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United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
---------
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended March 31, 2003
- -----------------------------------
Commission file number 1-1396
- -----------------------------
Eaton Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(216) 523-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X
There were 70.9 million Common Shares outstanding as of March 31, 2003.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Eaton Corporation
Statements of Consolidated Income
Three months
ended
March 31
---------------
(Millions except for per share data) 2003 2002
---- ----
Net sales $1,925 $1,723
Costs & expenses
Costs of products sold 1,415 1,286
Selling & administrative 329 310
Research & development 55 55
------ ------
1,799 1,651
------ ------
Income from operations 126 72
Other income (expense)
Interest expense-net (24) (27)
Other-net (3) 3
----- ------
(27) (24)
------ ------
Income before income taxes 99 48
Income taxes 27 15
------ ------
Net income $ 72 $ 33
====== ======
Net income per Common Share
assuming dilution $ 1.00 $ 0.47
Average number of Common Shares
outstanding 72.1 71.2
Net income per Common Share basic $ 1.01 $ 0.48
Average number of Common Shares
outstanding 71.1 70.1
Cash dividends paid per Common Share $ 0.44 $ 0.44
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
Mar. 31, Dec. 31,
(Millions) 2003 2002
---- ----
ASSETS
Current assets
Cash $ 59 $ 75
Short-term investments 43 353
Accounts receivable 1,231 1,032
Inventories 777 698
Deferred income taxes & other
current assets 299 299
------ ------
2,409 2,457
Property, plant & equipment-net 2,047 1,955
Goodwill 1,935 1,910
Other intangible assets 505 510
Other assets 366 306
------ ------
$7,262 $7,138
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt & current portion
of long-term debt $ 205 $ 201
Accounts payable 473 488
Accrued compensation 164 199
Accrued income & other taxes 239 225
Other current liabilities 711 621
------ ------
1,792 1,734
Long-term debt 1,874 1,887
Postretirement benefits other than pensions 651 652
Deferred income taxes & other liabilities 565 563
Shareholders' equity 2,380 2,302
------ ------
$7,262 $7,138
====== ======
See accompanying notes.
Eaton Corporation
Condensed Statements of Consolidated Cash Flows
Three months
ended
March 31
-------------
(Millions) 2003 2002
---- ----
Net cash (used) provided by operating activities
Net income $ 72 $ 33
Adjustments to reconcile to net cash
provided by operating activities
Depreciation & amortization 92 89
Amortization of intangible assets 6 6
Changes in operating assets &
liabilities, excluding acquisitions
& sales of businesses (204) (46)
Other-net 30 1
----- -----
(4) 83
Net cash provided (used) by investing activities
Expenditures for property, plant & equipment (43) (40)
Acquisitions of businesses, less cash acquired (219)
Net decrease in short-term investments 314 32
Other-net (10) 2
----- -----
42 (6)
Net cash used by financing activities
Borrowings with original maturities
of more than three months
Proceeds 76
Payments (2) (382)
Borrowings with original maturities
of less than three months-net (27) 217
Cash dividends paid (31) (30)
Proceeds from exercise of employee stock options 6 24
----- -----
(54) (95)
----- -----
Total (decrease) increase in cash (16) (18)
Cash at beginning of period 75 112
----- -----
Cash at end of period $ 59 $ 94
===== =====
See accompanying notes.
Notes To Consolidated Financial Statements
- ------------------------------------------
Dollars and shares in millions, except per share data (per share data assume
dilution, unless otherwise noted)
Preparation of Financial Statements
- -----------------------------------
The condensed consolidated financial statements of Eaton Corporation (Eaton
or the Company) are unaudited. However, in the opinion of management, all
adjustments have been made which are necessary for a fair presentation of
financial position, results of operations and cash flows for the stated
periods. These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
2002 Annual Report on Form 10-K. The interim period results are not
necessarily indicative of the results to be expected for the full year.
Acquisition of Business
- -----------------------
On January 31, 2003, Eaton acquired the electrical business of Delta plc for
approximately $215. The Delta business, which has operations in Europe and in
the Asia Pacific area, has 3,400 employees and is headquartered in the United
Kingdom. The business' major electrical brands include MEM(R), Holec(TM),
Bill(TM), Home Automation(TM), Elek(TM) and Tabula(TM). The Delta business will
be integrated into the Industrial & Commercial Controls segment. The allocation
of the purchase price for this acquisition is preliminary and will be finalized
late in 2003.
Restructuring Charges
- ---------------------
In 2003, Eaton incurred restructuring charges related primarily to the
integration of the Boston Weatherhead fluid power business acquired in
November 2002 and the electrical business of Delta plc acquired in January
2003. In 2002, the Company incurred charges to reduce operating costs across
its business segments and certain corporate functions. The charges in 2002
were primarily a continuation of restructuring programs initiated in 2001. A
summary of these charges follows:
Three months
ended
March 31
------------
2003 2002
---- ----
Business segment
Fluid Power $ 5 $ 17
Industrial &
Commercial Controls 1 13
Automotive 1
Truck 14
---- ----
6 45
Corporate 1 4
---- ----
Total $ 7 $ 49
==== ====
After-tax $ 5 $ 33
Per Common Share 0.06 0.46
The restructuring charges were included in the Statements of Consolidated
Income in Income from Operations. In Business Segment Information, the
restructuring charges reduced Operating Profit of the related business
segment, while the corporate restructuring charges were included in Corporate
Expense-Net.
Restructuring liabilities recorded at December 31, 2002, those recorded in
2003 as described above, and those utilized thus far in 2003, are summarized
as follows:
Workforce reductions Plant
-------------------- consolidation
Employees Dollars & other Total
--------- ------- ------------- -----
Liabilities remaining
at December 31, 2002 494 $11 $ 5 $16
2003 charges 83 1 6 7
Utilized in 2003 (285) (3) (6) (9)
---- --- --- ---
Liabilities remaining
at March 31, 2003 292 $ 9 $ 5 $14
==== === === ===
Stock Options
- -------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". If Eaton 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 indicated below:
Three months
ended
March 31
-------------
2003 2002
---- ----
Net income
As reported $ 72 $ 33
Stock-based compensation
cost, net of income taxes (3) (4)
----- -----
Assuming fair value method $ 69 $ 29
===== =====
Net income per Common Share
assuming dilution
As reported $1.00 $0.47
Stock-based compensation
cost, net of income taxes (0.04) (0.05)
----- -----
Assuming fair value method $0.96 $0.42
===== =====
Net income per Common Share basic
As reported $1.01 $0.48
Stock-based compensation
cost, net of income taxes (0.04) (0.05)
----- -----
Assuming fair value method $0.97 $0.43
===== =====
Comprehensive Income
- --------------------
The principal differences between net income as historically reported in the
Statements of Consolidated Income and comprehensive income are foreign
currency translation adjustments and deferred gain on cash flow hedges which
are recorded directly in Shareholders' Equity. Comprehensive income is as
follows:
Three months
ended
March 31
------------
2003 2002
---- ----
Net income $ 72 $ 33
Foreign currency translation
adjustments 8 (9)
Deferred gain on
cash flow hedges 5 3
Other 2 (1)
---- ----
Comprehensive income $ 87 $ 26
==== ====
Inventories
- -----------
Mar. 31, Dec. 31,
2003 2002
---- ----
Raw materials $ 323 $ 283
Work-in-process &
finished goods 489 449
----- -----
Gross inventories at FIFO 812 732
Excess of FIFO cost
over LIFO cost (35) (34)
----- -----
Net inventories $ 777 $ 698
===== =====
Net Income Per Common Share
- ---------------------------
Three months
ended
March 31
------------
2003 2002
---- ----
Net income $ 72 $ 33
==== ====
Average number of Common Shares
outstanding assuming dilution 72.1 71.2
Less dilutive effect of stock
options 1.0 1.1
---- ----
Average number of Common Shares
outstanding basic 71.1 70.1
==== ====
Net income per Common Share
Assuming dilution $1.00 $0.47
Basic 1.01 0.48
Business Segment Information
- ----------------------------
Three months
ended
March 31
---------------
2003 2002
---- ----
Net sales
Fluid Power $ 697 $ 597
Industrial &
Commercial Controls 514 486
Automotive 440 385
Truck 274 255
------ ------
Total net sales $1,925 $1,723
====== ======
Operating profit (loss)
Fluid Power $ 58 $ 43
Industrial &
Commercial Controls 32 18
Automotive 62 56
Truck 22 (10)
------ ------
174 107
Corporate
Amortization of
intangible assets (6) (6)
Interest expense-net (24) (27)
Corporate expense-net (45) (26)
------ ------
Income before income taxes 99 48
Income taxes 27 15
------ ------
Net income $ 72 $ 33
====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
Dollars and shares in millions, except per share data (per share data assume
dilution)
Results of Operations
- ---------------------
Sales for first quarter 2003 were $1,925, 12% above $1,723 in first quarter
2002. Sales growth was due to continued growth in excess of the Company's end
markets, revenue from the four acquisitions completed from November 2002
through January, and higher exchange rates. Approximately 5% of the increase
in sales came from outgrowing end markets, another 5% from the acquisitions,
and 2% from higher exchange rates.
Net income was $72 in first quarter 2003 compared to $33 in first quarter
2002, an increase of 118%. Net income per Common Share of $1.00 in 2003
increased 113% over net income per Common Share of $0.47 in first quarter
2002. Net income in 2003 included restructuring charges of $5 after-tax
($0.06 per share), compared to restructuring charges of $33 after-tax ($0.46
per share) in 2002. This increase in net income was also partially the result
of the benefits derived from the restructuring actions taken over the last
two years to resize the Company. Improved income was further due to higher
sales in 2003, despite flat markets and considerable economic uncertainties.
For the past four quarters, Eaton has experienced growth in revenue and
improved operating margins compared to the same period of the prior year.
In first quarter 2003, Eaton incurred restructuring charges related primarily
to the integration of the Boston Weatherhead fluid power business acquired in
November 2002 and the electrical business of Delta plc acquired in January
2003. These charges totaled $5 for the Fluid Power segment, $1 for the
Industrial & Commercial Controls segment, and $1 for Corporate.
In first quarter 2002, the Company incurred restructuring charges to reduce
operating costs across its business segments and certain corporate functions.
The charges in 2002 were primarily a continuation of restructuring programs
initiated in 2001. These charges totaled $17 for the Fluid Power segment, $13
for the Industrial & Commercial Controls segment, $14 for the Truck segment,
$1 for the Automotive segment, and $4 for Corporate.
The restructuring charges in 2003 and 2002 related to the business segments
were included in the Statements of Consolidated Income in Income from
Operations and reduced Operating Profit of the related segment. The corporate
restructuring charges were included in the Statements of Consolidated Income
in Income from Operations and were included in Business Segment Information
in Corporate Expense-Net.
As displayed in the Statements of Consolidated Income, Income from Operations
of $126 in first quarter 2003 increased 75% over first quarter 2002. The
increase was primarily the result of the benefit of restructuring actions
taken over the past two years combined with increased sales in 2003 and lower
restructuring charges incurred in 2003, offset by increased pension and other
postretirement expense in 2003.
Eaton expects its end markets in the first half of 2003 to be slightly weaker
than a year ago. In the second half, assuming current uncertainties related
to the economy are resolved, growth is expected to resume towards year-end.
As a result, the Company anticipates little overall growth in its end markets
for the year as a whole. The Company projects second quarter net income of
$1.15 to $1.25 per Common Share, with full year estimates of $4.50 to $4.75
per share. The Company anticipates the impact of restructuring charges on
second quarter net income to be $0.15 per share, with a full year effect of
$0.50 per share.
In fourth quarter 2002, certain key assumptions used to calculate pension and
other postretirement benefit expense were adjusted, including the lowering of
the assumed return on pension plan assets from 10.00% to 8.75% and the
discount rate from 7.25% to 6.75%. The effect of these changes on full year
2003 is estimated to be increased expense of $72 ($47 after-tax, or $0.65 per
share).
Business Segments
- -----------------
Fluid Power
- -----------
First quarter 2003 sales of Eaton's largest business segment, Fluid Power,
were $697, 17% above $597 in first quarter 2002. Approximately 8% of this
sales increase was due to the Boston Weatherhead and Mechanical Products
acquisitions in fourth quarter 2002. The remaining 9% increase in sales
resulted from growth in excess of end markets and higher foreign exchange
rates. This compares to a decline of 3% in Fluid Power's markets, with North
American fluid power industry shipments down about 2%, commercial aerospace
markets off 20%, and defense aerospace markets up by 11%. The Company does
not anticipate a recovery in the traditional mobile and industrial hydraulics
markets until late in the year. The construction and agricultural equipment
markets have shown little growth thus far, and are likely to be restrained until
economic uncertainties are resolved. The decline in the commercial aerospace
market has occurred as expected. Military aerospace markets have been strong,
largely offsetting the decline in the commercial markets.
Operating profits were $58 in first quarter 2003, up from $43 in first
quarter 2002. Restructuring charges recognized in 2003 were $5 compared to
$17 in 2002. These operating profits represented a return on sales of 8.3% in
2003, which was lower by 0.7% as a result of restructuring charges. The
return on sales in 2002 was 7.2%, which was lower by 2.8% as a result of
restructuring charges. In spite of general weakness in end markets, profits
in 2003 benefited from aggressive restructuring actions taken to resize this
business in prior periods and increased sales in 2003, as well as the $12
reduction in restructuring charges.
Industrial & Commercial Controls
- --------------------------------
In the Industrial & Commercial Controls segment, sales for first quarter 2003
were $514, up 6% from $486 in first quarter 2002. The sales increase was
primarily due to the Delta and Commonwealth Sprague Capacitor acquisitions in
first quarter 2003, partially offset by the divestiture of the Navy Controls
business in 2002. End markets for the electrical business weakened slightly
during the first quarter, with an estimated 1% decline in the markets for
this business compared to 2002. It is expected that the electrical
distribution equipment market will not begin to recover until the end of
2003. The residential market in North America has remained strong thus far in
2003.
Operating profits were $32 in first quarter 2003 compared to $18 in first
quarter 2002. Restructuring charges recognized in 2003 were $1 compared to
$13 in 2002. These operating profits represented a return on sales of 6.2% in
2003, which was lower by 0.2% as a result of restructuring charges. The
return on sales in 2002 was 3.7%, which was lower by 2.7% due to
restructuring charges. The increase in operating profits, after taking into
account the lower restructuring charges of $12, was primarily due to
increased sales and the benefits of restructuring actions.
In January 2003, Eaton completed the acquisition of the electrical business
of Delta plc for $215. The Delta business represents a significant addition
to the capabilities and geographic footprint in Europe of the Industrial &
Commercial Controls business. Additionally, in early January 2003 the
acquisition of the power systems business of Commonwealth Sprague Capacitor
was completed. This business will add to offerings in the areas of power
quality and energy management.
Automotive
- ----------
The Automotive segment posted sales of $440 in first quarter 2003, 14% above
$385 in first quarter 2002. This is a new record for Eaton's quarterly
Automotive segment revenues. NAFTA automotive production increased 2%, while
European production was flat, compared to first quarter 2002.
The Automotive segment continued its strong performance with sales growth
that considerably outpaced its end markets. The heavy investments the Company
has made in new product development over the last several years are
delivering tangible results as this business has been able to maintain the
accelerated pace of new product introductions and gain market share.
Operating profits were $62 in first quarter 2003, or an increase of 11%,
compared to $56 in first quarter 2002. First quarter 2002 included $1 of
restructuring charges. The segment produced a return on sales of 14.1% in
2003, down from 14.5% in 2002. The increase in profits was primarily the
result of the increase in sales during 2003.
Truck
- -----
The Truck segment posted sales of $274 in first quarter 2003, a 7% increase
over $255 in first quarter 2002. NAFTA heavy-duty truck production was up 4%
in 2003, NAFTA medium-duty truck production was up 1%, European truck
production was up 1%, and South American production increased by 11% versus a
year ago. First quarter production of NAFTA heavy-duty trucks totaled about
36,000 units. For the full year, the Company expects production of heavy-duty
trucks in NAFTA to total approximately 190,000 units.
Operating profits were $22 in first quarter 2003, compared to a loss of $10
in first quarter 2002. There were no restructuring charges in 2003, versus
$14 in 2002. The operating profits in 2003 represented a return on sales of
8.0%. The positive impact of the extensive restructuring actions in this
segment over the last two years can be seen in the improved profitability in
2003 over 2002.
Corporate
- ---------
Corporate expense-net was $45 in first quarter 2003 compared to $26 in first
quarter 2002. The increase was primarily the result of increased pension
expense and other postretirement benefit expense in 2003 compared to 2002. In
fourth quarter 2002, certain key assumptions used to calculate pension and
other postretirement benefit expense were adjusted, including the lowering of
the assumed return on pension plan assets from 10.00% to 8.75% and the
discount rate from 7.25% to 6.75%.
Changes in Financial Condition During 2003
- ------------------------------------------
Eaton's financial position remained strong during the first quarter of 2003.
Net working capital of $617 at the end of the quarter decreased from $723 at
year-end 2002 (the current ratio was 1.3 at March 31, 2003 and 1.4 at
December 31, 2002). The decrease was substantially related to the use of $219
of cash and short-term investments to fund the acquisitions of businesses in
first quarter 2003. This decrease was partially offset by increased accounts
receivable primarily resulting from increased sales in first quarter 2003.
Cash generated from operating activities was lower in 2003 compared to 2002
due to an increase in accounts receivable primarily related to increased
sales in 2003, and a reduction of accounts payable and other current
liabilities, and a payment of estimated United States Federal income taxes in
2003. Capital expenditures for first quarter 2003 were $43, $3 more than
first quarter 2002 and just over 2% of sales in 2003. Capital expenditures in
2003 are forecasted to be approximately $300 and will be funded primarily by
cash flow from operations.
Total debt of $2,079 at the end of the first quarter of 2003 decreased $9
from the end of 2002. The net debt to capital ratio increased to 45.4% at
March 31, 2003 from 41.9% at December 31, 2002, primarily the result of the
use of cash and short-term investments to fund the acquisitions of businesses
in first quarter 2003. The Company has credit facilities of $900, of which
$500 expire in May 2003 and $400 in April 2005. In the latter part of May
2003, the Company intends to enter into a new $250 revolving credit facility
that will expire in May 2008.
As noted in Item 6.(b) below, on April 17, 2003, the Company filed a Current
Report on Form 8-K in relation to Standard & Poor's Rating Services' decision
to place the Company's long-term credit rating on CreditWatch.
Contingencies
- -------------
The Company is subject to a broad range of claims, administrative
proceedings, and legal proceedings, such as lawsuits that relate to
contractual claims, patent infringement, personal injury (including asbes-
tos claims) and employment-related matters. Although it is not possible to
predict with certainty the outcome or cost of these matters, the Company be-
lieves that these matters will not have a material adverse effect on its
financial position, results of operations or cash flows.
Forward-Looking Statements
- --------------------------
This Form 10-Q contains forward-looking statements concerning the second
quarter 2003 and full year 2003 net income per share, Eaton's worldwide
markets, expenses of restructuring programs, and contingencies. These
statements are subject to various risks and uncertainties, many of which are
outside the Company's control. The following factors could cause actual
results to differ materially from those in the forward-looking statements:
unanticipated changes in the markets for the Company's business segments;
failure to implement restructuring plans; 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 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 or dispute resolutions;
and unanticipated further deterioration of economic and financial conditions
in the United States and around the world. Eaton does not assume any
obligation to update these forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
A discussion of market risk exposures is included in Part II, Item 7A,
"Quantitative and Qualitative Disclosure about Market Risk", of the Company's
2002 Annual Report on Form 10-K. There have been no material changes in
reported market risk since the inclusion of this discussion in the Company's
2002 Annual Report on Form 10-K referenced above.
Item 4. Controls & Procedures
- -----------------------------
Within 90 days prior to filing this report, an evaluation was performed,
under the supervision and with the participation of Eaton's management,
including Alexander M. Cutler - Chairman and Chief Executive Officer and
Richard H. Fearon - Executive Vice President - Chief Financial and Planning
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, Eaton's
management concluded that the Company's disclosure controls and procedures
were effective as of March 31, 2003. Subsequent to March 31, 2003, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls and no significant
deficiencies and material weaknesses existed which required corrective
actions.
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 Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosure.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
At the Company's Annual Meeting of Shareholders on April 23, 2003, the
shareholders re-elected three directors (Alexander M. Cutler, Gary L. Tooker
and Deborah L. McCoy) and elected two new directors (Gregory R. Page and
Kiran M. Patel), and ratified the appointment of the accounting firm of Ernst
& Young LLP as the Company's independent auditors for 2003. Results of voting
in connection with each issue were as follows:
Voting on Directors For Withheld Total
- ------------------- --- -------- -----
Alexander M. Cutler 62,945,686 1,396,573 64,342,259
Gary L. Tooker 63,233,139 1,109,120 64,342,259
Deborah L. McCoy 58,566,172 5,776,087 64,342,259
Gregory R. Page 63,359,225 983,034 64,342,259
Kiran M. Patel 63,350,378 991,881 64,342,259
Ratification of Ernst & Young LLP as Independent Auditors
- ---------------------------------------------------------
For 57,213,834
Against 6,482,984
Abstain 645,441
----------
Total 64,342,259
==========
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On January 21, 2003, the Company filed a Current Report on Form
8-K regarding the fourth quarter 2002 earnings release.
2. On April 14, 2003, the Company filed a Current Report on Form 8-K
regarding the first quarter 2003 earnings release.
3. On April 17, 2003, the Company filed a Current Report on Form 8-K
in relation to Standard & Poor's Rating Services' decision to
place the Company's long-term credit rating on CreditWatch.
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Date: May 15, 2003 /s/ Richard H. Fearon
----------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning
Officer
Certification
I, Alexander M. Cutler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eaton Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Alexander M. Cutler
----------------------------------------
Alexander M. Cutler - Chairman and Chief
Executive Officer
Certification
I, Richard H. Fearon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eaton Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Richard H. Fearon
--------------------------
Richard H. Fearon - Executive Vice President
- Chief Financial and Planning Officer
Eaton Corporation
Quarterly Report on Form 10-Q
First quarter 2003
Exhibit Index
Exhibit
4 Instruments defining rights of security holders, including
indentures (Pursuant to Regulation S-K Item 601(b)(4), the
Company agrees to furnish to the Commission, upon request, a
copy of the instruments defining the rights of holders of long-
term debt)
12 Ratio of Earnings to Fixed Charges
Eaton Corporation
2003 Quarterly Report on Form 10-Q
Item 6
Exhibit 12
Ratio of Earnings to Fixed Charges
Three months
ended Year ended December 31
March 31, --------------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Income from continuing operations
before income taxes $ 99 $399 $278 $552 $ 943 $616
Adjustments
Minority interests in
consolidated subsidiaries 3 14 8 8 2 (2)
Income of equity investees (1) (1) 0 (1) (1) (1)
Interest expensed 26 110 149 182 159 93
Amortization of debt issue
costs 0 2 1 1 0 0
Estimated portion of rent
expense representing
interest 8 34 38 39 36 28
Amortization of capitalized
interest 3 13 13 10 8 7
Distributed income of equity
investees 0 0 0 1 0 1
---- ---- ---- ---- ------ ----
Adjusted income from continuing
operations before income taxes $138 $571 $487 $792 $1,147 $742
==== ==== ==== ==== ====== ====
Fixed charges
Interest expensed $ 26 $110 $149 $182 $159 $ 93
Interest capitalized 2 8 12 22 21 16
Amortization of debt issue
costs 0 2 1 1 0 0
Estimated portion of rent
expense representing
interest 8 34 38 39 36 28
---- ---- ---- ---- ---- ----
Total fixed charges $ 36 $154 $200 $244 $216 $137
==== ==== ==== ==== ==== ====
Ratio of earnings to fixed
charges 3.83 3.71 2.44 3.25 5.31 5.42
Income from continuing operations before income taxes for years before 2002
include amortization expense related to goodwill and other intangible assets.
Upon adoption of SFAS No. 142 on January 1, 2002 the Company ceased
amortization of goodwill and indefinite life intangible assets.