PAGE 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2001
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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------ ---------------------------
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
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 twelve months and (2) has been subject to such filing
requirements for the past ninety days. Yes X
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of voting stock held by non-affiliates of the
registrant as of January 31, 2002 was $5.1 billion. As of January 31, 2002,
there were 69,667,411 Common Shares outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2002 annual shareholders' meeting are
incorporated by reference into Part III.
Page 2
Part I
Item 1. Business
Eaton Corporation (Eaton or Company), incorporated in 1916, is a global
diversified industrial manufacturer that is a leader in fluid power systems;
electrical power quality, distribution and control; automotive engine air
management and fuel economy; and intelligent truck systems for fuel economy and
safety. Worldwide sales in 2001 were $7.3 billion. Headquartered in Cleveland,
Ohio, Eaton has 49,000 employees and sells products in more than 50 countries.
For more information, visit http://www.eaton.com.
On March 31, 2001, Eaton sold its Vehicle Switch/Electronics Division (VS/ED).
The Company also sold its Air Conditioning & Refrigeration business (AC&R) in
the third quarter of 2001. Sales for these businesses totaled $398 million in
2000.
Business Segment Information
Information regarding principal products, net sales, operating profit and
long-lived assets by business segment and geographic region is presented in
"Business Segment and Geographic Region Information" on pages 36 through 40 of
this report. Additional information regarding Eaton's segments and business in
general is presented below.
Fluid Power
Patents and Trademarks -- Eaton owns, controls, or is licensed under many
patents related to this segment. Trademarks used in connection with the
marketing of products included in this segment are EATON, EATON (logomark),
CHAR-LYNN, Q-AMP, GEROLER, ORBIT, ORBITROL, VICKERS, HYDRO-LINE, TEDECO, STERER,
ILLUMINATER, LUBRICLONE, LEVELMASTER, EEMCO, TELLITE, AEROQUIP, "FLYING A" LOGO,
AEROQUIP EXPRESS, BENCHMARK, BRUISER, AQP, HI-PAC, STC, MATCHMATE, MATCHMATE
BLUE, MATCHMATE ICE, STARTLITE, EPSILON, ZAPPER, ZAPPER PLUS, PROCRIMP, RYNGLOK,
AIRFLEX, FAWICK, and GOLF PRIDE.
Competition -- Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton occupies a strong
competitive position in relation to the many competitors in this segment and,
with respect to many products, is considered among the market leaders.
Significant Customers -- Approximately 11% of this segment's net sales in 2001
were made to two manufacturers of vehicles in the United States and Europe. The
top customer of this segment is also the top customer of the Automotive segment.
Industrial & Commercial Controls
Patents and Trademarks -- Eaton owns, controls, or is licensed under many
patents related to this segment. Some of the more significant trademarks used in
connection with the marketing of products included in this segment are EATON,
EATON (logomark), CUTLER-HAMMER, CH (EMBLEM), C-H ESS, SERIES C (& DESIGN),
DE-ION, DURANT, FACTORYMATE, PANELMATE, POW-R-WAY, POW-R-LINE, POW-R-DESIGNER,
ADVANTAGE, ADVANTAGE PLUS, ADVANTAGE (& DESIGN), ADVANCED POWER CENTER, MAGNUM,
MAGNUM DS, DS, OPTIM, TRI-PAC, IMPACC, AFCI, INTELLIGENT TECHNOLOGIES, IT, and
HEINEMANN. In addition, the Company has the right to use the WESTINGHOUSE
trademark in marketing certain products until 2004.
Competition -- Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton occupies a strong
competitive position in relation to the many competitors in this segment and,
with respect to many products, is considered among the market leaders.
PAGE 3
Significant Customers -- Approximately 15% of this segment's net sales in 2001
were made to one customer located in the United States, which is not a
significant customer of any other segment.
Automotive
Patents and Trademarks -- Eaton owns, controls, or is licensed under many
patents related to this segment. While the EATON and EATON (logomark) trademarks
are emphasized in marketing many products within this segment, the Company also
markets under a number of other trademarks including EATONITE, DILL,
SUPERCHARGER (& DESIGN), Fluid Condition Monitor, FCM, and BLOCKER.
Seasonal Fluctuations -- Sales of the Automotive segment are generally reduced
in the third quarter of each year as a result of preparations by vehicle
manufacturers for the upcoming model year and temporary shut-downs for taking
physical inventories.
Competition -- Principal methods of competition in this segment are price,
service and product performance. Eaton occupies a strong competitive position in
relation to the many competitors in this segment and, with respect to many
products, is considered among the market leaders.
Significant Customers -- Approximately 49% of this segment's net sales in 2001
were made to divisions and subsidiaries of three large original equipment
manufacturers of vehicles and one other automotive component supplier. All of
these customers are concentrated in North America and Europe. Eaton has been
conducting business with each of these companies for many years. Sales to these
companies include a number of different products and different models or types
of the same product, sales of which are not dependent upon one another. With
respect to many of the products sold, various divisions and subsidiaries of each
of the companies are in the nature of separate customers, and sales to one
division or subsidiary are not dependent upon sales to other divisions or
subsidiaries. Two of these customers are significant customers of the Truck
segment, while another is the top customer of the Fluid Power Segment.
Truck
Patents and Trademarks -- Eaton owns, controls, or is licensed under many
patents related to this segment. Trademarks used in connection with the
marketing of products included in this segment are EATON, EATON (logomark),
FULLER, ROADRANGER, AutoShift, VORAD, SmartCruise, EASY-PEDAL, SOLO, ANGLE
SPRING, LIGHTNING SERIES and TOP 2.
Competition -- Principal methods of competition in this segment are price,
service and product performance. Eaton occupies a strong competitive position in
relation to the many competitors in this segment and, with respect to many
products, is considered among the market leaders.
Significant Customers -- Approximately 54% of this segment's net sales in 2001
were made to divisions and subsidiaries of four original equipment manufacturers
of heavy-, medium-, and light-duty trucks and off-highway vehicles, concentrated
in North America and Europe. Two of these customers are also significant
customers of the Automotive segment.
Information Concerning Eaton's Business in General
Patents -- Eaton's policy is to file applications and obtain patents for its new
products including product modifications and improvements. While patents
generally expire 20 years after the patent application filing date, new patents
are issued to Eaton on a regular basis. While in the aggregate Eaton's patents
are considered important in the operation of its businesses, the loss or
expiration of any one patent would not materially affect Eaton as a whole.
PAGE 4
Employees -- Eaton has 4,431 United States employees who are subject to a total
of 18 different collective bargaining agreements, six of which expire in 2002,
and are represented by the following unions: IAM, UAW, PACE, IBEW, USW, IUE,
MPWU, and BSEA.
Raw Materials -- Principal raw materials used are iron, steel, copper, nickel,
aluminum, brass, insulating materials, silver, rubber and plastic. Materials are
purchased in various forms, such as pig iron, metal sheets and strips, forging
billets, bar stock and plastic pellets. Raw materials, as well as parts and
other components, are purchased from many suppliers and, under normal
circumstances, the Company has no difficulty obtaining them.
Order Backlog -- Since a significant portion of open orders placed with Eaton by
original equipment manufacturers of cars, trucks and off-highway vehicles are
historically subject to month-to-month releases by customers during each model
year, such orders are not considered technically firm. In measuring backlog of
orders, the Company includes only the amount of such orders released by such
customers as of the dates listed. Using this criterion, total backlog at
December 31, 2001 and 2000 (in billions) was approximately $1.2 and $1.4,
respectively. Backlog should not be relied upon as being indicative of results
of operations for future periods.
Research and Development -- Research and development expenses for new products
and improvement of existing products in 2001, 2000 and 1999 (in millions) were
$228, $269 and $262, respectively. Over the past five years, the Company has
invested approximately $1.3 billion in research and development.
Protection of the Environment -- Operations of the Company involve the use and
disposal of certain substances regulated under environmental protection laws.
Eaton continues to modify, on an ongoing, regular basis, certain processes in
order to reduce the impact on the environment, including the reduction or
elimination of certain chemicals used in and wastes generated from operations.
Compliance with Federal, State and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, is not expected to have a
material adverse effect upon earnings or the competitive position of the
Company. Eaton's estimated capital expenditures for environmental control
facilities are not expected to be material for 2002 and 2003. Information
regarding the Company's liabilities related to environmental matters is
presented in "Protection of the Environment" on pages 29 and 30 of this report.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains
manufacturing facilities at 184 locations in 25 countries. The Company is a
lessee under a number of operating leases for certain real properties and
equipment, none of which are material to its operations. Eaton's principal
research facilities are located in Southfield, Michigan, and Milwaukee,
Wisconsin. In addition, certain divisions conduct research in their own
facilities. Management believes that the manufacturing facilities are adequate
for operations, and such facilities are maintained in good condition.
Item 3. Legal Proceedings
Information regarding the Company's legal proceedings is presented in
"Protection of the Environment" and "Contingencies" on pages 29 and 30 of this
report.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PAGE 5
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Shares are listed for trading on the New York, Chicago,
Pacific and London stock exchanges. Information regarding cash dividends paid
and the high and low market price per Common Share for each quarter in 2001 and
2000 is presented in "Quarterly Data" on pages 53 and 54 of this report. At
December 31, 2001, there were 11,193 holders of record of the Company's Common
Shares. Additionally, approximately 25,000 current and former employees were
shareholders through participation in the Eaton Savings Plan (ESP) (formerly
known as Eaton Share Purchase & Investment Plan), Eaton Personal Investment Plan
(EPIP) (formerly known as the Eaton Corporation 401(k) Savings Plan & Trust) and
the Aeroquip-Vickers Savings & Profit Sharing Plan.
Item 6. Selected Financial Data
Information regarding selected financial data is presented in the "Six-Year
Consolidated Financial Summary" on pages 55 and 56 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is presented on pages 41 through 52 of this report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Information regarding market risk is presented on page 48 of this report.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors, consolidated financial statements, and
financial review is presented on pages 12 through 40 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information contained in the definitive Proxy Statement to be filed on or about
March 15, 2002, with respect to directors, is incorporated by reference.
A listing of Eaton's officers, their ages, positions and offices held over the
past five years, as of January 31, 2002, follows:
Name Age Position (Date elected to position)
- ---- --- -----------------------------------
Alexander M. Cutler 50 Chairman and Chief Executive Officer;
President (August 1, 2000 - present)
President and Chief Operating Officer
(September 1, 1995 - July 31,2000)
Director (1993 - present)
PAGE 6
Craig Arnold 41 Senior Vice President and Group Executive
- Fluid Power(October 25, 2000 - present)
Corporate Vice President of General
Electric and President of GE Lighting
Services Ltd. (1999-2000)
Corporate Vice President and President
of GE Plastics, Greater China (1998 - 1999)
Corporate Vice President and President
of GE Appliances, Asia (1997-1998)
Managing Director of Structured Products Europe
at GE Plastics(1995 - 1997)
Stephen M. Buente 51 Senior Vice President and Group Executive -
Automotive (August 21, 2000 - present)
Operations Vice President - Automotive
Controls (1999-2000)
Operations Vice President - Engine
Components (1995-1999)
Randy W. Carson 51 Senior Vice President and Group Executive -
Cutler-Hammer (January 1, 2000 - present)
Vice President - Growth Initiatives
(February 24, 1999 - December 31, 1999)
Senior Vice President at Rockwell Automation
(1992-1998)
James E. Sweetnam 49 Senior Vice President and Group Executive
- Truck (July 1, 2001 - present)
Vice President - Heavy-Duty Transmission, Clutch
and Aftermarket (January 2000 - June 30, 2001)
Vice President and General Manager - Heavy-Duty
Transmission Division (1997 - 1999)
Kristen M. Bihary 48 Vice President - Communications
(July 28, 1999 - present)
Vice President - External Affairs,
Internal and Marketing Communications
at Shell Chemical Company (1998-1999)
Vice President - Public Affairs at Varity
Corporation (1995-1998)
Donald H. Bullock 42 Vice President - Information Technologies
(August 1, 2000 - present)
Director of Finance Reengineering (1998-2000)
Principal at CSC Index (1992-1998)
Susan J. Cook 54 Vice President - Human Resources
(January 16, 1995 - present)
Earl R. Franklin 58 Secretary and Associate General Counsel
(September 1, 1991 - present)
J. Robert Horst 58 Vice President and General Counsel
(January 1, 2000 - present)
Deputy General Counsel (1998-1999)
Associate General Counsel (1991-1998)
John S. Mitchell 45 Vice President - Taxes (November 22,
1999 - present)
Vice President - Taxes at The Limited,
Inc. (1997-1999)
Director of Taxes at The Limited, Inc.
(1987-1997)
PAGE 7
Robert E. Parmenter 49 Vice President and Treasurer
(January 1, 1997 - present)
Assistant Treasurer (1994-1996)
Billie K. Rawot 50 Vice President and Controller
(March 1, 1991 - present)
Ken D. Semelsberger 40 Vice President - Strategic Planning
(April 28, 1999 - present)
Director - Corporate Development and
Planning (1998 - 1999)
Director - Strategic Planning (1995 - 1998)
There are no family relationships among the officers listed, and there are no
arrangements or understandings pursuant to which any of them were elected as
officers. All officers hold office for one year and until their successors are
elected and qualified, unless otherwise specified by the Board of Directors;
provided, however, that any officer is subject to removal with or without cause,
at any time, by a vote of a majority of the Board of Directors.
Item 11. Executive Compensation
Information contained in the definitive Proxy Statement to be filed on or about
March 15, 2002, with respect to executive compensation, is incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information contained in the definitive Proxy Statement to be filed on or about
March 15, 2002, with respect to security ownership of certain beneficial owners
and management, is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None required to be reported.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The following report of independent auditors, consolidated
financial statements and financial review, included in Item 8, are
filed as a separate section of this report:
Report of Independent Auditors - Page 12
Consolidated Balance Sheets - December 31, 2001 and 2000 - Page 13
Statements of Consolidated Income - Years ended December 31, 2001,
2000 and 1999 - Page 14
Statements of Consolidated Cash Flows - Years ended December 31, 2001,
2000 and 1999 - Pages 15 and 16
Statements of Consolidated Shareholders' Equity - Years ended December
31, 2001, 2000 and 1999 - Pages 17 and 18
Financial Review - Pages 19 through 40
(2) All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission, are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
PAGE 8
(3) Exhibits
3(a) Amended Articles of Incorporation (amended and restated as of
April 27, 1994) - Incorporated by reference to the Form 8-K
Report dated May 19, 1994
3(b) Amended Regulations (amended and restated as of April 26,
2000) - Incorporated by reference to the Form 10-Q for the six
months ended June 30, 2000
4(a) Instruments defining rights of security holders, including
indentures (Pursuant to Regulation S-K Item 601(b)(4), the
Company agrees to furnish to the Commission, upon request, a
copy of the instruments defining the rights of holders of
long- term debt)
4(b) Eaton Corporation Rights Agreement dated June 28, 1995 -
Incorporated by reference to the Form 8-K Report dated June
28, 1995
10 Material contracts
The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and
restated as of March 31, 2000) - Incorporated by
reference to the Annual Report on Form 10-K for the
year ended December 31, 2000
(b) Executive Strategic Incentive Plan (amended and
restated as of June 21, 1994, July 25, 1995, April 21,
1998 and April 1, 1999) - Incorporated by reference to
the Annual Report of Form 10-K for the year ended
December 31, 2000
(c) Group Replacement Insurance Plan (GRIP), effective as
of June 1, 1992 - Incorporated by reference to the
Annual Report on Form 10-K for the year ended December
31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference to
the definitive Proxy Statement dated March 18, 1991
(e) 1995 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 17, 1995
(f) Incentive Compensation Deferral Plan (amended and
restated as of October 1, 1997) - Incorporated by
reference to the Annual Report Form 10-K for the year
ended December 31, 2000
(g) Strategic Incentive and Option Plan (amended and
restated as of September 24, 1996) - Incorporated by
reference to the Annual Report on Form 10-K for the
year year ended December 31, 1996
(h) Form of "Change of Control" Agreement entered into with
officers of Eaton Corporation as of November 1, 1996 -
Incorporated by reference to the Annual Report on Form
10-K for the year ended December 31, 1996
PAGE 9
(i) The following are incorporate by reference to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1990:
(i) Limited Eaton Service Supplemental Retirement Income Plan
(amended and restated as of January 1, 1989)
(ii) Amendments to the 1986 Stock Option Plan
(iii) Eaton Corporation Supplemental Benefits Plan (amended and
restated as of January 1, 1989) (which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess Benefits Plan (amended and restated
January 1, 1989) (with respect to Section 415 limitations of
the Internal Revenue Code)
(j) Executive Incentive Compensation Plan - Incorporated by reference
to the Annual Report on Form 10-K for the year ended December 31,
2000
(k) Plan for the Deferred payment of Directors' Fees (amended and
restated as of September 24, 1996 and amended effective as of
January 1, 1997) - Incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1997
(l) Plan for the Deferred Payment of Directors' Fees (originally
adopted in 1980 and amended effective February 25, 1997) -
Incorporated by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(m) 1996 Non-Employee Director Fee Deferral Plan (amended effective
January 1, 1997 and February 25, 1997) - Incorporated by
reference to the Annual Report on Form 10-K for the year ended
December 31, 1997
(n) Eaton Corporation Trust Agreement - Outside Directors (dated
December 6, 1996) - Incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31, 1996
(o) Eaton Corporation Trust Agreement - Officers and Employees (dated
December 6, 1996) - Incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31, 1996
(p) Eaton Corporation Retirement Plan for Non-Employee Directors
(amended and restated January 1, 1996) - Incorporated by
reference to the Annual Report on Form 10-K for the year ended
December 31, 1997
(q) 1998 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 13, 1998
12 Ratio of Earnings to Fixed Charges - Page 57
21 Subsidiaries of Eaton Corporation - Pages 58 through 65
23 Consent of Independent Auditors - Pages 66 through 68
24 Power of Attorney - Page 69
PAGE 10
(b) Reports on Form 8-K
On October 15, 2001, the Company filed a Current Report on Form 8-K
regarding the third quarter earnings release.
On January 22, 2002, the Company filed a Current Report on Form 8-K
regarding the fourth quarter earnings release.
(c) Exhibits
Certain exhibits required by this portion of Item 14 are filed as a
separate section of this report.
(d) Financial Statement Schedules
None required to be filed.
PAGE 11
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Eaton Corporation
-----------------------------
Registrant
Date: March 19, 2002 /s/ Billie K. Rawot
-------------------------------------
Billie K. Rawot
Vice President and
Controller - Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
DATE: March 19, 2002
Signature Title
--------- -----
*
- -------------------------------------------
Alexander M. Cutler Chairman and Chief Executive
Officer; President; Principal
Executive Officer; Director
*
- -------------------------------------------
Michael J. Critelli Director
*
- -------------------------------------------
Ernie Green Director
*
- -------------------------------------------
Ned C. Lautenbach Director
*
- -------------------------------------------
Deborah L. McCoy Director
*
- -------------------------------------------
John R. Miller Director
*
- -------------------------------------------
Furman C. Moseley Director
*
- -------------------------------------------
Victor A. Pelson Director
*
- -------------------------------------------
A. William Reynolds Director
*
- -------------------------------------------
Gary L. Tooker Director
*By /s/ Billie K. Rawot
----------------------------------------
Billie K. Rawot, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
PAGE 12
Eaton Corporation
2001 Annual Report on Form 10-K
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Eaton Corporation
We have audited the consolidated balance sheets of Eaton Corporation as of
December 31, 2001 and 2000, and the related statements of consolidated income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eaton Corporation
at December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
- ---------------------
Cleveland, Ohio
January 21, 2002
PAGE 13
Eaton Corporation
Consolidated Balance Sheets
December 31
----------------
(Millions) 2001 2000
---- ----
ASSETS
Current assets
Cash $ 112 $ 82
Short-term investments 199 44
Accounts receivable 1,070 1,219
Inventories 681 872
Deferred income taxes 153 147
Other current assets 172 207
------ ------
2,387 2,571
Property, plant & equipment
Land & buildings 763 792
Machinery & equipment 3,053 3,255
------ ------
3,816 4,047
Accumulated depreciation (1,766) (1,773)
------ ------
2,050 2,274
Goodwill 1,902 2,026
Other intangible assets 533 556
Other assets 774 753
------ ------
$7,646 $8,180
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 58 $ 447
Current portion of long-term debt 130 110
Accounts payable 418 396
Accrued compensation 158 199
Accrued income & other taxes 258 192
Other current liabilities 647 763
------ ------
1,669 2,107
Long-term debt 2,252 2,447
Postretirement benefits other than pensions 670 679
Deferred income taxes & other liabilities 580 537
Shareholders' equity
Common Shares (69.5 in 2001 and 68.3 in 2000) 35 34
Capital in excess of par value 1,348 1,266
Retained earnings 1,447 1,410
Accumulated other comprehensive income (loss) (299) (267)
Deferred compensation plans (56) (33)
------ ------
2,475 2,410
------ ------
$7,646 $8,180
====== ======
The Financial Review on pages 19 to 40 is an integral part of the consolidated
financial statements.
PAGE 14
Eaton Corporation
Statements of Consolidated Income
Year ended December 31
----------------------
(Millions except for per share data) 2001 2000 1999
---- ---- ----
Net sales $7,299 $8,309 $8,005
Costs & expenses
Cost of products sold 5,503 6,092 5,792
Selling & administrative 1,220 1,299 1,248
Research & development 228 269 262
------ ------ ------
6,951 7,660 7,302
------ ------ ------
Income from operations 348 649 703
Other income (expense)
Interest expense-net (142) (177) (152)
Gain on sales of businesses 61 340
Other-net 11 80 52
------ ------ ------
(70) (97) 240
------ ------ ------
Income from continuing operations before
income taxes 278 552 943
Income taxes 109 189 340
------ ------ ------
Income from continuing operations 169 363 603
Income from discontinued operations 90 14
------ ------ ------
Net income $ 169 $ 453 $ 617
====== ====== ======
Net income per Common Share assuming dilution
Continuing operations $ 2.39 $ 5.00 $ 8.17
Discontinued operations 1.24 .19
------ ------ ------
$ 2.39 $ 6.24 $ 8.36
====== ====== ======
Average number of Common Shares outstanding 70.5 72.6 73.7
Net income per Common Share basic
Continuing operations $ 2.43 $ 5.06 $ 8.31
Discontinued operations 1.25 .20
------ ------ ------
$ 2.43 $ 6.31 $ 8.51
====== ====== ======
Average number of Common Shares outstanding 69.4 71.8 72.5
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76
The Financial Review on pages 19 to 40 is an integral part of the consolidated
financial statements.
PAGE 15
Eaton Corporation
Statements of Consolidated Cash Flows
Year ended December 31
----------------------
(Millions) 2001 2000 1999
---- ---- ----
Net cash provided by operating activities
of continuing operations
Income from continuing operations $ 169 $ 363 $ 603
Adjustments to reconcile to net cash provided by
operating activities
Depreciation & amortization 355 364 332
Amortization of goodwill & other
intangible assets 94 98 89
Deferred income taxes 72 44 52
Pension assets (84) (67) (69)
Other long-term liabilities 30 35 54
Gain on sales of businesses & corporate assets (61) (22) (340)
Other non-cash items in income 2 (6) 15
Changes in working capital, excluding
acquisitions & sales of businesses
Accounts receivable 98 (39) (59)
Inventories 149 (13) 17
Accounts payable 64 (16) (3)
Accrued income & other taxes 61 (86) 67
Other current liabilities (129) (44) (58)
Other working capital accounts (53) (81) 2
Other-net (2) (11) 6
------ ------ ------
765 519 708
Net cash used in investing activities
of continuing operations
Expenditures for property, plant & equipment (295) (386) (480)
Acquisitions of businesses, less cash acquired (35) (115) (1,602)
Sales of businesses & corporate assets 403 122 544
Proceeds from initial public offering of subsidiary 349
(Purchases) sales of short-term investments (154) 40 (34)
Other-net 22 (34) (49)
------ ------ ------
(59) (24) (1,621)
Net cash (used in) provided by financing activities
of continuing operations
Borrowings with original maturities of more
than three months
Proceeds 1,481 1,555 1,917
Payments (1,419) (1,560) (1,517)
Borrowings with original maturities of less
than three months-net (643) 150 519
Cash dividends paid (120) (127) (128)
Purchase of Common Shares (12) (417) (5)
Sale of Common Shares 147
Proceeds from exercise of employee stock options 37 10 34
Other-net 1 (9)
------ ------ ------
(676) (388) 958
------ ------ ------
Cash provided by continuing operations 30 107 45
Net cash used in discontinued operations (104) (43)
------ ------ ------
Total increase in cash 30 3 2
Cash at beginning of year 82 79 77
------ ------ ------
Cash at end of year $ 112 $ 82 $ 79
====== ====== ======
PAGE 16
The Financial Review on pages 19 to 40 is an integral part of the consolidated
financial statements.
PAGE 17
Eaton Corporation
Statements of Consolidated Shareholders' Equity
Accumulated Total
Common Shares Capital in other Deferred share-
--------------- excess of Retained comprehensive compensa- holders'
Shares Dollars par value earnings income (loss) ESOP tion plans equity
(Millions) ------ ------- ----------- -------- ------------- ---- ----------- --------
Balance at January 1, 1999 71.7 $36 $853 $1,321 $(110) $(6) $(37) $2,057
Net income 617 617
Other comprehensive income (loss) (110) (110)
------
Total comprehensive income 507
Cash dividends paid (128) (128)
Issuance of shares under
employee benefit plans,
including tax benefit .8 49 (1) 6 54
Put option obligation (7) (7)
Sale of shares 1.6 1 146 147
Purchase of shares (.1) (5) (1) (6)
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 1999 74.0 37 1,041 1,804 (220) 0 (38) 2,624
Net income 453 453
Other comprehensive income (loss) (47) (47)
------
Total comprehensive income 406
Cash dividends paid (127) (127)
Issuance of shares under
employee benefit plans,
including tax benefit .3 57 (1) 6 62
Put option obligation 7 7
Purchase of shares (6.0) (3) (112) (302) (1) (418)
Initial public offering and
spin-off of subsidiary 272 (416) (144)
Other-net 1 (1) 0
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 2000 68.3 34 1,266 1,410 (267) 0 (33) 2,410
PAGE 18
Net income 169 169
Other comprehensive income (loss) (32) (32)
------
Total comprehensive income 137
Cash dividends paid (120) (120)
Issuance of shares under
employee benefit plans,
including tax benefit 1.1 1 64 (2) (1) 62
Issuance of shares to trust .3 22 (22) 0
Purchase of shares (.2) (4) (8) (12)
Other-net (2) (2)
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 2001 69.5 $35 $1,348 $1,447 $(299) $0 $(56) $2,475
==== === ====== ====== ===== ==== ==== ======
The Financial Review on pages 19 to 40 is an integral part of the consolidated
financial statements.
PAGE 19
FINANCIAL REVIEW
- ----------------
Dollars and shares in millions, except per share data (per share data assume
dilution)
ACCOUNTING POLICIES
- -------------------
Consolidation and Basis of Presentation
- ---------------------------------------
The consolidated financial statements include accounts of Eaton and all
majority-owned subsidiaries and other controlled entities. The equity method of
accounting is used for investments in associate companies and joint ventures
where the Company has a 20% to 50% ownership interest. These associate companies
and joint ventures are not material either individually, or in the aggregate, to
Eaton's financial position, net income or cash flows.
The Company does not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities" (SPEs). In the ordinary course of business, Eaton
leases certain real properties, primarily sales and office facilities, and
equipment, as described under "Lease Commitments" in the Financial Review.
Transactions with related parties are in the ordinary course of business, are
conducted on an arm's-length basis, and are not material to Eaton's financial
position, net income or cash flows.
Foreign Currency Translation
- ----------------------------
The functional currency for principally all subsidiaries outside the United
States is the local currency. Financial statements for these subsidiaries are
translated into United States dollars at year-end exchange rates as to assets
and liabilities and weighted-average exchange rates as to revenues and expenses.
The resulting translation adjustments are recorded in shareholders' equity in
accumulated other comprehensive income (loss).
Inventories
- -----------
Inventories are carried at lower of cost or market. Inventories in the United
States are generally accounted for using the last-in, first-out (LIFO) method.
Remaining United States and all other inventories are accounted for using the
first-in, first-out (FIFO) method.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization are computed by the straight-line method for
financial statement purposes. Cost of buildings is depreciated over forty years
and machinery and equipment over principally three to ten years. Goodwill and
intangible assets, primarily consisting of patents, trademarks and tradenames
have been amortized over a range of five to forty years. Software is amortized
over a range of three to five years.
Goodwill and other long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount may not be recoverable.
Events or circumstances that would result in an impairment review primarily
include operations reporting losses or a significant change in the use of an
asset. The asset would be considered impaired when the future net undiscounted
cash flows generated by the asset are less than its carrying value. An
impairment loss would be recognized based on the amount by which the carrying
value of the asset exceeds its fair value.
Statements of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets" were issued by
the Financial Accounting Standards Board (FASB) in the third quarter of 2001.
SFAS No. 141 eliminates the pooling-of-interests method for business
combinations and requires use of the purchase method.
PAGE 20
SFAS No. 142 changes the accounting for goodwill and indefinite life intangibles
from an amortization approach to a non-amortization approach requiring periodic
testing for impairment of the asset. Upon adoption of the Statement on January
1, 2002, the provisions of SFAS No. 142 require discontinuance of amortization
of goodwill and indefinite life intangible assets which were recorded in
connection with previous business combinations. The adoption of SFAS No. 142
will result in an annual decrease in pretax amortization expense associated with
goodwill and certain intangible assets of approximately $70.
Under SFAS No. 142, an impairment test will be required upon adoption and at
least annually to determine potential write-downs of goodwill and indefinite
life intangible assets. The Company does not expect to recognize an impairment
charge upon adoption of this Statement. Eaton also does not plan to reclassify
any intangible assets from goodwill upon adoption of the Statement.
In the third quarter of 2001, the FASB also issued SFAS No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets". This Statement addresses the
conditions under which an impairment charge should be recorded related to
long-lived assets to be held and used, except for goodwill, and those to be
disposed of by sale or otherwise. The provisions of this Statement are effective
January 1, 2002. The Company does not expect this Statement to have a material
impact on its financial position, net income or cash flows.
Financial Instruments
- ---------------------
In the normal course of business, Eaton is exposed to fluctuations in foreign
currencies, interest rates, and commodity prices. The Company uses various
financial instruments, primarily foreign currency forward exchange contracts,
interest rate swaps and commodity futures contracts to manage exposure to price
fluctuations. Financial instruments used by Eaton are straightforward,
non-leveraged, instruments for which quoted market prices are readily available
from a number of independent services. Financial instruments are not bought and
sold solely for trading purposes, except for nominal amounts authorized under
limited, controlled circumstances (in 2001, resulted in an immaterial net gain).
Credit loss from these instruments has never been experienced since the
counterparties to the instruments are major international financial institutions
with strong credit ratings and due to control over the limit of positions
entered into with any one party.
Effective January 1, 2001, Eaton adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. SFAS No. 133 requires all derivative financial
instruments to be recognized as either assets or liabilities on the balance
sheet and to be measured at fair value. Accounting for the gain or loss
resulting from the change in the financial instrument's fair value depends on
whether it has been designated, and effective, as a hedge and, if so, on the
nature of the hedging activity. The adoption of SFAS No. 133 did not have a
material effect on the Company's financial position, net income or cash flows.
Eaton's accounting policies related to financial instruments under SFAS No. 133
are summarized below:
Fair value hedge -- Financial instruments can be designated as hedges of changes
in the fair value of a recognized fixed-rate asset or liability, or a firm
commitment to acquire an asset or liability. In these cases, the gain or loss
from the hedge and the offsetting gain or loss from the hedged item are
recognized immediately in net income.
Cash flow hedge -- Financial instruments can be designated as hedges of variable
cash flows from a recognized variable-rate asset or liability, or a forecasted
acquisition of an asset or liability. For these hedges, the effective portion of
the gain or loss from the financial instrument is initially reported as a
component of other comprehensive income in shareholders' equity and subsequently
reclassified to net income when the forecasted transaction affects net income.
The ineffective portion of the gain or loss from the financial instrument is
immediately recognized in net income.
PAGE 21
Foreign currency net investment hedge -- Financial instruments can be designated
as hedges of the foreign currency exposure from a net investment in one of the
Company's foreign operations. In these cases, the gain or loss from the hedge
and the foreign currency gain or loss from the hedged net assets are reported as
a component of other comprehensive income in shareholders' equity.
Foreign currency fair value hedge -- Financial instruments can be designated as
hedges of the foreign currency exposure related to a recognized asset or
liability, or a firm commitment to acquire an asset or liability. For these
hedges, the gain or loss from the hedge and the offsetting foreign currency gain
or loss from the hedged item are recognized immediately in net income.
Foreign currency cash flow hedge -- Financial instruments can be designated as
hedges of the foreign currency exposure related to the cash flows associated
with a recognized asset or liability, or a forecasted acquisition of an asset or
liability. In these cases, the effective portion of the gain or loss from the
financial instrument is initially reported as a component of other comprehensive
income in shareholders' equity and subsequently reclassified to net income when
the forecasted transaction affects net income. The ineffective portion of the
gain or loss from the financial instrument is immediately recognized in net
income.
Non-hedging financial instruments -- The gain or loss related to financial
instruments that are not designated as hedges, are recognized immediately in net
income.
Options for Common Shares
- -------------------------
The Company applies the intrinsic value based method described in Accounting
Principles Board Opinion No. 25 to account for stock options granted to
employees to purchase Common Shares. Under this method, no compensation expense
is recognized on the grant date, since on that date the option price equals the
market price of the underlying Common Shares.
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are shipped to
unaffiliated customers. Shipping and handling costs billed to customers are
included in net sales and the related costs in cost of products sold.
The Securities and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition" provides guidance on the SEC staff's views on
application of generally accepted accounting principles to selected revenue
recognition issues. The Company's revenue recognition policy is in accordance
with generally accepted accounting principles and SAB No. 101.
Estimates
- ---------
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and notes. Actual results could
differ from these estimates.
Financial Presentation Changes
- ------------------------------
Certain amounts for prior years have been reclassified to conform to the current
year presentation.
ACQUISITIONS OF BUSINESSES
- --------------------------
The Company acquired businesses for a combined net cash purchase price of $35 in
2001, $115 in 2000 and $1,602 in 1999. All acquisitions were accounted for by
the purchase method of accounting and, accordingly, the Statements of
Consolidated Income include the results of the acquired businesses from the
effective dates of acquisition.
PAGE 22
In March 2001, Eaton completed the purchase of the remaining unowned 50%
interest of Sumitomo Eaton Hydraulics Company (known as Eaton Fluid Power Ltd.),
the former joint venture with Sumitomo Heavy Industries. This business
manufactures a complete line of hydraulic motors under the Orbit and Orbitol
brand names primarily for the Japanese mobile equipment market and has
annualized sales of $76 in the Pacific region. The operating results of this
business are reported in Business Segment Information in Fluid Power. During
2001, the Company also acquired the commercial clutch manufacturing assets of
Transmisiones TSP, S.A. de C.V. in Mexico and completed the acquisition of the
European portion of the vehicle mirror actuator business of Donnelley
Corporation, located in Manorhamilton, Ireland.
In September 2000, the industrial cylinder business of International Motion
Control Incorporated was acquired for $75. This business, which had 1999 sales
of $63, manufactures industrial cylinders which are primarily used by machine
and equipment builders to transfer and apply fluid power. The operating results
of this business are reported in Business Segment Information in Fluid Power.
In April 1999, the Company acquired Aeroquip-Vickers, Inc. for $1,589. The
operating results of this business are reported in Business Segment Information
in Fluid Power. As a result of the acquisition of Aeroquip-Vickers, Eaton
incurred acquisition integration costs related to Aeroquip-Vickers locations and
employees. Acquisition integration costs not associated with the generation of
future revenues, and which had no future economic benefit, were reflected as
assumed liabilities in the purchase price allocation. Acquisition integration
liabilities of $49 remained at December 31, 2000 and were substantially utilized
in 2001.
SALES OF BUSINESSES AND CORPORATE ASSETS
- ----------------------------------------
The Company sold businesses, product lines and certain corporate assets for
aggregate cash proceeds of $403 in 2001, $122 in 2000 and $544 in 1999.
The sales of businesses in 2001 included the Vehicle Switch/Electronics Division
(VS/ED), the Air Conditioning and Refrigeration business, and certain assets of
the Automotive and Truck segments. The sales of these businesses resulted in a
net pretax gain of $61 ($22 after-tax, or $.30 per Common Share).
The sales of certain corporate assets and product lines in 2000 resulted in a
net pretax gain of $22 ($14 after-tax or $.19 per Common Share).
Divestitures in 1999 included the sale of the Engineered Fasteners and Fluid
Power divisions. The sales of these businesses, and adjustments related to
businesses sold in prior periods, resulted in a net pretax gain of $340 ($198
after-tax, or $2.68 per Common Share). Substantially all of Vickers Electronic
Systems was sold, which was acquired in the acquisition of Aeroquip-Vickers,
resulting in no gain or loss.
The net gains on the sales of businesses in 2001 and 1999 were reported as a
separate line item in the Statements of Consolidated Income and Business Segment
Information. The net gain on the sales of corporate assets and product lines in
2000 was included in the Statements of Consolidated Income in Other income-net
and in Business Segment Information in Corporate & other-net. The operating
results of VS/ED and the businesses sold in 1999 are reported in Business
Segment Information as Divested operations.
PAGE 23
UNUSUAL CHARGES
- ---------------
2001 Charges
- ------------
In response to extraordinarily weak economic conditions in 2001, and to reduce
fixed operating costs, Eaton undertook restructuring actions that were needed to
help maintain a competitive advantage in the current economic environment. The
Fluid Power segment incurred charges throughout the year associated with the
ongoing integration of Aeroquip-Vickers and other recent business acquisitions.
The Industrial & Commercial Controls segment announced a restructuring program
in the second quarter and took charges in each subsequent quarter. The Truck
segment announced a plan in the first quarter and recorded associated charges in
every quarter of the year.
Restructuring actions in the Truck business consisted of $35 of workforce
reductions for 1,038 employees and $20 of asset write-downs and plant
consolidation and other expenses. The workforce reductions consisted of
severance and other employee benefits for the elimination of salary positions
within the organization and manufacturing personnel at the closed facilities.
The Company completed the closure of manufacturing facilities in Hillsville,
Virginia, and in Tipton, Gloucester and Aycliffe, United Kingdom, consolidating
production to a facility in Gdansk, Poland, as well as completing the closure of
the heavy-duty transmission plant in St. Nazaire, France.
Restructuring actions in the Industrial & Commercial Controls business consisted
of $21 of workforce separation costs for the termination of 887 personnel,
primarily manufacturing, and $9 of plant consolidation and other expenses.
In connection with the acquisition of businesses in the Fluid Power segment,
Eaton incurred acquisition integration costs related to Eaton locations and
employees. In accordance with generally accepted accounting principles, these
costs were recorded as expense as incurred. Integration charges related to the
acquisition of Aeroquip-Vickers and other recent acquisitions included $15 for
plant consolidation and other expenses and $7 for workforce reductions.
Workforce reductions include severance and other related employee benefits for
the termination of 239 personnel.
Restructuring actions related to corporate staff consisted of $8 for workforce
reductions, representing 10% of the corporate staff, as well as $4 for asset
writedowns and other expenses. A corporate charge of $10 related to an
arbitration was recorded in the second quarter of 2001. The arbitration award
related to a contractual dispute over supply arrangements initiated in February
1999 against Vickers, Incorporated, a subsidiary of Aeroquip-Vickers, Inc.,
which was acquired by Eaton in April 1999.
2000 Charges
- ------------
Integration charges related to the acquisition of Aeroquip-Vickers consisted of
$46 of plant consolidation and other expenses and $1 for workforce reductions.
The workforce reduction charges consist of severance and other related employee
benefits and included the termination of approximately 110 employees, primarily
manufacturing personnel. The Company also incurred $5 of corporate charges
related to the restructuring of certain functions.
1999 Charges
- ------------
Integration charges related to the acquisition of Aeroquip-Vickers included $21
for plant consolidation and other expenses. In addition, a $2 liability for
workforce reductions, severance and other related employee benefits, was
recorded and included the termination of 70 employees.
PAGE 24
As part of the ongoing effort to restructure European operations in the Truck
segment, a restructuring liability of $7 was recorded in 1999. This charge
related to workforce reductions, severance and other related employee benefits,
for the termination of 190 employees, primarily manufacturing personnel.
Summary of Unusual Charges
- --------------------------
A summary of unusual charges recorded in each year follows:
2001 2000 1999
---- ---- ----
Operational restructuring charges
Fluid Power $ 22 $ 47 $ 21
Industrial & Commercial Controls 30
Truck 55 7
Corporate 22 5 2
----- ---- ----
Pretax $ 129 $ 52 $ 30
===== ==== ====
After-tax $ 86 $ 34 $ 20
Per Common Share 1.21 .47 .27
The operational restructuring charges are included in the Statements of
Consolidated Income in Income from operations and reduced operating profit of
the related business segment. The corporate charges are included in the
Statements of Consolidated Income in Income from operations, except for $11 in
2001, which primarily related to the arbitration award, which is included in the
Statements of Consolidated Income in Other expense-net. All of the corporate
charges are included in Business Segment Information in Corporate & other-net.
Restructuring Liabilities
- -------------------------
Restructuring liabilities of $8 remained at December 31, 2000 related to prior
restructuring actions and were fully utilized in 2001. A movement of the various
components of charges related to 2001 restructuring actions are as follows:
Workforce reductions Inventory & Plant
-------------------- other asset consolidation
Employees Dollars write-downs & other Total
--------- ------- ----------- ------------- -----
2001 charges 2,310 $ 71 $ 20 $ 28 $119
Utilized in 2001 (1,966) (50) (20) (26) (96)
----- ---- ---- ---- ----
Liabilities remaining
at December 31, 2001 344 $ 21 $ 0 $ 2 $ 23
===== ==== ==== ==== ====
DISCONTINUED OPERATIONS
- -----------------------
On June 30, 2000, the Company's semiconductor equipment operations were
reorganized into a wholly-owned subsidiary, Axcelis Technologies, Inc.
(Axcelis). In July 2000, Axcelis completed an initial public offering (IPO) for
the sale of 17.6% of its common stock. The net proceeds from the IPO were $349.
On December 29, 2000 Eaton distributed its remaining interest in Axcelis to
Eaton shareholders as a dividend (spin-off). The gain on the IPO of $272 was
recorded as a direct increase to shareholders' equity. The spin-off was recorded
as a direct reduction of shareholders' equity of $416.
The consolidated financial statements present the semiconductor equipment
operations as a discontinued operation for 2000 and 1999. Operating results of
discontinued operations are summarized as follows:
PAGE 25
2000 1999
----- -----
Net sales $ 679 $ 397
Income before income taxes $ 132 $ 20
Income taxes 42 6
----- -----
Net income $ 90 $ 14
===== =====
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
At December 31, 2001, short-term debt was $58, which related to lines of credit
of subsidiaries outside the United States. These subsidiaries have available
lines of credit, primarily short-term, aggregating $119 from various banks
worldwide.
Long-term debt, excluding the current portion, follows:
2001 2000
---- ----
Variable rate notes due 2003 (3.08% at
December 31, 2001 based on 3-month LIBOR
plus 0.73%) $ 150
6.95% notes due 2004 250 $ 250
1.62% Yen notes due 2006 38
8% debentures due 2006
($80 converted to floating rate of
4.9% by interest rate swap) 86 86
8.9% debentures due 2006
(converted to floating rate of 5.9% by
interest rate swap) 100 100
6% Euro 200 million notes due 2007
(converted to floating rate of 4.1% by
interest rate swap) 177 186
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024 66 66
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 145 145
7.875% debentures due 2026 82 82
7.65% debentures due 2029
($100 converted to floating rate of
3.3% by interest rate swap) 200 200
6.4% to 7.6% medium-term notes due at
various dates ranging from 2002 to 2018 131 157
Commercial paper
($100 converted to fixed rate of
3.7% by interest rate swap) 630 900
Other 97 175
------ ------
$2,252 $2,447
====== ======
The Company has multi-year credit facilities of $900, $500 of which expires in
May 2003 and $400 expires in April 2005. Commercial paper of $630 is classified
as long-term debt because Eaton intends, and has the ability under this
agreement, to refinance these notes on a long-term basis.
The Company has entered into interest rate and currency swaps to manage interest
rate and foreign currency risk. A summary of these instruments outstanding at
December 31, 2001, excluding certain immaterial instruments, follows (currency
in millions):
PAGE 26
Interest rates(b)
Hedge Notional ----------------- Floating interest
type amount Receive Pay rate basis
--------- -------- ------- ----- -----------------
Interest rate swaps (a)
- -----------------------
Fixed to floating Fair value $ 80 8.0% 4.9% 6 month LIBOR +
2.9%
Fixed to floating Fair value $100 8.9 5.9 6 month LIBOR +
3.9%
Fixed to floating Fair value $100 7.65 3.3 6 month LIBOR +
1.35%
Floating to fixed Cash flow $100 2.0 3.7 3 month LIBOR
(matures in September 2002)
Fixed EUR to floating Fair value EUR 200 6.0 4.1 6 month EURIBOR +
EUR 0.54%
Currency swaps
- --------------
Floating EUR to floating $ n/a EUR 50 4.1 3.2 6 month EURIBOR +
(matures in 2007) 0.54%/
6 month USD LIBOR+
0.63%
Floating $ to floating Yen Net Yen 6,223 2.2 0.4 6 month USD LIBOR/
(matures in May 2002) investment 6 month JPY LIBOR+
0.3%
a The maturity of the swaps correspond with the maturity of the hedged item
as noted in the long-term debt table, unless otherwise indicated.
b Interest rates are as of year-end 2001.
The weighted-average interest rate on short-term borrowings, including
commercial paper classified as long-term debt, was 3.3% at December 31, 2001,
excluding the effect of the related interest rate swap, and 6.6% at December 31,
2000. The rate was 3.4% at the end of 2001 including the effect of the related
interest rate swap.
Aggregate mandatory annual maturities of long-term debt are as follows: 2002,
$130; 2003, $386; 2004, $256; 2005, $417; and 2006, $225.
Interest capitalized as part of the acquisition or construction of major fixed
assets was $12 in 2001, $22 in 2000 and $21 in 1999. Interest paid was $175 in
2001, $205 in 2000 and $163 in 1999.
The carrying values of cash, marketable investments and short-term debt in the
Consolidated Balance Sheet approximate their estimated fair values. The
estimated fair values of other financial instruments outstanding are as follows:
PAGE 27
2001 2000
-------------------------- --------------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------- ------- ----- -------- -------- -----
Long-term debt, current
portion of long-term
debt & foreign
currency principal swaps $(2,382) $(2,514) $(2,557) $(2,621)
Commodity contracts $ 14 a a $9 b a
Foreign currency forward
exchange contracts 122 (5) (11) 271 6 7
Interest rate swaps
Fixed to floating 509 10 10 436 b 20
Floating to floating 92 a a 100 b a
Floating to fixed 113 (3) (3) 13 b a
a Balance less than $1.
b Not applicable prior to adoption of SFAS No. 133 in 2001.
The estimated fair values of financial instruments are principally based on
quoted market prices. The fair value of foreign currency forward exchange
contracts, which primarily relate to the Euro and Yen and which mature in 2002,
and foreign currency principal and interest rate swaps are estimated based on
quoted market prices of comparable contracts, adjusted through interpolation
where necessary for maturity differences.
RETIREMENT BENEFIT PLANS
- ------------------------
The Company has defined benefit pension plans and other postretirement benefit
plans, primarily health care and life insurance. In the event of a change in
control of Eaton, excess pension plan assets of North American operations may be
dedicated to funding of health and welfare benefits of employees and retirees.
Components of plan obligations and assets and the recorded asset (liability) of
continuing operations are as follows:
Other postretirement
Pension benefits benefits
---------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Projected benefit obligation
at beginning of year $(1,762) $(1,754) $(827) $(835)
Service cost (61) (63) (14) (16)
Interest cost (124) (119) (62) (60)
Actuarial (loss) gain (128) (7) (72) 19
Benefits paid 213 160 79 67
Effect of translation 14 29
Other (8) (8) 2 (2)
------- ------- ----- -----
Projected benefit obligation
at end of year $(1,856) $(1,762) $(894) $(827)
------- ------- ----- -----
Fair value of plan assets at
beginning of year $ 2,209 $ 2,386
Actual return on plan assets (183) (24)
Employer contributions 37 28 $ 80 $ 65
Benefits paid (213) (160) (79) (67)
Effect of translation (11) (24)
Other (3) 3 (1) 2
------- ------- ----- -----
PAGE 28
Fair value of plan assets at
end of year $ 1,836 $ 2,209 $ 0 $ 0
------- ------- ----- -----
Benefit obligations with
no plan assets $ (107) $ (115) $(894) $(827)
Benefit obligations
less than plan assets 87 562
Unrecognized
Net loss (gain) 333 (213) 190 128
Prior service cost 33 35 (2) (9)
Other 1 (2) 7
------- ------- ----- -----
Recorded asset (liability) $ 347 $ 267 $(699) $(708)
======= ======= ===== =====
Amounts recognized in the balance sheet consist of:
Accrued asset $ 430 $ 372
Accrued liability (121) (115) $(699) $(708)
Intangible asset 7 10
Accumulated other comprehensive
income 31
------- ------- ----- -----
Net amount recognized $ 347 $ 267 $(699) $(708)
======= ======= ===== =====
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $286, $250, and $132, respectively, as of the end of 2001
and comparable amounts as of December 31, 2000 were $281, $247 and $136.
The components of net periodic benefit income (cost) of continuing operations
are as follows:
Pension benefits
--------------------------
2001 2000 1999
---- ---- ----
Service cost $ (61) $ (63) $ (67)
Interest cost (124) (119) (108)
Expected return on plan assets 213 200 179
Other 6 6 (3)
----- ----- -----
34 24 1
Curtailment loss (3) (2) (5)
Settlement gain 21 18 18
----- ----- -----
$ 52 $ 40 $ 14
===== ===== =====
Other postretirement benefits
-----------------------------
2001 2000 1999
---- ---- ----
Service cost $ (14) $ (16) $ (15)
Interest cost (62) (60) (54)
Net amortization 3 (3)
----- ----- -----
(73) (76) (72)
Curtailment gain 1 1
Settlement loss (4)
----- ----- -----
$ (73) $ (75) $ (75)
===== ===== =====
PAGE 29
Actuarial assumptions used in the calculation of the recorded asset (liability)
are as follows:
2001 2000
---- ----
Discount rate 7.25% 7.75%
Return on pension plan assets 10.00% 10.00%
Rate of compensation increase 4.00% 4.75%
Projected health care cost trend rate 8.00% 6.00%
Ultimate health care trend rate 5.00% 5.50%
Year ultimate health care trend rate
is achieved 2007 2001
Assumed health care cost trend rates have a significant effect on the amounts
reported for other postretirement benefits. A one-percentage-point change in the
assumed health care cost trend rate would have the following effects:
1% Increase 1% Decrease
----------- -----------
2001 benefit cost $ 2 $ (2)
Recorded liability
at December 31, 2001 33 (29)
The Company also has various defined-contribution benefit plans, primarily
consisting of the Eaton Savings Plan (ESP) (formerly known as Eaton Share
Purchase and Investment Plan (SPIP)) and the Aeroquip-Vickers Savings and
Profit-Sharing Plan. Total contributions related to these plans charged to
expense were $40 in 2001, $72 in 2000, and $34 in 1999.
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has established policies to ensure that its operations are conducted
in keeping with good corporate citizenship and with a positive commitment to the
protection of the natural and workplace environments. For example, each
manufacturing facility has a person responsible for environmental, health and
safety (EHS) matters. All of Eaton's manufacturing facilities are becoming
certified under ISO 14001, an international standard for environmental
management systems. The Company routinely reviews EHS performance at each of its
facilities and continuously strives to improve pollution prevention at its
facilities.
As a result of past operations, Eaton is involved in remedial response and
voluntary environmental remediation at a number of sites, including certain of
its currently-owned or formerly-owned plants. The Company has also been named a
potentially responsible party (PRP) under the Federal Superfund law at a number
of waste disposal sites.
A number of factors affect the cost of environmental remediation, including the
number of parties involved at a particular site, the determination of the extent
of contamination, the length of time the remediation may require, the complexity
of environmental regulations, and the continuing advancement of remediation
technology. Taking these factors into account, Eaton has estimated (without
discounting) the costs of remediation, which will be incurred over a period of
several years. The Company accrues an amount consistent with the estimates of
these costs when it is probable that a liability has been incurred. At December
31, 2001 and 2000, the Consolidated Balance Sheet included a liability for these
costs of $62 and $58, respectively. With regard to some of the matters included
in the liability, Eaton has rights of recovery from non-affiliated parties for a
portion of these estimated costs.
PAGE 30
Based upon the Company's analysis and subject to the difficulty in estimating
these future costs, Eaton expects that any sum it may be required to pay in
connection with environmental matters is not reasonably likely to exceed the
liability by an amount that would have a material adverse effect on its
financial position, net income or cash flows. All of these estimates are
forward-looking statements and, given the inherent uncertainties in evaluating
environmental exposures, actual results can differ from these estimates.
CONTINGENCIES
- -------------
The Company is subject to various investigations, claims, legal and
administrative proceedings, covering a wide range of matters that arise in the
ordinary course of business activities. Any liability that may result from these
proceedings is not expected to have a material adverse effect on Eaton's
financial position, net income or cash flows.
SHAREHOLDERS' EQUITY
- --------------------
There are 300 million Common Shares authorized ($.50 par value per share). At
December 31, 2001, there were 11,193 holders of record of Common Shares.
Additionally, approximately 25,000 current and former employees were
shareholders through participation in the Eaton Savings Plan (ESP), Eaton
Personal Investment Plan (EPIP)(formerly known as the Eaton Corporation 401(k)
Savings Plan & Trust) and the Aeroquip-Vickers Savings & Profit Sharing Plan.
The Company has plans which permit certain employees and directors to defer a
portion of their compensation. Eaton has deposited $51 of Common Shares and
marketable securities into a trust to fund a portion of these liabilities. The
marketable securities are included in other assets and the Common Shares are
included in shareholders' equity.
Stock Options
- -------------
Stock options have been granted to certain employees, under various plans, to
purchase Common Shares at prices equal to fair market value as of the date of
grant. Historically, the majority of these options vest ratably during the
three-year period following the date of grant and expire ten years from the date
of grant.
During 1998 and 1997, the Company granted special performance-vested stock
options with a ten-year vesting term in lieu of more standard employee stock
options. These options have a provision for accelerated vesting when Eaton
achieves certain net income and Common Share price targets. If the targets are
not achieved, these options become exercisable ten days before the expiration of
their ten-year term. As of December 31, 2001, 2.3 special performance-vested
stock options were outstanding of which .9 were exercisable.
A summary of stock option activity follows:
2001 2000 1999
--------------- --------------- ----------------
Average Average Average
price price price
per per per
option Options option Options option Options
------ ------ ------ ------- ------ ------
Outstanding, January 1 $57.30 10.2 $65.89 8.7 $61.46 7.5
Granted 72.98 1.2 71.90 1.5 74.53 2.2
Exercised 42.63 (1.0) 33.76 (.3) 44.95 (.8)
Canceled 67.05 (.5) 83.05 (.6) 75.12 (.2)
---- ---- ----
PAGE 31
Options outstanding before
spin-off of Axcelis 66.89 9.3 $65.89 8.7
====
Cancellation of options
of Axcelis employees 72.39 (.5)
Adjustment for spin-off
of Axcelis 1.4
---- ----
Outstanding, December 31 $60.12 9.9 $57.30 10.2
==== ====
Exercisable, December 31 $55.54 6.1 $51.51 5.8 $55.39 4.6
Reserved for future
grants, December 31 1.4 2.0 2.4
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:
Weighted- Weighted- Weighted-
average average average
Range of exercise remaining exercise exercise
prices per Options contractual price per Options price per
option outstanding life (years) option exercisable option
- --------------- ----------- ------------ --------- ----------- ---------
$29.34 - $39.99 .5 .9 $32.72 .5 $32.72
$40.00 - $49.99 2.0 3.2 45.64 2.0 45.64
$50.00 - $59.99 .1 7.8 57.50 .1 56.78
$60.00 - $69.99 5.0 6.5 61.77 2.9 61.79
$70.00 - $79.99 2.1 7.8 74.38 .5 75.45
$80.00 - $88.41 .2 7.2 86.33 .1 87.65
--- ---
9.9 6.1
=== ===
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation".
If Eaton accounted for its stock options under the fair value method of SFAS No.
123, net income and net income per Common Share would have been as indicated
below:
2001 2000 1999
---- ---- ----
Net income
As reported $ 169 $ 453 $ 617
Assuming fair value method 153 435 602
Net income per Common Share assuming
dilution
As reported $2.39 $6.24 $8.36
Assuming fair value method 2.17 5.99 8.16
Net income per Common Share basic
As reported $2.43 $6.31 $8.51
Assuming fair value method 2.21 6.06 8.30
PAGE 32
The fair value of each option grant was estimated using the Black-Scholes option
pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Dividend yield 2.5% 3% 3%
Expected volatility 26% 23% 21%
Risk-free interest rate 3.7% to 5% 6% to 6.8% 4.7% to 6.1%
Expected option life in years 4 4 or 5 4 or 5
Weighted-average per
share fair value of
options granted
during the year $15.71 $15.47 $12.99
Preferred Share Purchase Rights
- -------------------------------
In 1995, the Company declared a dividend of one Preferred Share Purchase Right
for each outstanding Common Share. The Rights become exercisable only if a
person or group acquires, or offers to acquire, 20% or more of Eaton's Common
Shares. The Company is authorized to reduce the 20% threshold for triggering the
Rights to not less than 10%. The Rights expire on July 12, 2005, unless redeemed
earlier at one cent per Right.
When the Rights become exercisable, the holder of each Right, other than the
acquiring person, is entitled (1) to purchase for $250, one one-hundredth of a
Series C Preferred Share, (2) to purchase for $250, that number of Eaton's
Common Shares or common stock of the acquiring person having a market value of
twice that price, or (3) at the option of the Company, to exchange each Right
for one Common Share or one one-hundredth of a Preferred Share.
Comprehensive Income (Loss)
- ---------------------------
The components of accumulated other comprehensive income (loss) as reported in
the Statement of Consolidated Shareholders' Equity are as follows:
Unrealized Deferred Minimum
Foreign gain (loss) gain pension
currency on available (loss)on liability
translation for sale cash flow adjust-
adjustments investments hedges ment Total
----------- ---------- --------- --------- -----
Balance at January 1,
1999 $(107) $(3) $ 0 $ 0 $(110)
1999 adjustment, net
of income taxes (116) 3 (113)
Recognition in income of
adjustment related to
divested businesses 3 3
----- --- --- ---- -----
Balance at December 31,
1999 (220) 0 0 0 (220)
2000 adjustment, net of
income taxes (47) (4) (51)
Adjustment for spin-off of
Axcelis 4 4
----- --- --- ---- -----
Balance at December 31,
2000 (263) (4) 0 0 (267)
2001 adjustment, net of
income taxes (20) 5 (5) (21) (41)
Recognition in income of
adjustment related to
divested businesses 9 9
----- --- --- ---- -----
PAGE 33
Balance at December 31,
2001 $(274) $ 1 $(5) $(21) $(299)
===== === === ==== =====
INCOME TAXES
- ------------
For financial statement reporting purposes, income from continuing operations
before income taxes, based on the geographic location of the operation to which
such earnings are attributable, is summarized below. Certain foreign operations
are branches of Eaton and are, therefore, subject to United States as well as
foreign income tax regulations. As a result, pretax income by location and the
components of income tax expense by taxing jurisdiction are not directly
related.
Income from continuing
operations before income taxes
------------------------------
2001 2000 1999
---- ---- ----
United States $192 $417 $773
Non-United States 95 135 173
Write-off of foreign currency translation
adjustments related to divested businesses (9) (3)
---- ---- ----
$278 $552 $943
==== ==== ====
Income tax expense of continuing operations follows:
2001 2000 1999
---- ---- ----
Current
United States
Federal $(30) $ 85 $223
State & local 9 19 13
Non-United States 59 51 51
---- ---- ----
38 155 287
Deferred
United States Federal 77 28 30
Non-United States
Change in valuation allowance (8)
Operating loss carryforwards 2 17
Other (6) 12 6
---- ---- ----
71 34 53
---- ---- ----
$109 $189 $340
==== ==== ====
Reconciliations of income taxes of continuing operations at the United States
Federal statutory rate to the effective income tax rate follow:
2001 2000 1999
---- ---- ----
Income taxes at the United States
statutory rate 35.0% 35.0% 35.0%
State & local income taxes 3.0 2.7 .6
Amortization of goodwill & intangible
assets 4.8 2.6 1.3
Adjustment of worldwide tax liabilities .3 5.0 1.3
Possessions credit related to Puerto
Rican operations (14.9) (8.4) (3.2)
Credit for increasing research activities (6.9) (3.2) (.9)
PAGE 34
Effective income tax rate differential
related to:
Sales of businesses 6.4 2.5
Foreign source income 10.6 1.2 1.5
Earnings of consolidated subsidiaries
and associate companies outside the
United States (1.7) (3.5) (2.2)
Other-net 2.8 2.8 .2
---- ---- ----
39.4% 34.2% 36.1%
==== ==== ====
Significant components of current and long-term deferred income taxes of
continuing operations follow:
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
2001
Accruals & other adjustments
Employee benefits $ 56 $ 167
Depreciation & amortization (436)
Other 89 $ (3) 26
Operating loss carryforwards 49 12
Other items 8 12 38
Valuation allowance (48) (39)
---- ---- -----
$153 $ 10 $(232)
==== ==== =====
2000
Accruals & other adjustments
Employee benefits $ 59 $ 195
Depreciation & amortization $ (8) (451)
Other 81 65
Operating loss carryforwards 3 47 3
Other items 7 14 26
Valuation allowance (3) (47) (27)
---- ---- -----
$147 $ 6 $(189)
==== ==== =====
At December 31, 2001, certain of Eaton's non-United States subsidiaries had
operating loss carryforwards aggregating $168 that are available to offset
future taxable income. Carryforwards of $60 have no expiration dates and the
balance expires at various dates from 2002 through 2011. The Company has
estimated foreign tax credit carryforwards of $38 available to offset future
income taxes. A valuation allowance has been recorded for substantially all of
these assets.
The Company has manufacturing facilities in Puerto Rico which operate under
United States tax law incentives that will no longer be available after 2005.
No provision has been made for income taxes on undistributed earnings of
consolidated non-United States subsidiaries of $736 at December 31, 2001, since
the earnings retained have been reinvested by the subsidiaries. It is not
practicable to estimate the additional income taxes and applicable foreign
withholding taxes that would be payable on the remittance of such undistributed
earnings.
Worldwide income tax cash flows were a refund of $11 in 2001, and payments of
$210 in 2000 and $169 in 1999.
The Internal Revenue Service (IRS) has asserted Eaton owes additional taxes and
interest for 1993 relating to the treatment of transactions involving
company-owned life insurance. A similar issue exists for 1994-1998. The Company
strongly disagrees with the IRS and is vigorously contesting the matter.
Management believes resolution of this matter will not have a material adverse
effect on Eaton's financial position, net income or cash flows.
PAGE 35
OTHER INFORMATION
- -----------------
Assets
- ------
Accounts receivable are net of an allowance for doubtful accounts of $20 at the
end of 2001 and $24 at the end of 2000.
The components of inventories follow:
2001 2000
---- ----
Raw materials $ 260 $ 310
Work in process 217 290
Finished goods 238 311
----- -----
Inventories at FIFO 715 911
Excess of current cost over LIFO cost (34) (39)
----- -----
Net inventories $ 681 $ 872
===== =====
Gross inventories accounted for using the LIFO method were $440 at the end of
2001 and $568 at the end of 2000.
Accumulated amortization of goodwill and intangible assets was $316 and $163 at
the end of 2001 and $277 and $159 at the end of 2000, respectively.
Eaton has company-owned life insurance policies insuring the lives of a portion
of active United States employees. The policies accumulate asset values to meet
future liabilities including the payment of employee benefits such as health
care. At December 31, 2001 and 2000, the investment in the policies included in
other assets was $66 and $33, net of policy loans of $403 and $405,
respectively. Net life insurance expense of $3 in 2001, $6 in 2000 and $8 in
1999, including interest expense of $41 in 2001, $35 in 2000 and $32 in 1999, is
included in selling and administrative expense.
Lease Commitments
- -----------------
The Company leases certain real properties, primarily sales and office
facilities, and equipment. Minimum rental commitments for 2002 under
noncancelable operating leases, which expire at various dates and in most cases
contain renewal options, are $81 and decline substantially thereafter.
Rental expense was $113 in 2001, $118 in 2000 and $108 in 1999.
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share assuming dilution and basic
follows:
PAGE 36
2001 2000 1999
---- ---- ----
Net income $ 169 $ 453 $ 617
===== ===== =====
Average number of Common Shares
outstanding assuming dilution 70.5 72.6 73.7
Less dilutive effect of stock options 1.1 .8 1.2
----- ----- -----
Average number of Common Shares
outstanding basic 69.4 71.8 72.5
===== ===== =====
Net income per Common Share
assuming dilution
Continuing operations $2.39 $5.00 $8.17
Discontinued operations 1.24 .19
----- ----- -----
$2.39 $6.24 $8.36
===== ===== =====
Net income per Common Share
basic
Continuing operations $2.43 $5.06 $8.31
Discontinued operations 1.25 .20
----- ----- -----
$2.43 $6.31 $8.51
===== ===== =====
Employee stock options to purchase 2.2 Common Shares in 2001, 6.0 in 2000 and
1.5 in 1999 were outstanding but were not included in the computation of net
income per Common Share assuming dilution, since they would have had an
antidilutive effect on earnings per share.
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- ---------------------------------------------------
Eaton is a global diversified manufacturer that is a leader in fluid power
systems; electrical power quality, distribution and control; automotive engine
air management and fuel economy; and intelligent truck systems for fuel economy
and safety. Major products included in each segment and other information
follows.
Fluid Power
- -----------
All pressure ranges of hose, fittings, adapters, couplings and other fluid power
connectors; hydraulic pumps, motors, valves, cylinders, power steering units,
transaxles and transmissions; electronic and hydraulic controls; electric motors
and drives; filtration products and fluid-evaluation products and services;
aerospace products and systems -- hydraulic and electrohydraulic pumps, motors,
electric motor pumps, hydraulic motor driven generators and integrated system
packages, hydraulic and electromechanical actuators, flap and slat systems, nose
wheel steering systems, cockpit controls, power and load management systems,
sensors, fluid debris monitoring products, illuminated displays, integrated
displays and panels, relays and valves; clutches and brakes for industrial
machines; golf grips and precision molded and extruded plastic products
Industrial & Commercial Controls
- --------------------------------
To control and protect electric motors -- drives, contactors, starters, and
other motor control products; for position sensing -- a wide range of sensors;
to control machine logic -- automation personal computers and programmable logic
controllers; to permit human interface with machines -- a full range of operator
interface hardware and software; to manage distribution of electricity in homes,
businesses and industrial facilities -- vacuum interrupters, a wide range of
circuit breakers and a variety of power distribution and control assemblies and
components; to support customer power and control system requirements --
engineering systems and diagnostic and support services; for commercial and
military applications -- thermal circuit breakers and power control and
conversion equipment
PAGE 37
Automotive
- ----------
Valvetrain systems, intake and exhaust valves, lash compensation lifters and
lash adjusters, cylinder heads, superchargers, limited slip and locking
differentials, transmission dampers, precision gear forgings, air control
valves, climate controls, engine sensors and controls, mirror actuators,
transmission controls, speed-sensitive steering systems, on-board vapor recovery
valves, check valves, fuel level sensors and pressure control valves
Truck
- -----
Heavy-, medium-, and light-duty mechanical transmissions, heavy-duty automated
transmissions, heavy- and medium-duty clutches, gears and shafts, traction
control systems, transfer boxes, power take-off units, splitter boxes, gearshift
mechanisms, transmissions for off-highway construction equipment, and collision
warning systems
Other Information
- -----------------
The principal markets for Fluid Power, Automotive and Truck are original
equipment manufacturers and after-market customers of heavy-, medium-, and
light-duty trucks, passenger cars, off-highway vehicles, industrial equipment
and aerospace products and systems. These original equipment manufacturers are
generally concentrated in North America and Europe; however, sales are made
globally. Most sales of these products are made directly to such manufacturers.
The principal markets for Industrial & Commercial Controls are industrial,
construction, commercial, automotive and government customers. These customers
are generally concentrated in North America; however, sales are made globally.
Sales are made directly by the Company and indirectly through distributors and
manufacturers' representatives to such customers.
No single customer represented more than 10% of net sales of continuing
operations in 2001, 2000 or 1999. Sales from ongoing United States and Canadian
operations to customers in foreign countries were $520 in 2001, $599 in 2000 and
$625 in 1999 (7% of sales in 2001, 7% in 2000 and 8% in 1999).
The accounting policies of the segments are generally the same as the policies
described under "Accounting Policies" in the Financial Review, except that
inventories and related cost of products sold of the segments are accounted for
using the FIFO method and operating profits only reflect the service cost
component related to pensions and other postretirement benefits. Intersegment
sales and transfers are accounted for at the same prices as if the sales and
transfers were made to third parties.
Identifiable assets exclude general corporate assets, which principally consist
of cash, short-term investments, deferred income taxes, certain accounts
receivable, certain property, plant and equipment, and certain other assets.
PAGE 38
Business Segment Information
2001 2000 1999
---- ---- ----
Net sales
Fluid Power $2,507 $2,607 $2,036
Industrial & Commercial Controls 2,199 2,421 2,274
Automotive 1,479 1,502 1,495
Truck 1,029 1,456 1,630
------ ------ ------
Total ongoing operations 7,214 7,986 7,435
Divested operations 85 323 570
------ ------ ------
Total net sales $7,299 $8,309 $8,005
====== ====== ======
Operating profit (loss)
Fluid Power $ 183 $ 235 $ 177
Industrial & Commercial Controls 163 251 181
Automotive 194 214 211
Truck (64) 107 235
------ ------ ------
Total ongoing operations 476 807 804
Divested operations 6 8 66
Amortization of goodwill & other
intangible assets (94) (95) (86)
Interest expense-net (142) (177) (152)
Gain on sales of businesses 61 340
Corporate & other-net (29) 9 (29)
------ ------ ------
Income from continuing operations before
income taxes 278 552 943
Income taxes 109 189 340
------ ------ ------
Income from continuing operations 169 363 603
Income from discontinued operations 90 14
------ ------ ------
Net income $ 169 $ 453 $ 617
====== ====== ======
Income from continuing operations before income taxes was reduced by unusual
items as follows:
Fluid Power $ 22 $ 47 $ 21
Industrial & Commercial Controls 30
Truck 55 7
Corporate 22 5 2
PAGE 39
2001 2000 1999
---- ---- ----
Identifiable assets
Fluid Power $1,345 $1,518 $1,504
Industrial & Commercial Controls 1,016 1,099 1,109
Automotive 781 816 802
Truck 651 710 767
------ ------ ------
Total ongoing operations 3,793 4,143 4,182
Goodwill 1,902 1,985 1,810
Intangible assets 533 553 595
Corporate 1,418 1,215 1,160
Divested operations 284 264
Net assets of discontinued operations 331
------ ------ ------
Total assets $7,646 $8,180 $8,342
====== ====== ======
Expenditures for property, plant & equipment
Fluid Power $ 61 $ 95 $ 118
Industrial & Commercial Controls 54 71 76
Automotive 96 96 92
Truck 64 81 120
------ ------ ------
Total ongoing operations 275 343 406
Corporate 17 28 34
Divested operations 3 15 40
------ ------ ------
Total expenditures for property, plant &
equipment $ 295 $ 386 $ 480
====== ====== ======
Depreciation of property, plant & equipment
Fluid Power $ 96 $ 97 $ 78
Industrial & Commercial Controls 72 74 73
Automotive 66 65 66
Truck 56 57 51
------ ------ ------
Total ongoing operations 290 293 268
Corporate 23 21 26
Divested operations 14 22
------ ------ ------
Total depreciation of property, plant &
equipment $ 313 $ 328 $ 316
====== ====== ======
PAGE 40
Geographic Region Information
Ongoing operations
--------------------------
Long-
Net Operating lived
sales profit assets*
----- --------- ------
2001
United States $5,677 $ 414 $1,419
Canada 177 11 15
Europe 1,108 (5) 322
Latin America 406 37 203
Pacific Region 310 19 91
Eliminations (464)
------ ------ ------
$7,214 $ 476 $2,050
====== ====== ======
2000
United States $6,483 $ 679 $1,532
Canada 182 15 14
Europe 1,232 46 352
Latin America 412 47 193
Pacific Region 253 20 79
Eliminations (576)
------ ------ ------
$7,986 $ 807 $2,170
====== ====== ======
1999
United States $6,067 $ 703 $1,584
Canada 172 12 11
Europe 1,171 61 335
Latin America 358 29 182
Pacific Region 213 (1) 74
Eliminations (546)
------ ------ ------
$7,435 $ 804 $2,186
====== ====== ======
*Long-lived assets consist of property, plant, and equipment-net.
Operating profit was reduced by unusual items as follows:
2001 2000 1999
---- ---- ----
United States $ 67 $ 42 $ 21
Europe 37 4 7
Latin America 2 1
Pacific Region 1
PAGE 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Dollar amounts in millions, except for per share data (per share data assume
dilution)
Overview
- --------
2001 was an exceptionally challenging year for Eaton. Market conditions weakened
as the year progressed and, exacerbated by effects of the September 11th
terrorist attacks, caused difficult operating conditions in most of the
Company's businesses. Worldwide net sales of continuing operations were $7,299
in 2001, which declined about 10% from 2000 excluding the impact on sales of the
divestiture of the Vehicle Switch/Electronics Division in 2001. During the
second half of 2001, sales in international markets were also negatively
affected by weaker economic conditions, which trailed the U.S. economy with the
normal six-month lag.
Income from continuing operations was $169 in 2001 ($2.39 per Common Share),
down from $363 in 2000 ($5.00 per share). Before unusual items in both years,
income from continuing operations was $233 in 2001 ($3.30 per share), down 39%
from $383 in 2000 ($5.28 per share). Unusual items, reported in both years,
include acquisition integration and restructuring charges and gains on sales of
businesses and corporate assets. In the face of the weakening worldwide economy,
the Company's business breadth paid off in 2001. Solid performances by the Fluid
Power, Industrial & Commercial Controls and Automotive segments mitigated
operating losses in the Truck segment, which reflected the extraordinarily
difficult conditions in that business during 2001.
In this difficult environment, Eaton's results were aided by early decisions to
resize those operations requiring attention. Eaton incurred $119 of
restructuring charges in 2001, which are expected to deliver $100 of savings in
2002. An additional $55 of restructuring actions will be initiated in early 2002
in the Truck, Fluid Power and Industrial & Commercial Controls segments. The
majority of these costs will be incurred in the first quarter and the Company
expects these additional actions to produce approximately $30 of additional
savings in 2002.
Throughout 2001, Eaton continued to focus on strengthening the balance sheet.
The net debt to total capital ratio at the end of 2001 was below 47%, compared
to 55% in 2000, primarily a result of repaying $564 of debt during 2001, and the
$185 increase in cash and short-term investments during the year.
2001 Compared to 2000 - Continuing Operations
- ---------------------------------------------
Results of Operations
- ---------------------
Net sales of continuing operations in 2001 were $7,299, a decrease of 12% from
2000. Excluding the impact on sales from the divestiture of the Vehicle
Switch/Electronics Division in 2001, sales from ongoing operations declined 10%
for the year. Sales of the Fluid Power segment were $2,507 in 2001, 4% below
2000, while sales of the Industrial & Commercial Controls segment of $2,199 were
down 9% from 2000. The Automotive segment reported sales of $1,479 in 2001,
which were down only 2% from 2000. Truck segment sales fell to $1,029, 29% below
2000, representing the largest segment decline across the Company.
Net sales in the United States and Canada decreased 12% in 2001 to $5,854,
primarily the result of current weak economic conditions. In 2001, sales in
Europe fell 10% to $1,108, as the European economy weakened as well. Sales in
the United States and Europe also were lower due to the divestiture in the first
quarter of 2001 of the Vehicle Switch/Electronics Division that had sales of
$323 in 2000. Sales in Latin America were $406, down 1% from the prior year.
Sales in the Pacific region increased 23% to $310, primarily due to the
acquisition of the remaining unowned 50% interest in Sumitomo Eaton Hydraulics
Company.
PAGE 42
In response to the weakening global business environment in early 2001, and the
anticipated delay in recovery of the economy and Eaton's end markets until the
second half of 2002, the Company took restructuring actions in 2001 to help
maintain a competitive advantage in the current economic environment and reduce
structural costs across its businesses. Restructuring charges in 2001 totaled
$119, including $55 related to the Truck business, $30 for the Industrial &
Commercial Controls business, and $22 for actions to continue the integration of
the former Aeroquip-Vickers operations and other recent acquisitions within
Fluid Power. Restructuring charges in 2001 for reductions in corporate staff and
other actions were $12. A charge of $10 was also recorded in 2001 related to an
arbitration award in connection with a contractual dispute over supply
arrangements associated with a subsidiary of Eaton. The arbitration award
resulted from a legal action initiated in February 1999 against Vickers Inc.,
part of Aeroquip-Vickers Inc., which was acquired by Eaton in April 1999.
All restructuring charges and other unusual pretax charges totaled $129 in 2001
($86 after-tax, or $1.21 per Common Share), compared to similar pretax charges
of $52 in 2000 ($34 after-tax, or $.47 per share). Unusual charges for 2000
included operational restructuring charges of $47 related to the Fluid Power
business segment and $5 for actions to restructure corporate staff. The
operational restructuring charges in 2001 and 2000 are included in the
Statements of Consolidated Income in Income from operations and reduced
operating profit of the related business segment. The corporate charges are
included in the Statements of Consolidated Income in Income from operations,
except for $11 in 2001 included in Other income-net that primarily related to
the arbitration award discussed above. In Business Segment Information, all
corporate charges are included in Corporate & other-net.
Income from operations in 2001 of $348 declined 46% from $649 in 2000, as
displayed in the Statements of Consolidated Income. The decline was the result
of the difficult operating conditions in most of Eaton's businesses in 2001,
especially the Truck segment, coupled with the increased levels of restructuring
charges recorded in 2001.
During 2001, Eaton sold businesses resulting in a net pretax gain of $61 ($22
after-tax, or $.30 per share). In the first quarter, the Vehicle
Switch/Electronics Division (VS/ED), which had sales of $323 in 2000, was
divested along with certain assets of the Truck segment. In the third quarter,
the Air Conditioning & Refrigeration business, which had sales of $75 in 2000,
was sold along with certain assets of the Automotive segment. These gains are
included as a separate line item in the Statements of Consolidated Income and
Business Segment Information. In Business Segment Information, the operating
results of VS/ED are included in Divested operations for all periods presented.
Income in 2000 was increased by a net pretax gain on the sales of corporate
assets of $22 ($14 after-tax, or $.19 per share). These gains were included in
the Statements of Consolidated Income in Other income-net and in Business
Segment Information in Corporate and other-net.
Income from continuing operations was $169 in 2001($2.39 per Common Share), down
53% from $363 in 2000 ($5.00 per share), including all unusual items. The
decline was the result of the difficult operating conditions in most of Eaton's
businesses in 2001, especially impacting the Truck segment. The decline was also
due to restructuring and other unusual charges recognized in 2001 as described
above. Before all unusual items in both years, earnings were $233 in 2001 ($3.30
per share), down 39% from $383 in 2000 ($5.28 per share).
PAGE 43
Business Segments
- -----------------
Fluid Power
- -----------
Eaton's largest business segment, Fluid Power, had sales in 2001 of $2,507, 4%
below 2000, due primarily to weak markets for mobile and industrial hydraulics
products. This result compared favorably to an 11% decline in Fluid Power's
markets, with North American fluid power industry shipments off about 17%, and
flat Aerospace shipments. Sales for the Aerospace business were up 9% during
2001. However, the anticipated weakening of this business, resulting from the
September 11th terrorist attacks, began to be felt during the fourth quarter.
Operating profits in 2001, after a reduction for $22 of restructuring charges,
were $183, down from $235 in 2000, which reflected $47 of restructuring charges.
The decrease in profit was primarily attributable to weak market conditions,
which resulted in a significant decrease in sales volumes during 2001, and
restructuring charges related to the integration of the former Aeroquip-Vickers
operations and other recent acquisitions within this segment. In response to
these weak market conditions, this segment accelerated the integration of
Aeroquip-Vickers and other recent acquisitions. The elimination of 600 positions
announced in April 2001 was expanded to 1,000 positions in the third quarter and
was completed before year-end. Profits before restructuring charges were $205 in
2001 (8.2% of sales), down 27% from $282 in 2000 (10.8% of sales).
In the first quarter of 2001, Eaton completed the purchase of the remaining
unowned 50% interest in Sumitomo Eaton Hydraulics Company (now referred to as
Eaton Fluid Power Ltd.), the former joint venture with Sumitomo Heavy Industries
located in Kyoto, Japan. This acquisition has annualized sales of $76 in the
Pacific region.
Industrial & Commercial Controls
- --------------------------------
Industrial & Commercial Controls sales in 2001 were $2,199, down 9% from 2000.
Excluding divestitures, sales were off about 7%, compared to an estimated 19%
decline in North American markets. This segment outperformed its markets due to
share growth, the continued growth of the Engineering Services and Systems (C-H
ESS) business and increased participation in power quality markets. The Company
is now seeing a significant weakening of the end markets for this segment due to
the prolonged weakness in the industrial segment of the economy. This segment
has not experienced a recovery of the short-cycle distributor flow goods
business, which typically includes higher margin products. Traditionally a
late-cycle business, the large-project business also showed weakness late in
2001.
Operating profits in 2001, after a reduction for $30 of restructuring charges,
were $163, down from $251 in 2000. Weak markets in the industrial and commercial
sectors and distributor businesses, as well as the effects of product mix and
restructuring charges, were responsible for the decreased profits in 2001. In
response to weakening market conditions in this business, restructuring actions
were implemented, including the elimination of 887 positions within the
organization. Profits before restructuring charges were $193 in 2001 (8.8% of
sales), down 23% from $251 in 2000 (10.4% of sales).
In the first quarter of 2001, the Company announced that it formed a 50-50 joint
venture with Hager Electro SA, creating Eletromar LTD. This operation
manufactures International Electrical Code residential circuit breakers in
Brazil for the South American marketplace.
Automotive
- ----------
Sales for the Automotive segment of $1,479 in 2001 were down 2% from 2000. This
compared to a 10% decrease in North American Free Trade Association (NAFTA)
automotive production and flat European automotive production. This segment
recorded strong results during a time of fluctuating customer demand. Despite
difficult North American markets and gradual weakening of markets in Europe,
this segment realized the benefit of product penetration and market share gains.
PAGE 44
Segment profits were $194 in 2001 (13.1% of sales), down 9% from $214 in 2000
(14.2% of sales). These results were a reflection of the reduced level of sales
experienced in 2001 and were achieved in spite of current market conditions and
increased engineering and research and development costs associated with new
product launches for model years 2002-2004.
Eaton recently announced the receipt of a contract from General Motors
Corporation's Tier One mirror suppliers to provide memory glass and
power-folding mirror actuators for a wide range of pick-up trucks and sport
utility vehicles, beginning in 2002. The Company recently announced that it
completed the acquisition of the European portion of the vehicle mirror actuator
business of Donnelley Corporation, located in Manorhamilton, Ireland. A portion
of Eaton's existing mirror actuator business will be relocated to the new
facility in Ireland and that operation is expected to reach sales levels of $50
over the next two to three years.
Truck
- -----
Due to extraordinarily depressed industry conditions, Truck segment sales in
2001 were $1,029, 29% below 2000. NAFTA heavy truck production for the year was
down 42% to 146,000 units, NAFTA medium-duty truck production was down 21%,
European truck production was down 9% and South American production was up 7%.
Operating losses for this segment were $64 in 2001, including $55 of
restructuring charges, compared to profits of $107 in 2000. The decrease in
profit was primarily attributable to the significant decrease in sales volumes
during 2001, the result of very weak market conditions and restructuring
charges. This segment has now completed restructuring actions related to the
European medium-duty and heavy-duty truck businesses. Given the continued
decline in the Truck segment's end markets, it is clear that the benefits of the
restructuring program are being realized. Before restructuring charges,
operating losses were $9 compared to profits of $107 a year ago, a drop of $116
on a $427 sales decline.
During 2001, Eaton acquired the commercial clutch manufacturing assets of
Transmisiones TSP, S.A. de C.V. This business, which had sales of $10 in 2000,
will be relocated to the new Truck facility in San Luis Potosi, Mexico, as that
plant becomes operational.
Non-operating Income (Expense)
- ------------------------------
Net interest expense was $142 in 2001, down from $177 in 2000. The decrease was
primarily related to the $564 reduction of debt from cash flow from operations
and proceeds from the sales of businesses in 2001, as well as reductions in
interest rates during 2001.
Corporate & other-net was expense of $29 in 2001 compared to income of $9 in
2000. The decline was due to a $22 pretax gain recorded in 2000 on the sales of
corporate assets and a charge of $10 recorded in 2001 related to an arbitration
award, both of which are discussed above.
Changes in Financial Condition During 2001
- ------------------------------------------
Eaton improved its strong financial position during 2001. Net working capital
increased to $718 at the end of 2001 from $464 at the end of 2000 (the current
ratio was 1.4 and 1.2 at the end of 2001 and 2000, respectively). The increase
in working capital was primarily a result of the $389 reduction in short-term
debt during 2001. This reduction was accomplished by the repayment of short-term
debt from cash flow from operations and proceeds from the sale of businesses,
and the refinancing of short-term debt through the issuance of $150 of floating
rate medium-term notes and $41 of Yen 1.62% notes. Cash and short-term
investments rose to $311 at the end of 2001, up $185 from the end of 2000, while
inventories were reduced by $191 to $681 at the end of 2001, primarily due to
cash flow from operations, tight control over working capital and capital
spending, and divestitures.
PAGE 45
Eaton continued to generate substantial cash flow from operating activities,
which is the primary source of funds to finance the needs of the Company.
Operating activities generated cash of $765 in 2001, up $246 (47%) from 2000.
This increase was generated, in spite of lower earnings in 2001 compared to
2000, due to tight control over working capital and capital spending. The Eaton
Business System (EBS) provided improvements in monitoring and controlling
working capital and capital spending, including a reduction in capital
expenditures to $295 in 2001, down $91 from 2000. Capital expenditures are
expected to be below $300 for 2002, with selective emphasis on programs designed
to enhance product quality, manufacturing productivity and business growth,
reduce costs and, selectively, to add capacity. These expenditures will be
funded primarily by cash flow from operations.
Eaton made progress toward its goal of strengthening the balance sheet and
reducing its net debt to total capital ratio during 2001. Total debt of $2,440
at the end of 2001 was down $564 from the end of 2000. Cash flow from operating
activities, proceeds from the sale of businesses and tight control over working
capital and capital spending enabled the Company to reduce the net debt to total
capital ratio to below 47% at the end of 2001 from 55% at the end of 2000.
Eaton's domestic long-term credit facilities were $900 at the end of 2001, of
which $500 expires in 2003 and $400 expires in 2005. These credit facilities
support outstanding commercial paper of $630 at the end of 2001, which was
classified as long-term debt.
Eaton is in compliance with all covenants or other requirements set forth in its
credit agreements or indentures, and it is not reasonably likely that this
situation would change in the foreseeable future. The Company does not have any
rating downgrade triggers that would accelerate the maturity dates of its debt,
apart from covenants which would accelerate $38 of debt if the Company lost its
investment grade ratings in conjunction with other significant events. A
downgrade in Eaton's credit ratings could adversely affect its ability to renew
existing, or obtain access to, new credit facilities in the future and could
increase the cost of such facilities. A downgrade in credit ratings also could
preclude Eaton's ability to issue commercial paper under its current programs.
Should this occur, the Company would seek alternative sources of funding,
including the issuance of bonds and secured lending. Eaton also has the ability,
at its option, to draw upon its $900 revolving credit facility.
Cash dividends paid in 2001 were $120. Annual dividends per share of $1.76 in
2001 were consistent with 2000. Eaton has paid dividends on Common Shares
annually since 1923.
Outlook for 2002
- ----------------
As a result of the market outlook for the various sectors Eaton serves, the
Company currently foresees the weighted average end markets for 2002 as
declining by approximately 8%, with no material strengthening until the middle
of 2002. Eaton expects key product program wins to increase revenue in 2002
above end market growth.
The Fluid Power segment will be impacted by traditional mobile and industrial
hydraulics markets which have remained very weak and Eaton still does not
anticipate a significant recovery in these markets until the middle of the
second half of 2002. The anticipated weakening of the aerospace market is
materializing and the Company foresees a 25-30% decline in the commercial
aircraft markets in 2002, partially offset by a 5% improvement in military
markets. Eaton expects that market conditions in the Industrial & Commercial
Controls segment will not improve until the end of 2002. In the North American
automotive business, any fall in demand in 2002 is expected to be offset by
increased market and product penetration. The Company initiated a record number
of new product launches in the areas of engine air management, powertrain, and
specialty controls and expects the Automotive segment to again outgrow its end
markets in 2002. For the Truck segment, Eaton expects that NAFTA heavy-duty
truck production will reach 150,000 units, up marginally from 2001 levels.
PAGE 46
Restructuring actions in 2001 for the Truck, Fluid Power and Industrial &
Commercial Controls segments, and corporate staff, are expected to deliver $100
of savings in 2002. An additional $55 of restructuring actions initiated in
early 2002, also related to the segments described above, should yield
additional savings. The majority of these costs will be incurred in the first
quarter and the Company expects these additional actions to produce
approximately $30 of additional savings in 2002.
For the year 2002, operating earnings guidance for Eaton is $4.25 to $4.50 per
Common Share, including the positive impact related to goodwill and other
intangible assets, offset by reduced pension income, both of which are described
further in "Significant Accounting Changes in 2002" below. Operating earnings
exclude charges related to the restructuring actions initiated in 2002. The
Company anticipates that it should be significantly cash flow positive again in
2002.
Significant Accounting Changes in 2002
- --------------------------------------
As described under "Depreciation and Amortization" in the Financial Review,
Eaton will adopt SFAS No. 142 in the first quarter of 2002. The adoption of SFAS
No. 142 will result in a decrease of annual amortization expense associated with
goodwill and certain intangible assets of approximately $70 ($61 after-tax, or
$.87 per Common Share). The Company does not expect to recognize an impairment
charge related to goodwill and intangible assets upon adoption of this
Statement.
Eaton estimates that 2002 earnings per Common Share will be reduced by $61 ($39
after-tax, or $.56) in comparison to 2001, due to the effect on pension income
of the dramatic decline in stock market valuations on the Company's pension
fund, coupled with lower discount rates associated with pension and other
postretirement benefit liabilities.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Eaton management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, management has made their best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates.
Revenue Recognition
- -------------------
Substantially all of Eaton's revenues are recognized when products are shipped
to unaffiliated customers. The SEC's Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition" provides guidance on the application of generally accepted
accounting principles to selected revenue recognition issues. The Company's
revenue recognition policy is in accordance with generally accepted accounting
principles and SAB No. 101.
Allowance for Uncollectible Accounts Receivable
- -----------------------------------------------
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer.
PAGE 47
Allowance for Obsolete and Excess Inventory
- -------------------------------------------
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management's review of inventories on hand compared to
estimated future usage and sales.
Impairment of Long-Lived Assets
- -------------------------------
Goodwill, intangible and other long-lived assets are reviewed by management for
impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. Goodwill and other intangible assets totaled
$2,435 at the end of 2001 and represented 32% of total assets. The majority of
these assets resulted from the $1,100 acquisition of the electrical distribution
and controls business unit of Westinghouse in 1994, and the $1,600 acquisition
of Aeroquip-Vickers in 1999. These businesses have a long history of operating
success and profitability and hold significant market positions in the majority
of their product lines. Their products are not subject to rapid technological or
functional obsolescence, which should result in continuous strong demand for
products for many years.
Deferred Income Tax Assets
- --------------------------
Deferred income tax assets and liabilities have been recorded for the
differences between the financial accounting and income tax basis of assets and
liabilities. Recorded deferred income tax assets and liabilities are described
in detail under "Income Taxes" in the Financial Review. Significant factors
considered by management in the determination of the probability of realizing of
deferred tax assets include historical operating results, expectations of future
earnings and taxable income and the extended period of time over which the
postretirement health care liability will be paid.
Pension Plans and Other Postretirement Benefit Plans
- ----------------------------------------------------
The measurement of liabilities related to pension plans and other postretirement
benefit plans is based on management's assumptions related to future events
including interest rates, return on pension plan assets, rate of compensation
increases, and health care cost trend rates. Actual pension plan asset
performance will either reduce or increase unamortized pension losses at the end
of 2002, which ultimately affects net income.
Protection of the Environment
- -----------------------------
Eaton's operations involve the use and disposal of certain substances regulated
under environmental protection laws. On an ongoing, regular basis, certain
processes continue to be modified in order to reduce the impact on the
environment, including the reduction or elimination of certain chemicals used
in, and wastes generated from, operations. Liabilities related to environmental
matters are further discussed under "Protection of the Environment" in the
Financial Review.
Contingencies
- -------------
The Company is subject to various investigations, claims, legal and
administrative proceedings, covering a wide range of matters that arise in the
ordinary course of business activities. Any liability that may result from these
proceedings is not expected to have a material adverse effect on Eaton's
financial position, net income or cash flows.
Other Matters
- -------------
Eaton does not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities" (SPEs). In the ordinary course of business, Eaton
leases certain real properties, primarily sales and office facilities, and
equipment, as described under "Lease Commitments" in the Financial Review.
PAGE 48
Transactions with related parties are in the ordinary course of business, are
conducted on an arm's-length basis, and are not material to Eaton's financial
position, net income or cash flows.
Eaton uses straightforward, non-leveraged, financial instruments for which
quoted market prices are readily available from a number of independent
services, to manage exposure to fluctuations in foreign currencies, interest
rates and commodity prices.
Contractual Obligations Related to Long-term Debt, Leases and Related Risk
Disclosure
- --------------------------------------------------------------------------
Eaton is subject to various financial risks attributable to operating in a
global economy. Systems to measure and assure that these exposures are
comprehensively evaluated have been developed so that appropriate and timely
action can be taken to reduce risk, if necessary. Management performs a monthly
oversight review of exposures. Derivative financial instruments are utilized on
a discrete basis to manage exposures in the foreign exchange, interest and
commodity markets only after approval by senior management. The counterparties
used in these transactions have been diversified in order to minimize the impact
of any potential credit loss in the event of nonperformance by the
counterparties. The effect of derivative financial instruments on the Company's
financial condition, net income or cash flows is not material. Derivative
activities are described in greater detail under "Debt and Other Financial
Instruments" in the Financial Review.
Eaton is subject to interest rate risk as it relates to long-term debt. The
table below presents principal cash flows and related weighted-average interest
rates by expected maturity dates of long-term debt, excluding foreign currency
principal swaps and immaterial long-term debt of certain international
operations.
2001 Expected maturity date
------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total Fair value
---- ---- ---- ---- ---- --------- ----- ----------
Long-term debt, including
current portion
Fixed rate (US$) $125 $150 $250 $ 15 $225 $939 $1,704 $1,832
Average interest rate 7.0% 3.1% 7.0% 6.4% 7.3% 7.2% 6.8%
Commercial paper (US$) $230 $400 $630 $630
Average interest rate 3.0% 3.0% 3.0%
2000 Expected maturity date
------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair value
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term debt, including
current portion
Fixed rate (US$) $100 $126 $253 $ 15 $1,135 $1,629 $1,693
Average interest rate 9.0% 7.0% 6.9% 6.4% 7.4% 6.9%
Commercial paper (US$) $500 $400 $900 $900
Average interest rate 6.6% 6.6% 6.6%
See "Debt and Other Financial Instruments" in the Financial Review for
additional information related to long-term debt of the Company.
Minimum rental commitments for 2002 under noncancelable operating leases, which
expire at various dates and in most cases contain renewal options, are $81 and
decline substantially thereafter.
PAGE 49
Euro
- ----
On January 1, 2000, 11 of the 15 member countries of the European Union (EU)
adopted the Euro as their common legal currency. Effective January 1, 2002, the
Euro became the functional operating currency of the participating countries.
Eaton has several operations within the participating countries. These
operations reviewed strategic and tactical areas arising from the Euro
conversion, focusing their efforts on those aspects of the Euro conversion
required to conduct Euro-denominated business transactions. Those aspects
included transacting business in the Euro, the competitive impact on product
pricing and adjustments to billing systems to handle parallel currencies. The
adoption of the Euro and the costs incurred to address the adoption of Euro did
not have a material impact on the Company's financial condition, net income or
cash flows.
Forward-Looking Statements
- --------------------------
This Annual Report to Shareholders contains forward-looking statements
concerning the year 2002 operating earnings per share, Eaton's worldwide
markets, benefits from restructuring programs, capital expenditures, cash flow,
volumes from new business awards and contingencies. These statements are subject
to various risks and uncertainties, many of which are outside of 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 sales
to these customers, 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, introduction of competing technologies, unexpected
technical or marketing difficulties, and unanticipated further deterioration of
economic and financial conditions in the United States and around the world.
Eaton does not assume any obligation to update these forward-looking statements.
2000 Compared to 1999 - Continuing Operations
- ---------------------------------------------
Results of Operations
- ---------------------
Net sales of continuing operations were $8,309 in 2000, an increase of 4% over
1999. The increase in sales was primarily the result of the acquisition of
Aeroquip-Vickers, Inc. in the second quarter of 1999, which more than offset
sales decreases related to businesses sold in 1999. The acquisition of
Aeroquip-Vickers was the primary driver of the 28% increase in sales of the
Fluid Power segment to $2,607 in 2000, compared to 1999. Sales of the Industrial
& Commercial Controls segment rose 7% to $2,421 in 2000 over 1999, in line with
overall growth in underlying markets that were paced by strong non-residential
building in North America. However, these increases in sales were largely offset
by extraordinarily difficult conditions in markets for truck components that
caused sales of this segment to fall 11% to $1,456 compared to 1999. Estimates
for heavy truck production in the NAFTA region show that production fell from
333,000 units in 1999 to 252,000 in 2000,a decline of about 25%. As an industry
leader in truck components, this segment was adversely affected by extraordinary
volatility in this market and was unable to reduce resources at the same pace as
orders dropped. Sales of the Automotive segment were $1,502 in 2000, up $7 from
1999, reflecting flat year-over-year light vehicle production in North America
and in Europe, and helped by sales from introductions of new products.
PAGE 50
Net sales in the United States and Canada in 2000 increased to $6,665, 7% over
1999, primarily the result of the acquisition of Aeroquip-Vickers and the strong
performance of certain of the Company's North American markets. In Europe, sales
rose 5% to $1,232, reflecting solid European economic performance with a 1% gain
in light vehicle production, an 8% rise in medium and heavy truck production,
and a 5% increase in industrial production during 2000. Sales in Latin America
rose 15% to $412, primarily due to the Latin American economic rebound with 4%
economic growth in the region. In the Pacific region, sales increased 19% in
2000 to $253, a reflection of that area's recovery from the economic crisis that
occurred in Asia in 1998. As a result of the increases in sales at international
operations, related operating profits increased 27% to $128.
As displayed in the Statement of Consolidated Income, continuing operations
reported Income from operations of $649 in 2000 (7.8% of sales), down from $703
in 1999 (8.8% of sales). These results reflect the benefit of Eaton's
diversification, with excellent performances by the Industrial & Commercial
Controls and Fluid Power segments offsetting extremely difficult conditions in
the Truck segment.
Income from operations in 2000 was reduced by restructuring charges of $52 ($34
after-tax, or $.47 per Common Share) compared to similar charges of $30 in 1999
($20 after-tax, or $.27 per share). The restructuring charges in 2000 and 1999
were primarily associated with the integration of Aeroquip-Vickers, and also
included $7 in 1999 for the restructuring of certain European operations of the
Truck segment. These charges reduced operating profit of the Fluid Power
segment, except for the $7 charge in 1999 mentioned previously, which reduced
operating profit of the Truck segment, and charges related to corporate staff
($5 for 2000 and $2 for 1999).
Other income-net in 2000 included a net gain on the sale of corporate assets of
$22 ($14 after-tax, or $.19 per Common Share). In 1999, the divestitures of the
Engineered Fasteners and Fluid Power divisions resulted in a pretax gain of $340
($198 after-tax, or $2.68 per share). These gains were included in the
Statements of Consolidated Income below income from operations and in Business
Segment Information below business segment operating profit.
Income from continuing operations was $363 in 2000 ($5.00 per Common Share),
down from $603 in 1999 ($8.17 per share). Excluding unusual items in both years,
earnings were $383 in 2000 ($5.28 per share), down from $425 in 1999 ($5.76 per
share).
Business Segments
- -----------------
Fluid Power
- -----------
Fluid Power sales were $2,607 in 2000, up 28% over 1999. The increase resulted
primarily from the acquisition of Aeroquip-Vickers in the second quarter of 1999
and other acquisitions in 2000. This increase in sales was offset to some extent
by a weaker Euro's impact on sales. The change in sales was also affected by a
3% increase in North American fluid power markets and a 9% decline in aerospace
markets.
Operating profit in 2000 was $235 compared to $177 in 1999. In the context of
soft industry conditions and the ongoing integration of Aeroquip-Vickers, the
segment performed reasonably well. The most difficult aspects of the
manufacturing integration of this acquisition have been completed. Overall, the
acquisition added about $.70 to earnings per share in 2000. Before acquisition
integration charges of $47 in 2000 and $21 in 1999, operating profit was $282
(10.8% of net sales), up 42% from $198 (9.7% of sales) in 1999.
During 2000, Eaton completed three acquisitions; the industrial cylinder
business of International Motion Control Incorporated, Frederick Duffield PTY
Ltd., an Australian-based manufacturer of metal hydraulic fittings and adapters,
and the clamps, flanges, seals and flexible joint business of Honeywell
International.
PAGE 51
Industrial & Commercial Controls
- --------------------------------
Industrial & Commercial Controls sales and profits in 2000 were at record
levels. Sales of $2,421 were 7% ahead of 1999, consistent with the increase in
North American shipments of distribution equipment and industrial controls.
Fourth quarter Cutler-Hammer orders were up 6% with disproportionate strength in
distribution equipment offsetting weakness in industrial controls.
Operating profit of $251 (10.4% of net sales) was 39% higher than 1999 operating
profit of $181 (8.0% of sales). The increase was primarily due to increased
sales in 2000. C-H ESS, the engineering services business, reported operating
profits during the fourth quarter of 2000, the first full quarter of
profitability.
At the end of 2000, the power tool switch product line, with annual sales of
about $40, was sold.
Automotive
- ----------
Automotive segment sales were $1,502 in 2000, only slightly above 1999 in large
part because of the weak Euro exchange rate. A 2% increase in volume compared
favorably with trends in Eaton's light vehicle markets, including a 2% drop in
production in the NAFTA region, a 1% increase in Europe, and a 19% rise in South
American output. The above-market volume performance was largely related to new
product introductions. Operating profit in 2000 was $214 (14.2% of net sales),
up from $211 (14.1% of sales) in 1999.
During 2000, Eaton began an expansion of its supercharger capacity in Brazil.
Truck
- -----
Truck sales in 2000 were $1,456, 11% below 1999. This compares to a 25% decline
in NAFTA production of heavy trucks, a 5% drop in NAFTA medium-duty truck
production, an 8% rise in European medium and heavy truck output and a 30%
increase in South American commercial vehicle production. This segment reported
operating profits of $107 in 2000 compared to profits of $242 in 1999, before
restructuring charges of $7 in 1999.
The North American heavy truck industry suffered a 25% drop during 2000, with
the entire production decline occurring in the second half of the year. This
decline was unprecedented, especially during a period of generally favorable
macroeconomic conditions. As an industry leader, Eaton was fully affected by
this extraordinary volatility, and was unable to reduce resources at the same
pace as orders dropped. This segment continued to win new business on a global
scale. However, the Company determined that the costs of serving demanding
customer needs in the context of unprecedented volatility had become
unacceptably high. As a result, in January 2001, the Company announced its plan
to restructure the Truck segment in order to begin to evolve to a business model
that is less vertically integrated, takes better advantage of its global
presence, and focuses on those areas where it brings distinctive value to the
marketplace.
During 2000, the Company announced a multi-year, $250 agreement to supply
medium-duty truck transmission components to DaimlerChrysler AG in Brazil from
Eaton's facility in Mogi Mirim, Brazil.
Non-operating Income (Expense)
- ------------------------------
Amortization of goodwill and other intangible assets was $95 in 2000, up $9 from
$86 in 1999. The increase was largely attributable to the recognition of a full
year of amortization related to the acquisition of Aeroquip-Vickers, compared to
nine months in 1999.
PAGE 52
Net interest expense was $177 in 2000 compared to $152 in 1999. The increase was
largely due to the recognition of a full year of interest for borrowings
required to finance the acquisition of Aeroquip-Vickers in the second quarter of
1999.
Corporate & other expenses netted to income of $9 in 2000 compared to net
expense of $29 in 1999, or a net change of $38. The change was primarily related
to a $22 gain on the sale of corporate assets recorded in 2000.
PAGE 53
QUARTERLY DATA
- -----------------
(Unaudited)
Quarter ended in 2001 Quarter ended in 2000
(Millions except for per share data) -------------------------------------- -------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
Continuing operations
Net sales $1,695 $1,750 $1,871 $1,983 $1,948 $2,008 $2,169 $2,184
Gross margin 415 424 471 486 493 516 605 603
Percent of sales 24% 24% 25% 25% 25% 26% 28% 28%
Income before income taxes 39 61 74 104 85 105 186 176
Income after income taxes $ 30 $ 40 $ 49 $ 50 $ 58 $ 69 $ 123 $ 113
Income from discontinued operations 26 24 22 18
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 30 $ 40 $ 49 $ 50 $ 84 $ 93 $ 145 $ 131
====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share
assuming dilution
Continuing operations $ .42 $ .57 $ .69 $ .72 $ .83 $ .95 $ 1.66 $ 1.52
Discontinued operations .37 .33 .30 .25
------ ------ ------ ------ ------ ------ ------ ------
$ .42 $ .57 $ .69 $ .72 $ 1.20 $ 1.28 $ 1.96 $ 1.77
====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share
basic
Continuing operations $ .42 $ .58 $ .70 $ .73 $ .84 $ .96 $ 1.69 $ 1.55
Discontinued operations .37 .33 .30 .25
------ ------ ------ ------ ------ ------ ------ ------
$ .42 $ .58 $ .70 $ .73 $ 1.21 $ 1.29 $ 1.99 $ 1.80
====== ====== ====== ====== ====== ====== ====== ======
Cash dividends paid per Common Share $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44
Market price per Common Share
High $76.00 $76.90 $81.43 $74.97 $76.31 $73.81 $86.56 $81.44
Low $58.34 55.12 66.16 63.75 57.50 58.94 66.25 60.13
PAGE 54
A reconciliation of income from continuing operations to operating earnings of
continuing operations follows:
Income from continuing operations $ 30 $ 40 $ 49 $ 50 $ 58 $ 69 $ 123 $ 113
Excluding (after-tax)
Unusual charges 17 22 17 30 14 8 7 5
Gain of sales of businesses (15) (7)
Gain on sales of corporate assets (7) (7)
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings from continuing
operations $ 47 $ 47 $ 66 $ 73 $ 72 $ 77 $ 123 $ 111
====== ====== ====== ====== ====== ====== ====== ======
Income from continuing operations
per Common Share assuming
dilution $ .42 $ .57 $ .69 $ .72 $ .83 $ .95 $ 1.66 $ 1.52
Per share impact of unusual items .23 .09 .25 .33 .20 .12 (.01) (.02)
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings per Common Share
Continuing operations .65 .66 .94 1.05 1.03 1.07 1.65 1.50
Discontinued operations .37 .33 .30 .25
------ ------ ------ ------ ------ ------ ------ ------
$ .65 $ .66 $ .94 $ 1.05 $ 1.40 $ 1.40 $ 1.95 $ 1.75
====== ====== ====== ====== ====== ====== ====== ======
Cash earnings per Common
Share assuming dilution
Continuing operations $ .91 $ .93 $ 1.22 $ 1.34 $ 1.31 $ 1.34 $ 1.92 $ 1.77
Discontinued operations .40 .35 .33 .28
------ ------ ------ ------ ------ ------ ------ ------
$ .91 $ .93 $ 1.22 $ 1.34 $ 1.71 $ 1.69 $ 2.25 $ 2.05
====== ====== ====== ====== ====== ====== ====== ======
Cash earnings per Common Share represent income per share excluding unusual
items and before amortization expense for goodwill and other intangible assets.
The effective income tax rate for the fourth quarter of 2001 was 24.9% compared
to 31.8% in the fourth quarter of 2000. The lower rate in 2001 was related to
adjustments of worldwide tax liabilities, including claims filed for research
credits for prior years.
PAGE 55
Eaton Corporation
Six-Year Consolidated Financial Summary
2001 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
(Millions except for per share data)
Continuing operations
Net sales $7,299 $8,309 $8,005 $6,358 $7,104 $6,515
Income before income taxes 278 552 943 616 730 428
Income after income taxes $ 169 $ 363 $ 603 $ 430 $ 526 $ 305
Percent of net sales 2.3% 4.4% 7.5% 6.7% 7.4% 4.7%
Extraordinary item - redemption of debentures (54)
Income(loss) from discontinued operations 90 14 (81) (62) 44
------ ------ ------ ------ ------ ------
Net income $ 169 $ 453 $ 617 $ 349 $ 410 $ 349
====== ====== ====== ====== ====== ======
Net income per Common Share assuming dilution
Continuing operations $ 2.39 $ 5.00 $ 8.17 $ 5.91 $ 6.72 $ 3.89
Extraordinary item (.69)
Discontinued operations 1.24 .19 (1.11) (.79) .57
------ ------ ------ ------ ------ ------
$ 2.39 $ 6.24 $ 8.36 $ 4.80 $ 5.24 $ 4.46
====== ====== ====== ====== ====== ======
Average number of Common Shares outstanding 70.5 72.6 73.7 72.7 78.2 78.2
Net income per Common Share basic
Continuing operations $ 2.43 $ 5.06 $ 8.31 $ 6.02 $ 6.85 $ 3.93
Extraordinary item (.71)
Discontinued operations 1.25 .20 (1.13) (.80) .57
------ ------ ------ ------ ------ ------
$ 2.43 $ 6.31 $ 8.51 $ 4.89 $ 5.34 $ 4.50
====== ====== ====== ====== ====== ======
Average number of Common Shares outstanding 69.4 71.8 72.5 71.4 76.8 77.4
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.72 $ 1.60
Market price per Common Share
High $81.43 $86.56 $103.50 $99.63 $103.38 $70.88
Low 55.12 57.50 62.00 57.50 67.25 50.38
- --------------------------------------------------------------------------------------------------------
Total assets $7,646 $8,180 $8,342 $5,570 $5,497 $5,290
Long-term debt 2,252 2,447 1,915 1,191 1,272 1,062
Total debt 2,440 3,004 2,885 1,524 1,376 1,092
Shareholders' equity 2,475 2,410 2,624 2,057 2,071 2,160
Shareholders' equity per Common Share $35.61 $35.29 $35.44 $28.69 $27.72 $28.00
Common Shares outstanding 69.5 68.3 74.0 71.7 74.7 77.1
- --------------------------------------------------------------------------------------------------------
PAGE 56
A reconciliation of income from continuing operations to operating earnings of
continuing operations follows:
Income from continuing operations $ 169 $ 363 $ 603 $ 430 $ 472 $ 305
Excluding (after-tax)
Unusual charges 86 34 20 44 69 31
Gain of sales of businesses (22) (198) (28) (69)
Gain on sales of corporate assets (14)
------ ------ ------ ------ ------ ------
Operating earnings from continuing
operations $ 233 $ 383 $ 425 $ 446 $ 472 $ 336
====== ====== ====== ====== ====== ======
Income from continuing operations
per Common Share assuming dilution $ 2.39 $ 5.00 $ 8.17 $ 5.91 $ 6.03 $ 3.89
Per share impact of unusual items .91 .28 (2.41) .23 .40
------ ------ ------ ------ ------ ------
Operating earnings per Common Share
Continuing operations 3.30 5.28 5.76 6.14 6.03 4.29
Discontinued operations 1.24 .19 (.73) .30 .58
------ ------ ------ ------ ------ ------
$ 3.30 $ 6.52 $ 5.95 $ 5.41 $ 6.33 $ 4.87
====== ====== ====== ====== ====== ======
Cash earnings per Common Share assuming dilution
Continuing operations $ 4.40 $ 6.37 $ 6.74 $ 6.75 $ 6.55 $ 4.77
Discontinued operations 1.35 .30 (.63) .31 .58
------ ------ ------ ------ ------ ------
$ 4.40 $ 7.72 $ 7.04 $ 6.12 $ 6.86 $ 5.35
====== ====== ====== ====== ====== ======
Cash earnings per Common Share represents income per share excluding unusual
items and before amortization expense for goodwill and other intangible assets.
PAGE 57
Eaton Corporation
2001 Annual Report on Form 10-K
Item 14(c)
Exhibit 12
Ratio of Earnings to Fixed Charges
Year ended December 31
-------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income from continuing operations before income taxes &
extraordinary item $ 278 $ 552 $ 943 $ 616 $ 730
Adjustments
Minority interests in
consolidated subsidiaries 8 8 2 (2) 1
Income of equity investees 0 (1) (1) (1) (3)
Interest expensed 149 182 159 93 86
Amortization of debt issue costs 1 1 0 0 1
Estimated portion of rent expense
representing interest 38 39 36 28 25
Amortization of capitalized interest 13 10 8 7 8
Distributed income of equity
investees 0 1 0 1 2
------ ------ ------ ------ ------
Adjusted income from continuing
operations before income taxes &
extraordinary item $ 487 $ 792 $1,147 $ 742 $ 850
====== ====== ====== ====== ======
Fixed Charges
Interest expensed $ 149 $ 182 $ 159 $ 93 $ 86
Interest capitalized 12 22 21 16 12
Amortization of debt issue costs 1 1 0 0 1
Estimated portion of rent expense
representing interest 38 39 36 28 25
-------- ------ ------ ------ ------
Total fixed charges $ 200 $ 244 $ 216 $ 137 $ 124
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 2.44 3.25 5.31 5.42 6.85
PAGE 58
Eaton Corporation
2001 Annual Report on Form 10-K
Item 14(c)
Exhibit 21
Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's subsidiaries, the
state or country in which each was organized, and the percentage of voting
securities owned by Eaton or another Eaton subsidiary as of December 31, 2001
are as follows:
Where Percentage of voting securities owned
Consolidated subsidiaries (A) Organized (by Eaton unless otherwise indicated)
- ----------------------------- --------- --------------------------------------
Vorad Safety Systems, Inc. California 100% IVHS Technologies, Inc.
Aeroquip International Inc. Delaware 77% Eaton Aeroquip Inc.
23% Vickers International Inc.
Cutler-Hammer de Puerto Rico Inc. Delaware 100% Cutler-Hammer Inc.
Cutler-Hammer Inc. Delaware 100%
Integrated Partial Discharge Delaware 100% Cutler-Hammer Inc.
Diagnostics, Inc.(IPDD)
Eaton AC&R Inc. Delaware 100% Eaton Aeroquip Inc.
Eaton Administration Corporation Delaware 100%
Eaton Aerospace LLC Delaware 100% Eaton Hydraulics Inc.
Eaton ESC Holding Company Delaware 100%
Eaton International Corporation Delaware 100%
Eaton Truck Systems, Inc. Delaware 100%
Eaton USEV Holding Delaware 100%
Company
Eaton VORAD Technologies, L.L.C. Delaware 94.3% Eaton Truck Systems, Inc.
(Partnership) Vorad Safety Systems, Inc.
4%
ERC Corporation Delaware 100% Eaton Leasing Corporation
ERC II Corporation Delaware 100% Eaton Leasing Corporation
IVHS Technologies, Inc. Delaware 69.8%
M.C. Aerospace Corporation Delaware 100% Eddot Company
Modern Molded Products, Inc. Delaware 100%
PAGE 59
Kate Patrick Mfg. Inc. Delaware 100% Modern Molded Products, Inc.
Kelmac Grip, L.P. Delaware 92% Modern Molded Products, Inc.
Kate Patrick Mfg. Inc.
8%
Eaton Hydraulics Inc. Delaware 100% Eaton Aeroquip Inc.
Vickers International Inc. Delaware 100% Eaton Aeroquip Inc.
Eaton AC&R Limited Indiana 99% Eaton AC&R Inc.
1% Eaton Aeroquip Inc.
Eaton Asia Investments Corporation Maryland 100%
Eaton Aeroquip Inc. Michigan 100% Aeroquip-Vickers Inc.
Aeroquip Inoac Company (Partnership) Michigan 51% Eaton Aeroquip Inc.
CAPCO Automotive Products Corporation Michigan 100%
Eddot Company Michigan 100% Eaton Hydraulics Inc.
G.T. Products, Inc. Michigan 100%
Aeroquip-Vickers, Inc. Ohio 100%
Cutler-Hammer IDT, Inc. Ohio 100%
Eaton Consulting Services Corporation Ohio 100%
Eaton Leasing Corporation Ohio 100%
Eaton MDH Co. Inc. Ohio 100%
Eaton MDH Limited Partnership Ohio 1%
99% Eaton MDH Co. Inc.
Eaton Properties Corporation Ohio 100% Eaton Leasing Corporation
Eaton Utah Corporation Ohio 100% Eaton Leasing Corporation
U.S. Engine Valve (Partnership) Ohio 5.607%
70% Eaton USEV Holding Company
Summa Manufacturing Corporation Tennessee 100% Eaton Hydraulics Inc.
Eaton S.A. Argentina 100%
Vickers Systems Pty. Ltd. Australia 100% Vickers International Inc.
Cutler-Hammer Controls Pty. Ltd. Australia 99.99996% Eaton International Corporation
.00004% Eaton Pty. Ltd.
PAGE 60
Eaton Finance Pty. Ltd. Australia 100% Eaton International Corporation
Eaton Finance G.P. Australia 99.834% Eaton Finance Pty. Ltd.
.166% Eaton Specialty Controls Pty. Ltd.
Eaton Pty. Ltd. Australia 100%
Eaton Specialty Controls Pty. Ltd. Australia 99.9996%
.0004% Eaton International Corporation
Eaton Holding G.m.b.H. Austria 100% Eaton International Corporation
A-VIC Limited Barbados 100% Aeroquip International Inc.
Aeroquip Ltd. Barbados 100% Aeroquip-Vickers Canada Inc.
Aeroquip-Vickers Assurance Ltd. Barbados 100% Aeroquip-Vickers Inc.
Eaton Foreign Sales Corporation Barbados 100%
Eaton Holding Limited Barbados 100% Eaton Yale
Ltd.
Eaton Services Limited Barbados 100% Eaton Holding
Limited
Saturn Insurance Company Ltd. Bermuda Islands 100%
Aeroquip do Brasil S.A. Brazil 99.5% Aeroquip-Vickers International Inc.
Eaton Ltda. Brazil 65.0428% Eaton Services
Services
Limited
34.9572% Eaton International Corporation
Eaton Truck Components Ltda. Brazil 21.135%
78.865% CAPCO Automotive Products
Corporation
Vicco Participacoes Ltda. Brazil 99.999% Aeroquip-Vickers International,
Inc.
.001% Aeroquip AG
Vickers do Brasil Ltda. Brazil 100% Vickers International Inc.
Aeroquip-Vickers Canada Inc. Canada 70.13% Aeroquip International Inc.
Vickers International Inc.
29.87%
Eaton ETN Offshore Ltd. Canada 100% Common Shares -
Eaton Corporation
100% Preferred Shares -
Eaton International
Corporation
PAGE 61
Eaton Yale Ltd. Canada 100% Eaton ETN Offshore Ltd.
Electrotechnique GFTL, Inc. Canada 100% Eaton Yale Ltd.
Cutler-Hammer Company Cayman Islands 100% Cutler-Hammer de Puerto Rico Inc.
Eaton Holding I Limited Cayman Islands 100% Eaton Holding III Limited
Eaton Holding II Limited Cayman Islands 100% Eaton Holding III Limited
Eaton Holding III Limited Cayman Islands 100% Eaton Holding G.m.b.H.
Santo Domingo Device Company Cayman Islands 50% Cutler-Hammer Inc.
Eaton Hydraulics (Shanghai)Co., Ltd. China 100% Eaton China Investment Co., Ltd.
Eaton Truck and Bus Components Company China 100% Eaton China Investment Co., Ltd.
(Shanghai) Ltd.
Eaton China Investments Co., Ltd. China 100% Eaton Asia Investments Corporation
Jining Eaton Hydraulics Company Ltd. China 60%
Shanghai Eaton Engine Components China 69.42% Eaton China Investment Co., Ltd.
Company, Ltd.
Cutler-Hammer (Suzhou) Electric Co., Ltd. China 59.1% Eaton Asia Investments Corp.
Eaton China Investments Co., Ltd.
40.9%
Vickers Hydraulic Systems (China) Co., China 100% Vickers International Inc.
Ltd.
Eaton Controles Industriales S.A. Costa Rica 100% Eaton International
Corporation
Cutler-Hammer, S.A. Dominican Republic 100% Cutler-Hammer Inc.
Aeroquip-Vickers S.A. France 61% Aeroquip International Inc.
Vickers International Inc.
39%
Eaton Automotive Controls Srl France 100% Eaton Technologies S.A.
Eaton S.A. France 100%
Eaton Technologies S.A. France 55%
45% Eaton International Corporation
PAGE 62
Aeroquip Wolfsburg G.m.b.H. & Co. KG Germany 100% Aeroquip-Vickers International
(Partnership) G.m.b.H.
Aeroquip Wolfsburg Verwaltungs G.m.b.H. Germany 100% Aeroquip International Inc.
Aeroquip-Vickers International G.m.b.H. Germany 94.9% Eaton Holding G.m.b.H.
Eaton Aeroquip Inc.
5.1%
Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H.
Eaton Controls G.m.b.H. & Co. K.G. Germany 99.33% Eaton Yale Ltd.
(Partnership) .67% Eaton G.m.b.H.
Eaton G.m.b.H. Germany .1%
99.9% Eaton Holding G.m.b.H
Eaton Holding G.m.b.H. Germany 100% Eaton B.V.
Eaton Limited Hong Kong 100% Eaton International
Corporation
Vickers Systems Limited Hong Kong 99.995% Vickers International Inc.
Vickers System Inc.
.005%
Eaton Industries Private Ltd. India .01%
99.99% Eaton International Corporation
Vickers Systems International Ltd. India 51% Vickers, Incorporated
Eaton Automotive Ltd. Ireland 100% Eaton B.V.
Aeroquip-Vickers S.p.A. Italy 99.88% Eaton Srl
.06% Aeroquip Corporation
Eaton Automotive Srl Italy 100% Eaton Srl
Eaton Srl Italy 100% Eaton B.V.
Hydroline Srl Italy 100% Aeroquip-Vickers S.p.A.
Eaton Fluid Power Co. Japan 100%
Eaton Fluid Power Limited Japan 100%
Eaton Japan Co., Ltd. Japan 100%
Vickers Systems Sdn. Bhd. Malaysia 100% Vickers International Inc.
Cutler-Hammer Controls Sdn. Bhd. Malaysia 100% Eaton International Corporation
Aeroquip de Mexico S.A. de C.V. Mexico 99.8% Controladora Aeroquip-Vickers de
Mexico S.A. de C.V.
.2% Aeroquip International Inc.
PAGE 63
Aeroquip S.A. de C.V. Mexico 99.998% Controladora Aeroquip-Vickers de
Mexico S.A. de C.V.
.002% Eaton Aeroquip Inc.
Aeroquip Servicios S.A. de C.V. Mexico 99.998% Aeroquip International Inc.
Eaton Aeroquip Inc.
.002%
Controladora Aeroquip-Vickers de Mexico Mexico 99.8% Aeroquip International Inc.
S.A. de C.V. Aeroquip-Vickers Inc.
.2%
Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton International Corporation
Eaton Controls, S. de R.L. de C.V. Mexico 99%
1% Eaton Truck Components, S. de R.L.
de C.V.
Eaton Molded Products S. de R.L. de C.V. Mexico 99.9999984%
.0000016% Eaton Controls, S. de R.L. de C.V.
Eaton Truck Components, S. de R.L. de Mexico 99.995%
C.V. .005% Condura S. de R.L. de C.V.
Operaciones de Maquila de Juarez S. de Mexico 99.956% Cutler-Hammer
R.L. de C.V. .044% Inc.
Condura S de. R.L. de C.V.
Eaton s.a.m. Monaco 100%
Eaton Automotive B.V. Netherlands 100% IKU Holding Montfoort B.V.
Eaton B.V. Netherlands 100% Eaton Holding International
I B.V.
Eaton C.V. (Partnership) Netherlands 99.9% Eaton Holding III
Limited
.1% Eaton International
Corporation
Eaton Holding B.V. Netherlands 100% Eaton B.V.
Eaton Holding International I B.V. Netherlands 100% Aeroquip International Inc.
Eaton International B.V. Netherlands 100%
IKU Holding Montfoort B.V. Netherlands 100% Eaton Holding B.V.
Eaton Finance B.V. Netherlands 100% Eaton B.V.
Hydrowa B.V. Netherlands 100% Eaton Holding B.V.
Eaton Finance N.V. Netherlands Antilles 45%
55% Eaton International Inc.
Vickers Systems Limited New Zealand 100% Vickers International Inc.
PAGE 64
Aeroquip-Vickers International Inc. Panama 100% Aeroquip A.G.
Cutler-Hammer Asia Corporation Philippines 100% Eaton International Corporation
Eaton Automotive Spolka z o.o. Poland 100% Eaton Automotive Srl
Eaton Controls Spolka z o.o. Poland 100% Eaton Holding B.V.
Eaton Truck Components S.A. Poland 99.51% Eaton B.V.
Aeroquip Singapore Pte. Limited Singapore 100% Aeroquip International Inc.
Aeroquip-Vickers Pte. Ltd. Singapore 100% Vickers International Inc.
Cutler-Hammer Pte. Ltd. Singapore 100% Eaton International Corporation
Vickers Systems Asia Pacific Pte. Ltd. Singapore 100% Vickers International Inc.
Aeroquip South Africa (Pty.) Ltd. South Africa 100% Aeroquip International Inc.
Eaton Truck Components (Pty) Limited South Africa 100% Eaton Limited
Eaton Automotive Controls Limited South Korea 100% Eaton International Corporation
Eaton Limited South Korea 100%
Aeroquip Iberica S.A. Spain 100% Aeroquip International Inc.
Eaton S.A. Spain 49.86%
50.14% Eaton International B.V.
Eaton Ros S.A. Spain 100% Eaton S.A.
Productos Eaton Livia S.A. Spain 48% Eaton S.A.
52% Eaton International B.V.
Vickers Systems AB Sweden 100% Vickers International Inc.
Aeroquip A.G. Switzerland 100% Aeroquip International Inc.
Eaton SA Switzerland 100%
Eaton Limited Taiwan 19.4%
80.6% Eaton International Corporation
PAGE 65
Modern Molded Products Limited Taiwan 100% Eaton International Corporation
Vickers Systems Ltd. Taiwan 99.996% Vickers International Inc.
Aeroquip-Vickers Inc.
.001% Aeroquip Corporation
Vickers, Incorporated
.001%
.001%
Eaton Technologies Limited Thailand 100%
Rubberon Technology Corporation Limited Thailand 100%
Aeroquip-Vickers Limited United Kingdom 100% Eaton Holding Ltd.
Cutler-Hammer Europa United 50% Eaton Limited
Pension Trustees Ltd. Kingdom 50% Eaton Financial Services Limited
Eaton Holding Limited United Kingdom 100% Eaton B.V.
Eaton Limited United Kingdom 100% Eaton Holding Limited
Eaton Shared Services Limited United Kingdom 100% Eaton Holding Limited
Aeroquip-Vickers Export Trading Company U.S. Virgin Islands 100% Aeroquip-Vickers Inc.
Cutler-Hammer de Venezuela S.A. Venezuela 100% Eaton International Corporation
(A) Other Eaton subsidiaries, many inactive, are not listed above. If
considered in the aggregate, they would not be material.
PAGE 66
Eaton Corporation
2001 Annual Report on Form 10-K
Item 14(c)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated January 21, 2002, with
respect to the consolidated financial statements of Eaton Corporation included
in this Annual Report (Form 10-K) for the year ended December 31, 2001.
Registration
Number Description Filing Date
------ ----------- -----------
333-56644 Aeroquip-Vickers Savings and Profit March 7, 2001
Sharing Plan - Form S-8 Registration Statement
333-43876 Eaton Corporation 401(k) Savings Plan - Form S-8 August 16, 2000
Registration Statement - 500,000 Shares
333-35946 Deferred Incentive Compensation Plan - Form S-8 May 1, 2000
Registration Statement - 375,000 Shares
333-86391 Aeroquip-Vickers Savings and Profit Sharing Plan - Form September 2, 1999
S-8 Registration Statement
333-86389 Eaton Corporation Executive Strategic Incentive Plan - September 2, 1999
Form S-8 Registration Statement
333-77245 Eaton Corporation 401(k) Savings Plan - Form S-8 April 28, 1999
Registration Statement
333-77243 Eaton Corporation Share Purchase and Investment Plan - April 28, 1999
Form S-8 Registration Statement
333-74355 Eaton Corporation $1,400,000,000 of Debt Securities, Debt March 12, 1999
Warrants, Common Shares and Preferred Shares - Form S-3
Registration Statement (Including Post Effective Amendment
No. 1 filed on April 23, 1999 and Amendment No. 2 filed on
May 11, 1999)
333-62375 Eaton Corporation 1998 Stock Plan - Form S-8 Registration August 27, 1998
Statement
333-62373 Eaton Holding Limited U.K. Savings-Related Share Option August 27, 1998
Scheme [1998] - Form S-8 Registration Statement
333-46861 Eaton Limited U.K. Savings-Related Share Option Scheme February 25, 1998
[1991] - Form S-8 Registration Statement
333-45575 Eaton Limited U.K. Savings-Related Share Option Scheme February 4, 1998
[1991] - Form S-8 Registration Statement
PAGE 67
333-35697 Cutler-Hammer de Puerto Rico Company Retirement Savings September 16, 1997
Plan - Form S-8 Registration Statement
333-28869 Eaton 401(k) Savings Plan and Trust - Form S-8 June 10, 1997
Registration Statement
333-25693 Eaton Corporation Shareholder Dividend Reinvestment Plan - April 23, 1997
Form S-3 Registration Statement
333-23539 Eaton Non-Employee Director Fee Deferral Plan - Form S-8 March 18, 1997
Registration Statement
333-22597 Eaton Incentive Compensation Deferral Plan - Form S-8 March 13, 1997
Registration Statement
333-13873 Eaton Corporation Investment Plan for Hourly Employees of October 10, 1996
the Hydraulics Division - Hutchinson Plant - Form S-8
Registration Statement
333-13869 Lincoln Plant Share Purchase and Investment Plan and Trust October 10, 1996
- Form S-8 Registration Statement
333-13861 Eaton Corporation 401(k) Savings Plan for the Hourly Rate October 10, 1996
Employees at Airflex Division - Form S-8 Registration
Statement
333-13855 Eaton Winamac Hourly Investment October 10, 1996
Plan and Trust - Form S-8 Registration Statement
333-03599 Eaton Corporation Share Purchase and Investment Plan - May 13, 1996
Form S-8 Registration Statement
333-01365 Eaton Corporation Incentive Compensation Deferral Plan - March 1, 1996
Form S-3 Registration Statement
33-64201 Eaton Corporation $120,837,500 of Debt Securities and Debt November 14, 1995
Warrants - Form S-3 Registration Statement
33-60907 Eaton 1995 Stock Plan - Form S-8 Registration Statement July 7, 1995
33-52333 Eaton Corporation $600,000,000 of Debt Securities, Debt February 18, 1994
Warrants, Common Shares and Preferred Shares - Form S-3
Registration Statement
33-49779 Eaton Limited U.K. Savings-Related Share Option Scheme July 16, 1993
[1991] - Form S-8 Registration Statement
33-49393 & Eaton Corporation Stock Option Plans - Form S-8 March 9, 1993
33-12842 Registration Statement
PAGE 68
33-15582 Eaton Limited U.K. Savings-Related Share Option Scheme - July 7, 1987
Form S-8 Registration Statement
/s/ Ernst & Young LLP
---------------------
Cleveland, Ohio
March 19, 2002
PAGE 69
Eaton Corporation
2001 Annual Report on Form 10-K
Item 14(c)
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed
below has made, constituted and appointed, and by this instrument does make,
constitute and appoint, Billie K. Rawot or William J. Nowak his or her true and
lawful attorney, for him or her and in his or her name, place and stead to
subscribe, as attorney-in-fact, his or her signature as Director or Officer or
both, as the case may be, of Eaton Corporation, an Ohio corporation, to its
Annual Report on Form 10-K for the year ended December 31, 2001 pursuant to the
Securities Exchange Act of 1934, and to any and all amendments to that Annual
Report, hereby giving and granting unto each such attorney-in-fact full power
and authority to do and perform every act and thing whatsoever necessary to be
done in the premises, as fully as he or she might or could do if personally
present, hereby ratifying and confirming all that each such attorney-in-fact
shall lawfully do or cause to be done by virtue hereof.
This Power of Attorney shall not apply to any Annual Report on Form 10-K
or amendment thereto filed after December 31, 2002.
IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland,
Ohio this 27th day of February 2002.
/s/ Alexander M. Cutler /s/ Billie K. Rawot
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Alexander M. Cutler, Chairman and Billie K. Rawot
Chief Executive Officer; President; Vice President and Controller;
Principal Executive Officer; Director Principal Accounting Officer
/s/ Michael J. Critelli /s/ Ernie Green
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Michael J. Critelli, Director Ernie Green, Director
/s/ Ned C. Lautenbach /s/ Deborah L. McCoy
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Ned C. Lautenbach, Director Deborah L. McCoy, Director
/s/ John R. Miller /s/ Furman C. Moseley
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John R. Miller, Director Furman C. Moseley, Director
/s/ Victor A. Pelson /s/ William Reynolds
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Victor A. Pelson, Director William Reynolds, Director
/s/ Gary L. Tooker
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Gary L. Tooker, Director