e10vq
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, 2010
Commission file number 1-1396
EATON CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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34-0196300 |
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification Number) |
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Eaton Center, Cleveland, Ohio
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44114-2584 |
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(Address of principal executive offices)
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(Zip Code) |
(216) 523-5000
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes 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 definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
There were 168.3 million Common Shares outstanding as of September 30, 2010.
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EATON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended |
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Nine months ended |
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September 30 |
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September 30 |
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(Millions except for per share data) |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
3,571 |
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$ |
3,028 |
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$ |
10,052 |
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$ |
8,742 |
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Cost of products sold |
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2,480 |
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2,178 |
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7,068 |
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6,541 |
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Selling & administrative expense |
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651 |
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553 |
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1,842 |
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1,665 |
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Research & development expense |
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104 |
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99 |
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308 |
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292 |
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Interest expense-net |
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33 |
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38 |
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102 |
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116 |
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Other (income) expense-net |
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(2 |
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(6 |
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(11 |
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(5 |
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Income before income taxes |
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305 |
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166 |
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743 |
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133 |
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Income tax expense (benefit) |
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36 |
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(28 |
) |
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89 |
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(40 |
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Net income |
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269 |
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194 |
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654 |
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173 |
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Adjustment of net income for noncontrolling interests |
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(1 |
) |
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(1 |
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(5 |
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(1 |
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Net income attributable to common shareholders |
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$ |
268 |
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$ |
193 |
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$ |
649 |
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$ |
172 |
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Net income per common share diluted |
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$ |
1.57 |
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$ |
1.14 |
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$ |
3.80 |
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$ |
1.02 |
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Average number of common shares outstanding diluted |
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170.3 |
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169.2 |
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170.0 |
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168.2 |
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Net income per common share basic |
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$ |
1.59 |
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$ |
1.16 |
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$ |
3.86 |
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$ |
1.03 |
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Average number of common shares outstanding basic |
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167.6 |
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167.0 |
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167.4 |
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166.9 |
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Cash dividends paid per common share |
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$ |
.58 |
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$ |
.50 |
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$ |
1.58 |
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$ |
1.50 |
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See accompanying notes.
2
EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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(Millions) |
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2010 |
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2009 |
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Current assets |
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Cash |
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$ |
395 |
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$ |
340 |
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Short-term investments |
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493 |
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433 |
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Accounts receivable |
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2,332 |
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1,899 |
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Inventories |
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1,533 |
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1,326 |
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Deferred income taxes & other current assets |
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600 |
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526 |
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Total current assets |
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5,353 |
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4,524 |
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Property, plant & equipment-net |
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2,381 |
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2,445 |
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Goodwill |
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5,440 |
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5,435 |
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Other intangible assets |
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2,360 |
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2,441 |
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Deferred income taxes & other long-term assets |
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1,481 |
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1,437 |
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Total assets |
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$ |
17,015 |
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$ |
16,282 |
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Current liabilities |
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Short-term debt |
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$ |
93 |
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$ |
113 |
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Current portion of long-term debt |
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5 |
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5 |
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Accounts payable |
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1,353 |
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1,057 |
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Accrued compensation |
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437 |
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256 |
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Other current liabilities |
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1,425 |
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1,258 |
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Total current liabilities |
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3,313 |
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2,689 |
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Long-term debt |
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3,406 |
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3,349 |
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Pension liabilities |
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1,263 |
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1,586 |
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Other postretirement benefits liabilities |
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748 |
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754 |
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Deferred income taxes & other long-term liabilities |
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1,036 |
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1,086 |
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Equity |
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Eaton shareholders equity |
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7,207 |
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6,777 |
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Noncontrolling interests |
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42 |
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41 |
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Total equity |
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7,249 |
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6,818 |
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Total liabilities & equity |
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$ |
17,015 |
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$ |
16,282 |
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See accompanying notes.
3
EATON CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
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Nine months ended |
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September 30 |
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(Millions) |
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2010 |
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2009 |
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Net cash provided by (used in) operating activities |
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Net income |
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$ |
654 |
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$ |
173 |
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Adjustments to reconcile to net cash provided by operating activities |
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Depreciation & amortization |
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413 |
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429 |
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Deferred income taxes |
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(11 |
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(164 |
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Pension expense |
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134 |
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223 |
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Contributions to pension plans |
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(378 |
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(209 |
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Changes in working capital |
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(70 |
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553 |
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Other-net |
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(15 |
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(102 |
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Net cash provided by operating activities |
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727 |
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903 |
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Net cash provided by (used in) investing activities |
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Expenditures for property, plant & equipment |
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(207 |
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(136 |
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Cash paid for acquisitions of businesses |
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(172 |
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(10 |
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Sales (purchases) of short-term investments-net |
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(47 |
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(92 |
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Other-net |
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(6 |
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4 |
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Net cash used in investing activities |
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(432 |
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(234 |
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Net cash provided by (used in) financing activities |
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Borrowings with original maturities of more than three months |
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Proceeds |
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55 |
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557 |
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Payments |
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(59 |
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(597 |
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Borrowings (payments) with original maturities of less than
three months-net (primarily commercial paper) |
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(19 |
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(425 |
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Cash dividends paid |
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(265 |
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(250 |
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Other-net |
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62 |
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14 |
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Net cash used in financing activities |
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(226 |
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(701 |
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Effect of foreign exchange rate changes on cash |
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(14 |
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36 |
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Total increase in cash |
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55 |
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4 |
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Cash at the beginning of the year |
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340 |
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188 |
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Cash at the end of the period |
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$ |
395 |
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$ |
192 |
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See accompanying notes.
4
EATON CORPORATION
NOTES TO THE THIRD QUARTER 2010 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Millions of dollars and shares unless indicated otherwise (per share data assume dilution)
PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation (Eaton)
have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of
the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the
information and notes 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 results of operations,
financial position, and cash flows for the stated periods. Management has evaluated subsequent
events through the date the financial statements were filed with the SEC. These financial
statements should be read in conjunction with the consolidated financial statements and related
notes included in Eatons 2009 Annual Report on Form 10-K. The interim period results are not
necessarily indicative of the results to be expected for the full year.
ACQUISITIONS OF BUSINESSES
In 2010 and 2009, Eaton acquired certain businesses and entered into joint ventures. The
Statements of Consolidated Income include the results of these businesses from the dates of the
transactions. These transactions are summarized below:
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Date of |
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Business |
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Annual |
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Acquired business |
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transaction |
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segment |
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sales |
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Wright Line Holding, Inc. |
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August 25, 2010 |
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Electrical |
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$101 for year |
A U.S. provider of customized enclosures, |
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Americas |
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ended |
rack systems, and air flow management systems |
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June 30, 2010 |
to store, power, and secure mission-critical IT |
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data center electronics. |
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EMC Engineers, Inc. |
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July 15, 2010 |
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Electrical |
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$24 for 2009 |
A U.S. energy engineering and energy |
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Americas |
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services company that delivers energy efficiency |
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solutions for a wide range of governmental, |
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educational, commercial and industrial facilities. |
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Joint venture agreement to support the COMAC C919 |
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July 12, 2010 |
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Aerospace |
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New joint |
single-aisle commercial aircraft program |
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venture |
A 49%-owned joint venture in China focusing |
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on the design, development, manufacturing and |
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support of fuel and hydraulic conveyance systems |
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for the global civil aviation market. |
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Micro Innovation Holding AG |
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September 1, 2009 |
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Electrical |
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$33 for 2008 |
A Switzerland-based manufacturer of human |
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Rest of World |
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machine interfaces, programmable logic controllers |
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and input/output devices. Eaton acquired the
remaining shares to increase its ownership from |
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50% to 100%. |
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SEG Middle East Power Solutions & Switchboard |
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July 2, 2009 |
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Electrical |
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$10 for 2008 |
Manufacture LLC |
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Rest of |
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A 49%-owned joint venture in Abu Dhabi |
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World |
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that manufactures low voltage switchboards |
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and control panels assemblies for use in the |
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Middle East power generation and industrial |
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markets. |
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5
On October 1, 2010, Eaton acquired CopperLogic, Inc., a North American manufacturer of electrical
and electromechanical systems. This business had sales of $35 for the year ended August 31, 2010.
ACQUISITION INTEGRATION, WORKFORCE REDUCTION & PLANT CLOSING CHARGES
Acquisition Integration Charges
In 2010 and 2009, Eaton incurred charges related to the integration of acquired businesses. These
charges were recognized as expense as incurred. A summary of these charges follows:
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Three months ended |
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Nine months ended |
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September 30 |
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September 30 |
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2010 |
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2009 |
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2010 |
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2009 |
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Electrical Americas |
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$ |
1 |
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$ |
2 |
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$ |
4 |
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Electrical Rest of World |
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$ |
6 |
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12 |
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20 |
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38 |
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Hydraulics |
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2 |
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3 |
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Aerospace |
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1 |
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4 |
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3 |
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9 |
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Automotive |
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1 |
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Pretax charges |
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$ |
7 |
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$ |
19 |
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$ |
25 |
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$ |
55 |
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After-tax charges |
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$ |
4 |
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$ |
12 |
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$ |
16 |
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$ |
36 |
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Per common share |
|
$ |
.03 |
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|
$ |
.07 |
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$ |
.10 |
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$ |
.21 |
|
Charges in 2010 were related primarily to Moeller and Phoenixtec. Charges in 2009 were related
primarily to Integrated Hydraulics, Kirloskar, Moeller, Phoenixtec and Argo-Tech.
Workforce Reduction Charges
Eaton took significant actions in 2009 to reduce its workforce in response to the severe economic
downturn. The reductions totaled approximately 17% of the full-time workforce. These actions
resulted in the recognition of severance and pension and other postretirement benefits expense of
$22 in the third quarter of 2009 and $156 in the first nine months of 2009.
Summary of Acquisition Integration, Workforce Reduction & Plant Closing Liabilities
A summary of liabilities related to acquisition integration, workforce reduction, and plant closing
charges, follows:
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Plant |
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Workforce reductions |
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closing |
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Total |
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Employees |
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Dollars |
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& other |
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dollars |
|
Balance at December 31, 2009 |
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|
1,418 |
|
|
$ |
43 |
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|
$ |
12 |
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|
$ |
55 |
|
Liabilities recognized |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
25 |
|
Utilized |
|
|
(1,157 |
) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
|
261 |
|
|
$ |
13 |
|
|
$ |
7 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These charges were included in the Statements of Consolidated Income in Cost of products sold or
Selling & administrative expense, as appropriate. In Business Segment Information, the charges
reduced Operating profit of the related business segment.
RETIREMENT BENEFIT PLANS EXPENSE
The components of retirement benefit plans expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
Other postretirement |
|
|
|
Pension benefits |
|
|
benefits |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
(30 |
) |
|
$ |
(26 |
) |
|
$ |
(4 |
) |
|
$ |
(3 |
) |
Interest cost |
|
|
(50 |
) |
|
|
(51 |
) |
|
|
(11 |
) |
|
|
(13 |
) |
Expected return on plan assets |
|
|
54 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(15 |
) |
|
|
(8 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
|
(38 |
) |
|
|
(18 |
) |
|
|
(16 |
) |
Curtailment loss |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Settlement loss |
|
|
(4 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
$ |
(45 |
) |
|
$ |
(49 |
) |
|
$ |
(18 |
) |
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
Other postretirement |
|
|
|
Pension benefits |
|
|
benefits |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
(89 |
) |
|
$ |
(86 |
) |
|
$ |
(12 |
) |
|
$ |
(11 |
) |
Interest cost |
|
|
(150 |
) |
|
|
(151 |
) |
|
|
(34 |
) |
|
|
(37 |
) |
Expected return on plan assets |
|
|
163 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(45 |
) |
|
|
(30 |
) |
|
|
(8 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121 |
) |
|
|
(125 |
) |
|
|
(54 |
) |
|
|
(49 |
) |
Curtailment loss |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
(1 |
) |
Settlement loss |
|
|
(13 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
$ |
(134 |
) |
|
$ |
(223 |
) |
|
$ |
(54 |
) |
|
$ |
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to limitations imposed by the Pension Protection Act on pension lump sum distributions, Eatons
U.S. Qualified Pension Plan became restricted in 2009 from making 100% lump sum payments. As a
result, the plan experienced a significant increase in lump sum payments in 2009 before the
limitation went into effect. Total pension settlement expense was $51 in the second quarter of
2009 and $77 in the first nine months of 2009, most of which was attributable to the U.S. pension
plans. A portion of the increase was attributable to the workforce reduction in 2009.
As a result of the workforce reduction in 2009, curtailment expense related to pension plans of $14
was recognized in the second quarter of 2009 and $21 in the first nine months of 2009. The
curtailment expense included recognition of the change in the projected benefit obligation, as well
as recognition of a portion of the unrecognized prior service cost.
These charges were primarily included in the Statements of Consolidated Income in Cost of products
sold or Selling & administrative expense, as appropriate. In Business Segment Information, the
charges were included in Pension & other postretirement benefits expense.
INCOME TAXES
During the third quarter of 2010 and the first nine months of 2010, income tax expense of $36 and
$89, respectively, was recognized (an effective tax rate of 11.7% in the third quarter and 12.0% in
the first nine months of 2010) compared to income tax benefits of $28 and $40 in the third quarter
of 2009 and the first nine months of 2009, respectively (a tax benefit rate of 17.0% in the third
quarter and 30.5% for the first nine months of 2009). Income tax expense for the first nine months
of 2010 included a non-cash, one-time charge of $23 ($0.14 per common share) that was recorded in
the first quarter of 2010 to reflect the impact of the Health Care Reform and Education
Reconciliation Act on taxation associated with Medicare Part D. Without this one-time charge,
income tax expense of $66 (an effective tax rate of 8.9%) would have been recognized in the first
nine months of 2010. Income tax expense for the first nine months of 2010 also reflected a benefit
associated with the successful resolution of international tax audit issues; the recognition of
state and local income tax attributes involving tax loss carryforwards, tax credits and other
temporary differences; the recognition of international tax incentives; and the recognition of
other international tax benefits. Included as an offset to the aforementioned income tax benefits
that lowered the effective income tax rate in the first nine months of 2010 were adjustments
totaling $22 related to an income tax audit of transfer prices for 2005 to 2009. The Company
concluded that the effect of these adjustments was not material to the prior period financial
statements, as well as the projected 2010 financial statements.
During the third quarter of 2010, Eaton acquired certain businesses and recorded acquired income
tax liabilities of $31.
MERITOR LITIGATION
On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor)
filed an action against Eaton in the U.S. District Court for Delaware. The action sought damages,
which would be trebled under U.S. 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 is currently pending. Accordingly, an
estimate of any potential loss related to this action cannot be made at this time.
7
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
269 |
|
|
$ |
194 |
|
|
$ |
654 |
|
|
$ |
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation & related hedging instruments |
|
|
419 |
|
|
|
177 |
|
|
|
(64 |
) |
|
|
393 |
|
Pensions & other postretirement benefits |
|
|
4 |
|
|
|
2 |
|
|
|
51 |
|
|
|
241 |
|
Cash flow hedges |
|
|
7 |
|
|
|
|
|
|
|
(2 |
) |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
430 |
|
|
|
179 |
|
|
|
(15 |
) |
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
699 |
|
|
|
373 |
|
|
|
639 |
|
|
|
840 |
|
Less comprehensive income attributable to noncontrolling interests |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common shareholders |
|
$ |
698 |
|
|
$ |
372 |
|
|
$ |
634 |
|
|
$ |
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EQUITY
The changes in Total equity follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eaton |
|
|
|
|
|
|
|
|
|
shareholders |
|
|
Noncontrolling |
|
|
Total |
|
|
|
equity |
|
|
interests |
|
|
equity |
|
Balance at December 31, 2009 |
|
$ |
6,777 |
|
|
$ |
41 |
|
|
$ |
6,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
649 |
|
|
|
5 |
|
|
|
654 |
|
Other comprehensive (loss) |
|
|
(15 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
634 |
|
|
|
5 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(265 |
) |
|
|
(4 |
) |
|
|
(269 |
) |
Issuance of shares under employee benefit
plans-net |
|
|
61 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
7,207 |
|
|
$ |
42 |
|
|
$ |
7,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eaton |
|
|
|
|
|
|
|
|
|
shareholders |
|
|
Noncontrolling |
|
|
Total |
|
|
|
equity |
|
|
interests |
|
|
equity |
|
Balance at December 31, 2008 |
|
$ |
6,317 |
|
|
$ |
48 |
|
|
$ |
6,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
172 |
|
|
|
1 |
|
|
|
173 |
|
Other comprehensive income |
|
|
667 |
|
|
|
|
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
839 |
|
|
|
1 |
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(250 |
) |
|
|
(4 |
) |
|
|
(254 |
) |
Issuance of shares under employee benefit
plans-net |
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Increase in noncontrolling interests due to
acquisitions of businesses |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
6,961 |
|
|
$ |
46 |
|
|
$ |
7,007 |
|
|
|
|
|
|
|
|
|
|
|
INVENTORIES
The components of inventories follow:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Raw materials |
|
$ |
682 |
|
|
$ |
608 |
|
Work-in-process & finished goods |
|
|
963 |
|
|
|
823 |
|
|
|
|
|
|
|
|
Inventories at FIFO |
|
|
1,645 |
|
|
|
1,431 |
|
Excess of FIFO over LIFO cost |
|
|
(112 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,533 |
|
|
$ |
1,326 |
|
|
|
|
|
|
|
|
8
NET INCOME PER COMMON SHARE
A summary of the calculation of net income per common share attributable to common shareholders
assuming dilution and basic follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30 |
|
|
September 30 |
|
(Shares in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income attributable to common shareholders |
|
$ |
268 |
|
|
$ |
193 |
|
|
$ |
649 |
|
|
$ |
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding diluted |
|
|
170.3 |
|
|
|
169.2 |
|
|
|
170.0 |
|
|
|
168.2 |
|
Less dilutive effect of stock options and restricted stock awards |
|
|
2.7 |
|
|
|
2.2 |
|
|
|
2.6 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding basic |
|
|
167.6 |
|
|
|
167.0 |
|
|
|
167.4 |
|
|
|
166.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted |
|
$ |
1.57 |
|
|
$ |
1.14 |
|
|
$ |
3.80 |
|
|
$ |
1.02 |
|
Net income per common share basic |
|
$ |
1.59 |
|
|
$ |
1.16 |
|
|
$ |
3.86 |
|
|
$ |
1.03 |
|
In the first nine months of 2010, 3.4 million stock options were excluded from the calculation of
diluted net income per common share because the exercise price of the options exceeded the average
market price of the common shares during the period and their effect, accordingly, would have been
antidilutive. This compares to 8.1 million antidilutive stock options for the same period in 2009.
FINANCIAL ASSETS & LIABILITIES RECOGNIZED AT FAIR VALUE
Financial instruments are categorized into a fair value hierarchy of three levels, based on the
degree of subjectivity inherent in the valuation methodology as follows:
|
|
Level 1 Quoted prices (unadjusted) for identical assets in active markets. |
|
|
|
Level 2 Quoted prices for similar assets in active markets, and inputs that are
observable for the asset, either directly or indirectly, for substantially the full term of
the financial instrument. |
|
|
|
Level 3 Unobservable prices or inputs. |
A summary of financial instruments recognized at fair value, and the fair value measurements used,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
value |
|
Cash |
|
$ |
395 |
|
|
|
|
|
|
|
|
|
|
$ |
395 |
|
Short-term investments |
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
493 |
|
Foreign currency forward exchange
contracts |
|
|
|
|
|
$ |
(9 |
) |
|
|
|
|
|
|
(9 |
) |
Commodity contracts |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Cross currency swaps |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
Fixed-to-floating interest rate swaps |
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
78 |
|
Related long-term debt converted to floating
interest rates by interest rate swaps |
|
|
|
|
|
|
(78 |
) |
|
|
|
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
888 |
|
|
$ |
(14 |
) |
|
$ |
|
|
|
$ |
874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 financial instruments are valued using an industry standard market approach. No financial
instruments were recognized using unobservable prices or inputs Level 3.
Long-term debt and current portion of long-term debt had a carrying value of $3,411 and fair value
of $3,894 at September 30, 2010.
Assets related to defined benefit pension plans of $2,373 were also measured at fair value at
September 30, 2010.
DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS & HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in
interest rates, foreign currency exchange rates and commodity prices. The Company uses various
derivative and non-derivative financial instruments, primarily interest rate swaps, foreign
currency forward exchange contracts, foreign currency swaps and, to
9
a lesser extent, commodity contracts, to manage risks from these market fluctuations. The
derivative financial instruments used by Eaton are straightforward, non-leveraged instruments. The
counterparties to these financial 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 derivative financial
instruments are not purchased and sold for trading purposes.
Derivative financial instruments are measured at fair value and recognized as assets or liabilities
in the Consolidated Balance Sheet. 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, on the nature of the hedging activity.
Eaton formally documents all relationships between derivative financial instruments accounted for
as hedges and the hedged item, as well as its risk-management objective and strategy for
undertaking the hedge transaction. This process includes linking all 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 Eaton shareholders equity and reclassified to income in the same period
when the gain or loss on the hedged item is included in income. |
|
|
|
|
Hedges of the foreign 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 Eaton shareholders equity
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 as
a hedge is included in the same line of the Statement of Consolidated 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 foreign currency that arise in the normal course of business.
Information as to the fair value of derivative financial instruments recognized in the Consolidated
Balance Sheet follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at September 30, 2010 |
|
|
|
Other |
|
|
Other |
|
|
Other |
|
|
|
current |
|
|
long-term |
|
|
current |
|
|
|
assets |
|
|
assets |
|
|
liabilities |
|
Derivatives designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps
(fair value hedges) |
|
|
|
|
|
$ |
78 |
|
|
|
|
|
Foreign currency exchange contracts
(cash flow hedges) |
|
$ |
6 |
|
|
|
|
|
|
$ |
4 |
|
Commodity contracts (cash flow hedges) |
|
|
3 |
|
|
|
|
|
|
|
|
|
Cross currency swaps (net investment hedges) |
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9 |
|
|
$ |
78 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts |
|
$ |
28 |
|
|
|
|
|
|
$ |
39 |
|
Commodity contracts |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36 |
|
|
|
|
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, 2009 |
|
|
|
Other |
|
|
Other |
|
|
Other |
|
|
|
current |
|
|
long-term |
|
|
current |
|
|
|
assets |
|
|
assets |
|
|
liabilities |
|
Derivatives designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps
(fair value hedges) |
|
|
|
|
|
$ |
29 |
|
|
|
|
|
Foreign currency exchange contracts
(cash flow hedges) |
|
$ |
6 |
|
|
|
|
|
|
$ |
4 |
|
Commodity contracts (cash flow hedges) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11 |
|
|
$ |
29 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts |
|
$ |
17 |
|
|
|
|
|
|
$ |
31 |
|
Commodity contracts |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20 |
|
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, the notional amount related to derivatives designated as hedges in the table
above was $1,129, including $640 of fixed-to-floating interest rate swaps. This compares to $879
of notional value at December 31, 2009, including $700 of fixed-to-floating interest rate swaps.
Amounts recognized in net income follow:
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
Gain (loss) recognized in net income |
|
|
2010 |
|
2009 |
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps |
|
$ |
13 |
|
|
$ |
16 |
|
Related long-term debt converted to
floating interest rates by interest rate
swaps |
|
|
(13 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
|
|
Gain (loss) recognized in net income |
|
|
2010 |
|
2009 |
Derivatives designated as fair value hedges |
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps |
|
$ |
49 |
|
|
$ |
(29 |
) |
Related long-term debt converted to
floating interest rates by interest rate
swaps |
|
|
(49 |
) |
|
|
29 |
|
The gains and losses described above were recognized in the Statements of Consolidated Income in
Interest expense.
Amounts recognized in Eaton shareholders equity follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
Gain (loss) |
|
|
Gain (loss) |
|
|
Gain (loss) |
|
|
Gain (loss) |
|
|
|
recognized in |
|
|
reclassified |
|
|
recognized in |
|
|
reclassified |
|
|
|
Eaton |
|
|
from Eaton |
|
|
Eaton |
|
|
from Eaton |
|
|
|
shareholders |
|
|
shareholders |
|
|
shareholders |
|
|
shareholders |
|
|
|
equity |
|
|
equity |
|
|
equity |
|
|
equity |
|
Derivatives designated
as cash flow or net
investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
exchange contracts |
|
|
|
|
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(1 |
) |
Commodity contracts |
|
$ |
6 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Cross currency swaps |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(10 |
) |
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
Gain (loss) |
|
|
Gain (loss) |
|
|
Gain (loss) |
|
|
Gain (loss) |
|
|
|
recognized in |
|
|
reclassified |
|
|
recognized in |
|
|
reclassified |
|
|
|
Eaton |
|
|
from Eaton |
|
|
Eaton |
|
|
from Eaton |
|
|
|
shareholders |
|
|
shareholders |
|
|
shareholders |
|
|
shareholders |
|
|
|
equity |
|
|
equity |
|
|
equity |
|
|
equity |
|
Derivatives designated
as cash flow or net
investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
exchange contracts |
|
$ |
1 |
|
|
|
|
|
|
$ |
(2 |
) |
|
$ |
(8 |
) |
Commodity contracts |
|
|
2 |
|
|
$ |
5 |
|
|
|
21 |
|
|
|
(16 |
) |
Cross currency swaps |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(13 |
) |
|
$ |
5 |
|
|
$ |
19 |
|
|
$ |
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The gains and losses described above that were reclassified from Eaton shareholders equity to the
Statements of Consolidated Income were recognized in Cost of products sold.
12
EATON CORPORATION
BUSINESS SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical Americas |
|
$ |
967 |
|
|
$ |
843 |
|
|
$ |
2,663 |
|
|
$ |
2,583 |
|
Electrical Rest of World |
|
|
707 |
|
|
|
646 |
|
|
|
1,980 |
|
|
|
1,785 |
|
Hydraulics |
|
|
583 |
|
|
|
418 |
|
|
|
1,641 |
|
|
|
1,273 |
|
Aerospace |
|
|
390 |
|
|
|
394 |
|
|
|
1,136 |
|
|
|
1,221 |
|
Truck |
|
|
534 |
|
|
|
401 |
|
|
|
1,479 |
|
|
|
1,014 |
|
Automotive |
|
|
390 |
|
|
|
326 |
|
|
|
1,153 |
|
|
|
866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,571 |
|
|
$ |
3,028 |
|
|
$ |
10,052 |
|
|
$ |
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical Americas |
|
$ |
141 |
|
|
$ |
142 |
|
|
$ |
366 |
|
|
$ |
392 |
|
Electrical Rest of World |
|
|
81 |
|
|
|
45 |
|
|
|
183 |
|
|
|
55 |
|
Hydraulics |
|
|
76 |
|
|
|
18 |
|
|
|
207 |
|
|
|
38 |
|
Aerospace |
|
|
60 |
|
|
|
57 |
|
|
|
157 |
|
|
|
198 |
|
Truck |
|
|
74 |
|
|
|
25 |
|
|
|
179 |
|
|
|
(12 |
) |
Automotive |
|
|
39 |
|
|
|
23 |
|
|
|
120 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit |
|
|
471 |
|
|
|
310 |
|
|
|
1,212 |
|
|
|
629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
(46 |
) |
|
|
(42 |
) |
|
|
(134 |
) |
|
|
(126 |
) |
Interest expense-net |
|
|
(33 |
) |
|
|
(38 |
) |
|
|
(102 |
) |
|
|
(116 |
) |
Pension & other postretirement benefits expense |
|
|
(30 |
) |
|
|
(36 |
) |
|
|
(91 |
) |
|
|
(175 |
) |
Stock option expense |
|
|
(2 |
) |
|
|
(7 |
) |
|
|
(9 |
) |
|
|
(20 |
) |
Other corporate expense-net |
|
|
(55 |
) |
|
|
(21 |
) |
|
|
(133 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
305 |
|
|
|
166 |
|
|
|
743 |
|
|
|
133 |
|
Income tax expense (benefit) |
|
|
36 |
|
|
|
(28 |
) |
|
|
89 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
269 |
|
|
|
194 |
|
|
|
654 |
|
|
|
173 |
|
Adjustment of net income for noncontrolling interests |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
268 |
|
|
$ |
193 |
|
|
$ |
649 |
|
|
$ |
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit was reduced by acquisition integration charges as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical Americas |
|
|
|
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
4 |
|
Electrical Rest of World |
|
$ |
6 |
|
|
|
12 |
|
|
|
20 |
|
|
|
38 |
|
Hydraulics |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
Aerospace |
|
|
1 |
|
|
|
4 |
|
|
|
3 |
|
|
|
9 |
|
Automotive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7 |
|
|
$ |
19 |
|
|
$ |
25 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
ITEM 2. MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS. |
EATON CORPORATION
Millions of dollars and shares unless indicated otherwise (per share data assume dilution)
Net income refers to net income attributable to Eaton common shareholders
OVERVIEW OF THE COMPANY
Eaton Corporation is a diversified power management company with 2009 sales of $11.9 billion.
Eaton is a global technology leader in electrical components and systems for power quality,
distribution and control; 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 70,000 employees and sells products to customers in more than 150
countries.
The principal markets for the Electrical Americas and Electrical Rest of World segments are
industrial, institutional, government, utility, commercial, residential, information technology and
original equipment manufacturers. These products are used wherever there is a demand for
electrical power in commercial buildings, data centers, residences, apartment and office buildings,
hospitals, factories and utilities. The segments share several common global customers, but a
large number of customers are located regionally and sales are made directly and indirectly through
distributors, resellers and manufacturers representatives.
The principal markets for the Hydraulics segment include oil and gas, renewable energy, marine,
agriculture, construction, mining, forestry, utility, material handling, truck and bus, machine
tools, molding, primary metals and power generation. Key manufacturers in these markets and other
customers are located globally, and these products are sold and serviced through a variety of
channels.
The principal markets for the Aerospace segment are manufacturers of commercial and military
aircraft and related after-market customers. These manufacturers and customers are located
globally, and products are sold and serviced through a variety of channels.
The principal markets for the Truck and Automotive segments are original equipment manufacturers
and after-market customers of heavy-, medium- and light-duty trucks, SUVs, CUVs, or passenger cars.
Customers are located globally, and most sales are made directly.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
This Managements Discussion & Analysis of Financial Condition & Results of Operations discloses
operating earnings, operating earnings per common share, and operating profit (loss) before
acquisition integration charges for each business segment, 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 Summary of Results of Operations for 2010 and
in Results by Business Segment. This Managements Discussion & Analysis of Financial Condition &
Results of Operations also discloses net income and net income per common share, and operating
earnings and operating earnings per common share, before the non-cash, one-time income tax charge
of $23 ($.14 per share) related to Medicare Part D, recognized in the first quarter of 2010, as
discussed below. Management believes that these financial measures are useful to investors because
they exclude transactions of an unusual nature, allowing investors to more easily compare Eatons
financial performance period to period. Management uses this information in monitoring and
evaluating the on-going performance of Eaton and each business segment.
SUMMARY OF RESULTS OF OPERATIONS FOR 2010 COMPARED TO 2009
Eaton reported net sales of $3.6 billion in the third quarter of 2010 and $10.1 billion in the
first nine months of 2010, increases of 18% and 15% over the third quarter and the first nine
months of 2009, respectively. Net income of $268 in the third quarter of 2010 and $649 in the
first nine months of 2010, increased significantly over net income of $193 in the third quarter of
2009 and $172 in the first nine months of 2009. Net income per common share was $1.57 in the third
quarter of 2010 and $3.80 in the first nine months of 2010, which increased 38% and 273%,
respectively, over net income per share of $1.14 in the third quarter of 2009 and $1.02 in the
first nine months of 2009. The results reflect the continued rebound in Eatons end markets in
2010 and the benefits of the substantial changes in the Companys cost structure implemented over
the past two years. Additionally, net income in the third quarter and the first nine months of
2010 improved over similar periods in 2009 due to the absence in 2010 of severance and pension and
other postretirement benefits expense of $22 in the third quarter of 2009 and $156 in the first
nine months of 2009.
14
The following are highlights of results for 2010 compared to 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
|
Nine months ended September 30 |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
% |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
Increase |
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
Increase |
|
Net sales |
|
$ |
3,571 |
|
|
$ |
3,028 |
|
|
$ |
543 |
|
|
|
18 |
% |
|
$ |
10,052 |
|
|
$ |
8,742 |
|
|
$ |
1,310 |
|
|
|
15 |
% |
Gross profit |
|
|
1,091 |
|
|
|
850 |
|
|
|
241 |
|
|
|
28 |
% |
|
|
2,984 |
|
|
|
2,201 |
|
|
|
783 |
|
|
|
36 |
% |
Percent of net sales |
|
|
30.6 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
|
|
|
|
29.7 |
% |
|
|
25.2 |
% |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
305 |
|
|
$ |
166 |
|
|
$ |
139 |
|
|
|
84 |
% |
|
$ |
743 |
|
|
$ |
133 |
|
|
$ |
610 |
|
|
|
459 |
% |
Income tax expense (benefit) |
|
|
36 |
|
|
|
(28 |
) |
|
|
64 |
|
|
NM |
|
|
|
89 |
|
|
|
(40 |
) |
|
|
129 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
269 |
|
|
|
194 |
|
|
|
75 |
|
|
|
39 |
% |
|
|
654 |
|
|
|
173 |
|
|
|
481 |
|
|
|
278 |
% |
Adjustment of net income
for noncontrolling
interests |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
common shareholders |
|
$ |
268 |
|
|
$ |
193 |
|
|
$ |
75 |
|
|
|
39 |
% |
|
$ |
649 |
|
|
$ |
172 |
|
|
$ |
477 |
|
|
|
277 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
diluted |
|
$ |
1.57 |
|
|
$ |
1.14 |
|
|
$ |
.43 |
|
|
|
38 |
% |
|
$ |
3.80 |
|
|
$ |
1.02 |
|
|
$ |
2.78 |
|
|
|
273 |
% |
Average common shares
outstanding diluted (in
millions) |
|
|
170.3 |
|
|
|
169.2 |
|
|
|
1.1 |
|
|
|
1 |
% |
|
|
170.0 |
|
|
|
168.2 |
|
|
|
1.8 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net
income attributable to
common shareholders to
operating earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
common shareholders |
|
$ |
268 |
|
|
$ |
193 |
|
|
$ |
75 |
|
|
|
39 |
% |
|
$ |
649 |
|
|
$ |
172 |
|
|
$ |
477 |
|
|
|
277 |
% |
Excluding acquisition
integration charges
(after-tax) |
|
|
4 |
|
|
|
12 |
|
|
|
(8 |
) |
|
|
|
|
|
|
16 |
|
|
|
36 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
$ |
272 |
|
|
$ |
205 |
|
|
$ |
67 |
|
|
|
33 |
% |
|
$ |
665 |
|
|
$ |
208 |
|
|
$ |
457 |
|
|
|
220 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
diluted |
|
$ |
1.57 |
|
|
$ |
1.14 |
|
|
$ |
.43 |
|
|
|
38 |
% |
|
$ |
3.80 |
|
|
$ |
1.02 |
|
|
$ |
2.78 |
|
|
|
273 |
% |
Per share impact of
acquisition integration
charges (after-tax) |
|
|
.03 |
|
|
|
.07 |
|
|
|
(.04 |
) |
|
|
|
|
|
|
.10 |
|
|
|
.21 |
|
|
|
(.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings per
common share |
|
$ |
1.60 |
|
|
$ |
1.21 |
|
|
$ |
.39 |
|
|
|
32 |
% |
|
$ |
3.90 |
|
|
$ |
1.23 |
|
|
$ |
2.67 |
|
|
|
217 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the third quarter of 2010 increased by 18% compared to the third quarter of 2009.
The increase was due to an 18% increase in core sales, as a 1% increase from acquisitions was
offset by a 1% decline from foreign exchange. End markets increased 14% in the third quarter of
2010.
Net sales in the first nine months of 2010 increased by 15% compared to the first nine months of
2009. The increase included 13% from core sales and 2% from foreign exchange.
Gross profit increased by 28% in the third quarter of 2010 compared to the third quarter of 2009,
and improved to 30.6% of sales. The increase was primarily due to the increase in sales in the
third quarter of 2010 and the Companys newly reset cost structure, including savings associated
with workforce reductions taken in 2009. The improvement in the third quarter of 2010 also
reflected the absence in 2010 of pretax charges of $22 for severance and pension and other
postretirement benefits expense in the third quarter of 2009 resulting from work force reductions
taken in 2009, a substantial portion of which were recognized in Cost of products sold.
Gross profit increased by 36% in the first nine months of 2010 compared to the first nine months of
2009, and improved to 29.7% of sales. The increase was primarily due to the same factors as in the
third quarter of 2010. The improvement in the first nine months of 2010 reflected the absence in
2010 of pretax charges of $156 in the first nine months of 2009 resulting from the work force
reductions taken in 2009, a substantial portion of which were recognized in Cost of products sold.
15
Net income of $268 in the third quarter of 2010 increased 39% compared to net income of $193 in the
third quarter of 2009. Net income per share of $1.57 in the third quarter of 2010 increased 38%
over $1.14 per share for the third quarter of 2009. The increases were primarily due to higher
sales in 2010 and the factors that affected gross profit
discussed above. Before the effect of acquisition integration charges, operating earnings were
$272 in the third quarter of 2010, or $1.60 per share, significantly above operating earnings of
$205 in the third quarter of 2009, or $1.21 per share.
Net income of $649 in the first nine months of 2010 increased 277% over net income of $172 in the
first nine months of 2009. Net income per share of $3.80 in the first nine months of 2010
increased 273% over net income per share of $1.02 in the first nine months of 2009. The increases were
primarily due to the same factors as in the third quarter of 2010. Net income in the first nine
months of 2010 included a non-cash, one-time income tax charge of $23 ($.14 per common share) that
was recognized in the first quarter of 2010 related to Medicare Part D resulting from the new
Health Care Reform and Education Reconciliation Act. Adjusting for this one-time income tax
charge, net income in the first nine months of 2010 was $672, or $3.94 per share, compared to net
income of $172 in the first nine months of 2009, or $1.02 per share. Before the effect of
acquisition integration charges, operating earnings were $665 in the first nine months of 2010, or
$3.90 per share, significantly above operating earnings of $208 in the first nine months of 2009,
or $1.23 per share. Adjusting for the non-cash, one-time income tax charge related to Medicare
Part D, operating earnings in the first nine months of 2010 were $688, or $4.04 per share.
Net cash provided by operating activities was $727 in the first nine months of 2010, a decrease of
$176 compared to net cash provided by operating activities of $903 in the first nine months of
2009. Operating cash flows in 2010 reflected higher net income in the first nine months of 2010 of
$654, before adjusting for noncontrolling interests, compared to $173 in the first nine months of
2009. Cash provided by operating activities in the first nine months of 2010 was lowered by
contributions to pension plans of $378 compared to $209 in the first nine months of 2009, and a use
of cash of $70 resulting from an increase in funding of working capital in the first nine months of
2010 compared to a decrease of $553 in working capital in the first nine months of 2009. The
increase in working capital funding in the first nine months of 2010, primarily accounts receivable
and inventory, was due to higher levels of operations in 2010 resulting from the global economic
recovery.
Total debt of $3,504 at September 30, 2010 increased by $37 from $3,467 at December 31, 2009. The
increase was primarily due to an increase in long-term debt of $57, partially offset by a $20
reduction of short-term debt. Short-term debt was reduced through the use of cash generated from
operations. The net-debt-to-capital ratio was 26.6% at September 30, 2010 compared to 28.4% at the
end of 2009, reflecting the combined effect of the $37 increase in total debt, the $430 increase in
Eaton shareholders equity and the $115 increase in cash and short-term investments. The increase
in equity primarily resulted from net income of $649, partially offset by cash dividends paid of
$265.
Net working capital of $2,040 at September 30, 2010 increased by $205 from $1,835 at the end of
2009. The increase was primarily due to a net increase in cash and short-term investments,
accounts receivable and inventory due to higher levels of operations resulting from the global
economic recovery, partially offset by related increases in accounts payable and other current
liabilities. Cash and short-term investments totaled $888 at September 30, 2010, an increase of
$115 from $773 at December 31, 2009. Accounts receivable days outstanding was even with the end of
2009, and days of inventory on-hand declined 3 days from the end of 2009. The current ratio was
1.6 at September 30, 2010 and 1.7 at year-end 2009.
On October 1, 2010, Eaton acquired CopperLogic, Inc., a North American manufacturer of electrical
and electromechanical systems. This business had sales of $35 for the year ended August 31, 2010.
On August 25, 2010, Eaton acquired Wright Line Holding, Inc. This U.S. business provides
customized enclosures, rack systems, and air flow management systems to store, power, and secure
mission-critical IT data center electronics. The business had sales of $101 for the year ended June
30, 2010.
On July 15, 2010, Eaton acquired EMC Engineers, Inc. This U.S. business is an energy engineering
and energy services company that delivers energy efficiency solutions for a wide range of
governmental, educational, commercial and industrial facilities. The firm is a leader in
retrofitting and modernizing mechanical, electrical and control systems, as well as energy modeling
and analysis, facility commissioning, and energy savings performance contracting. The business had
sales of $24 for 2009.
In July 2010, the Company increased the quarterly dividend on its common shares by 16%, from $0.50
per share to $0.58 per share.
As of mid-October, Eaton believes its overall end markets will grow 10% for all of 2010, 2
percentage points higher than expectations at the end of the second quarter of 2010, driven by
higher growth in non-U.S. markets.
16
OTHER RESULTS OF OPERATIONS
In 2010 and 2009, Eaton incurred charges related to the integration of acquired businesses. These
charges were recognized as expense as incurred. A summary of these charges follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Electrical Americas |
|
|
|
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
4 |
|
Electrical Rest of World |
|
$ |
6 |
|
|
|
12 |
|
|
|
20 |
|
|
|
38 |
|
Hydraulics |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
Aerospace |
|
|
1 |
|
|
|
4 |
|
|
|
3 |
|
|
|
9 |
|
Automotive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax charges |
|
$ |
7 |
|
|
$ |
19 |
|
|
$ |
25 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax charges |
|
$ |
4 |
|
|
$ |
12 |
|
|
$ |
16 |
|
|
$ |
36 |
|
Per common share |
|
$ |
.03 |
|
|
$ |
.07 |
|
|
$ |
.10 |
|
|
$ |
.21 |
|
Charges in 2010 were related primarily to Moeller and Phoenixtec. Charges in 2009 were related
primarily to Integrated Hydraulics, Kirloskar, Moeller, Phoenixtec and Argo-Tech. These charges
were included in the Statements of Consolidated Income in Cost of products sold or Selling &
administrative expense, as appropriate. In Business Segment Information, the charges reduced
Operating profit of the related business segment.
Eaton took significant actions in 2009 to reduce its workforce in response to the severe economic
downturn. The reductions totaled approximately 17% of the full-time workforce. These actions
resulted in the recognition of severance and pension and other postretirement benefits expense of
$22 in the third quarter of 2009 and $156 in the first nine months of 2009. These charges were
primarily included in the Statements of Consolidated Income in Cost of products sold or Selling &
administrative expense, as appropriate. In Business Segment Information, the charges reduced
Operating profit of the related business segment.
Due to limitations imposed by the Pension Protection Act on pension lump sum distributions, Eatons
U.S. Qualified Pension Plan became restricted in 2009 from making 100% lump sum payments. As a
result, the plan experienced a significant increase in lump sum payments in 2009 before the
limitation went into effect. Total pension settlement expense was $51 in the second quarter of
2009 and $77 in the first nine months of 2009, most of which was attributable to the U.S. pension
plans. A portion of the increase was attributable to the workforce reduction in 2009.
Additionally, as a result of the workforce reduction in 2009, curtailment expense related to
pension plans of $14 was recognized in the second quarter of 2009 and $21 in the first nine months
of 2009. The curtailment expense included recognition of the change in the projected benefit
obligation, as well as recognition of a portion of the unrecognized prior service cost. These
charges were primarily included in the Statements of Consolidated Income in Cost of products sold
or Selling & administrative expense, as appropriate. In Business Segment Information, the charges
were included in Pension & other postretirement benefits expense.
During the third quarter of 2010 and the first nine months of 2010, income tax expense of $36 and
$89, respectively, was recognized (an effective tax rate of 11.7% in the third quarter and 12.0% in
the first nine months of 2010) compared to income tax benefits of $28 and $40 in the third quarter
of 2009 and the first nine months of 2009, respectively (a tax benefit rate of 17.0% in the third
quarter and 30.5% for the first nine months of 2009). Income tax expense for the first nine months
of 2010 included a non-cash, one-time charge of $23 ($0.14 per common share) that was recorded in
the first quarter of 2010 to reflect the impact of the Health Care Reform and Education
Reconciliation Act on taxation associated with Medicare Part D. Without this one-time charge,
income tax expense of $66 (an effective tax rate of 8.9%) would have been recognized in the first
nine months of 2010. Income tax expense for the first nine months of 2010 also reflected a benefit
associated with the successful resolution of international tax audit issues; the recognition of
state and local income tax attributes involving tax loss carryforwards, tax credits and other
temporary differences; the recognition of international tax incentives; and the recognition of
other international tax benefits. Included as an offset to the aforementioned income tax benefits
that lowered the effective income tax rate in the first nine months of 2010 were adjustments
totaling $22 related to an income tax audit of transfer prices for 2005 to 2009. The Company
concluded that the effect of these adjustments was not material to the prior period financial
statements, as well as the projected 2010 financial statements.
17
RESULTS BY BUSINESS SEGMENT
Electrical Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Nine months ended September 30 |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
Increase |
|
|
2010 |
|
2009 |
|
(Decrease) |
|
2010 |
|
2009 |
|
(Decrease) |
Net sales |
|
$ |
967 |
|
|
$ |
843 |
|
|
|
15 |
% |
|
$ |
2,663 |
|
|
$ |
2,583 |
|
|
|
3 |
% |
Operating profit |
|
|
141 |
|
|
|
142 |
|
|
|
(1 |
)% |
|
|
366 |
|
|
|
392 |
|
|
|
(7 |
)% |
Operating margin |
|
|
14.6 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
13.7 |
% |
|
|
15.2 |
% |
|
|
|
|
Acquisition integration charges |
|
$ |
0 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
2 |
|
|
$ |
4 |
|
|
|
|
|
Before acquisition integration charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
141 |
|
|
|
143 |
|
|
|
(1 |
)% |
|
|
368 |
|
|
|
396 |
|
|
|
(7 |
)% |
Operating margin |
|
|
14.6 |
% |
|
|
17.0 |
% |
|
|
|
|
|
|
13.8 |
% |
|
|
15.3 |
% |
|
|
|
|
Sales of the Electrical Americas segment increased 15% in the third quarter of 2010 compared to the
third quarter of 2009. The increase included 12% from core sales, 2% from acquisitions of
businesses and 1% from foreign exchange. End markets for this segment grew 3% during the third
quarter, with good growth in the early- and mid-cycle markets, particularly in power quality and
industrial markets, largely offset by the weakness in the non-residential markets.
Sales in the first nine months of 2010 increased 3% compared to the first nine months of 2009. The
increase included 1% from core sales and 2% from foreign exchange. The increase reflected in
particular strong sales growth in the third quarter of 2010 compared to the third quarter of 2009.
Non-residential end markets declined in the first nine months of 2010, partially offset by growth
in the power quality and industrial businesses. For all of 2010, Eaton anticipates end markets for
this segment will decline by 1%, as the recovery in early- and mid-cycle markets and the benefits
from stimulus programs will have largely offset the decline in the non-residential market.
Operating profit in the third quarter of 2010 was $141 and the operating margin was 14.6%. The
decrease in operating profit before acquisition integration charges from the third quarter of 2009
was largely due to the cessation of temporary cost savings measures introduced in 2009 and changes
in mix, partially offset by savings resulting from the workforce reductions taken in 2009.
Operating profit in the first nine months of 2010 was $366. Excluding acquisition integration
charges of $2 in the first nine months of 2010, operating profit was $368 and the operating margin
was 13.8%. The decrease in operating profit before acquisition integration charges from the first
nine months of 2009 was primarily due to the same factors as in the third quarter of 2010.
On October 1, 2010, Eaton acquired CopperLogic, Inc., a North American manufacturer of electrical
and electromechanical systems. This business had sales of $35 for the year ended August 31, 2010.
On August 25, 2010, Eaton acquired Wright Line Holding, Inc. This U.S. business provides
customized enclosures, rack systems, and air flow management systems to store, power, and secure
mission-critical IT data center electronics. The business had sales of $101 for the year ended June
30, 2010.
On July 15, 2010, Eaton acquired EMC Engineers, Inc. This U.S. business is an energy engineering
and energy services company that delivers energy efficiency solutions for a wide range of
governmental, educational, commercial and industrial facilities. The firm is a leader in
retrofitting and modernizing mechanical, electrical and control systems, as well as energy modeling
and analysis, facility commissioning, and energy savings performance contracting. The business had
sales of $24 for 2009.
Electrical Rest of World
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Nine months ended September 30 |
|
|
2010 |
|
2009 |
|
Increase |
|
2010 |
|
2009 |
|
Increase |
Net sales |
|
$ |
707 |
|
|
$ |
646 |
|
|
|
9 |
% |
|
$ |
1,980 |
|
|
$ |
1,785 |
|
|
|
11 |
% |
Operating profit |
|
|
81 |
|
|
|
45 |
|
|
|
80 |
% |
|
|
183 |
|
|
|
55 |
|
|
|
233 |
% |
Operating margin |
|
|
11.5 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
9.2 |
% |
|
|
3.1 |
% |
|
|
|
|
Acquisition integration charges |
|
$ |
6 |
|
|
$ |
12 |
|
|
|
|
|
|
$ |
20 |
|
|
$ |
38 |
|
|
|
|
|
Before acquisition integration charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
87 |
|
|
|
57 |
|
|
|
53 |
% |
|
|
203 |
|
|
|
93 |
|
|
|
118 |
% |
Operating margin |
|
|
12.3 |
% |
|
|
8.8 |
% |
|
|
|
|
|
|
10.3 |
% |
|
|
5.2 |
% |
|
|
|
|
Sales of the Electrical Rest of World segment increased 9% in the third quarter of 2010 compared to
the third quarter of 2009. The increase included 12% from core sales and 1% from acquisitions of
businesses, partially offset by a 4%
18
decrease from foreign exchange. End markets for this segment grew 9% in the third quarter of 2010
compared to the third quarter of 2009, with European electrical markets up 9% and Asian markets up
10%.
Sales in the first nine months of 2010 increased 11% compared to the first nine months of 2009.
The increase included 10% from core sales and 1% from acquisitions of businesses. The increase was
primarily due to the same factors as in the third quarter of 2010. For all of 2010, Eaton
anticipates end markets for this segment will grow 7%.
Operating profit in the third quarter of 2010 was $81. Excluding acquisition integration charges
of $6 in the third quarter of 2010, operating profit was $87 and the operating margin was 12.3%,
which represents a significant improvement over the second quarter of 2010. The increase in
operating profit before acquisition integration charges from the third quarter of 2009 was largely
due to the increase in sales in the third quarter of 2010 and savings resulting from the workforce
reductions taken in 2009, partially offset by the cessation of temporary cost savings measures
introduced in 2009.
Operating profit in the first nine months of 2010 was $183. Excluding acquisition integration
charges of $20 in the first nine months of 2010, operating profit was $203 and the operating margin
was 10.3%. The increase in operating profit before acquisition integration charges from the first
nine months of 2009 was primarily due to the same factors as in the third quarter of 2010.
Hydraulics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Nine months ended September 30 |
|
|
2010 |
|
2009 |
|
Increase |
|
2010 |
|
2009 |
|
Increase |
Net sales |
|
$ |
583 |
|
|
$ |
418 |
|
|
|
40 |
% |
|
$ |
1,641 |
|
|
$ |
1,273 |
|
|
|
29 |
% |
Operating profit |
|
|
76 |
|
|
|
18 |
|
|
|
322 |
% |
|
|
207 |
|
|
|
38 |
|
|
|
445 |
% |
Operating margin |
|
|
13.0 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
12.6 |
% |
|
|
3.0 |
% |
|
|
|
|
Acquisition integration charges |
|
$ |
0 |
|
|
$ |
2 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
3 |
|
|
|
|
|
Before acquisition integration charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
76 |
|
|
|
20 |
|
|
|
280 |
% |
|
|
207 |
|
|
|
41 |
|
|
|
405 |
% |
Operating margin |
|
|
13.0 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
12.6 |
% |
|
|
3.2 |
% |
|
|
|
|
Sales of the Hydraulics segment increased 40% in the third quarter of 2010 compared to the third
quarter of 2009. The increase was driven by global hydraulics markets that grew 44% in 2010
compared to 2009, with U.S. markets up 58% and non-U.S. markets up 34%.
Sales for the first nine months of 2010 increased 29% compared to the first nine months of 2009.
The increase included 28% from core sales and 1% from foreign exchange. Eaton believes hydraulics
markets will show further improvement in the fourth quarter of 2010, although the rate of growth is
likely to be somewhat lower than in the third quarter of 2010. For all of 2010, Eaton now expects
hydraulics markets to grow 31%.
Operating profit in the third quarter of 2010 was $76 and the operating margin was 13.0%. The
increase in operating profit compared to the third quarter of 2009 was primarily due to the
increase in sales in the third quarter of 2010 and savings resulting from the workforce reductions
taken in 2009.
Operating profit in the first nine months of 2010 was $207 and the operating margin was 12.6%. The
increase in operating profit compared to the first nine months of 2009 was primarily due to the
same factors as in the third quarter of 2010.
In June 2010, Eaton signed a global strategic alliance with Linde Hydraulics of Germany. The
strategic alliance adds important products to Eatons product offerings and capitalizes on the
distribution capabilities of both companies.
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Nine months ended September 30 |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
(Decrease) |
|
2010 |
|
2009 |
|
(Decrease) |
Net sales |
|
$ |
390 |
|
|
$ |
394 |
|
|
|
(1 |
)% |
|
$ |
1,136 |
|
|
$ |
1,221 |
|
|
|
(7 |
)% |
Operating profit |
|
|
60 |
|
|
|
57 |
|
|
|
5 |
% |
|
|
157 |
|
|
|
198 |
|
|
|
(21 |
)% |
Operating margin |
|
|
15.4 |
% |
|
|
14.5 |
% |
|
|
|
|
|
|
13.8 |
% |
|
|
16.2 |
% |
|
|
|
|
Acquisition integration charges |
|
$ |
1 |
|
|
$ |
4 |
|
|
|
|
|
|
$ |
3 |
|
|
$ |
9 |
|
|
|
|
|
Before acquisition integration charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
61 |
|
|
|
61 |
|
|
|
(0 |
)% |
|
|
160 |
|
|
|
207 |
|
|
|
(23 |
)% |
Operating margin |
|
|
15.6 |
% |
|
|
15.5 |
% |
|
|
|
|
|
|
14.1 |
% |
|
|
17.0 |
% |
|
|
|
|
19
Sales of the Aerospace segment decreased 1% in the third quarter of 2010 compared to the third
quarter of 2009. The reduction resulted from lower foreign exchange rates, as core sales were
flat. In the third quarter of 2010, the commercial aerospace aftermarket started to rebound, with
both the U.S. and non-U.S. markets showing modest growth. Eaton estimates aerospace end markets
increased 3% in the third quarter of 2010 compared to the third quarter of 2009, with U.S. markets
increasing 4% and non-U.S. markets increasing 1%.
Sales in the first nine months of 2010 decreased 7% compared to the first nine months of 2009,
driven primarily by a decline in the commercial aerospace market. Eaton expects commercial
aftermarket growth to continue at a modest pace over the balance of 2010. For all of 2010, Eaton is
forecasting that the global aerospace market will decline 1%.
Operating profit in the third quarter of 2010 was $60. Excluding acquisition integration charges
of $1 in the third quarter of 2010, operating profit was $61 and the operating margin was 15.6%.
The increase in operating profit before acquisition integration charges from the third quarter of
2009 was primarily due to the savings resulting from the workforce reductions taken in 2009,
partially offset by the slight decline in sales in the third quarter of 2010.
Operating profit in the first nine months of 2010 was $157. Excluding acquisition integration
charges of $3 in the first nine months of 2010, operating profit was $160 and the operating margin
was 14.1%. The decrease in operating profit before acquisition integration charges from the first
nine months of 2009 was primarily due to the decline in sales for the first nine months of 2010.
On July 14, 2010, Eaton signed a letter of intent to supply cockpit panel assemblies and the
dimming control system for the COMAC C919 single-aisle commercial aircraft program. The total
value of the assemblies and control system is estimated to exceed $425 over the life of the
program, based on an anticipated volume of 2,500 aircraft.
On July 12, 2010, Eaton entered into a joint venture agreement with Shanghai Aircraft Manufacturing
Co., Ltd. (SAMC), a subsidiary of Commercial Aircraft Corporation of China (COMAC), to support the
COMAC C919 single-aisle commercial aircraft program. The joint venture will be based in Shanghai
and will focus on the design, development, manufacturing and support of fuel and hydraulic
conveyance systems for the global civil aviation market. Total program value for C919 conveyance
systems, including aftermarket opportunities, is estimated at $1.8 billion, based on an anticipated
volume of 2,500 aircraft. Eaton will own a 49% interest in the joint venture.
Truck
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Nine months ended September 30 |
|
|
2010 |
|
2009 |
|
Increase |
|
2010 |
|
2009 |
|
Increase |
Net sales |
|
$ |
534 |
|
|
$ |
401 |
|
|
|
33 |
% |
|
$ |
1,479 |
|
|
$ |
1,014 |
|
|
|
46 |
% |
Operating profit (loss) |
|
|
74 |
|
|
|
25 |
|
|
|
196 |
% |
|
|
179 |
|
|
|
(12 |
) |
|
NM |
Operating margin |
|
|
13.9 |
% |
|
|
6.2 |
% |
|
|
|
|
|
|
12.1 |
% |
|
|
(1.2 |
)% |
|
|
|
|
Sales of the Truck segment increased 33% in the third quarter of 2010 from the third quarter of
2009. The increase included 30% from core sales and 3% from foreign exchange. The increase
reflected global end markets that were up 28% in the third quarter of 2010 over the third quarter
of 2009, with U.S. markets up 24% and non-U.S. markets up 31%.
Sales in the first nine months of 2010 increased 46% compared to the first nine months of 2009.
The increase included 39% from core sales and 7% from foreign exchange. The increase was primarily
due to the same factors as in the third quarter of 2010. Eaton expects truck production in the
fourth quarter of 2010 will continue to improve, although at a slower rate that in the third
quarter of 2010. For all of 2010, Eaton anticipates end markets for this segment will grow 26%.
Operating profit in the third quarter of 2010 was $74 and the operating margin was 13.9%. The
increase in operating profit from the third quarter of 2009 was primarily due to the increase in
sales in the third quarter of 2010 and the savings resulting from the workforce reductions taken in
2009.
Operating profit in the first nine months of 2010 was $179 and the operating margin was 12.1%. The
increase in operating profit from the first nine months of 2009 was primarily due to the same
factors as in the third quarter of 2010.
20
Automotive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 |
|
Nine months ended September 30 |
|
|
2010 |
|
2009 |
|
Increase |
|
2010 |
|
2009 |
|
Increase |
Net sales |
|
$ |
390 |
|
|
$ |
326 |
|
|
|
20 |
% |
|
$ |
1,153 |
|
|
$ |
866 |
|
|
|
33 |
% |
Operating profit (loss) |
|
|
39 |
|
|
|
23 |
|
|
|
70 |
% |
|
|
120 |
|
|
|
(42 |
) |
|
NM |
Operating margin |
|
|
10.0 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
10.4 |
% |
|
|
(4.9 |
)% |
|
|
|
|
Acquisition integration charges |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
$ |
0 |
|
|
$ |
1 |
|
|
|
|
|
Before acquisition integration
charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
39 |
|
|
|
23 |
|
|
|
70 |
% |
|
|
120 |
|
|
|
(41 |
) |
|
NM |
Operating margin |
|
|
10.0 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
10.4 |
% |
|
|
(4.7 |
)% |
|
|
|
|
Sales of the Automotive segment increased 20% in the third quarter of 2010 from the third quarter
of 2009. The increase included 21% from core sales, partially offset by a 1% decrease from foreign
exchange. The increase reflected global automotive markets that grew 14% in the third quarter of
2010 compared to the third quarter of 2009, with U.S. markets up 27% and non-U.S. markets up 8%.
Sales in the first nine months of 2010 increased 33% compared to the first nine months of 2009. The
increase in sales included 32% from core sales and 1% from foreign exchange. The increase was
primarily due to the same factors as in the third quarter of 2010. For all of 2010, Eaton
estimates global automotive markets will grow by 24%.
Operating profit in the third quarter of 2010 was $39, an increase of 70% compared to the third
quarter of 2009 and the operating margin was 10.0% . The increase in operating profit from the
third quarter of 2009 was primarily due to the increase in sales in the third quarter of 2010 and
the savings resulting from the workforce reductions taken in 2009.
Operating profit in the first nine months of 2010 was $120 and the operating margin was 10.4%. The
increase in operating profit from the first nine months of 2009 was primarily due to the same
factors as in the third quarter of 2010.
Corporate
Corporate pension & other postretirement benefits expense was $30 and $91 in the third quarter and
the first nine months of 2010, respectively, compared to $36 and $175 for the same periods of 2009.
The declines were primarily due to decreased pension curtailment and lump sum settlement losses
recognized in 2010 compared to 2009, and charges related to the workforce reduction in 2009. Due
to limitations imposed by the Pension Protection Act on pension lump sum distributions, Eatons
U.S. Qualified Pension Plan became restricted in 2009 from making 100% lump sum payments. As a
result, the plan experienced a significant increase in lump sum payments in 2009 before the
limitation went into effect. Total pension settlement expense was $51 in the second quarter of
2009 and $77 in the first nine months of 2009, most of which was attributable to the U.S. pension
plans. A portion of the increase was attributable to the workforce reduction in 2009.
Additionally, as a result of the workforce reduction in 2009, curtailment expense related to
pension plans of $14 was recognized in the second quarter of 2009 and $21 in the first nine months
of 2009.
Other corporate expense-net of $55 in the third quarter of 2010 and $133 in the first nine months
of 2010 increased from $21 and $59 in the same periods in 2009,
respectively. The increases were primarily due to an increase in
costs to support accelerating global growth, as well as the
reinstatement of corporate costs, including compensation and employee
benefits, which had been reduced in 2009 due to the economic
recession.
CHANGES IN FINANCIAL CONDITION DURING 2010
Cash Flow & Working Capital
Cash flow provided by operating activities, including working capital management, and existing cash
and short-term investments are Eatons primary sources of liquidity. Net cash provided by
operating activities was $727 in the first nine months of 2010, a decrease of $176 compared to net
cash provided by operating activities of $903 in the first nine months of 2009. Operating cash
flows in 2010 reflected higher net income in the first nine months of 2010 of $654, before
adjusting for noncontrolling interests, compared to $173 in the first nine months of 2009. Cash
provided by operating activities in the first nine months of 2010 was lowered by contributions to
pension plans of $378 compared to $209 in the first nine months of 2009, and a use of cash of $70
resulting from an increase in funding of working capital in the first nine months of 2010 compared
to a decrease of $553 in working capital in the first nine months of 2009. The increase in working
capital funding in the first nine months of 2010, primarily accounts receivable and inventory, was
due to higher levels of operations in 2010 resulting from the global economic recovery.
Net working capital of $2,040 at September 30, 2010 increased by $205 from $1,835 at the end of
2009. The increase was primarily due to a net increase in cash and short-term investments,
accounts receivable and inventory due to
higher levels of operations resulting from the global economic recovery, partially offset by
related increases in accounts payable and other current liabilities. Cash and short-term
investments totaled $888 at September 30, 2010, an
21
increase of $115 from $773 at December 31, 2009.
Accounts receivable days outstanding was even with the end of 2009, and days of inventory on-hand
declined 3 days from the end of 2009. The current ratio was 1.6 at September 30, 2010 and 1.7 at
year-end 2009.
Debt & Equity
Total debt of $3,504 at September 30, 2010 increased by $37 from $3,467 at December 31, 2009. The
increase was primarily due to an increase in long-term debt of $57, partially offset by a $20
reduction of short-term debt. Short-term debt was reduced through the use of cash generated from
operations. The net-debt-to-capital ratio was 26.6% at September 30, 2010 compared to 28.4% at the
end of 2009, reflecting the combined effect of the $37 increase in total debt, the $430 increase in
Eaton shareholders equity and the $115 increase in cash and short-term investments. The increase
in equity primarily resulted from net income of $649, partially offset by cash dividends paid of
$265.
In July 2010, the Company increased the quarterly dividend on its common shares by 16%, from $0.50
per share to $0.58 per share.
Eaton continues to generate strong operating cash flow. Over the course of a quarter, cash,
short-term investments and short-term debt may fluctuate in order to manage global liquidity. The
Company maintains ready access to the commercial paper markets and $1.5 billion of existing credit
facilities. 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.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the table of contractual obligations presented on page 66
and 67 of Eatons Annual Report on Form 10-K for the year ended December 31, 2009.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning the performance in 2010 of
Eatons worldwide end markets. 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 Eatons 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 companys business segments; unanticipated downturns
in business relationships with customers or their purchases from the company; competitive pressures
on sales and pricing; increases in the cost of material, energy 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; the impact of acquisitions, divestitures, and joint ventures;
new laws and governmental regulations; interest rate changes; stock market 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.
ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in market risk presented on page 66 of Eatons Annual Report on
Form 10-K for the year ended December 31, 2009.
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 Eatons management, including
Alexander M. Cutler Chairman, Chief Executive Officer and President; and Richard H. Fearon
Vice Chairman and Chief Financial and Planning
Officer, of the effectiveness of the design and operation of Eatons disclosure controls and
procedures. Based on that evaluation, management concluded that Eatons disclosure controls and
procedures were effective as of September 30, 2010.
Disclosure controls and procedures are designed to ensure that information required to be disclosed
in Eatons reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in Eatons
reports filed under the Exchange Act is accumulated and communicated to management, including
Eatons Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
22
During the third quarter of 2010, there was no change in Eatons internal control over financial
reporting that materially affected, or is reasonably likely to materially affect, Eatons internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS.
Exhibits See Exhibit Index attached.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
EATON CORPORATION
|
|
|
|
|
Registrant |
|
|
|
|
|
|
|
Date: October 29, 2010
|
|
/s/ Richard H. Fearon
|
|
|
|
|
Richard H. Fearon |
|
|
|
|
Vice Chairman and Chief Financial and Planning Officer |
|
|
24
Eaton Corporation
Third Quarter 2010 Report on Form 10-Q
Exhibit Index
|
|
|
3 (a)
|
|
Amended Articles of Incorporation (amended and restated as of April 24, 2008) Incorporated by
reference to the Form 10-Q Report for the three months ended March 31, 2008 |
|
|
|
3 (b)
|
|
Amended Regulations (amended and restated as of April 23, 2008) Incorporated by reference to
the Form 8-K Report filed February 24, 2010 |
|
|
|
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 |
|
|
|
12
|
|
Ratio of Earnings to Fixed Charges Filed in conjunction with this Form 10-Q Report * |
|
|
|
31.1
|
|
Certification of Chief Executive Officer (Pursuant to Rule 13a-14(a)) Filed in conjunction with |
|
|
this Form 10-Q Report * |
|
|
|
31.2
|
|
Certification of Chief Financial Officer (Pursuant to Rule 13a-14(a)) Filed in conjunction with |
|
|
this Form 10-Q Report * |
|
|
|
32.1
|
|
Certification of Chief 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 * |
|
|
|
32.2
|
|
Certification of Chief 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 * |
|
|
|
101.INS
|
|
XBRL Instance Document * |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document * |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document * |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document * |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document * |
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document* |
|
|
|
* |
|
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 quarters ended September 30,
2010 and 2009, (ii) Consolidated Statements of Income for the nine months ended September 30, 2010
and 2009, (iii) Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009,
(iv) Condensed Statements of Consolidated Cash Flows for the nine months ended September 30, 2010
and 2009 and (v) Notes to Condensed Consolidated Financial Statements for the nine months ended
September 30, 2010.
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.
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