EATON CORPORATION 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 June 30, 2008
Commission file number 1-1396
EATON CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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34-0196300 |
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification Number) |
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Eaton Center, Cleveland, Ohio
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44114-2584 |
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(Address of principal executive offices)
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(Zip Code) |
(216) 523-5000
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant 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 |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
There were 166.2 million Common Shares outstanding as of June 30, 2008.
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EATON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended |
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Six months ended |
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June 30 |
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June 30 |
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(Millions except for per share data) |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
4,279 |
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$ |
3,248 |
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$ |
7,775 |
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$ |
6,361 |
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Cost of products sold |
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3,069 |
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2,346 |
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5,601 |
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4,573 |
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Selling & administrative expense |
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704 |
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528 |
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1,256 |
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1,035 |
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Research & development expense |
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111 |
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85 |
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200 |
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165 |
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Interest expense-net |
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44 |
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41 |
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82 |
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71 |
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Other (income) expense-net |
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(3 |
) |
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(8 |
) |
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(4 |
) |
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(2 |
) |
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Income from continuing operations before income taxes |
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354 |
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256 |
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640 |
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519 |
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Income taxes |
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21 |
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16 |
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63 |
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50 |
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Income from continuing operations |
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333 |
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240 |
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577 |
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469 |
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Income from discontinued operations |
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6 |
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3 |
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11 |
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Net income |
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$ |
333 |
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$ |
246 |
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$ |
580 |
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$ |
480 |
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Net income per Common Share assuming dilution |
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Continuing operations |
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$ |
2.03 |
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$ |
1.60 |
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$ |
3.68 |
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$ |
3.12 |
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Discontinued operations |
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.04 |
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.01 |
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.08 |
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$ |
2.03 |
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$ |
1.64 |
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$ |
3.69 |
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$ |
3.20 |
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Average number of Common Shares outstanding assuming
dilution |
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163.6 |
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150.3 |
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157.1 |
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150.1 |
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Net income per Common Share basic |
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Continuing operations |
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$ |
2.07 |
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$ |
1.63 |
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$ |
3.74 |
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$ |
3.18 |
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Discontinued operations |
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.04 |
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.01 |
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.08 |
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$ |
2.07 |
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$ |
1.67 |
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$ |
3.75 |
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$ |
3.26 |
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Average number of Common Shares outstanding basic |
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161.2 |
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147.4 |
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154.5 |
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147.4 |
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Cash dividends paid per Common Share |
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$ |
.50 |
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$ |
.43 |
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$ |
1.00 |
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$ |
.86 |
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See accompanying notes.
Page 2
EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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(Millions) |
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2008 |
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2007 |
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ASSETS |
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Current assets |
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Cash |
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$ |
219 |
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$ |
142 |
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Short-term investments |
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499 |
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504 |
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Accounts receivable |
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3,029 |
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2,208 |
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Inventories |
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1,844 |
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1,483 |
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Deferred income taxes & other current assets |
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472 |
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430 |
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6,063 |
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4,767 |
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Property, plant & equipment-net |
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2,699 |
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2,333 |
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Goodwill |
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6,181 |
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3,982 |
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Other intangible assets |
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2,047 |
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1,557 |
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Deferred income taxes & other assets |
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933 |
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791 |
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$ |
17,923 |
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$ |
13,430 |
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LIABILITIES & SHAREHOLDERS EQUITY |
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Current liabilities |
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Short-term debt |
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$ |
1,341 |
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$ |
825 |
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Current portion of long-term debt |
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148 |
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160 |
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Accounts payable |
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1,468 |
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1,170 |
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Accrued compensation |
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378 |
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355 |
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Other current liabilities |
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1,340 |
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1,149 |
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4,675 |
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3,659 |
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Long-term debt |
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3,155 |
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2,432 |
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Pension liabilities |
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946 |
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681 |
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Other postretirement liabilities |
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767 |
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772 |
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Other long-term liabilities & deferred income taxes |
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986 |
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714 |
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Shareholders equity |
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7,394 |
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5,172 |
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$ |
17,923 |
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$ |
13,430 |
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See accompanying notes.
Page 3
EATON CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
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Six months ended |
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June 30 |
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(Millions) |
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2008 |
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2007 |
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Net cash provided by (used in) operating activities |
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Net income |
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$ |
580 |
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$ |
480 |
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Adjustments to reconcile to net cash provided by (used in) operating activities |
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Depreciation & amortization |
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280 |
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227 |
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Pension liabilities |
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57 |
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106 |
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Changes in working capital, excluding acquisitions & sales of businesses |
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(459 |
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(389 |
) |
Voluntary contributions to United States & United Kingdom qualified
pension plans |
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(8 |
) |
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(163 |
) |
Other-net |
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(91 |
) |
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(23 |
) |
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359 |
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238 |
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Net cash provided by (used in) investing activities |
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Expenditures for property, plant & equipment |
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(217 |
) |
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(143 |
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Cash paid for acquisitions of businesses |
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(2,694 |
) |
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(794 |
) |
Sales of short-term investments-net |
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28 |
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322 |
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Other-net |
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(8 |
) |
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(6 |
) |
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(2,891 |
) |
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(621 |
) |
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Net cash provided by (used in) financing activities |
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Borrowings with original maturities of more than three months |
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Proceeds |
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1,112 |
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1,222 |
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Payments |
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(731 |
) |
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(765 |
) |
Borrowings with original maturities of less than three months-net,
primarily commercial paper |
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808 |
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216 |
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Cash dividends paid |
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(156 |
) |
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(126 |
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Proceeds from issuance of Common Shares |
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1,522 |
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Proceeds from exercise of employee stock options |
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42 |
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111 |
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Income tax benefit from exercise of employee stock options |
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12 |
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32 |
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Purchase of Common Shares |
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(309 |
) |
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2,609 |
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|
381 |
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Total increase (decrease) in cash |
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77 |
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(2 |
) |
Cash at the beginning of the year |
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142 |
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114 |
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Cash at the end of the period |
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$ |
219 |
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$ |
112 |
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|
See accompanying notes.
Page 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except for per share data (per share data assume dilution)
PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation (Eaton)
have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
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 financial position, results of operations and cash flows for
the stated periods. These financial statements should be read in conjunction with the consolidated
financial statements and related notes included in Eatons 2007 Annual Report on Form 10-K. The
interim period results are not necessarily indicative of the results to be expected for the full
year.
ACQUISITIONS OF BUSINESSES
In 2008 and 2007, Eaton acquired certain businesses in separate transactions. The Statements of
Consolidated Income include the results of these businesses from the effective dates of
acquisition. A summary of these transactions follows:
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Date of |
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Business |
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Acquired business |
|
acquisition |
|
segment |
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Annual sales |
The Moeller Group |
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April 4, 2008 |
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Electrical |
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1.02 billion for |
A Germany-based supplier of electrical
components for commercial and residential
building applications, and industrial controls for
industrial equipment applications |
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2007 |
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Balmen Electronic, S.L. |
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March 31, 2008 |
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Electrical |
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$6 for 2007 |
A Spain-based distributor and service provider
of uninterruptible power supply (UPS) systems |
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Phoenixtec Power Company Ltd. |
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February 26, 2008 |
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Electrical |
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$515 for 2007 |
A Taiwan-based manufacturer of single and
three-phase uninterruptible power supply (UPS)
systems |
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Arrow Hose & Tubing Inc. |
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November 8, 2007 |
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Hydraulics |
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$12 for 2006 |
A Canada-based manufacturer of thermoplastic
hose and tubing for the industrial, food and
beverage, and agricultural markets |
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MGE small systems UPS business from Schneider Electric |
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October 31, 2007 |
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Electrical |
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$245 for the |
A France-based global provider of power quality
solutions including uninterruptible power supply
(UPS) systems, power distribution units, static
transfer switches and surge suppressors |
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|
year ended Sept. 30, 2007 |
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Babco Electric Group |
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October 19, 2007 |
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Electrical |
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$11 for the |
A Canada-based manufacturer of specialty low- and medium-voltage switchgear and electrical housings for use in the Canadian oil and gas
industry and other harsh environments |
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year ended April 30, 2007 |
Page 5
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Date of |
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Business |
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Acquired business |
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acquisition |
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segment |
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Annual sales |
Pulizzi Engineering |
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June 19, 2007 |
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Electrical |
|
$12 for 2006 |
A U.S. manufacturer of alternating current (AC)
power distribution, AC power sequencing,
redundant power and remote-reboot power
management systems |
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Technology and related assets of SMC Electrical |
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May 18, 2007 |
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Electrical |
|
None |
Products, Inc.s industrial medium-voltage adjustable
frequency drive business |
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Fuel components division of Saturn Electronics & Engineering, Inc. |
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May 2, 2007 |
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Automotive |
|
$28 for 2006 |
A U.S. designer and manufacturer of fuel
containment and shutoff valves, emissions control
valves and specialty actuators |
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Aphel Technologies Limited |
|
April 5, 2007 |
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Electrical |
|
$12 for 2006 |
A U.K.-based global supplier of high density,
fault-tolerant power distribution solutions for
datacenters, technical offices, laboratories and
retail environments |
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Argo-Tech Corporation |
|
March 16, 2007 |
|
Aerospace |
|
$206 for 2006 |
A U.S.-based manufacturer of high-performance
aerospace engine fuel pumps and systems,
airframe fuel pumps and systems, and ground
fueling systems for commercial and military
aerospace markets |
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Power Protection Business of Power Products Ltd. |
|
February 7, 2007 |
|
Electrical |
|
$3 for 2006 |
A Czech Republic distributor and
service provider of Powerware®
products and other uninterruptible power supply (UPS) systems |
|
|
|
|
|
|
|
|
The allocation of the purchase prices for acquisitions in 2008, and certain acquisitions in 2007,
are not final and may be subsequently adjusted.
Pro
Forma Results of Continuing Operations
In 2008, Eaton acquired Moeller and Phoenixtec. In 2007, Eaton acquired Argo-Tech and the MGE small
systems UPS business. Unaudited pro forma results of continuing operations for the first six months
of 2008 and 2007, as if Eaton, Moeller, Phoenixtec, Argo-Tech and the MGE small systems UPS
business had been consolidated as of the beginning of those periods, follow. The pro forma results
include estimates and assumptions, which Eatons management believes are reasonable. However, the
pro forma results do not include any cost savings or other effects of the planned integrations of
these businesses, and, accordingly, are not necessarily indicative of the results that would have
occurred if the business combinations had been in effect on the date indicated. These pro forma
results do not include businesses acquired in 2008 and 2007 that were immaterial.
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30 |
|
June 30 |
(Millions except for per share data) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Net sales |
|
$ |
4,279 |
|
|
$ |
3,749 |
|
|
$ |
8,252 |
|
|
$ |
7,370 |
|
Income from continuing operations |
|
|
333 |
|
|
|
234 |
|
|
|
591 |
|
|
|
456 |
|
Net income from continuing operations per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming dilution |
|
$ |
2.04 |
|
|
$ |
1.56 |
|
|
$ |
3.76 |
|
|
$ |
3.04 |
|
Basic |
|
$ |
2.07 |
|
|
$ |
1.59 |
|
|
$ |
3.82 |
|
|
$ |
3.09 |
|
Page 6
Subsequent
Event
On
July 31, 2008, Eaton acquired the engine valves business of
Kirloskar Oil Engines Ltd. This India-based company, which had 2007
sales of $5, designs, manufactures and sells intake and exhaust
valves for diesel and gasoline engines.
Restructuring
Liabilities
Eaton has undertaken restructuring activities at acquired businesses, including workforce
reductions, plant consolidations and facility closures. In accordance with Emerging Issues Task
Force (EITF) Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination, liabilities for these restructuring activities were recorded in the allocation of the
purchase price related to the acquired business. A summary of these liabilities, and utilization of
the various components, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant |
|
|
|
|
|
|
Workforce reductions |
|
|
closing |
|
|
|
|
|
|
Employees |
|
|
Dollars |
|
|
& other |
|
|
Total |
|
Balance at January 1, 2008 |
|
|
659 |
|
|
$ |
27 |
|
|
$ |
12 |
|
|
$ |
39 |
|
Liabilities recorded in 2008 |
|
|
7 |
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Utilized in 2008 |
|
|
(334 |
) |
|
|
(13 |
) |
|
|
(2 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
332 |
|
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUISITION INTEGRATION CHARGES
In 2008 and 2007, Eaton incurred charges related to the integration of acquired businesses. These
charges, which consisted of plant consolidations and integration, were recorded as expense as
incurred. A summary of these charges follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Electrical |
|
$ |
7 |
|
|
$ |
2 |
|
|
$ |
10 |
|
|
$ |
4 |
|
Hydraulics |
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
7 |
|
Aerospace |
|
|
6 |
|
|
|
9 |
|
|
|
13 |
|
|
|
16 |
|
Automotive |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Corporate |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax charges |
|
$ |
17 |
|
|
$ |
14 |
|
|
$ |
30 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax charges |
|
$ |
11 |
|
|
$ |
9 |
|
|
$ |
20 |
|
|
$ |
18 |
|
Per Common Share |
|
$ |
.07 |
|
|
$ |
.06 |
|
|
$ |
.13 |
|
|
$ |
.12 |
|
Charges in 2008 related to the integration of primarily the following acquisitions: in the
Electrical segment, Moeller, Phoenixtec, the MGE small systems UPS business, and Senyuan; in the
Hydraulics segment, Ronningen-Petter, Synflex and Hayward; in the Aerospace segment, Argo-Tech,
PerkinElmer and Cobham; and in the Automotive segment, Saturn.
Charges in 2007 related to the integration of primarily the following acquisitions: in the
Electrical segment, Senyuan and Powerware; in the Hydraulics segment, Synflex, Hayward and
Walterscheid; and in the Aerospace segment, PerkinElmer and Cobham.
The acquisition integration charges were included in the Statements of Consolidated Income in Cost
of products sold or Selling & administrative expense, as appropriate. In Business Segment
Information, the charges reduced Operating profit of the related business segment.
Summary
of Acquisition Integration & Plant Closing Charges
A summary of acquisition integration charges recorded in 2008, and remaining liabilities related to
acquisition integration charges and Excel 07 plant closing charges recorded in prior years,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant |
|
|
|
|
Workforce reductions |
|
closing |
|
|
|
|
Employees |
|
Dollars |
|
& other |
|
Total |
Balance at January 1, 2008
|
|
|
563 |
|
|
$ |
14 |
|
|
$ |
1 |
|
|
$ |
15 |
|
Liabilities recorded in 2008
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
32 |
|
Utilized in 2008
|
|
|
(113 |
) |
|
|
(6 |
) |
|
|
(32 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
450 |
|
|
$ |
8 |
|
|
$ |
1 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 7
FINANCING OF THE ACQUISITIONS OF PHOENIXTEC & THE MOELLER GROUP
In February 2008, Eaton borrowed $250 under a 364-day $3.0 billion revolving credit agreement to
partially finance the acquisition of Phoenixtec. In April 2008, Eaton borrowed 1.33 billion
under the revolving credit agreement to finance the acquisition of The Moeller Group.
In April and May 2008, Eaton sold 18.678 million of its Common Shares in a public offering,
resulting in net cash proceeds of $1.522 billion. In May 2008, Eaton issued $300 of 4.9% notes due
in 2013 and $450 of 5.6% notes due in 2018. The cash proceeds from the sale of the Common Shares
and from the issuance of the notes were used to repay borrowings incurred to fund the acquisitions
of Moeller and Phoenixtec, and to repay commercial paper issued under the backstop provided by the
$3.0 billion revolving credit agreement. Subsequently, in May 2008 Eaton elected to terminate the
$3.0 billion revolving credit agreement.
LONG-TERM DEBT
In May 2008, Eaton issued $300 of 4.9% notes due in 2013 and $450 of 5.6% notes due in 2018. These
notes refinanced a portion of the short-term debt issued to acquire Moeller and Phoenixtec in 2008.
In May 2008, Eaton entered into a new $500 revolving credit facility. This facility replaced two
existing facilities totaling $300 that expired in May 2008. The new facility increases Eatons
United States long-term revolving credit facilities to $1.7 billion.
RETIREMENT BENEFIT PLANS EXPENSE
The components of retirement benefit cost for continuing operations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
postretirement |
|
|
|
Pension benefits |
|
|
benefits |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
(40 |
) |
|
$ |
(39 |
) |
|
$ |
(4 |
) |
|
$ |
(4 |
) |
Interest cost |
|
|
(35 |
) |
|
|
(40 |
) |
|
|
(12 |
) |
|
|
(11 |
) |
Expected return on plan assets |
|
|
34 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(7 |
) |
|
|
(18 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48 |
) |
|
|
(53 |
) |
|
|
(19 |
) |
|
|
(19 |
) |
Curtailment loss |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Settlement loss |
|
|
(7 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(55 |
) |
|
$ |
(67 |
) |
|
$ |
(19 |
) |
|
$ |
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
postretirement |
|
|
|
Pension benefits |
|
|
benefits |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
(75 |
) |
|
$ |
(75 |
) |
|
$ |
(8 |
) |
|
$ |
(7 |
) |
Interest cost |
|
|
(79 |
) |
|
|
(81 |
) |
|
|
(24 |
) |
|
|
(23 |
) |
Expected return on plan assets |
|
|
82 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(19 |
) |
|
|
(37 |
) |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
(104 |
) |
|
|
(38 |
) |
|
|
(37 |
) |
Curtailment loss |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Settlement loss |
|
|
(20 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(111 |
) |
|
$ |
(125 |
) |
|
$ |
(38 |
) |
|
$ |
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 8
INCOME TAXES
The effective income tax rates for continuing operations for the second quarter and the first half
of 2008 were 6.1% and 9.8%, respectively, compared to 6.5% and 9.6% for the same periods in 2007.
The income tax rate for the second quarter of 2008 was affected by actions taken to consolidate
various legal entities, thereby reducing taxes by $33.
Under FASB Interpretation (FIN) No. 48, for each of the unrecognized income tax benefits where it
is possible to estimate the increase or decrease in the balance within the next 12 months, the
Company does not anticipate any significant change.
During the first half of 2008, Eaton acquired several businesses in separate transactions. Eaton
recorded acquired income tax liabilities as of the acquisition dates including $24 of unrecognized
income tax benefits and $22 of related interest and penalties.
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
333 |
|
|
$ |
246 |
|
|
$ |
580 |
|
|
$ |
480 |
|
Foreign currency translation |
|
|
59 |
|
|
|
53 |
|
|
|
152 |
|
|
|
80 |
|
Pensions & other postretirement benefits |
|
|
14 |
|
|
|
22 |
|
|
|
33 |
|
|
|
32 |
|
Other |
|
|
11 |
|
|
|
2 |
|
|
|
11 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
417 |
|
|
$ |
323 |
|
|
$ |
776 |
|
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVENTORIES
The components of inventories follow:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
777 |
|
|
$ |
674 |
|
Work-in-process & finished goods |
|
|
1,181 |
|
|
|
917 |
|
|
|
|
|
|
|
|
Inventories at FIFO |
|
|
1,958 |
|
|
|
1,591 |
|
Excess of FIFO over LIFO cost |
|
|
(114 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,844 |
|
|
$ |
1,483 |
|
|
|
|
|
|
|
|
Page 9
NET INCOME PER COMMON SHARE
A summary of the calculation of net income per Common Share assuming dilution and basic follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30 |
|
|
June 30 |
|
(Shares in millions) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income from continuing operations |
|
$ |
333 |
|
|
$ |
240 |
|
|
$ |
577 |
|
|
$ |
469 |
|
Income from discontinued operations |
|
|
|
|
|
|
6 |
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
333 |
|
|
$ |
246 |
|
|
$ |
580 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of Common Shares outstanding assuming dilution |
|
|
163.6 |
|
|
|
150.3 |
|
|
|
157.1 |
|
|
|
150.1 |
|
Less dilutive effect of stock options |
|
|
2.4 |
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of Common Shares outstanding basic |
|
|
161.2 |
|
|
|
147.4 |
|
|
|
154.5 |
|
|
|
147.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Common Share assuming dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.03 |
|
|
$ |
1.60 |
|
|
$ |
3.68 |
|
|
$ |
3.12 |
|
Discontinued operations |
|
|
|
|
|
|
.04 |
|
|
|
.01 |
|
|
|
.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.03 |
|
|
$ |
1.64 |
|
|
$ |
3.69 |
|
|
$ |
3.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Common Share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.07 |
|
|
$ |
1.63 |
|
|
$ |
3.74 |
|
|
$ |
3.18 |
|
Discontinued operations |
|
|
|
|
|
|
.04 |
|
|
|
.01 |
|
|
|
.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.07 |
|
|
$ |
1.67 |
|
|
$ |
3.75 |
|
|
$ |
3.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL ASSETS & LIABILITIES MEASURED AT FAIR VALUE
In the first quarter of 2008, Eaton adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements. This Statement defines fair value for certain financial and
nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. This guidance applies
to other accounting pronouncements that require or permit fair value measurements. On February 12,
2008, the FASB finalized FASB Staff Position 157-2, Effective Date of FASB Statement No. 157.
This Staff Position delays the effective date of SFAS No. 157 for nonfinancial assets and
liabilities to 2009, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The adoption of SFAS No. 157 had no effect on
Eatons consolidated financial position or results of operations. A summary of financial assets and
liabilities that were measured at fair value at June 30, 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement used |
|
|
|
|
|
|
|
Quoted prices |
|
|
Quoted prices |
|
|
|
|
|
|
|
|
|
|
in active |
|
|
in active |
|
|
|
|
|
|
|
|
|
|
markets for |
|
|
markets for |
|
|
Other |
|
|
|
|
|
|
|
identical |
|
|
similar |
|
|
unobservable |
|
|
|
Recorded |
|
|
instruments |
|
|
instruments |
|
|
inputs |
|
|
|
value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Short-term investments |
|
$ |
499 |
|
|
$ |
499 |
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange
contracts |
|
|
8 |
|
|
|
|
|
|
$ |
8 |
|
|
|
|
|
Commodity contracts |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Fixed-to-floating interest rate swaps |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
Long-term debt converted to floating
interest rates by interest rate swaps |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
511 |
|
|
$ |
499 |
|
|
$ |
12 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 10
BUSINESS SEGMENT INFORMATION
In the first quarter of 2008, Eaton realigned its business segment financial reporting structure.
The Fluid Power segment was realigned into the Hydraulics segment and the Aerospace segment. The
Electrical and Truck segments continue as individual reporting segments and the automotive fluid
connectors business was transferred to the Automotive segment from Fluid Power. Accordingly,
business segment information for prior years has been restated to conform to the current years
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
1,939 |
|
|
$ |
1,158 |
|
|
$ |
3,243 |
|
|
$ |
2,242 |
|
Hydraulics |
|
|
695 |
|
|
|
619 |
|
|
|
1,352 |
|
|
|
1,193 |
|
Aerospace |
|
|
466 |
|
|
|
407 |
|
|
|
896 |
|
|
|
757 |
|
Truck |
|
|
625 |
|
|
|
498 |
|
|
|
1,192 |
|
|
|
1,074 |
|
Automotive |
|
|
554 |
|
|
|
566 |
|
|
|
1,092 |
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,279 |
|
|
$ |
3,248 |
|
|
$ |
7,775 |
|
|
$ |
6,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical |
|
$ |
250 |
|
|
$ |
139 |
|
|
$ |
410 |
|
|
$ |
259 |
|
Hydraulics |
|
|
92 |
|
|
|
68 |
|
|
|
170 |
|
|
|
134 |
|
Aerospace |
|
|
69 |
|
|
|
55 |
|
|
|
132 |
|
|
|
100 |
|
Truck |
|
|
94 |
|
|
|
75 |
|
|
|
179 |
|
|
|
182 |
|
Automotive |
|
|
51 |
|
|
|
69 |
|
|
|
97 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
(42 |
) |
|
|
(19 |
) |
|
|
(67 |
) |
|
|
(35 |
) |
Interest expense-net |
|
|
(44 |
) |
|
|
(41 |
) |
|
|
(82 |
) |
|
|
(71 |
) |
Minority interest |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(7 |
) |
|
|
(5 |
) |
Pension & other postretirement benefit expense |
|
|
(35 |
) |
|
|
(43 |
) |
|
|
(73 |
) |
|
|
(81 |
) |
Stock option expense |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(15 |
) |
|
|
(14 |
) |
Other corporate expense-net |
|
|
(69 |
) |
|
|
(37 |
) |
|
|
(104 |
) |
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
354 |
|
|
|
256 |
|
|
|
640 |
|
|
|
519 |
|
Income taxes |
|
|
21 |
|
|
|
16 |
|
|
|
63 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
333 |
|
|
|
240 |
|
|
|
577 |
|
|
|
469 |
|
Income from discontinued operations |
|
|
|
|
|
|
6 |
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
333 |
|
|
$ |
246 |
|
|
$ |
580 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets of the Electrical segment increased in the first half of 2008 by approximately
$1,049 as a result of the acquisitions of Moeller and Phoenixtec.
Page 11
ITEM 2. MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
Dollars in millions, except for per share data (per share data assume dilution)
OVERVIEW OF EATON
Eaton Corporation is a diversified power management company with 2007 sales of $13 billion. Eaton
is a global technology leader in electrical 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 81,000
employees and sells products to customers in more than 150 countries.
The principal markets for the Electrical segment are industrial, non-residential and residential
construction, commercial, government, institutional, and telecommunications customers. These
customers are generally concentrated in North America, Europe and Asia/Pacific; however, sales are
made globally, directly by Eaton and indirectly through distributors and manufacturers
representatives. The principal markets for the Hydraulics segment are original equipment
manufacturers and after-market customers of off-highway and industrial equipment, as well as
customers in oil and gas, fine chemicals, mining, metal forming, and food and beverage
applications. These customers are located globally, and these products are sold and serviced
through a variety of channels. The principal markets for the Aerospace segment are manufacturers of
commercial and military aircraft and related after-market customers. These customers are located
globally, and these products are sold and serviced through a variety of channels. The principal
markets for the Truck and Automotive segments are original equipment manufacturers and after-market
customers of heavy-, medium-, and light-duty trucks and passenger cars. These customers are located
globally, and most sales of these products are made directly to such customers.
HIGHLIGHTS OF RESULTS FOR 2008
In the second quarter of 2008, Eaton posted quarterly records for sales, net income and net income
per Common Share. Results for 2008 improved over the second quarter of 2007 despite the nearly 40%
rise in oil prices during the quarter, which caused significant turmoil in Eatons
transportation-related end markets. Sales and operating profits for the Electrical, Hydraulics,
Aerospace and Truck business segments all increased in the second quarter of 2008 compared to the
second quarter of 2007. Sales, operating profit and return on sales for the Electrical and
Hydraulics segments in the second quarter of 2008 were quarterly records.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
Increase |
|
|
2008 |
|
|
2007 |
|
|
Increase |
|
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,279 |
|
|
$ |
3,248 |
|
|
|
32 |
% |
|
$ |
7,775 |
|
|
$ |
6,361 |
|
|
|
22 |
% |
Gross profit |
|
|
1,210 |
|
|
|
902 |
|
|
|
34 |
% |
|
|
2,174 |
|
|
|
1,788 |
|
|
|
22 |
% |
Percent of net sales |
|
|
28.3 |
% |
|
|
27.8 |
% |
|
|
|
|
|
|
28.0 |
% |
|
|
28.1 |
% |
|
|
|
|
Income before income taxes |
|
|
354 |
|
|
|
256 |
|
|
|
38 |
% |
|
|
640 |
|
|
|
519 |
|
|
|
23 |
% |
Income after income taxes |
|
$ |
333 |
|
|
$ |
240 |
|
|
|
39 |
% |
|
$ |
577 |
|
|
$ |
469 |
|
|
|
23 |
% |
Income from discontinued operations |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
333 |
|
|
$ |
246 |
|
|
|
35 |
% |
|
$ |
580 |
|
|
$ |
480 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Common Share
assuming dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.03 |
|
|
$ |
1.60 |
|
|
|
27 |
% |
|
$ |
3.68 |
|
|
$ |
3.12 |
|
|
|
18 |
% |
Discontinued operations |
|
|
|
|
|
|
.04 |
|
|
|
|
|
|
|
.01 |
|
|
|
.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.03 |
|
|
$ |
1.64 |
|
|
|
24 |
% |
|
$ |
3.69 |
|
|
$ |
3.20 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the second quarter of 2008 were a quarterly record for Eaton. Sales growth of 32% in
the second quarter of 2008 over the second quarter of 2007 consisted of 19% from acquisitions of
businesses within the last year; 8% from organic growth; and 5% from foreign exchange. Acquisitions
of businesses included The Moeller Group, acquired in April 2008; Phoenixtec, acquired in February
2008; and the MGE small systems UPS business, acquired in October 2007, all of which are included
in the Electrical segment. These acquisitions further expanded the proportion of Eatons sales
outside of the United States. Organic growth included 6% from growth in end markets and 2% from
outgrowing end markets.
Page 12
The increase in sales for the second quarter of 2008 was primarily due to the acquisitions of
businesses, and strong end markets for the Electrical, Hydraulics and Aerospace segments. These
improvements were partially offset by the negative effect of the unforeseen increase in global oil
prices, which increased by nearly 40% in the second quarter of 2008. The sharp increase in global
oil prices negatively affected the Automotive, Truck and Aerospace segments, with light vehicle
sales declining sharply in the U.S., North American heavy-duty and medium-duty truck sales
flattening, and commercial airlines aggressively reducing the number of aircraft in operation.
Sales in the first half of 2008 increased 22% over the first half 2007 primarily due to the same
factors as in the second quarter of 2008, and also reflected sales of the Argo-Tech aerospace
business, acquired in March 2007.
Gross profit increased 34% in the second quarter of 2008 over the second quarter of 2007. This
increase was primarily due to sales growth of 32%; the benefits of integrating acquired businesses;
further benefits from the Excel 07 program; and continued productivity improvements driven by the
Eaton Business System (EBS). These improvements in gross margin were partially offset by the impact
of rising prices for raw materials, supplies and other commodities. The 22% increase in gross
profit for the first half of 2008 over the first half of 2007 was primarily due to the same factors
as in the second quarter of 2008.
Net income in the second quarter of 2008 was a record for Eaton, increasing 35% over the second
quarter of 2007. The improvement in 2008 was primarily due to higher sales and the other factors
that affected gross profit discussed above, partially offset by increases in selling,
administrative, research and development expenses, and higher interest expense, due in part to the
acquisitions of businesses in the past 12 months. The increase in net income for the second quarter
of 2008 also reflected the effect of actions taken in the quarter to consolidate various legal
entities, thereby reducing income taxes by $33. Net income per Common Share in the second quarter
of 2008 increased 24% over the second quarter of 2007 due to the factors that affected net income
discussed above, partially offset by the effect of the sale of 18.678 million Common Shares in a
public offering in April and May 2008. The increases of 21% in net income and 15% in earnings per
share for the first half of 2008 compared to the first half of 2007 were primarily due to the same
factors as in the second quarter of 2008.
In 2008, Eaton acquired certain businesses in separate transactions. The Statements of Consolidated
Income include the results of these businesses from the effective dates of acquisition. A summary
of these transactions follows:
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
Business |
|
|
|
Acquired business |
|
acquisition |
|
segment |
|
Annual sales |
The Moeller Group |
|
April 4, 2008 |
|
Electrical |
|
1.02 billion for |
A Germany-based supplier of electrical components for commercial and residential
building applications, and industrial controls for
industrial equipment applications |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Balmen Electronic, S.L. |
|
March 31, 2008 |
|
Electrical |
|
$6 for 2007 |
A Spain-based distributor and service provider of uninterruptible power supply (UPS) systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenixtec Power Company Ltd. |
|
February 26, 2008 |
|
Electrical |
|
$515 for 2007 |
A Taiwan-based manufacturer of single and
three-phase uninterruptible power supply (UPS)
systems |
|
|
|
|
|
|
|
|
On
July 31, 2008, Eaton acquired the engine valves business of
Kirloskar Oil Engines Ltd. This India-based company, which had 2007
sales of $5, designs, manufactures and sells intake and exhaust
valves for diesel and gasoline engines.
In February 2008, Eaton borrowed $250 under a 364-day $3.0 billion revolving credit agreement to
partially finance the acquisition of Phoenixtec. In April 2008, Eaton borrowed 1.33 billion
under the revolving credit agreement to finance the acquisition of Moeller. In order to refinance
debt that was issued to partially fund these acquisitions, Eaton sold 18.678 million of its Common
Shares in a public offering in April and May 2008, resulting in net cash proceeds of $1.522
billion. In May 2008, Eaton issued $300 of 4.9% notes due in 2013 and $450 of 5.6% notes due in
2018. The cash proceeds from the sale of the Common Shares and from the issuance of the notes were
used to repay borrowings incurred to fund the acquisitions of Moeller and Phoenixtec, and to repay
commercial paper issued under the backstop provided by the $3.0 billion revolving credit agreement.
Subsequently, in May 2008 Eaton elected to terminate the $3.0 billion revolving credit agreement.
Page 13
Total debt of $4,644 at June 30, 2008 increased $1,227 from $3,417 at year-end 2007. The increase
in total debt during 2008 included the issuance in the second quarter of 2008 of $750 of long-term
notes and $1,170 of commercial paper and other borrowings, partially offset by the repayment of
$731 of notes, commercial paper and other debt. The increase in total debt during 2008 largely
resulted from funding the acquisitions of Moeller, Phoenixtec, and other businesses for $2,694,
offset by combined cash proceeds of $2,272 from the sale of 18.678 million Common Shares for $1,522
and the issuance of $750 of long-term notes, and from other borrowings to fund working capital and
other requirements. These actions allowed Eaton to finish the second quarter of 2008 with
net-debt-to-capital ratios about the same as those prior to completing the acquisitions of Moeller
and Phoenixtec. The net-debt-to-capital ratio was 34.7% at June 30, 2008 compared to 34.9% at
year-end 2007, reflecting the combined effect during 2008 of the $1,227 increase in total debt, the
$72 increase in cash and short-term investments, and the $2,222 increase in Shareholders equity,
which largely resulted from the sale of 18.678 million Common Shares in the second quarter of 2008
for net cash proceeds of $1,522, and from net income of $580 for the first six months of
2008.
Net cash provided by operating activities rose to $359 in the first half of 2008 compared to $238
in the first half of 2007. The improvement of $121 in 2008 was primarily due to the decrease of
$155 in voluntary contributions made to the qualified pension plans in the United States and the
United Kingdom, and higher net income of $100, partially offset by a net increase of $70 in working
capital funding and other adjustments. Cash and short-term investments totaled $718 at June 30,
2008, up $72 from $646 at year-end 2007.
Net working capital of $1,388 at June 30, 2008 increased by $280 from $1,108 at year-end 2007. The
increase was primarily due to the $821 increase in accounts receivable that resulted from increased
sales in 2008 and the acquisitions of Moeller and Phoenixtec in 2008; the $361 increase in
inventories to support higher levels of sales and from the acquisitions of Moeller and Phoenixtec;
and the $72 increase in cash and short-term investments. These increases were partially offset by
the $516 increase in short-term debt due to higher commercial paper borrowings to fund operating,
investing and financing activities; and a net decrease of $458 in other working capital items. The
current ratio was 1.3 at June 30, 2008 and at year-end 2007.
In light of its strong results and future prospects, on January 21, 2008 Eaton increased the
quarterly dividend on its Common Shares by 16%, from $.43 per share to $.50 per share, effective
for the February 2008 dividend. This is the fourth dividend increase within the last three years,
reflecting Eatons philosophy of growing its dividend in line with its long-term growth in
earnings.
As of mid-July 2008, Eaton believes end markets in 2008 will be slightly weaker than its initial
forecast, due principally to the impact of higher oil prices on several of its end markets. Eaton
anticipates overall growth of 3% for its end markets in 2008, 1 percentage point lower than the
prior forecast. Eaton expects growth for U.S. markets to be 1% compared to the prior estimate of
2%, while non-U.S. markets are expected to grow 5% compared to the prior estimate of 6%. Eaton
anticipates net income per Common Share in the third quarter of 2008 to be between $1.75 and $1.85
per share, after acquisition integration charges of $.15 per share. For the full year of 2008, due
to the reduction in expectations for end market growth, Eaton reduced the midpoint of its guidance
for 2008 net income per share by $.20 per share. In addition, since the uncertainty regarding the
financing of the acquisitions of Moeller and Phoenixtec was resolved in the second quarter of 2008,
Eaton is narrowing its range of guidance for 2008 earnings. Eaton expects earnings per share for
2008 to be between $7.20 and $7.50 per share, after acquisition integration charges of $.50 per share.
Page 14
RESULTS
OF OPERATIONS 2008 COMPARED TO 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
Six months ended June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
Increase |
|
|
2008 |
|
|
2007 |
|
|
Increase |
|
Continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,279 |
|
|
$ |
3,248 |
|
|
|
32 |
% |
|
$ |
7,775 |
|
|
$ |
6,361 |
|
|
|
22 |
% |
Gross profit |
|
|
1,210 |
|
|
|
902 |
|
|
|
34 |
% |
|
|
2,174 |
|
|
|
1,788 |
|
|
|
22 |
% |
Percent of net sales |
|
|
28.3 |
% |
|
|
27.8 |
% |
|
|
|
|
|
|
28.0 |
% |
|
|
28.1 |
% |
|
|
|
|
Income before income taxes |
|
|
354 |
|
|
|
256 |
|
|
|
38 |
% |
|
|
640 |
|
|
|
519 |
|
|
|
23 |
% |
Income after income taxes |
|
$ |
333 |
|
|
$ |
240 |
|
|
|
39 |
% |
|
$ |
577 |
|
|
$ |
469 |
|
|
|
23 |
% |
Income from discontinued operations |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
333 |
|
|
$ |
246 |
|
|
|
35 |
% |
|
$ |
580 |
|
|
$ |
480 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Common Share
assuming dilution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.03 |
|
|
$ |
1.60 |
|
|
|
27 |
% |
|
$ |
3.68 |
|
|
$ |
3.12 |
|
|
|
18 |
% |
Discontinued operations |
|
|
|
|
|
|
.04 |
|
|
|
|
|
|
|
.01 |
|
|
|
.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.03 |
|
|
$ |
1.64 |
|
|
|
24 |
% |
|
$ |
3.69 |
|
|
$ |
3.20 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the second quarter of 2008 were a quarterly record for Eaton. Sales growth of 32% in
the second quarter of 2008 over the second quarter of 2007 consisted of 19% from acquisitions of
businesses within the last year; 8% from organic growth; and 5% from foreign exchange. Acquisitions
of businesses included The Moeller Group, acquired in April 2008; Phoenixtec, acquired in February
2008; and the MGE small systems UPS business, acquired in October 2007; all of which are included
in the Electrical segment. These acquisitions further expanded the proportion of Eatons sales
outside of the United States. Organic growth included 6% from growth in end markets and 2% from
outgrowing end markets.
The increase in sales for the second quarter of 2008 was primarily due to the acquisitions of
businesses, and strong end markets for the Electrical, Hydraulics and Aerospace segments. These
improvements were partially offset by the negative effect of the unforeseen increase in global oil
prices, which increased by nearly 40% in the second quarter of 2008. The sharp increase in global
oil prices negatively affected the Automotive, Truck and Aerospace segments, with light vehicle
sales declining sharply in the U.S., North American heavy-duty and medium-duty truck sales
flattening, and commercial airlines aggressively reducing the number of aircraft in operation.
Sales in the first half of 2008 increased 22% over the first half 2007 primarily due to the same
factors as in the second quarter of 2008, and also reflected sales of the Argo-Tech aerospace
business, acquired in March 2007.
Gross profit increased 34% in the second quarter of 2008 over the second quarter of 2007. This
increase was primarily due to sales growth of 32%; the benefits of integrating acquired businesses;
further benefits from the Excel 07 program; and continued productivity improvements driven by the
Eaton Business System (EBS). These improvements in gross margin were partially offset by the impact
of rising prices for raw materials, supplies and other commodities. The 22% increase in gross
profit for the first half of 2008 over the first half of 2007 was primarily due to the same factors
as in the second quarter of 2008.
Page 15
OTHER RESULTS OF OPERATIONS
In 2008 and 2007, Eaton incurred charges related to the integration of acquired businesses. These
charges, which consisted of plant consolidations and integration, were recorded as expense as
incurred. A summary of these charges follows:
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Electrical |
|
$ |
7 |
|
|
$ |
2 |
|
|
$ |
10 |
|
|
$ |
4 |
|
Hydraulics |
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
7 |
|
Aerospace |
|
|
6 |
|
|
|
9 |
|
|
|
13 |
|
|
|
16 |
|
Automotive |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Corporate |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax charges |
|
$ |
17 |
|
|
$ |
14 |
|
|
$ |
30 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax charges |
|
$ |
11 |
|
|
$ |
9 |
|
|
$ |
20 |
|
|
$ |
18 |
|
Per Common Share |
|
$ |
.07 |
|
|
$ |
.06 |
|
|
$ |
.13 |
|
|
$ |
.12 |
|
Charges in 2008 related to the integration of primarily the following acquisitions: in the
Electrical segment, Moeller, Phoenixtec, the MGE small systems UPS business, and Senyuan; in the
Hydraulics segment, Ronningen-Petter, Synflex and Hayward; in the Aerospace segment, Argo-Tech,
PerkinElmer and Cobham; and in the Automotive segment, Saturn. Charges in 2007 related to the
integration of primarily the following acquisitions: in the Electrical segment, Senyuan and
Powerware; in the Hydraulics segment, Synflex, Hayward and Walterscheid; and in the Aerospace
segment, PerkinElmer and Cobham. The acquisition integration charges were included in the
Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as
appropriate. In Business Segment Information, the charges reduced Operating profit of the related
business segment.
The effective income tax rates for continuing operations for the second quarter and the first half
of 2008 were 6.1% and 9.8%, respectively, compared to 6.5% and 9.6% for the same periods in 2007.
The income tax rate for the second quarter of 2008 was affected by actions taken to consolidate
various legal entities, thereby reducing taxes by $33.
Net income in the second quarter of 2008 was a record for Eaton, increasing 35% over the second
quarter of 2007. The improvement in 2008 was primarily due to higher sales and the other factors
that affected gross profit discussed above, partially offset by increases in selling,
administrative, research and development expenses, and higher interest expense, due in part to the
acquisitions of businesses in the past 12 months. The increase in net income for the second quarter
of 2008 also reflected the effect of actions taken in the quarter to consolidate various legal
entities, thereby reducing income taxes by $33. Net income per Common Share in the second quarter
of 2008 increased 24% over the second quarter of 2007 due to the factors that affected net income
discussed above, partially offset by the effect of the sale of 18.678 million Common Shares in a
public offering in April and May 2008. The increases of 21% in net income and 15% in earnings per
share for the first half of 2008 compared to the first half of 2007 were primarily due to the same
factors as in the second quarter of 2008.
Page 16
RESULTS BY BUSINESS SEGMENT
Electrical
|
|
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|
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|
|
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|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
2008 |
|
2007 |
|
Increase |
|
2008 |
|
2007 |
|
Increase |
Net sales |
|
$ |
1,939 |
|
|
$ |
1,158 |
|
|
|
67 |
% |
|
$ |
3,243 |
|
|
$ |
2,242 |
|
|
|
45 |
% |
Operating profit |
|
|
250 |
|
|
|
139 |
|
|
|
80 |
% |
|
|
410 |
|
|
|
259 |
|
|
|
58 |
% |
Operating margin |
|
|
12.9 |
% |
|
|
12.0 |
% |
|
|
|
|
|
|
12.6 |
% |
|
|
11.6 |
% |
|
|
|
|
Sales of the Electrical segment reached record levels in the second quarter of 2008. The 67%
increase in sales over the second quarter of 2007 consisted of 53% from acquisitions of businesses
within the past 12 months, primarily Moeller, Phoenixtec and the MGE small systems UPS business;
12% from organic growth; and 2% from foreign exchange. End markets for the Electrical segment grew
about 5% during the second quarter of 2008 compared to second quarter 2007. U.S. markets, which
make up 40% of Electricals sales, grew just under 5% in the second quarter of 2008, and non-U.S.
markets grew 5-1/2% in the second quarter of 2008. Sales for the first half of 2008 increased 45%
over the first half of 2007 primarily due to the same factors as in the second quarter of 2008.
Eaton expects growth in Electricals end markets for all of 2008 to be 5%.
Operating profit rose 80% in the second quarter of 2008 over the second quarter of 2007, and
operating margin rose to 12.9%, both of which were records for this segment. The increase in
operating profit over the second quarter of 2007 was largely due to growth in sales; results of
acquired businesses; further benefits from the Excel 07 program; and continued productivity
improvements. Operating profit was reduced by acquisition integration charges of $7 in the second
quarter of 2008 compared to charges of $2 in the second quarter of 2007, which reduced the
operating margin by 0.4% and 0.2% in 2008 and 2007, respectively. Acquisition integration charges
in 2008 primarily related to Moeller, Phoenixtec, the MGE small systems UPS business, and Senyuan.
Charges in 2007 related to Senyuan and Powerware. The incremental operating margin for the second
quarter of 2008 (the increase in operating profit compared to the increase in sales) was 14%. The
operating margin for acquired businesses for the second quarter of 2008 was 15%.
Operating profit for the first half of 2008 increased 58% over the first half of 2007 primarily due
to the same factors as in the second quarter of 2008. Operating profit was reduced by acquisition
integration charges of $10 in the first half of 2008 compared to charges of $4 in the first half of
2007, which reduced operating margin by 0.3% and 0.2% in 2008 and 2007, respectively.
On April 4, 2008, Eaton acquired The Moeller Group, a Germany-based business which is a leading
supplier of electrical components for commercial and residential building applications, and
industrial controls for industrial equipment applications. This business had sales of 1.02 billion
for 2007.
On March 31, 2008, Eaton acquired Balmen Electronic, S.L., a Spain-based distributor and service
provider of uninterruptible power supply (UPS) systems. This business had sales of $6 for 2007.
On February 26, 2008, Eaton acquired Phoenixtec Power Company Ltd., a Taiwan-based manufacturer of
single- and three-phase uninterruptible power supply (UPS) systems. This business had sales of $515
for 2007.
Page 17
Hydraulics
|
|
|
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|
|
|
|
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|
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|
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|
|
|
|
|
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|
|
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|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
2008 |
|
2007 |
|
Increase |
|
2008 |
|
2007 |
|
Increase |
Net sales |
|
$ |
695 |
|
|
$ |
619 |
|
|
|
12 |
% |
|
$ |
1,352 |
|
|
$ |
1,193 |
|
|
|
13 |
% |
Operating profit |
|
|
92 |
|
|
|
68 |
|
|
|
35 |
% |
|
|
170 |
|
|
|
134 |
|
|
|
27 |
% |
Operating margin |
|
|
13.2 |
% |
|
|
11.0 |
% |
|
|
|
|
|
|
12.6 |
% |
|
|
11.2 |
% |
|
|
|
|
Sales of the Hydraulics segment reached record levels in the second quarter of 2008. The 12%
increase in sales over the second quarter of 2007 consisted of 7% from organic growth and 5% from
foreign exchange. Global hydraulics markets grew 6% in the second quarter of 2008 compared to the
second quarter of 2007, with non-U.S. markets up 7% and U.S. markets up 4%. The hydraulics markets
in the second quarter of 2008 were stronger than expected due principally to strong worldwide
demand for agricultural, mining and oilfield equipment. Sales for the first half of 2008 increased
13% over the first half of 2007 primarily due to the same factors as in the second quarter of 2008.
Based on strong global demand for agricultural, mining and oilfield equipment that should result in
strong demand for hydraulic equipment, Eaton now believes global hydraulics markets for 2008 will
grow 3% compared to its prior estimate of 2%.
Operating profit rose 35% in the second quarter of 2008 over the second quarter of 2007, and
operating margin increased to 13.2%, both of which were records for this segment. The increase in
operating profit over the second quarter of 2007 was due to growth in sales; benefits of
integrating acquired businesses; further benefits from the Excel 07 program; and an overall
improvement in operating efficiencies. Operating profit was reduced by acquisition integration
charges of $1 in the second quarter of 2008 compared to charges of $3 in the second quarter of
2007, which reduced the operating margin by 0.1% and 0.5% in 2008 and 2007, respectively.
Acquisition integration charges in 2008 primarily related to Ronningen-Petter, Synflex and Hayward.
Charges in 2007 largely related to Synflex, Hayward and Walterscheid. The incremental operating
margin for the second quarter of 2008 was 32%.
Operating profit for the first half of 2008 increased 27% over the first half of 2007 primarily due
to the same factors as in the second quarter of 2008. Operating profit was reduced by acquisition
integration charges of $3 in the first half of 2008 compared to charges $7 in the first half of
2007, which reduced operating margin by 0.2% and 0.6% in 2008 and 2007, respectively.
Aerospace
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
2008 |
|
2007 |
|
Increase |
|
2008 |
|
2007 |
|
Increase |
Net sales |
|
$ |
466 |
|
|
$ |
407 |
|
|
|
15 |
% |
|
$ |
896 |
|
|
$ |
757 |
|
|
|
18 |
% |
Operating profit |
|
|
69 |
|
|
|
55 |
|
|
|
25 |
% |
|
|
132 |
|
|
|
100 |
|
|
|
32 |
% |
Operating margin |
|
|
14.8 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
14.7 |
% |
|
|
13.2 |
% |
|
|
|
|
Sales of the Aerospace segment reached record levels in the second quarter of 2008. The 15%
increase in sales over the second quarter of 2007 consisted of 14% from organic growth and 1% from
foreign exchange. Aerospace markets grew just under 7% in the second quarter of 2008 compared to
the second quarter of 2007. Sales for the first half of 2008 increased 18% over the first half of
2007 primarily due to the same factors as in the second quarter of 2008, and also reflected sales
of Argo-Tech, which was acquired in the first quarter of 2007. Eaton anticipates the global
aerospace market will grow 6% in 2008, slightly weaker than expectations at the end of the first
quarter as a result of the reduction in commercial aftermarket volume due to airline fleet capacity
adjustments initiated to deal with higher fuel prices.
Operating profit rose 25% in the second quarter of 2008 over the second quarter of 2007, and was a
second quarter record for this segment. The increase in operating profit over the second quarter of
2007 was due to growth in sales; benefits of integrating acquired businesses; and an overall
improvement in operating efficiencies. Operating profit was reduced by acquisition integration
charges of $6 in the second quarter of 2008 compared to charges of $9 in the second quarter of
2007, which reduced the operating margin by 1.3% and 2.2% in 2008 and 2007, respectively.
Acquisition integration charges in 2008 primarily related to Argo-Tech, PerkinElmer and Cobham.
Charges in 2007 largely related to PerkinElmer and Cobham. The incremental operating margin for the
second quarter of 2008 was 24%.
Page 18
Operating profit for the first half of 2008 increased 32% over the first half of 2007 primarily due
to the same factors as in second quarter of 2008. Operating profit was reduced by acquisition
integration charges of $13 in the first half of 2008 compared to
charges of $16 in the first half of
2007, which reduced operating margin by 1.5% and 2.1% in 2008 and 2007, respectively.
Truck
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2008 |
|
2007 |
|
Increase |
|
2008 |
|
2007 |
|
(Decrease) |
Net sales |
|
$ |
625 |
|
|
$ |
498 |
|
|
|
26 |
% |
|
$ |
1,192 |
|
|
$ |
1,074 |
|
|
|
11 |
% |
Operating profit |
|
|
94 |
|
|
|
75 |
|
|
|
25 |
% |
|
|
179 |
|
|
|
182 |
|
|
|
(2 |
)% |
Operating margin |
|
|
15.0 |
% |
|
|
15.1 |
% |
|
|
|
|
|
|
15.0 |
% |
|
|
16.9 |
% |
|
|
|
|
Sales of the Truck segment increased 26% in the second quarter of 2008 over the second quarter of
2007. The 26% increase in sales consisted of 17% from organic growth and 9% from foreign
exchange. Truck markets in the second quarter of 2008 were up 16% over the second quarter of 2007,
with U.S. markets up 13% and non-U.S. markets up 19%. Production of North American Class 8 trucks
in the second quarter of 2008 totaled 57,000 units, an increase of 7,000 units from the first
quarter of 2008. Sales in the first half of 2008 increased 11% over the first half of 2007, which
was less than the 26% increase in the second quarter of 2008, primarily due to end markets that
were weaker in the first quarter of 2008 versus stronger markets in the first quarter of 2007.
Eaton expects production of North American heavy-duty trucks in the third quarter of 2008 to be
slightly weaker than the second quarter of 2008 and then improve in the fourth quarter of 2008. As
a result, for the full year of 2008, Eaton expects North American Class 8 production to be 215,000
units. The Truck segment continues to significantly benefit from its strong position in non-U.S.
markets, particularly Brazil. Despite the reduced outlook for North American truck production, the
strength in international markets should allow the Truck segment to post a strong second half of
2008.
Operating profit increased 25% in the second quarter of 2008 over the second quarter of 2007. The
increase in operating profit over the second quarter of 2007 was due to growth in sales; further
benefits from the Excel 07 program; and an overall improvement in operating efficiencies.
Operating profit in the first half of 2008 decreased 2% from the first half of 2007. This reduction
was primarily due to reduced sales resulting primarily from end markets that were weaker in the
first quarter of 2008 compared to the first quarter of 2007. This segment achieved an operating
margin of 15.0% in the first half of 2008.
Automotive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
2008 |
|
2007 |
|
(Decrease) |
|
2008 |
|
2007 |
|
(Decrease) |
Net sales |
|
$ |
554 |
|
|
$ |
566 |
|
|
|
(2 |
)% |
|
$ |
1,092 |
|
|
$ |
1,095 |
|
|
|
|
|
Operating profit |
|
|
51 |
|
|
|
69 |
|
|
|
(26 |
)% |
|
|
97 |
|
|
|
132 |
|
|
|
(27 |
)% |
Operating margin |
|
|
9.2 |
% |
|
|
12.2 |
% |
|
|
|
|
|
|
8.9 |
% |
|
|
12.1 |
% |
|
|
|
|
The 2% decrease in sales of the Automotive segment in the second quarter of 2008 from the second
quarter of 2007 reflected an 8% decrease in sales volume, partially offset by a 6% increase from
foreign exchange. In the second quarter of 2008, the global automotive markets were down 3%
compared to the second quarter of 2007, with U.S. markets down 16% and non-U.S. markets up 6%. The
automotive market in the U.S. dropped markedly in the second quarter of 2008 in response to the
sharp increase in fuel prices. In addition, the strike at a major U.S. automotive supplier was not
fully resolved until very late in the quarter, further reducing automotive production in the U.S.
Sales for the first half of 2008 were flat compared to the first half of 2007 primarily due to the
same factors as in the second quarter of 2008.
Operating profit decreased 26% in the second quarter of 2008 from the second quarter of 2007,
largely due to the decline in sales volume; changes in product mix; and impact from the strike at
an automotive supplier, partially offset by further benefits from the Excel 07 program. Operating
profit in the second quarter of 2008 was reduced by acquisition integration charges of $1. These
charges reduced operating margin by 0.2%.
Operating profit in the first half of 2008 decreased 27% from the first half of 2007 primarily due
to the same factors as in second quarter of 2008. Operating profit in the first half of 2008 was
reduced by acquisition integration charges of $2, which reduced operating margin by 0.2%.
On
July 31, 2008, Eaton acquired the engine valves business of
Kirloskar Oil Engines Ltd. This India-based company, which had 2007
sales of $5, designs, manufactures and sells intake and exhaust
valves for diesel and gasoline engines.
Page 19
Corporate
Amortization
of intangible assets was $42 for the second quarter of 2008 and $67 for the first half
of 2008, an increase from $19 and $35 for the same periods in 2007, due to amortization of
intangible assets associated with recently acquired businesses.
Interest expense of $44 for the second quarter of 2008 and $82 for the first half of 2008 increased
from $41 and $71 for the same periods in 2007, primarily due to borrowings to finance recently
acquired businesses.
Other corporate expense-net of $69 for the second quarter of 2008 and $104 for the first half of
2008, increased from $37 and $82 for the same periods in 2007 primarily due to the amortization of
purchase price accounting adjustments related to the fair value of inventories of acquired
businesses, principally Moeller.
CHANGES IN FINANCIAL CONDITION DURING 2008
Net working capital of $1,388 at June 30, 2008 increased by $280 from $1,108 at year-end 2007. The
increase was primarily due to the $821 increase in accounts receivable that resulted from increased
sales in 2008 and the acquisitions of Moeller and Phoenixtec in 2008; the $361 increase in
inventories to support higher levels of sales and from the acquisitions of Moeller and Phoenixtec;
and the $72 increase in cash and short-term investments. These increases were partially offset by
the $516 increase in short-term debt due to higher commercial paper borrowings to fund operating,
investing and financing activities; and a net decrease of $458 in other working capital items. The
current ratio was 1.3 at June 30, 2008 and at year-end 2007.
Net cash provided by operating activities rose to $359 in the first half of 2008 compared to $238
in the first half of 2007. The improvement of $121 in 2008 was primarily due to the decrease of
$155 in voluntary contributions made to the qualified pension plans in the United States and the
United Kingdom, and higher net income of $100, partially offset by a net increase of $70 in working
capital funding and other adjustments. Cash and short-term investments totaled $718 at June 30,
2008, up $72 from $646 at year-end 2007.
In February 2008, Eaton borrowed $250 under a 364-day $3.0 billion revolving credit agreement to
partially finance the acquisition of Phoenixtec. In April 2008, Eaton borrowed 1.33 billion under the revolving credit agreement to finance the acquisition of Moeller. In order
to refinance debt that was issued to partially fund these acquisitions, Eaton sold 18.678 million
of its Common Shares in a public offering in April and May 2008, resulting in net cash proceeds of
$1.522 billion. In May 2008, Eaton issued $300 of 4.9% notes due in 2013 and $450 of 5.6% notes due
in 2018. The cash proceeds from the sale of the Common Shares and from the issuance of the notes
were used to repay borrowings incurred to fund the acquisitions of Moeller and Phoenixtec, and to
repay commercial paper issued under the backstop provided by the $3.0 billion revolving credit
agreement. Subsequently, in May 2008 Eaton elected to terminate the $3.0 billion revolving credit
agreement.
Total debt of $4,644 at June 30, 2008 increased $1,227 from $3,417 at year-end 2007. The increase
in total debt during 2008 included the issuance in the second quarter of 2008 of $750 of long-term
notes and $1,170 of commercial paper and other borrowings, partially offset by the repayment of
$731 of notes, commercial paper and other debt. The increase in total debt during 2008 largely
resulted from funding the acquisitions of Moeller, Phoenixtec, and other businesses for $2,694,
offset by combined cash proceeds of $2,272 from the sale of 18.678 million Common Shares for $1,522
and the issuance of $750 of long-term notes, and from other borrowings to fund working capital and
other requirements. These actions allowed Eaton to finish the second quarter of 2008 with
net-debt-to-capital ratios about the same as those prior to completing the acquisitions of Moeller
and Phoenixtec. The net-debt-to-capital ratio was 34.7% at June 30, 2008 compared to 34.9% at
year-end 2007, reflecting the combined effect during 2008 of the $1,227 increase in total debt, the
$72 increase in cash and short-term investments, and the $2,222 increase in Shareholders equity,
which largely resulted from the sale of 18.678 million Common Shares in the second quarter of 2008
for net cash proceeds of $1,522, and from net income of $580 for the first six months of
2008.
In May 2008, Eaton entered into a new $500 revolving credit facility. This facility replaced two
existing facilities totaling $300 that expired in May 2008. The new facility increases Eatons
United States long-term revolving credit facilities to $1.7 billion.
Page 20
In light of its strong results and future prospects, on January 21, 2008 Eaton increased the
quarterly dividend on its Common Shares by 16%, from $.43 per share to $.50 per share, effective
for the February 2008 dividend. This is the fourth dividend increase within the last three years,
reflecting Eatons philosophy of growing its dividend in line with its long-term growth in
earnings.
In the first quarter of 2008, Eaton adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements. This Statement defines fair value for certain financial and
nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The adoption of SFAS
No. 157 had no effect on Eatons consolidated financial position or results of operations.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the table of contractual obligations presented on page 71 of
Eatons Annual Report on Form 10-K for the year ended December 31, 2007.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning Eatons third quarter 2008 and
full year 2008 net income per Common Share, worldwide markets, growth in relation to end markets,
growth from acquisitions and events and trends that may affect Eatons future operating results and
financial position. These statements or disclosures may discuss goals, intentions and expectations
as to future trends, plans, events, results of operations or financial condition, or state other
information relating to Eaton, based on current beliefs of management as well as assumptions made
by, and information currently available to, management. Forward-looking statements generally will
be accompanied by words such as anticipate, believe, could, estimate, expect, forecast,
guidance, intend, may, possible, potential, predict, project or other similar words,
phrases or expressions. These statements should be used with caution and are subject to various
risks and uncertainties, many of which are outside Eatons control. The following factors could
cause actual results to differ materially from those in the forward-looking statements:
unanticipated changes in the markets for Eatons business segments; unanticipated downturns in
business relationships with customers or their purchases from Eaton; competitive pressures on sales
and pricing; increases in the cost of material and other production costs, or unexpected costs that
cannot be recouped in product pricing; the introduction of competing technologies; unexpected
technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions;
strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated
difficulties integrating acquisitions; new laws and governmental regulations; interest rate
changes; stock market fluctuations; and unanticipated deterioration of economic and financial
conditions in the United States and around the world. Eaton does not assume any obligation to
update these forward-looking statements.
ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk presented on page 70 of Eatons Annual Report on
Form 10-K for the year ended December 31, 2007.
ITEM 4. CONTROLS & PROCEDURES
Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act), an evaluation
was performed, under the supervision and with the participation of Eatons management, including
Alexander M. Cutler Chairman, Chief Executive Officer and President; and Richard H. Fearon -
Executive Vice President Chief Financial and Planning Officer, of the effectiveness of the design
and operation of Eatons disclosure controls and procedures. Based on that evaluation, management
concluded that Eatons disclosure controls and procedures were effective as of June 30, 2008.
Disclosure controls and procedures are designed to ensure that information required to be disclosed
in Eatons reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in Eatons reports filed under the
Exchange Act is accumulated and communicated to management, including Eatons Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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Eaton acquired The Moeller Group and Phoenixtec in 2008. These businesses maintain their own
accounting and information systems and processes, and, prior to their acquisitions by Eaton,
reported their financial results using non-United States generally accepted accounting and
reporting principles. Eaton is currently implementing its policies and processes at these
businesses. Accordingly, the acquisition of these businesses has affected Eatons internal control
over financial reporting. With the exception of these business acquisitions in the first half of
2008, there was no change in Eatons internal control over financial reporting during the second
quarter of 2008, that materially affected, or is reasonably likely to materially affect, Eatons
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits See Exhibit Index attached.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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EATON CORPORATION |
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Registrant |
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Date: August 5, 2008
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/s/ Richard H. Fearon |
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Richard H. Fearon
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Executive Vice President - |
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Chief Financial and Planning Officer |
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EATON CORPORATION
SECOND QUARTER 2008 REPORT ON FORM 10-Q
EXHIBIT INDEX
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3 (a)
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Amended Articles of Incorporation (amended and restated as of April 24, 2008) Incorporated by
reference to the Form 10-Q Report for the quarter ended March 31, 2008 |
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3 (b)
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Amended Regulations (amended and restated as of April 23, 2008) Incorporated by reference
to the Form 10-Q Report for the quarter ended March 31, 2008 |
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4
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Instruments defining rights of security holders, including indentures (Pursuant to Regulation S-K
Item 601(b)(4), Eaton agrees to furnish to the Commission, upon request, a copy of the
instruments defining the rights of holders of long-term debt) |
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12
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Ratio of Earnings to Fixed Charges Filed in conjunction with this Form 10-Q Report |
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31.1
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Certification of Chief Executive Officer (Pursuant to Rule 13a-14(a)) Filed in conjunction with
this Form 10-Q Report |
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31.2
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Certification of Chief Financial Officer (Pursuant to Rule 13a-14(a)) Filed in conjunction with
this Form 10-Q Report |
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32.1
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Certification of Chief Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act) Filed in conjunction with this Form 10-Q Report |
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32.2
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Certification of Chief Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act) Filed in conjunction with this Form 10-Q Report |
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