Installments are paid on or about March 15 of each year, except as otherwise provided herein. Plan--This Incentive Compensation Deferral Plan II pursuant to which Incentive Compensation may be deferred for later payment. Retirement--The Termination of Employment of a Participant who is age fifty (50) or older and has at least ten (10) years of service with Eaton. For this purpose, service shall be measured in the same manner as Service under the Pension Plan for Eaton Corporation Employees. Retirement Compensation--That portion of Incentive Compensation deferred for payment at Retirement or in Periodic Installments commencing at Retirement. Short-Term Compensation--That portion of Incentive Compensation deferred for payment in accordance with Article V. Termination of Employment--The time when a Participant shall no longer be employed by Eaton whether by reason of Retirement, death, voluntary resignation (with or without good reason), divestiture or closing of a business unit, plant or facility, discharge (with or without cause), or such disability that, under the then current employment practices of Eaton, the employment of the Participant is terminated. Termination of Employment shall include "separation from service" within the meaning of Section 409A of the Code, meaning that a Participant whose level of bona fide services is permanently decreased to no more than twenty (20) percent of the average level of bona fide services performed over the preceding 36-month period shall incur a separation from service for purposes of the Plan. Notwithstanding the foregoing, upon a sale or other disposition of assets of Eaton or any of its subsidiaries to an unrelated purchaser, Eaton reserves the right, to the extent permitted by Section 409A of the Code, to determine whether Participants providing services to the purchaser after and in connection with the purchase transaction have experienced a separation from service. Treasury Bill Interest Equivalent--A rate of interest equal to the quarterly average yield of 13-week U.S. Government Treasury Bills. Treasury Note Based Interest--A rate of interest equal to the average yield of 10-year U.S. Government Treasury Notes plus 300 basis points. -3- IV. ELECTION TO DEFER Section 4.01 Deferral Options For each award period ending during or after 2005 (an "Award Period") with respect to any plan eligible for the deferral of Incentive Compensation hereunder, the Participant may elect to defer the receipt of all or part of his or her Incentive Compensation as Short-Term Compensation or Retirement Compensation. Once a Participant has made an effective election, he or she may not thereafter change that election or change any allocation between Short-Term Compensation or Retirement Compensation. Section 4.02 Amount Deferred Not less than ten (10) percent of Incentive Compensation awarded for any Award Period may be deferred under the Plan. If a Participant elects to allocate a portion of Incentive Compensation to both Short-Term Compensation and Retirement Compensation, the amount allocated to each shall be not less than ten (10) percent of the Incentive Compensation awarded for any Award Period. Section 4.03 Election Deadline To be in effect for an Award Period, a Participant's election must be completed, signed and filed with the Committee on or before December 31 of the taxable year immediately preceding the taxable year in which the services are performed, except that in the case of any performance-based compensation within the meaning of Treasury Regulation Section 1.409A-1(e) based on services performed over a period of at least 12 months, such election must be made no later than six (6) months before the end of the Award Period and otherwise in accordance with rules and procedures established by the Committee. Moreover, in the case of the first year in which a Participant becomes eligible to participate in the Plan, such election may be made with respect to services performed subsequent to the election within thirty (30) days after the date the Participant becomes eligible to participate in the Plan. In the event that an election is made hereunder in the Participant's first year of eligibility with respect to compensation that is earned based on a specific performance period and after the beginning of that performance period (but subject to the first sentence of this Section 4.03), the election shall apply only to the compensation paid for services performed after the election. An election will be deemed to apply to compensation paid for services performed after the election if the election applies to no more than an amount equal to the total amount of the compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election over the total number of dates in the performance period. -4- V. SHORT-TERM COMPENSATION Section 5.01 Amount If elected by a Participant, payment of the amount of Incentive Compensation allocated to Short-Term Compensation will be deferred. Short-Term Compensation shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant's name. Treasury Bill Interest Equivalents shall be credited quarterly to the Participant's Short-Term Compensation Account until such compensation is paid to the Participant. Section 5.02 Election and Payment Short-Term Compensation, together with credited Treasury Bill Interest Equivalents, shall be paid to the Participant in a lump sum or in not more than five (5) annual installments, as elected by the Participant. At the time a Participant elects to defer receipt of Incentive Compensation as Short-Term Compensation pursuant to Section 4.01, the Participant shall also elect with respect to the deferral for such Award Period the time at which payment of such amount shall be made or begin and which of the methods of payment described in this Section 5.02 shall be used, provided that such payment may not be made prior to March 15 of the second year following the Award Period for which the Short-Term Compensation was credited to the Participant. Upon the death of a Participant who has a Short-Term Compensation Account, the entire amount of his or her Short-Term Compensation then remaining shall be distributed to the Participant's Beneficiary in a lump sum within ninety (90) days following the death. VI. RETIREMENT COMPENSATION Section 6.01 Duration If elected by a Participant, payment of the amount of Incentive Compensation allocated to Retirement Compensation will be deferred to Retirement, but subject to the limitations of Section 9.02. Retirement Compensation shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant's name. At the time a Participant elects to defer receipt of Incentive Compensation as Retirement Compensation pursuant to Section 4.01, the Participant shall also elect with respect to the deferral for such Award Period, whether such amount is to be distributed in a lump sum or in the form of Periodic Installments over a period of five (5), ten (10), or fifteen (15) years, subject, however, to the provisions of Section 6.07. Following a Participant's Retirement, payment to the Participant shall be made or commence on or about March 15 of the year following the date of such Retirement, subject to the provisions of Sections 6.07 and 9.02. -5- Section 6.02 Common Share Retirement Compensation Between fifty (50) percent and one hundred (100) percent, as elected by the Participant, of the amount allocated to Retirement Compensation shall be credited to Common Share Retirement Compensation, and the balance shall be credited to Interest Rate Retirement Compensation. Common Share Retirement Compensation shall be converted into a number of share units based upon the average of the mean prices for Eaton Common Shares for the twenty (20) trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately following the end of the incentive period in which the Incentive Compensation to be deferred was earned. Until the Participant's Common Share Retirement Compensation is paid, on each Eaton Common Share dividend payment date, dividend equivalents equal to the actual Eaton Common Share dividends paid shall be credited to the share units in the Participant's Account, and shall in turn be converted into share units utilizing the mean Eaton Common Share price on the dividend payment date. Upon payment of Common Share Retirement Compensation, the share units standing to the Participant's credit shall be converted to the same number of Eaton Common Shares for distribution to the Participant in the form of Eaton Common Shares. Section 6.03 Interest Rate Retirement Compensation Retirement Compensation not credited to Common Share Retirement Compensation shall be credited to Interest Rate Retirement Compensation. Interest Rate Retirement Compensation shall be credited to the Interest Rate Retirement Compensation Account, which shall earn Treasury Note Based Interest, compounded quarterly, until paid. Section 6.04 Periodic Installments Following Death Upon the death of a Participant who has commenced receiving Periodic Installments, the entire remaining amount of his or her Retirement Compensation shall be distributed to the Participant's Beneficiary. Such distribution shall be made in a lump sum within ninety (90) days following the death. Section 6.05 Termination of Employment The Retirement Compensation Account of a Participant who has a Termination of Employment for reasons other than Retirement shall be distributed in a lump sum. The lump sum payment shall be made within sixty (60) days following such Termination of Employment, subject to the provisions of Section 9.02. Section 6.06 Limited Redeferral A Participant who has made an effective election under Section 6.01 with respect to deferral of Retirement Compensation for payment in a lump sum following Retirement may make a subsequent election to delay payment or commencement of payment of such amount for a period -6- of five (5) years from the date such payment would otherwise have been made, which election may include a change in the form of payment in accordance with the following provisions, subject to such administrative rules and procedures as may be established by the Committee: (a) the subsequent election shall not take effect until 12 months after the date on which it is made; and (b) payment in the form of Periodic Installments over a period of five (5) years may be elected. Any such subsequent election shall become irrevocable on the later of the date when made or the date which is 12 months before the date the Participant could first be eligible for Retirement. Notwithstanding the foregoing provisions of this Section 6.06, no such subsequent election shall be given effect unless the Participant has a Termination of Employment by reason of Retirement. VII. AMENDMENT AND TERMINATION Section 7.01 Right to Amend or Terminate Eaton fully expects to continue the Plan but it reserves the right, except as otherwise provided herein, at any time by action of the Committee, to modify, amend or terminate the Plan for any reason, including adverse changes in the federal tax laws. Notwithstanding the foregoing and subject to the provisions of Section 9.01, upon the occurrence of a Change in Control, no amendment, modification or termination of the Plan shall, without the consent of the Participant, alter or impair any rights or obligations under the Plan with respect to such Participant. Section 7.02 American Jobs Creation Act of 2004 The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by Eaton to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on and after January 1, 2005, including as contemplated by Section 885 (f) of the American Jobs Creation Act of 2004. Moreover, after January 1, 2007, and on or before December 31, 2007, and to the extent permitted by the Committee in accordance with terms set forth on an election form provided by Eaton, a Participant may make a change in a payment election as described in IRS Notice 2006-79, provided that with respect to an election to change a time and form of payment made after January 1, 2007 and on or before December 31, 2007, the election may apply only to amounts that would not otherwise be payable in 2007 and may not cause an amount to be paid in 2007 that would not otherwise be payable in 2007. -7- VIII. ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall interpret the provisions of the Plan where necessary and may adopt procedures for the administration of the Plan which are consistent with the provisions of the Plan and any rules adopted by the Committee. Each Participant or Beneficiary must claim any benefit to which such Beneficiary may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the specific reasons for the denial. The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty (60) days after the notice of the denial of his or her claim. The written decision by the Committee with respect to the review must be given within one hundred twenty (120) days after receipt of the written request. The determinations of the Committee shall be final and conclusive. IX. PAYMENTS Section 9.01 Termination upon Change in Control. The Board shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire benefit to the Participant or, if applicable, his Beneficiary, pursuant to an irrevocable action taken by the Board within the thirty (30) days preceding or the 12 months following a Change in Control, provided that this Section 9.01 will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored by the service recipient immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c)(2) are terminated and liquidated with respect to each Participant that experienced the change in control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 9.01, where the change in control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. Section 9.02 Time of Payment Notwithstanding any provision of the Plan to the contrary, compensation deferred under the Plan shall not be distributed earlier than (a) separation from service as determined by the Secretary of the Treasury (except as provided below with respect to a "specified employee" of Eaton); -8- (b) the date the Participant becomes disabled (within the meaning of Section 409A(a)(2)(C) of the Code); (c) death of the Participant; (d) a specified time (or pursuant to a fixed schedule) specified under the Plan at the date of the deferral of such compensation; (e) to the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of Eaton, or in the ownership of a substantial portion of the assets of Eaton; (f) the occurrence of an unforeseeable emergency as defined in Section 409A(a)(2)(B)(ii) of the Code; or (g) termination of the Plan as described in Section 7.01 or 9.01. In the case of any Participant who is determined by the Company to be a "specified employee" within the meaning of Section 409A of the Code and applicable Treasury regulations, distributions shall not in any event be made or begin until the first business day of the month which is six (6) months after the date of his separation from service (or, if earlier, the date of death of the Participant) (the "permitted payment date"). In the event any payment to a specified employee is delayed by reason of this provision, such payment (including interest or earnings otherwise credited through the permitted payment date) shall be made on such permitted payment date. X. MISCELLANEOUS Section 10.01 Adjustments In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or similar event affecting shares of the Company, the Committee shall equitably adjust the limitation on the number and class of share units which may be allocated to Participants as Common Share Retirement Compensation, and the number of share units previously allocated to their Accounts. Section 10.02 Designation of Beneficiaries Each Participant shall have the right, by written instruction to the Committee, on a form supplied by the Committee, to designate one (1) or more primary and contingent Beneficiaries (and the proportion to be paid to each, if more than one is designated) to receive his or her Account balance upon his or her death. Any such designation shall be revocable by the Participant. -9- Section 10.03 Committee Actions All actions of the Committee hereunder may be taken with or without a meeting. If taken without a meeting, the action shall be in writing and signed by a majority of the members of the Committee and if taken with a meeting, a majority of the Committee shall constitute a quorum for any such action. The determination by the Committee as to the withholding of taxes shall be binding upon the Participants and their Beneficiaries. Section 10.04 Assignment No benefit under the Plan shall be subject to anticipation, alienation, sale, transfer or encumbrance, and any attempt to do so shall be void. No benefit hereunder shall in any manner be liable for the debts, contracts, or liabilities of the person entitled to such benefits. During a Participant's lifetime, rights hereunder are exercisable only by the Participant or that person's guardian or legal representative. Notwithstanding the foregoing, nothing in this Section shall prohibit the transfer of any benefit by will or by the laws of descent and distribution or (if permitted by applicable regulations under Section 16(b) of the Securities Exchange Act of 1934) pursuant to a qualified domestic relations order, as defined under the Code and the Employee Retirement Income Security Act of 1974, as amended. Section 10.05 No Funding Required The obligations of Eaton to make payments shall be a liability of Eaton to the Participant. Eaton shall not be required to maintain any separate fund or reserve, or purchase or acquire life insurance on a Participant's life, or otherwise segregate assets to assure that any particular asset of Eaton is available to make such payments by reason of Eaton's obligations hereunder. Nothing contained in the Plan shall be construed as creating a trust or other fiduciary relationship between Eaton and a Participant or any other person. Section 10.06 Certain Adjustments to Accounts In the event that it shall be determined in accordance with any policy, program or standard adopted by Eaton that any Incentive Compensation payable to a Participant which has been deferred under the terms of the Plan is to be restored to Eaton, the Account of such Participant shall be appropriately adjusted to eliminate such deferral, and no substitution shall be provided. Section 10.07 No Employment Contract The Plan shall not be deemed to constitute a contract of employment between Eaton and a Participant. Neither shall the execution of the Plan nor any action taken by Eaton or the Committee pursuant to the Plan confer on a Participant any legal right to be continued in any other capacity with Eaton whatsoever. -10- Section 10.08 Governing Law The Plan shall be construed and governed in accordance with the law of the State of Ohio to the extent not covered by Federal law. Section 10.09 Effective Date The Plan was adopted by the Board on December 8, 2004, effective January 1, 2005, and is amended and restated effective January 1, 2008, as set forth herein. APPROVAL AND ADOPTION The Eaton Corporation Deferred Incentive Compensation Plan II, as amended and restated in the form attached hereto, is hereby approved and adopted. - ---------------------------------------- Date: October 27, 2007 Name - ---------------------------------------- Title - ---------------------------------------- Name - ---------------------------------------- Title -11- EX-10.I 8 l30233aexv10wi.txt EX-10(I) EXHIBIT 10 (I) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) LIMITED EATON SERVICE SUPPLEMENTAL RETIREMENT INCOME PLAN II The Limited Eaton Service Supplemental Retirement Income Plan II (herein referred to as the "Plan"), an unfunded, nonqualified deferred compensation plan adopted by Eaton Corporation (the "Company") on December 8, 2004, for certain of its executives, is set forth below as amended and restated effective January 1, 2008, and such other dates as may be provided herein. ARTICLE I PURPOSE OF THE PLAN Upon becoming employed by the Company, certain key executives may have foregone retirement benefits from their former employer and may not be able to earn adequate pension benefits from the Company. The Company believes that it is in the best interest of the Company to be able to attract and retain such mid-career executives. The purpose of the Plan is to provide each such executive with retirement income in an amount as set forth in Article IV, and thereby provide a total pension benefit that is comparable to the benefit the executive would have received if he or she had not agreed to the mid-career change in employment. ARTICLE II ELIGIBILITY Any executive of the Company designated by the Committee shall be eligible to participate under the Plan (a "Participant"). ARTICLE III DEFINITIONS As used in the Plan the following definitions shall apply: "Average Final Annual Compensation." The Participant's Average Final Annual Compensation determined as if he or she is eligible to participate under Appendix A of the Pension Plan. "Board." The Board of Directors of the Company. "Cause." For purposes of this Plan, the Company shall have "Cause" to terminate the Participant's employment upon (i) the willful and continued failure by the Participant to substantially perform the Participant's duties with the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness), after a demand for substantial performance is delivered to the Participant by the Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company. For purposes of this definition, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Participant's employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of conduct set forth above in clauses (i) or (ii) of this definition and specifying the particulars thereof in detail. 2 "Change in Control." A "Change in Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25 percent or more of the combined voting power of the Company's then outstanding voting securities, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 55 percent of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company, (iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25 percent or more of the combined voting power of the Company's then outstanding securities; or (v) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. For purposes of the Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect). "Committee." The Compensation and Organization Committee of the Board. "Credited Service." The service credited to a Participant as "Service" under the Pension Plan. "Disability." Any termination of employment which entitles the Participant to a disability benefit under the Pension Plan. 3 "Good Reason." Any termination of employment under the following circumstances shall be for "Good Reason": (i) without the Participant's express written consent, the assignment to the Participant of any duties inconsistent with the Participant's positions, duties, responsibilities and status with the Company immediately prior to a Change in Control, or a change in the Participant's reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of the Participant from or any failure to re-elect the Participant to any of such positions, except in connection with the termination of the Participant's employment for Cause, Disability or as a result of the Participant's death; (ii) a reduction by the Company in the Participant's base salary as in effect immediately prior to the Change in Control or as the same may be increased from time to time thereafter; or the failure by the Company to increase such base salary each year after a Change in Control by an amount which at least equals, on a percentage basis, the average annual percentage merit increase in the Participant's base salary during the five (5) full calendar years immediately preceding a Change in Control; (iii) a failure by the Company to continue the Participant's participation in the Plan, the Company's Executive Incentive Compensation Plan, Deferred Incentive Compensation Plan II, Executive Strategic Incentive Plan, Incentive Compensation Deferral Plan II, Excess Benefits Plan II and Supplemental Benefits Plan II, as each plan may be modified from time to time but substantially in the form presently in effect (collectively, the "Plans"), on at least the basis as in effect immediately prior to the Change in Control or to pay Participant any amounts earned under the Plans in accordance with the terms of the Plans. (iv) the relocation of the Company's principal executive offices to a location outside Cuyahoga County, Ohio, or any county adjoining Cuyahoga County, Ohio, or the Company's requiring the Participant to be based anywhere other than the Company's principal executive offices or the location where the Participant is based immediately 4 prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the Participant's business travel obligations in effect immediately prior to the Change in Control, or, in the event the Participant consents to any such relocation of the Company's principal executive offices, the failure by the Company to pay (or reimburse the Participant for) all reasonable moving expenses incurred by the Participant relating to a change of the Participant's principal residence in connection with such relocation and to indemnify the Participant against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) the Participant's aggregate investment in such residence or (b) the fair market value of such residence as determined by any real estate appraiser designated by the Participant and reasonably satisfactory to the Company) realized in the sale of the Participant's principal residence in connection with any such change of residence; (v) the failure by the Company to continue in effect any benefit or compensation plan (including but not limited to the Plan), pension plan, life insurance plan, health and accident plan or disability plan in which the Participant is participating at the time of a Change in Control (or plans providing the Participant with substantially similar benefits), the taking of any action by the Company which would adversely affect the Participant's participation in or materially reduce the Participant's benefits under any of such plans or deprive the Participant of any material fringe or personal benefit enjoyed by the Participant at the time of the Change in Control, or the failure by the Company to provide the Participant with the number of paid vacation days to which the Participant is then entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control; (vi) the failure of the Company to obtain the agreement by any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the assets of the Company, by agreement in form and substance satisfactory to Participant, to expressly assume this Plan and the obligations of the Company hereunder; or 5 (vii) any purported termination of the Participant's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination as herein defined (and, if applicable, the definition of "Cause" as herein defined); and for purposes of the Plan, no such purported termination shall be effective. "Notice of Termination." Any termination of the Participant's employment by the Company for Cause or Disability or by the Participant for Good Reason shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Plan, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated. "Pension Plan." The Pension Plan for Eaton Corporation Employees. "Supplement." The annual amount of retirement income payable to the Participant in accordance with the provisions of the Plan. This amount is calculated as follows: (a) the Participant's Average Final Annual Compensation, multiplied by the applicable percentage from Table A in Section 4.01 associated with the Participant's age and service, MINUS (b) the Participant's annual benefits payable from the (i) Pension Plan, (ii) the Limited Eaton Service Supplemental Retirement Income Plan, the Supplemental Benefits Plan, and the Excess Benefits Plan (the "Grandfathered Offset Benefit"), and (iii) the Supplemental Benefits Plan II and the Excess Benefits Plan II (collectively, the "Offset Benefits"), assuming payment in the form of a single life annuity based on factors and assumptions used for such purpose under the Pension Plan, whether or not payment is or can be made in such form under any of the arrangements listed in this paragraph (b). The Grandfathered Offset Benefit shall be determined with reference to the present value of the aggregate amounts to which he would have been entitled under the arrangements listed in clause 6 (ii) of this paragraph (b) if the Participant had voluntarily terminated services without Cause on December 31, 2004, and received a payment of the benefits in the form with the maximum value available from those arrangements on the earliest possible date allowed thereunder to receive a payment of benefits following a termination of services. Notwithstanding the foregoing, the Grandfathered Offset Benefit may increase to reflect the present value of the benefits the Participant actually becomes entitled to, in the form and at the time actually paid, determined under the terms of the arrangements listed in clause (ii) of paragraph (b), as in effect on October 3, 2004, without regard to any further services rendered by the Participant after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than a participant election with respect to the time or form of an available benefit). For purposes of calculating the present value of a benefit under this paragraph, reasonable actuarial assumptions and methods must be used. "Termination of Employment." The date the Participant's Service ends under the Pension Plan. ARTICLE IV AMOUNT OF SUPPLEMENT Section 4.01. Calculation of Supplement. The annual retirement income payable under the Plan shall be calculated by reference to Table A below. There is no amount under age 55 and the full percentage available is earned at attainment of age 62. Table A Percentage of Average Final Annual Compensation
For Participants with Less Than 15 Years of Credited Service Months --------------------------------------------------------------------------------------------- Age* 0 1 2 3 4 5 6 7 8 9 10 11 - ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 55 25.0% 25.3% 25.5% 25.8% 26.0% 26.3% 26.5% 26.8% 27.0% 27.3% 27.5% 27.8% 56 28.0% 28.3% 28.5% 28.8% 29.0% 29.3% 29.5% 29.8% 30.0% 30.3% 30.5% 30.8% 57 31.0% 31.3% 31.5% 31.8% 32.0% 32.3% 32.5% 32.8% 33.0% 33.3% 33.5% 33.8% 58 34.0% 34.3% 34.5% 34.8% 35.0% 35.3% 35.5% 35.8% 36.0% 36.3% 36.5% 36.8% 59 37.0% 37.3% 37.5% 37.8% 38.0% 38.3% 38.5% 38.8% 39.0% 39.3% 39.5% 39.8% 60 40.0% 40.2% 40.3% 40.5% 40.7% 40.8% 41.0% 41.2% 41.3% 41.5% 41.7% 41.8% 61 42.0% 42.2% 42.3% 42.5% 42.7% 42.8% 43.0% 43.2% 43.3% 43.5% 43.7% 43.8% 62 44.0%
7
For Participants with At Least 15 Years of Credited Service Months --------------------------------------------------------------------------------------------- Age* 0 1 2 3 4 5 6 7 8 9 10 11 - ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 55 28.5% 28.8% 29.1% 29.4% 29.7% 30.0% 30.3% 30.5% 30.8% 31.1% 31.4% 31.7% 56 32.0% 32.3% 32.6% 32.9% 33.2% 33.5% 33.8% 34.0% 34.3% 34.6% 34.9% 35.2% 57 35.5% 35.8% 36.1% 36.4% 36.7% 37.0% 37.3% 37.5% 37.8% 38.1% 38.4% 38.7% 58 39.0% 39.3% 39.6% 39.9% 40.2% 40.5% 40.8% 41.0% 41.3% 41.6% 41.9% 42.2% 59 42.5% 42.8% 43.1% 43.4% 43.7% 44.0% 44.3% 44.5% 44.8% 45.1% 45.4% 45.7% 60 46.0% 46.2% 46.3% 46.5% 46.7% 46.8% 47.0% 47.2% 47.3% 47.5% 47.7% 47.8% 61 48.0% 48.2% 48.3% 48.5% 48.7% 48.8% 49.0% 49.2% 49.3% 49.5% 49.7% 49.8% 62 50.0%
* Age at Termination of Employment. Section 4.02. No Interest Created. Neither the Participant nor his or her surviving spouse shall have any interest in any specific asset of the Company, including policies of insurance. The Participant and his or her surviving spouse or beneficiary shall have only the right to receive the benefits provided under the Plan. Section 4.03. Determination of Amount. The Supplement shall be calculated assuming that the Offset Benefits commence on the same date as the Supplement. Section 4.04. Form of Payment. The Supplement shall be paid to the Participant in a single sum payment. The benefit payable shall be actuarially adjusted by using the same actuarial factors as used under the Pension Plan for converting the normal form of benefit to an actuarially equivalent optional benefit. Section 4.05. Benefit Payment Date. The amount of the benefit payable to a Participant under the Plan shall be calculated as of his "calculation date" which is the first day of the month next following the date of his separation from service (within the meaning of Section 409A of the Code, meaning that a Participant whose level of bona fide services is permanently decreased to no more than twenty (20) percent of the average level of bona fide services performed over the preceding 36-month period shall incur a separation from service for purposes of the Plan) on or after the date he has attained age 55. Such amount shall be credited with interest based on the "applicable interest rate" determined under Section 417(e) of the Code (in the manner used under the Pension Plan) until his benefit payment date determined under this Section 4.05. A Participant's benefit shall be paid on or about the first day of the third month next following the 8 date of his separation from service (within the meaning of Section 409A of the Code, as further described above) on or after the date he has attained age 55. Notwithstanding the foregoing, in the case of a Participant who is determined by the Company to be a "specified employee" within the meaning of Section 409A of the Code and applicable Treasury regulations, payment shall not in any event be made until the first business day of the month which is six (6) months after the date of his separation from service hereunder (or, if earlier, the date of death of the Participant). If the Participant receives payment of the benefit hereunder before the normal benefit commencement date under the Pension Plan, the benefit payable under Section 4.01 shall also be reduced by applying the same factors that would be applied for such purpose under the Pension Plan. In the event a Participant becomes entitled to an additional benefit under the Plan after his calculation date (by reason of the additional accrual of benefits under the Pension Plan while on long term disability, for example), the amount of any such additional benefit shall be calculated as of December 31 of each calendar year beginning with the year following the year in which his initial calculation date falls and shall be paid to him within the ninety (90) day period following. ARTICLE V PAYMENT OF SUPPLEMENT Section 5.01. General Obligation and Vesting. The Company will pay the Supplement to Participant in a single sum on the date determined under Section 4.05. Notwithstanding anything herein to the contrary, the Company shall have no obligation to pay the Supplement to the Participant if the Participant terminates employment with the Company (a) for any reason prior to age 55, or (b) with less than ten (10) years of Credited Service unless the Participant is age 65 at the time of termination of employment. Section 5.02. Death. If the Participant dies after attaining age 55 and while employed by the Company (regardless of the Participant's Credited Service), the Company will pay a benefit to the Participant's surviving spouse calculated in accordance with the Plan. The surviving spouse will receive fifty (50) percent of the benefit that would have been payable to the Participant if the Participant had not less than ten (10) years of Credited Service and terminated on the date of death, payable in a single sum within ninety (90) days following the date of death. 9 Notwithstanding the foregoing, a Participant may elect a beneficiary other than his or her spouse (as permitted under the Pension Plan except that no spousal consent shall be required), with the benefit amount determined in the same manner as for a surviving spouse and payable in a single sum within ninety (90) days following the date of death. For this single sum calculation, the nonspouse beneficiary shall be assumed to have the same age as the Participant. If a Participant dies after Termination of Employment but before commencement of benefits, the payment due to the surviving spouse or other beneficiary shall be calculated using the method described above. ARTICLE VI COVENANTS OF PARTICIPANT By accepting payments hereunder the Participant covenants that for a period of three (3) years after the Participant leaves the employment of the Company, he or she will not engage in any activities which, in the opinion of the Company, are in competition with the Company or any of its subsidiaries without first obtaining the written consent of the Company; provided, however, that this provision shall not apply if, within five (5) years after a Change in Control, the Participant's employment with the Company is terminated by the Participant for Good Reason or by the Company without Cause. ARTICLE VII LOSS OF BENEFITS If the Participant fails to observe or perform any of the covenants by the Participant contained herein in any material respect, the Participant shall forfeit all rights which he or she may have to any benefits for which provision is made herein. ARTICLE VIII MISCELLANEOUS Section 8.01. Assignment. Except as otherwise provided herein, neither the Participant nor any beneficiary for which provision is made herein shall have the right to sell, alienate, 10 anticipate, assign, transfer, pledge, encumber or otherwise convey the right to receive the Supplement. Section 8.02. No Contract of Employment. The Plan shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to discharge the Participant, or restrict the right of the Participant to terminate his or her employment with the Company. Section 8.03. Security. The rights of the Participant under the Plan shall be solely those of an unsecured creditor of the Company. Any securities or fixed or other assets acquired by the Company in order to be able to satisfy the liabilities assumed by it hereunder, shall not be deemed to be held under any trust for the benefit of the Participant or to be considered security for the performance of the obligations of the Company but shall be, and remain, general, unpledged, unrestricted assets of the Company. Section 8.04. Governing Law. The Plan shall be subject to and construed under the laws of the State of Ohio, without giving effect to any conflicts of laws principles thereunder. Section 8.05. Amendment and Termination. The Company may at any time amend or terminate the Plan. Notwithstanding the foregoing, upon the occurrence of a Change in Control, no amendment or termination shall, without the consent of the Participant, alter or impair any vested rights of the Participant under the Plan based upon the Participant's age and years of Credited Service at the time of such amendment or termination or the manner in which amounts are to be paid to the Participant or his or her surviving spouse or beneficiary under the Plan. Section 8.06. Plan Termination Preceding Change in Control. The Board shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire benefit to the Participant or, if applicable, his Beneficiary, pursuant to an irrevocable action taken by the Board within the thirty (30) days preceding a change in control of the Company (within the meaning of Section 409A of the Code), provided that this Section 8.06 will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored 11 by the service recipient immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c) (2) are terminated and liquidated with respect to each Participant that experienced the change in control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 8.06, where the change in control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. Section 8.07. American Jobs Creation Act. The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by the Company to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on or after January 1, 2005, including as contemplated by Section 885(f) of the American Jobs Creation Act of 2004. APPROVAL AND ADOPTION The Limited Eaton Service Supplemental Retirement Income Plan II as amended and restated in the form attached hereto, is hereby approved and adopted. - ------------------------------------- Date: October 27, 2007 Name - ------------------------------------- Title - ------------------------------------- Name - ------------------------------------- Title EX-10.J 9 l30233aexv10wj.txt EX-10(J) EXHIBIT 10 (J) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON CORPORATION SUPPLEMENTAL BENEFITS PLAN II The Eaton Corporation Supplemental Benefits Plan II, an unfunded, nonqualified deferred compensation plan adopted December 8, 2004, is set forth below, as amended and restated effective January 1, 2008 and such other dates as may be provided herein. 1. Purpose. The purpose of the Supplemental Benefits Plan II is to provide benefits in excess of certain limitations imposed by the Code with respect to certain employees who participate in the Pension Plan. 2. Definitions. The following definitions are used throughout the Plan: (a) "Pension Administration Committee" means the committee comprised of officers of the Corporation appointed by the Board of Directors from time to time to administer the Corporation's retirement benefit programs. (b) "Board of Directors" means the Board of Directors of the Corporation. (c) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time. (d) "Committee" means the Compensation and Organization Committee of the Board of Directors. (e) "Corporation" means Eaton Corporation, an Ohio corporation. (f) "Participant" means a participant in the Pension Plan who is eligible to receive benefits under the Plan. The term "Participant" shall include the beneficiary of a deceased Participant. (g) "Pension Plan" means the Pension Plan for Eaton Corporation Employees sponsored by the Corporation, which is a defined benefit plan intended to qualify under Section 401(a) of the Code, and each other defined benefit plan sponsored by a subsidiary of the Corporation that is intended to qualify under Section 401(a) of the Code. (h) "Plan" or "Supplemental Benefits Plan II" means the Eaton Corporation Supplemental Benefits Plan II as amended from time to time. 3. Eligibility. An employee of the Corporation who is a participant in the Pension Plan and who is "highly compensated" within the meaning of Code Section 401(a)(4) shall be eligible to receive a benefit in an amount determined under Section 4. 4. Pension Plan Supplemental Benefits. A Participant who is eligible to receive a benefit under the Pension Plan shall be entitled to receive a benefit under the Plan in an amount equal to the difference between (i) and (ii), where: (i) equals the aggregate amount of monthly income payable to the Participant under the Pension Plan on the normal benefit commencement date specified in the Pension Plan as determined under the normal retirement benefit formula of the Pension Plan before applying any provision reducing pension benefits because of the provisions of the Code limiting the maximum amount of an employee's compensation which may be taken into account for purposes of calculating benefits under the Pension Plan; and (ii) equals the aggregate amount of monthly income determined in paragraph (i) after applying the provisions of the Code limiting the maximum amount of an employee's -2- compensation which may be taken into account for purposes of calculating benefits under the Pension Plan. Notwithstanding the foregoing, a Participant's benefit under the Plan shall be reduced by the present value of the amount to which the Participant would have been entitled under the Eaton Corporation Supplemental Benefits Plan ("Plan I") if the Participant had voluntarily terminated services without cause on December 31, 2004, and received a payment of the benefits available in the form with the maximum value from Plan I on the earliest possible date allowed under Plan I to receive a payment of benefits following a termination of services (such amount being hereinafter referred to as the "Grandfathered Amount"). Notwithstanding the foregoing, the Grandfathered Amount may increase to equal the present value of the benefit the Participant actually becomes entitled to, in the form and at the time actually paid, determined under the terms of Plan I (including applicable limits under the Code), as in effect on October 3, 2004, without regard to any further services rendered by the Participant after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than a participant election with respect to the time or form of an available benefit). For purposes of calculating the present value of a benefit under this paragraph, reasonable actuarial assumptions and methods must be used. 5. Vesting. Subject to the rights of general creditors as set forth in Section 8 and the right of the Corporation to discontinue the Plan as provided in Section 11(c), a Participant shall have a vested, and nonforfeitable interest in benefits payable under Section 4 to the same extent and in the same manner as benefits are vested under the Pension Plan. 6. Benefit Payment Date. The amount of the benefit payable to a Participant under Section 4 shall be calculated as of his "calculation date" which is the first day of the month next following (i) the date of his separation from service (within the meaning of Section 409A of the -3- Code, meaning that a Participant whose level of bona fide services is permanently decreased to no more than twenty (20) percent of the average level of bona fide services performed over the preceding 36-month period shall incur a separation from service for purposes of the Plan) or (ii) if later in the case of a Participant who was accruing a benefit under Appendix A or Appendix B of the Pension Plan on January 1, 2003, the date he attains age 55. Such amount shall be credited with interest based on the "applicable interest rate" determined under Section 417(e) of the Code (in the manner used under the Pension Plan) until his benefit payment date determined under this Section 6. A Participant's benefit shall be paid on or about the first day of the third month next following (i) the date of his separation from service (within the meaning of Section 409A of the Code, as further described above) or (ii) if later in the case of a Participant who was accruing a benefit under Appendix A or Appendix B of the Pension Plan on January 1, 2003, the date he attains age 55. Notwithstanding the foregoing, in the case of a Participant who is determined by the Corporation to be a "specified employee" within the meaning of Section 409A of the Code and applicable Treasury regulations, payment shall not in any event be made until the first business day of the month which is at least six (6) months after the date of his separation from service hereunder (or, if earlier, the date of death of the Participant). If the Participant receives payment of the benefit hereunder before the normal benefit commencement date under the Pension Plan, the benefit payable under Section 4 shall also be reduced by applying the same factors that would be applied for such purpose under the Pension Plan. In the event a Participant becomes entitled to an additional benefit under the Plan after his calculation date (by reason of the additional accrual of benefits under the Pension Plan while on long term disability, for example), the amount of any such additional benefit shall be calculated as of December 31 of each calendar year beginning with -4- the year following the year in which his initial calculation date falls and shall be paid to him within the ninety (90) day period following. 7. Form of Benefit. (a) The benefit payable under Section 4 shall be paid to the Participant in a single sum payment. The benefit payable under Section 4 shall be actuarially adjusted by using the same actuarial factors as are applied under the Pension Plan for converting the normal form of benefit to an actuarially equivalent optional benefit. (b) If the Participant has a vested interest under the Plan and dies prior to commencement of any benefit under the Plan, the Company will pay a benefit to the Participant's surviving spouse in the form of a single sum within ninety (90) days following the Participant's date of death. The benefit shall be calculated in the same manner as provided under the Pension Plan. Notwithstanding the foregoing, a Participant may elect a beneficiary other than his or her spouse (as permitted under the Pension Plan except that no spousal consent shall be required), with the benefit amount being determined in the same manner as provided under the Pension Plan and payable in a lump sum form of payment only. 8. Funding of Benefits. (a) The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Corporation's general assets, and nothing contained in the Plan shall require the Corporation to set aside or hold in trust any funds for the benefit of a Participant, who shall have the status of a general unsecured creditor with respect to the Corporation's obligation to make payments under the Plan. Any funds of the Corporation available to pay benefits under the Plan shall be subject to the claims of general creditors of the Corporation and may be used for any purpose by the Corporation. -5- (b) Notwithstanding the provisions of subsection (a), the Corporation may, at the direction, and in the absolute discretion, of the Pension Administration Committee, transfer to the trustee of one or more irrevocable domestic trusts established in the United States for the benefit of one or more Participants' assets from which all or a portion of the benefits provided under the Plan will be satisfied, provided that such assets held in trust shall at all times be subject to the claims of general unsecured creditors of the Corporation and no Participant shall at any time have a prior claim to such assets. 9. Administration of the Plan. The Pension Administration Committee shall administer the Plan and shall keep a written record of its action and proceedings regarding the Plan and all dates, records and documents relating to its administration of the Plan. The Pension Administration Committee is authorized to interpret the Plan, to make, amend and rescind such rules as it deems necessary for the proper administration of the Plan, to make all other determinations necessary or advisable for the administration of the Plan and to correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent that the Pension Administration Committee deems desirable to carry the Plan into effect. The powers and duties of the Pension Administration Committee shall include, without limitation, the following: (a) Determining the amount of benefits payable to Participants and authorizing and directing the Corporation with respect to the payment of benefits under the Plan; (b) Construing and interpreting the Plan whenever necessary to carry out its intention and purpose and making and publishing such rules for the regulation of the Plan as are not inconsistent with the terms of the Plan; and -6- (c) Compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan. No member of the Pension Administration Committee shall vote on any matter relating specifically to such member. In the event that a majority of the members of the Pension Administration Committee will be specifically affected by any action proposed to be taken (as opposed to being affected in the same manner as each other Participant in the Plan), such action shall be taken by the Compensation Committee. 10. Claims Procedure. (a) If a Participant (hereinafter referred to as the "Applicant") does not receive the timely payment of the benefits which the Applicant believes are due under the Plan, the Applicant may make a claim for benefits in the manner hereinafter provided. All claims for benefits under the Plan shall be made in writing and shall be signed by the Applicant. Claims shall be submitted to a representative designated by the Pension Administration Committee and hereinafter referred to as the "Claims Coordinator." If the Applicant does not furnish sufficient information with the claim for the Claims Coordinator to determine the validity of the claim, the Claims Coordinator shall indicate to the Applicant any additional information which is necessary for the Claims Coordinator to determine the validity of the claim. Each claim hereunder shall be acted on and approved or disapproved by the Claims Coordinator within thirty (30) days following the receipt by the Claims Coordinator of the information necessary to process the claim. In the event the Claims Coordinator denies a claim for benefits in whole or in part, the Claims Coordinator shall notify the Applicant in writing of the denial of the claim and notify the Applicant of his right to a review of the Claims Coordinator's decision by the Pension -7- Administration Committee. Such notice by the Claims Coordinator shall also set forth, in a manner calculated to be understood by the Applicant, the specific reason for such denial, the specific provisions of the Plan on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of the Plan's appeals procedure as set forth in this Section. If no action is taken by the Claims Coordinator on an Applicant's claim within thirty (30) days after receipt by the Claims Coordinator, such claim shall be deemed to be denied for purposes of the following appeals procedure. (b) Any Applicant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the Pension Administration Committee. Such appeal must be made within three (3) months after the Applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must: (i) request a review by the Pension Administration Committee of the claim for benefits under the Plan; (ii) set forth all of the grounds upon which the Applicant's request for review is based on any facts in support thereof; and (iii) set forth any issues or comments which the Applicant deems pertinent to the appeal. The Pension Administration Committee shall regularly review appeals by Applicants. The Pension Administration Committee shall act upon each appeal within thirty (30) days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Pension Administration Committee as soon as possible but not later than sixty (60) days after the appeal is received by the Pension Administration Committee. -8- The Pension Administration Committee shall make a full and fair review of each appeal and any written materials submitted by the Applicant in connection therewith. The Pension Administration Committee may require the Applicant to submit such additional facts, documents or other evidence as the Pension Administration Committee in its discretion deems necessary or advisable in making its review. The Applicant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Pension Administration Committee, provided the Pension Administration Committee finds the requested documents or materials are pertinent to the appeal. On the basis of its review, the Pension Administration Committee shall make an independent determination of the Applicant's eligibility for benefits under the Plan. In the event the Pension Administration Committee denies an appeal in whole or in part, the Pension Administration Committee shall give written notice of the decision to the Applicant, which notice shall set forth, in a manner calculated to be understood by the Applicant, the specific reasons for such denial and which shall make specific reference to the pertinent provisions of the Plan on which the Pension Administration Committee's decision is based. 11. Miscellaneous. (a) Nothing in the Plan shall confer upon a Participant the right to continue in the employ of the Corporation or an affiliate of the Corporation or shall limit or restrict the right of the Corporation or any affiliate to terminate the employment of a Participant at any time or without cause. (b) Neither the Corporation nor any Participant hereunder shall assign, transfer or delegate this Plan or any rights or obligations hereunder except as expressly provided herein. Without limiting the generality of the foregoing, no right or interest under this Plan of a Participant -9- shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant. (c) The Plan may be amended at any time by the Pension Administration Committee provided such amendment does not have the effect of increasing, directly or indirectly, the benefit of any Participant. The Plan may also be amended or terminated by the Board of Directors at any time, and any amendment adopted by the Board of Directors shall supersede any prior or later amendment adopted by the Pension Administration Committee that is inconsistent with the action of the Board of Directors. Subject to the provisions of Section 11(d), no amendment shall have the effect of impairing or decreasing a Participant's accrued benefit. No amendment may amend or modify the preceding sentence. (d) The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by the Corporation to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on or after January 1, 2005, including as contemplated by Section 885(f) of the American Jobs Creation Act of 2004. Moreover, to the extent permitted in guidance issued by the Secretary of the Treasury and in accordance with procedures established by the Committee, a Participant may be permitted to terminate participation in the Plan or cancel an outstanding deferral election with regard to amounts deferred after December 31, 2004. (e) The Board of Directors shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire benefit to the Participant or, if applicable, his -10- Beneficiary, pursuant to an irrevocable action taken by the Board of Directors within the thirty (30) days preceding or the 12 months following a change in control of the Corporation (within the meaning of Section 409A of the Code), provided that this Section 11(e) will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored by the service recipient immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c) (2) are terminated and liquidated with respect to each Participant that experienced the change in control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 11(e), where the change in control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. (f) The Plan is intended to provide benefits for "management or highly compensated" employees within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore to be exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and no further benefits shall accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt. -11- (g) If any provision in the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue to full force and effect without being impaired or invalidated in any way. (h) The Plan shall be construed and governed in all respects in accordance with applicable federal law and, to the extent not preempted by such federal law, in accordance with the law of the State of Ohio. APPROVAL AND ADOPTION The Eaton Corporation Supplemental Benefits Plan II, as amended and restated in the form attached hereto, is hereby approved and adopted. - ---------------------------------------- Date: October 27, 2007 Name - ---------------------------------------- Title - ---------------------------------------- Name - ---------------------------------------- Title -12- EX-10.K 10 l30233aexv10wk.txt EX-10(K) (EATON LOGO) EXHIBIT 10 (K) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) [date] EATON CORPORATION EATON CENTER 1111 SUPERIOR AVENUE CLEVELAND, OHIO 44114 AWARD OF RESTRICTED SHARE UNITS UNDER THE EATON CORPORATION 2004 STOCK PLAN The Compensation and Organization Committee (the "Committee") of the Board of Directors of Eaton Corporation (the "Company") has awarded you a number of restricted share units effective as of [date] (the "Effective Date") under the terms and conditions of the Company's 2004 Stock Plan (the "Plan"). Information concerning the number of restricted share units awarded to you (the "Award") is available online through the Eaton Service Center at Fidelity which may be accessed through the Company's website. You are required to accept the Award online at the Eaton Service Center at Fidelity. By so accepting the Award you acknowledge and agree as follows: 1. ACCEPTANCE. I hereby accept the aforementioned award on the terms and conditions provided in the Plan and this Agreement. 2. RESTRICTED SHARE UNITS. I acknowledge that, as of the Effective Date, restricted share units (the "Restricted Units") have been awarded to me, contingent on the continuation of my service with the Company as provided herein. Each Restricted Unit is equivalent in value to the market value of one (1) Common Share of the Company. The Restricted Units shall be forfeited and immediately cancelled if my employment with the Company is terminated under any circumstances whatsoever, including without limitation dismissal, resignation, divestiture of operations, death, disability or retirement. This possibility of forfeiture shall lapse only if I have been continuously employed by the Company or one of its affiliates to such dates as follows: - two years after the Effective Date with respect to 100% of the Restricted Shares, Upon the lapse of the possibility of forfeiture with respect to any of the Restricted Units, I will be paid by the Company an amount in cash equal to the closing market price of an equivalent number of Common Shares of the Company on the date of such lapse. If any Restricted Units are forfeited for any reason, I understand that I will not be entitled to any payment in respect of any Restricted Units so forfeited. The Management Compensation Committee of the Company (the "Management Committee") reserves the right to decide to what extent my leaves of absence for government or military service, illness, temporary disability, or other reasons shall not be deemed to be an interruption of continuous employment. 3. NON-TRANSFERABILITY. The Restricted Units shall be non-transferable. I agree not to make, or attempt to make, any sale, assignment, transfer or pledge of any Restricted Units. 4. REORGANIZATIONS, ETC. In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or other event affecting the Company's Common Shares, the number of Restricted Units shall be equitably adjusted by the Management Committee so as to reflect that change. 5. DIVIDEND EQUIVALENTS AND VOTING RIGHTS. I acknowledge that there are no voting rights associated with the Restricted Units such as those available to holders of Common Shares of the Company. Until my employment with the Company and its affiliates terminates for any reason, or until such time as the possibility of forfeiture lapses pursuant to Paragraph 2 above, whichever occurs first, the Company will pay me a cash amount equal to the number of Restricted Units subject to restriction times the per share quarterly dividend payments made to common shareholders of the Company, with such payments to be made reasonably promptly after the payment of each such quarterly dividend. 6. TAX WITHHOLDINGS. I hereby authorize the Company to withhold from any amounts otherwise payable to me, or any of my successors in interest, such federal, state, local or foreign taxes as may be required by law in connection with the award to me of Restricted Units or the lapse of the possibility of forfeiture thereof. I agree that if such amounts are insufficient, I will pay or make arrangements satisfactory to the Company for payment of such taxes. 7. NO RIGHTS TO CONTINUED EMPLOYMENT. I acknowledge that this award of Restricted Units does not in any way entitle me to continued employment with the Company for the period during which the possibility of forfeiture continues or for any other period, and does not limit or restrict any right the Company otherwise may have to terminate my employment. 8. COMPETITION BY EMPLOYEE. I expressly acknowledge and agree that in the event that I voluntarily leave the employment of the Company or a subsidiary and within one year after the vesting of the Restricted Units enter into an activity as employee, agent, officer, director, principal or proprietor which, in the sole judgment of the Management Committee, is in competition with the Company or a subsidiary, the amount of the total fair market value of such vested Restricted Units as of the vesting date shall inure to the benefit of the Company and I agree to promptly pay the same to the Company, unless the Management Committee in its sole discretion shall determine that such action by me is not inimical to the best interests of the Company or its subsidiaries. 2 9. CHANGE OF CONTROL. Notwithstanding anything in this Agreement to the contrary, effective upon a Change of Control of the Company (as defined below), the Restricted Units shall vest and the forfeiture restrictions referred to in Paragraph 2 hereof shall lapse. For the purpose of this Agreement, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the "Outstanding Common Shares") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding common shares and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding common shares of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of 3 directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which I, or any entity in which I am a partner, officer or more than 50% owner, initiate, if immediately following the transaction or series of transactions that would otherwise constitute a Change of Control, I, either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially own, directly or indirectly, more than 10% of the then outstanding common shares of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation. 10. MISCELLANEOUS. Unless otherwise expressly provided herein, terms defined in the Plan shall have the same meanings when used in this Agreement. The Management Committee shall have the right at any time in its sole discretion to amend, alter, suspend, discontinue or terminate any Restricted Units without my consent. Also, the Restricted Units shall be null and void to the extent the grant of Restricted Units or the lapse of restrictions thereon is prohibited under the laws of the country of my residence. The Management Committee may, in circumstances determined in its sole discretion, provide for the lapse of the above restrictions at earlier dates. The use of the masculine gender shall be deemed to include the feminine gender. In the event of a conflict between this Agreement and the Plan, this Agreement shall control. This Agreement represents the entire understanding between us on the subject hereof and shall be governed in accordance with Ohio law, without giving effect to conflict of law principles. 4 EX-10.L 11 l30233aexv10wl.txt EX-10(L) (EATON LOGO) EXHIBIT 10 (L) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) [date] EATON CORPORATION EATON CENTER 1111 SUPERIOR AVENUE CLEVELAND, OHIO 44114 AWARD OF RESTRICTED SHARE UNITS UNDER THE EATON CORPORATION 2004 STOCK PLAN The Compensation and Organization Committee (the "Committee") of the Board of Directors of Eaton Corporation (the "Company") has awarded you a number of restricted share units effective as of [date] (the "Effective Date") under the terms and conditions of the Company's 2004 Stock Plan (the "Plan"). Information concerning the number of restricted share units awarded to you (the "Award") is available online through the Eaton Service Center at Fidelity which may be accessed through the Company's website. You are required to accept the Award online at the Eaton Service Center at Fidelity. By so accepting the Award you acknowledge and agree as follows: 1. ACCEPTANCE. I hereby accept the aforementioned award on the terms and conditions provided in the Plan and this Agreement. 2. RESTRICTED SHARE UNITS. I acknowledge that, as of the Effective Date, the restricted share units referred to above (the "Restricted Units") have been awarded to me, contingent on the continuation of my service with the Company as provided herein. Each Restricted Unit is equivalent in value to the market value of one (1) Common Share of the Company. The Restricted Units shall be forfeited and immediately cancelled if my employment with the Company is terminated under any circumstances whatsoever, including without limitation dismissal, resignation, divestiture of operations, death, disability or retirement. This possibility of forfeiture shall lapse only if I have been continuously employed by the Company or one of its affiliates to such dates as follows: - two years after the Effective Date with respect to 100% of the Restricted Shares, - three years after the Effective Date with respect to an additional 30% of the Restricted Shares, and - four years after the Effective Date with respect to an additional 40% of the Restricted Shares. Upon the lapse of the possibility of forfeiture with respect to any of the Restricted Units, I will be paid by the Company an amount in cash equal to the closing market price of an equivalent number of Common Shares of the Company on the date of such lapse. If any Restricted Units are forfeited for any reason, I understand that I will not be entitled to any payment in respect of any Restricted Units so forfeited. The Management Compensation Committee of the Company (the "Management Committee") reserves the right to decide to what extent my leaves of absence for government or military service, illness, temporary disability, or other reasons shall not be deemed to be an interruption of continuous employment. 3. NON-TRANSFERABILITY. The Restricted Units shall be non-transferable. I agree not to make, or attempt to make, any sale, assignment, transfer or pledge of any Restricted Units. 4. REORGANIZATIONS, ETC. In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or other event affecting the Company's Common Shares, the number of Restricted Units shall be equitably adjusted by the Management Committee so as to reflect that change. 5. DIVIDEND EQUIVALENTS AND VOTING RIGHTS. I acknowledge that there are no voting rights associated with the Restricted Units such as those available to holders of Common Shares of the Company. Until my employment with the Company and its affiliates terminates for any reason, or until such time as the possibility of forfeiture lapses pursuant to Paragraph 2 above, whichever occurs first, the Company will pay me a cash amount equal to the number of Restricted Units subject to restriction times the per share quarterly dividend payments made to common shareholders of the Company, with such payments to be made reasonably promptly after the payment of each such quarterly dividend. 6. TAX WITHHOLDINGS. I hereby authorize the Company to withhold from any amounts otherwise payable to me, or any of my successors in interest, such federal, state, local or foreign taxes as may be required by law in connection with the award to me of Restricted Units or the lapse of the possibility of forfeiture thereof. I agree that if such amounts are insufficient, I will pay or make arrangements satisfactory to the Company for payment of such taxes. 7. NO RIGHTS TO CONTINUED EMPLOYMENT. I acknowledge that this award of Restricted Units does not in any way entitle me to continued employment with the Company for the period during which the possibility of forfeiture continues or for any other period, and does not limit or restrict any right the Company otherwise may have to terminate my employment. 8. COMPETITION BY EMPLOYEE. I expressly acknowledge and agree that in the event that I voluntarily leave the employment of the Company or a subsidiary and within one year after the vesting of the Restricted Units enter into an activity as employee, agent, officer, director, principal or proprietor which, in the sole judgment of the Committee, is in competition with the Company or a subsidiary, the amount of the total fair market value of such vested Restricted Units as of the vesting date shall inure to the benefit of the Company and I agree to promptly pay the same to the Company, unless the Management Committee in its sole discretion shall determine that such action by me is not inimical to the best interests of the Company or its subsidiaries. 2 9. CHANGE OF CONTROL. Notwithstanding anything in this Agreement to the contrary, effective upon a Change of Control of the Company (as defined below), the Restricted Units shall vest and the forfeiture restrictions referred to in Paragraph 2 hereof shall lapse. For the purpose of this Agreement, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the "Outstanding Common Shares") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding common shares and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding common shares of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of 3 directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which I, or any entity in which I am a partner, officer or more than 50% owner, initiate, if immediately following the transaction or series of transactions that would otherwise constitute a Change of Control, I, either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially own, directly or indirectly, more than 10% of the then outstanding common shares of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation. 10. MISCELLANEOUS. Unless otherwise expressly provided herein, terms defined in the Plan shall have the same meanings when used in this Agreement. The Management Committee shall have the right at any time in its sole discretion to amend, alter, suspend, discontinue or terminate any Restricted Units without my consent. Also, the Restricted Units shall be null and void to the extent the grant of Restricted Units or the lapse of restrictions thereon is prohibited under the laws of the country of my residence. The Management Committee may, in circumstances determined in its sole discretion, provide for the lapse of the above restrictions at earlier dates. The use of the masculine gender shall be deemed to include the feminine gender. In the event of a conflict between this Agreement and the Plan, this Agreement shall control. This Agreement represents the entire understanding between us on the subject hereof and shall be governed in accordance with Ohio law, without giving effect to conflict of law principles. 4 EX-10.M 12 l30233aexv10wm.txt EX-10(M) (EATON LOGO) EXHIBIT 10 (M) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) [date] EATON CORPORATION EATON CENTER 1111 SUPERIOR AVENUE CLEVELAND, OHIO 44114 AWARD OF RESTRICTED SHARES UNDER THE EATON CORPORATION 2004 STOCK PLAN The Compensation and Organization Committee (the "Committee") of the Board of Directors of Eaton Corporation (the "Company") has awarded you a number of restricted Common Shares of the Company effective as of [date] (the "Effective Date") under the terms and conditions of the Company's 2004 Stock Plan (the "Plan"). Information concerning the number of restricted shares awarded to you (the "Award") is available online through the Eaton Service Center at Fidelity which may be accessed through the Company's website. You are required to accept the Award online at the Eaton Service Center at Fidelity. By so accepting the Award you acknowledge and agree as follows: 1. ACCEPTANCE. You accept the Award on the terms and conditions provided in the Plan and this Award Agreement. 2. RESTRICTED SHARES. You acknowledge that, as of the Effective Date, the Award has been granted to you, contingent on the continuation of your service with the Company as provided herein. The restricted shares which are the subject of the Award (the "Restricted Shares") shall be forfeited and shall be immediately re-transferred to the Company if my employment with the Company is terminated under any circumstances whatsoever, including without limitation dismissal, resignation, divestiture of operations, death, disability or retirement. This possibility of forfeiture shall lapse as follows: - two years after the Effective Date with respect to 100% of the Restricted Shares If any Restricted Shares are forfeited for any reason, you will surrender to the Company any certificates which I then hold evidencing such shares. You understand that you will not be entitled to any payment in respect of shares so forfeited. The Committee reserves the right to decide to what extent leaves of absence for government or military service, illness, temporary disability, or other reasons shall not be deemed to be an interruption of continuous employment. 3. TRANSFERABILITY. Until the possibility of forfeiture lapses with respect to any of the Restricted Shares, those shares shall be non-transferable. You agree not to make, or attempt to make, any sale, assignment, transfer or pledge of any of the Restricted Shares prior to the date on which the possibility of forfeiture with respect to such shares lapses. 4. LEGENDS, POSSESSION AND REORGANIZATION. You acknowledge that the certificates for the Restricted Shares will bear a legend referring to this Agreement and to the restrictions contained herein. You further acknowledge that the Company may elect to retain those certificates in its possession as a means of enforcing these restrictions. In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or other event affecting the Company's Common Shares, the number and class of the Restricted Shares shall be equitably adjusted by the Committee so as to reflect that change. Any new certificates for Restricted Shares shall bear the legends referred to in this Section 4. No adjustment provided for in this Section 4 shall require the Company to sell or transfer a fractional share. 5. DIVIDENDS AND VOTING. If you are the shareholder of record on any record date for the payment of a dividend on the Restricted Shares, you will be entitled to receive the dividend when paid, regardless of whether or not the restrictions imposed by Section 2 have lapsed. If you are the shareholder of record on any record date for the taking of a vote by the shareholders of the Company, you will be entitled to vote the Restricted Shares regardless of whether or not the restrictions imposed by Section 2 hereof have lapsed. 6. WITHHOLDINGS. You hereby authorize the Company to withhold from any amounts otherwise payable to you, or any of my successors in interest, such federal, state and local taxes as may be required by law in connection with the award to you of Restricted Shares or the lapse of the possibility of forfeiture thereof. You agree that if such amounts are insufficient, you will pay or make arrangements satisfactory to the Company for payment of such taxes. You understand that the Company may defer the issuance to you of a certificate evidencing shares of Restricted Shares, or the issuance of a new certificate evidencing the lapse of the restrictions thereon, until such payment or provision has been made. You hereby authorize the conversion to cash by the Company of a sufficient number of the shares of Restricted Shares to satisfy any such withholding tax obligations. 7. CONTINUED EMPLOYMENT. You acknowledge that this award of Restricted Shares does not in any way entitle you to continued employment with the Company for the period during which the possibility of forfeiture continues or for any other period, and does not limit or restrict any right the Company otherwise may have to terminate your employment. 8. COMPETITION BY EMPLOYEE. You expressly acknowledge and agree that in the event that you voluntarily leave the employment of the Company or a subsidiary and within one year after the vesting of the Restricted Shares enter into an activity as employee, agent, officer, director, principal or proprietor which, in the sole judgment of the Committee, is in competition with the Company or a subsidiary, the amount of the total fair market value such vested Restricted Shares as of the vesting date shall inure to the benefit of the Company and you agree to promptly pay the same to the Company, unless the Committee in its sole discretion shall determine that such action by you is not inimical to the best interest of the Company or its subsidiaries. 9. CHANGE OF CONTROL. Notwithstanding anything in this Agreement to the contrary, effective upon a Change of Control of the Company (as defined below), the Restricted Shares 2 shall vest and the forfeiture restrictions referred to in Paragraph 2 hereof shall lapse. For the purpose of this Agreement, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the "Outstanding Common Shares") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding common shares and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding common shares of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members 3 of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which you, or any entity in which you are a partner, officer or more than 50% owner, initiate, if immediately following the transaction or series of transactions that would otherwise constitute a Change of Control, you, either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially own, directly or indirectly, more than 10% of the then outstanding common shares of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation. 10. MISCELLANEOUS. Unless otherwise expressly provided herein, terms defined in the Plan shall have the same meanings when used in this Agreement. The use of the masculine gender shall be deemed to include the feminine gender. In the event of a conflict between this Agreement and the Plan, this Agreement shall control. This Agreement represents the entire understanding between the parties on the subject hereof and shall be governed in accordance with Ohio law. 4 EX-10.N 13 l30233aexv10wn.txt EX-10(N) (EATON LOGO) EXHIBIT 10 (N) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) [date] EATON CORPORATION EATON CENTER 1111 SUPERIOR AVENUE CLEVELAND, OHIO 44114 AWARD OF RESTRICTED SHARES UNDER THE EATON CORPORATION 2004 STOCK PLAN The Compensation and Organization Committee (the "Committee") of the Board of Directors of Eaton Corporation (the "Company") has awarded you a number of restricted Common Shares of the Company effective as of [date] (the "Effective Date") under the terms and conditions of the Company's 2004 Stock Plan (the "Plan"). Information concerning the number of restricted shares awarded to you (the "Award") is available online through the Eaton Service Center at Fidelity which may be accessed through the Company's website. You are required to accept the Award online at the Eaton Service Center at Fidelity. By so accepting the Award you acknowledge and agree as follows: 1. ACCEPTANCE. You accept the Award on the terms and conditions provided in the Plan and this Award Agreement. 2. RESTRICTED SHARES. You acknowledge that, as of the Effective Date, the Award has been granted to you, contingent on the continuation of your service with the Company as provided herein. The restricted shares which are the subject of the Award (the "Restricted Shares") shall be forfeited and shall be immediately re-transferred to the Company if my employment with the Company is terminated under any circumstances whatsoever, including without limitation dismissal, resignation, divestiture of operations, death, disability or retirement. This possibility of forfeiture shall lapse as follows: - two year after the Effective Date with respect to 30% of the Restricted Shares, - three years after the Effective Date with respect to an additional 30% of the Restricted Shares, and - four years after the Effective Date with respect to an additional 40% of the Restricted Shares. If any Restricted Shares are forfeited for any reason, you will surrender to the Company any certificates which I then hold evidencing such shares. You understand that you will not be entitled to any payment in respect of shares so forfeited. The Committee reserves the right to decide to what extent leaves of absence for government or military service, illness, temporary disability, or other reasons shall not be deemed to be an interruption of continuous employment. 3. TRANSFERABILITY. Until the possibility of forfeiture lapses with respect to any of the Restricted Shares, those shares shall be non-transferable. You agree not to make, or attempt to make, any sale, assignment, transfer or pledge of any of the Restricted Shares prior to the date on which the possibility of forfeiture with respect to such shares lapses. 4. LEGENDS, POSSESSION AND REORGANIZATION. You acknowledge that the certificates for the Restricted Shares will bear a legend referring to this Agreement and to the restrictions contained herein. You further acknowledge that the Company may elect to retain those certificates in its possession as a means of enforcing these restrictions. In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or other event affecting the Company's Common Shares, the number and class of the Restricted Shares shall be equitably adjusted by the Committee so as to reflect that change. Any new certificates for Restricted Shares shall bear the legends referred to in this Section 4. No adjustment provided for in this Section 4 shall require the Company to sell or transfer a fractional share. 5. DIVIDENDS AND VOTING. If you are the shareholder of record on any record date for the payment of a dividend on the Restricted Shares, you will be entitled to receive the dividend when paid, regardless of whether or not the restrictions imposed by Section 2 have lapsed. If you are the shareholder of record on any record date for the taking of a vote by the shareholders of the Company, you will be entitled to vote the Restricted Shares regardless of whether or not the restrictions imposed by Section 2 hereof have lapsed. 6. WITHHOLDINGS. You hereby authorize the Company to withhold from any amounts otherwise payable to you, or any of my successors in interest, such federal, state and local taxes as may be required by law in connection with the award to you of Restricted Shares or the lapse of the possibility of forfeiture thereof. You agree that if such amounts are insufficient, you will pay or make arrangements satisfactory to the Company for payment of such taxes. You understand that the Company may defer the issuance to you of a certificate evidencing shares of Restricted Shares, or the issuance of a new certificate evidencing the lapse of the restrictions thereon, until such payment or provision has been made. You hereby authorize the conversion to cash by the Company of a sufficient number of the shares of Restricted Shares to satisfy any such withholding tax obligations. 7. CONTINUED EMPLOYMENT. You acknowledge that this award of Restricted Shares does not in any way entitle you to continued employment with the Company for the period during which the possibility of forfeiture continues or for any other period, and does not limit or restrict any right the Company otherwise may have to terminate your employment. 8. COMPETITION BY EMPLOYEE. You expressly acknowledge and agree that in the event that you voluntarily leave the employment of the Company or a subsidiary and within one year after the vesting of the Restricted Shares enter into an activity as employee, agent, officer, director, principal or proprietor which, in the sole judgment of the Committee, is in competition 2 with the Company or a subsidiary, the amount of the total fair market value such vested Restricted Shares as of the vesting date shall inure to the benefit of the Company and you agree to promptly pay the same to the Company, unless the Committee in its sole discretion shall determine that such action by you is not inimical to the best interest of the Company or its subsidiaries. 9. CHANGE OF CONTROL. Notwithstanding anything in this Agreement to the contrary, effective upon a Change of Control of the Company (as defined below), the Restricted Shares shall vest and the forfeiture restrictions referred to in Paragraph 2 hereof shall lapse. For the purpose of this Agreement, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the "Outstanding Common Shares") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding common shares and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan 3 (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding common shares of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which you, or any entity in which you are a partner, officer or more than 50% owner, initiate, if immediately following the transaction or series of transactions that would otherwise constitute a Change of Control, you, either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially own, directly or indirectly, more than 10% of the then outstanding common shares of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation. 10. MISCELLANEOUS. Unless otherwise expressly provided herein, terms defined in the Plan shall have the same meanings when used in this Agreement. The use of the masculine gender shall be deemed to include the feminine gender. In the event of a conflict between this Agreement and the Plan, this Agreement shall control. This Agreement represents the entire understanding between the parties on the subject hereof and shall be governed in accordance with Ohio law. 4 EX-10.O 14 l30233aexv10wo.txt EX-10(O) EXHIBIT (O) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) 2008 STOCK OPTION GRANT STOCK OPTION AGREEMENT UNDER THE 2004 STOCK PLAN DATE OF GRANT: ____________________ DATE OF EXPIRATION: _______________ EATON CORPORATION, an Ohio corporation (the "Company"), hereby grants to the Optionholder, in consideration of service by him or her to the Company or a subsidiary of the Company, the option to purchase from the Company from time to time during a period which shall end at the close of business on the tenth anniversary of the date of the granting of this option (such period being referred to as the "fixed term of the option"), unless sooner terminated as hereinafter provided, the number of common shares of the Company with a par value of fifty cents each (the "Common Shares") specified in the Optionholder's account available online through the Eaton Benefits Center at Fidelity, or in other method of communication designated by the Company. For purposes of the foregoing sentence, "close of business" shall mean 4:00 p.m. Eastern Time on the day of the tenth anniversary. However, if that day falls on a Saturday, Sunday or other day when the principal stock exchange for the Common Shares is closed for trading, "close of business" shall mean 4:00 p.m. Eastern Time on the nearest preceding day when that stock exchange is open for trading. This option is subject to, and is granted in accordance with, the 2004 Stock Plan (the "2004 Plan"), and upon the terms and conditions herein set forth. I. TERMS OF EXERCISE OF OPTION A. By the Optionholder While an Employee of the Company or a Subsidiary The Optionholder may exercise this option only after he or she remains in the continuous employment of the Company for a period of one year from the date of granting of this option and only as to the number of shares which become vested as set forth below. Employment by a subsidiary shall be counted as employment by the Company. Subject to Section I. B. hereof, after one year of such continuous employment following the date of grant of this option, the Optionholder, while still so employed, may exercise this option as follows: 1. At any time after one year of such continuous employment from the date of grant, as to 33% of the Common Shares subject to this option; 2. At any time after two years of such continuous employment from the date of grant, as to an additional 33% of the Common Shares subject to this option; and 3. At any time after three years of such continuous employment from the date of grant, as to an additional 34% of the Common Shares subject to this option. The Compensation and Organization Committee of the Board of Directors of the Company (the "Committee") reserves the right to decide to what extent leaves of absence for government or military service, illness, temporary disability, or other reasons shall not be deemed to be an interruption of continuous employment. (EATON LOGO) 2008 STOCK OPTION AGREEMENT I. TERMS OF EXERCISE OF OPTION (CONTINUED) B. By the Optionholder When No Longer Employed by Either the Company or a Subsidiary 1. Retirement. If the Optionholder ceases to be an employee of the Company or a Subsidiary as a result of retirement on or after normal retirement age (age 65 for U.S. employees), or on or after age 50 with 10 years of service to the Company or a subsidiary (early retirement), he or she may exercise this option with respect to all Common Shares then subject to this option which are vested at the date of such retirement in accordance with the schedule set forth in Section I.A above, for a period not to exceed the shorter of the remaining term of this option or five years after the retirement date. 2. Divestiture of a Facility. If the Optionholder ceases to be an employee as a result of the divestiture of a facility where the Optionholder is employed, he or she may exercise this option with respect to all Common Shares then subject to this option, both vested and unvested, for a period not to exceed 90 days after the effective date of the divestiture. If the divestiture results in the retirement of the Optionholder (as described in Subsection B.1), then he or she may exercise this option with respect to all Common Shares then subject to this option (both vested and unvested) for a period not to exceed the shorter of the remaining term of the option or five years after the retirement date. 3. Other Terminations. If the Optionholder ceases to be an employee for any reason other than those described in Subsections B.1. or B.2., he or she may exercise this option only for the number of Common Shares which are vested at the time he or she ceased to be an employee, and he or she may exercise this option only for a period not to exceed 90 days following the termination of employment. 4. Company Discretion. In the case of a termination of an officer of the Company that is subject to Subsections B.1 or B.3, the officer may exercise this option for such number of Common Shares that is greater than the number provided by those Subsections as the Committee may authorize by acceleration of vesting or extension of the exercise period (but not beyond the ten year term of this option). In the case of the termination of employment of an employee who is not an officer of the Company that is subject to Subsections B.1 or B.2, the employee may exercise this option for such number of Common Shares greater than provided by those Subsections as the Management Compensation Committee ("Management Committee") may authorize by acceleration of vesting or extension of the exercise period (but not beyond the ten year term of this option). The Optionholder should have no expectation that the Committee or the Management Committee will take any discretionary action contemplated by this Subsection B.4. 2 (EATON LOGO) 2008 STOCK OPTION AGREEMENT II. TERMS OF EXERCISE OF OPTION (CONTINUED) B. By the Optionholder When No Longer Employed by Either the Company or a Subsidiary (continued) 5. Incentive Stock Options To receive favorable tax treatment afforded Incentive Stock Options, the Incentive Stock Option Shares must be exercised within 90 days of retirement or other termination of employment or within one year of termination of employment due to permanent and total disability. Incentive Stock Option Shares that are not exercised within those periods will, for tax purposes, be treated the same as Non-Qualified Stock Options. C. By the Optionholder After Change in Position If the Optionholder should be assigned to any position with the Company or its subsidiaries which is, in the sole and absolute discretion of the Committee, of lesser responsibility than that which is held by the Optionholder upon the date hereof, thereafter the Optionholder may exercise this option (during the term of the option) only for the number of Common Shares for which the option was exercisable at the time of such assignment or such greater number of Common Shares as determined by the Committee in the exercise of its sole and absolute discretion. D. In Case of the Death of the Optionholder Upon the death of the Optionholder, this option shall be exercisable by the Optionholder's estate, or by a person who has acquired the right to exercise this option by bequest or inheritance, (i) during the period of 12 months after the date of death (but no later than the end of the fixed term of the option) for the number of Common Shares for which the option was exercisable upon the date of death, and (ii) during such period of time, if any (but ending no later than the end of the fixed term of the option), which the Committee may determine in its sole and absolute discretion, for the number of Common Shares for which the Optionholder could have exercised this option in accordance with its terms prior to the expiration of that period of time if the Optionholder had lived. E. Term and Acceptance of Option The option shall in no event be exercisable after the expiration of 10 years from the date of the granting of the option, notwithstanding anything to the contrary in Sections I. A, B, C or D above. The option hereby granted shall be considered terminated and cancelled, in whole or in part, to the extent that it can no longer be exercised under the terms hereof or under the terms of the 2004 Plan, for the Common Shares originally subject to this option, or in the event the Optionholder shall fail, within 60 days after being notified of the granting of this option, to accept such option in the manner specified online through the Eaton Benefits Center at Fidelity or in any other manner designated by the Company and communicated to the Optionholder. II. EXERCISING OPTION--RIGHTS AS A SHAREHOLDER A. Exercise and Payment This option shall be exercised only at a time when the principal stock exchange for the Common Shares is open for business. An exercise of this option will be effective when the person or estate entitled to exercise it shall indicate the decision to do so, as to all or any part of the Common Shares for which it may then be exercised, by any method of communication expressly authorized by the Company, and at the same time 3 (EATON LOGO) 2008 STOCK OPTION AGREEMENT II. EXERCISING OPTION--RIGHTS AS A SHAREHOLDER (CONTINUED) A. Exercise and Payment (continued) tenders or makes available to the Company (by any method expressly authorized by the Company) payment in full for the exercise price in cash or by delivery to the Company of Common Shares owned by the Optionholder, or by tender of a combination of cash and Common Shares. A partial exercise of this option shall not affect the right to exercise it from time to time thereafter as to the remaining Common Shares subject to the option. The Company shall notify the Optionholder of the expiration date of the fixed term of this option no less than 90 days, nor more than 180 days, in advance of such expiration date. B. Shareholder Rights No holder of this option shall have any rights as a shareholder with respect to any Common Shares subject to the option unless and until he or she shall have received a certificate or certificates for such Common Shares. Subject to compliance with all the terms and conditions hereof and of the 2004 Plan, including all rules, regulations and determinations of the Committee, the Company shall, as promptly as possible after any exercise of this option, deliver a certificate or certificates for an appropriate number of Common Shares; provided, however, that no such certificate or certificates shall be so delivered unless and until adequate provision has, in the judgment of the Company, been made for any and all withholding taxes in respect of the exercise of the option. III. TRANSFER OF OPTION This option shall not be transferable otherwise than by will or the law of descent and distribution or to the extent permitted by rules or regulations under Section 16(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and the Committee. IV. COMPLIANCE WITH LAWS, REGULATIONS AND RULES The Company will use its reasonable best efforts to comply with all federal and state laws and regulations and all rules for domestic stock exchanges on which its Common Shares may be listed, which apply to the issuance of the Common Shares subject to this option, and to obtain such consents and approvals to such issuance which it deems advisable from federal and state bodies having jurisdiction of such matters. However, anything herein to the contrary notwithstanding, this option shall not be exercisable, and the Company shall not be obligated to issue or deliver any certificate for shares subject to this option, in violation of any such laws, regulations or rules and unless and until such consents and approvals have been obtained. Any share certificate issued to evidence Common Shares as to which this option is exercised may bear such legends and statements as the Committee shall deem advisable to assure compliance with federal and state laws and regulations. If a person or an estate purporting to acquire the rights to exercise this option by bequest or inheritance shall attempt to exercise this option, the Company may require reasonable evidence as to the ownership of this option and may request such consents and releases of taxing authorities as it deems advisable. 4 (EATON LOGO) 2008 STOCK OPTION AGREEMENT V. ADJUSTMENT UPON CHANGE OF SHARES In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or other event affecting Common Shares, the number and class of Common Shares subject to this option, the price per share payable upon exercise of this option and the conditions on which this option shall become exercisable, shall be equitably adjusted by the Committee so as to reflect such change. No adjustment provided for in this Section V shall require the Company to sell or transfer a fractional share. VI. EFFECT ON EMPLOYMENT The granting of this option shall not give the Optionholder any right to be retained in the employ of the Company or any subsidiary, and shall not affect the right of the Company to terminate the employment of the Optionholder at any time with or without assigning a reason therefore to the same extent as the Company might have done if this option had not been granted. VII. COMPETITION BY OPTIONHOLDER In the event that the Optionholder voluntarily leaves employment of the Company or a subsidiary and within one (1) year after exercise of any portion of this option enters into an activity as employee, agent, officer, director, principal or proprietor which, in the sole judgment of the Committee, is in competition with the Company or a subsidiary, the amount by which the fair market value per share on the date of exercise of any such portion exceeds the option price per Common Share hereunder, multiplied by the number of Common Shares subject to such exercised portion, shall inure to the benefit of the Company and the Optionholder shall pay the same to the Company, unless the Committee in its sole discretion shall determine that such action by the Optionholder is not inimical to the best interest of the Company or its subsidiaries. VIII. CHANGE OF CONTROL A. Exercise of Option Notwithstanding anything in Section I.A to the contrary, effective upon a Change of Control of the Company (as defined below), this option shall become fully exercisable for 100% of the Common Shares subject to this option. B. Definition For the purpose of this Agreement, a "Change of Control" shall mean: 1. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the "Outstanding Common Shares") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection 1, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 5 (EATON LOGO) 2008 STOCK OPTION AGREEMENT VIII. CHANGE OF CONTROL (CONTINUED) B. Definition (continued) 2. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or 3. Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding common shares and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding common shares of the 3. corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 4. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which the Optionholder, or any entity in which the Optionholder is a partner, officer or more than 50% owner initiates, if immediately following the transaction or series of transactions that would otherwise constitute a Change of Control, the Optionholder, either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially owns, directly or indirectly, more than 10% of the then outstanding common shares of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation. 6 (EATON LOGO) 2008 STOCK OPTION AGREEMENT IX. ENFORCEABILITY This Agreement shall be binding upon and inure to the benefit of the Company, and its successors and assigns, and upon the personal representatives, executors, administrators, legatees and distributees of the Optionholder. X. 2004 PLAN CONTROLS The terms and conditions of the 2004 Plan, as amended from time to time in accordance with the provisions of Section 12 thereof, shall control the terms and conditions of this option, and anything contained in this Agreement inconsistent with or in violation of the terms and conditions of the 2004 Plan shall be of no force or effect and shall not be binding upon the Company or the Optionholder. The 2004 Plan and this Agreement represent the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, representations and understandings, whether written or oral. XI. CONSTRUCTION It is intended that acquisition of this option by the Optionholder shall qualify for exemption from the provisions of Section 16(b) of the Exchange Act, and each and every provision of this Agreement shall be construed, interpreted and administered so that the grant of this option, whether made to an officer or director of the Company or to any other employee of the Company or a subsidiary, shall so qualify. Any provision of this Agreement that cannot be so construed, interpreted and administered shall be of no force or effect. XII. GOVERNING LAW This Agreement shall be construed in accordance with the laws of the State of Ohio, except as otherwise specifically provided herein. 7 EX-10.Q 15 l30233aexv10wq.txt EX-10(Q) EXHIBIT 10 (Q) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON CORPORATION 200_ STOCK OPTION GRANT STOCK OPTION AGREEMENT UNDER THE 2004 STOCK PLAN (NON-EMPLOYEE DIRECTOR) Name ________________________ Date of Grant _____________ Number of Shares ____________ Option Price ______________ EATON CORPORATION, an Ohio corporation (the "Company"), hereby grants to the Optionholder, in consideration of service by him or her to the company or a subsidiary of the Company, the option to purchase from the Company the number of common shares of the Company with a par value of fifty cents each (the "Common Shares") specified above from time to time during a period which shall end at the close of business on the tenth anniversary of the date of the granting of this option (such period being referred to as the "fixed term of the option"), unless sooner terminated as hereinafter provided. For purposes of the foregoing sentence, "close of business" shall mean 4:00 p.m. Eastern Time on the day of that tenth anniversary. However, if that day falls on a Saturday, Sunday or other day when the principal stock exchange for the Common Shares is closed for trading, "close of business" shall mean 4:00 p.m. Eastern Time on the nearest preceding day when that stock exchange is open for trading. This option is subject to, and is granted in accordance with, the 2004 Stock Plan (the "2004 Plan"), and upon the terms and conditions herein set forth. I. TERMS OF EXERCISE OF OPTION A. By the Optionholder While Serving as a Member of the Board. This option shall become exercisable after a period of six months following the date of grant, provided the Optionholder remains in continuous service as a member of the Board for that period. The Optionholder, while serving as a member of the Board, may exercise this option at any time after this option becomes exercisable, but not later than the end of the fixed term of the option. The Governance Committee of the Board (the "Committee") reserves the right to decide to what extent leaves of absence for government service, illness, temporary disability, or other reasons shall not be deemed to be an interruption of continuous service. Notwithstanding the foregoing provisions of this Section I A, this option may be exercised after service on the Board ends as provided in Section I B below. B. By the Optionholder When No Longer Serving as a Member of the Board. The Optionholder may not exercise this option after he or she ceases to serve as a member of the Board, except that if the Optionholder ceases to serve as a member of the Board after reaching the retirement age designated by the then-current Board retirement policy or after at least ten years' service on the Board, then he or she may exercise this option at any time after a period of six months following the date of grant, but not later than the end of the fixed term of the option. C. In case of the Death of the Optionholder. If the Optionholder is entitled to exercise this option at the date of his or her death, then this option may be exercised during the period of 12 months after the death of the Optionholder (but no later than the end of the fixed term of the option) by the Optionholder's estate or by a person or persons who has acquired the right to exercise this option by bequest or inheritance. This option may be so exercised only as to the number of Common Shares for which it could have been exercised at the time the Optionholder died. I. TERMS OF EXERCISE OF OPTION (continued) D. Termination. This option shall in no event be exercisable after the expiration of 10 years from the date of the granting of the option, notwithstanding anything to the contrary in Sections I A, B or C above. The option hereby granted shall be considered terminated and cancelled, in whole or in part, to the extent that it can no longer be exercised under the terms hereof or under the terms of the 2004 Plan, for the Common Shares originally subject to this option, or in the event the Optionholder shall fail, within 60 days after the date of the granting of this option, to deliver to the Company an acceptance of such option executed by him or her. E. Acceleration - Change in Control. Notwithstanding anything in Section I A or B to the contrary, this option shall become immediately exercisable for all of the Common Shares subject to the option upon a change in control of the Company (as defined below). For purposes of this Agreement, a "change in control of the Company" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 60% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act") of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company, (iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. For purposes of this Agreement, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1) of the Exchange Act (as then in effect). II. EXERCISING OPTION - RIGHTS AS SHAREHOLDERS A. Exercise and Payment This option shall be exercised only at a time when the principal exchange for the Common Shares is open for business. An exercise of this option will be effective when the person or estate entitled to exercise it shall indicate the decision to do so, as to all or any part of the Common Shares for which it may then be exercised, by any method of communication expressly authorized by the Company and at the same time tenders or makes available to the Company (by any method expressly authorized by the Company) payment in full for the exercise price in cash or by delivery to the Company of Common Shares owned by the Optionholder, or by tender of a combination of cash and Common Shares. A partial exercise of this option shall not affect the right to exercise it from time to time thereafter as to the remaining Common Shares subject to the option. The Company shall notify the Optionholder of the expiration date of the fixed term of this option no less than 90 days, nor more than 180 days, in advance of such expiration date. 2 II. EXERCISING OPTION - RIGHTS AS SHAREHOLDERS (continued) B. Shareholder Rights No holder of this option shall have any rights as a shareholder with respect to any Common Shares subject to the option unless and until he or she shall have received a certificate or certificates for such Common Shares. Subject to compliance with all the terms and conditions hereof and of the 2004 Plan, including all rules, regulations and determinations of the Committee, the Company shall, as promptly as possible after any exercise of this option, deliver a certificate or certificates for an appropriate number of Common Shares; provided, however, that no such certificate or certificates shall be so delivered unless and until adequate provision has, in the judgment of the Company, been made for any and all withholding taxes in respect of the exercise of the option III. TRANSFER OF OPTION This option shall not be transferable otherwise than by will or the law of descent and distribution or to the extent permitted by rules or regulations under Section 16(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and the Committee. IV. COMPLIANCE WITH LAWS, REGULATIONS AND RULES The Company will use its reasonable best efforts to comply with all federal and state laws and regulations, and all rules for domestic stock exchanges on which its Common Shares may be listed, which apply to the issuance of the Common Shares subject to this option, and to obtain such consents and approvals to such issuance which it deems advisable from federal and state bodies having jurisdiction of such matters. However, anything herein to the contrary notwithstanding, this option shall not be exercisable, and the Company shall not be obligated to issue or deliver any certificate for shares subject to this option in violation of any such laws, regulations or rules and unless and until such consents and approvals have been obtained. Any share certificate issued to evidence Common Shares as to which this option is exercised may bear such legends and statements as the Committee shall deem advisable to assure compliance with federal and state laws and regulations. If a person or an estate purporting to acquire the rights to exercise this option by bequest or inheritance shall attempt to exercise this option, the Company may require reasonable evidence as to the ownership of this option and may request such consents and releases of taxing authorities, as it deems advisable. V. ADJUSTMENT UPON CHANGE OF SHARES In the event that the outstanding Common Shares shall be changed in number or class by reason of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, spin off, stock dividend, rights offering or other event affecting Common Shares, the number and class of Common Shares subject to this option, and the price per share payable upon exercise of this option shall be equitably adjusted as determined by the Committee so as to reflect such change. No adjustment provided for in this Section V shall require the Company to sell or transfer a fractional share. VI. COMPETITION BY OPTIONHOLDER In the event that the Optionholder within one year after exercise of any portion of this option enters into an activity as employee, agent, officer, director, principal or proprietor which, in the sole judgment of the Committee, is in competition with the Company or a subsidiary, the amount by which the fair market value per share on the date of exercise of any such portion exceeds the option price per Common Share hereunder, multiplied by the number of Common Shares subject to such exercised portion, shall inure to the benefit of the Company; and the Optionholder shall pay the same to the Company, unless the Committee in its sole discretion shall determine that such action by the Optionholder is not inimical to the best interest of the Company or its subsidiaries. 3 VII. ENFORCEABILITY This Agreement shall be binding upon and inure to the benefit of the Company, and its successors and assigns, and upon the personal representatives, executors, administrators, legatees and distributes of the Optionholder. VIII. STOCK OPTION PLAN CONTROLS The terms and conditions of the 2004 Plan, as amended from time to time in accordance with the provisions of Section 11 thereof, shall control the terms and conditions of this option, and anything contained in this Agreement inconsistent with or in violation of the terms and conditions of the 2004 Plan shall be of no force or effect and shall not be binding upon the Company or the Optionholder. The 2004 Plan and this Agreement represent the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, representations and understandings, whether written or oral. IX. CONSTRUCTION It is intended that acquisition of this option by the Optionholder shall qualify for exemption from the provisions of Section 16(b) of the Exchange Act, and each and every provision of this Agreement shall be construed, interpreted and administered so that the grant of this option, whether made to an officer or director of the Company or to any other employee of the Company or a subsidiary, shall so qualify. Any provision of this Agreement that cannot be so construed interpreted and administered shall be of no force or effect. X. GOVERNING LAW This Agreement shall be construed in accordance with the laws of the State of Ohio, except as otherwise specifically provided herein. EATON CORPORATION By ------------------------------------- And by --------------------------------- ACCEPTANCE OF OPTION BY OPTIONHOLDER Accepted by ------------------------- Signature Date -------------------------------- 4 EX-10.S 16 l30233aexv10ws.txt EX-10(S) EXHIBIT 10 (S) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON CORPORATION Plan for the Deferred Payment of Directors' Fees (originally adopted in 1985 and amended effective as of September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004, and in certain respects effective January 1, 2005) ARTICLE I ESTABLISHMENT OF PLAN 1.01 "Establishment of Plan and Effective Date": Eaton Corporation (the "Company") has established this Plan for the Deferred Payment of Directors' Fees (the "Plan") effective as of October 23, 1985. The Plan was amended and restated as of September 24, 1996, January 28, 1998, January 23, 2002, and February 24, 2004, and was further amended on December 8, 2004. The terms of the Plan, as amended through February 24, 2004 (the "Prior Terms") shall continue in effect with respect to and shall govern all benefits earned and vested under the Plan as of December 31, 2004. The terms of the Plan (not including the Prior Terms, which are not modified hereby) are hereby amended and restated in their entirety as set forth in this document effective January 1, 2005, to reflect prospective amendments made after February 24, 2004, and to govern all deferred compensation that was not earned and vested under the Plan as of December 31, 2004. Notwithstanding the foregoing, however, for the period prior to January 1, 2009, the Plan shall operate based upon Notice 2005-1, additional notices published by the Treasury Department and the Internal Revenue Service providing transition guidance, and a good faith, reasonable interpretation of Section 409A of the Internal Revenue Code and its purpose. 1.02 "Statement of Purpose": It is the purpose of the Plan to attract and retain qualified persons to serve as Directors of the Company by enabling such Directors to defer some or all fees which may be payable to them for future services as a member o the Board of Directors of the Company or as Chair or a member of any committee of the Board. 2 ARTICLE II DEFINITIONS When used herein the following terms shall have the meanings indicated unless a different meaning is clearly required by the context: 2.01 "Board": The Board of Directors of Eaton Corporation. 2.02 Reserved. 2.03 "Committee": The Governance Committee of the Board, which shall have full power and authority to administer and interpret, in its sole discretion, the provisions of the Plan. 2.04 "Company": Eaton Corporation and its corporate successors. 2.05 "Compensation": The total annual fees paid to a Participant for services as a Director of the Company including the annual retainer fee, meeting attendance fees, additional annual retainer fees paid to Board Committee Chairs or members and any other fees paid by the Company for services as a Director of the Company. 2.06 Reserved. 2.07 "Deferral Account Balance": At any particular date, the total of all Compensation deferred under the Plan and earnings credited thereto less the amount of any deferred Compensation previously paid to the Participant; provided that separate records shall be maintained within the Deferred Account Balance to reflect Compensation deferred under the Plan for periods ending on and before December 31, 2004 and earnings credited thereto and Compensation deferred under the Plan for periods ending on and after January 1, 2005 and earnings credited thereto. 2.08 "Deferred Compensation Agreement": The written agreement between the Company and a Participant. 2.09 "Designated Beneficiary": One or more beneficiaries, as designated by a Participant in a written form filed with the Secretary of the Company and approved by the Committee, to whom payments otherwise due to or for the benefit of the Participant hereunder shall be made in the event of the Participant's death prior to the commencement of benefit payments hereunder or the complete payment of such benefit. In the event no such written designation is made by a Participant or if such Designated Beneficiary shall not be in existence at the time of the Participant's death or if such Designated Beneficiary predeceases the Participant, the Participant shall be deemed to have designated his or her estate as the Designated Beneficiary. 3 2.10 Reserved. 2.11 Reserved. 2.12 "Lump Sum Payment": The lump sum amount which is equal to the then present value of the payment, in fifteen (15) annual payments commencing on the date of the lump sum payment, of the Participant's Deferred Account Balance plus a rate of return thereon equal to the rate or rates of interest specified in the Participant's Deferred Compensation Agreement throughout that fifteen year period, discounted with a rate of interest equal to "Moody's Corporate Bond Yield Average - Monthly (Average Corporates)" most recently published by Moody's Investor Services, Inc., or any successor thereto, at the time of the calculation. 2.13 Reserved. 2.14 "Normal Plan Participation Termination Date": The date of the Annual Meeting of the Company's shareholders immediately following the date a Participant attains the age of sixty-eight (68). 2.15 "Participant": A Director who is or hereafter becomes eligible to participate in the Plan and does participate by electing, in the manner specified herein, to defer Compensation pursuant to the Plan. 2.16 "Plan": This Plan for the Deferred Payment of Directors' Fees as contained herein which was originally effective as of October 23, 1985, and which has been amended from time to time thereafter. 2.17 "Regular Annuity Starting Date": The April 1st of the second calendar year following the year in which the Participant attains the age of sixty-eight (68). 2.18 Reserved. 2.19 Reserved. 4 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 "Eligibility": Any Director of the Company who is separately compensated for his or her services on the Board and who is first elected to the Board prior to 1996 shall be eligible to participate under the Plan. Directors who serve as either an officer or an employee of the Company, or who are first elected after 1995, shall not be eligible to participate under the Plan. 3.02 "Manner of Election": (a) Any person wishing to commence participation in the Plan must file a signed copy of the Deferred Compensation Agreement with the Secretary of the Company at Eaton Center, Cleveland, Ohio 44114. If the Committee accepts the election, an eligible Director shall become a Participant in the Plan as of December 1, 1985 for an election filed in 1985 and as of the January 1st immediately following the date an election is filed in any year after 1985 if such election is filed prior to December 1 of such year. Upon the request of a Participant, for periods after 2004 the Committee may in its sole discretion approve the termination of future deferrals by such Participant effective as of the January 1st immediately following such request. (b) The Committee shall be vested with the authority to deny Participants the opportunity, on a prospective basis beginning as of any January 1st, to defer future Compensation pursuant to the Plan for any reason if such denial is applied equitably to all Participants; provided, however, that the foregoing authority does not apply to any Participant's right to continue to defer the amount constituting his or her then existing Deferred Account Balance and any past and future earnings thereon, which amounts shall continue to be deferred and/or paid in accordance with the other terms and conditions of this Plan. (c) The Deferred Compensation Agreement electing deferral of Compensation for a particular calendar year must be made as described in paragraph (a) not later than December 31 of the preceding calendar year. Beginning with Compensation earned on and after January 1, 2005, the Deferred Compensation Agreement shall also contain the Participant's election with respect to the form of payment of such amounts. 5 3.03 "Limits on Deferred Compensation": (a) Subject to required minimum and maximum annual limitations on the amount of Compensation which may be deferred equal to $5,000 and $30,000, respectively, a Participant may defer all or any portion of his or her future Compensation which is earned during a period of at least four (4) years (16 full calendar quarters) or for the period to his or her Normal Plan Participation Termination Date, if earlier, or for any period of time longer than four years which ends prior to his or her Normal Plan Participation Termination Date. Nothing contained in the Plan shall restrict any Director of the Company from participating in or deferring compensation pursuant to any other Company plan for the deferral of Directors' fees. (b) Reserved. 6 ARTICLE IV BENEFITS 4.01 "Normal Plan Participation Termination Benefit": (a) The Normal Plan Participation Termination Benefit is a level fifteen (15) year annuity payable to a Participant after his or her Normal Plan Participation Termination Date in fifteen (15) equal annual installments commencing on the Participant's Regular Annuity Starting Date and continuing on the anniversary of that date each year thereafter until fifteen (15) annual payments have been made; and (b) The Normal Plan Participation Termination Benefit shall be calculated by reference to the Participant's total Compensation deferred under the Plan and the rate or rates of interest specified in his or her Deferred Compensation Agreement; provided, however, that at the Participant's election, the Normal Plan Participation Termination Benefit shall be paid in a Lump Sum Payment on the Participant's Regular Annuity Starting Date. 4.02 Reserved. 4.03 Reserved. 4.04 "Limitations on Distribution": Notwithstanding any provision of the Plan to the contrary, Compensation deferred under the Plan shall not be distributed earlier than the first to occur of the following: (a) separation from service as determined by the Secretary of the Treasury; (b) the date the Participant becomes disabled (within the meaning of Section 409A(a)(2)(C) of the Internal Revenue Code of 1986, as amended (the "Code")); (c) death of the Participant; (d) a specified time (or pursuant to a fixed schedule) specified under the Plan at the date of the deferral of such Compensation; (e) to the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company; or 7 (f) the occurrence of an unforeseeable emergency as defined in Section 409A(a)(2)(B)(ii) of the Code. 8 ARTICLE V SURVIVOR BENEFIT 5.01 "Survivor Benefit": Upon the occurrence of any of the following events, the Company shall pay to a Participant's Designated Beneficiary a benefit as defined in this Article V (herein referred to as a "Survivor Benefit"): (a) The death of a Participant while serving as a Director of the Company; or (b) The death of a Participant after becoming entitled to a Normal Plan Participation Termination Benefit but prior to commencement of payment of such benefit. 5.02 "Amount of Survivor Benefit": The Survivor Benefit shall be an amount equal to the Participant's Deferred Account Balance at the date of his or her death together with interest thereon, compounded annually, from the date Compensation was deferred until the date it is completely paid by the Company (a "Deferral Period") at a rate equal to the prime rate set forth in The Wall Street Journal (or any successor thereto) (hereinafter referred to as the "Prime Rate") from time to time during the Deferral Period. The Survivor Benefit shall be paid in a lump sum within ninety (90) days of the date of death. 5.03 "Survivor Benefit After Commencement of Benefit Payments to the Participant": In the event a Participant who has begun to receive benefit installment payments under the Plan dies prior to full payment of his or her Normal Plan Participation Termination Benefit, all remaining payments due hereunder shall be made to such Participant's Designated Beneficiary in a lump sum within ninety (90) days of the date of death. 9 ARTICLE VI CERTAIN PAYMENTS TO PARTICIPANTS 6.01 Reserved. 6.02 Reserved. 6.03 Reserved. 10 ARTICLE VII AMENDMENT AND TERMINATION 7.01 "Right to Amend and Terminate the Plan": The Company fully expects to continue the Plan but it reserves the right, at any time or form time to time, by action of the Committee, to modify or amend the Plan, in whole or in part. In addition, the Company reserves the right by action of the Committee to terminate the Plan, in whole or in part, at any time and for any reason, including, but not limited to, adverse changes in the federal tax laws. Notwithstanding anything herein to the contrary, no amendment, modification or termination of the Plan shall, without the consent of the Participant, alter this provision or impair any of the Participant's rights under the Plan with respect to benefits accrued prior to such amendment, modification or termination. 7.02 Reserved. 7.03 "Plan Termination in Connection with Change in Control": The Board shall have the authority, in its sole discretion, to terminate the Plan and pay each Participant's entire Account to the Participant or, if applicable, his or her Beneficiary, pursuant to an irrevocable action taken by the Board within the thirty (30) days preceding a change in control (within the meaning of Section 409A of the Code and the regulations thereunder) of Eaton. This Section 7.03 will only apply to a payment under the Plan if all agreements, methods, programs, and other arrangements sponsored by the service recipient immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Treasury Regulation Section 1.409A-1(c) (2) are terminated and liquidated with respect to each Participant that experienced the change in control event, so that under the terms of the termination and liquidation all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within twelve (12) months of the date the service recipient irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section 7.03, where the change in control event results from an asset purchase transaction, the applicable service recipient with the discretion to liquidate and terminate the agreements, methods, programs, and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. 11 ARTICLE VIII MISCELLANEOUS 8.01 "Non-Alienation of Benefits": Subject to any federal stature to the contrary, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or chare, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. 8.02 "No Trust Created": The obligations of the Company to make payments hereunder shall constitute a liability of the Company to the Participant. Such payments shall be made from the general funds of the Company, and the Company shall not be required to establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payments shall be made, and neither a Participant nor Designated Beneficiary shall have any interest in any particular asset of the Company by reason of its obligations hereunder. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Company and a Participant or any other person. 8.03 "No Employment Agreement": The Plan shall not be deemed to constitute a contract of employment between the Company and a Participant. Neither shall the execution of the Plan nor any action taken by the Company pursuant to the Plan be held or construed to confer on a Participant any legal right to be continued as Director of the Company, in an executive position or in any other capacity with the Company whatsoever; nor shall any provision herein restrict the right of any Participant to resign as a Director. 8.04 "Binding Effect": Obligations incurred by the Company pursuant to the Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Participant or his or her Designated Beneficiary. 8.05 "Claims for Benefits": Each Participant or Designated Beneficiary must claim any benefit to which he or she may be entitled under this Plan by filing a written notification with the Secretary of the Company. The Committee shall make all determinations with respect to such claims for benefits. If a claim is denied by the Committee, it must be denied within a reasonable period of time in a written notice stating the following: (a) The specific reason for the denial. 12 (b) The specific reference to the Plan provisions on which the denial is based. (c) A description of additional information necessary for the claimant to present his or her claim, if any, and an explanation of why such information is necessary. (d) An explanation of the Plan's claims review procedure. The claimant may have a review of the denial by the Committee by filing a written notice with the Secretary of the Company within sixty (60) days after the notice of the denial of his or her claim. The written decision by the Committee with respect to the review must be given within one hundred and twenty (120) days after receipt of the written request. 8.06 "Entire Plan": This document and any amendments hereto contain all the terms and provisions of the Plan with respect to benefits that were not earned and vested under the Plan on December 31, 2004. 8.07 "American Jobs Creation Act of 2004": The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and Treasury Regulations and published guidance issued pursuant thereto for Compensation deferred after December 31, 2004. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended in the manner and to the extent determined necessary or desirable by the Company to reflect or otherwise facilitate compliance with such provisions with respect to amounts deferred on and after January 1, 2005, including as contemplated by Section 885(f) of the American Jobs Creation Act of 2004. 13 ARTICLE IX CONSTRUCTION 9.01 "Governing Law": The Plan shall be construed and governed in accordance with the law of the State of Ohio. 9.02 "Gender": The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. 9.03 "Headings, etc.": The cover page of the Plan, the Table of Contents and all headings used in this Plan are for convenience of reference only and are not part of the substance of the Plan. 14 EX-10.X 17 l30233aexv10wx.txt EX-10(X) EXHIBIT (X) EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) CHANGE OF CONTROL AGREEMENT AGREEMENT by and between Eaton Corporation, an Ohio corporation (the "Company") and _______________________ (the "Executive"), dated as of the ____ day of _____________, 20__. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if the Executive's employment with the Company is terminated within the 12 months prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of 1 a Change of Control (such a termination of employment, an "Anticipatory Termination", then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding common shares of the Company (the "Outstanding Company Common Shares") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election 2 contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Shares and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Shares and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which the Executive, or any entity in which the Executive is a partner, officer or more than 50% owner initiates, if immediately following the transaction or series of transactions that would otherwise constitute a Change of Control, the Executive, 3 either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially owns, directly or indirectly, more than 10% of the then outstanding common shares of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter 4 be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be increased no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date, and thereafter at least annually, in each case by a percentage not less than the average annual percentage merit increase in the Executive's base salary during the five (5) full calendar years (or such lesser number of years that the Executive has been employed by the Company and its affiliated companies) immediately preceding the Effective Date. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash in an amount (the "Annual Bonus Amount") at least equal to the Executive's Incentive Potential (as defined in the Eaton Incentive Compensation Plan or any successor plan) for the most recent year for which an Incentive Potential was established before the Effective Date under the Eaton Incentive Compensation Plan or any successor plan, adjusted by the average of the Executive's individual performance rating for each of the three most recent years ended before the Effective Date, but eliminating any Corporate Performance Factor (as defined in the Eaton Incentive Compensation Plan or any successor plan). Each such Annual Bonus shall be paid no later than March 15th of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus in accordance with the provisions of the Eaton Deferred Incentive Compensation Plan II or any successor plan. 5 (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies (including without limitation the Company's Deferred Incentive Compensation Plan, Limited Eaton Service Supplemental Retirement Income Plan, long-term Executive Strategic Incentive Plan and Supplemental and/or Excess Benefits Plans, as and to the extent those plans are in effect from time to time), but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 6 (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 14(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned 7 to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. 8 (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 14(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the 9 Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 5 constitutes a "separation from service" within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and notwithstanding anything contained herein to the contrary, the date on which such separation from service takes place shall be the "Date of Termination." 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination, to the extent not theretofore paid to the Executive, (2) the amount, if any, which has been earned by the Executive with respect to any completed Incentive Year under the Eaton Incentive Compensation Plan or any successor thereto, and any completed Award Period under the Eaton Executive Strategic Incentive Plan or any successor 10 thereto, in each case to the extent not theretofore paid to the Executive, and (3) with respect to each Award Period under the Eaton Executive Strategic Incentive Plan or any successor thereto which begins before and ends after the Date of Termination, an amount equal to (x) 100% of the Executive's Individual Incentive Target (as defined in such plan) for such Award Period times (y) a fraction, the numerator of which is the number of days in such Award Period before the Date of Termination, and the denominator of which is the total number of days in such Award Period (the amount described in clause (3), the "Pro-Rata Bonus," and the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the product of (1) the Multiple (as defined below) and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus Amount; (ii) for a number of years after the Executive's Date of Termination equal to the lesser of two and the Multiple, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed for a number of years after the Date of Termination equal to the lesser of two and the Multiple and to have retired on the last day of such period, and for purposes of any reimbursement of eligible expenses to the Executive and/or the Executive's family under the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement incurred following the first eighteen months of continuation coverage under this Section 6(a)(ii), such reimbursement shall be made on or before the last day of the Executive's taxable year following the taxable year in which the expense was incurred (the amount of continued coverage and benefits that the Company is obligated 11 to provide pursuant to this paragraph in any given calendar year shall not affect the amount of continued coverage and benefits that the Company is obligated to provide in any other calendar year, and the Executive's right to have the Company provide such continued coverage and benefits may not be liquidated or exchanged for any other benefit); (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); provided, however that to the extent that any Other Benefits are deferred compensation within the meaning of Section 409A of the Code and the Treasury Regulations promulgated thereunder and subject to the requirements of Section 409A of the Code, such Other Benefits shall not be paid or provided before the first business day (the "Delayed Payment Date") that is six months after the Date of Termination. The "Multiple" means the lesser of (i) three and (ii) the number of years and portions thereof (expressed as a decimal fraction) from the Date of Termination until the Executive's 65th birthday. Notwithstanding the foregoing, if the Executive is a "specified employee" within the meaning of Section 409A of the Code (as determined in accordance with the methodology established by the Company as in effect on the Date of the Termination) (a "Specified Employee") on the Date of Termination, the Company shall pay to the Executive the amounts described in (A)(3) and (B) in a lump sum in cash on the Delayed Payment Date. (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other 12 peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination (except that in the event that the Disability does not qualify as a disability within the meaning of Section 409A(a)(2)(C) of the Code, the Pro-Rata Bonus shall be paid on the Delayed Payment Date). With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families; provided, however that to the extent that any Other Benefits are deferred compensation within the meaning of Section 409A of the Code and the Treasury Regulations promulgated thereunder and subject to the requirements of Section 409A of the Code, if Executive is a Specified Employee, such Other Benefits shall not be paid or provided before the Delayed Payment Date. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination and (y) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to 13 the Executive in a lump sum in cash within 30 days after the Date of Termination, provided, however, that if the Executive is a Specified Employee, the Pro-Rata Bonus will be paid to the Executive on the Delayed Payment Date. Notwithstanding the foregoing, to the extent that any Other Benefits required to paid pursuant to this Section 6(d) are deferred compensation within the meaning of Section 409A of the Code and the Treasury Regulations promulgated thereunder and subject to the requirements of Section 409A of the Code, if Executive is a Specified Employee, such Other Benefits shall not be paid or provided before the Delayed Payment Date. 7. Termination of Agreement in Connection With Change of Control. In the event of a change of control as defined in Section 1.409A-3(i)(5) of the Treasury Regulations (for purposes of this Section 7 only, a "Change of Control Event"), the Board shall have the authority, in its sole discretion, to terminate the Agreement pursuant to an irrevocable action taken by the Board within the 30 days preceding the Change of Control Event, provided that this Section 7 will only apply to a payment under the Agreement if all agreements, methods, programs, and other arrangements sponsored by the service recipient immediately after the time of the Change of Control Event with respect to which deferrals of compensation are treated as having been deferred under a single plan within the meaning of Section 1.409A-1(c)(2) of the Treasury Regulations are terminated and liquidated with respect to the Executive, so that under the terms of the termination and liquidation the Executive is required to receive all amounts of compensation deferred under the terminated agreements, methods, programs, and other arrangements within 12 months of the date the Board irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements. Solely for purposes of this Section, where the Change of Control Event results from an asset purchase transaction, the service recipient with the discretion to liquidate and terminate the agreements, methods, programs and other arrangements is the service recipient that is primarily liable immediately after the transaction for the payment of the deferred compensation. If the Agreement is terminated pursuant to this Section 7, the Company shall pay to the Executive in a lump sum in cash within 12 months of the date the Board irrevocably takes all necessary action to terminate and liquidate the agreements, methods, programs and other arrangements, the amount that would have been payable to the Executive if during the Employment Period the Company had terminated the Executive's employment other than for Cause or Disability or if the Executive had terminated his employment for Good Reason in accordance with Section 6(a) of this Agreement. 14 8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to the last sentence of this Section 8 and to Section 14(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive becomes entitled to receive severance benefits under Section 6(a) hereof, such severance benefits shall be in lieu of any benefits under any severance or separation plan, program or policy of the Company or any of its affiliated companies to which the Executive would otherwise have been entitled. 9. Full Settlement; Legal Fees. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as specifically provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, at any time from the Effective Date through the Executive's remaining lifetime (or, if longer, through the 20th anniversary of the Effective Date), to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. In order to comply with Section 409A of the Code, in no event shall the payments by the Company under this Section 9 be made later than the end of the calendar year next following the calendar year in which such fees and 15 expenses were incurred, provided that the Executive shall have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company is obligated to pay in any other calendar year, and the Executive's right to have the Company pay such legal fees and expenses may not be liquidated or exchanged for any other benefit. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to an excise tax imposed by Section 4999 or to the additional income tax imposed by Section 409A(a)(1)(B) of the Code or any interest or penalties are incurred by the Executive with respect to such tax or taxes (such tax or taxes, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 10(c), all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint 16 another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination which in no event will be later than the last day of the Executive's taxable year next following the Executive's taxable year in which the Executive remits the Excise Tax to the United States Treasury. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, 17 (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c)) promptly pay to the Company the amount of such refund (together with 18 any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as 19 hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Trust Deposit. (a) Upon the occurrence of a Proposed Change of Control (as defined below) during the Change of Control Period, the Company shall deposit in trust or escrow with a third party cash in an amount sufficient to provide all of the benefits and other payments to which the Executive would be entitled hereunder if a Change of Control occurred on the date of the Proposed Change of Control and the Executive's employment were terminated by the Executive for Good Reason immediately thereafter. Upon such deposit, references hereunder to any payment by the Company shall be deemed to refer to a payment from such trust or escrow; provided, however, that nothing contained herein shall relieve the Company of its obligation to make the payments required of it hereunder in the event any such payment is not made from the trust or escrow. (b) "Proposed Change of Control" means: (i) the commencement of a tender or exchange offer by any third person (other than a tender or exchange offer which, if consummated, would not result in a Change of Control) for 25% or more of the Outstanding Company Common Shares or combined voting power of the Outstanding Company Voting Securities; (ii) the execution of an agreement by the Company, the consummation of which would result in the occurrence of a Change of Control; or (iii) the adoption by the Board, as a result of other circumstances, including circumstances similar or related to the foregoing, of a resolution to the effect that, for purposes of this Agreement, a Proposed Change of Control has occurred. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This 20 Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: -------------------------- Eaton Corporation Eaton Center Cleveland, Ohio 44114-2584 If to the Company: Eaton Corporation Eaton Center Cleveland, Ohio 44114-2584 Attention: Corporate Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. 21 (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. In addition, this Agreement shall automatically and immediately terminate upon any transfer of the Executive's employment, prior to the Effective Date, to any position with the Company as to which Change of Control Agreements, in the form of this Agreement, have not been made available by action of the Board and, in the event of such transfer of employment, the Executive shall have no further rights under this Agreement. As of the date hereof, this Agreement supersedes the Change of Control Agreement between Executive and the Company date ___________. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. (g) Notwithstanding any provision in this Agreement to the contrary, in the event of an Anticipatory Termination, any payments that are deferred compensation within the meaning of Section 409A of the Code that the Company shall be required to pay pursuant to Section 6(a)(1) of this Agreement shall be paid as follows: (i) if such Change of Control is a "change in control event" within the meaning of Section 409A of the Code, (A) except as provided in clause (i)(B), on the date of such Change of Control, or (B) if the Executive is a "specified employee" within the meaning of Section 409A of the Code (as determined in accordance with the methodology established by the Company as in effect on the Date of Termination) and the Delayed Payment Date is later than the Change of Control, on the Delayed Payment Date, and (ii) if such Change of Control is not a "change in control event" within the meaning of Section 409A of the Code, on the first business day following the 12-month anniversary of the date of such Anticipatory Termination. In the event of an Anticipatory Termination, any payments or benefits that are not deferred compensation within the meaning of Section 409A of the Code that the Company shall be required to pay or provide pursuant to Section 6(a) of this Agreement shall be paid or shall commence being provided on the date of the Change of Control. (h) Within the time period permitted by the applicable governmental regulations, the Company may, in consultation with the Executive, modify this Agreement, in the least restrictive manner necessary and without any diminution in the value of the payments to the Executive, in order to cause the provisions of the Agreement to comply with the requirements of 22 Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ---------------------------------------- [name of Executive] EATON CORPORATION By ------------------------------------- M. M. McGuire Vice President and General Counsel By ------------------------------------- E. R. Franklin Vice President and Secretary 23 EX-10.MM 18 l30233aexv10wmm.txt EX-10(MM) EXHIBIT 10 (mm) Eaton Corporation 2007 ANNUAL REPORT ON FORM 10-K ITEM 15 (B) EATON CORPORATION BOARD OF DIRECTORS POLICY ON INCENTIVE COMPENSATION, STOCK OPTIONS AND OTHER EQUITY GRANTS UPON THE RESTATEMENT OF FINANCIAL RESULTS It is a Policy of the Board of Directors of Eaton Corporation that, if the Board determines that an Executive engaged in any fraud, misconduct or other bad-faith action that, directly or indirectly, caused or partially caused the need for a material accounting restatement for any period as to which a Performance-Based Award was paid or credited to the Executive, the Performance-Based Award shall be subject to reduction, cancellation or reimbursement to the Company at the discretion of the Board. As used in this Policy, the term "Executive" means any Eaton executive who participates in either the Executive Strategic Incentive Plan I or the Executive Strategic Incentive Plan II, or both, or any successors to those plans; and the term "Performance-Based Award" means incentive compensation (whether awarded under the above Plans or the Executive Incentive Compensation Plan or any other Eaton incentive compensation plans), stock options, restricted stock or other equity grant awarded to the Executive pursuant to any Eaton stock plan or similar plan, or any gain realized by the Executive from the exercise of any such stock options, or the vesting of any such restricted stock or other equity grant, during the twelve-month period following the first public issuance of the incorrect financial statement. EX-12 19 l30233aexv12.txt EX-12 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGES
Year ended December 31 --------------------------------------- (Millions of dollars) 2007 2006 2005 2004 2003 - --------------------- ------ ------ ------ ----- ---- Income from continuing operations before income taxes $1,041 $ 969 $ 964 $ 749 $463 Adjustments Minority interests in consolidated subsidiaries 14 10 5 7 12 (Income) losses of equity investees (6) 1 1 (3) Interest expensed 193 139 109 88 93 Amortization of debt issue costs 1 1 1 1 2 Estimated portion of rent expense representing interest 44 41 38 37 38 Amortization of capitalized interest 12 12 12 17 13 Distributed income of equity investees 1 1 4 3 ------ ------ ------ ----- ---- Adjusted income from continuing operations before income taxes $1,300 $1,174 $1,134 $ 902 $618 ====== ====== ====== ===== ==== Fixed charges Interest expensed $ 193 $ 139 $ 109 $ 88 $ 93 Interest capitalized 14 14 13 7 7 Amortization of debt issue costs 1 1 1 1 2 Estimated portion of rent expense representing interest 44 41 38 37 38 ------ ------ ------ ----- ---- Total fixed charges $ 252 $ 195 $ 161 $ 133 $140 ====== ====== ====== ===== ==== Ratio of earnings to fixed charges 5.16 6.02 7.04 6.78 4.41
EX-21 20 l30233aexv21.txt EX-21 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 21 SUBSIDIARIES OF EATON CORPORATION Eaton is publicly held and has no parent corporation. Eaton's subsidiaries as of December 31, 2007 and the state or country in which each was organized are as follows:
Consolidated subsidiaries (A) Where Organized - ----------------------------- --------------- Argo-Tech Corporation Costa Mesa California Eaton MDH Company Inc. California Eaton Aerospace HiTemp Inc. Colorado Aeroquip International Inc. Delaware Argo-Tech Corporation Delaware Argo-Tech Corporation (Aftermarket) Delaware Argo-Tech Corporation (OEM) Delaware Arrow Hose & Tubing (Delaware) Inc. Delaware AT Holdings Corporation Delaware Durodyne Inc. Delaware Eaton Administration Corporation Delaware Eaton Aerospace LLC Delaware Eaton Asia Investments Corporation Delaware Eaton Aviation Corporation Delaware Eaton Aviation Products Corporation Delaware Eaton Electrical de Puerto Rico Inc. Delaware Eaton Electrical Inc. Delaware Eaton Filtration LLC Delaware Eaton Hydraulics Inc. Delaware Eaton International Corporation Delaware Eaton MDH Limited Partnership Delaware Eaton Nocadoli Holding LLC Delaware Eaton USEV Holding Company Delaware Eaton Worldwide LLC Delaware ERC Corporation Delaware EIC Holding I LLC Delaware EIC Holding II LLC Delaware EIC Holding III LLC Delaware EIC Holding IV LLC Delaware EIC Holding V LLC Delaware EIC Holding VI LLC Delaware EIC Holding GP I Delaware EIC Holding GP II Delaware EIC Holding GP III Delaware EIC Holding GP IV Delaware Intelligent Switchgear Organization LLC Delaware Modern Molded Products, Inc. Delaware Tractech Holdings Inc. Delaware Tractech Inc. Delaware U.S. Engine Valve Delaware Vickers International Inc. Delaware Aphel Technologies Inc. Florida CAPCO Automotive Products Corporation Michigan Eaton Aeroquip Inc. Michigan Eaton Inoac Company Michigan Aeroquip-Vickers, Inc. Ohio Eaton Electrical IDT Inc. Ohio Eaton Leasing Corporation Ohio Arrow Hose & Tubing (USA), Inc. Texas
Cutler-Hammer de Argentina S.A. Argentina Eaton Power Quality S.A. Argentina Eaton S.A. Argentina Eaton Electric Systems Pty. Ltd. Australia Eaton Finance Pty. Ltd. Australia Eaton Industries Pty. Ltd. Australia Eaton Power Quality Pty. Ltd. Australia Eaton Pty. Ltd. Australia Vickers Systems Pty. Ltd. Australia Eaton Holding G.m.b.H. Austria Aeroquip-Vickers Assurance Ltd. Barbados Eaton Holding Srl Barbados Eaton Electric S.A. Belgium Eaton Filtration, BVBA Belgium Aeroquip-Vickers International Inc. Bermuda Cambridge International Insurance Company Ltd Bermuda Eaton Services Limited Bermuda Saturn Insurance Company Ltd. Bermuda Aeroquip do Brasil, Ltda. Brazil Eaton Ltda. Brazil Eaton Power Solutions Ltda. Brazil Senyuan International Investments Limited British Virgin Islands Team Achieve Investments Limited British Virgin Islands Winner Hydraulics Ltd. British Virgin Islands Aeroquip-Vickers Canada, Inc. Canada Arrow Hose & Tubing, Inc. Canada Eaton ETN Offshore Company Canada Eaton Power Quality Company Canada Eaton Yale Company Canada 1057584 Ontario Inc. Canada Cutler-Hammer Electrical Company Cayman Islands Cutler-Hammer Industries Ltd. Cayman Islands Eaton Holding III Limited Cayman Islands Georgetown Financial Services Ltd. Cayman Islands Senyuan International Holdings Limited Cayman Islands Changzhou Lanling Electrical Co., Ltd. China Changzhou Senyuan Switch Co. Ltd. China Eaton (China) Investments Co., Ltd. China Eaton Electrical (Suzhou) Co., Ltd. China Eaton Fast Gear (Xi'an) Co., Ltd. China Eaton Filtration (Shanghai) Co. Ltd. China Eaton Fluid Conveyance (Luzhou) Co., Ltd. China Eaton Fluid Power (Jining) Co., Ltd. China Eaton Fluid Power (Shanghai) Co., Ltd. China Eaton Hydraulics Systems (Jining) Co. Ltd. China Eaton Industries (Shanghai) Co. Ltd . China Eaton Industries (Wuxi) Co. Ltd. China Eaton Industrial Clutches and Brakes (Shanghai) Co., Ltd. China Eaton (Ningbo) Fluid Conveyance Co. Ltd. China Eaton Power Quality (Shanghai) Co., Ltd. China Eaton Senstar Automotive Fluid Connectors (Shanghai) Co., Ltd. China Eaton Truck and Bus Components (Shanghai) Company, Ltd. China Hangzhou Eaton Power Quality Co., Ltd. China Shanghai Eaton Engine Components Company, Ltd. China Zhenjiang Eaton Electrical Systems Company Limited China Eaton Electrical S.A. Costa Rica Eaton Electric s.r.o. Czech Republic Eaton Industries s.r.o. Czech Republic Eaton Electric ApS Denmark
Cutler-Hammer, S. A. Dominican Republic Eaton Holec, OY Finland Eaton Power Quality Oy Finland Eaton Aviation S.A.S. France Eaton Power Quality Holding S.A.S. France Eaton Power Quality S.A.S. France Eaton Power Solutions S.A.S France Eaton SAS France Eaton Technologies S.A. France Eaton Automotive G.m.b.H. Germany Eaton Filtration G.m.b.H. Germany Eaton Filtration Holdings G.m.b.H. Germany Eaton Fluid Connectors G.m.b.H Germany Eaton Fluid Power G.m.b.H. Germany Eaton Holding G.m.b.H. Germany Eaton Holding II G.m.b.H. and Co. KG Germany Eaton Holding Investments G.m.b.H & Co. KG Germany Eaton Power Quality G.m.b.H Germany Eaton Filtration Limited Hong Kong Eaton Power Quality Limited Hong Kong Team Billion Investment Limited Hong Kong Vickers Systems Limited Hong Kong Eaton Industries Private Ltd. India Eaton Industrial Systems Private Limited India Eaton Power Quality Private Limited India Eaton Technologies Private Limited India Vickers Systems International Ltd. India PT Fluid Sciences Batam Indonesia Tractech (Ireland) Limited Ireland Eaton Fluid Power Srl Italy Eaton Srl Italy Eaton Filtration Ltd. Japan Eaton Fluid Power Limited Japan Eaton Japan Co., Ltd. Japan Eaton Holding S.a r.l. Luxembourg Eaton Holding II S.a.r.l. Luxembourg Eaton Holding III S.a.r.l. Luxembourg Eaton Holding IV S.a.r.l. Luxembourg Eaton Holding V S.a.r.l. Luxembourg ETN Asia International Limited Mauritius ETN Holding 1 Limited Mauritius ETN Holding 2 Limited Mauritius ETN Holding 3 Limited Mauritius Eaton Electric Manufacturing Holdings Sdn. Bhd. Malaysia Eaton Electric Switchgear Sdn. Bhd. Malaysia Eaton Technologies S. de R.L. de C.V. . Mexico Eaton Controls, S. de R.L. de C.V. Mexico Eaton Electrical Mexicana S. de R.L. de C.V. Mexico Eaton Industries S. de R.L. de C.V. Mexico Eaton Trading Company, S. de R.L. de C.V. Mexico Eaton Truck Components, S. de R.L. de C.V. Mexico Eaton Power Quality s.a.r.l. Morocco Eaton B.V. Netherlands Eaton C.V. Netherlands Eaton Electric B.V. Netherlands Eaton Holding B.V. Netherlands Eaton Holding I B.V. Netherlands Eaton Holding II B.V. Netherlands Eaton Holding III B.V. Netherlands
Eaton Holding IV B.V. Netherlands Eaton Holding V B.V. Netherlands Eaton Holding International I B.V. Netherlands Eaton Holding International II B.V. Netherlands Eaton Industries B.V. Netherlands Eaton International B.V. Netherlands Eaton Finance N.V. Netherlands Antilles Eaton Power Quality Company New Zealand Vickers Systems Limited New Zealand Eaton Automotive Components Spolka z o.o. Poland Eaton Automotive Spolka z o.o. Poland Eaton Automotive Systems Spolka z o.o. Poland Eaton Truck Components Spolka z o.o. Poland Eaton Madeira SGPS Lda Portugal Aeroquip Singapore Pte. Limited Singapore Eaton Electrical Pte. Ltd. Singapore Eaton Filtration Pte. Ltd. Singapore Eaton Power Quality Pte. Ltd. Singapore Vickers Systems Asia Pacific Pte. Ltd. Singapore Eaton Electric Solutions s.r.o. Slovak Republic Aeroquip (South Africa) Pty. Ltd. South Africa Eaton Truck Components (Pty.) Limited South Africa Eaton Automotive Controls Limited South Korea Eaton Limited South Korea Aeroquip Iberica S.L. Spain Eaton S.L. Spain Productos Eaton Livia S.L. Spain Eaton Holec, AB Sweden Eaton Power Quality AB Sweden Eaton Industries Manufacturing G.m.b.H. Switzerland Eaton Manufacturing Limited Partnership Switzerland Modern Molded Products Limited Taiwan Rubberon Technology Corporation Limited Thailand Aphel Ltd. United Kingdom Aphel Technologies Ltd. United Kingdom Carter Ground Fueling United Kingdom Eaton Aerospace Limited United Kingdom Eaton Electric, Ltd United Kingdom Eaton Filtration Limited United Kingdom Eaton Holdings, Ltd United Kingdom Eaton Industries Limited United Kingdom Eaton, Ltd United Kingdom Eaton Power Quality Ltd. United Kingdom Eaton Power Solutions Ltd. United Kingdom Ultronics, Ltd. United Kingdom Eaton Electrical, S.A. Venezuela
(A) Other Eaton subsidiaries, many inactive, are not listed above. If considered in the aggregate, they would not be material. EX-23 21 l30233aexv23.txt EX-23 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements of Eaton Corporation and in the related Prospectuses:
Registration Number Description Filing Date - ------------ ----------- ----------------- 333-147267 Eaton Savings Plan - Form S-8 Registration Statement - 10,000,000 Shares November 9, 2007 333-136292 Eaton Corporation Incentive Compensation Deferral Plan - Form S-8 Registration Statement - 70,000 Shares August 4, 2006 333-136291 Eaton Corporation - Shareholder Dividend Reinvestment and Direct Share Purchase Plan -1,000,000 Shares -Prospectus August 4, 2006 333-130318 Eaton Corporation - Form S-3 Automatic Shelf Registration Statement December 14, 2005 333-129602 Eaton Corporation Shareholder Dividend Reinvestment Plan - Form S-3 Registration Statement - 75,000 Shares November 9, 2005 333-125836 Eaton Savings Plan - Form S-8 Registration Statement - 9,000,000 Shares June 15, 2005 333-124129 Eaton Corporation Incentive Compensation Deferral Plan II - Form S-8 Registration Statement - 400,000 Shares April 18, 2005 333-124128 Eaton Corporation Deferred Incentive Compensation Plan II - Form S-8 Registration Statement - 750,000 Shares April 18, 2005 333-124127 2005 Non-Employee Director Fee Deferral Plan - Form S-8 Registration Statement - 30,000 Shares April 18, 2005 333-116974 Eaton Corporation Deferred Incentive Compensation Plan - Form S-8 Registration Statement - 750,000 Shares June 29, 2004 333-116970 Eaton Corporation 2004 Stock Plan - Form S-8 Registration Statement - 7,000,000 Shares June 29, 2004 333-104366 1996 Non-Employee Director Fee Deferral Plan - Form S-8 Registration Statement - 33,000 Shares April 8, 2003 333-97365 Eaton Corporation Incentive Compensation Deferral Plan - Form S-8 Registration Statement July 30, 2002 333-97373 Cutler-Hammer de Puerto Rico Inc. Retirement Savings Plan - Form S-8 Registration Statement July 30, 2002 333-97371 Eaton Corporation 2002 Stock Plan - Form S-8 Registration Statement July 30, 2002 333-43876 Eaton Corporation 401(k) Savings Plan - Form S-8 Registration Statement - 500,000 Shares August 16, 2000 333-35946 Deferred Incentive Compensation Plan - Form S-8 Registration Statement - 375,000 Shares May 1, 2000
333-86389 Eaton Corporation Executive Strategic Incentive Plan - Form S-8 Registration Statement September 2, 1999 333-62375 Eaton Corporation 1998 Stock Plan - Form S-8 Registration Statement August 27, 1998 333-62373 Eaton Holding Limited U.K. Savings - Related Share Option Scheme [1998] - Form S-8 Registration Statement August 27, 1998 333-23539 Eaton Non-Employee Director Fee Deferral Plan - Form S-8 Registration Statement March 18, 1997 333-22597 Eaton Incentive Compensation Deferral Plan - Form S-8 Registration Statement March 13, 1997 333-01365 Eaton Corporation Incentive Compensation Deferral Plan - Form S-3 Registration Statement March 1, 1996 33-60907 Eaton 1995 Stock Plan - Form S-8 Registration Statement July 7, 1995 33-49393 & Eaton Corporation Stock Option Plans - Form S-8 Registration Statement 33-12842 March 9, 1993
of our reports dated February 26, 2008, with respect to the consolidated financial statements and schedule of Eaton Corporation, and the effectiveness of internal control over financial reporting of Eaton Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2007. /s/ Ernst & Young LLP - ------------------------------------- Cleveland, Ohio February 26, 2008 EX-24 22 l30233aexv24.txt EX-24 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed below has made, constituted and appointed, and by this instrument does make, constitute and appoint, Richard H. Fearon, Billie K. Rawot or William J. Nowak his or her true and lawful attorney, for him or her and in his or her name, place and stead to subscribe, as attorney-in-fact, his or her signature as Director or Officer or both, as the case may be, of Eaton Corporation, an Ohio corporation, to its Annual Report on Form 10-K for the year ended December 31, 2007 pursuant to the Securities Exchange Act of 1934, and to any and all amendments to that Annual Report, hereby giving and granting unto each such attorney-in-fact full power and authority to do and perform every act and thing whatsoever necessary to be done in the premises, as fully as he or she might or could do if personally present, hereby ratifying and confirming all that each such attorney-in-fact shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall not apply to any Annual Report on Form 10-K or amendment thereto filed after December 31, 2008. IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland, Ohio this 23rd day of January, 2008. /s/ Alexander M. Cutler /s/ Richard H. Fearon - ------------------------------------- ---------------------------------------- Alexander M. Cutler, Chairman Richard H. Fearon, and Chief Executive Officer; Executive Vice President--Chief President; Principal Executive Financial and Planning Officer; Officer; Director Principal Financial Officer /s/ Billie K. Rawot - ------------------------------------- Billie K. Rawot, Vice President and Controller; Principal Accounting Officer /s/ Christopher M. Connor /s/ Michael J. Critelli - ------------------------------------- ---------------------------------------- Christopher M. Connor Director Michael J. Critelli Director /s/ Charles E. Golden /s/ Ernie Green - ------------------------------------- ---------------------------------------- Charles E. Golden Director Ernie Green Director /s/ Deborah L. McCoy - ------------------------------------- ---------------------------------------- Ned C. Lautenbach Director Deborah L. McCoy Director /s/ John R. Miller /s/ Gregory R. Page - ------------------------------------- ---------------------------------------- John R. Miller Director Gregory R. Page Director /s/ Gary L. Tooker - ------------------------------------- ---------------------------------------- Victor A. Pelson Director Gary L. Tooker Director
EX-31.1 23 l30233aexv31w1.txt EX-31.1 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 31.1 CERTIFICATION I, Alexander M. Cutler, certify that: 1. I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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: February 26, 2008 /s/ Alexander M. Cutler ---------------------------------------- Alexander M. Cutler Chairman and Chief Executive Officer; President EX-31.2 24 l30233aexv31w2.txt EX-31.2 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 31.2 CERTIFICATION I, Richard H. Fearon, certify that: 1. I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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: February 26, 2008 /s/ Richard H. Fearon ---------------------------------------- Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer EX-32.1 25 l30233aexv32w1.txt EX-32.1 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 32.1 CERTIFICATION This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Annual Report on Form 10-K for the year ended December 31, 2007 ("10-K Report"). I hereby certify that, based on my knowledge, the 10-K 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-K Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries. Date: February 26, 2008 /s/ Alexander M. Cutler ---------------------------------------- Alexander M. Cutler Chairman and Chief Executive Officer; President EX-32.2 26 l30233aexv32w2.txt EX-32.2 EATON CORPORATION 2007 ANNUAL REPORT ON FORM 10-K ITEM 15(B) EXHIBIT 32.2 CERTIFICATION This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Annual Report on Form 10-K for the year ended December 31, 2007 ("10-K Report"). I hereby certify that, based on my knowledge, the 10-K 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-K Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries. Date: February 26, 2008 /s/ Richard H. Fearon ---------------------------------------- Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer -----END PRIVACY-ENHANCED MESSAGE-----