Back to GetFilings.com
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 76.0 million Common Shares outstanding as of September 30, 2003.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
Eaton Corporation
Statements of Consolidated Income
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
(Millions except for per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net sales $2,026 $1,830 $5,978 $5,434
Costs & expenses
- ----------------
Costs of products sold 1,479 1,316 4,392 3,966
Selling & administrative 327 302 995 917
Research & development 57 51 168 156
Interest expense-net 20 26 68 80
Gain on sale of business - (18) - (18)
Other (income) expense-net 1 21 (8) 26
------- ------- ------- -------
Income before income taxes 142 132 363 307
Income taxes 35 39 91 93
------- ------- ------- -------
Net income $ 107 $ 93 $ 272 $ 214
======= ======= ======= =======
Net income per Common Share
assuming dilution $ 1.39 $ 1.30 $ 3.67 $ 2.98
Average number of Common Shares
outstanding 77.2 71.9 74.2 71.7
Net income per Common Share basic $ 1.41 $ 1.32 $ 3.73 $ 3.03
Average number of Common Shares
outstanding 75.9 70.8 73.1 70.5
Cash dividends paid per Common Share $ 0.48 $ 0.44 $ 1.36 $ 1.32
See accompanying notes.
Eaton Corporation
Condensed Consolidated Balance Sheets
Sept. 30, Dec. 31,
(Millions) 2003 2002
---- ----
ASSETS
Current assets
- --------------
Cash $ 72 $ 75
Short-term investments 522 353
Accounts receivable 1,314 1,032
Inventories 735 698
Deferred income taxes & other
current assets 306 299
------ ------
2,949 2,457
Property, plant & equipment-net 2,059 1,955
Goodwill 1,998 1,910
Other intangible assets 508 510
Deferred income taxes & other assets 389 306
------ ------
$7,903 $7,138
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
- -------------------
Short-term debt & current portion of
long-term debt $ 41 $ 201
Accounts payable 504 488
Accrued compensation 202 199
Accrued income & other taxes 284 225
Other current liabilities 761 621
------ ------
1,792 1,734
Long-term debt 1,901 1,887
Postretirement benefits other than pensions 639 652
Deferred income taxes & other liabilities 628 563
Shareholders' equity 2,943 2,302
------ ------
$7,903 $7,138
====== ======
See accompanying notes.
Eaton Corporation
Condensed Statements of Consolidated Cash Flows
Nine months ended
September 30
-----------------
(Millions) 2003 2002
---- ----
Net cash provided by operating activities
- -----------------------------------------
Net income $ 272 $ 214
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 280 265
Amortization of intangible assets 18 16
Gain on sale of business - (18)
Changes in operating assets & liabilities,
excluding acquisitions & sales of
businesses (90) 127
Other-net 37 39
------ ------
517 643
Net cash used in investing activities
- -------------------------------------
Expenditures for property, plant & equipment (177) (139)
Acquisitions of businesses, less cash acquired (256) (11)
Sale of business - 95
Net increase in short-term investments (162) (77)
Other-net (7) (5)
------ ------
(602) (137)
Net cash provided by (used in) financing activities
- ---------------------------------------------------
Borrowings with original maturities of more
than three months
Proceeds 11 419
Payments (164) (639)
Borrowings with original maturities of less
than three months-net (47) (258)
Cash dividends paid (98) (92)
Proceeds from exercise of employee stock options 84 41
Sale of Common Shares 296 -
------ ------
82 (529)
------ ------
Total decrease in cash (3) (23)
Cash at beginning of period 75 112
------ ------
Cash at end of period $ 72 $ 89
====== ======
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.
Acquisitions of Businesses
- --------------------------
On January 31, 2003, Eaton acquired the electrical business of Delta plc for
approximately $215. The Delta business has operations in Europe and in the Asia
Pacific area. Sales in 2002 were $360. 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 Electrical segment (formerly
the Industrial & Commercial Controls segment). The allocation of the purchase
price for this acquisition is preliminary and will be finalized in first quarter
2004.
On August 5, 2003, Eaton formed a joint venture with Caterpillar Inc. to provide
switchgear products under the Cat(R) brand name. The joint venture operates
under the name Intelligent Switchgear Organization LLC and is 51% owned by
Eaton. Eaton's investment in the joint venture is approximately $30.
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 Nine months ended
September 30 September 30
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Fluid Power $ 2 $ 6 $ 11 $ 24
Electrical 5 - 12 15
Automotive - - - 1
Truck - - - 14
----- ----- ----- -----
7 6 23 54
Corporate - - 1 4
----- ----- ----- -----
Total $ 7 $ 6 $ 24 $ 58
===== ===== ===== =====
After-tax $ 5 $ 4 $ 16 $ 39
Per Common Share $0.06 $0.05 $0.21 $0.53
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 224 3 21 24
Utilized in 2003 (652) (10) (18) (28)
----- ----- ----- -----
Liabilities remaining
at September 30, 2003 66 $ 4 $ 8 $ 12
===== ===== ===== =====
Pension and Other Postretirement Benefit Expense
- ------------------------------------------------
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%. Pretax operating income for third quarter 2003 was
reduced by $18 ($12 after-tax, or $0.15 per Common Share) compared to the same
period in 2002 due to the effect on pension income of the decline in stock
market valuations on Eaton's pension fund assets, coupled with lower discount
rates associated with determining pension and other postretirement benefit
liabilities. Pretax operating income for the first nine months of 2003 was
similarly reduced by $50 ($33 after-tax, or $0.44 per share) compared to the
same period in 2002.
Gain on Sale of Business
- ------------------------
In July 2002, the Navy Controls business was sold resulting in a pretax gain of
$18 ($13 after-tax, or $0.18 per Common Share).
Contribution to Eaton Charitable Fund
- -------------------------------------
In third quarter 2002, a charge of $10 was recorded for a contribution to the
Eaton Charitable Fund ($6 after-tax, or $0.09 per Common Share). In the
Statements of Consolidated Income, the charge was included in Other (income)
expense-net. In Business Segment Information, the charge was included in
Corporate expense-net.
Other (Income) Expense-Net
- --------------------------
The change of $20 in Other (income) expense-net for third quarter 2003 compared
to the same period in 2002 was primarily due to a loss of $1 in foreign exchange
in 2003 versus a loss of $5 in 2002, reduced legal expenses of $4 in 2003, and
the contribution to the Eaton Charitable Fund of $10 in third quarter 2002. The
change of $34 in Other (income) expense-net for the first nine months of 2003
compared to the same period in 2002 was primarily due to a gain of $5 in foreign
exchange in 2003 versus a loss of $8 in 2002, the contribution to the Eaton
Charitable Fund of $10 in third quarter 2002, and various other items including
reduced legal expenses and favorable legal settlements in 2003.
Income Taxes
- ------------
The effective income tax rate for third quarter and the first nine months of
2003 was 25.0%. The rates in 2003 compared to 29.6% for third quarter 2002 and
30.4% for the first nine months of 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 Nine months ended
September 30 September 30
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 107 $ 93 $ 272 $ 214
===== ===== ===== =====
Average number of Common Shares
outstanding assuming dilution 77.2 71.9 74.2 71.7
Less dilutive effect of stock
options 1.3 1.1 1.1 1.2
----- ----- ----- -----
Average number of Common Shares
outstanding basic 75.9 70.8 73.1 70.5
===== ===== ===== =====
Net income per Common Share
---------------------------
Assuming dilution $1.39 $1.30 $3.67 $2.98
Basic 1.41 1.32 3.73 3.03
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 Nine months ended
September 30 September 30
----------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income
----------
As reported $ 107 $ 93 $ 272 $ 214
Stock-based compensation
expense, net of income taxes (3) (4) (9) (11)
------- ------- ------- -------
Assuming fair value method $ 104 $ 89 $ 263 $ 203
======= ======= ======= =======
Net income per Common Share
assuming dilution
---------------------------
As reported $ 1.39 $ 1.30 $ 3.67 $ 2.98
Stock-based compensation
expense, net of income taxes (0.04) (0.05) (0.12) (0.15)
------- ------- ------- -------
Assuming fair value method $ 1.35 $ 1.25 $ 3.55 $ 2.83
======= ======= ======= =======
Net income per Common Share
basic
---------------------------
As reported $ 1.41 $ 1.32 $ 3.73 $ 3.03
Stock-based compensation
expense, net of income taxes (0.04) (0.05) (0.12) (0.15)
------- ------- ------- -------
Assuming fair value method $ 1.37 $ 1.27 $ 3.61 $ 2.88
======= ======= ======= =======
Comprehensive Income
- --------------------
Comprehensive income is as follows:
Three months ended Nine months ended
September 30 September 30
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $107 $ 93 $272 $214
Foreign currency translation 5 (40) 56 (56)
Cash flow hedges - (1) 4 2
----- ----- ----- -----
Comprehensive income $112 $ 52 $332 $160
===== ===== ===== =====
Inventories
- -----------
At At
Sept. 30, Dec. 31,
2003 2002
---- ----
Raw materials $313 $283
Work-in-process &
finished goods 459 449
----- -----
Gross inventories at FIFO 772 732
Excess of FIFO
over LIFO cost (37) (34)
----- -----
Net inventories $735 $698
===== =====
Business Segment Information
- ----------------------------
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales
---------
Fluid Power $ 683 $ 609 $2,083 $1,834
Electrical 612 506 1,701 1,511
Automotive 395 393 1,267 1,197
Truck 336 322 927 892
------- ------- ------- -------
$2,026 $1,830 $5,978 $5,434
======= ======= ======= =======
Operating profit
----------------
Fluid Power $ 65 $ 44 $ 186 $ 145
Electrical 49 49 114 109
Automotive 44 52 164 172
Truck 52 45 114 65
------- ------- ------- -------
210 190 578 491
Corporate
---------
Amortization of
intangible assets (5) (5) (18) (16)
Interest expense-net (20) (26) (68) (80)
Gain on sale of business - 18 - 18
Corporate expense-net (43) (45) (129) (106)
------- ------- ------- -------
Income before income taxes 142 132 363 307
Income taxes 35 39 91 93
------- ------- ------- -------
Net income $ 107 $ 93 $ 272 $ 214
======= ======= ======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ---------------------------------------------------------------------------
Dollars in millions, except per share data (per share data assume dilution)
Results of Operations
- ---------------------
Sales for third quarter 2003 were $2,026, 11% above $1,830 in third quarter
2002. Sales growth in 2003 of 11% consisted of 8% from four recent business
acquisitions and the new joint venture with Caterpillar Inc., and 3% 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 third
quarter 2002. For the first nine months of 2003, sales were $5,978, 10% higher
than $5,434 in 2002. Sales growth of 10% for the first nine months of 2003
consisted of 7% from the acquisitions and the new joint venture, 2% from higher
foreign exchange rates, and 1% from organic growth, net of the effect of the
sale of Navy Controls in July 2002.
Net income of $107 for third quarter 2003 increased 15% compared to $93 in the
same period of 2002. Net income per Common Share of $1.39 in third quarter 2003
increased 7% compared to $1.30 per share in 2002. The sale of 3.7 million Common
Shares in June 2003 reduced net income per share for third quarter 2003 by $0.07
compared to the same period in 2002. Net income in 2003 included restructuring
charges of $5 after-tax ($0.06 per share) compared to $4 after-tax ($0.05 per
share) in 2002. Improved income in 2003 was primarily due to higher sales in
2003, modest profits from the recent business acquisitions, lower net interest
expense and a reduction in income tax expense. Increased income also resulted
from the benefits of restructuring actions taken in recent years. These
increases in income were partially offset by increased pension and other
postretirement expense in 2003. Net income in third quarter 2002 included a
pretax gain of $18 on the sale of the Navy Controls business ($13 after-tax, or
$0.18 per Common Share), partially offset by a pretax contribution of $10 to the
Eaton Charitable Fund ($6 after-tax, or $0.09 per Common Share).
Net income for the first nine months of 2003 was $272 and net income per Common
Share was $3.67, increases of 27% and 23%, respectively, over $214 and $2.98 per
share in the first nine months of 2002. Net income in 2003 included
restructuring charges of $16 after-tax ($0.21 per share) compared to $39 after-
tax ($0.53 per share) in 2002. Improved income in 2003 was primarily due to
higher sales in 2003, modest profits from the recent business acquisitions,
lower net interest expense and a reduction in income tax expense. Increased
income was also due to the benefits of restructuring actions taken in recent
years and lower restructuring charges in 2003. These increases were partially
offset by increased pension and other postretirement expense in 2003. As
described above, net income for the first nine months of 2002 included a gain on
the sale of Navy Controls, partially offset by a contribution to the Eaton
Charitable Fund.
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. For
third quarter 2003, these charges were $2 for the Fluid Power segment and $5 for
the Electrical segment. For the first nine months of 2003, restructuring charges
were $11 for the Fluid Power segment, $12 for the Electrical segment, and $1 for
Corporate.
In 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.
For third quarter 2002, these charges were $6 for the Fluid Power segment. For
the first nine months of 2002, restructuring charges were $24 for the Fluid
Power segment, $15 for the Electrical 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%. Pretax operating income for third quarter
2003 was reduced by $18 ($12 after-tax, or $0.15 per Common Share) compared to
the same period in 2002 due to the effect on pension income of the decline in
stock market valuations on Eaton's pension fund assets, coupled with lower
discount rates associated with determining pension and other postretirement
benefit liabilities. Pretax operating income for the first nine months of 2003
was similarly reduced by $50 ($33 after-tax, or $0.44 per share) compared to the
same period in 2002.
In July 2002, the Navy Controls business was sold resulting in a pretax gain of
$18 ($13 after-tax, or $0.18 per Common Share).
In third quarter 2002, a charge of $10 related to a contribution to the Eaton
Charitable Fund ($6 after-tax, or $0.09 per Common Share) was recorded. In the
Statements of Consolidated Income, the charge was included in Other (income)
expense-net. In Business Segment Information, the charge was included in
Corporate expense-net.
The change of $20 in Other (income) expense-net for third quarter 2003 compared
to the same period in 2002 was primarily due to a loss of $1 in foreign exchange
in 2003 versus a loss of $5 in 2002, reduced legal expenses of $4 in 2003, and
the contribution to the Eaton Charitable Fund of $10 in third quarter 2002. The
change of $34 in Other (income) expense-net for the first nine months of 2003
compared to the same period in 2002 was primarily due to a gain of $5 in foreign
exchange in 2003 versus a loss of $8 in 2002, the contribution to the Eaton
Charitable Fund of $10 in third quarter 2002, and various other items including
reduced legal expenses and favorable legal settlements in 2003.
The effective income tax rate for third quarter and the first nine months of
2003 was 25.0%. The rates in 2003 compared to 29.6% for third quarter 2002 and
30.4% for the first nine months of 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.
While Eaton's end markets remained depressed in third quarter 2003, the Company
anticipates modest growth in fourth quarter 2003 compared to 2002, driven
principally by a stronger heavy-duty truck market in North America. The Company
continues to make good progress on integrating the recent business acquisitions.
The profits of the acquired businesses, while still modest, are beginning to
reflect the benefits of integration activities. In addition, working capital in
these acquisitions has been significantly reduced and further improvements are
expected over the balance of the year. The Company anticipates full year 2003
net income per Common Share of $4.80 to $4.90 and fourth quarter net income per
share of $1.15 to $1.25. The impact of restructuring charges to integrate the
recent business acquisitions and the new joint venture on 2003 net income is
expected to be $0.35 per share, with approximately $0.15 per share in the fourth
quarter of the year.
Business Segments
- -----------------
Fluid Power
- -----------
Third quarter 2003 sales of Fluid Power, Eaton's largest business segment, were
$683, 12% above $609 in third quarter 2002. Excluding the impact of the Boston
Weatherhead and Mechanical Products acquisitions, sales were up 4% over third
quarter 2002. This compares to a decline of 3% in Fluid Power's markets, with
North American fluid power industry shipments down about 5%, commercial
aerospace markets off 10%, and defense aerospace markets up by 12%. Eaton does
not anticipate a recovery in the traditional mobile and industrial hydraulics
markets until next year. The decline in the commercial aerospace market has
occurred as expected while military aerospace markets have been strong, largely
offsetting the decline in the commercial markets. Sales for the first nine
months of 2003 were $2,083, 14% above $1,834 for the same period in 2002,
primarily as a result of the business acquisitions.
Operating profit was $65 in third quarter 2003, up 48% from $44 in third quarter
2002. Restructuring charges recorded in third quarter 2003 were $2, and
primarily related to the acquisition of the Boston Weatherhead business in
November 2002, compared to $6 in 2002. Operating profit for the first nine
months of 2003 was $186, an increase of 28% compared to $145 for the same period
in 2002. For the first nine months of 2003, restructuring charges were $11
compared to $24 in 2002. Operating profit in third quarter 2003 represented a
return on sales of 9.5%, which was reduced by 0.3% due to restructuring charges,
compared to 7.2% in 2002, which was reduced by 1.0% due to restructuring
charges. For the first nine months of 2003, the return on sales was 8.9%, which
was reduced by 0.6% due to restructuring charges, compared to 7.9% in 2002,
which was reduced by 1.3% due to restructuring charges. Increased operating
profit in 2003 was primarily due to higher sales in 2003, the benefits of
restructuring actions taken in recent years to resize this business and reduced
restructuring charges in 2003. These improvements were partially offset in the
first half of 2003 by lower margins related to the Boston Weatherhead business
acquired in November 2002.
Electrical
- ----------
In the Electrical segment, third quarter 2003 sales were $612, up 21% from $506
in third quarter 2002. Excluding the impact of the acquisitions of the
electrical business of Delta plc and Commonwealth Sprague Capacitor and the new
joint venture formed with Caterpillar, third quarter sales were up 2% compared
to 2002. End markets for the electrical business remained weak during the third
quarter, with an estimated 3% decline in the markets for this business compared
to third quarter 2002. Eaton expects that the overall electrical markets will
remain flat for the balance of 2003, with modest growth expected to resume in
the first half of next year. Sales for the first nine months of 2003 were
$1,701, 13% above $1,511 for the same period in 2002, with growth coming from
the business acquisitions, partially offset by the sale of the Navy Controls
business in July 2002.
Operating profit was $49 in third quarter 2003 and in 2002. Restructuring
charges recorded in third quarter 2003 were $5 and primarily related to the
acquisition of the electrical business of Delta plc in January 2003. Operating
profit for the first nine months of 2003 was $114, an increase of 5% compared to
$109 for the same period in 2002. For the first nine months of 2003,
restructuring charges were $12 compared to $15 in 2002. Operating profit in
third quarter 2003 represented a return on sales of 8.0%, which was reduced by
0.8% due to restructuring charges, compared to 9.7% in 2002. For the first nine
months of 2003, the return on sales was 6.7%, which was reduced by 0.7% due to
restructuring charges, compared to 7.2% in 2002, which was reduced by 1.0% due
to restructuring charges. Excluding the electrical division of Delta plc, which
was acquired on January 31, 2003, the profitability of the base electrical
business has improved significantly. The integration of the electrical division
of Delta plc continues on plan. This acquisition reduced the operating margins
of the Electrical segment for both the third quarter and first nine months of
2003 by slightly less than 2 percentage points, compared to 2002. Increased
operating profits in the first nine months of 2003 were primarily due to the
benefits of restructuring actions taken in recent years to resize this business
and reduced restructuring charges in 2003.
During third quarter 2003, Eaton formed a joint venture with Caterpillar Inc. to
provide switchgear products under the Cat(R) brand name. The joint venture
operates under the name Intelligent Switchgear Organization LLC and is 51% owned
by Eaton. Annual revenues within the next two to three years are expected to be
in excess of $100.
Among major contract wins in the Electrical segment in third quarter 2003 was a
contract to supply electrical equipment for Phase I of the new Terminal 5 at
London's Heathrow Airport. Terminal 5 will proceed in phases, with the entire
project scheduled to be completed by 2006.
Automotive
- ----------
The Automotive segment posted third quarter 2003 sales of $395, 1% above $393 in
third quarter 2002. Automotive segment revenue outpaced its end markets, as it
has done consistently all year. Both NAFTA and European automotive production
declined 5% compared to third quarter 2002. Sales for the first nine months of
2003 were $1,267, 6% above $1,197 for the same period in 2002, a reflection of
stronger sales in the first half of 2003. Traditionally, sales for this segment
are lower in the third quarter than in the second quarter as a result of the
normal seasonal pattern of automotive industry production.
Operating profit in third quarter 2003 was $44, down 15% compared to $52 in
third quarter 2002. Operating profit for the first nine months of 2003 was
$164, a decrease of 5% compared to $172 for the same period in 2002. Operating
profit in third quarter 2003 represented a return on sales of 11.1% compared to
13.2% in 2002. For the first nine months of 2003, the return on sales was 12.9%
compared to 14.4% in 2002. Returns on sales in 2003 were lower than 2002
primarily as a result of increased costs related to new product launches and
several facility relocations which are currently underway. The Company expects
to make further progress on these programs during fourth quarter 2003, which
should lead to an improvement in margins.
Truck
- -----
The Truck segment posted sales of $336 in third quarter 2003, up 4% compared to
$322 in third quarter 2002. In third quarter 2003, NAFTA heavy-duty truck
production of about 47,000 units was down 16% compared to third quarter 2002,
reflecting the fact that third quarter 2002 was the height of the "pre buy" that
occurred in 2002, and NAFTA medium-duty truck production was down 4%. European
truck production was down 5% and Brazil vehicle production was down 1%. Growth
in Truck segment sales in third quarter 2003 was principally due to higher sales
outside North America. In light of the slightly weaker than expected industry
bookings levels in August and September, the Company expects fourth quarter 2003
production of heavy-duty trucks in NAFTA to be approximately 52,000 units,
resulting in full year production totaling 180,000 units. Sales for the first
nine months of 2003 were $927, 4% above $892 in the same period in 2002, with
growth coming from the same factors as in third quarter 2003.
Operating profit was $52 in third quarter 2003, up 16% compared to $45 in third
quarter 2002. Operating profit for the first nine months of 2003 was $114, an
increase of 75% compared to $65 for the first nine months of 2002. There were no
restructuring charges recorded in the first nine months of 2003 compared to $14
for the same period in 2002. Operating profit in third quarter 2003 represented
a return on sales of 15.5% compared to 14.0% in 2002. For the first nine months
of 2003, the return on sales was 12.3% compared to 7.3% in 2002, which was
reduced by 1.6% due to restructuring charges. Increased operating profit in 2003
was primarily due to the benefits of restructuring actions taken in recent years
to resize this business, the absence of restructuring charges in 2003 compared
to 2002, and increased sales in 2003.
In third quarter 2003 Eaton announced that it, together with Shaanxi Fast Gear
Co., Ltd. and Xiang Torch Investment Co., Ltd., have signed an agreement to form
a joint venture in Xi'an, China to produce heavy-duty truck transmissions for
the growing Chinese market. Eaton will have 55% ownership of the venture, which
will be called Eaton Fast Gear (Xi'an) Co., Ltd. The joint venture will be
formally established upon obtaining regulatory approval. Production is expected
to begin in the fourth quarter of 2004.
Corporate
- ---------
Corporate expense-net was $43 in third quarter 2003 compared to $45 in
third quarter 2002. The decrease was primarily due to reduced foreign exchange
losses in 2003, reduced legal expenses in 2003 and the contribution to the Eaton
Charitable Fund of $10 in third quarter 2002, partially offset by increased
pension and other postretirement benefit expense in 2003. For the first nine
months of 2003, Corporate expense-net was $129 compared to $106 for the same
period in 2002. The increase was primarily the result of increased pension and
other postretirement benefit expense in 2003, partially offset by foreign
exchange gains in 2003, the contribution to the Eaton Charitable Fund of $10 in
third quarter 2002, and various other items including reduced legal expenses and
favorable legal settlements in 2003.
Changes in Financial Condition During 2003
- ------------------------------------------
Net working capital of $1,157 at September 30, 2003 substantially increased from
$723 at year-end 2002 (the current ratio was 1.6 at September 30 compared to 1.4
at December 31, 2002). The increase was due to increased accounts receivable
resulting from higher sales in third quarter 2003 compared to fourth quarter
2002, increased working capital resulting from the acquisition of the electrical
business of Delta plc in January 2003, and 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 was $517 in the first nine months of
2003 compared to $643 generated in the same period in 2002. The lower amount of
cash generated in the first nine months of 2003 was primarily due to increased
cash used for working capital to support growth in sales. Capital expenditures
for the first nine months of 2003 were $177, compared to $139 for the same
period in 2002. Capital expenditures for full year 2003 are forecasted to be
between $290-$300.
Total debt of $1,942 at September 30, 2003 decreased $146 from $2,088 at the end
of 2002. The net-debt-to-capital ratio decreased to 31.4% at September 30, 2003
from 41.9% at December 31, 2002 due primarily to cash flow from operating
activities, cash proceeds of $296 from the sale of 3.7 million Common Shares in
June 2003 and proceeds from the exercise of stock options. Eaton has credit
facilities of $650, of which $400 expire in April 2005 and $250 in May 2008. On
October 22, 2003, Fitch Ratings Services raised the Company's long-term debt
rating from 'A-' to 'A' and its short-term debt rating from 'F2' to 'F1' or
prime. Fitch also changed its outlook of the Company from 'positive' to
'stable'.
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, Eaton's worldwide markets,
restructuring charges, working capital, and new contracts and contingencies.
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 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, litigation or dispute resolutions; material acquisitions or
divestitures; significant costs from new laws and governmental regulations; and
unanticipated deterioration of economic and financial conditions in the United
States and around the world. The Company 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 Eaton'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 September 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 July 15, 2003, Eaton filed a Current Report on Form 8-K
regarding the second quarter 2003 earnings release.
2. On October 14, 2003, Eaton filed a Current Report on Form 8-K
regarding the third 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: November 12, 2003 /s/ Richard H. Fearon
----------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning
Officer
Eaton Corporation
Quarterly Report on Form 10-Q
Third Quarter 2003
Exhibit Index
Exhibit
- -------
4 Instruments defining rights of security holders, including indentures
(Pursuant to Regulation to S-K Item 601(b)(4), Eaton agrees to
furnish to the Commission, upon request, a copy of the instruments
defining the rights of holders of long-term debt)
12 Ratio of Earnings to Fixed Charges
31.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302)
31.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302)
32.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906)
32.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906)
Exhibit 12
Eaton Corporation
Quarterly Report on Form 10-Q
Third Quarter 2003
Ratio of Earnings to Fixed Charges
Nine months
ended Year ended December 31
Sept. 30, --------------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Income from continuing
operations before income taxes $363 $399 $278 $552 $ 943 $616
Adjustments
- -----------
Minority interests in
consolidated subsidiaries 9 14 8 8 2 (2)
Income of equity investees (3) (1) - (1) (1) (1)
Interest expensed 73 110 149 182 159 93
Amortization of debt issue
costs 1 2 1 1 - -
Estimated portion of rent
expense representing
interest 25 34 38 39 36 28
Amortization of capitalized
interest 10 13 13 10 8 7
Distributed income of equity
investees - - - 1 - 1
---- ---- ---- ---- ------ ----
Adjusted income from continuing
operations before income taxes $478 $571 $487 $792 $1,147 $742
==== ==== ==== ==== ====== ====
Fixed charges
- -------------
Interest expensed $ 73 $110 $149 $182 $ 159 $ 93
Interest capitalized 5 8 12 22 21 16
Amortization of debt issue costs 1 2 1 1 - -
Estimated portion of rent
expense representing interest 25 34 38 39 36 28
---- ---- ---- ---- ------ ----
Total fixed charges $104 $154 $200 $244 $ 216 $137
==== ==== ==== ==== ====== ====
Ratio of earnings to fixed
charges 4.60 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 Eaton ceased amortization of
goodwill and indefinite life intangible assets.
Exhibit 31.1
Eaton Corporation
Quarterly Report on Form 10-Q
Third 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 have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 2003 /s/ Alexander M. Cutler
------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer
Exhibit 31.2
Eaton Corporation
Quarterly Report on Form 10-Q
Third 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 have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 12, 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
Third 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 September 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: November 12, 2003 /s/ Alexander M. Cutler
------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to Eaton Corporation and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Eaton Corporation
Quarterly Report on Form 10-Q
Third 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 September 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: November 12, 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 has been
provided to Eaton Corporation and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.