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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950152-01-500132.txt : 20010308
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ACCESSION NUMBER: 0000950152-01-500132
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010306
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EATON CORP
CENTRAL INDEX KEY: 0000031277
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600]
IRS NUMBER: 340196300
STATE OF INCORPORATION: OH
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 002-25786
FILM NUMBER: 1561655
BUSINESS ADDRESS:
STREET 1: EATON CTR
STREET 2: 1111 SUPERIOR AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44114-2584
BUSINESS PHONE: 2165235000
MAIL ADDRESS:
STREET 1: 1111 SUPERIOR AVENUE
STREET 2: EATON CENTER
CITY: CLEVELAND
STATE: OH
ZIP: 44114
FORMER COMPANY:
FORMER CONFORMED NAME: EATON YALE & TOWNE INC
DATE OF NAME CHANGE: 19710822
</SEC-HEADER>
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<TYPE>10-K405
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<FILENAME>l86847ae10-k405.txt
<DESCRIPTION>EATON CORPORATION 10-K405
<TEXT>
<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2000
Commission file number 1-1396
Eaton Corporation
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
- ------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(216) 523-5000
- ------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------ ----------------------------
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
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 twelve months and (2) has been subject to such filing requirements
for the past ninety days. Yes X
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of voting stock held by non-affiliates of the
registrant as of January 31, 2001 was $4.7 billion. As of January 31, 2001,
there were 68,450,766 Common Shares outstanding.
<PAGE> 2
Page 2
Documents Incorporate By Reference
Eaton Corporation (Eaton or Company) submits all required reports to the
Securities and Exchange Commission (Commission), including financial statements,
notes to financial statements and other financial information, through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
In order to minimize cost and duplication of information provided to
shareholders, the Company has not reproduced in this document the Annual Report
on Form 10-K filed with the Commission, but instead, has elected to provide
certain financial information in Parts I and II of Form 10-K through
incorporation by reference to the 2000 Annual Report to shareholders.
Portions of the Proxy Statement for the 2001 annual shareholders' meeting are
incorporated by reference into Part III.
Part I
Item 1. Business
Eaton Corporation (Eaton or Company), incorporated in 1916, is a global
diversified industrial manufacturer. Eaton is a leader in fluid power systems,
electrical power quality and controls, automotive air management and fuel
economy, and intelligent truck components for fuel economy and safety. Worldwide
sales in 2000 reached $8.3 billion. Headquartered in Cleveland, Ohio, the
Company has 59,000 employees and 195 manufacturing sites in 24 countries on six
continents. The internet address for Eaton is http://www.eaton.com.
On June 30, 2000, Eaton's semiconductor equipment operations were reorganized
into a wholly-owned subsidiary, Axcelis Technologies, Inc. In July, Axcelis
completed an initial public offering for 17.6% of its common stock, and on
December 29, 2000 Eaton distributed its remaining interest in Axcelis to Eaton
shareholders as a dividend (spin-off). Accordingly, the consolidated financial
statements have been restated to display Axcelis as a discontinued operation.
Business Segment Information
Information regarding principal products, net sales, operating profit and
long-lived assets by business segment and geographic region, is presented in
"Business Segment and Geographic Region Information" on pages 45 through 50 of
this report. Additional information regarding Eaton's segments and business in
general is presented below.
<PAGE> 3
Page 3
Automotive
Patents and Trademarks - Eaton owns, controls, or is licensed under many patents
related to this segment. While the EATON and EATON (logomark) trademarks are
emphasized in marketing many products within this segment, the Company also
markets under a number of other trademarks including EATONITE, DILL, IKU, ULV,
SUPERCHARGER (& DESIGN), DYNA-TRAXX, INTELLI-TRAXX.
Seasonal Fluctuations - Sales of the Automotive segment are generally reduced in
the third quarter of each year as a result of preparations by vehicle
manufacturers for the upcoming model year and temporary shut-downs for taking
physical inventories.
Competition - Principal methods of competition in this segment are price,
service and product performance. Eaton occupies a strong competitive position in
relation to many competitors in this segment and, with respect to many products,
is considered among the market leaders.
Significant Customers - Approximately 45% of this segment's net sales in 2000
were made to divisions and subsidiaries of three large original equipment
manufacturers of vehicles, generally concentrated in North America and Europe.
Eaton has been conducting business with each of these companies for many years.
Sales to these companies include a number of different products and different
models or types of the same product, sales of which are not dependent upon one
another. With respect to many of the products sold, various divisions and
subsidiaries of each of the companies are in the nature of separate customers,
and sales to one division or subsidiary are not dependent upon sales to other
divisions or subsidiaries. One of these customers is also a significant customer
of the Truck segment.
Fluid Power
Patents and Trademarks - Eaton owns, controls, or is licensed under many patents
related to this segment. The EATON, EATON (logomark), CHAR-LYNN, Q-AMP, GEROLER,
ORBIT, ORBITROL, VICKERS, TEDECO, STERER, ILLUMINATER, LUBRICLONE, LEVELMASTER,
EEMCO, TELLITE, AEROQUIP, "FLYING A" LOGO, AEROQUIP EXPRESS, BENCHMARK, BRUISER,
AQP, HI-PAC, STC, MATCHMATE, MATCHMATE BLUE, MATCHMATE ICE, STARTLITE, EPSILON,
RYNGLOK, AIRFLEX, FAWICK, and GOLF PRIDE trademarks are used in connection with
marketing products included in this segment.
Competition - Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton occupies a strong
competitive position in relation to many competitors in this segment and, with
respect to many products, is considered among the market leaders.
<PAGE> 4
Page 4
Significant Customers - Approximately 6% of this segment's net sales in 2000
were made to one manufacturer of vehicles in Europe, which is not a significant
customer of any other segment.
Industrial & Commercial Controls
Patents and Trademarks - Eaton owns, controls, or is licensed under many patents
related to this segment. The EATON, EATON (logomark), CUTLER-HAMMER, CH
(EMBLEM), C-HESS, SERIES C (& DESIGN), DE-ION, DURANT, CHALLENGER, FACTORYMATE,
PANELMATE, POW-R-WAY, POW-R-LINE, POW-R-QUICK, POW-R-DESIGNER, ADVANTAGE,
ADVANTAGE PLUS, ADVANTAGE (& DESIGN), ADVANCED POWER CENTER, MAGNUM, MAGNUM DS,
DS, OPTIM, TRI-PAC, IMPACC, and HEINEMANN are some of the more significant
trademarks used in connection with marketing products included in this segment.
In addition, the Company has the right to use the WESTINGHOUSE trademark in
marketing certain products until 2004.
Competition - Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton occupies a strong
competitive position in relation to many competitors in this segment and, with
respect to many products, is considered among the market leaders.
Significant Customers - Approximately 20% of this segment's net sales in 2000
were made to one customer located in the United States, which is not a
significant customer of any other segment.
Truck
Patents and Trademarks- Eaton owns, controls, or is licensed under many patents
related to this segment. The EATON, EATON (logomark), FULLER, ROADRANGER,
AutoShift, VORAD, SmartCruise, EASY-PEDAL , SOLO, ANGLE SPRING, LIGHTNING and
TOP 2 trademarks are used in connection with marketing products included in this
segment.
Competition - Principal methods of competition in this segment are price,
service and product performance. Eaton occupies a strong competitive position in
relation to many competitors in this segment and, with respect to many products,
is considered among the market leaders.
Significant Customers- Approximately 62% of this segment's net sales in 2000
were made to divisions and subsidiaries of four original equipment manufacturers
of heavy-, medium-, and light-duty trucks and off-highway vehicles, generally
concentrated in North America and Europe. One of these customers is also a
significant customer of the Automotive segment.
Information Concerning Eaton's Business in General
Patents - Eaton's policy is to file applications and obtain patents for its new
products including product modifications and
<PAGE> 5
Page 5
improvements. While patents generally expire 20 years after the patent
application filing date, new patents are issued to Eaton on a regular basis.
While in the aggregate Eaton's patents are considered important in the operation
of its businesses, the loss or expiration of any one patent would not materially
affect Eaton as a whole.
Employees - Eaton has 5,571 United States employees who are subject to a total
of 18 different collective bargaining agreements and are represented by the
following unions: IAM, UAW, PACE, IBEW, USW, IUE, MPWU, and BSEA.
Raw Materials - Principal raw materials used are iron, steel, copper, aluminum,
brass, insulating materials, silver, rubber and plastic. Materials are purchased
in various forms, such as pig iron, metal sheets and strips, forging billets,
bar stock and plastic pellets. Raw materials, as well as parts and other
components, are purchased from many suppliers and, under normal circumstances,
the Company has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed with Eaton by
original equipment manufacturers of cars, trucks and off-highway vehicles are
historically subject to month-to-month releases by customers during each model
year, such orders are not considered technically firm. In measuring backlog of
orders, the Company includes only the amount of such orders released by such
customers as of the dates listed. Using this criterion, total backlog at
December 31, 2000 and 1999 (in billions) was approximately $1.4 and $1.5,
respectively. Backlog should not be relied upon as being indicative of results
of operations for future periods.
Research and Development - Research and development expenses for new products
and improvement of existing products in 2000, 1999 and 1998 (in millions) were
$269, $262 and $252, respectively. Over the past five years, the Company has
invested approximately $1.3 billion in research and development.
Protection of the Environment - Operations of the Company involve the use and
disposal of certain substances regulated under environmental protection laws.
The Company continues to modify, on an ongoing, regular basis, certain processes
in order to reduce the impact on the environment, including the reduction or
elimination of certain chemicals used in and wastes generated from operations.
Compliance with Federal, State and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, is not expected to have a
material adverse effect upon earnings or the competitive position of the
Company. Eaton's estimated capital expenditures for environmental control
facilities are not expected to be material for 2001 and 2002. Information
regarding the Company's liabilities related to environmental
<PAGE> 6
Page 6
matters, presented in "Protection of the Environment" on pages 35 and 36 of this
report.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains
manufacturing facilities at 195 locations in 24 countries. The Company is a
lessee under a number of operating leases for certain real properties and
equipment, none of which are material to the Company's operations. Eaton's
principal research facilities are located in Southfield, Michigan, and
Milwaukee, Wisconsin. In addition, certain divisions conduct research in their
own facilities. Management believes that the manufacturing facilities are
adequate for operations, and such facilities are maintained in good condition.
Item 3. Legal Proceedings
None required to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Shares are listed for trading on the New York, Chicago,
Pacific and London stock exchanges. Information regarding cash dividends paid
and the high and low market price per Common Share for each quarter in 2000 and
1999, is presented in "Quarterly Data" on pages 66 and 67 of this report. At
December 31, 2000, there were 11,847 holders of record of the Company's Common
Shares. Additionally, approximately 28,000 current and former employees were
shareholders through participation in the Eaton Share Purchase and Investment
Plan.
Item 6. Selected Financial Data
Information regarding selected financial data, is presented in the "Five-Year
Consolidated Financial Summary" on pages 68 and 69 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", is presented on pages 51 through 65 of this report.
<PAGE> 7
Page 7
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Information regarding market risk, is presented on pages 62 and 63 of this
report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, financial review and the report of
independent auditors, is presented on pages 17 through 50 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information contained in the definitive Proxy Statement to be filed on or about
March 16, 2001, with respect to directors, is incorporated by reference.
A listing of Eaton's officers, their ages, positions and offices held over the
past five years, as of January 31, 2001, follows:
Name Age Position (Date elected to position)
- --------------------- ---- ----------------------------------------------
Alexander M. Cutler 49 Chairman and Chief Executive Officer;
President (August 1, 2000 - present)
President and Chief Operating Officer
(September 1, 1995 - July 31,2000)
Director (1993 - present)
Adrian T. Dillon 47 Executive Vice President - Chief
Financial and Planning Officer
(April 23, 1997 - present)
Vice President - Chief Financial and
Planning Officer (1995-1997)
Craig Arnold 40 Senior Vice President and Group
Executive - Fluid Power(October 25,
2000 - present)
Corporate Vice President of General
Electric and President of GE
Lighting Service Ltd. (1999-2000)
Corporate Vice President and President
of GE Plastics, Greater China (1998-
1999)
<PAGE> 8
Page 8
Corporate Vice President and President of
GE Appliances, Asia (1997-1998)
Managing Director of Structured
Products Europe at GE Plastics(1995-
1997)
Stephen M. Buente 50 Senior Vice President and Group
Executive - Automotive (August 21,
2000 - present)
Operations Vice President - Automotive
Controls (1999-2000)
Operations Vice President - Engine
Components (1995-1999)
Randy W. Carson 50 Senior Vice President and Group
Executive - Cutler-Hammer
(January 1, 2000 - present)
Vice President - Growth Initiatives
(February 24, 1999 - December 31,
1999)
Senior Vice President at Rockwell
Automation (1992-1998)
Thomas W. O'Boyle 58 Senior Vice President and Group
Executive - Truck Components
(September 1, 1995 - present)
Kristen M. Bihary 47 Vice President - Communications
(July 28, 1999 - present)
Vice President - External Affairs,
Internal and Marketing Communications
at Shell Chemical Company (1998-1999)
Vice President - Public Affairs at
Varity Corporation (1995-1998)
Donald H. Bullock 41 Vice President - Information
Technologies (August 1, 2000 -
present)
Director of Finance Reengineering
(1998-2000)
Principal at CSC Index (1992-1998)
Susan J. Cook 53 Vice President - Human Resources
(January 16, 1995 - present)
Earl R. Franklin 57 Secretary and Associate General Counsel
(September 1, 1991 - present)
J. Robert Horst 57 Vice President and General Counsel
(January 1, 2000 - present)
Deputy General Counsel (1998-1999)
Associate General Counsel (1991-1998)
<PAGE> 9
Page 9
Stanley V. Jaskolski 62 Vice President - Technical Management
(October 1, 1990 - present)
John S. Mitchell 44 Vice President - Taxes (November 22,
1999 - present)
Vice President - Taxes at The Limited,
Inc. (1997-1999)
Director of Taxes at The Limited, Inc.
(1987-1997)
Robert E. Parmenter 48 Vice President and Treasurer
(January 1, 1997 - present)
Assistant Treasurer (1994-1996)
Billie K. Rawot 49 Vice President and Controller
(March 1, 1991 - present)
Ken D. Semelsberger 39 Vice President - Strategic Planning
(April 28, 1999 - present)
Director - Corporate Development and
Planning (1998-1999)
Director - Strategic Planning (1995-1998)
There are no family relationships among the officers listed, and there are no
arrangements or understandings pursuant to which any of them were elected as
officers. All officers hold office for one year and until their successors are
elected and qualified, unless otherwise specified by the Board of Directors;
provided, however, that any officer is subject to removal with or without cause,
at any time, by a vote of a majority of the Board of Directors.
Item 11. Executive Compensation
Information contained in the definitive Proxy Statement to be filed on or about
March 16, 2001, with respect to executive compensation, is incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information contained in the definitive Proxy Statement to be filed on or about
March 16, 2001, with respect to security ownership of certain beneficial owners
and management, is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None required to be reported.
<PAGE> 10
Page 10
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) (i) The following consolidated financial statements and
financial review, included in Item 8, are filed as a
separate section of this report.
Report of Independent Auditors - Page
Consolidated Balance Sheets - December 31, 2000 and
1999 - Pages 18 and 19
Statements of Consolidated Income - Years ended
December 31, 2000, 1999 and 1998 - Page 20
Statements of Consolidated Cash Flows - Years ended
December 31, 2000, 1999 and 1998 - Page 21
Statements of Consolidated Shareholders' Equity - Years ended
December 31, 2000, 1999 and 1998 - Page 22
(2) All schedules for which provision is made in Regulation S-X of
the Securities and Exchange Commission, are not required under
the related instructions or areinapplicable and, therefore,
have been omitted.
(3) Exhibits
3(a) Amended Articles of Incorporation (amended and
restated as of April 27, 1994) - Incorporated by
reference to the Form 8-K Report dated May 19, 1994
3(b) Amended Regulations (amended and restated as of
April 26, 2000) - Incorporated by reference to Form 10-Q
for the six months ended June 30, 2000
4(a) Instruments defining rights of security holders,
including indentures (Pursuant to Regulation S-K
Item 601(b)(4), the Company agrees to furnish to the
Commission, upon request, a copy of the instruments
defining the rights of holders of long-term debt)
4(b) Eaton Corporation Rights Agreement dated June 28, 1995 -
Incorporated by reference to the Form 8-K Report dated
June 28, 1995
<PAGE> 11
Page 11
10 Material contracts
The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and
restated as of March 31, 2000)(filed as a separate
section of this report)
(b) Executive Strategic Incentive Plan (amended and
restated as of June 21, 1994, July 25, 1995, April
21, 1998 and April 1, 1999)(filed as a separate
section of this report)
(c) Group Replacement Insurance Plan (GRIP), effective
as of June 1, 1992 - Incorporated by reference to
the Annual Report on Form 10-K for the year ended
December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 18,
1991
(e) 1995 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 17, 1995
(f) Incentive Compensation Deferral Plan (amended and
restated as of October 1, 1997)(filed as a
separate section of this report)
(g) Strategic Incentive and Option Plan (amended and
restated as of September 24, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(h) Form of "Change of Control" Agreement entered into
with officers of Eaton Corporation as of November
1, 1996 - Incorporated by reference to the Annual
Report on Form 10-K for the year ended December
31, 1996
(i) The following are incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990:
<PAGE> 12
Page 12
(i) Limited Eaton Service Supplemental
Retirement Income Plan (amended and
restated as of January 1, 1989)
(ii) Amendments to the 1980 and 1986 Stock
Option Plans
(iii) Eaton Corporation Supplemental Benefits
Plan (amended and restated as of January
1, 1989) (which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess Benefits Plan
(amended and restated as of January 1,
1989) (with respect to Section 415
limitations of the Internal Revenue
Code)
(j) Executive Incentive Compensation Plan (filed as a
separate section of this report)
(k) Plan for the Deferred Payment of Directors' Fees
(amended and restated as of September 24, 1996 and
amended effective as of January 1, 1997) -
Incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1997
(l) Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and amended effective
February 25, 1997) - Incorporated by reference to
the Annual Report on Form 10-K for the year ended
December 31, 1996
(m) 1996 Non-Employee Director Fee Deferral Plan
(amended effective January 1, 1997 and February
25, 1997) - Incorporated by reference to the
Annual Report on Form 10-K for the year ended
December 31, 1997
(n) Eaton Corporation Trust Agreement - Outside
Directors (dated December 6, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
<PAGE> 13
Page 13
(o) Eaton Corporation Trust Agreement - Officers and
Employees (dated December 6, 1996) - Incorporated
by reference to the Annual Report on Form 10-K for
the year ended December 31, 1996
(p) Eaton Corporation Retirement Plan for Non-
Employee Directors (amended and restated January
1, 1996) - Incorporated by Reference to the Annual
Report filed on Form 10-K for the year ended
December 31, 1997
(q) 1998 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 13, 1998
12 Ratio of Earnings to Fixed Charges (filed as a separate
section of this report)
21 Subsidiaries of Eaton Corporation (filed as a separate
section of this report)
22 Consent of Independent Auditors (filed as a separate
section of this report)
23 Power of Attorney (filed as a separate section of this
report)
(b) Reports on Form 8-K
On November 30, 2000, the Company filed a Current Report on Form
8-K regarding the suspension of its $500 million Common Share
repurchase program and the prospects for the North American
vehicle market for fourth quarter 2000 and the first quarter of
2001.
On December 11, 2000, the Company filed a Current Report on Form
8-K announcing the spin-off of Axcelis Technologies, Inc.
On January 12, 2001, the Company filed a Current Report on Form
8-K announcing an expected charge of $55 million to restructure
its Truck business in 2001.
On January 22, 2001, the Company filed a Current Report on Form
8-K regarding the fourth quarter 2000 earnings release.
<PAGE> 14
Page 14
On January 31, 2001, the Company filed a Current Report on Form
8-K regarding financial data restated for discontinued operations.
The restated data includes Comparative Financial Summaries,
Balance Sheets, Income Statements, and Business Segment
Information for 1996-2000 and quarterly information for 2000 and
1999.
(c) Exhibits
Certain exhibits required by this portion of Item 14 are filed as
a separate section of this report.
(d) Financial Statement Schedules
None required to be filed.
<PAGE> 15
Page 15
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Eaton Corporation
------------------------------
Registrant
Date: March 5, 2001 /s/ Adrian T. Dillon
------------------------------
Adrian T. Dillon
Executive Vice President--
Chief Financial and Planning
Officer; Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
DATE: March 5, 2001
Signature Title
- ------------------------------------- -------------------------------------
*
- -------------------------------------
Alexander M. Cutler Chairman and Chief Executive Officer;
President; Director
*
- -------------------------------------
Billie K. Rawot Vice President and Controller;
Principal Accounting Officer
*
- -------------------------------------
Michael J. Critelli Director
*
- -------------------------------------
Ernie Green Director
*
- -------------------------------------
Ned C. Lautenbach Director
*
- -------------------------------------
Deborah L. McCoy Director
*
- -------------------------------------
John R. Miller Director
<PAGE> 16
Page 16
*
- -------------------------------------
Victor A. Pelson Director
*
- -------------------------------------
A. William Reynolds Director
*
- -------------------------------------
Gary L. Tooker Director
*By /s/ Adrian T. Dillon
---------------------------------------
Adrian T. Dillon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
<PAGE> 17
Page 17
Eaton Corporation
2000 Annual Report on Form 10-K
Items 6, 7, 7A, 8 & Item 14(c)
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Eaton Corporation
We have audited the consolidated balance sheets of Eaton Corporation as of
December 31, 2000 and 1999, and the related statements of consolidated income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eaton Corporation
at December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 19, 2001
<PAGE> 18
Page 18
Eaton Corporation
Consolidated Balance Sheets
December 31
-----------------
(Millions) 2000 1999
---- ----
ASSETS
Current assets
Cash $ 82 $ 79
Short-term investments 44 83
Accounts receivable 1,219 1,165
Inventories 872 876
Deferred income taxes 147 161
Other current assets 207 188
------ ------
2,571 2,552
Property, plant & equipment
Land & buildings 792 728
Machinery & equipment 3,255 3,116
------ ------
4,047 3,844
Accumulated depreciation (1,773) (1,550)
------ ------
2,274 2,294
Goodwill 2,026 1,853
Other intangible assets 556 598
Deferred income taxes & other assets 753 714
Net assets of discontinued operations 331
------ ------
$8,180 $8,342
====== ======
The Financial Review on pages 23 to 50 is an integral part of the consolidated
financial statements.
<PAGE> 19
Page 19
Eaton Corporation
Consolidated Balance Sheets
December 31
-----------------
(Millions) 2000 1999
---- ----
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 447 $ 958
Current portion of long-term debt 110 12
Accounts payable 485 487
Accrued compensation 199 277
Accrued income & other taxes 191 255
Other current liabilities 675 579
------ ------
2,107 2,568
Long-term debt 2,447 1,915
Postretirement benefits other than pensions 679 666
Deferred income taxes & other liabilities 537 569
Shareholders' equity
Common Shares (68.3 in 2000 and 74.0 in 1999) 34 37
Capital in excess of par value 1,266 1,041
Retained earnings 1,410 1,804
Accumulated other comprehensive income (loss) (267) (220)
Shares in trust - deferred compensation plans (33) (38)
------ ------
2,410 2,624
------ ------
$8,180 $8,342
====== ======
The Financial Review on pages 23 to 50 is an integral part of the consolidated
financial statements.
<PAGE> 20
Page 20
Eaton Corporation
Statements of Consolidated Income
Year ended December 31
----------------------
(Millions except for per share data) 2000 1999 1998
---- ---- ----
Net sales $8,309 $8,005 $6,358
Costs & expenses
Cost of products sold 6,092 5,792 4,528
Selling & administrative 1,299 1,248 974
Research & development 269 262 252
------ ------ ------
7,660 7,302 5,754
------ ------ ------
Income from operations 649 703 604
Other income (expense)
Interest expense - net (177) (152) (88)
Gain on sales of businesses 340 43
Other - net 80 52 57
------ ------ ------
(97) 240 12
------ ------ ------
Income from continuing operations before
income taxes 552 943 616
Income taxes 189 340 186
------ ------ ------
Income from continuing operations 363 603 430
Income (loss) from discontinued operations 90 14 (81)
------ ------ ------
Net income $ 453 $ 617 $ 349
====== ====== ======
Net income per Common Share-assuming dilution
Continuing operations $ 5.00 $ 8.17 $ 5.91
Discontinued operations 1.24 .19 (1.11)
------ ------ ------
$ 6.24 $ 8.36 $ 4.80
====== ====== ======
Average number of Common Shares
outstanding 72.6 73.7 72.7
Net income per Common Share-basic
Continuing operations $ 5.06 $ 8.31 $ 6.02
Discontinued operations 1.25 .20 (1.13)
------ ------ ------
$ 6.31 $ 8.51 $ 4.89
====== ====== ======
Average number of Common Shares
outstanding 71.8 72.5 71.4
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76
The Financial Review on pages 23 to 50 is an integral part of the consolidated
financial statements.
<PAGE> 21
Page 21
Eaton Corporation
Statements of Consolidated Cash Flows
Year ended December 31
-----------------------
(Millions) 2000 1999 1998
---- ---- ----
Net cash provided by operating activities
of continuing operations
Income from continuing operations $ 363 $ 603 $ 430
Adjustments to reconcile to net cash
provided by operating activities
Depreciation & amortization 364 332 254
Amortization of goodwill &
other intangible assets 98 89 58
Deferred income taxes 44 52 106
Gain on sales of businesses &
corporate assets (22) (340) (43)
Other non-cash items in income (20) (34)
Changes in operating assets &
liabilities, excluding
acquisitions & sales of businesses
Accounts receivable (39) (59) (63)
Inventories (13) 17 (55)
Accounts payable & other accruals (139) (33) (26)
Accrued income & other taxes (86) 67 5
Other - net (31) (20) (9)
------ ------ ------
519 708 623
Net cash used in investing activities of
continuing operations
Expenditures for property, plant &
equipment (386) (480) (468)
Acquisitions of businesses, less cash
acquired (115) (1,602) (117)
Proceeds from initial public offering
of subsidiary 349
Sales of businesses & corporate assets 122 544 375
Other - net 6 (83) (56)
------ ------ ------
(24) (1,621) (266)
Net cash (used in) provided by financing
activities of continuing operations
Borrowings with original maturities of
more than three months
Proceeds 1,555 1,917 1,409
Payments (1,560) (1,517) (982)
Borrowings with original maturities of
less than three months - net 150 519 (303)
Cash dividends paid (127) (128) (126)
Purchase of Common Shares (417) (5) (349)
Sale of Common Shares 147
Other - net 11 25 17
------ ------ ------
(388) 958 (334)
------ ------ ------
Cash provided by continuing operations 107 45 23
Net cash (used in) provided by discontinued
operations (104) (43) 2
------ ------ ------
Total increase in cash 3 2 25
Cash at beginning of year 79 77 52
------ ------ ------
Cash at end of year $ 82 $ 79 $ 77
====== ====== ======
The Financial Review on pages 23 to 50 is an integral part of the consolidated
financial statements.
<PAGE> 22
Page 22
Eaton Corporation
Statements of Consolidated Shareholders' Equity
<TABLE>
<CAPTION>
Shares in trust
Accumulated ------------------ Total
Common Shares Capital in other Deferred share-
--------------- excess of Retained comprehensive compensa- holders'
(Millions) Shares Dollars par value earnings income (loss) ESOP tion plans equity
------ ------- ---------- -------- ------------- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 74.7 $37 $ 844 $1,385 $(148) $(20) $(27) $2,071
Net income 349 349
Other comprehensive income 38 38
------
Total comprehensive income 387
Cash dividends paid, net of
ESOP tax benefit (126) (126)
Issuance of shares under
employee benefit plans,
including tax benefit .5 25 (1) 14 38
Put option obligation, net 16 16
Purchase of shares (3.7) (1) (42) (286) (329)
Issuance of shares to trust, net .2 10 (10) 0
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 1998 71.7 36 853 1,321 (110) (6) (37) 2,057
Net income 617 617
Other comprehensive income (loss) (110) (110)
------
Total comprehensive income 507
Cash dividends paid, net of
ESOP tax benefit (128) (128)
Issuance of shares under
employee benefit plans,
including tax benefit .8 49 (1) 6 54
Put option obligation, net (7) (7)
Sale of shares 1.6 1 146 147
Purchase of shares (.1) (5) (1) (6)
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 1999 74.0 37 1,041 1,804 (220) 0 (38) 2,624
Net income 453 453
Other comprehensive income (loss) (47) (47)
------
Total comprehensive income 406
Cash dividends paid (127) (127)
Issuance of shares under
employee benefit plans,
including tax benefit .3 57 (1) 56
Put option obligation, net 7 7
Purchase of shares (6.0) (3) (112) (302) (417)
Issuance of shares 5 5
Initial public offering and
spin-off of subsidiary 272 (416) (144)
Other - net 1 (1) 0
---- --- ------ ------ ----- ---- ---- ------
Balance at December 31, 2000 68.3 $34 $1,266 $1,410 $(267) $ 0 $(33) $2,410
==== === ====== ====== ===== ==== ==== ======
</TABLE>
The Financial Review on pages 23 to 50 is an integral part of the consolidated
financial statements.
<PAGE> 23
Page 23
FINANCIAL REVIEW
All references to net income per Common Share assume dilution, unless otherwise
indicated.
ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include accounts of the Company and all
majority-owned subsidiaries. The equity method of accounting is used for
investments in associate companies and joint ventures where the Company has a
20% to 50% ownership interest.
Foreign Currency Translation
The functional currency for principally all subsidiaries outside the United
States is the local currency. Financial statements for these subsidiaries are
translated into United States dollars at year-end exchange rates as to assets
and liabilities and weighted-average exchange rates as to revenues and expenses.
The resulting translation adjustments are recorded in shareholders' equity in
accumulated other comprehensive income (loss).
Inventories
Inventories are carried at lower of cost or market. Inventories in the United
States are generally accounted for using the last-in, first-out (LIFO) method.
Remaining United States and all other inventories are accounted for using the
first-in, first-out (FIFO) method.
Depreciation and Amortization
Depreciation and amortization are computed by the straight-line method for
financial statement purposes. Cost of buildings is depreciated over forty years
and machinery and equipment over principally three to ten years. Goodwill and
intangible assets, primarily consisting of patents, trademarks, tradenames are
amortized over a range of five to forty years. Software is amortized over its
estimated useful life, generally three to five years, but not to exceed five
years.
Goodwill and other long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount may not be recoverable.
Events or circumstances that would result in an impairment review primarily
include operations reporting losses or a
<PAGE> 24
Page 24
significant change in the use of an asset. The asset would be considered
impaired when the future net undiscounted cash flows generated by the asset are
less than its carrying value. An impairment loss would be recognized based on
the amount by which the carrying value of the asset exceeds its fair value.
Financial Instruments
The Company selectively uses straightforward, nonleveraged financial instruments
as part of foreign exchange and interest rate risk management programs.
Financial instruments are not bought and sold solely for trading purposes except
for nominal amounts authorized under limited, controlled circumstances. Credit
loss has never been experienced, and is not anticipated, as the counterparties
to various financial instruments are major international financial institutions
with strong credit ratings and due to control over the limit of positions
entered into with any one party. Although financial instruments are an integral
part of the Company's risk management programs, their incremental effect on
financial condition and results of operations is not material.
The Company and its subsidiaries are exposed to fluctuations in foreign
currencies in the normal course of business. Foreign currency forward exchange
contracts and other instruments are used to reduce exposure to foreign currency
fluctuations. Accrued gains or losses on those financial instruments which hedge
net investments in subsidiaries outside the United States are recorded in
shareholders' equity. Gains or losses on those financial instruments which hedge
specific transactions are deferred and subsequently recognized in net income
when the gains or losses on the hedged foreign currency transaction are
recognized in net income. Cash premiums and discounts related to these financial
instruments are amortized to other income-net over the life of the respective
agreement.
In the normal course of business the Company's operations are also exposed to
fluctuations in interest rates. Interest rate swaps, forward interest rate
agreements and other instruments are used to reduce the cost of, and exposure
to, interest rate fluctuations. Accrued gains or losses on interest rate swaps
and other instruments are included in interest expense since they hedge interest
on debt. Gains and losses on forward interest rate agreements are deferred and
subsequently recognized in net income when interest expense on the hedged debt
is recognized in net income. Cash premiums related to these financial
instruments are amortized to interest expense over the life of the respective
agreement.
<PAGE> 25
Page 25
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, requires all derivative
instruments to be recognized on the balance sheet at fair value. The standard
must be adopted by the Company effective January 1, 2001. Adoption will not have
a material effect on the consolidated results of operations or financial
position of the Company.
Options for Common Shares
The Company applies the intrinsic value based method described in Accounting
Principles Board Opinion No. 25 to account for stock options granted to
employees to purchase Common Shares. Under this method, no compensation expense
is recognized on the grant date, since on that date the option price equals the
market price of the underlying Common Shares.
Revenue Recognition
Substantially all revenues are recognized when products are shipped to
unaffiliated customers.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition". SAB 101 clarifies the
SEC staff's views on application of generally accepted accounting principles to
revenue recognition. The Company has concluded its revenue recognition policy
continues to be appropriate and in accordance with generally accepted accounting
principles and SAB 101.
The Company's accounting policy with respect to shipping and handling costs
billed to the customer is to include the amounts billed in net sales and the
related costs in cost of products sold.
Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
certain circumstances that affect amounts reported in the accompanying
consolidated financial statements and notes. Actual results could differ from
these estimates.
Financial Presentation Changes
Certain amounts for prior years have been reclassified to conform to the current
year presentation.
<PAGE> 26
Page 26
DISCONTINUED OPERATIONS
On June 30, 2000, the Company's semiconductor equipment operations were
reorganized into a wholly-owned subsidiary, Axcelis Technologies, Inc.
(Axcelis). In July 2000, Axcelis completed an initial public offering (IPO) for
the sale of 17,050,000 shares of common stock at $22 per share. The proceeds
from the IPO, net of an underwriting discount and other offering expenses, were
$349 million and, together with cash from other sources available to Axcelis,
were used to pay a $300 million dividend to Eaton. On December 29, 2000 Eaton
distributed its remaining interest in Axcelis to Eaton shareholders as a
dividend (spin-off). The distribution was tax-free to Eaton and its shareholders
for United States income tax purposes. The $272 million gain on the IPO was
recorded as a direct increase to shareholders' equity. The spin-off was recorded
as a $416 million direct reduction of shareholders' equity.
The consolidated financial statements have been restated to present the
semiconductor equipment operations as a discontinued operation. Results reported
separately by Axcelis are reported on a stand-alone basis and differ from
results of discontinued operations. Operating results of discontinued operations
are summarized as follows (in millions):
2000 1999 1998
---- ---- ----
Net sales $ 679 $ 397 $ 267
Income (loss) before income taxes $ 132 $ 20 $(131)
Income taxes (benefit) 42 6 (50)
----- ----- -----
Net income (loss) $ 90 $ 14 $ (81)
===== ===== =====
ACQUISITIONS OF BUSINESSES
The Company acquired businesses for a combined net cash purchase price (in
millions) of $115 in 2000, $1,602 in 1999 and $117 in 1998. All acquisitions
were accounted for by the purchase method of accounting and, accordingly, the
Statements of Consolidated Income include the results of the acquired businesses
from the effective dates of acquisition.
In September 2000, the industrial cylinder business of International Motion
Control Incorporated was acquired for $75 million. This business, which had 1999
sales of $63 million, manufactures industrial cylinders which are primarily used
by machine and equipment builders to transfer and apply fluid power. The
operating results of this business are reported in Business Segment Information
in Fluid Power.
<PAGE> 27
Page 27
In April 1999, the Company acquired Aeroquip-Vickers, Inc. The operating results
are reported in Business Segment Information in Fluid Power. The assets acquired
and liabilities assumed in the acquisition of Aeroquip-Vickers were recorded at
estimated fair values as determined by Eaton's management. The Company obtained
independent appraisals of the fair values of the acquired property, plant and
equipment, and identified intangible assets, and their remaining useful lives
and has completed the review and determination of the fair values of the other
assets acquired and the liabilities assumed. A summary of the assets acquired
and liabilities assumed in the acquisition follows (in millions):
Recorded fair values
Assets acquired $1,724
Liabilities assumed (1,217)
Goodwill (amortized by the straight-line
method over forty years) 1,116
------
Purchase price 1,623
Less cash acquired & liability for
outstanding shares (30)
------
Net cash paid $1,593
======
As a result of the acquisition of Aeroquip-Vickers, Eaton incurred acquisition
integration costs for the incremental expenditures to exit and consolidate
activities at Aeroquip-Vickers locations, to involuntarily terminate
Aeroquip-Vickers employees and to integrate operating locations and other
activities of Aeroquip-Vickers with Eaton. Acquisition integration costs, which
are not associated with the generation of future revenues and have no future
economic benefit, have been reflected as assumed liabilities in the purchase
price allocation. The components of the acquisition integration liabilities are
as follows (in millions of dollars):
Workforce reductions Plant
-------------------- consolidation
Employees Dollars & other Total
--------- ------- -------------- -----
1999 470 $ 31 $ 1 $ 32
Utilized in 1999 (460) (28) (1) (29)
----- --- --- ---
Balance at
December 31, 1999 10 3 0 3
2000 2,075 72 10 82
Utilized in 2000 (1,060) (33) (3) (36)
----- --- --- ---
Balance remaining at
December 31, 2000 1,025 $ 42 $ 7 $ 49
===== === === ===
<PAGE> 28
Page 28
The acquisition integration liabilities for Aeroquip-Vickers were based on
Eaton's integration plan which focuses on: 1) manufacturing process and supply
chain rationalization, including plant closings, 2) elimination of redundant
administrative overhead and support activities, and 3) restructuring and
repositioning of the sales/marketing and research and development organizations
to eliminate redundancies. Workforce reductions primarily related to plant
closings and consolidations, for which decisions were finalized in the first
quarter of 2000. Adjustments to these liabilities will be 1) recorded as a
reduction of net income, if the ultimate amount of the liability exceeds the
estimate, or 2) recorded as a reduction of goodwill, if the ultimate amount of
the liability is below the estimate.
SALES OF BUSINESSES & CORPORATE ASSETS
The Company sold businesses, product lines and certain corporate assets for
aggregate cash proceeds (in millions) of $122 in 2000, $544 in 1999 and $375 in
1998. The sale of certain corporate assets and product lines in 2000 resulted in
a pretax gain of $22 million ($14 million after-tax or $.19 per Common Share).
Divestitures in 1999 included the sale of the Engineered Fasteners division in
August and the Fluid Power division in October. The sales of these businesses,
and adjustments related to businesses sold in prior periods, resulted in a
pretax gain of $340 million ($198 million after-tax, or $2.68 per Common Share).
In December, substantially all of Vickers Electronic Systems was sold, which was
acquired in the acquisition of Aeroquip-Vickers, resulting in no gain or loss.
Divestitures in 1998 included the sale of the Axle and Brake business in January
and the automotive leaf spring business in April. The sales of these businesses,
and adjustments related to businesses sold in prior periods, resulted in a
pretax gain of $43 million ($28 million after-tax, or $.38 per Common Share).
The operating results of businesses sold in 1999 and 1998 are reported in
Business Segment Information as Divested Operations.
<PAGE> 29
Page 29
UNUSUAL CHARGES
During 2000 and 1999, in connection with the integration of Aeroquip-Vickers,
Eaton incurred various costs, primarily plant consolidation and other expenses,
including outside consulting fees, travel expenses and the relocation of
inventory and equipment. In accordance with generally accepted accounting
principles, these acquisition integration costs, which are associated with the
generation of future revenues and have future economic benefit, were recorded as
expense. Acquisition integration expenses related to Aeroquip-Vickers, and
restructuring charges in 2000, 1999, and 1998 related to other business
segments, are included in the Statements of Consolidated Income in Income from
Operations and reduced operating profit of the related segment and are described
below.
2000 Charges
Income from continuing operations in 2000 was reduced by charges of $52 million
($34 million after-tax, or $.47 per Common Share), which included $47 million
associated with the integration of Aeroquip-Vickers and $5 million of corporate
related charges. Integration charges consisted of $46 million of plant
consolidation and other expenses and $1 million for workforce reductions. The
workforce reduction charges consist of severance and other related employee
benefits and include the expected termination of approximately 110 employees,
primarily manufacturing personnel.
1999 Charges
Income from continuing operations in 1999 was reduced by charges of $30 million
($20 million after-tax, or $.27 per Common Share), which included $23 million
associated with the integration of Aeroquip-Vickers as discussed above and $7
million of restructuring charges related to the Truck segment.
Integration charges of $23 million related to the acquisition of
Aeroquip-Vickers included $21 million for plant consolidation and other
expenses. In addition, a $2 million liability for workforce reductions,
severance and other related employee benefits, was recorded and included the
expected termination of 70 employees, primarily manufacturing personnel.
As part of the ongoing effort to restructure European operations in the Truck
segment, a restructuring liability of $7 million was recorded. The Company is
completing the closure of a manufacturing facility in Aycliffe, United Kingdom
and consolidating production into an existing facility
<PAGE> 30
Page 30
in Poland. This charge related to workforce reductions, severance and other
related employee benefits, for the expected termination of 190 employees,
primarily manufacturing personnel.
1998 Charges
Income from continuing operations in 1998 was reduced by charges of $68 million
($44 million after-tax, or $.61 per Common Share) which included $58 million to
restructure certain business segments and $10 million for a contribution to the
Company's charitable trust.
Restructuring charges of $58 million primarily related to workforce reductions,
inventory write-downs, and other costs in the Automotive, Industrial and
Commercial Controls, and Truck segments. The charges included $33 million for
workforce reductions, primarily severance and other related employee benefits,
for the expected termination of 2,525 employees, mainly manufacturing personnel.
Certain plants in these segments were closed and production was consolidated
into other existing facilities.
Restructuring Liabilities
Movement of the various components of restructuring liabilities of continuing
operations are as follows (in millions of dollars):
Inventory & Plant
Workforce other asset consolidation
Employees reductions write-downs & other Total
--------- ---------- ----------- ------------- -----
1998 2,525 $ 33 $ 16 $ 9 $ 58
Utilized in 1998 (600) (5) (16) (6) (27)
----- ---- ---- ---- ----
Balance remaining
at December 31, 1998 1,925 28 0 3 31
1999 260 9 0 0 9
Utilized in 1999 (1,825) (22) 0 (2) (24)
----- ---- ---- ---- ----
Balance remaining
at December 31, 1999 360 15 0 1 16
2000 0 0 0 0 0
Utilized in 2000 (180) (7) 0 (1) (8)
----- ---- ---- ---- ----
Balance remaining
at December 31, 2000 180 $ 8 $ 0 $ 0 $ 8
===== ==== ==== ==== ====
DEBT AND OTHER FINANCIAL INSTRUMENTS
At December 31, 2000, short-term debt was $447 million, of which $368 million
related to United States operations. Credit facilities of $600 million, which
mature April 2001,
<PAGE> 31
Page 31
are available to support this short-term debt. Subsidiaries outside the United
States have lines of credit, primarily short-term, aggregating $128 million from
various banks worldwide. At December 31, 2000, $79 million was outstanding under
these lines of credit.
Long-term debt at December 31, excluding the current portion, follows (in
millions):
2000 1999
---- ----
6.95% notes due 2004 $ 250 $ 250
8% debentures due 2006 86 86
8.9% debentures due 2006 100 100
6% Euro 200 million notes due 2007 186
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024 66 94
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 145 150
7.875% debentures due 2026 82 82
7.65% debentures due 2029 200 200
6.4% to 7.6% medium-term notes due at
various dates ranging from 2002 to
2018 257 167
Commercial paper 900 500
Other 75 186
------ ------
$2,447 $1,915
====== ======
The Company has a multi-year credit facility of $900 million, $500 million of
which expires in 2003 and $400 million expires in 2005. Commercial paper of $900
million is classified as long-term debt because the Company intends, and has the
ability under this agreement, to refinance these notes on a long-term basis.
In March 2000, the Company entered into a seven-year Euro 200 million interest
rate swap to convert the 6% Euro 200 million notes from a fixed-rate to a
floating-rate based upon the six-month Euro Interbank Offered Rate (4.8% at
December 31, 2000).
In 1999, the Company entered into a five-year $100 million interest rate swap
and a thirty-year $150 million interest rate swap. These swaps effectively
convert a portion of the 6.95% notes and the 7.65% debentures to floating rates
based on the six-month London Interbank Offered Rate (6.2% at December 31,
2000).
In 1999, the Company entered into an agreement expiring in May 2002, which
effectively converts $50 million of United States dollar floating-rate debt into
Japanese Yen
<PAGE> 32
Page 32
denominated debt with interest payable at a floating-rate (.849% at December 31,
2000). In 1999, the Company also entered into an agreement expiring in October
2001, which effectively converts $50 million of United States dollar
floating-rate debt into Euro denominated debt based on the three-month Euro
Interbank Offered Rate (4.9% at December 31, 2000).
The weighted-average interest rate on short-term borrowings, including
commercial paper classified in long-term debt, was 6.5% and 6.2% at December 31,
2000 and 1999, respectively.
Aggregate mandatory sinking fund requirements and annual maturities of long-term
debt are as follows (in millions): 2001, $110; 2002, $131; 2003, $504; 2004,
$255; and 2005, $415.
Interest capitalized as part of the acquisition or construction of major fixed
assets (in millions) was $22 in 2000, $21 in 1999 and $16 in 1998. Interest paid
(in millions) was $205 in 2000, $163 in 1999 and $102 in 1998.
The carrying values of cash, short-term investments and short-term debt in the
Consolidated Balance Sheet approximate their estimated fair values. The
estimated fair values of other financial instruments outstanding at December 31
are as follows (in millions):
2000 1999
------------------------- --------------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------- ------- ----- -------- -------- -----
Marketable debt securities $ 48 $ 48 $ 63 $ 63
Long-term debt, current
portion of long-term
debt & foreign
currency principal swaps (2,557) (2,621) (1,927) (1,963)
Foreign currency forward
exchange contracts $ 271 6 7 $ 20
Interest rate swaps
Fixed to floating 436 20 250 (7)
Fixed to fixed 75 1 (1)
Floating to floating 100 50 (1)
The estimated fair values of financial instruments are principally based on
quoted market prices. The fair value of foreign currency forward exchange
contracts, which primarily mature in 2001, and foreign currency principal and
interest rate swaps are estimated based on quoted market prices of comparable
contracts, adjusted through interpolation where necessary for maturity
differences.
<PAGE> 33
Page 33
RETIREMENT BENEFIT PLANS
The Company has defined benefit pension plans and other postretirement benefit
plans, primarily health care and life insurance. In the event of a change in
control of the Company, excess pension plan assets of North American operations
may be dedicated to funding of health and welfare benefits of employees and
retirees.
Components of plan obligations and assets and the recorded asset (liability) of
continuing operations at December 31 are as follows (in millions):
Other
postretirement
Pension benefits benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Benefit obligation at beginning
of year $(1,754) $(1,600) $(835) $(767)
Service cost (63) (67) (16) (15)
Interest cost (119) (108) (60) (54)
Effect of divestitures 2 25 3 13
Effect of acquisitions (179) (106)
Actuarial (loss) gain (7) 40 19 36
Benefits paid 160 146 67 60
Effect of translation 29 3
Other (10) (14) (5) (2)
------- ------- ----- -----
Benefit obligation at end
of year $(1,762) $(1,754) $(827) $(835)
------- ------- ----- -----
Fair value of plan assets at
beginning of year $ 2,386 $ 2,004
Actual return on plan assets (24) 341
Employer contributions 28 20 $ 65 $ 58
Effect of divestitures (26)
Effect of acquisitions 192
Benefits paid (160) (146) (67) (60)
Effect of translation (24) (1)
Other 3 2 2 2
------- ------- ----- -----
Fair value of plan assets at
end of year $ 2,209 $ 2,386 $ 0 $ 0
------- ------- ----- -----
Pension plan assets in excess of
benefit obligations $ 447 $ 632
Obligations with no plan assets $(827) $(835)
Unamortized
Net (gain) loss (213) (469) 128 156
Prior service cost 35 36 (9) (15)
Other (12) (14)
------- ------- ----- -----
Recorded asset (liability) $ 257 $ 185 $(708) $(694)
======= ======= ===== =====
<PAGE> 34
Page 34
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets (in millions) were $281, $247 and $136, respectively, as of
December 31, 2000, and $146, $136 and $23, respectively, as of December 31,
1999.
The components of net periodic benefit income (cost) of continuing operations
for the years ended December 31 are as follows (in millions):
Pension benefits
-------------------------
2000 1999 1998
---- ---- ----
Service cost $(63) $(67) $(57)
Interest cost (119) (108) (98)
Expected return on plan assets 200 179 158
Other 6 (3) (4)
---- ---- ----
24 1 (1)
Curtailment (loss) gain (2) (5) 8
Settlement gain 18 18 41
---- ---- ----
$ 40 $ 14 $ 48
==== ==== ====
Other postretirement benefits
-----------------------------
2000 1999 1998
---- ---- ----
Service cost $(16) $(15) $(12)
Interest cost (60) (54) (49)
Net amortization (3) (2)
---- ---- ----
(76) (72) (63)
Curtailment gain 1 1 1
Settlement loss (4) (5)
---- ---- ----
$(75) $(75) $(67)
==== ==== ====
The curtailment and settlement gains and losses reflect the sales of the
Engineered Fasteners and Fluid Power divisions in 1999 and the Axle and Brake
business in 1998.
<PAGE> 35
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Actuarial assumptions used in the calculation of the recorded asset (liability)
are as follows:
2000 1999
---- ----
Discount rate 7.75% 7.50%
Return on pension plan assets 10.00% 10.00%
Rate of compensation increase 4.75% 4.50%
Projected health care cost trend rate 5.25% 6.00%
Ultimate health care trend rate 5.50% 5.25%
Year ultimate health care trend rate is achieved 2001 2001
Assumed health care cost trend rates have a significant effect on the amounts
reported for other postretirement benefits. A one-percentage-point change in the
assumed health care cost trend rate would have the following effects (in
millions):
1% Increase 1% Decrease
----------- -----------
2000 benefit cost $ 3 $ (2)
Recorded liability
at December 31, 2000 32 (29)
The Company also has various defined-contribution benefit plans, primarily
consisting of the Eaton Share Purchase and Investment Plan and the
Aeroquip-Vickers Savings and Profit Sharing Plan. Total contributions related to
these plans charged to expense were (in millions) $75 in 2000, $34 in 1999 and
$9 in 1998.
PROTECTION OF THE ENVIRONMENT
The Company has established policies to ensure that its operations are conducted
in keeping with good corporate citizenship and with a positive commitment to the
protection of the natural and workplace environments. For example, each
manufacturing facility has a person responsible for environmental, health and
safety (EHS) matters. All of the Company's manufacturing facilities are becoming
certified under ISO 14001, an international standard for environmental
management systems. The Company routinely reviews EHS performance at each of its
facilities and continuously strives to improve pollution prevention at its
facilities.
As a result of past operations, the Company is involved in remedial response and
voluntary environmental remediation at a number of sites, including certain
currently-owned or formerly-owned plants. The Company has also been named a
potentially responsible party (PRP) under the Federal Superfund law at a number
of waste disposal sites.
<PAGE> 36
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A number of factors affect the cost of environmental remediation, including the
number of parties involved at a particular site, the determination of the extent
of contamination, the length of time the remediation may require, the complexity
of environmental regulations, and the continuing advancement of remediation
technology. Taking these factors into account, the Company has estimated
(without discounting) costs of remediation, which will be incurred over a period
of several years. The Company accrues an amount consistent with the estimates of
these costs when it is probable that a liability has been incurred. At December
31, 2000 and 1999, the Consolidated Balance Sheet included a liability for these
costs (in millions) of $58 and $52, respectively. With regard to some of the
matters included in the liability, the Company has rights of recovery from
non-affiliated parties for a portion of these estimated costs.
Based upon the Company's analysis and subject to the difficulty in estimating
these future costs, the Company expects that any sum it may be required to pay
in connection with environmental matters is not reasonably likely to exceed the
liability by an amount that would have a material adverse effect on its
financial condition, results of operations, or liquidity. All of these estimates
are forward-looking statements and, given the inherent uncertainties in
evaluating environmental exposures, actual results can differ from these
estimates.
SHAREHOLDERS' EQUITY
There are 300 million Common Shares authorized ($.50 par value per share). At
December 31, 2000, there were 11,847 holders of record of Common Shares.
Additionally, approximately 28,000 current and former employees were
shareholders through participation in the Eaton Share Purchase and Investment
Plan (SPIP), and the Aeroquip-Vickers Savings & Profit Sharing Plan.
The Company has plans which permit eligible employees and directors to defer a
portion of their compensation. The Company has deposited $61 million of
marketable securities and its Common Shares into a trust to fund a portion of
these liabilities. The marketable securities are included in other assets and
the Common Shares are included in shareholders' equity.
Stock Options
Stock options have been granted to certain employees, under various plans, to
purchase Common Shares at prices equal to fair market value as of date of grant.
Historically, the
<PAGE> 37
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majority of these options vest ratably during the three-year period following
the date of grant and expire ten years from the date of grant.
During 1998 and 1997, the Company granted special performance-vested stock
options with a ten-year vesting term in lieu of more standard employee stock
options. These options have a provision for accelerated vesting when the Company
achieves certain net income and Common Share price targets. If the targets are
not achieved, these options become exercisable ten days before the expiration of
their ten-year term. As of December 31, 2000, 2.5 million special
performance-vested stock options were outstanding of which 1.0 million were
exercisable.
As a result of the spin-off of Axcelis on December 29, 2000, all outstanding
stock options were adjusted to reflect the effect of the spin-off. Outstanding
options were adjusted so that the intrinsic values of the options after the
spin-off were equivalent to the intrinsic values of the options immediately
before the spin-off (intrinsic value represents the difference between market
value and option price on a per share basis extended by the number of shares).
The intrinsic value was maintained by a combination of a reduction of the
exercise price relative to the market price of Eaton Common Shares subsequent to
the spin-off and an increase in the number of shares underlying the outstanding
options.
A summary of stock option activity follows (shares in millions):
2000 1999 1998
--------------- --------------- ----------------
Average Average Average
price price price
per per per
share Shares share Shares share Shares
------- ------ ------- ------ ------ ------
Outstanding, January 1 $65.89 8.7 $61.46 7.5 $55.85 6.8
Granted 71.90 1.5 74.53 2.2 87.81 1.2
Exercised 33.76 (.3) 44.95 (.8) 43.40 (.4)
Canceled 83.05 (.6) 75.12 (.2) 71.11 (.1)
---- --- ---
Options outstanding at
December 29, before
spin-off of Axcelis $66.89 9.3
Cancellation of options
of Axcelis employees 72.39 (.5)
Adjustment for spin-off
of Axcelis 1.4
---- --- ---
Outstanding, December 31 $57.30 10.2 $65.89 8.7 $61.46 7.5
==== === ===
Exercisable, December 31 $51.51 5.8 $55.39 4.6 $51.91 4.8
Reserved for future
grants, December 31 2.0 2.4 4.4
<PAGE> 38
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The following table summarizes information about stock options outstanding at
December 31, 2000 after the spin-off of Axcelis (shares in millions):
Weighted- Weighted-
average average
remaining exercise
Range of exercise Number contractual price per
prices per share outstanding life (years) share
- ---------------------------------------------------------------------
$20.79 - $29.99 .5 .9 $27.21
$30.00 - $39.99 .5 2.1 33.88
$40.00 - $49.99 2.2 4.1 45.64
$50.00 - $59.99 .1 8.6 57.44
$60.00 - $69.99 5.6 7.5 61.70
$70.00 - $79.99 1.1 7.3 75.67
$80.00 - $88.41 .2 8.3 86.55
The following table summarizes information about stock options that are
exercisable at December 31, 2000 after the spin-off of Axcelis (shares in
millions):
Weighted-
average
exercise
Range of exercise prices Number price per
per share exercisable share
- -----------------------------------------------------
$20.79 - $29.99 .5 $27.21
$30.00 - $39.99 .5 33.88
$40.00 - $49.99 2.2 45.64
$50.00 - $59.99 .1 55.52
$60.00 - $69.99 2.1 61.86
$70.00 - $79.99 .3 76.01
$80.00 - $88.41 .1 87.73
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation".
If the Company accounted for its stock options under the fair value method of
SFAS No. 123, net income (in millions) and net income per Common Share would
have been as indicated below:
<PAGE> 39
Page 39
2000 1999 1998
---- ---- ----
Net income
As reported $ 453 $ 617 $ 349
Assuming fair value method 435 602 338
Net income per Common Share-assuming
dilution
As reported $6.24 $8.36 $4.80
Assuming fair value method 5.99 8.16 4.65
Net income per Common Share-basic
As reported $6.31 $8.51 $4.89
Assuming fair value method 6.06 8.30 4.73
The fair value of each option grant was estimated using the Black-Scholes option
pricing model with the following assumptions:
2000 1999 1998
---- ---- ----
Dividend yield 3% 3% 3%
Expected volatility 23% 21% 22%
Risk-free interest rate 6% to 6.8% 4.7% to 6.1% 5.5% to 5.7%
Expected option life in years 4 or 5 4 or 5 4, 5 or 6
Weighted-average per share
fair value of options
granted during the year $15.47 $12.99 $18.73
Preferred Share Purchase Rights
In 1995, the Company declared a dividend of one Preferred Share Purchase Right
for each outstanding Common Share. The Rights become exercisable only if a
person or group acquires, or offers to acquire, 20% or more of the Company's
Common Shares. The Company is authorized to reduce the 20% threshold for
triggering the Rights to not less than 10%. The Rights expire on July 12, 2005,
unless redeemed earlier at one cent per Right.
When the Rights become exercisable, the holder of each Right, other than the
acquiring person, is entitled (1) to purchase for $250, one one-hundredth of a
Series C Preferred Share, (2) to purchase for $250, that number of the Company's
Common Shares or common stock of the acquiring person having a market value of
twice that price, or (3) at the option of the Company, to exchange each Right
for one Common Share or one one-hundredth of a Preferred Share.
Comprehensive Income
The components of accumulated other comprehensive income (loss) as reported in
the Statement of Consolidated Shareholders' Equity are as follows (in millions):
<PAGE> 40
Page 40
Unrealized
Foreign gain (loss)
currency on available
translation for sale
adjustments securities Total
----------- ---------- -----
Balance at January 1, 1998 $(139) $(9) $(148)
1998 adjustment, net of income taxes (2) 6 4
Recognition in income of adjustment
related to divested businesses 34 34
----- --- -----
Balance at December 31, 1998 (107) (3) (110)
1999 adjustment, net of income taxes (116) 3 (113)
Recognition in income of adjustment
related to divested businesses 3 3
----- --- -----
Balance at December 31, 1999 (220) 0 (220)
2000 adjustment, net of income taxes (47) (4) (51)
Adjustment for spin-off of Axcelis 4 4
----- --- -----
Balance at December 31, 2000 $(263) $(4) $(267)
===== === =====
INCOME TAXES
For financial statement reporting purposes, income from continuing operations
before income taxes (in millions), based on the geographical location of the
operation to which such earnings are attributable, is summarized below. Certain
foreign operations are branches of Eaton Corporation and are, therefore, subject
to United States as well as foreign income tax regulations. As a result, pretax
income by location and the components of income tax expense by taxing
jurisdiction are not directly related.
2000 1999 1998
---- ---- ----
United States $417 $773 $588
Non-United States 135 173 62
Write-off of foreign currency
translation adjustments related
to divested businesses (3) (34)
---- ---- ----
$552 $943 $616
==== ==== ====
Income tax expense of continuing operations for the years ended December 31
follows (in millions):
<PAGE> 41
Page 41
2000 1999 1998
---- ---- ----
Current
United States
Federal $ 85 $223 $ 22
State & local 19 13 15
Non-United States 51 51 41
---- ---- ----
155 287 78
Deferred
United States
Federal 28 30 102
Non-United States
Change in valuation allowance (8)
Operating loss carryforwards 2 17 (1)
Other 12 6 7
---- ---- ----
34 53 108
---- ---- ----
$189 $340 $186
==== ==== ====
Reconciliations of income taxes of continuing operations at the United States
Federal statutory rate to the effective income tax rate for the years ended
December 31 follow (in millions):
2000 1999 1998
---- ---- ----
Income taxes at the United States
statutory rate 35.0% 35.0% 35.0%
State & local income taxes 2.7 .6 1.8
Amortization of goodwill & intangible
assets 2.6 1.3 1.1
Adjustment of worldwide tax liabilities 5.0 1.3 .3
Possessions credit related to Puerto
Rican operations (8.4) (3.2) (6.5)
Credit for increasing research activities (3.2) (.9) (1.5)
Effective income tax rate differential
related to:
Sales of businesses 2.5 1.7
Foreign source income 1.2 1.5 .3
Earnings of consolidated subsidiaries
and associate companies outside the
United States (3.5) (2.2) (.4)
Other--net 2.8 .2 (1.6)
---- ---- ----
34.2% 36.1% 30.2%
==== ==== ====
<PAGE> 42
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Significant components of current and long-term deferred income taxes of
continuing operations at December 31 follow (in millions):
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
2000
Accruals & other adjustments
Employee benefits $ 59 $ 195
Depreciation & amortization $ (8) (451)
Other 81 65
Operating loss carryforwards 3 47 3
Other items 7 14 26
Valuation allowance (3) (47) (27)
---- ---- -----
$147 $ 6 $(189)
==== ==== =====
1999
Accruals & other adjustments
Employee benefits $ 51 $ 2 $ 205
Depreciation & amortization (5) (431)
Other 101 28
Operating loss carryforwards 57 3
Other items 9 16 (4)
Valuation allowance (56)
---- ---- -----
$161 $ 14 $(199)
==== ==== =====
At December 31, 2000, certain non-United States subsidiaries had operating loss
carryforwards aggregating $146 million. Carryforwards of $99 million have no
expiration dates and the balance expires at various dates from 2001 through
2010.
The Company has manufacturing facilities in Puerto Rico which operate under
United States tax law incentives that will no longer be available after 2005.
No provision has been made for income taxes on undistributed earnings of
consolidated non-United States subsidiaries of $701 million at December 31,
2000, since the earnings retained have been reinvested by the subsidiaries. If
distributed, such remitted earnings would be subject to withholding taxes but
substantially free of United States income taxes.
Worldwide income tax payments (in millions) were $210 in 2000, $169 in 1999 and
$30 in 1998.
<PAGE> 43
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The Internal Revenue Service (IRS) has asserted the Company owes additional
taxes and interest for 1993 relating to the treatment of transactions involving
company-owned life insurance. A similar issue exists for 1994-1998. The Company
strongly disagrees with the IRS and is vigorously contesting the matter.
Management believes resolution of this matter will not have a material adverse
effect on the Company's results of operations, financial condition and cash
flows.
OTHER INFORMATION
Assets
Accounts receivable are net of an allowance for doubtful accounts of $24 million
at the end of 2000 and $23 million at the end of 1999.
The components of inventories at December 31 follow (in millions):
2000 1999
---- ----
Raw materials $ 310 $ 287
Work in process 290 332
Finished goods 311 295
----- -----
Gross inventories at FIFO 911 914
Excess of current cost over LIFO cost (39) (38)
----- -----
Net inventories $ 872 $ 876
===== =====
Gross inventories accounted for using the LIFO method (in millions) were $568 at
the end of 2000 and $555 at the end of 1999.
Accumulated amortization of goodwill and intangible assets (in millions) was
$277 and $159 at the end of 2000 and $230 and $126 at the end of 1999,
respectively.
The Company has company-owned life insurance policies insuring the lives of a
portion of active United States employees. The policies accumulate asset values
to meet future liabilities including the payment of employee benefits such as
health care. At December 31, 2000 and 1999, the investment in the policies
included in other assets (in millions) was $33 and $53, net of policy loans of
$405 and $397, respectively. Net life insurance expense (in millions) of $6 in
2000, $8 in 1999 and $7 in 1998, including interest expense of $35 in 2000, $32
in 1999 and $33 in 1998, is included in selling and administrative expense.
<PAGE> 44
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Lease Commitments
Minimum rental commitments for 2001 under noncancelable operating leases, which
expire at various dates and in most cases contain renewal options, are $76
million and decline substantially thereafter.
Rental expense (in millions) was $118 in 2000, $108 in 1999 and $85 in 1998.
Net Income per Common Share
The calculation of net income per Common Share-assuming dilution and basic
follows:
(Millions except for per share data) 2000 1999 1998
---- ---- ----
Net income $ 453 $ 617 $ 349
===== ===== =====
Average number of Common Shares
outstanding - assuming dilution 72.6 73.7 72.7
Less dilutive effect of stock options .8 1.2 1.3
----- ----- -----
Average number of Common Shares
outstanding - basic 71.8 72.5 71.4
===== ===== =====
Net income per Common Share
Assuming dilution
Continuing operations $5.00 $8.17 $5.91
Discontinued operations 1.24 .19 (1.11)
----- ----- -----
$6.24 $8.36 $4.80
===== ===== =====
Net income per Common Share
Basic
Continuing operations $5.06 $8.31 $6.02
Discontinued operations 1.25 .20 (1.13)
----- ----- -----
$6.31 $8.51 $4.89
===== ===== =====
Employee stock options to purchase 6.0 million Common Shares in 2000, 1.5
million in 1999 and 3.7 million in 1998 were outstanding but were not included
in the computation of net income per Common Share-assuming dilution, since they
would have had an antidilutive effect on earnings per share.
<PAGE> 45
Page 45
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
The Company is a global manufacturer of highly engineered products, which serve
the industrial, vehicle, construction, commercial and aerospace markets with
59,000 employees and 195 manufacturing sites in 24 countries around the world.
The Company's segments are based on the way that management aggregates products
and business units for making operating decisions and assessing performance.
Major products included in each segment and other information follows.
Automotive
Valve train systems, intake and exhaust valves, lash compensation lifters and
lash adjusters, cylinder heads, superchargers, limited slip and locking
differentials, transmission dampers, precision gear forgings, air control
valves, climate controls, convenience switches (for power windows, door locks,
mirrors, lights, etc.), engine sensors, mirror actuators, transmission controls,
keyless entry systems, daytime running lamps, speed-sensitive steering systems,
on-board vapor recovery valves, check valves, fuel level sensors and pressure
control valves
Fluid Power
All pressure ranges of hose, fittings, adapters, couplings and other fluid power
connectors; hydraulic pumps, motors, valves, cylinders, power steering units,
transaxles and transmissions; electronic and hydraulic controls; electric motors
and drives; filtration products and fluid-evaluation products and services;
aerospace products and systems - hydraulic and electrohydraulic pumps, motors,
electric motor pumps, hydraulic motor driven generators and integrated system
packages, hydraulic and electromechanical actuators, flap and slat systems, nose
wheel steering systems, cockpit controls, power and load management systems,
sensors, fluid debris monitoring products, illuminated displays, integrated
displays and panels, relays and valves; clutches and brakes for industrial
machines; golf grips and precision molded and extruded plastic products
Industrial and Commercial Controls
To control and protect electric motors -- drives, contactors, starters, and
other motor control products; for position sensing -- a wide range of sensors;
to control machine logic -- automation personal computers and programmable logic
controllers; to permit human interface with machines -- a full range of operator
interface hardware and software; to manage distribution of electricity in homes,
businesses and
<PAGE> 46
Page 46
industrial facilities -- vacuum interrupters, a wide range of
circuit breakers and a variety of power distribution and control assemblies and
components; to support customer power and control system requirements --
engineering systems and diagnostic and support services; for commercial and
military applications -- thermal circuit breakers and power control and
conversion equipment
Truck
Heavy-, medium-, and light-duty mechanical transmissions, heavy-duty automated
transmissions, heavy- and medium-duty clutches, traction control systems,
transfer boxes, power take-off units, splitter boxes, gearshift mechanisms,
transmissions for off-highway construction equipment, intelligent cruise control
systems, collision warning systems and transportation logistics management
systems
Other Information
The principal markets for Automotive, Fluid Power, and Truck are original
equipment manufacturers and after-market customers of heavy-, medium-, and
light-duty trucks, passenger cars, off-highway vehicles, industrial equipment
and aerospace products and systems. These original equipment manufacturers are
generally concentrated in North America and Europe; however, sales are made
globally. Most sales of these products are made directly to such manufacturers.
The principal markets for Industrial and Commercial Controls are industrial,
construction, commercial, automotive and government customers. These customers
are generally concentrated in North America; however, sales are made globally.
Sales are made directly by the Company and indirectly through distributors and
manufacturers' representatives to such customers.
No single customer represented more than 10% of net sales of continuing
operations in 2000, 1999 or 1998. Sales from ongoing United States and Canadian
continuing operations to customers in foreign countries (in millions) were $599
in 2000, $625 in 1999 and $744 in 1998 (7% of sales in 2000, 8% in 1999 and 12%
in 1998).
The accounting policies of the segments are generally the same as the policies
described under "Accounting Policies" in the Financial Review, except that
inventories and related cost of products sold of the segments are accounted for
using the FIFO method and the segment results only reflect the service cost
component related to pensions and other postretirement benefits. Intersegment
sales and transfers
<PAGE> 47
Page 47
are accounted for at the same prices as if the sales and transfers were made to
third parties.
Identifiable assets exclude general corporate assets, which principally consist
of short-term investments, deferred income taxes, certain accounts receivable,
certain property, plant and equipment, and certain other assets.
<PAGE> 48
Page 48
Business Segment Information
(Millions) 2000 1999 1998
---- ---- ----
Net sales
Automotive $1,825 $1,857 $1,741
Fluid Power 2,607 2,036 681
Industrial & Commercial Controls 2,421 2,274 2,145
Truck 1,456 1,630 1,478
------ ------ ------
Total ongoing operations 8,309 7,797 6,045
Divested operations 208 313
------ ------ ------
Total net sales $8,309 $8,005 $6,358
====== ====== ======
Operating profit
Automotive $ 225 $ 236 $ 198
Fluid Power 235 177 117
Industrial & Commercial Controls 251 181 140
Truck 107 235 201
------ ------ ------
Total ongoing operations 818 829 656
Divested operations 44 49
Amortization of goodwill & other
intangible assets (98) (89) (58)
Interest expense - net (177) (152) (88)
Gain on sales of businesses 340 43
Corporate & other - net 9 (29) 14
------ ------ ------
Income from continuing operations before
income taxes $ 552 $ 943 $ 616
====== ====== ======
Income from continuing operations before income taxes was reduced by unusual
items as follows (in millions):
Automotive $ 12
Fluid Power $ 47 $ 21 1
Industrial & Commercial Controls 28
Truck 7 17
Corporate 5 2 10
<PAGE> 49
Page 49
(Millions) 2000 1999 1998
---- ---- ----
Identifiable assets
Automotive $1,056 $1,020 $1,012
Fluid Power 1,518 1,504 359
Industrial & Commercial Controls 1,099 1,109 1,090
Truck 710 767 725
------ ------ ------
Total ongoing operations 4,383 4,400 3,186
Goodwill 2,026 1,853 970
Other intangible assets 556 598 182
Corporate 1,215 1,160 834
Divested operations 125
Net assets of discontinued operations 331 273
------ ------ ------
Total assets $8,180 $8,342 $5,570
====== ====== ======
Expenditures for property, plant & equipment
Automotive $ 111 $ 123 $ 115
Fluid Power 95 118 43
Industrial & Commercial Controls 71 76 144
Truck 81 120 126
------ ------ ------
Total ongoing operations 358 437 428
Corporate 28 34 26
Divested operations 9 14
------ ------ ------
Total expenditures for property, plant &
equipment $ 386 $ 480 $ 468
====== ====== ======
Depreciation of property, plant & equipment
Automotive $ 79 $ 81 $ 80
Fluid Power 97 78 24
Industrial & Commercial Controls 74 73 64
Truck 57 51 52
------ ------ ------
Total ongoing operations 307 283 220
Corporate 21 26 18
Divested operations 7 10
------ ------ ------
Total depreciation of property, plant &
equipment $ 328 $ 316 $ 248
====== ====== ======
<PAGE> 50
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Geographic Region Information
Ongoing operations
--------------------------
Long-
Net Operating lived
(Millions) sales profit assets*
----- --------- ------
2000
United States $6,672 $ 688 $1,550
Canada 182 15 14
Europe 1,364 47 412
Latin America 421 48 217
Pacific Region 254 20 81
Eliminations (584)
------ ------ ------
$8,309 $ 818 $2,274
====== ====== ======
1999
United States $6,310 $ 721 $1,598
Canada 172 12 11
Europe 1,294 66 398
Latin America 365 29 206
Pacific Region 213 1 81
Eliminations (557)
------ ------ ------
$7,797 $ 829 $2,294
====== ====== ======
1998
United States $4,902 $ 571 $1,148
Canada 159 11 9
Europe 841 58 275
Latin America 411 23 223
Pacific Region 123 (7) 50
Eliminations (391)
------ ------ ------
$6,045 $ 656 $1,705
====== ====== ======
*Long-lived assets consist of property, plant, and equipment - net.
Operating profit was reduced by unusual items as follows (in millions):
2000 1999 1998
---- ---- ----
United States $ 42 $ 21 $ 42
Europe 4 7 7
Latin America 1 1
Pacific Region 8
<PAGE> 51
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
All references to net income per Common Share assume dilution.
Overview of Operating Results for 2000
- --------------------------------------
Worldwide net sales of continuing operations reached a record $8.309 billion in
2000, 4% ahead of 1999. Income from continuing operations was $363 million in
2000 ($5.00 per Common Share), down from $603 million in 1999 ($8.17 per share).
Excluding unusual items in both years, income from continuing operations was
$383 million in 2000 ($5.28 per share), down from $425 million in 1999 ($5.76
per share). Unusual items included acquisition integration and restructuring
charges, and gains on sales of businesses and corporate assets reported in both
years. Total net income was $453 million, or $6.24 per share in 2000 compared to
$617 million, or $8.36 per share in 1999.
Eaton's semiconductor equipment operations were reorganized into a wholly-owned
subsidiary, Axcelis Technologies, Inc. on June 30, 2000. In July, Axcelis
completed an initial public offering for 17.6% of its common stock, and on
December 29th Eaton distributed its remaining interest in Axcelis to Eaton
shareholders. Accordingly, the consolidated financial statements have been
restated to present the semiconductor equipment operations as a discontinued
operation. For 2000, net sales of discontinued operations were $679 million, up
71% from 1999. Income from discontinued operations rose to $90 million in 2000,
up sharply from $14 million in 1999.
Sales and net income per share before unusual items for continuing and
discontinued operations combined were new records in 2000. Income from
continuing and discontinued operations before unusual items reached $473
million, or $6.52 per Common share, on combined sales of $8.988 billion.
Comparable 1999 earnings were $439 million, or $5.95 per share, on combined
sales of $8.402 billion. These results were achieved despite the increasingly
challenging economic environment experienced in the second half of 2000. For the
first time, the Company reported record annual earnings per share before unusual
items despite a severe downturn in the North American heavy truck market. The
Company's diversification strategy paid off in 2000, with notable performances
by the Industrial & Commercial Controls and Fluid Power segments offsetting
results reflective of the extraordinarily difficult conditions in the Truck
segment. Additionally, the continuing recovery of markets for semiconductor
capital equipment and benefits of the restructuring of this business initiated
in the second half of 1998 benefited the results of discontinued operations.
<PAGE> 52
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2000 Compared to 1999 - Continuing Operations
- ---------------------------------------------
Results of Operations
- ---------------------
Net sales of continuing operations were $8.309 billion in 2000, an increase of
4% over 1999. The increase in sales was primarily the result of the acquisition
of Aeroquip-Vickers, Inc. in the second quarter of 1999, which more than offset
sales decreases of $208 million related to businesses sold in 1999. The
acquisition of Aeroquip-Vickers was the primary driver of the 28% increase in
sales of the Fluid Power segment to $2.607 billion in 2000, compared to 1999.
Sales of the Industrial & Commercial Controls segment rose 6.5% to $2.421
billion in 2000 over 1999, in line with overall growth in underlying markets
that were paced by strong non-residential building in North America. However,
these increases in sales were largely offset by extraordinarily difficult
conditions in markets for truck components that caused sales of the Truck
segment to fall 11% to $1.456 billion compared to 1999. Preliminary data for
class 8 trucks in the NAFTA region show that production fell from 333,000 units
in 1999 to 252,000 in 2000, a decline of about 25%. As an industry leader in
truck components, the Truck segment was adversely affected by extraordinary
volatility in this market and was unable to reduce resources at the same pace as
orders dropped. Sales of the Automotive segment were $1.825 billion in 2000,
down $32 million from 1999, reflecting flat year-over-year light vehicle
production in North America and in Europe, and helped by sales from
introductions of new products.
Net sales in the United States and Canada in 2000 increased to $6.854 billion,
6% over 1999, primarily the result of the acquisition of Aeroquip-Vickers and
the strong performance of certain of the Company's North American markets. In
Europe, sales rose 5% to $1.364 billion, reflecting solid European economic
performance with a 1% gain in light vehicle production, an 8% rise in medium and
heavy truck production, and a 5% increase in industrial production during 2000.
Sales in Latin America rose 15% to $421 million, primarily due to the Latin
American economic rebound with 4% economic growth in the region. In the Pacific
Region, sales increased 19% in 2000 to $254 million, a reflection of that area's
continuing recovery from the economic crisis that occurred in Asia in 1998. As a
result of the increases in sales at international operations, related operating
profits increased 20% to $130 million.
As displayed in the Statement of Consolidated Income, continuing operations
reported Income from Operations of $649 million in 2000 (7.8% of sales), down
from $703 million in 1999 (8.8% of sales). These results reflect the benefit of
Eaton's diversification, with excellent performances by the Industrial
<PAGE> 53
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& Commercial Controls and Fluid Power segments offsetting extremely difficult
conditions in the Truck segment.
Income from Operations in 2000 was reduced by restructuring charges of $52
million ($34 million after-tax, or $.47 per Common Share) compared to similar
charges of $30 million in 1999 ($20 million after-tax, or $.27 per share). The
restructuring charges in 2000 and 1999 were primarily associated with the
integration of Aeroquip-Vickers, and also included $7 million in 1999 for the
restructuring of certain European operations of the Truck segment. These charges
reduced operating profit of the Fluid Power segment, except for the $7 million
charge in 1999 mentioned previously which reduced operating profit of the Truck
segment, and charges related to general corporate ($5 million for 2000 and $2
million for 1999).
Income in 2000 included a net gain on the sales of corporate assets of $22
million ($14 million after-tax, or $.19 per Common Share). In 1999, the
divestitures of the Engineered Fasteners and Fluid Power divisions resulted in a
pretax gain of $340 million ($198 million after-tax, or $2.68 per share). These
gains were included in the Statements of Consolidated Income in Other income-net
and in Business Segment Information below business segment operating profit.
Income from continuing operations was $363 million in 2000 ($5.00 per Common
Share), down from $603 million in 1999 ($8.17 per share). Excluding unusual
items in both years, earnings were $383 million in 2000 ($5.28 per share), down
from $425 million in 1999 ($5.76 per share). The benefits of the Company's
diversification were also reflected in cash earnings per share (earnings per
share before non-cash amortization of acquisition-related goodwill and other
intangibles). Excluding unusual items in both years, cash earnings per share of
continuing operations in 2000 were $6.37, compared to $6.74 in 1999. Cash
earnings per share have been included because it is commonly used by financial
analysts as one measure of operating performance. Cash earnings per share are
not determined using generally accepted accounting principles and, therefore,
are not necessarily comparable to other companies. Cash earnings per share
should not be considered in isolation or as a substitute for, or more meaningful
than, measures of performance determined in accordance with generally accepted
accounting principles.
<PAGE> 54
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Business Segments
- -----------------
Automotive
- ----------
Automotive segment sales were $1.825 billion in 2000, 2% below 1999, in large
part because of the weak Euro exchange rate. A 2% increase in volume compared
favorably with trends in Eaton's light vehicle markets, including a 2% drop in
production in the NAFTA region, a 1% increase in Europe, and a 19% rise in South
American output. The above-market volume performance was largely related to new
product introductions. Operating profit in 2000 was $225 million (12.3% of net
sales), down $11 million from $236 million (12.7% of sales) in 1999.
During 2000, Eaton began an expansion of its supercharger capacity in Brazil and
announced it would divest its Vehicle Switch/Electronics Division, which had
2000 sales of $323 million, because the business no longer fit its longer-term
strategic objectives.
Fluid Power
- -----------
Fluid Power sales were $2.607 billion in 2000, up 28% over 1999. The increase
resulted primarily from the acquisition of Aeroquip-Vickers in the second
quarter of 1999 and other acquisitions in 2000. This increase in sales was
offset to some extent by a weaker Euro's impact on sales. The change in sales
was also affected by a 3% increase in North American fluid power markets and a
9% decline in aerospace markets.
Operating profit in 2000 was $235 million compared to $177 million in 1999.
Before acquisition integration charges of $47 million in 2000 and $21 million in
1999, operating profit was $282 million (10.8% of net sales), up 42% from $198
million (9.7% of sales) in 1999. In the context of soft industry conditions and
the on-going integration of Aeroquip-Vickers, the segment performed reasonably
well. The most difficult aspects of the manufacturing integration of this
acquisition have been completed. Overall, the acquisition added about 70 cents
to earnings per share in 2000.
During 2000, Eaton announced it agreed to purchase Sumitomo Heavy Industries,
Ltd.'s 50% interest in Sumitomo Eaton Hydraulics Company, Ltd. (SEHYCO), the two
companies' Japanese hydraulic products joint venture. During the year, Eaton
also completed three other acquisitions; the industrial cylinder business of
International Motion Control Incorporated, Frederick Duffield PTY Ltd., an
Australian-based manufacturer of metal hydraulic fittings and adapters, and the
clamps, flanges, seals and flexible joint business of Honeywell International.
The Company remains cautious about the prospects for fluid power markets in
2001, given the current stagnant trend in
<PAGE> 55
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industry orders, however aerospace markets should be at least 10% above 2000.
Volumes should exceed market trends due to the three acquisitions completed over
the course of 2000, and the addition of SEHYCO, which is expected to close
during the first quarter of 2001. Profits in 2001 should also benefit from the
expected additional 25 cents per share accretion generated by completion of the
Aeroquip-Vickers integration.
Industrial & Commercial Controls
- --------------------------------
Industrial & Commercial Controls sales and profits in 2000 were at record
levels. Sales of $2.421 billion were 7% ahead of 1999, consistent with the
increase in North American shipments of distribution equipment and industrial
controls. Operating profit of $251 million (10.4% of net sales) was 39% higher
than 1999 operating profit of $181 million (8.0% of sales).
Fourth quarter Cutler-Hammer orders were up 6% with disproportionate strength in
distribution equipment offsetting weakness in industrial controls. CHESS, the
engineering services business, was in the black during the fourth quarter of
2000, the first full quarter of profitability. While volume growth in 2001 is
expected to be moderate compared to 2000, Eaton expects another record year from
Industrial & Commercial Controls in 2001.
At the end of 2000, the power tool switch product line, with annual sales of
about $40 million, was sold.
Truck
- -----
Truck segment sales in 2000 were $1.456 billion, 11% below 1999. This compares
to a 25% decline in NAFTA production of class 8 trucks, a 5% drop in NAFTA
medium-duty truck production, an 8% rise in European medium and heavy truck
output and a 30% increase in South American commercial vehicle production. This
segment reported operating profits of $107 million in 2000 compared to profits
of $242 million in 1999, before restructuring charges of $7 million in 1999.
The North American heavy truck industry suffered a 25% drop during 2000, with
the entire production decline occurring in the second half of the year. This
decline was unprecedented, especially during a period of generally favorable
macroeconomic conditions. As an industry leader, Eaton was fully affected by
this extraordinary volatility, and was unable to reduce resources at the same
pace as orders dropped. This segment continues to win new business on a global
scale. However, the Company has determined that the costs of serving demanding
customer needs in the context of unprecedented volatility have become
unacceptably high. As a result, in January 2001, the Company announced its plan
to restructure the Truck segment in
<PAGE> 56
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order to begin to evolve to a business model that is less vertically
integrated, takes better advantage of its global presence, and focuses on those
areas where it brings distinctive value to the marketplace. Eaton expects to
take a $55 million charge during 2001 to restructure this business, with about
$40 million recognized in the first quarter of 2001 and the balance of the
expense recognized over the remainder of the year. Recurring annual savings from
the restructuring are anticipated to reach $40 million, with a payback period of
approximately 18 months. The result is expected to be a more flexible, more
profitable organization that is less affected by the inevitable ups and downs of
this dynamic, growth market, and can better serve the needs of its customers,
suppliers, employees and owners.
During 2000, the Company announced a multi-year, $250 million agreement to
supply medium-duty truck transmission components to DaimlerChrysler AG in Brazil
from Eaton's facility in Mogi Mirim, Brazil.
Non-operating Income (Expense)
- -----------------------------
Amortization of goodwill and other intangible assets was $98 million in 2000, up
$9 million from $89 million in 1999. The increase was largely attributable to
the recognition of a full year of amortization related to the acquisition of
Aeroquip-Vickers, compared to nine months in 1999.
Net interest expense was $177 million in 2000 compared to $152 million in 1999.
The increase was largely due to the recognition of a full-year of interest for
borrowings required to finance the acquisition of Aeroquip-Vickers in the second
quarter of 1999.
Corporate and other expenses netted to income of $9 million in 2000 compared to
net expense of $29 million in 1999, or a net change of $38 million. The change
was primarily related to a $22 million gain on the sale of corporate assets
recorded in 2000.
Changes in Financial Condition
- ------------------------------
Eaton continues to generate substantial cash from operating activities, the
primary source of funds to finance the needs of the Company. Continuing
operations generated operating cash flow of $519 million in 2000 compared to
$708 million in 1999. Spending in 2000 included higher income tax payments
related to taxes payable for gains on businesses sold in 1999 and increased
expenditures related to the integration of Aeroquip-Vickers.
<PAGE> 57
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Net working capital was $464 million at the end of 2000 with a current ratio of
1.2. The primary cause of the increase in working capital was the $413 million
net reduction of short-term debt and current portion of long-term debt. This
reduction reflected the reclassification of $400 million of short-term debt to
long-term debt, the result of a new $400 million long-term credit facility
entered into during 2000.
Total debt was $3.004 billion at the end of 2000, up $119 million from $2.885
billion at the end of 1999. The increase reflected the use of $417 million of
cash in 2000 to repurchase Common Shares, offset by a $300 million dividend
received from Axcelis. Axcelis paid the dividend to Eaton using proceeds
received from the initial public offering of its common stock in July 2000 and
other cash resources available to it. In March 2000, Eaton sold Euro 200 million
of 6% notes due 2007 and in August 2000, issued $100 million of 7.05%
medium-term notes due 2002. Net proceeds from the sale of the notes were used to
refinance outstanding commercial paper and short-term notes.
As discussed under "Debt and Other Financial Instruments" in the Financial
Review, the Company's domestic multi-year credit facilities were $900 million at
the end of 2000, of which $500 million expires in 2003 and $400 million expires
in 2005. These credit facilities support outstanding commercial paper of $1.275
billion at the end of 2000 of which $900 million was classified as long-term
debt, up from $500 million at the end of 1999 because of the new $400 million
facility entered into in 2000.
Cash dividends paid in 2000 were $127 million and represented 27.9% of net
income. Annual per share dividends of $1.76 in 2000 were consistent with 1999.
Eaton has paid dividends on Common Shares annually since 1923.
In January 2000, to avoid the dilution of earnings per share resulting from the
exercise of stock options, Eaton's Board of Directors authorized the purchase of
up to $500 million of Common Shares over a five-year period. This authorization
replaced the expiring five million share repurchase program authorized in 1994.
In July 2000, the Board of Directors authorized the repurchase of an additional
$500 million of Common Shares. The Company intended to purchase these shares in
the open market and, market conditions permitting, expected to complete these
repurchases by year-end 2000. In light of softening general economic conditions,
and in order to strengthen its balance sheet, in January 2001, Eaton announced
that it was suspending purchases under the July program. During 2000, under both
programs described above, 6 million shares were repurchased for $417 million.
<PAGE> 58
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Emphasis continues to be focused on the ongoing physical capital investment
program designed to enhance product quality, manufacturing productivity and
business growth, reduce costs and, selectively, to add capacity. Capital
expenditures for 2000 were $386 million. Capital spending in 2001 is expected to
continue at the level reached in 2000.
Goodwill and other intangible assets totaled $2.582 billion at the end of 2000
and represented 32% of total assets. The majority of these assets resulted from
the $1.1 billion acquisition in 1994 of the electrical distribution and controls
business unit of Westinghouse, and the $1.6 billion acquisition in 1999 of
Aeroquip-Vickers. Goodwill for these businesses is amortized over 40 years since
these businesses have a long history of operating success and profitability,
which Eaton expects to continue. Each business holds a significant market
position in the majority of their product lines and their products are well
accepted by customers, which should continue in the future. These products are
not subject to rapid technological or functional obsolescence, which should
result in continuous strong demand for products for many years. The integration
of these businesses and product lines into Eaton has created permanent value
through the streamlining of product lines, manufacturing capacity and
organization structure. This should enable the combined businesses to obtain
synergy of complementary product offerings, operations and technical expertise
for many years to come.
The Company records deferred income tax assets and liabilities for the
differences between the financial accounting and income tax basis of assets and
liabilities. Recorded deferred income tax assets and liabilities are described
in detail under "Income Taxes" in the Financial Review. Deferred tax assets are
expected to be realized through the reduction of future taxable income.
Significant factors considered by management in the determination of the
probability of realization of deferred tax assets include historical operating
results, expectations of future earnings and taxable income and the extended
period of time over which the postretirement health care liability will be paid.
Eaton is subject to various inherent financial risks attributable to operating
in a global economy. Systems to measure and assure that these exposures are
comprehensively evaluated have been developed so that appropriate and timely
action can be taken to reduce risk, if necessary. Monitoring of exposures and
the evaluation of risks includes approval of derivative activities on a discrete
basis by senior management. Management performs a monthly oversight review of
exposures and derivative activities. Derivative financial instruments are
utilized to manage exposures in both the interest and foreign exchange markets.
The counterparties used in these transactions
<PAGE> 59
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have been diversified in order to minimize the impact of any potential credit
loss in the event of nonperformance by the counterparties. Although derivatives
are an integral part of risk management programs, their incremental effect on
financial condition and results of operations is not material. Derivative
activities are described in greater detail under "Debt and Other Financial
Instruments" in the Financial Review.
Operations of the Company involve the use and disposal of certain substances
regulated under environmental protection laws. On an ongoing, regular basis,
certain processes continue to be modified in order to reduce the impact on the
environment, including the reduction or elimination of certain chemicals used in
and wastes generated from operations. Liabilities related to environmental
matters are further discussed under "Protection of the Environment" in the
Financial Review.
1999 Compared to 1998 - Continuing Operations
- ---------------------------------------------
1999 proved to be a very eventful and significant year with Eaton reporting
record sales, net income and net income per Common Share. While the most
significant contribution to the increase in sales was the addition of
Aeroquip-Vickers, increases were registered by all businesses. Each of Eaton's
four business segments, Automotive, Fluid Power, Industrial and Commercial
Controls, and Truck, reported record sales in 1999.
On April 9, 1999, Eaton acquired Aeroquip-Vickers, Inc., the largest acquisition
in the Company's history. Aeroquip-Vickers had 1998 sales of $2.1 billion. This
significant acquisition, as discussed under "Acquisitions of Businesses" in the
Financial Review, built upon and extended Eaton's already strong position in
mobile and industrial hydraulics. Aeroquip-Vickers is a global leader in
industrial hydraulics that fundamentally complements Eaton's existing strengths
in mobile hydraulics to position the combined business as a world leader in
serving both mobile and industrial hydraulics customers. Aeroquip-Vickers also
complements Eaton's existing global hydraulics market strengths with a
significant complementary product line contribution of hoses and couplings that
serve mobile, industrial, aerospace and automotive customers. Together, Eaton
and Aeroquip-Vickers created an aerospace and hydraulics business and a systems
capability across all hydraulics applications.
Results of Operations
- ---------------------
Worldwide sales of continuing operations reached a record $8.005 billion in
1999, 26% ahead of 1998. The increase in sales in 1999 was primarily
attributable to the acquisition of Aeroquip-Vickers. Sales in the United States
and Canada
<PAGE> 60
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increased 28% to $6.482 billion and rose 54% in Europe to $1.294 billion. In
Latin America, sales decreased 11% to $365 million as this region continued to
struggle with economic weaknesses in Mexico, Brazil, and Argentina. Sales in the
Pacific Region increased 73% in 1999 to $213 million, reflecting a partial
recovery from the economic crisis that occurred in Asia in 1998.
As displayed in the Statement of Consolidated Income, continuing operations
reported Income from Operations of $703 million in 1999, an increase of 16% over
1998. Income from continuing operations, including the gain on sales of
businesses and restructuring charges, of $603 million in 1999 increased 40% from
1998 and 1999 earnings per share were $8.17, 38% above 1998.
The improved performance in 1999 was primarily the result of the acquisition of
Aeroquip-Vickers, robust conditions in the Truck, Automotive, and Industrial and
Commercial Controls markets, and the benefits of 1998's restructuring actions.
Although conditions in the Fluid Power business remained very weak, excellent
progress was made in the integration of Aeroquip-Vickers. During 1999, the
Aeroquip and Vickers businesses added about $.27 to earnings per share before
unusual charges.
In 1999, the divestitures of the Engineered Fasteners and Fluid Power divisions
resulted in the recognition of a pretax gain of $340 million ($198 million
after-tax, or $2.68 per Common Share). The Engineered Fasteners and Fluid Power
divisions had 1998 sales of $94 million and $189 million, respectively. Unusual
charges of $30 million were recorded in 1999 ($20 million after-tax, or $.27 per
share). These charges were associated with the integration of Aeroquip-Vickers
and the restructuring of certain European operations in the Truck segment.
In 1998, a pretax gain of $43 million ($28 million after-tax, or $.38 per Common
Share) was recognized related to business divestitures, net of adjustments
related to businesses sold in prior periods. During 1998, unusual pretax charges
of $68 million were recorded ($44 million after-tax, or $.61 per share), which
included $58 million to restructure operations within certain business segments
and $10 million for a contribution to Eaton's charitable trust. The
restructuring charges principally related to workforce reductions, inventory
and other asset write-downs, plant closing and other costs.
<PAGE> 61
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Business Segments
- -----------------
Automotive
- ----------
The Automotive segment achieved record sales of $1.857 billion in 1999, 7% above
1998. This increase compared to increases of 9% in North American light vehicle
production and 2% in European output and a 20% decrease in South American
output. This above-market performance was attributable to penetration gains
across certain product lines.
Operating profit reached a record $236 million, an increase of 19% over 1998.
This record performance was primarily due to increased sales and benefits of
1998's restructuring initiatives. Before restructuring charges of $12 million in
1998, operating profit in 1999 was 12% ahead of 1998.
Fluid Power
- -----------
The Fluid Power segment achieved record sales of $2.036 billion in 1999, well
above 1998 sales of $681 million. The increase in sales was primarily due to the
acquisition of Aeroquip-Vickers. Aeroquip's fluid conveyance business also
finished 1999 on a strong note.
Operating profits reached a record $177 million in 1999, an increase of 51% from
1998. During 1999, operating profits were reduced by charges of $21 million
related to the integration of Aeroquip-Vickers. Before unusual charges in both
years, operating profit in 1999 was 68% ahead of 1998.
Industrial & Commercial Controls
- --------------------------------
Sales of Industrial and Commercial Controls reached a record $2.274 billion in
1999, 6% ahead of 1998 and exceeding the 3% rise in the North American market
for electrical distribution equipment and industrial controls. Sales growth was
attributable to strong residential and commercial construction markets, new
multi-product "solutions" packaging, and a sharp increase in shipments in the
Navy Controls business. The new Engineering Services business unit whose sales
nearly tripled from the previous year boosted results in 1999.
Operating profits of $181 million in 1999 were also a record, 29% above 1998.
This increase was the result of increased sales and benefits of 1998's
restructuring initiatives partially offset by the costs of building the new
Engineering Services business unit. Before 1998 restructuring charges of $28
million, operating profit in 1999 was 8% ahead 1998.
Truck
- -----
Truck segment sales in 1999 reached a record $1.630 billion, increasing 10% over
1998. This sales growth compared with a
<PAGE> 62
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20% rise in NAFTA class 8 factory sales, flat European commercial truck
production, and a decline of 25% in South American truck output. The Company
took advantage of boom conditions in North American truck markets and worked
hard to meet the challenge of surging demand.
Operating profits reached a record of $235 million in 1999, 17% ahead of 1998.
Before restructuring charges in both years, operating profits were 11% ahead of
last year. These improved results were primarily due to increased sales offset
by operating inefficiencies stemming from unprecedented demand.
In 1999, a restructuring charge of $7 million was recorded related to the
announced closure of the Aycliffe, United Kingdom medium-duty transmission
plant. This closure was a part of 1998's $150 million cost-out program.
Non-operating Income (Expense)
- -----------------------------
Amortization of goodwill and other intangible assets of $89 million in 1999
increased by $31 million over 1998. This increase was largely attributable to
the acquisition of Aeroquip-Vickers.
Net interest expense of $152 million in 1999 increased by $64 million over 1998.
The increase was primarily due to borrowings required to finance the acquisition
of Aeroquip-Vickers.
As previously discussed, a gain on the sales of businesses of $340 million was
recorded in 1999 compared to $43 million in 1998.
Corporate and other expenses of $29 million in 1999 increased by $43 million
over 1998. The year-to-year change was related primarily to incentive
compensation and deferred compensation accruals. A $24 million increase in
incentive compensation accruals related to the record performance in 1999
compared to the disappointing operating results experienced in 1998, resulting
in higher compensation expense. A $19 million increase in deferred compensation
accruals was due to an increase in the stock price during 1999 from the year-end
level of 1998, which drove an increase in the accrual in 1999.
Market Risk Disclosure
- ----------------------
Eaton is subject to interest rate risk as it relates to long-term debt. The
table below presents principal cash flows (in millions) and related
weighted-average interest rates by expected maturity dates of long-term debt,
excluding foreign currency principal swaps and immaterial long-term debt of
certain international operations.
<PAGE> 63
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December 31, 2000 Expected maturity date
------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair
value
---- ---- ---- ---- ---- ---------- ------ ------
Long-term debt,
including
current portion
Fixed rate (US$) $100 $126 $253 $ 15 $1,135 $1,629 $1,693
Average interest
rate 9.0% 7.0% 6.9% 6.4% 7.4% 6.9%
Commercial paper
(US$) $500 400 900 900
Average interest
rate 6.4% 6.4% 6.4%
December 31, 1999 Expected maturity date
------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair
value
---- ---- ---- ---- ---- ---------- ------ ------
Long-term debt,
including
current portion
Fixed rate (US$) $ 10 $102 $ 27 $254 $1,008 $1,401 $1,443
Average interest
rate 12.5% 9.0% 6.6% 6.9% 7.6% 7.5%
Commercial paper
(US$) $500 500 500
Average interest
rate 6.1% 6.1%
See "Changes in Financial Condition" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for details on the Company's
primary market risks, and the objectives and strategies used to manage these
risks. Also, see "Financial Instruments" under Accounting Policies in the
Financial Review for additional information on market risks.
Euro
- ----
On January 1, 1999, eleven of the fifteen member countries of the European Union
(EU) began a three-year transition phase during which the Euro was adopted as
their common legal currency. The Euro is traded on currency exchanges and is
available for non-cash transactions. During the transition period, public and
private parties may pay for goods and services using either the Euro or the
participating country's legacy currency on a "no compulsion, no prohibition"
basis. The conversion rates between the existing legacy currencies
<PAGE> 64
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and the Euro were fixed on January 1, 1999. The legacy currencies will remain
legal tender for cash transactions between January 1, 1999 and June 30, 2002 by
which date all legacy currencies will have been withdrawn from circulation and
the new Euro denominated bills and coins will be used for cash transactions.
The Company has several operations within the eleven participating countries
that have adopted the Euro as the legal currency of the country. These
operations and operations in other European countries and elsewhere in the world
are conducting business transactions with customers and suppliers denominated in
the Euro. Euro denominated bank accounts have been established to accommodate
Euro transactions. Exposure to changes in European foreign exchange rates has
reduced as a result of the Euro conversion.
The Company has established a steering committee to review strategic and
tactical areas arising from the Euro conversion. Their efforts focused on those
aspects of the Euro conversion required to conduct Euro-denominated business
transactions beginning in 1999. Those aspects included transacting business in
the Euro, the competitive impact on product pricing and adjustments to billing
systems to handle parallel currencies. Systems are in place which are capable of
transacting business in Euro's during the transitional period until December 31,
2001. Continuing analysis and development efforts by the steering committee and
project teams at the business units continue to ensure that the full
implementation, systems upgrades, policy and procedural changes for Euro
functionality are adopted in line with the timetable and regulations established
by the EU by January 1, 2002.
Based on current estimates, the Company does not expect the costs incurred to
address the Euro will have a material impact on the financial condition or
results of operations.
Forward-Looking Statements
- --------------------------
This Annual Report to Shareholders contains forward-looking statements
concerning earnings per share in 2001, the sale of its Vehicle
Switch/Electronics Division, sales volume and profits in the Fluid Power
segment, volume growth in the Industrial & Commercial Controls segment, expected
restructuring charge, recurring annual savings from restructuring and future
prospects for the Truck segment, the Company's capital spending in 2001, synergy
related to the integration of Aeroquip-Vickers Inc., an agreement to supply
medium-duty truck transmission components to Daimler Chrysler AG in Brazil and
the realization of tax assets through the reduction of future taxable income.
These statements are subject to various risks and uncertainties, many of which
are
<PAGE> 65
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outside the Company's control. The following factors could cause actual
results to differ materially from those in the forward-looking statements:
difficulties in negotiating the sale of the Vehicle Switch/Electronics Division,
unanticipated costs or impediments in implementing the restructuring of the
Truck business and the operations of that business thereafter, unanticipated
changes in the heavy- and medium-duty truck markets, the fluid power markets or
the industrial and commercial controls markets, a significant downturn in the
economy or in business relationships with customers or unanticipated reductions
in their purchases from the Company, competitive pressure on sales and pricing,
increases in the cost of material and other production costs that cannot be
recouped in product pricing and deterioration of economic conditions in the
United States and around the world. Eaton does not assume any obligation to
update these forward-looking statements.
<PAGE> 66
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Quarterly Data
- --------------
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended 2000 Quarter ended 1999
(Millions except for per share data) -------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing operations
Net sales $1,948 $2,008 $2,169 $2,184 $2,081 $2,118 $2,202 $1,604
Gross margin 493 516 605 603 549 575 618 471
Percent of sales 25% 26% 28% 28% 26% 27% 28% 29%
Income before income taxes 85 105 186 176 354 274 177 138
Income after income taxes $ 58 $ 69 $ 123 $ 113 $ 215 $ 175 $ 118 $ 95
Income (loss) from
discontinued operations 26 24 22 18 9 9 7 (11)
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 84 $ 93 $ 145 $ 131 $ 224 $ 184 $ 125 $ 84
====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share -
assuming dilution
Continuing operations $ .83 $ .95 $ 1.66 $ 1.52 $ 2.86 $ 2.34 $ 1.62 $ 1.32
Discontinued operations .37 .33 .30 .25 .12 .12 .09 (.15)
------ ------ ------ ------ ------ ------ ------ ------
$ 1.20 $ 1.28 $ 1.96 $ 1.77 $ 2.98 $ 2.46 $ 1.71 $ 1.17
====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share -
basic
Continuing operations $ .84 $ .96 $ 1.69 $ 1.55 $ 2.91 $ 2.39 $ 1.65 $ 1.33
Discontinued operations .37 .33 .30 .25 .13 .13 .09 (.15)
------ ------ ------ ------ ------ ------ ------ ------
$ 1.21 $ 1.29 $ 1.99 $ 1.80 $ 3.04 $ 2.52 $ 1.74 $ 1.18
====== ====== ====== ====== ====== ====== ====== ======
Cash dividends paid per
Common Share $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44
Market price per Common Share
High $76.31 $73.81 $86.56 $81.44 $89.13 $103.50 $94.69 $ 74
Low 57.50 58.94 66.25 60.13 67.50 85.38 71.69 62
</TABLE>
<PAGE> 67
Page 67
Reconciliation of income from continuing operations to operating earnings of
continuing operations follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations $ 58 $ 69 $ 123 $ 113 $ 215 $ 175 $ 118 $ 95
Excluding (after-tax)
Unusual charges 14 8 7 5 12 5 2
Gain of sales of businesses (117) (81)
Gain on sales of corporate
assets (7) (7)
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings from
continuing operations $ 72 $ 77 $ 123 $ 111 $ 110 $ 99 $ 120 $ 95
====== ====== ====== ====== ====== ====== ====== ======
Income from continuing
operations per Common Share -
assuming dilution $ .83 $ .95 $ 1.66 $ 1.52 $ 2.86 $ 2.34 $ 1.62 $ 1.32
Per share impact of unusual
items .20 .12 (.01) (.02) (1.39) (1.01) .03
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings per Common
Share
Continuing operations 1.03 1.07 1.65 1.50 1.47 1.33 1.65 1.32
Discontinued operations .37 .33 .30 .25 .12 .12 .09 (.15)
------ ------ ------ ------ ------ ------ ------ ------
$ 1.40 $ 1.40 $ 1.95 $ 1.75 $ 1.59 1.45 $ 1.74 $ 1.17
====== ====== ====== ====== ====== ====== ====== ======
Cash operating earnings per Common
Share
Continuing operations $ 1.31 $ 1.34 $ 1.92 $ 1.77 $ 1.72 $ 1.61 $ 1.94 $ 1.48
Discontinued operations .40 .35 .33 .28 .15 .15 .12 (.13)
------ ------ ------ ------ ------ ------ ------ ------
$ 1.71 $ 1.69 $ 2.25 $ 2.05 $ 1.87 $ 1.76 $ 2.06 $ 1.35
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Cash earnings per Common Share represent income per Common Share excluding
unusual items, before amortization expense for goodwill and other intangible
assets.
<PAGE> 68
Page 68
Eaton Corporation
Five-Year Consolidated Financial Summary
<TABLE>
<CAPTION>
For the year 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
(Millions except for per share data)
<S> <C> <C> <C> <C> <C>
Continuing operations
Net sales $8,309 $8,005 $6,358 $7,104 $6,515
Income before income taxes 552 943 616 730 428
Income after income taxes $ 363 $ 603 $ 430 $ 526 $ 305
Percent of net sales 4.4% 7.5% 6.7% 7.4% 4.7%
Extraordinary item - redemption of debentures (54)
Income(loss) from discontinued operations 90 14 (81) (62) 44
------ ------ ------ ------ ------
Net income $ 453 $ 617 $ 349 $ 410 $ 349
====== ====== ====== ====== ======
Net income per Common Share - assuming dilution
Continuing operations $ 5.00 $ 8.17 $ 5.91 $ 6.72 $ 3.89
Extraordinary item (.69)
Discontinued operations 1.24 .19 (1.11) (.79) .57
------ ------ ------ ------ ------
$ 6.24 $ 8.36 $ 4.80 $ 5.24 $ 4.46
====== ====== ====== ====== ======
Average number of Common Shares outstanding 72.6 73.7 72.7 78.2 78.2
Net income per Common Share - basic
Continuing operations $ 5.06 $ 8.31 $ 6.02 $ 6.85 $ 3.93
Extraordinary item (.71)
Discontinued operations 1.25 .20 (1.13) (.80) .57
------ ------ ------ ------ ------
$ 6.31 $ 8.51 $ 4.89 $ 5.34 $ 4.50
====== ====== ====== ====== ======
Average number of Common Shares outstanding 71.8 72.5 71.4 76.8 77.4
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76 $ 1.72 $ 1.60
</TABLE>
<PAGE> 69
Page 69
<TABLE>
<S> <C> <C> <C> <C> <C>
Market price per Common Share
High $ 86.56 $103.50 $ 99.63 $103.38 $ 70.88
Low 57.50 62 57.50 67.25 50.38
At the year-end
- -----------------------------------------------------------------------------------------------------
Total assets $8,180 $8,342 $5,570 $5,497 $5,290
Long-term debt 2,447 1,915 1,191 1,272 1,062
Total debt 3,004 2,885 1,524 1,376 1,092
Shareholders' equity 2,410 2,624 2,057 2,071 2,160
Shareholders' equity per Common Share $35.29 $35.44 $28.69 $27.72 $28.00
Common Shares outstanding 68.3 74.0 71.7 74.7 77.1
- -----------------------------------------------------------------------------------------------------
For the year
- -----------------------------------------------------------------------------------------------------
Reconciliation of income from continuing operations to operating earnings of
continuing operations follows:
Income from continuing operations $ 363 $ 603 $ 430 $ 472 $ 305
Excluding (after-tax)
Unusual charges 34 20 44 69 31
Gain of sales of businesses (198) (28) (69)
Gain on sales of corporate assets (14)
------ ------ ------ ------ ------
Operating earnings from continuing
operations $ 383 $ 425 $ 446 $ 472 $ 336
====== ====== ====== ====== ======
Income from continuing operations
per Common Share - assuming dilution $ 5.00 $ 8.17 $ 5.91 $ 6.03 $ 3.89
Per share impact of unusual items .28 (2.41) .23 .40
------ ------ ------ ------ ------
Operating earnings per Common Share
Continuing operations 5.28 5.76 6.14 6.03 4.29
Discontinued operations 1.24 .19 (.73) .30 .58
------ ------ ------ ------ ------
$ 6.52 $ 5.95 $ 5.41 $ 6.33 $ 4.87
====== ====== ====== ====== ======
</TABLE>
<PAGE> 70
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash earnings per Common Share
excluding unusual items - assuming dilution
Continuing operations $ 6.37 $ 6.74 $ 6.75 $ 6.55 $ 4.77
Discontinued operations 1.35 .30 (.63) .31 .58
------ ------ ------ ------ ------
$ 7.72 $ 7.04 $ 6.12 $ 6.86 $ 5.35
====== ====== ====== ====== ======
</TABLE>
Cash earnings per Common Share represent income per Common Share excluding
unusual items, before amortization expense for goodwill and other intangible
assets.
<PAGE> 71
Page 70
Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 10(a)
Deferred Incentive Compensation Plan
(amended and restated as of March 31, 2000)
I. PURPOSE
-------
The purpose of the Deferred Incentive Compensation Plan is to promote
the greater success of Eaton Corporation and its subsidiaries by
providing a means to defer Incentive Compensation for key employees
whose level and nature of position enable them to affect significantly
the profitability, competitiveness and growth of Eaton.
II. CONCEPT
-------
The Plan is based on the concept that the deferral of Incentive
Compensation for later payment to a Participant, including the later
payment during Retirement, will provide a benefit to each Participant
and an incentive to improve the profitability, competitiveness and
growth of Eaton.
III. DEFINITIONS
-----------
Unless otherwise required by the context, the terms used herein shall
have the meanings as set forth below:
ACCOUNT: The account established by Eaton for each Participant to which
may be credited his or her Deferred Incentive Compensation, Dividend
Equivalents, Treasury Bill Interest Equivalents and Fixed Rate Interest
Equivalents.
BENEFICIARY: The person or entity (including a trust or the estate of
the Participant) designated in a written document executed by the
Participant and delivered to the Committee. If at the time when any
unpaid balance of Deferred Incentive Compensation shall be or become
due at or after the death of a Participant, there shall not be any
living person or any entity in existence so designated, the term
"Beneficiary" shall mean the Participant's estate.
BOARD: The Board of Directors of Eaton.
CAUSE: For the purposes of this Plan, Eaton shall have "Cause" to
terminate the Participant's employment hereunder upon (i) the willful
and continued failure by the Participant to substantially perform the
Participant's duties with Eaton (other than any such failure resulting
<PAGE> 72
Page 71
from the Participant's incapacity due to physical or mental illness),
after a demand for substantial performance is delivered to the
Participant by the Board which specifically identifies the manner in
which the Board believes that the Participant has not substantially
performed the Participant's duties, or (ii) the willful engaging by the
Participant in gross misconduct materially and demonstrably injurious
to Eaton. For purposes of this definition, no act, or failure to act,
on the Participant's part shall be considered "willful" unless done, or
omitted to be done, by the Participant not in good faith and without
reasonable belief that the Participant's action or omission was in the
best interest of Eaton. Notwithstanding the foregoing, the
Participant's employment shall not be deemed to have been terminated
for Cause unless and until there shall have been delivered to the
Participant a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters of the entire membership of the Board
at a meeting of the Board called and held for such purpose (after
reasonable notice to the Participant and an opportunity for the
Participant, together with the Participant's counsel, to be heard
before the Board), finding that in the good faith opinion of the Board
the Participant was guilty of conduct set forth above in clauses (i) or
(ii) of this definition and specifying the particulars thereof in
detail.
CHANGE IN CONTROL OF EATON: For purposes of this Plan, a "Change in
Control of Eaton" shall be deemed to have occurred if (i) a tender
offer shall be made and consummated for the ownership of securities of
Eaton representing 25% or more of the combined voting power of Eaton's
then outstanding voting securities, (ii) Eaton shall be merged or
consolidated with another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by
the former shareholders of Eaton, other than affiliates (within the
meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of
any party to such merger or consolidation, as the same shall have
existed immediately prior to such merger or consolidation, (iii) Eaton
shall sell substantially all of its assets to another corporation which
is not a wholly owned subsidiary of Eaton, (iv) any "person" (as such
term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is
or becomes the beneficial owner, directly or indirectly, of securities
of Eaton representing 25% or more of the combined voting power of
Eaton's then outstanding securities; or (v) during any period of two
consecutive years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a
majority thereof unless the
<PAGE> 73
Page 72
election, or the nomination for election by Eaton's shareholders, of
each new director was approved by a vote of at least two-thirds of the
directors then still in office who were Directors at the beginning of
the period. For purposes of this Plan, ownership of voting securities
shall take into account and include ownership as determined by applying
the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in
effect).
COMMITTEE: The Corporate Compensation Committee of Management of Eaton.
COMPENSATION COMMITTEE OF THE BOARD: The Compensation Committee of the
Board of Directors of Eaton.
CONTINGENT SHARE UNITS: Units credited to a Participant's Account which
are equivalent in value to the market value of Eaton Common Shares.
DEFERRAL PLANS: Shall mean the Incentive Compensation Deferral Plan,
the Strategic Incentive and Option Plan and this Plan.
DEFERRED INCENTIVE COMPENSATION: That portion of Incentive Compensation
which has been deferred pursuant to the Plan and any Dividend
Equivalents, Treasury Bill Interest Equivalents, Fixed Rate Interest
Equivalents and Contingent Share Units which are attributable thereto.
DEFERRED INCENTIVE COMPENSATION AGREEMENT: The written agreement
between Eaton and a Participant pursuant to which Incentive
Compensation is deferred under the Plan.
DISABILITY: If, as a result of the Participant's incapacity due to
physical or mental illness, the Participant shall have been absent from
the Participant's duties with Eaton on a full-time basis for 180
consecutive business days and within thirty (30) days after written
Notice of Termination the Participant shall not have returned to the
full-time performance of the Participant's duties, any termination of
the Participant's employment by Eaton shall be for "Disability."
DIVIDEND EQUIVALENT: An amount equal to the per share dividends paid on
Eaton Common Shares.
EATON: Eaton Corporation, an Ohio corporation, and its subsidiaries and
successors and assigns.
EATON COMMON SHARES: The common shares of Eaton.
<PAGE> 74
Page 73
EXECUTIVE INCENTIVE COMPENSATION PLAN: An incentive compensation
plan approved (a) by the Board of Directors of Eaton for
participation in this Plan and whose participants are designated by
the Committee on an annual basis or (b) by the Management
Compensation Committee (comprised solely of officers of the
Company) and whose participants do not include any officers of the
Company.
FAILURE TO PAY: Shall mean that the circumstances described in
either (i) or (ii) have occurred:
(i) Any Participant shall have notified Eaton and the
Trustee in writing that Eaton shall have failed to
pay to the Participant, when due, either directly or
by direction to the trustee of any trust holding
assets for the payment of benefits pursuant to the
Plan, at least 75% of any and all amounts which the
Participant was entitled to receive at any time in
accordance with the terms of the Plan, and that such
amounts remain unpaid. Such notice must set forth
the amount, if any, which was paid to the
Participant, and the amount which the Participant
believes he or she was entitled to receive under the
Plan. The failure to make such payment shall have
continued for a period of 30 days after receipt of
such notice by Eaton, and during such 30-day period
Eaton shall have failed to prove, by clear and
convincing evidence as determined by the Trustee in
its sole and absolute discretion, that such amount
was in fact paid or was not due and payable; or
(ii) More than two Plan Participants shall have notified
Eaton and the Trustee in writing that they have not
been paid when due, either directly or by direction
to the Trustee, amounts to which they are entitled
under the Plan and that such amounts remain unpaid.
Each such notice must set forth the amount, if any,
which was paid to the Participant, and the amount
which the Participant believes he or she was
entitled to receive under the Plan. Within 15 days
after receipt of each such notice, the Trustee shall
determine, on a preliminary basis, whether any
failure to pay such Participants has resulted in a
failure to pay when due, directly or by direction,
at least 75% of the aggregate amount due to all
Participants under all the Deferral Plans in any
two-year period, and that such amounts remain
unpaid. If the Trustee determines that such a
failure has occurred, then it shall so notify Eaton
and the Participants in writing within the same 15
day period. Within a period of 20 days after receipt
of such notice from the Trustee, Eaton shall have
failed to prove by clear and convincing evidence, in
the sole and
<PAGE> 75
Page 74
absolute discretion of the Trustee, that such amount
was paid or was not due and payable.
FIXED RATE INTEREST EQUIVALENT: With respect to any Participant,
the rate of interest as specified in the Deferred Incentive
Compensation Agreement between such Participant and Eaton.
FUNDED AMOUNT: With respect to the Account of any Participant, the
value of any assets which have been placed in a grantor trust
established by the Company to pay benefits with respect to that
Plan Account, as determined at the time initial payments are to be
made pursuant to the selections made by the Participants in
accordance with Section 9.03.
GOOD REASON: For purposes of this Plan, any Termination of
Employment by a Participant under the following circumstances
shall be for "Good Reason":
(i) without the Participant's express written consent, the
assignment to the Participant of any duties inconsistent
with the Participant's positions, duties, responsibilities
and status with Eaton immediately prior to a Change in
Control of Eaton, or a change in the Participant's reporting
responsibilities, titles or offices as in effect immediately
prior to a Change in Control of Eaton, or any removal of the
Participant from or any failure to re-elect the Participant
to any of such positions, except in connection with the
termination of the Participant's employment for Cause,
Disability or as a result of the Participant's death;
(ii) a reduction by Eaton in the Participant's base salary as in
effect immediately prior to the Change in Control of Eaton
or as the same may be increased from time to time; or the
failure by Eaton to increase such base salary each year
after a Change in Control of Eaton by an amount which at
least equals, on a percentage basis, the average annual
percentage merit increase in the Participant's base salary
during the five (5) full calendar years immediately
preceding a Change in Control of Eaton;
(iii) a failure by Eaton to continue the Participant's
participation in Eaton's Executive Incentive Compensation
Plan (the "I.C. Plan"), Deferred Incentive Compensation
Plan (the "Deferred I.C. Plan"), Limited Eaton Service
Supplemental Retirement Income Plan (the "Limited Service
Plan"), the Executive Strategic Incentive Plan (the "ESIP
Plan") and the Supplemental
<PAGE> 76
Page 75
Benefit Plan established by the Board as a result of the
limitations on pension benefits imposed by Section 415 of
the Internal Revenue Code (the "Supplemental Plan"), as each
plan may be modified from time to time but substantially in
the form presently in effect, on at least the basis as in
effect immediately prior to the Change in Control of Eaton
or to pay the Participant any amounts earned under such
plans in accordance with the terms of such plans.
(iv) the relocation of Eaton's principal executive offices to a
location outside Cuyahoga County, Ohio or any county
adjoining Cuyahoga County, Ohio, or Eaton's requiring the
Participant to be based anywhere other than Eaton's
principal executive offices or the location where the
Participant is based immediately prior to the Change in
Control of Eaton except for required travel on Eaton's
business to an extent substantially consistent with the
Participant's business travel obligations in effect
immediately prior to the Change in Control of Eaton, or, in
the event the Participant consents to any such relocation of
Eaton's principal executive offices, the failure by Eaton to
pay (or reimburse the Participant for) all reasonable moving
expenses incurred by the Participant relating to a change of
the Participant's principal residence in connection with
such relocation and to indemnify the Participant against any
loss (defined as the difference between the actual sale
price of such residence and the higher of (a) the
Participant's aggregate investment in such residence or (b)
the fair market value of such residence as determined by any
real estate appraiser designated by the Participant and
reasonably satisfactory to Eaton) realized in the sale of
the Participant's principal residence in connection with any
such change of residence;
(v) the failure by Eaton to continue to effect any benefit or
compensation plan (including but not limited to the plans
described under paragraph (p)(iii) above), pension plan,
life insurance plan, health and accident plan or disability
plan in which the Participant is participating at the time
of a Change in Control of Eaton (or plans providing the
Participant with substantially similar benefits), the taking
of any action by Eaton which would adversely affect the
Participant's participation in or materially reduce the
Participant's benefits under any of such plans or deprive
the Participant of any material fringe or personal benefit
enjoyed by the Participant at the time of the Change in
Control of Eaton, or the failure by
<PAGE> 77
Page 76
Eaton to provide the Participant with the number of paid
vacation days to which the Participant is then entitled on
the basis of years of service with Eaton in accordance with
Eaton's normal vacation policy in effect immediately prior
to the Change in Control of Eaton;
(vi) the failure of Eaton to obtain the assumption of this Plan
by any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially
all of the assets of Eaton, by agreement in form and
substance satisfactory to the Participant, to expressly
assume this Plan and the obligations of Eaton hereunder; or
(vii) any purported termination of the Participant's employment
which is not effected pursuant to a Notice of Termination
satisfying the requirements of a Notice of Termination as
herein defined (and, if applicable, the definition of
"Cause" as herein defined); and for purposes of this Plan,
no such purported termination shall be effective.
INCENTIVE COMPENSATION: The full amount of the annual Incentive
Compensation awarded to a Participant under the Executive Incentive
Compensation Plan.
INCENTIVE YEAR: An incentive year as defined under the provisions
of the Executive Incentive Compensation Plan.
LUMP SUM PAYMENT: Means an amount (payable in cash or Eaton Common
Shares, or a combination thereof) equal to the total of the
following amounts calculated as of the date of the payment:
(i) The amount, if any, of the Participant's Periodic
Compensation then credited to his Account and accrued and
unpaid Treasury Bill Interest Equivalents thereon; plus
(ii) The amount, if any, of the Participant's unpaid Type A
Retirement Compensation calculated in accordance with
Section 6.04 of the Plan and assuming for purposes of the
conversion calculation that a Change in Control of Eaton has
occurred within the relevant time period so that Section
6.04(b) is applicable; plus
(iii) The amount, if any, payable as a lump sum in relation to
Type B Retirement Compensation, calculated in accordance
with Section 6.10(a)(ii) of the Plan, assuming that the
Type B Retirement Compensation would be credited with Fixed
<PAGE> 78
Page 77
Rate Interest Equivalents from the date of the Lump Sum
Payment until paid over the fifteen-year period following
the date of such Lump Sum Payment.
In the event that a Participant or a Participant's Designated
Beneficiary has begun to receive benefit installment payments under
the Plan prior to the date of the Lump Sum Payment, the amount of
such Lump Sum shall be equal to the present value of the remaining
annual payments which otherwise would have been made calculated as
described in this Section.
MEAN PRICE: The mean between the highest and lowest quoted selling
price of an Eaton Common Share on the New York Stock Exchange List
of Composite Transactions.
NORMAL RETIREMENT DATE: The date a Participant attains age
sixty-five (65).
NOTICE OF TERMINATION: Any termination of the Participant's
employment by Eaton for Cause or Disability or by the Participant
for Good Reason shall be communicated by written Notice of
Termination to the Participant or Eaton, respectively. For purposes
of this Plan, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Plan
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Participant's employment under the provision so indicated.
PARTICIPANT: An employee of Eaton in a key position receiving
benefits under the Executive Incentive Compensation Plan and
participating under the Plan.
PERIODIC COMPENSATION: That portion of a Participant's Incentive
Compensation which is deferred under the Plan for payment over a
period of five (5) years.
PERIODIC INSTALLMENTS: Equal monthly, quarterly, semiannual or
annual payments, over a period not to exceed 15 years, as
determined by the Committee in its sole discretion.
PLAN: The Deferred Incentive Compensation Plan pursuant to which
all or a portion of Incentive Compensation may be deferred for
later payment to a participant, as amended and restated as of
January 1, 1989, and as subsequently amended on March 31, 2000 to
provide for distributions of Type A Retirement Compensation first
commencing after March 31, 2000 shall be made in Eaton Common
Shares (except as otherwise provided in Section 6.04).
<PAGE> 79
Page 78
RETIREMENT: The Termination of Employment of a Participant who is
age fifty-five (55) or older and who has at least ten (10) years of
service with Eaton or who is age sixty-five (65) or older or under
circumstances making him eligible to receive pension payments under
a pension plan sponsored by Eaton commencing within sixty (60) days
of the date of such Termination of Employment.
RETIREMENT COMPENSATION: That portion of Incentive Compensation
deferred under the Plan for payment to a Participant upon his or
her Retirement which either shall be Type A Retirement Compensation
or Type B Retirement Compensation as selected by the Participant in
accordance with Section 4.01.
TERMINATION AND CHANGE IN CONTROL: Shall mean the termination of
the employment of a Participant for any reason whatsoever prior to
a Change in Control, upon a subsequent Change in Control or
termination of the employment of a Participant for any reason
whatsoever during the three-year period immediately following a
Change in Control.
TERMINATION OF EMPLOYMENT: The time when a Participant shall no
longer be employed by Eaton whether by reason of Retirement, death,
voluntary resignation (with or without Good Reason), divestiture or
closing of a business unit, plant or facility, discharge (with or
without Cause), or such disability that, under the then current
employment practices of Eaton, the employment of the Participant is
deemed to have been terminated.
TREASURY BILL INTEREST EQUIVALENT: A rate of interest equal to the
quarterly average yield of 13-week U.S. Government Treasury Bills.
TRUSTEE: Shall mean the trustee of any trust which holds assets for
the payment of the benefits provided by the Plan.
TYPE A RETIREMENT COMPENSATION: As defined in Section 6.01.
TYPE B RETIREMENT COMPENSATION: As defined in Section 6.01.
<PAGE> 80
Page 79
IV. ELECTION TO DEFER
-----------------
SECTION 4.01. With respect to Incentive Compensation for each
Incentive Year commencing in or after 1986, the Participant shall
be given the opportunity to elect, by signing and delivering to the
Committee a Deferred Incentive Compensation Agreement, the manner
and extent to which the Participant's Incentive Compensation
awarded in respect to such Incentive Year shall be deferred under
the Plan, the allocation between Periodic Compensation and
Retirement Compensation and, with respect to the latter, the
allocation between Type A Retirement Compensation and Type B
Retirement Compensation.
SECTION 4.02. Not less than 10% of Incentive Compensation awarded
for any Incentive Year may be deferred under the Plan.
SECTION 4.03. If a Participant elects to allocate a portion of
Incentive Compensation to both Periodic Compensation and Retirement
Compensation, the amount allocated to each form of Compensation
shall be not less than 10% of the Incentive Compensation awarded
for any Incentive Year.
SECTION 4.04. To be in effect for an Incentive Year, a
Participant's election pursuant to Section 4.01 must be completed
on or before June 15 of such Incentive Year; PROVIDED, HOWEVER,
that in order to select Type B Retirement Compensation such
election must be completed on or before December 2 of the
immediately preceding Incentive Year. Only Participants who have
elected to allocate Deferred Incentive Compensation to Retirement
Compensation for the Incentive Year commencing in 1985 (under the
Plan as in effect prior to the October 23, 1985 amendment and
restatement thereof) shall be entitled to allocate all or part of
such Deferred Incentive Compensation to Type B Retirement
Compensation.
SECTION 4.05. Once a Participant has made an effective election
under Section 4.01 with respect to the deferral and allocation of
his or her Incentive Compensation, he or she may not thereafter
change that election or change the allocation between Periodic
Compensation and Retirement Compensation or between Type A
Retirement Compensation and Type B Retirement Compensation.
<PAGE> 81
Page 80
V. PERIODIC COMPENSATION
---------------------
SECTION 5.01. There shall be computed and credited quarterly to the
Participant's Account Treasury Bill Interest Equivalents on all
unpaid Periodic Compensation.
SECTION 5.02. Commencing in January of the second year following
the Incentive Year for which the Periodic Compensation was credited
to the Participant, the Periodic Compensation shall be paid to the
Participant in five (5) equal annual installments; and, with each
such installment, there shall be paid to the Participant all
Treasury Bill Interest Equivalents credited to the Participant and
then unpaid.
SECTION 5.03. Upon Termination of Employment, any unpaid Periodic
Compensation and any unpaid Treasury Bill Interest Equivalents
credited thereon shall be paid to the Participant, or his or her
Beneficiary, as the case may be, pursuant to the schedule for
payment described in Section 5.02.
VI. RETIREMENT COMPENSATION
-----------------------
A. General.
--------
SECTION 6.01. The amount of Deferred Incentive Compensation
allocated to Retirement Compensation shall correspond with the
portion of the Incentive Compensation award elected by the
Participant pursuant to Section 4.01. Such amount may be allocated
between Type A Retirement Compensation and, subject to Sections
6.08 and 6.09, Type B Retirement Compensation. Amounts allocated as
Type A Retirement Compensation shall be converted into a number of
Contingent Share Units on such date or dates as shall correspond
with the determination and transfer of Incentive Compensation (it
being understood that such transfer may be the payment date of such
Incentive Compensation). The amounts allocated as Type A Retirement
Compensation shall be converted into a number of Contingent Share
Units based upon the average of the Mean Prices for Eaton Common
Shares for the twenty trading days of the New York Stock Exchange
during which Eaton Common Shares were traded immediately following
the end of the Incentive Year in which the Incentive Compensation
so allocated was earned. Amounts allocated as Type B Retirement
Compensation shall not be converted into Contingent Share Units,
but instead shall be credited with Fixed Rate Interest Equivalents,
compounded annually, until paid.
<PAGE> 82
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Retirement Compensation which the Participant elects to have
converted into Contingent Share Units is referred to herein as
"Type A Retirement Compensation" and Retirement Compensation to be
credited with Fixed Rate Interest Equivalents is referred to herein
as "Type B Retirement Compensation."
B. Provisions Regarding Type A Retirement Compensation.
----------------------------------------------------
SECTION 6.02. On each dividend payment date for Eaton Common
Shares, Dividend Equivalents shall be credited to the Participant's
Account with respect to all Contingent Share Units then credited to
such Account and shall be converted into an appropriate number of
Contingent Share Units utilizing the procedures set forth in
Section 6.01 but at the Mean Price on said dividend payment date.
SECTION 6.03. In determining the number of Contingent Share Units
to be credited to a Participant, whether by reason of the
conversion of Retirement Compensation to Contingent Share Units or
by reason of the conversion of Dividend Equivalents to Contingent
Share Units, such number may be expressed in fractions of a
Contingent Share Unit computed to the nearest tenth. The number of
Contingent Share Units credited to a Participant shall be
appropriately adjusted to reflect any change in the capitalization
of Eaton resulting from a stock dividend, stock split,
reorganization, merger, consolidation, recapitalization,
combination, exchange of shares or any other similar events.
SECTION 6.04. Upon Retirement or other Termination of Employment of
the Participant or upon any other distribution of Type A Retirement
Compensation, (x) all Contingent Share Units standing to his or her
credit shall be converted to an equal number of Eaton Common Shares
and (y) his or her account shall be credited with an additional
amount equal to the amount, if any, by which the amount determined
under Subsection 6.04(a) exceeds the greater of the amounts
determined under Subsections 6.04(b) and (c):
(a) the total of all Incentive Compensation allocated to Type A
Retirement Compensation, as determined prior to conversion
to Contingent Share Units pursuant to Section 6.01 hereof,
and Treasury Bill Interest Equivalents, compounded
quarterly, in respect to such Incentive Compensation for the
period from the date of allocation to the date of Retirement
or other Termination of Employment or distribution.
(b) the product of the average of the Mean Prices for an Eaton
Common Share for the twenty (20) trading days of the New
York Stock Exchange during which Eaton Common Shares
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were traded immediately preceding the date of Retirement or
other Termination of Employment or distribution multiplied
by the number of Contingent Share Units then credited to the
Participant's Account.
(c) if a Change in Control of Eaton shall have occurred at any
time within the period of thirty-six (36) months immediately
preceding the Participant's Retirement or other Termination
of Employment, the product of the highest of the following:
(i) the highest price paid for an Eaton Common Share in
any tender offer in connection with the Change in
Control;
(ii) the price received for an Eaton Common Share in any
merger, consolidation or similar event in connection
with the Change in Control; or
(iii) the highest price paid for an Eaton Common Share as
reported in any Schedule 13D within the sixty (60)
day period immediately preceding the Change in
Control;
multiplied by the number of Contingent Share Units credited
to the Participant's Account at the time of his or her
Retirement or other Termination of Employment or distribution.
The additional amount, if any, so determined shall be converted to
Eaton Common Shares based on the average of the Mean Prices for
Eaton Common Shares on the date of such determination which shall
be credited to the Participant's Account and held for later
distribution as set forth in Section 6.05.
SECTION 6.05. Upon Retirement or other Termination of Employment of
a Participant or upon any other distribution of Type A Retirement
Compensation, and after the conversion of Contingent Share Units to
Eaton Common Shares and the calculation of the additional amount,
if any, to be credited to the Participant's Account as set forth in
Section 6.04, the Committee shall determine in its sole discretion
the method of distribution of such Eaton Common Shares and the
additional amount, if any, whether in a lump sum, to be paid within
one year after Retirement or other Termination of Employment or
upon the date of any of other distribution of such Compensation, or
Periodic Installments; PROVIDED, HOWEVER, that in making such
determination the Committee may consider the wishes and needs of
the Participant or his or her Beneficiary, as the case may be, with
respect to the payment of Type A Retirement Compensation.
<PAGE> 84
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SECTION 6.06. There shall be computed on a quarterly basis and
credited to the Participant's Account Dividend Equivalents on the
unpaid amount of Type A Retirement Compensation determined pursuant
to Section 6.04 until such Compensation is paid by Eaton. All
credited Dividend Equivalents shall be converted to Eaton Common
Shares using the method set forth in Section 6.04 but based on a
date which is as near to the distribution date as is
administratively practical.
SECTION 6.07. Commencing at such time as the Committee shall
determine, but not later than one (1) year following Retirement or
other Termination of Employment, the Eaton Common Shares credited
to the Participant's Account in accordance with Section 6.04 shall
be distributed to the Participant or his Beneficiary, as the case
may be, in accordance with the schedule for distribution determined
under Section 6.05 and, with each Periodic Installment, there shall
be paid all Dividend Equivalents credited to the Participant and
then unpaid.
C. Provisions Regarding Type B Retirement Compensation.
----------------------------------------------------
SECTION 6.08. A Participant may defer as Type B Retirement
Compensation all or any portion of his or her future Incentive
Compensation which is earned during a period of four (4)
consecutive Incentive Years or for the period to his or her Normal
Retirement Date, if earlier; PROVIDED, HOWEVER, that with respect
to any Incentive Year, the amount of Incentive Compensation a
Participant may defer as Type B Retirement Compensation must be at
least $5,000 and no greater than the maximum amount for such
Incentive Year specified in such Participant's Deferred Incentive
Compensation Agreement; PROVIDED, FURTHER, that any Incentive
Compensation in excess of such annual maximum limitation may be
deferred as either Periodic Compensation or Type A Retirement
Compensation.
SECTION 6.09. Notwithstanding anything herein to the contrary,
Eaton shall be entitled to deny Participants the opportunity to
elect to defer future Incentive Compensation as Type B Retirement
Compensation for any reason if such Incentive Compensation is not
then subject to an effective deferral election; PROVIDED, HOWEVER,
that any such denial by Eaton of the opportunity to elect deferrals
shall apply to all Participants equally.
SECTION 6.10.
(a) Following Retirement, all Type B Retirement Compensation
then credited to a Participant's Account,
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together with Fixed Rate Interest Equivalents earned during
the period of deferral, shall be paid to the Participant or
his or her Beneficiary in fifteen (15) equal annual
installments commencing on the first day of February
following the year in which the Participant attains age 65;
PROVIDED, HOWEVER, that after consideration of the wishes
and needs of the Participant or his or her Beneficiary, the
Committee may determine in its sole discretion (i) to
commence payment of the installments to any Participant at
an earlier date following Retirement; (ii) to pay to any
Participant the Type B Retirement Compensation in a lump sum
within one year following Retirement; or (iii) to pay Type B
Retirement Compensation in a lump sum upon any Termination
of Employment by reason of divestiture or closing of a
business unit, subsidiary, plant or facility or to provide
that such Type B Retirement Compensation shall be paid
commencing on a date which is subsequent to such Termination
of Employment but not later than the Participant's Normal
Retirement Date. For purposes of the payments under the
foregoing clauses (ii) and (iii), the amount of such lump
sum shall be equal to the then present value of the fifteen
(15) annual payments which otherwise would have been made as
calculated using an interest rate equal to "Moody's
Corporate Bond Yield Average - Monthly (Average Corporates)"
most recently published by Moody's Investor Services, Inc.
(or any successor thereto) at the time of the calculation.
(b) The rate of each Participant's Fixed Rate Interest
Equivalent, as set forth in his or her Deferred Incentive
Compensation Agreement, is based on the assumption that the
Participant will defer a specified amount of Incentive
Compensation for four (4) consecutive years or to his or her
Retirement, if earlier. Notwithstanding any provisions
hereof to the contrary, upon a Participant's Termination of
Employment, other than for Retirement and except as provided
in Section 6.10(c), all Type B Retirement Compensation then
credited to his or her Account shall be credited only with
Treasury Bill Interest Equivalents, compounded quarterly,
for the actual period of deferral until paid in lieu of the
Fixed Rate Interest Equivalents otherwise credited to Type B
Retirement Compensation; PROVIDED, HOWEVER, that the
Committee may determine in its sole discretion that all Type
B Retirement Compensation credited to a Participant's
Account shall continue to be credited with Fixed Rate
Interest Equivalents until paid. Upon such Termination of
Employment, payment of the amounts
<PAGE> 86
Page 85
credited to a Participant's Account shall be made as
determined by the Committee (i) in Periodic Installments
commencing within one year following such Termination of
Employment or at such other date not later than first
February following the Participant's Normal Retirement Date
as determined by the Committee, or (ii) in a lump sum within
one year following such Termination of Employment or at such
other date not later than the first February following the
Participant's Normal Retirement Date as determined by the
Committee.
(c) Notwithstanding anything in Section 6.10(b) to the contrary,
(i) if a Participant's Termination of Employment occurs
within five (5) years after a Change in Control of Eaton and
such Termination of Employment is by Eaton without Cause or
by the Participant for Good Reason or for Retirement, all
Type B Retirement Compensation then credited to the
Participant's Account shall be credited with the Fixed Rate
Interest Equivalents and held under the Plan as elected by
the Participant in his or her Deferred Incentive
Compensation Agreement; (ii) if within five (5) years after
a Change in Control of Eaton a Participant is not permitted
to complete the deferral of Incentive Compensation until the
Participant's Retirement because of any amendment or
termination of the Plan, all Type B Retirement Compensation
then credited to the Participant's Account shall be credited
with the Fixed Rate Interest Equivalents and held under the
Plan as elected by the Participant in his or her Deferred
Incentive Compensation Agreement; or (iii) if a
Participant's Termination of Employment is caused by any
divestiture or closing of a business unit, subsidiary, plant
or facility, the Compensation Committee of the Board may
determine in its sole discretion that all Type B Retirement
Compensation then credited to the Participant's Account
shall be credited with the Fixed Rate Interest Equivalents
until paid as provided under Section 6.10(a).
VII. AMENDMENT AND TERMINATION
-------------------------
SECTION 7.01. Eaton fully expects to continue the Plan but it
reserves the right, except as otherwise provided herein, at any
time or from time to time, by action of the Compensation Committee
of the Board, to modify or amend the Plan, in whole or in part, or
to terminate the Plan, in whole or in part, at any time and for any
reason, including, but not limited to, adverse changes in the
federal tax laws; PROVIDED, HOWEVER, that no amendment may be made
to the
<PAGE> 87
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provisions of the Plan which comply with Rule l6b-3(c)(2)(ii)(A) of
the Securities Exchange Act of 1934, as amended, more than once
every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act,
or the rules thereunder.
SECTION 7.02. In the event of any termination of the Plan which
results in the Participants being unable to have any future
Incentive Compensation allocated as Type B Retirement Compensation,
the amount of all Type B Retirement Compensation credited to a
Participant's Account at the date of such Plan termination shall be
converted to Type A Retirement Compensation, effective
retroactively to the date such Retirement Compensation was
allocated pursuant to Section 6.01, and either shall be paid to the
Participant or continue to be held under the Plan as elected by the
Participant in his or her Deferred Incentive Compensation
Agreement, except for 1985 Incentive Compensation, if any, deferred
as Type B Retirement Compensation which shall continue to be held
under the Plan. Notwithstanding the foregoing, in the event of a
termination of the Plan within five (5) years after a Change in
Control of Eaton, all Type B Retirement Compensation then credited
to a Participant's Account together with Fixed Rate Interest
Equivalents earned during the period of deferral shall not be
converted to Type A Retirement Compensation but shall be held under
the Plan as elected by the Participant in his or her Deferred
Incentive Compensation Agreement. No amendment to, or termination
of, the Plan after a Change in Control of Eaton shall modify this
provision or any provision hereof relating to a Change in Control
of Eaton or the rights of a Participant in effect under the Plan
immediately prior to such Change in Control of Eaton.
Notwithstanding anything herein to the contrary, no amendment,
modification or termination of the Plan shall, without the consent
of the Participant, alter or impair this provision or any of the
Participant's rights under the Plan with respect to benefits
accrued prior to such amendment, modification or termination.
VIII. ADMINISTRATION
--------------
SECTION 8.01. The Plan shall be administered by the Committee in
accordance with rules of general application for the administration
of the Plan as the Committee may, from time to time, adopt. The
Committee shall interpret the provisions of the Plan where
necessary and may adopt procedures for the administration of the
Plan which are consistent with the provisions of the Plan and the
rules adopted by the Committee.
<PAGE> 88
Page 87
SECTION 8.02. Each Participant or Beneficiary must claim any
benefit to which he or she may be entitled under the Plan by a
written notification to the Committee. If a claim is denied, it
must be denied within a reasonable period of time in a written
notice stating the specific reasons for the denial. The claimant
may have a review of the denial by the Committee by filing a
written notice with the Committee within sixty (60) days after the
notice of the denial of his or her claim.
The written decision by the Committee with respect to the review
must be given within one hundred and twenty (120) days after
receipt of the written request.
IX. PAYMENTS TO PARTICIPANTS
------------------------
SECTION 9.01.
Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the Participants
shall be entitled to receive from the Company the payments as
provided in Section 9.03 .
SECTION 9.02.
Notwithstanding anything herein to the contrary, upon the
occurrence of a Failure to Pay, each Participant covered by the
situation described in clause (i) of the definition of Failure to
Pay, or each of the Participants in the event of a situation
described in clause (ii) of that definition, as the case may be,
shall be entitled to receive from the Company the payments as
provided in Section 9.03.
SECTION 9.03.
No later than the first to occur of (i) one year following the date
hereof for any current Participant, (ii) a Termination and Change
in Control or a Failure to Pay for any current Participant or (iii)
the date upon which any person who is not a current Participant
upon the date hereof becomes a Participant, each Participant shall
select one of the payment alternatives set forth below with respect
to that portion of the Participant's Plan Account equal to the full
amount of the Account minus the Funded Amount, and with respect to
that portion of the Account equal to the Funded Amount. The payment
alternatives selected with respect to the two portions of the
Account need not be the same. The payment alternatives are as
follows:
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(a) a lump sum payment within 30 days following the Termination
and Change in Control or Failure to Pay, as the case may be;
(b) payment in monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years, as
selected by the Participant at the time provided in the
first paragraph of this Section 9.03, commencing within 30
days following the Termination and Change in Control or
Failure to Pay, as the case may be, which are substantially
equal in amount or in the number of share units being valued
and paid, except that earnings attributable to periods
following Termination and Change in Control or Failure to
Pay shall be included with each payment.
Payment shall be made to each such Participant in accordance with
his or her selected alternative as provided in Sections 9.01 and
9.02.
X. MISCELLANEOUS
-------------
SECTION 10.01. Each Participant shall have the right, by written
instruction to the Committee, on a form supplied by the Committee,
to designate one or more primary and contingent beneficiaries (and
the proportion to be paid to each, if more than one is designated)
to receive his or her Deferred Incentive Compensation upon his or
her death. Any such designation shall be revocable by the
Participant.
SECTION 10.02. The Committee may, in its sole discretion, change
the amount of the Periodic Installments or the number of years over
which the Periodic Installments are to be paid or permit the
payment of any Deferred Incentive Compensation at any date or dates
which may be earlier than the payment date or dates provided under
the Plan. The Committee may consider the needs and desires of the
participant or beneficiary in making this decision. The
determination of the Committee shall be final and conclusive upon
Eaton, the Participant and the Beneficiary. Any Type B Retirement
Compensation paid pursuant to this Section 10.02 to a Participant
who would then be eligible to terminate his or her employment for
Retirement shall be credited with the Fixed Rate Interest
Equivalent on the amount so paid. Any Type B Retirement
Compensation paid to a Participant who is not then eligible to
terminate his or her employment for Retirement shall be credited
only with the Treasury Bill Interest Equivalent.
SECTION 10.03. All payments under the Plan shall be subject to such
taxes (federal, state or local) as may be due thereon and the
determination by the Committee as to
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withholding with respect thereto shall be binding upon the
Participant and his or her Beneficiary.
SECTION 10.04. If any Participant under the Plan is a member of the
Committee, he or she shall not participate as a member of the
Committee in any determination under the Plan relating to his or
her Deferred Incentive Compensation.
SECTION 10.05. All action of the Committee hereunder may be taken
with or without a meeting. If taken without a meeting, the action
shall be in writing and signed by a majority of the members of the
Committee and if taken with a meeting, a majority of the Committee
shall constitute a quorum for any such action.
SECTION 10.06. Subject to any federal statute to the contrary, no
right or benefit under the Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance, or charge, and
any attempt to anticipate, alienate, sell, assign, pledge,
encumber, or charge any right or benefit under the Plan shall be
void. No right or benefit hereunder shall in any manner be liable
for or subject to the debts, contracts, liabilities, or torts of
the person entitled to such benefits. If the Participant or
Beneficiary shall become bankrupt, or attempt to anticipate,
alienate, sell, assign, pledge, encumber, or charge any right
hereunder, then such right or benefit shall, in the discretion of
the Company, cease and terminate, and in such event, the Company
may hold or apply the same or any part thereof for the benefit of
the Participant or his or her spouse, children, or other
dependents, or any of them, in such manner and in such amounts and
proportions as the Company may deem proper.
SECTION 10.07. The obligations of Eaton to make payments hereunder
shall constitute a liability of Eaton to the Participant. Eaton
may, but shall not be required to, establish or maintain any
special or separate fund, or purchase or acquire life insurance on
a Participant's life, or otherwise to segregate assets to assure
that such payments shall be made.
SECTION 10.08. The Plan shall not be deemed to constitute a
contract of employment between Eaton and a Participant. Neither
shall the execution of this Plan nor any action taken by Eaton
pursuant to this Plan be held or construed to confer on a
Participant any legal right to be continued as an employee of
Eaton, in an executive position or in any other capacity with Eaton
whatsoever.
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SECTION 10.09. Obligations incurred by Eaton pursuant to this Plan
shall be binding upon and inure to the benefit of Eaton, its
successors and assigns, and the Participant or his or her
Beneficiary.
SECTION 10.10. This Plan shall be construed and governed in
accordance with the law of the State of Ohio.
SECTION 10.11. The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender, and the singular
may include the plural, unless the context clearly indicates to the
contrary.
SECTION 10.12. All headings used in the Plan are for convenience of
reference only and are not part of the substance of the Plan.
<PAGE> 92
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Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 10(b)
Executive Strategic Incentive Plan
(amended and restated as of June 21, 1994,
July 25, 1995, April 21, 1998 and April 1, 1999)
1. PURPOSE
-------
The purpose of the Executive Strategic Incentive Plan (the "Plan") is
to promote the growth and profitability of Eaton Corporation (the
"Company") through the granting of incentives intended to motivate
executives of the Company to achieve demanding long-term corporate
objectives and to attract and retain executives of outstanding ability.
2. ADMINISTRATION
--------------
Except as otherwise expressly provided herein, the Plan shall be
administered by the Compensation and Organization Committee (the
"Committee") of the Company's Board of Directors which shall consist of
at least three directors of the Company selected by the Board.
Except as otherwise expressly provided herein, the Committee shall have
complete authority to: (i) interpret all provisions of the Plan
consistent with law; (ii) designate the executives to participate under
the Plan; (iii) determine the incentive targets and performance
objectives applicable to participants; (iv) adopt, amend and rescind
general and special rules and regulations for the Plan's
administration; and (v) make all other determinations necessary or
advisable for the administration of the Plan.
3. ELIGIBILITY
-----------
Any executive of the Company designated by the Committee in its sole
discretion shall be eligible to participate in the Plan.
4. INCENTIVE TARGETS
-----------------
(A) Establishment of Incentive Amounts
Individual Incentive Amounts for each participant with respect
to each Plan Award Period (as defined below) shall be
determined by multiplying the Incentive Percentages adopted by
the Committee which are applicable to such participant, and
which may not exceed 120%, by
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the amount of such participant's actual weighted average
year-end salary range midpoint for the Award Period. In the
event that during any Award Period a participant's salary
grade changes to a grade for which a different Incentive
Percentage would be applicable, such different Incentive
Percentage shall be applicable to such participant with
respect to the portion of any Award Period remaining after
such salary grade change. With respect to Award Periods
beginning on or after January 1, 1998, participant incentive
targets will be expressed in the form of Performance Share
Units which will be determined by the Committee by: (a) first
estimating the Individual Incentive Amount for each
participant with respect to each Award Period by multiplying
the Incentive Percentage adopted by the Committee which is
applicable to such participant, by the amount of such
participant's estimated weighted average salary range midpoint
for the Award Period and, (b) then dividing such Individual
Incentive Amount by the average of the mean prices for the
Company's common shares for the first twenty(20) trading days
of each Award Period. At the end of each Award Period the
estimated Individual Incentive Amount used for each
participant (and the resulting number of Performance Share
Units) shall be adjusted to reflect the participant's actual
weighted average year-end salary range midpoint for such Award
Period. In all cases, such amount shall be rounded up to the
nearest 50 whole units. For purposes of the Plan, "mean price"
shall be the mean of the highest and lowest selling prices for
Company common shares quoted on the New York Stock Exchange
List of Composite Transactions on the relevant trading day.
Notwithstanding the foregoing, the Committee may, in its sole
discretion, use a different method for establishing incentive
targets for participants under the Plan.
(B) Award Periods
Each Award Period shall be the four-calendar year period
commencing as of the first day of the calendar year in which
the performance objectives are established for the Award
Period as described in Section 4(C). A new Award Period shall
commence as of the first day of each calendar year, unless
otherwise specified by the Committee.
(C) Establishment of Company Performance Objectives
As soon as practicable at the beginning of each Award Period,
threshold, target, and maximum Company performance objectives
for such Award Period shall be established by the Committee.
The performance objectives
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shall be based upon cash flow return on gross capital
("CFROGC") except that, for Award Periods commencing on or
after January 1, 1998, unless otherwise determined by the
Committee in its sole discretion, performance objectives will
be established using a CFROGC/EPS Growth Performance Matrix
which shall use the Company's average cash flow return on
gross capital for such period along one axis and the Company's
cumulative earnings per share for such period along the second
axis. Within sixty (60) days after the performance objectives
have been established by the Committee, each participant will
be provided with written notice of his or her established
objectives. In its sole discretion, the Committee may modify
previously established performance objectives as a result of
any change in conditions, the occurrence of any events or
other factors which make such objectives unsuitable.
Notwithstanding the foregoing, after a Change in Control (as
hereinafter defined), neither the Committee nor the Board
shall have the authority to modify performance objectives in
any manner which could prove detrimental to the interests of
the Plan's participants.
(D) Determination of Payments
As promptly as practicable after the end of each Award Period,
the Committee shall fix the level of attainment of the
Company's performance for the Award Period and approve award
payments under the Plan which shall not exceed: (i) 50% of the
participant's Incentive Amount upon attainment of the
threshold performance objective; (ii) 100% of the
participant's Incentive Amounts upon attainment of the target
performance objective; and (iii) 200% of the participant's
Incentive Amount upon attainment of the maximum performance
objective; provided, however, that if the Company's
performance does not place it within the top 25%, using
equivalent measurements of performance, of a group of peer
companies selected by the Committee in its sole discretion, an
award payment equal to 150% of the participant's Incentive
Amount shall instead be paid upon the attainment of maximum
performance. Payments ranging from 50% to 200% of the
Incentive Amounts will be determined by the Committee in
respect of an Award Period for the attainment of performance
objectives between either threshold and target or target and
maximum. Such amounts, if any, shall be paid to the
participant in cash within ninety (90) days after the end of
each Award Period, unless the participant made an irrevocable
election to defer all or part of the amount of his or her
award payment pursuant to any long term incentive
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compensation deferral plan adopted by the Company and made
available for amounts earned hereunder.
Notwithstanding the foregoing, for Award Periods beginning on
or after January 1, 1998, Final Individual Performance Share
Unit Awards shall be determined by the Committee by: (a)
determining the CFROGC/EPS Growth Matrix Performance
Percentage applicable for the Award Period; (b) multiplying
such percentage by the number of Performance Share Units
credited to the participant and (c) further multiplying the
result by an Individual Performance Rating which will be a
whole percentage between zero and 150% established by the
Committee in its sole discretion after considering the
recommendations of Company management. The Final Individual
Performance Share Unit Award shall be distributed to
participants in the form of whole Company common shares
(except that, to the extent necessary to satisfy federal,
state or local tax withholding obligations, Performance Share
Units may be converted to cash at a market value of Company
common shares determined by the Committee), unless the
participant has made an irrevocable election to defer all or
part of the amount of his or her award pursuant to any long
term incentive compensation deferral plan adopted by the
Committee or the Company.
5. PRORATA PAYMENTS
----------------
A participant must be employed by the Company or one of its
subsidiaries at the end of an Award Period in order to be entitled to a
payment in respect to such Award Period; provided, however, that a
payment, prorated for the participant's length of service during the
Award Period, may be authorized by the Committee, in its sole
discretion, in the event the employment of a participant terminates
before the end of an Award Period due to death, permanent disability,
normal or early retirement, closure or divestiture of an Eaton facility
or any other reason. Notwithstanding the foregoing, upon any
termination of the Plan by the Committee during the term of any Award
Period, payments to all participants will be made, prorated for each
participant's length of service during the Award Period prior to the
date of Plan termination.
6. OTHER PROVISIONS
----------------
(A) Adjustments upon Certain Changes
In the event of changes to the structure or corporate
organization of the Company's businesses which affect the
participants and/or the performance prospects of the Company,
the Committee may make appropriate adjustments
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to individual participant Incentive Targets or to the
established performance objectives for incomplete Award
Periods. Adjustments under this Section 6 shall be made by the
Committee, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding and
conclusive. Notwithstanding the foregoing, after a Change in
Control, neither the Committee nor the Board shall have the
authority to change established Performance Objectives in any
manner which could prove detrimental to the interests of the
participant.
(B) Change in Control Defined
For purposes of the Plan, a Change in Control shall be deemed
to have occurred if:
(i) a tender offer shall be made and consummated for the
ownership of 25% or more of the outstanding voting
securities of the Company,
(ii) the Company shall be merged or consolidated with
another Corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation
shall be owned in the aggregate by the former
shareholders of the Company as the same shall have
existed immediately prior to such merger or
consolidation,
(iii) the Company shall sell substantially all of its
assets to another corporation which is not a
wholly-owned subsidiary of the Company,
(iv) a "person" within the meaning of Section 3(a)(9) or
of Section 13(d)(3) of the Securities Exchange Act of
1934 (as in effect on the effective date of the Plan)
shall acquire 25% or more of the outstanding voting
securities of the Company (whether directly,
indirectly, beneficially or of record). For purposes
of the Plan, ownership of voting securities shall
take into account and shall include ownership as
determined by applying the provisions of Rule
13d-3(d)(1)(I) under the Securities Exchange Act of
1934 (as in effect on the effective date of the
Plan), or
(v) during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason
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to constitute at least a majority thereof
unless the election, or nomination for
election by the Company's shareholders, of
each new director was approved by a vote of
at least two-thirds of the directors then
still in office who were directors at the
beginning of the period.
(C) Non-Transferability
No right to payment under the Plan shall be subject to debts,
contract liabilities, engagements or torts of the participant,
nor to transfer, anticipation, alienation, sale, assignment,
pledge or encumbrance by the participant except by will or the
law of descent and distribution or pursuant to a qualified
domestic relations order.
(D) Compliance with Law and Approval of Regulatory Bodies
No payment shall be made under the Plan except in compliance
with all applicable federal and state laws and regulations
including, without limitation, compliance with tax
requirements.
(E) No Right to Employment
Neither the adoption of the Plan nor its operation, nor any
document describing or referring to the Plan, or any part
thereof, shall confer upon any participant under the Plan any
right to continue in the employ of the Company or any
subsidiary, or shall in any way affect the right and power of
the Company or any subsidiary to terminate the employment of
any participant under the Plan at any time with or without
assigning a reason therefore, to the same extent as the
Company might have done if the Plan had not been adopted.
(F) Interpretation of the Plan
Headings are given to the sections of the Plan solely as a
convenience to facilitate reference; such headings, numbering
and paragraphing shall not in any case be deemed in any way
material or relevant to the construction of the Plan or any
provisions thereof. The use of the masculine gender shall also
include within its meaning the feminine. The use of the
singular shall also include within its meaning the plural and
vice versa.
(G) Amendment and Termination
The Committee may at any time suspend, amend or terminate the
Plan. Notwithstanding the foregoing, upon the
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occurrence of a Change in Control, no amendment, suspension or
termination of the Plan shall, without the consent of the
participant, alter or impair any rights or obligations under
the Plan with respect to such participant.
(H) Effective Dates of the Plan
The Plan was adopted by the Board on April 24, 1991 but the
effective date of the Plan shall be January 1, 1991. The Plan
was amended and restated as of June 21, 1994, July 25, 1995,
April 21, 1998 and April 1, 1999.
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Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 10(f)
Incentive Compensation Deferral Plan
(amended and restated as of October 1, 1997)
I. Purpose
The Incentive Compensation Deferral Plan (the "Plan") enables employees who
contribute significantly to the success of Eaton Corporation (the "Company") to
defer receipt of awards earned under incentive compensation plans and certain
other compensation. The purpose of the Plan is to help attract and retain highly
qualified individuals, to provide an incentive to those individuals to improve
the profitability, competitiveness and growth of the Company, and to help align
their interests with those of the shareholders.
II. Eligibility
All elected officers of the Company are eligible to participate in the Plan with
respect to i) amounts earned under the Executive Strategic Incentive Plan or any
other Eaton incentive plan made available for deferral hereunder by the
Committee; and ii) any amount paid as a Recruitment Bonus. Such other executives
as determined by the Committee shall also be eligible to participate in the Plan
with respect to any amounts earned under any Eaton incentive compensation plan
made available for deferral hereunder by the Committee, including the Senior
Operations Managers Plan, and any amount paid as a Recruitment Bonus.
III. Definitions
The terms used herein shall have the following meanings:
Account--A bookkeeping account established by Eaton for a Participant to which
may be credited Deferred Incentive Compensation and earnings or losses thereon.
Agreement--A written agreement between Eaton and a Participant deferring the
receipt of Incentive Compensation and indicating the term of the deferral.
Beneficiary--The person or entity designated in writing by the Participant and
delivered to the Committee. If that person or entity is not living or in
existence at the time any unpaid
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balance of Deferred Incentive Compensation becomes due after the death of a
Participant, the term "Beneficiary" shall mean the Participant's estate or legal
representative or any person, trust or organization designated in such
Participant's will.
Board--The Board of Directors of Eaton Corporation.
Change in Control of Eaton--Shall be deemed to occur if (i) a tender offer shall
be consummated for 25% or more of the combined voting power of Eaton's then
outstanding voting securities, (ii) Eaton shall be merged or consolidated with
another corporation and as a result less than 75% of the outstanding voting
securities of the resulting corporation shall be owned by the former
shareholders of Eaton, other than affiliates (within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such
merger or consolidation, as the same shall have existed immediately prior to
such merger or consolidation, (iii) Eaton shall sell substantially all of its
assets to another corporation which is not a wholly owned subsidiary of Eaton,
(iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of 25%
or more of the combined voting power of Eaton's then outstanding securities; or
(v) during any period of two consecutive years, individuals who at the beginning
of that period constitute the Board cease to constitute at least a majority
thereof unless the election, or the nomination for election by Eaton's
shareholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period. For purposes of this Plan, ownership of voting securities shall take
into account and include ownership as determined by applying the provisions of
Rule 13d-3(d)(l)(i) of the Exchange Act (as then in effect).
Committee--The Compensation and Organization Committee of the Board.
Common Share Retirement Compensation--Retirement Compensation which is converted
into share units in accordance with Article VII.
Deferred Incentive Compensation--That portion of Incentive Compensation deferred
pursuant to the Plan.
Eaton--Eaton Corporation, an Ohio corporation, and its subsidiaries and
successors and assigns.
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Eaton Common Shares--The common shares of Eaton Corporation with a par value of
$.50 each.
Incentive Compensation--Any payment awarded to a Participant under any Incentive
Compensation Plan or paid as a Recruitment Bonus.
Incentive Compensation Plan--Any incentive compensation plan approved by either
the Board or its Compensation Committee.
Interest Rate Retirement Compensation--Retirement Compensation which is credited
with Treasury Note Based Interest in accordance with Article VII.
Participant--An employee of Eaton who elects to defer receiving benefits under
an Incentive Compensation Plan designated by the Committee as eligible for
deferral hereunder or any Recruitment Bonus.
Periodic Installments--Monthly, quarterly, semiannual or annual payments, over a
period not to exceed fifteen years, as determined by the Committee in its sole
discretion, which are substantially equal in amount, or, in the case of Common
Share Retirement Compensation, substantially equal in the number of share units
being valued and paid or the number of Eaton Common Shares being distributed,
except that earnings attributable to periods following Retirement or Termination
of Employment shall be included with each payment.
Plan--This Incentive Compensation Deferral Plan pursuant to which Incentive
Compensation may be deferred for later payment.
Proposed Change in Control--The first to occur of any of the following events
(including the expiration of the periods specified therein):
(i) twenty (20) days after the commencement of a tender offer shall be made for
the ownership of securities of Eaton representing 25% or more of the combined
voting power of Eaton's then outstanding voting securities (unless such tender
offer shall have been withdrawn);
(ii) twenty (20) days after the commencement of solicitation of proxies or
consents for a merger or consolidation with another corporation and as a result
of such merger or consolidation less than 75%, in the Committee's view, of the
outstanding voting securities of the surviving or resulting corporation would be
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owned in the aggregate by the former shareholders of Eaton, other than the party
and any affiliates (within the meaning of the Exchange Act) of any party, to
such merger or consolidation, as the same shall have existed immediately prior
to such merger or consolidation;
(iii) upon the date that Eaton shall have entered into an agreement to sell
substantially all of its assets to another corporation which is not a wholly
owned subsidiary of Eaton;
(iv) within twenty (20) days after any "person" (as such term is used in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act) becomes the beneficial owner,
directly or indirectly, of securities of Eaton representing 15% or more of the
combined voting power of Eaton's then outstanding securities; or
(v) upon the date that individuals who, at the beginning of any period of two
consecutive years, constitute the Board, cease for any reason to constitute at
least 76% thereof, unless the election, or the nomination for election by
Eaton's shareholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
For purposes of this definition, ownership of voting securities shall take into
account and include ownership as determined by applying the provisions of Rule
13d-3(d)(1)(i) of the Exchange Act (as then in effect).
Recruitment Bonus--Any amount offered by the Company in order to recruit new
executives.
Retirement--The Termination of Employment of a Participant who is age fifty-five
or older and who has at least ten years of service with Eaton, who is age
sixty-five or older or who is eligible to receive pension payments under a
pension plan sponsored by Eaton commencing within sixty days of the date of such
Termination of Employment, or who is approved by the Committee to qualify as a
retirement.
Retirement Compensation--That portion of Incentive Compensation deferred for
payment at Retirement, at one year following Retirement, or in Periodic
Installments commencing after Retirement.
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Short-Term Compensation--That portion of Incentive Compensation deferred for
payment as determined by the Committee in accordance with Article V.
Termination of Employment--The time when a Participant shall no longer be
employed by Eaton, whether by reason of retirement, death, voluntary
resignation, divestiture, discharge (with or without cause), or such disability
that, under the then current employment practices of Eaton, the employment of
the Participant is deemed to have been terminated.
Treasury Bill Interest Equivalent--A rate of interest equal to the quarterly
average yield of 13-week U.S. Government Treasury Bills.
Treasury Note Based Interest--A rate of interest equal to the average yield of
10-year U.S. Government Treasury Notes plus 300 basis points.
Variable-Term Compensation--That portion of Incentive Compensation deferred for
payment to a Participant until such time as it is determined by the Committee in
its sole discretion that such compensation can be paid in whole or in part
without exceeding the deduction limit imposed by Section 162(m) of the Internal
Revenue Code or without being subject to that section.
IV. Election to Defer
Section 4.01 Deferral Options
For each award period ending during or after 1994 (an "Award Period") with
respect to any plan eligible for the deferral of Incentive Compensation
hereunder, or with respect to any Recruitment Bonus offered by the Company after
October 1, 1997, the Participant may elect to defer the receipt of all or part
of his or her Incentive Compensation as Short-Term Compensation, Variable-Term
Compensation or Retirement Compensation. Once a Participant has made an
effective election, he or she may not thereafter change that election or change
any allocation between Short-Term Compensation, Variable-Term Compensation or
Retirement Compensation.
Section 4.02 Amount Deferred
Between 10% and 100% of any Recruitment Bonus may be deferred under the Plan and
not less than 10% of Incentive Compensation awarded for any Award Period may be
deferred under the Plan,
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except that Variable-Term Compensation may be less than 10% of the Incentive
Compensation awarded for any Award Period. If a Participant elects to allocate a
portion of Incentive Compensation to both Short-Term Compensation and Retirement
Compensation, the amount allocated to each shall be not less than 10% of the
Incentive Compensation awarded for any Award Period.
Section 4.03 Election Deadline
To be in effect for an Award Period, a Participant's election must be completed,
signed and filed with the Committee on or before such date as is necessary to
defer an award for Federal income tax purposes. Elections to defer a Recruitment
Bonus must be completed, signed and filed with the Committee prior to the
Participant's acceptance of employment with the Company.
V. Short-Term Compensation
If elected by a Participant, payment of the amount of Incentive Compensation
allocated to Short-Term Compensation will be deferred. Treasury Bill Interest
Equivalents shall be credited quarterly to the Participant's Short-Term
Compensation Account until such compensation is paid to the Participant.
Short-Term Compensation, together with credited Treasury Bill Interest
Equivalents, shall be paid to the Participant in a lump sum or in not more than
five annual installments as determined by the Committee.
VI. Variable-Term Compensation
Section 6.01 Amount and Duration
Variable-Term Compensation is a response to amendments to the Internal Revenue
Code which limit the deductibility of individual annual compensation in excess
of $1 million. Only those Participants whose total taxable compensation is
likely to exceed that amount will be offered the opportunity to select
Variable-Term Compensation.
If elected by a Participant, the amount of Incentive Compensation allocated to
Variable-Term Compensation will be the amount (if any) determined by the
Committee in its sole discretion which, when added to other compensation of the
Participant, exceeds the deductible compensation limit imposed by Internal
Revenue Code Section 162(m). Amounts allocated as Variable-Term Compensation
shall be credited to the Account of the Participant on the date such amounts
would have been paid if there had been no valid
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deferral election. Variable-Term Compensation will be deferred until such time
as the Committee, in its sole discretion, shall determine that it, together with
the earnings thereon, can be paid in whole or in part without exceeding the
limit imposed by Section 162(m).
Section 6.02 Earnings
The Variable-Term Compensation Account shall be credited with Treasury Note
Based Interest, compounded quarterly until paid.
VII. Retirement Compensation
Section 7.01 Duration
If elected by a Participant, payment of the amount of Incentive Compensation
allocated to Retirement Compensation will be deferred to Retirement or to one
year after Retirement, but subject to Committee discretion as to date of payment
as provided herein. Retirement Compensation shall be credited to the Participant
on the date such amount would have been distributed to him or her if there had
been no valid deferral election by establishing an Account in the Participant's
name.
Section 7.02 Common Share Retirement Compensation
Between fifty percent and one hundred percent, as elected by the Participant, of
the amount allocated to Retirement Compensation shall be credited to Common
Share Retirement Compensation, and the balance shall be credited to Interest
Rate Retirement Compensation.
Common Share Retirement Compensation shall be converted into a number of share
units based upon the average of the mean prices for Eaton Common Shares for the
twenty trading days of the New York Stock Exchange during which Eaton Common
Shares were traded immediately following the end of the incentive period in
which the Incentive Compensation to be deferred was earned. On each Eaton Common
Share dividend payment date, dividend equivalents equal to the actual Eaton
Common Share dividends paid shall be credited to the share units in the
Participant's Account, and shall in turn be converted into share units utilizing
the mean Eaton Common Share price on the dividend payment date.
The maximum, cumulative number of share units that may be allocated to all
Participants is 2 million.
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Allocations to Common Share Retirement Compensation are subject to approval of
the Plan by the Company's shareholders and to the share unit limitation provided
above. If that approval is not obtained, or if that limitation would be
exceeded, then those allocations shall instead be made to Interest Rate
Retirement Compensation.
Upon payment of Common Share Retirement Compensation in Eaton Common Shares, the
share units standing to the Participant's credit shall be converted to the same
number of Eaton Common Shares for distribution to the Participant.
Upon payment of Common Share Retirement Compensation in cash, including any
installment thereof in the case of Periodic Installments, the share units
required to make the cash payment shall be converted to an amount equal to the
greater of: (a) the product of the average of the mean prices for an Eaton
Common Share for the last twenty trading days of the New York Stock Exchange
during which Eaton Common Shares were traded in the month immediately preceding
the month in which the date of payment occurs, multiplied by the number of share
units then credited to the Participant's Account, or (b) if a Change in Control
of Eaton shall have occurred at any time within thirty-six months immediately
preceding the payment, the product of the number of share units credited to the
Participant's Account at the time of payment multiplied by the highest of (i)
the highest price paid for an Eaton Common Share in any tender offer in
connection with the Change in Control of Eaton; (ii) the price received for an
Eaton Common Share in any merger, consolidation or similar event in connection
with the Change in Control of Eaton; or (iii) the highest price paid for an
Eaton Common Share as reported in any Schedule 13D within the sixty-day period
immediately preceding the Change in Control of Eaton.
Section 7.03 Interest Rate Retirement Compensation
Retirement Compensation not credited to Common Share Retirement Compensation
shall be credited to Interest Rate Retirement Compensation. Interest Rate
Retirement Compensation shall be credited to the Interest Rate Retirement
Compensation Account, which shall earn Treasury Note Based Interest, compounded
quarterly, until paid.
Section 7.04 Periodic Installments
Upon the death of a Participant who has commenced receiving Periodic
Installments, the entire remaining amount of his or her Retirement Compensation
shall be distributed to the Participant's Beneficiary. Such distributions may be
made either in a lump sum or in installments in such amounts and over such
periods, not exceeding the remaining number of annual installments from the date
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of death of the Participant, as the Committee may direct in its sole discretion.
Section 7.05 Termination of Employment
The Retirement Compensation Account of a Participant whose employment terminates
for reasons other than Retirement shall be distributed in a lump sum or in
Periodic Installments, as the Committee may determine in its sole discretion.
The lump sum payment shall be made, or the Periodic Installments shall commence,
as the Committee may determine in its sole discretion, no later than the
February 1 of the calendar year immediately after the calendar year that
includes the earliest of: (i) the Participant's death, (ii) the Participant's
attainment of age 55 if he or she was credited with at least 10 years of service
for Eaton (or an affiliate of Eaton), (iii) the Participant's attainment of age
65, or (iv) the fifth anniversary of the Participant's termination of
employment.
Earnings shall be credited on undistributed Retirement Compensation Accounts,
and annual installment payments shall be adjusted to reflect such additional
earnings, based on the remaining number of installment payments to be
distributed and based on Treasury Note Based Interest, computed quarterly.
VIII. Amendment and Termination
Eaton fully expects to continue the Plan but it reserves the right, except as
otherwise provided herein, at any time by action of the Committee, to modify,
amend or terminate the Plan for any reason, including adverse changes in the
federal tax laws. Notwithstanding the foregoing, (a) no amendment or
modification of the provisions of the Plan permitting officers to receive awards
or setting the formula that determines the amount, price and timing of awards,
shall be made more than once every six months (or at more frequent intervals if
permitted by applicable governmental regulations); and (b) upon the occurrence
of a Change in Control of Eaton, no amendment, modification or termination of
the Plan shall, without the consent of the Participant, alter or impair any
rights or obligations under the Plan with respect to such Participant.
IX. Administration
The Plan shall be administered by the Committee. The Committee shall interpret
the provisions of the Plan where necessary and may adopt procedures for the
administration of the Plan which are consistent with the provisions of the Plan
and any rules adopted by the Committee.
After Retirement or other Termination of Employment, the Committee shall
determine in its sole discretion (i) whether Retirement
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Compensation shall be paid in a lump sum or in Periodic Installments, (ii) the
date on which a lump sum payment will be made or Periodic Installments will
commence, which in the case of Retirement shall be not later than one year
following the date to which the deferral was made, and in the case of
Termination of Employment for reasons other than Retirement shall be in
accordance with Section 7.05, (iii) whether to change the Periodic Installments
or the number of years over which they are to be paid, and (iv) whether Common
Share Retirement Compensation will be paid in cash or in Eaton Common Shares. In
making these determinations, the Committee may consider the wishes and needs of
the Participant or his or her Beneficiary.
Each Participant or Beneficiary must claim any benefit to which such Beneficiary
may be entitled under the Plan by a written notification to the Committee. If a
claim is denied, it must be denied within a reasonable period of time in a
written notice stating the specific reasons for the denial. The claimant may
have a review of the denial by the Committee by filing a written notice with the
Committee within sixty days after the notice of the denial of his or her claim.
The written decision by the Committee with respect to the review must be given
within one hundred twenty days after receipt of the written request.
The determinations of the Committee shall be final and conclusive.
X. Automatic Lump Sum Payment
Except as provided below, upon the date of a Proposed Change in Control, Eaton
shall make an immediate lump sum payment of the Account balances, including all
earnings to that date, to each Participant or his or her Beneficiary. At any
time prior to a Proposed Change in Control, the Committee may decide that the
Lump Sum Payment shall not be made, upon a Proposed Change in Control, because
any such payment is not then advisable, in the Committee's judgment, in order to
protect the benefits of the Participants under the Plan. If the Committee makes
such a decision, it may thereafter (i) take no further action, in which case the
Lump Sum Payments will not be made, (ii) reconsider such decision and decide at
a later date (which may be subsequent to a Proposed Change in Control) to
terminate the Plan and make Lump Sum Payments, (iii) provide funding for the
Plan benefits by depositing funds in trust for such purpose or (iv) take no
action to protect the Plan benefits.
XI. Miscellaneous
Section 11.01 Adjustments
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or similar
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event affecting shares of the Company, the Committee shall equitably adjust the
limitation on the number and class of share units which may be allocated to
Participants as Common Share Retirement Compensation, and the number of share
units previously allocated to their Accounts.
Section 11.02 Designation of Beneficiaries
Each Participant shall have the right, by written instruction to the Committee,
on a form supplied by the Committee, to designate one or more primary and
contingent Beneficiaries (and the proportion to be paid to each, if more than
one is designated) to receive his or her Account balance upon his or her death.
Any such designation shall be revocable by the Participant.
Section 11.03 Committee Actions
All actions of the Committee hereunder may be taken with or without a meeting.
If taken without a meeting, the action shall be in writing and signed by a
majority of the members of the Committee and if taken with a meeting, a majority
of the Committee shall constitute a quorum for any such action. The
determination by the Committee as to the withholding of taxes shall be binding
upon the Participants and their Beneficiaries.
Section 11.04 Assignment
No benefit under the Plan shall be subject to anticipation, alienation, sale,
transfer or encumbrance, and any attempt to do so shall be void. No benefit
hereunder shall in any manner be liable for the debts, contracts, or liabilities
of the person entitled to such benefits. If the Participant or Beneficiary shall
become bankrupt, or attempt to anticipate, alienate, sell, transfer or encumber
any benefit hereunder, then such benefit shall, in the discretion of the
Committee, cease and terminate, and the Committee may hold or apply the same for
the benefit of the Participant or his or her spouse, children, or other
dependents, or any of them, in such manner and in such amounts and proportions
as the Committee may deem proper. During a Participant's lifetime, rights
hereunder are exercisable only by the Participant or that person's guardian or
legal representative. Notwithstanding the foregoing, nothing in this Section
shall prohibit the transfer of any benefit by will or by the laws of descent and
distribution or (if permitted by applicable regulations under Section 16(b) of
the Securities Exchange Act) pursuant to a qualified domestic relations order,
as defined under the Internal Revenue Code and the Employee Retirement Income
Security Act.
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Section 11.05 No Funding Required
The obligations of Eaton to make payments shall be a liability of Eaton to the
Participant. Eaton shall not be required to maintain any separate fund or
reserve, or purchase or acquire life insurance on a Participant's life, or
otherwise segregate assets to assure that any particular asset of Eaton is
available to make such payments by reason of Eaton's obligations hereunder.
Nothing contained in the Plan shall be construed as creating a trust or other
fiduciary relationship between Eaton and a Participant or any other person.
Section 11.06 No Employment Contract
The Plan shall not be deemed to constitute a contract of employment between
Eaton and a Participant. Neither shall the execution of the Plan nor any action
taken by Eaton or the Committee pursuant to the Plan confer on a Participant any
legal right to be continued in any other capacity with Eaton whatsoever.
Section 11.07 Governing Law
The Plan shall be construed and governed in accordance with the law of the State
of Ohio to the extent not covered by Federal law.
Section 11.08 Effective Date
The Plan was originally adopted by the Board on June 22, 1994 and was amended by
the Committee and restated effective as of October 1, 1997.
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Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 10(j)
Executive Incentive Compensation Plan
I. Purpose
The purpose of the Plan is to provide an annual incentive compensation
opportunity for eligible employees in executive, administrative,
professional, technical, or advisory positions whose actions are
considered to have a significant impact on corporate performance.
II. Administration
The Plan is adopted by the Board of Directors of Eaton Corporation and may
be amended, modified or discontinued as the Board,in its sole discretion,
may deem necessary.
The Plan is administered by the Management Compensation Committee (the
"Committee"), which shall consist of the Chief Executive Officer and up to
four officers designated by the Chief Executive Officer. The Committee
shall have complete authority to interpret all provisions of the Plan
consistent with the law.
III. Concept
The Plan is based on the concept that those individuals in positions that
have an opportunity to significantly affect company results should have a
significant portion of their total compensation at risk and linked to
business and individual results.
IV. Eligibility
Any salaried employee of the Corporation or any of its subsidiaries
(including any subsidiary acquired after adoption of this Plan) who in the
judgment of the Commit- tee meets the criteria described in Article I may
be selected for participation in the Plan. The Committee will have final
authority for designating participants in the Plan, but may delegate this
authority, as it deems advisable.
An employee may be designated as a participant on the first of any month
following the approval of the Committee or its designee.
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V. Calculation of Incentive Compensation Payments
Plan participants will be placed into one of three (3) Incentive
Compensation Programs within the overall Plan. These three Programs are:
Operations Program - which will include participants who are assigned to
operating units.
Corporate Staff Program - which will include participants who are members
of corporate staff functional departments.
Executive Management Program - which will include senior elected officers.
The total Corporate Incentive Pool will be created by multiplying
participants' salary grade midpoints by target Percentage Incentive Factors
appropriate for their respective levels of responsibility. The aggregate
pool amount will then be multiplied by the Corporate Performance Factor to
determine the Initial Adjusted Corporate Incentive Pool.
The Corporate Performance Factor raises or lowers the Initial Corporate
Incentive Pool based on Eaton's performance as measured by Cash Flow Return
on Gross Capital (CFR). A philosophical cornerstone of the Plan is the
belief that consistently high CFR performance will result in increases in
shareholder value. The Compensation and Organization Committee of the Board
will establish the Corporate Performance Factor Schedule. This schedule
will define the threshold, target, and maximum CFR goals and pool
adjustment levels for the designated year. This process determines the
maximum amount of the Initial Adjusted Corporate Incentive Pool but is not
linked to the incentive distribution process.
The Compensation and Organization Committee of the Board of Directors, in
its sole discretion, will determine the Final Adjusted Corporate Incentive
Pool by multiplying the Initial Adjusted Corporate Incentive Pool by a
Corporate Performance Incentive Pool Modifier which can affect the initial
incentive pool by as much as plus or minus twenty (20%) percent. In
applying the Corporate Performance Incentive Pool Modifier, the Committee
will take into consideration such other performance factors as it deems
appropriate which may include, but are not limited to: performance versus
Profit Plan goals; performance versus that reported for Eaton's peer
companies and progress toward the execution of the corporation's growth
strategies.
The process of allocating the incentive funds is based upon performance
ratings. In the Operations Program, each appropriate operating unit will be
given a rating on a scale from zero (0)
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to 150. Participants in each program will be given individual ratings based
on the same scale. These ratings will be established by a senior officer,
subject to final review and approval by the Chief Executive Officer, and
will be based primarily upon the success of the unit and/or individual in
meeting pre-established objectives. If is intended that the ratings process
should allow maximum flexibility for the recognition of unanticipated
challenges and opportunities, which may not have been contemplated at the
time the original objectives were established.
While it is not necessary that the entire Final Adjusted Corporate
Incentive Pool be allocated to participants, the total of all awards made
to participants throughout the Corporation cannot be greater than the sum
of the pools of all three programs. Excepted from this provision are the
awards made to designated employees by the Compensation and Organization
Committee of the Board of Directors, which shall be calculated in a manner
consistent with the Plan, but which shall be paid from the Corporation's
General Funds rather than the Corporate Incentive Pool. At the sole
discretion of the Chief Executive Officer, money not distributed from one
program may be reallocated to another program.
VI. Other Provisions
The Plan provides for a Special Award Fund which will allow the
Compensation and Organization Committee of the Board of Directors, on an
exception basis, to award special payments to individual participants who,
in that Committee's judgment, have made extraordinary contributions to the
Corporation in a year when there would normally be no incentive
compensation payment due to below threshold corporate performance. The
maximum amount of such awards is defined in Article X of this Plan.
Note: When assigning individual ratings a specific effort is made to reward
extraordinary job performance. To accomplish this senior officers are
expected to allocate ratings above 100 based on clearly demonstrated and
exceptional job performance, leadership and initiative. The remainder of
that business unit and/or department incentive pool will be allocated,
again by job performance, to the remaining participants. As a natural
consequence of this process the individual rating will generally average
100. However, because the Plan is designed to reward exceptional
performance with ratings well above 100, fully competent performers can
expect individual ratings that may average below 100.
<PAGE> 114
Page 113
VII. Payment
Incentive compensation will be paid in the year subsequent to the year in
which it is earned at the earliest feasible date following the
determination of final corporate performance and the calculation of
individual incentive payments.
VIII. Service for Part of Year
A participant must be employed by the Company or one of its subsidiaries at
the end of an Award Period in order to be entitled to a payment in respect
to such Award Period; provided, however, that a payment, prorated for the
participant's months of participation during the Award Period, may be
authorized by the Committee, in its sole discretion, in the event the
employment of a participant terminates before the end of an Award Period
due to death, permanent disability, normal or early retirement, closure or
divestiture of an Eaton facility or any other reason.
IX. Accounting Provisions
Awards paid out under the provisions of the Plan to participants in the
Operations Program will be accrued for and charged to the appropriate
units. Awards to participants in the Executive Management and Corporate
Staff Programs will be accrued for and charged as a corporate
administrative expense.
X. Definitions of Special Terms
INCENTIVE POTENTIAL - The amount derived from multiplying a participant's
midpoint by the target percentage incentive factor appropriate for the
position's level of responsibility. This calculation is made prior to any
adjustment for corporate, group or individual results.
INITIAL ADJUSTED CORPORATE INCENTIVE POOL - The sum of the Incentive
Potential for all participants in each of the three programs multiplied by
the Corporate Performance Factor.
FINAL ADJUSTED CORPORATE INCENTIVE POOL - The result obtained by
multiplying the Initial Adjusted Corporate Incentive Pool by the Corporate
Performance Modifier as described in Section V.
CORPORATE PERFORMANCE FACTOR - Adjustment percentages which raise or lower
the Corporate Incentive Pool based on Eaton's performance. The following
schedule will be applied to the 2000 incentive pool adjustment.
<PAGE> 115
Page 114
Corporate
Performance
CFR Factor
14.75% Threshold 40%
20.30% Target 100%
21.40% Maximum 200%
CASH FLOW RETURN ON GROSS CAPITAL - Net income plus depreciation, goodwill
amortization and after-tax net interest divided by capital plus accumulated
depreciation multiplying a participant's midpoint by the target percentage
minus goodwill and short-term investments.
SPECIAL AWARD FUND - An amount not greater than twenty (20%) percent of the
sum of the Corporate Incentive Pool. The Compensation and Organization
Committee of the Board of Directors will have sole authority to grant up to
the maximum of this Fund to recognize extraordinary contributions to the
Corporation in a year when the CFR threshold was not met and the Plan did not
generate payments for participants.
MIDPOINT - The midpoint of the base salary range for each participant's level
of responsibility that is effective as of July 1st of each new incentive year.
PERCENTAGE INCENTIVE FACTOR SCHEDULE - A schedule outlining the percentage to
be applied against the midpoint of the base salary range of each level of
participant in order to determine the participant's Incentive Potential. The
incentive factor will vary according to level of responsibility and may be
changed from time to time to reflect the competitive practices for companies
comparable to Eaton. The schedule will be established by the Compensation
Department subject to review and approval of the Compensation and Organization
Committee of the Board of Directors.
<PAGE> 116
Page 115
Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 12
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
Before income taxes & extraordinary
item $ 552 $ 943 $ 616 $ 730 $ 428
Adjustments
Minority interests in
Consolidated subsidiaries 8 2 (2) 1 1
Income of equity investees (1) (1) (1) (3) (4)
Interest expensed 182 159 93 86 85
Amortization of debt issue costs 1 1 1
Estimated portion of rent expense
Representing interest 39 36 28 25 23
Amortization of capitalized interest 10 8 7 8 8
Distributed income of equity
Investees 1 1 2 3
-------------- ------------- ------------- ------------- --------------
Adjusted income from continuing
Operations before income taxes &
extraordinary item $ 792 $1,147 $ 742 $ 850 $ 545
============== ============= ============= ============= ==============
Fixed Charges
Interest expensed $ 182 $ 159 $ 93 $ 86 $ 85
Interest capitalized 22 21 16 12 8
Amortization of debt issue costs 1 1 1
Estimated portion of rent expense
Representing interest 39 36 28 25 23
-------------- ------------- ------------- ------------- --------------
Total fixed charges $ 244 $ 216 $ 137 $ 124 $ 117
============== ============= ============= ============= ==============
Ratio of earnings to fixed charges 3.25 5.31 5.42 6.85 4.66
</TABLE>
<PAGE> 117
Page 116
Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 21
Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's subsidiaries, the
state or country in which each was organized, and the percentage of voting
securities owned by Eaton or another Eaton subsidiary as of December 31, 2000
are as follows:
<TABLE>
<CAPTION>
Percentage of voting securities
Consolidated Where owned (by Eaton unless
subsidiaries (A) Organized otherwise indicated)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Vorad Safety Systems, Inc. California 100% IVHS Technologies, Inc.
Aeroquip International Inc. Delaware 77% Eaton Aeroquip Inc.
23% Vickers International Inc.
Cutler-Hammer de Puerto Rico Inc. Delaware 100% Cutler-Hammer Inc.
Cutler-Hammer Inc. Delaware 100%
Integrated Partial Discharge Delaware 100% Cutler-Hammer Inc.
Diagnostics, Inc. (IPDD)
Eaton Administration Corporation Delaware 100%
Eaton Aerospace LLC Delaware 100% Eaton Hydraulics Inc.
Eaton ESC Holding Company Delaware 100%
Eaton International Corporation Delaware 100%
Eaton Truck Systems, Inc. Delaware 100%
Eaton USEV Holding Company Delaware 100%
</TABLE>
<PAGE> 118
Page 117
<TABLE>
<S> <C> <C>
Eaton VORAD Technologies, L.L.C. Delaware 93.3% Eaton Truck Systems, Inc.
(Partnership) 6.7% Vorad Safety Systems, Inc.
ERC Corporation Delaware 100% Eaton Leasing Corporation
ERC II Corporation Delaware 100% Eaton Leasing Corporation
IVHS Technologies, Inc. Delaware 69.8%
M.C. Aerospace Corporation Delaware 100% Eddot Company
Modern Molded Products, Inc. Delaware 100%
Kate Patrick Mfg. Inc. Delaware 100% Modern Molded Products, Inc.
Kelmac Grip, L.P. Delaware 92% Modern Molded Products, Inc.
8% Kate Patrick Mgf. Inc.
Eaton Hydraulics Inc. Delaware 100% Eaton Aeroquip Inc.
Vickers International Inc. Delaware 100% Eaton Aeroquip Inc.
Eaton Asia Investments Corporation Maryland 100%
Eaton Aeroquip Inc. Michigan 100% Aeroquip-Vickers Inc.
Aeroquip Inoac Company (Partnership) Michigan 51% Eaton Aeroquip Inc.
CAPCO Automotive Products Corporation Michigan 100%
Eddot Company Michigan 100% Eaton Hydraulics Inc.
</TABLE>
<PAGE> 119
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<TABLE>
<S> <C> <C>
G.T. Products, Inc. Michigan 100%
Aeroquip-Vickers, Inc. Ohio 100%
Cutler-Hammer IDT, Inc. Ohio 100%
Eaton Consulting Services Corporation Ohio 100%
Eaton Leasing Corporation Ohio 100%
Eaton MDH Co. Inc. Ohio 100%
Eaton MDH Limited Partnership Ohio 1%
99% Eaton MDH Co. Inc.
Eaton Properties Corporation Ohio 100% Eaton Leasing Corporation
Eaton Utah Corporation Ohio 100% Eaton Leasing Corporation
U.S. Engine Valve (Partnership) Ohio 5.607%
70% Eaton USEV Holding Company
Summa Manufacturing Corporation Tennessee 100% Eaton Hydraulics Inc.
Eaton S.A. Argentina 100%
Vickers Systems Pty. Ltd. Australia 100% Vickers International Inc.
Cutler-Hammer Controls Pty. Ltd. Australia 99.99996% Eaton International Corporation
.00004% Eaton Pty. Ltd.
Eaton Finance Pty. Ltd. Australia 100% Eaton International Corporation
Eaton Finance G.P. Australia 99.834% Eaton Finance Pty. Ltd.
.166% Eaton Specialty Controls Pty. Ltd.
</TABLE>
<PAGE> 120
Page 119
<TABLE>
<S> <C> <C>
Eaton Pty. Ltd. Australia 100%
Eaton Specialty Controls Pty. Ltd. Australia 99.9996%
.0004% Eaton International Corporation
Eaton Holding G.m.b.H. Austria 100% Eaton International Corporation
A-VIC Limited Barbados 100% Aeroquip International Inc.
Aeroquip Ltd. Barbados 100% Aeroquip-Vickers Canada Inc.
Aeroquip-Vickers Assurance Ltd. Barbados 100% Aeroquip-Vickers Inc.
Eaton Foreign Sales Corporation Barbados 100%
Eaton Holding Limited Barbados 100% Eaton Yale
Ltd.
Eaton Services Limited Barbados 100% Eaton Holding
Limited
Saturn Insurance Company Ltd. Bermuda Islands 100%
Aeroquip do Brasil S.A. Brazil 99.5% Aeroquip-Vickers International
Inc.
Eaton Ltda. Brazil 65.0428% Eaton Services Limited
34.9572% Eaton International Corporation
Eaton Truck Components Ltda. Brazil 21.135%
78.865% CAPCO Automotive Products
Corporation
Vickers do Brasil Ltda. Brazil 100% Vickers International Inc.
Aeroquip-Vickers Inc. Canada 100% Aeroquip International Inc.
</TABLE>
<PAGE> 121
Page 120
<TABLE>
<S> <C> <C>
Eaton ETN Offshore Ltd. Canada 100% Common Shares -
Eaton Corporation
100% Preferred Shares -
Eaton International
Corporation
Eaton Yale Ltd. Canada 100% Eaton ETN Offshore Ltd.
Electrotechnique GFTL, Inc. Canada 100% Eaton Yale Ltd.
Eaton Holding I Limited Cayman Islands 100% Eaton Holding III Limited
Eaton Holding II Limited Cayman Islands 100% Eaton Holding III Limited
Eaton Holding III Limited Cayman Islands 100% Eaton Holding G.m.b.H.
Eaton Hydraulics (Shanghai)Co., Ltd. China 100% Eaton China Investment Co., Ltd.
Eaton Truck and Bus Components Company China 100% Eaton China Investment Co., Ltd.
(Shanghai) Ltd.
Eaton China Investments Co., China 100% Eaton Asia Investments
Ltd. Corporation
Jining Eaton Hydraulics Company Ltd. China 60%
Shanghai Eaton Engine Components China 69.42% Eaton China Investment Co., Ltd.
Company, Ltd.
Cutler-Hammer (Suzhou) Electric Co., China 100%
Ltd.
Vickers Hydraulic Systems (China) Co., China 100% Vickers International Inc.
Ltd.
Eaton Controles Costa Rica 100% Eaton
</TABLE>
<PAGE> 122
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<TABLE>
<S> <C> <C>
Industriales S.A. International Corporation
Cutler-Hammer, S.A. Dominican Republic 100% Cutler-Hammer Inc.
Aeroquip-Vickers S.A. France 61% Aeroquip International Inc.
39% Vickers International Inc.
Eaton Automotive Controls Srl France 100% Eaton Technologies S.A.
Eaton S.A. France 100%
Eaton Technologies S.A. France 55%
45% Eaton International Corporation
Aeroquip Wolfsburg G.m.b.H. & Co. KG Germany 100% Aeroquip-Vickers International
(Partnership) G.m.b.H.
Aeroquip Wolfsburg Verwaltungs G.m.b.H. Germany 100% Aeroquip International Inc.
Aeroquip-Vickers International G.m.b.H. Germany 94.9% Eaton Holding G.m.b.H.
5.1% Eaton Aeroquip Inc.
Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H.
Eaton Controls G.m.b.H. & Co. K.G. Germany 99.33% Eaton Yale Ltd. (Canada)
(Partnership) .67% Eaton G.m.b.H.
Eaton G.m.b.H. Germany .1%
99.9% Eaton Holding G.m.b.H
Eaton Holding G.m.b.H. Germany 100% Eaton B.V.
Eaton Limited Hong Kong 100% Eaton International
Corporation
</TABLE>
<PAGE> 123
Page 122
<TABLE>
<S> <C> <C>
Vickers Systems Limited Hong Kong 99.995% Vickers International Inc.
.005% Vickers System Inc.
Eaton Industries Private Ltd. India .01%
99.99% Eaton International Corporation
Vickers Systems International Ltd. India 51% Vickers, Incorporated
Aeroquip-Vickers S.p.A. Italy 99.88% Eaton Srl
.06% Aeroquip Corporation
Eaton Automotive Srl Italy 100% Eaton Srl
Eaton Srl Italy 100% Eaton B.V.
Hydroline Srl Italy 100% Aeroquip-Vickers SpA
Eaton Japan Co., Ltd. Japan 100%
Japan Fawick Company Limited Japan 50%
Sumitomo Eaton Hydraulics Co., Ltd. Japan 50%
Vickers Systems Sdn. Bhd. Malaysia 100% Vickers International Inc.
Cutler-Hammer Controls Sdn. Bhd. Malaysia 100% Eaton International Corporation
Aeroquip de Mexico S.A. de C.V. Mexico 99.8% Controladora Aeroquip-Vickers de
Mexico S.A. de C.V.
.2% Aeroquip International Inc.
Aeroquip S.A. de C.V. Mexico 99.998% Controladora Aeroquip-Vickers de
Mexico S.A. de C.V.
</TABLE>
<PAGE> 124
Page 123
<TABLE>
<S> <C> <C>
.002% Eaton Aeroquip Inc.
Aeroquip Servicios S.A. de C.V. Mexico 99.998% Aeroquip International Inc.
.002% Eaton Aeroquip Inc.
Condura S. de R.L. de C.V. Mexico 99.999556%
.000444% Eaton Controls S. de R.L. de C.V.
Controladora Aeroquip-Vickers de Mexico 99.8% Aeroquip International Inc.
Mexico S.A. de C.V. .2% Aeroquip-Vickers Inc.
Cutler-Hammer Mexicana, S.A. Mexico 100% Eaton International Corporation
Eaton Controls, S. de R.L. de C.V. Mexico 99%
1% Condura S. de R.L. de C.V.
Eaton Molded Products S. de R.L. de Mexico 99.9999985%
C.V. .0000015% Condura S. de R.L. de C.V.
Eaton Truck Components, S. de R.L. de Mexico 99.995%
C.V. .005% Condura S. de R.L. de C.V.
Operaciones de Maquila de Juarez S. de Mexico 99.956% Cutler-Hammer Inc.
R.L. de C.V. .044% Condura S de. R.L. de C.V.
Eaton s.a.m. Monaco 100%
Eaton Automotive B.V. Netherlands 100% IKU Holding Montfoort B.V.
Eaton B.V. Netherlands 100% Eaton Holding International I
B.V.
Eaton C.V. (Partnership) Netherlands 99.9% Eaton Holding III
Limited
.1% Eaton International
Corporation
Eaton Holding B.V. Netherlands 100% Eaton B.V.
</TABLE>
<PAGE> 125
Page 124
<TABLE>
<S> <C> <C>
Eaton Holding International I B.V. Netherlands 100% Aeroquip International Inc.
Eaton International B.V. Netherlands 100%
IKU Holding Montfoort B.V. Netherlands 100% Eaton Holding B.V.
Eaton Finance B.V. Netherlands 100% Eaton B.V.
Hydrowa B.V. Netherlands 100% Eaton Holding B.V.
Eaton Finance N.V. Netherlands Antilles 45%
55% Eaton International Inc.
Vickers Systems Limited New Zealand 100% Vickers International Inc.
Aeroquip-Vickers International Inc. Panama 100% Aeroquip A.G.
Cutler-Hammer Asia Corporation Philippines 100% Eaton International Corporation
Eaton Automotive Spolka z o.o. Poland 100% Eaton Automotive Srl
Eaton Controls Spolka z o.o. Poland 100% Eaton Holding
B.V.
Eaton Truck Components S.A. Poland 99.51% Eaton B.V.
Aeroquip Singapore Pte. Limited Singapore 100% Aeroquip International Inc.
Aeroquip-Vickers Pte. Ltd. Singapore 100% Vickers International Inc.
Cutler-Hammer Pte. Ltd. Singapore 100% Eaton International Corporation
Vickers Systems Asia Pacific Pte. Ltd. Singapore 100% Vickers International Inc.
</TABLE>
<PAGE> 126
Page 125
<TABLE>
<S> <C> <C>
Aeroquip South Africa (Pty.) Ltd. South Africa 100% Aeroquip International Inc.
Eaton Truck Components (Pty) Limited South Africa 100% Eaton Limited
Vickers Systems Korea Ltd. South Korea 100% Vickers International Inc.
Eaton Automotive Controls Limited South Korea 100% Eaton International Corporation
Eaton Limited South Korea 100%
Aeroquip Iberica S.A. Spain 100% Aeroquip International Inc.
Eaton S.A. Spain 49.86%
50.14% Eaton International B.V.
Eaton Ros S.A. Spain 100% Eaton S.A.
Productos Eaton Livia S.A. Spain 48% Eaton S.A.
52% Eaton International B.V.
Vickers Systems AB Sweden 100% Vickers International Inc.
Aeroquip A.G. Switzerland 100% Aeroquip International Inc.
Eaton SA Switzerland 100%
Eaton Limited Taiwan 19.4%
80.6% Eaton International Corporation
Modern Molded Products Limited Taiwan 100% Eaton International Corporation
Vickers Systems Ltd. Taiwan 99.996% Vickers International Inc.
.001% Aeroquip-Vickers Inc.
</TABLE>
<PAGE> 127
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<TABLE>
<S> <C> <C>
.001% Aeroquip Corporation
.001% Vickers, Incorporated
Eaton Technologies Limited Thailand 100%
Rubberon Technology Corporation Limited Thailand 100%
Aeroquip-Vickers Limited United Kingdom 100% Eaton Holding Ltd.
Cutler-Hammer Europa Pension Trustees United Kingdom 50% Eaton Limited
Ltd. 50% Eaton Financial Services Limited
Eaton Financial Services Limited United Kingdom 100% Eaton Limited
Eaton Holding Limited United Kingdom 100% Eaton B.V.
Eaton Limited United Kingdom 100% Eaton Holding Limited
Eaton Shared Services Limited United Kingdom 100% Eaton Holding Limited
Aeroquip-Vickers Export Trading Company U.S. Virgin Islands 100% Aeroquip-Vickers Inc.
Cutler-Hammer de Venezuela S.A. Venezuela 100% Eaton International Corporation
</TABLE>
(A) Other Eaton subsidiaries, many inactive, are not listed above. If
considered in the aggregate, they would not be material.
<PAGE> 128
Page 127
Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated January 19, 2001, with
respect to the consolidated financial statements of Eaton Corporation included
in this Form 10-K for the year ended December 31, 2000:
<TABLE>
<CAPTION>
Registration Number Description Filing Date
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
333-43876 Eaton Corporation 401(k) Savings Plan - Form S-8 August 16, 2000
Registration Statement - 500,000 Shares
333-35946 Deferred Incentive Compensation Plan - Form S-8 May 1, 2000
Registration Statement - 375,000 Shares
333-86391 Aeroquip-Vickers Savings and Profit Sharing Plan - Form September 2, 1999
S-8 Registration Statement
333-86389 Eaton Corporation Executive Strategic Incentive Plan - September 2, 1999
Form S-8 Registration Statement
333-77245 Eaton Corporation 401(k) Savings Plan - Form S-8 April 28, 1999
Registration Statement
333-77243 Eaton Corporation Share Purchase and Investment Plan - April 28, 1999
Form S-8 Registration Statement
333-74355 Eaton Corporation $1,400,000,000 of Debt Securities, Debt March 12, 1999
Warrants, Common Shares and Preferred Shares - Form S-3
Registration Statement (Including Post Effective Amendment
No. 1 filed on April 23, 1999 and Amendment No. 2 filed on
May 11, 1999)
333-62375 Eaton Corporation 1998 Stock Plan - Form S-8 Registration August 27, 1998
Statement
</TABLE>
<PAGE> 129
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<TABLE>
<S> <C> <C>
333-62373 Eaton Holding Limited U.K. Savings-Related Share Option August 27, 1998
Scheme [1998] - Form S-8 Registration Statement
333-46861 Eaton Limited U.K. Savings-Related Share Option Scheme February 25, 1998
[1991] - Form S-8 Registration Statement
333-45575 Eaton Limited U.K. Savings-Related Share Option Scheme February 4, 1998
[1991] - Form S-8 Registration Statement
333-35697 Cutler-Hammer de Puerto Rico Company Retirement Savings September 16, 1997
Plan - Form S-8 Registration Statement
333-28869 Eaton 401(k) Savings Plan and Trust - Form S-8 June 10, 1997
Registration Statement
333-25693 Eaton Corporation Shareholder Dividend Reinvestment Plan - April 23, 1997
Form S-3 Registration Statement
333-23539 Eaton Non-Employee Director Fee Deferral Plan - Form S-8 March 18, 1997
Registration Statement
333-22597 Eaton Incentive Compensation Deferral Plan - Form S-8 March 13, 1997
Registration Statement
333-13873 Eaton Corporation Investment Plan for Hourly Employees of October 10, 1996
the Hydraulics Division - Hutchinson Plant - Form S-8
Registration Statement
333-13869 Lincoln Plant Share Purchase and Investment Plan and Trust October 10, 1996
- Form S-8 Registration Statement
333-13861 Eaton Corporation 401(k) Savings Plan for the Hourly Rate October 10, 1996
Employees at Airflex Division - Form S-8 Registration
Statement
</TABLE>
<PAGE> 130
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<TABLE>
<S> <C> <C>
333-13855 Eaton Winamac Hourly Investment Plan and Trust - Form S-8 October 10, 1996
Registration Statement
333-03599 Eaton Corporation Share Purchase and Investment Plan - May 13, 1996
Form S-8 Registration Statement
333-01365 Eaton Corporation Incentive Compensation Deferral Plan - March 1, 1996
Form S-3 Registration Statement
33-64201 Eaton Corporation $120,837,500 of Debt Securities and Debt November 14, 1995
Warrants - Form S-3 Registration Statement
33-60907 Eaton 1995 Stock Plan - Form S-8 Registration Statement July 7, 1995
33-52333 Eaton Corporation $600,000,000 of Debt Securities, Debt February 18, 1994
Warrants, Common Shares and Preferred Shares - Form S-3
Registration Statement
33-49779 Eaton Limited U.K. Savings-Related Share Option Scheme July 16, 1993
[1991] - Form S-8 Registration Statement
33-49393 & Eaton Corporation Stock Option Plans - Form S-8 March 9, 1993
33-12842 Registration Statement
33-15582 Eaton Limited U.K. Savings-Related Share Option Scheme - July 7, 1987
Form S-8 Registration Statement
</TABLE>
/s/ Ernst & Young LLP
Cleveland, Ohio
March 5, 2001
<PAGE> 131
Page 130
Eaton Corporation
2000 Annual Report on Form 10-K
Item 14(c)
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed
below has made, constituted and appointed, and by this instrument does make,
constitute and appoint, Adrian T. Dillon, Billie K. Rawot or William J. Nowak
his or her true and lawful attorney, for him or her and in his or her name,
place and stead to subscribe, as attorney-in-fact, his or her signature as
Director or Officer or both, as the case may be, of Eaton Corporation, an Ohio
corporation, to its Annual Report on Form 10-K for the year ended December 31,
2000 pursuant to the Securities Exchange Act of 1934, and to any and all
amendments to that Annual Report, hereby giving and granting unto each such
attorney-in-fact full power and authority to do and perform every act and thing
whatsoever necessary to be done in the premises, as fully as he or she might or
could do if personally present, hereby ratifying and confirming all that each
such attorney-in-fact shall lawfully do or cause to be done by virtue hereof.
This Power of Attorney shall not apply to any Annual Report on Form 10-K
or amendment thereto filed after December 31, 2001.
IN WITNESS WHEREOF, this Power of Attorney has been signed this 27th day
of February, 2001.
<TABLE>
<S> <C>
/s/ Alexander M. Cutler /s/ Deborah L. McCoy
- ---------------------------------------------------------- -----------------------------------------------------------------
Alexander M. Cutler Deborah L. McCoy
Chairman and Chief Executive Director
Officer; President; Director
/s/ Adrian T. Dillon /s/ John R. Miller
- ---------------------------------------------------------- -----------------------------------------------------------------
Adrian T. Dillon John R. Miller
Executive Vice President--Chief Director
Financial and Planning Officer;
Principal Financial Officer
/s/ Billie K. Rawot /s/ Victor A. Pelson
- ---------------------------------------------------------- -----------------------------------------------------------------
Billie K. Rawot Victor A. Pelson
Vice President and Controller; Director
Principal Accounting Officer
/s/ A. William Reynolds
/s/ Michael J. Critelli -----------------------------------------------------------------
- ---------------------------------------------------------- A. William Reynolds
Michael J. Critelli
Director
/s/ Ernie Green
- ----------------------------------------------------------
Ernie Green
</TABLE>
<PAGE> 132
Page 131
<TABLE>
<S> <C>
Director Director
/s/ Ned C. Lautenbach /s/ Gary L. Tooker
- ---------------------------------------------------------- -----------------------------------------------------------------
Ned C. Lautenbach Gary L. Tooker
Director Director
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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