ETN 09.30.2013 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
Commission file number 000-54863
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EATON CORPORATION plc |
(Exact name of registrant as specified in its charter) |
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Ireland | | 98-1059235 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
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Fitzwilliam Hall, Fitzwilliam Place, Dublin 2, Ireland | | - |
(Address of principal executive offices) | | (Zip Code) |
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| | | | | | | | | | | |
| | | +1 (440) 523-5000 | | | |
| | | (Registrant's telephone number, including area code) | | | |
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| | | Not applicable | | | |
| | | (Former name, former address and former fiscal year if changed since last report) | | | |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 474.5 million Ordinary Shares outstanding as of September 30, 2013.
PART I — FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS. |
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
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| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(In millions except for per share data) | 2013 | | 2012 | | 2013 | | 2012 |
Net sales | $ | 5,607 |
| | $ | 3,950 |
| | $ | 16,519 |
| | $ | 11,978 |
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| | | | | | | |
Cost of products sold | 3,883 |
| | 2,747 |
| | 11,488 |
| | 8,316 |
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Selling and administrative expense | 967 |
| | 687 |
| | 2,885 |
| | 2,079 |
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Research and development expense | 166 |
| | 102 |
| | 479 |
| | 313 |
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Interest expense - net | 63 |
| | 42 |
| | 209 |
| | 100 |
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Other expense (income) - net | 7 |
| | (4 | ) | | 3 |
| | 7 |
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Income before income taxes | 521 |
| | 376 |
| | 1,455 |
| | 1,163 |
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Income tax expense | 7 |
| | 29 |
| | 64 |
| | 123 |
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Net income | 514 |
| | 347 |
| | 1,391 |
| | 1,040 |
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Less net income for noncontrolling interests | (4 | ) | | (2 | ) | | (9 | ) | | (2 | ) |
Net income attributable to Eaton ordinary shareholders | $ | 510 |
| | $ | 345 |
| | $ | 1,382 |
| | $ | 1,038 |
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| | | | | | | |
Net income per ordinary share | | | | | | | |
Diluted | $ | 1.07 |
| | $ | 1.02 |
| | $ | 2.90 |
| | $ | 3.05 |
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Basic | 1.08 |
| | 1.02 |
| | 2.92 |
| | 3.08 |
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| | | | | | | |
Weighted-average number of ordinary shares outstanding | | | | | | | |
Diluted | 477.2 |
| | 339.8 |
| | 476.2 |
| | 339.7 |
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Basic | 474.0 |
| | 337.6 |
| | 473.1 |
| | 336.7 |
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Cash dividends declared per ordinary share | $ | 0.42 |
| | $ | 0.76 |
| | $ | 1.26 |
| | $ | 1.52 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(In millions) | 2013 | | 2012 | | 2013 | | 2012 |
Net income | $ | 514 |
| | $ | 347 |
| | $ | 1,391 |
| | $ | 1,040 |
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Less net income for noncontrolling interests | (4 | ) | | (2 | ) | | (9 | ) | | (2 | ) |
Net income attributable to Eaton ordinary shareholders | 510 |
| | 345 |
| | 1,382 |
| | 1,038 |
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Other comprehensive income, net of tax |
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Currency translation and related hedging instruments | 286 |
| | 146 |
| | (104 | ) | | 47 |
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Pensions and other postretirement benefits | 31 |
| | 22 |
| | 120 |
| | 93 |
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Cash flow hedges | 5 |
| | 4 |
| | — |
| | 16 |
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Other comprehensive income attributable to Eaton ordinary shareholders | 322 |
| | 172 |
| | 16 |
| | 156 |
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Total comprehensive income attributable to Eaton ordinary shareholders | $ | 832 |
| | $ | 517 |
| | $ | 1,398 |
| | $ | 1,194 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONDENSED CONSOLIDATED BALANCE SHEETS
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(In millions) | September 30, 2013 | | December 31, 2012 |
Assets | | | |
Current assets | | | |
Cash | $ | 642 |
| | $ | 577 |
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Short-term investments | 698 |
| | 527 |
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Accounts receivable - net | 3,950 |
| | 3,510 |
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Inventory | 2,403 |
| | 2,339 |
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Deferred income taxes | 404 |
| | 393 |
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Prepaid expenses and other current assets | 669 |
| | 429 |
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Total current assets | 8,766 |
| | 7,775 |
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| | | |
Property, plant and equipment - net | 3,757 |
| | 3,823 |
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| | | |
Other noncurrent assets |
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Goodwill | 14,276 |
| | 14,211 |
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Other intangible assets | 7,231 |
| | 7,468 |
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Deferred income taxes | 328 |
| | 369 |
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Other assets | 954 |
| | 1,704 |
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Total assets | $ | 35,312 |
| | $ | 35,350 |
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Liabilities and shareholders’ equity | | | |
Current liabilities | | | |
Short-term debt | $ | 88 |
| | $ | 757 |
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Current portion of long-term debt | 576 |
| | 314 |
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Accounts payable | 1,976 |
| | 1,879 |
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Accrued compensation | 430 |
| | 463 |
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Other current liabilities | 1,984 |
| | 2,008 |
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Total current liabilities | 5,054 |
| | 5,421 |
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Noncurrent liabilities | | | |
Long-term debt | 9,029 |
| | 9,762 |
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Pension liabilities | 1,801 |
| | 2,004 |
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Other postretirement benefits liabilities | 733 |
| | 740 |
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Deferred income taxes | 1,513 |
| | 1,456 |
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Other noncurrent liabilities | 1,065 |
| | 812 |
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Total noncurrent liabilities | 14,141 |
| | 14,774 |
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Shareholders’ equity | | | |
Eaton shareholders’ equity | 16,071 |
| | 15,113 |
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Noncontrolling interests | 46 |
| | 42 |
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Total equity | 16,117 |
| | 15,155 |
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Total liabilities and equity | $ | 35,312 |
| | $ | 35,350 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| | | | | | | |
| Nine months ended September 30 |
(In millions) | 2013 | | 2012 |
Operating activities | | | |
Net income | $ | 1,391 |
| | $ | 1,040 |
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Adjustments to reconcile to net cash provided by operating activities | | | |
Depreciation and amortization | 740 |
| | 419 |
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Pension expense | 239 |
| | 205 |
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Contributions to pension plans | (303 | ) | | (383 | ) |
Contributions to other postretirement benefits plans | (45 | ) | | (34 | ) |
Changes in working capital | (813 | ) | | (318 | ) |
Other - net | 204 |
| | 48 |
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Net cash provided by operating activities | 1,413 |
| | 977 |
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| | | |
Investing activities | | | |
Cash paid for acquisitions of businesses | (11 | ) | | (554 | ) |
Capital expenditures for property, plant and equipment | (372 | ) | | (357 | ) |
(Purchases) sales of short-term investments - net | (185 | ) | | 89 |
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Proceeds from sales of businesses | 761 |
| | 3 |
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Other - net | (50 | ) | | (38 | ) |
Net cash provided by (used in) investing activities | 143 |
| | (857 | ) |
| | | |
Financing activities | | | |
Proceeds from borrowings | 6 |
| | 600 |
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Payments on borrowings | (1,012 | ) | | (321 | ) |
Payments of financing costs | — |
| | (63 | ) |
Cash dividends paid | (597 | ) | | (384 | ) |
Exercise of employee stock options | 98 |
| | 54 |
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Excess tax benefit from equity-based compensation | 24 |
| | 18 |
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Other - net | (4 | ) | | — |
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Net cash used in financing activities | (1,485 | ) | | (96 | ) |
| | | |
Effect of currency on cash | (6 | ) | | 16 |
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Total increase in cash | 65 |
| | 40 |
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Cash at the beginning of the period | 577 |
| | 385 |
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Cash at the end of the period | $ | 642 |
| | $ | 425 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
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Note 1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2012 Form 10-K, as updated by Exhibit 99.1 of Eaton's current report on Form 8-K filed on September 6, 2013. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities Exchange Commission.
During the first quarter of 2013, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segments include Electrical Products and Electrical Systems and Services (which include legacy Eaton and former Cooper Industries plc (Cooper) electrical businesses), and Vehicle (which includes truck and automotive drivetrain and powertrain systems businesses). For those reportable segments that were re-segmented, previously reported segment information has been updated for all periods presented. See Note 13 for additional information related to these segments.
Certain prior year amounts have been reclassified to conform to the current year presentation.
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Note 2. | ACQUISITIONS AND SALE OF BUSINESSES |
In 2012, Eaton acquired businesses in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions. These transactions and the related annual sales prior to acquisition are summarized below:
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Acquired businesses | | Date of transaction | | Business segment | | Annual sales |
Cooper Industries plc | | November 30, 2012 | | Electrical Products; Electrical Systems and Services | | $5,409 for 2011 |
A diversified global manufacturer of electrical products and systems, with brands including Bussmann electrical and electronic fuses; Crouse-Hinds and CEAG explosion-proof electrical equipment; Halo and Metalux lighting fixtures; and Kyle and McGraw-Edison power systems products. | | | |
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Rolec Comercial e Industrial S.A. | | September 28, 2012 | | Electrical Systems and Services | | $85 for the 12 months ended September 30, 2012 |
A Chilean manufacturer of integrated power assemblies and low- and medium-voltage switchgear, and a provider of engineering services serving mining and other heavy industrial applications in Chile and Peru. | | | |
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Jeil Hydraulics Co., Ltd. | | July 6, 2012 | | Hydraulics | | $189 for 2011 |
A Korean manufacturer of track drive motors, swing drive motors, main control valves and remote control valves for the construction equipment market. | | | |
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Polimer Kaucuk Sanayi ve Pazarlama A.S. | | June 1, 2012 | | Hydraulics | | $335 for 2011 |
A Turkish manufacturer of hydraulic and industrial hose for construction, mining, agriculture, oil and gas, manufacturing, food and beverage, and chemicals markets. This business sells its products under the SEL brand name. | | | |
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Gycom Electrical Low-Voltage Power Distribution, Control and Automation | | June 1, 2012 | | Electrical Systems and Services | | $24 for 2011 |
A Swedish electrical low-voltage power distribution, control and automation components business. | | | |
Cooper Industries plc
On November 30, 2012, Eaton Corporation acquired Cooper for a purchase price of $13,192. The acquisition of Cooper has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. For accounting purposes, Eaton has been treated as the acquirer in the transaction.
The estimated purchase price allocation below represents Cooper's opening balance sheet on November 30, 2012, as updated for adjustments made during 2013 primarily related to intangible assets, goodwill, certain property values and the related deferred tax impact. Eaton's consolidated balance sheet at December 31, 2012 and the related notes to the consolidated financial statements have been adjusted to reflect these adjustments. The Company did not revise the Consolidated Statement of Income for the year ended December 31, 2012, as any adjustment was considered immaterial. For additional information, refer to Eaton's Form 10-K for the year ended December 31, 2012, as updated by Exhibit 99.1 of Eaton's current report on Form 8-K filed on September 6, 2013.
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November 30, 2012 (as adjusted) |
Working capital accounts (1) | | $ | 2,304 |
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Prepaid expenses and other current assets | | 204 |
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Property, plant and equipment | | 885 |
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Investment in Apex Tool Group, LLC | | 807 |
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Intangible assets | | 5,250 |
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Other assets | | 35 |
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Debt | | (1,221 | ) |
Accounts payable | | (519 | ) |
Other current liabilities | | (673 | ) |
Other noncurrent liabilities | | (2,185 | ) |
Total identifiable net assets | | 4,887 |
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Goodwill | | 8,305 |
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Total consideration | | $ | 13,192 |
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(1) Working capital accounts include Cash, Short-term investments, Accounts receivable and Inventory. | | |
The purchase price allocation for Cooper continues to be evaluated. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments will be recorded. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The finalization of the purchase accounting assessment will result in changes in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.
Goodwill has been allocated to the Electrical Products and Electrical Systems and Services segments. The goodwill recognized is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. See Note 4 for additional information about goodwill.
Contingent liabilities assumed as part of the transaction total $226 and are included in Other current liabilities and Other noncurrent liabilities. These contingent liabilities are related to environmental, legal (including product liability claims) and tax matters. Contingent liabilities are recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting. Legal matters, and certain environmental matters that are legal in nature, are recorded at the respective probable and estimable amount. The estimated fair values noted above continue to be evaluated and are subject to change upon completion of the final valuation. Changes in the respective fair value of these assumed contingent liabilities may be material.
Sale of Apex Tool Group, LLC
In July 2010, Cooper formed a joint venture, named Apex Tool Group, LLC (Apex), with Danaher Corporation (Danaher). Apex was formed by combining Cooper’s tools business with certain tools businesses from Danaher’s Tools and Components segment. Cooper and Danaher each owned a 50% interest in the joint venture, had equal representation on its board of directors and had a 50% voting interest in the joint venture.
On October 10, 2012, Cooper and Danaher announced they had entered into a definitive agreement to sell Apex to Bain Capital for approximately $1.6 billion subject to post-closing adjustments. On February 1, 2013, the sale of Apex was completed.
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Note 3. | ACQUISITION INTEGRATION AND RESTRUCTURING CHARGES |
Eaton incurs integration charges and transaction costs related to acquired businesses. A summary of these charges follows:
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| Three months ended September 30 | | Nine months ended September 30 |
| 2013 | | 2012 | | 2013 | | 2012 |
Acquisition integration charges | | | | | | | |
Electrical Products | $ | 9 |
| | $ | 1 |
| | $ | 24 |
| | $ | 1 |
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Electrical Systems and Services | 10 |
| | 1 |
| | 26 |
| | 8 |
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Hydraulics | 8 |
| | 5 |
| | 28 |
| | 9 |
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Total business segments | 27 |
| | 7 |
| | 78 |
| | 18 |
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Corporate | 9 |
| | 1 |
| | 21 |
| | 2 |
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Total acquisition integration charges | $ | 36 |
| | $ | 8 |
| | $ | 99 |
| | $ | 20 |
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| | | | | | | |
Transaction costs | | | | | | | |
Corporate | $ | 2 |
| | $ | 19 |
| | $ | 9 |
| | $ | 26 |
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Total transaction costs | $ | 2 |
| | $ | 19 |
| | $ | 9 |
| | $ | 26 |
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| | | | | | | |
Total acquisition integration charges and transaction costs before income taxes | $ | 38 |
| | $ | 27 |
| | $ | 108 |
| | $ | 46 |
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Total after income taxes | $ | 26 |
| | $ | 18 |
| | $ | 73 |
| | $ | 30 |
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Per ordinary share - diluted | $ | 0.05 |
| | $ | 0.05 |
| | $ | 0.15 |
| | $ | 0.09 |
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Business segment integration charges in 2013 were related primarily to the integrations of Cooper and Polimer Kaucuk Sanayi ve Pazarlama. Business segment integration charges in 2012 were related primarily to the integrations of Internormen Technology Group, Jeil Hydraulics, Polimer Kaucuk Sanayi ve Pazarlama and E. Begerow GmbH & Co. KG. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information the charges reduced Operating profit of the related business segment.
Corporate integration charges in 2013 and 2012 were related primarily to the integration of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information the charges were included in Other corporate expense - net.
Acquisition-related transaction costs, such as investment banking, legal, other professional fees, and costs associated with change in control agreements, are not included as a component of consideration transferred in an acquisition but are expensed as incurred. Acquisition-related transaction costs in 2013 and 2012 were related to the acquisition of Cooper. These charges were included in Selling and administrative expense, Interest expense - net and Other corporate expense - net, as appropriate. In Business Segment Information the charges were included in Interest expense - net and Other corporate expense - net.
See Note 2 for additional information about business acquisitions.
Restructuring Charges
During the fourth quarter of 2012, Eaton undertook restructuring activities to improve the efficiency of certain businesses. These actions resulted in a charge in the fourth quarter of 2012 of $50, comprised of severance costs totaling $34 and other non-cash expenses totaling $16.
During 2013, Eaton undertook restructuring activities related to the acquisition and integration of Cooper in an effort to gain efficiencies in selling, marketing, traditional back-office functions and manufacturing and distribution. These actions resulted in charges totaling $26, comprised primarily of severance costs, and are included in the table above in acquisition integration charges. These restructuring initiatives are expected to continue through the second half of 2013.
Restructuring charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 13 for additional information about business segments. As of September 30, 2013, the liabilities related to restructuring actions totaled $29.
A summary of goodwill follows:
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| September 30, 2013 | | December 31, 2012 |
Electrical Products | $ | 5,937 |
| | $ | 5,874 |
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Electrical Systems and Services | 5,550 |
| | 5,531 |
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Hydraulics | 1,388 |
| | 1,404 |
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Aerospace | 1,045 |
| | 1,045 |
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Vehicle | 356 |
| | 357 |
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Total goodwill | $ | 14,276 |
| | $ | 14,211 |
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Assessing Goodwill for Impairment
Goodwill is tested for impairment annually as of July 1 at the reporting unit level, which is equivalent to Eaton's operating segments. Impairment testing for 2013 was performed using a quantitative analysis under which the fair value for each reporting unit was estimated using a discounted cash flow model, which considered forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows were based on the Company's long-term operating plan and a terminal value was used to estimate the operating segment's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows of the respective operating segment. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
For 2013, based on a quantitative analysis, the fair values of Eaton's reporting units continue to substantially exceed the respective carrying amounts.
On November 30, 2012, the closing date of the acquisition of Cooper, Eaton borrowed $1,669 on a $6.75 billion, 364-day bridge facility (the Facility) which was obtained on May 21, 2012. The Facility was obtained to finance a portion of the cash paid to acquire Cooper and was available in a single draw on the closing date of the acquisition. On February 1, 2013, Eaton repaid the outstanding balance on the Facility.
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Note 6. | RETIREMENT BENEFITS PLANS |
The components of retirement benefits expense follow:
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| Three months ended September 30 |
| United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Service cost | $ | 32 |
| | $ | 28 |
| | $ | 16 |
| | $ | 13 |
| | $ | 5 |
| | $ | 5 |
|
Interest cost | 37 |
| | 33 |
| | 20 |
| | 18 |
| | 10 |
| | 10 |
|
Expected return on plan assets | (56 | ) | | (46 | ) | | (21 | ) | | (18 | ) | | (2 | ) | | (2 | ) |
Amortization | 33 |
| | 30 |
| | 7 |
| | 3 |
| | 3 |
| | 3 |
|
| 46 |
| | 45 |
| | 22 |
| | 16 |
| | 16 |
| | 16 |
|
Settlement loss | 23 |
| | 8 |
| | — |
| | — |
| | — |
| | — |
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Total expense | $ | 69 |
| | $ | 53 |
| | $ | 22 |
| | $ | 16 |
| | $ | 16 |
| | $ | 16 |
|
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| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 |
| United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Service cost | $ | 96 |
| | $ | 86 |
| | $ | 46 |
| | $ | 37 |
| | $ | 15 |
| | $ | 13 |
|
Interest cost | 111 |
| | 100 |
| | 59 |
| | 56 |
| | 27 |
| | 29 |
|
Expected return on plan assets | (169 | ) | | (136 | ) | | (63 | ) | | (56 | ) | | (5 | ) | | (5 | ) |
Amortization | 99 |
| | 88 |
| | 21 |
| | 11 |
| | 10 |
| | 10 |
|
| 137 |
| | 138 |
| | 63 |
| | 48 |
| | 47 |
| | 47 |
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Settlement loss | 39 |
| | 17 |
| | — |
| | 2 |
| | — |
| | — |
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Total expense | $ | 176 |
| | $ | 155 |
| | $ | 63 |
| | $ | 50 |
| | $ | 47 |
| | $ | 47 |
|
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Note 7. | LEGAL CONTINGENCIES |
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries (including asbestos claims), antitrust matters and employment-related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. This judgment is based on an alleged violation of an agency agreement between Raysul and Saturnia. At September 30, 2013, the Company has a total accrual of 74 Brazilian Reais related to this matter ($33 based on current exchange rates), comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($27 based on current exchange rates) with an additional 14 Brazilian Reais recognized through September 30, 2013 ($6 based on current exchange rates). In 2010, Eaton filed motions for clarification with the Brazilian court of appeals which were denied on April 6, 2011. Eaton Holding and Eaton Ltda. filed appeals on various issues to the Superior Court of Justice in Brasilia. In April 2013, the Superior Court of Justice ruled in favor of Raysul. Additional motions for clarification have been filed with the Superior Court of Justice in Brasilia and an additional appeal is being considered. The Company expects that any sum it may be required to pay in connection with this matter will not exceed the amount of the recorded liability.
On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the United States District Court for Delaware. The action sought damages, which would be trebled under United States antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion was denied on March 10, 2011. On March 14, 2011, Eaton filed a motion for entry of final judgment of liability, zero damages and no injunctive relief. That motion was denied on June 9, 2011. On August 19, 2011, the Court entered final judgment of liability but awarded zero damages to plaintiffs. The Court also entered an injunction prohibiting Eaton from offering rebates or other incentives based on purchasing targets but stayed the injunction pending appeal. Eaton appealed the liability finding and the injunction to the Third Circuit Court of Appeals. Meritor cross-appealed the finding of zero damages. On September 28, 2012, the Court of Appeals affirmed the District Court's denial of Eaton's motion for judgment as a matter of law, and let stand the jury verdict in favor of Meritor. The Third Circuit also ruled that the plaintiffs' damages report was properly excluded, but reversed the judgment of zero damages and ordered that the District Court must allow plaintiffs a limited opportunity to amend the damages report, which may be re-considered for reliability and admissibility. Injunctive relief also was vacated. An estimate of any potential loss related to this action cannot be made at this time.
Frisby Corporation, now known as Triumph Actuation Systems, LLC, and other claimants (collectively, the Frisby Parties) asserted claims alleging, among other things, unfair competition, defamation, malicious prosecution, deprivation of civil rights, and antitrust in the Hinds County Circuit Court of Mississippi in 2004 and in the Federal District Court of North Carolina in 2011. Eaton had asserted claims against the Frisby Parties regarding improper use of trade secrets and these claims were dismissed by the Hinds County Circuit Court. The dismissal of Eaton’s claims by the Hinds County Circuit Court is on appeal to the Mississippi Supreme Court which, on September 25, 2013, issued an order that stayed all proceedings in the Hinds County Circuit Court pending further order of the Mississippi Supreme Court. During the third quarter of 2013, the Frisby Parties submitted various expert damage designations related to their claims in the Hinds County Circuit Court. An estimate of potential loss, if any, cannot be made at this time.
The effective income tax rate for the third quarter of 2013 was 1.4% compared to 7.7% for the third quarter of 2012 and 4.4% for the first nine months of 2013 compared to 10.6% for the first nine months of 2012. The lower effective tax rate in the third quarter of 2013 was primarily attributable to tax effects associated with the acquisition of Cooper. The lower effective tax rate in the first nine months of 2013 was attributable to the item noted above, the recording of the entire 2012 U.S. research and experimentation credit in the first quarter of 2013, the reinstatement in 2013 of the U.S. research and experimentation credit and enhanced utilization of foreign tax credits in the U.S.
At the end of the fourth quarter of 2011, the IRS issued a Statutory Notice of Deficiency (Notice) for Eaton's 2005 and 2006 tax years. The Notice proposes assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S., net of agreed credits and deductions. The Company has set its transfer prices for products sold between these affiliates at the same prices that the Company sells such products to third parties. The Notice was issued despite the IRS having previously recognized the validity of the Company's transfer pricing methodology by entering into two successive Advance Pricing Agreements (APAs) that approved and, in fact, required the application of the Company's transfer pricing methodology for the ten year period of 2001 through 2010. For the years 2001 through 2004, the IRS had previously accepted the transfer pricing methodology related to these APAs after a comprehensive review conducted in two separate audit cycles. On December 16, 2011, immediately prior to the Notice being issued, the IRS sent a letter stating that it was canceling the APAs.
The Company firmly believes that the proposed assessments are without merit. The Company also believes that it was in full compliance with the terms of the two APAs, and that the IRS's unilateral attempt to retroactively cancel these two APAs is also without merit, and represents a breach of the two agreements. On February 29, 2012, the Company filed a Petition with the U.S Tax Court in which it asserted that the transfer pricing established in the two APA contracts meets the arms-length standard set by the U.S. income tax laws, and accordingly, that the two APA contracts should be enforced in accordance with their terms. On June 11, 2012, the Company filed a motion for partial summary judgment with the U.S. Tax Court, asking the U.S. Tax Court to find that the APAs are binding contracts and that the IRS has the burden of proof to substantiate cancellation of the APAs. On June 26, 2013, the U.S. Tax Court ruled that the IRS has the discretion to unilaterally cancel an APA and that the taxpayer bears the burden of proving that the IRS abused that discretion. While the Company disagrees with the Tax Court's ruling, the Company remains confident that it will be able to demonstrate that it was in full compliance with the APAs and that the IRS abused its discretion in canceling the APAs after their terms expired. In addition, the Company continues to believe the transfer pricing methodology contained in the APAs is correct and that the ultimate resolution of this matter will not have a material impact on the consolidated financial statements.
During the third quarter of 2013, adjustments were made to Deferred income taxes and Other current liabilities on the Consolidated Balance Sheet at December 31, 2012 to net certain deferred tax assets against deferred tax liabilities within current and long-term classifications in the amount of $49 and $885, respectively. These adjustments are related to the acquisition of Cooper and combining both Eaton and Cooper U.S. operations into one tax paying component. The Company concluded that the impact of these adjustments were not material to its 2012 consolidated financial statements.
The changes in Shareholders’ equity follow:
|
| | | | | | | | | | | |
| Eaton shareholders’ equity | | Noncontrolling interests | | Total equity |
Balance at December 31, 2012 | $ | 15,113 |
| | $ | 42 |
| | $ | 15,155 |
|
Net income | 1,382 |
| | 9 |
| | 1,391 |
|
Other comprehensive loss | 16 |
| | — |
| | 16 |
|
Cash dividends paid | (597 | ) | | (5 | ) | | (602 | ) |
Issuance of shares under equity-based compensation plans - net | 157 |
| | — |
| | 157 |
|
Balance at September 30, 2013 | $ | 16,071 |
| | $ | 46 |
| | $ | 16,117 |
|
The changes in Accumulated other comprehensive (loss) income follow:
|
| | | | | | | | | | | | | | | |
| Currency translation and related hedging instruments | | Pensions and other postretirement benefits | | Cash flow hedges | | Total |
Balance at December 31, 2012 | $ | (367 | ) | | $ | (1,599 | ) | | $ | 2 |
| | $ | (1,964 | ) |
Other comprehensive (loss) income before reclassifications | (104 | ) | | 12 |
| | (1 | ) | | (93 | ) |
Amounts reclassified from Accumulated other comprehensive (loss) income | — |
| | 108 |
| | 1 |
| | 109 |
|
Net current-period other comprehensive (loss) income | (104 | ) | | 120 |
| | — |
| | 16 |
|
Balance at September 30, 2013 | $ | (471 | ) | | $ | (1,479 | ) | | $ | 2 |
| | $ | (1,948 | ) |
The reclassifications out of Accumulated other comprehensive loss follow:
|
| | | | | | |
| | Nine months ended September 30, 2013 | | Consolidated Statements of Income classification |
Amortization of defined benefit pension items | | | | |
Actuarial loss | | $ | (169 | ) | | 1 |
| | (169 | ) | | |
Tax benefit | | 61 |
| | |
Total, net of tax | | (108 | ) | | |
| | | | |
Gains and losses on cash flow hedges | | | | |
Floating-to-fixed interest rate swaps | | (1 | ) | | Interest expense - net |
Currency exchange contracts | | 1 |
| | Cost of products sold |
Commodity contracts | | (1 | ) | | Cost of products sold |
| | (1 | ) | | |
Tax expense | | — |
| | |
Total, net of tax | | (1 | ) | | |
| | | | |
Total reclassifications for the period | | $ | (109 | ) | | |
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic pension cost. See Note 6 for additional information about defined benefit pension items.
Net Income per Ordinary Share
A summary of the calculation of net income per ordinary share attributable to shareholders follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Shares in millions) | 2013 | | 2012 | | 2013 | | 2012 |
Net income attributable to Eaton ordinary shareholders | $ | 510 |
| | $ | 345 |
| | $ | 1,382 |
| | $ | 1,038 |
|
| | | | | | | |
Weighted-average number of ordinary shares outstanding - diluted | 477.2 |
| | 339.8 |
| | 476.2 |
| | 339.7 |
|
Less dilutive effect of equity-based compensation | 3.2 |
| | 2.2 |
| | 3.1 |
| | 3.0 |
|
Weighted-average number of ordinary shares outstanding - basic | 474.0 |
| | 337.6 |
| | 473.1 |
| | 336.7 |
|
| | | | | | | |
Net income per ordinary share | | | | | | | |
Diluted | $ | 1.07 |
| | $ | 1.02 |
| | $ | 2.90 |
| | $ | 3.05 |
|
Basic | 1.08 |
| | 1.02 |
| | 2.92 |
| | 3.08 |
|
For the third quarter and the first nine months of 2013, 0.2 million stock options were excluded from the calculation of diluted net income per ordinary share because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive. For the third quarter and the first nine months of 2012, 4.2 million and 2.5 million stock options, respectively, were excluded from the calculation of diluted net income per ordinary share because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive.
| |
Note 10. | FAIR VALUE MEASUREMENTS |
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:
|
| | | | | | | | | | | | | | | |
| Total | | Quoted prices in active markets for identical assets (Level 1) | | Other observable inputs (Level 2) | | Unobservable inputs (Level 3) |
September 30, 2013 | | | | | | | |
Cash | $ | 642 |
| | $ | 642 |
| | $ | — |
| | $ | — |
|
Short-term investments | 698 |
| | 698 |
| | — |
| | — |
|
Net derivative contracts | (7 | ) | | — |
| | (7 | ) | | — |
|
Long-term debt converted to floating interest rates by interest rate swaps - net | 4 |
| | — |
| | 4 |
| | — |
|
| | | | | | | |
December 31, 2012 | | | | | | | |
Cash | $ | 577 |
| | $ | 577 |
| | $ | — |
| | $ | — |
|
Short-term investments | 527 |
| | 527 |
| | — |
| | — |
|
Net derivative contracts | 83 |
| | — |
| | 83 |
| | — |
|
Long-term debt converted to floating interest rates by interest rate swaps - net | 87 |
| | — |
| | 87 |
| | — |
|
Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $9,605 and fair value of $9,787 at September 30, 2013 compared to $10,076 and $10,793, respectively, at December 31, 2012. The fair value of Eaton's debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.
| |
Note 11. | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES |
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Condensed Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
| |
• | Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value. |
| |
• | Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) and reclassified to income in the same period when the gain or loss on the hedged item is included in income. |
| |
• | Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income. |
The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a currency and certain commodity contracts that arise in the normal course of business. Gains and losses associated with commodity hedge contracts are classified in Cost of products sold.
Eaton uses certain of its debt denominated in various currencies to hedge portions of its net investments in foreign operations against currency exposure (net investment hedges). Debt denominated in various currencies and designated as non-derivative net investment hedging instruments was $102 and $116 at September 30, 2013 and December 31, 2012, respectively.
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional amount | | Other current assets | | Other long-term assets | | Other current liabilities | | Other long-term liabilities | | Type of hedge | | Term |
September 30, 2013 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 3,090 |
| | $ | 1 |
| | $ | 45 |
| | $ | — |
| | $ | 42 |
| | Fair value | | 6 months to 21 years |
Floating-to-fixed interest rate swaps | 300 |
| | — |
| | — |
| | 1 |
| | — |
| | Cash flow | | 9 months |
Currency exchange contracts | 451 |
| | 7 |
| | — |
| | 2 |
| | — |
| | Cash flow | | 12 to 36 months |
Commodity contracts | 2 |
| | — |
| | — |
| | — |
| | — |
| | Cash flow | | 12 months |
Total | | | $ | 8 |
| | $ | 45 |
| | $ | 3 |
| | $ | 42 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Currency exchange contracts | $ | 4,729 |
| | $ | 25 |
| | | | $ | 40 |
| | | | | | 12 months |
Commodity contracts | 10 |
| | — |
| | | | — |
| | | | | | 12 months |
Total | | | $ | 25 |
| | | | $ | 40 |
| |
| | | | |
| | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 1,290 |
| | $ | 2 |
| | $ | 85 |
| | $ | — |
| | $ | — |
| | Fair value | | 6 months to 21 years |
Floating-to-fixed interest rate swaps | 300 |
| | — |
| | — |
| | — |
| | 2 |
| | Cash flow | | 1 year |
Currency exchange contracts | 451 |
| | 9 |
| | — |
| | 4 |
| | — |
| | Cash flow | | 12 to 36 months |
Commodity contracts | 17 |
| | — |
| | — |
| | — |
| | — |
| | Cash flow | | 12 months |
Total | | | $ | 11 |
| | $ | 85 |
| | $ | 4 |
| | $ | 2 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Currency exchange contracts | $ | 4,997 |
| | $ | 23 |
| | | | $ | 31 |
| | | | | | 12 months |
Commodity contracts | 19 |
| | 1 |
| | | | — |
| | | | | | 12 months |
Total | | | $ | 24 |
| | | | $ | 31 |
| | | | | | |
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany sales and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts.
Amounts recognized in Accumulated other comprehensive income (loss) follow:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 |
| 2013 | | 2012 |
| Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) | | Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) |
Derivatives designated as cash flow hedges | | | | | | | |
Floating-to-fixed interest rate swaps | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
|
Currency exchange contracts | 9 |
| | — |
| | 4 |
| | 2 |
|
Commodity contracts | — |
| | — |
| | 2 |
| | (3 | ) |
Total | $ | 9 |
| | $ | — |
| | $ | 5 |
| | $ | (1 | ) |
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30 |
| 2013 | | 2012 |
| Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) | | Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) |
Derivatives designated as cash flow hedges | | | | | | | |
Floating-to-fixed interest rate swaps | $ | — |
| | $ | (1 | ) | | $ | (3 | ) | | $ | (1 | ) |
Foreign currency exchange contracts | 1 |
| | 1 |
| | 10 |
| | 1 |
|
Commodity contracts | (1 | ) | | (1 | ) | | 2 |
| | (7 | ) |
Total | $ | — |
| | $ | (1 | ) | | $ | 9 |
| | $ | (7 | ) |
Gains and losses reclassified from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income were recognized in Cost of products sold and Interest expense - net.
Amounts recognized in net income follow:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2013 | | 2012 | | 2013 | | 2012 |
Derivatives designated as fair value hedges | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 5 |
| | $ | 11 |
| | $ | (83 | ) | | $ | 25 |
|
Related long-term debt converted to floating interest rates by interest rate swaps | (5 | ) | | (11 | ) | | 83 |
| | (25 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Gains and losses described above were recognized in Interest expense - net.
The components of inventory follow:
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Raw materials | $ | 1,008 |
| | $ | 919 |
|
Work-in-process | 400 |
| | 424 |
|
Finished goods | 1,118 |
| | 1,129 |
|
Inventory at FIFO | 2,526 |
| | 2,472 |
|
Excess of FIFO over LIFO cost | (123 | ) | | (133 | ) |
Total inventory | $ | 2,403 |
| | $ | 2,339 |
|
| |
Note 13. | BUSINESS SEGMENT INFORMATION |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance.
During the first quarter of 2013, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segments are Electrical Products and Electrical Systems and Services (which include legacy Eaton and former Cooper electrical businesses), and Vehicle (which includes truck and automotive drivetrain and powertrain systems businesses). Previously reported segment financial information has been updated for all periods reported.
Electrical Products consists of electrical components, industrial controls, residential products, single phase power quality, emergency lighting, fire detection, wiring devices, structural support systems, circuit protection, and lighting products.
Electrical Systems and Services consists of power distribution and assemblies, three phase power quality, hazardous duty electrical equipment, intrinsically safe explosion-proof instrumentation, utility power distribution, power reliability equipment, and services.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2013 | | 2012 | | 2013 | | 2012 |
Net sales | | | | | | | |
Electrical Products | $ | 1,817 |
| | $ | 919 |
| | $ | 5,235 |
| | $ | 2,708 |
|
Electrical Systems and Services | 1,639 |
| | 910 |
| | 4,784 |
| | 2,675 |
|
Hydraulics | 739 |
| | 763 |
| | 2,267 |
| | 2,267 |
|
Aerospace | 448 |
| | 419 |
| | 1,328 |
| | 1,285 |
|
Vehicle | 964 |
| | 939 |
| | 2,905 |
| | 3,043 |
|
Total net sales | $ | 5,607 |
| | $ | 3,950 |
| | $ | 16,519 |
| | $ | 11,978 |
|
| | | | | | | |
Segment operating profit | | | | | | | |
Electrical Products | $ | 301 |
| | $ | 172 |
| | $ | 814 |
| | $ | 462 |
|
Electrical Systems and Services | 231 |
| | 111 |
| | 668 |
| | 278 |
|
Hydraulics | 89 |
| | 93 |
| | 271 |
| | 325 |
|
Aerospace | 64 |
| | 49 |
| | 193 |
| | 168 |
|
Vehicle | 161 |
| | 144 |
| | 465 |
| | 472 |
|
Total segment operating profit | 846 |
| | 569 |
| | 2,411 |
| | 1,705 |
|
| | | | | | | |
Corporate | | | | | | | |
Amortization of intangible assets | (110 | ) | | (45 | ) | | (325 | ) | | (129 | ) |
Interest expense - net | (63 | ) | | (42 | ) | | (209 | ) | | (100 | ) |
Pension and other postretirement benefits expense | (55 | ) | | (41 | ) | | (136 | ) | | (121 | ) |
Inventory step-up adjustment | — |
| | (1 | ) | | (34 | ) | | (4 | ) |
Other corporate expense - net | (97 | ) | | (64 | ) | | (252 | ) | | (188 | ) |
Income before income taxes | 521 |
| | 376 |
| | 1,455 |
| | 1,163 |
|
Income tax expense | 7 |
| | 29 |
| | 64 |
| | 123 |
|
Net income | 514 |
| | 347 |
| | 1,391 |
| | 1,040 |
|
Less net income for noncontrolling interests | (4 | ) | | (2 | ) | | (9 | ) | | (2 | ) |
Net income attributable to Eaton ordinary shareholders | $ | 510 |
| | $ | 345 |
| | $ | 1,382 |
| | $ | 1,038 |
|
Business segment operating profit was reduced by acquisition integration charges as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2013 | | 2012 | | 2013 | | 2012 |
Electrical Products | $ | 9 |
| | $ | 1 |
| | $ | 24 |
| | $ | 1 |
|
Electrical Systems and Services | 10 |
| | 1 |
| | 26 |
| | 8 |
|
Hydraulics | 8 |
| | 5 |
| | 28 |
| | 9 |
|
Total | $ | 27 |
| | $ | 7 |
| | $ | 78 |
| | $ | 18 |
|
Corporate acquisition integration charges totaled $9 and $21 for the third quarter and the first nine months of 2013, respectively, and $1 and $2 for the third quarter and the first nine months of 2012, respectively. Corporate acquisition integration charges related primarily to the acquisition of Cooper and are included above in Other corporate expense - net.
Acquisition-related transaction costs, such as investment banking, legal, other professional fees, and costs associated with change in control agreements, are included above in Interest expense - net and Other corporate expense - net and are related to the acquisition of Cooper. These charges totaled $2 and $9 for the third quarter and the first nine months of 2013, respectively, and $19 and $26 for the third quarter and the first nine months of 2012, respectively. See Note 3 for additional information about acquisition integration charges and transaction costs.
For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2012 Form 10-K, as updated by Exhibit 99.1 of Eaton's current report on Form 8-K filed on September 6, 2013.
| |
Note 14. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
On November 20, 2012, Eaton Corporation issued senior notes (the "Senior Notes") totaling $4,900 to finance part of the cash portion of the acquisition of Cooper. Eaton and certain other of Eaton's principal 100% owned operating subsidiaries (the "Guarantors") fully and unconditionally guaranteed (subject, in the case of the Guarantors, other than Eaton, to customary release provisions as described below), on a joint and several basis, the Senior Notes. The following condensed consolidating financial statements are included so that separate financial statements of Eaton, Eaton Corporation and each of the Guarantors are not required to be filed with the Securities and Exchange Commission. The consolidating adjustments primarily relate to eliminations of investments in subsidiaries and intercompany balances and transactions. The condensed consolidating financial statements present investments in subsidiaries using the equity method of accounting.
The guarantee of a Guarantor that is not a parent of the issuer will be automatically and unconditionally released and discharged in the event of any sale of the Guarantor or of all or substantially all of its assets; or following, or in connection with, the release or termination of the Guarantor as a guarantor under all other U.S. debt securities or U.S. syndicated credit facilities, subject to limitations set forth in the indenture. The guarantee of a Guarantor that is a direct or indirect parent of the issuer will be automatically and unconditionally released and discharged following, or in connection with, the release or termination of the Guarantor as a guarantor under all other debt securities or syndicated credit facilities (in both cases, U.S. or otherwise), subject to limitations set forth in the indenture.
Eaton was incorporated under the laws of Ireland on May 10, 2012, and became the successor registrant to Eaton Corporation on November 30, 2012 in connection with the acquisition of Cooper. Therefore, for presentation purposes of entities under common control, Eaton is presented as the parent company in the 2013 condensed consolidating financial statements. For periods prior to November 30, 2012, Eaton Corporation is presented as the parent company.
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 1,695 |
| | $ | 1,636 |
| | $ | 3,424 |
| | $ | (1,148 | ) | | $ | 5,607 |
|
| | | | | | | | | | | |
Cost of products sold | — |
| | 1,319 |
| | 1,214 |
| | 2,500 |
| | (1,150 | ) | | 3,883 |
|
Selling and administrative expense | 2 |
| | 370 |
| | 194 |
| | 401 |
| | — |
| | 967 |
|
Research and development expense | — |
| | 71 |
| | 46 |
| | 49 |
| | — |
| | 166 |
|
Interest expense (income) - net | — |
| | 63 |
| | 7 |
| | (7 | ) | | — |
| | 63 |
|
Other expense (income) - net | — |
| | 2 |
| | (9 | ) | | 14 |
| | — |
| | 7 |
|
Equity in (earnings) loss of subsidiaries, net of tax | (563 | ) | | (292 | ) | | (676 | ) | | (224 | ) | | 1,755 |
| | — |
|
Intercompany expense (income) - net | 63 |
| | (90 | ) | | 222 |
| | (195 | ) | | — |
| | — |
|
Income before income taxes | 498 |
| | 252 |
|
| 638 |
|
| 886 |
|
| (1,753 | ) |
| 521 |
|
Income tax expense (benefit) | (12 | ) | | (21 | ) | | 45 |
| | (5 | ) | | — |
| | 7 |
|
Net income | 510 |
| | 273 |
|
| 593 |
|
| 891 |
|
| (1,753 | ) |
| 514 |
|
Less net income for noncontrolling interests | — |
| | — |
| | — |
| | (1 | ) | | (3 | ) | | (4 | ) |
Net income attributable to Eaton ordinary shareholders | $ | 510 |
| | $ | 273 |
|
| $ | 593 |
|
| $ | 890 |
|
| $ | (1,756 | ) |
| $ | 510 |
|
| | | | | | | | | | | |
Other comprehensive loss | $ | 322 |
| | $ | 109 |
| | $ | 347 |
| | $ | 505 |
| | $ | (961 | ) | | $ | 322 |
|
Total comprehensive income attributable to Eaton ordinary shareholders | $ | 832 |
| | $ | 382 |
| | $ | 940 |
| | $ | 1,395 |
| | $ | (2,717 | ) | | $ | 832 |
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 |
| | | | | | | | | | | | | | | | | | | |
| Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | 1,653 |
| | $ | 622 |
| | $ | 2,511 |
| | $ | (836 | ) | | $ | 3,950 |
|
| | | | | | | | | |
Cost of products sold | 1,197 |
| | 489 |
| | 1,897 |
| | (836 | ) | | 2,747 |
|
Selling and administrative expense | 319 |
| | 77 |
| | 291 |
| | — |
| | 687 |
|
Research and development expense | 55 |
| | 26 |
| | 21 |
| | — |
| | 102 |
|
Interest expense (income) - net | 47 |
| | 1 |
| | (6 | ) | | — |
| | 42 |
|
Other expense (income) - net | 1 |
| | — |
| | (5 | ) | | — |
| | (4 | ) |
Equity in (earnings) loss of subsidiaries, net of tax | (276 | ) | | (13 | ) | | — |
| | 289 |
| | — |
|
Intercompany (income) expense - net | (52 | ) | | (5 | ) | | 57 |
| | — |
| | — |
|
Income before income taxes | 362 |
|
| 47 |
|
| 256 |
|
| (289 | ) |
| 376 |
|
Income tax expense (benefit) | 17 |
| | 9 |
| | 3 |
| | — |
| | 29 |
|
Net income | 345 |
|
| 38 |
|
| 253 |
|
| (289 | ) |
| 347 |
|
Less net income for noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Net income attributable to Eaton ordinary shareholders | $ | 345 |
|
| $ | 38 |
|
| $ | 251 |
|
| $ | (289 | ) |
| $ | 345 |
|
| | | | | | | | | |
Other comprehensive loss | $ | 172 |
| | $ | 12 |
| | $ | 146 |
| | $ | (158 | ) | | $ | 172 |
|
Total comprehensive income attributable to Eaton ordinary shareholders | $ | 517 |
| | $ | 50 |
| | $ | 397 |
| | $ | (447 | ) | | $ | 517 |
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 5,026 |
| | $ | 4,835 |
| | $ | 10,117 |
| | $ | (3,459 | ) | | $ | 16,519 |
|
| | | | | | | | | | | |
Cost of products sold | — |
| | 3,911 |
| | 3,588 |
| | 7,450 |
| | (3,461 | ) | | 11,488 |
|
Selling and administrative expense | 6 |
| | 1,081 |
| | 565 |
| | 1,233 |
| | — |
| | 2,885 |
|
Research and development expense | — |
| | 199 |
| | 138 |
| | 142 |
| | — |
| | 479 |
|
Interest expense (income) - net | — |
| | 206 |
| | 21 |
| | (18 | ) | | — |
| | 209 |
|
Other expense (income) - net | — |
| | 16 |
| | 13 |
| | (26 | ) | | — |
| | 3 |
|
Equity in (earnings) loss of subsidiaries, net of tax | (1,576 | ) | | (916 | ) | | (848 | ) | | (629 | ) | | 3,969 |
| | — |
|
Intercompany expense (income) - net | 188 |
| | (304 | ) | | (462 | ) | | 578 |
| | — |
| | — |
|
Income before income taxes | 1,382 |
| | 833 |
|
| 1,820 |
|
| 1,387 |
|
| (3,967 | ) |
| 1,455 |
|
Income tax expense (benefit) | — |
| | (66 | ) | | 28 |
| | 102 |
| | — |
| | 64 |
|
Net income | 1,382 |
| | 899 |
|
| 1,792 |
|
| 1,285 |
|
| (3,967 | ) |
| 1,391 |
|
Less net income for noncontrolling interests | — |
| | — |
| | — |
| | (6 | ) | | (3 | ) | | (9 | ) |
Net income attributable to Eaton ordinary shareholders | $ | 1,382 |
| | $ | 899 |
|
| $ | 1,792 |
|
| $ | 1,279 |
|
| $ | (3,970 | ) |
| $ | 1,382 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | $ | 16 |
| | $ | 45 |
| | $ | 41 |
| | $ | (66 | ) | | $ | (20 | ) | | $ | 16 |
|
Total comprehensive income attributable to Eaton ordinary shareholders | $ | 1,398 |
| | $ | 944 |
| | $ | 1,833 |
| | $ | 1,213 |
| | $ | (3,990 | ) | | $ | 1,398 |
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 |
| | | | | | | | | | | | | | | | | | | |
| Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | 5,097 |
| | $ | 1,965 |
| | $ | 7,606 |
| | $ | (2,690 | ) | | $ | 11,978 |
|
| | | | | | | | | |
Cost of products sold | 3,890 |
| | 1,499 |
| | 5,616 |
| | (2,689 | ) | | 8,316 |
|
Selling and administrative expense | 960 |
| | 243 |
| | 876 |
| | — |
| | 2,079 |
|
Research and development expense | 166 |
| | 74 |
| | 73 |
| | — |
| | 313 |
|
Interest expense (income) - net | 116 |
| | 5 |
| | (21 | ) | | — |
| | 100 |
|
Other expense - net | 1 |
| | 5 |
| | 1 |
| | — |
| | 7 |
|
Equity in (earnings) loss of subsidiaries, net of tax | (948 | ) | | (44 | ) | | — |
| | 992 |
| | — |
|
Intercompany (income) expense - net | (176 | ) | | (14 | ) | | 190 |
| | — |
| | — |
|
Income before income taxes | 1,088 |
|
| 197 |
|
| 871 |
|
| (993 | ) |
| 1,163 |
|
Income tax expense | 50 |
| | 53 |
| | 20 |
| | — |
| | 123 |
|
Net income | 1,038 |
|
| 144 |
|
| 851 |
|
| (993 | ) |
| 1,040 |
|
Less net income for noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Net income attributable to Eaton ordinary shareholders | $ | 1,038 |
|
| $ | 144 |
|
| $ | 849 |
|
| $ | (993 | ) |
| $ | 1,038 |
|
| | | | | | | | | |
Other comprehensive income | $ | 156 |
| | $ | 17 |
| | $ | 64 |
| | $ | (81 | ) | | $ | 156 |
|
Total comprehensive income attributable to Eaton ordinary shareholders | $ | 1,194 |
| | $ | 161 |
| | $ | 913 |
| | $ | (1,074 | ) | | $ | 1,194 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS SEPTEMBER 30, 2013 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash | $ | 2 |
| | $ | 37 |
| | $ | 17 |
| | $ | 586 |
| | $ | — |
| | $ | 642 |
|
Short-term investments | — |
| | 140 |
| | 20 |
| | 538 |
| | — |
| | 698 |
|
Accounts receivable - net | — |
| | 27 |
| | 1,116 |
| | 2,807 |
| | — |
| | 3,950 |
|
Intercompany accounts receivable | 21 |
| | 1,042 |
| | 2,871 |
| | 3,950 |
| | (7,884 | ) | | — |
|
Inventory | — |
| | 345 |
| | 612 |
| | 1,483 |
| | (37 | ) | | 2,403 |
|
Prepaid expenses and other current assets | — |
| | 694 |
| | 190 |
| | 228 |
| | (39 | ) | | 1,073 |
|
Total current assets | 23 |
| | 2,285 |
|
| 4,826 |
|
| 9,592 |
| | (7,960 | ) | | 8,766 |
|
| | | | | | | | | | | |
Property, plant and equipment - net | — |
| | 949 |
| | 769 |
| | 2,039 |
| | — |
| | 3,757 |
|
| | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | |
Goodwill | — |
| | 1,382 |
| | 9,433 |
| | 3,461 |
| | — |
| | 14,276 |
|
Other intangible assets | — |
| | 216 |
| | 4,033 |
| | 2,982 |
| | — |
| | 7,231 |
|
Deferred income taxes | — |
| | 846 |
| | — |
| | 236 |
| | (754 | ) | | 328 |
|
Investment in subsidiaries | 23,952 |
| | 8,563 |
| | 31,089 |
| | 8,705 |
| | (72,309 | ) | | — |
|
Intercompany loans receivable | — |
| | 7,690 |
| | 2,069 |
| | 18,319 |
| | (28,078 | ) | | — |
|
Other assets | — |
| | 471 |
| | 95 |
| | 388 |
| | — |
| | 954 |
|
Total assets | $ | 23,975 |
| | $ | 22,402 |
| | $ | 52,314 |
| | $ | 45,722 |
| | $ | (109,101 | ) | | $ | 35,312 |
|
| | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Short-term debt | $ | — |
| | $ | 75 |
| | $ | — |
| | $ | 13 |
| | $ | — |
| | $ | 88 |
|
Current portion of long-term debt | — |
| | 552 |
| | 8 |
| | 16 |
| | — |
| | 576 |
|
Accounts payable | — |
| | 422 |
| | 396 |
| | 1,158 |
| | — |
| | 1,976 |
|
Intercompany accounts payable | 1 |
| | 3,716 |
| | 3,418 |
| | 749 |
| | (7,884 | ) | | — |
|
Accrued compensation | — |
| | 101 |
| | 52 |
| | 277 |
| | — |
| | 430 |
|
Other current liabilities | 1 |
| | 611 |
| | 350 |
| | 1,074 |
| | (52 | ) | | 1,984 |
|
Total current liabilities | 2 |
| | 5,477 |
| | 4,224 |
| | 3,287 |
| | (7,936 | ) | | 5,054 |
|
| | | | | | | | | | | |
Noncurrent liabilities | | | | | | | | | | | |
Long-term debt | — |
| | 7,739 |
| | 1,274 |
| | 16 |
| | — |
| | 9,029 |
|
Pension liabilities | — |
| | 788 |
| | 221 |
| | 792 |
| | — |
| | 1,801 |
|
Other postretirement benefits liabilities | — |
| | 448 |
| | 185 |
| | 100 |
| | — |
| | 733 |
|
Deferred income taxes | — |
| | — |
| | 1,434 |
| | 833 |
| | (754 | ) | | 1,513 |
|
Intercompany loans payable | 7,902 |
| | 1,986 |
| | 17,362 |
| | 828 |
| | (28,078 | ) | | — |
|
Other noncurrent liabilities | — |
| | 597 |
| | 103 |
| | 365 |
| | — |
| | 1,065 |
|
Total noncurrent liabilities | 7,902 |
| | 11,558 |
|
| 20,579 |
|
| 2,934 |
|
| (28,832 | ) |
| 14,141 |
|
| | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | |
Eaton shareholders' equity | 16,071 |
| | 5,367 |
| | 27,511 |
| | 39,468 |
| | (72,346 | ) | | 16,071 |
|
Noncontrolling interests | — |
| | — |
| | — |
| | 33 |
| | 13 |
| | 46 |
|
Total equity | 16,071 |
| | 5,367 |
| | 27,511 |
| | 39,501 |
| | (72,333 | ) | | 16,117 |
|
Total liabilities and equity | $ | 23,975 |
| | $ | 22,402 |
|
| $ | 52,314 |
|
| $ | 45,722 |
|
| $ | (109,101 | ) |
| $ | 35,312 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2012 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash | $ | 7 |
| | $ | 54 |
| | $ | 14 |
| | $ | 502 |
| | $ | — |
| | $ | 577 |
|
Short-term investments | — |
| | 25 |
| | 38 |
| | 464 |
| | — |
| | 527 |
|
Accounts receivable - net | — |
| | 624 |
| | 413 |
| | 2,473 |
| | — |
| | 3,510 |
|
Intercompany accounts receivable | 38 |
| | 365 |
| | 4,693 |
| | 5,643 |
| | (10,739 | ) | | — |
|
Inventory | — |
| | 341 |
| | 563 |
| | 1,474 |
| | (39 | ) | | 2,339 |
|
Prepaid expenses and other current assets | — |
| | 391 |
| | 149 |
| | 273 |
| | 9 |
| | 822 |
|
Total current assets | 45 |
| | 1,800 |
| | 5,870 |
| | 10,829 |
| | (10,769 | ) | | 7,775 |
|
| | | | | | | | | | | |
Property, plant and equipment - net | — |
| | 934 |
| | 793 |
| | 2,096 |
| | — |
| | 3,823 |
|
| | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | |
Goodwill | — |
| | 1,382 |
| | 9,381 |
| | 3,448 |
| | — |
| | 14,211 |
|
Other intangible assets | — |
| | 231 |
| | 4,104 |
| | 3,133 |
| | — |
| | 7,468 |
|
Deferred income taxes | — |
| | 941 |
| | 12 |
| | 262 |
| | (846 | ) | | 369 |
|
Investment in subsidiaries | 20,662 |
| | 7,678 |
| | 14,428 |
| | 6,365 |
| | (49,133 | ) | | — |
|
Intercompany loans receivable | — |
| | 7,650 |
| | 13,262 |
| | 14,125 |
| | (35,037 | ) | | — |
|
Other assets | — |
| | 460 |
| | 90 |
| | 1,154 |
| | — |
| | 1,704 |
|
Total assets | $ | 20,707 |
| | $ | 21,076 |
| | $ | 47,940 |
| | $ | 41,412 |
| | $ | (95,785 | ) | | $ | 35,350 |
|
| | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Short-term debt | $ | — |
| | $ | 753 |
| | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 757 |
|
Current portion of long-term debt | — |
| | 303 |
| | 8 |
| | 3 |
| | — |
| | 314 |
|
Accounts payable | — |
| | 424 |
| | 343 |
| | 1,112 |
| | — |
| | 1,879 |
|
Intercompany accounts payable | 2 |
| | 2,794 |
| | 4,855 |
| | 3,088 |
| | (10,739 | ) | | — |
|
Accrued compensation | — |
| | 129 |
| | 76 |
| | 258 |
| | — |
| | 463 |
|
Other current liabilities | — |
| | 523 |
| | 375 |
| | 1,114 |
| | (4 | ) | | 2,008 |
|
Total current liabilities | 2 |
| | 4,926 |
| | 5,657 |
| | 5,579 |
| | (10,743 | ) | | 5,421 |
|
| | | | | | | | | | | |
Noncurrent liabilities | | | | | | | | | | | |
Long-term debt | — |
| | 8,397 |
| | 1,331 |
| | 34 |
| | — |
| | 9,762 |
|
Pension liabilities | — |
| | 895 |
| | 255 |
| | 854 |
| | — |
| | 2,004 |
|
Other postretirement benefits liabilities | — |
| | 454 |
| | 189 |
| | 97 |
| | — |
| | 740 |
|
Deferred income taxes | — |
| | — |
| | 1,464 |
| | 838 |
| | (846 | ) | | 1,456 |
|
Intercompany loans payable | 5,592 |
| | 1,401 |
| | 14,857 |
| | 13,187 |
| | (35,037 | ) | | — |
|
Other noncurrent liabilities | — |
| | 440 |
| | 86 |
| | 286 |
| | — |
| | 812 |
|
Total noncurrent liabilities | 5,592 |
| | 11,587 |
|
| 18,182 |
|
| 15,296 |
|
| (35,883 | ) |
| 14,774 |
|
| | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | |
Eaton shareholders' equity | 15,113 |
| | 4,563 |
| | 24,101 |
| | 20,505 |
| | (49,169 | ) | | 15,113 |
|
Noncontrolling interests | — |
| | — |
| | — |
| | 32 |
| | 10 |
| | 42 |
|
Total equity | 15,113 |
| | 4,563 |
| | 24,101 |
| | 20,537 |
| | (49,159 | ) | | 15,155 |
|
Total liabilities and equity | $ | 20,707 |
| | $ | 21,076 |
|
| $ | 47,940 |
|
| $ | 41,412 |
|
| $ | (95,785 | ) |
| $ | 35,350 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net cash provided by (used in) operating activities | $ | 88 |
| | $ | 542 |
| | $ | 313 |
| | $ | 523 |
| | $ | (53 | ) | | $ | 1,413 |
|
| | | | | | | | | | | |
Investing activities | | | | | | | | | | | |
Cash paid for acquisitions of businesses, net of cash acquired | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
Capital expenditures for property, plant and equipment | — |
| | (112 | ) | | (66 | ) | | (194 | ) | | — |
| | (372 | ) |
(Purchases) sales of short-term investments - net | — |
| | (115 | ) | | 18 |
| | (88 | ) | | — |
| | (185 | ) |
Loans to affiliates | — |
| | (219 | ) | | (23 | ) | | (4,267 | ) | | 4,509 |
| | — |
|
Repayments of loans from affiliates | — |
| | 28 |
| | 102 |
| | 4,030 |
| | (4,160 | ) | | — |
|
Proceeds from sale of business | — |
| | — |
| | — |
| | 761 |
| | — |
| | 761 |
|
Other - net | — |
| | (25 | ) | | 4 |
| | (29 | ) | | — |
| | (50 | ) |
Net cash (used in) provided by investing activities | — |
| | (443 | ) |
| 35 |
|
| 202 |
|
| 349 |
|
| 143 |
|
| | | | | | | | | | | |
Financing activities | | | | | | | | | | | |
Proceeds from borrowings | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
Payments on borrowings | — |
| | (975 | ) | | (35 | ) | | (2 | ) | | — |
| | (1,012 | ) |
Proceeds from borrowings from affiliates | — |
| | 1,975 |
| | 2,436 |
| | 98 |
| | (4,509 | ) | | — |
|
Payments on borrowings from affiliates | — |
| | (2,391 | ) | | (1,639 | ) | | (130 | ) | | 4,160 |
| | — |
|
Other intercompany financing activities | 504 |
| | 1,153 |
| | (1,107 | ) | | (550 | ) | | — |
| | — |
|
Cash dividends paid | (597 | ) | | — |
| | — |
| | — |
| | — |
| | (597 | ) |
Cash dividends paid to affiliates | — |
| | — |
| | — |
| | (53 | ) | | 53 |
| | — |
|
Exercise of employee stock options | — |
| | 98 |
| | — |
| | — |
| | — |
| | 98 |
|
Excess tax benefit from equity-based compensation | — |
| | 24 |
| | — |
| | — |
| | — |
| | 24 |
|
Other - net | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
Net cash used in financing activities | (93 | ) | | (116 | ) |
| (345 | ) |
| (635 | ) |
| (296 | ) |
| (1,485 | ) |
| | | | | | | | | | | |
Effect of currency on cash | — |
| | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
Total (decrease) increase in cash | (5 | ) | | (17 | ) |
| 3 |
|
| 84 |
|
| — |
|
| 65 |
|
Cash at the beginning of the period | 7 |
| | 54 |
| | 14 |
| | 502 |
| | — |
| | 577 |
|
Cash at the end of the period | $ | 2 |
| | $ | 37 |
|
| $ | 17 |
|
| $ | 586 |
|
| $ | — |
|
| $ | 642 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 |
| | | | | | | | | | | | | | | | | | | |
| Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net cash provided by operating activities | $ | 25 |
| | $ | 29 |
| | $ | 923 |
| | $ | — |
| | $ | 977 |
|
| | | | | | | | | |
Investing activities | | | | | | | | | |
Cash paid for acquisitions of businesses, net of cash acquired | 1 |
| | — |
| | (555 | ) | | — |
| | (554 | ) |
Capital expenditures for property, plant and equipment | (198 | ) | | (33 | ) | | (126 | ) | | — |
| | (357 | ) |
Sales (purchases) of short-term investments - net | 100 |
| | — |
| | (11 | ) | | — |
| | 89 |
|
Loans to affiliates | (183 | ) | | — |
| | (6,528 | ) | | 6,711 |
| | — |
|
Repayments of loans from affiliates | 143 |
| | — |
| | 6,320 |
| | (6,463 | ) | | — |
|
Proceeds from sale of business | 2 |
| | — |
| | 1 |
| | — |
| | 3 |
|
Other - net | (31 | ) | | (7 | ) | | — |
| | — |
| | (38 | ) |
Net cash (used in) provided by investing activities | (166 | ) |
| (40 | ) |
| (899 | ) |
| 248 |
|
| (857 | ) |
| | | | | | | | | |
Financing activities | | | | | | | | | |
Proceeds from borrowings | 600 |
| | — |
| | — |
| | — |
| | 600 |
|
Payments on borrowings | (306 | ) | | (12 | ) | | (3 | ) | | — |
| | (321 | ) |
Payments of financing costs | (63 | ) | | — |
| | — |
| | — |
| | (63 | ) |
Proceeds from borrowings from affiliates | 6,528 |
| | — |
| | 183 |
| | (6,711 | ) | | — |
|
Payments on borrowings from affiliates | (6,320 | ) | | — |
| | (143 | ) | | 6,463 |
| | — |
|
Other intercompany financing activities | (15 | ) | | 22 |
| | (7 | ) | | — |
| | — |
|
Cash dividends paid | (384 | ) | | — |
| | — |
| | — |
| | (384 | ) |
Exercise of employee stock options | 54 |
| | — |
| | — |
| | — |
| | 54 |
|
Excess tax benefit from equity-based compensation | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
Other - net | (2 | ) | | — |
| | 2 |
| | — |
| | — |
|
Net cash provided by (used in) financing activities | 110 |
|
| 10 |
|
| 32 |
|
| (248 | ) |
| (96 | ) |
| | | | | | | | | |
Effect of currency on cash | — |
| | — |
| | 16 |
| | — |
| | 16 |
|
Total (decrease) increase in cash | (31 | ) |
| (1 | ) |
| 72 |
|
| — |
|
| 40 |
|
Cash at the beginning of the period | 120 |
| | 3 |
| | 262 |
| |
| | 385 |
|
Cash at the end of the period | $ | 89 |
|
| $ | 2 |
|
| $ | 334 |
|
| $ | — |
|
| $ | 425 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).
COMPANY OVERVIEW
Eaton Corporation plc (Eaton or the Company) is a power management company providing energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical power. With 2012 net sales of $16.3 billion, the Company is a global technology leader in electrical products, systems and services for power quality, distribution and control, power transmission, lighting and wiring products; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 102,000 employees in over 60 countries, and sells products to customers in more than 175 countries.
In 2012, Eaton acquired certain businesses that affect comparability on a year over year basis, the most substantial of which was Cooper Industries plc (Cooper). Cooper was acquired November 30, 2012 for a purchase price of $13,192. See Note 2 in the 2012 Form 10-K, as updated by Exhibit 99.1 of Eaton's current report on Form 8-K filed on September 6, 2013 for additional information on the acquisition of Cooper. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. For a complete list of business acquisitions impacting the comparative periods, see Note 2 to the Condensed Consolidated Financial Statements.
The acquisition of Cooper has significantly transformed Eaton's mix of businesses. As a result, during the first quarter of 2013, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segments are Electrical Products and Electrical Systems and Services (which include legacy Eaton and former Cooper electrical businesses), and Vehicle (which includes truck and automotive drivetrain and powertrain systems businesses). For those reportable segments that were re-segmented, previously reported segment financial information has been updated for all prior periods. See Note 13 to the Condensed Consolidated Financial Statements contained in the Form 10-Q for the quarterly period ending March 31, 2013. The re-segmentation did not impact previously reported consolidated results of operations. For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2012 Form 10-K, as updated by Exhibit 99.1 of Eaton's current report on Form 8-K filed on September 6, 2013.
Summary of Results of Operations
A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per ordinary share-diluted follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2013 | | 2012 | | 2013 | | 2012 |
Net sales | $ | 5,607 |
| | $ | 3,950 |
| | $ | 16,519 |
| | $ | 11,978 |
|
Net income attributable to Eaton ordinary shareholders | 510 |
| | 345 |
| | 1,382 |
| | 1,038 |
|
Net income per ordinary share-diluted | $ | 1.07 |
| | $ | 1.02 |
| | $ | 2.90 |
| | $ | 3.05 |
|
RESULTS OF OPERATIONS
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per ordinary share, and operating profit before acquisition integration charges for each business segment, as well as corporate expense, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in the table below and in the discussion of the operating results of each business segment. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment. For additional information on acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.
Consolidated Financial Results
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Net sales | $ | 5,607 |
| | $ | 3,950 |
| | 42 | % | | $ | 16,519 |
| | $ | 11,978 |
| | 38 | % |
Gross profit | 1,724 |
| | 1,203 |
| | 43 | % | | 5,031 |
| | 3,662 |
| | 37 | % |
Percent of net sales | 30.7 | % | | 30.5 | % | | | | 30.5 | % | | 30.6 | % | | |
Income before income taxes | 521 |
| | 376 |
| | 39 | % | | 1,455 |
| | 1,163 |
| | 25 | % |
Net income | $ | 514 |
| | $ | 347 |
| | 48 | % | | $ | 1,391 |
| | $ | 1,040 |
| | 34 | % |
Less net income for noncontrolling interests | (4 | ) | | (2 | ) | | | | (9 | ) | | (2 | ) | | |
Net income attributable to Eaton ordinary shareholders | 510 |
| | 345 |
| | 48 | % | | 1,382 |
| | 1,038 |
| | 33 | % |
Excluding acquisition integration charges and transaction costs (after-tax) | 26 |
| | 18 |
| | | | 73 |
| | 30 |
| | |
Operating earnings | $ | 536 |
| | $ | 363 |
| | 48 | % | | $ | 1,455 |
| | $ | 1,068 |
| | 36 | % |
| | | | | | | | | | | |
Net income per ordinary share-diluted | $ | 1.07 |
| | $ | 1.02 |
| | 5 | % | | $ | 2.90 |
| | $ | 3.05 |
| | (5 | )% |
Excluding per share impact of acquisition integration charges and transaction costs (after-tax) | 0.05 |
| | 0.05 |
| | | | 0.15 |
| | 0.09 |
| | |
Operating earnings per ordinary share | $ | 1.12 |
| | $ | 1.07 |
| | 5 | % | | $ | 3.05 |
| | $ | 3.14 |
| | (3 | )% |
Net Sales
Net sales in the third quarter of 2013 increased 42% compared to the third quarter of 2012 due to an increase of 40% from the acquisition of businesses and an increase in core sales of 3%, partially offset by a decrease of 1% from the impact of currency translation. Net sales in the first nine months of 2013 increased 38% compared to the first nine months of 2012 due to an increase of 40% from the acquisition of businesses, partially offset by a decrease in core sales of 1% and a decrease of 1% from the impact of currency translation. The increase in core sales in the third quarter is primarily due to the increase in core sales in the Electrical, Aerospace and Vehicle segments. The decrease in core sales in the first nine months of 2013 reflects soft end markets due to a continuation of the subdued global economic conditions experienced during the second half of 2012 and the first half of 2013. Eaton now anticipates that its end markets for 2013 will be flat.
Gross Profit
The gross profit margin remained relatively consistent for the third quarter and the first nine months of 2013 as compared to the same periods of 2012, with productivity efficiencies offsetting lower core sales due to continued subdued global economic conditions, as noted above.
Income Taxes
The effective income tax rate for the third quarter of 2013 was 1.4% compared to 7.7% for the third quarter of 2012 and 4.4% for the first nine months of 2013 compared to 10.6% for the first nine months of 2012. The lower effective tax rate in the third quarter of 2013 was primarily attributable to tax effects associated with the acquisition of Cooper. The lower effective tax rate in the first nine months of 2013 was attributable to the item noted above, the recording of the entire 2012 U.S. research and experimentation credit in the first quarter of 2013, the reinstatement in 2013 of the U.S. research and experimentation credit and enhanced utilization of foreign tax credits in the U.S.
Net Income
Net income attributable to Eaton ordinary shareholders of $510 in the third quarter of 2013 increased 48% compared to Net income attributable to Eaton ordinary shareholders of $345 in the third quarter of 2012. Net income per ordinary share of $1.07 in the third quarter of 2013 increased 5% from Net income per ordinary share of $1.02 in the third quarter of 2012. Net income attributable to Eaton ordinary shareholders of $1,382 in the first nine months of 2013 increased 33% compared to Net income of $1,038 in the first nine months of 2012. Net income per ordinary share of $2.90 in the first nine months of 2013 decreased 5% from Net income per ordinary share of $3.05 in the first nine months of 2012. The increase in Net income attributable to Eaton ordinary shareholders in both the third quarter and the first nine months of 2013 was primarily due to higher sales volumes resulting from the acquisition of businesses, the most substantial of which was Cooper, and a lower effective income tax rate. The increase in Net income per ordinary share in the third quarter reflects the impact of higher core sales in the Electrical, Aerospace and Vehicle segments, as noted above. The decrease in Net income per ordinary share in the first nine months of 2013 reflects the impact of the incremental shares issued in the acquisition of Cooper and purchase price accounting charges resulting from the transaction.
Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquired businesses and acquisition integration charges, see Note 2 and Note 3 to the Condensed Consolidated Financial Statements, respectively.
Electrical Products
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase | | Nine months ended September 30 | | Increase |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Net sales | $ | 1,817 |
| | $ | 919 |
| | 98 | % | | $ | 5,235 |
| | $ | 2,708 |
| | 93 | % |
| | | | | | | | | | | |
Operating profit | 301 |
| | 172 |
| | 75 | % | | 814 |
| | 462 |
| | 76 | % |
Operating margin | 16.6 | % | | 18.7 | % | | | | 15.5 | % | | 17.1 | % | | |
| | | | | | | | | | | |
Acquisition integration charges | $ | 9 |
| | $ | 1 |
| | | | $ | 24 |
| | $ | 1 |
| | |
| | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | |
Operating profit | $ | 310 |
| | $ | 173 |
| | 79 | % | | $ | 838 |
| | $ | 463 |
| | 81 | % |
Operating margin | 17.1 | % | | 18.8 | % | | | | 16.0 | % | | 17.1 | % | | |
Net sales increased 98% in the third quarter of 2013 compared to the third quarter of 2012 due to an increase of 96% from the acquisition of businesses, an increase in core sales of 1% and an increase of 1% from the impact of currency translation. Net sales increased 93% in the first nine months of 2013 compared to the first nine months of 2012 due to an increase of 95% from the acquisition of businesses, partially offset by a decrease in core sales of 2%. Core sales growth in the third quarter of 2013 reflects strength in the Americas and Asia Pacific. The decrease in core sales in the first nine months of 2013 was primarily impacted by weakness in Europe. Eaton now anticipates its Electrical Products markets will grow 1% for all of 2013.
The operating margin before acquisition integration charges decreased from 18.8% in the third quarter of 2012 to 17.1% in the third quarter of 2013. The operating margin before acquisition integration charges decreased from 17.1% in the first nine months of 2012 to 16.0% in the first nine months of 2013. The decrease in operating margin in both the third quarter and the first nine months of 2013 was primarily due to the changed mix of products in the segment as a result principally of the Cooper acquisition.
Electrical Systems and Services
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase | | Nine months ended September 30 | | Increase |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Net sales | $ | 1,639 |
| | $ | 910 |
| | 80 | % | | $ | 4,784 |
| | $ | 2,675 |
| | 79 | % |
| | | | | | | | | | | |
Operating profit | 231 |
| | 111 |
| | 108 | % | | 668 |
| | 278 |
| | 140 | % |
Operating margin | 14.1 | % | | 12.2 | % | | | | 14.0 | % | | 10.4 | % | | |
| | | | | | | | | | | |
Acquisition integration charges | $ | 10 |
| | $ | 1 |
| | | | $ | 26 |
| | $ | 8 |
| | |
| | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | |
Operating profit | $ | 241 |
| | $ | 112 |
| | 115 | % | | $ | 694 |
| | $ | 286 |
| | 143 | % |
Operating margin | 14.7 | % | | 12.3 | % | | | | 14.5 | % | | 10.7 | % | | |
Net sales increased 80% in the third quarter of 2013 compared to the third quarter of 2012 due to an increase of 78% from the acquisition of businesses and an increase in core sales of 3%, partially offset by a decrease of 1% from the impact of currency translation. Net sales increased 79% in the first nine months of 2013 compared to the first nine months of 2012 due to an increase of 78% from the acquisition of businesses and an increase in core sales of 2%, partially offset by a decrease of 1% from the impact of currency translation. Core sales growth in both the third quarter and the first nine months of 2013 reflect strength in the Americas and Asia Pacific. Eaton now anticipates its Electrical Systems and Services markets will grow 1.5% for all of 2013.
The operating margin before acquisition integration charges increased from 12.3% in the third quarter of 2012 to 14.7% in the third quarter of 2013. The operating margin before acquisition integration charges increased from 10.7% for the first nine months of 2012 to 14.5% for the first nine months of 2013. The increase in operating margin in both the third quarter and the first nine months of 2013 was primarily due to the changed mix of products in the segment as a result of the acquisitions.
Hydraulics
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Net sales | $ | 739 |
| | $ | 763 |
| | (3 | )% | | $ | 2,267 |
| | $ | 2,267 |
| | — | % |
| | | | | | | | | | | |
Operating profit | 89 |
| | 93 |
| | (4 | )% | | 271 |
| | 325 |
| | (17 | )% |
Operating margin | 12.0 | % | | 12.2 | % | | | | 12.0 | % | | 14.3 | % | | |
| | | | | | | | | | | |
Acquisition integration charges | $ | 8 |
| | $ | 5 |
| | | | $ | 28 |
| | $ | 9 |
| | |
| | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | |
Operating profit | $ | 97 |
| | $ | 98 |
| | (1 | )% | | $ | 299 |
| | $ | 334 |
| | (10 | )% |
Operating margin | 13.1 | % | | 12.8 | % | | | | 13.2 | % | | 14.7 | % | | |
Net sales decreased 3% in the third quarter of 2013 compared to the third quarter of 2012 due to a decrease in core sales of 2% and a decrease of 1% from the impact of currency translation. Net sales in the first nine months of 2013 were the same as in the first nine months of 2012, with an increase of 7% from the acquisition of businesses offset by a decrease in core sales of 6% and a decrease of 1% from the impact of currency translation. The decrease in core sales in both the third quarter and the first nine months of 2013 primarily reflects lower market demand, particularly in the U.S. and Asia Pacific. Eaton now anticipates its Hydraulics markets will decline 6% for all of 2013.
The operating margin before acquisition integration charges increased from 12.8% in the third quarter of 2012 to 13.1% in the third quarter of 2013. The operating margin before acquisition integration charges decreased from 14.7% for the first nine months of 2012 to 13.2% for the first nine months of 2013. The decrease in operating margin in the first nine months of 2013 was primarily due to lower core sales, as noted above.
Aerospace
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase | | Nine months ended September 30 | | Increase |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Net sales | $ | 448 |
| | $ | 419 |
| | 7 | % | | $ | 1,328 |
| | $ | 1,285 |
| | 3 | % |
| | | | | | | | | | | |
Operating profit | 64 |
| | 49 |
| | 31 | % | | 193 |
| | 168 |
| | 15 | % |
Operating margin | 14.3 | % | | 11.7 | % | | | | 14.5 | % | | 13.1 | % | | |
Net sales in the third quarter and first nine months of 2013 increased 7% and 3%, respectively, compared to the third quarter of 2012 and the first nine months of 2012. The higher sales were a result of increased core sales, particularly to the commercial OEM market. Eaton continues to anticipate its Aerospace markets will grow 3% for all of 2013.
The operating margin increased from 11.7% in the third quarter of 2012 to 14.3% in the third quarter of 2013. The operating margin increased from 13.1% for the first nine months of 2012 to 14.5% for the first nine months of 2013. The increase in operating margin in both the third quarter and the first nine months of 2013 was primarily due to higher sales volumes and improved productivity.
Vehicle
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Net sales | $ | 964 |
| | $ | 939 |
| | 3 | % | | $ | 2,905 |
| | $ | 3,043 |
| | (5 | )% |
| | | | | | | | | | | |
Operating profit | 161 |
| | 144 |
| | 12 | % | | 465 |
| | 472 |
| | (1 | )% |
Operating margin | 16.7 | % | | 15.3 | % | | | | 16.0 | % | | 15.5 | % | | |
Net sales increased 3% in the third quarter of 2013 compared to the third quarter of 2012 due to an increase in core sales of 5%, partially offset by a decrease of 2% from the impact of currency translation. Net sales decreased 5% in the first nine months of 2013 compared to the first nine months of 2012 due to a decrease in core sales of 3% and a decrease of 2% from the impact of currency translation. The increase in core sales in the third quarter of 2013 was primarily due to higher sales in Latin America vehicle markets and North America and Asia Pacific light vehicle markets. The decrease in core sales in the first nine months of 2013 was primarily due to lower sales volumes in the NAFTA Class 8 truck market and the European light vehicle market, partially offset by higher sales in Latin American markets and in North American and Asia Pacific light vehicle markets. Eaton now anticipates its Vehicle markets will be flat for all of 2013.
The operating margin increased from 15.3% in the third quarter of 2012 to 16.7% in the third quarter of 2013. The operating margin increased from 15.5% for the first nine months of 2012 to 16.0% for the first nine months of 2013. The increase in operating margin in both the third quarter and the first nine months of 2013 was primarily due to the changed mix of products and improved productivity.
Corporate Expense
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | |
Increase | | Nine months ended September 30 | |
Increase |
| 2013 | | 2012 | | | 2013 | | 2012 | |
Amortization of intangible assets | $ | 110 |
| | $ | 45 |
| | 144 | % | | $ | 325 |
| | $ | 129 |
| | 152 | % |
Interest expense - net | 63 |
| | 42 |
| | 50 | % | | 209 |
| | 100 |
| | 109 | % |
Pension and other postretirement benefits expense | 55 |
| | 41 |
| | 34 | % | | 136 |
| | 121 |
| | 12 | % |
Inventory step-up adjustment | — |
| | 1 |
| | NM |
| | 34 |
| | 4 |
| | NM |
|
Other corporate expense - net | 97 |
| | 64 |
| | 52 | % | | 252 |
| | 188 |
| | 34 | % |
Total corporate expense | $ | 325 |
| | $ | 193 |
| | 68 | % | | $ | 956 |
| | $ | 542 |
| | 76 | % |
Total Corporate expense increased 68% in the third quarter of 2013 to $325 from $193 in the third quarter of 2012 primarily due to the acquisition of Cooper. The acquisition of Cooper resulted in an increase of 144% in Amortization of intangible assets and an increase of 50% in Interest expense - net, primarily related to financing activities in conjunction with the acquisition.
Total Corporate expense increased 76% in the first nine months of 2013 to $956 from $542 in the first nine months of 2012 primarily due to the acquisition of Cooper. The acquisition of Cooper resulted in an increase of 152% in Amortization of intangible assets and an increase of 109% in Interest expense - net, primarily related to financing activities in conjunction with the acquisition.
For additional information regarding the acquisition of Cooper, see Note 2 to the Consolidated Financial Statements contained in the 2012 Form 10-K, as updated by Exhibit 99.1 of Eaton's current report on Form 8-K filed on September 6, 2013.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Financial Condition and Liquidity
Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk. The Company maintains access to the commercial paper markets through a commercial paper program, which is supported by credit facilities in the aggregate principal amount of $2,000. There were no borrowings outstanding under these revolving credit facilities at September 30, 2013. Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business.
Eaton was in compliance with each of its debt covenants as of September 30, 2013 and for all periods presented.
Undistributed Assets of Non-U.S. Subsidiaries
At September 30, 2013, approximately 65% of the Company's consolidated cash and short-term investments resided in non-U.S. locations. These funds are considered permanently reinvested to be used to expand operations either organically or through acquisitions outside the U.S. The largest growth areas that are expected to require capital are in developing markets. The Company's U.S. operations generate cash flow sufficient to satisfy U.S. operating requirements and service its debt. The Company does not intend to repatriate any significant amounts of cash to the U.S. in the foreseeable future.
Sources and Uses of Cash Flow
Operating Cash Flow
Net cash provided by operating activities was $1,413 in the first nine months of 2013, an increase of $436 compared to $977 in the first nine months of 2012. Higher operating cash flow in the first nine months of 2013 compared to the first nine months of 2012 was due primarily to higher net income and lower contributions to defined benefits plans, partially offset by higher working capital requirements due to the acquisition of Cooper.
Investing Cash Flow
Net cash provided by investing activities was $143 in the first nine months of 2013, an increase of $1,000 compared to a use of cash of $857 in the first nine months of 2012. Investing cash flows in 2013 were primarily impacted by the proceeds from the sale of Apex Tool Group, LLC (Apex) totaling $761 and a decrease in cash paid for acquisitions of businesses from $554 in the first nine months of 2012 to $11 in the first nine months of 2013. For additional information on the sale of Apex and business acquisitions, see Note 2 to the Condensed Consolidated Financial Statements.
Financing Cash Flow
Net cash used in financing activities was $1,485 in the first nine months of 2013, a decrease of $1,389 compared to a use of cash of $96 in the first nine months of 2012. The decrease was primarily due to higher payments on debt borrowings, higher cash dividends and lower borrowings. Higher debt repayments included $669 on the bridge facility and $300 on notes that matured in May 2013. Cash dividends to ordinary shareholders increased $213 in the first nine months of 2013 due to the increase in shares outstanding as a result of the acquisition of Cooper and an increase in the quarterly cash dividend. Proceeds from borrowings decreased from $600 in the first nine months of 2012 to $6 in the first nine months of 2013. The proceeds from borrowings in the first nine months of 2012 related to the private debt issuance that was completed during the second quarter of 2012.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the Company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; increases in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; tax rate changes or exposure to additional income tax liability; stock market and currency fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. Eaton does not assume any obligation to update these forward-looking statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
There have been no material changes in exposures to market risk since December 31, 2012.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act), an evaluation was performed, under the supervision and with the participation of Eaton’s management, including Alexander M. Cutler, Principal Executive Officer, and Richard H. Fearon, Principal Financial Officer, of the effectiveness of the design and operation of Eaton’s disclosure controls and procedures. Based on that evaluation, management concluded that Eaton’s disclosure controls and procedures were effective as of September 30, 2013.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, Eaton’s internal control over financial reporting.
PART II — OTHER INFORMATION
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ITEM 1. | LEGAL PROCEEDINGS. |
Information regarding the Company's current legal proceedings is presented in Note 7 and Note 8 of the Notes to the Condensed Consolidated Financial Statements.
“Item 1A. Risk Factors” in Eaton's 2012 Form 10-K includes a discussion of the Company's risk factors. There have been no material changes from the risk factors described in the 2012 Form 10-K.
Exhibits — See Exhibit Index attached.
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.
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| | | EATON CORPORATION plc | |
| | | Registrant | |
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Date: | November 7, 2013 | By: | /s/ Richard H. Fearon | |
| | | Richard H. Fearon | |
| | | Principal Financial Officer |
| | | (On behalf of the registrant and as Principal Financial Officer) |
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Eaton Corporation plc
Third Quarter 2013 Report on Form 10-Q
Exhibit Index
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3 (a) | | Certificate of Incorporation - Incorporated by reference to the Form S-8 filed November 30, 2012 |
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3 (b) | | Amended and restated Memorandum and Articles of Incorporation - Incorporated by reference to the Form 10-Q Report for the three months ended September 30, 2012 |
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4 | | Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt |
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12 | | Ratio of Earnings to Fixed Charges — Filed in conjunction with this Form 10-Q Report * |
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31.1 | | Certification of Principal Executive Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report * |
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31.2 | | Certification of Principal Financial Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report * |
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32.1 | | Certification of Principal Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report * |
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32.2 | | Certification of Principal Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report * |
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101.INS | | XBRL Instance Document * |
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101.SCH | | XBRL Taxonomy Extension Schema Document * |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document * |
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101.DEF | | XBRL Taxonomy Extension Label Definition Document * |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document * |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document * |
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* | | Submitted electronically herewith. |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended September 30, 2013 and 2012, (ii) Consolidated Statements of Income for the nine months ended September 30, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income for the three months ended September 30, 2013 and 2012, (iv) Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2013 and 2012, (v) Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, (vi) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 and (vii) Notes to Condensed Consolidated Financial Statements for the nine months ended September 30, 2013.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.