ETN 09.30.2012 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
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) | | | |
| | | | | | | | | | | |
| | | Not applicable | | | |
| | | (Former name, former address and former fiscal year if changed since last report) | | | |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 337.9 million Common Shares outstanding as of September 30, 2012.
PART I — FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS. |
EATON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(In millions except for per share data) | 2012 | | 2011 | | 2012 | | 2011 |
Net sales | $ | 3,950 |
| | $ | 4,123 |
| | $ | 11,978 |
| | $ | 12,016 |
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| | | | | | | |
Cost of products sold | 2,747 |
| | 2,900 |
| | 8,316 |
| | 8,444 |
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Selling and administrative expense | 687 |
| | 668 |
| | 2,079 |
| | 2,031 |
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Research and development expense | 102 |
| | 104 |
| | 313 |
| | 316 |
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Interest expense-net | 42 |
| | 29 |
| | 100 |
| | 92 |
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Other (income) expense-net | (4 | ) | | (10 | ) | | 7 |
| | (30 | ) |
Income before income taxes | 376 |
| | 432 |
| | 1,163 |
| | 1,163 |
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Income tax expense | 29 |
| | 65 |
| | 123 |
| | 172 |
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Net income | 347 |
| | 367 |
| | 1,040 |
| | 991 |
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Less net income for noncontrolling interests | (2 | ) | | (2 | ) | | (2 | ) | | (3 | ) |
Net income attributable to Eaton common shareholders | $ | 345 |
| | $ | 365 |
| | $ | 1,038 |
| | $ | 988 |
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| | | | | | | |
Net income per common share | | | | | | | |
Diluted | $ | 1.02 |
| | $ | 1.07 |
| | $ | 3.05 |
| | $ | 2.86 |
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Basic | 1.02 |
| | 1.07 |
| | 3.08 |
| | 2.90 |
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| | | | | | | |
Weighted-average number of common shares outstanding | | | | | | | |
Diluted | 339.8 |
| | 341.9 |
| | 339.7 |
| | 344.4 |
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Basic | 337.6 |
| | 338.1 |
| | 336.7 |
| | 339.7 |
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| | | | | | | |
Cash dividends declared per common share | $ | 0.76 |
| | $ | 0.34 |
| | $ | 1.52 |
| | $ | 1.02 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(In millions) | 2012 | | 2011 | | 2012 | | 2011 |
Net income | $ | 347 |
| | $ | 367 |
| | $ | 1,040 |
| | $ | 991 |
|
Less net income for noncontrolling interests | (2 | ) | | (2 | ) | | (2 | ) | | (3 | ) |
Net income attributable to Eaton common shareholders | 345 |
| | 365 |
| | 1,038 |
| | 988 |
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| | | | | | | |
Other comprehensive income (loss), net of tax |
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| |
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Foreign currency translation and related hedging instruments | 146 |
| | (449 | ) | | 47 |
| | (111 | ) |
Pensions and other postretirement benefits | 22 |
| | 34 |
| | 93 |
| | 69 |
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Cash flow hedges | 4 |
| | (20 | ) | | 16 |
| | (25 | ) |
Other comprehensive income (loss) attributable to Eaton common shareholders | 172 |
| | (435 | ) | | 156 |
| | (67 | ) |
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Total comprehensive income (loss) attributable to Eaton common shareholders | $ | 517 |
| | $ | (70 | ) | | $ | 1,194 |
| | $ | 921 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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(In millions) | September 30, 2012 | | December 31, 2011 |
Assets | | | |
Current assets | | | |
Cash | $ | 425 |
| | $ | 385 |
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Short-term investments | 620 |
| | 699 |
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Accounts receivable-net | 2,645 |
| | 2,444 |
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Inventory | 1,801 |
| | 1,701 |
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Other current assets | 704 |
| | 597 |
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Total current assets | 6,195 |
| | 5,826 |
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| | | |
Property, plant and equipment-net | 2,794 |
| | 2,602 |
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| | | |
Other noncurrent assets |
| |
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Goodwill | 5,838 |
| | 5,537 |
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Other intangible assets | 2,253 |
| | 2,192 |
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Deferred income taxes | 1,064 |
| | 1,134 |
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Other assets | 656 |
| | 582 |
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Total assets | $ | 18,800 |
| | $ | 17,873 |
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| | | |
Liabilities and shareholders’ equity | | | |
Current liabilities | | | |
Short-term debt | $ | 108 |
| | $ | 86 |
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Current portion of long-term debt | 307 |
| | 321 |
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Accounts payable | 1,441 |
| | 1,491 |
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Accrued compensation | 385 |
| | 420 |
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Other current liabilities | 1,467 |
| | 1,319 |
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Total current liabilities | 3,708 |
| | 3,637 |
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Noncurrent liabilities | | | |
Long-term debt | 3,690 |
| | 3,366 |
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Pension liabilities | 1,509 |
| | 1,793 |
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Other postretirement benefits liabilities | 645 |
| | 642 |
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Deferred income taxes | 569 |
| | 442 |
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Other noncurrent liabilities | 437 |
| | 501 |
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Total noncurrent liabilities | 6,850 |
| | 6,744 |
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| | | |
Shareholders’ equity | | | |
Eaton shareholders’ equity | 8,220 |
| | 7,469 |
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Noncontrolling interests | 22 |
| | 23 |
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Total equity | 8,242 |
| | 7,492 |
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Total liabilities and equity | $ | 18,800 |
| | $ | 17,873 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| | | | | | | |
| Nine months ended September 30 |
(In millions) | 2012 | | 2011 |
Operating activities | | | |
Net income | $ | 1,040 |
| | $ | 991 |
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Adjustments to reconcile to net cash provided by operating activities | | | |
Depreciation and amortization | 419 |
| | 419 |
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Pension expense | 205 |
| | 170 |
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Contributions to pension plans | (383 | ) | | (341 | ) |
Contributions to other postretirement benefits plans | (34 | ) | | (150 | ) |
Changes in working capital | (318 | ) | | (290 | ) |
Other-net | 48 |
| | (110 | ) |
Net cash provided by operating activities | 977 |
| | 689 |
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| | | |
Investing activities | | | |
Cash paid for acquisitions of businesses | (554 | ) | | (298 | ) |
Capital expenditures for property, plant and equipment | (357 | ) | | (384 | ) |
Sales of short-term investments-net | 89 |
| | 272 |
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Other-net | (35 | ) | | 1 |
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Net cash used in investing activities | (857 | ) | | (409 | ) |
| | | |
Financing activities | | | |
Borrowings with original maturities of more than three months | | | |
Proceeds | 600 |
| | 352 |
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Payments | (319 | ) | | (14 | ) |
Payments with original maturities of less than three months-net | (2 | ) | | (38 | ) |
Deferred financing costs | (63 | ) | | — |
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Cash dividends paid | (384 | ) | | (348 | ) |
Exercise of equity-based awards | 54 |
| | 66 |
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Repurchase of shares | — |
| | (343 | ) |
Excess tax benefit from equity-based compensation | 18 |
| | — |
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Other-net | — |
| | (4 | ) |
Net cash used in financing activities | (96 | ) | | (329 | ) |
| | | |
Effect of foreign exchange rate changes on cash | 16 |
| | (6 | ) |
Total increase (decrease) in cash | 40 |
| | (55 | ) |
Cash at the beginning of the period | 385 |
| | 333 |
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Cash at the end of the period | $ | 425 |
| | $ | 278 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
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Note 1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation (Eaton or Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2011 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the SEC.
Certain prior year amounts have been reclassified to conform to the current year presentation.
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Note 2. | ACQUISITIONS OF BUSINESSES |
In 2012 and 2011, Eaton acquired businesses and entered into a joint venture in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions and the related annual sales prior to acquisition are summarized below:
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Acquired businesses and joint venture | | Date of transaction | | Business segment | | Annual sales |
Rolec Comercial e Industrial S.A. | | September 28, 2012 | | Electrical Americas | | $85 for the 12 months ended September 30, 2012 |
A Chilean manufacturer of integrated power assemblies and low- and medium-voltage switchgear, and a provider of engineering services serving mining and other heavy industrial applications in Chile and Peru. | | | |
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Jeil Hydraulics Co., Ltd. | | July 6, 2012 | | Hydraulics | | $189 for 2011 |
A Korean manufacturer of track drive motors, swing drive motors, main control valves and remote control valves for the construction equipment market. | | | |
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Polimer Kaucuk Sanayi ve Pazarlama A.S. | | June 1, 2012 | | Hydraulics | | $335 for 2011 |
A Turkish manufacturer of hydraulic and industrial hose for construction, mining, agriculture, oil and gas, manufacturing, food and beverage, and chemicals markets. This business sells its products under the SEL brand name. | | | |
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Gycom Electrical Low-Voltage Power Distribution, Control and Automation | | June 1, 2012 | | Electrical Rest of World | | $24 for 2011 |
A Swedish electrical low-voltage power distribution, control and automation components business. | | | |
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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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| | | | | | |
Acquired businesses and joint venture | | Date of transaction | | Business segment | | Annual sales |
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. | | | |
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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. | | | |
| | |
On May 21, 2012, Eaton reached an agreement to acquire Cooper Industries plc (Cooper). Cooper is incorporated in Ireland and is a diversified global manufacturer of electrical components and tools with sales of $5.4 billion for 2011. At the close of the transaction, Eaton and Cooper will be combined under a newly created company (New Eaton), which is currently called Eaton Corporation Limited and is incorporated in Ireland. The total consideration to be received by Cooper shareholders in the transaction is comprised of both cash and equity and has a value of approximately $11.8 billion based on the closing share price of Eaton common stock of $42.40 on May 18, 2012. Based on the terms of the transaction agreement, the purchase consideration entitles the holder of each ordinary share of Cooper to receive from New Eaton $39.15 and 0.77479 of a New Eaton ordinary share. At the close of the transaction, the former shareholders of Eaton and Cooper are expected to own approximately 73% and 27% of New Eaton, respectively. The transaction was approved by shareholders of both companies on October 26, 2012, and is subject to receipt of certain regulatory approvals and other customary conditions. The transaction is expected to close in the fourth quarter of 2012.
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Note 3. | ACQUISITION INTEGRATION CHARGES |
Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:
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| Three months ended September 30 | | Nine months ended September 30 |
| 2012 | | 2011 | | 2012 | | 2011 |
Business segment | | | | | | | |
Electrical Americas | $ | 1 |
| | $ | 3 |
| | $ | 4 |
| | $ | 7 |
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Electrical Rest of World | 1 |
| | — |
| | 5 |
| | 1 |
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Hydraulics | 5 |
| | 1 |
| | 9 |
| | 1 |
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Total business segment integration charges before income taxes | 7 |
| | 4 |
| | 18 |
| | 9 |
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Corporate | 20 |
| | — |
| | 28 |
| | — |
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Total integration charges before income taxes | $ | 27 |
| | $ | 4 |
| | $ | 46 |
| | $ | 9 |
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After-tax integration charges | $ | 18 |
| | $ | 2 |
| | $ | 30 |
| | $ | 6 |
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Per common share | $ | 0.05 |
| | $ | 0.01 |
| | $ | 0.09 |
| | $ | 0.02 |
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Business segment charges for the third quarter of 2012 were related primarily to Internormen Technology Group, Jeil Hydraulics, Polimer Kaucuk Sanayi ve Pazarlama (SEL) and E. Begerow GmbH & Co. KG. Business segment charges for the first nine months of 2012 were related primarily to The Moeller Group, Internormen Technology Group, E. Begerow GmbH & Co. KG and Tuthill Coupling Group. Business segment charges in 2011 were related primarily to CopperLogic, Wright Line Holding and EMC Engineers. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Note 13, Business Segment Information, the charges reduced Operating profit of the related business segment.
Corporate charges in 2012 were related primarily to pre-acquisition transaction costs associated with the planned acquisition of Cooper. These charges were included in Selling and administrative expense and Interest expense-net. In Note 13, Business Segment Information, the charges were included in Interest expense-net and Other corporate expense-net. See Note 2 for additional information about business acquisitions.
A summary of goodwill follows:
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| September 30, 2012 | | December 31, 2011 |
Electrical Americas | $ | 2,058 |
| | $ | 2,043 |
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Electrical Rest of World | 986 |
| | 981 |
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Hydraulics | 1,393 |
| | 1,116 |
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Aerospace | 1,045 |
| | 1,040 |
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Truck | 149 |
| | 150 |
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Automotive | 207 |
| | 207 |
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Total goodwill | $ | 5,838 |
| | $ | 5,537 |
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The increase in goodwill in 2012 was primarily due to businesses acquired during 2012. For additional information regarding acquired businesses, see Note 2.
Assessing Goodwill for Impairment
Goodwill is tested for impairment annually as of July 1 at the reporting unit level, which is equivalent to Eaton's operating segments. Impairment testing for 2012 was performed from a qualitative perspective by assessing certain 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 2012, the fair value of Eaton's reporting units continues to substantially exceed the respective carrying amount.
On May 21, 2012, Eaton secured a 364-day bridge facility totaling $6.75 billion related to financing the cash portion of the acquisition of Cooper. The bridge facility will be available in a single draw on the acquisition closing date. At the Company's discretion, the interest rate on the bridge facility may initially be set at either a LIBOR-based rate plus a margin of 1.25%, with increases in margin every 90 days to a maximum margin of 2.50%, or an Alternate Base Rate (ABR) plus the margin for LIBOR loans at any time minus 1.00%. The ABR is the highest of (a) Prime Rate (as published in the Wall Street Journal), (b) the Federal Funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00%. The bridge facility allows for voluntary prepayment at any time without a premium or penalty. Upon the closing of the Cooper acquisition or shortly thereafter, the bridge facility will be guaranteed by certain subsidiaries of the Company and Cooper. The bridge facility contains customary events of default, the occurrence of which may accelerate the payment of interest and principal amounts outstanding. The bridge facility is subject to certain customary affirmative and negative covenants. At September 30, 2012, capitalized deferred financing fees totaled $56 and are being amortized in Interest expense-net over the estimated term of the bridge facility.
On June 14, 2012, Eaton refinanced a $500, three-year revolving credit facility and a $500, five-year revolving credit facility with a $750, three-year revolving credit facility and a $750, five-year revolving credit facility, respectively. These facilities increase long-term revolving credit facilities from $1.5 billion to $2.0 billion. The revolving credit facilities are used to support commercial paper borrowings. The three-year revolving credit facility will expire June 14, 2015, and the five-year revolving credit facility will expire June 14, 2017. There were no borrowings outstanding under Eaton's revolving credit facilities at September 30, 2012.
On June 28, 2012, Eaton received proceeds totaling $600 from the private issuance of $300, 3.47% notes due June 28, 2021 and $300, 3.68% notes due June 28, 2023 (collectively, the Notes). Interest is payable semi-annually. The Notes contain a change of control provision which requires the Company to make an offer to purchase all or any part of the Notes at a purchase price of 100% of the principal amount plus accrued and unpaid interest. The Notes are subject to certain customary covenants.
These financing activities were initiated to enhance the Company's capital structure prior to completing the acquisition of Cooper. See Note 2 for additional information about business acquisitions.
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Note 6. | RETIREMENT BENEFITS PLANS |
The components of retirement benefits expense follow:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 |
| United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
Service cost | $ | 28 |
| | $ | 23 |
| | $ | 13 |
| | $ | 12 |
| | $ | 5 |
| | $ | 4 |
|
Interest cost | 33 |
| | 33 |
| | 18 |
| | 19 |
| | 10 |
| | 10 |
|
Expected return on plan assets | (46 | ) | | (41 | ) | | (18 | ) | | (17 | ) | | (2 | ) | | — |
|
Amortization | 30 |
| | 19 |
| | 3 |
| | 3 |
| | 3 |
| | 3 |
|
| 45 |
| | 34 |
| | 16 |
| | 17 |
| | 16 |
| | 17 |
|
Curtailment loss | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Settlement loss | 8 |
| | 5 |
| | — |
| | — |
| | — |
| | — |
|
Total expense | $ | 53 |
| | $ | 39 |
| | $ | 16 |
| | $ | 18 |
| | $ | 16 |
| | $ | 17 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30 |
| United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
Service cost | $ | 86 |
| | $ | 69 |
| | $ | 37 |
| | $ | 37 |
| | $ | 13 |
| | $ | 12 |
|
Interest cost | 100 |
| | 99 |
| | 56 |
| | 59 |
| | 29 |
| | 30 |
|
Expected return on plan assets | (136 | ) | | (123 | ) | | (56 | ) | | (53 | ) | | (5 | ) | | — |
|
Amortization | 88 |
| | 57 |
| | 11 |
| | 9 |
| | 10 |
| | 9 |
|
| 138 |
| | 102 |
| | 48 |
| | 52 |
| | 47 |
| | 51 |
|
Curtailment loss | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Settlement loss | 17 |
| | 12 |
| | 2 |
| | 3 |
| | — |
| | — |
|
Total expense | $ | 155 |
| | $ | 114 |
| | $ | 50 |
| | $ | 56 |
| | $ | 47 |
| | $ | 51 |
|
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Note 7. | LEGAL CONTINGENCIES |
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. This judgment is based on an alleged violation of an agency agreement between Raysul and Saturnia. At September 30, 2012, the Company has a total accrual of 77 Brazilian Reais related to this matter ($38 based on current exchange rates), comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($30 based on current exchange rates) with an additional 17 Brazilian Reais recognized through September 30, 2012 ($8 based on current exchange rates) due to subsequent accruals for interest and inflation. The Company expects that any sum it may be required to pay in connection with this matter will not exceed the amount of the recorded liability. In 2010, Eaton filed motions for clarification with the Brazilian court of appeals which were denied on April 6, 2011. Eaton Holding and Eaton Ltda. filed appeals on various issues to the Superior Court of Justice in Brasilia. All appeals have been accepted by the Superior Court of Justice and will be heard in due course.
On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the United States District Court for Delaware. The action sought damages, which would be trebled under United States antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion was denied on March 10, 2011. On March 14, 2011, Eaton filed a motion for entry of final judgment of liability, zero damages and no injunctive relief. That motion was denied on June 9, 2011. On August 19, 2011, the Court entered final judgment of liability but awarded zero damages to plaintiffs. The Court also entered an injunction prohibiting Eaton from offering rebates or other incentives based on purchasing targets but stayed the injunction pending appeal. Eaton appealed the liability finding and the injunction to the Third Circuit Court of Appeals. Meritor cross-appealed the finding of zero damages. On September 28, 2012, the Court of Appeals affirmed the District Court's denial of Eaton's motion for judgment as a matter of law, and let stand the jury verdict in favor of Meritor. The Third Circuit also ruled that the plaintiffs' damages report was properly excluded, but reversed the judgment of zero damages and ordered that the District Court must allow plaintiffs a limited opportunity to amend the damages report, which may be re-considered for reliability and admissibility. Injunctive relief also was vacated. An estimate of any potential loss related to this action cannot be made at this time.
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries (including asbestos claims), antitrust matters and employment-related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
The effective income tax rate for the third quarter of 2012 was 7.7% compared to 15.2% for the third quarter of 2011 and 10.6% for the first nine months of 2012 compared to 14.8% for the first nine months of 2011. The lower effective tax rate in the third quarter of 2012 was primarily attributable to the utilization of deferred tax assets in Asia Pacific jurisdictions, as well as adjustments related to the filing of the 2011 income tax returns in the United States and international tax jurisdictions. The lower effective tax rate in the first nine months of 2012 was attributable to the items noted above, the favorable impact of enhanced investment incentives in Europe, and a reduction in deferred tax liabilities in a European jurisdiction due to the realization of a lower effective tax rate.
At the end of the fourth quarter of 2011, the IRS issued a Notice for Eaton's 2005 and 2006 tax years. The Notice proposes assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S., net of agreed credits and deductions. The Company has set its transfer prices for products sold between these affiliates at the same prices that the Company sells such products to third parties. The Notice was issued despite the IRS having previously recognized the validity of the Company's transfer pricing methodology by entering into two successive binding Advance Pricing Agreements (APAs) that approved and, in fact, required the application of the Company's transfer pricing methodology for the ten year period of 2001 through 2010. For the years 2001 through 2004, the IRS had previously accepted the transfer pricing methodology related to these APAs after a comprehensive review conducted in two separate audit cycles. On December 16, 2011, immediately prior to the Notice being issued, the IRS sent a letter stating that it was canceling the APAs.
The Company firmly believes that the proposed assessments are without merit. The Company also believes that it was in full compliance with the terms of the two APAs and that the IRS's unilateral attempt to retroactively cancel these two binding contracts is also without merit and represents a breach of the two contracts. On February 29, 2012, the Company filed a Petition with the U.S. Tax Court in which it asserted that the transfer pricing established in the two APA contracts meets the arms-length standard set by the U.S. income tax law, that the transfer pricing the Company has used is in full compliance with U.S. income tax laws, and accordingly, that the two APA contracts should be enforced in accordance with their terms. On June 11, 2012, the Company filed a motion for partial summary judgment with the U.S. Tax Court, asking the U.S. Tax Court to rule the APAs are “contracts” and that the IRS has the burden of proof to substantiate cancellation of the APAs. On October 22, 2012, a hearing on the partial summary judgment motion was held at the U.S. Tax Court. The Company believes that the ultimate resolution of this matter will not have a material impact on its consolidated financial statements.
The changes in Shareholders’ equity follow:
|
| | | | | | | | | | | |
| Eaton shareholders’ equity | | Noncontrolling interests | | Total equity |
Balance at December 31, 2011 | $ | 7,469 |
| | $ | 23 |
| | $ | 7,492 |
|
Net income | 1,038 |
| | 2 |
| | 1,040 |
|
Other comprehensive income | 156 |
| | — |
| | 156 |
|
Cash dividends paid and accrued | (512 | ) | | (3 | ) | | (515 | ) |
Issuance of shares under equity-based compensation plans-net | 69 |
| | — |
| | 69 |
|
Balance at September 30, 2012 | $ | 8,220 |
| | $ | 22 |
| | $ | 8,242 |
|
Net Income per Common Share
A summary of the calculation of net income per common share attributable to common shareholders follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Shares in millions) | 2012 | | 2011 | | 2012 | | 2011 |
Net income attributable to Eaton common shareholders | $ | 345 |
| | $ | 365 |
| | $ | 1,038 |
| | $ | 988 |
|
| | | | | | | |
Weighted-average number of common shares outstanding-diluted | 339.8 |
| | 341.9 |
| | 339.7 |
| | 344.4 |
|
Less dilutive effect of stock options and restricted stock awards | 2.2 |
| | 3.8 |
| | 3.0 |
| | 4.7 |
|
Weighted-average number of common shares outstanding-basic | 337.6 |
| | 338.1 |
| | 336.7 |
| | 339.7 |
|
| | | | | | | |
Net income per common share | | | | | | | |
Diluted | $ | 1.02 |
| | $ | 1.07 |
| | $ | 3.05 |
| | $ | 2.86 |
|
Basic | 1.02 |
| | 1.07 |
| | 3.08 |
| | 2.90 |
|
For the third quarter and first nine months of 2012, 4.2 million and 2.5 million stock options, respectively, were excluded from the calculation of diluted net income per common share because the exercise price of the options exceeded the average market price of the common shares during the period and their effect, accordingly, would have been antidilutive. For the third quarter and first nine months of 2011, 2.7 million and 1.1 million stock options, respectively, were excluded from the calculation of diluted net income per common share because the exercise price of the options exceeded the average market price of the common shares during the period and their effect, accordingly, would have been antidilutive.
| |
Note 10. | FAIR VALUE MEASUREMENTS |
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:
|
| | | | | | | | | | | | | | | |
| Total | | Quoted prices in active markets for identical assets (Level 1) | | Other observable inputs (Level 2) | | Unobservable inputs (Level 3) |
September 30, 2012 | | | | | | | |
Cash | $ | 425 |
| | $ | 425 |
| | $ | — |
| | $ | — |
|
Short-term investments | 620 |
| | 620 |
| | — |
| | — |
|
Net derivative contracts | 93 |
| | — |
| | 93 |
| | — |
|
Long-term debt converted to floating interest rates by interest rate swaps - net | 92 |
| | — |
| | 92 |
| | — |
|
| | | | | | | |
December 31, 2011 | | | | | | | |
Cash | $ | 385 |
| | $ | 385 |
| | $ | — |
| | $ | — |
|
Short-term investments | 699 |
| | 699 |
| | — |
| | — |
|
Net derivative contracts | 46 |
| | — |
| | 46 |
| | — |
|
Long-term debt converted to floating interest rates by interest rate swaps - net | 66 |
| | — |
| | 66 |
| | — |
|
Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $3,997 and fair value of $4,576 at September 30, 2012 compared to $3,687 and $4,273, respectively, at December 31, 2011. The fair value of debt is determined based on trade information in the financial markets of the Company's public debt and is considered a Level 2 fair value measurement.
| |
Note 11. | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES |
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, foreign currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, foreign currency forward exchange contracts, foreign currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Condensed Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between these derivative financial instruments accounted for as hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
| |
• | Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value. |
| |
• | Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) and reclassified to income in the same period when the gain or loss on the hedged item is included in income. |
| |
• | Hedges of the foreign currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income. |
The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business. Gains and losses associated with commodity hedge contracts are classified in Cost of products sold.
Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Debt denominated in foreign currency and designated as non-derivative net investment hedging instruments was $129 at September 30, 2012 and December 31, 2011.
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional amount | | Other current assets | | Other long-term assets | | Other current liabilities | | Other long-term liabilities | | Type of hedge | | Term |
September 30, 2012 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 1,290 |
| | $ | — |
| | $ | 92 |
| | $ | — |
| | $ | — |
| | Fair value | | 1 to 21 years |
Floating-to-fixed interest rate swaps | 300 |
| | — |
| | — |
| | — |
| | 2 |
| | Cash flow | | 2 years |
Foreign currency exchange contracts | 436 |
| | 8 |
| | — |
| | 4 |
| | — |
| | Cash flow | | 12 to 36 months |
Commodity contracts | 27 |
| | — |
| | — |
| | — |
| | — |
| | Cash flow | | 12 months |
Total | | | $ | 8 |
| | $ | 92 |
| | $ | 4 |
| | $ | 2 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Foreign currency exchange contracts | $ | 3,641 |
| | $ | 14 |
| | | | $ | 16 |
| | | | | | 12 months |
Commodity contracts | 22 |
| | 1 |
| | | | — |
| | | | | | 12 months |
Total | | | $ | 15 |
| | | | $ | 16 |
| |
| | | | |
| | | | | | | | | | | | | |
December 31, 2011 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 940 |
| | $ | — |
| | $ | 68 |
| | $ | — |
| | $ | 2 |
| | Fair value | | 1 to 22 years |
Floating-to-fixed interest rate swaps | 300 |
| | — |
| | — |
| | — |
| | — |
| | Cash flow | | 2 years |
Foreign currency exchange contracts | 308 |
| | 4 |
| | — |
| | 9 |
| | — |
| | Cash flow | | 12 to 36 months |
Commodity contracts | 47 |
| | — |
| | — |
| | 7 |
| | — |
| | Cash flow | | 12 months |
Total | | | $ | 4 |
| | $ | 68 |
| | $ | 16 |
| | $ | 2 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Foreign currency exchange contracts | $ | 2,954 |
| | $ | 18 |
| | | | $ | 14 |
| | | | | | 12 months |
Commodity contracts | 61 |
| | — |
| | | | 12 |
| | | | | | 12 months |
Total | | | $ | 18 |
| | | | $ | 26 |
| | | | | | |
The foreign currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage foreign currency volatility or exposure on intercompany sales and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these foreign currency exchange contracts.
Amounts recognized in Accumulated other comprehensive income (loss) follow:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 |
| 2012 | | 2011 |
| Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) | | Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) |
Derivatives designated as cash flow hedges | | | | | | | |
Floating-to-fixed interest rate swaps | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Foreign currency exchange contracts | 4 |
| | 2 |
| | (7 | ) | | (1 | ) |
Commodity contracts | 2 |
| | (3 | ) | | (12 | ) | | 2 |
|
Total | $ | 5 |
| | $ | (1 | ) | | $ | (19 | ) | | $ | 1 |
|
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30 |
| 2012 | | 2011 |
| Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) | | Gain (loss) recognized in Accumulated other comprehensive income (loss) | | Gain (loss) reclassified from Accumulated other comprehensive income (loss) |
Derivatives designated as cash flow hedges | | | | | | | |
Floating-to-fixed interest rate swaps | $ | (3 | ) | | $ | (1 | ) | | $ | — |
| | $ | — |
|
Foreign currency exchange contracts | 10 |
| | 1 |
| | (6 | ) | | (1 | ) |
Commodity contracts | 2 |
| | (7 | ) | | (13 | ) | | 7 |
|
Derivatives designated as net investment hedges | | | | | | | |
Cross currency swaps | — |
| | — |
| | 1 |
| | — |
|
Total | $ | 9 |
| | $ | (7 | ) | | $ | (18 | ) | | $ | 6 |
|
Gains and losses reclassified from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income were recognized in Cost of products sold or Interest expense-net, as appropriate.
Amounts recognized in net income follow:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2012 | | 2011 | | 2012 | | 2011 |
Derivatives designated as fair value hedges | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 11 |
| | $ | 23 |
| | $ | 25 |
| | $ | 25 |
|
Related long-term debt converted to floating interest rates by interest rate swaps | (11 | ) | | (23 | ) | | (25 | ) | | (25 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Gains and losses described above were recognized in Interest expense-net.
The components of inventory follow:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Raw materials | $ | 779 |
| | $ | 706 |
|
Work-in-process | 305 |
| | 272 |
|
Finished goods | 872 |
| | 867 |
|
Inventory at FIFO | 1,956 |
| | 1,845 |
|
Excess of FIFO over LIFO cost | (155 | ) | | (144 | ) |
Total inventory | $ | 1,801 |
| | $ | 1,701 |
|
| |
Note 13. | BUSINESS SEGMENT INFORMATION |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton’s operating segments are Electrical Americas, Electrical Rest of World, Hydraulics, Aerospace, Truck and Automotive. For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2011 Form 10-K.
EATON CORPORATION BUSINESS SEGMENT INFORMATION
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2012 | | 2011 | | 2012 | | 2011 |
Net sales | | | | | | | |
Electrical Americas | $ | 1,143 |
| | $ | 1,074 |
| | $ | 3,363 |
| | $ | 3,071 |
|
Electrical Rest of World | 686 |
| | 755 |
| | 2,020 |
| | 2,285 |
|
Hydraulics | 763 |
| | 717 |
| | 2,267 |
| | 2,130 |
|
Aerospace | 419 |
| | 420 |
| | 1,285 |
| | 1,218 |
|
Truck | 549 |
| | 715 |
| | 1,805 |
| | 1,964 |
|
Automotive | 390 |
| | 442 |
| | 1,238 |
| | 1,348 |
|
Total net sales | $ | 3,950 |
| | $ | 4,123 |
| | $ | 11,978 |
| | $ | 12,016 |
|
| | | | | | | |
Segment operating profit | | | | | | | |
Electrical Americas | $ | 207 |
| | $ | 156 |
| | $ | 559 |
| | $ | 432 |
|
Electrical Rest of World | 76 |
| | 62 |
| | 181 |
| | 209 |
|
Hydraulics | 93 |
| | 109 |
| | 325 |
| | 335 |
|
Aerospace | 49 |
| | 71 |
| | 168 |
| | 166 |
|
Truck | 103 |
| | 139 |
| | 339 |
| | 349 |
|
Automotive | 41 |
| | 62 |
| | 133 |
| | 167 |
|
Total segment operating profit | 569 |
| | 599 |
| | 1,705 |
| | 1,658 |
|
| | | | | | | |
Corporate | | | | | | | |
Amortization of intangible assets | (45 | ) | | (47 | ) | | (129 | ) | | (143 | ) |
Interest expense-net | (42 | ) | | (29 | ) | | (100 | ) | | (92 | ) |
Pension and other postretirement benefits expense | (41 | ) | | (35 | ) | | (121 | ) | | (105 | ) |
Other corporate expense-net | (65 | ) | | (56 | ) | | (192 | ) | | (155 | ) |
Income before income taxes | 376 |
| | 432 |
| | 1,163 |
| | 1,163 |
|
Income tax expense | 29 |
| | 65 |
| | 123 |
| | 172 |
|
Net income | 347 |
| | 367 |
| | 1,040 |
| | 991 |
|
Less net income for noncontrolling interests | (2 | ) | | (2 | ) | | (2 | ) | | (3 | ) |
Net income attributable to Eaton common shareholders | $ | 345 |
| | $ | 365 |
| | $ | 1,038 |
| | $ | 988 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).
COMPANY OVERVIEW
Eaton Corporation 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 74,000 employees in over 50 countries, and sells products to customers in more than 150 countries.
Eaton acquired certain businesses that affect comparability on a year over year basis. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. For a list of business acquisitions and joint ventures impacting the comparative periods, see Note 2 to the Condensed Consolidated Financial Statements.
A summary of Eaton’s Net sales, Net income attributable to Eaton common shareholders, and Net income per common share-diluted follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2012 | | 2011 | | 2012 | | 2011 |
Net sales | $ | 3,950 |
| | $ | 4,123 |
| | $ | 11,978 |
| | $ | 12,016 |
|
Net income attributable to Eaton common shareholders | 345 |
| | 365 |
| | 1,038 |
| | 988 |
|
Net income per common share-diluted | $ | 1.02 |
| | $ | 1.07 |
| | $ | 3.05 |
| | $ | 2.86 |
|
RESULTS OF OPERATIONS
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per common share, and operating profit before acquisition integration charges for each business segment as well as corporate expense, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in the table below and in the discussion of the operating results of each business segment. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.
Consolidated Financial Results
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Decrease | | Nine months ended September 30 | | Increase |
| 2012 | | 2011 | | | 2012 | | 2011 | |
Net sales | $ | 3,950 |
| | $ | 4,123 |
| | (4 | )% | | $ | 11,978 |
| | $ | 12,016 |
| | — | % |
Gross profit | 1,203 |
| | 1,223 |
| | (2 | )% | | 3,662 |
| | 3,572 |
| | 3 | % |
Percent of net sales | 30.5 | % | | 29.7 | % | | | | 30.6 | % | | 29.7 | % | | |
Income before income taxes | 376 |
| | 432 |
| | (13 | )% | | 1,163 |
| | 1,163 |
| | — | % |
Net income | $ | 347 |
| | $ | 367 |
| | (5 | )% | | $ | 1,040 |
| | $ | 991 |
| | 5 | % |
Less net income for noncontrolling interests | (2 | ) | | (2 | ) | | | | (2 | ) | | (3 | ) | | |
Net income attributable to Eaton common shareholders | 345 |
| | 365 |
| | (5 | )% | | 1,038 |
| | 988 |
| | 5 | % |
Excluding acquisition integration charges (after-tax) | 18 |
| | 2 |
| | | | 30 |
| | 6 |
| | |
Operating earnings | $ | 363 |
| | $ | 367 |
| | (1 | )% | | $ | 1,068 |
| | $ | 994 |
| | 7 | % |
| | | | | | | | | | | |
Net income per common share-diluted | $ | 1.02 |
| | $ | 1.07 |
| | (5 | )% | | $ | 3.05 |
| | $ | 2.86 |
| | 7 | % |
Excluding per share impact of acquisition integration charges (after-tax) | 0.05 |
| | 0.01 |
| | | | 0.09 |
| | 0.02 |
| | |
Operating earnings per common share | $ | 1.07 |
| | $ | 1.08 |
| | (1 | )% | | $ | 3.14 |
| | $ | 2.88 |
| | 9 | % |
Net Sales
Net sales in the third quarter of 2012 decreased 4% compared to the third quarter of 2011. The sales decrease was due to a decrease of 4% from the impact of foreign exchange and a decrease of 2% in core sales, partially offset by an increase of 2% from acquisition of businesses. End markets declined 1% in the third quarter of 2012 compared to the same period in 2011. The decrease in core sales in the third quarter of 2012 was due to lower sales volumes as a result of subdued economic growth in Europe and China, and decelerating industrial activity in the U.S. Net sales in the first nine months of 2012 were flat compared to the first nine months of 2011, with a decrease of 3% from the impact of foreign exchange offset by an increase of 2% in core sales and an increase of 1% from acquisitions of businesses. The increase in core sales in the first nine months of 2012 was due to modest growth of the Company's markets during the first six months of 2012, partially offset by lower sales volumes in the third quarter of 2012 as noted above.
Gross Profit
Gross profit decreased 2% in the third quarter of 2012 compared to the third quarter of 2011. Gross profit margin increased 0.8 percentage points from 29.7% in the third quarter of 2011 to 30.5% in the third quarter of 2012. Gross profit increased 3% in the first nine months of 2012 compared to the first nine months of 2011. Gross profit margin increased 0.9 percentage points from 29.7% for the first nine months of 2011 to 30.6% for the first nine months of 2012. The gross profit margin in both the third quarter and first nine months of 2012 was positively impacted by lower commodity costs, partially offset by the factors impacting net sales as noted above.
Income Taxes
The effective income tax rate for the third quarter of 2012 was 7.7% compared to 15.2% for the third quarter of 2011 and 10.6% for the first nine months of 2012 compared to 14.8% for the first nine months of 2011. The lower effective tax rate in the third quarter of 2012 was primarily attributable to the utilization of deferred tax assets in Asia Pacific jurisdictions, as well as adjustments related to the filing of the 2011 income tax returns in the United States and international tax jurisdictions. The lower effective tax rate in the first nine months of 2012 was attributable to the items noted above, the favorable impact of enhanced investment incentives in Europe, and a reduction in deferred tax liabilities in a European jurisdiction due to the realization of a lower effective tax rate.
Net Income
Net income attributable to Eaton common shareholders of $345 in the third quarter of 2012 decreased 5% compared to net income of $365 in the third quarter of 2011, and Net income per common share of $1.02 in the third quarter of 2012 decreased 5% from Net income per common share of $1.07 in the third quarter of 2011. The decrease in the third quarter of 2012 was primarily due to lower sales volumes as noted above and costs incurred pursuant to the acquisition of Cooper, partially offset by lower commodity costs and a lower effective tax rate. Net income attributable to Eaton common shareholders of $1,038 in the first nine months of 2012 increased 5% compared to net income of $988 in the first nine months of 2011, and Net income per common share of $3.05 in the first nine months of 2012 increased 7% over Net income per common share of $2.86 in the first nine months of 2011. The increase in the first nine months of 2012 was primarily due to strong incremental margins on sales volume growth during the first nine months of 2012, lower commodity costs, and a lower effective tax rate.
Business Segment Results of Operations
The following is a discussion of net sales, operating profit and operating profit margin by business segment that includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquired businesses and acquisition integration charges, see Note 2 and Note 3 to the Condensed Consolidated Financial Statements, respectively.
Electrical Americas
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | | | Nine months ended September 30 | | |
| 2012 | | 2011 | | Increase | | 2012 | | 2011 | | Increase |
Net sales | $ | 1,143 |
| | $ | 1,074 |
| | 6 | % | | $ | 3,363 |
| | $ | 3,071 |
| | 10 | % |
| | | | | | | | | | | |
Operating profit | 207 |
| | 156 |
| | 33 | % | | 559 |
| | 432 |
| | 29 | % |
Operating margin | 18.1 | % | | 14.5 | % | | | | 16.6 | % | | 14.1 | % | | |
| | | | | | | | | | | |
Acquisition integration charges | $ | 1 |
| | $ | 3 |
| | | | $ | 4 |
| | $ | 7 |
| | |
| | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | |
Operating profit | $ | 208 |
| | $ | 159 |
| | 31 | % | | $ | 563 |
| | $ | 439 |
| | 28 | % |
Operating margin | 18.2 | % | | 14.8 | % | | | | 16.7 | % | | 14.3 | % | | |
Net sales increased 6% in the third quarter of 2012 compared to the third quarter of 2011 due to an increase of 6% in core sales. End markets grew 4% in the third quarter of 2012 compared to the same period in 2011. Net sales increased 10% in the first nine months of 2012 compared to the first nine months of 2011 due to an increase of 10% in core sales and an increase of 1% from the acquisition of businesses, partially offset by a 1% decrease from the impact of foreign exchange. The increase in net sales in both the third quarter and first nine months of 2012 was due to continued growth in markets served by the Electrical Americas segment, with particularly strong growth in residential and non-residential construction markets. Eaton now anticipates its Electrical Americas markets will grow 6% for all of 2012.
Operating profit before acquisition integration charges in the third quarter of 2012 increased 31% from the third quarter of 2011. Operating margin before acquisition integration charges increased 3.4 percentage points from 14.8% in the third quarter of 2011 to 18.2% in the third quarter of 2012. Operating profit before acquisition integration charges in the first nine months of 2012 increased 28% from the first nine months of 2011. Operating margin before acquisition integration charges increased 2.4 percentage points from 14.3% for the first nine months of 2011 to 16.7% for the first nine months of 2012. The increase in operating margin in both the third quarter and first nine months of 2012 was primarily due to benefits from higher sales volumes, lower commodity costs, and commodity hedge contract losses in the third quarter of 2011 that did not repeat in 2012.
Electrical Rest of World
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | (Decrease) increase | | Nine months ended September 30 | | (Decrease) increase |
| 2012 | | 2011 | | | 2012 | | 2011 | |
Net sales | $ | 686 |
| | $ | 755 |
| | (9 | )% | | $ | 2,020 |
| | $ | 2,285 |
| | (12 | )% |
| | | | | | | | | | | |
Operating profit | 76 |
| | 62 |
| | 23 | % | | 181 |
| | 209 |
| | (13 | )% |
Operating margin | 11.1 | % | | 8.2 | % | | | | 9.0 | % | | 9.1 | % | | |
| | | | | | | | | | | |
Acquisition integration charges | $ | 1 |
| | $ | — |
| | | | $ | 5 |
| | $ | 1 |
| | |
| | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | |
Operating profit | $ | 77 |
| | $ | 62 |
| | 24 | % | | $ | 186 |
| | $ | 210 |
| | (11 | )% |
Operating margin | 11.2 | % | | 8.2 | % | | | | 9.2 | % | | 9.2 | % | | |
Net sales decreased 9% in the third quarter of 2012 compared to the third quarter of 2011 due to a decrease of 6% from the impact of foreign exchange and a decrease of 3% in core sales. End markets declined 6% in the third quarter of 2012 compared to the third quarter of 2011. Net sales decreased 12% in the first nine months of 2012 compared to the first nine months of 2011 due to a decrease in core sales of 7% and a decrease of 6% from the impact of foreign exchange, partially offset by an increase of 1% from the acquisition of a business. The decrease in net sales in both the third quarter and first nine months of 2012 reflects lower sales volumes from the continued weakness in Europe and China. Eaton continues to anticipate its Electrical Rest of World markets will decline 3% for all of 2012.
Operating profit before acquisition integration charges in the third quarter of 2012 increased 24% from the third quarter of 2011. Operating margin before acquisition integration charges increased 3.0 percentage points from 8.2% in the third quarter of 2011 to 11.2% in the third quarter of 2012. The increase in operating margin in the third quarter of 2012 was primarily due to favorable product mix, lower commodity costs, and commodity hedge contract losses in the third quarter of 2011 that did not repeat in 2012. Operating profit before acquisition integration charges in the first nine months of 2012 decreased 11% from the first nine months of 2011. Operating margin before acquisition integration charges was flat, at 9.2% for the first nine months of 2011 and 2012. Operating margin in the first nine months of 2012 was positively impacted by lower commodity costs, as described above, offset by the impact of lower sales volumes from the continued weakness in Europe and China.
Hydraulics
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2012 | | 2011 | | | 2012 | | 2011 | |
Net sales | $ | 763 |
| | $ | 717 |
| | 6 | % | | $ | 2,267 |
| | $ | 2,130 |
| | 6 | % |
| | | | | | | | | | | |
Operating profit | 93 |
| | 109 |
| | (15 | )% | | 325 |
| |