ETN 12.31.2011 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 2011
Commission file number 1-1396
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EATON CORPORATION |
(Exact name of registrant as specified in its charter) |
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Ohio | | 34-0196300 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
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Eaton Center, Cleveland, Ohio | | 44114-2584 |
(Address of principal executive offices) | | (Zip code) |
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| | | (216) 523-5000 | | | |
| | | (Registrant's telephone number, including area code) | | | |
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| Securities registered pursuant to Section 12(b) of the Act: | |
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Title of each class | | Name of each exchange on which registered |
Common Share ($0.50 par value) | | The New York Stock Exchange |
| | | | | | | The Chicago Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2011 was $17.5 billion.
As of January 31, 2012, there were 334.7 million Common Shares outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2012 annual shareholders meeting are incorporated by reference into Part III.
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Part I
Item 1. Business.
Eaton Corporation (Eaton or Company) is a diversified power management company with 2011 net sales of $16.0 billion. The Company 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 73,000 employees in over 50 countries and sells products to customers in more than 150 countries.
Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy and information statements, as well as any amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the Company's Internet website at http://www.eaton.com. These filings are also accessible on the SEC's Internet website at http://www.sec.gov.
In 2011, Eaton acquired businesses and entered into a joint venture in separate transactions for combined net cash purchase prices of $325 million. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions are summarized below:
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Acquired businesses and joint venture | | Date of transaction | | Business segment | | Annual sales (in millions) |
E.A. Pedersen Company | | December 29,
2011 | | Electrical
Americas | | $37 for 2011 |
A United States manufacturer of medium voltage switchgear, metal-clad switchgear, power control buildings and relay control panels primarily for the electrical utilities industry. | | | |
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IE Power, Inc. | | August 31,
2011 | | Electrical
Americas | | $5 for 2010 |
A Canadian provider of high power inverters for a variety of mission-critical applications including solar, wind and battery energy storage. | | | |
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E. Begerow GmbH & Co. KG | | August 15,
2011 | | Hydraulics | | $84 for 2010 |
A German system provider of advanced liquid filtration solutions. This business develops and produces technologically innovative filter media and filtration systems for food and beverage, chemical, pharmaceutical and industrial applications. | | | |
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ACTOM Low Voltage | | June 30,
2011 | | Electrical
Rest of World | | $65 for the
year ended
May 31,
2011 |
A South African manufacturer and supplier of motor control components, engineered electrical distribution systems and uninterruptible power supply (UPS) systems. | | | |
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C.I. ESI de Colombia S.A. | | June 2,
2011 | | Electrical
Americas | | $8 for 2010 |
A Colombian distributor of industrial electrical equipment and engineering services in the Colombian market, focused on oil and gas, mining, and industrial and commercial construction. | | | |
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Internormen Technology Group | | May 12,
2011 | | Hydraulics | | $55 for 2010 |
A Germany-based manufacturer of hydraulic filtration and instrumentation with sales and distribution subsidiaries in China, the United States, India and Brazil. | | | |
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Eaton-SAMC (Shanghai) Aircraft Conveyance System Manufacturing
Co., Ltd. | | March 8,
2011 | | Aerospace | | Joint venture |
A 49%-owned joint venture in China focusing on the design, development, manufacturing and support of fuel and hydraulic conveyance systems for the global civil aviation market. | | | |
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Tuthill Coupling Group | | January 1,
2011 | | Hydraulics | | $35 for the
year ended
November 30,
2010 |
A United States based manufacturer of pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications. | | | |
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On February 20, 2012, Eaton reached an agreement to acquire Polimer Kaucuk Sanayi ve Pazarlama A.S., a Turkish manufacturer of hydraulic and industrial hose. This business sells its products under the SEL brand name and had sales of $335 for 2011. The acquisition is expected to close early in the second quarter of 2012 and will be included in the Hydraulics segment. The terms of the agreement are subject to customary closing conditions.
Eaton's acquired businesses and joint venture entered into for 2010 and 2009 are presented in Note 2 of the Notes to the Consolidated Financial Statements.
Business Segment Information
Information by business segment and geographic region regarding principal products, principal markets, methods of distribution, net sales, operating profit and assets is presented in Note 14 of the Notes to the Consolidated Financial Statements on pages 50 through 54. Additional information regarding Eaton's segments and business is presented below.
Electrical Americas and Electrical Rest of World
Principal methods of competition in these segments are performance of products and systems, technology, customer service and support, and price. Eaton has a strong competitive position in these segments and, with respect to many products, is considered among the market leaders. In normal economic cycles, sales of these segments are historically lower in the first quarter and higher in the third and fourth quarters of a year. In 2011, one large distributor of electrical products represented 12% of the sales of the Electrical Americas segment.
Hydraulics
Principal methods of competition in this segment are product performance, geographic coverage, service and price. Eaton has a strong competitive position in this segment and, with respect to many products, is considered among the market leaders. Sales of this segment are historically higher in the first and second quarters and lower in the third and fourth quarters of the year.
Aerospace
Principal methods of competition in this segment are total cost of ownership, product and system performance, quality, design engineering capabilities and timely delivery. Eaton has a strong competitive position in this segment and, with respect to many products and platforms, is considered among the market leaders. In 2011, 11% of this segment's sales were made to one large manufacturer of aircraft.
Truck
Principal methods of competition in this segment are product performance, global service, and price. Eaton has a strong competitive position in this segment and, with respect to many products, is considered among the market leaders. In 2011, 66% of this segment's sales were made to five large manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles.
Automotive
Principal methods of competition in this segment are product performance, global service, and price. Eaton has a strong competitive position in this segment and, with respect to many products, is considered among the market leaders. Sales of this segment historically are slightly lower in the third quarter of the year as a result of the normal seasonal pattern of automotive industry production. In 2011, 58% of this segment's sales were made to six large manufacturers of vehicles and related components.
Information Concerning Eaton's Business in General
Raw Materials
Eaton's major requirements for raw materials include iron, steel, copper, nickel, aluminum, brass, silver, lead, molybdenum, titanium, vanadium, rubber, plastic, electronic components, and insulating materials. Materials are purchased in various forms, such as extrusions, castings, powder metal, metal sheets and strips, forging billets, bar stock and plastic pellets. Raw materials, as well as parts and other components, are purchased from many suppliers and, under normal circumstances, the Company has no difficulty obtaining them. In 2011, prices increased throughout the year for certain raw materials purchased by Eaton. These price increases were managed through a variety of cost reduction projects and customer price increases. Eaton maintained appropriate levels of inventory to prevent basic shortages and did not experience any availability constraints in 2011.
Patents and Trademarks
Eaton considers its tradename and trademark to be of significant value to its business as a whole. The Company's products are marketed under a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. Eaton develops and acquires new intellectual property on an ongoing basis and considers all of its intellectual property to be valuable. Based on the broad scope of the Company's product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on Eaton's consolidated financial statements or its business segments. The Company's policy is to file applications and obtain patents for the great majority of its new products including product modifications and improvements.
Order Backlog
Since a significant portion of open orders placed with Eaton by original equipment manufacturers of trucks, off-highway vehicles and passenger cars are historically subject to month-to-month releases by customers during each model year, these orders are not considered firm. In measuring backlog orders, only the amount of orders to which customers are firmly committed are included. Using this criterion, total backlog at December 31, 2011 and 2010 was approximately $3.8 billion and $3.2 billion, respectively. Backlog should not be relied upon as being indicative of results of operations for future periods.
Research and Development
Research and development expenses for new products and improvement of existing products in 2011, 2010 and 2009 were $417 million, $425 million and $395 million, respectively. Over the past five years, the Company has invested approximately $2.0 billion in research and development.
Environmental Contingencies
Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. Eaton continues to modify certain processes on an ongoing, regular basis in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in, and wastes generated from, operations. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, are not expected to have a material adverse effect upon earnings or the competitive position of the Company. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for 2012 and 2013. Information regarding the Company's liabilities related to environmental matters is presented in Note 7 of the Notes to the Consolidated Financial Statements on page 37.
Foreign Operations
Financial information related to Eaton's foreign operations is presented in Note 14 of the Notes to the Consolidated Financial Statements on page 54. Information regarding risks that may affect foreign operations is presented in Item 1A of this Form 10-K Report.
Item 1A. Risk Factors.
Among the risks that could materially adversely affect Eaton's businesses, financial condition or results of operations are the following:
Volatility of end markets that Eaton serves.
Eaton's segment revenues, operating results and profitability have varied in the past and may vary from quarter to quarter in the future. Profitability can be negatively impacted by volatility in the end markets that Eaton serves. The Company has undertaken measures to reduce the impact of this volatility through diversification of markets it serves and expansion of geographic regions in which it operates. Future downturns in any of the markets could adversely affect revenues, operating results and profitability.
Eaton's operating results depend in part on continued successful research, development and marketing of new and/or improved products and services, and there can be no assurance that Eaton will continue to successfully introduce new products and services.
The success of new and improved products and services depends on their initial and continued acceptance by Eaton's customers. The Company's businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience difficulties or delays in the research, development, production or marketing of new products and services which may prevent Eaton from recouping or realizing a return on the investments required to bring new products and services to market.
Eaton's ability to attract, develop and retain executives and other qualified employees is crucial to the Company's results of operations and future growth.
Eaton depends on the continued services and performance of key executives, senior management and skilled personnel, particularly our professionals with experience in our industry and business. Eaton cannot be certain that any of these individuals will continue to be employed. A lengthy period of time is required to hire and develop replacement personnel when skilled personnel depart the Company. An inability to hire, develop and retain a sufficient number of qualified employees could materially hinder the business by, for example, delaying Eaton's ability to bring new products to market or impairing the success of the Company's operations.
Eaton's operations depend on production facilities throughout the world, many of which are located outside the United States and are subject to greater risks of disrupted production.
Eaton manages businesses with manufacturing facilities worldwide. In the last five years, the Company's operations outside the United States have increased significantly in relative size in comparison to its total operations. The Company's manufacturing facilities and operations could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity or public health concerns. Some of Eaton's non-United States manufacturing facilities also may be more susceptible to economic and political upheaval than United States facilities. Any such disruption could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately compensate for losses.
If Eaton is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, operations could be disrupted or data confidentiality lost.
Eaton relies on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, or computer viruses. In addition, security breaches could result in unauthorized disclosure of confidential information. If these information technology systems suffer severe damage, disruption or shutdown and business continuity plans do not effectively resolve the issues in a timely manner, there could be a negative impact on operating results or the Company may suffer financial or reputational damage.
Eaton's substantial foreign sales subject it to economic risk as Eaton's results of operations may be adversely affected by changes in local government regulations and policies and foreign currency fluctuations.
As noted above in Item 1 “Foreign Operations”, a significant portion of Eaton's sales are to customers outside the United States, and the Company expects sales in foreign markets to continue to represent a significant portion of its total sales. Foreign sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, exchange controls and repatriation of earnings. Changes in the relative values of currencies occur from time to time and could affect Eaton's operating results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through hedging activities, these risks could adversely affect operating results.
Eaton may be subject to risks relating to changes in its tax rates or exposure to additional income tax liabilities.
Eaton is subject to income taxes in the United States and various non-United States jurisdictions. Domestic and international liabilities are subject to the allocation of income among various tax jurisdictions. The Company's effective tax rate could be affected by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or changes in tax laws. The amount of income taxes paid is subject to ongoing audits by United States federal, state and local tax authorities and by non-United States tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to the Company's tax liabilities.
Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases, or supplier insolvencies could increase operating costs and adversely impact the competitive positions of Eaton's products.
Eaton's major requirements for raw materials are described above in Item 1 “Raw Materials”. Significant shortages could affect the prices Eaton's businesses are charged and the competitive position of their products and services, all of which could adversely affect operating results.
Further, Eaton's suppliers of component parts may increase their prices in response to increases in costs of raw materials that they use to manufacture component parts. As a result, the Company may not be able to increase its prices commensurately with its increased costs. Consequently, operating results could be materially and adversely affected.
Finally, while Eaton carefully monitors the viability of each of its suppliers, the recent global economic downturn has had an adverse impact on Eaton's suppliers' liquidity and solvency. Should one or more material suppliers become insolvent, Eaton could be required to pay increased prices for affected raw materials or components, or experience difficulty in replacing the insolvent supplier, either of which could adversely affect operating results.
Eaton engages in acquisitions and joint ventures, and may encounter unexpected difficulties identifying, pricing or integrating those businesses.
Eaton seeks to grow, in part, through strategic acquisitions and joint ventures, which are intended to complement or expand the Company's businesses, and expects to continue to do so in the future. The success of this strategy will depend on Eaton's ability to identify, price, finance and complete these transactions or arrangements. Success will also depend on the Company's ability to integrate the businesses acquired in these transactions and to develop satisfactory working arrangements with the Company's strategic partners in the joint ventures. Eaton may encounter unexpected difficulties in completing and integrating acquisitions with Eaton's existing operations, and in managing strategic investments. Furthermore, the Company may not realize the degree, or timing, of benefits anticipated when it first entered into a transaction. Any of the foregoing could adversely affect the Company's business and operating results.
Eaton may be unable to adequately protect its intellectual property rights, which could affect the Company's ability to compete.
Protecting Eaton's intellectual property rights is critical to its ability to compete and succeed. The Company owns a large number of United States and foreign patents and patent applications, as well as trademark and copyright registrations that are necessary, and contribute significantly, to the preservation of Eaton's competitive position in various markets. Although management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments, there can be no assurance that any one, or more, of these patents and other intellectual property will not be challenged, invalidated or circumvented by third parties. Eaton enters into confidentiality and invention assignment agreements with the Company's employees, and into non-disclosure agreements with suppliers and appropriate customers so as to limit access to and disclosure of proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies. Moreover, the protection provided to Eaton's intellectual property by the laws and courts of foreign nations may not be as advantageous as remedies available under United States law.
Eaton is subject to litigation and environmental regulations that could adversely impact Eaton's businesses.
At any given time, Eaton may be subject to litigation, the disposition of which may have a material adverse effect on the Company's businesses, financial condition or results of operations. Information regarding current legal proceedings is presented in Note 7 of the Notes to the Consolidated Financial Statements on page 36.
Eaton participates in markets that are competitive and Eaton's results could be adversely impacted by competitors' actions.
Eaton's businesses operate in competitive markets. The Company competes against other global manufacturers and service providers on the basis of product performance, quality and price, in addition to other factors. While Eaton's product development and quality initiatives have been competitive strengths in the past, actions by Eaton's competitors could lead to downward pressure on prices and/or a decline in the Company's market share, either of which could adversely affect operating results.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 219 locations in 34 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment, none of which is material to its operations. Management believes that the existing manufacturing facilities are adequate for operations and that the facilities are maintained in good condition.
Item 3. Legal Proceedings.
Information regarding the Company's current legal proceedings is presented in Note 7 of the Notes to the Consolidated Financial Statements on page 36.
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of the Registrant
Information regarding executive officers of the Company is presented in Item 10 of this Form 10-K Report.
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's common shares are listed for trading on the New York and Chicago stock exchanges. Information regarding cash dividends paid, and the high and low market price per common share, for each quarter in 2011 and 2010 is presented in “Quarterly Data” on page 68. At December 31, 2011, there were 8,191 holders of record of the Company's common shares. Additionally, 18,220 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP), and the Eaton Puerto Rico Retirement Savings Plan.
Information regarding equity-based compensation plans required by Regulation S-K Item 201(d) is provided in Item 12 of this Form 10-K Report.
Item 6. Selected Financial Data.
Information regarding selected financial data is presented in the “Ten-Year Consolidated Financial Summary” on page 69.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
“Management's Discussion and Analysis of Financial Condition and Results of Operations” is presented on pages 55 through 67.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Information regarding market risk is presented in “Market Risk Disclosure” on pages 65 through 66.
Item 8. Financial Statements and Supplementary Data.
The report of the independent registered public accounting firm, consolidated financial statements, and notes to consolidated financial statements are presented on pages 15 through 54.
Information regarding selected quarterly financial information for 2011 and 2010 is presented in “Quarterly Data” on page 68.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton's management, including Alexander M. Cutler - Chairman and Chief Executive Officer; President; and Richard H. Fearon - Vice Chairman and Chief Financial and Planning Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, Eaton's management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2011.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, Eaton has included a report of management's assessment of the effectiveness of internal control over financial reporting, which is presented on page 18.
“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of December 31, 2011 is presented on page 17.
During the fourth quarter of 2011, there was no change in Eaton's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
Item 9B. Other Information.
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required with respect to the directors of the Company is set forth under the caption “Election of Directors” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
A listing of the Company's executive officers, their ages, positions and offices held over the past five years, as of February 1, 2012, follows:
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Name | | Age | | Position (Date elected to position) |
Alexander M. Cutler | | 60 | | Chairman and Chief Executive Officer; President (August 1, 2000 - present) |
| | | | Director (September 22, 1993 - present) |
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Richard H. Fearon | | 55 | | Vice Chairman and Chief Financial and Planning Officer (April 24, 2002 - present) |
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Craig Arnold | | 51 | | Vice Chairman and Chief Operating Officer - Industrial Sector (February 1, 2009 - present) |
| | | | Chief Executive Officer - Fluid Power Group (October 25, 2000 - January 31, 2009) |
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Thomas S. Gross | | 57 | | Vice Chairman and Chief Operating Officer - Electrical Sector (February 1, 2009 - present) |
| | | | President - Power Quality and Control Business (April 1, 2008 - January 31, 2009) |
| | | | Vice President and President - Power Quality Solutions Operations |
| | | | (May 16, 2005 – March 31, 2008) |
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James W. McGill | | 56 | | Executive Vice President - Chief Human Resources Officer (January 1, 2010 - present) |
| | | | President - Asia-Pacific Region (April 1, 2008 - December 31, 2009) |
| | | | Vice President - Asia-Pacific (April 1, 2006 - March 31, 2008) |
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Mark M. McGuire | | 54 | | Executive Vice President and General Counsel (December 1, 2005 - present) |
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Name | | Age | | Position (Date elected to position) |
Thomas E. Moran | | 47 | | Senior Vice President and Secretary (October 1, 2008 - present) |
| | | | Assistant Secretary and Managing Counsel, The Dow Chemical Company (2002 - 2008) |
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Billie K. Rawot | | 60 | | Senior Vice President and Controller (March 1, 1991 - present) |
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David B. Foster | | 40 | | Senior Vice President - Corporate Development and Treasury (August 1, 2011 - present) |
| | | | Vice President of Finance - Asia Pacific (June 1, 2008 - July 31, 2011) |
| | | | Director of Finance - Automotive Group Engine Air Management Operations |
| | | | (January 1, 2006 - May 31, 2008) |
There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors.
Information required with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
The Company has adopted a Code of Ethics, which applies to the directors, officers and employees worldwide. This document is available on the Company's website at http://www.eaton.com.
There were no changes during the fourth quarter 2011 to the procedures by which security holders may recommend nominees to the Company's Board of Directors.
Information related to the Audit Committee, and members of the Committee that are financial experts, is set forth under the caption “Board Committees - Audit Committee” in the definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Item 11. Executive Compensation.
Information required with respect to executive compensation is set forth under the caption “Executive Compensation” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required with respect to securities authorized for issuance under equity-based compensation plans is set forth under the caption “Equity Compensation Plans” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Information required with respect to security ownership of certain beneficial owners, is set forth under the caption “Share Ownership Tables” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required with respect to certain relationships and related transactions is set forth under the caption “Review of Related Person Transactions” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Information required with respect to director independence is set forth under the caption “Director Independence” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Item 14. Principal Accounting Fees and Services.
Information required with respect to principal accountant fees and services is set forth under the caption “Audit Committee Report” in the Company's definitive Proxy Statement to be filed on or about March 16, 2012, and is incorporated by reference.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
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(a) | (1) The report of the independent registered public accounting firm, consolidated financial statements and notes to consolidated financial statements are included in Item 8 above: |
Report of Independent Registered Public Accounting Firm - Page 15
Consolidated Statements of Income - Years ended December 31, 2011, 2010 and 2009 - Page 19
Consolidated Balance Sheets - December 31, 2011 and 2010 - Page 20
Consolidated Statements of Cash Flows - Years ended December 31, 2011, 2010 and 2009 - Page 21
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2011, 2010 and 2009 - Page 22
Notes to Consolidated Financial Statements - Pages 23 through 54
All other schedules for which provision is made in Regulation S-X of the SEC are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
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3 (i) | Amended Articles of Incorporation (amended and restated as of April 27, 2011) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2011 |
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3 (ii) | Amended Regulations (amended and restated as of April 27, 2011) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2011 |
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4 (a) | Pursuant to Regulation S-K Item 601(b) (4), the Company agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt |
| |
(a) | Senior Executive Incentive Compensation Plan (effective January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008 |
| |
(b) | Executive Incentive Compensation Plan (effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2005 |
| |
(c) | 2005 Non-Employee Director Fee Deferral Plan (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(d) | Deferred Incentive Compensation Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(e) | Excess Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(f) | Incentive Compensation Deferral Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(g) | Limited Eaton Service Supplemental Retirement Income Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(h) | Supplemental Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(i) | Form of Restricted Share Unit Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(j) | Form of Restricted Share Unit Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(k) | Form of Restricted Share Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(l) | Form of Restricted Share Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(m) | Form of Restricted Share Agreement (Non-Employee Directors) - Incorporated by reference to the Form 8-K Report filed February 1, 2010 |
| |
(n) | Form of Stock Option Agreement for Executives (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(o) | Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 |
| |
(p) | Form of Stock Option Agreement for Non-Employee Directors (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(q) | 2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002 |
| |
(r) | 2004 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 19, 2004 |
| |
(s) | 2008 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008 |
| |
(t) | 2009 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 2009 |
| |
(u) | Plan for the Deferred Payment of Directors' Fees (originally adopted in 1985 and amended effective September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004 and, in certain respects, January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(v) | 1996 Non-Employee Director Fee Deferral Plan (amended and restated effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006 |
| |
(w) | Form of Change of Control Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008 |
| |
(x) | Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(y) | Form of Indemnification Agreement entered into with directors of Eaton Corporation - Incorporated by reference to the Form 8-K Report filed January 26, 2007 |
| |
(z) | Executive Strategic Incentive Plan (amended and restated January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008 |
| |
(aa) | Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(bb) | Supplemental Executive Strategic Incentive Plan (effective as of June 25, 2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008 |
| |
(cc) | Deferred Incentive Compensation Plan (amended and restated effective November 1, 2007) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2009 |
| |
(dd) | 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998 |
| |
(ee) | Incentive Compensation Deferral Plan (amended and restated October 1, 1997) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000 |
| |
(ff) | Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(gg) | Trust Agreement - Non-employee Directors (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(hh) | Group Replacement Insurance Plan (GRIP) (effective June 1, 1992) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 1992 |
| |
(ii) | 1991 Stock Option Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(jj) | Excess Benefits Plan (amended and restated effective January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(kk) | Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002 |
| |
(ll) | Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other Equity Grants upon the Restatement of Financial Results - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007 |
| |
(mm) | Amended and Restated Grantor Trust Agreement for Non-Employee Directors' Deferred Fees Plans - effective January 1, 2010 - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2010 |
| |
(nn) | Amended and Restated Grantor Trust Agreement for Employees' Deferred Compensation Plans - effective January 1, 2010 - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2010 |
| |
12 | Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report * |
| |
14 | Code of Ethics - Incorporated by reference to the definitive Proxy Statement filed on March 14, 2008 |
| |
21 | Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K Report * |
| |
23 | Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report * |
| |
24 | Power of Attorney - Filed in conjunction with this Form 10-K Report * |
| |
31.1 | Certification of Chief Executive Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report * |
| |
31.2 | Certification of Chief Financial Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report * |
| |
32.1 | Certification of Chief Executive Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report * |
| |
32.2 | Certification of Chief Financial Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report * |
| |
101.INS | XBRL Instance Document * |
| |
101.SCH | XBRL Taxonomy Extension Schema Document * |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document * |
| |
101.PRE | XBRL Taxonomy Extension Presentation 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 years ended December 31, 2011, 2010 and 2009, (ii) Consolidated Balance Sheets at December 31, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009, (iv) Notes to Consolidated Financial Statements for the year ended December 31, 2011.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K 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.
Certain exhibits required by this portion of Item 15 are filed as a separate section of this Form 10-K Report.
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: | February 24, 2012 | By: | /s/ Richard H. Fearon |
| | | Richard H. Fearon |
| | | Vice Chairman and Chief Financial and Planning Officer |
| | | (On behalf of the registrant and as Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date: February 24, 2012
|
| | | | | | |
Signature | | Title | | | | |
| | | | | | |
* | | | | | | |
Alexander M. Cutler | | Chairman and Chief Executive Officer; President; Principal Executive Officer; Director | | | | |
| | | | | | |
* | | | | | | |
Billie K. Rawot | | Senior Vice President and Controller; Principal Accounting Officer | | | | |
| | | | | | |
* | | | | * | | |
Todd M. Bluedorn | | Director | | Christopher M. Connor | | Director |
| | | | | | |
* | | | | * | | |
Michael J. Critelli | | Director | | Charles E. Golden | | Director |
| | | | | | |
* | | | | * | | |
Arthur E. Johnson | | Director | | Ned C. Lautenbach | | Director |
| | | | | | |
* | | | | * | | |
Deborah L. McCoy | | Director | | Gregory R. Page | | Director |
| | | | | | |
* | | | | | | |
Gary L. Tooker | | Director | | | | |
|
| | |
*By | | /s/ Richard H. Fearon |
| | Richard H. Fearon, Attorney-in-Fact for the officers and directors signing in the capacities indicated |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton Corporation as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eaton Corporation at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eaton Corporation's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 24, 2012
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
We have prepared the accompanying consolidated financial statements and related information of Eaton Corporation included herein for the three years ended December 31, 2011. The primary responsibility for the integrity of the financial information included in this annual report rests with management. The financial information included in this annual report has been prepared in accordance with accounting principles generally accepted in the United States based on our best estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, Eaton's independent registered public accounting firm, on those financial statements is included herein.
Eaton has high standards of ethical business practices supported by the Eaton Code of Ethics and corporate policies. Careful attention is given to selecting, training and developing personnel, to ensure that management's objectives of establishing and maintaining adequate internal controls and unbiased, uniform reporting standards are attained. Our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with the Company's commitment to a high standard of business conduct.
The Board of Directors pursues its responsibility for the quality of Eaton's financial reporting primarily through its Audit Committee, which is composed of five independent directors. The Audit Committee meets regularly with management, the internal auditors and the independent registered public accounting firm to ensure that they are meeting their responsibilities and to discuss matters concerning accounting, control, audits and financial reporting. The internal auditors and independent registered public accounting firm have full and free access to senior management and the Audit Committee.
|
| | | | |
/s/ Alexander M. Cutler | | /s/ Richard H. Fearon | | /s/ Billie K. Rawot |
Chairman and Chief Executive Officer; President | | Vice Chairman and Chief Financial and Planning Officer | | Senior Vice President and Controller |
| | | | |
February 24, 2012 | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Eaton Corporation
We have audited Eaton Corporation's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Eaton Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Eaton Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Eaton Corporation as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated February 24, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 24, 2012
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Eaton Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act rules 13a-15(f)).
Under the supervision and with the participation of Eaton's management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2011. In conducting this evaluation, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on this evaluation under the framework referred to above, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2011.
The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2011. This report is included herein.
|
| | | | |
/s/ Alexander M. Cutler | | /s/ Richard H. Fearon | | /s/ Billie K. Rawot |
Chairman and Chief Executive Officer; President | | Vice Chairman and Chief Financial and Planning Officer | | Senior Vice President and Controller |
| | | | |
February 24, 2012 | | | | |
EATON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| Year ended December 31 |
(In millions except for per share data) | 2011 | | 2010 | | 2009 |
Net sales | $ | 16,049 |
| | $ | 13,715 |
| | $ | 11,873 |
|
| | | | | |
Cost of products sold | 11,261 |
| | 9,633 |
| | 8,782 |
|
Selling and administrative expense | 2,738 |
| | 2,486 |
| | 2,252 |
|
Research and development expense | 417 |
| | 425 |
| | 395 |
|
Interest expense-net | 118 |
| | 136 |
| | 150 |
|
Other income-net | (38 | ) | | (1 | ) | | (9 | ) |
Income before income taxes | 1,553 |
| | 1,036 |
| | 303 |
|
Income tax expense (benefit) | 201 |
| | 99 |
| | (82 | ) |
Net income | 1,352 |
| | 937 |
| | 385 |
|
Less net income for noncontrolling interests | (2 | ) | | (8 | ) | | (2 | ) |
Net income attributable to Eaton common shareholders | $ | 1,350 |
| | $ | 929 |
| | $ | 383 |
|
| | | | | |
Net income per common share | | | | | |
Diluted | $ | 3.93 |
| | $ | 2.73 |
| | $ | 1.14 |
|
Basic | 3.98 |
| | 2.76 |
| | 1.16 |
|
| | | | | |
Weighted-average number of common shares outstanding | | | | | |
Diluted | 342.8 |
| | 339.5 |
| | 335.8 |
|
Basic | 338.3 |
| | 335.5 |
| | 332.7 |
|
| | | | | |
Cash dividends paid per common share | $ | 1.36 |
| | $ | 1.08 |
| | $ | 1.00 |
|
The notes on pages 23 to 54 are an integral part of the consolidated financial statements.
EATON CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| December 31 |
(In millions) | 2011 | | 2010 |
Assets | | | |
Current assets | | | |
Cash | $ | 385 |
| | $ | 333 |
|
Short-term investments | 699 |
| | 838 |
|
Accounts receivable-net | 2,444 |
| | 2,239 |
|
Inventory | 1,701 |
| | 1,564 |
|
Deferred income taxes | 398 |
| | 303 |
|
Prepaid expenses and other current assets | 199 |
| | 229 |
|
Total current assets | 5,826 |
| | 5,506 |
|
| | | |
Property, plant and equipment | | | |
Land and buildings | 1,525 |
| | 1,494 |
|
Machinery and equipment | 4,669 |
| | 4,485 |
|
Gross property, plant and equipment | 6,194 |
| | 5,979 |
|
Accumulated depreciation | (3,592 | ) | | (3,502 | ) |
Net property, plant and equipment | 2,602 |
| | 2,477 |
|
| | | |
Other noncurrent assets |
| |
|
Goodwill | 5,537 |
| | 5,454 |
|
Other intangible assets | 2,192 |
| | 2,272 |
|
Deferred income taxes | 1,134 |
| | 1,001 |
|
Other assets | 582 |
| | 542 |
|
Total assets | $ | 17,873 |
| | $ | 17,252 |
|
| | | |
Liabilities and shareholders’ equity | | | |
Current liabilities | | | |
Short-term debt | $ | 86 |
| | $ | 72 |
|
Current portion of long-term debt | 321 |
| | 4 |
|
Accounts payable | 1,491 |
| | 1,408 |
|
Accrued compensation | 420 |
| | 465 |
|
Other current liabilities | 1,319 |
| | 1,284 |
|
Total current liabilities | 3,637 |
| | 3,233 |
|
| | | |
Noncurrent liabilities | | | |
Long-term debt | 3,366 |
| | 3,382 |
|
Pension liabilities | 1,793 |
| | 1,429 |
|
Other postretirement benefits liabilities | 642 |
| | 743 |
|
Deferred income taxes | 442 |
| | 487 |
|
Other noncurrent liabilities | 501 |
| | 575 |
|
Total noncurrent liabilities | 6,744 |
| | 6,616 |
|
| | | |
Shareholders’ equity | | | |
Common shares (334.4 million outstanding in 2011 and 339.9 million in 2010) | 167 |
| | 170 |
|
Capital in excess of par value | 4,169 |
| | 4,093 |
|
Retained earnings | 5,103 |
| | 4,455 |
|
Accumulated other comprehensive loss | (1,964 | ) | | (1,348 | ) |
Deferred compensation plans | (6 | ) | | (8 | ) |
Total Eaton shareholders’ equity | 7,469 |
| | 7,362 |
|
Noncontrolling interests | 23 |
| | 41 |
|
Total equity | 7,492 |
| | 7,403 |
|
Total liabilities and equity | $ | 17,873 |
| | $ | 17,252 |
|
The notes on pages 23 to 54 are an integral part of the consolidated financial statements.
EATON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Year ended December 31 |
(In millions) | 2011 | | 2010 | | 2009 |
Operating activities | | | | | |
Net income | $ | 1,352 |
| | $ | 937 |
| | $ | 385 |
|
Adjustments to reconcile to net cash provided by operating activities | | | | | |
Depreciation and amortization | 556 |
| | 551 |
| | 573 |
|
Deferred income taxes | (113 | ) | | 26 |
| | (191 | ) |
Pension expense | 227 |
| | 179 |
| | 270 |
|
Contributions to pension plans | (372 | ) | | (403 | ) | | (271 | ) |
Contributions to other postretirement benefits plans | (223 | ) | | (82 | ) | | (87 | ) |
Excess tax benefit from equity-based compensation | (57 | ) | | — |
| | (4 | ) |
Changes in working capital |
|
| |
|
| | |
Accounts receivable-net | (219 | ) | | (305 | ) | | 440 |
|
Inventory | (113 | ) | | (219 | ) | | 292 |
|
Accounts payable | 92 |
| | 322 |
| | (73 | ) |
Accrued compensation | (38 | ) | | 203 |
| | (50 | ) |
Accrued income and other taxes | 123 |
| | (11 | ) | | 34 |
|
Other current assets | 11 |
| | (46 | ) | | 48 |
|
Other current liabilities | (30 | ) | | 22 |
| | 58 |
|
Other-net | 52 |
| | 108 |
| | (16 | ) |
Net cash provided by operating activities | 1,248 |
| | 1,282 |
| | 1,408 |
|
| | | | | |
Investing activities | | | | | |
Capital expenditures for property, plant and equipment | (568 | ) | | (394 | ) | | (195 | ) |
Cash paid for acquisitions of businesses | (325 | ) | | (222 | ) | | (10 | ) |
Sales (purchases) of short-term investments-net | 103 |
| | (392 | ) | | (64 | ) |
Other-net | (10 | ) | | (4 | ) | | 44 |
|
Net cash used in investing activities | (800 | ) | | (1,012 | ) | | (225 | ) |
| | | | | |
Financing activities | | | | | |
Borrowings with original maturities of more than three months | | | | | |
Proceeds | 353 |
| | 55 |
| | 558 |
|
Payments | (65 | ) | | (65 | ) | | (887 | ) |
Borrowings (payments) with original maturities of less than three months-net (primarily commercial paper) | 12 |
| | (37 | ) | | (424 | ) |
Cash dividends paid | (462 | ) | | (363 | ) | | (334 | ) |
Exercise of employee stock options | 71 |
| | 157 |
| | 27 |
|
Repurchase of shares | (343 | ) | | — |
| | — |
|
Excess tax benefit from equity-based compensation | 57 |
| | — |
| | 4 |
|
Other-net | (4 | ) | | (8 | ) | | (5 | ) |
Net cash used in financing activities | (381 | ) | | (261 | ) | | (1,061 | ) |
| | | | | |
Effect of foreign exchange rate changes on cash | (15 | ) | | (16 | ) | | 30 |
|
Total increase (decrease) in cash | 52 |
| | (7 | ) | | 152 |
|
Cash at the beginning of the period | 333 |
| | 340 |
| | 188 |
|
Cash at the end of the period | $ | 385 |
| | $ | 333 |
| | $ | 340 |
|
The notes on pages 23 to 54 are an integral part of the consolidated financial statements.
EATON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common shares | | Capital in excess of par value | | Retained earnings | | Accumulated other comprehensive loss | | Deferred compensation plans | | Total Eaton shareholders' equity | | Noncontrolling interests | | Total equity |
| | | | | | | |
(In millions) | Shares | | Dollars | | | | | | | |
Balance at January 1, 2009 | 330.0 |
| | $ | 165 |
| | $ | 3,869 |
| | $ | 3,844 |
| | $ | (1,538 | ) | | $ | (23 | ) | | $ | 6,317 |
| | $ | 48 |
| | $ | 6,365 |
|
Net income | — |
| | — |
| | — |
| | 383 |
| | — |
| | — |
| | 383 |
| | 2 |
| | 385 |
|
| | | | | | | | | | | | | | | | | |
Foreign currency translation and related hedging instruments (net of income tax expense of $45) | — |
| | — |
| | — |
| | — |
| | 349 |
| | — |
| | 349 |
| | — |
| | 349 |
|
Pensions (net of income tax expense of $42) | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
Other postretirement benefits (net of income tax benefit of $14) | — |
| | — |
| | — |
| | — |
| | (56 | ) | | — |
| | (56 | ) | | — |
| | (56 | ) |
Cash flow hedges (net of income tax expense of $19) | — |
| | — |
| | — |
| | — |
| | 36 |
| | — |
| | 36 |
| | — |
| | 36 |
|
Other comprehensive income |
| |
| |
| |
| |
| |
| | 330 |
| | — |
| | 330 |
|
Total comprehensive income |
| |
| |
| |
| |
| |
| | 713 |
| | 2 |
| | 715 |
|
Cash dividends paid | — |
| | — |
| | — |
| | (334 | ) | | — |
| | — |
| | (334 | ) | | (5 | ) | | (339 | ) |
Issuance of shares under employee benefit plans-net (net of income tax benefit of $3) | 2.3 |
| | 1 |
| | 78 |
| | — |
| | — |
| | 2 |
| | 81 |
| | — |
| | 81 |
|
Business divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Balance at December 31, 2009 | 332.3 |
| | 166 |
| | 3,947 |
| | 3,893 |
| | (1,208 | ) | | (21 | ) | | 6,777 |
| | 41 |
| | 6,818 |
|
Net income | — |
| | — |
| | — |
| | 929 |
| | — |
| | — |
| | 929 |
| | 8 |
| | 937 |
|
| | | | | | | | | | | | | | | | | |
Foreign currency translation and related hedging instruments | — |
| | — |
| | — |
| | — |
| | (78 | ) | | — |
| | (78 | ) | | — |
| | (78 | ) |
Pensions (net of income tax benefit of $30) | — |
| | — |
| | — |
| | — |
| | (61 | ) | | — |
| | (61 | ) | | — |
| | (61 | ) |
Other postretirement benefits (net of income tax benefit of $4) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Other comprehensive loss |
| |
| |
| |
| |
| |
| | (140 | ) | | — |
| | (140 | ) |
Total comprehensive income |
| |
| |
| |
| |
| |
| | 789 |
| | 8 |
| | 797 |
|
Cash dividends paid | — |
| | — |
| | — |
| | (363 | ) | | — |
| | — |
| | (363 | ) | | (8 | ) | | (371 | ) |
Issuance of shares under employee benefit plans-net (net of income tax expense of $3) | 7.6 |
| | 4 |
| | 146 |
| | (4 | ) | | — |
| | 13 |
| | 159 |
| | — |
| | 159 |
|
Balance at December 31, 2010 | 339.9 |
| | 170 |
| | 4,093 |
| | 4,455 |
| | (1,348 | ) | | (8 | ) | | 7,362 |
| | 41 |
| | 7,403 |
|
Net income | — |
| | — |
| | — |
| | 1,350 |
| | — |
| | — |
| | 1,350 |
| | 2 |
| | 1,352 |
|
| | | | | | | | | | | | | | | | | |
Foreign currency translation and related hedging instruments (net of income tax benefit of $11) | — |
| | — |
| | — |
| | — |
| | (241 | ) | | — |
| | (241 | ) | | — |
| | (241 | ) |
Pensions (net of income tax benefit of $162) | — |
| | — |
| | — |
| | — |
| | (337 | ) | | — |
| | (337 | ) | | — |
| | (337 | ) |
Other postretirement benefits (net of income tax benefit of $11) | — |
| | — |
| | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) | | — |
| | (16 | ) |
Cash flow hedges (net of income tax benefit of $12) | — |
| | — |
| | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) | | — |
| | (22 | ) |
Other comprehensive loss |
| |
| |
| |
| |
| |
| | (616 | ) | | — |
| | (616 | ) |
Total comprehensive income |
| |
| |
| |
| |
| |
| | 734 |
| | 2 |
| | 736 |
|
Cash dividends paid | — |
| | — |
| | — |
| | (462 | ) | | — |
| | — |
| | (462 | ) | | (4 | ) | | (466 | ) |
Issuance of shares under employee benefit plans-net (net of income tax benefit of $72) | 2.8 |
| | 1 |
| | 177 |
| | (2 | ) | | — |
| | 2 |
| | 178 |
| | — |
| | 178 |
|
Business divestiture | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) |
Repurchase of shares | (8.3 | ) | | (4 | ) | | (101 | ) | | (238 | ) | | — |
| | — |
| | (343 | ) | | — |
| | (343 | ) |
Balance at December 31, 2011 | 334.4 |
| | $ | 167 |
| | $ | 4,169 |
| | $ | 5,103 |
| | $ | (1,964 | ) | | $ | (6 | ) | | $ | 7,469 |
| | $ | 23 |
| | $ | 7,492 |
|
The notes on pages 23 to 54 are an integral part of the consolidated financial statements.
EATON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
| |
Note 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
General Information
Eaton Corporation (Eaton or Company) is a diversified power management company with 2011 net sales of $16.0 billion. The Company 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 73,000 employees in over 50 countries, and sells products to customers in more than 150 countries.
Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from these estimates. Management has evaluated subsequent events through the date the consolidated financial statements were filed with the Securities Exchange Commission.
The consolidated financial statements include accounts of Eaton and all subsidiaries and other controlled entities. Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in associate companies where the Company has a 20% to 50% ownership interest. Equity investments are evaluated for impairment whenever events or circumstances indicate the book value of the investment exceeds fair value. An impairment would exist if there is an other-than-temporary decline in value. These associate companies are not material either individually, or in the aggregate, to Eaton's consolidated financial statements. Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities. In the ordinary course of business, the Company leases certain real properties and equipment, as described in Note 7.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Foreign Currency Translation
The functional currency for subsidiaries outside the United States is primarily the local currency. Financial statements for these subsidiaries are translated at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive loss.
Revenue Recognition
Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers and title has transferred in accordance with shipping terms (FOB shipping point, FOB destination or equivalent International Commercial (INCO) Terms), the selling price is fixed and determinable and collectability is reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Although the majority of the sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, judgment is required to determine the appropriate accounting, including whether the deliverables specified in these agreements should be treated as separate units of accounting for recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for each element. For delivered elements, sales are recognized only when the delivered elements have standalone value, fair values of undelivered elements are known, there are no uncertainties regarding customer acceptance, and there are no customer-negotiated refund or return rights affecting the sales recognized for delivered elements. Sales for service contracts generally are recognized as the services are provided.
Eaton records reductions to revenue for customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels or other objectives.
Long-Lived Assets
Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. Cost of buildings are depreciated generally over 40 years and machinery and equipment over 3 to 10 years. At December 31, 2011, the weighted-average amortization period for intangible assets subject to amortization was 18 years for patents and technology and 17 years for customer relationships, primarily as a result of the long life of aircraft platforms. Software is amortized up to a maximum life of 10 years.
Long-lived assets, except goodwill and indefinite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. Determining asset groups and underlying cash flows requires the use of significant judgment.
Goodwill and Indefinite Life Intangible Assets
Goodwill and indefinite life intangible assets are evaluated annually for impairment as of July 1 using qualitative analysis, a discounted cash flow model and other valuation techniques. Additionally, goodwill and indefinite life intangible assets are evaluated for impairment whenever events or circumstances indicate there may be a possible permanent loss of value.
Goodwill is tested for impairment at the reporting unit level, which is equivalent to Eaton's operating segments, and based on the net assets for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment, as this represents the lowest level that constitutes a business and for which discrete financial information is available and is the level which management regularly reviews the operating results.
Qualitative Analysis
In September 2011, the Financial Accounting Standards Board issued a revised standard on testing goodwill for impairment. The revised standard allows an entity to first assess the carrying value of goodwill based on qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount. If, based on a qualitative assessment, the fair value of a reporting unit is more likely than not lower than its carrying value, the entity must then test goodwill from a quantitative perspective similar to prior guidance. This standard is effective for 2012, with early adoption permitted. Eaton elected to adopt this standard for its 2011 annual impairment testing.
Impairment testing for 2011 was performed by assessing certain qualitative trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors were compared to, and based on, the assumptions used in the quantitative assessment performed in 2010. For 2011, it is more likely than not that the fair value of Eaton's reporting units continues to substantially exceed the respective carrying amount.
Quantitative Analysis
In 2010, goodwill was tested based on a discounted cash flow model to estimate the fair value of each operating segment, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The Company selected the discounted cash flow methodology as it believes that it is comparable to what would be used by market participants. The forecasted cash flows are based on the Company's long-term operating plan, and a terminal value is used to estimate the operating segment's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market participants of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective operating segment. Sensitivity analyses are performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. For 2010, the fair value of Eaton's reporting units substantially exceeded the respective carrying values.
Indefinite life intangible assets primarily consist of trademarks. The fair value of these assets are determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For 2011 and 2010, the fair value of indefinite lived intangible assets substantially exceeded the respective carrying value.
For additional information about goodwill and other intangible assets, see Note 4.
Derivative Financial Instruments and Hedging Activities
Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, foreign currency and interest rates on certain debt instruments. These instruments are marked to fair value. Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether an instrument has been designated as a hedge. For those instruments that qualify for hedge accounting, Eaton designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of these instruments that do not qualify for hedge accounting are recognized immediately in net income. See Note 12 for additional information about hedges and derivative financial instruments.
Warranty Accruals
Product warranty accruals are established at the time the related sale is recognized through a charge to Cost of products sold. Warranty accrual estimates are based primarily on historical warranty claim experience and specific customer contracts. Provisions for warranty accruals are comprised of basic warranties for products sold, as well as accruals for product recalls and other events when they are known and estimable. See Note 7 for additional information about warranty accruals.
Asset Retirement Obligations
A conditional asset retirement obligation is recognized at fair value when incurred if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized when sufficient information is available to estimate fair value.
Income Taxes
Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of the respective assets and liabilities, using enacted tax rates in effect for the year when the differences are expected to reverse. Deferred income tax assets are recognized for United States and non-United States income tax loss carryforwards and income tax credit carryforwards. Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax assets. Eaton recognizes the income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. Eaton evaluates and adjusts these accruals based on changing facts and circumstances. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The Company has accrued penalties in jurisdictions where they are automatically applied to any deficiency, regardless of the merit of the position. For additional information about income taxes, see Note 8.
Equity-Based Compensation
Eaton recognizes equity-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. The fair value of restricted stock units is based on the closing market price of Eaton common stock on the grant date. Stock options are granted with an exercise price equal to the closing market price of Eaton common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. See Note 10 for additional information about equity-based compensation.
| |
Note 2. | ACQUISITIONS OF BUSINESSES |
Eaton acquired businesses and entered into joint ventures in separate transactions for combined net cash purchase prices of $325 in 2011, $222 in 2010, and $10 in 2009. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions are summarized below:
|
| | | | | | |
Acquired businesses and joint ventures | | Date of transaction | | Business segment | | Annual sales |
E.A. Pedersen Company | | December 29,
2011 | | Electrical
Americas | | $37 for 2011 |
A United States manufacturer of medium voltage switchgear, metal-clad switchgear, power control buildings and relay control panels primarily for the electrical utilities industry. | | | |
| | | | | | |
IE Power, Inc. | | August 31,
2011 | | Electrical
Americas | | $5 for 2010 |
A Canadian provider of high power inverters for a variety of mission-critical applications including solar, wind and battery energy storage. | | | |
| | | | | | |
E. Begerow GmbH & Co. KG | | August 15,
2011 | | Hydraulics | | $84 for 2010 |
A German system provider of advanced liquid filtration solutions. This business develops and produces technologically innovative filter media and filtration systems for food and beverage, chemical, pharmaceutical and industrial applications. | | | |
| | | | | | |
ACTOM Low Voltage | | June 30,
2011 | | Electrical
Rest of World | | $65 for the
year ended
May 31,
2011 |
A South African manufacturer and supplier of motor control components, engineered electrical distribution systems and uninterruptible power supply (UPS) systems. | | | |
| | | | | | |
C.I. ESI de Colombia S.A. | | June 2,
2011 | | Electrical
Americas | | $8 for 2010 |
A Colombian distributor of industrial electrical equipment and engineering services in the Colombian market, focused on oil and gas, mining, and industrial and commercial construction. | | | |
| | | | | | |
Internormen Technology Group | | May 12,
2011 | | Hydraulics | | $55 for 2010 |
A Germany-based manufacturer of hydraulic filtration and instrumentation with sales and distribution subsidiaries in China, the United States, India and Brazil. | | | |
| | | | | | |
Eaton-SAMC (Shanghai) Aircraft Conveyance System Manufacturing
Co., Ltd. | | March 8,
2011 | | Aerospace | | Joint venture |
| | |
A 49%-owned joint venture in China focusing on the design, development, manufacturing and support of fuel and hydraulic conveyance systems for the global civil aviation market. | | | |
| | | | | | |
Tuthill Coupling Group | | January 1,
2011 | | Hydraulics | | $35 for the
year ended
November 30,
2010 |
A United States based manufacturer of pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications. | | | |
| | | | | | |
Chloride Phoenixtec Electronics | | October 12,
2010 | | Electrical
Rest of World | | $25 for the
year ended
September 30,
2010 |
A China manufacturer of UPS systems. Eaton acquired the remaining shares to increase its ownership from 50% to 100%. | | | |
| | | | | | |
CopperLogic, Inc. | | October 1,
2010 | | Electrical
Americas | | $35 for the
year ended
September 30,
2010 |
A Canadian manufacturer of electrical and electromechanical systems. | | | |
| | | |
| | | | | | |
Wright Line Holding, Inc. | | August 25,
2010 | | Electrical
Americas | | $101 for the
year ended
June 30,
2010 |
A United States provider of customized enclosures, rack systems, and air-flow management systems to store, power, and secure mission-critical IT data center electronics. | | | |
|
| | | | | | |
Acquired businesses and joint ventures | | Date of transaction | | Business segment | | Annual sales |
EMC Engineers, Inc. | | July 15,
2010 | | Electrical
Americas | | $24 for 2009 |
A United States energy engineering and energy services company that delivers energy efficiency solutions for a wide range of governmental, educational, commercial and industrial facilities. | | | |
| | | | | | |
Micro Innovation Holding AG | | September 1,
2009 | | Electrical
Rest of World | | $33 for 2008 |
A Switzerland manufacturer of human machine interfaces, programmable logic controllers and input/output devices. Eaton acquired the remaining shares to increase its ownership from 50% to 100%. | | | |
| | | | | | |
SEG Middle East Power Solutions & Switchboard Manufacture LLC | | July 2,
2009 | | Electrical
Rest of World | | Joint venture |
A 49%-owned joint venture in Abu Dhabi that manufactures low-voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets. | | | |
On February 20, 2012, Eaton reached an agreement to acquire Polimer Kaucuk Sanayi ve Pazarlama A.S., a Turkish manufacturer of hydraulic and industrial hose. This business sells its products under the SEL brand name and had sales of $335 for 2011. The acquisition is expected to close early in the second quarter of 2012 and will be included in the Hydraulics segment. The terms of the agreement are subject to customary closing conditions.
| |
Note 3. | ACQUISITION INTEGRATION CHARGES |
Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:
|
| | | | | | | | | | | |
| 2011 | | 2010 | | 2009 |
Business segment | | | | | |
Electrical Americas | $ | 8 |
| | $ | 2 |
| | $ | 4 |
|
Electrical Rest of World | 2 |
| | 33 |
| | 60 |
|
Hydraulics | 4 |
| | 1 |
| | 3 |
|
Aerospace | — |
| | 4 |
| | 12 |
|
Automotive | — |
| | — |
| | 1 |
|
| 14 |
| | 40 |
| | 80 |
|
Corporate | — |
| | — |
| | 2 |
|
Total integration charges before income taxes | $ | 14 |
| | $ | 40 |
| | $ | 82 |
|
After-tax integration charges | $ | 10 |
| | $ | 27 |
| | $ | 54 |
|
Per common share | $ | 0.03 |
| | $ | 0.08 |
| | $ | 0.16 |
|
Charges in 2011 were related primarily to CopperLogic, Tuthill Coupling Group, Wright Line Holding, EMC Engineers and Internormen Technology Group. Charges in 2010 were related primarily to Moeller and Phoenixtec. Charges in 2009 were related primarily to Moeller, Phoenixtec and Argo-Tech. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. See Note 2 for additional information about business acquisitions.
| |
Note 4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
A summary of goodwill follows:
|
| | | | | | | |
| 2011 | | 2010 |
Electrical Americas | $ | 2,043 |
| | $ | 2,061 |
|
Electrical Rest of World | 981 |
| | 985 |
|
Hydraulics | 1,116 |
| | 1,007 |
|
Aerospace | 1,040 |
| | 1,037 |
|
Truck | 150 |
| | 151 |
|
Automotive | 207 |
| | 213 |
|
Total goodwill | $ | 5,537 |
| | $ | 5,454 |
|
The increase in goodwill in 2011 was primarily due to businesses acquired during 2011, partially offset by foreign currency translation. For additional information regarding acquired businesses, see Note 2.
A summary of other intangible assets follows:
|
| | | | | | | | | | | | | | | |
| 2011 | | 2010 |
| Historical cost | | Accumulated amortization | | Historical cost | | Accumulated amortization |
Intangible assets not subject to amortization (primarily trademarks) | $ | 451 |
| | | | $ | 451 |
| | |
| | | | | | | |
Intangible assets subject to amortization | | | | | | | |
Customer relationships | $ | 1,173 |
| | $ | 322 |
| | $ | 1,187 |
| | $ | 274 |
|
Patents and technology | 849 |
| | 308 |
| | 835 |
| | 260 |
|
Other | 481 |
| | 132 |
| | 441 |
| | 108 |
|
Total other intangible assets | $ | 2,503 |
| | $ | 762 |
| | $ | 2,463 |
| | $ | 642 |
|
Expense related to intangible assets subject to amortization in 2011, and for each of the next five years, follows:
|
| | | |
2011 | $ | 158 |
|
2012 | 157 |
|
2013 | 149 |
|
2014 | 143 |
|
2015 | 139 |
|
2016 | 135 |
|
Short-term debt of $86 at December 31, 2011 included $75 of short-term commercial paper in the United States which had a weighted-average interest rate of 0.45%, $10 of other short-term debt in the United States, and $1 of short-term debt outside the United States. Short-term debt of $72 at December 31, 2010 included $50 of short-term commercial paper in the United States which had a weighted-average interest rate of 0.45%, $15 of other short-term debt in the United States, and $7 of short-term debt outside the United States. Borrowings outside the United States are generally denominated in local currencies. Operations outside the United States had available short-term lines of credit of $1,181 from various banks worldwide at December 31, 2011.
A summary of long-term debt, including the current portion, follows:
|
| | | | | | | |
| 2011 | | 2010 |
7.58% notes due 2012 | $ | 12 |
| | $ | 12 |
|
5.75% notes due 2012 | 300 |
| | 300 |
|
4.90% notes due 2013 ($200 converted to floating rate by interest rate swap) | 300 |
| | 300 |
|
5.95% notes due 2014 ($100 converted to floating rate by interest rate swap) | 250 |
| | 250 |
|
Floating rate notes due 2014 ($300 converted to fixed rate by interest rate swap) | 300 |
| | — |
|
4.65% notes due 2015 | 100 |
| | 100 |
|
5.30% notes due 2017 | 250 |
| | 250 |
|
6.875% to 7.09% notes due 2018 | 36 |
| | 36 |
|
5.60% notes due 2018 ($215 converted to floating rate by interest rate swap) | 450 |
| | 450 |
|
4.215% Japanese Yen notes due 2018 | 129 |
| | 123 |
|
6.95% notes due 2019 ($300 converted to floating rate by interest rate swap) | 300 |
| | 300 |
|
8.875% debentures due 2019 ($25 converted to floating rate by interest rate swap) | 38 |
| | 38 |
|
8.10% debentures due 2022 | 100 |
| | 100 |
|
7.625% debentures due 2024 ($25 converted to floating rate by interest rate swap) | 66 |
| | 66 |
|
6.50% debentures due 2025 | 145 |
| | 145 |
|
7.875% debentures due 2026 | 72 |
| | 72 |
|
7.65% debentures due 2029 ($50 converted to floating rate by interest rate swap) | 200 |
| | 200 |
|
5.45% debentures due 2034 ($25 converted to floating rate by interest rate swap) | 140 |
| | 140 |
|
5.25% notes due 2035 | 27 |
| | 42 |
|
5.80% notes due 2037 | 240 |
| | 240 |
|
Other | 232 |
| | 222 |
|
Total long-term debt | 3,687 |
| | 3,386 |
|
Less current portion of long-term debt | (321 | ) | | (4 | ) |
Long-term debt less current portion | $ | 3,366 |
| | $ | 3,382 |
|
On June 16, 2011, Eaton issued $300 floating rate senior unsecured Notes due June 16, 2014 (the Notes). The Notes bear interest annually at a floating rate, reset quarterly, equal to the three-month LIBOR rate for U.S. dollars plus 0.33%. Interest is payable quarterly in arrears. The Notes contain a provision which requires the Company to make an offer to purchase all or any part of the Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest if certain change of control events occur. The Notes are subject to customary non-financial covenants.
Eaton refinanced a $500, five-year revolving credit facility in June 2011 (the Facility). The Facility will expire June 16, 2016, replacing a $500 facility that had been set to expire on September 1, 2011. This refinancing maintains long-term revolving credit facilities at a total of $1,500, of which $500 expires in 2012, 2013 and 2016, respectively. These facilities support Eaton's commercial paper borrowings. There were no borrowings outstanding under these revolving credit facilities at December 31, 2011 or 2010.
Eaton is in compliance with each of its debt covenants for all periods presented.
Mandatory maturities of long-term debt for each of the next five years follow:
|
| | | |
2012 | $ | 321 |
|
2013 | 310 |
|
2014 | 570 |
|
2015 | 103 |
|
2016 | 1 |
|
Interest paid on debt follows:
| |
Note 6. | RETIREMENT BENEFITS PLANS |
Eaton has defined benefits pension plans and other postretirement benefits plans.
Obligations and Funded Status
|
| | | | | | | | | | | | | | | | | | | | | | | |
| United States pension liabilities | | Non-United States pension liabilities | | Other postretirement liabilities |
| 2011 | | 2010 | | 2011 | | 2010 | | 2011 | | 2010 |
Funded status | | | | | | | | | | | |
Fair value of plan assets | $ | 1,664 |
| | $ | 1,572 |
| | $ | 989 |
| | $ | 937 |
| | $ | 156 |
| | $ | — |
|
Benefit obligations | (2,899 | ) | | (2,458 | ) | | (1,505 | ) | | (1,460 | ) | | (853 | ) | | (826 | ) |
Funded status | $ | (1,235 | ) | | $ | (886 | ) | | $ | (516 | ) | | $ | (523 | ) | | $ | (697 | ) | | $ | (826 | ) |
| | | | | | | | | | | |
Amounts recognized in the Consolidated Balance Sheets | | | | | | | | | | | |
Non-current assets | $ | — |
| | $ | — |
| | $ | 78 |
| | $ | 52 |
| | $ | — |
| | $ | — |
|
Current liabilities | (12 | ) | | (9 | ) | | (24 | ) | | (23 | ) | | (55 | ) | | (83 | ) |
Non-current liabilities | (1,223 | ) | | (877 | ) | | (570 | ) | | (552 | ) | | (642 | ) | | (743 | ) |
Total | $ | (1,235 | ) | | $ | (886 | ) | | $ | (516 | ) | | $ | (523 | ) | | $ | (697 | ) | | $ | (826 | ) |
| | | | | | | | | | | |
Amounts recognized in Accumulated other comprehensive loss (pretax) | | | | | | | | | | | |
Net actuarial loss | $ | 1,601 |
| | $ | 1,142 |
| | $ | 348 |
| | $ | 311 |
| | $ | 257 |
| | $ | 232 |
|
Prior service cost (credit) | 1 |
| | — |
| | 10 |
| | 8 |
| | (9 | ) | | (11 | ) |
Total | $ | 1,602 |