United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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
-
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X
-
There were 75.1 million Common Shares outstanding as of June 30, 2003.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
Eaton Corporation
Statements of Consolidated Income
Three months ended Six months ended
June 30 June 30
------------------ ------------------
(Millions except for per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net sales $2,027 $1,881 $3,952 $3,604
Costs & expenses
- ----------------
Costs of products sold 1,498 1,364 2,913 2,650
Selling & administrative 339 305 668 615
Research & development 56 50 111 105
Interest expense-net 24 27 48 54
Other (income) expense-net (12) 8 (9) 5
------- ------- ------- -------
Income before income taxes 122 127 221 175
Income taxes 29 39 56 54
------- ------- ------- -------
Net income $ 93 $ 88 $ 165 $ 121
======= ======= ======= =======
Net income per Common Share
assuming dilution $ 1.27 $ 1.21 $ 2.27 $ 1.68
Average number of Common Shares
outstanding 73.5 72.1 72.9 71.6
Net income per Common Share basic $ 1.29 $ 1.24 $ 2.30 $ 1.71
Average number of Common Shares
outstanding 72.5 70.7 71.9 70.4
Cash dividends paid per Common Share $ 0.44 $ 0.44 $ 0.88 $ 0.88
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
June 30, Dec. 31,
(Millions) 2003 2002
---- ----
ASSETS
Current assets
- --------------
Cash $ 87 $ 75
Short-term investments 342 353
Accounts receivable 1,269 1,032
Inventories 753 698
Deferred income taxes & other
current assets 295 299
------ ------
2,746 2,457
Property, plant & equipment-net 2,071 1,955
Goodwill 1,964 1,910
Other intangible assets 498 510
Other assets 377 306
------ ------
$7,656 $7,138
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
- -------------------
Short-term debt & current portion of
long-term debt $ 53 $ 201
Accounts payable 473 488
Accrued compensation 180 199
Accrued income & other taxes 246 225
Other current liabilities 731 621
------ ------
1,683 1,734
Long-term debt 1,913 1,887
Postretirement benefits other than pensions 647 652
Deferred income taxes & other liabilities 607 563
Shareholders' equity 2,806 2,302
------ ------
$7,656 $7,138
====== ======
See accompanying notes.
Eaton Corporation
Condensed Statements of Consolidated Cash Flows
Six months ended
June 30
-----------------
(Millions) 2003 2002
---- ----
Net cash provided by operating activities
- -----------------------------------------
Net income $ 165 $ 121
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 188 176
Amortization of intangible assets 13 11
Changes in operating assets & liabilities,
excluding acquisitions & sales of
businesses (170) (11)
Other-net 59 18
------ ------
255 315
Net cash used in investing activities
- -------------------------------------
Expenditures for property, plant & equipment (110) (87)
Acquisitions of businesses, less cash acquired (226) (10)
Net decrease (increase) in short-term investments 16 (43)
Other-net (13) -
------ ------
(333) (140)
Net cash provided by (used in) financing activities
- ---------------------------------------------------
Borrowings with original maturities of more
than three months
Proceeds 11 122
Payments (152) (451)
Borrowings with original maturities of less
than three months-net (34) 127
Cash dividends paid (62) (61)
Proceeds from exercise of employee stock options 31 40
Sale of Common Shares 296 -
------ ------
90 (223)
------ ------
Total increase (decrease) in cash 12 (48)
Cash at beginning of period 75 112
------ ------
Cash at end of period $ 87 $ 64
====== ======
See accompanying notes.
Notes To Condensed 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 with sales in 2002 of approximately $360, 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 is included in 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 Six months ended
June 30 June 30
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Fluid Power $ 4 $ 1 $ 9 $ 18
Industrial &
Commercial Controls 6 2 7 15
Automotive - - - 1
Truck - - - 14
----- ----- ----- -----
10 3 16 48
Corporate - - 1 4
----- ----- ----- -----
Total $ 10 $ 3 $ 17 $ 52
===== ===== ===== =====
After-tax $ 6 $ 2 $ 11 $ 35
Per Common Share $0.09 $0.03 $0.15 $0.49
The restructuring charges were included in the Statements of Consolidated
Income in Costs of products sold or Selling & administrative expense, as
appropriate. In Business Segment Information, the restructuring charges
reduced Operating profit of the related business segment or were included in
Corporate expense-net, as appropriate.
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 183 2 15 17
Utilized in 2003 (563) (5) (15) (20)
----- ----- ----- -----
Liabilities remaining
at June 30, 2003 114 $ 8 $ 5 $ 13
===== ===== ===== =====
Other (Income) Expense-Net
- --------------------------
The change in Other (income) expense-net for second quarter and first half
2003 compared to the same periods in 2002 was primarily due to foreign
exchange gains, reduced legal expenses, and favorable legal settlements in
2003.
Income Taxes
- ------------
The effective income tax rate for second quarter 2003 was 23.4% and for first
half 2003 was 25.0%, compared to 31.0% for the same periods in 2002. The
lower rates in 2003 reflect many factors, including higher earnings in tax
jurisdictions with lower income tax rates and increased tax benefits from tax
losses.
Sale of Common Shares
- ---------------------
In June 2003, Eaton sold 3.7 million Common Shares for net proceeds of $296,
which were used to pay down commercial paper and for general corporate
purposes.
Net Income per Common Share
- ---------------------------
Three months ended Six months ended
June 30 June 30
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 93 $ 88 $ 165 $ 121
===== ===== ===== =====
Average number of Common Shares
outstanding assuming dilution 73.5 72.1 72.9 71.6
Less dilutive effect of stock
options 1.0 1.4 1.0 1.2
----- ----- ----- -----
Average number of Common Shares
outstanding basic 72.5 70.7 71.9 70.4
===== ===== ===== =====
Net income per Common Share
---------------------------
Assuming dilution $1.27 $1.21 $2.27 $1.68
Basic 1.29 1.24 2.30 1.71
Stock Options
- -------------
Eaton has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation".
If the Company accounted for its stock options under the fair Value based method
of SFAS No. 123, net income and net income per Common Share would have been as
indicated below:
Three months ended Six months ended
June 30 June 30
----------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income
----------
As reported $ 93 $ 88 $ 165 $ 121
Stock-based compensation,
net of income taxes (3) (3) (6) (7)
------- ------- ------- -------
Assuming fair value method $ 90 $ 85 $ 159 $ 114
======= ======= ======= =======
Net income per Common Share
assuming dilution
---------------------------
As reported $ 1.27 $ 1.21 $ 2.27 $ 1.68
Stock-based compensation,
net of income taxes (0.04) (0.05) (0.08) (0.10)
------- ------- ------- -------
Assuming fair value method $ 1.23 $ 1.16 $ 2.19 $ 1.58
======= ======= ======= =======
Net income per Common Share
basic
---------------------------
As reported $ 1.29 $ 1.24 $ 2.30 $ 1.71
Stock-based compensation,
net of income taxes (0.04) (0.05) (0.08) (0.10)
------- ------- ------- -------
Assuming fair value method $ 1.25 $ 1.19 $ 2.22 $ 1.61
======= ======= ======= =======
Comprehensive Income
- --------------------
The principal differences between net income as historically reported in the
Statements of Consolidated Income and Comprehensive income are foreign
currency translation and cash flow hedges, which are recorded directly in
Shareholders' equity. Comprehensive income is as follows:
Three months ended Six months ended
June 30 June 30
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 93 $ 88 $165 $121
Foreign currency translation 41 (6) 51 (16)
Cash flow hedges (1) - 4 3
----- ----- ----- -----
Comprehensive income $133 $ 82 $220 $108
===== ===== ===== =====
Inventories
- -----------
June 30, Dec. 31,
2003 2002
---- ----
Raw materials $322 $283
Work-in-process &
finished goods 467 449
----- -----
Gross inventories at FIFO 789 732
Excess of FIFO
over LIFO cost (36) (34)
----- -----
Net inventories $753 $698
===== =====
Business Segment Information
- ----------------------------
Three months ended Six months ended
June 30 June 30
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales
---------
Fluid Power $ 703 $ 628 $1,400 $1,225
Industrial &
Commercial Controls 575 519 1,089 1,005
Automotive 432 419 872 804
Truck 317 315 591 570
------- ------- ------- -------
$2,027 $1,881 $3,952 $3,604
======= ======= ======= =======
Operating profit
----------------
Fluid Power $ 63 $ 58 $ 121 $ 101
Industrial &
Commercial Controls 33 42 65 60
Automotive 58 64 120 120
Truck 40 30 62 20
------- ------- ------- -------
194 194 368 301
Corporate
---------
Amortization of
intangible assets (7) (5) (13) (11)
Interest expense-net (24) (27) (48) (54)
Corporate expense-net (41) (35) (86) (61)
------- ------- ------- -------
Income before income taxes 122 127 221 175
Income taxes 29 39 56 54
------- ------- ------- -------
Net income $ 93 $ 88 $ 165 $ 121
======= ======= ======= =======
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 second quarter 2003 were $2,027, 8% above $1,881 in second quarter
2002. Sales in second quarter 2003 were the highest quarterly sales since
second quarter 2000. Sales growth in 2003 of 8% consisted of 6% from the four
recent business acquisitions completed during November 2002 through January
2003 and 2% from higher foreign exchange rates. Eaton continued to outperform
its end markets, as the Company estimates that its overall end markets
declined 5% compared to second quarter 2002. For first half 2003, sales were
$3,952, 10% higher than $3,604 in 2002, with growth coming from the same
factors as in second quarter 2003.
Net income of $93 for second quarter 2003 increased 6% compared to $88 in the
same period of 2002. Net income per Common Share of $1.27 in second quarter
2003 increased 5% compared to $1.21 per share in 2002. Net income in 2003
included restructuring charges of $6 after-tax ($0.09 per share) compared to
$2 after-tax ($0.03 per share) in 2002. Improved income in 2003 was primarily
due to higher sales in 2003, modest profits from the recent business
acquisitions, and a reduction in income tax expense. Increased income also
resulted from the benefits of restructuring actions taken in recent years to
resize the Company. These increases in income were partially offset by higher
restructuring charges and increased pension and other postretirement expense
in 2003.
Net income for first half 2003 was $165 and net income per Common Share was
$2.27, increases of 36% and 35%, respectively, over $121 and $1.68 per share
in first half 2002. Net income in 2003 included restructuring charges of $11
after-tax ($0.15 per share) compared to $35 after-tax ($0.49 per share) in
2002. Improved income in 2003 was partially due to higher sales in 2003,
modest profits from the recent business acquisitions, and a reduction in
income tax expense. Increased income was also due to lower restructuring
charges in 2003 and the benefits of restructuring actions taken in recent
years to resize the Company. These increases were partially offset by
increased pension and other postretirement expense in 2003.
In second 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 $4 for the Fluid Power segment and $6
for the Industrial & Commercial Controls segment. For first half 2003,
restructuring charges totaled $9 for the Fluid Power segment, $7 for the
Industrial & Commercial Controls segment, and $1 for Corporate.
In second 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 $1 for the Fluid Power segment and
$2 for the Industrial & Commercial Controls segment. For first half 2002,
restructuring charges totaled $18 for the Fluid Power segment, $15 for the
Industrial & Commercial Controls segment, $1 for the Automotive segment, $14
for the Truck segment, and $4 for Corporate.
Restructuring charges in 2003 and 2002 were included in the Statements of
Consolidated Income in Costs of products sold or Selling & administrative
expense, as appropriate. In Business Segment Information, the restructuring
charges reduced Operating profit of the related business segment or were
included in Corporate expense-net, as appropriate.
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 $0.62 per
share), which was, and will be, reflected appropriately in each quarterly
period in 2003.
The change in Other (income) expense-net for second quarter and first half
2003 compared to the same periods in 2002 was primarily due to foreign
exchange gains, reduced legal expenses, and favorable legal settlements in
2003.
The effective income tax rate for second quarter 2003 was 23.4% and for first
half 2003 was 25.0%, compared to 31.0% for the same periods in 2002. The
lower rates in 2003 reflect many factors, including higher earnings in tax
jurisdictions with lower income tax rates and increased tax benefits from tax
losses.
For second half 2003, Eaton does not anticipate any significant growth in its
end markets. As a result, for the year as a whole, the Company expects its
end markets to be flat to slightly down. Eaton has made good progress during
the second quarter on integrating its four recent business acquisitions.
Profits of the acquired businesses have thus far been modest, as the real
benefits from the restructuring activities will not be seen until second half
2003. The Company continues to make progress in reducing the working capital
and improving the performance of the acquired businesses, and anticipates
that their working capital levels will be reduced significantly by the end of
the year. Eaton anticipates full year 2003 net income per share of $4.50 to
$4.75 and third quarter net income per share of $1.15 to $1.25. The Company
anticipates the impact on 2003 net income of restructuring charges to
integrate recent business acquisitions to be $0.50 per share, with
approximately a $0.15 per share effect in both the third and fourth quarters
of the year. In spite of end markets that were weaker than expected at the
beginning of the year, and the sale of an additional 3.7 million shares,
Eaton is maintaining its full year earnings guidance provided in January of
this year.
Business Segments
- -----------------
Fluid Power
- -----------
Second quarter 2003 sales of Fluid Power, Eaton's largest business segment,
were an all-time quarterly record of $703, 12% above $628 in second quarter
2002. Excluding the impact of the Boston Weatherhead and Mechanical Products
acquisitions, sales increased 4% over second quarter 2002, inclusive of the
effect of higher foreign exchange rates. This compares to a decline of 5% in
Fluid Power's markets, with North American fluid power industry shipments
down about 8%, commercial aerospace markets off 18%, and defense aerospace
markets up by 16%. The Company does not anticipate a recovery in the
traditional mobile and industrial hydraulics markets until next year. The
construction and agricultural equipment markets have shown little growth,
despite earlier expectations that they would post moderate growth in 2003.
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. Sales for first half 2003 were $1,400, 14% above
the same period in 2002, with growth coming from the same factors as in
second quarter 2003.
Operating profits were $63 in second quarter 2003, up 9% from $58 in second
quarter 2002. Restructuring charges recognized in second quarter 2003 were $4
compared to $1 in 2002. Operating profits for first half 2003 were $121, an
increase of 20% compared to $101 in first half 2002. For first half 2003,
restructuring charges were $9 compared to $18 in 2002. Operating profits in
second quarter 2003 represented a return on sales of 9.0%, which was reduced
by 0.5% due to restructuring charges, compared to 9.2% in 2002, which was
reduced by 0.2% due to restructuring charges. For first half 2003, the return
on sales was 8.6%, which was reduced by 0.7% due to restructuring charges,
compared to 8.2% in 2002, which was reduced by 1.5% due to restructuring
charges. The Boston Weatherhead acquisition reduced the margins for the Fluid
Power segment in second quarter and first half 2003 compared to last year,
but the Company expects stronger profitability from this business in second
half 2003 as the restructuring programs generate increased benefits.
Increased operating profits in 2003 were primarily due to higher sales in
2003, reduced restructuring charges in first half 2003, and the benefits of
restructuring actions taken in recent years to resize this business.
Industrial & Commercial Controls
- --------------------------------
In the Industrial & Commercial Controls segment, second quarter 2003 sales
were $575, up 11% from $519 in second quarter 2002. Excluding the impact of
the Delta and Commonwealth Sprague Capacitor acquisitions in 2003 and the
divestiture of the Navy Controls business last year, second quarter sales
were down 2% compared to 2002, inclusive of the effect of higher foreign
exchange rates. End markets for the electrical business remained weak during
the second quarter, with an estimated 4% decline in the markets for this
business compared to last year. It is expected that the electrical
distribution equipment market will not begin to recover until 2004. The
residential market in North America has remained strong thus far in 2003, but
the commercial markets - particularly the office construction markets - have
weakened further. Sales for first half 2003 were $1,089, 8% above the same
period in 2002, with growth coming from the same factors as in second quarter
2003.
Operating profits were $33 in second quarter 2003, down 21% compared to $42
in second quarter 2002. Restructuring charges recognized in second quarter
2003 were $6 and were primarily related to the acquisition of the electrical
business of Delta plc in January 2003. Restructuring charges in second
quarter 2002 were $2. Operating profits for first half 2003 were $65, an
increase of 8% compared to $60 for first half 2002. For first half 2003,
restructuring charges were $7 compared to $15 in 2002. Operating profits in
second quarter 2003 represented a return on sales of 5.7%, which was reduced
by 1.1% due to restructuring charges, compared to 8.1% in 2002, which was
reduced by 0.4% due to restructuring charges. For first half 2003 and 2002,
the returns on sales were both 6.0%, which were reduced by 0.6% and 1.5%,
respectively, due to restructuring charges. The integration of the electrical
division of Delta, which was purchased at the end of January, is proceeding
slightly ahead of plan. This acquisition reduced the margins for the
Industrial & Commercial Controls segment in second quarter and first half
2003 compared to last year, but the Company expects stronger profitability
from this business in second half 2003 as the restructuring programs begin to
generate benefits. Increased operating profits in first half 2003 were
primarily due to reduced restructuring charges in 2003 and the benefits of
restructuring actions taken in recent years to resize this business.
Automotive
- ----------
The Automotive segment posted record second quarter 2003 sales of $432, which
was 3% above $419 in second quarter 2002. NAFTA automotive production
declined 10%, while European production was down 6%, compared to 2002. The
Automotive segment continued its strong performance with sales that
significantly outpaced its end markets. The segment also benefited during
second quarter 2003 from the strong Euro, which added 5% to revenues for the
quarter. Sales for first half 2003 were $872, 8% above the same period in
2002, a reflection of stronger sales in first quarter 2003 and a stronger
Euro.
Operating profits in second quarter 2003 were $58, down 9% compared to $64 in
second quarter 2002. Operating profits for first half 2003 and 2002 were
$120. Operating profits in second quarter 2003 represented a return on sales
of 13.4% compared to 15.3% in 2002. For first half 2003, the return on sales
was 13.8% compared to 14.9% in 2002. Returns on sales in 2003 were lower than
2002, principally as a result of increased costs related to new product
launches.
Truck
- -----
The Truck segment posted sales of $317 in second quarter 2003, up 1% compared
to $315 in second quarter 2002. In second quarter 2003, NAFTA heavy-duty
truck production of about 45,000 units was down 5%, NAFTA medium-duty truck
production was up 4%, European truck production was down 5%, and South
American production was flat versus a year ago. Sales for first half 2003
were $591, 4% above $570 in first half 2002. For the full year, the Company
expects production of heavy-duty trucks in NAFTA to total approximately
190,000 units.
Operating profits were $40 in second quarter 2003, up 33% compared to $30 in
second quarter 2002. Operating profits for first half 2003 were $62, an
increase of 210% compared to $20 for first half 2002. There were no
restructuring charges recorded in 2003 compared to $14 for first quarter
2002. Operating profits in second quarter 2003 represented a return on sales
of 12.6% compared to 9.5% in 2002. For first half 2003, the return on sales
was 10.5% compared to 3.5% in 2002, which was reduced by 2.5% due to
restructuring charges. Increased operating profits in 2003 were primarily due
to the absence of restructuring charges in 2003 compared to 2002, the
benefits of restructuring actions taken in recent years to resize this
business, and increased sales in 2003. The new operating model put in place
in the Truck business over the last two years has enabled the business to
adjust to the ramping up and down of volumes last year, and to this year's
ramping up of volumes, without incurring the inefficiencies and expediting
costs incurred in previous periods of substantial volume change.
Corporate
- ---------
Corporate expense-net was $41 in second quarter 2003 compared to $35 in
second quarter 2002. For first half 2003, Corporate expense-net was $86
compared to $61 in first half 2002. The increases were primarily the result
of increased pension expense and other postretirement benefit expense,
partially offset by foreign exchange gains, reduced legal expenses, and
favorable legal settlements in 2003.
Changes in Financial Condition During 2003
- ------------------------------------------
Net working capital of $1,063 at June 30, 2003 substantially increased from
$723 at year-end 2002 (the current ratio was 1.6 at June 30 compared to 1.4
at December 31, 2002). The increase was primarily due to increased accounts
receivable due to higher sales in 2003, but also reflected increased working
capital resulting from the acquisition of the electrical business of Delta
plc in January 2003. The increase was also partially due to the retention of
a portion of the cash proceeds of $296 from the sale of 3.7 million Common
Shares in June 2003.
Cash generated from operating activities of $255 in first half 2003 was lower
than the $315 generated in first half 2002 primarily due to increased
accounts receivable in 2003 resulting from increased sales. Capital
expenditures for first half 2003 were $110, $23 more than first half 2002 and
just under 3% of sales in 2003. Capital expenditures in 2003 are forecasted
to be approximately $300.
Total debt of $1,966 at June 30, 2003 decreased $122 from $2,088 at the end
of 2002. The net debt to capital ratio decreased to 35.4% at June 30 from
41.9% at December 31, primarily the result of cash proceeds of $296 from the
sale of 3.7 million Common Shares in June 2003. The Company has credit
facilities of $650, of which $400 expire in April 2005 and $250 in May 2008.
On April 17, 2003, the Company filed a Current Report on Form 8-K in regard
to Standard & Poor's Rating Services' decision to place the Company's long-
term credit rating on CreditWatch. On July 3, 2003 Standard & Poor's affirmed
Eaton's 'A-' credit rating and removed Eaton from CreditWatch.
In July 2003, the Company increased the quarterly cash dividend to $0.48 per
Common Share, a 9% increase over the prior dividend of $0.44 per share. The
Company estimates that the increase will require additional cash of
approximately $12 on an annual basis.
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 third quarter
2003 and full year 2003 net income per Common Share, our worldwide markets,
expenses of our restructuring programs, working capital, and the flexibility
to pursue growth opportunities. These statements should be used with caution.
They 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 us; 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, litigation or dispute
resolutions; material acquisitions or divestitures; significant costs from
new laws and governmental regulations; and unanticipated further
deterioration of economic and financial conditions in the United States and
around the world. We do 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 and Procedures
- -------------------------------
Pursuant to SEC Rule 13a-15, an evaluation was performed, under the
supervision and with the participation of Eaton's management, including
Alexander M. Cutler - Chairman and Chief Executive Officer and Richard H.
Fearon - Executive Vice President - Chief Financial and Planning Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, Eaton's management
concluded that the Company's disclosure controls and procedures were
effective as of June 30, 2003.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the
Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On April 14, 2003, the Company filed a Current Report on Form
8-K regarding the first quarter 2003 earnings release.
2. On April 17, 2003, the Company filed a Current Report on Form 8-K in
regard to Standard & Poor's Rating Services' decision to place the
Company's long-term credit rating on CreditWatch.
3. On July 15, 2003, the Company filed a Current Report on Form 8-K
regarding the second quarter 2003 earnings release.
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: August 13, 2003 /s/ Richard H. Fearon
----------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning
Officer
Eaton Corporation
Quarterly Report on Form 10-Q
Second Quarter 2003
Exhibit Index
Exhibit
- -------
4 Instruments defining rights of security holders, including indentures
(Pursuant to Regulation to 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
31.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302)
31.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302)
32.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906)
32.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906)
Exhibit 12
Eaton Corporation
Quarterly Report on Form 10-Q
Second Quarter 2003
Ratio of Earnings to Fixed Charges
Six months
ended Year ended December 31
June 30, --------------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Income from continuing
operations before income taxes $221 $399 $278 $552 $ 943 $616
Adjustments
- -----------
Minority interests in
consolidated subsidiaries 6 14 8 8 2 (2)
Income of equity investees (3) (1) - (1) (1) (1)
Interest expensed 51 110 149 182 159 93
Amortization of debt issue
costs 1 2 1 1 - -
Estimated portion of rent
expense representing
interest 17 34 38 39 36 28
Amortization of capitalized
interest 7 13 13 10 8 7
Distributed income of equity
investees - - - 1 - 1
---- ---- ---- ---- ------ ----
Adjusted income from continuing
operations before income taxes $300 $571 $487 $792 $1,147 $742
==== ==== ==== ==== ====== ====
Fixed charges
- -------------
Interest expensed $ 51 $110 $149 $182 $ 159 $ 93
Interest capitalized 3 8 12 22 21 16
Amortization of debt issue
costs 1 2 1 1 - -
Estimated portion of rent
expense representing
interest 17 34 38 39 36 28
---- ---- ---- ---- ------ ----
Total fixed charges $ 72 $154 $200 $244 $ 216 $137
==== ==== ==== ==== ====== ====
Ratio of earnings to fixed
charges 4.17 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.
Exhibit 31.1
Eaton Corporation
Quarterly Report on Form 10-Q
Second Quarter 2003
Certification
I, Alexander M. Cutler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eaton Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 13, 2003 /s/ Alexander M. Cutler
------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer
Exhibit 31.2
Eaton Corporation
Quarterly Report on Form 10-Q
Second Quarter 2003
Certification
I, Richard H. Fearon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eaton Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 13, 2003 /s/ Richard H. Fearon
------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning Officer
Exhibit 32.1
Eaton Corporation
Quarterly Report on Form 10-Q
Second Quarter 2003
Certification
This written statement is submitted in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 ("10-Q Report").
I hereby certify that, based on my knowledge, the 10-Q Report fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C 78m), and information contained in the 10-Q Report fairly presents,
in all material respects, the financial condition and results of operations
of Eaton Corporation and its consolidated subsidiaries.
Date: August 13, 2003 /s/ Alexander M. Cutler
------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Eaton Corporation and
will be retained by Eaton Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 32.2
Eaton Corporation
Quarterly Report on Form 10-Q
Second Quarter 2003
Certification
This written statement is submitted in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 ("10-Q Report").
I hereby certify that, based on my knowledge, the 10-Q Report fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C 78m), and information contained in the 10-Q Report fairly presents,
in all material respects, the financial condition and results of operations
of Eaton Corporation and its consolidated subsidiaries.
Date: August 13, 2003 /s/ Richard H. Fearon
------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning Officer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Eaton Corporation and
will be retained by Eaton Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.